Secured Transactions Outline

Secured Transactions
file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...
Note to self: This outline contains some numbers, some not-numbers.. That's because I outlined
course following the book. But then, I took some liberty where the book's topic sequencing/grouping
seemed strange.
Chapter 1 - Creating a Security Interest
Introduction
What is a Secured Transaction? (9-109)
Party has lent money to debtor, taken back interest in debtors assets (personal property) as
a secured interest
Party (now a Secured Party) holds onto this secured interest in the property until the
secured party is paid in full.
If the debtor defaults in some manner, the secured party can repossess (take the debtors
entire bundle of rights in that property), sell property, and use proceeds against the debt
Why Secured Credit?
Advantages
For Secured Party
Secured party [creditor] charges lower interest to debtor (risk of not getting paid is
much lower since they have that secured interest)
Secured party [creditor] has priority if debtor defaults, can foreclose upon debtor (as
opposed to unsecured parties, who must go to court to obtain judgment)
Secured party [creditor] has leverage over debtor (I have a secured interest over all of
your assets)
Having a secured party [creditor] signals to the rest of the world [other creditors] that
you are a confident debtor
Disadvantages to SP
What is an Unsecured Transaction?
e.g. credit card transactions
Advantages
For Unsecured Creditor
Creditor can charge higher interest rate
Lower transaction costs (unsecured credit/transactions are common, day-to-day
activities
For Debtor
Property stays unencumbered by debt obligations
Disadvantages
For Unsecured Creditor
No collateral
No priority in case of default or bankruptcy
Key Terms in Creating a Security Interest
Security Agreement: [9-102(a)(73)] = The agreement that creates the security interest. The
medium may be either tangible or electronic.
Security Interest [1-201(b)(35)] = The interest in property that secures payment of the debt.
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Financing Statement [9-102(a)(39)] = The record (tangible or electronic) that the secured
party files in public records, usually the states filing office
Collateral [9-102(a)(12)] = General term for ANY property subject to a security interest;
collateral may be tangible property or intangible (increasingly popular) property
Examples of Tangible Property
Inventory (Goods held for sale)
Consumer Goosd (Goods used for family/household purposes)
Farm Products
Equipment
Note: These categories are from the perspective of the DEBTOR
Categories are MUTUALLY EXCLUSIVE. Debtor can only classify goods one way, e.g.
inventory OR consumer goods.. depends on Debtor's perspective
Example
If the debtor is a Retailer, its collateral (e.g. furniture) may be the Inventory it sells
(which customers take home, as consumer goods)
If the debtor is an individual its goods (e.g. furniture bought from the Retailer) is a
consumer good
Examples of Intangible Property
Accounts
Intellectual Property (e.g. copyrights, trademarks, etc)
General Intangibles (other rights to payment, but NOT accounts, chattel paper, deposit
accounts, commercial tort claims, etc.) (see 9-102(a)(42) (see Visualizing Secured
Transactions, p. 12)
1. Rights of Unsecured Creditor
Seller vs Debtor
(Historic) Rule: Before judgment (or its equivalent), an unsecured creditor has no rights at
law or in equity in the property of his debtor.
i.e. to collect from Debtors, seller must:
Sue Debtor and obtain money judgment
Do whatever required under State law to authorize sheriff to seize (levy on) D's assets
Sell assets in payment of the judgment debt (subject to certain exemptions that allow Ds
to protect assets from creditors)
Notes
Seizure can be physical taking of property, or symbolic (e.g. by filing papers)
Once the seizure occurs, the seller/creditor has an interest in the seized property
The interest is called a "judicial lien"
Seller is known as a lien creditor (i.e. one who holds a judicial lien)
Seller vs Other Unsecured Creditors and Trustee in Bankruptcy
First in time, first in right
Example
S1, S2, and S3 all sell to D on unsecured credit
D defaults on the debts on all 3 sales
S2 follows the procedures required to collect from Debtors (see Seller vs Debtor)
Sheriff, acting under the judgment for S2, seized all of D's assets (including those sold by
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S1 and S3)
D now has no more unencumbered assets
Priority among JUDGMENT creditors is based on the time the sheriff seizes the assets
Therefore, S1 and S3 are subordinate to S2's interest
Note: These rights suck. That's why it's better to be a secured creditor
2. Rights of Secured Creditor
Seller vs Debtor
Seller has power to re-take collateral from Debtor
Seller sells wine barrels to D. D promises to pay via Promissory note
i.e. Seller has given value; Debtor owes a debt
Seller enters into written security agreement w/ Debtor
Sec agmt grants security interest in collateral
Sec agmt can be electronic (e.g. e-mail); Debtor authenticates the sec agmt (by signing
paper, or replying to e-mail)
ie Debtor has authenticated sec agmt in an authenticated record. At this point, sec
interest has "attached" -- it's enforceable wrt collateral (9-203(a))
But note: The sec int is not PERFECTED yet
If D defaults, Seller can retake collateral and sell it at auction
Usu doesn't require going to court unless the proceeds of sale don't cover the
deficiency and Seller wants to recover the difference
If so, Seller must sue D and obtain a judgment for the deficiency
Seller vs Other Creditors and Trustee in Bankruptcy
Secured Party is prior to other Unsecured Parties under 9-201(a)
UNPERFECTED Secured Party is subordinate to Lien Creditors
9-317(a)(2)(A) - Until Seller PERFECTS sec int, the unsecured sec int is subordinate to
lien creditors
Note: This is an example of Art 9 providing "otherwise"
Attachment
Who are the Parties to a Secured Transaction?
Debtor (9-102(a)(28))
1. Person having an interest (e.g. ownership, but NOT a security interest) in collateral;
OR
2. Seller of Accounts, Chattel Paper, Payment Intangibles, or Promissory Notes; OR
3. Consignee (we didn't cover consignment)
Obligor (9-102(a)(59))
Person who
1. Owes payment/performance of secured obligation; OR
2. Has provided property other than collateral to secure SP's secured obligation; OR
3. Is "otherwise accountable" for payment/performance of secured obligation
Secured Party (9-102(a)(72))
1. Recipient of Security Interest; OR
2. Person holding agricultural lien; OR
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3. Consignor; OR
4. Purchaser of accounts, chattel paper, payment intangibles, or promissory notes; OR
5. Representative receiving sec int/ag lien; OR
6. Person holding security interest under Art 2, 2A, 4, or 5
NOTE!! The Debtor and the Obligor CAN BE SEPARATE PEOPLE/ENTITIES; though
they're usually the same
Secured Party
9-203(b) Security interest attaches when:
(1) Secured party gives value; AND
"Value" means:
A binding commitment to extend credit, or the extension of immediately available
credit; OR
A pre-existing claim; OR
Delivery under a pre-existing contract; OR
Any consideration sufficient to support a simple contract
(2) Debtor has rights in collateral (RIC) or the power to transfer RIC to a secured party; AND
(3) Another thing (see 9-203(b))
9-203(b)(3)(A) Authenticated Security Agreement (9-203(b)(3)(A)) that describes the
collateral (and, if timber is involved, describes the land), OR
Definition: Agreement that creates or provides for a security interest (9-102(a)(73));
Signed by debtor
(B) SP has possession of the collateral (under 9-313), and the collateral is not a
certificated security in registered form (e.g. car deed?); OR
(C) The security IS a certificated security in registered form and the security certificate
has been delivered to the SP (under 8-301); OR
(D) the collateral is deposit accounts, electronic chattel paper, investment property, or
letter-of-credit rights, and the secured party has control under Section 9-104, 9-105,
9-106, or 9-107 pursuant to the debtor's security agreement
1, The Security Agreement
What is the Security Agreement?
An agreement that creates or provides for a security interest (9-102(a)(73))
Key Guidelines for Sec Agmt Formation
Should always include the magic language (debtor grants a SI in X which secures $$$)
Must be either written or done via an electronic medium
Authentication [9-102(a)(7)] = Includes either signing a record or adopting a symbol or
encrypt with the present intent of the authenticating person to identify that person and to
adopt/accept the record
2. The Composite Document Rule
A signed fin stmt may operate as a sec agmt (see Bollinger), if combined w/ other
documents to show intent to create sec agmt
In re Bollinger Corp (Majority View) (CA3 1980)
FP
ICC loaned Bollinger $150K. ICC filed financing statement. Z&J made loan to
Bollinger, agreeing to pay off ICC loan in exchange for the assignment of ICCs
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original promissory note and SA to Z&J. Bollinger then executed a promissory note
to Z&J, evidencing the agreement (and referring to the SI). No formal SA was ever
executed between the parties, but Z&J did file a financing statement in connection
with the promissory note. When Bollinger declared bankruptcy, administrator
refused to recognize Z&Js SI in the machinery and equipment that had originally
secured ICCs loan
I
Can a signed financing stmt operate as a security agreement?
RAH
HELD: the minimal formal requirements of 9-203(1)(b) were met by the Fin stmt and
the p note; and the crs of dealing btwn parties indicated the intent to create a
security interest
RULE: Multiple documents taken together may create a security if intent to create
a sec int is shown
Although there is no formal SA, the collection of documents here (FS +
promissory note + course of dealing documents) provide enough evidence of
parties' intent
American Card (Minority View)
HELD: A writing CANNOT operate as a SA unless it contains some words
UNEQUIVOCALLY and SPECIFICALLY granting a security interest
Two views re: existed of valid security agreement:
Pro-Secured Creditor View:
The requirement of a written sec agmt is merely for evidence
i.e., If (1) Creditor advances money to Debtor, (2) Debtor signs promissory note, and
(3) the fin stmt describes the collateral, then a sec interest has been created. (i.e.
No need for a formal sec agmt)
A-1 Paving
FP
Port Royal entered into a Sales Contract with A-1, selling equipment and motor
vehicles to A-1 in exchange for repayment in monthly installments. The Sales
Contract specified that any disputes should be governed pursuant to IN law.
Port Royal then filed a UCC-1 FS and attached Exhibit B which provided a
description of the equipment/vehicles transferred under the Sales Contract.
I
Whether Port Royal and A-1 created a valid SI in the assets that Port Royal
contracted to sell to A-1?
RAH
HELD: COURT: YES
RULE: A properly-filed UCC Fin Stmt creates an effective SI under Article 9 (of
Indianas UCC) if
(1) that financing statement satisfies the formal writing requirements under
9-203 AND
(2) the finder of fact determines that the parties intended the FS to serve as
a security interest(parol evidence ADMISSIBLE as to this prong)
Note: This holding is very far-reaching
Pro-Trustee in Bankruptcy View:
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The secured creditor has a very strong position against other creditors in bankruptcy
Note: A security agreement may serve as a financing stmt if signed by both parties
(9-402)
3. Description of Collateral
Description of Collateral in the Security Agreement
9-108(a) - Description of personal property is sufficient, whether or not it is specific IF
IT REASONABLY IDENTIFIES WHAT IS DESCRIBED
Examples of what "Reasonably Identifies" collateral
For Investment Properties e.g. Security Entitlement, Securities Account, or
Commodity Account (9-108(d))
Use of those terms, OR
Use of the term, "Investment Property", OR
Description of underlying financial asset or commodity contract
For Other Collateral (9-108(b))
Specific Listing
Category
Type of collateral defined in the UCC
Quantity
Computational/allocational formula or procedure; OR
ID "by any other method" IF the identity of the collateral is objectively
determinable
What is NOT sufficient to reasonably ID collateral
"Super-generic" descriptions, such as "all the debtor's assets" or "all the debtor's
personal property" - 9-108(c)
i.e. Sec Agmt MUST be specific in naming collateral
POLICY
Debtor's property is at risk
A description only by "type of collateral" for (9-108(e))
Commercial Tort Claim (defined in 9-102(a)(13)); OR
In a consumer transaction, description "by type" for Consumer Goods, A security
entitlement, a securities account, or a commodities account
Financing Statement: A financing stmt sufficiently indicates the collateral it covers if it
provides
(1) a description of the collateral pursuant to 9-108 (the Security Agreement rules); OR
(2) an indication that the financing stmt covers all assets or all personal property
NOTE: The fin stmt CAN have super-generic description of collateral
POLICY
This broader standard is consistent with the purpose of a FS needs to merely
notify subsequent creditors that a lien may exist and that further inquiry is necessary
Security Agreement vs Financing Statement
Security Agreement MAY NOT use "super-generic" descriptions, e.g. "all assets"
Financing Stmt MAY use "super-generic" descriptions
In re Grabowski (SD Ill 2002)
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FP
Priority dispute between Bank of America and South Pointe Bank regarding their
SIs in three items of farm equipment owned by the debtors. B of A claims a prior SI
in the equipment by virtue of a SA signed by the debtors in Dec. 1998; B of A then
filed a FS listing the debtors business address and describing the collateral as All
Inventory, Chattel Paper, Accounts, Equipment, and General Intangibles. South
Pointe then obtained a lien on the debtors equipment in January 2000; South
Pointe filed a FS describing the collateral specifically.
I
South Pointe alleges that B of As FS, although prior in time, was INSUFFICIENT to
perfect the Banks SI because it did not mention any specific items of equipment or
even make reference to farm equipment or farm machinery
RAH
HELD: COURT: B of As FS SUFFICIENT to perfect its SI in the subject farm
equipment (and, therefore, the Banks interest, being prior in time, SUPERIOR to
that of South Pointe)
B of As FS, although providing a general description, was SUFFICIENT to notify
subsequent creditors that a lien existed on the debtors property
6. Value and Rights in Collateral
9-203(b): Sec int does not attach in collateral until value has been given and debtor has
rights in collateral
a. Value
"Value" means:
A binding commitment to extend credit, or the extension of immediately available
credit; OR
A pre-existing claim; OR
Delivery under a pre-existing contract; OR
Any consideration sufficient to support a simple contract
1-204(4): Any consideration sufficient to support a simple contract
9-102(a)(57): "New value" --> money, property, or new credit given up front
b. Rights in Collateral
"Rights in collateral"
Need not be FULL property rights
9-203, Cmt 6: A debtor's limited rts in collateral, short of full ownership, are
sufficient for a sec int to attach
e.g. A lessee of personal property doesn't OWN the leased the property, but may
create a sec int in its valuable rights under the lease
"Power to transfer rights in collateral"
9-203, Cmt 6: This lang allows a debtor to transfer, and a sec int to attach to,
greater rights than the debtor has
Swets Motor Sales, Inc. v. Pruisner
FP
Swets Motor Sales, Inc. v. Pruisner (IA 1975) Swets sold used cars/trucks to
Pruisner, a retail auto dealer. Pursuant to an oral agreement, Swets delivered
vehicles to Pruisner with unencumbered certificates of title and was paid by
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Pruisner at the time of delivery. Chrylser financed Pruisners inventory based

upon a valid security agreement with filed financing statements covering all
vehicles in Pruisners possession. In 1973, four of Pruisners checks, written to
Swets and worth approximately $31,000, were dishonored.
I
Pruisner then sued on the grounds that his interest in the automobiles was
superior (it still held title) to that of Chrysler.
RAH
HELD: The rights of Swets to the automobiles in question is junior and inferior to
Chrysler
RULE: UCC 2-403 governs A purchaser of goods acquires all title which his
transferor had or had power to transfer except that a purchaser of a limited
interest acquires rights only to the extent of the interest purchased. A person with
voidable title has power to transfer a GOOD title to a good faith purchaser for
value. When goods have been delivered under a transaction of purchase the
purchaser has such power even though(b) the delivery was in exchange for a
check which is later dishonored
-Thus, despite the fact that Pruisner tendered a subsequently dishonored check,
he could transfer good title to a good faith purchaser for value. -No questions as
to Chryslers lack of good faith
-Chysler gave value (because they acquired the rights to the cars as security for
or in total/partial satisfaction of a pre-existing claim)
Notes
-Chysler is also a VALID SECURED PARTY When Swets delivered the
vehicles, Pruisner acquired SUFFICIENT RIGHTS in the vehicles to permit
Chyslers SI to ATTACH
Automatic Attachment of Sec Int to Certain kinds of Collateral
A sec int automatically attaches to certain types of collateral
4. Automatic Attachment of Sec Int to After-Acquired Collateral
Under Article 9, a SI may not only apply to the collateral that the debtor owns at the
time the SI is granted but also to later-acquired collateral.
As specified by 9-204, NO NEW security agreement is necessary when the collateral
is acquired LATER if the security agreement provides that it applies to after-acquired
collateral.
No new Sec Agmt needed for non-Consumer Goods Collateral under 9-204(a)
Sec int may apply not only to collateral the debtor owns at time sec int is granted,
but also to after-acquired collateral
RULE: 9-204(a) - IF sec agmt provides that it applies to after-acquired collateral,
THEN no new sec agmt is necessary
What happens when parties have left out after-acquired property clauses in
inventory or accounts financing transactions in which it is likely that they intended to
include the terms?
UCC does not say; Issue is left to state law
Majority Approach
Security interests in inventory and accounts receivable PRESUMABLY
INCLUDE after-acquired inventory and receivables, SUBJECT to rebuttal by
evidence that the parties intended otherwise
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POLICY
Rests on the unique nature of inventory/accounts receivable as cyclically
depleted and replenished assets.
In re Filtercorp, Inc (Majority Approach) (CA9 1998)
FP
In re Filtercorp (9th Cir. 1998) Filtercorp took out a series of loans from
Paulman. The loans were memoralized by promissory note, which
provided for a security in the accounts receivable and inventory of
FilterCorp. The parties never executed a separate SA, but Paulman
perfected his interest by filing a FS. Despite the notes reference to an
inventory listing, none was attached to the note or the FS.
I
Did the parties intend to secure AFTER-ACQUIRED inventory/accounts
receivable with the 1992 promissory note?
RAH
HELD: Ct adopts majority view (rebuttable presumption)
Presumption that after-acquired property is included STANDS unrebutted
as to accounts receivable; no evidence of intent -> Paulman has a SI in
after-acquired accounts receivable of Filtercorp.
Presumption that after-acquired property is REBUTTED for inventory by
the reference to the attached inventory listing (even though it was never
actually attached)
Minority Approach
Require EXPRESS language evidencing the parties intent to cover afteracquired inventory or accounts receivable
POLICY
It's neither onerous or unreasonable to require a SA to make clear its
intended collateral
New Sec Agmt needed for Consumer Goods Collateral under 9-204(b)
Sec int in after-acquired property does not extend to consumer goods collateral
RULE: 9-204(b)(1) - An after-acquired property clause is not effective wrt consumer
goods
BUT! The after-acquired property clause IS effective wrt consumer goods if the
debtor acquires rights in them within 10 days after the secured party gives value
e.g. when a consumer buys a stove from a retailer on secured credit, the retailer's
sec int does not also extend to other consumer goods purchased later
RULE: 9-204(b)(2) - An after-acquired property clause is not effective wrt
commercial tort claims
5. Automatic Attachment of Sec Int to Proceeds of Collateral
Revised art 9 assumes (as did former Art 9) that the parties intend that the sec agmt
covers proceeds unless otherwise agreed
9-203(f) + 9-315(a)(2) ==> sec int attached to collateral automatically attaches to any
identifiable proceeds of the collateral
"Proceeds" means:
1972 version: whatever is received when collateral is sold, exchanged, collected,
or otherwise disposed of
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1994 version: "proceeds" includes payments or distributions made wrt investment

property collateral (see former 9-306(2))
Rev 9-102(a)(64): 'Proceeds" includes what is "acquired upon the sale, lease,
license, exchange, or other disposition of collateral"
Includes claims arising from loss or damage to the collateral (9-102(a)(64)(D))
Insurance payments arising from such loss or damage are also "proceeds"
(9-102(a)(64)(E))
Rev: 9-102(a)(12)(A): "Collateral" includes proceeds
Note: Revised Article 9 takes a different approach by defining collateral to
include proceeds -> Under this system, FINAL-GENERATION PROCEEDS are
considered proceeds, while EARLIER-GENERATION PROCEEDS are
considered collateral
Attachment of Sec Int to Supporting Obligations
9-203(f): A sec int that attaches to collateral automatically attaches to obligations
supporting the collateral
i.e. Art 9 treats supporting obligations the same way it treats proceeds
"Supporting obligation" = 9-102(a)(77) --> means a letter-of-credit right or secondary
obligation that supports the payment or performance of an account, chattel paper, a
document, a general intangible, an instrument, or investment property
Chapter 2 - Perfection
A. Introduction
9-308: Perfection of Security Interest
Except as otherwise provided in this section and Section 9-309, a security interest is
perfected if it has attached and all of the applicable requirements for perfection in Sections
9-310 through 9-316 have been satisfied.
A security interest is perfected when it attaches if the applicable requirements are satisfied
BEFORE the security interest attaches.
Difference between "perfection" and "attachment"
If a sec int has "attached," it is enforceable against the debtor (9-203(b)) and unsecured
creditors (9-201(a))
BUT to have the most favorable status wrt 3rd party claimants (eg other secured parties,
buyers, and lien creditors), the sec int must be perfected
Outside of Bankruptcy:
A sec int that is "attached," but not "perfected" is enforceable against unsecured creditors
and the debtor
In Bankruptcy
BC 544(a)(1): The Trustee in Bankruptcy has the rights of a lien creditor
9-317(a)(2): An unperfected sec int is generally subordinate to the rights of a lien creditor
If the sec int is avoided in bankruptcy, the former sec party is demoted to the status of an
unsecured creditor
Overview - Methods of Perfection
Perfection By Attachment (9-309)
Some Sec Ints Perfect Automatically When They Attach (see below.. this is just a summary
overview)
(1) Purchase-Money Security Interests (PMSIs) in consumer goods (except as otherwise
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provided in 9-311)
(2) an assignment of accounts or payment intangibles which does not by itself or in
conjunction with other assignments to the same assignee transfer a significant part of the
assignor's outstanding accounts or payment intangibles;
(3) a sale of a payment intangible
9-102(a)(61): "Payment intangible" means a general intangible under which the
account debtor's principal obligation is a monetary obligation.
(4) a sale of a promissory note
(5) a security interest created by the assignment of a health-care-insurance receivable to
the provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until the
debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section 9-206(c);
(10) a security interest in investment property created by a broker or securities
intermediary;
(11) a security interest in a commodity contract or a commodity account created by a
commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent
transfers by the assignee thereunder; and
(13) a security interest created by an assignment of a beneficial interest in a decedent's
estate.
By Possession or Delivery of Collateral (9-313)
9-313(a): Possession of collateral by the Secured Party constitutes perfection with respect
to:
Goods
Instruments (e.g. promissory notes, checks)
Negotiable documents (e.g. bills of lading, warehouse receipts)
Chattel paper (leases of personal property, sales contracts reserving a sec int)
Money (currency), AND
Certificated securities (stocks, bonds)
i.e. the above types of collateral can be physically possessed
Instruments, chattel paper, and certificated securities are all represented by essential
writings, which are tangible
General Intangibles and accounts are NOT represented by essential writings
By Control (ability to dispose of collateral unilaterally, w/o further authorization from Debtor)
"Control" = ability to dispose of collateral unilaterally (i.e. w/o cooperation of the debtor)
Types of collateral that REQUIRE control:
9-312(b)(1): Control = only method of perfecting a sec int in a deposit acct (e.g.
checking/savings accounts at a bank)
Compliance with Other Law
9-311 -- Sec ints subject to other law can be perfected ONLY in compliance w/ that law (i.e.
not in compliance w/ Art 9)
e.g. Motor vehicles -- sec ints in vehicles comply w/ state vehicle code
e.g. sec ints in Registered Copyrights must be recorded in the Copyright Office in Wash DC
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Filing
9-310(a) -- BASIC RULE: Perfection must be by filing a financing statement (except for
when filing isn't necessary)
9-502(d) -- Financing Stmt may be filed BEFORE sec agmt or sec int attaches
A financing statement may be filed before a security agreement is made or a security
interest otherwise attaches.
9-310(b) -- Lists cases when filing is NOT necessary to perfect sec int:
(1) sec int is perfected under 9-308(d), (e), (f), or (g)
9-308(d) [Supporting Obligation]: Perfection of a security interest in collateral also
perfects a security interest in a supporting obligation for the collateral.
9-308(e):
(2) sec int is perfected under Section 9-309 when it attaches;
(3) sec int is in property subject to a statute, regulation, or treaty described in Section
9-311(a);
(4) sec int is in goods in possession of a bailee which is perfected under Section
9-312(d)(1) or (2);
(5) sec int is in certificated securities, documents, goods, or instruments which is
perfected without filing or possession under Section 9-312(e), (f), or (g);
(6) sec int is in collateral in the secured party's possession under Section 9-313;
(7) sec int is in a certificated security which is perfected by delivery of the security
certificate to the secured party under Section 9-313;
(8) sec int is in deposit accounts, electronic chattel paper, investment property, or letterof-credit rights which is perfected by control under Section 9-314;
(9) sec int is in proceeds which is perfected under Section 9-315; or
(10) sec int is perfected under Section 9-316.
Automatic Perfection By Attachment
Some Sec Ints Perfect Automatically When They Attach
(1) Purchase-Money Security Interests (PMSIs) in consumer goods (except as otherwise
provided in 9-311)
(2) an assignment of accounts or payment intangibles which does not by itself or in
conjunction with other assignments to the same assignee transfer a significant part of the
assignor's outstanding accounts or payment intangibles;
(3) a sale of a payment intangible
9-102(a)(61): "Payment intangible" means a general intangible under which the account
debtor's principal obligation is a monetary obligation.
(4) a sale of a promissory note
(5) a security interest created by the assignment of a health-care-insurance receivable to the
provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until the
debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section 9-206(c);
(10) a security interest in investment property created by a broker or securities intermediary;
(11) a security interest in a commodity contract or a commodity account created by a
commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent transfers
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by the assignee thereunder; and

(13) a security interest created by an assignment of a beneficial interest in a decedent's
estate.
B. Perfection By Filing
Policy behind Filing
Article 9 filing system has two purposes: (1) to allow the filing party to establish a priority in
the debtors collateral and (2) to provide information to the searching party about SI in this
property
1. The Notice Filing System
"Notice Filing" = the only record filed is a financing stmt that gives NOTICE that a sec int
may exist in the debtor's collateral
POLICY
Allow filing party to establish priority in debtor's collateral
Provide info to the searching party about sec ints in the property
This type of system generally shifts burden onto searching/inquiring creditor -> once this
creditor finds a financing statement, creditor should either go to the debtor to inquire as to
the specifics of the SA OR the creditor may also go to the secured party (but the SP has
NO DUTY to respond to other creditors)
Duty of Secured Party to Resond to Requests for Information
Duty: UCC 9-210 Request for Accounting -> SP has a statutory duty to provide a list of
collateral and respond to requests for an account if the DEBTOR requests accounting
Failure to comply with 9-210 may lead to actual/statutory damages (9-625)
9-210(b) -- Secured Parties must respond to requests for accounting (of debtor?)
9-210(c): SP MAY respond to requests for a list of collateral
See also 9-210(d) and 9-210(e).
Rules Governing Filing
What is a Financing Statement?
"Financing statement" means a record or records composed of an initial financing
statement and any filed record relating to the initial financing statement. (9-102(a)(39))
When Is A Financing Statement Required to Perfect a Sec Int?
General Rule
Financing Stmt must be filed to perfect security interest
Exceptions
1. Perfection of Sec Int in Collateral Related to Collateral as to which perfection occurs
(9-308(d) - (g))
2. Automatic Perfection upon Attachment (9-309)
3. Property whose perfection is governed by other applicable law (9-311)
e.g. cars
4. Goods in the possession of a bailee covered by a non-negotiable document
(9-312(d))
5. Temporary Perfection (9-312(e)-(g))
Automatic Perfection for 20 days after attachment of
Certificated securities, negotiable documents, or instruments, to the extent the
sec int arises for new value given under authenticated sec agmt (9-312(e))
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6. Perfection by Possession (SP in possession of collateral) (9-313)

7. Perfection of Certificated Security by Delivery (9-313)
8. Perfection by Control (9-314)
9. Perfection in Proceeds (9-315)
10. Perfection upon a Change in Governing Law (9-316)
The Filing System - What Do You File (and what constitutes "filing"?
a. Financing Statement Records
Initial Financing Statement
What to File
Initial Fin Stmt Form = 9-521(a) (must be accepted by ALL filing offices)
If more space needed (e.g. more than 2 debtors, ore more than 1 SP, or more
space needed to decribe collateral: use Form UCC1Ad as supp to fin stmt
Duration: How Long Fin Stmt Lasts
Initial Fin Stmt lasts for 5 years (9-515(a))
At end of 5 yrs, initial fin stmt lapses, UNLESS a continuation is filed BEFORE
expiration (9-515(c))
Who can File?
If D authenticates the sec agmt, then the D has automatically authorized the filing
of a fin stmt
A person can file an init fin stmt ONLY IF debtor has authorized the filing in an
authenticated record (9-509(a))
What Happens if Filing was not Authorized?
The fin stmt is INEFFECTIVE (9-510(a))
Filer is liable under 9-625 for actual and statutory damages
Amendment
What is an Amendment?
9-512(a) - Amendment means...
Continuation/termination of fin stmt
Addition/deletion of collateral
Changing info in fin stmt
Continuation Statement
Purpose
Extends fin stmt an additional 5 years (if filed BEFORE lapse of fin stmt)
(9-515(e))
Effect of Continuation Stmt
5 year extension starts at the time the fin stmt would have become ineffective
had no continuation been filed
When can Continuation Be Filed?
Continuation can only be filed w/in 6 months of expiration of fin stmt (9-515(d))
POLICY
This prevents filer from accumulating 5-year extensions by filing
continuations all at once
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Other Amendments do NOT extend fin stmt

see 9-512(b)
Who can file continuation?
9-509(d)(1) - the SP of record (9-511) may authorize the filing of a continuation
w/o further authorization by Debtor if some part of the obligation secured by the
sec int is still owed
Termination Statement (9-513)
Consumer Goods
9-513(a)
A secured party shall cause the secured party of record for a financing
statement to file a termination statement for the financing statement if the
financing statement covers consumer goods and:
(1) there is no obligation secured by the collateral covered by the financing
statement and no commitment to make an advance, incur an obligation, or
otherwise give value; OR
(2) the debtor did not authorize the filing of the initial financing statement.
In Commercial Cases
If obligation secured by the collateral secured by fin stmt is paid in full, debtor
may demand termination (9-513(c))
If D DEMANDs term, SP has 20 days to:
1. Send D a termination statement that D may file, OR
2. File the term stmt. itself
No Duty for SP to Terminate
The SP has NO DUTY to send D a term stmt until D demands one
Protection for Debtor
Even if D forgets to demand term stmt, Fin Stmts automatically expire
after 5 years, UNLESS they are continued
What if the debt is NOT paid in full before 5 years???
In Non-Commercial Cases??
Debtor's Powers
If SP fails to comply with 9-513(a) or (b), debtor may authorize the filing of a
term stmt. 9-509(d)(2)
Assignment (9-514)
9-514(a) Assignment Reflected on Initial Filing Statement
See statute?
9-514(b) Assignment of Filed Financing Stmt
See statute?
9-514(c) Assignment of Record of Mortgage
See statute?
See also 9-511 -- Secured Party of Record
b. Safe Harbor Form
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9-521(a) Safe Harbor Initial Financing Statement Form (accepted by all filing offices)
What is REQUIRED on init fin stmt (9-516(b)(5)(C))
Type of Organization
Jurisdiction of Organization
Organizational ID
What data is OPTIONAL on init fin stmt
Social Security # (see 9-516(b))
Addendum (Form UCC1Ad)
When the Addendum is Required:
If collateral is real property-related collateral such as timber to be cut or goods
that are to become fixtures
What Constitutes Filing
9-516(a): Except as otherwise provided in subsection (b), communication of a record
to a filing office and tender of the filing fee or acceptance of the record by the filing
office constitutes filing.
NOTE! This means that if the filing office accepts a filing that is missing info (e.g.
addresses), it still counts.
9-520(c): The fin stmt is "effective" if it contains the debtor name and collateral
2. Sufficiency of Financing Statement
See 9-521(a) -- Sets out the Safe Harbor Financing Stmt form
9-502(a): Fin stmt is "sufficient" ONLY IF it:
Provides the name of the debtor AND
(see below for more about what constitutes a sufficient statement of the debtor's
name)
The name of the secured party (or its representative) (9-503), AND
Indicates the collateral covered by the fin stmt (9-504)
Indication of collateral as described in 9-108 (for security agreements) 9-504; OR
Statement that Financing Stmt covers "All assets" or "All personal property"
Note: Super-Generic descriptions of collateral ARE allowed in the FIn Stmt
(9-108(b)(3))
NOTE: Even if the fin stmt is suficient, filing may not have taken place, because the
filing office may still refuse the fin stmt. see 9-516
4. Indication of Collateral
a. Original Collateral
9-502(a)(3): Fin stmt MUST indicate the collateral covered by the fin stmt
Description of Collateral (9-504(2)) is met by:
Description of Collateral (under 9-108), OR
An indication that the fin stmt covers "all assets or personal property"
(9-108(b)(3))
POLICY
Generic descriptions of collatearl are allowed in fin stmt because fin stmt
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only serves to notify the world that there may be a sec int in D's property
ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A.
F
I
RAH
b. Proceeds
Basic Rules:
1. A perfected security interest in the original collateral AUTOMATICALLY
continues in the proceeds, WHETHER OR NOT the fin stmt mentions proceeds
(9-315(c))
2. If a filed fin stmt covers the original collateral, the sec int in the proceeds
continues until the fin stmt either lapses or is terminated (9-315(e)(1)), AS LONG
AS:
(a) the proceeds themselves are collateral in which a sec int may be perfected
by filing (in the office in which the fin stmt is filed) AND
(b) the proceeds are not acquired with cash proceeds (9-315(d)(1))
3. A sec int in cash proceeds continues INDEFINITELY
4. If the debtor uses cash proceeds to buy NEW collateral (e.g. inventory or
equipment), then the sec int continues in the new collateral for only 21 days.
(9-315(d)(3)); See also 9-315, Cmt 5
HOWEVER, if the fin stmt indicates the type of collateral purchased,
then the sec into continues in the new collateral until fin stmt lapses or expires?
5. Name of Debtor
a. Basic Rules
9-503(a): A fin stmt "sufficiently provides the name of the debtor if":
(1) If D is INDIVIDUAL: By giving the name of the individual, NOT THE D/B/A or
trade name (9-503(a)(4)(A))
(2) If D is a GENERAL PARTNERSHIP: By giving the name of the
PARTNERSHIP, not the names of the parters
BUT!! If the partnership doesn't have a name (e.g. no formal p-ship agmt), then
use the partner's individual names
(3) If D is REGISTERED ORGANIZATION: By giving the name of
the organization indicated in the pub records of the D's organizing jurisdiction
(9-503(a)(1))
"Registered Organization": 9-102(a)(70) -- Organized under the law of a state
or fed govt that requires the maintenance of a public record showing the
organization to have been organized
Examples: Corporations, LLCs, Limited Partnerships
NOT Included in Registered Organizations: General Partnerships (see 9-503,
cmt 2)
b. Minor Errors Rule
9-506 - Resolves disputes regarding minor errors on fin stmt
9-506(a) - A Fin stmt w/ minor errors IS EFFECTIVE... UNLESS!! the errors
make the fin stmts "seriously misleading"
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What is "seriously misleading?"

9-506(b): Except otherwise provided in (c), a fin stmt that "fails sufficiently to
provide the name of the debtor in accordance w/ 9-503(a) is seriously
misleading
9-506(c): If a search of the records of the filing office under the debtor's correct
name, using the filing office's standard search logic, if any, would disclose the
'correct' financing statement, even though the D's name is technically
incorrectly stated wrt Section 9-503(a), the filed name is ok (i.e. not seriously
misleading).
1. Trade Names
Before revised Art 9 -- Cts held that the use of a trade name in the fin stmt was
appropriate
e.g. D's legal name is "Becaon Realty Investment Co", a gen pship. Its trade
name is "Hilton Inn". Before Rev Art 9, a fin stmt w/ Hilton Inn would
sufficiently name the organization
In part because a gen pship does not have a legal reqment to be named
w/ the legal name, since it's not a registered org?
Under Revised Art 9 -- 9-503(c) -- Trade name is INSUFFICIENT to name the
Debtor
2. Search Logic Issues
"Reasonably Diligent Searcher Rule: Even if the D's name is not correctly stated,
diligent searchers using the D's correct name should find the right (defective) fin
stmt
Some cts hold that even though 2 the filed name is incorrect, if it's spelled
closely enough, it's ok
e.g. Correct name = Voyageur Corp; Fin Stmt says Voyager Corp -- ct holds
that this is ok (i.e. not seriously misleading)
e.g. Correct name = Mines Tire Company, Inc; filed name = Mines Company,
Inc. -- ct held this was ok (i.e. not seriously misleading)
Before Rev Art 9: Burden was on the SEARCHING CREDITOR to find the right
fin stmt, to determine whether there may be any sec ints in D's collateral
Rev Art 9: Burden is on the FILING CREDITOR to file the correct name on the fin
stmt
9-506(c): If a search of the records of the filing office under the debtor's correct
name, using the filing office's standard search logic, if any, would disclose the
'correct' financing statement, even though the D's name is technically incorrectly
stated wrt Section 9-503(a), the filed name is ok (i.e. not seriously misleading).
Pankratz Implement Co v. Citizens National Bank
FP
I
RAH
Add in OneNote notes about 9-503 (2010 Amendments) -- see 2/12 lecture
3. Financing Statement Must Be Authorized by Debtor
Art 9 no longer requires that fin stmt be signed by debtor
9-502(a) -- drops the signature requirement. BUT! Debtor must still "authorize" the fin
stmt in an authenticated record.
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9-509(a) -- A person (usu the Secured Party [SP]) may file a fin stmt ONLY IF debtor
authorizes the filing in an authenticated record
9-509(b) -- By authenticating, the debtor/new debtor authorizes the filing of an initial fin
stmt, and an amendment covering (1) the collateral described in the SEC AGMT and
(2) property that BECOMES collateral later under 9-315(a)(2), whether or not the sec
agmt expressly covers proceeds
9-510(a) -- A Filed record is effective only to the extent it was filed by a person who
may file it under 9-509
POLICY
Dropping the signature requirement allows for electronic filing
Damages: If SP files fin stmt w/o required auth by Debtor
9-625(b): Debtor can collect in the amt of loss caused by SP's act
9-625(e)(3): Provides for $500 recoverable by Debtor
9-513(c)(4): Allows Debtor to demand a termination stmt from SP (e.g. back out of sec
int)
Term stmt must be sent w/in 20 days after it receives the demand
But also: 9-518 -- Allows for the filing of a correction stmt to fix an incorrect filing
3. When Filing Becomes Effective
When does filing "occur"? (9-516(a))
(a) when a fin stmt is presented to the filing office w/ tender of filing fee, OR
(b) when the filing office accepts the record
a. Filing Office Indexing Errors
9-517 - Failure of filing office to index a record correctly does not affect the
effectiveness of the filing
See also 9-519(h), 9-523(a).
b. Duty of Filing Office to Accept or Reject
When the Filing Office MUST refuse to accept a record (9-520(a))
For a reason set forth in 9-516(b)
i.e. the filing office CANNOT refuse for a reason other than in 9-516(b)
When the Filing Office MAY refuse to accept a record
ONLY for a reason set forth in 9-516(b)
i.e. the filing office CANNOT refuse for a reason other than in 9-516(b)
9-516(b)
Filing does not occur with respect to a record that a filing office refuses to accept
because:
(1) the record is not communicated by a method or medium of communication
authorized by the filing office;
(2) an amount equal to or greater than the applicable filing fee is not tendered;
(3) the filing office is unable to index the record because:
(A) in the case of an initial financing statement, the record does not provide a
name for the debtor;
(B) in the case of an amendment or correction statement, the record:
(i) does not identify the initial financing statement as required by Section
9-512 or 9-518, as applicable; or
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(ii) identifies an initial financing statement whose effectiveness has lapsed

under Section 9-515;
(C) in the case of an initial financing statement that provides the name of a
debtor identified as an individual or an amendment that provides a name of a debtor
identified as an individual which was not previously provided in the financing
statement to which the record relates, the record does not identify the debtor's last
name; or
(D) in the case of a record filed [or recorded] in the filing office described in
Section 9-501(a)(1), the record does not provide a sufficient description of the real
property to which it relates;
(4) in the case of an initial financing statement or an amendment that adds a
secured party of record, the record does not provide a name and mailing address for
the secured party of record;
(5) in the case of an initial financing statement or an amendment that provides a
name of a debtor which was not previously provided in the financing statement to
which the amendment relates, the record does not:
(A) provide a mailing address for the debtor;
(B) indicate whether the debtor is an individual or an organization; or
(C) if the financing statement indicates that the debtor is an organization, provide:
(i) a type of organization for the debtor;
(ii) a jurisdiction of organization for the debtor; or
(iii) an organizational identification number for the debtor or indicate that the
debtor has none;
(6) in the case of an assignment reflected in an initial financing statement under
Section 9-514(a) or an amendment filed under Section 9-514(b), the record does not
provide a name and mailing address for the assignee; or
(7) in the case of a continuation statement, the record is not filed within the
six-month period prescribed by Section 9-515(d).
If the filing office wrongfully accepts a record that does not contain the information set
out in 9-516
Liability/Damages
Article 9 does NOT address the liability of a filing officer to those harmed by negligence
State law governs negligence
Fin stmt can survive errors (9-520(c))
9-520(c) - A filed financing statement satisfying Section 9-502(a) [sufficiency of fin
stmt] and (b) is effective, even if the filing office is required to refuse to accept it for
filing under subsection (a)
However, Section 9-338 [priority of sec int/ag lien perfected by filed fin stmt with
incorrect info] applies to a filed financing statement providing information described in
Section 9-516(b)(5) which is incorrect at the time the financing statement is filed.
What If the Filer Makes Minor Errors/Omissions?
Substantial Compliance Doctrine
Financing Stmt is still effective, despite minor error/omissions, UNLESS seriously
misleading (9-506(a))
What is/isn't Seriously Misleading?
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Error/Omission Related to Debtor's Name

A Fin Stmt where the name does not comply w/ 9-503(a) IS seriously
misleading (9-506(b))
If search of records under Debtor's name (which must comply w/ 9-503(a)),
using the standard search logic of the filing office would disclose the fin stmt,
the name is NOT seriously misleading (9-506(c))
Error/Omission Related to SP's Name
Error is never Seriously misleading (Cmt 2 to 9-506)
POLICY
Even w/ incorrect SP name, the existence of the fin stmt serves notification
purpose
Filing does NOT occur if the Filing Office Refuses to Accept Because:
Failure to Provide Adequate Forms/Fees
Filer uses an unauthorized form or method of communicating the fin stmt
(9-516(b)(1))
Filer doesn't include the filing fee (9-516(b)(2))
Lack of Information about Secured Party
In the case of an initial fin stmt or amendment that adds a SP of record, the record
does not provide a name and mailing address for the SP of record (9-516(b)(4))
Lack of Information about Debtor
9-516(b)(3) The name of the debtor
9-516(b)(3)(C) The last name of an individual debtor
9-516(b)(5): A filing does not occur if the filing office refuses to accept a record that
lacks (A) debtor's mailing address; (B) whether debtors is individual or organization;
(C) if so, organization type, org jurisdiction, org ID # (or indicate that the debtor has
no org ID)
Note -- see also 9-516(b)(3) re: Amendments and Correction Statements
The Filing Office's Duty/Discretion to Reject a Filing
The filing office SHALL refuse to accept a record for filing for a reason set forth in
9-516(b)
The filing office MAY refuse to accept a record ONLY for a reason set forth in 9-516(b)
i.e.. not for any other reason (like, they just felt like it..)
What if the Filing Office makes a mistake?
ACCEPTING A Filing It Could/Should Have Rejected (under 9-516(b))?
Still effective -- "Except as otherwise provided in subsection (b), communication of a
record to a filing office and tender of the filing fee or acceptance of the record by the
filing office CONSTITUTES FILING (9-516(a))"
9-338 What Happens (i.e. what is the Priority of) Sec Int (or Ag Lien) Perfected by
Filed Fin Stmt that provides Certain Incorrect Info
If a security interest or agricultural lien is perfected by a filed financing statement
providing information described in Section 9-516(b)(5) which is incorrect at the
time the financing statement is filed:
(1) the sec int / ag lien is SUBORDINATE to a conflicting perfected security
interest in the collateral to the extent that the holder of the conflicting security
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interest gives value in reasonable reliance upon the incorrect information; and
(2) a purchaser, other than a secured party, of the collateral takes free of the
sec int or ag lien to the extent that, in reasonable reliance upon the incorrect
information, the purchaser gives value and, in the case of chattel paper,
documents, goods, instruments, or a security certificate, receives delivery of
the collateral.
Wrongly REJECTING A Financing Stmt (i.e. for a non-9-516(b) reason)?

The filing is effective (9-516(d)), as long as it is submitted in proper form, with the
filing fee
Exception:
The fin stmt is NOT effective against a purchaser of the collater that gives value
in reasonable reliance upon the absence of the record from the files
Improperly Indexing a Record in the Wrong Place?
The filed record is STILL EFFECTIVE (9-517)
Note -- with computers, this should be increasingly rare
BUT What happens if the filing office does not correctly INDEX the record after it is
received (i.e. filing office messes up?)
In re Hergert (BC Idaho 2002)
FP
Pacific (SP) filed financing statement identifying SP as Pacific One Bank and
listing two business addresses (ID, OR) for the SP. Pacific then merged into the
Bank such that the name and one of the addresses on the FS is now incorrect.
I
RAH
HELD: Errors in the SPs name and address are NOT SERIOUSLY MISLEADING,
do NOT vitiate the EFFECTIVENESS of the filing
Although Section 9-502(a) requires a FS to provide the name of the SP, an error in
the name of the SP is not seriously misleading
Searches are NOT conducted under the SPs name; no filing is needed to continue
the perfected status of a SI after it is assigned
Article 9 recognizes that a limited function is served by the inclusion on the FS of the
SPs address; it only indicates a place to which others can send any required
notifications
Where Do You File?
For Non-Real Property-Related Collateral
9-501(a)(2) - Central Filing Office = usu office of Secy of State
For Real-Property Related Collateral
9-501(a)(1) - In the office where the real property mortgages are recorded
6. Post-Filing Changes
Events occurring after a financing statement has been filed can affect the accuracy of
information contained in it
Nonetheless, Article 9 generally does not care about post-filing changes and information
EXCEPT for seriously misleading debtor name changes and Article 9 does not care about
changes of collateral ownership EXCEPT where the new assignee lives in a different
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jurisdiction
a. Transfer of Collateral
For Transfers Not Affected by a Change in Governing Law/Jurisdiction
9-315(a)(1) - Effect of DISPOSITION of Collateral on the Security Interest
(unless otherwise provided in 2-403(2)) a security interest or agricultural lien
continues in collateral notwithstanding sale, lease, license, exchange, or other
disposition thereof UNLESS the secured party authorized the disposition free of
the security interest or agricultural lien
9-315(a)(2) - The sec int also attaches to "any identifiable proceeds of collateral"
9-507(a) - Effect of Transfer of Collateral on the Continued Effectiveness of a Fin Stmt
A filed financing statement remains effective with respect to collateral that is sold,
exchanged, leased, licensed, or otherwise disposed of and in which a security
interest or agricultural lien continues, even if the secured party knows of or consents
to the disposition.
POLICY
Saves the SP monitoring costs; imposes search costs on 3rd parties dealing w/
transferees in collateral
For Transfers to a Person Who Becomes a Debtor and Is Located in a New Jurisdiction
The sec int remains perfected for ONE YEAR after the transfer 9-316(a)(3)
i.e. the SP must monitor the collateral
b. Name Change
"Pure" Name Change: Only the businesss name changes; i.e. Business entity has not
changed
9-507(b) - Name Changes Are Generally Not Misleading
(Except as otherwise provided in subsection (c) and Section 9-508) A financing
statement still effective, even if after the financing statement is filed, the information
provided in the financing statement becomes seriously misleading under Section
9-506.
9-507(c) - Change in Debtor's Name
If a debtor so changes its name that a filed financing statement becomes seriously
misleading under Section 9-506:
(1) the financing statement is effective to perfect a security interest in collateral
acquired by the debtor before, or within four months after, the change; and
(2) the financing statement is not effective to perfect a security interest in collateral
acquired by the debtor more than four months after the change, unless an
amendment to the financing statement which renders the financing statement not
seriously misleading is filed within four months after the change.
c. Change in Business Structure
9-102(a)(56) - Definition of New Debtor
A person/org is a New Debtor if it "becomes bound as debtor" under 9-203(d) by a sec
agmt previous entered into by another person
POLICY
The New Debtor rules benefit the secured creditor of the original debtor -- makes
their lives easier
N.D. is bound to the original O.D.'s sec agmt, and the O.D.'s sec int remains
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perfected in old and newly acquired collateral w/o the filing of a new fin stmt, for at
least 4 months
Attachment
A person becomes bound as debtor by a security agreement entered into another
person (i.e. a "new debtor") if, by operation of law other than this article or by contract:
9-203(d)
(1) the security agreement becomes EFFECTIVE to create a SI in the persons
property; OR
(2) the person becomes generally obligated for the obligations of the other person,
including the obligation secured under the security agreement, and acquires or
succeeds to all or substantially all of the assets of the other person
9-203(e) - Is a New Sec Agmt Necessary for New Debtor?
(2) If Org/Person B is a New Debtor, bound by the sec agmt by Org/Person A, then
B does NOT need to enter into a new sec agmt w/ SP
(also, (1) - the agreement satisfies subsection 9-203(b)(3) with respect to existing or
after-acquired property of the new debtor to the extent the property is described in
the agmt)
NOTE: This would really only come into play if there are no other secured parties, no
bankruptcy in this case, you could still pick up your secured interests without
perfection
A common manner for a successor entity to become bound as a debtor is for it to
agree to become liable for all debts of its predecessor at the time when it receives
transfer of its predecessors assets
Perfection
9-508(a) - Is a New Fin Stmt Necessary for New Debtor?
The fin stmt naming the ORIGINAL DEBTOR is EFFECTIVE to perfect a sec int in
the collateral of the NEW DEBTOR, to the extent that the fin stmt would have been
effective had the original debtor acquired the collateral.
This includes existing collateral held by the new debtor covered by the original
debtor's sec agmt, not just the collateral acquired from the original debtor
BUT EXCEPTION -- 9-508(b) - Fin Stmt Becoming Seriously Misleading
If the difference between the name of the original debtor and that of the new
debtor causes a filed financing statement that is effective under subsection (a) to
be seriously misleading under Section 9-506:
acquired by the new debtor before, and within four months after, the new
debtor becomes bound under Section 9-203(d); and
(2) the financing statement is not effective to perfect a security interest in
collateral acquired by the new debtor more than four months after the new
debtor becomes bound under Section 9-203(d) unless an initial financing
statement providing the name of the new debtor is filed before the expiration of
that time.
9-508 - Effectiveness of Fin Stmt if New Debtor becomes bound by sec agmt
"New debtor" means a person that becomes bound as debtor under Section
9-203(d) by a security agreement previously entered into by another person.
(9-102(a)(56))
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9-508(a) - Except as otherwise provided in this section, a filed financing

statement naming an original debtor is effective to perfect a security interest in
collateral in which a new debtor has or acquires rights to the extent that the
financing statement would have been effective had the original debtor acquired
rights in the collateral.
9-508(b) - If the difference between the name of the original debtor and that of the
new debtor causes a filed financing statement that is effective under subsection (a)
to be seriously misleading under Section 9-506:
acquired by the new debtor before, and within four months after, the new
debtor becomes bound under Section 9-203(d); AND
(2) the financing statement is not effective to perfect a security interest in
collateral acquired by the new debtor more than four months after the new
debtor becomes bound under Section 9-203(d) unless an initial financing
statement providing the name of the new debtor is filed before the expiration of
that time.
Priority
9-326(a) Subject to subsection (b), a security interest created by a new debtor, which
is perfected by a filed financing statement that is effective solely under Section 9-508
in collateral in which a new debtor has or acquires rights is subordinate to a security
interest in the same collateral which is perfected other than by a filed financing
statement that is effective solely under Section 9-508.
9-326(b). The other provisions of this part determine the priority among conflicting
security interests in the same collateral perfected by filed financing statements that are
effective solely under Section 9-508. However, if the sect agmts to which a new
debtor became bound as debtor were not entered into by the SAME ORIGINAL
DEBTOR, the conflicting security interests rank according to priority in time of
the new debtors having become bound.
D. Perfection by Possession or Delivery
No authenticated sec agmt is required
Both attachment (9-203(b)(3)(B)) and perfection (9-313(a)) occur when a secured party takes
possession of colateral
What Is Perfection by Possession 9-313(a)
a secured party may perfect a security interest in negotiable documents, goods,
instruments, money, or tangible chattel paper by taking possession of the collateral
BUT NOT General Intangibles or Accounts
Perfection by Delivery 9-313(a)
A secured party may perfect a security interest in certificated securities by taking delivery of
the certificated securities under Section 8-301
1. Possession by Agent
Possession by an AGENT of the SP (for the purpose of possessing on behalf of the SP)
CONSTITUTES POSSESSION (see 9-313, cmt 3)
In re Rolain
FP
I
RAH
2. Possession by Bailee
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Pre-Revision
If Debtor's property was in possession of a non-agent bailee, the D and SP could create a
perfected sec int in the property
How to Perfect
Negotiable Documents of Title
Perfection could occur either in the document or in the goods
All other bailments
Perfection could occur if
1. secured creditor had the bailee issue a document of
2. notified the bailee of its sec int, OR
3. filed as to the goods
Post-Revision
What types of collateral can have perfected sec ints?
9-312(a) -> A sec int in the following types of collateral may be perfected BY FILING
Chattel Paper
Negotiable Documents
Instruments
9-102(a)(47) - means a negotiable instrument or any other writing that evidences
a right to the payment of a monetary obligation, is not itself a security agreement
or lease, and is of a type that in ordinary course of business is transferred by
delivery with any necessary indorsement or assignment.
Investment Property
How to Perfect Sec Int in goods held by 3rd party
9-313(c) - SP does NOT have a perf sec int in property that a 3rd party possess
UNLESS:
1. The person acknowledges that it holds possession of the collateral for the SP
AND
2. The acknowledgement is in an authenticated record (i.e. signed writing OR
authenticated electronic record)
Goods covered by negotiable document
9-312(c) - While goods are in the possession of a bailee that has issued a
negotiable document covering the goods:
(1) a security interest in the goods may be perfected by perfecting a security
interest in the document; AND
(2) a security interest perfected in the document has priority over any security
interest that becomes perfected in the goods by another method during that time.
Goods covered by non-negotiable document
9-312(d) - While goods are in the possession of a bailee that has issued a
nonnegotiable document covering the goods, a security interest in the goods may
be perfected by:
(1) issuance of a document in the name of the secured party; OR
(2) the bailee's receipt of notification of the secured party's interest; OR
(3) filing as to the goods.
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Rights of 3rd Party Bailee

9-313(f) - If 3rd party is instructed by debtor and SP to acknowledge that it holds
possession for the SP, the 3rd party may decline.
3rd party NOT required to acknowledge that it holds the property for the SP
Duties of 3rd Party in possession of collateral
9-313(g) - If the 3rd person does acknowledge that it holds possession for the SP, the
nature of its duties is left to:
(1) agreement of the parties, OR
(2) other applicable law
When does Perfection by Possession Occur?
9-313(d) - If perfection of a security interest depends upon possession of the collateral by a
secured party, perfection occurs no earlier than the time the secured party takes possession.
How Long does Perfection by Possession Last?
9-313(d) - If perfection of a sec int depends on possession of collateral by a secured
party, perfection continues only while the secured party retains possession.
E. Perfection by Control
Control is an alternative way of perfecting a sec int in the following types of collateral:
Deposit Accounts (9-104)
9-104: A secured party has control of a deposit account if:
(1) the secured party is the bank with which the deposit account is maintained;
(2) the debtor, secured party, and bank have agreed in an authenticated record that the
bank will comply with instructions originated by the secured party directing disposition
of the funds in the deposit account without further consent by the debtor; or
(3) the secured party becomes the bank's customer with respect to the deposit
account.
Electronic Chattel Paper (9-105)
9-105: A secured party has control of electronic chattel paper if the record or records
comprising the chattel paper are created, stored, and assigned in such a manner that:
(1) a single authoritative copy of the record or records exists which is unique,
identifiable and, except as otherwise provided in paragraphs (4), (5), and (6),
unalterable;
(2) the authoritative copy identifies the secured party as the assignee of the record or
records;
(3) the authoritative copy is communicated to and maintained by the secured party or
its designated custodian;
(4) copies or revisions that add or change an identified assignee of the authoritative
copy can be made only with the participation of the secured party;
(5) each copy of the authoritative copy and any copy of a copy is readily identifiable as
a copy that is not the authoritative copy; AND
(6) any revision of the authoritative copy is readily identifiable as an authorized or
unauthorized revision.
Investment Property (9-106)
Letter-of-credit rights (9-107)
9-107: A secured party has control of a letter-of-credit right to the extent of any right to
payment or performance by the issuer or any nominated person if the issuer or
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nominated person has consented to an assignment of proceeds of the letter of credit

under Section 5-114(c) or otherwise applicable law or practice.
F. Security Interests in Consumer Goods
1. Consumer Transactcions Under Article 9
Art 9 is subordinate to State Consumer Protection Laws
9-201(b)
Art 9 does not determine the validity of waiver of defenses clauses in consumer credit
transactions
9-403(e)
Special Protection for Defaulting Consumer Debtors
9-620(e)
Statutory Damages for Failure to Comply with Provisions on Default in Consumer
Transactions
9-625(c)(2)
Limitations on the Effects of After-Acquired Property Clauses
9-204(b)(1)
POLICY
Prevent a seller from adding on new sales to the balances of old ones merely by using
an after-acquired property clause in the original sec agmt
But it failed (see CB p. 107)
2. Perfection of Sec Ints in Consumer Goods
Filing not required for Purchase-Money Sec Ints
9-309(1) - A Purchase-Money Sec Int in CONSUMER GOODS is automatically perfected
at the time of attachment; no filing required
POLICY
(1) Consumer transactions are usu small; i.e. the expense of filing would cost
significantly more
(2) Usually numerous consumer transactions -- filing would cause undue burden on
the filing system
(3) The pre-Code rules in states didn't require filing
(4) Parties to consumer transactions are less likely to search the records
Goods are always classified from the Debtor's POV
Equipment
Inventory
Consumer Goods
Farm Products
But filing IS required for non-purchase-money sec ints in consumer goods
NOTE: For motor vehicles, boats, etc., automatic perfection does not apply under 9-309.
Must comply with certificate of title laws
9-309
9-320
G. Choice of Law
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1. Location of Debtor Governs Tangible and Intangible Collateral

Former Art 9
The problem with Former Art 9 = complicated rules
For "ordinary goods"
Situs Test: The fin stmt had to be filed in the state where the goods were located
For intangibles (e.g. accounts and general intangibles)
Place of filing = location of the debtor
If the proceeds of the sale of goods are intangibles
Place of filing = Required to be both the location of the goods AND the location of the
debtor (to cover both the goods and the proceeds)
If goods were moved from one state to another
Follow the goods
If the goods are "mobile" and moved constantly?
Place of filing = debtor's location
Revised Art 9
9-301(1) - General Rule = the law of the location of the debtor governs the issues of (1)
perfection, (2) the effect of perfection, and (3) priority wrt both tangible and intangible
collateral, whether perfected by filing or automatically
But there are exceptions to the general rule
9-301(2) wrt to possessory security interests, the issues of (1) perfection, (2) the effect
of perfection, and (3) priority are governed by a situs test: the location of the
COLLATERAL controls, not the location of the debtor.
9-301(3)(C) - wrt nonpossessory perfection of sec ints in tangible property, the law of
the situs of the COLLATERAL governs the EFFECT of perfection and the PRIORITY,
but NOT PERFECTION. Perfection is governed by the law of the location of the debtor
9-302 - Deposit Accounts
9-303
9-304
9-305
2. Location of the Debtor
Location of Debtor
Individual
Location of Debtor = principal residence of debtor
Organization
9-307(b) Location of Debtor = organization's place of business, if it has only
one. Place = chief executive office if multiple places of business
Unregistered Partnership
Location of Debtor = Chief Executive Office
"Registered Organization"
9-307(e) - A "Registered Organization" organized under state law is located in the
state of organization.
9-102(a)(70) Registered Organization - Limited Partnerships, LLCs, and Corporations
(officially, it's "means an organization organized solely under the law of a single
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State or the United States and as to which the State or the United States must
maintain a public record showing the organization to have been organized.")
9-307(c) - Limitation to 9-307(b)'s location of debtor rule for debtors outside US
9-307(b)'s location test applies to non-US debtors only when the foreign jurisdiction's
law generally requires public record notice of nonpossessory security interests as a
condition of priority
If (b) does not apply (and US debtor), then Location of Debtor = D.C. (District of
Columbia)
If Debtor of Collateral Moves to a Different Jurisdiction
9-316(a) - Continuation of Perfection
A security interest perfected pursuant to the law of the jurisdiction designated in
Section 9-301(1) or 9-305(c) remains perfected until the earliest of:
(1) the time perfection would have ceased under the law of that jurisdiction;
(2) the expiration of four months after a change of the debtor's location to another
jurisdiction; or
(3) the expiration of one year after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction.
3. Goods Covered by Certificate of Title
a. The Basic Rules of Perfection
How to Perfect
9-311(a)(2) Fin Stmts ineffective
Filing a fin stmt is neither necessary nor effective to perfect a sec int in goods
9-311(b) Must Comply w/ Cert of Title Statutes
Compliance w/ such a statute is the equivalent to filing a fin stmt. A sec int in such
property may be perfected ONLY by compliance
Duration of Perfection
9-311(c) Governed by Cert of Title Statutes
Inapplicability to Certain Inventory
9-311(d) - During any period in which collateral subject to a Cert of Title statute is
inventory held for sale/lease by a person or leased by that person as lessor, and that
person is in the business of selling goods of that kind, this section does not apply to a
security interest in that collateral created by that person.
e.g. car dealer
BUT NOTE!! 9-311(d) does not apply to dealers who ONLY lease goods. Even
though they eventually may sell the goods, they should not be considered "in the
business of selling goods of that kind." 9-311, cmt 4
b. What Law Governs Perfection?
9-303(c) - The local law of the jurisdiction under whose cert of title the goods are covered
governs (1) perfection, (2) the effect of perfection or nonperfection, and (3) the priority of
a sec int in the goods covered by a cert of title from the time the goods become covered
by the cert of title until the goods cease to be covered by the cert of title"
Meeks v. Mercedes Benz Credit Corp
FP
I
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RAH
c. Change in Debtor's Location
In re Baker
FP
I
RAH
See also 9-316(d)
See also 9-316(e)
See also 9-337(1)
NEW SECTIONS ADDED IN 2010 AMENDMENTS (see supp book), p. 931
9-316(h)
9-316(i)
Example 9
Chapter 3 - Priority
A. Introduction
Default Priority Rule: Security Interests are Primary
9-201(a) - Except as provided "otherwise" in the UCC, a sec agmt is effective according to
its terms btwn the parties, against purchasers of the collateral, and against creditors
i.e. even an unperfected sec int is prior to the rts of unsecured creditors and to any other
purchaser or creditor, unless the UCC provides "otherwise"
B. First-to-File Rule
Goals
Idenfity the property claimed
Identify the priority of claimants
1. Conflicting Security Interests
Under Traditional Law
Basic priority rule was: First in time, first in right
Problem is: this dictum is too imprecise to deal w/ a notice filing sys in which filing &
attachment of sec int can happen at diff times
Current Law
Basic priority rule is: "first to file-or-perfect"
9-322(a) - Except as otherwise provided in this section [9-322], priority among conflicting
sec ints/ag liens in the same collateral is determined as follows:
(1) Perf vs Perf: Conflicting PERFECTED sec ints/ag liens rank according to priority
in time of filing OR perfection. i.e. priority is given to the earlier of the time of first
filing or first perfecting
Note: Priority Rules govern ag liens
Ag lien = statutorily created property rts in frm products that secure obligations
incurred by the debtor in connection w/ its farming ops
Not consensually created sec ints; but Rev Art 9 considers the holder of an ag
lien to be a "secured party"
Other law (not UCC) governs ag lien creation. But Art 9 governs perfection and
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priority
(2) Perf vs Unperf: A perfected sec int/ag lien has priority over a conflicting
unperfected security interest or agricultural lien.
(3) Unperf vs Unperf: If all conflicting SPs (sec ints/ag liens) are unperfected, the
first sec int/ag lien to attach or become effective has priority.
9-317(a) - A sec int/ag lien is SUBORDINATE TO the rights of
(1) a person entitled to priority under 9-322; AND
(2) except as otherwise provided in subsec (e) [wrt PMSIs], a person who becomes a
lien creditor before the earlier of:
(A) the time the sec int/ag lien is perfected; OR
(B) one of the conditions in 9-203(b)(3) is met AND a fin stmt covering the collateral
is filed
Proceeds
9-322(b) The time of filing or perfection of a sec int in collateral is deemed to be the
time of filing or perfection of the sec int in the proceeds
Supporting Obligations
9-322(b) The time of filing or perfection of a sec int in collateral supported by a
supporting obligation is deemed to be the time of filing or perfection of the sec int in the
supporting obligation
2. Future Advances
Definition:
Art 9 doesn't define "advance"
The term connotes value given by the creditor to the debtor, or from which the debtor
benefits
i.e. "advance" is similar to "value"
"Future Advance" is NOT "after-acquired property"
Future advances concern the type of debt (future advances) secured by the debtor's
assets
After-acquired property clauses concern the collateral (after-acquired) that secures the
debt
Rules
See 9-203 and 9-204: If a sec agmt includes both (1) an after-acquired property clause
and (2) future advances clause, then:
1 - the sec int automatically attaches to any after-acquired property at the time when
the debtor acquires rights in this collateral, AND
2 - the collateral secures all future advances made by the sec party to the debtor
How to secure Future Advances
Dragnet clause
A provision in a sec agmt that secures both (1) a specific loan and (2) future loans
made by creditor to debtor w/ same collateral
Clause provides for "cross-collateralization": collateral securing the specific loan also
secures future advances
Dragnet clauses are generally considered valid unless specific grounds for
invalidating them exist
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See 9-323, cmt 3 - Explains Relationship of 3-22 and 3-23 (titled Future
Advances), CB p. 128
Shelby County State Bank v. Van Diest Supply
FP
Debtor filed for bankruptcy. Van Diest (SP#1) takes a SI in debtors inventory based on
executed SA which provided for a blanket lien on all inventory, notes and accounts
receivable, etc. Two years later, SP#1 and Debtor entered into new SA, which
described the SI as being in all inventory, including but not limited to agricultural
chemicals, fertilizers, and fertilizer materials sold to Debtor by Van Diest Supply Co.
whether now owned or hereafter acquired Bank (SP#2) then takes a SI in all of
debtors inventory pursuant to an executed SA and a filed FS.
I
Who has priority?
RAH
HELD: SP #1 HAS PRIORITY IN INVENTORY sold to Debtor by Van Diest (SP#1)
Under typical Article 9 priority rules, SP #1 would have priority in EVERYTHING -But,
Bank successfully points out that the language of the second SA indicates that the
SP#1s SI is only in all inventory sold to Debtor by Van Diest (phrase sold to Debtor by
Van Diest modifies including but not limited to)
Court agrees that this language is ambiguous -> language should be construed
AGAINST the drafter (SP#1); Thus, SP#1s SI should be restricted to inventory sold to
Debtor by Van Diest
Supported by evidence from several notices indicating that Van Diest was only
interested in having a PMSI only in the inventory it sold to Debtor
SA should provide clear notice to the world as to what property encumbered
See also 9-312
3. Financing Statement as an Umbrella
Previous views
One view
In order for a subsequent future advance clause to have 9-312 priority, the original sec
agmt must have a future advance clause (Coin-o-matic case, CB pp. 129-130)
Another view: Fin stmt = umbrella -- the fin stmt gives the world notice of present and
future sec ints in the collateral
Where (1) an original sec agmt is executed, a debt is created, and a fin stmt describing
collateral is filed; and (2) a later advance is made with a sec agmt covering the same
collateral as the original sec agmt, the lender has a perfected sec int in the collateral
for both the original debt and also the later advance
Policy stated on CB p. 131
Current View
A sec int can be perfected by a future advance; thus 9-322 gen rule governs priority of
future advances
i.e. priority is generally NOT based on the time when the future advance is given
Exception: 9-323(a) Governs When Priority IS based on the time of advance

Except as otherwise provided in subsection (c), for purposes of determining the priority
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of a perfected security interest under Section 9-322(a)(1), perfection of the security

interest dates from the time an advance is made to the extent that the security interest
secures an advance that:
(1) is made while the security interest is perfected only:
(A) under Section 9-309 when it attaches; OR
(B) temporarily under Section 9-312(e), (f), or (g); AND
(2) is not made pursuant to a commitment entered into before or while the security
interest is perfected by a method other than under Section 9-309 or 9-312(e), (f), or
(g).
4. Position of First-to-File Secured Party
Generally: Secured Creditors should never allow themselves to conflict w/ another secured
creditor who has filed first, UNLESS they have taken precautions
Precautions
Junior Secured Creditor gets a PMSI (Purchase-Money Sec Int)
Senior Secured Creditor agrees to subordinate its security interest in part or in whole to
that of the jr creditor
Subordination agmts are allowed by and deemed enforceable by 9-339 and BC 510
Jr creditor has bought out Sr creditor
C. Purchase-Money Priority
1. Collateral Other Than Inventory/Livestock
Definition
A security interest in goods is a PMSI
(1) to the extent that the goods are "purchase money collateral" wrt to that sec int
i.e. the goods secure a purchase-money obligation
i.e. the PMSI is always created in connection w/ a new acquisition of goods by the
debtor. The goods become collateral ("purchase-money" collateral) for the obligation
("purchase-money obligation) to pay the purchase price of the goods to the seller, or
to pay back a 3rd party who financed the debtor's acquisition of those goods
(2) if the security interest is in inventory that is or was purchase-money collateral, also
to the extent that the security interest secures a purchase-money obligation incurred
with respect to other inventory in which the secured party holds or held a
purchase-money security interest; and
also to the extent that the security interest secures a purchase-money obligation
incurred with respect to software in which the secured party holds or held a
purchase-money security interest.
Purchase-Money Obligation = one incurred
(i) as all or part of the price of collateral [Seller Purchase-Money Obligation]
e.g. seller sells goods to buyer and takes a sec int in the goods to secure the unpaid
price; OR
(ii) for value given to enable the debtor to acquire rights in or use of the collateral (if the
value is in fact used that way) [Lender Purchase Money Obligation]
e.g. lender lends money to debtor to enable it to buy goods
Purchase-Money Obligation includes all expenses incurred in connection w/ purchase of
collateral, not just the purchase price
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NOTE! PMSI is limited to goods and software

a. Purchase-Money Security Interests (PMSI)
Main Priority Rule
9-324(a) - PMSI in Collateral
Except as otherwise provided in subsection (g), a perfected purchase-money
security interest in goods other than inventory or livestock has priority over a
conflicting security interest in the same goods
9-324(a) - PMSI in Proceeds
Except as otherwise provided in Section 9-327, a perfected security interest in its
identifiable proceeds also has priority, if the purchase-money security interest is
perfected when the debtor receives possession of the collateral or within 20 days
afterward.
POLICY
PMSI priority is a way for debtors to break the monopoly of the first party to file over
the debtor's credit supply
Brodie Hotel Supply, Inc. v. United States (CA9 1970)
FP
Brodie sold the restaurant equipment to Standard. Standard went bankrupt and
Brodie left it in the restaurant. With Brodies consent, Lyon took possession of the
restaurant and began operating it on June 1, 1964. Throughout the summer of
1964, Brodie and Lyon negotiated over the price/terms under which Lyon was to
purchase the equipment. On November 2nd, Bank loaned $$$ to Lyon and took
an SI in the restaurant equipment. Two days later, the Bank filed a FS. On
November 12th, Brodie delivered a bill of sale to Lyon and took a SI in the
equipment. Brodie filed a FS on November 23rd.
I
Who has priority?? Depends on when debtor (Lyon) took possession
RAH
HELD: Brodie has priority (PMSI)
-Under traditional priority rules, Bank would win out but, this is a seller type
purchase money obligation
-Under old rules, PMSI perfected at the time the debtor receives possession of
the collateral or within 10 days after the debtor receives possession)
-Although Bank alleged that Lyon became a debtor and the equipment became
collateral when Lyon took possession of the restaurant, the Court disagreed
-Here, Lyon did not become an Article 9 debtor until November 12 (that is when
he officially purchased the equipment and became obligated to pay the purchase
price) -Equipment did not become collateral until this point either
-Thus, because FS filed within 10 days of debtor (Lyon) taking possession, PMSI
in existence and TRUMPS regular SI
Priority Among Multiple PMSIs
Three possible solutions
(i) Priority goes to the first PMSI to file
(ii) Priority goes to a favored type of PMSI
(iii) PMSIs rank equally; priority is awarded pro rata
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9-324(g) endorses approach (ii) [favored type of PMSI, e.g. Sellers/Vendors]

PMSI vs PMSI (9-324(g))
Seller vs Financer
Seller has priority
NOTE: "Seller" = PMSI securing an obligation incurred (by debtor) as all or part
of the purchase price of the collateral (i.e. debtor bought the collateral using
credit). "Financer" = PMSI securing an obligation incurred for value given to
debtor to acquire rights in or use of collateral (e.g. loans money to debtor)
Other Conflicts (e.g. Seller vs Seller, Financer vs Financer)
Priority is resolved by 9-322(a) -- see Basic Rules section
What if Purchase-Money and Non-Purchase-Money Obligations are Mixed?
b. The Transformation Rule
Definition
A sec int in any item securing more than its own price is transformed into a non
PMSI
Southtrust Bank v. Borg-Warner Acceptance Corp.
FP
Bank took back a SI in inventory and filed FS first, while BWAC purported to take
back a PMSI in inventory. The SAs between BWAC and the debtors contained an
after-acquired property clause and a future advances clause (crosscollateralization of purchase money).
I
RAH
HELD: COURT: Inclusion of an after-acquired property clause and a future
advances clause CONVERTS a PMSI into an ordinary security interest
-Otherwise, it is too difficult to directly trace the money to the purchaser of the
inventory (not really PMSI anymore)
-Here, no mechanism to allocate payments between purchase money and
nonpurchase money obligations
-A PMSI requires a one-to-one relationship between the debt and the collateral
-Nonetheless, BWAC retains a SI in the goods; just happens to lose its priority
status as a PM secured lender
Dual-Status Doctrine
Rejected transformation rule (and result from Southtrust Bank), held that the
presence of a nonpurchase money security interest does NOT destroy the purchase
money aspect. Instead, a PMSI can remain to the extent that it secures the price of
the goods even though it secures the price of other items
UCC 9-103(f) adopts the dual status rule for nonconsumer-goods transactions
Under 9-103(f), A PMSI does NOT lose its status as such, even if
(1) the purchase money collateral also secures an obligation that is not a
purchase-money obligation; OR
(2) collateral that is NOT purchase money collateral also secures the
purchase-money obligation; OR
(3) the purchase money obligation has been renewed, refinanced, consolidated,
or restructured.
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NOTE: **9-103(f) DOES NOT APPLY TO CONSUMER GOODS

TRANSACTIONS In these transactions, courts generally apply the transformation
rule
Section 9-103(e) supplies a method for allocating payments between purchase
money and nonpurchase money obligations (this type of allocation mechanism was
found lacking in Southtrust)
Section 9-103(b)(2) CHANGES THE OUTCOME in Southtrust
Defines a SI in goods as a PMSI if the SI is in inventory that is or was purchase
money collateral, also to the extent that the SI secures a purchase money obligation
incurred with respect to other inventory in which the SP holds or held a PMSI.
-Cross-collateralization clauses are OK so long as all of the money involved is
purchase money
2. Inventory
a. Requirements for PMSI in Inventory
9-324(b) - PMSI in Inventory
A perfected PMSI has priority over the following:
a conflicting security interest in the same inventory, AND
a conflicting security interest in chattel paper or an instrument constituting proceeds
of the inventory and in proceeds of the chattel paper, if so provided in Section 9-330,
AND
in identifiable cash proceeds of the inventory to the extent the identifiable cash
proceeds are received on or before the delivery of the inventory to a buyer
Requirements for PMSI priority
(1) the purchase-money security interest is already perfected when the debtor
receives possession of the inventory (no 20-day grace period); AND
(2) the purchase-money secured party sends an authenticated notification to the
holder of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within five
years before the debtor receives possession of the inventory; and
(4) the notification states that the person sending the notification has or expects to
acquire a purchase-money security interest in inventory of the debtor and describes
the inventory.
Limitations and Exceptions
Priority in general is subject to 9-324(c) (must notify)
Priority specifically of identifiable cash proceeds limited by 9-327 (priority of security
interests in deposit accounts)
Exceptions provided in 9-324(g) (conflicting PMSIs -- see above)
Differences btwn PMSI in Non-Inventory and PMSI in Inventory
Collateral
Note: The major difference btwn requirements for non-inventory and inventory
collateral is: The PMSI SP must notify any prior holders of security interests in the
debtor's inventory who have filed fin stmts that it intends to engage in
purchase-money financing of the D's inventory
9-324(a) does NOT require notice; the PM SP does not have to search for prior
filings
The notice is good for 5 years, and the PMSI does not begin to run for goods
delivered until the PM SP perfects
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Proceeds
PMSI is limited to identifiable cash proceeds received on or before delivery of
the inventory to the buyer
Priority Rules for PMSI in Inventory
see above--requirements for PMSI in inventory
b. Consumer Goods Exception in 9-103(h)
No PMSI Avoidance by Trustee in Bankruptcy
A PMSI cannot be avoided under BC 522(f)(1)(B)
Perfecting a PMSI in Inventory
9-309(1) - No financing stmt needs to be filed to perfect a PMSI in Consumer Goods
A Seller has a PMSI in goods purchased only when the sec int is taken SOLELY to
secure all or part of its price
D. Lien Creditors
What is a lien creditor?
(A) a creditor that has acquired a lien on the property involved by attachment, levy, or the
like;
Generally, this refers to a judgment lien creditor Example: D owes X $5,000
(unsecured); D doesnt pay X, so X sues D and receives judgment, which X then enforces
the judgment (places a lien on an asset)
(B) an assignee for benefit of creditors from the time of assignment; OR
(C) a trustee in bankruptcy from the date of the filing of the petition; OR
(D) a receiver in equity from the time of appointment.
1. Conflict with an Unperfected Security Interest
An unperfected sec int is subordinate to the rights of a lien creditor - 9-317(a)(2)
A trustee in banktrupcty can avoid (i.e. defeat) an unperfected sec int
A trustee in bankruptcy IS a lien creditor under 9-102(a)(52)(C) together with BC
544(a)(1) and BC 550(a)
Note: This is perhaps the most important conflict treated by Article 9
2. Conflict with a Future Advance
The Future Advance has priority (9-323(b))
(1) if the advance is made or committed within 45 days after the lien arises (even with
knowledge of the lien), AND
(2) if the advance is made or committed after the 45-day period, as long as the SP does
NOT have knowledge of the lien at the time of the advance or commitment
Non-Advance Obligations (incurred by debtor after a lien attaches)
What is a nonadvance?
e.g. collection and interest charges
e.g. attorney's fees
What law governs nonadvances?
9-317(a)(2) controls these -- the secured non-advances are protected when made by a
creditor perfected ON or BEFORE the lien attaches
The date on which the non-advance is made does not affect priority
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9-323(b) does NOT address priority contests btwn a creditor whose NONadvance
obligations are secured and the rights of a lien creditor
A sec int is subordinate to those rights to the extent that the specified
circumstances occur (9-323, cmt 4)
Priority contests btwn a nonadvance secured obligation vs a lien creditor is not a
"specified circumstance"
Note: Unlike advances, non-advance obligations can easily be incurred by a debtor
AFTER a lien attaches
It is important (for purposes of the Federal Tax Lien Act) to establish under state law an
absolute priority for a future advance over a lien creditor for 45 days even if made w/
knowledge of the lien - 9-323, cmt 4
Note: This conflict is "much less significant" than the Lien Creditor vs Unperfected Sec Int
conflict (CB p. 154-155)
E. Buyers and Lessees
SPs are in a strong position compared to persons who buy or lease goods from the debtors
1. Buyers and Lesses of Non-Inventory Goods
Perfection
Purchase-money secured parties who have not perfected at the time of sale or lease
have 20 days (after the buyer/lessee has RECEIVED delivery) in which to perfect 9-317(e)
Priority
Perfected Sec Ints (Perfected Secured Parties' interests) are prior to buers and lessees
(9-317(b))
Unperfected Sec Ints are prior to the rights of buyers/lessees EXCEPT FOR those who
1. give value, AND
2. receive delivery w/o knowledge of the security interest
Continuation of Sec Int
Sec int continues in the goods sold or leased AND in any identifiable proceeds (SP vs
buyers of collateral) (9-315(a))
2. Buyers and Lessees of Inventory Goods
a. Buyer/Lessees In The Ordinary Course of Business (BIOCOBs/LIOCOBs)
What is a BIOCOB/LIOCOB?
BIOCOB means a person who buys
1. Buys in good faith
2. Does not know that the sale violates the rights of another person in the goods
3. In the ordinary course of business
4. From a person in the business of selling goods of that kind.
See also 2-716
See also 2-502
Priority
Buyers/Lessees of inventory collateral take free of inventory sec ints
A BIOCOB takes free of a sec int created by the byer's seller, EVEN IF the sec int is
perfected and buyer knows of its existence - 9-320(a)
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This rule is restricted primarily to inventory collateral 9-320(a), cmt 3

A lessee in ordinary course of business (LIOCOB) takes its leasehold interest free of a
security interest in the goods created by the lessor, even if the security interest is
perfected and the lessee knows of its existence. 9-321(c)
b. Goods Subject to Certificate of Title Acts
Priority
A BIOCOB has priority over a sec int created by the buyer's seller (9-320(a))
e.g. "buyer" = consumer; "buyer's seller" = car dealer; SP = manufacturer/shipper (of
the car to the dealer?)
A BIOCOB takes free of a sec int created by the byer's seller, EVEN IF the sec int is
perfected and the buyer knows of its existence - 9-320(a)
How to Perfect
Except as provided in 9-311(d), the exclusive method of perfecting a sec int in certain
kinds of goods (including motor vehicles) is by indicating the SP's lien on the cert of
title (9-311(a)(2))
9-311(d) says that goods held in a dealer's inventory are NOT governed by cert of
title perfection (e.g. a car dealer??). In these cases, SP can perfect by filing
c. Waiver
What is Waiver?
The inventory financer (SP) may expressly authorize the dealer to sell the inventory
free of its (SP's) sec int, while safeguarding its interest by imposing controls over the
proceeds received by the dealer for the goods sold (because the purpose of inventory
is to be sold)
e.g. financer may require the dealer to deposit the proceeds in a lockbox acct under
the control of the SP
Rules on Effectuating Waiver
SP's waiver MUST (expressly?) authorize disposition of collateral free of its (SP's) sec
int - 9-315(a)
Note: Article 9 "leaves the determination of authorization to the courts, as under
former Art 9" - 9-315, cmt 2 (i.e. Art 9 does not say HOW to authorize; thus, courts
must determine whether or not authorization was sufficient)
Priority
If SP waives in this manner, buyers take free of financer's (SP's) sec int, without having
to rely on 9-320.
3. Buyers of Consumer Goods
Automatic Perfection of PMSI in Consumer Goods
PMSI in consumer goods automatically perfects on attachment
"Consumer Goods" means goods used or bought for use primarily for "personal, family, or
household purposes."
e.g. -- a retailer who reserves sec ints in consumer goods it sells, but does not file fin
stmts for, has a perfected sec int in those goods
Priority
Priority of Retailer vs Buyer's Trustee in Bankruptcy
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A Retailer (PMSI) is prior to the rights of the Buyer's (e.g. the Shopper's) trustee
in bankruptcy (and other lien creditors?) - 9-309(1)
e.g. a Retailer is prior to the rights of a shopper's trustee in bankruptcy
Priority of Wholesaler vs Buyer's Trustee? (when Wholesaler -> Retailer -> Buyer)
A buyer (Buyer) of goods from a person who bought consumer goods (Retailer,
who bought from Wholesaler) takes free of a sec int, even perfect, if the buyer (Buyer)
buys: (9-320(b))
(1) without knowledge of the security interest;
(2) for value;
(3) primarily for the buyer's personal, family, or household purposes; AND
(4) before the filing of a financing statement covering the goods.
4. When Is a Buyer Considered a BIOCOB (for 9-320(a) and (b))?
Possible Dates when buyer becomes BIOCOB, and therefore, the buyer's "knowledge" of
SP's right is relevant
(1) Date of execution of sales contract (2-103(1)(a), 2-106)
(2) Date of Identification of the goods under the sales contract (2-501)
(3) Date of passage of title in the goods (2-401(2) - (3))
(4) Date of delivery of the goods
(5) Date of acceptance of the goods (after delivery) (2-606)
Majority Court Rule
The date when the buyer becomes BIOCOB is the date on which the goods are identified
to the contract (option (2) above)
Art 9 Rule (probably use this on exam)
For non-Consumer goods
Only a buyer that (1) takes possession of the goods or (2) has a right to recover the
goods from the seller under Art 2 may be a BIOCOB (9-201(9))
For Consumer goods
A consumer is a BIOCOB when it has a right of replevin (which occurs when the
goods are identified to the sales contract) (2-716(3))
"Replevin" is A legal action to recover the possession of items of Personal Property.
5. Double-Debtors
Prof said this topic would make for a good final exam question.....
Rule
Double-Debtor only applies when
1. there are 2 SPs and 2 Ds
2. equipment-to-equipment sale
9-322 - regular priority rules
9-326
9-306
Example
Scenario: SP 1 loans D1 money and takes back a SI in equipment, current and after
acquired; files a financing statement in 2004. SP 2 loans D2 money and takes back a SI
in equipment, current and after acquired; files a financing statement in 2003. D2
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purchases that same equipment from D1 in exchange for $$$

Assuming both D1 and D2 default, who has priority? We know that D2 is not a BIOCOB
(item will not be new) SP2 argues that it filed first, SA covered after-acquired equipment
SP1 argues that SI in equipment travels with equipment (collateral)
Resolution: SP #1 wins according to Section 9-325 (which trumps the first to file, first to
perfect rule)
UCC 9-325 Priority of SI in Transferred Collateral
(a) Subordination of SI in transferred collateral - Except as otherwise provided in
subsection (b) of this section, a security interest created by a debtor is subordinate to a
security interest in the same collateral created by another person if
(1) The debtor acquired the collateral subject to the security interest created by the
other person;
(2) The security interest created by the other person was perfected when the debtor
acquired the collateral; and
(3) There is no period thereafter when the security interest is unperfected.
(b) Limitation of subsection (a) subordination - Subsection (a) of this section subordinates
a security interest only if the security interest:
(1) otherwise would have priority solely under Section 9-322(a) or 9-324; or
(2) arose solely under Section 2-711(3) or 2A-508(5)
POLICY
SP2 can investigate the transaction (see if the equipment sold from D1 to D2 is
encumbered) if D2 asks for more money, more loans
SP1 kind of at the mercy of D1, SP1 probably more vulnerable than SP2
Also likely that D1 is breaking its contract with SP1 when it sells equipment; Not giving
SP1 the ability to keep its SI would essentially leave it with NOTHING
Bank of the West v. Commercial Credit Financial Services, Inc.
Note: We skipped this case during lecture
FP
In 1982, BOW loans money to Allied, takes back SI in inventory and accounts (current
and A/A); BOW then files a FS. In 1984, CCFS loans money to BCI, takes back SI in
inventory and accounts (current and A/A); CCFS then files a FS. BCI sells its beverage
business (including inventory/accounts in which CCFS had a perfected SI) to Allied.
BOW now argues that it has priority over CCFS because it was the first to file and the
SA covered after-acquired equipment.
I
RAH
HELD: CCFS has priority (squares with later drafted UCC 9-325)
Allied is NOT a buyer in the ordinary course of business -> Allied took the collateral
subject to SI
Purpose of first to file/first to perfect rule is to protect FUTURE creditors of the debtor:
this purpose NOT served by applying these traditional rules here and giving
Allied/BOW priority
Allied should not be able to acquire any greater rights in the BCIs assets than its
transferor, BCI, had in them
G. Accounts and General Intangibles
1. Priority in Proceeds
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Perfection of Sec Ints in Accts and Gen Intangibles

General Rule
Accounts and General Intangibles can be perfected only by filing (9-310(a))
Possession is NOT a means of perfection for intangibles such as these
No PMSIs in Accounts/Gen Intangibles
Purchase-money sec ints canNOT be created in accounts; only in goods and software
(see 9-103; 9-324, cmt 2)
Priority Between Conflicting Sec Ints
General Rule
Determined by the first-to-file-or-perfect rule of 9-322(a)
Accounts as Proceeds of Other Collateral
The SI attaches to any identifiable proceeds (9-315(a))
Proceeds are identifiable if: (9-315(b))
(1) if the proceeds are goods, to the extent provided by Section 9-336; and
(2) if the proceeds are not goods, to the extent that the secured party identifies
the proceeds by a method of tracing, including application of equitable principles,
that is permitted under law other than this article with respect to commingled
property of the type involved.
Perfection = A SI in proceeds is a PERFECTED SI if the SI in the original collateral
was perfected (9-315(c))
Perfection can expire:
A perfected security interest in proceeds becomes unperfected on the
twenty-first day after the security interest attaches to the proceeds
unless: 9-315(d)
(1) The following conditions are satisfied, OR:
(a) A filed financing statement covers the original collateral; AND
(b) The proceeds are collateral in which a security interest may be perfected by
filing in the office in which the financing statement has been filed; AND
(c) The proceeds are not acquired with cash proceeds.;
(2) The proceeds are identifiable cash proceeds; OR
(3) The security interest in the proceeds is perfected other than under subsection
(c) of this section when the security interest attaches or within twenty days
thereafter.
Exceptions
Payment Intangibles
Note: We did not cover this in class
Sec Ints subject to other law
e.g. Registered copyrights (9-311(a)(1))
NOTE: Key here: Does FIRST SECURED PARTY have continuous unbroken perfection?
2. Section 9-309(2) Exception
Automatic Perfection vs Filing Requirement
Automatic perfection for: an assignment of accounts or payment intangibles which does
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not by itself or in conjunction with other assignments to the same assignee transfer a
significant part of the assignor's outstanding accounts or payment intangibles - 9-309(2)
In re Tri-County Materials, Inc.
FP
Ladd was a GC which had a construction contract with the state of IL. Ladd and
Tri-County entered into a contract by which Tri-County would supply Ladd with
$250,000 worth of sand and gravel. In order to complete its contractual obligations,
Tri-County needed certain equipment to process the sand and gravel; in turn,
Tri-County leased from KMB equipment valued at $30,484. Tri-County filed for
bankruptcy; at this time, Ladd owed Tri-County $43,413.
I
KMB then asserted it had a SI in the funds due from Ladd to Tri-County (KMB owed
$30,484).
RAH
HELD: KMB did NOT have a perfected SI
RULE: The assignment must be both a "small percentage" AND ALSO a "casual &
isolated (rare)" assignment
KMB did NOT file a FS
Applied both the percentage test and casual/isolated test -Percentage test -> 12% of
the contract ($250,00) INSIGNIFICANT
Casual/isolated transaction test -> NO; Both parties sophisticated, this was a formal,
written agreement between two corporations
H. Chattel Paper and Instruments
1. Introduction
"Chattel Paper" means a record or records that evidence both (1) a monetary obligation and
(2) a security interest in specific goods or a lease of goods
Possession/Control of Chattel Paper
Instruments and Chattel Paper can be given to a creditor (i.e. creditor can possess the
paper)
Possession of these writings gives the possessor control over the obligation
Perfection
Perfection of SI in chattel paper is by physical possession/delivery (9-313(a))
Perfection of SI in electronic chattel paper is by control
Priority
Priority in Chattel Paper
A purchaser of chattel paper has priority over a sec int in the chattel paper that is
claimed "merely as proceeds of inventory" subject to a sec int if: (9-330(a))
1. Purchaser acts in good faith
2. Purchaser acts in the ordinary course of Purchaser's business
3. Purchaser gives "new value"
4. Purchaser takes possession of or obtains control of the chattel paper (see 9-105
5. The chattel paper is unstamped (i.e. the chattel paper does not indicate that it
has been assigned to an identified assignee other than the purchaser.)
A purchaser of chattel paper has priority over a sec int in the chattel paper that is
claimed "other than merely as proceeds of inventory" subject to a sec int if (9-330(b))
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1. Purchaser acts in good faith

2. Purchaser acts in the ordinary course of Purchaser's business
3. Purchaser gives "new value"
4. Purchaser takes possession of or obtains control of the chattel paper (see 9-105
5. Purchaser does not have knowledge that the purchase violates the rights of the
secured party
What is "New Value"?
"New value" means (i) money, (ii) money's worth in property, services, or new credit,
or (iii) release by a transferee of an interest in property previously transferred to the
transferee. The term does not include an obligation substituted for another
obligation. (9-102(a)(57))
Who Gives New Value, and How?
The holder of a PMSI in inventory new value for chattel paper constituting proceeds
of the inventory. 9-330(e)
How to know if a SP has control of chattel paper:
A secured party has control of electronic chattel paper if the record or records
comprising the chattel paper are created, stored, and assigned in such a manner
that:
(1) a single authoritative copy of the record or records exists which is unique,
identifiable and, except as otherwise provided in paragraphs (4), (5), and (6),
unalterable;
(2) the authoritative copy identifies the secured party as the assignee of the
record or records;
(3) the authoritative copy is communicated to and maintained by the secured
party or its designated custodian;
(4) copies or revisions that add or change an identified assignee of the
authoritative copy can be made only with the participation of the secured party;
(5) each copy of the authoritative copy and any copy of a copy is readily
identifiable as a copy that is not the authoritative copy; AND
(6) any revision of the authoritative copy is readily identifiable as an authorized or
unauthorized revision.
What Constitutes Knowledge of the SP's rights?
A stamp on chattel paper (i.e. an indication that it has been assigned to an identified
secured party other than the purchaser) defeats 9-330(a) and also 9-330(b)
(9-330(f))
(this is because the stamp constitutes knowledge that the purchase violates the
SP's rights)
Priority in Proceeds of Chattel Paper
A purchaser with priority in chattel paper under 9-330(a) or (b) also has priority in the
proceeds of the chattel paper to the extent that: (9-330(c))
1. 9-322 provides for priority in the proceeds; OR
2. the proceeds consist of the specific goods covered by the chattel paper or cash
proceeds of the specific goods, even if the purchaser's security interest in the
proceeds is unperfected.
Exception to 9-330(c) (9-327)
(Exception for if the proceeds of chattel paper are in a deposit account?) The
following rules govern priority among conflicting security interests in the same
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deposit account:
(1) A security interest held by a secured party having control of the deposit
account under Section 9-104 has priority over a conflicting security interest held
by a secured party that does not have control.
(2) Except as otherwise provided in paragraphs (3) and (4), security interests
perfected by control under Section 9-314 rank according to priority in time of
obtaining control.
(3) Except as otherwise provided in paragraph (4), a security interest held by the
bank with which the deposit account is maintained has priority over a conflicting
security interest held by another secured party.
(4) A security interest perfected by control under Section 9-104(a)(3) has priority
over a security interest held by the bank with which the deposit account is
maintained.
Rex Financial Corp. v. Great Western Bank & Trust
Note: We did not cover this case in class
FP
Rex had an SI in Debtors inventory (automobiles). Debtor sold its inventory on credit
to a number of parties and took back an SI (via SA) in those automobiles. Debtor then
sold these SA contracts to Great Western in the ordinary course of its business. The
SA contracts constitute chattel paper (evidence a monetary obligation AND a SI in
specific goods) here, Great Western is the chattel paper purchaser.
I
RAH
HELD: Great Western has SUPERPRIORITY
RULE
A later chattel paper purchaser can step ahead of an earlier secured party
Whether you fall under (a) or (b) depends on the status of the COMPETING party,
not the chattel paper purchaser
-Took physical possession; gave new value (new money NOT intended to satisfy
pre-existing obligations); purchased in OCOB
-SI claimed by Rex is claimed merely as proceeds -> Rex had a SI in the collateral
and the proceeds upon the sale
-Rex did NOT place a substantial reliance on the chattel paper in making the loan
(instead, relied on the collateral/proceeds)
2. "Merely as Proceeds"
How to Determine whether 9-330(a) or (b) Applies
Depends on whether the chattel paper is claimed "merely as proceeds of inventory", or
"other than merely as proceeds of inventory"
See CB pp. 201 - 202
Note: Think of "merely as proceeds" as SP merely wants proceeds from inventory, not the
actual chattel paper
Note: Think of "other than merely as proceeds" as SP actually wants the chattel paper,
e.g. for the purpose of selling contracts
3. Instruments
What are "Instruments"?
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Negotiable Instruments, and other written promises to pay money that are, in effect,
treated similarly in the market place (9-102(a)(47))
"Instruments" EXCLUDES:
Security Agreements
Leases
Writings that in ordinary course of business are transferred by delivery with any
necessary indorsement or assignment
Investment property
Letters of credit
Writings that evidence a right to payment arising out of the use of a credit or charge
card or information contained on or for use with the card.
Priority
Between Bank and Someone who purchases an instrument from Debtor
Except as otherwise provided in Section 9-331(a), a purchaser of an instrument has
priority over a security interest in the instrument if: (9-330(d))
1. The sec int is perfected by a method other than possession
2. The purchaser gives value
3. Purchaser takes possession of the instrument
4. Purchaser acts in good faith and without knowledge that the purchase violates the
rights of the secured party.
Filing (fin stmt) under Art 9 does NOT constitute notice of a claim or defense to
the holders or purchasers of instruments. 9-331(c)
The exceptions in 9-331(a):
Art 9 does not limit the rights of a holder in due course of a negotiable instrument
A holder in due course of a negotiable instrument take priority over an earlier
security interest, even if perfected, to the extent provided in Articles 3, 7, and 8
What is a Holder in Due Course?
see 3-302
I. Deposit Accounts
We consider the priority of the SP in proceeds deposited in a deposit account
What Is A Deposit Account?
It's a demand, time, savings, passbook, or similar account maintained with a bank.
9-102(a)(29)
e.g. checking accounts, savings accounts, trust accounts
It does NOT include investment property or accounts evidenced by an instrument. These
are covered by Article 3
"Bank" means "savings bank, savings and loan assoc, credit union, trust
company. 9-102(a)(8)
Creating Security Interest in Deposity Accounts
Pre-Revision law was non-uniform (9-109, cmt 16)
Post-Revision law
Deposit Accounts as Collateral is Difficult
9-109(d)(13) excludes security interests in deposit accounts as original collateral in
consumer transactions (leaves this area to the vagaries of pre-Revision law
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(9-109(d)(13))
1. When customers deposit money in banks, the depositor become a creditor of the
bank (see CB p. 209)
Customer may use right to payment (from accct) as collateral (payment intangible?),
but usu the sec int in the rt to payment is created in the bank itself
2. Bank setoff rights (see CB p. 209)
How to Perfect an Interest in Sec Int in Deposit Accounts
Perfection by Control
Control is the SOLE method of perfection for sec ints created in deposit accts as
original collateral (9-312(b)(1); cmt 2 to 9-104)
Filing a fin stmt is not necessary to perfect a sec int in deposit accounts perfected by
control 9-310(b)(8)
A security interest in deposit accounts may be perfected by control of the collateral
under Section 9-104. (9-314(a))
1. A SP has control of a deposit account if: (9-104(a))
1. the SP is the bank with which the account is deposited, OR
2. the 3 parties (debtor, secured party, and bank) have agreed in an authenticated
record that the bank will comply with instructions originated by the secured party
directing disposition of the funds in the deposit account without further consent by
the debtor; OR
3. the secured party becomes the bank's customer with respect to the deposit
account.
Priority Rules for Deposit Accounts
a. Note: There is no "a." Shut up your face. I took creative liberty in rearranging the
book's outline (ok, fine.. "a." is up above in "Perfection by Control")
1. An SP having 9-104 control of the deposit account always beats a SPS lacking 9-104
control (9-327(1))
Once proceeds are deposited in a dep acct in which the depositary bank has a sec int,
the sec int in the proceeds is likely to be suborndiated to the bank's sec interest
2. SPs rank in order of time of achieving control of deposit account (9-327(2))

3. The depositary bank (where the deposit acct is maintained) always prevails over
competing sec ints, EXCEPT if the competing sec int is the depositary bank's customer
(9-104(a)(3)). -9-327(3) and (4)
In this case, both banks have 9-104(a)(3) "control"
So the priority contest reverts to chronological test
b. Priority in Security Interests in Deposit Accounts as Proceeds of Other Collateral
c. Priority in Security Interests in Deposit Accounts as Original Collateral
d. Critique
J. Cash Proceeds (i.e. Transfers of Money)
The question: What is the priority of the SP wrt those to whom the debtor has made payments
from the deposit acct? What happens to the SP's sec int if the D pays its bills by drawing on the
account?
Perfection
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Perfection of money (cash) transferred is by possession only (9-312(b), 9-313(a))

Perfection of funds/checks (deposit account) transferred is by control only (9-312(b),
9-313(a))
1. Priority
Old approach (Pre-Rev Art 9)
Recipients of payments from D's deposit account take priority over SP
If cash proceeds are covered into D's checking acct and paid out in operation of D's
business, recipients of the funds take free of any claim the SP may have in them as
proceeds
HCC Credit Corp. v. Springs Valley Bank & Trust
FP
I
RAH
Current approach (Post-Rev Art 9)
Recipients of Cash/Currency
A transferee of money (i.e. cash withdrawn from a deposit acct) takes the money free
of a security interest UNLESS the transfer acts in collusion with the debtor in violating
the rights of the SP (9-332(a))
Recipients of Funds (e.g. Checks)
A transferee of funds from a deposit acct (e.g. a check drawn on the account) takes
the funds free of a sec int in the deposit account UNLESS the transferee acts in
collusion w/ the debtor in violating the rts of the SP (9-322(b))
"Collusion" occurs when a person breaches his own duty to the victim (the SP) by:
1. committing a tort together with another, OR
2. knowingly giving substantial assistance to another's act that is breach of duty, or
knowingly encouraging another to commit the tort or giving substantial assistance to
the other in committing the tort
Note: Collusion is not an 'individual' act -- it requires at least 2 colluders
Transferees of Instruments
If a holder takes an instrument in which there is a security interest, it (the holder) takes
subject to that security interest (i.e. SP has priority) UNLESS it is a holder in due
course (3-306)
"Holder in Due Course" means holder takes an instrument:
1. For value
2. In Good Faith
3. And without notice of claims or defenses
What constitutes Notice/Knowledge?
Filing (fin stmt) under Art 9 does NOT constitute notice of a claim or defense
to the holders or purchasers of instruments. 9-331(c)
See also 9-331 cmt 5
Holder in Due Course means: (3-302(a)) = Person takes an instrument for value, in
good faith and WITHOUT notice of claims or defenses
9-330(d) - Except as otherwise provided in Section 9-331(a), a purchaser of an
instrument has priority over a security interest in the instrument perfected by a
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method other than possession IF the purchaser gives value and takes possession of
the instrument in good faith and without knowledge that the purchase violates the
rights of the secured party.
2. Lowest Intermediate Balance Rule
Risks to SP w/ Deposit Accounts
D may drain acct by payments to transferees who take free of SP's interest (9-332(d))
D may commingle proceeds w/ non-proceeds, making it difficult to identify proceeds in
compliance with 9-315's reqs (proceeds must be identifiable for sec int to continue in the
collateral)
Proceeds that are commingled with non-proceeds are identifiable to the extent that the SP
identifies the proceeds by a method of tracing (9-315(b)(2))
Tracing methods include the application of equitable principles
Lowest Intermediate Balance Rule (see CB p. 232)
1) Debtor is always deemed to have spent non-proceeds first! (from the mixed account)
2) Additions of non-proceeds do NOT replenish lost proceeds
3) Additions of proceeds INCREASE level of proceeds
4) The beneficiary can have his prior lien only on the lowest intermediate balance left in
the account
The LIB is allowed as an equitable remedy/tracing method (cmt 3 to 9-315)
Chrysler Credit Corp. v. Superior Court
FP
Chrysler had a SI in East County Dodges vehicles. The two parties formed an
agreement whereby East County Dodge would place proceeds (from vehicle sales)
into a trust account (bearing BOTH the Debtor and SPs names). In violation of this
agreement, Debtor placed funds into its general operating account (if $$$ placed
into general operating account would have then been directly transferred to the trust
account, NO problems -> proceeds identifiable). But, here, Bank of the West did
sweeps of Debtors general account, took it out and re-loaned to Debtor (pursuant to
a credit agreement).
I
RAH
HELD: Chrysler stuck with the Lowest Intermediate Balance (probably close to zero)
-Throughout most of the time, General Operating Account maintained zero/negative
balance (and any funds in there were likely funds loaned by BOW)
-Remedy: Chrysler should have been more vigilant, could have also argued that
BOW had knowledge/did not act in good faith (since they helped the parties set up
the trust account)
Chapter 4 - Default and Enforcement
A. Introduction
B. Default
1. The Meaning of Default
Default is not defined in Art 9. It is the event that triggers a SP's right to enforce its sec int,
based on whatever the agreement btwn SP and D says (generally a failure to make
payment) (9-601(a)).
The Uniform Consumer Credit Code defines default (UCCC 5-109)
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Acceleration Clauses Should the debtor default, SP can accelerate the ENTIRE balance of
loan
Example: Debtor owes $12,000 to SP; Debtor supposed to pay $1,000/month. If Debtor
misses an installment (default under the SA), SP can accelerate the entire balance
-If SP does NOT have an acceleration clause, he/she must wait for each missed payment to
sue for the $1,000 owed each month
The SP's Rights After a Default (9-601(a))
(1) SP may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security
interest, or agricultural lien by any available judicial procedure; AND
(2) If the collateral is documents, SP may proceed either as to the documents or as to the
goods they cover.
"Proceed" against the collateral means:
1. Selling
Under 9-610, make commercially reasonable reasonable sale of collateral and
collection of rights to payment
then under 9-615, apply the proceeds of the sale to the satisfaction of the obligation
secured by the sec int.
2. Collect based on rights to payment
SP may proceed in a commercially reasonable manner under 9-607 to collect the
amount owed (e.g. payment from the D's account) by notifying the acct debtor to
make payment to the SP
3. Take the collateral
SP may accept the collateral in full or in partial satisfaction of the amount still owed
(under 9-620), but ONLY IF the debtor consents to the acceptance in the manner
prescribed by the statute.
(3) Except as otherwise provided in Section 9-602 (waiver), the SP has any rights provided
by agreement of the parties
The SP's Rights and Duties (9-601(b))
A secured party in possession of collateral or control of collateral under Section 9-104,
9-105, 9-106, or 9-107 has the rights and duties provided in Section 9-207. (see 9-207)
2. Waiver and Estoppel
Rule
Risk for SP is that behavior could be construed as "ordinary course of dealings", or as
waiver
Art 9 does not define what kind of conduct constitutes waiver, or the effect of non-waiver
clauses
Moe v. John Deere Co.
Sig: Example of the trend of authority regarding what constitutes waiver
FP
Moe v. John Deere Company (SD 1994) Deere financed Moes tractor purchase
(Moe was to make annual installments for 5 years). On several occasions, Moe
made late payments; these late/full payments were waived. After Moe missed a
revised payment deadline, Deere contacted Moe and the parties developed a new
payment agreement (with no specific deadline). Several months later, Deere
repossessed the tractor. Before repossession occurred, Moe did NOT receive any
notice. SA contained a non-waiver clause stating that waiver or condonation of any
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breach or default shall NOT constitute a waiver of any other or subsequent breach
or default Deere argues that this non-waiver clause is effective (such that
previous waivers/modifications of contract terms do NOT effect future rights of
default/repossession)
I
RAH
HELD: Adopted MAJORITY VIEW: Creditor must give notice that contract must be
complied with in the future (if late payments previously accepted)
Here, Deeres conduct induced Moes justified reliance that late payments
acceptable
Notice MUST be given whether or not there is a non-waiver clause
C. Enforcement
1. Cumulative Remedies
SP may disregard its in rem rights against its collateral and proceed outside Art 9 to obtain
an in personam judgment against the debtor as thought the debt were unsecured
(9-601(a)(1))
The SP's rights under 9-601(a) and (b) are cumulative and may be exercised
simultaneously. 9-601(c)
9-601(e)
9-610(b)
9-620(e)-(f)
Okefenokee Aircarft, Inc. v. Primesouth Bank
FP
I
RAH
2. Repossession
Self-Help Repossession
SP has property rights in collateral, which include the right to repossess the collateral w/o
judicial assistance
RULE
SP may repossess collateral. (9-609(a))
If equipment, SP may choose not to remove, but to render the equipment unusable on
the debtor's premises, under 9-610. (9-609(a))
SP may repossess/disable without judicial process, AS LONG AS SP does not breach
the peace (9-609(b))
Breach of Peace
What is Breach of Peace?
If SP Fears Breach of Peace
SP can have judicial officers seize possession under a replevin action (or similar), with
the costs passed to the debtor under 9-608(a)
Damages for Breach of Peace
Art 9 Damages
SP is liable for damages in the amt of any loss suffered by debtor 9-625(b)
Consumer Transactions
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D is entitled to statutory damages "not less than the credit service charge plus 10%
of the principal amt of the obligation or the time-price differential + 10% of the cash
price" 9-625(c)
Other-Law Damages
Tort Law: Wrongful repossession is the tort of "conversion of property" (i.e. stealing?).
Tort law supplements D's right to recovery for breach of peace (cmt 3 to 9-625)
Punitive Damages
Punitive damages are only recoverable by operation of other law (UCC 1-305)
D may qualify for punitive damages if the repossessing party's conduct falls within the
jurisdiction's laws of e.g. malic, oppression, or fraud
Williams v. Ford Motor Credit Co.
FP
I
RAH
HELD/RULE: NO BREACH OF THE PEACE where Williams did not raise an
objection to the taking, and the repossession was accomplished without any incident
which might tend to provoke violence
Judicial Action
RULE: SP may take (repossess) collateral by judicial action (9-609(b)(1))
If the collateral is repossessed or sold by judicial officers, the Art 9 limitations do not apply
to the removal or sale. The reqs of "commercially reasonable" disposition don't apply;
whether a SP may bid at the judicial sale is governed by other state law. Cmt 8 to 9-601
Examples of actions (state actions):
1. Replevin; Claim and Delivery; Writ of Possession
Levying officer (sheriff or marshal) seizes property; delivers it to SP; SP then
disposes of property under Art 9 (e.g. sell for $$)
2. SP reduce its claim to judgment
Reduce the claim to judgment; levy on the collateral; execute on its judgment by a
judicial sale under 9-601(a)
3. Judicial foreclosure
Court sells the collateral under a judicial sale, similar to the execution sale on a
money judgment
Cla-Mil East Holding Corp v. Medallion Funding Corp.
Sig: Demonstrates an important advantage to SPs in opting for judicial action
FP
I
RAH
3. Disposition of Collateral
Traditional Rule
Required a public auction sale to the highest cash bidder after public notice of the sale
Current Rule
The foreclosing creditor can sell, lease, license or otherwise dispose of the collateral
(9-610(a))
a. Notification Before Disposition
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(1) Notification Medium: Mail vs Internet

SP must send a reasonable authenticated notification of disposition to (9-611(b) and
(c))
The debtor, any secondary obligor (such as guarantor), and
in non-consumer cases:
For Non-Consumer Transactions
9-613 - Prescribes the contents of the notification, and provides a safe harbor form
For Consumer Transactions
9-614 - Prescribes the contents of the notification and provides a safe-harbor form
Moore v. Wells Fargo Construction
FP
I
RAH
(2) Public or Private Sale
SP may dispose of the collateral at a public or private sale - 9-610(b)
The method selected must be "commercially reasonable" (9-609(b), 9-610(b))
"Commercially Reasonable Means the disposition is made: (9-627(b))
(1) in the usual manner on any recognized market; OR
(2) at the price current in any recognized market at the time of the disposition; OR
(3) otherwise in conformity with reasonable commercial practices among dealers
in the type of property that was the subject of the disposition.
If Public Sale
Definition: A disposition at which the price is determined after the public has had a
meaningful opportunity for competitive bidding
The notification must state the time and place of the public sale (9-613(1)(E))
The SP may purchase at a public sale (9-610(c))
If Private Sale
Definition: We don't know
The notification need only state the time after which the sale is made (9-613(1)(E))
The SP may not purchase at a private sale UNLESS (and only if) the collateral is of
a kind that is customarily sold on a recognized market or the subject of widely
distributed standard price quotations.(9-610(c))
(3) Marshaling
Definition: Marshaling allows a jr secured party to require a sr secured party to
proceed against collateral other than assets in which the jr SP has a sec int
Advantage: Marshaling can prevent a SP from disposing of collateral (and
preventing other creditors from satisfying their claims in the collateral)
RULE (Requires 3 conditions)
(1) The 2 parties are creditors of the same debtor; AND
(2) Two funds are owned by the debtor; AND
(3) One of the creditors can satisfy its entire claim from either or both funds
When is Marshaling Appropriate?
The courts decide (cmt 5 to 9-610)
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b. Commercially Reasonable Disposition

"Commercially Reasonable Means the disposition is made: (9-627(b))
(1) in the usual manner on any recognized market; OR
(2) at the price current in any recognized market at the time of the disposition; OR
(3) otherwise in conformity with reasonable commercial practices among dealers in the
type of property that was the subject of the disposition.
ALL ASPECTS of the disposition of collateral must be commercially reasonable, including
the method, manner, time, place, and other terms (9-610(b))
General Electric Capital Corp v. Stelmach Construction Co
FP
I
RAH
c. Liability for Deficiency
(1) Non-Consumer Transactions
When the Debtor receives surplus from disposition
After disposition of the collateral by SP, any surplus from the sale goes to the
debtor. The obligor (usu but not always D is liable for any deficiency. (9-615(d))
When Debtor does NOT receive surplus from disposition
If the underlying transaction is not a sec int, but an outright sale of accounts, chattel
paper, payment intangibles, or promissory notes, the debtor receives no surplus.
The obligor is NOT liable for a deficiency.
Debtor's Remedy for SP's failure to comply w/ Article 9
Former Art 9
Injunction
"Absolute Bar" Rule
Denies the non-complying SP a deficiency judgment altogether
"Rebuttable Presumption" Rule
Limited the liability of the SP to the amt by which the debt exceeded the amt
that would have been recovered at the sale of the collateral had it been
disposed of in compliance w/ the statute
The presumption was that the proceeds of the sale were equal to the amt of the
debt, leaving no deficiency, unless the SP could rebut the presumption by
proving that a complying sale of the collateral would have brought less than the
debt
This was the majority rule under former Art 9
"Setoff" Rule
Allowed the debtor to deduct from the deficiency owed the amt of its loss
caused by the SP's transgression
Rev. Art 9
The debtor can place in issue the SP's compliance w/ Part 6 of Article 9. Then,
SP has the burden of proving that it has complied w/ the requirements of Part
6 (9-626(a)(2))
SP may still recover if it can prove it complied w/ 9-627(b): That the disposition
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was made
1. in the usual manner on a recognized
2. on a recognized market
3. at the price current in that market
4. and conformed to reasonable commercial practices among dealers in the
type of property sold
Art 9 adopts the "Rebuttable Presumption" rule - 9-626(a)(3) and (4)
RULE (cmt 3, 9-626)
Unless the SP proves that compliance w/ the relevant provisions would have
yielded a smaller amt, under 9-626(4), the amt that a complying collection,
enforcement, or disposition would have yielded is deemed to be equal to the
amt of the secured obligation, together w/ expenses and attorney's fees.
The SP must prove that compliance w/ the relevant provisions would have
yielded a smaller amt under 9-626(4).
The SP may not recover any deficiency unless it meets this burden
(2) Consumer Transactions
RULE:
No wholly satisfactory solution to the deficiency judgment problem has been worked
out (see CB p. 300)
9-625(c)
9-626(a)
9-616
d. Section 9-615(f)
Protects debtors by limits deficiency judgments in cases in which a commercially
reasonable, procedurally correct foreclosure sale
(i) is made to (A) the SP; (B) a person related to the secured party (e.g. an affiliate), or
(C) a secondary obligor (such as a guarantor of the debt); AND
(ii) the price obtained at the sale is significantly below the range of proceeds that a
complying disposition to a person other than the secured party would have bought
e. Transfer Statements
5. Acceptance of Collateral in Satisfaction of Debt
Strict Foreclosure
9-620
Full Strict Foreclosure
Full satisfaction SP takes collateral, calls it even
-Benefits: SP escapes judicial scrutiny (and with it, notice & commercially
reasonable disposition provisions), SP may be able to sell collateral (keep surplus)
SPs can enjoy strict foreclosure only if after default, the debtor consents to the
acceptance in satisfaction
How Debtor is Deemed to Consent to Acceptance
By expressly agreeing to the terms of the acceptance in a record authenticated after
default. 9-620(c)(2)
By silence (if after 20 days after SP's proposal to accept is sent) (9-620(c))
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Partial Full Strict Foreclosure

Partial satisfaction SP takes collateral, gives debtor a credit against total debt
Under OLD Article 9, PARTIAL strict foreclosure was NOT permitted
-Benefits: SP can avoid some judicial scrutiny, give D low-ball price, D gets actively
engaged and comes to an agreement To do a PARTIAL strict foreclosure, you
MUST obtain the Debtors express agreement
Non-Consumer Debtors
Debtor may consent to acceptance of collateral in partial satisfaction ONLY IF
Debtor expressly agrees to the terms of the acceptance in a record authenticated
after default (9-620(c)(1))
Acceptance by silence is NOT allowed (unlike for Full Strict Foreclosure)
Consumer Debtors
A SP MAY NOT accept collateral in partial satisfaction of the obligation it secures in a
consumer transaction (9-620(g))
Acceptance of the collateral in satisfaction of consumer goods is NOT effective if
the Debtor still possesses the collateral (9-620(g)(3))
If SP has possession of Consumer Goods Collateral
SP in possession of consumer goods collateral MUST foreclose by disposition
under 9-610 IF (9-620(e))
1. Debtor has paid 60% of the cash price of the collateral; OR
2. Debtor has paid 60% of the obligation secured by the goods
The disposition must take place w/in 90 days of taking possession (9-620(f))
See also 9-602(10)
Intangibles
9-605
9-628
Cmt 10 to 9-620
"Constructive" Strict Foreclosure
8. Redemption of Collateral by Debtor
Debtor has right to redeem the collateral by paying the SP before foreclosure: (9-623)
1. The full amount owing on the debt; AND
2. Expenses incurred by SP in repossessing and preparing the property for sale
Consumer Goods
The D must be given information about its right to redeem (see 9-614)(1)(C)
In Bankruptcy
A Chapter 7 debtor can redeem consumer goods in some cases by paying SP the value
of thee collateral (BC 722)
Any deficiency remaining becomes and unsecured claim of the creditor and is
discharged (BC 722)
Basic Shortcoming of 9-623 and BC 722:
The Defaulting debtor is broek; at best, can only pay the amt necessary to redeem only in
installments
But if D is an INDIVIDUAL who qualifies for Chapter 13 Bankruptcy, then
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BC 1325(a)(5) allows D to redeem proprty by paying the creditor its present value in
installments
Chapter 9 - Security Interests in Bankruptcy
A. Overview of Bankruptcy
1. Introduction
Bankruptcy is federal law (11 U.S.C. 101, et. seq)
But the rights in bankruptcy of debtors and creditors are governed largely by state law
2. Types of Bankruptcy
1. Chapter 7 (Liquidation, i.e. selling all yo sh'yit)
"Liquidation" is The collection of assets belonging to a debtor to be applied to the
discharge of his or her outstanding debts.
All of the debtor's property owned at the date of bankruptcy becomes part of the
bankruptcy estate (BC 541)
An "individual" (non-organization) debtor may exempt certain property from the
bankruptcy estate
See 522(d)?
2. Chapter 11, 12, or 13 (Rehabilitation/Reorganization)
Chapter 13 is only for a debtor who is an "individual w/ regular income who owes, on the
date of the filing of the petition in bankruptcy, noncontingent, liquidated, unsecured debts
of less than $360,475 and noncontingent, liquidated, secured debts of less than
$1,081,400 (BC 109(e))
Chapter 11 can be used both individuals and organizations, but is primarily for biz orgs
Chapter 12 is for "family farmers", defined in BC 101
3. The Petition in Bankruptcy and the Automatic Stay
Voluntary bankruptcy begins w/ the Debtor filing a petition in bankruptcy to the Bankruptcy
Court (BC 301)
The filing acts as an automatic stay against certain acts taken against the D or wrt
bankruptcy estate property (BC 362(a))
About the Stay
The stay insulates the D from certain actions to collect pre-bankruptcy debts; e.g.
commencement/continuation of judicial proceedings against D to recover a
pre-bankruptcy claim
enforcement of any pre-bankruptcy judgment against D or against property of the
estate
any act to obtain possession of property of the estate or property held by the estate
any act to create, perfect, or enforce any lien against property of the state
Creditors' Rights Against the Stay
something BC 362(d)
4. The Trustee in Bankruptcy (TIB)
Chapter 7
Trustee in Bankruptcy administers the bankruptcy estate
Can be an individual or corporation (BC 321)
Trustee's duties are fiduciary: (BC 704)
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Main duty is: Collect the property of the estate, reduce it to money by selling it, and
apply the proceeds to payment of bankruptcy expenses and creditors' claims
In collecting property, trustee has power to "avoid" some pre-bankruptcy transfers that
violate bankruptcy policy
Chapter 11
Usu no trustee in Chapter 11; only appointed in "unusual" cases e.g. fraud or gross
mismanagement by debtor (BC 1104(a))
Instead, the debtor continues to possess its property and acts as trustee (BC 1107(a) and
BC 1108)
Chapters 12 and 13
Primary duty is to disburse creditrs payments due under bankruptcy
Trustee is appointed by bankruptcy ct, or is a "standing trustee" appointed to all Chap 12
and 13 BC cases in the district
5. Claims in Bankruptcy
Chapter 7
After TIB collects BR estate and sells it, proceeds are applied to pay bankruptcy
expenses and creditors' claims
Definition: "Claim" is the creditor's basis for receiving payments from the BR estate
Creditor files "proof of claim" w/ BR ct (BC 501 and Bankruptcy Rule 3001)
NOTE: "Claims" only apply to D's obligations BEFORE bankruptcy
Claims can only be paid if "allowed" (BC 502)
Secured Claims
BC 506(a)(1)
BC 541(a)(1)
Unsecured Claims
6. Distribution of Assets to Unsecured Creditors
Chapter 7
Unsecured creditors receive distributions AFTER the TIB disposes BR estate property in
satisfaction of secured claims (BC 726)
Order of priority is:
1. The ten priority claims set out in BC 507 (in the order of priority set out in 507) (BC
507)
2. Administrative expenses described in BC 503
Chapters 12, and 13
BC 507
For chapters 12 and 13, the plan must provide for payment in full of all priority claims
Deferred payment can be made, with interest, over the pd of the plan
Chapter 11
BC 507
Plan must provide for payment in full of all priority claims
Some priority claims must be paid in cash on the eff. date
Some priority claims can be paid, w/ interest, over time
7. Discharge
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Chapter 7
A debtor who is an individual will normally receive discharge from pre-bankruptcy debts
(BC 727(b))
A debtor who is a corporation or partnership may NOT be discharged from
pre-bankruptcy debt
Sometimes debtor does not qualify for discharge (BC 727(a))
e.g. If D has received a discharge under Chapter 7 in a case commenced w/in 8 years
of the time the current case was commenced
e.g. misconduct by debtor
Sometimes, the debt itself is a type that cannot be discharged. (BC 523(a))
e.g. if creditor has equity in the property greater than the debtor does; creditor may
have a claim against the debtor that survives bankruptcy
Chapter 11
A debtor who is a corporation or partnership MAY be discharged from debt
Chapter 11 discharge for non-individual debtors is NOT subject to the special
exceptions to dischargeability under BC 523(a)
Chapter 12
A debtor who is a corporation or partnership MAY be discharged from debt
Chapter 13
B. Secured Claims in Bankruptcy
1. The Meaning of Secured Claim
When a D whose property is subject to an Art 9 sec int files bankruptcy, the SP becomes a
"Secured Claim" (9-506(a)(1))
The collateral is the property of the debtor's estate (under 541(a))
The claim is governed by Federal Bankruptcy Law
RULE
Secured claim is prior to unsecured claims
Secured claims take "off the top," before distribution to unsecured creditors (BC 725)
Is an allowed claim Secured or Unsecured? (BC 506(a)(1))
The claim must be "allowed"
The claim must be made by a SP; i.e. a creditor secured by a lien on:
1. property in which the estate has an interest, OR
2. property that is subject to setoff under BCC 553
If the above 2 requirements are true, the claim is:
a secured claim to the extent of
the value of such creditors interest in the estates interest in such property, OR
the amount subject to setoff, as the case may be, AND
an unsecured claim to the extent that
the value of such creditors interest, OR
the amount so subject to setoff is less than the amount of such allowed claim.
NOTE: one claim may have a secured AND unsecured portion
2. The Automatic Stay
Automatic stay restricts the enforcement of a security interest in bankruptcy property (BC
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326(a))
Pre-petition secured creditors may not enforce their security interests in the property of the
estate or of the debtor (BC 362(a)(5))
Thus, an Art 9 SP is barred from repossession (9-609), including both self-help AND
judicial process
The automatic stay is a form of injunction
Damages
Violators may be held in contempt of court and assessed damages
An "individual" injured by a will violation of the stay may recover actual damages, costs
and attorney's fees (and possibly even punitive damages) BC 326(k)(1)
"Individual" means natural person, not legal entities (e.g. corporations and
partnerships)
When does the automatic stay end?
When the case is closed or dismissed (BC 362(c)(2))
Or, even earlier wrt property that is no longer property of the estate (BC 362(c)(1))
Secured Claim RIghts Against the Stay
Court may terminate or modify the stay on certain grounds BC 362(d)
3. The Effect of Discharge
On Secured Claims
Compare to Article 9
SP had 2 rights after default of the debtor: 9-601(d)
1. Hold debtor personally liable on the secured obligation
2. Enforce security interest against the collateral
Bankruptcy Approach
Chapter 7
If debtor is granted discharge under BC 727(b), then
1. Debtor is NOT personally liable on the obligation
2. Debtor is still under the secured obligation (SP still has righst?)
i.e. the discharge transforms a "recourse" debt into a "non-recourse" debt (i.e.
non-recourse against the debtor personally) (BC 524(a))
So then, who IS liable if debtor is not?
A surety or other guarantor is liable even though the principal debtor is released
by discharge (BC 524(e))
An insurance carrier is still liable even though the insured person is discharged
If a debt is secured by property of a 3rd party, that property can be reached to the
full extent of the security agmt
If the discharged debt was secured by a lien in the debtor's property, the
debtor's property is still 'take-able'
BC 506(d) preserves Long v. Bullard (see p. CB 494)
A lien not void under BC 506(d) will survive bankrupcty (see CB p. 494)
On Unsecured Claims
D. Avoidance Powers of the Trustee
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"Avoidance Powers" means the TIB's power to nullify a pre-petition secured transaction (see
BC 541(a)(3))
1. Strong-Arm Clause (BC 544(a))
If the security interest isn't perfected at the time the debtor files in banktruptcy, it may be set
aside totally
A trustee may avoid any transfer of property of the debtor that is "voidable" by a hypothetical
judicial lien creditor at the date of bankruptcy (544(a)(1))
The rights of a lien-creditor are given by UCC 9-317(a)(2)
Courts have held that the trustee, invoking the rts of a lien creditor, may set aside a
security interest in its entirety that is subordinated to a judicial lien by 9-317(a)(2)
BUT! Perfection after bankruptcy can defeat the Trustee's rights avoidance rights IF Article
9 gives retroactive effect to perfection (BC 546(b))
2. Preferences
If an insolvent debtor pays an unsecured creeditor in preference to other creditors w/in 90
days b4 filling for bankruptcy, the payment may be recovered as a voidable preference (BC
547)
E. Preferences (BC 547)
What is a preference?
Insolvent debtors who can't pay all unsecured creditors in full may "prefer" one over the
other (e.g. pay utilities instead of credit card bill)
Bankruptcy law prevents debtors from making payments to preferred creditors onn the eve
of bankruptcy (in order to upset the pro rata bankruptcy distributions) (see BC 547)
1. Elements of a Voidable Preference (BC 547(b))
Except as provided in 547(c) and (i), the trustee may avoid ANY transfer of an interest of the
debtor in property
1. to or for the benefit of another creditor
2. for on on account of an antecedent debt owed by the debtor before such transfer was
made
3. made while the debtor was insolvent
4. made
(A) on or within 90 days before the date of the bankruptcy petition; OR
(B) between 90 days and 1 year before the date of bankruptcy petition filing , IF such
creditor at the time of such transfer was an insider; AND
5. that enables such creditor to receive more than such creditor would have received if
(A) the case were under Chapter 7 (Bankruptcy Code)
(B) the transfer had not been made; AND
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title
2. Basic Applications of Preference Law
Note: CB Problems 1 and 2 are important, according to the casebook authors (p. 521)
BC 547(b)(5)
3. Policy behind Preference Law
Equitable Distribution to Creditors (prevent debtor from "preferring" one creditor over
another)
Prevent creditors from racing to the ct house to dismember the debtor during his slide into
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bankruptcy (protects the debtor by preventing the creditor from jockeying for preference)
4. The Effect of Avoidance
If TIB avoids a preferential transfer under BC 547(b), the property transferred by debtor to
creditor or its value can be recovered for the benefit of the estate (BC 550(a))
If Preference Occurred when D paid in Cash
TIB may recover an equivalent amount, which becomes part of the bankruptcy estate (BC
541(a)(3))
If Preference Occurred when Creditor obtained a lien in D's property
Assuming the property to which the lien applies is property of the bankruptcy estate
Avoidance of the preference usu means the creditor's lien is nullified
See BC 551?
5. Preference Period
To be voidable, the preference must have occurred during the "preference period" (BC
547(b)(4))
The "insider" thing -- "insider" preferences are fraudulent (see CB p. 525)
6. Transfers to or for Benefit of a Creditor
a. Transfer of Debtor's Property
RULE: To be a preference, the property transferred must be that of the debtor (BC
547(b))
b. To or for the Benefit of Another
Preference law is different than the law of a fraudulent transfer
DIfference is
A fraudulent transfer is void no matter who the recipient is
Preference is only voidable if the transfer is made to or for the benefit of a creditor
of the debtor-transferor (BC 547(b)(1))
Exceptions to the Law of Preferences
7. Contemporaneous Exchanges
One element is that the transfer must be for or on account of an antecedent debt
Thus, if an insolvent buyer (within 90 days of bankruptcy) buys goods and pays for them
at the time of sale by transferring money/other property to the seller, there is NO
PREFERENCE b/c the buyers obligation to pay for the goods and the transfer of property
to satisfy the obligation arise CONTEMPORANEOUSLY
-Courts will also prohibit preference if there is a SUBSTANTIALLY contemporary advance
If a bank advances funds to a D who intends to secure the loan by granting the bank a
sec int in D's property, and the granting of the sec int is delayed only a short time, the
exchange is essentially contemporaneous, and the sec int cannot be avoided BC
547(c)(1)
8. Ordinary Course Payments
The trustee cannot avoid a transfer if the transfer was in payment of a debt incurred by D
in the ordinary course of business or financial affairs of the debtor AND: BC 547(c)(2)
(A) the transfer was made in the ordinary course of business/financial affairs of D and
transferee; OR
(B) the transfer was made according to ordinary business terms
In re National Gas Distributors, LLC
63 of 65
5/7/2013 3:42 PM
FP
I
RAH
9. Floating Lien as a Preference
Generally refers to the trustees ability to avoid SPs SI in after-acquired property
(pursuant to an after-acquired property clause in the SA)
-BC 547(c)(5) governs, deals with inventory and receivables
-Does NOT cover equipment or consumer goods
RULE 9-547(b)(5)
The trustee may not avoid a transfer that creates a perfected sec int in inventory or a
receivable, or the proceeds of either,
EXCEPTION
The trustee MAY avoid the portion of a transfer that creates a perfected sec int in
inventory, or a receivable, or the proceeds of either, to the extent that:
as of the date of the filing of the petition and to the prejudice of other creditors
holding unsecured claims, the aggregate of all such transfers to the transferee
caused a reduction of any amount by which the debt secured by such sec int
exceeded the value of all sec ints for such debt on the later of:
(A)
(i) wrt to a transfer under 547(b)(4)(A), 90 days before the filing of the
petition; OR
(ii) wrt to a transfer under 547(b)(4)(B), one year before the date of the filing
of the petition; OR
(B) the date on which new value was first given under the sec agmt creating
such sec int
General Approach: Two-Point Net Improvement Exception
(1) On day 90, you look at amount of debt secured and subtract off the value of
the collateral (including any identifiable proceeds) -> this is amount X
If on day 90, the calculation results in a negative, SP is over-secured (STOP
the analysis!)
(2) Do the same calculation on day 0 -> this is amount Y
(3) Subtract X-Y -> this is the amount of the preference that the trustee CAN
AVOID; if this number is zero or negative, there is NO preference
10. False Preferences: Delayed Perfection of Security Interests
Delayed Attachment
There may be a delay between the time when credit is granted and the sec int
intended to secure that credit attaches
Since the subsequent attaching of a sec int is a transfer of the debtor's property on
account of the debt, there may be a voidable preference if the other elements of BC
547(b) are present
If the delay is very short, the sec int may be saved by BC 547(c)(1) as a
contemporaneous transfer
If the credit was for the purpose of enabling the debtor to acquire collateral that
secures the debt, the sec int may be saved if there was compliance w/ BC 547(c)(3)
Delayed Perfection
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5/7/2013 3:42 PM
A problem arises when the granting of credit and the creation of the sec int are
contemporaneous, but there is a delay before perfection
Secret lien?
Example:
D in financial trouble wants to conceal its true financial condition from general
creditors
D obtains an emergency loan from a creditor and grants a mortgage or real
property, or a sec int in personal property to secure the loan
The property involved might be most of D's previously unencumbered assets
If public notice of the transaction were given, other creditors would be deterred
from giving the debtor further unsecured credit (because of the lack of
unencumbered assets)
So D might not record the mortgage or file the fin stmt
Issue is fraud on creditors, not preference
BC 547(e)(2) defines when a transfer is made
For the purposes of this section (547), except as provided in paragraph (3) of this
subsection, a transfer is made
(A) at the time such transfer takes effect between the transferor and the
transferee, if such transfer is perfected at, or within 30 days after, such time,
except as provided in subsection (c)(3)(B); OR
(B) at the time such transfer is perfected, if such transfer is perfected after
such 30 days; OR
(C) immediately before the date of the filing of the petition, if such transfer is
not perfected at the later of
(i) the commencement of the case; OR
(ii) 30 days after such transfer takes effect between the transferor and the
transferee.
For the purposes of this section, a transfer is not made until the debtor has acquired
rights in the property transferred. BC 547(e)(3)
BC 547(e)(1) defines "perfection"
(1) For the purposes of this section (547)
(A) a transfer of real property other than fixtures, but including the interest of a
seller or purchaser under a contract for the sale of real property, is perfected
when a bona fide purchaser of such property from the debtor against whom
applicable law permits such transfer to be perfected cannot acquire an interest
that is superior to the interest of the transferee; AND
(B) a transfer of a fixture or property other than real property is perfected when a
creditor on a simple contract cannot acquire a judicial lien that is superior to the
interest of the transferee.
PMSI
65 of 65
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Secured Transactions

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Pruisner at the time of delivery. Chrylser financed Pruisners inventory based

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

1994 version: "proceeds" includes payments or distributions made wrt investment

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

by the assignee thereunder; and

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

6. Perfection by Possession (SP in possession of collateral) (9-313)

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Other Amendments do NOT extend fin stmt

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

What is "seriously misleading?"

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

(ii) identifies an initial financing statement whose effectiveness has lapsed

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Error/Omission Related to Debtor's Name

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Wrongly REJECTING A Financing Stmt (i.e. for a non-9-516(b) reason)?

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

9-508(a) - Except as otherwise provided in this section, a filed financing

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Rights of 3rd Party Bailee

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

nominated person has consented to an assignment of proceeds of the letter of credit

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

1. Location of Debtor Governs Tangible and Intangible Collateral

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

Exception: 9-323(a) Governs When Priority IS based on the time of advance

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

of a perfected security interest under Section 9-322(a)(1), perfection of the security

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

NOTE! PMSI is limited to goods and software

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

9-324(g) endorses approach (ii) [favored type of PMSI, e.g. Sellers/Vendors]

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

NOTE: **9-103(f) DOES NOT APPLY TO CONSUMER GOODS

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

This rule is restricted primarily to inventory collateral 9-320(a), cmt 3

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...

purchases that same equipment from D1 in exchange for $$$

file:///C:/Users/lherard/Dropbox/Spring 2013/Secured Transactions/Outli...