Bar Exam Outline COMMERCIAL PAPER + SECURED TRANSACTIONS COMMERCIAL PAPER Key Concepts Note: y y Draft: Instrument where

e the drawer orders drawee to pay Where payable on demand and drawn on a bank even without the words of negotiability = check y Special checks: ertified check bank certifies it (problem: a lot of banks o wont do it) o ashiers check [Bank = Drawer = Drawee]. Bank orders bank itself to pay Payee. Indorsement: y Signature other than maker, drawer or acceptor y Special indorsement identifies the person to whom payable, blank does not y Restrictive indorsement limits payment, unrestrictive does not y Qualified indorsement negates secondary liability, unqualified does not y Anomalous indicates accommodation y y I. Holder v. Maker (Drawer) Negotiable instrument  A writing  Signed by maker (drawer) of y Agency (power of attorney) o Principle is L if agent was authorized. o Agent is L only if signed w/o showing (1) represented party or (2) representative capacity  E.g. for A y Forgery Forger is L; not the party whose name was forged o E.g. Forger signs /Robert Redford/. Forger is L; Robert Redford is not L.  Unconditional y = No promise modifier. o f. Acceleration clause is OK b/c it modifies time. y No express conditions o Implied (conduct)/constructive (by law) conditions OK. y Not subject to another writing o But, secured by OK y Limitation of funds acceptable o E.g. for buying A, from my bank account OK  Promise or order y IOU is not a promise.  To pay a fixed amount y with or without interest; Instrument where maker promises to pay payee Where the promise is by a bank to repay = certificate of deposit

 

y at a fixed or variable rate Of money w/ No other unauthorized promises y No additional promise allowed. y But, allowed exceptions: Promise o (1) to give Security (collateral); o (2) to allow the holder confess judgment or dispose of collateral; o (3)to waive protections for the maker/indorser;  i.e., waive e.g. right to notice of dishonor o (4) of attorneys fees (no need to be fixed). On demand/at a definite time y If check is postdated, it is non-negotiable. y Any acceleration clause is OK. o A pays $1k every month OK This becomes rather a malpractice not to include this. o on death of B NOT negotiable b/c no definite time. o on 1/1/2011, accelerated by death of B OK. To bearer/to order at time of issue (unless check). y to bearer/ to order are the magic words. o promise is not a magic word. o E.g. I promise to pay on the order of B = order paper. y pay to the order of ____ (a check w/ a blank payee line) = bearer paper. y I promise to pay for a keg of nails = bearer paper.

Negotiated  Only a HOLDER can negotiate an instrument.  Negotiation makes the transferee a holder. y E.g. if a person (forger) forges an indorsement of an order paper, the transferee is not a holder b/c the forger was not a holder.  Order = Proper indorsement + delivery  Bearer = Mere transfer of possession f. Delivery = voluntary transfer of possession y y If a thief steals a bear payer, it is negotiated.  Last endorsement rule y Special indorsement = order y Blank indorsement = bearer Holder in due course (1) A holder  Made by a proper negotiation. See above. (2) for value  Executed (=present) consideration; no future o E.g. Attorney receives a negotiable instrument as an advance on fees. This is not for value, therefore the attorney is not an HDC.  Antecedent claim (consideration) o E.g. 1 year ago, attorney performed for client and billed her. Now, the attorney received $1k for the bill.  No consideration b/c there was preexisting duty.  But this is nevertheless for value. o You bank as an HDC if consideration given

(3) in good faith  (a) Honesty in fact; and o pure heart, empty head test a Subjective test.  (b) Observance of reasonable commercial standards of fair dealing o Merchants test an Objective test. (4) without knowledge or notice of a. overdueness, b. dishonored, c. principal (interest) payment at default, d. claim, e. defenses, f. forgery, g. irregularity, or h. incompleteness, which questions authenticity.  Non-HDC: (b/c these are suspicious) o Bulk (buyer in bulk) o Estate (buyer from estate) o Judicial Sale (buyer through judicial sale)  Partial HDC o Time of payment (wrt notice) for the instrument governs the HDC status.  Ex1> Swindler defrauds Maker to get a $1k check. Then Swindler sells the check to an HDC for $500. y HDC is a full HDC for the $1k.  Ex2> HDC paid $250 for the purchase. Before clearing the balance tomorrow, HDC finds out about the swindle. y HDC is a partial HDC for $500. (proportional) (5) takes free of personal defenses and claims, but subject to real defenses  Forgery, Fraud in factum o Fraud is only a personal defense. o Fraud in factum = maker (a) didnt know/ (b) had no reasonable way of knowing that the signed paper was an instrument.  E.g. I couldnt read not a real defense b/c you could have someone else to read for me.  Alteration, Adjudicated insanity o Simple insanity is voidable. Adjudicated insanity renders it void.  Infancy, Illegality o Illegal subject matter (e.g. murder) void. Real defense.  E.g. I gave you the check in exchange for marijuana real defense. o Illegal purpose voidable.  Duress, Discharge in bankruptcy  Suretyship defenses if known, SOL (3 years drafts, 6 years notes unless no demand, then 10 years)  FTC Amelioration o Rule: No HDC rule applies where: (1) human buys (2) consumer goods/services (3) on credit.  Bottom line Those who buy consumer goods w/ checks cant easily avoid liability. o (1) human not corporation

o o o

(2) consumer goods Family used goods, e.g. refrigerator, gym. No land. (3) on credit where you pay more than 4 installments. E.g. Infant bought food on credit. If food seller (HDC of infants check) demands payment, can the infant refuse, based on real defense? No b/c of FTC amelioration rule.

Shelter Rule (=umbrella protection) Anyone who takes after HDC gets rights of HDC except participant (thief) o E.g. even if B received from A (HDC) a check knowing that it was issued out of fraud in factum, B is entitled to As rights. o But if B stole a bear paper from A, then B is not entitled to As rights.

II.

Holder v. Indorser Contract of secondary liability  Indorser may be L for the amount at the time of indorsement. y E.g. A indorses a note for $1k. Later, the note is altered to $2k. Maker is bankrupt (so dishonors the note). Holder can hold A (indorser) for $1k (at the time of indorsement).  Before holder sues indorser, holder must take 3 steps: y (1) Presentment o = Holder goes to maker/drawee (bank) & demands payment. o Must be made within 30 days. y (2) Dishonor o = Maker/drawee (bank) refuses. y (3) Notice of dishonor o = Holder tells the indorser (secondary party).  Warranty Liability for off instrument Extra protection for holders y Holder should consider transferors warranty L if it is an off instrument, i.e.: o transferor transferred the instrument (i) w/ without recourse or (ii) w/o signature. y Issuance No warranty L. y Transfer o Applies to all of the following instruments  (a) w/o indorsement  (b) w/ without recourse (=qualified indorsement) o Transferor warrants (non-waivable for checks; waivable for notes):  (1) right to enforce (=proper negotiation; title)  (2) signature genuine (+ authorized)  (3) no alteration  (4) no defense/claim against transferor  (5) no knowledge of insolvency/bankruptcy initiation. y Cf. If transferor actually knew of makers insolvency, then it is fraud. y Presentment (final surrender to maker/drawee) o Presenter only warrants (1) right to enforce (proper negotiation; title). o Presenters warranties as to signatures:  Presenter warrants only as to indorsers signatures.

As to drawers signature, presenter only warrants no knowledge of forged signature.

III. Holder v. Drawee (bank) None unless acceptance (certification)  If certification (e.g. CD), drawee is liable for consequential damages. y Drawer becomes remitter, and is discharged from L. IV. Drawer v. Drawee (bank) Contractual relationship  (Drawer puts money in drawee and drawee pays out according to drawers order.)  Properly Payable Rule Banks dont have to pay, but they can choose to pay (properly payable) when: y (1) Overdraft Banks dont have to pay, but they can pay and make the loan to drawer. y (2) Date Banks dont have to pay post-dated checks, but they can. y (3) Dead drawer Bank can still pay even if drawer is dead, unless bank knows it. y Not over stop payment Banks must honor drawers stop payment order.  Not properly payable When Drawee (bank) does not honor drawer, bank is L to drawer for wrongful dishonor (breach of K). Bank loses. Two situations y (1) If bank didnt pay where it should have Contractual damage, if any. y (2) Forged signatures. If bank paid where it shouldnt have paid: o (a) Forged drawer/maker signature  b/c drawer/maker is not L for signature; forger is L. o (b) Forged indorsement  b/c transferee who possesses through a forged indorsement is not a proper holder  If a thief steals a check, forges indorsement and presents to bank, and the bank paid the thief, the proper payee can sue bank for conversion.  But, exceptions. See below.  Exceptions Bank wins if Drawer/maker/payee was negligent. y Impostor; fictitious payee (UCC 3-405) o (a) Issuance to Impostor If an impostor induces issuer to issue the impostor an instrument by impersonating a payee:  Any person can indorse in the name of the payee. The instrument is effective.  Drawer loses against any BFP. o (b) Issuance to fictitious payee Any payee in a fictitious name is effective Bank wins.  Any person in possession of the instrument is holder.  E.g. Pay to the order of Robert Redford [Mickey Mouse] This is not forgery.  If anybody indorses on the back of the check, drawer suffers. Drawer loses against any BFP. o (c) Fraudulent indorsement by accounting e/e Bank wins.  E.g. An accounting e/e receives a corporate check payable to e/r, and indorses to herself. Forged indorsement is effective.  This does not apply to forged drawer signatures.

E/r must not let the same person to (i) open a corporate account and (ii) sign the checks. Drawer negligence in drafting Bank wins. o No negligence:  Use of pencil  Leaving blank checks on top of table in restaurant o Negligence:  Leaving amount line blank/lots of space  Leaving space and say I trust you to put in right amount Drawer negligence in notifying Bank wins. o If drawer finds a forgery/etc, he should notify the bank quickly. Otherwise, drawer suffers. o How fast (after bank made the paper available to drawer)?  Forged drawer/maker signature 1 year  Forged indorsement 3 years (=SOL)  Multiple forgeries by same wrongdoer 30 days 

V.

Effect of Alteration/Incomplete Instruments a. Incomplete Instruments i. Effect of incomplete instrument An incomplete instrument may be enforced (1) according to its incomplete terms; OR (2) as augmented by an authorized completion. ii. Burden of proof 1. The person asserting lack of authorization has the burden of establishing completion w/o authorization. 2. *If the person who completed the instrument simply did so according to an (oral) agreement w/ the other party, the other party cannot prove that the completion was unauthorized. b. Alteration = an unauthorized change in an instrument that modifies the obligation of any party in any respect. i. The effect of an alteration depends on whether the alterers intent was fraudulent or non-fraudulent. c. Non-fraudulent Alteration Non-fraudulent alterations do not discharge any party, and the instrument may be enforced according to its original terms. d. Fraudulent Alteration A fraudulent alteration has the effect of discharging every party obligated on the instrument, unless the party (1) assents to the alteration or (2) is precluded from asserting the alteration. i. Exception HDC 1. But, an HDC (a person who takes the instrument for value, in good faith, without notice to the alteration) may enforce the instrument: a. according to its original terms; OR b. in the case of an incomplete instrument altered by an unauthorized completion, according to its terms as completed.

VI. Bank recovery (finality)  Where a bank pays on a forged drawers signature or other mistake (e.g. insufficient fund), payment is final and no recovery is permitted from the innocent party whom the bank paid. Bank cant recover.  Where the bank pays on a forged indorsement, payment is not final and the bank can recover from the innocent party whom it paid y b/c presenter breached warranty of right to enforce (title). VII. Accord & Satisfaction  If: y (1) There is a pending claim/claim in dispute; and y (2) Instrument must be tendered in full satisfaction conspicuously.  then y collection is discharged of debtors obligation,  unless: y the debtor who received the instrument tenders repayment of the paper within 90 days.  E.g. Buyer sends check ($600) to settle dispute on $1k table. Seller cashes it in. Within 90 days seller sends $600 to buyer and says Lets start over. Then no accord & satisfaction. VIII.Lost/Stolen/Destroyed instruments a. When a person demands payment w/o producing instrument claiming it was lost/stolen/destroyed, i. he is nevertheless entitled to payment, so long as he can prove: 1. (1) the ownership, 2. (2) the terms of the instrument, and 3. (3) a factual reason why he could not produce it. ii. Then, the court will order the maker/drawee to pay him. But, the court will also require the person to give flexible protection, (e.g. bond) 1. so that the maker/drawee may be protected from other claims on the instrument. b. When a person demands payment against a bank for a cashiers/tellers/certified check that he claims to be lost/stolen/destroyed, i. the bank waits for 90 days. 1. No bond is required of the person demanding payment. ii. If nobody else claims it during 90 days, bank pays the person. iii. After that, if an HDC appears and demands payment, bank must pay him too, and the claimant must repay.

SECURED TRANSACTIONS (UCC Article 9) Memorize: PMSI = A (1) security interest (2) that secures repayment of a loan (3) used to purchase the collateral. I. MECHANICS A. Collateral 1. Classification a. Tangible movable things (1) Inventory (2) Equipment (3) Consumer Goods (4) Rights in Real Property = Fixtures + As-extracted collateral b. Intangible rights (1) Account (2) Deposit Account (3) Instrument (4) Chattel Paper (5) Investment Property (6) General Intangibles 2. Mnemonic = ICED GALF + P + (FA) a. Inventory b. Instruments (1) A promise to pay debtor memorialized in a note/certificate of deposit. i. If not memorialized, account (receivable) ii. E.g. checks, promissory notes. c. Investment Property (rarely comes on exam) Perfected only by control (1) Stocks & Bonds d. Consumer Goods e. Chattel Paper (1) = Paper representing both a promise to pay + a property right. (2) On exam, think about only two kinds: (3) (1) Any lease of a thing (right to collect future rent + reversionary right) i. E.g. Debtor, a car dealer, grants interest in the car lease to creditor. (Right to collect stream of payment only will be an account.) (4) (2) Retail installment sale agreement, RISA, promissory note + security agreement i. E.g. Debtor, a car dealer, grants interest in the car sold to consumer under a retail installment sale agreement. Just in case the consumer breaches installment payment, the dealer put security interest in the car as well, so that the dealer can take the car back when consumer defaults. 1. Now the dealer has a PMSI (purchase money security interest) in the car. 2. Creditor has chattel paper. ii. *Ask: Who is the debtor? Dealer? Or Car owner? f. Equipment g. Electronic Chattel Paper

h. Documents i. Deposit Accounts Perfection only by control (1) Bank account (2) Art 9 deals w/ only commercial account. j. General Intangibles (1) Catch-all Other intangible rights not otherwise categorized. i. No instrument (no memorialization), no right to pay at all. ii. Any non-monetary right under K. (2) e.g.: i. Rights in intellectual property ii. Business goodwill k. Accounts (Account Receivable) (1) Account = Right to collect on a promise to pay the debtor later on a monetary obligation after sale/lease of a non-land related thing. i. Account has no or insufficient writing to be an instrument/chattel paper. ii. Excludes: 1. Deposit accounts 2. Health care insurance receivables 3. Investment property. iii. Includes: credit card debts. (2) Any time something is sold/leased in exchange for a promise to pay debtor in the future, an account is created. l. Letter of Credit Right m. Farm Products n. Proceeds (1) Whether or not the security agreement says so, a security interest automatically attaches to whatever the debtor receives for/on account of the collateral, as long as the proceeds are somehow identifiable as linked to original collateral. i. Other creditor may attach security interest in the proceeds (as deposit account/investment property/etc). Then discuss priority of collaterals. o. (Fixtures) (1) Perfection must be filed a mortgage records where the land is. p. (As-Extracted Collateral) (1) Oil/gas/minerals (2) Security interest will attach as soon as it is extracted.

II.

CREATING SECURITY INTEREST (RIGHTS) VALID AGAINST THE DEBTOR ATTACHMENT A. Step 1 CREATION 1. Two ways to create rights: 2. (1) Possession/Control + oral agreement a. Control = Debtors permission to release collateral to creditor. 3. (2) Security Agreement a. (i) Authenticated Record = signed by debtor or by otherwise indicated assent in some perceivable form, e.g. email/voicemail b. (ii) Describing collateral

(1) Description must simply reasonably identify, generally by categories (e.g. inventory, equipment), but not all assets. (2) After-acquired collateral OK. (3) Future loan OK. i. There is no attachment until creditor gives value (in the future). (4) Cf. Consumer goods i. (1) Description must be more specific. ii. (2) After-acquired collateral for consumer goods are limited to those acquired within 10 days of the secured value have been given. B. Step 2 ATTACHMENT 1. Value (gift) Value must be given to debtor by creditor. a. E.g. Creditor giving loan to debtor (99% of exam) b. Pre-existing duty/debt is value. 2. Rights Debtor must have a right in the collateral to give away to creditor. 3. Agreement a. (1) Authenticated (1) signed or otherwise indicated assent in a perceivable form (2) e.g. email/voicemail ok. Oral agreement is OK if creditor takes possession/control of the collateral. b. (2) security agreement c. (3) describing collateral (1) Reasonably identifying the collateral. By category only OK. But not all assets. (2) after-acquired collateral OK. (3) Future loans OK. e.g. all future indebtedness OK. (4) Consumer Goods limitations: i. More specific description required. ii. After-acquired collateral applicable only to property acquired within 10 days of any secured value given. C. Doubling of collateral 1. If a property changes hands, a security interest in follows the property, unless creditor releases it by consent. 2. E.g. collateral in debtor-seller + collateral in buyer D. Suspect transaction: 1. Effects Sale, not a lease/consignment. Creditor: a. (1) loses ownership in property; and b. (2) has unperfected security interest in the goods (Article 9 applies). 2. Lease but actually a sale. E.g: a. Lease term over entire useful life of property b. Buyout option at the end of lease for nominal value ($1) 3. Consignment but actually a sale a. When delivering (1) non-consumer goods (2) worth more than $1k (3) to a merchant for sale, b. law treats consignor not as owner who sold the goods w/ right of return, but as creditor w/ security interest in goods, if the merchant: (1) acts under its own separate name; (2) is not an auctioneer; and (3) is not generally known to sell other peoples goods.

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III.

MAKING RIGHTS ENFORCEABLE AGAINST 3P PERFECTION  Only after attachment has occurred + one of various steps for perfection taken properly. A. Filing a UCC-1 Financing Statement 1. Creditor does not file a security agreement. 2. (1) Debtors Name Most tested, if tested. a. Financing statements are indexed by debtors name. b. Full, accurate legal name of the debtor to enable other creditors to find the statement. (1) Trade names/nicknames are insufficient and thus make financing statement ineffective. (2) If filing offices search logic w/ full legal name cannot not find misspelled/wrong name, then: i. the financing statement is seriously misleading and ineffective, and the security interest is unperfected. (3) If debtors name changes which makes the financing statement seriously misleading, 3. (2) Secured Creditors Name 4. (3) Description of Collateral a. Super-generic description OK (e.g. all of the debtors property), but: (1) To be effective, a UCC-1 filing must have been authorized in an authenticated record by debtor. i. E.g. security agreement covering the same collateral. b. If financing statement describes collateral more broadly then security agreement, creditor must either have (1) debtor sign the financing statement or (2) authorize filing by a separate document. 5. Fixture filing a. Fixture + as-extracted collateral Financing statement must be filed as a fixture filing, at mortgage records. b. More info required: (1) Describe the real property w/ sufficient detail to support a mortgage; (2) State that the filing covers fixtures; and (3) Identify the owner of realty (if different from owner of fixture). 6. Effective for all transactions, 5 years. a. Lapse Filing lasts 5 years. If it lapses, the collateral is treated as if the statement has never been filed. b. Continuation b/t 4 yr 6 mo and 5 yr. c. Properly filed statement perfects any security interest in described collateral in any secured loan b/t creditor & debtor. (1) E.g. Debtor cleared loan by repayment. Debtor loans from the same creditor w/ same collateral before filing lapses. No need to file another statement again. 7. Filing Locations for interstate transactions a. Fixture filing where the land is. b. Other financing statements where the debtor is. (1) Individuals principal place of residence. (2) Registered organizations state of registry. (3) Unregistered orgs (e.g. general partnerships) where the office is. If more than one offices, place of chief executive office. i. **Sole proprietorship = individuals. unregistered orgs.

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c. If debtor moves to a new state Creditor has 4 months. After that, financing statement in the previous state is retroactively ineffective, as it never existed. B. Possession (Tangibles only) 1. Cannot perfect by possession if: a. Accounts/Deposit accounts b. Electronic chattel paper c. Letter of credit right d. General intangibles 2. Possession satisfies both writing requirement for attachment and perfection. 3. Possession is superior perfection to filing for: a. (1) instrument + (2) chattel paper. C. Lien on certificate of title (Vehicles only) 1. If a collateral is a (1) vehicle (2) covered by a certificate of title perfect only by applying the Department of Motor Vehicles to have the lien noted on the face of the certificate of title. a. Car dealers inventory inventory. May be perfected by filing a UCC-1. D. Control (deposit account*/investment property/electronic chattel paper/letter of credit right only) 1. Control = Debtors permission to release collateral to creditor. 2. Deposit accounts can be perfected only by control. 3. Perfection by control in investment property beats perfection in any other way. 4. Control of deposit accounts by 1 of 3 ways: a. If [creditor = bank of the deposit account], the bank has control; b. Control agreement bank agrees to follow the secured creditors instructions as to the money in the account; or c. Add creditors name to the deposit account. 5. Control of investment property If collateral is: a. certified securities, perfection is done by (1) transfer of possession of the certificate + indorsement, or (2) re-registration of the stock in creditors name. b. indirectly held through broker, perfection is done by 1 of 3 ways: (1) If [creditor = broker], broker has control; (2) Control agreement broker agrees to follow the secured creditors instructions as to the stock/bond in the account; or (3) Add creditors name as account holder. E. Automatic Perfection upon Attachment ***Memorize PMSI definition*** 1. PMSI (purchase money security interest) a. PMSI = A (1) security interest (2) that secures repayment of a loan (3) used to purchase the collateral. (1) loan whatever portion of loan OK (2) used to purchase Actual use. b. Rule: PMSI in consumer goods is automatically perfected. (1) Why this rule? To encourage lending consumers. c. Two scenarios: (1) Bank loans debtor to buy collateral

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(2) Seller of goods loans debtor to buy sells collateral 2. Temporary + Continuation a. Proceeds automatically attached to a perfected collateral is automatically perfected for 20 day grace period. (1) After 20 days, perfection continues in 3 ways w/o further action (filing a new UCC-1) by creditor: i. Original financing statement describes the proceeds (easy); ii. If identifiable cash proceeds, continuous automatic perfection; OR iii. Perfection as a matter of law if: 1. original collateral was perfected by filing; 2. proceeds can be perfected by filing in the same office as the original collateral; AND 3. proceeds were not acquired w/ cash proceeds. a. = debtor receives property instead of cash b. 4 months grace period in the new jxn when debtor moves.

IV.

PRIORITY BATTLES WHO WINS? A. Perfected Secured creditor (PSC) v. Perfected Secured creditor (PSC) 1. First to Perfect (through UCC-1 filing/otherwise) wins. 2. **Exceptions (Super Priority, where 2d PSC in time prevails): If 2d PSC is a holder of PMSI (Purchase money security interest), he may achieve super priority. a. PMSI = A (1) security interest (2) that secures repayment of a loan (3) used to purchase the collateral. b. PMSI in inventory (+ proceeds) (1) To achieve priority, holder of PMSI must do 2 things before he delivers collateral to debtor: i. Perfect the PMSI; and ii. Notify in writing any PSC for after-acquired inventory of his priority. (2) Example> Macys borrows $2M from Bank, granting Bank a security interest in all of Macys inventory, whether now held or hereafter acquired. Bank properly perfects its interest. Bank is a PSC in inventory. i. Later, Macy's acquires Armani's spring line of clothing on credit, granting Armani a security interest in the line. Armani is a PMSI holder. The collateral is inventory. ii. How can Armani achieve priority in the Armani spring line? iii. A> Armani must satisfy two requirements: 1. Armani must file properly before debtor Macy's takes possession AND 2. Armani must notify Bank before debtor Macy's takes possession. c. PMSI in equipment (non-inventory, + proceeds) (1) Grace period If PMSI is perfected within 20 days of delivery of collateral to debtor, the holder of PMSI beats all other SC and LC. (2) No notice to other SC+LC required.

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B. Perfected Secured creditor (PSC) v. Lien creditor (LC) 1. If PSC perfects before LC arises, SC wins. Otherwise, LC wins. a. Example> C sells D a stereo on an installment plan. C secures interest in the stereo and perfects. (1) Later D defaults. C wants the stereo back. However, a dentist asserts a claim (LC). What result? (2) A> C prevails b/c C perfected first. i. This is true even if LS acquired right through judicial process (e.g. trustee in bankruptcy, cts seizing order) 2. Fixtures first-filing PSC wins, regardless of PSC filed a UCC-1 or a fixture filing w/ mortgage record. C. PSC v. Purchaser from debtor (Buyer of goods) 1. General rule: A perfected security interest follows collateral into the hands of buyer. (Even if buyer bought the goods before collateral was perfected, the collateral follows the goods.) 2. Exceptions a. BIOC rule: (1) Inventory sold in the ordinary course of Debtors business is generally not subject to SI. The SI is cut off. (2) = BIOC (buyer in the ordinary course) takes free of security interest of PSC (perfected secured creditor). b. Garage sale rule: (1) nBIOC (Non-ordinary course buyer) Where buyer is a not BIOC (i.e. debtor did not sell to buyer in his ordinary course of business), i. Buyer takes free of security interest of unperfected secured party. ii. If the SI was perfected b/f purchase, then buyer loses. iii. Example> C secured interest in Ds stereo (w/o perfection). 1. Later D defaults. D sells stereo to B in garage sale. What result? a. A> B prevails b/c C did not perfect. V. ENFORCEMENT ON DEFAULT A. Repossession 1. SC can repossess the collateral w/o notice & by any means, so long as it does not breach the peach. a. Breaching the peach stick to your gut feeling what is breaching. 2. **Collection rights of SC from non-goods (account) collateral. a. Debtors account collateral (right to collect from debtors debtor) can be repossessed by telling the debtors debtor to pay directly to SC. (1) Payment to debtor does not discharge the debtors debtor from debtor. B. Foreclosure by Sale 1. Sale must be commercially reasonable. C. Strict Foreclosure: Creditor keeps the collateral by negotiating w/ debtor to buy it. 1. Proposal In exchange for forgiveness of some/all of debt. 2. Notice Creditor must notify other actually/constructively known creditors having interest in the collateral. 3. Assent from debtor + other creditors. Failure w/in 20 days is a silent assent. D. Remedies for Creditors failure to comply = actual damages.

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