Secured Transactions Fall 2010 – Paul A. Mariano

Chapter 1: Creating a Security Interesta. The Security Agreement

i. § 9-203(a): a security interest attaches to collateral when it becomes enforceable against the debtor

ii. How though?1. See § 9-203(b)

a. Value given (i.e. giving a loan)b. The debtor has rights in the collateralc. One of four other requirements that have the function of the

statute of frauds (These are laid out in 9-203(b)(3))i. The most common is (a) the debtor has

authenticated a security agreement that provides a description of the collateral (you can authenticate by signing the thing)

ii. Does it have to be in writing?1. Lacy says it does have to be in writing or in

some other medium that can be retrieved in a tangible form

2. Key definition is authenticate; what’s it mean?

a. To sign or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record (§ 9-102(a)(7))

b. The definition of “sign” is found at § 1-201(b)(37) – using a symbol executed or adopted w/ present intention to adopt or accept a writing

c. The definition of “record” is found at § 9-102(a)(69) – info inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form

d. So it takes a long time to figure out where the writing requirements of a statute of frauds are

b. The Composite Document Rule (Bollinger Case)a. Can you use composite documents to demonstrate whether a sufficient

security agreement was around?i. What does intent to create a security agreement mean????

1. check out the promissory note: it mentions that there would be a future Security Agreement

2. however, the court holds that the note, by itself, is not sufficient (b/c of the future language)

ii. So yeah, intent…1. Do the writings taken together show an intent to create a

security interest?2. intent test page 26: a writing(s) that adequately describe the

collateral, are signed by the debtor, and establish that a security interest was agreed uponwould satisfy both the formal requirements of the statute and the policies behind it

3. Z & J argued that the financing statement, in and of itself, was enough to constitute a security agreement

a. The court notes the requirements for both documents are very similar and checks out other cases to see how this was ruled upon

b. Virtually every decision has held that a financing statement standing alone won’t constitute a valid security agreement

i. § 9-502(d): a financing statement may be filed before a security agreement is executed or a security interest attaches

ii. Because secured creditors can file as soon as negotiations begin establishes the fact that a financing statement doesn’t necessarily represent a security agreement (lenders can pull out)

iii. Also noteworthy is the fact that Section 502 doesn’t require the other party to sign the financing statement

4. So what was the critical document?a. Letter that establishes substitution for items of

collateral (if there was no security interest, there would be no need for such a document)

c. Description of Collaterali. General notes:

1. § 9-203(b) requires the security agreement to be a writing and include a description of the collateral that reasonably identifies the collateral

2. § 9-108 indicates when the collateral description in a security agreement is ok (when it reasonably identifies)

3. in § 9-108, a description is effective if it “reasonably identifies what is described”

a. examples of collateral descriptions occur in 108(b)b. 108(c) outlaws supergeneric descriptions in Security

Agreements

4. in addition, § 9-502(a) requires a financing statement to indicate the type of collateral covered

5. § 9-504 indicates when a financing statement sufficiently indicates collateral covered; FS may use supergeneric descriptions like “all assets of debtor” or “all personal property of debtor”

d. After-Acquired Collaterali. General:

1. in 9-204(a) & (b) allows a security agreement to create or provide for a security interest in after-acquired property/collateral

2. How specific must the description be to create SI in a/a/p?

e. Proceedsi. § 9-102(a)(64) defines proceeds; related definition in (a)(12)

1. traditionally includes whatever the debtor gets on the disposition of collateral

ii. So if the debtor sold a piece of secured collateral in exchange for some sweet cash, this cash would be “proceeds” and the secured party automatically has a secured interest in the proceeds

iii. 9-203(f) and 9-315(a)(2) taken together provide that a SI that has attached to collateral automatically attaches to any identifiable proceeds of the collateral.

iv. Hypo:1. Feb 1 debtor grants security interest in a JD tractor2. Files financing statement listing collateral "1 JD tractor"3. July 1 debtor sells tractor to a third party for cash and opens a new

bank account w/the cash proceeds from the sale4. No other deposits/withdrawals from the bank account5. July 15 debtor buys MF tractor with a check from this bank

account6. Does the secured party have an security interest in the new tractor?

a. Yes, 9-102(a)(64) defines proceedsb. 9-315(a)(2) says that the security interest will continue in

the proceeds from the sale of the collateral as long as the proceeds are identifiable; identifying the proceeds can be a problem w/cash proceeds but not in this case b/c they opened the new account and did not deposit any additional money into that account

c. 9-102(a)(12) tells us that collateral includes proceeds to which a security interest attaches; so the cash constituted proceeds to which the proceeds attached and the cash became collateral; in exchange for that collateral, debtor received new tractor which becomes proceeds subject to the security interest under 9-315(a)(2) so the new tractor becomes collateral

f. Value and Rights in Collaterali. Value

1. 9-203(b): a SI does not attach in collateral until value has been given and the debtor has rights in the collateral

2. 2-501(1) talks about a buyer acquiring a special property on the identification of goods to a K for sale.

3. In some cases, the SI can attach when the debtor does not have possession of the collateral.

4. An obligation to make a loan that would arise under a SA, even if conditional upon approval by the credit committee is still sufficient value to support a SI

ii. Rights in Collateral1. Swets Motor Sales, Inc. v. Pruisner

a. Swets is going out and purchasing used cars and would resell them to Pruisner. Swets would give to Pruisner the actual vehicle and the certificate of title covering the vehicle. Pruisner would then write checks drawn on his deposit account payable to Swets. Pruisner was operating a car dealership, and he had a floor plan agreement w/ Chrysler Credit under which Chrysler Credit was financing Pruisner’s inventory of new and used cars. Chrysler had a SA covering the inventory, motor vehicles and after-acquired property. Chrysler also filed a financing statement to perfect its security interest. Perfection by stating on certificate of title. Swets is upset b/c Pruisner’s check bounced. Chrysler asserts they have security interest in the cars and they almost certainly made advances against each of these cars. Did Chrysler have a security interest in these cars when the check that Pruisner gave for the cars was dishonored? If Chrysler has a security interest, does it prevail over any claim by Swets?

b. Could say that Swets should’ve taken a SI. Maybe so, but 2-507(2) gives Swets a sort of right to reclaim the goods. It tells us that a buyer’s right to retain and dispose of the goods is conditional upon making the payment when due.

c. 2-511(3) tells us that a payment by check is conditional until the check is declared good.

d. Now the question becomes, how does that reclamation right fair against a secured party of the buyer. Ct doesn’t really get into this issue.

e. The ct. really gets into a priority rule. 2-401(1) tells us that if a person has voidable title, that person can transfer a good title to a good faith purchaser for value. What’s voidable title? Code doesn’t really define it but it gives us some illustrations. - A person has voidable title if they pay for goods with a check that is subsequently dishonored.

f. Here, Pruisner had voidable title even though his title was no good as against Swets.

g. Is Chrysler a good faith purchaser for value? (Honesty in fact in the conduct or transaction concerned) Yes

h. Did Chrysler give value? It gave a loan to Pruisner and made advances against the cars to which Pruisner had voidable title?

i. Is Chrysler a purchaser? 1-201(33). A purchaser is anyone who obtains an interest in personal property in a consensual transaction. Chrysler is a purchaser.

j. B/c Chrysler was a good faith purchaser, it has priority over Swets.

k. Court ignores problem: in general, if you want to transfer an interest in property, normally you can’t transfer better title than you’ve got. Pruisner may have right sin the collateral but argument that those rights could be subject to Swets’ right of reclamation

l. 9-203 has been a revision to make people more comfortable with this decision: (b)(2) – the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party.

2. A. Lassberg & Co. v. Atlantic Cotton Co., Inc.a. Lassberg is creditor of Mahaffey who is a cotton broker. M

owes L 400K. In order to secure this debt, M enters into a SA w/ L secured by after-acquired property. M enters into a transaction with Pecot in which M would look for buyers for Pecot’s cotton. P would ship cotton to M who would get money from the buyer, take his commission and send the money to P. L is arguing that it has a SI in this cotton M when stored some of it for 4-5 days.

b. Ct says that just b/c you’re in possession as a bailee of someone else’s property does not give you rights in the collateral to encumber it.

c. M was more than a bailee – he was authorized to make sells on behalf of P. Court says not sufficient.

Chapter 2: PerfectionA. Introduction

a. Notes:i. If a secured interest remains unperfected, it is subordinated

against a lien creditor (including the bankruptcy trustee)ii. Just b/c you perfect an interest, doesn’t mean you’ve

established priority quite yetb. Ways to do it:

i. Attachment1. secured party doesn’t have to give any public notice2. example: purchase money security interest; retailer

retaining a security interest in goods sold to a customer

(good against other secured parties, but not against subsequent customers)

3. this appears contrary to the basic premise of the Code4. 9-309

ii. Possession1. if the debtor doesn’t have the stuff anymore, then it

indicates that the collateral isn’t unemcumbered2. problems: can’t perfect intangibles (many forms of

collateral are pure intangibles and there is nothing to take possession of); debtor might need possession of the collateral to conduct business

iii. Control1. Only in specifically defined situations. In general,

“control” is the ability to dispose of collateral unilaterally, w/out the cooperation of the debtor.

iv. Compliance with other law1. other federal statutes or state ones2. motor vehicles are perfected by notation of the lien on

the certificate of title pursuant to the state codev. Filing

1. 9-310(a), filing is the primary method for perfecting a FS

g. Perfection by Filingi. Notice Filing

1. Problems (page 55)a. raises the provision 9-210 (supposed to put interested third

parties on notice)i. so how do we get more information when you’re

interested in making a loan and you find a financing statement?

1. Interested third parties have no right to request information from a secured party; that right only remains with the debtor

ii. So, and HMO is wicked indebted to some crooked physicians like Jayme’s dad; docs want their money back but find a loan from a lender to the HMO

1. 9-210 won’t allow them to get some sweet info about the loan, only the debtor can do this (and they won’t b/c they don’t want to facilitate a judgment against their property)

2. The contract between the lender and the HMO almost certainly included a provision that states when a conflicting lien attaches, the HMO would be in default and all of their stuff goes back to the lender

h. Sufficiency of Financing Statement (In re Hegert)

i. Section 9-502(a): a financing statement is sufficient only if it contains:1. Name of the debtor 2. Name of representative of the secured party3. Indicates the collateral covered

ii. Section 9-502(b) for fixturesiii. Look at the UCC 1 form (or check out 9-521)—it has lots of blanks for

more info than is required under 9-502(a)iv. 9-516: if the filing office rejects the financing statement for any of the

reasons listed in the statute, filing does not occur1. basically this brings up the question of what happens when the

financing statement omits information2. What happens if the filing office makes a mistake?

v. 9-516(b) – refusal to accept record; filing does not occurvi. 9-520(a) states that filing does not occur w/ respect to a record that a filing

office rejects b/c it lacks this infovii. Why separate the provisions required in 9-502 and 9-521?

1. It happens in situations where a filing office submits a filing statement that omits info. As long as you have the required info under 9-502(a) it’s effective and if the filing office accepts and files the statement, then it is effective to perfect the SI in debtor’s collateral.

viii. These provisions apply only to the Omission of information. ix. Problems with a financing statement:

1. Omissions (item is left blank); can still file the statement though if the filing office accepts it; 9-520(c)

2. Error on the financing statement when it is filed; 9-506(a)3. Error because of subsequent events; 9-507(b)

a. Perhaps a name changed after filing4. Omissions v. Error:

a. If you’ve got an omission problem then the Q typically will come up: if despite the omission the secretary of state has accepted statement for filing. Although it should have been refused, it was accepted, then it’s effective to perfect security interest unless omitted info is from 9-502

b. If you’ve got an error in address or name of SP then you’ve got a different problem. You’ve got a situation where the financing statement has been accepted but the info is erroneous.

5. Errors – two types:a. Erroneous at time of filing:

i. 9-506 - minor errors not seriously misleading do not interfere with perfection; fatal errors typically relate to the name of the debtor

ii. 9-338 - if someone reasonably relies on the incorrect information, the security interest of the

erroneous party is subordinate to the person who relied on the wrong information

b. Subsequent events render information erroneous:i. 9-507(b) says if the UCC was correct when filed,

the fact that subsequent events have rendered it seriously misleading is irrelevant, it remains effective for perfection even though the name and address of secured party has changed

6. Other provisions to look at:a. 9-506 – minor errors or omissions are Ok, however, if the

errors are seriously misleading then this can make the financing statement ineffective

b. 9-338 – this kicks in when somebody’s relied upon the incorrect info. If you reasonably rely upon the erroneous information, then the security interest of the party who perfected the erroneous financing statement is going to be junior to you.

c. Under 9-516(b), the financing statement must give address of debtor. What happens if it’s wrong? Is it still effective? This will be decided under 9-506.

d. The fatal errors in info typically relate to the name of the debtor and not really to anything else.

i. Financing Statement Authorized by Debtori. No longer has to be signed by the debtor in the hope that everything will

eventually become electronic in nature (stupid old Article 9 required this)ii. However, the debtor must still authorize the filing of the financing

statement in an authenticated record; 9-509(a)1. under 9-509(b), the debtor, by signing the security agreement,

authorizes the secured party to file a financing statement covering the collateral described in the security agreement

iii. 9-625(b) allows the debtor to collect damages if the secured party files a financing statement without the requisite authorization by the debtor; 9-625(e) provides for a $500 penalty recoverable by the debtor

iv. 9-513(c)(4) – the debtor can demand a termination statement from SP that must be sent w/in 20 days after demand is received

v. 9-509(d) – debtor can file termination statement himself if SP filed unauthorized FS

j. Indication of Collaterali. Original Collateral

1. supergeneric descriptions are ok in FS (not in SA) b/c it gives creditors notice to look more closely; hard to really mess this up

2. 9-504a. (1) suggests that a sufficient description of collateral in the

SA may be used to indicate the collateral in the FS, and often drafters use the same description in both records

b. (2) – the description of collateral is sufficient if it is either a description pursuant to 9-108 (SA) or an indication that the FS covers all assets or personal property

ii. Proceeds – *SOMETIMES ON BAR EXAM*1. when the debtor defaults, does the secured party have an interest in

the inventory, accounts, cash, or equipment2. 9-102(a)(64) - proceeds3. 9-315(c) – a perfected SI in the original collateral automatically

continues in the proceeds, whether or not the FS mentions proceeds

4. 9-315(e)(1) – If a FS covers the original collateral, the SI in the proceeds continues until the FS either lapses or is terminated so long as

a. The proceeds are collateral in which a SI may be perfected and

b. The proceeds are not acquired w/ cash proceeds (9-315(d)(1)

5. A SI in cash proceeds continues indefinitely, so long as they can be identified (9-315(d)(2)

k. Name of Debtori. Basic Rules

1. see 9-503(a); a financing statement must sufficiently provide the name of the debtor

2. Why is everything so rigorous?a. Obviously because they’re indexed according to the name

of the debtor; see 9-519(c)(1)b. For example, if you’re an interested party, you submit a

request for a search under 9-523(c)(1)(A)ii. 9-503: Name of the Debtor and Secured Party

1. different rules for different types of partiesa. for instance, in terms of registered organizations, the

debtor’s name is what appears on that organization’s articles of incorporation

b. (a)(4) usually applies to everyone elseiii. Minor Errors Rule

1. Some idiot will always misspell things 2. 9-506 tells courts how to approach the problem

a. A tolerant rule: if a financing statement has a minor error, it’s still effective unless the error makes it “seriously misleading”

b. 9-506(b): failure to sufficiently provide the name of the debtor is seriously misleading (unless afforded protection by the 9-506(c) safe harbor)

l. Post-Filing Changesi. Transfer of Collateral

1. are the goods in the possession of the buyer still subject to the secured party’s security interest; if so, is the security interest perfected

2. Example:a. On 7/1 SP and D enter into a SA over equipment; there is a

no sale auth. Clauseb. The debtor, in violation of the SA, sells some equipment to

the buyerc. Debtor files bankruptcyd. Does the SP have a security interest in the equipment, and

is it perfectede. 9-315(a)(1): a security interest continues in collateral

unless the secured party has authorized the sale free of the security interest

i. This sale was definitely not authorized so the security interest will continue

ii. The buyer may try to argue that he paid value and took in good faith but this super tough luck

f. What about the financing statement?i. See 9-507(a): the financing statement remains

effective3. Sweet Variation:

a. Assume that on 7/1/06 Bank files a FS in NC; the SA precluded the debtor from sales; debtor sold to the Buyer (an SC corp.) and a lender is thinking about lending to the Buyer

b. Two things have happened:i. A transfer and a change in governing law

ii. The Buyer is a debtor and is located in SC; normally to perfect you would just need to file in SC

iii. See 9-316(a)(3): transfer of collateral to a debtor in another jurisdiction

1. the filing in the old jurisdiction remains effective for a period of one year

2. if the Bank can track down the collateral, the Bank is authorized to file a financing statement under 9-509(c)

3. if the Bank files in the one-year period, things remain continuously perfected; if not, tough

ii. Name Change1. American Furn. Corp. changes its name to AFC, Inc.

a. SA Inventory a/a/pb. SP1 F.S. Am. Furn. Corp. 7/1/06c. 1/1/08 name change to AFC, Inc.

i. Who has the secured interest in inventory after the name change?

ii. Filed F.S. has become seriously misleadingiii. 9-507(c) – F.S. filed against Am. Furn. Corp. will

remain effective for SI in inventory for 4 months after the name change (5/1/08)

1. but won’t attach to the inventory acquired after 1/1/08

d. SP1 has to monitor the debtor and update its F.S. within the 4 months and the credit searcher has to monitor to see if there are any SP’s

iii. Change in Business Structure1. Problem page 85

a. 5/1/2004 Bank enters into a SA with the Scotts (individuals); Scotts grant the Bank a SA in all of their inventory, equipment, & accounts; also an a/a/p clause; Bank files a FS under the individuals’ names

b. In 7/2004, the Scotts decide to incorporate as “KC of Camden, Inc.,” which assumes all their business assets and debts;

c. In 8/2004, BW agreed to supply inventory to the Corp. in exchange for a security interest in all of its current and after acquired inventory; BW perfects by filing a FS that lists KC of Camden, Inc. as the debtor

d. Bankruptcy on 2/1/05e. Which party, the Bank or BW, has priority?f. Three Groups of Inventory:

i. Group A: stuff owned by the Scotts on 7/1/2004 and transferred to the Corp. - §9-315(a)(1), 9-320(a), 9-507(a)

ii. Group B: inventory acquired by the Corp. from third parties before 11/1/2004 – 7/1/04 to 10/31/04

iii. Group C: stuff acquired after by the Corp. from third parties after 11/1/2004 or to 1/31/05 – these are the issue ones

g. 1st Step:i. Determine whether a security interest has attached

h. 2nd Step:i. If there is a security interest, was the interest

perfectedi. 3rd Step:

i. If both parties have perfected interests, which party has priority?

2. Resolution of the Problem – “Special Priority Rule” a. Under 9-315(a)(1): security interest continues unless the

Bank authorizes a sale free of the security interest

i. Buyer could try to argue that buyer in ordinary course and they take free of the Bank’s security interest 9-320(a) & 1-201(b)(9) – but the provision specifically excludes bulk sales – sale here is outside the ordinary course of business – must know about the perfected security interest

ii. Therefore, the Bank still has an interest in Group A inventory

iii. However, is it perfected?1. No way BW ever finds this; the Bank’s F.S.

& interest has become seriously misleading but has it become unperfected?

a. Nope; § 507(a) says perfection continues, also look at 507(b)

2. So both BW and the Bank have perfected interests

3. Priority between BW and the Bank creates a double debtor problem and the Bank wins here bc the Bank perfected against the transferor, the Scotts, over the party that perfects against the Transferee, KC.

iv. This is a transfer problemb. What happens to inventory that the Scotts never owned

(after they incorporated)Groups B & Ci. Clearly BW has a perfected security interest in this

stuffii. What about the Bank? New Debtor Rules

1. first question is whether the Corp. is a new debtor; test found in 9-203(d)(2) for Attachment: “the person becomes generally obligated for the obligations of the other person…and acquires or succeeds to all or substantially all of the assets of the other person” – a/a/p clause in the Bank’s S.A. with the Scotts is effective to create a SI in the property acquired by KC

2. if there is a “new debtor” 9-203(e) says that you don’t have to have a revised security agreement

3. KC of Camden probably a new debtor4. 9-102(a)(56) – new debtor, 9-102(a)(60) –

original debtoriii. So if there is a security interest, is it perfected?

1. 9-508(a) Perfection: says perfection continues; however

2. 9-508(b): says that if the difference in names causes the FS to become seriously misleading, perfection will only apply to collateral acquired by the new debtor before, and within four months

a. Therefore, the Bank wouldn’t have a perfected interest in Group C stuff because it was over 4 months – 9-508(b)(2) – Bank would have filed within the 4 month period Bank is perfected in Group B and unperfected in Group C

c. So the Bank and BW both have a perfected interest in Group B stuff; who has priority?

i. 9-322(a)(1) Priority: would suggest the Bank would have priority because filed first

ii. 9-322(f)(1) states that there is an exception for “other provisions of this part” – which means that if you can find another priority rule in the 300 section then that priority rule preempts the residual rule of 9-322. It means that only if there is not a special rule that applies then you go to the residual rule of 9-322.

iii. 9-326(a) subordinates the interest of a new debtor who has a FS effective solely under 9-508 to any perfected interest that is perfected other than by a filed FS effective solely under 9-508.

iv. This view is slightly different than under pre-revision Article 9 because it still allows the Bank to defeat lien creditors (namely the Bankruptcy trustee) even though it is subordinate to BW.

d. Group C Resolution:i. If the Bank does nothing, it’s security interest will

be unperfectedii. So the Bank should be monitoring the Debtor

iii. Assume that on 10/1/2004 the Bank gets things together and files a FS with the new name:

1. A reasonable question is to ask whether the Bank is authorized to file against KC? Only have relationship with the Scotts.

a. 509(b) gives them sweet authorization

2. So what happens now?a. Obviously, the Bank will have a

perfected interest but will it change things under 9-326(a) priority rule?

i. Comment 2 says this section won’t apply when a new initial financing statement is filed. Comment 1 in updated UCC.

ii. So the Bank has priorityb. If there is no subordination under 9-

326 then there is no special priority rule under 9-322(f) and therefore it goes back into 9-322(a)(1). Change from prior law.

3. Pre-Revision Authoritiesa. Under old Article 9, courts would say the Bank never

entered into an agreement with the corporation and therefore does not have an enforceable security interest

4. “New Debtor” Under Article 9a. Look under 9-203(d) to determine if there is a new debtor

i. The person becomes generally obligated for the obligations of the other person including the obligation secured under the SA, and acquires or succeeds to all or substantially all of the assets of the other person.

b. 9-203(e) – if a new debtor becomes a debtor in a SA entered into by another person, the SofF is satisfied w/ respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement

m. The Filing Systemi. Central Filing

ii. Kinds of Records Filed1. § 9-515(a): a financing statement remains effective for 5 years and

lapses at the end of this term2. What are the consequences of lapse?

a. upon lapse, a financing statement ceases to be effective and any security interest that was perfected becomes unperfected

3. What can the secured party do to avoid lapse?a. file a continuation statement; see 9-515(e)b. see the UCC-3 form (the Swiss Army Knife of forms)

i. easy to do, and the only trick is as to when it can be done

ii. 9-515(d): can only be filed during the final 6 months of the prior financing statement

iii. If an untimely continuation statement is accepted, 9-510 says it will still be ineffective

n. Choice of Law

i. Location of Debtor Governs Tangible and Intangible Collateralii. Location of the Debtor

1. Example: on 3/1 Bank and Debtor (NC) enter into a SA for equipment; where does the Bank file to perfect?

a. § 9-307(b)(1): individual is located in the state in which they reside

b. Bank should file in NCc. Assume that on 7/1 the Debtor relocates to SC

i. See 9-316 (deals with a change in governing law)ii. Assuming debtor files bankruptcy on 12/1, will the

bank’s security interest be perfected?1. 9-316 indicates that the filing will be

effective for four months after relocation; however, this is after 4 months so it will become unperfected

iii. This sucks hard for the bank b/c they now have to monitor the debtor to determine if they’ve established a sweet, new residence

o. Goods Covered by Certificate of Titlei. The Basic Rules of Perfection

1. Security interests are noted on certificates of title; big issue deals with motor vehicles

2. 9-311(a)(2) & (b): a security interest in a motor vehicle covered by a certificate of title statute must be perfected under that statute and the filing of a FS is ineffective

a. Two exceptions to 311(b): i. 9-311(d): applies to inventory held for sale or lease

by a person or leased by that person as lessor and that person is in the business of selling goods of that kind

1. If they aren’t in the business of selling goods of that kind, you need to perfect on the certificate of title

ii. Collateral pursuit provisions – when multiple authorities have a issued a certificate of title for the same car – 9-313(b) & 9-316(d) & (e)

b. There is a box for lien holders on the certificate of titlec. If you want to register a car you have to have a certificate

of title in your named. There is an exception for inventory:

i. If you sell new or used cars and grant an interest in inventory, that interest must be perfected by filing: 9-311(d)

ii. Also, during the time the dealer holds the vehicles for sale or lease, no certificate of title has yet been

issued, and 9-311(d) states that during this time 9-311 does not apply

e. Normally, when you buy a car, the dealer retains a security interest by applying, on your behalf, for a certificate of title (the title lists you as the debtor, etc.)

f. The normal problems involve some sweet fraudg. Example:

i. On 1/10/09 SP-1 has a SA in a motor vehicle; the debtor lives in NC so the SP sends it all there

ii. 9-309(1) – SI perfects when it attaches iii. NC issues a COT listing the debtor as the owner and

listing the SP-1 as the lien holderiv. What messes everything up is when the debtor gets

a COT from another jurisdiction that doesn’t disclose the interest of SP-1

v. 2/1/09 - SC issues a COT – no liens - If D got SC to issue a COT, it won’t show the lien of SP-1

vi. Four subsequent events:1. Debtor files bankruptcy

a. Either 4/1/09 or 9/1/09b. 9-316(e) is N/A

2. Debtor sells to used-car dealera. 9-315(a)(1)b. 9-320 – if BOC takes free – but no

good bc not a BOC – 1-201(b)(9) – debtor not a car dealer

c. Have to look at 9-316(d) – perfection by possession w/n the 4 months

d. Can beat the car dealer if you come in and perfect within the 4 months – can take the car to perfect- dealer is at risk for the first 4 months after SC issues the COT

e. Dealer should just trace the VIN#3. Debtor sells car to a consumer

a. Consumer buys on 3/1/09b. SP 4/1 repossess c. What if the car is just sold to some

random dude?i. 9-337(1): will probably help

out the consumer buying the car (lots of requirements though; clean COT is the most difficult)

d. If this is just a case of a used car dealer, SP 1 will win because 337

says “other than a person in the business of selling goods of that kind”

4. Debtor uses the car for collateral for a loan (SP-2) – cash for title type of business

a. 3/1/09 SP-2 - SI - SC – COTb. 9-337(2)

vii. First look at 9-316(e) – a security interest described in (d) becomes unperfected as against a purchaser of goods for value and is deemed never to have been perfected as against a purchases of the goods for value if the applicable requirements for perfection under 9-311(b) or 9-313 are not satisfied before the earlier of:

1. The time the SI would have become unperfected under the law of the other jurisdiction

2. The expiration of 4 months.viii. 9-303(b) and (c) envision a situation like this:

1. (b) Tells us goods cease to be covered at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time the goods become covered subsequently by a certificate of title issued by another jurisdiction.

a. Goods were covered on 4/1 but ceased to become covered by NC certificate of title on 7/1 when SC issued a certificate of title.

2. (c) Tells us the applicable law. Things don’t look good for SP1 b/c on 7/1 this car ceased to be covered by NC certificate of title.

ix. Is SP-1 unperfected now?x. Remember 9-316 and the four-month rule. 9-316(d)

and (e) have similar rules that affect certificate of title.

xi. 9-316(d) tells us the NC perfected SI remains perfected as long as it would have remained perfected in NC had SC not issued a certificate of title. This relates back to 9-303.

xii. 9-316(e)(2) is similar to the four-month rule under (b), but it’s still different.

1. 9-316(b) does not equal 9-316(e)2. It’s as if, to the trustee, that the SC title had

never been issued.

ii. What Law Governs Perfection?1. 9-303(c) states: “The local law of the jurisdiction under whose

certificate of title the goods are covered govern perfection, the effect of perfection or nonperfection, and the priority of a security interest in the goods covered by a certificate of title from the time the goods became covered by the certificate of title until the goods cease to be covered by the certificate of title.”

p. Perfection by Possessioni. Possession by Agent

1. The transaction in which perfection occurs by the secured party’s possession is often called a pledge

a. See UCC § 9-310(b)(6)2. An oral agreement is ok as long as the secured party has possession

of the collaterala. both attachment (9-203) and perfection (9-313(a)) occur

when a secured party takes possession of collateralb. no authenticated security agreement is required

3. Additional issues;a. Why does a secured party have a perfected interest if it has

possession?i. The notion is that the debtor’s lack of possession

puts third parties on notice that the debtor does not have unencumbered possession of the collateralsupposed to give notice to third parties

ii. Ct. in Rolain never really follows through on this idea

iii. See comment 3, § 9-3131. a court may sometimes determine that a

person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party

q. Possession by Baileei. What does the secured party have to do to establish a perfected interest

when the collateral is in the actual possession of a third party?1. Collateral not covered under a document of title

a. § 9-313(c) 2. Goods are in the possession of a bailee that has issued a negotiable

document of titlea. Documents of title are viewed as locking up all the property

interests in goods into a piece of paperb. Example: farmer gets his cotton ginned and bailed and

transfers possession to a state warehouse in exchange for a negotiable warehouse receipt (evidences that the possessor

has rights to the cotton and shows that the warehouse has taken possession)

i. You deal with the goods through the receiptsc. What’s the magic and significance of negotiability?

i. See 9-312(c)ii. Significance is that the only way to get possession

of whatever is in the receipt is to give them the document

3. goods covered by a non-negotiable document of titlea. Example: 4/15 debtor enters into a security agreement with

a banki. Agreement:

1. Debtor makes bats, sends them to a field warehouse; warehouse gives a non-negotiable instrument in the name of the bank, who then makes a loan to the debtor

b. 9-312 tells us how to perfect a non-negotiable receipti. One way is to have the thing issued in the name of

the secured partyii. What do we do when the debtor wants to sell the

bats?1. he makes a payment on the loan; bank issues

a release order to the warehouse when then delivers the bats back to the debtor

On 5/1 assume that debtor sends the month of April production to the

r. Perfection by Controli. Control is alternative way to perfect in: (see 9-314(a))

1. Deposit accounts (9-104)2. Electronic chattel paper (9-105)3. Investment property (9-106)4. Letter-of-credit rights (9-107)

ii. Control is only way to perfect in:1. Deposit accounts as original collateral (9-312(b))2. Letter-of-credit rights other than as supporting obligations (9-

313(b))iii. Requirements for control:

1. Requirements differ for each different type of collaterals. Security Interests in Consumer Goods (PMSI/purchase money obligation –

Matthews case)i. Consumer Transactions Under Article 9

1. 9-204(b) severely limits the use of a/a/p clauses to prevent people from mortgaging their future

2. Article 9 isn’t really drafted to prevent abuse of consumersa. there are, however, some protections

b. 9-201(b): the Code falls back to be subordinate to consumer protection laws

c. 9-103: cross collateralizationi. However, this rule won’t apply to consumer

transactionsii. Courts have to fashion their own rules

3. 9-309(1): lists a set of transaction in which a secured party’s interest is perfected on attachment

a. One of which is purchase money security interests4. 9-312 and 313

a. Instrumentsb. Goods

ii. Perfection of Security Interests in Consumer Goods1. One of the traditional themes in Article 9 is that to perfect a

security interest, one must provide notice to the outside world (filing, possession, etc.)

2. However, 9-309(1) presents situations when Automatic Perfection occurs

a. Seems fundamentally against the policies of Article 9no notice

3. 9-301(1) – does not apply to goods described in 9-311(a) – motor vehicles need to be under certificate of title statute

a. Limited to purchase-money security interests (PMSI) (defined in 9-103); must also be limited to consumer goods (defined in 9-102(a)(23))

i. Can’t look at a lawn tractor and say that it is a consumer good

1. If held by a dealer then it is inventory2. If held by a landscape person then it is

equipment3. Only consumer good if held by the debtor

and held for usual family purposesii. Have to look at the purpose for why debtor holds

the goodb. Purchase-money obligation 9-103(a)(2)

i. Seller sells good to buyer and retains an interest in the good for buyer to pay the seller

ii. Third party obligation – buyer gets loan from the bank to buy a good from the seller. When buyer got the loan it granted a SI in the good to the bank. The loan must be made for the buyer to purchase the good or be what is AKA an enabling loan. Loan will typically be a check made payable to the buyer and the seller so in theory the buyer can’t use the loan for anything else than buying the good from the seller.

iii. The goods would be a consumer good, the lender is a purchase-money obliger and the elements of 9-103 are met and it is automatically perfected.

iii. Example time:1. Case #1: somebody wants to buy an awesome green tractor to mow

the lawn; debtor goes to the seller and needs financing to get the tractor; seller gives the mower on credit with the agreement that he has an SI in the tractor

2. Case #2: debtor still wants the awesome green tractor; seller says tough, we don’t do credit; debtor rolls to a finance company and explains the situation; finance company gives the debtor a loan/check to acquire the tractor if they grant them a SI in the tractor; debtor just endorses the check to the seller and the debtor gets the sweet tractor, which they then paint red because is gay

iv. Let’s look at some definitions:1. 9-103(b)(1): purchase money security interest

a. To the extent that the goods are purchase money collateral with respect to that security interest

b. What the deuce is purchase money collateral?i. 9-103(a)(1)

1. Means goods that secure a purchase money obligation

c. So do the goods secure a purchase money obligation?i. 9-103(a)(2)

1. Obligation incurred as all or part of the price of the collateral (Case 1) or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so use (Case 2)

2. Case 2 is really called an enabling loan d. The goal is to fit everything into the definitions

v. Super Example:1. 7/1 debtor purchases Item #1 from the seller and grants a security

interest in Item #1 to secure the purchase price which is debt #1.a. Purchase money SI.

2. 9/1 debtor wants some more stuff and this will be a secured arrangement giving the seller an SI in Item #2; supposedly this covers debt #2 as well as the remainder of debt #1; in addition the collateral is Items 1 & 2. It will invariably have this cross-collateralization clause in the agreement which says that Item #2 covers debt #1 and that debt #2 is also covered by item #1.

3. What is the effect of the cross-collateralization?a. Many times it destroys purchase money statusb. 9-103(h) seems to say keep applying the transfer rule

4. One final thing with PMSI in consumer goods

a. Debtor gets loan from Sears and gives Sears a PMSI. Say Sears says that Debtor can’t sell tractor without prior written consent. Debtor sells anyway. Has a garage sell to do this and Buyer buys. Debtor probably defaults on payments. Sears decides to go after the Buyer. Does Sears have priority as SP over the Buyer of the collateral?

i. Sears’ SI in tractor will continue despite sale – 9-315(a)(1)

ii. 9-320(a) – buyer in ordinary course and takes free1. But to be buyer in ordinary course 1-201(b)

(9) needs to be a seller in the ordinary business of selling tractors so 9-320(a) is N/A

iii. 9-320(b) – possibly protect the buyer – buyer can take free of Sears’ SI if five conditions are met

iv. 9-309(1) – is Sears going to rely on automatic perfection? If so then it will lose to Buyer at the yard sale.

v. 9-320(b)(4) – if Sears perfected by filing a F.S. then it will prevail over the Buyer.

1. Probably not feasible for Sears to file a F.S. on small items.

Chapter 3: Priorityt. Conflicting Security Interests

i. Problem 1 p.1191. 2/2 Bank files a FS covering Debtor’s equipment and submits a

request for more information; after this, Debtor applies to Lender for a loan and signs a SA on 2/5 granting the Lender an SI covering all of its equipment (also files a FS on this date); 2/9 the filing office tells the Bank no other weird things were on file as of 2/2; Bank advances loan proceeds on 2/9

a. There are two protected SIsb. Who has priority?

i. 9-322(a)(1) says that conflicting SIs rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the SI is first perfected.

c. In this case, the Bank doesn’t perfect until 2/9, but it files on 2/2 and can rely on this date

ii. Problem 2 p.1191. Debtor applies to Bank for a loan; Debtor gives a valuable jewel

for collateral on 2/2 and bank advances the funds; Debtor, on 2/5, wants money from the Lender and grants Lender an SA in various items including the jewel; this is perfected by filing a FS

a. Who wins?

i. The bank again because they perfect by possession this time

ii. Of course the Lender will never find this but they should’ve asked to see the collateral first

u. Future Advancesi. 9-204: things can cover any other debt that the debtor owes to the secured

partyii. 9-204(c): says if the parties so provide, any future advances will be

covered by the original agreementiii. Problem 1

1. Bank makes a loan of $100k for an SA in equipment with the provision that any additional loan will also be secured by the equipment; a FS is filed on 10/1

2. on 11/1, Lender shows up and determines the collateral is worth more than the amount of the Bank’s loan and makes a loan of $75,000; also, they file a FS

3. on 12/1 makes a future advance of $100k4. Debtor defaults and the collateral is only worth $150k5. Who wins?

a. Bank clearly gets the initial $100k; what about the additional amount?

v. Operating Under the First to File Rulei. Problem 1 (mid p.128)

1. Bank one and Lender has SIs perfected in debtor’s collateral (assume that on 7/1/05 Bank one enters into a SA for equipment with an a/a/p and f.a. clause and files a FS; on 7/1/06 lender does the same thing)

2. Bank Two comes b/c Bank One is tired of the debtor’s nonsense; two ways to do it

a. Bank Two makes a loan to debtor to pay off Bank One that erases all of Bank One’s SI and stuff; Bank Two claims a SI in the equipment; in this case, the debtor is entitled to receive a termination letter and eliminate the effect of Bank One’s nonsense

b. Another way is for Bank Two to pay off Bank One’s stuff and take an assignment of all Bank One’s rights

c. An assignment is obviously better b/c that way Bank Two gains priority over the stupid lender

d. See discussion after Bollinger, supraii. Problem 2 (bottom p.128)

1. on 2/1 bank advances a loan of $50k with an SA for the equipment and files a FS; on 6/15 debtor wants some more money from another lender, who wants some more info

2. debtor files a 9-210 request for information and the Bank says on $50k is owed

3. Lender concludes the equipment is worth a lot more and advances another $40k and files a FS

4. on 7/1 Bank enters into SA #2 with the equipment and $60k5. Who has what kind of priority?

a. Bank obviously wins with the first $50kb. Lender was pretty stupid b/c the bank will always win

6. There is no liability to anyone according to 9-210 because the inquiry says nothing about the Bank not lending anymore

w. Collateral Other Than Inventory (Brodie Hotel Supply)i. Purchase Money Security Interests

1. Example:a. On 7/1/05 Bank gets an SA with an a/a/p in equipment for a

loan and files a FSb. On 7/1/07 debtor wants some sweet new equipment but

Bank refuses; the dealer of the equipment wants to sell it but wants priority in the equipment

i. This is a problem b/c the Bank has already filedii. Super gay b/c it gives the Bank an unjustified

ability to control the debtor’s creditiii. So the Code creates purchase money priority; see 9-

103 and 9-324c. If the seller perfects within 20 days of the debtor getting the

equipment, the seller will get priority over the Bank i. So we need to establish a PMSI and perfect within

20 daysx. Inventory (Southtrust v. Borg-Warner)

i. Requirements for PMSI in Inventory1. Section 9-324(b)

a. Harder to do than section (a)i. You have to perfect before the person receives

possessionii. You must send authenticated notice to any other

secured creditor holding an interest in the inventory (must tell the party that PM financer expects to acquire PMSI in the debtor’s inventory, and must describe the inventory).

1. This notice must be received before the debtor gets possession of the inventory

2. Have all these hoops bc the first filer is going to rely on the inventory in making f.a.’s on the loan agreement

b. 9-103(h) – equipment cross collateralization c. 9-103(f) – equipment – courts read too much into this

section according to Lacy

d. 9-103(b)(2) – real protection for purchase money selleri. Is the SI in item one a PMSI in a cross

collateralization situation?1. (b)(2) tells us it is

a. Item 1 is inventoryb. Item 2 was PM collateral at some

timec. Security obligation that was PM

obligationi. Item 1 now secures Debt 2,

bc Item 2 is going2. (b)(2) – was to overturn Borg-Warner

y. Lien Creditorsi. Conflict with an Unperfected Security Interest

1. p.146 Problem 1a. 2/1 SP entered SA w/collateral equipment and provided a

loanb. 2/5 creditor levied executionc. 2/9 SP filed FSd. 9-317(a)(2)(A) security interest is subordinate to rights of

creditor who becomes lien creditor before security interest was perfected

e. Assume SP took pmsi in equipment and delivered it to debtor on 2/1. 9-317(e) if SP has pmsi in new equipment, if SP files w/in 20 days after debtor gets possession, SP wins. 9-317(e) protects SP from losing to intervening lien creditor.

ii. Conflict with a Future Advance1. in a conflict btw advance made pursuant to A9 SI and subsequent

lien creditor’s rights, 9-323(b) recognizes priority of the future advance

a. if the advance is made or committed w/in 45 days after the lien arises even with knowledge of the lien; and

b. if the advance is made or committed after the 45-day period so long as the secured party is without knowledge of the lien at the time of the advance or commitment.

z. Buyers and Lesseesi. Basics:

1. When a debtor sells an item of collateral to a Buyer, we’re worried about whether a secured party’s SI still is attached to the item

2. How do you determine if the SI continues in the collateral?a. Two issues:

i. Does the SI continue notwithstanding the sale?1. § 9-315(a)(1): the SI will continue in the

collateral notwithstanding the sale unless the

SP has authorized the debtor to sell free of the SI

a. the debtor’s authority to sell is almost always addressed in the SA and these agreements will almost always require permission; this will always be so in consumer goods

b. inventory will be different; the debtor can’t generate cash unless it sells the inventory; so in an inventory financing arrangement the debtor will likely be authorized to sell the collateral (however, the SA sometimes requires the financer’s approval before the sale can occur)

2. for instance, if a buyer bought a mobile home (down payment and installment payments); the inventory financer will require the mobile home dealer to assign or transfer the chattel paper to it

3. waiver: if the inventory financer knows the debtor has historically sold inventory without permission, such behavior constitutes waiver of the SA and consent won’t be required

ii. If the SI continues notwithstanding the sale, does the buyer still take free of the SI?

1. § 9-317(b)a. the buyer takes free only of

unperfected SIs; there are some other requirements as well

b. if this is no help, then you roll on to 9-320(a)

2. § 9-320(a)3. § 1-201(b)(9)

aa. Buyers and Lessees of Non-Inventory Goodsi. Case #1

1. Lender has a SI in debtor’s equipment to secure a loan of $100k on 2/1; the SA says unauthorized sales constitute default; on 3/1 debtor contracts to sell 2 pieces of equipment to Buyer (in violation of the SA); Buyer pays $10k down and agrees to pay the remaining $15k at delivery; Lender realizes they are dumb and files a FS on 3/15; Buyer pays the $15k on 4/1 and gets the equipment

a. Buyer probably does a UCC search because the debtor doesn’t really do this in the ordinary course and won’t find anything on 3/1

b. Does the Buyer take free of the SI?i. Under 9-317(b) buyer gives value and doesn’t know

of the security interest but doesn’t receive delivery before Lender perfects

ii. Case #21. What happens if on 3/10 the Buyer pays the rest and takes

possession?a. The buyer would win against the unperfected SI

2. What if the Lender had lent money to the Debtor that enabled Debtor to buy the equipment that it later sold to Buyer?

a. 9-317(e) tells the Lender that if they have a PMSI and they perfect within 20 days of when the Debtor gets possession of the collateral they will prevail over intervening lien creditors and buyers

b. However, we would need to know when the debtor took possession of the collateral (because the Lender would have to file within 20 days of this)

3. Does the PM priority create a problem for the Buyer?a. Yes, he could still be junior to the priority of the Lender

bb. Buyers and Lessees of Inventory Goodsi. Buyer in the Ordinary Course of Business

1. buyers and lessees of inventory collateral take free of inventory security interests; see § 9-320(a) (ordinary course of business)

2. Problem 1:a. Lender takes a SI in Debtor’s equipment (business

machines) by filing; again, sale without consent constitutes default; Debtor, in violation, sells some of the machines to Dealer; Dealer buys and sells used business machines and sells the machines in question to Buyer for cash (Buyer purchases to use in his business); neither Dealer or Buyer knows of Lender’s SI

i. 9-317(b) is of no help b/c Lender’s SI was perfected before Dealer got his stuff

1. everyone will win if they are a buyer in the ordinary course b/c no one knew of Lender’s SI

ii. Is Dealer a buyer in the ordinary course of business?

1. § 1-201(b)(9)a. Must be in good faithb. In the ordinary course (selling stuff

is the ordinary course)

c. Take possession or have a right to possession

d. Must give new valuee. No knowledge of a SI violationf. You have to purchase from someone

who’s in the business of doing this (in the business of selling goods of that kind)

2. this is all weird b/c under the definition you can’t know the sale violates someone else’s rights but you can know of the existence of the security interest

3. dealer will lose b/c he didn’t purchase from someone in the business of selling goods of that kind and thus, he’s not a buyer in the ordinary course of business

iii. Is Buyer a buyer in the ordinary course of business?1. presumably acted in good faith, gave value,

and took possession; never heard of Lender and seems to purchase from a used equipment dealer (a person in the business of selling goods of that kind)

2. however, the Buyer only takes free of SI created by the “buyer’s seller”

a. the SI we’re talking about is Lender’s and was created in a K between Lender and the initial debtor; the buyer’s seller was not a party to this transaction

b. therefore buyer would only take free of some SI that dealer himself created; still subject to Lender’s SI

iv. What are the Lender’s rights with respect to the machines now in Buyer’s possession?

1. Comment 3 to § 9-320cc. Goods Subject to Certificate of Title Acts

a. we’re going to generally be worried about whether or not the buyer is in the ordinary course

b. 260 S.E.2d 712i. A Dodge dealership had all of its stuff financed by Chrysler credit and

had a little truck they leased from another dude; a guy needs a truck and purchases the leased truck; he never gets the COT

ii. Court held that even though the guy was familiar with car transactions he was still a buyer in the ordinary course

iii. If the owner of goods puts them in possession of someone who deals in goods of that kind, then the merchant can still transfer good title

c. 690 F.2d 422i. Guy (Irvin) that drove to VA to get used cars brought them down and

sold them to a guy that auctioned them offii. Irvin entered into agreements with the dealer in VA, who would

transfer possession to him but retained the COT; Irvin then sold the cars to Rawls who paid Irvin with a check; theoretically Irvin was supposed to pay the dealers who then released the COT; Irvin of course didn’t pay and blew the money on coke and whores

iii. Rawls argues that he can prove he owns the cars without having COT and establish his status as a buyer in the ordinary course (saying the dealer entrusted the cars to Irvin)

iv. So the issue was whether Rawls was buyer in the ordinary course (§ 1-201(b)(9))

1. Ct. said he wasn’t acting in the ordinary course of business and the VA dealer won

dd. Double Debtorsi. Seebrite v. Transouth Financial Corp.

1. Partnership enters into a SA with Transouth under which Transouth takes a SI in inventory and a/a/p; debtor can’t sell without prior written consent; perfected by filing a financing statement

2. Partnership enters into a transaction where it sells a bulldozer (an item of inventory) to one of the 3 partners; partner finances the acquisition of the new bulldozer by going to a retail lender (Seebrite); Seebrite makes a loan that enables the partner to acquire the bulldozer; Seebrite has an SA and perfects five days after the guy gets the bulldozer

3. Partnership conceals this transaction from Transouth and didn’t use the proceeds to pay them; partner defaults to Seebrite and partnership defaults to Transouth; both think they have a perfected SI in the bulldozer

4. What do we do here?a. BOW applied 9-312 (old one, now its 9-322)b. First of all, Seebrite has a PMSI

i. Under 9-324, a PMSI would have priority if this isn’t inventory

c. You must purchase with good faith and without notice that the sale violates another SI

i. Partner is not a BOC bc obviously knows with only 3 of them and is subject to Transouth SI.

d. How does SC Sup. Ct. resolve this dispute?i. Court reverses the lower court that found for

Transouth.ii. Court concludes like 9th Cir. That priority rules of

Art. 9 don’t apply so they look to first principles.

1. Bc the court gave Seebrite priority it appears that the Court does not apply the Doctrine of Derivative Title as the first principle which is the 9th Circuits first principle.

2. Says that Seebrite is in the same situation as a good faith purchaser for value.

3. SC Sup. Ct. appears to be saying that the partner who is a bad guy has the right the power to convey title better than Transouth’s to Seebrite bc of good transfer negotiation.

4. Seebrite would need to show that Transouth authorized the sale – but can’t do this and argues that this would put a burden on commerce

5. SC Court’s good faith purchaser for value is first principle not the derivative title as 9th Cir.

6. And that if they did apply Art. 9 then Seebrite should win under 9-324(a).

e. What rule is right?i. Created by the buyer/seller limitation

1. Protection does not extend to buyer/sellerf. What does revised Art. 9 do?

i. 9-325 - “Special Priority Rule” - addresses the Double Debtor problem

1. See the Bar outline p. 50 ii. Bank of the West v. Commercial Credit Financial Services, Inc.

1. on similar facts they applied § 9-3122. 9-315(a)(1) – sale from BCI to Allied was not authorized by

CCFS. Allied not a BOC under 1-201(b)(9) bc not making a bulk sale. SA would remain effective under 9-507(a). CCFS retains a SI in the inventory.

3. Bank also has SI in the inventory under a/a/p and it is perfected bc they filed a FS covering the inventory. Court is presented with two perfected SI in the inventory and has the resolve the priority.

a. D.Ct. looked to 9-312(5)(a) of 1972 code which is the same as 9-322(a)(1) – first to file or perfect generally prevails – D.Ct. concludes that since Bank filed in 1982 before CCFS then it prevails.

b. Say that SA filed by Bank did not provide any notice to CCFS.

4. Doctrine of Derivative Title – Court thinks that the correct result is reached in this case by applying the common sense notion that a creditor cannot convey to another more than it owns.

5. 9th Cir. Awards priority to CCFS based on the Doctrine of Derivative Title based on the fact that Article 9 does not cover the issue with the first to file rule

ee. Rights to Paymenti. Scope of Article 9

1. § 9-109(a)a. Article 9 applies to a transaction that creates a security

interest in personal property or fixtures by contract; andb. a sale of accounts, chattel paper, payment intangibles, or

promissory notesff. Reordering of Rights to Payment in Article 9

i. The New Definitionsii. Sale of Rights to Payment

1. In re Commercial Money Center, Inc.a. Debtor owns a piece of property and leases it to a 3rd party;

lessee is obligated to pay rent for however long the lease is for; obviously the lessor has the right to take possession if there is default

b. If the owner of the equipment leases things and assigns the lease to a secured party; the lease is still chattel paper of course, but the buyer gets a fairly limited interest (title remains in the owner); the buyer gets the right to lease the goods to someone else for the remainder of the lease term (no right to liquidate and take proceeds from the sale)

c. If you’re taking this assignment you really want the right to receive rent; you don’t really care so much about the ability to lease to someone else

d. This is posed as question of perfection:i. The lessor was supposed to go about making sure

the SIs were perfected; the lessor sold the monetary obligation to a 3rd party in one transaction; this monetary obligation will be used to back things in the commercial market

ii. Would have made sense for the equipment leases to go into possession of a bailee and for FSs to be filed

e. NetBank is arguing that they’ve stripped out just the payment stream from the chattel paper and under 9-309(3) they will be automatically perfected b/c it’s a sale of a payment intangible

f. The court eventually held that the payment stream was way different than chattel paper

i. This didn’t evidence a monetary obligation, but was a monetary obligation

g. However, the court later held that even though this involved a payment intangible, the case involved a lease, not a sale, and automatic perfection did not occur

h. This thing creates at least two problems:i. Assume on 3/1 Debtor sell a payment intangible to

SP1 (automatically perfected); on 5/1, Debtor sells chattel paper from which the payment intangible has been stripped to SP2

ii. So there’s a dispute over who is entitled to the monetary obligation

iii. SP1 will say they perfected first under 9-322(a) by automatic perfection; SP2 will claim perfection by possession of the chattel paper but won’t take effect until 5/1

iv. SP2 will bring up 9-330(b): they are a purchaser giving new value in the ordinary course; there’s a problem with this argument though

1. 9-318(a): if a debtor sells accounts, chattel paper, etc., and the buyer’s SI is perfected then the debtor retains no legal or equitable interest in the property

2. Once the debtor sold the payment intangible, SP1 will argue that the debtor had no interest left to assign to SP2

gg. Effect of Sales of Receivables: The Octagon Heresyi. The court said that even if you have a true sale, the interest of the buyer is

a SI (seller is a debtor; buyer is a SP; receivables although sold are collateral); there is a residual interest sufficient to draw assets back into reorganization stuff

ii. What does Article 9 say about things?1. If you have a sale of notes or chattel paper and the buyer perfects,

9-318(a) says the debtor sold the chattel paper retains no legal or equitable interest and the receivables are outside the reach of the bankruptcy trustee.

a. The language comes from the definition of property of the estate in BC § 541(a); basically to overrule the Octagon case

ii. Accounts and General Intangibleshh. Basics:

i. Retailer sells good to Buyers on unsecured credit accounts; these accounts are valuable collateral and the Retailer can enter into relations with a Finance Company (Finco); Finco gives the Retailer a loan in exchange for a SI in the accounts

ii. Additionally, Finco might just buy the accounts (paying the Retailer cash); Finco has acquired all of the debtor’s rights in the accounts

1. this stuff is still in the scope of Article 9 (despite the fact that the Retailer has no interest left); see 9-109(a)(3)

2. Why?a. b/c sometimes it’s hard to tell what happened

iii. So Finco must perfect so goodii. Priority In Proceeds

i. Problem 1, Part A:1. assume that on 3/1 Bank enters into a SA for inventory and a/a/p

for a loan with a FA clause; filed a FS the same day2. Lender rolls up on the scene on 7/1, does a UCC search and finds

that no one has filed against the debtor’s accountsa. So lender enters into a SA with the debtor and takes an SI

in the accounts (with a/a/p) and files a FS in the accounts3. debtor defaults of course4. under 9-102(a)(64)(A & B) declares that all of these accounts are

proceeds, which means that the bank has an SI in all the stuff (automatically protected for 20 days and they filed in the local SofS’s office to extend their perfected)

5. So who has priority?a. 9-322(b)(1) says the date for filing for the collateral is the

same for the date of filing for proceedsb. So their interest in the accounts as proceeds perfected on

3/1ii. Section 9-309(2) Exception

1. In re Tri-County Materials, Inc.a. KMB and Tri-county enter into an assignment where Tri-

county assigns its right to receive payment from Ladd Construction Company

b. the assignment is in writing but KMB doesn’t file a FSc. before things are paid off, Tri-County files bankruptcy and

the trustee argues that the remaining amount is an unperfected security interest

d. What arguments could KMB make?i. Argue the thing wasn’t under Article 9

1. This would be true under 9-109(d)(7) if there was the assignment of only one account to KMB

2. Therefore Common Law would applyii. 9-309(2)

1. An assignment of accounts that doesn’t by itself or in conjunction with other assignments transfer a significant part of the assignor’s outstanding accounts or payment intangibles

e. So the court looks at how much is transferred:i. The amount transferred was only 12% of

outstanding debts to Tri-County and thus, it wasn’t a significant part

f. Things don’t here thoughi. Check out comment 4 to 9-309

ii. There’s a second part to the analysis fun; it looks like an isolated incident but notes that this is a classic secured transaction and they won’t allow such a creditor to get priority without filing

iii. Nothing in the code really justifies the casual and isolated test or that a classic secured transaction is immune to perfection

jj. Chattel Paper and Instruments (Rex Financial v. Great Western/Financial America v. Galaxy)

1. Introductiona. 9-102(a)(11), 9-102(a)(31), 9-102(a)(78)b. Security interests

i. Assignee of Dealer’s PMSI – 9-310(c)ii. Chattel paper – 9-109(a)(3), 9-313(a)

c. 9-315(c) SI in chattel paper as proceeds will be automatically perfected for 20 days

d. 9-315(d) if you filed FS to perfect SI and would have filed in same office to perfect in proceeds, SI continues beyond 20 days

e. Is there a special priority rule that will preempt the residual rule? 9-330(a) and (b) special priority rules that protect certain purchasers of CP. Did Rex obtain SI in CP merely as proceeds or other than merely as proceeds?

i. (a) merely as proceedsii. (b) other than merely as proceeds

iii. Commentary No. 8 concluded that if the SI in CP is claimed by a floor-planner, it is merely as proceeds. Availability lenders are other than merely as proceeds. Only difference btw a and b is fatal knowledge.

iv. Under revised A9, more protection to inventory financer 9-330(a)(2) knowledge requirement. If conditional sales contract indicated that it had been assigned to someone other than GW, even though GW met the conditions, they would not have priority over the inventory financer.

v. 9-330(a) is the applicable provision1. this is the basic idea of inventory floor

planningvi. anyways, we’re in this section b/c inventory floor

planners 9-315(c) & (d)(1) take SI in chattel paper merely as proceeds 9-315(a)(2)

vii. So for the finance company to establish priority for merely as proceeds need to prove:

1. 9-330(a)(1):

a. Act in good faith b. In the ordinary course of his businessc. Give new valued. Take possession of the chattel papere. *Fatal knowledge

2. as long as the contract didn’t include language that indicated it had been assigned to someone, finance company will be super fine

kk. Deposit Accountsi. Security Interests in Deposit Accounts as Proceeds of Other Collateral—

What right does a bank have to set off against a deposit account that contains identifiable cash proceeds to pay back loans bank made to debtor? (p.200-201)

1. Relationship btw bank and customer of the bank; customer deposits funds into checking account at the bank, giving rise to a debt that bank is obligated to repay

2. Customer might borrow money from the bank also and customer owes the bank the loan balance. Suppose deposit account is 3K and bank loaned customer 10K.

3. Bank has a right of setoff, bank will take the balance in deposit account and apply it towards satisfaction of loan obligation if it is in default. This is a bank's right as a matter of law, not contract or A9. customer has to be in default on the loan.

4. What if the customer borrowed the money personally but the customer opened the deposit account as trustee for some beneficiary. In this situation, bank is not entitled to set off. Relationship must be mutual, customer must be creditor of the bank in same status as he is as the debtor of the bank.

5. Suppose the customer is a business and has granted SP a SI in inventory and SP has perfected the SI. The debtor sells inventory for cash and SP has SI in cash proceeds. Debtor then takes cash proceeds and deposits them into his bank account. SP will have to take into account principals of tracing and identification. Assume SP can establish that funds in account are identifiable cash proceeds. Suppose the bank sets off against the money in the account. Who wins the priority conflict? Majority view was that bank is unsecured creditor of the debtor and SP holds a SI in identifiable cash proceeds and is perfected. Most courts would say SP wins. Terms of SA are binding on debtor and on 3d parties and creditors unless code otherwise provides and majority view was that code did not.

6. Under Revised A9, applies to the priority of right of setoff. 9-340(a) bank exercising common law right to setoff will in most cases have priority over SP claiming perfected SI in identifiable cash proceeds. Opposite result.

ll. Security Interests in Deposit Accounts as Original Collateral— To what extent can a SP, particularly bank at which debtor maintains deposit account, establish an A9 SI in the deposit account? How does it perfect that interest? Is bank's SI in deposit account going to be granted priority over conflicting claims?i. 9-102(a)(29) defines deposit account, any type of savings/checking account

that is held at a bank.ii. 9-109(d)(13) A9 does not apply to the creation of a SI in a deposit account

created in a consumer transaction. In all transactions other than consumer transactions, debtor can grant A9 SI in a deposit account.

iii. 9-203(b)(3)(D) - statute of fraudsiv. 9-312(b)(1) and 9-314(a) - perfecting SI in deposit account as original

collateral with control – what is control of a deposit account? Concept borrowed from Art. 8. See 9-104 below.

v. 9-327 - priority rulesvi. 9-104 - all three of the above determinations relate to control, if SP has

control over deposit account, satisfies statute of frauds; only way you can perfect in deposit account as original collateral is by taking control of the account; SP who perfects by control has priority over SP who has perfected in some other manner.

Most important is 9-104(a)(1) SP has control over deposit account if SP is bank with which deposit account is maintained.

Control satisfies SoF, perfects bank's SI in deposit account, and establishes bank's priority over other secured parties

9-104(a)(3) – if SP becomes customer of the bank then they get control as customer.

mm. Fixturesi. 9-604(d)

ii. Lamp is pure personaliii. HVAC – is a fixtureiv. Bricks is on the verge of real propertyv. Pure real property – 9-334(a)

vi. Hard to draw the line between fixture and real propertyvii. Many times need to make a fixture filing 9-102(a)(40) under 9-502(a) &

(b)viii. Part (c)

1. 9-334(e)(3)2. 9-334(d)3. 9-334(h) – since construction mortgage can’t assert the PM priority

– these are the things that are going on4. 9-334(e)(2) – readily removable fixture or machine – r/r/f/m

a. No 20 day grace periodnn. Circular Priority

i. Problem page 4511. Value of real property without sprinkler system was 2 million

dollars2. Assume that the value of sprinkler system alone is 100K

3. 7/1/08 – 2d Bank SA with debtor covering sprinkler system – debt of 80K

a. FS in SOSb. Defective fixture filing

4. 9/1/08 – 3d Bank SA with debtor covering sprinkler system – debt of 80K

a. FS in SOSb. Effective fixture filing in appropriate ROD office

5. 7/1/09 – first bank makes loan to debtor secured under mortgage encumbering this real estate – debt of 2,060,000

a. Bank records the mortgage6. Defaults on all loans

a. Two funds herei. 2 million in real property

ii. 100K in sprinkler system fundb. Doctrine of marshalling – bank must assert its claim on the

fund that it has its lien first and then on the other fund to the extent that the first doesn’t cover it’s amount owed

7. What about 2d bank v. 3d banka. Both banks don’t have real property encumbrances but

have Art. 9 SI’si. 9-322(a)(1) - 2d bank over 3d bank

8. 1st bank v. 2d banka. 9-334(c)

9. What about 1st bank v. 3d banka. 9-334(e)(1) – 3d over 1st b. Circular priority

ii. 2d Bank $80K – if you assume that 2d bank’s fixture filing was effectiveiii. 3d Bank $20Kiv. 1st Bank 0v. But if the 2d bank fixture filing is defective then 1st bank steps into 2d’s

position and gets the $60K owed to it, but 2d bank will get $20K left over. 3d bank still gets the $20K. 3d bank neither benefits nor suffers from 2d bank’s mess up. Common way that courts resolve circular problems. Casebook doesn’t particularly like it though.

vi. BRC 551 – deals with circular problem as welloo. Cash Proceeds

i. Priority1. Pre-Revision Background

a. HCC Credit Corp. v. Springs Valley Bank & Trust2. Transferees of Funds under Section 9-3323. Transferees of Instruments under Section 9-330(d)

ii. Lowest Intermediate Balance Rule1. Basics

a. Two rules:

i. Rule #1: spend non-proceeds first; if you have a bank account w/proceeds and non-proceeds, assume non-proceeds are used up first to make purchases

ii. Rule #2: unless express intent to make restitution made by trustee/debtor, subsequent deposits of non-proceeds do not replenish the invasion, they do not compensate for spent proceeds.

b. When could you argue successfully that a deposit was made w/express intent to make restitution?

i. When a trustee has knowingly spent beneficiary's money, knows that he shouldn't have done it, and then makes a deposit of his own money back into the account. The deposit will be viewed as having the intent to make restitution.

Chapter 4: Default and EnforcementA. IntroductionB. DefaultC. Enforcement

a. Cumulative Remediesb. Repossessionc. Disposition and Collaterald. Secondary Obligorse. Acceptance of Collateral in Satisfaction of Debtf. Effect of Disposition or Acceptance on Third Partiesg. Collection of Rights to Payment

i. Major’s Furniture Mart, Inc. v. Castle Credit Corp.1. Major’s sold its receivables to Castle Credit; the question was over

sale versus loan but the reason it was litigated was b/c of a surplusa. Basically the credit people collected a lot more money than

it paid to the furniture martb. If all they had done was grant an SI in the receivables, the

debtor would have been entitled to the surplusc. In contrast, if the transaction was viewed as a sale, the

finance company would have been entitled to receive the surplus

2. the court eventually held that the transaction was really a loan3. What does the court look at in a case like this?

a. They focus on the “right of recourse”i. If the finance company had truly bought all of this

stuff, the risk of deficiency would have been transferred to the finance company

b. So the court checks out the contract super close and concludes that the finance company has complete recourse…thus the thing was a loan

4. method of perfection

a. automatic perfection would apply to sales but not to SI’s on loans (generally)

ii. Asset Securitization:1. Dealer sells a lot of junk under conditional sales contract; they

want to transfer the chattel paper to a special purpose entity; we want this to be a “sale”

2. the special purpose entity will issue publicly traded debt securities backed by a pool of this chattel paper to the capital markets in exchange for cash

a. the capital market people will want to buy these things at low interest rates if they can be assured that the installment payment will go directly to the indentured trustee who holds the securities for the benefit of the people

b. so you want to eliminate credit risk…which translates into lower interest rates

3. the idea of asset securitization is to take an originator, eliminate their credit risk other than the credit risk of the individual people entering into the conditional sales contracts (they want to only face the credit risk of the account debtors)

4. How do you pull this off?5. What is the bankruptcy risk?

a. Forgetting to perfect your interest and becoming unsecuredb. The real problem is the originator filing under Chapter 11

i. People under Chapter 11 really need some sweet cash flow (early in the reorganization process)

ii. Courts have held that the originator has legal title to the stuff mentioned above, and it’s considered to be property of the estate

iii. They might have access to the property thenc. We really want to avoid having an originator’s bankruptcy

mess things upi. If the transaction really is a sale, then it’s beyond

bankruptcyii. If the purported sale turns out to be a loan secured

by the financial assets, then the accounts and chattel paper will be property of the originator’s estate and can be sucked into the reorganization

Chapter 5: Leases and Consignments (Georgetown Steel)A. LeasesB. Consignments

a. Common Law Consignmentsi. Traditionally the dealer had no ownership interest in the goods that could

be reached by creditorsii. Known as the “true consignment”

b. Consignments under Article 2 and now Article 9

i. Definition: see § 9-102(a)(20)1. True consignment: a transaction that creates a real article 9 security

interest that secures the obligation of a dealer (a sale designed as a consignment); basically the dealer has title

2. “security” consignment: § 1-201(b)(35)3. Article 2 “sale or return;” 2-326(1)(b)

a. A situation in which goods are sold by the manufacturer to the dealer

b. Buyer has the option of paying the purchase price or returning the goods

c. How is this different from a true consignment?i. In a sale the dealer has the immediate responsibility

for paying the purchase priceii. In a true consignment, the dealer never assumes an

obligation to pay the price of the goods (the dealer is just a bailee with certain fiduciary duties)

1. these are real bailmentsiii. Pretty tough to tell the difference in the real world

unless people drafted their documents carefully4. Article 9 security consignment:

a. If you have a consignment as defined under 9-102(a)(20)i. If you have a true consignment that falls under this

definition, then under 9-109(a)(4) Article 9 will apply

ii. Thus, the manufacturer (consignor) will be viewed as having a security interest in the goods that have been delivered

iii. Under 9-103(d) the SI of a consignor is a PMSI in inventory; a purchase money inventory interest

iv. De minimis exceptionv. Not all true consignments are under the statute

b. Consumer goods exception: 9-102(a)(20)(C)1. SC case: 614 SE2d 648 (2005)

a. Bentley granted a SI in his current and after acquired inventory of used cars; plaintiff was an owner of a used car and wanted to sell (dealer didn’t want to buy; owner parked it on the lot and dealer agreed to show it; if an offer was made, the dealer would communicate with the owner

b. Of course the dealer was in financial trouble and defaulted; financer tried to seize everything

c. Ct. of appeals said it wasn’t a consignment b/c it was consumer

goods held by the owner immediately before the delivery

c. Security Consignment Exclusioni. 9-102(a)(20(D) – if the interest of the consignor in the inventory in

possession of consignee creates an obligation on the consignee then it creates a regular Article 9 security in the inventory but not a consignment security interest.