Secured Transactions
Czarnetzky, Spring 2005
PART I: THE CREDITOR-DEBTOR RELATIONSHIP
Ch. 1: Creditor’s Remedies Under State Law (p.1)
I. Introduction (p.1)
II. Security and Foreclosure (p.3)
III. Repossession of Collateral (p.4)
IV. Art. 9 and Deficiency (p.6)
Ch. 2: Creditor’s Remedies Under Bankruptcy
I. Federal Bankruptcy Law (p.8)
Ch. 3: Creation of Security Interests (p.11)
I. Formalities for Attachment (p.11)
II. How to Describe Collateral in a Security Agreement (p.12)
III. Proceeds, Products and Other Value-Tracing Concepts (p.13)
IV. Legal Limits on What May be Collateral (p.14)
Ch. 4: Default (p.15)
I. Default, Acceleration and Cure Under State Law (p.15)
Ch. 5: The Prototypical Secured Transaction (p.16)
I. The Prototypical Secured Transaction (p.16)
PART II: THE CREDITOR-3RD PARTY RELATIONSHIP
Ch. 6: Perfection (p.17)
I. The Personal Property Filing System (p.17)
II. Art. 9 Financing Statement: The D’s Name (p.18)
III. Art. 9 Financing Statement: Other Information (p.20)
IV. Exceptions to the Art. 9 Filing Requirement (p.23)
V. Purchase-Money Security Interests in Consumer Goods (p.24)
VI. Characterizing Collateral for the Purpose of Perfection (p.25)
Ch. 7: Maintaining Perfection (p.27)
I. Maintaining Perfection Through Lapse and Bankruptcy (p.27)
II. Maintaining Perfection Through Changes of Name, Identity and Use (p.28)
III. Maintaining Perfection Through Relocation of D or Collateral (p.31)
Ch. 9: Competitions for Collateral (p.33)
I. Liens Cs Against SCs (p.33)
II. BTs Against SCs (p.34)
III. SCs Against SCs (p.35)
IV. Seller Against SCs (p.37)
V. Buyer Against SCs (p.38)
VI. Statutory Lien Cs Against SCs (p.40)
PART I: THE CREDITOR-DEBTOR RELATIONSHIP
Chapter 1: Creditor’s Remedies Under State Law
I. Introduction
1. General on Secured Credit
a) there is no federal commercial law, thus no uniformity…Article 9 of the UCC was
drafted by scholars who felt there needed to be some proposed uniform law
b) credit is the way entrepeneurs finance their businesses, unsecured credit has too high
of an interest rate so D take out loans which are secured by some form of
collateral which D owns…the bank will then grant D an interest rate significantly
less than that of an UC b/c D has pledged some portion of D’s property…usually
includes a pledge of all of a business’s assets plus some personal guaranty on D’s
part which means that whatever can not be paid by the assets of the business will
be paid by D
c) individuals can finance through:
(1) unsecured credit (2) cash flow (3) secured credit
d) buying a car through credit is the most common type of secured transaction involving
personal credit…buying a home is another but that deals w/ real property
(mortgages) and what we are focusing on is situations where the collateral is
personal property
e) the whole idea of secured credit is to lower interest and allow for debt collection
f) important distinction:
(a) debt that is owed to the C and the security interest…if D borrows money from
the bank, D has the personal obligation to pay the money back
(b) when a debt is secured through a security interest, what the D is doing is
granting the SC a right to immediate possession of some or all property of
the D and the right to sell such property upon default by D
*when we talk about avoiding a security interest, all we are doing is
taking away the right to the property, we are not removing the
personal obligation to repay the debt
g) If a piano company borrows money from Bank A, giving the bank a security interest in
the piano (its inventory) as collateral, the piano company is the D and the bank is
the SC. If the piano company sells a piano on credit to a musician, reserving a
security interest in the piano until it is paid for (PMSI), the piano company is now
the SC and the musician is the D. If the piano company then sells the musician’s
promise to pay the debt (account receivable) to Bank A, then the piano company
is the D and Bank A is the SC.
2. UC’s Remedies
a) UC MUST get a judgment against the debtor before UC can attempt
to get their money back…unsecured creditors can NOT use self-help to collect
the debt
b) once UC obtains judgment against debtor, he must enroll the judgment in the
jurisdiction where the D has property…clerk then issues a writ to the sheriff who
satisfies the debt by taking property of the D…duty is given to sheriff b/c this can
be a dangerous situation…D that has defaulted is typically not very happy
c) a garnishment is where money is periodically taken away from some source of the
D’s income…this is the result of a lawsuit brought by the UC against
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some individual who has money of the debtor…the D does not have to be
a party to the lawsuit…the ONLY issue in a garnishment action is, “Does
the 3rd party owe money to the debtor?”
*naturally a debt accrues b/t the debtor and his employer so the UC
sues the employer to collect the debt the D owes to the
UC…every time the debt accrues b/t the employer and the
D, a portion of the payment goes to the creditor
*however, there are some limits placed on these garnishments by
state/federal law
*as an UC you should look for wages or bank accounts b/c
in each instance there is a debtor/creditor relationship b/t the bank
or employer and the debtor so you as the UC can
put yourself b/t the C (bank/employer) and the D
c) exemptions allow D to keep the equity interest in the house/car/widget…if D
has no equity interest in the house, the exemption does nothing
(1) debt is $20K, house valued at $100K, exemption in MS is $75K
-extent of exemption is $75K
-amount of equity after exemption is $5K
(2) Czar owns H2 worth $30K and pledges it as collateral to secure a
$10K loan, MS allows $2K exemption on automobile
-no exemption…debtor MUST have equity in the property to claim
an exemption
(3) Czar owns H2 worth $10K, owes the bank $10K on a loan, MS
exemption on car is $2K
-Czar gets to exempt $2K b/c he has equity in the H2…the loan is
not connected to the H2 this time
-exemptions are born from the idea that no matter how crummy someone is, they
deserve place to live, mode of transportation, and a way to make a living
*homestead exemption
*automobile exemption
*tools of the trade exemption
d) fraudulent conveyances: 2 types of fraudulent conveyances that all states recognize:
1) actual fraudulent conveyance: property conveyed w/ intent to hinder, delay or
defraud C…C can sue the transferee for the property
conveyed…law recognizes “badges of fraud” which are evidence of
fraudulent conveyances:
(a) transfer of property right before judgment, and
(b) transfer to a close relative or business partner
2) constructive fraudulent conveyance: do not have to prove intent to defraud
C, all you have to show is that at the time the D was insolvent he
transferred property for less than it was worth…state laws differ as to
whether they will recognize fraudulent conveyances
a) many states hold that the smallest bit of consideration will
prevent the C from asserting a fraudulent conveyance
(consideration sufficient to support a K)
b) other states look into the consideration in order to determine if
the consideration is of “reasonably equivalent value”
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e) debtor’s interrogatories: UC has judgment but really does not know what type of
assets D has, most state’s laws permit UC to collect debtor’s interrogatories
whereby you ask them, “how much money is in your wallet?”, “do you own that
watch?”, “how did you get here today?”
f) 4th amendment does NOT apply to debt collection, sheriff may enter D’s house w/out
D’s permission and take whatever belongs to D
g) Art 9 gives SCs self-help remedies in that upon default by D, SC can go grab the
personal property w/out involving the court
II. Security and Foreclosure (p.21-36)
1. Liens
a) a security interest is a type of lien:
1) security interest/consensual liens: arises as result of agreement b/t SC and D
2) judicial liens: liens that arise when an UC gets a judgment against a D…nonconsensual liens…judgment automatically results in lien on real property
but for personal property UC has to get enter judgment and get a writ of
assistance issued to sheriff
3) statutory liens: arise purely by operation of law…non-consensual liens
-mechanic’s lien: exists when person works on property of another, the
lien exists for up to the value of the work done
-inn keeper’s lien: hotel can get lien on anything in the room
2. UC v. SC
a) why would anyone want to be an UC?
1) higher interest rates, although it comes w/ higher risk
2) sometimes there is no choice i.e. Πs who win tort-claims against Δs become
involuntary unsecured creditors
3) sometimes people do not know they are doing it
4) sometimes it is inappropriate to ask for security interest
b) UC v. SC
1) security interests lead to lower interest rates and are better for creditors b/c they
have collateral…however, small mistake in security agreement can make
SC an UC
2) main reason to have a security interest is leverage b/c it will intimidate D’s
to think they can have their property taken
3) UC don’t like SC b/c SC get first dibs on the assets, but it would be almost
impossible to outlaw security interests as long as economy believes in free
transferability of property
4) UC will always lose to SC in judgments…even when SC comes along after UC
and even though UC did all the work in obtaining the judgment
3. Substance Over Form
a) under Art 9, if necessary courts will disregard what the parties call their agreement
(parties may call it a lease, while court may find it to be a security agreement)
b) parties can not avoid the requirements of Art 9 by cleverly disguising the transaction
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*Basil (p.27): if parties to the transaction characterize their transaction as a lease,
courts will still examine the transaction to determine if it is actually a
security interest…e.g., where purchase of car is disguised as a lease in that
payments on lease are exactly equal to payments on purchase of car
c) DANGER: in purchase disguised as a lease, D/C haven’t complied w/ Art 9, therefore
the courts will go ahead and deem the transaction a purchase and give the
C UC status
d) §109(a)(1): Art 9 applies to any transaction, regardless of form, where there is a
security interest
4. Foreclosure Procedure
a) judicial foreclosure: procedure by which C may go to court to get the property
*accomplished through entry of a court order – civil action; remedy is replevin
*SC don’t have to go for personal property (b/c of self-help) but both SC and UC
have to go for real property and UC have to go for personal property
b) what is actually being foreclosed at foreclosure sale?
*the right to redeem the property (right of D)…once this right has been
foreclosed, the D can not cure the default
* “until the gavel drops” in all states including real property, the D has the right to
redeem the property by paying unpaid payments, plus interest, plus fees,
plus cost of collection…D does not get to redeem by satisfying the
payments D has missed, D must pay the entire balance of the property plus
any costs associated w/ collection (b/c of “acceleration clause”)…called
tendering the debt
c) UCC foreclosure by sale: under Art 9 there is a right to redeem which ends when the
gavel drops at the foreclosure sale of the collateral…after default the SC takes
possession of the collateral and then conducts a sale (w/out having to do public
auction) and once the sale is final, then the D’s right to redeem is foreclosed
5. Problems
*2.2
*2.5
III. Repossession of Collateral (p.37-58)
1. Importance of Possession Pending Foreclosure
a) reasons why SC wants possession pending foreclosure:
1) D whose rights in the collateral are about to extinguish has little interest in
preserving it
2) use of the collateral b/t the time the right to foreclose accrues and the time it
becomes final may have substantial economic value
3) if the D is in possession of the collateral leading up to the sale, then it may be
difficult or impossible for prospective purchasers to evaluate the property,
thereby depressing the resale price
2. Right to Possession Pending Foreclosure – Personal Property
a) §9-609: SC has the right to take possession of the property immediately upon default if
as long as there is no breach of the peace
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b) if a breach of the peace will result from repossessing the collateral then the SC must
get a court order, usually by filing an action for replevin
c) no notice is required in order for a SC to repossess
*Dell’s Big Saver Food, Inc: SC went to court and got court order which granted
the SC immediate possession of the collateral after the D defaulted on
payments…D was not given any notice of the proceeding and later
claimed the order was a violation of D’s due process rights
*Ct held that due process only requires notice and an opportunity
to be heard…this ex parte proceeding is not a final
judgment and there is an opportunity to be heard in the
form of a post-seizure hearing
-also, the sheriff can seize collateral w/out notice so
long as the D has the immediate right to a
hearing and SC may have to post a bond
d) if there is a resale of the property then it is only required to be commercially
reasonable
3. Art 9 Right to Self-Help Repossession
*§9-609:
(a) After default, a secured party:
(1) may take possession of collateral; and
(2) w/out removal, may render equipment unusable and dispose of
collateral on a D’s premises under §9-610
*think large farm equip that is difficult to move
(b) A secured party may proceed under subsection (a):
(1) pursuant to judicial process; or
(2) w/out judicial process, if the secured party can proceed w/out
breach of the peace
(c) If so agreed, and in any event after default, a secured party may
require a D to assemble the collateral and make it available to the
secured party at a place to be designated by the secure party which
is reasonably convenient to both parties
4. Limits of Self-Help: Breach of the Peace
a) if there is possibility of breach of the peace, the SC must back off and resort to the
judicial process to repossess the collateral …the SC need not involve courts or
public officials if the SC can get possession w/out a breach of the peace, but if the
D resists repossession, then the SC MUST obtain a court order for repossession
from the D
b) 2 factors to determine if breach of peace occurred:
(1) potential for immediate violence, and
(2) nature of the premises intruded upon
c) Salisbury Livestock (p.48): SC repossessed some cars from ranch and D claimed
breach of the peace…D claims cars were parked close to the house which resulted
in breach of the peace even though there was no actual breach of the peace
*there does not have to be an actual breach of the peace for D to
assert the repossession was prohibited, just a threat of a breach of
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the peace
*ALL Cts will prohibit SCs from:
(1) entering D’s house even if door is unlocked
(2) breaking into a private location to repossess property
*however, mere technical trespass is not a breach of the peace
d) However, where an attempted repossession is halted upon protest by the D, nothing in
the Code forbids the SC from making second, third or more attempts at
repossession
-HYPOS: p.50
5. Due Process and §9-609
a) in self-help repossession, due process requires:
(1) D be provided w/ a hearing before the property/collateral is taken, or
(2) D be provided w/ certain pre-seizure procedural safeguards, coupled w/ a
prompt post-deprivation hearing before final judgment
6. Self-Help Against Accounts as Collateral
a) collateral can be “accounts receivable” of business…these accounts receivable are
personal property…problem is that SC can not use traditional method of
repossession since the source of the collateral is intangible
b) Ways in which a security agreement may be structured when collateral is accounts:
(1) Creditor could give debtor complete freedom to collect on accounts and use
the proceeds in his business.
(2) Creditor could allow debtor to collect on accounts but require him to
immediately apply a portion of the proceeds to the loan.
(3) Creditor may arrange with the debtor that the account debtors will pay directly
to the creditor.
(4) Creditor may employ lock box method
c) Art 9 provides a self-help remedy to the SC…under §9-607 the SC who knows the
identity of the account debtors can simply send them written notices to directly
pay the accounts receivable to the SC, basically just bypasses the gym and SC is
allowed to collect collateral directly
e) another way to structure this is for business to have accounts receivable
payments mailed to a PO Box and give the SC the key, this way
the business’s debtors do not know the business has defaulted on a
security agreement…this method is known as “lockbox”
7. Problems
*3.2
*3.3
IV. Art 9 Sale and Deficiency (p.80-94)
1. Strict Foreclosure Under Art 9
a) Art 9’s stated purpose is to secure repayment of debt by the liquidation of the collateral
in the event of a default by the D…sales under Art 9 serve the same purpose as
judicial sales, they determine the value of the collateral and convert it into cash
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b) In lieu of other remedies, the SC who repossesses goods may elect to keep them and
forget the rest of the debt. This process is called strict foreclosure. SC electing
strict foreclosure must send an authentication notice to the D of the SC’s
intention to keep the collateral in satisfaction of the debt. The SC must also
send such a notice to other Cs having an interest in the collateral if those Cs
themselves have previously sent an authenticated notice to the repossessing SC of
their interest OR filed a FS
c) If SC sends D a proposal for retention of the collateral in full satisfaction of the debt
and does not receive a notification of objection to the proposal w/in 20 days,
consent is implied
d) 3 situations where there MUST be a sale of the collateral:
1) if w/in 20 days after the notice is sent, any person entitled to notice objects to
the SC’s proposal to retain the goods in satisfaction of the debt
2) if the collateral is in consumer goods, the D can consent, in writing or by
silence, to strict foreclosure only after repossession
3) strict foreclosure is NOT permitted if the D has paid 60% of the cash price of
consumer goods purchased on credit or 60% of the loan against consumer
goods
2. Sale Procedure Under Art 9
a) if there is going to be a sale of collateral, there are two rules:
1) SC must provide notice of the sale to the D and all other lienholders (in case
the collateral is sold for more than the amount owed to SC)
2) §9-610(b): “every aspect of the disposition – including the method, manner,
time, place and terms – MUST be commercially reasonable”
b) persons to be notified:
1) debtor
2) any secondary obligors
3) if the collateral is other that consumer goods:
*anyone that has notified the debtor that they want notice
*any secured creditor that has requested notification
*any other secured party with a security interest in the collateral that
requested notification.
c) exceptions to providing notice:
1) if collateral is stock (b/c it already has FMV)
2) if collateral is perishable goods
d) failure to provide notice:
1) failure to provide notice does not invalidate the sale, but it is a defect that can
have the effect of reducing the amount of deficiency the SC can
recover
2) fact that sale will not be invalidated provides protection to good
faith purchasers at Art 9 sale
e) types of sales:
1) public sale: auction determined at specific time in specific public place
2) private sale: anything other than a public auction…public is not invited
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-in order to get maximum value, SC markets to individuals believed to be
interested in the collateral
-“e-bay” creates an interesting problem whether it is private or public
f) Fed. Dep. Ins. Corp. (p.84): notice provided to D by SC did not make it clear where
sale was to take place...Ct said this did not invalidate the Art 9 sale of the
collateral…Ct puts burden on D to find out where sale is if D is truly
interested…as a SC you should do all that is required to provide adequate notice,
however, if the notice is reasonably informative to force the reasonable D to
inquire further, the notice is probably commercially reasonable
g) HYPOS:
1) notice says sale will occur on June 1 yet sale actually takes place on May 1
-if D proves he was told sale would be on June 1 and collateral was sold
on May 1, D probably has claim…although honestly what are the
D’s damages…probably only has claim if as a result of the sale the
SC is over-secured
2) notice says sale will occur on May 1 but sale actually occurs July 1
-result probably different here b/c once D showed up for sale and no one
was there, a reasonable D would have inquired further as to
where/when sale was to occur
3) notice provides no date or time as to sale of collateral
-notice is still commercially reasonable so long as D has time to contact
the SC to find out time and location of sale
*Art 9 attempts to lay down rules to provide some sense of certainty to
commercial transactions although Art 9 does not want rules to become so
rigid as to hinder the transaction
*realize, the D has just had his property seized, if D is at all interested in the
property, D will be doing everything he can to figure out when the sale is
h) contents of sufficient notice
-contents of notification are sufficient if:
(a) describes the D and SC
(b) describes the collateral that is subject to disposition
(c) states method of intended disposition
(d) states that the D is entitled to an accounting of unpaid indebtedness
(e) states time and place of a public disposition or time after which any
other dispositions are made
i) errors in notice
-contents of notification providing substantially the information listed in §9613(1) are sufficient, even if the notification includes:
(a) information not specified in §9-613(1), or
(b) minor errors that are not “materially misleading”
*§9-614 provides proper notice where consumer goods are being sold
j) commercially unreasonable sale
-where sale conducted by SC is determined to be commercially unreasonable,
there is a rebuttable presumption that the value of the collateral was at
least that of the debt (meaning there will be NO chance for SC to bring
deficiency action against D)
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k) Chavers v. Frazier (p.86): what is the commercially reasonable manner to sell an
airplane?...SC must conduct a commercially reasonable sale in the context of
the collateral…as a SC you want to do what is necessary to have a commercially
reasonable sale b/c if you do not, then when you go after D for the deficiency, D
will point to your sloppiness w/ the sale and that you did not maximize the value
of the collateral
l) Problems
*5.1
*5.2
Chapter 2: Creditor’s Remedies in Bankruptcy
I. Federal Bankruptcy Law
a) typically based on 2 principles:
1) D receives a discharge of all debts…personal obligation to pay is wiped clean
2) bankruptcy process provides an orderly liquidation of the D’s financial assets
and an orderly distribution of those assets to Cs
b) Bankruptcy Law is not a means to erase security interests in a debtor’s collateral
d) Liens ride through bankruptcy. What is erased is the debtor’s personal obligation to
repay the loan.
1. Chapter 7: Liquidation Bankruptcy/Straight Bankruptcy
a) D files petition for bankruptcy asking for protection of federal bankruptcy
court…official is appointed by the court (“bankruptcy trustee” (BT)) who owes
a fiduciary duty to the Cs…trustee is not there to help the D but rather the
C…trustee’s job is to gather up all of the D’s property, liquidate it and
distribute it to the Cs
*caveat is that state law typically allows certain property to be exempted,
i.e. homestead, etc…this property will not be part of the
bankruptcy proceeding
*you do not need a judgment to be a C at bankruptcy, just proof that you
are owed money by D…trustee will investigate validity of claim
*anything earned by the D after time of filing is retained by D
b) upon filing of bankruptcy, the D lists all Cs who are then sent a form that has the
notice of bankruptcy on one side and a “proof of claim” on the other side…trustee
must then look over these claims in order to determine the validity of the
claims…remember, the trustee has fiduciary duty to Cs to maximize the estate for
the UCs
c) filing of bankruptcy petition gives rise to an automatic stay which is an injunction that
arises automatically the moment the bankruptcy petition is filed in bankruptcy
court, it does not matter whether or not any C was provided notice
*automatic stay stops ALL C collection activity of any sort, particularly in
an attempt to grab the D’s property…due to “supremacy clause”
federal law of bankruptcy trumps Art 9 state law rights of creditors
*if an act is unknowingly committed by a C in violation of the automatic
stay, court can undo the action
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*if an act is knowingly committed by a C in violation of the automatic
stay, the C can be sued for punitive damages
*many bankruptcy cases are filed just to invoke the automatic
stay...corporation may seek the protection of the
automatic stay in order to determine whether they are solvent or
not
* exceptions:
(1) criminal prosecutions are more important than bankruptcy
charges
(2) actions for alimony, maintenance, child support
*can go to judge in an attempt to lift automatic stay
*NEVER tell a client they can continue collection activities
once the D has filed bankruptcy
d) SCs are going to get their collateral which is one of the reasons they are SCs…if there
are no more assets remaining after SCs have been satisfied, the debt owed to the
UCs is wiped clean and UCs get nothing…if there are assets remaining after SCs
have been satisfied, assets are divided among the UCs on pro rata basis
*however, b/c of duty that trustee owes to ALL Cs, trustee MUST
investigate every security interest asserted by the SCs…if trustee
finds imperfection in security interest then trustee can ask court to
expunge the security interest and these assets are then divided up
among the UCs on pro rata basis
e) all property that trustee gathers from D is called the estate…after collateral is
distributed to SCs, the trustee takes all of the assets – including tort actions that
have not yet been filed (any legal or equitable rights) – and divide it up among the
UCs on pro rata basis
*example of disposition of assets at bankruptcy:
-UC1= $50K Assets= $1K 
UC1= $500
-UC2= $30K
UC2= $300
-UC3= $20K
UC3= $200
f) HYPO:
1) under-SC loans D $100K for a car which the SC took a security interest in…D
has made no payments and the car has depreciated in value to
$50K…what does under-SC get?
*bifurcation of claims: C has a secured claim for whatever the car
is sold for b/c it is collateral (or perhaps C can keep the car
itself if he wishes) AND C has an unsecured claim for
whatever remains of the $100K debt
*under-SC is not entitled to interest on the debt b/c this would
merely complicate things and the idea of this process is to
quickly and efficiently distribute D’s assets
*sometimes bankruptcy court will lift the automatic stay where the
SC is under-secured b/c the D has no equity in the
collateral thus the SC is going to get it anyway, however, if
the D does have equity in the collateral, the stay will not be
lifted
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2) over-SC loans D $50K for a car which SC takes a security interest in…D has
made no payments…what does over-SC get?
*interest will be allowed to accrue on the debt until either it
reaches $75K…this is only fair b/c this is the deal the D
voluntarily made w/ the SC
g) Ds generally have no money so in a typical bankruptcy situation, the UC gets 0%
recovery on every dollar of debt
*ex: after SCs are satisfied, “hotch pot” of assets is $1K in it and claims of
UCs are $10K…UCs get .10c on every $1…once this is figured
out, the trustee sends out checks to the UCs whose claims have
then been validated
2. Chapter 13 Bankruptcy
a) D gets to keep assets so long as D can propose a plan by which D will finance their
debts and pay Cs from future earnings…plan has to meet certain minimums or it
automatically becomes a Chapter 7 Liquidation Bankruptcy
b) Individuals w/ a regular income can file Chapter 13 if:
1) present plan to bankruptcy court by which:
a) D over the next 3 years will pay “disposable income” to Cs
*this is income above and beyond that which is necessary to live
b) over 3 years, D must give Cs at least as much as Cs would have gotten
had D filed a Chapter 7 bankruptcy
*must have some formula for interest b/c money will decrease over
time
3. Chapter 11 Bankruptcy
a) same as Chapter 13, but D presents plans to Cs who vote on it…no time limit…most
appropriate for corporations b/c under Common law when corporation goes
insolvent its creditors own it
b) if plan is rejected, it is converted to Chapter 7 bankruptcy…often creditors get shares
of stock when corporation comes out of bankruptcy
Chapter 3: Creation of Security Interests
I. Formalities for Attachment (p.135-155)
1. Formalities for Art 9 Security Interests
a) “a security interest is meant to be enforceable not just b/t the D and C, but a perfected
security interest also has binding effect as against the rest of the world”…permits
a SC to gain a property interest in some property of the D such that it prevents UC
from looking to that property to satisfy a debt (hints at relation b/t SC & UC)
b) SC has a perfected security interest when 2 conditions are met:
1) security interest attaches to the collateral
2) all the steps necessary to perfect the security interest have taken place
c) in MS the way a SC perfects a security interest is to make a filing w/ the state or a SC
creditor may perfect a security interest by taking possession of the collateral
*perfecting a security interest is a way to let the rest of the world know
that the SC has an interest in the collateral
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d) a security interest attaches to collateral when it becomes enforceable against the D w/
respect to collateral, unless an agreement expressly postpones the attachment
e) formalities required for the creation of a security interest enforceable against the
debtor…only when all 3 requirements are met will the security interest attach to
the collateral and become enforceable against the D:
1) collateral must be in the possession of the SC, OR the D must have
“authenticated a security agreement which contains a description
of the collateral”; (CREATION)
-“authenticated security agreement” must be able to be
reduced to a writing (see infra)
2) value must have been given by SC;
-“value” is anything sufficient to support a K
(consideration) but can also be something not
(ATTACHMENT)
sufficient to support a K (past
consideration)…extremely broad term
-this is satisfied when SC provides the $$ for the loan
3) the D must have rights in the collateral
-in basic sense, D can not grant a security interest in
property that D has no rights in…but also, this is
important where security interest is being granted in
goods as soon as they are identified w/ the buyer/D
-when disputes arise if often boils down to who the
collateral was identified w/ first, who perfected first
f) In re Ace Lumber (p.140): req’t of an authenticated security agreement is not always
satisfied by document that says “security agreement”…req’t is “something that
can be reduced to tangible writing”…all the parties here agreed they had entered
into a security agreement but there was no document that authenticated the
security agreement…they had some documents that had been exchanged back and
forth
*Ct applied the composite document doctrine: if the parties can piece
together documents to be read together as a security agreement, the
cts will uphold it as sufficiently authenticating a security
agreement
*the documents must contain some term indicating a security agreement
and also some indication that the D authorized the transaction
g) Problem
*8.4
II. How to Describe Collateral in a Security Agreement (p.155-68)
1. Sufficiency of Description: Art 9 Security Agreements
a) primary function of description of collateral in security agreement is to enable
interested parties to identify the collateral…always include the D and C but also
may include 3rd parties
b) collateral can be described in a security agreement by either:
1) type
-broad categories defined by Art 9 (see definitions page, attached)
12
2) item: requires particularity
-serial #, etc.
-washer would be sufficient b/c people only have one washer, but TV
would not b/c people have more than one TV
c) description that says, “all the D’s assets or personal property” is NOT sufficient…it is
possible to reach the same result as this description using both particularity and
categories of collateral
d) In re Shirel: Shirel applied for credit card w/ appliance store, complex K stated that
anything purchased w/ the credit card would be used as collateral for the debt
created
*Ct held that “all merchandise” was not a sufficient enough description to
create a security interest, although Czar questions this, the
description was definitely more than what is used in §9-108(c)
e) practical advice: if you are describing collateral, put as much info in the description as
possible…the more detailed a description the better; however, there is a line of
cases that says that generic descriptions are ok as long as a reasonable person
would be able to identify the collateral from that description (applying a
community standard)
2. After-Acquired Property (§9-204)
a) “after-acquired property” clause entails any property the D acquires after the
transaction takes place... “D grants to C a security interest in all _____ owned or
hereinafter acquired”
b) this prevents the D and SC from having to re-negotiate a new security agreement each
time the D acquired additional property covered in the security agreement as
collateral…also creates a floating lien in that the $$ amount of the collateral ebbs
and flows as the amount of inventory goes up and down
c) if security agreement grants a security interest in inventory, even if the security
agreement does not contain an “after-acquired property” clause, the cts
will read one into the security agreement…however, most courts will
NOT read an “after-acquired property” clause into a security agreement
w/ any other type of collateral
3. Future Advances (§9-204)
a) “future advance clauses”: clause that says the collateral mentioned in this security
agreement operates to cover both the advance now and any future
advances…prevents parties from having to re-negotiate every time they want to
borrow money…usually works in coordination w/ an “after-acquired property”
clause
b) future obligations that come into existence as a result of an additional extension of
credit by the SC to the D are “future advances”
4. Dragnet Clause
a) “dragnet clause”: a security agreement sometimes provides that the collateral will be
security not only for repayment of this loan but also for any other debts owed by
the D to the SC now or in the future…clause in a security agreement that says, “I
13
D grant security interest in this collateral…this secures all obligations the D has
or will have w/ the C”
*prior to these clauses, D/SC had to do a new security agreement for every transaction…these
clauses also have huge impact on priority…allowing a perfected security interest to attach
to the collateral from the date of the original security agreement allows SCs to lock in
their priority
III. Proceeds, Products and Other Value-Tracing Concepts (p.168-83)
1. Proceeds
a) proceeds includes anything received by the D on the sale or any other kind of
disposition of the collateral, whether or not the disposition was authorized by C
b) even if security agreement does not mention proceeds, the security interest
automatically covers them (like “after-acquired property” clause and
inventory)…proceeds are defined as part of collateral
c) McLemore v. Mid-South (p.170): PIK payments are part of gov’t subsidy whereby
farmers K w/ gov’t not to grow crops…SC w/ security interest in the crops on that
property then argues that PIK payments are proceeds
*Ct held that PIK payments were proceeds since they were a result of the
crops which is what the security agreement covered…very pro-C
decision
d) HYPO:
*D grants SC security interest in racehorse, horse wins race worth 1M, breaks
ankle and is killed…there is no insurance…SC argues that winnings are
proceeds from the sale of the horse’s ability to run the race, this is so b/c
horse declines in value as he runs the race…Czar says nice try but not
enough, SC should have included this in security agreement
2. Termination of Security Interest in Collateral
a) security interest continues in collateral unless SC authorizes sale of the collateral
*if SC does not authorize sale of collateral, but D sells it anyway, what remedies
does SC have…security interest continues in collateral
b) if SC authorizes sale of collateral, the security interest continues in the form of
proceeds…§9-315(a)(1): buyer takes free of the security interest and the SC can
only look to the D and the proceeds
c) some states make it a crime to sell collateral covered in a security agreement, called
selling out of trust
3. Tracing Proceeds
a) §9-315(a)(2): security interest attaches to any identifiable proceeds…§9-315(b)(2):
proceeds that are commingled with other property can be recovered if SC can
identify them by tracing them (covered infra)
b) to determine what is identifiable, SCs use the lowest intermediate balance
rule…make a chart (p.176)
Description
Deposits
W/drawals
Balance
Opening balance
$3,000
14
Sale of Ford
$12,000
$15,000
Tuition payment
$11,000
$4,000
Student loan
$6,000
$10,000
Books
$5,000
$5,000
-analysis:
(a) what was opening balance on day deposit of proceeds was made
(b) put deposits and withdrawals in chronological order
(c) look at time b/t deposit of the proceeds and current date
(d) lowest # (other than the opening balance) is the lowest intermediate
balance…this is what the SC gets…here it is $4,000
c) if the lowest intermediate balance is $0 on day 1, then $12K is deposited, then $12K is
w/drawn for tuition, then the $12K can readily be traced to the school
d) if you as SC are unsure whether or not some potential collateral constitutes a proceed,
use specific terms in the security agreement to make sure you capture these other
things
-calf born from cow that is collateral
4. Other Value Tracing Techniques
a) a secured party who wants to contract as nearly as possible for the value of its
collateral, it whatever form it may take, will want to employ some additional
value tracing concepts.
b) Product – something the collateral produces
*ex – wool is the product of sheep
c) Profits – used to describe the excess revenue of a business over the expenses where the
business itself is the collateral
*problem is that the word profits is ambiguous
*anytime a security interest includes the term profits w/o any other evidence, the
court will interpret it to mean profit a prendre which gives the creditor the
right to enter the debtor’s land and extract natural resources.
d) Rents – money paid for temporary use of the collateral. Offspring of collateral is most
often used with regard to animals.
5. Non Value Tracing Concepts
a) replacements, additions, or substitutions to the collateral
b) they can pick up ppty acquired by the debtor eith value not derived from previously
existing collateral.
b) Value in after acquired property, replacements, additions, and substitutions can come
entirely from some other source, such as unencumbered property of the debtor, a
new loan, or a capital contribution by the debtor’s owners.
6. Problems
*10.1
*10.2
IV. Legal Limits on What May be Collateral (p.196-217)
1. Property that Cannot be Collateral
15
a) fixtures: if the fixture is removed from the property it would cause substantial damage
to the real property…Art 9 covers interests in personal property, however, there
are some pieces of personal property that become so attached to the real property
that the personal property is considered part of the real property…this is the only
limit the UCC places on what may serve as collateral
b) Federal Trade Comm’n specifically lists other items that may not be used as
collateral…since FTC is federal law and Art 9 is state law, supremacy clause
mandates that FTC wins:
1) non-possessory, non-purchase money sec interest (PMSI) in D’s consumer
goods:
-non-possessory: means that D retains possession of what was purchased
on credit and also retains possession of collateral
-non-purchase money: means that the SC is not taking secured interest in
what was purchased but rather something else
-FTC does not want SC taking security interest in collateral that is highly
personal in nature
2) future income of D: not enforceable under Art 9…however, just b/c SC can
not grant a security interest in future income does not mean that SC can
not get a judgment lien to garnish wages
3) pension rights: just not right for SC to tie up D’s retirement package w/
security interest
4) licenses: e.g., liquor license…gov’t issued license resembles property but gov’t
considers it a privilege ONLY granted to the person named on the
license…utilitarian definition of property is something you can sell, thus a
license is not property
*however, it is not uncommon for D to grant a security interest in a
liquor license among other things, if SC takes possession of
the license then the issuing committee can then transfer the
rights under the liquor license…but, if gov’t wants to refuse
them the right to transfer liquor license the gov’t most
certainly can
* Debtors can create security interests in (1) the proceeds that
come into existence when debtors sell those licenses and
franchises and (2) the revenues that debtors derive from the
use of the licenses and franchise.
Chapter 4: Default: The Gateway to Remedies
I. Default, Acceleration and Cure Under State Law (p.217-39)
1. Default & Acceleration
a) default is defined most simply as the D’s failure to pay the debt when due or otherwise
perform the agreement b/t the D and C…terms of default will be in the security
agreement and can basically be whatever the D and C agree to…p.218: Standard
Default Provisions…notice of default is not required
16
b) acceleration clause: term in security agreement that says that upon default, all
obligations of the D under the K become due and owing…it is malpractice not to
put “acceleration provision” in security agreement if you are working
for SC
2. Limits on the Enforceability of Acceleration Clauses
a) the SC has the right to exercise the acceleration clause even for a tiny default in
payment, however, SC can also exercise the acceleration clause if the SC “deems
itself insecure” the SC has the right to accelerate ONLY if the SC in “good faith”
believes the prospect of payment or performance is impaired
* “good faith” means honesty in fact and observance of reasonable
commercial standards
b) Czar says this creates a little bit of uncertainty any time the SC exercises the right of
acceleration upon default
c) JR Hale (p.223): stands for the proposition that some cts will entertain the notion that
due to the behavior of the SC, certain duties must be imposed on SC
3. Lender Liability
a) one area where all cts hold that SC has duty to D is where upon default the SC comes
in and takes over D’s business, SC has the duty to run the business appropriately
and to satisfy debts to creditors as well as himself w/ $$ made
b) KMC (p.230): ct held SC liable for damages for foreclosing on D and ruining the D’s
business even though SC had every right to foreclose
c) Kham & Nates (p.230): ct held opposite of KMC and stated that “banks are not there
to be your (D’s) friend”
4. Problems
*13.4
Chapter 5: The Prototypical Secured Transaction
I. The Prototypical Secured Transaction (p.253-73)
1. Parties
a) SC: Deutsche Bank
b) D: Bonnie’s Boat World
c) Supplier: boat manufacturer
d) Consumers: boat purchasers
2. Floor-Planning Agreement (Inventory Lending Agreement)
a) 3 party agreement whereby SC agrees to finance but if SC has to repossess the boats
(b/c D defaults on security agreement), then SC can give the boats right back to
Supplier/Manufacturer who will satisfy debts of D
b) D borrows money from SC to buy stuff from Supplier/Manufactuter…SC takes a
security interest in “stuff”/boats being purchased w/ money loaned to D
3. Documents
a) security agreement (p.255)
17
-p.256, para.3: grant of the security interest…includes all categories of collateral
except “farm products”…includes “after-acquired property”
clause…includes proceeds
-p.257: obligations D(dealer) has to SC
-p.260(a)-(s): terms of default
-p.260-61: D’s obligations after default
b) financing statement (p.264)
-document MUST be filed w/ state financing office in order to perfect a security
interest, unless SC perfects security interest by taking possession of
collateral
-if this document is filed in wrong place, SC is actually a UC and although K w/
D is still enforceable, there will be other SCs who will have priority over
UC
c) personal guarantee (p.265)
-since D/Bonnie’s Boat World is a corporation (which we know b/c it says “Inc.”
on financing statement), D/Bonnie’s Boat World has limited liability…so,
SC/Deutsche Bank requires D/Bonnie’s Boat World to sign a personal
guarantee which effectively suspends limited liability for the
transaction…D/Bonnie’s Boat World is willing to sign this b/c if she
doesn’t then SC/Deutsche Bank will not loan her the money
d) floorplan agreement
-agreement b/t SC/Deutsche Bank and Suppler/boat manufacturer whereby
SC/Deutsche Bank gets full balance on loan from manufacturer
4. Monitoring
a) idea of “trust but verify”…theoretically, the D/Bonnie’s Boat World could attempt to
make some quick money if things went south…in order to prevent this,
SC/Deutsche Bank (and maybe even Supplier/boat manufacturer since they are on
hook as well) will monitor the collateral
b) there may be a provision in the security agreement which allows SC to enter premises
at any time to inspect and requiring D to produce books upon request
PART II: THE CREDITOR-3RD PARTY RELATIONSHIP
Chapter 6: Perfection
I. The Personal Property Filing Systems (p.275-94)
1. Priority
a) focus has now shifted from relationship b/t D & C to relationship b/t SC and others
claiming to have an interest in the collateral
b) if there is more than one lien against collateral, each lien will have priority…liens are
commonly labeled “1st”, “2d”, “3d”…a lien w/ a higher priority over another is
referred to as a senior lien or prior lien and the other is referred to as a junior
lien
c) if the value of the collateral is insufficient to pay all of the liens, the senior liens take
priority over the junior liens
d) Peerless Packing (p.278): 6 UCs all supply a grocery store…one of them approaches
D and demands a security interest in the business (past consideration is
18
sufficient to support a security interest)…D defaults on bills and SC takes
possession of store to the dismay of the remaining 5 UCs who bring suit claiming
unjust enrichment
*Ct said unjust enrichment is not a sufficient claim to defeat the claim
of a SC…law prefers the person w/ priority over a D’s property
e) HYPO:
*SC hires the D as manager of business then sends letter to UCs telling them that
the collateral is being retained by the SC in lieu of foreclosure…UCs are
now “s-o-l” b/c if they sue the D he will file bankruptcy which discharges
the debt owed to the UCs
f) the only way for an UC to destroy priority is to show that the security interest was
never perfected or never attached thus security interest never became effective
2. Priority Among UCs
a) typically established by K or in bankruptcy Congress has stated that there are 12
different types of UCs who will be paid before the standard UC…a bondholder is
an UC
3. Perfection of Security Interest
a) perfecting a security interest establishes the SC’s priority…perfection is usually done
through filing a financing statement w/ a state office…Czar says think of this as
the SC leaving a message for any subsequent searchers that I (the SC) have a
security interest in this piece of collateral
b) subsequent searchers know where to look so this serves to protect them from loaning
the D money on the same terms
c) excluding GA & LA, the office of filing is the state level, and SCs or subsequent
searchers should go to the secretary of state’s office or some sub-office to do a
search or file a financing statement… “fixture filings” are different in that they
are typically filed locally rather than on a state level…perfection of a copyright is
also not done at the state level
d) National Peregrine, Inc (p.284): Congress has created office specifically for filing of
financing statements in copyrights…moral of the story is that SC must look
everywhere he can think of and file a financing statement in every office SC feels
may be relevant…all you are trying to do is notify all subsequent searchers that
you (the SC) have a security interest in the collateral
*Patent Act does not preempt state filing system the same way that the
Copyright Act does.
4. Problem
*16.1
II. Art 9 Financing Statements: The D’s Name (p.294-312)
1. Components of the Filing System
a) if perfection is going to be obtained by filing a financing statement, what information
is required? (discussed infra)
19
b) Art 9 financing statement does not have to be perfect, it only has to be sufficient to
provide notice to subsequent searchers that there is a security interest in the
property…§9-506(a): “a financing statement substantially complying w/ the
requirements of [part 5 of Art 9] is effective, even if it includes minor errors or
omissions, unless the errors or omissions make the financing statement seriously
misleading”
*seriously misleading errors make the financing statement defective and
SC will become UC b/c security interest will not be perfected
c) presumption that financing statements are effective.
2. Correct Names for Use on Financing Statements
a) personal property system is based on the name of the D…more personal property
exists than real property and if all system did was identify name of personal
property, system would not work b/c so much personal property is similar while
identical names are very uncommon
b) Individual as D
(i) use name on driver’s license…if you are a SC lending money to an individual
D you should always get a copy of their driver’s license or birth certificate
(ii) GP general partnerships are not corporations, thus when doing financing
statement for general partnership, SC must determine names of all partners
*LP (limited partnership) follows same process as corporations
(iii) if you use some official record(s) of names, you at least have an argument
that you used the proper name.
c) Corporation as D
(i) name of the D indicated on the public record where D incorporated the
business
(ii) this certificate of incorporation will show the one and only true name of the
corporation
(iii) be careful not to put trade name on the financing statement…easiest way
to tell this is that corporation’s official name will have one of magic words
after it, i.e. “Corp., Company, Co., Inc., LLC”…using only the trade
name renders the financing statement ineffective. It does not
automatically render a financing stmt ineffective, however it is not
necessary nor sufficient.
*can use “McDonald’s, Inc. d/b/a McDonald’s”
3. Errors in the D’s Name on Financing Statement
a) most searches are initiated by persons who intend to lend money to the D…they search
to assure themselves that no other SC has perfected a prior security interest in the
collateral…search is conducted in the D name index and is for listings under the
name of the D, this search should discover any financing statements filed and
indexed under that name
b) if the searcher searches under the correct name of the D, but does not find any prior
filings b/c the prior SC listed an incorrect name on its financing statement, the
prior filing is ineffective…seriously misleading error in financing statement
renders the statement ineffective which prevents the C from becoming a SC
20
c) if the searcher searches under the correct name of the D, but does not find prior filings
made in the correct name of the D b/c the filing office indexed the prior filings
incorrectly, the prior filings are ineffective
*in this case, the subsequent searcher may have a COA against the filing
officer
d) however, if a search of the records of the filing office under the D’s correct name,
using the filing office’s standard search logic, if any, would disclose a
financing statement that fails sufficiently to provide the name of the D in
accordance w/ §9-503(a), the name provided does not make the financing
statement seriously misleading
*this is a way of keeping subsequent searchers in check b/c they are going
to do all they can to claim that prior SC did not have a perfected
security interest
*this is a hypothetical standard, all the test requires is a showing that
“had the subsequent searcher conducted a reasonable search, he or
she would have discovered the financing statement”
*purpose is the concept of notice
e) Trans-American (p.304): “Ward Corp, Inc.” appeared on financing statement…name
on document of incorporation was “Wardcorp, Inc.”…although very close in
relationship to one another, upon examination of how far these names would be
from each other in an alphabetical search on a computer:
*Ct held that the name “Ward Corp, Inc.” was seriously misleading and
thus the security interest of the previous SC was not perfected
*Ct applied test and determined that a reasonable search using the
standard search logic would not have disclosed the financing
statement
-see also In re Tyler (p.308) (holding that erroneous filing of “Tri
State Moulded Plastic, Inc.” where correct name was “Tri
State Molded Plastic, Inc.” was seriously misleading due to
search being conducted on computer)
f) In re Alexander (p.308): SC made an erroneous filing in the local records of Benson
Co., ND…Ds’ names were John Alexander and Larry Alexander…SC put these
names on the financing statement but also specified that the financing statement
be filed under Alexander Farms
*Ct held the error was not seriously misleading b/c the “court believes it
reasonable that a C interested in the property of John and Larry
Alexander w/in the largely rural county of Benson County, ND,
would examine all financing statements filed under the name
Alexander”
*however, this argument is now flawed b/c most filing systems now
operate on a state rather than local level
III. Art 9 Financing Statements: Other Information (p.312-27)
1. Information on Financing Statement
a) §9-502(a) requirements for effective financing statement
(1) name of D
21
(2) name of SC
(3) indication of the collateral covered
b) §9-520(a) requires filing officer to refuse to accept it unless it contains items (1) and
(2) and these additional items:
(4) mailing address of the SC
(5) mailing address of the D
(6) indication of whether the D is an individual or corporation
c) §9-516(b)(5)(C), if the D is an organization also requires rejection of the financing
statement unless it contains:
(7) type of organization (corp., LLC, etc.)
(8) D’s jurisdiction of organization
(9) D’s organizational ID # (usually tax id#)
d) if the financing statement lacks any of these pieces of information other than (3)
indication of the collateral covered, the filing officer should refuse to accept it and
communicate to the filer the reason for refusal and the date and the time the
record would have been filed
*however, if financing statement contains all info, then filing officer can
not refuse to accept it
e) filing officer has NO duty to check the authenticity of the information, only should
check to see whether or not it is there
f) filing can be done on Art 9 form which lists required information or may also be done
electronically in jurisdictions which permit such
2. Wrongly Accepted Filings
a) if a filing officer mistakenly accepts a filing that contains items (1)-(3) above, but is
missing another item or items such that the filing officer was required to reject the
filing pursuant to §§9-520(a) or 9-516(d), the filing is nevertheless effective
*however, if the missing information is from items (1)-(3) the financing
statement will not be effective
b) this is b/c items (1)-(3) are effective to put the subsequent searcher on notice that there
is a previous lien
3. Wrongly Rejected Filings
a) if the filing officer should accept an initial financing statement, either b/c it is correct
or b/c the manner in which it is incorrect does not warrant rejection under §9516(d), but the filing officer rejects it instead, the financing statement will not
appear on the public index/record
b) instead, the filing officer will stamp it w/ the date and time of the attempted filing and
return it to the filer…this attempt to file nevertheless perfects the underlying
security interest sufficiently to defeat lien creditors (UCs) and BTs
*effectively creates a “secret lien” on the collateral which defeats
subsequent lien holders, however, this is not a big deal b/c lien
holders do not collect debts based on what is in the filing system
anyway
22
c) but, this non-filing is NOT sufficient to create priority over a subsequent SC b/c the
subsequent SC depends on what is in the filing system when determining whether
to enter into C/D relationship or not
4. Filer (SC) Errors in Accepted Filings
a) if filer (SC) entirely omits from the financing statement a piece of required
information, the filing officer should reject the financing statement; however, if
the required piece of information is merely incorrect, the filing officer can not
reject the financing statement
*the effect of this financing statement will depend upon whether the error
was made in items (1)-(3) or in items (4)-(9)
b) we are not talking about situation where filer (SC) fails to put this info in financing
statement (b/c it would be automatically rejected), we are talking about situation
where filer (SC) has put info down, it is just wrong
5. Information Necessary Only to Qualify for Filing ((4)-(9) incorrect)
a) items (4)-(9) are not necessary for the sufficiency of a financing statement…if the
information furnished in response to any or all of these items is merely erroneous,
the financing statement qualifies for a filing, however, this filing will not be fully
effective
b) these filings will be effective against: (a) lien creditors, (b) BTs, and
others, but NOT against purchasers who give value and act in reasonable reliance
on the incorrect information
c) how does a purchaser give value and act in reasonable reliance on the incorrect info?
*1st Bank is lending to John P. Smith who lives in LA…1st Bank conducts a
search under that name which returns 30 filings all against John P. Smith
at a San Fran address…1st Bank checks the San Fran address and
discovers that a person named John P. Smith (not 1st Bank’s D) lives
there, assuming that all 30 filings are against that JPS and not their JPS,
1st Bank loans the money…2d Bank in fact lent money to JPS in LA, but
the clerk who filed the financing statement for 2d Bank put the address of
JPS in San Fran so 2d Bank showed up as one of the 30 filings that 1st
Bank saw…2d Bank’s filing is effective against lien holders but NOT
against 1st Bank who gave value in reasonable reliance on the filing
6. Required Information
a) items (1)-(3) are necessary for the effectiveness of the financing statement…if the
financing statement substantially complies w/ the requirement to specify these
items, the financing statement will be effective despite “minor errors or
omissions, unless the errors or omissions make the financing statement seriously
misleading”
*inclusion of D’s name covered supra, here we are more concerned w/
SC’s name and description of collateral
b) Grabowski (p.318): financing statement granted security interest to Bank 1 in
equipment…dispute arose as to whether the security interest was in all of D’s
equipment b/c a subsequent lender (SC) issued credit on that collateral
23
*Ct held that Bank 1 wins…if description of collateral is going to limit the
collateral to collateral at a particular location, then it will
probably say so rather than just saying equipment…Ct essentially
says that upon seeing the financing statement and having
questions, the subsequent searcher should have called D and asked
what collateral was covered by financing statement
c) in a financing statement, SC can use generic descriptions (all D’s personal property)
b/c all financing statement is doing is providing notice…can NOT do this w/
security agreement b/c it is a K binding on both parties
7. Authorization to File Financing Statement
a) historically, financing statements had to be signed by D but w/ the increased use of
electronic filing, this became difficult…now, a person may file a financing
statement only if the D authorizes the filing in an authenticated record
*by authenticating a security agreement, D authorizes the filing of
financing statement
b) if there is no authenticated record and the financing statement is filed, the financing
statement is not authorized and thus does not perfect the SC’s interest in the
collateral
IV. Exceptions to the Art 9 Filing Requirement (p.327-45)
1. Ways to Perfect
a) filing financing statement
b) SC can perfect by taking possession of collateral
c) SC may enjoy automatic perfection by operation of law
d) SC may give notice to or through some person or organization that controls the
collateral
2. Possession as Perfection of Collateral - Possession Gives Notice Theory
a) 9-313 there are certain types of collateral where possession perfects the security
interest and there is no reason to file…this collateral is
1) negotiable documents
2) goods
3) instruments
4) money
5) tangible chattel paper
these are all tangible things
b) goods is the term for almost all tangible items of ppty i.e. equipment, inventory, and
farm products
b) instrument is a right to payment in a written form and this can be
possessed (tangible item i.e. check, promissory note, etc.)…if the
right to payment is written in a document, the SC can use the
written document to take possession of the associated money
c) negotiable document is a document that gives its bearer the right to possession of
goods, i.e. warehouse receipts (document issued that allows owner to get goods
out of warehouse), bills of lading, etc.
d) tangible chattel paper is the combination of a note (written right to payment) and a
security interest…extremely important in buying cars…chattel paper can be used
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as collateral for the dealership b/c the chattel paper allows SC to step into the
shoes of the business and allows SC to collect payment and right to the collateral
e) SC MUST file: SC can not perfect by possession of intangible goods such as accounts
or general intangibles…these can ONLY be perfected by filing…if the collateral
does not fit into one of the categories under Art 9 then it is probably general
intangibles…does not include deposit accounts
f) SC MUST possess: only collateral that MUST be perfected by possession is money b/c
the gov’t wants to ensure the liquidity of money
g) possession does not necessarily mean that SC must have the collateral on his own
property, but the SC does need to have control over the collateral…an agent could
be used to take control over the property although typically taking possession
does mean physical control
*legal right to possession
*bank that loans $$ to casino doesn’t actually have possession of $$, it is
in the casino vault, however, if bank really wanted to, they could
go take possession…they have a right of control over the $$
3. Possession or Filing
a) w/ regard to goods, possession is an alternative, but for instruments, tangible chattel
paper, negotiable documents and certificated securities, perfection by possession
is superior to perfection by filing
*possession is superior b/c this type of collateral are all types of written
documents that give bearer right to collateral
b) purchasers who subsequently take possession of these kinds of collateral generally take
priority over SC who previously perfected by filing…filing is however, fully
effective against lien creditors and trustees in bankruptcy
c) searchers must check both the filing system and the collateral itself for goods or
negotiable documents (however, this does not include negotiable promissory
notes)
d) in order to be safe, SC should always go look at collateral prior to taking a
security interest in it
4. Collateral in the Control of the SC
a) control, rather than possession, is sufficient to perfect a security interest in some types
of collateral such as:
1) deposit accounts (bank accounts)
2) electronic chattel paper
2) investment property
4) letter of credit rights
b) 3 ways for SC to take control of a deposit account:
1) SC may be the bank in which the deposit account is maintained
2) D, SC, and bank can authenticate a record instructing the bank to comply w/
the SC’s instructions regarding the deposit account
3) SC can become the bank’s “customer” meaning the deposit account can be put
in SC’s name
c) all 3 methods result in a secret lien b/c none of this control paperwork has to be filed
and to a subsequent searcher it appears that D is in control/possession of collateral
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V. Purchase Money Security Interest in Consumer Goods
a) security interests in PMSIs in consumer goods are considered automatically
perfected…probably the most common secured transaction other than pawn
shop…however, PMSIs in collateral other than consumer goods still has to be
perfected either by filing or possession
1. Purchase Money Security Interest
a) D borrows money to buy a good and signs security agreement whereby the good
purchased w/ the borrowed money is the collateral…D has to use the loaned
money loaned to buy the goods/collateral or they don’t get it…SC/bank can pay
directly to the seller to make sure D pays for the good/collateral w/ the loaned
money
b) sometimes PMSIs function as priming liens
c) we allow consumer goods to serve as collateral here and not in other parts of Art 9 b/c
the D is using the loaned money to purchase the good/collateral…this encourages
free market economy by promoting efficiency and low prices
d) rationale is that there are tons of these type of transactions everyday.
2. Consumer Goods
a) goods that are used or bought primarily for personal, family or household use
b) Gallatin National Bank (p.335): issue was whether or not a yacht was a consumer
good…for big ticket items in order to be safe, SC should file a financing
statement to make sure they are secured…however, if state law does not limit the
value of consumer goods, big ticket items should be covered
c) not the nature of the goods, but rather the use which determines classification.
d) certificate of title – major exception is with automobiles. All that an auto dealer has to
do to perfect a security interest in an automobile is note is somewhere in the title.
3. Security Interests Not Covered by Art 9
a) wage claims
b) insurance policies and claims
c) real estate interests
d) non-commercial tort claims
e) it is possible to get a security interest in each of these as collateral, however, Art 9 does
not cover it
f) Bluxome (p.339): Ct held that if neither Art 9 nor legislation cover the method of
perfection, then security interest is automatically perfected
VI. Characterizing Collateral for the Purpose of Perfection (p.371-75)
1. Inventory Distinguished from Equipment
a) distinction b/t categories of collateral, depends not on the intrinsic nature of the goods,
but on the manner in which they are used
b) goods are inventory when they are held by a person for sale or lease or to be
furnished under a K for service…if goods are inventory they are NOT
equipment…goods held for lease are explicitly included in the definition of
inventory, thus the videocassettes held by Blockbuster for rental are
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inventory…on the other hand, the computers that Blockbuster uses to keep track
of the videos will not be inventory even if Blockbuster has a policy of selling
machinery when it becomes obsolete, b/c implicit in the definition of inventory is
that the D must be in the business of selling or leasing goods of the kind
c) w/ motor vehicles:
-if used by D as equipment, security interest in them as collateral is
perfected by notation on the certificate of title
-if used by D as inventory held for sale or lease and D is in business of selling or
leasing goods of the kind, security interest in them as collateral is
perfected by filing in statewide Art 9 system
2. Determining the Proper Method of Perfection
a) instruments distinguished from general intangibles
(i) Omega (p.363): if SC has a particularized piece of collateral that:
(1) SC can not tell what category of collateral it fits in, and
(2) the method of perfection of a security interest in that collateral will be
affected by manner in which court classifies collateral…in order to
be sure, SC should file a financing statement and take possession of the
collateral
b) true leases distinguished from leases intended as security
(i) Art 9 applies to a secured transaction in personal property but not to true
leases…if court re-characterizes a transaction as a secured transaction,
then Art 9 kicks in and SC better have done everything proper to perfect or
else SC may actually be UC
(ii) HYPO:
-Czar leased a stone smasher from Meyers and received the right to
purchase the stone smasher at the end of the lease…payments
under the lease add up exactly to the economic value of the
collateral
*Cts will typically re-characterize this as a secured
transaction, thus Meyers must have perfected his
security interest in order to repossess stone smasher
either through self-help or by other means
-same facts, but stone smasher is worth $50K and lease payments over
3yrs add up to $10K and at the end of the lease term Czar has the
right to purchase for $30K
*since lease payments do not approach the actual value and
there is actual consideration for the purchase rather
than nominal consideration, this is probably a lease
(iii) main characteristics for a disguised sale:
(a) lease payments add up to economic value of the collateral
(b) is there an option to purchase at the end of the lease, is it for or
nominal consideration
(c) is the lease for the economic life of the collateral
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c) chattel papers and instruments distinguished from accounts
(i) instruments are distinguished from accounts in that:
(1) don’t really have a writing for an account;
(2) definitions are very different
(ii) instrument is a writing that evidences a right to monetary payment
(iii) account evidences a right to payment for goods sold or services
rendered, but not in writing
(iv) general intangible is a right to payment, but not in writing and not for goods
sold or services rendered
(v) chattel paper is a combination of monetary obligation to pay and a security
interest in specific goods
3. Multiple Items as Collateral
a) In re Leasing Consultant (p.368): leased goods taken to NJ where ct re-characterizes
transaction as a sale…lessor (SC) makes clever argument to get
collateral/property back, even if there was a sale, there were two types of
collateral, (a) leased goods, and (b) goods w/ a reversionary interest in them via K
which was held by SC (attempt to perfect by possession)
*Ct totally rejects argument stating that when a transaction is recharacterized it means that the SC sold those goods so there is no
security interest in collateral or any reversionary interest
-practical advice is to tell client to file financing statement here
4. Problem
*21.1
Chapter 7: Maintaining Perfection
I. Maintaining Perfection Through Lapse and Bankruptcy (p.375-90)
1. Termination and Release
a) termination: if the D has paid the secured obligation and the SC is not required by K
to lend more money, the D can demand that the SC file a termination statement
w/in 20 days
*if the SC fails to do so, the SC becomes liable for actual damages and in
addition, a civil penalty of $500
b) upon filing of the termination statement, the financing statement to which it relates
becomes ineffective…when searching, it is not a bad idea to pair up all documents
that relate to one another
c) release: the release of collateral covered by a financing statement is accomplished by
amending the financing statement…this is totally up to the SC whether or not he
wishes to release some of the collateral in light of partial payment unless the SC is
bound by K to do so
*amendment must state which collateral is being released
d) termination statement or amendment must identify – by its file number – the financing
statement to which it relates…in addition the termination statement must identify
that the identified financing statement is ineffective…an error in the termination
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statement leaves open the question as to whether or not the termination is
effective, subject to the “seriously misleading” standard
2. Self-Clearing and Continuation Under the Art 9 Filing System
a) while the filing system for real property enables searchers to trace real property all the
way back to the Civil War, the Art 9 filing system for personal property is a “selfclearing” meaning that after 5 years a financing statement is discarded
b) financing statements for personal property lapse after 5 years…however, these
financing statements can be renewed or continued if done w/in 6 months prior to
the lapse
*reason this can only be done w/in 6 months prior to the lapse is to
encourage SCs to monitor their security interests rather than
simply file several continuances when the SCs file the original
financing statement
*if filed after 6 month window expires, the continuation functions as a
new financing statement which affects priority of the SC
*“tickler system” describes old system used where secretary kept track of
when the lapse of a financing statement comes near and lets
attorney know so they can file continuance…new computer
systems have made this obsolete
c) SC can file continuation stmt w/o approval of D
d) upon lapse, the security interest becomes unperfected and is deemed never to have
been perfected against a purchaser of the collateral for value…one year after a
financing statement lapses, the filing officer can remove it from the records and
destroy it
*however, SC will retain priority over lien creditors and bankruptcy
trustees so long as the security interest was perfected at time of
filing of bankruptcy or lien was levied
e) Art 9 filing officers are required to index records w/in 2 days of their receipt, however,
this is one of the least followed rules in Art 9 simply b/c most Art 9 offices are
understaffed and swamped
f) Worthern Bank (p.381): H grants security interest to NBC in all accounts
receivable…all filings made…H decides to continue the agreement but NBC does
not file continuance w/in 6 month window so security interest lapses…NBC later
realizes what happened and filed continuance…in the meantime, H files for
bankruptcy...BT argues that financing statement lapsed prior to H
filing for bankruptcy so trustee should get everything…NBC found an old
financing statement which they claimed was intended to be a continuation
statement, but NBC had checked the wrong box
*Ct held this was not a continuation statement, thus the security interest
lapsed making NBC an UC, thus losing out to BT
-NBC argues this was harmless error, Czar says harmless
error is a good argument sometimes but NOT when
you are filling out financing statements
g) However, continuation stmts are not stayed by the automatic stay in bankruptcy
proceeding.
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II. Maintaining Perfection Through Changes of Name, Identity and Use (p.390-403)
1. Changes in the D’s Name
a) even though a change in the D’s name renders a filed financing statement seriously
misleading, the financing statement remains effective w/ regard to:
(1) collateral owned by the D at the time of the name change; and
(2) collateral acquired by the D in the first 4 months after the change.
b) rule really only affects SCs who have a security interest in collateral that is inventory
or some other collateral that turns over…creates potential problem for SCs w/
floating liens
c) make sure you – as the attorney for a bank that is going into lending – include this rule
in preliminary discussion w/ bank’s officers
d) even though the governing rules are similar, it is important to distinguish changes of
D’s name form the transfer of collateral to a new D…assume that Teresa
Williams as individual borrowed money against the equipment of her business…if
Teresa later incorporates the business under the name Williams Electronics, Inc.,
this is not a change of name but rather a creation of a new entity probably
followed by a transfer of collateral to a new D…the financing statement filed
against Teresa would be effective against the collateral in the hands of William
Electronics, Inc.
2. Changes in Use of Collateral Which Affect Description of Collateral
a) Type 1 Change: change in circumstances that did not control the place of filing but
that does make the collateral difficult for the searcher to identify as covered by the
filing…even if the change in circumstances has made the financing statement
seriously misleading, the financing statement remains effective
*e.g., Bank1’s security agreement correctly describes the collateral as
“Coyote Loader, serial # 8203G45”, that the D holds the loader as
inventory at the time Bank1 files its financing statement, and that
the financing statement describes the type of collateral as
inventory…Bank1 is perfected…later the D begins using the
loader as equipment and seeks to borrow against it from
Bank2…Bank2’s search will discover Bank1’s financing
statement, but Bank2 may not realize the significance
*see infra #4 piece of advice for Bank…this is why you ask D if the
collateral has been used for any other reason than it is now being
used for
b) Type 2 Change: change in circumstances that is sufficient to affect the method of
perfection that would have been appropriate for the initial filing…collateral’s use
has changed in a way that renders the initial financing statement seriously
misleading and the means of perfection for the collateral now that it is being used
in differently would be different…SC has to perfect using whatever method of
perfection as would be appropriate for the collateral as it is being used now
*e.g., Dawson Lumber takes a security interest in lumber that it sells to
Michelle Pfeiffer and perfect by filing a financing statement in the
office of secretary of state…later Pfeiffer uses the lumber to build
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a hot tub that is attached to real property in such a manner that it
becomes a fixture
3. Collateral  Non-Cash Proceeds
a) recall that under §9-315(82) that a perfected security interest attaches to any
identifiable proceeds…barter is the exchange of one commodity for another in a
transaction in which no cash is involved, proceeds from the exchange are noncash…rules governing exchange such as this are different from the rules
governing cash proceeds
b) Type 0 Barter : proceeds received by the D fall w/in the description of collateral in the
already-filed financing statement…SC does not have to do anything
*e.g., the security agreement described the collateral as “Coyote Loader,
serial #8203G45” and the financing statement, properly filed only
in the office of the secretary of state, described the type of
collateral as “loader”…D trades the Coyote Loader for a
Caterpillar Loader…the security interest attaches to the Caterpillar
Loader as proceeds w/out a statement to that effect in the security
agreement (attachment)…the security interest is perfected in the
Caterpillar Loader b/c the description “Loader” in the financing
statement is broad enough to encompass it…in this exchange, the
SC has a perfected security interest in the new collateral on the
basis of description rather than by §9-315
c) Type 1 Barter: proceeds received by D are property not covered by the description in
the financing statement but are property in which the security interest could be
perfected by filing in the same office where the SC’s financing statement is
already on file…SC remains perfected w/out a new filing
*e.g., D’s exchange of inventory for equipment would be a type 1 barter
if the original financing statement covered only inventory…the
equipment is not covered by the description in the financing
statement, but the filing needed to perfect in equipment as original
collateral would be made in the same filing office
*e.g, financing statement covers only inventory and the D trades inventory
for a circus elephant that will not be inventory…SC remains
perfected in the elephant w/out further action
d) Type 2 Barter: proceeds received by D are of a type in which filing is required in a
filing office other than the one in which the original collateral was perfected by
filing…SC must re-file to perfect the security interest in the new collateral…to be
continuously perfected, the SC must filings w/in 20 days from the time the
D receives the proceeds
*e.g., D traded a Coyote Loader that is to be used as equipment for an
automobile and an aircraft…security interests in equipment is
perfected by filing in office of secretary of state, security interest in
automobile is perfected by recording on certificate of title by
DMV, security interest in aircraft is perfected by filing in office of
FAA
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*In re Seaway Express Corp. (p.397): personal property as collateral
exchanged by D for real property, SC was monitoring collateral
and notified the D that SC wanted D to record a deed conveying
the property to SC…perfection of the security interest is different
than perfection of the security interest before (type 2 barter)…SC
did not get the deed recorded and under real property law there is
no way to force the D to make the deed
*SCs can NEVER protect themselves against dishonest Ds…best SC can
do is have K that minimizes risks…fraud on part of D throws Art 9
out the window
4. Collateral  Cash Proceeds  Non-Cash Proceeds
a) so long as the cash proceeds are identifiable by tracing, the security interest of the SC
in the collateral continues
b) Type 0: original filing remains effective to cover goods of the same description
*e.g., security agreement described collateral as “Coyote Loader, serial
#8203G45” and the financing statement, properly filed only in the office
of secretary of state, described the type of collateral as “Loader”…D sold
the Coyote Loader for cash and took the cash and purchased a Caterpillar
Loader
c) Type 1: exchange results in collateral that is no longer covered by the original
description in the financing statement…SC has to file a new financing statement
w/in 20 days of the D’s receiving the new collateral or the SC will not have a
continuously perfected security interest…if filed after 20 days, the new financing
statement is only effective from day of filing rather than date of original filing
*notice that SC has to re-file here unlike w/ type 1 barters
d) Type 2: exchange results in collateral that is of a type that requires a filing in a
different office than original collateral…same rules as Type 1 (discussed supra)
5. Collateral  Cash Proceeds
a) SC has continuous perfection in all identifiable proceeds
b) See 3 Ways by which SC can take “control” of deposit account p.25-26
6. Practical Advice to Bank Thinking About Lending
a) draft a security agreement whereby the D has to notify the SC if any name changes
take place
b) since not all Ds will comply w/ this rule, the banks as SC should check the collateral
every 3 months or so, at least, NO longer than 4 months
*this is so b/c financing statement becomes seriously misleading after
name change except as to collateral which D owned or acquired
w/in 4 months of name change…by checking every 3-4 months,
SC can tell if D acquired new collateral and thus SC may need to
refile
*possibly need to shorten this time to 19 days due to Type 2 Barters
c) ask D of all names the D has ever done business under…allows bank as SC to research
all names and find out if another SC has a security interest in any collateral of D
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d) if SC is lending money against a specific piece of collateral, SC should ask the D if D
has ever granted a previous security interest in the collateral to anyone
else…however, SC does not have to worry about general classes of collateral i.e.
inventory b/c it turns over
*as SC you are trying to make sure that D didn’t own the collateral, grant
security interest in collateral to another SC, change names and now
attempt to grant a second security interest in it to you as SC, b/c as
the second SC in line, you are second in priority on the collateral
e) draft security agreement whereby the SC has to disclose any change whatsoever in the
form of the business
f) as SC, inform D that you want to be informed of ANY changes in the use of the
collateral
III. Maintaining Perfection Through Relocation of D or Collateral (p.403-15)
1. State-Based Filings in a National Economy
a) it is important to realize that Art 9 is state law which presents problems when D’s or
collateral cross state lines…these problems would not exist if Art 9 was federal
law…functions of these provisions in Art 9 is to let SC know what state to file in
and searcher know which state to search in
2. Location of the D
a) §9-301:
(1) Except as otherwise provided, the location of the D determines where a filing
will take place
*this is true regardless of where collateral is located…the filing is
to give notice to subsequent Cs and since the subsequent Cs
will at least know what state the D is located in the
subsequent Cs know where to search…this provision
addresses the perfection of a non-possessory security
interest
b) §9-307 specifies the location of specific types of Ds
(a) place of business means a place where a D conducts its affairs
(b) except as otherwise provided in this section, the following rules determine a
D’s location
(1) D who is an individual is located at the individual’s principal
residence
(2) D that is an organization and has only one place of business is
located at its place of business
-organization: 2 or more persons having a joint or
common interest
(3) D that is an organization and has more than one place of
business is located at its chief executive office.
(c) if D is located in foreign country and that foreign country does not have a
filing system available to the public, then for purpose of Art 9, residence
of D is Washington, D.C.
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(e) registered organization that is organized under the law of a State is located in
that State
*corporations, LLPs, LPs, etc.
c) HYPO:
*San Antonio Hotel in TX. Jose owns the hotel. He lives in TN and manages the
100 room Hotel from there. Jose keeps the books and records on a
personal computer in his home. Jose makes all major decisions for the
business, including the hiring and firing or employees. He is in touch
daily w/ Hector the on-site manager. Where is Hotel’s place of business?
-based on facts…TN
-what if Hotel was incorporated in TX…TX
3. Location of the Collateral
a) §9-301:
(2) Where security interest is perfected by possession, the law where the
collateral is located governs
*there is no filing when security interest is perfected through
possession…another reason why SC should insist on seeing
collateral so SC knows which law applies…this provision
addresses the perfection of a possessory security interest
b) this section is beyond the scope of the course…just keep in mind that fixture filings are
done where land is located so the other provisions we covered don’t apply
4. Relocation of D
a) §9-316:
(a) A properly perfected security interest remains perfected in the original
jurisdiction until:
(1) security interest lapses;
(2) the expiration of 4 months after D moves to another state
(3) the expiration of 1 year after a transfer of collateral to a person that
thereafter becomes a D and is located in another jurisdiction
(4) Have 1 yr to discover the transfer of assets to a newly incorporated
entity in another jurisdiction rather than the 4 months normally
required to the change of a personal principal residence.
b) most important thing to learn from all of these rules is that:
(1) SCs must monitor their Ds and their collateral and if anything changes, then
very likely it will have some affect on the validity of the filing
(2) shortest grace period SC have is 20 days so SCs should check the collateral
pretty frequently
(3) level of investigation required of SCs really depends on the economics of the
situation
5. Brandon’s Question About Cars
a) SC perfects security interest in a mobile car by noting it on the title, but also,
the SC holds the title and theoretically there is only one title to a car…when D
moves to new state the state will require that the D get a new title and in order to
34
do that, D is going to have to tell the state who has the old title…thus, the state
will deal directly w/ the SC…SC will be sent new certificate of title by new state
so there should be continuous perfection of title
Chapter 9: Competitions for Collateral
I. Lien Cs Against SCs (p.463-72)
1. How C Becomes a Lien C
a) prototypical lien creditor is a C who has obtained a judgment against the D and had
clerk’s office issue a writ to the sheriff to enforce the judgment
b) if two lien creditors both claim rights to the D’s property, the first to perfect their
interest wins
c) when is a lien creditor’s interest perfected:
(1) majority says when sheriff actually physically seizes the property
(2) minority says at time sheriff is issued the writ by the clerk’s office
(3) two states say when judge enters judgment against D
d) also, keep in mind that a BT has the official status as a perfected lien
holder that levied the lien at the moment the bankruptcy petition is filed
2. Priority b/t Lien C and SC
a) priority b/t a lien C and a non-purchase money SC depends on whether the lien creditor
“becomes a lien creditor” before the SC does either of two things:
(1) perfects its security interest, or
(2) files a financing statement and complies w/ §9-203(b)(3)
b) §9-203(b)(3) defines the formalities for attachment of a security interest…security
interest attaches when:
a) value is given,
b) for property the D has an interest in, and
c) either the SC takes possession of collateral, or
there is a security agreement b/t the parties
c) general rule: first to perfect wins
3. Purchase-Money Priority (PMSIs)
a) PMSIs are an exception to the notion of first in time, first in right…a PMSI can prime
a lien C’s interest only if the PMSI comes into existence and attaches to the
collateral before the C obtains its lien against the collateral
b) if the PMSI attaches first, the holder of the PMSI has a 20 day grace period in which it
can perfect and thereby defeat a lien that came into existence b/t the dates of
attachment and perfection
c) this means that if a D buys property on C and the lien creditor levies before the SC
perfects its interest, the lien creditor will prevail UNLESS the SC perfects its
interest w/in 20 days of the time the D received delivery of the property…the
effect is that a purchase-money SC that went public later can defeat a lien creditor
who went public up to 20 days earlier
d) reason for allowing the 20 day grace period is to facilitate sales of personal property on
secured credit…the grace period makes it possible for the seller to give immediate
35
delivery to the buyer, w/out first filing its financing statement…not allowing the
grace period would result in delays in sales transactions
e) although the grace period might upset a lien creditor who ran a check on the D and
found no security interests, the actual injury is very small…no UC actually
decides to lend more money based on a clear title…moreover, lien creditors who
are concerned about the possibility of secret liens might choose to delay their
levies for 20 days after the D acquires the new property to see if a PMSI shows up
on the public record
f) this applies to ALL PMSIs, not just PMSIs in consumer goods
II. BTs Against SCs (p.486-518)
1. Strong-Arm Clause
a) as soon as the bankruptcy petition is filed, the BT has the power of a perfected lien
creditor which defeats a SC where the SC has not yet perfected the security
interest…BT then takes all property including that which was encumbered by the
unperfected security interest
b) BT is obligated to sell this property and give the proceeds to the UC
c) why is this called the strong-arm clause?
*b/c it strong-arms individual UCs as well as individuals who think they are SCs
but are not due to some defect…basically, just by filing the petition for
bankruptcy, the only claim that defeats the BTs is a SC’s previously
perfected security interest and possibly a PMSI which is perfected w/in 20
days of the D taking possession of the property
2. Preferences
a) BT as representative of UCs has the power to avoid certain transactions – called
preferences – that occurred during the filing of bankruptcy
b) as individuals approach bankruptcy, they typically pay off family and friends first
before other Cs…where Czar has $100 in assets and owes Mom $100 and AmEx
$100…Czar is much more likely to give Mom the $100 then declare bankruptcy,
thus AmEx gets screwed b/c Czar preferred his Mom over them
*everything other than a pro rata split is a preference for one side or the
other
c) theory is that at time when D is insolvent, the D has obligation to be fair to all of his Cs
and not show a preference…historically, all states have “preference
laws”…bankruptcy code now gives BT the power to sue “Mom” for transactions
that occurred prior to filing of bankruptcy that had the effect of preferring Mom
over other Cs
d) if D grants Mom a security interest in the amount she is owed, Mom is able to get
more than she would have gotten had D just filed bankruptcy or if he would have
given her a preference over other Cs…however, again the bankruptcy code allows
the BT to avoid security interests granted on account of a pre-existing debt…BT
can file a lawsuit to avoid such a transaction
*even if secured interest is granted on day 0, money is loaned, on day 30
SC perfects security interest and on day 35 D files bankruptcy, BT
can still avoid the transaction...intent does not matter
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e) Get Two Questions from E. Mills that Czar said would be two good exam questions
III. SCs Against SCs (p.519-35)
1. General Rule
a) basic rule is that, in a competition b/t two SCs, the first to file or perfect their security
interest wins…compare this to a competition b/t a SC and a lien holder where the
“first to perfect wins”
b) in other words, the priority date of a security interest is the date of filed financing
statement or perfected by possession, whichever date is earlier
*on 12/1, B1 files financing statement against the collateral of D, but B1
does not lend any money nor enter into any security agreement
(this means the security interest has not attached)
*on 12/5, B2 files financing statement against the same collateral and
perfects by entering into a security agreement w/ the D and lending
money
*on 12/10, B1 perfects by entering into a security agreement w/ the D and
lending money
*B1 has priority b/c rule is first to perfect OR file
c) b/c of the possibility that a SC has taken possession of collateral before subsequent SC
takes security interest in the collateral, subsequent SC should ALWAYS go look
at the collateral…remember, SC can perfect security interest by taking possession
of collateral which will not show up on Art 9 filings…in addition to looking at
collateral, SC should also ask D if anyone else has a security interest in the
collateral (remember, perfecting by possession does not necessarily mean physical
possession, it may just be control)
2. Priority in PMSIs (all collateral except inventory)
a) PMSIs in collateral other than inventory has priority over a conflicting security
interest in the same collateral if the PMSI is perfected not later than 20 days after
the D receives possession of the collateral
*PMSIs give the holder priming liens
*DO NOT get this rule confused w/ PMSI Rule that applies to consumer
goods
b) HYPO:
*B1 files financing statement against all after-acquired equipment of D on
2/1…on 7/1 PMS sells computer to D, delivers possession, and retains a
PMSI…on 7/20 PMS perfects by filing a financing statement…PMS has
priority over B1 in regards to this computer
c) this rule seems to violate principle of “first in time, first in right”…but the PMSI is
“first” in another sense, it either supplied the collateral or made advances to
enable the D to acquire the collateral…PMSI priority can be understood as
recognizing that the purchase-money lender has a relationship w/ the collateral
before the “after-acquired” SC does
d) this exception merely excuses the purchase-money lender from going through a strawman transaction whereby the purchase-money lender insists that a straw man take
title to the collateral and grant a perfected PMSI, before transferring the collateral
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to the D…the D then would have taken title subject to an already perfected PMSI
and the after-acquired SC’s interest would not have been though to be first in time
e) what about when two PMSIs are in competition?
*purchase money security interest that is selling the collateral wins (p.526-27)
3. PMSIs in Inventory
a) SC who is a PMSI in inventory can obtain priority but SC must jump through several
hoops to get there, basically to prove that the pre-existing inventory financer
knows and approves of the PMSI transaction
b) it is not enough to simply perfect w/in 20 days…p.528, comply with special timing
and notice provisions:
1. The purchase-money financier must perfect before the
debtor receives possession of the collateral, and
2. The purchase-money financier must give advanced notice to the
inventory lender that it expects to acquire a PMSI in inventory. To
give this notice the purchase-money lender first searches the filing
system for the names and addresses of all secured parties w/ a
filing against inventory of the type it plans to sell. The lender then
sends the notice, typically by certified mail, to each of the
inventory lenders. Like a financing statement, the notice expires at
the end of 5 years. The purchase-money supplier can avoid
expiration by repeating the notice at intervals of less than 5 years.
*no way to do this w/out having inventory lender involved
4. Purchase money priority flows through to proceeds.
a) subject to exception with regard to inventory: PM priority in inventory flow through
only to chattel paper and instruments; does not flow through to accounts.
See problem 32-1
IV. Sellers Against SCs (p.574-92)
1. Limits of the After-Acquired Property Clause
a) Art 9 does not require that D be the owner of the collateral to grant a valid security
interest in it, only that the D have “rights in the collateral”
b) competition b/t seller of goods (OU Press) and SC who has an interest in the goods
(Bank)…Square Books buys a load of books from OU Press, check to OU Press
bounces…books are placed on shelves before check bounces…Bank financed
Square Books w/ inventory serving as collateral
*Bank will be able to take the books OU Press sold to Square Books and
was never paid for and sell them…if there is anything left over
when Bank gets done then OU Press will get that…price OU Press
pays for being in the position of an UC
2. Rules Governing Title to Personal Property
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a) “nemo dat”: one can not give what they do not have…D can only give an interest in
collateral which D has right in
b) Czar parks his car on street…car is stolen and thief sells car to innocent widow…Czar
then sues innocent widow for possession of car
*Czar wins b/c thief had “void” title
c) Czar sells to Meyers…Meyers check bounces…prior to check bouncing, Meyers sells
to innocent widow…Czar sues innocent widow for possession of car
*innocent widow wins b/c law recognizes that Meyers had “voidable title”
which is sufficient to convey title…Czar’s remedy here is to sue
Meyers
*innocent widow is bona fide purchaser…this is the same relationship as
b/t Square Books, OU Press, and Bank
*person with voidable title can pass good title to a good faith purchaser for
value
d) this is the rule b/c Czar voluntarily chose to deal w/ Meyers and Czar is in a better
position to monitor Meyers than innocent widow is
3. Rules Governing Security Interests in Personal Property
a) a good faith purchaser for value defeats the claim of an unpaid seller…UCC defines a
SC as a “good faith purchaser for value” by molding together several definitions
-purchaser: person who takes by purchase…when a SC acquires a
security interest in collateral, the C is a purchaser of the collateral
and is eligible for whatever protections purchasers have under the
law
-purchase: taking by mortgage, pledge, or any other voluntary transaction
creating an interest in property
-good faith: honesty in fact (does not have to comport w/ reasonable
commercial standards of fair dealing in the trade; this is the
revision, but only a few states have adopted it)
-value: any consideration sufficient to support a K
b) a SC can be a good faith purchaser of collateral for value even though the SC does not
purchase the collateral in the ordinary sense of the word, has bad intentions, and
pays nothing for it
c) SI holder who is honest in fact and gives value has an enforceable SI in the title of
collateral even though he only has voidable title in the debtor’s collateral.
d) In re Samuels (p.577): CIT (SC) financed the inventory of Samuels (D)
slaughterhouse…Samuels bought cattle from Stowers (seller) over an 11-day
period and paid for the purchases by check…on the 12th day, Samuels filed for
bankruptcy…the check bounced and Stowers wanted his cattle back…CIT
claimed the cattle under the after-acquired property clause in the security
agreement
*Ct held that CIT was a good faith purchaser for value and defeated
Stowers UC claim
*Congress subsequently passed a law allowing sellers of cattle to defeat
the claim of a SC “good faith purchaser”
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4. Suppliers/Sellers Against Inventory Secured Lenders
a) p.578-79
5. Seller’s Weapons Against the After-Acquired Property Clause
a) sellers have typically attempted to use one of 7 different methods to defeat SCs
b) ultimately all of these techniques either fail or are extremely limited
1) PMSI
-but in order to grant a PMSI in inventory, the D must have approval from
their lender (SC)
2) Retention of Title
-however, unless seller files financing statement, then this secured credit
will not be perfected and seller will again lose to SC
3) Consignment
-Art 9 treats consignment as a PMSI in inventory
4) Right of Reclamation
-even though seller has right of reclamation under Art 2, this will not
defeat the claim of a SC under Art 9
5) Express/Implied Agreement b/t Seller and SC
-typically Ds do not want to do this and if the seller requires this then D
will take his business elsewhere
6) Equitable Subordination
-there is nothing inequitable about feeding a lien
7) Unjust Enrichment
-as long as SC is not encouraging transactions b/t the parties then claim
will not defeat SC’s claim
V. Buyers Against SCs (p.592-609)
1. Authorized Disposition Exception
a) general rule is that a security interest continues in collateral
b) however, if SC gives authorization for the D to sell the collateral then security interest
does NOT continue in the collateral…the course of dealing b/t the D and SC
can affect whether SC is said to authorize the sale
c) Gretna State Bank (p.595): SC can be found to have authorized the sell even if the
security agreement specifically prohibits such a sell…Bank had security interest
in D’s hogs and cows which were farm products…security agreement prohibited
the sale of the collateral w/out the prior written consent…D sold some cattle
w/out consent and the bank sued the buyer
*Ct held that the bank’s security interest did not continue in the cattle after
the sale b/c the sale was authorized…Ct relied on the fact that the
D previously had sold cattle and hogs w/out bank’s written
consent, bank knew about many of these sales, and the bank had
not objected t o them or rebuked the D for making them…thus the
bank had thereby waived the security agreement provision
requiring written consent
2. Buyer in the Ordinary Course of Business (BIOC)
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a) the law favors SCs in almost every transaction, however, the law favors buyers in the
ordinary course of business even more
b) think of this as grocery store…SC has security interest in inventory of grocery store,
however, you as the BIOC are not going to demand to see the store’s security
agreement when you buy cereal in order to determine if the sale was
authorized…you are not worried that the SC is actually going to come to your
home and seize your Frosted Flakes
c) BIOC: a person that buys goods
a) in good faith w/out knowledge that the sale violates the rights of another person
in the goods, and
b) from a person (seller) in the ordinary course of business
d) BIOC defeats the claim of a SC if:
1) BIOC takes free of
2) perfected security interest created by the buyer’s seller
*big deal, security interest must stem from seller (see supra (g))
3) even if the security interest is known by buyer
e) although it appears that the knowledge of the buyer is vital here, actually all we are
concerned w/ is that the buyer does not know that the sale violates another
person’s security interest…the buyer can know that there is a pre-existing security
interest but what buyer can’t do is know of a condition in the D’s security
agreement that restricts some activity and then engage in that activity w/ D
f) make no mistake, the SC is free to and will go after the proceeds of the sale of the
collateral that the D has…this rule does not affect the rights of SC to do so
g) HYPO:
*Bank holds security interest in all personal property owned by DW,
including its single traffic light, to secure a loan for $90M…DW sells the traffic
light to Linda in a sale that is not in the ordinary course of DW’s business…as
previously noted, Linda takes subject to Bank’s security interest…not realizing
the traffic light is encumbered, Linda sells to Neiman Marcus in a sale that is in
the ordinary course of business…although Neiman Marcus is a BIOC, the security
interest in the traffic light was not created by the buyer’s seller (Linda) rather the
security interest was created by DW so NM takes subject to Bank’s security
interest
f) farm-products exception: Art 9 affords no protection to those who buy farm products,
however, Congress passed a law which protects them
g) Daniel (p598): when do purchasers who have made payment on a car but not taken
title become protected from security interest created by the seller...Ct held that
buyer can become good faith purchaser prior to title passing, either:
(1) date of initial K
(2) date the goods are identified
(3) date title passes to purchaser
(4) date the purchaser gets delivery
(5) date the purchaser accepts the goods
*after this decision, UCC defined this such that “only a buyer that takes
possession of the goods or has a right to recover the goods from the
seller under Art 2 may be a BIOC’
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3. Consumer to Consumer Sale Exception (Garage Sale Exception)
a) does not only apply to garage sales, but this is what the drafters had in mind…the
BIOC exception does not apply b/c seller here is not in the ordinary business of
selling such property
b) Steve offers to sell his riding lawn mower to Tom for $600…if Sears holds a security
interest in the lawn mower that is perfected by filing and Sears has not authorized
the sale, Tom will get the lawn mower subject to Sears’ security interest…this is
b/c Steve does not deal in lawn mowers
c) however, 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) w/out knowledge of the security interest;
(2) for value;
(3) primarily for the buyer’s personal, family, or household purpose; and
(4) before the filing of a financing statement covering the goods
d) this exception does not affect transactions where there is a financing statement on file
but if there is no financing statement on file, buyer takes free of any security
interests…this is weird but this is the rule
VI. Statutory Lien Cs Against SCs (p.609-30)
1. Statutory Liens in Personal Property
a) statutory liens arise purely by operation of statute
-although consensual liens and judicial liens also arise by statute, both of these
type liens can also arise by judgment, whereas a statutory lien can not
arise by judgment
b) statutory liens arise automatically by statute due to the relationship b/t the parties
-state legislatures have determined that due to either political reasons or the
special nature of the work that certain individual’s are involved in and the
position that such work places them in relation to SCs, they deserve more
protection than the normal UC
c) types of statutory liens are:
-artisan liens
-mechanic’s liens
-garage keeper’s liens
-inn keeper’s liens, etc.
-mechanic’s liens include liens that arise due to any work done by any person on
any property (real or personal)
d) situations lends itself to D complaining about bill or refusing to pay it
2. Priority of Statutory Lien Holders
a) what this means in regards to Art 9 is that…
*priority as b/t a statutory lien and other liens depends first on the statute that
creates the lien…after all, the state legislature is the same body that passes Art 9
so they have the authority to say this particular lien trumps any other type of lien
(p.619)
b) default rule: possessory statutory lien holder has priority over SC
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*Art 9 §333 addresses the issue of priority where the statute creating the
statutory lien does NOT address priority
c) agricultural liens (farmer purchases seed from co-op and says he will pay when crop
comes in…state legislature grants seller a lien in the cotton crop…assume also
that farmer has granted a security interest in the crops to a local bank as well…if
crop comes in and is not enough to satisfy the debt to the co-op or bank, there will
be a competition for the collateral)
*state legislatures grant statutory liens to seed sellers or anyone else
extending credit to farmers
*Revised Art 9 changes rule a bit…requires in order for statutory lien to be
perfected, an agricultural lien holder must file a financing statement and in
competition w/ a consensual SC, the first to file wins
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