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    of 35
    m. Ww. v. OVERVIEW re-Code Security Devices [1] Liens (1] Coverage of Article 9 [2] 9-203. Attachment of a [3] {§.9-302. Perfection of a SIA [4] Definitions of Interested Parties [4] =mooee SC v. CUSTOMER [3] A.” $9-307. SC v. Customer of Dealer [5] Dealer v. Customer ILC v. Retailer [6] SC v, TRUSTEE [61 BCS S441), Unperfected $C v. Trustee (7) SC wa PMSIv, Trasce [7] BCS S4H(b). Unperfected SC, Trste (7] BC § 547. Preferential Transfers [7] 2. Bement [8] Fall perfection = transfer (8) BCS S47(0,SKA). AAP inn BC 54946), Excepions [10] BBC § 549(¢)5). AAP in accounts & inveotory avoidable above value at 90 days (11) pase inventory avoidable if creditor undersecured [10] SC. 8C [15] A. | §9-312(5), Perfected SC v. Perfected SC > Ist 1 Fie or Perfect Wins [15] B. §9-312(4), PMSI v. Perfected Sil in Non-Inventory {16] Definition of PMSI [16] © PMSty. Trustee [17] D. $9312), PMSI v. SCin Inventory (17) § 9-312(3) wiperfetion & notice re'ment [17-18] § 2-326), Consignments [18] E._Perfecied SC v. Perfected PMSI in A/R proceeds [19] § 9-312(3), Proceeds from inventory [19] §.9-306(3). Must perfect in proceeds in 10 days or do 1 of 3 things (20-21) § 9-306(4). Proceeds from non-inventory [21] F§9.312(5), PST. PMSI [22] G.§9-312(5), Perfected $C in Proceeds v. Perfected SC in AIR [23] H. §9:312(), Perfected SC v. Perfected SC in Future Advances [23] SC v.JLCre future advances (25) SSC v. Trustee re future advances [26] 1. $9308, Perfected SC v. Perfected SC in Chattel Paper as Proceeds (27] I. SCy.SC in Proceeds (29) §.9:306(4), SC v. Trustee re proceeds [30] § 9-306(5). Perfectad SC v. Perfected S ‘Trustee v. SC in chattel paper [32] ‘Trustee v. SC in inventory [33] retuned goods (31 FINAL WORDS FROM KING [34] A. $2702, Seller's Remedies on Discovery of Buyer's Insolvency [34] L A OVERVIEW PRE-CODE SECURITY DEVICES Draft. seller’ order of payment from the buyer. A check isa draft drawn on a bank Drafts are governed by Article 3 2. Pledge. Possession of personal property transferred to pledgce as security for pledgor's payment of deb or other obligation, Tile remains whorrower. ‘Transfer of posession is actual notice, Chattel Mortgage. Mortgage taken by mortgagee in personal property of the mortgagor that is filed (constructive noice); morigagee gets loan from mortgagor to buy goods. Goods remain possession of mortgagee, but mortgagor may repossess 4. Courts woulda’ allow a chate! mortgage on property thatthe borrower had right to sell Conditional Sale Contract. Seller retains tile, buyer gets possession. Payment isin installments & tte is transferred upon fll payment. Seller can repossess. Same as a chattel morgage, excep! no fling teq', A conditional sale is the old way of describing a PMSI 4, Must be a vender (not bank), Some states rel filing. AMR, Debt owed to an enterprise arising in ordinary course 6. Tripartite Arrangement, For example, Ford sends cart Dealer & bill of lading (a type of chattel morigage) to Bank. Dealer sends rust receipt (another type of chattel mortgage) t0 Bank. Bank then feels secure & sends $ to Ford & bill of lading to Dealer. If Dealer sells the car & doesnt send $ to Bank, Bank uses rust receipt o recover car. Problem is that Buyer of ‘ar may have been in the dark, To correct fortis problem, Uniform Trust Receipts Act rq's filing agreement boon Bank & Dealer & inventory & AJR become collateral (assignment of intangibles) a. Bills of lading are documents of title, governed by Article 7. SEE E 41+ for documents such as bills of lading & warehouse receipts. LIEN A claim, encumbrance or charge on property forthe payment of some debt, obligation or duty. A ‘qualified right of property which a creditor has in o over speciTic property of his debtor as security. Right or claim against some interest i property created by lw or contact. Statutory, ¢g.,tax lien or mechanic’ len, 2 Judicial, A right arising out ofa judicial proceeding, eq’ a judgment; eg. a judgment len, an attachment, a garnishment (re property in hands of 3d party) 3 Consen al. A pledge, among other things, create a cons wal Hen, Don't need w go 19 COVERAGE OF ARTICLE 9 Article 9 covers all slagreement, defined as consensual lens SEE § 9-102 for policy & subject mater of Article 9: {§9-102(1) covers consensual liens & § 9-102) covers contracts. ‘Types of Collateral Goods are define ss movables o Hxcures, no eal estate SEE § 9-108. i. consumer goods (primarily for personal or household use) Inventory (bel for sle in ordinary course) farm produets (farming operations) ‘equipment (anything else) b. — Quasi-tangible property: SEE § 9-105(1)\b) & (i, instruments (writing which evidences a right to the payment of §& isnot itself aa or lease & is ofthe type transfered in ordinary course hy delivery w/o necessary endorsement or assignment, e-., bonds stocks, checks) fi, chattel paper (a promise to pay + a si in chattel) ui defined in §9-105(1)0) Accounts & general intangibles; SEE § 9-106, 1. Account (right 10 payment for goods sold or leased or for sexvices rendered ‘hich are not evidenced by an instrument or chatel paper ) General intangibles (any personal property other than goods, accounts, cuttel paper, documents, insrumtens & money, e., good wil, contract rights, license ‘agreement re trademark where licensee has to pay royalties) ‘Transactions excluded from Article 9; SEE § 9-104 Statutory liens (& common law Tiens) b. Judicial Leases — tre leases are not covered, but leases that let che buyer end up owning the chattel atthe end are covered as they are really a conditional sale, SEE E. 5+ for leases. King thnks all leases should be covered. ATTACHMENT OF A Si Anattachment creates a sa, The creditor isan unperfected SC. The sais binding between the SC.& the debtor. Coexistence of these 3 reqiments is necessary for attachment, $9201). SEEE 11-19, 4, Either a wricen sa which contains a description ofthe collateral & i signed by the ddebior OR collateral is in the possession of the secured purty. SEE below i. Attachment is embodied in a SECURITY AGREEMENT whiel mus: (A) Bein writing unless the collateral i in possession of the secured pay. (B) Convey asin specific collateral. The document must show intent 10 create a i (specific wording isnot eq. (1) Fé usually fail to show intent & thus are not substitutes Fora sla SEEE 12-15. (C)_Deserbe the collateral. The description must be reasonably suficient (e.g. equipment or instrument). See Orix Credit Alliance v. Ommibank (Tex. 1993) (the "wherever located” problem). (1) Proceeds are covered from the sale of the described collateral & need not be specifically mentioned, § 9-208(3) & § 9-306(2), (2) AAP must be specifically mentioned (except for inventory). AAP. clauses are invalid unless the debtor gets the goods w/in 10 days aller the creditor gives value. § 9-204, (D) Be signed by the debvor. Valve given by the secured pargy kor mast have rights inthe collateral. Look to Article 2. § 2-502 (buyers rights to goods on seller's insolvency). Concept of identification. 1st Tenn, Bank v. Graphic (Missouri 1993) (sight in the collateral: § 2-502), Front Raw Seating, Inc. v, New England Concerts (Mass. 1992) Concerts owes $ 10 FR & H. FR isa judicial lien creditor & His a Ist in time unpecfected SC. FR wins. Gipson County Farm Bureau v. Greer (Ind. 1993) ‘Method of notice = publicly file a financing statement, Financing statement can serve asa la if tmeets the req ments ofa va. Need language sufficient to indicate intention to crete fi (Here, no granting language.) file Hs 00 May 1 & then file s/a on June 1 sais considered to have been perfected on May | (that is, notice occurs on May 1). Creditor in Gibson tried to do this — filed is early but then never filed the va later, so Vi never perfected. SEE E 32. PERFECTION OF A S/A. ‘There are 3 ways to perfect a s/a which makes the sla effective against the world (as opposed to agains the deblor). Perfection doesnot occur until one ofthese step is taken & the sfa has altached. 1 ng th a place designed in § 9-401(1) alternatives) Gives constructive nie b. Fismust contain SEE E 32} 3. description of collateral (ot as specific asa) fi. name & address of debtor ii, signature of debtor © Minor errors are okay. May be filed before sla created (see Gilbson above ) Amendments ar effective from dat of filing. Filing in wrong place i « major error. 4. Duration. Fis ceases to he effective 5 years after the filing [$ 9-403(2)]. Time period ‘may be extended by filing continuation statement [§ 9-403(3)] not eaier than 6 ‘months before the original expiration date, SEE E 30-31 2 Possession [§ 9-302(a)] Collateral must be tangible b. Must be reduced 10 creditors contol (Je, field warchousing for inventory) c._Perfection by possession ends when possession ends 3. Automatie Perfection, occurs for PMST in consumer goods, except cas which must be registered. §9-302(d), § 9-302 is forthe reuilers benefit — spares retailer the expense ble ‘consumer Won't look anyway, However, IF fiefs, even consumer buying rom consumer will take wie security imeres; SEE below & § 9.307(2). If there is a perfection by one method & then perfection by another, the date of perfection relates buck tothe Ist perfection unless there was a lapse of time bewn perfection (for lapses, SEE E 31), For perfection in multi-state transactions (§ 9-103), SEE E 57-73, DEFINITIONS OF INTERESTED PARTIES 1. UnSC. Now. Has personal interest such as « bill. May sue & become a JLC. 2% JLC, Formerly an unSC, Trustee is. lien creditor. Aries at time of levy when the sheriff seizes the property 3. SCor unperfected SC. Debtor agrees to the lien (consensual lien) & creditor has taken the necessary steps to sa attach, Perfected SC. Attached & perfected, nL. SC v. CUSTOMER SC v. CUSTOMER OF DEALER DEALER y. CUSTOMER A customer isa buyer of consumer goods in the ordinary course (BOC) ora buyer of consumer ‘goods notin the ordinary course, Cars are not covered 1. §1-2010). BOC = a person who in good faith & wio knowledge tha the sale to him isin violation of the ownership rights or security interest ofa 3rd party inthe goods buys in ‘ordinary course from a person in the business of selling goods ofthat kind but does not include a pawnbroker. FOCUS hereon the seller. 2 §$9:207(1). BOC takes free ofa si created by Seller even if thesis perfected & even if BOC knows of its existence 4. Foresample, Reailer gives Bank ash in inventory. Bank perfects. Retailer sels fig OA. Retailer goes bankrupt. Bank cannot recover frig from A. § 9-30). Rationale is that we do not expect buyer to eck for Hs & that we do not Want 10 penalize someone simply from knowing that ssf exists © BOC must buy from ordinary dealer. For example, C buys fig from Retailer. C gives Reutlera sf. C siops making payments to Retailer & sels frig 0 S. Resailer may be able o go after S be Sis nora BOC (be C was not in the business of selling goods of that kind), SEE § 9-307(2). King says this is unfair hfe no one checks the filing office when they buy & used frig from a non-vender, 4. § 9-307(1) isthe “except where otherwise provided" in §9-306(2), § 9-307(1) isa major exception. 3. $9-307(2), Non-BOC of consumer goods for valve & for own personal purposes takes fee of ai even if perfected IF buys wlo knowledge ofthe sfi UNLESS prior tothe purchase, the secured party filed a f/s covering such goods 4. A non-BOCis someone who buys the goods from someone who does not ordinarily sell theme. C who sold the used fig b. Here the ts must be fled even though consumer goods perfect automatically. of §9.307(1) & Q) use. sells to Buyer- to Retailer-2 to Buyer RI v.B2, who wins? a §9-307(1) does not protect B2. Icincorretly seems lke it should prowect B2 ble B2 is 1 BIO from R2 who ornarily deal in such goods. But § 9-307(1) is NOT applicable Die doesn' cover used goods: takes fre of a Si created by bis seller..." RI created a i, nor R2 & B2 bought from R2 bb, § 9-307(2) does not protect B2, R2 did not buy the goods for own personal purposes. ‘Case law says that both the seller & the buyer must have the goods as consumer goods B2 loses ble R2 held the goods as. retailer. ©. B2 may have a c/a against R2 under an implied warranty of title. RU wins. m. JLC y, RETAILER For example, Retr sells to BOC. Judicial lien creditor JC) then gets judgment against BOC ‘Who has priovty in the consumer good, ILC or Retailer? 1 §9-30100b). ILC takes priority over an mperfected SC. 2. §9-302(1)(@), PMSI in consumer goods perfects automatically -» Retailer has perfected SC & thus has priority SC v. TRUSTEE 1) give debtor fresh stat & (2) provide for the equitable distribution among the UuaSCs, Trustee wants to knock-out the SCs. Beyond the extent ofthe collateral, a secured creditor is unsecured, BC § 101. Definitions. (Chapters 7,9, 11, 12 & 13 are seting in which a secured transaction may be tested "is an asset liquidation (trustee isan independent 3 person) 9s rea municipality 11 deals wreorganizations (debtor remains in possession). 12s reorganization of a fail farm 13 is for individuals whegulae income. RC § 523, Nondischargable debts. [BC § 362. Automatic stay for any creditor trying to collect from or perfect on debtor. There are ‘exceptions (e.g. PMSI has 10 days to perfect: if the Chapter X occurs wrin that 10 days, the creditor can sill perfec) BC § 361, Stay can be vacated if there is lack of adequate protection, BBC § 5444@)(1). Strong-arm provision of BC. Puts trustee in shoes of a hypothetical len editor. Truste is considered tobe a JLC on the date ofthe filing. State law determines the rights of LC iespeet to transfers made by the debtor. §9-301(1)(b). Lien creditor has priority over an unperfected SC. Lien creditor defied § 9-301(3). BC § 544(a)() gives truste the status ofa hypothetical lien creditor (federal bankruptcy aw) & §9-301(1}() defines what the trustee can do with that power (sate la) versus an lunperfected SC. BBC § 547 — what the trustee works with (re preferential transfers) c. UNPERFECTED SC v. TRUSTEE — BC § $44(a)(1) € loans D $50 secured by all of Ds equipment. C does not file. Chapter X filed 10 months late. Unperfected SC (C) v. Trustee (T), Who wins? |. $9302). Filing is necessary for C to perfect be no possession, C did not file 2 §9:301(1)(b). AJLC takes priority over € (an unperfected SC), 3. BC § S44(a)(1). Trustee has the power of a ILC ut ime of Chapter X filing. Trustee wins. If C had filed om the day before fling of Chapter X, ruse could not have used § 544 us could hhave used BC § 547 (re preferences}. ‘SC WIA PMSI v. TRUSTEE 1. $9-301@). Ifa SC wla PMS files win 10 days afer debvor receives possession ofthe collateral, che SC takes priority over the rights of a ILC which arse between the ime of attachment & the time of fling: perfection relates back tothe PMI creation date. Thus, a SC ‘wa PMSI who files win 10 days after a Chapter X is filed, takes priority asa perfected SC over the rustee (a ILO) 2 What makes a via PMSI? a. §9-107. Asis PMSI to the extent that itis taken by she seller ofthe collateral to secure al of par of is price, or taken by a person who gives value by making advances or incurring an obligation Wo enable the debor to acquire rights in or the use of collateral if such value is in Fact so used. b.§9-302(1)(@). PMSI in consumer goods (other than motor vehicles reg'd to be registered) automatically perfects — no need for § 9-301(2) grace period (above). UnSC v. TRUSTEE — BC § 844(b) BC § $44(b) gives the trustee the rights of an actual unSC under applicable state law to void transfers, This goes back in time & an actual unSC must exis forthe trustee to assume this position, ‘The trustee usually sticks wABC § $44(a)(1) strong-arm bv this gives him the satus of a JLC, which ives him the power over unSC & unperfected SCs, PREFERENTIAL TRANSFERS (PT) — BC § 547 LBC §847(b). Any transfer ofan interest ofthe debtor in property which satisfies the reqment ‘of BC § 547(b), & is thus deemed preferential, may be avoided by the Trustee as a preferential transfer. Such iransfers hurt the equitable distribution of assets to unSCs. A transfer = any mode, director indirect, absolute or conditional, voluntary or involuntary, of Aisposing of or parting w/an ineres in property including retention of vile as a secured ierest& foreclosure ofthe debtor's equity of redemption [BC § 101(84)] ‘Trustee must prove each element of BC § 547(b) to show that a transfer isa preferential teanster ‘There must be a transfer ofthe debtor's property [BC § S47(b)). The debtors assets must be diminished, e., the perfection of a Vi is a transfer will >the estate (consisting of the unSCs) getting less. But paying down a debt is nora preferential transfer, The transfer need nor be voluntary by the debtor to be a preferential transfer: ‘Transfer must be to or for the benefit ofa creditor [BC § $47(b\ 1]. Ee. if Debior doesn't pay the creditor, Guarantor will — so if Debtor pays Creditor, Guarantor is relieved of liability. Thus, the payment may be avoidable on 2 grounds: (1) payment o a creditor, & (2) forthe benefit of a guarantor (also a eredito). ‘Transfer must be for oF on account of am antecedent debt owed by the debtor before such transfer was made [BC § $47(b)(2)}. An antecedent debt = Property 0s out w/o present consideration (concurrent transfer for value). Note that § 9-108 ‘Was supposed to allow 2 bank 10 make Sagreements in AAP & not allow the wustee (0 avoid them, bur the courts have disregarded § 9-108. ‘Transfer must he made while the debtor was insolvent [BC § S47(b)(3)}. BCS 547(6| provides a rebuttable presumption of insolvency win 90 days, ‘Transfer must be on or w/in 90 days before the day ofthe filing ofthe petition, or btwn 90 days & one year before the filing ifsuch creditor atthe time of transfer ‘was an insider [BC § $4700). ‘Transfer mus allow creditor fo get more than such creditor would receive if the transfer had not been made & the creditor ree'd payment of such debt to the extent provided inthe BC [BC § 547(0N5)]. ‘Transfer includes the perfection of a st BC § 547(e)2) defines transfer as perfection (a legal fletion), but does not say if full perfection is needed, 1 BC§ S47(@)(2\A). A transfer Is made at the time such transfer takes effect ‘btwn the transferor & transferee, if such transfer is perfected at or w/in 10, days after such time. Transfer is date of sf when win 10 days; have a 10 day ‘race perio 10 file (& needa be a PMS). This BC grace period applies even though under state law a lien creditor could prevail during the 10 day period on non-PMSI, Ji, BC § $47(0)(2)B). A transfer is made atthe time such transfer is perfected itsuch transfer is perfected after 10 days. Transfer is date of perfection when after 10 days iii, BC § $47(€)(2\(C). A transfer is made immediately before the date of the filing of the petition if such transfer is not perfected at the later of the ‘commencement of the case oF 10 days after such transfer takes effect btwn the transferor & transferee. If there isno fling, perfection is deemed to have ‘occurred the day before bankrupty. Full perfection is necessary for a BC § 547 transfer, given the BC § S47(eK1XBy's {definition of perfection: i. BC§ $47(6)(1)B). A transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a Judicial lien that is superior to the interest of the transferee. A transfer is perfected when a judicial lien ereitor cannot get superior right, fi, §9-301(1)(b). The “when” refered to in BC § 547(@)(1)(B) incorporates the UCC definition of perfection — when a creditor cannot longer aequire a judicial lien that is superior tothe inveret of a SC is when that SC isu perfected SC. SEEE 13 Examples asing § 541). a, Example of an avoidable preference: December! a & loan August ffs ied October! Chapter X filed ‘There are 3 important DATES in preference problems: (1) the date ofthe creation ofthe sf, (Q) the date of the filing of the fs, & {G) the date of the filing of Chapter X. ere, transfer was not perfected until August 1. On August 1. the JLC could no longer get privity under §9-301(1)(). This was a transfer [BC § 547(\1X(B)}. The transfer ‘was for antecedent debt. The transfer was made wrin 90 days ofthe Chapter X filing filing isnot made win 10 days of sa, transfer occurs atthe time of perfection [BC § 547(e)(2)(B)] here, August I. This transfer is avoidable as a preference. b. Example of «transfer w/in 90 days tha is na avoidable: December 1 a & loan, fs filed February 1 Chapter X filed ‘Transfer occurred wiin 90 days. Not avoidable bc transfer was nor for antecedent debt AAP clauses in non-inventory are avoidable if ereditor is UNDERsecured, Example. AAP clause of a sai perfected before the 90 day period, but payments are made win the 90 days, Tf the creditor is UNDERSecured (ie. the equipment is worth less than S100) can the trustee recover these paymens as preferential transfers? December 1, 1992. $100 loan, secured by present & furre equipments ts filed May 29, 1994 Chapier X filed a. § S44(a) isnot applicable bic the trustee (as JLC) has no power over this prior perfected SC (perfected before the 90 day period). b. § $47(bNS)(A). One ofthe rea'ments for a preferential transfer is thatthe creditor receive more than such ereditor would receive is transfer had net been made & creditor rec'd payment to the extent provided by the BC. A. perfected SC who is LUNDERsecured will ge less than he wants bfe collateral value is < amount owed. Payments during 90 day period would thus be giving creditor more than he would have received in a Chapter X i. Rationale — Value ofthe estate is lessened. I the creditor was fully secured, then the payments would give the debior $1 for every $1 equity inthe collateral & the estate is not lessened & a req/ment for preferential transfer is not satisfied. ii, Eg, if collateral = $75 & debt = $85. In liquidation, SC would share w/other ‘SCS as to the unsecured portion ofthe debt, Thos this creditor would get $75 & 10¢ on the dollar for the last $10. Any payments on debt ree'd by the SC an the nseeured portion of the debt wfin the 90 days prior to the Chapter X fling are recoverable by she trustee, Remember io check exceptions in BC § S47). Til, § 9-108 is supposed to allow AAP clauses but courts ignore it 6 BC§ 547(0) exceptions to transfers found to satisfy BC § S47(b). all ofthe elements of BC § 547(b) are met & it would seem thatthe tstee has the power t0 ‘oid the transfer, then look to BC § 54710) co save the creditor. 4. BC§ $47(0\(1). Trustee may not avoid a transfer to the extent that such transfer was intended by the debtor & creditor to be & in fact was a or exchange for new value given to the debtor. b. BC 547(c)(2)(A), ‘Trustee may not avoid a transfer to the extent the transfer was incurred by the debtor in the ordinary course of business oF financial affairs, made in the ordinary course of business or financial affairs & made according to ordinary business terms, £4, Debtor pays Creditor on the 10th of every month, such a payment is valid even if win the 90 day period & is not considered payments for antecedent debt. Financial affairs refers tothe personal finances of a debtor wie is notin ‘business, Purpose is to permit normal financial relations as the debtor slides ito ‘bankruptey, allowing him to pay, e¢., doctor bills, BBC § 547(\(2) does no place atime limit on ordinary course payments. Unclear ‘whether long-term debt payments are covered ©. BC§S47(0)3). Trustee may not avoid a transfer that ereates a sin property acquired by the debtor to the extent such si secures new value & is perfected on ‘or before 10 days after the debtor receives possession. 4 BCS $47(€)(6). Trustee may not avoid a transfer that is the fixing ofa statutory lien. BES S47(0)(4) & (1). SEEBC § $47(€\(S) below. AAP clause in accounts & inventory are avoldable above the debt Tevel. 4. BC§ S47(0)5). Only epplicable to AAP interests in accounts & inventory Example. Creditor gets a perfected si for $100 loan, backed by present & future inventory. Inventory on hand is $130. February 28 Debt stands @ $125 ($100 + interest) & inventory stands @ $90, Laer $15 of new inventory is acquired & SIO AVR created. May 29 Chapter 11 filed Can this si be atacked by debior? Can any part of the debt be avoided” i. BC 547 preference will not knock out a perfected BC § $47((S). Trustee may not invalidate asa preference a perfected s/ in inventory or a receivable or the proceeds of elther, except to the extent that the aggregate ofall such transfers tothe transferce caused a reduction, a8 of the date of filing ofthe petition & to the prejudice of other creditors Iolding unsecured claims, of any amount by which the debt secured by such ‘fi exceeded the value of alls for such debt 90 days before the date of the filing of the petition, iil, Inthis case, $25 of new inventory & A/R were created after the 90 day point ‘The creditor isnot secured as to this property. The tuste only has to pay $50, (A) Nocevery improvement in position may be avoided by the tuste/debior under BC § $47(e)(5). Trustee must prove that other ereitor’s position {improved win the 9 days a the expense ofthe other creditors. E ‘where the SC was the ony creditor w/inerest inthe milk & the supplies that ereted the milk & no assets of other creditors were depleted to make the milk, BC § 547 (€)5) was a (B) The mere increase inthe valu ofthe inventory does not mean there was a preferential transfer. The creditor may maintain hs priority in inventory acquired whi the 90 day'period i other assets are no diminished, © o “The emtte increase in vale ofthe inventory may not be avoidable, CCost of improvement: Part of the increase may be illusory be the debtor may have increased his inventory by finishing raw materials. Only the actual cost to the estate (labor + materials) is a preferential transfer ‘against the creditor. There may even be improvement wo cos, €.@3 warehouse full of ol tha suddenly goes up due to market conditions Problems wiapplying BC § 587(6XS). Remember, the trustee must prove allthe element of BC § 54746) 1 void a preference. Three problems force these cases ta settle: (1) Hows the valve of the inventory measured? Is it hook value? Cost of replacement? Wholesale price? Retil? Fair market? Liquidation value? (2) How much inventory was there 90 days before Chapter X?” Who knows, (3) The trusee may not bring an aetion uni & at that point, all the records ae gone ars afer the bankruptey If the court decides creditor’ interest in inventory isa preferential ‘transfer the creditor mus invoke BC § 547(c) & prove all of the elements tw overcome BC § $47(b). b, ‘The World Before BC § 547(@\5). Example, 1. King's Analysis. There should have been no AAP tunder the old BC. For purposes of BC § 547, asking "when did the December 1, 1992. Sia & loan, & fs covering all present & Ture inventory. March 1, 1994 $25 inventory acg'd May 29, 1994 Chapter X filed inventory win 90 days castor ‘occur was the equivalent of asking "when was the sion AAP perfected?” 2. What Courts Actually §9-303. Siiis perfected when i attaches & other applicable steps to perfect are taken, 9-302, Steps to perfection include fling. Filed 1s on December 1 9-203, Attachment req i, sla (December 1), ii value given, loan (December 1), & ii, debior rights in colatra Debtor rights in collaieral screwed up Inventory financing. Often, as this ‘example, collateral is the AAP in inventory. Debior didnot acquire rights inthe AAP in inventory until w/in the 9 days before the Chapter X fling ‘Thus, giving the creditor an interes in this inventory is for an antecedent debt & avoidable as preference. wold BC. Dubay v. Williams & Gain Merchumts were against above reasoning; said dhat the trustee could not void the iransfer. How did courts do this? a. Transfer occurs upon fll perfection BC § 547(@)(1)B) && (2). Pall perfection occurs when a JLC cannot acquire superior rights over the SC in collateral (see above). b. Perfection req i. filing as [8 9-302), ii, signed sa whlescription [BC § 203], & ii, attachment [§ 9-303] Althouse SC does not fly perfect until debor acquires the property, similarly, dhe JLC does notatach until that same moment. Therefore. the JLC & the SC have equal rights. The ILC does not have superior rights ‘Thus. since the ILC cannot acquire superior rights, the transfer eannot Be voided by the trustee Example December 1, 1992 sla & loan, fs WAAP clause February 15,1994 JLC appears March 28, 1994 AAP inventory acquired May 29, 1994 (Chapter X fled ‘The JLC & the SC do not atach to the inventory until it is aquired. On February 28, the interests ofthe JEC & SC are equal. BC § S47(eX1(B) defines a transfer as the point at which dhe TLC cannot acquire superior rights over the SC; this isthe date of perfection ‘The JLC could not acquire superior rights in the AAP on any date afer the SC files the fis on December 1 hve on the date the AAP aquired, the meres of the ILC & SC are equal Since December 1 is clearly outside ofthe 90 day window during which it is possible for Taste to avoid the transfer as preferential, Trustee cannot void the transfer & AAPs are okay. What Courts Did Not Do w/0ld BC: 4 §9-204, Floating len concept. Floating liens are perfected upon actual physical transfer + filling. Rationale was that other creditors were on ‘notice; no Tien creditor can get priority. This applied to inventory, not ‘equipment. The problem wt is tha it doesnot really deal wiperfection 0 the courts did not use it. (See helow for more on § 9-204.) b. $9108. Tis provision was created be the drafters wanted to stop APS from being avoidable, problem created by § 9-208 (debeor rights inthe collateral). § 9-108 created a legal fiction by saying that if new value is given at the time asa is made, secured W/AAP, the interest given to a creditor upon receipt ofthe AAP by the debtor is said to be taken for new cconsideration (not antecedent debt). This provision req that the sabe made inthe ordinary course of business. The courts do not use § 9-108 ‘oe it was state la & state law eannot preempt federal law [BC § 547(b) (which voided AAPs win 90 day period) in the federal courts. Mississippi River theory. iis perfected on the mass of inventory Couns did not use it be it was a devise for statutory interpretation & 9-303 clearly showed legislative inten 1o look at pieces of inventory. How Congress Responded. BC § $47(€)(3) was meant to overrule the above cases by saying A wransfer is nor made until D has ucquired rights in the property transferred, & allow the trustee to void transfers of interest in inventory made win the 99 day perio BC § 547(€)(5) saved the day. Oniy applies to inventory & AR. Pinpoimts 2 dates: (1) 90 days before Chapter X filing, what isthe value ofthe inventory secured by the AAP? & (2) At Chapter X filing has the inventory increased in value? The creditor cannot get more than the vale ofthe inveniory atthe 90 day mark. The purpose ofthis testi to sop the estate from geting hurt win the 90 day period. IV. § 9-312. PERFECTED SC v. PERFECTED § Disputes arise when two SCs have Vinterests in the same property & property is not suicent ro pay off both — that i, the debior is double-financed. A, § 9.31215). PERFECTED SC v. PERFECTED SC > 1ST TO FILE OR PERFECT WINS g93i2a) gos) ggg) 89312) PMSIv. PMSIv. sf PMSI v. PMSI Any Pert. SC v, Perf. SC Inventory Non-Inventory Bither Either Ded cash proceeds Any proceeds Any proceeds Future advanees $9-312(5). Ist to File or Perfect Wins. (a) Conflicting interest rank according to priority in time of fling or perfection. Priority dates from the time a fling is Ist made covering the collateral or the time the sf is Ist perfected, whichever is earlier, provided that there isno period thereafter when there is neither filing nor perfection. (b) So long as conflicting sinterest are unperfected, the Ist to attach has priority. Eg. Bank A loans D $10 & files a Vain DS furniture (equipment). Later, Bank B files Sa in Dis furniture. Or, e.g, Bank A loans D $10 & files a Va in Dis Furniture (equipment). Bank B then takes possession ofthe Furniture as collateral fr a fon to D. §9-312(5), Bank A wins. a. First1o file or perfect visakes priority when the other rues (below) do not apply. The other rules deal with: ‘The nature of the si (PMSIs have priority over filed si). ‘The nature of te collateral (proceeds as chattel paper). ‘The nature of the a (AAP clauses; future advances). b. Unlike BC § 54702), “perfect” in § 9-312 requires only simple steps reid for perfection: attachment not necessary (eg. debtor neednt have possession ofthe collateral, & creditor did not sent $). Race to filing office. Thus, Bank A wins as fist tof ©. Recording gives constructive notice to B, Filing or possession, Remember that 1 PMST in consumer goods perfects automaticll 2 Knowledge by A ofa prior unperfected SC is irrelevant re § 9-312. Too ifficult prove ‘whesher a party acually knew of anotber si Eg, Bank A files ls signed by D. Bank B loans $ to D & files Bank then loans $ 10 D wiknowledge of B's loan D goes into Chapter X Bank A wins. § 9.3124). PMSI v. PERFECTED SC in NON-INVENTORY 16) 9.31214) 215) PMSIv. sf PMSI v. PM Any Perf, SC v. Pert, SC Inventory Non-Inventory ith ther Ded eash proceeds ‘Any proceeds Any proceeds Future advances ‘A business could not get anymore goods if dhe suppliers’ PMST had to take subject o another sf PMSI has priority over an earlier perfected sf, The general Wirt to file” rules changes when certain types of sare involved. 1. § 9-107, Definition of PML, A visa PMSI to the extent that its (a) taken or retained by the seller of the collateral to secure all or part of its price; OR (b) taken by a person ‘who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value isin fact so used. King says thai is important thatthe bank be able to prove this. Banks commonly ensure (b) bby making a loan check jointly payable to Buyer & Seller so both have to sign to get. {§9-312(4), PMSLv. perfected SC in collateral other than inventory. A PMSTin collateral other than inventory has priority over a conflicting sf in the same collateral or {ts proceeds if the PMSI is perfected at the time the debtor receives possession of the collateral or win 10 days thereafter 4, stole is a here, Knowledge by PMSI of prior SC is relevant (Noble v, Mack). Possession may mean when the debtor res the collateral or when itis installed, Cours vary. the creditor files win 10 days of possession, a SC who files before the creditor cannot claim privity be the date of perfection relates back to the date of possession. Cross reference § 9-301(2), where a TLC cannot intervene in the 10 days, © Eg, May D purchases $5 of funiture (equip. for hotel from W (PMI) June 15 furniture readied for shipment (e.g. segregated & packed) June 21D exhibits invoices to Bank which loans D $3 & va & fs June 30 physical delivery made to hotel July6 Wiles & then D goes broke Who gets the $2 rec'd from the bankruptcy sale ofthe furniture? W wins i. §9.312(4) applies ive this is a PMSI vi which knocks out § 9-312(5)(0), & ‘Boods covered are equipment which is "other than inventory.” i, §9-312(4). W wins bf he filed win 10 days of receipt of the goods by D which ‘gave W a perfected PMST which has priority over non-PMSTs. W did not even hhave 1 check the records, IW failed o file w/in 10 days, it would have had only a perfected sf & woul lose 10 Bank: UNLESS Bank proves it has 2 prior PMSI (§ 9-107) to beat § 9-312(4). The facts do not ell us whether Bank loaned the $9 W to enable im to buy the Furniture, or whether W used $ funds to buy the furniture, PMSI v. TRUSTEE D. Inthe example above, W versus Trustee? W wins L 992s applicable bf this is not SC versus SC (e.g, Hunter v. MeHleny) 9.30102) Ifthe secured party fles wirespect to a PMSI before or win 10 days after the debtor ree's possession of the collateral, he takes priority over the rights of a transferee in bulk or of a lien creditor whieh arise btwn the time the sf attaches & the time of filing, ‘The PMST must be fully perfected, unlike § 9-312 which reqs perfection or filing. Trustee camot use BC § S44 bie W isa SC before the date of Chapter X filing 3. BC $547. Although req!ments for a "preferemial” transfer exist under BC § 547(b), this qualifies as an exception under BC § 547(¢}4)B). i. BC§S47(0\(4)(B). The trustee may not avoid a transfer that creates a sin property acquired by the debtor that is perfected on or before 10 days after the debtor ree’s possession of such property. §9-312(3), PMSI v, PERFECTED SC TORY 93120) 9.31215) 9.31207 PMSIv. sf PMSLv. sf PMSLv. PMSI Any Perf, SC v. Pert. SC nventory Non-Inventory Either Either Ted cash proceeds Any proceeds ‘Any proceeds Future advances §9-312(3). A perfected PMSI in inventory has priority over a conflicting s/ in the same Inventory & also has priority in IDENTIFIABLE cash proceeds rec'd on or before the delivery ‘of the inventory to a buyer TF: (a) the PMSI is perfected at the time the debtor rec’s possession of the inventory: & (b) the purchase 8 secured party gives notification in writing tothe holder of the conflicting if the holder had filed a fs covering the same types of inventory (i) before the date ofthe filing made by the purchase § secured party, or (i) before the beginning of the 21 day period where the PMSIis temporarily perfected wio filing or possession [§ 9-30415) (c) the holder of the conflicting si rec’s the notification w/in § years before the debtor ree's possession ofthe inventory; & (@) the notification states that the person giving the notice has or expects to acquire a PMSI in inventory of the debtor, describing such inventory by item or type. 1. Why a SC in memory is reated diferent from a SC in non-inventory. Non-inventory is generally sound longer than inventory. iin inventory generally would be virwally ‘worthless it did not inelude a sin afleracquired inventory. A s/ in non-inventary has value generally whether or not after acquired equipment, for example, is included, ‘The Two Req'ments for PMSI priority: Ex. Perfection atthe time the debtor recs possession. Supplier must file before shipping of goods. No 10 day grace period for Supplier. [Notice must be given in writing by Supplier 1 conflicting SCs in the same type of inventory who have filed ts i. §9.312(3)(b). Time of notice. ‘The notification must be made by PMSI before he files. If PMSI is to be temporarily perfected for 21 days under § 8-304(5), ‘however, the notice must be given before this 21 days period starts (.e, before the goods are relewsed to Debion §9-3123)(). Life of notice. The notice is valid for 5 years; ie, the noice rust be given less than 5 years before the debtor ees possession of the inventory to be covered by the PMSI. This means thatthe purchase $ lender need give only one notice to a confiting secured party & he may then make as ‘many purchase $ loans as he wishes during the ensuing 5 years. §9-312(3)(4). Contents. ‘The notice must state that the person giving it has or {expects fo acquire a PMST in inventory of the debior & must deseribe such inventory by item or type. May 1 Reuiler purchases $5 of furniture (inventory) from W w/PMSI June 15 furiture readied for shipment by W (segregated & packed) Sune 26 voices sent by W & rec'd by Retailer later Reuiler exhibits invoices to Bank which loans Retailer $3 & Bank & Retailer sign sla & the bank files ts & 1W sends notice to Bank of W's PMS in Retailer's inventory June 30 Physical delivery made wo Retailer later Retailer files Chapter X ‘Wio gets the $2 rec from the bankruptcy sale of the furniture? How could Supplier have protect itself if Bank had a pre-existing perfected Wi in inventory? b § 9:312(4) is n/ato inventory Under § 9.31213), W's PMSI wins HOWEVER § 9-312(3) is generally not used be in the normal course of business, a supplier gives inventory-type merchandise on unsecured terms, Thus, raeely a conflict hn Supplier & Bunk unless the creditor (Gupplier) knows Buyer is going under — then the creditor secures the transaction under § 9-312) [$9-306 gives W & Bank si but docsn' establish priority.) CONSIGNMENTS. similar problem arises when Supplier gave goods to Retailer fon consignment & then Retailer went bankrupt. Bank WAAAP clause in inventory wil claim the consigned inventory. Who wins? i True consignment. Essence of a consignment sale is that ifthe consignee is tunable to resell the goods, he may return them & he does not have to pay for ‘them until he sells them. Priority problem arises here; Supplier mast have secured the transaction under § 9-312), Consignment in form. Where Supplier retains tle as security for the purchase pric, this is a pseudo-secured transaction — Supplier has retained title as security for the purchase price. Mos likely cannot use § 9-312(3). Consignor rust fle an Anicle 9 iin the consigned merchandise or be held to have an ingerest inferior to that ofthe consignee’s creditors or tuste in bankruptcy [5 232603) 4. What does Bank do upon notification? 4. Sia may not permit Bank o whhold advance. 6 ‘may prohibit anew lien on the bank's collateral, « negative pledge clause. © Sia may allow Bank to seize the collateral if Debwor breaches by allowing another si in 5. What can Bank do to prohibit Debtor from buying new inventory which will drive Debtor out of business? Bank may decide bankruptcy is best for Bank purposes. b. Bank may loan Debtor more $ to buy the inventory © Bank may take exception t negative pledge clause thereby subordinating its si in the Jnventory to that Supplier. § 9-312) & (4). PERF “TED SC , PERFECTED PMSI in A/R PROCEEDS e312 PMSI sf PMSI sf PMSI v. PM Any Perf, SCr.¥, Por. SCF Inventory Non-Inventory Either Ted cash proceeds Any proceeds Future advances 1. §9.312G). Proceeds from inventory. In « conflict brwn perfected PMST & prior perfected SC in inventory, where the inventory flows into AIR proceeds, perfected SC will generally win simply bf (3) Is rarely used. PMSI could win ifhe had followed § 9-312(3) & the proceeds are identified cash proceeds E g., Supplier has PMSTin inventory & Bank has perfected si flows into A/R proceeds. Who wins? inventory. The inventory a. §9-203(3). A sf will low into proceeds even if fs & va do not claim proceeds; proceeds must be generated by the sale ofthe inventory covered by the si. Both ‘creditors should Fle in AMR b. §9-312(3), PMSI must have followed the 2 steps (above) re PMST in inventory (perfection & notice req ments) to have priority over SC. © §9-306, (1) "Proceeds" includes whatever is received upon the sale, exchange, collection oF other disposition of collateral or proceeds. Money, checks, deposit accounts & the like are “cash proceeds." All other proceeds are "non-cash proceeds." (2) Except where this Article otherwise provides [§ 9-307(2)], as continues inthe collateral notw/standing sale, exchange or other disposition thereof unless the disposition was authorized by the secured party i the sa oF otherwise, & also continues in any identifiable proceeds ineluding collections rec'd by the debtor. 4 §9-312(3). A perfected PMSTin inventory has priority in dentable cash proceeds. ‘These proceeds must be from the sale ofthe specific inventory Supplier sold to Debtor. ‘Such proceeds are usualy generated a he ret sle level, but Supplier wla PMST has no real priority in proceeds at all be the code wants to protect the original holder of ‘i in inventory. §'9-312(3) does this by saying i. Cash means only cash & checks. ‘The supplier only has a PMSU in cash, Debior must receive the cash from Buyer (retail customer) on or before Debtor delivers the inventory to Buyer [$ 93123) ‘Cash must be idensfable. This period begins when Buyer hands $ 0 cashier & ‘ends when cashier puts $ in cash register. Credit card sales are not covered. Since cash must be reel on oF before delivery of the inventory to Buyer, creditcard sales are not covered. Thus ‘Supplier daes not have priority in creditcard sales — Supplier has only & perfected si, which is inferior to Banks [§ 931203) © §9-306(2) gives a secured party an interest in proceeds, but whether this interest in proceeds is perfected is governed by § 9-306), § 9-306(3). The sin proceeds isa continuously perfected si ifthe interest in the original collateral was perfected but it ceases to be a perfected si & becomes tunperfected 10 days afler receipt of the proceeds by the debtor UNLESS: (a) filed fs covers the original collateral & the proceeds are collateral in ‘which a sf may be perfected by fing in the office or offices where the 1s ‘has been fled &, if the proceeds are acquired w/eash proceeds, the ‘description of collateral in the ts indicates the types of property ‘constituting the proceeds; (b) a filed fs covers the original collateral & the proceeds are identifiable cash proceeds; or () the sin the proceeds is perfected before the exp period. Except as provided in this section, a s/ in proceeds can be perfected only by the methods or under the circumstances permitted inthis Article for original collateral ofthe same type. tion ofthe 10 day {§9-306(3). The sin proceeds must EITHER be perfected by a new f/s win 10 days OR: i. Same wpe of collateral, Where a fs has been filed covering the original collateral & the proceeds are of the same type so that the 1, filed in che place it ‘was aetally fled is the appropriate means of fling, the original fs cover the proceeds as well no additional filing is necessary. Not necessary’ thatthe 1 explicitly mentions that proceeds ae to be covered. F104 (A) Bank files fs in Dealer's inventory & Dealer sells part of inventory & recs in retum, more inventory (trade-in), tis proceeds is covered hy original 0s. If Dealer recs in return a promissory note (a negotiable instrument), original fs no longer constitute adequate perfection (B) proceeds were A/R, original fs would not constitute adequate perfection — Creditor would have to file separately in these proceeds ble sintcress| in AIR ae filed in place different from sfinterests in inventory (C)__ Ifprocceds were a promissory note, Creditor must file win 10 days oF ‘ake possession of the promissory note bic filing isnot the way to perfect asitina promissory note [dentfiahle cash proceeds ‘The secured party's proceeds interest will be perfected ifa filed fs covered the original collateral & the proceeds are identiiable cash proceeds (e.., 8, checks, deposit accounts). Bu this interest is perfected only as long as the debtor holds ont the cash. If he uses the cash to buy something else, () must apply; furthermore, in the case of proceeds acid leash proceeds, there isan additional req’ment thatthe description of collateral in the fs indicate the type of property consituting the proceeds [$ 9-306(3\(a)] fil, 10day grace period, For 10 days after the receipt of proceeds by the debvor ‘Grom the original collateral) the proceeds are perfected (assuming the intrest ‘the original collateral was perfected), This is true no matter what the nature of the proceeds is & no matter what the nature ofthe perfection of the original collateral was IF fal to file win 10 days, perfection is not continuous & cannot relate date of. perfection back to the date of original perfection in the original collateral §9-312(4). Proceeds from non-inventory. Ina conflict brn perfected PMSI & prior perfected SC in non-inventory, where the collateral flows into A/R proceeds, perfected PMSL E-g., Supplier of truck to debtor takes a PMS in the truck (hich he perfects win 10 days of deliver ‘Bank has a preexisting perfected s/ in all debtors equipment. Debtor sells the truck for cash. Who gets the proceeds? 9-203. Unless otherwise agreed a s/a gives the secured party the rights to proceeds provided in § 9-306, Proceeds are automatically covered by ts in the original collateral § 9.206. (1) "Proceeds" includes whatever is received upon the sale, exchange, collection or ather disposition of collateral or proceeds. Money, checks, deposit accounts & the like are “cash proceeds." All other proceeds are "non-cash, proceeds.” (2) Except where this Article otherwise provides [§ 9-307(2)], st ‘continues in the collateral notw/standing sale, exchange or other i thereof unless the disposition was authorized by the secured party in the a or otherwise, & also continues in any identifiable proceeds including collections rec'd by the debtor. Since nether the sla nor the ffs need to have included proceeds, both Supplier & Bank have vnterest inthe proceeds ©. §9-312(4), PMSL. perfected SC in collateral other than inventory. A PMSI in collateral other than inventory has priority over a conflicting sf (any non-PMSI filed earlier) in the same collateral or its proceeds ifthe PMSI is perfected atthe time the debtor receives possession of the collateral or w/in 10 days thereafter. Supplier wins. The procezds need not be identifiable cash proceeds. 4. §9-306(3), ‘The sin proceeds must EITHER be perfected by a new ffs win 10 days OR (i through i above: i. Same type of coats [dentfiable cash proceeds. Here, assuming the proceeds are not identifiable, the PMST must file 10 day grace period, Remember, if the proceeds ate not the type that can be perfected by filing (e.g. notes), Supplicr must take possession wlin 10 days of the receipt of proceeds by Debior in order to perfec. IF the iin proceeds is perfected win 10 day, it relates back to the date of debtor's acquisition of the proceeds & thus might avoid a BC § 547 preference. INTERACTION BIWN § 9-312) & (5) 931g) 952i) 93s) 892) PMSI sf PMSI v. sf PMSLy. PMSI Any Pert. SCr. v. Pert. SC. Inventory Non-Inventory Either TDed cash proceeds Any proceeds Any proceeds Future advances Eg, Debtor buys a car for $18 & puts down $2; wants to finance the rest. Dealer will oly finance S10. Bank loans Debtor the remaining $6 w/a check payable to Debtor & Dealer October 17 Debtor gives Bunk a sa: Bank files October 18 Dehtor buys car from Dealer wicheck from Bank Debtor gives Dealer a sla October 24 Dealer files later Debtor files Chapter X Bank forecloses & sells car for $10 (which is less that both sfnterests). Who gets $? 1. $9312) is nla because the goods are consumer ‘of consumer, who does not hold them for resale goods (not inventory) — goods are in hands §§9-312(4) in nla because it applies to the proceeds from non-inventory in a conflict brwn a perfected PMSI & prior perfected SC (& the PMST has priority — here, PMST versus PMSI. Dealer has PMSI bl loaned Debtor the § to buy te car & took as inthe car. Bank has PMSI be loaned Debtor the Sto buy the care & has check as proof. 3. §9-312(5) applies in conflicts btwn two PMSIs, Ist to ile o perfect wins. Bank wins, Dealer is 2nd to file & is on notice. [IF Bank had fled one day before Dealer, would be unfair to apply (5) ble would be truly no notice to Dealer: in such case, divide $ fail. §9.312(8). PERFECTED SC in PROCEEDS v. PERFECTED SC in A/R Same as perfected SC v perfected SC in proceeds Eg. January 1 Bank files Vi in Debtor's AR February 1 Creditor files & perfects Wi in D's inventory ‘April | Debtor sells some inventory in ordinary course & AMR reads "payable win 90 days” in AIR? ‘Who has priority 1 $9312) & (4) are nla because nether Bank nor Creditor has PMSL 2 $9-312(5) is applicable: Itt file or perfor Bank wins. §9-312(7), PERFECTED SC y. PERFECTED SC in FUTURE ADVANCES 1203) S124) 5 9.3120) PMSIv. PMSIv. sf PMSI. PMSI any Pert. SCr.v. Por. SCr Inventory Non-Inventory Either Either Ded cash proceeds Any proceeds Any proceeds Future advances 1. Bg, May 15 Bank A loans Debior $1, $/a describes forklift tuck ($2 value) & no mention of cher equipment Fis says “equipment & forklift ruck 1239. August 1 Bank B loans Debor $25. Sla & fs on all machinery ($27 value), October 15 Bank A loans Debtor $30, Sf amended t include machinery. F/s not changed. later Debtor files Chapter X. All items sod for value fee of liens. a. §9:312(3) & (4) are n/a because no evidence of PMSIS ere, b. §9-312(5) applies to SC versus SC. Bank A definitely gets proceeds from the forklift truck bie sf was clearly perfected by any definition of perfection be it attached before Bank A even entered the picture. ‘The loan on the forklift ruck was not a future ‘advance. What about proceeds from the machinery? 4. Is attachment (§ 9-303] necessary for perfection under § 9-312 SC versus SC? Bank A's sin “all equipment” did not attach until Bank A made the loan on October 15 giving value fo this transfer, whieh was after Bank B's loan had attached, If stachment is necessary for perfection under § 9-312, Bank A loses & future advances sre not viable, § 9-312 only req’ filing, it does not require attachment for perfection. Bank B is ‘on notice that be Bank's fs says “all equipment.” UCC (1) does not want to force Bank A to check the records again, & (2) wants to encourage early fling, as Bank A aid ere. © §9-312(7). Itfuture advances are made while asi is perfected by filing or the taking of possession, the si has the same priority for the purposes of § 931215) wirespect tothe future advances as it docs wirespect to the Ist advanee. Ifa ‘commitment is made before or while the sis so perfected, the has the same priority w/respect to advances made pursuant thereto. In other cases a perfected ‘iihas priority from the date the advance is made. § 9-312(7) applies here. A. future advance made on a previously perfected si has the same priority athe first tdvance made under §9-312(5). Bank A wins. [Bank A should have mentioned “all equipment” in its sfa as well as its s which would have shown intent to make a future advance. 2. §9-312(7) was created to guarantee future advances. Although the § 9-312(8)) Isto file rule accomplishes the same purpose, § 9-312(7) ‘was added to correct judges who were sorewing up by saying that future advances were separate transactions which were not covered by the original fs & req'd their own (Coin.o.Mate , § 9-204 *Moatng liens” allows a favo cover future advances. §9-312(7) is not redundant be § 9-204 i a general validarion clause, but does not deal wSC versus SC or perfection. (See below for more on § 9-204.) task? Dia § 9-312(7) accompli Could Bank B (above) defeat Bank A’s priority in its future advance? Bank B could argue: 4. §9-204(3). Obligations covered by a sa may include future advances or other value whether oF not the advances or value are given pursuant fo commitment. In other words, even ifthe seeured party docs not commit himself to make these future Toans in the original sa, they are sil covered when he does make them, i, §9-204, Comment 5, sates that "collateral may secure future as well as present ‘advances when the a so provides” indicating that future advances are covered only ifthe sfaso provides. This is unclear. When drafting, then, should provide in sa that future advances ae wo be covered, Bank B could argue thatthe f/s does not cover future advances unless sla mentions facure advances be otherwise there is no proof that Bank A intended to make a future ‘advance. Wio intent to make a future advance, the Future advance isa new transaction, Here, Bank A's a did not mention future advances. b.§9-312(7). Iteould be argued that § 9-312(7) req’s that sla mention future advances This is poor UCC draping ble §9-312(7) doesnot sy that sa need not mention future advances. This impedes the effectiveness of §9-312(7) be some argue that sa must ‘mention future advances, Intent of the drafters was tat s/a needn't mention future advances be drafters favored noice filing (if Bank A filed Ist, Bank B was on notice & that was sufficient for the drafters). Here, fs mentioned all equipment & the drafters intended wo protects. The drafters didnot care about intent. However, Bank B can ‘make that argument ‘What can Bank B do once it kn that Bank A's fs covers all equipment? a Eg, Bank A files ts & gets sa Bank B files fs & gets sla & makes loan, Bank A makes loan, . Clearly Bank A has priority under § 9-312(7) in this SC versus $C future advances. Bank B was on notice. ©. Bank B could have: i. not made loan to Debior: subordinate Bank A's debt (Bank A must agree to this terminated Bank A's Ya by paying off Debtor's loan to Bank A (then Bank B is ‘the only bank wa sf, SC v. JLC & SC v. Trustee in future advances. Eg. May15 Bank loans Debtor $1, S%a describes Forklift tuck ($2 value) & no mention of other equipment Fis says “equipment & forklift ruck 1239. August 1 Creditor gets a judgment against Debtor for S35 October Creditor causes Ievy to be made on Debtor's property & thus is TLC. October 15 Bank loans Debtor $30 (future advance) later Debtor files Chapter X. Altes sold for vl, free of Hens Bank ges $1. Who gets est, Bank? Creditor (ILC)? or Trustee (ILC)? 8. SCv.JLC re future advances. This scenario rarely occurs be hanks dont end $ 10 Debtor when Sheriff has closed down Debtor. Bank is only in the dark re existence of @ nin the case of tax liens. i. § 9-312 only applies to SC versus SC & thus isa i §9-301(1)(b). An unperfected sis subordinate to the rights of a person ‘who becomes alien creditor before the sis perfected. Ask, did Creditor become a JLC before Bank's si was perfected? {§9-303(1). A sis perfected when it has attached & when all of the applicable steps req'd for perfection had been taken. iv, § 9-208 defines atachment, When did the October 15 loan attached? §.9-203(a) Collateral in SCs possession? No ‘la which describes collateral signed by debior? Yes. 203{b) Vale given re May 15 loan? Yes. Value given re October 15 loan? No.” §9-203(c) Debtor has rights in the collateral? Yes. 8 #§ 201, The only way Bank could have given value on May 15 would have been if there was a binding commitment on that date to make a loan in the fuure "THUS since here wasn binding commiment to make loan in the Fate on ‘May 15, Bunk had an unperfected sf uns the loan was made on October 1S (which was after the ILC was created) £ §9-301(4). A person who becomes a lien creditor while a sis perfected takes subject to the security interest only to the extent that it secures days thereafter ‘OR made wo knovledge of the lien or pursuant to a commitment entered into wo knowledge ofthe lien, Ifa perfected SC makes a future advance w/in 45 days of te ereation ofa ILC, the SC has priority. Bank wins SC v. Trustee re future advances. &. Even though BC § $47 permits Truste to void the 2nd loan ($30) & take Priority over the SLC, Ji, §9-301(4) gives Bank priority over Trustee re the future advance as long as it ‘occurs win 45 days of he Sa, Bank wins, § 9-408. PERFECTED SC v. PERFECTED SC in CHATTEL PAPER AS PROCEEDS The Ist file or perfect rules of § 9-312(5) governs most priority disputes in proceeds. ‘Thisis one exception. BANK shin inventory (proceeds auto. matically covered) new foun

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