CHAPTER ONE INTRODUCTION TO SECURED TRANSACTION

It is understandable that someone extending credit in a sale or loan transaction wants to be sure of repayment. Some debtors are so solvent and/or trustworthy that the creditor demands nothing more than the debtor's promise to pay (sometimes called a "signature" loan) creditors doing this are said to be unsecured. In many transactions the creditor is less sanguine about the debtor's ability or desire to repay and may demand that the debtor either obtain a surety (called by various names! a co-signor, a guarantor, or" in #rticle $ of the %niform &ommercial &ode" an accommodation party) or secure the debt by nominating some of the debtor's current or future property as collateral. If the debtor defaults" the collateral may be sei'ed and sold and the proceeds of the sale used to pay the debt. Basic definitions: # lien is an interest in the debtor's property given by the law to protect a creditor. i. If the debtor voluntarily grants such an interest" a consensual lien is created. ii. If a consensual lien is ta(en in the debtor's real property" the lien is called a mortgage. # consensual lien in personal property or fixtures is called a security interest and is governed by #rticle ) of the %niform &ommercial &ode. Involuntary liens can also be imposed against the debtor's property. If the lien arises from *udicial proceedings (the creditor sues" recovers *udgment" and sends the sheriff out to sei'e the defendant's property)" a judicial lien is created. # statutory lien is one imposed by either a statute or the common law in favor of certain creditors the law deems worthy of protection. +xamples are the liens given to landlords" to artisans repairing personal property (the garage mechanic" for example)" and to a host of others" such as ostlers" inn(eepers" and even attorneys. # mechanic's lien is a statutory lien in favor of those who perform construction wor(. #nd if you do not pay your taxes" the federal government will file the awesome federal tax lien" a statutory lien that reaches all of the taxpayer's property" a matter we treat at length in a later chapter. BANKRUPTCY PRE-CODE SECURITY DEVICES Wa ace !" Ratne# $%&'() ,. -y the law of .ew /or(" a transfer of property" as security for a debt" which reserves to the transferor the right to dispose of the property or to apply its proceeds for his own uses is fraudulent and void as to creditors. 0. 1his rule applies to the assignment of present and future boo( accounts as well as to assignment of chattels" since it does not result from the retention of ostensible ownership by the assignor" but from the fact that the reservation of dominion by him is inconsistent with the effective disposition of title and creation of a lien. $. Held that an assignment made by a mercantile corporation" more than four months before it was ad*udged ban(rupt" of its present and future accounts receivable as security for a loan was void

under the above rule" so that delivery of a list of accounts" and payments made within the four months" were inoperative to perfect a lien in the assignee" but were unlawful preferences" under the -an(ruptcy #ct. secret lien2a ien not appearing of record and un(nown to the purchasers a ien reserved by the vendor and (ept hidden from third parties to secure the payment of goods after delivery. P ed*e In a pledge3 the debtor (called a pledgor) gives physical possession of the collateral to the creditor (called the pledgee) until the debt is paid. 3ossession then perfects the creditor's interest in the collateral (even against the ban(ruptcy trustee). C+atte ,o#t*a*e 1he debtor could always mortgage land" so why not have something similar for personal property (chattels)? #nd" as with real property" the mortgage given by the debtor (the mortgagor) to the creditor (the mortgagee) was recorded in a designated place and indexed under the name of the debtor so that other potential creditors could chec( and see whether the collateral was encumbered. 1hus" the debtor could have possession" but the secret lien problem so dreaded in -enedict v. 4atner was avoided because the mortgage was (through the recording system) witness to the creditor's very public interest in the property. A. Conditional Sale &onditional sale whereby the buyer got possession of the property but the seller reserved full and complete title to it until the buyer paid in full (the condition in conditional sale was this payment before the buyer got any title. In most states the seller's interest in a conditional sale had to be filed to be perfected. -ie d Wa#e+o.se

B"

CHAPTER TWO THE SCOPE O- ARTIC/E &

V" E0C/USIONS -RO, ARTIC/E & A" Federal Statutes %&& does not displace federal law" however it applies to the extent the federal statute doesn5t in personal property. 6ust remember that for certain matters must be researched on federal 7 state level ship mortgages" aircraft titles" patent 7 copyrights" railroad e8uipment 7 some interstate commercial vehicles are in part governed by the federal statutes. 9urther" certain federal statutes may void security interests. +.g! 1ruth in :ending #ct. P+i 1o A!iation !" S+ac1et $%&23) 9acts! Seller sold the same airplane to two different buyers one had possession but didn5t record" the second on got the documents 7 recorded right away. ;ho gets it< 1he party that recorded ,ain 4oint: t#ansfe# of tit e to ai#c#aft s not !a id a*ainst innocent 3 #d 4a#t5 67o.t #eco#ded 6#itten a*#ee8ent B. /AND/ORD9S /IEN AND OTHER STATUTORY /IENS

PROB/E, : & #S a security for rent money" lease agreement stated that he can sei'e all tenant inventory in case of default. =oes he have to perfect under article )< /+S" consensual landlord's liens are not excluded from coverage of the %niform &ommercial &ode. C" Wa*e Assi*n8ents Statutory regulations (illed wage assignments thus some states absolutely prohibit the assignment of future wages. but some permit them in limited circumstances if the employer consents" some states if both employer 7 spouse agree. P#o; e8 : %< Insurance sales" to secure a loan he gave the ban(" all present 7 future commissions earned or to be earned from company ">"". #rticle ) cover< .?" 1he %&& @ )A,BC" exempts from the coverage of %.&.&. art. ) any transfer of a claim for wages" salary or other compensation of an employee. D. Non-financing Assignments i. %&& article ) doesn5t apply to some transfer of accounts" chattel paper" payment intangibles" or promissory notes is meant to be an exclusion of assignments of nonAfinancing nature. P#o; e8 :%% a) - sold his business w. all account receivables .eed to ta(e article ) steps< .?" 1his article shall not apply to! C) a sale of accounts" chattel paper" payment intangibles" or promissory notes as part of a sale of the business out of which they arose b)# agreed to paint. 3ortrait of mayor but doesn5t have time. De mandated *ob to -. 6ust - ta(e article ) step< .?" this article shall not apply to! an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract c) # sold unpaid account to collection agency. 6ust collection agency ta(e comply w. article )< .?" this article shall not apply to an assignment of accounts" chattel paper" payment intangibles" or promissory notes which is for the purpose of collection only d) # transferred to - the right to money of portrait he sold. 6ust - comply with article )< .? 1his article shall not apply to an assignment of a single account" payment intangible" or promissory note to an assignee in full or partial satisfaction of a preAexisting indebtedness

C" REA/ ESTATE +xcept for fixtures" real estate security interests are not covered by covered by article ). ;hat about the paperwor( 7 promissory not the debtor sign< Problem # 12 Bank A took from ank B as collateral real property mortgages ! promissory notes of B"s orro#ers. $hat should A do to protect its interest? 1his article doesn5t apply to ban(s - real property mortgage. Dowever" when -an( - %ses them as collateral to -an( # article ) will cover" "if - sells the promissory note to #" or gives security interest in the note to secure its own obligation" this article applies"

#'s security interest in the note gives it a security interest in mortgage lien that secures the note. If security interest in the note is perfected" then SI in the mortgage is perfected. D" OTHER E0C/USIONS P#o; e8 : %3 -an( too( security interest in all credit card purchases 7 personal chec(ing account .#rticle ) applies to account< .o" this article doesn5t apply to an assignment of a deposit account in a consumer transaction" A#tic e &-%<& 6+at t+is a#tic e does = doesn>t co!e#

CHAPTER 3 THE CREATION O- A SECURITY INTEREST

I" C/ASSI-YIN? THE CO//ATERA/ #rticle ) divides article ) into many different categories Goods: &onsumer Eoods +8uipment 9arm 3roducts Inventory Quasi-Tangible property (pieces of paper used as collateral) Instruments Investment 3roperty (stoc(s 7 bonds and rights to accounts containing the same) =ocuments (warehouse receipts and bill of lading) &hattel paper :etters of credit Intangible Property(property having no significant physical for ) #ccounts DealthA&areAInsurance 4eceivables (these are subcategory of "accounts") =eposit accounts Eeneral Intangibles 3ayment Intangibles (these are subAcategories of "general intangibles") .ote that e%uipment is defined not only to have an unusual meaning but also as a catchall category for any good that doesn5t fit into the other three goods categories. Similarly "general intangibles". P#o; e8 %@

a. # professional pianist piano < +8uipment! (also

when we cant fit anywhere we (to be a farm product

pick equipment)
&attle 9attened by a farmer for sale!< -a#8 P#od.cts F /es

the owner must be engaged in farming)

# farmer's 1ractor < +8uipment (not a farm product) 1he 9armers &hic(ens < 9arm 3roducts 1he manor < 9arm product # mobile home< (good" consumer good or manufactured home) # right to sue someone under breach of contract (is a chosen action is the old term of art for the right to sue somebody) i. a general intangible" or perhaps an account. #n #ccount is # right to sue someone from negligence arising from automobile accident 1orts issue excluded from the scope of article ) # right to sue corporation for wooing away a trusted employee &ommercial tort claim! w/in the scope of article ) # security interest in a lawsuit 3. has already won and that has been reduced to a settlement agreement &omment ,G once a claim arising in tort has been settled 7 it doesn5t matter what type of claim it was 7 is considered a payment intangibleincluded in article ) (a) i. ii. 3encils 7 other stationary supplies used by Sears or a similar large retailer in its credit offices inventory if its for sale # li8uor license (w/in one of the 8uasiAtangable" you can pass them sub*ect to approval) general intangible # right to return of a security deposit held by landlord. i. payment intangible # newspaper carrier's right to payments for papers already delivered i. account a newspaper carrier's right to payments for papers to be delivered in the future i. account aunt augusta! i. 3ayment intangible &urtains bought by a lawyer for the new office / ;hat if after purchasing the curtains the lawyer decides to use them at home< =o they become consumer goods< If w/in 0C hours they are used ,0 in the household 7 ,0 in the business< 3rimarly means G,H or greater. 9or personal use primarly for family or household in this hypo it is therefore business

#unt #ugusta loaned her nephew IG"BBB with an oral agreement he would repay the money the following year. If she wants to use this agreement as collateral" how would it be classified< i. 3ayment intangible In Re Morton 9acts! ban(rupt bought car for personal use" after a while he was using it in connection with his employment 7 furthering his employers business. whether car was a consumer goods or inventory< Started as consumer good 7 became inventory. Is it relevant< .o bc' the protection afforded by article ) precludes filing made in the proper place from being struc( down because of a change in the collateral actual use. ,ain Point: T+e 8o8ent of t+e 4.#c+ase of t+e #e e!ant 4oint of inA.i#5 Class Notes: there has to be a good faith representation at the time of loan. P#o; e8 : %( B: hospital needs loan. Its patient belong to various health plans which they authori'e the hospital to bill. Dospital has many of such receivables in process collection. &an it use as collateral<< A: YES ,B) (d) (J)! claim under a policy of insurance not covered but an assignment by or to healthcare insurance receivable is covered !ypo: ;hat if the credit card company was selling those accounts as assets< (not using them as collateral" they are selling them to ma(e some cash)< /+S" still sub*ect to article ) P#o; e8 :%C B: merchants sends transactions to &redit card company for reimbursement. &an && &ompany use those transactions papers as &ollateral< )A,B0(a)(0) Ans6e#: &redit card is the debtor to those merchants" I don5t thin( it can <<< P#o; e8 :%D ,K(a) 6il( in the hand of a farmer< 9arm products In the hands of store< Inventory Sold to customer< &onsumer product 4estaurant< Inventory ,K(b) certificate of deposit issued by a ban(< Instrument air bill issued by airline as a receipt for fro'en shrimp< =ocument receipt given to a farmer by a silo operator when the farmer stored grain< =ocument in a doc.8ent its o6ne#s+i4E in inst#.8ent *i!es 5o. t+e #i*+t to 4a58ent ,K(c) 4are coins bough by hobbyist for his collection! consumer goods ,K(d) tax refund payment intangible ,K(e) davanger bond issued by corporation< (Security) investment property right to ,BB shares of stoc( recorded! broad category !investment 3. smaller category! security in title

,K(g) &omputer program ,K(h) the monthly rental obligations owed to landlord who wants to use them as collateral< #ccount (right to payment) the promissory notes signed by the tenants to pay their rent< Instrument ( negotiable instrument or any other writing evidencing right to pmt. ) ,o#*an Co.nt5 -eede#s Inc" !" ,cCo#8ic1 Buyers of in&entory in the course of usiness take free of perfected security interest . 9acts! cattle used on cattle drives not as rodeo calves or feeder cattle. Issue! whether they are inventory or e8uipment< ,ain 4oint: 4#inci4a .se of *oods dete#8ine 6+et+e# t+e5 a#e in!ento#5 o# eA.i48ent" 9actors to determine! o 1he good are for immediate or ultimate sale o 1hey have a long period of use in the business +8uipment! when they are fixed assets" or have as identifiable units" a relatively long period of use Inventory! even if not held up for sale" if they are used up or consumed in a short period of time in the production of some end product. Problem # 18 B: +lvis guitar bought by a fan who doesn't play guitar< Dow is the guitar classified< .ot investment property c'. not security AF &onsumer goods $ .ot inventory c'. not for sale If the ct. decide that its not cge8uipment that is a catch all)

Chattel papers: e.g: car dealership, car buyers notes promissory notes & security agreements giving SI so dealership can repossess in the event of default. These set of papers are called Chattel papers. Dealership can sell those papers or use them as collateral; this is an article transaction re!uiring article steps
P#o; e8 :%& +lectronic chattel paper means chattel paper evidenced by a record or records consisting of information stored in an electronic median B: can the dealership use the electronic version of car lease Ls as &ollateral< A: /es P#o; e8 : '< B: the state enacted a statute giving debtors unpaid debtors put a lien on farmers' crop (Statutory lien! bc'.it arises by statute it arises by statute not by farmers consent)M is this an article ) transaction< A: Statutory liens are not covered by article ) (but agricultural liens are) II" TECHNICA/ VA/IDITY O- THE -OR,S 1he creation of article ) security interest involves 0 documents! the security agreement and the financing statement.

Security "gree ent: is a L. between the debtor 7 creditor by which the debtor grants to the creditor (the secured party) a security interest. 3urpose is to create property rights between & 7 =. Financing State ent: is the notice that is filed in the place specified by the article (7 indexed under the debtor's name) in order to give later creditor's an awareness that the collateral is encumbered. 3urpose is property rights between & 7 the rest of the world.

A.

The Securit A!reement Where the Collateral is w/in secured party's possession no written agreement required (although desirable) But when it is not a security agreement must . be authenticated by the debtor !. describe the collateral
Problem # 21 N! 9 bought &ompuer from # on credit. L says " conditional sale L! title remain to the store until paid in full" the ( described the computer but didn5t say the words" security intersest". =oes it 8ualify as a Security agreement< AF /+S" doesn5t need to the magic words.

T+e -inancin* State8ent : filled in public office by creditor (S3) to perfect the creditor's right. doesn5t need to be signed by anyone ( the debtor have authenticated it by signing the security agreement) must identify the parties ,. indicate what collateral it covered i. if realty interest involved ( timber" fixtures minerals to be extracted from the ground) it must describe realty" 0. indicate owner of realty (if not the same as obligor) 7 $. Indicate that it would be filed in real property records. C. .ote! if financing office ta(e w/o these things it is effective. P.#4ose: i. Eive notice ii. =oesn5t need details of transaction li(e loan amt. 7 monthly pmts. Interested parties can get those details from original parties. 1ypically have the addresses of d 7 S3.

B.

The debtor"s Identit : "# typically inde$ed under debtor's name% bc&. later creditors will search under his name. '()# )# )*+,-'./' ', B0 C,--0C'.
Problem # 22 'Darry 9ellini ran a movie theater called "9ellini's #rt 1heater"" but" bc'. he was sole proprietor" that was a trade name. De gave a security interest in the business's e8uipment to Shar(teeth 9inance &omtatement. 1he financing statement calls for a listing of the "debtor's name." a) Should the parties use the business name or individual name< Individual's name

b) If theater were run as a partnership" would the partnership's name be used as debtor's name< +artnership name11 Problem # 2# B: = name name was "6ichael # +rwin"" but the financing as "6i(e +rwin." 1he rules of #rticle ) excuse "minor errors unless seriously misleading" AF 6aybe seriously misleading

Pa#1#atG I84 e8ent Co" !" CitiGens Nationa Ban1

,AIN POINT: H,ino# 8iss4e in* of de;to#9s na8e on a financin* state8ent 8a5 #ende# it Hse#io.s 5 8is eadin*H and !oid t+e sec.#it5 inte#est 1he ban( argued that the misspelling of the debtor's name as "4oger"" rather than "4odger"" on the creditor's financing statement rendered it "seriously misleading" and ineffective if a searcher utili'ed the "standard search logic" 1he court held that 8ino# e##o#s 6e#e t+ose t+at 6o. d #es. t in t+e disco!e#5 of a financin* state8ent 6+i e sea#c+in* .nde# t+e de;to#9s co##ect e*a na8e" 1he court found that the creditor's financing statement was seriously misleading because the ban( was unable to find the debtor's name using the "standard search logic" and the only search that would have produced the creditor's interest would have been by using the temporary internet search logic" which did not constitute an official search. 1he court also 4 aced t+e ;.#den on t+e fi in* c#edito# to co##ect 5 ist t+e de;to#9s na8e" A 8ista1e in t+e de;to#9s na8e can ;e se#io.s 5 8is eadin* !oidin* t+e sec.#it5 inte#est !ypo: Does a na8e c+an*e affect t+e sec.#it5 inte#estI 1he secured party has C month to amend their financing. ;hatever they secured before continue to be perfected" but the future secured items will be affected. (the creditor will not be perfected in that new inventory) Problem # 2$ %: Barbara .. took a loan from ,/B using her in2entory 3 equipment as a collateral. ,/B filed "#. When she got married she changed her name to Barbara B. 3 then borrowed another 456 from /"C% who didn7t find the first encumbrances on her business under her new last name. did ,/B lose their #) bc&. it failed to refile her name change11 A: /eed to amend their financing statement w/in 8 month. &&&& Problem #2' B: 1he :ast .ational -an( filed a financing statement in the proper place to perfect its security interest in the accounts receivable of the #merican +lectronics Store. ;hen the latter ran into financial difficulty" its assets were sold to a new electronics concern" Ooice of Papan" which moved into the same retail location. 6ust :ast .ational refile to (eep its security interest perfected in (,) the accounts actually transferred by #merican +lectronics to Ooice of Papan or (0) accounts thereafter ac8uired by Ooice of Papan< See @)AGBK(a) and its" ?fficial &omment $. A: w.r.t collateral that is sold" exchanged" leased or licensed a financing statement remains effective following the disposition of collateral only when the security interest remains in the collateral. IIIIII B: =o we get the same result if #merican +lectronics Store merges with Ooice of Papan and the new entity is called "Ooice of +lectronics" Inc."< .

A: is he new debtor< 3erson becomes bound by a previous security agreement. 1he new person is bound 7 no new agreement is re8uired. Satisfy for existing 7 after ac8uired property to the extent described in the agreement. IIIIII B: ;hat if the opposite happens" and the debtor remains the same" but :ast .ational assigns its interest in the debtor's accounts to ?ctopus .ational -an(< A: .?" If S3 assigns SI filing not re8uired to continue the perfected statute. BF Is ?ctopus .ational's interest superior to that of :ast .ational's creditors<IIIIII B! &onsider that the transfer of the security interest from :ast .ational to ?ctopus .ational is itself the transfer of an account or chattel paper see ?fficial &omment C" +xample 0 to @)A$,B. IIIIII P#o; e8 : 'C: B: ;hen 4obin ?a(apple found he could not get a loan unless he had collateral" he got permission from his foster brother" 4ichard =auntless" to use 4ichard's yacht as collateral. Should the lender ma(e both sign the security agreement (only 4obin signed the promissory note)< ;hich of these parties is the "debtor" and which the "obligor"< &ompare @@)A, B0(a)(0J)(#) and )A, B0(a) (G)). %nder whose name should the financing statement be filed< =ebtor! 4obin ?bligor! his brother 4ichard 4ichard must sign IIIIII

WEEK 3
*ultiple Choice .nswers !9 B !9! C :9 0 'he issue here is that the name was not correct on the financing statement% which is why the second party would ha2e superior interest. :9! . )f the name changes the secured party has four months from the date to amend their financing statement. .ny collateral that they would attach after this date% if they ha2en7t amended% will not be perfected. 'here are four methods of perfection; ) "iling !) +erfecting through +ossession :) +erfecting through Control < We will look at priority first 8) .utomatic +erfection .ttachment=>9!5: < authenticated securit a!reement by debtor that accurately describes the collateral. < /ot required where possession or assigned < secured creditor has to pro2ide (alue to debtor. < debtor has ri!hts to the collateral.

D" Desc#i4tion of t+e Co ate#a

P#o; e8 : 'D N! 3 signed S# 7 9S to "19&" giving them SI "all personal property =. owns now" will own or even hopes to own from now till he dies" does 19& have a SI in his guitar< )A,BJ (c) says a generic a superAgeneric descriptions are not ?L for the same thin but for the )AGBC ade8uacy of description of the financing statement you can have a super generic description 9or this problem this description doesn5t wor(out bc'. if it cant attach it cannot be perfected. ;e want the L". between the = 7 & not to have any ambiguity that5s why we re8uest more specifity in the S#. )n -e ?rabowski discusses the same thing as this problem In #e ?#a;o6s1i -acts: -oth lenders filed financing statements. 1he first lender" the first to file" described its collateral in general terms and listed the debtors' business address" rather than their home address where the collateral was located. 1he second lender described the collateral more specifically and included the debtors' home address. Iss.e: whether the first lender's description was ineffective to perfect its security interest in the e8uipment< Ho din* = Reasonin*: =espite the generality of the first lender's description" it was sufficient to notif5 s.;seA.ent c#edito#s t+at a ien eJisted on t+e de;to#s9 4#o4e#t5 and t+at f.#t+e# inA.i#5 6as necessa#5 to dete#8ine t+e eJtent of t+e ien. 1hus" the court found no merit in the second lender's argument that the description of the first lender's collateral was too general to fulfill the notice function of a financing statement under the %niform &ommercial &ode" 1he debtors' business" address was not part of the lender's description of its collateral and" thus" did not serve to limit the collateral sub*ect to the lien. In addition" the financing statement listed the names of the debtors" and not the name of the debtors' business. P#o; e8 : '2 B: ban( (ept her *ewelry in a vault as a collateral for her loan. 1heir financing statement said "personal property" She borrowed it to wear it when another creditor si'ed by *udicial order. Is ban('s interest perfected by the filed financing statement< (S&#.) A: /+S" )AGBC states that all personal descriptions general description therefore sufficient for financing statement.

"CC permits debtors to encumber current & future property as collateral for credit; this is called floating lien. Creditor#s lien attach to ne$ property $%o the signing of any further paper$or&.
P#o; e8 : '& B: SI 7 9I described collateral as "inventory". =oes this extend to replacement for original collateral< 6a(es a difference if it says " I. now owned or after ac8uired" but 9S only said "I"< A: In this case" inventory would extend to replacements because by its nature we are thin(ing about inventory that is constantly overturned and replaced. +8uipment on the other hand is not as predictable" and it is not guaranteed that I will purchase more and there is not a floating lien. 1he safest thing to do is to specify that the interest is in current or afterAac8uired interests.

W+en 5o. .se t+e te#8s acco.nt #ecei!a; e so8e co.#t ;5 its nat.#e 6e a#e t+in1in* a;t" In!ento#5 t+at is constant 5 o!e#t.#ned Q1he safest way is to say current 7 after ac8uired inventory or current 7 after ac8uired interest. "%.&.&. @ )A,,B" advised courts not to re8uire the most exact and detailed description possible. # ma*ority of courts had adopted the view that" where the security agreement covered "all" inventory or accounts receivable" but contained no specific reference to afterAac8uired property" it was reasonable to assume that afterAac8uired receivables were included because of the revolving nature of the receivables and a resulting floating lien." P#o; e8 : 3< B: 9S says "various e8uipment see attached list" . .o list was attached. Is 9S to perfect a SI< AF /+S the word "various e8uipment' would notify other creditors that there is a security interest in place in accordance wit the financing statement. #lso" e8uipment is a section of the %&& so it should be fine for the security agreement as well. P#o; e8 : 3% B: S# stated &/ "machinery" e8uipment" furniture 7 fixtures". 9S added " inventory 7 accts. 4eceivable". 1he parties willing to testify to that this was what the loan ntended. ?ther creditors ob*ect. =oes S3 I reach that addition< A) Because the security agreement unambiguously described the collateral in which the security interest was granted the creditor was barred from establishing" via the loan documents" which was parol evidence" that the property omitted from the security agreement was intended by the parties to be covered by the security agreement.. i.e! S# has to define w. specifity 7 ade8uacy what SI in & are. P#o; e8 : 3' B: bank want to gi2e loan secured by in2entory. w/in that in2entory 2ery important 3 e$pensi2e equipment should #) name that equipment% say all in2entory or say @w/o limitations@1 A) A t+#ee of t+e8 a#e effecti!eE it9s ;ette# as a a65e# to 8a1e s.#e to 4.t t+e a;ic.s-%'" $inc .din* 67o.t i8itations) P#o; e8 : 33 BF agreement forgot to fill to Seller name. 9S stated he had SI in the item. Is the agreement w. blan( a S#< ;hat abt. 9inancing statement< ;hat abt. -oth< A: i.e! the security agreement doesn5t have the debtor's name anywhere on the doc this is not a security agreement for lac( of sufficiency

III"

ATTACH,ENT O- THE SECURITY INTEREST Attachment; is the process by which the #) in fa2or of the creditors becomes effecti2e against debtor. Perfection: is the process by which the Creditor's #) becomes effecti2e against the rest of the $orld.

Ste*s to attachment: . #. must be signed. !. creditor must gi2e value :. Aebtor must ha2e some rights in the Collateral

Bo#de# State Ban1 of ?#een;.s+ !" Ba* e5 /i!estoc1 EJc+an*e

,ain 4oint: don>t need o6ne#s+i4 fo# so8e SI to attac+7 as on* as de;to# +as Hs.fficient #i*+tsH in co ate#a " Iss.e of whether careta(er who entered a cattle sharing arrangement with owner of cattle giving careta(er the right to receive some of the proceeds generated when calves were sold had significant rights to grant security interest in them was to be decideArights includes full ownership as well as limited rights that fall short of full ownership. -acts! ,) P 7 # entered into a cattleAsharing agreement. #. agreed to care for and breed P's cattle" and also provided that the cattle would be considered to be owned by and sold in the name of P's 9arms. 0) Some dispute over what the profit sharing arrangement was 7 percentage bc'. &ontract was orally modified. $) # obtained loans from -an(" granting it a security interest in all of his "rights title and interest" in all "livestoc(" then owned or thereafter ac8uired. C) #. sold all P's cattle that he had raised pursuant to their agreement. G) 1he livestoc( exchange was aware of the -an('s S# with # but determined that the SI did not attach to the calves and allowed them to be sold" and issued a chec( to Pohnson 9arms. R) -an( sued the livestoc( exchange and P" contending that they had converted the -an('s perfected SI in the calves" and P. sought indemnity from #. in the event that the -an('s claim was successful Ho din*s: whether ban('s security interest in calves attached and was enforceable did not depend on whether debtor had ownership interest in calves" but on whether he had rights in calves under cattleA sharing agreementF i"e: +ou don,t ha(e to ha(e o-nershi* but onl some interest in the cattle to use them as collateral .or a securit a!reement. P#o; e8:3@ $SCAN) a) 1he interest attached on Panuary R" the date the loan was made" the debtor signed the security agreement and the debtor had rights in the pitchApipe guitar. 1he trumpets are different because they were going to be shipped at a later date" and so the interest attaches 6arch ,Gth bc'. that is the date that was mar(ed for the shipment. %nder 0AGB," once the goods are mar(ed for shipping (identified) at that point the buyer has an insurable interestAthe debtor has rights in the collateral at this point. &ould also be 6arch $oth bc'. the interest was supposed to be inventory in the store. b) 9inancing statement doesn5t change the attachment date" 7 u cannot be perfected until u have attachment. Bou might want to file it early to make your interest superior. )f you are a perfected secured party% your date off attachment is the date of filing. Bou cannot file a financing statement before you get a security agreement unless you get written permission from the debtor. b) *arch : st=the date when the 2alue is pro2ided. # commitment to loan has value as long as it is a binding commitment.

CHAPTER @ PER-ECTION O- THE SECURITY INTEREST

. #) that is perfected makes it senior to most later creditors. *ust attach before to perfect. #) between A 3 C must be effecti2e.

Perfection of the Security Interest

Possession $nly %illing and&or Possession %iling $nly %iling and&or Control $nly Control

#oney

Goods, "egotia le Instruments, !angi le Chattel Paper

Accounts, General Intangi les, Commercial !ort Claims

Investment Property, Electronic Chattel Paper

Deposit Accounts, Letter of Credit Rights

I"

P/R0/CTI1N 10 T2/ P1/SS/SSI1N 3P4/56/7

P#o; e8 : 3(

B: 6useum party (eeping *ewel for -. # buys *ewel from - giving it a big down payment 7 signing an agreement to ma(e three more pmt. &an # perfect a SI by notifying the museum of the sale 7 telling them to hold it to his benefit until she fisnishes paying (li(e an escrow agreement 7 the museum is escrow agent)< A: in order to rely on this section and perfect through possession" needs to obtain an ac(nowledgment from the museum in writing that they are holding it for him as a security interest. Section &-3%3" W+en Possession ;5 o# De i!e#5 to Sec.#ed Pa#t5 Pe#fects Sec.#it5 Inte#est 6it+o.t -i in* @)A$,$ $c) (If the good not covered by a document) a secured party ta(es possession of collateral in the possession of person other than debtor. when! (,) 1hat party authenticates that it holding the collateral for the secured party5s benefit or (0) 1he person ta(es possession after authenticating that it will hold the collateral for the secured party5s benefit. P#o; e8 : 3C a) !.o" because under appropriate circumstances" even though there is perfection under a negotiable warehouse receipt" because the debtor is so closely related to the *anitor" the goods would not be perfected. %nder )A$,0" a security interest can be perfected from a bailee through the warehouse receipt. if we didn5t have the ganitor issue would the security interest be perfect< /+S" that can be perfected by possession. -ailee here is the field house" they can be perfected in the document. In order to b e true field warehouse situation we need a true fieldhouse situation.<<<< /?% 3+49+&1 # ;#4+D?%S+ 4+&+I31 -/ 3?S++SSI?.... b) )A$,0(f)(0)(e) 1emporary perfected for 0B days " i.e interest is protected for 0B days c) If the debtor needs temporarily he gets 0B days grace period there . ;hat happen if it doesn5t get bac( to them w/in 0B days< Dow can we protect ourselves against other creditors priority wise< 9inancing statement. P#o; e8 : 3D ,).o. #lthough they are perfected on the $G notes they have" under )A$,0(g) they lose the security interest if more than 0B days have lapsed unless they have filed the financing statement to protect themselves as an insurance policy. 0) (a) 3erfection by filing permitted. # security interest in chattel paper" negotiable documents" instruments" or investment property may be perfected by filing.

I"

AUTO,ATIC PER-ECTION
>9:5>='ypes of #ecurity )nterests that are .utomatically .ttached ) +urchase *oney #ecurity )nterest Consumer ?oods #eller acts as a creditor and gi2es the debtor financing to purchase from them Bank makes loan to buyer% who makes payment to seller% who gi2es title back to buyer% who gi2es a security interest to the bank. /,/0C; you ha2e a rare coin% and you want cash% you lose the coin to get security interest to get the clubs% which do not ha2e a

!)

security interest in them. .n .ssignment of .ccounts (treated like a security interest) )f the assignment constitutes less than a significant amount of the debtor7s interest% it is automatically perfected. Automatic *er.ection; means that the #+ need only make sure its #) has attached to get perfection. It occurs -ith: a. +*#) b. Certain accounts 3 other intangibles

a. Purchase money security interest (PMSI)# A security interest that is created #hen a uyer uses the lenders money to make the purchase and immediately gi&es the lender security ('(ee the )niform *ommercial *ode+), a security interest that is either (-) taken or retained y the seller of the collateral to secure all or part of its price or (.) taken y a person #ho y making ad&ances or incurring an o ligation gi&es &alue to ena le the de tor to ac%uire rights in or the use of collateral if that &alue is in fact so used. /// 0f a uyer"s purchase of a oat, for e1ample, is financed y a ank that loans the amount of the purchase price, the ank"s security interest in the oat that secures the loan is a purchase-money security interest...2(B3A*4"( 3A$ 50*607A89:) II" A.to8atic Pe#fection "$ P%SI in &onsu er goods $e gi&e automatic perfection to ;<(0 in consumer goods #=o re%uiring further filling or possession c>. consumer goods are unlikely to e used as collateral t#ice, thus rarely any later creditors to protect. 8ot #orth it for merchants to pay to file it. ?1ception@ motor &ehicles, (0 re%uires perfection steps. P#o; e8 : 32 a) 1hat will only attach to stuff ac8uired w/in ten daysQ..o. %nder )A0BC" when a secured creditor tries to ta(e a sec.#it5 inte#est in a of de;to#s cons.8e# *oodsE t+at 6i on 5 attac+ to st.ff t+at is acA.i#ed 6it+in %< da5sE not indefinite 5" b) It is still a security agreement whether or not they are the direct seller or a third party securer. c) 1he actual cash or chec( that the secured creditor is providing has to go to pay for the good which the finance company is trying to get an interest in. d) 9inance company would get the sewing machine because they would be automatically perfected and a perfected secured creditor would beat out the other secured creditors who are not perfected.

In re Short

9) 1he debtor bought furniture from furniture co for I0JBB" then he too( a second loan for I$0C0. then he refinanced them into one 1wo loans! one 36SI and one not" which are refinanced into a K( loan. I) whether a 36SI when the original 36 is refinanced through renewal or consolidation with another obligation< 4) =ual Status 4uleF alien maybe partially 36 7 partially nonA36" but the part that is not 36 is not destroyed. 1he unpaid part of 36 still stands and attaches. #utomatic 1ransformation 4uleFthey are consolidated and the 36SI is extinguished &ase by &aseFhas been so transformed that it cannot be viewed as a 36SI anymore. Sa e on A44#o!a and Sa e o# Ret.#nF Consi*n8ent Sa es and Ri*+ts of C#edito#s ( ) Dnless otherwise agreed% if deli2ered !oods ma be returned by the buyer e2en though they conform to the contract% the transaction is (a) a @sale on a**ro(al8 if the goods are deli2ered primarily for use% and (b) a @sale or return8 if the goods are deli2ered primarily for resale. ( ) EPurchase9mone collateral: means goods or software that secures a purchase9money obligation incurred with respect to that collateralF and (!) E+urchase9mone obli!ation: means an obligation of an obligor incurred as all or part of the price of the collateral or for 2alue gi2en to enable the debtor to acquire rights in or the use of the collateral if the 2alue is in fact so used. P#o; e8 :3& .o "this is a sale on approval" until they accept it its not sub*ect to the claims. Does N- A.a if5 as t+e 4.#c+ase 8one5 1indI .ightflyer5s security interest 8ualifies because once it becomes a . . . 6./. Ca*ital commercial automoti(e .inance Inc. (. S*arton Motors; 4td. Iss.e: whether by Spartan advancing the funds to purchase vehicles after Spartan had already paid for 7 received them" the =. E+&& ac8uired a 36SI< -acts: 1he lender and the auto dealer had a security agreement whereby the lender ac8uired a blan(et lien on the auto dealer's inventory. 1hereafter" the secured lender and the auto dealer entered into a security agreement in which the funds loaned were secured by the vehicles purchased by those funds. 1he auto dealer purchased two cars and" within days thereafter" was reimbursed by the secured lender. ;hen the auto dealer's business failed" the secured lender claimed that it had a purchase money security interest in the two cars. 1he lender argued that it had the priority lien. 1he court agreed with the secured lender" and held that U"C"C" K &-%<D$;) did not #eA.i#e t+at t+e sec.#ed ende# 4a5 t+e f.nds di#ect 5 to t+e se e# of t+e ca#s o# t+at t+e oan occ.# 4#io# to t+e sa e" T+e sec.#ed ende# 6as a; e to s+o6 t+at t+e ad!ance 6as 8ade to ena; e t+e a.to dea e# to 4.#c+ase t+e co ate#a E and t+at t+e seA.ence of oan fi#st and acA.isition second 6as not #eA.i#ed as this practice was common and routine between the parties. 1he agreement between the secured lender and the auto dealer was ade8uately specific to identify the collateral" and the lender was timely put on notice. SSSSSSSS&losely #llied 1est! ,) 1emporal 3roximityF&loseness in 1ime 0) 1he parties had to intend that it was going to be a 36SI

If both are established" and the court thin(s they were here" and it appears that Spartan motors would not have bought these two cars without the loan from E6#&" then the transactions were closely aligned and they are considered 36SI. B" Ce#tain Acco.nts = ot+e# Intan*i; es 0 tests available " significant part" or "casual isolated transaction"

In 'e (ood
(test for Significant " ount) Iss.e: ;hether this transaction falls w/in the exemption from filling< -acts: 1he debtors" an attorney" and his law firm" assigned the rights to contingency fee proceeds from certain litigation to the creditor" another attorney who loaned the debtors money. 1he debtors ultimately filed for ban(ruptcy under &hapter ,, of the -an(ruptcy &ode. 1he ban(ruptcy court held that the transaction in 8uestion did not fall within the exemptions from filing contained in %.&.&. @ )A$B0(,)(e)" and thus the creditor was an unsecured creditor. ?n appeal" the court reversed and remanded" holding that the creditor had a perfected security interest in the accounts. 1he court found that the creditor had met its burden with regard to the Ho din*: cas.a and iso ated t#ansaction test because the creditor was not a commercial lender engaged in regularly accepting assignments from debtors. Reasonin*: %) t+e t#ansaction 6as ;et6een t6o indi!id.a s 6+o 8aintained a 4e#sona and 4#ofessiona #e ations+i4" ') c#edito# 6as not #e*. a# 5 en*a*ed in t+e ;.siness of ta1in* acco.nts andE t+e#efo#eE +e c ea# 5 fe 6it+in t+e eJe84tion f#o8 fi in* .nde# @ )A$B0(,)(e). It was error for the ban(ruptcy court to hold otherwise. P#o; e8 : @< .o" because under )A$BC a sale of accounts is automatically perfected. P#o; e8 : @% If you have attached original collateral you are also attached in the supporting obligation.

III PER-ECTIN? BY -I//IN? 0$cept for the transaction listed in @ >9: 5 % 'illing of "inancing #tatement is the e$clusi2e method of perfection of the creditor's security interest;
A" T+e ,ec+anics of Filing -efore computer age was harder. .ow" most &entral filing" typically in the secretary of state, for almost all financing statements. :ocal &ounty" for matters having to do with realty. P#o; e8 : @' B: #i*+t na8e 6#on* 4 ace A: +. filed first. $hiche&er creditor loses should sue the state for negligence. Dypo! what if the financing statements said Sha(espeare<< 9iled in the wrong place 9inancing statement is ineffective. NoteF A 6a5s 8a1e co4ies 6+en 5o. fi e -S"

P#o; e8 : @3 B: how long is 9S affective A: DCC >94 4=. filed financing statement is effecti2e for a period o. .i(e ears a.ter the date o. .ilin!. 'he effecti2eness of a filed fin statement lapses on the e$piration of the period of its effecti2eness unless before the lapse a continuation statement is filed. a. )t is effecti2e for fi2e years. b. )t is not because the continuation must be filed within the last G months of the pre2ious filing7s 4 years e$piration% no sooner. c. /o% it does not. ./ B has priority because the effecti2eness of the statement lapsed by not being continued. 'he security interest became un9perfected upon the lapse and is deemed ne2er to ha2e been perfected as against a purchaser for 2alue. . purchaser for 2alue C./ be a #ecured Creditor% which is why ./B is co2ered. d. )t still lapses and ./B is still first. 'he policy reason for that type of rule is ... e. P#o; e8 : @@ B: A: Secured creditor is a purchaser for value$ secured party of record must file a termination statement w/in 0B days of notice =ebtor could file a termination statement under If consumer goods! 1ermination must be made upon earlier of (i) , month " or (ii) 0B days days after authenticated demand" 'he company has a month to comply with the termination statement% which is filed when no 2alid obligation is secured by the collateral (for consumer goods). 'he amendment has to identify that the debtor is doing it and that it is against the secured party% and puts other creditors on notice. 'his also happens when the debtor did not authori&e the filing of the initial financing statement. Dnder >9G!4 a person is liable for damages in the amount of any loss caused by a failure to comply with this article. Hoss can include loss resulting from the debtor7s inability to obtain% or increased costs of% alternati2e financing.

In his exams he as(s one policy 8uestion. e"g! # 7 - went under the code what's the reason behind/ what's the policy.
P#o; e8: @( B: divorcing man filed faux financing statements in the public records office showing his assets were a security for various nonexistent loans in favor of himself. ;hat can the wife's lawyer do to clean up those records< A: )n the case of an unauthori&ed financing statement% the person named as debtor in the financing statement may file a termination statement% effecti2e against the bogus filings.

IV"

PER-ECTION BY CONTRO/
%<7'7'<<& Wee1 @ C ass s ides

6& CA, = 6& CA0 &hec(ing act can't perfect by filing only 6& CA$ 9. feb G all $ re8uirements! #SI " value" debtor has rights in the collateral.

CHAPTER ( ,U/TI-STATE TRANSACTION

/ach state has ado*ted a (ersion o. the <CC; -ith some (er small di..erences .rom state to state; and it is (er im*ortant that the ha(e the same choice o. la- rules. The code sa s that ou .ile in the =urisdiction -hose la- !o(erns *er.ection; -hich is im*ortant so ou >no- -here to .ile and ou do not ha(e com*etin! interests. ?hen readin! @9#A1 Per.ection means the technical ste*s needed .or *er.ection. /..ect o. Per.ection and Priorit mean the le!al status !i(en to creditor and his ri!hts a!ainst #rd *arties. <nder @9#A1: 317 ?here(er the debtor is located; the la- o. that =urisdiction !o(erns all as*ects o. the transaction. 327 ?hen -e ha(e a *ossessor securit interest; a *led!e; it is the collateral,s location that !o(erns all as*ects o. the transaction. 3#7 ?hile tan!ible ne!otiable documents; !ood; instruments; mone ; or tan!ible chattel *a*er is located in a =urisdiction; the local la- o. that =urisdiction !o(erns: i. The e..ect o. *er.ection or non9*er.ection and the *riorit o. a non9 *ossessor securit interest in the collateral. ii. The debtor,s location is the location o. *er.ectionB-here to .ile. I. 6eneral Choice o. la-s #rticle ) adopts a domicile approach and loo(s to the law of the de tor"s location as the state in which perfection need to be ta(e. Dowever" if the &/ has a physical form" the law of the *urisdiction in which of &/ is located will govern issues involving priority 7 other article ) matters. So" the secured party loo(s for! i. the *urisdiction in which the debtor is located is located as the place of perfection" -%1 ii. 1he collateral as to the effect of perfection. Problem $C: 'he creditor should file the financing statement in the debtor7s location% their domicile in the case of an indi2idual% which is Wyoming in this case and the general rules of perfection apply though this is a good. 'he creditor7s security interest will not be attached to the boat any longer and ,hio law go2erns because in the case of goods% the effect of perfection and priority is determined for goods by the collateral7s location. Problem $D: T4 ace of ;.sinessU means a place where a debtor conducts its affairs. =ebtor5s location!

(,) If =ebtor is an indi!id.a located at the indi!id.a >s 4#inci4a #esidence. (0) If debtor is an o#*aniGation 7 has on 5 % 4 ace of ;.siness located at its 4 ace of ;.siness" ($) if debtor that is an o#*aniGation = +as 8o#e t+an % 4 ace of ;.siness located at its c+ief eJec.ti!e office" If non of t+ese a44 ies (or = in a place does not apply that doesn5t have a recording system li(e overseas etc.") the debtor is located in the Dist#ict of Co .8;ia" Dnder >9:5I(e) if an organi&ation is registered in a state and is the debtor% it is located in the state in which it is registered. )f they were an indi2idual debtor it would be their personal residence and if it is a common la- *artnershi*; !eneral *artnershi*; -hich is not re!istered -ith the state; is located at its *lace o. business. )t is not that there is one state where you can file% but there will be one state where all of the files are located% which makes them easier to locate. )n the case of Jahalla% you would file in Washington AC. Problem $E: # security interest perfected remains perfected until the earliest of! (,) 1he time perfection ceased under the law of that *urisdiction (0) @ 8ont+s afte# a de;to#>s #e- ocate to another *urisdiction or ($) % 5ea# afte# a t#ansfe# of co ate#a anot+e# de;to# 6+o is ocated in anot+e# L.#isdiction" >9: G that it has 8 months after the change in the debtor7s location to file in the new location. )f it merges% then under >9: G(a)(:)% you ha2e year after a transfer of collateral to a person that thereby becomes a debtor and is located in another Kurisdiction. Problem $@: $If t+e de;to#s fai s to 4e#fect t+ei# inte#est 67in t+e ti8e f#a8e a;o!e t+e5 ;eco8e .n4e#fected = #e8ain .n4e#fected a*ainst a 4.#c+ase# fo# !a .e ) /o% they are going to lose their priority under >9: G(b)% which states that if a security interest in (a) becomes perfected under the law of the other Kurisdiction before the e2ent in that subsection% it remains perfected thereafter. )f it does not become perfected% it becomes unperfected and is deemed ne2er to ha2e been perfected as against a purchaser of the collateral for 2alue.

I"

II" Ce#tificate of Tit e 'itle is a legal term for an owner's interest in a piece of property. )t may also refer to a formal document that ser2es as e2idence of ownership. Con2eyance of the document may be required in order to transfer ownership in the property to another person. 'itle is distinct from possession% a right that often accompanies ownership but is not necessarily sufficient to pro2e it. )n many cases% both possession and title may be transferred independently of each other.
Problem # 'A %:

A: DCC >9:5: (a) 'his section applies to goods co(ered b a certi.icate o. title; e2en if there is no other relationship between the Kurisdiction under whose certificate of title the goods are co2ered and hte goods or the debtor. (b) goods become co2ered by a certificate of title when a 2alid application for the certificate of title and the applicable fee are deli2ered to the appropriate authority. (c) the local law of the Kurisdiction under whose certificate of title the goods are co2ered go2erns perfection% the effect of perfection or non9perfection% and the priority of a security interest in goods co2ered by a certificate of title from the time the goods become co2ered by the certificate of title until the goods cease to be co2ered by the certificate of title. 2+P1 $92: )t will remain perfected in the first Kurisdiction so long as security interest has remained perfected under the law of the first state. 2+P1 $9#: 'he #) is treated as unperfected against the used car dealer under >9: G(e) Dsed car dealer will likely take free of #) under >9: I. 2 *o $9$: 'he buyer takes free of the security interest in accordance >9::I( ). T2/R/ IS A C2ART IN S4I5/S .or Part and Result. MetF!er (. Americredit 0inancial Ser(ices
A third person purchased a car in New York. The holder financed the purchase and the New York certificate of title issued to the person reflected the holder's security interest in the car. The person later moved to Georgia. He submitted an application to convert the New York certificate of title to a Georgia one. The state motor vehicle department processed the application but made a clerical error. As a result a Georgia certificate of title was issued that did not reflect the holder's security interest in the car. The person later transferred the car to an automobile dealer owner and eventually the buyer purchased it. After the buyer registered the car the holder located it repossessed it and sold it at auction. !n appeal the appellate court found that the buyer took the car free of the security interest pursuant to !.".G.A. # $$% &%''(. Although the holder's security interest in the car remained perfected at the time that the buyer purchased the car that security interest could not be enforced against the buyer a good faith purchaser as defined in !.".G.A. # $$%&%''()$* since the security interest was not properly reflected on the Georgia certificate of title.

http'&&la()scu)edu&%ac*e Page&"eustadter&article+&main&commentary&,-)html Problem '1: %uestion: on 4/ 5 'ourist buys car from /C# in ,6 4/ ! /C# records lien on ,6 title 4/ 8 Car to 'C; new clean title > although the law requires the lien stays in title) 4/!G 'ourist sells car to )nnocent (?"+L)

/C# repossesses car < .s of *ay !M% 'e$as certificate still co2ers 2ehicle >9:5:(b) < 'e$as law go2erns >9:5:N < /C# is still perfected when new 'e$as cert is issued without notation of #) because within 8 months >9: G(d)(e) William )nnocent will take free of /C#7s security interest under >9::I( ) st lender remains perfected w/in 8 month as abo2e ho-e(er a bu er o. the !oods 9other than a *erson in the business o. sellin! !oods o. that >ind9 ta>es .ree o. the securit interest i. the bu er !i(es (alue and recei(es deli(er o. the !oods a.ter issuance o. the certi.icate and -ithout >no-led!e o. the securit interestF Problem '2: )t should only last four months. 'he issue is going from a DCC state to a C' state. Because the law of the state says that you ha2e to ha2e it titled under our state% he becomes unperfected and the bank must re9record or continue in the new state. When mo2ing from title state to a DCC state% he is probably going to continue to be perfected indefinitely in state under >9:5:(b) and (c)

4/!M

C+a4te# C PRIORITY
I" Si84 e dis4.tes" ;hich creditor gets what< @)A$,K lists the parties prevailing over an unperfected security interest (attached but not perfected). 4ien creditor: 3A7 a creditor that has acquired a lien on the property in2ol2ed by attachment% le2y% or the likeF 3B7 an assi!nee for benefit of creditors from the time of assignmentF 3C7 a trustee in ban>ru*tc from the date of the filing of the petitionF or 357 a recei(er in eGuit from the time of appointment. P#o; e8 : (3 B: +. boo(store borrowed I,B ( from ?ctopus .ational ban( (?.-)" signed a SI giving ?.- a floating lien over inventory. ?.- never filed. 6 travel services was an unpaid creditor of the + 7 recovered a *udgment against the store. It then had the sheriff levy on the inventory. a) ;ho gets paid ,st when the inventory is sold< b) if" instead of a *udgment creditor's sei'ing the goods" + had filed ban(ruptcy petition while ?.- was still unperfected" what result< a) :ien creditor ac8uires a lien on the 3 by attachment" when there is a conflicting SI " a lien creditor is entitled to priority if +e is t+e ea# ie# in ti8e (except to that is 36SI)" 6 gets ,s

;) P#o; e8 : (@ B: &1# used its accounts receivables as &/ for a loan from 6S ban(" but 6S didn5t file 9S. R month later &1# too( another loan from -.-" who searched 7 didn5t see 6S 9S" so it too( an I in &1# accounts receivables. -.- filed 9S. ;hich ban( has superior interest< A: a perfected security interest has priority over unperfected SI" therefore -.- has priority" P#o; e8 : (( B: + went to two ban(s ,st .- 7 0nd S- " on the same day to borrow money using inventory as &/ 7 signed a S# with both. ,st .- filed 9S Sept 0G " but didn5t gave him the money or ma(e any commitment until .ov. ,B. /// 0nd S- loaned + the I 7 filed 9S on ?ct 0. + paid neither a) =o both ban(s have a perfected SI< &an 0 creditors have SI in the same &/< yes ;) (#ttachment is a prere8uisite to perfection" and attachment doesn5t occur until & gives value) which ban( has superior right to the inventory< ,st has priority. ;hichever party files first regardless of who gave the loan ,st. C) If 0nd S- had 4no#ledge of the transaction between + 7 ,st .-" does this affect its priority< Lnowledge is irrelevant for determining priority of claims P#o; e8 : (C A: &ollateral may secure future as well as past or present advances if the security agreement so provides. P#o; e8 : (D A! HNotice fi in*H: the financing statement maybe made before the security interest attaches. %sed in financing transactions involving inventories" accounts" 7 chattel paper because it obviates the necessity on refilling on each series of transactions in a continuing arrangement under which the collateral changes from day to day<<<< P#o; e8 : (2 a) C/B% don7t need to file bc&. consumer goods 3 are perfected by possession or filling. b) )f perfection depends on possession of C/ by #+ F perfection doesn7t start b8 possession% 3 continues only while the #+ retains possession. -emains perfected w/o filling for !5 days if #+ borrows to d for a manner preliminary to their sale or e$change. 1111 c) . security )nterest secured by one method remains secured if method changes as long as there is no interruption (continues ) P#o; e8 : (& B: &attle &ompany too( a loan to purchase Derd" signed SI using herd as &/ for "this and all other obligations now or hereinafter owed to the ban(. " . -an( 9iled 9S. 0 years

later received a credit from the same card 7 used it to travel to #ustralia for a business reason. ;hen he failed to pay the &redit card (although loan pmt. &urrent) the ban( repossessed the cattle. =id the ban( interest encompass &redit card obligation< ;ould it ma(e a difference if he had gone to #ustralia in search of the perfect wave for surfing< D#a* net C a.se: &ollateral covering several loans under a single security agreement" also called a dragnet clause. In essence" collateral for each loan bac(s the entire pac(age of loans 1he true intention of the parties is really the sole and controlling factor in determining whether future advances were covered by the original agreement Q Vorl would have to be reAperfected.") W In 'e (ollin (page !I) =ebtors disputed the enforceability of "dragnet clauses" in security agreements that provided future advances and antecedent debts would also be secured. 1he court held the f.t.#e t#ansaction 8.st ;e Hso #e ated toH t+e 4#i8a#5 oan t+at t+e consent of t+e de;to# to its inc .sion 8a5 ;e infe##ed. 1he court declined to adopt a per se test based on the status of the loans as purchase money transactions. 1he court could not find future advances for credit card charges sufficiently related to vehicle loans. 1he vehicle loan differed in scope and solemnity from the miscellaneous credit card charges" and consent for vehicles to secure credit card account would not be inferred. #s to antecedent loans" the court adopted the "specific reference" standard. 1he antecedent debts were not specifically referenced" as such" the vehicles did not secure them. &reditor's ob*ections were overruled and the debtors' ob*ections to the claims were sustained. Cross9Collateral Clauses: &ommon stipulation in loan agreements under which a ban( has a legal right to sei'e any or all assets pledged by a borrower (for different loans with the same ban() even if only one loan goes into default. -an(ers *ustify this clause on the logic that a default sours the ban(Aclient relationship" not a *ust a loan agreement. Problem # CA B: used one &.& for his purchases using purchased ob*ects as &/. 9rom another ban( he financed his ranching operations using &attle as &/. -oth ban(s S# stated that debt also encompass "any 7 all debts now existing or afterAac8uired" . the two ban(s merged. =o the cattle protect his &.& debts< A: .ot according to the "so related test"

I"
A.

P,SI
The Basic Rule 1he seller or lender who advances money has a special e8uity in the eyes of the law. If the parties sign a S#" the seller/lender gets a 36SI. +ven though the goods become sub*ect to existing SI when they come into the buyer's possession" the P,SI is *i!en 4#io#it5F e!en if P,SI is ate# in ti8e. ;here the co ate#a is cons.8e# *oodsE no f.#t+e# ste4s is #eA.i#ed for 36SI to prevail over prior or later interest.

A ot+e# P,SI 8.st ;e 4e#fected 67in '< da5s following the buyers possession to ta(e advantage of the relationAbac( priority to that date. Special 4ule for! i. 36SI ta(en in goods that are to become part of the buyer's inventory 7 ii. 36SI ta(en in goods to become buyer's livestoc(.

PMSIs are an eHce*tion to the .irst9to9.ile9or9*er.ect rule. 3 ste4 to ana 5Gin* a P,SI 4#o; e8: %" C assif5 t+e co ate#a " '" Does a SP +a!e a P,SI" 3" Did t+e SP 6it+ a P,SI co84 5 6it+ K&-3'@ to *et 4#io#it5I Problem #C1 %: Sophy signed SI for the furniture it bought for the new apartments on *une J 7 goods delivered the same day " although Dowever the company's e8uipment was under SI 7 9S for a ban(. 1his agreement contained an "afterAac8uired property" clause" which stated that later similar collateral coming into the property" clause" which stated that later similar collateral coming into the buyer's estate would automatically fall under the ban('s SI. the policy of Sophy's Interiors was not to file financial statements for its credit furniture sales. a7 Bill had rights in the interior stuff he bought on credit on the day he recei2ed% KuneM. b7 Company should perfect its #) w/in 5 days. 99999999999 99999999999 9999999999 9999999999999 99999999999999

. security agreement may create or pro2ide for a security interest in after9 acquired collateral . credit buyer acquires @rights@ in the property when possession is recei2ed from the seller. When a buyer takes possession of property under a credit sales contract% he acquires the property% not merely an equity interest in the property. 'he seller retains only a security interest in the property. . determination of which party holds title to the property is immaterial. 'he sufficiency of a description in a financing statement is measured in terms of notice. 'he designation of @equipment now owned or hereafter acquired@ gi2es notice to a seller of a machine to be installed on the premises of an operating business and used in production that it is subKect or likely to be subKect to a perfected security interest. Code O >9!5! ( >85) states that each pro2ision of this article with regards to rights% obligations or remedies applies whether title to collateral is in the secured party or in the debtor. I. it is the desire o. the *arties to e..ect a reser(ation o. title until the *urchase *rice be *aid; a secured transaction should be entered into and a *ro*er .ilin! made i. reGuired to *rotect the creditor"s interest as a!ainst third *ersons.

 "or a plaintiff to reco2er in detinue he must show; a7 that at the commencement of the action he had a general or special property in the goods sued for% b7 the right to immediate possession of the goods% and c7 that the defendant had possession of the property. the first to file a financing statement gains priority. specific e$ception to the rule% by gi2ing purchase money security interests priority o2er other security interests in the same collateral% pro2ided the purchase money interest is perfected by filing within a designated period after the debtor takes possession of the goods. 6alleon Industries (. 4e- n Machiner 9) 1he financier had a security interest in all existing and ac8uired factory e8uipment. 1he supplier ordered the e8uipment from the manufacturer to be shipped to the supplier and delivered to the factory after cash payment. 1he manufacturer shipped the e8uipment to the factory. 1he supplier demanded cash payment from the factory. 1he factory failed to pay the supplier and the financier. 1he financier foreclosed under its security interest on all of the factory's e8uipment. 1he supplier brought a detinue action against the factory and the financier. I) D) 1he financier's security interest in later ac8uired factory e8uipment had priority P#o; e8 : C' B: Oideo store owner has a floating lien on over inventory 7 e8uipment. De bought a dog I,0BB"he got the dog agreed to pay I,BB/ month but will not get the title until all pmts. 3aid. She stopped paying 7 the ban( sei'ed all assets including the dog. ;hat are the options for the dog owner< A: Since video store owner didn5t fulfill the condition precedent to ma(e full payment" 1he ban('s security interest could not attach because the video store owner had mere possession of the dog. Problem # C# B! Dart farm gave 9armer a R month lease w. option to buy at any time during the lease term" called "sale on approval" $ month after e8uipment delivery " farmer agreed to buy 7hart filed a 9S next day claiming 36SI. 9armer already had a perfected floating lien for another ban(. ;ho wins the priority hart farm or the ban(< A: )A$0C &omment ( c ) once a lease converted a SI " filing a 9S is necessary to protect the seller's SI. B" In!ento#5 = /i!estoc1 Inventory financer will have a perfected interest in existing 7 after ac8uired inventory" in effect a floating lien over the mass of changing goods available for sale by the debtor' to other. If the debtor buys new inventory 7 gives the seller 36SI" the original financier is hurt if!

i. ii.

doesn't (now abt. the 36SI 7 thin(s he has propriety of all &/ 36SI is held to prevail over the already perfected interest in afterA ac8uired inventory. )A$0C (b) has notification procedure for the 36SI secured creditor to follow in order to get normal priority. P#o; e8 : C@ a" ,8ada8 Be inda ;" No s+e +as '< da5s c" ""

K.n1e !" S4#a*.e Nationa Ban1

Wee1 C 6& RA, Erowamerica 6& RA0 - ,st to file or perfect. ;e go after ,st to file ,st 6& KA$ &. # doesn5t matter bc'. not for inventory. 1o get super priority has to perfect -+9?4+ =+:IO+4/" .eed to send authenticated notification (letter) sent 7 received w/in G year period 34I?4 =+:IO+4/ . + is wrong bc'. 1hey are perfected. 6& RAC & .plain meaning test is the test adopted by the %&&. 3lain meaning test! business class" personal class. Same &lass 3lus so related. 14%+ &?.SIE.6+.1! Indicative 9actors! &onsignor repossesses goods if not sold &onsignor controls the price &onsignor &ontrol 3roceeds &onsignor bears ris( of loss If &ee issues a SI" the title remains w. &or. =ISE%IS+= S#:+ ;I1D S+&%4I1/ I.1+4+S1 (case law test) 3ersuasive 9actors! -uyers Leeps Eood if .ot Sold -uyer &ontrols 3rice. -uyer -ears 4is( of :oss In this case the rest there will competition w. rest of secured creditors. #rticle ) says that certain &on. ;e will treat as a SI =efinition is in #) A,B0 (a) III" Cont#o = P#io#it5 &ontrol is to "intangibles" as "possession" is to goods. 1a(ing steps to "&ontrol" gives the world some notice at least that the creditor has legal rights in intangible property that must be respected.

A" Cont#o o!e# In!est8ent P#o4e#t5 Dow is SI ta(en in investment property< 0 ways! ,. the filling of a financing statement and/or 0. the ta(ing of control over the investment property. the 0nd method trumps the ,st a S3 who has control has priority one who has merely filed. Eenerally one has control over a certified security by ta(ing delivery of it along with any necessary endorsements. 1he same rule applies to uncertified securities" the only difference is here deli&ery is artificially defined as ma(ing sure that the secured party is registered as the stoc( owner in the records of the issuing corporation. In the case of 0ndirect holding" *ontrol re8uires that S3 ta(es steps to ma(e sure that it can reach the rights of the debtor in the event it needs to foreclose" as shown in the next case. N.8;e# CD 1o get &ontrol of a security under entitlement! by becoming an account holder w. your debtor" transferring the assets to your own ban(" B" Cont#o o!e# De4osit Acco.nt Similar rules apply. #rticle ) allows a SI in such accounts by a creditor obtaining control over the account. &onsumer accounts may not be used as collateral for consumer debts. (can be for nonA consumer debts) N.8;e# C2 C" Cont#o o!e# /ette#s of C#edit Ri*+ts" If one party doesn5t trust the other to ma(e payment at an agreed upon time" that party may re8uire that the payment be made directly by a reputable ban(. 1he ban( then will issue a letter of credit to the person to whom the credit is o be made specifying the circumstances under which the ban( will honor drafts. 1he person who gets the ban( to grant him is called the applicant. 1he beneficiary can use its rights under the letter as a &/. P#o; e8 :C& IV" BUYERS )A$,G a buyer ta(es sub*ect to the SI unless the S3 authori'es sale w/o SI P#o; e8 : D< Inte#nationa Ha#!este# Co" !" ? endennin* Pa*e %(@ P#o; e8 : D% /ou can't be a buyer of ordinary goods if the possession of the seller. P#o; e8 : D' ;hen you are an insider you are not a buyer in the course of business. P#o; e8 : D3 ?nce it was placed on his lot from her prospective she was a buyer in the ordinary course of business. "3imping both sides of the street"<<<<

=on5t need to (now who is a holder in due course he will tell us on the examQ. P#o; e8 : D@

WEEK D C+a4te# '

II" Consi*n8ents # true consignment is neither a sale or a security device it is a mar(eting procedure by which the owner of the goods (the consignor) sends (consignsB them to a retailer (the consignee) for sale to the public. 1he retailer doesn5t buy the goods (so no sales ta(e place when the consignor deliver the goods to the consignee). If the retailer cannot sell them" they are returned to the consignor. 1he consignee is the selling agent for the consignor. i.e! bailee with the ability to sell the bailor's goods. 1he advantage to a true consignor of a true consignment over an outright sale is that he retains control over the terms of retail sale 7 at common la# there is no re8uirement that he files a notice that this is a consignment. Some consignments are not true consignments but are sales of credit (secured transactions) disguised as consignments in order to escape the filing re8uirement." If the retailer must pay for the goods whether or not able to resell them " this is not a true consignment" it is a creation of SI in goods. If a security interest is intended" then it must not be true consignment at all 7 article ) re8uirements must be complied with. #rticle ) adopted some (inds of true consignments 7 treat them as article ) matters" therefore needs the usual steps of perfecting "a SI in someone else's inventory" but leaving some true consignments outside the &ode" thus protected by common law. &lass .otes! If we have a true consignment" the consignor (eeps title" therefore the creditor cannot attach to that &// (that can create secret liens). ?nce we separate true consignment what

2Remaining Disguised Sales3

A+ Consignments under .+/-012a32103

!rue Consignments 2under casela(3 !ransactions 4called5 Consignments

is left over< 4emaining disguised sales" we true them as true salesQ &onsignments can be article ) &onsignment which are a subAgroup of 1rue consignments. In order to protect themselves they need to file 9S. Dow do we give them strategic advantage ! they are providing a 36SI to the buyer" therefore if they follow the steps in )A0C(b) they will have super priority. Dow do you (now that it is a true consignmet< T#.e Consi*n8ent Indicati!e -acto#s: P &onsignor (eeps good if .ot Sold P &onsignor controls 3rice P &onsignor controls 3roceeds P &onsignor bears 4is( of :oss Dis*.ised sa e 6it+ sec.#it5 inte#est: Pe#s.asi!e -acto#s: P -uyer (eeps Eood if .ot Sold P -uyer &ontrols 3rice P -uyer -ears 4is( of :oss -o o6 t+is not o.t ine ;cG" O.t ine is 6#on* = 44 e" /ost 4oints" $+e 6as )

!rue Consignment or Disguised Sale6 See Casela( factors

If DISG7ISED SALE) ) )

If !R7E C$"SIG"#E analy8e unde -012a32103 to if meets defin 4Consignmen

!hen A+ applies and the seller&consignor must comply (ith A+ to have priority against other secured creditors)

If A+ C$"SIG"#E"!) ) )

If "$! A+ C title has ee Consignor, against the of the consi

Type of "onsignment/

91cluded True "onsignment

0ncluded True "onsignment

3isguised 8ecurity 0nterest

7nder the "ode/

0s a consignment but doesn+t meet the re5uirements of .&%$-2)a*)2-*)A*% )"* )e.g. aggregate value is less than 6$---*

4eets all the definitional re5uirements of .&% $-2)a*)2-*

0s e1cluded under .&% $-2)a*)2-*)3* from the A& definition of consignment because it in%fact secures an obligations )e.g. the consignee is obligated to keep the good regardless of sale*. The consignor is deemed a secured creditor under the "ode and must file a financing statement to protect itself.

.hat it means/

The rights of the consignee+s creditors are governed by non%A& law and the creditors will likely be subordinate )second in line* to the interest of the consignor.

The consignor is deemed a secured creditor under the "ode and must file a financing statement to protect itself against the consignee+s creditors but A& foreclosure rules do not apply )see .&% ,-$)g**

Dypo X KA,!.ew hybrid automotive company hopes to avoid the claims of its dealer5s creditors by providing cars under a &onsignment #greement. %nder the agreement automotive company (eeps title" but transfers possession to the dealer. 1he dealer is obligated to sell the vehicles within one year of delivery by automotive company or otherwise pay the wholesale price as determined by automotive company. 1rue consignment or disguised sale< 1his is a disguised sale bc'. they were re8uired to buy it" they bear the ris( of loss. If they want to (eep priority the company needs to file a financing statement. Hypo A-. Breen<achines sells computers that are refur ished and assem led from used parts to the ma1imum e1tent possi le. Breen<achines enters into a *ontract for (elling (er&ices #ith the usinesses that pro&ide computers for refur ishing. 6he *ontract for (elling (er&ices sets Breen<achinesC e&entual sale price for the refur ished computers and re%uires that the usinesses take ack the computers that Breen<achines doesnCt sell, at #hich point Breen<achines gets a refund of the money that it originally paid for the computers. A normal o ser&er #ould likely elie&e that Breen<achines actually ought the used computers. 0s this a true consignment or a disguised sale? 6rue *onsignment, the fact that they set the price together is a little #eird as is the refund money though. As it is a true consignment, is it also an AD *onsignment? ED--F. (.F) IConsi*n8entM means a transaction" regardless of its form" in which a person delivers goods to a merchant for the purpose of sale and! (#) the merchant! (i) deals in goods of that (ind under a name other than the name of the person ma(ing delivery (ii) is not an auctioneer and (iii) is not generally (nown by its creditors to be substantially engaged in selling the goods of others (-) with respect to each delivery" the aggregate value of the goods is I,"BBB or more at the time of delivery (&) the goods are not consumer goods immediately before delivery and (=) the transaction does not create a security interest that secures an obligation. 0f they #ant to protect themsel&es from green machine creditors they need to file a financing statement. Gor to e an article D consignment@ pple donCt need to kno# itCs a consignment, #hich meansHarticle D is designed to protect creditors, if they kno# itCs a

P#o; e8 : @ .o the SI would not reach that of a dealer's because this is not going to meet the article ) definition largely because it appears thet pple. Lnow that this store sells good for others. In Re -a;e#s: P#o; e8 : ( Is this an article ) consignment< De would have to do a filling. If most pple" believe that he ma(es them himself then pple don5t believ he does consignments" its worth MI,BBB" he is not an auctioneer" 7 """. P#o; e8 : CC -arbara Shipe( was pleased and flattered when 1im Isle" owner of Isle's 9ine #rt ;or(s" as(ed her if he could exhibit and sell some of her poetry. She gave him five of her favorite pieces. 1he next day she too( a party of friends down to the store to see the display and was astounded to learn that ?ctopus .ationnl -an( (?.%)" which had a perfected floating lien on the store's inventory" had foreclosed and sei'ed everything in the store" including -arb's pottery. &an ?.- do this to her< She has to file before delivery 7 give notice to other credits she will have a 36SI %nder )A,B$(d) an article ) consignment is treated li(e a 36SI

/eases F a problem similar to the applicability of article ) to consignments occurs when the parties disguise a secured sale as a lease
P#o; e8 : C Notes Pa*e '3 +ach lease must be evaluated on its own. It doesn5t necessary answer the central 8uestion if the lessee pays consideration e8ual to or even greater than the fair mar(et value (96O) of the leased goods. .or does the lessee's assumption of ma*or duties (taxes" ris( of loss" etc) necessarily indicate a lease or a sale of goods. As on* as t+e ease doesn>t co!e# t+e tota econo8ic ife of t+e *oods" In Re Winston Does t+e t#ansaction fa into one of t+e ;#i*t ine #. es of %-'<3$;)I $inse#t *#a4+E its not 6" ast 5ea#s) ?#a4+ ' fo# t+e second %" did t+e esee *i!e !a .e = #ecei!e de i!e#5 67o 1no6 ed*e of t+e SI = 4#io# to t+e 4e#fection of SII $&-3%D c)

YesI T+e sec.#ed c#edito# ta1es SUBNECT to t+e inte#est of esee ;" NOI Is t+e esee a essee in t+e o#dina#5 co.#se of ;.siness &-3'%I Y E S *o ;a c1 to a

NO Does sec.#e f.t.#e ad!a sec.#ed c#edito# 8 da5s afte# $i) t+e s +ad 1no6 ed*e of t+e ease ;eca8e e 3'3f) I YES a NO t+e sec.#ed c#edito# ta1es -REE of t+e inte#est of t+e essee P#o; e8 : D ;hat is missing in this is the present mar(et vale. ;e need that to (now whether it was nominal or not. ,B years implies that it was nominal value" however doesn't cut it clear. In #e A#c+itect.#a ,i 6o#1 of Vi#*iniaE Inc" -) =ebtor entered a "truc( lease agreement"" which provided for debtor's lease of a semiAtractor from creditor. =ebtor and a third party entered a "conditional sales agreement" for a for(lift. 1he third party assigned all of its rights to creditor. =ebtor subse8uently filed a &hapter ,, petition" but continued to operate its business as a debtorAinApossession under chapter ,,. &reditor asserted that the agreements were leases and sought to compel their assumption or re*ection under chapter ,,. &reditor further sought to re8uire payment on the leases. =ebtor argued that &hapter ,, did not apply because the transactions were not true leases. 1he court found against creditor as to the for(lift transaction and in favor of creditor as to the semiAtractor transaction.

H) 1he court held that the for(lift transaction was a security agreement rather than a lease. Dowever" the semiAtractor agreement was a true lease because the option to purchase the semiAtractor was for more than *ust nominal consideration.

/eases T/easeH means a transfer of the right to possession . . . " but a sa eE including a sale on approval or a sa e o# #et.#n" is not a lease. . .
It should be noted that according to @0#" unless the context clearly indicates otherwise" the term includes a sublease."

/esee9s Benefit P TaJ Benefits = /ease Pa58ent AA business expense deduction. = P.#c+ase Pa58ent F depreciation deduction. P #void personalAproperty taxes. P 1he lessor ris(s that a good5s 9uture money value will decline. P =oesn5t impact ability to borrow. P -alance Sheets F some aren5t listed as liabilities giving up a SI for a loan appears as a debt.

P P P P P

/esso#9s Benefit TaJ ded.ctions for accelerated depreciation. Re8edies AA the lessor can exercise lease remedies" not L.st A#tic e & #e8edies" Ban1#.4tc5 Ri*+ts -- often ;ette#" 1he lessor can TcramAdownU against a 3S3. /ou can charge +i*+ inte#est rates and not violate state usury laws.

A Sa e o# A easeI
P P ?ood>s #esid.a !a .e after the lease term. P 1he good5s true owner ta(es the ris( that the residual value is different than the parties expected at the outset. T+e#e is Ost#on* e!idenceM of: = Sa e 67SI AA if the residual value passes to the lessee for no or a nominal payment. = /ease P if (i) lessor gets the residual value" or (ii) lessee pays 96O for it. W+at is No8ina Va .eI K%-'<3$d) guides us on Tnominal considerationU! = .ominal AA if it5s less than the lessee5s cost of not exercising

'essidual )alue* Pay ent &alculation: = Oalue of Eood Y I0B"BBB = :ease 1erm Y G years = 4esidual Oalue Y +xpected

value of good after G years Y IG"BBB = T:easeU 3ayment Y I,G"BBB amorti'ed over G years. P

the option. = Not nominal AA if the rent was the 964 when the lessee has to exercise the option. 1here is no universallyAaccepted definition of TnominalU. = ZKBH of 96O< ZGBH of 96O.

3-Ste4 Test -- K%-'<3 P Ste4 %: 6ay the lessee terminate the agreement atAwill< = /es AA it5s a lease. VIf there5s a big penalty F not a TrealU option.[ = .o AA it may be a sale (or it may not be a sale). Eo to Step 0. STEP '! If the lessee can>t terminate the lease atAwill" and the transaction satisfies any one of K%-'<3$;)$%)-$@)" it5s a sale! = 1he lease term Q the good5s remaining economic life o# = the lessee 8.st (i) buy the good" or (ii) extend the agreement for the good5s remaining economic life o# = the lessee may renew the lease or buy the good for Tno8ina conside#ationU o# STEP 3:If neither Step , nor Step 0 is satisfied" who TappearsU to be the real owner< :oo( at K%-'<3$c)$%)-$C) = .3O rent Q 96O. = :essee assumes ris( of loss of goods = :essee pays taxes" fees" maintenance" etc. = :essee has an option to renew or buy = ?ption to renew or buy v. 96O = :essee has option to buy at a price Q good5s 96O P &onsider any other relevant fact.
P#o; e8 : 2% 1o avoid a breach of L. company that has a 9S against its e8uipment" leased its e8uipment for the length of the pro*ect . Is the lease sub*ect to current SI < # lessee in the ordinary course of business ta(es the leasehold interest free of a security interest in the goods created by the lessor even though the security interest is perfected (Section )A$B$) and the lessee (nows of its existence.

P#o; e8 : 23 #rticle 0 trumps #rticle ) if debtor is in possession. 6ar( is entitled to the :uggage according to article 0. @,n rightful reKection or Kustifiable re2ocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any e$penses reasonably incurred in their inspection% receipt% transportation% care and custody and may hold such goods and resell them in like manner as an aggrie2ed seller @ 1he rights of an unpaid seller are governed by both #rticle 0 and #rticle ). If the seller gets a security agreement covering the item sold" a 36SI arises " #rticle ) handles the priority If the seller extends credit to buyer but fails to reserve a security interest" article @0applies. if the buyer gets the goods and pays with a chec( that is dishonored ("..S.9."A"not sufficient funds")" the seller's rights are governed by article 0

Bou are a Buyer in the ,rdinary Course of Business )" .HH .++HB to #cenario

'he purchase is an ordinary purchase of the seller7s in2entory% and

'he buyer purchased the goods for 2alue% and

Buyer purchased goods in good faith and w/o knowledge of 2iolation of #ec. .g.% and

'he s.i. was created by the buyer7s seller

The <CC sa s a bu er not in the ordinar course o. business ta>es .ree o. increases in the s.i. due to .uture ad(ances; unless the ad(ances are made b the creditor in the $' da s .ollo-in! the sale and are made either -ithout >no-led!e o. the sale or *ursuant to a commitment -ithout such >no-led!e. P#o; e8 : 2@ a) ;here the seller discovers that the buyer has received goods on credit while insolvent" the seller may reclaim the goods upon demand made within a reasonable time after the buyer's receipt of the goods. b) 1he seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay. c) .?" Successful reclamation of goods excludes all other remedies with respect to them.

d) (Note t+at 4.#c+ase# inc .de sec.#ed 4a#ties) Q""'-@<3$%) e) (e should ha2e gotten a +*#) ()n2entory purchase9money priority. #ubKect to subsection (c) and e$cept as otherwise pro2ided in subsection (g)% a perfected purchase9money security interest in in2entory has priority o2er a conflicting security interest in the same in2entory) In 'e "rlco +e d t+at #ec a8ation #i*+ts e!a4o#ated 6+en t+e de;to# so d t+e in!ento#5 t+e !endo# so.*+t to #ec ai8 and t+e sa e 4#oceeds 6e#e 4aid to t+e senio# sec.#ed ende#E 6+o 6as dee8ed a O*ood fait+ 4.#c+ase#M .nde# UCC K ' -) In an adversary proceeding in ban(ruptcy court" plaintiff seller moved for summary *udgment against defendant debtor for reclamation of goods" pursuant to ,, %.S.&.S. @ GCR(c) ban(ruptcy trustee moved for summary *udgment in favor of defendant. :ender" who held a perfected security interest in substantially all of debtor's assets" was a good faith purchaser for value. 1hus plaintiff's interest as a reclaiming seller was sub*ect to lender's rights as a good faith purchaser. 3laintiff's reclamation claim was rendered valueless because proceeds from the disposition of the defendant's goods were used to pay lender's secured claim" and the value of any right plaintiff had to an administrative claim or replacement lien" pursuant to ,, %.S.&.S. @ GCR" was 'ero. Since plaintiff did not have a secured claim" it could not see( application of a marshaling remedy. 3laintiff's motion for summary *udgment was denied and defendant's motion for summary *udgment was granted. P#o; e8 :2( ;here a secured creditor encourages a transaction and is benefited by the transaction between its debtor and an unsecured creditor that enhances the value of the secured collateral" the secured creditor may be held liable to the unsecured creditor on the theory of un*ust enrichment. %n*ust enrichment or restitution" those are e8uitable claims that do supplement the %&&.

Stat.to#5 /ien Ho de# N.st as t+e ;.5e# in t+e o#dina#5 co.#se of ;.siness is a fa!o#ite of t+e a6E t+e H#e4ai#4e#sonH in t+e o#dina#5 co.#se of ;.siness is f#eA.ent 5 *i!en 4#io#it5 o!e# 4#e!io.s 5 4e#fected sec.#it5 inte#est"
P#o; e8 : 2C a) . possessory lien on goods has priority o2er a security interest in the goods (unless the lien a statute pro2ides otherwise) . b) 0ffecti2eness of possessory lien depends on the person7s possession of the goods. 1he possession go to the garage only if it is in the garage's possession"Qonce the possession is given up then the ban( will have priority. c) it doesn5t matter d) :ien reAattach< Purisdiction is split over that 8uestionQvery few would give 6i(e priority.

(C) Rea pp. !"# $ !%& (up to Section 'III)( )ut s*ip Pro)lem "#. (+) +o P,, on page !-..

?//J E Com*lete Re(ie- /ssa Problem *osted on T?/N P*. 1@$ B 21A 3u* to Section K7 5o an *re9released h *os. Priorit o.: "i$tures .ccessions and Commingling ?ee> ELL Bobb "s Notes #ecured 'ransactions=Class /otes 5:55> +ractice 0ssay (.) #tate Bank=.-% 0quipment% Aog "ood/)n2entory < has an after acquired property clause% >9!58. Became secured when they attached% >9!5:(b)=creditor gi2es 2alue% debtor has rights in collateral% and signed security agreement by debtor that adequately describes collateral. 'hey are perfected by filing >9:5M% : 5. +up Chow < has +*#)% >9 5:% in the in2entory. 'hey ha2e attached under >9!5:(b)=they ga2e >5 days to pay for the dog food% they are selling the dog food to them% and security agreement. 'hey are perfected because they filed a "#. < .nalysis under >9:!8(b) < ?i2es super priority to someone with +*#) in in2entory if; < #ecured +arty be perfected when Aebtor recei2es possession of in2entory. < +*#) #C sent authenticated notification to any other secured creditor% which was recei2ed within fi2e years prior to receipt of in2entory. < +up Chow sent a letter and it doesn7t matter that #tate Bank didn7t recogni&e the interest. < Was not perfected before Aebtor recei2ed first shipment% but has super priority on the second shipment. < Dnder >9:!!(a)% if we ha2e two perfected parties% priority goes to the first to file or perfect. (B) )s -ed "ern a Buyer in the ,rdinary Course1 < Dnder >9:!5(.)% such a buyer takes free of the creditors of the seller. < . buyer in ordinary course must buy; < with good faith < without knowledge sale 2iolates rights of another < not from a pawn broker < in ordinary course < seller of goods of that kind. < +*#) #C sent authenticated notification to any other secured creditor% which was

recei2ed within fi2e years prior to receipt of in2entory. < +up Chow sent a letter and it doesn7t matter that #tate Bank didn7t recogni&e the interest. < Aog *art is not in the business of selling commercial storage bins that are used in the store% and -ed "ern will take subKect to the interest of #tate Bank in the storage bin. (owe2er% as for the dog food purchased% that will be taken free of any interests of the respecti2e #cs. RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR %uestions .or NeHt ?ee> < ?ho has *riorit ; and in -hat amount is their claim& 2 *o: Aebtor owns a printing press worth S 55 !/ #+! files "# indicating interest in press !/! #+ makes S:5 loan% and attaches #) in press !/: #+! makes S85 loan% attaches #) in press !/8 #+ files financing statement indicating interest in press < )f we sell this press% the first S85 goes to #+!. )f the press sells for more than S85% the ne$t S:5 goes to #+ . )f the press sells for more than SI5% the remainder of the 2alue goes back to debtor. RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR 0iHtures and Accessions and Commin!lin! 0iHture < a good that becomes so related to particular real property that an interest arises in it under real property law. 'his is a punt to the state law. Bou need to look up what a fi$ture is according to your state.

"i$ture 'est=Hooked .t Wisconsin Haw < "actors < +hysical anne$ation to realty1 < in case% wheels were remo2ed from mobile home and power lines were attached to it < adaptation to use or purpose < intention of person making anne$ation to make permanent accession < looked at the fact that the wheels were remo2ed% an insurance policy was taken out% and a building permit was obtained or the foundation "i$ture "iling < #imilar to financing statement with additional requirements; < debtors name < #+7s name < description of collateral < the name of the real owner of the property% if someone different than the debtor < /eed to put the owner7s creditors on notice < legal description of the property < states that it has to be filed in the real property records

Problem ED: ?eneral rule is you ha2e to file them at the county le2el. )f you qualify as a transmitting utility% so you only need to file at the state le2el. 2 *o E91 !/ #+ attaches #) in fi$tures !/! *ortgagee records mortgage against fi$tures !/: #+ perfects through fi$ture filing Who (as +riority1 < 'he mortgagee has priority because the #+ didn7t do the fi$ture filing before the mortgagee recorded the mortgage. >9::8 gi2es fi$ture priority rules. Combining part c and e( )% it is a race rule when the race is between a mortgagee and a #+. 2 *o E92 !/ Bobs ( 3 C attaches a +*#) in an (L.C unit that it sold to owner of a new building !/! ?romerica Bank records a mortgage against the building including its fi$tures !/: Bob7s perfects through a fi$ture filing. Who (as +riority1 < )f our #C with an interest in a fi$ture has a +*#) and they perfect within !5 days% then they can ha2e super priority as against our mortgagee (real estate encumbrancer) >9::8(d). Priorit Test .or 0iHtures Aid the -00 record the interest before the #C filed "i$ture "iling1 < /o < #C has priority in fi$ture < Bes < Aoes the competing #C meet the +*#) requirements under >9::8(d) < /o < -00 has priority < Bes < Aoes the -00 meet the requirements of a Construction *ee under >9::8(h) < /o < #C has priority < Bes < Aoe the item meet the Ereadily remo2ableT 0$ception1 >9::8(e)(!) < /o < (as the -00 consented to #C7s priority under >9::8(f)( )1 < /o < Aoes the debtor ha2e the right to remo2e1 >9::8(f)(!) < /o

< -00 wins 2 *o E9# !/ Bobs attaches +*#) (L.C unit that it sold to owner of a new building !/! ?rowmerica Bank records a mortgage against a new building% for which the mortgage loan proceeds will be sued to construct. !/: Bob7s perfects +*#) through fi$ture filing !/8 Construction completed Who (as +riority < Dnder >9:88(h)% if we ha2e a construction *ee and the .iHture is installed be.ore construction is com*leted% then construction *ee will ha2e priority. When #C is up against a lien creditor% the #C can perfect through any method% and that means they do not ha2e to file a fi$ture filing% and can ha2e priority e2en through filing a "#. )f you ha2e two #Cs competing% you can obtain priority by Kust filing a regular "#. Bou only ha2e to file a fi$ture filing if you are trying to protect yourself from -00s. Problem @2: )t is entitled to automatic perfection of consumer goods (a +*#) is automatically perfected upon attachment.) 'he statement should contain the other mans name as well because the financing statement needs to ha2e the name of the record holder. )f filed on *ay 5th% yes% because this is within the !5 day limitation. #imon7s landlord lien is defeated by the +*#) because it is an interest of the owner. Problem @#: C#B can refuse permission to impro2e unless they get adequate assurances of being reimbursed. Blast is not liable to #imon for damage because #imon is the debtor and #+s are not liable to debtors for damages. We would reimburse the bank because the bank holds the mortgage on the property and the debtor didn7t pay for the fi$ture that had to be remo2ed in the first place. (aple$ood ") Couple purchased home and *aplewood bank ga2e them a mortgage. Couple purchased multiple things from sears and installed them after filing of statements through sears. Bank has mortgage and #ears has #. for things in kitchen. #ears has priority in the kitchen because they properly recorded their interests and made a 2alue for the things they were taking out. )) (ow much money is owing to #ears=impro2ement of 2alue from installing the condition 2ersus pulling all of the cabinets out and trying to resell them1 -) 'he sole remedy is remo2al of the items and resale. Bou are not entitled to the increase in 2alue from the installation of the cabinets. 'he current 2ersion of this case=post this case=says that the interest holder in fi$tures can look to the code or applicable fi$ture laws in the state. Problem @$:

Beah% under >9::8()) a perfected #) in crops has priority o2er a conflicting encumbrancer or owner of the real property if the A has an interest of record in or is in possession of the real property. Problem @': "i$ture filing would be the best because the facts are 2ery similar to the mobile home case. Ao e2erything is the practical answerF especially since the cost is 2ery low=but is not the right answer on the e$am. Bou had to note that this was co2ered by a certificate of title. )f the state C,' statute co2ers this% then you better do that (>9::8(e)(8)). Accessions and Comin!lin! 2 *o E9' !/ Aor grants #) in office computer to Bank ,ne !/! Aor acquires memory and grants a +erfected #ecurity )nterest(+#)) in the memory to Bank 'wo !/: Aor installs the memory in the computer !/8 Bank ,ne perfects its security interest through filing. Who (as +riority1 < Dnder >9::4(a)% a #) continues e2en if we install the accession (the memory)% and after it is installed% its priority is determined by general priority rules. Because Bank ! was perfected prior and was the first to file% it will pre2ail. Problem @C: . car is subKect to a C,'% so the interest of the tires will be subordinate to the party with the #) in the car. 2 *o E9C < Aor is a car manufacturer < ?rowmerica perfects a #) in Aor7s e$isting and after9acquired 2ehicles < #teelco acquires a +*#) in Aor7s steel meets all the requirements of >9:!8(b) < #teel is then used to make cars Who has priority in the cars1 >9::G(c)% (d)% (e) < >9::G(d) says if the #) is attached before they become commingled% they also become attached after% and if they were perfected before% they are perfected after the commingling. >9::G(e) says that normal priority rules apply. #teelco% which had super priority as a +*#) holder% will also ha2e super priority in this car.

Class /otes week > *C >9 *>9>9! B would be true if bahama bree&e filed w/in !5 days.

I0" ACCESS AND CO,,IN?/IN?

$hen goods are affi1ed to other goods (as opposed to realty), an accession occurs, ! the rights of the creditors are regulated y ED-33I. (ame pro lem arises #hen they are com ined #ith other goods ED-33J P#o; e8 : &C ?oods installed in motor 2ehicles. 'he #+ who is listed on the certificate of title has priority in all accessions added to the 2ehicle no matter whether the accessions are prior or subsequent to the certificate of title on the car. O>9::4(d)% ,fficial Comment I K. 0/5/RA4 PRI1RITI/S 01R 5/BTS AN5 TAK/S A. fe eral priority statute "ederal priority statute is a pre9bankruptcy priority for all federal claims% so that these claims are paid first when a debtor becomes insol2ent. K 3D%3" P#io#it5 of ?o!e#n8ent c ai8s
$a) $%) # claim of the %nited States Eovernment shall be paid first when2 $A) a person indebted to the Eovernment is insolvent and2 $i) 1he debtor without enough property to pay all debts ma(es a voluntary assignment of property $ii) 3roperty of the debtor" if absent" is attached or $iii) an act of ban(ruptcy is committed or $B) the estate of a deceased debtor" in the custody of the executor or administrator" is not enough to pay all debts of the debtor. $') 1his subsection does not apply to a case under title ,,. $;) # representative of a person or an estate (except a trustee acting under title ,,) paying any part of a debt of the person or estate before paying a claim of the Eovernment is liable to the extent of the payment for unpaid claims of the Eovernment.

# choate lien is one to which nothing further must be done to ma(e it enforceable. +lements such as the identity of the lienor and the property that is sub*ect to the lien are established thus" the lien is certain and definite. InchoateE the opposite of choate" is the more commonly used phrase. It means unfinished or incomplete and is used to describe a number of things such as liens" rights. http!//www.greenemar(ley.com/federalAtaxAlienApriority.htm B" TaJ /iens-Basic P#io#it5 1he fedral tax lien arises on assessment 7 covers all taxpayer's property" presently owned 7 after ac8uired. 1he I4S wins claims against all parties except those listed in I.4.&. R$0$(a). 1o prevail over such persons te r federal tax lien must be designated under state law. (R$0$(f)). P#o; e8 : &D Unites States !E Estate of Ro8ani" -) -oth a *udgment lien and federal tax liens encumbered the real property of 9rancis 4omani's 3ennsylvania estate" worth IG$"BB," following his death. 1he estate's administrator sought a county court's permission to transfer the property to the *udgment creditor. 1he Eovernment ob*ected to the conveyance" arguing that $, %S& section $K,$(a)" which provides that a Eovernment claim "shall be paid first" when a decedent's estate cannot pay all of its debts" prioriti'ed its payment. .evertheless" the court authori'ed the conveyance. %ltimately" the 3ennsylvania Supreme &ourt affirmed. 1he court concluded that 9ederal 1ax :ien #ct of ,)RR modified the Eovernment's preference and recogni'ed the priority of many state claims over federal tax liens.

I) =oes the federal priority statute" $, %S& section $K,$(a)" re8uire that that a federal tax claim be given preference over a *udgment creditor's perfected lien on real property where such a preference is not authori'ed by the 9ederal 1ax :ien #ct of ,)RR< C) .o. the &ourt held that section $K,$(a) does not re8uire that a federal tax claim be given preference over a *udgment creditor's perfected lien on real property. R) section $K,$(a) has been limited by -ede#a TaJ /ien Act of %&CCE 6+ic+ 4#o!ides t+at sa5s a fede#a ien fo# ;ac1 taJes is not !a id .nti t+e *o!e#n8ent fi es 4#o4e# notice 6it+ state o# oca officia s" 1he1ax :ien #ct "represents &ongress' detailed *udgment as to when the Eovernment's claims for unpaid taxes should yield to many different sorts of interests... in many different types of property... specifically crafted for tax collection purposes." -ig issue here is interpretation of the priority statute. 1he federal government usually have priority. 1he federal tax lien act ma(es the federal governmet sub*ect to priority. ;hat T+e fede#a 4#io#it5 stat.teE $, %.S.&. @ $K,$"V9.,[ provides that" when a debtor of the %nited States is insolvent and not in ban(ruptcy" it must pay its debts to the government first before paying any other creditor. Its purpose is "to secure ade8uate public revenues to sustain the public burden"" -ede#a taJ /ien Basic P#io#it5 91: applies to Tall property and rights to property" whether real or personal" belong to such person.U @R$0, :ien arises on date of assessment. @R$00 91: has priority over all competing claims" even those obtained before the tax lien" except for the claim of Tany purchaser" holder of a SI" mechanic5s lienor or *udgment creditor.U @R$0$(a) = 1o have priority over these interests 9eds must have filed -+9?4+ such interest arises. 4e8uirements of SI under 91:# @R$0$(h)

H54o &-' 0/, Erowmerica attaches a SI in all assets of =ebtor. 0/0 I4S files notice of 9ederal 1ax :ien 0/$ Erowmerica perfects SI ;ho has priority in the assets of =ebtor< Erowamrica" in this case the basic rule. -.t.#e Ad!ances And Afte# AA.i#ed P#o4e#t5: ;ho has priority< In what amount is the priority claim< ?ene#a R. e: A f oatin* sec.#it5 inte#est in afte#-acA.i#ed co ate#a 6i ;e SUBORDINATE to a 4#io# fi ed taJ ien" 9 See 91:# @R$0$(h) re8uirement that collateral be Tin existence.U

&ollateral is in existence 3rotected against P:& o I.+. 3erfected Oalue Eiven

+,ception$ $ $ Ta, -ien .ill be subordinate to after collateral ac/uired under a floating lien if: :A #ritten (A is entered in B?G79? the ta1 lien is filed. :6he (0 is ;?9G?*6?5 at the time the ta1 lien is filed. :6he secured party has made the loan in the ordinary course of her usiness. :6he collateral (commercial financing security under the G63A) is ac%uired y the de tor=ta1payer in the ordinary course of her usiness. o (su section (r) says that the protection is only for Kcertain commercial transactions, not consumerL). :6he loans (or purchases) are made efore the MJth day after the date of the ta1 lien filing (i.e. the lender has MI days or until he ac%uires notice of the lien to make an ad&ance secured y after-ac%uired collateral) and #ithout kno#ledge of the ta1 lien. :6he collateral must e ac%uired #ithin MI days after the filing of the lien (kno#ledge is irrele&ant).

H54o: &-3-an( has a perfected SI with after ac8uired clause" I,BB"BBB loaned to =ebtor ,B/, 1ax :ien 9iled ,B/0 -an( obtains actual (nowledge of tax lien ,B/$ I,B"BBB future advance by -an( +arly .ovember" after ac8uired collateral +arly =ecember" after ac8uired collateral In what collateral will the -an( have first priority< In what amount< Lnowledge doesn5t stop them from going afterAac8uired property..Lnowledge not relevent. H54oF &-@ 0/, A #ttachment and 3erfection of SI in afterAac8uired inventory = IK"BBB :oan = Inventory shipment # received by =ebtor $/, A I0"BBB :oan = Inventory shipment - received by =ebtor $/0 A .otice of 91: filed by I4S $/C A -an( obtains (nowledge of 91: $/G A IG"BBB :oan = Inventory shipment & received by =ebtor G/G A I,B"BBB :oan = Inventory shipment = received by =ebtor Ans6e#: priorities in #" - 7 &. bc'. they where filed w/in CG days 91S 9iled. # 7 - are ?( " &. 1he amt is )L. the GL loan though is not" bc'. Kno6 ede co.nts +e#e" #lthough w/in CG days. = is after the CG days.

/IENS: P#io#it5 O!e# Sec.#it5 Inte#ests P 58o.t+ Sa!in*s Ban1 !" U"S" IRSF -an( and Service both claimed funds owed by hospital to taxpayer under personal services contract. I.4.&. @ R$0$(c) extends the priority of prior security interests to certain 8ualified property obtained by the taxpayer within CG days of the tax lien filing. 1he 9irst &ircuit held that even though the proceeds of the contract were only accounts receivables" under the 4egulations for section R$0$" contract rights and the proceeds thereof are ac8uired at the same time the parties enter into the contract. -ecause the taxpayer entered into the service contract CG days after the Eovernment filed its tax lien (even though she had not yet performed and and had not been paid)" the ban(5s security interest was superior to the Service5s. P#o; e8 : &2 It has not been resolved whether 36SI super priority applies towards tax lien. D" TaJ /iens = -.t.#e ad!ances If the lien is undiscovered 7 the advance is given " who has priority the I4S or the :ender< I4& R$0$(d) allows a @( da5 6indo6 afte# notice of ien +as ;een fi edE it is not valid against a SI that came into existence after the tax filing and before the CRth day after the filing (that is if there is no (nowledge) S.88a#5 of t+e s5ste8: a" ?o! ta1es ien to satisf5 de;t ;" /ien a#ises 6+en t+e de;t is assessedE ;.t is not !a id a*ainst a co84etin* SC .nti a 4.; ic fi in* is 8ade c" SIs t+at a#ise 4#io# to taJ ien fi in* +a!e 4#io#it5E 6+i e t+ose t+at a#ise afte#6a#ds a#e s.;o#dinated TaJ /iens = :1ax :iens. 91:# @R$0$(d) :-uyers. %&& @)A$0$(d) ::ien &reditors. %&& @)A$0$(b) TaJ /iens and -.t.#e Ad!ances$KC3'3$d) #eA.i#e8ents): P 1he written S# covering the property was entered before the tax lien was filed. P 1he SI was perfected before the tax lien was filed. P 1he advance was made within CG days of the tax lien filing. P 1he -an( had no (nowledge of the tax lien.

%uture advance made' After %ederal !a? Lien .@A1A2d3

;<= days Advances made (ithout Bno(ledge are secured y the item levied against)

> <= days Advances are su ordinate to ta? lien)

After Cuyer .+/A1A2d3

Advances made (ithout Cuyer taBes free of Bno(ledge future advance) 2or pursuant to a commitment made (& o Bno(ledge3 are secured y the purchased item) Advances in this period remain secured y property levied against) Advances are su ordinate unless made *&$ *& $ Bno(ledge or pursuant to inding commitment made (& o Bno(ledge)

After Dudicial Lien .+/A1A2 3

P P#o; e8 : && #ugust/, I,GBB owed to the ban( 7 1ax :ien filed" ,0 ( in e8uipment collateral. agust/$, I,B( advance by ban( w/o (nowledge. a) ,,BB left over goes to the I4S b) ;hat f the ban( did (now<< 1hen it will be *ust limited to I,"GBB 3art 0 on august ,G G( advance by the ban( w/o (nowledge! Since they made them both w/o (nowledge" even after CG days if without (nowledge there continue to be interest total amt ,R(.

C+a4te# D Ban1#.4tc5 And A#tic e &

: St#on* A#8 C a.se" K(@@$a): the ban(ruptcy trustee has all the rights 7 privileges of a lienA creditor under state law. : P#efe#ences" K(@D$;) o Ti8e of T#ansfe#" K(@D$e)$') o EJce4tions" K(@D$c) S.;stantia 5 Conte84o#aneo.s" K(@D$c)$%) O#dina#5 Co.#se" K(@D$c)$') Ne6 Va .e" K(@D$c)$3) Net Res. t R. e" K(@D$c)$@) - oatin* /iens" K(@D$c)$() : -#a.d. ent T#ansfe#s : A!oidance of Non-Consens.a /iens

I" T+e T#.stee9s Stat.s 1he trustee may avoid the security interest in its entirety" even if there is no such actual creditor and even though the security interest would only be subordinated" not eliminated" under state law. 9or this reason" -an(r. &ode (@@$a) is often referred to as the "strong arm clause.2 #voidance of the security interest under this section of the -an(ruptcy &ode has the same effect as avoidance of a security interest under the preference power. (@@$;) if any unsecured creditor could reach an asset of the debtor outside ban(ruptcy" the 1rustee can use @ GCC(b) to obtain that asset for the estate. #s part of the estate" that asset is then divided among all the unsecured creditors" not *ust the creditor who could have reached the asset outside ban(ruptcy. P#o; e8 : %<< a) /es .the -L trustee comes in bC secured creditor come in will have priority b) even if two seconds before that will allow them to be protected 7 will get to their collateral to the top c) 36SI" \ 0o day Erace period< .ormally a 36SI creditor get a super priority" as long as 36SI perfects w/in 0B days.

'he #ecured Creditor in Bankruptcy

). 'hree important issues re position of #C in bankruptcy .. 'he filing alters the opportunities a2ailable to the #C . 'he filing creates an automatic stay of actions against the debtor and its property. BC :G!. 'hus% #C is barred from repossessing collateral under >9G5> or selling it under >9G 5. a. )nstead% automatic stay under BC :G!(d) B. 'he filing means that transactions that took place before the bankruptcy will be e$amined (a2oiding powers of trustee; the trustee gets powers that the A doesn7t7 get) C. (ow to 2alue the collateral

II" P#efe#ences:
#. 3references are transfers that favor one existing creditor over another in the period leading up to ban(ruptcy. @GCK(b) 3reference 4e8uirements! ,. 1ransfer of debtor's property 0. 1o creditor/ claimant. @,B,(,B) 7 (G) $. ?n #ccount of an antecedent (prior) debt. C. Insolvency (presumed w/in )B day period). GCK(f) G. w/in )B days of date of ban(ruptcy R. 6ore than creditor will get under normal ban(ruptcy distribution. 'he basic elements of an a2oidable preference in section 48I(b) of the bankruptcy code are a transfer of an interest of the debtor in property

Inse#t H54o %<-% P#o; e8 : %<% Section GCK(c)(0) of the -an(ruptcy &ode provides that a debtor or trustee may not avoid a transfer that was "(#) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee (-) made in the ordinary course of business or financial affairs of the debtor and the transferee Vthe 'sub*ective prong'[ and (&) made according to ordinary business terms Vthe 'ob*ective prong' [." P#o; e8 : %<' Section GCK(e)(0) of the -an(ruptcy &ode provides that a transfer effected by the creation of a lien is deemed to have been made at the time the transfer ta(es effect between the transferor and the transferee if the lien is perfected within $B days. &onversely" if perfection is delayed for more than $B days" the transfer is deemed to have been made at the time of perfection. 1his timing distinction is crucial when a debtor see(s to avoid" or undo" a security interest granted to a lender on the basis that the lien gave the lender preferential treatment visA]Avis other creditors of the debtor. P#o; e8 : %<3 (@D$c)$@) t+e t#.stee 8.st not a!oid .nde# t+is section a t#ansfe# to or for the benefit of a creditor" to the extent that" after such transfer" such creditor gave new value to or for the benefit of the debtor2 $A) not secured by an otherwise unavoidable security interest and $B) on account of which new value the debtor did not ma(e an otherwise unavoidable transfer to or for the benefit of such creditor Wee1 %< P4" '3& P '(<

III" T+e - oatin* /ien in Ban1#.4tc5

C+a4te# 2 P#oceeds
Ho8e6o#1 P $'(% P 'C2) P#oceeds
/ormally% a creditor with a +urchase *oney #ecurity )nterest in )n2entory% who complies with the requirements of >9: !(:)% gets senior priority o2er the in2entory in question and in what type of proceeds1 Identi.iable Cash Proceeds recei(ed b the Secured Part on or be.ore deli(er o. the !oods to the Bu er. .ccording to DCC >9 58(l)% the DCC does not apply to security interests in @deposit accounts@ unless they are Proceeds. .ccording to DCC >9:5G(!) a security interest continues in any @identi.iable proceeds @ recei2ed upon the sale% collection% or other disposition of the original collateral. What is the name of the rule referring to the most common method of tracing proceeds1 4o-est Intermediate Balance Rule.

P#o; e8 : %<C a) .?" she is a buyer in the ordinary course of business however the ban( has an interest in the deposited chec( 7 old car as proceeds of the inventory. ()A$0B(a) -uyer in ordinary course of business. +xcept as otherwise provided in subsection (e)" a buyer in ordinary course of business" other than a person buying farm products from a person engaged in farming operations" ta(es free of a security interest created by the buyer5s seller" even if the security interest is perfected and the buyer (nows of its existence. b) +roceeds are the money (check deposited) 3 the promissory notes>9: 4(a) #ecurity interest continues in Collateral( unless the secured party authori&ed the disposition free of the security interest or agricultural lienF and a security interest attaches to any identifiable proceeds of collateral) c) .utomatic -a#8e#s coo4e#ati!e E e!ato# !" Union State ;an1 1he livestoc( lender loaned money to the livestoc( owner and too( a security interest covering" among other things" the livestoc(. Subse8uently" the livestoc( owner entered into several purchase money security agreements with the feed seller for livestoc( feed" and the feed seller had a purchase money security interest covering" among other things" the feed and the products and proceeds thereof. ;hen the livestoc( owner defaulted" the feed seller filed an action see(ing possession of the collateral and *oined the livestoc( lender as a party. ?n the feed seller's motion to ad*udicate law points" the district court ruled that the livestoc( lender's security interest in the livestoc( was prior and superior to that of the feed seller. 1he court affirmed" finding that while the feed seller held a purchase money security interest in the feed" such interest did not continue in the livestoc( that consumed the feed. Ingestion and biological transformation of feed was not a type of "other disposition" nor did the feed become commingled with the livestoc( P#o; e8 : %<D .o AA the crops never existed" so the right to federal payments cannot be proceeds of them V;haley (the textboo() disagreed" double chec([ P#io#ities in P#oceeds P#o; e8 : %<2 a) 3urchasers of chattel paper who has possession 7 gives value have priority over SI in proceeds. &assiopeia ban( has priority. ;) P#o; e8 : %<& a) /es b) It can exercise its right of recoupment c) Dave a SI in the deposit act<<<< H-CC C#edit Co#4" !" S4#in* Va e5 Ban1 = T#.st Co" =ebtor sold e8uipment and used the proceeds to pay off promissory notes" three of which were not yet due" held by defendant ban(. 3laintiff secured creditor filed suit" see(ing to recover proceeds from the sale of the property in which it held a security interest. =efendant's loan officer agreed debtor's

payment was extraordinary and constituted the largest ever made on any debt owed by debtor to defendant. 1hus" the payment was not in the ordinary course of debtor's business" and defendant was not protected in (eeping these proceeds under %.&.&. @ )A$BR cmt. 0(c)" which allowed a recipient of a payment made in the ordinary course by a debtor to ta(e such payment free and clear of any claim that a secured party had in the payment as proceeds. 1he court reversed the trial court's grant of summary *udgment in favor of defendant" finding that plaintiff had a binding and enforceable security agreement against debtor" debtor understood the purpose and effect of the security agreement" and plaintiff's security interest was valid and perfected as to e8uipment and proceeds from the sale of that e8uipment. =efendant ban( was aware of this security agreement and security interest. P#o; e8 : %%< 1he 9. S both filed is effective for 9our months" they need to file a new one w/in C months. ?therwise they ran( e8ually in proportion7 time. ?.- has priority over #.- (assuming they filed w/in C months) P#o; e8 : %%% a) =on5t need to file b) =on5t need to file c) :aw trumps %&&. 6ust file. d) )f cash proceeds (money% checks% bank accts) inter2ene in the creation of the new proceeds. )n that case the #+ is gi2en temp. perfection for !5 days and must file a new "# describing the !nd generation proceeds in the appropriate office or lost its perfection. O>9: 4(d)( )(C), O>9: 4(e)% Comment 4. e) -e9coupment trumps proceeds f) 1ransferee of moneyA not acting with =. ta(es free of SI. P#o; e8 : %%' 3osseser of chattel paper trumps priority by proceeds &artier prevails.

?//J 12

P $'C&-'&C Defa. t)

I"

C+a4te# &: DE-AU/T P#e-defa. t D.ties of t+e Sec.#ed 4a#t5

P#o; e8 : %%3 a) 3arty in possession have to use reasonable care De authori'ed the sale" but the ban( unreasonably delayed. 1he ban( is responsible for not selling the chattel paper they owed him a duty of care that they breached. (/ou can have an oral security agreement when there is possession or control.) 1his is not a clear cut answer their responsibility is limited top the physical aspect of care. b) 4esponsibility/ obligation can be altered by agreement" Dowever" &an't disclaim a reasonable duty of care by L. c) 1hey failed to provide the proper amount authenticated. In this case they have to compensate him for his losses 7 the profits he would have made. 1his issue is not clear under the court the ban( has C days to send the debtor an accurate accounting. If they failed they are liable. -ut

what are the damages they are responsible/ what are the rights< #ny loss or damages caused by the error under )AR0G(b) 7 Statutory damages for nonAcompliance with the accounting re8uirement. P#o; e8 : %%@ .?" If sp has possession of &/" the ris( of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage

II"

Defa. t

State ;an1 of Pi4e# Cit5 !" A-Wa5E Inc" 1he ban( was awarded a *udgment against its debtor upon promissory notes that had been secured by an interest in grain that was stored in the granary's warehouse. 1he ban( obtained a citation order re8uiring the granary to surrender the debtor's grain there was an error in the order" and the granary sold the grain after paying the ban( a minimal amount. 1he granary urged that the trial court properly dismissed the ban('s complaint under the doctrine of merger and that any rights the ban( had under the promissory notes merged into the *udgment" extinguishing any interest the ban('s debtor had in the grain" and that the ban( was barred under res *udicata from pursuing its claim. 1he court held that the merger of the note in the ban('s *udgment against debtor and the ban('s citation action did not affect the ban('s security interest in the remaining grainAsale proceeds. A#tic e & of t+e U"C"C" 6as intended to 4#o!ide a sec.#ed c#edito# 6it+ 8. ti4 e #e8edies .4on a de;to#9s defa. t" T+at t+e o#de# ente#ed in t+e citation 4#oceedin* a*ainst t+e *#ana#5 6as a fina o#de# did notE .nde# #es L.dicataE 4#ec .de t+e ;an1 f#o8 4.#s.in* t+e instant action" C ass Notes: 1here was a *udgment for ,BB( for nonApayment pf 3.. Somehow the lawyer screwed up. 1hey got a *udgment for G (" he sold the grains for ,, ( 7 paid the rest for other debts. ;hen the ban( reali'ed the mista(es they wanted the rest of their balance. T+e #i*+ts of a SP a#e c.8. ati!e = 8a5 ;e eJe#cised si8. taneo.s 5E t+e5 don>t *et a 6indfa " T+e5 can on 5 co ect on t+e de;t = #easona; e eJ4enses" Once t+e de;to# +as defa. ted t+e c#edito# +as 8. ti4 e o4tions: %" N.dicia enfo#ce8ent : '" Re4oses 3" BOTH !ypo0: 1an2 one provides 03 loan 4 Get PSI in &*$ Then ban2 5 does the sa e$ &* is .orth 06788 4 debtor has substantial unsecured debt$ !e defaults9 )f you are bank two do you prefer Kust going 3 reposing this or Kudicial enforcement1 Judicial enforcement is e$pensi2e but might gi2e you priority ad2antage. 3 with repossession you are running against con2ersion 3 breach of peace. ?hat clause should ou *ut in de.ault *ro(ision& What would an assignment clause with1 )n a default clause you are forcing the debtor to beha2e% do what you want them to do. *ake them take care of the collateral. ?i2es the Bank an ama&ing amount of power if they ha2e those sort of insecurity clause. (owe2er% e2en with them %they ha2e ha2e to abide by the DCC. K%-3<&" O4tion to Acce e#ate at Wi A te#8 4#o!idin* t+at one 4a#t5 " " " 8a5 acce e#ate 4a58ent " " " o# #eA.i#e " " " additiona co ate#a Hat 6i H o# 6+en t+e 4a#t5 Hdee8s itse f insec.#eEH " " " 8eans t+at t+e 4a#t5 +as 4o6e# to do so on 5 if t+at 4a#t5 in *ood fait+ ;e ie!es t+at t+e 4#os4ect of 4a58ent o# 4e#fo#8ance is i84ai#ed" " " "

P P

?ood -ait+ ReA.i#e8ent (@,A$BC) F imposes a duty of Thonesty in factU and observing Treasonable commercial standards of fair dealing. ?1ample@ If a -an( is see(ing to accelerate for a reason other than the defaults" it may not be acting in good faith. P#o; e8 : %%(

a) .o" it has nothing to do with the debtor. ;) .o" nothing to do with that debtor ability to pay. c7 .ot good enough. It allows them to as( for assurances (1his is L. law ) V;hen reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand ade8uate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. M d) .ot good enough (1hey need to act in good faith they can as( for assurances.) e) .? f) /+S" letting anyone sei'e the collateral (in whole or in part) grounds to declare default. *) De8and Notes: the holder of a demand note could demand payment at any time for any reason or for no reason. =uty of good faith in acceleration clauses is inapplicable to demand notes. -ut it is inapplicable to default bc'. it violates the duty of good faith. K in*;ie !" Co88e#cia C#edit Co#4" 3laintiff's vehicle was repossessed without notice. 3laintiff filed suit against defendant &redit &orporation for unlawful conversion. Pury found for plaintiff and awarded actual and punitive damages. =efendant appealed and alleged the trial court erred in instructing *ury to find for plaintiff on the illegality of the repossession" in submitting to the *ury the instruction on actual damages" and in submitting to the *ury the issue of punitive damages. 1he court found that defendant needed to give notice and demand to plaintiff if defendant felt "insecure" and wanted to repossess the vehicle. 1he court determined defendant failed to give notice of the intention to repossess or demand" never returned plaintiff's personal property" and failed to notify plaintiff after the repossession. 1he court held actual and punitive damages were appropriate because there was evidence" if believed by the *ury" to warrant the inference of more than simple inadvertence or a technical conversion.Doesn>t +a!e to 4#o!ide a notice of defa. t o# Notice of #e4ossessionE +o6e!e# 8ost oan doc.8ents 6i +a!e s.c+ a 4#o!ision = a c.#e $c+ance to fiJ t+e" 4#o; e8) P#o; e8 : %%C Ti8e is of t+e Essence C a.se: a party who has by its action waived that re8uirement of time of the essence in the L. can reinforce by sending a notification that from now on. V# party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be re8uired of any term waived" unless the retraction would be un*ust in view of a material change of position in reliance on the waiver.[

1hrough course of dealing they have waived their right" therefore tey cant. Dowever they can reinforce that by reAinstate that provision.

III" Re4ossession = Resa e

Wi ia8son !" - o6e# To5ota Inc" Non-de e*a; e d.t5 on t+e c#edito# to #ef#ain f#o8 ;#eac+in* t+e 4eace 6+en #e4ossessin* sec.#ed co ate#a 1he seller sold a vehicle to the purchaser and the purchaser paid a down payment and agreed to pay the remainder in biAwee(ly payments. 1he purchaser also gave the seller a security interest in the vehicle. 1he purchaser became ill and subse8uently died from his illness. Sometime during his illness" the purchaser donated the vehicle to a camp but stopped ma(ing payments. 1he camp too( the vehicle to an auto shop to examine it and assure the vehicle was safe to sell. 1he auto shop had no (nowledge of any lien on the vehicle" nor did it (now that the seller had declared the purchaser to be in default and had hired an independent contractor to repossess the vehicle. 1he independent contractor removed the loc( and chain" and repossessed the vehicle. 1he seller asserted that it was not liable for the actions of the independent contractor" and that he had no prior (nowledge that the independent contractor intended to brea( into the auto shop. 1he court noted that t+e d.t5 to 4#ese#!e t+e 4eace 6as non-de e*a; e. 1he court affirmed the trial court's finding that the conduct of the independent contractor evinced a wanton and rec(less disregard for the rights of another" and was oppressive. ( facto# to conside# 6+et+e# it is a ;#eac+ of Peace: P ;here the repossession occurred P the debtor5s express or constructive consent P how $rd parties reacted P the nature of premises entered and P the S35s use of deception. P#o; e8 : %%D a) It's not a breach of piece (brea(ing the window is not an issue bc'. it is there &/ at that point) " but when the guy yells at him it becomes a breach of peace if 7 he must 8uit. De probably can't try again that night. (coming bac( showed up not to be a breach case) ;) .ot breaching the peace here (although some tric(ery is involved) c) De cannot enter premises to repose. d) 1his is clear tric(ery" so it is breaching the peace. Hi i8an !" Co;ado 1he seller and purchaser entered into a second instrument entitled "chattel mortgage"" which gave the seller a chattel mortgage interest in RJ cows and , bull. #fter delivery of the cattle" the purchaser culled a number of the cattle delivered under a claim of right. 1he seller too( exception to this practice. 1he parties entered into a third chattel mortgage agreement. ;ith the third instrument" the seller filed ../. %&& :aw financing statement. 1he purchaser was never in default on the contract payments. 1he seller showed up at the purchasers' farm and claimed he was repossessing the cattle under the terms of the security agreement. 1he purchasers protested. 1he seller was arrested for possession of stolen property and the purchaser was later charged with fraudulent sale of mortgaged property. T+e co.#t iss.ed t+e o#de#E +o din* t+at: $%) t+e c+atte 8o#t*a*es 4#o!ided t+e se e# 6it+ t+e #i*+t toE .4on defa. tE #e4ossess t+e co ate#a .nde# t+e te#8s of t+e K &-(<3 F $') t+e #e4ossession #i*+ts *#anted .nde# t+e K &-(<3 co. d on 5 ;e eJe#cised 6it+o.t ;#eac+ of t+e 4eaceF and ($) the reta(ing of the

purchaser's cattle was a breach of the peace. P#o; e8 : %%2 1he exculpatory clause not enforceable" cant wave the duty of good faith 7 reasonableness P#o; e8 : %%& =oes the ban( have this right< If so agreed " in any event after default" a sp may notify an account debtor's customers to ma(e payment to or to the benefit of the secured party. If the spa stops opening its doors" the customers no longer have to pay the ban( because the payment was conditional upon the customer's services from ;onder Spa. CBC(a) says the obligation to pay the ban( is sub*ect to the agreement between wonder spa 7 the customers. 1hey can use any defenses they have against the spa (unless they ma(e them sign an agreement to (eep paying /. -eyond the scope of article )) P#o; e8 : %'< P.; ic Sa e: people (new abt. it 7 had the opportunity to bid. Ho6 8.c+ notice is #eA.i#edI Since t+is is a 4.; ic sa e Do# 8.st ;e *i!en #easona; e notice" See cons.8e# !" non-cons.8e# t#ansactions T+e on 5 6a5 to 1no6 is to fo o6 t+e

Defa. t
#rticle ) is silent about the definition of "default" . Some good default provisions to protect the creditor! Insecurity clause #ntAassignment clause ?nce we have a default the creditor has a multitude of options of how to go after the collateral. Dow much notice does the creditor before he reposes the collateral< .?.+" as long as he doesn5t breach the peace. 9or the portion of eth debt that is nonAsecured getting a *udgment lien will give them priority w.r.t unsecured debt. Das to give notice before disposing of collateral o 4esidential ! ,B days notice o &ommercial! ade8uate notice. R = N of Tennessee Inc" !" B an1ens+i4 ,e ton #ea estate P#o; e8 :%'': a) the notice here is too short" one day notice is very short" suggesting it is unreasonable. .o notice or very short notice can be reasonable if the S3 can show a good cause. b) do they have to wash the collateral< 1he code is ambiguous. 1he case sited found it unreasonable if w/o the collateral depreciate. 1o stay on the safe side" clean the collateral c) was it npt commercially reasonably to conduct the sale on a snow storm< 3robably not" the case found it not commercially reasonable to. P#o; e8 : %'3

1he secured party cannot get the debtor to waive these rights. In RA0C states some rights that can be waived but only after default. P#o; e8 : %'@ 4ule doesn5t say that *unior creditor has to pay to the senior creditor. 1he senopr will be notified if the *unior has ta(en them 7 then say! "hey this is ours 7 get it bac(" P#o; e8 : %'( 1he rebuttal presumption that they can toss it bac( 7 forth until the parties eventually settle on the issue. If you don5t do it right you lose your right to defeciancy. %nless the creditor can show that If even commercially reasonable there still be a deficiency. P#o; e8 : %'D a little shady position bc'. a minor opens the door 7 let him in might be a breach of the peace. Should he have given him the painting bac( after he paid the late payment< If there was an acceleration clause mot li(ely" an exception to that is when we have a consumer good P#o; e8 : %'2 In waiting to sell the goods they have constructively elected straight foreclosure< 1here is no such thing as constructive strict foreclosure" but you can use delay to claim that the sale wasn5t commercially reasonable. Ree!es !" -o.tG = Tanne#E Inc"
$. 0ndians traded :ewelry to pawnshop for cash; shop sent notice after default. No one ob:ected. <awnshop sold :ewelry in ordinary course of business. 2. "ourt/ if going to keep it couldn+t sell it. )===*. '. Newell/ don+t have to keep it b>c no one would use this procedure if they had to keep the collateral. a. "omment $$ to &%,2-/ the role of good faith. 91ample of proposal with collateral value greater than amount of loan/ that violates principle of good faith. ?7T normally cases shouldn+t be second%guessed on value of collateral. @. "ase/ N!T good= Newell/ if proper notice given to the debtor the 8T is pretty much over if no ob:ection. 8< can do whatever they want with the collateral.