Bar Exam Outline – COMMERCIAL PAPER + SECURED TRANSACTIONS

COMMERCIAL PAPER

Key ConceptsNote:

Instrument where maker promises to pay payee Where the promise is by a bank to repay = certificate of

depositDraft:

Instrument where the drawer orders drawee to pay Where payable on demand and drawn on a bank even

without the words of negotiability = check Special checks:

o Certified check – bank certifies it (problem: a lot of banks won’t do it)

o Cashier’s check – [Bank = Drawer = Drawee]. Bank orders bank itself to pay Payee.

Indorsement: Signature other than maker, drawer or acceptor Special indorsement identifies the person to whom payable,

blank does not Restrictive indorsement limits payment, unrestrictive does

not Qualified indorsement negates secondary liability,

unqualified does not Anomalous indicates accommodation

I. Holder v. Maker (Drawer)Negotiable instrument

A writing Signed by maker (drawer) of

Agency (“power of attorney”) o Principle is L if agent was authorized.o Agent is L only if signed w/o showing (1) represented

party or (2) representative capacity E.g. “for A”

Forgery – Forger is L; not the party whose name was forgedo E.g. Forger signs “/Robert Redford/.” Forger is L; Robert

Redford is not L. Unconditional

= No promise modifier.o Cf. Acceleration clause is OK b/c it modifies time.

No express conditionso Implied (conduct)/constructive (by law) conditions OK.

Not subject to another writingo But, “secured by…” OK

Limitation of funds acceptableo E.g. “for buying A”, “from my bank account” OK

Promise or order IOU is not a promise.

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To pay a fixed amount with or without interest; at a fixed or variable rate

Of money w/ No other unauthorized promises

No additional promise allowed. But, allowed exceptions: Promise

o (1) to give Security (collateral);o (2) to allow the holder confess judgment or dispose of

collateral;o (3)to waive protections for the maker/indorser;

i.e., waive e.g. right to notice of dishonoro (4) of attorney’s fees (no need to be fixed).

On demand/at a definite time If check is postdated, it is non-negotiable. Any acceleration clause is OK.

o “A pays $1k every month” OK – This becomes rather a malpractice not to include this.

o “on death of B” – NOT negotiable b/c no definite time.o “on 1/1/2011, accelerated by death of B” OK.

“To bearer”/“to order” at time of issue (unless check). “to bearer”/ “to order” are the magic words.

o “promise” is not a magic word.o E.g. “I promise to pay on the order of B” = order paper.

“pay to the order of ____” (a check w/ a blank payee line) = bearer paper.

“I promise to pay for a keg of nails” = bearer paper.

Negotiated Only a HOLDER can “negotiate” an instrument. Negotiation makes the transferee a holder.

E.g. if a person (forger) forges an indorsement of an order paper, the transferee is not a holder b/c the forger was not a holder.

Order = Proper indorsement + delivery Bearer = Mere transfer of possession

Cf. Delivery = voluntary transfer of possession If a thief steals a bear payer, it is negotiated.

Last endorsement rule Special indorsement = order Blank indorsement = bearer

Holder in due course(1) A holder

Made by a proper negotiation. See above.(2) for value

Executed (=present) consideration; no future o E.g. Attorney receives a negotiable instrument as an

advance on fees. This is not “for value,” therefore the attorney is not an HDC.

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Antecedent claim (≠consideration)o E.g. 1 year ago, attorney performed for client and billed

her. Now, the attorney received $1k for the bill. No consideration b/c there was preexisting duty. But this is nevertheless “for value.”

o You bank as an HDC if consideration given(3) in good faith

(a) Honesty in fact; ando “pure heart, empty head” test – a Subjective test.

(b) Observance of reasonable commercial standards of fair dealing

o Merchants’ test – an Objective test.(4) without knowledge or notice of

a. overdueness,b. dishonored,c. principal (≠interest) payment at default,d. claim,e. defenses,f. forgery,g. irregularity, orh. incompleteness, which questions authenticity.

Non-HDC: (b/c these are suspicious)o Bulk (buyer in bulk)o Estate (buyer from estate)o Judicial Sale (buyer through judicial sale)

Partial HDCo Time of payment (wrt notice) for the instrument

governs the HDC status. Ex1> Swindler defrauds Maker to get a $1k check.

Then Swindler sells the check to an HDC for $500. HDC is a full HDC for the $1k.

Ex2> HDC paid $250 for the purchase. Before clearing the balance tomorrow, HDC finds out about the swindle.

HDC is a partial HDC for $500. (proportional)

(5) takes free of personal defenses and claims, but subject to real defenses

Forgery, Fraud in factumo Fraud is only a personal defense.o Fraud in factum = “maker (a) didn’t know/ (b) had no

reasonable way of knowing that the signed paper was an instrument.”

E.g. “I couldn’t read” not a real defense b/c you could have someone else to read for me.

Alteration, Adjudicated insanityo Simple insanity is voidable. Adjudicated insanity renders

it void. Infancy, Illegality

o Illegal subject matter (e.g. murder) – void. Real defense.

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E.g. “I gave you the check in exchange for marijuana” – real defense.

o Illegal purpose – voidable. Duress, Discharge in bankruptcy Suretyship defenses if known, SOL (3 years drafts, 6 years

notes unless no demand, then 10 years)

FTC Amelioration — o Rule : No HDC rule applies where: (1) human buys (2)

consumer goods/services (3) on credit. Bottom line – Those who buy consumer goods w/

checks can’t easily avoid liability.o (1) human – not corporationo (2) consumer goods – Family used goods, e.g.

refrigerator, gym. No land.o (3) on credit – where you pay more than 4 installments.o E.g. Infant bought food on credit. If food seller (HDC of

infant’s check) demands payment, can the infant refuse, based on real defense? – No b/c of FTC amelioration rule.

Shelter Rule (=”umbrella protection”) — Anyone who takes after HDC gets rights of HDC except participant (thief)

o E.g. even if B received from A (HDC) a check knowing that it was issued out of fraud in factum, B is entitled to A’s rights.

o But if B stole a bear paper from A, then B is not entitled to A’s rights.

II. Holder v. Indorser — Contract of secondary liability Indorser may be L for the amount at the time of indorsement.

E.g. A indorses a note for $1k. Later, the note is altered to $2k. Maker is bankrupt (so dishonors the note). – Holder can hold A (indorser) for $1k (“at the time of indorsement”).

Before holder sues indorser, holder must take 3 steps: (1) Presentment

o = Holder goes to maker/drawee (bank) & demands payment.

o Must be made within 30 days. (2) Dishonor

o = Maker/drawee (bank) refuses. (3) Notice of dishonor

o = Holder tells the indorser (secondary party).

Warranty Liability for “off instrument” – Extra protection for holders Holder should consider transferor’s warranty L if it is an “off

instrument,” i.e.:o transferor transferred the instrument (i) w/ “without

recourse” or (ii) w/o signature. Issuance – No warranty L.

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Transfero Applies to all of the following instruments

(a) w/o indorsement (b) w/ “without recourse” (=qualified indorsement)

o Transferor warrants (non-waivable for checks; waivable for notes):

(1) right to enforce (=proper negotiation; title) (2) signature genuine (+ authorized) (3) no alteration (4) no defense/claim against transferor (5) no knowledge of insolvency/bankruptcy

initiation. Cf. If transferor actually knew of maker’s

insolvency, then it is fraud. Presentment (final surrender to maker/drawee)

o Presenter only warrants (1) right to enforce (proper negotiation; title).

o Presenter’s warranties as to signatures: Presenter warrants only as to indorsers’

signatures. As to drawer’s signature, presenter only warrants

no knowledge of forged signature.

III. Holder v. Drawee (bank) — None unless acceptance (certification) If certification (e.g. CD), drawee is liable for consequential damages.

Drawer becomes remitter, and is discharged from L.

IV. Drawer v. Drawee (bank) — Contractual relationship (Drawer puts money in drawee and drawee pays out according to

drawers order.) “Properly Payable” Rule – Banks don’t have to pay, but they can

choose to pay (“properly payable”) when: (1) Overdraft – Banks don’t have to pay, but they can pay and

make the loan to drawer. (2) Date – Banks don’t have to pay post-dated checks, but they

can. (3) Dead drawer – Bank can still pay even if drawer is dead,

unless bank knows it. Not over “stop payment” – Banks must honor drawer’s “stop

payment” order. Not “properly payable” – When Drawee (bank) does not honor

drawer, bank is L to drawer for wrongful dishonor (breach of K). Bank loses. Two situations –

(1) If bank didn’t pay where it should have – Contractual damage, if any.

(2) Forged signatures. If bank paid where it shouldn’t have paid:

o (a) Forged drawer/maker signature

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b/c drawer/maker is not L for signature; forger is L.

o (b) Forged indorsement b/c transferee who possesses through a forged

indorsement is not a proper “holder” If a thief steals a check, forges indorsement and

presents to bank, and the bank paid the thief, the proper payee can sue bank for conversion.

But, exceptions. See below. Exceptions – Bank wins if Drawer/maker/payee was negligent.

Impostor; fictitious payee (UCC §3-405)o (a) Issuance to Impostor – If an impostor induces issuer

to issue the impostor an instrument by impersonating a payee:

Any person can indorse in the name of the payee. The instrument is effective.

Drawer loses against any BFP.o (b) Issuance to fictitious payee – Any payee in a

f ictitious name is effective – Bank wins. Any person in possession of the instrument is

holder. E.g. “Pay to the order of Robert Redford [Mickey

Mouse]” – This is not forgery. If anybody indorses on the back of the check,

drawer suffers. Drawer loses against any BFP.o (c) Fraudulent indorsement by accounting e/e – Bank

wins. E.g. An accounting e/e receives a corporate check

payable to e/r, and indorses to herself. Forged indorsement is effective.

This does not apply to forged drawer signatures.

E/r must not let the same person to (i) open a corporate account and (ii) sign the checks.

Drawer negligence in drafting – Bank wins. o No negligence:

Use of pencil Leaving blank checks on top of table in restaurant

o Negligence: Leaving amount line blank/lots of space Leaving space and say “I trust you to put in right

amount” Drawer negligence in notifying – Bank wins.

o If drawer finds a forgery/etc, he should notify the bank quickly. Otherwise, drawer suffers.

o How fast (after bank made the paper available to drawer)?

Forged drawer/maker signature – 1 year Forged indorsement – 3 years (=SOL) Multiple forgeries by same wrongdoer – 30 days

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V. Effect of Alteration/Incomplete Instrumentsa. Incomplete Instruments

i. Effect of incomplete instrumentAn incomplete instrument may be enforced

(1) according to its incomplete terms; OR(2) as augmented by an authorized completion.

ii. Burden of proof1. The person asserting lack of authorization has the burden

of establishing completion w/o authorization.2. *If the person who completed the instrument simply did so

according to an (oral) agreement w/ the other party, the other party cannot prove that the completion was unauthorized.

b. Alteration = an unauthorized change in an instrument that modifies the obligation of any party in any respect.

i. The effect of an alteration depends on whether the alterer’s intent was fraudulent or non-fraudulent.

c. Non-fraudulent AlterationNon-fraudulent alterations do not discharge any party, and the instrument may be enforced according to its original terms.

d. Fraudulent AlterationA fraudulent alteration has the effect of discharging every party obligated on the instrument, unless the party (1) assents to the alteration or (2) is precluded from asserting the alteration.

i. Exception – HDC1. But, an HDC (a person who takes the instrument for value, in

good faith, without notice to the alteration) may enforce the instrument:

a. according to its original terms; ORb. in the case of an incomplete instrument altered by an

unauthorized completion, according to its terms as completed.

VI. Bank recovery (finality) Where a bank pays on a forged drawer’s signature or other mistake

(e.g. insufficient fund), payment is final and no recovery is permitted from the innocent party whom the bank paid. – Bank can’t recover.

Where the bank pays on a forged indorsement, payment is not final and the bank can recover from the innocent party whom it paid

b/c presenter breached warranty of right to enforce (title).

VII. Accord & Satisfaction If:

(1) There is a pending claim/claim in dispute; and (2) Instrument must be tendered “in full satisfaction”

conspicuously. then

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collection is discharged of debtor’s obligation, unless:

the debtor who received the instrument tenders repayment of the paper within 90 days.

E.g. Buyer sends check ($600) to settle dispute on $1k table. Seller cashes it in. Within 90 days seller sends $600 to buyer and says “Let’s start over.” Then no accord & satisfaction.

VIII. Lost/Stolen/Destroyed instrumentsa. When a person demands payment w/o producing instrument claiming it

was lost/stolen/destroyed,i. he is nevertheless entitled to payment, so long as he can prove:

1. (1) the ownership, 2. (2) the terms of the instrument, and 3. (3) a factual reason why he could not produce it.

ii. Then, the court will order the maker/drawee to pay him. But, the court will also require the person to give “flexible protection,” (e.g. bond)

1. so that the maker/drawee may be protected from other claims on the instrument.

b. When a person demands payment against a bank for a cashier’s/teller’s/certified check that he claims to be lost/stolen/destroyed,

i. the bank waits for 90 days.1. No bond is required of the person demanding payment.

ii. If nobody else claims it during 90 days, bank pays the person.iii. After that, if an HDC appears and demands payment, bank must pay

him too, and the claimant must repay.

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SECURED TRANSACTIONS(UCC Article 9)

Memorize: PMSI = A (1) security interest (2) that secures repayment of a loan (3) used to purchase the collateral.

I. MECHANICSA. Collateral

1. Classificationa. Tangible movable things

(1) Inventory(2) Equipment(3) Consumer Goods(4) Rights in Real Property = Fixtures + As-extracted

collateralb. Intangible rights

(1) Account(2) Deposit Account(3) Instrument(4) Chattel Paper(5) Investment Property(6) General Intangibles

2. Mnemonic = ICED GALF + P + (FA)a. Inventoryb. Instruments

(1) A promise to pay debtor memorialized in a note/certificate of deposit.

i. If not memorialized, account (receivable)ii. E.g. checks, promissory notes.

c. Investment Property (rarely comes on exam) – Perfected only by control

(1) Stocks & Bondsd. Consumer Goodse. Chattel Paper

(1) = Paper representing both a promise to pay + a property right.

(2) On exam, think about only two kinds: (3) (1) Any lease of a thing (right to collect future rent +

reversionary right)i. E.g. Debtor, a car dealer, grants interest in the car

lease to creditor. (Right to collect stream of payment only will be an account.)

(4) (2) Retail installment sale agreement, RISA, promissory note + security agreement

i. E.g. Debtor, a car dealer, grants interest in the car sold to consumer under a retail installment sale agreement. Just in case the consumer breaches installment payment, the dealer put security interest in the car as well, so that the dealer can take the car back when consumer defaults.

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1. Now the dealer has a PMSI (purchase money security interest) in the car.

2. Creditor has chattel paper.ii. *Ask: Who is the debtor? Dealer? Or Car owner?

f. Equipmentg. Electronic Chattel Paperh. Documentsi. Deposit Accounts – Perfection only by control

(1) Bank account(2) Art 9 deals w/ only commercial account.

j. General Intangibles(1) “Catch-all” – Other intangible rights not otherwise

categorized.i. No instrument (no memorialization), no right to

pay at all.ii. Any non-monetary right under K.

(2) e.g.:i. Rights in intellectual property

ii. Business goodwillk. Accounts (Account Receivable)

(1) Account = Right to collect on a promise to pay the debtor later on a monetary obligation after sale/lease of a non-land related thing.

i. Account has no or insufficient writing to be an instrument/chattel paper.

ii. Excludes:1. Deposit accounts2. Health care insurance receivables3. Investment property.

iii. Includes: credit card debts.(2) Any time something is sold/leased in exchange for a

promise to pay debtor in the future, an account is created.

l. Letter of Credit Rightm. Farm Productsn. Proceeds

(1) Whether or not the security agreement says so, a security interest automatically attaches to whatever the debtor receives for/on account of the collateral, as long as the proceeds are somehow “identifiable” as linked to original collateral.

i. Other creditor may attach security interest in the proceeds (as deposit account/investment property/etc). Then discuss priority of collaterals.

o. (Fixtures)(1) Perfection must be filed a mortgage records where the

land is.p. (As-Extracted Collateral)

(1) Oil/gas/minerals(2) Security interest will attach as soon as it is extracted.

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II. CREATING SECURITY INTEREST (RIGHTS) VALID AGAINST THE DEBTOR – ATTACHMENTA. Step 1 – CREATION

1. Two ways to create rights:2. (1) Possession/Control + oral agreement

a. Control = Debtor’s permission to release collateral to creditor.3. (2) Security Agreement

a. (i) Authenticated Record = signed by debtor or by otherwise indicated assent in some perceivable form, e.g. email/voicemail

b. (ii) Describing collateral(1) Description must simply “reasonably identify,”

generally by categories (e.g. inventory, equipment), but not “all assets.”

(2) After-acquired collateral – OK.(3) Future loan – OK.

i. There is no attachment until creditor gives value (in the future).

(4) Cf. Consumer goods – i. (1) Description must be more specific.

ii. (2) After-acquired collateral for consumer goods are limited to those acquired within 10 days of the secured value have been given.

B. Step 2 – ATTACHMENT1. Value (≠gift) – Value must be given to debtor by creditor.

a. E.g. Creditor giving loan to debtor (99% of exam)b. Pre-existing duty/debt is value.

2. Rights – Debtor must have a right in the collateral to give away to creditor.

3. Agreementa. (1) Authenticated

(1) signed or otherwise indicated assent in a perceivable form

(2) e.g. email/voicemail ok. Oral agreement is OK if creditor takes possession/control of the collateral.

b. (2) security agreementc. (3) describing collateral

(1) Reasonably identifying the collateral. By category only OK. But not “all assets.”

(2) “after-acquired” collateral OK.(3) Future loans OK. e.g. “all future indebtedness” OK.(4) Consumer Goods limitations:

i. More specific description required.ii. After-acquired collateral applicable only to

property acquired within 10 days of any secured value given.

C. Doubling of collateral1. If a property changes hands, a security interest in follows the

property, unless creditor releases it by consent.2. E.g. collateral in debtor-seller + collateral in buyer

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D. Suspect transaction: 1. Effects – Sale, not a lease/consignment. Creditor:

a. (1) loses ownership in property; and b. (2) has unperfected security interest in the goods (Article 9

applies).2. “Lease” but actually a sale. E.g:

a. Lease term over entire useful life of propertyb. Buyout option at the end of lease for “nominal” value ($1)

3. “Consignment” but actually a salea. When delivering (1) non-consumer goods (2) worth more

than $1k (3) to a merchant for sale, b. law treats “consignor” not as owner who sold the goods w/ right

of return, but as creditor w/ security interest in goods, if the merchant:

(1) acts under its own separate name;(2) is not an auctioneer; and(3) is not generally known to sell other people’s goods.

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III. MAKING RIGHTS ENFORCEABLE AGAINST 3P – PERFECTION Only after attachment has occurred + one of various steps

for perfection taken properly.A. Filing a UCC-1 “Financing Statement”

1. Creditor does not file a security agreement.2. (1) Debtor’s Name – Most tested, if tested.

a. Financing statements are indexed by debtor’s name.b. Full, accurate legal name of the debtor to enable other

creditors to find the statement.(1) Trade names/nicknames are insufficient and thus

make financing statement “ineffective.”(2) If filing office’s search logic w/ full legal name cannot not

find misspelled/wrong name, then: i. the financing statement is “seriously misleading”

and “ineffective,” and the security interest is “unperfected.”

(3) If debtor’s name changes which makes the financing statement “seriously misleading,”

3. (2) Secured Creditor’s Name4. (3) Description of Collateral

a. Super-generic description OK (e.g. “all of the debtor’s property”), but:

(1) To be effective, a UCC-1 filing must have been authorized in an “authenticated record” by debtor.

i. E.g. security agreement covering the same collateral.

b. If financing statement describes collateral more broadly then security agreement, creditor must either have (1) debtor sign the financing statement or (2) authorize filing by a separate document.

5. Fixture filing a. Fixture + as-extracted collateral – Financing statement must be

filed as a “fixture filing,” at mortgage records.b. More info required:

(1) Describe the real property w/ sufficient detail to support a mortgage;

(2) State that the filing covers fixtures; and(3) Identify the owner of realty (if different from owner of

fixture).6. Effective for all transactions, 5 years.

a. Lapse – Filing lasts 5 years. If it lapses, the collateral is treated as if the statement has never been filed.

b. Continuation – b/t 4 yr 6 mo and 5 yr.c. Properly filed statement perfects any security interest in

described collateral in any secured loan b/t creditor & debtor.(1) E.g. Debtor cleared loan by repayment. Debtor loans

from the same creditor w/ same collateral before filing lapses. No need to file another statement again.

7. Filing Locations for interstate transactionsa. “Fixture filing” – where the land is.b. Other financing statements – where the debtor is.

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(1) Individuals – principal place of residence.(2) Registered organizations – state of registry.(3) Unregistered orgs (e.g. general partnerships) – where

the office is. If more than one offices, place of chief executive office.

i. **Sole proprietorship = individuals. ≠unregistered orgs.

c. If debtor moves to a new state – Creditor has 4 months. After that, financing statement in the previous state is retroactively ineffective, as it never existed.

B. Possession (Tangibles only) 1. Cannot perfect by possession if:

a. Accounts/Deposit accountsb. Electronic chattel paperc. Letter of credit rightd. General intangibles

2. Possession satisfies both writing requirement for attachment and perfection.

3. Possession is superior perfection to filing for: a. (1) instrument + (2) chattel paper.

C. Lien on certificate of title (Vehicles only)1. If a collateral is a (1) vehicle (2) covered by a certificate of title –

perfect only by applying the Department of Motor Vehicles to have the lien noted on the face of the certificate of title.

a. Car dealer’s inventory – inventory. May be perfected by filing a UCC-1.

D. Control (deposit account*/investment property/electronic chattel paper/letter of credit right only)

1. Control = Debtor’s permission to release collateral to creditor.2. Deposit accounts can be perfected only by control.3. Perfection by control in investment property beats perfection in

any other way.4. Control of deposit accounts – by 1 of 3 ways:

a. If [creditor = bank of the deposit account], the bank has control;

b. Control agreement – bank agrees to follow the secured creditor’s instructions as to the money in the account; or

c. Add creditor’s name to the deposit account.5. Control of investment property – If collateral is:

a. certified securities, perfection is done by (1) transfer of possession of the certificate + indorsement, or (2) re-registration of the stock in creditor’s name.

b. indirectly held through broker, perfection is done by 1 of 3 ways:

(1) If [creditor = broker], broker has control;(2) Control agreement – broker agrees to follow the secured

creditor’s instructions as to the stock/bond in the account; or

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(3) Add creditor’s name as account holder.

E. Automatic Perfection upon Attachment***Memorize PMSI definition***

1. PMSI (purchase money security interest) a. PMSI = A (1) security interest (2) that secures repayment of a

loan (3) used to purchase the collateral.(1) “loan” – whatever portion of loan OK(2) “used to purchase” – Actual use.

b. Rule : PMSI in consumer goods is automatically perfected.(1) Why this rule? – To encourage lending consumers.

c. Two scenarios:(1) Bank loans debtor to buy collateral(2) Seller of goods loans debtor to buy sell’s collateral

2. Temporary + Continuationa. Proceeds automatically attached to a perfected collateral is

automatically perfected for 20 day grace period. (1) After 20 days, perfection continues in 3 ways w/o further

action (filing a new UCC-1) by creditor:i. Original financing statement describes the

proceeds (easy);ii. If identifiable cash proceeds, continuous

automatic perfection; ORiii. Perfection as a matter of law if:

1. original collateral was perfected by filing;2. proceeds can be perfected by filing in the

same office as the original collateral; AND3. proceeds were not acquired w/ cash

proceeds.a. = debtor receives property instead of

cashb. 4 months grace period in the new jxn when debtor moves.

IV. PRIORITY BATTLES – WHO WINS?A. Perfected Secured creditor (PSC) v. Perfected Secured creditor (PSC)

1. First to Perfect (through UCC-1 filing/otherwise) wins.2. **Exceptions (Super Priority, where 2d PSC in time prevails): If

2d PSC is a holder of PMSI (Purchase money security interest), he may achieve super priority.

a. PMSI = A (1) security interest (2) that secures repayment of a loan (3) used to purchase the collateral.

b. PMSI in inventory (+ proceeds)(1) To achieve priority, holder of PMSI must do 2 things

before he delivers collateral to debtor:i. Perfect the PMSI; and

ii. Notify in writing any PSC for after-acquired inventory of his priority.

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(2) Example> Macy’s borrows $2M from Bank, granting Bank a security interest “in all of Macy’s inventory, whether now held or hereafter acquired.” Bank properly perfects its interest. Bank is a PSC in inventory.

i. Later, Macy's acquires Armani's spring line of clothing on credit, granting Armani a security interest in the line. Armani is a PMSI holder. The collateral is inventory.

ii. How can Armani achieve priority in the Armani spring line?

iii. A> Armani must satisfy two requirements: 1. Armani must file properly before debtor

Macy's takes possession AND2. Armani must notify Bank before debtor

Macy's takes possession.c. PMSI in equipment (non-inventory, + proceeds)

(1) Grace period – If PMSI is perfected within 20 days of delivery of collateral to debtor, the holder of PMSI beats all other SC and LC.

(2) No notice to other SC+LC required.

B. Perfected Secured creditor (PSC) v. Lien creditor (LC)1. If PSC perfects before LC arises, SC wins. Otherwise, LC wins.

a. Example> C sells D a stereo on an installment plan. C secures interest in the stereo and perfects.

(1) Later D defaults. C wants the stereo back. However, a dentist asserts a claim (“LC”). What result?

(2) A> C prevails b/c C perfected first.i. This is true even if LS acquired right through

judicial process (e.g. trustee in bankruptcy, ct’s seizing order)

2. Fixtures – first-filing PSC wins, regardless of PSC filed a UCC-1 or a fixture filing w/ mortgage record.

C. PSC v. Purchaser from debtor (Buyer of goods)1. General rule: A perfected security interest follows collateral into

the hands of buyer. (Even if buyer bought the goods before collateral was perfected, the collateral follows the goods.)

2. Exceptions a. BIOC rule:

(1) Inventory sold in the ordinary course of Debtor’s business is generally not subject to SI. The SI is cut off.

(2) = BIOC (buyer in the ordinary course) takes free of security interest of PSC (perfected secured creditor).

b. Garage sale rule: (1) nBIOC (Non-ordinary course buyer) – Where buyer is a

not BIOC (i.e. debtor did not sell to buyer in his ordinary course of business),

i. Buyer takes free of security interest of unperfected secured party.

ii. If the SI was perfected b/f purchase, then buyer loses.

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iii. Example> C secured interest in D’s stereo (w/o perfection).

1. Later D defaults. D sells stereo to B in garage sale. What result?

a. A> B prevails b/c C did not perfect.

V. ENFORCEMENT ON DEFAULTA. Repossession

1. SC can repossess the collateral w/o notice & by any means, so long as it does not breach the peach.

a. “Breaching the peach” – stick to your gut feeling what is breaching.

2. **Collection rights of SC from non-goods (account) collateral. a. Debtor’s account collateral (right to collect from debtor’s

debtor) can be repossessed by telling the debtor’s debtor to pay directly to SC.

(1) Payment to debtor does not discharge the debtor’s debtor from debtor.

B. Foreclosure by Sale1. Sale must be commercially reasonable.

C. “Strict” Foreclosure: Creditor keeps the collateral by negotiating w/ debtor to buy it.

1. Proposal – In exchange for forgiveness of some/all of debt.2. Notice – Creditor must notify other actually/constructively known

creditors having interest in the collateral.3. Assent from debtor + other creditors. Failure w/in 20 days is a

silent assent.D. Remedies for Creditor’s failure to comply = actual damages.

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