Commercial Law

Prof. Graham
Spring 2005
Text: Problems and Material on Commercial law, 7th Ed., Whaley.
Grade: B

3) Introduction. UCC –what is it? Purpose? Texas has adopted a version of the
UCC. Always be sure you’re dealing with the latest version.
a) Art. 3 – negotiable instruments
i) “Article 3 applies to negotiable instruments.” p. 242
b) Casebook – Ch 7, p. 325
c) Art. 1 – Definitions, p.
i) Analyzing Problems Under the UCC:
(1) First, is this governed by Art. 3? Do we have a negotiable
Instrument? If it’s not a neg. instr. it’s not governed by Art. 3.
d) 2 types of Neg instruments: “Notes” and “Drafts” – § 3-104(e)
i) What is a negotiable instrument? § 3-104(e) (“an instrument is a “note” if it
is a promise and is a “draft” if it is an order.”)
(1) “NOTE” is a written PROMISE to pay. It’s a 2-party transaction of
Promise § 3-103(a)(12): maker/payee. EX: “I promise to pay B $”
(2) “DRAFT” is a written “ORDER” to Pay. It’s a 3-party transaction
(i) drawer - § 3-103(a)(5)(the person ordering the payment),
(ii) drawee §3-103(a)(4)(the person ordered to make the payment),
(iii) payee
1. EX: A orders B to pay C.
(iv) Order § 3-103(a)(8) (“a written instruction to pay money signed
by the person giving the instruction”). (Exam question: is this a
neg instr. a note or a draft?).
1. writing
2. signed
(b) A “note” created by a bank is a CD (but this may or may not be
negotiable).
(c) the most common type of draft is a check.
(3) Remitter. § 3-103(a)(15)—“remitter” -- “a person who purchases an
instrument from its issuer if the instrument is payable to an identified
person other than the purchaser.” Problem 81 p. 327: Portia is buying a
car and the seller won’t take a personal check. So she gets a cashier’s
check, issued by the Bank. What do we call Portia? CN: The bank is
both the “drawer” and “drawee.”
 (a) § 3-104(g) – Cashier’s check means a draft with respect to which
the drawer and drawee are the same bank or branches of the same
bank.
(b) Who is the payee? Whoever is selling the car, Seller.
e) Non-Bank Drafts
i) Used in the Sale of goods. 3-party transaction
(1) Seller = drawer – orders the buyer to pay seller’s designee (payee)
(2) Buyer = drawee
(3) payee -- Banks purchase drafts at a discount .
(a) CN: Seller orders Buyer to pay the Bank.
(b) Drawer Drawee Payer
ii) But the bank will discount the amount because it has to make money on it,
and because of the “time value of money” and because they are taking on
the risk of not collecting. Bank pays a discounted amount to A, but collects
the full amount from B.
4) Is the instrument NEGOTIABLE in Form? (Negotiability is the type of
transfer.)
a) Technical requirements of negotiability -- ALL 7 requirement must be met
p. 335:
i) “Writing” –for both “Promise” and “order” § 3-103(a)(8) and (12)
ii) “Signed” – for both “promise” and “Order” § 1-201(37), p. 29:
“includes using any symbol executed or adopted with present intention
to adopt or accept a writing.”
(1) Comment 37 – “a complete signature is not necessary. The symbol
may be printed, stamped, or written; it may be by initials or by
thumbprint. It may be on any part of the document and in appropriate
cases may be found in a billhead or letterhead. . . . The question is
always whether the symbol was executed or adopted by the party
with present intention to adopt or accept the writing.”
(2) Problem 82: signs an X with branding Iron. Yes, its a signature.
(3) Problem 83 – What if an individual signs a corporation’s name?
(a) § 3-401 Signature. (b) A signature may be made (i) manually or
by means of a device or machine, and (ii) by the use of any name,
including a trade or assumed name, or by a word, mark, or symbol
executed or adopted by a person with present intention to
authenticate a writing.
(b) § 3-402 By representative
(c) § 3-403 Unauthorized Signature. “an unauthorized signature
is ineffective except as the signature of the unauthorized signer in
favor of a person who in good faith pays the instrument or takes it
for value.”
iii) Unconditional Promise or Order -- §3-104(a), p. 331
(1) Reason: We want a negotiable Instrument to be unconditional,
because if a conditional paper were negotiable, prospective holders of
the paper would not feel safe in taking it until they had checked to see
if the condition had occurred.
(2) Exception—Implied conditions. Some conditions are okay: §3-
106. Express conditions are NOT Okay – they Destroy
negotiability. EX: “I promise to pay only if the building does not
burn down.” Implied conditions, on the other hand, ARE okay. EX:
“I have rented the building and will pay $ to owner.” There is
an implied condition that the building not burn down.
(a) Reference is okay, but “subject to” another document is not
okay. Why not? Because then the parties have to look outside the
negotiable instrument
(3) Triffin v. Dillabough, p. 332; § 3-104(a).
(a) Issue: whether AE’s money-orders are negotiable instruments,
and if so, whether Triffin has the rights of a HDC who may
recover the face value of those money-orders from AE? Held,
yes.
(b) Facts: AE had its money orders stolen. They were pre-printed
with the signature of the Chairman of AE, but blank as to amount,
sender, payee, and date. Dillabough presented several checks to a
check cashing business, and the owner, Giunta paid the face
value. AE refused to pay Giunta, because they were stolen
checks. Giunta then sold the money orders to Triffin.
(c) Was the negotiability of these money orders destroyed by the
legend: “Will not be paid it if has been altered or Stolen”? Held,
no; this was not a condition, merely a restatement of AE’s
defenses present in the commercial Code. Held, this is not an
express condition, just a warning, just an expression of their
rights.
(d) The dissent argues that the inclusion of the word “if” makes it an
express condition and thereby destroys negotiability. Was this an
express condition?
iv) Consideration Stated, p. 341
(1) § 3-106 permits the instrument to mention the details of the
underlying contract without destroying negotiability as long as
payment of the note is not made “subject to” the performance of that
contract.
(2) § 3-106(a)’s last sentence permits a reference to the underlying
contract, though an incorporation of the terms of that contract
 (without restating them in the note itself) would be fatal to
negotiability.
(3) Referencing an underlying contract. Does reference to underlying
contract destroy negotiability? no. What if payment is made subject
to the terms of an underlying contract?
(4) What if the note incorporates the TERMS of the underlying
contract? negotiability is destroy, but the court may look to art. 3 for
guidance, as well as general contract law.
(5) Reason: prospective holders should never he required to investigate
whether all is well with the original agreement; the separate
agreement might contain terms placing a condition on
payment; Negotiability must be determinable from the four corners
of the instrument.
(6) Problem 84, p. 342
(a) Not negotiable, because it used the word “subject to”. Com’t 1,
2nd para, §3-106.
(b) Yes, negotiable. This is a mere reference to a separate writing
regarding the amount of payment.
(c) Yes, negotiable. This contains only reference to the content
regarding rights to prepayment and acceleration. Com’t 1, para 2,
last sentence. § 3-106(b)(i). CN: this does bring in terms from
another agreement, and appears to be “subject to” but specifically
permitted are:
1. “collateral,
2. prepayment, and
3. acceleration”.
(7) Problem 85
(a) “Void after 90 days.” Does this destroy negotiability?
technically, it is a condition, but the bank will not generally pay
attention to it. Also, due to automated processing it will probably
not get picked up. But the check represents an agreement between
the bank and the maker of the check.
(8) Prblem 86
(a) §3-106(b)(i)—an instrument is not made conditional by reference
to another record for a statement of rights with respect to
collateral.
(b) Com’t 1, 3rd para: A statement of rights and obligations
concerning collateral . . . does not prevent the note from being an
instrument if the statement is in the note itself.
(c) My answer: this is a negotiable instrument because the condition
regarding collateral is in the note itself.
 (d) §3-106
1. Express condition – payment “IF” a certain condition is met.
2. Implied Condition?
3. Subject to: another agreement?
4. “As per” another agreement?
5. Collateral, prepayment or acceleration described in another
document?
6. Payment limited to an particular fund? ok
v) Fixed Amount of Money, p. 342
(1) Problem, p. 87
(a) §3-112 Interest ..(b)
(b) My answer: Negotiability is NOT destroyed.
(2) Must be Money—not bales of cotton or other commodity.
(a) § 1-201(b)(24) “money” means “A medium of
exchange currently adopted or authorized by a domestic or foreign
govt.” This provision is designed to address the Euro. What
about Trade beads or tobacco? Early in our history, tobacco was a
medium of exchange, but not today. This is more like barter,
without an exact valuation.
(b) Foreign currency. §3-107 “Unless the provision otherwise
provides, the amount payable in foreign money, may be paid in
foreign money.” Thus I have the choice of paying either in
French francs or in US dollars. What’s the spot rate? The rate at
the current time. If a rate at a future date were allowed, it could be
higher or lower, depending on inflation, country risk, etc. The
Code looks only at the spot rate, the daily conversion rate on the
day the note is paid. But it also says, “unless the instrument
otherwise provides” so you can specify otherwise.
vi) “Courier without Luggage” Requirement, p. 343
(1) The instrument must not be burdened with anything other than the
unconditional promise or order; it cannot be made to carry around
other legal obligations. If the maker of the note adds any undertaking
in addition to the promise to pay money, the note becomes non-
negotiable. § 3-104(a)(3) “no other undertaking”. This is because
you want it to be definite on the face of the document.
(2) Problem 88, p. 344
(a) negotiability destroyed, because it adds an extra condition, which
doesn’t fall into any of the exceptions. This is a clear example of
what makes it nonnegotiable.
 (b) CN: This sounds vague “if holder deems himself insecure” at
“any time”. But this deals with collateral, which is one of the
exceptions.
(c) “Maker agrees” this is a confession of judgment clause--
negotiability is not destroyed. §3-104(a)(3)(ii) allows for a
confession judgment clause.
(d) “Payment in full clause” §3-311 Accord and satisfaction. But
this also contains reference to other documents (reference doesn’t
destroy negotiability). But what about the “payment in full”
clause? §3-311, requirements: Good faith, unliquidated, etc. But
an “accord and satisfaction” clause does not destroy negotiability.
(e) Negotiability probably not destroyed. But this is not a good idea
to have the SI and instrument in one document.
(3) Woodworth v. Richmond Indiana Venture, p. 344
(a) This case involves a promissory note. Woodworth agreed to pay
a sum certain. Signet Bank claimed to be a HDC. First question:
do we have a negotiable instrument?
(b) R: In order to be negotiable, a promissory note must be signed,
unconditional promise to pay a sum certain in money which is
payable on demand or at a definite, stated time. The note must be
payable to order or bearer and contain no other promise, order,
obligation, or power given by the maker except as authorized by
§§3101, 3805., §3104. Here, the note contains a promise by the
maker resulting in forfeiture of his partnership interest and
payment in event of default.
(c) Where there is doubt as to the negotiability of an instrument,
the decision should be against negotiability. Since the
promissory note is not negotiable, D cannot claim the status of a
HDC and is subject to ordinary contract defenses that P may
assert.
(d) CN: there is a forfeiture clause, exercisable by the
partnership. This makes a difference, because forfeiture clause
could not be exercised by the HDC, only by the partnership. Thus
it destroyed negotiability.
vii) 6. Payable (i) on Demand or (ii) At a Definite time, p. 347
(a) A holder of an instrument must be able to tell when it comes due, or
the instrument is non-negotiable; however, there is no requirement
that the instrument be dated. An undated instrument that specifies no
time of payment is treated as an instrument payable on demand by the
holder.
(i) § 3-108 payable on demand, or at a definite time: payable:
 1. at sight = payable on demand; if
2. no time is specified = payable on demand. It can be subject to
acceleration or extension, but if the extension is at the
maker’s option then it must be at a definite time. Can it be
both? Yes, it could be on demand up to a certain time, and
then after that, then . . .
(ii) § 3-113.
(b) Prblem 89, p. 347—Is negotiability destroyed?
(i) “Payable 30 days after sight.” Demand or definite time? yes,
Definite time.
(ii) “Payable in 11 installments, etc” CN: This is neither on demand
or at a definite period of time, thus not negotiable.
(iii) Negotiability not destroyed. cf. §1-208. CN: Definite time but
with an acceleration clause.
(iv) Not destroyed. CN: we can determine on the date the instrument
is created when “tomorrow” will be.
(v) Not destroyed. CN: Do we know at the time the note was
created whether ... It is an extension at the maker’s option, but an
extension is to another definite time.
(vi) Negotiability Destroyed. CN: not an extension at maker’s
option to a definite date. There is no definite date here.
(vii) This is a post obituary note. not payable on demand and not at a
specific time, so its not negotiable and art. 3 doesn’t apply.
(viii) “Payable 100 years from today” this is a definite
period. “but if my rich uncle Al dies . . .” this is an acceleration
clause, which is allowed, but it’s not very certain so it’s arguable.
(ix) “Payable on my next birthday” but the time must be certain from
the face of the document.
viii) Payable to Bearer or Order (words of negotiability)- §3-109, p. 348
(1) Establishing privity.
(a) Bearer paper. “Payable to bearer” (but too negotiable, like cash).
“Payable to cash or to the order of cash” is bearer paper like cash.
(b) Order paper. “Payable to order” – to specific person, or the person
that person “orders” to pay. It must use the word “order” unless it’s a
check.
(c) Why does this language matter? 2 reasons.
(i) 1st to determine whether we have a negotiable instrument.
(ii) 2nd goes to negotiation. there are different requirement for
transferring bearer paper and order paper, to meet the technical
requirements of negotiation.
 (d) Can bearer paper become order paper and vice versa? yes, change it
by the form of the indorsement on the back of the check. Blank
indorsement or a special indorsement.
(2) Problem 90, p. 349 are the following are promissory notes.
(a) No, there are no words of negotiability. Could say, “pay to John
Smith or order.” (see 3-107 for alteration)
(b) “pay to the order of John Smith or bearer.” payable to “bearer.” See
com’t 2, §3-109. The term “bearer” controls.
(c) “Pay to bearer” this is bearer paper.
(i) “Pay to the order of Cash.” Payable to bearer.
(ii) “Pay to a Merry Christmas.” Technically, bearer.
(d) Problem 91, p. 349
(i) “Pay to the order of (blank).” see §3-115, com’t 2--Incomplete
instrument. It is bearer paper until the blank is filled in. It’s
bearer paper if it doesn’t state a payee. 3-104(c) deals with
chad [??].
(ii) “Pay to John Doe’s Estate” § 3-110(c)(2)(i). Is John Doe’s estate
a person? If an instrument is payable to an estate the instrument is
payable to the trustee, whether or not the beneficiary or estate is
also named.” So it’s still negotiable; still order paper.
(iii) “Pay the order of the president of the U.S.” §3110(c)(2)(iv)—A
person to whom an instrument is payable may be identified in any
way . . . If an instrument is payable to an office or to a person
described holding an office, the instrument is payable to the
named person, the incumbent of the office, or a successor to the
incumbent.” It’s payable to whoever holds that office.
(iv) Still negotiable. Drawer of a check crossing out “to the order
of” §3-104(d) “A promise or order other than a check is not an
instrument if, at the time it is issued or first comes into possession
of a holder, it contains a conspicuous statement, however
expressed, to the effect that the promise or order is not negotiable
or is not an instrument governed by this Article.”
(v) Still negotiable. §3-104(c) §3-104(c) in the case of checks which
do not require the word “order.”
1. how to destroy negotiability? § 3-104(d). State upon the
instrument that it is non-negotiable. You could stamp it “non-
negotiable.”
(3) Consumer Notes
(a) FTC, see notice on p. 350. This seems to say you could never have a
holder in due course because it seems to place a condition on it. Or it
may defeat the courier without luggage requirement. Ordinarily, it
 would defeat negotiability, but the Code says that this particular
statement does not. See § 3-106(d). this looks like it destroys
negotiability, but the code tells us no.
5) Negotiation, p. 353
a) technical terms
i) Maker. §3-103(a)(7) The person who issues the promissory note and
promises to pay. Under §3-412, the issuer of a promissory note is to
obligated to “pay the instrument...”
ii) bearer. §1-201(b)(5) whoever possesses the instrument
iii) Payee. The person to whom the promissory note or draft is made payable.
This person may further transfer – negotiate -- the check.
iv) Drawer. § 3-103(a)(5). Person who creates the draft and orders the drawee
to pay.
(1) Obligations. §3-414, by drawing a draft, the drawer promises that upon
dishonor of the draft by the drawee, the drawer will pay the amount of
the draft.
(2) Cf: a drawer creates a draft, while a maker creates a note.
v) Drawee. The person who the drawer has ordered to pay the payee. § 3-
103(a)(4). If the drawee doesn’t accept the draft then it is dishonored. If
the drawee doesn’t pay, then the drawer has the obligation to pay if the draft
is dishonored.
(1) Obligations. incur an obligation if you accept it under § 3-
409. Obligations of an acceptor is under § 3-413. You have to pay if
you accept. If the drawee doesn’t accept then the drawer must pay it.
b) Negotiability (form) vs. Negotiation (transfer)
i) “Is an instrument negotiable” asks if the instrument is in the proper form to
meet the technical requirements of negotiability in §3-104(a).
ii) “Has the instrument been negotiated?” asks about the legal validity of the
attempted transfer of the instrument.
c) Three steps of Transfer and negotiation, p. 354
i) Issuance. § 3-105.
ii) transfer 
iii) Presentment for payment. §3-501(a).
d) Transfer
i) CN: 3-201 negotiation.
ii) Under §3-203(b), the physical transfer of an instrument, whether or not the
transfer is a negotiation, vests in the transferee whatever rights the transferor
had in the instrument. If the physical transfer is done in such a manner as to
make the transferee a technical holder, then the transfer is called
a negotiation. ... but the transferee cannot acquire rights of a HDC by a
 transfer, directly or indirectly, from a HDC if the transferee engaged in
fraud or illegality affecting the instrument.
iii) Holder. §1-201(b)(21): The person in possession of a negotiable
instrument that is payable either to the bearer or to an identified person that
is the person in possession;[very important]. the legal effect . . .
iv) Negotiation. § 3-201. Negotiation means transfer of possession, whether
voluntary or involuntary, of an instrument by a person other than the issue
to a person who thereby becomes its holder. Com’t 1. Thief or Finder
becomes holder if it’s bearer paper.
(1) Negotiation of order paper is accomplished by
(a) the indorsement by the proper person (now the indorser §3-204(d)),
and
(b) the delivery of the instrument to the transferee (now the holder)
(c) “negotiation means the transfer of an instrument, whether voluntary
or involuntary” what is a holder.
e) Special and Blank indorsement-§3-205, p. 355
i) Indorsement. §3-204 “Indorsement means a signature other than that of a
signer as a maker . . . “
ii) Indorser -3-204(b)
iii) Misspelled name 3-204(d). Sign both correct and incorrect. A drawee
bank will require the payee’s indorsement before it makes payment. §3-
501(b)(2)(iii). The payee can indorse in two ways:
(1) blank indorsement: sign the back of the check, which has the legal
effect of converting the instrument into bearer paper.
(2) Special indorsement. This preserves the order characteristic. The
original payee specifies a new payee by writing “Pay (name of new
payee)” above the indorsement. This has the legal effect of making the
instrument the sole property of the new payee, who becomes a holder as
soon as the instrument is delivered.
(3) Anomalous Indorsement. Someone who just signs to show receipt, etc.
(4) Restrictive indorsement 3-206—read this!!!
iv) Problem 92, p. 356 [exam question]
(1) drawer—Hansen; drawee—Mechanical National Bank; payee—
Egger/Cornucopia Grocery; depositary bank—Octopus Nat’l Bank, §4-
105(2).
(2) The following qualify as a holder: Wm Egger because he was identified
in the instrument and in possession, Cynthia Egger, because she was in
possession and the instrument was payable to the bearer after Wm
indorsed it; the manager of Cornucopia Grocery as an agent, because he
was in possession when it was payable to bearer; Cornucopia Grocery
Store because the manager converted the blank indorsement into a
 special indorsement by writing “Pay to the Cornucopia Grocery” above
Egger signature, and it was, through its agents, in possession;
NOT SPEEDYbecause he was not identified in the instrument, nor was it
payable to the bearer while he was in possession of it; Octopus was a
holder because it was the depository bank §4-205; NOT Mechanical .
(3) CN: not covered in class. § 4-205—yes, the depository bank becomes the holder, whether or not
the customer indorses it.
(4) Converted a blank endorsement to a special endorsement.
(5) Indorsers. § 3-204. Wm Egger; Octopus. [Mechanical Bank is
the acceptor §3-103].
v) Problem 93,
(1) §3-110(d), OC 4
(a) If an instrument is payable to two or more persons alternatively (“X
or Y”), it is payable to any of them and may be negotiated,
discharged, or enforced by any or all of them in possession of the
instrument.
(b) If an instrument is payable to two or more persons not
alternatively (“X and Y”), it is payable to all of them and may be
negotiated, discharged or enforced only by all of them.
(c) If an instrument payable to two or more persons
is ambiguous (“X,Y”) as to whether it is payable to the persona
alternatively, the instrument is payable to the person alternatively.
vi) Problem 94, p. 357 Portia Moot receives a check made out to “Portia
Mort.”
(1) §3-204(d), OC 3 “The payee may indorse in the name used in the
instrument, in the payee’s correct name, or in both. In each case the
indorsement is effective. . . the accepted commercial practice is to
endorse in both names.”
f) Persons who may sue to enforce payment. §3-301. Holder, or persons
entitled to enforce the instrument.
(1) Two requirements to be a holder: §1-201(20):
(a) possession of the instrument and, for non-bearer instruments,
(b) be the person identified in the instrument, either as payee or special
endorsee.
ii) Problem 95, p. 358
(1) These were promissory notes, so two parties. They allonge by folding it
in. It must be stapled, etc.
(2) §3-204(a) “a paper affixed to the instrument is a part of the
instrument.” OC 1 “An indorsement on an allonge is valid even though
there is sufficient space on the instrument for an indorsement.”
 (3) MA: The Bank is a holder, because the peace of paper was an allonge,
or paper affixed to the instrument, if the folding is sufficient to be
“affixed.”
g) Forgery of the Payee’s Name, p. 358
i) An unauthorized signature is not effective to negotiate the instrument, so
following a forgery of the payee’s name, no later transferee can qualify as
a holder.
ii) If the instrument is payable to the order of a named payee, only that payee
can become a holder. UNAUTHORIZED SIGNATURE of payee’s or
special indorsee’s name (forgery or signature by non-agent) is NOT
effective negotiation.
iii) For BEARER PAPER, forged indorsement does not have any effect on
subsequent “holder” status. Valid indorsements are not required to
negotiate bearer paper: §3201(b)
iv) Named payee must take possession to become a holder.
v) No one subsequent can be a holder unless the named payee indorses.
vi) No subsequent transferee, even if innocent, can be a holder.
vii) Problem 96, p. 359
(1) §3-306 “A persons taking an instrument, other than a person having
right of a HDC, is subject to a claim of a property or possessory right in
the instrument or its proceeds, including a claim to rescind a negotiation
and to recover the instrument or its proceeds.
(2) Cornucopia was not a holder in due course because the check was
fraudulently indorsed. Because it was not a HDC, it took the instrument
subject to the claim by Laura. Therefore, Laura can get her check back
from the Grocery store.
(3) CN: can she get the check back? yes. the grocery store loses.
viii) Problem 97
(1) Once Laura signed the check, the check became payable to the bearer,
as it was a blank indorsement. The requirement of a holder for a bearer
instrument is possession. Therefore the bank is a holder. CN: it doesn’t
matter that it is a forgery, because it’s bearer paper. Two requirements
for order paper to become bearer 1 indorsement, 2 transfer.
(2) CN: [see Slides]. Is this bearer paper? yes, writing, signed,
unconditional, fixed date, in money, no additional promises. The date is
the day it was written because none is given.
(3) CN: This is a check, thus a draft. §3-104, §3-103. Parties are the Joe
Smith, Amy Adams, and the bank.
(4) CN “I, John Doe, promise to pay to Sally Smith $10 if she runs the
White Rock Marathon in under 4 hours. /s/ X.” This is probably not
 negotiable because of the condition, otherwise it would be a note
because only two parties. The signature is fine under 1-201(b)(37).
(5) CN: “In accordance with a contract for sale of the Paramount Theater
dates January 1, 2005, I promise to pay to John Doe or order $500k on
demand. H must refurbish the theater to my satisfaction before this
obligation becomes due and own. Dates and sign this day, jan 1,
2005. /s/ May Miller.” The problem is the language that he must
“refurbish to my satisfaction.” This could either be an extra agreement
or promise; either way it is an express condition that defeats
negotiability.
(6) “Susie Simon has a check made payable to her from Texas Tech in her
purse when it is stolen. She has not indorsed it. Can Terry Talon, who
finds the check, deposit it into his bank account?” no.
(7) “Rita Rich’s father gives her a $200 check and tells her to buy a pair of
shoes. She immediately signs her name on the back and puts it in her
pocket. She loses the check and Mike Moore finds it. Can he deposit
the check . . .”?
(8) §3-415(a)
ix) Problem 98
(1) This is specially indorsed check “pay Lilly Lawyer” above her
signature. Now Grocery is not a holder, and it takes the check subject to
Lilly’s claim.
(2) §3-205(a)(special indorsement)
x) RULE: any unauthorized indorsement of the payee’s name of any special
indorsee’s name is not a valid negotiation and gives subsequent transferees
no legal rights in the instrument no matter how innocent they are or how far
removed from the forgery. BUT once an instrument becomes a bearer
paper, subsequent unauthorized signatures have no effect on the holder
status of later takers, since valid indorsements are not required to negotiate a
bearer paper. §3-201(b).
xi) Problem 99
(1) YES. § 3-205(c) “The holder may convert a blank indorsement that
consists only of a signature into a special indorsement by writing, above
the signature of the indorser, word identifying the person to whom the
instrument is made payable.”
6) Holder in Due Course (“HDC”), p. 361
a) CN: Steps in the analysis:
i) First, do we have a negotiable instrument? §3-104;
ii) Second, was there a negotiation? § 3-201-for bearer paper, you need
delivery or transfer, for order paper you need indorsement and delivery;
iii) Indorsement? 3-204
b) HDC takes
i) 1) for value,
ii) 2) in good faith,
iii) 3) without notice of defects and defenses.
c) “Dishonor” means that the bank refused to pay, because, for example, the
drawer didn’t have sufficient funds; but if it is dishonored, the drawer retains
the obligation to pay the instrument. Can I be a HDC if it is stamped on the
back “NSF”? No, because then you have notice of dishonor. Slight blemishes
won’t matter; it has to call into question the authenticity.
d) Acquiring Holder in Due Course Status--§ 3-302(a)
i) A HDC takes free of most of the defenses the parties to the original
transaction have against one another.
(1) Can the payee ever be a HDC? 3-302 OC 4.Yes; but not in the normal
situation. Only when there is fraud or two payees. Situations in which
there can never be HDC:
(a) acquisition of negotiable instrument through judicial process. If you
acquired through judicial process then you have some notice that a
defense may be hidden there someone.
(b) bulk transaction--When you acquire a bunch of instruments at
once. BULK TRANSFERR CAN NEVER BE A HDC.
(c) Gift.
(2) Is it a negotiable instrument?
(3) Has there been effective negotiation? – Drawee bank can never be a
HDC; the instrument is presented to it, not negotiated with it.
ii) “Holder”—to be a HDC, the possessor must first be a holder which means
the instrument must be technically negotiable and must have been
technically negotiated. NOTE: the drawee bank is not a holder.
iii) “Value”--§3-303—the holder must have given value, i.e., it can’t have
been a gift; value is not the same as consideration. § 3-303 OC 1, 1st
paragraph. “One gives value only to the extent that the holder
has performed the consideration or made some irrevocable commitment in
connection with it.”
(1) CN: If I give you a check as a gift, then you can’t be a HDC, because a
gift does not constitute value. Thus, a donee can never be a
HDC. What’s the difference between value and consideration? An
executory promise can constitute “consideration” but not “value.” The
reason is that you’re not out anything.
(2) What about purchasing a note at a discount? If I have a note worth $1k,
I can sell it to a finance company, and even though they pay me less than
the full value of the note, it is still value.
(3) Problem 100, p. 363, --
 (a) §§3-303
(b) 3-306 – “a person taking an instrument, other than a holder in due
course, is subject to a claim of a property possessory right in the
instrument or its proceeds, including a claim to rescind a negotiation
and to recover the instrument or its proceeds.” MA: Here, the atty
had not yet performed any services, so he is not a holder in due
course and is subject to a claim to receive the instrument. CN: What
if it were a “retainer,” i.e., buying a reservation of the lawyers time,
could it be value then? If the atty has turned away other business,
then possibly he has given value. So this could be argued either way.
(4) Problem 101, p. 364
(a) Finance is a HDC for $22,800, under §3-303(a)(4)
(b) CN: Do we have a negotiable instrument? yes; was it negotiated?
yes. There’s a discounting of the note; but the car falls apart so the
maker of the note has a defense. If we have a HDC then we take free
of that defense. If it’s a HDC, then it is for the face amount of the
note, not the discounted amount, because it takes on the risk.
(c) Yes, because it is for an antecedent debt. §3-303(a)(3). But the
extra $2k, no.
(i) CN: Not on the portion of the gift.
(5) Problem 102
(a) No, because it has not given value. Last National Bank is not a
HDC, because its still has the funds in its checking acct. It can put a
freeze on the checking account, and recoup the money from the
checking acct.
(i) The drawee bank dishonors the bank and sends it back? The
answer to whether the dispositary bank is a HDC depends on
whether the bank gave provisional credit and the customer
withdrew the credit to your account, and the customer withdrew it.
(6) Falls Church v. Welsley Heights Reaalty, Inc, p. 365
(a) Can a depositary bank achieve the status of HDC of a negotiable
paper deposited with it by a customer?
(b) F: X drew a check for $1,400, payable to the order of a Customer of
Bank. The Customer deposited the check in his account and was
given a provisional credit. The customer withdrew $140 from his
account prior to the bank’s discovering that X had stopped payment
on the $1,400 check. When the check was returned to the bank
dishonored, the bank’s customer left no credits in his account on
which to charge the $140. The bank then made a demand on X for
the amount. X refused.
 (c) R: UCC provides that a bank acquires a SI in items deposited with it
to the extent that the provisional credit given the customer on the
item is withdrawn. § 4-210. For the purpose of achieving the status
of HDC, the depositary bank gives value to the extent that it acquires
a SI in the item in question. § 4-211. As a HDC as to $140, the Bank
is a HDC and its claim cannot be defeated.
(d) CN: Here, the customer had nothing in the account except $1,400-
$140. If all they gave was $140, then they’re only a holder to the
extent of $140.
(e) Problem 103
(i) Here the bank is not a HDC of any amount because they haven’t
given value. §4-210(b) FIFO Rule-- “credits first given are first
withdrawn.” If he withdraws $750 then the bank becomes a HDC
for $250.
iv) “Good faith” and “notice,” p. 366
(1) To become a HDC, the owner must be in effect a bona fide purchaser,
i.e., given value in good faith, which is both an objective and subjective
test.
(a) §1-201(20)—“honesty in fact in the conduct or transaction
concerned:
(b) § 3-103(a)(4)—honesty in fact & “the observance of reasonable
commercial standards of fair dealing.
(c) §3-103, OC 4:
(2) General Investment Corp v. Angelini, p. 367
(a) Lustro agreed to do some work on Angelinis’ home. Angelini
executed a note that it would begin payments 60 days after the work
was completed. Before Lustro completed the work he sold the note
at a discount to General Investment. But Lustrro never completed the
work. Claiming to be a HDC, General Investment sued Angelini.
(b) R: The more the holder knows about the underlying transaction, and
particularly the more he controls or participates or becomes involved
in it, the less he fits the role of a food faith purchaser for value.
(c) Ordinarily where the note appears to be negotiable in form and
regular on its face, the holder is under no duty to inquire as to
possible defenses, such as failure of consideration, unless the
circumstance of which he has knowledge rise to the level that the
failure to inquire reveals a deliberate desire on his part to evade
knowledge because of a belief or fear that investigation would
disclose a defense arising from the transaction. Once it appears that a
defense exists against the payee, the person claiming the rights of a
HDC has the burden of establishing that he is in all respects such a
 holder. §3-308. Absence of inquiry under the circumstance amounts
to an intentional closing of the eyes and mind to any defect in or
defenses to the transfer. They could have demanded a certificate of
completion. Thus, Gen Inv did not acquire the note in good faith and
therefore is not a HDC.
(d) CN: Gen Investment is buyer commercial paper at a discount. This
transaction called for the payment of $3,600 in cash, this was
transferred from the contractor, Lustro, to Gen Instrment
Corpr. There was a contract that payments on the note would begin
only after 60 days from the commencement of work. Here, there
wasn’t much work. 10% of the notes Gen Inv bought came from this
contractor. They did not ask for a certificate of completion which
they should have from a reasonable commercial stand point. They
were in the business of buying notes from contractors, so they should
have known to ask for a certificate. Also, they didn’t inquire as to
whether the work had been done. Held, even though they gave value,
they didn’t take in good faith [because they didn’t observe reasonable
commercial standards].
v) Problem 104, p. 372
(1) §3-302(a)
(2) §3-307(b)(4) “If an instrument is issued by the . . . fiduciary as such, to
the taker as payer, the taker has notice of the breach of fiduciary duty if
the instruments if (i) taken in payment of or as a security for a debt
known by the taker to be the personal debt of the fiduciary, (ii) taken in a
transaction known by the taker to be for the personal benefit of the
fiduciary, or (iii) deposited to an account other than an account of the
fiduciary, as such or an account of the represented person.”
(3) CN: Was Am Ex a HDC? Was there reason to question the
authenticity? This is a very common business practice for corporations
pay their Am Ex bills for their employees. So there was nothing on the
face that would give AM Ex notice of defenses. Merely using a
corporate account to pay a personal bill does not create circumstances so
suspicious as to call into doubt the authenticity.
vi) Winter & Hirsch v . Passarelli, p. 372
(1) Whether the defense of usury is available for use against the P, who
claims to be HDC of the promissory note and therefore claim to have
taken it free from the defense of usury.
(2) F: P provided the money for the usurious loan before the loan was
actually made. P Winter & Hirsch gave money to Equitable, and
Equitable gave money to Passarelli, in exchange for a note. Winter &
Hirsch claim to be a HDC. Because it gave Equitable the money before
 the note was executed, it was a co-originator of the loan and as such is
charged with knowledge of the terms of the loan, and therefore knew of
the usurious rate being charged.
(3) Even if the note was seen prior to plaintiff giving Equitable $11k, then P
also say that the D had signed a note promising to repay $16k. As such
it should have asked why Equitable would sell a $16k note for $11k. We
cannot permit parties to intentionally keep themselves in ignorance of
facts which, if known, would defeat their unlawful purpose. §3-
302 states that when an instrument is so incomplete as to call its validity
into question, a purchaser of that instrument is on notice of the
possibility of a claim against it. Here, the incomplete part was the
principal sum of the loan extended to the D [the note didn’t say how
much Equitable had loaned to Passerelli (10k), only the amount (16K)
Passarelli was obligated to pay, and the amount of the discount
(11k)]. By failing to include the principal amount loaned to the
borrower on the face of the loan contract or note, a subsequent purchaser
of that contract is able to say “I had no idea that usury was involved.”
(4) CN: first, was the note usurious? yes, it called for the maker of the note
to pay more interest than is legally permissible. In some cases you can
look the right to collect the principle. Was Winter & Hirsh a HDC?
(a) Maker -- Passarelli,
(b) payee -- Equitable.
(5) Equitable sells it to Winter & Hirsh. W&H acquired this note through
transfer. Did it acquire it through negotiation, and was it a HDC? §3-
302 – did it take for value, in good faith, without notice? Did W&H give
value? yes. So this case will turn on whether W&H had notice of
possible defects. Here there was a very deep discount. A discount by
itself, standing alone, is not necessarily lack of value, or notice of a
defense. Good faith and notice are tightly intertwined. But W&H made
the payment before Equitable made the loan, this made them such close
partners as to be a co-originator. What is notice?
(6) §1-202 Notice; Knowledge. “from all the facts and circumstances
known to the person at the time in question has reason to know that it
exists.”
(a) FTC issue p. 150
vii) Problem 105. 3-302(a)(1)—the purchaser has notice of a claim or defense
if the instrument is so incomplete, bears such visible evidence of . ..
alteration. .. .”
(1) this would not seem to be “so incomplete”. This alteration would not
call into question the authenticity of the entire instrument. If I decided to
cross out the amount, then it might call that into question.
viii) Problem 106--§3-304(b) and (c), OC 2:
(1) (b)(1) “If the principal is payable in installments and a due date has not
been accelerated, the instrument becomes overdue upon default under
the instrument for non-payment of an installment, and the instrument
remains overdue until the default is cured.
(2) (c) Unless the due date of principal has been accelerated, an instrument
does not become overdue if there is default in payment of interest but not
no default in payment of principal.”
(3) §3-302(a)(2)(iii) “without notice that the instrument is overdue or has
been dishonored or there is an incurred default with respect to payment
of another instrument issued as part of the same series.”
(4) CN: In a normal amortizing note, like a mortgage, you are paying off
both the principal and interest. In an interest-only note, you don’t pay
any of the principal until the very end. If it says “failed to make first
payment” it means that the interest wasn’t due [paid?]. §3-304(b) deals
with the principal being paid. So interest being overdue does not rise to
the level of notice for the purpose of defeating HDC status.
ix) Problem 107—
(1) § 3-304(a)(2) “An instrument payable on demand becomes overdue . . .
if the instrument is a check, 90 days after its date”
(2) Here, the check was dated April 30 and presented to the Grocery on
August 31 (4 months, 120 days). Therefore it was overdue and Grocery
is not a HDC.
(3) CN: the grocery paid value, but they had some notice of defects,
because after 90 days it’s overdue. It was a stale check.
x) Problem 108—Forgotten notice doctrine-deleted from Code. § 1-201(25)
(1) Maker of the Note is Ellen Brown; payee is the computer company; Harold Slow is that cashier at
the bank. Note: for Art. 4 stop payment of checks. We’ll be talking about reasonable actions on
both sides. Oral stop-payment orders, written stop-payment orders. The bank would defend that it
had taken reasonable steps.
xi) Problem 109—
(1) Tractors sells the note to a Finance company at a discounted amount
(this alone doesn’t give notice of defect). Was there a transfer? Yes, but
it didn’t occur until it was indorsed. For a negotiation of order paper you
need a (a) transfer and (2) indorsement. Here, it was transferred first,
then indorsed. I can make them give me the indorsement. But I already
know of the defect because the equipment isn’t working, the defenses to
the note . . . Therefore the indorsement doesn’t help much. What I
know at the time of negotiation is what matters, and here the negotiation
occurs after I have notice, which means I can’t be a HDC.
(2) §3-203(c) “Unless otherwise agreed, if an instrument is transferred for
value and the transferee does not become a holder because of lack of
indorsement by the transferor, the transferee has a specifically
 enforceable right to the unqualified indorsement of the transferor,
but negotiation of the instrument does not occur until the indorsement is
made.”
(a) OC 3, “Until [the transferor indorsed the instrument] the transferee
does not become a holder, and if earlier notice of a defense or claim
is receied, the trasnferr does nto qualify as a HDC.”
(b) OC 4Case #4.
(3) Here, Friendly received notice of the defense of Maker before obtaining
the indorsement by Tractors; therefore Friendly cannot become a HDC
because at the time notice was received the note had not been negotiated
to the Purchaser/Friendly.
xii) Party to the transaction rule Jones v Approved Bancredit, p. 379-- An
agent for Dell, a home building contract, presented Jones with documents.
Jones said she wanted to have her atty examine the documents first. Dell
objected and eventually Jones signed, among others, a note for $3, 250,
which Dell immediately sold to Bancredit for $2,250. A builder crashed a
bulldozer into the home, ultimately requiring the complete demolition of the
structure. Dell (the originally payee) closed its office. Bancredit sued Jones
for the note. It turned out that Dell and Bancredit were wholly owned
subsidiaries of Homes, Inc. Homes Inc. and Bancredit had the same officers
and directors. Each transaction of Dell was approved in advance by
Bancredit. Held, Bancredit was so involved in the transaction that it may
not be treated as a subsequent purchaser for value. It was more nearly
an original party to the transaction. Therefore, Bancredit should be denied
HDC status.
(1) Too-Closely Connected test, p. 386. This provides a medthod for
denying HDC status, which also goes to good faith.
(a) Is the buyer-transferee the alter-ego of the seller-transferor? Do they
have the same officers, same personnel, same location?
(b) Who drafted the original promissory note?
(c) Is the buyer-transferee mentioned in the note?
(d) Does the seller transferor sell paper to other buyers, or is the buyer-
transferee the only market?
(e) Did the buyer-transferee get involved in the transaction by which the
note was created? Did it, for instance, conduct a credit investigation
of the maker?
(f) Did the buyer-transferee have some knowledge of the seller
transferor’s poor past performance fo similar contracts?
xiii) Sullivan v. United Dealers Corp., p. 386
(1) Whether United Dealers Corp (transferee), a finance company, was a
HDC of a promissory note executed and delivered by Sullivan (maker),
 in payment for building material and labor furnished by Memorial Swift
Homes, the payee of the note?
(2) Sullivan executed a negotiable note for $18k to Memorial Swift. On the
same day, Memorial negotiated the note and assigned it to United
Dealers. United in turn negotiated the not to a Bank. Sullivan
defaulted. The bank transferred the note back to the finance company
for value. United sued Sullivan, who in turn claimed the defense that the
work was not done in a workmanlike manner and United is not a HDC.
(3) R: Notice, in order to prevent one from being a HDC means notice at
the time of the taking or at the time the instrument is negotiated, and not
notice arising subsequently. The moment value is given for the
instrument is decisive. The moment value is given without notice, the
status as a HDC generally is definitely and irrevocable fixed. Under §3-
302(f)—to be effective, notice to a purchaser must be received at such
time and in such manner as to give a reasonable opportunity to act on
it. Here, there was no direct connection between the contractor and the
finance company. United had no notice and therefore was a HDC.
(4) CN: Sullivan is the maker of the note; Memorial Swift was the payee; it
sold the note to United. Memorial was supposed to build a house for
Sullivan, then Sullivan defaulted and returned the note to the finance
company. Sullivan says that the Bank knew of the underlying contract,
but they did get a certificate from Sullivan that things were going
well. The best thing about Sullivan’s argument and they knew that
somewhere down the road there might be a defense. But this doesn’t
matter, as long as you’re proceeding in good faith, if all you know is that
there may be somesubsequent defenses.
xiv) The Shelter Rule, p. 389
(1) If I’m a HDC I might be able to give you the same rights of a HDC I . .
one way to not be a HDC, if, for example, I give you a gift, but you have
the same rights that I have. So there’s a difference between being a
HDC and acquiring the rights of a HDC as the transferee.
(2) Problem 110—
(a) Is Alfred a HDC? yes. He paid value, even if it is discounted. Thus
Alfred as HDC. He didn’t know of the problems with the
case. Alfred gives the note to his daughter. She is not a HDC, but he
gave her the gift.
(3) Problem 111, p. 390. What if Jessica gets the note and gives it to her
husband. He is not a HDC, but he gets the rights of the HDC with a
claim against the maker. This is the difference between having
the rights of a HDC and being a HDC. If I only have the rights, then I
 can only go after the maker; if I’m a HDC, then I can go after anyone in
the chain.
(4) Problem 112—Is Portia .... we don’t look merely to that transfer of the
rights, because she is a HDC in her own right. If you pay a note, you get
it back, so she acquires her original HDC status.[????]
xv) Triffin C Sommerset Vally Bank
(1) Drawer of check? House contracting co. Threshold question, do we
have a negotiable instrument. Does it call into question is authenticity?
(2) How did Triffin acquire the checks?
(3) How did the check cashing Co. acquired Check?
(4) Negotiable instruments?
(5) Check Casher as HDC?
(6) Triffin as HDC or
(7) What about FORGERY of the signatures 3-308.
e) Real and Personal Defenses/Claims
i) Defenses against a HDC, p. 398
(1) § 3-305, OC 3
(2) Obligor—the party being sued by the holder of the instrument.
(3) CN: §3-305(a)(1) real defenses [very important]
(a) Infancy – to the extent under state law it is a defense to a simple
contract. This depends on state law. If it’s a defense to a contract
under state law, it will be good against a HDC.
(b) Duress, lack of legal capacity. “Duress” means gun-to-the-head
duress, not a remote threat or minor bullying. “Lack of legal
capacity” also goes to state law.
(c) Illegality (gambling, usury,) if it VOIDS the transaction; not if it is
just voidable. If it nullifies the obligations. “Usury” is charging
more than the legal rate of interest.
(d) Fraud that induced signature. Only fraud in factum or essential
fraud. where it arises in a situation where the person has no
knowledge nor a reasonable opportunity to learn of character or terms
of the instrument
(e) Insolvency--Bankruptcy. If I list this obligation on my schedule, it is
discharged, even if the note later ends up in the hands of a HDC.
(4) Personal Defenses -- § 3-305(a)(2) (3). A HDC wins against these
defenses.
(a) Art. 3 Defenses OC 2 for.
(b) common law defenses-- fraud, misrepresentation or mistake in
issuance.
(c) Claims in recoupment. (a)(3). “Recoupment” is the legal ability to
substract from any payment due the amount the person trying to
 collect the debt happens to owe the debtor. Illustration: Buyer issues
a note to the order os Seller in exchange for a promise of Seller to
deliver specified equipment. Is seller fails to deliver the equipment
or delivers equipment that is rightfully rejected, Buyer has a defense
to the note because the performance that was the consideration for the
note was note rendered.-- claims I can make that mean I do not have
to pay what . . .
(5) Problem 113, p. 399 – Seller said that the boat would never sink. But
the boat did sink. Seller gave the note to his father as a gift. Is the claim
that the boat sunk be a personal or real defense? -- personal defense: Is
it a fraud that induced the signature ? . .. . What about the expense of
raising the boat? He’s seeking recovery of the expense of raising the
boat? It rose out of the transaction – this is recoupment. What about the
dog bite? This didn’t rise out of the same transaction.
(a) Real & personal defenses: Is the Father a HDC? Is representation
about “unsinkable” boat, “essential fraud” - real defense? no,
personal defense
(b) Set-off is not the same as recoupment.
(c) CN: trace out the chain of this instrument: Maturin is the maker,
Aubrey is the payee, these are the original parties to the transaction.
The payee gives it to his father. Does the father acquire as a HDC?
No because payee was not a HDC. What if payee sold it to someone
else? the other person would become a HDC.
(i) If he had stolen it and forged a signature, there would never be a
HDC. But if he received it as a gift, and then sells it to someone
else, as long as that person paid value, in good faith, without
notice of defenses, then that person is a HDC. Now, if this third
person gave it to someone, then this new person would not be a
HDC but would take under the Shelter Rule with the rights of a
HDC.
(d) Under §3-305, there are some defenses that won’t win against a
HDC if proven, and some that will when proven. If we had a non-
HDC then we can ansert all the defenses in subsection 1.
(6) Real defense of fraud. §3-305(a)(l)(iii). This is a very hard defense
to prove, as illustrated by the following cases. FDIC v. Culver, p. 400
(a) Culver signed a paper, which he thought was a receipt but turned out
to be a promissory note. Payee is Rexford State Bank
(b) Was the FDIC a HDC? Yes, (FDIC is an exception to the rule that a
buyer of bulk notes can never be a HDC).
(c) What was Culver’s defense? - Fraud in factum. “fraud that induced
the obligor to sign the instrument without knowledge or opportunity
 to learn . . .” If he were correct of meeting the test in 3305(a)(1)(iii),
then he would have prevailed and would not have had to pay
FDIC. He said he thought it was a receipt. He also said that he
didn’t have the opportunity to learn of the terms of the note because it
was blank. Real defense? Personal Defense?—Real defense. Court
says, you dummy, it was not reasonable for you to sign the
instrument with all the blanks there. He could have read it and seen
that it was not a receipt.
(d) Ort (1884) -- this case had better facts than Culver, suggesting he
didn’t have the opportunity to learn about it. ... someone approached
Farmer, and told him what the note was, but he didn’t have his
glasses with him, so he had the agent to read it to him. The agent
said it was an agency contract. The farmer protested at first, he
didn’t have his glasses, and even if he did, he couldn’t read that
well. Farmer signed an instrument. The court didn’t excuse him,
because he did have enough opportunity to not sign.
(e) Rights of HDC as to incomplete instrument? §3-407(c) --
(7) Problem 114, p. 406—
(a) A sells B the Brooklyn bridge, then A sells the note to a finance
company. This is common law fraud and is not good against a HDC.
(8) Problem 115—
(a) Piano Co. indorses note to the bank at a discount. So the bank is a
HDC even though it was discounted. He offered the real defense of
infancy and he would win if it were a good defense under state law.
(b) Do we have a negotiable instrument?
(c) Negotiated?
(d) HDC?
(e) What is the defense?--Real or personal?
(f) Who wins?
(9) Problem 116
(a) Another minor. He wants his check back. He wants to recover his
check. §3-306. “a person having the rights of a HDC, takes free of .
..
ii) Illegality--gambling. Sea Air Support Inc. v Herrman, p. 407
(a) F: Hermann wrote a check for $10k payable to Ormbsy
House. Who’s the Plaintiff here? Casino. “Illegality of the
transaction” because this was a gambling debt. So this would be
good against a HDC. The Court concluded that there was no HDC,
because the casino was on notice. There were problems with value
because it was a promise for future value, which is not “value.”
(b) Law that voids the contract.
 (i) Void (majority) Kedzie v. Hodge, p. 409
1. Illegality of the transaction. It is only when an obligation is
made entirely null and void under local law that the illegality
exist as one of the real defenses under §3-305 to defeat a claim
of a HDC; Not if it is merely voidable.
2. Defense is illegality because he was not a licensed
plumber. Held, this is not the type of illegality we’re looking
at. It must be a law that makes the contract void.
(ii) Voidable (minority). defense of illegality is not limited to
gambling and usury.
iii) Insolvency
(1) Problem 117.—§3-305(a)(1) & (b). Transfer Warranties – 3-416(a)(4)
& (5).
(a) Defense was discharge in bankruptcy. this is a real defense and is
good against a HDC.
(b) Transfer of Warranty – the transferor warrants that the instrument is
not subject to a defense or claim in recoupment of any party which
can be asserted against the warrantor, and that the warrantor has not
knowledge of any insolvency proceeding commented with respect to
the maker ...”
(2) Problem 118, p. 418--§3-501(b)(2); §3-601, §3-602
(a) Malvolio signs $18k note payable to Val, Val discounts note to
Orsino. Malvolio sends payment in full to Orsino. Mal then asks for
Note Back. But it didn’t give it back but sold it to Olivia. Olivia
notifies him that they hold note & he should make payments to
Olivia. 3-501(b)(2) they must surrender the instrument if full
payment is made. But here, they [???]
(b) 3-601 “Discharge of the obligation of a party is not effective against
a person acquiring rights oa holder ind due course of the instrument
without notice of the discharge.”
(c) 3-602 OC 2—“if a person entiled to enfore the instumen transfers
the instrument without giving notice to parties obligated to pay the
instrument, and one of those parties subsequently makes a payment to
the transferor, the payment is effective even thoug it is not makde to
the perons entitled to enforce the instrument.”
(d) Discharge by payment ..
(i) Real or personal defense?
(3) Analysis?
(a) First Q: Negotiable instrument? This will determine the rights and
obligations of the parties to the instrument.
(i) NOTE: Maker and Payee.
 (ii) Draft: drawer, drawee, payee.
(b) Second Q: has it been negotiated to HOLDER – §3-201- negotiation.
(c) Third Q:
(d) Forth Q.
(4) Now go to problem 113 above.
iv) Forgery
(1) Is forger a real defense under the Code, so that it can be raised against a
HDC, or a person defense, so that it cannot . . .  § 3401(a) “A person
is not liable on an instrument unless the person signed the instruments,”
and §3-403(a):
(2) Problem 119.—§3-305(a) and (b);
(a) Slick signs Money’s name to promissory note. Who is obligated by
this signature? §3-401(a) and 3-403(a). Bank takes as HDC. What
is the effect of §3-305(a) and b?
(b) Key: Don’t analysis this as a Real or Personal Defense. Why?
(i) Who is obligated under the instrument? the con man. But Slick
skipped town.
(ii) 3-401(a)—a person is not liable on an instrument unless the
person signed the instrument or his agent signed it for him
(c) 3-402 a –Unauthorized signature
(d) The Bank takes as a HDC. A forged maker’s signature is not one of
the defenses in §3-305(a), but: “Except as otherwise provided in this
section, the right to enforce the obligation of a party to pay an
instrument ....” Here, Money never had an obligation to pay so you
don’t even have to look at the defenses.
(3) Problem 120—Travelers checks.
(a) §3-104(i) “Traveler’s check” means an instrument that is payable on
demand, is drawn on or payable through a bank . . . .” The bank is
both the drawee and the drawer. The person buying the travelers
check is a remitter. §3-103(15).
(b) What’s the result? § 3-106 (c) the person who should countersign
must countersign. Failure to sign does not prevent the person from
becoming a holder. the specimen signature is there for the purpose of
comparing the signature. If I made a sloppy forgery, then there could
never be a HDC, then there would be notice of a defense.
(c) Key: Do we have an HDC? §3-302. There are some forgeries in the
change.
(d) §3-308—Proof of signature. First we accept the signatures as valid
unless someone presents evidence to the contrary. If someone says
that it was forged, then I have the burden of showing that it’s not
 forged, but I’m aided by the presumption that it is authentic. This is a
shifting set of presumptions.
(e) Defenses §3-305.
v) Procedural Issues
(1) You don’t have to be a HDC to sue on a Note.
(2) Person entitled to enforce instrument §3-301. The holder, the person
who holds it, or a person not in possession who is entitled to enforce,
could be someone taking under the Shelter rule.
(3) Holder
(4) Nonholder: Sheler Rule, Depositary bank, Rightful owner of lost
instrument §3-309
(5) Virginia Nat’l Bank v. Holt, p. 420
(a) VNB had a note in its possession. Holts were the makers. Mrs. Holt
claims she didn’t sign it. But procedurally she didn’t meet the burden
of proof. She did deny it but she didn’t put on any proof to overcome
the presumption of proof.
(b) §3-308 creates a presumption that a signature is genuine.
(c) The code determines not only substantive rights but also procedural
rights.
(d) §3-308—proof of signature.
vi) Defenses against a non-holder in Due Course, p. 424
(1) Common personal defenses.
(2) Herzog Contracting Corp. v. McGowen, p. 424
(a) Whether solely on the basis that the notes are “clear and
unambiguous” they are enforceable regardless of what the parties
actually intended?
(b) The notes would be enforceable if enforcement was sought by a
HDC, §3-305. But Herzog was no a HDC. A holder of a promissory
note who is not a HDC takes the note subject to all defenses of any
party which would be available in an action of simple contract. §3-
305(b). One such defense is that the parties did not intend to create an
enforceable contract.
(c) Held, court allows parole evidence to show it was a sham
transaction, the note was never intended to be enforced, so long as
neither party was a HDC. . . there wasn’t a HDC. The question is
whether to let in evidence that the note was fraudulent or a sham
transaction. They were allegedly trying to defraud the IRS.
(d) §3-105(b)—“An instrument that is conditionally issued or os issued
for a special purpose is binding on the maker or drawer, but failure of
the condition or special purpose to be fulfilled is a defense.
 (e) §3-117—this contemplates admitting parole evidence, but it say that
it’s subject to applicable law. If state law allows it, then you could
have a defense.
vii) Jus Tertii—§3-305(c), p. 431
(1) Prohibition vs. Jus Terii §3-305(c)
(a) Unless other person joins the lawsuit, and that person pursues the
claim. If you want to assert someone else’s rights, bring them into
the lawsuit
(b) OC 4: Illustration: Buyer buyer food from Seller and negotiations to
seller a sachiser’s check used by Bank in payment of the
proce. Shortly after delivering the check to Seller, Buyer leanrs that
Sller has defrauded Buyer in the sale transferion.
(i) Seller may enforce the check against Bank even though Seller is
not a HDC. Bank has no defesnet to its obligation to pay the
check...Bank cannot asser the Buyer’s claim of fraud unless Buyer
is joined in the action in which Seller is trying to enforce payment
of the check.
(2) Accommodation parties – §3-305(d).—can raise defense except
personal defenses. But not discharge in insolvency.
(3) Problem 121—§3-602, p. 431
(a) This can’t be a negotiable instrument because it violates the Courier-
without-luggage rule. But if it were, what kind of instrument would
it be? bearer paper. How do you negotiate bearer
paper? delivery. He gave it to his uncle. Do we have a HDC? no,
because the uncle received it by gift. But Stonewall did give money
for it, even if at a discount. They could be a HDC. The uncle has the
defense of failure of consideration. The check bounced, so they
didn’t really give value, and if they’re not a HDC, then he may be
able to recover the note. While in their possession, the note is stolen.
Jane is a HDC.
(b) 3-602—so he should try to join these other parties.
viii) Conclusion---
7) The Nature of Liability, p. 435
a) Ask 4 questions when a problems arise.
i) Who are the parties? (drawer, payee, drawee, maker, indorser, guarantor,
acceptor, accommodation party, etc.)
ii) What causes of action are available to each party? (contractual,
warranty, conversion, suits “off the instrument”)
iii) What DEFENSES are possible?
iv) Can liability be passed to someone else?
b) There are 3 theories for suing under the code (by analogy)
 i) Contract §3-412, §3-415, §4-401
(1) Obligations of issuer, acceptor, drawer, indorser
ii) Property (warranty §3-416, 3-417, 4-207, 4-208
iii) Tort
c) Underlying obligation, p. 436
i) INTRO: Distinguish the underlying obligations from the instrument
itself. If a check is lost in the mail, found by a thief, forged and cashed,
the payee can still sue on the underlying obligation. See explanation
following §3-420, p. 363. In addition to the negotiable instrument, may the
party always bring suit on the underlying obligation? no. At some point, the
one obligation is merged into the other for a period of time.
ii) Merger-§ 3-310(b)--Problem 122, 437
(1) Merger—once an instrument was offered and accepted in satisfaction of
an underlying obligation, the obligation merged with the instrument,
and until the instrument was dishonored the underlying obligations is
suspended (unavailable as a cause of action).
(2) He tried to sue her even though she had given him a promissory note
and he had accepted it. The underlying obligation was suspended upon
delivery of the note; but for how long? Until paid or dishonored, and
this cannot be determined until the underlying obligation becomes due.
Here, it was still unmature.
(3) §3-412—If we have a cashier’s check or a note, if dishonored the
drawer is obliged to pay the note.
iii) Problem 123, p. 437
(1) §3-104(g)—cashiers check. The unusual thing is that the person with
the underlying obligation here is not a party to the transaction. The bank
is both drawer and drawee. the person who buys the cashier’s check is
the remitter.
(2) §3-310(a)—“if a cashier’s check is taken for an obligation . . . the
obligation is discharged to the same extent discharge would result is an
amount of money equal to the amount of the instrument were taken in
payment of the obligation.”
(3) MA: she should tell him that the amount is discharged.
(4) CN: ONB is the drawer/drawee. Simon accepts the cashier’s check in
payment of the rent and before he can cash it, he has failed. Can Simon
now go against Aunt Fran? No, acceptance of a cashier’s check
discharges the underlying obligation just as if she paid in cash. Once he
accepted the check, her underlying obligation was discharged.
(5) If it were a normal check and the bank dishonored it, then Simon could
go back to Fran for the underlying obligation. With a normal check,
 delivery of the check holds the underlying obligation in suspension , but
does not discharge it.
iv) Problem 124, p. 438
(1) CN: there is an underlying obligation to pay rent, it is paid by check,
payee tears up the check
(2) §§3-604—Discharge by cancellation or renunciation. A person
entitled to enforce an instrument [Simon], with our without
consideration, may discharge the obligation of a party to pay the
instrument (i) by an intentional voluntary act, such as surrender of the
instrument to the party, destruction, mutilation, cancellation...”
(3) CN: this could go both ways. He did intend to tear it up, but he did it
under a mistake of law. He might actually prevail, because . . . there was
no intent to discharge the obligated party.
(4) 3-310(b)(4)(If a note . . . is taken for an obligation, the obligation is suspended to the same extent
the obligation would be discharged if an instrument were taken, and “if lost, stolen or destroyed,
the obligee may not enforce it”)
(5) 3-309--???
v) Ward v. Federal Kemper Ins. Co., p. 438
(1) F: W changed vehicles which reduced his insurance premiums. Ins. Co
sent him a refund check of $12.50 which he received but never cashed
(negotiated). Then, the Ins Co. realized the refund should have been
$4.50, and charged him the difference ($7.50), which he never paid.
Later, W got in a wreck and Ins. Co declined to give coverage.
(2) R: an insurer may not cancel a policy for nonpayment of premium
unless the premium is in fact due.
(3) I: Who had the $7.5 premium that was included in the un-negotiated $12
check? If this was Ward’s by virtue of his possession of the check and
his ability to negotiate it, then Ward owed Ins. Co. the $7.5 and the
cancellation was proper. If the $7.50 was still under Ins Co.’s control
because the check had not been negotiated when the policy was
cancelled, the cancellation was improper.
(4) R: 3-408 “A check or other draft does not of itself operate as an
assignment of funds in the bands of the drawee available for its payment,
and the drawee is not liable on the instrument until the drawee accepts
it.”
(5) Ward argues that it was still under Ins. Co.’s control because it could
have made a stop payment on it. Ins. Co. argues that it was not because
W could have negotiated it to a HDC in which case it would be liable on
the whole amount.
(6) Held, a check is not payment, the money remained under Ins. Co.’s
control and therefore the cancellation of the policy was improper.
 (7) CN: Ins. Co. sent him a rebate check, but then realized they sent too
much. He never cashed the check. If the funds still belonged to them
because it wasn’t cashed, then they owe himmoney. But if by sending
him a check, he got control to it. The bank relationship is debtor /
creditor where the bank is the debtor. and this is important in the analysis
of this case. a check doesn’t represent an assignment of funds, just a
direction to the drawee to pay that money. Holding the check is not
owning the funds, but owning an obligation of the bank. Who owns the
money? the bank, owns it, subject to their deposit liability. Ward won.
d) Liability on the instrument, p. 443
i) Putting your signature on a negotiable instrument – except as a witness –
leads to a promise implied-in-law (actual intent is irrelevant) to pay the
instrument under certain circumstances. This obligation is called liability
on the instrument, i.e., as a result of signing the instrument, and the person
who could enforce that liability was the current holder of the instrument.
(1) §3-401(a) “A person is not liable on an instrument unless the
person signed the instrument.” This implies they are liable if
they do sign. (b) says that a signature can be made with anything that
expresses an intention to sign.
(2) Signed §1-201(37) & §3-401(b)
(3) A forger’s signing creates a liability in signing the instrument, not what
name he signed.
(4) §3-105(c) issuer of the instrument. “Issuer is the maker or drawer of the
instrument.” Bank issuing a cashier’s check.
ii) Primary liability §3-412
(1) Maker’s obligation, p. 444
(a) The maker of an instrument is absolutely liable on the instrument, as
is the bank that issues a cashier’s check. §3-412. When there is more
than one maker, they are jointly and severallyliable.
(b) Problem 125, p. 444
(i) 3-116—“two or more person who have the same liability on an
instrument as makers, drawers, acceptors, indorses who indosrse
as joint payee, ...are jointly and severally liable in the capacity in
which they sign.”
(ii) joint and several liability: you can sue co-makers, anyone of
them, because the liability is joint and sevr’l, and
(iii) Right to contribution: they have the right to contribution from
each other. What if one of the makers is insolvent? Divide the
remaining liability amount the solvent signers.
(2) The indorser’s obligation--§3-415, p. 445
 (a) once the payee signs the back of the instrument, the payee incurs the
obligations of the indorser. §3-415. Anyone who signs an
instrument in an ambiguous capacity is conclusively presumed to
assume this liability. But the indorser’s obligation (unlike
the maker’s) is secondary: – 3 conditions must be met before he can
be sued. There is no obligation until the three requirements have
been met.
(i) 1. Presentment. the instrument must first have
been presented to the maker or the drawee,
(ii) 2. Dishonor. there must have been a dishonor, and,
(iii) 3. Notice of dishonor. §3-503 requires that the indorser be
given notice of dishonor.
(b) CN: the indorser’s liability arises only if the instrument is
dishonored, so this is a secondary liability. If the instrument is paid
as completed, but is not then . . . you will have a liability to pay it
according to its terms, and you owe this obligation to anyone entitled
to enforce the instrument or a subsequent indorser. How to pick up
liability:
(i) Signing the back of the instrument §3-204(a)
(ii) Signing in ambiguous capacity §3-415. If not clear, then I pick
up obligation.
(c) What is the obligation of the indorser? §3-415 (pay according to its
terms, ).
(i) To whom owed.?—anyone entitled to enforce.
(ii) The indorser to a negotiable instrument, and the person who
signs in an ambiguous way
(d) Indorser obligation is secondary and arises under 3
conditions. 3415: Presentment, dishonor, Notice of dishonor, §3-
503. So failure to get notice may get you off the hook. If I’m an
indorser and the person who has the check either keeps passing it on
or after 30 days, then your obligation is discharged.
(3) Discharge by Acceptance. §3-413. The fact that you deposit in your
bank doesn’t make your own bank the acceptor of the check, until the
check makes its way back to the drawee bank, and then the drawee bank
makes an acceptance or dishonor.
(a) What does acceptance of a check by a bank mean? It does not mean
acceptance by a depositary check. My bank is the depositary bank; if
it is a prudent bank, it will not give me complete credit until it passes
the check on to the drawee bank. Only when it gets back to the
drawee bank that it is either accepted or dishonored. They might
dishonor the check because of NSF, or because there’s been a stop
 payment. If it has been dishonored, then they can go after the
maker/drawer, -- or they can go after the indorser, if there’s first been
presentment, dishonor, and notice of dishonor to the ...
(b) §3-504—Excused presentment and Notice of Dishonor. but these
three requirements must be met before the indorser has any liability.
(c) §3-415—also says the indorser’s liability can be extinguished after
30 days.
(4) Problem 126, p. 445—Billy writes and check to Snow. Payee Snow
indorses and cashes check at drugstore. Drugstore indorses and deposits
with Jordan Bank. Depositary bank indorses and presents to drawee
bank. Drawee Bank does not accept but dishonors and returns check
NSF. Check is returned to the depositary bank. The Drugstore has gone
out of business and can’t be reached. Can the Depositary Bank sue a
previous indorser (Snow)? yes.
(a) CN: §3-415(a) the bank is a party entitled to enforce. Can Snow,
who in this instance is a payee and indorser, . . .
(i) Once you sign it as an indorser, you pick up the obligation to pay
on the instrument the amount that is stated, any party that has the
right to enforce the liability.
(ii) Can snow raise a defense of failure of consideration from the
previous indorser? no.
(b) 3) §3-116 Joint and Several Liability. “Except as provided in the
instrument, two or more persons who have the same liability on an
instrument as makers, drawers, acceptors, indorsers who indorse as
joint payees are jointly and severally liable in the capacity in which
they sign.” Snow is entitled to contribution from the others.
(i) CN: It’s possible that we sign as joint indorsers. A person liable
for joint and several liability is entitled to contribution.
(ii) §3-415, OC 5; I can go backward in the indorsement chain, but
not forward. EX: If A signs, then B signs, then C signs, then I
sign, then D signs, then E signs and it is dishonored and E sues
Me. I can get contribution from A, B, and C, but not D.
(iii) §3-205(d)—anomalous indorsement. CN: an indorsement made
by a person who is not a holder. OC 3. The only effect of an
anomalous indorsement is to make the signer liable on the
instrument as an indorser. Such an indorsement is normally made
by an accommodation party.
(c) Problem 127, p. 446—Peppermint Patty is one of 4 co-signers on a
note to the bank for a loan to Charlie Brown. When the note
becomes due, the bank presents it to Charlie Brown and he can’t pay
it, i.e., dishonors it. PP claims she’s only liable for 1/4th. See §3-
415.
(i) Is she right? MA: no. 3-415(a) they are co-sureties, not sub-
sureties. They are joint and severally liable.
(ii) If she pays $10k can she sue Pig Pen for the entire amount or
only for part? see §3-116, §3-205(d). §3-205 OC 3: “the only
effect on an anomalous indorsement” is to make the signer liable
on the instrument as an indorser.” MA: She would seem to be
able to sue only for part, i.e., contribution, under §3-116.
(iii) Can she bring the other indorsers into the lawsuit? §3-119. yes.
(iv) §§3-116, 3-205. MA: the indorsers are jointly and severally
liable. All anomalous indorsers are liable. Therefore she will
have to pay the full amount.
(v) Co-Suretyship vs. Sub Suretyship. 447
1. §3-205(d), § 3116,
2. §3-415, OC 5. CN: why do we call these anomalous?,
because they’re just signed as accommodation parties. they’re
just signing to incur obligation . . . why would they want to do
this? Here, Charley Brown would not have gotten the money
if he hadn’t gotten four anomalous indorsers. Ask yourself
whether the person is signing as an indorser or as an
anomalous indorsement.
(vi) §3-119—Notice of Right to Defend Action--Vouching In. If
the notice states that the person notified may come in and
defend. If I go after an anomalous indorser, the Anomalous
indorser can go after the other indorsers. If you have the
opportunity to come in and defend your interests, and you don’t
then it will be binding on you. This is a required opportunity for
me to go after....if you do not notify then you don’t have the right
to pursue contribution from them.
1. Can the indorsers go after the maker? §3-412. The issuer of a
note is obliged to pay an instrument ....to an indorser who paid
the instrument under §3-415.
2. §3-419(f)—this says the reverse. The right of reimbursement
that the indorser has against the maker. The “indorser’s
obligation” refers to sureties, whose law has been altered by
the UCC.
3. Who is the indorser a surety for? Who is the principal
here? An accommodation party may sign as a maker, drawer,
acceptor, or anomalous indorser. The liability they pick up is
in the capacity in which they sign.
 (d) Qualified indorsements. §3-415(b)—if an indorsement states that
it is made “without recourse” ...the fact that I indorse without
recourse, only affects my liability, does not affect the transfer of the
...but if it’s a check then I’m . . . then you can’t be gone with all
liabilities.
(i) Qualified Indorsements. By writing “without recourse” above his
name, the indorser can escape liability. §3-415(b).
(e) Indorser’s liability. Problem 128, p. 447
(i) Parties: Melody maker; Ivory is the payee; Friendly is HDC. A
HDC is a “party entitled to enforce the instrument”; the maker
must pay to the person holding the note. Melody has maker
liability. Even though there may be a cause of action, there may
also be defenses.
(ii) Causes of action:
(iii) Defenses: failure of consideration. is this good against a HDC?
no, because it’s a personal defense. Music Co.’s defenses? They
signed “without recourse.” They can disclaim indorser liability;
had it been a check they would not have been able to disclaim
transfer warranty.
(iv) CN: Friendly tries to sue the maker, who claims failure of
consideration, which is not a defense; But what if Friendly goes
after the Music Co., can the Music Co. defend that there’s failure
of consideration? They need to bring Melody in; but they would
still lose. But the indorser here signed “without recourse,” so she
has no liability unless it’s a check, even against a HDC.
(f) Indorsers can only go back in the chain, not forward in the chain.
(5) Some people, as a favor, sign on as a surety. There are problems with
being a surety, you pick up liability that you didn’t mean to pick up.
iii) Sureties obligation, p. 448
(1) Problem with being a surety?—If you sign at the request of your friend,
then you will pick up liability without getting any benefit of the
instrument. That’s what the FTC notice is for. FTC “plain language
notice.” p. 449.
(2) What are the 3 “contracts” in a surety case?
(a) The underlying obligation between the principal and the creditor
(b) the promise of the surety to back up the underlying obligation and
see that the creditor loses nothing as a result of accepting the
principal’s promise on the first contract
(c) the promise of the principal to reimburse the surety if the surety is
forced to pay off on the surety’s promise to the creditor.
(3) Problem 129
 (a) Identify the parties—
(i) Surety?-Big Bank;
(ii) Principal?-Quickie;
(iii) Creditor?—Frank Family
(b) Three contracts?
(i) Frank Family/Quickie for Quickie to build a house and pay
Quickie when complete;
(ii) Quickie/BB; Contract between the principal (Quickie) and the
surety (BB) to pay the surety
(iii) Big Bank/Family Frank to pay laborers.
(4) Remedial rights of sureties.
(a) CN: The bank had secondary liability as a surety, that if the
accommodating party could not perform, the surety would
perform. What happens if the surety does get liability? It has
common-law remedies.
(b) Reimbursement—from the principal.
(c) Exoneration, p. 450—the surety can compel the principal to
perform instead of the surety. You want the right of
exoneration. This avoids having the surety pay and then going after
the principal, the surety can just make the principal pay.
(d) Subrogation—by paying off the second contract, the surety acquires
the ability to become a party to the first contract and enforce it as if
the surety were the creditor. CN: this comes up in the insurance
context. If I pay the creditor, I step into his shoes, and get his rights
to, if he has collateral I can go after the collateral and sell it.
(e) Contribution—right of partial reimbursement that co-sureties have
against each other.
(f) Strictissimi Juris—where possible a court will find in favor of the
surety. Strict construction in favor of surety.
(i) Discharge of a Surety
1. Modification of underlying Agreement between the Principal
and creditor.
a. Even if it Benefits Surety? doesn’t matter. The law goes in
favor of the surety.
2. Releasing Principal. If you discharge the primary obligor
then you are discharging the surety. “If the creditor releases
theprincipal debtor from liability on the first contract or gives
the debtor a binding extension of time in which to pay, the
surety is discarged unless (1) the surety consents, or (2) the
creditor informs the principal of the preservatnion of the
surety’s rights against the principal.”
 a. Granting principal more time to pay?—“I’ll give you an
additional 6 months to pay.” This will discharge the
surety’s obligation, because I may go bankrupt during this
time.
b. Preservation of secondary obligor’s recourse.
3. 2 Hypos, p. 452.
a. The note comes due, and the principal does not pay it; the
creditor waits a month before suing. – no discharge.
b. The note comes due, and the creditor and principal agree to
wait a month to enforce it, with the principal agreeing to
pay an extra month’s worth of interest.
(ii) Accommodation party, p. 453--§3-419—a party who signs the
instrument without being a direct beneficiary of the value given
for the instrument. OC 1. The accommodation party may sign in
any capacity, but is obligated to pay the instrument in the capacity
in which the accommodation party signs.”
(iii) 3-419(d)— Guaranteeing payment is the default. the person
seeking to enforce the instrument must go after the surety first. ...
unless you have unambiguous words to the contrary, stating the he
is guaranteeing collection only.
(iv) (e) the accommodated party may not seek reimbursement from
the accommodation party.
(g) Problem 130, p. 454
(i) The default is that he is guaranteeing payment, not collection. If
it is a guarantee for collection only, it must be unambiguously
stated.
(ii) May George establish his status as surety against a HDC? See §
3-419(c) OC 3 (), §3-205(d) (anomalous indorsement), §3-
605(h)(“a secondary obligor asserting discharge under this section
has the burden of persuasion both with respect to the occurrence
of the acts alleged to harm the secondary obligor and loss or
prejudice cause by those acts.”). MA: Yes, because under 3-
419(c) the HDC would be on notice that he was
an accommodation party. CN: 3419(c); 3-302(a)(2), but its Not
good against a HDC.
(iii) May George [an accommodation party] defend on the basis that
he received no consideration for his undertaking? no; §3-419(b)
OC 2. “The obligations of the accommodation party may be
enforced . . . whether or not the accommodation party
receives consideration for the accommodation.”
1. CN: may be enforced notwithstanding the statute of frauds.
 (iv) Is George an accommodation maker or accommodation
indorser?—MA: maker. §§3-116(a)(“two or more persons who
have the same liability on an instrument as makers, drawers,
acceptors, indorsers who indorse as joint payees, or anomalous
indorsers are jointly and severally liable in the capacity in which
they sign”), 3-204(a) (“Indorsement . . . “)—Philly Bond v.
Highland Homes –“ a signature in the lower right hand corner of
an instrument indicates an intent to sign as the maker of a note or
the drawer of a draft.”
(h) CN Words of Guarantee.
(i) Art. 3 applies to signers of a negotiable instrument
(ii) Separate document?
(iii) NOTE: art. 3 applies only to accommodation parties who sign
the instrument; not if they sign a separate suretyship
agreement. OC 3, last para 3-419.
(iv) Guarantor—3-419(d), only liable if the other party cannot pay
up.
(v) Problem 131, p. 455—MA yes.
(i) Floor v. Melvin, p. 455
(i) Melvin signed the back of the note: “For an in consideration of
funds advanced to Melco, Inc., we irrevocably guarantee Majorie
Floor against loss by reason of nonpayment of this note.”
(ii) CN: Estate of Melvin – Guarantor against Loss. Guarantee of
payment or collection? Who must be sued first? 4419(d) &
(e).“Accommodation party “ can sue. “Accommodation party”
(iii) Not Vice Versa 3-419(f)
(iv) I: Must Majorie Floor sue Melco first, or can sue go directly after
Melvin for the money?
(v) There are two types of contracts guaranteeing negotiable
instruments:
1. Contracts guaranteeing the collection of notes: the guarantor
promises to pay the debt upon condition that the owner shall
use the ordinary legal means to collect it from the debtor with
diligence but to no avail.
2. Contracts guaranteeing the payments of notes: guarantor
promises to pay the debt at maturity if the principal debtor fails
to, and upon maturity the guarantor must be sued at once.
3. EX: “I hereby guarantee this loan” = guarantee of payment, not collection.
4. EX: “For value received I guarantee payment of the within note at maturity.” – for
payment
 (vi) Here, the terms of the guarantee are made conditional upon the
collection of the note, not payment. Because it is a guarantee
against “loss”.
(j) Problem 132, p. 459
(i) Who is the principal and who is the Surety?
(ii) Does the maker of a note have a cause of action against
indorsers, whose 3-415(a) obligations runs to “ a person entitled
to enforce the instrument” defined in 3301 as the holder (defined
in 1201(20) as the person identified in the instrument as the
person to whom it is payable which ot note include the maker).
(iii) Can Portia Sue the mother? §3-412. no.
(iv) CN: the mother borrowed the money from ONB and signed as a
maker, but the mother is an accommodation party.
iv) Tender of Payment, p. 460--§3-603.
(1) Problem 133
(a) §3-603(c) (“If tender of payment of an amount due on an instrument
is made to a person entitled to enforce the instrument, the obligation
of the obligor to pay interest after the due date on the amount
tendered is discharged.”) MA: Here, Cather, the co-signer, tendered
payment. Therefore, he is discharged of his obligation to pay interest
after this date.
(b) CN: indorser is discharged because he may not be able to pay at a
later date.
(c) CN: interest is discharged, if I agree to take at a later date. This is so
as not to increase the surety’s risk. So we stop the interest.
(d)
(e) §3-603(b) (“If tender of payment . . . is made to a person entitled to
enforce the instrument and the tender is refused, there is a discharge,
to the extent of tender ... of the obligation of the indorser or the
accommodation party.). MA: therefore Goodwin (one entitled to
enforce it) may not recover from Cather (accommodation
party.). Nor can he recover from Stout who is the indorser.
(f) What if payment is tendered, refused, and then both the
accommodation party and the maker go bankrupt? Can Goodwin, the
purchaser of the note, go after Stout, the indorser/seller/payee? §3-
415(a) “if an instrument is dishonored, an indorser is obliged to pay
the amount due on the instrument “). MA: so yes, Goodwin can go
after Stout the indorser for the money.
(g) Cather is the accommodation party.
 (h) CN: the accommodation maker goes to holder and offers to pay the
debt. Refusal of tender will discharge an accommodation party and
an indorser.
(i) any refusal of tender is a discharge
(j) Impairment of collateral as Discharge – See new rules, below
(i) 3-605(d) also (e), (f), (g), (h)
v) § 3-605 – Strictissimi Juris Again, p. 461
(1) Under 3-605(e), (f), (g) the non-consenting surety is discharged, up to
the value of the collateral, if the creditor (holder) fails to protect the
collateral and if it is thereby unavailable to pay the debt.
(2) New Rules for Discharge of Secondary Obligors §3-605
(a) Test: loss to the secondary obligor
(b) 3-605(a)—RELEASE of the primary obligor in whole or in part:
(i) If the 2d’ry obligor has already paid part, he can still recover
from the 1st obligor.
(ii) Discharge of the 1st obligor is discharge of 2nd obligor to same
extent – unless creditor “retains the right to enforce” against 2nd
obligor BUT 2nd obligor gets credit for partial payment by
obligor and is Discharged to the extent it would cause LOSS to
2nd obligor [e.g., in the meantime, the primary obligor goes
bankrupt, or does have the resources. this adversely affects.]
(iii) CHECK: Any discharge of the maker is discharge of
the indorser.
(c) 3-605(b)(2)—granting Extension of Time to principal obligor
discharges the Secondary obligor to the extent that it causes the
second obligor loss.
(d) 3-605(c)—Other modification......
(e) Impairment of the collateral—3-605(d)-- What is
collateral? security. Impairment of collateral. But what happens if I,
as the security holder, damage the collateral? that’s animpairment of
collateral. It’s equivalent to losing the security interest.
(f) 2d obligor Discharge to the extent of Impairment
(g) 2nd obligor can always consent . . . .
(3) Problem 134[???]
(a) 3-605(e)—“A secondary obligor is not discharged under subsections
. . . unless the person enetiled to enforce the instrument knows that
the person is asecondary obligor or has notice under section 3419(c)
that the instrument was signed for accommodation.”
(b) 3-605(g)--
(c) Arnold’s liability is now only for 4k.
(d) Here the bank was under-secured.
(4) Chemical Bank v. Pic Motors Corp, p. 461
(a) F: Bank agreed to Lend money to Pic under an established line of
credit on the security of Pic’s inventory of cars as collateral. Siegel
had been the director, president and principal stock holder of Pic,
personally guaranteed the loans in writing. Siegel then sold his
interest in Pic to Robl, and resigned as director and president. Pic fell
behind on the payments. Bank then made a demand, and then sued
Pic and the guarantors. Siegel defends that the deficiency was caused
by the failure of the Bank to conduct regular inspections of the
business. No provision of the loan agreement or the guaranty
agreement obligated the Bank to conduct inspections. Held, Siegel
was still liable.
(b) CN: This was a floor plan arrangement. The dealer wants to secure
a line of credit, this has a lien on the cars that move in and out of the
lot.
(c) Pic – Car Dealership, Floor plan arrangement – Inventory Financing
line of credit secured by cars. Siegel – Guarantor – resigns for
company “the undersigned hereby guarantees, absolutely and
unconditionally, the payment of all liabilities of the borrower,
whether now existing or hereafter incurred.” It is “out of
trust”. Siegel sells remaining collateral, pays down note;
(d) Is He liable for deficiency? yes. He said that the bank had a duty to
inspect the collateral and preserve it.
(e) Discharge?
(f) Negligence or Fraud of Bank employees?
(g) Prior course of dealing
(5) Problem 135, p. 467
(a) 3-605(e), George would only be discharged if the Finance Co. knew
that George signed as a secondary obligator, which is not clear here.
(b) Under 3-605(f)? George did not consent to the event or conduct
(bankruptcy) that is the basis of the discharge. Therefore, he IS
discharged.
(c) OC 7, 3605.
(d) CN: The bankruptcy creditors took priority here. Does impairment
of the collateral cause an impairment of the note? It’s not clear who
is the accommodation party, nor whether the bank is at fault.
(e) The accommodation party is discharged to the extent of the
impairment.
(f) Tax issue. Even though the state seized the vineyard to pay a tax
liability, she is no worse off, she hasn’t been caused a loss, because
the taxes would have had to have been paid anyway.
(6) Problem 136, p. 468—§3-605 [???]
(a) §3-605(b)—deals with situations where the person entitled to
enforce an instrument, YNB here, grants the principal obligor, Jck
Point, an extension of time. MA: here, YNB did not grant an
extension of time, but rather a discharge of a party of the amount,
therefore I think that 3-605(b) does not apply. So Shadbolt still owes
it.
(b) CN: he borrows 75k, and he gets a surety. is the surety
(i) 3-419(e)[f?], OC 3 §3-605. Is the secondary obligor
discharged? He is discharged to the extent he has suffered
a loss. if truly the primary obligor had nothing else, then he
wouldn’t have suffered a loss. If he truly didn’t have any more
money then he’s not prejudiced. Then there’s also the issue of the
subsection (g) language.
(c) 3605(c) OC 4. Extension of time is discharged, only to the extent he
is damages
(i)
(d) 3-605(d) OC 5.
(i) Stock. If the primarily obligor just takes it back then the
secondary obligor has much less protection. But here they
consented in advance, then you can no longer complain.
(ii) 3-605(h) and (i)—burden of proof.
(e) 3-605(i) OC 2.—it’s presumed that it caused a full loss up to my full
liability. The party seeking to enforce my obligation as the secondary
party has the burden of proof. If I’m trying to enforce it and I say it’s
not the full amount, then I have to prove it.
(7) London Leasing Corpor v. Interfina, Inc, p. 469
(a) I: whether a corporate officer who makes a note on behalf of his
corporation and, also personally endorses that note is discharged from
personal liability on the note by an agreement between the payee and
the corporate maker, by its president, which extends the corporate
maker’s time to pay the note?
(b) F: Interfina made and delivered to Plaintiff a promissory note for
$52k signed by Frederick as president of Interfina, and signed by
Frederick personally. When the note was not paid on time, Interfina,
through Frederick, made agreements to extend the time of the due
date; these Frederick signed only in his corporate capacity.
(c) Frederick contends that the extension agreements, which were not
signed by him in his personal capacity, as a matter of law discharged
him from personal liability on the note because he did not personally
consent to the extension.
 (d) R: What is consent?
(e) Held, Frederick consented.
(f) CN: President signs on behalf of the corporation and
personally. Here he was so intertwined with the transaction, he had
the opportunity and consent... and this w
vi) New notes for old, p. 472
(1) Problem 137
(a) MA: no; §3-310(b)(2)—“In the case of a note, suspension of the
obligation continues until dishonor of the note or until it is paid.”
(b) may enforce either note.
(c) §3-605(c)
(d) CN: Bank had a valid promissory note with a guarantor. Instead of
extending the note, then entered into a new not and they held the first
note as collateral for the second note. The accommodation party
knew nothing about the extension.. She’s discharged to the extent
she is damaged.
(2) Problem 138
(a) 3-605(e)(impairment of the collateral)
(b) 3-305(b) “The right of a HDC
(c) 3-601(b) “Discharge of the obligation of a party is not effective
against a person acquired rights of a HDC of the instrument without
notice of discharge.”
(d) 3-302(b) “Notice of discharge makes the discharge effective against
a person who became a HDC with notice of discharge.”
(e) CN: Discharge to the extent he is damaged. But this is a personal
defense. The rule is that the collateral follows the note. there is
question regarding whether they were a HDC.
(3) Conclusion
(4) Liability (methodology)
(a) What are the parties? Drawer, maker, payee, drawee, indorser,
guarantor
(b) What liability on the underlying obligation?
(c) What rights and obligations under the UCC?
(d) What defenses?
(e) Can liability be passed to someone else?
(i) maker’s obligation 3412
(ii) Drawers obligation 3414.
(f) What’s the obligation?
(i) To whom is it owed? person entitled to enforce.
(ii) When does it arise?
(g) When can it he discharged?
 (h) Difference between primary liability and secondary liability?
(i) 3-414(f)—drawee suspends payments means “bank failure.”
(j) Indorser’s obligations §3-415.
(k) anomalous indorser?
(5) Accommodations parties (sureties) §3-419
(6) Discharge of secondary obligors 3-605 Extent?
(a) Extension of time, medication, impairment of collateral.
(b) Consent & Waiver
(7) Tender of payment – §3-603
(8) Drawer’s obligations §3-414
e) The Drawer’s Obligation--§3-414, p. 473
i) §3-414—the drawer’s obligation is secondary because the draft must first
be presented to the drawee for payment and dishonored by the drawee
before the drawer has a legal obligation to pay the instrument.
(a) Presentment and dishonor 3-501 and 3-502. R
ii) Presentment and Dishonor, p. 474
(1) “Presentment” is the demand for payment made to the maker of the note
or, for drafts, to the drawee. §3-501. Exhibition is only required if the
presentee demands it. §3-501(b)(2).
(2) “Dishonor” is the refusal to pay. §3-502.
(3) Problem 139, p. 474.
(a) If a bank won’t pay a check that the payee won’t sign, has a
technical dishonor occurred? Grosvenor takes check to bank, refuses
to sign his name, and bank refuses it. Is this dishonor?
(i) 3-501(b)(3)(i)—“without dishonoring the instrument, the party to
whom presentment is made may (i) return the instrument for lack
of necessary indorsement.”
1. CN: they may also ask him to sign a receipt, but more likely
they were asking him to indorse it. But it’s not a dishonor, so
the drawer is not liable. The drawee bank is justified without
dishonor in requiring indorsement.
(ii) 3-501(b)(2)(iii)—“Upon demand of the person to whom
presentment is made, the person making presentment must (iii)
sign a receipt on the instrument for any payment made or
surrender the instrument if full payment is made.”
(b) MA: there has been no technical dishonor.
(4) Problem 140, p. 474
(a) Is the drawer still liable on a check that has not been cashed for 8
months?
(i) 4-404—Bank not obliged to pay check more than 6 mos old.
1. CN: But it may pay the check
 (ii) 3-408—drawee is not liable until it accepts the check; but the
check by itself does not operate as an assignment of funds.
(iii) 3-414(f)—if the bank fails during this time of delay, then drawer
is discharged, but if the bank does not fail then he’s not
discharged. CN: thus delay in presentment alone, does not result
in a discharge, only if there is also a bank failure.
(iv) 3415(e)--
iii) Requiring a thumbprint is ok. Messing v. Bank of America, p. 475
(1) Whether Bank’s practice of requiring non-account check holders to
provide a thumbprint signature before it will honor a check is lawful?
yes.
(2) Banks can require a thumbprint as a reasonable form of identification.
(3) CN: This was not a messy thumbprint, it’s invisible. He was not a
customer of the bank. The drawer of the bank was a customer. This is
used as a theft or fraud deterrent. Is there are privacy issue? he could
have taken his business elsewhere. There is not database of these
thumbprints. The court held that it was a reasonable
iv) Notice of Dishonor—3-503, p. 480
(1) Indorsers are entitled to notice of dishonor. If I want to preserve
liability, do I need to send a certified letter? no. any reasonable
means. If the bank sends it back through the collection process, that is
adequate notice of dishonor.
v) Protest. 3-505. Evidence of dishonor is a document purporting to be a
protest.
(1) Not often used in a domestic transaction, but in international
transactions. This is a notarized certificate of dishonor made by a US
consul. This is a notarized statement of presentment and dishonor. But
is some cases, we can get away with no presentment and no dishonor.
vi) Excuse. 3-504
(a) force majeure, acts of god, presentment is excused if it can’t be
made with reasonable diligence
(b) Maker has already repudiated, is dead or in bankruptcy.
(c) Waiver
(i) No reason to expect the instrument to be paid or accepted. §3-
504(a)(iv)—“Presentment for payment or acceptance of an
instrument is excused if the drawer or indorser whose obligation is
being enforced has waived presentment or otherwise has no
reason to expect or right to required that the instrument be paid or
accepted.”
 (ii) §3-504(b)(ii)—“Notice of dishonor is excused if the party whose
obligation is being enforced waived notice of dishonor. A waiver
of presentment is also a waiver or notice of dishonor.”
(d) Delay can be excused
(e) WAIVER or PRESENTMENT = waiver of notice of dishonor.
(2) Problem 141
(a) Is this effective? yes, Does the tiny print matter? probably not.
(3) Problem 142, p. 482
(a) Frank has a check written out to him from Dan. Frank indorses the
check over to Holdit. Frank then calls Dan and got him to put a stop
payment on the check. But Holdit didn’t present the check to his
bank for 6 weeks. After 6 weeks he took it to his bank, Creditors
National Bank, who in turn presented the check to the drawee bank,
which dishonored the check. Creditors National bank takes the
money back from Holdit. Holdit sues Frank for his indorser’s
obligation.
(b) Was Frank discharged by delay of presentment ? yes. 3-415(e)—“If
an indorser of a check is liable under subsection (a) and the check is
not presented for payment, or given to a depositary bank for
collection within 30 days after the day the indorsement was made, the
liability of the indorser under subsection (a) is discharged.” CN: Is
indorser discharged? 3415(e)
(c) Was presentment delay excused within the meaning of 3-
504(a)(iv)? no. —“Presentment for payment or acceptance of an
instrument is excused if the drawer or indorser whose obligation is
being enforced has waived presentment or otherwise has no reason to
expect or right to require that the instrument be paid or accepted.”
(d) Is delay in presentment excused? no, because he was the one who
got the indorser to put a stop payment.
(4) Makel Textiles v Dolly Originals, p. 483
(a) Dolly borrowed $40k, paid down $30k, and made a note for 10k. It
then executed 5 notes for 2k each. One was deposited but returned
for insufficient funds.
(b) The notes were signed personally by Goldberg and Kushner.
(c) Because Goldberg was the president and principal officer of Dolly,
and signed in that capacity as well as in a personal capacity, it was
unnecessary to serve Goldberg with notice of dishonor and
nonpayment because failure to do so could not injure or prejudice his
rights in anyway. Formal notice of presentment and dishonor to Mr.
Goldberg would be merely a useless gesture of advising him of a fact
 with which he was already aware. §3-504. He already knew that the
notes could not be and were not paid from any corporate funds.
(d) Regarding Kushner, he signed only as an indorser, there is no proof
of presentment and dishonor, nor was there any activity or
participation in the affairs of the corporation so as to excuse
presentment or notice of dishonor.
(e) Held, the claim against Kushner is dismissed, the claim against
Goldberg wins.
(f) CN: Goldberg was the president; because he knew the corporation
couldn’t pay it, so the technical requirements of presentment
wouldn’t have done any good.
(g) Kushner was just an indorser. there was no evidence to prove up
notice of presentment and dishonor, so he was discharged.
(h) Last guy: Lewis was discharged because it wasn’t even his
signature. §3-401. “A person is not liable unless he signs an
instrument.” The only person still on the hook is the person for whom
the technical requirements of presentment and dishonor would be
unnecessary.
vii) The Drawee’s Obligation, p. 485
(1) the drawee, not having signed the draft, is not liable on it. The drawee
having signed nothing, incurs no contractual obligation.
(a) Problem 143
(i) §3-408. Drawee not liable on unaccepted check. “A check or
other draft does not of itself operate as an assignment of funds in
the hands of the drawee available for its payment, and the drawee
is not liable on the instrument until the drawee accepts it.”
(ii) CN: under 3408, with respect to the person presenting the check,
the check itself does not operation as an assignment of funds.
(iii) 3-401(a)-a person is not liable on an instrument unless that
person signs it.
(iv) 3-414,
(v) 4-402—the bank may be liable to the customer for wrongful
dishonor. so the drawer may sue the bank.
(vi) Bank refuses to accept draft although money is in account. The
holder of the check cannot sue the bank, but the drawer of the
check can do this.
(2) The Non-Bank Acceptor, p. 486
(a) The drawee who places a signature on a draft is said to have
accepted it, and he incurs the obligation of an acceptor. §3-
413. “Acceptance” is the “drawee’s signed agreement to pay a draft
as presented.” §3-409.
 (b) Norton v. Knapp (1884), p. 486
(i) F: Drawee, Miles Knapp was presented with a sight draft to pay
to the order of Exchange Bank, $85.” On the back of it Knapp
wrote “Kiss my foot. Miles Knapp.”
(ii) I: How to construe the words “Kiss my foot.”? Held, this was a
refusal.
(iii) D intended by the use of the contemptuous and vulgar words to
give emphasis to his intention not to accept or have thing to do
with the bill or the plaintiff. They imply, and are understood to
mean a contemptuous refusal to comply with such request.
(iv) CN: Court says it couldn’t have been acceptance. S
(v) EX: Payable 60 days after sight. You have to present to start the
running of the time period. So there are two presentments.
(c) Sight drafts and delay periods. If the drawee had dishonored the first
presentment (instead of indorsing it) -- the one for acceptance—he
would not have been liable on the instrument because at that point
she had incurred no 3-413 liability.
(d) When a sight draft gives the drawee time for payment after sight, the
holder must make a presentment for acceptance in order to start the
running of the credit period. 3-502(b)(4), OC 4, last para.
(3) Checks, p. 489
(a) 3-408
(i) Galyen Petroleum Co v. Hixson, p. 489
1. Galyen-payee presented checks to drawee bank, drawn on the
account of drawer. Bank refused despite having adequate
funds in Hixson’s account. On three instances, the Bank
refused to honor checks presented by Galyen, drawn on
Hixson’s acct.
2. The bank setoff the amount in Hixson’s acct, against a loan,
even though it was not yet due.
3. Hixson declared bankruptcy and was discharged.
4. Galyen says bank unlawfully refused to honor his checks.
5. R: 3-408—a check or other draft does not of itself operate as
an assignment of any funds in the hands of the drawee, and the
drawee is not liable on the instrument until he accepts it.
6. CN: Bank returned check NSF, even though the acct held
money; Bank exercised setoff. Not property. Third party
rights to account funds: Special agreement drawer/payee; oral
statement by the bank officer-fraud; negligence of bank;
earmarking of the funds. these are non-code provisions.
 (ii) Nevertheless, the bank may incur some liability under §1-103,
for common law liabilities.
(4) Certification--acceptance, p. 492
(a) The drawee bank’s acceptance of a check is called “certification.”
(b) §3-409(d) “A ‘certified check” means a check accepted by the bank
on which it is drawn....The drawee bank has no obligation to certify
the check, and refusal to certify is not dishonor of the check.” OC 4:
“In the absence of an agreement, a bank is under no obligation to
certify a check.”
(c) §3-411—“If an obligated bank [the acceptor of a certified check]
wrongfully refuses to honor it” may be liable for expenses and
consequential damages.
(d) §3-413—“Obligation of acceptor.” The acceptor of a draft is
obligated to pay it according to its terms.
(e) Problem 144, p. 492
(i) a. Does the drawee bank have to certify a check? No. bank is
under no obligation to certify a check. 3-409d.
(ii) b. What should the payee do?
1. Cash the check or get Generous George to make an agreement
with the bank to certify it.
(iii) c. No, the church cannot sue G, G is discharged once acceptance
occurs, but it can sue the bank. 3-411(b)—“if the obligated bank
wrongfully refuses to pay a certified check, the person asserting
the right to enforce the check is entitled to compensation.” an
certified check is a check accepted by the bank upon which it is
drawn. §3-409(d). Once the bank has accepted it, the drawer is
discharged. 3-414(c) “If a draft is accepted by a bank, the drawer
is discharged, regardless of when or by whom acceptance was
obtained.” If the bank wrongfully refuses to honor
(iv) What if G donated a certified check which the bank later
dishonored? OC 3, 3414, “the drawer is discharged of liability on
a draft accepted by a bank regardless of when accepted was
obtained.”
(v) CN: What if the bank had certified, is the drawer still liable??
viii) Signature by an Agent--§3-402(a), p. 492
(1) 3-402(a)—agency law, real, express or implied, or apparent.
(a) §3-402(b)(1)
(b) To avoid liability, the agent should do two things:
(i) (1) name the principal and
(ii) (2) unambiguously indicate that the agent is signing only in a
representative capacity.
 (iii) If you fail to, then what will happen? worst case is that you
become personally liable. If it’s against a HDC, then you will
lose. If not then you’ll be able to show that the parties’ intent was
not to bind the person.
(c) OC 2: Any ambiguity should be resolved against the agent.
(d) Problem 145, p.
(i) §3-402 OC 1.
(ii) Look to ordinary contract law.
(iii) Yes, he is bound.
(iv) He does not name the principle. Is the principle bound? Yes,
under ordinary agency law.
(v) What about, “Money Corporation, John Smith.” Does this name
the principal? yes. Does it unambiguously show a representative
capacity? no. So he will be personally liable to a HDC. As
between the original parties, he would be able to prove that the
parties didn’t intend for him to sign in his agency capacity.
(e) Problem 146
(i) Yes, Finch would be liable. Though he has unambiguously
indicated that he is an agent, he has not named the
principal. Therefore any ambiguity will be resolved against him.
CN: He would be liable because the principal is not named.
(ii) Not liable to Wickets because they had notice that he was signing
with authority of Biggley.
(f) Mundaca Investment Cor v. Febba, p. 494
(i) F: At the end of the bote below the signature line, the name of
each defendant was typewritten beside the preprinted term
“Borrower.” Following their signature, each of the defendants
handwrote the word “trustee.” But the trstee was not identified on
the fact of the notes.
(ii) They do not indicate the name of the trust. So as to a HDC they
would be personally liable, but
(iii) Because the represented person --the trust – is not identied in
the instrument as required by 3402(b)(1), this case fall under
3402(b)(2). Thus they are personally liable in two situations 1) to
a HDC, 2) to any other party unless defendants prove that the
originalparties did not inent them to be personnlly liable.
(iv) Held, there was a genuine issue of material fact, therefore
summary judgment was not appropriate, because the note stated
“Borrower”.
(g) Problem 147
 (i) “John Smith”—personally liable, because this neither indicates
that he is an agent, nor does it name the principal. John Smith is
personally liable.
(ii) “Money Corporation, John Smith.” – personally liable. Though
he has indicated the name of the principal, he has not indicated
that he is an agent. CN: maybe personally liable. It is ambiguous.
(iii) “Money corporation, John Smith, President” not personally
liable. Here he has both named the principal and indicated that he
is signing as an agent. CN: this is the most advisable way to sign.
(h) Problem 148
(i) CN: what if the check have the principal’s name in the upper left
hand corner. 3402(c)
(ii) No. he is not liable. Tho he did not indicate that he was an agent,
when dealing with checks that indicate the name of the holder of
the account upon which it is drawn, no one is deceived. §3-402(c)
OC 3—“If a representative signs the name of the representative as
drawer of the check without indication of the representative status
and the check is payable from an account of the represented
person who is identified on the check, the signer is not liable on
the check if the signature is an authorized signature of the
represented person.”
(i) Assumed name. Nichols v Seale, p. 498
(i) Note was signed in the following manner: “The Fashion Beauty
Salon, Carl Nichols [typed], /s/ Carl Nichols. The Fashion Beauty
salon was a dba, i.e., assumed name for Carls Fashion, Inc.
(ii) Held, the use of an assumed name does “name the persons
represented’ within the meaning of the code. extrinsic/parol
evidence is admissible to identify the signer, and when he is
identified, the signature is effective.
(iii) Also, parole evidence is admissible to show, as between
the original parties, that the signer was not personally
obligated. The intent must be communicated to the other party.
(iv) CN: is using the dba sufficient disclosure of the principal. yes.
(v) Is the signature ambiguous as to the representative capacity. yes,
but we’re not dealing with a HDC, so he gets the opportunity to
prove up the intent of the parties, whether the original parties
intend for him to be bound or not.
(vi) There’s a problem with this case under Texas law, he failed to
disclose his intent, even though he had that intent.
8) Banks and their customers, p. 503
a) Overview/ recap
 i) Bank deposits & Collections Art. 4.
ii) If conflict between art. 3 & art. 4, which controls? article 4 controls.
iii) Definitions: §§4-104 & 4-105.
iv) Payor Bank = Drawee bank
v) Depositary bank = 1st bank for collection
vi) Depositary bank could be payor Bank as well.
vii) Debtor/creditor
viii) Principal/agent—in my bank, I am the principal, the bank becomes my
agent
ix) “properly payable” rule – §4-401
x) What happens is the bank pays an item that is not “properly payable?” If it
is properly payable, the bank
b) Problem 149, p. 505
i) Postdated Check: 4401(c) the bank can properly pay on a postdated check
unless you give the bank notice with reasonable certainty. Usually their
contract sets out what “reasonable notice” is. And how far in advance do
you have to give reasonable notice? so they’ll have enough time to act on
it. What is the basis for this rule on postdated checks? because the
checking system is automated and you can’t catch this kind of thing.
ii) You may think that a postdated check is not properly payable, but it is,
unless you give the bank reasonable notice with reasonable certainty. But
how law does this notice last?
(1) 6 months -- written
(2) 14 days –oral
(3) renew it for an additional 6 months.
iii) Procedure §4-401 & §4-403(b).
c) Problem 150
i) Someone forges my name? under a forged drawers signature, the item may
not be properly payable. §3-401 a person is not liable on an instrument
unless the person signs the in instrument. 3-403 (discussing unauthorized
signatures). But it may be effective for the wrongdoer.
ii) If you lose your check book, can the bank require you to pay a stop
payment fine for all the remaining check? §4-401 OC 1 no. It is
inappropriate for the bank to require stop-payment order, because a check
with a forged drawer’s signature by itself is not properly payable.
d) Problem 151, p. 506
i) Widow writes a check for $10.00, then someone steals it and changed the
amount for $1,000. Is this properly payable for 1,000? 4-401(d) a bank that
in good faith makes . . . unless the bank has notice that the completion was
improper. This is tough on the customer. But it does have the good faith
requirement. Here, the customer may have to eat the loss. It’s an allocation
 of loss between innocent parties. Fortunately for the widow, there’s another
problem with this instrument, because there was never an negotiation,
because the signature was forged, so this does not work against the widow
here. 4-401(d) provides that if the bank makes payment to a holder, but a
thief is not a holder, because there was no negotiation.
e) “Properly payable Rile
i) What happens if the bank pays and the item is not properly payable? it
must recredit the account. – § 4401
(1) Not Conversion, because the money in the acct belongs to the bank, not
the customer. The customer is a creditor to the bank and the bank is a
debtor to the customer. The bank cannot convert its own property.
ii) Problem 152, p. 507
(1) No Drawer’s signature
(2) pre-authorized Draft/tele-check
(3) Depositary Bank liability?
(4) No Drawer’s Signature – not properly payable?
(5) CN: it was not properly payable because there was no signature under
4401. This gives the customer the ability to have “buyer’s remorse.” the
operation of this rule could requires the bank to take a loss when a
customer may or may not have authorized this.
f) General Rules
i) Issues in applying Properly Payable Rule
ii) Which prevails: the writing or numbers? 3-114. typewritten rules over
numbers, and handwritten over both.
iii) Discuss MICR Encoding
g) Problem 153, p. 507
i) 8 year old check paid? §4-404 –“bank is under no obligation to pay a check
that is over 6 months old.”
ii) Overdrafts? 4-401(a)
(1) May the bank pay? yes.
(2) Must the bank pay? no. The overdraft is effectively a loan.
iii) How quickly must he file suit? Art 4; §4-111- 3 years after the cause of
action accrues.
iv) Statute of limitation on check §3-118(c)—6 years.
h) Wrongful Dishonor—§4-402, OC, p. 508--
i) General Rule—a payor bank wrongfully dishonors an item it if a bank fails
to honor an item that is properly payable. 4-402
(1) The bank may but doesn’t have to honor a check that would cause an
overdraft. When does it determine whether there are enough funds in the
account: between the time of receipt and
ii) Punitive damages. Twin City v. Isaacs, p. 508
 (1) P’s checkbook was missing; two forged checks showed up; the bank put
a freeze on P’s account because P had once been convicted of a
burglary. But someone else was convicted for forging the checks. The
account remained frozen for 4 years. Jury awarded P 18k in
compensatory, and 45k in punitive damages.
(2) Held, there is sufficient evidence to sustain damages for mental
suffering, loss of credit, and loss attributable to the inability to pursue the
purchase of a home.
(3) CN: Bank decided not to pay and froze the account, for 4 years; as a
result they bounced a bunch of checks, had their cars repossessed, and
the bank was continuing to charge them a service fee. Before the freeze,
their credit rating was “impeccable.” But afterward they couldn’t get
any credit anywhere else. Personally, they almost got a divorce. The
court awarded compensatory and punitive damages. Actually damages
are a question of fact and must be proved up. Punitive damages are not
authorized by §4-402, but are recognized in the commentary.
iii) Problem 154, p. 512
(1) CN: couple files for divorce and the atty files a lis pendens. Atty advised
the bank to freeze the acct until after the divorce. 4-402 rreui damages
proved, so he would have to prove them. Therefore summary judgment
would be inappropriate.
(2) No; it is a question of fact. §4-402(b).
iv) Problem 155, p. 513
(1) F: Check maker’s bank's alleged failure to make full payment of payroll
checks maker issued to its employees by imposition of a service charge
was contrary to the purpose of the Illinois commercial code to simplify,
clarify and modernize law governing commercial transactions and thus
illegal. Your Style Publications, Inc. v. Mid Town Bank and Trust Co. of
Chicago
(2) Could the bank and the customer make an agreement that the bank may
dishonor an over-the-counter check presented by someone who does not
have an account with the bank? MA: yes,
(3) 4-103
(4) CN: goes to drawee bank and tries to cash the check. Bank’s policy was
not to accept those who do not have an account with the bank. Was this
a wrongful dishonor, yes, because the check was properly payable.
(5) Refusal to pay “on us” check if payee is not a customer –Wrongful
Dishonor? yes
(6) Who can sue? OC 5. Only the customer/account holder. The payee is
not a party to the contract. The bank’s liability
 (7) FEES to cash “on us” check. Deposit account agreement?—would
you include in your account contract that you can charge a fee to pay for
cashing the check.
(a) 4-401 says that the UCC does not regulate banks setting fees
for. What if a bank charged 45 to cash a check? it might be
considered unconscionable. It must al
v) Death or incompetence of Customer, p. 513
(1) §4-405—a bank may honor checks even after the maker is dead or
incompetent, and up to 10 days after it received knowledge of the death.
(2) Authority of payor bank rendered ineffective?
(3) What if the Bank does not know?—then it can continue.
(4) Grace period?-10 days.
(5) Who can stop payment during grace period?—a party claiming to be a
party in interest. Any party.
(6) Problem 156, p. 513
(a) §4-405(b)—if ordered to stop payment by a person claiming an
interest in the account, then the bank MAY NOT continue to make
payments, even within the 10 day period. The bank MUST stop
honoring checks.
(b) 3-502
(c) 4402--??
(d) Crazy Nelly—no grounds , relationship, or justification, even though
baseless, the bank must stop payments.
vi) Bank’s Right of Setoff, p. 514
(1) Although the UCC mentions setoff in passing, the Code neither
establishes this right nor regulates it. It’s a common law right. It’s a
settling of mutual obligations. But the mutual obligations must occur in
the same right and capacity. So if I have a personal acct and a business
account and I take out a business loan, the bank cannot setoff my
personal account.
(2) Setoff may be had only against generally accounts, not special accounts.
(3) Consumer protections:
(4) Walter v. Nat’l City Bank of Cleveland, p. 516
(a) Account balance: 3,600.
(b) Loan/note amount (unmatured): 3,600.
(c) Here, the bank made the loan to debtor after he was already
insolvent.
(d) CN: a Third Party obtained a judgment against the acct holder, the
bank did not hold the judgment held by a third party against the bank
customer. the judgment creditor served the bank with a notice of
garnishment. The bank setoff his account for the loan, even though
 the loan was not yet due. Was there mutuality between the loan the
and the deposit account? yes, but it wasn’t due yet. The judgment
creditor got to them first, so they should have paid him. There are
times when the bank can setoff an unmatured loan if the debtor
becomes involvent afterthe loan is made. But most installment loans
contain an insecurity provision.
vii) Customer’s right to Stop Payment, p. 520
(1) §4-403, OC 1: Procedure? Duration? Burden of Proof?
(2) Ordinary checks
(a) Parr v. Security Nat’l Bank, p. 521
(i) P ordered a stop payment, first orally, then in writing, and both
times made a 50-cent error in identifying the amount. P did give
the correct date, check number, of the check. Bank ended up
paying the check.
(ii) RULE: Stop payment order must identify the check with
“Reasonable accuracy.” Held, P gave reasonable accuracy even if
the amount was off by 50-cents. the bank’s defense that it’s
computer could only detect an exact match is untenable.
(iii) CN: what info did she give to identify the check? she gave the
check number, account number, it was timely. Bank said that the
computers would only stop payment if the amount was exactly
correct, but they didn’t inform her of this, neither in the account
agreement, nor when she entered the stop payment order. Held,
she had given enough information, and it was the banks burden.
(iv) What if they just made a mistake? is that a defense to failure to
do a stop payment order? OC 7 no, even if made by mistake or
inadvertence.
(b) Problem 157, p. 523
(i) P buys a refrigerator which is a piece of junk.
(ii) (a)—§4-403(a). MA: the stop payment order did not give enough
information to be effective. I agree.
(iii) (b)—§4-103(a)—these provisions may be varied by
agreement. CN: no, you can’t contract away good faith and
ordinary care.
(iv) (c)—§4-403, OC 7 –pay by mistake.: no, this agreement is
invalid.
(v) (d)—stop payment fee. §4-403 OC 1—this is a loss that should
be born by the bank as part of the cost of doing banking....CN:
this is allowed but not specifically authorized and is subject to
good faith..
 (vi) (e) Bank’s right of subrogation 4407: This means that they may
not have to re-credit the account even though they wrongfully
paid.
(c) Problem 158, p. 525
(i) 4-407(2)—bank’s right of subrogation.
(ii) CN: He puts an oral stop payment, which is good for 14 days
(written is for 6 months. 4403). Was the stop payment order
legitimate on the part of the customer or would the car seller still
have a claim against him? The dealer would still have a claim
against him because his only problem is with the color. So when
the bank negligently makes a payment, it steps into the shoes of
the payee and doesn’t have to re credit the account before they
assert the right of subrogation.
(d) Canty v. Vermont National Bank, p. 525
(i) P handed his canceled IRS checks over to the IRS for
inspection. The IRS re-deposited the check, and the Bank paid
them as second time, withdrawing the funds from his
account. Plaintiff moved for summary judgment.
(ii) R: 4407—
(iii) 4-401 if an item is not properly payable, the bank may not
charge the customer’s account and if it has done so, it must re-
credit the acct. However, the bank may refuse to re-credit its
customer’s acct after wrongful payment of an item by subrogating
itself to the rights of the presenter or the improperly paid
instrument.
(iv) The IRS is unique because our account with them is never
settled. Given the purpose of avoiding unjust enrichment, the
question is whether plaintiff depositor actually suffered any loss
by the admittedly improper payment.
(v) Held, plaintiff will have to prove his loss. The bank is not
required to re-credit his account before exercising its subrogation
rights.
(vi) CN: the IRS was owed money by the depositor, and if they didn’t
get it through the payment of the checks, then they would have
gotten it some other way, and so the bank steps into the shoes of
the IRS.
(e) Problem 159, p. 529
(i) (a) Can a drawee bank be a HDC? No, §4-403 OC 7.
1. 4-407 OC 1. “Payment can be stopped against a HDC, but if
it is, the drawer or maker is liable and the sound rule is that the
bank is subrogated to the rights of the HDC.”
 2. MA: this would seem to help the bank.
(ii) (b) 4-403(c)—the burden of establishing loss because of the
wrongful payment is on the customer.
(iii) CN: this is a gift check, with a timely stop payment, transferred
to a third party for value, so is the written stop payment order
effective against a HDC?—yes, but the bank gets the rights of the
HDC. So the effect is the same. And not have to credit the
account. Usually, a bank will honor the stop payment order. This
situation of the bank invoking its subrogation rights only arises
when the bank accidentally pays out on the check. §4407.
(f) Problem 160, p. 529
(i) §4-211—a bank has given value to the extent it has a security
interest in an item.
(ii) 4-210(a)—a bank has a security interest in an item to the extent it
makes an advance on or against the item.
(iii) MA: so here the bank would be a HDC.
(iv) CN: As a HDC, the bank is entitled to recover against the
drawer. They could also recover against Maggie Lee.
(3) Cashiers-, Tellers-, and Certified Checks, p. 530
(a) Can a customer stop payment on a check that has been certified?
no. “A customer has no right to stop payment on a certified
check. §4-403 OC 4. This is true of a cashier’s check and a teller’s
check.
(b) CN: §4-403 a customer purchasing a cashier’s check has no right to
stop payment.
(c) Problem 161, p. 530
(i) §3-411 OC—the purchaser of a teller’s or cashier’s check has no
right to ask for a stop payment , and if the bank does refuse or
stop payment, then the bank may be liable.
(ii) §3-305(c)—the obligor bank may not assert any defenses against
a person entitled to enforce the instrument.
(iii) What can Tom do?
(iv) 3-202 OC 2—“The remedy of a person with a claim to the
instrument is replevin, impoundment, injunction, et.”
(v) 3-201—
(d) Declaration of loss period – 90 days. CN: He asks the bank to stop
payment, can he do this? no. If the bank does stop payment then
the bank can be liable under §4-411.
(i) Lost or stolen cashier’s check. §3-312. Only the drawer, payee,
or remitter. The loss was not because of transfer, seizure, and he
can’t reasonably get it back. The file this, thenwait 90 days, then
 they can recover the amount of the lost, stolen, cashiers’
check. That mean so for the first 90 days, the bank must honor it,
then it can refuse to pay it.
(ii) What if the bank does what it should do, and does not stop
payment? Then he has rights against the seller of the car under
contract law.
(e) Problem 162, p. 531
(i) §3-312(b)(2) OC 3, 2d para
(ii) §3-312(c), 3415—Portia signed her name. Therefore she is an
indorser and is liable on the check.
(iii) CN: Portia sent it to her uncle. Nothing happens . .. What should
happen here.
(iv) If it waits 90 days then the bank is justified in paying it. This is a
timing issue because the HDC was paid by the ...the original bank
has a valid declaration of loss. If you lose or have stolen a
cashier’s check, you can file a declaration of loss and waiting 90
days. What if payment is demanded before the running of the 90
days? Until the claim becomes enforceable, it has no legal effect
and the party may pay it to someone else... you have to pursue
other remedies. You can go against the other, but not the bank,
the bank is entitled to pay within the 90 days. If something
happens during the declaration of loss period then you’re out of
luck.
viii) Bank Statements--4-406, p. 532
(1) §4-406(a)—requires that the bank return “sufficient information” about
the check in the bank statement but does not mandate return of the
check.
(a) “Sufficient information” means: item number, amount, and date
of payment.” This is the minimum standard, safe harbor. What is the
minium info the bank must return to the customer in the bank
statement?
(b) 7 years. The bank must keep these records for 7 years. How long
must the bank retain items or copies? 7 years.
(c) Customer’s Duty to Examine statements. How long does
customer have to examine statement and report alteration or
unauthorized signature? Customer is looking for forgeries or
alterations. And how long to report? Reasonable promptness? Not
exceeding 30 days. can it be less than 30 days? yes. But the bank
will put this into the contract to it’s less than 30 days.
 (2) How quickly must Bank provide item/copy? a reasonable time,
depending on the bank’s system and the customer’s needs. Can it charge
Fees? yes, as long as it’s reasonable. Customer Remedy? OC 3.
(3) What is the customer’s remedy if the bank does not make the statement
available? The Code does not address this, but looked to other law.
(4) Shifting Burden. §4-406(c)-(f) There is a shifting burden dealing with
unauthorized signatures. They only have the duty to report from the
information the bank gave back to them.
(5) Problem 163, p. 532
(a) CN: Portia gets a letter from the IRS saying that she’s getting an
audit, she calls up the bank and asks for 172 checks. The bank says
sure, but it’ll be $25 per check. Can they do this? as long as it’s
reasonable
(b) Fees. §4-406 OC 3—“This act does not regulate fees that banks
charge their customers for furnishing items or copies, but under
principles of law such as unconscionability or good faith and fair
dealing, courts have reviewed the fees ...”
(c) §4-406(b)—the bank must provide the copies.
(6) Problem 164, p. 533
(a) §4-406(c)—after the bank has provided the customer with a bank
statement, the customer must use reasonable care in examining it for
errors such as whether there was any payment not authorized. “The
customer must promptly notify the bank of the relevant facts.”
(b) MA: yes, joe is required to report this to the bank. Yes, he has the
obligation to report alternations and unauthorized signatures.
i) Bank Collections, p. 534
i) Process: Check goes to Depositary bank, then to Collecting banks, then to
Payor bank.
(1) Funds flow from Customer’s acct at Payor Bank to collecting bank to
depositary bank to Payee or indorser’s account. This is called float time.
(2) How long does this take? it used to take a week. Now it’s much less.
(3) when is the money available to payee or indorser?
ii) Controlling law
(1) UCC Art. 4
(2) Federal Reserve Reg. J - Fedwire, p. 2099
(a) CN: Federal reserve banks. There are 12 in the country, one of
which is in Dallas. Reg. J governs how the Federal Reserve will deal
with these.
(3) Clearinghouse Rules
(a) A group of banks gets together and sorts out all of the checks in a
given area.
 (4) Expedited Funds Availability Act (“EFAA”)(1988) & Reg CC – 12 229
–Commentary Appendix E.
iii) Funds availability.
(1) CN: Banks can make funds available sooner, but we won’t complain
about that. When MUST a bank make funds available? Federal law
(Reg CC) preempts UCC 4215
(a) When as a matter of legal right is the customer entitled to the funds?
(2) Cash, p. 535
(a) If you deposit cash into your banking acct how quickly can you take
it out against? the next banking day. §4-215(f)
(b) Banking day. §4-104(a)(3)—“when the bank is open to the public
for carrying on substantially all of its banking functions.”
(c) CN: Reg CC 229.10—Next day availability. EXAM
Question. “Next business day after the banking day of deposit IF
MADE IN PERSON TO BANK EMPLOYEE and not depositing
into an ATM, or night deposit.”
(i) Banking day. 229.2(f) When the bank is open for all functions.
(ii) Business day. 229.2(g) calendar day other than a weekend or
holiday.
(d) What about CASH deposited at ATM or night drop? Second
business day after banking day of deposit.
(e) DISCUSS cut off time 4108. The bank can set a time, after 2 A.M.
as the cutoff time, and item received after that time is treated as being
received at the opening of the next banking day.
In person/over the counter ATM or night drop
Next banking day Second business day

(3) Checks, p. 536—look first whether a federal rule will control.

(a) Across the counter Presentments.
(i) If someone gives you a check and you (the payee) walk into the
drawee bank and present it across the counter, how quickly must
the bank pay or dishonor it?—[ §3-502(b)(2)requires the bank to
make a decision to honor or dishonor that same day]
(b) “On us” Items.
(i) If the payee and the drawer each maintain an acct at the same
bank, this is an “on us” item, 4-215(e)(2) permits you to remove
the money at the opening of the second banking day following
receipt.
(ii) But EFAA requires the depositary bank to make same-bank
checks available for withdrawal on the business day after the
 business day of deposit, ie, next day. Thus, a bank must decide
whether to honor overnight.
(c) Transit Items. If the depositary bank and the payor/drawee bank
are not the same, the check is a transit item. Your bank then becomes
the collecting bank.
(d) “Next day” availability for checks. 229.10.
(i) Business day after the banking day.
1. Treas. Check – deposited in acct of payee.
2. Cashiers’ check –acct of payee, in person, special deposit slip
if required. Use a special deposit slip so you can recognize
that it’s something that’s going to require next day availability.
3. “On us” checks (in same state or processing unit)
a. Lesser of $100 or total deposits that are not otherwise
“next day.” This is to make some amount available.
(4) Problem 165, p. 537
(a) Father gives son $1k check. son mails it unindorsed to his bank.
(b) Lack of indorsement. §4-205—“if the customer fails to indorse the
check, the bank nevertheless becomes the HDC. The lack of a
signature does not prevent it from being a valid negotiation;
moreover, the bank was a person entitled to enforce under §3-
301 because it was a HDC. Additionally, failure of consideration is
not a defense against a HDC.
(i) CN: if you decide to deposit a check into your own acct, and
forget to indorse it, the bank may not require you to endorse
it. See 4-205 Bank is a HDC when it gives value; thus father
cannot prevail on person defense of a Failure of Consideration.
(c) CN: Did the bank have to require his indorsement? no. The father is
trying to say he rescinded a gift check, but a HDC intervened in the
form of the bank, which paid value by offsetting a debt. So the HDC
is able to prevail against the donor. For the purposes of determining
the HDC, the bank acquires this status at the moment of setoff.
(d) “Lock Box” arrangements.—If a store has a bunch of checks, they
don’t have to indorse them all. Also, a mortgage company, you may
send the check to the mortgage processing unit, they receive all the
checks is their PO box, make a list of all the checks, but they may not
indorse them. Sometimes a third party has the job to process the
checks, and they may not indorsement.
iv) Check Clearing process
(1) Interbank Collection –art. 4—parts 2&3
(2) In small towns, two banks will often agree to permit the depositary bank
to debit the account of the payor bank for the amount of the deposited
 check, subject to the right of the payor bank to dishonor the check later
and have the acct re-credited...Each bank has 2 banking days in which to
pass the item on to the next bank §4-202.
(3) What is “Provisional settlement”?—one that can legal be reversed,
a final settlement cannot be legally reversed.
(4) What is charge back?—when you’ve made provisional credit, but then
found out that the check was no good, so you charge back the acct.
(5) “Float period.”—the physical time taken for the check to go through
the process.
(6) What is a Clearing house?
v) Availability of Ordinary Checks
(1) Reg CC -12 cfr 229.12
(a) LOCAL CHECKS defined 228.2(r)
(i) 2nd business day following the banking day of deposit
(b) NONLOCAL CHECKS – 229.2(v)
(i) 5th business day following the banking day of deposit.
(2) Exceptions to general availability rules
(a) New accts (first 30 days) 229.13. Because the bank doesn’t know
you and there’s the possibility of fraud.
(b) Large checks  $5k in any one banking day. This limits the bank’s
risk.
(c) Re-deposited checks. Why? It’s already been presented and
dishonored once, so the likelihood of it being returned NSF is high.
(i) BUT not for missing indorsement or postdated
(d) Repeated overdrafts. To protect the bank from risk.
(e) reasonable cause to doubt collectability
(f) Emergency conditions. If something beyond the control of the bank,
prevent it from
(3) Notice & Liability.
(a) When to give the customer notice? at time of deposit or as soon as
practical.
(i) one time notice
(b) General disclosure—229.15. must be conspicuous, in a form
customer can keep.
(c) Civil liability – 229.21. If bank fails to comply with these, they may
be subject to civil liability.
(d) What about Bona Fide Errors?
(e) Reliance on FRB Rulings?
(4) Problem 166, p. 540
(a) §4-204—A collecting bank shall send items by a reasonably prompt
method . . .”
 (b) §4-215(e)(1)—“credit given by a bank for an item in a customer’s
acct becomes available for withdrawal as of right: If the bank has
received provisional settlement for the item, when the settlement
becomes final, and the bank as had a reasonable time to receive
return of the item and the item has not been received within
time.” So failure to dishonor within the required time entitles the
customer to payment as a matter of right.
vi) The Federal availability Rules
(1) Federal rules usually completely displace §4-215(e)(1).
(2) The next day Availability of Special Items.
(a) Under the EFAA, next banking day availability is required for items
not likely to be dishonored, such as govt, checks, bank checks, wire
transfers.
(b) $100 availability rule.
(3) Availability of ordinary checks.
(a) Local checks. Located within the federal processing region.
(b) Non-local checks. Not located within the federal processing region.
(c) See MAP/CHART p. 544
(4) Escape valves
(a) New accts
(b) Large checks
(c) Re-deposited Check
(d) Repeated overdrafts
(e) The reasonable cause exception.
(f) Emergency conditions
(g) The notice
(h) Civil liability.
j) Final Payment--§4-215, p. 547
i) INTRO: the moment of final payment fixes many of the legal rights. The
payor bank is “accountable” for the amount of the check, and may no longer
dishonor the check and must pay it to the person entitled to enforce it. §4-
302(a). Thus, following final payment, the payor bank bears the risk of any
mistaken payment not covered by one of the legal theories (breach of
presentment warranties, restitution §3-418). §4-301(b).
ii) §4-215. Final payment of a check destroys the check as a cause of action,
dishonor is no longer possible, and the drawer and indorser are off the
hook. CN: “An item is finally paid when the item has been (1) paid in cash,
(2),
iii) Problem 167, p. 548
 (1) teller is counting out the cash. But then he checks the computer, and
discovers that he doesn’t have the money in the acct. can the teller grab
the money back? no. It’s been paid in cash and it’s final.
(2) The bank had paid the item in cash. Therefore, under §4-215, the bank
had made a final payment.
iv) Problem 168, p. 548
(1) Split deposit. A $1k check, $200 cash, $800 deposited. Has the bank
made final payment? if all the money gets paid out and then the
customer pays some of it back to deposit, this is a final settlement for the
full 1k. But what if they just give you $200, and you tell them to deposit
the rest, then it’s final payment for $200, not the $800. But if I already
have $200 in my acct, and the bank give $200 from my acct and
provisional credit for the $1000 then there’s not final payment.
v) Problem 169, p. 549
(1) Cashier’s check in lieu of cash. §3-104(g) (“Cashier’s check”), 3-
412 (obligation of an issuer of a cashier’s check), the bank is both
drawer and drawee, but it fails before the cashier’s check can be
presented.
(2) §3-414 (this section does not apply to cashier’s checks), §3-
310(b)(1) (payment or certification of a check results in discharge of the
obligation to the extent of the amount of the check.)
(3) §4-215(a)(2)—An item is finally paid by a payor bank when the bank
has first settled for the item without having right to revoke the
settlement under applicable law.
(4) §4-213(c)—if settlement for an item is made by cashier’s check . . . and
the person receiving settlement, before its midnight deadline: presents
the check for collection, settlement is final when the check is finally
paid, or fails to present for collection, settlement is final at the midnight
deadline of the person received settlement.
(5) CN: she’s the payee on a 1k check, brings it to the bank and gets a
cashier’s check in lieu of cash. She endorsed it to her creditor and the
bank fails. See 4-215 OC 8.
vi) Second method of making final payment is settling for a check and not
having the legal right to evoke the settlement. §4-215(a)(2).
vii) Third method, and most common, Where final payment is made by simply
holding onto the check past the deadline to returning it. §4-215(a)(3).
(1) Deadline. depends on the agreement, clearing house rules, or the UCC (midnight deadline).
(a) Midnight deadline. §4-104(a)(10)—midnight on its next banking
day following the banking day on which it receives the relevant item
or notice or from which the time for taking action commences to run,
whichever is later. CN: if today is a “banking day,” then I have until
midnight the second day, not tonight.
 (b) Interaction between 4215 and Reg cc. Bank has a period of time
within which to make final payment or DISHONOR. With dishonor
they may be liable to their customer for not honoring a properly
payable item.
(c) Questions
(i) When did the check come in?
(ii) When does the count start?
(iii) When must the bank make a decision?
(2) Problem 170, p. 550
(a) When did the check come in? Tuesday morning, legally, though
actually the check came in on Friday. Wednesday, midnight is the
time to worry about.
(3) Rock Island Auction Sales Inc. v. Empire Packing Co, p. 550
(a) Construing §4-302.
(b) September 24, Rock received a check from Empire for $14k,
(c) September 24 Rock deposited check with First Bank.
(d) September 27 payor bank Illinois Nat’l Bank received item; Held
item until Oct 2. Oct 4, received by First Bank.
(e) Nov 7, Empire goes bankrupt.
(f) Rock sues Ill. Nat’l Bank, because it held the check beyond the time
limit fixed by § 4-302.
(g) “Accountable”=liable.
(h) Held, the statute imposes liability for the amount of the item. §4-
302 imposes liability upon a payor bank for failing to act prior to its
midnight deadline. 4-103(5) imposes liability on a depositary bank
or collecting bank for the same fault.
(i) 4-303 places a greater liability on payor banks than §4-103 places on
depositary or collecting banks, because those banks are merely
conduits, whereas the payor bank knows whether or not there are
sufficient funds available to pay the item.
(j) CN: Customer said he would put the money in the bank. The bank
tried to do him a favor, but became strictly liable.
(4) Reg CC & Returning Checks
(a) 229.30
(i) Two day & 4 day test for expeditious means
(ii) Highly expeditious means – Results in an extra day – Discuss
mailbox compared with Courier.
(b) A payor bank that misses its midnight deadline is strictly liable for
the amount of the check involved. Reg. CC creates a warranty of
timely return for checks, so that if a bank is guilty of making a late
return it has to respond in damages. But because banks were
 “mailing “ the checks by placing them in an envelop and then in the
mail before their midnight deadline, thus complying with the law that
they “Send” it before their midnight deadline, but with the result that
no one knew when it would arrive at the other bank, the Reg. CC now
provides that a payor bank is permitted to miss its midnight deadline
as long as it is able nonetheless to return a check to the presenting
bank before the close of that bank’s next working day, in effect
giving banks an extra day to return the check.
(5) Highly Expeditious. First Nat’l Bank of Chicago v. Standard Bank
& Trust, p. 554
(a) NB sues Standard bank, for failure to return checks in a timely
fashion. Held, the checks were returned timely.
(b) I: which bank should absorb the loss of a check kiting scheme
perpetrated against both of these banks?
(c) F: a person presented NB with checks amounting to 3.9 M, drawn on
Standard, and presented Standard with checks amounting 4 M drawn
on NBD. The next day each bank presented the other with the checks.
(d) Next day (Monday), NBD opted not to honor the checks, and
returned all the check to Standard.
(e) Tuesday, Standard received notice of this decision. Standard then
attempted to dishonor its checks. Stanford executives drove the
checks to NBD’s processing center. the checks were received by NB
at 3: 58pm, but NB did not credit Standard’s account.
(f) I: Did Standard return the check in compliance with Reg CC, which
provides that the deadline is extended if the bank uses a “highly
expeditious” means of transportation.
(g) Under the UCC, a paying bank may dishonor or revoke its
provisional settlement of a check before midnight on the next
business day after it received the check. 4-301.
(h) But Reg CC extends the deadline when a paying bank “expedites
delivery of a returned check.” Thus the bank need not regularly use a
courier to delivery the check.
(i) Here, Standard’s executives drove to the processing center.
(j) Held, NB should have honored the checks Standard delivered in the
amount of 3M.
(k) CN: The executive drove to the bank, and the court cut them a
break. There’s a special allowance for highly expeditious.
(l) Standard misses the midnight deadline.
(6) Problem 171, p. 560
(a) Reg. 229.36 (b)—Receipt at bank office or processing center: A
check is considered received by the paying bank when it is received
 1) at a location to which delivery is requested by the paying bank 2)
at an address of the bank associated with the routing number on the
check ; at any at a branch, head office, or other location consistent
with the name and address of the bank on the check if the bank is
identified on the check by name and address.
(b) MA: when received at the branch.
(c) CN: this is a multi-branch situation with a check processing
center. Is the moment of presentment to the payor bank for purposes
of EXPEDITIOUS RETURN when the checks get to the processing
center OR when they are returned to the individual branch?
k) Check return, p. 560
i) Intro:
(1) Federal Notice for large check return,--2,500 +.
(a) §229.33 requires the payor bank to send a direct notice to the
depositary bank any time it decides not to pay a check in the amount
of $2,500 or more. Failure to give notice makes it liable for actual
damages.
(b) How quickly must notice be given?—“notice must be received by
the depositary bank by 4pm (local time) on the second business day
following the banking day on which the check was presented to the
paying bank.”
ii) Purposes of EFAA –
(1) Benefit to Customers/ Customer quick access to funds
(2) Risk to depositary funds
(3) Customer may withdraw funds BUT subject to CHARGE BACK
(4) What if FUNDS are gone?
(5) Reg. cc balance the customer interest with FEDERAL Notice for large
check return, 229.33, and forward Collection test, 229.30. You can’t
route return items in a very circuitous way, you must return checks in the
same way you would the forward checks.
l) Charge Back, p. 562
i) If the depositary bank has given as advance on a check, and the drawee
bank turns out to dishonor it, the depositary bank can seek reimbursement
from the depositor, on three grounds: the initial contract agreement signed
when the acct was opened, the indorser’s obligation (3-415), and the
statutory right of charge back.
ii) CN: P If the payor/drawee bank dishonors and returns a check to
depositary bank, that bank can look to customer (No matter how long since
deposit). Three ways to charge bank the customer’s acct.
(1) Contract agreement
(2) Indorser’s obligation §3-415
 (3) Charge back §4-214—this has some time limits on it.
iii) SkIP__Problem 172, p. 562
(1) Monday, july 8—Pythias deposits in DSB, a check drawn on BNbank.
(2) july 10—DSB receives check, marks NSF and returned to DS bank the next day (July 11).
(3) July 11—Pythias writes check on his acct at DSB.
(a) Can Pythias sue DSBank under 4402
(i) 4215(d)—If provisional settlement for an item does not become final, the item is not
finally paid.”
(ii) 4215(e)(1)—“[Subject to (i) appliacebl law stating a time for availability of funds and
(ii) any right of the bank to apply the credit to an obligation ot the customer,] credit given
by a bank for an item in a customer’s acct becomes available for withdrawal as of right
(1) if the bank has received a provisional settlement for the item, when the settlement
becomes final and the bank and had a reasonable time to received return of the item and
the item has not been recieved within that time.”
(iii) 4-214—
(b) Since DSBank has failed to give a propert chargeback notice, it is liable for the amount of the
item?
(i) 4214(a)—If the reutn or notice is delayed beond the banks’s midnight deadline or a
longer reasonable time after it learns the facts, the bank may revoke the settlkemnt ,
charge back the credit, or obtain refund from its cumster, but it is liablt for any loss
resulting from the delay.”
(c) If it had given Pythias notice of dishonor, could DSBank have recovered the $500 even if it
had let Pythias withdraw all the money from his account prior to the reutn of the check from
the payor bank?
(i) 4214(d)(1)—“The right to charge back is not affect by (1) previous use od a credit given
for the item.”
(d) Would your answer to the first question be the same if DSBank both the depositary and the
payor bank?
(i) 4-215(e)(2)—Subject to . .. . credit given by a bank for an item in a customer’s acct
becomes available for withdrawal as of right: (2) if the bank is both the depositary bank
and the payor bank, and the itemis finally paid, at the opening of the bank’s second
banking day following receipt of the item.”
(ii) 4302—“If an item is presented to and received by a payor bank, the bank is accountable
for the amount of []”
(iii) Rec. CC 229.10(c)(vi)—Certain check deposits. (1) General Rule. A depositary bank
shall make funds deposited in an account by check available for withdrawal not later than
the business day after the banking day on which the funds are deposited, in the case of—
(vi) A check deposited in a branch of the depositary bank and drawn on the same or
another branch of the same bank if both branches are located in the same state or the
same check processing region; and
(e) If the check had been returned by BN Bank to DSBank on September 25, could DSBank have
still charged back?
(i) 4214(a)—“these rights to revoke, charge back, and obtain refund terminate if and when
a settlement for anitem reiceved by the abk is or becomes final.” I.e, Charge bank is
allowd only for provisional settmentments. If the payor bank made final payment on a
check, all the provisional settlements “firm up and became final” Charge back is not
allowed to undo final settlements.
(f) If the check is sent through for repayment, does 4214 allow DSBank to charge back,
assuming that it does not immediately on learning of the seoncd return?
(4) Gordon v. Planters and merchants Bancshares, inc., p. 563
(a) Gordon sues Planters for wrongful charge back of a check he
deposited into his acct.
 (b) September 24—Gordon deposits check (from Co-op drawn on First
National) in Planters Bank (where Wallace works)
(c) September 25—First national makes final settlement with Planters,
Planters credits Gordon acct.
(d) September 26—Wallace calls Gordon’s home
(e) September 27—Wallace calls Co-op-“check had cleared”
(f) Oct 3 Wallace instructed a chargeback against Gordon’s acct.
(g) I: because Planter admitted fault, the only question is was there was
evidence to support awarding punitive damages.
(h) First, are punitive damages allowed under §4-415(d)? yes.
(i) Second, was there sufficient evidence that Planters (through
Wallace) acted wantonly in causing the injury or with such conscious
indifference to the consequences that malice may be inferred”? yes.
(j) Third, Was there an agency relationship between Wallace and
Planters? yes.
(k) Fourth, attys fees
(l) CN: Gordon received a check made out to the business, which he
deposited it into his personal acct. He thought he had bought out the
partnership and owns it all. The check was long overdue; Wallace
had to use his position to get dishonored. The bank had to pay
punitive damages. You can you the dishonor process with our own
bank to effect your’ personal interested to secure a wrongful charge
back.
(5) Problem 173, p. 574
(a) CN: EFAA tells customer when the funds are available, it does not
say that the customer gets to keep them.
(b) Provisional settlement; she goes . . .. .
iv) Undoing Final Payment, p. 574
(1) Can the payor after final payment, resist payment using common law
theories, such as mistake?
(a) Problem 174, p. 575
(i) 4-302(b)—“The liability of a payor bank to pay an item pursuant
to subsection (a) is subject to defend based on breach of a
presentment warranty (4-208) or proof that the person seeking
enforcement of the liability presented or transferred the item for
the purpose of defrauding the payor bank.”
(ii) 3418--
(iii) §1-203—Lease distinguished from SI.
(iv) CN: 1103—Fraud outside the UCC.
1. §1-103—other law supplements UCC. So if you can’t help
you’re client under the UCC, try fraud etc.
 2. §2-418—restitution
3. §4-302(b)--
(b) Problem 175, p. 575
(i) Buyer receives a product that turns out not to be what it ordered.
But it already sent a check to the seller. It immediately sends a
stop payment order to its bank. But its bank negligently pays the
check anyway. What is the bank’s defense?
(ii) 3-418 & OC—If the drawee of a draft pays a draft and the
drawee acted on the mistaken belief that payment of the draft had
not been stopped.... the drawee may recover the amount of the
draft from the person to whom or for whose benefit payment was
made..” Thus, “if the drawee acted under a mistaken belief that
the check had not been stopped, the drawee is entitled to recover
the funds paid or to revoke the acceptance whether or not the
drawee acted negligently [except against a HDC or BFP?].
(iii) CN: this is negligent payment of a stop payment order. Look at
subrogation.
v) Restrictive Indorsements and Banks, p. 576
(1) 4203—only the collecting bank’s transferor can give it binding instructions and the collecting
bank need not examine the documents to see whether other instruction or restruction are contained
in it. See OC.
(2) Problem 176, p.
(a) 3206(c)(2)—this would seem to suggest that the depositary bank converts the check as
well. Of the banks involved, only the depositary bank faces liability for non-compliance with
the terms of a restrictive indorsement.
vi) Delays, p. 577
(1) Problem 177
(a) F: Janitor accidentally feeds a box of checks into a paper
shredder. For some of the checks the bank would he a depositary
bank or collecting bank, for other payor/drawee bank.
(i) Collecting banks are required to take action before their midnight
deadline following receipt §4-202(b).
(ii) Payor banks become absolutely accountable for a check not
routed before the expiration of the midnight deadline. §4-
215(a)(3), §4-301, §4-302.
(iii) §4-109(b)—“Delay by a collecting and payor bank is excused if
it is because of circumstances beyond its control and the bank
exercises such diligence as the circumstances require.”
(iv) MA: here, , the delay was arguable not because of circumstances
beyond the bank’s control, but it certainly it exercised such
diligence as the circumstances required.
(v) Bank loses.
vii) Priorities in the Bank acct-- the four legals, p. 578 – ON EXAM
(1) Who gets paid first?
(2) 4303(a)—the four legals come too late if a given check has either been
certified or the bank has taken the steps that lead to final payment of the
check; or after the time periods described in (a)(5).
(3) These are guaranteed to be on the midterm. The four legals are
(a) Notice (of customer’s death).
(b) Stop payment
(c) Service of legal process
(d) bank’s right of setoff
(e) 4-303(b)—pay in any order
(4) Problem 178, p. 578
(a) Filing bankruptcy freezes the acct when the bank has notice of
BR. Then a check come through.
(b) First, payee is standing at the counter. As long as they knew nothing
about it, they are allowed to pay the amount.
(c) second check for $500 came through. This is fine because they did
not know about the BR.
(d) What about the check that got put in the hold file, and is sitting there
without final payment when the notice of BR comes in.
(e) Telling the bank teller over lunch with someone who happened to
run into, is probably not notice. Chatting over lunch while probably
not suffice unless that was the teller’s responsibility.
(f) at 4, the teller makes a payment of
(g) Some of these checks were presented over-the-counter for
immediate payment in cash, which means it’s a final payment.
(h) Notice of bankruptcy. There may be a delay in time between the
filing of BR and the time when the bank learns of it. Here, the
Debtor filed BR at the end of the day. Before the bank has notice,
any payments are valid. The bank receives official notice when the
trustee calls the bank and tells the bank.
(i) EXAM: she may set up a problem dealing with when notice was
received. It also deals with an item that is pending.
(j) Bank’s right to setoff.
(5) Problem 179, p. 580
(a) §4-303(b)—items may be accepted, paid, certified, or charged to the
indicated account of its customer in any order.” So the bank has
discretion of paying it in any order it wants. One way to avoid
litigation is to establish a policy and then follow it religiously.
(b) CN: this deals with the order in which the bank pays items. Usually
a number of checks clear in one day. What order to pay in? The
bank sometimes uses the high-to-low, where the bank will look at all
 your checks and then pay the highest checks first, because usually
there are items which are highly important that you pay. If your bank
has $3k, and your mortgage is $2.9, and then you have 10 $100
checks. It’s a balancing of the evils. The customer can protect
against this with overdraft protection. Some say that high-to-low
check processing yields NSF fees which may
9) Wrongdoing and Error: Chapter 12, p. 581
a) Forgery of the Payee’s Name, p. 582
i) Intro: the forgery of the payee’s name means that no valid negotiation
takes place;
ii) Remember:
(1) No valid negotiation can occur – so no one taking after forgery can be a
HDC or holder.
(2) But Bearer paper is different result.
(3) It is possible to be a non holder with rights of a holder – Shelter Rule –
§3-203(b).
(4) Can deposit without indorsement: 4205. Can the bank be a HDC? yes.
also if the item was delivered without an indorsement, Bank can force
indorsement.
(5) Can force indorsement. 3203(c)
(6) “Person entitled to enforce” the instrument: Definition 3-301.
(7) Person who loses the instrument, but can recreate: §3-309.
(8) Payment of acceptance by mistake: §3-418(b). This is harder to
analyze.
(9) Properly payable rule §4-401 – If payee’s name is forged, check is not
properly payable.
iii) Problem 180, p. 582
(1) Thief finds check and forges payee’s signature then below it signs his
own. He deposits check in Bank, but the maker had already stopped
payment. Thief has fled. Is the bank a HDC?
(a) 3-414(b)
(b) 3-201—“Negotiation’ means a transfer of possession, whether
voluntary or involuntary, of an instrument by a person other than the
issuer to a person who thereby becomes its holder.” There was no
negotiation because the bank never became the holder.
(c) Stolen check. Thief forges payee’s name as indorsement. Deposits
check, withdraws case & disappears. Drawer
(2) If a check is payable to the order of a X, only X can be a
holder. Without a valid indorsement by the payee, not later person can
qualify as a holder.
 (3) §4-208—Presentment Warranties. the drawee bank has several choices.
Presentment warranty’s are available only to the drawee bank. It can go
back against the immediately back in the change of collection, or if over-
the-counter, then that person; if there is a series, then it can go after
anyone in the chain. But what about the previous people?.
(4) transfer warranties, § 4-207, this is designed to pass the liability up the
chain to the person who dealt with the person who breached the
warranty. Each person along the way has violated the warranty.
(5) So the rights of the depositary bank is to go after the person who
violated the transfer warranty. But what if the check had been made out
to bearer or indorsed in blank, then no indorsement would have be
required, So if this was stolen there would have been not warranty
necessary.
iv) A “person entitled to enforce the instrument.” §3-301.
(1) The holder of the instrument
(2) a non-holder of the instrument who has the rights of a holder or
(a) EX: Problem 181, p. 583
(i) Portia gives a check for which she is the payee to Helen for an
antecedent debt, but forgot to indorse it. Is Helen a holder and
can she force Portia to sign it? §3-203(b). CN: Helen is not a
holder but she can require Portia to indorse it under 3203(c)--
(ii) EX: Depositary bank. Portia deposits check, unendorsed, in a
new bank acct. §4-205 gives the depositary banks portia’s holder
rights and makes it a person entitled to enforce the instrument in
spite of the lack of signature.
1. The depositary bank will be come a holder but only if the
depositor was a holder.
(3) a person not in possession of the instrument who is entitled to
enforce under 3309, or 3418(d).
(a) A person who has lost the instrument but who has the right to go to
court and recreate it pursuant to §3-309.
(i) EX: Portia’s cat chews up the check. Portia is no longer a
holder, but she is still a person entitled to enforce by using the
mechanism of §3-309.
(b) The person described in 3418(b).
b) Warranty Liability, p. 584
i) INTRO: When there’s a forgery, look to:
(1) properly payable rule 4401
(2) warranties
(3) conversion
ii) Presentment. §3-417 & §4-208---Run to Draw
 (1) No unauthorized or missing indorsements, no alternation, no knowledge
of forged drawer’s signature.
iii) transfer – 3416 & 4207
iv) Go Back up chain to wrongdoer or 1st party to deal with him
v) Problem 182, p. 584
(1) §4-401—“a bank may charge against the acct of a consumer [only] an
item that is properly payable. . . “ MA: here the check was not properly
payable because it was forged.
(2) 4-302(b)—final payment does not prevent warranty liability from giving
relief to the bank, see 4208.
(3) CN: Harry Villain is not a thief but a Finder. Finder forges Payee’s
name and cashes it a drugstore. Drugstore deposits it at Merchant’s
bank.
(4) Check forwarded for collection to drawee bank ONB. Drawer gets the
bank statement & discovers forged indorsement § 4-406.
(a) Can payee make the drawee bank re-credit or account? Under §4-
401 because the item was not properly payable.
(b) What is ONB’s remedy? §4-302(b) §4-208, go up the chain for the
presentment warranties.
(c) Presentment warranties run to drawee inclied prior transfer.....
vi) Problem 183, p. 585
(1) What warranties can the depositary bank use? Notice to prior
warrantors? §4-207(d). Do they have to give notice? no, only required to
prevent the warrantor from being discharged, it protects against loss for
not giving notice.
(2) When to file suit? 4-111—3 years after the cause of action occurs.
(3) 4-208(a)
(4) 4207(a)
(5) 4207(d)
(6) 4-111—
vii) Problem 184—
(1) What if you are the drugstore, what is you’re theory of recovery? You
have the transfer warranty. Pass the loss back to wrongdoing or 1st to
deal with him. Factually you’d win, but realistically, you probably
won’t find him. The drugstore were always in the best position to
prevent the loss, so they should have gotten his id.
c) Conversion Liability—§3-420(c), p. 587
i) Conversion at common law: a civil action for misappropriation of
another’s property.
ii) Only the person whose property rights are adversely affected [the holder]
may sue for conversion.
iii) Problem 185, p. 587
(1) The teller says they won’t pay the check and they wont’ give it
back. This is to illustrate the idea of conversion.
iv) Problem 186
(1) Art is a thief and takes a check that is made out to a named payee, who
had already endorsed the check. But do we know how he endorsed it? If
it were a blank endorsement, it would have been bearer paper, and it’s
treated like cash. But what if he had indorsed it payable to another
named party, then Art would have to forge it.
(2) But REMEMBER: Only the person whose rights are adversely
affected may sue for conversion.
(3) Who May NOT bring an action in conversion?
(a) §3-420—the issuer cannot sue in conversion, only the payee,
because this is the person whose rights are adversely affected. But he
cannot sue for conversion unless you receive the instrument by actual
delivery.
(b) §3-420(c)—a representative, other than a depositary bank, who has
in good faith ....this places a higher burden on the depositary bank,
because it has more likely dealt directly with the wrongdoer.
(4) Theories of recovery:
(a) 1. Conversion: payee can sue drawee bank or anyone taking a check
after forgery
(i) If drawee pays the payee, draw[ee] sues on Presentment
Warranty (not a person entitled to enforce the instrument 4-208).
(ii) That person pursues Transfer warranties. 4207
(b) §3-420
(c) 2. Replevy the check from current possessor (probably drawee check
returned in statement). Cross off forged indorsement, indorse &
present tot drawee bank. If draw resulted payment, sue drawer on
drawer’s obligations §3-414 or Underlying obligation.
v) Problem 187, p. 589
(1) 3-420(a)—Portia is the issuer/drawer who give check to her landlord,
and it is stolen from him. She sues the bank in conversion. Can she do
this? no. The issuer cannot sue in conversion. Who is the proper
plaintiff? The landlord. But what is Portia’s remedy? go after her bank
under the properly payable rule §4-401(a).
vi) Problem 188, p. 589
(1) ONB cannot sue in conversion because it never received delivery of the
instrument. §3-420(a).
(2) CN: what is the risk you run when the issuer drops an incertified check
in the mail? You cannot sue for conversion. Because the issuer cannot
 sue for conversion and the payee who never received the check cannot
sue for conversion. There may be other remedies, but not this one.
vii) Leeds v. Chase Manhattan Bank, p. 589
(1) Atty received a check in a settlement case made “to the order of
Client.” Above this he type “Egnasko as atty for”. He endorsed the
back and deposited it into his Trust fund acct.
(2) R: 3-420(a) provides that an “instrument is converted if it is taken by
transfer, other than negotiation, from a person not entitled to enforce the
instrument or a bank makes or obtains payment with respect to the
instrument for a person not entitled to enforce the instrument or received
payment.”
(3) Although the check was not actually delivered to Client, it was delivered
to Egnasko as Client’s atty, with intent that title be transfer to Client, the
payee. Accordingly, Client is entitled to bring this action for conversion
as one who “received delivery of the instrument . . . through delivery to
an agent . . .” 3420(a).
(4) DEPOSITARY BANK:
(5) DRAWEE BANKE:
(6) Leeds—Payee, Egnasko—agent; Chase (agent’s Bank), Summit—
drawee; agent alters payee name on check; bank pays to Altered Payee
name; Check not delivered to payee, but to their AGENT—This is
delivery. Indorsement was unauthorized. Depositary bank
Liable: RULE—loss falls on 1st solvent party in the stream after the
forger.
(7) Summit paid in good faith, no conversion . 3410(c).
(8) CN: Agent altered the settlement check and made himself the
payee. Once he received the funds, he gave them another check, drawn
on a different account. He was their agent so....delivery to agent is
delivery to the payee. He indorsed the check in an unauthorized
fashion. So when he took it to the bank he was not a person entitled to
enforce the instrument. The loss should fall on him, but he’s not
around. So the loss should fall on the depositary bank, because they
worked most closely with him. He he typed in this the depositary bank
may not have been able to detect it. There is no conversion action able
against the collecting banks, because they paid in good faith.
(9) Warranties, presentment and transfer. 4207--
viii) Problem 189, p. 594
(1) Conversion in joint accounts. Is a missing signature the same as a
forged one? yes. But what could he have done? He could have
deposited it into a joint acct instead of his individual account because
then he wouldn’t need her signature. But then he would have withdrawn
 the funds. There’s nothing that she could have done if he had deposited
it into a joint acct. Here he tried to deposit it into his individual acct
without only his signature on it.
(2) 3-110(b)
(3) 3-420(a)—OC 1.
d) Forgery of the Drawer’s name, p. 594
i) RULE: The drawee who pays or accepts a draft takes the risk of a forged
drawer’s signature. BUT: the drawee does not take the risk of a forged
indorser’s signature [which risk falls on the depositary bank].
ii) Price v. Neal, p. 594
(1) F: If the drawee pays or accepts the draft, it cannot pass the risk of the
drawer’s signature being forged off onto prior good faith parties. This
rule is embedded in UCC § 4-301, which makes the payor able
accountable for an item that has been finally paid. Also, §3-418, a
finality rule.
(2) CN: It used to be that the drawee bank used to take out signature card
and physically compare them. This doesn’t happen any more. It’s more
a risk of loss between two innocent parties.
(3) “The drawee bank must know its client’s signature as a mother knows
her son.”
(4) Loss allocation Rules.
(a) If the drawer’s signature is forged but the drawee bank pays the
check anyway, Price v. Neal puts the loss on the PAYOR (drawee)
bank – even if there is no fault or negligence.
(b) §3-418(c)—Drawee bank cannot recover mistake payment or
payment over forged drawer’s signature from a “Person who took the
instrument in good faith” or “in good faith changed position” OC 1.
(c) You have to incorporate the section of (c) to get to the Holding in
Price v. Neal
iii) Decibel Credit Union v. Pueblo Bank, p. 599
(1) F: Thief steals blank checks, forges drawer’s signature.
(2) a thief stole blank checks furnished by Decibel to one of its
customers. The thief forged the signature of the customer on several
checks. Each check was cashed at Pueblo Bank. Pueblo processed all
checks through the Federal Reserve System to Decibel, and Decibel
timely paid the checks.
(3) Decibel/drawee—
(4) Pueblo Bank/presenting bank
(5) Held, there were no presentment or transfer warranties made to Decibel
by Pueblo by returning the check to it through the Federal Reserve
system.
 (6) A transfer warranty as to the genuineness of the drawer’s signature does
not apply for the benefit of the drawee bank.
(7) CN: Which party must bear the loss for amounts paid on Forged
checks?
(8) Decibel bank’s customer discovers forgery upon reviewing statements.
iv) Was there breach of PRESENTMENT WARRANTY? §4-208. There’s a
warranty made that the warrantor ..... if the drawer’s signature is forged, has
there been a violation of the presentment warranty? it was forged, but not
altered, moreover it’s clear that the warrantor has no knowledge that it was
not authorized, but was the warrantor a person entitled to enforce the
draft. A forgery operates as a signature of the person forging. So there’s no
violation of the presentment warranty.
v) What about the transfer warranty?
vi) Transfer warranty includes a warranty that all signatures are authentic but
this is not what we’re concerned with here. Transfer warranty as to the
Genuineness of drawer’s signature does not apply for the benefit of the
drawee bank. [presentment warranties run to the drawee bank, transfer
warranties do not.
vii) §3-416—Transfer warranties CANNOT be disclaimed with respect to
checks – §3-416 and OC & 4207. You can indorse “without recourse,” but
you can’t disclaim a transfer warranty. Distinguish transfer warranties and
presentment warranty.
viii) 3416—OC 4—what is not warranted? NO promise that there won’t be
collection difficulties.
ix) TO whom does the transfer warranty run? to everyone in the chain except
the drawee bank.
x) §3-416(a)(6)—Remotely created consumer items. Limited rejection
of Price v. Neal for remotely created consumer items. Depositary bank is in
best position to bear loss. 3-416(a)(6_ & 4-207(a)(6). OC 8.
xi) Distinguish the liability for a forged signature of a payee, and a
drawer. For a payee, it’s the first person to deal with the wrongdoer, i.e.,
the collection bank. With a forged signature ot the drawer’s signature, the
drawee bank usually bears the liability.
xii) Problem 190, p. 602
(1) Harry steals a check from Portia and makes it out to himself and signs
her name on the drawer’s line. He cashes it at Drugstore  Merchants
Bank  ONB(drawee).
(2) Thief steal check book, forges Drawer’s signature, cashes check at
drugstore, check deposited to Merchant bank. MB presents check to
drawee (payor) bank.
(3) §4-401(a)—
 (4) §4-208(a)—ONB can go after Merchant’s Bank, and the Drugstore,
each of whom have warranted that (a) they are entitled to enforce the
draft, and the draft has not been altered, (b) the warrantor has not
knowledge that the signature of the purported drawer of the draft is
unauthorized.
(5) §3-418—the remedies of subsection (a) cannot be asserted against
Merchant’s bank or Drugstore because they took the instrument in good
faith and for value.
(6) §4-406- customer’s responsibility to examine the bank statement. She
did this in a timely manner.
(7) Is the check properly payable under 4401? no, it’s not paid according
to the customer’s instructions, so the bank has to re-credit her acct. The
check was not properly payable so customer won’t have to bear the
loss. The drawee bank will try to pass the loss up the chain of ... for
presentment warranty, but it can’t under Price v. Neal.
xiii) Problem 191, p. 603
(1) Did the depositary bank [Merchant’s } violate 4-208(a)(1)(Presentment
warranties).
(a) MA: No. Under §3-403—“an unauthorized signature is ineffective
except as the signature of the unauthorized signature in favor of a
person who in good faith pays the instrument or takes it for
value.” I.e., the forgery acts as if the forger had signed his own name
instead of the name forged. Legally, the check was drawn by Harry
Villain payable to the order of Harry Villain. The drawee bank
decided to pay, but cannot charge the customer for this. Under Price
v. Neal, it must eat the loss.
(b) Therefore, the depositary bank was a person entitled to enforce the
draft of Villain.
(c) CN: is the depositary bank a “person entitled to enforce...” no.
(d) CN: Price v Neal discussion. Compare loss allocation to the payor
bank.
(e) SEE slides.
xiv) Problem 192, p. 603
(1) 4-208(a)
(2) 3-418—the depositary bank may claim it took it in good faith for value,
in which case this section cannot be used against it.
xv) QUESTION:
e) Validation of the forgery, p. 604,
f) CN: Basic forgery rule. §3-403 has an escape clause. An unauthorized
signature may be ratified. Agency law. Principal accepts benefits of forgery:
i) Both Price v. Neal and the rule that forged indorsement is ineffective to
negotiate the instrument put a heavy burden on drawee banks. §3-
403(a) has an escape clause in the words “Unless otherwise provided in this
Article or Article 4” and “an unauthorized signature may be
ratified.” Ratification occurs when the party in question, with full
knowledge of the forgery or alteration, accepts the benefits thereof or
actively assents to the wrongful activity.
ii) Problem 193, p. 605
(1) F: H got the benefit of delaying his divorce.
(2) Apparent authority,
(3) Ratification where agent has apparent authority
iii) Common Law Validation, p. 606
(1) Hutzler v. Hertz Corp., p. 606
(a) Hutz settles with Hertz in a wrongful death claim. Huts makes the
check payable to “Hutz and Yudow, her attorney,” drawn on
Manufacturer Hanover. Yudow sign his own name and forges Hutz,
and deposits the check into his personal account. Then he closes the
account and skips town. Hutz sues Hertz and Many Hanny. Trial
court dismissed the claim against both and Hutz appealed only the
dismissal of the claim against Herts.
(b) Agency law: Herts has no further liability.
(c) Negotiability instrument law. Hutz should have sued the drawee
bank, not the payor.
(d) CN: Payee—Hutz and her atty, Yudow. Yudow indorsed the check
individually, and deposited the check in his own acct. If there is a
joint payee, then normally both signatures are required.
(e) Yudow must have had apparent authority, and under the law of
agency, ....it’s clear that if Hertz had paid in cash, they would have
been discharged of their obligation; with a check, there is suspension
of that obligation until cashed, here it was cashed. So even though he
forged his signature, and both signatures were required....she bears
the loss because she selected the agent.
(2) QUESTION: Could Huts have sued the drawee bank? §3-420(a). Can
the plaintiff (whose signature as a joint payee was forged by her agent)
sue the drawee bank for Conversion? Yes,§3-420 OC 2. Without both
signature’s there’s not an appropriate negotiation.
(3) Problem 194, p. 611
(a) Drawer gives check to payee who loses it. Generally, the loss will
go the person who first dealt with the forger.
 (b) §4-320(a)—“an instrument is converted if it is taken by transfer,
other than a negotiation, from a person not entitled to enforce the
instrument.”
(c) 4401
(d) 4407
(e) CN: How to avoid double recovery?
(f) Payee losses check, wrongdoer forgers payee’s signature. Can the
payee sue the drawee bank for conversion? yes, §3-420. Because
you should have paid me and you paid someone else.
(g) Can the drawer sue the drawer for conversion? no. No, because
conversion is not available to the issuer of the check.
(h) Is the drawee bank also liable to the drawer under §4-401? no,
because there was still an obligation. The bank would have to pay
twice, both to the drawer and payee. The theory is that the funds got
to where they needed to go.
(i) Remember: subrogation §4-407 will also allow
(4) A successful conversion action destroys the drawer’s §4-401 not
properly payable suit against the drawee.
(5) WRONGDOING & ERROR—When good checks go bad.
(a) Validation of forgery, we have discussed the effects of FORGED
drawer’s signature & forged payee’s signature
(i) Those results will change if there is RATIFICATION of forgery
(ii) Common law: acceptance of benefit (H wanted to stay married,
so he said nothing when his W signed his name.)
(iii) Agency: apparent authority
(iv) If the drawee bank pays a check with a forged drawer’s
signature, the drawee Bank will most likely take the loss because
of Price v Neal Rule (Drawee must know drawer’s signature as a
mother knower her child) and §3-418(a) &(c). OC 1.
(v) The presentment warranty will not help the drawee bank
here. See §4-208, 3417. Reas what is being warranted.
(vi) What the drawee bank should do is dishonor the check (not pay
it). The check would in that case be returned through the chain of
banks to the depositary bank. Hopefully, the Depositary bank
gave only provisional credit and could Charge back (§4-214) the
amount against its customer’s account. The Customer will be able
to go back up the chain of indorsements & transfer warranties
until it reaches the wrongdoer or the 1st solvent party to deal with
the forger (wrongdoer). It could go all the way back to the
wrongdoer, but this rarely happens.
 (b) If the drawee bank pays a check with a forged payee’s signature, the
usual rule is that the DEPOSIATARY bank is most likely to take the
loss because there can be no negotiation after forgery of the named
payee’s indorsement, so no “person entitled to enforce the
instrument,” so violation of the presentment and transfer warranties.
(c) In these fact situations, also consider Conversion §3-420 and
Subrogation §4-401 as wells at the properly payable Rule §4-401 and
the Bank Statement Rule §4-406.
(d) Also ask if there has been RATIFICATION. if so, then it operations
as if there were no forgery.
(e) 4 UCC Validating Wrongdoing”
(i) 3404—the Imposter Rule
(ii) 3405—The employee endorsement rule
(iii) 3406 –negligence Rule
(iv) 4406—Bank Statement rule
(v) READ CHECK 21 FEDERAL LAW provision, which preempt
state law.
iv) The Impostor Rule—§3-404, p. 612
(1) The impostor rule validates the Payee’s name, when the drawer or
maker has been duped by either an outsider or a trusted employee into
creating an instrument on which the name of the payee is highly likely to
be forged. This covers:
(a) Impostors
(b) Fictitious payees
(c) Who is an impostor? One who impersonates the payee—result
governed by §3-404(a) indorsement in the name of payee can be
effective.
(d) Who is a fictitious payee? Made up name or Real company named
as payee IF no intent to give that company an interest in the
instrument. §3-404(b).
(e) Anyone in possession is a HOLDER & can indorse.
(f) The impostor rule places the loss on the person who had the ability
to verify the identity of the impostor.
(2) Loss Sharing for Negligence. §3-404(d). There are two negligence
parties, the drawer who should have verified the identity of the payee
and the bank because it should have
(a) Rationale:
(3) Problem 195, p. 612
(a) No. §3-404(a)—indorsement is effective as the indorsement of the
payee in favor of a person who pays in good faith or takes it for
 value. Therefore, Amy cannot raised the claim that it’s not properly
payable under §4-101.
(b) There is no Hilda Humane, and even if there is Sandra Sting is not
this. So Amy cannot rely on forgery as a defense.
(c) CN: Impostor payee §3-404(a)
(i) Is this properly payable? §4-401. It may not be, but for the
operation of this rule. You could say that had there no ....because
there was an impostor
(ii) What is the effect of 3404(a)
(iii) Will the Bank share in loss? 3404(d)—does the bank have a
responsibility to verify the id? yes. (Be very familiar with the
examples following §3404 exam]
(4) Problem 196,
(a) §3404(b)—“a person whose intent determines to whom an
instrument is payable” is usually the person writing the check.
(i) §3-110(a) “The person to whom an instrument is initially
payable is determined by the intent of the person signing as the
issuer of the instrument. The instrument is payable to the person
intended by the signer even if that person is identified in the
instrument by another name.”
(b) MA: “Walter Heartstrong” was the person to whom the instrument
was intended to be payable. But under §3-404(b) the husband can do
nothing.
(c) Who did the insurance company intend to pay? This may be
arguable. They intend to pay whoever signed the letter asking for the
cancellation of the insurance policy.
(d) Is W an impostor (posing as Walter)? this is debatable. “If an
impostor, and by use of the mails induces the issuer to issue the check
to her, then her indorsement will be effective as to her name. But the
question is whether she will have to pay him again. He may have
ratified her act of forgery.
(e) Is the Bank also negligent? Husband negligent? 3-404(d).
(f) Will the Ins. Co. have to pay Husband?
(g) Common law? acceptance of benefit?
(h) You could argue that the bank was negligent, also that the husband
was negligent.
(5) Problem 197,
(a) §3-404(b)—
(b) Yes, the checks are properly payable because the intended payee is
himself.
 (c) Corporate Treasurer add fictitious employees to payroll & cashes
check (indorsing in fictitious name).
(d) Are these checks properly payable ? §3-404(b).
(e) Same result if real former employees? §3-404(b)
(f) STUDY EXAMPLES in OC to 3404.
(g) CN: this is a situation where there is either fictitious persons or
person’s not intended to receive. In both situations
(h) As between the corporation and the bank who takes the loss,
because of the impostor/fictitious payee rule? The corporation.
(6) Problem 198, p. 614
(a) Not §3-404(b), but §3-405 OC 1.
(b) CN: person writing check DOES intend named payee to get proceeds
of check so this is not a 3-404 case UNLESS we view the Secretary
as the one whose intent controls.
(c) If there were no such person, §3-404 would apply
(d) In any event, the bank will be protected by §3-405.
(e) Is the check properly payable? the bank didn’t following his
instructions, they paid someone other than the person intended. The
bank counters that this is part of the impostor/fictitious payee
rule. Then he counters that the bank was also negligent.
v) Employee Indorsement Rule, p. 614
(1) Who is an employee?
(2) What is “fraudulent indorsement?
(a) Employer?
(b) Payee
(3) Who has “responsibility” for the instrument?
(4) Who does not have responsibility?
(5) §3-405(b) What if the bank fails to exercise “ordinary care” in paying
the instrument?
(6) SEE examples in commentary.
(7) 3-405 and OC 1,
(8) Problem 199, p. 614
(a) F: bookkeeper forgers a
(b) She is generally responsible for handling checks? does that make her
“responsible” yes. Maintenance man? no.
(c) Does 3-405 cover forgery of Employer’s name as payee?
(d) Does she have “Responsibility? yes
(e) Who takes the loss? the employer
(f) bank may be liable for some comparative negligence.
(g) IF these validation rules do not apply, who is likely to bear the loss
for forged payee signature?
 (h) Forged drawer’s signature?
(i) NOTE on federal commercial paper law.
(9) Problem 200, p. 615
(a) 3404(b)
(b) Price v. Neal
(c) CN: Stolen check book. Writes name of a fictitious
payee. Ordinarily a forged indorsement makes the bank responsible
under Price v. Neal. But is there a validation.
(d) If an indorsement is validated it operates as a valid indorsement.
vi) The Negligence Rule, p.
(1) A party is estopped from complaining about a forgery when the person’s
own negligence substantially contributed to the creation of the
forgery. Young v. Grote.
(2) A party who is negligent and contribute...
(3) Problem 201, p. 616
(a) F
(4) Problem 202, p.
(a) F
(5) Depositary Bank v. Drawer (Citizens and Assoc)., p. 617
(a) 3-406
(b) F: Frieda Gray, a branch manager for Allied Mortgage, received
three checks from Citizens totaling $50k, and payable to
Allied. Gray deposited these checks in her personal acct, the an
indorsement “Allied Mortgage Company #259” or “Allied Branch
#259.”
(c) The checks were written by Wilburn, president of Citizens.
(d) Gray – branch magr for Allied. Check were made payable to Allied,
Gray took checks as Allied, deposited to her personal acct. Forged
Indorsement. [normally the depositary bank suffers the loss of a
forgery. in the case of a forged indorsement, it is not a valid
indorsement, so there is not one entitled to enforce the check, there is
no valid negotiation]. Who normally takes the loss? Why? see
above.
(e) Can we apply §3-405 to shift loss?
(f) Allied’s employee forged Allied/Payee’s. Who’s employee was
she? someone not a party to the suit.
(g) Try to shift the loss.
(h) Although we expect the depositary bank to take the loss for forged
indorsement UCC §3-406 may change the result:
(i) Negligence validates forgery
 (j) HOw was the drawer negligent? They didn’t verify that she was
authorized, they could have...but were they that negligent?
(k) How was the depositary bank negligent?
(l) Comparative negligence: Drawer 80%, Depositary 20%
(m) Key—you can use these sections for reallocating the loss and
passing it back to someone else. One section is negligent
contributing to a forged signature.
(6) Problem 203, p. 624
(a) 3-307(b)(2)—the bank is charged with notice of the breach of
fiduciary duty if the payment is taken... or deposited into an acct
other than the acct of the fiduciary as fiduciary. If the bank knows
she’s the corporate treasurer, then the bank may have a heightened
duty. If they’ve been negligent it m...§3-406. 3307 may give us
notice.
(7) Problem 204
(a) 4-401—properly payable
(b) Instruments payable “to the order of the bank” are NOT bearer
paper. Court imposes a duty on the bank to investigate why the
check is payable to the bank. treasurer could not have gotten away
with writing check to Cash or Bearer.
(c) Bank’s negligent practice caused the loss caused by “forged
indorsement” but was corporation also negligent? What is the effect
if there is negligence on both sides? Apportion the loss according to
negligence.
(8) Problem 205,
(a) 3-307(b)(3)
(b) Fiduciary Issues>
(c) 3307
(d) Fiduciary uses instrument payable to represented person or fiduciary
as such for persona benefit
(e) Patrick has a Claim to the CD without repaying the loan, ) since the
bank knew it belonged to him and was being used for mame’s
personal benefit
(f) What if she has written check out of trust acct to pay her salary as
trustee §3-307(b)(3).
(g) OC 2—situation in which fiduciary embezzles money by
vii) The Bank Statement Rule, p. 626
(1) 4406—the customer must examine the bank statement or be estopped
from asserting unauthorized signatures or material alterations that could
have be discovered. This is an extension of 3406.
(2) Problem 206, p.
 (a) Furnace repair man steals check and forgers the drawer signature.
(b) 4406(d)(1)
(c) Forged Drawer’s signature
(d) Does the bank have to re-credit acct?
(e) Not properly payable
(f) Price v. Neal, 3418 (a) &(c).
(g) BUT customer failed to exercise “reasonable promptness in
examining the statement and reporting the forgery, but did the bank
suffer a loss?
(h) What if she had notified them promptly? the bank still takes the
loss. The only place it would make a difference, because....the bank
would take the loss in any event, unless it has some avenue of
recovery that she has precluded from her failure to give prompt
notice.
(i) If she failed to do something that actually caused them to eat the
loss. Because of her inaction, she caused them loss.
(j) Because the bank had to pay is not the loss we’re talking about.. If
they have an avenue of recovery, which her inaction caused.
(3) Problem 207, p. 627
(a) 4406(c) (d) (e) and (f)
(b) The customer has the
(c) Forged drawer signature -- must bank re-credit?
(d) 4406(c) Customer failed to exercise reasonable promptness in
examining statements
(e) 4406(d)—bank shows that customer’s failure led to more forged
checks by same wrongdoer
(f) NOTE that drawee bank could have liability for checks cleared
before statement plus reasonable time.
(g) 4406(f) statute of limitation. Customer precluded after 1 year from
statement
(h) 4406(e) –Bank failed “ordinary care” – apportioned bank lacks
“good faith”, Bank take the whole loss. See definition of “good
faith”—§1-201(b)(20)—“honesty in fact” and “observance of
reasonable commercial standards of fair dealing.”
(i) Shifts: first, the general rule is that the depositary bank will suffer
the bank, then look to whether the customer failed to notify in time,
within one year. Be clear about how the loss can be shifted back and
forth.
(4) Falk v. Northern Trust Co., p. 627
 (a) §4-406—Without regard to CARE or lack of care of either customer
or Bank, a customer has 1 year after statement to report forged
Drawee’s signature or Alternations
(b) BUT What if the bank acted in bad faith? then it extends it beyond
the one year.
(5) Problem 208, p. 634
(a) 4406(c), (d)
(b) 4406(e)
(c) 4103(c)—ordinary care
(d) 3103(a)(7)
(e) Bank paid checks with Forged drawee’s signature.
(f) Customer failed to review statements and report items for 7 months
after 1st item: 4406(c) & (d).
(g) Customer says bank negligent in not reviewing items—apportion
loss §4-407(e)
(h) BUT 3103(a)(9) –Ordinary care
(i) Bulk filing, standing alone is not negligence.
(6) Problem 209, p. 634
(a) 4406(d)
(b) 4401
(c) 4-103
(d) 4406(e)
(e) What is the effect of a deposit acct agreement that imposes a short
time for the customer to discover and report forgeries?
(f) §1-302- variation by agreement. the effect of the provisions of the
UCC may be disclaimed by agreement. But the obligations of good
faith.. a time that is not manifestly unreasonable, may be fixed by
agreement
(7) Problem 210, p. 635
(a) Bank adds a clause.
(b) 4103
(c) 4401(a)
(d) 3103(a)(7)
(e) CN: but can the deposit acct agreement vary the rile of Price v. Neal/
§3-418.... probably not
(8) Problem 211, p.
(a) 4208(a)(2)
(b) 4406(F) last sentence
(c) 4208(c)
(d) Customer signs all check. One is stolen and filled in. Bank pays
check. Customer discovers and reports it 2 years later.
 (e) 4401? 4406?
(f) Bank re-credit customer’s account.
(g) Can drawee (Payor) bank pursue breach of presentment
warranty? §4-406(f)? no, if they choose to re-credit the acct. they
can’t pass the loss along
(9) Problem 212, p. 636
(a) 4208(c)
(b) 3417(c)
(c) 3404(bA)—Fictitious payees—anyone can indorse in that name so
everyone after that is a “holder” if in good faith paying or taking for
value or collection
(d) So no violation of presentment warranty §4-208
(e) Under agency law, principal is responsible for Agent’s acts within
the scope of his employment; check appeared to be properly
(f) Graham has typed out the bank statement rule, but we should do the
same ourselves for the other rules, the Imposter rule, 3404,
Employment Indorsement Rule, 3405, negligence Rule, 3406, Bank
statement Rule 4406.
g) Alteration, p. 637
i) CN: An alteration means . . . notice that it doesn’t speak of non-fraudulent
alternations. Discharge as a personal Defense §3-305. Real defenses are
good against a HDC. “Discharge” does not appear in the real defenses, but
it would fall under the personal defenses as in “simple contract.”
ii) §3-407(c)—may enforce the rights according to its original terms. see also
§4-401(d) a bank that in good faith makes payment ...unless the bank
knows that the alteration was improper.
iii) Problem 213
(1) 3-407—a fraudulent alternation completely discharges any non-
negligent person whose negotiable instruments contract is changed by
the alteration.
(2) Is the maker of
(3) Maker signs note in the amount of $100, but it is altered to show
$9,500. Then it is discounted for $100 to a company that “always buys
their paper”. Would this lead to a HDC? probably not, the discount was
too deep, and it was probably a party to the original transaction. So if
it’s not a HDC then he can raise the defense of discharge.
(4) What if the document had already gone through a bank... they would
have to re-credit it part of it, but they would have to enforce according to
its original terms.
iv) Problem 214
(1) 3-115
 (2) 3407
(3) 3-406
(4) 4401(d)
(5) Guy signs a check, with nothing else filled out. Check stolen,
Completed and paid. Can he get the drawee bank to re-credit his account
because not properly payable? §4-401. He claims discharged by §3-
407 Alteration.
(6) But see §3407(c)
(7) §3406—His negligence contributed to alteration
(8) 4401(d)
(9) §3-115(b) may be paid according to its terms as augmented by
completion. (c) If words or numbers are added to an incomplete....so the
bank can enforce it but they would go back to the warranties to recover.
(10) As to the bank, it is enforceable. So who has the remedies here,
and who has to go after someone for completing the instrument? the
drawer. This makes sense because it’s his fault. So the drawer takes the
loss unless he can go after the person who altered. it. His common law
defense is discharge.
v) Problem 215
(1) 3309 & OC
(2) CN: This was an alteration by someone who didn’t have fraudulent
intent, so it’s not an alteration that would discharge the party?
(3) What if she had eaten it? §3-309, is the reconstruction provision. It’s
not a cancellation because she’s not a person entitled to enforce. §3-604.
vi) Problem 216, p. 638
(1) 3407
(2) 4401(d)—drawee bank can charge customer’s acct for original amount
($5) and §3-4107(c)
(3) 4208(a)
(4) Drawee bank can recover from Collecting Bank under presentment
warranty 4208 , a 4-317.
(5) Collecting bank recovers from depositary bank under transfer warranties
4207, 3416.
10) Check 21
a) Check clearing act for the 21st century
b) Federal Reserve Reg. CC subpart D (Commentary)
c) Regulation effective: Oct 28 , 2004
d) SUBSTITUTED CHECK
i) Paper reproduction of an original check
ii) Suitable for electronic processing
e) Purpose: speed, efficiency and cost reduction
 f) Does not REQUIRE bank to use electronic process. Nor does it alter tha
agreement between you and your bank.
g) Truncate – remove an original check from forward collection or return process
and send instead a substitute Check, or MICR line info or electronic image
h) Losses associated with Substitte checks
i) Fall on the reconverting Bank
(1) Bank that creates a dsusbtitute check
(2) OR--- 1st bank to receive substitute check
(3)
i) Warranties and indemnities are involved.
j) Consumer concerns
i) Notices
ii) Expedited Recredit
(1) content of claim
(2) timing—bank must receive the claim by the ened of the 40th calendar
day on which the bank mailed or delivered the statement.
(3) When must the bank investigate and respond? denial or provisional
recredit (up to 2.5k) by end of 10th calender day day after banking day
when bank received claim – Recredit or deny in full by Day 45
Explain denial
Comparative Negligence
Check 21 & Law Enforcement
Law Enforcement Concerns
Original Check Retention -- No measures to
Encourage
Electronic Check Conversion
Information from check is used for Electronic Payment from your account
Check is NOT the method of payment
You must be notified of electronic conversion
What law controls? EFTA & Reg E
Consequences: Faster Processing, Cost Reduction this reduces float time to
almost nothing.
Different Consumer Rights:
Reg E – Error Resolution – 60 days to report, bank has 45 days to
resolve
Electronic Fund Transfers
Electronic Check Conversion
ATMs
Point of Sale (POS Transactions) – Debit Cards
Preauthorized Transfers
Telephone Transfers
 Letters of Credit & Secured Transactions

Commercial Law
Graham, Spring 2005
Art. 5-Art. 9

CONTROLLING LAW: UCC Article 5; Texas Business & Commerce Code -

Chapter 5 (1999); www.capitol.state.tx.us; UCP 500 (1994) – Uniform Customs &
Practice International Chamber of Commerce; U.N. Convention on Int’l Standby
Letters of Credit International Standby Practices (ISP 98) – ICC published 2001
What is a Letter of Credit?
Three Parties:
1. Buyer (Applicant)
2. Seller (Beneficiary)
3. Issuing Bank
4. Confirmer – §5-107: Pays on letter of credit, reimbursement by issuer;
usually bank in beneficiary’s location; directly obligation on L/C
5. Nominated Person
Adviser
Three Contracts:
1. Between Buyer (who applies for L/C) & Seller (who will get paid by L/C)
2. “Undertaking” of the Bank to Pay the Beneficiary Upon Presentment of
Documents
3. Reimbursement Contract between Applicant & Bank

Letters of Credit
Commercial Letter of Credit
Payment Device
Loan Aspects - Time before Reimbursement
Protects Seller
Standby Letter of Credit
Like a Guarantee of Performance (“Backup”)
Risk Analysis is the Same as Loan
Most Expire without Draw
Independence Principle
Key attribute of L/C
INDEPENDENT of underlying sales contract
 5-103(d) (“The rights and obligations of an issuer to a beneficiary or
nomintated person under a letter of credit are independent of the
existence, performance, or nonperformance of a contract.”) &
5-108(f)(“An issuer is not responsible for the performance or
nonperformance of the underlying contract.”)
Issuer pays against DOCUMENTS
5-108 Issuer’s Rights & Obligations
Duty to Applicant to Examine Documents
Dishonor if Documents do not “Strictly Comply” with L/C
Duty to Beneficiary & Applicant to Pay if Documents Comply
Quick Review of Documents
Issuer has a “Reasonable Time” after presentation – Not beyond the end of the
7th Business Day after receipt of documents
7 days is not a safe harbor
Must decide to PAY or GIVE NOTICE of Documentary Discrepancy

Except Fraud, Forgery, Expiration before Presentation

“Strict Compliance” – 5-108; Strict Compliance - not “Substantial
Compliance”
BUT not “slavish conformity” or “oppressive perfectionism”
Examples in Comments
General Motors – Jeneral Motors
Number – No.
Bank of Clarksville – Bank of Clarksville, Clarksville, TN
Not just Documents, also time & place of presentation
Invoice is critical – description of goods.
Once there’s notice of documentary discrepancy, then there’s opportunity to
cure.

Nondocumentary Conditions
Label as “L/C” is not controlling
If nondocumentary conditions are FUNDAMENTAL, it’s not a Letter of
Credit and Not Governed by Article 5
5-102 Comment 6: Label not conclusive.
If nondocumentary conditions are not fundamental, they are disregarded
- 5-108(g)
When Does a Letter of Credit Expire?
Terms provide expiration date
Failure to specify date does not invalidate L/C
No Stated Expiration Date: Expires 1 Year after Date of Issuance
Perpetual: Expires 5 Years after Date of Issuance
Injunctions Against Honor
Injunction to prevent payment by Issuer; Injunctions should be few & far
between; Exception to Independence Principle; Applicant can get Injunction to
prevent the Beneficiary from presenting forged documents or committing
material fraud. 5-109 and OC.
Statute of Limitations
Later of:
One Year after L/C expiration date OR
One year after cause of action accrues. §5-115.

Revocable or Irrevocable?
If silent, L/C is Ireevocable. If irrevocable, then it can’t be changed.

Assignment of Proceeds. 5114.

See sample problems

Secured Transactions
9-101 – Comprehensive Scheme for the regulation of “security interests” in
PERSONAL PROPERTY and fixtures. Standardization
The Scope of Article 9
The Creation of a Security Interest
Perfection of Security Interest
Possession?
Filing?
Control?
Priority
Default & Enforcement
Building on Art. 3
Promissory Note – Unsecured (Signature Loan)
Add Accommodation Maker (Co-signor)
Add Guarantor
Add Collateral
How to protect the Lender’s interest in the Collateral? – Article 9
Bankruptcy is the ultimate test
Bankruptcy Primer: Unsecured Creditors usually get nothing. Secured
Creditors can get value of collateral; IF Perfected under Article 9, If
Security Interest in Collateral is Unperfected, Creditor becomes an
Unsecured Creditor
1) Pre-Code Security Devices, p. 810
a) Secret lien. Benedict v. Ratner – U.S. Supreme Court 1925, p. 810--Hub
Carpet – Bankrupt (Debtor); Benedict – Trustee; Ratner – Written
Agreement 4 mo. 3 days before bankruptcy (outside the 90 day period.).
Assignment to secure existing loan $15k plus future advances up to $15k. NY
law – transfer of property as security that reserves to transferor the right to
dispose of & use proceeds is, as to creditors, fraudulent & void “Unrestricted
Dominion Reserved”
b) CN: trying to avoid a secret lien. Before the UCC, here debtor retained
possession of the collateral. Ostensible or seeming ownership, also unrestricted
dominion. To the outside world it looks like it belongs to him and it’s not clear
that a SI has been created. So a secret lien can be a fraud on other creditors. It
wasn’t recorded anywhere. He had the opportunity to require periodic financial
statements. He had the right to require a transfer of the accounts
receivable. But he didn’t do any of them. He left the control completely with
the debtor’s purview. And when the debtor earned more money
c) A. Pledge(hypothecation), p. 815
i) In a “pledge” debtor gives physical possession of the collateral to the
creditor until the debt is paid. Possession Perfects Security Interest.
(1) 2 Drawbacks: Only Tangible Objects can be Pledged; Debtor needs to
keep possession of some collateral.
d) B. Chattel Mortgage, --Real Property Mortgage; Chattel Mortgage for
Personal Property; Filing allows Mortgagor to retain possession; Avoids
“Secret Lien” problem. But every state adopted its own version.
e) C. Conditional Sale,
i) Problem 256, p. 816
(1) When can the Seller Repossess? The unpaid seller may repossess only
three circumstances:
(a) (1) when 2-702 applies;
(b) (2) buyer has specifically granted seller a SI in the object sold; and
(c) (3) when the seller sues, recovers judgment and has the sheriff seize
the property as part of the execution of the seller’s judgment.
(2) 2-702: Seller discovers that Buyer has received goods on credit
while insolvent. If the seller discovers that the buyer has received the
goods on credit while insolvent, the seller may reclaim the goods upon
demand made within a reasonable time after the buyer’s receipt of the
goods.
(3) Security Interest. art. 9. if I don’t have an SI, and don’t fall within 2-
702, all I can do is get a judgment.
(a) Sheriff seizes property for Judgment Creditor
 (4) What effect does the seller’s retention of title have under the UCC? §2-
401(1), 2d sentence, and 1201(37) last sentence in first para.
ii) Conditional Sale attempted to have Seller retain Title although Debtor has
possession. But this creates a Secret Lien. “Fictitious Title Retention” =
Unperfected SI. What effect does “retention of title” have under Article 9?
(1) 9-202 Titles to Collateral Immaterial. “Except as otherwise
provided...Art 9 the rights and obligations apply whether titles to
collateral is in the secured party or the debtor.
f) D. “Trust Receipts” - Automobile Dealer – Floor Plan Financing; Factory’s
Lien
g) Field Warehousing; regardless of what we call these, we have to follow the
provisions of art. 9. Article 9 Covers all these: 9-109. What the Parties call the
security device is irrelevant
2) THE SCOPE OF ARTICLE 9, §9-109 p. 821
a) Article 9 History. First adopted by all states in 1960s. Current: “Revised
Article 9” – Effective July 1, 2001. Transition Rules 9-702;
b) Scope: 9-109(a)(1): Article 9 covers “a transaction, regardless of its form, that
create a security interest in personal property or fixtures BY CONTRACT” not
by operation of law.
c) “Security Interest” – Defined §1-201(b)(35) “an interest in PERSONAL
PROPERTY or fixtures which secures payment or performance of an
obligation.”
i) “Secured Party” §9-102(a)(72)
ii) “Debtor” §9-102(a)(28)
iii) “Collateral” §9-102(a)(12)
iv) Be sure you can identify: Debtor, Secured Party, Underlying Obligation,
Collateral
v) Note: §1-203
d) Problem 257
i) §9-109(d)(2). Is an “Artisan’s Lien” created by statute an Article 9
“Security Interest”? no, if it arises by operation of law, it doesn’t meet the
“contract” requirement, and it’s specifically excluded.
ii) What about priority? §9-333 deals with a possessory lien, look at this
section, even if it is created by statute.
iii) What about signing a statement giving a right to repossess? §9-
109(a)(1) now we have an art. 9 security interest. It’s a consensual lien
credit by contract.
e) Sale of Accounts Receivable. Problem 258, p. 822
i) Sale of Accounts Receivable (NOT a loan). Is this an Article 9 “Security
Interest”? 9-109(a)(3) yes, it applies to “accounts receivable.” OC 5:
Transfer of Ownership in Sales Receivables is Treated as creating a
 “security interest” even if SALE. Buyer must perfect this “security interest”
under Article 9, Includes SALES of Accounts, Chattel Paper, Payment
Intangibles or Promissory Notes
ii) KEY POINT: Some business transactions with no apparent loan or
collateral may still fall with in Article 9. If a “security interest” is
created, perfection under Art. 9 is required.
3) CONSIGNMENTS, p. 822. Art. 9 applies to “consignments” §9-109(a)(4)
a) Definition: 9-102(a)(20). “Consignment” means a transaction, regardless of its
form, in which a person delivers goods to a merchant for the purpose of sale
and: (A) the merchant: (i) deals in goods of that kind under a name other than
the name of the person making delivery; (ii) is not an auctioneer, and (iii) is not
generally known by its creditors to be substantially engaged in selling the
goods of others.
i) KEY: person to whom goods delivered is “not generally known by its
creditors to be substantially engaged in selling goods of others”
ii) Distinguish True Consignment: Neither SALE nor SECURITY DEVICE
iii) Benedict v. Ratner problem?
iv) Some “consignments” are disguised sales on credit
(1) EX: Antiques Are Us, is a well known place where antique dealers
could hire out space and exhibit the wares, with the store handing the
sales and taking a commission on each one, and returning to the dealers
items that remain unsold. When the store takes out a loan from ONB
and uses as collateral “all its property,” will the bank’s SI reach the items
in the store that belong to the dealers if the dealers have never taken the
steps required of consignors under Art. 9? Problem 259, p. 824.
(2) ANSWER: no, because Antique’s R Us is generally known as a place
where antique dealers can hire out space. Thus, it would fall under the
exception of being generally known, so long as they are also generally
known to their creditors as such.
(3) COMPARE: Retail carpet merchant enters an agreement with Persian
Rug Seller stating that title to the rugs remained with the dealer, that the
proceeds of any sale are held in trust for the dealer; the proceeds of any
sale were to be remitted to the dealer, and the all rugs were held at the
risk of the consignee. Before entering into the agreement, Retail Carpet
never dealt with oriental rugs. Retail put an advertisement in the
newspaper stated “By Special arrangement, we proudly introduce a
distinctive collection of Oriental Rugs.” Merchant does not perfect;
Bankruptcy
(4) ANSWER: this was not a true consignment. First, the agreement
provided that the risk was on the consignee; it also provided that the
consignee held the proceeds in trust and yet it was allowed to mingle the
 proceeds with its own funds. Moreover there is no evidence that Retail
was generally known to its creditors to be substantially engaged in the
selling of goods of others. In re Fabers, p. 824
(5) Does Article 9 Apply? yes.
(6) Does Risk of Loss make a difference? yes.
(7) Trade usage? no, doesn’t matter that in this trade its always
consignment.
(8) Who wins? Consigning rug owner or B’cy Trustee? trustee.
v) Problem 260, p. 826
(a) Yes, this is a consignment because it meets the requirements of §9-
102(a)(20).
(b) Is this a True Consignment? OR is it an Article 9 Consignment? this
is an art 9 consignment. Is Article 9 perfection of SI required?
4) III. LEASES, p. 827
a) §1-203(a). Lease distinguished from SI
i) Bright Line Test: A transaction in the form of a lease creates a SI IF
(1) lease is for a term AND
(2) Not subject to termination by lessee AND
(3) one of the following
(a) Original term of lease = economic life of the goods
(b) Lessee is Bound to Renew for remaining economic life or Bound to
become Owner
(c) Lessee has Option to Renew for remaining life for no additional or
nominal consideration; OR
(d) Option to become Owner at no/nominal consideration, e.g., $1.00.
CN: it looks like I’ve bought it but am paying off the amount.
(4) What if we can’t determine that a Lease is actually a “SI” under the
Bright Line Test?-- We must look to facts of each case. §1-203(a)
ii) BUT see §1-203(c)
(1) Lease is not necessarily a “SI” IF any one of the factors under §1-203(a)
are met, merely because lessee has option to renew, assumes payment of
taxes, because lessee has option at a fixed price. These are factors but
alone will not suffice. Use these factors if the bright-line test doesn’t
give an answer.
(2) What if several of those factors are met?
(3) When is consideration “nominal”? Comment 2: FOCUS ON
ECONOMICS, not intent of the parties.
iii) Problem 261, p. 827
(1) Connie’s leased a Copy Machine from BIG; 5 year lease; Rental
payments equal the current Market Price; Option to Purchase at end of
lease for $5;
 (2) this falls under (b)(4); but they failed to record the perfection of the
interest.
(3) After Lease was in place, Connie’s borrowed money from ONB &
signed security agreement pledging all of Connie’s “equipment”; Bank
perfected; BIG did not; Who wins? The Bank. Was this a Lease or
Security Interest? 1-203
(4) Real World Question: Why try to structure a transaction as a LEASE
rather than a SALE? See conservative tax tips on p. 828
(5) Focus is on the “EQUITY” lessee builds in leased property and the
VALUE of property at the end of the lease
iv) Distinguish and true lease from a disguised lease. §1-201(35)
(1) 1. If at the end of the lease period the lessee becomes the owner of the
property for little or no consideration, a secured transaction and not a
lease has been created.
(2) 2. If the contract contains a clause that permits the lessee to
terminate the lease at any time and return the leased goods, a true lease
has resulted. Such a right of termination is not an attribute of a sale of
goods.
(3) 3. If the lease is for the entire economic life of the leased goods, with or
without renewal, a disguised sale has occurred.
v) Problem 262, p. 829
(1) 5 year lease – 10 year useful life
(2) $300,000 lease payments = FMV
(a) Option to own at lease end for $10,000
(b) Is it a true lease?
(c) Is it an Article 9 “security interest”?
(d) CN: here the lessee has the option to own. is 10k nominal? depends,
if the fmv is 300k, it may be nominal. if nominal then it’s a SI.
vi) In re Architectural Millwork of Virginia, p. 830
(1) F; CN: he went down with the intention of buying a truck, and then
spoke with the dealer as to how to pay for it. The dealer talked him into
buying it with “lease financing”. But was it a lease or did it create a
SI? The determining factor was not whether he agreed to pay
maintained or insurance, but what’s leftover when he was done, this is
the economics reality test.
(2) RULE: it is a SI if the contract allows the lessee to become the
owner of the lease property for nominal or no additional
consideration upon compliance with the terms of the lease.
(3) Ch 11 Bankruptcy – DIP; Associates & Debtor have 2 “lease
agreements”
 (4) Forklift lease—contract provides for the option to purchase the forklift
for $1 dollar after all scheduled payments are completed. Held, this was
a security agreement, not a true lease. $1 dollar is a nominal amount,
thus it falls within the brightline test. §1-203(b)(4)
(5) Truck lease. Did it create an option? yes, for $9.5k, the residual value;
but this is not “nominal consideration”.
(a) There, if (i) the debtor cannot avoid paying Associates the value of
the payments due under the lease, and (ii) the debtor can become the
owner of the Freightliner for nominal or not consideration upon
compliance with the terms, the the transaction creates a security
interest.
(b) Here the first condition exists, but the second does not, the
consideration – 9.5k compare to the cost of the lease $38k – is not
nominal. Nevertheless, the fact that the transaction doesn’t meet any
of the bright line tests does not conclusively mean that the Truck
Agreement is a true lease. Look to 1-203(c).(2) and (6).
(6) Debtor wanted to buy truck, used “lease financing”
(7) Final adjustment clause –
Doesn’t meet Bright Line Test
(8) Could buy at end of lease for $9,725 ($38,500)
(9) Economic Realities Test
vii) Play It Safe. §9-505 – Precautionary Filing; when in doubt. Option of
Filing Financing Statement w/o affecting substantive classification of the
transaction. CN: you might need to perfect the transaction, just in case the
transaction did create a SI. But if I do this, does this mean that I’m
admitting it is a SI? “filing and compliance is not a factor of whether the
collateral secures an obligation.” 9505(b).
viii) Equitable Subordination. Problem 263, p. 838
(a) Hospital requires the builder to get a surety. Crash borrows money
from ONC, with the right to collect progress payments; goes
bankrupt.
(b) Who wins? look to §9-109(a)—this covers transactions regardless of
form....by contract. Equitable subordination arises by law not by
contract, so Surety would be ahead of the bank.
(c) Is this transaction subject to Article 9? no.
ix) Exclusions from Article 9, p. 839
(1) §9-109(c) and (d). This article does not apply to the degree federal law
preempts.
(2) A. Federal Statutes
(a) Philko Aviation v. Shacket (US), p. 840
 (i) CN: this is a choice between two innocent parties. The Shackets
bought an airplane, paid full price, and had possession of the
airplane, but didn’t get title to it; but the seller then sold the title to
another purchaser, who filed the title to the aircraft with the FAA.
(ii) I: the Federal Aviation Act prohibits transfer of title to aircraft
from having validity against innocent third parties unless the
transfer has been evidence by a written instrument, and the
instrument has been recorded with the FAA.
(3) B. Landlord’s Lien and Other Statutory Liens, p. 845
(a) Problem 264
(i) Is a landlord’s lien required to be recorded under art. 9?
(ii) If this was a landlord’s lien arising by operation of law, then it
would not require perfection; but here, they have made an
agreement, a contract, and the landlord would have to perfect it.
(4) C. Wage assignments—§9-109(d)(3)—art. 9 does not apply to
assignment for claim of wages.
(a) But what about “commissions”? Problem 265 –
(i) Wages versus commissions. are wages and commissions the
same thing? it’s arguable.
(5) D. Non-Financing Assignments—§9-109(d)(4)—(7)
(a) Problem 266
(i) This is a sale of accts, but here is was part of the sale of the
business of the business out of which it arose, so it’s excluded
under 9-109(d)(4)—“sale of accounts as part of a sale of the
business out of which they arose.”
(ii) §9-109(a)(72(D), and
(iii) §9-109(d)(6)—assignment of right to payment from the payor,
but the assignee is required to perform.
(iv) §9-109(d)(5)—assignment of accounts for collection only.
(v) §9-109(d)(7)—single account in payment of a preexisting debt.
(6) E. Real estate, p.
(a) Problem 267
(i) F: normally real estate doesn’t fall under Art. 9 because it
addresses personal property. But the documents may be
intangibles, and so may be perfected.
(ii) §9-109b—the real property is not subject to this article, but the
paper is.
(7) F. Other exclusions. 9109(d)

Creation of a SI, Chapter 19

5) Classifying collateral
a) What is collateral? §9-102(a)(12)?--Property subject to a ”Security interest” or
ag lien. Includes proceeds.
(1) proceeds to which a SI attaches
(2) Accts, chattel paper, payment intangibles & notes SOLD
(3) Goods subject of consignee.
b) Types of collateral
i) consumer goods
ii) equipment
iii) Farm Products
iv) Inventory
c) 4 Classes of goods are mutually exclusive: however, goods can fall into
different categories under different circumstances.
(1) EX: a coffee maker at home is consumer goods, but in a hotel is
inventory.
d) “goods” §9-102(a)(44)—Property that is movable when SI attaches:
i) Fixtures
ii) Standing timber to be cut and removed
iii) Unborn young of animals
iv) Crops grown, growing or to be grown
v) Manufactured homes
vi) Includes Computer program imbedded in goods
vii) What does defined term GOODS not include?
e) “Consumer goods” §9-109(a)(23): (1) Used or bought for use, (2) primarily
for, (3) personal, family or household purposes.
f) Equipment 9-102(a)(33)—goods other than inventory, farm products, or
consumer goods.
g) Farm products 9102(a)(34)
i) Goods other than standing timber, which respect to which the debtor is
engaged in a “Farming operations”
ii) Includes: Crops (even aquatic, ) Livestock, supplies, products of crops or
livestock in Un-manufactured states – OC 4a.
iii) What is “Farming Operations’? 9102(a)(35).
h) Inventory—9-109(a)(48)—OC 4a
i) Goods other than Farm Products
ii) A. Leased by lessor
iii) B. Held for sale or lease
iv) C. Furnished by a Person under a contract of service
v) D. Raw materials, work in process, or materials used or consumed in a
business.
i) Quasi-intangible property—pieces of paper,
 1) instruments - includes prom notes. Negot instrument OR any other writing that evidences a rt
to pymt and trans in ord course of bus by indorsement and assignment
 Does NOT include: LOC; invest prop; credit card rt to pymt

2) Investment Property (PRF – GEN MEANS STOCKS AND BONDS) – certificated or not; debt
security also (bond)
3) Documents (WH receipts and bills of lading)
 Title docs that can be transferred

4) Chattel Paper – record evidences 1)monetary obl and 2) security interest

5) LOC rights to pymt 9102a51

j) intangible property—No Significant physical form
1. Accounts 9102a2
- rt to pymt from a 3d party of a monetary obl;
Pymts for: property, services, lottery winnings; credit card bill

2. Deposit accts BUT SEE 9109d13

- does not include investment prop or accts evidenced by instrument
RULE – art 9 doesn’t govern assignment of deposit acct in CONSUMER TRANSACTION
but priority rules
apply IRT proceeds
3. General Intangibles – comm. tort claims; LOC rights; rt to sue for BREACH OF K; rt to money
oil or gas
- Pymt intangibles – rt to payment that doesn’t fall under pymt of monetary obl for services
(like retrn of sec
dposit)
- software
i) Why is it important to Classify Collateral?
ii) Does the Debtor’s announced use of Collateral matter?
k) Instruments – 9-102(a)(47)
l) Promissory Notes 9-102(a)(65)
m) Investment Property (stocks & bonds) 9-102(a)(49)
n) Documents (WareHouse receipts & bills of lading)--9-102(a)(30)
o) Chattel Paper – 9-102(a)(11) – record evidences both a monetary
obligation + SI.
p) Letter of Credit Rights 9-102(a)(51)
q) Accounts 9-102(a)(2) Right to payment of monetary obligation: for
property, for services, lottery winnings, credit card bill
i) NOT payment right evidenced by Chattel Paper & NOT Deposit
Accounts, NOT L/C rights, NOT Investment Property
r) Health-Care-Insurance Receivables 9-102(a)(46)
2. Deposit Accounts – 9-102(a)(29) BUT 9-109(d)(13)
3. General Intangibles - 9-102(a)(42)
i) See Comment 4d (“catchall” category for intangibles)
STEPS

1) PRF – after identify the creditor, debtor, agrmnt, need to ID the collateral
 May not be governed by art 9
  Rule – primary use rule (1st use) determines type of collateral

2) Next w is how to perfect sec interest – may be outside art 9

ii)
Problem 268

In re Morton, p. 851
Collateral is 1968 Ford Bronco; Debtor is Morton
Creditor is Maine National Bank – perfected SI.
Is collateral Consumer Goods? 9-102(a)(23)
Is it Equipment? 9-102(a) (33)
How & when to decide?
What if debtor lies? Monitoring obligation for creditor?
Problem 269, p. 854– Health-Care-Insurance Receivables
9-109(d)(8)
9-102(a)(46)
Problem 270, p. 855
Credit Card Receivables
9-109(a)(2)
Problem 271, p. 855
Morgan County Feeders, p. 856
Are these cattle Equipment or Inventory?
Problem 272, p. 858
Elvis Presley Guitar
Problem 273
Car Lease Contracts as Collateral?
Problem 274 – Crop Duster Lien
Creating a Security Interest
FIRST: Classify Collateral – GOODS
Consumer Goods
Equipment
Farm Products
Inventory
Quasi-Intangible
Intangible
SECOND, Review Technical Validity of Forms Creation of “Security Interest” 1-
201(b)(35)
Interest in Personal Property/Fixtures that secures Payment or Performance
6) TECHNICAL VALIDITY OF THE FORMS, p. 859
i) The creation of an art. 9 SI usually requires both a security agreement and
a financial statement.
ii) Security agreement—contract between debtor and creditor; Creates
Property Rights between D & CR – Contract - 9-102(a)(73)
iii) Financial statement—notice that is filed in the place specified in §9-501
in order to give the later creditors an awareness that the collateral is
encumbered. Creates Property Rights as against Third Parties – Notice – 9-
102(a)(39) Must be Filed & Indexed: 9-501
iv) §§9203(a) and (b), 9-502(a), 9-509(a) and (b) and 9521
v) A. The security agreement, p. 860
IF Collateral in Secured Party’s Possession, no written security
agreement required BUT may be advisable
9-203 – Attachment & Enforceability of Security Interest
Attaches to Collateral when Enforceable against D
SI is enforceable vs. D & 3rd parties IF:
Value Given;
D has rights in collateral or power to transfer rights to secured
party; AND
One of the following:
i. D has AUTHENTICATED a Security Agreement with
DESCRIPTION OF COLLATERAL
ii. Possession (except certificated securities)
iii. Special provisions under Art.8 for Certificated
Securities
iv. Control: Deposit Accts, Electronic chattel paper,
investment property, L/C rights, electronic documents
b. No particular form necessary – 1-201(3) agreement
c. Apparently absolute transfer may be secured transaction –
9-203 – OC 3 (B/S or lease) – parol ev.
(1) If collateral is not in the secured party’s possession or control, the §9-
203 security agreement must (a) be authenticated by the debtor and (b)
describe the collateral. But the security agreement need not be in any
particular form; it needn’t call itself a security agreement. OC 3, 9203.
(2) Problem 275, p. 860
(a) §1-201(35)
(b) §2-401(1)—“any retention or reservation by the Seller of the title
(property) in goods shipped or delivered to the Buyer is limited in
effect to a reservation of a SI.”
(c) MA: yes. the contract describes the computer and he has signed it,
thereby complying with §9-203(b)(3)(A)
(d) “Conditional Sale Contract”
(e) Is it a Security Agreement?
(f) Good Lawyering - Security Agreement should:
 (i) ID Parties, Describe Collateral, Grant SI, Specify Contractual
Agreement, Esp. Default
b) guy buys computer from store and seller makes him sign a conditional sales K
which tried to reserve - - - title in seller until full pymt is really a security interest
despite what the document itself said

(1) A: this is a sec agreement qualifies as a SI that attached b/c he signed the K
(authenticated); it described the collateral (computer) ; and value was given by seller
c) title passes to buyer subject to SI of seller here
(a) Rule – any reservation of title by seller is limited to a reservation of a security
interest and title still passes to buyer.
(b) PRF – best sec agreement would 1) expressly grant a SI 2) make provisions as to
default and when sec party can go after the collateral
ii) B. The Financing Statement (“FS”) UCC-1, p. 861
(1) §9-502(a)—The financing statement need not be signed by anyone,
though it must identify the parties and indicate what collateral is
covered.
(2) 9516—other requirements.
(3) Document Filed by Secured Party in Public Office
(4) PERFECTS Creditor’s Rights in Collateral
(5) What’s Required? 9-502
(a) NAME OF DEBTOR
(b) NAME OF SECURED PARTY
(c) COLLATERAL
(6) 1999 Simplification – FS does NOT have to be SIGNED – 9-
502(a). Why Not?
(7) What are the limits on anybody filing a Financing Statement?
(8) DISCUSS “NOTICE” FILING
(9) See Also 9-516 Other Filing Office Requirements
iii) C. The Debtor’s Identity, p.
(1) Problem 276, p. 862
(a) a. Use the individual’s name, unless a dba is a “registered
organization.” §9-503--
(b) b. 9503(4)(A) OC 2.
(c) Sole Proprietor & Trade Name
(d) Which to use for Financing Statement?
(e) What if Partnership?
(f) Should a FS use a trade name or a sole proprietor’s individual name?
(g) 9-503(c): A financing statement that provides only the debtor’s
trade name does NOT sufficiently provide the name of the debtor.
(h) What about a partnership? 9-503(a)(1) – A formal partnership is a
“registered organization” and the FS must provide the name of the
debtor indicated on the public record of the debtor’s jurisdiction of
organization. An informal partnership would be covered by 9-
 503(a)(4) and the Comment says: if it has a name, use that; if it has
no name, use the names of the partners. When read together with the
“trade name” provision, the best advice is to provide both the name
of the informal partnership and the names of the individuals as
additional debtors. See instructions to UCC-1.
(2) Problem 277, p.
(a) F: real name: “Raymond F. Sargent, Inc.” Financing statement
named: “Raymond F. Sargent Co., Inc.”
(b) §9-506—“A financing statement substantially satisfying the
requirements of this part is effective, even it if has minor errors or
omissions, unless the errors or omissions make the financing
statement seriously misleading.”
(c) MA: Here, the statement is effective, because the error is not
“seriously misleading.”
9-506(c) Filing Office’s Standard Search Logic
Issues: Debtor’s Identity
(a) Debtor’s name is not exactly correct on financing statement.
(b) This problem highlights the requirement to file the FS under the
debtor’s correct legal name. This is required by 9-503(a)(1) and by
the practicality of computerized search. 9-506 says that if a search of
the records would disclose a FS filed with minor errors/omissions,
the FS is not “seriously misleading” and it will be effective.
(3) Problem 278, Change in Debtor’s name, p. 862
(a) 9507(c), OC4.
(b) MA: The SI is still good.
- lady borrowed from ONB who correctly filed FS as to her Inventory
and Equipment.- she got married and changed name. She borrowed
another 50K from fin co.
did ONB lose SI b/c it failed to refile when her name changed ? no;
but need to worry about after name change b/c 4 mo time period will
run and will lose SI in inv and equip
(a) What if the Debtor’s name changes after the FS is filed? 9-507(c)
(b) IF the Debtor so changes name that a FS becomes “seriously
misleading”, it remains effective for collateral acquired by the D
before or within 4 months after the change. To be effective for
collateral acquired AFTER 4 months, the Secured Party must file an
amendment to the Financing Statement.
(c) Where there is actually a NEW debtor involved but the same
collateral & same secured party, 9-508(b) has a similar four-month
rule.
 (4) Problem 279, p. 863—Last Nat’l Bank filed a FS in the proper place to
perfect its SI in the accounts receivable of the American Electronics
Store (AES). When AES ran into financial difficulty, it sold its assets to
a new electronics business, Voice of Japan.
What if the Creditor’s name changes after the financing statement is filed?
Creditor does not have to but may refile. However, the assignment (or sale) itself may
be A SEPARATE secured transaction that must meet UCC requirements.
(5)
(a) Post-Filing Disposition of Collateral. §9-507(a) OC 3. “a
financing statement remains effective even if the collateral is sold or
otherwise disposed of.”
(i) MA: So, AES and voice of Japan are still bound.
(b) When a person becomes bound by another person’s security
agreement. §9-102(a)(56) (“New debtor” means a person that
becomes bound as debtor under §9203(d) by a security agreement
previously entered into by another person”), §9-203(d) and (e) OC 7,
§9-508 (“a filed financial statement naming an original debtor is
effective to perfect a SI in collateral in which a new debtor has or
acquires rights to the extent that the financial statement would have
been effective had the original debtor acquired rights in the
collateral.”).
(i) MA: Still bound.
(c) Assignment of perfected security interest. §9-310(c)(“filing under
this section is not required”) and §9-511—secured party of record.
(i) MA: still bound.
(d) Priority.
(6) Problem 280, p. 863
(a) F: using someone else’s property as collateral.
(b) §9-102(a)(28)(A)—(“debtor” is a person having an interest, other
than a SI, in the collateral, whether or not the person is an obligor)
§9-102(59)(“obligor” mean a person that (i) owes payment or other
performance of the obligation (ii) has provided property other than
the collateral to secure payment or other performance of the
obligation, or (iii) is otherwise accountable in whole or in part for
payment other obligation.”)
(c) MA: So, both Robin and Richard are “Debtors” though only Robin
is the “obligor.”
(d) Highlights the distinction between “Debtor” and Obligor”. See
discussion in point 1 above.
(e) File financing statement in the name of the “Debtor” – even if he is
not the one who owes money to the Creditor.
iv) Description of the Collateral, p. 864
(1) §9-108—sufficiency of description. There are a variety of ways of
describing the collateral so that a reasonable person would know what
we’re talking about. It could be listed, by category, by type of collateral
(except commercial tort and consumer transaction), by quantity,
computational, or formula... all of these are subject to the test of whether
the identity of the collateral is objectively determinable. DESCRIPTION
is Sufficient – even if not specific IF it REASONABLY IDENTIFIES
Collateral
(2) Problem 281, p. 864
(a) “All personal property D now owns or ever owns or even hopes to
own between now and the end of the world or his death, whichever
occurs first.”
(b) 9108 (c) a descriptions of debtor’s property such as “all the debtor’s
property”, do not reasonable identify.
(c) §9-504 (“A FS sufficiently indicates the collateral that it covers if
the financing statement provides: (1) a description in §9-108 or (2) an
indication that the FS covers all assets or all personal property.”
(d) The FS is designed to give notice to the world, but needn’t give
every detail. But in the security agreement, super-generic does not
work.
(e) §9-108 OC 2, 3, 4.
(f) Investment property. What would be want to be more specific about
consumer investment property? Because we want to protect
consumers. 9108e states that a description only by type is
insufficient, you have to be more specific and tie it to a specific
event. (e) a description only by type of collateral is insufficient
description of commercial tort claims, and consumer
transactions. See OC 5. You can’t use a future tort claim as
collateral. But what if we assign an interest in the tort claim
immediately when we have it? All we know is that we have a claim,
not the value, nor who may be responsible for it. But it is possible to
describe this for the purposes of art. 9.
(3) Problem 282, p. 865
(a) D borrows money for her business & Bank takes security interest in
“inventory, accounts receivable, equipment, instruments, general
intangibles, personal property”.
(b) MA: the jewelry was secured through possession, and therefore the bank lost it when it
returned the jewelry to her, as the bank did in Halberstadt when the bank handed the jewelry
over to the auctioneer, who by contract is the agent of the debtor.
(c) CN: The FS says “personal property”. What about the sufficiency of
the description? §9-108. A specific listing would have won the case
 for them. But they tried to describe it by typeof collateral. She’s an
individual. One question might be what the security agreement said,
so it’s possible that it might be enough to put them on notice

Bank argues the jewelry is personal property. At the time these cases
were decided, the UCC required that FS describe the collateral by
“item” or “type”, so the bank loses the argument that it has a prior
perfected SI. The courts might also have been (and they might now
be) swayed by the bank’s poor judgment in releasing the jewelry
from its control back to the debtor, with no clear way for other
creditors to even suspect that it was subject to a SI. It might be
argued (and some of you in class did argue) that the Financing
Statement could sufficiently “indicate” the collateral. The nature of
personal jewelry is such that other creditors are unlikely to be put on
notice by the supergeneric description “all personal property” (what
about her tooth brush and other personal items which are also
personal property?). In any event, the Security Agreement would
have to “describe” the collateral.
(4) Floating liens. Problem 283, p. 865
(a) “inventory.”
(b) §9-204(a) (deals with security agreement)—“a security agreement
may create or provide for a SI in after-acquired property. A SI does
not attach to consumer goods or tort claims. ... future advances.” So
you can provide for future advances but you must be specific.
(c) §9-108 OC 3—“whether a description in a security agreement is
sufficient to include after acquired collateral if the agreement does
not explicitly so provide is a question of contract interpretation.”
(d) §9-502 OC 2--“
(5) Problem 284, p. 866
(a) Description: “Various equipment, see attached list.” But there is no
list. This is insufficient. a reasonable person wouldn’t be able to
figure it out.
(6) Problem 285, p. 866
(a) Security agreement stated: “machinery, equipment, furniture and
fixtures.”
(b) FS says all this and adds “inventory & accounts receivable”.
(c) Debtor and Creditor agree that they intended more expansive
version. Other Creditors complain.
(d) Who wins?
(e) 9-203(b) Courts have said this Creditor loses. Why? Other
creditors were warned in FS?
 (f) Winning argument is that 9-203 says no SI will attach or be
enforceable against the debtor and 3rd parties unless the collateral is
described in the security agreement. So even if the FS is more
expansive, only the description in the security agreement will be
enforceable.
(7) Problem 286, p. 866
F “All equipment” should be sufficient – but since so much money is at
stake, better to also describe this item specifically plus all other
equipment.
(8) Problem 287, p. 867
(a) Is a document which leaves blank the person to whom a SI is granted
a 9203 “security agreement”?
In the security agreement, the secured party’s name was left
blank. Will the courts use a complete financing statement that refers
to this security agreement to supply the missing info? 1-201
Comment 3. “Agreement” is governed by the law of
contracts. You might argue that they can be read together to piece
together a complete security agreement, but don’t ever let this happen
to you.
d) ATTACHMENT OF THE SI, p. 867
i) ATTACHMENT—Process by which SI becomes effective against
the debtor. PERFECTION is how the SI becomes effective against the rest of
the world.
ii) Steps for “attachment” under §9-203:
(1) A SI must be “authenticated in a record,” not oral. “authentication”
can be signing. The security agreement must be authenticated, but the
financing statement does not have to be signed.
(2) the creditor must give value (see §1-201(44))
(3) debtor must have some rights in the collateral. (See foster brother
problem, he had an agreement which is sufficient).
iii) Read § 9203 and §9-204(after acquired property; future advances)
iv) Thrift In v. ADE , Inc., p. 868
(1) ADE—Auto Seller; Thrift—financer; Devers—Auto dealer
(a) ADE gave Devers possession of 3 autos; Devers was to pay by
check later; ADE retained titles. Thrift has an SI in Devers’
inventory.
(2) Classify collateral §9-102(a)(44)—Goods (consumer goods, inventory,
equipment, farm products?)
(3) INVENTORY: Were the cars “inventory?” yes.
(i) “consumer goods”, [cars might be consumer goods, but not
here].
 (ii) Equipment”, not here.
(iii) “inventory”, yes.
(b) The classes of goods are mutually exclusive: the goods can only be
characterized as belonging in one of the four classes at the same time
by the same person.
(c) TEST: the principle test to determine whether goods are inventory is
that they are held for immediate or ultimate sale. Here, although
ADE and Devers intended Devers not to encumber the vehicles for
immediate sale until ADE was paid, Devers nevertheless held the
cars for ultimate sale. Therefore the cars were inventory.
(4) ISSUE: Did SI attach?
(5) ATTACHMENT:
(a) The SI does not attach to the collateral until there is
an agreement that it attach, value is given, and the debtor
has rights in the collateral.
(b) I: Did Devers have rights in the collateral?
(c) R: §2-401(1)—“any retention or reservation by the seller of the title
in goods shipped or delivered to the buyer is limited to a reservation
of a SI.” When the debtor acquires possession of the collateral under
a contract, he has acquired such rights in the collateral as to allow the
security of his creditor to attach to the collateral, and this is true
regardless of who maybe deemed to have title and to and ownership
of such collateral.
(d) Here, Devers acquired an interest in the collateral when it received
possession of the cars from ADE pursuant to their contract. Thrift’s
SI attached at that time.
v) Problem 288, p. 872
When Does the Security Interest ATTACH?
Jan. 6 - Security Agreement: “all existing and after-acquired inventory
in the store”
Jan. 6 – Loan is funded – he gets the money
Jan. 6 - Inventory is 4 guitars & 1 pitch pipe
He also has a contract with TTMC for 40 trumpets to be
delivered March 30
March 15 – Seller marks trumpets “For Shipment to Gabriel’s Store”
March 30 – Trumpets shipped & received
vi)
(1) March 15 TTMC packaged 40 trumpets and marked them “For
Shipment to Gabriel’s Trumpet Store.”
(2) March 30—Gabriel receives trumpets and displays them in the store.
(3) a. MA: Bank’s SI attaches on March 15 per 2501, when the goods are
identified by the seller.
(a) §9-203(a)—“A SI attaches to collateral when it
becomes enforceable against the debtor with respect to the
collateral.”
(b) §2-501-The buyer obtains a special property and an insurable interest
in goods by identification of existing goods as goods to which the
contract refers.”
(4) b. MA: It is possible to create a SI in after acquired property.
(a) §9-502(d)—“A financing statement may be filed before a security
agreement is made or a security interest otherwise attaches.”
(b) §9-322(a)(1)—“Conflicting perfected SI’s rank according to priority
in time of filing or perfection.”

9-203(a) & 2-501

Bank gave value immediately.
Agreement was properly signed.
Only requirement remaining for attachment depends on the
subquestion: When did Gabriel have rights in the
collateral?
For guitar & pitch pipe – Jan. 6 is date of attachment.
For trumpets – March 15 – When goods are identified to the contract
under 2-501 (since we didn’t study sales, you might not find this), this D
has rights to the collateral and the SI will attach.
An argument could be made that the words “in store” postpone
attachment (9-203) and so the SI did not attach until March 30. Be clear
with drafting to avoid questions like this.

What if FS is filed on Jan. 7?

No change in ATTACHMENT dates, but PERFECTION (as we discuss
in the next chapter) occurs when FS is filed – Jan. 7.
The FS MAY be filed prior to attachment (done to ensure priority).
§9-502(d) “A FS may be filed before a security agreement is made of a
security interest otherwise attaches.”

If the bank does not fund the loan until March 31, there is no
ATTACHMENT of a security interest until that time – when the bank
(Creditor/Secured Party) has given VALUE.
What about loan commitment? 9-102(a)(68) & 9-323 – Priority Rules
for Advances that we’ll discuss later.
 vii) The requirement that Debtor have rights to collateral. In re Howell
Enters., p. 873
(1) Howell—Rice seller; Tradax—Rice seller; Schwartz –Rice purchaser –
L/C Applicant. Schwartz won’t deal directly with Tradax.
(2) First National—Security creditor; Perfected SI in Howell’s Accounts
receivable.
(3) Is this L/C an Account receivable? CN: but Howell was never out any
rice, it never shipped the rice, the only party entitled to payment for the
rice was Tradex.
(4) Did the debtor have an interest in the collateral? CN: did Howell have
an interest in the LC, which constituted an acct which they could pledge
as collateral from First National? no, they had no interest in the L/C
proceeds, they were just a pass through, offering their name only. So
Howell didn’t meet this test for the SI attaching.
(5) Who wins? Tradax or the Bank? Tradax wins because the Bank’s SI
attached only to Howells accounts receivable, and the LC was never an
account receivable for Howell.
7) PERFECTION OF THE SECURITY INTEREST (CH 20)—§9-308, p. 879
a) ATTACHMENT is the process by which SI becomes effective against Debtor.
b) PERFECTION – Process by which Creditor’s SI becomes effective against the
rest of the world, especially later creditors
i) 9-203
ii) Attachment
(1) Security Agreement - Authenticated in a Record
(2) CR must give VALUE
(3) D must have rights in Collateral
iii) Perfection of the SI; If the “security interest” is PERFECTED, it is senior
to later creditors – esp. B’cy TR
iv) 9-308 – First, it must ATTACH 9-203
v) UCC Perfection Sections: 9-308 to 9-316
vi) How to PERFECT:
(1) By Filing a FS §9-310
(2) By Possession (Pledge)
(3) By Automatic Perfection
(4) By Control
c) I. PERFECTION BY POSSESSION (PLEDGE), p. 880
i) §9-313 OC 2, 3, 4.
ii) Must be tangible. Possession gives notice to the world at large.
iii) Problem 289, p. 880—Escrow
 (1) Gracie owns Diamond, which is at museum; Brown agrees to buy,
makes down payment; Signed agreement gives Gracie a SI in his own
diamond until all payments made.
(2) How can he perfect? Perfection by Possession
(3) Goods in Possession of Third Party – 9-313. Is Notice to the 3rd party
enough? no. What more is required? authenticated acknowledgements
(4) What MUST the 3rd party do? nothing.
(5) Here the diamond is physically located in the museum.
(6) If the collateral is in possession of a third party, it’s not perfected unless
the third party authenticates, but they are not required to, nor do they
have a duty to confirm. So this is a risky way of doing it.
iv) 9-313(c)—Gracie will take “possession” of the collateral only if the
Museum “authenticates a record acknowledging that it holds possession of
the collateral for the secured party’s benefit.”
v) 9-313(f)—“A person in possession of collateral is not required to
acknowledge that it holds possession for a secured party’s benefit.”
vi) 9-313(g)—“If a person acknowledges that it holds possession for the
secured party’s benefit: the acknowledgement is effective under subsection
(c).”
(1) MA: in other words, the Museum doesn’t have to acknowledge that it is
holding the diamond for the benefit of Gracie, but if it does, then Gracie
“takes possession,” and the security interest is perfected.
(2) CN: How could it be perfected? under (c) (1) the Museum takes
possession first, then authenticates, under (2) the museum takes
possession after it authenticates.
vii) Agency. Is the 3rd party an agent of Secured Party (9-312) or a non-agent
bailee (9-313)? Best advice: Get acknowledgement
(1) Compare 9-312 – Goods covered by negotiable or non-negotiable
documents. Such as a ware[house receipts]
(a) Perfection by Possession
(b) Warehouse receipt = document of title
(2) 9-312(c) – Goods covered by Negotiable Document
(a) a SI in the Document has priority over a SI in the goods. So you
want perfection of the document.
(3) 9-312(d)—warehouse receipts, such as a grain document. Perfect an
interest in the grain, have the warehouseman issue a document in the
interest of the secured party. The farmer or bank can notify the
warehouse. It doesn’t specify which party can notify. And here,
notification will work to perfect the SI. Look to OC 7 and examples, and
OC 9.
 (4) Know difference between 9313 (OC 4) and 9312. If you have any doubt
as to which may apply, do both, get the acknowledgement and give
notification. But
(a) 9-312 (c) or (d) apply to situation where the goods are in possession
of a bailee who have issued a document of title covering the goods;
(i) agent of secured party
(ii) notification sufficient for perfection
(b) 9-313(c) applies to goods in possession of a third party who has not
issued a document, and provides a method of perfection by
possession when the collateral is possessed by a third party who
is not the secured party’s agent.
(i) not agent of secured party
(ii) notification not sufficient for perfection; must authenticate
acknowledgement.
(c) Perfection by Possession?
viii) “Field Warehousing”— the warehouse comes to the goods, instead of
vice versa. Problem 290, p. 881
(1) Fred’s hired the debtor’s own janitor and paid him $1 to be the field
warehouseman. Who creates WH receipt? Debtor’s Janitor gets $1 to
be field WHman?
a. KD gets loan, pledges WH Receipt
b. Bank takes possession of WH Receipt
(2) This looks a little like a sham arrangement. There was a warehouse
receipt, but who writes it up? the warehouseman. This receipt could be
negotiable, you need it to claim the goods.
(3) a. 9-312(c)—“while goods are in possession of a bailee that has issued a
negotiable document covering the goods: (a) a SI in the goods may be
perfected by perfecting a SI in the document.”
(a) 9313 OC 3.
(b) MA: First, under §9-312(c), the bank would seemed to have “Taken
possession.” However, under 9313 OC3, a court may find that the
person in possession – the janitor for Kiddie Delight – was “too
closely connected or controlled by the debtor that the debtor has
retained effective possession.” If so, it’s a sham. This is particularly
probable in light of the meager pay - $1 – that Fred’s pays it’s
custodian.
(4) b. Temporary Perfection. yes. Under 9-312(e), “a SI in certificated
securities, negotiable documents, or instruments is perfected without
filing or taking of possession or control for a period of 20 days from the
time it attaches to the extent that it arises for new value given under an
authenticated security agreement.”
 (5) c. no. What if D gets goods back to clean? 9-312(f). Under §9-312(f)—
the secured party can make the documents available to the debtor and
still retain its SI for up to 20 days, but only if it’s for the purpose of
“ultimate sale or exchange, or loading, unloading, storing....” (g) a
perfected SI in an instrument, remains effective if it’s for these stated
purposes of “ultimate sale or exchange, or presentation, collection,
enforcement, etc.”
(6) The warehouse as responsibility for its employees, so the bank would
have to go after the warehouseman (Fred’s).
(7) 1. Does Bank have perfected security interest in inventory? OC3 to
9-313 & 9-312(c) – Question is POSSESSION
(8) Does the Bank have a perfected security interest in the WH receipt even
before the bank gets possession of it?
(9) Negotiable Document
(10) Written, authenticated security agreement, D had rights & value
was given
(11) 9-312(e) – TEMPORARY PERFECTION
(12) What if CR loses perfected position?
ix) Problem 291, p. 882
(1) Karate school pledges 36 promissory notes to NFC as collateral for
loan; Signed security agreement, NFC takes possession of notes; School
takes back one note to present it for payment (this is one of the
“purposes under 9312(g)); School officer forgets for 6 months, School
goes bankrupt
(2) Does Bank have Perfected SI? 9-312(g), (h)
(3) Listed Purposes – Temporary Perfection – How long? 20 days.
(4) MA: the Finance company would retained its SI for 20 days despite
giving the note back to the debtor. 9-312(g). But at the expiration of 20
days, Finance Co lost its perfection. 9-312(h)
(5) Could Finance Co protect itself by filing a financing statement as to the
promissory note? MA: Yes, under 9312(a) “a SI in ... negotiable
instruments may be perfected by filing.” Would this be a good idea? yes.
(6) CN: they can give it back, only for 20 days and for the stated
purpose. It was for the stated purpose, but both the president and the
loan officer forgot about it, so the SI is lost.
(7) What if there’s a gap period of unperfection? this could cause a lapse in
perfection. You want to make sure your perfection is continuous.
d) AUTOMATIC PERFECTION --§9-309, p. 882
i) A. PMSI in Consumer Goods, p.
(1) A PMSI in consumer goods is automatic because otherwise it would be
too expensive and the seller would just include it into the purchase price.
(2) “Purchase money interest. §9-103.
(3) Problem 292, p. 883 Aluminum siding salesman & the sewing machine
(a) a. §9-204 -- A SI does not attach in after acquired property
in consumer goods, unless they’re acquired within 10 days.
(b) b. Yes, §9-103(a)(2)— “a PMSI means [1] an obligation of an
obligor incurred as all or part of the price of the collateral or [2] for
value given to enable the debtor to acquired rights in or the use of the
collateral if the value is in fact so used.” Thus, the PMSI applies not
only to the seller but also to the lender.
(c) c. No; the value must in fact be used to acquired the right or use of
the collateral with the money. §9-103(a)(2). How to protect against
misuse? §3-110(d) make the check out to the payee.
(d) d. Finance Co has the PMSI, therefore it gets the sewing machine.
(e) What is the bankruptcy trustee’s interest? it’s perfected on filing BR.
(4) In re Short, p. 884[Graham likes this case.]
(a) CN: Debtors borrow money and later the lender has them sign a new
note. Here, debtor hadn’t paid anything. The loan was for a short
period of time with a balloon payment at the end. If the debtor can’t
make the payment at the end, one option is to default at the end, and
bank repossesses; another is to sign a new loan agreement. Here, the
bank failed to perfect a SI, so it had to rely on the PMSI. Here, the
parties did express intent to continue the PMSI but did not allocate
[how much of the debt was for the PSMI and how much for the
nonPMSI]. As a drafting matter, you want to be as explicit as
possible, state that the parties intend for the PMSI to continue and
give an allocation of the funds.
(b) Debtors want to avoid Lender’s lien, i.e., get the furniture for
free. Bedroom furniture is exempt property. Was this a PMSI? If
not, could it be avoided under BR Code 522(f)?
(c) When a creditor consolidates a PMSI with a non PMSI loan, does he
lose his SI? no, only “to the extent” it is not a PMSI. This is the
“dual status” rule.
(d) Split of authority. Some courts hold that the PMSI is lost altogether.
(e) Split:
(i) 1. PMSI automatically transformed into a non-PMSI when
proceeds of renewal note are used to pay original note – “all or
nothing”. This is like a novation, one note is substituted for
another note.
2. “Dual Status” This is more favorable to the lender.– PMSI to
the extent taken to secure purchase price – BUT how to
allocate payments?
 a. By agreement? yes, this is a possibility. FIFO? Forfeit if
no agreement?
3. “Middle of the Road”, case by case – how much change has
there been in the obligation?
b. Renewal or Novation – Did parties state intent? Do they
intend a renewal of the loan or a brand new unsecured loan,
or for the PMSI to continue?
(5) Problem 293, p. 893
(a) Bank has a perfected floating lien on all of Façade
Motors equipment. Façade Motors borrows a Persian rug from
Persia, Inc, to see if it fits in its office. Does the bank’s lien attach?
(i) 2-326(1) and (2). Here the goods (rug) was delivered primarily
for use, therefore it is a “sale on approval.” 2-326(1)(a). as such,
the rug is not subject to the claims of the buyer’s creditors until
acceptance. §2-326(2).
(b) Façade decides to buy the rug; signs the K, makes down payment;
and borrows the installment money from Flyby-Night Savins, giving
it a SI in the rug. Is this a PMSI?
(i) MA: No. 9-103(a) and OC 3—“The concept of a PMSI requires
a close nexus between the acquisition of collateral and the secured
obligation. Thus, a SI does not qualify as a PMSI if the debtor
acquires property on unsecured credit and subsequently creates
the SI to secure the purchase price.”
(c) SEE POSTED ANSWERS
(6) Proximity in time, intent of parties, and course of dealing in
determining PMSI. GE Capital Commer Auto Finance v. Spartan, p.
894
(a) I: Whether by advancing Debtor the funds to purchase vehicles after
Debtor itself had already paid for and received them, GMAC thereby
acquired a PMSI in the cars that could defeat a previously perfected
SI in all of Spartan’s inventory held by GECC? yes, GMAC has
established that its post-purchase advance entitled it to a PMSI in the
collateral such that it had priority over GECC’s prior “dragnet” lien.
(b) CN: Here, debtor had already purchased the car before they
advanced the “purchase” money.
(c) TEST: whether the transactions were closely allied, proximity in
time, intent of parties and course of dealing. This was a usual
practice. The drafting attys messed up because the agreement didn’t
provide for reimbursement, only advances, but the court overcame
this by the course of dealing.
ii) B. Certain Accts and Other intangibles, p. 903
 (1) Automatic perfection. §9-309(2) + OC 4 “§9-309(2) affords automatic
perfection to certain assignments of payment intangibles as well as
accounts. The purpose is to save from ex post facto invalidation casual or
isolated assignments – assignments which no one would think of filing.”
(2) In re Wood, p. 904
(a) CN: Larkin loans his friend Wood, another lawyer, $10k. In
exchange, Wood assigns him the proceeds from two
litigations. Thus, the security for the loan is A payment that the
lawyer will receive on a contingency basis, but you can’t tell anyone
about it. This is a secret lien issue.
(b) The trial court imputed the knowledge to the lawyers. Held, the fact
that lender was an attorney didn’t make him ineligible for 9309(2)’s
automatic perfection.
(c) percentage test. 9-309(2)—. “as assignment which does not
transfer a significant part. This would not permit an assignee to
escape the filing requirements if he received a large portion of an
assignor’s accounts whether or not the transaction was an isolated
one. This is a narrow exception to the filing requirement, not
applicable if the transaction was in the general course of commercial
financing.
(d) “casual and isolated transaction” test. OC 4. Examine the
circumstances surrounding the transaction, uncluding the status of the
assignee, to determine whether the assignee was, in fact, casual and
isolated. Where the assignee is regularly engaged in commercial
financing and routinely accepts assignments of accounts,
perfectionby filing is required regardless of the actual amount of the
accounts assigned.
iii) Automatic perfection Sale of promissory notes. §9-309(4).
(1) Problem 294, p. 907
ONB sells promissory notes to LNB
Sale of Promissory Notes is an Art. 9 transaction
Who is Debtor? – seller. Who is Secured Party?—buyer.
Must LNB file a Financing Statement? Perfect by Possession? 9-309(4)
(a) Must a financing statement be filed?
(2) Securitization of mortgages, sale on an interest in pool of mortgages,
promissory notes, accts receivable, sale of receivables—
(3) Loan participation—Sale of part of loan. Recourse and nonrecourse. If
there’s a problem with it can I get my money back. nonrecourse is an
assumption of risk.
Mortgage Warehousing – Bank makes loan to mortgage lender, taking SI in
underlying mortgages. Transfer with recourse/without recourse
 9-309(3) & (4) - Automatic Perfection only works IF there is a SALE
(a) IF in doubt? 9-310, 9-312
(b) But 9309 only applies to sales. But if there is any doubt, file it.
iv) SUPPORTING OBLIGATION. Problem 295, p. 908
NFC loans $20,000 to Portia Secured by AR; NFC files Financing
Statement; One Acct is guaranteed by mother of obligor
How to perfect security interest in Surety Obligation? 9-308(d)
(a) 9102(a)(77)(“supporting obligation” means a ...secondary
obligation that supports the payment o an account.”)
(b) 9102(a)(71)(“Secondary obligor means an obligor to the extent that
the obligor’s obligation is secondary.”)
(c) 9203(f)(“attachment of a SI in collateral ...is attachment of a SI in
a supporting obligation for the collateral”) OC 8 A SI in a supporting
obligation automatically follows from a SI in the underlying,
supported obligation.
(d) 9308(d)—“Perfection of a SI in collateral also perfects a SI in a
supporting obligation for the collateral.”
(e) CN: A guarantee is a supporting obligation, and perfection in the
one also perfects it in the guarantee.
e) PERFECTION BY FILING, p. 908
i) §9-310—Filing is the ONLY method of perfection EXCEPT:
(1) possession 9313
(2) automatic 9309
(3) control 9314, 9312
(4) Certificated of titled statute 9311
(5) Goods in possession of bailee/certificates securities 9312
(6) Proceeds 9315
(7) Continued Perfection – 9-316
(8) Temporary Perfection
(9) Supporting Obligation – 9-308
(10) Mortgage – 9-308
ii) A. The Mechanics of Filing, p. 909
(1) Why central filing vs Local filing? SoS office. On line search.
(2) Problem 296, p. 909
(a) Error by filing office. Could depend on who caused the error?
(b) Shakespeare is president of Hamlet Corp. Elsinore lent Hamlet Corp
$100k. The clerk at the SoS office filed it under “Shakespeare”
instead of “Hamlet.” Later another finance co lent Hamlet co money,
taking an SI in the same equipment.
(c) Did Elsinore “file” first so that it has priority, or did it bear the risk
of clerical error?
 (d) §9-516(1)—What constitutes filing.—“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.”
(e) §9-517—Effect if indexing errors. “The failure of the filing office to
index a record correctly does not effect the effectiveness of the filed
record.” C2. “The risk if on the one searching the record, not the one
filing.”
(f) The losing party should sue the state for negligence.
Who caused the error?
9-516(a), 9-517, 9-516(d)
Did EFC “file”?– 9-516(a)
Somebody loses – What recourse? Practical Note: Get duplicate
copy 9-523(a)
(g)
iii) B. Other filings, p. 910
(1) “A FS is effective for 5 years” and then it lapses. §9515(a).
(2) Pub finance /mfg home related filing is effective 30 years §9515(b).
(3) Continuation statement §9515 (d) and (e). When can you file a
continuation statement? §9515 (d) “only within 6 months before the
expiration of the 5 year period.
(4) How long must filing office retain filings?
How long is a filed Financing Statement effective? 9-515
Public Finance/Mfg Home related filing?
Continuation Statement 9-515 (d) & (e)
When can you file? Discuss Gap issues
How long must filing office retain filings? 9-522
Assignment Statement? 9-514
Partial Release of Collateral? 9-512
Correction Statement 9-518
Amendments – 9-509
(5)
(6) Problem 297, p.
(a) a. 5 years. 9515(a)
(b) b. continuation statement. 9515(d), 9510(c).
(c) c. No. once it lapses, the FS ceases to be effective, and thereby
becomes unperfected. As such it loses its priority. §9-515(c)
(d) CN: if you don’t file your continuation statement , it’s as if you
never filed.
(7) Termination. Problem 298, p.
(a) §9-513 termination statement. 9-625(e)(4) Liability for failure to
comply with 9513 in filing a termination statement.
 (b) 9-509(d)(2)—“a person may file an amendment . . . only if: the
amendment is a termination statement for a FS as to which the
secured party of record as filed to file, the debtor authorizes the
filing, and the termination statement indicates the the debtor
authorized it to be filed.”
(c) What procedures?
(d) Consumer goods?
(e) Open drawer concept.
(8) Problem 299—Bogus financing statement,
(a) Unauthorized bogus filing. 9513 OC 3, 9509 OC 3(“a person who
files an unauthorized record in violation of (a)(1) is liable under
§9625(b) and (e) for actual and statutory damages.”
(b) penalty? can debtor filing a termination statement,
(c) 9518- a person can file a correction statement if the person believes
that the record is inaccurate or was wrongfully filed.
iv) PERFECTION BY CONTROL – 9-314
8) MULTI-STATE TRANSACTIONS, p. 913
a) Choice of laws 1-105. General Choice of law, goes to party autonomy.
i) “reasonable relation” test.
ii) §9-301 is controlling, domicile approach. the law of the debtor’s
location is the state in which the steps for perfection need to be taken. §9-
301(1). If the property has a physical location, then the law of the state in
which it is located controls priority. 9301(1) and (3). 9301(2)—where it has
physical location.
iii) Basic rule: look to
(1) Debtor’s location as Place of perfection
(2) Collateral’s location as Effect of perfection.
iv) Problem 300, p. 914
(1) Residence in Wy, boat in Ohio. Ohio law: whenever a consumer has
paid more than 75% of a debt secured with consumer goods, the SI
automatically disappears. Wyo has no such law.
(2) MA: creditor should file in Wyo because that’s where the creditor
resides, but when the debtor has paid 75%, the creditor will lose its SI
because the law of the jx in which the goods is located
controls. CN: we file where the debtor is, but look to the location of the
boat for the effect.
v) Problem 301, p. 914
(1) §9-307 -- they conduct their business both in NJ and in Baltimore,
therefore, they have more than one place of business. therefore, under
b3, it’s place of business if where it’s chief executive office, Baltimore.
 (2) CN: 9307 OC 2. “chief executive” office is not defined, but seemed to
be where the conduct their affairs,; “where persons dealing with the
debtor would normally look for credit information.” But you may
protect yourself by perfecting under the law of each jx.
(3) CN: When will the debtor be deed to be located in the DC? 9307(c). IF
Perfection occurs in an off shore jx, then you are deemed to be domiciled
in Washington DC.
(4) Example 1: Debtor is an English corporation with 7 offices in US and
(5) Where is the Debtor’s Place of Business? 9307
(6) STOPP
vi) 4 month grace period when debtor changed location. Problem 302, p.
915
(1) Change of debtor’s location to another jx. 9316(a). the SI remain
perfected for 4 months. CN: debtor is located in Illinois, Does the bank
lose it’s perfection by moving to Washington. No. Under 9316, as SI
remains perfected until the earliest of 4 months to file in the jx, or when
the perfection would have ceased under the law of the original jx. So if
I’m at the end of the 5 year period, (see §9515(a) above). If the FS
lapsed, I have 6 month window to file a continuation statement. So I
may not have a full 4 months. The 4 month grace period is designed to
give you time to learn debtor has moved.
(2) Merger. 9316(a)(3). The perfection remains good for 1 year after
merger. CN: only if the original perfection hasn’t lapsed in the original
state.
vii) Problem 303, p. 916
(1) Contest between 2 perfected creditors.
(2) ONB–filed 1st in Ill.
(3) LNB-filed 2nd in Ill.
(4) LNB – promptly refiles in DC.
(5) ONB waits 9months before filing in DC.
(6) Who has priority? 9316(b) & Example 7 Retroactive Unperfection. OC
3.
(7) Ma: Last national Bank will get priority over First national bank.
(8) “Purchase” 1201(32)
(9) “purchaser” 1201(33)
b) II. Certificates of Title 9-303 & 9-337, p. 916
i) Problem 304, p. 917
(1) Lyle was domiciled in Michigan, bought his new truck in Pennsylvania,
and told the dealer there that he lived in Indiana, because license and
registration fees were cheaper there. The dealer perfected his interest in
 Indiana. Lyle went bankrupt and claims that the dealer was unperfected
because its SI was not perfected in Michigan.
(2) CN: 9303(a) “applies to goods covered by a certificate of title even if
there is no relation between the jx under whose certificate of title the
gods are covered and the goods or the debtor.” Thus, this section applies
to certificates of a jx having no other contacts with the goods or the
debtor; all you need is the piece of paper. Accordingly, the truck dealer
wins.
ii) Problem 305, p. 917
(1) Holly is a resident of Tex. but purchased her car in Oklahoma. Both
Texas and Oklahoma law required lien interests to be recorded on the
certificate of title, which the dealer did. Holly drove the car to Texas
and obtained a certificate of title somehow, which did not show the
lien. Holly then sells the car to Innocent. Dealer repossess the car. Who
should get it?
(2) §9-303(b) “goods cease to be covered by a certificate of title at . . . the
time the good become covered subsequently by a certificate of title
issued by another jx”) and OC 6
(3) §9-316(d)(this suggests that the Oklahoma certificate remains perfected)
and (e) (under the best of circumstances, the OK dealer should have had
4 months to protect.) and OC 5
(4) §9-337 and OC—this suggests that innocent purchaser takes free of the
lien. This will protect Neighbor but not the used car dealer. Otherwise,
the Ok dealer has 4 months to perfect a new title.
iii) Problem 306, p. 918
(1) Armstrong buys yacht in state that does not have certificates of title for
boats, requires filing. ONB files. Armstrong moves to a certificate of
titles state, but he never gets a certificate.
(2) How long will ONB’s perfection last?—here, the goods are never
covered by a subsequent certificate of title. 9316e--
(3) What if D moves from certificate of title state to a no certificate state?
(4) 9-316—SI remains perfected following a change in jxal law for: “the
time perfection would have ceased under the law of that jx.” Thus, 5
years in the original jx, or 4 months in the new jx. Then under 9303 see
if the goods become covered by a Certificate of title in a new jx. Here,
they don’t, because he’s moving to a filing state. §9-303 is an exception
to the general rule. But §9-337 protects innocent purchasers who are not
in the business.
(5) §9-322
9) PRIORITY—9-317, p. 919
a) I. Simple disputes, P.
b) INTRO. §9-317, an (unperfected) SI loses to: holder of a priority interest under
§9-322(priority among conflicting SI’s) and a lien creditor before SI is
perfected or §9-203(b)(3) conditions are met & FS is filed, See OC 4.
i) Buyer or lessee may take free IF value given & delivery taken without
knowledge & before perfection.
ii) 9-317(e) PMSI—When must seller file?
(1) before or within 20 days after debtor receives delivery of collateral. If
so, PMSI wins over buyer, lessor, or lien creditor.
iii) §9-322—(read commentary and Examples)—Conflicting SIs. Three rules:
among two competing perfected SI’s, the first to file wins; among a
perfected and unperfected SI, the perfected one wins; among two competing
unperfected SI’s, the first to attach wins.
iv) Problem 307, p. 919
(1) Epstein borrowed 10k from ONB. ONB never filed a financing
statement. A Martin’s Travel, a creditor, levies on the inventory. Who
gets paid first?
(2) §9-317(a)(2)—A SI is subordinate to the rights of . . . a person who
becomes a lien creditor before the earlier of the time . . . the SI is
perfected.”
(3) A “lien creditor” means a creditor that has acquired a lien on the
property involved by attachment or levy.” §9-102(a)(52)—“
(4) MA: Martin’s Travel will get the money, not ONB. The lien creditor
wins because ONB didn’t perfect.
v) Problem 308, p. 920
(1) §9-317—“An SI is subordinate to the right of ... a person entitled to
priority under section 9322” §9-322(a)(2) and OC 3—“a perfected SI has
priority over a conflicting unperfected SI.”
(2) CN: First to file will win. Bentham Bank filed first so it has priority.
vi) First to file (not give value) wins. Problem 309, p. 920
(1) a. yes. Both First and Last national Bank have security interests in the
same collateral.
(2) b. attachment is a prerequisite to perfection §9-308 and attachment
cannot occur until the creditor gives value. Which bank has the superior
right to the inventory? §9-322 OC 4, Example 1 (even though B gives
value first, A has priority because it filed first.). “Filing may occur
before the SI attaches.”
(a) You can gain priority by filing a financing statement before the
money goes out the door. The attachment need not occur for priority
to be established. So, file immediately or before the money is given.
vii) Future-advances. Problem 310, p. 921
 (1) §9-204(c) and OC 5. “Obligations covered by a security agreement may
include future advances.” “Collateral may secure future as well as
present advances when the security agreement so provides.”
(2) MA: nothing need be done. CN: notice filing lets you know that the
security agreement covers future advances as well. (NOTE: After-
acquired property clauses don’t apply to consumer goods or commercial
tort claims.)
viii) Problem 311, p. 921
(1) §9-204(c) “obligations covered by a security agreement may include
future advances ... whether or not the advances are given pursuant to an
agreement.”
(2) §9-323(a) and OC 3 (“the time when an advance is made plays no role
in determining priorities among conflicting SI’s except when a FS
was not filed and the advance is the giving of valued as the last step for
attachment and perfection.”), Example 1.
(3) CN: the first to files wins; but what if a creditor never filed a
termination statement. The world at large is on notice that there may be
a SI. Party files a new Security agreement but not a new financing
statement, the first one is still out there. Is it good? [yes]
ix) Problem 312, p. 922
(1) bank puts stamp collection in vault. It has perfection by
possession. They give collection back.
(2) a. Bank has priority because it has an SI through possession. §9-
313. Because possession makes that bank’s SI a perfected one, 9313,
and priority among perfected SI’s is determined by the first to file or
perfect, 9322, and the bank perfected first, the bank has priority.
(3) b. §313(d)(perfection continues only while the secured party retains
possession.), 9312(f) applies when goods are in possession of bailee (but
bank/creditor is the bailee). CN: §9-312(f) says the bank can give it
back, but only “for the purpose of ultimate sale or exchange, or loading
and unloading....” Here, are they releasing it for the proper purpose? for
ultimate sale? no, so they lose the SI. They are unperfected and Dad is
perfected, he filed a financing statement.
(4) c. MA: Father wins, because there was a lapse in perfection. §9-308(c)
– “An SI is perfected continuously if it is originally perfect by one
method under this article and is later perfected by another method under
this article, without an intermediate period when it was
unperfected.” [moreover, thought a security agreement was signed, the
bank never filed an FS. If it had filed a FS, it would have been
continuously perfected and treated as though it had filed first.]
c) Dragnet Clause— Under 9204(c) A security agreement may provide that
collateral secured future advances whether or not the advances are given
pursuant to commitment. A dragnet clause allows the SI to pick up unrelated
obligations.
i) Gilmore test based on intention of the parties and the requirement that the
later obligation be “related” “similar” or “of the same class as the original
transaction.” Is this still used? See §9-204, OC 5—“the obligation need not
be of the same or similar type as the earlier advances.” A better method
would be to specify the collateral in every loan agreement.
ii) Problem 313, p. 922
(1) D borrows money from the bank to buy cattle. The Security agreement
states that it is using the cattle as collateral not only for the PMSI but all
other obligations now or hereafter owned to the bank. The bank then
issues him a creditor card. He uses it to take a trip to Australian.
(2) 9204 and OC 5. It’s possible that the cattle would secure the credit card
debt, particularly if they’re both used for a business purpose. Even
though this section suggests that the dragnet clause would cover this, but
don’t rely on it, be specific about the collateral.
iii) In re Wollin, p. 923
(1) Dragnet Clauses under Oregon law.
(2) R: No matter how the clause is drafted, the future advance to be
covered must be of the same class as the primary obligation and so
related to it that the consent of the debtor to its inclusion may be
inferred. Loans of the same character (i.e., all business loans or all
consumer loans) do not necessarily meet the “same class” standard. The
future transactions must be so related to the primary loan “that the
consent of the debtor to its inclusion may be inferred.
(3) Here, we cannot find the VISA charges sufficiently related to the Pickup
loan. A loan to purchase a vehicle differs in the scope and solemnity
from the miscellaneous charge typical of a VISA account. It cannot be
inferred that the debtor’s consent to have their vehicles secure the VISA
acct.
(4) CN: auto loans and creditor card debt. Held, no, they are not the same
class. The plain meaning argument was rejected. It was narrowly
construed. The new version of the Code is very favorable to dragnet
clauses, but this line of cases are still out there
iv) Problem 314, p. 929
(1) Probably not because that was not the parties’ intent.
(2) CN: What happens when banks merge? Debtor specifically keeps one
class of debt at one bank, and another type of debt at another bank to
avoid the effect of the dragnet clauses. Then the banks merge. It would
 be allowed under a strict reading of the dragnet clause, but it wouldn’t be
equitable. 9204 OC 5. Even though the security agreement, at the time
they entered the transaction, they didn’t intend this. But argue equity.
d) PMSI’S—§9-317(e), p. 930
i) A. THE BASIC RULE, P.
(1) Consumer goods PMSI. Where the collateral is consumer goods, no
further steps are required for the PMSI to prevail over prior or later
interests. 9309(1).
(2) All other PMSI’s. For all other PMSI’s a SI must be perfected during a
20-day grace period following the buyer’s possession of the goods in
order to take advantage of a relation-back of priority to that date. §9-
317(e) and §9-324(a).
(3) §9-103—PM COLLATERAL is either goods or software, nothing else. It
can be consumer or non-consumer, it could be held by the seller of the
goods or software, or by the bank who lends money for the purchase of
the goods or software.
(4) §9-309—PMSI has automatic perfection. OC 3 “No filing or other
steop is required to perfect a purchase money security interest in
consumer goods.” PMSI has priority over prior perfected SI’s in the
same goods. 9324(a). If Non-consumer goods, 20 day grace period to
file for relations back. §9-317(e) and
(5) What if 2 PMSI’s? 9324(g), Price over value given, seller >
lender. What if you have two lenders? go back to §9-322, first in time
first in right.
(6) INVENTORY PMSI §9-324(b) and (c)
(a) PMSI [in inventory] takes priority over perfected SI in same
collateral IF:
(i) 1. PMSI is perfected when Debtor gets possession of
INVENTORY.
(ii) 2. holder gives authenticated NOTICE to conflicting SI holder.
(so the other secured party can stop making advances)
(iii) 3. Other secured party gets notice not earlier than 5 years before
Debtor gets inventory AND (so giving notice 6 years before
debtor gets inventory won’t work)
(iv) 4. Notice states: “Has or expected to acquire PMSI in
INVENTIORY of D” and describes inventory.
(7) Inventory Lender (inventory Financier).
(a) Inventory turns over
(b) lender makes periodic advances
(8) PMSI
(a) Seller of specific item of inventory
 (b) Lender to acquire specific item of inventory.
(c) CN: What if you find that there’s already an inventory
financer? you may not want to make the loan.
(9) NOTICE protects the NonPMSI inventory Secured Party – If it gets
notice, it won’t make further advances. You can see the name of the
other security holder, and you have to send him notice. You have 20
days to file. But the prior creditor has.. .
(a) Notice to Conflicting Inventory Secured Party – Timing
(i) §9-324 OC 5 – Notice.... “The perfected purchase money
security interest achieves priority over a conflicting SI only if the
holder of the conflicting SI receives a notification within five
years before the debtor receives possession of the purchase money
collateral.”
(b) Where to send the notice OC 6. to the address on the FS.
(c) Consignments—PMSI §9-103(d). Notices that consignor has
delivered or expects to deliver goods, properly described “on
consignment” – sufficient. Notice does not have to use the term “SI.”
(d) Consignor’s interest vs. Other secured Party’s interest in goods.
(10) A PMSI gets priority over all other SI’s.
(a) Problem 315, p. 930
(i) Paramount Homes goes to furniture store and buys furniture.
Signs a security agreement. First: is it consumer goods? no.
business.
(ii) a. MA: they have the policy not to file because usually furniture
is consumer goods and therefore doesn’t require the filing of a SI
to be perfected. 9309(1). Doing so would be unnecessary
expense. here it is unwise because it’s not clear that the furniture
would be classified as “consumer goods.”
(iii) b. MA: On June 10, Sophy’s will have priority. On June 30,
Bank will have priority. [bank has a 20 day grace period for non-
consumer goods. The goods were purchased on June 8, so the
bank has until June 28 to file, after which it loses it SI priority.]
ii) Galleon Industries v. Lewyn Machinery, p. 931
(a) Inadvertently, a machine was sent directly to the Buyer Galleon,
instead of to the seller. Seller sent him an invoice requiring payment
in the next 30 days. Buyer never paid.
(b) Buyer Galleon had already entered into a security agreement with
Bank which includes as collateral “all equipment and inventory
owned or to be thereafter acquired.”
(c) 9204 provides that a dragnet SI attaches whenever the debtor
acquires rights to the collateral covered by the Security agreement.
 (d) Because Seller sent an invoice asking for payment in the next 30
days, Buyer was a credit buyer. A credit buyer acquires “right” in the
property when possession is received from the seller.
(e) Seller, if retaining title until payment, by delivery to a credit buyer
reserved only a PMSI, such SI was never perfected by filing as
required by §9-310(a). Seller could have perfected its PMSI and
received priority over the perfected SI of Bank by filing a financial
statement at the time of delivery or within 20 days. §9-324(a). Seller
learned of the foreclosure and taking of possession by the Bank 2
days before it’s time to file had expired. By filing at that time it
could have gotten priority of the perfected SI of the Bank.
(f) Because Buyer had sufficient rights, by delivery and sending of the
invoice, the Bank’s SI attached.
(g) CN: Lewyn’s agreement was for cash only. No credit. But
manufacturer accidentally ships directly to buyer. Lewyn sent an
invoice saying net 30 days, this looks like company credit. Could
they have a PMSI? yes. There is a prior perfected SI held by a
bank. Nov 21 1969, Bank gets a security agreement covering
equipment and inventory on after acquired property. Lewyn could
have checked the record and found this. FS filed on Dec. 1, 1969.
(h) june 22, 1970 Lewyn’s machine shipped
(i) june 22 1970—lewyn’s invoice
(j) bank forecloses on prior debt.
(k) Lewyn says: “I retained title until paid.” But title doesn’t mean
anything. Galleon had right in the machine. 9204 – vesting of rights
in D, not passing of title. Effect of invoice? If you want to reserve
title, you should still file an FS.
(l) Lewyn had a PMSI – but never perfected by filing.
(m) 9309 (consumer goods automatic). 9317(e) file within 20
days. 9324—notice. He had time to file—is this a lawyer issue? You
should always file anyway, he still had two days to file.
(2) Problem 316, p. 934
(a) Store granted a floating lien over its inventory and equipment to
Bank, which perfected its SI by filing a FS.
(b) Store then bought a dog for $1200, paying $100 per month until paid
off. Seller and Buyer agreed that the store would not get title to Dog
until all payments had been made. When store stopped making
payments, Bank seized all its assets, including Dog.
(c) What remedies does Seller have?
(d) MA: the dog was “equipment.” This is not consumer
goods. Agatha Shaw forgot to file. She would be ok for 20
 days. She also has to give notice. Store had not paid full price for
dog, doesn’t matter.
(3) Problem 317, p. 934
(a) OC 3 to 9324
(b) PMSI wins.
(c) 2-326(2)—“if delivered goods may be returned by the buyer even if
they conform to the contract, the transaction is a “sale on approval” if
the goods are delivered primarily for use. Goods held on approval
are not subject to the claims of the buyer’s creditor’s until
acceptance.”
(d) OC 3 to §9-324 – “”Once the lease is convered to a SI, filin a
financial statement is necessary to protect the sellers SI. The 20 day
period does not commence unitl the goods become “collateral.”
iii) B. Inventory and Livestock, p. 935
(1) Inventory. 9-324(b). Problem 318, p.
(a) MCA had perfected SI in Inv of Clothing store. Store owner
contract to buy $4k in inventory. Dec 10 sale, dec 11 notice. PMSI
filed Dec 11. Goods delivered on Dec 12.
(b) a. Who has priority? -- Madame because, notice and filed within 20
days.
(c) b. If notice not received until Dec 12? On time shot for
Madame? Notice is good for 5 years under 9324(b)(3).
10) REVIEW—
a) Scope of art. 9—“Security interests” in Personal property & Fixtures – §9101
(not real property).
b) How to protect the Lender’s interest in Collateral?
c) What do we want to avoid? Ratner, secret lien.
d) scope 9109, sale of intangibles, consignments, transactions regardless of form
that creates a SI in personal property or fixtures by CONTRACT. Is
Materialman’s lien created by statute an Art 9 SI? no.
e) Be Sure to identify (exam analysis):
i) debtor
ii) secured party
iii) underlying obligation
iv) collateral
f) Definitions §9-102.
g) Consignments and Art. 9.
i) Is it a disguised sale or true consignment?
ii) Key: It is an art. 9 “security interest” that must be perfected to be protected
IF the person to whom goods delivered is “not generally known by its
 creditors to be substantially engaged in selling goods of others” §9-
109(a)(4) and OC 6. Defined §9-102(a)(20).
h) Leases & SI’s.
i) Lease distinguished from SI. Bright line test 1-203:
(1) Transaction in form of lease creates a SI if lease is for a term and not
subject to termination by lessee AND
(a) Lease term=remaining life
(b) Lessee bound to renew
(c) option to renew for life with no or nominal consideration
(d) Option to own.....
i) Precautionary filing. Play it safe. §9-505. Exclusion from art. 9. §9-109(c)
and (d).
j) Creation of SI
i) First, Classify Collateral. “Collateral” 9102(a)(12)
ii) Property subject to a “security interest
iii) Types of Collateral : goods (movable)
(1) Consumer goods, personal, family, household
(2) Equipment—default
(3) Farm products –D in “farming operation”
(4) Inventory—leased, held for sale/lease, raw materials, WIP, material
used or consumed.
(5) Quasi-intangible property ”Piece of paper (Instruments /Promissory
notes); investment property (stocks and bonds), documents (WH
receipts/Bills of lading); chattel paper, L/C rights.
(6) Intangible: no physical form.
(a) Accounts
(b) Deposit accts
(c) General Intangibles
k) Analysis
i) First, is it covered by art 9?
ii) Who are the parties?
iii) Classify collateral
iv) Review technical validity of the forms
(1) 1. Security agreement §9-102(a)(73)
(2) 2. Financing statement...
l) Security agreement §9203
i) Enforceable against D & 3rd parties IF:
(1) Value given
(2) D has rights in collateral AND
(3) one of the following:
 (a) D has authenticated a security agreement with description of
collateral
(b) Possession. Need not sign it, but must somehow authenticate it. The
must also described the collateral. Super-generic will not work in the
Security agreement.
(c) Control (deposit account)
m) Financing Statement –UCC 1
i) Document filed in Public filing office – SOS
ii) Perfects creditor’s rights in Collateral
iii) What’s required §9-502
(1) Name of debtor
(a) Debtor’s identity—what name to use?
(b) Name change?
(c) Collateral transferred
(d) §9-507
(2) name of secured party (if you have a PMSI you need to give him
notice).
(3) collateral indicated
iv) Does a financing statement have to be signed? no.
v) Extensive chapter 19 analysis posted.
vi) Contract description of collateral required for Security agreement &
Financing Statement.
n) Perfection of SI
i) Perfection by Possession
(1) What is possession?
(2) Goods in possession of Third Party?
(a) Is notice to 3rd party enough?
(b) When do we have to get acknowledgement?
(c) Cf §9312 and 9313.
(d) §9-312 goods covered by a negotiable or nonnegotiable
documents. §9-313, where there is no document of title.
(e) We need authentication, but we can’t make them authenticate it.
(f) Temporary perfection for specific purposes §9-312(f).
(3) What about motor vehicles? §9-311(a)(2)
(4) What’s the problem with a gap in perfection? You loss priority.
ii) Automatic perfection
(1) 9309—perfection as soon as SI attaches 9203
(2) PMSI in consumer goods
(3) Supporting obligation 9308
iii) Perfection by filing
(1) This is the only method unless you fall into an exception §9-310
 (2) What if error in filing?
(3) Mechanics of filing:
(a) How long FS effective 9515
(b) Continuation statement? When can you file?
(c) Termination Statement §9-513
(d) Bogus Filings §9-513, 9509 OC 3
(e) Can a D file a termination statement? yes.
iv) Perfection by control 9314.
o) Multi-state transactions
i) conflicts provision. 9301
ii) Where should we file FS?
(1) Debtor’s location for where to perfect
(2) Collateral’s location for effect of perfection.
(3) 9307
(4) Place of business,
(5) principal residence
(6) One or more placed of business
(7) Chief executive office
(8) DC – certain non-USdebtrs.
p) Priority
i) Simple disputes
ii) PMSI
(1) Inventory and livestock
(a) Inventory financier has perfected interest in existing and after
acquired inventory.
(b) D buys new inventory and gives seller PMSI
(c) PMSI (super-priority wins IF
(i) 9-324(4 requiremnts)
1. PMSI perfected when D gets possession
2. Authenticated Notice sent to prior lien holders
3. Prior lien holder receives notice within 5 years BEFORE D
receives possession
4. Content of notice: has ____PMSI in described inventory.
iii) Kunkel v. Spragy National Bank, p. 936
(1) 2 creditors: same cattle as collateral
(2) Hoxie feeders—PMSI
(3) Bank—prior perfected SI? held, yes.
(4) Did the debtor have “right in the collateral”?—Feed lot sold the cattle
but kept the collateral. Debtor never received the cattle. Debtor could
determine the sale price and if they could be sold. Debtor also had the
risk of loss.
 (5) Remember §9203. Hoxie kept the cattle -- D had some control. Held,
Bank did have SI. PMSI wins even though no notice—why?
(6) D files BR
(7) Should the trustee win? if BR was filed before perfection, but not under
this fact situation.
(8) Should the bank win?—because it had a prior SI.
(9) Should the PMSI win?
(10) CT says: sale had occurred; but passage of title doesn’t control.
(a) hoxie had constructively deliver cattle to D;
(b) Morken had title to cattle;
(c) Hoxie had SI and was bailee; D had “rights in collateral” and could
give Bank a SI.
iv) NOTES
(1) Can the creditor have PMSI if it retains possession of inventory? yes
(2) Creditor with SI in inventory would be more likely to perfect by Filing –
Why?
(3) Timing of PMSI notice: after cattle sold and slaughter; D never took
possession §9-324(b) and OC 5 “If the debtor never receives
possession, the five year period never begins, and the purchase
money SI has priority, even if notification is not given.” It’s not as
important to give notice because Debtor doesn’t have possession.
(4) What about cash proceeds? Even if there is a delay in payment, can it
be a cash sale?
(5) p. 946 about weigh and grade pricing.
v) Conflicting PMSI’s—vendor wins. Problem 319, p. 947
(1) Has buys inventory and finances it two ways. Standard gets a PMSI and
Files. MDNB also loans money to finance inventory and Files—part of
proceeds pay standard. Mar 28 – Hans contracts to buy 3k in goods,
down payment of 1.5k. Mar 28 – hans borrows 1.5k DP from MDNB
(2) Both send notice
(3) April 2 – goods delivered
(4) Who wins? 9324(g) and OC 13. Standard Wholesalers wins because it
is the seller of the goods and therefore has a PMSI. It enables him to
acquire. In OC 13 talks about favoring the vendor. Equities favor the
vendor
vi) Consignment. Problem 320, p. 948
(1) What about consignor? §9-103(d) and OC 6(the interest of a
“consignor” is a PMSI in inventory), 9319. Barbara’s interest is a PMSI
in inventory. So she would have a super-priority PMSI, but she still
doesn’t win, why not? Because she doesn’t follow the requirements of
§9-324(b).
 (2) Barbara deliver pottery to Gallery for sale
(3) ONB has floating lien on inventory
(4) Can bank get her pottery?
(5) Consignor is purchase money CR – §9103(d)
(6) But she shed to follow 9324(b)
(7) Could argue consignee was “generally known to sell goods of other’s”
9-102(a)(29) – so not art 9 consignment
(8) Was it consumer goods? No, art. 9 consignment
q) III. Control and priority, p. 948--2 types of collateral securing a loan.
i) Investment property –§9-102(a)(49)
(a) Certificated securities; uncertificated securities; Securities
Entitlement (account with stockbroker); commodities contract and
account.
(2) How do we perfect and SI in investment property?
(a) Filed financing statement, or
(b) Control—this will not prevail. Control could be:
(i) take delivery with indorsements
(ii) uncertificated – Deliver, records reflect that I have the SI in it.
(3) Problem 321, p.
(a) Goldbury buys 100 shares of stock. BBB holds at Clearing Corp but
marks its records. ONB wants to loan money secured by stock
(b) 8106(d) OC 4
(c) Have the account changed so the Bank owns the acct or 3rd party
agreement.
(d) 9328(3)
(e) First in time to control wins.
ii) B. Control over deposit accts, p. 950
(1) Problem 322, p. 950
(a) §9-104—Control of Deposit Acct.
(b) Second party is LNB -- the bank holding the deposit.
(c) 2 party agreement:
(i) bank will comply with instructions from secured party without
D’s further consent. 9104(a)(2).
(ii) Security party is named as owner of account. 9104(a)(3).
(d) Priority – §9-327.
(i) Control over non-control
(ii) first in time to control wins
(iii) BUT bank that holds the deposit wins (unless bank is named as
acct holder 9104(a)(3)) Under 9-327 this sets up the priority over
a deposit acct.
 (iv) Control wins over not control; if two control, prior in time over
later; if in a bank acct, then bank holders over everyone else.
r) BUYERS, p. 952--
i) General Rule. §9-201(a)—Except as provided otherwise by the UCC, a
security agreement is effective according to its terms between the
parties, against purchasers of the collateral and against creditors.
ii) Exceptions
(1) 9-320(a). Buyer of Goods. A buyer in the ordinary course of business
. . . takes FREE of a SI created by a buyer’s seller, even if the SI is
perfected and the buyer knows of its existence. (BIOCOB)
(2) “Buyer in the Ordinary Course of Business”- §1-201b9 -- is a person
who buys goods in good faith w/o knowledge…and seller cannot be
pawn broker and seller must be in business of selling goods of that kind
and in accordance with usual customary practices in that business (not
farm products…primarily deals with inventory)
(3) 9-320e- Buyer doesn’t take free if CR has possession of the goods
(4) When buyer will take free of prior SI in SLIDES** (9-320a and 1-
201)…
(a) BOC,
(b) Doesn’t buy in BULK,
(c) Does not take in satisfaction of prior debt,
(d) Seller’s business is selling this kind of goods,
(e) Good Faith and w/o knowledge that purchase will violate the
security interest,
(f) Not farm products,
(g) Seller’s prior CR doesn’t keep possession,
(h) Competing SI is created by Seller
(i) ****Know this for exam
(5) §9317(b)
iii) Problem 324, p. 952
(1) a. MA: 9320(a)—as a buyer, Ms. Consumer takes free of the SI.
(2) b. MA: No, it makes no difference whether Ms. Consumer knows of the
SI. 9320 OC 3. So, it wouldn’t matter if she had known that ONB had
the perfected security interest in the inventory BUT it may matter what
she did know about their interest (i.e. if a term in the security agreement
would be violated b/c the agreement said No sales);
(3) c. MA: Not in the ordinary course of business. This is debatable…there
are many stores that frequently run liquidation sales, so look if store does
this a lot to make her a buyer in the ordinary course of business;
iv) Bad faith. International Harvester v. Glenenning, p. 953
 (1) International had a SI in 3 tractors, executed by Barnes. Int’l alleges
conspiracy between Barnes and Glendenning. Barnes pretending to sell
Glendenning 2 tractors. Glendenning took the tractors to Louisiana and
sold them there.
(2) I: was Glendennign a buyer in the ordinary course of business?
(3) Glendenning was a former International employee and knew about their
floor plan program.
(4) Glen had known Barnes, an International dealer, for 2 years. Glen was
approached about buying 3 of Barnes’ tractors for 18k. He counter
offered 16k, which Barnes accepted, though Glen knew they were worth
22k. Barnes gave him a bill of sale stating he had purchased the three
tractors for $24, 700 with cash payment of $16k and balance of $8,700.
Also reciting that Glen traded in 4 tractors with values totaling $8,700,
so the total consideration was shown as paid. The next day, Barnes wrote
up a second bill of sale stating the same as the first, and Glen handed
over the 16k. Then the collection manager for Int’l called, questioning
Glen about the transaction. Glen told him he had traded in 4 tractors and
paid 16k cash for the three.
(5) Glen’s defense was that he was a BIOCOB under 9-320(a).
(6) Held, Glen did not buy in good faith and therefore was not a buyer in
the ordinary course of business.
(7) Appeal for wrongful conversion of 3 tractors; P was a holder of a duly
perfected security interest in 3 new International tractors
(8) Was G a buyer in the ordinary course of business? No, G had many
years of experience as a tractor dealer, a salesman and one of the most
active traders of farm equipment in the County; he purchased the
equipment for considerably less than its value and made no investigation
of International’s security interest
(9) Look on slides
(10) *Bad faith can sometimes alter Article 9 priorities
(11) [instert lease review here]
v) Possession Prevents buyer from “taking free”. Problem 325, p. 958
(1) Deering MillikenMill FabricsTanbro Fabrics
(2) Mill buys from Deering but leaves goods in Deerings possession. Mill
then sells to Tanbro. Mill goes bankrupt. Deering refuses to deliver to
Tanbro.
(3) 9320(e) “Subsection (a) and (b) do not affect a SI in goods in
the possession of the secured party under §9313.” OC 8 “this prevents a
buyer of goods collateral from taking free of a SI if the collateral is in
the possession of the secured party.”
 (4) Before taking possession of fabrics, MF contracts with DM to buy them
and sign security agreements; MF then sells the goods to T wholesaler
and they pay MF for these; Textiles still sitting in warehouse and MF
goes bankrupt; Who will win here? 9-320 OC 8...Buyer of goods
collateral prevented from taking free of a SI if collateral is in possession
of the secured party
vi) Problem 326, p. 959
(1) F ONB had a perfected SI in all cars on SM’s lot. SM owed money in
past due insurance premiums to HT who came to buy a new car from
SM. SM gave HT a check for the debt but then HT endorsed it back over
to SM when he saw a new car he wanted to buy. Is HT a buyer in the
ordinary course of business so as to take free of ONB’s SI? No, this is
acquiring the goods in satisfaction of a prior debt so there cannot be a
BIOCOB here.
vii) First National Bank and Trust v. Ford Motor credit Co, p. 959
(1) Ford Motor Credit had a floor plan with Dealer. Dealer issued title to
two of its cars to its officers and obtained a loan from the bank for the
wholesale price, giving bank an SI in them. Dealer then placed the cars
in the new car lot. The bank knew that these cars were not being sold in
the ordinary course of business.
(2) Held, the bank is a financier, not a buyer.
(3) Floor plan arrangement- selling cars to individual purchasers so co. can
pay off credit company and credit company has a PMSI in the cars
(4) Do some of these purchasers take free of the companies SI? Are they
buyer’s in the ordinary course of business? Did they buy in good faith
and w/o knowledge that purchase would violate a security interest? The
bank here worked very closely with dealership so are not BOC
(5) If they had been, bank could win with its PMSI in the cars and if a
buyer in the ordinary course bought these cars
(6) Analysis: 2 separate credit transactions (id parties and the collateral…
(a) 1. borrower is car co. and seller is car manufacturer and financer is
credit company with a secured interest in inventory of the cars…
(b) 2. If purchased by a buyer taking free of the 1st security interest then
move to 2nd transaction b/w company and the bank…bank did take a
PMSI in the 3 cars but the borrowers were never buyers in the
ordinary course of business b/c they worked within the company)
viii) Problem 327, p. 965
(1) LorriArthurAnn
(2) A buys new car on credit from L’s car city which took a PMSI in the
car. A was a used car dealer by profession but he had purchased the car
for his own private use; but he parked the car in his lot and one day sold
 it for cash to Ann; A didn’t mention to her that it was his personal car; so
Ann sued L’s car city demanding that it release title…Ann is a buyer in
the ordinary course here; Is Lori’s out of luck here? The SI remains
perfected in the proceeds so they should go back after Arthur for the
proceeds
ix) Problem 328, p. 965
(1) Spa pledges 50 promissory notes; bank takes possession of the notes;
Spa gets release of 10 notes to present for payment; Spa sells note to
ONB…who wins? This goes to the 20 day grace period for taking the
collateral back into possession for certain purposes…9-331- HDC of
negotiable instrument not affected; Look at HDC’s defenses available
under 3-305…
(2) 9312(g)-the SI in certificate or instrument remain good for 20 days if
released for presentment for collection.
(3) 9331—a HDC takes priority over an earlier perfected SI as provided
under 3-302, and 3-305.
x) Problem 329, p. 965
(1) 9-320(b) & OC 5. This is meant to cover a sale of consumer goods by a
consumer to a consumer.
(2) MA: no, Voice of Japan cannot repossess, even though it has a PMSI in
the receiver. It has not yet filed a a financing statement, and the receiver
was sold from one consumer to antoher, therefore Nancy takes free of
the SI.
(a) Can V get this from N? Is N protected in the ordinary course
provision? …if buy (1) w/o knowledge (2) for value and (3) primarily
for their personal use and (4) before filing of a financing statement
(some stores have polices not to file financing statements); If V had a
prior filed FS this section wouldn’t apply.
xi) Problem 330, p. 966
(1) a. cf 9201, 9-401(b)(“An agreement between the debtor and secured
party which prohibits a transfer of the debtor’s rights in collateral or
makes the transfer a default does not prevent the transfer from taking
effect.”) and 9-315(a)(1)(“a SI continues in collateral notwithstanding
sale, lease, or other disposition unless the secured party authorizes the
disposition free of the SI.”).
(2) MA: buyer takes subject to the SI. Not “ordinary course of business”
because seller was not in business of selling ice cream machines, only
ice cream.
(3) b. yes, then the buyer could take free of the SI. 9-317(b)—“A buyer
takes free of an SI if the buyer gives value and receives delivery of the
collateral without knowledge of the SI and before it is perfected.”
 (4) c. Bank knows of and approves the sale. 9-315(a)(1)—buyer takes
subject to the SI, “unless secured party authorizes the disposition free of
the SI.” Thus, secured party may be able to go after collateral and the
proceeds after it is sold to a buyer
xii) Problem 331, p. 967
(1) §2403, 9201(“except as provided in the UCC, a security agreement is
effective against purchaser of the collateral”), and 9317(e)—If a person
files a FS with respect to a PMSI before 20 days after debtor takes
possession, the SI take priority over the rights of a buyer which arise
between the time the SI attaches and the time of filing.”
xiii) Problem 332, p. 967
(1) Waiver of SI? 9-315(a)(1) Can purchaser take free from the security
interest here? This is not covered by 9-320a b/c it is farm products;
Graham would argue there is a waiver of the proior security interest or
approval of the sale…
xiv) Clovis Nat’l Bank, p. 967—Bank waived its SI by
(1) There is a farm products exception as mentioned in 9-320a. Go to
federal statute for preemption- FSA of 1985 (p. 1667 in code
book). Texas doesn’t have a central filing system under this act.
(2) §1631- deals with lenders to people engaged in farming
operations…LOOK IN SLIDES
s) V. Leases, p. 982
i) Lease defined 2A-103(1)(p)—“a transfer of right to possession for a period
in return for consideration.”
ii) Distinguished from SI §1-203--
(1) Bright line test: It’s a SI IF for a term & lessee can’t terminate AND
(a) Original lease term=economic life
(b) lessee is bound to renew or buy
(c) lessee has option to buy or extend for nominal value
(2) if it is not a SI under this test, fact/circumstance
iii) Problem 335, p. 982
(1) ONB loans $ to HCC, HCC gives SI in equipment, including “after
acquired.” ONB files a financing statement. HCC leases equipment to
NCC. IS NCC subject to ONB’s existing SI in equipment?
(2) §2A-307—creditor takes subject to the leasehold interest unless his SI
attached before the lease began in which case “a lessee takes a leasehold
interest subject to a SI held by a creditor of the lessor.” this makes it
look like creditor will win.
(3) §9-321(c) lessee in the ordinary course of business. “A lessee
in ordinary course of business takes its leasehold interest free of a SI in
the goods created by the lessor, even if the SI is perfected and the lessee
 knows of its existence.” This doesn’t mean that the lessee is going to
win, because it’s not in the ordinary course of business. The
construction company is not in the business of leasing goods. So this
provision will not defeat the bank’s prior SI under 2A-307. Not ordinary
course because it’s a one time lease situation.
iv) Problem 336, p. 982
(1) Sale leaseback—2A-308(3)—whether I structure it as a sale or
leaseback, the result is the same, the same amount of money is being
paid to the bank. Usually people do this for tax purposes. This looks
like it’s not a true lease.
(2) Hcc buys equipment, sells it to ONB, leases it back from bank. HCC
then borrows $ from ANB – collateral is equipment.
(3) HCC defaults on lease, ONB tries to repossess. ANB says, I have an
interest in the same equipment. If true lease, ONB wins over ANB. But
is it a true lease? This is a SI, not a true lease, because it’s for the entire
economic life of the grading machine, therefore it’s a disguised sale.
therefore ANB wins. Here debtor retained possession of collateral. It
was an SI therefore it should have filed a financing statement.
(4) ARTICLE 2A leases. §2A-308—nothing in this article impairs the right
of creditors.
t) VI. Article 2 Claimants -- Sales (of goods)
i) When can the seller win over a subsequent creditor of the purchaser of
goods?
ii) Problem 337, p. 983
(1) Rights of unpaid Seller. Art. 2 & 9. Jack buys luggage from Alligator
Fashions. PMSI & filed financing statement §9-103. Priority §9-324 (a)
(PMSI wins over a nonPMSI) and (b)(PMSI in inventory)
(2) Jack sells luggage to Mark for cash; and Jack misrepresents the
product; Mark revokes acceptance §2-608 (right to revoke) and claims
SI §2-711(3) (on rightful rejection, the buyer has an SI in the
goods). Then seller says, “no, I assert a SI in the luggage because I paid
for it.” We have two competing SI’s the PMSI and the Article 2 SI.
(3) Alligator Fashions calls loan – can it repossess?
(4) What happens long as Mark has possession?—“§9-110—A SI arising
under 2-711 is subject to this article. However, until the debtor obtains
possession of goods: the SI is enforceable, and has priority over a
conflicting SI created by the debtor.” Until the original debtor gets it
back, Mark is going to have priority. But as soon as he gets it back,
Mark loses the SI. What does Mark have to do to perfect.
iii) Problem 338, p. 984
 (1) Author decides to publish book. Gets an Order from Cowskin Books, it
receives 200 books. They can’t pay. What can author do? §2-702—
Seller’s remedies on Discovery of Buyer’s insolvency: if already
delivered, seller can reclaim the goods. Does misrepresentation
matter? Shipping costs?
(2) What if Cowskin’s inventory subject to prior perfected SI?
(3) What should the author have done? PMSI & notice §9-324(b). CN: It
looks like the prior perfected SI in inventory will win. What should he
do? go through the provisions of Art. 9 and consider it
a PMSI. why? he’s the seller of the books extending credit to enable
the buyer to purchase the books. He’s ok for 20 days but then he should
file. Thus, he should do to be sure he’s not taking subject to the
preexisting SI in inventory. So he will win because a PMSI. BR code
might allow him to get the books from TRUSTEE.
iv) In re Arlco, p. 985
(1) CIT, holder of perfected SI in AR and INV, is a good faith purchaser for
value. Galey’s interest as Reclaiming Seller is subject to CIT’s rights
(2) What could the seller do? §9-324(b)
(a) PMSI review. PMSI in goods has “super priority” over prior
perfected SI’s §9-324(a), if perfected when D takes possession OR
within 20 days.
(b) Consumer goods. PMSI – don’t have to file, automatic perfection
but should file? §9-309.
(c) Equipment PMSI – 20 days to file
(d) Inventory PMSI §9-324(b) –special case.
(i) PMSI holder must send authenticated notice within 5 years
before D takes possession
(ii) Notice required IF prior filing Financial statement.
u) VII. Statutory lien holders, p. 994
i) When can the holder of a prior perfected lien find itself out of luck? §9-
333 (Possessory liens—priority over other SI’s). Statutory lien for
repairs. Who wins? Bank or repairman? What if the car is in the shop?
ii) Release of possession?
iii) Does the creditor have to consent to repairs? -- If I know Bank has an
indorsement on my certificate of title, do I need the bank’s consent to have
oil changed? no.
iv) What if the charges are too high? §1-203. can they keep my car until I pay
this fee? They are subject to a good faith restriction.
v) VIII. Fixtures, p. 995
i) Intro: What are “fixtures”? §9-102(a)(41)—“goods that have become so
related to real property that an interest arises in them under real property
law.”
(1) Pure annexation test: How hard to remove fixture from real
property? the harder to remove, the more it’s a fixture.
(2) Intent of parties test:
(3) Trade fixtures—necessary to business
(4) Assembled industrial plant. If it’s part of your operation and included in
your physical plant.
(5) Priority general rule is that fixture SI is subordinate to a conflicting
interest of an encumbracner of the related real property other than the
debtor.§9-334(c).
ii) Where to file? General rule. With the real property record. §9-
501(b), if equipment, file UCC 1 with SOS; if fixtures, then file in
the county clerk where the property is located. What’s the solution? File in
both places.
iii) Exception. Transmitting Utility. Problem 341, p. 999
(1) §9-501(b)—File an SI in a fixture in the county clerks office
(2) §9-102(a)(80)—“transmitting utility” means a person primarily
engaged in the business of operating a rail road...”
(3) CN: this includes a pipe, What is the General Rule about Perfecting
a Security Interest in Fixtures – Where to File? Railroad is
“Transmitting Utility” 9-501(b) – Central Filing
iv) Problem 342, p. 1000
(1) Simon borrows $4 M to build a building from CSB, granting CSB a
mortgage in the real estate “ and all appurtenances or things affixed
thereto, now present or after acquired.” The mortgage was filed in the
real property records.
(2) CONTENT OF THE FINANCING STATEMENT 9502(a),
(a) name of debtor,
(b) name of creditor,
(c) indicates collateral.
(3) But if fixtures also 9502(b)—
(a) indicate covers this type of collateral,
(b) indicate to be filed in real property records,
(c) describe
(d) Name of Record Owner of Real Property IF D does not have interest
in real property
(4) FILED MORTGAGE is effective as financing statement re: FIXTURES
IF 9-502(c)– indicates goods covered that are or will be fixtures
 (5) CN: Is the furnace a fixture? yes, it should be filed in the property
records.
(6) Is the mortgage effective as a FS? MA: yes, record of the mortgage is
effective as a financial statement.
(7) Technical sentence to include: 9502(b)(2)—it must “indicate to be filed
in the real property records” so people know where to look and the clerk
knows where to file it. Describe real property just as you would as it in a
mortgage.
(8) Will Blast prevail over CSB?
(a) §9-334(d) PMSI in fixtures prevails over other encumbrances of real
property “if the debtor has an interest of record in or is in possession
of the real property and: the SI is a PMSI; the encumbrance arises
before the goods become fixtures; and the SI is perfected with fixture
filing within 20 days of the goods becoming fixture.”
(b) §9-334(h)—“A SI in fixtures is subordinate to a construction
mortgage if a record of the mortgage is recorded before the goods
become fixtures and the goods become fixtures before the completion
of the construction.” OC 11 “(h) expressly gives priority to the
construction mortgage recorded before the filing of the PMSI in
fixtures.”
(c) §9-334(e)(1)—A perfected SI in fixture has priority over a
conflicting interest of encumbrancer or owner of real property if:”
(d) 9-339—This article does not preclude subordination by agreement
by a person entitled to priority.”
v) Problem 343, p. 1000
(1) refrigerator, computer. Fixture filing vs. Mortgage
(2) Refrigerator
(3) Computer for office use?
(4) 9-334(e)(2)—If readily removable, a holder of fixtures filing might
win. Only: factory /officer machines, Equipment not primarily used in
operation of real property, or replacement of domestic applicant that are
consumer goods.
(5) BUT refrigerator is not consumer goods and is original
installation. See OC 8. This applies to situations were a consumer, or a
renter, wishes to buy and install his own refrigerator. If the seller of the
consumer good refrige perfects by any method then they’ll take priority
over the mortgage. This applies only to replacement of consumer goods,
not original one.
(6) 9-334(f)(2)—“A SI in fixtures whether or not perfected, has priority
over a conflicting interest of an encumbrancer or owner of the real
 property if the debtor has a right to remove the goods as against the
encumbrancer or owner.”
vi) Lewiston Bottled gas v. Key Bank, p. 1000
(1) F: 90 AC’s purchased and installed in A hotel. The Grand Beach is
owned individually by DiBiase.
(2) Held, Bank’s mortgage has priority over LBG’s PMSI in the units.
(3) in 1986, Bank loan 2.5 M in exchange for a mortgage on DiB’s
property. Recorded in county. 1987 – DiB buys AC’s in return for a
PMSI. The contract states the AC’s will remain personal property
notwithstanding their attachment to real property. Recorded with SOS
and county, but in the name of Grand Beach Hotel, not as DiBiase. Later
in 1987 Bank gives second loan, for second mortgage.
(4) Fixture test: 1) physically annexed, 2) adapted to the use to which the
real estate is put 3) annexed with intent to make it part of realty. Held,
the AC’s were installed into the wall and removal would leave a whole
in the wall; the AC’s provided climate control for the comfort of the
guests; intent of the parties is an objective test. Held, these AC’s are
fixtures.
(5) Priority: Bank’s first mortgage takes priority over LBG’s SI in the units
unless LBG’s SI falls within one of the exceptions in 9-334. 9-334(d),
but this requires perfection of the PMSI, and here it was never perfected
because they didn’t do a fixture filing, which requires filing in the same
place as a mortgage would and that the financing statement contain the
name of a record owner. Here, it was filed in the right place, but not in
the name of the record owner.
(6) CN: what was in the financing statement? Name of the buyer, yes,
Grand Beach; name of creditor, yes, indicate collateral; but if fixtures
you need also 9502(b) the name of the record owner, who was DiBiase.
[they left this out.]
vii) Problem 344, p. 105
(1) 9-334(e)(3) “a perfected SI in fixtures has priority over a conflicting SI
if the conflicting SI is a lien on real property obtained by legal
proceedings.”
(2) MA: Simon’s creditors will have priority.
(3) OC 9—“a perfected fixture SI takes priority over a subsequent judgment
lien or other lien obtained by legal proceedings, even if no evidence of
the SI appears in the relevant real–property records.”
(4) CN: the fixture filing will win over the judgment lien because it was
perfected before the judicial lien arises.
viii) Problem 345, p. 1005
 (1) §9-334(e)(2)(C)—a perfected SI in fixtures has priority ... if before the
good become fixtures, the SI is perfect by any method (ie, “fixture filing”
or “UCC filing”) and the fixtures are readily removable replacement of
domestic appliances that are consumer goods.”
(2) CN: tenant buys a refrigerator on credit from Easy Credit – PMSI. 9-
334(f)(2)
(a) Does the D have the right to remove? examine the lease
(b) Refrigerator is consumer goods and it is a replacement
(3) Can be perfected by any method.
ix) Problem 346, p. 1005
(1) Tuesday buyer trash compactor on credit from Easy Credit. Remodels
kitchen to accommodate it. Installed may 7.
(2) 9-309 OC 3—“A fixture filing is required for priority over conflicting
interests in fixtures to the extent provided in §9334.”
(3) On may 7, what do you advice Easy Cred? do a fixture filing within 20
days.
(4) EC has to file even though this is a PMSI in consumer goods because
they will become fixtures. 9309 OC 3.
(5) File before fixture installed or within 20 days. 9334(d)(3) and IF EC
does this, it wins.
(6) 9334(e)(2)(c) does NOT apply because not replacement.
(7) MA: no automatic perfections.
(8) Should the FS contain, in addition to debtor’s name, the name of the
owners? 9-502(b)(4)—“to be sufficient, a financing statement which is
filed as a fixture filing and covers goods that are fixtures, must satisfy
subjection (a) and also: if the debtor does not have an interest of record
in the real property, provide the name of the record owner.”
(9) MA: yes. here, Tuesday (debtor) does not have an interest of record in
the real property (He’s a tenant), and therefore the name of the owner
(Simon) must be provided.
(10) 9-334(d)—20 days. Perfection occurs within 20 days of the
goods becoming fixtures.
w) Repossession/enforcement
i) Problem 347, p. 1006
(1) If you have priority you can get your fixtures. Pay for
(2) Enforcement. 9-604 and OC 2—
(3) (d)—reimburse other security holders, not the debtor, for the
damage. But you might end up paying more than you benefit.
(4) Don’t’ have to pay replacement value or diminution.
ii) Maplewood Bank v. Sears, p. 1006-{This case is overruled]
(1) I: whether a first mortgage or a fixture financier is entitled to priority in the funds realized from a
foreclosure sale of the mortgaged premises. Held, the first mortgage is entitled to priority
 (2) F: bank holds the first mortgage. Sears holds a PMSI in fixture which when perfected has priority
of the conflicting interest of an encumbrancer or owner of the real estate. The PMSI of Sears in
the goods or chattel which became fixtures gives it a “super priority” as to those goods or chattels
which became fixtures.
(3) What remedies are available to a PMSI lien holder upon deful by debtor? 9604 (old version)
gives sears two options: removal of the fixtures or foregoing removal of the fixtures. It does not
entitle Sears to receive from the proceeds obtained at the foreclosure sale, the difference between
the value of the realty with the new kitchen and the value of the realty after the new kitchen has
been removed.
(4) CN: Sears was a fixture financer, claims an interest in the remodeled
kitchen and asked to be paid out of the foreclosure proceeds. Held, you
can get your fixture or not get it. In other words, Sears could have gone
down to rip out the kitchen. But a house without a kitchen isn’t worth
much to the mortgagee nor the. and the used kitchen doesn’t do Sears
any good.
iii) NOTE 9604(b) is meant to overrule this case. OC 3. It makes clear that a
SI in fixtures may be enforced either under real property law or under any of
the applicable provisions of Part 6, including sale or other disposition either
before or after removal of fixtures.
x) ACCESSIONS AND COMMINGLING, p. 1011
i) Accessions. §9-335--Accession occurs when goods are fixed to other
goods (as opposed to realty). can take a SI in accession. SI continues when
goods becomes accession. SI in accession is subordinate to perfected SI in
whole. If priority, may remove accession after default. Reimburse other
CR (not D) for physical injury.
ii) Commingling. 9336
(1) Eggs in a cake – identity is lost. No SI in separate element. If collateral
is commingled, SI attaches to whole; SI remains perfected IF perfected
before.
(2) What if more than one SI attaches to the product or mass? Perfected
over unperfected. IF all are perfected: Equal in rank in proportion to
value of collateral at time of commingling. EX: if eggs cost 200, flour
300, and cake sells for 1000, then I have 2/5ths of a 1000. Hopefully
worth more secured then without. Only get proportional interest not a
windfall. Look at examples in OC. §9-336 Example 1,
y) X. Federal Priorities for debts & Taxes, p. 1012
i) A. The Federal Priority Statute. General federal priority – ALL federal
claims.
(1) Tax, Contract, federal insurance Loans, guaranties. These are paid first
in BR. Statute is absolute. But courts have subordinated some interest
that are choate. Gordon v. Campbell. 3 part test for whether a prior lien
is CHOATE:
(a) ID of lienor
(b) amount of lien
 (c) description of property
(2) “all personal property used in business” not definite – Floating lien
won’t win.
(3) 1953: Lien is Inchoate if Creditor has neither title nor possession. CN:
but is it possible to have a perfected SI without possession? yes, filing
FS.
(4) US SCT has not found prior liens CHOATE. But Lower federal court
held that Most SI’s perfected under art 9 are CHOATE & win over US
claims.
ii) B. Tax liens—Basic Priority, p. 1014
(1) Federal tax lien arises upon assessment. Covers all taxpayer’s property,
real/personal, now owned or after-acquired. Secret lien?
(2) Priority EXCEPTION:
(a) Purchaser,
(b) Holder of SI,
(c) Merchant’s Lien or
(d) judgment liens.
(3) These will win over the IRS assessed tax lien, Until federal Tax lien
Filed in accordance with State law.
(4) US v. Estate of Romani, p. 1014
(a) The federal priority statute provided that a claim of the US govt
“Shall be paid first,” when a decedents’ estate cannot pay all its
debts. 31 usc 3713.
(b) I: Whether that statute requires that a federal tax claim be given
preference over a judgment creditor perfected lien in real property
even though such a preference is not authorized by the Federal tax
lien act. 26 usc 6321.
(c) F: judgment creditor had a lien on decedent’s estate for
$490k. Estate was worth only $53k.
(d) Held, the judgment creditor’s duly perfected lien has priority.
(e) CN: General Federal priority
(f) What about judgment creditor’s perfected lien on Real Property?
(i) Jan. 25, 1985 – Judgment granted and recorded.
(ii) Perfected – CHOATE – Nothing more to do.
(iii) IRS files a series of tax liens.
(iv) 1913: Federal Tax Lien shall not be valid vs. Mortgagee,
Purchaser, or Judgment Creditor UNTIL Notice is FILED
(v) Romani dies – Jan. 13, 1992
(vi) Estate is insufficient
(vii) UNFILED TAX LIENS – Secret Liens
(viii) Prior perfected judgment lien wins
iii) C. Tax Liens and After-acquired property, p. 1024
(1) Problem 351, p.
(a) On Jan 1 ONB Perfected SI in inventory, AR, instruments, Chattel
paper of Auto Dealer. Smiles Motors fails to pay federal tax.
(b) IRS files Tax LIEN – OCT 1.
(c) Nov. 1 and Dec 1 – new shipment of cars arrive to Smiles Motors.
(d) Does filing o Tax Lien Cut off bank’s floating lien?
(e) Exception permitted for “Commercial financing” - constitutes
existing perfect security and takes priority over filed federal tax lien
IF new collateral Acquired within 45 days after tax lien filed AND
loan make without knowledge of tax lien filing.”
(f) The November shipment would probably be protected but probably
not the Dec. 1 shipment, because not within the 45 day period.
(g) CN: Here, we are talking about the 45 day window because they
perfected before the tax lien was filed. Future advances can also fall
within this 45 days window.
(2) 45 Day Rule--9323(b)
(a) Advances made by a perfected art. 9 creditor win over
intervening lien creditor, for 45 days after lien established.
(b) 9-323(d) –NON-ordinary course buyers are protected from an SI
in future advances made with knowledge of purchase OR “45 days
after purchase.”
(c) FLIP: Secured creditor is protected for 45 days
(d) 9-323(e) You can make a commitment to make advances during the
45 day window.
(e) 9-323(f) Lease
(f) Read commentary about when the test is ADVANCE DATE or
DATE of perfection.
(3) Plymouth Savings v. IRS, p. 1026
(a) Hospital owes Shirley. Shirley owes Bank and IRS.
(b) Bank files FS – 9/22/93
(c) Bank loans$ --4/13/94, secured by cash proceeds from Services.
(d) IRS assesses FICA liability 9/19/94 and FILES 12/19/94
(e) IRS assesses FICA liability 2/2/95 and IRS files 2/14/95
(f) 3/31/95 contract between Shirley and Hospital
(g) Does she have to perform services within 45 days?
(h) After Acquired property?
(i) Court says Bank’s prior perfected SI may trump IRS filed lien.
(4) Problem 352, p. 1033
(a) PMSI 6 months after IRS filed tax lien against D.
(b) Who wins?
 (c) Rev Rul. says PMSI. PMSI attaches upon receipt. Thus, at the time
the taxpayer acquired the equipment, it is encumbered by the
PMSI. As soon as it comes into the hands of the debtor it already has
the PMSI stuck to it.
(d) SO a PMSI will have priority over the IRS lien even when the IRS
has filed a lien, because it attaches as soons as it comes into the
purchasers hands.
iv) D. Tax Liens and Future Advances, p.
(a) Future advances have priority for 45 days if (1) prior perfected SI in
existing property secured the advance AND (2) no knowledge of filed
tax lien.
(b) IRC
(2) Problem 353, p. 1034
(a) Hat factory owned my Marie. Bank finances; SI in all
equipment. Advances “from time to time as it thinks
prudent”. Financing statement filed.
(b) Aug 1, She owes $1,500.
(c) Equipment: 2 machines.
(d) Aug 1 IRS files lien.
(e) Aug 31 – Bank loans another 10k.
(f) This is within the 45 day window, secured by previously owned
equipment owned before the IRS filed it tax lien.
(g) What if someone buys the equipment out from under the bank? This
is not an ordinary course buyer because marie is in the business of
selling hats not [equipment]....A non ordinary course buyer would
win if the bank knew about the purchase and the bank has 45 days to
make sure the machines are still on debtor’s premises. 9323(d).
(h) What about BUYER of felt Press. Does the bank know?
11) BANKRUPTCY AND ART. 9, p. 1035
a) The trustee’s status, p.
i) Problem 354, p. 1036
(1)
b) II. Preferences §547, p. 1037
i) Problem 355, p. 1041
F June 8 – Business borrows $80k from ONB; SI in Equipment worth
$100,000
July 18 – Bank Files Financing Statement
July 19 – Business Files Bankruptcy
Can the Trustee turn the Bank into an Unsecured Creditor on the theory that
the DELAYED PERFECTION is a preference?--YES
IF Bank is perfected, extraordinary payments are not avoided.
 What if the Bank were undersecured? Would routine payments be
preferential? NO – Ordinary Course. 547(c)(2).
ii) Problem 356, p.
June 1 – Bank loans Kermit $1,000 to buy Banjo; Buys Banjo Nov. 15
Bank files Financing Statement on Nov. 20; Bankruptcy Petition – Nov. 21
PMSI
Is this a Preference? It is within 90 days
Is it a Voidable Preference? NO. 547(c)(3)(PMSI)
(1)
iii) Problem 357, p. 1042
(1) §§544(a)(2), 547(c)(4)
John borrows $1,000 from Bank; Signature Loan – No Collateral
Sept. 25 – John makes $500 payment to bank
Assume not in Ordinary Course
Oct. 4 – He borrows $300 more & gives SI in sword collection
Bank never files Financing Statement
Bankruptcy Filing – Nov. 8, 2013
CR has to give back $500 - $300 new advance = $200
(2)
(3) Phase 1 2023
(a) D$1k C
(4) Phase 2 Sept 25, 2013
(a) D $500NOT PROTECTED!!!!
(5) Phase 3 Oct 4
(a) D$300protected by 547(c)(3)-“new value” “not secured”,
debtor did not make an “otherwise unavoidable transfer”
(b) DSI (unperfected)
(6) BR Nov 2013

c) III. The Floating Lien in BR, p.

i) §547(c)(5)—Test: compare the debt/collateral ratio at two points: 90 days
before the filing of the petition (or the first date within that period where a
debt was owned if the loan was made within the 90 day period), and the
date of filing the petition. There is a preference to the extent that
the creditor’s position has improved within this period.
ii) Problem 358, p. 1043
(1) Debt: 20k
(2) March 1, inventory $8.
(3) May 28, BR, inventory worth 20k
(4) PREFERENCE=$12k
iii) In re Smith’s Home Furnishings, p. 1043
 (1)
Bankruptcy & Article 9
Bankruptcy Code – Federal Law
Chapter 7 – Liquidation
Chapter 11 – Reorganization
Chapter 13 – Plan for Individuals w/ Regular Income
Chapter 12 – Family Farmers
Voluntary Bankruptcy Commenced by Filing a Petition in Bankruptcy in the
Bankruptcy Court
Bankruptcy & Article 9
Automatic Stay – No more actions to collect pre-petition debt
Can’t Repossess by self-help or judicial process
9-609 Rights are Stayed
Must go through Bankruptcy Court
362 – Petition for Relief from Automatic Stay
Motion to Lift Stay
PRIORITIES in Bankruptcy
DISCHARGE is a fresh start for the Debtor

Bankruptcy Trustee
Bankruptcy Trustee – Chapter 7
Collects Property of Estate, Reduces it to Money, Pays Expenses of Bankruptcy
& Creditors
Trustee under Ch. 13 or Ch. 12 – Disburses money paid in under the plan
Chapter 11 – Usually Debtor in Possession (DIP) – No Trustee
Plan Confirmed
Pre-Bankruptcy Creditors must file “Proof of Claim” in Ch. 7 Bankruptcy
Claim cannot be paid unless it is “Allowed”
Claims are Unsecured or Secured
Example: Bank submits a Proof of Claim based on pre-petition debt of $10,000
Collateral Security is valued at $5,000.
Bank has a secured claim for $5,000 & unsecured claim for $5,000.
Secured Claims get paid first & Unsecured claims are paid pro rata (usually nothing or
cents on the dollar)
Bankruptcy is the ultimate test for creditors
Importance of “Secured Claims”
Critical to Perfect a Security Interest under Art. 9
BUT subject to Trustee’s “Avoidance Powers”
1. BC 544 (a) – “Strong Arm” Clause – Trustee takes the position of a
“hypothetical judicial lien creditor” at the moment of filing. CN: if you haven’t
taken all the perfection steps.
 BUT BC 544 allows perfection after Bankruptcy to defeat the Trustee’s
rights IF Article 9 gives retroactive effect to perfection.
2. Subrogation of Trustee – 544(b): Trustee Stands in the Shoes of an
Unsecured Creditor who can defeat a secured claim.
Moore v. Bay (1931): A Security Interest Voidable under state law is
voidable IN ITS ENTIRETY in Bankruptcy. All Creditors get the
benefit VOID AGAINST ONE, VOID AGAINST ALL Bankruptcy
Trustee’s Powers.
3. PREFERENCES – BC 547
Voluntary & Involuntary Preferences; In Non-Bankruptcy: Race of
Diligence among CRs; Bankruptcy: Equality of Distribution
5 Elements of a Voidable Preference
Transfer of an interest in property of the D:
1. To or for the benefit of a Creditor
2. For an antecedent debt
3. Made while D was insolvent
4. Made
A. Within 90 Days before Filing Bankruptcy Petition;
B. Within 1 Year before Filing Petition IF INSIDER
5. Enables CR to receive more than CR would receive IF
Ch 7 Liquidation; Transfer had not been made; AND Creditor
Received payment under Ch. 7 Rules

Why have a preference period? Bankruptcy philosophy, even playing field for
all creditors.
What is the EFFECT of the Trustee’s Avoidance of a Preferential Transfer?
If the preference was a payment in cash, the Trustee gets it back into the estate
If the preference was obtaining an Article 9 security interest, it is nullified
If the preference was a judicial lien, it is nullified
Exceptions to Preference Avoidance
Exceptions – BC 547
ONE: Contemporaneous Exchange for New Value
Insolvent D can Buy Goods & Pay for them Contemporaneously

TWO: Ordinary Course Payment of Debts

When is it not ordinary course?
Medium of payment changed?

THREE: PMSI
Creation of Security Interest for NEW VALUE
 1. Given at the signing of a Security Agreement describing the
collateral
2. New Value given by Secured Party
3. To enable D to Acquire Collateral
4. Used by D to acquire Collateral
5. Perfected on or before 20 days after D gets possession

FOUR: Creditor extends NEW Value and receives an interest in D’s Property
IF Not otherwise avoidable

FIVE: Perfected Security Interests in Inventory, Receivables or Proceeds of

either are not avoided EXCEPT TO EXTENT: Measure value of collateral 90
days before filing and on date of Filing & Secured Creditor cannot get more .
This addresses FLOATING LIENS

SIX: Statutory Liens not avoidable under 545

SEVEN: BFP of child support, alimony, etc.

EIGHT: In consumer bankruptcy, aggregate payments of less than $600.

Fraudulent Transfers – BC 548 & Uniform Fraudulent Transfer Act

Trustee can avoid fraudulent transfers within one year of the Bankruptcy Filing
ACTUAL FRAUD – actual intent to hinder, delay, or defraud any entity to which the
D was or became indebted
Badges of Fraud: Insider Relationships; D Retains Possession; Inadequate
Consideration; Financial Condition Before & After Transfer; Pattern; Chronology of
Events; Secrecy
CONSTRUCTIVE FRAUD
D gets less than Reasonably Equivalent Value (REV) AND was insolvent on
date of transfer. Idea is not to deplete the estate and not get reasonably equivalent
value

Foreclosure Sales as Fraudulent Transfers – less than reasonably equivalent value

DURETT (5th Cir. 1980) – BUT S CT 1994 focuses on Process not “Market value”
BFP V. RTC. FMV can’t be determined from a forced sale because no willing buyer
willing seller.
Problem 354
Korean Restaurant – many unsecured Creditors
April 17 – Bank loans $10,000 secured by Equipment
April 18 – Restaurant files Bankruptcy
 1. One Hour Later, Bank Files Financing Statement
TRUSTEE Can Avoid Security Interest – Bank is Unsecured. The SI
never takes effect.
2. What if one second before? Bank is OK, substantially contemporaneous
exchange of value – not preference
3. What if PMSI? 20 days allowed to perfect. 9-320, 9321
Preferences – Problem 355
June 8 – Business borrows $80k from ONB
Security Interest in Equipment worth $100k. Bank is oversecured. This is
avoidable.
July 18 – Bank Files Financing Statement
July 19 – Business Files Bankruptcy.
Can the Trustee turn the Bank into an Unsecured Creditor on the theory that the
DELAYED PERFECTION is a preference?—YES. If you delay this long then
it may not be an exchange for new value. So the bank needs to file
immediately.
IF Bank is perfected, extraordinary payments are not avoided.
What if the Bank were undersecured? Would routine payments be preferential?
NO – Ordinary Course. Extraordinary payments is when you pay off a big
chunk all at once. If the bank is fuly secured, then it has a right to all of that
collateral. If Debtor pays off more of the loan, then it will deplete the assets of
the estate but it will be a commensurate reduction in liabilities.
NEW Facts for this problem:
March 1—Debt $19k
Value of collateral $5k
May 28 – Debt 19k
Value of Collateral $20
Position improved $14k
NEW FACTS
March 1 – Debtor 12k
Colateral value 19k
May 28 00 Debt 22k
Collateral value 20
Undersecured amount is 2k at both mearus dates, so no avoidable preference.
Preferences – Problem 356
June 1 – Bank loans Kermit $1,000 to buy Banjo
Buys Banjo Nov. 15
Bank files Financing Statement on Nov. 20
Bankruptcy Petition – Nov. 21
PMSI
Is this a Preference? It is within 90 days
 Is it a Voidable Preference? NO. because he filed within the 20 days.

Preferences – Problem 357

John borrows $1,000 from Bank; Signature Loan – No Collateral
Sept. 25 – John makes $500 payment to bank; Assume not in Ordinary Course
Oct. 4 – He borrows $300 more & gives SI in sword collection; Bank never
files Financing Statement
Bankruptcy Filing – Nov. 8, 2013
CR has to give back $500 (no ord. course) - $300 new advance = $200
Preferences –Problem 358—Floating liens in BR
Bank has a perfected SI in inventory of Bookstore; Bookstore owes bank $20k.
March 1—collateral worth 8k
May 28 Bookstore files BR petition
May 28—Collateral worth 20k
What can the trustee do? 547(c)(5) bank has perfected SI....
This is an improvement in position test. An over-secured/fully secured claimant
cannot improve his position, so if he is over-secured at 90 days before the floating
lien.
Fraudulent Conveyances – Problem 359
Austin gives right to receive royalty payments to WIFE as collateral for the “the
many debts I owe....” the is fraudulent.

NonConsensual liens and the Trustee

BR trustee has power to avoid judicial liens acquired.....
12) PROCEEDS, p. 1055
a) I. The meaning of Proceeds, p.
i) §9-102(a)(64)—“whatever is acquired in exchange for the collateral;
whatever is collected; rights arising out of collateral; claims arising out of
loss of collateral; insurance payable by reason of collateral.” Basically
anything resulting from the sale or exchange of the collateral but also under
(e) insurance.
ii) cash proceeds. 9-102(a)(9)
iii) §9-315(a)(2)—“a SI attaches to any identifiable proceeds.”
iv) Is attachment of CR SI in proceeds automatic or must it be claims in a
Security agreement? Automatic. §9-203(f)(“Attachment of an SI gives you
the right to the proceeds and is also an attachment to the supporting
obligation”) and §9-315(c)(“A SI in proceeds is a perfected SI if the SI in
the original collateral was perfected.”).
v) Problem 360, p. 1055
(1) F: Rosetta and Champ Motors. See §9-103 PMSI. Bank has a
perfected SI in the inventory of Champ motors. 9324(b) procedure.
 (2) Does the bank’s SI continue in the car it is delivered to Rosetta? §9-
320(a), she buys in the ordinary course therefore she takes the car free of
the SI. But the bank is not totally out of luck, because they still have a
SI in the proceeds, the check, the promissory note, and the trade in. §9-
315(a) an SI continues in collateral, notwithstanding sale even if there’s
some disposition of the collateral, unless we have an exception.
(3) a. Does the Bank’s SI continue in the car once it is delivered to Stone?
(a) §9-320(a)—“a buyer in ordinary course of business, takes free of a
SI created by the buyer’s Seller, even if the SI is perfected and the
buyer knows of its existence.”
(4) b. What are the proceeds of the car sale? --old car, $200 check,
promissory note.
(5) Attachment automatic. c. 9-203(f)—“The attachment of a SI
in collateral gives the secured party the rights to proceeds proved by §9-
315 and is also attachment of SI in the supporting
obligation [guarantee].” CN: Once the bank has an attachment to the
car, we have a right to the proceeds when the car is sold. 9315(c) and
perfected SI in inventory gives an automatic SI in the proceeds.
vi) Farmers Cooperative v. Union State Bank, p. 1056
(1) Cockrum operated a farm. Union Bank had a SI covering “livestock,
and supplies used or produced in farming operations whether now or
hereafter existing or acquired.”
(2) Coop had a PMSI for feed. Cooperative filed a financing statement for
each transaction, which covered “all of debtor’s hogs now owned or
hereafter acquired, including offspring.”
(3) Cockrum defaults on both obligations.
(4) COOP claims it’s right to the hogs is superior to the Bank’s under 9-
324(a), which provides that a PSMI has priority over a conflicting
SI. PMSI is defined in 9-103 as an SI
(a) take or retained by the seller of the collateral, or
(b) taken by a person who makes advances enabling the debtor to
acquire rights in the collateral
(5) Does COOP have a PMSI in the hogs? no, only in the feed. But are the
hogs “proceeds” of the feed, i.e., “whatever is received upon sale,
exchange, collection or other disposition of the collateral or proceeds”?
under 9315(a).
(6) Held, ingestion and biological transformation of feed is not a type of
“other disposition” within the contemplation of §____. hog are not
proceeds of feed.
(7) COOP argues it should still win under 9-339—that an SI continues if the
collateral is commingled with the mass. Held, the feed is not
 manufactured, processed, assembled or commingled; it has merely lost
it’s identity through ingestion.
(8) CN: Bank finances a farming operation. the Bank takes an SI in farm
products. Farmer enter’s several SI’s with COOP for feed. but the bank
takes an interest in the livestock, and the COOP takes it in feed. Though
the bank may have an SI in all the farm products, the COOP has a PMSI
in the feed which is a super priority.
(9) So, if this were all, then the COOP would have priority. But the hogs
ate the feed.
vii) Proceeds and cars. Art 9 does not usually apply to SI in insurance policies
as collateral UNLESS insurance payments are PROCEEDS ..... If a car
owner sells a car and deposits money in bank account, that is proceeds and
SI attaches. §9-315(a)(2) and §9-315(b)(2) tracing.
viii) Problem 361, p. 1060
(1) If a Creditor has a SI in Farmer’s crops, and the govt pays farmer not to
grow any crops, are these payments proceeds?
(2) What about govt payments NOT to grow crop? Secured Creditor has
perfected SI in crops--- IS govt payment proceeds? Court are split. A
good lawyer would spell it out clearly in the security agreement.
b) II. PRIORITY IN PROCEEDS, p. 1060
i) Problem 362, p. 1060
(1) Auto Audio sells and installs car stereo systems (Accessions). Lender
finances INVENTORY. When AA sells in the ordinary course of
business, it gets:
(a) cash,
(b) credit without a contract (AR), and
(c) signed promissory note and security agreement (chattel paper).
(2) Financer makes a loan – Collateral is AR and chattel paper; Financer
knew about Lender’s loan and inventory SI; Financer files a FS and has
possession of chattel paper. Lender gets inventory; both
claim AR and chattel paper. Are these proceeds of inventory? yes.
(3) Which creditor prevails? Lender will get inventory. But what about the
AR and Chattel paper, which are proceeds of the inventory.
(4) §9-322(a) AR
(a) First to file or perfect
(5) IF the bank filed first and re-perfects a SI in proceeds under §9-315(d)
within 20DAYS, its priority would continue. IF SI in AR filed in same
place as inventory not need to re-file. 9315(a)—“SI attaches to any
identifiable proceeds of collateral.”
(6) Chattel paper –Financer wins §9-330. §9-330(a)—“A purchaser
of chattel paper has priority over a SI in chattel paper which is claimed
 merely as proceeds of inventory subject to an SI IF: in good faith and in
the ordinary course of the purchaser’s business (buying notes was
Financer’s business), the purchaser gives new value and takes possession
of the chattel paper.”
(a) MA: here, the chattel paper is claimed merely as proceeds of
inventory, Financer has given new value, in the ordinary course of its
business and it has taken possession, but HAS IT TAKEN IN GOOD
FAITH if it “knew about the prior loan and inventory SI”? Yes, only
if it knew that it was taking in violation of the Lender’s security
agreement. If the bank really wanted to protect itself it could have
taken a SI in the chattel paper.
(7) 9315(d)—A perfected SI in proceeds WILL become unperfected on the
21st day after interest attaches.
(8) 9-322(a) and (b)(“the time of filing as to a SI in collateral is also the
time of filing as to a SI in proceeds.”)
(9) Continued perfection. So when do you need to filed again within 20
days to keep you SI in the proceeds?
(10) Usual situation: Secured Lender. D sells collateral, gets
gash. As long as it’s cash, Lender can trace. If D uses cash to buy
something else, CR must refile. But original filing could cover new
item. EX: original filing covers inventory and equipment. D sells
inventory, gets cash and buys equipment. CN: this is second generation
proceeds. He may just buy new inventory, in which case you don’t have
to worry about refilling. Also, the original filing could spell out the new
items. If it doesn’t I will likely have to refile to continue to claim an SI
in the second generation of proceeds.
ii) Problem 363, p. 1060
(1) A/C co borrows $15k from Financer to purchase new furnace – to be
used as equipment (but it could be qualified as a fixture in which case
you file with the county clerk) BUT AC co sells it to a customer and
installed it. Financer had an PMSI. Was the sale to customer in the
ordinary course such that the customer takes in the ordinary course? it
take free of, because the AC co is in the business of selling
furnaces. AC co gets 17k check and deposits it in bank. So the Financer
loses its SI in the furnace but they could get the SI in the
proceeds. BIOCOB.
(2) Bank acct:
(a) $81 orig balance
(b) $17k cash proceeds check
(c) balance $1,7081
(d) Plus $5k deposit
 (e) balance $2,2081
(f) minus $5,040 withdrawal
(g) Balance $17,041
(3) Are the proceeds still in the bank? §9-315(b) tracing. Lowest
intermediate balance. It never dropped below $17k so the Financer can
claim its proceeds. If it had dropped $17k then the bank couldn’t claim
this. BUT 9340 favors depositary banks right of setoff over secured
party unless control by acct in own name. If I’m the financer and I
realize my proceeds are in the bank, I could probably get those proceeds
unless the bank decides to setoff the proceeds, unless I have the bank
acct in my own name.
(4) General rule: in tracing commingled funds in which another had a
legally recognized interest, called the lowest intermediate balance.
(5) a. 9315(b)—if the proceeds are not goods, then the secured party can
identify the proceeds by tracing., OC 3—lowest intermediate balance
rule.
(6) b. Bank’s Right of setoff funds which represent proceeds over this
another party has an SI. The bank’s right of setoff is not affected by a SI
in a deposit account maintained with the secured party. §9-340(b).
(7) Explaining lowest intermediate balance: common law rule used
in tracking trust funds. under the UCC: the fact that cash proceeds are
deposited into an acct and commingled with other funds does not destroy
their status as “proceeds” to which a secured party may have a claim. If
the D withdraws funds from an acct in which there are commingled
funds.
iii) HCC Credit v. Springs Valley, p. 1061
(1) Tractor sales sold 14 tractors and used the $199,122 proceeds to pay off
a debt it owed to Bank. But HCC had a SI in the tractors and the
proceeds from the tractors. Because the payment to the bank was not in
the ordinary course of business, HCC is entitled to the $199,122.
(2) R: §9-315 provides that a” SI continues in any identifiable proceeds
including collection received by the debtor.”
(3) Pre 1999 revision case. HCC credit PMSI in tractors and
proceeds. Lindsey tractors agreed to pay HCC immediately upon sale of
tractors, but did not require segregation into a separate acct. Lindsey
tractor sold 14 tractors. Customer paid Lindsey 199,122. $199,122 is
proceeds of tractors. Lindsey deposited the 199,122 into acct at bank.
(4) 22,870 balance
(5) 199,122 deposit of proceeds from tractors
(6) 221,992 balance
(7) 212, 104.75 – paid to bank
 (8) This was not an exercise of setoff: D paid bank without collusion. D
owned bank on 4 notes – some were not due. Court said not in ordinary
course – PMSI holder should win, otherwise it would be a
windfall. Recipient had no reasonable expectation of being paid ahead
of another secured creditor. Bank was aware of PMSI and took account
of this in lending decision. Court finds in equity.
iv) UCC §9-332(b) says Transfer of fund from a deposit acct take funds free of
a SI in the deposit Acct unless the transferee act in collusion (there was no
collusion in this case) with D to violate the rights of secured party . But
remember this is where there is a SI in deposit account, but jsue [?] check
out of acct. (but argue equity)
v) 9-315(d) indicate that a perfected SI continues if the proceeds are
identifiable cash proceeds, even beyond the 20 days.
vi) how do we idenfy? use equitable principles of lowest intermediate
balance.
vii) NOTES, p.
(1) 9332(b) and OC
viii) Problem 364, p. 1071
(1) ONB loans 200k to debtor store. SI in inventory, now and after. Filed
FS
(2) ONB$200kBig Dept store—july 5
(3) ANB$100kTotal store—Sept 25
(4) Merger--$300—Total Dept Store
(5) §9-102(a)(56)(“new debtor”)
(6) §9-203(d) and (e)—the new debtor become liable
(7) §9-508 and OC—a filed FS naming an original debtor is effect to
perfect a SI in collateral in which a new debtor has rights”
(8) §9-325
(9) §9-326 and OC
(10) CN: depends on which one runs down to re-file during the 4
month period first.
ix) Problem 365, p. 1071
(1) 9-315(d)—A SI in proceeds becomes unperfected on the 21st day after
the SI attaches to the proceeds, UNLESS---“
(2) Aug 2—
(3) a. trading one computer for another computer.
(a) 9-315(d)(A) the FS covered the original collateral (“all business
machines”).
(b) MA: no hurry; 9315(c)(1) not subject to the 21 day termination;--the
original FS covers “all business machines” therefore presumably
covered the computer (A); the “proceeds” are another computer and
 thus “collateral in which a SI may be perfected” (B); AND the new
computer was acquired with the old computer and therefore the
“proceeds” were not acquired with cash (C).
(c) CN: no need to refile.
(4) b. trading computer for painting.
(a) Can an SI in the painting be filed in the same office as the
“machines?”
(b) CN: both a equipment so no need to refile,
(5) c. trading copy machine for used car.
(a) MA: here, the “proceeds” fail the (c)(1) test under the (B), because
the only way to acquired a lien interest in the car is on the certificated
of title and therefore not “perfected by filing in the office in which
the FS has been filed.” None of the other exceptions apply.
(b) CN: proceeds of the trade are the used car; the original filing won’t
help me out here, because I have to note the SI in the note of the car.
(6) d. sells calculator for cash, use cash to buy painting.
(a) REFILE the calculator was sold for cash, and the cash used to buy
the painting. unless it falls under (c)(2).
(b) CN: this is second generation proceeds. First gen is cash, second gen
is the painting. Then you need to refile.
(7) e. Setoff by another bank. §9-340.
(a) setoff wins unless I’ve changed the name on the acct.
(8) f. “coffee maker” may not be a “business machine.” but if it is, 9332(a
transferee of money takes free of a SI unless the transferee acts in
collusion”)
(a) CN: here the salvation army wins, no collusion.
x) Problem 366, p. 1072
(1) 9330(c) and
(2) OC 9 Priority in returned and repossessed goods.
(3) OC 10 Assignment of Non-leas chattel paper.
Bank floor plans INVENTORY of Motors
Files FS
Motors sells car to Smith
$1,000 DP & Note for $25,000
Motors sells note to Finance Co, which takes possession of note & notifies
Smith to make future payments to Finance Co.
Parties cancel
Car Returned to Motors by Smith – Sept. 11
Finance Co. claims car as PROCEEDS of Contract for Purchase which
Finance has in its possession
Bank claims superior interest in CAR
 Who wins? 9-330(c) & OC 9 & 10 – Finance Co.
RETURNED & REPOSSESSED GOODS may be proceeds of chattel
paper; Purchaser of Chattel Paper superior 9-330(c) BUT if perfected by
possession of CP, must file within 20 days 9-315(d)
(4)
Default, p. 1073
13) I. Pre-default Duties of the Secured Party, p. 1073
a) Duty of reasonable care. Problem 367, p.
i) a. §9-207—requires secured party to exercise reasonable care. If chattel
paper, it may included defending against the rights of third parties.
ii) b. 1-102(3)--?
iii) c. 9207)b)(3)—the secured party shl keep the collateral idenfiable”
(1) 9210-a secured party shall respond to a request within 14 days after
receipt.
(2) Damages.
(a) §9-625(b) (a person is liable for damages in the amount of any loss
caused by a failure to comply with this article.) and
(b) (f)-“Statutory damages: noncompliance with §9210.” A debtor may
recover damages under §9625(b) plus $500 in each case from a
person that, without reasonable cause, fails to comply with a request
under 9-210.”
b) Problem 368, p. 1074
i) 9-207(b)(2)—if a secured party has possession of collateral [stamp
collection], the risk of accidental loss or damages is on the debtor to the
extent of a deficiency in any effective insurance coverage.”
ii) MA: here, there was no deficiency, so she need not pay.
14) II. Default--§9-601, p. 1075
a) State Bank of Piper v. A-Way, Inc., p. 1075
i) Bank had SI in grain and proceeds of the sale of grain. The grain was
stored in D’s warehouse.
ii) Bank make a request upon D for the amount of assets D held on Bank’s
behalf. In response, he listed the number of bushels he held, 5,141.20. The
bank confused this number with their value, and moved to have D pay them
$5,141.20. At a court hearing, D failed to appear and the bank’s motion was
granted by default. Complying with the court order, D sold the bushels, paid
bank the $5141.20, and used the rest of the 11k to pay off other debts. 8
monthns later, the bank realized its error and brought action to enforce its SI
in the remaining proceeds above the $5141.20. D claims res judicata and
doctrine of merger. Held, this is without merit.
iii) R: 9-601
 iv) A Secured creditor’s effort to collect its debt through the judicial process
will not operate to destroy his SI in relation to the debtor or affect his prioity
with respect to third parties.
v) Here, even thought the notes merged into the judgment precluding further
action on the notes, that merger did not preclude P from bringing this action
to enforce its SI in the grain. The SI in the grain was separate and apart
from the SI in the notes under the security agreement.
vi) REs judicata bars an subsequent action on the same claim.
b) What is default? Not defined in the UCC, but should be spelled out clearly in
contract, because repossessing with no right to do so could result in liability for
conversion. Some Si agreements contain acceleration clauses.
c) Problem 369, p. 1080
i) a. yes,
ii) b. no
iii) c. no
iv) d. no
v) e. no
vi) f. yes.
d) Klingbiel c. Commercial Credit Corp. p. 1081
i) Four days before Purchaser’s first monthly payments was do, Seller [who
had a PMSI in the car], without demand, notice, or communication,
repossessed the car. Seller claims that under the contract they had a right to
accelerate if they felt themselves insecured.
ii) R: there is a difference between acceleration and repossession. You can
accelerate without notice; once this is done, there must be a notice and
demand before repossession occurs.
iii) Here the security agreement stated that “Purchase agrees in the case of
acceleration to pay the amount to the Seller, upon demand, or at the election
of the Seller, to deliver the vehicle to the Seller.” The contract explicitly
states that the Purchaser is entitled to demand before repossession occurs.
iv) The jury’s award of punitive damages will be upheld.
e) Problem 370, p. 1085
i) 2-208???
ii) §2-209(5)—“A party that has made a waiver affecting an executory
portion of a contract may retract the waiver by reasonable notification
received by the other party that strict performance will by required of any
termed waived, unless retraction would be unjust in view of a material
change of position in reliance to the waiver.”
15) III. Repossession and Resale, p. 1086
a) §9-609—allows repossession without breach of the peace.
b) Williamson v. Fowler Toyota, p. 1087
 i) I: Whether a creditor is liable for the trespass and the rsulting damages
caused by an independent contractor employed by the creditor to repossess
secured collateral pursuant to [].
ii) Held, the statutes creates a nondelegable right to refrain from breaching the
peace when repossessiong secured collateral, and thefore the creditor is
liable for any breach of the peace by the independent contractor.
iii) Held, the independent contractor’s wanton and reckless disregard of the
propery right of another may be imputed to the employer and exemplary
damages awarded [].
iv) F: Gilmore bought a Chevette giving Seller a PMSI. While Gilmore was
ill, he gave the car to Camp Hudgens, but stopped making payments. Camp
Hudgens took the car to Williamson, who have no knowledge that Seller
had declared default and hired an independent contractor to repo it. The
independent contractor, discovered the car and Williamson Auto, found the
gates locked and cut them with bolt cutters.
c) Problem 371, p. 1094
i) Notice before repossession not required under 9609.
(1) a.
(2) b.
(3) c. entering debtor’s premises. 9602(6)
(4) d.
d) Hilliman v Cobado, p. 1095
i) Contract provided a SI in cattle, and gave lender the right to enter the
premises peaceably.
ii) Here, lender, along with two deputy sheriff’s came to debtors’ house, and
despute pleas not to do so, went to his barn and began loading the cattle into
his truck. A Lt. Sheriff arrived and informed Lender that if he left with the
cattle he would be arrested for stealing property. He did and he was.
iii) R: repossession is a delegation of the state’s exclusive right to resolve
disputes, and should be strictly confined to situation when the repossession
may be accomplished peaceably. No physical confrontation required.
iv) Held, as a metter of law, Lender breached the peace.
e) Problem 372, p. 1098
i) Loan agreements states that ONB has all the rights provided in Part 6 art. 9
of the UCC and that it will not be liable for conversion if there are other
items in the car when repossessed.
ii) Debtor defaults. ONB repossesses and Debtor claims thre were golf clubs
in the trunck ONB can find none.
iii) Will the exculpatory clause beupheld?
f) Bankruptcy-automatic stay, p. 1099
g) Problem 373, p. 1099
 i) MA: yes; 9607 –“after default a secured party may notify an account
debtor to make payment to the secured party.” and OC
ii) 9406(c)—an account debtor may ask the assignee and the assignee shall
provide, proof that the assignment has been made.
iii) 9-404(a)—the rights of the assignee are subject to [any defenses of the
account debtor has against the assignor].
iv) 9403(b)—an agreement between an account debtor and an assignor not to
assert against an assignee any claim or defense that the account debtor may
have against the assignor is enforceable by an assignee that takes an
assignment [as a HDC].
h) 9610-
i) 9611(c)-requires notice to debtor of the time and place of sale.
j) Problem 374, p. 1100
i) Private vs. public sale. OC 7 to 9610.
(1) private-secured party may not buy
(2) public—secured party may buy; debtor is entitled to notification of the
“time and place of a publis disposition.”
(a) “public disposition” is one t which the price id determined after the
public has had a meaningful opportunity for competitive bidding.
ii) advance notice. 9611, 9612—reasonable timeis a question of fact.
iii) Notice content. 9614
iv) 9616—
v) 9625(c) and (e)
vi) 9627(a)
vii) 9610(e)
viii) 9615(f)
ix) 9626(a)(5)
x) 9625(d)
k) Problem 375, p. 1101
i) a. surety. 9611--; is a surety a “debtor”?
(1) §9-102(a)(28)(A)(“debtor” mean “a person having an interest, other
than a SI or other lien, in the collateral, whether or not the person if an
obligor”),
(2) §9-102(a)(71)(secondary obligor”), §9-611(c)
(3) owner of collateral (Laydon). OC 2a to §9-102
(4) Oral notice? §9-611(b)(reasonable authenticated notice; §1-201(38),
§9-102(a)(7) (“authenticate” means signed or other symbol) and OC 5 to
§9-611
ii) b. Parties entitled to notice of:
 (1) stock sale? MA: no, because stock “threatens to decline speedily in
value or is of the type customarily sold in a recognized market.”
§9611(d)
(2) Equipment? MA: yes. §9611(c)
(3) Do buyer’s at a public sale take free of any SI, if no notice is sent to the
SI holder? Good faith buyers, take free. So, Crowley does not because
he knew of the SI. §[9-]617
(4) Buyer from Crowley? §2-403(1)
iii) c. Sufficient notice,
iv) d. returned notices. OC 6 to 9611(“It is left to judicial resolution whether
“reaonsable notification” required a secured party who sends notification
and learned that the debtor did not receive it must attempt to located the
debtor and send another notification.
v) e. 9-611(c)(3)(A)(“the secured party shall send an authenticated
notification of disposition to any other secured party”) and (e)
vi) f. Burden of proof of commercial reasonableness of sales? 9-626(a)(2)—if
placed in issue, the secured party has the burden of proof.
vii) g. OC 7 9-610—absent publicity there is no public sale.
viii) h. 2-312; 9-610(d) and (e) and OC 11
l) Problem 376, p. 1102
i) a. MA: no; in a nonconsumer transaction, at least 10 days are required. §9-
612.
ii) b. MA: no; the can sell the equipment in “its present condition.” §9-610(a)
iii) c. MA: yes, they must dispose of the equipment in a commercially
reasonable way, and it is probably not commercially reasonable to sell it in a
snowstorm. 9610(b).
m) Waiver--Problem 377, p. 1103
i) 9-602 and OC.
ii) 9-602 and OC 4.
n) Problem 378, p.
i) 9-608--
ii) 9-615
iii) OC 5 to 9-610
o) Penalties for noncompliance. p. 1103
i) Problem 370, p. 1104
(1) 9-626(a) and OC
(2) 9-625
(3) Personal Use 9-626(b)
16) IV. REDEMPTION AND STRICT FORECLOSURE, p. 1104
a) Redemption. Problem 380, p. 1104
 i) 9-623 and OC 2 The debtor may redeemed the collateral as long as the
secured party bas not collected, disposed of, or accepted the collateral as
satisfaction. TO redeem the collateral a peson must tender fulfillment of all
obligation secured. If the entire balanced of a secured obligation has been
accelerated, it would be necessary to tender the entire balance.”
ii) MA: thus to redeem the yacht, Paul must pay the entire amount.
b) Strict Foreclosures. This occurs when a creditor repossesses the collateral and
simply keeps it in satisfaction of the debt. 9-620, 9-621, 9-622
i) Problem 381, p. 1105
(1) 9-620(e) and (f)
(2) 9625(b) and (c)
(3) 9-620(g)
ii) Problem 382, p. 1106
(1) No constructive Strict Foreclosure. §9-620 OC 5 “acceptance does
not occur unless, in addition, the secured party consents to the
acceptance in an authenticated record or sends to debtor a proposal.”
iii) Reeves v. Foutz & Tanner, p. 1106
(1) I: whether a securd party who sends a notice of intent to retain
collateral, in conformance with 9-620 may sell the collateral in its
regular court of business without complyaing with 9-610? Held, no.
Pre-Default Duties of Secured Party
9-207
Rights & Duties of Secured Party Having Possession or Control of Collateral
Reasonable Care in Custody & Preservation of Collateral
Chattel Paper or Instrument: Preserve rights against prior parties
Pre-Default Duties
Who pays reasonable expenses? Taxes, Insurance, Maintenance – D
Risk of Accidental Loss – D (to extent insurance does not cover)
SP – keep collateral identifiable, but may commingle fungible collateral
SP – may use or operate to preserve value or as agreed (except consumer
goods) or w/court order
CR’s duty to apply money received from collateral to reduce obligation or
remit to D

Default
What is “an event of DEFAULT”? - Not defined in UCC. Specify in Security
Agreement, clearly spell it out, but usual ones include:
Failure to make payments when due
Making false/misleading statements in connection with making the
agreement
Collateral lost, stolen, damaged, destroyed
 Failure to maintain collateral & insurance
Grant by D of SI in same collateral
Levy upon or seizure of collateral
Failure to make books & records or collateral available for inspection
Failure of D to notify of change in name, org. structure, place of doing
business, location of collateral
Death, dissolution, termination of existence, insolvency

General Insecurity Clause (these are universal)

EX: “Any other change in the condition or affairs, financial or otherwise, of the
D, or any guarantor or surety of the liability secured by this agreement which
IN THE OPINION of the Secured Party impairs the value of the collateral or
imperils the prospect of the D’s full performance or satisfaction of obligations
secured by this agreement.”
But this is subject to the Good Faith limitations of UCC.

Acceleration 1-309--At will or when the CR deems itself insecure ONLY if that
party in GOOD FAITH believe that the prospect of payment or performance is
impaired. Burden of establishing lack of Good Faith is on the D
What NOTICE?
Notice of default?
Events in agreement are usually AUTOMATIC DEFAULT
Secured Party can act immediately
Drafting of Security Agreement is key
Notice of repossession?
Secured Party’s Remedies Upon Default
Cumulative. 9-601
Reduce Claim to Judgment
Foreclose
Documents: Proceed on Documents or Goods
These rights Protect CR – BUT 9-602 Non-Waivable Rights. GOOD FAITH –
Grain Elevator Case - Cumulative Remedies, No Merger, No Res Judicata
here

Debtors Rights Protected

9-602 - D Can’t Waive:
Requests for Accounting
Application of Proceeds
Disposition of Collateral
NO BREACH OF PEACE if secured party takes possession without judicial
process
 Calculation & Explanation of Deficiency/Surplus
Accepting Collateral in Satisfaction of Obligation
Redemption of Collateral
Secured Party’s Liability for Failure to comply with Art. 9 – 9-625 & 9-626
Repossession w/o right - Conversion
Enforcement as a Private Matter
CR can decide what steps to take & when
No court need be involved
BUT potential liability for Secured CR:
9-627 Determination of Whether conduct was Commercially Reasonable
Liability for Non-Compliance with Art. 9. Just because SP could have
gotten a better price had you done things different does not mean it
acting in a commercially unreasonable manner.
9-625 & 9-626
Acceleration of Debt in Non-Default Case on Bad Faith Determination
of Insecurity – Punitive Damages

REPOSSESSION
§9-609 – Secured Party may take possession of Collateral after Default
By Judicial Process
Without Judicial Process WITHOUT BREACH OF PEACE
Not defined BUT: Cutting a lock, bringing off-duty officer (OC),
disregard for 3rd party storage, use of force. A car parked in street, even
if picking lock, is not breach of the peace.
Secured Party is liable for Independent Contractors (OC), danger, generating
fright/anger
REPO Horror Stories – PUNITIVE DAMAGES
D’s property in vehicle?
Disposition of Collateral
9-610 – Any Commercially Reasonable Manner: Method, Manner, Time,
Place, and any other Terms must be reasonable.
How long can SP wait to sell? Reasonable time
Duty to clean or prepare? Sell ‘as is’, if you’re just hosing it down, then
perhaps, if expensive and involved, then probably not. Whatever is
commercially reasonable.
Price Alone? 9-610 OC 10; 9-627 (Safe Harbors)
Public Sale, at auction, involves notice requirements. SP can buy at public
sale.
Private Sale is ok, but SP can’t buy.
Secured Party may Buy IF
Public Sale
 Private Sale ONLY if collateral is customarily sold on recognized mkt
OR standard price quotations
Junior Secured Party holds rights to dispose of collateral. Does he have to wait
for senior creditor to accelerate? no, jr creditor can go after the collateral first;
their rights are determined under art. 9, ie , who gets paid first upon disposition
of the collateral. Multiple Secured Parties; Conflicting Rights – Art. 9
Priorities.
Application of Proceeds 9-615
Junior Secured Party must act in good faith & w/out knowledge that it violates
rights of Senior
Foreclosure
Public/Private sale; must be Commercially Reasonable; may result in
Surplus/Deficiency; 9-611 – Authenticated Notice must be sent out Before
Disposition of Collateral: Notice to D; Notice to Secondary Obligor UNLESS
right to notice is WAIVED.
Have to search records 10 days before notice – Notify other Creditors who have
filed Financing Statements. If yes, then they too much be given notice.
What about perishable goods? Tomatoes. May sell without notice.
Timeliness of Notice. 9-612 Reasonable – Question of Fact
Other than Consumer Situations:
After Default
At least 10 days before Disposition of Collateral
Contents & Form of Notice – 9-612
No required phrasing, but safe harbor
Consumer Goods Notice – 9-613

Waiver of Default – How to Reinstate Strict Adherence to terms? 2-

209(5) 2209(5)—Waiver “A party that has made a waiver affecting an executory
portion of a contract may retract....etc.” If you waive compliance you can
recover strict compliance.
Executory part of contract, not retroactive
Reasonable Notification Received
Unless unjust - material change of position in reliance
Repossession:
Trickery is Okay
Secured Creditor is Liable for Independent Contractor who repossesses
collateral
Protest after Repossession may come too late
Disposing of Collateral
How can the secured CR dispose of collateral?
9-610 – Foreclosure Sale – or other disposition
 COMMERCIALLY REASONABLE
What kind of notice does the secured party have to give before selling the
collateral? 9-611
Who gets the notice? – 9-611 – D (can waive notice), 2nd Obligor (can waive
notice); CRs
9-613 & 9-614 FORMS are SAFE HARBORS
When does the secured CR have to give notice?
9-612 – Reasonable time – Question of FACT
For Commercial transactions – At least 10 days before disposition. Less than
10 days will not be reasonable.
What protects D’s interests?
1. 9-610 – Reasonable disposition. CN: all terms of disposition have to be
commercially reasonable.
2. 9-611 through 9-614 – Notice. CN: what kind of notice and content of
notice. This is a protection for the debtor.
3. 9-615(f) – Price – Special Rule for calculating surplus/deficiency –
Compensates for lack of incentive to maximize return. CN: so can a Secured party
buy the collateral? yes, if it’s in a punlic sale; at a private sale if there’s a specified
market price. 9-610.
Application of Proceeds of Collateral Deficiency 9-615
Secured Party shall apply proceeds to:
Expenses of repossession & sale (attorney’s fees if agreed)
Obligation secured. CN: if there’s anything left, then pay to junior
secured creditors.
Subordinate interests secured
Debtor if SURPLUS results
Debtor is liable for DEFICIENCY
Protection: Recalculation if SP buys & price is low

Consumer Goods Transaction

Consumer D gets explanation of calculation of DEFICIENCY/SURPLUS – 9-
616
Within 14 days of request OR
Send waiver of right to Deficiency w/in 14 days
Can you charge consumer D for this explanation?
No charge for ONE explanation each 6 month period
Not more than $25 for each additional request

More Debtor Protection – §9-625 & §9-626

If SP fails follow Art. 9 Rules, D entitled to: INJUNCTIVE RELIEF. CN: if
SP tries to sell without giving notice to anyone. D can get injunctive
 relief. But if it’s too late to get injunictive relief? But how do you prove your
harm?
LOSS Caused – How to Determine?
1. SET-OFF Rule: SP entitled to deficiency less the LOSS CAUSED
2. REBUTTABLE PRESUMPTION: 9-626 (UCC version)
D must raise noncompliance with Art. 9 for collection, enforcement
disposition, acceptance. Once debtor raises the issue, then
Collateral presumed to be worth amount of debt; (then the burden shifts
to SP)
SP must prove lower value of collateral; If DEFICIENCY, D has burden
to show “below range of prices for complying disposition to other than
SP”
UCC RULE for COMMERCIAL TRANSACTIONS (OC)
3. ABSOLUTE BAR: SP is not entitled to deficiency
More Damage Provisions
9-625
DAMAGES = Loss Caused by Noncompliance
Consumer Goods: Damages for Noncompliance * Credit service charge
PLUS 10% of Principal
D may sue for loss of SURPLUS. CN: you sold my collateral for less, I
would have been entitled to the surplus.
Supplemental Statutory Damages in addition to LOSS.
$500 in each case for listed section violations
Rights of Transferee
What Rights does a buyer of foreclosed collateral have?
ALL D’s Rights
Security Interest Extinguished
Subordinate Liens Extinguished
Transferee – IN GOOD FAITH - takes FREE of these interests – even if SP
makes mistakes
Transferee – NOT IN GOOD FAITH – Takes subject to liens
Transfer of Record or Legal Title
9-619 – Transfer Statement
SP authenticates transfer statement. CN: if I repos goods, will D want to
cooperate in issuing a transfer statement, so that whoever buys the collateral
can have a statement that indicates.
Transfer Statement entitles Transferee to all rights of D specified
Acceptance of Collateral 9-620
Full or Partial Satisfaction of Obligation – ONLY IF:
D consents to terms
 SP does not receive Notification of Objection w/in 20 days after
proposal from D or others holding interest in collateral
What is a ‘Proposal’ and when must SP send? 9-621
Consumer Goods MUST be in possession of D when he consents to
acceptance in satisfaction
CAN’T be accidental or by lapse of time: SP MUST CONSENT – “No
Constructive Strict Foreclosure”
For Consumer Goods: If 60% of purchase price has been paid, must dispose of
collateral under 9-610
What happens after default & repossession?:
1. Repossession & Resale – Public or Private Sale with Deficiency or Surplus

2. SP Retains Collateral in full or partial satisfaction of obligation - 9-620 – SP

Election– Called “STRICT FORECLOSURE”
3. Redemption – 9-623
Before Collection of Collateral by SP 9-607, before Disposition of
collateral under 9-610 OR before strict foreclosure is agreed to, D tenders Cash
for obligation + expenses

Waivers – 9-625
Waiver of Disposition Notice.
D or Secondary Obligor
Only by authenticated agreement after default
Waiver of Mandatory Disposition under 9-610. CN: this means there can be no
acceptance in full or partial satisfaction.
D can waive by authenticated agreement after default
Waiver of redemption right
Not for consumer goods
Authenticated Agreement after Default
Remember the No-Waiver Section 9-602
Clear that D can’t waive rule prohibiting SP from buying collateral at private
sale – This must follows rules of “Strict Foreclosure” – Acceptance in Full or
Partial Satisfaction
.