Secured Transactions Outline Prof. McJohn

Short outline of Article 9§9-109 gives the scope of Article 9. 9-301 gives the rules for multi-state transactions.

Many of the following use definitions from 9-102 and other provisions - and the Article 1 duties apply: 1-102(3), 1-201 and 203.

I. Attachment (how creditor's security interest becomes effective against debtor)

A. Under 9-203, attachment occurs when three conditions met:1. A written security agreement, describing collateral 9-108, signed by debtor or

creditor in possession of the collateral per agreement;2. creditor has given value ('1-201(44)); and3. debtor has rights in the collateral.

B. The collateral may include after-acquired property (a floating lien), unless it is consumer goods given as additional collateral or commercial tort claim. 9-204

C. PMSI in consumer goods is automatically perfected on attachment 9-309(1)

D. The debtor may still use collateral in its possession. 9-205

E. Creditor in possession is subject to 9-207 duties to take care of, and 9-210 duties to account for, collateral.

II. Perfection (how creditor gives notice to make security interest effective against the rest of the world i.e. competing creditors, the trustee if debtor files bankruptcy, etc.)

The security interest is perfected when (1) it has attached and (2) creditor has done whatever else is necessary (filed a financing statement, gotten a notation on a vehicle's title, taken possession or control of the collateral, or nothing if perfection is automatic). 9-308.

A. Creditor may perfect by possession (cannot possess accounts or general intangibles). 9-312, 313

B. The creditor must file, unless otherwise perfected 9-310 1. creditor is in possession, or2. that particular security interest perfects automatically or temporarily 9-309, 312;

or3. the collateral is a vehicle subject to a certificate of title statute. 9-311.4. collateral is proceeds covered by 9-3165. creditor is in control of the collateral 9-314

C. Filing of financing statement1. what constitutes filing 9-5162. where to file 9-501

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3. what to file and what if debtor's name changes 9-502, 503, 504, 506, 507

4. duration, termination, amendment, assignment of financing statement: 9-512-515

Special rules govern goods in the hands of a bailee: 9-312, 313

So to figure out if creditor has a perfected security interest in collateral, you first check if the security interest has attached, then check whether creditor has done whatever else (if anything) is necessary for it to be perfected.

If debtor disposes of collateral,1. security interest still attaches and remains perfected, unless creditor consents .

An exception: some buyers take free of the security interest 2. security interest also attaches to the proceeds and is perfected automatically, but may lapse. 9-315, 325

III. Priority Rules: Who Has Senior Interest in the PropertyThe priority rules govern contests between various categories of claimants:

9-317 Unperfected secured creditor v. various parties9-320 Buyers of goods v. secured creditors9-333 Statutory/common law secured creditors v. perfected creditors9-322 Perfected secured creditors v. other perfected secured creditors9-324 Special priority for perfected purchase money security interest (PMSI)

Remember also the rules for preferential transfers and fraudulent conveyances.

IV. Default (what creditor can do to get paid)

Upon default (which parties may define by agreement):

A. Creditor may exercise any of its remedies 9-601 (note that debtor may not waive certain rights 9-602)

B. Creditor may take possession of, or disable, collateral 9-609 or notify account debtors to pay creditor 9-607.

C. Creditor may sell the collateral, 9-610, but1. must give notice (with exceptions) and do everything reasonably2. must account for proceeds and give surplus to debtor or other creditors, and may

get deficiency from debtor.

Good faith etc. buyer of sale by creditor takes free of interests of debtor and creditor.

D. Creditor may offer to keep the collateral in satisfaction of the debt. 9-620, but subject to 60% rule and no partial satisfaction rules for consumer goods

E. Debtor may redeem collateral. 9-623

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F. Any violation of creditor's duties subjects creditor to possible(1) liability for damages 9-625(2) loss of right to sue for deficiency 9-626

(3) liability for conversion if creditor has interfered with another person's property rights(4) breach of the security agreement or debt instrument

Chapter 18 The Scope of Article 9

I. Security Interest DefinedArt 9 governs the relationship between the creditor and the debtor. It safeguards the creditors, and puts the world on notice about the security interest. If a lender makes a loan and does not follow the requirements of article 9, the lender will loose the collateral

1-201(35) - Security Interest Defined: means an interest in personal property or fixtures which secures payment or performance of an obligation. (Security Interest includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Art 9)

§9.109(a) –General Scope: Except as otherwise provided in subsections (c) and (d), this article applies to: 1. A transaction regardless of its form, that creates a security interest in personal property or fixtures by contract, 2. An agricultural lien, 3. A sale of accounts, chattel, paper, payment intangibles, or promissory notes, 4. Consignment, 5. A security interest arising under Sec. 2-401, 2-505, 2-711(3), or 2A-508(5), as provided in Sec. 9-110, 6. A security interest arising under Section 4-210 or 5-118

Problem 263 - Assume that a state statue gives someone doing repairs a possessor artisan’s lien on the property repaired. Mr. Baker took his car into Mack’s Garage for repair, but, being strapped for funds couldn’t pay the full bill, and Mack wouldn’t let him have the car back. (a) Is Mack’s artisan’s lien an Article 9 Security Interest? (b) If prior to repair work Mr. Mack signed a statement that allowed for repossession of car if the bill wasn’t paid – does this create a security interest under the code?

1. No. Mark’s artesian lien is not a security interest because Article 9 doesn't apply to leans that are created by statutes. 9-109(d)(2) – Inapplicability of article – The article does not apply to (2) – a lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but 9-333 applies with respect priority of the lien

2. Yes. §9-109(a)(1) provides that art 9 applies to agreements that are explicitly agreed upon (contract). This security of personal property and the requirements were followed to secure the loan.

Problem 264 - To raise money, Farmer Brown Fresh Veggies Roadside Stand sold all of its accounts receivable to Night-flyer Finance Co. which notified the customers that henceforth all payment should be made directly to Nightflyer. (a) Is this sale nonetheless an Article 9 security interest? (b) Even though Farmer Brown has no further obligation to Nightflyer Finance, would he be termed an Article 9 “debtor”?

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1. Note: That this not a loan from the finance company to the farmer with the accounts put up as collateral; it is an outright sale. If it were a loan, and if the collectible accounts exceeded the amount of the loan , the excess would be returned to Farmer Brown; in an actual sale Nightflyer can keep the surplus.

i. 9-608(b) Loan Farmer Brown entitled to a surplus ii. 9-608(b) Sale Farmer Brown (debtor) is not entitled to a surplus (If it

was a loan then the debtor would be entitled to the surplus)

a. Yes.This sale is nonetheless an Art 9 security interest – See 9-109(a)(3). – a sale of account, chattel paper, payment intangibles, or a promissory note is within the scope.

b. Yes. Even though Farmer Brown has no further obligations to Nighflyer, he would of necessity be termed an Art 9 debtor. See 9-102(28)(b) – Debtor means - a seller of accounts, chattel paper, payment intangibles, or promissory notes. This is so because he contracted w Nightflyer and he could potentially collect from Farmer Brown.

II. Consignments – revised sec 9-109(a)(4) explicitly brings consignments within the scope of Art 9.

a. The definition of consignment - neither a sale nor a security device, it is a marketing procedure by which the owner of goods (the consignor) sends (consigns) them to a retailer (the consignee) for sale to the public.

The retailer does not buy the goods (so no sale takes place when the consignor delivers the goods to the consignee).

If the retailer cannot sell them, they are returned to the consignor. The consignee is the selling agent for the consignor, or, looked at another

way, the consignee is a bailee with the ability to sell the bailor’s goods. The advantages to the consignor of a true consignment over an outright

sale (with reservation of a security interest so the goods can be reclaimed if the retailer does not pay for them) is that the consignor retains control over the terms (and thus can dictate the retail price), and, at least at common law, there is no requirement that the consignor file a notice anywhere announcing that a consignment is going on.

o 9-102(a)(20) – “Consignment” means a transaction. Regardless of its form, in which a person delivers goods to a merchant for the purpose of sale, and (A) Merchant i. Deals in goods of that kind under a name other than the name of the person

making delivery, ii. Is not an auctioneer; iii. and is not generally known by its creditors to be substantially engaged in selling the goods of others;

(B) with respect to each delivery, the aggregate value of the goods is $1k or more at the time of delivery (C) the goods are not consumer goods immediately before delivery; and (D) the transaction does not create a security interest that secures an obligation.

b. Some consignments are not true consignments at all but are sales on credit (i.e. secured transactions) disguised as consignments in order to escape the filing requirements.

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i. If the retailer must pay for the goods whether or not able to resell them, this is not a true consignment, even if called that; it is the creation of a security interest in goods.

ii. If the security interest is intended, then it is not a true consignment at all. Then Art. 9 must be complied with to perfect 9-102(a)(20)(D)

Problem 265 Antiques Are Us was the largest antiques store in the city, well known as a place where antiques dealers could hire out space and exhibit their wares, with the store handling the sales and taking a commission on each one, and returning to the dealers items that remained unsold. When the store takes out a loan from Octopus National Bank (ONB) and uses as collateral “all its property” will the banks security interest reach the items in the store that belong to the dealer if the dealers have never taken the steps required of consignors under Article 9

1. Article 9 does not apply here because the seller is generally known by his creditors to sell goods on consignment. There is no need for the antique owners to file a financing statement. 9-102(a)(20)(A)(iii)

2. Rule: The dealer should file a financing statement if all the inventory is not on consignment, however, if the dealers are known by its creditors “that all inventory is on consignment” there is no need to file a financing statement.

In re Fabers, IncFacts: Mehdi Dilmaghani & Co. (P) a dealer in Oriental carpets delivered certain carpets to Fabers, Inc. (D), a carpet retailer in Connecticut. The agreement provided that the carpets remained the property of Mehdi (P) until sale, and that the funds received from any sale remained the property of Mehdi (P). It was essentially a consignment. While carpets were in Fabers’s (D) possession, Farbers (D) filed for bankruptcy. Mehdi (P) then petitioned to reclaim the goods form the bankrupt estateHolding: Yes. A consignor of goods to a bankrupt may be unable to reclaim them upon the consignee’s bankruptcy. Under U.C.C. 2-326, adopted in Connecticut, goods delivered for resale are subject to the claims of the possessors creditors unless (1) the seller is generally known by his creditors to sell goods on consignment, or (2) the deliverer of the goods (the consignor) complies with Art 9 filing provisors. Here, Mehdi (P) admittedly did not file any type of Art. 9 financing statement. In addition, there is no evidence that (D) was known by its creditors to sell goods on consignment. Therefore, the carpets were subject to the claims of (D) creditors, and therefore beyond the reach of Mehdi (P) to reclaim them. Motion denied.

o 2-326 exists to prevent fraud from being perpetrated upon a consignee’s creditors. If goods are in a consignee’s possession, the consignee’s creditors are entitled to believe that any monies loaned or advanced may be secured by the consignee’s inventory. Sec 2-326 prevents a secret consignment agreement from defeating this reasonable expectation.

Problem 266: When Luke Skywalker, an artisan who handcrafted his wares, finish creating a large jeweled sword, he took it down to Weapons of the World (WOW), a large gun and weapon dealer, which mostly sold items that it either manufactured itself or bought from other dealers around the globe. The sword was appraised as being worth over $25,000. Luke asked WOW to sell the sword for him. Is this an article 9 consignment so that Luke need to take Article 9 steps to protect himself from WOW’s other creditors who have an interest in the stores inventory?

Yes. This is Article 9 consignment because the seller is not generally known to sell things on consignment. Thus Luke needs to file article 9 requirements to protect his sword.

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III. Leases

1-203 Lease Distinguished from Security Interest - Disguising a secured sale as a lease (1) A sale on Credit – deliver goods and you keep it until you pay for it (2) A Real Lease – deliver goods, as long as you keep it you pay for it. If you don’t want the goods you terminate the lease, and return the goods to the owner.

Factors that help to tell leases from secured transactions:1. If at the end of the lease period the lessee becomes the owner of the

property for little or no consideration, a secured transaction and not a lease has been created

2. If the contract contains a clause that permits the lessee to terminate the lease at any time and return the leased goods, a true lease has resulted. Such a right of termination is not an attribute of a sale of goods.

3. If the lease is for the entire economic life of the leased goods, with or without renewal, a distinguished sale has occurred.

Problem 267 – BIG Machines Inc. leases a duplicating machine to Connie Print Shop. The lease was for 5 yrs, and the rental pay over this period exactly equaled the current market price of the machine. The lease K further provided that at the end of the 5 yrs, Connie’s Print Shop might purchase the machine out right by paying BIG Machines $5 BIG Machines did not file an Article 9 financing statement. Thereafter Connies, Print Shop borrowed money from the ONB and signed a security agreement with the bank granting it an interest in all of the print shop’s equipment. ONB duly perfects its security inters by filing UCC financing statement in the appropriate place. When Connies Print Shop failed to repay the loan, ONB seized all the shop’s equipment including the duplicating machine. ONB v. BIG Machine Inc. who get the machine.

1. This looks more like a secured sale. This is a credit sale in disguise. Thus have to file a ucc form. Otherwise, this would be an unperfected secure sale.

Had the option to purchase for little or no consideration There is no right to terminate The lease is for the entire economic life of the leased good

Problem 268 – Business Corp leased a massive copier from Copiers Inc. for 5yrs. At the onset of the lease the copier had a FMV of 300,000 and a predicted 10yr life. Over the course of the 5yr-lease the rental payment would total to 330,000. The lease provides that Business Corp has the option to become the owner of the copier at the end of the 5 yr period by paying Copies Inc. the amount of 10,000. (a) Is this a true lease or a secured sale? (b) Would we reach a different result if the copier’s useful life were only 5 yrs?

1. This is a real lease with the option to purchases for 10,000. Here the machine is good for 10 yrs, and the lease is good for 5 yrs (not the entire life of the product). After 5 yrs the lessor can take it back or offer the lessee the option to purchase.

2. If it were only 5 years, this would be a sale because they committed themselves to pay the entire value for something that is not worth anything after 5 years.

In re Architectural Millwork of Virginia, Inc.Facts: ∆ Millwork of Va., leased a truck from Π Associate Leasing Co., and there was a clause that allowed for the final sale of the truck after the lease. The ∆ also entered into an option to purchased K with Komatsu forklift, to purchase a forklift for $1 after all payments.

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Issue: Is this lease agreement a security agreement if the option to purchase is for a nominal amount (inadequate consideration) upon the completion of the lease. Basically is this a true lease. Rule: Yes, this is a security agreement because the lessee has the option to be the owner of the property for (1) no additional consideration or (2) nominal/inadequate consideration

IV. Other Transactions

Problem 269 – When Mercy Hospital administrators decided to build a new addition, they hired a general K named Crash Construction Co. and required it to get a surety to guaranty the performance of the construction job and the payment of all the workers and material supplies. Standard Surety issued such a performance and payment bond covering Crash’s obligation to Mercy Hospital. To finance the construction, Crash borrowed money from ONB and gave as collateral the right to collect the progress payment from MH as they came due. ONB filed an article 9 financing statement. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, by virtue of the common law with to subrogation, Standard Surety claimed a superior right to unpaid monies retained by MH, which were to be paid to Crash. ONB also claimed his fund, pointed to its filed security interest, and stated that SS subrogation right was only an unfilled Article 9 security interest. Who wins?

1. Surety wins over ONB. Doctrine of Equitable Subordination §510(c) – the equitable right given to sureties to step into the legal shoes of the person they have paid, in order to remedy creditor misconduct. Standard Surety wins because they have priority and superior rights. The issue, of whether a surety that issued performance and payment bonds and then satisfied claims against the contractor by paying laborers and material men demands superior rights as against the contractor's secured creditors to final progress payments and retained funds held by the project owner. Standard Surety's subrogation rights were superior to secured creditors whose interests were perfected under the Uniform Commercial Code, and part of the purpose of withholding final progress payments and retained funds was to protect the interests of the surety.

2. 966 P.2d 424 - held that: (1) in an issue of first impression, surety had superior rights as against secured creditor to contract proceeds.

V. Exclusions from Article 9 (9-109(c) and (d)a. This article doesn’t apply to the extent that:

i. A statute, regulation or treaty of the US preempts this articleii. Another statute of this State expressly governs the creation, perfection,

priority, or enforcement of a security interest created by this State or a governmental unit of this State;

iii. A statute of another state, a foreign country, or a governmental unit of another State or a foreign country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of security interest created.

iv. The rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under sec 5-114.

b. Article 9 does NOT apply to: i. an assignment for a claim of wages

ii. a sale of accounts, chattel paper, payment intangibles, or promissory notes that arose as part of a sale of a business

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iii. an assignment of accounts, chattel paper, payment intangibles, or promissory notes for the purpose of collection only

iv. an assignment of a right to payment under a K to an assignee that is also obligated to perform under the K

v. an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness

vi. a transfer of an interest in or an assignment of a claim under a policy of insurance (other than an assignment by a health care provider of a health care insurance receivable and any subsequent right to payment)

vii. an assignment of a right represented by a judgment viii. true leasesix. landlord’s liens (see below)

A. Federal Statutes

Philko Aviation, Inc v. ShacketFacts: Π Shacket bought an airplane from Smith but didn’t file a UCC filing statement with the FAA, Smith fraudulently sold the plane to Philko. Philko and Shacket were in dispute over who owned the plane Rule: Subsequent purchasers have priority if the original purchaser did not comply with transaction requirements to establish title (in this case a federal statute).

B. Landlord Lien and Other Statutory Liens

Problem 270 – When Christopher Morely opened his bookshop, the landlord wanted security for the rent. The signed a lease agreement provided that all of the inventory (books) would be subject to a lien in the landlord’s favor and could be seized and sold if Chris defaulted on the rent payments. Is the landlords lien required to be perfected under Article 9?

1. Article 9 would apply here because this is a contract in personal property. However, if this was a landlord’s lien, Article 9 would not apply. It’s one of the exceptions.

2. landlord’s lien is created through operation of law (statute) not an agreement like here

C. Wage Assignments – 9 – 109(d)(3)

Problem 271 – Carl Jugular was an independent insurance agent who sold policies for many companies, though his primary sales were the life and auto policies of Montana Ins. Assoc. In order to float a loan to buy a car, Carl gave the lending bank a security interest in ‘all present and future commission earned or to be earned” from the MIA. Does Article 9 cover this assignment?

1. Article would apply here because Carl is not an employee but is an independent contractor. Thus would not fall within 9 – 109(d)(3) exclusion. (Exception: Employee wages and earning are not under Article 9 vs. Independent K wages and earnings does fall under Article (look at authority of Independent K vs. Employee)

D. Non-Financing Assignments

The 9-109 (d)(4) – (7) exclusions of some transfers of accounts, chattel paper, payment, intangibles, and promissory notes is meant to be an exclusion of all such assignments of a non-financing nature.

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Problem 272– When Dean Malone sold his lucrative art business to John Pivarksi, he sold not only all the tangible assets but his outstanding accounts relievable as well. (a) Must the buyer take the steps required by Article 9 of a secured party? (b) If Malone received commission to paint a portrait of the mayor but was to busy and decided to give the job to another artist must he take article 9 steps? (c) When one of Malone’s clients refused to pay for a delivered painting, Malone sold the account to a Trash Collection Agency, does the Trash Agency have to comply to Article 9? (d) Malone transferred to the store the money due from a client whose portrait he had painted in the month before. Must the art supply store take article 9 steps?

1. 9-102(a)(72)(D) – “Secured party” means (D) a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold a. No need to file a UCC §9-109(d)(4) financing statement because there is no one

relying on the remainder of the business, therefore John Pivarksi is already a secured party. Because it is in conjunction with a business sale, the buyer does not have to take the steps required by Art 9. Generally the sale of A/R is subject to article 9. However, here the seller is selling the whole business. So after the D will not have a business and thus will not have A/R. Thus, this situation would fall into 9-109(d)(4) exclusion (already given notice)

b. No. 9-109(d)(6) An assignment of right to payment under a contract to an assignee that is also obligated to perform under the contract. No need to file. The assignment to draw a painting would fall into this exception. (same)

c. No. 9-109(d)(5) an assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only. Trash doesn’t have to comply with Art 9 because the assignment would fall into the 9-109(d)(5) exclusion.

d. No. 9-109(d)(7) An assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtness. This situation would fall into this exclusion (didn’t change overall financial situation)

E. Real EstateExcept for fixtures, real estate security interests are not covered by Art 9. (not too important for us > this is mortgage law)

Problem 273 - Local Loan Co. needed to borrow money, ONB agreed to loan it the requisite amount, taking into ONB’s possession as collateral real property mortgages and accompanying promissory notes given to LLC by its borrowers. (a) Need ONB do anything either in the real property recording office or under UCC Article 9 provisions to protect its interest in the collateral? 9-109(11) and 9-109(b) See official comment 7 p 653.

1. Article 9 does apply to this situation. This article doesn’t apply to the creation of the real-property mortgage. However, if LLC sells the promissory note to ONB or gives a security interest in the note to secure LLC’s own obligation to ONB, this Article applies to the security interest created in favor of ONB. The security note is covered by this article even though the note is secured by real property mortgage. Also, X’s security interest in the note gives X an attached security interest in the mortgage lien that secures the note and, if the security interest in the note is perfected, the security interest in the mortgage lien likewise is perfected. See 9-203 and 9-308.

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F. Other Exclusions

Problem 274 - ONB issued Connie a credit card. As collateral for the credit card debts, ONB took a security interest in all items she purchased using the credit card, as well as in her personal checking account with the bank. Does art 9 apply to the bank’s right to this account?

1. No. Under 9-109(d)(13) a security interest in a bank account or an assignment in a depository personal account in a customer transaction is excluded. However, commercial bank accounts are included under article 9.

2. Assignments of Bank accounts can fall under Article 9 if it is used for a consumer transaction > 9-315, 9-322 (???)

Chapter 19 Classifying the Collateral

I. Classifying the Collateral - Art 9 divides collateral (defined in 9-102(a)(12)) into many different categories Legal distinctions based on the type of collateral, necessary to perfect a security interest in negotiable instruments. The debtors announced use of the collateral determines its classification.

Collateral Under §9-102(a)(12) Article 9 only applies to 3 Major categories of property

A. Goods: Moveable things when a secured interest attaches: Tangible moveable things (ex. Can’t move land or real estate)

1. Consumer Goods: goods acquired by the debtor for personal or family household uses. (ex. a book, a car for family use, paintings to hang at home)

2. Equipment: are goods that aren’t consumer goods, farm products or inventory. (i.e. curtains in lawyer’s office)

3. Farm Products: goods where the debtor is a farmer (ex. crops, livestock and supplies)

4. Inventory: goods leases by the debtor, held by the debtor for sale, or provided by the debtor, or raw materials

B. Quasi Tangible Property (paper)1. Instruments: A promissory note or a check 2. Investment property: stocks and bonds3. Documents: receipt – a piece of paper when you hand over goods

when that person is going to hold onto the goods. 4. Chattel Paper**: 5. Letters of Credit Rights:

C. Intangible Property1. Accounts: an account is a right to payment for goods or services.

(ex. someone in debt to you, or right to $ for property, sale of a vessel, insurance money)

2. Deposit Account: Money in the bank3. General Intangibles: this is just the catch all category. Not a

deposit account, not an account. 4. Payment Intangible: Any right to payment that isn’t an account.

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Problem 275 –a. Pianist’s piano – equipmentb. Cattle fattened by a farther for sale – farm product

a. Farmer tractor = Equipmentb. Farmers Chicken = Farm Productsc. Manure from dairy = Equipment

c. Mobile Home = Consumer goodsd. Right to sue for a breach of contract = General Intangible

a. Right to sue for negligence from auto accident = not under Article 9 – it’s a tort action – 9-109(d)(12)

b. Right to sue corporation for wooing away employee = Article 9 – 102(a)(12) – Comment 15, Art 9 applies to the assignment of the commercial tort claims.

c. Settlement agreement = not under Article 9 - ???? Ask McJohn

e. Pencils and stationary used by Sears = inventoryf. Liquor License = General Intangible g. Curtains for law office = equipment

a. Use the curtains at home = personal useh. Aunt Augusta use 5,000 as collateral = payment intangible

In Re Troupe: Facts: ∆ Morton bought a truck subject to PMSI held by Maine Bank. Morton originally brought the Ford Bronco for personal, family or household purposes (consumer goods) but began using it for employment/business purposes (equipment). Morton declared bankruptcy and Maine Bank security interest attached. The bank argued that because the car was used primarily for employment purposes a second financing statement needed to be filed in order for the Ford Bronco’s interest to be perfected. Under §9-109 courts look to the buyers interest in the collateral “at the time of purchase” therefore one filing statement perfected the Ford Bronco as consumer goods because only later did Morton begin using the Ford Bronco for employment purposes/equipment. Accordingly, PMSI with bank was perfected.

Payment Intangibles (a)(61)

Deposit Account (a)(29)

Letters of Credit Rights

Investment Property

(a)(49)

Chattel Paper (a)

(11)

Instrument (a)(47)

Document (a)(30)

General Intangible

s (a)(42)

Equipment

(a)(33)

Inventory (a)(48)

Farm Products(a)(34)

Consumer Goods (a)

(23)

Account (a)(2)

“The Intangible

s”

Goods (a)(44)

Collateral (a)(12)

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Rule: A perfected interest is established because classification is determined when the security interest is attached. Under §9-109 this is a transaction that creates a security interest in personal property. Unsecured Loans – need a paper judgment after a judicial proceeding to repossess the assets.Secured Loans – no need for hoops of judicial proceeding and sheriffs to repossess assets.

Problem 276 – Mercy Hospital needs financing and calls you with this question. Many of its patients are members of various health plans and when they come in for treatment they sign paper work authorizing the hospital to seek payment from their insurance provider. The hospital always has a large number of such receivables in process of collection. When the hospital borrows money can it use the “monies due” from various health plans as collateral?

Yes. Article 9 is collateral as Health Care Insurance. o 9-102(a)(46) – Health care insurance receivable …o 9-109(d)(8) – a transfer of an interest in or an assignment of a claim under a policy of

insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment, but Sec 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds are within the scope of art 9.

Problem 277 – Passport Credit Card Co. issued millions of credit cards worldwide. The merchants then sent the resulting paperwork to Passport for reimbursement. When Passport needs to borrow money can they use these credit card transactions as collateral? Outright Sale of credit card transactions (property)?

Yes, they can use credit card transactions as collaterals. Rule 9-102(a)(2) – says that the term account includes rights arising out of the use of a credit or charge card or information contained on or for use with the card. Thus it would be an article 9 transaction.

An outright sale of such property by Passport is also an Art 9 transaction – 9-109(a)(3) – a sale of accounts, chattel paper, payment intangibles, or promissory notes.

Problem 278 – o Milk in the hands of the farmer - Farm product, in the hands of the grocery story -

inventory, in the hands of the grocery store’s customer who is buying for consumption - consumer goods. Restaurant – inventory.

o A certificate of deposit issued by the bank – this is an instrument 9-102(a)(47) - Instrument means …. or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment. The term does not include i investment property, ii letters of credit or iii writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or use with the card.

o An airbill issued by an airline as a receipt for frozen shrimp shipped by air – document o A receipt given to farmer - documento Rare coins bought by a hobbyist for addition to his collection – consumer goods

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o A tax refund – general intangibles because it’s a right to repayment which is not for goods served or leased or for services rendered a right to payment not yet earned by performance.

o A debenture bond issued by a corporation – investment propertyo 100 shares of stock recorded on the books of the debtor’s stockbroker – investment

propertyo The checking account you have down at your bank – deposit accounto A computer program – general intangibleo The monthly rental obligations owed to a landlord, who wants to use these obligations as

collateral for a loan. – accounto Promissory notes signed for the tenant to pay their rent – Instrument

Morgan County Feeders Inc. v. McCormick: (Priority Rule) Facts: After Allen sold cattle to McCormick, but before McCormick could get the cattle, Morgan County Feeders interfered and seized the cattle alleging that the cattle were equipment and thus subject to MCF security interest. The parties agreed that the cattle were not farm products but used as cattle drives for equipment. Rule: Goods in a business are equipment when they are fixed assets or have as identifiable units, a relatively long period of use. Goods are inventory, even though not held for sale, if they are used up or consumed in a short period of time in the production of some end product.

Problem 279 – Ambulance was a lawyer who loved speculative investments. When Elvis died, Ambulance acquired one of his guitars. He decided to keep it for years and let it appreciate in value (he did not himself play the guitar). If Ambulance uses the guitar as collateral for a loan needed to run his law practice, how is the guitar classified?

o The guitar would be classified as consumer goods 9-102(a)(23) – Consumer goods – means goods that are used or bought for use primarily for personal, family, or household purposes.

o If he was a professional guitar player – equipmento If he was a store owner then inventory

Problem 280 – Car lease contracts that Dime-A-Minute Rental Cars use as Collateral when it borrows money from a bank? If Dime-A-Minute so moves into the computer age that it stops using paper entirely, can be electronic version of this paperwork be used as collateral?

9-102(a)(31) – Electronic chattel paper means chattel paper evidenced by a record or records consisting of information stored in an electronic medium

9-105 – Control of Electronic Chattel Paper Does article 9 apply here? Yes. Provision 102 Definitions. The leases are the

collateral. The bank can win here only if it perfects its security interest. This is chattel paper - one of the things that falls under this category is a lease.

Does Art 9 apply to the sale of the leases? Article 9 does apply because this is a sale of Chattel paper.

Problem 281 – Montana enacted a statute giving unpaid crop dusters a lien on crops of the farmer. This is a statutory lien (since it arises by statute and not left to the consent of the debtor – farmer). Is this nonetheless an Article 9 transaction subject to the requirements?

9-102(a)(5) – “Agricultural lien” means an interest in farm products:

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Yes. Article 9 normally does not apply to statutory liens. However under 9-109(a)(2) as an exception article 9 does apply to agricultural liens if they provide services for farm operations. Article 9 only applies to transactions that create a security interest between 2 agreeing and informed consenting parties.

Note: Article 9 would apply if the farmer said, “I agree that my crop dusters are collateral under the Montana Statute.”

II. Technical Validity of the Forms 9-203 – Three requirements must be fulfilled in order for the security interest

to attach – A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless the agreement expressly postpones the time of attachment.

1. The value has to be given (the creditor has to give value)2. The debtor has rights in the collateral or the power to transfer

rights in the collateral to a secured party (the debtor has to have rights in collateral)

3. Can't be effective until the debtor signs security agreement with a reasonable description of the collateral or creditor in possession of the collateral per agreement.

The creation of an Art 9 security interest typically involves two documents: the security agreement and the financing statement.

A. The security agreement is the contract between the debtor and the creditor by which the debtor grants to the creditor (the secured party) a security interest in the collateral.

1. 9-102 (a)(73) – “Security agreement” means an agreement that creates or provides for a security interest.

2. The purpose of the security agreement is to create property rights between the debtor and the creditor

3. Where the collateral is in possession of the secured party, no written security agreement is required by law (though one is probably still desirable for evidentiary reasons).

4. If the collateral is in the secured party’s possession or control, the 9-203 security agreement must be authenticated by the debtor (authenticate is defined in 9-102(a)(7) and (b) describe the collateral (plus the land if timber is involved)

B. The financing statement if the notice that is filed in the place specified in 9-501 (and indexed under the debtor’s name) in order to give later creditors an awareness that the collateral is encumbered.

1. The purpose of a financing statement is to create property right in the creditor against most of the rest of the world.

2. The lender files a financing statement to give notice to later creditors as to what property of the debtor is encumbered by prior liens. Consequently the financing statement does not typically contain many details of the underlying transaction.

Problem 282 – Bean bought a new computer on credit before he could take it home the store made him sign a Conditional Sales Contact by which he agreed that title to the computer would

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remain with the store until he had fully paid for his purchase. The contract described the computer but nowhere did it mention a security interest. Does the contract qualify as a security agreement under 9-203? See also 1-201(37) signed and 2-401(1) –

This is a secured transaction. It fulfills the 3 requirements because the creditor gave value when handed over the PC, the debtor has the right in the collateral because they have the PC, and debtor signed the sec agreement with a reasonable description of the contents of the contract agreement and Bean (debtor) signed the contract under §1-201.

Art 9 says that if the substance of transaction is the good sold on credit - this is a secured loan. This is a security agreement - agreement that secures an interest.

C. The Debtor’s Identity When the financing statement is filed (typically in the Secretary of State’s office), it

will be indexed under the debtor’s name. Because later possible creditors will search the records under that name, it is particularly important that it be correct.

Problem 283 – Harry Fellini ran a movie theater called “Fellini’s Art Theater” as a sole proprietor with the same trade name. He gave a security interest in the business’s equipment to S Finance company. The financing statement calls for a listing of the “debtor’s name.

a). Should the parties use the business name or individual name? 9-503 Article 9 says that we have put the real legal name. Have to put down Harry Fellini. Art 9 says that have to put down the debtor's real name and not the trade name because the trade name can change at any time. b). If the theater were run as a partnership, would the partnership’s name be used as the debtor’s name? Article 9-503(a)(4)(A) Must be an organization. Official comment 2 Section 1-201(28) defines the term “organization,” which appears in subsection (a)(4), very broadly, to include all legal and commercial entities as well as associations that lack the status of legal entity. Thus the term includes partnerships.

1. allows use of the partnership name as the debtor name because that is the legal entity that is borrowing money. Similarly, LLC or Corp. would also be used to identify the debtor when the business entity borrows money in the LLC, Corp or Partnership capacity.

Problem 284 – Debtor’s correct name – “Michael A. Erwin” – financing statement listed him as “Mike Erwin” –The rule of Art 9 “excuse minor errors unless seriously misleading” 9-506(a).

Art. 9 says - we don't want to penalize the creditor for a small mistake. To figure out if it's seriously misleading you search the records using the same system that the government uses and if the correct name is found anyway then it is not seriously misleading.

o Is the party okay here? Yes. As long as the name comes up with reasonable search tactics then the error was not seriously misleading.

Problem 285 – Barbara Song borrowed 50,000 from ONB in order to start her business “Barb Interior Design” ONB and Ms. Song signed a security agreement showing her as the debtor, and giving ONB an interest in the inventory and equipment. ONB duly filed a financing statement. Ms. Song married Fred Dancer and then changed her name to Mrs. Barbara Dancer. She subsequently, borrowed another 50,000 from Nightflyer Finance Co., which loaned her the

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money after searching the records under “Dancer” and finding no prior faults. (a) Did ONB loose its security interest because it failed to re-file when Barbara changed her name? (b) What can the creditor do to protect against this risk?

a. 9-507 Comment 4 – If a name leading, the financing statement, unless amended to provide the debtor’s new correct name, is effective only to perfect a security interest in collateral acquired by the debtor before, or within four months after, the change. If an amendment that provides the new correct name is filed more than four months, after the change, the financing statement as amended would be effective also with respect to collateral acquired more than four months after the change, but only from the time of the filing of the amendment. Thus, ONB would not lose its security interest as long they would refile w/in 4 months or if refilled after 4 months would only be effective from the time of the filing of the amendment.

b. The security agreement K should say (1) if you change your name you have to contact us or it is a breach of K (2) Creditor should always ask individuals if they have ever had another name and for her maiden name to see if there had been any name changes (3) Call the person every 3 months to make sure their name hasn’t changed (however this could be complicated); If this was a Corp check with Secretary of State office to see if Corp changed their name every three months. If it's an individual, then it's more complicated.

Problem 286 - The Last National Bank filed a financing statement in the proper place to perfect its security interest in the accounts receivable of the American Electronic Store. When AES had financial difficulty, its assets were sold to Voice of Japan, who moved into the same retail location. Must Last National Bank refille to keep its security interest perfected in (a) the accounts transferred by AES to Voice? (b) accounts later acquired by Voice. (c) If AES merges with Voice to become Voice of Electronics?

– 9-507(a) – a filed financing statement remains effective with respect to collateral that is sold, exchanged, licensed, or otherwise disposed of and which interest or agricultural lien continues, even if the secured party knows of or consents to the disposition. See also comment 3 – Normally, a security interest does continue after the disposition of collateral. go over wit Travis.

Problem 287: When Robin Oakapple found he could not get a loan unless he had collateral, he got permission from his step-brother Richard to use his yacht as collateral. (a) Should the lender have both Robin and Richard sign the security agreement? (b) Which of these parties is the debtor and which the obligor?

– Yes, it is best for the lender to have both on the hook under the security agreement; however, the financing statement must be filed under the owner of the collateral. – Richard

o 9-102(28)(a) Debtor means – a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor

o 9-102(59) – Definition of obligor – The owner of the collateral is the debtor. - Richard. The other person is the obligor. -

Robin.

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D. Description of the Collateral

Problem 288 - Peter Poor signed a security agreement and financing statement in favor of the Total Finance Co. giving the company security interest in “all personal property debtor now owns or ever owns between now and the end of the world or his death, whichever occurs first.” Does this perfect an interest in his guitar? A super generic description of a collateral and thus this is not effective

– Under §9-108 the security agreement is only sufficient when it reasonably identifies what is described HOWEVER under §9-504 the financing statement the collateral is sufficiently defined if it “covers all personal property or assets”

– The distinction between a security agreement under §9-108 vs. a financing statement under §9-504, the latter allows for general terms because it puts the creditor on notice to look to §9-108 to see what is specifically covered.

– As a matter of policy a guitar would not be perfected under the broad financing statement and the unidentified guitar in the security agreement.– The description here is super generic for the secure agreement - this a very broad

umbrella, gives the creditor too much leverage to take everything. - this is not effective for the secure agreement as a matter of the contract law.

In Re Grabowski Facts: Bank of America (D) and South Pointe Bank (P) both claimed security interests in three items of farm equipment owned by the bankruptcy debtors. South Pointe (P) contended that D financing statement (although prior in time) which indicated that Bank of America (D) had a lien on property consisting of “all inventory, chattel paper, accounts, equipment, and general intangibles,” was insufficient under the UCC to perfect D security interest in the farm equipment. Rule: A bank’s financing statement that indicates the bank has a lien on property consisting of “all inventory, chattel paper, accounts, equipment, and general intangibles” is sufficient to perfect its security interest in a Chapter 11 debtor’s property.

Problem 289 - Polly Travis opened branches of clothing stores all over the state. Polly borrowed money from Longhorn State Bank to open more stores. Longhorn took a security interest in “all inventory, accounts receivable, equipment instruments, general intangibles and personal property.” The bank also made her pledge her personal jewelry by bringing it from home to the banks vault. Later Polly requested the jewelry to wear to an event, where another creditor seized it by judicial process. Is Longhorn Bank security interest perfected by the filed financing statement?

– Broad Approach: LSB security interest included “personal property” under broad approach jewelry would be listed under personal property.

– Narrow Approach: A financing statement’s description of the collateral as “personal property” is insufficient to satisfy §9-402’s requirement that collateral for a loan must have been described with sufficient specificity to allow a reasonable identification of the collateral. o Thus, a court could find that the financing statement, which merely described

the collateral as “personal property” was insufficient to have perfected.

Problem 290 - The security agreement and the financing statement both describe the collateral as “inventory.” (a) Does this limit the security interest to existing inventory, or does the security

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interest extend to the replacement for original collateral? (b) If the security agreement (between debtor and creditor) said, inventory “now owned or after acquired” but the financing statement (UCC filed document to put 3rd parties on notice) had only mentioned inventory, does this perfect the interest in after-acquired inventory?

– If you just say inventory, then it seems that it includes that the debtor owned at the time that he signed. If you are expecting to reach further acquired inventory, it is better to spell it out. o In Re Filter 163 .3d 570 suggest that security interest in inventory and accounts

receivable presumptively included after-acquired property, subject to rebuttal by evidence that parties intended otherwise and that ‘loan company’ had a security interest in company’s after-acquired accounts receivable but not in company’s after-acquired inventory.

o This would be left up to the Parole Evidence rule of the K, most courts would look at the language of the K and suggest that if “after acquired property was contemplated then it should be written into the K” other courts look at the “reasonable notice of a need for prudent inquiry of the identified secured party in order to ascertain accurately the scope of the existing security agreement.”

o See – 9-108 comment 3 and 9-502.

Problem 291: The financing statement description said “various equipment, see attached list.” No list was attached. Is the statement sufficient to perfect the security interest in d’s equipment?

o No. A financing statement should reasonably describe the collateral & then have a list attached to further describe the collateral.

Problem 292: The security agreement stated that the collateral was “machinery equipment, furniture and fixtures.” To this list the financing statement added “inventory and accounts receivable.” The parties testify that the loan was secured by inventory, accounts receivable, and the items in the security agreement. Does the secured party’s interest reach inventory and accounts receivable?

– Would only include things that are included in the security agreement. The creditor only gets what's in the security agreement. Under §9-203(b) and parole evidence rule, a creditor only gets what is specified in the security agreement (i.e K).

Problem 293: Loan officer at ONB: The bank is planning to make a loan to Luddite Tech Inc. and wants to take a security interest in the debtors equipment. Luddite most expensive equipment is the Abacus 12. Should ONB security agreement say “the debtor grants a security interest in (a) the Abacus 12 plus all other equipment (b) all equipment, particularly the Abacus 12 OR (c) all equipment?

o If there is one piece of equipment that is worth more than everything else. Saying "All equipment" should be fine, but all equipment including the most expensive item is probably better.

Problem 294: The security agreement stated that the tractor buyer granted a security interest to “ ____” but the seller forgot to fill in his own name (as the creditor). The seller later filed a financing statement showing he had a secured interest in the buyers tractor. Is the purported document with the blank a §9-203 security agreement? What about the financing statement?

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o Bolinger - read in conjunction with filed financing statement signed by the debtor and containing a detailed list of all of the collateral intended to secure the loan, and supported by correspondence and course of dealing showing intent to create a security agreement, was sufficient. Financing statement is okay also.

The creditors name left off the K is still sufficient if you can still show that a K was intended.

Minor error that is not seriously misleading as long as key information of debtor is included.

Major Error because the court requires debtors name, creditor name, and description of collateral

Note from pg 814 – To met all the above objectives, the wise creditor will:a. Make sure all the forms are correctly filled out in all particularsb. Check the debtor’s technical legal name now and in the immediate past and make sure

it is correctly listed on all the documentsc. Refine if the debtor’s name changes in any wayd. Describe the collateral as accurately and completely as possible in all documentse. Inquire into the source of the debtor’s title to ensure that the former owner’s creditors

have no valid claims

III Attachment of the Security Interest Attachment is the process by which the security interest in favor of the creditor becomes

effective against the debtor. Perfection is the process by which the creditor’s security interest becomes effective

against most of the rest of the world. The steps involved in attachment are described in 9-203. They are:

o A security agreement must be signed (or creditor in possession of collateral)o The creditor must give value (defined in 1-201(44) – after all, you shouldn’t get

a security interest unless you’ve done something to deserve it); and o The debtor must have some rights in collateral (one cannot give a security

interest in property one does not own or have legal interest in).

Thrift Inc v. A.D.E. IncFacts: Thrift made loans to Devers and secured those loans with the “after acquired inventory.” ADE sold cars to Devers (transfer of title was delayed), but Devers check was dishonored. Thrift took all the cars upon Devers default on the loan. Thrift sued ADE to get title to the cars. Rule: A security interest in after-acquired goods attaches upon the debtor’s receipt of autos for resale, even if the vendor has not yet received payment. Thus Thrift’s security interest prevails.

Problem 295 - R Gabriel decided to go into music business and borrowed $35,000 from ONB to open his shop, named Gabriel Trumpets. On Jan. 6 he signed a security agreement with ONB giving an interest in “all existing or after-acquired inventory in the store.” On Jan.6 his inventory was 4 guitars, and a pitch pipe. Gabriel had a K with TTMC to sell him 40 trumpets paid for in advance of the delivery date (Mar 30). On Mar 15 TTMC marked the trumpets for shipment to Gabriel’s Trumpet store. The trumpets were shipped and displayed in GTS on Mar 30.

a. On what day or days did the bank’s security interest attach (that is, become effective) to the guitars, pitch pipe, and trumpets?

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i. January 6th, under §9-203 all 3 requirements are met because security interest attaches (1) assigns security agreement (2) creditor gives value (3) creditor has rights in the collateral. Moreover §2-501(1) says that goods mentioned in the K are a special property insurable interest even if the goods are nonconforming or can be rejected or returned.

ii. Gabriel doesn’t acquire rights to the trumpets until they are deliveredb. Does your answer change if we add the fact that the bank filed a proper financing

statement covering Gabriel’s inventory on January 7? Can a financing statement be filed before the security agreement is signed? Attached? Why would a creditor wish to file a financing statement before the security interest had attached?

i. The answer wouldn’t change and the banks interest will still be perfected if it filed the UCC financing statement on Jan. 7, under §9-502(d) a financing statement may be filed before a security agreement is made or a security interest otherwise attaches.

ii. A creditor would file a financing statement before the security interest attaches because the rule is first to file OR perfect. This would establish priority of the Bank amongst other creditors per rule 9-322.

o If the bank did not advance any money until March 31 (the date the bank actually saw the trumpets in the store), and if the bank did not make any commitment?

Would change to March 31 because prior to that date the security agreement would not meet the requirements for attachment under 9-203.

In Re Howell Enterprise, Inc.Facts: Howell Ent. mistakenly listed a credit as an account receivable and the lender tried to take it as a security interest. Rule: A security interest cannot attach unless the debtor giving the interest has rights in the collateral. A party having a security interest in accounts receivable may not be able to claim an item that is incorrectly entered as such an account.

Class Problem - Pat decided to purchase a laptop computer for her use in the kitchen and to bring on family trips with her children. On June 20, 2005, Pat went to Store, which specialized in computers, and asked for a recommendation for a lightweight and durable computer for home and travel use. The laptop computer (Laptop) recommended by Store cost more than Pat expected and Store’s Manager asked Pat whether she wanted Store to finance the purchase. Pat agreed and Store loaned Pat $4,500 for the purchase of the Laptop. Pat signed Store’s standard security agreement which described the Laptop and Pat left Store with the Laptop. Store did not file a financing statement. Pat loved the Laptop and soon realized that it was far more efficient for her job as an independent sales consultant than her existing desktop. She started taking the Laptop to her office and used it almost exclusively for business purposes. She did not inform Store about this change of use. Pat’s business grew and she obtained a $50,000 loan from Bank as operating capital, agreeing that Bank could have a security interest in all of heroffice equipment, including the Laptop she had purchased from Store. On October 1, 2005, Pat signed the security agreement Bank had requested and prepared and Bank duly filed a valid financing statement. Pat defaulted on both her loan from Store and from Bank. On April 1, 2006, Store repossessed the Laptop. Both Store and Bank claim a security interest in the Laptop. What are the rights of the parties?

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We have two perfected creditors here. One is perfected by the automatic perfection - PMSI - in consumer goods. (Look at the debtor's purpose for acquiring the goods - his purpose here is to acquire the goods for personal use). PMIS often get priority even over the people who perfected first.

Chapter 20 Perfection of the Security Interest

1. How to perfect a security interest. Regardless of whether the security interest is perfected or not, if the debtor defaults, the creditor will take the collateral. However, if there is another party involved, the creditor with a perfected security interest will supersede the creditor with non perfected interest. Therefore, in order to be a real secured creditor, a creditor needs to perfect security interest. This can be done in 4 ways:

o File a financing statement in UCC office as directed in that particular state - a relatively simple form. This statement is good for 5 years and can be renewed for another 5 years. The state statute will tell u the right way to do this - in Mass with the sec of state. – this is the most common way of perfection.

o Can perfect by taking actual possession of the collateral interests in tangible property (ex. goods). Can give it to the third party. But a third party has to give a receipt.

o Can perfect by taking control of the collateral. This analogous to getting possession but instead involves a security like a bank account.

o Automatically – PMSI (in consumer goods) - there is no practical reason to filing thus the creditor is excused.

Other automatic perfections Minor Asst Accounts:  no need to file UCC Sale of Promissory Note: subject to article 9 and the buyer of the

note does not have to file the UCC paper, because other creditors do not need to know of that because if X sells it he no longer has it.

o Getting the certificate of title - ex. bank placing their name on the certificate of title for an auto.

If a security interest is perfected, it is senior to most later creditor interests (especially that of the trustee in bankruptcy should the debtor go bankrupt).

o 9-308(a) –Perfection of security interest – Except as otherwise provided in this section and Section 9-309, a security interest is perfected if it has attached and all of the applicable requirements for perfection in Section 9-310 through 9-316 have been satisfied. A security interest in perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.

o General Rule of 9-310: to perfect a security interest you must file a financing statement unless

(1) automatic (2) Possession (3) Controlo A security interest cannot be perfected unless it has attached.

This is an obvious requirement: a security interest must be effective between the debtor and the other creditor before it has legal meaning as to

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other parties. Thus, even if one of the 9-203 criteria is lacking the interest would not have attached and therefore would not perfect.

                                                            

I Perfection by Possession – if the collateral is in the physical possession of the creditor, the world at large is alerted to that creditor’s possible interest in the property, and no other notice is therefore required. Obviously only collateral having physical form can be possessed.

Problem 296 – Archibald Gracie, owns The White Star of England, a famous large diamond currently on display at the Astor Museum in NY. Molly Brown has agreed to buy the diamond, she made a down payment – with 3 more to go. Gracie and Brown have a signed purchase agreement, which contain a clause granting him (Archie Gracie) a security interest in his own diamond until she has made all the required payments. (a) Can he perfect his security interest in the diamond by simply notifying the museum of the sale and to hold it for his benefit until payment is satisfied, thus creating an escrow agent arrangement?

o Gracie can not perfect a security interest in the diamond by notifying the museum of the sale and telling the museum to hold it for his benefit – has to get some kind of receipt from the museum. 3rd party Bailee must acknowledge in a record that it is holding for creditor. Notice to bailee alone is insufficient. 9-313(c)

a. 9-313(c) – authorizes perfection without filling when collateral is in possession of person other than debtor.

b. 9-313(f) – says that acknowledgment is not required – a person in possession of collateral is not required to acknowledge that it holds possession for a secured party’s benefit. ???

c. 9-313(g) – says that there is no duty of confirmation of acknowledgment to another person.

Problem 297 – Kiddie Delight Toy, Inc. wanted to borrow money and use its inventory of toys as collateral. It called Freds Field Warehouse Co. and Fred’s came to the plant, put the inventory in a locked room and posed a sign on the door saying “Contents of room under control of FWCo.” Fred’s issued a negotiable warehouse receipt deliverable to the order of Kiddie Delight. Fred hired Mort Menia, the Kiddie Delight janitor for $1.00 per week to watch the goods. KD pledge the warehouse receipt to Mammon State Bank in return for a loan. Kiddie went bankrupt shortly thereafter.

a. The bank did not have a perfected security interest in the inventory. 9-312 (c) Says that a security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time. See also comment 3 in 9-313. Not for perfection. The rules only apply if a 3rd party is in possession of the collateral, and that would mean possession that excludes the debtor - but here the debtor has free access and control. Creditor is unperfected.

c. If inventory stored in warehouse not owned/controlled by debtor The bank has a perfected security interest in the warehouse receipt even before the bank gets possession of it. The 9-312(e) Temporary perfection: new value – says that a security interest in a receipt will be perfected without filing or taking possession or control for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.

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Problem 298 – Karate Inc. pledge 36 of the promissory notes given by its customers, to Nightflyer in return for a loan. They signed a security agreement and Nightflyer Finance Co. took possession of the notes. A month later, Arnold Sun (Karate Inc. President) requested the note so that he can present it to a customer for payment. The finance co. gave him the note on April 6, but forgot about it. The Karate school went bankrupt on Oct. 12. (a) Does NFCo have a perfected security interest in any or all of the promissory notes? (b) Could the finance Co. have protected themselves by filing a UCC financing statement as to the promissory notes.(a) The bank has perfected security interest by possession in 35 promissory notes, but it doesn’t in the one that it gave back to Sun because more than 20 days have lapsed between April 6 and October 12.

o 9-312(g) – A perfected security interest in a certificated security or instrument remains perfected for 20 days w/out filling if the secured party delivers the security certificate or instrument to the debtor for the purpose of:

Ultimate sale or exchange; or Presentation, collection, enforcement, renewal, or registration of

transfer. o 9-312(h) - After the 20-day period specified in subsection (e), (f), or (g)

expires perfection depends upon compliance with this article.(b) The finance company could have protected themselves by filing a financing statement. When relying for possession for perfection, it is your responsibility to get it back within 20 days.

II Automatic Perfection – means that the secured party need only make sure that its security interest has attached, and perfection is thereby accomplished without the need for any further steps.

A. Purchase Money Security Interest in Consumer Goods a. To qualify for automatic perfection under 9-309(1), the security interest in

consumer goods must qualify as a purchase money interest, a term defined in 9-103. A PMSI is granted to sellers or lenders whose willingness to extend credit permitted the debtor to acquire the collateral. Such creditors obviously have a superior equity in the collateral versus other creditors, and code frequently affords them special considerations.

a. Goods, Quasi Tangible or Intangibleb. Goods acquired for personal or family or household usec. PMSI (Purchase Money Security Interest in consumer goods

perfects automatically) transaction where the debt represents the price of the collateral

The theory behind automatic perfection of liens on consumer goods is that it is unlikely that the goods will be used to secure other debts.

Problem 299 – Bilko Siding, Inc. put aluminum siding on Mr. and Mrs. Brown’s home. They signed a K on August 4, giving the co. a security interest in all their currently owned and acquired in the future consumer goods. On Sept. 25 the Browns went to First Finance Co. and borrowed $80 for the stated purpose to buy a sewing machine. They signed a security agreement with the Financing Co. granting it a security interest in the sewing machine, however the

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Financing Co. did not file a UCC financing statement. The Brown bought the machine on Oct. 11 and filed for bankruptcy on Oct. 12. Bilko and First Finance claim the machine?

a. Binko’s security interest did not attach to the sewing machine because the debtor did not acquire right in the machine within 10 days after Bilko gave value.

b. The loan agreement creates a PMSI even though First Finance was a lender and not a seller.

9-102(a)(2) – says that a purchase-money obligation is created when an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to right in or the use of the collateral if the value is in fact so used. So, as long as the 80 was used for the sewing machine the purchase-money obligation was created.

Created a purchase-money obligation because they provided money and enabled the debtor to acquire collateral.

d. No. It would not have been a PMSI if the Browns has used the 80 to pay liquor bill and had used 80 from their savings account to buy the sewing machine. PMSI has to be for a stated purpose. To better protect themselves should have indicated the purpose on the check.

e. Assuming 80 was used for the announced person. Who gets the sewing machine? The bank because a security interest doesn’t attach under a term constituting an after-acquired property clause to consumer goods, unless the debtor acquires rights in them w/in 10 days after the secured party gives value.

In Re ShortFacts: Short (P) entered into a retail installment contract to buy bedroom furniture. The entire balance was due in one year. The contract to pay the debt, which granted a security interest in the furniture was assigned to American General Finance (D) on the date of signing. One year later, Short (P) executed a note with American (D), which consolidated the furniture debt with other debts. The note allowed monthly payments, and it listed the collateral as a continued purchase money interest in the bedroom furniture as well as some other household items owned by Short (P). P then filed bankruptcy and moved to avoid D’s lien on all the furniture, contending that the refinancing destroyed the purchase money character of the lien and therefore the lien should be exempt from creditor process pursuant to Bankruptcy Code.Rule: A purchase money security interest retains its character when the debt is consolidated with other obligations and thus is not subject to avoidance under Bankruptcy Code.

Problem 300 – Façade Motors decide to buy an expensive rug for its main office. It selected one form the stock of Treasures of Persia Inc. which let Façade Motors take the rug back to the office to try it out to see if it wanted to buy the rug. All of the equipment of Façade Motors was covered by a “perfected floating lien” in favor of ONB. (a) As soon as Façade gets possession of the rug – does the bank lien attach? Façade made a down payment and decided to purchase the rug by signing a K with Treasures of Persia, Inc. (b) To finance the rest of the installment payments, Façade Motors borrowed money from Nightflyer Savings & Loan, giving it a security interest in the rug. Does Nightflyer’s security interest qualify as the purchase money kind.

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a. The bank’s lien doesn’t attach before Façade Motors makes up its corporate mind. 2-326 (2) – goods held on approval are not subject to the claims of the buyer’s creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer’s possession.b. Yes. 9-103(b) – “purchase-money obligation” – all or in part.

***Stone: assigning small portion of accounts or more accounts to someone who is not a lender > automatic perfection

General Electric Capital Commercial Automotive Finance v. Spartan MotorsRule: A purchase money security interest may be obtained under 9-107 even where the debtor first obtains the property and is later reimbursed by the purported purchase money security interest creditor.

Problem 301 – ONB sold its promissory notes to LNB (sale of promissory note is an Article 9 transaction. The seller = debtor and buyer = secured party.) Must LNB file a financing statement or make sure it has possession in order to perfect its security interest in the notes?

No LNB does not need to file a financing statement. Under 9-309(4) a sale of a promissory note is perfected upon attachment and perfects automatically.

o 9-109(a)(3) – a sale of accounts, chattel paper, payment intangibles is covered by Art 9.

o 9-309(4) – a sale of the promissory note is perfected upon attachment

Problem 302 – (not explained in detail) Guarantor > 2ndary obligoro 9-203(f) – the attachment of a security interest in collateral gives the secured

party the rights to proceeds provided by Section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral.

o 9-308(d) – perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral.

o Thus Nightflyer doesn’t need to do anything else as it has already perfected the interest in the accounts receivable by filling a financing statement.

Problem 303 – Hamlet Corp. Borrowed 100,000 form Elsnore Finance Co. and gave it a security interest in the company’s equipment. The parties properly filled out a financing statement with W. Shakespeare as president of Hamlet Corp. Elsnore gave the financing statement and the filing fee to a clerk at the Secretary of State office. The Clerk Ophelia Nuner, filed the financing statement under “Shakespeare” instead of “Hamlet.” One year last Hamlet got another loan from another finance company and gave them a security interest in the same equipment, with no loan under Hamlet showing in the records. (a) Did Elsnore file first or do they bear the risk of Ophelia “the faulty clerk” Nuner?

o Elsinore did file first here 9-517 – The failure of the filing office to index a record correctly does not affect the effectiveness of the record. They still maintain priority. Should have gotten a receipt to ensure that it was filed correctly. The following creditor that looses can bring a claim against a filing office.

o Acceptance by clerk = filing

**Vehicles: perfected SI by putting name of bank on title

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Problem 304 - ONB had a security interest in the equipment of Weekend Construction Co. for which it filed a financing statement in the proper place on May 1, 2009. Anti-trust National Bank took a security interest in the same collateral and filed its financing statement on May 2, 2009, in the same place

o A financing statement is effective for a period of five years after the date of filing. – 9-515(a)

o No, 9-515(d) – a continuation statement may be filed only w/in six months before the expiration of the 5yr period specified in subsection (a) or the 30 day period specified in b.

9-510 deems continuation statement not timely filed ineffective.o ANB would get the priority because the security interest becomes unperfected

upon lapse, and thus the secured interest ANB would get priority. o ANB will still have priority over ONB. Refilling after the renewal date does not

allow retaining their priority before the renewal date.

Problem 305 – When Portia Moot paid off her debt to Last National Bank, which had loaned her $3000 to buy a computer for her law office (and filed financing statement for a PMSI), she wanted the bank to clear up the records at the filing office. (a) Does she have the right? (b) What if they fail to do so?

o yes she can request LMB to deliver a termination statement. If they failed to do so they liable to her for damages. She can file her own termination statement.

o For consumer goods > creditor is obligated to terminate

Problem 306- When attorney Sam Ambulance handled a divorce for a client, he incurred the wrath of her ex-husband. Andrew Anarchist, president of Freeman Common Law Movement. The irate ex-spouse filed 42 phony financing statements on the public records showing that all of Sam’s assets were security for various non-existence loans in favor of Anarchist (the secured party of record). What can Sam do to clean up the title to his property?

Can file his own termination statement for bogus security interests, and file a claim for defamation.

Chapter 21 Multi-State Transactions When it's a multi-state case. Laws are different from state to state. Thus the choice of law

does matter. Choice of law provision in a contract - why would one do that? - the drafter might perfect

one state's law over another, for predictability. Article 9 doesn't let it be there. Art 9 carves out an exception to that. If one was to make a loan to an organization that was incorporated in Delaware but has offices in other states, if one would look for UCC financing statement the might not find them and might be misled. Art 9 says you can't choose the law, we'll choose it for you. Art 9 used to say that if you can touch the collateral, then that is where the financing statement should be filed. So, under the old rule this created a problem because if a debtor had collaterals in all 50 states then would have to file in all 50. Also if the collateral moved from state to state, would have to re file. Also created a problem with intangible collaterals, such as accounts.

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o The new rule is - file where the debtor is located. The revision adopts a domicile approach and looks to the law of the debtor’s location as the state in which the steps for perfection need to be taken.

However, if the collateral has physical form, the law of the jurisdiction in which the collateral is located will govern issues involving priority and other Article 9 matters – 9-301(1) and (3).

So, the secured party looks to the jurisdiction in which the debtor is located as the place of perfection, but the jurisdiction of the collateral’s location as to the effect of perfection.

9-301 - Says file where the debtor is located. Differentiates between perfection and everything else - the law governing the perfection of a collateral is the law of the state where the debtor is located. The law governing everything else is the law where the collateral is located.

Ex. Debtor is located in Mass and the collateral is in NH. With respects to which state law governs, it really doesn't matter. All the states that UCC governs have the same laws. Thus if the MA law applies perfected would supersede the non perfected and same thing in NH.

9-307 tells us where the debtor is located - says if it's a corporation it has to be registered in one place - the place where the financing statement is filed.

Also tells us what happens if the debtor moves - Individual - have 4 months to refile and the creditor remains perfected. So if this is a partnership that is not registered - they have 4 months.

Problem 307 - Mary Bush lived at a home she owned in Cheyenne, Wyoming, but she

also wanted to buy a sailboat in Cleveland, Ohio, and planned to keep the boat there after the purchases. Ohio law provides that whenever a consumer pays more than 75% of a debt secured by consumer goods, the creditors secured interest is automatically stripped from the consumer goods, BUT Wyoming has not such rule. (a) If a creditor loans Mary money to buy the sail boat, where should the creditor file the financing statement to perfect their interest? (b) When Mary pays the 75% of debt will the creditors security interest still be attached?

***A). General Rule > Perfection is governed by the law of the state where debtor is located, except when…B) Possessory security interest > perfect at place where collateral is located if creditor has possession C). Effects of Perfection > Governed by where the collateral is located

The collateral is the boat, it’s a PMSI - therefore do not have to file a financing statement - it perfects automatically. Ohio law would apply because that is where the collateral is located.

Cannot include choice of law clause in K to govern PLACE OF PERFECTION

Problem 308 - Peripetic Corp. (PCorp) was organized under the laws of the Delaware, but has a large retail store in NJ. PCorp was a husband-and-wife business and they did all the paper work at their Maryland home. PCorp stationary used the home Maryland address. (a)

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When the corporation borrows money against their accounts receivable, where should the financing statement be filed? (b) If PCorp was registered in the Republic of Jahala, where should the financing statement be filed?

A). The financing statement should be filed in Delaware. 9-307 tells us that if a debtor is an organization with more than one place of business, a debtor is located at it’s chief executive office.

If PCorp. is organized under the laws of DE then that is the debtors location > RULE for registered organizations***

B) Under Article §9-307(c), if it’s a foreign corporation then their location would usually be in District of Columbia. However if the foreign country has something similar to UCC codes then you can file in that foreign country.

MOVING OF S.I. TO NEW JURISDICTION

Problem 309 - FF&M is a legal partnership that has its principal place of business in Chicago, IL, where ONB has a security interest in their accounts receivable and had filed its UCC financing statement in IL. (a) If FF&M make a move to DC in January 1, 2013 does ONB loose its perfection or does it have a grace period to refile in the new jurisdiction? (b) If FF&M law firm merges with a law firm in DC, and DC firm assumes all debts and accounts of FF&M, is the time period the same?

o 9-316 Continued Perfection of Security Interest Following Change in Governing Law.

A security interest perfected pursuant to the law of the jurisdiction designated in 9-301(1) or 9-305(c) remains perfected until the earliest of:

The time perfection would have ceased under the law of the jurisdiction

The expiration of four months after a change of the debtor’s location to another jurisdiction, or

The expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction.

a. Same rule applies as with individuals with the non registered orgs - thus should have filed in IL.

If they have to re-file it must be done within 4 months or they loose their sec statement

b. Transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction - then creditor gets a year to re-file.

Problem 310 - Suppose the FF& M had two creditors with perfected security interest before its permanent move to DC. ONB filed its financing statement first and LNB filed its financing statement second, but both filed in Chicago, IL in 2012. When the move occurred on January 1, 2013 LNB promptly re-filed in DC before the end of March of that year, but ONB was careless and didn’t realize that the firm had moved until September. (a) If ONB filed in ZDC in September, will it retain its priority over LNB?

o 9-316(b) –If a security interest described in subsection (a) becomes perfected under the law of the other jurisdiction before the earliest time or event described in that subsection, it remains perfected thereafter. If the security interest does not

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become perfected under the law of the other jurisdiction before the earliest time or event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.

o See also comment 3. o After 4 months the creditor that didn't refile (ONB) becomes unprotected and

looses it's priority.

Certificates of title - Not covered o General rule - if the state has issued a certificate of title that state law applies. If

the debtor moves that state law still governs.

Chapter 22 PriorityI. A basic priority provision is §9-317, which lists the parties prevailing over an unperfected

security interest (one that has attached but that the creditor has failed to take the steps required for perfection).

§9-317 Interests That Take Priority Over or Take Free Security Interest or Agricultural Lien.

a) Conflicting security interests and rights of lien creditors . A security interest or agricultural lien is subordinate to the rights of:

1. a person entitled to priority under Sec. 9-3222. and except as otherwise provided in subsection (e), a person that

becomes a lien creditor before the earlier of the timea. the security interest or agricultural lien is perfected; orb. one of the conditions specified in Sec. 9-203(b)(3) is met

and a financing statement covering the collateral is filed.e) Purchase-money security interest . Except as otherwise provided in

Sections 9-320 and 9-321, if a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.

Problem 314 – E’s Bookstore borrowed 10K from ONB, signing a security agreement giving the bank a floating lien over the store’s inventory. ONB, due to negligence, never got around to filing the financing statement. MTS was an unpaid creditor of the bookstore that sued on the debt and recovered a judgment against the store. It then had the sheriff levy on the inventory. ONB learned of this and calls you, ONB’s attorney.

a. Does ONB or Marin’s Travel Service get paid first when the inventory is sold? See 9-317(a)(2), and the definition of lien creditor in 9-102(a)(52).

i. ONB has an effective interest against the bookstore, but it's not perfected. MTS is an unsecured creditor of the book store. MTS is a judgment creditor - they have to identify the assets of the book store and then attach the interest to the creditor - they become a lien creditor. So, who takes priority? Whoever establishes the priority takes first. 9-317

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ii. 9-317(a)(2) says - An unperfected security interest is subordinate to the lien creditor. So, this is a race - whether the security creditor perfects first. The sec. creditor should always win because the way they perfect the interest is by filing the financing statement. ONB once they file the financing statement they have the priority. For a lien creditor however it's always a long process. Have to file a law suit, get the award, find the inventory…

iii. Once priorities are established the unperfected creditor cannot jump and file the financing statement. Thus the lien creditor would win.

b. If, instead of a judgment creditor’s seizing the goods, Bookstore had filed a bankruptcy petition while ONB’s lien was still unperfected, what result?

i. Trustee gets priority if the bookstore goes into bankruptcy and then ONB looses its unperfected interest under bankruptcy. Once priorities are established the unperfected creditor cannot jump and file the financing statement. Thus the lien would win.

ii. The day the bookstore files bankruptcy, the bankruptcy trustee becomes their creditor. So, on the day that they file that is the cut of for priorities. Cannot change the status after that.

iii. This doesn't depend on the reliance of the party or anything else. There is no need to show reliance on the party of the other party.

Problem 315 - Coke Travel Agency (CTA) used its accounts receivable as collateral for a loan from the Mansfield State Bank, but the bank failed to file the financing statement that CTA had signed because the banks attorney lost the statement. 6 months later Coke needed another loan, and applied for one through Bentham National Bank, filed a financing statement and searched the files and discovered that there was no financing statement recorded for CTA as debtor, and took a security interest in CTA accounts receivable. Which bank has priority over CTA accounts receivable as collateral? 9-322(a)(2) and official comment 3 to 9-317.

o 9-322(a)(2) – a perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien

Unsecured collateral - MSB Secured collateral – BNB Can two creditors have interest in the same collateral? Yes. Who is going to the priority here? BSB because they have a perfected

interest. Under 9-322(a)(2), the perfected creditor wins. Problem 316: Jay Eastriver ran a clothing store and needed money. He went to First

National Bank and Second State Bank to take out two loans, using his inventory as collateral and Jay Eastirver signing security agreements. FNB filed a financing statement on 9/25 but did not loan Eastriver the money until 11/10. On 10/2 SSB loaned the money and filed the financing statement.

o Rule: Two perfected creditors - the winner is the first to file or the first to perfect. The way we deal with that is we look at both creditors to see who has filed or perfected 1st. Looking at the two creditors here, FNB wins because they filed on 9/25, even though the SSB lended money first. This might seem like an unfair result. However, the answer to this is that banks should know the rules, and that

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they have to search the records to make sure that no one else established priority. If they choose to loan anyway, then they assume the 2nd priority.

FNB filed financing statement on 9/25 so they have superior right to the inventory because they filed an effective financing statement

Problem 317: When FNB took a perfected security interest in the inventory of JE’s clothing store, the security agreement provided that the inventory would secure not only the current loan, “but all the future advances of whatever kind.” Six months later FNB loaned JE an additional 10K and had him sign a new promissory note for that amount. Do the existing filed financing statement and security agreement need to be altered in any way, or are they sufficient as is to protect the bank? 9-204(c) and official comment 5.

o No, the parties are free to agree that a security interest secures any obligation whatsoever. Determining the obligations secured by collateral is solely a matter of construing the parties’ agreement under applicable law.

Problem 318: Assume in the last Problem that FNB made Eastriver the first loan and filed its financing statement, he then borrowed more money form SSB, using the same inventory as collateral, and this lender also filed the financing statement in the correct place. Eastrvier paid of FNB but they never filed a termination statement. A month later FNB loaned Eastriver more money. The parties signed a new security agreement but no new financing statements were filed. FNB thought that the earlier financing statement would protect the 2nd loan, even if the loan was not contemplated at that time. (a) Is that right?

o 9-323(a) – FNB was the first to file and so, under the first-to-file-or-perfect rule of Section 9-322(a)(1), FNB’s security interest has priority over SSB, As long as FNB was the first to file or perfect, FNB would have priority with respect to both advances if either FNB or SSB had perfected by taking

o Future advances get the same priority as the first as long as the financing statement has been filed. Again, this might seem unfair but the rationale behind this is that 2nd should have searched the records and should have known the rules. Therefore, the party with priority may enhance it's position.

Problem 319: Phillip Philatealy pledged his valuable stamp collection to the Collectors National Bank (CNB) in return for a loan he gave CNB an “oral security interest in his collateral with out filing a financing statement. The bank took possession and put the stamp collection in their vault. Phillip borrowed money from his father and gave him a signed security agreement in the same stamp collection. The father filed a financing statement in the proper place.

o CNB will have the priority because they perfected by possessiono 9-313(d) If perfection of a security interest depends upon possession of the

collateral by a secured party, perfection occurs no earlier than the time the secured party takes possession and continues only while the secured retains possession.

If the creditor lets the debtor take the repossession - by doing that the creditor looses his priority to the filed party. What creditor could have done to maintain priority is file the financing statement prior to allowing repossession.

Problem 320: Howard Red Poll decided to go into the cattle biz and borrowed 65,000 from Brangus National Bank to finance part of the purchase for the initial herd. Poll signed me a security agreement using the cattle as collateral for this “and all other obligation now or hereafter owed to the bank.” A financing statement covering this

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transaction was filed in the appropriate place. Two years later, Poll received a charge card from the same bank and used it to finance a trip to Australia to look over cattle ranching there. When Howard failed to pay the credit card bill they took the cattle. (a) Did BNB security interest in the cattle encompass the credit card obligation? (b) Would it make a difference if his trip to Australia was unrelated to his farming and instead went for wave surfing?

o Secured creditor Art 9 v. someone who became a lien creditor - Future advancements and the security agreement - This is a dispute between the creditor and debtor as to the kind of security interest that this is . The court is likely to say here that the cattle is collateral. An alternative argument would be that the cattle was only were kettle business and that the card is just a coincidence.

o Sec agreement is just a contract. This is a SCOPE of security interest problem and we need to know what

debt is or debts are secured by the loan. First we need to decide whether the (1) purchase of the cattle and (2) the trip to Australia are separate transactions. Next we need to know if the cattle were collateral for “all obligations now or hereafter for the bank.” Jurisdictions differ on this issue.

Broad Approach of scope of Future Advances under §9-204(c): allow for parties freedom of K to allow “loans to also include advances hereafter”

Narrow Approach of Scope on Future Advances under §9-204(c): look to the intent of parties to under the initial K as the controlling factor to determine whether additional advances are included in the original security agreement.

Yes. Under normal K interpretation one was a business loan and if the two K parties never contemplated or K to attach “thing personal and separate” to the collateral of a business then the cattle would not cover events unrelated to the farming like wave surfing in Australia

In re WollinFacts: Prior to the Moodys and Wollin (collectively, “debtors”) (D) filling for bankruptcy under Chapter 13, Oregon Federal Credit Union (OFCU) (P) had extended lines of credit and issued credit cards to the debtors (D). Advances against the lines of credit were secured by vehicles that were to be purchased by the loans, and all the loans had identical “dragnet” clauses that provided for cross- collateralization on other loans. OFCU (P) claimed that these dragnet provisions should be enforced, and, in each case, objected to confirmation. The debtors (D), in turn, objected to OFCU’s (P) proofs of claim. The Chapter 13 Trustee recommended confirmation and the court took the matter under advisement. Issue: To be enforceable, must a dragnet provision in a consumer loan meet a strict “same class” test for subsequent loans and specifically reference antecedent loans?Rule of law: To be enforceable, a dragnet provision in a consumer loan must meet a strict “same class” test for subsequent loans and must specifically reference antecedent loans.

Problem 319: No. To be enforceable, a dragnet provision in a consumer loan must meet a strict “same class” test for subsequent loans and must specifically reference antecedent loans.

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Purchase Money Security Interests – the seller who extends credit to the buyer or the lender who advances the money to enable the buyer to purchase the collateral has a special equity in it in the eyes of the law.

If the parties sign a security agreement, the seller/lender gets a purchase money interest (PMSI).

9-103 Purchase-Money Security Interest; Application of Payments; Burden of Establishing - a seller which finances the purchase price of an item directly, or a lender which loans money to allow a debtor to acquire rights

Even though the goods become subject to an existing security interest when they come into the buyer’s possession, the PMSI is given priority. This is true in spite of the fact that the purchase money security interest is later in time to earlier perfected interests.

Where the collateral is consumer goods, no further steps are required for a purchase money security interest therein to prevail over prior or later interests.

a) 9-309 Security interest upon attachment 1. (1) – a purchase money security interest in consumer goods, except

as otherwise provided in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in Section 311(a).

All other purchase money security interests must be perfected during a 20-day “grace period” following the buyer’s possession of the goods in order to take advantage of a relation-back of priority to date.

a) §9-317(e) - Purchase-money security interest. Except as otherwise provided in Sections 9-320 and 9-321, if a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.

b) §9-324 – Priority of Purchase-Money Security Interests - (a) – General rule: purchase-money priority. Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

Problem 322: When Paramount Homes finished building Utopia Ltd. it had to furnish a club house so it sent Bill to “Sophy’s Interiors” where Bill made 2000 worth of credit purchases and signed a security agreement on behalf of Paramount Homes in favor of the seller (Sophy’s Interiors). The agreement was singed and goods delivered on June 8. Bill failed to mention that all his employers equipment (Paramount Homes) was already on collateral for an existing security agreement with Sullivan National Bank and contained an “after acquired property clause” that later similar collateral coming into the buyers estate would automatically fall under the bank’s security interest. Sophy’s policy was not to file financing statement for its credit furniture sales.

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o Creditor - the furniture store, they have the PMSI. Competing creditor - the bank. They have a security interest in store's property. They have a perfected security. If they were perfected, Sophie's the furniture store would win. They are not perfected because PMSI is not consumer goods - here they are buying for business. They 20 days to act.

o The reason that Sophie didn't file a financing statement because generally they sell consumer goods and think that they don't need to.

Problem 323: Video Wonder granted a floating lien over its inventory to Last National Bank, which perfected its security interest by filing a financing statement in the appropriate place. Agathat Shaw sold a guard dog Fang to Video Wonder for 1,200. The manager agreed to sell her 100 per month until the dog was paid for in full, and Shaw agreed in writing to sign over Fang’s papers. Fang proved to be a good watch dog, but when Video Wonder stopped making payment to all creditors two months later, LNB seized all of the store’s assets, including Fang. Can Agatha Saw argue that the Bank security interest only attached to Video Wonder’s equity in the dog, or until VW paid the entire debt.

o Art 9 overrides the terms of their transaction. This is PMSI, but because the dog is used for business - have to file. Agatha looses here because she didn’t realize because she didn't file.

Problem 324: Hart Farm Equip. leased a back hoe to Farmer for 6 months, with the option to purchase at any time during that 6 month period (sale on approval). Farmer Beans equipment was already subject to a perfected floating lien (perfected interest in existing and after acquired inventory) in favor of ONB. 3 months after the delivered of the backhoe, Farmer Bean agreed to buy the backhoe, and Hart Farm field a financing statement the next day, claiming a PMSI. Hartfarm Equip. v. ONB for the priority interest of the backhoe?

o Argument - Missed the 20 day window here. Thus the other creditor gains the priority. However, the 20 day window here begins when they make it a secure transaction. W hen a piece of equipment becomes collateral and not just when it received. – Thus Hart Farm should win > 20 days doesn’t begin until actual sale

o If the PMSI collateral is inventory, then have to give notice to the other creditor and have to perfect before the inventory is delivered

o 9-324 Official comment 3 o If the PMSI collateral is inventory, then have to give notice to the other creditor

and have to perfect before the inventory is delivered

B. Inventory and Livestock Problem 325: The Merchants Credit Association held a perfected security interest in the

inventory of Harold’s Clothing Store. Harold Went to the NY Fashion Show, and K to buy $4,000 worth of clothes for resale at Madame Belinda’s Fashions Inc. which took a PMSI in the clothes on Dec. 10, the date of sale. Madame Belinda wrote the MCA on December 11 and informed the credit manager of the sale. He protested but did nothing. Madame Belinda filed on December 11, the goods were delivered to the store on Dec. 12.

o Who has priority? Under §9-324(b)(3) Madame Belinda has priority because she gave (*) notice to the creditors Dec.11 (*) on or before the merchandise was delivered on Dec.12. Hence her PMSI has priority and has a security interest if

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notification was received within 5 years before the debtor receives possession of the inventory.

o What if the notice wasn’t received until Dec 13th? Yes. If notice wasn’t received until after delivery of the inventory then Madame Belinda would not have a priority interest, because under §9-324 must notify before the debtor takes possession of the goods.

o No. She can’t sell indefinitely, but she can for 5 years. 9-323Problem 326: Hans Racing Equipment bought its inventory from Standard Auto Wholesale Inc. (SAW), which always filed a financing statement and took a PMSI in the goods sold to Hans, on the same day. Hans also borrowed money from MDNB to finance the purchase of inventor from wholesalers, part of which is used to pay off Standard Auto. MDNB filed a financing statement claiming a security interest in Hans inventory. On March 28 Hans K to buy 3,000 in goods from Stamford with a down payment of 1500, and giving Standard a PMSI on the goods for the balance. On the same day he borrowed 1500 down payment from MDNB and also gave the bank a PMSI in the same goods. Both creditors knew of the other, so they both sent written notice to each other. The goods were delivered to Hans on April 2. Who has Priority MDNA or SAW?

Under §9-324(g) vendor beats a lender. The seller of property (SAW) takes priority over someone that simply loans money for the PMSI (MDNB).

Rationale: The law is more sympathetic to the vendors hazard of losing resale estate previous lowed than to the 3rd party lenders risk of being unable to collect from an interest in real estate that never previously belong to it.

First to file OR perfect rule also applies.Problem 327: Barbara Shipek was pleases and flattered when Tim Isle, owner of Isle’s Fine Art Works asked her if he could exhibit and sell some of her pottery. She gave him 5 pottery pieces, and the next day she took a party of friends down to the store to see the display and was astounded to learn that ONB, who had a floating lien on the store’s inventory, took her pottery pieces.

Here, a consigner will loose security interest if they do not file a financing statement to give public notice of a retained interest.

Doesn’t it matter if he is a known or unknown dealer in those goods? If known by creditors to sell things on consignment then there is no need for Barb to file a financing statement.

Bank Accounts/Letters of Credit: need control over to perfect

IV BUYERS - Buyer in the ordinary course of business (BIOC): Under §9-320 other than a person buying farm products from a person in farming operations, takes free of a security interest created by the buyers seller, even if the security interest is perfected AND the buyer knows of its existence.

Buying something in Good Faith (bona fide purchaser) from a person that is selling merchandise in the ordinary course of business

BIOC Requirementso Buy inventory in the ordinary course of the sellers business that normally sells

goods of that kind (does not apply to farm products). o Buy in Good Faith (a) reasonably fair and (b) honesty in facto Security interest must be created by the buyers seller. This only applies if you buy

directly form the debtor, not as a transferee of the original seller.

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o Debtor has to be in possession of inventory.o Garage Sell Exception

Someone who buys consumer goods from a consumer [that normally sells those goods] takes them free and clear of a stored security interest. (What if you sell your car at a garage sell?)

BUYERS REQUIREMENTS Must buy in the ordinary course of the seller business Does not buy (a) entire inventory of business OR (b)does not take interest as security for

all or partial satisfaction of pre-existing debt Buy from someone in the business of selling those goods Buy in good faith without knowledge of violation of a security agreement Does not buy farm products from a farmer Seller must part with collateral Security interest must be created by the buyers seller (i.e. not a 3rd party)

Problem 331: Betty Consumer bought a tv from Distortion TV Inc. a retail store. A month later Distortion went bankrupt and an ONB representative told Betty to return the tv because ONB held a security interest in all of Distortions Inventory and ONB had the right to repossess any of it.

a. Under 9-320(a) a BIOC from a merchant and a bona fide good faith purchaser would take the goods free of a security interest.

b. It would not matter if Betty had knowledge that the inventory was subject to a security interest because she is a BIOC – subsection (a) provides that such a buyer takes free of a security interest, even though perfected, and even thought the buyer knows the security interest exists.

c. Liquidation – If Betty bought the tv at a liquidation sale, this is not a sale of a BIOC.d. Layaway – would be able to recover her down payment and whatever she paid to date.

Not sure about if she’ll able to keep the TV – unjust enrichment.

GF defined as requiring “honesty in fact and the observance of reasonable commercial standards of fair dealing”

Problem 332: Deering Milliken was a textile manufacture. It routinely sold textiles on credit to Mill Fabrics, a firm that finished the textiles into dyed and patterned fabrics. It was Mill Fabrics practice to resell the fabrics to Tanbro Fabrics, a wholesaler. While the textiles were still in Deerings warehouse, Mill Fabrics K to buy them from Deering, signing a security agreement to that effect and giving Deering a financing statement, which it duly filed. In turn MF sold the textiles to TF, which paid MF for them, but delayed taking delivery for a few weeks, and the fabrics remained in Deering’s possession. Deal of this kind were common in the textile industry, and all the parties knew of each others interest. Unfortunately, MF became insolvent and never paid Deering for the textiles, and Deering therefore refused to deliver them to Tanbro. Tanbro v. Deering who should prevail.

Here, MF, the middle man, became insolvent but still had TF’s money for the dyed and pattern fabrics that MF was going to get from DM to transfer for TF, but MF never paid DM. Tanbro Fabrics v. Deerings Milken Warehouse:

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Tanbro must meet all 7 requirements on pg. 1029. Here, the buyer Tanbro did not qualify under #6 requirements of BIOC because the debtor MF was not in possession of the goods, however, the creditor Deering Milken was. So here, the buyer Tanbro met all the requirements except for #6 “the sellers creditor must part with the possession,” and Tanbro paid Mill Fabrics but delayed taking delivery for a few weeks.

o Requirement (6) pg 1029 – the seller’s creditor must part with possession (the issue in the above problem)

o See 9-320(e) Comment 8– Possessory security interest not affected

Problem 333: ONB had a perfect security interest on all cars of Smiles Motor’s lot. Smiles owed 5,000 in past due insurance to Howard Teeth, who showed up to buy a car from Smiles. The president of Smiles first gave Howard a check for 5,000, but Howard endorsed the check back over to Smiles to purchase a new car on the lot. Is Howard a buyer in the ordinary course of business as to take free of ONB’s security interest?

Here Howard took the 5000 in satisfaction of a pre-existing debt to the Insurance Co. And the only way to get rid of a security interest and qualify as a BIOC is to give new value. Unfortunately under requirement #2 the buyer must give a form of new value, and Howard did not give new value here so ONB still has a security interest in the car. There was no new value here

What’s the difference, if Howard was an independent K and it went into the books of his accounts payable, then he retrieved the 5,000 profits, would he be able to buy the car free of ONB’s security interest?

Problem 334: Arthur Greenbaum bought a new car on credit from Lorri’s Car City, which took a PMSI in the vehicle, perfecting same by notation of its lien interest on the certificate of title, as required by state law. Arthur was a used car dealer by profession, but he had purchased the car for his own private use. Nonetheless, he frequently parked the car on his lot, and sold it for cash to Ann Matheson, a customer in search of a good car. Arthur did not mention that it was his personal car. Ann sued LCC, demanding that it release the title. What result?

Although Arthur is acting in bad faith, here Anne satisfies the 7 requirements under BIOC and LCC would have to release the title. (1) Here Anne is a buyer in the ordinary course of business and she meets all the requirements on pg. 1029. (2) Anne is a buyer in the ordinary course of the sellers businesses. (3) She gave value, (4) form the merchant, in good faith without knowledge. (5) Further, this is not a farm product. (6) The seller creditor was not in the possession of the collateral. (7) Greenbaum created the security interest because he signed the promissory note as a debtor. LCC recourse would be to sue Arthur and his business to recoup the monies.

Problem 336: Andy bought a stereo receiver on credit from Voice of Japan, Inc. an electronic store, giving it a purchase money security interest in the receiver. Voice of Japan did not file a financing statement. 6 months later, when Andy still owned Voice of Japan $300, he held a garage sale and sold he receiver to Nancy for $200. If Andy stops making payments to Voice of Japan can they repossess the receiver from Nancy.

- Although Nancy is not a BIOC of business because the seller is not a merchant in those goods, however, Nancy is protected by the “Garage Sale Provision under 9-320(b) buying consumer goods as consumer goods. Here she takes priority over Voice of Japan.

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- NOTE: Voice of Japan can retain priority over a Garage Sell Buyer if Voice of Japan files a UCC Financing Statement to retain priority even over purchases of consumer goods. So Nancy should still do a UCC search.

If the secured party does file, all buyers take subject to the security interest. If the secured party doesn’t file, a buyer who meets the qualification stated in the preceding paragraph takes free of the security interest

Problem 337: The Repossession Finance Co. had a duly filed perfected security interest in the equipment of White Truck Ice Cream Inc. WTIC was a family business. One day while Bill was selling ice cream to customers, a consumer asked about buying the ice-cream making machine for his family. Bill sold him a machine and Frank paid cash. When WTIC failed to make there payments, the finance company reposed all the companies equipment. When Frank refused to turn over the ice cream machine, repossession sued him for conversion even though he “bought it from Bill of WTIC Inc.”

Who wins, RFCo. v. Bill? Here, RFO security interest will continue to attach to the ice cream maker machine even though it was sold because RFO has a perfected interest. Interestingly, Frank is not a BIOC of Business because Bill doesn’t normally sell “ice cream machinery” although Bill sold ice cream he did not have the authority over RFO to sell the machine. The Garage Sell Exception will not work because Bill doesn’t normally sell those goods.

If banks interest were unperfected at the time of sale, then Under §9-317(b) a buyer of goods take free of a security interest if the buyer gives value (money) and receives delivery (ice cream machine) without knowledge of the security interest AND before it is perfected. Here, Frank would take the machine without it being subject to repossession.

If the bank knew and approved of sale, RFO would be waiving their security interest.

Problem 338: Paul Pop was a rock singer to whom ONB loaned $8,000 so he could buy stereo equipment for his road show. On April 2, Paul purchased the equipment and on April 10, ONB filed its financing statement in the proper place. However, in the interim, on April 8, Paul sold the equipment to Use Stereo Heaven, which brought without knowledge of the bank PMSI. Does ONB or USH have superior claim to the equipment?

ONB still has superior priority to the claim, because under §9-317(e) if a financing statement is filed within 20days in respect to a PMSI, then the security interest takes rights over the buyer which arise between when the security interest attaches and the time of filing. Here, ONB sold on April 2 and filed the financing statement on April 10. Although USH bought the goods on April 8, ONB still had until April 22 (20 days from April 2) to file a financing statement, they did so ONB’s interest is protected.

RELEASE OR WAIVER OF SI-Express or Implied

Problem 339: When Farmer Bean borrowed a large amount of money form Farmers’ Friend Financing Co. (FFFC) he was required to sign a security agreement by which he promised not to sell the crop that was the collateral for the loan without the written consent of the FFFC. Nonetheless, every year he sold the crop to the same buyer and remitted the proceeds to FFFC without getting its written consent. (a) Does the buyer take free of the security interest under §9-320(a)? (b) If FFFC never protested year after year, can it be assumed that they waived their interest?

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Under §9-320(a) although the buyer would normally be a BIOC of business and take free of a security interest, here the buyer is not a BIOC of business under the exception because they are buying “farm products from a person engaging in farming,” so the buyer would not take the crop free of a security interest and FFFC has the right to take the crop or profits as a violation of the security interest.

Under the K law of Estoppel, the creditor can release their security interest explicitly by (a) signing a waiver OR implicitly by (b) failing to object when they know that collateral for a transaction is sold in repeated violation of a security interest. The result is that a “waiver of estoppel is created and an implied agreement to release the security interest” because Farmer Bean does this every year.

Problem 341: Mr. & Mrs. Halyard purchased a yacht with money borrowed from (BNB)., which took a security interest in the yacht and duly filed a financing statement. The Halyards sold the boat to Oil Slick Boats Inc. (OSB) informing OSB of the existing security interest that BNB has and the need to make monthly payments to BNB. OSB sold the boat for full value to Mr. & Mrs. Blink who believed OSB had clear title. When OSB stopped making payments they repossessed the boat. (a) Has the Blink’s property been converted or are they protected under §9-320(a)? (b) What does “created by the buyers sellers” mean? (c)Why would the drafters favor the original creditor rather than a BIOC of business? (d) If the Blinks loose their property in a law suit, who should they sue on what theory? (e)Can OSB use the same theory against the Haylards?

The blinks are not protected under §9-320(a) for BIOC. Here, the Blinks brought the yacht from a 3rd party, although OSB is an entity in the business that sells goods of that kind, nevertheless, the Blinks fail to meet requirement #7 that the “competing security interest must be done and created by the buyers seller.” Here, the security interest is not created by the seller because the dealer did not sign the security agreement. The security agreement was created by the Halyards and BNB, not by OSB and BNB. -like chain of title?

Rationale: if BNB takes security interest in the inventory of the merchant, they know the merchant may sell to BIOC of business, so that risk is foreseeable and contemplated into the security interest. Here, BNB deal with an individual (Halyards) and had no notice of the BIOC rule to apply. The intervening party takes this transaction out of the BIOC protection under 9-320(a).

Define “created by buyers seller”

LEASES:-Lessee’s subject to SI

Problem 342: Bank has interest in factory’s milling machine, who leases machine to a manufacturer. Manufacturer’s rights under lease are subject to Bank’s SI.

Problem 343: Bank has SI in factory’s milling machine. Accountant suggests to sell machine to bank and lease it back. Problem of secret lien > seller that keeps the goods. Effect will be given to this transaction unless done with intent to fraud creditors.

VI Article 2 Claimants

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Problem 344: Jack Gladhand was a traveling salesman. He needed new luggage to carry his samples and bough a set from Alligator Fashions, which reserved a security interest therein and filed a financing statement. A month later, in the middle of a hot sales deal, Jack sold all of his samples and the luggage to Mark Impulse, a compulsive buyer. Jack told Mark, that the luggage was genuine alligator. When Mark discovered the truth he revoked his acceptance of the goods and claimed a security interest in the goods. Alligator Fashions decide to call the loan and repossess the luggage. Who is entitled to the luggage.

- This makes buyer of luggage a creditor and Jack a debtor, so gives Mark a SI in the luggage, and Mark will take priority as long as he remains inpossession

- Under §9-110 Comment 4 example: As long as the seller does not recover possession of the equipment, Mark takes priority over Alligator Fashions and Mark has a senior interest. A buyer that holds onto goods for collateral as repayment of damages has priority even though there is a perfected security interest.

Problem 345: Guy Baldwin was a successful author who self-published his own book and marketed it directly to retailers. He received an order for 200 copies from Cowskin Book Chain, and he shipped off the book with an invoice for price. Two days latter he learned that Cowskin was insolvent and unable to pay. (a) What can the seller do. (b) If Cowskin was lying about there financial condition

a. Under §2-702(2) if a seller delivers goods to an insolvent buyer the seller may reclaim the goods upon a demand made within a reasonable amount of time (approx. 10 days) after they buyers receipt of goods > Guy has no SI here!

b. Under §2-702 if the buyers is fraudulent about their insolvency the seller may not base a right to reclaim goods on such misrepresentation and can only reclaim subject to rights of BIOC or Good-Faith purchaser.

c. See 9-324 (b) – Guy Baldwin should have perfected his interest and he should have also given the notification to the bank. Look on 1056 -1057 for steps to recover against the bankruptcy trustee.

Problem 346: ONB has SI in FF’s cattle and realize FF is in dire financial straights. Decide to call loan, get cattle back and sell. Decide that cattle are still growing and ONB would receive more profit if they wait for cattle to grow for 3 months. Chow hound sells cattle food to FF on credit w/o a SI through encouragement that FF is doing ok financially.

Court will apply doctrine of Equitable Subordination Creditor acted unconscionably so gives Chow Hound priority over

ONB

VII Statutory Lien Holders

Problem 347: RFC had a perfected interest in Hattie’s Mobile Car. The car broke down and was towed to Mikes Garage, where it was repaired. State law gave a possessory artisan’s lien to repairpersons. The garage told Hattie that they were claiming such a lien, but when she pleads with the manager he allowed her to drive the car to work because she agreed to return the car to

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storage every night. RFC found out about this practice, accelerated the amount due on the car and repossessed from the parking lot of Hattie’s job.

Generally, a statutory lien takes priority over a security interest in the goods (Hatties Car). Here, Mikes Garage would have superior priority if they were in possession of the goods, but because the garage was not in possession of the goods (Hattie’s car) then RFC security interest takes priority.

Appeal in error from a judgment of the Circuit Court, Hamilton County, Joe N. Hunter, J., holding a recorded security interest in a motor vehicle superior to a nonpossessory statutory lien for repairs to the vehicle. The Court of Appeals, Matherne, J., held that a repairman must retain possession of a vehicle repaired in order to maintain priority of his statutory lien over that of a previously perfected security interest in the same vehicle.

FIXTURES: Can get priority over mortgagee if file a “fixture filing” before property becomes a fixture Construction Mortgage will get priority over a fixture filing though

TAX LIENS IRS usually gets super priority

Chapter 23 Bankruptcy and Article 9Under UCC Art 9, when a debtor goes bankrupt, a secured creditor keeps collateral, but an unsecured has to wait to take from the bankruptcy estate. Any time two parties enter into a transaction there is a possibility that one of the parties will go into bankruptcy.

Bankruptcy Basics:Brings all claims to one central forumCan be voluntary OR involuntary - Normally initiated by D, but C can put D into it (rare)

Voluntary - if an individual or a company having financial difficulties and declare bankruptcy. Most are voluntary

Involuntary - here the creditors are placing the debtor into the involuntary bankruptcy.

2 types of bankruptcy Liquidation : sell all D’s assets and parcel out $ to C’s - Most common Reorganization : when business is worth more as a going concern.

Reorganize the financial structure of D; have a plan of reorg approved by the parties (may be better for both C & D)

Many businesses fall here: Chapter 11 Re-org Sometimes, there will be a reorganization attempted and if realized that it's not

possible then there will be a liquidationA Trustee may be appointed

Common in liquidation, BUT Debtor-in-possession : In re-org., D normally remains in possession

and continues to operate.o Estate: All D’s property goes into Bankruptcy Estate unless exempt

Exempt property under Bankruptcy law (fed) is pretty similar to state law

Fed exemptions apply if state’s exemptions are super low

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o Discharge : If D is an individual, then at end of case, the pre-bankruptcy debts get discharged. an individual gets something that a corporation doesn't - the individual gets to keep some of their assets and then their pre bankrupcy debts are discharged.

Corporations are not entitled to a discharge o Some debts are NOT dischargeable!

Student loans Some torts

Secured Creditors fair well in bankruptcy b/c entitled to value of their collateral

o SI is preserved in bankruptcyo NOT subject to statutory exemptions (like outside bankruptcy)o BUT NOT entitled to possession during bankruptcy

If already in possession, have to give back to D or Trustee during bankruptcy

Keeps intangible right, BUT NOT tangible thing Bankruptcy in negotiation: need to draft Ks against losing rights in event of

bankruptcy Subset of Secured Creditors in b’ruptcy

Oversecured & Undersecured Creditors :o Oversecured: value of collateral exceeds the amount of the debt

Builds in a cushion Example: mortgage for 80k and 20k down payment, house

is worth 100ko Undersecured: debt exceeds the value of collateral

UNsecured Creditors DN do so well in bankruptcy o Split what is left AFTER priority claims and secured creditors paido Normally, there is nothing left for the unsecured creditors

The Automatic Stay : at moment of bankruptcy initiated, 2 things happeno Creates an estate of ALL D’s assetso Creates an automatic stay: have to leave all D’s property alone AND cease all

collection efforts v. D. Now, the creditors have to go to a bankruptcy court if they want to collect their debts.

o Gives D the ability to stop all the Creditors from racing to D’s assets Violation of the automatic stay :

o Intentional, knowing, should have known: remedies are damages, atty’s feeso NO penalty if minor violation, DN know/innocent violation

Motion to Lift Stay o can be granted IF there is no court action for 30 dayso 2 ways to win motion

Undersecured collateral NOT needed for reorg: 2 prongs: D has no equity in the collateral (aka, C is undersecured); AND C has to show that the collateral is NOT necessary for effective

reorganization

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State of collateral: Court can lift stay if collateral is not adequately protected b/c SC by law is entitled to adequate protection of its collateral.

Adequate protection : protection from loss by decline in value of collateral (big worry for undersecured creditor)

Getting adequate protection: D can pay C cash OR give C more collateral

C is NOT entitled to the time value of the collateral SPLIT in courts over when you figure out adequate protection:

petition date or motion date

I. The Trustee’s Status – The filing of bankruptcy petition creates an automatic stay of any further creditor collection activity. Thereafter creditors must pursue whatever right they have in the bankruptcy proceeding only.

The trustee in bankruptcy is given a number of useful rights in resisting or attacking creditors’ claims.

o The strong arm clause 544 – Avoidance – imbues the trustee with the state law status of a hypothetical judicial lien creditor who acquires a lien on all of the debtor’s property as of the moment of the filing of the bankruptcy petition.

Unperfected security interest gets wiped out in bankruptcy - if an interest is not perfected, then during bankruptcy a secure creditor becomes the unsecured. So, if someone hasn't perfected they loose their priority

o 9-317(a)(2 ) allows such a lien creditor to avoid unperfected security interests, the trustee may do so too.

o 588 – gives the trustee the benefit of whatever defenses the debtor would have had against the creditor’s claim, so that, for example, if the debt is barred by the Statute of frauds or a statute of limitations, the trustee may assert these matters.

o Preferences – 547 – The rules against preferential transfers are designed to combat two evils:

1 . a feeding frenzy by the creditors, as they seize everything in sight while there is still something to seize

2 . the debtor’s decision to pay off a favorite creditor and stiff the others.

A preference – is a “transfer” (defined in the Bankruptcy Code to include the creation of a security interest in the debtor’s property) made or suffered by the bankrupt to pay or secure a preexisting debt within the 90-day period preceding the filing of the bankruptcy petition, which has the effect of giving the transferee (the creditor) a greater payment than the creditor would get under the usual bankruptcy distribution.

Exceptions (1) contemporaneous exchange for new value(2) ordinary payment to creditor in course of business(3) PMSI

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I THE TRUSTEE’S STATUS

Problem 359: Lew Sun, moved to Chi-town and opened Seoul Food restaurant. He had many unsecured creditors. On April 17 he applies to the ISBank for a 10,000 loan, and signed a security interest agreement and financing statement with his equipment as collateral. On April 18, 1hr before the bank filed the financing statement he filed for bankruptcy.

Because the bank did not perfect their security interest before the debtor filed for Bankruptcy, ISB looses its security interest.

If ISB filed its financing statement 2 seconds before Sun filed for bankruptcy, then their interest would be perfected.

If this was a PMSI, as long as the security interest was perfected within 20days after the debtor received the collateral, the creditors security interest will relate back if it is filed within 20days.

It's a cut and dry rule - if you don't perfect prior to bankruptcy you loose the priority and become unsecured

The bankruptcy code does not get into too many specifics, it's just a race. The only exception is the PMSI - if the banker perfects within the 20 day grace period

then they would still be a secured creditor.

Problem 360: On June 8th BCorp borrowed 80,000 from ONB and gave the bank a security interest in its equipment (worth 100,000). July 18th ONB duly filed a financing statement, next day BCorp filed for bankruptcy. (a) Can the trustee destroy ONB’s secured position and turn it into a general creditor under the theory that the delayed perfection is a preference? (b) If ONB perfected on June 8th but the debtor made extraordinary payment to ONB in the 90day period before filing the Bankruptcy petition, could the trustee use §547 to make ONB give the money back to the estate? (c) ONB perfected on June 8 but the collateral was only worth $60,000 (80,000 debt – the bank is under-secured). Would routine payment made to service this debt be preferential?

a. No, the trustee cannot turn the over secured creditor ONB in the general creditor because they filed in exactly 10 days. If they were to file one day later then they could. 547(D)(2)(a)

b. Yes, 547(b)(4)(A) says that the trustee may avoid any transfer of an interest of the debtor in property made on or within 90 days before the date of the filing of the petition.

c. No 547(c)(2) – the trustee cannot avoid to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee. Thus the trustee cannot turn the debtor into general creditor.

Prof’s answer - Yes, delayed perfection can be a preference because the exchange is not contemporaneous.

o EG On day 1, lender makes loan and parties sign security agreement. 3 months later, lender files financing statement. Bankruptcy Code deems the transfer of the security interest to occur when perfected, so lender made loan on day 1, but got security interest 3 months later, so would not be treated as contemporaneous.

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Problem 361: On Nov. 1, the Piggy National Bank loaned Kermit $1,000 to buy a banjo he wanted for his nightclub act, making him sign a security agreement and financing statement. He bought the banjo on Nov. 15, and the bank duly filed the financing statement on Nov. 20. Kermit filed for bankruptcy on Nov. 21. (a)Is the transfer of the security interest in his banjo a preference? (b) If the bank’s security interest was not of the purchase money variety but was simply a floating lien covering all after-acquired equipment, what result using the same dates?

No, under §547(c)(3) a debtor (Kermit) may not avoid bankruptcy responsibilities that creates a purchase money security interest in property (banjo). PMSI Loans have a 20day grace period.

Travis has to ask about B547 - trustee recovery - Transfer of d's property To creditor

<90 days before bankruptcy, 1 y for insiders And improves position over 547 But not

Contemporaneous exchange New value Ordinary course PMSI 20 day Inventory - improvement test New value after

Problem 362: In early 2013 John Carter borrowed $1000 form the Barsoom World Bank; (a signature loan, no collateral). On Sept. 25, 2013 John made a $500 payment to the bank (not in the ordinary course of business). And on Oct. 4 he borrowed $300 giving the bank a security interest in his sword collection. The bank never filed a financing statement and John filed for bankruptcy on Nov. 8, 2013. How much can bankruptcy trustee recover from the bank?

The Bankruptcy Trustee would recover the $500 payment because it is subject to avoidance under §547( )( ) because it is a transfer of property to a creditor within 90days of the debtor filing for bankruptcy.

What if the debtor sends in $500 and the bank sends him $300 - this would fall under the new value exception provision. The bank would have to give 200 back.

V THE FLOATING LIEN IN BANKRUPTCY

Problem 363: The Last National Bank had a perfected security interest in the inventory of the Epstein Bookstore, which owed the bank $20,000. On March 1, the inventory was worth $8,000. On May 28th when Epstein filed for bankruptcy, the inventory was worth $20,000 because the store had purchased several new shipments for cash in the interim. (a) What can the trustee do about the bank’s claim? (b) What if the bank first loaned Epstein $20,000 on May 1 when the inventory was worth $12,000?

In re Smith’s Home Furnishings, IncRule: Payments made to a creditor by a debtor during 90 days before the debtor files for bankruptcy will not be avoided as preferential transfers where the creditor has a floating lien and it cannot be shown that the creditor received a greater amount by virtue of the payments than it would have received in hypothetical bankruptcy.

IV FRAUDULENT TRANSFERS

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Under 548 or 544(b) of the Bankruptcy Code, the trustee can avoid any transfer (including the creation of an Article 9 security interest) that is a fraudulent transfer.

o Types of Fraudulent Transfers under §548 that allows trustee’s to invalidate fraudulent transfers

Transfer of debtors property with the intent to defeat the rightful claims of creditors.

Transfer of debtors property made a year before bankruptcy while the debtor was solvent and the debtor did not receive adequate compensation for the property (i.e. gifts for cheap).

Problem 364: When Arnold Austin retired as an international diplomat, he was famous but much in debt. He decided to make money by writing his memoirs. He gave a security interest in the right to receive royalty payments from his publisher to his wife as collateral for the “many debts he owes her” and she duly filed a financing statement 5 months before Arnold filed for bankruptcy. (a) Can the trustee avoid this security interest? Look under 548

- The bankruptcy trustee can avoid this because there was no valid agreement – no value/consideration given

Bankruptcy on Exam***(1) Strong-arm: trustee may avoid SI if unperfected at bankruptcy (or 20 days after for PMSI)(2) Preferential Transfer: trustee may recover transfer of property 90 days before bankruptcy if it improves creditors position

Some exceptions > over-secured creditors, etc. (do not worry about for exam)(3) Fraudulent Transfer: trustee may recover transfers of debtors property made up to 1 year before bankruptcy if debtor didn’t receive reasonably equivalent value

Chapter 24 Proceeds

I The Meaning of Proceeds 1) Whatever one gets back from the sale of collateral is considered proceeds.2) The same rules apply:

- 9-203 – Attach – 1. Have to give value, 2. Sign an agreement, and 3. Take possession of the collateral (acquire rights)

- 9-310 – Perfect- 9-317, 9-322, 9-324 – Priority- 9-317, 9-320 – Buyers

o 9-317 - Tells us that an unperfected creditor looses to perfected creditor. A subsequent lien creditor (a judgment creditor) looses to a perfected security creditor.

- 9-322 - Two perfected creditors – Fist to file or perfect wins. - PMSI creditor can be a super perfected creditor- Buyers

o 9-317 - A basic non-perfected creditor would loose to a regular buyer

o 9-320 - Lien creditor - or a bankruptcy trustee (gets treated as a lien creditor)

3) 9-102(a)(64) - Proceeds, except as used in Section 9-609(b), means the following property:

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a. Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral

b. Whatever is collected on, or distributed on account of, collateral;c. Rights arising out of collateral;d. To the extent of the value of collateral, claims arising out of the loss,

nonconformity, or interference with the use of, defects or infringement of rights in, or damage to , the collateral, or

e. To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of right in, or damage to, the collateral.

4) 9-102(a)(9) - Cash Proceeds means proceeds that are money, checks, deposit accounts, or the like.

5) 9-315 Secured Party’s Rights on Disposition of Collateral and in Proceeds.a. (Disposition of collateral: continuation of security interest or agricultural

lien; proceeds .) a security interest or agricultural lien continues in collateral notwithstanding sale, lease,

license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien

A security interest attaches to any identifiable proceeds of collateral. – tells us that the secured party’s security interest automatically attaches to the proceeds as they become proceeds

Ex1. D sells equipment to buyer and gets back property. What about creditor's security interest in the equipment. Does the collateral become buyer's

9-315(a)(1) Security interest goes along with the collateral 9-315(a)(2) says that security interest attached to any identifiable proceeds

What are proceeds - Defined in 9-1029-315 e secure interest is perfected and remains perfected for 20 days - this is for

equipment For cash proceeds – Buyer gives the debtor some inventory - the debtor trades equipment for

inventory. The collateral is the inventory but the collateral only covers the equipment. 315 says that whatever comes in as an exchange remains perfected.

If buyer gives cash proceeds for the collateral. Does art 9 apply when the collateral was given in exchange for cash.

After 20 days you are going to run out unless u could have included it in financing statement but it wasn't acquired with the case proceeds.

Equipment for cash proceeds for inventory - has to be perfected within 20 days. The real rule is that creditor has an interest in identifiable proceeds. This becomes

tricky with cash proceeds. In particular where the cash proceeds get mixed in with other assets.

In order for creditor to have an interest in cash proceeds, the creditor has to identify.

 Priority Creditor #1 - Inventory Creditor #2 - Inventory 

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Article 9 doesn't treat the creditors differently with respect to priority. Thus the same priority rules apply. Exception - Priorities in shuttle paper 9 - 102 - piece of paper that represent a promise to pay money in the  Ex2. Debtor is a car dealer signs a sellers contract promising to pay moneyThe sales contract grants the security interest in the carPurchaser of shuttle paper takes priority over the other creditor who would have gotten the shuttle paper as proceeds. Remember that if there is shuttle paper involved - the shuttle paper takes priority.

Problem 367 - When Rosetta Stone bought a new car from Champollion Motors Inc, she traded in her 5yr old car, made a $200 down payment by giving the dealer her check, and signed a promissory note for the balance payable to the dealership. Ramses National Bank had a perfected security interest in Champollion Motors’ Inventory.

The debtor in this transaction is Rosetta because she bought the car. Secured creditor is Remeses. Ramese’s debtor is Champ.

Under 9-320(a) although the bank had a perfected security interest in Champollion Motor’s Inventory, a buyer in the ordinary course of business can cut off security interest created by the merchant, even if the interest is perfected and the buyer knows of its perfections. (Note: Security interest does continue with purchases of farm products)

Security interest attaches automatically to collateral/proceeds. Article 9 in effect amends the security agreement -> attaches to proceeds.

-Proceeds: whatever is received in exchange for collateral -Gains SI in the new proceeds (check, old car, etc.) The security interest in proceeds attaches automatically – do not have to

specify in the agreement. 9-203.

Co-Mingling: creditor must be able to identify proceeds!!

Farmers Cooperative Elevator Co. v. Union State BankFacts: After Cockrum formed a security agreement with plies and Union State (D) covering his livestock and their supplies and Union State (D) perfected its interest, he entered into several purchase money agreements with Farmers Cooperative Elevator Co. (P) (Co-op) for livestock feed. When he subsequently defaulted on both obligations, Co-op (P) sued Cockrum, seeking possession of the hogs on the grounds that they were the proceeds of the feed. As a result, Union State security interest be established as a first security lien on Cockrum’s hog inventory. On Co-op’s (P) motion to adjudicate law points, the district court ruled that Union State’s (D) security interest in the hogs was prior and superior to Co-op’s (P). Co-op (P) appealed. Issue: Does a purchase money security interest in collateral have priority over a conflicting security inters tint he same collateral or its proceeds if it is perfected before the latter interest?Holding: Yes. A purchase money security interest in collateral has priority over a conflicting security interest in the same collateral or its proceeds if it is perfected before the latter interest. This rule merely restates the principle outlined in the Iowa Commercial Code. The code defines proceeds to include “whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.” The “other disposition of collateral” language found in this section has

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been found not to include the consumption of feed since “there are no traceable proceeds to which the security interest may be said to have attached” once the feed is consumed. Moreover, Bostron points out that feed eaten by cattle does not become commingled with them as contemplated by ucc 9-315. In the instant case, the district court did not err in finding that the hogs were not the proceeds of their feed, and therefore, D’s security interest in them was superior to Co-op’s.

II Priorities in Proceeds > same priority rules apply hereProblem 369: AAAS sold and installed stereos in cars. AAAS inventory was financed by Canis Major Bank and Trust Co. which had a security interest in the present and after acquired inventory. When AAAS sold the stereo systems they sometimes accepted, cash, extended credit w/o signed K, and sometimes made credit customers sign K promising payment and granted AAAS a security interest in the system. AAAS took out another loan from Cassioperia Finance Co., granting the lender a security interest in its accounts receivable and chattel paper. Cassioperia knew all about the prior loan and inventory security interest of CMB at the time it duly filed its financing statement. AAAS defaulted on both loans and both CMB and CFC claimed the accounts and chattel paper (only CMB claimed inventory). CMB said accounts and chattle paper were proceeds of inventory. The chattel paper was in CFC possession, and did not collect on accounts receivable yet. (a) who prevails?

Canis has priority in cash and accounts > first to file/perfect has priority Chattel Paper Exception: Because the chattel paper was in Cassiopia’s possession they

take the priority. With chattel paper the rule is that whoever takes the position of it first takes priority. – 9-330 (a) A purchaser of chattel paper has priority over a security interest in the chattel paper which is claimed merely as proceeds of inventory subject to a security interest.

Problem 370: Shadrach Heating and Air Inc. borrowed $15,000 from the Meshach Merchants Financing Association (MMFA) in order to purchases a new furnace for SHAInc. home office. When one of its clients need an identical furnace in a hurry, SHAInc. Sold it its own new furnace, which it installed in the clients business. The $17,000 check it received in payment was put into SHAInc. checking account (prior $81 balance), with Abendego State Bank. SHAInc. made another deposit of 5,000 and subsequently withdrew $5040.

Yes. 9-315 Comment 3 – A security interest attaches to any identifiable proceeds commingled with other property.

The bank may exercise the right to set-off, unless the competing secured party is the customer of the bank. However, if this was done opportunistically, then would not be able to take advantage.

Courts use a TRACING RULE to determine which funds are proceeds Once money goes out of account > creditor loses SI in those funds***

Problem 369: ONB loaned 200K to Big Department Store and took a security interest in its inventory “now owned or after-acquired,” which it perfected by filing a financing statement on July 5. ANB loaned 100k to Total Store and took a security interest in its inventory “now owned or after-acquired,” which it perfected by filling a financing statement on September 25. Without the consent of either creditor, the two retailers merged the following year, when the inventories of both were worth 300K. The new entity was named Total Department Store. Which bank has priority in this situation?

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Double debtor rule. As prof read the rules (they were added in the most recent version of Article 9 and aren't entirely clear), the creditors would keep their respective priority - ie ONB would get collateral from Big, and ANB the collateral from Total. We skipped this problem for class purposes.

Rule Attachment to the resulting proceeds is automatic under 9-315(a)(2), but perfection is much more complicated under 9-315(c) and (d).

o There is an automatic 20-day period of perfection on any proceeds. After the end of the 20 days, however, perfection in proceeds lapses unless one of the criteria (d)(1) through (3) is met.

Problem 370: On August 2, when the filed financing statement in favor of the LNB covered “all business machines” the debtor engaged in the transactions listed below. Decide for each transaction if the bank should take action before August 22 or if the financing statement is sufficient as filed.

a. The debtor traded a computer for another computer – the bank doesn’t have to do anything because the financing statement covers the original collateral – 9-315(d)(1)(A) – computer fits “all business machines” category.

b. The debtor traded another computer for a painting to be hung in the office – The original filing lists the inventory as collateral. The proceeds with which we are now concerned are equipment. Under 9-501(a)(2) the place for filing on equipment is the same place as one would file on inventory. That being so the perfection LNB has in business machines doesn’t lapse at the end of the 20days.

c. The debtor traded a duplicating machine for a used car (and state law requires a lien interest in a vehicle to be noted on the certificate title as the sole means of perfection) – would have to reperfect in compliance with the state law. – Check this one

d. The debtor sold a calculator to a friend for cash and that same day used cash to buy a painting – because the painting was acquired with cash proceeds, subsection (d)(1)(c) does not extend perfection beyond 20-day automatic period, would have to make a separate filing or loose their status.

e. The debtor sold an adding machine for $500 and put the cash in a bank account at a different bank at a different bank; on August 2 that bank exercised its right of setoff against the account. – Check w/ Travis

f. The debtor sold a coffee maker for $200 and gave the money to a Salvation Army volunteer that same day; The bank doesn’t have to do anything – 9-332(a) A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the right of secured party.

Problem 371: Balboa Bank & Trust Company floor-loaned the inventory of Erickson Motors and perfected its security interest in the inventory by filing in the proper place. Erickson Motors sold a car to John Smith, who paid $1000 down and signed a K obligation to pay $25,000 more. The car dealership assigned this K to the Cartier Finance Co, which took possession of the contract and notified Smith he was to make future payment to Cartier. Smith made no payment at all because the car had serious mechanical difficulties, and eventually Erickson Motors on September 11. On September 12 a representative of Cartier Finance Co. came to the dealership and took possession of the car, claiming it was proceeds from the K of purchase, which Cartier

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still had. Balboa Bank objected and claimed a superior interest in the car, asserting its priority in the inventory of the dealership. Who prevails here?

Cartier’s interest (even if unperfected) would be senior to Balboa’s interest under 9-322(C) – a purchaser having priority in chattel paper under subsection (a) or (b) also has priority in proceeds of the chattel paper to that the proceeds consist of the specific goods covered by the chattel paper or cash proceeds of the specific goods, even if the purchaser’s security interest in the proceeds is unperfected.

Chapter 25 Default Article 9 does not define “Default.” It is determined by the terms of the security

agreement between the debtor and the secured party. *can basically agree to anything as default * “insecurity clause” > basic all encompassing clause to protect creditor What's default and what are the effects

o Debtor signs a security agreement - art 9 says that when debtor defaults the creditor can exercise any of the remedies - 1. the creditor can go after the collateral either by using self help or get an order from the court to get the collateral or 2. the creditor can sue.

o After default the creditor has the right of repossession – Repossess – after default the creditor can repossess the collateral and take

possession of the collateral without giving the debtor noticeo Self-help is authorized in Art 9. o Creditor's other remedies include - sale of the collateral

In personal property as soon as default has occurred, the creditor can go in take the collateral and sell it without the court order. The requirement is that everything that the creditor does in a commercially reasonable way as if they were selling their own equipment Art 9 creditor has to try their best

o Lastly, there is redemption This applies to the foreclosures in real estate as well as to the personal property Article 9 for personal property

o The judicial oversight is a lot more relaxed than it is in real estateo Rights of creditors (1) Repossess and Sell(2) Accelerate Debt(3) Increase Interest Rate

o Repossession - When the debtor goes into default, the creditor can take the collateral (real - has to file). Here on day 1 of default the creditor can take the possession. Art 9 doesn't have to give notice, no judicial supervision is required, and no waiting period. As long they don't take it away forcefully. - no breach of piece (In A priority dispute - a possessor's lien has priority over a statutory lien)

o Alternatively the creditor may simply disable the collateral - disabling a machine in a factory so that the debtor can't use it anymore.

o After that the creditor can sell the collateral, they don't have to go to court before or after the sale. They just sell, take the money and apply to the debt

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o Art 9 says if the debtor defaults the creditor can take any his remedies - they have a range of options, don't have to pick one, once they exercise one can then exercise another. Would not be bared by res judicata.

o But the creditor does have to give notice to the debtor before selling the collateral (the kind of notice depends on the kind of sale) - if it's a private sale - then the debtor doesn't get a chance to show up and bit. If it's a public sale, then the creditor has to give notice of the time and place. The debtor can show up then and bid or observe how the bidding is going

o Everything that a creditor does, has to be done in a reasonably commercial way to try to get the best price that they reasonably can.

o Art 9 creditor can sell however, whenever they want to as long as it is done in a reasonably commercial way - sell it as if it was your own. Art 9 relies on steering the creditors toward the marketplace

o After the property is sold, the money is applied to the expenses associated w the sale, apply to the debt, if there is money left - surplus, then the leftover goes to the debtor. If there is not enough money - then this is called a deficiency.

oo Usually upon default the creditor can accelerate the debt and (a) ask for

the entire amount (b) raise the interest rate (c) make debtor pay for any additional attorney’s fee’s

oo Buyers’ rights

o The buyer is treated differently also - with real property the buyer is subject to all sort of uncertainties. An article 9 buyer as long as they buy in gf, they get to keep the collateral even if it wasn't sold in a commercially reasonable way.

o Buyer can sue creditor cause the creditor didn't sell in a reasonable wayo Buyer will pay a higher sale price when it's sold this wayo The debtor also has a right of redemption but it is more limited than in real.

The debtor has to pay off the entire debt to redeem. The right of redemption ends at the sale. Once the collateral sold, the debtor can't redeem it.

o Protection for the buyer - if the creditor does something in a non commercially reasonable way, the buyer may sue the creditor

o Redemption – until the creditor has sold the real estate property the debtor can always pay off the debt and get the collateral back.

Right of Redemption – anytime before the property is sold just make missing required payments

Statutory Right of Redemption – after the property is sold. The debtor just has to match the high bid.

I Pre-Default Duties of the Secured Party

9-207 – Rights and Duties of Secured Party Having Possession or Control of CollateralExcept as provided in (d), a secured party shall use reasonable care in the custody and preservation of collateral in the secured party’s possession.

o Must take reasonable care of the collateral

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o Provided that the creditor has taken reasonable care, the risk of the loss is on the debtor and not on creditor unless there is insurance.

Problem 374 – Problem 372: Andy Doria was the owner of 100 shares of Titanic Telephone, which he pledged to the Morro Castle National Bank as collateral for a $10,000 loan. At the time of the pledge, the stock was selling for $100 a share. The security agreement was oral, and the bank didn’t file a financing statement. (a) if the stock began to fall in value and was worth $80 on Nov. 4th and Andy called the bank to tell them to sell, the bank refused, subsequently the stock bottomed out at $1.50, does the bank take the loss on the 10,000 loan?

a. Here, the “stock” collateral is destroyed by no fault of the bank and the stock wasn’t insured. The bank can still go after the debtor for the remaining balance -$1.50 x 100 even if the collateral was non-negligently destroyed. Under §9-207(2) the risk of loss of the collateral is on the debtor if the collateral is not insured. Further, all the creditor has to do is act reasonably, and the reasonable person may believe that the stock is going to go up, therefore the bank was not even negligent in not selling.

b. A banks pledge agreement to not be responsible for its own negligence would not allow a party to K around reasonable care. The UCC have certain protections given to debtors that cannot be K around or waived by the debtor like disclaiming negligence or K around duty of reasonableness.

However, it would help the bank if under freedom of K through both K parties with equal bargaining power stated that by agreement they both determined the standards by which the performance of such obligations was to be measured if such standards were not manifestly unreasonable.

c. The bank is liable - 1. they have to take reasonable care and failure to track how many shares they have would violate that obligation. 2. 9-210 imposes a specific obligation on the creditor to respond accurately to the debtor's accounting requests.

SUBROGATION:

Problem 375: Mazie borrowed 2,000 from MBS Bank and pledged her stamp collection as collateral. She used the money for a S. American vacation. While she was away her stamps were destroyed in an earthquake while still in possession of the bank. Fortunately the bank had Gibbons insurance which paid them the 2,000 for the loss of the stamp collection. Gibbons then notified Mazie that she should pay the $2,000 to the insurance company, under a theory of subrogation (to step in the shoes of the bank). Need she pay?

Yes. Although the debtor didn’t cause the lost to the stamp collection and the insurance company is to protect the creditor (bank) and the debtor, the right of subrogation allows the insurance company to recover from debtor to the extent she doesn’t have insurance to cover her own collateral. See 9-207(b)(2).

Risk of loss of collateral remains on Debtor even if Creditor in possession!! (unless negligence by creditor or parties agreed otherwise)

II Default

State Bank of Piper City v. A-Way, Inc.

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The creditor is likely to have additional provision - ex. if there is a default, the creditor has the right to accelerate the possession. It's also common when there is a default for creditor to raise the interest rate and fees. Once the default occurs the creditor has a lot of leverage.

What's default? Could be non payment or risk to collateral. May be financial covenants - may something like if your condition gets worse

- overall assets to overall debt - then we can call it a default. May also say if you don't have a certain amount of cash on hand. Could also

say that if particular person is no longer with the company would equal default.

Cross default - if a customer is in default with one creditor another creditor may claim default.

So, the definition of default may be a heavily negotiated item.

The creditor can only call something a default in good faith - meaning if they honestly believe that they were in default.

Insecurity ClauseThe parties agree that if at any time the secured party deems itself insecure because in good faith it believes the prospect of payment or performance is impaired, it shall have the right to declare a default and accelerate payment of all unpaid sums or performance or, at its option, may require the debtor to furnish additional collateral. (1-208, 1-309)

REASONABLE GROUNDS DECLARING DEFAULT & ACCELERATION CLAUSE THROUGH INSECURITY AGREEMENT

Problem 376: When Mr. and Mrs. Bankruptcy bought a mobile home from Nervous Motors, Inc. they signed a PMS agreement in favor of the seller that contained an acceleration agreement. Are any of the following sufficient to trigger the proper use of the acceleration clause that allows the creditor to “declare a default and accelerate payment of all unpaid sums, performance and to furnish additional collateral?

A. A very bad financial quarter for Nervous Motors? A very bad financial quarter is not enough to trigger the acceleration agreement because a financial quarter can change easily. Would be a breach of contact if they accelerate into debt

B. A serious drop in the state of the economy? This is one is a little better, but is not enough to make this particular creditor think that this particular became more risky.

C. Knowledge that the debtor was talking to a bankruptcy officer is insufficient because there can be many reasons that the creditor spoke to a bankruptcy lawyer that does not pertain to the current loan or any loans the debtor may have. Look under 2-609

D. A report (which simple investigation would show to be false) that the Bankruptcys have failed to pay their grocery bills for the last two months? Again here they don't have a reason to be insecure

E. An anonymous phone call that states the Bankruptcys are getting ready to move the mobile home to Mexico? This one is probably the best one we have so far, but still it is not strong enough. Without them verifying the grounds for insecurity would not be enough. An anonymous call is probably not enough unless cooberated with additional evidence after a significant and reasonable investigation that the loan was sufficiently risky.

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F. This one is likely that nervous motors can claim a default. Confiscation of the mobile home because of marijuana subjects Mr. and Mrs. mobile home to a possible forfeiture proceeding by the state government, and to possible forfeiture proceeding by the federal government, to which the ∆ have no defense. Thus it is justified that the creditor can exercise its accelerated insecurity clause. Further the creditor did not accelerate in bad faith and had reasonable cause to believe that the property was in danger of misuse or confiscation.

G. Would it be different if instead of an insecurity clause they had a demand clause? Yes. Here the parties have agreed to a completely different set of rights - they can exercise demand at any time - ” this can be exercised at anytime “for any reason even if its in violation of public policy – age, gender, sex”– see 1-208

Problem 375: Nattly bought a car with money borrowed from Carpe Finance Co. (who had a perfected security interest in the car). The security agreement provided that “time was of the essence” and that the acceptance by the finance company of late payment was not a waiver of its right to repossess. Nattly always paid 10 – 15 days late. One month CFC had enough and sent out a repossession team using a duplicate set of keys. Has Nattly defaulted on the loan?

A security agreement is just a K, “time is of the essence” = if debtor doesn’t make a payment on time then that is a default, however if the debtor repeatedly makes late payment and the debtor continues to accept them then under K law its (estoppel, waiver, or waiver of objection).

i. To prevent against this estoppel and implied acceptance, the creditor should say this “doesn’t constitute a waiver and we still retain the rights” 2-209(5)

Note: if the debtor dies, ill, or disabled the secured creditor must look first to the credit card insurance company before repossessing.

III Repossession and Resale

(1) Notice(2) Commercially Reasonable

Creditor has two ways to take possession of the collateral1. Judicial process - seek the court order - civil contempt2. The creditor can also proceed without judicial process and without notice to the debtor if

the creditor can do so without breaching the piece. If they do breach the piece, the creditor may be liable for damages and not be able to get back the collateral

Section 9-609 authorizes the secured party to skip going through judicial process and to repossess the collateral on the debtor’s default if this can be done without a “breach of the peace.”

Breach of Peace – is a public act that disturbs the public safety, or is likely to cause apprehension of violence among the public. The Repossessing agent can gain two forms of consent (1) to get consent on the spot of the impending repossession (2) creditors may have a security agreement that says “the debtor agrees that if debtor goes into default, they will allow repossessor to come onto property and take collateral.

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Williamson v. Fowler Toyota, Inc Security interest is a property interest. Creditor sells the care to the buyer. The buyer brings the car to a mechanic's shop. The creditor reposes the car for non payment and while doing so breaches the piece. Breaking into the premises of the 3rd party is likely to be held to be a breach of piece. Creditor is liable for damages. The jury also awarded 30k punitive damages - This is the big risk to the creditor - punitive damages.

Factors that help to determine whether there has been a breach of peace Breach of piece is a very vague term. In general the breach of the piece is a public

act that disturbs the public safety. In general, if there is violence or the potential for violence, the court will likely hold that there had been a breach of piece.

If the collateral is on the third party's premises then it is more likely that the court will hold that there has been a breach of piece.

The court will also look to see if there has been consent. Also, the creditors are likely to include a permission clause to protect themselves -

make the debtor sign the agreement that allows the creditor to take the possession of the collateral

Time - more likely to be deemed a breach of piece if it happened at night. Objection - from the debtor point of view the debtor has a veto. If the debtor

protested then it is likely to be held to be a breach of piece. The Art 9 is not just concerned about the debtor and the creditor but for

the public safety generally. So, the debtor can always jump on top of the collateral and this way ensure that the article won't be taken. However, if the debtor says stop but the creditor still takes the collateral away, very few debtors who are already missing their payments would be able to bring a legal action for the breach of piece.

Show of force Breaking in Manner

Problem 376: Don Jose was in charge of repossession for Carmen Motors. One Monday morning the dealership told him that cars owned by four debtors were to be picked up because the buyers missed payments. (a) Is CM required to give the debtors notice that they are in default before repossessing. a. If the repossessing agent breaks the car window in the debtors drive-way and then hotwires

the car, this is a clear BOP because it would cause a reasonable apprehension of a BOP of not only the owner but other 3rd parties. (i.e. glass breaking, on the property of the debtor, and hotwiring a car).

If the debtor came out and started yelling, this would also be a BOP and the repossessing creditor would have to disengage and try to get an order of replevin. If there is a reasonable time period laps between the first BOP and the second attempt for repossession and the potential for substantial violence has been reduce, then a second attempt at repossession is okay.

b. If the repossession agent shows up with an off duty police officer wearing his uniform a suit for conversion against the creditor is likely proper, although there is not a constructive breach of peace by the mere presence of the officer, but an actual breach since he was acting under color of law, without legal process or authority, and enabled creditor to repossess over debtors potential for objection. Here constructive force = a BOP.

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c. If the creditor goes about collecting the vehicle in a manner inconsistent with the K (i.e. locksmith to open garage door) then the creditor was justified in repossessing the automobile because the debtors were in default. Therefore, the debtors were only entitled to recover their damages stemming directly from the manner in which their car was repossessed.

d. If the creditor says that there is a recall of the vehicle when in actually there is not this borders on fraud, § 9-503 does not permit repossession through trickery, without the buyer's knowledge. As a matter of policy the courts do not want to condone the seller’s/creditors conduct that defeats the desirable policy of discouraging extrajudicial acts by citizens that could result in violence. Hence, the trickery that the creditors participated in created the action for conversion.

Problem 377: ONB financed Mary Melody purchase of a new car, in which it perfected its security interest. The loan agreement provided that on default the bank all rights that the parties agreed that the bank would not be liable for conversion or any other items in the car at the time of repossession. ONB repossess and her golf clubs were in the car. Mary sued and ONB used there exculpatory clause in K agreement as a defense?

If creditor takes possession of the car and there is personal property in the car, then the creditor must return the property within a reasonable time period upon knowledge of the property or else be liable for conversion. Does Conversion require knowledge? (a) some courts will hold no liability because there was no intent (b) other courts will hold no damage unless deprivation of use of property to the debtor (i.e. you can’t golf at night, maybe if she was going to fly out the next day to win a tournament may constitute a conversion)

Problem 378: Wonder Spa gave ANB a security interest in its accounts receivable and chattel paper in return for a loan. When Wonder Spa missed two payments in a row, ANB notified the spa customers that future payments should be made directly to the bank.

a. Does the bank have this right? 9-607 allows the assignee to liquidate collateral by collecting whatever may become due on the collateral, whether on or not the method of collection contemplated by the security arrangement before default was direct (payment by the account debtor to the assignee) or indirect (payment by the account debtor to the assignor).

b. If the Spa stops opening its doors, need its former customers keep paying? Look under 9-404(a) – might assets defenses unless the agreement explicitly waived.

After repossession, the secured party may in some circumstances (9-620 to 9-622) simply keep the collateral and give up further remedy (this is called strict foreclosure).

More typically the repossessing creditor will resell the collateral and, if the resale does not pay the debt in full, then sue the debtor for any deficiency (or, if the resale more than pays the debt, return the surplus to the debtor).

9-610 – and sections that follow regulate the sale and dictate that the secured party must give the debtor notice of the time and place of the sale. (Goods that may rapidly decline in value do not need to give notice to debtor for sale)

i. Reason for this requirement1. Redemption2. or the debtor can attend the sale or send potential buyers who will

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enter real bids and, by actively competing in the bidding, bring a fair price for the collateral.

Every aspect of the disposition of collateral, including the method, manner, time, place, and other terms must be commercially reasonable.

2 Types of WarraniesWarranty of Quality - You get the same warranty that a normal buyer would get in a regular consumer setting.

Warranty that there aren't any security interest. Basically when the buyer buys, he buys free and clear of all claims or liens.

Warranty's of Title If this was a private sale, then the Merchant would make an implied warranty

Problem 379: After Nightflyer Loan Company had repossessed LB’s car, it decided to advertise it for bids in a local newspaper.

Nightflyer can sell the car in any commercially reasonable way, if a reasonable person would sell cars through ads in the paper then it is okay.

Is this a private or a public sale? This is a private sale, even though it is in the paper, it is still a private sale and the creditor just has to give the debtor a BAR DATE stating when they will sell the car at the latest date.

How much in advance must she be given notice? The creditor just need to give the debtor a Reasonable Notice = which is 10 days.

After the sale, N says that LB still owed 3200 – wants to know how they came up w/ this figure. If the Price is suspiciously low? That doesn't conclusive establish that a sale is not commercially reasonable, if it was sold in a private sale well below market price a court is likely to conclude it was not reasonable. However if it was at a public auction and it went at a suspiciously low price, where a lot of people are bidding on it, then there may be a better case here.

The consequences to the creditor is that the creditor is liable for damages, and they loose the right to deficiency if the debtor was damaged if she LB can prove that N acted in bad faith.

Problem 380: pg 1181 – long problema.        The Millers are debtors and Obligorsb.       Stuhldreher is just an obligor, because he hasn't put up any collateral. c.        Layden isn't liable on the debt but he put up property of his. d.       THE MILLERS GO INTO DEFAULT and apocalypse sells the stock on the market where the agent is the only participant.

Who's entitled to notice? Anyone who ever owns the collateral, who ever owns the debt and who ever files the financing statement.

1.       The debtors are entitled to notice of the sale of collateral because it is their stock property and are entitled to the amount they property is sold for in their deficiency.

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2.       Stoldreher as a secondary obligor is entitled to notice3.       Layden is entitled to notice because the more you sell the equipment for the less his stock is at risk for being sold 4.       Article 9 says, if another creditor has a security interest in the equipment and inventory that has filed a financing statement that covers the equipment, they are also entitled to notice because they have an economic interest in the collateral.

***e.        (1) If there is a recognized market for the collateral then the creditor does not need to give notice √ if it's a publicly traded stock because that is the price that is likely to be gotten anyway (2) anyone selling things that may be of no value soon ( i.e. strawberries) f.         If the Creditor sends 1 notice to the Millers? You have to decide whether this would be deemed commercially reasonable to locate the debtor. g.        Who has the burden of proof? The creditor has the burden to prove that it was a reasonable sale because the creditor has better access to the information about the sale. h.        Consequences if the equipment was worth 10,000 and the creditor sold it for 500 without advertising and marketing?

This is not commercially reasonable so there are 2 types of consequences - Creditor could loose the right to deficiency. If the entire debt is 80,000 then the unreasonable sale of 500 would of set the 10,000. Here it would be 80,000 √ 10,000 = 70,000.

Problem 381: BSB held a perfected security in the logging equipment of the Blue Ox Timber Company. When Blue Ox defaulted on its loan repayment, BSB repossessed the equipment. The sale was held the next day in the middle of a snowstorm. The equipment sold for very little (there was only one bidder, and he complained that it was had to know the condition of the equipment becaue it was so dirty, being covered with mud from the back woods). BNB sued Blue Ox for the amount still due.

a. This creditor (1) didn't give sufficient notice √ here no notice need to give at least 10days notice (2) sold snow plow in the middle of a snow storm with only one buyer which is commercially unreasonable (3) creditor didn't clean snow plow to present it will. Even though 9-610 says sell collateral in current condition, nevertheless this still needs to be done in a commercially reasonable way.

a. Creditor would be liable for damages from sale price to debt.    

Problem 382: When you explained to your client, Repossession Finance Company, all the rights that debtors have when the creditor seizes the collateral and resells it, the president o the company asked you to draft a clause in the security agreement waiving these rights. How should you do this? Waive rights/

a.        Waivers are not effective 9-602 has a list of things that cannot be waived in the security agreement. However some can be waived after default because it may allow for a faster more efficient productive sale.  

Problem 383:

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a.        Nightflyer doesn't have to give the money from the sale of the inventory to ONB. Nightgflyer has to sell collateral subject to security interest.

*must inform buyer and ONB of SI > commercially reasonable *Buyer only gets collateral free and clear of debtor and JUNIOR Creditors > not ONB here

 Nightflyer is liable to buyer for breach of warranty. Here, ONB would be able to take the inventory from BUYER because ONB has priority of collateral over Nightflyer. Thus, buyer would sue Nightflyer for breach of warranty.

Problem 384: F Motors repossessed the car that PM used in her law practice but failed to send her any notice of the foreclosure sale, which brought only half the amount she still owed on the car. May F Motors sue her deficiency?

a.        For non consumer transactions. Take the difference between FMV and price the creditor got and creditor is liable for that. It is usually left up to the courts in that state. Article 9 leaves this open for each state to interpret it themselves.  

 On default, creditor may: 

Sue for debt Take possession of collateral Sell collateral - Can apply the sale proceeds to the debt

notice - creditor has to give notice all commercially reasonable - must act commercially reasonably with

respect to every aspect of disposition Other STRICT FORECLOSURE (not if >60% paid consumer goods) - this isn't

really a remedy. The creditor keeps the collateral and wipes out the debt. The creditor doesn't have the right to do that, rather the creditor can propose to do that. If the debtor doesn't reject this, only then it's effective. There is a protection for consumer goods.

Art 9 says that if it's consumer goods and the debtor has paid more than 60%, then cannot do the strict foreclosure.

But the debtor may redeem - despite all of the above the debtor can redeem the collateral.

Reeves v. Foutz & Tanner, Inc Court held that the creditor couldn't turn around and sell and item that was

strictly foreclosed on. If they were going to sell the collateral they would have to do that in compliance with Art 9. The creditor who uses strict foreclose cannot turn and sell the collateral right away.

The counter argument is - what else is creditor going to do with collateral if they can't sell it?

 Problem 385 - There has been a default so the creditor has a right to take possession. The debtor wants the boat back, the creditor says yes you can redeem the collateral but you have to pay it in

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full (acceleration clause). This is how most courts read this to mean that the debtor has to pay the entire amount of the debt.

 Problem 386 - Debtor buys a painting on credit, the collateral is the painting. Clause in the agreement says - if the debtor doesn't make the payments on time, the creditor can take it and keep it. The debtor makes some payments and then misses some payments. Can the creditor keep the painting?

No. The debtor has certain rights that it can't waive. Art 9 says after default, after the creditor has taken possession of the collateral, the creditor can offer to partake in the strict foreclose. However, they can't do that in the beginning in the security agreement.

This would probably be okay for the creditor as long as there was no violence involved.

The paining went up in value - would be able to keep the increase. Could they have done strict foreclose after default? They wouldn't be

allowed to do that because here the collateral is consumer goods, and they paid more than 60%.

If they paid less would have been okay for the creditor to offer strict foreclose. However the debtor has a choice to reject.

 Problem 387 - The creditor declares the default and takes possession of the collateral. Strict foreclose is an explicit procedure set out in a statute - there wasn't any strict foreclose here, so the debtor's argument is defeated. However, the creditor may still lose here because they sold the collateral. Have to ask whether this commercially reasonable - if it wasn't commercially reasonable to wait a year and a half then the creditor would loose. This problem is a reverse of the Reeves case

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