Secured Transactions

Spring 2012
Professor Warner
Jennifer Kwapisz

I. Remedies of Unsecured Creditors

a. Status as a Creditor
i. Creditor: anyone who is owed a legal obligation that can be reduced to a money
judgment
ii. Creditor-debtor (obligee-obligor) relationships may be voluntary or involuntary
iii. Creditor is unsecured unless creditor contracts with debtor for secured status or is
granted it by statute
iv. Creditor has right to demand payment from debtor

b. Prohibited Remedy for Unsecured Creditor: Self-Help Seizure

i. Concerns:
1. Violence
2. Social Order
3. Inter-creditor Disputes (“First Dibs”)
4. Inertia (creditor wants to change the status quo)
5. Procedural due process
ii. May be liable for conversion
iii. May also face punitive damages
iv. Creditor has legally enforceable right to be paid, but not to the property seized

c. Remedy: Pressure/Leverage
i. Examples: interest, penalty, credit reporting, threaten legal process, secured
transaction

d. Remedy: Judicial Order/Judgment

i. Mere fact that creditor is owed $ does not give creditor any right, title, or interest
to any of the assets of debtor
ii. Judicial mechanism is required to give creditor those rights
iii. Court order declaring that creditor is owed money
iv. Judgment creditor: court judgment established liability
v. Money judgment can be enforced only in state where rendered > creditor must
establish judgment in destination state before invoking enforcement powers of
that state

vi. Mechanisms to Enforce the Order (Vitale v. Hotel California)

1. Discovery: necessary to determine what assets debtor has available, where
they are, whether they are exempt, & whether they are able to be liquidated
2. Disclosure of assets (may require body attachment, which is an arrest until
the party is interviewed; may also require contempt proceeding) > may be
problematic though because debtor can withdraw and hide assets
a. 2 Main Types of Fraudulent Transfers by Debtors
i. Any transfer made w/ actual intent to hinder, delay, or defraud any
creditor > bad intent (can be inferred from several acts)
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 ii. Any transfer made w/o receiving a reasonably equivalent value in
exchange for the transfer if debtor was insolvent at time of transfer
(debtor cannot make gifts or sell assets for less than reasonably
equivalent value)
3. Writ of execution/levy: Judgment creditor gives sheriff writ of execution &
instructions, directing sheriff to levy (seize) property to fulfill the judgment
a. May still encounter difficulties from lack of information, lack of
cooperation, the debtor withdrawing property, & mistakes in collection
b. If property seized turns out to belong to third party, judgment creditor
may be liable to third party or face conversion claims (third party
recovers value of property)
c. Sheriff may insist on indemnity so he is not held accountable if
something is wrongfully seized
4. Auction sale: property has to actually belong to the debtor or else the
creditor will be liable
5. Writ of garnishment: require third party to pay judgment creditor rather
than debtor
6. Imprisonment: court can order imprisonment but not for judgments related
to personal injuries, wages of working people, or breaches of most contracts
(usually reserved for most serious violations)

vii. Problems/Barriers to Collection:

1. Expensive, time consuming, risky, may not be effective
a. May be able to include provision in contract that debtor will cover fees in
event of default
2. Priority (“First Dibs”)
a. Other creditors may also be trying to attain the same assets
b. Not fraudulent for debtor to pay one of its creditors as long as debtor does
not make payment for purpose of defrauding other creditors
3. Exemptions
a. Certain assets are exempt from reach of creditors
b. Aim to prevent debtor from being left destitute (societal judgment)
c. NY Exemptions:
i. Wedding ring (any value)
ii. Homes up to $150,000 (over & above the mortgage) in metro area
iii. Pension plan
iv. $4,000 value of car (over mortgage)
v. Watch (personal property?) protected up to $35

e. Areas of Law Looked to For Remedy

i. Contract: Debtor promises to pay. Also promises that, if he fails to pay, the
creditor gets other property (collateral). May also promise not to transfer or give
anyone else interest in that property. May also promise that creditor has first dibs
on that property.
ii. Property: Debtor owns house for $50,000. Loan from creditor for $20,000
(+$2,000 interest) by end of year. Debtor defaults. Creditors wants debtor to sell
him house for $20,000. > Problematic- Debtor only wanted to give creditor house
in order to obtain loan but not to lose ownership right ultimately. (Don't want sell
$50,000 house for $20,000!)
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 1. Mandatory Option to Purchase House: Debtor transfers title to creditor during
term of loan, and then creditor transfers title back at the end of the loan. If
debtor defaults at end of established time period, then creditor has full right o
house & can use it to enforce the debt.
2. Equity Abhors a Forfeiture: Debtor might be able to obtain right to house
even if he does not complete payments until shortly after due date (especially
where creditor would be making an unconscionable profit)
3. Maxim of Equity: “He who seeks equity must do equity.”: Debtor will
probably have to pay damages for the delay

II. Security & Foreclosure

a. Lien: A charge against or an interest in property to secure payment of a debt or

performance of an obligation
b. Security interest: most common form of lien; any lien created by contract between
debtor & creditor
i. Right in property that is contingent upon nonpayment of a debt
ii. Agreement that creates security interest may impose obligations on the debtor that
apply even in the absence of default

c. Types of Security Interests

i. Mortgage: security interest in real property; transfer title to someone else in order
to secure debt and still get property back
ii. Personal Property (Article 9 of UCC): non-possessory interest; one party usually
has title but the other party is able to use property while they are paying it off

d. Security Interests in Real Property

i. Lien/Mortgage involves a transfer of rights (can normally only transfer the rights
you have)
ii. During the time of the lien, the debtor cannot transfer right to the collateral to
anyone other than the creditor > Creditor has enforceable interest in collateral
1. Title states: title is in the mortgage-holder & debtor has a reserved right
2. Lien states: title is in the debtor & mortgage-holder has a reserved right
iii. “Intended as Security Doctrine”: court will look to intent of parties in determining
whether a security interest exists; if it functions as security, it will be treated as a
security
1. Substance over Form: Is it being given as collateral to secure a debt?
2. Court of equity will treat a deed absolute in form as a mortgage when the
instrument is executed as security for a debt (Basile v. Erhal Holding Corp.-
NY App. Div.)
a. Interest would have to be enforced through foreclosure, not by merely
filing a deed in lieu of foreclosure
3. Equity court’s power is limited in scope though: can only be exercised where
a security interest existed, not an outright transfer
iv. Foreclosure
1. Right to redemption (equity of redemption): debtor redeems collateral by
repaying the loan (plus interest) & providing any other compensation
a. Only exists when collateral is worth more than the debt (ie., if your
home is worth more than your mortgage, you have equity in your home)
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 2. Foreclosure action: forecloses equity of redemption (judicial
determination); allows creditor to transfer good title free from equity of
redemption of debtor
3. Deed in lieu of foreclosure: debtor can agree to transfer property,
immediately extinguishing the mortgage & underlying mortgage debt
4. [Note: Article 9 provides non-judicial procedure for personal property
foreclosure but permits judicial foreclosure methods if secured parties prefer]

e. Security Interests in Personal Property

i. Non-possessory Interest: modern idea that one party has title but the other party is
able to use property while they are paying it off
ii. Article 9 does not adopt lien theory or title theory

iii. UCC § 9-109: Scope

a. Article Applies To:
i. Transactions that Create Security Interests
ii. Agricultural Liens
iii. Sale of accounts, chattel paper, payment intangibles, or promissory notes
iv. Consignments

b. Type 1: Transactions that Create Security Interests

i. UCC § 9-109
1. Transaction, regardless of form (“transaction” not defined in UCC)
2. That creates (different from real property; “intent” doesn’t matter;
only matters that security interest is created)
3. A security interest (see UCC § 1-201(b)(35) below)
4. In personal property or fixtures (excludes real property; includes
property on borderline between real and personal)
5. By contract (defined in UCC §1-201(b)(12); agreement does not
have to be written; voluntary liens only)
ii. UCC § 1-201(b)(35)- Security Interest Defined:
1. An interest (not defined; Court has held that it does not include
negative promises- ie, “I will not give anyone else a lien or title or
other interest in the car.")
2. In personal property or fixtures
3. Which secures (not defined- “provides leverage”?)
4. Payment or Performance of
5. An Obligation
6. [Looking for relationship between interest & obligation such that the
interest secures the obligation]
iii. Oral security interest: not effective if debtor has possession of collateral
under Statute of Frauds of Article 9 (needs to be in writing)

c. Type 2: Agricultural Liens

i. Involuntary liens given to people who provide services to farmers
ii. Only type of interest in Article 9 that is involuntary
iii. Many states have removed this provision

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d. Type 3: Sale of accounts, chattel paper, payment intangibles, or
promissory notes
i. Applies to certain true sales
ii. 1-201(b)(35): "Security interest" includes any interest of a consignor and
a buyer of accounts, chattel paper, a payment intangible, or a promissory
note in a transaction that is subject to Article 9
iii. Selling of a payment stream
iv. In addition to covering any transaction where a debtor takes a thing and
grants the bank a lien on it in exchange for taking $ on loan, Article 9
will also cover situations where the debtor sells (assigns) the creditor his
right of payment
v. While outstanding, the debt is an "account payable" of the dealor-debtor
and an "account receivable" of the creditor-manufacturer
vi. "Factor": someone who takes assignment of account and tries to collect
on their own
vii. Courts have not made distinction between factor bearing a loss ("true
sale") and factor still receiving money to cover deficiency ("security
interest disguised as sale")
1. Contracts for sale of accounts frequently give purchaser a "right of
recourse" against seller w/ respect to unpaid accounts
2. If account debtor does not pay, seller will buy account back for
initial sale price > guarantee purchaser the full face amount of
accounts
3. Sale of accounts with recourse is essentially a secured loan but not
all courts hold this way
viii. If sale of accounts is part of underlying sale, then it does not fall within
Article 9
ix. Accounts: UCC § 9-102(a)(2)
1. Right to payment of a monetary obligation, whether or not earned by
performance, for:
a. Property that has been or is to be sold, leased, licensed, assigned,
or otherwise disposed of
b. Services rendered or to be rendered
c. Policy of insurance issued or to be issued
d. Secondary obligation incurred or to be incurred
e. Energy provided or to be provided
f. Use or hire of a vessel under a charter or other contract
g. Arising out of the use of a credit or charge card or information
contained on or for use with the card
h. Winnings in a lottery operated or sponsored by the State
2. Includes health care receivables
3. Exclusions:
a. rights to payment evidenced by chattel paper or an instrument,
b. commercial tort claims,
c. deposit accounts,
d. investment property,
e. letter-of-credit rights or letters of credit, or

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 f. rights to payment for money or funds advanced or sold, other
than rights arising out of the use of a credit or charge card or
information contained on or for use with the card
x. Chattel Paper: UCC § 9-102(a)(11)
1. Record(s) that evidence both a monetary obligation and:
a. Security interest in specific goods
b. Security interest in specific goods and software used in the goods
c. Security interest in specific goods and license of software used in
the goods
d. Lease of specific goods
e. Lease of specific goods and license of software used in the
goods.
2. "Monetary obligation" means a monetary obligation secured by the
goods or owed under a lease of the goods and includes a monetary
obligation with respect to software used in the goods.
3. Exclusions:
a. Charters or other contracts involving use or hire of vessel
b. Records that evidence right to payment arising out of use of
credit or charge card or info contained on or for use with the card
4. If a transaction is evidenced by records that include an instrument or
series of instruments, the group of records taken together constitutes
chattel paper.
xi. Promissory Notes: UCC § 9-102(a)(65)
1. Instrument that evidences a promise to pay a monetary obligation;
2. Does not evidence an order to pay; and
3. Does not contain an acknowledgment by a bank that the bank has
received for deposit a sum of money or funds.
4. [Just loaning $; nothing given in exchange]
xii. Payment Intangibles: UCC § 9-102(a)(61)
1. General intangible under which the account debtor’s principal
obligation is a monetary obligation
a. General intangible: any personal property, including things in
action, other than accounts, chattel paper, commercial tort
claims, deposit accounts, documents, goods, instruments,
investment property, letter-of-credit rights, letters of credit,
money, and oil, gas, or other minerals before extraction
2. [Anything where the primary obligation is to pay creditor $ but it is
not represented by one of those 3 previous forms]

e. Type 4: Consignments
i. 1-902(a)(20): "Consignment" (that is a secured transaction) means a
transaction, regardless of its form, in which a person delivers goods to a
merchant for the purpose of sale and:
1. The merchant:
a. deals in goods of that kind under a name other than the name of
the person making delivery; and
b. is not an auctioneer; and
c. is not generally known by its creditors to be substantially
engaged in selling the goods of others
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 2. With respect to each delivery, the aggregate value of the goods is
$1,000 or more at the time of delivery;
3. The goods are not consumer goods immediately before delivery; and
a. “Consumer goods”: goods that are used or bought for use
primarily for personal, family, or household purposes
4. The transaction does not create a security interest that secures an
obligation.
a. Issue here is what happens at default: whether to take stuff back
or have a foreclosure sale
b. True consignor can just take the goods back without using
foreclosure procedures [Secured party that is consignor has not
duties under § 9-601(g), rights after default]
ii. 1-201(b)(35): "Security interest" includes any interest of a consignor and
a buyer of accounts, chattel paper, a payment intangible, or a promissory
note in a transaction that is subject to Article 9
iii. Consingor -- Consignee -- Buyer
iv. Consignor gives possession & agency (power to sell) to the consignee
1. Like a bailor-bailee relationship, except in the consignor-consignee
relationship, the one with possession has the right to sell and transfer
title to a buyer > severs title and possession
v. A consignment may fail one of the elements set out in 1-902(a)(20) and
still be a “true consignment” > simply not covered by Article 9
vi. True consignment is treated like a Purchase Money Security Interest
(PMSI) Lender in Inventory
vii. Ex: Owner gives art to selling agent who puts it on display. Selling agent
can transfer possession to the buyer. Title goes directly to buyer. Selling
agent never had title (it was on consignment).

f. Other Types of Security Interests and Related Issues

i. Conditional Sales
1. UCC § 1-201(b)(35): Retention or reservation of title by a seller of
goods notwithstanding shipment or delivery to the buyer under
Section 2-401 is limited in effect to a reservation of a “security
interest”
2. UCC §2-401(1): Any retention by seller of title (property) in goods
shipped/delivered to buyer is limited in effect to a reservation of
security interest
3. Buyer becomes owner of goods & seller becomes secured creditor
for price of goods (seller retains title until buyer has finished paying)
4. Hypo: A selling car to B. B wants title and possession. B will pay A
$1000 in a year. A will give B the car but title shall not go to B until
last payment is received. > Satisfies definition of security interest
under 9-109 > Subject to Article 9 (Not Article 2)
5. Despite having title, seller cannot just reclaim property (has to
follow the processes of repossession)

ii. Sale on Approval and Sale or Return: UCC § 2-326 (Pseudo-Sales)

1. Unless otherwise agreed, if delivered goods may be returned by the
buyer even if they conform to the contract, the transaction is:
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 a. “sale on approval” if the goods are delivered primarily for use;
and
b. “sale or return” if the goods are delivered primarily for resale
(sounds like a consignment except, in a consignment, the original
owner keeps title)
2. Goods held on approval are not subject to the claims of the buyer's
creditors until acceptance
3. Goods held on sale or return are subject to such claims while in the
buyer's possession
4. Note:
a. Sale on approval and sale or return involve a transfer of title
b. Consignments do not involve a transfer of title

iii. Asset Securitization:

1. To “securitize” an asset is to divide ownership of its value into large
numbers of identical shares
2. Owner of accounts (the “originator”) sells the accounts to a separate
entity (the “special purpose vehicle”)
a. [Creditor sells shares in open accounts in order to generate
capital earlier than waiting for repayment]
3. Lender (owner of the SPV) then loans the SPV money and takes a
security interest in the accounts receivable
4. Then SPV issues securities in “tranches,” which are backed by the
accounts receivable
a. Tranches are different priority levels
5. When the accounts start coming in, the SPV pay the tranches by their
priority level
6. If it’s with recourse, then the originator will buy back uncollected
accounts (SPV is like a lender)
7. Problem: Businesses loan consumers $ and take back mortgages on
their houses (Business supposed to do due diligence) > Business then
sells these mortgages into some sort of pool (sell bonds in public
trading markets that people can buy- be paid back certain amount of
$ w/ interest over time) > Business gets a fee for each transaction (no
one's checking to make sure mortgage is good because business is
incentivized not to)

iv. Leases Intended as Security Interests

1. UCC § 1-203: Lease Distinguished from Security Interest
a. (b) PER SE RULE (Transaction is in Article 9):
i. STEP ONE: A transaction in the form of a lease creates
a security interest if the consideration that the lessee is to
pay the lessor for the right to possession and use of the
goods:
ii. is an obligation for the term of the lease [scheduled
payments]; and
iii. is not subject to termination by the lessee, and;
iv. STEP TWO: Residual Value Factors

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 i. Original term is equal or greater than remaining
economic life of goods
ii. Lessee is bound to renew lease for remaining
economic life of goods or bound to become owner
iii. Lessee has option to renew lease for remaining
economic life of goods for no additional consideration
or nominal (see below) upon compliance w/
agreement
iv. Lessee has option to become owner of goods for no
additional consideration or nominal (see below)
additional consideration upon compliance
v. [Basically, lessee was building up equity (purchasing
residual value) during time that he was making
payments]
b. (a) IF YOU DON’T PASS BRIGHT LINE (PER SE) TEST:
Whether a transaction in the form of a lease creates a lease or
security interest is determined by the facts of each case (owner,
idea of transaction, who pays taxes/maintenance, who bears risk
of damage)
c. Additional consideration is nominal if it is less than the lessee's
reasonably predictable cost of performing under the lease
agreement if the option is not exercised
d. Additional consideration is not nominal if:
i. When the option to renew the lease is granted to the
lessee, the rent is stated to be the fair market rent for the
use of the goods for the term of the renewal determined at
the time the option is to be performed; or
ii. When the option to become the owner of the goods is
granted to the lessee, the price is stated to be the fair
market value of the goods determined at the time the
option is to be performed.

g. Creditor’s Remedies under Article 9

i. Seller's Remedies on Discovery of Buyer's Insolvency: UCC § 2-702:
1. (2) Where the seller discovers that the buyer has received goods on
credit while insolvent, the seller may reclaim the goods upon
demand made within ten days after the receipt, but if
misrepresentation of solvency has been made to particular seller in
writing within three months before delivery the ten day limitation
does not apply. Except as provided in this subsection, the seller may
not base a right to reclaim goods on the buyer’s fraudulent or innocent
misrepresentation of solvency or of intent to pay.
a. Implicit in every request to deliver goods on credit is a
representation that the debtor is solvent
b. Codification/limitation of right of reclamation
c. If I sold buyer goods on credit and find out that buyer is insolvent,
then I have a right to reclaim the goods within 10 days
d. If debtor misrepresents insolvency, then the 10-day limitation is
removed > Unlimited reclamation period
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 i. Including a representation on forms that a buyer is solvent wil
give the seller more of a remedy in event of insolvency
2. (3) The seller's right to reclaim under subsection (2) is subject to the
rights of a buyer in ordinary course of business or other good-faith
purchaser for value under Section 2-403. Successful reclamation of
goods excludes all other remedies with respect to them.
a. Cannot get back property if it has been sold (still has to be with the
debtor in order to recover it)
b. Protect buyer in due course & any other good faith purchaser
c. Could still recover from a bad faith purchaser
d. Priority Rule
e. Limited Rule

ii. Creditor’s Rights after Default: UCC § 9-601(a)

1. After default, a secured party has the rights provided in this part and,
except as otherwise provided in Section 9-602, those provided by
agreement of the parties. A secured party:
a. May reduce a claim to judgment, foreclose, or otherwise enforce
the claim, security interest, or agricultural lien by any available
judicial procedure; and
b. If the collateral is documents, may proceed either as to the
documents or as to the goods they cover.
c. [Creates a sort of "default contract": the contract that reasonable
people bargaining in reasonable equality of position would have
entered into]
2. After default, secured party has these rights and those provided by
agreement of the parties
a. UCC § 9-602: limits the parties’ ability to change certain things in
the contract [lists 13 items]
b. UCC § 9-603: parties can redefine the standards the courts will
apply as long as the standards are not manifestly unreasonable

iii. Rights after Default: Exclusions under UCC § 9-601(g)

1. Except as otherwise provided, this part imposes no duties upon
secured party that is a consignor or is a buyer of accounts, chattel
paper, payment intangibles, or promissory notes
2. Enforcement issue: drop back to normal law of consignment and sale
3. Article 9 is important for other reasons, prior to default

III. Defining Default

a. UCC does not define: leaves default to be defined by parties in the contract
b. Governed by Part 6 of Article 9
c. Examples of Common Definitions of Default:
i. Non-payment (common law)
ii. Damage to the collateral
iii. Alteration of the collateral
iv. Failure to insure collateral
v. Move the collateral (ex: out of state)
vi. Sell the collateral
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 vii. Lien to someone else on the collateral
viii. Bankruptcy
ix. Suit or judgment
x. Missed payment to anyone else ("Universal Default Clause" > some states now
make this illegal)
xi. Death of debtor
xii. Debtor loses job
xiii. Can even extend to things that are not the debtor's fault (ex: earthquake)

IV. Acceleration & Cure

a. When a seller pays in installments, the common law treats each installment as a
separate obligation (absent contractual provision otherwise)
b. When debtor defaults, seller can only sue for defaulted installments up to that point >
Has to bring additional lawsuits for defaults afterward or just wait until the time that
all the installments were due & then sue
c. Acceleration Clauses:
i. Contractual provisions that state that, in the event of default by the debtor in any
obligation under the repayment contract, the creditor may at its option declare
all of the payments immediately due and payable & then enforce the entire
obligation
ii. UCC § 1-309: Term providing that one party or that party's successor in interest
may accelerate payment or performance or require collateral or additional
collateral “at will” or when the party “deems itself insecure,” or words of
similar import, means that the party has power to do so only if that party in
good faith believes that the prospect of payment or performance is impaired.
The burden of establishing lack of good faith is on the party against which the
power has been exercised.
iii. Creditor choosing to exercise option to accelerate must due so in many specified
in contract
d. Limitations on Enforceability of Acceleration Clauses:
i. Where creditor does not exercise right to accelerate repeatedly over course of
dealings, the court may find that the clause is not enforceable (JR Hale
Contracting Co. v. United New Mexico Bank at Albequerque: not enforceable
on estoppel grounds)
ii. Three Defenses of Debtors in Default (JR Hale Contracting Co.)
1. Waiver
a. Intentional relinquishment of a known right
b. May imply waiver from the circumstances
c. Waiver applies to one time
2. Modification
a. Modified contract through course of dealing
b. Show from the circumstances that creditor intended to modify
c. Contract is forever changed
3. Estoppel
a. Creditor did something to trick other party into believing that it was ok
to pay late (waived or modified)
b. Reasonable expectations of the debtor

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 c. Creditor does not intend waiver or modification, but creditor is
nonetheless estopped from arguing that the debtor did not have the right
to pay late
e. Debtor’s Right to Cure
i. Debtor has right to cure default by paying amount then due
ii. Once acceleration occurs, debtor can cure (redeem) only by paying entire
amount of accelerated debt
iii. Real Property: After default, mortgagor may tender arrearage & reinstate
payment schedule, but only prior to acceleration
1. "Tender": immediate offer to perform one's obligations under a contract

V. Repossession of Collateral after Default

a. At common law, sale was necessary to:
i. Determine value
ii. Determine whether there was equity
iii. Get payment for the creditor
iv. Attempt to get market value of the collateral
b. Question of who possesses collateral from time of default to sale

c. Real Property
i. Debtor generally remains in possession until the sale > the debtor may damage
the property while in his possession
ii. Problem: Value of collateral is driven down at foreclosure sale (buyer cannot
examine it & has to pay cash) > typically 40-60% of market value

d. Personal Property
i. Article 9 gives the creditor possession until the sale occurs
ii. UCC § 9-609:
1. (a) After default, a secured party:
a. may take possession of the collateral; and
b. without removal, may render equipment unusable and dispose of
collateral on a debtor's premises under Section 9-610
2. (b) A secured party may proceed under subsection (a):
a. pursuant to judicial process; or
b. without judicial process, if it proceeds without breach of the peace.
3. (c) If so agreed, and in any event after default, a secured party may require
the debtor to assemble the collateral and make it available to the secured
party at a place to be designated by the secured party which is reasonably
convenient to both parties.

iii. Taking Possession by Judicial Process

1. Action in replevin: suit for possession of my property (sheriff is then sent to
get the collateral)
2. Usually required to provide debtor with notice of replevin action
3. No notice is required if: (Del's Big Saver Foods, Inc. v. Carpenter Cook,
Inc.)
a. Sworn affidavit (specific facts showing entitlement to relief)
b. Judge determines if affidavit is sufficient

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 c. Accommodation of right of hearing (# of days to challenge
repossession after)
d. Bond (creditor has to post from good & sufficient surety)

iv. Taking Possession by Self-Help (Without Judicial Process)

1. Default
2. No Breach of the Peace
a. If creditor breaches the peace, the debtor may:
i. Sue for trespass
ii. Sue for wrongful repossession
iii. Sue for conversion
iv. [If creditor takes property and debtor was not in default, you have
the same result, unless the court finds waiver, modification, or
estoppel]
v. Not bring a due process claim (creditor is not a state actor)
b. Two Primary Factors for Breach of Peace: (Salisbury Livestock Co. v.
Colorado Central Credit Union)
i. Risk of immediate violence (main factor)
ii. Nature of premises intruded upon (in a trespass action)
iii. [Trespass alone is not enough for breach of the peace]
c. You can have breach of peace even if no one noticed (& even if there is
no confrontation)
d. Usually, even when there is a fight/confrontation, the question is
whether something indicated to creditor that there was risk of
violence/harm &, if so, did he withdraw
e. Involvement of local law enforcement in self-help repossession is
generally considered a breach of the peace
f. If a debtor says “no” (refuses creditor’s repossession), this is a per se
breach of the peace
g. Cannot waive or vary standard for measuring breach of peace by
agreement (maybe to some extent for commercial cases but not
consumer)
h. Difficulty determining when repossession is over

v. Repossession of Accounts
1. UCC § 9-607: If so agreed, and in any event after default, a secured party:
a. may notify an account debtor or other person obligated on collateral to
make payment or otherwise render performance to or for the benefit of
the secured party;
b. may take any proceeds to which the secured party is entitled under
Section 9-315;
c. may enforce the obligations of an account debtor or other person
obligated on collateral and exercise the rights of the debtor with respect
to the obligation of the account debtor or other person obligated on
collateral to make payment or otherwise render performance to the
debtor, and with respect to any property that secures the obligations of
the account debtor or other person obligated on the collateral;

13
 d. if it holds a security interest in a deposit account perfected by control
under Section 9-104(a)(1), may apply the balance of the deposit account
to the obligation secured by the deposit account; and
e. if it holds a security interest in a deposit account perfected by control
under Section 9-104(a)(2) or (3), may instruct the bank to pay the
balance of the deposit account to or for the benefit of the secured party.
2. Hypo: You buy computer on credit w/ promise to pay Bozos Computers.
[Bozos could take a lien on computer to create a secured transaction, but
does not here.] Bozos needs more capital, which Bozos gets on loan from
the bank in exchange for assignment of its interest in your credit. Bank is
concerned w/ your collateral.
a. Account debtor: You
b. Secured party: Bank
c. Debtor: Bozo
d. At Bozo's default, the Bank can send you a notice, notifying you to now
pay the Bank rather than Bozos
3. UCC § 9-406(a): Payment after Notification
a. An account debtor . . . may discharge its obligation by paying the
assignor until, but not after, the account debtor receives a notification,
authenticated by the assignor or the assignee, that the amount due or to
become due has been assigned and that payment is to be made to the
assignee.
b. After receipt of the notification, the account debtor may discharge its
obligation by paying the assignee and may not discharge the obligation
by paying the assignor.
4. Hypo: Bozos tells you that the bank made a mistake, so you keep paying
Bozos. Bozos gets the $ and never gives it to Bank. Bank sues you.
a. Bozos: assignor
b. Bank: assignee
c. Bank wins: payment to Bozos does not count to fulfill the obligations
5. UCC § 9-406(d): A term in an agreement between an account debtor and an
assignor or in a promissory note is ineffective to the extent that it:
a. Prohibits, restricts, or requires the consent of the account debtor or
person obligated on the promissory note to the assignment or transfer of,
or the creation, attachment, perfection, or enforcement of a security
interest in, the account, chattel paper, payment intangible, or promissory
note; or
b. Provides that the assignment or transfer or the creation, attachment,
perfection, or enforcement of the security interest may give rise to a
default, breach, right of recoupment, claim, defense, termination, right of
termination, or remedy under the account, chattel paper, payment
intangible, or promissory note.
c. [UCC throws risk of fraud to the account debtor (individual customers)]
6. UCC § 9-404: Unless an account debtor has made an enforceable agreement
not to assert defenses or claims, the rights of an assignee are subject to:
a. All terms of the agreement between the account debtor and assignor and
any defense or claim in recoupment arising from the transaction that
gave rise to the contract; and

14
 b. Any other defense or claim of the account debtor against the assignor
which accrues before the account debtor receives a notification of the
assignment authenticated by the assignor or the assignee.
7. Hypo: Bozo punches you in face. Can you assert counterclaim to offset
amout owed?
a. Yes, if Bozo hits you before you get notice from the bank (but not if
after)
8. UCC § 9-403(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:
a. For value;
b. In good faith;
c. Without notice of a claim of a property or possessory right to the
property assigned; and
d. Without notice of a defense or claim in recoupment of the type that may
be asserted against a person entitled to enforce a negotiable instrument
under Section 3-305(a)
e. > > Only applies to business transactions; consumer transactions fall
under (d) < <
f. Example: If something in agreement between you and Bozos says no
claims or defenses against bank as assignee, then this is enforceable as
long as the bank took for value (loaned $ to Bozos), in good faith (just a
commercial player), without notice (did bank know that the computers
were already defective)
9. Hypo: Buying computers on credit from Computers Inc. The account debtor
signs account w/ Computers Inc. Agreement had waiver clause in it.
Computers Inc. immediately assigns account to Bank. Account debtor never
receives computers. > Account debtor still has to pay Bank
10. Hypo: Enter into agreement w/ lessee company for lease for 5 years. Lease
will probably be assigned. Lessee company goes out of business and no
services are provided. > Account debtor still has to pay if there is a waiver
clause in the agreement
vi. When Repossession Goes Wrong: UCC § 9-625:
1. (b) A person is liable for damages in the amount of any loss caused by a
failure to comply with this article. Loss caused by a failure to comply may
include loss resulting from the debtor's inability to obtain, or increased costs
of, alternative financing.
2. (c)(2) If the collateral is consumer goods, a person that was a debtor or a
secondary obligor at the time a secured party failed to comply with this part
may recover for that failure in any event an amount not less than the credit
service charge plus 10 percent of the principal amount of the obligation or
the time-price differential plus 10 percent of the cash price.
a. For consumers, there is an automatic minimum penalty
3. Hypo: Price of car $10,000. Interest would be $3000. Quadriplegic in
wheelchair tells repossessor not to take car. Repossessor takes it away. >
Breach of the peace. Any damages?
a. If car is considered a consumer good, then 10% of $10,000 plus time-
price differential ($3,000) > $4,000 can be collected
15
VI. Judicial Sale & Deficiency (After Repossession)
a. Action for deficiency: if property is sold but brings in less than the amount owed to
the creditor
b. Real Property
i. Sheriff selling on courthouse steps
ii. Sale price determines what value the creditor gets and then what deficiency the
debtor still owes
iii. Sufficiency of sale price: "shocks the conscience" (courts won't invalidate
judicial sale unless price is so small that it "shocks the conscience")
1. Anything below 10% will usually shock the conscience
2. Anything above 40% will be ok
3. Between 10% and 40% involves looking at factors
4. (Armstrong v. Csurilla)
iv. Sheriff's deed comes w/ no warranties of everything (essentially a quitclaim
deed- sold with encumbrances)
v. Redemption: possible to occur post-sale (within a certain period of time)

c. Personal Property
i. § 9-610: Disposition of Collateral After Default
1. (d) A contract for sale, lease, license, or other disposition includes the
warranties relating to title, possession, quiet enjoyment, and the like which
by operation of law accompany a voluntary disposition of property of the
kind subject to the contract.
a. Law will imply that I have represented I own what I sell you
2. (e) A secured party may disclaim or modify warranties under subsection (d):
a. In a manner that would be effective to disclaim or modify the
warranties in a voluntary disposition of property of the kind subject
to the contract of disposition; or
b. By communicating to the purchaser a record evidencing the contract
for disposition and including an express disclaimer or modification
of the warranties.
3. (f) A record is sufficient to disclaim warranties under subsection (e) if it
indicates “There is no warranty relating to title, possession, quiet enjoyment,
or the like in this disposition” or uses words of similar import.

ii. § 9-623: Right to Redeem Collateral

1. A debtor, any secondary obligor, or any other secured party or lienholder
may redeem collateral
2. To redeem collateral, a person shall tender:
a. Fulfillment of all obligations secured by the collateral; and
b. Reasonable expenses and attorney's fees described in Section 9-
615(a)(1) > repossession & preparation sale expenses
c. [ > Debtor must pay however much is owed, even if collateral has
depreciated in value]
3. Redemption may occur at any time before a secured party:
a. Has collected collateral under Section 9-607; or

16
 b. Has disposed of collateral or entered into a contract for its
disposition under Section 9-610; or
c. Has accepted collateral in full or partial satisfaction of the obligation
it secures under Section 9-622.
4. [No post-sale redemption]

iii. Creditor Has Two Options to Dispose of Collateral

1. Strict Foreclosure
a. Debtor has right to force creditor to sell property, but creditor can offer
to keep it
2. Sale
a. Debtor does not have right to keep creditor from selling property if he
chooses to

iv. Strict Foreclosure

1. Creditor can propose to keep collateral in (1) full or (2) partial satisfaction
2. Debtor has to agree in writing
3. Debtor can only agree after default

4. § 9-620: Acceptance of Collateral in Full or Partial Satisfaction of

Obligation; Compulsory Disposition of Collateral
a. (a) Secured party may accept collateral in full or partial satisfaction of
the obligation it secures only if:
i. Debtor consents to the acceptance
ii. Secured party does not receive, within the time set forth in
subsection (d), a notification of objection to the proposal
authenticated by [other people with liens]:
1. Person to which the secured party was required to send a
proposal under Section 9-621;
2. Any other person, other than the debtor, holding an interest in
the collateral subordinate to the security interest that is the
subject of the proposal
3. If the collateral is consumer goods, the collateral is not in the
possession of the debtor when the debtor consents to the
acceptance; and
4. Subsection (e) does not require the secured party to dispose of
the collateral or the debtor waives the requirement pursuant to
Section 9-624
b. (c) Debtor’s Consent:
i. Dbtor consents to an acceptance of collateral in partial satisfaction
of the obligation it secures only if the debtor agrees to the terms of
the acceptance in a record authenticated [sign something; could be
electronic record too] after default
ii. (Debtor consents to an acceptance of collateral in full satisfaction
of the obligation it secures only if the debtor agrees to the terms of
the acceptance in a record authenticated after default or the secured
party:
1. Sends to the debtor after default a proposal that is
unconditional or subject only to a condition that collateral not
17
 in the possession of the secured party be preserved or
maintained;
2. In the proposal, proposes to accept collateral in full satisfaction
of the obligation it secures; and
3. Does not receive a notification of objection authenticated by
the debtor within 20 days after the proposal is sent.
a. Debtor's silence in response to proposal can be deemed
consent if the secured creditor gives the notice above for
full satisfaction > but then the secured creditor will not be
able to obtain the deficiency
c. (e) Mandatory disposition of consumer goods: A secured party that has
taken possession of collateral shall dispose of the collateral pursuant to
Section 9-610 within the time specified in subsection (f) if:
i. 60 percent of the cash price has been paid in the case of a
purchase-money security interest in consumer goods; or
ii. 60 percent of the principal amount of the obligation secured has
been paid in the case of a non-purchase-money security interest in
consumer goods.
iii. [ > Prevent secured creditor from obtaining the debtor's equity]

5. § 9-622: Effect of Acceptance of Collateral

a. A secured party's acceptance of collateral in full or partial satisfaction of
the obligation it secures:
i. Discharges the obligation to the extent consented to by the debtor;
ii. Transfers to the secured party all of a debtor's rights in the
collateral;
iii. Discharges the security interest or agricultural lien that is the
subject of the debtor's consent and any subordinate security interest
or other subordinate lien; and
iv. Terminates any other subordinate interest.
b. A subordinate interest is discharged or terminated under subsection (a),
even if the secured party fails to comply with this article.
i. Closes out your own & any junior interests in property
ii. Does not close out senior (higher priority) interests

6. § 9-624: Waiver
a. (a) Debtor or secondary obligor may waive the right to notification of
disposition of collateral under Section 9-611 only by an agreement to
that effect entered into and authenticated after default
b. (b) Debtor may waive the right to require disposition of collateral under
Section 9-620(e) only by an agreement to that effect entered into and
authenticated after default
c. (c) Except in a consumer-goods transaction, a debtor or secondary
obligor may waive the right to redeem collateral under Section 9-623
only by an agreement to that effect entered into and authenticated after
default

7. § 9-602 limiting waiver & § 9-603 involving agreement as to standards

18
v. Sale
1. Expect better value than real estate sale

2. § 9-610: Disposition of Collateral After Default

a. (a) After default, a secured party may sell, lease, license, or otherwise
dispose of any or all of the collateral in its present condition or following
any commercially reasonable preparation or processing.
b. (b) Every aspect of a disposition of collateral, including the method,
manner, time, place, and other terms, must be commercially reasonable.
If commercially reasonable, a secured party may dispose of collateral by
public or private proceedings, by one or more contracts, as a unit or in
parcels, and at any time and place and on any terms (Chavers v. Frazier-
Lear jet case)

3. § 9-627: Whether Conduct Was Commercially Reasonable

a. (a) The fact that a greater amount could have been obtained by a
collection, enforcement, disposition, or acceptance at a different time or
in a different method from that selected by the secured party is not of
itself sufficient to preclude the secured party from establishing that the
collection, enforcement, disposition, or acceptance was made in a
commercially reasonable manner.
i. Price alone is not enough > UCC is asking a different question that
real estate law
ii. Article 9 looks instead on procedures/process you went through to
conduct the sale, not the sale price itself
iii. One place we look at price > where the creditor is the buyer
iv. Judge will probably scrutinize more clearly when price seems
unreasonable though
b. (b) Safe Harbor Rule: A disposition of collateral is made in a
commercially reasonable manner if the disposition is made:
i. In the usual manner on any recognized market;
1. Ex: sell stock that was given as security > just sell on stock
exchange (doesn't matter how low the price is)
ii. At the price current in any recognized market at the time of the
disposition; or
1. Ex: just want to sell stock to myself > pay going price at that
time on the market > sold at price current in recognized market
iii. Otherwise in conformity with reasonable commercial practices
among dealers in the type of property that was the subject of the
disposition
1. Hire someone in market to sell it for you or to advise you;
reasonableness might depend on who you have selling it
2. Courts generally give secured creditor a fair amount of leeway
c. (c) A secured party may purchase collateral:
i. At a public disposition; or

19
 ii. At a private disposition only if the collateral is of a kind that is
customarily sold on a recognized market or the subject of widely
distributed standard price quotations.
d. Note: Dumping certain collateral might be commercially reasonable
when the property has no value (cost of sale would be greater than value
it would yield)
e. Note: In some circumstances, the creditor might be required to take
reasonable affirmative steps to prepare collateral for sale

4. § 9-611: Notification Before Disposition of Collateral

a. (b) Except as otherwise provided in subsection (d), a secured party that
disposes of collateral under Section 9-610 shall send to the persons
specified in subsection (c) a reasonable authenticated notification of
disposition.
b. (c) Secured party shall send authenticated notification of disposition to:
i. Debtor
1. “Debtor”: person having interest, other than security interest
or other lien, in the collateral, whether or not the person is an
obligor
2. "Obligor": person that, with respect to obligation secured by a
security interest in or an agricultural lien on the collateral
owes payment or performance
ii. Secondary obligor; and
1. Either
a. (1) second liener has said they want notice by sending
authenticated notice announcing lien & stating they want
notice if there is ever a sale or
b. (2) second liener files notice of lien in public records &
creditor will have to check public records before selling
iii. If collateral is other than consumer goods:
1. Any other person from which the secured party has received,
before the notification date, an authenticated notification of a
claim of an interest in the collateral;
2. Any other secured party or lienholder that, 10 days before the
notification date, held a security interest in or other lien on the
collateral perfected by the filing of a financing statement that:
a. Identified the collateral;
b. Was indexed under the debtor's name as of that date; and
c. Was filed in the office in which to file a financing
statement against the debtor covering the collateral as of
that date; and
3. Any other secured party that, 10 days before the notification
date, held a security interest in the collateral perfected by
compliance with a statute, regulation, or treaty described in
Section 9-311(a)
c. (d) Subsection (b) does not apply if the collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on
a recognized market.

20
 d. (e) A secured party complies with the requirement for notification
prescribed by subsection (c)(3)(B) if:
i. Not later than 20 days or earlier than 30 days before the
notification date, the secured party requests, in a commercially
reasonable manner, information concerning financing statements
indexed under the debtor's name in the office indicated in
subsection (c)(3)(B) [public record office]; and
ii. Before the notification date, the secured party:
1. Did not receive a response to the request for information; or
2. Received a response to the request for information and sent an
authenticated notification of disposition to each secured party
or other lienholder named in that response whose financing
statement covered the collateral.
iii. [Another safe harbor rule: If Secretary does not answer you or give
you the wrong info, you're ok as long as you made the request at
the proper time]

5. § 9-612: Timeliness of Notification Before Disposition of Collateral

a. (a) Except as otherwise provided in subsection (b), whether a
notification is sent within a reasonable time is a question of fact
b. (b) In a transaction other than a consumer transaction, a notification of
disposition sent after default and 10 days or more before the earliest time
of disposition set forth in the notification is sent within a reasonable time
before the disposition.
i. [Subsection (b) is a safe harbor]
ii. Might be able to get less than 10 days if you define reasonableness
in the agreement as being a certain number of days (just cannot be
manifestly unreasonable)
iii. Might also want to put things in agreement about where to send
notice and put responsibility for notice of change of address on
debtor

6. § 9-613: Contents and Form of Notification Before Disposition of

Collateral: General (Safe Habor Form Included)
a. Except in a consumer-goods transaction, the following rules apply:
i. The contents of a notification of disposition are sufficient if the
notification: (In re Downing)
1. Describes the debtor and the secured party;
2. Describes the collateral that is the subject of the intended
disposition;
3. States the method of intended disposition;
4. States that the debtor is entitled to an accounting of the unpaid
indebtedness and states the charge, if any, for an accounting;
and
5. States the time and place of a public disposition or the time
after which any other disposition is to be made.
a. Public sale: need time & place (debtor can show up & bid,
can challenge creditor if they sell the property for a lower
amount by arguing sale was commercially unreasonable)
21
 b. Private sale: do not need time & place of sale; only time
after which it will be disposed of (last redemption date)
ii. Whether the contents of a notification that lacks any of the
information specified in paragraph (1) are nevertheless sufficient is
a question of fact.
iii. The contents of a notification providing substantially the
information specified in paragraph (1) are sufficient, even if the
notification includes:
1. Information not specified by that paragraph; or
2. Minor errors that are not seriously misleading
iv. A particular phrasing of the notification is not required.

7. § 9-614: Notice for Sales Involving Consumer-Goods Transactions

8. § 9-625: Remedies for Secured Party's Failure to Comply with Article

a. (a) If it is established that a secured party is not proceeding in
accordance with this article, a court may order or restrain collection,
enforcement, or disposition of collateral on appropriate terms and
conditions.
b. (b) Subject to subsections (c), (d), and (f), a person is liable for damages
in the amount of any loss caused by a failure to comply with this article.
Loss caused by a failure to comply may include loss resulting from the
debtor's inability to obtain, or increased costs of, alternative financing.
c. (c) Except as otherwise provided in Section 9-628:
i. Who Can Recover: Person that, at the time of the failure, was a
debtor, was an obligor, or held a security interest in or other lien
on the collateral may recover damages under subsection (b) for
its loss;
ii. Consumer Goods Damages: If the collateral is consumer goods,
a person that was a debtor or a secondary obligor at the time a
secured party failed to comply with this part may recover for that
failure in any event an amount not less than the credit service
charge plus 10 percent of the principal amount of the obligation
or the time-price differential plus 10 percent of the cash price
d. (d) A debtor whose deficiency is eliminated under Section 9-626 may
recover damages for the loss of any surplus. However, a debtor or
secondary obligor whose deficiency is eliminated or reduced under
Section 9-626 may not otherwise recover under subsection (b) for
noncompliance with the provisions of this part relating to collection,
enforcement, disposition, or acceptance.
e. (e) In addition to any damages recoverable under subsection (b), the
debtor, consumer obligor, or person named as a debtor in a filed record,
as applicable, may recover $500 in each case from a person that:
i. Fails to comply with Section 9-208;
ii. Fails to comply with Section 9-209;
iii. Files a record that the person is not entitled to file under Section
9-509(a);
iv. Fails to cause the secured party of record to file or send a
termination statement as required by Section 9-513(a) or (c);
22
 v. Fails to comply with Section 9-616(b)(1) and whose failure is
part of a pattern, or consistent with a practice, of noncompliance;
or
vi. fails to comply with Section 9-616(b)(2).
f. (f) A debtor or consumer obligor may recover damages under subsection
(b) and, in addition, $500 in each case from a person that, without
reasonable cause, fails to comply with a request under Section 9-210. A
recipient of a request under Section 9-210 which never claimed an
interest in the collateral or obligations that are the subject of a request
under that section has a reasonable excuse for failure to comply with the
request within the meaning of this subsection.
g. (g) If a secured party fails to comply with a request regarding a list of
collateral or a statement of account under Section 9-210, the secured
party may claim a security interest only as shown in the list or statement
included in the request as against a person that is reasonably misled by
the failure

9. § 9-626: Action in Which Deficiency or Surplus is in Issue

a. (a) [Applicable rules if amount of deficiency or surplus in issue.] In
an action arising from a transaction, other than a consumer transaction,
in which the amount of a deficiency or surplus is in issue, the following
rules apply:
i. (1) A secured party need not prove compliance with the provisions
of this part relating to collection, enforcement, disposition, or
acceptance unless the debtor or a secondary obligor places the
secured party's compliance in issue.
ii. (2) If the secured party's compliance is placed in issue, the secured
party has the burden of establishing that the collection,
enforcement, disposition, or acceptance was conducted in
accordance with this part.
iii. (3) Except as otherwise provided in Section 9-628, if a secured
party fails to prove that the collection, enforcement, disposition, or
acceptance was conducted in accordance with the provisions of
this part relating to collection, enforcement, disposition, or
acceptance, the liability of a debtor or a secondary obligor for a
deficiency is limited to an amount by which the sum of the secured
obligation, expenses, and attorney's fees exceeds the greater of:
1. (A) the proceeds of the collection, enforcement, disposition, or
acceptance; or
2. (B) the amount of proceeds that would have been realized had
the noncomplying secured party proceeded in accordance with
the provisions of this part relating to collection, enforcement,
disposition, or acceptance.
iv. (4) For purposes of paragraph (3)(B), the amount of proceeds that
would have been realized is equal to the sum of the secured
obligation, expenses, and attorney's fees unless the secured party
proves that the amount is less than that sum.
v. (5) If a deficiency or surplus is calculated under Section 9-615(f),
the debtor or obligor has the burden of establishing that the amount
23
 of proceeds of the disposition is significantly below the range of
prices that a complying disposition to a person other than the
secured party, a person related to the secured party, or a secondary
obligor would have brought.
b. (b) [Non-consumer transactions; no inference.] The limitation of the
rules in subsection (a) to transactions other than consumer transactions is
intended to leave to the court the determination of the proper rules in
consumer transactions. The court may not infer from that limitation the
nature of the proper rule in consumer transactions and may continue to
apply established approaches.
i. No rule for consumer transactions
ii. Court cannot think about prior rule as reason to adopt rule in (b)

10. § 9-615. Application of Proceeds of Disposition; Liability for Deficiency

and Right to Surplus
a. (a) [Application of proceeds.] A secured party shall apply or pay over
for application the cash proceeds of disposition under Section 9-610 in
the following order (priority) to:
i. (1) the reasonable expenses of retaking, holding, preparing for
disposition, processing, and disposing, and, to the extent provided
for by agreement and not prohibited by law, reasonable attorney's
fees and legal expenses incurred by the secured party;
ii. (2) the satisfaction of obligations secured by the security interest or
agricultural lien under which the disposition is made;
iii. (3) the satisfaction of obligations secured by any subordinate
security interest in or other subordinate lien on the collateral if:
1. (A) the secured party receives from the holder of the
subordinate security interest or other lien an authenticated
demand for proceeds before distribution of the proceeds is
completed; and
2. (B) in a case in which a consignor has an interest in the
collateral, the subordinate security interest or other lien is
senior to the interest of the consignor; and
3. Hypo: Person with first lien on property forecloses, and there
is a surplus. Person with second lien wants the surplus- He
needs to send signed notice under 9-615(a)(3) so that he can
seek payment from that sale rather than chasing down the
debtor for the money
iv. (4) a secured party that is a consignor of the collateral if the
secured party receives from the consignor an authenticated demand
for proceeds before distribution of the proceeds is completed.
b. (b) [Proof of subordinate interest.] If requested by a secured party, a
holder of a subordinate security interest or other lien shall furnish
reasonable proof of the interest or lien within a reasonable time. Unless
the holder does so, the secured party need not comply with the holder's
demand under subsection (a)(3).
c. (c) [Application of noncash proceeds.] A secured party need not apply
or pay over for application noncash proceeds of disposition under
Section 9-610 unless the failure to do so would be commercially
24
 unreasonable. A secured party that applies or pays over for application
noncash proceeds shall do so in a commercially reasonable manner.
d. (d) [Surplus or deficiency if obligation secured.] If the security
interest under which a disposition is made secures payment or
performance of an obligation, after making the payments and
applications required by subsection (a) and permitted by subsection (c):
i. (1) Unless subsection (a)(4) requires the secured party to apply or
pay over cash proceeds to a consignor, the secured party shall
account to and pay a debtor for any surplus; and
ii. (2) The obligor is liable for any deficiency
e. (e) [No surplus or deficiency in sales of certain rights to payment.] If
the underlying transaction is a sale of accounts, chattel paper, payment
intangibles, or promissory notes:
i. (1) the debtor is not entitled to any surplus; and
ii. (2) the obligor is not liable for any deficiency.
f. (f) [Calculation of surplus or deficiency in disposition to person
related to secured party.] The surplus or deficiency following a
disposition is calculated based on the amount of proceeds that would
have been realized in a disposition complying with this part to a
transferee other than the secured party, a person related to the secured
party, or a secondary obligor if:
i. (1) the transferee in the disposition is the secured party, a person
related to the secured party, or a secondary obligor; and
ii. (2) the amount of proceeds of the disposition is significantly below
the range of proceeds that a complying disposition to a person
other than the secured party, a person related to the secured party,
or a secondary obligor would have brought.
iii. Low Price Disposition Rule: Solves problem where secured
creditor buys property at a very low price and then seeks a
deficiency in a very large amount
iv. Only applies when secured creditor did everything right but the
amount of proceeds is still “significantly below”
v. No safe harbor here
g. (g) [Cash proceeds received by junior secured party.] A secured party
that receives cash proceeds of a disposition in good faith and without
knowledge that the receipt violates the rights of the holder of a security
interest or other lien that is not subordinate to the security interest or
agricultural lien under which the disposition is made:
i. (1) takes the cash proceeds free of the security interest or other
lien;
ii. (2) is not obligated to apply the proceeds of the disposition to the
satisfaction of obligations secured by the security interest or other
lien; and
iii. (3) is not obligated to account to or pay the holder of the security
interest or other lien for any surplus.

VII. “Why Secured Transactions?”: Rationale and Basic Examples

a. Interest rate: essentially attempting to calculated risk (people pay a little bit more to
make up for those who will not pay)
25
 b. Secured Transactions really operate in risk
c. Hypo (Unsecured):
i. $100 is assets & $200 in debt. One lender is owed $110 (.55). Other lender is
owed $90 (.01). Probability of default is 1% (.01).
ii. If lender defaults, he will get share of assets, debt, & interest.
iii. Lender one: .01(-110 + .55(100)) = .55 extra will be paid
iv. Lender two: .01(-90 + .45(100)) = .45 extra will be paid
v. Debtor will be paying an extra $1.00 (.55+.45)
d. Hypo (Secured):
i. First lender is unsecured. Second lender is secured.
ii. Lender two: .01(-90 + 90) = 0 charged in extra interest
iii. Don't need to include risk (lower interest risk)
iv. Theory behind Article 9
e. Secured transactions often put risk on those who are least able to spread it & afford it
f. Secured transactions are important to allow expansion of business (use assets as
collateral) > originally meant to be better for everyone by spreading cost, but big
lenders are better at minimizing cost

VIII. Bankruptcy & the Automatic Stay

a. State Law v. Federal Law

i. State: quick, cheap, hierarchy, business usually dies
ii. Federal (bankruptcy): collaborative, collective, possible for business to survive
1. Discharge: permanent forgiveness of debt
2. Extension or Debt Adjustment: rescheduling of repayment
3. Consider whether company will be worth more/less as a “going concern”
or as a liquidated entity (rescue)
iii. Federal law supersedes state law (once bankruptcy process begins, fed law
controls; rights under state law can be preempted by filing for bankruptcy)

b. Vocabulary (B=Bankruptcy; N=Non-bankruptcy)

i. Debt: sum of money owing (B & NB), fluctuates as interests, attorneys fees,
and collections expenses are incurred, and payments are made
ii. Discharging debt: permanently enjoins creditor from attempting to collect
iii. Nonrecourse: discharged debt that cannot be enforced against debtor
iv. "Claim" in B: amount of debt owed to creditor under NB law at time B case is
filed (amount actually owed) > claim is important in determining creditor's
rights in B cases
c. Filing for Bankruptcy
i. Easy switch from state law to bankruptcy > just filing fee & additional forms
ii. Don’t need to be insolvent to file bankruptcy
iii. Unsecured creditors may force a bankruptcy (rare)
iv. Two Things Happen Upon Filing:
1. Bankruptcy estate (all debtor's property) is automatically created
2. Stay (injunction) against all collection activities is automatically imposed
(11 USC § 362)
a. (a) Except as provided in subsection (b) of this section, a petition filed
under § 301, 302, or 303 of this title, or an application filed under

26
 section 5(a)(3) of the Securities Investor Protection Act of 1970,
operates as a stay, applicable to all entities, of:
i. (3) any act to obtain possession of property of the estate or of
property from the estate or to exercise control over property of
the estate;
ii. (4) any act to create, perfect, or enforce any lien against property
of the estate;
iii. (5) any act to create, perfect, or enforce against property of the
debtor any lien to the extent that such lien secures a claim that
arose before the commencement of the case under this title;
iv. (6) any act to collect, assess, or recover a claim against the
debtor that arose before the commencement of the case under
this title
b. Essentially, the stay prevents secured creditor from taking any action to
create, perfect, or enforce any security interests
c. [Note: The automatic stay is like a preliminary injunction. Discharge at
the end of bankruptcy proceedings is like a permanent injunction.]

d. Lifting the Stay

i. Balance policy in bankruptcy of restructuring & maximizing/preserving value
with protecting financing
ii. Secured creditor has property interest in some assets (unlike unsecured assets) >
at least some due process requirements
iii. 11 USC § 362(d): On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided under subsection (a)
of this section, such as by terminating, annulling, modifying, or conditioning
such stay—
1. (1) [Lack of Adequate Protection]: for cause, including the lack of
adequate protection of an interest in property of such party in interest
2. (2) [No Good Bankruptcy Reason to Wait]: with respect to a stay of an act
against property under subsection (a) of this section, if— (In re Craddock-
Terry Shoe Corporation)
a. (A) the debtor does not have an equity in such property (equity could go
toward paying off unsecured creditors; secured creditors are not really
affected); and
b. (B) such property is not necessary to an effective reorganization
(preserve value)
iv. Adequate Protection
1. § 361 tells us we can get adequate protection (no definition)
2. Creditor wants to argue that bankruptcy proceeding is hurting the creditor
and so he should get compensated in period installments, lien on other
property, etc. (ex. depreciation of a vehicle)
3. “Adequate protection” tries to ensure that C’s lien position will be the same
as before the bankruptcy proceeding started
v. Note: Bankruptcy Code does not say what “value” is or how to determine it
vi. Secured creditor tends to use these rules as leverage for negotiation

e. Types of Bankruptcy Cases

i. Chapter 7
27
 1. Debtor surrenders all of the debtor's non-exempt assets to a bankruptcy
trustee & receives a discharge of all of the debtor's dischargeable debt >
liquidation
2. Debts excluded from discharge: domestic support obligations, most taxes,
debt incurred through fraud, student loans
3. Secured creditors: entitled to repossess collateral unless debtor redeems it
for cash or "reaffirms" all or part of it in side deal w/ creditor (reaffirmation
is highly regulated)
4. Trustee appointed who collects assets, liquidates assets, & pays out to
creditors according to priority pro rata
5. Not corporate & partnership debtors
6. Mostly human debtors
ii. Chapter 11
1. Debtor usually remains in possession of property of estate during case
2. Debtor can continue to operate business & manage financial affairs
3. Debtor proposes plan to restructure debt (reduce amount owing, reschedule
repayment, or both)
4. Creditors can vote against plan, but court can "cram down" plan against
creditors if it respects priority rights & promises to pay each creditor at
least as much as creditor would receive under Chapter 7
5. If plan is confirmed, debotor's obligations replace original obligations &
debt is discharged
6. Individuals filing under Chap 11 have these rules & special rules (similar to
Chap 13) rules apply
7. Old creditors come out of bankruptcy as new shareholders (old
shareholders are wiped out)
iii. Chapter 13
1. Only available to individual debtors whose unsecured debts are less than
$337,000 & whose secured debts are less than ~$1 million
2. Disposable income: income remaining after various allowances for living
expenses, including payments to secured creditors for homes and
automobiles
3. Debtor proposes a plan ot pay all of the debtor's disposable income to
unsecured creditors over period of 3-5 years if debtor's income is below
state median or 5 years if above
4. Creditors do not vote
5. Debtor receives discharge of debtor's dischargeable debts & keeps all
property, not just exempt property
6. Old creditors come out of bankruptcy as new shareholders (old
shareholders are wiped out)

Chap. 7 Corporate Chap 11 Indiv Chap. 11 Chap. 13

Eligibility Indiv & Corp Corp Indiv Indiv who meets
debt limits
Nature Liquidation Debtor proposes & Debtor proposes Debtor proposes
court confirms & court confirms & court confirms
restructuring plan restructuring plan restructuring plan
Duration of Plan N/A No limit 5 years 3-5 years

28
Possession Trustee Debtor Debtor Debtor
(Rarely Trustee) (Rarely Trustee)
Creditor Minimal May form May form May object
Involvement committees, vote, & committees, vote,
object & object
Time of ~90 days At plan confirmation Upon completion Upon completion
Discharge after filing of payments of payments

f. Distribution of Assets
i. Claims against estate are accelerated at bankruptcy filing & whole debt will be
resolved during case
ii. 11 USC § 502: Allowance of Claims or Interests
1. Creditor files one-page proof of claim > describes debt & states that it
remains outstanding (attached contract)
2. Deemed allowed (eligible to share in distribution made in bankruptcy case)
unless a party in interest objects
iii. 11 USC § 1111 (Chapter 11 Cases):
1. Even easier: debtor files list of creditors & amounts owing to each
2. Proof of claim is not necessary if not disputed
iv. Very little incentive for debtor to dispute claim in B
1. Determination that debt is owed does not lead to seizure
2. If claim is disputed, there is an evidentiary hearing > court can estimate
amount & proceed if resolution of a claim threatens to delay case
3. If debtor had legal defense in NB, then B estate will have same defense > but
if court determines full amount is owed, the claim will be allowed
4. Debtor will probably conclude it is not worth the additional cost of litigating
v. 11 USC § 502(b): Objections- If there is an objection, the court shall determine
the amount of claim as of date of filing
1. Accelerates the principal
2. Secured creditor is owed entire principal but only the amount of interest that
was owed as of the date of filing (stops the running of additional interest)

vi. Secured Creditors

1. 11 USC § 506(a)(1): Allowed claim (total amount owed under 502) is a
secured claim to the extent of the value of such creditor's interest in the
estate's interest in such property
i. Such value shall be determined in light of purpose of the valuation & of
proposed disposition or use of such property, and in conjunction with any
hearing on such disposition or use or on a plan affecting such creditor's
rights [Court is not bound by particular decision about value made at an
earlier stage of the case]
2. Claim may be part secured & part unsecured (bifurcated)
3. Hypo: SC with truck worth 8,000 as collateral. 10,000 debt
a. Allowed secure claim = 8000 (whole amount > bankruptcy protects
secured creditor's property interest in value)
b. Allowed unsecured claim = 2000 (goes into the pot with other unsecured
claims > percentage pro rata payment)
4. Hypo: SC with truck worth 18,000 as collateral. 10,000 debt.
a. 506(a)(1) says it is secured to extent of the full amount of the claim
29
 b. SC would get $10,000 before estate & unsecured creditors get anything
c. Unsecured creditors are then paid out of the equity
5. 11 USC § 506(b): To extent secured claim is secured by property the value of
which is greater than the amount of such claim, there shall be allowed to the
holder of such claim interest on such claim and any reasonable fees, costs,
or charges provided for under agreement or state statute
a. Attorneys fees and costs must be reasonable
b. Payment of attorneys fees and costs by debtor must be provided for under
agreement or state statute
c. Hypo: SC with truck worth 18,000 as collateral. 10,000 debt + interest >
SC would get the $10,000 value + interest up to the amount of the
collateral
6. "Undersecured" creditor: not enough collateral, bifurcate claim, gets up to
amount of collateral (which is less than debt)
7. "Oversecured" creditor: entire claim is accrued claim & he gets post-petition
interests and fees
a. Interest, attorneys fees, and costs can be accrued only to the extent that
the value of the collateral exceeds the amount of the claim secured by it
8. 11 USC § 554: Gives trustee right to abandon any collateral that is
burdensome or of inconsequential value
a. Ceases to be property of the estate & ownership reverts to debtor >
secured creditor must still move to lift the stay before continuing with
foreclosure
b. Ex: Collateral is worth less than the lien so that all the debtor's interest in
the collateral is bare ownership
9. 11 USC § 363: Trustee may sell collateral inside or outside the ordinary
course of business
a. Chapter 7
i. Trustee sells property in whatever manner trustee thinks will
maximize net proceeds (broad leeway)
ii. When trustee liquidates property of estate, trustee ordinarily sells
only debtor's equity in property subject to a security interest,
because that is all the estate has succeeded to under B (sale is
subject to secured creditor's lien)
iii. Sale terminates automatic stay with regard to the collateral >
bankruptcy case might continue but collateral would no longer be a
part of it > the secured creditor could then foreclose its liens, if
there had not been a bankruptcy
iv. Under some circumstances, trustee can sell collateral "free and clear
of liens" > secured claim then would be limited by the value of the
proceeds (not just value of collateral)
v. Trustee who incurs reasonable, necessary costs and expenses of
preserving or disposing of property securing an allowed secured
claim may recover them from the property
10. 11 USC § 1325: Plan (Chapter 11 & 13) re-defines relationship between
debtors & creditors
a. (a)(5)(A): Court shall confirm if the holder has accepted the plan
b. (a)(5)(C): Debtor surrenders the property to the holder

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 c. “Cram Down Power”: confirmation of plan by the court to which creditor
does not agree
i. Amount will be the minimum repayment that the court will consider
"fair & equitable"
d. (a)(5)(B)(i): Court shall confirm a plan if the plan provides that:
i. (I)The holder of such claim retain the lien securing such claim until
the earlier of:
1. (aa) the payment of the underlying debt determined under
nonbankruptcy law; or
2. (bb) discharge under section 1328; and
ii. (II) if the case under this chapter is dismissed or converted without
completion of the plan, such lien shall also be retained by such
holder to the extent recognized by applicable nonbankruptcy law
iii. Plan must specify that the creditor retain its lien, but after
confirmation, the lien secures only the new debt
e. (a)(5)(B)(ii): The value, as of the effective date of the plan, of property to
be distributed under the plan on account of such claim is not less than the
allowed amount of such claim
i. Payment must have a "value' as of the effective date of the plan of
that amount
ii. Question arises regarding how to determine value where payment is
in monthly installments with interest (enough interest to
compensate creditor for time delay and risk associated)
iii. Calculating Appropriate Interest (Till v. SCS Credit Corporation)
1. Start with prime rate (what is best borrower being charged)
2. How much worse than the best borrower are you
3. If there is a market, you look to it to determine the rate
4. If there is no market, look at risk-free rate and then adjust it

vii. Unsecured Creditors

1. Amount of unsecured claim in B: amount owed on debt under NB laws as of
moment the petition is filed
2. If creditor's contract provides for debtor to pay attorneys fees or other fees,
those amounts are included in the amount of the claim, as long as they were
incurred prior to time of filing
3. Amount of unsecured claim does not grow w/ interest during B case (may
collect rate of interest after default up until the time of filing)
4. Pro rata distribution: each unsecured creditor gets percentage of debt based
on size of claim (premised on equality)
5. Example: Creditor A is owed $100. Creditor B is owed $900. Debtor only
has $100. A would get $10, B would get $90

IX. Attachment

a. Two Steps in Secured Transaction

i. Attachment = Enforceable
 Process you go through that gives you a valid security interest
ii. Perfection = Protection from 3rd Parties

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 1. Debtor must authorize a financing statement in the public records in order for
a secured party to have priority over some other creditors
b. § 9-201: Except as otherwise provided in [the Uniform Commercial Code], a security
agreement is effective according to its terms between the parties, against purchasers
of the collateral, and against creditors.

c. § 9-203(b): Attachment is not enforceable unless three formalities are established

(Exception to § 9-201):
i. Agreement
ii. Value
iii. Rights in Collateral

d. The three formalities can occur in any order: once all three are met, the security
interest attaches
e. Attachment may occur with respect to different things at different times (may occur
as soon as debtors get property, even without creditor knowing about it) > Watch out
for timing of attachment questions

f. Formality One: Agreement

i. One of Two Components Must Be Met:
1. Collateral must be in possession of secured creditor OR
 "In possession": only applied to tangible things
 Oral agreement is ok
2. Debtor must have "authenticated a security agreement which contains a
description of the collateral"
 "Security agreement" (§ 9-102): agreement that creates or provides
for a security interest (agreement may be express or implied)
o No need for special language; liberal test (“provides for”)
o Court will look at the context to try to determine the intent: need to
be able to find language that at least seems to recognize some
interest in property (in exchange for payment or performance)
o Safest to just say "I hereby grant you an Article 9 security interest"
 “Authenticated” = signed; execute or otherwise adopt a symbol, or
encrypt or similarly process a record in whole or in part, with the
present intent of the authenticating person to identify the person and
adopt or accept a record (§ 9-102)
 “Record” (§ 9-102(a)(69)): info inscribed on a tangible medium or
which is stored in an electronic or other medium and is retrievable in
perceivable form > need not be permanent or indestructible, not human
memory (according to comments)
o Oral security agreement is not enforceable if the collateral is not in
the possession of the secured creditor (even if the debtor agrees)
 “Description of Collateral” (important for both attachment & notice)
o Test of sufficiency is whether description makes identification of
collateral described possible
o Not required to be exact and detailed (rejection of “serial number”
test)

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  Note: If you decide to use a serial number and use the wrong
one, courts are split as to whether ID is sufficient
o Dual Filter Test: In order for creditor to have valid & attached
security interest:
 (1) Are the words that describe the collateral sufficient?
 (2) Contract- What was the agreement of the parties?
(Court may choose to reform contract to meet what the
parties intended)
o UCC 9-108
 (a) Except as otherwise provided in subsections (c), (d), and
(e), a description of personal or real property is sufficient,
whether or not it is specific, if it reasonably identifies what is
described
 (b) Except as otherwise provided in subsection (d), a
description of collateral reasonably identifies the collateral if
it identifies the collateral by:
 (1) specific listing;
 (2) category;
 (3) except as otherwise provided in subsection (e), a type
of collateral defined in the Uniform Commercial Code
 (4) quantity;
 (5) computational or allocational formula or procedure; or
 (6) except as otherwise provided in subsection (c), any
other method, if the identity of the collateral is
objectively determinable.
 (c) A description of collateral as “all the debtor's assets” or
“all the debtor's personal property” or using words of similar
import does not reasonably identify the collateral.
 [You’ll have a debt but no lien]
 (e) A description only by type of collateral defined in the
Uniform Commercial Code is an insufficient description of:
 (1) a commercial tort claim; or
 (2) in a consumer transaction, consumer goods, a
security entitlement, a securities account, or a commodity
account.
o UCC Categories of Collateral
 Tangible
 Consumer goods
 Farm products
 Inventory: goods, other than farm products, which:
o (A) are leased by a person as lessor;
o (B) are held by a person for sale or lease or to be
furnished under a contract of service;
o (C) are furnished by a person under a contract of
service; or
o (D) consist of raw materials, work in process, or
materials used or consumed in a business.

33
 Equipment (goods other than inventory, farm products, or
consumer goods)
 Quasi-Tangible
 Instruments (debt represented by paper)
 Chattel paper
 Intangible
 Commercial tort claim
 Accounts (including credit card receivables)
 General intangible
o Any personal property (not real estate), including
things in action, other than accounts, chattel paper,
commercial tort claims, deposit accounts, documents,
goods, instruments, investment property, letter-of-
credit rights, letters of credit, money, and oil, gas, or
other minerals before extraction
o Includes payment intangibles and software
o Composite Document
 Where description is missing from the security agreement,
courts will generally pull together authenticated documents to
determine agreement
 E-mail may be problematic (authenticated?)
 Ex: Description says “See Exhibit A” and Exhibit A is
missing
o UCC 9-204: After-Acquired Property
 (a) Except as otherwise provided in subsection (b), a security
agreement may create or provide for a security interest in
after-acquired collateral.
 Court may imply that “after-acquired property is included
for (Stoumbos v. Kilimnik):
o (1) Inventory
o (2) Accounts receivable
 Implication might be negated by language such as
“inventory on hand” or “inventory currently in store”
 For all other types of collateral, it is necessary to state
expressly that after-acquired property included
 Secured creditor can put a lien on all after-acquired
property without any new consideration
 (b) A security interest does not attach under a term
constituting an after-acquired property clause to:
 (1) consumer goods, other than an accession when given
as additional security, unless the debtor acquires rights in
them within 10 days after the secured party gives value;
or
o After-acquired property clause will only last for 10
days
o However, after each advance (giving of new value),
the clause revives itself for 10 days

34
 o Example: if credit card company gave credit card
after initial loan, it would revive itself again for 10
days because the credit card is giving value
 (2) a commercial tort claim
o Policy is trying to allow debtor to obtain new
financing with rise of tort claim
o In theory, secured creditor must wait till after the
tort is committed and can then get the debtor to sign
over the interest, granting a lien on tort claim
o However, creditor could seek agreement for tort
claim to be security interest on existing financing too
(example: clause in agreement requiring debtors to
notify creditor of commercial tort claim & to sign
amendment adding tort claims when they arise to
SA)
 (c) A security agreement may provide that collateral secures,
or that accounts, chattel paper, payment intangibles, or
promissory notes are sold in connection with, future
advances or other value, whether or not the advances or value
are given pursuant to commitment.
 Secured creditor can secure more than the current debt,
such as future advance made by the secured creditor
 Security agreement can ensure that any advance we make
under line of credit will be secured by the collateral
 Can voluntarily decide to secure future extensions of
credit by current collateral > capture what would be an
otherwise unsecured loan
 May include later arising tort claims (whatever kind or
nature, arising in contract or tort) > could be a debt (tort
claim can be a debt but not a collateral)
 Example: Bank gives me $3 million line of credit. I
borrow $1 million. Paying up and down on line of credit.
Paying interest on amount of debt that I have at any given
time (rather than interest on entire amount). > After-
acquired property clause in inventory & accounts
receivable + other indebtedness clause secures the ball of
debt without caring about each particular advance or what
particular items (as long as value of items exceeds line of
credit)
 Example: Boat loan for $10000. Car loan for $20,000.
Both have other indebtedness clauses. Cross-
collaterized so that boat secured both loans and car
secures both loans.
 Dragnet Clauses: drag in all debts and property that you now
or may later own
o Formula to Capture All Personal Property:
 "All” +
 “Present and future (or hereafter aquired)" +

35
  "Inventory, farm products, equipment, quasi-intangibles . . .
general intangibles" (look to definition of general intangibles
for a complete list of all the categories > include everything
except consumer goods or commercial tort claims) +
 "As defined by the UCC"
3. [Technically, they are broken up differently in § 9-203(b)(3) but they
basically fall into these two groupings]

g. Formality Two: Value (§ 1-204)

i. A person gives value for rights if the person acquires them:
1. In return for a binding commitment to extend credit or for the extension of
immediately available credit, whether or not drawn upon and whether or not
a charge-back is provided for in the event of difficulties in collection;
2. As security for, or in total or partial satisfaction of, a preexisting claim;
a. Note: Even includes past (pre-existing) consideration: person gives
value if he acquires rights as security for a pre-existing debt (creditor
does not promise anything new in return). No need for new
consideration.
3. By accepting delivery under a preexisting contract for purchase; or
4. In return for any consideration sufficient to support a simple contract
ii. Virtually always met (low threshold) > exists anytime you take an SI for an
existing debt or take SI in a new debt
iii. All this matters for is when creditor gets the lien
iv. Only time value would not be met is when creditor does not give loan

h. Formality Three: Rights in Collateral

i. Can't give what you don't have: can transfer only as much as I own; can only
give SI in things that I own
ii. If debtor owns limited interest in property & grants security interest in property,
security interest generally only attached to that limited interest (nemo dat non
habet)
iii. Parties sometimes deliberately create security interests in property in which
debtor has something less than outright ownership (ex: lessee's rights under
lease; contract to purchase property)
iv. Some owners who acquire rights in property by fraud have power to transfer to
bona fide purchasers ownership rights they do not have (same true for security
interests)
v. Power to convey rights (don't look to Article 9- look to law elsewhere to see if
person had power to convey rights > often agency law)
1. Agency
a. If agent has full power to transfer rights, then the principal will be
liable for those transfers > SI created by those transfers will be valid
b. Note: the principal might have a separate cause of action against the
agent in the agent acts wrongfully or abuses authority
2. Thief
a. Can validly convey stolen money
b. Even though he had no rights in the money, he had the right to convey
good title > SI would be valid

36
i. Proceeds
i. Proceeds concept allows you to grab property you did not originally agree to
(may be completely different from what was described in security agreement)
ii. UCC § 9-203(f): The attachment of a security interest in collateral gives the
secured party the rights to proceeds provided by Section 9-315 and is also
attachment of a security interest in a supporting obligation for the collateral.
1. Where old stuff generates new stuff ("proceeds"), security interest
automatically attaches to new stuff, with slight limitation in 9-315
(identifiable)
2. Proceeds can also generate their own proceeds (proceeds of proceeds is
proceeds) > allows security interest to continue to grow
iii. UCC § 9-315: Secured Party's Rights on Disposition of Collateral and in
Proceeds.
1. (a) Except as otherwise provided in this article and in Section 2-403(2):
a. (1) A security interest or agricultural lien continues in collateral
notwithstanding sale, lease, license, exchange, or other disposition
thereof unless the secured party authorized the disposition free of the
security interest or agricultural lien; and
b. (2) A security interest attaches to any identifiable proceeds of
collateral.
2. (b) Proceeds that are commingled with other property are identifiable
proceeds:
a. (1) If the proceeds are goods, to the extent provided by Section 9-336;
and
b. (2) If the proceeds are not goods, to the extent that the secured party
identifies the proceeds by a method of tracing, including application of
equitable principles, that is permitted under law other than this article
with respect to commingled property of the type involved
iv. UCC § 9-102(a)(64): “Proceeds”, except as used in Section 9-609(b), means the
following property:
1. (A) whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral;
2. (B) whatever is collected on, or distributed on account of, collateral;
a. Move to asset-generation model (things that you get from your
collateral)
b. Ex: Car being leased out of two days: $ from the lease is still proceeds
3. (C) rights arising out of collateral;
a. Ambiguous; leads to most controversy
b. Ex: Lien on slot-machines at casino. If casino sells slot machine, what
they get when they sell it is proceeds. Can creditor argue that the
quarters put into the slot machine are proceeds? > Could argue that
quarters are only put into machine because machine is there
c. Might lead to increased conflicts between lenders claiming same
“proceeds” that arose from two different collateral
4. (D) to the extent of the value of collateral, claims arising out of the loss,
nonconformity, or interference with the use of, defects or infringement of
rights in, or damage to, the collateral; or
a. Old model of replacement collateral

37
 5. (E) to the extent of the value of collateral and to the extent payable to the
debtor or the secured party, insurance payable by reason of the loss or
nonconformity of, defects or infringement of rights in, or damage to, the
collateral.
v. Value Tracing Concepts
1. SI will follow value of collateral through some transformations
2. Look to equitable principles outside Article 9
3. Lowest intermediate balance method
a. Presume that debtor will spend his own money first (FIFO)
b. If money in an account at any time dips beneath the amount that the
lender is owed, the lender will be entitled to lowest amount it reached
(Ask what was the smallest number was between time it went in and
time it went out)
c. If money in an account stays above the amount that the lender is owed
for the entire time, then the lender will be entitled to full amount
contributed
4. Proceeds give secured creditors more that what they would be entitled to
under strict value-tracing
5. Other value-tracing concepts: product, profit, rents, offspring

vi.
vii. Tracing Collateral Value in Bankruptcy
1. Bankruptcy Code § 361: No new liens after automatic stay
2. Bankruptcy Code § 552(a): Bankruptcy cuts off after-acquired property
clauses
3. Bankruptcy Code § 552(b):
a. (1) Proceeds Rule Continues to Work in Bankruptcy: Except as
provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this
title, if the debtor and an entity entered into a security agreement before
the commencement of the case and if the security interest created by
such security agreement extends to property of the debtor acquired
before the commencement of the case and to proceeds, products,
offspring, or profits of such property, then such security interest
extends to such proceeds, products, offspring, or profits acquired by the
estate after the commencement of the case to the extent provided by
such security agreement and by applicable nonbankruptcy law, except

38
 to any extent that the court, after notice and a hearing and based on the
equities of the case, orders otherwise
i. Note: Unresolved question of what definition of “proceeds” to use
since the new Article 9 definition does not match up with the
Bankruptcy Code definition, which would not catch post-petition
assets

b. (2) Exception- Equities of the Case:

i. Estate might be able to get some of the proceeds back under the
equities of the case
ii. Argument that, although secured creditor is entitled to the
collateral plus proceeds under (b)(1), the secured creditor should
have to reimburse the estate for expenses that went into enhancing
the value of the collateral (most you could justify giving =
collateral + proceeds – costs)
iii. In re Delbridge (Formula Approach): Cash collateral = average
depreciation of capital / (average depreciation of capital + farmer's
average direct expenses + average market value of labor) * Average
dollar proceeds of milk sold
1. Looking at how much the creditor gave and how much the
debtor gave > Share in proportion to how much each put in
2. Take into account depreciation (how much of collateral was
used up)
4. Bankruptcy Code § 506(c): How to determine amount of secured claim
a. Supported by value of collateral
b. Under/over secured
c. Trustee may recover from property the reasonable necessary costs and
expenses of preserving property to benefit of holder of such claim
5. Other provisions of the code (ex: “adequate assurance”) ensure that secured
creditor will at minimum get the collateral back

X. Perfection
a. Perfection concerns “priority” when there are conflicting claims between secured
creditors & third parties
b. Perfected secured creditors beat unsecured creditors (Peerless Packing Co. v.
Malone & Hyde Inc.- court rejected “unjust enrichment” in context of Article 9)

c. Two Goals of Perfection

i. Establish priority
ii. Give warning that there is a security interest

d. Giving Warning

i. General Rule: Filing System

1. UCC 9-310(a) Except as otherwise provided in subsection (b) and Section 9-
312(b), a financing statement must be filed to perfect all security interests
2. Theory of filing system: provide actual & constructive notice of security
interests

39
3. Multiplicity of Filing Systems
a. State Law: Each county in US has-
i. Real estate recording system: real estate mortgages & Article 9
fixture filings (UCC 9-501(a)(1))
ii. Separate systems for property tax liens, local tax liens, and money
judgments
iii. State UCC filing systems (not GA or LA)
iv. Certificate of tile systems: notices of SI in automobiles (& separate
systems for boats or mobile homes)
v. Specialized systems for other kinds of collateral
1. Article 9 does not apply to insurance policies (other than
assignment by or to health-care provider of health-care
insurance receivable) (UCC 9-109(d))
vi. UCC §9-521: Form you use when you use the UCC system
b. Federal Law
i. UCC 9-109(c)(1): Article 9 does not apply to the extent that a
statute, regulation, or treaty of the United States preempts
ii. SI in Copyrights: must file in Copyright Office (National
Peregrine v. Capitol Federal Savings & Loan Association of
Denver)
1. Problematic Collateral: Websites
a. Register in copyright office as “general intangible”
probably
b. J. Kozinski says a new filing is needed each time content
changes; otherwise you are not perfected (even if financing
statement said “present and hereafter acquired GIs”)
c. Other cases have said that Kozinski's rule applies to
registered copyrights, but unregistered copyrights can be
perfected in UCC filing statement.
d. Creates a problem for secured creditor who had SI in
unregistered copyright if debtor decides to register
copyright immediately before bankruptcy (not perfected)
iii. SI in aircrafts: must file with Aircraft Registry (Federal Aviation
Administration); pre-empts state
iv. SI in Patents: file in state UCC office (does not pre-empt UCC);
might also file notice with patent/trademark office but not required
c. In practice, it’s probably usually wise to just file in both state & federal
systems

4. Article 9 Financing Statement Requirements

a. (1) Name of debtor
b. (2) Name of secured creditor
c. (3) Indication of collateral covered (reasonable description of
collateral)
d. (4) Mailing address of secured creditor
e. (5) Mailing address of debtor
f. (6) Indication of whether debtor is an individual or a corporation
g. (7) Type of organization
h. (8) Debtor's jurisdiction of organization
40
 i. (9) Debtor's organization ID Number

5. “Big Three”: financing statement is sufficient (perfected) only if it contains

items 1–3 (UCC 9-502)
a. Name of Debtor
i. Remember: Debtor is the entity with the interest in the collateral
ii. UCC 503(a): A financing statement sufficiently provides the name
of the debtor:
1. Organization: (1) Except as otherwise provided in paragraph
(3), if the debtor is a registered organization or the collateral is
held in a trust that is a registered organization, only if the
financing statement provides the name that is stated to be the
registered organization's name on the public record most
recently filed with or issued or enacted by the registered
organization's jurisdiction of organization which purports to
state, amend, or restate the registered organization's name;
2. Non-Organization: (4) in other cases:
a. (A) if the debtor has a name, only if the financing statement
provides the individual or organizational name of the
debtor; and
i. General Partnerships: legal name of a general
partnership is the name by which it is generally known
in the community; don't use the two individual debtor
names if the entity has a name
b. (B) if the debtor does not have a name, only if it provides
the names of the partners, members, associates, or other
persons comprising the debtor, in a manner that each name
provided would be sufficient if the person named were the
debtor.
iii. Trade Names
1. UCC 9-503(b)(1): A financing statement that provides the
name of the debtor in accordance with subsection is not
rendered ineffective by the absence of a trade name or other
name of the debtor
2. UCC 9-503(c): Only trade name does not sufficiently comply

b. Name of Secured Party

i. Perhaps not as necessary as 9-502 indicates at first glance (see
details under errors below) > Needs to be there but does not need
to be correct

c. Indication of Collateral
i. UCC 5-504: A financing statement sufficiently indicates the
collateral that it covers if the financing statement provides:
1. (1) a description of the collateral pursuant to Section 9-108; or
2. (2) an indication that the financing statement covers all assets
or all personal property.
ii. Just need to indicate that searcher should inquire more
(“indication”)
41
 iii. “All,” “presently owned and hereafter acquired,” etc. are not
needed
iv. Best method: “All assets” > not necessary to be more specific,
perfected in anything you got under security agreement but not in
anything more than that (However, debtor may not authorize this
indication)

6. Rejection of Financing Statement

a. UCC 9-516(b)(5): Filing does not occur with respect to a record that a
filing office refuses to accept because, in the case of an initial financing
statement or an amendment that provides a name of a debtor which was
not previously provided in the financing statement to which the
amendment relates, the record does not:
i. (A) provide a mailing address for the debtor; or
ii. (B) indicate whether the name provided as the name of the debtor
is the name of an individual or an organization

7. Filing Office Errors in Rejection

a. Filing office is not allowed to use human judgment (verify accuracy of
the information) > As long as information is provided, the financing
statement should be accepted (example: State listed as “MJ” should still
be accepted and SI should be considered perfected)
b. If Secretary of State rejects something it should not have rejected, it is
perfected

8. Filing Office Errors in Acceptance

a. UCC 9-516(a): Except as otherwise provided in subsection (b),
communication of a record to a filing office and tender of the filing fee
or acceptance of the record by the filing office constitutes filing.
b. If Secretary of State accepts something it should not have accepted, it is
perfected

9. Filer Errors in Accepted Filings

a. UCC 9-338: If a security interest or agricultural lien is perfected by a
filed financing statement providing information described in Section 9-
516(b)(5) which is incorrect at the time the financing statement is filed:
i. (1) the security interest or agricultural lien is subordinate to a
conflicting perfected security interest in the collateral to the extent
that the holder of the conflicting security interest gives value in
reasonable reliance upon the incorrect information; and
ii. (2) a purchaser, other than a secured party, of the collateral takes
free of the security interest or agricultural lien to the extent that, in
reasonable reliance upon the incorrect information, the purchaser
gives value and, in the case of chattel paper, documents, goods,
instruments, or a security certificate, receives delivery of the
collateral.
42
 iii. [Reliance has to be in good faith]

b. Errors in Debtor’s Name

i. UCC 9-506(a): A financing statement substantially satisfying the
requirements of this part is effective, even if it has minor errors or
omissions, unless the errors or omissions make the financing
statement seriously misleading
ii. Test (Normally): Reasonably Diligent Searcher
iii. Inquiry Notice: Question of whether it gave the searcher a
warning (red flag)
iv. UCC 9-506(c): If a search of the records of the filing office under
the debtor's correct name, using the filing office's standard search
logic, if any, would disclose a financing statement that fails
sufficiently to provide the name of the debtor in accordance with
Section 9-503(a), the name provided does not make the financing
statement seriously misleading.
1. New York Search Logic Rules:
a. Human judgment does not play a role
b. No distinction is made between upper and lower case
letters.
c. All periods, commas and dashes (hyphens) are replaced
with a space
d. All other punctuation marks, and all accent marks, are
disregarded.
e. The words, phrases and abbreviations set forth in
subparagraph 143-4.3(c)(4)(i), if located at the end of the
name, will be disregarded. After the words, phrases and
abbreviations set forth have been removed from the end of
the name, the name will be reviewed again, and if the word
“COMPANY” or the abbreviation “CO” is then located at
the end of the name, such word or abbreviation will be
disregarded.

f. The following words, anywhere in the name, will be

disregarded: “the”, “of”, “and” and “or”
g. All spaces, and all characters other than letters (A to Z) or
numbers (0 to 9), will be disregarded.

43
 h. Individual name category & organizational name category
will search for stored name that is an exact match to the
name specified
i. An initial in the First Name field or Middle Name field of a
search is treated as the logical equivalent of all names that
begin with such initial
i. Searching for “John Smith” will not retrieve “J. Smith”
ii. However, searching for “J. Smith” will retrieve “John
Smith” > An initial in the field of filing is not treated as
the logical equivalent
j. Abbreviation of a word is not treated as the logical
equivalent of the word.
k. Nicknames are not treated as the logical equivalent of a
given name.
2. IACA Search Logic Rules
a. Punctuation marks and accents are disregarded. Only the
letters A to Z in upper or lower case, the numbers 0, 1, 2, 3,
4, 5, 6, 7, 8, and 9, and the symbol &, in any combination,
are considered in conducting the search.
b. No distinction between upper and lowercase letters
c. "The" is disregarded at beginning but not elsewhere
d. Longer list of noise words than NY
3. [Review handout for examples]

c. Errors in Secured Party’s Name

i. UCC 9-506 Comment 2: Inasmuch as searches are not conducted
under the secured party's name, and no filing is needed to continue
the perfected status of security interest after it is assigned, an error
in the name of the secured party or its representative will not be
seriously misleading. However, in an appropriate case, an error of
this kind may give rise to an estoppel in favor of a particular holder
of a conflicting claim to the collateral.
ii. Only time when mistake in secured party's name would be fatal
would be if the name of the secured party was left out
iii. May be problematic though when agents or subsidiaries are
involved > hard to show whose financing statement it is
1. Should be a separate financing statement for each creditor
(even if the same agent is filing for multiple creditors

d. Errors in Indication of Collateral

i. Avoid incorporation by reference (ex: reference to security
agreement): arguably does not give the searcher notice
ii. Putting wrong serial number (if you decide to indicate by serial
number) could be fatal

10. Authorization to File Financing Statement

a. UCC 9-509(a)(1): A person may file an initial financing statement,
amendment that adds collateral covered by a financing statement, or
amendment that adds a debtor to a financing statement only if the
44
 debtor authorizes the filing in an authenticated record or pursuant to
subsection (b) or (c)
b. UCC 9-509(b): By authenticating or becoming bound as debtor by a
security agreement, a debtor or new debtor authorizes the filing of an
initial financing statement, and an amendment, covering:
i. (1) the collateral described in the security agreement; and
ii. (2) property that becomes collateral under Section 9-315(a)(2),
whether or not the security agreement expressly covers proceeds.
c. UCC 9-510(a): A filed record is effective only to the extent that it was
filed by a person that may file it under Section 9-509.
i. If financing statement indicates more collateral than security
agreement, financing statement as far as it was authorized—for the
collateral covered by the security agreement (deaggregation)
ii. If financing statement originally included collateral that was not
part of security agreement, but then later obtains a security interest
in that collateral, it might be considered a ratification of the
original financing statement but probably would not date back to
the date of filing (would date to acquiring of SI instead)
d. UCC 9-509(c): By acquiring collateral in which a security interest or
agricultural lien continues under Section 9-315(a)(1), a debtor
authorizes the filing of an initial financing statement, and an
amendment, covering the collateral and property that becomes
collateral under Section 9-315(a)(2).
e. If you file financing statement without debtor's authorization, the
financing statement is not effective

11. Additional Considerations: Timing of Filing

a. UCC 9-502(d): A financing statement may be filed before a security
agreement is made or a security interest otherwise attaches
b. Might want to captured after-acquired party
c. Would be authenticated authorization (no automatic authorization)
d. Establishes priority early (priority will date back to filing of financing
statement for each piece of after-acquired property)

ii. Three Exceptions to General Filing Requirement:

1. Collateral in Possession of Secured Party
a. UCC 9-310(b)(6): The filing of a financing statement is not necessary
to perfect a security interest in collateral in the secured party’s
possession under UCC 9-313
b. UCC 9-313(a): Except as otherwise provided in subsection (b), a
secured party may perfect a security interest in negotiable documents,
goods, instruments, money, or tangible chattel paper by taking
possession of the collateral
i. Money: UCC 913(b)(3): A security interest in money may be
perfected only by the secured party's taking possession under
Section 9-313.
1. UCC 1-201(24): “Money” means a medium of exchange
currently authorized or adopted by a domestic or foreign
government. The term includes a monetary unit of account
45
 established by an intergovernmental organization or by
agreement between two or more countries.
ii. Negotiable Document in Goods: UCC 912(c): While goods are in
the possession of a bailee that has issued a negotiable document
covering the goods:
1. (1) a security interest in the goods may be perfected by
perfecting a security interest in the document; and
2. (2) a security interest perfected in the document has priority
over any security interest that becomes perfected in the goods
by another method during that time.
iii. Nonnegotiable Document in Goods: UCC 912(d): While goods
are in the possession of a bailee that has issued a nonnegotiable
document covering the goods, a security interest in the goods may
be perfected by:
1. (1) issuance of a document in the name of the secured party;
2. (2) the bailee's receipt of notification of the secured party's
interest; or
3. (3) filing as to the goods.
iv. Instrument: UCC 9-102(47): “Instrument” means a negotiable
instrument or any other writing that evidences a right to the
payment of a monetary obligation, is not itself a security agreement
or lease, and is of a type that in ordinary course of business is
transferred by delivery with any necessary indorsement or
assignment.
1. Does not include: (i) investment property, (ii) letters of credit,
or (iii) writings that evidence a right to payment arising out of
the use of a credit or charge card or information contained on or
for use with the card.
v. Chattel Paper: UCC 9-102(11): “Chattel paper” means a record or
records that evidence both a monetary obligation and a security
interest in specific goods
1. If a transaction is evidenced by records that include an
instrument or series of instruments, the group of records taken
together constitutes chattel paper.
2. Not necessarily a negotiable note
3. If something is part of chattel paper, then perfection by
possession is sufficient
c. Taking possession beats filing in establishing priority

2. Collateral in Control of Secured Party

a. "Control" is a new concept: involves mostly a possession concept but
also the idea of endorsement
b. UCC 9-314(a): A security interest in investment property, deposit
accounts, letter-of-credit rights, or electronic chattel paper may be
perfected by control of the collateral under Section 9-104, 9-105, 9-106,
or 9-107
i. Deposit Account: UCC 9-312(b)(1): A security interest in a deposit
account may be perfected only by control under Section 9-314;

46
 1. UCC 9-102(29): “Deposit account” means a demand, time,
savings, passbook, or similar account maintained with a bank.
The term does not include investment property or accounts
evidenced by an instrument.
2. Includes what we commonly know as bank accounts
3. If there is no certificate that meets qualifications for
instrument, then it is a deposit account
4. Three ways of establishing control: UCC 9-104(a)
a. (1) The secured party is the bank with which the deposit
account is maintained;
b. (2) The debtor, secured party, and bank have agreed in an
authenticated record that the bank will comply with
instructions originated by the secured party directing
disposition of the funds in the deposit account without
further consent by the debtor; or
c. (E) The secured party becomes the bank's customer with
respect to the deposit account.
ii. Letter-of-Credit Rights: UCC 9-312(b)(2): Except as otherwise
provided in Section 9-308(d), a security interest in a letter-of-credit
right may be perfected only by control under Section 9-314
iii. Accounts: debt owed to a business; not dispensable writings
iv. Investment property: includes “securities account”
1. UCC 8-106(d)(3): A purchaser has “control” of a security
entitlement if another person has control of the security
entitlement on behalf of the purchaser or, having previously
acquired control of the security entitlement, acknowledges that
it has control on behalf of the purchaser
c. Certificated & Uncertificated Securities:
i. UCC 8-102(4): “Certificated security” means a security that is
represented by a certificate.
ii. UCC 8-106(a): A purchaser has “control” of a certificated security
in bearer (no name of recipient; person who bears it can just use it)
form if the certificated security is delivered to the purchaser.
iii. UCC 8-106(b): A purchaser has “control” of a certificated security
in registered form (registered to a particular person) if the
certificated security is delivered to the purchaser, and:
1. (1) the certificate is indorsed to the purchaser or in blank by an
effective indorsement; or
2. (2) the certificate is registered in the name of the purchaser,
upon original issue or registration of transfer by the issuer.
iv. UCC 8-106(c): A purchaser has “control” of an uncertificated
security if:
1. (1) the uncertificated security is delivered to the purchaser; or
2. (2) the issuer has agreed that it will comply with instructions
originated by the purchaser without further consent by the
registered owner.

3. Automatic Perfection

47
a. UCC 9-309(1): The following security interests are perfected when they
attach (automatic):
i. (1) A purchase-money security interest in consumer goods, except
as otherwise provided in Section 9-311(b) with respect to consumer
goods that are subject to a statute or treaty described in Section 9-
311(a)
ii. (3) A sale of a payment intangible;
iii. (4) A sale of a promissory note (instrument);
b. PMSI
i. Consumer goods are those primarily for household or personal
purposes (value does not matter- Gallatin Nat'l Bank v. Lockovich)
1. Two Basic Requirements:
a. Purchase money security interest must be securing its own
purchase price (enabling loan or advance of credit)
b. Loan or advance has to be in fact used so (otherwise you are
not perfected; tracing concepts might reveal that it was not
so used)
ii. UCC 9-103(b): A security interest in goods is a purchase-money
security interest:
1. (1) to the extent that the goods are purchase-money collateral
with respect to that security interest;
2. (2) if the security interest is in inventory that is or was purchase-
money collateral, also to the extent that the security interest
secures a purchase-money obligation incurred with respect to
other inventory in which the secured party holds or held a
purchase-money security interest; and
3. (3) also to the extent that the security interest secures a
purchase-money obligation incurred with respect to software in
which the secured party holds or held a purchase-money
security interest.
iii. UCC 9-103(a): Definitions
1. (1) “Purchase-money collateral” means goods or software that
secures a purchase-money obligation incurred with respect to
that collateral; and
2. (2) “Purchase-money obligation” means an obligation of an
obligor incurred as all or part of the price of the collateral (first
party creditor-seller gave $) or for value given to enable the
debtor to acquire rights in or the use of the collateral if the value
is in fact so used (third party creditor).
iv. UCC 9-311: state law carve-outs; ex: cars were carved out by
certificate of title laws
v. UCC 9-313: carve-out for certificate of title too: go through state
process to perfect car, possession wouldn't work with
possession/filing and wouldn't be automatic
vi. Cases are unclear regarding what happens if creditor consolidates
loan with an earlier loan, putting them both into the same
agreement: many say that this is a loss of PMSI (consumer-
protection concerns)
1. Allocation rules for non-consumer goods in UCC 9-103:
48
 a. (h) The limitation of the rules in subsections (e), (f), and (g)
to transactions other than consumer-goods transactions is
intended to leave to the court the determination of the
proper rules in consumer-goods transactions. The court
may not infer from that limitation the nature of the proper
rule in consumer-goods transactions and may continue to
apply established approaches.
2. However, these do not apply to PMSI since they are not
consumer goods transactions
4. [Review Handout]

iii. Risks: Filer v. Searcher

1. Filer: first secured party
a. Burden to get debtor's name
b. Burden to get description right was less (more on searcher)
2. Searcher: second secured party
a. After searching UCC records, searcher also has to perform additional
inquiry
b. Determine whether there is possession
c. Determine whether there is control

e. Maintaining Perfection
i. Lapse & Bankruptcy
1. Filing encumbers assets for 5 years from date of filing (UCC 9-515(a))
2. After 5 years, financing statement will lapse and creditor will become
unperfected unless a continuation is filed (UCC 9-515(c))
a. If the security interest or agricultural lien becomes unperfected upon
lapse, it is deemed never to have been perfected as against a purchaser
of the collateral for value.
i. Purchaser of collateral for value: purchaser who takes by purchase
(by sale, security interest)
1. UCC 1-201(29) “Purchase” means taking by sale, lease,
discount, negotiation, mortgage, pledge, lien, security interest,
issue or reissue, gift, or any other voluntary transaction
creating an interest in property.
2. Purchaser "for value": gives "something more"
3. Secured creditor still "gives value" even if he does not give
anything more
ii. Would not include bankruptcy trustees or liens creditors, since they
take by operation of law rather than voluntariness
1. If debtor files for bankruptcy before a continuance is filed, his
position relative to the bankruptcy trustee is frozen but other
debtors might still pose a threat
2. Not a violation of the stay to file a continuance (allowed to
maintain or continue perfection)
b. After 6 years, the Secretary of State is allowed to discard

49
 c. Malpractice can arise if attorney does not file/contact client about filing
continuation statement
3. Continuation statement must be filed with six months before the expiration
of the 5-year period (cannot be earlier than 6 months or later than 6 months)
(UCC 9-515(d))
4. Effect of Filing Continuation: Effectiveness of the initial financing
statement continues for a period of five years commencing on the day on
which the financing statement would have become ineffective in the absence
of the filing (UCC 9-515(e))
a. Filing a new statement instead of a continuation: the priority date is the
later date of filing (not the original filing date of the other statement >
lose to everyone who came in the middle)
b. Continuation statement is a form of amendment
5. UCC 9-515 contains Uniform Form of Written Financing Statement and
Amendment
6. Authorization:
a. Continuations and amendments need to be authorized by the secured
party of record (9-510, 9-509) > amendments that terminate financing
statement early, remove collateral
b. Debtor has to authorize amendments adding a debtor or adding a
collateral
c. Authorization is not a matter of public record > private agreement
7. Termination Statement (UCC 9-513)
a. (a) A secured party shall cause the secured party of record (might be
someone different than secured party, for example through assignment)
for a financing statement to file a termination statement for the
financing statement if the financing statement covers consumer goods
and:
i. (1) there is no obligation secured by the collateral covered by the
financing statement and no commitment to make an advance, incur
an obligation, or otherwise give value; or
ii. (2) the debtor did not authorize the filing of the initial financing
statement.
b. (b) To comply with subsection (a), a secured party shall cause the
secured party of record to file the termination statement:
i. (1) within one month after there is no obligation secured by the
collateral covered by the financing statement and no commitment
to make an advance, incur an obligation, or otherwise give value;
or
ii. if earlier, within 20 days after the secured party receives an
authenticated demand from a debtor.
c. (c) In cases not governed by subsection (a), within 20 days after a
secured party receives an authenticated demand from a debtor, the
secured party shall cause the secured party of record for a financing
statement to send to the debtor a termination statement for the financing
statement or file the termination statement in the filing office if:
i. (1) except in the case of a financing statement covering accounts
or chattel paper that has been sold or goods that are the subject of
a consignment, there is no obligation secured by the collateral
50
 covered by the financing statement and no commitment to make
an advance, incur an obligation, or otherwise give value;
ii. (2) the financing statement covers accounts or chattel paper that
has been sold but as to which the account debtor or other person
obligated has discharged its obligation;
iii. (3) the financing statement covers goods that were the subject of a
consignment to the debtor but are not in the debtor's possession;
or
iv. (4) the debtor did not authorize the filing of the initial financing
statement.
d. UCC 9-625: Debtor, consumer obligor, or person named as a debtor in
a filed record, as applicable, may recover $500 in each case from a
person that fails to cause the secured party of record to file or send a
termination statement as required by Section 9-513(a) or (c)
e. Searcher who sees a termination statement is still required to do due
diligence (do not know if it was authorized or mistaken)
f. Possible to file an information filing with an explanatory statement in
the records

ii. Changes of Name

1. UCC 9-512: Amendment of Financing Statement
a. (a) Subject to Section 9-509, a person may add or delete collateral
covered by, continue or terminate the effectiveness of, or, subject to
subsection (e), otherwise amend the information provided in, a
financing statement by filing an amendment that:
i. (1) Identifies, by its file number, the initial financing statement to
which the amendment relates; and
ii. (2) if the amendment relates to an initial financing statement filed
[or recorded] in a filing office described in Section 9-501(a)(1),
provides the information specified in Section 9-502(b)
iii. [Amendments are deemed valid at original date of filing except for
those adding new collateral or a new debtor]
iv. [Amendments removing information have retroactive effect]
b. (b) Except as otherwise provided in Section 9-515, the filing of an
amendment does not extend the period of effectiveness of the financing
statement.
c. (c) A financing statement that is amended by an amendment that adds
collateral is effective as to the added collateral only from the date of the
filing of the amendment
2. New lender needs to make sure that every financing statement earlier in time
is terminated (or there is a private agreement regarding priority) because it
could appear a loan was paid off but then the financing statement could be
amended to add a new loan after searcher looked
3. Authorization to Amend (UCC 9-509)
a. (a) A person may file an initial financing statement, amendment that
adds collateral covered by a financing statement, or amendment that
adds a debtor to a financing statement only if the debtor authorizes the
filing in an authenticated record or pursuant to subsection (b) or (c)

51
 b. (d) A person may file an amendment other than an amendment that
adds collateral covered by a financing statement or an amendment that
adds a debtor to a financing statement only if:
i. (1) the secured party of record authorizes the filing; or
ii. (2) the amendment is a termination statement for a financing
statement as to which the secured party of record has failed to file
or send a termination statement as required by Section 9-513(a) or
(c), the debtor authorizes the filing, and the termination statement
indicates that the debtor authorized it to be filed.
4. Effect of Certain Events on Effectiveness of Financing Statement (UCC 9-
507)
a. (b) [Information becoming seriously misleading.] Except as
otherwise provided in subsection (c) and Section 9-508, a financing
statement is not rendered ineffective if, after the financing statement is
filed, the information provided in the financing statement becomes
seriously misleading under Section 9-506.
i. Generally this prefers filer over the searcher
ii. Puts a lot more burden—the risk of change—on searchers
iii. If it was not seriously misleading at the time it was filed, it is still
effective (Ex: Did any equipment used to be inventory? If so, person
with inventory in financing statement will win.)
b. (c) [Change in debtor's name.] If the name that a filed financing
statement provides for a debtor becomes insufficient as the name of the
debtor under Section 9-503(a) so that the financing statement becomes
seriously misleading under Section 9-506:
i. The financing statement is effective to perfect a security interest in
collateral acquired by the debtor before, or within four months after,
the filed financing statement becomes seriously misleading; and
1. Same as 9-507(b) Rule in many respects: still perfected in
collateral as long as it was properly perfected in that collateral
originally > even though financing statement is now seriously
misleading due to change in debtor’s name
2. If interest in collateral was perfected within 4 months of name
change, it will continue to be perfected for as long as the
statement is continued without needing to amend the debtor’s
name
ii. The financing statement is not effective to perfect a security interest
in collateral acquired by the debtor more than four months after the
filed financing statement becomes seriously misleading, unless an
amendment to the financing statement which renders the financing
statement not seriously misleading is filed within four months after
the financing statement became seriously misleading.
1. [Judge “seriously misleading” by search logic standards]
2. Problem is after-acquired property:
3. If interest in collateral is acquired more than 4 months after
name change, the statement is not effective to perfect the
interest in this collateral unless the debtor’s name is amended >
If amended before the four months pass, then you will remain
perfected under the existing financing statement
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 4. Hypo: Filing a new financing statement in the debtor’s new
name > Perfected but the priority date does not date back >
File a continuation statement instead
5. Best practice would be to check every 4 months to see if entity
or individual has changed its name
6. [If asked to issue a legal opinion, you might write “We have
assumed, with your permission, that the only individual/entity
name was ever ABC Corp.]
5. Effectiveness of Financing Statement if New Debtor Becomes Bound by
Security Agreement (§ 9-508)
a. (a) [Financing statement naming original debtor.] Except as
otherwise provided in this section, a filed financing statement naming
an original debtor is effective to perfect a security interest in collateral
in which a new debtor has or acquires rights to the extent that the
financing statement would have been effective had the original debtor
acquired rights in the collateral.
i. “New debtor”: entity that has become liable for obligations
(including security agreements) of old debtor under existing law
ii. Think mergers (& look to merger law)
iii. The security interest is attached
b. (b) [Financing statement becoming seriously misleading.] If the
difference between the name of the original debtor and that of the new
debtor causes a filed financing statement that is effective under
subsection (a) to be seriously misleading under Section 9-506:
i. (1) the financing statement is effective to perfect a security
interest in collateral acquired by the new debtor before, and
within four months after, the new debtor becomes bound under
Section 9-203(d); and
ii. (2) the financing statement is not effective to perfect a security
interest in collateral acquired by the new debtor more than four
months after the new debtor becomes bound under Section 9-
203(d) unless an initial financing statement providing the name of
the new debtor is filed before the expiration of that time.
1. Hypo: Because XYZ became bound by security agreement, the
after-acquired property clause in original agreement with
ABC will continue to attach. What if the after-acquired
property is not acquired though until eight months after
merger? > It will be attached but not perfected.
c. (c) [When section not applicable.] This section does not apply to
collateral as to which a filed financing statement remains effective
against the new debtor under Section 9-507(a).
6. Name Change & New Debtor: What if the surviving entity changes its name
at the time of the merger?
a. Use a combination of 9-508 and 9-507: commonality is the 4 month
period
b. After merger, “new debtor” is typically the entity that becomes liable
for the obligations of the old debtor (check state law) > if that is true,
then the new debtor is responsible for all obligations, including the
security agreement
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 7. Individual Debtors (Points above Focus on Corporate World)
a. Lien continues from debtor to buyer1 (and so on as it pases from
b. 9-315(a)(1): a security interest or agricultural lien continues in
collateral notwithstanding sale, lease, license, exchange, or other
disposition thereof unless the secured party authorized the disposition
free of the security interest or agricultural lien; and
i. Secured party’s knowledge/consent of sale is not enough > has to
consent specifically to release from the lien
c. 9-507(a): A filed financing statement remains effective with respect to
collateral that is sold, exchanged, leased, licensed, or otherwise
disposed of and in which a security interest or agricultural lien
continues, even if the secured party knows of or consents to the
disposition
i. Exception: Buyer in the ordinary course (will cover later)
ii. Buying assets instead of merging companies prevents you from being
a “new debtor” (not assuming obligations of old debtor); however,
the security interest existing in those assets will continue with them
through asset acquisition > Secured creditor will not get any after-
acquired property though from a sale of assets

iii. Changes in Collateral (Proceeds)

1. 9-203(f): Attachment of SI in collateral gives SC right to proceeds
2. 9-315(a)(2): A security interest attaches to any identifiable proceeds of
collateral
a. You get a lien, but do you have priority?
3. 9-315(c): A security interest in proceeds is a perfected security interest if the
security interest in the original collateral was perfected.
4. 9-315(d): A perfected security interest in proceeds becomes unperfected on
the 21st day after the security interest attaches to the proceeds unless:
a. (1) the following conditions are satisfied:
i. (A) a filed financing statement covers the original collateral;
1. Can you trace it for identifiability
ii. (B) the proceeds are collateral in which a security interest may be
perfected by filing in the office in which the financing statement
has been filed; and
1. Same office rule: If you would have filed the financing
statement for the proceeds in the same place where you would
have filed for original collateral, you are perfected.
2. Hypo: Security interest in car and security interest in
inventory. Same office rule will not apply because car uses
certificate of title system > you will not be in the same office.
iii. (C) the proceeds are not acquired with cash proceeds;
1. Must be a direct barter > If there is an intermediate step where
it goes through cash proceeds, the same office rule does not
apply
b. (2) the proceeds are identifiable cash proceeds; or
i. 9-102(9): Cash proceeds” means proceeds that are money, checks,
deposit accounts, or the like.
ii. Continue to be perfected without doing anything
54
 iii. Could have perfected an interest in proceeds of cash by filing,
even though cash itself would typically require control to perfect
iv. Needs to be “identifiable” > lowest intermediate balance
c. (3) the security interest in the proceeds is perfected other than under
subsection (c) when the security interest attaches to the proceeds or
within 20 days thereafter.
5. Summary: Perfection
a. Automatically get perfection for 20 days if perfected in original stuff
b. Perfect new stuff (c)(3): take steps to perfect prior to end of 20 days, get
continuing security interest
c. Cash proceeds (c)(2): continues to be perfected after 21st day
d. Same office rule (c)(1): if the way you would perfect new stuff is by
filing statement in same office and new stuff is direct proceeds, then
you do not have to do anything at all to perfect

iv. Choice of Law: Problems of State-Based Systems

1. UCC 1-301: parties can choose which law applies in agreements between
one another > but this does not apply for perfection (dealing with third
parties who are not subject to these agreements)
a. (c)(8): If one of the following provisions of [the Uniform Commercial
Code] specifies the applicable law, that provision governs and a
contrary agreement is effective only to the extent permitted by the law
so specified: Sections 9-301 through 9-307.

2. UCC 9-501: Filing Office

a. (a) Except as otherwise provided in subsection (b), if the local law of
this State governs perfection of a security interest or agricultural lien,
the office in which to file a financing statement to perfect the security
interest or agricultural lien is:
i. (1) the office designated for the filing or recording of a record of a
mortgage on the related real property, if:
1. (A) the collateral is as-extracted collateral or timber to be cut;
or
2. (B) the financing statement is filed as a fixture filing and the
collateral is goods that are or are to become fixtures; or
3. For fixtures, timber to be cut, or as-extracted collateral (real-
estate related collateral), financing statement will need to be
filed in state where that stuff is located and in the real-estate
records > This collateral is usually subject to Article 9, but
here the recordation piece is thrown back into real estate
ii. (2) the office of [ ] [or any office duly authorized by [ ]], in all
other cases, including a case in which the collateral is goods that
are or are to become fixtures and the financing statement is not
filed as a fixture filing.

3. UCC 9-301: Choice of Law for Perfection: Except as otherwise provided

in Sections 9-303 through 9-306, the following rules determine the law
governing perfection, the effect of perfection or nonperfection, and the
priority of a security interest in collateral
55
 a. (1) Except as otherwise provided in this section, while a debtor is
located in a jurisdiction, the local law of that jurisdiction governs
perfection, the effect of perfection or nonperfection, and the priority of
a security interest in collateral.
i. General Rule: You look to where the debtor is (not to where the
collateral is) > If debtor is in NY, then look to § 9-501 of NY UCC,
which will tell us "If the local law of this state, then the office in
which to file a financing statement is . . . . [the state whose law you
are looking at]"
ii. Does not govern relationship between the parties > just perfection
b. (2) While collateral is located in a jurisdiction, the local law of that
jurisdiction governs perfection, the effect of perfection or
nonperfection, and the priority of a possessory security interest in that
collateral.
i. Exception to General Rule: Location of collateral only governs
choice of law for perfection where there the security interest is
possessory
c. (3) Except as otherwise provided in paragraph (4), while negotiable
documents, goods, instruments, money, or tangible chattel paper is
located in a jurisdiction, the local law of that jurisdiction governs:
i. (A) perfection of a security interest in the goods by filing a fixture
filing;
ii. (B) perfection of a security interest in timber to be cut; and
1. "Standing timber": once you have a contract to cut standing
timber, the trees fall under Article 9 (not real estate law)
iii. (C) the effect of perfection or nonperfection and the priority of a
nonpossessory security interest in the collateral.
iv. Exception to General Rule: For quasi-tangibles, look to local law
where the instrument is if any of these three things are present
d. (4) The local law of the jurisdiction in which the wellhead or minehead
is located (where the property is located) governs perfection, the effect
of perfection or nonperfection, and the priority of a security interest in
as-extracted collateral.
i. Minerals from mines can be subject to Article 9 as soon as they
come out of the ground to surface level > "as-extracted collateral"
ii. Fixtures are also governed by Article 9

4. UCC 9-307: Location of Debtor

a. (a) [“Place of business.”] In this section, “place of business” means a
place where a debtor conducts its affairs.
b. (b) [Debtor's location: general rules.] Except as otherwise provided in
this section, the following rules determine a debtor's location:
i. (1) A debtor who is an individual is located at the individual's
principal residence.
1. Can't be by agreement of parties because this is still involving
third parties
ii. (2) A debtor that is an organization and has only one place of
business is located at its place of business.

56
 iii. (3) A debtor that is an organization and has more than one place
of business is located at its chief executive office.
1. Look to 9-307(e) for answer to this question for registered
organizations > place of incorporation
2. A partnership is not a registered organization: file where
office is if there is only one office; file where “chief executive
office” is (Secured creditor could file everywhere or could
require the partnership to incorporate in order to get a loan)
c. (e) [Location of registered organization organized under State law.]
A registered organization that is organized under the law of a State is
located in that State.
i. We are talking about corporations and some alternative
organizations (LLP, LLC, limited partnerships, professional
corporations)
ii. “State” only refers to states in the United States (not foreign)
> For foreign countries, the “other organization” rule applies
d. (c) [International Issues] Subsection (b) applies only if a debtor's
residence, place of business, or chief executive office, as applicable, is
located in a jurisdiction whose law generally requires information
concerning the existence of a nonpossessory security interest to be
made generally available in a filing, recording, or registration
system as a condition or result of the security interest's obtaining
priority over the rights of a lien creditor with respect to the collateral.
If subsection (b) does not apply, the debtor is located in the District of
Columbia.
i. If the foreign country has a system roughly equivalent to
Article 9 filing system, then use that system (same idea of
having one place for filing each security interest)
ii. If the foreign country does not have a system like that, then
the debtor is located in D.C. (probably always wise to follow
in D.C. as a background)
iii. Foreign corporation would be treated an unregistered
organization

5. UCC 9-316: Debtor’s Change of Location

a. (a) [General rule: effect on perfection of change in governing law.]
A security interest perfected pursuant to the law of the jurisdiction
designated in Section 9-301(1) or 9-305(c) remains perfected until the
earliest of:
i. (1) the time perfection would have ceased under the law of
that jurisdiction;
ii. (2) the expiration of four months after a change of the
debtor's location to another jurisdiction; or
1. Four months after move to perfect > if you do so, then
you will remain perfected (effect of continuation)
iii. (3) the expiration of one year after a transfer of collateral to a
person that thereby becomes a debtor and is located in another
jurisdiction.

57
 1. When debtor transfers collateral to a debtor in a
different state, there is a one year grace period for the
debtor to file a new financing statement
b. (b) [Security interest perfected or unperfected under law of new
jurisdiction.] If a security interest described in subsection (a) becomes
perfected under the law of the other jurisdiction before the earliest time
or event described in that subsection, it remains perfected thereafter. If
the security interest does not become perfected under the law of the
other jurisdiction before the earliest time or event, it becomes
unperfected and is deemed never to have been perfected as against a
purchaser of the collateral for value (real buyers and secured
creditors).
i. Retrospecitvely unperfected as to real buyers and secured
creditors if you do not file within the four months
c. Examples:
i. After moving, you immediately file a financing statement in
the new state. You do not file a continuation statement in the
old state. > You are still continuously perfected because the
new initial financing statement has the effect of continuing the
previous one. Perfection will date back to the date of the
original filing statement in the previous state.
ii. Four months after moving, you still have not filed a new
financing statement. You are unperfected as to trustees, lien
creditors, secured parties, and buyers who assert an interest
after this point.
iii. While you are living in your old state, a trustee, lien creditor,
secured party, and buyer all assert interests in collateral that
you have filed a financing statement for. You move to a new
state and let four months go without filing a new financing
statement. > Trustee and secured creditor will still be
subordinate to you. Secured party and buyer will move ahead
of you in priority.
iv. You file a financing statement with an after-acquired property
clause in New York. You then buy Item1 while in NY. You
move to Florida, where you then buy Item2 within 4 months
of moving. After 4 months pass, you still have not filed a new
financing statement in Florida and you acquired Item3.
1. PERFECTION = ATTACHMENT + APPLICABLE
PERFECTION STEP
a. In order for the above rules to apply, attachment must
take place in the same state as the applicable
perfections step that has already been taken. The grace
period does not apply to after-acquired property that is
acquired after the move.
2. Your interest in Item1 is perfected during the first four
months of your move because perfection occurred while in
NY. (Rights attached in NY + Financing statement)
3. Your interest in Item2 was never perfected. Rights in this
collateral did not arise in NY, so there was no perfection
58
 in NY. A financing statement should have been filed in
Florida.
4. Your interest in Item3 was never perfected. Rights in this
collateral did not arise in NY and the property was
acquired after the 4-month grace period.

v. Certificate of Title Systems

1. UCC 9-311(a)(3) [Security interest subject to other law.]: Except as
otherwise provided in subsection (d), the filing of a financing statement is
not necessary or effective to perfect a security interest in property subject to
a statute of another jurisdiction which provides for a security interest to be
indicated on certificate of title as a condition or result of the security
interest's obtaining priority over the rights of a lien creditor with respect to
the property.
2. For certain types of collateral (such as cars), SI must be perfected in a
separate system from UCC filing system
3. In US, SIs in motor vehicles are perfected by notation on certificate of title
in all but a few states > secured creditor must deliver its application for
notation of its lien on the certificate of title to the Department in order to be
perfected
4. Exception- UCC 9-311(d) [Inapplicability to certain inventory.]: During
any period in which collateral subject to a statute specified in subsection
(a)(2) is inventory held for sale or lease by a person or leased by that person
as lessor and that person is in the business of selling goods of that kind, this
section does not apply to a security interest in that collateral created by that
person.
a. Do not have to perfect on certificate of title as long as held in inventory
by person in business of selling goods of that kinds (merchant)
b. "In the business of selling goods of that kind": exception excludes
lessors (they still need to file in certificate of title system)

5. UCC 9-303: Perfection in Certificate of Title System

a. (a) [Applicability of section.] This section applies to goods covered by
a certificate of title, even if there is no other relationship between the
jurisdiction under whose certificate of title the goods are covered and
the goods or the debtor.
b. (c) [Applicable law.] The local law of the jurisdiction under whose
certificate of title the goods are covered governs perfection, the effect
of perfection or nonperfection, and the priority of a security interest in
goods covered by a certificate of title from the time the goods become
covered by the certificate of title until the goods cease to be covered by
the certificate of title.

6. UCC 9-316: Continuing Perfection

a. (d) [Goods covered by certificate of title from this state.] Except as
otherwise provided in subsection (e), a security interest in goods
covered by a certificate of title which is perfected by any method under
the law of another jurisdiction when the goods become covered by a
certificate of title from this State remains perfected until the security
59
 interest would have become unperfected under the law of the other
jurisdiction had the goods not become so covered.
i. If you have something like a boat motor that does not need to be
certificated in old state that does in new state, still perfected if
done as old state required
b. (e) [When subsection (d) security interest becomes unperfected
against purchasers.] A security interest described in subsection (d)
becomes unperfected as against a purchaser of the goods for value and
is deemed never to have been perfected as against a purchaser of the
goods for value if the applicable requirements for perfection under
Section 9-311(b) or 9-313 are not satisfied before the earlier of:
i. (1) the time the security interest would have become unperfected
under the law of the other jurisdiction had the goods not become
covered by a certificate of title from this State; or
ii. (2) the expiration of four months after the goods had become so
covered.
iii. If you are certificated under NC law, as goods remaining
certificated by that certificate of title, you are perfected.
iv. You may cease to be covered if a “clean certificate” is issued
(does not state liens).
v. If you cease to be covered by the NC certificate, then you are
perfected for 4 months.
vi. Certificate of title provides governing law until the security
interest ceases to be covered by that certificate

7. UCC 9-337: Priority of SI in Goods Covered by Certificate of Title:

If, while a security interest in goods is perfected by any method under the
law of another jurisdiction, this State issues a certificate of title that does not
show that the goods are subject to the security interest or contain a statement
that they may be subject to security interests not shown on the certificate:
a. (1) a buyer of the goods, other than a person in the business of selling
goods of that kind, takes free of the security interest if the buyer gives
value and receives delivery of the goods after issuance of the certificate
and without knowledge of the security interest; and
b. (2) the security interest is subordinate to a conflicting security interest
in the goods that attaches, and is perfected under Section 9-311(b), after
issuance of the certificate and without the conflicting secured party's
knowledge of the security interest.
c. You continue to be perfected unless a new certificate is issued.
d. If new certification does not show lien, SC will lose to buyer who buys
in reliance w/o knowledge of lien, unless buyer is a dealer (in business
of selling goods of that kind); will also lose to new secured creditor.
e. If buyer is in business of selling goods of that kind, of if the buyer/SC
knows about the lien, SC will win but only for up to four months.
f. Next person takes free of the lien (as long as they don't know about it)

8. UCC 9-335: Accessions

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 a. (a) [Creation of security interest in accession.] A security interest
may be created in an accession and continues in collateral that becomes
an accession.
i. Accession: one item of personal property affixed to another (where
one is not covered by a certificate of title)
b. (b) [Perfection of security interest.] If a security interest is perfected
when the collateral becomes an accession, the security interest remains
perfected in the collateral.
c. (c) [Priority of security interest.] Except as otherwise provided in
subsection (d), the other provisions of this part determine the priority of
a security interest in an accession.
d. (d) [Compliance with certificate-of-title statute.] SI in an accession is
subordinate to a SI in the whole which is perfected by compliance with
the requirements of a certificate-of-title statue under Section 9-311(b)
i. Law treats car a whole unit > SI is accessions is subordinated to SI
in the whole
ii. Regardless of order in which the 2 SIs were perfected & even
though the SI in the accession attached and became perfected
before accession was affixed and before SI in whole was created
e. (e) [Removal of accession after default.] After default, subject to Part
6, a secured party may remove an accession from other goods if the
security interest in the accession has priority over the claims of every
person having an interest in the whole.
i. Whichever SC had greater priority will still take first
ii. Bars holder of subordinate accessions interest from enforcing it,
rendering it virtually worthless

XI. Competitions for Collateral: Priority Rules

a. Basic Priority Rule: first in time has priority

i. Exception: PMSI (usually 20 day window)

b. Conflict 1: Lien Creditor (including Trustee) v. Secured Creditor

i. UCC 9-102(52): "Lien Creditor"- creditor who has acquired lien on property
involved by attachment (pre-judgment), levy, or the like
ii. Attachment: legal process in which P obtains writ & delivers it to sheriff who
then levies on property of the debtor (attachment is before judgment; execution
is after) > property is held by sheriff pending outcome of litigation

iii. Types of Lien Creditors

1. Judgment Creditor: unsecured creditor who won judgment against debtor,
obtained writ of execution, and obtained lien by levying on specific property
of the debtor
2. Trustee in Bankruptcy: has rights of hypothetical ideal lien creditor (no
debilitating history or knowledge) who obtained lien on all property of
debtor at instant bankruptcy case was filed

iv. UCC 9-317(a) [Conflicting security interests and rights of lien creditors.]
A security interest or agricultural lien is subordinate to the rights of:
61
 1. (1) a person entitled to priority under Section 9-322; and
2. (2) except as otherwise provided in subsection (e), a person that becomes a
lien creditor before the earlier of the time (first in time rule):
a. (A) the security interest or agricultural lien is perfected; or
b. (B) one of the conditions specified in Section 9-203(b)(3) is met and a
financing statement covering the collateral is filed.
i. If you file and sign security agreement with an after-acquired
property clause, and then sheriff levies, you win as secured creditor
ii. UCC 9-203(b)(3): Except as otherwise provided in subsections (c)
through (i), a security interest is enforceable against the debtor and
third parties with respect to the collateral only if one of the following
conditions is met:
1. (A) the debtor has authenticated a security agreement that
provides a description of the collateral and, if the security interest
covers timber to be cut, a description of the land concerned;
2. (B) the collateral is not a certificated security and is in the
possession of the secured party under Section 9-313 pursuant to
the debtor's security agreement;
3. (C) the collateral is a certificated security in registered form and
the security certificate has been delivered to the secured party
under Section 8-301 pursuant to the debtor's security agreement;
or
4. (D) the collateral is deposit accounts, electronic chattel paper,
investment property, or letter-of-credit rights, and the secured
party has control under Section 9-104, 9-105, 9-106, or 9-107
pursuant to the debtor's security agreement.
3. Examples:
a. Sheriff levies after attachment of SC’s interest but before filing. >
Judgment creditor will prevail over SC (because SC was not yet
perfected)
b. SC is perfected. Sheriff levies after perfection. > SC will win unless
there is an exception (for example, if the requirements for attachment are
not met under UCC 9-203).
i. Note: Under UCC 9-201, except as otherwise provided in [the
Uniform Commercial Code], a security agreement is effective
according to its terms between the parties, against purchasers of the
collateral, and against creditors. > Security agreement will govern.
c. SCI filed financing statement. Sheriff levied on collateral. After levy,
SC and debtor sign security agreement and loan of money is made. >
Judgment creditor will win (because SC was not perfected at time of
levy)

v. Exception: 317(e)- Except as otherwise provided in Sections 9-320 and 9-321,

if a person:
1. Files a financing statement
2. With respect to a purchase-money security interest
3. Before or within 20 days after the debtor receives delivery of the collateral,
4. The security interest takes priority
a. Over the rights of a buyer, lessee, or lien creditor
62
 b. Which arise between the time the security interest attaches and the time
of filing.
5. 20-day grace period gives debtor ability to purchase and take the goods,
while the creditor files the financing statement.
6. Examples:
a. SC acquires a PMSI. Sheriff levies. Then SC files. > If SC files within
20 days of delivery of the collateral, then SC will still beat the
intervening lien creditor
b. You buy a computer and give SC a PMSI. The computer is delivered
ten days later. Sheriff then levies on the computer. On day 28, SC files
financing statement. > SC will still have priority because 20 days runs
from the date of delivery, not attachment.
c. You buy a computer and give SC a PMSI. Sheriff then levies on the
computer. The computer is delivered ten days later. > Clock does not
start running until delivery. SC can still win if he files within 20 days of
delivery.
d. You buy a computer and give SC a PMSI. SC files. Sheriff then levies
on the computer. > SC wins.
vi. UCC 9-323(b) [Future Advances- Lien Creditor]: Except as otherwise
provided in subsection (c), a security interest is subordinate to the rights of a
person that becomes a lien creditor to the extent that the security interest secures
an advance made more than 45 days after the person becomes a lien creditor
unless the advance is made:
1. (1) without knowledge of the lien; or
2. (2) pursuant to a commitment entered into without knowledge of the lien.
3. Enables secured creditor to conduct one search at the time it begins its
lending relationship with debtor and make future advances w/o fear of
unknown lien creditors
4. SC can make advances (& have priority) for 45 days even if SC
learns/knows about the lien
5. 45 day rule makes it possible for advances to continue after secured creditor
finds out about levy while secured creditor determines next course of action
(like filing for bankruptcy)
6. After 45 days, SC would not have priority unless he did not know about the
lien or he entered into an agreement before he did not know about the lien

vii. Special Case: Trustee in Bankruptcy v. Secured Party

1. Treat trustee in bankruptcy the same as “ideal” lien creditor
a. Pretends that, at the moment bankruptcy is filed, trustee was owed $ at
that instant, trustee sued, trustee got judgment, and sheriff executed levy
b. “Strong Arm Power”: bankruptcy trustee or debtor in possession has
power to avoid most kinds of SIs that remain unperfected as of time of
filing of bankruptcy case
2. Bankruptcy Code § 544(a)(1): The trustee shall have, as of the
commencement of the case, and without regard to any knowledge of the
trustee or of any creditor, the rights and powers of, or may avoid any
transfer of property of the debtor or any obligation incurred by the debtor
that is voidable by a creditor that extends credit to the debtor at the time of
the commencement of the case, and that obtains, at such time and with
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 respect to such credit, a judicial lien on all property on which a creditor on a
simple contract could have obtained such a judicial lien, whether or not such
a creditor exists.
3. Bankruptcy trustee will try to show that SC was unperfected before
bankruptcy, because then SC’s secured claim is an unsecured claim

c. Bankruptcy Preference Power

i. Priority Under State Law: State law gives priority among unsecured creditors
based on order in which they take particular legal steps to collect their debts

ii. Priority Under Bankruptcy Law:

1. Unsecured are expected to file claims against the estate: paid pro rata, in
proportion to their claims
2. Preference Period: bankruptcy imposes policy of equal treatment of general
unsecured creditors retroactively for 1 year against creditors who are
"insiders" of debtor and for 90 days against those who are not
a. Trustee or debtor in possession can avoid any transfer made during
preference period that would have effect of preferring one unsecured
creditor over others
b. Prevents debtor from defeating bankruptcy policies by liquidating their
estate on eve of bankruptcy & giving SIs to favorite creditors
c. Once debtor is in bankruptcy, neither debtor nor trustee can prefer one
pre-petition secured creditor over another

3. What Security Interests Can Be Avoided as Preferential?

a. Bankruptcy Code § 547(b): Except as provided in subsections (c) and
(i) of this section, the trustee may avoid any transfer (including creation
& perfection of SIs) of an interest of the debtor in property—
b. (1) to or for the benefit of a creditor;
i. Must have already been creditor at time of receipt
c. (2) for or on account of an antecedent debt owed by the debtor
before such transfer was made;
i. Shelter from avoidance interests securing loans that were
secured at time they were made
d. (3) made while the debtor was insolvent;
e. (4) made [within preference period]—
i. (A) on or within 90 days before the date of the filing of the
petition; or
ii. (B) between ninety days and one year before the date of the
filing of the petition, if such creditor at the time of such
transfer was an insider; and
f. (5) that enables such creditor to receive more than such creditor
would receive if—
i. (A) the case were a case under chapter 7 of this title;
ii. (B) the transfer had not been made; and
iii. (C) such creditor received payment of such debt to the extent
provided by the provisions of this title.

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 iv. Improvement Test: To be avoidable, transfer must have
improved creditor's position, thus enabling the creditor who
to recover more than he would have if debtor had been
liquidated under Chapter 7 w/o making the transfer

4. Relation-Back Rules
a. Bankruptcy 547(e)(2): if a secured creditor perfects its SI within 30
days after interest takes effect between debtor and secured creditor
(attachment), the interest is deemed perfected as of the time it took
effect between debtor & secured creditor
b. Bankruptcy 547(e)(3): rustee cannot avoid PMSI provided that the
secured creditor disburses the loan proceeds at or after the signing of
the SA and perfects the interest within 30 days after debtor receive
possession of collateral
c. UCC 9-317(e): grace period for perfection of PMSI

d. Conflict 2: Secured Creditor v. Secured Creditor

i. Basic Rule: First to file or perfect has priority

1. UCC 9-322(a)(1): (a) [General priority rules.] Except as otherwise
provided in this section, priority among conflicting security interests and
agricultural liens in the same collateral is determined according to the
following rules: Conflicting perfected security interests and agricultural
liens rank according to priority in time of filing or perfection. Priority dates
from the earlier of the time a filing covering the collateral is first made or
the security interest or agricultural lien is first perfected, if there is no period
thereafter when there is neither filing nor perfection.
2. Priority date is the earlier of the dates on which the secured party filed with
respect to the interest or perfected it
3. Priority is retained as long as the holder remains continuously filed or
perfected

ii. Exception- UCC 9-325: Transferred Collateral

1. (a) [Subordination of security interest in transferred collateral.] Except
as otherwise provided in subsection (b), a security interest created by a
debtor is subordinate to a security interest in the same collateral created by
another person if:
a. (1) the debtor acquired the collateral subject to the security interest
created by the other person;
b. (2) the security interest created by the other person was perfected when
the debtor acquired the collateral; and
c. (3) there is no period thereafter when the security interest is unperfected.
d. SI perfected against a transferee is subordinated to those perfected
against the transferor > party that perfected before transfer has priority
2. (b) [Limitation of subsection (a) subordination.] Subsection (a)
subordinates a security interest only if the security interest:
a. (1) otherwise would have priority solely under Section 9-322(a) or 9-
324; or
b. (2) arose solely under Section 2-711(3) or 2A-508(5).
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iii. Priority in After-Acquired Priority
1. If it fits the description of the security agreement, then the filing covers the
property & priority dates from the time of filing

iv. Exception: Purchase-Money Security Interests

1. UCC 9-324: PMSI in collateral other than inventory has priority over a
conflicting SI in the same collateral if the PMSI is perfected not later than
20 days after debtor receives possession of the collateral
2. Rule governs only if parties make no agreement to the contrary
3. More than one creditor may have a valid PMSI in the same collateral
a. Both would have priority over any nonpurchase money SI
b. UCC 9-324(g)(1) gives seller's PMSI priority over cash-lender's PMSI
c. UCC 9-324(g)(2): refers issue of priority to UCC 9-322(a) when both
PMSIs are in favor of lenders rather than sellers > gives priority to first
to file or perfect
4. UCC 9-324(b): Perfected PMSI in inventory has priority over a conflicting
security interest in the same inventory, has priority over a conflicting
security interest in chattel paper or an instrument constituting proceeds of
the inventory and in proceeds of the chattel paper, if so provided in Section
9-330, and, except as otherwise provided in Section 9-327, also has priority
in identifiable cash proceeds of the inventory to the extent the identifiable
cash proceeds are received on or before the delivery of the inventory to a
buyer, if:
a. (1) the purchase-money security interest is perfected when the debtor
receives possession of the inventory;
b. (2) the purchase-money secured party sends an authenticated notification
to the holder of the conflicting security interest;
c. (3) the holder of the conflicting security interest receives the notification
within five years before the debtor receives possession of the inventory;
and
d. (4) the notification states that the person sending the notification has or
expects to acquire a purchase-money security interest in inventory of the
debtor and describes the inventory.
e. No 20 day grace period if inventory in the hands of the buyer
f. Rules permit purchase-money priority in inventory only when:
i. Purchase-money financier perfects no later than time the debtor
receives possession of the collateral
ii. Purchase-money financier gives advance notice to inventory lender
that it expects to acquire a PMSI in inventory
1. Lender has to search & send notice. Notice expires after 5 years.
5. PMSI in Proceeds:
a. Generally, if debtor exchanges collateral with PMSI for proceeds, the
seller will have purchase-money priority over a competing SI perfected
by an earlier filing against the debtor naming those proceeds as original
collateral
b. Exception: 9-324(b): Purchase-money status in inventory flows only into
chattel paper, instruments, and cash proceeds > Prevents purchase-
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 money status from flowing to other kinds of proceeds (most notably
accounts)

v. Priority in Commingled Collateral: UCC 9-336

1. (a) [“Commingled goods.”] In this section, “commingled goods” means
goods that are physically united with other goods in such a manner that their
identity is lost in a product or mass.
2. (c) [Attachment of security interest to product or mass.] If collateral
becomes commingled goods (identity of collateral is lost as it becomes part
of whole), a security interest attaches to the product or mass.
3. (d) [Perfection of security interest.] If a security interest in collateral is
perfected before the collateral becomes commingled goods, the security
interest that attaches to the product or mass under subsection (c) is
perfected.
4. (e) [Priority of security interest.] Except as otherwise provided in
subsection (f), the other provisions of this part determine the priority of a
security interest that attaches to the product or mass under subsection (c).
5. (f) [Conflicting security interests in product or mass] If more than one
security interest attaches to the product or mass under subsection (c), the
following rules determine priority:
a. (1) A security interest that is perfected under subsection (d) has priority
over a security interest that is unperfected at the time the collateral
becomes commingled goods.
b. (2) If more than one security interest is perfected under subsection (d),
the security interests rank equally in proportion to the value of the
collateral at the time it became commingled goods.

e. Conflict 3: Buyer v. Secured Creditor

i. Basic Rule: Buyers take subject to pre-existing security interests (UCC 9-210
and 9-315(a))
ii. Exception One: Buyer-in-the-Ordinary Course
1. UCC 9-320(a): Protects buyer in ordinary course of business > Buyer takes
free of SI created by buyer’s seller, even if SI is perfected & buyers knows
of its existence
a. Buyers authorized to assume debtor is authorized to sell collateral free
and clear of SI unless buyer learns otherwise
b. If buyers knows that, in addition, the sale violates a term in the SA, then
the buyer takes subject to the SI
2. UCC 1-201(b)(9): "Business is in the ordinary course” only if it is from a
person in the business of selling goods of that kind
a. Seller's business, not buyer's business
b. Buyer in ordinary course of business means a person that buys goods
in good faith, without knowledge that the sale violates the rights of
another person in the goods, and in the ordinary course from a person,
other than a pawnbroker, in the business of selling goods of that kind. A
person buys goods in the ordinary course if the sale to the person
comports with the usual or customary practices in the kind of business
in which the seller is engaged or with the seller's own usual or
customary practices . . . .
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 3. Buyer will only take free of a SI created by its seller
a. Does not take free of SIs created by predecessors in title > SC could file
a financing statement against him
4. Farm Products Exception (UCC 9-320(a)): farm products omitted
5. When bankruptcy petition is filed or SC taken possession of collateral, there
will typically be some people who have contracted to buy some of collateral
but have not yet completed transaction > A buyer will take free of inventory
lender’s SA and will be able to keep what was bought
6. Buyer in ordinary course of business may defeat inventory lender's SI even
without taking possession of the goods

iii. Exception Two: Buyer-Not-in-the-Ordinary Course

1. Buyer not-in-the-ordinary course takes subject to any SI that is already
perfected in a sale not authorized by SC
2. If buyer gives value and receives delivery of collateral without knowledge
of a not-yet-perfected SI, buyer will take free of interests
3. UCC 9-323:
a. (d) [Buyer of goods.] Except as otherwise provided in subsection (e), a
buyer of goods other than a buyer in ordinary course of business takes
free of a security interest to the extent that it secures advances made
after the earlier of:
i. (1) the time the secured party acquires knowledge of the buyer's
purchase; or
ii. (2) 45 days after the purchase.
b. (e) [Advances made pursuant to commitment: priority of buyer of
goods.] Subsection (d) does not apply if the advance is made pursuant to
a commitment entered into without knowledge of the buyer's purchase
and before the expiration of the 45-day period.
4. UCC 9-317(b): [Buyers that receive delivery.] Except as otherwise
provided in subsection (e), a buyer, other than a secured party, of tangible
chattel paper, tangible documents, goods, instruments, or a certificated
security takes free of a security interest or agricultural lien if the buyer gives
value and receives delivery of the collateral without knowledge of the
security interest or agricultural lien and before it is perfected.

iv. Exception Three: Authorized Disposition

1. UCC 9-315(a)(1): SI does not continue in collateral if secured party
authorized disposition free of SI
2. Authorization to sell need not be express

v. Exception Four: Consumer-to-Consumer Sale Exception

1. UCC 9-320(b): Buyer of goods from person (in hands of seller) who used
or bought the goods for use primarily for personal, family, or household
purposes (consumer goods) takes free of SI, even if perfected, if buyer buys
(in hands of buyer after sale):
a. Without knowledge of the SI
b. For value
c. Primarily for buyer’s personal, family, or household purposes (consumer
goods)
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 d. Before filing of financing statement covering the goods
2. Buyer is protected from an automatically perfected PMSI in consumer
goods

Secured Creditor v. Secured Creditor (Outline Addendum)

Exception to First In Time Rule: Deposit Accounts

1. Only way to perfect interest in deposit accounts as original collateral is through control
2. However, interest in proceeds in deposit account can be perfected in other ways
3. UCC § 9-327. Priority of Security Interests in Deposit Account.
a. (1) CONTROL BEATS FILING: A security interest held by a secured party
having control of the deposit account under Section 9-104 has priority over a
conflicting security interest held by a secured party that does not have control.
b. (2) WHEN MULTIPLE PARTIES HAVE CONTROL, TIMING
GOVERNS: Except as otherwise provided in paragraphs (3) and (4), security
interests perfected by control under Section 9-314 rank according to priority in
time of obtaining control.
c. (3) Except as otherwise provided in paragraph (4), a security interest held by the
bank with which the deposit account is maintained has priority over a conflicting
security interest held by another secured party.
d. (4) A security interest perfected by control under Section 9-104(a)(3) has priority
over a security interest held by the bank with which the deposit account is
maintained

Exception to First In Time Rule: Priority of SI Created by New Debtor

a. UCC § 9-326(a) [Subordination of security interest created by new debtor.]
Subject to subsection (b), a security interest created by a new debtor which is
perfected by a filed financing statement that is effective solely under Section 9-
508 in collateral in which a new debtor has or acquires rights is subordinate to a
security interest in the same collateral which is perfected other than by a filed
financing statement that is effectively solely under Section 9-508.
b. 9-508 specifies that new debtors have four months to file new financing statement
c. “A filed financing statement that is effective solely under Section 9-508” =
Financing statement filed against original debtor that continues to be effective for
four months after new debtor enters
i. Does not encompass new initial financing statement with new debtor’s
name
ii. Does not encompass financing statement field against original debtor
which remains effective against collateral transferred by original debtor to
new debtor
d. Example: SP1 has SI in X’s inventory & AAP inventory that was perfected by
filing. SP2 has SI in item of Z’s inventory that was perfected by possession. Z
and X merge, with Z assuming X’s responsibilities. SP1s financing statement is
effective to perfected interest in Z’s item of inventory. However, SP1s interest is
subordinate to SP2s, regardless of time of filing.
e. Example: SP1 has SI in X’s inventory & AAP inventory that was perfected by
filing. SP2 has SI in Z’s inventory & AAP inventory that was perfected by filing.
Z and X merge, with Z assuming X’s responsibilities. SP1s financing statement is
effective; however SP2 has priority regardless of who filed first.
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Buyer v. Secured Creditor (Outline Addendum)

Exception to Exception of Buyers that Receive Delivery

a. UCC 9-317(e): If a person files a financing statement with respect to a PMSI
before or within 20 days after debtor receives delivery of collateral, the SI takes
priority over rights of a buyer, lessee, or lien creditor which arise between time SI
attaches and time of filing.

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