LAW 634 Outline
(Includes text and statutes; my handwritten notes may come later)
(“PR 9-xxx” = pre-revision article 9; “9-xxx” (no “UCC” = revised article 9)
I. ATTACHMENT AND PERFECTION OF SECURITY INTERESTS (Art. 9 covers personal, not real property)
A. “Security interest” = lien created by agreement (i.e., a voluntary lien), or “an interest in
personal property . . . [that] secures payment or performance of an obligation . . . .” (1-207(37))
B. We have secured credit transaction to encourage transactions, by reducing risk exposure
C. Secured creditors take priority over unsecured creditors
i. PR 9-201: “Except as otherwise provided by this Act a security agreement is effective
according to its terms between the parties, against purchasers of the collateral and against
creditors”
D. Lory v. Parsoff, 296 A.D.2d 535 (2d Dep’t 2002)
i. “An attorney’s failure to file a Uniform Commercial Code financing statement in the
manner necessary to perfect his client’s security interest constitutes malpractice as a
matter of law.”
E. Knox v. Phoenix Leasing Inc. 29 Cal. App. 4th 1357 (1994)
i. Per PR 9-203 and 9-402, a SP’s claim to collateral whose purchase it helped finance takes
priority over the unsecured claim of he who sold the collateral to the debtor
ii. SP owes restitution to the seller iff it induces seller to transact with debtor, to its benefit
F. Different types of liens exist
i. Statutory lien: favored by law without a bargain; excluded from Article 9 by PR 9-104(c)
except as PR 9-310 applies to set their priority over security interests
ii. Judicial lien: seizure of property pursuant to a money judgment
iii. Consensual liens: typical credit transaction covered by Article 9; requires attachment and
perfection to take effect
a. Attachment: creation of SI via security agreement; attachment = enforceable
against debtor
b. Perfection: a completion of a security interest that results from either possession
of the property, or a filing in a public office of notice of the secured transaction
1. Requirements for perfection (per 9-203(b))
i. Security agreement containing info about collateral, and
authenticated with signatures
ii. Value delivered from creditor to debtor
iii. Debtor has rights to the collateral
iv. Public notice: filing; automatic (PMSI, per 9-309); secured party
takes possession; control (for deposit and investment accounts)
2. The above steps don’t have to happen in any order; perfection occurs
when the last step occurs
i. With floating liens, the last step will be when the after-acquired
goods arrive and come into possession of the debtor
G. Perfection matters a lot in bankruptcy proceedings
i. PR 9-301(1) / 9-317: “[A]n unperfected security interest is subordinate to the rights of . . .
a person who becomes a lien creditor [someone who obtains a judicial lien] before the
security interest is perfected . . . .”
ii. One type of lien creditor is the bankruptcy trustee, who under 11 USC 544(a) obtains the
rights and powers of a “super-creditor,” a representative of all unsecured creditors
collectively who tries to keep as many assets as possible available for distribution
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H.
I.
J.
K.
L.
M.
iii. 9-317 + 11 USC 544(a) = unperfected SI’s unenforceable in bankruptcy
In re Bollinger, 614 F.2d 924 (1980)
i. Composite document rule: per PR 9-402, a security agreement can serve as a financing
statement if signed by both parties; a financing statement can serve as a security
agreement if it (maybe with help from other documents) has enough detail to show that a
valid SI exists
Swets Motor Sales, Inc. v. Pruisner, 236 N.W.2d 299 (1975) (Voidable Titles)
i. Per PR 2-403, SP who buys something that seller doesn’t own (i.e., no title) still has
priority over holder of title, as long as SP bought in good faith; title changes hands when
seller completes performance; seller cannot reclaim goods past an initial 10-day (longer if
buyer misrepresents himself in writing) period, based on fraud allegations
In re Filtercorp, Inc., 163 F.3d 570 (9th Cir. 1998) (Floating Liens)
i. One creditor lost out to subsequent creditors because his SI did not mention afteracquired inventory, and he did not stay sale of assets per 11 USC 363(m), while debtor
was in bankruptcy court
ii. PR 9-204 (minority view): SI must mention after-acquired accounts or inventory
explicitly
iii. PR 9-204 (majority view): SI has rebuttable presumption of covering after-acquired
inventory, because no creditor would agree to collateral that expired so quickly; rebut
presumption with evidence that parties intended to limit the SI
iv. PR 9-110: security agreement need not describe covered collateral specifically as long as
it reasonably identifies what is described
9-315(a)(2): security interest in collateral automatically passes to identifiable proceeds of the
disposition of that collateral
9-203(f): SI in a supporting obligation (e.g., letter of credit rights or secondary obligations such
as guarantees) automatically follows from SI in the underlying, supported collateral
Problems page 33-34
i. An omnibus clause in a security agreement that describes general classes of assets (e.g.,
“equipment”) per PR 9-109 would include company cars that fall under the PR 9-109(2)
definition of equipment
ii. A collateral clause that lists “molds, tools, dies, component parts,” but then says
“including specifically” 4 particular molds, covers only those molds  if you plan to
mention specific items, then cover all items specifically or else only the items listed
specifically will count
II. THE FILING SYSTEM
A. PR 9-302 and PR 9-304 deal with financing statements, the common method of perfection
B. C2:PR9-402 and C5:PR9-204(d): only “notice filing required”
i. PR 9-402(1): the financing statement (the only public document) need only include “a
statement indicating the types, or describing the items, of collateral”  specific items of
collateral not necessary, but don’t trust legal presumptions in a jurisdiction: mention
specifically in the security agreement that after-acquired assets count as collateral
ii. 9-210: at debtor’s request, SP may have to disclose the complete state of affairs
a. 9-210 gives debtor the right to an accounting of the aggregate secured obligation
balance owed; 9-625(f) gives debtor right to $500 penalty if secured party
doesn’t comply with 9-210 without reasonable cause
C. 9-516(a): Electronic filing without debtor signature OK if debtor authenticates by signing the
security agreement (per 9-509(a), 9-510(a))
i. 9-502(c): debtor’s signature no longer has to appear on the financing statement; debtor’s
name is enough (debtor still has to authorize by signing the security agreement)
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ii. If secured party files without debtor’s authentication, then 9-513(c)(4) allows debtor to
demand a termination statement from secured party within 20 days after secured party
receives the demand
iii. 9-625(b): if secured party files unauthorized filing, then debtor can collect damages in the
loss caused by the secured party’s act
iv. 9-625(e)(3): if secured party files unauthorized filing, then debtor can collect a $500
penalty
D. 9-521(a),(b): forms for financing statement amendment/addendum, respectively; make sure
that debtor’s name appears correctly!
i. In re Mines Tire Co., 194 B.R. 23 (Bankr. W.D.N.Y. 1996)
a. Minor Error Rule of PR 9-402: financing statements must list the debtor’s name,
but minor errors that are not seriously misleading will not cause problems
1. Not seriously misleading = a reasonably diligent searcher would likely
discover the financing statement indexed under the correct name; if
human searchers would examine all corporate names with certain basic
components, then computer searchers need to do the same and can’t
excuse themselves because a search of the exact name turned up empty
ii. Problem p. 57: “Voyager” instead of “Voyageur” in a filing statement
a. 9-506(a) clears up the problem in Mines: a financing statement that does not
comply with 9-503 is presumed to be misleading unless, per 9-506(c), a searcher
using the correct name of the debtor would find the flawed financing statement
“using the filing office’s standard search logic”  importance of local practice
1. If the filing office searches alternative spellings routinely, then a spelling
error would not be misleading
iii. Pearson v. Salina Coffee House, Inc., 831 F.2d 1531 (10th Cir. 1987)
a. SP must list debtor’s legal name – searching by trade name creates too much of a
burden for potential creditors (debtor can have many trade names, or trade name
could differ from legal name so much that creditor would have no idea who the
real debtor is; also, creditors expected to sue using debtor’s legal name)
iv. Cabool State Bank v. Radio Shack, Inc., 65 S.W.3d 613 (Mo. Ct. App. 2002)
a. Change of debtor trade name does not invalidate a financing statement (i.e.,
require updating), where the creditor listed the individual debtors and not the
entity’s old trade name
v. In re Scott, 113 B.R. 516 (Bankr. W.D. Ark. 1990)
a. In contrast to above case, financing statement does lose validity where individual
debtors who signed create a corporation, and transfer the assets in the SI to the
corporation
b. PR 9-402(7) / 9-508 gives a SP 4 months to amend financing statement after a
corporate debtor changes name or corporate structure  here, the new
corporation had no agreement with the creditor, allowing seizure of collateral by
a different creditor who had SI with the corporate entity
vi. What if debtor sells collateral, and SP executes new security agreement but doesn’t file a
new financing statement?
a. SP still should have its secured interest intact  it consented to transfer, but a
transfer subject to the security interest, not free and clear of it
1. 9-507(a): “A filed financing statement remains effective with respect to
collateral that is sold, exchanged, leased, licensed, or otherwise disposed
of and in which a security interest . . . continues, even if the secured party
knows of or consents to the disposition.”
2. 9-315(a): “Except as otherwise provided in this article . . . (1) a security
interest . . . continues in collateral notwithstanding sale . . . or other
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disposition thereof unless the secured party authorized the disposition free
of the security interest . . .; and (2) a security interest attaches to any
identifiable proceeds of collateral.
vii. Estate of Harris v. Harris, 218 F.3d 1140 (10th Cir. 2000)
a. A trust obtains a judgment against P
b. D lets some of its cattle graze on P’s land  P puts his brand on the cattle too
c. Trust tries to satisfy its judgment by seizing any cattle with P’s brand on them 
presumption that P owns the cattle
d. D wins: its brand plus ownership papers refute P’s presumption of ownership 
Trust can’t seize cattle that P does not own
E. Mechanics of filing
i. UCC-1 (central filing with secretary of state) or UCC-2 (local filing) required for
perfection
ii. 9-403(4): filing officer must give each statement a filing number, mark it with the date
and hour of filing, and index the form in the name of the debtor in a file open to public
inspection
iii. 9-302(2): a secured party can assign his perfected interest to someone else, and that other
person need not file a new form
iv. 9-403(2): a filed financing statement lasts 5 years; UCC-3 continuation statement then
required
v. In re Flagstaff Foodservice Corp., 16 B.R. 132 (Bankr. S.D.N.Y. 1981)
a. Committee of unsecured creditors challenges another party’s security agreement,
on grounds that the secured party had no proof that the town clerk received the
documents
b. Secured party wins: PR 9-403(1) [9-501, 519] says that presentation to the filing
officer constitutes filing  perfection; secured party does not suffer if filing
officer doesn’t do his job
F. Perfection by possession
i. In re Rolain, 823 F.2d 198 (8th Cir. 1987)
a. PR 9-305 allows collateral to enter possession of an escrow agent designated by
both sides, who is detached from each side; here; the attorney for one side is too
close to the transaction  invalid transfer that does not create possession 
trustee in bankruptcy can ignore this unperfected SI
ii. 9-313(c): A secured party takes possession “when the person in possession authenticates
a record acknowledging that it holds possession of the collateral for the secured party’s
benefit”
iii. 9-313(f): “A person in possession of collateral is not required to acknowledge that it
holds possession for the secured party’s benefit.”
iv. 9-313(g): Acknowledgement effective under section C even if the acknowledgement
violates some other debtor’s rights; someone in possession who gives acknowledgement
owes nothing to the secured party and does not have to confirm the acknowledgement to
another person  person in possession has duties only to the extent that the security
agreement says so
a. This helps out people who hold other people’s property for reasons unrelated to
secured transactions (e.g., holding for storage, repair, or use)
G. Ordinary Goods
i. 9-309(1): Purchase money security interest in consumer goods perfected automatically at
time of attachment, with no filing requirement
ii. BUT watch whether an item = consumer good or equipment (personal or business use)
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iii. Filing still necessary for nonpurchase money security interest in consumer goods, and for
priority over buyers of consumer goods per 9-320(b) (e.g., consumer goods transaction at
a garage sale destroys unperfected SI  store should file for big ticket items)
iv. “Purchase-money” defined in 9-103
a. PM = money given to debtor to buy the collateral
b. PMSI = SI in collateral bought with PM
c. From Black’s Law Dictionary: “If a buyer's purchase of a boat, for example, is
financed by a bank that loans the amount of the purchase price, the bank's
security interest in the boat that secures the loan is a purchase-money security
interest”
d. 9-103(a)(1): Purchase-money collateral = “goods or software that secures a
purchase-money obligation incurred with respect to that collateral”
H. Multiple state transactions
i. The basic problem: where do you file a financing statement when collateral, debtor, and
secured party all lie in different jurisdictions?
ii. 9-301(1): “Except as otherwise provided in this section, while a debtor is located in a
jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection
or nonperfection, and the priority of a security interest in collateral”
iii. 9-301(2): For possessory security interests, law of the state where collateral is determines
perfection and priority
iv. 9-301(3): For goods, documents, and instruments, the law of the debtor’s location
determines the place of perfection, but the law of the collateral’s location governs the
effect of perfection or nonperfection and the priority of a nonpossessory security interest
v. An example
a. Creditor 1 takes a possessory security interest in inventory located in State A
b. Creditor 2 takes a nonpossessory security interest in the same collateral by filing
a financing statement in State B, where debtor is located
c. Under 9-301(1), State B’s law (law of debtor’s location) governs whether
Creditor 2 is perfected
d. Under 9-301(2), State A’s law (location of collateral) determines whether
Creditor 1 is perfected
e. Under 9-301(3)(i), State A’s law determines priority in Debtor’s inventory in the
state as between Creditor 1 and 2
vi. General Elec. Co v. Halmar Distributors, Inc., 968 F.2d 121 (1st Cir. 1992)
a. Creditor had more than the normal 4 months to amend a financing statement,
after debtor moved; it had extra time because debtor filed for bankruptcy, and
bankruptcy tolls the 4-month period  creditor has until bankruptcy proceedings
end to file new financing statement (PR 9-403(2))
vii. Note that 9-515 drops the tolling language from PR 9-403(2)  a secured party now has
to make sure that a financing statement does not lapse during a bankruptcy
I. Intangibles
i. Mellon Bank v. Metro Communications, Inc., 945 F.2d 635 (3d Cir. 1991)
a. Under PR UCC, filing in the state of a company’s chief executive office counted
as filing in the place of the debtor’s location {Now, the state of incorporation is
all that matters}
III. PRIORITY
A. UCC system not perfect, but an improvement over pre-UCC situation
i. 9-201: Except for lots of exceptions that we will discuss later, a security agreement takes
priority over purchasers of collateral and unsecured creditors
ii. 9-312: system to determine priority between secured creditors
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B.
C.
D.
E.
iii. 9-301: lien creditor (e.g., bankruptcy trustee) > unsecured creditor, but a purchase-money
creditor has relation-back rights against a lien creditor
iv. 9-323(a): In general, a secured party takes subject of all advances made by a competing
secured party that has priority under 9-322(a)
The first-to-file rule
i. Allis-Chalmers Credit Corp. v. Cheney Investment, Inc., 605 P.2d 525 (Kan. 1980)
a. In all cases not governed by other rules, and assuming that the interests were
equal, first-to-file rule holds sway
The purchase money priority: collateral other than inventory (exception to FTF)
i. Brodie Hotel Supply, Inc. v United States, 431 F.2d 1316 (9th Cir. 1970)
a. Perfected PMSI trumps any other SI, even if SI filed first (PR 9-312(5))
ii. Before you answer on an exam who the claimants are, figure out what the collateral is
and where it is; then check for perfection; then check for FTF; then check for exceptions
to FTF; if collateral sold, then use rules for proceeds (must be identifiable!)
iii. What about priority among multiple PMSIs?
a. 9-324(a): Purchase money priority applies when the collateral = goods
b. 9-324(g): Priority goes to the enabling lender over the purchase money seller;
“After all, the lender also has provided a valuable financial input into the
debtor’s acquisition of the collateral.”
c. 9-328(1): Priority in investment property goes to the secured party who has
control over the collateral  inconsistent with 9-324 and its granting of priority
to the enabling lender
1. 9-328(2): If more than one party controls, then priority goes to who took
control first
d. 9-328(6): Priority goes on a pro rata basis among claimants when perfection
occurs without control and the debtor is a broker, securities intermediary, or
commodities intermediary
iv. Dual status rule (replaces old transformation rule)
a. Dual-status rule: Presence of NPMSI doesn’t destroy the PMSI qualities; PMSI
remains to the extent that it secures the price of the goods, even though it secures
the price of other items as well
1. 9-103(f): PMSI does not lose its status as such, even if
i. The PM collateral also secures an obligation that is not a PM
obligation;
ii. Collateral that is not PM collateral also secures the PM obligation;
OR
iii. The PM obligation has been renewed, refinanced, consolidated, or
restructured
Buyers and lessees
i. A creditor with a perfected SI in goods has priority over a buyer who buys the goods
from the debtor (9-317(b)) unless either the SP authorized the debtor to sell (9-315(a)) or
the buyer is a “buyer in ordinary course of business” (9-320(a))
a. Buyer in ordinary course of business = “a person who in good faith and without
knowledge that the sale to him is in violation of the ownership rights or security
interest of a third party in the goods buys in ordinary course from a person in the
business of selling goods of that kind” (1-201(9))
ii. Gordon v. Hamm, 74 Cal. Rptr. 2d 631 (Ct. App. 1998)
a. SP can’t stop a debtor merchant from selling collateral in the ordinary course of
business, to someone who in good faith had no idea what was going on  SP’s
only concern is that debtor repay the debt at some point, somehow
Rights to payment (i.e., debtor puts up some future revenue stream as collateral)
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i. Accounts and general intangibles
a. In re Tri-County Materials, Inc., 114 B.R. 160 (Bankr. C.D. Ill. 1990)
1. Under PR 9-302(1)(e), perfection requires a filed financing statement,
except for an assignment of accounts that does not transfer a “significant”
part of the assignor’s outstanding accounts (percentage can be one test for
“significant”)
b. Artoc Bank and Trust, Ltd. v. Apex Oil Co., 975 F.2d 1365 (8th Cir. 1992)
1. A buyer has to follow seller’s instructions to send payments to a third
party, per an arrangement to give the third party a SI in the accounts
receivable
2. Buyer cannot ignore seller’s arrangement with a third party, and create
set-offs against what seller owes buyer in unrelated contracts
ii. Chattel paper
a. 9-102(a)(11): Chattel paper = “a record or records [that] evidence both a
monetary obligation and a security interest in or a lease of specific goods”
b. Rex Fin. Corp. v. Great W. Bank & Trust, 532 P.2d 558 (Ariz. Ct. App. 1975)
1. Buyer of chattel paper (security agreements in this case) has priority over
the SP who created the purchased contracts in the first place
iii. Deposit accounts
a. Using deposit accounts as collateral can create complications, because
classifying a deposit account is tough (are they proceeds?)
b. Common law setoff: a bank that loans to a customer has the right to set off the
amount of the loan against the amount of the deposit account  sometimes
conflicts arise between Article 9 provisions and this common law principle
c. Citizens Nat’l Bank (D) v. Mid-States Dev. Co., Inc. (P), 380 N.E.2d 1243 (Ind.
Ct. App. 1978)
1. SI between depositor and third party takes priority over bank’s right to
setoff deposit funds against loans from bank to depositor; deposits =
proceeds  subject to SI over unsecured deposit relationship between
depositor and bank
iv. Cash proceeds
a. The clash is between a SP who was first to file with respect to collateral, and a
third party who stakes a claim to cash proceeds of the disposition of the collateral
b. HCC Credit Corp. v. Springs Valley Bank & Trust, 712 N.E.2d 952 (Ind. 1999)
1. Where debtor sells collateral and uses proceeds to pay off a third party
debt, the third party can keep the money if paid in the ordinary course of
debtor’s business
2. If an extraordinary payment, though, then SP’s interest takes priority, and
SP can collect to the extent that it can trace the funds out of a deposit
account that mingles all sorts of funds
c. 9-332: transferee of money, or of funds from a deposit account, takes free of a SI
unless the transferee colludes with debtor in violating the rights of the SP
d. 9-331: a holder of a junior SI may take free of a senior SI, if the junior SP holds
in due course (i.e., took in good faith that no other SI’s existed)
e. Lowest intermediate balance rule: a way to trace funds from proceeds, when
mingled with other funds in a deposit account
1. Chrysler Credit Corp. v. Sup. Ct., 17 Cal. App. 4th 1303 (Ct. App. 1993)
i. SP with SI in proceeds can pull funds from a deposit account only
to extent that the proceeds are identifiable amidst all the account’s
funds
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ii. Lowest intermediate balance rule: SP can pull only from funds that
remain in an account after withdrawals (deposits don’t count)  if
account balance drops to zero, then SI destroyed and SP becomes
general creditor
v. Commingled and processed goods
a. 9-336: “The security interests rank equally in proportion to the value of the
collateral at the time that it became commingled goods”; big change from old
rule of determine what percentage of collateral’s final cost came from each SP
F. Conflicting interests not governed by Article 9
i. Subrogation {the assumption by a third party (as a second creditor or an insurance
company) of another's legal right to collect a debt or damages}
a. Canter v. Schlager, 267 N.E.2d 492 (Mass. 1971)
1. When a contractor assigns money due from client to a surety (who
guarantees payment to subcontractors), it has created a right of
subrogation as a matter of law  subrogation does not require existence
of a contract  does not fall under UCC (UCC covers only SI’s created
by contract)  subrogation right exists without need to file for perfection
G. Federal tax liens
i. Shell Oil Co. v. Capital Financial Services, 170 B.R. 903 (Bankr. S.D. Tex. 1994)
a. Federal tax liens do not violate the automatic bankruptcy stay because the stay
applies only to property of the estate
b. Also, IRS’ tax claim had priority over wage claims of debtor’s employees
because it was filed more than 45 days before the wage claim took effect
c. SI in future accounts receivable not perfected until the accounts receivable exist
(which is why the wage claim took so long to take effect)
ii. United States v. Estate of Romani, 523 U.S. 517 (1998)
a. Tax Lien Act supercedes all other federal priority statutes; under TLA, judgment
liens filed before federal tax lien take priority
iii. PMSI has priority over tax liens, even if filed later
IV. ENFORCEMENT
A. Acceleration: debt payable in installments becomes payable in full, immediately
B. Good faith and fair dealing
i. KMC Co., Inc.(D) v. Irving Trust Co., 757 F.2d 752 (7th Cir. 1985)
a. Creditors can’t accelerate payments due and enforce waivers of right to trial by
jury unless 1) a reasonable creditor would have accelerated under the
circumstances; and 2) the creditor acts in good faith  you can’t cut off a line of
credit, watch debtor collapse, and then accelerate, for no reason
C. Repossession
i. Penney v. First Nat’l Bank of Boston, 433 N.E.2d 901 (Mass. 1982)
a. Self-help repossession OK if 1) no state action ( no Amend 14 due process
implications); 2) no breach of peace (PR 9-503); and 3) no contractual provisions
setting this up that are unconscionable
ii. Williams v. Ford Motor Credit Co., 674 F.2d 717 (8th Cir. 1982)
a. Self-help repossession proceeded properly where repo men were polite and did
not breach peace, and debtor did not raise objections while the repossession
occurred
iii. Moe v. John Deere Co., 516 N.W.2d 332 (S.D. 1994)
a. Repossession not OK where debtor’s default unclear as a matter of fact, and
where creditor had accepted late payments in the past  requires new notice that
strict compliance with contract will be required again
iv. NY Veh. & Traf. Law § 425
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a. Notify police and nearest DMV office within 24 hrs of repossessing a vehicle
v. In re Wagner, 74 BR 898 (Bankr. E.D. Pa. 1987)
a. Creditor violated stay, whether he had specific knowledge of its existence or
effect, when he twice approached debtor after filing of bankruptcy petition and
threatened to repossess certain trucks. Bankr.Code, 11 U.S.C.A. § 362(a)(3, 6).
b. Creditor's actions, in bursting into debtor's home and threatening to blow debtor's
brains out in effort to convince him to return certain trucks, fully justified award
of actual and punitive damages, attorney fees and costs under automatic stay
provisions, notwithstanding creditor's argument that he in good faith believed
that he was true owner of trucks, and that actions were not subject to stay.
Bankr.Code, 11 U.S.C.A. § 362(h).
vi. In re MacLeod, 118 B.R. 1 (Bankr. D.N.H. 1990)
a. You can’t use off-duty police officers during self-help repossession  state
action  unlawful without notice and hearing
vii. Hilliman v. Cobado, 499 N.Y.S.2d 610 (Sup. Ct. Catt. Co. 1986)
a. Physical confrontation not necessary for breach of the peace; breach can occur by
ignoring debtor and sheriff orders to leave the premises, and by saying "to hell
with this we're taking the cows," while ignoring warning that taking property
anyway would lead to arrest
D. Disposition of collateral: property, plant, and equipment
i. In re Excello Press, Inc., 890 F.2d 896 (7th Cir. 1989)
a. Oral communication enough to give notice of asset disposition under PR 9-503;
sale is valid if “commercially reasonable” (effort in finding bidders, and seller’s
good faith, are factors in figuring out what that means)
ii. May v. Women’s Bank, 807 P.2d 1145 (Colo. 1991)
a. A personal guaranty on a debt does not by itself = waiver of right, under UCC, to
receive notice of asset disposition and have asset disposed in a commercially
reasonable sale
E. Disposition of collateral: accounts receivable and chattel paper
i. 9-607 (Replaces and broadens PR 9-502)
a. Continues policy of making rights to payment a very desirable form of collateral
by giving SP a fast and sure method of realizing on the collateral
b. 9-607a1: SP can notify account debtor, or obligor on a promissory note, to make
payment to SP; SP can do this upon default and need not notify debtor
c. 9-607a3: SP may enforce the obligations against the account debtor or obligor
directly, regardless of whether the security agreement calls for account debtor to
pay debtor or SP
d. 9-607: SPs must proceed in a commercially reasonable manner in collecting
rights to payment, because of the impact of collection on debtor’s recourse
liability {i.e., impact on what debtor owes to SP}
e. BUT
f. The commercially reasonable standard does not apply if SP has no right of
recourse against the debtor, as in the case of a true sale and not a secured
transaction {in a sale of accounts, buyer entitled to all proceeds without further
issues, whereas in a transfer of accounts to secure a debt, SP could take action
against debtor if debt not repaid – action would consist of demanding payment on
the accounts}
V. SECURITY INTERESTS IN BANKRUPTCY
A. Preferences
i. An insolvent debtor who cannot pay all unsecured creditors in full may prefer one of
them by transferring property to the creditor, to pay the debt owed
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ii. Since this transfer can occur involuntarily, unsecured creditors who sense that they would
receive little in a bankruptcy liquidation often try to obtain a judicial lien that forces
payment to them, before the debtor can file for bankruptcy
iii. As a result, transactions occurring before the bankruptcy can frustrate the order of
payments under the Bankruptcy Code  11 U.S.C. 547
iv. 11 U.S.C. 547 designed to undo certain pre-bankruptcy transactions  voidable transfers
v. Text of 11 U.S.C. 547b
a. [T]he trustee may avoid any transfer of an interest of the debtor in property-b.
(1) to or for the benefit of a creditor;
c.
(2) for or on account of an antecedent debt owed by the debtor before such
transfer was made;
d.
(3) made while the debtor was insolvent;
e.
(4) made-f.
(A) on or within 90 days before the date of the filing of the petition; or
g.
(B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider; and
h.
(5) that enables such creditor to receive more than such creditor would receive
if-i.
(A) the case were a case under chapter 7 of this title
j.
(B) the transfer had not been made; and
k.
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title [11 USCS §§ 101 et seq.].
vi. In 11 U.S.C. 547c, trustee may not avoid transfers that created security interests
vii. Matter of Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988)
a. Payments voided as preferences because they were made while debtor insolvent
(liabilities >= assets)
viii. In re Tolona Pizza Prods. Corp., 3 F.3d 1029 (7th Cir. 1993)
a. Payments made within 90 days of bankruptcy filing <> voidable preferences,
where the debt was both incurred and paid in the ordinary course of business of
the two parties
VI. CONTRACT FORMATION: BATTLE OF THE FORMS; STATUTE OF FRAUDS; ACCEPTANCE / REPUDIATION
WARRANTY
A. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569 (10th Cir. 1984)
i. When a question of contract formation arises, per 2-207 (actually says additional, not
different), based on different terms in the offer and acceptance, all conflicting terms
cancel out (“knock-out rule”)  acceptance covers only those terms from offeror that
offeree did not contradict
B. Consarc Corp. v. Marine Midland Bank, 996 F.2d 568 (2d Cir. 1993)
i. Under New York law, a written contract may be formed from more than one writing.
Relevant writings creating a contract may consist of letters bearing the signature of only
one party or even memoranda unsigned by either party.
ii. A unilateral offer may be accepted by the other party's conduct and thereby give rise to
contractual obligations.
iii. To determine the terms of a contract a court must ascertain the parties' intent based on the
language they used. Interpreting the agreement requires consideration as to whether any
terms of that agreement are ambiguous. Whether a contract's terms are ambiguous is a
question of law decided by the court. An ambiguous term is one about which reasonable
minds could differ.
iv. If a contract is unambiguous, courts are required to give effect to the contract as written
and may not consider extrinsic evidence to alter or interpret its meaning. If ambiguous
(e.g., multiple meanings), then submit extrinsic evidence to trier of fact.
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C.
D.
E.
F.
G.
H.
v. The most common factors relied on in determining intent include: (1) number of terms
agreed upon compared to total number to be included, (2) relationship of the parties, (3)
degree of formality attending similar contracts, (4) acts of partial performance by one
party accepted by the other, (5) usage and custom of the industry, (6) subsequent conduct
and interpretation by the parties themselves, (7) whether writing is contemplated merely
as a "memorial," (8) whether contract needs a formal writing for its full expression, (9)
whether any terms remain to be negotiated, (10) whether contract has few or many
details, (11) whether amount involved is large or small, (12) whether a standard form is
widely used in similar transactions or whether this is an unusual type of contract, (13) the
speed with which the transaction must be concluded, (14) the simplicity or complexity of
the transaction, (15) the availability of information necessary to decide whether to enter
into a contract, and (16) the time when the contract was entered into
NY Gen. Oblig. § 5-701 {The Statute of Frauds}
i. Contracts taking effect more than a year from acceptance must be in writing
ii. No mention here (as opposed to UCC SOF) of minimum dollar value
NY CPLR 3211(a)(5) {Motion to dismiss}
i. You can dismiss a COA for SOF violation (e.g., a COA to enforce an oral contract taking
effect more than 1 year after acceptance)
Laidlaw Transp., Inc. v. Helena Chem. Co., 680 N.Y.S.2d 365 (4th Dep’t 1998)
i. U.C.C. § 2-207 governs whether additional terms on a delivery ticket become part of the
contract between the parties. That section makes a distinction between a clause
disclaiming warranties, which would normally "materially alter" the contract, and a
clause limiting a party's remedy in a reasonable manner, which may be considered part of
the parties' agreement.
ii. A disclaimer or exclusion of warranties delivered to the buyer after consummation of the
sale is not effective unless the parties have entered into a separate agreement pursuant to
U.C.C. § 2-209.
iii. An exclusive remedies clause and a clause limiting consequential damages to the
purchase price of a product, are enforceable unless they fail of their essential purpose.
U.C.C. § 2-719 (2).
iv. Whether an exclusive or limited remedy provision fails of its essential purpose is an issue
of fact for the jury.
v. It is well settled where a contract contains both an exclusive remedy provision and a
provision limiting consequential damages, the provision limiting consequential damages
will be enforced provided that it is not unconscionable, even where an issue of fact exists
concerning the enforceability of the exclusive remedy provision.
Sessa v. Riegle, 427 F. Supp. 760 (E.D. Pa. 1977)
i. When buyer has chance at unlimited inspection of goods before acceptance, meeting
burden of proving effective rejection and breach of express warranty will be tough
ii. When buyer has unlimited inspection, seller’s statements that the goods “are sound” will
be general opinion and not an express warranty
Bethlehem Steel Corp. v. Chicago Eastern Corp., 863 F.2d 508 (7th Cir. 1988)
i. An action for breach of an implied warranty must generally be commenced within four
years from the date when the goods were tendered by the seller to the buyer.
La Villa Fair v. Lewis Carpet Mills, Inc., 548 P.2d 825 (Kan. 1976)
i. Per 2-711, buyer may cancel order and recover deposit or damages, if he justifiably
rejects or revokes acceptance (see relevant provisions of UCC)
VII. WARRANTIES AND REMEDIES
A. Cayuga Harvester v. Allis-Chalmers, 465 N.Y.S.2d 606 (4th Dep’t 1983)
i. Lots of mechanical down time and repeated replacements and repairs = failure of
essential purpose of a limited remedy such as repair and replacement warranty
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a.
B.
C.
D.
E.
Under the Uniform Commercial Code, the parties to a sale may, within certain
limitations, allocate the risks of their bargain by limiting the remedy of the buyer.
U.C.C. § 2-719(1)(a). When, however, a limited remedy such as an exclusive
repair and replacement warranty fails of its essential purpose, the buyer is
relieved of its restrictions and may resort to other remedies as provided in § 2719(2). The code also permits the parties to agree to exclude consequential
damages unless the exclusion is unconscionable U.C.C. § 2-719(3).
b. Failure of essential purpose of limited remedy = question of fact
c. The seller in all cases is free to disclaim warranties in the manner provided in
U.C.C. § 2-316.
Roneker v. Kentworth Truck Co., 944 F. Supp. 179 (W.D.N.Y. 1996)
i. Warranties that exclude consequential damages and limited buyer's remedy to repair and
replacement are not unconscionable under NY UCC, as long as failure of the warranty
does not result from bad faith
NY UCC § 2-719
i. Allows limiting damages to repair and replacement
ii. Consequential damages may be limited or excluded unless the limitation or exclusion is
unconscionable. Limitation of consequential damages for injury to the person in the case
of consumer goods is prima facie unconscionable but limitation of damages where the
loss is commercial is not
Zhong Ya Chem. Ltd. v. Indust. Chem. Trading, 2001 U.S. Dist. LEXIS 19184 (S.D.N.Y.
2001)
i. When an attempted revocation is ineffective, the buyer holds title to the goods and its
refusal to make payment breaches the sales contract.
ii. When a buyer's rejection is procedurally correct though substantively wrong, N.Y.
U.C.C. Law § 2-601(1), the seller retains title to the goods and is entitled to
nonacceptance damages only.
Sack v. Lawton, 2003 U.S. Dist. LEXIS 12279 (S.D.N.Y. 2003)
i. The general rule for measuring damages for a breach of contract is the amount necessary
to put the plaintiff in the same economic position he would have been in had the
defendant fulfilled his contract.
ii. A seller may recover the entire contract price, if the seller is unable to resell the goods at
a reasonable price or the circumstances reasonably indicate that such effort will be
unavailing. N.Y. U.C.C. Law § 2-709(1)(b).
iii. An aggrieved seller may recover incidental damages, that is, commercially reasonable
charges incurred in, for example, stopping delivery or in the transportation, care, and
custody of goods after the buyer's breach. N.Y. U.C.C. Law §§ 2-708, 2-709, and 2-710.
Since the purpose of providing incidental damages is only to put the seller in as good a
position as performance would have done, incidental damages under the New York
Uniform Commercial Code are limited to out-of-pocket expenses.
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