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SECURED TRANSACTIONS CREATION, PERFECTION AND PRIORITY UNDER UCC ARTICLE 9

Note: Portions of the outline that are particularly relevant to security interests in non-intermediated securities (i.e., certificated securities) appear in bold type.

1) SCOPE OF UCC ARTICLE 9

a) Article 9 Transactions UCC 9-109 i) Security Interest

(1) Transaction, regardless of form, that creates a security interest in personal property or fixtures by contract

(2) Security interest is an interest in personal property or fixtures to secure payment or to secure performance of an obligation UCC 9-102(37) (a) Secured Partyperson in whose favor a security interests is created UCC 9-102(72) (b) Debtorperson with the interest in the collateral UCC 9-102(28) (c) Obligorperson who owes payment or performance, usually the debtor UCC 9-102(59)

ii) Agricultural Liens (ALWAYS STATUTORY) (1) Interest in farm products (not a security interest) (2) Secures payment for goods, services, or real estate lease in connection with debtors farming operation (3) Created by statute (4) Creditor furnished goods/services or leased real property in the ordinary course of debtors business AND (5) Statute does not require possession to effectuate the lien

iii) Sale of Intangibles (Debtor sells his rights to payment) (1) Accounts (2) Chattel paper (3) Payment intangibles (4) Promissory notes

iv) Consignments (1) A consignment is a bailment for the purpose of sale. Article 9 applies if

(a) Merchant receiving goods (i) Is not an auctioneer (ii) Does not do business under name of the consignor (iii) Is not generally know by creditors to be a consignee

(b) Each delivery is $1000 or more at the time of delivery (c) Goods are not consumer goods immediately before delivery AND (d) The transaction is not a security interest

v) Conditional Sales UCC 9-109(a)(5); 2-401 (1) Any attempt by a seller to retain title in goods shipped or delivered is limited to a security interest

vi) Leases Intended as Security UCC 1-201(37): Article 9 applies if: (1) Lease is not subject to termination by the lessee AND one of the following:

(a) Term of the lease and economic life are equal (b) Lessee is bound to buy (c) Renewal or buyout at end of term for nominal consideration

(i) Nominal consideration is determined by comparing the buyout/renewal price to the "reasonably predictable fair market value"

(ii) Reasonably predictable fair market value is what the parties expected the goods would be worth at the time the parties entered into the lease agreement

(iii) If the only reasonable thing to do is pay the buyout price, the price is nominal (2) Security interests are not created in the following situations UCC 1-201(37)

(a) Clause requiring the lessee to pay insurance, taxes, etc. (b) Lessor files a financing statement (c) Present value of the property is substantially greater than or equal to the fair market value at the time the

lease was entered into (d) Full payout leases where lessee pays the full price at the end of the term

2 (e) Renewals for consideration (not nominal)

b) Collateral: Determined by the debtors use of the property i) Classification UCC 9-102

(1) Tangibles: Goods (movables at the time the interest attaches) including Fixtures UCC 9-102(a)(44). (a) Goods Generally

(i) Classification of goods is mutually exclusive: goods must be one of the four classifications (ii) The classification of goods is determined by their principal use (iii) If you can't determine the principal use, the good is equipment

(b) Consumer goods UCC 9-102(a)(23) (i) Primarily for personal, family, or household use (ii) Businesses cannot have consumer goods, only individuals

(c) Equipment UCC 9-102(a)(33) (i) Goods other than inventory, consumer goods, or farm products (ii) Rule out all other goods before picking equipment (iii) Animals can be equipment (if not on the farm as farm product) (iv) Principal Use Doctrine: = equipment

(d) Inventory UCC 9-102(a)(58) (i) Goods other than farm products where debtor

1. holds the goods for sale or lease OR 2. uses up or consumes the goods in business

(e) Farm Products UCC 9-102(a)(34) (i) Goods held by debtor (farmer) engaged in farming operation

1. Farming operation is raising, cultivating, fattening, etc. on the farm AND (ii) Goods are either

1. crops 2. livestockanimals raised on the farm 3. suppliesseed, fertilizer, feed, NOT fixed assets 4. products of crops or livestock in unmanufactured state

(f) Fixtures: UCC 9-102(a)41) (i) Personal property that is so related to real property that an interest arises under real property law (ii) Fixtures will either be

1. Equipment, if the debtor is a business OR 2. Consumer goods, if the debtor is an individual

(2) Intangibles (a) Money: medium of exchange adopted by a government (1-201(24)) (b) Investment Property

(i) Security (directly or indirectly held, certificated security or uncertificated security), commodity contract, or commodity account (9-102(a)(13))

(c) Commercial Tort Claim (i) Individuals tort claim arising out of business and not involving personal injury, or (ii) An organizations tort claim (9-102(a)(13))

(d) Chattel Paper (i) The records constituting a secured transaction in, or a lease of, specific goods, but not the charter of

a vessel (9-102(a)(11)) (ii) Record that evidences both a debt and a security interest in specific goods

(e) Instrument (i) Right to payment of a monetary obligation represented by a negotiable instrument or by a writing

commonly transferred by delivery and any necessary endorsement or assignment, unless it is a lease or security agreement, investment property, letter of credit, or writings evidencing a credit card receivable (9-102(a)(47))

(ii) Types 1. promissory notes 2. checks 3. negotiable certificates of deposit; drafts

(f) Deposit Account (i) demand, time, savings, or passbook account maintained with a bank, but not investment property or

an instrument (9-102(a)(29)) (g) Account

3 (i) right to payment of a monetary obligation that arises from (1) the disposition of property by sale,

lease, license, or otherwise (2) the rendering of services, (3) the issuing of insurance, (4) the incurring of a secondary obligation, (5) the providing of energy, (6) the chartering of a vessel, (7) the use of a credit card, or (8) legal lottery winnings; unless the right to payment results from money advanced or comes within one of the other categories of intangible property

(h) Document (i) warehouse receipts, bills of lading, and similar documents embodying rights to goods possessed by

a bailee (9-102(a)(30)) (ii) documents means documents of title

(i) General Intangibles (i) any personal property not fitting into one of the other categories (ii) (i.e. software, copyrights, patents, payment intangibles)

c) ExclusionsUCC 9-109(d) excludes the following from Article 9: i) Transactions Excluded

(1) Statutory liens other than agricultural liens (2) Assignments of deposit accounts (bank accounts) in consumer transactions (3) Insurance policies EXCEPT Health Care Insurance Receivables (4) Transfer of accounts, chattel paper, payment intangibles, or promissory notes where

(a) Sale is part of a going out of business sale (b) Assignment is for collection purposes only

(5) Assignment of a single account, payment intangible, or promissory note (NOT CHATTEL PAPER) to satisfy a preexisting debt

(6) Assignment of a right to payment under contract to assignee who is also obligated to perform under the contract

ii) Collateral Excluded (1) Non-commercial tort claims (2) Real estate other than fixtures

2) CREATION OF SECURITY INTERESTS: ATTACHMENT UCC 9-203

a) General Rule: A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral i) Attachment is all that is necessary when the dispute is between the creditor and the debtor ONLY ii) Where there is a dispute involving a third party, the security interest is enforceable against third parties

BUT perfection will be necessary to determine priority b) Requirements: (1) Agreement; (2) Debtor has Rights in the Collateral; (3) Creditor gives Value (Statute of

Frauds) i) Agreement and Authenticated Record: Debtor authenticates a security agreement that describes the collateral

(1) UCC 9-102: Security agreement is an agreement that creates or provides for a security interest (a) This is the intent requirement (b) The parties, particularly the debtor, must have intended to create a security interest and intent to

do so must be evidenced in some kind of record (c) No magic words are required in the agreement

(2) UCC 9-102: Authenticated Record (a) The debtor signed the agreement or (b) The debtor executed or adopted a symbol with the present intent to adopt or accept a record (c) Record is information inscribed on a tangible medium or stored in electronic medium and is

retrievable in perceivable form (d) Emails can be records (e) Bundle of Documents Theory: ALL the correspondences by the parties can be used to meet the

authenticated record requirement (3) UCC 9-108: Description of the Collateral

(a) General rule (i) Reasonably identifies what is described.

1. Exact description of the collateral 2. Category of collateral 3. An Article 9 description (e.g., accounts, chattel paper, inventory, etc.) 4. Quantity 5. Computational or allocational formula or procedure OR

4 6. Any oth