Secured Transactions
Prof. Barnes
8/23/05
CH. 1: INTRODUCTION
§ 9-101 – 9-108: introductory & definitional
§-9-102: definitions
§ 9-109: Scope (p. 707)
(a) consensual/contractually related interests—a transaction, regardless of its form, that creates a security interest in
personal property or fixtures by K;

what is definition of a security interest?
-see Article I of UCC—1-201(35), p. 29
-§ 1-201(35): definition of SI—interest (title, lease, license) which secures payment or
performance of any obligation

Ex: new business wants to buy some equipment & inventory; bank has 3 options—take
Possession (don’t want title to this), possibly a lease party for the equipment & grant bank an interest in the inventory
(bank doesn’t have full title, but upon default—failure to pay or failure to perform results in repossession)  falls
under Art. 9
Benedict v. Ratner
Why do we care about SI in personal ppty? Bankruptcy (goal of this course is to be able to
Structure a transaction which will survive a bankruptcy filing).
Benedict is the trustee in bankruptcy suing Ratner. Carpet business has accounts receivable. Uncle agrees to provide financing to
company, in return for the right to collect the A/R; uncle lets nephew continue to collect them, dispose of them as he needs to,
make periodic payments as he can, but basically allows nephew to keep complete dominion & control. (at this time, no system of
filing an interest in the a/r existed) Existence of the assignment was to be kept secret; fallacy of Brandeis’ opinion is that he based
it on NY personal ppty law; concludes that there must have been a fraud b/c didn’t cure the problem of ‘ostensible ownership’
§ 9-205 changed the law of Benedict
A SI isn’t invalid solely b/c debtor has right to…
Today, there is no such thing as presumptive/conclusive fraud b/c we separate 2 things—title from ultimate ownership, so long as
I have a valid SI;
-article 9 simply requires that you file publicly to solve the problems which arose in
Benedict.
p. 11-old statutes
§9-108
8/25/05
CH. 2: THE SCOPE OF ARTICLE 9


Article 9 covers all trans which are consensual interests in ppty for payment or performance; it also covers some
borderline areas which are essential to avoid gray.
‘Ostensible ownership’—want no one to claim interest in ppty w/o putting your name in the public or having actual
possession;
I. Security Interest Defined
9-109: scope of article 9

includes sales of accounts, promissory notes, consignments, intangibles, chattel paper

Presumption is “in”, if it’s an interest in ppty by K & secures payment or performance, & includes certain (1) sales of
accts, chattel paper, & negotiable instruments, (2) consignments, & (3) some leases
Problem #2: state statute gives someone doing repairs a possessory lien on the ppty; can’t pay bill, & mechanic won’t return the
car;
1

(a) is this a 9-109 security interest? No, is one of the exceptions in 9-109(d)—
‘a lien, other than an agri. Lien, given by statute or other rule of law for svcs or
materials;
but mechanic does have OO;
Problem #3: farmer sells vegetables at roadside stand; sell all her A/R to financing co. Is this a loan or a sale?

is an outright sale—9-109(a)(2), so when farmer sells to Nightflyer, Nightflyer must file
o Brown gets listed as a debtor in this case;

sales of accounts, chattel paper & negotiable instruments  always ‘in’
9-102(a)(2): def. of A/R
“rt to payment of a monetary obligation, whether or not earned by performance”
for ppty that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of

DOES NOT include chattel paper or negotiable instruments;
o Accounts: K is ‘naked’; is fully assignable
o Chattel paper: is a K, but there is a retained interest in a thing; ex: K for sale of car, in which car stands as
collateral;
o Negotiable instruments: is a K for payment of $ but is in negotiable form—elements are it’s certain, payable
to certain person, and is payable to bearer or other person;
II. Consignments
Problem # 4: store holds the goods & collects the $ for the real seller; store takes out loan w/ bank; will the bank’s SI reach the
items in the store that belong to the dealers if dealers haven’t taken appropriate steps under Art. 9?

if it’s a consignment, it still is a secured transaction
o if it doesn’t sell, you want it back; but 1st, want it sold—so the fxn is essentially a SI;
9-102(a)(20): Defines ‘consignment’
“ means a transaction, regardless of its form, in which a person delivers goods to a
merchant for the purpose of sale and:
(A) merchant:
i. deals in goods of that kind under name other than name of person making
delivery.
ii. is not auctioneer, AND
iii. is not generally known by its creditors to be substantially engaged in selling
the goods of others;
(B) w/ respect to each delivery, the aggregate value of the goods is $1K or more at time
of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction doesn’t create a SI that secures an obligation.
1-201(35): defines ‘security interest’
In re Fabers
+ MD ships to Fabers; Fabers goes bankrupt; MD argues that the rugs were sent to Fabers on consignment & are to be returned to
MD;

MD failed to establish ostensible ownership, b/c he did NOT file.
Problem # 5: p. 23

this is an Article 9 consignment, so Luke needs to take steps to protect himself from WOW’s creditors

9-102(a)(20)—must meet all the requirements of A-D;
III. Leases
1-203: deals w/ leases; defines leases (p. 35)


whether a transaction in the form of a lease creates a lease or SI, is determined by the facts of each case.
(b) creates a SI if the consideration that the lessee is to pay the lessor for the right to possession & use is an obligation
for the term of the lease & is not subject to termination by the lessee (termination means terminate the time period &
also terminate the obligation to pay—if obligation to pay isn’t terminated, then it’s not true termination); and:
o (1) original term of lease is = to or > the remaining economic life of the goods—then this = a real sale (b/c no
residual interest to go back to lessor)
o (2) lessee is bound to renew lease for duration of economic life or to become owner of the goods (no way out,
have to take the goods)
2
(3) lessee has option to renew for remaining economic life of goods for no add’l consideration or nominal
consideration upon compliance w/ the lease agreement; (no reasonable choice but to buy the ppty) or
***B is conclusive;
(c) are factors to look at;
(d) factors to determine if consideration is nominal;
o when rent is FMV NOT nominal
o when option is granted
o



Problem # 6: this has the form of a lease, but probably isn’t a lease

no termination clause; can buy for $5.00; but must know whether the $5.00 is nominal consideration (must know value
of goods at that moment—whether a businessman would have no reasonable choice but to buy the ppty).

Bank wins the machine, b/c BIG didn’t file;
Problem # 7:

buyer is paying full price + interest—indicates that this is a SI;

this is a secured sale—when they have the option to pay the $10K, they have entered into a secured transaction; can
terminate, but not early & by that time anyway, have already paid the full price of the machine.
9/1/05
Interests in Personal Property, do they secure payment or performance?
(i.e.—does article 9 apply?)
Possible
Sales
(accounts, chattel paper, neg. inst)
Y
-Must file
Consignments (for sale)
Y
-Must file (see exceptions)
Leases
Y
-only one that cause us a problem
Suretyship
Included
Y
Y
?
Not included
§ 1-201(35) & follow-up test of § 1-203
§ 1-203 (b): 4 tests—all say that you should file
is it possible for lessee to terminate the obligation & all obligations to pay? If so, this is not Art. 9 transaction, but
is a true lease.
If the lessee has no right to terminate AND 1, 2, 3, or 4:
(1) the original term of lease is = to or greater than the remaining economic life of the goods.
(2) lessee is bound to renew the lease for the remaining economic life or is bound to become the owner of the
goods
(3) lessee has option to renew the lease for remaining economic life of goods for no consideration or nominal
consideration
(4) lessee has option to become the owner for no additional/nominal consideration
Leases:
In re Architectural Millwork of Va, Inc.
Debtor filed bankruptcy & retained 2 assets—Freightliner truck & forklift—both the subject of leases & debtor hasn’t paid on
either of the leases; Associates wants these to be considered as true leases; forklift was treated as a real sale in this case, subject
to Art. 9, so Assoc. can’t demand payments, but can come & repossess it;

the truck—Associates wants payments on it; Millworks refuses;

$9700 termination payment in the lease—called an adjustment clause—implication in this that the debtor would be able
to buy the truck at the end of the lease if he chose; court treats this as an option to buy;

question now becomes under § 1-203 (d)—lessee has option to become owner of goods for no additional/nominal
consideration
o ct. deems the $9700 is not nominal—compares it in proportion to the original purchase price of the truck;
o the $9700 is close to the residual value of the truck, & no reasonable person would refuse the option in this
case;

court holds that this is a true lease
o debtor must make payments
o test: what would a reasonable, sensible person similarly situated do? Would he have a choice?
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IV. OTHER TRANSACTIONS
Surety: USF&G

usually in the form of a bond—either secures payment or performance of a party who is unable to do so.

OUTSIDE Art. 9—do NOT have to file;
Problem #8:
Surety co. issues bond for performance & payment to Crash Const. who was hired by hospital to build an addition; Crash
finances this deal by taking out a loan w/ Octopus National Bank (ONB); Crash offers it’s A/R from its building K w/ Mercy
as collateral for the $ fronted to it to purchase the surety. (ONB MUST file). Crash goes into bankruptcy;
ONB argues $ to him, b/c he has rights to A/R; Surety argues $ to it; have an ostensible ownership problem; $ goes to surety

if all standard has are their insurance rights to subrogate, do they have to file?
o NO


Why don’t suretyships have to file?
o Public policy reason—are putting themselves at risk;
o Also, the only reason there was $ in the A/R, was because Surety stepped in & finished the job; if surety
hadn’t stepped in, then A/R would be in default; so, ostensible ownership problem makes them no worse
off—if surety weren’t in the picture, then no $ to ONB;
Secured parties always lose to a surety
V. EXCLUSIONS FROM ARTICLE 9
A. Federal Statutes

Preemption
Philko Aviation v. Shacket
Smith sells plane to Shacket; gives possession to Shacket & says he’ll file the paperwork w/ the FAA; Smith doesn’t & turns
around & sells the plane to Philko Aviation—doesn’t give possession, but does give over the bill of sale for the plane, which
Philko files w/ the FAA.

Philko wins over Shacket who has not filed;

Federal law 49 U.S.C. 1403 preempts state law; also any vehicles registered w/ interstate commerce commission;
railroads; patents & copyrights—federal law preempts in all these cases;
B. Landlord’s Lien & Other Statutory Liens
Problem #9
LL wants security for rent; signed lease providing that inventory subject to a lien & could be seized in the case of default. Is the
LL’s lien required to be perfected under Art. 9?

§ 9-109(d)(1)—refers to a LL’s lien—is a non-consentual lien (outside Art. 9)

Yes, this must be perfected if he wants this consensual lien;
C. Wage Assignments
Art. 9 doesn’t cover assignments of wages/salary of an EE;
Problem #10
Carl gives bank rights to all present & future commissions earned as collateral for loan;
Art. 9?—NO—but are commissions to be considered wages? And also, is he an EE of MIA or an independent agent?
+ if he gets wages/equivalent thereof art. 9 doesn’t apply
+ the more like a bonus it is  article 9 more likely to apply
* Policy: shouldn’t be in the business of financing future earnings;
D. Non-Financing Assignments
9-109(d)(4): art. doesn’t apply to sale of account, chattel paper, negotiable instrument, involved in the sale of the business—a one
time deal—these items are attached to the business sold, and aren’t in art. 9.
(d)(5): an assignment of accounts, etc. for the purpose of collection only.
(d)(6): assignment of right to payment under a K to an assignee that is also obligated to perform
under the K.
(d)(7): sale for full or partial satisfaction of a debt previously owed.
Problem #11:
4
No to all of the above—(d)(4) through (d)(7)
E. Real Estate

RE security interests are NOT covered by Art. 9.
Problem #12:
Mortgagee gets the mortgage on the ppty; debtor gets the ppty & the loan $; mortgagee is the secured creditor—this is all outside
Art. 9. Mortgagee gets loan from ONB, and grants a security interest in the ppty to ONB (the right to receive the $$ from
debtor).
o Is this within Art. 9?

Yes—ostensible ownership problem—if there’s no way of knowing of the relationship b/t ONB &
M’gee, then there’s the potential for fraud just as in Philko case;

9-109(d)(11)—doesn’t apply to RE

9-109(b)—must be compared w/ 9-109(d)(11)—B wins if we have to different tiers.
o Does ONB need to do anything to protect its interest?

Yes—must comply w/ Art. 9 if they only want the promissory notes; if they want the right to the
RE in default, must also file in the RE records;

Art. 3—signed writing to ‘bearer or order’
9/6/05
Ch. 3: THE CREATION OF A SECURITY INTEREST
I. Classifying the Collateral
§ 9-102: consensual interest in personal property or fixtures which secures a debt or obligation
§ 9-109: scope
(1) Sales: incl. accounts, CP, neg. instruments
(2) All consignments (exception for goods under $1K—de minimus idea)
(3) Leases: some included, some not—test: what would a sensible person do;
(4) Suretyships: OUTSIDE Art. 9; (subrogation & the like)
2 Ideas:
(1) Security Agreement: is the K; has 2 signatures—debtor & security party; gives you attachment—makes the K enforceable
b/t the parties;

want a granting clause

must be a writing & must be authenticated (something like a statute of frauds)

test: must be sufficiently specific to resolve K disputes
(2) UCC-1: solves the problem of ostensible ownership of the goods; gives public notice done via filing;



Both documents require that you describe the goods—see § 9-203 (SA) & § 9-502 (UCC) & § 9-108 (sufficiency of the
description); § 9-501 (tells what office to file in)
To classify the goods tells you what description must be in the documents
Purpose is to put the public on notice
§ 9-203: Attachment & Enforceability of Security Interest; Proceeds; Supporting Obligations;
Formal Requisites; p. 714

(a) attachment
o security interest attaches to collateral when it becomes enforceable against the debtor w/ respect to the
collateral, unless agreement expressly postpones the time of attachment;

(b) enforceability:
o security interest is enforceable against the debtor & 3rd parties w/ respect to the collateral only if:

(1) value has been given

(2) debtor has rights in the collateral

(3) debtor has authenticated the SA
§ 9-501: Filing Office (p. 818)

fixture filing: w/ Chancery or w/ Sec. of State
§ 9-502: Contents of Financing Statement; Record of Mortgage as Financing Statement; Time of
5

Filing Financing Statement
(a) Sufficient only if:
o (1) provides name of debtor
o (2) provides name of secured party or representative
o (3) indicates the collateral covered by the FS (only requires indicating the collateral, not describing)
§ 9-504: Indication of Collateral

sufficiently indicates the collateral if FS provides:
o (1) a description of the collateral pursuant to 9-108; or
o (2) an indication that the FS covers all assets or personal ppty;
Why Classify the Collateral?
§ 9-102—definitional section
§ 9-102 (a)(44): Goods (p. 684)
§ 9-102 (a)(34): Farm Products
§ 9-102 (a)(24): Consumer Goods
§ 9-102 (a)(48): Inventory(held for sale or used in process of selling)
§ 9-102 (a)(33): Equipment (is the catch-all—if it doesn’t fit into any other category, it
is classified as equipment)

FS—safe harbor—use the categories above listed in Art. 9—courts have never held that these weren’t sufficient
descriptions;
Quasi-Tangible Ppty: pieces of paper used as collateral

includes negotiable instruments (§ 3-104); investment ppty (stocks & bonds); documents (warehouse receipts & bills of
lading); chattel paper (has 2 things—debt & specific interest in a chattel; and letters of credit

Piece of paper itself has some legal significance;
Intangible Ppty: ppty having no significant form

Accounts, deposit accounts, and general intangibles (§9-102(a)(42)—catch-all category)
o Accounts: anything not put into a bank that has a right to payment
Problem #13:
(a) equipment
(b) farm products
a. tractor--equipment
b. chickens-farm products
c. manure—farm products
(c) mobile home—consumer good (but see, different way to file 9-102(53))
(d) right to sue someone for breach of K: general intangible
a. right to sue for negligence arising out of a car wreck: art. 9 doesn’t apply to tort claims (can’t use art. 9 to
finance for personal tort claims) see § 9-109(d)(12)
b. right to sue corporation for taking trusted EE: 9-102(a)(13)—commercial tort claim is allowed under Art. 9.
c. security interest in a lawsuit plaintiff has already won & that has been reduced to a settlement agreement:
allowed under Art. 9—b/c it’s just a right to $ at this point & can be used;
(e) pencils & other stationary supplies used by Sears: inventory
(f) a liquor license: general intangible
a. a right to return of a security deposit held by LL: general intangible
b. newsboy’s right to payments for papers already delivered: account—goods sold
c. carrier’s right to payments for payments to be delivered in future: account
(g) curtains bought by lawyer for law office: equipment
a. what if later he decides to use them at his home? No-don’t become consumer goods; once they are one
category, they remain in that category forever; the time of characterization is the time at which the papers are
filed
(h) obligation to repay $5K: general intangible
In re Morton (p. 47)
Problem here is w/ classification of the ppty; for hypothetical, call this truck a piece of equipment; he bought car to use in his
business to replace an aging car—this at the time would have correctly been considered consumer goods; later, he began using it
solely for the business—would be considered equipment at that time;

at the time the secured interest attaches, is the use that controls*
o here, that was consumer goods; can’t look back & see how it was used; look only to the use at the time the
interest attaches;
6


§ 9-308—Last Event Test
o a security interest is perfected if it has attached & all applicable requirements for perfection are satisfied
(don’t care beyond this point in time)
What if buyer lies to seller, and intends to make it inventory, but tells seller he intends to use it as consumer goods?
o So, miscategorized—what happens? Code will cut it off at the moment all conditions are satisfied; won’t
make this a subjective test;
o Cut off the transaction; end it;
Problem #14:
When the hospital borrows $, can it use the monies due it from various health plans as collateral?

Yes—these are characterized as health care insurance receivables. 9-102(a)(46)
Problem # 15:
Can Passport use these credit card transactions as collateral?

Yes—9-102: account—services rendered;

so, even if this was an outright sale, Art. 9 still applies;
Problem #16:
(a) FP; inventory; consumer goods; no
(b) Deposit account or possibly an instrument; bill of lading (aka document of title); document of title
(c) Consumer goods, maybe inventory if he intended to sell
(d) until moment check is cut, it’s a pure intangible—it’s a right to payment—general intangible
(e) quasi-intangible
(f) deposit account
(g) if software, it can be described as software under (a)(75); but otherwise, it will be classified as Goods
(h) is LLs obligation w/ TT part of art. 9---no (b/c RE), but if LL has an interest granted by consent, that is Art. 9, and the
right to payment in the LL’s hands is collateral. = Account.

quasi-intangible—instruments
**mark p. 45-46 in book for exam**
9/8/05
Creation of a Security Interest (cont’d)
(1) Security Agreement & (2) Financing Statement
9-203 elements of
9-502—elements of
9-108 sufficient description 9-504—indicate type of collateral
Attachment—contractual enforceability

the SA contains all terms of the agreement

9-108: sufficient description to minimize disputes
Perfection—cures ostensible ownership

puts you on notice to inquire further

description here will be a lot more vague
Morgan Co. Feeders, Inc. v. McCormick

Allen agreed to sell cows to McCormick; Morgan Co. seized the cows, which were subject to a perfected SI in their
favor;

Issue: are they inventory or equipment?
o Inventory passes to the buyer free of even perfected SI; pieces of equipment do not;
o Definition turns on the function of the goods & the status of the person using them;

here, McCormick is not in the business of selling cattle (use as inventory);
o 9-102(a)(48): defines inventory—problem here is that he doesn’t lease the cattle;
o 9-102(a)(33): equipment—if used or bought for use primarily in business, or if the goods are not included in
the definitions of inventory, farm products, or consumer goods;

Cattle here = Equipment; Morgan county wins
Problem #17:

could be classified as consumer goods
o 9-102(a)(23): definition—goods bought/used primarily for household purposes;
o here, he didn’t use the guitar, but it was a speculative investment

better classification is inventory
7
o
‘held by person for sale or lease or to be furnished under a K of service’;
Problem # 18:
Problem # 19:

statutory lien: art. 9?
o YES—these belong to 9-102(a)(5)****memorize this***
o 9-109 says that scope is consensual, except w/ regard to agriculture—see 9-102(a)(5);
o ag. Liens beat art. 9 security interests;
II. TECHNICAL VALIDITY OF THE FORMS
9-203(a)
9-502(a): requires name of debtor, name of secured party, and indicates collateral covered;
9-509(a): Person entitled to file record

person may file an initial FS only if (1) debtor authorizes it
9-521: p. 844: UCC forms; always good to put a signature block on the UCC form as well as the
security agreement;
A. The Security Agreement
Problem # 20:

K does qualify as a security agreement under 9-203;

Purpose of the SA is to contractually attach the collateral

For attachment rights: 9-203
o Must give value, (2) debtor must have rights in the collateral, (3) one of these conditions is met: (a) debtor
has authenticated a SA that has description of the collateral
o For our purposes, this does meet the requirements of a minimalist SA; but for this class, we MUST put in a
granting clause; (Barnes requires*****)

SA should also include ‘default conditions/events’

Requirements for SA:
o (1) Signature
o (2) Description
o (3) Granting clause
Chattel Paper: definition

is the obligation (which may start out w/ an acct. or negotiable instrument) together w/ the security interest in the
specific good.
B. The Financing Statement
C. The Debtor’s Identity
Problem # 18:

chattel paper—each paper is an account w/ a specific interest in a good; each specific good is a chattel paper (not
singular, but goods must be specified in the chattel paper, can’t be general)
Problem # 21:
(a) use individual name, even though tradename, b/c 9-503 says that unless these are
as in filed, can’t use them
(b) partnership’s name—9-503(4)(A)—use both names of the partnership—can’t use a
shortened name;
Problem # 22:

This is just a minor error

9-506: a FS substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions,
unless the errors or omissions make the FS seriously misleading;
Problem # 23:

ONB doesn’t lose its SI

9-507(c): 4 month rule—the original filing is good even after she gets married for 4 months;
o good idea to check on these every 90 days;
o at end of 4 mos, you lose, unless you re-file w/ the amended name;
Problem # 24:
8

(1) in the accounts actually transferred to Voice of Japan—do not have to re-file
o 9-507(a)
o 9-507(c): if debtor changes its name so that FS becomes seriously misleading:

FS is effective w/i 4 mos after the change; and

FS is NOT effective to perfect a SI in collateral acquired by the debtor more than 4 months after the
change, unless an amendment is filed within 4 months after the change.

if they form a new entity, what happens?
o 9-508(b): if the difference b/t the name of the original debtor and that of new debtor causes a filed FS that is
effective to be seriously misleading:

(1) the FS is effective to perfect a SI in the collateral acquired by new debtor before, and within 4
months after, the new debtor becomes bound under 9-203(d); and

(2) FS isn’t effective to perfect SI in collateral acquired by new debtor more than 4 months after the
new debtor becomes bound unless an initial FS is filed w/ name of new debtor;

What if identity of secured party changes? Refile? No
o Need the records be changed?
o 9-310(c): as far as debtor’s creditors, the perfected SI is still perfected;
100s—intro
200s--attachment
300s—perfection
400s
500s--mechanics
9/13/05
9-108 description 9-507 transfer name change
9-109 scope
9-508 transfer debtor new
9-203
9-310 assignment (refile)
9-204
9-308
9-309
9-210
9-501
9-502
Requirements of:
Financing Statement9-521

name of debtor, name of secured party, description of collateral
Security Agreement 9-203

description of collateral, signature of parties, & Also, include a granting clause

also generally have default clause:
o specify what amounts to—including failure to notify of a name change, etc.
Global Rules: ***

money = collateral

file early, often, and everywhere

always be concerned about bankruptcy

4 month period to refile under new names; whether it’s a name change under 507 or transfer to a new debtor under 508;
Problem #25:

should both sign the security agreement? Esp. Dauntless
o Yes—should get both, but to have a hold on the collateral, you must get the owner/grantor of the collateral to
sign the security agreement (Dauntless), but also want the borrower of the $ to sign a promissory note
(Oakapple), obligating him to pay the $ back;
o 9-102(28): defines ‘debtor’—the debtor is the owner—the person w/ rights in the collateral; Dauntless =
debtor

Under whose name should the financing statement be filed?
o Dauntless—b/c he’s the owner of the property
D. Description of the Collateral
9
Problem #26:

this doesn’t perfect SI in his guitar

9-108(c), comment 1—this language doesn’t reasonably identify the collateral;
o must adequately describe the collateral

but, see 9-504 regarding Financing Statement
o indicating collateral is good enough
Problem #27:

FS includes ‘all inventory, accounts receivable, equipment, instruments, general intangibles, & personal property’, as
well as pledging her extensive jewelry collection; bank files FS;

The jewelry would fall under the category of ‘personal property’ in the FS, and so the interest would be perfected, but
this same description is insufficient for the SA for the property to have attached.
o Could have said consumer goods, or jewelry in SA;
o 9-108 says don’t use the phrasing of ‘personal ppty’

Perfection occurs when the last event necessary for perfection occurs; no attachment, so no perfection.

Bank loses—not perfected
Problem #28:

lists as ‘inventory’—does this limit the SI to existing inventory only, or does SI extend to replacement for the original
collateral?
o This description would be sufficient for the FS, but as far as the SA is concerned, this wouldn’t be sufficient
to cover replacement collateral.
o 9-108, comment 3—SA must have language to include ‘after acquired inventory’, b/c as the comment
indicates, this is a question of contract interpretation. So, as safety net, always include this.
o 9-502, comment 2—refers to FS—doesn’t have to use language of ‘after-acquired collateral’ for the FS to be
effective to that collateral
Problem #29:

FS says ‘various equipment’, see attached list, but attach no list

This isn’t sufficient to put anyone on notice of what equipment is subject to a lien;
Problem #30:

‘machinery, equipment, furniture, and fixtures’; FS added inventory & A/R; parties willing to testify that they meant to
include;

This doesn’t serve to reach the interest in the inventory & A/R—other creditors will object on grounds of unfairness to
other creditors;
Problem #31:

deals w/ the SA—description must be adequate to resolve possible contractual disputes

always tack on language of ‘after-acquired property’ as well

best choice: Abacus 12 plus all other the equipment; or all equipment, including but not limited to the abacus 12, as
well as all after-acquired equipment.
Problem #32:

SA is contractual agreement, but filed a FS

If the secured party has signed, then this would possibly be ok; SA is not a K w/o the name in there.

What about the FS leaving off a name? not valid—must have name, secured party & collateral
III. ATTACHMENT OF THE SI

Elements: 9-203
o DESCRIPTION
o GRANTING CLAUSE
o AUTHENTICATED WRITING
o VALUE
o RIGHTS IN THE COLLATERAL
Thrift v. ADE

Thrift = secured party (financing co.); Devers = Buyer/Debtor; ADE = dealer
o Thrift made loan to Devers to buy 3 cars; Devers gives Thrift SA in inventory; Devers buys 3 cars from
ADE; ADE sends the cars to Devers; Devers is to send the $ within 5 days; Devers check bounces;
10
o
o
Thrift wins, b/c ADE is unsecured; ADE should have had a SA, and held onto the CTs; Court says that
Devers acquired interest in the collateral when it received possession of the cars from ADE; Thrift’s interest
in the collateral attached at that time;
Attached secured party beats unattached secured party.
Problem #33:

Roy borrows $30K in a 1/6 SA, giving interest in all ‘existing and after-acquired inventory in the store’; 1/6 received
the $; 3/15 packaged the trumpet order; 3/30 shipped & received the inventory;

(a) current inventory attached on the 6th of January (guitars & pitch pipe); trumpets—on 3/15 (the day he obtained
rights in the collateral)

(b) what if FS filed on 1/7? Doesn’t change date of attachment, just changes the time that the world is put on notice;
o **perfection isn’t achieved until 3/15—the date of priority (of creditors)—9-322—relates back to the earlier
of your filing or perfection time;

Here, the priority relates back to 1/7
o attachment = 3/15, perfection = 3/15; priority = 1/7
o FS can be filed before the SA is signed—9-502(d)
9/15/05
CH. 4: PERFECTION OF THE SECURITY INTEREST
9-309, 9-310, 9-312, 9-313, 9-322, 9-308 (last event test)
§ 9-310:

(a) except as otherwise provided, a FS must be filed to perfect all SI and agricultural liens.
§ 9-322:

priority: the earlier a filing, the earlier the perfection
3 Methods of Perfection:
1. automatic (9-309)
2. filing (9-310)
3. possession (9-312, 9-313)
4. CT
5.
I. Perfection by Possession (Pledge)
(normally, the order you want to follow is: file, do SA, check to make sure there are rights, and give out $).

typically, occur all at one time;

9-203(b)3: one of the following conditions is met:
o (a) debtor has authenticated a SA
o (b) collateral isn’t a certificated security in possession of secured party
o (c) collateral is certificated security, and has been delivered to secured party
o (d) collateral is deposit accounts, electronic chattel paper, investment property, letter of credit rights, or
electronic documents, and secured party has control.

for ordinary goods, possession will be a substitute evidentiary test
§ 9-313: When Possession by or Delivery to Secured Party Perfects Security Interest w/o filing

(a) except as otherwise provided in subsection (b), a secured party may perfect a SI in tangible negotiable instruments,
goods, instruments, money, or tangible chattel paper by taking possession of the collateral. A secured party may
perfect a SI in certificated securities by taking delivery of certificated securities.

possession cures the big issue of article 9—ostensible ownership.

possession is the alternative to filing
Problem #34:

Can someone else hold possession for you?

§ 9-313(c), (f)(g):
o (c) w/ respect to collateral other than certificated securities and goods covered by a document, a secured party
takes possession of collateral in the possession of a person other than the debtor, the secured party, or a lessee
of the collateral from the debtor in the ordinary course of the debtor’s business, when:

(1) person in possession authenticates a record acknowledging that it hold possession for the
secured party’s benefit; or
11

o
(2) person takes possession of the collateral after having authenticated a record acknowledging that
it will hold possession of collateral for the secured party’s benefit.
(f) person in possession is not required to acknowledge that it holds possession for a secured party’s benefit.
(can’t compel them, but can request it).
Problem #35:

(a) does possession of the negotiable warehouse receipt give bank perfected SI in the inventory?
o 9-312: perfection of SI in….
o (a) SI in chattel paper, negotiable documents, instruments, or investment ppty may be perfected by filing.
o (b) SI in deposit account perfected by control, (b)(2) letter of credit by control, and (b)(3) in $ by possession).
o (c) while goods are in the possession of a bailee that has issued a negotiable document covering the goods:

(1) SI in goods perfected by perfected a SI in the document; and

(2) SI perfected in the document has priority over any security interest that becomes perfected in
the goods by another method during that time.

If Fred had a real agent there protecting the property, there isn’t proper bailment by a 3 rd party—see 9-313
(comment)—can’t be held by debtor or someone in their control.

SO, this is not a legitimate negotiable document, so possession of the goods controls.

(b) see 9-312(e)
o (e): ‘temporary perfection—a SI in certificated securities, negotiable documents, or instruments is perfected
w/o filing or the taking of possession or control for a period of 20 days from the time it attaches to the extent
that it arises for new value given under an authenticated SA.’

9-312(f)

(d) sue Fred’s.
Problem # 36:

promissory notes = negotiable instruments

have perfected SI in the 35 notes that they kept possession of, but the one note they gave back to Karate, they have lost
interest in, b/c the 20 day period has expired under 9-312(f);

Finance Co. could have protected itself by filing a FS—9-312(a).
Possession is a granted interest by turning over possession & control.
II. AUTOMATIC PERFECTION
§ 9-309: SI Perfected Upon Attachment

The following are perfected when they attach:
o (1) a purchase-money security interest in consumer goods, except as otherwise provided in 9-311(b), w/
respect to consumer goods that are subject to…..
o see definition of PMSI—9-103:
A. Purchase Money Security Interest in Consumer Goods
Problem #37:
(a) 9-204(b): Bilko’s SI does not attach—no after-acquired property clauses in the consumer context.

why would Bilko want a SI in sewing machine? Easier to collect the goods; works as leverage.
(b) 9-103(a)(2): Yes—can be seller or financier;
(c) no—wouldn’t have been PMSI; can use 2 party checks, or send $ directly to the person the borrower says it’s going to
go to.
(d) First Finance—even though not perfected, b/c not filed, but wins as an automatic perfection; b/c Bilko’s though 1 st,
wasn’t a valid security interest.
In re Short (p. 81)
American Finance loaned $ to Shorts to buy furniture; borrowers later consolidated some loans, and new loan described collateral
as a continued PMI;

don’t use the words refinance, termination or novation, rather use consolidate or continue, preservation, or rollover
(words that suggest an intent to preserve the original character of the transaction as a PMSI).

One line of cases holds that PMSI is automatically ‘transformed’ into a nonpurchase money SI, when proceeds of
renewal note are used to satisfy the original note.

2nd line of cases rejects this approach, and hold that lien is either partial purchase $ or non-purchase $--use dual status
test—how much has been paid towards the purchase and how much towards the non-purchase$.
o Run into problem w/ accounting—how to divide the $ paid b/t the 2 debts; towards the oldest debt or the
newer one?
12

Here, use case-by-case approach/facts case—
o Still is PMSI in the original loan—only 2 payments were made on the furniture, and language of intent in the
agreement showed that parties wished to preserve the character of the original promissory note in the
consolidated loan.
Problem #38:

on-approval—seller lets buyer take back to office to see if he wants it;

does bank’s lien attach as soon as buyer gets possession?
o NO—buyer has no rights in the collateral.

Does Nighflyer’s SI qualify as the purchase kind?
o NO—not a purchase $ security interest; Façade already bought the rug;
9/20/05
9-102, 103, 308, 309, 310, 311, 312 & 313
(1) attachment (9-203—4 elements:

value

rights

written SA or possession
(2) Perfect (9-308)

9-308: last event test

9-310: default

4 ways to achieve:
o filing
o automatic 9-309
o possession 9-312, 313
o certificate of title 9-311/31
(3) Priority

First in time, first in right

9-322: the earlier of perfection or filing
(4) Other methods (covered later on)
GMAC case: (p. 90)

test: was it a purchase money security interest?
o If so, it gets you ease of perfection & better priority.

9-103: defines PMSI

GECC argues: it has SA, has filed, and has given $ to dealer;

GMAC argues: it gave the $ specifically for the purchase of these 2 cars; but, dealer has actually already purchased the
cars, and then GMAC gave them the $ to reimburse them.

Holding: GMAC falls under 9-103(a)(2)—obligation of an obligor for all or part of the collateral, or for value given to
enable debtor to acquire rights in or the use of the collateral.
o Could more easily have been solved by GMAC giving $ directly to seller, and seller not relinquishing
possession of cars until $ was received. If this was done, perfection would have been automatic.

Even if GMAC proves PMSI, does it mean automatic perfection or priority?
o No—these goods are inventory, and the only PMSI perfection which is automatic, is consumer goods—9309(1).
o But, do get priority—9-322:

(d)

(a)(1)-general rules
9-324: Priority of PMSIs:

a perfected PMSI in goods other than inventory or livestock has priority over a conflicting security interest in the same
goods, and, except as otherwise provided in § 9-327, a perfected security interest in its identifiable proceeds also has
priority, if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter.
B. Certain Accounts & Other Intangibles
9-309(2):

gives automatic perfection for assignment of accounts (so long as not substantial)
9-109(a)(3):
13


includes a sale of accounts, chattel paper, payment intangibles or promissory notes;
(d)(4) – (d)(7)—excludes 4 types of sales of accounts:
(1) part of sale of a business
(2) satisfaction of a pre-existing debt
(3) for collection purposes only
(4) under which assignee is obligated to perform.
o
but otherwise, perfection is automatic under 9-309 (so long as it’s not a substantial transaction).
In re Wood (p. 100)

Larkin loaned Wood $10K; Wood would not have to pay for 5 years; Agreement to give some of the proceeds from
pending litigation—is an account receivable.

Does Art. 9 include this type of account? Yes (9-109)

Is it one of the 4 exclusions under 9-109(d)? No.

Is it automatic?
o Depends on whether this is a substantial portion of Woods accounts;

Court looks at the circumstances of the transaction;
o Was a casual and isolated transaction b/t 2 people who maintained a personal & professional relationship.
o Larkin was not regularly engaged in the business of taking accounts (financing).
Problem # 39:

one bank sells all its promissory notes to another bank
o inside article 9? Yes—must file.

must last national file to perfect its SI in the notes?
o 9-309(4)—no filing required.
o Don’t have to file, but must perfect. Best to take possession of the promissory note.
Problem #40:

9-308(d): security interest is perfected when attached;
o Supporting obligation: perfection of a SI in collateral also perfects a SI in a supporting obligation for the
collateral.
III. PERFECTION BY FILING
A. The Mechanics of Filing
9-501: office where you file
9-502: form that you file
Problem #41:

Hamlet was loaned $ (Shakespeare was the president of the company); clerk misfiled the form; later bank loaned
Hamlet more $, and checked records, and found none under Hamlet’s name.

9-517: if you submit it correctly, what is done afterwards is their problem

Whichever creditor loses should sue state for negligence. Some states have set aside a fund from the filing fees with
which to pay judgments against the filing officer.
B. Other Filings
Problem #42:

Who has priority? ONB has priority, b/c filed 1st.

(a) FS is effective for 5 years. (9-515(a)).

(b) if ONB files a continuation statement on May 1, 2006, is its perfected position continued? (filed 1 year in advance)
o § 9-515(d): a continuation statement may be filed only within 6 months before the expiration of the 5 year
period.
o A lot of courts hold that it loses its priority position by filing too early.

(c) Does ONB retain priority if it never files continuation?
o 9-515(c): it lapses—loses priority.

(d) if perfection lapses, & it files a week later, is it still senior to ANB?
o No, once lost, it’s lost.
Problem #43:

not automatic perfection for computer, b/c not a consumer good.

Wants bank to clear up records at filing office, does she have this right?
o Yes—9-513
14

What can she do if they fail to comply?
o 9-625(b): person is liable for damages in the amount of any loss caused by a failure to comply. Loss cuased
may include loss resulting from the debtor’s inability to obtain, or increased costs of alternative financing.
o (e): gets de minimus $500 damages + plus actual damages.
Problem #44:

ex-spouse filed false FS against attorney; what can Sam do to clear up the title to his property?

Can file FS himself, and sue for damages.
IV. PERFECTION BY CONTROL
§ 9-314(a) provides that a “security interest in investment property, deposit accounts, letter-of-credit rights, or electronic chattel
paper may be perfected by control of the collateral under 9-104, 105, 106 or 107.

Control (aka ‘hyper-possession) generally means that the secured party has taken the steps described in these sections
so it is obvious to anyone investigating the state of the collateral that the secured party has rights therein.
9/22/05
CH. 5: MULTI-STATE TRANSACTIONS
I. GENERAL CHOICE OF LAW RULES
These provisions deal w/ choice of law:
1-301: parties have the right to choose which law to be bound by;
(c) an agreement by parties to a domestic transaction that any or all of their rights & obligations are to be determined by
the law of this state or of another state is effective, whether or not the transaction bears a relation to the state
designated.
(d) in the absence of an agreement, rights are determined by the law that would be selected by application of this state’s
conflict of laws principles.
9-301: Law Governing Perfection & Priority of Security Interests

law of the debtor location will govern most things—a domicile regime;
o the domicile of the party dictates where you perfect.
o The idea of priority (who wins among those who are perfected) is determined by the location of the goods at
the time of the dispute.

Except as otherwise provided in § 9-303 through 9-306 (these specify location of the goods, aka anti-domicile rules),
the following rules (1)determine the law governing perfection, (2) the effect of perfection or nonperfection, and (3) the
priority of a security interest in collateral:
o (1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of
that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a SI in
collateral. (domicile)
o (2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect
of perfection or nonperfection, and the priority of a possessory SI in that collateral. (domicile)
o (3) Except as otherwise provided in paragraph (4), while (a)tangible negotiable documents, (b) goods, (c)
instruments, (d)money, or (e) tangible chattel paper is located in a jurisdiction, the local law of that
jurisdiction governs:

(A) perfection of a SI in the goods by filing a fixture filing

(B) perfection of a SI in timber to be cut; and

(C) the effect of perfection or nonperfection and the priority of a nonpossessory security interest in
the collateral.
***missing phrase ‘governs perfection’—b/c perfection is still governed by domicile, and only the effect of
perfection/nonperfection and priority are governed by local law under this subsection.***

ex: farmer in LA, w/ farms in LA, MS, AL, owns equipment located in all 3 states; according to law, the perfection is
made under (1) while debtor located in jurisdiction—he’s located in LA, the effect of perfection/nonperfection &
priority, look to MS & AL law
o
o
o
o
9-303—certificates of title
9-304—deposit accounts, where located
9-305—investment property, jurisdiction where located governs
9-306—letter of credit rights
Problem #45:
15

Mary lives in WY; buys boat in Ohio & plans to keep it there; Ohio law provides that when consumer has paid more
than 75% of debt secured by consumer goods, creditor can’t repossess; WY has no such rule;
o If creditor loans Mary $ to buy the sailboat & takes a SI, where should creditor file FS?

WY—location of debtor (domicile)
o When Mary has paid 75% of debt, will creditor’s SI still be attached to the boat?
o Consumer protective rule apply? Ohio to determine effect of perfection & priority
Problem #46:

When corporation borrow $, in what state should the FS be filed?
o 9-307: Location of Debtor

(b)(2) debtor that is an organization & has only 1 place of business is located at its place of
business

(b)(3) debtor that is an organization & has more than one place of business is located at its chief
executive office.

(c) if subsection (b) does not apply, debtor is located in DC

(d) a person that ceases to exist, have a residence, or have a place of business continues to be
located in the jurisdiction specified by subsections (b) & (c).

(e) A registered organization that is organized under the law of a state is located in that state.
o Delaware

If the corporation was registered in the Republic of Jahala, a pacific island nation, where should the FS be filed? 9307(c)—DC
Problem #47:

legal partnership w/ business in Illinois, where ONB has SI in the accounts receivable, had filed its FS.
o IL is original place to file.

Move to D.C.—how long does ONB have to refile? 4 months--§ 9-316(a)(3).

If they merge w/ D.C. firm? ONB has 1 year—9-316:
o 9-316: a SI perfected pursuant to the law of the jurisdiction designated in § 9-301(1) or 9-305(c) remains
perfected until the earliest of:

(1) the time perfection would have ceased under the law of that jurisdiction (original FS lasts 5
years)

(2) the expiration of 4 months after change of the debtor’s location to another jurisdiction; or

(3) the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor
and is located in another jurisdiction.
Problem #48:

if partnership has 2 creditors before its move to DC; ONB is filed 1 st, Last National filed 2nd;

when move occurs, LNB refiles in DC; ONB doesn’t refile until 6 months later. Who has priority?
o Last National Bank—b/c of failure to re-file within 4 months
o If both refile within the 4 months, doesn’t matter who files first, because the priority is preserved during that
time.

see 9-316(b)
II. CERTIFICATES OF TITLE

whoever issues the CT is the jurisdiction whose law applies.

9-303:
o (a) this section applies to goods covered by CT even if there is no relationship b/t the jurisdiction under
whose CT the goods are covered and the goods or the debtor.
o (b) Goods become covered by a CT when a valid application for CT and the fee are delivered to the
appropriate authority. Goods cease to be covered by a CT at the earlier of the time the CT ceases to be
effective under the law of the issuing jurisdiction or the time the goods become covered subsequently be a CT
issued by another jurisdiction.
Problem #49:

Saylor lives in Michigan, buys truck in PA, tells dealer to register it in IN;

Ringer Truck city is perfected, but real issue is priority

How should this come out?
o Ringer Truck City wins—until someone else issues a CT, theirs is still effective.

9-303(a).
(9-317 through 9-337—governs priority)
16
Problem #50:

Tourist lives in TX, buys car in OK; OK dealer does a CT. Tourist drives back to TX & re-registers the car there.
Tourist sold the car to her neighbor, William Innocent. Dealer repossesses the car.

Who is entitled to the car?
o Innocent—9-337
o 9-337: innocent buyers can buy;
o 9-316:

(d)

(e) 4 months doesn’t apply—CT good as long as its effective. (forever, until a new CT is issue)
Problem #51:

Armstrong bought a yacht in a state that doesn’t use CTs for boats, but does a FS instead. ONB filed the FS.
Armstrong moves to a CT state.

Does ONB’s perfection last as long as its filed FS is still effective or only 4 months?
o Get 4 months

What if opposite occurs?
o ONB is still perfected—as long as CT is issued and good.
CH. 6 PRIORITY
I. SIMPLE DISPUTES
9-317: (a) a SI or agricultural lien is subordinate to the rights of:
(1) a person entitled to priority under 9-322 (parties who are filed and perfected); and
(2) except as otherwise provided in subsection (e), a person that becomes a lien creditor
before the earlier time:
(A) the SI or agricultural lien is perfected; or
(B) one of the conditions specified in section 9-203(b) is met & a FS covering the collateral is filed.
Problem #52:

ONB only has attachment under 9-201, b/c never filed—no perfection.

Martin’s Travel got a judgment against the bookstore.

Does ONB or Martin’s get paid 1st when inventory is sold?
o See 9-317(a)(2)—Martin wins (judgment creditor)., but ONB can still file.

What if bookstore had filed bankruptcy while ONB’s lien was still unperfected?
o Depends on the other creditor’s w/ perfection.
o Moment bankruptcy is filed—its too late for ONB to file—instantaneous stay is granted once the bankruptcy
petition is filed. ONB loses.

Judgment lien creditor:
o Includes bankruptcy trustees
Problem #53:

Coke used A/R as collateral, but Mansfield bank failed to file. Later, Coke got loan from Bentham National Bank, who
did file.

Who has superior interest in the collateral?
o See 9-322(a)(2) & 9-317:

(a)(2)—a perfected SI has priority over a conflicting unperfected SI.
Problem #54:

Gets loans from FNB, and SSB. FNB filed FS 1st (9/25), but didn’t loan $ until 11/10. On 10/2, SSB loaned $ & filed
its FS.

(a) did both banks have a perfected SI, assuming they filed in the proper place? (i.e. is it possible for 2 creditors to have
perfected SI in the same collateral?)
o who’s the 1st to perfect? Second State Bank

b/c for perfection, there must be attachment, and for attachment, there must be rights in the
collateral, and credit for value given ($).

FNB perfects on 11/10; SSB perfects on 10/2.
o both banks filed in the proper place
o it is possible for 2 creditors to have perfected SI in same collateral.

Perfection is not exclusive.
17


9-322(a)(1): PRIORITY—First in time, first in right (by either filing or perfection).
o Conflicting perfected SI rank according to priority in time of filing or perfection.
o Priority dates from the earlier of the time a filing is first made or the SI is 1 st perfected.
o (d) First to File priority rule for certain collateral

if SI interest in chattel paper, deposit accounts, negotiable documents, instruments, investment
ppty, or letter-of credit rights is perfected by a method other than filing, conflicting perfected Sis in
proceeds of collateral rank according to priority in time of filing.
Elements of Perfection:
o Last event Test: 9-308
9/27/05
§9-322:
§9-317:
§ 9-320: Buyers (specialty rule)
§ 9-323: F.A. priority
§ 9-324: PMSI—Trumping Rule-9-327
9-328
9-330
9-331
9-334: Crops
Problem #55:

What happens when FNB loans add’l $10K?
o FNB is still 1st in priority, b/c of prior existing FS on file.
9-323—lender in 2nd place can never be safe—future advances always retain same priority.
For purposes of priority, perfection of SI dates from the time an advance is made to the extent that the SI secures an
advance that:
(1) is made while SI is perfected only:
a. under § 9-309 (automatic perfection) when it attaches; or
b. temporarily under § 9-312 (e)(f) or (g)
Future advances relate to the time of filing.
* unless it falls under one of the strange cases of perfection.
* NO alteration of FS needed;
Problem #56:

FNB never filed termination agreement; later loaned more $--can FNB rely on the old FS?
o Yes—doesn’t matter if piling on old transaction, or a new transaction, once you cured the requirement of
public notice.

FNB’s priority over SNB is still in effect.
o As long as was 1st to file or perfect, they retain priority.
* ‘Future Advances’: NO—b/c new agreement takes place of the old one;
Problem #57:
9-203: attachment is ok, if give possession at that time.
(a) Who has priority? Bank

9-322—conflicting perfected SI, priority dates from the earlier of time of filing or lien is 1 st perfected.
(b) No—312(f) says where it’s a negotiable document or in possession of bailee, can turn over; but that’s not the case here—
313(d) says perfection occurs no earlier than the time the secured party takes possession & continues only while secured party
retains possession.
(c) Father wins—9-308(c)—continuous perfection is necessary, so CNB should have filed to perfected its interest.
Problem #58:
(a) Did bank’s SI in cattle encompass the CC obligation?

Yes--§ 9-204 (a) & (c) & Comment 5—parties are free to agree that SI secures any obligation whatsoever. (same result
in In re Wollin). Some cases look at intent of parties, others at ‘same type’/category; others—how related.
(b) Different result if trip was for personal reasons?
In re Wollin (still good law)
18




dragnet clause:
Bank’s position: say that ‘any other amt’ owed in the future includes CC debt, wants to apply ‘class test’—can apply
dragnet to anything of same type.
Court applies a test of consent of intention
Regarding antecedent loans—court adopts ‘rationale of intention’ of the parties.
Future Advances:
(1) provide for future advances in SA
(2) provide for in new SA if not in 1st
(3) intention shown (K language)
(4) antecedent collateral should be referenced specifically on new advance.
(lender already knows about the antecedent collateral, so why not specifically reference it).
9-204, Comment 5: trying to get rid of Gilmore test, not the result of the Wollin case;
Problem #59:
Objective manisfestation of intent—banked at 2 different banks for just this reason, to keep cross-collateralization not an issue of
concern for him.
II. PURCHASE MONEY SECURITY INTERESTS
A. The Basic Rule
Problem #60:
(a) Why might it have such a policy? Is it wise here?

b/c most of Sophy’s customers are likely consumer context;

not wise here, b/c commercial customer, and there is a prior existing lien which this equipment will be subject to.
(b) On June 10, who has priority in the furniture? Sophy has 20 grace period in which to perfect. On June 30, if Sophy
hasn’t filed, then Sullivan National Bank will have priority, b/c the 20 days have run.
Problem #61:
Problem # 62:
Problem # 63:
310, 312, 313, 314
317
322/323
320, 324, 327, 328
10/4/05
1. 9-308: last event (money)
2. 9-317: lose if unperfected
3. 9-322: Fit Fir Rule—first in time, first in right—whoever filed 1st has priority
4. nuance of priority:
9-320: buyers
9-324: PMSI
9-327: control deposit accounts
9-328: controls investment securities
* generally, first in time, first in right, except PMSI, buyers, and control freaks
Problem #64:

Hans buys from Standard Auto Wholesale, which took PMSI (9-103) in the goods & filed FS the same day. MDNB
also loans $ to finance the purchase of inventory; Hans used some of this $ to pay off Standard.

MDNB didn’t enable him in the acquisition of the property.

Both creditors sent notice to the other. F

The enabling acquisition advance is PMSI from MDNB. And Standard was also given a PMSI in the inventory—both
are perfected—Who has priority?
o 9-324(g): prefer the price seller over the cash enabler—seller over financier.
19
Problem #65:

delivery of the goods on consignment means that they were considered inventory of the gallery owner

she is a purchase money secured party—if she filed FS as a purchase money deliverer, she would have a better
position.
(perfection rules—9-310 through 314)
III. CONTROL AND PRIORITY
A. Control Over Investment Property

3 Types of Investment Securities: Art. 8-102
o (1) Certificated securities (a4)
o (2) Un-certificated securities (a18)
o (3) Entitlements (a17)

9-314: Perfection by Control
o
(a) A SI in investment ppty, deposit accounts, letter of credit rights, electronic chattel paper or electronic
documents MAY be perfected by control of the collateral,
o (b) when the secured party obtains controls and remains perfected by control only while secured party retains
control.
o (c) SI in investment ppty is perfected by control under 9-106 from the time the secured party obtains control
and remains perfected by control until:

(1) secured party doesn’t have control; and

(2) one of the following occurs:

(A) if the collateral is a certificated security, the debtor has or acquires possession of the
certificate. (debtor has control)

(B) if the collateral is an uncertificated security, the issuer has registered or registers the
debtor as the registered owner; or

(C) if collateral is security entitlement, the debtor is or becomes the entitlement holder.

9-106: Control of Investment property
o person has control as provided in § 8-106
o 8-106: control by possession (certificated), registration (non-certificated), or as holder of entitlement
(entitlements)

9-310: When Filing is required, a FS must be filed to perfect all SI and agricultural liens
o (b) exceptions: (8)—9-314—don’t have to file for these items if perfected by control under § 9-314.

9-328: Priority of SI in Investment Property
o priority among conflicting SI in the same investment ppty:

(1) a SI held by party having control has priority over a SI held by party that does not have control.
o Control is always preferred over filing w/ this category
Problem #66:

shares are held by broker, so this is an entitlement.

What is the best method of getting control over the security entitlement? 8-106(d), comment 4—becoming the
entitlement holder—clears any conflict.

(a) If another creditor also gets control over the rights, who has priority?
o 9-328(2): ranked in priority of time—whoever does means of perfection listed in (B) first; all are ok as means
of perfection, but some means are deemed safer than others.

(b) If Goldbury borrows $ after ONB has control, and grants B & B a SI in stocks held w/ them, is B & B’s SI superior
to ONB?
o Yes—exception § 9-328(3): SI held by intermediary or a securities account maintained w/ the securities
intermediary has priority over a conflicting SI held by another secured party.
B. Control Over Deposit Accounts

9-327: Priority of SI in Deposit Accounts
o (1) SI held by secured party having control has priority over a conflicting SI.
o (2) SI perfected by control under 9-314 rank according to priority in time of obtaining control.
o (3) Except, as SI held by the bank w/ which the deposit account is maintained has priority over a conflicting
SI held by another secured party.
20
o
o
o
o
(4) A SI perfected by control under 9-104(a)(3) has priority over a SI held by the bank w/ which deposit
account is maintained.
9-310—filing for perfection, but this falls into (8) exception, so filing is permissive.
9-314—allows for perfection by control.
9-104 = control = priority under 9-327—first in time first in right control trumps others (filing) bank set-off.
Control if:

(a)(1) secured party is the bank where account is maintained

(a)(2) debtor, secured party and bank have agreed in an authenticated record that the bank will
comply w/ the instructions originated by the secured aprty directing disposition of fund in account
w/o further consent by the debtor; or

(a)(3) secured party becomes the bank’s customer w/ respect to the deposit accounts. ***this is the
best means*****move account into your name.
Problem # 67:

3 possibilities of control: 9-104
o (a)(1), (a)(2), or (a)(3)

If Computer later borrows $ from Last National and grants bank a SI in the account held there, who has priority—LNB
or Investment Bank of America?
o Last National—9-327(3) & (4)
C. Control Over Letters of Credit Rights


If one party doesn’t trust the other to may payment at agreed-time, that party may require that payment be made by
bank of good repute. If this is done, the bank will issue a letter of credit to the person to whom payment is to be made
(beneficiary) specifying the circumstances under which bank will honor drafts drawn on it by that person.
Other party to the transaction who gets bank to issue the letter of credit is called debtor/applicant.
Problem #68:

How can new lender obtain perfected interest in rights represented by the letter of credit?
o Can always file, but it’s not necessary under 310(8), if perfection by control under 9-314, and control over
letter of credit is governed by 9-107

9-107
o A secured party has control of LOC right to the extend of any right to payment or performance by the issuer
or beneficiary if the issuer or beneficiary has consented to an assignment of proceeds of the LOC…

If they can’t get control, can still get the account (which is the right to payment), but can’t get the right to letter of
credit itself unless you get control.

9-329: follows from 327 & 328 regarding priority
IV. BUYERS

9-320: Buyer of Goods
o (a) A buyer in the ordinary course of business, other than a person buying farm products from a person
engaged in farming operations, takes free of a SI created by the buyer’s seller, even if the SI is perfected and
the buyer knows of its existence.
Problem #69:

ONB had perfected SI in TV; Consumer has paid for the TV;

(a) What should Consumer tell bank? 9-320(a)
o ‘Buyer in ordinary course of business’ (def. 1-201(9))—means a person…who (1) gives new value & (2)
takes possession, in good faith (1-201(20)) w/o knowledge that the sale violates a right of another in the
goods, and in the ordinary course from a person in the business of selling goods of that kind.
o A BIOC ‘takes free’ of SI created by the buyer’s seller, even if knowledge and perfected = instead of original
goods, look for ‘proceeds’

(b) Would it matter if she had known of SI in the inventory?
o No—knowledge of FS is not knowledge of violation—TV store can’t pay back the bank unless it gets $ from
consumer. Comment 3

(c) Would it matter if she bought at ‘liquidation sale’ and was informed by store that store planned to file bankruptcy?
o No—liquidation sales are still ok.

(d) What if consumer put TV on ‘layaway’ and had paid 50% of price, and had store keep TV until she finished paying,
when the store files for bankruptcy?
21
o
See § 2-502: Yes, a buyer who gets taken advantage of within 10 days has protection. A buyer will get $ paid
in if within 10 days of insolvency. Lay away preference of up to $900.
10/6/05
(9-320(a), (b), 9-317, 9-322)
International Harvester Co. v. Glendenning

suit for wrongful conversion of 3 tractors. Barnes is a dealer of tractors for Int’l Harvester. Int’l gives Barnes tractors
(inventory seller) (most likely have SA, FS, AAP clause, and future advances); Glendenning is a farmer.
o Barnes makes deal w/ Glendenning—Barnes gives 3 tractors, and Glendenning is to give $16K cash and 4
older tractors; in reality, however, only gave the $, not trade-in tractors, though the receipt for the transaction
says he gave all of this.
o Glendenning is contacted by Int’l and lies again, saying he did give the tractors.
o Glendenning is a buyer, who buys, delivers new value, good faith (no), reasonably (no), from someone in the
ordinary course (yes), dealer (yes).
Problem #70:

Deering did sell in the ordinary course of business, but did it sell to a buyer? So long as possession remains w/ the
original secured party—the seller can retain.

9-320(e) and comment 8.
Qualifications under 1-201 (p. 154-55).
Problem #71:

was new value given???
o Took check & turned around & re-endorsed it back to dealer.
o Should have given a check of his own to avoid this issue.

courts have tended to hold that this is NOT new value.
1st Nat’l Bank v. Ford Motor Credit Co.
FMCC (SA, FS, Aap clause, classic floor plan—FMCC gets PMSI in all the cars it gives to dealer). Dealer refinances 2 of their
own cars—double financing.

Overton & Magill buy 2 of the cars on their lot, getting financing from 1 st National, who also has SA, FS, and CT on
the cars.

Cars are placed back on the lot for resale

Have 2 perfected secured parties here—FMCC as PMSI, and 1st National as consumer goods w/ CT—actually didn’t
get a CT on the cars.

FMCC maintains priority over the bank

Bank could have avoided this by making sure that Overton & Magill were actual BIOC, and filed a CT—b/c BIOC
takes free of any security interest.
o would be very difficult for bank to do.
Problem #72:

Ann should win, b/c she’s a BIOC, but ? is is this inventory in the typical sense?

This isn’t inventory (b/c belongs to Arthur personally), so technically, this was consumer goods, not buying from
inventory; nonetheless, she’s going to take free of any secured interest.
Problem #73:

Wonder Spa pledge 50 promissory notes to Bank in return for loan. Spa asked to have 10 notes back for presentment to
makers for payment, and bank turned them over. Wonder Spa sold to Octopus National Bank

3-104: defines negotiable instrument (elements), different from:
o Accounts receivable—right to receive payment for goods sold/services rendered, but is intangible.
o Takes on character of tangibility if it has ‘bearer’ or ‘order’
o Chattel paper can be SI in property
o Negotiable documents: warehouse receipt

9-331: BIOC vs. ‘holders in due course’
o holder in due course takes priority over an earlier security interest, even if perfected, to the extent provided.
o ***note—don’t ever let go of a promissory note***
Problem #74:

Who wins? Nancy wins if Japan is not filed.
22
o

Voice of Japan—Andy owes Voice of Japan $, and resells to Nancy, but still owes the $ to Japan, IF Japan
filed
o Problem—Andy isn’t in the business of selling goods of this kind—so 9-320(b) doesn’t protect Nancy.
9-320(b): otherwise, Nancy wins
Missed class 10/11
10/13/05
9-317: unperfected
9-322: F in T, F in R
9-324: PMSI
9-320: buyers in ordinary course
9-321: leases in ordinary course
2A-307
2A-308
9-2210 (2-711(3))
2-702/2-403
9-333
V. LEASES
ONB has ongoing floating lien (SA, FS, equipment) on Highbid Const. Highbid goes to sub/c and leases the equipment to him to
do the work; Highbid gets promise to do work & $ for the equipment.
Problem #80:

Is lessee subject to ONB’s existing SI in the equipment?
o 2A-307:

(2) except as as otherwise provided in subsection (3), and 2a-306, 308, a creditor (ONB) of a lessor
(highbid) takes subject to the lease K unless the creditor holds a lien that attached to the goods
before the lease K became enforceable.

ONB does not have a lien (has a security interest), so (2) doesn’t protect them.

(3) except as otherwise provided in § 9-317, 321, 323, a lessee takes a leasehold interest subject to
a security interest held by a creditor of the lessor.

Highbid isn’t in the business of leasing equipment. So, ONB is protected unless sub/c (lessee) is a
lessee in the ordinary course of business.
o Is it a lease in the ordinary course of business? NO

If lease in ordinary course of business, ONB loses;
o Is it a genuine lease? Yes—meets test under 2a-103 and definition of lease 1-203;

If not a genuine lease, then creditor of lessee wins;
o A lien is anything other than a consensual security interest.
Problem #81:
Lessee returns equip to Highbid; Now, Highbid enters agreement to sell equip to ONB outright; and will lease the equip back;
The term of the lease was exactly equal to the useful life of the equipment.

is this a genuine lease? No—b/c if lease goods for their entire lifetime use, then it’s not a temporal time slice; idea of a
lease is that it will have some reciprocal value to the owner at the end of the lease;

So, in essence this is a sale, and not a genuine lease.
o A false lease: can be created by either lease for entire useful life of goods, option to purchase for nominal
value at lease end or option to renew for remainder of useful life of goods;

Now, Highbid goes to ANB, and offers the bill of sale for the grading machine, but does not tell about the subsequent
sale to ONB & leaseback. ANB loans $ and files FS. Who wins b/t ONB and ANB?
o 2A-308: A creditor of a seller may treat a sale or an identification of goods to a K for sale as void if as against
the creditor retention of possession by the seller is fraudulent under any statute or rule or law, BUT, retention
of possession of the goods pursuant to a lease K entered into by the seller as lessee and the buyer as lessor (ie.
Genuine lease) in connection w/ the sale or identification of the goods is not fraudulent if the buyer bought
for value and in good faith.—requires lease, good faith, and value;
o This is a false lease—b/c for entire useful life of the goods; ANB is an article 9 bank; ONB’s deal was a sale
& financing—false lease;
o ANB wins;

Would same result occur if lease agreement allowed HIghbid to terminate at any time?
o No—this would be a genuine lease—ONB is a genuine lessor 2A-308(3) and 2-307(1) protect them.
V. ARTICLE 2 CLAIMANTS
Problem #82:

Jack is traveling salesman. Buys set of luggage from Alligator, who reserved a SI and files a FS. Jack sells the luggage
to Mark, claiming it is alligator, when he knows it is really lizard. Mark revoked acceptance when he learned the truth;
23



***use unamended Art. 2-608 (p. 1055);
9-110: says art. 2 SI don’t have to be filed;
Who’s entitled to the luggage?
o Alligator—have 2 SI’s here both perfected by different means; buyer here is not a buyer in ordinary course of
business; buyer revokes acceptance, so is becoming a secured creditor. Possession alone doesn’t give you
priority, unless you’re a buyer in the ordinary course of business. Here, Mark is no longer a buyer, b/c is
trying to revoke and get his $ back, thereby making him a creditor.
o Now, it becomes a ? of who is 1st—so Alligator wins;
Problem #83:

ships books to buyer and later learns they have no $. What can he do?
o Has 10 days to reclaim the goods.

If 2 weeks after shipping, Cowskin sent him letter lying about its financial condition; now how long does he have to
make his reclamation of demand?
o Key to avoiding this problem of selling goods on credit is to file—art. 2 gives you right to reclaim, but is
subject to art. 9 if there is another creditor.

If Cowskin’s inventory was subject to a perfected SI in favor of a bank, which thereby had a floating lien on the
inventory, could he still reclaim the books?
o 2-702(3) and 2-403(1)—a seller who sells on credit may have right to revoke/reclaim for failure to repay, but
all he has is a SI in the goods—have entrusted to goods to a seller of that kind—so, Baldwin loses;

Art. 2 is subject to good faith ‘purchasers’—purchasers includes art. 9, so lose to art. 9 secured parties.
o So, Baldwin is just an unperfected creditor—must file.
In re Arlco, Inc.

debtor is Arlco; CIT has floating lien (SA, FS, covering all assets including inventory); Arlco buys goods from Galey
on credit; invoices allow ’10 days’ for payment; Trustee says that Arlco owes Galey nothing;

uses CIT’s claim as its argument

2-702: Galey’s right to reclaim is valid, subject to the rights of a buyer in the ordinary course or other good faith
purchaser under this article (2-403).

2-403: CIT is a perfected secured party under art. 9; Galey’s right to reclaim is only good against Arlco, and only for 10
days;

Art. 9 defeats Art. 2
Problem #84:

Farm is about to be foreclosed on by bank; bank has perfected SI in the cattle; ONB asks Cow Chow to deliver cattle
feed, so keep cows fat, so they’ll be worth more $, but doesn’t mention that they are about to foreclose; Cow Chow was
unsecured. Can they get any $ from the foreclosure sale?
o NO—need to have filed—if they had filed under 9-324, would have an agricultural production money
security interest—which would have given them priority. But,
o Cow Chow can argue fraud:

1-103: don’t set aside basic principles of law & equity, fraud, coercion…etc.

also 1-304: obligation of good faith—lack of good faith on part of ONB;
10/18/05
9-505, 9-109, 9-203, 9-333, 9-334(a)(c)(d)(h), 9-604
9-505: lease
VII. STATUTORY LIEN HOLDERS (9-333)(don’t focus on this too much)

blackletter law: arise by non-consent, arise by statute—mechanics lien for example;

most common are building and construction liens

Absent something in art. 9 which says that art. 9 wins, these liens win out.
Problem #85:

Garage had statutory lien on Hattie’s car; they let her take the car during the day, and she returns it at night; her creditor
accelerates the loan and repossesses.

(a) Which creditor wins? If mechanic lets it out of his possession, he loses—possession always wins—an unperfected
mechanic’s lien vs. a perfected Art. 9 interest.

(b) No—repossession has no ability to affect her right to be subject to this statute; mike wins if it’s in his possession.
24

(c) mixed statute and CL ?—most jurisdictions allow the lien to re-attach; but would recommend not releasing the
vehicle at all.
VII. FIXTURES

Are fixtures in Art. 9?
o Yes—it’s a consensual interest in personal property or fixtures—9-109
o 9-334: (a) a SI under this article may be created in goods that are fixtures or may continue in goods that
become fixtures. A SI does not exist under this article in ordinary building materials incorporated into an
improvement on land.
o 9-102(41): definition
o Fixtures are goods that become so associated w/ the RE that it becomes part of the RE.
o 3 Big Tests:

(1) Institutional test—if thing is so connected to the institution that in interest in them arises under
real ppty law.

(2) Annexation test—measured by difficulty of removal; if physically attached to the floor for
example.

(3) Intentional test—was it the intention of the parties that it become so related to the RE that it
becomes part of the RE?

this is the MS test

this is majority test—is objective, not subjectively determined.

Attachment
o Financier b/c financing goods that become attached to the property.
o Who’s the debtor? Most of the time, there isn’t a conflict w/ RE person, unless the debtors coincide. (when
your equipment purchaser also happens to be the debtor in a RE transaction).

Ex:
o Cameraland has cabinets installed by Trade Fixture; in return they give $200K SA and FS in their inventory;
Camera also has mortgaged the pprty, and mortgage is recorded in RE records.
o If debtor happens to have also granted a RE interest—record debtor in land records, but art. 9 filing is under a
different system.
o So, to correct the problem, have come up w/ 9-334.
o (c) gives the basic rule—SI in fixtures is subordinate (lack of priority, not perfection) to a conflicting interest
of an encumbrancer or owner of the related real ppty other than the debtor.

So, would lose to RE mortgagee, but not to a trustee in bankruptcy.
George v. Commercial Credit Corp.—no longer good law (here in MS)

asset in question is a mobile home, which is a fixture under state law

Annexation test
o Most courts apply intentional test;

Answer in this case is now overridden by statute in most states.
o If want a SI in mobile home today, would want to do a CT, and not necessarily a RE filing—MS law.

9-311: except as otherwise provided, the filing of FS is not necessary or effective to perfect a SI in ppty subject to: (2)
o list any CT statute covering cars, trailers, mobile homes, manufactured homes, boats, tractors, etc.
Problem #86:

Monopoly went to ONB to borrow $; using RR tracks as collateral; tracks are installed in 117 counties, must a FS be
filed in each one?

§ 9-501(b): perfection methods under art. 9, say that for fixtures, designate an office—here it is the secretary of state; if
a transmitting utility like a RR, then place for filing is SOS office.
Problem #87:

Simon borrowed $4M from CSB, to which he mortgaged the RE and all appurtances or things affixed thereto, now
present or after-acquired. Is the mortgage effective as a FS?
o 9-502(c): mortgage is effective as a FS filed as a fixture filing or as a FS covering as-extracted collateral or
timber to be cut only if:

(1) the record indicates the goods or accounts that it covers;

(2) the goods are to become fixtures related to the real property described in the record;

(3) the record satisfies the requirements for a FS in this section.

Where should Blast file its FS?
o § 9-501: file in RE records of chancery court

Is there a technical sentence that needs to be in this FS?
o § 9-502(b)(2): must indicate that it is to be filed (for record) in the real property records.
25


Why would the drafters have added such a requirement?
o b/c it has to be there to tip off the RE mortgagees that there is a fixture
o so, for fixtures—want to file in RE records, and also under Art. 9.
Even if Blast files in right place, and before furnace is installed, will Blast prevail over CSB?
o NO, bank wins—must look at 2 provisions.
o § 9-334(d): if you perfect, then PMSI art. 9 trumps pre-existing RE lien.
o But, (d) is subject to (h): priority of construction mortgage: a SI in fixtures is subordinate to a construction
mortgage if a record of the mortgage is recorded, before the goods become fixtures and the goods become
fixtures before the completion of the construction. Construction lender = ‘super PMSI’. So again, RE lender
wins.
o What can Blast do to ensure itself of priority?

9-339—get a subordination agreement—get construction to subordinate prior to installation of the
furnaces.
Problem #88:

Would it matter if object were a refrigerator?

§ 9-334(e)(2): A perfected SI in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real
property if:
o (1) debtor has an interest of record in the real property or is in possession of the real property and the SI.

(A) is perfected by fixture filing before the interest of encumbrancer and

(B) has priority over any conflicting interst of a predecessor in title of the encumbrancer or owner.

(2) before the goods become fixtures, the security interest is perfect by any method permitted by this article and the
fixtures are readily removable:
o (A) factory or office machines; (B) equipment not primarily used or lead for use in operation of the real
property or (C) and replacements of domestic appliances.

So, here, these are de minimis exceptions to priority.
o Original goods are part of the RE, but replacements to them are not covered.

What if a personal computer?
Lewiston Bottled Gas co. v. Key Bank of Maine
LBG sold 90 units to DiBiase; Key Bank held the mortgage on DiBiase’s property, and was recorded in the RE records.

Are these units fixtures?
o Yes—apply mixed test.
o To protect LBG, would have recommended that they file in SOS office and in local RE office (w/ notation to
file this in the RE records).

Here, LBG did file in both places, but noted that the debtor on the records was listed as Grand Beach, Inc., whereas
Key Bank’s was filed under the name of DiBiase.
o Most states consider what LBG did to be a deceptive filing—safest route is to file 4 times—2 times in each
place, under each name.

So, misfiled = unperfected, so Key Bank wins.
Problem # 89:

Simon failed to pay his attorney, who got a judgment entered against him, and levied against the building and its
contents.

Will Simon’s creditors holding SI in fixtures prevail if they have perfected by fixture filings?
o § 9-334(e)(3): a perfected SI in fixtures has priority over conflicting interest of an encumbrancer or owner of
the real property if:

(3) the conflicting interest is a lien on the real property obtained by legal or equitable proceedings
after the SI was perfected by any method permitted by this article.

(trustee always loses here)

What if those creditors filed FS in all the correct places except RE records?
o Even if fixtures, and didn’t file as fixture, any method of perfection will win. Filed as art. 9 goods, and b/c
still goods, if you file properly, you can still win, Bc
o § 9-502: filing of art. 9 FS

(b) FS filed as fixture filing must….

9-501 and 502: if not filing as fixture, the proper way to file and the place to file is the regular art. 9 method and office.
Problem # 90:
TT moves in; she buys a new refrigerator, and creditor doesn’t have to file, b/c this is consumer goods—automatic perfection.
Does creditor win against RE person?
26


Yes—(e)(2): win b/c it’s a replacement, and …..see book…………
No—9-334 gives priority.
Problem # 91:

Is it entitled to automatic perfection?
o No, b/c not replacement, but is original equipment. But, 9-309, comment 3—this is automatic perfection, but
if there is a RE person out there, want to make sure they don’t have priority 1 st.
10/20/05
(9-102(1), 9-109 (scope), 9-203 (attachment), 9-501 & 502 (filing), 9-333, 9-334, 9-335,
26 USC 6323, 31 USC 3713.
Attachment 9-203,
Perfect 9-501
Filing 9-310, 9-311
Priority 9-327 (first in time first in right)
9-323 future advances
9-324 PMSI
9-320
Exceptions: 9-333 (also includes federal liens), 9-334, 9-335 (accessions and commingling) )
Problem #92:

after building is completed—PMSI has priority 9-334(d);

what if damage to building structure?
o Obligated to pay for damage, but don’t have to pay for the loss in value.
Maplewood v. Sears

overturned—Sears installed cabinets, and wants to come in and remove the entire kitchen; instead, Sears wants to take
priority, and get $ from the sale;

2002—revision—9-604(d)—gives fixture filer the right Sears wanted in this case—comment 3—enforcement—can
allow sears to become a lienor on the real property, and instead of taking goods out, can be paid 1 st out of the sale
proceeds of the property as a lienor.
9-334 gives PMSI priority, but watch out for construction lenders, and also:
* exception: (1) crops and (2) manufactured homes.
Problem #93:
Bean gave mortgage to Rural State Bank; Bean borrowed $ to plant this year’s crop, and gave SI in the crop to Seeds, the PMSI;
Who wins Rural State or Seeds?

9-334(i): encumbrancer loses to crop financiers;
o can’t pay off mortgage w/o the crops, so crop financier has to win;
Problem #94:

9-334(e)(4): exception—mortgagor of the land didn’t rely on the home’s presence in its financing, so they shouldn’t
win; also, manu. homes are covered by CTs; if CT is filed, then person wins.

Want to:
o 1st—file CT
o 2nd—fixture filing for PMSI
o 3rd—RE mortgage as last ditch effort;
IX. ACCESSIONS AND COMMINGLING
Problem #95:
Victor is traveling salesman. He owned car which credit union had perfected SI, noted on the CT. Goes to buy new tires from
Yeti, who claims a PMSI in them.

Will Credit union or tire company have priority over tires?
o 9-335(d): efficiency—if you’re a CT person, then you ought to be able to rely on that CT, and if this wasn’t
the case, you’d have to search the records all the time to make sure there weren’t any subsequent liens against
the collateral.

SI in accession is subordinate to SI in whole which is perfected w/ the requirements of CT.
27
o
o
9-335: normal rule: SI may be created in accession and continues in collateral that becomes an accession; (b)
if a SI is perfected when the collateral becomes an accession, the SI remains perfected in the collateral; (c)
except as otherwise provided in (d), the other provisions of this part (part 3 of article 9, the 300s) determine
the priority of a SI in an accession.
(e) allows removal of accession after default
X. FEDERAL PRIORITIES FOR DEBTS AND TAXES
A. The Federal Priority Statute
(p. 1982-83):
1. 26 USC 6323: any claim I have wins over any other claims—Tax lien statute
2. 31 USC 3713 (p. 209): Priority of Govt. Claims—Priority

is only designed to collect taxes;
3. By doing the right thing under Art. 9, it will get you close to defeating the tax collector as
well;
4. Few particular rules dealing w/ ‘choateness’ and priority vs. perfection.
B. Tax Liens – Basic Priority
US v. Estate of Romani ***read this case*** p. 209

estate is worth ~$53K; is in debt for ~$900K—there’s a perfected judgment lien and a perfected tax lien ($490K)
against them. Who wins? The Supreme Court affirmed, holding that the federal priority statute did not give preference
to petitioner’s tax liens over the perfected judgment lien, where the priority statute did not supercede the federal tax lien
act. 6323; Tax liens were not valid as against the earlier judgment lien. The judgment creditor acquired a valid lien

3 requirements of ‘choateness”:
o lienor is known
o property value has been given
o perfected in some fashion

The later, more specific statute and its provisions are comprehensive, reflecting an obvious attempt to accommodate the
strong policy objections to the enforcement of secret liens.

Judgment creditor wins***
o Goes w/ policy against secret liens—tax lien is effective upon filing, and doesn’t trump out earlier filed
parties---tax lien is effective, but effective doesn’t mean priority!!
Perfection or (effectiveness) does NOT = Priority
Tax Statute, § 6323, specifically overrides gen. § 3713 (which is outdated)
If all gov.t claims had priority, they would be effective at that date = secret lien.
Abuse or unfair use of sovereign’s power.
C. Tax Liens and After-Acquired Property
Problem #96:
ONB has perfected SI in inventory (floor plan). Smiles failed to pay its federal taxes, and tax lien filed 10/1;

Elements of attachment: (makes agreement enforceable b/t debtor and creditor)
o Value, rights, and signed security agreement
o The last event to occur is the rights under 9-208, and this is the determining point—this is perfection.
o Priority, however, depends on ‘first in time, first in right’ to file.

Who has 1st perfected?
o IRS—why? b/c their lien doesn’t wait for rights to be given, but the 1 st to file was Bank;

9-323—after acquired property—relates back to first to file—bank has priority, IRS perfects 1st;

6323(c)(2)—can continue after-acquired property up to 45 days after filing of the tax lien; can’t make future advances
after knowledge of the 45th day after tax lien.

Lenders must check records often;

Answer: NO—until 45 days; but, if the bank has actual knowledge of the tax lien, they are prevented from providing
future advances (won’t be protected)
Plymouth Savings Bank v. IRS

Dionne owned nursing home, and bank gave credit and filed a FS taking security in ppty and other assets. (FS can be
indication of collateral—‘all personal property’, but for SA, description must be sufficient to dissolve disputes b/t the
parties—should mention Equip, inventory, A/R, chattel paper, general intangibles, health payment receivables).
o Dionne defaults, owing $66K to Bank; Misses FICA payments, so IRS lien arises; and IRS files, making its
lien effective (under 6323 test).
o Next, she goes to hospital and makes K under which she’ll be paid $300K.
28



Plymouth Bank took SA & FS (covering all property, including accounts receivable, general intangibles) in Greenlawn
(Dionne); Dionne failed to pay taxes; tax lien is filed (2 nd in time)—IRS filed correctly under 6321 and 6323; 31
USC—says IRS gets general priority (against other unsecured creditors); 6323 specifically says tax lien must be filed in
proper place, and then they take the regular order (like a regular creditor); Hospital comes in and says it will buy
Greenlawn from Dionne for $300K—only want the license, not the actual nursing home itself; Who wins?
o Bank wins; IRS loses Bank filed SA & FS, which included all property, including accounts receivable,
general intangibles, and should have included “all proceeds”. So long as this was created within the 45 days
of the tax lien filing, bank is ok (i.e. so long as it attached (signed SA, value being given, and rights in the
collateral)).
o 9-208 says it becomes perfected by the last event; when Dionne creates rights in it w/ the hospital and she
obtains rights, the bank gets those rights, and this is the last event.
o Had this K been entered into after 45 days, the rights would have gone to the IRS;
o A/R is right to payment for goods sold or services rendered whether or not yet earned under Art. 9; at the
moment there was a K b/t hospital and Dionne, it became coate;
Idea of coateness: it becomes coate from a tax perspective, and perfected from an attachment perspective;
***Always check the tax lien filings at least every 30 days if advancing additional funds, if relying on after acquired
property***
10/25/05
31 USC § 3713, 26 USC § 6323
9-322
9-323
9-324
9-208
11 USC 544
11 USC 547
9-317
Problem #97:
6 mos after IRS filed tax lien against her, Charlene Magee bought fire extinguisher system for her stables. Bought it on credit
from King, which reserved a PMSI, filed correctly prior to turning over possession. Is IRS lien superior to King’s PMSI?

if it had been general creditor, 9-324 PMSI would be a superior creditor against other Art. 9 filers (first to file filers);
Art. 9 gives PMSI creditors priority over other creditors who may have been first to file, and IRS bows to the same rule
here.

King wins tax law doesn’t apply to PMSIs, and IRS agrees & recognizes that Art. 9 rules—if attach simultaneously,
Art. 9 gets priority, b/c Art. 9 gives it priority; IRS lien can only attach to property that they own at that time; both of
these are instantaneously perfected; (so long as you do PMSI financing).
4 Big Ideas:
General priority rule
Tax rule
Do what art. 9 requires you to do
Coateness
CH. 7: BANKRUPTCY AND ARTICLE 9
I. THE TRUSTEE’S STATUS
Bankrupt files a petition in the bankruptcy court, and court will consider the petition;
* Immediately upon filing of the petition, an automatic stay is in place
* i.e.—‘hands off’
* Also, immediately upon filing, the trustee is granted the status of judicial lien creditor.
* 9-317: if you’re not perfected prior to a lien creditor, you lose;
* USC 544: strong arm statute (p. 232): gives 9-317 and 9-320 powers granted under
Art. 9.
(a) a creditor that extends credit to the debtor at the time of the commencement of
the case, and that obtains, at such time and with respect to such credit, a
a judicial lien on all property on which a creditor on a simple K could
could have obtained such a judicial lien, whether or not such a creditor
exists;
(b)
(c)
Problem #99:
29




On 4/17 applies for loan of $10K, signed SA and FS in favor of bank, secured by restaurant equipment; On 4/18, one
hour before bank filed its FS, Sun filed bankruptcy petition.
(a) If no new general creditors came into existence between the loan on 4/17 and petition filing on 4/18, can the trustee
avoid the bank’s SI under § 544(a) of the Code?
o At moment of filing, the bank was not yet perfected; don’t get a grace period to file; if it were a PMSI could
argue that you should be allowed the 20 days, but this is simply a plain Art. 9 transaction.
(b) What result if the bank had filed its FS 2 seconds before the petition was filed?
o Bank would win; trustee loses;
(c) If the bank’s interest had been a PMSI, would the filing of the petition have cut off the usual 20-day grace period?
See § 546(b) of the code:
o No, grace period still applies; ask court to raise the stay for the limited purpose of filing;
II. PREFERENCES (p. 234-236)
§ 547: Preferences - 7 subsections
(a) definitional
* “inventory, new value, and receivable” just like in Art. 9
(b) elements of preferences
(1) Trustee may avoid any transfer of the property
(2) to/for the benefit of a creditor
(3) on account of antecedent debt
(4) made while debtor was insolvent
(5) made within 90 days or 1 year if an insider;
(6) If b/c of the transfer, you receive more by that transfer than you would as a general
unsecured creditor in liquidation (chapter 7).
**will presume that this element is always met**
(c) exceptions (mainly 1 – 5, but there are 7)
(d)
(e)
(f) debtor is presumed insolvent on and during the 90 days immediately preceding filing of the
petition. (is a rebuttable presumption); trustee has benefit of presumptive insolvency.
(g) the trustee has the burden of proving the avoidability of transfer under subsection (b), and the
creditor or party in interest against whom recovery or avoidance is sought has burden of
proving the nonavoidability of a transfer under subsection (c) of this section.
General Ideas:
Attachment “A”
Perfection “P”
Transfer day “T”
Effective date “E” (under bankruptcy)
Filing Date “F”
Priority Date “Pr”

Ex: On 1/1/99 (“F” date, and also had “Pr” though no collateral yet), 1st Bank filed FS against Camera, and took SA
and FS; SA includes equipment and inventory for this new business; in Feb. 1999, the store is built and equipment and
inventory arrive (“A” date), and (“P” date); “Pr” date gets to relate back to 1/1; a new camera is acquired in 2003 (“A”,
“P”, but “Pr” date remains back on 1/1);

When does the transfer actually take place? When the title transfers;

Could say that Priority relates back under Art. 9 to 1/1/99, but problem is that this didn’t attach until 2003; Could say
that since “A” occurs in 2003, transfer should also be deemed to have occurred at the same time.

(e)(1)(A): for transfer of real property other than fixtures, but including the interest of a seller or purchaser under a K
for the sale of real property, is perfected when a BFP of such property from the debtor against whom applicable law
permits such a transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and

(e)(1)(B): a tfr of a fixture or property other than real property is perfected when a creditor on a simple K can’t acquire
a judicial lien that is superior to the interest of the transferee.
o A perfection occurs at that moment—1/1/99—as soon as you file, a judicial lien creditor can’t beat you—
may not win anything, b/c may not acquire anything, BUT, cannot beat you.

(e)(2) For the purposes of this section, a transfer is made:
o (A) at the time such transfer takes effect b/t the transferor and the transferee, if such transfer is perfected at,
or within 10 days after, such time, except as provided in (c)(3)(B).

if done, then this will relate back to the “Pr” date.

So, in our example, the “Pr” date, “E” date, and “T” date are all the same—1/1/99.
30
o
o
(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days; or

“P” date is 2003, and 10 days prior to it would still be in 2003, so the transfer date is only 10 days
prior to this 2003 date.

So, any floating liens chasing old debt is a bad idea under bankruptcy; no transfers on account of
antecedent debt.
** so the adding of additional property is what the problem is here***
Examples:

Bankruptcy is filed on 11/1; the 90 days prior is the preference period; outside this 90 days, on July 15, Bank loans $ to
Camera;
o Bank does SA and FS and files it on 8/15
o “T” date, “P”, and “E” date = 8/15
o Debt date “D” = 7/15
o During the last 90 days if you go in unsecured, you remain unsecured—Bank loses.

Bankruptcy is filed on 11/1, July 15 Bank loans $; File SA on 8/20
o “P” date = 8/20;
o “A” date = 8/15
o “T” date = 8/15—relates back to 8/15 though doesn’t occur until 8/20.
o “E” date = 8/15
o But this is still a transfer covering antecedent debt.
***Do not make an unsecured loan do not try to secure it later; there are no gaps allowed for debt and attachment;
10/27/05
§ 547
(b) transfer: antecedent debt
benefit creditor
while insolvent
90 days/1 year
receives more than they would receive in liquidation
(e) attachment (art. 9) which roughly equals effective (in bankruptcy)
perfection (art. 9) which someway equals transfer (in bankruptcy)
o when bankruptcy talks about perfection, it is the same as perfection itself under Art. 9.
Example # 1: person comes into bank to borrow $ on 5/5; bank loans $100K w/ payment due in full in 6 months (~ November).
Bank hears rumors of bankruptcy and calls person in to sign SA in July, pledging office furniture; August 1, person files
bankruptcy petition;

from art. 9 perspective, this was screwed up, b/c wasn’t in the right sequence:
o (1) file FS (2) SA (3) rights in the collateral (4) make loan/give $
o 9-322 gives first in time to file or perfect (so long as perfected later), gives relation back date.

Loan = 5/5

“Attachment” A date = July, but no perfection (not filed), so loses from Art. 9 perspective

(e) (1)(B): a transfer of a fixture or property other than real property is perfected when a creditor on simple K cannot
acquire a judicial lien that is superior to the interest of the transferee.
o At any time, does the above transaction hold position above a judicial lien creditor? NO—so no perfection
just as in article 9.

(e)(2)(A): a transfer is made at the time such transfer takes effect b/t the transferor and transferee, if such transfer is
perfected at, or within 10 days after…
o never perfected, so, no transfer is made; no “T” date.

and § 544—says if you’re unperfected you lose, just like 9-317 under Art. 9.
o So 544 controls here—strong arm statute.
Steps to Approach these problems:
(1) § 544—does it apply
(2) § 547 (b)—elements
(c)—exceptions
Example #2: May 5 do loan, sign SA, which covers office furniture; bank does not file until July 15.

From Art. 9 Perspective:
o “a” date = 5/5
o “P” date = 7/15
31

From Bankruptcy Perspective:
o “A” date = 5/5
o “E” date = 5/5
o “P” date = 7/15
o “T” date = at time transfer takes effect (5/5), if perfected within 10 days; = 7/15

Under definition of “transfer”
o Antecedent debt = 5/5—this is a transfer for antecedent debt;
o Benefit creditor = yes
o While insolvent = yes, presumption is within 90 days
o 90 days = yes
o receive more =yes;
= Preference—fails under bankruptcy law—trustee can avoid any transfer that does this;
2 rules of bankruptcy:
(1) Never loan $ without immediate attachment (b/c only can relate back to “E”
date) (don’t delay b/t debt and attachment).
(2) Do not delay between attachment and perfection (except the 10 days);
Example #3: loan on 5/5; do documents on 5/10—SA; don’t file until 7/15 (“P” date)

“E” date = 10th

“A” date = 10th

“D” date = 5/5

“T” date = 7/15 (on account of antecedent debt)
Example #4: loan on 5/5, 5/15 is perfected (“P” date), 5/10 documents are signed (“E” date, “A” date)

if perfected at or within 10 days of when it becomes effective, it goes back to the effective date (“E” date = 5/10)

“T” date = 5/15

Transfer? Yes—is still on account of antecedent debt
Example #5: loan on 5/5, and SA on 5/5; 5/11, do FS;

“P” date = 5/11 (from art. 9) and from bankruptcy

“T” date = 5/5 (b/c perfected within 10 days)

“E” date = 5/5

On account of antecedent debt? NO—b/c were able to move it back to “E” date of 5/5, so now are contemporaneous.
Example #6: 5/5 do loan, value, and SA; do not perfect; debtor repays loan on 5/20;

bad practice under art. 9, but what about bankruptcy

Is this a transfer? Yes—b/c judicial lien creditor could have had $ if it was still in debtor’s hands; Repayment of funds
take it out of creditor’s estate takes it away from judicial lien creditor;

“P” date = 5/20 from bankruptcy perspective, but not Art. 9.

Is a transfer on account of antecedent debt—no filing, D date was 5/5, not perfected within 10 days, so transfer on
account of antecedent debt = preference.
Example #7: GMAC has floor plan/floating lien w/ Hevner; GMAC loans $ 5/5, does SA w/ after-acquired property clause, as
well as future advance clause; FS is filed 4/1; On July 15, there’s a new shipment of cars that arrives;
* Article 9:
“A” date = 5/5; “E” date = 5/5
“F” date = 4/1
“Pr” date = 4/1
“P” date = last event
*For the new cars: “A” date = 7/15
“P” date = 7/15

under 9-322—first to file or perfect = priority.

Under Bankruptcy:
o “T” date = 7/15—b/c it’s the perfection date, b/c you are perfected more than 10 days after it became
effective.
o This does qualify as § 547 preference, BUT,
o (c)(5) exception: The trustee may not avoid under this section a transfer—

that creates a perfected SI in inventory or a receivable or the proceeds of either, except to the
extente that the aggregate of all such transfers to the transferee caused a reduction as of the date of
filing of the petition and to the prejudice of creditors holding unsecured claims.
32

o
Are fully secured as of 8/1 bankruptcy date; if $150K in debt at 8/1, and collateral is worth
$200K—the aggregate suggests no wrongdoing
If you’re never undersecured, you will win;
Problem #100:

On 6/8, Business borrowed $80K from ONB, and gave SI in equipment worth $100K (oversecured); On 7/18, ONB
filed FS; 7/19 Business filed bankruptcy.

Can trustee destroy ONB’s secured position and turn it into a general creditor under theory that delayed perfection is a
preference?
o “A” & “E” date = 6/8
o “P” = 7/18 for both
o “T” = 6/18—transfer on account of antecedent debt.

If ONB perfected on 6/8, but collateral worth only $60K (undersecured), Would routine payments made to service this
debt be preferential?
o “A” & “E” & “P” = 6/8; “T” of collateral
o If 7/1 routine payment, files for bankruptcy 7/19

A transfer back occurs anytime you give back cash 7/1 “transfer”

C2 exception: allowed to make ordinary payments in the ordinary course of business, so long as
debts were incurred in ordinary course of business, and payments are routine.
o So this transfer is not avoidable by the trustee.
Problem #101:
11/1 Piggy loaned Kermit $1K to buy a banjo; he signed SA and FS on 11/1; bought banjo on 11/15; FS filed on 11/20; Kermit
filed bankruptcy 11/21.

Is the transfer of the SI in his banjo a preference?
o 547(c)(3):
o “E” and “A” on 11/15; Filing and Perfection on 11/20; Transfer on 11/20; can move transfer date back to
11/15.
o Transfer on account of antecedent debt? Yes—but there’s an exception
o (c)(3) that creates a SI in property acquired by the debtor

(A) to the extent such SI secures new value that was—

(i) given at/after signing of SA

(ii) given by/on behalf of the secured party under such agreement

(iii) given to enable debtor to acquire such property; and

(iv) in fact used by debtor to acquire such property; and

(B) that is perfected on or before 20 days after debtor receives possession of such property.
o NOT a transfer.
Problem #102

John borrowed $1K in early 2013; on 9/25/13, he makes $500 payment to bank (not in ordinary course); on 10/4
borrows $300 more, giving bank SI in his sword collection. Bank doesn’t file a FS, and John files for bankruptcy on
11/8.

How much if anything can bankruptcy trustee recover from bank?
o Loan/signature = early 2013
o 9/25 = payment of $500
o 10/4 = loan additional $300
o Any transfers? Yes—debtor is giving up property that would otherwise be in his estate; on 10/4—SA in the
sword collection, but this is not perfection, b/c bank never filed, and is not a transfer—judicial lien creditor
can still beat them.
o What about $500 payment? Transfer

A judicial lien creditor could no longer have access to $500; is “P” under bankruptcy, and is a
transfer for antecedent debt.

Was unsecured, can’t get paid back—too late for the bank—aka “netting out exception”
o What does bank do though that suggests they aren’t being preferenced?

Loans additional $--suggesting he’s not being preferenced;

(c)(4): is that we ‘net out’ these 2 things; to the extent that preferential transfer is followed by new
value to the debtor,

Bank must return $200; b/c it’s essentially bank is out the $300, and this $200, so really are out the
$500—i.e.—netted out;
11/1/05
33
#102 (Continued)

544—strongarm—if unperfected, create hypo lien creditor in the trustee. (replicates 9-317)

547

loan unsecured, 9/25 makes $500 repayment; 10/4, Carter borrows $300 more giving SI in sword collection;
bankruptcy on 11/8.
o Go back 90 days—everything that happens between 8/8 and 11/8.
o If unsecured on 11/8, 544 kicks in and if unsecured on this date, bank loses.

Is this a preference?
o “A”—isn’t “A” for this transaction, b/c unsecured;
o “P” date is 9/25 under bankruptcy—b/c this $ is out of the estate.
o “T” date is 9/25, and “E” date is 9/25.
o “D” date is 9/4.
(getting repaid is as much a transfer as filing a FS under bankruptcy laws).
3 Ideas:
(1) no piling on, b/c makes bankruptcy more likely
(2) class equal treatment (no preferences)
(3) Ostensible ownership problem.



$300 additional loan—does this allay any of these fears?
o (1) Yes—adding $ to the estate
o (2) offsets idea of being preferred
o (3) OOP—not a complete problem, but is problem b/c still want to get $ back.
547(c)(4):
o The trustee may not avoid under this section a transfer—
o (4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or
for the benefit of the debtor—

(A) not secured by an otherwise unavoidable SI; and (element 1)

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or
for the benefit of such creditor. (element 2)
see drawings—on handout:
o assets went from $1000 to $500, and then to $800.
o Make bank give back the $200 to return his assets back to $1000.
o Or easier way—

Carter
Bank
Bank

$1000
gets $500 back (transfer)
gives $300 New value

so, net these 2 out—the $500 transfer and the $300 new value—so the transfer comes back fully
into the estate, net out $200 preferential transfer.
III. THE FLOATING LIEN IN BANKRUPTCY

Hypo #7 on handout:
o Steps: (1) does 544 apply

(2) look for 547 elements to see if met

(c) exceptions:

(1) substantially contemporaneous exchanges (10-30 days)

(2) ordinary course installment payments & business exp.

(3) PMSI—30 days

(4) Netting out

(5) Floating Lien—2 point net improvement test

Hypo #7: May 1, FS filed (Priority date); 5/5 Loan and SA signed (“A”, E”, and “D”, also perfection for the 1st
delivered goods)(9-203)(9-208-last event test);
o So, when new cars are delivered on 7/15, what is the art. 9 “P” date for those cars?

7/15—the day owner acquired rights in the collateral. Priority is back on 5/1.

“T” date is 7/15—is perfected within 10 days after effective date, and this is the 2 nd perfection date.

So, here, there’s a transfer now on account of antecedent debt.
If outstanding loan is for $10M, and collateral is worth $5M—bankrupt might try to ‘bump up’ the collateral in effort
to repay the bank. (preference of increasing the value of collateral goes to the bank).
o The ratio of collateral / debt = ½
o From article 9, this is perfectly fine

34
o
But, from bankruptcy, we say ‘hands off’ in last 90 days.

Look to (c)(5)—if at 90 days out, collateral to debt ratio is ½, and by bankruptcy time, the collateral
to debt ratio is 2/2—shows that this is a voidable
Problem #103

Bank had perfected SI in inventory of Epstein bookstore, which owed bank $20K. On 3/1, inventory was worth $8K.
On 5/28, Epstein filed for bankruptcy, inventory was worth $20K, b/c store had bought new shipments for cash in the
interim.

Transfer = increase in the collateral
o When a lien creditor can no longer defeat you. (e)(1)

On account of antecedent debt?
o Yes

for benefit of creditor? Yes

during 90 days? Yes

Creditor to receive more? Yes

Use 2 point net improvement test: debt & value at point one as compared to at point #2.
o At 90 days before, $12,000 under collateralized
o At bankruptcy, $0 (fully collateralized
o So, improvement total is $12K.
o When debt is larger than your collateral, this is your shortfall (20K – 8K = $12K)
o What if collateral has increased from $68K, and you loan has increased from $20K to $80K?

Has there been an increase in position?

At point 1 and at point 2, your debt still exceeds your collateral by $12K, so no
improvement from this standpoint.

focus on the relationship b/t the debt and the collateral (not the actual dollar amounts) for the 2 point net
improvement test.
In re Smith’s Home Furnishings, Inc.

Issue: way that collateral value is determined
o Trustee wants to use ‘add-back’ method—took the payments + the value of the collateral—add back in the
payments as if they’re part of the collateral.

Can’t use add-back method
o Burden is placed upon trustee to prove that there were transfers during the 90 day period, and can’t use fact
that payments were made and add that back into the value of the collateral. Must show that there was value
increase at that time.
o Trustee must show that 2 point net improvement test isn’t accurate.
IV. FRAUDULENT TRANSFERS
247-248—Fraudulent Transfers
Problem # 104

544(b): trustee can avoid transfer, b/c as fraudlent, falls under strong arm clause.
o No value is given here—what the wife has provided in exchange for the rights.

Look for value equivalence says 544(b).
o As trustee’s lawyer, look for last minute transfers without value.
o Can go back full year in some cases.
11/3/05
9-102
9-203
9-315
9-320
9-322(b)
9-330
9-332
9-401/501 (where and what you file—don’t have to mention
proceeds).
CH. 8 PROCEEDS
I. The Meaning of Proceeds

About the monopoly rule—first in time, first in right—not only do you get an interest in the goods but the proceeds of
the goods.

9-102(a)(64):
35
o
o
o
o



(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
(B) whatever is collected on, or distributed on account of collateral (stocks and bonds for ex);
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference w/
the use of, defects, infringement…
o (E) to the extent of the value of collateral and to the extent payable to the debtor or secured party, insurance
payable by reason of loss, etc.
9-102(a)(9): cash proceeds
9-203: says SA need only describe original collateral
9-315: b/c by implication of law, will include proceeds.
Problem #105:

Stone bought car from Champollion; traded in her 5 year old car, made $200 down payment, signed promissory note
for balance payable to the dealership. Bank had perfected SI in Campollion’s inventory.

(a) Does that SI continue in the car once it is delivered to Ms. Stone?
o Car is sold—it is inventory collateral
o 9-320—SI does not continue—b/c she’s a buyer in the ordinary course of business, buyer takes free any
interest created by the seller.
o No/yes—9-315: proceeds interest is a substitute, so interest in collateral continues, BUT, NOT if otherwise
provided—apply 9-320—Buyer in the ordinary course of business (BIOC).

If non-BIOC, can continue to seek the collateral.
o Reconciling these 2 code provisions: Why BIOC wins?

Negative--Idea of assuredness of title—facilitates commerce.

Positive--Proceeds stands as new value for the secured party.

(b) What are the proceeds of the car sale?
o The trade-in, the $200 check (negotiable instrument), and the promissory note (negotiable instrument).

(c) Is the attachment of the creditor’s SI in the proceeds automatic, or must they be claimed in the original SA?
o 9-203(f): attachment is automatic.
Farmers Co-op Elevator v. Union State Bank
Issue of who has priority in a failed agricultural business. The bank wins—it has SI in the equipment, fixtures, all farm products,
etc. The co-op claimed it had priority b/c of a SI in the hog feed. The court says no—once the feed was consumed, it was gone
and there were no real proceeds.

Bank as of 2/81 has SA FS in the hogs; 12/81—Co-op has PMSI, SA, FS, gives feed.

Co-op argues that the feed is now part of the hogs, so therefore he has an interest in the hogs.
o Hogs are proceeds

Holding: there are no traceable proceeds to which interest can attach.
o Not proceeds, b/c there is no 9-315(a)(1) “sale, lease, license, exchange, or other disposition”
o Production $ security interest—PRMSI—later recognized by the court (but not at the time of this case).
Problem # 106

Farmers’ Friend Credit Association loaned Farmer Bean $ secured by his crops. In 2011, the federal govt. paid Farmer
not to grow crop that year. Is the govt. payment the ‘proceeds’ of the crop?
o Most likely not—there’s no disposition—no crop was grown, so there can’t be any proceeds therefrom.
II. PRIORITIES IN PROCEEDS
Problem #107

AAAS sold and installed stereos in cars. Inventory was financed by Canis Bank, which had perfected SI in present and
after-acquired inventory. When it sold the systems, it was sometimes paid cash, sometimes extended credit w/o signed
Ks, and sometimes made customers sign Ks promising payment, granting AAAS a SI in the systems. Later, AAAS got
loan from Casiopeia, who got a SI in the accounts receivable and chattel paper.

AAAS defaulted—both claim the accounts receivable and chattel paper—who wins?
o Canis argued that A/R and chattel paper were proceeds of the inventory. Chattel paper was in Casiopeia’s
possession.
o Accounts = K obligation for goods sold
o Chattel paper = (1) promissory note (i.e. any kind of debt instrument), and also account receivable., (2) gives
specific chattel as security.

Who wins chattel paper?
36
o



Casiopeia—9-330(a)(1): purchaser of chattel paper has priority over a SI in the chatter paper which is
claimed merely as proceeds of inventory subject to a SI if in (1) good faith and (2)in the ordinary course of
business, the purchaser gives (3) new value and (4)takes possession of the chattel paper.
Who wins for the Accounts Receivable?
o 9-315 gives bank automatic rights in the proceeds, except as otherwise provided, and there are no exceptions
to be found.
o Exceptions:
o 9-322: first in time, first in right
o 9-323: SA, after-acquired property
o 9-324: PMSI
o 9-325: priority interests in transferred collateral (debtor transfers secured collateral to another debtor)
o 9-326: new debtor
o 9-327: deposit accounts—bank wins.
o 9-328: investment property—control provision—if you have control, you win.
o 9-329: skip this
o 9-330: people who give new value and take possession of the collateral
o 9-331: purchasers
o 9-332: transferees of $
o 9-334: PrMSI—watch out for production $ SIs.
o 9-335: accessions
o 9-336: co-mingled goods
o 9-320: BIOCs always win.
only way to break the general monopoly (first in time first in right) is to be one of these exceptions.
1-201(29): purchaser—definition—includes buyers and financiers.
o Casiopeia is a purchaser
o Canis is also a purchaser
o But one purchaser is a true purchaser, and he takes priority over a SI in the chattel paper which is claimed
merely as proceeds of the inventory subject to a SI
Problem #108

Shadrach borrowed $15K from MMFA to buy new furnace for its home office. An important client needed furnace in
hurry, which Shadrach gave its new furnace and installed, receiving $17K which it put in its bank account at Abednego
Bank. Shadrach made one further deposit of $5K, and a week later withdrew $5,040.

$17K = proceeds

Who gets the $?
o 9-315(b): Proceeds that are commingled w/ other property are identifiable proceeds:

(1) if proceeds are goods—N/A here

(2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a
method of tracing, including application of equitable principles, that is permitted under law other
than this article w/ respect to commingled property of the type involved.

Look at deposit account:
Balance
$81
$17,081
$22,081
Action & Amt
+ 17,000
+ 5,000
-5040
o


Dynamic Balance
17,081
22,081
17,041
Proceeds
17,000
17,000
17,000
Non-Proceeds
81
5,081
41
Is it traceably still the secured party’s collateral?

Yes.
(a) are proceeds from the furnace still in the bank accounts?
o The general rule is that “in tracing commingled funds, it is presumed that any payments made were from
other than funds in which another had a legally recognized interest”, called the lowest intermediate balance
rule.
o Yes—are traceable, using lowest intermediate balance rule.
(b) If Shadrach defaults on its loan repayment to MMFA and also an unsecured promissory note held by Abednego
Bank, can it exercise is CL right of setoff and pay itself out of the checking account, or is its setoff right junior to
MMFA’s SI in the proceeds.
37
o
o
9-340: Yes—Abednego can take its setoff.
Best idea of MMFA is to segregate funds—otherwise bank will win out everytime—bank will always want to
have deposit account w/ someone w/ whom they have a loan relationship.
Hypo: using table
Balance
$81
$17,081
$22,081
$17,041
$19,041
$9,000


Action & Amt
Dynamic Balance
Proceeds
Non-Proceeds
+ 17,000
17,081
17,000
81
+ 5,000
22,081
17,000
5,081
-5040
17,041
17,000
41
+ 2,000
19,041
17,000
2041
- 10,041
9,000
9,000
0
+ 10,000 (Non19,000
9,000
10,000
proceeds)
minority of courts say to apply this $10K non-proceeds 1st to the proceeds to replenish it.
But, the slight majority say you DO NOT replenish, and are still at $9K—whatever the lowest intermediate balance of
proceeds is, is the MOST you can get—most you can prove, and here it is the $9K figure.
11/8/05
Proceeds (cont’d)

w/ proceeds, start w/ 9-203—do we have a SA which reasonably describes the collateral.

Then, we have 2 provisions: dealing w/ perfection
o 9-501: the filing office.
o 9-502: the form
o W/ these must only indicate the type of collateral.
o But haven’t indicated Proceeds—do we need to?

NO—9-203 gives automatic perfection over proceeds.
9-315: Secured Party’s Rights on Disposition of Collateral & in Proceeds.

says auto-attachment

SA perfection

“except as otherwise provided” (a)
o (1) a SI or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange or other
disposition thereof un less the secured party authorized the disposition free of the SI or agricultural lien; and
o (2) a SI attaches to any identifiable proceeds of the collateral.
o (b) When commingled proceeds identifiable.
o (c) Perfection of SI in proceeds—a SI in proceeds is a perfected SI if the SI in the original collateral was
perfected.

Must link up the perfections—1st perfection was in the collateral, 2nd one was in the proceeds.
o (d) Continuation of Perfection—becomes unperfected after 21 day after SI attaches, unless:

(1) the following conditions are satisfied:

(A) a filed FS covers the original collateral;

(B) the proceeds are collateral in which a SI may be perfected by filing in the office in
which the FS has been filed; and

(C) the proceeds are NOT acquired w/ cash proceeds.

(2) the proceeds are identifiable cash proceeds; or

(3) the SI in the proceeds is perfected other than under subsection (c) when the SI attaches to the
proceeds or within 20 days thereafter.
* BUT, 9-320: Buyers in the ordinary course of business
* authorize
* inventory amounts to a conclusive presumption
* financed to an inventory seller
9-323: after acquired property—expansion—but must mention this specifically in SA.
9-322: as long as mentioned, this gives you First in time, First in right—gives you priority for both of them.
Limitations: worry about these, b/c these will trump 1st in time, 1st in right.
9-332: cash—where it goes?
9-330: Negotiable instruments and chattel paper—ordinary transfers win out.
38
9-332:
9-508:
9-325:
HCC Credit Corp. v. Springs Valley Bank & Trust Co.

Lindsey is a retailer of tractors and sold 14 tractors. The tractors were financed by HCC and had a perfected SI in both
the tractors and the proceeds. State Trans. Dept. buys 14 tractors and pays Lindsey $199, 122 for the tractors. Lindsey
takes the $ and deposits it into its account at Springs Valley Bank on 8/15/1991. On 8/16/1991, Lindsey pays the bank
on some loans it has. In December 1991, Lindsey filed for bankruptcy.
o Is there a bankruptcy problem?

§ 544—does not apply, b/c $ is gone.

§ 547—transfer—when gave the bank $ that the trustee could no longer get (8/1991)—is more than
90 days before filing of bankruptcy—so bank lucks out, even though they are clearly being
preferred.

HCC is arguing that its SA covered the tractors and inventory, and now that the tractors have been sold, HCC is
substituting and can trace the proceeds, but the $ has been paid over to the bank.
o Argues 9-315—auto attachment, SA perfection, and 9-322—first in time, first in right.
o BUT, code says “except as otherwise provided”—(332 wasn’t in place at the time of this case).

HCC wins—case hinges on ‘in the course of ordinary business phrase’—the payment was not in ordinary course of
operation of business.
o Bank had knowledge—it was unusual for Lindsey to pay such a large amount of $.

With 332 in place:
o Case would come out differently
o “A Transferee of $ takes the $ free of a SI unless the transferee acts in collusion w/ the debtor in violating the
rights of the security party.”
o Bank would win, unless you could prove the bank was involved in a conspiracy w/ debtor to screw HCC.
Problem #109
ONB loaned $200K to BDS and took a SI in its inventory now owned and after-acquired and filed the FS on 7/5. ANB loaned
$100K to Total Store and took a SI in its inventory now owned or after acquired and filed a FS on 9/25. W/o the creditors’
consent, the 2 stores merged the following year when the inventories of both were worth $300K. The new entity was named
Total Department Store.

Which bank has priority in this situation?
o 9-326(b): Attachment determines priority—whoever signs SA w/ Total Department Store 1st.
o 9-508: (a) except as otherwise provided, a filed FS naming an original debtor is effective to perfect a SI in
collateral in which a new debtor has or acquires rights to the extent that the FS would have been effective had
the original debtor acquired rights in the collateral. (“new debtors” for 508, and “name change” for 507).
o If seriously misleading name change, creditors will get 4 months to re-perfect. Must re-file to re-perfect.
o 9-325: A SI created by a debtor (TDS) is subordinate to a SI in the same collateral created by another person
(Total Store) if:

(1) debtor acquired the collateral subject to the SI created by the other;

(2) SI created by the other person was perfected when the debtor acquired the collateral and;

(3) there is no period thereafter when the SI is unperfected—4 months to refile and re-perfect under
new name.
(b) Limitation of subsection (a) subordination:
* 9-326: the new debtor will kill you off, but (b) says here is your priority provision:
(b) when the new debtor becomes bound—whichever bank gets them signed 1st will win and have priority.
* the SA to which a new debtor became bound as debtor were not entered into by the same original debtor,
the conflicting Sis rank according to priority in time of the new debtor’s having become bound.
* Both banks
* Rules to memorize:
(1) Priority continues b/t ONB and ANB and TDS, ONB beats, but must reperfect
for TDS.
(2) Perfection lasts for 4 months.
(3) Whoever files 1st will have priority in after-acquired property.
Problem #110:
On August 2, when the filed FS in favor of LNB covered “all business machines”, the debtor engaged in the transactions listed
below. Decide for each transaction if the bank should take action before August 22 or if the FS is sufficient as filed:
(a) The debtor traded a computer for another computer.
+ No action required—substitution
39
(b) Debtor traded another computer for a painting to hang in the office.
+ No action required—substitution—is clearly proceeds—automatic attachment and automatic perfection. Filing
will be in Sec. of State’s office for both
+ 9-315: (A, B, C)
(c) Debtor traded a duplicating machine for a used car (state law requires a lien interest in a vehicle to be noted on the
CT as the sole means of perfection).
+ is perfected technically for 20 days, but on 21 day, must re-perfect by getting name noted on CT.
(d) Debtor sold a calculator to a friend for cash and that same day used the cash to buy
The painting.
+ must re-file—9-315(C)—harder to trace the $.
(e) Debtor sold adding machine for $500 and put cash in a bank account at different bank and on 8/2, that bank
exercised its right of setoff against the account
+ 9-340: Bank wins that is setting off—1st person has perfected SI in equipment and the proceeds, but 9-340 says
that the bank wins when it takes its right of set-off.
(f)
Debtor sold a coffee maker for $200 and gave the $ to Salvation army volunteer that same day.
+ 9-332(a): Money is gone—no 20 day rule applies.
Problem #111:
Balboa Bank had a floor-planned inventory of Erickson Motors and perfected its SI by filing. Erickson sold car to John Smith,
who paid $1000 down and signed K (obligation to pay the $ and gives them the right to repossess the car if he doesn’t = chattel
paper)to pay $25K more. The dealership assigned the K to the Cartier Finance Co., which took possession of the K and notified
Smith he was to make future payments to Cartier. Smith made no payments, b/c car had mechanical problems and returns car to
dealer. Cartier comes to dealership and takes possession of the car. The Bank argues that it had a superior interest in the car.

Cartier has no interest in the car

9-330 says that buyer of chattel paper has priority over a SI in the chattel paper (collateral) which is claimed merely as
proceeds of inventory subject to a SI.

Inventory = Balboa; Chattel paper = Cartier.

9-330(c): Cartier wins to the extent that they have chattel paper priority.
11/10/05
CH. 9: DEFAULT
Part 6 of Art. 9—2 big ideas:
(1) 9-601(a): after default SP has the rights provided in this part except as otherwise provided by agreement of the parties. A
Secured party:

(1) may reduce a claim to judgment, foreclose, or may otherwise enforce the claim, SI, or agricultural lien b y any
available judicial procedure; and

(2) if the collateral is documents, may proceed either as to the documents or as to the goods they cover.
(2) 9-625, 627, 628: provision on damages


9-625: (a) if it is established that a secured party is not proceeding in accordance w/ this article, a court may order or
restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.
o (b) A person is liable for damages in the amount of any loss caused by failure to comply. Loss caused by
failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of ,
alternative financing.
o (e) Statutory Damages: $500 liquidated damages;

(1) fails to comply w/ 9-208

(2) fails to comply w/ 9-209

(3) improper filings (9-509)(a)

(4) fails to terminate 9-513

(5) fails to comply w/ 9-616(b)(1)—failure to account for any deficiency or surplus and failure to
deal w/ a deficiency.
o (f) Statutory damages: noncompliance w/ § 9-210:

$500 in each case where person fails to comply w/ request under 210, and also damages.
9-626: Action in Which Deficiency or Surplus is in Issue:
40
o
o
o
o
o
(a)(1-3)
Liability of debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the
secured obligation, expenses, and attorney’s fees exceeds the greater of: (A) (B)
(4) which amount is likely to be greater? The amount received when in violation or the amount received if
done correctly? –amt. if done correctly.
(5)
(b)
9-601: cumulative!!! (watch out for specified damages though)
9-626: watch out for loss of deficiency.
I. PRE-DEFAULT DUTIES OF THE SECURED PARTY
Problem #112:

Andy was owner of 100 shares of Titanic, which he pledged to Morro Castle Bank for $10K loan. At the time, the
stock was selling for $100/share. SA was oral and bank filed no FS.

(a) If the stock began to fall in value and if on 11/4 it was selling at $80/share, Andy called bank and told them to sell,
and bank doesn’t and stock value drops to $1.50/share. Is the bank responsible?
o NO—9-207: (a) a Secured party shall use reasonable care in the custody and preservation of collateral in the
secured party’s possession.
o Andy after telling bank, should take these shares and substitute other collateral. Debtor has an obligation if
you disagree w/ secured party
o What if everyone in the world said to sell the stock today?

Is this reasonable care—can argue yes.

(b) Would it help the bank’s position if the pledge agreement contained a clause saying that the bank was not
responsible for its own negligence in dealing w/ the stock?
o § 1-302(b)
o No—b/c bank is pretty much insulated to begin w/

Andy’s dealing become more complicated, and the bank held, as pledge, Andy’s stocks in 5 different companies. One
of these, Lusitania Foundry, offered a stock split option that had to be exercised by 12/31, so Andy wrote the bank,
asking how many shares of Lusitania Foundry the bank held. The bank replied that it held 50 shares. (actually was
150). Andy gave bank 50 shares of equivalent stock in exchange for the 50 shares of Lusitania, to exercise his option.
On 1/3, Andy learned that bank held 100 more shares of this stock. Does Andy have a cause of action against the bank
under 9-207? Under § 9-210? What damages can he recover? See § 9-625(b)& (f).
o Yes—he has possibility to realize a loss, but the bank has no possibility of loss. No risk to the bank. The
bank didn’t make a judgment, but made an error—so there is a jury question here. Offer of substitute stock
takes away risk, so no judgment involved here—This is a violation of 9-207—error failure
Problem #113

Mazie borrowed $2K from Bank and pledged her stamp collection. While away, the bank was destroyed by an
earthquake along w/ the collection. Bank was insured and received $2K. Ins. co. notified Mazie that she should pay
the $2K debt to the insurance company, using doctrine of subrogation. Need she pay? § 9-207(b)(2)

Who bore the risk of loss/failure?
o If bank is in possession of stamps, they must use reasonable care, and to do this effectively, they should have
insurance. So, any failure to have insurance would have let Mazie of the hook for paying.

9-207(b)(2): the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective
insurance company.
o 2-507: specifies no subrogation—so by analogy, that’s the thought here.
II. DEFAULT
State Bank of Piper City v. A-Way, Inc. (p. 271)

Brenner gave interest in grain to State Bank. Grain was stored at A-way. Brenner defaults, and Bank gets a default
judgment against him. Bank sends A-way a citation to discover how much grain was there. Bank made an error in the
amount of $ they wished to collect (instead of asking for 5K bushels of grain, asked for $5K). A-way sold the grain
and sent the $, but kept the surplus for itself.

State Bank moved against A-Way to get the surplus. A-Way said that doctrines of merger and res judicata prevented
them from having to give the $--these do not apply in this case.

Art. 9-601: cumulative—pursue as many actions as you wish, as long as in good faith, and you can’t collect more than
the amount which is owed.
41
Foster v. Knutson

Fosters (4) + 1 person buy stock from Hesperian for an orchard. Seattle Bank is the secured party. Hesperian was
required to (1) keep records (2) pay taxes (3) insure and (4) make payments (5) orchard health—don’t waste)—these
are all specified as bases for default.
o The court will not impose upon them what you think is default—you MUST specify default in the K.

Was there a default?
o Weren’t keeping up w/ payments, weren’t maintaining books (due to catastrophic freeze). Bank could have
declared a default, and demanded all the money due, in addition to repossession—get the stock for Hesperian.
o Instead, the Bank made a new agreement—modification made in good faith, which specifies some more
defaults (put up more collateral, and more bookkeeping).

Hesperian defaults for the 2nd time—didn’t pay, didn’t pay taxes, didn’t keep books (p. 277)—any single default,
uncured is the basis for declaring remedies under Part 6 of Art. 9.

9-601

9-625

Big Idea # 3: specify terms of default in your K.
If through inadvertence, mistake or deliberate bad faith, the creditor repossesses when there is no right to do so, the creditor is
guilty of conversion and will have to pay damages caused thereby.
1-309
Problem #114:

Mr. and Mrs. Bankruptcy bought a mobile home from Nervous Motors, signed a Purchase money security agreement in
favor of the seller that contained an acceleration clause identical to the one above. Which of the following events is
sufficient to trigger proper use of that clause?

(a) a bad financial quarter for Nervous? NO—not sufficient to accelerate

(b) serious drop in state economy? NO—closer, but still not enough

(c) knowledge that debtors have been talking to a lawyer? Not enough, but if this is a 2-609 situation, can allow
additional assurances.

(d) need to do more investigation to be sufficient.

(e) anonymous phone call state Bankruptcys are getting ready to move to Mexico? Need to contact debtors—not
sufficient.

(f) confiscation of the mobile home and arrest of Bs for possessing marijuana? Yes—good faith termination as basis for
acceleration.

(g) would 1-309 be relevant if Bs had signed a demand promissory note? If demand is linked to default, then 309
applies, but if simply a demand note, can accelerate—it already is accelerated.
11/15/05
Practice Exam:
Tips:
(1) Call of the question
(2) Reason (Rule?) (Issues?)
(3) Citations
***outline answer first***
1. B/t 2nd Bank and trustee, who wins as to the Dale K?

Trustee wins
o Why? b/c 2nd bank is not perfected--§ 9-317—unperfected loses to lien creditors (i.e trustee). Also, § 544—
strong-arm: says that trustee is the hypothetical lien creditor and defeats unperfected.
o Why are they unperfected?

No filing = no perfection - § 9-310

Exceptions to filing:

Automatic

CT

Possession

Control

Possession is not permitted b/c these are “goods” are in fact accounts receivable and obligated to
pay for the goods sold or 9-102). So, perfection only by filing.

No filing = no perfection.
*** Be sure to classify***
42





PN—is an instrument
Instrument isn’t defined in art. 9, and neither is negotiable instrument.
So, must go back to 1-201 definitions—it doesn’t define either.
Now, go to 9-102(47)
3-104: elements of negotiable instrument:
o writing
o payable to bearer or order –must have this exact language** “magic words” to be considered a negotiable
instrument.
o must be negotiable.
2. Will Jefferson be able to retrieve the camera from Benbow? Why or why not?


NO—why?
o He’s a buyer in the ordinary course of business (BIOC).
o BIOC – 1-201(9): defines buyer—If Buyer, then

9-320(a): buyer takes free from any SI created by his seller, even if SI is perfected, and even if
buyer knows of its existence—buyer takes free!!!
Is Benbow a BIOC?
o B (bought) ordinary course (sale/inventory of store) (Snope’s is a seller), knowledge of existence is ok so
long as not intent to interfere, to violate purpose of SA & FS. (knowledge of existence is not knowledge of
violation).
o 9-322 offers same priority in proceeds – 9-315—implicit authorization – have to sell to get $.
o Knowledge—SA may specify what violation is.
o Does his personal knowledge mean that he didn’t operate in good faith, and then is no longer a BIOC? Art. 9
policy favors him as the buyer.
3. B/t 1st Bank and Jefferson Bank, which has superior interest in the documents? Why?


Documents = chattel paper—defined in 9-102(11)—record or records that evidence both a monetary obligation (PN,
A/R) and a SI (car) in specific goods. (***chattel paper is the only art. 9 that has debt & goods***)
JB wins – Why?
o Rule: 9-330: says purchaser of chattel paper has priority over mere proceeds interest.
o Similar logic to BIOC or other substitution rule.
o New value was given by JB to Abel = proceeds (9-315)
o $ substitutes

9-322 says first in time, first in right, but this is cut off by 9-330—which begins w/ language of
‘except as provided in this part’. Part 3.

9-330 speaks about possession to win, but not perfection to win.

Purchaser has priority over one claimed merely as proceeds, if…give new value, take
possession, and in good faith……..(see code). (d)
4. If Abel defaults, who wins between USAC and Home? Why?




(what is steel under Art. 9? Goods—is it consumer, farm products, equipment or inventory?
o Either equipment or inventory—doesn’t matter—rule is the same—b/c filed FS is done 6/1. (this is priority
date as well).
o 9-308: 6/5 is the perfection date—date you get rights in the collateral.
o 7/15: Home takes field warehouse; 7/20 takes possession.

7/15 (Attachment date); 7/20 (perfect by possession) 9-312, 9-313
USAC wins
o 9-322 First in time, first in right (priority for U is 6/1 (dates from time of the filing), vs. 7/20 for Home)
9-324: If equipment, (a) says that PMSI wins if perfected within 20 days.
o (b) says if it’s inventory, then PMSI only if perfected before possession + notice.
o Definitions: 9-102

Inventory: (48) goods leased, held for sale, furnished under K, or consist of raw materials, or
materials used/consumed in business. ***

Equipment: (33) goods other than inventory, consumer or farm product (so, this is NOT
equipment).
o 9-324(b) applies

possession at same moment as debtor possession.
No letter is sent to USAC—therefore, no priority for PMSI.
43

Could also argue that Home doesn’t prove that they are a PMSI.
5. Between Hans, the trustee, and Anderson, who has priority in the inventory? Why?

Trustee wins
o 9-317: unperfected SP loses or
o 544
o secured, attached, but not perfected.
o 547—small preference issue here.
11/17/05
9-601: Cumulative
through 9-609: about remedies—judgment, repossession, self-help, etc.
9-610 to 9-619: disposition of the goods
+ 9-610: default & damages obtainable by both parties after default
o way to dispose of goods to est. either a surplus or deficiency
9-620 to 9-622: absolute foreclosure
9-625: damages provisions for violations
(b) actual
(c) service charge + 10% for consumers
(d) & (e) $500 class
9-627 to 9-628: deficiency limitations
Klingbiel v. Commercial Credit Corp.
5/26/1966—P entered into K to buy a new car, and he made a down payment. Payments on car were to commence on 6/26/66,
under the K containing the acceleration and enforcement provisions. Dealer assigned the K to Commercial. Before 1 st payment
was due, Commercial felt insecure, and directed repossession—gave no notice, demand, communication or correspondence.

K allowed if seller feels insecure—purchaser to pay amt. to seller, upon demand, or at election of the Seller.
o This language was the problem here—b/c of the ‘upon demand” language, commercial was required to give
notice to purchaser.
o Violated 601-609—damages under 625—possible actual damages Plus credit charges.

So, Klingbiel to get his car back.
Problem #115:
SA provided “time is of the essence” and that acceptance of late payments was not a waiver of its rights to repossess. Natty
always paid 10 to 15 days late. One month Repossession Finance and seized the car.

Has a default occurred?
o Under 2-208 (sale of goods)—“course of performance”—regularly accepting these payments late, meant that
they acquiesced to accepting the payments late.
o To correct, add an excplicit statement of the K or reasserting a prior statement of the K to the contrary of this
performance.

Modification is only good if it is for the future, and is reasonable and fair.
9-609: Secured party’s right to take possession after default
(a)
(b)
III. Repossession & Resale
Williamson v. Fowler Toyota, Inc.

Gilmore made K to buy car, giving SI to Fowler. Gilmore dies, and donates car to Camp Hudgens (Williamson).
Williamson had no knowledge of any lien on the car. Fowler sends repo man to repossess the car. Repo guy finds out
where car is, and shows up that night to look around. He repossessed the vehicle after cutting the lock on the gate to
gain access. Concern here is if this is a breach of the peace?
o Definition of breach of the peace: Hester case (292-293, MS case)—says that when one employs another to
perform a task in which a serious danger to person or property, a crime or some tort can reasonably be
anticipated in its performance, it is no defense to say the act causing the harm was committed by an
independent contractor.

Here, the crime of trespass is the tort.

Ultimately, Fowler argues that they weren’t liable—court says no—his duty is non-delegable.
44

o Court says no matter what, if you hired the guy, you’re in trouble—idea of ratification.
Punitive Damages:
o 1-203: All law supplements unless
Problem #116:

Is Carmen required to give notice?
o No—unless K calls for notice to be given.

(a) Breach of the peace?
o Yes—under case law, this is a violation

Test: Is there a tort involved? And (2) Is it likely to induce a reaction?

This test is objective—based on what a reasonable person would do.

If no answer to the door—likely can take the car.

If late at night, and break window—no—will constitute a breach of the peace.

If use coat hanger to unlock car, during day—no breach of peace

But if this same scenario at night—is a breach of the peace.

If he hears the window break—any kind of confrontation, you must leave.

Can you return again the same night?
o Yes—if the scene changes; it’s quieter, etc.

(b) Don told Micaela he was repossessing the car, and she said nothing. Has a breach of the peace occurred?
o Likely yes, b/c of presence of off-duty police officer—likely suppression—she won’t speak in that
circumstance, and this will be treated as a breach of the peace.

(c) Don broke into Zuniga’s garage through use of a locksmith. Clause in K provided that he secured party had the
right to enter the debtor’s premises to remove the property. Does the repossession comply w/ 9-609?
o NO—the trespass is probably ok, but if you take the situation as a whole, the neighbors are likely to suspect
you as a thief, and you can’t waive the right of the neighborhood to object to your behavior, so will not
normally permit you to use a locksmith—a few courts have allowed this though.

(d) Don phoned Morales and said that the car was being recalled b/c of an unsafe engine mount. Morales brought the
car in, and Don told him, “it’s repossessed” and refused to return it. Is the repossession valid?
o Generally, this is ok, but no taunting of the owner, or it will likely be treated as a breach of the peace.
Hilliman v. Cobado

P trying to recover 26 cattle taken from his sons property. D sold the P a herd of cattle.

No default by Ps,

Held—this was a breach of the peace—b/c of threat by sheriff to arrest (physical intimidation).
Problem # 117
ONB financed Mary’s purchase of a new car, in which it perfected its SI. The loan agreement provided that on default the bank
had all the rights listed in Part 6 of Art. 9 and that the parties agreed that eh bank would not be liable for conversion or otherwise
if there were any other items in the car at the time it was repossessed. Mary missed a payment, and ONB repossessed late at
night. She argued b/c her golf clubs were in the trunk, but ONB looked and said they couldn’t find them. When she sued, ONB
defended on the basis of the SA’s exculpatory clause. Is it valid?

art. 9 says we can set the standards by which we deal, but can’t permit you to exculpate yourself.

So, ONB is liable—best idea is to have a neutral party inventory the item after it is repossessed.
Imperial Discount Corp. v. Aiken

D owned a car and bought a battery for it on credit. He missed payments, and the store had the right to repossess, but
didn’t have the right to repossess the car, only the right to repossess the battery.

What they did that was wrong was that they imposed a late charge and also sold the car at public auction, and charged
D fees for auction and storage.
o He only owed $30 to begin with, and now owes Imperial $128.
o Technically, Art. 9 permits it, but here, it is held to be unconscionable.

So, adds in the general idea of conscionability.

Does the decision conflict w/ KNUTSON?
o ARE THEY INCONSISTENT? NO—EVEN THOUGH BOTH SOUND LIKE SECURED PARTY IS GETTING A HUGE
ADVANTAGE, IN KNUTSEN, THE SECURED PARTY WAS ENTITLED TO RECOVER, B/C OF A DEFAULT, AND HERE IT WAS
UNCONSCIONABLE FOR THE SECURED PARTY TO TAKE THE CAR.
11/29/05
9-609: Peaceable repo
9-610: Disposition (Public & Private)
45
9-611: Notice (who)
9-612: Notice (Form & time)
9-613: Contents (non-cons)
9-614: Contents (consumer)
9-615: Calculating surplus or deficiency
9-616: Explanation (form)
Redemption/Strict Foreclosure:
9-620: Acceptance of collateral
9-621: Notice
9-622: Effect
9-623: Redemption
9-624: Waiver (post default)
***note*** be sure to differentiate b/t consumers and non-consumers—if it doesn’t say consumer, it probably doesn’t apply to
consumers.
Default (cont’d)
Problem # 118:

Wonder Spa gave SI in A/R and chattel paper for its loan. Wonder Spa missed 2 payments. ANB told customers to
make future payments to the bank. Does the bank have this right?
o A/R: I owe you; can be naked account – obligation to pay
o CP – the owe you (account or obligation)-security interest in the thing.
o 9-607: Yes—rights upon default includes processing accounts against the account debtor; go directly to their
A/R people. Don’t have to put this in your agreement; this is an automatic right under 9-607.

If the spa closes its doors, need its former customers keep paying ANB?
o 9-404(a): 3rd party rights—continues the rights of assignees—right of assignee (Bank) are subject to the
following…”see code.
o Bank is subject to all the rights of Wonder Spa—Bank cant sue Account debtors b/c Wonder Spa closed its
doors—Bank takes w/ all its + and -.
o Note: don’t sign a NI agreeing to pay new holders in due course—b/c you waive all defenses against new
assignees—can waive by K or by instrument.
Problem # 119:

Nightflyer repossessed Brown’s car and advertised for bids in local paper. Is this a public or private sale?
o Public (9-610 (b)
o Every aspect of disposition of collateral, including the method, manner, time, place and other terms must be
commercially reasonable.
o Comment 7—defines public vs. private:

(i) Secured party may buy at public sale, but can’t buy at a private sale.

(ii) debtor is entitled to notice of time & place for a public disposition, and the time after which a
private disposition will occur.

How much in advance of the resale must she be given notice? 9-611, 9-612.

What should the notice say? 9-614 or 9-613 (for non-consumer)

After resale, Nightflyer sent a statement saying the amount that she now owed was $3,200. Brown is not sure how
bank came up w/ this amount. What are her rights here? 9-615, 9-625(c) & (e).
o Entitled to form which explains the calculation—any fees and charges—safe harbor form—if you comply w/
this, then you are safe.
o If you met the elements of 615, then you are safe.

Price obtained at resale seems suspiciously low. How relevant is that? 9-627(a)
o If price is not “reasonable”, then secured party loses their right to deficiency, and is left to what the court
determines to be a reasonable value.
o 9-627(a): just b/c price is low doesn’t mean commercially unreasonable—not conclusive presumption.

BUT, proof under Art. 9 is on the seller to show reasonableness. Debtor wins if SP gets low price
and doesn’t have evidence of actual cost or value.

She suspects that the reason bid was so low was b/c Nightflyer was the only bidder. Can they do that? 9-610 (e), 9615(f), an d 9-626(a)(5).

If Brown succeeds in reducing the amount she owes, can she also get actual damages for the harm they have caused
her? 9-625(d).
o NO—625(d) limits you—if no deficiency, your actual damages are limited to those—if seller failed to do
reasonable disposition, then there will be deemed to be no deficiency (borrower will not owe anything).
o Can go w/ either actual damages or deficiency—But, not both.
46
Problem # 120:
(a) Is a surety entitled to a notice under 9-611?
o 611: all secondary obligors include suretys;
o also includes debtors, a secured party that secured 10 days before notice is sent out.
o Are a secondary secured party.
o Is Layden a secured party? Yes—it’s his collateral which is being taken away, so he’s entitled to notice as
well.
o Does oral notice to Mr. S satisfy 611(b), comment 5? No—must be an authenticated notice—could be by email if done properly.
(b) Were any parties entitled to notice of the stock sale? Sale of equipment? If no notice was sent to Northbend Credit
before equipment sold, did Mr. Crowley take free of its SI when he bought the equip at the foreclosure sale? Did the
buyer from Mr. Crowley?
o No notice of stock sale—b/c here, notice isn’t necessary b/c 611(d) says don’t have to send out these notices
if of a type regularly sold on a recognized market. = stocks
o No notice to Northbend:

Mr. Crowley: 617—says only take free if you act in good faith—not here, b/c he is the one doing
the auction, knows he is in violation.

(c) Is the notice sent to Mr. Miller sufficient as to Mrs. Miller?
o No—notice to each debtor is the best means—2 debtors = 2 letters.
(d) Does 9-611 require the creditor to whom a notice is returned by P.O. to take further steps to notify the debtor. See
comment 6.
o must ask if “reasonable”—how much effort would it take to find out why letter was returned? Here,
wouldn’t have been difficult to find new address, so not in good faith.
(e) If the restaurant equip is also named as collateral in a junior filed FS, must the bank notify that secured party of the
resale? 9-611(c) and (e).
o any one on the records 10 days before notice goes out, then must notify these people. If you look b/t 20 and
30 days, and no one shows up as being secured party, then you are free. (even if overlooked by negligence).
(f) Who has burden of proof as to the commercial reasonableness of the sales? 9-626(a)(2)
o Secured party
(g) If Crowley had given equip sale no publicity, has a public sale occurred, and if so, was it commercially reasonable?
See 9-610, comment 7.
o No—b/c there must be a reasonable opportunity to bid—must be some publicity—not sure how much—just
what is “commercially reasonable”.
(h) When a SP repossesses goods and sells them at foreclosure sale, will this give rise to Art. 2 sales warranties being made
to the purchaser at the sale? See 2-312, 9-610(d) & (e), and 610, comment 11.
o Art. 2 still in effect—if secured party, you are giving out warranties—art. 9 doesn’t give these away—can get
these waived, but always be careful when selling used goods.
Problem # 121:
(a) Was the notice period too short?
o Yes—requires 10 days for non-consumers;
o 9-612: doesn’t specify if this applies to consumers; consumers are not as sophisticated, and wont likely have
$ available to re-purchase the goods.
(b) Is the SP required to was the collateral prior to sale? 9-610(a)
o 610 seems to say no, but Weiss case seems to say whatever would be “reasonable”
(c) Did it violate 9-610(b) to conduct the sale in a snowstorm?
o Yes—in the south, but maybe not in other areas.
Problem # 122:

Yes, you can draft—can’t waive all rights—9-602 can specify standards of behavior.

9-624 allows you to waive after default.
Problem # 123:

Junior lienholder repossesses and sells the collateral. Must it account to primary lienholder, ONB?

9-608: SP shall apply or pay over proceeds in the following order: pay reasonable expenses, legal expenses incurred,
obligations incurred by security interests or the lien under which the collection or enforcement is made; and (C) refers
to any subordinate security interest (so how does senior get paid???)

So, Nightflyer gets its $ 1st--***be 1st, be aggressive.

9-615: also refers to any subordinate security interest—ONB must prove it is in line—give notice and repossess from
the repossessor—b/c ONB has priority.
47
o
o
Has option to repossess peaceably, or can bid for the item at auction.
Assuming haven’t already done, then the only SP obligation to do is to satisfy junior people after sale, so
senior must assert their rights.
Problem # 124: do not do!!!

Façade failed to send any notice of foreclosure sale, which only brought in ½ amount Portia owed. Can it still sue her
for the deficiency?
o 9-626(a) & comments:

What are Portia’s rights?
o 9-625
48