SECURED TRANSACTIONS

DOBBINS – FALL 2012 ____________________________________________________________________________________________________________ Analysis: Note that even if the question only asks about priority with respect to certain collateral, you cannot answer that question without first identifying the collateral and determining the relationship of the relevant parties to that property.

1. Identify property: What type of property is it (goods (inventory, equipment, consumer goods),
account, deposit account, chattel paper, instrument)?

2. Identify the parties: What is the status of the party: debtor, creditor (unsecured, secured, lien),
buyer? 3. Two key players:

a. Debtors - 9-102(a)(28)- persons who acquire collateral that are subject to a S.I. b. Creditorsi. Lien Creditors-9-102(a)(52) – creditor who acquires a lien on property through judicial
process.

ii. Unsecured Creditorsiii. Secured Creditors: 9-102(a)(73)
1. Perfected 2. Unperfected 4. Determine the nature of the relationship of parties to specific property a. If debtor, does debtor have ownership or other interest in the property? b. If creditor, what type (lien, secured, PMSI, unsecured)? c. If secured creditor, what type of security interest (perfected, unperfected)? 5. Determine relationship of parties to other parties with respect to specific property

a. If several parties have an interest in the same property, what is their relative relationship to
each other with respect to that property (who has priority)? ____________________________________________________________________________________________________________

CREATION & ATTACHMENT
A. Introduction

1. Three steps: There are three separate and distinct steps/concepts that apply to security interests: a. Creation: Security interests are created by contract. The debtor and creditor must consent to
the creation of the security interest.

b. Attachment: Attachment is the point at which the security interest becomes enforceable. An
unenforceable security interest is worthless. A creditor who has an unenforceable security interest is merely an unsecured creditor. For this reason, creation of a security interest, by itself, has little relevance or significance.

c. Perfection: A perfected security interest is enforceable against the debtor and defines the
secured party’s rights against other secured parties who have an interest in the same collateral. Perfection establishes the secured party’s priority with respect to the collateral. B. Creation of Security Interest

1. Creation of Security Interest: A security interest is created when the parties intend to create a
security interest “regardless of its form.” §9-109(a).

a. Secured creditor: A “secured party” is a person in whose favor a security interest is created
or provided for under a security agreement. §9-102(a)(72).

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

ii. “Security interest” means an interest in personal property or fixtures which secures
payment or performance of an obligation.” § 1-201(b)(35). Levy - 1

1. This is a contingent interest in the specified property of the debtor. If the debtor defaults, then the secured party’s right to take possession of and sell the property secured by the agreement arises. 2. By itself, creation of a security interest means almost nothing. It’s like a contract that does not confer any rights or that is unenforceable

b. Unsecured creditor: Unless a creditor contracts with the debtor for secured status or is
granted it by statute, the creditor is unsecured. Unsecured creditors are “general creditors” or “ordinary creditors.”

i. Judgment creditor: If the unsecured creditor has already obtained a court judgment
to establish liability, the creditor is a judgment creditor, but the mere grant of a judgment does not alter the creditor’s unsecured status.

2. Two types of enforcement related to security interests: a. Enforcement of the security interest against the debtor—the question in these cases is
whether an enforceable security interest in the debtor’s property has been created. If an enforceable security interest has been created, the security interest has attached. i. Creating an enforceable security interest gives the secured party enforcement rights against the debtor.

b. Enforcement of the security interest against other creditors—the question in these
cases is which security interest has priority if more than one creditor has a security interest in the same collateral. Secured parties establish their priority by perfecting their security interest. i. Perfecting a security interest gives the secured party enforcement rights (priority) against other secured creditors. C. Attachment

1. Three formalities must be met for attachment: a. Value given; i. “Value”: “Value” is defined so broadly in §1-201(44) that the requirement is virtually
always met in a commercial transaction.

1. Except as otherwise provided in Articles 3, 4, and 4, a person gives value for
rights if the person acquires them:

a. in return for a binding commitment to extend credit or for the extension
of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection;

b. as security for, or in total or partial satisfaction of, a pre-existing claim
[past consideration]; c. by accepting delivery under a pre-existing contract for purchase; or

d. In return for any consideration sufficient to support a simple contract. ii. Past loan: Past consideration does constitute “value.” §1-201(44)(b). A debtor can
give a security interest in property to secure a loan that was made in the past. The prior loan is sufficient “value” to create an enforceable security interest. The secured party need not give or promise anything in return for the security interest. This makes it easy to transform from an unsecured creditor to a secured creditor. The debtor must simply agree to grant the security interest and meet the requirements of § 9-203.

b. Debtor has rights in the collateral; i. The debtor can only grant a security interest in property in which the debtor has an
interest. The interest granted by the debtor can be no greater than the debtor’s interest in the property. If the debtor has only a partial or limited interest in the property (such as a one-half interest in a bank account), then the security interest will only attach to that partial or limited interest.

Levy - 2

1. No rights when SA entered into: If the agreement exists before the rights
in the collateral, the agreement is not enforceable and does not attach. However, if the debtor later acquires rights, the agreement becomes enforceable. ii. Debtor can only give away (or encumber) what he owns. iii. The security interest is not enforceable until the debtor acquires rights in the property.

c. AND Either i. The collateral is in the possession or control of the secured creditor pursuant
to the security agreement

1. If the secured party takes possession of the collateral, no
authenticated agreement is required. An oral security agreement would be sufficient.

2. A security agreement may be created orally, with the secured party
taking possession of the collateral. According to Comment 4: attachment without an authenticated record is appropriate in cases of possession since “the secured party’s possession substitutes [as evidence of the secured party’s claim of interest in the property] for the debtor’s authentication under paragraph (3)(A).”

ii. OR the debtor has an authenticated security agreement that provides a
description of the collateral §9-203(b). 1. The security agreement between the debtor and secured party need only be in an authenticated record to fulfill the requirement of paragraph 9-203(b)(3)(A).

2. Authenticated agreement: includes a writing or an electronically created
document that is not printed out. An agreement sent by e-mail and acknowledged by a return e-mail would qualify as an authenticated agreement under Revised Article 9.

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

b. “Record”: means information that is inscribed on a tangible medium or
which is stored in an electronic or other medium and is retrievable in perceivable form. §9-102(a)(69).

3. Intent to create a security agreement: When the parties have neglected to
sign a separate security agreement, the majority of courts look at the transaction as a whole to determine if there is a writing, or writings, signed by the debtor describing the collateral which demonstrates intent to create a security interest in the collateral. Ace Lumber. D. What Collateral is Covered by Security Agreement?

1. Interpreting security agreements: Generally, the court will try to determine the intention of the
parties as objectively expressed in the written security agreement. Where the agreement is ambiguous, parol evidence may be introduced; where the writing results from mutual mistake, the security agreement can be reformed. a. Debtor against Creditor i. Court will try to determine the intention of the parties as objectively expressed in the written security agreement ii. Where the agreement is ambiguous, parol evidence may be introduced iii. Where the writing results from mutual mistake, the security agreement can be reformed

b. Creditor against 3rd party - Although a security agreement is a K between the debtor and
creditor, in most circumstances, it binds 3rd parties as well (9-201)(a)

Levy - 3

c. Interpreting descriptions of collateral – understand the different description. Article 9
defines many types of collateral including: i. Accounts ii. Equipment iii. Inventory iv. Instruments v. Consumer goods vi. General intangibles

2. Sufficiency of description: The security agreement must reasonably identify what is described.
§9-108; Shirel. (The description can’t be too vague or too broad.)

a. Test: The test of sufficiency of a description is that the description does the job assigned:
make possible the identification of the collateral described. 9-108 cmt 2. The purpose is to sufficiently describe the collateral so that a third party could reasonably identify the items which are subject to the security agreement.

i. Vague description: If the description has several interpretations, the court should
find the interpretation which is most favorable to the debtor. In re Shirel.

b. Examples of “reasonable identification”, §9-108(b): A description of collateral
reasonably identifies the collateral if it identifies the collateral by: i. specific listing; ii. category;

iii. a type of collateral defined in the UCC except;
1. a commercial tort claim; or 2. In a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account. iv. quantity; v. computational or allocational formula or procedure; or

vi. Any method, if the identity of the collateral is objectively determinable, as long as the
description is not supergeneric.

c. Security agreement describes which collateral secures the transaction while the financing
statement merely puts 3rd parties on notice.

3. After-acquired property: “After-acquired” property is a term used to refer to property that a
debtor acquires after the security agreement is authenticated or the security interest is otherwise created.

a. Validity: A security agreement may create or provide for a security interest in after-acquired
collateral unless it involves

i. consumer goods, other than an accession when given as additional security, unless the
debtor acquires rights in them within 10 days after the secured party gives value; OR

ii. A commercial tort claim. UCC §9-204.
b. Does description cover after-acquired property? i. Factors: 1. whether there is a high-turnover in the property; 2. intent of parties; AND

3. Language of the security agreement (“crops that are growing” – suggests the
crops currently on property, not future crops.) ii. Implied after-acquired language:

1. “Inventory” – yes. High turnover rate, fungible. If getting a security interest in
inventory, crops (argue that crops are cyclical) or accounts receivable, do not have to use special language.

a. “Inventory”: Goods other than farm products which are sold or leased
in a person's business. (or if they are raw materials, works in process or materials used or consumed in business). 9-102(48) 2. “Account” – maybe Levy - 4

3. “Equipment” – no. If it’s equipment, probably not high-turnover so no afteracquired interest. You need a clause in security agreement that says it includes after-acquired equipment.

a. “Equipment”: Goods other than inventory, farm products or consumer
goods. 9-102(33)

4. What obligations are secured? Virtually any obligation can be secured if the parties make their
intention clear.

a. Future advance: when the future obligation will come onto existence as a result of an
additional extension of credit by the secured creditor

b. 9-204(c): A security agreement may provide that collateral secures, or that accounts, chattel
paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment.

i. If SA doesn’t cover future advances: If the security agreement doesn’t cover
future advances, the creditor won’t be able to collect on the collateral for future advances as a secured creditor – he is an unsecured creditor for the future advances. E. Proceeds and Other Value Tracing Concepts 1. Value-Tracing v. Non-Value-Tracing: The distinction is between the value of collateral and the collateral itself.

2. First, identify the collateral; what personal property secures payment of the obligation? 3. The next question is: what happens if the debtor disposes of the collateral?
a. Security Interest in Original Collateral After Disposition

i. § 9-201(a): Except as otherwise provided in UCC, a security agreement is effective
according to its terms between the parties, against purchasers of the collateral, and against creditors.

ii. § 9-315: Disposition of collateral: continuation of security interest or agricultural lien;
proceeds. Except as otherwise provided in this article and in -> Section 2-403(2): 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; . . .

b. If the secured party has expressly or impliedly authorized disposition of the collateral
free of the security interest, then the security interest does not continue in the original collateral.

i. Authorization cannot be merely an authorization to sell, but must be authorization to
sell free of the security interest. § 9-315(a)(1)Continuing Security Interest after Unauthorized Disposition of Collateral

c. If the secured party has not authorized the debtor to sell the collateral free of the
security interest, the security interest continues in the original collateral.

i. A transferor generally cannot transfer more than it owns; cannot transfer more rights
or better title than he or she has.

d. The Comment also identifies several provisions of Article 9 under which a transferee takes free
of a security interest. [Note that Section 9-320(a) protects buyers in the ordinary course of business. Such buyers take free of the security interest.] e. If the security agreement states that the debtor may only sell the collateral if the sale is authorized by the secured creditor and the debtor sells without obtaining that authorization, then the new buyer will own the collateral subject to the security interest. The debtor has the right to transfer ownership of the collateral (§ 9-401), though it may be a breach of the security agreement or even a crime, but the security interest remains. 4. Does security interest continue in the proceeds?

a. Rule: Even if the SA makes no mention of proceeds, a security interest automatically covers
any identifiable proceeds (unless parties agree otherwise). §9-315(a)(2); 9-203(f). Proceeds are collateral. §9-102(a)(12)(A). Levy - 5

b. 9-102(a)(64): “Proceeds”, except as used in Section 9-609(b), means the following property: i. whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; ii. whatever is collected on, or distributed on account of, collateral; iii. rights arising out of collateral; iv. 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; [tort, breach of contract, patent, trademark or copyright infringement claims] or v. 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 rights in, or damage to, the collateral.

c. Proceeds are “collateral”: § 9-102(a)(12): “Collateral” means the property subject to a
security interest or agricultural lien. The term includes: proceeds to which a security interest attaches . . .

i. Value v. Collateral: If the debtor sells the collateral, the payment received—the
proceeds—represents the value of the collateral, and is collateral itself (see § 9-102(a) (12)). ii. When proceeds are disposed of or rights arise out of proceeds, whatever is received is “proceeds.” Thus, proceeds of proceeds are proceeds.

d. An enforceable security interest gives the secured party rights in the proceeds from the
disposition of collateral and a security interest automatically attaches to the proceeds under Article 9.

e. § 9-203(f): [Proceeds and supporting obligations.] 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.]

f. § 9-315: [Disposition of collateral: continuation of security interest or agricultural lien;
proceeds.] Except as otherwise provided in this article and in Section 2-403(2): i. 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; [and ii. a security interest attaches to any identifiable proceeds of collateral. iii. Comment 2: Subsection (a)(1) . . . contains the general rule that a security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transferee or, in an appropriate case, maintain an action for conversion. The secured party may claim both any proceeds and the original collateral but, of course, may have only one satisfaction. . . . [T]he general rule does not apply, and a security interest does not continue in collateral, if the secured party authorized the disposition, in the agreement that contains the security agreement or otherwise.

g. Proceeds must be “identifiable”: A security interest continues to encumber proceeds only
so long as they remain identifiable. §9-315(a)(2).

h. Limitations on the secured creditor’s ability to trace the collateral: i. Commingled proceeds: To commingle is to put proceeds together in one mass with
identical noncollateral so that no one can tell which is actually which.

1. Rule: Proceeds that are commingled are identifiable proceeds a. If the proceeds are goods (see definition below), to the extent provided
by §9-336; AND

i. §9-336: If goods are commingled, a security interest does not
exist in the commingled goods but attaches to the product or mass.

ii. Example: If creditor has a security interest in flour, and debtor
sells flour to baker, who then mixes the flour with other Levy - 6

ingredients to produce a cookie, the creditor has a security interest in the cookie, not flour, sugar, and chocolate chips.

b. If the proceeds are not goods, to the extent that the secured party
identifies the proceeds by a method of tracing, including application of equitable principles. §315(b).

i.

“Lowest intermediate balance rule” §9-315(b), cmt 3. That rule provides that the amount of the secured creditor’s collateral remaining in a bank account is equal to the lowest balance of all funds in the account between the time the collateral was deposited to the account and the time the rule is applied.

1. If proceeds deposited in bank account: If the
proceeds are cash and checks and the debtor deposits them into a bank account, the proceeds are now in the form of a deposit account and the creditor has a security interest in the deposit account. (But the problem is if the proceeds are commingled with other funds.)

ii. Explanation: The lowest intermediate balance rule presumes
that a debtor who spends money from a commingled account spends first from his own funds. Once the balance of the commingled account drops below the amount of the deposited proceeds, then the secured creditor’s interest in the proceeds abates accordingly.

ii. Money transferred from bank account: A transferee of funds from a deposit
account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party. §9-332(b) iii. But, although cash proceeds that the debtor transfers are free of the security interest, anything that the debtor purchased with that cash may nevertheless still be proceeds. value-tracing concepts: Parties may also contractually agree that the secured party shall have an interest in products, profits, rents, and offspring of collateral. These are referred to as additional value-tracing concepts because they are thought to be derived from the previously existing collateral. All are arguably “rights arising out of collateral,” which would make them proceeds. If they are proceeds, then they a security interest attaches to them automatically under § 9-315(a), even if they are not mentioned in the security agreement. If not, then they a security interest attaches only if they are within the description of the collateral. Defining products, profits, rents, and offspring can be an issue since they may be used in their common, everyday sense or as terms of art.

5. Other a.

b.

c.

i. Product: The “product” of collateral is something the collateral produces. Most
commonly used for agriculture – i.e., cows produce milk, wool from sheep, maple syrup from trees. These “products” may also be “proceeds” of the collateral named b/c they “arise out of collateral,” §9-102(a)(64), but that is unclear.

ii. Profit: “Profit” can be used to describe the excess of revenues of a business over the
expenses where the business itself is the collateral.

iii. Rents: “Rents” are money paid for the temporary use of collateral. iv. Offspring: “Offspring” of collateral is a term most often used with regard to animals.
I.e., baby sheep from sheep, calves from cows, baby horses from horses, etc.

6. Non-value tracing concepts: After-acquired property, replacements, additions, and substitutions
in a description of collateral a. After-acquired property, replacements, additions, and substitutions are considered non-valuetracing concepts because they are acquired by the debtor with value not derived from previously existing collateral. i. Their value can come entirely from some other source, such as unencumbered property of the debtor, a new loan, or a capital contribution by the debtors’ owners. Levy - 7

ii. If they are not covered by the security agreement, then they are neither collateral nor proceeds and the secured party has no security interest in that property at all. iii. If they are covered by the security agreement, then they are collateral and are treated like any other collateral.

b. The distinction between after-acquired property and proceeds:
i. If collateral is sold and the proceeds are used to purchase new property, then the new property is proceeds (and after-acquired property). ii. If the new property is purchased using funds not derived from the original collateral, that property may be after-acquired property, but not proceeds. c. In practice, the security agreement usually provides that the collateral includes both. In such cases, it does not matter which is being applied and it is unnecessary to distinguish between the two. ____________________________________________________________________________________________________________

PERFECTION
A. What is priority?

1. The secured creditor has superior rights in specified items of the debtors’ property, a matter of
priority. Lien creditors (including secured creditors) have priority over unsecured creditors with respect to property affected by the lien (in which the secured creditor has a security interest).

2. In resolving disputes between secured creditors, the general rule is “first in time is first in right.”
In other words, the first to establish their security interest in the collateral and accomplish “perfection” of that security interest has first priority in that collateral. a. A security interest is perfected if it has attached and all the applicable requirements for perfection have been satisfied.

3. Priority: If there is more than one lien against collateral, each will have a priority. a. Prior/ senior lien: A lien with priority higher than another is referred to as the senior or prior
lien.

b. Subordinate/ junior lien: The other is referred to as the subordinate or junior lien. If the
value of the collateral is insufficient to pay all of the liens against an item of collateral, the junior liens yield to the senior ones.

c. Example: D owes A $7k and B $9k. Each has a security interest in D’s car, which is worth
$12k. If A’s lien has priority over B’s lien and either is foreclosed, A will be entitled to $7k of the value of the car and B will be entitled to the remaining $5k. Once the car has been liquidated and the proceeds distributed, B will be an unsecured creditor for the $k balance owed to her. 4. General analysis

a. b. c. d.

Is filing permissible for perfection? Did the creditor choose the correct state? Did the creditor choose the correct office? Did the financing statement meet the requirements of the code?

B. How do creditors get priority?

1. General rule: first in time, first in right. The first party to “perfect” (or take certain steps toward
perfection of) a security interest has priority over later secured creditors (and, of course, unsecured creditors).

a. But in order for the system to be effective, potential secured creditors need a reliable way to
determine whether any other parties already have a security interest in certain collateral. In other words, potential secured creditors need to know whether they will have priority over other secured creditors before they agree to make a loan. So, the lien priority system depends upon access to information about existing liens. Levy - 8

2. The steps that must be taken differ with the type of lien, but generally fall into one of 4
categories: a. filing notice in a public records system established for that purpose (this is the predominant Article 9 approach); b. taking possession of collateral (allowed or required in some instances under Article 9); c. taking control of collateral by means of the stake holder’s agreement to hold for the secured creditor; and d. Posting notice on the property or where it will be seen by persons dealing with the property.

3. The taking of whatever steps are required to give public notice of a lien is generally
referred to as perfecting the lien. 4. Multiplicity of filing systems: a. The federal government maintains filing systems for patents, trademarks, copyrights, aircraft, and ship mortgages. b. Typically, the type of collateral determines the proper system in which a notice should be filed, but it is not always easy to determine what category certain property should be in. c. Generally, each filing system is operated and exists independently. The various filing systems do not overlap or communicate. If the notice is filed in the wrong place, a searcher looking in the right system will not find it (and, consequently, it is usually not an effective filing). If the searcher looks in the wrong system, it will not be informed that the notice is in another system. 5. Methods of costs of searching: a. One way to be sure that you have filed in the right place is to file in every conceivable system. No punishment for filing unnecessarily.

b. Reminder: the first party to perfect their security interest has priority. Filing may be in the
state’s Article 9 filing system, or some other system set up under state or federal law (federal patent or copyright system, state certificate of title statute for automobiles, boats, etc.). Filing in such a system is one means of perfection.

6. Priority statutes: a. § 9-308(a): 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 Sections 9-310 through 9-316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.

i. For perfection by filing - security interest is perfected if it has attached and the
financing statement has been filed in accordance with § 9-310.

b. § 9-310: describes when a security interest is perfected by filing a financing statement. The
default rule for perfection is in paragraph (a):

i. “Except as otherwise provided in subsection (b) and Section 9-312(b), a financing
statement must be filed to perfect all security interests . . .” ii. So, unless another provision requires or permits perfection by some other means, you must file a financing statement to perfect a security interest.

c. § 9-311: Recognizes that perfection of a security interest in some forms of property is
governed by statutes or regulations other than Article 9. Filing a financing statement is not necessary or effective to perfect a security interest subject to such statutes or regulations. Examples would be patents, cars, trailers, mobile homes, or boats covered by a certificate of title statute.

d. § 9-501: is the rule for determining where to file when perfection is to be accomplished by
filing a financing statement. If state law governs perfection of a security interest, then the proper place to file a financing statement to perfect a security interest [applies only when perfection can be accomplished by filing a financing statement] (other than a mortgage on real property) is the filing office designated by the state (fill in the blanks where the brackets are in the statute). Paragraph (1) covers real estate; paragraph (2) covers “all other cases.”

e. § 9-317 (a)(2)(A): A security interest is subordinate to the rights of a person who becomes a
lien creditor before the security interest is perfected. Levy - 9

i. If a lien creditor and secured creditor both have an interest in the same
property, then the party with priority in that property gets it. Priority depends on the timing of two events—(1) when lien creditor became a lien creditor, and (2) when the secured party perfected its security interest. The first of these events to take place determines priority. So, a lien creditor has priority over a security interest if the person becomes a lien creditor before the security interest is perfected. If the security interest is perfected before a person becomes a lien creditor, then the secured party has priority.

f. § 9-315(a): Secured party’s rights on disposition of collateral and proceeds g. § 9-320: (a) Except as otherwise provided in subsection (e), a buyer in the ordinary course of
business, . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. This is an exception to the general rule in § 9-315.

h. § 9-401: An agreement between the debtor and secured party which prohibits a transfer of
the debtor's rights in collateral or makes the transfer a default does not prevent the transfer from taking effect. C. How to perfect?

1. Steps for determining how to perfect: A security interest cannot be perfected unless/ until it has
attached. a. first, categorize the collateral; b. determine whether perfection will be governed by Article 9, the real estate recording statutes, or other law;

c. Finally, examine that law to determine what, if anything, it requires of the creditor to perfect
the security interest.

2. Step 1: Categorize collateral: Article 9 retains four mutually-exclusive “types” of collateral that
consist of goods: “consumer goods,” “equipment,” “farm products,” and “inventory.” For example, the same property cannot simultaneously be both equipment and inventory. In borderline cases—a physician’s car or a farmer’s truck that might be either consumer goods or equipment—the principal use to which the property is put is determinative. Goods can fall into different classes at different times. As under former Article 9, goods are “equipment” if they do not fall into another category.

a. Goods: “Goods” means all things that are moveable when a security interest attaches. §9102(A)(44).

i. Goods includes: “Goods” includes fixtures, standing timber that is to be cut and
removed under a conveyance or contract for sale, the unborn young of animals, crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and manufactured homes. §9-102(A)(44). 1. Includes: a. consumer goods, 9-102(a)(23); b. farm products, 9-102(a)(34); c. inventory, 9-102(a)(48); d. equipment, 9-102(a)(33).

2. Not goods: “Goods” does not include accounts, chattel paper, commercial tort
claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, OR oil, gas, or other minerals before extraction. §9-102(A)(44).

ii. Consumer goods: “Consumer goods” are “goods that are used or bought for use
primarily for personal, family, or household purposes.” §9-102(a)(23).

1. Use of goods: It is not the nature of the goods but rather the use to which
they are put or the purpose for which they are bought that determines their classification. The same computer might be “consumer goods” if the debtor uses it for family entertainment but “equipment” if the debtor uses it in business. Levy - 10

b. Instruments v. General Intangibles

i. § 9-102(a)(42)—“General intangible” means any personal property [default
category], including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.

ii. § 9-102(a)(47)—“Instrument” means a negotiable instrument or any other writing
that evidences a right to the payment of a monetary obligation, is not itself a security agreement [this would make it chattel paper] or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement 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 on or for use with the card [these are accounts].

iii. § 9-102(a)(61)—“Payment intangible” means a general intangible under which the
account debtor’s principal obligation is a monetary obligation. iv. Omega Environmental v. Valley Ban - The court held that the certificate of deposit was an instrument even though it stated on its face that it was not transferable. “If there is evidence that the type of writing at issue is ordinarily transferred in the marketplace by delivery with the necessary endorsement, the requirements of Article 9 are met.” c. Chattel Paper, Instruments, Accounts, and Payment Intangibles Distinguished

i. § 9-102(a)(2) - “Account”, Means “account receivable” under Article 9. Note that the
term does not include deposit accounts.

ii. Deposit account: Deposit accounts include bank accounts, but not accounts iii. iv. § 9-102(a)(11)—“Chattel paper” means a record or records that evidence both a
monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. If the transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper. 1. “Monetary obligation” means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. 2. It is the combination of the two obligations—the promise of a party to pay money and the grant of a security interest—both evidenced in the same record or records that make for chattel paper v. If the collateral meets the definition of chattel paper, then it is chattel paper even if it also meets the definition of an account, instrument, or payment intangible. § 9-102(a) (11) evidenced by an instrument (i.e., certificate of deposit). § 9-102(a)(29) Money/ cash: This includes a check.

vi. If the collateral meets the definition of an instrument (but not chattel paper), it is an
instrument even if it also meets the definition of an account. § 9-102(a)(47) 1. “Instrument” means a. a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, b. is not itself a security agreement or lease, AND c. is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment. §9-102(a)(47). (Includes a promissory note.) vii. If the collateral meets the definition of an account (but not chattel paper or instrument), it is an account even if it also meets the definition of a payment intangible. § 9-102(a)(2)

Levy - 11

viii. If the collateral meets the definition of a payment intangible (but not chattel paper, instrument, or account) then it is a payment intangible. § 9-102(61), (42)

3. Step 2: Where to file: If the collateral is a trademark or patent, file in US Patent and Trademark
office (may also have to file in UCC office), if copyright file in US Copyright Office, if real estate file according to real estate statutes. If the collateral falls under Article 9, proceed to Step 3.

4. Step 3: Determine methods of perfection under Article 9 a. Perfection by filing (Default): If perfecting by filing a financing statement, see Financing
Statement Requirements, below.

i. General rule, § 9-310(a): Except as otherwise provided in subsection (b) and Section
9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens. §9-310(a). (Must perfect by filing unless there is an exception.)

1. Perfection by filing permitted: A security interest may be perfected by
filing for: a. chattel paper, b. negotiable documents, c. instruments, d. investment property, AND e. goods. §§9-312(a), 9-313(a)

2. Perfection by filing required: A security interest must be perfected by filing
for: a. accounts AND b. general intangibles. Cmt 2 to §9-313.

b. Perfection by possession: Possession is not merely an observable fact, but in many
situations depends ultimately on the legal right of the would-be possessor. In determining whether a particular person has possession, the principles of agency apply.

i. Possession allowed for perfection: 1. Alternative: Perfection by possession is an alternative to filing a financing
statement for a. goods, b. instruments, c. tangible chattel paper, d. negotiable documents, AND

i. “Negotiable documents” include negotiable warehouse
receipts, negotiable bills of lading, and similar documents, but does not include negotiable promissory notes (which are instruments). §§ 9-102(a)(30); 1-201.

e. Certified securities- perfection by taking delivery. §§9-312(a), 9-313(a). 2. Superior: Purchasers who subsequently take possession of (and
thereby perfect their security interest in) these kinds of collateral generally take priority over secured creditors who previously perfected by filing. §§ 9-330(b), (c), (d), 9-331(a). Filing is, however, fully effective against lien creditors and trustees in bankruptcy. Perfection by possession is superior to perfection by filing for: a. instruments, b. tangible chattel paper, c. negotiable documents, AND

d. Certified securities. §§9-330(b), (c), (d), 9-331(a). i. Explanation: Purchasers who subsequently take possession of
(and thereby perfect their security interest in) these kinds of collateral generally take priority over secured creditors who previously perfected by filing. §§ 9-330(b), (c), (d), 9-331(a). Filing is, however, fully effective against lien creditors and trustees in bankruptcy. Levy - 12

3. Comment 3 to § 9-313: This section does not define “possession.” It adopts
the general concept as it developed under former Article 9. As under former Article 9, in determining whether a particular person has possession, the principles of agency apply.

ii. Possession required for perfection: A security interest in money can be perfection
only by the secured party’s taking possession under Section 9-313. § 9-312(b)(3).

iii. Perfection by possession impossible: Perfection by possession is impossible (they
may not be perfected by possession) for security interests in (which are difficult to possess):

1. Accounts AND 2. General intangibles. §9-313(a). iv. When perfection by possession occurs: “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 party retains possession.” §9-313(d).

v. § 9-313(c) Collateral that ARE NOT certificated securities and goods covered
by a document: a secured party takes possession of collateral in the possession of a person other than the debtor, the secured party, or a lessee of the collateral from the debtor in the ordinary course of the debtor's business, when: 1. the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party's benefit; or 2. the person takes possession of the collateral after having authenticated a record acknowledging that it will hold possession of collateral for the secured party's benefit.

c. Perfection by control (deposit account and investment property) i. Control required for deposit account: A security interest in a deposit account may
be perfected only by control under Section 9-314. § 9-312(b)(1). 1. Deposit accounts include bank accounts, § 9-102(a)(29), but not accounts represented by a certificate of deposit (these are instruments).

2. “Control”: Three ways that a secured party can take “control” of a deposit
account, per §9-104:

a. The secured party can be the bank in which the account is maintained; i. Bank has automatic perfection of their interest in the bank
account. No other form of public notice is necessary; all actual and potential creditors of the debtor are always on notice that the bank with which the debtor’s deposit account is maintained may assert a claim against the deposit account.

b. The debtor, the secured party, and the bank can authenticate a record
instructing the bank to comply with the secured party’s instructions without further consent by the debtor. (deposit account control agreement)

c. The secured party can become the bank’s “customer” by putting the
account in the name of the secured party. i. As the customer, the secured party would enjoy the right (but not necessarily the exclusive right) to withdraw funds from, or close, the deposit account. See Sections 4-401(a), 4-403(a).

ii. Control possible for investment property: A security interest in an investment
property may be perfected by control (or filing) under Section § 9-314

1. NOTE: A security interest held by a secured party having control of investment
property under Section 9-106 has priority over a security interest held by a secured party that does not have control of the investment property. § 9-328(1) d. Automatic perfection: PMSI in consumer goods: Levy - 13

i. This is an exception to the filing requirement because the purchase money security
interest in consumer goods is “automatically” perfected upon attachment . §9309(1).

ii. Automatic perfections applies only to a PMSI, applies only when the collateral is
consumer goods, and does not apply to motor vehicles. 1. § 9-102(a)(23) “Consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes. 2. Note that the intended use of the goods controls whether they are consumer goods. The same goods (such as a car, computer, or television) may be equipment if used for business but consumer goods if used for personal, family, or household purposes. iii. Requirements:

1. Purchase-money security interest (PMSI); a. PMSI: A security interest is a PMSI to the extent that the goods are
purchase-money collateral with respect to that security interest. §9103(b)(1).

i. “Purchase-money collateral”: “Purchase-money collateral” is
collateral, either goods or software, that secured a purchase money obligation incurred with respect to that collateral. §9103(a)(1).

1. “Purchase-money obligation”: A “purchase-money
obligation” is an obligation of an obligor incurred

a. as all or part of the price of the collateral OR
b. for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. §9-103(a)(2). b. A SI in a collateral is PSMI if either: i. A seller sold the debtor the collateral in which it took a security interest OR;

ii. A lender loaned the debtor the money that the debtor used to
buy the collateral. See below. c. Two common situations: i. The obligation being secured is the debtor’s obligation to pay to the seller from whom it has bought the collateral “the price” of the collateral itself. Example: A seller allows the buyer to purchase on credit, but as part of the exchange protects himself by retaining a security interest in the goods. (But if lender extends line of credit beyond what is paid for collateral, probably no PMSI). ii. Third-party lender advances funds to debtor with which the debtor is to acquire the collateral.

2. In a consumer good: A PMSI in any other kind of good besides consumers
good must be perfected by the ordinary means required by the Code for the type of collateral. a. A security interest in goods is a purchase-money security interest: i. (1) to the extent that the goods are purchase-money collateral with respect to that security interest; ii. (2) if the security interest is in inventory that is or was purchasemoney collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest; and iii. (3) also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in Levy - 14

which the secured party holds or held a purchase-money security interest

3. AND The value given was actually used by the debtor to acquire rights
in the collateral. If the secured party cannot establish that the value given was actually used by the debtor to acquire rights in the collateral, then there is no purchase money security interest. TYPE
OF

COLLATERAL
YES

FILING § 9-310
YES YES YES YES

POSSESSION
YES

CONTROL
NO NO NO NO NO YES:

AUTOMATIC
NO

Farm Products Consumer Goods Equipment Inventory Fixtures (Equipment)

§ 9-313(a)
YES YES YES

PMSI § 9-309
NO NO

Legally, YES Practically, NO

Document

YES

YES

NO

Certified Security

YES

Investment Property Deposit Account Commercial Tort Claim Instrument Chattel Paper

YES

NO

YES § 9-313(a) if possession by delivery under § 8-301 NO unless Certified Security NO § 9-312(b)(1) NO

§ 9-314(a) if control by delivery under § 8-106
YES YES

unless PMSI Fixture is a Consumer Good § 9309 Temporary Perfection for 20 Days § 9-312(e) or (f) Temporary Perfection for 20 Days § 9-312(e) or (g)
NO YES

§ 9-309(10)

YES

§ 9-314
NO

NO NO

§ 9310(a) YES § 9312(a) YES § 9312(a)
YES YES

YES

§ 9-313(a)
YES

NO

NO

unless sold under § 9-309(4)
NO

§ 9-313(a) only Tangible Chattel Paper
YES NO

§ 9-314(a) only Electronic Chat. Pap.
NO NO

Accounts

unless assignment of small portion (§ 9309) or sale of lottery winnings (§ 9309(14))
NO

Agricultural Lien

YES

(ONLY § 9-310 Filing)
YES

NO

NO

General Intangibles Payment Intangibles

NO

NO

NO

YES

NO

NO

YES

if it’s a true sale

____________________________________________________________________________________________________________

FINANCING STATEMENT
A. Financing Statements 1. Purpose of the financing statement - notice. It is intended to give prospective creditors notice that certain personal property of the debtor is already subject to a security interest (or perhaps many security interests). Levy - 15

2. Index a. Some systems use the description of the collateral as the index. b. Article 9 uses the name of the debtor as the index. § 9-519(c). While it is possible for more than one debtor to have the same name, the name is likely to be far more unique than a description of the collateral. c. Other information, such as the debtor’s address, name and address of the creditor, the filing date, or a description of the collateral may be included in the index and may help the searcher confirm that the statement refers to a particular debtor and not another that may have the same name. 3. Search Systems - Accuracy of the results is based on the accuracy of the search term in the relevant system. In Article 9 systems, this usually means the accuracy (or at least consistency) of the debtor’s name on the financing statement/filing index and in the search term

4.

§ 9-502: states what information must be included in a financing statement for the financing statement to be sufficient (in other words, what is necessary for the statement to be effective): (1) name of the debtor; (2) name of the secured party; (3) indication of the collateral to be covered by the financing statement. These requirements must be met in order for the statement to be “sufficient.” See Comment 3 (but see § 9-506 for effect of errors on effectiveness of the financing statement).

B. Financing Statement Requirements

1. General rule: “A financing statement substantially complying with the requirements of part 5 of
Article 9 is effective, even if it includes minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.” §9-506(a).

a. “Seriously misleading”: Whether an error in a particular item of information is “seriously
misleading” depends in part on the function that information serves in the search process.

b. Effect of insufficient filing: If the filing statement is insufficient, then the filer has not
established perfection (if filing is required for perfection) and the creditor will lose priority over perfected secured creditors.

2. Authorization to file a financing statement: Before filing a financing statement, the secured
creditor must obtain authorization from the debtor in an authenticated record. §9-509(a)(1). A prior authenticated security agreement is sufficient. §9-509(b). If the person filing a financing statement is not authorized, the financing statement is ineffective. §9-510(a).

3. Required information: Per §9-502(a), a financing statement requires:
a. DEBTOR’S NAME:

i. Who is the debtor? Debtor: 9-102(a)(28): A debtor is a person who has a right in
the collateral, other than a security interest or other lien, whether or not the person is an obligor. 1. Person: 1-201(27): includes people, corporation, business trust, estate, trust, partnership, LLC, association, joint venture, government, agency, public corporation, or any other legal or commercial entity.

ii. Sufficiency of Debtor Names 9-503: A financing statement sufficiently provides the
name of the debtor:

1. if the debtor is a registered organization (i.e., corporation), the name of the
debtor indicated in the public records (i.e., certificate of incorporation); a. Anything required to register with the Secretary of the State pursuant to statutory law b. The debtor’s trade name is not sufficient 9-503(c)

2. if the debtor is an individual, the individual’s name as known in the community
(or, i.e., an unincorporated sole proprietorship);

3. if the debtor is an organization, the organization’s name as known in the
community (i.e., unchartered partnership);

4. If the debtor has no name, the names of the partners, members, associates, or
other persons comprising the debtor. §9-503(a). Levy - 16

iii. Errors in debtor’s name:

1. § 9-506: Even if the financing statement does not comply with all of the
requirements set out, it may still be effective if the errors or omissions do not make the financing statement seriously misleading. The accuracy of the debtor’s name is addressed specifically in paragraphs (b) and (c). a. (B) “Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.” This is the general rule. If the name of the debtor does not comply with the rules in § 9-503, then the financing statement is not effective.

b. (C) Exception to the general rule recognizes - if the searcher would
have been able to find the financing statement despite the error, the goal of giving notice is met and the financing statement should be effective.

i. The test is to enter the correct name and apply the official search
logic. Whatever is found is effective; whatever is not is ineffective. 2. Comment 2: A financing statement that is seriously misleading under this section is ineffective even if it is disclosed by (i) using a search logic other than that of the filing office to search the official records, [such as the logic used by Westlaw or Lexis] or (ii) using the filing office’s standard search logic to search a data base other than that of the filing office [searching a database such as Westlaw or Lexis].

3. Trade names: A “trade” or “fictitious” name is a name under which a person
or entity conducts business that is not its legal name. (i.e., McDonald’s Corp. of Atlanta d/b/a as “McDonald’s.”)

a. Rule: A financing statement is not rendered ineffective by inclusion of
the debtor’s trade name, but use of a trade name alone does not sufficiently provide the name of the debtor. §9-503(b) & (c).

4. If not sufficient: a. Incorrect name listed by creditor: If the secured party lists an
incorrect name for the debtor on its financing statement, the prior filing is ineffective. §§9-503(a) and 9-506(a) & (c).

b. Incorrect name due to filing officer: If the filing officer indexes the
prior filings incorrectly, the prior filings are nevertheless effective. §9517. Searchers may have a cause of action against the filing officer.

b. SECURED CREDITOR’S NAME: The function of the secured party’s name on the financing
statement is to unambiguously identify the holder of the security interest, so in some cases the secured party’s address will be equally necessary. (i.e., if the party’s name is “John Smith” need an address to identify which John Smith.)

c. AND DESCRIPTION OF COLLATERAL COVERED: The description of collateral in a financing
statement must “reasonably identify the collateral.” §§9-108; 9-504… but super-generic descriptions like “all personal property” or “all assets” are valid in financing statements. FS can generally be broader than SA.

i. § 9-102(a)(2)—“Account” means “account receivable” under Article 9. Note that the
term does not include deposit accounts.

ii. § 9-102(a)(11)—“Chattel paper” is the combination of the promise of a party to pay
money and the grant of a security interest both evidenced in the same record or records that make for chattel paper. In some instances the one writing contains both parts and is itself chattel paper. In other instances it will be a set of writings normally physically held together, for example, stapled to one another, that together evidence both a monetary obligation and a security interest in specific property. The packet is then considered to be a single piece of chattel paper. Individual promissory notes, etc. Levy - 17

still retain their character as negotiable instruments, so far as the law of negotiable instruments is concerned, but if they are physically connected to a record evidencing a security agreement, they are chattel paper for Article 9 purposes.

iii. § 9-102(a)(29)—“Deposit account” a checking account would be an example of a
deposit account.

iv. § 9-102(a)(33)—“Equipment”
v. § 9-102(a)(42)—“General intangible”

vi. § 9-102(a)(44)—“Goods” See Comment 4: This Article retains the four mutuallyexclusive “types” of collateral that consist of goods: “consumer goods,” “equipment,” “farm products,” and “inventory.” vii. § 9-102(a)(47)—“Instrument”

4. Information necessary to qualify for filing: a. Rule: A filing office must reject a financing statement unless it contains the “required
information” of §9-502(a) plus the following “necessary information,” per §9-520(a): i. mailing address of the secured creditor, §9-516(b)(4); ii. mailing address of debtor, §9-516(b)(5)(A) iii. an indication of whether the debtor is an individual or corporation, §9-516(b)(5)(B); AND iv. if the debtor is an organization: 1. type of organization (corporation, LLC, etc.), 2. debtor’s jx of organization; and 3. debtor’s organizational identification number. §9-516(b)(5)(C).

b. Erroneous information: If any of the information is erroneous (as opposed to omitted
entirely), the financing statement qualifies for filing. §9-502(a).

i. Limited effectiveness: But, although filings with incorrect §9-516(b)(5) information
will be effective against lien creditors, bankruptcy trustees and others (“lienperfected”), it is not effective against purchasers who give value and act in reasonable reliance on the incorrect information (“purchaser-perfected”). §9-338. (See example, pg 310.)

c. Omitted information: If any of this information is omitted (as opposed to merely erroneous),
the filing officer should reject it and communicate to the filer the reason for refusal and the date and time the record would have been filed. §9-520(b). The attempt at filing has accomplished nothing, but the filer has the opportunity to try again.

i. Wrongly accepted filings: If a filing officer mistakenly accepts a filing that contains
the “required information” (information under §9-502(a)) but is missing another item such that the filing officer was required to reject the filing pursuant to §§9-520(a) and 9-516(b), the filing is nevertheless effective. §9-520(c).

ii. Wrongly rejected filings: If a filing officer wrongly rejects a financing statement (i.e.,
it meets all the information requirements), the attempt to file nevertheless perfects the underlying security interest sufficiently to defeat lien creditors, but not against a purchaser of the collateral who gives value in reasonable reliance upon the absence of the record from the files. §9-516(d). C. Where to file?

1. General rule: Debtor’s location determines which jurisdiction’s law applies. §§ 9-301(1), 9-307
Comment 2.

2. Possessory security interest: If possessory SI, file where the collateral is located. 9-301(2).
Possessory Sis: instrument, tangible document,

3. Non-possessory SI: If the SI is nonpossessory, then file in the jx where the debtor is located. §9301(1); 9-501(a)(2).

a. Where debtor is located: File in the secretary of state’s office where the debtor is located
9-301(1) Levy - 18

i. Individual debtor: An individual debtor is “located” at the individual’s “principal
residence.” §9-307. (Individual debtor includes a sole proprietorship.)

1. An individual debtor is deemed to be located at the individual's principal
residence with respect to both personal and business assets.

2. If the security interest in question is a purchase-money security interest in
consumer goods which is perfected upon attachment, see Section 9-309(1), the choice of law may make no difference. In other cases, when a doubt arises, prudence may dictate perfecting under the law of each jurisdiction that might be the debtor's "principal residence."

ii. Registered Organization: A debtor that is a registered organization and has
only one place of business is located at its place of business.

1. Registered organization is “an organization organized solely under the law of
one State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized under the law of a "State" is located in its State of organization

2. “Place of business”: Place of business means a place where a debtor
conducts its affairs. §9-307(a). Thus, every organization, even those that do not conduct “for profit” business activities, have a place of business. 3. Events affecting the status of a registered organization, such as the dissolution of a corporation or revocation of its charter, do not affect its location for purposes of subsection (e). 4. However, certain of these events may result in, or be accompanied by, a transfer of collateral from the registered organization to another debtor. This section does not determine whether a transfer occurs, nor does it determine the legal consequences of any transfer

iii. All other Organizations: A debtor that is an organization and has more than one
place of business is located at its chief executive office. If only one place of business, it is the state in which it has the POB.

1.

“Chief executive office”: Generally, courts use the nerve center test to determine the chief executive office: the organization is located in the place from which it is managed – regardless of the location of its operations.

4. As a general matter, the location of the debtor determines the jurisdiction whose law governs
perfection of a security interest. See Sections 9-301(1), 9-305(c). It also governs priority of a security interest in certain types of intangible collateral, such as accounts, electronic chattel paper, and general intangibles. D. When to file? 1. A financing statement can be initially filed at any time – before or after the SI comes into existence. See §9-502(d). 2. Because time of filing controls a number of possible priority contests, a secured party should file its financing statement as soon as possible. a. To secure priority, a creditor may file a financing statement even before the security agreement has been authenticated by the debtor.

b. Priority rule – first to file OR perfect has priority.
____________________________________________________________________________________________________________

MAINTAINING PERFECTION
A. Maintaining Perfection through Lapse and Bankruptcy 1. Removing filings from the public record: a. Methods: i. Termination: Levy - 19

1. Termination statement: If the debtor has paid the secured obligation and the
secured party is not required by K to lend more money, the debtor can demand that the secured party file a termination statement within 20 days. §9-513(c) (1).

2. Failure of secured party to file termination statement: If the secured
party fails to do so, the secured party becomes liable for actual damages and, in addition, a civil penalty of $500. §9-625(b) and (e)(4).

3. Effect: Upon the filing of a termination statement, the financing statement to
which it relates ceases to be effective. §9-513(d).

ii. Release of collateral by Amendment: Release of collateral from the coverage of a
financing statement is accomplished by amending the financing statement. §9-512(a). The secured party is obligated to file a termination statement upon full payment of the secured debt, but is not obligated to file an amendment deleting collateral on partial payment unless the secured party has contracted to do so.

1. Effect of amendment on continuation statement: An amendment does not
extend the period of effectiveness of the original financing statement. §9512(b). (Example: FS filed March 11, 2000. Amendment filed February 2, 2002. Period of effectiveness is still through March 11, 2005.) b. Required information:

i. Rule: A termination statement or amendment must
1. identify, by its file number, the initial financing statement to which it relates; AND 2. a termination statement must indicate that the identified financing statement is no longer effective, §9-102(a)(79).

ii. Errors: Errors in a termination statement or amendment are not ineffective unless the
errors make the financing statement “seriously misleading.” §9-506. 2. Self-clearing and continuation:

a. Rule: Financing statements are effective for only five years and unless the secured party
takes affirmative action by filing a continuation statement during the last six months of the five-year period, the financing statement “lapses.” §9-515(a) and (c). (If a continuation statement is filed, the financing statement is good for an additional five years after the original date of filing. Example: FS filed March 11, 2000. Continuation statement filed February 2, 2005. FS now good until March 11, 200.)

i. Premature continuation statement: A continuation statement that is filed before
the last six months of the five-year period is ineffective. §9-510(c).

ii. “Lapse”: Upon lapse, the security interest becomes unperfected. §9-515(c). It is
deemed never to have been perfected as against a purchaser of the collateral for value. §9-515(c).

1. However, provided that the security interest was perfected at the time the lien
creditor levied or at the filing of the bankruptcy petition, the secured creditor retains priority over the lien creditor or trustee. The security interest will, however, be subordinate to a lien creditor that levies after lapse and to the trustee in a bankruptcy filed after lapse. §9-515.

3. Effect of bankruptcy on lapse and continuation: A secured party must file continuation
statements at five-year intervals to avoid lapse. No exception is made simply b/c the debtor has filed for bankruptcy. §9-515(c). (In other words, if the debtor goes into bankruptcy and the five-year period is approaching, must still file a continuation statement. If creditor fails to do so, the security interest will lapse.) B. Maintaining Perfection through Changes of Name, Identity, and Use 1. Most significant amendments are made to the filing statements:

Levy - 20

a. Changing the debtor’s name – Action by filing creditor is only required when the filing
becomes seriously misleading. Original filing will be ineffective more than 4 months after the change.

b. Changing debtor’s location – Filing creditor has 4 months after the change in location to
discover the debtor relocated and to refile in the new location to continue the perfection of SI perfected in the old location.

c. Continuation - §9-515(a) a filed FS is effective for a period of 5 years after the date of filing.
To continue perfection, (d) requires that a continuation statement is filed within 6 months before the expiration of the 5-year period. d. Adding or deleting collateral

e. Termination – Terminate a bogus filing by filing a termination statement, correction
statement, or attempt to recover actual damages caused by the purported creditor’s failure to comply with Article 9.

2. Changes to debtor’s name: a. Rule: Even though a change in the debtor’s name renders a filed financing statement
seriously misleading, the financing statement is still effective with regard to

i. collateral owned by the debtor at the time of the name change AND ii. Collateral acquired by the debtor in the first four months after the change. §9-507(c). 1. After four months: The financing statement is not effective to perfect a
security interest in collateral acquired by the debtor more than 4 months after the change, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months of the change.

a. Amendment must be filed to maintain perfection: To maintain
perfection in collateral acquired four months after the name change, the secured party must file an amendment giving its correct name within four months of the change in its name. §9-507(c). b. Two-step inquiry under § 9-507(c): i. Does the change of the debtor’s name make the financing statement seriously misleading under § 9-506? 1. If not, then no amendment necessary. 2. If so, then: a. the original financing statement effective to perfect security interest in collateral acquired up to 4 months after the name change; b. the original financing statement is ineffective to perfect a security interest in collateral acquired more than 4 months after the name change. An amendment must be filed within 4 months after the name change to perfect a security interest in this collateral. ii. Failure to file the amendment within 4 months renders the security interest in the later acquired collateral unperfected.

c. Example: Under this rule, a secured party that financed the purchase of a specific item of
collateral (i.e., a boat) has no reason to concern itself with later changes in the debtor’s name. On the other hand, a secured party that is financing the debtor’s inventory of boats on a continuing basis should concern itself with the changes in the debtor’s name. The secured party’s filing will not be effective against inventory the debtor acquires more than four months after the debtor changes its name.

3. Change of name v. Transfer of collateral to new debtor: Even though the governing rules are
similar, it is important to distinguish changes of name, which are covered by §9-507(c), from the transfer of collateral to a new debtor, which is covered by §9-507(a). New Debtor §9-508. a. New debtor [9-102(a)(56)]: “a person that becomes bound as debtor under Section 9-203(d) by a security agreement previously entered into by another person.” b. A new debtor steps into the shoes of the original debtor by assuming, and agreeing to perform under, the security agreement. Levy - 21

c. Under § 9-508(c), the transfer of collateral to a new debtor is the same as the transfer of collateral to anyone else: A financing statement filed against the original debtor remains effective against the collateral under 9-507(a).

d. If the new debtor’s name is different from the debtor’s name on the financing statement, 9508(b) applies the rule in 9-507(c): the financing statement remains effective with respect to collateral acquired by the new debtor within 4 months after the change, but is not effective with respect to collateral acquired by the new debtor later.

e. If the new debtor is located in a different jurisdiction, the SP has one year to refile in
the new jurisdiction to continue perfection 9-316(a)(4)

4. Continuing Perfection in Original Collateral After Disposition (§ 9-507(a)) a. A security interest in collateral continues after an unauthorized disposition. § 9-315(a)(1). A
financing statement covering the collateral remains effective after disposition so long as the security interest in the collateral continues. § 9-507(a).

i. If the security interest in collateral continues after disposition under § 9-315(a)(1),
then a financing statement covering that collateral remains effective after disposition under § 9-507(a). b. § 9-507 Comment 3 paragraph 2: As a consequence of the disposition, the collateral may be owned by a person other than the debtor against whom the financing statement was filed. c. Under subsection (a), the secured party remains perfected even if it does not correct the public record. For this reason, any person seeking to determine whether a debtor owns collateral free of security interests must inquire as to the debtor’s source of title and, if circumstances seem to require it, search in the name of a former owner. Subsection (a) addresses only the sufficiency of the information contained in the financing statement. A disposition of collateral may result in loss of perfection for other reasons. See Section 9-316 5. Relocation of the debtor

a. Rule: A security interest remains perfected until the earliest of: i. the time of perfection would have ceased under the law of that jurisdiction; ii. the expiration of four months after a change of the debtor’s location to another jx (if
the debtor relocates to another jurisdiction, the secured party is given four months to refile in the new jurisdiction); OR

1. Individual debtor: When an individual debtor changes his state of principal
residence, the secured creditor who filed in the original state has four months in which to file in the destination state. §9-316(a)(2). If the secured creditor does not, the security interest becomes unperfected. §9-316(b).

iii. The expiration of one year after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction. §9-316(a).

1. Registered organization: If a debtor reincorporates by merger or sale of
assets, the secured creditor has one year in which to discover the merger and perfect in the destination state. §9-316(a)(3).

b. Comment 2. Continued Perfection: A security interest perfected under the law of one
jurisdiction remains perfected for a fixed period of time (four months or one year, depending on the circumstances), even though the jurisdiction whose law governs perfection changes. If a secured party properly reperfects a security interest before it becomes unperfected under subsection (a), then the security interest remains perfected continuously thereafter. See subsection (b).

c. Comment 3. Retroactive Unperfection. Subsection (b) sets forth the consequences of the
failure to reperfect before perfection ceases under subsection (a):

i. The security interest becomes unperfected prospectively and, as against purchasers
for value, including buyers and secured parties, but not as against donees or lien creditors, retroactively. The rule applies to agricultural liens, as well. See also Section 9-515

Levy - 22

ii. Although this approach creates the potential for circular priorities, the alternativeretroactive unperfection against lien creditors-would create substantial and unjustifiable preference risks. 6. Changes Affecting the Description of the Collateral (Change in Use) (§9-507(b)) a. Under § 9-507(b), financing statement also remains effective even if the information in the financing statement becomes seriously misleading under §9-506 (except with respect to changes in the debtor’s name). § 9-507(b), (c).

i. Changes to the secured party’s name will not affect the effectiveness of the
financing statement.

b. A description of the collateral is seriously misleading due to a change in the collateral such
that the description is no longer accurate, but the collateral, as changed, would be perfected if a financing statement with the correct description had been filed. The place of filing would be the same. c. IMPORTANT: Section 9-507(b) only excuses changes that make the financing statement seriously misleading. It does not excuse changes that make the financing statement wholly ineffective, such as a change that requires perfection by some means other than simply filing a financing statement (fixture filing, notation on certificate of title, etc.).

7. Changes to collateral: Where the use, appearance, or intrastate location of the collateral changes
(or there is a change in debtor’s residence or place of business), if original filing was enough to perfect, re-filing is not required, even if the description is now seriously misleading. §9-507(b). (Therefore, even if change use from “inventory”, which is filed in secretary of state's office, to “equipment” used in farm operations, filed in county recorder's office – no need to refile).

a. Amendment of financing statement is not necessary when the collateral changes use so
that it has a different characterization

8. Where perfection depends upon possession and no possession: “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 party retains possession.” §9-313(d).

9. Maintaining perfection in Proceeds: On sale, exchange, collection, or other disposition of
collateral, a security interest continues in identifiable proceeds. §§9-102(a)(64) & 9-315(a)(2). The holder of the security interest will want (1) the security interest to be perfected in the proceeds and (2) the perfection to be continuous from the creditor’s initial filing. a. Exchange of collateral: i. Is there attachment?

ii. Is it a proceed? SI continues to attach to proceeds. iii. Is the interest perfected? §9-315
iv. Is it identifiable?

b. Collateral for non-cash proceeds i. Did a filed financing statement cover the original collateral? Where the
exchange is collateral for non-cash proceeds that are covered by description in financing statement, no action is required by secured party to maintain perfection. §9-502(d). (The issue is whether the non-cash proceeds are covered by the original financing statement.)

ii. Are the proceeds collateral in which a SI may be perfected by filing in the
office in which the financing statement has been filed? Where the exchange is collateral for non-cash proceeds not covered by description in financing statement, but security interest in proceeds could be perfected by filing in same office as original financing statement, no action is required by secured party to maintain perfection. §9315(d)(1).

iii. Are the proceeds not acquired with cash proceeds? Where the exchange is
collateral for non-cash proceeds of a type in which filing is required in a filing office other than the one in which the original collateral was perfected by filing, secured

Levy - 23

party must re-file in correct office for the non-cash proceeds within 20 days from the time the debtor receives the non-cash proceeds. §9-315(d).

1. Note: The secured party does not need any additional authorization to file the
financing statement necessary to perfect the interest in the proceeds. See § 9509(b)(2), Comment 4. But, if the proceeds are in the form of real (as opposed to personal ) property, Article 9 does not apply and the secured party must comply with the requirement of the real property system. See In re Seaway.

2. If the proceeds are identifiable cash proceeds then it remains perfected. c. Collateral for cash proceeds to non-cash proceeds i. Covered by description in original financing statement: Where the exchange is
collateral for cash proceeds (proceeds that are money, checks, deposit accounts, or the like) to non-cash proceeds covered by description in original financing statement, no action is required by secured party to maintain perfection. §9-315(d)(3). 1. Note: The security interest in the non-cash proceeds is perfected when the security interest attaches because the proceeds are covered by the financing statement. §9-315(d)(3)

ii. Not covered by financing statement but “same office”: Where the exchange is
collateral for cash proceeds to non-cash proceeds not covered by description in original financing statement, but security interest in non-cash proceeds could be perfected by filing in same office as original financing statement, secured party must file new financing statement in same office as original financing statement within 20 days of the debtor’s receipt of the new property. § 9-315(d)(3).

1. Note: If the second filing occurs within 20 days of the debtor’s receipt of the
new property, the second filing is effective as of the date of the first filing and perfection is continuous thereafter. If the second filing occurs after the end of the 20-day period, it dates only from the time it was made.

2. Note: The secured party does not need any additional authorization to file the
financing statement necessary to perfect the interest in the proceeds. See § 9509(b)(2), Comment 4. But, if the proceeds are in the form of real (as opposed to personal ) property, Article 9 does not apply and the secured party must comply with the requirement of the real property system. See In re Seaway.

iii. Not covered and no “same office”: Where the exchange is collateral for cash
proceeds to non-cash proceeds of a type in which filing is required in a filing office other than the one in which the original collateral was perfected by filing, secured party must re-file in the correct office for the non-cash proceeds within 20 days of the debtor’s receipt of the new property.

d. Collateral for cash proceeds (i.e., check) and no new property: Where the exchange is
collateral for cash proceeds and no new property, no action is required by secured party to maintain perfection. §9-315(d)(2).

i. Note: The secured party can perfect a security interest in the cash proceeds in a bank
account by perfecting in the bank (deposit) account as original collateral by taking control of the account. § 9-314(a). Exchange of Collateral
Type of Exchange Action required by secured party to maintain perfection None Deadline for continuous perfection n/a Relevant section(s)

Collateral for noncash proceeds that are covered by description in financing statement

§ 9-502(d) The financing statement perfects the security interest in the collateral since the description covers the proceeds.

Levy - 24

Collateral for noncash proceeds not covered by description in financing statement, but security interest in proceeds could be perfected by filing in same office as original financing statement Collateral for noncash proceeds of a type in which filing is required in a filing office other than the one in which the original collateral was perfected by filing Collateral for cash proceeds (no new property) Collateral for cash proceeds to noncash proceeds covered by description in original financing statement. Collateral for cash proceeds to noncash proceeds not covered by description in original financing statement, but security interest in non-cash proceeds could be perfected by filing in same office as original financing statement Collateral for cash proceeds to noncash proceeds of a type in which filing is required in a filing office other than the one in which the original collateral was perfected by filing

None

n/a

§ 9-315(d)(1) [text refers to this as “the same office rule”]

Secured party must refile in correct office for the non-cash proceeds

Within 20 days from the time the debtor receives the non-cash proceeds

§ 9-315(d)(3)*

None

n/a

§ 9-315(d)(2)**

None

n/a

Secured party must file new financing statement in same office as original financing statement

Within 20 days of the debtor’s receipt of the new property.***

§§ 9-315(d)(3) The security interest in the non-cash proceeds is perfected when the security interest attaches because the proceeds are covered by the financing statement. § 9-315(d)(3)*

Secured party must refile in the correct office for the non-cash proceeds

Within 20 days of the debtor’s receipt of the new property.***

§ 9-315(d)(3)*

Levy - 25

1.

2. 3.

Note: the secured party does not need any additional authorization to file the financing statement necessary to perfect the interest in the proceeds. See § 9-509(b)(2), Comment 4. But, if the proceeds are in the form of real (as opposed to personal) property, Article 9 does not apply and the secured party must comply with the requirement of the real property system. See In re Seaway. The secured party can perfect a security interest in the cash proceeds in a bank account by perfecting in the bank (deposit) account as original collateral by taking control of the account. § 9-314(a). If the second filing occurs within 20 days of the debtor’s receipt of the new property, the second filing is effective as of the date of the first filing and perfection is continuous thereafter. If the second filing occurs after the end of the 20-day period, it dates only from the time it was made

____________________________________________________________________________________________________________

PRIORITY
A. The Concept of Priority: State Law

1. Priority in Foreclosure: what happens to other liens when one lienholder forecloses? Depends
upon the priority of the foreclosing party as compared to the other lienholders. a. Absent an agreement to the contrary, any lien holder may foreclose while the debtor is in default to that lien holder. The existence of a prior lien generally does not block the exercise of rights under a subordinate one. b. Multiple lien holders with interest in debtors property – any of them can foreclose. What happens when one of them chooses to foreclose? Whatever is left over goes to the next junior lien holder. c. No lien holder is compelled to foreclose. Each has the option to extend the debtor’s time for payment or simply to forbear from exercising its remedy. d. So, even though creditor A may have first priority with respect to certain collateral, creditor B may foreclose on the collateral if the debtor is in default with respect to its obligation to creditor B. Even if the debtor is also in default with respect to its obligation to creditor A, creditor A may still choose not to foreclose and sit back and watch while creditor B forecloses

2. General principles governing judicial or foreclosure sales:
a. The sale discharges from the collateral the lien under which the sale is held and all subordinate liens. See § 9-617(a). It does not discharge prior (senior or higher priority) liens. b. The sale transfers the debtor’s interest in the collateral to the purchaser, subject to all prior liens. See § 9-617(a). The holder of the prior lien cannot enforce the debt against the person who purchases at the foreclosure sale, because that person has not assumed the debt or agreed to pay it. But the holder of the prior lien can enforce the lien against the purchaser. Unless the debt underlying the prior lien is paid by the purchaser or someone else, the holder of the prior lien can foreclose (take the collateral from the purchaser). c. The proceeds of sale are applied first to the expense of sale, then to payment of the lien under which the sale was held, then to payment of subordinate liens in the order of their priority. See § 9-615(a). The remaining surplus, if any, is paid to the debtor. See § 9-615(d)(1). Unsecured creditors do not share in the distribution; their remedy is to levy on the surplus in the hands of the debtor. d. The debt underlying each lien is reduced by the amount paid to the lien holder from the sale, but the balance remains owing. The lien holder is then entitled to a judgment against the debtor for the deficiency, unless there is a statute providing otherwise. See § 9-615(d)(2). 3. Right to possession between lien holders: a. Lien creditor v. Lien creditor: i. When does a party actually become a lien creditor? 1. When the writ is executed—the creditor levies on the collateral. ii. State approaches to priority 1. Majority Rule: first to levy has priority a. Policy is that this gives actual notice. 2. Minority Rule: first to deliver the writ to the sheriff has priority Levy - 26

a. Policy: this takes care of problems regarding lazy sheriffs and loss of party control. b. Although the text of Article 9 does not expressly require it, comment 5 to § 9-609 states: i. Conflicting rights to possession among secured parties are resolved by the priority rules of this Article. Thus, a senior secured party is entitled to possession as against a junior claimant. Non-UCC law governs whether a junior secured party in possession of collateral is liable to the senior in conversion. Normally, a junior who refuses to relinquish possession of collateral upon demand of a secured party having a superior possessory right to the collateral would be liable in conversion. c. See Grocers Supply Co. v. Intercity Investment Properties, Inc. - The court noted that the security agreement between appellant and appellee retailer clearly provided that a judgment against appellee retailer, or the levy, seizure, or attachment of the collateral, constituted a default and upon the occurrence of any of those events, the entire obligation became immediately due and payable at secured party's option. d. U.C.C. Notice of Sale: Section 9-611 requires the foreclosing secured party to give notice to certain lienholders B. Secured v. Unsecured 1. Which party prevails? a. Characterize the parties. b. Classify the collateral. c. Determine whether the security interest is perfected or unperfected. d. Find the code section that contains the appropriate rule.

e. Apply the facts to the rule to obtain the result. 2. Rule: An (unperfected) secured creditor has priority over an unsecured creditor. §9-201.
a. An unsecured creditor has no right to possession of the debtor’s collateral. Thus, such a creditor has no right to challenge a secured party’s right to possession or foreclosure, nor does the unsecured creditor have a right to proceeds from the sale of the collateral. § 9-615 (surplus must be paid to the debtor after subordinate security interests and liens are paid). b. Unsecured creditors must reduce their claim to a judgment and execute on the judgment (at which point they become lien creditors entitled to priority as set out in § 9-317). C. Secured v. Secured 1. Which party prevails? a. Characterize the parties. b. Classify the collateral. c. Determine whether the security interest is perfected or unperfected. d. Find the code section that contains the appropriate rule.

e. Apply the facts to the rule to obtain the result. 2. Priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules § 9-322(a): a. (1) Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection. b. (2) A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien. c. (3) The first security interest or agricultural lien to attach or become effective has priority if conflicting security interests and agricultural liens are unperfected. 3. General rules: a. Unperfected v. Unperfected: First security interest to attach or become effective has
priority if conflicting security interests are unperfected. §9-322(a)(3), Comment 11

b. Perfected v. Unperfected: A perfected security interest has priority over a conflicting
unperfected security interest. §9-322(a)(2); Comment 4, Example 2 Levy - 27

c. Perfected v. Perfected: First to file OR perfect has priority. §9-322(a)(1). (Priority dates
from the earlier of the time a filing covering the collateral is first made or the security interest is first perfected, if there is no period thereafter when there is neither filing nor perfection. Look to see if a party has already perfected by possession.) Note: this assumes that the security interest is perfected at the time of the conflict.

i. If a secured creditor has filed but has not perfected when another secured creditor
seeks to foreclose on the collateral, then the first secured creditor is still unperfected and has priority only as an unperfected secured creditor. Moreover, if the security interest has not attached it is not enforceable, so the creditor is an unsecured creditor and has no rights in the collateral.

d. Proceeds: The time of filing OR perfection as to a security interest in collateral is also the
time of filing or perfection as to a security interest in proceeds (so same rules apply as in subsection (a)). §9-322(b)(1), Comment 6, Example 5

i. Exception: Security interest perfected against transferor of collateral has priority over
security interests previously perfected against transferee. §9-325(a), Comment 3, 4

ii. Remember: A security interest attaches automatically to proceeds but is not
automatically perfected.

e. Future advances: The priority of every advance dates from the earlier of filing OR
perfection. § 9-322(a)(1), cmt 4. Provided that the financing statement covers the collateral/ future advances clause, all advances made by secured creditor have priority as of the filing of the financing statement. i. Remember this is only in conflicts between secured creditors.

ii. Exception: The only instance when the time of the advance figures in the priority
scheme of § 9-322 is when the security interest is perfected only automatically under § 9-309 or temporarily under § 9-312(e),(f) or (g), and the advance is not made pursuant to a commitment entered into while the security interest was perfected by another method. See § 9-323(a), Comment 3.

f. After-acquired property: Provided that the description of the collateral in the financing
statement is broad enough to cover the after-acquired collateral, the filing covers it and it has the same priority as the original collateral. After-acquired lender’s priority dates from the time of its filing. §9-322(a)(1), cmt 5, Example 4. But see § 9-325(a).

i. §9-325(a): “A security interest created by a debtor is subordinate to a security
interest in the same collateral created by another person if: 1. the debtor acquired the collateral subject to the security interest created by the other person; 2. the security interest created by the other person was perfected when the debtor acquired the property; AND 3. there is no period thereafter when the security interest is unperfected.”

ii. Note: Recall that priority is not the same as perfection. The debtor does not acquire
rights in the collateral until it takes delivery. Thus, the secured party’s interest in the collateral cannot attach until the debtor takes delivery. § 9-203. Since the security interest cannot be perfected until it attaches, the security interest is not perfected until the debtor takes delivery of the collateral. Priority, however, dates from the time of filing or perfection. Filing can happen before attachment.
General rules § 9-322(a) Perfected v. Perfected: First to file or perfect has priority. § 9-322(a)(1); Comment 4, Example 1 Perfected v. Unperfected: A perfected security interest has priority over a conflicting unperfected security interest. Future advances § 9-322(a)(1) “In general, the rule in subsection (a)(1) does not distinguish among various advances made by a secured party. The priority of every advance dates from the earlier of filing or perfection.” Comment 4* After-acquired property § 9-322(a)(1) Provided that the description of the collateral in the financing statement is broad enough to cover the after-acquired collateral, the filing covers it and it

Levy - 28

§ 9-322(a)(2); Comment 4, Example 2 Unperfected v. Unperfected: First security interest to attach or become effective has priority. § 9-322(a)(3), Comment 11 Proceeds: The time of filing or perfection as to a security interest in collateral is also the time of filing or perfection as to a security interest in proceeds (so same rules apply as in subsection (a)). § 9-322(b)(1), Comment 6, Example 5 Exception: Security interest perfected against transferor of collateral has priority over security interests previously perfected against transferee. § 9-325(a), Comment 3, 4 Provided that the financing statement covers the collateral, all advances made by secured creditor have priority as of the filing of the financing statement. Exception: The only instance when the time of the advance figures in the priority scheme of § 9-322 is when the security interest is perfected only automatically under § 9-309 or temporarily under § 9-312(e),(f) or (g), and the advance is not made pursuant to a commitment entered into while the security interest was perfected by another method. See § 9-323(a), Comment 3.

has the same priority as the original collateral. In other words, the afteracquired lender’s priority dates from the time of its filing.** Comment 5, Example 4 But see § 9-325(a).

4. Non-PMSI Secured v. PMSI Secured (Superpriorities)
a. Non-inventory collateral (for proceeds too):

i. Rule: A perfected PMSI in goods other than inventory or livestock has priority
over a conflicting security interest in the same goods and a perfected security interest in its identifiable proceeds if the PMSI is perfected

1. when the debtor receives possession of the collateral (i.e., perfection by control
or automatic perfection) OR

2. within 20 days thereafter (i.e., files financing statement). § 9-324(a), Comment
3.

ii. When more than one creditor has a valid PMSI: When more than one creditor has
a valid PMSI in the same collateral the seller’s PMSI interest has priority over the cash lender’s PMSI. §9-324(g)(1).

b. Inventory collateral (for proceeds too): (The 20-day grace period for the filing of a PMSI
in §9-324(a) does not apply when the property sold will be inventory in the hands of the buyer.)

i. Rule: A perfected PMSI in inventory has priority over a conflicting security interest in
the same inventory and also has priority in identifiable cash proceeds of the inventory to the extent they are received on or before the delivery of the inventory to the buyer if: 1. the PMSI is perfected when the debtor receives possession of the inventory;

2. the PMSI party sends an authenticated notification to the holder of the
conflicting security interest;

3. the holder of the conflicting security interest receives the notification within 5
years before the debtor receives possession of the inventory; AND

4. the notification states that the person sending the notification has or expects to
acquire a PMSI in inventory of the debtor and describes the inventory. § 9324(b), Comments 4, 5, 6

ii. *Proceeds in accounts, chattel paper, & instruments: Because accounts are not
cash proceeds, the purchase-money priority in inventory does not carry over into proceeds consisting of accounts. § 9-324 Comments 8, 9. But it does carry over into proceeds consisting of chattel paper or instruments. §9-324(a).

iii. Notification requirement: Notice is only required if the conflicting security interest
had filed a financing statement covering the same types of inventory:

1. if the PMSI is perfected by filing, before the date of the filing; OR
Levy - 29

2. if the PMSI is temporarily perfected without filing or possession under § 9312(f), before the beginning of the 20-day grace period thereunder. § 9-324(c).

iv. Exception – Deposit account: When the proceeds of original collateral consist of a
deposit account, § 9-327 governs priority to the extent it conflicts with the priority rules of § 9-324. § 9-324(a), (b). Non-inventory v. Inventory
Collateral other than inventory or livestock Inventory  The collateral is other than inventory or livestock  There are at least two SI in the same collateral

   

The collateral is other than inventory or livestock There are at least two SI in the same collateral One of the SI is a PMSI and The PMSI was perfected when the debtor received possession of the collateral or 20 days thereafter.

 

One of the SI is a PMSI and

The PMSI was perfected when the debtor received possession of the collateral or 20 days thereafter.

5. PMSI v. PMSI

a. Obligation from seller v. obligation from lender enabling debtor to acquire
collateral: A security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of collateral. § 9-324(g)(1), Comment 13

b. All other cases (including obligation from lender enabling debtor to acquire
collateral v. obligation from lender enabling debtor to acquire collateral): Section 9322(a) applies to the qualifying security interests. § 9-324(g)(2), Comment 13 6. Commingled goods:

a. Commingled goods (identity lost): Where identify of collateral is lost by commingling as
collateral becomes part of product or mass, security interest continues in the product or mass. § 9-336(c)

i. SI perfected in collateral b/f commingling: If a security interest in collateral is
perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass under subsection (c) is perfected. § 9-336(d).

1. Priority: A security interest that is perfected under subsection (d) has priority
over a security interest that is unperfected at the time the collateral becomes commingled goods. § 9-336(f)(1), Comment 5, Example 4.

2. More than one SI perfected in collateral b/f commingling: If more than
one security interest is perfected under subsection (d), the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods. § 9-336(f)(2), Comment 6, Example 5

b. Accessions (identity not lost): By definition, if identity is not lost, then the term
“commingled goods” does not apply. § 9-336(a), Comment 3. (Where the identity is not lost, as where a replacement part is installed, the replacement part is an “accession.”)

i. Rule: If the identity is not lost, it is an accession, and secured party has interest only in
the original collateral and not the whole of which it becomes a part, the secured party’s interest in the collateral continues to be perfected and have priority, but remedies may be impaired. § 9-335. D. Lien Creditors v. Secured Creditors

1. “Lien creditor”: A “lien creditor” is a creditor that has acquired a lien by attachment, levy, or the
like. § 9-102(a)(52)(A). (“Lien creditor” also includes a trustee in bankruptcy from the date of the filing of the petition.) (Note that this does not include a secured party, even though a security interest is a type of lien. These two types of liens are treated differently under Article 9.)

a. When a party becomes a lien creditor: A person becomes a lien creditor at the time of
levy. Levy - 30

2. Lien creditor v. Lien creditor: Whoever becomes a lien creditor first has the first lien (i.e.,
whichever lien creditor levies first has priority). (Whoever becomes a lien creditor second has second lien, and so on.) i. , or letter-of-credit rights, and the secured party has control under §§ 9-104, 9-105, 9106, or 9-107.

3. Lien creditor v. Non-PMSI Secured creditor: a. Lien creditor has priority if: A security interest is subordinate to the rights of a person that
becomes a lien creditor before the earlier of the time (either): i. the security interest is perfected; OR

ii. The debtor has authenticated a security agreement that provides a description of the
collateral and a financing statement covering the collateral is filed. § 9-317(a)(2).

b. Secured party has priority if: If the above conditions aren’t met, then the secured party
has priority. (i.e., secured party has priority if it perfected b/f lien creditor levied or if there was a security agreement and financing statement covering collateral b/f lien creditor levied.) c. Requirements for perfection—§ 9-308(a): A security interest is perfected when it has attached and all of the applicable requirements for perfection (i.e, filing, possession, control, or automatic perfection) have been satisfied. i. The conditions under § 9-203(b)(3) are: 1. the debtor has authenticated a security agreement that provides a description of the collateral; 2. the collateral is not a certificated security and it is in the possession of the secured party under § 9-313 pursuant to the debtor’s security agreement; 3. the collateral is a certificated security in registered form and the security has been delivered to the secured party under 8-301 pursuant to the debtor’s security agreement; or 4. the collateral is deposit accounts, electronic chattel paper, investment property

4. Lien creditor v. PMSI Secured creditor: a. Rule: Except as otherwise provided in §§ 9-320 [buyer of goods, see below], if a person files a
financing statement with respect to a PMSI 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. § 9-317(e).

i. Notes: In order for the PMSI to get priority, the security interest must have attached
before the other party becomes a lien creditor. Recall the requirements for attachment in §9-203. Section 9-317(e) only gives the secured party 20 days after attachment to file the financing statement. If the PMSI is perfected before the other party becomes a lien creditor, the secured party will have priority under § 9-317(a)(2) (A) and § 9-317(e) is irrelevant.

ii. PMSI in consumer goods is perfected upon attachment. § 9-309(1). Thus, if a person
becomes a lien creditor after the PMSI in consumer goods attaches, the secured creditor will have priority under § 9-317(a)(2)(A). iii. A PMSI in other types of collateral must be perfected by appropriate means (i.e, filing, possession, or control). Section 9-317(e) only applies to perfection by filing. 5. Future advances: a. A future advance made pursuant to a future advance clause is perfected on the date of the filing as to the collateral.

b. Rule: A security interest is subordinate to the rights of a person that becomes a lien creditor
to the extent that the security interest secures an advance made more than 45 days after the person becomes a lien creditor unless the advance is made: i. without the knowledge of the lien; or

ii. pursuant to a commitment entered into without knowledge of the lien. § 9-323(b). c. Explanation: A secured party who otherwise has priority under § 9-317(a)(2) retains
priority over a lien creditor if the advance is made less than 45 after a person becomes Levy - 31

a lien creditor, regardless of whether the secured party knew about the lien when it made the advance. If the advance is made more than 45 days after a person becomes a lien creditor, the security interest only retains priority if the advance is made without knowledge of the lien or is made pursuant to a commitment entered into without knowledge of the lien. Otherwise, the lien is subordinated.

i. A security interest does not automatically have priority if the requirements of
paragraphs (1) or (2) are met. The secured party must still establish priority under § 9317.

ii. If the person becomes a lien creditor before the secured party perfects or files and
meets one of the conditions of § 9-203(b)(3), the lien creditor has priority without regard to § 9-323. § 9-317(a)(2).

6. Priority of nonadvances: Non-advances – interest, attorney’s fees, and expenses of collection
accruing on the debt owing to the secured party – continue to have priority over a later judicial lien if they had been undertaken before the lien attached, even if they did not mature until after attachment. (§9-232(b) is not a restraint on nonadvances.)

a. Non-advances relate back to the time of the transaction that triggers the non-advance. The
priority is determined from that date, such as the obligation of the debtor to pay interest or to reimburse the creditor for attorney’s fees incurred with respect to loans made prior to the imposition of the lien. b. These non-advances continue to have priority over a later judicial lien if they had been undertaken before the lien attached, even if they did not mature until after attachment. 7. Secured Party v. Party with Interest in Commingled Goods

a. Commingled goods – goods that are so combined with other goods they cannot be
recovered. §9-337 b. §9-337(d) If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is perfected.

c. Secured Party v. Secured Party - §9-337(f) i. If more than one security interest attaches to the product or mass, the following rules
determine priority:

1. A security interest that is perfected has priority over a security interest that is
unperfected at the time the collateral becomes commingled goods.

2. If more than one security interest is perfected, the security interests rank
equally in proportion to the value of the collateral at the time it became commingled goods.
Non-PMSI secured creditor § 9-317(a)(2): A security interest is subordinate to the rights of a person that becomes a lien creditor before the earlier of the time: PMSI secured creditor § 9-103 [definition of PMSI]; § 9-317(e): Except as otherwise provided in §§ 9320 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. Recall that a PMSI in consumer goods is perfected upon attachment. § 9309(1). Future Advances § 9-323(b): Except as provided in subsection (c) [buyer of receivables], a security interest is subordinate to the rights of a person that becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after the person becomes a lien creditor unless the advance is made: (1) without the knowledge of the lien; or (2) pursuant to a commitment entered into without knowledge of the lien. See also Comment 4. In other words, a secured party who otherwise has priority under § 9-317(a)(2) retains priority over a lien creditor if the advance is made less than 45 after a

(A) the security interest is
perfected; or

(B) one of the conditions specified
in § 9-203(b)(3) is met and a financing statement covering the collateral is filed. In other words, if a person becomes a lien creditor before both of the two times stated, the lien creditor has priority over the secured creditor. § 9-308(a): A security interest is perfected when it has attached and all of the applicable requirements for perfection (i.e, filing, possession, co

Levy - 32

ntrol, or automatic perfection) have been satisfied. The conditions under § 9-203(b)(3) are: (1) the debtor has authenticated a security agreement that provides a description of the collateral; (2) the collateral is not a certificated security and it is in the possession of the secured party under § 9-313 pursuant to the debtor’s security agreement; (3) the collateral is a certificated security in registered form and the security has been delivered to the secured party under 8-301 pursuant to the debtor’s security agreement; or (4) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under §§ 9-104, 9-105, 9-106, or 9-107 pursuant to the debtor’s security agreement.

A PMSI in other types of collateral must be perfected by appropriate means (i.e, filing, possession, or control).

person becomes a lien creditor, regardless of whether the secured party knew about the lien when it made the advance. If the advance is made more than 45 days after a person becomes a lien creditor, the security interest only retains priority if the advance is made without knowledge of the lien or is made pursuant to a commitment entered into without knowledge of the lien.

E. Buyers v. Secured Creditors (Does the security interest continue in the collateral?)

1. General rule: Generally, buyers take subject to encumbrances of record. §9-201 & 9-315(a).
However, there are a few exceptions. If one of the exceptions applies, the buyer takes free of the security interest, which means the secured creditor can’t claim it as collateral. The secured creditor has to look elsewhere – to the proceeds.

2. Authorized disposition exception, §9-315(a)(1): The security interest does not continue in the
collateral if “the secured party authorized the disposition free of the security interest.” §9-315(a)(1).

a. Authorization? The authorization can be express or implied. The authorization must be for
a disposition “free of the security interest.” Where secured creditor knows that buyer is selling collateral in violation of SA and secured creditor doesn’t do anything, courts have held this as implied authorization. Courts are split as to “conditional authorizations” (i.e., can sell collateral but only if you pay proceeds to secured creditor.)

b. Authorized disposition: If the creditor authorizes the debtor to dispose of the collateral
free of the security interest the buyer takes free of the security interest, the creditor’s security interest in the collateral is terminated, the buyer takes free of the security interest, and the secured creditor can look only to the debtor and the proceeds. §9-315(a)(1). (Authorization may be expressed in the SA, in some other writing, or might be implied from the circumstances or conduct of the parties.)

c. Unauthorized disposition: Where the creditor has not authorized the debtor to dispose of
the collateral free of the security interest, but the debtor disposes of it anyway, the buyer owns the collateral subject to the security interest. The buyer may or may not know of that interest.

3. Buyer-in-the-ordinary-course exception, §9-320(a): (Applies to perfected and unperfected
security interests.)

a. §9-320(a) Except as otherwise provided in subsection (e), a buyer in ordinary course of
business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.

b.

“Buyer in ordinary course”: A person “buys in the ordinary course of business” if the sale is within the ordinary course of the seller’s business. §1-201(b)(9). (The focus is on the seller’s business, not the buyer’s.)

Levy - 33

i. "Buyer in ordinary course of business" means a person that buys goods in good
faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind.

ii. Satisfaction of debt: “Buyer in ordinary course” does not include a person that
acquires goods in a transfer in bulk or as security for in total or partial satisfaction of a money debt. §1-201(b)(9).

c. Secured party not in possession of goods: If the secured party is not in possession of the
goods, a buyer in the ordinary course of business takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence, but not if the buyer knows that the sale violates a term in an agreement with the secured party. §9-320(a) Comment 3.

d. EXCEPT WHEN THE Secured party in possession of goods: If the secured party is in
possession of the goods, then § 9-320(a) and (b) do not apply and the general rules of §§ 9315, 9-317(b) apply (and the buyer takes subject to the security interest). § 9-320(e), Comment 8

4. Buyer-not-in-the-ordinary-course exception, §9-323(d),(e) & 9-317(b): (Applies only to
unperfected security interests.) Rule summary: A buyer who buys goods not in the ordinary course of business (seller sells you something he doesn't usually sell), you have priority over unperfected security interests, but not perfected security interests. The line-up of priority is perfected security interests, you, unperfected security interests.

a. Rule: A buyer, other than a secured party, of tangible chattel paper, documents, goods,
instruments, or a security certificate takes free of a security interest if i. the buyer gives value and receives delivery of the collateral ii. without knowledge of the security interest AND

iii. before it is perfected (so does not apply to perfected security interest). §9-317(b). b. Future advances: i. Rule: A buyer of goods other than a buyer in the ordinary course of business takes
free of a security interest to the extent that it secures advances made after the earlier of: 1. the time the secured party acquires knowledge of the buyer’s purchase; OR

2. 45 days after the purchase. § 9-323(d) ii. Exception: § 9-323(d) does not apply if an advance is made pursuant to a
commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45-day period. §9-323(e).

5. Consumer-to-consumer-sale exception (buyer of consumer goods) §9-320(b): a. §9-320(b): A buyer of goods from a person who used or bought the goods for use primarily
for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:

i. without knowledge of the security interest; ii. for value; iii. primarily for the buyer’s personal, family, or household purposes; AND iv. Before the filing of a financing statement covering the goods. 1. NOTE: If the SP perfects by filing rather than relying on automatic perfection,
the buyer loses his status as a 9-320(b) buyer.

b. The exception applies only if the goods are consumer goods in the hands of the seller before
the sale and consumer goods in the hands of the buyer after the sale. It is also called the “garage sale” exception. If the secured party is in possession of the goods, then § 9-320(a) and (b) do not apply and the general rules of §§ 9-315, 9-317(b) apply (and the buyer takes subject to the security interest). § 9-320(e), Comment 8

c. The buyer in a consumer-to-consumer sale is protected from an automatically perfected PMSI
in consumer goods. A secured party that relies on automatic perfection of a PMSI in consumer Levy - 34

goods may lose their security interest in collateral in a consumer to consumer sale under this section.

6. Farm products NOT AN EXCEPTION, §9-320(a): a. A buyer in ordinary course of business buying farm products from a person engaged in
farming operations, DOES NOT TAKE free of a security interest created by the buyer's seller.

7. In summary: other exceptions to the general rule that the security interest continues in the
collateral after disposition by the debtor: a. Sale when the security interest is unperfected b. sale of inventory, c. sale of seller’s consumer goods to a consumer buyer, and d. sale of farm products.
Authorized Disposition § 9-315(a)(1), Comment 2 § 9-320 Comment 6 A security interest continues in collateral notwithstanding sale, lease, license, exchange or other disposition thereof unless the secured party authorized the disposition free of the security interest. After default by the debtor, the secured party may repossess the collateral from the transferee, or, in an appropriate case, maintain an action for conversion. If the disposition free of the security interest is authorized, the secured party’s only right will be to proceeds. § 9-315 Comment 2 Buyer-in-theOrdinary-Course § 9-320(a), Comment 3 Example 1 § 1-201(9) [defines buyer in the ordinary course of business; only applies to buyers of goods] If the secured party is not in possession of the goods, a buyer in the ordinary course of business takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence (but not if the buyer knows that the sale violates a term in an agreement with the secured party). §9-320 Comment 3 If the secured party is in possession of the goods, then § 9-320(a) and (b) do not apply and the general rules of §§ 9-315, 9-317(b) apply (and the buyer takes subject to the security interest). § 9-320(e), Comment 8 Buyer Not-in-the-OrdinaryCourse § 9-323(d),(e), § 9-317(b), Comment 6 A buyer, other than a secured party, of tangible chattel paper, documents, goods, instruments, or a security certificate takes free of a security interest if the buyer gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected. § 9-317(b). Future Advances A buyer of goods other than a buyer in the ordinary course of business takes free of a security interest to the extent that it secures advances made after the earlier of: (1) the time the secured party acquires knowledge of the buyer’s purchase; or (2) 45 days after the purchase. § 9-323(d) § 9-323(d) does not apply if an advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45day period. § 9-323(e) *Note the special priority rule for PMSIs. § 9-317(e) Consumer-to-Consumer § 9-320(b), Comment 5 A buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value;

(3)

primarily for the buyer’s personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods. Note that a secured party that relies on automatic perfection of a PMSI in consumer goods may lose their security interest in collateral in a consumer to consumer sale under this section.

____________________________________________________________________________________________________________

CREDITORS’ REMEDIES
A. Introduction Levy - 35

1. Priority in foreclosure a. Two basic principles: Two basic principles govern the timing of the enforcement of
competing liens against the same collateral.

i. Any lien holder may foreclose; Absent an agreement to the contrary, any lien
holder may foreclose while the debtor is in default to that lien holder.

ii. No lien holder is compelled to foreclose. Each has the option to extend the
debtor’s time for payment or simply to forebear from exercising its remedy.

b. Principles: These principles govern most judicial or foreclosure sales: i. Discharge of lien and subordinate liens: The sale discharges from the collateral
the lien under which the sale is held and all subordinate liens. §9-617(a). It does not discharge prior liens.

ii. Enforcement of prior lien: The sale transfers the debtor’s interest in the collateral to
the purchaser, subject to all prior liens. §9-617(a). Unless the debt underlying the prior lien is paid by the purchaser or someone else, the holder of the prior lien can foreclose.

iii. Distribution of proceeds: The proceeds of sale are applied first to the expenses of
sale, then to payment of the lien under which the sale was held, then to payment of subordinate liens in the order of their priority. §9-615(a). The remaining surplus, if any, is paid to the debtor. §9-615(d)(1). Unsecured creditors do not share in the distribution.

iv. If balance remaining – deficiency judgment: The debt underlying each lien is
reduced by the amount paid to the lien older from the sale, but the balance remains owing. The lien holder is then entitled to a judgment against the debtor for the deficiency, unless there is a statute providing otherwise. §9-615(d)(2).

2. The right to possession between lien holders: If two lien holder foreclose at the same, the
majority of courts require that junior lien holders surrender possession to senior lien holder, effectively giving seniors the right of way. B. Remedies of Unsecured Creditor

1. Unsecured creditor remedies: The creditor is entitled to coerce payment of the debt only through
the judicial processes specified by the state.

a. Judicial foreclosure: Unsecured creditor can get judicial foreclosure, see below. b. No self-help: Unsecured creditors do not have access to self-help seizures of the debtor’s
property.

i. Conversion: In most instances, a prohibited seizure of a debtor’s property will
constitute the tort of conversion.

c. Wrongful collection practices: Though the creditor has the right to demand payment from
the debtor, if it does so in an unreasonable manner, it may incur liability for wrongful collection practices. d. Property exempt from execution: i. provisions for burial (cemetery lot, coffin, etc.); ii. business and farm equipment up to a certain dollar amount ($7,500); iii. consumer goods (i.e., household goods, furnishing, clothes up to certain dollar amount ($5,000)); iv. motor vehicles up to certain amount ($1,200); v. net income up to certain amount (75% of debtor’s net income for each one week pay period is exempt); vi. depository accounts up to certain amount ($1,000); vii. homestead up to a certain amount ($40,000) except for mortgages, laborers’, mechanics’, and purchase money liens and taxes. C. Remedies of Secured Creditors Levy - 36

1. Default: Creditors have access to remedies only if the debtor is in “default.” §9-601(a). “Default” is
the debtor’s failure to pay the debt when due or otherwise perform the agreement between debtor and creditor. (Article 9 does not define default. Most SAs contain extensive definitions of default.)

a. Defining when payment is due: Payment schedules are fixed by K at the time the loans are
made and are therefore subject to almost infinite variation. Examples: installment loans (payments due at regular intervals), single payment loans (payment due at a specific time unless creditor renews note for additional time), and lines of credit (bank contracts to lend up to a fixed amount of money as the debtor needs it). b. Acceleration and cure

i. Acceleration: An acceleration clause in the K states that in the event of default by the
debtor in any obligation under the repayment K, the creditor may, at its option, declare all of the payments immediately due and payable. The practical effect of acceleration is often to eliminate the debtor’s ability to cure its default.

ii. Debtor’s right to cure: A debtor has the right to cure a default by paying the
amounts when due. If the debtor cures before the creditor accelerates, the necessary sum may be small. Some debtors, particularly those who get reminders from their creditors, make up payments in time and get out of jeopardy.

c. Remedies after default: Two categories of remedies:
i. judicial remedies such as foreclosure and replevin, which are administered by the court; AND ii. self-help remedies such as repossession without judicial process, the notification of account debtors, or the refusal to make further advances to the debtor under a line of credit. d. Foreclosure principles

i. Discharge of liens: The sale discharges from the collateral the lien under which the
sale is held and all subordinate liens, but the purchaser takes the collateral subject to all prior (senior) liens. §9-617(a).

ii. Distribution of proceeds: The proceeds of sale are first applied to the expenses of
the sale, then to payment of the lien under which the sale was held, then to payment of subordinate liens in the order of their priority. §9-615(a). The remaining surplus, if any, is paid to the debtor. §9-615(d)(1). Unsecured creditors do not share in the distribution. If subordinate (junior) liens are not satisfied by the foreclosure proceeds, those lienholders are unsecured creditors for the remaining amount of the lien. e. Relevant Codes: i. UCC Section 9-610 – After default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral. ii. UCC Section 9-623 - the sale or disposition itself forecloses the debtor’s right to redeem the property. iii. UCC Section 9-617(a) – Sale extinguishes the creditor’s security interest in collateral and transfers to the purchaser all of the debtor’s rights in the collateral. iv. UCC Section 9-601(a) - if the creditor chooses, it may foreclose by any available judicial procedure.

2. Take possession after default, §9-609: Unless otherwise agreed, immediately after default, a
secured party may take possession of the collateral or without removal, render equipment unusable and dispose of collateral on debtor’s premises under §9-610. §9-609(a). a. Repossession: The act or an instance of retaking property; especially a seller’s retaking of goods sold on credit when the buyer has failed to pay for them. i. Difference between possession and foreclosure: 1. Only foreclosure transfers ownership of the collateral from the debtor to the secured party or a purchaser at a foreclosure sale. 2. However, possession of the collateral before foreclosure can benefit the secured party. Levy - 37

b. Section 9-609(a) allows the secured party to take possession of the collateral without judicial intervention. i. If the debtor is in default under the agreement between the debtor and the secured party, the secured party may take possession of the property without first getting a court order or even proving in court that the debtor is in default. ii. This right to “self-help repossession” is limited by § 9-609(b)(2) which specifies that the secured party may only take possession of the property if it can do so “without a breach of the peace.”

c. After the debtor’s default, the secured party has essentially 3 options:
i. The secured party can use judicial foreclosure and have the court conduct the foreclosure sale. ii. If allowed under § 9-620, the secured party can opt for strict foreclosure and accept the collateral in full or partial satisfaction of the obligation. iii. The secured party can dispose of the collateral. Disposition may be by sale, lease, license, or “other disposition”. § 9-610. This may take place after self-help repossession or after a replevin action.

d. Self-help or judicial process? A secured party may proceed under §9-609(a)
i. pursuant to judicial process; OR

ii. Without judicial process if it proceeds without breach of peace. §9-609(b). 1. “Breach of the peace”: The two primary factors in determining whether a
creditor’s trespass onto a debtor’s property rises to the level of a breach of the peace are:

a. the potential for immediate violence; AND
i. timing and manner of repossession; ii. if there was a confrontation.

b. the nature of the premises intruded upon. Salisbury Livestock Co. 2. Resistance from debtor: If the debtor resists repossession, the secured party
must obtain a court order for possession and have the sheriff take possession from the debtor. The easiest way to obtain such an order is by filing an action for replevin. e. Proceeding by Judicial Action i. Replevin: name of both a writ and a cause of action. the debtor resists repossession, SC can obtain a court order for possession, replevin, and have the sheriff take possession from the debtor. To “replevy” is to regain possession of personal property under a provisional remedy that allows the plaintiff, upon giving security (such as a bond), to regain the disputed property from the defendant and hold it until the court decides who owns it. ii. If the secured party is unable or unwilling to regain possession of the property on its own, the secured party may file a replevin action and get a writ of replevin ordering the debtor to turn the property over to the secured party. iii. Del’s Big Saver Foods, Inc. v. Carpenter Cook, Inc. Note that the debtor in this case did not claim that the secured party failed to comply with the Wisconsin version of Article 9 or the state replevin requirements. Instead, the debtor claimed that the state judge’s application of the laws was unconstitutional. The court upheld the statutes and procedures, including the ex parte order granting the secured party immediate possession of the collateral. f. If collateral was “accounts”:

i. “Accounts”: “Accounts” means accounts receivable. §9-102(a)(2). ii. Self-help against accounts as collateral: If the debtor had used their accounts
receivable as collateral, upon default, the secured creditor who knows the identity of the account debtors (the people who owe the debtor) can simply send them written notices to pay directly to the secured creditor. §9-607.

Levy - 38

3. Article 9 sale, §9-610: The key factor that distinguishes Article 9 sales from judicial foreclosure
sales is the lack of court involvement in an Article 9 sale. The sale is conducted by the secured party, and the secured party decides when and how the sale should be conducted (within the parameters set out in Article 9). § 9-610. Proceeds of the sale are also distributed by the secured party in the order prescribed by § 9-615.

a. General Rule: After default, a secured party may dispose (sell, lease, license, or otherwise
dispose) of any or all collateral in its present condition or following any commercially reasonable preparation or processing, by public or private proceedings, by one or more contracts, as units or in parcels, and at any time and place and on any terms, as long as every aspect of the disposition is “commercially reasonable.” §9-610(a), (b).

i. “Commercially reasonable”: Every aspect of disposition of collateral must be
commercially reasonable. §9-610(b).

1. §9-627 Circumstances: The disposition of collateral is commercially
reasonable if it is made: a. in the usual manner on any recognized market; b. at the price current in any recognized market at the time of the disposition; c. otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition; OR d. if it is approved in a judicial proceeding or by or on behalf of the creditors. (However, such approval is not necessary). § 9-610(b), 9627(c), (d).

2. Greater amount: “The fact that a greater amount could have been obtained
by a . . . disposition . . . at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the . . . disposition . . . was made a commercially reasonable manner.” § 9-627(a).

3. If not commercially reasonable: If the debtor believes that the sale was not
conducted in a commercially reasonable manner, the debtor must file suit to recover damages. § 9-625(b). If the collateral is consumer goods, the debtor is also entitled to statutory damages. § 9-625 (c), (e). The sale itself, however, will not be set aside.

a. Debtor’s remedies if sale is commercially unreasonable: Section
9-626 governs the burden of proof and presumptions in cases in which a surplus or a deficiency is at issue. ii. Public or private disposition?

1. Public: If the secured party chooses to sell at a public disposition (auction), the
secured party may bid on, and if the highest bidder, purchase, the collateral. § 9-610(c)(1). This ensures that the highest price for the collateral is obtained.

2. Private: A secured party that chooses to sell at a private disposition (private,
negotiated sale), may purchase the collateral only if the collateral is of a kind that is customarily sold on a recognized market or is the subject of widely distributed standard price quotations. § 9-610(c)(2). If there is an easily verifiable market price for the collateral, the debtor is not harmed by allowing the secured party to purchase the collateral at that price. b. Notification of sale requirement:

i. Who gets notice, §9-611: Section 9-611 requires the secured party to send notice of
disposition (whether public or private) of the collateral to: 1. the debtor; 2. any secondary obligor (which would include guarantors or other sureties); 3. if the collateral is anything other than consumer goods, (i) any other person from whom the secured party has received an authenticated notification of a claim of an interest in the collateral; (ii) any other secured party or lienholder Levy - 39

that has a security interest in or other lien on the collateral that was perfected by the filing of a financing statement; (iii) any other secured party or lienholder that has a security interest in the collateral that was perfected by compliance with a statute, regulation or treaty. ii. Sufficient notice:

1. Non-consumer goods: Except in a consumer-goods transaction, notification
is sufficient if it: a. describes the debtor and the secured party; b. describes the collateral that is the subject of the intended disposition; c. states the method of intended disposition; d. states that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; AND e. states the time and place of a public disposition or the time after which any other disposition is to be made. §9-613(1)

2. Consumer goods: In a consumer-goods transaction, notification is sufficient if
it: a. provides the information in §9-613(1); b. describes any liability for a deficiency of the person to which notification is sent; c. a telephone number from which the amount that must be paid to the secured party to redeem the collateral under §9-623 is available; AND

d. a telephone number or mailing address from which additional
information concerning the disposition and the obligation secured is available. §9-614(1).\ 3. §9-612 – 10 days or more before disposition is reasonable time.

iii. Sufficient form of notification: §9-613 iv. Result of no notice: Failure to give required notice does not invalidate the sale, but
may reduce or eliminate any deficiency the secured party can recover.

v. Perishable collateral: If the collateral is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized market, then the notice provisions above to do not apply. § 9-611(d).

vi. Waiver of notice: Debtor can only waive the right to notice of disposition of collateral
after default. The waiver must be in an authenticated agreement. § 9-624(a) c. Debtor’s rights:

i. If secured party fails to comply with Article 9 requirements: Under § 9-625, “[I]f
it is established that a secured party is not proceeding in accordance with this article, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.” In addition to stopping a sale that does not comply with Article 9, a court can order a sale if the secured party is merely hanging on to the collateral and not making any effort to sell it (unless, of course, the debtor has agreed, after foreclosure, to allow the secured party to retain the collateral in full or partial satisfaction of the debt). 1. Default remedy is under (b), which allows for actual damages. This would apply to damages for breach of the peace (see Comment 3) but no double recovery if tort damages are recovered.

ii. Right of redemption: Under § 9-623 the debtor has the right to redeem the collateral
before the sale. The right of redemption is given to all lienholders, even judgment lienholders and holders of other nonconsensual liens. Comment 2 to § 9-623.

1. Redemption requirements: Redemption requires
a. payment of the full amount of the obligation secured by the collateral AND i. If the entire balance of a secured obligation has been accelerated, it would be necessary to tender the entire balance. If not, payment in full of all monetary obligations then due and Levy - 40

performance in full of all other obligations then matured is required. Comment 2 to § 9-623.

b. The secured creditor’s expenses of sale as described in § 9-615(a)(1). i. “Expenses”: Recoverable expenses under § 9-615(a)(1) include
1. attorney fees (if provided for in the agreement and not prohibited by law); 2. expenses for retaking, holding, preparing for disposition, processing, and disposition. 2. Waiver:

a. Non-consumer transactions: In non-consumer goods transactions, a
debtor can only waive the right to redeem collateral after default. The waiver must be in an authenticated agreement. § 9-624(c).

b. Consumer goods transaction: In consumer goods transactions, the
debtor cannot waive the right of redemption. § 9-602(11).

d. Failure to sell collateral: If the secured party is able to sell but delays an unreasonably long
time in doing so, § 9-626(a) limits the deficiency available to the secured creditor. A debtor may also use § 9-625(a) and seek an order compelling a sale.

e. Discharge of liens: The sale discharges from the collateral the lien under which the sale is
held and all subordinate liens, but the purchaser takes the collateral subject to all prior (senior) liens. §9-617(a).

f. Distribution of proceeds: The proceeds of sale are first applied to the expenses of the sale,
then to payment of the lien under which the sale was held, then to payment of subordinate liens in the order of their priority. §9-615(a). The remaining surplus, if any, is paid to the debtor. §9-615(d)(1). Unsecured creditors do not share in the distribution. If subordinate (junior) liens are not satisfied by the foreclosure proceeds, those lienholders are unsecured creditors for the remaining amount of the lien.

4. Judicial foreclosure (non-Article 9 sale): This is the process that unsecured creditors must follow.
It is an expensive, time-consuming process that is likely to yield far less than market value for the collateral. This is the least attractive and least popular option for secured creditors. a. Proceeds of foreclosure:

i. Distribution of proceeds: Once a sale has been confirmed, the sale proceeds are
distributed in the following order: 1. reimbursement of foreclosing creditor expenses of the sale; 2. to foreclosing creditor up to the amount of the debt secured by the foreclosed lien; 3. if no other liens, any remaining surplus to debtor.

ii. Deficiency: If the proceeds of the sale are insufficient to pay the full amount of the
debt secured by the foreclosed lien, the foreclosing creditor may ask the court to enter a judgment for the deficiency.

b. Avoiding foreclosure: If there are no other liens or interests in the collateral, the debtor can
simply transfer the property to the creditor by means of a “deed in lieu of foreclosure.”

5. Strict foreclosure (retention): Strict foreclosure refers to allowing the secured party to accept the
collateral in full or partial satisfaction of the debt. Instead of selling the collateral and using the sale proceeds to pay off the debt, the secured party gets ownership of the collateral and no sale is conducted. a. Three requirements:

i. Debtor must consent, § 9-620(a)(1), (b). 1. Consent to partial satisfaction: Consent to acceptance of the collateral in
partial satisfaction of the obligation is only valid if it is agreed to in an authenticated record and the record must be authenticated after default. § 9620(c)(1).

Levy - 41

a. No partial satisfaction if consumer transaction: In a consumer
transaction, a secured party may not accept collateral in partial satisfaction of the obligation it secures. § 9-620(g).

2. Consent to full satisfaction: a. Valid? Consent to acceptance of the collateral in full satisfaction of the
debt is only valid if either (§ 9-620(c)(2)): i. it is agreed to in an authenticated record and the record is authenticated after default; OR ii. after default, (1) the secured party sends the debtor a proposal that is unconditional or subject only to a condition that collateral in the possession of the secured party be preserved or maintained; (2) in the proposal, the secured party proposes to accept the collateral in full satisfaction of the obligation it secures, and (3) the secured party does not receive notification of objection authenticated by the debtor within 20 days after the proposal is sent.

3. Note: Note that if the acceptance is in full satisfaction of the debt, the debtor
must either consent in an authenticated record or the secured party may send notice of intent to accept in full satisfaction and the debtor does sent a timely rejection; consent will be implied if the secured party fails to receive an authenticated objection within 20 days after the proposal is sent. Oral objection is not sufficient. Note that this implied consent is not available if the secured party is accepting the collateral in partial satisfaction of the debt.

ii. No objection from parties with subordinate interest, §9-620(a)(2) AND; There
must be no objection by parties other than the debtor who have an subordinate interest in the collateral or by anyone to whom the secured party is required to give notice under § 9-621 (other persons with liens against the collateral). § 9-620(a)(2).

iii. If the collateral is consumer goods, the collateral cannot be in the possession
of the debtor when the debtor consents to the acceptance, § 9-620(a)(3).

1. Consumer goods and 60% paid: If the collateral is consumer goods and the
secured party has taken possession of the collateral, the secured party cannot accept the goods in full satisfaction of the obligation if 60% of the price or loan has been. § 9-620(a)(4),(e). In that case, the secured party must dispose of the consumer goods within 90 days after taking possession; or within any longer period to which the debtor and all secondary obligors have agreed in an agreement to that effect entered into and authenticated after default. § 9620(f). a. 60% of the cash price has been paid in the case of a PMSI in consumer goods. b. 60% of the principal amount of the obligation secured has been paid in the case of a non-PMSI in consumer goods. ____________________________________________________________________________________________________________ CHECKLIST GENERAL DEBTOR-CREDITOR RELATIONSHIPS 1) Creditor must get a lien by process of execution (judgment) 2) Exceptions a) Statutory liens (construction liens and artisan’s liens) b) Consensual Agreements (mortgages and Art. 9 Security Interests in Personal Property) UCC ARTICLE 9 Levy - 42

1) Attachment (Secured party’s rights in collateral as against the debtor) a) Three Requirements i) Value given (any debt) ii) Debtor has rights in the collateral iii) Security agreement created or Possession b) Evidence of Security Agreement (Statute of Frauds) i) Agreement and creditor has possession of the collateral (IF value has been given and debtor has rights, once creditor possesses the collateral, he has attached and perfected) ii) Agreement in an Authenticated Record (signed writing) c) Authenticated Record i) Description of Collateral: Reasonably identifies the collateral (NO SUPERGENERIC DESCRIPTIONS such as “all debtor’s assets/property) ii) Language indicating that the collateral described is security for a debt (no magic words needed) iii) Security interest attaches to after-acquired collateral by agreement (“all debtor’s existing and after-acquired equipment) iv) Security interest attaches to identifiable proceeds v) Agreement can provide for future advances d) General Rules i) Debtor can transfer rights to the collateral (i.e., sell, grant another security interests, etc.) ii) Typically, the security interest follows the collateral even if the debtor disposes of it unless Creditor authorized the debtor to transfer free of the security interest iii) Generally, the original secured party wins except as provided by the priority rule (see below) 2) Perfection (Secured party’s rights against 3d parties) (Attachment must be established before you can perfect)

a) Perfection by filing a financing statement in the office of the secretary of state
i) What? (1) Debtor’s name (minor errors OK; if debtor changes his name, it’s seriously misleading and you need to file new FS) (2) Secured party’s name (3) Indication of the collateral (supergeneric OK) ii) Where? (1) Individuals: state of debtor’s principal residence (2) Organizations (a) Principal place of business (b) If more than one, in the chief executive office iii) Authorized by debtor in an authenticated record (if there’s a security agreement, it’s authorized)

b) Perfection by Possession of Collateral
i) Tangible goods ii) Chattel paper iii) Negotiable instruments

c) Perfection by Control (investment property, deposit accounts, electronic chattel paper, letters of
credit) d) Automatic Perfection i) PMSI in consumer goods ii) PMSI is (1) money lent to the debtor to buy the actual collateral or (2) seller financing iii) Consumer goods: personal, family, or household use e) Temporary i) 20 days for proceeds Levy - 43

ii) Beyond 20 days (1) “Same office” Rule (proceeds could be filed in the same office as original collateral) (2) Identifiable cash proceeds (3) Creditor perfects within the 20-day temporary period (filing, possession, etc.) iii) Four months after debtor relocates if debtor’s location governs perfection 3) Priorities (More than one creditor has rights in the debtor’s collateral after debtor defaults) a) General Rules i) Between unperfected secured parties: first to attach ii) Between perfected and unperfected: perfected secured party wins iii) Between two perfected secured creditors: first to file or perfect iv) Purchase Money Security Interests have superpriority b) PMSI in Inventory wins IF: i) Perfected when debtor gets possession of inventory and ii) Notice to prior creditors c) PMSI in Equipment wins IF: i) Perfected before or within 20 days after debtor gets possession of the equipment d) Conflicting PMSI i) If the PMSI is seller financing, seller wins ii) Otherwise, first to file or perfect wins e) Purchaser of Chattel Paper i) Good faith purchaser of chattel paper takes priority over proceed interests in the chattel paper and any other security interest in the chattel paper if purchased without knowledge of any violation of the secured party’s rights f) Buyers

i) Regular buyer takes free of a security interest if he gives value and receives delivery without
knowledge of the security interest and before perfection

ii) Buyer in the ordinary course of business take free even if perfected if
(1) Buyer buys in the ordinary course of his business (2) Seller (debtor) is engaged in the business of selling goods of that kind (3) Buyer has no knowledge that the sale violates the secured party’s rights (buyer can know about the security agreement) Consumer to Consumer Sales (E.g., yard sales): Buyer takes free eve if perfected if: (1) Buyer has no knowledge of the security interests (2) Gives value (3) Goods are consumer goods (4) Before secured party filed

iii)

g) Lien Creditors i) General rule: lien creditors beat unsecured creditors ii) Exceptions: Security interest beats lien creditor if (1) Secured party is perfected before the lien attaches or (2) Secured party files first and meets one of the attachment requirements (value given; agreement or debtor has rights) 4) Rights on Default a) Repossession i) After default ii) Cannot “breach the peace” b) Sale of Collateral i) Commercially reasonable Levy - 44

ii) Private or public iii) Notice of the sale to debtor or surety (if applicable) iv) Order of Distribution (1) Expenses (2) Secured debt is paid (3) Junior liens and interests are paid (4) If there is a surplus, debtor gets the balance (5) If there is a deficiency, creditor can sue for deficiency c) Retaining the Collateral (Strict Foreclosure) i) Proposed to the debtor ii) Acceptance by the debtor or acquiescence iii) Complete satisfaction: (1) Fully satisfies the debt (2) Not allowed for consumer goods where debtor has paid 60% of the secured debt iv) Partial Satisfaction for Non-consumer goods (1) Partial satisfaction of the debt (2) Debtor is liable for the balance (3) Not allowed for consumer goods d) Debtor’s Right of Redemption i) Any time before disposition ii) Pay all obligations plus reasonable expenses e) Failure to Comply with the Code i) Creditor is liable for actual damages ii) Court presumes that the value of the collateral is presumed equal to the amount of the debt

Levy - 45

Sign up to vote on this title
UsefulNot useful