SECURED TRANSACTIONSOUTLINE Code in blue Cases in red SI = Security interest SA = Security Agreement AL = Agricultural Lien FS = Financing Statement ***CREDITORS

REMEDIES UNDER STATE LAW*** General Stuff Article 9 governs secured transactions. Definitions are usually found in 9 !"!# !"$# or ! !"! and !"$. %&y &ave secured transactions''' (olicy reasons) a. %ays for a ban* to ma*e money bac* if debtors don+t ,ay bac* loans) !. Sue and get a -udgment. $. Increase interest rates. b. Secured transactions e.ist to *ee, interest rates do/n. 0&ey do t&is by ma*ing sure t&ere is collateral. c. Secured credit la/ also ma*es a c&ea,er /ay of getting t&at collateral 1i.e.# allo/s a ban* to get a/ay /it& !!2 on loans instead of !324. 5a*es it c&ea,er to lend# &el,s t&e economy gro/. d. 5a*es sure t&at t&e ,eo,le /&o borro/ t&e money are t&e ones ,aying it bac*# and t&e loss is not distributed to t&ose /&o are ,aying. Secured loan mortgage# car loan# inventory loan 6nsecured loan 7 student loan# credit cards Difference bet/een t&e t/o) t&e secured loan attac&es to somet&ing Secured status usually comes from a contract# can come from a lien# or -udicial order A security interest is a relations&i, bet/een a debt and some sort of ,ro,erty t&at serve as collateral. Can force t&e sale of t&e collateral and &ave t&e ,roceeds a,,lied to t&at debt. (riority 7 t&e rig&t to be ,aid from t&e value of t&e collateral u, to t&e full amount of t&e debt in ,reference to t&e com,eting debt. Security agreement 7 basically a contract bet/een t&e debtor and t&e creditor. 9 !"#$ %enera& 'a&i(ity )* Security Agreement. 1a4 8.ce,t as ot&er/ise ,rovided by t&is Act a security agreement is effective according to its terms bet/een t&e ,arties# against ,urc&asers of t&e collateral and against creditors. 9ot&ing in t&is Article validates any c&arge or ,ractice illegal under any statute or regulation t&ereunder governing usury# small loans# retail installment sales# or t&e li*e# or e.tends t&e a,,lication of any suc& statute or regulation to any transaction not ot&er/ise sub-ect t&ereto. a. Creditors+ :emedies of 6nsecured Creditors 6nder State La/ 1Assignment !4) %&o is an unsecured creditor' !. Anyone o/ed a legal obligation t&at can be reduced to a money -udgment is a creditor of t&e ,arty o/ing t&e obligation. i.e.# com,any /it& a valid ,atent infringement claim# t&e consumer /it& a defective ,roduct still covered by a /arranty# and t&e c&ild /&o is t&e beneficiary of a non custodial ,arent+s court im,osed su,,ort obligation. $. 5ost debtor creditor relations&i,s are entered into voluntarily. ;. 6nless a creditor contracts /it& t&e debtor for secured status or is granted it by statute# t&e creditor /ill be unsecure(. 6nsecured creditors are t&e general creditors or ordinary creditors. <. If t&e unsecured creditor &as already obtained a court -udgment to establis& liability# t&e creditor is a -udgment creditor# but t&e mere grant of -udgment ()es n)t alter t&e creditor+s unsecured status. =o/ do unsecured creditors com,el ,ayment' :emedies) 0&e la/ ,rovides ,rocedures for t&e collection of unsecured debts and regulates or bars many alternatives. Self &el, sei>ure of t&e debtor+s ,ro,erty is (:?=I@I08D. !. Demand re,ayment $. Civil litigation ;. 5oney -udgment <. If t&e creditor &as t&e rig&t to demand ,ayment from t&e debtor# and does so in an unreasonable manner# it may incur liability for /rongful collection ,ractices.

II.

b.

Conversion 0&e /rongful e.ercise of dominion and control over anot&er+s ,ro,erty in denial of or inconsistent /it& &is rig&ts. Larceny 0&e unaut&ori>ed ta*ing and removal of t&e (ersonal (ro,erty of anot&er by an individual /&o intends to ,ermanently de,rive t&e o/ner of itA a crime against t&e rig&t of ,ossession. 1non violent t&eft4

Vitale v. Hotel California S&eriff and bodyguards case. ( sued D and got a -udgment. ( t&en &as to get t&e s&eriff to e.ecute t&e /rit. S&eriff /ent to bar to try to e.ecute but /as turned a/ay by bouncer. Debtor /as t&e cor,oration =otel California. 0&ey /ere renting t&e ,lace and furniture /&ere t&e bar /as# so s&eriff couldn+t ta*e t&e ,ro,erty. S&eriff finally gets in and levies BC!< from D+s registers. Issue) %&et&er multi,le levies can be e.ecuted under t&e same /rit and is t&e reDuest to levy several times under one /rit unreasonable' 5ulti,le levies are ,ossible until t&e return date# and as long as early levies are not returned. 5ulti,le levies are only unreasonable after no more assets could ,ossibly be levied. After t&e first /rit is satisfied# ( must file for an alias /rit if &e /ants more. 8.em,tions to levies) 6nder state la/# some t&ings are e.em,t See t&e %isconsin statutes in t&e boo* on ,age !3. E. Writ )* garnis+ment is anot&er ,ossible levy. 0&is /ould reDuire t&e ;rd ,arty to ,ay t&e -udgment creditor rat&er t&an t&e debtor if ;rd ,arty is in ,ossessions of ,ro,erty of t&e debtor or o/es money to t&e debtor. c. Limitations on com,elling ,ayment) !. ?btaining information about t&e debtor+s assets t&roug& discovery can ta*e a long time. Fou also &ave to as* t&e rig&t Duestions $. 0&e creditor must establis& t&e -udgment in t&e destination state before invo*ing t&e enforcement ,rocedures of t&at state. ;. (reference It is not fraudulent for a debtor to ,ay one of its creditors# even if t&e effect is to leave not&ing for ot&ers# so long as t&e debtor does not ma*e t&e ,ayment for t&e ,ur,ose of defrauding t&e ot&ers. <. 8.em,tion statutes can be an im,ediment to t&e collection of -udgment debt. 0&ese statutes ,revent t&e s&eriff from sei>ing certain ,ro,erty under a /rit of e.ecution. 5eant to ensure t&at t&e debtor is not left destitute. 3. Courts can order t&ose sub-ect to t&eir -urisdiction to meet t&eir legal obligations and im,rison t&em if t&ey refuse to com,ly. 0&is does 9?0 include -udgments for ,ersonal in-uries# t&e /ages of /or*ing ,eo,le# or t&e breac&es of most *inds of contracts. E. 0&e availability of effective remedies to enforce ,articular rig&ts reflects to some degree t&e relative values society ,laces on t&ose rig&ts. III. Security and Foreclosure 1Assignment $4 a. 9ature of Security !. 5ore effective set of collection rig&ts is *no/n as a lien) A c&arge against or an interest in ,ro,erty to secure ,ayment of a debt or ,erformance of an obligation. If t&e debt is not ,aid /&en due# t&e creditor can com,el t&e a,,lication of t&e value of t&e collateral to ,ayment of t&e debt. 0&e creditor does t&is by foreclosure. b. M)st c)mm)n *)rm )* &ien is SECURIT, INTEREST. 0&ere are also ot&er liens 1nonconsensual liens4) Liens granted by statute 1statut)ry &iens4 and liens obtained by unsecured creditors t&roug& -udicial ,rocess 1-u(icia& &iens4. !. Any lien created by contract bet/een debtor and creditor. $. Can create a security interest /it&out intent. 9 #"9.a/.#/$ Sc)0e$ G0H&is article a,,lies to a transaction# regardless of its form# t&at creates a security interest in ,ersonal ,ro,erty or fi.tures by contract. c. 'irtua&&y anyt+ing rec)gni1e( as 0r)0erty can serve as collateral. 6sefulness of certain ,ro,erty as collateral de,ends on) !. 0&e value of t&e ,ro,erty. $. 0&e leverage t&e creditor can derive from t&e ability to de,rive debtor of t&at ,ro,erty. 3.

0&e rig&ts of t&e &older of a SI are rig&ts t&at ta*e effect u,on default. So a SI is a 1rig+t in 0r)0erty/ t+at is .c)ntingent )n n)n0ayment/ .)* a (e2t/ . e. %&y /ould someone ever be an unsecured creditor since secured creditors get ,reference' !. Can c&arge &ig&er interest rates in e.c&ange. $. Some don+t c&oose to be unsecured. ;. @usiness custom. f. In real estate la/# no matter if t&e ,arties intend to create a security interest# t&e la/ /ill recast it as a security interest. ALL A3OUT SU3STANCE4 NOT 5ORM. g. 8Duity of :edem,tion) 6ntil t&e eDuity is foreclosed# t&e debtor &as t&e rig&t to get t&e ,ro,erty by ,erforming t&e obligation. Basile v. Erhal Holding Company 1,g. $C4 !. In !9I$# ( mortgaged &is ,ro,erty to D. ( instituted action to find mortgage null and void based on usury. ( argued t&at D didn+t foreclose &er eDuity of redem,tion. ( defaulted on loan and fire insurance. $. RULE) A deed conveying real ,ro,erty# alt&oug& absolute on its face# /ill be considered to be a mortgage /&en t&e instrument is e.ecuted as a security for a debt. ;. E6uity )* Re(em0ti)n) It is inse,arably connected /it& mortgage# and cannot be /aived or abandoned by any sti,ulation of t&e ,arties made at t&e time# even if embodied in t&e mortgage. General rule is t&at if t&ere is an eDuity of redem,tion# you need to foreclose# unless t&ere is an immediate deed in lieu of default. &. JIntended as securityK doctrine 9 !"91a41!4 ,rovides t&at Article 9 a,,lies to any transaction regar(&ess of its form t&at creates a security interest in ,ersonal ,ro,erty. !. Conditional Sale 7 6CC $ <"!1!4 7 any retention or reservation by t&e seller of t&e title 1,ro,erty4 in goods s&i,,ed or delivered to t&e buyer is limited ineffect to a reservation of a security interest. :esult) t&e buyer becomes t&e o/n of t&e goods and t&e seller becomes t&e secured ccreditor for t&e ,rice of t&e goods. $. Leases Intended as Security Interests 7 If t&e term of t&e lease e.tends for t&e entire remaining economic life of t&e collateral# t&e economic effect of t&e lease on t&e ,arties may be identical to t&e economic effect of a sale /it& a security interest bac* for t&e ,urc&ase ,rice. A sale# combined /it& a security interest securing ,ayment of t&e ,urc&ase ,rice# &as ,recisely t&e same economic im,act on t&e ,arties as a lease for t&e entire economic life of t&e ,ro,erty. ;. Sales of Accounts 7 Art. 9 a,,lies to sale of accounts as /ell as a security interest in accounts Accounts ,ayableL Accounts receivable factoring) sell t&e accounts ate discount Loan) borro/ from a ban* /it& t&e accounts as collateral Issue) recourse Accounts money t&at+s o/ed Account debtor <. Asset Securiti>ation 7 to divide o/ners&i, of an assets value into large numbers of identical s&ares. Can be /it& or /it&out recourse. i. Foreclosure ,rocedure !. 6CC Foreclosure by Sale 7 (ersonal ,ro,erty 5ig&t be fasterLeasier on t&e creditor 1redem,tion rig&t may be gone for t&e debtor4 M 9 E!"1a4 after default# t&e secured ,arty may sell# lease# license# or ot&er/ise dis,ose of any or all of t&e collateral. M9 E$; 0&e sale or dis,osition itself forecloses t&e debtor+s rig&t to redeem t&e ,ro,erty. M9 E!C1a4 0&e sle e.tinguis&es t&e creditor+s security interest in t&e collateral and transfers to t&e ,urc&aser all of t&e debtor+s rig&ts in t&e collateral. M9 E"!1a4 If t&e creditor so c&ooses# it may foreclose by any available -udicial ,rocedure. -. %ays to *)rec&)se) i. 7u(icia&) 8veryt&ing (rimarily used for real ,ro,erty. It is court ordered. File a com,laint# ,rove t&e obligation &asn+t been met# ,rove t&e e.istence of t&e security# and as* -udge to foreclose. ii. 8)9er )* Sa&e) A,,oint a ;rd ,arty and give deed to t&em to &old 1often an attorney4 and if debtor ,ays# t&e deed is given to t&e debtor. If t&e debtor fails to fulfill t&e obligation# t&en t&e creditor gets t&e deed to foreclose on it and sell after a certain number of days. If debtor disagrees t&at t&ere is a breec&# go to litigation to determine if t&ere /as a breec& of contract. At t&e moment t&e creditor ta*es ,ossession of t&e deed# it is foreclosed. iii. U.C$C$ Statut)ry) For foreclosure on ,ersonal ,ro,erty. 6se ot&er state means of foreclosure. :e,ossession. 6.C.C. foreclosure is ta*ing ,ossession of t&e collateral and selling it. Creditor can basically foreclose on t&e ,ro,erty immediately /&en breac& occurs. 8Duity of redem,tion is gone. *. Cost of t&e statutory foreclosure) 0a*ing t&e -udicial ,rocess a/ay from t&e debtor.

d.

IN.

:e,ossession of Collateral 1Assignment ;4 gets t&e remedy /it&out foreclosure a. 0&e im,ortance of ,ossession ,ending foreclosure !. 0&e ,arty in ,ossession ,robably /ill ca,ture t&e use value of t&e collateral $. ?nly t&e ,arty in ,ossession may &ave access to t&e ,ro,erty to evaluate it before it is sold ;. 0&e creditor+s gain of ,ossession may interru,t t&e debtor+s use <. @y determining /&o is ,&ysically in ,osition to maintain or destroy t&e collateral# ,ossession may determine /&et&er and &o/ t&e collateral is ,eserved. 3. (ossession ,rovides bargaining leverage. b. 0&e rig&t to ,ossession ,ending foeclosure 7 ,ersonal ,ro,erty M9 E"9 gives t&e secured ,arty t&e rig&t to ta*e ,ossession immediately on default. If debtor resists re,ossession# t&e secured ,arty must obtain a court order for ,ossession 7 re,levin. 6CC tends to favor t&e creditor. Advice to t&e client) resistO c. 0&e Article 9 :ig&t to Self =el, :e,ossession 7 M9 E"9 a creditor /it& an Art. 9 security interest in tangible# ,ersonal ,ro,erty can by,ass t&e courts and t&e s&eriff and do its o/n /or* to reclaim t&eir collateral. 0&e courts generally &old t&at t&e duty to refrain from breac& of t&e ,eace during re,ossession is nondelegable# ma*ing t&e secured creditors liable for t&e conseDuences of illegal re,ossessions by t&eir inde,endent contractors. Advantages) don+t &ave to go t&roug& t&e courtL-udicial ,rocess. M9 E"91$4 gives t&e crditor t&e o,tion of leave JeDui,mentK tem,orarily in t&e ,ossession of t&e debtor but render it unusable. d. 0&e Limits of Self =el,)@reac& of t&e (eace 6CC ,ermits self &el, re,ossession only if t&e secured creditor

Salisbury Livestock Co. v. Colorado Central Cerdit Union Issue) %&et&er t&e entry to re,ossess /as ,rivileged eit&er by t&e self &el, statute or by consent /&en t&e re,ossessors came onto t&e ranc& of a t&ird ,arty not ,rivy to t&e loan agreement to re,osess several ve&icles. :ule) 0&e t/o ,rimary factors considered in ma*ing t&is determination are t&e ,otential for immediate violence and t&e nature of t&e ,remises intruded u,on Analysis) Loo* to M!9I :estatement 1Second of 0orts4 for reasonable analysis) If no confrontation and timing and manner are found resonable 7 t&en ,rivileged. If manner or timin of entry /as unreasonable because it triggered a breac& of t&e ,eace 7 t&en un,rivileged. Conforntation or violence is not necessary to find a breac& of t&e ,eace 7 t&e ,ossibility of immediate violence is sufficient. A tres,ass breac&es t&e ,eace only if certain ty,es of ,remises are invaded# or immediate violence is li*ely. Conclusion) A resonable -ury could find t&at t&is /as not a reasonable entry onto t&e ,remises because of t&e location and setting of t&e entry and t&e ,rivacy e.,ecttions of rural residents. e. !. Self =el, Against Accounts as Collateral 7 M9 E"C 7 t&e secured creditor /&o *no/s t&e identity of t&e account debtors can send /ritten notice to ,ay directly to t&e secured creditor. $. M9 <"E1a4 7 t&e account debtor can disc&arge its obligation only by ,aying t&e secured ,arty 7 not /&o t&e debt /as originally o/ed to. ;. M9 <"E1c4 an account debtor concerned about /&o is actually entitle to t&e money can reDuest ,roof of t&e assignment. Pudicial Sale and Deficiency 1Assignment <4 a. After a -udgment in a -udicial foreclosure# t&e collateral is sold in a ,ublic sale in order to convert t&e value of t&e ,ro,erty to cas& so t&at t&e debt may be ,aid. 0&e reDuirement t&at collateral be e.,osed to ,ublic sale as ,art of t&e foreclosure ,rocess# generally cannot be varied by contract. b. :easoning) !. (ro,erty sells for mar*et 1true4 value $. c. Deficiency 7 once t&e ,ro,erty is sold# t&e asset value /asn+t enoug& to cover t&e lien amount. 0&is is ris*y for secured creditors. Some states &ave anti deficiency statutes t&at ma*e t&e amount you get is /&at you get and any deficiency is lost.

N.

NI. Article 9 Sale and Deficiency 1Assignment 34 M9 E!31d41$4 7 after a,,lication of t&e ,roceeds of sale t&e obligor is liable for any deficiency M9 E!31f4 JIf t&e transferee . . . is t&e secured ,artyK t&en Jt&e deficiency is based on t&e amount of ,roceeds t&at /ould &ave been reali>ed in a com,lying dis,osition to Gsome ot&er transfereeHK M9 E$E1a41;4 If t&e secured ,arty did not com,ly /it& Article 9 ,rocedures for Jcollection# enforcement# dis,osition or acce,tance#K liability is limited to t&e amount by /&ic& t&e secured obligation e.ceeds t&e greater of 1!4 t&e ,roceeds or 1$4 t&e amount t&at /ould &ave been reali>ed by com,liance. (roblems /it& Art. 9 ,rocedure Failure to sell t&e collateral

<

0&e reDuirement of notice of sale 0&e reDuirement of a commercially reasonable sale a. Acce,tance of Collateral After a default t&e debtor can consent to t&e secured ,arty retaining t&e collateral in full or in ,artial satisfaction of t&e obligation it secures# sub-ect to < conditions !4 M9 E$"1a41$4 7 t&ere must be no ob-ections from ot&ers &olding liens against t&e collateral $4 M9 E$"1g4 7 acce,tance in ,artial satisfaction is not ,ermitted in a consumer transaction) sale is an absolute ,rereDuisite to a deficiency -udgment. ;4 M9 E$"1a4 7 if t&e collateral is consumer goods t&e debtor can consent to strict foreclosure only after re,ossession. <4 M9 E$"1e4 7 strict foreclosure is not ,ermitted if t&e debtor &as ,aid E"2 of t&e cas& ,rice of consumer goods ,urc&ased on credit or E"2 of t&e loan against ot&er consumer goods. Sale (rocedure under Article governed by M9 E!"

b.

***CREATION O5 SECURIT, INTERESTS*** NII. Formalities for Attac&ment 1Assignment I4 a. Attac&ment) 0&e /ay to get a &old of t&e collateral t&at t&e debtor used as security 6.C.C. 9 !":1b4 lists t&ree formalities reDuired for t&e creation of a security interest enforceable against t&e debtor) !. 'a&ue must +a;e 2een gi;en. Nalue defined in ! $"< 1Nalue is given /&en t&ere is a contract to e.tend credit4. Nalue is defined in ! $"!1<<4 very broadly. a. ! $"!1<<4 encom,asses all forms of consideration t&at /ould su,,ort an ordinary contract 1including ,ast consideration4. b. It is easy for an unsecured debt to become secured at any time in t&e debtor creditor relations&i,. $. T+e (e2t)r must +a;e rig+ts in t+e c)&&atera&. 0&e debtor must &ave some rig&t in /&at &e is ,ledging as collateral. 0&e courts &ave read ; significant subte.ts into t&is rule) a. 0&ey read it to mean t&at if t&e debtor o/ns a &imite( interest in ,ro,erty and grants a security interest in t&e ,ro,erty# t&e security interest /ill generally attac& to only t&at limited interest. b. Some Jo/nersK /&o acDuired t&eir rig&ts in ,ro,erty by fraud &ave t&e ,o/er to transfer to bona fide ,urc&asers o/ners&i, rig&ts t&ey t&emselves do not &ave. GNoidable titleH c. 0&e last relates to t&e time at /&ic& t&e security interest becomes enforceable. Debtor may grant a SI to creditor in collateral &e doesn+t currently o/n# but may later acDuire# and t&en t&e SI becomes enforceable. ;. One )* t+e *)&&)9ing c)n(iti)ns must 2e met) a. 0&e debtor &as aut&enticated 1signed4 a security agreement t&at ,rovides a descri,tion of t&e collateral and# if t&e security interest covers timber to be cut# a descri,tion of t&e land concernedA b. 0&e collateral is not a certificated security and is in t&e ,ossession of t&e secured ,arty under Section 9 ;!; ,ursuant to t&e debtor+s security agreementA c. 0&e collateral is a certificated security in registered form and t&e security certificate &as been delivered to t&e secured ,arty under Section I ;"! ,ursuant to t&e debtor+s security agreementA or d. 0&e collateral is de,osit accounts# electronic ,a,er# investment ,ro,erty# or letter of credit rig&ts# and t&e secured ,arty &as control under Section 9 !"<# !"3# !"E# or !"C ,ursuant to t&e debtor+s security agreement <. Agreement and security interest defined in ! $"!. 3. 5ust start at 9 $"; and go t&roug& t&e code defining basic terms. 9 !":.a/ A security interest attac&es to collateral /&en it becomes enforceable . . . 1b4 GAH security interest is enforceable . . . only if) 1!4 ;a&ue &as been given 1M! $"<4 1$4 t&e debtor &as rig+ts in t+e c)&&atera& 1M$ 3"!1!41a44A and 1;41A4 t&e debtor &as aut+enticate( a security agreement t&at ,rovides a descri,tion of t&e collateral . . . :8NI8% FIS=8:5A9+S (I8: 0:A9SAC0I?9. A9S%8:) %=A0 A:8 0=8 G?ALS ?F 0=8 (A:0I8S' (ossession or Aut&enticated Security Agreement !. Article 9 ratifies $ ty,es of security agreements /&ic& are aut&enticated records) Ga signed /ritingH a. Aut&enticated :ecords) Contract

b.

$.

Security Agreement 5ade 8ffective @y (ossession) 5ost uncommon G,a/ns&o,H. M9 $";1b41;41@4 9eit&er oral or /ritten security agreement) An agreement inscribed on some tangible medium in /&ic& it can be stored and from /&ic& it can be retrieved. Information so inscribed is referred to as a JrecordK. 0&e record must be aut&enticated by ,rocessing it /it& t&e intention to identify t&e aut&enticator and Jado,t or acce,tK t&e record. Security Agreement) Creates or ,rovides a security interest 7 don+t need any s,ecial /ords Contains a descri,tion of t&e collateral# a descri,tion of t&e obligations secured# and ,rovisions# defining default# s,ecifying t&e rig&ts of t&e secured creditor on default# re im,osing ot&er obligations on t&e debtor. G%&en t&e debtor &as signed t&e agreement# t&e 6CC M9 $";1b41;41A4 reDuirement of an aut&enticated security agreement is fulfilled.H

b. c.

c.

d.

e. f.

! 0arts t) t+e C)m0)site D)cument Ru&e) e.amines all of t&e documents bet/een t&e debtor and creditor to decide if toget&er t&ey adeDuately describe t&at a security interest /as agreed u,on. !. %&at documents ma*e u, t&e agreement under 9 $"; 1financing statement and security agreementLcontract4 $. Is t&ere a meeting of t&e minds' 5ust be sub-ective intent. 5ay &ave to be ob-ective intent language t&at s&o/s intent 1one argumentQargument from Ace4. A signature insures a meeting of t&e mind. Pustifications for :eDuiring Security Agreements to be Aut&enticated) !. (reventing Fraud) Comment ; to 6.C.C. 9 $"; e.,lains t&at t&e reDuirement of a /riting in Article 9 is Jin t&e nature of a Statute of Frauds.K 0&e modern t&eory is t&at courts s&ould be s*e,tical about agreements t&at are not in /riting. $. 5inimi>ing Litigation) If t&e security agreement and t&e descri,tion of collateral are in /riting# t&ere /ill be less c&ance t&at t&e debtor and t&e creditor /ill differ as to /&et&er a security interest /as granted and# if so# /&at ,ro,erty /as to serve as collateral. ;. Cautioning Debtors) :eDuiring t&at t&e ,romise of security be in /riting to be enforceable /ill result in debtors ma*ing better decisions about /&et&er security agreements are in t&eir interest. <. C&anneling 0ransactions) @y refusing to enforce oral security agreements t&e la/ encourages t&e ,arties to ,ut t&em in /riting. 3. Discouraging Secured Credit) Secured creditors are ty,ically ban*s and insurance com,anies and t&ey invo*e a legal device t&at gives t&em collection advantages not universally s&ared. %&en t&ey do so im,erfectly 1by failing to aut&enticate4 observers believe it is fair to ,ull t&em do/n to t&e level of t&e unsecured fol*s t&ey /ere trying to best. 0&e com,eting ,olicy is t&e ()ctrine )* e6uita2&e m)rtgages) 6nder t&at doctrine# t&e courts can enforce oral security agreements /&ere to do so /ould be JeDuitableK. 0&e doctrine is im,liedly re,udiated in t&e te.t of 9 $";1b41;4. SI+s in real estate 1mortgage4 reDuire more formality.

I.! (romissory 9oteA Financing StatementA Cover Letter Are any of t&ese alone an aut&enticated security agreement' 9ot alone# Dualify as a security agreement Do t&ey meet t&e reDuirements of t&e com,osite document rule' Considered toget&er may Dualify. Do you need to loo* at t&e transcri,t from t&e trial' S&ould loo* at t&e transcri,t in addition to t&e com,osite document rule I.; a4 Does t&e ban* &ave an enforceable security interest' 9o. b4 t/o /ee*s later# t&e debtor+s la/yer mails t&e list to t&e secured ,arty+s la/yer# and t&e secured ,arty+s la/yer sta,les it to t&e security agreement. Is t&e agreement enforceable' S,lit of aut&ority 7 de,ends on em,&asis 9 $";1b41;41A4 1J...t&e debtor &as aut&enticated a security agreement4 1t&at ,rovides a descri,tion of t&e collateral...K4 = no ?: J...t&e debtor &as aut&enticated 1a security agreement t&at ,rovides a descri,tion of t&e collateral...K4 = yes c4 %&at if @artell sent t&e list t/o years after closing' Cases don+t say d4 %&at if @artell sent t&e list after 5artine> filed ban*ru,tcy' If /as unsecured at t&e time of filing for ban*ru,tcy no go. NIII. %&at Collateral and ?bligations are Covered 1Assignment 94) %&at is a security agreement' 9 !"$1a41C<4 %&at rules a,,ly to its inter,retation' Loo* to Contract la/ %&at is t&e relations&i, bet/een t&e security agreement and t&ird ,arties' Inter0retati)n) Generally) contract rules govern 'a&i(ity 9 $";1b41;41A4 reDuires a descri,tion t&at Jreasonably identifiesK t&e collateral 9 !"I1b4 ,ermits) s,ecific listingA categoryA 6CC categoryA DuantityA com,utational formula 9 !"Ic cannot say Jall assetsK 9 !"I1e4 not Jcommercial tort claimsK

9 !"I1b41E4 J?b-ectively determinableK by /&om' 6sing /&at additional information' 8.am,le) JinventoryK is goods &eld for sale 7 de,ends on debtor+s intention 7 ?R 8.am,le) Jcro,s gro/ing on real estate described by ASCS Farm Serial 9umber R !$; 7 ?R 8.am,le Jcreditor s&all &ave a security interest in all items ,urc&ased on t&is accountK 7 9ot ?R a. b. %&at can /e use to inter,ret t&e language of t&e statutes' !. 9otesLcomments to t&e code $. (olicy Section 9 !"I1b4 tells us /&en a descri,tion of collateral is sufficient. Sufficient descri,tion may be met by noting one of t&e follo/ing) !. S,ecific listingA $. CategoryA ;. 8.ce,t as ot&er/ise ,rovide in subsection 1e4# a ty,e of collateral defined in t&e 6CCA <. Suantity 1if somet&ingQDuantity alone is not enoug&4 3. Com,utational or allocational formula or ,rocedureA or E. 8.ce,t as ot&er/ise ,rovided in subsection 1c4# any ot&er met&od# if t&e identity of t&e collateral is ob-ectively determinable. 5uncti)na& Test) If you go over to a debtor+s ,ro,erty and can read its descri,tion in t&e security agreement and *no/ t&at it is t&e collateral describedQt&e functional test &as been met. Alt&oug& a security agreement is a contract bet/een t&e debtor and t&e creditor# in most circumstances# it binds ; rd ,arties as /ell 1often secured ,arty ta*es collateral ot&er creditors /ere counting on for collection4. Descri,tions of Collateral 9 !"$) !. Acc)unt) 8.ce,t as used in Jaccount forK means a rig&t to ,ayment of a monetary obligation# /&et&er or not# earned by ,erformanceT..1see rest of 9 !"$1a41$44. $. C)nsumer %))(s) Goods t&at are used or boug&t for use ,rimarily for ,ersonal# family# or &ouse&old ,ur,oses. 9 !"$1a41$;4 ;. E6ui0ment) Goods ot&er t&an inventory# farm ,roducts# or consumer goods. 9 !"$1a41;;4. 1i.e.# :ace&orses could be included4. <. %enera& Intangi2&e) Any ,ersonal ,ro,erty# including t&ings in action# ot&er t&an accounts# c&attel ,a,er# commercial tort claims# de,osit accounts# documents# goods# instruments# investment ,ro,erty# letter of credit rig&ts# letters of credit# money# and oil# gas# or ot&er minerals before e.traction. 0&e term includes ,ayment intangibles and soft/are. 9 !"$1a41<$4 1i.e. ?/ner of restaurant# /&en granting SI in Jgeneral intangibles#K is including in t&at collateral &is liDuor license.4 3. Instruments)9 !"$1a41<C4 E. In;ent)ry) Goods ot&er t&an farm ,roducts# /&ic&) a. 1A4 Are leased by a ,erson as lessorA b. 1@4 Are &eld by a ,erson for sale or lease or to be furnis&ed under a contract of serviceA c. 1C4 Are furnis&ed by a ,erson under a contract of serviceA or d. 1D4 Consist of ra/ materials# /or* in ,rocess# or materials used or consumed in a business. 9 !"$1a41<I4 JIm,ortK does not mean effect. A*ter Ac6uire( 8r)0erty !. 0erm used to refer to ,ro,erty t&at a debtor acDuires after t&e security interest is created 1accounts receivable often after acDuired collateral4 or t&e security agreement is aut&enticated. $. 0&ere is a &itc& in using t&e accounts as collateral) 0&e accounts t&at e.ist on any given day /ill disa,,ear as t&ey are ,aid off. 0&e collateral e.isting on t&e day of t&e loan transaction may s&rin* considerably in ;" days and nearly disa,,ear in E" or 9". ;. 0&e accounts t&at are generated after t&e security agreement is signed are Jafter acDuired ,ro,erty.K =aving t&em as collateral is crucial to t&e ,osition of t&e accounts secured lender. <. 9 $"<1a4) 8.ce,t as ot&er/ise ,roved in subsection 1b4# a security agreement may create or ,rovide for a security interest in after acDuired collateral. 3. 9 $"<1b4) A security interest does not attac& under a term constituting an after acDuired ,ro,erty clause to) a. Consumer goods# ot&er t&an an accession /&en given as additional security# unless t&e debtor acDuires rig&ts in t&em /Lin !" days after t&e secured ,arty gives valueA or b. A commercial tort claim. 1non commercial tort claims may be attac&able4 E. After acDuired ,ro,erty clauses declining# bLc of t&e use of com,uters. Some de,artment stores include a security agreement on t&e recei,t for eac& credit ,ur,ose.

c. d. e.

f. g$

Stoumbous v. Kilimnik Language is Jinventory on &and at 5ay !# !9I$#K JeDui,ment#K and JaccountsK.

Issue$ %&et&er t&e security interest in inventory and eDui,ment s&ould e.tend to eDui,ment acDuired after t&e date of ,urc&ase of t&e business. Syn)0sis )* Ru&e )* La9$ %&ere a security agreement ,rovides for a security interest in Jall inventoryK or similar language# t&e document incor,orates after acDuired inventory if t&e inventory refers to assets t&at are cyclically de,leted and re,lenis&ed suc& as inventory or accounts receivable. Ana&ysis$ 0&e inventory in t&is case is not sub-ect to freDuent turnover. 0&e ma-ority rule t&at e.tends security interests to after acDuired eDui,ment does not a,,ly. :es,ondent too* a J,urc&ase moneyK interest in t&e eDui,ment &e actually sold to AA5. 8ven /&en limited to t&e eDui,ment on &and at t&e time of sale# :es,ondent+s interest /ould &ave been secure. C)nc&usi)n$ 9o. 0&e security agreement in t&is case /as intended only to include eDui,ment &eld ,rior to t&e date of ,urc&ase. Language is Jinventory on &and at 5ay !# !9I$#K JeDui,ment#KK and JaccountsK. ( sold business to AA5 retaining SI in inventory and eDui,ment and used after acDuired ,ro,erty language in regards to accounts receivable. Account is any rig&t to ,ayment u,on sale of inventory. %&at counts as after acDuired ,ro,erty' De,ends on t&e conte.t. After acDuired ,ro,erty clauses normal /&en creditors ta*e SI in broad categories of collateral 1floating liens4. ( argues t&at /&ere a creditor acDuires a SI in eDui,ment and inventory# t&e court s&ould find t&at t&is interest automatically e.tends to t&e after acDuired inventory and eDui,ment. 0&ere is su,,ort for t&e ,ro,osition t&at# /&ere a financing statement or security agreement ,rovides for a security interest in Jall inventory#K t&e document incor,orates after acDuired inventory. 0&e rationale is t&at t&e inventory is constantly turning over# and no creditor could reasonably agree to be secured by an asset t&at /ould vanis& in a s&ort time in t&e normal course of business. %&ere t&e /ordLdescri,tion does not connote t&at it is constantly turning over# t&en more s,ecific language is needed t&an for inventory. &. After acDuired ,ro,erty can be used /it& inventory and accounts# anyt&ing else you /ant to cover under t&is language you must s,ecifically state. i. After acDuired ,ro,erty clauses become ineffective u,on t&e filing of ban*ru,tcy. -. Nirtually any obligation can be secured if t&e ,arties ma*e t&eir intention clear. *. 5uture a(;ance A debt t&at does not e.ist yet but t&e ,arties believe /ill come into e.istence at a later time. l. Dragnet c&ause 7 agreements t&at ,ur,ort to secure every obligation to t&e secured creditor of any *ind t&at may come into e.istence in t&e future. Gafter acDuired ,ro,erty clauseH m. A security interest can also secure a debt t&at does not yet e.ist but /&ic& t&e ,arties contem,late /ill come into e.istence in t&e future. If t&e future obligation /ill come into e.istence as t&e result of an additional e.tension of credit by t&e secured creditor# it is referred to as a future advance. IU. (roceeds# (roducts# and ?t&er Nalue 0racing Conce,ts 1Assignment !"4 In order for somet&ing to be attac&ed# debtor &as to &ave rig&ts in t&e collateral. If a debtor *no/s t&at t&e debtor sold# rented# transferred collateral# but does not&ing about it# it /aives its rig&ts. Collateral can c&ange in form t&at ,uts t&em outside of t&e descri,tion of collateral in t&e security agreement. 0&e creditor usually &as t&e security interest attac& to /&atever t&e debtor receives in return. ?ne /ay to assure t&at a security interest /ill follo/ t&e value is to include) 1!4 e.,ress language in t&e descri,tion of t&e collateral in t&e security agreement t&at covers all forms t&e value is li*ely to ta*eA 1$4 encumbering ALL t&e debtor+s ,ro,ertyA value tracing conce,ts. 0&e e.,ress language included in security agreements to follo/ t&e value of t&e collateral is called J;a&ue tracing c)nce0ts.K 0&ese include ,roceeds# ,roducts# rents# ,rofits and offs,ring. a. 8r)cee(s 7 /ill follo/ t&e value of t&e collateralA does not &ave to be money 9 #"!.a/.<=/ 8r)cee(s$$$means t+e *)&&)9ing 0r)0erty> 1A4 %&atever is acDuired u,on t&e sale# lease# license# e.c&ange# or ot&er dis,osition of collateralA 1@4 %&atever is collected on# or distributed on account of# collateral 1i.e.# ,roceeds of a slot mac&ine4A 1C4 :ig&ts arising out of collateral 1can mean ,roceeds of some ot&er *ind# virtually any ,ro,erty lin*ed to t&e collateral4A 1D4 0o t&e e.tent of t&e value of collateral# claims arising out of t&e loss# nonconformity# or interference /it& t&e use of# defects or infringement of rig&ts in# or damage to# t&e collateral# orA 184 0o t&e e.tent of t&e value of collateral and to t&e e.tent ,ayable to t&e debtor or t&e secured ,arty# insurance ,ayable by reason of t&e loss or nonconformity of# defects or infringement of rig&ts in# or damage to# t&e collateral. %&en ,roceeds are dis,osed of or rig&ts to arise out of t&em# /&atever is received is J,roceeds.K 0&us t&e ,roceeds of ,roceeds are ,roceeds.

b.

c.

d. e.

f.

Conce,ts of ,roceeds and after acDuired ,ro,erty freDuently overla,# but t&e former is a value tracing conce,t# /&ile t&e latter is not. 8ven if t&e security agreement ma*es no mention of ,roceeds# a security interest automatically covers t&em. 0&e rule derives from 9 $";1f4 and 9 ;!31a4) a. 9 !":.*/> 0&e attac&ment of a security interest in collateral gives t&e secured ,arty t&e rig&ts to ,roceeds ,rovided by 9 ;!3 and is also attac&ment of a security interest in a su,,orting obligation for t&e collateral. b. 9 :#?.a/> 8.ce,t as ot&er/ise ,rovided in t&is article and in $ <";1$4) 1!4 A security interest or agricultural lien continues in collateral not/it&standing sale# lease# license# e.c&ange# or ot&er dis,osition t&ereof un&ess t&e secured ,arty aut&ori>ed t&e dis,osition free of t&e security interest or agricultural lienA and 1$4 A security interest attac&es to any identifiable ,roceeds of collateral. .2/ (roceeds t&at are commingled /it& ot&er ,ro,erty are identifiable ,roceeds) 1!4 if t&e ,roceeds are goods# to t&e e.tent ,rovided by M9 ;;E andA 1$4 if t&e ,roceeds are not goods# to t&e e.tent t&at t&e secured ,arty identifies t&e ,roceeds by a met&od of tracing...,ermitted under la/ ot&er t&an t&is article. E@AM8LE> 5oney commingled in a ban* account C)mming&ing 0r)cee(s) If t&e ,roceeds of a ,iece of collateral are ,ut into a ban* account /it& unrelated money in it# t&e ,roceeds &ave lost identifiability 1ability to be traced4. %e can still loo* to records of t&e ban* and t&e account to identify. 0&is test is called t&e J&)9est interme(iate 2a&ance test.K 0&is rule ,rovides t&at t&e amount of t&e secured creditor+s collateral remaining in a ban* account is eDual to t&e lo/est balance of all funds in t&e account bet/een t&e time t&e collateral /as de,osited to t&e account and t&e time t&e rule is a,,lied. Assum,tion is t&at t&e debtor /ill s,end &is o/n money first. 9 :!!.2/ 0r);i(es t+at a trans*eree )* *un(s *r)m a (e0)sit acc)unt taAes t+e *un(s *ree )* a SI in t+e (e0)sit acc)unt un&ess t+e trans*eree acts in c)&&usi)n 9it+ t+e (e2t)r in ;i)&ating t+e rig+ts )* t+e secure( 0arty . 8ven t&oug& t&e cas& ,roceeds t&at t&e debtor transfers from t&e ban* account are free of t&e SI# anyt&ing t&e debtor ,urc&ased /it& t&at cas& may nevert&eless still be ,roceeds. Secured creditors sometimes aut&ori>e t&eir debtors to dis,ose of t&e c)&&atera& *ree )* t+e security interest. %&en t&is occurs# M9 ;!31a41!4 gives effect to t&e aut+)ri1ati)n) 0&e buyer ta*es free of t&e security interest and t&e secured creditor can loo* only to t&e debtor and t&e ,roceeds. 0&e language of many SA+s ,ro&ibits t&e sale of t&e collateral. 0&e debtor must ,ay in full in order to &ave t&e rig&t to sell t&e collateral. 8ven if t&e security agreement e.,ressly ,ro&ibits sale of t&e collateral t&e debtor &as t&e ,o/er under M9 <"! to trans*er o/ners&i, to a buyer. !. 9 ="#.2/ An agreement 2et9een t+e (e2t)r an( secure( 0arty 9+ic+ 0r)+i2its a trans*er )* t+e (e2t)rs rig+ts in c)&&atera& )r maAes t+e trans*er a (e*au&t ()es n)t 0re;ent t+e trans*er *r)m taAing e**ect$ $. 0&e result is t&at after a sale t&at t&e secured ,arty &as not aut&ori>ed to be free of t&e security interest t&e buyer /ill o/n t&e collateral sub-ect to t&e security interest. 0&e buyer may not *no/ of t&at interest. ;. If a debtor sells t&e collateral /Lout aut&ori>ation# t&e SI continues in t&e original collateral and also in t&e ,roceeds. 0&is is no mere tracing of t&e value of t&e collateralA it is ,otentially a multi,lication of t&e value in favor of t&e creditor. 1see 9 !"$1a41!$4 and 1E<4 and 9 ;!31a44. A security interest continues to encumber ,roceeds only so long as t&ey remain Jidentifiable.K 9 ;!31a41$4

In re Oriental ug !arehouse Club Fas&er rugs consigned rugs to D in a consignment agreement for a total of B!"E#"C;. Fas&er filed a 6CC ! financing statement /L t&e Secretary of State. D sold some of t&e rugs# but didn+t give Fas&er t&e ,roceeds# instead boug&t ot&er rugs# after &e &ad ,ut t&e money into t&e account. 0&is Duestion comes do/n to t&e lo/est intermediate balance. For t&e ,roceeds# and ne/ rugs to be considered J,roceedsK under t&e code# t&ey must &ave come from t&e collateral# and be identifiable. Court &eld against (# bLc it cannot be ascertained /&at in t&e account /as ,roceeds and /&at /as not ,roceeds. g$ Ot+er 'a&ue Tracing C)nce0ts> !. 8r)(uct) Somet&ing t&e collateral ,roduces. 0&e term is most commonly used in t&e conte.t of agriculture. 0&ese ,roducts may also be ,roceeds of t&e collateral named because t&ey arise out of collateral. $. 8r)*it) Can be used to describe t&e e.cess of revenues of a business over t&e e.,enses /&ere t&e business itself is t&e collateral. ;. Rent) 5oney ,aid for t&e tem,orary use of collateral. <. O**s0ring) most often used /it& regard to animals. 3. (roducts# ,rofits# rents# and offs,ring of collateral are all arguably rig&ts arising out of collateral# t&us t&ey are arguably all ,roceeds.

&.

N)n 'a&ue Tracing C)nce0ts> After acDuired ,ro,erty# re,lacements# additions and substitutions in a descri,tion of collateral are non value tracing in t&at t&ey can ,ic* u, ,ro,erty acDuired by t&e debtor /it& value not derived from t&e ,reviously e.isting collateral. After acDuired ,ro,erty :e,lacements Additions Substitutions

!"

Liability of @uyer of collateral If security interest continues in collateral# t&e buyer ta*es Jsub-ect toK t&e security interest. U. T+e Lega& Limits )n W+at May 3e C)&&atera& 1Assignment !$4 Art. 9 &as no e.,ress limits on /&at may serve as collateral M9 $"<1b4 0/o limits) !4 after acDuired ,ro,erty clauses do not attac& to consumer good acDuired more t&an ten days after t&e lender ma*es t&e loan $4 after acDuired ,ro,erty clauses do not reac& commercial tort claims a$ On&y B0r)0ertyC can 2e c)&&atera& C)&&atera& means t&e ,ro,erty sub-ect to a security interest M9 !"$1a41!$4 Security interest. An interest in ,ersonal ,ro,erty or fi.tures /&ic& secures ,ayment or ,erformance of an obligation. M ! $"!1;C4 9 #"9.a/$ G0H&is article a,,lies to a transaction . . . 0&at creates a security interest in ,ersonal ,ro,erty or fi.tures . . . 9 #"!.a/.=!/$ JGeneral intangibleK means any ,ro,erty . . . 8ers)na& 0r)0erty$ (ro,erty t&at is not real ,ro,erty. 8r)0erty$ 0&e rig&t to e.clude ot&ers. A rig&t of o/ners&i,. %&atever t&e la/ says is J,ro,erty.K b. 8r)0erty T+at Cann)t 2e C)&&atera& !. (ro,erty of a (ersonal 9ature 8urc+ase m)ney security interest a security interest given to secure eit&er ,art of t&e ,urc&ase ,rice of t&e collateral# or money borro/ed to ,ay ,art of t&e ,urc&ase ,rice of t&e collateral. It is ina,,ro,riate for creditors to ta*e and enforce non,ossessory# non,urc&ase money security interests in ,ro,erty t&at is &ig&ly ,ersonal in nature and &as little resale value. If an item is e.em,t unsecured creditor cannot sei>e it Does not a,,ly to secured creditors 3anAru0tcy C)(e ?!!.*/ o Security interests in ,ro,erty in t&e ,ossession of a secured creditor are e.ce,ted from M3$$1f4 avoidance o (urc&ase money security interests in ,ersonal items also are e.ce,ted from M3$$1f4 avoidance $. Future Income of Individuals Assignment )* 9ages$ 0&e grant of a security interest in future ,ersonal earnings. 8.am,le) Credit 6nion lends Debtor B$"* to buy a car. Debtor signs an JirrevocableK instruction to 8m,loyer to deduct B<"" a mont& from Debtor+s ,ayc&ec* and ,ay it to Credit 6nion against t&e loan. Against ,ublic ,olicy in most states. Noid in ban*ru,tcy in all states. ?nce a ,erson files ban*ru,tcy# any encumbrances of &isL&er earnings after filing are void. ;. (ension Funds Cannot use money t&at &as been saved for retirement. c$ 5uture 8r)0erty as C)&&atera& !. A business debtor can encumber future earnings of t&e business. $. 0&e security interest attac&es /&en t&e ,ro,erty comes into e.istence or into t&e &ands of t&e debtor. ;. A business t&at &as encumbered it future income can esca,e t&e encumbrance by filing ban*ru,tcy. ($ 'a&ua2&e N)n0r)0erty as C)&&atera& !. Licenses are not ,ro,erty and are generally not available for use as collateral. e$ Restricti)ns )n t+e %rant )* Security Interests Ma(e Ine**ecti;e M9 <"I) measures restricting grant of security interests in general intangibles are ineffective. Debtors can grant security interests in general intangibles# des,ite contract ,rovisions and la/ ,ro&ibiting suc& grants. Secured ,arty cannot enforce t&eir security interests to t&e detriment of t&e ,arty ,rotected by t&e contract ,rovisions or la/# but t&e secured ,arties can /ait for liDuidation of t&e collateral %ant general intangibles available for use as collateral Conflict /it& state la/s %ays to get around it for somet&ing ot&er t&an ,ro,erty to be considered a general intangible# it first must be found to be ,ersonal ,ro,erty# e.am,le) liDuor license

***DE5AULT> T+e %ate9ay t) Reme(ies*** UI. Default# Acceleration# and Cure 6nder State La/ 1Assignment !;4 a. Default M9 E"!1a4 7 must be clear /&at constitutes default.

b.

c.

0&e secured ,arty &as t&e rig&t to 1!4 reduce a claim to -udgment# foreclose# or ot&er/ise enforce t&e claimLsecurity interest by any available -udicial ,rocedureA and 1$4 if document# t&en may ,roceed eit&er as to t&e documents or as to t&e goods t&ey cover. !. Default is t&e debtor+s failure to ,ay t&e debt /&en due or ot&er/ise ,erform t&e agreement bet/een debtor and creditor. $. Creditors can+t e.ercise t&eir remedies under state la/ until t&e debtor defaults. ;. Security agreements nearly al/ays define default e.,ansively. %&en is (ayment Due' :emedy creditor /ants) Acceleration !. Installment Loans) %&en t&e ,arties contem,late t&at t&e debtor /ill re,ay in a series of ,ayments. (ayment is due on an interval basis 1mont&ly# Duarterly# or annually4. $. Single (ayment Loans) 5any secured loans are made ,ayable on a ,articular day. ;. Lines of Credit) 0&e ban* contracts to lend u, to a fi.ed amount of money as t&e debtor needs it. 6nder most line arrangements# t&e debtor borro/s t&e money sim,ly by /riting a c&ec* on its ban* account. Acceleration and Cure !. Acceleration Clauses) (rovisions in installment loan agreements t&at o,t out of t&e common la/ ruleA reDuires ,ayment of t&e loan in full u,on demand. $. 0&e ,ractical effect of acceleration is often to eliminate t&e debtor+s ability to cure its default. =ave to cure before t&e lender accelerates. ;. Acceleration occurs generally /&en t&e contract says it occurs. But) In re Crystal (ro,erties# Ltd.# $EI F.;d C<; 19t& Cir. $""!4 JGAH creditor must ta*e affirmative action to ,ut t&e debtor on notice t&at it intends to e.ercise its o,tion to accelerate. J@ot& state and federal courts &ave made clear t&e unDuestionable ,rinci,le t&at# even /&en t&e terms of a note do not reDuire notice or demand as a ,rereDuisite to accelerating a note# t&e &older must ta*e affirmative action to notify t&e debtor t&at it intends to accelerate.K

Old Republic Insurance Co. v. Lee# 3"C So.$d. E3< 1Fla. Dist. Ct. A,,. !9IC4. Issue$ %&et&er t&e mortgagor &ad t&e rig&t to ,revent t&e mortgage &older from e.ercising &is o,tion to accelerate by tendering t&e arrears due. Ru&e$ ?nce t&e mortgage &older &as e.ercised &is o,tion to accelerate# t&e rig&t of t&e mortgagor to tender only t&e arrears is terminated. Ana&ysis. 0&e mortgagor u,on t&e occurrence of a default may tender t&e arrears due and t&ereby ,revent t&e mortgage &older form e.ercising &is o,tion to accelerate. =o/ever# once t&e mortgage &older &as e.ercised &is o,tion to accelerate# t&e rig&t of t&e mortgagor to tender only t&e arrears is terminated. C)nc&usi)n. 9o. 0&is rig&t terminates once t&e mortgage &older &as e.ercised &is o,tion to accelerate. Limits on t&e 8nforceability of Acceleration Clauses) A secured creditor can e.ercise its rig&t to accelerate for even a tiny or fleeting default in ,ayment. @ut if t&e grounds for acceleration are merely t&at t&e secured creditor deems itself insecure# t&e creditor &as t&e rig&t to accelerate only if it in good fait& believes t&e ,ros,ect of ,ayment or ,erformance is im,aired. J.R. Hale Contracting Co. v. United New e!ico "ank at #lbu$uer$ue# C"" (.$d 3I! 1.5. !99"4 Issue$ %&et&er :es,ondent actual /aived# e.,ress or im,lied in fact# its rig&t to declare a default and accelerate ,ayment. %&et&er t&e ,arties intended to modify t&e contract. %&et&er :es,ondent /aived by esto,,el its rig&t to declare a default and accelerate ,ayment. %&et&er t&ere are facts in t&e record t&at /ould allo/ a -ury to conclude t&at :es,ondent lac*ed good fait&. Ru&e )* La9$ A /aiver im,lied in fact occurs /&en t&e intent to /aive a contractual obligation is im,lied from a ,arty+s re,resentations t&at fall s&ort of an e.,ress declaration of a /aiver or from &is conduct. @ased u,on t&e &onest believe of t&e ot&er ,arty t&at a /aiver /as intended# a /aiver by esto,,el may be ,resumed or im,lied contrary to t&e intention of t&e ,arty /aiving certain rig&ts. 0&e /aiver is -ustified because t&e esto,,ed ,arty reasonably could e.,ect t&at &is actions /ould induce t&e reliance of t&e ot&er ,arty. Ana&ysis. 0&e ,ost agreement conduct of :es,ondent did not indicate an actual intent to /aive any rig&ts under t&e contract. %&en a ,arty acce,ts a late ,ayment on a contract /it&out comment it /aves t&e default t&at e.isted. %it& re,etition# suc& actions may suggest an intention to acce,t late ,ayments generally. =o/ever# &ere# t&e ban* &ad not acce,ted any earlier late ,ayments on t&is contract. 0&e one ,ayment reDuired /as overdue and (etitioner did not reDuest an e.tension. %&ile :es,ondent+s silence may &ave been misleading it did not reveal an actual intention to relinDuis& any contractual rig&ts. Since :es,ondent &ad no actual intent to /aive its rig&ts under t&e contract# it necessarily follo/s t&at t&ere can be no issue of /&et&er t&e ,arties intended to modify t&e agreement. <.

Silence may form t&e basis for esto,,el if a ,arty stands mute /&en &e &as a duty to s,ea*. (etitioner inter,reted :es,ondent+s be&avior in t&e lig&t of its earlier dealings and :es,ondent s&ould &ave been a/are of t&is consideration. :es,ondent &ad a duty to inform (etitioner t&at it /ould enforce ,erformance under t&e contract according to t&e letter of t&eir agreement. :es,ondent+s declaration of default /it&out /arning and sudden acceleration of ,ayment /as t&e detrimental result of (etitioner+s reliance. 0&e reDuirement of &onesty in fact is sub-ective. =o/ever# a -ury may evaluate t&e credibility and conduct of a creditor by ob-ective standards sub-ect to ,roof and conducive to t&e a,,lication of reasonable e.,ectations in commercial affairs. 0&is inDuiry /ill necessarily focus on t&e facts and circumstances *no/n to t&e creditor at t&e time. C)nc&usi)n$ 9o. :es,ondent+s silence did not indicate an actual intention to relinDuis& any contractual rig&ts. 9o. Since :es,ondent &ad no intent to actually /aive its rig&ts under t&e contract t&ere is no issue /&et&er t&ere /as a modification. Fes. :es,ondent &ad a duty to inform (etitioner t&at it /ould enforce ,erformance under t&e contract according to t&e letter of t&eir agreement and (etitioner detrimentally relied on :es,ondent+s failure to do so. Fes. 0&e determination of good fait& s&ould be based on t&e facts and circumstances surrounding t&e acceleration and not solely on :es,ondent+s testimony. 0&e debtor+s rig&t to cure) A debtor &as t&e rig&t to cure a default by ,aying t&e amounts t&en due. 5ust be done ,rior to acceleration. 8nforceability of (ayment 0erms Are &ars& ,ayment terms enforceable' % C Co. v. Irving &rust Co. 1Et& Cir. !9I34 establis&ed Len(er &ia2i&ity lenders must treat t&eir borro/ers fairly and /&en t&ey don+t# t&ey can be sub-ect to borro/er litigation under a variety of legal claims. Generally involves breac& of contract andLor fraud claims. D)&(ing) An obligation to act in good fait& reDuires a ,eriod of notice to R9C to allo/ it a reasonable o,,ortunity to see* alternate financing# absent valid business reasons ,recluding Irving from doing soT Pust as Irving+s discretion /&et&er or not to advance funds is limited by an obligation of good fait& ,erformance# so too /ould be its ,o/er to demand re,ayment. %'a( ) Nate*s S'oes No. +, Inc. v. -irst "ank o. /'iting# 1Ct& Cir. !99"4. Alt&oug& courts often refer to t&e obligation of good fait& t&at e.ists in every contractual relation# t&is is not an invitation to t&e court to decide /&et&er one ,arty oug&t to &ave e.ercised ,rivileges e.,ressly reserved in t&e document. %&en t&e contract is silent# ,rinci,les of good fait& fill t&e ga,. 0&e do not bloc* use of t&e terms t&at actually a,,ear in t&e contract. %&at is Jg))( *ait+K' A com,act reference to an im,lied underta*ing not to ta*e o,,ortunistic advantage in a /ay t&at could not &ave been contem,lated at t&e time of drafting# and /&ic& t&erefore /as not resolved e.,licitly by t&at ,arties. (rocedures After Default !. :emedies) 1!4 Pudicial remedies suc& as foreclosure and re,levin# /&ic& are administered by t&e courts# and 1$4 Self &el, remedies suc& as re,ossession /Lout -udicial ,rocess# t&e notification of account debtors# or t&e refusal to ma*e furt&er advances to t&e debtor under a line of credit. 0&e (rototy,ical Secured 0ransaction 1Assignment !34 a. 0&e (arties * Deutsc& Secured (arty * @onnie @re>&nev Debtor b. Deutsc& A,,roves @onnie+s Loan c. Deutsc&e and @onnie+s Documents t&e Loan !. Security Agreement and Statement of 0ransaction $. Financing Statement Filed in t&e 6CC filing system of t&e state. 5eant to give ,ublic notice t&at Deutsc&e claims a security interest in t&e collateral. ;. 0&e (ersonal Guarantee 0/o reasons for reDuiring) 1!4 if t&e borro/er cannot re,ay# t&e o/ners mig&tA and 1$4 in t&e event of default# t&e lender /ill &ave t&e coo,eration of t&e o/ners. d. @onnie @uys Some @oats !. 0&e Floor,lan Agreement financing t&e ,urc&ase of inventory t&at is on a dealer+s Js&o/room floor.K Allo/s for t&e manufacturer to buy bac* t&e inventory at t&e full invoice ,rice s&ould t&e inventory be re,ossessed. Advantages) * 5anufacturer can offer Dualified dealers !""2 financing * 5anufacturer does not bear muc& of t&e ris* since ,ayment comes from t&e ban*# not t&e dealer * @an*+s ris* of loss after re,ossession is less bLc manufacturer agrees to buy t&e merc&andise bac* 3.

d.

e.

UII.

* @an* is able to offer Dealer a larger line of credit * @an* is able to finance a larger ,ortion of eac& ,urc&ase * Dealer may benefit from subsidies offered by manufacturer to Deutsc&e $. 0&e @uy ?nce t&e ,urc&ase is a,,roved by Deutsc&e# merc&andise is s&i,,ed to dealer# and Deutsc&e ,ays manufacturer. Deutsc&e records t&e ,ayment to manufacturer as a loan to dealer. e. @onnie Sells a @oat f. 5onitoring t&e 8.istence of t&e Collateral Terms) 8vent of default V91a4 1s4 identifies defaultA 1i4 1iv4 remedies Floor,lan agreement V! ,urc&ase inventory from an a,,roved vendorA V$ describes t&e relations&i, bet/een Deutsc&e W @onnieXs# and &o/ Deutsc&e /ill finance @onnieXs inventory Security interest V; secures all and future ,aymentsA V31d4 reservation of title Commercially reasonable sale V!" outlines t&e met&od of ,rivate sale of collateral Inventory VV!# ;# < /&ere inventory /ill be located G,rinci,le ,lace of businessH Lien V91s4 relations&i, bet/een t&e collateral W t&e obligation Collateral V; identifies /&at constitutes collateralA V< &o/ collateral to be &andled 1located4A V3WE dealer /arrantiesA VCWI ,ayment of interest and ,rinci,le Future advances V! outlines ,ayments to aut&ori>ed vendors for inventory Acceleration V91i4 s&ould @onnieXs default# Deutsc&e can accelerate t&e loan ,ayments Euesti)ns) !. If @onnie misses a fe/ ,ayments# and Deutsc&e does not&ing# and t&en later s&e gets bac* u, to date on ,ayments# is t&at o*ay' V9 Deutsc&eXs failure to e.ercise any of Deutsc&eXs rig&ts or remedies &ereunder /ill not /aive any of Deutsc&eXs rig&ts or remedies as to any ,ast# current# or future default. =o/ever# s&ould Deutsc&e allo/ &er to miss ,ayments and t&en cure t&e default# /it&out doing anyt&ing' 0&ey may be esto,,ed from future activities if t&is /ere to become a ,attern t&at @onnieXs came to rely on. $. =o/ does Deutsc&e monitor @onnie+s business and its com,liance /it& t&e terms of t&e Security Agreement' VE1ii4 1A4 1C4 rig&t to ins,ect inventory 1collateral4A com,liance /L AgreementA e.amine boo*s W recordsA V! a,,rove vendorsA V31e4 rig&t to ins,ect boo*s ;. %&y does Deutsc&e insist on &aving a ,o/er of attorney to ta*e actions related to t&e collateral' V!! because Deutsc&e /ants to minimi>e t&eir ris*s of /aste# fraud# and destruction of t&e collateral <. %&ere is t&e Jcross defaultK' V91f4 s&ould @onnie+s or a guarantor default on an obligation to a t&ird ,arty# @onnie /ill be in default to Deutsc&e. 3. =o/ does @onnie get t&e advances s&e needs from Deutsc&e' V$ floor,lan agreement Emai& t) 3)nnies> email to @onnie e.,laining /&at t&e agreement does. 8.,lain) %&at are t&e advantages of t&e agreement to Deutsc&e# s&oreline and @onnie'A =o/ does @onnie @uy a boat'A =o/ does @onnie sell a boat'A =o/ does Deutsc&e monitor t&e e.istence of t&e collateral' @onnie) 0&e Floor,lan Agreement is meant to ,rovide an inducement for Deutsc&e to consider e.tending your credit. =ere# S&oreline is setting out an agreement /it& Deutsc&e to do several t&ings# in return for ,ayment directly from Deutsc&e. 0&e advantage of t&is to you is t&at you become a more attractive dealer# and because t&e Deutsc&e is dealing directly /it& S&oreline# /it& Deutsc&eXs reduced ris* of loss s&ould S&oreline &ave to buy bac* t&e boats at full ,rice# you may receive t&e benefit of s,ecial subsidies offered by S&oreline. 0&e advantages to Deutsc&e is t&eir ris* is muc& less# and t&ey may be able to offer you a lo/er interest rate on t&e funds t&at t&ey advance to you (aragra,& !. outlines t&e met&od in /&ic& you may ,urc&ase a boat from S&oreline. ?nce you &ave found a boat t&at you /ant for your inventory# S&oreline /ill send an invoice to Deutsc&e and s&i, t&e boat to you. Deutsc&e /ill ,ay t&e invoice and you /ill t&en be res,onsible for re,ayment of t&e advanced funds. %&en you find a buyer for a boat ,urc&ased from S&oreline# t&ey /ill ,ay you# and you /ill for/ard t&e funds directly to Deutsc&e to cover t&e advance. D /ill &ave an individual sto, by unannounced to inventory t&e boats. =e must inventory all boats at t&e same time. If a boat is not on t&e lot it must be accounted for eit&er in your boo*s or in location. If an item is off t&e lot# t&e individual /ill accom,any you to t&e offsite location of t&e boat. !3.! 0&ere could be several ,roblems /it& t&is met&od of c&ec*ing t&e Duantity of oil) 0&e tan*s could be filled /it& somet&ing ot&er t&an soybean oil to a certain amountA All of t&e tan*s may not be uniformA =o/ accurate is t&e taste testing by t&e c&ec*er' !3.; 0&e ,ersonal guarantee# /&ile ,roviding some added ,rotection for t&e ban*# does little if t&e -udgment is uncollectible. =o/ever# by reDuiring t&e guarantee it /ould a,,ear t&at t&e borro/er /ould &ave a little Ys*in in t&e gameY by being /illing to guarantee t&e amount t&ey are borro/ing. 0&e borro/er t&at is un/illing to do so# may re,resent a ris* because s&ould t&e

business get in trouble# t&ey may care less if /&at t&ey are losing is t&e business and not t&eir ,ersonal assets. All in all# t&e ban* must determine /&at t&at small bit of security is /ort& in t&e face of t&e ,ossibility of losing ,ossible business. !3.< a4 yes# Deutsc&e &as a rig&t to t&e boats as ,er t&e Agreement# V91iii4# and by la/# M9 E"9# and u,on t&eir direction @onnieXs must eit&er deliver t&e boats or Deutsc&e may come collect t&em# or render t&en in some /ay unusable. Deutsc&e is also able to get a deficiency -udgment. b4 0&e boats t&at Deutsc&e retrieves from @onnieXs are covered by t&e floor,lan agreement /it& S&oreline 1t&ey agreed to buy t&em bac* at full invoice ,rice. =o/ever# t&e five boats t&at are out of trust# @onnie /ill be res,onsible for t&e full amount of t&ose boats# ,lus finance c&arges# etc. /it&in !" days. c4 @onnieXs does not &ave t&e ,o/er to *ee, t&e boats since Deutsc&e &as made a demand t&at t&ey be returned. S&e could &old on to t&em if s&e t&reatens a breac& of t&e ,eace and could t&en &old Deutsc&e u, for some time. 0&en Deutsc&e /ould &ave to go t&roug& t&e courts. d4 @onnie s&ould /or* /it& Deutsc&e so t&at t&ey mig&t be less li*ely to ,ress for ,rosecution since s&e &as /illfully not ,aid t&e ,rice of five boats as ,er t&e Agreement.

***8ER5ECTION*** UIII. 0&e (ersonal (ro,erty Filing System 1Assignment !E4 a. Com,etition for t&e Secured Creditor+s Collateral !. General rule) 0&e first to attac& and ,erfect a security interst &as ,riority $. (erfection) (ublic notice given by a ,ro,er met&od ;. :ationale) a. First+s treatment is fair because debtor agreed to it b. Later+s treatment is fair because t&ey *ne/ about first b. %&at is (riority' 8very *ind of lien &as ,riority over all unsecured debts. 0&e rig&t to be ,aid in full in ,reference to ot&ers. !. Lien a relations&i, bet/een a debt and ,ro,erty t&at serves as collateral Ga security interest is a ty,e of lienH a. SeniorL,rior lien a lien /it& ,riority &ig&er t&an anot&er b. SubordinateL-unior lien all ot&er liens. If t&e value of collateral is insufficient to ,ay all of t&e liens against an item of collateral# t&e -unior liens yield to t&e senior ones. $. (riority) ?t&er (ossible :ules) :8P8C08D (ro rata s&are# Status of com,eting creditors# tracing and recovery of value given to debtor. TERMS> (riority 7 t&e rig&t to be ,aid in full in ,reference to all ot&ers (erfection 7 filing# ,ossession# control# ,osting notice Com,etition for collateral Subordination (erfection by filing (erfection by ,ossession (erfection by control Filing systems Searc&ing Certificate of title filing systems 0eerless 0acking Co. v. alone ) Hyde, Inc.# ;CE S.8.$d !E! 1%. Na. !9II4. Issue> %&et&er t&e t&eory of un-ust enric&ment is a,,licable in a case governed by Art. 9 of t&e 6.C.C. Ru&e> 8Duitable claims of un-ust enric&ment are generally disallo/ed in cases governed by Article 9 Ana&ysis> &e ,ur,ose and effectiveness of t&e 6.C.C. /ould be substantially im,aired if interests created in com,liance /it& t&e 6.C.C. could be defeated by a,,lication of t&e eDuitable doctrine of un-ust enric&ment. 0&e 6.C.C. ,rovides -ustice in t&e long run in large ,art t&roug& t&e certainty and ,redictability of its ,rovisions# /&ic& s&ould not be set aside absent truly egregious circumstances verging on actual fraud. In t&is case# no suc& circumstances &ave been ,resented. C)nc&usi)n> 9o# t&e t&eory of un-ust enric&ment is ina,,licable in a case governed by Art. 9. c. !. $. ;. <. =o/ Do Creditors Get (riority' General rule) 0&e first to attac& and ,erfect a security interest &as ,riority. (erfection) (ublic notice given by a ,ro,er met&od Central to t&e system of lien ,riority is t&e idea t&at liens ran* in t&e c&ronological order in /&ic& t&ey /ere created. Any lien created after t&at is subordinate. 0&ere are some e.ce,tions to t&is. 0&is ma*es sense because you *no/ /&ere you are and /&en you establis& t&e order# and /&at is already in e.istence. M9 ;"I1a4 (erfecting t&e lien) 5a*ing a lien discoverable) Gcan de,end on t&e ty,e of collateralH a. Filing notice in a ,ublic records system b. 0a*ing ,ossession of collateral c. 0a*ing control of collateral by means of t&e sta*e &older+s agreement to &old for t&e secured creditor# or d. (osting notice on t&e ,ro,erty or /&ere it /ill be seen by ,ersons dealing /it& t&e ,ro,erty 0&e 0&eory of t&e Filing System 0&e filing systems gives constructive notice W is su,,osed to give actual notice to t&e later creditor. M9 !"91a4 0&is article a,,lies to a transaction...t&at creates a security interest in ,ersonal ,ro,erty or fi.tures by contract. M9 ;!"1a4 8.ce,t as ot&er/ise ,rovided in subsection 1b4 1,ossession# control# automatic ,erfection4... a financing statement must be filed to ,erfect all security interests M9 ;!"1b4 M9 ;!!1a4 M9 3"!1a4 If t&e local la/ of t&is State governs ,erfection of a security interest...t&e office in /&ic& to file a financing states...is) 1!4 t&e office designated for t&e filing of a mortgage...if t&e financing statement is filed as a fi.ture filing 1$4 t&e office of t&e Secretary of State in all ot&er cases...

d. !. $. ;. <. 3. E.

C. e.

Initial financing statement 16.C.C. !4 5et&ods and Costs of Searc&ing

UIN. Article 9 Financing Statements) 0&e Debtor+s 9ame 1Assignment !C4 a. 0&e Com,onents of a Filing System !. A filing system consists not only of t&e filed records but also of subsystems for adding ne/ records searc&ing among t&e records# and removing obsolete records. a. Rec)r( 7 information t&at is inscribed on a tangible medium or /&ic& is stored in an electronic medium and is retreiveable in ,erceivable form. b. 5i&e num2ers ars assigned by t&e filing officer at t&e secretary of state+s office c. 5inancing statement F a standard for t&at is on file at t&e filing office. Sometimes it is a searc&able form. d. T+e In(eG 7 t&e collection of records in t&e Sec. of State+s office. e. $. 5inancing Statements) Can be filed in ,a,er or electronically. ;. In(eG) %&en a financing statement is filed# t&e filing officer assigns it is a uniDue number# usually referred to as t&e .ile nu(ber or in some local systems# t&e book and page nu(ber. a. A fe/ *inds of filing systems inde. by a descri,tion of t&e collateral. b. :eal estate and motor ve&icle filing systems can inde. by collateral. c. M9 3!91c4 reDuires t&at t&e filing office inde. financing statements according to t&e name of t&e debtor. <. Searc+ Systems) Some com,uter systems sort t&e inde. entries al,&abetically and ,rint &ard co,ies of t&e inde. a. (roblems) A miss,elling early in a name can t&ro/ a name to a distant ,art of t&e directory. 0&e ,osition of even a correctly s,elled name can be affected by arbitrary# difficult to discover rules for al,&abeti>ing. b. Searc& Logic) :ules t&at determine /&at t&e ,rogram /ill consider eDuivalent. c. T+e 3asAet) 6ninde.ed# undiscoverable documents# not yet ,rocessed *e,t in a bas*et on someone+s des*. d. BAs )*C (ate F M9 3$;1c41!4 7 t&e filing office s&all communicate...to any ,erson /&o reDuests it) 1!4 /&et&er t&ere is on file Gas ofH a date and time s,ecfied by t&e filing office# ... any ZZZZZ e. t&e date as of /&ic& t&e searc& is re,orted. b. Correct 9ames for 6se on Financing Statements M9 3"E1a4) A financing statement su2stantia&&y c)m0&ying /it& t&e reDuirements of ,art 3 of Article 9 is effective# even if it includes minor errors or omissions# unless t&e errors or omissions ma*e t&e financing statement seri)us&y mis&ea(ing. $. M9 3"E1c4 if t&e /rong name is still able to be found 7 t&en not seriously misleading ;. M9 3";) (rovides t&at a financing statement sufficiently ,rovides t&e name of a registered entity only i. it ,rovides t&e name of t&e debtor indicated on t&e ,ublic record of t&e debtor+s -urisdiction of origin. <. M9 3";1a41<4) As to an in(i;i(ua& )r 0artners+i0# t&e financing statement must ,rovide t&e individual or organi>ational name of t&e debtor. 3. M9 3";1b4) A financing statement t&at ,rovides t&e name of t&e debtor in accordance /it& subsection 1a4 rendered ineffective by t&e absence of) a. A trade name or ot&er name of t&e debtor# or b. 6nless reDuired under subsection 1a41<41@4# names of ,artners# members# associates# or ot&er ,ersons com,rising t&e debtor. E. M9 3";1c4) A financing statement t&at ,rovides only t&e debtor+s tra(e name does not sufficiently ,rovide t&e name of t&e debtor. H$ In(i;i(ua& Names a. 0&e correct name of an individual is t&e name &eLs&e is generally *no/n by in t&e community. b. Courts &ave consistently favored t&e longer or more formal version of a name. c. 0/o alternatives for M9 3";1a4) I. C)r0)rate Names) a. M9 3";1a41!4) Jt&e name t&at is stated to be t&e registered org.s name on t&e ,ublic organic record most recently filed /it& or issued...by t&e ...-urisdiction of organi>ation.K b. 0&e cor,oration can c&ange t&at name only by filing an amendment /it& t&e secretary of state. c. In t&e large ma-ority of states# t&e name must s&o/ t&at t&e entity is a cor,oration. 1Does t&is by including L.L.C.# Inc.# Co.# etc.4 d. 9o state /ill ,ermit t&e formation of $ cor,orations /it& t&e same name or confusingly similar names. 9$ 8artners+i0 Names a. 0&e secretary of state /ill not ,ermit use of a name t&at is t&e same as# or confusingly similar to# t&at of a limited ,artners&i, already c&artered by t&e state. b. 0&e legal name of a general ,artners&i, is t&e name by /&ic& it is generally *no/ in t&e community. c. 9 3"C contains rules dealing /it& t&e effects of ,artners&i, name c&anges on filing and searc&ing. !.

Safe =arbor

9 3"C1c4) If a debtor so c&anges its name t&at a filed financing statement becomes seriously misleading under Section 9 3"E) i. 0&e financing statement is effective to ,erfect a security interest in collateral acDuired by t&e debtor before# or /it&in < mont&s after# t&e c&angeA and ii. 0&e financing statement is not effective to ,erfect a security interest in collateral acDuired by t&e debtor more t&an < mont&s after t&e c&ange# unless an amendment to t&e financing statement /&ic& renders t&e financing statement not seriously misleading is filed /Lin < mont&s after t&e c&ange. #"$ Tra(e Names a. A trade name is a name under /&ic& a ,erson or entity conducts business t&at is not its legal name. b. 5ost states &ave a fictitious name statute reDuiring t&at every ,erson or entity doing business in a name ot&er t&an its o/n file notice in a ,ublic record system ,rovided for t&at ,ur,ose. c. 9 3";1b4 and 1c4 ma*e clear t&at trade names are neit+er necessary n)r su**icient to identify a debtor on a financing statement. ##$ T+e Entity 8r)2&em a. 0&e difficulty of determining t&e correct name of a legal entity is easily confused /it& a muc& more basic Duestion) %&o# or /&at# can &ave a name' b. M9 !"$1a41$I4) A (e2t)r means 1A4 a ,erson &aving an interest# ot&er t&an a security interest or ot&er lien# in t&e collateral# /&et&er or not t&e ,erson is an obligorA 1@4 A seller of accounts# c&attel ,a,er# ,ayment intangibles# or ,romissory notesA or 1C4 a consignee. c. A 0ers)n is defined in ! $"!1$C4) (erson means an individual# cor,oration# business trust# estate# trust# ,artners&i,# limited liability com,any# association# -oint venture# government# governmental subdivision agency# or instrumentality# ,ublic cor,oration# or any ot&er legal or commercial entity. d. ! $"!1$34) Organi1ati)n means a ,erson ot&er t&an an individual. e. An entity mig&t be a debtor under Article 9 and its name mig&t s&o/ u, on financing statements# even t&oug& it is not recogni>ed as a legal entity for any ot&er ,ur,ose. f. Standard Searc& Logic) Cor,orations 1a4 9o distinction is made bet/een u,er and lo/er case letters. 1b4 (unctuation mar*s and accents are disregarded 1c4 %ords and abbreviations t&at indicate t&e e.istence or nature of an organi>ation are disregarded 1d4 0&e /ord J0&eK at t&e beginning of t&e seac& criteria is desregarded 1e4 All s,aces are disregarded. Standard Searc& Logic) Individuals 9ame 0y,e :ule First and middle Initials are t&e eDuibalent of all names t&at begin /it& t&e intials 5iddle 9omiddle name is t&e eDuivalent of all middle names 8UA5(L8) :eDuest) JPo&n A. Smit&K :etrieves) Individual debtors /it& JPo&nK or t&e initial JPK as first name# JSmit&K as last name# and not&ing# t&e initial JAK or any c. 8rrors in t&e Debtors+ 9ames on Financing Statements !. If t&e searc&er searc&es under t&e correct name of t&e debtor# but does not find t&e ,rior filing bLc t&e ,rior secured ,arty listed an incorrect name for t&e debtor on its financing statement# t&e 0ri)r *i&ing is ine**ecti;e. $. 9 3";1a4) GSufficiency of Debtor+s 9ameH A financing statement sufficiently ,rovides t&e name of t&e debtor) a. If t&e debtor is a registered organi>ation# only if t&e financing statement ,rovides t&e name of t&e debtor indicated on t&e ,ublic record of t&e debtor+s -urisdiction of organi>ation /&ic& s&o/s t&e debtor to &ave been organi>edA b. If t&e debtor is a decedent+s estate# only if t&e financing statement ,rovides t&e name of t&e decedent and indicates t&at t&e debtor is an estateA c. If t&e debtor is a trust or a trustee acting /L res,ect to ,ro,erty &eld in trust# only if t&e financing statementA i. (rovides t&e name s,ecified for t&e trust in its organic documents or# if no name is s,ecified# ,rovides t&e name of t&e settlor and additional information sufficient to distinguis& t&e debtor from ot&er trusts &aving one or more of t&e same settlorsA ii. Indicates# in t&e debtor+s name or ot&er/ise# t&at t&e debtor is a trust or is a trustee acting /L res,ect to ,ro,erty &eld in trustA and d. In ot&er cases) i. If t&e debtor &as a name# only if it ,rovides t&e individual or organi>ational name of t&e debtorA and ii. If t&e debtor does not &ave a name only if it ,rovides t&e names of t&e ,artners# members# associates# or ot&er ,erson com,rising t&e debtor.

d.

9 3"E1a4) G5inor 8rrors and ?missionsH a financing statement substantially satisfying t&e reDuirements of t&is ,art is effective# even if it &as minor errors or omissions# unless t&e errors or omissions ma*e t&e financing statement seriously (isleading. <. 9 3"E1c4) GFinancing Statement not Seriously 5isleadingH If a searc& of t&e records of t&e filing office under t&e debtor+s correct name# using t&e filing office+s standard searc& logic# if any# /ould disclose a financing statement t&at fails sufficiently to ,rovide t&e name of t&e debtor in accordance /it& section 9 3";1a4# t&e name ,rovided does not ma*e t&e financing statement seriously misleading. 3. 9 3!C) If t&e searc& is made under t&e correct name of t&e debtor# but does not find ,rior filings made in t&e correct name of t&e debtor bLc t&e filing officer inde.ed t&e ,rior filings incorrectly# t&e ,rior filings are nonet&eless effective. E. 0est for Sufficiency) %&en t&e sufficiently of t&e debtor+s name as ,rovided in t&e financing statement is c&allenged# t&e test is not /&et&er t&e trustee or later lender actually .ound t&e financing statement# but /&et&er a &y,ot&etical searc& by t&e trustee or later lender under t&e correct name of t&e debtor would 'ave .ound t&e financing statement. C. "ransameri#a Commer#ial $inan#e Corp. v. %eneral Ele#tri# Capital Corp .) An error in t&e debtor+s name is seriously misleading if it /ould ,revent t&e reasonably diligent searc&er from discovering t&e financing statement. !C.! no good = a# c# and g !C.$ 7 %&at *ind of entity is Lee Leasing' 1a4 6nder /&at name /as t&e cor,oration formally incor,orated' =as t&e com,any done business under any ot&er name' Is @ob t&e sole ,ro,rioter' Does @ob &ave a valid driverXs license' =as @ob been *no/n by or ever &ad anot&er name' %&o o/ns t&e collateral' %&at if J=idden Assets Cor,.K o/ns it' Find documents s&o/ing collateral sold to Lee Leasing# Inc. 1b4 C@0 /ould enter a filing statement against Lee Leasing since t&e ,ro,erty belongs to t&at com,any. !C.3 all are effective against Po&n (&illi, Smit&. UN. Article 9 Financing Statements) ?t&er Information 1Assignment !I4 0&eory of t&e filing system) First ta*ers communicate t&eir interests to later ta*ers. (roblems) 1!4 0&ey must e filing and searc&ing in t&e same system 1$4 0&ey must be filing and searc&ing in t&e same name 1;4 Searc&er may need moreinformation. Is t&is filer a&eadZZZ 1<4 Is t&is my debtor'A Is t&is my collateral'A =o/ do I find t&e secured creditor to as*' 9 3$! contains a standard form for filing and amending t&e financing statement in a &ard co,y# but Article 9 does not reDuire its use. 0&e secured ,arty can use its o/n form or even file a co,y of t&e security agreement as a financing statement. 9 3!E1b4) G:efusal to acce,t recordA filing does not occurH Filing does not occur /L res,ect to a record t&at a filing office refuses to acce,t bLc) 1!4 0&e record is not communicated by a met&od or medium of communication aut&ori>ed by t&e filing office# 1$4 An amount eDual to or greater t&an t&e a,,licable filing fee is not tenderedA 1;4 0&e filing office is unable to inde. t&e record bLc) 1A4 In t&e case of an initial financing statement# t&e record does not ,rovide a name for t&e debtorA 1@4 In t&e case of an amendment or correction statement# t&e record) 1i4 Does not identify t&e initial financing statement as reDuired by 9 3!$ or 9 3!I as a,,licableA or 1ii4 Identifies an initial financing statement /&ose effectiveness &as la,sed under 9 3!3. 1C4 In t&e case of an initial financing statement t&at ,rovides t&e name of a debtor identified as an individual or an amendment t&at ,rovides a name of a debtor identified as an individual /&ic& /as not ,reviously ,rovided in t&e financing statement to /&ic& t&e record relates# t&e record does not identify t&e debtor+s last nameA or 1D4 In t&e case of a record filed 1or recorded4 in t&e filing office described in 9 3"!1a41!4# t&e record does not ,rovide a sufficient descri,tion of t&e real ,ro,erty to /&ic& it relatesA 1<4 In t&e case of an initial financing statement or an amendment t&at adds a secured ,arty of record# t&e record does not ,rovide a name and mailing address for t&e secured ,arty of recordA 134 In t&e case of an initial financing statement or an amendment t&at ,rovides a name of a debtor /&ic& /as not ,reviously ,rovided in t&e financing statement to /&ic& t&e amendment relates# t&e record does notA 1A4 (rovide a mailing address for t&e debtorA 1@4 Indicate /&et&er t&e debtor is an individual or an organi>ationA or 1C4 If t&e financing statement indicates t&e debtor is an organi>ation# ,rovide) 1i4 A ty,e of organi>ation for t&e debtorA 1ii4 A -urisdiction of organi>ation for t&e debtorA or

;.

1iii4 An organi>ational identification number for t&e debtor or indicate t&at t&e debtor &as none. 1E4 In t&e case of an assignment reflected in an initial financing statement under 9 3!<1a4 or an amendment filed under section 9 3!<1b4# t&e record does not ,rovide t&e name and mailing address for t&e assigneeA or 1C4 In t&e case of a continuation statement# t&e record is not filed /Lin t&e E mont& ,eriod ,rescribed by 9 3!31d4. a. 5inancing Statement %&at does it need to be valid' !. 0&e name of t&e debtor. $. 0&e name of t&e secured creditor. ;. An indication of t&e collateral covered. <. 0&e mailing address of t&e secured creditor Section 9 3!E1b41<4 3. 0&e mailing address of t&e debtor. E. An indication of /&et&er t&e debtor is an individual or a cor,oration. If t&e debtor is an organi>ation 9 3!E1b41341C4 also reDuires re-ection of t&e financing statement unless it contains ; additional items of information. 9 3$"1b4) If a financing statement lac*s any of t&ese 9 ,ieces of info.# ot&er t&an an indication of t&e collateral covered# t&e filing officer s&ould refuse to acce,t it and communicate to t&e filer t&e reason for refusal and t&e date and time t&e record /ould &ave been filed. 0&e attem,t at filing &as accom,lis&ed not&ing# but# notified of its failure# t&e filer &as t&e o,,ortunity to try again. If [< E need not be correctA filing officer not e.,ected to c&ec* for accuracy. %&at must be in a filed financing statement) $. Against a reliance ,urc&aser) M9 3"E1a4 !. 9ame of t&e debtorA not seriously misleading. $. 9ame of t&e secured ,artyA can+t seriously mislead but mig&t give rise to an esto,,el ;. Indication of collateralA not seriously misleading 0&e totality of information included must not be seriously misleaing# M9 3"E1a4. Financing ,arty is meant to give notice to ;rd ,arties t&at certain ,ro,erty mig&t be encumbered# and additional investigation is needed by searc&er. Security agreement is meant to limit t&e collateral t&at t&e creditor &as interest in. 0&e financing statement does not need to describe t&e collateral in t&e same /ay t&at t&e security agreement does# it -ust needs to ,ut ;rd ,arties on inDuiry notice. 0&ere is no need for after acDuired language. Security agreement)descri,tion of collateral Financing statement) indication of collateral

2$ 5i&ing O**ice Err)rs in Acce0tance )r Re-ecti)n #$ Wr)ng&y Acce0te( 5i&ings a. Im,ro,er Acce,tance) If t&e information in ! ; is correct# t&en it is effective even if /rongly acce,tedA &o/ever# if t&e information in < 9 is incorrect# t&en M9 ;;I a,,lies and is still effective. b. 9 3$"1c4) G%&en filed financing statement effectiveH A filed financing statement satisfying 9 3"$1a4 and 1b4 is effective# even if t&e filing office is reDuired to refuse to acce,t it for filing under subsection 1a4. =o/ever# 9 ;;I a,,lies to a filed financing statement ,roviding information described in 9 3!E1b4134 /&ic& is incorrect at t&e time t&e financing statement is filed. c. 0&e reasons /&y t&ey are effective are t&at t&e omission necessitates furt&er inDuiry# t&erefore misleading no one# and if t&e filing officer /ould &ave re-ected t&e filing# t&at /ould &ave given t&e filer t&e o,,ortunity to correct its error. $. Wr)ng&y Re-ecte( 5i&ings) a. If t&e filing officer s&ould acce,t an initial financing statement# eit&er bLc it is correct or bLc t&e manner in /&ic& it is incorrect does not /arrant re-ection under 9 3!E# but t&e filing officer re-ects it instead# t&e financing statement /ill not a,,ear on t&e ,ublic record. Instead# t&e filing officer /ill stam, it /it& t&e date and time of t&e attem,t to file and return it to t&e filer. 19 3$"1b44 b. 9 3!E1d4) G:efusal to acce,t recordA record effective as filed recordH A record t&at is communicated to t&e filing office /L tender of t&e filing fee# but /&ic& t&e filing office refuses to acce,t for a reason ot&er t&an one set fort& in subsection 1b4# is effective as a filed record e.ce,t as against a ,urc&aser of t&e collateral /&ic& gives value in reasonable reliance u,on t&e absence of t&e record from t&e files. c. So# t&e attem,t to file nevert&eless ,erfects t&e underlying SI sufficiently to defeat lien creditors. It is ineffective against a ,urc&aser /&o relied on it to e.tend credit. c$ 5i&er Err)rs in Acce0te( 5i&ings !. Information 9ecessary ?nly to Sualify for Filing a. If a filer entirely omits from t&e financing statement a ,iece of information reDuired in 9 3!E1b4# t&e filing officer can and s&ould re-ect t&e filing. 9 3$"1a4. b. If t&e reDuired ,iece of info. is merely incorrect# &o/ever# t&at is insufficient reason for re-ection.

M 9 ;;I) If a SI or agricultural lien is ,erfected by a filed financing statement ,roviding information described in 9 3!E1b4134 /&ic& is incorrect at t&e time t&e financing statement is filed) 1!4 t&e SI or AL is subordinate to a conflicting ,erfected SI in t&e collateral to t&e e.tent t&at t&e &older of t&e conflict SI gives value in reasonable reliance u,on t&e incorrect info.A and 1$4 a ,urc&aser# ot&er t&an a secured ,arty# of t&e collateral ta*es free of t&e SI or AL to t&e e.tent t&at# in reasonable reliance u,on t&e incorrect info.# t&e ,urc&aser gives value and# in t&e case of c&attel ,a,er# documents# goods# instrument# or a security certificate# receives delivery of t&e collateral. 9 ::I says t&at t&e /rongly acce,ted SI is ,erfected if it satisfies 9 3$". 0&e security interest to t&e -udgment creditor is subordinate to a ,urc&aser+s interest if t&e ,urc&aser gives value $. :eDuired Information %&y certain information is included in financing statements and t&e effect of omission) a. 9ame of Secured (arty) Searc&ers may need t&e name of t&e secured ,arty for $ reasons) i. If terminations statements# released of collateral# or subordination agreements are needed to modify or eliminate ,rior filings to ,ave t&e /ay for t&e ne/ loan# t&e name of t&e secured ,arty on t&e financing statement tells t&e searc&er /&o can or must aut&enticate t&em. ii. 0&e searc&er may need info. from t&e secured ,artyA t&e secured ,arty+s name on t&e financing statement assures t&e searc&er t&at it is inDuiring of t&e rig&t ,erson. *Function of secured ,arty+s name on financing statement is to unambiguously identify t&e &older of t&e SI b. Descri,tion of Collateral) 0&e descri,tion of collateral in a financing statement is often identical to t&at in t&e SA# but t&at is not al/ays so. i. 0&ere are differences in t&e legal standards for t&e descri,tion of t&e collateral in SA and financing statements) a. JSu,er genericK descri,tions are valid in financing statements but not in SA+s. b. 0&e function of t&e financing statement is to ,ut searc&ers on notice of t&e identity of t&e collateral. %e give /ords in t&e financing statement t&eir common meanings. In contrast# /ords in descri,tions of SA+s are given t&e meaning t&at t&e ,arties+ intended. ii. In$uiry Notice A financing statement need not s,ecify t&e ,ro,erty encumbered by a secured ,arty+s lien# but need merely notify subseDuent creditors t&at a lien may e.ist and t&at furt&er inDuiry is necessary to disclose t&e com,lete state of affairs. iii. 0ickle Logging if a financing statement collateral descri,tion clearly does not include t&e collateral of interest to t&e searc&er# t&e searc&er need inDuire no furt&er. %rabo&ski v. 'ohn (eere ) Co. @?A and S( bot& &ad security interests in farming eDui,ment of (+s. @?A filed first and gave a general descri,tion of t&e collateral and filed t&e (+s business address. S( filed second and noted t&e collateral very s,ecifically and gave t&e (+s &ome address# /&ere t&e eDui,ment /as *e,t for t&eir &ome farming business. S( says t&at @?A+s financing statement is invalid bLc it is too general and lists t&e business address# so ; rd ,arties /ould believe t&at t&e Po&n Deere business eDui,ment /as collateral# not t&e &ome business eDui,ment. Court said t&at @?A+s financing statement /as not too broad for a financing statement under 9 !"I. 0&e court says# regarding t&e address# t&at t&e ,ur,ose of it /as not to give t&e location of t&e collateral# but /as given to contact t&e debtor if necessary to furt&er investigate. ;. Aut&ori>ation to File a Financing Statement a. 0&e ,ur,ose of a financing statement is to advise later lenders of t&e e.istence of a ,rior security interest. b. In some states it is illegal to file or refuse to release a Jfraudulent lienK. c. @efore filing a financing statement# t&e secured creditor must obtain aut&ori>ation from t&e debtor in an aut&enticated record. 9 3"91a41!4. d. So# all t&e creditor needs to do to obtain t&e rig&t to file a financing statement is /&at it already &ad to do to become a secured creditor get t&e debtor to aut&enticate a security agreement. M9 !"$1a41C4) Aut&enticate means) 1A4 0o signA or 1@4 0o e.ecute or ot&er/ise ado,t a symbol or encry,t or similarly ,rocess a record in /&ole or in ,art# /it& t&e ,resent intent of t&e aut&enticating ,erson to identify t&e ,erson and ado,t or acce,t a record. M9 3!"1a4) GFiled record effective if aut&ori>edH A filed record is effective only to t&e e.tent t&at it /as filed by a ,erson t&at may file it under 9 3"9. M9 3"9 (ersons 8ntitled to File a :ecord) G(erson entitled to file recordH A ,erson may file an initial financing statement# amendment t&at adds collateral covered by a financing statement# or amendment t&at adds a debtor to a financing statement only if) 1!4 0&e debtor aut&ori>es t&e filing in an aut&enticated record or ,ursuant to subsection 1b4 or 1c4A or

1$4 0&e ,erson &olds an agricultural lien t&at &as become effective at t&e time of filing and t&e financing statement covers only collateral in /&ic& t&e ,erson &olds an agricultural lien. GSecurity agreement as aut&ori>ationH @y aut&enticating or becoming bound as debtor by a security agreement# a debtor or ne/ debtor aut&ori>es t&e filing of an initial financing statement# and an amendment# covering) 1!4 0&e collateral described in t&e SAA and 1$4 (ro,erty t&at becomes collateral under 9 ;!31a41$4# /&et&er or not t&e SA e.,ressly covers ,roceeds. GAcDuisition of collateral as aut&ori>ationH @y acDuiring collateral in /&ic& a SI or agricultural lien continues under 9 ;!31a41!4# a debtor aut&ori>es t&e filing of an initial financing statement# and an amendment# covering t&e collateral and ,ro,erty t&at becomes collateral under 9 ;!31a41$4. G(erson entitled to file certain amendmentsH A ,erson may file an amendment ot&er t&an an amendment t&at adds collateral covered by a financing statement or an amendment t&at adds a debtor to a financing statement only if) 1!4 0&e secured ,arty of record aut&ori>es t&e filingA or 1$4 0&e amendment is a termination statement for a financing statement as to /&ic& t&e secured ,arty of record &as failed to file or send a termination statement as reDuired by 9 3!;1a4 or 1c4# t&e debtor aut&ori>es t&e filing# and t&e termination statement indicates t&at t&e debtor aut&ori>es it to be filed. G5ulti,le secured ,arties of recordH If t&ere is more t&an one secured ,arty of record for a financing statement# eac& secured ,arty of record may aut&ori>e t&e filing of an n amendment under subsection 1d4. Section 3!E reDuires t&at a filer provide information. J8ffective as a filed recordK = filed 1,erfected4 (urc&ase defined in ! $"!) It &as been inter,reted t&at involuntary liens are not ,urc&ases. 1! $"!1$94) (urc&ase means ta*ing by sale# lease# discount# negotiation# mortgage# ,ledge# lien# security interest# issue or reissue# gift# or any ot&er voluntary transaction creating an interest in ,ro,erty.4 9 3!31d4) A record t&at is communicated to t&e filing office /it& tender of t&e filing fee# but /&ic& t&e filing office refuses to acce,t for a reason ot&er t&an one set fort& in subsection 1b4# is effective as a filed record e.ce,t against a ,urc&aser 1defined in ! $"!4 of t&e collateral /&ic& gives value in reasonable reliance 1must &ave loo*ed and found not&ing4 u,on t&e absence of t&e record from t&e files. Code is meant to ,rotect lenders. 0&at is /&y 3!E1d4 made a distinction bet/een ,urc&asers and -udgment creditors. If you leave information t&at falls under 9 3!E1b4134 and it is not re-ected by t&e officer# t&en it is valid# bLc t&e information is not incorrect# -ust missing. 0&is is bLc no one is misled. If t&e financing statement is not filed# t&en it is seriously misleading bLc it does not give notice. 3$" is saying t&at t&e financing statement is effective only if it satisfies 3"$1a4 and 1b4. Terms) Initial financing statement Amendments 7 form at M9 3$!1b4 Assignment) Continuation statement) 0ermination statement) (arty Information c&ange) Financing statement

!I.; Smit& = B$ER -udgmentA sees t&ese filed financing statements a. If Glacier @an*+s Security Agreement covers t&e 0rimble Store and one of t&e financing statements /as intended %e re,resent Glacier @an*. %e /ere su,,osed to &ave t&e 0rimble store# but 0rimble is not in our SA descri,tion. UNI. 8.ce,tions to t&e Article 9 Filing :eDuirement 1Assignment !94 ; %ays to (erfect ?t&er t&an Filing) !. (ossession $. Automatic (erfection by o,eration of la/. ;. Secured creditor may give notice to or t&roug& some ,erson or organi>ation t&at controls t&e collateral. 5ost *inds of security interestsA ,ublic record filing 8.ce,tions) ,ossessionA controlA automatic ,erfection by o,eration of la/

a.

Collateral in t&e (ossession of t&e Secured (arty !. (ossession Gives 9otice 0&eory (ossession is a substitute for ,ublic notice filing for some *inds of collateral. For some ty,es of collateral) an ineffective form of ,erfection For money) 0&e sole means of ,erfecting a security interest 7 ,ossession. M9 ;!"1b41E4) 0&e filing of a financing statement is not necessary to ,erfect a SI) In collateral in t&e secured ,arty+s ,ossession under 9 ;!;. ***19 ;!" also ,rovides ot&er situations in /&ic& t&e filing of a financing statement is not necessary to ,erfect a SI.4*** 8.ce,tion to filing reDuirement is grounded on $ assum,tions) 1!4 A ,erson /&o buys or lends against certain *inds of collateral /ill loo* at t&e collateral before disbursing its money. 1$4 Loo*ing at collateral in t&e J,ossessionK of a secured ,arty /ill alert t&e searc&er to t&e ,ossible e.istence of a SI. 0&ese $ assum,tions called J0)ssessi)n gi;es n)ticeK. 0roble() (ossession doesn+t al/ays give notice# es,ecially to unso,&isticated lenders. It favors t&e relatively so,&isticated ,arties /&o engage in t&ese transactions re,eatedly# at t&e e.,ense of ,eo,le /&o stumble occasionally into a system in /&ic& JeverybodyK *no/s t&ings t&at t&ey do not. Invisible means of ,ossession) Agent) ?ne /&o acts on be&alf of anot&er# and sub-ect to t&e ot&er+s control. M9 ;!;1c41!4 a ,erson in ,ossession aut&enticates a record ac*no/ledging t&at it &olds ,ossession...for t&e secured ,arty+s benefit. G0&is may not be an agency relations&i,H $. %&at is (ossession' 1!4 ,&ysical control of ,ro,erty or 1$4 t&e rig&t to ,&ysically control ,ro,erty. 0&e legal rig&t to control is n)t determinative of ,ossession. 0&is is a legal construct. A secured ,arty can ,ossess collateral t&roug& an agency. 9 :#:.a4 G(erfection by ,ossession or deliveryH 8.ce,t as ot&er/ise ,rovided in subsection 1b4# a secured ,arty may ,erfect a SI in tangi2&e neg)tia2&e ()cuments 1e.. A document t&at is title for t&e goods or a substitute to itA gives t&e &older t&e rig&ts to t&ose goods4# g))(s 1e.. All t&ings t&at are moveable /&en a security interest attac&es4# instruments 1e.. A negotiable or any ot&er /riting t&at evidences t&e rig&t to a monetary ,aymentA substitute for money4# m)ney# or tangi2&e c+atte& 0a0er 1c&attel ,a,er Ga record1s4 t&at s&o/s a monetary obligation W a security interest in leased goodsH t&at is /ritten do/n4# by ta*ing ,ossession of t&e collateral. A secured ,arty may ,erfect a security interest in certificated securities by ta*ing delivery of t&e certificated securities under I ;"!. ;. (ossession as a means of (erfection) De,ending on t&e ty,e of collateral# ,ossession may ,lay any of ; roles in t&e ,erfection of SI+s) o (ossession is an alternative form of ,erfection for some ty,es of collateral. o (ossession is an ineffective form for ot&er ty,es of collateral. o (ossession is t&e s)&e means of ,erfecting a SI in money. (ossession is an alternative to filing /it& goods# instruments# tangible c&attel ,a,er# negotiable documents# and certificated securities. o M9 ;!$1a4) A security interest in c&attel ,a,er# negotiable documents# instruments# or investment ,ro,erty may be ,erfected by filing. o M9 ;!$1c4) GGoods covered by negotiable documentH %&ile goods are in t&e ,ossession of a bailee t&at &as issued a negotiable document covering t&e goods) a. 1!4 A security interest in t&e goods may be ,erfected by ,erfecting a SI in t&e documentA and b. 1$4 A SI ,erfected in t&e document &as ,riority over and SI t&at becomes ,erfected in t&e goods by anot&er met&od during t&at time. o M9 ;!" says you must file to ,erfect e.ce,tT.# and 9 ;!; says you may ,ossess goods to ,erfect t&e SI. Fou don+t =AN8 to ,ossess# but you can. o Instruments) File or ,ossess to ,erfect SI 1loo* at ;!" and ;!;4. (ossession trum,s filing. o (erfection by ,ossession is su0eri)r t) 0er*ecti)n for goods# instruments# tangible c&attel ,a,er# negotiable documents# and certificated securities. (urc&asers /&o subseDuently ta*e ,ossession of t&ese *inds of collateral generally ta*e ,riority over secured creditors /&o ,erfected by filing. o (erfection by ,ossession trum,s ,erfection by filing. a. 9 ;;"1d4) GInstrument ,urc&aser+s ,riorityH 8.ce,t as ot&er/ise ,rovided in 9 ;;!1a4# a ,urc&aser of an instrument &as ,riority over a met&od ot&er t&an ,ossession if t&e ,urc&aser gives value and ta*es ,ossession of t&e instrument in good fait& and /Lout *no/ledge t&at t&e ,urc&ase violate t&e rig&ts of t&e secured ,arty.

b.

9 ;;!1a4) G:ig&ts under Articles ;# C# and I not limitedH 0&is article does not limit t&e rig&ts of a &older in due course of a negotiable instrument# a &older to /&ic& a negotiable document of title &as been duly negotiated# or a ,rotected ,urc&aser of a security. 0&ese &olders or ,urc&asers ta*e ,riority over an earlier SI# even if ,erfected# to t&e e.tent ,rovided in Articles ;# C# and I. c. 0&e effect of suc& liberali>ation of t&e ,erfection reDuirement is to im,ose an additional burden on t&e searc&er. Searc&er must c&ec* bot& t&e system and t&e collateral itself. (erfection by ,ossession is im,ossible for SI in accounts and general intangibles. 0&e secured ,arty /&o ta*es ,ossession of a negotiable ,romissory note is regarded as &aving ,erfected in t&e rig&t to ,ayment it re,resents. T) 2e suite( t) 0er*ecti)n 2y 0)ssessi)nJ c)&&atera& must +a;e a 0+ysica& em2)(iment rec)gni1a2&e as eGc&usi;e&y re0resenting t+e rig+t. 0&e reason t&at money can only be ,erfected by ,ossession is to encourage free negotiability of money# un&am,ered by t&e need to conduct searc&es in t&e system. M9 ;!$1a4 ,ermits t&e ,erfection of SI+s in bot& instruments and c&attel ,a,er by filing. M9 ;;" ,rotects t&e ,urc&asers /&o ta*e ,ossession of c&attel ,a,er or instruments from SI+s ,erfected in t&em by filing. @Lc ,urc&aser is defined to include t&ose /&o ta*e a SI in t&e c&attel ,a,er or instruments as /ell as t&ose /&o buy t&em# t&e effect is to give ,riority to t&ose /&o ,erfect by ta*ing ,ossession over t&ose /&o ,erfect by filing. Collateral in t&e Control of t&e Secured (arty 6sually control t&ings you can+t ,ossess. !. Article 9 recogni>es c)ntr)& of some *inds of collateral as a substitute for filing. 0&ey include) (e0)sit acc)untsJ e&ectr)nic c+atte& 0a0erJ in;estment 0r)0ertyJ an( &etters )* cre(it rig+ts$ a. De0)sit acc)unts) 0y,e of ,ro,erty generally referred to as a ban* account. M9 !"$1a41$94. 0&is definition e.cludes instruments. i. M9 !"< indicates ; /ays to ta*e control of de,osit accounts) !. Secured ,arty can be t&e ban* in /&ic& t&e account is maintained. $. 0&e debtor# t&e secured ,arty# and t&e ban* can aut&enticate a record instructing t&e ban* to com,ly /it& t&e secured ,arty+s instructions /it& regard to t&e account. ;. 0&e secured ,arty can become t&e ban*+s customer by ,utting t&e account in t&e name of t&e secured ,arty. b. In;estment 0r)0erty) a securityTsecurity entitlement# securities account# commodity contract# or commodity account. i. Securities) investment mediums li*e stoc*s# bonds and commodities contracts) !. 0ransferable $. Divisible 1lots of t&e same t&ing4 ;. 0&e ty,e of t&ing traded in t&e securities mar*ets or on an e.c&ange ii. (erfecting a security interest in a security# certificated or uncertificated# may be ,erfected !. by filing# or $. by ta*ing delivery# or ;. by ta*ing control of t&e security. iii. Delivery W Control !. 6ncertificated security $. Delivery W control /&en t&e issuer registers t&e ,urc&aser or t&e ,urc&aser+s non securities intermediary re,resentative as t&e o/ner a. Certificated security) secured ,arty obtains delivery of t&e certificate and registers itself as t&e o/ner of t&e security on t&e records of t&e cor,oration b. 6ncertificated security) secured ,arty registers itself as t&e o/ner of t&e security on t&e records of t&e cor,oration. iv. 0&e security interest of a secured ,arty &aving control of investment ,ro,erty &as ,riority over t&e security interest of a secured ,arty t&at does not &ave control. v. Direct W Indirect =olding vi. A ,urc&aser of securities t&at registers its o/ners&i, /it& t&e issuing cor,oration /it& or /it&out a certificate is referred to as Jdirectly &oldingK t&e security. vii. Indirect &olding)securities ,urc&aser buys t&roug& a securities intermediary /&ic& buys t&e securities on &isL&er be&alf and ac*no/ledges t&e ,urc&aser+s o/ners&i, in mont&ly statement. viii. A secured ,arty ,erfects an interest in a securities entit&ement by !. becoming t&e entitlement &older or $. obtaining t&e securities intermediary+s agreement t&at t&e latter /ill com,ly /it& t&e secured ,arty+s instructions regarding t&e entitlement.

b.

0&e secured ,arty is in control of t&e account even t&oug& t&e debtor can /rite c&ec*s on t&e account and ,er&a,s /it&dra/ t&e entire amount. 0&e control s,ecified 9 !"< is ,otential control# not actual control. ;. (arties /&o /is& to encumber a de,osit account /Lout ,utting ot&er creditors on notice could do so by agreement. <. If anybody is controlling t&e collateral ot&er t&an t&e debtor 1band and debtor can control toget&er4# you must as* /&y t&ey &ave t&at control. @Lc if t&ey+ve ta*en control to ,ut you on notice# you &ave to find t&at out. c. Automatic (erfection of (urc&ase 5oney Security Interests in Consumer Goods !. M9 ;"91!4 creates an e.ce,tion to t&e filing reDuirement for most (5SI+s in consumer goods. 0&e follo/ing SI+s are ,erfected /&en t&ey attac&) a. A (5SI in consumer goods# e.ce,t as ot&er/ise ,rovided in 9 ;!!1b4 /L res,ect to consumer goods t&at are sub-ect to a statute or treaty described in 9 ;!!1a4. i. C)nsumer g))(s 7 goods t&at are boug&t ,rimarily for ,ersonal# family or &ouse&old ,ur,oses. Does not matter &o/ muc& t&e item costs. b. (5SI if i. It is ta*en or retained by t&e seller of collateral to secure all or a ,art of its ,urc&ase ,rice# or ii. It is ta*en by a ,erson /&o by ma*ing advances on incurring an obligation gives value to enable t&e debtor to acDuire rig&ts in or t&e use of t&e collateral 1if suc& value is in fact so used4 $. SI+s t&at met t&e terms of t&is e.ce,tion are considered JautomaticallyK ,erfected. ;. (urc&ase money is giving you t&e money to ,urc&ase t&e collateral. (urc&ase money can also e.ist /&en for instance# you get a @est @uy credit card to buy a ,lasma 0.N. <. M9 !";1b41!4) A security interest in goods is a ,urc&ase money security interest to t&e e.tent t&at t&e goods are ,urc&ase money collateral /L res,ect to t&at security interest. 3. (5SI+s arise in $ situations) a. 8.) (auline buys a ,iano from S/eigert+s for B$#""". S&e ,ays B!"" do/n and signs a note ,romising to ,ay t&e remaining B!#9"" to S/eigert+s. If t&e note is secured by a SI# it is (5SI. b. 8.. (auline ma*es a,,lication to Friendly Finance for a loan t&at /ill enable &er to buy t&e ,iano. S&e signs a ,romissory note for B!#9"" and SA listing t&e ,iano s&e is about to ,urc&ase as collateral. Friendly lends &er t&e B!#9"" and s&e uses t&e money# toget&er /it& &er B!"" to buy t&e ,iano from S/iegert+s. 0&e difference from t&e first situation is t&at a ;rd ,arty ,rovided t&e financing for t&e ,urc&ase and became a secured. i. A secured ,arty can easily lose t&e ,urc&ase money status of its interest. 8.) (auline de,osits t&e B!#9"" loan ,roceeds into &er ban* account# and t&en /rites a c&ec* for B$#""". A Duestion may arise as to /&et&er t&e loan ,roceeds /ere in fact used to buy t&e ,iano. c. Consumer Goods i. ***A (5SI is automatically ,erfected )n&y in consumer goods.*** ii. A (5SI in any ot&er *ind of goods must be ,erfected by t&e ordinary means reDuired in Code for t&e ty,e of collateral. iii. M9 !"$1a41$;4) Consumer goods means goods t&at are used or boug&t for use ,rimarily for 0ers)na&J *ami&yJ )r +)use+)&( 0ur0)ses. d. General Intangibles and Accounts) 9ot mentioned in 9 ;!"# you must file.*** In re Loc*ovic& 3. SI+s 9ot Governed by Article 9 or Anot&er Filing Statute) Interests in /age claims# insurance ,olicies and claims# real estate interests# and non commercial tort claims. a. Insurance ,olicies 7 security interests are J,erfectedK by notification to t&e insurance com,any and inclusion of t&e seured ,arty as a Jloss ,ayeeK on t&e ,olicy itself b. 9on Commercial 0ort Claims 7 @lu.ome Street Associates v. Fireman+s Fund Insurance Co. c. W+y 8er*ecti)n' Gives notice to ,otential ne/ secured creditorsA and to &el, allocated t&e assets of t&e debtor in case of default.

$.

8er*ecti)n Met+)(s
Collateral Goods Chattel paper, tangible Instruments eposit !""ounts Filing (9-312) Optional Optional Optional exclusive Possession (9-313) Optional preferred preferred Control (9-314)

#le"troni" "hattel paper $one% Certi&i"ated 'e"urit% (n"erti&i"ated se"urit% )egotiable bill o& lading )egotiable *arehouse re"eipt

Optional exclusive Optional Optional Optional Optional Optional optional optional

optional

Preferred preferred

!9.! a4 cas& in t&e cas& register 7 ,ossession M9 ;!$1b4A b4 negotiable ,romissory note 7 ,ossession or filing M9 ;!;1a4 W M9 ;!$1a4A c4 money in a ban* account 7 control M9 !"<A d4 s&are of G5 stoc* 7 filing# ,ossession# or control M9 ;!$1a4# M9 ;!;1a4# M9 ;!<1a4A e4 ,romissory notes W security interests in cars' 7 filing or ,ossession M9 ;!$1a4# M9 ;!;1a4 UNII. 0&e Land and Fi.tures :ecording System 1Assignment $"4 a. :eal (ro,erty :ecording System !. Different from ,ersonal ,ro,erty filing system in < /ays) a. Contains documents evidencing liens against real estate# and documents evidencing transfers of o/ners&i, 1deeds4. 0&e ,ersonal ,ro,erty eDuivalent of deeds 1bills of sale4# are not filed in Article filing system. b. Costs more t&an filing in ,ersonal ,ro,erty system. c. :eal estate recording systems aren+t self ,urging. d. Debtor+s name ,roblem relatively insignificant. $. Can searc& by names of ,arties and by t&e descri,tion of ,ro,erty. b. (erfecting in fi.tures !. Goods t&at &ave become so related to ,articular real ,ro,erty t&at an interest in t&em arises under real ,ro,erty la/ 6CC M9 !"$1a41<!4 $. 9ot&ing in Article 9 ,revents t&e creation of ,erfection of SI in fi.tures under real estate la/ of t&e state. M9 ::=.2/> KSI in *iGtures un(er rea& 0r)0erty &a9L T+is artic&e ()es n)t 0re;ent creati)n )* an encum2rance u0)n *iGtures un(er rea& 0r)0erty &a9. *. In re Cliff+s idge Skiing Corp. a. Court ,uts fort& a : 0art test to tell /&et&er somet&ing is a good or a fi.ture) a. Is t&e ,ro,erty anne.ed or attac&ed to t&e realty# b. Is t&e attac&ed ,ro,erty ada,ted or a,,lied t&e use of t&e realty# and c. Is it intended t&at t&e ,ro,erty /ill be ,ermanently attac&ed to t&e realty. b. 0&e boo* gives us anot&er test) Integrate( In(ustria& 8&ant test Goods can be a fi.ture if it is integral to a business or industry /&et&er or not it is attac&ed. c. A m)rtgage ()es n)t c);er a *iGture unti& it is a 0art )* t+e rea& 0r)0ertyJ 2ut a *iGture *i&ing ()es. d. A fi.ture filing is not&ing furt&er from a regular financing statement ot&er t&an /&ere you file it. <. @y filing an ordinary financing statement in t&e ,ersonal ,ro,erty filing system# a secured creditor can ,erfect a SI in goods t&at are fi.tures. Suc& a filing is not a Jfi.ture filing#K but t&ere is not&ing in Article 9 t&at says one must ma*e a fi.ture filing to ,erfect in fi.tures. 9 3"!1a41$4 5ust &ave t&e name of t&e debtor# secured ,arty# descri,tion of t&e collateral# and say t&at it /ill be filed in t&e real ,ro,erty file. 3. A mortgage may be effective as a fi.ture filing as of t&e date of its recordation M9 3"$1c4 E. M9 3"! does not reDuire filing in t&e real estate records to ,erfect in fi.turesA it merely reDuires filing in t&e real estate records to ,erfect by means of a .i!ture .iling. Real estate recording system Art. 9 filing system 1. Mortgages 1. Financing statement 2. Financing statements filed as fixture filings 3. Mortgages effective as fixture filings under 9! "#2$c%

(erfecting in t&e Fi.tures of a 0ransmitting 6tility ***MAINTAININ% 8ER5ECTION*** UNIII.5aintaining (erfection 0&roug& C&anges of 9ame# Identity and 6se 1Assgn. $;4 a. C&anges in t&e Debtor+s 9ame !. %&en dealing /it& a cor,oration# t&ere are /ays t&at searc&er ,rior interestsLloans) a. Insisting t&at debtor ,rove its incor,oration under t&e la/s of some state or country. b. Searc&ing t&e records of t&at state or country for c&anges of t&e debtor+s name. c. =aving discovered t&at t&e debtor /as ,reviously named somet&ing else# conducting its searc& in t&at name as /ell as t&e ne/ one. $. %&en t&ere is a name c&ange for cor,. or individual# FS needs to be amended to reflect t&at c&ange. ;. If a $nd ban* files a FS under debtor+s ne/ name on collateral t&at t&e !st ban* already &ad a SI# a merger is created. <. 9 ?"H.a/> KDis0)siti)nL A *i&e( 5S remains e**ecti;e 9M res0ect t) c)&&atera& t+at is s)&(J eGc+ange(J &ease(J &icense(J )r )t+er9ise (is0)se( )* an( in 9+ic+ a SI )r agricu&tura& &ien c)ntinuesJ e;en i* t+e secure( 0arty An)9s )* )r c)nsents t+e (is0)siti)n$ 18.) 0eresa borro/ed money against &er eDui,ment# later incor,orates &er business and names it %illiams 8lectronics and transfers o/ners&i, in collateral to cor,. 0&e FS is still effective as against t&at collateral4. 3. 9 ?"H.2/> KIn*)rmati)n 2ec)ming seri)us&y mis&ea(ingL EGce0t as )t+er9ise 0r);i(e( in su2secti)n .c/ an( 9 ?"IJ a *inancing statement is n)t ren(ere( ine**ecti;e i*J a*ter t+e *inancing statement is *i&e(J t+e in*)rmati)n 0r);i(e( in t+e *inancing statement 2ec)mes seri)us&y mis&ea(ing un(er 9 ?"< . E. 9 ?"H.c/> KC+ange in (e2t)rs nameL I* a (e2t)r s) c+anges its name t+at a *i&e( *inancing statement 2ec)mes seri)us&y mis&ea(ing un(er 9 ?"<) a. T+e 5S is e**ecti;e t) 0er*ect a security interest in c)&&atera& ac6uire( 2y t+e (e2t)r 2e*)re )r 9Min = m)nt+s a*terJ t+e c+ange4 an(# b. T+e 5S is n)t e**ecti;e t) 0er*ect a security interest in c)&&atera& ac6uire( 2y t+e (e2t)r m)re t+an = m)nt+s a*ter t+e c+angeJ un&ess an amen(ment t) t+e 5S 9+ic+ ren(ers t+e 5S n)t seri)us&y mis&ea(ing is *i&e( 9Min = m)nt+s a*ter t+e c+ange. C. (ur,ose of < mont& rule is for t&e merger to occur. I. If @an* $ finds out t&at debtor c&anged &er name# t&ey need to /ait out t&e < mont&s to see if @an* ! re files. @an*s usually /on+t ma*e loan until < mont& ,eriod &as ela,sed. b. C&anges Affecting Descri,tion of Collateral !. 0y,e I c&anges) C&ange in use. @an* ! lends against debtor+s inventory. Debtor starts using inventory as eDui,ment and see*s to borro/ against it. @an* $ /ill discover @an* !+s FS# but it /ill say inventory# so t&ey may not sus,ect t&e eDui,ment t&ey are about to lend against /as once t&at inventory. 9 3"C1b4 says FS still effective. $. 0y,e II c&anges) C&ange in ty,e. Lumber Co. ta*es SI in /ood it sells to 5. 5 t&en builds &ot tub and attac&es it to real ,ro,erty so t&at it is a fi.ture. 9 3"C1b4 forgives t&e c&ange in descri,tion# but not t&e failure to file a fi.ture filing. 8.c&ange of t&e collateral !. @arter 0ransactions) a. 9 :#?.(/.#/> KA 0er*ecte( SI in 0r)cee(s 2ec)mes un0er*ecte( )n t+e !#st (ay a*ter t+e SI attac+es t) t+e 0r)cee(s un&ess>L t+e *)&&)9ing c)n(iti)ns are satis*ie( ) a$ A *i&e( 5S c);ers t+e )rigina& c)&&atera&4 2$ T+e 0r)cee(s are i(enti*ia2&e cas+ 0r)cee(s4 )r c$ T+e 0r)cee(s are n)t ac6uire( 9M cas+ 0r)cee(s$ b. ; ty,es) a. 0y,e ") 0&e ,roceeds received by debtor fall /Lin t&e descri,tion of collateral of already filed FS. 18.) @an* lends against Coyote loaderQdescri,tion in FS is JloaderK. Debtor e.c&anges for Cater,illar loader. 0&is is o*4. b. 0y,e !) 8.c&ange of collateral for noncas& ,roceeds /&ere t&ose ,roceeds are ,ro,erty not covered by t&e descri,tion in t&e FS but are ,ro,erty in /&ic& a SI could be ,erfected by filing in t&e office /&ere t&e secured creditor+s FS is already on file. 18.) 8.c&ange of inventory for eDui,mentQstill coveredL,erfected4. c. 0y,e $) 8.c&ange of collateral for non cas& ,roceeds of a ty,e in /&ic& filing is reDuired in a filing office ot&er t&an t&e one in /&ic& t&e original collateral /as ,erfected by filing. 18.) 8.c&ange coyote loader for aircraftQno longer ,erfectedQdoes not invo*e 9 ;!31d41!4 e.ce,tion4. 0o be continuously ,erfected in t&e $ items so t&at it &as one

c.

,erfection dating from t&e time of t&e filing of t&e original collateral# t&e secured ,arty must ma*e t&ese filings /Lin $" days from t&e time t&e debtor receives t&e ,roceedsLe.c&ange. $. Collateral to Cas& (roceeds to 9on Cas& (roceeds a. If debtor sells collateral for cas& and t&en buys somet&ing else /it& t&at cas&# t&e creditor must file /Lin $" days of t&e recei,t of ne/ ,ro,erty to be continuously ,erfected. If $nd filing occurs after t&e end of t&e $" day ,eriod# it dates only from t&e time it /as made not continuous. b. 0&is ty,e of transaction governed by 9 ;!31d41;4. Collateral to Cas& (roceeds a. 9 ;!31d41$4 grants secured ,arties continuous# ,er,etual ,erfection in identifiable cas& ,roceeds. b. @an* account can be Jcas& ,roceedsK. As long as t&e account is identifiable# it attac&es automatically. c. Creditor needs to ta*e control of t&e de,osit account to ,erfect.

;.

UIU. 5aintaining (erfection 0&roug& :elocation of Debtor or Collateral 1Assgn. $<4 a. 9 ;"! t&roug& 9 ;"C tells /&ere to file and searc&. b. Initial (erfection !. At t&e Location of t&e Debtor) a$ 9 :"#.#/> EGce0t as )t+er9ise 0r);i(e( in t+is secti)nJ 9+i&e a (e2t)r is &)cate( in a -uris(icti)nJ t+e &)ca& &a9 )* t+at -uris(icti)n g);erns 0er*ecti)nJ t+e e**ect )* 0er*ecti)n )r n)n 0er*ecti)nJ an( t+e 0ri)rity )* a SI in c)&&atera&$ 2$ 9 :"H.a/ .2/> a$ In t+is secti)nJ B0&ace )* 2usinessC means a 0&ace 9+ere a (e2t)r c)n(ucts its a**airs$ 2$ EGce0t as )t+er9ise 0r);i(e( in t+is secti)nJ t+e *)&&)9ing ru&es (etermine a (e2t)rs &)cati)n> i$ .#/ A (e2t)r 9+) is an in(i;i(ua& is &)cate( at t+e in(i;i(ua&s 0rinci0a& resi(ence$ ii$ .!/ A (e2t)r t+at is an )rgani1ati)n an( +as )n&y )ne 0&ace )* 2usiness is &)cate( at t+e 0&ace )* 2usiness$ iii$ .:/ A (e2t)r t+at is an )rgani1ati)n an( +as m)re t+an )ne 0&ace )* 2usiness is &)cate( at its c+ie* eGecuti;e )**ice$ c. ?ne need not live in t&e building currently for it to Dualify as one+s ,rinci,al residence. Do not need to intend to stay t&ere ,ermanently eit&er. ($ 9 :"H.e/> A registere( )rgani1ati)n t+at is )rgani1e( un(er t+e &a9 )* a state is &)cate( in t+at state$ e. For an unregistered organi>ation# t&ey must file /&ere t&eir ,rinci,al ,lace of business is. 0&e only time /e care about ,lace of business is /&en t&ere is -ust one. f. BNer;e Center TestC) 0&e organi>ation is located in t&e ,lace from /&ic& it is managedQ regardless of t&e location of its o,erations. 0&e ,lace from /&ic& it is managed is its nerve center# t&e ,lace from /&ic& commands originate. $. ;. At t&e location of t&e Collateral) Fi.ture filing must be made in t&e office designated for t&e filing or recording of a mortgage on t&e real ,ro,erty to /&ic& t&e fi.ture is attac&edQ9 3"!1a41!4. :elocation of Debtor a$ 9 :#<.a/> K%enera& Ru&e> E**ect )n 0er*ecti)n )* c+ange in g);erning &a9L A SI 0er*ecte( 0ursuant t) t+e &a9 )* t+e -uris(icti)n (esignate( in 9 :"#.#/ )r 9 :"?.c/ remains 0er*ecte( unti& t+e ear&iest )*> a$ T+e time 0er*ecti)n 9)u&( +a;e cease( un(er t+e &a9 )* t+at -uris(icti)n4 2$ T+e eG0irati)n )* = m)nt+s a*ter a c+ange )* t+e (e2t)rs &)cati)n t) an)t+er -uris(icti)n4 )r c$ T+e eG0irati)n )* # year a*ter a trans*er )* c)&&atera& t) a 0ers)n t+at t+ere2y 2ec)mes a (e2t)r an( is &)cate( in an)t+er -uris(icti)n$ b. If a debtor reincor,orates by merger or sale of assets# 9 ;!E1a41;4 /ill a,,ly# giving t&e secured creditor ! year to discover t&e merger and ,erfect in t&e destination state.

NNN8RIORIT,NNN

UU.

0&e Conce,t of (riority a. $ basic ,rinci,les govern t&e timing of t&e enforcement of com,eting liens against t&e same collateral) !. Absent an agreement to t&e contrary# any lien &older may foreclose /&ile t&e debtor is in default to t&at lien &older. 0&e e.istence of a ,rior lien generally doesn+t bloc* t&e rig&ts under a subordinate one. $. 9o lien &older is com,elled to foreclose. b. General rules of Foreclosure 19 E!3 and 9 E!C4) !. 0&e sale disc&arges from t&e collateral t&e lien under /&ic& t&e sale is &eld and all subordinate liens. $. 0&e sale transfers t&e debtor+s interest in t&e collateral to t&e ,urc&aser# sub-ect to all ,rior liens. ;. 0&e ,roceeds of sale are a,,lied first to e.,enses of sale# t&en to ,ayment of lien under /&ic& sale /as &eld# t&e to ,ayment of subordinate liens in t&e order of ,riority. <. 0&e debt underlying eac& lien is reduced by amount ,aid to lien &older from sale# but balance remains o/ing. 0&e lien &older is t&en entitled to a -udgment against t&e debtor for deficiency 1deficiency -udgment4 unless a statute ,rovides ot&er/ise. c$ 9 <#H.a/> KE**ects )* (is0)siti)nL A secure( 0artys (is0)siti)n )* c)&&atera& a*ter (e*au&t> #$ .#/ Trans*ers t) a trans*eree *)r ;a&ue )* t+e (e2t)rs rig+ts in t+e c)&&atera&4 $. .!/ Disc+arges t+e SI un(er 9+ic+ (is0)siti)n 1sale4 is ma(e4 an( :$ .:/ Disc+arges any su2)r(inate SI )r )t+er su2)r(inate &ien$ d. If !st mortgagor forces sale) !. 5ortgage sale /ill disc&arge !st and $nd mortgageLliens so t&at t&e ,urc&aser /ill o/n t&e vacation &ome free and clear of t&em. $. S&eriff /ill use t&e !st ,roceeds of sale to ,ay t&e e.,enses of sale. ;. S&eriff /ill ,ay t&e ne.t amount to !st mortgagor. <. S&eriff /ill ,ay ne.t amount 1if any4 to $nd mortgagor. 3. S&eriff /ill ,ay any remaining balance to debtor 1ignoring claims of unsecured creditors4. e. If $nd mortgagor forces sale) !. 5ortgage sale disc&arges only t&e $nd mortgage and subordinate liensA t&e ,urc&aser /ill ta*e sub-ect to first mortgage. $. S&eriff /ill use first ,roceeds of sale to ,ay t&e e.,enses of sale. ;. S&eriff /ill not ,ay anyt&ing to !st mortgagor# but /ill ,ay ne.t amount to $nd mortgage &older. <. S&eriff /ill ,ay any remaining balance to debtor 1unless t&ere are ot&er subordinate secured claims4. f. At foreclosure /e+re -ust getting rid of security# not t&e contract t&at secured t&at interest. g. 5ortgages usually &ave ,riority over -udgment liens for t&e sim,le reason t&at /&en a debtor &as -udgment liens against &is ,ro,erty# no on /ill ma*e a mortgage loan to debtor. &. %ro#er+s Supply Co. v. Inter#ity Investment ,roperties 1:ig&t to (ossession @et/een Lien =olders4 !. Grocers Su,,ly lent money to 0&e Grocery Store and Cedric %ise. $. Intercity foreclosed on a -udgment lien# *no/ing t&at ( &ad an interest in t&e inventory of t&e Grocery Store. Intercity too* ,ossession of t&e inventory and did not notify ( of t&e foreclosure. ;. ( &ad to ,ay B$<#""" to re acDuire t&e inventory. <. 0&e security agreement bet/een ( and 0&e Grocery Store ,rovided t&at a -udgment against t&e debtor# or t&e levy# sei>ure# or attac&ment of t&e collateral constituted a default and u,on t&e occurrence of any of t&ose events# t&e entire obligation becomes immediately due and ,ayable at secured ,arty+s o,tion /Lout notice to debtor. 3. Court &eld t&at (+s rig&t to ta*e ,ossession of t&e collateral /as su,erior to t&e rig&t of Intercity. E. 0&is case says t&at senior creditor &as an absolute rig&t to ,ossession. So t&e senior creditor can *ee, a -unior creditor from collecting by ta*ing ,ossession of t&e collateral /&enever t&ey /ant. 0&e -unior creditor is sub-ected to t&e /&imsy of t&e senior creditor. i. -. *. $rierson v. -nited $arm .gen#y !. 0&is case says t&at if t&e senior lien &older &as t&e rig&t to foreclose 1li*e in Grocers Su,,ly4 but c&ooses not to# and t&is frustrates t&e ability of -unior creditors to foreclose# t&en t&e senior lender must foreclose. Senior lien creditor can assert its rig&t to ,ossess if collateral /ould be /asted u,on sale. C)&&usi)n) 0&is case says t&at if t&e senior lien &older &as t&e rig&t to foreclose 1li*e in Grocers Su,,ly4 but c&ooses not to# and t&is frustrates t&e ability of -unior creditors to foreclose# t&en t&e senior lender must foreclose.

NNNCOM8ETITIONS 5OR COLLATERAL*** UUI. Lien Creditors Against Secured Creditors 1Assignment $I4 a. =o/ Creditors @ecome JLien CreditorsK

!. $. ;. <. b.

9 !"$1a413$4 defines lien creditor broadly as including any Jcreditor /&o &as acDuired a lien on t&e ,ro,erty involved by attac&ment# levy or t&e li*e.K Attac&ment is /&en a ,laintiff in litigation receives -udgment# gives /rit to s&eriff# and levies on it. Nirtually synonymous /it& e.ecution# but attac&ment occurs before -udgment is entered# e.ecution occurs after. Garnis&ment) 6nsecured creditor may obtain lien creditor status by reac&ing debts o/ing from a ; rd ,arty to debtor or ,ro,erty of debtor is in ;rd ,arties &ands. :ecordation of a Pudgment for 5oney Damages) :ecordation of -udgment in real ,ro,erty recording system creates and ,erfects a lien against all real ,ro,erty o/ned by debtor /Lin county.

(riority Among Lien Creditors !. First creditor to ta*e t&e legally designated crucial ste, &as !st lien# t&e $nd to ta*e ste, &as $nd lien and so fort&. $. La/s generally a/ard a lien ,riority as of one of four dates) a. Date of Levy) Date on /&ic& s&eriff or ot&er officer too* ,ossession of ,articular ,ro,erty. b. Date of Delivery of %rit) A /rit of e.ecution# attac&ment# or garnis&ment ty,ically is issued by cler* of court on reDuest of creditor /&o is entitled to it. Creditor t&en delivers /rit to s&eriff. c. Date of Service of %rit of Garnis&ment) Service is delivery of /rit by s&eriff to garnis&ee# ty,ically ban* or em,loyer. d. Date of :ecordation of Pudgment) Date -udgment is delivered to filing or recording officer. ;. (riority @et/een Lien Creditor and Secured Creditor a. (riority bet/een lien creditor and non ,urc&ase money secured creditor de,ends on /&et&er t&e lien creditor becomes a lien creditor before secured creditor does eit&er of $ t&ings) a. (erfects its SI or b. Files a financing statement and com,lies /it& 9 $";1b41;4. 2$ 9 :"I.a/> K8er*ecti)n )* SIL EGce0t as )t+er9ise 0r);i(e( in t+is secti)n an( 9 :"9J a SI is 0er*ecte( i* it +as attac+e( an a&& )* t+e a00&ica2&e re6uirements *)r 0er*ecti)n in 9 :#" t+r)ug+ 9 :#< +a;e 2een satis*ie($ A SI is 0er*ecte( 9+en it attac+es i* t+e a00&ica2&e re6uirements are satis*ie( 2e*)re t+e SI attac+es$ c. In most states# lien creditors become lien creditors on t&e date of levy. ($ 9 :#H.a/> KC)n*&icting SIs an( rig+ts )* &ien cre(it)rsL A SI )r AL is su2)r(inate t) t+e rig+ts )*> a$ A 0ers)n entit&e( t) 0ri)rity un(er 9 :!!4 an( 2$ EGce0t as )t+er9ise 0r);i(e( in .e/J a 0ers)n t+at 2ec)mes a &ien cre(it)r 2e*)re t+e ear&ier )* t+e time> i$ T+e SI )r AL is 0er*ecte(4 )r ii$ One )* t+e c)n(iti)ns s0eci*ie( in9 !":.2/.:/ is met an( a 5S c);ering t+e c)&&atera& is *i&e($ e. (riority @et/een Lien Creditors and 5ortgage Creditors a. (riority bL/ lien creditors and mortgage creditors is governed by real estate la/. b. :8 la/ generally gives ,riority to fist lien created and t&en reverses t&e result only if t&e failure to ,erfect offends t&e state+s recording statute. c. A mortgage granted before t&e -udgment creditor became lien creditor by recording its -udgment &as ,riority over -udgment lien even t&oug& -udgment lien /as !st lien ,erfected. (urc&ase 5oney (riority a. %&en a $nd in time interest ta*es ,recedence over an earlier interest# t&e cognoscenti describe t&e $nd secured creditor as J,rimingK t&e !st. FreDuently occurs /it& (5SI+s# /&ic& may be granted and ,erfected long after t&e com,eting liens t&ey ,rime. b. (5SI+s e.ce,tion to first in time is first in rig&t rule. c. 9 :#H.e/> K8MSIL EGce0t as )t+er9ise 0r);i(e( in 9 :!" an( 9 :!#J i* a 0ers)n *i&es a 5S 9M res0ect t) a 8MSI 2e*)re )r 9Min !" (ays a*ter (e2t)r recei;es (e&i;ery )* t+e c)&&atera&J t+e SI taAe 0ri)rity );er t+e rig+ts )* a 2uyerJ &esseeJ )r &ien cre(it)r 9+ic+ arise 2et9een t+e time t+e SI attac+es an( t+e time )* *i&ing$

f.

UUII. Secured Creditors Against Secured Creditors 1Assignment ;$4 a. 0&e @asic :ule) First to File or (erfect

#$

9 :!!.a/> K%enera& 8ri)rity Ru&esL EGce0t as )t+er9ise 0r);i(e( in t+is secti)nJ 0ri)rity am)ng c)n*&icting SIs an( ALs in t+e same c)&&atera& is (etermine( acc)r(ing t) t+e *)&&)9ing ru&es> a$ C)n*&icting 0er*ecte( SIs an( ALs ranA acc)r(ing t) 0ri)rity in time )* *i&ing )r 0er*ecti)n$ 8ri)rity (ates *r)m t+e ear&ier )* t+e time a *i&ing c);ering t+e c)&&atera& is #st ma(e )r t+e SI )r AL is *irst 0er*ecte(J i* t+ere is n) 0eri)( t+erea*ter 9+en t+ere is neit+er *i&ing n)r 0er*ecti)n$ 2$ A 0er*ecte( SI )r AL +as 0ri)rity );er a c)n*&icting un0er*ecte( SI )r AL$ c$ T+e *irst SI )r AL t) attac+ )r 2ec)me e**ecti;e +as 0ri)rity i* c)n*&icting SIs an( Agricu&tura& &iens are un0er*ecte($ ***N)teJ t+e ru&e is t+e *irst t) *i&e or 0er*ect*** 9 :!? 8ri)rity )* SIs in Trans*erre( C)&&atera&> a$ .a/ KSu2)r(inati)n )* SI in trans*erre( c)&&atera&L EGce0t as )t+er9ise 0r);i(e( in .2/J a SI create( 2y a (e2t)r is su2)r(inate t) a SI in t+e same c)&&atera& create( 2y an)t+er 0ers)n i*> a$ .#/ T+e (e2t)r ac6uire( t+e c)&&atera& su2-ect t) t+e SI create( 2y t+e )t+er 0ers)n4 2$ T+e SI create( 2y t+e )t+er 0ers)n 9as 0er*ecte( 9+en t+e (e2t)r ac6uire( t+e c)&&atera&4 an( c$ T+ere is n) 0eri)( t+erea*ter 9+en t+e SI is un0er*ecte($ 2$ .2/ KLimitati)n )* Su2secti)n .a/ su2)r(inati)nL Su2secti)n .a/ su2)r(inates a SI )n&y i* t+e SI> a$ Ot+er9ise 9)u&( +a;e 0ri)rity s)&e&y un(er 9 :!!.a/ )r 9 :!=4 )r b. Ar)se s)&e&y un(er ! H##.:/ )r !A ?"I.?/. (riority of Future Advances a. :ule regarding future advances is essentially t&e rule a,,lied bet/een a mortgage &older and lien creditor. b. (rovided only t&at t&e secured creditor+s financing statement Jcovers t&e collateral#K all advances made by t&e secured creditor to t&e debtor &ave ,riority as of t&e foiling of t&e FS. c. Future advances are a ty,e of collusion. d. If t&ere is an agreement saying t&at t&e secured creditor /ill give money /Lin a certain amount of time# and it is made before t&e SC *no/s about a lien creditor# t&e SC can lend t&at money at any time in t&e future. If t&ere is no agreement# and t&e SC doesn+t lend /Lin <3 days of levy# t&en t&e lien creditor ta*es ,riority. e. A SC cannot lend more t&an t&e amount set fort& in t&e original agreement# unless it ma*es a ne/ security agreement 1/&ic& it must do before *no/ledge of t&e lien in order to attac& to original SA and get ,riority4. f. 0&e general rule for attac&ment) If t&e documents at t&e time of t&e creation of t&e SA says /e /ill lend . amount of dollars and . more /&enever /e deem necessary# t&en any future advance /ill attac& and /ill &ave ,riority. If t&ere is no suc& agreement# any future advance /ill not be attac&ed. g$ 9 :!: K5uture A(;ancesL a$ KW+en 0ri)rity 2ase( )n time )* a(;anceL EGce0t as )t+er9ise 0r);i(e( in .c/J *)r 0ur0)ses )* (etermining t+e 0ri)rity )* a 0er*ecte( SI un(er 9 :!!.a/.#/J 0er*ecti)n )* t+e SI (ates *r)m t+e time an a(;ance is ma(e t) t+e eGtent t+at t+e SI secures an( a(;ance t+at> i$ .#/ Is ma(e 9+i&e t+e SI is 0er*ecte( )n&y> #$ Un(er 9 :"9 9+en it attac+es4 )r !$ Tem0)rari&y un(er 9 :#!.e/J .*/J )r .g/4 an( ii. .!/ Is n)t ma(e 0ursuant t) a c)mmitment entere( int) 2e*)re )r 9+i&e t+e SI is 0er*ecte( 2y a met+)( )t+er t+an un(er 9 :"9 )r 9 :#!.e/J .*/ )r .g/. 2$ KLien Cre(it)rL EGce0t as )t+er9ise 0r);i(e( in .c/J a SI is su2)r(inate t) t+e rig+ts )* a 0ers)n t+at 2ec)mes a &ien cre(it)r t) t+e eGtent t+at t+e SI secures an a(;ance ma(e m)re t+an =? (ays a*ter t+e 0ers)n 2ec)mes a &ien cre(it)r un&ess t+e a(;ance is ma(e> i$ .#/ WM)ut An)9&e(ge )* t+e &ien4 )r ii$ 8ursuant t) a c)mmitment entere( int) 9M)ut An)9&e(ge )* t+e &ien$ c$ K3uyer )* Recei;a2&esL Su2secti)ns .a/ an( .2/ ()nt a00&y t) a SI +e&( 2y a secure( 0arty t+at is a 2uyer )* acc)untsJ c+atte& 0a0erJ 0ayment intangi2&esJ )r 0r)miss)ry n)tes )r a c)nsign)r$

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($ K3uyer )* %))(sL EGce0t as )t+er9ise 0r);i(e( in .e/J a 2uyer )* g))(s )t+er t+an a 2uyer in )r(inary c)urse )* 2usiness taAes *ree )* a SI t) t+e eGtent t+at it secures a(;ances ma(e a*ter t+e ear&ier )*> i$ .#/ T+e time t+e secure( 0arty ac6uires An)9&e(ge )* t+e 2uyers 0urc+ase4 )r ii$ =? (ays a*ter t+e 0urc+ase$ e$ Su2secti)n .(/ ()es n)t a00&y i* t+e a(;ance is ma(e 0ursuant t) a c)mmitment entere( int) 9M)ut An)9&e(ge )* t+e 2uyers 0urc+ase an( 2e*)re t+e eG0irati)n )* t+e =? (ay 0eri)($ *$ EGce0t as )t+er9ise 0r);i(e( in su2secti)n .g/J a &esee )* g))(sJ )t+er t+an a &essee in )r(inary c)urse )* 2usinessJ taAes t+e &ease+)&( interest *ree )* a SI t) t+e eGtent t+at it secures a(;ances ma(e a*ter t+e ear&ier )*> i$ .#/ Te time t+e secure( 0arty ac6uires An)9&e(ge )* t+e &ease4 )r ii$ =? (ays a*ter t+e &ease c)ntract 2ec)mes en*)rcea2&e$ g$ Su2secti)n .*/ ()es n)t a00&y i* t+e a(;ance is ma(e 0ursuant t) a c)mmitment entere( int) 9M)ut An)9&e(ge )* t+e &ease an( 2e*)re t+e eG0irati)n )* t+e =? (ay 0eri)($ 3. (riority in After AcDuired (ro,erty a. If a debtor later acDuires ,ro,erty t&at fits t&e descri,tion in t&e SA# t&e SI attac&es under 9 $";1b4. b. As against ot&er secured creditors of t&e debtor# t&e after acDuired lender+s ,riority dates from t&e time of its filing. A SI &as t&e same ,riority /L res,ect to after acDuired ,ro,erty t&at it &as /L res,ect to t&e original collateral. (5SI+s Generally a$ 9 :!=.a/> K%enera& Ru&e> 8MSI 0ri)rityL EGce0t as )t+er9ise 0r);i(e( in .g/J a 0er*ecte( 8MSI in g))(s )t+er t+an in;ent)ry )r &i;est)cA +as 0ri)rity );er a c)n*&icting SI in t+e same g))(sJ an(J eGce0t as )t+er9ise 0r);i(e( in 9 :!HJ a 0er*ecte( SI in its i(enti*ia2&e 0r)cee(s a&s) +as 0ri)rityJ i* t+e 8MSI is 0er*ecte( 9+en t+e (e2t)r recei;es 0)ssessi)n )* t+e c)&&atera& )r 9Min !" (ays t+erea*ter$ b. 8.) @an* ! files a FS against t&e eDui,ment of Davis Industries on Feb. !. ?nly Puly !# (referred 5icro Sales# Inc 1(5SI4 sells a com,uter to Davis# delivers ,ossession# and retains a (5SI. ?n Puly $"# (5SI ,erfects by filing a FS. (5SI &as ,riority over @an* ! /L regard to t&e com,uter under 9 ;$<1a4. c. 0&is violates first in time rule. It is bLc t&e (5 lender is Jfirst in anot&er im,ortant sense) It eit&er su,,lied t&e collateral or made advances to enable t&e debtor to acDuire t&e collateral. d. (5 lender &as a relations&i, /L collateral before after acDuired lender does. e. :ule enables com,anies to sell and deliver immediately /Lout &aving to c&ec* ,ublic records. *$ 9 :!=.g/.#/> KC)n*&icting 8MSIsL I* m)re t+an )ne SI 6ua&i*ies *)r 0ri)rity in t+e same c)&&atera& un(er .a/J .2/J .(/J )r .*/ A SI securing an )2&igati)n incurre( as a&& )r 0art )* t+e 0rice )* t+e c)&&atera& +as 0ri)rity );er a SI securing an )2&igati)n incurre( *)r ;a&ue gi;en t) ena2&e t+e (e2t)r t) ac6uire rig+ts in )r t+e use )* c)&&atera&$ (5SI+s in Inventory a. 0&e $" day grace ,eriod for t&e filing of a (5SI in 9 ;$<1a4 does not a,,ly /&en t&e ,ro,erty sold /ill be inventory in t&e &ands of t&e buyer. b. 0&e inventory lender must learn of t&e financing before disbursing against t&e collateral. c$ 9 :!=.2/> KIn;ent)ry 0urc+ase m)ney 0ri)rityL Su2-ect t) su2secti)n .c/ an( eGce0t as )t+er9ise 0r);i(e( in .g/J a 0er*ecte( 8MSI in in;ent)ry +as 0ri)rity );er a c)n*&icting SI in t+e same in;ent)ryJ +as 0ri)rity );er a c)n*&icting SI in c+atte& 0a0er )r an instrument c)nstituting 0r)cee(s )* t+e in;ent)ry an( in 0r)cee(s )* t+e c+atte& 0a0erJ i* s) 0r);i(e( in " ::" an( eGce0t as )t+er9ise 0r);i(e( in 9 :!HJ a&s) +as 0ri)rity in i(enti*ia2&e cas+ 0r)cee(s are recei;e( )n )r 2e*)re t+e (e&i;er )* t+e in;ent)ry t) a 2uyerJ i*> a$ .#/ T+e 8MSI is 0er*ecte( 9+en t+e (e2t)r recei;es 0)ssessi)n )* t+e in;ent)ry$ 2$ .!/ T+e 0urc+ase m)ney secure( 0arty sen(s an aut+enticate( n)ti*icati)n t) t+e +)&(er )* t+e c)n*&icting SI4 c$ .:/ T+e +)&(er )* t+e c)n*&icting SI recei;es t+e n)ti*icati)n 9Min ? years 2e*)re t+e (e2t)r recei;es 0)ssessi)n )* t+e in;ent)ry4 an( ($ .=/ T+e n)ti*icati)n states t+at t+e 0ers)n sen(ing t+e n)ti*icati)n +as )r eG0ects t) ac6uire a 8MSI in in;ent)ry )* t+e (e2t)r an( (escri2es t+e in;ent)ry$

E.

C.

d. I.

(rotection comes /Lout necessity for t&e inventory lender to searc& t&e filing system before ma*ing eac& advance.

(urc&ase 5oney (riority in (roceeds a. (urc&ase money ,riority under 9 ;$<1a4 e.tends to t&e collateral or its ,roceeds. b. 0&ere is an e.ce,tion to t&e above rule) (urc&ase money status in inventory flo/s only into c&attel ,a,er# instruments# and cas& ,roceeds. 0&is ,revents ,urc&ase money status flo/ing into ot&er *inds of ,roceeds# most notably accounts. (riority in Commingled Collateral a. Collateral is co((ingled /&en it is mi.ed /L ot&er ,ro,erty. b. %&en t&e identity of collateral is lost by commingling 1as t&e collateral becomes ,art of a ,roduct or mass4# t&e SI continues in t&e ,roduct or mass. c. %&en identity is not lost# but is instead used as a re,lacement ,art in a mac&ine 1accession4# t&en t&e secured ,arty+s interest /ill continue to be ,erfected# and it /ill &ave ,riority over later ,erfected interests in t&e /&ole. d. If more t&an one SI attac&es to a ,roduct or mass as a result of commingling# t&e interests ran* eDually and s&are in t&e ,ro,ortion t&at t&e cost of eac& ,arty+s contribution bears to t&e total cost of t&e ,roduct or mass.

9.

b. UUIII.