Secured Out Lin Em

8/2/2019 Secured Out Lin Em

1/29

Table of Contents

INTRODUCTION ....................................................................................................................................................................THE UNIFORM COMMERCIAL CODE .......................................................................................................................................

ESTABLISHMENT .................................................................................................................................................................ACTORS....................................................................................................................................................................................ATTACHMENT ..........................................................................................................................................................................

PERFECTION .........................................................................................................................................................................GENERAL RULE: 9-201 A SECURITY AGREEMENT IS EFFECTIVE AGAINST A DEBTOR, PURCHASER, AND CREDITORS(EXCEPT) ..............................................................................................................................................................................METHODS OF PERFECTION (OFTEN DRIVEN BY THE CLASS OF COLLATERAL, RISK TO 3RD PARTIES, METHODS OFENFORCEMENT, AND DEFAULT PROCEEDINGS) ......................................................................................................................FORMS OF INTANGIBLE COLLATERAL ................................................................................................................................... IDENTIFYING FORM OF COLLATERAL (INTANGIBLE) .............................................................................................................

PRIORITY ................................................................................................................................................................................RESIDUALRULE9-201: SA IS EFFECTIVE AGAINST CREDITORS OF THE DEBTOR UNLESS THERE IS A RULE THATPROVIDES OTHERWISE............................................................................................................................................................ 9-322GENERAL PRIORITY RULE ........................................................................................................................................... CERTIFICATE OF TITLE LAWS ................................................................................................................................................

MULTI-STATE JURISDICTION ISSUES (WHAT STATE GOVERNS PERFECTION?) .....................................................................LAPSE AND REPERFECTION....................................................................................................................................................

PROCEEDS OF COLLATERAL ..........................................................................................................................................GENERALLY ........................................................................................................................................................................... PERFECTION WITH PROCEEDS................................................................................................................................................

PURCHASE-MONEY SECURITY INTERESTS ...............................................................................................................GENERALLY ........................................................................................................................................................................... FORMS OF COLLATERALWITH PMSI ..................................................................................................................................TRANSFORMATION VS.DUAL STATUS................................................................................................................................... COMMINGLING &TRACING ...................................................................................................................................................

BUYERS ................................................................................................................................................................................... ORDINARY BUYERS ............................................................................................................................................................... BICOB ...................................................................................................................................................................................RIGHTS OF DIFFERENT TYPES OF BUYERS.............................................................................................................................

FUTURE ADVANCES ............................................................................................................................................................GENERALLY ........................................................................................................................................................................... FUTURE ADVANCE CLAUSES .................................................................................................................................................

FORECLOSURE .....................................................................................................................................................................DEFAULTREMEDIES OF A SECURED CREDITOR.................................................................................................................. BASIC STRUCTURE FOR FORECLOSING ON A SI(SET OF REMEDIES TO EMPLOY IN THE EVENT OF DEFAULT)9-600S .......THESALE .............................................................................................................................................................................

BANKRUPTCY .......................................................................................................................................................................GENERAL PROTOCOL ............................................................................................................................................................. TRUSTEE AND PRIORITY.........................................................................................................................................................


2/29

Secured Transactions Outline

INTRODUCTION

The Uniform Commercial CodeA. Joint effort of ALI (American Law Institute) and UCC (had the money to fund)B. Sections

1. Article 2: sales2. Article 3: negotiable instruments3. Article 7: documents of title4. Article 8: investment securities5. Article 9: secured transactions

i. Scopea. 9-109(a)(1)creates a security interest in personal property by contractb. 9-109(a)(3)Applies to the outright sale of a right to collect $c. 9-109(d)(13)does notapply to an assignment of a deposit account in a consumer transaction except the

provisions that apply as to proceeds

ESTABLISHMENT9-102(a)(73) Security Agreement: agreement that creates or provides for a secured interest1-201(b)(37)Security Interest: interest in personal property/fixtures, which secures payment/performance of obligation

ActorsA. Debtor: person having an interest, other than a security interest or a lien, in the collateral, whether or not the person is an

obligor. The rightful owner of the property.1. Not limited to the person who signs the security agreement (can be, does not have to be)2. Any person at the time of the transaction that has any interest in property other than the secured party (JTsif one sign

the security agreement without the others knowledge they are still BOTH debtorshave an interest in the property)B. Secured Party 9-102(a)(72): person in whose favor a security interest is createdC. Obligor: person who owes the debtAttachmentA. To have an enforceable security agreement there must be attachmentof a security interesta security interest is only

enforceable against a debtor if(1) value has been given, (2) the debtor has rights in the collateral, and (3) there is anauthenticated security agreementwith an adequate description of the collateral.1. You do not have to have a document titled security agreement you just have to meet all requirements: signature on t

note, description on financing statement, agreement (not just notegoing to agree & not just a FS)2. You can locate requirements in different places and infer through course of conduct3. Attachment occurs as soon as the last of the 3 parts of the puzzle is locked into place

B. ThreeRequirements9-203(b):1. VALUE: the secured party must give value to the debtor (make the loan) 1-204

i. Does not require new advance of credit when new inventory purchased (old loans can sufficeantecedent debt)ii. Pre-existing debt can constitute value

2. RIGHTS:i. Debtor must have rights in the collateral OR the power to transfer rights in the collateral to a secured party

a. 9-401(a) rights can be voluntarily or involuntarily gained (seizure)b. The agreement does not actually attach to thingsattaches to RIGHTSii. Nemo dat quod non habetcant give what do not have (only give a security interest commensurate w/ rights)a. In a voluntary tx, transferee usually acquires the rights that the transferor hadderivative rights

1) Security agreement cant create a secured interest in after-acquired equipmentthe interest does not comeinto being once the debtor has possession of the collateral, but not before

iii. Article 9 does not specify what level of property interest is requireda. A debtor that has a transferable property interest under other law has sufficient rights to grant an enforceable

security interestbut only to the extent of the property interest1) Lessee can only convey the rights he maintains under the lease agreement (cannot encumber lessor). Whe

the lease expires, the lessor can recover at foreclosure-sale (could take from buyer)2) Joint Tenant can use a joint-tenancy as collateralbut the secured party would become a tenant in comm

with previous joint tenant


3/29

(a) If other JT consentsthe security interest attaches to transferable rights of any consenting person(i) JT situation, if the other JT consents to use his rights as part of the collateral (granting interest in

whole), the security interest would attach to the sum total rights of both (whole property)3) Theft: Thief steals TV and sold to a used TV store (puts in inventory and grants a SI to bank)

(a) TV store defaults, bank repossesses, and sells your TV to a GFPV(b) Owner can reclaim TVsue in replevy or in conversionthe TV store had neither the right nor the

power to grant good title to a GFPV (thief had no title to give (void).(c) Security interests NEVER attach to stolen goods

4) Sell with fraud: TV to buyer (who acted in fraud and never intended to pay)(a) Voluntary transaction with fraudowner gave buyer voidable title

(i)

If the buyer subsequently sells to a GFPV2-403(1) (before owner reclaims)full title is conveyed(owner cannot reclaim TV).(ii)A person with voidable title has POWER to transfer food title to good faith purchaser for value if

necessarily the RIGHT

Buyer is still a converter, but owner losses right to replevy when TV sold to a GFPVcouldonly sue buyer for conversion

(iii)But if the buyer sells to a used TV storecan still get back in the same way could reclaim frombuyerstore not a GFPV.

Law has developed so that the TV store now gets full title as well (gets voidable title and thepower the transfer all rights)

Person with voidable title has the POWER to transfer full title to a GFPV(iv) If fraudulent buyer (voidable title) grants security interest in goods and defaults to both seller and

bankwho wins?

(v) 2-403(1) still applies because a secured party is a purchaser The debtor here is the buyerhad the POWER to convey title The secured party will win against owners, but the owner still has some interest

5) Sell on creditthe owner has no more rights in the TV, has traded full title for a promise of payment(a) Even if the buyer defaults, cannot get TV back(b) Sale is a transfer of title for a pricefull title has passed, not voidable in any form(c) Can only sue, get a judgment and try to collect

6) What is the difference in thief and fraud sale?(a) Ostensible Ownership problemin the voluntary transaction, the owner gave the buyer the ability to

act to the world as though he owned the TV(b) Estoppelempowers the party who consents to the creation of a security interest to cause that interes

attach to the rights of the non-consenting party

(i)

9-203(b)(2) recognizes attachment by estoppel when referring to the debtors power to transferrights(ii) Example

B fraudulently induces S to enter into a sales contract, where S turns over possession of thegoodstitle passes to B (but it is voidable, S can reclaim because of the fraud)

B resells goods to GFPV before S recovers possessionsevers Ss rights to reclaim title(estopped)Bs title was voidable, but the GFPVs title is NOT

(iii)NOTE: if B had granted a security interest to Fraudulent Buyer (instead of selling to GFPV), undethe doctrine ofDerivative TitleFBs interest would attach to BOTH Bs rights and Ss rights byestoppelwould have FULL title upon default (title is voided just as if there were a sale to a GFP

Bank takes free of owners interest Bank gave value in the loanpurchaser under definition in UCCcut offOs rights Doctrine of Derivative Title: in a voluntary transaction in which property is transferred, the

transferee will acquire the property rights of the transferor and no moreiv. Right vs. Power

a. If party had neither the right nor the power to take your goods2 options for remedies (NOT both)1) Replevy the bike: (sue in replevin) have the sheriff return to you in species (actually get YOUR bike)2) Action in Conversion:intentional tort where one exercises unjust control over goods of another and won

give it backv. BAILMENTtransaction where goods are placed in the rightful possession of a person who is not their owner

(giving someone else possession where it is understood that you will retain titletitle does NOT pass)a. A bailee has neither the right nor the power to transfer the bailors interesteven to a GFPV

1) Loaned TV to a friend (simple loan, no payment)bailment(a) Friend sells TV to GFPV owner can reclaim TV(b) There is NO passage of title with a bailment


4/29

(i) Bailments are treated differently even though the appearance is the same as a fraud sale(ii) Ownership is important and will only be subordinate in special cases

(c) Owner Thief Buyer 1 GFPV (owner can still get backtitle has not passed)2) Owner gives TV to TV repair shop (also a store)

(a) If the store sells the TV to a BICOB (buyer in the ordinary course of business)the buyers interest aprotectedcan only sue repair shop for conversion

(b) Cannot use 2-403(2) here because there is no voidable title issuevi. ENTRUSTMENT2-403(3)only important because of2-403(2)

a. Entrustmentany delivery and acquiescence in the retention of possessionb. Term entrustment only matters for the purposes of the rule stated in 2-403(2)

1)

For (2) to apply, they must be a merchant2) If you entrust goods to a merchant, then you risk the inclusion in inventory and sale3) Merchant may not have the legal rightbut they have the POWER4) Transfer full right of entrustor (owner)

c. ConsequentlyBICOB would also take free of any security interest3. SIGNED AGREEMENT: typically a signed security agreement (the interest is actually createdat the signing)

i. Descriptionii. Authenticationiii. Present Intentiv. Statute of Frauds requires a signed agreement for an conveyance of property

a. But the agreement must also satisfy the requirements of9-203(b)(3)4 requirements (one must be met)1) One of those is possessionagreement is authenticated if SP haspossession of the collateral

b. Make sure the signer has the authority to act for the debtor in signing the agreement1) Oral Agreements CAN be sufficient if the secured party has possession or control of the collateral2) Some have argued that a collection of documents can satisfy authentication requirement. Bollinger did not

require formal SAonly evidence of intent to create a security agreement(a) Held that

(i) FS itemizing collateral and a board of directors resolution showed adequate intent(ii) FS, loan application and promissory note were sufficient(iii)Application for car certificate of title and promissory note did NOT constitute a security agreemen(iv)Note and FS were NOT sufficient where secured party prepared SA but the debtor never signed

NB: The requirements can occur in any order, and the moment that all 3 are present a valid, enforceable security interest attache

FINAL QUESTION: Own two watches W1 & W2. Take to jeweler to repair (also buys and sells watches). Jeweler puts bothwatches in inventorysecured creditor has an interest in all inventories, including AA. Sells W1 to a BICOB, and then defaultwith the bank and the bank repossess W2. Owner wants to replevy both watches.

W1under entrustment doctrine 2-403(3) owner created the appearance of ostensible ownershipo (cannot reclaim from BICOB: protected. 2-403(2) appliesjeweler had POWER to convey title

Cannot use 2-403(1) because there is NO TITLE ISSUE with bailments (no voidable title passed) W2Bank will try to win as a good faith purchaser but they lose because the jeweler never had voidable title

o (in a bailment the owner retains title at all times) Bank cannot take advantage of 2-402(2) because the rule uses the term buyer NOT purchaser The bank is NOT protected and the owner can replevy W2.

v. Documenta. This does not have to be a formal document just a writing that evidences the agreement to create a security

interest in some form of collateral1) No writing requirement

b. Promissory Notes: (on demand repay the amount due)1) Mere promissory note would NOT be sufficient to create a security interestbecause it doesnt contain a

description of collateral.(a) It does not show the required present intent to enter INTO a security agreement

(i) Only shows parties were thinking about granting an interest2) In re Bollinger Corp. held that a promissory note standing alone was NOT sufficient, but considered other,

external evidence (course of dealings) to infer the existence of a security agreement.3) Doesnt have to be a separate document, can combine SA w/ the promissory note with simple addition of

language.c. Obligation securedFUTURE ADVANCES and DRAGNET CLAUSES (anaconda mortgages)

1) Cross-Security Clause the collateral shall stand as security for ANY indebtedness or any sort now orhereafter

2) UCC allows future advance provisions and puts no restrictions on what obligations can be secured


5/29

(a) But only future advances that are similar and related to the initial, principal obligation shall begiven the benefit ofbroad future advance clausesand all obligations provisions

(b) 4 part relatedness test:(i) Other indebtedness allegedly covered by the agreement is specifically expressed therein(ii) Other indebtedness are of the same class as the debt referenced in the security agreement(iii)Other indebtedness were intended to be separately secured(iv)Whether the secured party relied on the clause in making a further loan

3) Can also cover prior loans:(a) L1 (unsecured) L2 (unsecured) L3 (secured w/ future advance clause) L4 (SA applies to ALL

C. Necessary Elements of a Security Agreement1.

Code does not require that all be contained in single document2. Required Elementsi. DESCRIPTION OF COLLATERAL: 9-203 there must be a sufficient description of collateral (tracked in the FS

a. 9-108 deals with the sufficiency of the description of collateralneeds not be specific it if reasonably identifiewhat is describedneed not be exact

(a) The standard is forgiving(b) Question is whether the description provides the key so that clarity is provided(c) Extrinsic evidence can be used to determine the sufficiency of the description(d) The more specific the description, the more like that a mistake can be made

b. There are 3 ways to describe collateral1) SPECIFIC descriptioni.e. VIN numbers2) CATEGORY defined by the parties (term agreed upon by parties, NOT a UCC term)3) UCC TYPE set out in the UCC (inventory, consumer goods, equipment, farm equipment)

(a) Noteshould stipulate in SA how you are using terms(b) GOODS 9-102(a)(44) can be divided into 4 UCC types:(i) Main Types (there are 15-16):

Consumer Goods:9-102(a)(23) used primarily for personal, household or family purposes Inventory:9-102(a)(48)all assets held for sale or lease

- Includes raw materials, work in process, or materials used or consumed in a business Equipment: is negatively defined as not falling under any of the other categories. Farm Equipment

(ii) The classes are mutually exclusivecannot occupy more than one(c) Fixturesgoods that have become attached to real estate in such a manner that a buyer would assume

that the item in included in the contract(i) If the seller wants to reserve them, they must do so in the contract(ii)

A fixture could be removed and still have value apart from the real estate E.g.chandeliers Not brickalthough they started as goods, removing them would destroy the structure and the

would not have the same value(iii)Exists in the never-lands b/t real estate and goods

(d) The UCC type matters for repossession(i) Equipmentbuyer should have checked for the existence of a security interestsecured party can

repossess even from a GFPV

Buyer would then have a cause of action for breach of implied warranty against seller(ii) Consumer Goodssecurity interest does NOT attach (negative impact on commerce)

Natural assumption that inventory will be sold; bank estopped from repossessing BICOB beats a perfected security interest

c. You can take an interest in a commercial tort claim.1) 9-108(e)(1)policy behind this is to discourage bringing tort claims that may have no merit (comment 5)

(a) A category can be created but it cant simply be all commercial tort claims 2) 9-204(b)(2)if you cant take a security interest in all existing, you cant take one in all future claims

d. Supergeneric Descriptions 9-108(c)Article 9 PROHIBITS supergeneric descriptions of collateral in a securagreement (but NOT in a FS)1) Cannot take an interest in all debtors assets or similar determination

e. After-AcquiredCollateral1) 9-204 provides that a security interest MAY attach to collateral acquired after the filing of the FS2) Requires explicit agreement between the parties for the attachment of after-acquired collateral

(a) Simply saying all inventory could mean on hand now, or at any given momentambiguous3) A floating lien allows a secured party to create a security interest to float from inventory shipment to

inventory shipment (9-204)


6/29

(a) Security interest attaches to existing and after acquired inventory(b) There may be no new consideration but there can still be value for new shipments(c) Can float in 3 ways:

(i) Can create a security interest that will attach to new assets acquired by the debtor (9-204(a))(ii) Future Advances(iii)Proceedsas long as you can identify that the proceeds come from the collateral

f. Software1) Distinguishing types of software

(a) Goods 9-102(a)(44)(all things moveable and have value because of their physical form) includes acomputer program embedded in a good and any supporting information provided in connection with th

transaction relating to the program if:(i) Program is associated w/ the goods in such a manner that it iscustomarilyconsidered part of thegoods, OR

(ii) By becoming owner of the goods, aperson acquires a right to use the program in connection w/goods

i.e. anti-lock brake system in a car is embedded software included in the definition of goods(iii)NOTE: goods does NOT include a computer program embedded in goods that consist solely of

medium in which the program in embedded (i.e. program on a CD)(b) Non-Goods (software)buy a computer that comes installed with software

(i) 9-102(a)(75)computer program and any supporting information provided in connection with atransaction relating to the program

Program does not include all information in electronic form(ii) That software is typically not considered part of the computer or good

By becoming the owner of the computer DO NOT get the right to use the programtypicallyhave to agree to separate licensing agreement with the software manufacturer (must agree to tterms)

(iii)Own UCC categorysubset ofgeneral intangibles 9-102(a)(42) General Intangibles means any personal property that does not fit into the other categories

(defined in the negativedumping ground like equipment)

Two subsets: software and payment intangiblesii. AUTHENTICATION:must be signed documentation 9-102(a)(7)

a. Recordinformation that is inscribed on a tangible medium or which is stored in an electronic or other mediuthat is retrievable in perceivable form. 9-102(a)(69)

b. Considerations1) Blank Check: YES, can still argue that there was a signature in the letterhead that becomes attached with th

volitional act of sending of giving the check to someone2) Voice Mail: NO, the drafters determined that a voice mail could not be authenticated3) Email: STRONGER argument than voice mail

(a) Argument is stronger if there is an actual signature at the bottom of the message (either manually orautomatically imputed)

c. Agency issuesis this person acting on behalf of the debtor (does he have that power)?1) NOTEproof of representation does NOT have to exist in the signature itselfcan use additional

(extrinsic) evidence to demonstrate that he was authorized to act for the debtoriii. PRESENT INTENT: must actually have thepresent intentto enter into a security agreement

a. Mere fact that a financing statement is filed does NOT satisfy the requirement for present intent1) Pre-filing common practicenot sufficient to show agreement

PERFECTION

General rule: 9-201 a security agreement is effective against a debtor, purchaser, and creditors (except)A. A valid enforceable security agreement may be under attack from 3rd partiesB. Perfection is NOT required as between the secured party and debtor, only comes into play with 3rdparty interestsC. Upon attachment, the security interest is enforceable against a defaulting debtor.

1. Attachment Enforceable Additional Steps Perfection2. Generally involves affirmative act (filing a financing statement)

i. SA cannot perfect until attached 9-308 Perfection can never precede attachmenta. Then have to satisfy requirements from 9-310316

D. 9-203(b)is the starting place for priority contests against 3rd partiesmust be perfectedE. A perfected security agreement generally is effective against 3rd parties (purchasers, creditors)


7/29

1. So long as the financing statement is filed before the emergence of a LC, the security interest is perfectedi. Does not matter when it got the judgmentit is the moment of execution (levy) that matters.

F. 3 conditions for attachment: value, SA and D must have an interest in the collateralG. 9-308(c)Continuous Perfection for perfecting to be continuous, there cannot be a gapMethods of Perfection (often driven by class of collateral, risk to 3rd parties, methods of enforcement, and default proceedingA. Default perfection under certain provisions of Article 9B. Automatic perfection

1. Temporary Perfection = Instruments + New Value + 20 Days2. Perfection lasts beyond 20 days when the proceeds are identifiable cash proceeds (9-315(d)(2))3.

If you perfect as to the original collateral, you are perfected as to the proceeds for 20 days. The hardest question is whetyou get to keep perfection beyond 20 days?i. As long as you have cash proceedsyes

C. Deference to state law: 9-311 subject to statute (state or federal) [i.e. CERTIFICATE OF TITLE LAWS]D. Filing a Financing Statement with the Secretary of State

1. Basicsi. 9-102(a)(23):Filing statementrecord(s) composed of an initial financing statement + any filed record relating to

initial FSii. Right to File (cannot file a FS if you dont have the right to do so from the debtor)

a. SP must have debtors authorization to file a FS1) Only authorized to file a FS to the extent that the SA permits it

(a) But you are perfected to the extent the FS is valid2) 9-509(a)(1)requires that the FS be signed by the D (actual signature not necessaryneed authorization)

(a) 9-509(b)provides that the authentication of the SA ipso facto authorizes the filing of a FS covering tsame collateral described in the SA (cannot extend beyond that description)

(b) 9-509(c)the acquisition of collateral in which a SI continues as proceeds ipso facto constitutes anauthorization to file an initial financing statement against the person who acquired the collateral(comment 4)

3) When dealing with corporation, make sure authorizer has agency power to do sob. May be liable for damages caused (prevent securing other financing) if you improperly file a FS or file an

amendment when you are not the secured party of recordc. PRE-FILING FS 9-502(d)

1) SP is permitted to pre-file a FS to ensure place in priority (first-to-file)2) But if the transaction later falls apartunauthorized filing because there was no SA

(a) You did not have authority to file the FSd. Correction statementsare included in the drawer of the FS, but they DO NOT impact PERFECTION

1) SP are not going to lend against an existing FS because that security interest is still perfected2) Remedy against wrongful filer

(a) $500 and other damages(b) American rule that parties should bear own costs of litigation does NOT apply

iii. Mechanicsa. Once filed, a FS is good for 5 YEARSbut will stay in the recordsb. Just because you find a FS does not mean dont need further exploration

1) FS ONLY says there are questions that need to be answereddoes not itself provide answers (WARNINGc. Distinguish SA and FS

1) SA is a contract between parties (what is included in here is more importantactual agreement)(a) Have to be careful how term things herecontract subject to contract interpretation rules

2) FS serves a notice function but rarely gives you much information(a)

If leave out inclusion of AA in FS (or ambiguously misstate collateral) but it is included correctly inSAstill perfected as to AA collateral

(b) Purpose of FS is to spark questionsserved purpose; still effective2. Elements:

i. Required forperfection9-502(a)(though not enoughoffice technically required to reject it)a. Debtorsname

1) 9-503FSs are indexed according to debtors namevery important to have this correct(a) 9-506(c)names not complying with 9-503(a) creates a rebuttable presumption of serious misleading

(i) Unless a search of the records in the office under the correctname would still produce the FS2) 9-503(c) Trade Names: a FS that only provides a debtors trade name is NOT sufficient unless a search

under the real name would turn up the FS filed under the trade name.(a) Are perfected if you leave trade name off. Are not perfected if you use ONLY trade name


8/29

3) NOTE: NO such thing as a sole proprietorship just search for the individualb. Secured partys name (representative)

1) 9-506an error in the name of the SP will not render the FS ineffective(a) 9-506(b)however, general rule is that a FS that fails to sufficiently provide the name of the debtor in

accordance w/ (a) is seriously misleading2) 9-509(d)(1)the person/party listed on the FS as the SP is considered the party of record and is the only

party that can authorize amendments to the FS (including to terminate)3) SA is made in favor of one lender who serves as the collateral agent for all the lenders

(a) Flexibility in listing SP9-502(a)(2)allows listing the names of all SP or just have representative4) Post-filing changes dont matter here

c.

Indication of collateral covered by the SA1) 9-108 description of collateral should reasonably identify the collateral (list items, categories, UCC types)(a) NOTE: 9-504(2)Indication that the FS covers all assets of personal property is sufficientfor a FS,

where it is NOT acceptable for a SAd. Signature of D is no longer required9-503 (comment 3)

ii. Additional elementsrequired for acceptance by filing office9-520a. 9-516 sets out specifics of when must accept or reject a filing

1) There are other elements that are required for filing9-516(b)(5)(a) Mailing address of debtor(b) Indication of whether debtor is an organization or an individual

(i) If debtor is an organization must provide type of organization,jurisdiction, ID number NOTE: SSN is not required, but there is a box for itpolicy reasons protection of identity.

2) Rejection9-520(a)(a) Must notify the secured party on rejection and tell them why so that they can correct and resubmit

b. If the office accepts a FS w/o them, FS is still perfected so long as it has the 3 mandatory elements of9-502(a)is filed under 9-509(a)

iii. Errors in informationa. Post-Filing changes in information

1) 9-507(a) a financing statement remains effective, even if the collateral is sold or otherwise disposed of(a) However, perfection may be lost for other reasons (comment 3example)

2) 9-507(b) imposes no burden to correct information that changes after filing(a) If you get it right the first time, there is no burden to changeeven if becomes seriously misleading

3) 9-507(c)change in debtors nameONLY APPLIES TO AA COLLATERAL(a) FS effective for collateral acquired before or within 4 months of the change(b) But does not apply to collateral acquired by D 4 months after change, unless SP amends FS (no longer

seriously misleading) should amend to ADD a name, not change the namestill want notice under oldname

(c) If SP allows 4 months to pass then fileperfection starts from the new day and are subordinate to anyearlier arising interests(i) New priority date is the amendment date [comment 4] but not explicitly set out in rule

The comment applies the rule sensiblyLOOK AT IT4) If the description of the collateral changes (filed on equipment, but debtor later uses as consumer goods)

Generally still perfected if you were perfected at the outset.b. Minor Errors by filing party

1) 9-506Minor errors do not make the FS ineffective, but an error that is seriously misleading may(a) Mistake in Ds name can be very misleading

2) Misleading 3rd parties with incorrect information(a) 9-338 ONLY applies to purchaser who rely on the filing

(i) Must be reasonably misledby incorrect information to subordinate the interest of the misleadingparty. Even if the other SP was the first to fileSP2 has an estoppel argument(b) Another party cant be mislead by information that is not thereif the filing office accepts a FS witho

Ds address, SP2 cannot claim reasonable reliance and estoppel on a blank.3) Does NOT apply to an LC b/c they do not rely on the filing system

c. Errors in the filing office (you fill out the form correctlythey mess up putting information into system)1) 9-516(a)Communication (in accordance w/ office policies) of a FS & tender of filing fee OR acceptance

a record by the office constitutes filing [9-310perfected so long as accepted]2) You are perfected so long as you did all that you were supposed to do3) 9-516(d)a record communicated to FO and rejected for reason other than (b) is effective except against a

purchaser of the collateral that gives value in reasonable reliance upon the absence of the record from thefiles.


9/29

3. Amendmentsi. UCC provides forms to make amending easyii. Types

a. Termination: ends the effectiveness of the FS1) Regardless of date of termination, will remain in the records for 6 YEARS for inspection2) Debtor can request that a secured party terminate an inactive FShave 20 days to comply

b. Continuation: continue the effectiveness of the FS past the 5 year period1) 6 months prior to 5 year lapse when continuation must be filed to retain perfection2) Ifyou dont and the first statement lapses (creating a gap) you lose the prior perfection date

c. Assignment:1)

Technicallydont have to amend the FS to reflect assignment2) But may want to be the secured party of record

4. Locationhave to determine which secretary of states office to file in (See Multi State Jurisdiction Info Below)i. 9-307 File the Financing Statement in the office that is the location of the debtor

E. Possession of Collateral1. Generally

i. If you are perfecting by possession, the SA does not have to bewritten (can be in oral form)a. 9-203(b) there has to be a security agreement, but it does not have to be in record form

ii. Generally if the SP is in possession of the collateral, no filing is necessaryNOTE: 9-207(a) when SP is in possession of collateralmust use reasonable care in custody and preservation

iii. Perfection by possession vs. by filinga. 9-313 lists collateral thatMAYbe perfected by possession (some can also be perfected by filing 9-312)

1) Chattel Paper2) Instruments3) Goods4) Documents5) Money

(a) MONEYMUSTbe perfected by possessionCANNOT perfect by filingb. ACCOUNTS CANNOTbe perfected by possession ONLY by FILINGc. Accounts & Money are on opposite extremes: ONLY perfect $$ by possession; ONLY perfect account by filin

2. Often times possession is not practical (inventory, equipment) debtor needs to continue in business, but still other meanand benefits of seeking perfection by possessioni. Where possession is allowed SP can take possession directly, or through an agent

a. Constructive Possession: SP can appoint an agent to retain possessionbut CANNOT be the debtor (orsomeone too close to the debtor)1) Generally - lawyer can be a dual agent but both parties must agree and there must be full disclosure

b. A bailee may first hold for the debtor and then subsequently hold for the SPshould authenticate a record sayithat holding for SP to ensure perfection1) 9-313(c) mechanicstake possession of the collateral through the possession of the baileewhen bailee

authenticates a record acknowledging that they are holding to the benefit of the SPperfection throughpossession

2) If bailee delivers collateral back to debtorperfection is lost (unless SP has perfected by some otheradditional means)

3) 9-313(g)(2) imposes no duty on the bailee merely by acknowledging holding for SPshould have sign acontract so can enforce under other law or other sections of article (state code may impose a duty)(a) Without additional agreement under no duty to confirm to another party that they have signed and

accepted position as bailee for SP4) 9-313(h)allows easier practice of MWLs (comment 9)

F.

Control of collateral through anotherinvestment property info (9-314)1. May use investment property (account with stockbroker as collateral)i. Filing a FS is a weak way to perfect that interestliquid market for stock

a. But filing is still allowed for perfection1) Will beat a bankruptcy trustee or a LC2) But will NOT be perfected against a purchaser for value (another SP or a buyer)

b. Better to perfect by possession but cannot possessii. Turn stockbroker into a bailee to hold the collateral on behalf of the secured party

a. Bailee agrees to honor orders from bank without reference to debtor3 parties sign an agreementHeld by contract law to agreementif disobey bank, liable under breach of contract out of own pocke

2. Allows perfection by placing the secured party in control over the collateral


10/29

Forms of Intangible CollateralNB: In Re Copeland: a security interest in certified securities (stock) can be perfected by possession (by bailee) OR filingA. ACCOUNTS:

1. Creation of an account:i. Merchant sells goods to buyer who enters into a contract to pay (some time in future or on installments)

a. Article 2 covers saletransfer of title in exchange for a priceb. Merchant exchanged his ownership in inventory for the buyers promise to pay (buyer now owns inventory)

1) Transferred full rights with title to B in exchange for a promise to pay(a) That promise is an account (intangible property)

2. Account9-102(a)(2): right of payment of a monetary obligation whether or not earned by performancei.

[Subcategories: property has been sold, leased, license, assigned, disposed ofall create accounts]3. Granting a security interest in accountsi. Same as assigning the accounts to the bank for the purpose of collateral

4. Perfection of accountsCANNOT perfect throughPOSSESSION (not listed under 9-313)i. Default of merchant

a. 9-102(a)(3): account debtor is a person obligated on an account or chattel paper1) Does NOT include persons obligated to pay on negotiable instruments (have to use a different term)2) Why a different term? For instruments just say person obligated on an instrument because instruments

point you out of article 9 to article 3.(a) Instruments are differentmust have actual possession of instrument to collect

ii. Collection and Assignment 9-406The importance of Account Debtorsa. Account debtor may discharge obligation by paying the assignor (merchant assigns right to be paid to the bankb. If buyer has no notice of assignment and pays wrong partythe assignee cannot sue buyer for paymentc. Initially discharge debt by paying obligor (merchant)Until (but not after) you receive notification

authenticated by either the merchant or the bank of the assignment1) Buyer has a right to request proof of assignment 9-406(c).2) Once buyer initiates a request, it stalls effectiveness of noticepayments made to the merchant in the inter

are still applied to the debt and you are discharged3) But once furnished with reasonable proofmust pay assignee4) Once you receive signed notification, all payments after that point have to go to the bank5) If you ignore or inadvertently pay the merchant, you are NOT discharged

(a) The bank can still come after you for payment and force buyer to deal with the merchant to recoupd. 9-406(d)(2) generally, terms restricting assignment are ineffective

1) The increases practicality so that assets can flow from one person to another & it does infringe on the policof freedom to contract

e. NB: If its chattel paper created from the combination of a negotiable instrument and a security agreement, thecollection rules reside in Article 3. Comes from the definition of Account Debtor9-102(a)(3)

iii. Defensesa. 9-404 baseline proposition that assignee stands in the shoes of the assignor and is subject to all the same defensb. But if there is a waiver-of-defense clause in the agreement asserting that the assignment is not subject to

defenses1) In setting up the SA with the merchant, you are going to ask that the merchant include in all its contracts w

its buyers that the buyer waives any defenses against an assignee2) Agreement must be enforceable under9-404(a)

(a) Must have a term in the agreement not to asset defenses(b) Assignee must qualify under 9-403 (not just an assigneeonly enforceable against by type of GFPV)

(i) Must take an assignment for value (article 3 definition of value)(ii) In good faith(iii)

Be without notice that someone claims a property interest in the assigned right(iv)Without notice that there is a defense in existence

(c) If enforceable basically have the same rights as a HOLDER IN DUE COURSE under Article 3instruments

5. 9-109(a)(3)Article 9 governs the outright sale of accounts (comment 4)B. Instruments:

1. Defined:i. 9-102(a)(47) unconditional promise to pay a fixed amount of money with or without interest

a. Payable on demand or at a definite time (installment payments)b. Promise represented by a negotiable writingc. Examples

1) Promissory Notes


11/29

2) Checks3) Negotiable Instruments (NB: Henning will tell you if you have a negotiable instrument, wont have to figu

out)ii. Payment right

a. Two possibilities:1) 9-102accounts (right to payment for property that has been sold)2) 9-102instruments (qualifies under 3-104)

b. Definition of accounts excludes instrumentsso use term person obligated on instrument (not account debtoiii. Special characteristics of the document

a. The promise to pay is reified (made real) in the instrument (no longer intangible)b.

The writing itself becomes a tangible representation of an intangible right to payment and that right is transferrwith physical delivery of the document

c. At MINIMUM, the transferee gets the same rights as the transferor1) HOLDER IN DUE COURSE (special type of bona fide purchaser takes free of most contract defenses)

(a) Gives value (defined 3-303(a))(b) Good faith(c) No notice of problems relating to original transaction

2. Perfection (filing, possession, temp. automatic perfection)i. 9-312(a) allows perfection by filing & temporary automatic perfection may be available under 9-312(e) or (g)

a. 9-312(e) allows temporary automatic perfection20 days from the time the interest attaches to the extent it ariunder any new value given1) Definition of new value under9-102(57)

b. Filing will allow you to beat a LC, and buyers who dont qualify for other protectionsc. But not enough protection as against risk of9-330(d) (super-purchaser rule for instruments) and 9-331(a)ii. POSSESSION is bettera. 9-313 allows perfection by possessionb. Benefits

1) Protects against a negotiation to a holder in due course under 9-331(a) would otherwise take free of SI2) Precludes application of9-330(d) which gives priority to certain purchasers even if not holders in due cour

(a) 9-330 priority rule for chattel paper or instrument when bought by purchaser(i) Purchaserbroad termincludes SP (buyer is the narrower term)(ii) 9-330(d) purchaser of an instrument has priority and can win unless they had knowledge of the

existence of a prior security interest (filing first will not beat this purchaser)

Purchaser of an instrument has priority over interest perfected by means other than possessionc. The duty to pay follows the instrument

1) No notification requirement2) If buyer pays merchant (innocently unaware of the transfer) he will have to make a SECOND payment to t

SP and then sue merchant for restitution3) Greater protection in instruments than accountsno risk of inadvertent payment

3. Collection (falls under Article 3)i. Person obligated on an instrument (NOT an account debtor) has a right to demand presentation of the instrument

(right to collect embodied within the paper) have to do more than just notifyii. Must be in possession of the paper to collect on the instrument in the event of debtor default.

4. Defensesa. 3-104 deals with negotiable instruments (cannot get from article 9)b. 3-405(a) makes the 9-404 rule apply

1) Unless there is an exception, the SP takes subject to any defenses2) 3-405(b) the rights of a HOLDER IN DUE COURSE are not subject to defenses (term of art). When deal

w/ a negotiable instrument, you have to be aware that you may lose your defenses if the instrument falls inthe hands of a holder in due courseeveryone knows this (doesnt need to be in the initial agreement)C. Chattel Paper:

1. Defined: promise to pay with a security interesti. Bundle of rightsnot just right to enforce the promise to paycan either sue to enforce OR foreclose on the goodsii. 9-102(a)(11)record or records (one or more writing or electronic document) that evidences a monetary obligation

ANDa. EITHER a security interest in a specific good or a lease in a specific good

2. Perfectioni. 9-313 can possess EITHER by filing or possession (or control when dealing with electronic chattel paper)ii. FILEperfected against LC

a. Do not need physical possession of the chattel paper to enforce payment obligation


12/29

b. But possession can be preferred for evidentiary reasons ANDc. Dangers of not taking possession

1) Risk that a good faith purchaser for value will take interest out from under you(a) 9-330(a)(c)

(i) 330(a)a superpurchaser!(b) Could assign paper a second time to a purchaser who could take free of the security interest

2) Must have a term in the agreement making the bank free of defenses(a) Bank must qualify under 9-403 as applies to account debtor(b) Account debtor includes one who owes money on chattel paper (unless it includes a negotiable

instrument)

Chattel Paper vs. Account:Two buyers: one makes just a promise to pay (account); other includes a SA (chattel paper)BOTH are account debtorsBank wants to collect following defaultsends notice to both buyers of assignment from merchantBoth buyers default on payments and bank wants to recover from both

Accountbank must sue of judgment as a LC (no security interestcannot go after specific goods)Chattel Paperbank can repossess goods from buyer (succeeds in the rights of the merchant and can foreclose w/ defau

CP has more value in the market place than accounts, because it is backed up by collateralBut the two are still similar

Same with defenses of buyermust waive and have a qualified assigneeCollect through notificationShould take possession to protect yourselfCan perfect by filing OR possession (filing protects against bankruptcy trustee)

Identifying Forms of Collateral (intangible)A. Merchant leases car to lesseeretains title, uses car as collateral for loan

1. There is a retained interest so you have chattel paper [monetary interest AND lease of specific goods]2. Have an account debtor3. If BOTH the merchant AND the lessee defaultthere is NO article 9 remedy

i. All you can do is terminate the lease, and possession of the car reverts back to merchant as inventorythen SPforeclose on inventory to recoup loan (just adds an additional step)

B. Merchant sells goods to buyers and has SA in separate writing1. Have a SA describing goods as collateral AND a negotiable instrument evidencing buyers obligation to pay2. Still have chattel paperrecords that evidence a monetary obligation and a security interest

i. Here there is the inclusion of an instrumentii. Have to go to article 3looking for holder in due course status for the SP (take free of defenses)a. Must take possession of document

C. Farmer harvested crop and stored in independent grain elevator1. Grain elevator issues paper saying farmer stored 50,000 bushels of grain, paper also says who can get the grain out

i. Grain elevator is a bailee and will be liable in conversion for giving grain to wrong personii. Paper includes statementdeliver to order of farmer OR to bearer

a. Negotiable instrumentsuggests that someone other than farmer can claim the grain1) Nonnegotiable would only be payable to farmer

b. NOTE: the effect of the paper is ACTUALLY TITLE (not a representation of title like a certificate of title, theinstrument itself has real legal value).1) Title transfers with deliveryneed only transfer the paper when using an intermediary bailee

2. Document of Title:7-201 (dealing with bailments)9-102(a)(30)i. Two Kinds

a. Document issued by bailee who stores the goodswarehouse receiptb. Document issued by bailee who transfers the goodsbill of lading

ii. Document can be negotiableties ownership of the goods to the documentbecomes not only the receipt but also embodiment of the ownership of the goodstransfer document to transfer goods. When document says to the ordor or to be delivered to bearer it is negotiablea. Or, they can be non-negotiable

iii. Perfection9-312(c) may perfect by filing or possession


13/29

PRIORITY

RESIDUAL RULE 9-201: SA is effective against creditors of the debtor unless there is a rule that provides otherw

9-322 General Priority RuleA. DO NOT decide priority before I have advised myself: (VERY IMPORTANT!!!!!)

1. Step 1: whether the SP is perfected/unperfected at the time in question.2. Step 2: Categorize my other party.3. Step 3: Apply the priority rule.

B. BASIC RULES1. First-To-File:

9-322(a)(1)

(as between two perfected SPs, the first-to-file/perfect take prioritypure race system)2. Perfected Beats Unperfected3. Three Basic Contests:

i. SP vs. LC: if perfected when LC arises, SP will win (if not will lose)a. 9-102(a)(52)Lien Creditor[creditor that has obtained an interest in the property through levy or attachment

involuntary judicial proceeding]1) Most common formbankruptcy trustee544 trustee has the same rights or status as a LC

b. Process: Law grants LC a lien at moment of levy (until then had no interest in rights of debtor, only a judgmenc. 9-317(a)(2)unperfected security interest is vulnerable to the rights of an LC (subordinates SP rights)

1) LC must arise BEFORE:(a) Perfection OR(b) Conditions of9-203(b)(3) are met and FS filed [signed SA & filed FS beat later LC]

(i) 9-203(b)(3) requires authentication of a SA(ii) Ex: D signs SA SP files LC interest D gives value (attachment/perfection simultaneously)

Value is under 9-203(b)(1) so it does not matter that it was given after LC arose. Only authentication of the SA must arise before the LC does for the SP to beat the LC

d. 9-317(e) creates an exception to 9-317(a)(2)PMSI grace period1) PMSI Secured Party must perfect by filing within 20 days of the LC arising to prevail over LC2) If a person files a FS w/ respect to a PMSI within 20 days after the debtor receives the collateral, they are

perfected3) Ex: M executed/delivered docs. to FB FB advanced funds to GM cars delivered/LC levied 3 days

FS file(a) Bank perfected interest w/in 20 days of delivery (moment of possession starts clock)perfectedLC

loses(b) Relation BackPerfection:Perfection relates back to moment of attachment (when D got rights in

collateral)ii. SP vs. Regular Buyer: if SP perfectedwins; if unperfected will lose ONLY if the buyer gives value and takes

deliverywithout knowledge of the security interesta. 9-315(a)Residual rulesecurity interest continues not withstanding sale, unless:

1) SP consents to disposition free of security interest OR2) Provision of2-403(2) provides otherwise

b. Unperfected interest:9-317(b)buyer takes free of a security interest if(1) they give value and (2)receivesdelivery of goods (3) without knowledge of the security interest (4)BEFORE the security interest is perfec1) Knowledge = actual knowledge. Either subjective apprehension of a fact or youve come so close, you sho

be charged with subjective apprehension.c. Perfected interest:

1) 9-320(a): BICOB takes free of a security interest created by Bs immediate seller, even if B has knowledgethe security interest (so long as dont know the sale is adverse) and even if the security interest is perfected

2)

9-320(b): Buyer of**CONSUMER GOODS** takes free of a perfected security interest if the buyer givalue, lacks knowledge of competing interest and buys the goods for consumer use [BUYERS SELLERSRULE] (automatically perfected as PMSI, there can be no FS on record and does not apply to goodsperfected by possession)(a) SP takes a PMSI in Ds home TV (automatic perfection in PMSI for consumer goods) and does not fil

D sells TV to B (gives value, lacks knowledge, for use in Bs home). B takes FREE(b) SP could have protected itself by filing a FS(c) If B had been a dealer in TV and took for business and not personal use, SPs automatic perfection wo

have stood under 9-315(a)iii. SP1 vs. SP2:

a. 9-322(a)(1): Residual Rulefirst to file or perfect1) Priority dates from the earlier of filing or perfection


14/29

2) Allows preemptive filingcan beat a different SP whose interest may attach and perfect first, if you file fib. But beware gaps in perfectioncannot jump across gaps (have to start over)

C. Role of KNOWLEDGE in priority contests1. Rules

i. 9-322 first to file rule is PURE RACEknowledge plays no roleii. 9-377 has special rules protecting good faith buyers who rely on faulty certificates of title and have no knowledgeiii. 9-317 gives certain buyers priority over an unsecured party so long as they do not have notice of competing interesiv. BICOB takes free so long as does not have notice that sale violates interest of SP (ok if know SP exists)

Certificate of Title LawsA. Generally

1. 9-311(a)(2) filing is neither necessary nor effective to perfect collateral that falls under state law (certificate of title lawi. 9-311(d): Unless car is inventory, held for sale or lease by a person in the business of selling goods of that kind

a. Then perfection by filing is appropriate so long as remains in inventory2. 9-311(b)compliance with other law is necessary3. Must comply with the law of the jurisdictionthat is the exclusive method for perfection from the time the goods

become covered in that jurisdiction to the time they cease to be coveredi. Certificate of title can be issued by any state

a. Generally where cheapestcould have Alabama buyer, dealer and bankperfected in Oklahomab. 9-303(a)certificate can be issued even though there is no relationship between jurisdiction and collateral

ii. Becoming coveredwhen a valid application and fee are delivered to the appropriate authoritya. 9-303uses the term becomes covered (not the same as becomes perfected)

1) Becomes covered is a term of art used to determine what state law you look to for perfection determinati2) Does not answer to perfection but tells you where to look(a) 2 possibilities of moment or perfection

(i) Tender of application and fee OR(ii) Issuance of certificate by state

b. 9-303(b) deals with when an asset becomes covered1) Becomes covered when a valid application and fee are delivered to the appropriate authority2) Article 9 does not require the proof of the old certificate of title to become covered

iii. Cease to be covered at the earlier of time the certificate ceases to be effective under the issuing jurisdiction or ttime the goods become covered (should have become covered) by another jurisdictiona. Simply moving the car from state A to state B does not make the title issued by state A ineffectiveb. But if the debtor moves to state C that requires a new certificate of title to be issued to get license plate, debtor

must submit a new application and fee in accordance with state Cs lawnow becomes covered under state Clawgoverns perfection and priority

1) Look to 9-316 to see the impact of shifting the law that governs the transaction2) 9-316(d) contains general savings provision - SP has window of re-perfection if prior perfection lapses

(a) Even though new state governs, new state law will defer to the prior state to determine whether or not collateral is still perfected [issues ofpriority are governed by the NEW state]

(b) Deference is limited by 9-316(e)not a infinite grace period(i) Have 4 months in the new jurisdiction covering the goods to reperfect (file for new certificate)(ii) Becomeprospectively unperfected and retroactively unperfected as against a purchaser for value

(not an LC) if dont reperfect before 4 months lapse

NB:9-316(e)DOES NOT APPLY TO LCnever become unperfected as against a LC, evenever reperfect in covering state

The lapse in perfection only effects retroactive or prospective purchasers for value4. General perfection requirements

i.

Go to the secretary of states office, provide:a. Old Title, ApplicationFee, Formii. Two different possibilities of timing:

a. Moment of perfection is the moment the application is accepted by the office in most states1) AL: perfected upon tender AND deliver (deliver application to DMV, tender fees, and surrender existing

title)]b. Some states dont perfect until state actually issues the certificate showing the lien

iii. Creates a different notice systemfiling not necessary b/c the existence of the security interest is denoted on thecertificate of title. Generally, title is issued to creditor (lienholder) who will hold the title until the buyer has finishepaying for the cara. Compliance with the state or federal statute gives you the SAME Priority RIGHTS of article 9 perfectionb. Legal affect of possession of titlecreates the best evidence of who owns the cartitle is actually a

metaphysical thing (merely represented) in the paper.


15/29

iv. There are special rules that protect certainpurchasers when new certificates of title are issued, perfection under theoriginal jurisdiction has not lapsed, and the new certificate ERRONEOUSLY DOES NOT disclose that the car issubject to a security interest [does NOT apply to a dealer]a. 9-337(1): buyer (other than person in business of selling goods) takes FREE of perfected security interests if:

1) Give value2) Receives delivery after the issuance of the new certificate3) WITHOUT KNOWLEDGE of the security interest

b. 9-337(2): security interest is subordinate to conflicting security interest that attaches and is perfected in the newcertificatebut only if the 2

ndSP is without knowledge of the 1

st.

c. Example:1)

Certificate issued in state Bdoes not show that car is subject to security interest2) Buyer buys the car relying on clean titletakes priority over the bank (even though still perfected undercertificate of state A) as long as the buyer did not have knowledge of the security interest

3) Same result if dealing with SP2 instead of buyerSP2 relied on clean certificate in granting secured loan5. NOTE:NO automatic perfection in a PMSI for a car as consumer goodscertificate of title statute supersedes cod

i. But there is also no need to file within 20 days of delivery to perfect PMSI 9-310 filing not necessaryii. So long as get appropriate certificate of titleperfection is achieved

6. NOTE: a certificate of origin is NOT a certificate of titlehas no legal value, simply something created by themanufacturer attesting that the car is a genuine GM

B. Example:1. Becomes covered in A becomes covered in C LC or buyer appears

i. Look at law of state C to determine if it will accept title of state Aii. 9-316(d) second state looks back and says prior certificate of title continues indefinitely (NOT a 4 month rule)

a. (e) Only applies to purchaserspurchaser for value becomes unperfected and deemed never to have beenperfected before (after 4 months)iii. Priority Issues

a. If SP never reperfects in state CSP still wins against LC (certificate of A carries over indefinitely as againstbankruptcy trustees or LC)

b. But if a buyer or an SP2 arises after the 4 month windowSP1 loses (applies retroactively as well)Multi-State Jurisdiction Issues (What state governs perfection?)

NOTE: consider question in stageshow to know whose law governs before go to substantive law of that state for answer9-301 9-307ONLY give you a states name (answers no other question)Start in the state where the litigation occurs, and then the judge will apply the law of the relevant state

A. Choice of Law in Article 91. Perfection is governed by the law of the debtors locationkicks into place the INSTANT the debtor moves

i. Filing based on the location of the debtorgives 3rd parties some indication of where they should looka. 9-307 Determining the location of the debtor (will apply the statute as enacted in state of litigation to determine

what states law of perfection should apply)1) Individual: place ofresidence9-307(b)(1)

(a) (sole proprietorship is a fictionfile in individuals place of residence)2) RegisteredOrganization:9-307(e), (f)

(a) Any Corp. that depends on public filing for their existencecorporation, LLC, LLP(b) Should file in the location of the articles of incorporation(c) Foreign Corporation must be registered in the US to fall under registered organization provisions

(i) If offices are located outside the US apply 9-307(c) The debtors location rule only applies if that place is located in a jurisdiction that operates un

a similar notice system

Otherwise assume that the debtor is located in Washington, DC3) Organization: 9-307(b)(2), (3) Most partnerships are not registeredexist by virtue of partner agreemen

(a) Single place of businesslocated at that place(b) Multiple places of businesslocated at the chief executive office

b. State of location of debtor provides the substantive law for perfection1) If unsure where to file (cannot tell where chief executive offices are) FILE EVERYWHERE that might b

the location of the debtor insurance against possible imperfectionii. But there is a grace period under 9-316(a)[looking at law of new state of debtors location] (comment 2example

a. If you perfected under 9-301(1) in the old state, you remain perfected in the new state until (earliest occurrence1) FS in the old state is no longer effective (lapses after 5 years)2) 4 months after change of debtors location


16/29

3) Collateral is sold to a new debtor in a different stateget 1 year of protection 9-316(a)(3)b. Must re-file in the new state, before lapse to prevent gap in perfection

2. Priority is governed by the law of the location of the collateral (follow the stuff)i. Look to the priority laws of the state of the location of the collateral

a. 9-301(3)(c) local law of the jurisdiction in which the collateral is located governs the effect of perfection or nonperfection and priority ofnonpossessory security interests1) Debtors location still governs perfection, but location of the collateral governs priority

ii. Apply 9-317 of the jurisdiction in which the collateral is locatediii. If the collateral has NO PHYSICAL LOCATIONlike accounts, go back to the debtors location

B. SUMMARY1.

Location of D controls both perfection, the effects of perfection or nonperfection, and priority with respect to collateral consists of intangibles 9-301(1)

2. Location of D controls perfection with respect to tangible collateral (goods and indispensible papers) 9-301(1)3. A situs rule governs the effects of perfection andpriority with respect to tangible collateral 9-301(3)(c)4. In other wordsif goods are in State A and D is located in State B, a nonpossessory security interest will be perfected b

filing in State B, but priority contests will be resolved under the law of State A. The law of State A will govern everyaspect of a possessory security interest (9-301(2)) b/c thats where the goods are located

5. Deposit Accountsspecial, governed by law of the jx of the bank w/ which the account is maintained 9-3046. Security Agreement:parties can choose the applicable law so long as it is reasonable related

C. HYPO: Debtor is a Sole proprietorship located in AL. SA is for inventory & equipment & after-acquired collateral. SPperfects by filing a financing statement in AL. Debtor them moves to Mississippi.1. The law that governs the transaction the moment after the move is MS law.2. The grace period is governed by the new jurisdictions law (MS) go to MSs version of9-316(a)3. What happens after the grace period?i. Go to 9-316(b)4. Once you perfect, for how long are you perfected?

i. The number of years given by the new jurisdictions law (in most jx5 years)5. The moment the change in jx occurs, the governing law changes6. ***Dont try to solve the are you perfected? and the do you have priority? questions at once. Separate them in your

mind.D. HYPO: Same facts as above. After move to MS and during grace period, D buys new equipment. A new FC company files

MS for inv./equip. & AA property. Bank (original SP) then files before grace period is over. Is there a different answer for Aequipment?1. Under 9-316(a), the new equipment was never perfected under AL law b/c attachment couldn't occur until the debtor

acquired rights. No grace period for AA property (this is the law today) against anyone, even a Lien Creditor.

Lapse and ReperfectionA. 3 situations in which SP will need to re-perfect

1. 9-316(a)i. Effect Of Lapse: prospectively unperfected as to everyone, retroactively unperfected against purchaser for value

(GFPV, SP) but NOT a LCii. Instances

a. Change of locationmust reperfect within 4 monthsb. Transfer of collateral to another locationmust reperfect within 1 year

2. 9-315(c)i. Effect Of Lapse: prospectively unperfected as to everyone, retroactively unperfected against purchaser for value

(GFPV, SP) but NOT a LCii. FS lapses after 5 yearsfail to file a continuation

3.

9-316(d), (e)i. Goods subject to certificate of title lawii. Perfect properly in one state, but car becomes covered by another state

a. Perfected as against an LC FOREVER (never will become prospectively unperfected)b. After 4 months prospectively and retroactively unperfected as against apurchaser for value

B. Typical lapse of a FS1. A FS is only good for 5 years (remain on books for 6)9-515(a)

i. Good for 5 years afterfiling (ex. file: 6.1.07 6.1.12 is okay)2. 6 month window prior to termination to file a continuation statement and avoid a lapseperfected for an additional 5 y

i. Continuation statement continues from day which FS would have been ineffectivea. Ex: FS: 6.1.07 CS: 2.10.12 = New Lapse Date: 6.1.17

ii. 9-501(c)A CS not filed w/in 6 months period is ineffective


17/29

3. If you fail to file a continuation statementyou are deemed NEVER to have been perfected as against a purchaser forvalue (retroactive imperfection), and prospectively unperfected as to everyone. (LCs too).

PROBLEM ON FINAL: Circular PrioritiesSP1 LC SP2 SP1 FS lapses nowFiles 5/07 3/12 Files 4/12 5/12 7/12Three different priority contests:1)SP1 vs. SP2generally first to file or perfect rule

At the time SP2 filed, SP1 was still perfected (5 yrs.). But once SP1 allowed FS to lapse, became retroactively unperfecagainst purchasers for value (like SP2). Unperfected SP vs. perfected SPperfected wins

Bright line ruleknowledge does not matterEven if SP1 re-filed, still would be a gap in perfection and would loseSP2 wins 9-322(a)(2)

2)SP1 vs. LCSP1 would win because LC arose before lapse (not retroactively unperfected as to LC)3)SP2 vs. LCLC wins, already there when SP2 arises. Security interest coexists w/the LCs rights (SP2 should have known)Who gets is? Everyone beats everyone else in a circlearticle 9 does not provide a clear answer

PROCEEDS OF COLLATERAL

GenerallyA. Defined: proceeds are new property that replaces all or some of the economic value of the collateral [whatever is received u

the sale, exchange, collection or other disposition of the collateral]1. When collateral is sold to a good faith purchaseroften SP is limited to pursuing the proceeds2. If there is a perfected SI in collateral, there is an automatically perfected SI in the proceeds of the collateral

i. 9-203(f) security interest attaches to collateral and extends through to proceedsii. 9-315(a)(2) attaches security interest to any identifiable proceedsthe only qualifying factor is identifiable

B. Certain kinds of secured transactions expect the existence of proceeds1. Want the debtor to sell inventory so can repay loan.2. Security interest in INVENTORY should AUTOMATICALLY suggest security interest in ACCOUNTS (natural proce3. Distinguish proceeds from AA collateralif SA covers inventory and you trade a car out of inventory for another car

there is no proceeds issue (new car is part of inventory as welljust AA)i. Generally can avoid tracing problems by covering all anticipated categories in the SA and include those all as origi

collateralno issue with lapsed perfection or tracinga. SA should include: inventory, AA, chattel paper (catch all leases here if written), unsecured accounts,b. If you only are secured as to inventoryyou will notsweep in accounts generated by services (repair) b/c they

not come out inventory sales

Perfection with ProceedsA. Assuming there was perfection (no tracing issues)

1. Example: SP with perfected interest in backhoe (FS filed as to backhoe, no mention of proceeds)i. D sells backhoe to 3rd party B who pays by checkii. Can SP go after B? Yes, B takes subject to perfected security interest in equipment (not inventory). 9-315(a), (b)

perfected security party beats ordinary buyeriii. SI continued in BOTH original collateral (backhoe) AND proceedsSP can go after either (but can only recover o

a. If B1 was to resale to B2would still be a continued security interest3 possible sources of recovery2. Attachmentgenerally attach to anything that is a replacement of the collateral

i. Insurance payments 9-102(64)(E)ii. Also extends to claims for loss profits for use of equipment

a. Have the settlement check divided to avoid tracing problems and litigationB. Perfection in Proceeds 9-315

1. 9-315(c): security interest in proceeds is perfected if the interest in the original collateral was perfected2. 9-315(d): cuts off the temporary automatic perfection of proceeds

i. Start measuring from the moment of attachment or the moment the D acquires rights in the proceedsii. Will have at least20 days of perfectionthen will become unperfected if cant fit into a category below 20 day gra

period unless you meet other requirements.a. If you fail to perfect in that 20-day period you create a gap in perfection and lose the original filing date if y

do perfectperfection relates back to the original filingiii. 9-315(d)(1): Exceptions to the 20 day rule (Comment 5 2 examples)

a. Three requirements are met:


18/29

1) FS filed covering original collateral2) Proceeds of collateral could be perfected by filing in the same office

(a) Collateral inventory- chattel paper proceedsperfection does NOT lapse(i) Assets at BOTH ends of the swap must be perfectable by filing as opposed to something else does

work for Certificates of Title: i.e, cars - - cant perfect a car by filing (unless inventory)3) Proceeds were not acquired with cash (no cash out)

(a) Perfection will lapse if is a cash out phase after 20 days, UNLESS:(i) Original perfection was by filing in the same office were would file for proceeds AND(ii) One of two things:

Description of the original FS was BROAD enough to cover the proceeds OR Perfection occurs by the appropriate method before the grace period expiresb. Direct swap:

1) E.g.: SA covering inventory between SP and merchantmerchant trades cars for other things(a) Sells car taking used car as a tradedont have to go to proceeds, becomes part of inventory(b) Sells car on unsecured credittraded car for account(c) Sells car on secured credittraded car for chattel paper(d) Obligation represented by instrumenttraded car for negotiable instrument

2) Rule makes sensegenerally predictable swaps(a) Perfection in inventory SHOULD give notice of interest in these predictable proceeds

3) Continuation of perfection(a) Direct swap with no cash out phase continues perfected until FS lapses (after 5 years)(b) Accounts, chattel paper and instruments all can be perfected by filing (so continued perfection here) bu

would still be exposed to some priority contests without possession

c. Cash Outmore likely to sell backhoe, get cash and buy the horse1) Can hold the cash indefinitely and be perfected (under 9-315(d)(2)identifiable cash proceeds)2) But if there is a cash out phaseyou buy something elseyou have to perfect within 20 days

iv. 9-315(d)(2): proceeds are identifiable cash proceedsa. Cash Proceeds perfection does NOT LAPSE

1) Arise when a debtor receives cash or check in full or partial payment of an account or for inventory in whithe SP has a perfected security interest(a) or the like (comment 13(e) to 9-102)

2) If the cash becomes commingled with other funds so that it is no longer identifiable, can use the lowestintermediate balance rule to identify the proceeds (comment 3)

3) Considerations:(a) 9-331(a): transferee of a check that qualifies as holder in due course, takes free of perfected interest(b) 9-330(d): transferee may take free even if not a holder in due course if give value, take possession in

good faith without knowledge that transfer violates the rights of the SP (even if know SP exists)(c) 9-332(b): transfer of funds from a deposit account takes free if the transferee does not act in collusion

with the debtor to violate the secured parties rights [9-322(a) similar rule for money]b. CANNOT BE A CASH OUT PHASE: If money is taken out of account by D to buy something else (horse)

1) There is an attached security interest in proceedso long as can trace2) But only have a 20 day window of perfection in the horse

v. 9-315(d)(3): security interest perfected other than under (c)3. Gap in Perfection (miss 20 day window, but then catch and perfect)

i. Because nothing suggests retroactive invalidationyou get FULL protection for those 20 days

PURCHASE-MONEY SECURITY INTERESTS

Times when PMSI matters 9-317(e): PMSI perfected within 20 days of debtor receiving delivery gets priority over LC arising between attachment and

filing; and the interest of buyers and lessees are subordinated if they arise in the 20 day gap and the SP is later perfected

9-309(1): automatic perfection without filing or possession in most CONSUMER goods 9-324: exception to the first-to-file rule (9-322(a)(1)) & gives PMSI priorityGenerallyA. Defined:

1. PMSI must incur obligation as all or part of the price of the collateraldebtor acquires rights or use in the collateral 9-103(a)(2)i. Only applies to goods andassociatedsoftware (necessary for the use of the goods, integrated within) 9-103(c)

2. Two forms


19/29

i. Sellers PMSIseller allows D to buy on credita. obligation incurred as part or all of the price of the collateral

ii. Lenders PMSISecured party financing(enabling loan) bank makes a loan specifically for the purchase of acollateral, and the funds are used as such (have to be able to trace)a. Value given to D to acquire collateral

1) [Comment 3] money must be secured PRIOR to the collateraldoes not qualify if D gets on unsecured creand subsequently creates a security interest in the purchase price

b. Temporal connection between incurrence of PM obligation and attachment and perfection of SI1) If D received loan, charged collateral on credit card, and later used loan to pay off credit cardNO PMSI2) Value must in fact so used

(a)

Does not count even if SP made the loan to enable D to purchase the collateral but cannot traceB. Priority Rule: 9-324PMSI priority ruleexception to the general first to file rule1. 9-324(b) deals with proceeds in the form of cash, instruments and chattel paperwith regard to INVENTORY

i. There is NO mention of accountsuse first-to-file ruleii. Only cash, instruments and chattel paper can have pass through PMSI priority (if they comply with 9-330)

Forms of Collateralwith PMSIA. EQUIPMENT

1. 9-324(a)dealing with equipment20 day grace period to perfect beginning the DAY the D gets possession in thecollateral (comment 3)

2. All you have to do is file and you are perfectedPMSI super-priorityB. INVENTORY

1. Inventory covered under 9-324(b) (comment 4)2. Additional requirements for perfection in PMSI for inventoryi. Have to file FS BEFORE debtor receives collateral

a. There is NO GRACE PERIODb. Must NOTIFY, file and perfect ALL before the debtor gets possession

ii. Have to NOTIFY other SPs of the existence of the PMSIBEFORED receives collaterala. 9-234(b)(4) notification requirements:

1) Person sending notification has or expects to acquire a PMSI in the inventory of the debtor and describes thanticipated inventory

2) Must be received by other SP within 5 years of the debtor receiving possession3. However, they still get the 20 day grace period with regards to lien creditors b/c of9-317(e)

NOTE: article does not define the level of possession that the debtor must obtain before the 20 day grace period kicks in 9324(a) [comment 3] 20 days does not begin to run until the goods become collateralsubject to a security interest

Transformation vs. Dual StatusA. Two Approaches

1. Transformation Rule (old rule)suggested PMSI would be transformed into a non-PMSI whenever PMSI financedcollateral was mixed

2. Dual status Rule: Revised article 9 allows a transaction to be part-PMSI and part-non-PMSI (can be bothnotransformation)i. NON-CONSUMER TRANSACTIONSto the extent in

a. 9-103(b)(1)allows the maintenance of PMSI protection to the extent that the collateral is still PMSI1) 9-103(f) rejects the transformation rule in non-consumer PMSI

b. Must figure out how much of the collateral is purchase money (secures a purchase money obligation)1) 9-103(e) gives the order of priority for payment in transactions NOT dealing with CONSUMER goods.

Determines how payments are to be applied(a) First apply in accordance with terms of agreementSP and D set out how payment is to be applied in

(i) So long as reasonable, the court will apply the terms agreed upon(b) If there is no actual or implied agreement:

(i) According to any intention manifested by the obligor at or before payment(ii) Then, in this order:

Unsecured obligations PMSI (first in time and full, and then on down) Secured obligations not subject to PMSI

c. Cross-Collateralization (comment 4example)1) Each item of inventory secures not only its own price, but also the aggregate of the unpaid price of all

inventory financed by SP(a) This does not destroy PMSI status


20/29

(b) Under 9-103(b)(1) have a PMSI in each item only to the extent that the item secures a PM obligationincurred with respect to that item

(c) Can create a PMSI in each item of inventory to secure the aggregate of the purchase money obligationii. CONSUMERGOODS (different rules)

a. NOTE: AUTOMATIC perfection in a PMSI in CONSUMER GOODS1) Seller will always win in taking out a PMSI in consumer goods2) Never has to file3) Does not matter if originally purchase as consumer goods, but the purpose later changesyou can still tak

advantage of the automatic perfection of PMSIb. Transformation rule? (consumers love it because it strips goods of PMSI status and allows exemption in

bankruptcy)1) 9-102 defines consumer debt (debt incurred for personal, family, or household goods)(a) 9-103(h) leaves transformation vs. dual status issue to the court (to apply commonly accepted methods

Commingling & TracingA. SP must be able to trace the collateral to maintain the PMSIcan only have a PMSI in purchase-money collateral

1. Priority:i. Ex: M filed within 20 days of D receiving the collateral

a. The 20 day grace period DOES NOT begin until D actually RECEIVES the collateral (not until then that another parcould be mislead by D seeking another secured interest in the collateral or an LC could start grabbing)

b. Rationalesimilar to LC1) 9-317:perfectedSP beats a LC2) 9-317(e) if SP files a FS in the PMSI within 20 days of D receiving possessionSP1 is perfected as to buyer,

lessee, SP, or LC that arose in that 20 day gap3) A good faith purchaser (buyer) buys the collateral from D in the interim

(a) 9-317(e) protects a PMSI secured party from a good faith buyer (just like an LC) that arisesc. If SP1 filed first, still loses to M

ii. 9-324(a) exception for PMSI in equipmenta. If 20 day window passes w/o PMSI filing, kicked out of the special PMSI priority rules and BACK to first to fi

rules

HYPO: Seller (SP1) sells tractor to Debtor on credit (creates a PMSI) SP signs SA on 3/1 Delivers it to D on 3/5Something happens and now there is a LC with a judgment against D (apply 9-317(a)) SP2 files/perfects (apply 9-317(b)) Buyer buys tractor (apply 9-322(a)(2)) SP1 belatedly files a FS on 3/23.

SP1 wins against all 3 b/c of9-317(e) & 9-324(a)

BUYERSResidual rule of9-315 is subject to exceptionsSPs are perfected against buyers, except as otherwise provided in code.

Ordinary BuyersA. 9-317(b): If SP is unperfected at the time B takes delivery without knowledgeB beats SP

1. Requirements must be met BEFORE SP files or perfects:i. NO knowledgeii. Take deliveryiii. Gives value (contract promise suffices)

2. If buyer takes free of interestcan sell free of interest (nemo dotstand in shoes, derivative rights)B. Authorized and Unauthorized Dispositions

1. If SP authorizes the disposition of collateralthe security interest is severed and buyer takes free and clear2. But if the SP does not authorize, the buyer may take subject to the security interest that survives the saleC. Ex: SP (SA in equip.) D (K w/ B to sell E) B (searches, finds nothing) SP Files Delivery B pays (no knowledg

of SP)1. 9-317(b): SP wins because perfected by filing before B took deliverySPs rights extend to buyer and can repossess

equipment and sell at a foreclosure sale or hold liable in conversion for fair market value of the equipment2. What if B took delivery BEFORE it pays and SP files and B learns of SPs security interest?

i. Must BOTH take delivery and give value to have priority over an unperfected security interesta. TRICK: gives value is not the same as paymaking the promise to pay in the SA is giving value

(1) payment is a red herring look for giving value which includes a contract to payii. B would win b/c it took delivery & gave value before SP filed

3. If B has knowledge of the existence of SP before it takes delivery SP wins


21/29

BICOBA. 1-201(9): Person that buys goods in good faith without knowledge the sale violates the rights of others in the goods, and from a

person, other than a pawn broker, in the business of selling goods of that kind1. Seller must be in BUSINESS of selling the goods

i. Cant be a manufacturer selling equipment it doesnt needii. Can be a farmer selling livestock or cropsiii. Generally think of retailer selling inventory

2. Cannot be in partial or total satisfaction of a debt3. Careful with a sale in bulkSP may or may not anticipate a sale in bulk4. SP cant go after goods sold to a BICOB (even if there is still an attached security interest)5. Its an objective standard of good faith (e.g. if someone buys something well below a reasonable price, the interested SP ma

be able to prove that they were not buying in good faith)6. So long as created by buyers immediate seller

i. Protection does NOT apply to remote sellersB. 9-320(a): BICOB takes FREE of a security interest created by the seller even if the BICOB takes WITH KNOWLEDGE

ON FINALSP (takes SA in inv. & equip. & AA/files FS) D (sells equip. to B1 (used equip. dealer)) B1 (puts in inventory) B2 (GF(buys from B1)

Here, you have a perfected SP vs. regular buyerSP wins, continued priorityWhen equipment is in B1s inventory, SP still

Secured Out Lin Em

Documents

Transcript of Secured Out Lin Em