Documente Academic
Documente Profesional
Documente Cultură
MollSpring 2007
I. Remedies of Unsecured Creditors Under State Law....................................................................1 A. Who Is an Unsecured Creditor?..............................................................................................1 B. How Do Unsecured Creditors Compel Payment?...................................................................1 C. Limitations on Compelling Payment.......................................................................................2 D. Is the Law Serious About Collecting Unsecured Debts?........................................................2 E. Problem Set 1..........................................................................................................................2 II. Security and Foreclosure.............................................................................................................5 A. The Nature of Security............................................................................................................5 B. Foreclosure Procedure.............................................................................................................6 1. Judicial Foreclosure.............................................................................................................6 2. Power of Sale Foreclosure...................................................................................................7 3. U.C.C. Foreclosure by Sale..................................................................................................7 C. Problem Set 2..........................................................................................................................8 III. Repossession of Collateral.......................................................................................................10 A. The Importance of Possession Pending Foreclosure.............................................................10 B. The Right to Possession Pending ForeclosureReal Property............................................10 1. The Debtors Right to Possession During Foreclosure......................................................10 2. Appointment of a Receiver................................................................................................11 3. Assignment of Rents..........................................................................................................11 C. The Right to Possession Pending ForeclosurePersonal Property......................................11 D. The Article 9 Right to Self-Help Repossession....................................................................12 E. The Limits of Self-Help: Breach of the Peace......................................................................12 F. Self-Help Against Accounts as Collateral.............................................................................13 G. Problem Set 3........................................................................................................................15 IV. Judicial Sale and Deficiency....................................................................................................19 A. Strict Foreclosure..................................................................................................................19 B. Foreclosure Sale Procedure...................................................................................................19 C. Problems with Foreclosure Sale Procedure...........................................................................20 1. Advertising.........................................................................................................................20 2. Inspection...........................................................................................................................21 3. Title and Condition............................................................................................................21 4. Hostile Situation.................................................................................................................21 5. The Statutory Right to Redeem..........................................................................................21 D. Antideficiency Statutes.........................................................................................................21 E. Credit Bidding at Judicial Sales............................................................................................22 F. Judicial Sale Procedure: A Functional Analysis...................................................................22 G. Problem Set 4........................................................................................................................22 V. Article 9 Sale and Deficiency...................................................................................................25 A. Strict Foreclosure Under Article 9........................................................................................25 B. Sale Procedure Under Article 9.............................................................................................26 C. Problems with Article 9 Sale Procedure...............................................................................29 1. Failure to Sell the Collateral..............................................................................................29 2. The Requirement of Notice of Sale...................................................................................29 3. The Requirement of a Commercially Reasonable Sale.....................................................32 D. Article 9 Sale Procedure: A Functional Analysis................................................................34 E. Problem Set 5........................................................................................................................34
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E. Problem Set 1
1.1 Jeff lends Lisa $1000 to buy lawn furniture. Lisa signs IOU and doesnt pay him back. Jeff wants to take the lawn furniture. Can he? NO; Jeff must go through the court system and become a judgment creditor. Here, Jeff does not have the right to do a self-help execution. He is an unsecured CR with no special rights to do self-help execution. He would be liable for conversion and larceny if he takes the furniture. Jeff should sue Lisa for breach of K (valid K, enforceable, Lisa 2 of 136
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1.4 Has judgment now and wants money. What does the attorney need to know? Karen has to compel payment thru legal channels (writ of execution or garnishment). How to find assets? Every collection suit allows discovery. Ask for a deposition in aid of execution. It may be hard to serve a subpoena on the DR because DR is being evasive. Formal discovery is very expensive. Other ways to find assets: o Public records would tell me if Knopf owns real estate or has cars registered in his name. o Could hire a private investigator to research what other personal property Knopf might have. o Use discovery proceedings to depose Knopf and gain information that way or through a request for production of records. Use interrogatories. o Search for lawsuits that DR is involved in. Deposition in aid of execution: a deposition to determine where assets are located (to aid in preparing a writ of execution). You must serve the DR with the notice of the deposition. Many times the DR has fled the jurisdiction at this point. Additionally, depositions are extraordinarily expensive b/c you must hire a court reporter and pay for binding and mailing Taking the day care centers equipment is dicey. The judgment is against Knopf, not the day care center, which might be its own corporate entity. Levying property that belongs to Knopf clearly is permissible. It may be possible to go after the day care equipment, but unsecured CRs of the day care center probably also want the equipment and the writ of execution must identify the equipment for the sheriff. 1.5 Every state has exempt property statutes. SO you may not be able to touch some of the DRs assets because they are exempt. The statutes keep the DRs from becoming wards of the state. Toyota: The motor vehicle is worth $4,800 more than is exempt so it is partially exempt and might be able to force a sale of the vehicle to take that amount per 815.18(9), except that Knopf has not claimed any consumer goods, so the $5,000 consumer goods exemption can be added to the motor vehicle exemption, making the vehicle untouchable. Vehicle can be consumer goods. House: House is worth $35,000. The homestead exemption gives you $40,000 but you must reside there. Also, can only exempt land up to 40 acres. Assuming that the house is his homestead, it probably is exempt from execution because it is worth less than $40,000 per 815.20. If he is not occupying the house, it is not exempt, and can
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Notes Uncovering assets during a deposition can be tricky. The questions need to uncover current and potential sources of funds and current and potential assets. Once you have a writ of execution, you must identify specific assets for the sheriff to levy. Partially exempt property can be seized, sold and the exempt amount turned over to the debtor.
II.
B. Foreclosure Procedure
Foreclosure procedures for real estate vary widely from state to state. However, Article 9 provides a standard template for the foreclosure process upon personal property. Foreclosure on personal property however is distinct from taking possession of the collateral. Foreclosure is a process that leads to the transfer of ownership of the collateral free from any right of the debtor to redeem the collateral. Usually the transfer in ownership occurs coincidentally with a transfer in possession. But, the transfer in possession may occur earlier or later.
1. Judicial Foreclosure
A foreclosure is said to be a judicial foreclosure if it is accomplished through a court order. In order to get the court order, the creditor must sue the debtor and request that the equity of redemption be foreclosed. If the creditor succeeds, then the court sets a date for a foreclosure sale. On that date, the sheriff conducts an auction and the winner pays the entire purchase price to the sheriff immediately. The foreclosure sale is confirmed by the court. At this time, the debtor may raise any objections such as the following: 6 of 136
C. Problem Set 2
2.1: See problem 1.6 for background. Now, Karen has a security interest in the car, house, day care equipment, and bank account. Karen can foreclose on the car, day care equipment, and bank account, as 815.18(12) prevents Ted from claiming that the property is exempt from a secured CR. 815.18(12) says that a creditor can get personal prop if the creditor holds a security interest. Karen may be able to take the house though, but the only people able to foreclose on a homestead are mortgages, laborers, mechanics, and purchase money lenders per 815.20(1). If Karen only had an Art. 9 security interest, then that applies only to personal property and house still would be exempt. Every states exemption statute gives way to those with security interests or liens. Secured creditors are not affected by exemption statutes. They only stop unsecured creditors. A purchase money lien is when someone loans you money to buy a particular item ONLY. 2.3: Your client, a bank, wants to foreclose on the Hurleys, who have missed payments on their house. Linda Hurley comes to see you, saying that her husband has cancer and 8 of 136
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III.
Repossession of Collateral
A. The Importance of Possession Pending Foreclosure
When a secured creditor has placed a debtor in default and is seeking to foreclose, the creditors interest in the collateral is much greater than the debtors interest. In order to protect that interest, the creditor should take possession of the collateral at the first opportunity for several reasons. First, the debtors incentive to maintain the collateral is non-existent and the debtor may destroy the collateral out of spite. Second, the use of the collateral between the time the right to foreclose accrues and the time the foreclosure sale is confirmed may have significant economic value. Third, if the debtor is in possession of the property, then potential buyers may have difficulty determining the collaterals true value. Creditors who can take possession of key collateral have enormous bargaining leverage. This leverage alone may be enough to enable the creditor to get paid, to raise the interest rate, to demand additional collateral, etc. Alternatively, a debtor that can deny effectively possession of collateral has bargaining leverage that enables the debtor to extend payments, renegotiate payment terms, etc.
2. Appointment of a Receiver
While a foreclosure case is pending, any interested party can apply for the appointment of a receiver to preserve the value of the collateral. A foreclosing mortgagee does not always succeed in winning the appointment of a receiver. Explicit provision for a receiver in the mortgage helps. Many states have statutes governing the appointment of receivers
3. Assignment of Rents
If the real property that is serving as collateral is an income producing property, then the creditor should include in the mortgage a provision allowing the creditor to take an assignment of rents. This provision gives the mortgagee the right to collect the rents directly form the tenants in the event of default.
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IV.
A secured creditor may foreclose on his collateral via a judicial foreclosure. Once a judgment has been entered in a judicial foreclosure and the property seized, the next step required by law is a public sale. This procedure usually cannot be varied by contract. Of course, most Article 9 security interests do not go through judicial foreclosure; they follow the path of nonjudicial foreclosure.
A. Strict Foreclosure
One exception exists to the public sale requirement for strict foreclosures. Strict foreclosures are associated with real estate transactions known as contract for deed or installment land contract. In these types of transactions, the seller finances the sale to the buyer and retains title to the real property as security until the debtor pays the full purchase price. If the debtor defaults, then after a grace period the debtors interest in the property is forfeited and the court confirms that title remains with the seller.
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1. Advertising
The statutory procedure for a foreclosure sale requires that the sale be advertised. Because the sale does not occur between a willing seller and a willing buyer, the advertisements tend to lack useful information and are placed in small circulation papers. Instead the advertisement is the minimum required to satisfy the statute. Consequently, the only people that see the advertisements are professional bargain hunters.
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4. Hostile Situation
Because foreclosure sales are unwilling transactions, the debtor may not be forthcoming with information or access to the property to prospective buyers. The public official conducting the sale is not a good source of information. Even the foreclosing creditor may not have good information about the property. Furthermore, the debtor frequently will try to obstruct the sale by creating procedural irregularities.
D. Antideficiency Statutes
The prices at foreclosure sales reflect the adverse conditions. As a result, the secured creditor is highly likely to have a deficiency after the sale. The secured creditor pursues this deficiency against the debtor with a deficiency judgment. In many states though, the debtor benefits from an antideficiency statute that prevents the creditor from being unjustly enriched by capping a deficiency judgment at the difference between the debt and the fair market value of the collateral.
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G. Problem Set 4
4.1: I represent a bank foreclosing on a piece of property. The debt is $53,232, but the house is worth $40-45,000. My state doesnt allow deficiency judgments. a) If the bank is the only bidder, what should I advise them to bid? Moll says bid the full amount of the debt. There is no incentive to bid low because the bank cannot get a deficiency judgment. CB can credit bid the full amount it is owed so it has nothing to lose. This creates a high redemption price. Why do we want to do this? This will prevent a lawsuit for inadequate price because the debtor cannot argue for an unfair sale. Per the Armstrong case, value is adequate as long as it is 40% of the collaterals value. A judicial sale only gets overturned if it shocks the conscience. Additionally, (Depends on State) CB wants to set the price high if debtor has a statutory right to redeem. Debtor has a common law right to redeem before the sale if the debtor can come up with amount of debt plus interest. But, the common law right ends with the sale. Some states allow a statutory right of redemption after the sale. It gives the debtor a period of time to redeem by paying the amount of the purchase price at the foreclosure
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V.
Sales under Article 9 serve essentially the same purpose as judicial sales. They determine the value of the collateral and convert that value into cash. If the debtor has equity in the collateral, the secured creditor deducts the amount owed from the proceeds of the sale and sends the remainder to the debtor.
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Class notes Article 9 sales bring higher prices than judicial sales for the reason previously cited. Judical foreclosure is possible for Article 9 secured creditor.
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To: ___ [Name of debtor, obligor, or other person to which the notification is sent] From: ___ [Name, address, and telephone number of secured party] Name of Debtor(s): ___ [Include only if debtor(s) are not an addressee] [For a public disposition:] We will sell [or lease or license, as applicable] the ___ [describe collateral] [to the highest qualified bidder] in public as follows: Day and Date: ___ Time: ___ Place: ___ [For a private disposition:] We will sell [or lease or license, as applicable] the ___ [describe collateral] privately sometime after ___ [day and date]. You are entitled to an accounting of the unpaid indebtedness secured by the property that we intend to sell [or lease or license, as applicable] [for a charge of $ ___]. You may request an accounting by calling us at ___ [telephone number] 9-614. CONTENTS AND FORM OF NOTIFICATION BEFORE DISPOSITION OF COLLATERAL: CONSUMER-GOODS TRANSACTION In a consumer-goods transaction, the following rules apply: (1) A notification of disposition must provide the following information: (A) the information specified in Section 9-613(1); (B) a description of any liability for a deficiency of the person to which the notification is sent; (C) a telephone number from which the amount that must be paid to the secured party to redeem the collateral under Section 9-623 is available; and (D) a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available. (2) A particular phrasing of the notification is not required. (3) The following form of notification, when completed, provides sufficient information: ___ [Name and address of secured party] ___ [Date] NOTICE OF OUR PLAN TO SELL PROPERTY ___ [Name and address of any obligor who is also a debtor] Subject: ___ [Identification of Transaction]
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E. Problem Set 5
5.1: Bank repod Maxwells silver Mercedes and sent him notification that bank would sell it in a private sale after ten days from this notice. The balance owing on the loan, including principal, interest, attorneys fees, and expenses of sale is $10,000. a) If the fair market value of the car is $8,000, but it sells for $7,000 in a commercially reasonable sale. What is the proper deficiency award? $3000 per UCC 9-626 Section 9-626 says dont include consumer transactions. 9-102 (a)(26) defines consumer transactions stating it is an obligation incurred primarily for personal, family or household purposes. This is a consumer transaction so 9626(a) does not apply. 9-626(b) applies because court has discretion.
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VI.
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F. Problem Set 6
6.1 Upon filing of a petition, an automatic stay is placed on the debtors assets. 11 U.S.C. 362(a). Violations of the stay may result in damages; attorneys fees; or punitive damages. Unsecured creditors can file a claim. 6.2 The automatic stay prevents any repossession. 11 U.S.C. 362(a)(2). The stay stops secured creditors too. 6.3 The automatic stay prevents foreclosure actions also. 11 U.S.C. 362(a)(4), (a)(6). But, secured creditors can lift the stay under 362(d) for cause if 1. lack of adequate protection or 2. no equity and not necessary for reorganization. Adequate protection prevents loss caused by delay in foreclosure caused by the stay. 6.5 You still cannot foreclose because of the automatic stay. 362(a). However, you can attempt to have the stay lifted under 362(d). The debtor is attempting to reorganize. Under 362(d)(2), the stay is lifted for cause if there is no equity and the collateral is not necessary for reorganization. The debtor has equity and the collateral is necessary for reorganization. Under 362(d)(1), the stay is lifted for cause if there is a lack of adequate protection to prevent loss cause by delay in foreclosure caused by the stay. The collateral is not insured. Lack of insurance is an event of default. Insurance cannot be obtained. The collateral may lack adequate protection. 6.6. a. Debtor is protected by the automatic stay. Creditors must cease collection efforts. Unsecured creditor cannot lift the stay for any reason. Unsecured creditor may file a proof of claim and get in line. b. Debtor is protected by the automatic stay. Creditors must cease collection efforts. Secured creditors may lift the stay for cause. Although debtor does not have any equity in the collateral, the collateral is necessary for reorganization. This prevents lifting the 42 of 136
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J. Problem Set 7
7.1 How do you determine the allowed amount of an unsecured claim in bankruptcy? The allowed unsecured claim is calculated as follows Allowed Claim = Principal + Prepetition Interest + Prepetition Fees (if allowed) = $30,000 + (($30,000 * 18%)*0.5) + 0 = $30,000 + $2,700 + 0 = $32,700 No prepetition fees are allowed because the contract does not address. U.C.C. 9-615(a) (1). 7.2 How are funds distributed to general unsecured creditors? Funds are distributed to general unsecured creditors on a pro rata basis. Recovery = (Allowed Claim/Total Claims) * Funds Available = ($32,700/$1,191,500) * $59,575 = $1,635 7.3 (a) How do you determine the allowed amount of a secured claim in bankruptcy? The allowed secured claim is calculated as follows: Allowed Claim = Principal + Prepetition Interest + Prepetition Fees (if allowed) = $340,000 + (($340,00 * 12%)*0.5) + 0 = $340,000 + $20,400 + 0
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Secured Financing Prof. MollSpring 2007 B. Formalities for Article 9 Security Interests
9-203. ATTACHMENT AND ENFORCEABILITY OF SECURITY INTEREST; PROCEEDS; SUPPORTING OBLIGATIONS; FORMAL REQUISITES (a) [Attachment.] A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. (b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; (B) the collateral is not a certificated security and is in the possession of the secured party under Section 9-313 pursuant to the debtor's security agreement; (C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 8-301 pursuant to the debtor's security agreement; or (D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 9-104, 9-105, 9-106, or 9-107 pursuant to the debtor's security agreement. (c) [Other UCC provisions.] Subsection (b) is subject to Section 4-210 on the security interest of a collecting bank, Section 5-118 on the security interest of a letter-of-credit issuer or nominated person, Section 9-110 on a security interest arising under Article 2 or 2A, and Section 9-206 on security interests in investment property. U.C.C. 9-203(b) lists three formalities required for the creation of a security interest enforceable against the debtor: (1) either the collateral must be in the possession of the secured creditor or the debtor must have authenticated a security agreement which contains a description of the collateral; (2) value must have been given; (3) the debtor must have rights in the collateral. Only when all three of these requirements have been met does the security interest attach to the collateral and become enforceable against the debtor. Class notes Attachment occurs only once all three requirements have been satisfied. These requirements may be satisfied in any order. Attachment establishes the security interest, makes the creditor a secured creditor and gives the creditor rights in the collateral.
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Secured Financing Prof. MollSpring 2007 C. Formalities for Real Estate Mortgages
The formalities of real estate mortgages vary from state to state. Most states require that the mortgage be in writing and signed by the debtor in the presence of witnesses. Strict compliance with the formalities is necessary.
D. Problem Set 8
8.1 Examine each of the three documents to see if they create a security agreement Promissory note o No description of the collateral o Authentication o No magic language, but intent is manifested Financing statement o Description of the collateral o No authentication o No intent from the document Lawyers letter o Possible authentication through agency theory o Description of the collateral o Intent The composite document rule may allow the court to objectively determine if there is a security interest and there was intent to create a security interest. But, the composite document rule is not universally recognized. 8.2 The security interest attaches when the requirements of U.C.C. 9-203(b) have been satisfied. Three requirements must be satisfied value has been givenloan proceeds and promise to repay debtor has rights in the collateraldebtor owns the collateral the collateral has been identifiedsigned security agreement identifying the collateral Upon the completion of the last of these items, the security interest attached to the collateral. 8.3 (a) Is there a security interest? Three requirements must be satisfied value has been givenloan proceeds and promise to repay debtor has rights in the collateraldebtor owns the collateral the collateral has been identified--?? No security interest attaches. (b) If list is later stapled to the agreement, does the security interest attach?
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IX.
A security agreement gives the creditor the right to apply the value of the collateral to the debt. In order to be enforceable, the security agreement must describe the collateral and describe the obligations secured. If the descriptions are insufficient, then the creditor may not have a security interest.
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F. Problem Set 9
9.1 a. 9-203(b)(3)(A) requires a description. 9-108(a) gives the standard, reasonably identifies what is described. Here we also have a problem with after-acquired property.
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X.
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C. Non-Value-Tracing Concepts
Creditors also may take other security interests that are not related to value-tracing. These non-value-tracing concepts track property that does not derive any of its value from preceding collateral. Such concepts as after-acquired property, replacements, 60 of 136
D. Problem Set 10
10.1 Proceeds always are included as collateral. 9-203(f). Other things such as products, offspring, substitutions, additions or replacements are not included automatically. The creditor may reach the collateral in two ways squeeze the new collateral into the collateral described in the security agreement; or argue that the new collateral is proceeds of the collateral described in the security agreement. 10.2 Description a. Money b. Parrot c. New computer d. Myna bird No No No, after-acquired No Proceeds Yes Yes, form doesnt matter Maybe, where did the money come from? Yes, if from accounts.
10.3 Race horse winnings: products nope profits not likely because profits generally applies to extractive minerals; plus after acquired property problem proceeds analogize to depreciation, but horse was not disposed of 10.4 Proceeds always are included in any security agreement. 9-203(f). If the value of the inventory can be traced, then accounts and many other things may be encumbered. 10.5 a. Proceeds always are included in any security agreement. 9-203(f). Claims arising from the loss of the collateral are considered to be proceeds. 9-102(a)(64)(D). The claim is the collateral. b. Proceeds includes to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. 9-102(a)(64)(E). c. This is a commingling problem. We must trace the proceeds using the lowest intermediate balance rule. 9-315(b)(2). Debits Credits Balance Opening Balance 5,000 Insurance Proceeds 35,000 45,000
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XI.
A debtor may continue to transform his property after the debtor is in bankruptcy. These changes may result in increases or decreases in the categories of property originally described in the security agreement.
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C. Problem Set 11
XII. The Legal Limits on What May Be Collateral XIII. Default, Acceleration, and Cure Under State Law
A. Default
A debtor defaults on a loan by either doing something that he should not have done or failing to do something that he should have done. Security agreements define the events of default that will result in the debt being accelerated. A typical list of events of default might include the following; debtor fails to pay any obligation to the creditor when due; debtor breaches any warranty or provision of any agreement with the creditor; debtor dies, becomes insolvent or ceases to do business; collateral is lost or destroyed; debtor files for bankruptcy or an involuntary petition is filed; creditor believes in good faith that ability for repayment is impaired; any guarantor defaults in any obligation to the creditor
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3. Lines of Credit
With a line of credit, the creditor contracts to lend up to a specific amount of money up to the credit limit to the debtor during a period of time. The debtor then borrows against the line of credit as necessary.
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F. Problem Set 13
XIV. Default, Acceleration, and Cure Under Bankruptcy Law XV. The Prototypical Secured Transaction
A. The Parties
The prototypical secured transaction occurs between a lender and a borrower. A lender may loan money for a variety of reasons including floorplanning, the purchase of the inventory that is on the dealers showroom floor. The borrower typically is a business that has a timing problem with money.
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2. The Buy
When the borrower wants to use the funds, the lender, supplier and borrower exchange information to make sure that all parties agree to the transaction.
G. Problem Set 15
15.1 Fraud is possible.
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B. What Is Priority?
Collateral may have more than one lien. The lien with higher priority is referred to as the senior lien. The other lien is referred to as the subordinate lien. Creditors may agree contractually to subordinate their debt. Creditors with a security interest have priority over unsecured creditors. Creditors who have perfected their security interests get priority over creditors who have not perfected their security interests. Among creditors who have perfected their security interests, first in time is first in rights. 68 of 136
G. Problem Set 16
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1. Financing Statements
Financing statements are entered into the filing system in different ways in different states. Although states originally kept the paper records, technology has moved financing statements onto other media such as microfilm, microfiche or computer images.
2. The Index
Every financing statement is assigned a unique number, usually referred to as the file number. To find a financing statement, the searcher must have the file number. However, most people only have either a description of the collateral or the debtors name. Descriptions of collateral most frequently are useful with tracts of land or motor vehicles because the collateral has a stable identity. For other types of collateral, the debtors name is the only stable element. Indices are needed to crossreference the debtors name or collateral with the file numbers.
3. Search Systems
Computer systems enable the filing system to be searched effectively using the indices. The computer systems search logic determines the effectiveness of any search. Misspellings, alternate spellings or abbreviations compound the problems of doing an effective search of the filing system. Delays between the time that the financing statement is recorded and the time that the financing statement is indexed also introduce errors. Class Notes 9-519(h) gives the filing office two days to update their records. If the filing office takes more than two days, it suffers no penalties. 9-524. Moreover, if the filing office screws up, that doesnt affect the validity of the filing and the filing office will not be held liable. 9-517.
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1. Individual Names
The legally correct name for an individual is the name by which the person is generally known. The situation is complicated by the fact that a person may change their name by filing court papers, marrying or divorcing. As a result, the correct name for an individual is an elusive concept. Furthermore, more than one person may have the same name. Some courts have required that a financing statement contain the full legal name of an individual by analogizing with the U.C.C.s treatment of tradenames. Case In re Kinderknecht (p. 296) Financing statements
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2. Corporate Names
The exact full legal name of a corporation can be found on the articles of incorporation filed with secretary of state of the state of incorporation. Also, no state permits the formation of two corporations with the same name. Corporate names must be unique within a state. However, two corporations can have the same name if they are incorporated in different states.
3. Partnership Names
A limited partnership also must file paperwork with the state and be issued a certificate. A general partnership does not need to register. The legal name of a general partnership is the name by which it is generally known in the community.
4. Trade Names
9-503. NAME OF DEBTOR AND SECURED PARTY (b) [Additional debtor-related information.] A financing statement that provides the name of the debtor in accordance with subsection (a) is not rendered ineffective by the absence of: (1) a trade name or other name of the debtor; or (2) unless required under subsection (a)(4)(B), names of partners, members, associates, or other persons comprising the debtor. (c) [Debtor's trade name insufficient.] A financing statement that provides only the debtor's trade name does not sufficiently provide the name of the debtor. A trade name is not a legal name. The user of a trade name may or may not register the trade name with the state. As a result, the use of a trade name on a financing statement does not identify the debtor.
D. Problem Set 17
17.1 First, what type of entity is it? Resolution of this question will determine what name to search under. Several ways exist to determine the type of entity including the following: ask the debtor; search public records. If the entity is a general partnership, then search should be done for the name of the partnershipMcErny Leasing. If the entity is a sole proprietorship, then McErny Leasing is a trade name. A financing statement filed under a trade name is ineffective per 9-503(b)-(c). The financing statement must be filed under the full legal name of the ownerRobert Joseph McErny. After filing, an official search under the full legal name will determine if any other liens are valid even if filed under a different name because they are not seriously misleading. 17.2 (a) Susan Alexander (b) John Phillip Smith (c) Same discussion as for 17.1 and sole proprietorships on p. 300. 17.3 By the definition, all 112 financing statements are not seriously misleading. So, all 112 financing statements must be checked. Each states official search logic is unique. Do not rely upon unofficial searches. 17.6 (a) First, file the financing statement. Second, search the index three business days later. If the secretary of state is in compliance, then the financing statement should appear in the record. You will be ready in plenty of time. (b) First, file the financing statement. Second, run an expedited search on the index at two weeks plus one day. You still will be ready, but with less margin for error. A financing statement can be filed before the security agreement is signed. The significance of a financing statement only is to give notice of a need for further investigation. The debtors signature on the security agreement gives the creditor a security interest.
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XVIII.
A. Introduction
Although electronic filing is permitted in some states, financing statements typically are written documents prepared on pre-printed forms. The U.C.C. provides a standard form, but a creditor may devise its own form as long as the form contains the required information. To comply with all of the U.C.C.s requirements, the form must contain the following: name of the debtor; name of the secured creditor; description of the collateral covered; mailing address of the debtor; mailing address of the secured creditor; indication of whether the debtor is an individual or an organization; and for organizations o the type of organization; o debtors jurisdiction of organization; and o debtors organization identification number. If the form does not contain all of the required information, the filing office will reject the form and the security interest will not be perfected. The filing office does not check the information for accuracy.
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2. Required Information
9-502. CONTENTS OF FINANCING STATEMENT; RECORD OF MORTGAGE AS FINANCING STATEMENT; TIME OF FILING FINANCING STATEMENT (a) [Sufficiency of financing statement.] Subject to subsection (b), a financing statement is sufficient only if it: (1) provides the name of the debtor; (2) provides the name of the secured party or a representative of the secured party; and (3) indicates the collateral covered by the financing statement. .... The three elements required for effectiveness of a filing include name of the debtor; name of the secured creditor; and description of the collateral covered. A financing statement containing correct information on all three of these elements will be effective. An incorrect name of the secured creditor prevents a searcher from obtaining termination statements and prevents a searcher from verifying information with the secured creditor. An incorrect description fails to put searchers on notice. The standards for description are different for security agreements and financing statements. In a financing statement a secured creditor may employ super-generic terms.
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E. U.C.C. Insurance
The consequences of U.C.C. filing problems can be severe. As a result, U.C.C. insurance has been developed to mitigate the risks. U.C.C. insurance is analogous to title insurance. The critical difference is that U.C.C. insurance does not protect against the possibility that the debtor does not own the collateral. Class Notes There are two questions that need to be answered with respect to a financing statement: 1. Should the financing statement be rejected? 2. Is the financing statement effective? To determine if a financing statement should be rejected, you first go to section 520(a). If all of the boxes from section 516(b) are filled in, then the financing statement should be accepted. The filing office does not evaluate the information for correctness.
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F. Problem Set 18
18.1 (a) A financing statement with missing information should be rejected; a financing statement with incorrect information should be accepted. The secured party may amend the financing statement later. Additionally, even if the secured party does not correct the financing statement, the secured party only will lose ground per section 338. (b) If the filing office wrongly rejects the financing statement, then what? The financing statement is of limited value. Any purchaser, as defined in section 1201(b)(30), who has done a search has priority over the secured party with the wrongly rejected financing statement. However, the secured party with the wrongly rejected financing statement has priority over involuntary liens (statutory, judicial, bankruptcy trustee). You are not perfected. (c) If the financing statement is accepted with incorrect information from section 516(b) (5), then the financing statement is effective. However, the financing statement is subject to the limitations of section 9-338. 18.2 (a) The F/S is missing the secured partys address. The F/S should have been rejected per section 9-520(a) because the F/S was missing information from section 9-516(b)(4). But, is the F/S effective? Yes, look to section 9520(c). The F/S contains the information in section 9-502(a). The incorrect information is referenced in section 9-516(b)(4). So the effectiveness is not limited by section 9-338. (b) The F/S contains an incorrect debtor mailing address. The F/S should not have been rejected per section 9-520(a) because the filing office is not supposed to evaluate the F/S for the correctness of the information and some information was present in all of the section 9-516(b) fields. But, is the F/S effective? Yes, look to section 9-520(c). The F/S contains the information in section 9-502(a). The incorrect information is referenced in section 9-516(b)(5)(A). So, the effective is limited by section 9-338 with respect to purchasers and other voluntary liens. (c) The F/S contains an incorrect secured partys name. The F/S should not have been rejected per section 9-520(a) because the filing office is not supposed to evaluate the F/S for the correctness of the information and some information was present in all of the section 9-516(b) fields. But, is the F/S effective? Yes, look to section 9-520(c). The F/S contains incorrect information for field in section 9-502(a)(2).
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2. What Is Possession?
Two factors determine if a party has possession: 1. physical control 2. legal right. Someone has possession of an object only if they have the legal right to exercise physical control over the object. A party that only has physical control has naked possession.
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2. Consumer Goods
9-102. DEFINITIONS AND INDEX OF DEFINITIONS (a) [Article 9 definitions.] In this article: .... (23) "Consumer goods" means goods that are used or bought for use primarily for personal, family, or household purposes. .... The PMSI security interest only is perfected automatically in consumer goods. Case Gallatin Natl Bank v. Lockovich (p. 328) Exceptions to the Article 9 filing requirement Operation of law PMSI in consumer goods
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XX. The Land and Fixtures Recording Systems XXI. Characterizing Collateral for the Purpose of Perfection
A. Determining the Proper Place of Filing
1. Personal Property Distinguished from Real Property 2. Inventory Distinguished from Equipment
2. True Leases Distinguished from Leases intended as Security 3. Realty Paper 4. Chattel paper and Instruments Distinguished from Accounts
D. Problem Set 21
Accounts Certificate of title goods Automatic 9-309 Filing 9-310, 9-312 Cert. of Title 9-311 Possession 9-313 Control 9-314
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N/A N/A
N/A
D. Problem Set 22
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1. Barter Transactions
A debtor may execute a non-cash exchange of the collateral for some new item. This barter transaction invokes different rules depending upon the relationship between the former collateral and the new collateral. A type 0 exchange is one where the new collateral is covered by the existing financing statement. In this case, the creditor remains perfected. Furthermore, the security interest attaches to the new collateral as proceeds of the old collateral. A type 1 exchange is one where the new collateral is not described by the existing financing statement, but a new financing statement would be filed at the same office. In this case, the security interest attaches to the new collateral as proceeds and the security interest is perfected in the new collateral despite the lack of description. A type 2 exchange is one where the new collateral is not described by the existing financing statement and the security interest in the new collateral would be perfected in a different location or method. Because a searcher would have no indication of the perfected security interest, the perfection in the proceeds will lapse unless the security interest in the new collateral is perfected as required. A creditor does not need to get a new authorization in order to perfect in the new collateral under section 9-509(b)(2). Case Natl Bank of Alaska v. Erickson (p. 390) Changes of Name, Identity and Use Exchange of collateral Type 2 - barter transaction Need to perfect
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D. Problem Set 23
23.1 Client has loaned money to borrower. a. Client has changed the use of the collateral. Item has changed from inventory to equipment. The definition of consumer goods is not met because the goods are owned by the company. Inventory is perfected by filing; equipment is perfected by filing. No problem per 9-507(b) c. Change in collateral. Item has changed from inventory to equipment through barter. The new equipment is identifiable proceeds. So a security interest attaches to the new equipment per 9-315(a) (2). But, is it perfected? Under 9-315(c), the security interest in the new equipment is perfected. However, the perfection expires in 21 days unless the conditions of 9-315(d) are met. Under 9-315(d)(1), the perfection continues because a filed financing statement covers the original collateral; the proceeds are not acquired with cash proceeds; and, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed. d. Change in collateral to cash to new collateral. Collateral has changed form twice. The collateral became cash and then the collateral became equipment. So, a security interest attaches to the cash per 9-315(a)(2). Under 9-315(c), the security interest in the cash is perfected. However, the perfection expires in 21 days unless the conditions of 9-315(d) are met. Under 9-315(d)(2), the perfection continues because the proceeds are identifiable cash proceeds. Under 9315(a)(2), a security interest attaches to the new equipment because the new equipment is identifiable proceeds. Under 9-315(c), the security interest in the new equipment is perfected. However, the perfection expires in 21 days unless the conditions of 9-315(d) are met. Perfection is not automatic under 9-315(d)(1) or (2). New financing statement must be filed. Authority to file the new financing statement comes from 9-509(b)(2). 23.2 Debtor changes corporate name from South West Appliance Corporation to South West General, Inc. six months ago. Does lender need to do anything to remain perfected? The threshold question is Is the new name seriously misleading? The lender resolves this by doing a search under the debtors new name. If the old name shows up, then the
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B. Initial Perfection
1. At the Location of the Debtor
The correct state to file a financing statement is the location of the debtor. The location of the debtor is determined from section 9-307. For an individual, the correct state is the state containing the debtors principal residence. For a registered organization, the correct state is the state of registration. For an unregistered organization, the correct state is the location of the chief executive office. The chief executive office is located in the place from which it is managed.
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E. Problem Set 24
24.1 Client makes $250,000 loan to William Shatner. The collateral is the equipment, accounts and inventory of Shatner Engineering in AZ. Shatner is the sole owner. Exwife runs the business and gets salary and share of profits. Shatner is the decider. Shatner lives in KS and works in MO. He may move to MO. He sometimes lives in AZ. He plans to move to HI in a couple of years. a. Where do you file? From the problem, WS is the obligor per 9-102(a)(59). But, is WS the debtor per 9102(a)(28)? Debtor has an interest, other than a SI in the collateral. The collateral is owned by Shatner Engineering. What is Shatner Engineering? SE is not corporation, LLC or LLP because no appropriate indicator. SE could be sole proprietorship of William Shatner or SE could be general partnership because ex-wife works in business and gets a share of the profits. If SE is a sole proprietorship, then SE normally considered as synonymous with WS. WS is an individual. Under 9-307(b)(1), location of an individual debtor is the individuals 102 of 136
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XXV.Maintaining Perfection in Certificate of Title Systems XXVI. The Concept of Priority: State Law
Priority means that if the value of the collateral is sufficient to pay only one creditor, the law requires that value be used to pay the creditor who has priority. These rules only come into play when there is more than one interest in the property.
A. Priority in Foreclosure
9-615. APPLICATION OF PROCEEDS OF DISPOSITION; LIABILITY FOR DEFICIENCY AND RIGHT TO SURPLUS (a) [Application of proceeds.] A secured party shall apply or pay over for application the cash proceeds of disposition under Section 9-610 in the following order to: (1) the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for by agreement and not prohibited by law, reasonable attorney's fees and legal expenses incurred by the secured party; (2) the satisfaction of obligations secured by the security interest or agricultural lien under which the disposition is made; (3) the satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral if: (A) the secured party receives from the holder of the subordinate security interest or other lien an authenticated demand for proceeds before distribution of the proceeds is completed; and
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D. Problem Set 26
26.1 Client is bidding on property sold at foreclosure sale. Property has three mortgages. The senior lien is for $17,000; the middle lien is for $10,000; and the junior lien is for $29,000. The middle lien holder foreclosed. Client values the property at $25,000. Sale expenses are $200. How much should the client bid? Client should bid $8,000 or $8,200 to cover the expenses. The junior lien will be wiped out in the sale. The property will pass with the senior lien of $17,000 in place. 26.2 Judgment creditor with $8,000 judgment executes on $75,000 car. Car has two prior liens. Senior lien is for $60,000; middle lien is for $30,000; judgment creditor is last in line. Expenses of conducting the sale are $200. What will be the maximum bid? There should be no bid. The sale will not remove either the senior lien of $60,000 or the middle lien of $30,000. No one should take on $90,000 of liens with only a $75,000 car. 26.3 Client is a bank. Client holds a first security interest in equipment owned by HW on a debt for $27,000. Equipment should bring $40,000 at a sheriffs sale. HW is in financial difficulties. Rumor is that a second lien holder is foreclosing on the equipment. a. If this information is correct, should client be concerned? 9-611(c) requires second lien holder to notify Client 9-617(b) allows a good-faith transferee to take collateral free of clients lien even if secured party did not comply with section 9-611(c). 9-625(b) allows recovery for damages caused by noncompliance. Normally, this action is an event of default. Clients lien is senior. Client should advertise its lien. Client should foreclose to protect its interest. Although client could pursue an action for damages, that does not seem like an efficient course of action. b. Can client protect its position by purchasing the equipment at the sale? Yes, but money goes to second lien holder. Clients position is not improved. c. Can client prevent the sale? 9-609(a) right to repossess if debtor defaults.
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26.6 Statute places state property tax liens above all other liens. Client is a first mortgage holder. a. What effect on first mortgage holder? Property sold in foreclosure on property tax lien transfers free of any mortgage. b. If such a foreclosure happens, what can client do to protect itself? Pay the property taxes. c. How can client avoid this problem? Collect the property taxes with the mortgage payment and pay the property taxes directly.
XXVII.
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F. Problem Set 28
28.1 RFT has a $50,000 unsecured obligation with CC. SE has received a $125,000 judgment against CC. RFT is concerned that SE will have priority in CCs assets. What can RFT do? SE is a judgment creditor of CC. SE is not a judgment lien creditor of CC until SE has the sheriff levy a writ of execution on CCs assets. Until the levy, SE has no interest in any of CCs assets. RFT has satisfied two of the three requirements for a SI: value and CC has rights in the collateral. If RFT gets CC to sign a security agreement and files a financing statement before SE levies on CCs assets, RFT will have a security interest with priority over SEs lien. CC may be open to this idea as CCs feelings towards SE probably are negative. Furthermore, RFT then may be able to Grocers Supply SE. 28.2 PG lends $20,000 to MH that is secured with equipment on MHs property. On 3/7, MH signs a F/S, SA and note for PG. On 3/7, PG files the F/S but does not disburse funds. On 3/10, the sheriff levies on the equipment for SP. On 3/11, PG receives back her U.C.C. search showing a first priority on the equipment. a. On 3/11, is PG perfected? Under 9-308(a), a SI is perfected if it has attached and the requirements for perfection have been satisfied. A SI is perfected when it attaches if the perfection requirements are satisfied before the SI attaches. PG has satisfied the filing requirement for perfection of a SI in equipment under 9-310(a). PG has not disbursed 113 of 136
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D. Problem Set 29
29.1 Mortgagor borrows $50,00 secured by real property. Mortgage has a future advances clause for an additional $25,000 but no obligation to lend. Mortgage states interest at 10% and attorneys fees are collectible. J obtains a judgment for $100,000 against debtor. J records a lien on the real property. Mortgagee knows of lien. Mortgagee makes mortgagor an additional $25,000 advance. Mortgagor defaults on the loan owing $75,000 plus $10,000 in interest. Mortgagee incurs $5,000 in attorneys fees. Who has priority in the property? The future advances clause in the mortgage is not a commitment, but under real estate law the future advance clause puts subsequent creditors on notice. Consequently, the mortgagee may make the advance even with knowledge of the lien. The advances, 116 of 136
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XXX. Trustees in Bankruptcy Against Secured Creditors: The Strong Arm Clause XXXI. Trustees in Bankruptcy Against Secured Creditors: Preferences
A. Priority Among Unsecured Creditors
1. Priority Under State Law: A Review
For unsecured creditors, priority was established by perfecting a judgment. The time of that perfection depends upon state law. Alternatively, the unsecured creditor can enlist the help of the debtor, sign a security agreement and file a financing statement.
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1. Generally
Section 547(b) of the bankruptcy code allows the trustee to avoid any preferential transfers that meet the criteria. These criteria work to exclude security interests that were created as part of the initial transaction. Only transfers related to antecedent debts can be avoided. If the transfer is part of a substantially contemporaneous exchange, then the transaction was not related to an antecedent debt. Also, any preferences made while the debtor is solvent cannot be avoided. Under 547(f), the debtor is presumed to be insolvent on and during the 90 days immediately preceding the date of the filing of the petition. Preferences made before the preference period cannot be avoided. Finally, preferences that do not improve the creditors position cannot be avoided. However, section 547(c) provides several classes of otherwise avoidable transactions that cannot be avoided.
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4. Relation-Back Rules
Several relation-back rules are relevant. The major provisions are as follows: 11 U.S.C. 547(e)(2)(A) 9-317(e) Class notes The major exceptions to preference avoidance are as follows: 547(c)(1)contemporaneous exchange 547(c)(3)PMSI 547(c)(5)after acquired accounts and inventory
D. Problem Set 31
31.1 GI files chapter 11 bankruptcy. On 12/30, the case was converted to chapter 7. Can the following transactions be avoided? Under 11 U.S.C. 348(a), conversion of a case from a case under one chapter to case under another chapter does not effect a change in the date of the filing of the petition. GIs date of the filing of the petition remains the date that GI filed a petition for chapter 11 bankruptcy. Under 11 U.S.C. 348(d), a claim against the estate or the debtor that arises after the order for relief but before conversion from chapter 11 to chapter 7 shall be treated as if such claim had arisen immediately before the date of the filing of the petition. All claims against GI that arise between the filing of chapter 11 and conversion to chapter 7 are treated as if such claim had arisen immediately before the date of the filing of the petition, which is the date that GI filed a petition for chapter 11 bankruptcy. a. On 8/15, GI borrowed $300,000 from F. GI executed a note, SA and F/S covering equipment. F filed the F/S on 8/16. Under 11 U.S.C. 547(b), the trustee may avoid any transfer of an interest of the debtor in property (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent;
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Under 9-324(b), a perfected PMSI in inventory can get priority over other types of S/Is in inventory provided that the PMSI holder complies with the requirements of 9324(b)-(c). These requirements include the following: identify conflicting secured parties through a U.C.C. search perfect the PMSI before delivering the goods to the debtor; notify the conflicting secured party before delivering the goods to the debtor; renotify the conflicting secured party every five years; This priority extends to identifiable cash proceeds and chattel paper but it does not extend to accounts under 9-324(b). ELG can get a perfected PMSI in SMs inventory by financing the inventory and thereby get priority over FNB in SMs inventory. If SM sells
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XXXIII. Secured Creditors Against Secured Creditors: Land and Fixtures XXXIV. Competitions Involving Cross-Collateralization and Marshaling Assets XXXV. XXXVI. Sellers Against Secured Creditors Buyers Against Secured Creditors
A. Introduction
The sale of collateral by a debtor may or may not release the security interest of the creditor. Sometimes the buyer may acquire ownership of the property without a lien; other times the creditors lien remains in place. The applicable law reflects the expectations of buyers and sellers.
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D. Problem Set 36
36.1 DDS sold consumer goods to Beavis on credit for $1,925. Beavis signed a note, SA and F/S. DDS filed the F/S and perfected its SI. SA says that Beavis will not sell the consumer goods. Beavis sells the consumer goods to Butthead for $960. Butthead paid with a check. Butthead purchased the consumer goods without knowledge of DDS SI. Can DDS repossess the consumer goods from Butthead? If so, does DDS need to refund Butthead his $960? Under 9-315(a)(1), a SI continues in collateral notwithstanding sale unless the secured party authorized the disposition free of the SI. DDS did not authorize Beavis to dispose of the consumer goods. Under 9-320(a), a BIOCOB takes free of a SI created by the buyers seller, even if the SI is perfected and the buyer knows of its existence. A BIOCOB buys goods in good faith without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person in the business of selling goods of that kind. Butthead is not a BIOCOB because Beavis is not a person in the business of selling consumer goods. Under 9-320(b), a buyer of goods from a person who used or bought goods for use primarily for personal, family or household purposes takes free of a SI, even if perfected, if they buyer buys (1) without knowledge of the SI; (2) for value; (3) primarily for the buyers personal, family, or household purposes; and (4) before the filing of a F/S covering the goods. Butthead bought the consumer goods from Beavis who used the goods as consumer goods without knowledge of DDSs SI, for value, to use as consumer goods, but after DDS filed a F/S covering the consumer goods. DDS still has a perfected SI because Butthead bought the consumer goods after DDS filed a F/S covering the consumer goods. Under 9-609, after default a secured party may take possession of the collateral pursuant to judicial process or without judicial process, if it proceeds without breach of the peace. Beavis committed an event of default by selling the consumer goods. The consumer goods are DDSs collateral. DDS may take possession of the consumer goods. DDS did not receive the $960 from Butthead. So, DDS does not have to refund Butthead the $960. 36.2 UCB has a SI in the inventory of SC. The SA authorized sales in the ordinary course of business, prohibited sales on credit, and required SC deposit all proceeds from the sale of inventory into a deposit account maintained at UCB. UCB perfected the SI.
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