Louisiana Security Devices Survey

I. Introduction
a. Concept of security device
i. A theoretical explication
1. Definition: some accessory right, either real or credit, accorded to
a certain obligee, either by will or by law, over and above the
ordinary rights that obligees enjoy as a matter of course, the
purpose of which is to increase the chance that this obligee will
ultimately obtain satisfaction of the obligation owed to him.
2. Accessory right: created to provide security for the performance of
a principal obligation.
a. Thus in principle, a security device cannot exist without a
principal obligation.
i. This is true as a general rule.
ii. However, La. R.S. 10, article 9 treats some security
devices as if they came into existence even before
the principal obligations came into existence
b. The accessory follows the principal. Whatever happens to
the principal obligation that the security device is backing
up, the same thing in theory should happen to the accessory
obligation (the security device).
c. Thus, if the principal obligation is extinguished, so should
the security device be. If the principal obligation is null, so
should the security device be.
3. Real right or credit right
a. Enumeration
i. Real right is a right on a thing. It enables the holder
of the right to do something with the thing.
ii. Credit right is a right against a person.
b. Some security devices are real rights, some are credit
rights. There are significant effects resulting from this
distinction.
4. By will or by law
a. By law: Some security devices arise merely by operation
of law, without bargaining by the parties. Unusual.
b. By will: Most security devices are contractual (bargained-
for).
5. Over and above the ordinary rights that obligees enjoy as a matter
of course (unsecured creditor rights)
a. Process of obtaining payment from a defaulting debtor
i. Sue and obtain either a default judgment or a
regular judgment

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 ii. Cannot then engage in self-help to go get the
money. Art. 3183 common pledge: each piece of a
debtors property is potentially on the hook to each
of his creditors, to be executed on in the event of
default: The property of the debtor is the common
pledge of his creditors, and the proceeds of its sale
must be distributed among them ratably, unless
there exist among the creditors some lawful causes
of preference. Every unsecured creditor has an
equal interest in the debtors property.
iii. The creditor can then wave the judgment in the
debtors face, and the debtor probably still will not
pay. The creditor must then execute [foreclose].
Have to see the judge a second timeto get an
order for the sheriff to go seize, and then sell, the
debtors property.
1. The judgment debtor rule allows the creditor
to go back to court to sue the debtor to
identify the debtors property. And if the
debtor doesnt appear in court, have to hire a
private investigator to identify the property.
2. The basic writ of seizure is a writ of fifa.
(fieri facias). If the judge issues it, its
directed to the sheriff to go seize property
identified in the writ. This means the sheriff
must be told exactly what to seize and where
to go to find the property.
3. For movable property, the sheriff is
supposed to warehouse it (no one actually
does this)so turn over the property to a
keeper who keeps it pending the sale.
iv. Sheriff sale (public auction)
1. After the sale, the sheriff takes his cut and
turns the remaining proceeds over to the
creditor
ii. A practical explication
1. The plight of the unsecured creditor (see above)
2. The rights of the unsecured creditor
a. Explication and enumeration thereof (see above)
b. Assessment thereof (why these rights leave a lot to be
desired)

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 i. The sheriff wrongfully seizes the debtors property
if the debtor already sold the property to someone
else. In essence, with no security device, the debtor
can rightfully do whatever he wants with the
property if done before the sheriff seizes it.
ii. Exemptions from seizure
1. These include basic clothing, basic furniture,
anything needed for trade, automobile and
house (up to certain amounts)
iii. Art. 3183 The distribution among creditors is pro
rata. This means that each creditor gets the debtors
assets in proportion to the overall portion of the
debt that a creditor is owed.
3. The solutions to this plight
a. Security devices solve these problems. They give the
creditor some kind of solution to some of the problems with
the basic set of remedies.
b. Classification of security devices
i. Summa divisio: According to that which supplies the security: persons vs.
things
1. Personal security: security in a person
a. Concept
i. Defined: gives the creditor additional rights against
a person other than the debtor
ii. Instance: suretyship
1. This provides a second debtor, essentially
2. This does not solve the problems of the
delay or costs in the fifa process, or the
competing creditor problem.
3. Rather, it solves the problem that the debtor
cannot pay.
2. Real security: security in a thing
a. Concept: identification of the thing in a document
i. This solves the problem of locating and identifying
the debtors assets.
ii. It also gives the creditor real rights that stay
attached to the thing no matter whether the debtor
alienates the thing.
iii. The creditor also may be able to take advantage of a
streamlined procedure: executory process
iv. Also, because there is a preference, it takes the
creditor out of the common pledge. He gets paid
out of the asset that is the collateral, and he gets

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 paid first, until either his claim is satisfied, or the
collateral value runs out.
b. Classification according to the nature of the thing in which
the security lies
i. Movable security
1. Concept
a. Caveat
2. Illustrations: Article 9 security interests,
certain statutory liens & privileges
ii. Immovable security
1. Concept
a. Caveat
2. Illustrations: mortgages, certain statutory
liens & privileges
c. Classification according to who controls the thing
i. Possessory security
1. Concept: pending performance of the
obligation that the real security is accessory
to, the creditor holds the property. The most
ancient form of security.
a. This may be better for the creditor
because the collateral wont
disappear.
b. Possessory security is rare
2. Illustrations: pledge, pawn (now a kind of
Article 9 security interest), antichresis
a. Possessory security has been called
pledge traditionally. Pledge is
subdivided into 2 categories in the
civil law:
i. Antichresis: Immovable
pledge. No one has done one
of these since at least the 19th
Century in Louisiana. This
was more useful in an
agricultural society where the
land would be useful in the
hands of the creditor.
ii. Pawn: Movable pledge. At a
pawn shop, the pawn broker
loans you money, and to
secure repayment, he holds
the movable.

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 ii. Non-possessory security
1. Concept: the debtor continues to hold onto
the collateral while the payment of the debt
is pending.
a. The debtor gets to continue to use
the property. This may be good for
the creditor if the debtor can use the
property to produce fruits, rents, etc.
b. Also, the debtor often needs to hold
onto the property to use it.
iii. Illustrations: an Article 9 security interest based on
a security agreement, mortgages
ii. According to the source of the security
1. Volitional (conventional) security
a. Concept
b. Illustrations: Article 9 security interests, conventional
mortgages
2. Legal security
a. Concept
b. Illustrations: various so-called statutory liens or
privileges, legal mortgages
i. Usually they are called either liens or privileges.
II. Suretyship (Personal Security)
a. Concept
i. Background
1. The common law calls it guaranty
2. Our law looks pretty Roman still
ii. Definition
1. 3035 Suretyship is an accessory contract by which a person binds
himself to a creditor to fulfill the obligation of another upon the
failure of the latter to do so.
a. There must be an existing principal obligation for the
suretyship to be in existence, due to the accessory nature of
the contract of suretyship.
b. The essence is the suretys binding himself to pay anothers
obligation to that other persons creditor. That other
person is the principal obligor.
c. Failure of the principal obligor to pay the creditor is what
triggers the suretys obligation to pay the creditor.
i. The suretys liability is contingent, or conditional
contingent upon the principal obligors failure to
perform
2. Usual context: start-up business may not be able to get a loan from
a lenderthe lender is not comfortable with lending to an entity

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 where it will only have recourse against the entity, and not the
entitys owner (for a closely-held entity). Therefore, the entitys
shareholder(s) will become surety(ies) for the obligation to induce
the lender to provide funding to the entity.
b. Scope (what obligations can be secured by suretyship)
i. 3036 Suretyship may be established for any lawful obligation, which, with
respect to the suretyship, is the principal obligation.
1. Usually an obligation to pay money will be secured by suretyship,
but others may be also
2. Any legal obligation will do
a. For example, an obligation to perform a service. Like a
construction bond.
c. Formation requirements
i. General contractual formation requirements: cause, capacity, consent, &
object
1. The only deviant consent rule: 3039 Acceptance of suretyship is
presumed
ii. Special formal requirements
1. 3038 It must be in writing and express. Its a solemn contract.
2. In writing
a. May be AUPS or authentic act.
b. Electronic (La. R.S. 9:2601 et seq.)if a law requires a
writing, an electronic writing satisfies the law. Same for an
electronic signature.
i. So a suretyship contract may be created via email.
3. Express
a. It must be clear and unambiguous that the alleged surety
intended to become a surety
b. Suretyship is not presumed
c. There must be a writing making it crystal clear that you
intended to pay if the principal obligor does not pay
d. Ball Marketing Enterprise v. Rainbow Tomato Co.
i. Cites to old case: We are behind the debtor and are
financing him and we feel that you are perfectly
safe on this sort of a contract. This was held not to
be express. Exch. Nat. Bank v. Waldron.
ii. In this case, we will take such steps as are
necessary to assure payment to you by the principal
obligor of amounts due. Held not to be express.
Interpreted literally, the surety is only promising to
pressure the debtor to pay.
d. Interpretation

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 i. Issue: someone signs as a principal debtor but then later says Oh no, Im
only a surety!
1. Normally, the parol evidence rule would prevent the guy from
testifying that his intent was only to provide suretyship.
2. But, the statute breaks this parol evidence rule.
3. 3037 One who ostensibly binds himself as a principal obligor is
considered a surety if the principal cause of the contract with the
creditor is to guarantee performance of such obligations.
a. This is related to the civil law of simulations. In Louisiana,
we always treat the contract as the real transaction, not
the apparent.
b. So for example, if parent signs on a loan so that kid can buy
a car, because the principal cause of the parent signing is to
guarantee the kids payment, the parent will be treated as a
surety. This is true even though the parent signs on a line
that reads debtorwhich otherwise indicates principal
obligor. However, the creditor will have to be aware that
the surety was really only signing as a surety.1
c. NOTE, this is a suppletive rule. The parties may agree that
the parent will assume principal obligor liability, and then
he will not be treated as a surety. Its all a matter of what
the parties agreed to.
4. 3037 Paragraph b - A creditor in whose favor a surety and principal
obligor are bound together as principal obligors in solido may
presume they are equally concerned in the matter until he clearly
knows of their true relationship.
a. This is a rule of commercial paperif the instrument is
transferred, the transferee may treat the parent in the above
scenario as a principal obligor.
e. Classification
i. Legal: bail bondsmanship
ii. Commercial
1. Defined
a. 3042 A commercial suretyship is one in which:
i. (1) The surety is engaged in a surety business
1. Would include company that issues bonds
for contractors
ii. (2) The principal obligor or the surety is a business
corporation, partnership, or other business entity

1
Clarify this: exactly what is the knowledge requirement? 3037 doesnt have a knowledge requirement, textually.
Does the creditor have to be aware that the principal cause of the contract is to guarantee performance? And if so, is
this an actual or constructive knowledge standard?

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 iii. (3) The principal obligation arises out of a
commercial transaction of the principal obligor; or
iv. (4) The suretyship arises out of a commercial
transaction of the surety
b. **Commercial means business. So, for example, if the
principal obligation is in any way related to business,
then the suretyship is commercial.
iii. Ordinary
1. Defined: neither commercial nor legal
2. This is a small category: no business motivation. Personal,
individual transactions with non-business entities
f. Effects
i. Relations between the surety and the obligee (creditor)
1. Nature and extent of suretys liability
a. The nature: the full performance of the principal obligation
i. But this is a default rule. The parties may agree that
a surety will be liable for less than all of the
principal debt.
b. The condition: default of the debtor triggers the suretys
liability to the creditor
2. Defenses
a. Not available2
i. Discussion
1. Defined: if owner of business is sued, he
can say sue the business entity first to get
satisfaction
2. Not available to a surety. The creditor may
sue the surety first. The creditor is not
required to first exhaust his remedies against
the principal obligor. If the principal obligor
defaults, the creditor may pursue the surety.
ii. Division
1. The surety may not say that he will only pay
the creditor his virile share
2. The surety may be required to pay the entire
monetary amount owed to the creditor (once
the debtor defaults)
b. Available defenses
i. Guiding principle: surety may raise any defense
available to the principal obligor
ii. Non-formation (3046)

2
Note, however, that the parties may contract for these defenses. Nearly all the rules re: suretyship are suppletive.

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 1. General rule: The surety may raise the
defense that one of CCCO3 or form
requirements were not 4met in formation of
the principal obligation or the suretyship
2. Exception: as to the principal obligation, the
surety may assert against the creditor any
defense to the principal obligation that the
principal obligor could assert except lack of
capacity or discharge in bankruptcy of the
principal obligor
a. The reason for the discharge-in-
bankruptcy exception: the reason the
creditor got the suretyship to begin
with was fear of the principal
obligors potential to become
insolvent, so the surety may not raise
the principal debtors discharge in
bankruptcy as a defense
b. The reason for the lack-of-capacity
exception: addresses the situation
where the surety is signing for the
principal obligor because that
principal obligor lacks capacity, as in
the parent signing for the child.
Therefore, the parent would not be
allowed to complain of his minor
childs lack of capacity.
ii. Relations between the surety and the principal obligor
1. Collection rights (subrogation and reimbursement)
a. Enumeration & explication
i. Suretys right of reimbursement
1. Concept of reimbursement
a. 3049 If the surety pays the creditor,
the surety is entitled to
reimbursement from the principal
debtor.
2. Prerequisites to reimbursement
a. (1) Surety has paid the creditor
b. (2) The principal debt must have
been due and exigible

3
Cause, capacity, consent, and object.
4

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 i. Due means the term for
performance has arrived.
Therefore, if the surety pays
early, the right of
reimbursement will not arise
until the debt becomes due.
ii. Exigiblethere is no
defect in the obligation that
would impede its
performance. The obligation
must be enforceable against
the principal debtor. If not
exigible due to relative or
absolute nullity, or
extinguishment/extinction of
the obligation, then the surety
has no right of
reimbursement if he pays the
creditor on the obligation.
Examples: null due to
relative nullity, or obligation
has prescribed: then non-
exigible.
iii. Exception: 3050 However a
surety can get reimbursement
for paying a non-exigible
debt under certain
circumstances: the surety is
in good faith, and before the
surety paid (1) the surety
made a reasonable effort to
notify the obligor that the
creditor was demanding
payment from the surety, or
(2) the principal obligor was
apprised [actually knew] that
the creditor was insisting on
payment. What would bad
faith be? WDK.
ii. Suretys right to subrogation
1. Concept of subrogation

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 a. 3048 The subrogation is by operation
of law
b. When the surety pays, he is
subrogated to the creditors rights
against the debtor
c. How is this different from the
suretys right of reimbursement from
the debtor? There is subrogation to
all of the creditors rights against the
debtor. Therefore, if the debtors
obligation was secured by a
mortgage, the surety is subrogated to
the creditors accessory right in the
mortgage. Also, if creditor and
debtor had agreed that the creditor
would get attorney fees and
additional interest if the creditor had
to sue the debtor; the surety is
subrogated to these rights against the
debtor.
i. The latter example is stated
directly in 3052: The surety
may recover by subrogation
such attorneys fees and
interest as are owed with
respect to the principal
obligation.
2. Extent of subrogation:
a. If the surety doesnt pay the entire
debt, he only gets subrogated for as
much as he paid. He cant obtain
more from the debtor than what he
paid the creditor.
b. Additionally, if the surety doesnt
pay the entire debt, the creditor has
priority in recovering from the
debtor.
i. For example, surety pays 75k
out of 100k principal
obligation. So creditor still is
owed 25k from the debtor.

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 Say that the debtor only has
one asset worth 10k. The law
of subrogation (Art. 1826)
says that the original creditor
has a preference. Therefore,
the creditor has the
preference to get the
remaining 10k that the
creditor is owed. Therefore,
the suretys right of
subrogation to the creditors
right, in the amount of 75k,
will go unsatisfied in this
scenario.
b. Limitation
i. This applies to both collection rights
(reimbursement & subrogation)
ii. 3051 If the surety paid and did not notify the debtor
that he paid, and the debtor then pays, the surety
gets neither reimbursement nor subrogation.
1. The surety would have an unjust enrichment
action against the creditor (who got paid
twice).
2. Right to demand security (3053)
a. Under certain circumstances, the surety before he pays may
demand that the debtor give the surety security to back up
the suretys collection rights of reimbursement &
subrogation. This applies when:
i. (1) Surety is sued by the creditor
ii. (2) Principal debtor is insolvent.
iii. (3) Principal obligor fails to perform an act
promised in return for the suretyship; or
iv. (4) The principal obligation is due or would be due
but for an extension of its term not consented to by
the surety
b. Practically speaking, this right to demand security is not
that important. If the debtor has an asset that could be
security, wouldnt the creditor just proceed against the
debtor?! Additionally, if the debtor will not grant the
security, then the surety has to sue the debtor to get him to
grant security.
iii. Relations among the sureties

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1. Division of responsibility
a. Similar to the rules of solidarity among debtors
b. Each surety is liable for his virile share (by default, this
means by heads)
i. 3 co-sureties are each responsible for 1/3
ii. 3055 [T]hey are presumed to share the burden of
the principal obligation in proportion to their
number unless the parties agreed otherwise or
contemplated that he who bound himself first would
bear the entire burden of the obligation regardless of
others who thereafter bind themselves
independently of and in reliance upon the obligation
of the former. The article contemplates the
possibility that the later-added sureties may agree
that the first surety is liable for 100%.
c. When the creditor demands payment from a surety, the
creditor may demand 100% from a surety. Then that surety
may obtain contribution from the other sureties, if there are
any
i. Also, note that the surety must pay more than his
share to have contribution rights against the other
co-sureties
2. Right of contribution
a. In general
i. The paying surety has this right against other co-
sureties in the amount of the share of the obligation
each is to bear.
ii. If a co-surety becomes insolvent, the insolvent
suretys share is distributed among the other sureties
iii. Example
1. 4 sureties, 100k debt. S1 pays the entire
debt. S2 becomes insolvent.
2. If there had been no insolvency, S1 could
have gotten 25% from each of the other 3
sureties. And S1 would not be able to
recover his own 25% virile share.
3. But because of insolvency, S3, S4, and S1
must bear the burden of insolvent S2s share.
Therefore, each of 3 the remaining sureties
are each liable for (25% + 1/3(25%)). This
means that each of the remaining sureties is
liable 33%, after the insolvency.

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 b. Where one surety pays part but obtains a release for all
(3057)
i. If surety obtains a conventional discharge
[remission] for all the sureties, any reduction in the
amount owed by those released benefits them
proportionately.
ii. Example
1. S1 says he will pay the creditor an amount
less than the principal debt if the creditor
releases all the sureties from the debt.
2. S1 pays off 100k debt for only 90k, and
obtains a release.
3. When the paying surety gets a remission,
each surety must bear the benefit equally.
Each surety (S2, S3, & S4) must pay to S1
of the 90k that S1 actually paid.
iv. See Kilborn Suretyship Basics Problems
g. The end (extinction & termination)
i. Extinction
1. Accessorium non ducit sed sequitur suum principale
a. General principle: the end of the principal obligation is the
end of the suretyship
b. Particular applications
i. Prescription: not technically a mode of extinction,
but a mode of barring suit on obligations, which has
the same effect. 3060 If the principal obligation
prescribes, the suretyship is extinguished.
ii. Remission
1. Of principal obligor
2. Of one of multiple sureties
iii. Novation of the principal obligation
iv. Occurrence of a condition
v. Confusion
2. Modification of the principal obligation
a. **3062 The modification or amendment of the principal
obligation, or the impairment of real security held for it, by
the creditor, in any material manner and without the
suretys consent, has the following effects:
i. Ordinary suretyship is extinguished.
ii. Commercial suretyship is extinguished to the extent
the surety is prejudiced by action of the creditor,
unless...[]
b. Modifications

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 i. Only modifications short of novation are
contemplated. Including mere modifications.
ii. Examples
1. Extension of a suspensive term
2. Increase in the interest rate on the obligation
iii. The only modification that will exterminate the
suretyship is a material modification. Material
means significant. This is true regardless of the
type of suretyship.
iv. Materiality depends on the circumstances.
1. Magnitude of the change in interest rate or
term
a. An extension of time might help the
surety because the debt will not be
due as soon, so the debtor would not
be in default as early
b. An extension of time might hurt the
surety because at the present time the
debtor has sufficient assets, but the
debtor is depleting them, and if the
debtor is not required to pay until
later on, the debtor might not have
sufficient assets and the surety might
be called upon to pay
c. Note, WDK but materiality
probably does not mean prejudice to
the creditor (because this is a
different inquiry if the suretyship is
commercial).
2. Material probably means significant.
v. However, if the suretyship is commercial there is an
additional requirement: the surety must be
prejudiced by the modification. The suretyship is
then extinguished only to the extent of the prejudice.
1. Prejudice: WDK, but probably dollar-for-
dollar harm.
2. Hypos
a. If the paying surety goes to get
payment from the debtor, and the
debtor complies, the surety has not
been prejudiced by the creditors
change of the principal obligation.

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 So there will be no extinguishment
of the suretyship.
b. If the extension of time does not
harm the suretythe debtor is just as
insolvent as he was before the
modificationthere has been no
prejudice to the surety, and the
suretyship is not extinguished.
3. Impairment of real security for the principal obligation
a. Concept: the principal obligation is not only secured by the
suretyship agreement, but also by real security provided by
the principal obligor
i. This prong of the article only comes into play if (a)
there was real security for the principal debt and (b)
it was impairedan interference with the suretys
ability to assert those real security rights through
subrogation
b. Examples of impairment
i. Release of the real security (e.g., creditor releases
the debtor from the mortgage)
ii. Creditor causes the real security to lapse (e.g., the
creditor fails to file a notice of reinscription of the
mortgage or continuation statement of the Article 9
security interest)
c. Effects: Same rules as for modification of the principal
obligation (extinguishment of ordinary suretyship, and
extinguishment of commercial suretyship to the extent the
surety is prejudiced by the impairment of real security).
ii. Termination (Art. 3061)
1. Rule: upon notice to the creditor, for a continuing guaranty.
2. Non-traditional principal obligations may exist: securing a
revolving line of credit (a continuing guaranty). This is the only
kind of suretyship addressed by 3061: A surety may terminate the
suretyship by notice to the creditor. The termination does not
affect the suretys liability for obligations incurred by the principal
obligor, or obligations the creditor is bound to permit the principal
obligor to incur at the time the notice is received, nor may it
prejudice the creditor or principal obligor who has changed his
position in reliance on the suretyship.
3. At any point in time, the surety may back out of the continuing
guaranty. This doesnt mean the surety can back out of securing
obligations that have already been incurred by the debtor, but it

16
 does mean that the surety can, upon notice to the creditor,
terminate the responsibility for securing future principal
obligations of the debtor that have not yet been incurred.
h. Waiver of suretyship defenses
i. Questions
1. Can the surety waive the benefit that results from the other
surety(ies) getting remitted?
2. Can the surety agree to pay even if the creditor releases the debtor
from the principal obligation?
3. Can the surety agree that he will never terminate his continuing
guaranty of the debtors revolving line of credit?
ii. The answer
1. 3040 Suretyship may be qualified, conditioned, or limited in any
lawful manner. This is circular though, because we dont know
whether certain kinds of waivers are lawful.
2. Most of the protections available to sureties can be waived. So
most of these defenses can be waived.
3. However, waiver of remission rights is radical. WDK.
a. Waiver of the defense of release of the principal debtor: the
essence of suretyship as a contract is payment if the
principal debtor does not pay. To promise to pay even if
the principal debtor is released effectively is a promise to
pay, unconditionally. This means that in fact, the surety is
not a surety, but a principal obligor! In principle, this
would be an enforceable obligation: principal liability in
disguise as a suretyship.
b. Remission of other sureties: agreeing to pay 100% of the
debt even if one or more of the other sureties is released.
The issue is whether its a rule of public order that if a
surety is released it benefits the other sureties
proportionately.
i. The default rule is that we assume its a suppletive
rule.
ii. What is immoral about waiver of such a protection?
Kilborn says theres no problem, and Trahan agrees,
that the rule is suppletive. So the surety could agree
to this.
iii. See Kilborn Suretyship Problem (Extinction/Termination)
III. Article 9 Security Interests (Volitional Real5 Movable Security)
a. Permissible range
i. Re obligations secured
5
Volitional real security as a concept: It can be subclassified into: volitional real movable security and volitional
real immovable security.

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 1. Re nature of the obligations: any and every kind of obligation (to
do, to give, to pay money, not to do etc.)
2. Re time of the obligations: any of the following
a. Pre-existing obligations (e.g., the creditor is nervous that
the debtor wont be able to pay, and so obtains a security
interest for a previously-created debt)
b. Contemporaneous obligations (an obligation created at the
same time as the security interestthe paradigmatic case)
c. Future obligations
i. Two varieties:
1. Loan of moneydate is fixed in the future.
Just establish the security interest today
2. Revolving line of creditagreement that
debtor will be able to go obtain loan
amounts in the future. Security interest can
be established today.
d. NOTE: We have to look at the types of obligations that
may be secured for each type of security device. These are
just the rules for Article 9 security interests.
ii. Re collateral
1. Re nature of the collateral
a. The original collateral
i. Generally
1. General rule (9-109): This article applies to
a transaction, regardless of its form, that
creates a security interest in personal
property [movables] or fixtures by contract
a. Any movable may be collateralized
as a general rule.
b. The mere fact that the thing does not
fit into one of these nominate
categories (e.g., goods) does not
mean the thing cant be
collateralized. Because the default
rule is that a movable can be
collateralized.
c. Still, we categorize movable
collateral because (a) many
categories have different rules
attached to them (e.g., how the
interest is attached or perfected); and
(b) these terms are customarily used

18
 in Art. 9 security agreements and
financing statements
2. Exceptions
a. (c) Federal preemption and
international comity
b. (d) Main exceptions
ii. Goods (9-102(a)(44))
1. Goods Defined:
a. UCC: All things []movable[]
when a security interest attaches, and
all fixtures. [But by movable, the
UCC (common law) means
corporeals.] Thus goods are all
corporeals.
i. Fixtures are goods that have
become so related to
particular real property that
an interest in them arises
under real property law. The
civil law concept is
component parts and integral
parts of immovables. This is
odd because in principle
security interests are only
supposed to apply to
movables. But for
component parts/fixtures,
even immovables can be
subject to Art. 9 security
interests!
ii. Standing timber is also a
good. Although its an
immovable under Louisiana
law!
iii. The unborn young of
animals. Crops grown or to
be grown. Manufactured
homes.
b. Louisiana: This definition clarifies
fixtures: only if created before the
thing becomes a fixture (thus, before

19
 it becomes incorporated into the
other immovable).
2. Inventory (9-102(a)(48))
a. Defined: goods, other than farm
products, which:
i. are held by a person for sale
or lease or to be furnished
under a contract of service
ii. consist of raw materials,
work in process.
b. One of the most commonly
collateralized goods. A debtor can
collateralize all of his inventory if he
wants.
3. Farm products (9-102(a)(34))
a. Defined: goods, other than standing
timber, with respect to which the
debtor is engaged in a farming
operation and which are:
i. crops grown
ii. livestock
iii. supplies used in farming
iv. etc.
4. Consumer goods (9-102(a)(23))
a. Defined: goods that are used or
bought for use primarily for
personal, family, or household
purposes
5. Equipment (9-102(a)(33))
a. Defined: means goods other than
inventory, farm products, or
consumer goods. This is the
residual category of good. If its
not another type of good, then its
equipment.
b. Equipment is a commonly used type
of collateral, like inventory.
Equipment could be furniture, art
hanging on the wall, or any other
corporeal movable that doesnt fit
within another sub-category of
goods.

20
 iii. Documentary collateral6
1. Generally
a. Most of this is incorporeal.
Essentially, these are often things
that are represented by a corporeal,
but which are really the underlying
rights, which are incorporeal. Like a
check. The check itself is corporeal,
but it represents an incorporeal right.
The incorporeal right is what may be
granted as security.
2. Instruments (9-102(a)(47))
a. UCC
i. Defined: a negotiable
instrument or any other
writing that evidences a right
to the payment of a monetary
obligation
ii. Examples: Notes, drafts
(e.g., checks)
iii. Any and all commercial
paper
b. Louisiana: essentially the same
3. Chattel paper (9-102(a)(11))
a. Defined: a record or records that
evidence both a monetary obligation
and a security interest in specific
goods
b. A package of documents that
includes not only the right to collect
money but also a security interest.
Therefore, a creditor make take a
security interest in a security interest.
Example: the car dealer who has a
loan owed and a security interest in
the car, may grant this entire piece of
chattel paper as a security interest to
the dealerships creditor.
4. Investment property (9-102(a)(49))

6
A Kilborn-ism.

21
 a. Defined: a security, whether
certificated or uncertificated, security
entitlement
b. Essentially: Corporate stock or
interests in commodities (i.e.,
futures)
5. Documents (9-102(a)(30))
a. Defined: a document of title or a
receipt of the type described in 7-
201(b).
b. Actually very narrow: bills of
lading, warehouse receipts, aircraft
hangar receipts.
c. Essentially: documents prepared in
the course of transporting movables.
iv. Intangible property7
1. Generally: a category including other types
of movables
2. Accounts (9-102(a)(2))
a. Defined: a right to payment of a
monetary obligation for property that
is sold, for services to be rendered,
for a policy of insurance
b. Essentially: accounts receivable.
c. Note that we think of accounts
receivable in the business context,
but this is also if my buddy owes me
money on an obligation. Thats an
account.
d. Louisiana difference: Money owed
under a mineral lease is not an
account. A carve-out from the
definition of accounts.
3. Deposit accounts (9-102(a)(29))
a. Defined: means a demand
[checking], time [savings], savings,
passbook, or similar account
maintained with a bank.
b. Louisiana: definitions not different,
but collateralization rules are
different

7
Another Kilborn-ism.

22
 c. Under UCC 9-109(d)(13), can only
collateralize a bank account for a
commercial transaction, not a
consumer transaction [Best Buy
cannot get a security interest in my
bank account when I buy a TV (a
consumer protection rule)].
i. However, in Louisiana, a
bank account can be used to
secure ANY type of
obligation, consumer or
commercial. Note, that our
version of the UCC is the
least consumer friendly in the
country. More stuff can be
collateralized in Louisiana
than in any other state.
4. Certain tort claims (9-102(a)(13))
a. Commercial tort claim defined: a
claim arising in tort with respect to
which (A) the claimant is an
organization, or (B) the claimant is
an individual and the claim (i) arose
in the course of the claimants
business, and (ii) does not include
damages arising out of personal
injury or wrongful death
b. Louisiana: go to the general rule,
even though there is no specific
category of tort claims defined.
Therefore, the general rule is that its
a movable, so it can be subject to an
Art. 9 security interest. But we have
to check La. R.S. 10:9-109 to see if
an exception applies. No exception.
Therefore, tort claims may still be
collateralized in Louisiana.
Personal injury claims may be
collateralized in Louisiana.
5. General intangibles (9-102(a)(42))

23
 a. Defined: any personal property,
including things in action, other than
accounts this is the residual
category, after you take out other
types of documentary collateral and
intangible property that dont fit in
any of the sub-categories of
documentary collateral or intangible
property. Commercial tort claims are
excluded from this category, because
they are their own separate category.
b. Louisiana: tort claims are excluded
entirely from this definition. Of
course, remember: although tort
claims dont fall within a nominate
category of movables under Article
9, the general rule says that they may
be collateralized.
v. Minerals (9-102(a)(6))
1. As-extracted collateral defined: oil, gas,
or other minerals that are subject to a
security interest that:
2. Louisiana:
a. Minerals in the ground:
i. Fugacious [natural gas, oil,
and other fluid minerals] are
movables.
ii. Non-fugacious [solid
minerals like salt and
sulphur] are immovables
because they are component
parts of tracts of land.
iii. But theres no problem with
our movable/immovable
dichotomy, because the Art. 9
interest is in the extracted
collateral. So grant an
interest in the mineral,
subject to suspensive
condition: once extracted,
the interest attaches.

24
 b. Definition in La. essentially same as
UCC
b. Derivatives of the original collateral (proceeds, etc.) 9-
102(a)(64))
i. Proceeds defined: whatever is acquired upon
sale, lease, or other disposition of collateral;
whatever is collected on account of collateral; rights
arising out of collateral Anything generated by
the original collateral.
1. Default rule: if the debtor grants an interest
in present collateral, if the debtor sells (for
example) that movable, the security interest
attaches to the price paid for the movable.
This is real subrogation in Louisiana. The
interest attaches to the thing replacing the
collateral.
2. Proceeds are extremely broad. Examples:
a. I buy a laptop and owe the seller,
who is a debtor indebted to someone
else. The seller had granted a
security interest to his creditor in the
laptop. The debtors account
(money owed) is proceeds of the
laptop that was collateral in the
debtors hands.
3. *Collateral includes not only original
collateral, but also proceeds of the collateral.
2. Re time of the collateral
a. Present property: this is clearly permissible because the
debtor has rights in the collateral at present.
b. Future-acquired property: this is permissible. Agree to
grant an interest in collateral that will be acquired by the
debtor. But attachment will not actually occur until the
debtor obtains the collateral.
i. Set up paperwork to grant an interest in the
collateral that the debtor does not yet have but
hopes to have.
c. Future (after-acquired) property: permissible. Create an
interest over current collateral, and more collateral that the
debtor obtains in the future will become subject to the
security interest.
b. Creation of the security

25
 i. Effectivity between the parties: attachment8
1. (1) The obligee/secured party must give value
a. UCC 1-204 Except as otherwise provided, a person gives
value for rights if the person acquires them:
i. in return for a binding commitment to extend credit
or for the extension of immediately available credit
ii. as security for, or in total or partial satisfaction of a
preexisting claim
iii. by accepting delivery
iv. in return for any consideration sufficient to support
a simple contract.
b. The value is given by the creditor
i. Usually, under 1-204, value is given in that the
creditor extends credit in exchange for receiving
rights from the debtor
ii. Value includes past consideration, current credit
extension, or credit to be extended in the future
c. Until value is given, attachment does not occur:
i. Even if the other two prerequisites for attachment
have occurred, no attachment until value is given
ii. The time of giving value is important to know the
time at which attachment occurred (for priority
among creditors, and other reasons)
d. Note, that in addition to the requirements for attachment, a
prerequisite is a meeting of the mindsbasic obligations
rule for forming the security agreement
2. (2) The obligor must have rights in the collateral
a. Having rights
i. In almost every case, the right that the debtor has
is ownership
ii. However, the debtor need not have full ownership
to be able to grant a security interest in collateral
1. Security interest can be granted in the
usufruct. Even if the security agreement
says it is over the cow, if the debtor has a
usufruct over the cow, the collateral is only a
usufruct over the cow.
8
UCC 9-203: (a) A security interest attaches to collateral when it becomes enforceable against the debtor with
respect to the collateral, unless an agreement expressly postpones the time of attachment. (b) An interest becomes
enforceable against the debtor and third parties if (1) value is given, (2) debtor has rights in the collateral, and (3)
debtor has authenticated security agreement providing description of the collateral or the secured party goes into
possession. This is about making the security interest effective between the parties (debtor and creditor (secured
party)). Note: an agreement to create a security interest is a prerequisite for both attachment and perfection
because Art. 9 is about volitional security interests.

26
 2. Same principle with a lease. If debtor is
merely leasing a thing, he can only grant an
interest in the lease (not in full ownership).
b. Note, that attachment does not occur until the debtor
acquires rights in the collateral. So if create the agreement
today, but debtor does not have rights in the collateral yet,
attachment does not occur until the debtor obtains rights in
the collateral.
3. (3) Either9
a. (A) The collateral must be put into the possession or
control of the obligee/secured party, or
i. Essence: taking possession or quasi-possession
(control) of the collateral
ii. Example: pledge AKA pawn AKA possession of
the thing
iii. Rationale that possession of collateral does not
usually happen: we want the debtor to retain
possession because he can generate revenue with
the collateral, with which he will be able to repay
the debt
iv. Control is of certain incorporeal rights, e.g.,
chattel paper, deposit accounts, investment property
b. (B) The obligor must authenticate a security agreement
that10
i. [initial definitions]
1. Note, its the debtor who must authenticate
this agreement
2. Security agreement
a. UCC 9-102(a)(73): an agreement
that creates or provides for a security
interest.
b. Thus, a security agreement is simply
a meeting of the minds re: granting
a security interest.
3. Authenticate
a. *NOT about authentic acts
b. UCC 9-102(a)(7): to (A) sign; or (B)
execute or otherwise adopt a symbol,

9
NOTE: That with both of the following options, you always need a security agreement, which is a meeting of the
minds. The only difference is form: if authenticated, this satisfies the requirement. But even if its possession of
the collateral and meeting of the minds, this is still a security agreement.
10
(1) provides evidence of intent to create a security interest, (2) identifies the obligation(s) secured, and (3)
provides a description of the collateral.

27
 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.
i. (69) Record means
information inscribed on a
tangible medium or stored on
an electronic or other
medium and retrievable in
perceivable form.
ii. (A) Thus one possibility is a
writing signed by the debtor.
iii. (B) The other is enigmatic,
but it includes emailstype
ones name at the bottom.
Voicemail might work: its a
record that is in electronic
form; there was an attempt to
identify the record as ones
own (assuming the debtor
leaves a message that he has
granted a security interest and
names himself). WDK with
voicemails.
ii. (1) provides evidence of intent to create a security
interest
1. The writing must reflect that there was a
meeting of the minds
2. In Re Thompson
a. 15 page agreement. Buyer of the
cattle granting a security interest.
But parties never used the words
security interest or lien, or
anything comparable.
b. But the parties did use the word
encumbrance and said that if the
buyer didnt pay the price, the seller
would become the owner. At old
common law, this was the rule: the
defaulting debtor would lose
ownership back to the creditor if the

28
 debtor defaulted. Note this rule is no
longer applicable. But at the time,
this phrase in the security agreement
indicated an intent to grant a security
interest. The agreement also stated
that there was no other encumbrance
on the property.
3. Best practice: clearly state the intent to
grant a security interest:
a. Caption the document security
agreement
b. Use the verb authenticate and
Article 9
c. I the debtor do hereby grant an Art. 9
security interest, for the purpose of
securing obligations, etc
4. UCC 9-109(a)(1)
5. Composite document rule (as defined in Ace
Lumber Supply): A security agreement may
not be a necessary document as long as there
is a (1) promissory note, (2) financing
statement, and (3) something showing the
parties intended a to form a security
agreement
6. **See Problem 8.1, regarding the composite
document rule; and Kilborn Hypo 8.
iii. (2) identifies the obligation(s) secured
1. Example: document grants a security
interest in Trahans turtlenecks. Not
sufficient for attachment because there is no
identification of the principal obligation.
However, if the debtor borrowed more than
once from the creditor, we can argue that
this collateral secures preexisting debt.
2. The rule: though not obvious from the
UCC, the security agreement has to identify
the obligation(s) secured
3. Necessity of specificity:
a. Securing any and all indebtedness to
the creditor incurred previously or in
the futureprobably sufficient. This
is a line of credit.

29
 b. The specificity required is that which
is necessary to alert third parties to
the obligations secured
c. For a one-time loan, give the details
of the loan, as much as is possible
iv. (3) provides a description of the collateral
1. UCC 9-108
a. (a) A description of personal or real
property is sufficient, whether or not
specific, as long as it reasonably
identifies the property.
b. (b) examples of reasonable
identification:
i. specific listing. Examples:
VIN, manufacturers sticker
with number on equipment,
or other identifying mark or
name. Not all collateral have
such characteristics.
ii. category. Article 9 nominate
categories included here:
refer to the collateral by
equipment, etc.? no. This
actually refers to laymens
categorization of movables,
such as furniture or white
goods. Perhaps, My
trucks.
iii. a type of collateral defined in
the UCC. Here are the
nominate categories in
Article 9 like equipment,
accounts, general
intangibles, etc.
However, in certain
situations this classification
may not occur in consumer
transactions or with respect
to commercial tort claims.
Therefore, a debtor in a
consumer transaction could
not describe the collateral as

30
 all of his equipment,
inventory, etc.
2. In Re Shirel
a. The department store, on a credit
card application, had the debtor sign
an agreement describing collateral as
all merchandise purchased at the
store.
b. Held: the description was not
sufficient.
c. Court says this was not specific
enough. This is because it was a
consumer transaction (and the
contract was adhesionary). A third
person looking at the agreement
must be able to tell that certain
things fit the description of the
collateral in the security agreement.
d. Criticism: wouldnt a third person
think that the refrigerator (at issue in
this case) would fit within the term
merchandise?
e. Therefore, in consumer transactions,
the agreement must provide language
that provides certainty, not mere
possibility, that particular collateral
fits within the description
f. Solution: (1) on the receipt for every
purchase with the debtors store
credit card, list the
manufacturer/make of the collateral
on the receipt and create a security
agreement, or (2) on the receipt,
have the debtor sign and grant a
security interest in the refrigerator.
In some cases, the courts have held
that refrigerator is specific enough
in the consumer context.
3. Per se insufficient description: a description
of the collateral as all the debtors assets
or all the debtors goods. UCC 9-108(c).
4. Special description problems

31
a. After-acquired property
i. The attachment does not
actually occur until debtor
obtains rights in the property,
although the security
agreement may be formed
before that happens.
ii. Specificity problem:
description is accounts,
inventory, and equipment.
Certainly this grants an
interest in these present
assets, but does such a
description convey an intent
to grant an interest in assets
of those categories that are
later acquired? The way to
avoid this problem is to
describe the assets as now
existing or to be acquired in
the future. Minority view
if the document does not
expressly mention after-
acquired property, future
property is not collateral.
Majority ruleas to some
categories of collateral, its
natural to assume that the
parties intended for after-
acquired property o be
covered: property that
regularly turns over in the
course of business (e.g.,
accounts, inventory).
Equipment is not such a
natural assumption because it
is expected to endure a while
and not need replacement for
a long time. With the high-
turnover assets, the courts
will assume that they are

32
 collateral unless the parties
express otherwise. Louisiana
has no cases on this issue;
WDK whether they would
adopt the majority or
minority view.
iii. Stoumbos: where the
agreement described
equipment, there was no
interest in after-acquired
equipment because this is not
the type of asset normally
subject to frequent turnover.
iv. In certain categories, after-
acquired property clauses are
legally ineffective: consumer
goods acquired more than 10
days after secured party gives
value; and commercial tort
claims.
v. See Problem 8.3
vi. See Problem Set 9
b. Proceeds, etc.
i. Defined (9-102(a)(64)):
whatever is acquired upon
sale, lease, license, or
exchange, or other
disposition of collateral;
whatever is collected on
account of collateral; rights
arising out of collateral;11
claims arising out of damage
to collateral; insurance
payable on account of loss of
or damage to the collateral;
etc.
ii. The basic concept is rights
arising out of collateral.
Proceeds are an extremely
broad category.

11
If the original collateral is livestock, would offspring of the livestock be proceeds?

33
iii. Rule: Proceeds of collateral
are themselves generally
collateral, by operation of
law, as long as the proceeds
are identifiable. UCC 9-
315(a)(2). Identifiability is
difficult: if the collateral is
sold, and the proceeds
(money) are deposited in the
bank account, it might be
difficult to identify the
proceeds. The courts require
tracing mechanisms to be
employed to identify the
proceeds of original
collateral. Methods: LIFO;
FIFO; the intermediate
balance rule (the majority
rule). The intermediate
balance rule says that when
the cash proceeds of
collateral are placed in a bank
account of other money, if the
balance drops below the
value of the proceeds
originally deposited, the
proceeds are equal to the
lowest bank account balance.
iv. There are other terms like
products, profit, rents,
and offspring. These are
value-tracing concepts in
addition to proceeds.
Trahan says that these other
terms are sometimes
unnecessary because they are
included within the term
proceeds. But, for
example, offspring may not
be included within
proceeds. So there might

34
 be some utility in adding one
of these other terms because
proceeds alone as a matter
of law are included within the
definition of collateral, but
not these other categories.
WDK what profits means.
v. Note other non-value tracing
concepts: replacements,
additions, substitutions,
and after-acquired property.
These are types of after-
acquired property; not
proceeds. Not about value-
tracing, but rather about new
property entirely. With such
after-acquired property, there
is no value tracing necessary
because value-tracing applies
to identification of proceeds,
not after-acquired property.
vi. In Re Oriental Rug: Creditor
took security interest in rugs
sold to the debtor. The
debtor resold these rugs and
used the purchase price to
buy new rug inventory. The
court required the creditor to
carry the burden of tracing
the proceeds back to the
original collateral. Because
the creditor could not trace
the cash proceeds from the
sale, to the checking account,
to the purchase of new
inventory, there is no security
interest in the new rugs.
vii. Multiplication of collateral:
the cow is collateral. Sell the
cow, and the money is also
collateral because proceeds.

35
 Use the money to buy beans.
The beans are proceeds of
proceeds of collateral, so they
are also covered. (The Blob).
viii. See Problem Set 10.
ii. Effectivity as against third persons: perfection12
1. Introduction: priority explained
a. Importance of priority
i. For the secured party: whether and when the
interest becomes effective against third parties
determines the secured partys rights vis--vis other
parties. Important to give the secured creditor an
advantage over other secured creditors in the event
of the debtors default.
b. UCC 9-308(a)
i. Security interest is perfected if (1) it has attached
and (2) all of the applicable requirements have been
satisfied. These additional requirements are in the
alternative: (1) filing a financing statement, (2)
control, or (3) possession.
ii. Remember that attachment and perfection are two
different things. Though attachment is a
prerequisite for perfection.
2. Prerequisites for perfection: (1) Attachment and (2) Alternative
additional prerequisites (see infra)
3. The alternative additional prerequisites
a. (Alt. 1) Filing a financing statement
i. Financing statement
1. Definition
a. 9-102(a)(39): a record or records
composed of an initial financing
statement and any filed record
relating to the initial financing
statement. Worthless definition!
b. Better definition, which includes the
biggie requirements: Writing that
provides the name of the debtor,
provides the name of the secured
party, and indicates the collateral
covered by the financing statement.
2. Requirements (UCC 9-502)
a. The name of the debtor
12
The action that must be taken to make the security interest effective against third persons.

36
 i. The most important
requirement: the financing
statements are indexed by the
debtors name. Note, that
when we say this provides
notice to third parties, this
means we make available a
filing system by which
interested third persons can
go take the affirmative step to
search. And these searches
are done by debtors name.
Note that this is a system that
doesnt index by type of
collateral (e.g., searching by
equipment, goods, etc.). That
wouldnt be practical for a
creditor to search. We index
by name, making it very
important to get the name of
the debtor right, else the
creditor will not find the
debtor, and therefore not find
the notice of collateral that is
intended.
ii. How to do the name: 9-
503(a)(1);(4).
iii. Registered organizations: an
organization organized under
the law of a State where
under the law of the State the
organization must be
registered with the Secretary
of State to do business as a
juridical person. In
Louisiana, these are only
corporations and LLCs. For
registered organizations, the
name should be the name of
the organization as listed on
the articles of incorporation

37
 filed with the Secretary of
State.
iv. Unregistered organizations:
If its a partnership that
doesnt have a name, then the
names of the partners,
members, etc. comprising the
debtor should be used. But if
it is an organization with a
name, the debtors name is
the organizational name.
v. Individuals (natural persons):
use the individuals name.
Thank you, Captain Obvious
[UCC]! Should we use the
name used in the community,
the full legal name, or
something else? If youre
risk averse, file multiple
financing statements with
permutations of the name
(but it costs to file each
filing). If you only file one,
file the debtors name as full
legal name.
vi. Errors: UCC 9-506(a) A
financing statement
substantially satisfying the
requirement of listing the
debtors name is effective
even if it has minor errors or
omissions, unless these errors
or omissions make the
financing statement seriously
misleading. (b) Seriously
misleading means failing to
provide the name correctly.
(c) If a search of the records
of the filing office under the
debtors correct name, using
the filing offices standard

38
 search logic, if any, would
disclose a financing
statement that fails
sufficiently to provide the
name of the debtor in
accordance with 9-503(a), the
name provided does not make
the financing statement
seriously misleading. Search
logic weeds out certain
characteristics of searches
deemed irrelevant. What is
Louisianas search logic?
WDK! The search logic of
some states is forgiving, of
others is not. In some states,
if you dont get the name
exactly right when searching,
you wont find the financing
statements.
vii. IACA Search Logic: Search
logic (1) does not distinguish
between upper and lower
case letters; (2) disregards
punctuation marks and
accents; (3) ignores words,
such as corporation, corp.,
incorporated, LLC, or a
Georgia corporation that
indicate the existence or
nature of an organization; (4)
ignores the word the at the
beginning of the name; (5)
ignores spaces; (6) treats an
initial as the equivalent of a
first or middle name
beginning with that letter; (7)
treats no middle name as the
equivalent of all middle
names.

39
 viii. See Problem Set 17.** We
will NOT be tested on IACA
search logic.
b. The name of the secured party or
his/its representative
i. We have no rules as to how
much is required to get the
secured partys name right.
Reason: its not essential for
indexing and searching
purposes, unlike the debtors
name.
ii. Reason for requiring the
secured party name to be
listed is that a searcher13
might want to contact the
party to work out a
subordination agreement; to
allow the searcher to contact
the secured creditor in order
to clarify the extent of
collateral covered where the
financing statement doesnt
describe the collateral very
specifically; and otherwise
obtaining more information
from the secured party.
Therefore, what is needed is a
name sufficient to allow a
reasonable searcher to figure
out who the secured party is.
iii. What is sufficient: Weiss
might be enough! The
standard is very low. The
criterion: is the name given
enough to alert a reasonable
searcher to who the secured
party is?
c. Indication of the covered collateral

13
A searcher in this outline means a would-be creditor trying to ascertain whether property he seeks to take a
security interest in is already encumbered.

40
 i. Can be described more
broadly in the financing
statement than in the security
agreement.
ii. Can be supergeneric; can be
all the debtors property.
The problem for the debtor is
that no one else will loan
money to the debtor because
on the face of the financing
statement, all the debtors
property is encumbered. And
then the debtor will have to
explain to the new lender that
the financing statement is not
correctthe security
agreement only covers
certain individual items.
iii. Can be very specific, too:
but the risk is that the secured
party might not get coverage
of all the collateral he wants.
Also, if you make an error in
the specific description, you
might not get covered what
you want covered.
iv. In Re Pickle Logging: The
financing statement labeled
the collateral as a particular
model: the 548 G skidder,
when it was really the 648 G
skidder they intended. The
court held that what the
financing statement listed
was what was effective
against third parties; thus the
648 G was not covered as to
third parties.
v. See Teel case in the problems
re errors in description of the
collaterals location.

41
 d. Others (?) (of requirements for
filing)
i. These requirements are the
little onesnot needed for
perfection to occur.
ii. Addresses of the parties,
business information, etc.
iii. Note: although these
requirements are not
necessary perfection,
technically, the filing officer
wont accept the filing unless
it has the requisite
information on the form.
ii. Filing
1. Definition: Taking the financing statement
(or electronically filing) to the filing officer
who will date/time stamp and place the
record into the appropriate records under the
name of the debtor
2. Requirements
a. Where & with whom to file
i. In most states: file with the
Secretary of State. **In
Louisiana: file with any
parish clerk of court (who
then forwards all the
financing statements to the
Secretary of State, who
maintains the entire system).
Do not have to file with the
parish where the property is
located; can file in whatever
parish you want. Our
relaxation of the central filing
system allows for less
backlogs and is a huge
advantage for secured parties.
b. Persons entitled to file
i. Cannot be filed unless the
debtor gives authorization.
But dont always need the

42
 debtor to sign the financing
statement.
ii. UCC: By the debtor signing
a security agreement, this
provides tacit authority for
the creditor to file a financing
statement that covers the
collateral described in the
security agreement. Note the
limitation: the tacit authority
only exists if the collateral
listed in the financing
statement is not more than
the collateral listed in the
security agreement.
iii. Often, the creditor files the
financing statement if there is
even a possibility of the loan
going through. Thus, its
typical that a financing
statement will be filed before
a security agreement exists.
In such a case, the secured
party needs specific
authorization to file on the
debtors behalf. The
authorization would need to
be authenticated in a record.
iv. Improper refusal to accept
filing: If the office refuses to
accept the filing, the
financing statement is treated
as if filed. Hypo, when the
filing office erroneously
rejects the filing, if (a) the
prospective new secured
party did not search the
records, then the rejected
filing is still effective; (b) the
prospective new secured
party did search the records,

43
 the filing is not effective
against this third party
(prospective secured party).
In Louisiana the rule is
different because if one
parish refuses to accept the
filing, the filer can go to a
different parish. Therefore,
the only way to make the
financing statement effective
in Louisiana is to actually
file.14
c. Additional information beyond that
required to perfect security interest
i. Generally: these filing
requirements are addressed to
the filing office (analogous to
requirements of the minister
in case of marriage). These
are the little requirements
not required for perfection.
ii. Additional information re the
debtor: address, type of
person (natural vs. juridical)
whether an organization or
individual, type of
organization and jurisdiction
of organization (if debtor is
an organization),
organizational ID # (9-516(b)
(5)).
iii. Additional information re the
secured party: address (9-
516(b)(4)).
iv. What is the effect if there are
errors or omissions? 9-
506(a) refers to Part 5 as a
whole, and it says that in
principle seriously

14
Need additional clarification of the difference in rules between Louisiana and other jurisdictions where the filing
officer does not file the financing statement.

44
 misleading errors or
omissions re: the little
requirements still makes the
filing ineffective! Thus the
issue, for example, would be
is the leaving out the
address of the secured party
something that makes the
statement seriously
misleading? Also, under
what circumstances would
omitting the address (or other
item) make the filing
seriously misleading? These
are the proper inquiries. The
purpose of requiring the
secured partys address is to
assist identification of the
secured party; thus to
determine whether the
absence of the address makes
the filing ineffective, we
would ask whether under
these facts the absence of the
address prevents the UCC
searcher from identifying and
being able to contact the
secured party. If so, then the
statement is seriously
misleading, and therefore
ineffective.
v. See Problem Set 18.
b. (Alt. 2) Possession
i. Concept
1. UCC 9-313(a) A secured party may perfect a
security interest in tangible negotiable
documents, goods, instruments, money, or
tangible chattel paper by taking possession
of the collateral.

45
 a. Essentially, goods and documentary
collateral may be possessed, to
perfect.
2. The secured party must take possession.
3. What is possession?
a. Civil law: the secured party would
only be precariously possessing.
b. Mandate: the secured party would
precariously possess through an
agent.
c. Purpose of the rule: to give notice to
the world that the creditor has an
interest in the collateral (same
purpose as a financing statement). A
searcher is supposed to be on notice
that if another party possesses a thing
owed to someone else, the other
party may have a security interest in
the thing.
i. The debtor cannot be the
agent who possesses on
behalf of the creditor
ii. An employee of the debtor
probably could not be an
agent possessing on behalf of
the creditor, because this
would not serve the purpose
of the rule. A third party
would not see the debtors
employees possession as
indicating that someone other
than the debtor asserts an
interest.
iii. The safe thing is to have the
agent be someone completely
unrelated to the debtor, to
indicate that a creditor is
possessing such as to assert a
security interest.
ii. Scope
1. Where permissible: corporeals,
documentary collateral

46
 a. For these types of collateral, the
secured creditor may either file a
financing statement or take
possession. In other words, these are
alternative perfection methods.
2. Where mandatory (exclusive): money
a. Therefore, for money, the security
interest may not be perfected by
filing a financing statement.
Possession is mandatory to perfect
the security interest in money.
c. (Alt. 3) Control
i. Concept
1. Definition
a. Not defined in the UCC
b. Similar to possession; has to do with
exercising authority over things that
are incorporeal
2. UCC 9-314(a) Investment property, deposit
accounts, etc. [we dont care about the
others].
a. But, the Louisiana version of Article
9 also lists another type of collateral
that may be perfected by control:
life insurance
ii. Scope
1. Where permissible: deposits, life insurance,
investment property
a. Re deposit accounts see infra under
deposit accounts
b. Re life insurance see infra under life
insurance
c. Investment property
i. For investment property,
control is merely an
alternative to filing a
financing statement, to
perfect. But control is not
mandatory to perfect (contra
deposit accounts and life
insurance).
ii. Control depends on the type
of investment property

47
 involved, and there are at
least 3: certificated,
uncertificated, and
investment entitlements. See
UCC 8-106.
iii. Certificated securities.
Defined. May be bearer, or
registered. A certificated
security is one where a
certificate has been issueda
stock certificate. In bearer
form, the certificate says that
all the rights belong to
bearer. Most are
registered, meaning that the
name of the stock purchaser
is both on the certificate and
registered back at corporate
headquarters. Perfection. 8-
106(a): For bearer
certificated security, control
occurs through delivery
[delivery is (1) acquisition of
possession by the
purchaser {which includes
a secured party}, (2) stock
certificate physically handed
over to creditor or creditors
agent, or (3) [handing it over
to an agent]{UCC 8-301}] to
the secured party. For
registered certificated
security, control occurs
through both (a) delivery and
(b) either (i) endorsement or
(ii) contacting the issuing
company and asking to place
the secured partys name in
the company records as the
registered party.

48
iv. Uncertificated securities.
Defined. Electronic
documentation system
instead of physical one.
Notations in the electronic
records of corporations when
stock is purchased. This
form of securities never
caught on in America.
Perfection. Either (a)
delivery of the security to the
secured party [having the
issuer register the secured
partys name], or (b) issuer
agrees that it will comply
with instructions originated
by secured party without
further consent by the
registered owner.
v. Securities entitlements.
Defined. The most common
form of securities today. Two
stages of creation
corporation issues huge
chunks of stock to stock
brokerage firms, who would
then sell brokerage interests
to their customers.
Perfection. Methods: (a) If
the secured party is the
stockbroker through whom
the debtor obtained the
security, the stockbroker
automatically has control.
(b) The secured party
becomes the entitlement
holder. (c) The securities
intermediary has agreed to
comply with entitlement
orders originated by the
secured party without further

49
 consent by the entitlement
holder.
2. Where mandatory (exclusive): deposits, life
insurance
a. Deposit accounts
i. Security interest in a deposit
account may only be by
control. UCC 9-312(b)(1).
ii. May be controlled in one
of three ways: (1) if the
secured party also is the bank
where the deposit account is
located, the bank is
automatically perfected; (2)
the debtor, secured party, and
the bank authenticate an
agreement that the bank
where the deposit account is
kept will follow the secured
partys instructions regarding
the funds; or (3) the secured
party becomes another joint
holder on the account, with
the debtor.
iii. Reiteration: UCCcan only
have security interest in bank
account if underlying debt
arises out of commercial
transaction. Louisianacan
have security interest in bank
account even if underlying
debt is a noncommercial
transaction.
b. Life insurance
i. In UCC jurisdictions,
perfection must be done by
filing financing statements; in
Louisiana, it can and MUST
be done by control.
ii. La. R.S. 10:9-107.1: Two
ways for control: (1) if the
secured creditor is the

50
 insurance company that
issued the policy, the creditor
automatically has control; or
(2) the insurance company
authenticates a record
acknowledging notice of the
granting of a security interest
to the secured party in the
policy.
iii. Reiteration: note that both possession and control
not only take care of perfection, but also take care
of the third requirement for attachment
iv. See Problem Set 19
d. (Alt. 4) Nothing additional (of automatic perfection)
i. Concept: upon attachment, perfection automatically
occurs
1. Note: the creation of the debt does not
automatically create the security interest.
There still must be attachmentthe creation
of the interest.
2. The only thing that is automatic is
perfection.
ii. Scope (permissible only): Purchase money
security interest (PMSI15) in consumer goods
1. PMSI defined
a. A security interest that secures the
performance of an obligation to pay
the purchase price of a good sold on
credit
i. A security interest securing
repayment of the loan used to
purchase the property that
serves as collateral
b. Scenarios:
i. Seller provides the credit
ii. Third party lender provides
the credit
c. In either scenario, a PMSI is created
2. Consumer good: a good that is used or
bought for use primarily for personal,
family, or household purposes.

15
Pronounced pihm-see.

51
4. Special perfection problems: perfection of security interest in
immovable-related collateral
a. Generally: these types are recognized in Article 9 but
really are on the boundary between movables and
immovables
b. Categories of immovable-related collateral
i. Fixtures
1. Defined: goods that have become so related
to real property that an interest arises in
them under real property law
a. In Louisiana, these are component
parts of an immovable under the
Civil Code
b. Under the common law, even some
non-attached things may be fixtures
things intimately related to the
purpose of the real property (like a
copier in an office building)
i. So the common law category
of fixtures is broader than the
civil law definition
2. Louisianas non-uniform-UCC definition:
goods other than consumer goods that after
placement on or incorporation in the
immovable have become component parts
under Civ. Code arts. 463, 65, 66, or 67
a. Thus fixtures in Louisiana are
component parts under Arts. 463, 65,
66, and 67.
3. Requirements to be a fixture:
a. A good (corporeal movable)
b. Must fall into one of the above-
mentioned Civil Code categories
i. 463-64: other constructions
permanently attached to the
ground (OCPAs) are only
immovables if they there is
unity of ownership (land
owner and OCPA owner are
the same person). The other
categories (land, buildings)
are always immovables.

52
 ii. 465: integral parts of tracts
of land, buildings, and
OCPAs
iii. 466: component parts of
buildings; includes heating
installations, chandeliers, etc.
Things that if removed will
cause substantial damage to
the underlying thing.
iv. 467: For a unitary owner of
the underlying immovable, a
thing on the immovable, such
that the thing serves the
immovable (e.g., a tractor
sitting on a tract of land,
where the farmer owns both
the land and the tractor); and
where the owner files a
declaration that the thing is a
component part of the
immovable.
4. Other unique aspect of the Louisiana
definition
a. A fixture cannot be a consumer good
i. This is different from every
other jurisdiction!
ii. Rationale: WDK
iii. Outcome: theres no way to
grant an Art. 9 security
interest in the Equibank
chandelier
ii. Standing timber sold to be cut
1. Uniform UCC: 9-102(a)(44) goods include
standing timber that (i) is to be cut and
removed (ii) under a conveyance or contract
for sale, and (iii) that is destined to be cut.16
a. So in other jurisdictions, the debtor
who owns both the timber and the
land on which it sits can grant a
security interest in the timber, unlike
in Louisiana
16
Clarify that the UCC definition is written correctly. It appears not to be correct.

53
 2. Louisiana: differs from the uniform
definition: (1) the timber in question must
belong to someone other than the owner of
the ground, and (2) the timber conveyance
(sale) to the debtor must be recorded.
a. (3) In both jurisdictions, the standing
timber must be destined to be cut, to
be collateralizable under Article 9.
Most timber conveyances contain a
term in which the timber must be
cut; and we know that in Louisiana if
there is no stipulated term, the party
may go to court to get a declaration.
i. Therefore, note that if the
debtor purchases the timber
interest, with a view to never
cut the timber, the timber is
NOT collateralizable under
Article 9 because the timber
is not destined to be cut.
ii. Of course, if the timber is
ever cut, its a good/movable
so it can easily be
collateralized under Art. 9
(because its no longer
standing timber).
iii. As-extracted collateral
1. Defined: minerals as of the time they are
mined from the ground.17
a. The security interest in minerals is
subject to a suspensive condition
that they will be mined out of the
ground.
b. Uniform definition of as-extracted
collaterals: both the minerals
mined out of the ground and
accounts generated by sale of the
minerals
2. The landowner can collateralize the minerals
in his land as as-extracted collateral
17
Question: does attachment occur at the time the security agreement is createdor do the minerals have to first
come out of the ground to qualify as as-extracted and therefore for attachment to occur?

54
 3. What about if debtor grants mineral lease to
someone and receives a royalty?
a. The definition does not cover the
royalty. Royalties are not an account
because they are paid for the
privilege of a third party coming
onto the land. Royalties cannot be
collateralized under Art. 9.
c. Perfection
i. Under Model UCC Art. 9
1. Fixtures
a. Alt. 1: regular filing with Secretary
of State (9-310(a) & 9-334)
i. Defined: filing a financing
statement, as usual
ii. Effect: limited perfection:
only against two categories of
competitors: (1) bankruptcy
trustees, and (2) lien creditors
b. Alt. 2: special fixture filing in
local real estate records (9-502(b))
i. Fixture filing: filing of a
financing statement covering
goods that are, or are to
become, fixtures.
ii. Requirements: in addition to
the biggie requirements of
financing statements
generally, the fixture filing
must (1) indicate that it
covers this type of collateral
(fixtures); (2) indicate that
it is to be filed in the real
property records (in the
county containing the
immovable property into
which the fixture will be
incorporated); (3) describe
the real property into which
the fixture will be put, and
the description must be good
enough under mortgage law

55
 for describing real property;
and (4) if the debtor does not
have an interest of record in
the real property, provide the
name of a record owner [if
the owner of the immovable
and the fixture are different,
we also want the name of the
owner of the immovable].
iii. See our UCC-1F statement.
Easy to convert to a fixture
filing. Check the box (5a) to
say that this is a fixture filing.
Fill in the box for describing
the real property. Etc. So a
fixture filing is done on a
usual financing statement. It
just contains more
information than a regular
financing statement, and will
be filed in a different place
(where mortgages on
immovable property are
filed), outside of Louisiana.
This means that the rule is
wacko outside of Louisiana.
2. Standing timber sold to be cut / as-extracted
collateral (9-502(b))
a. Perfection can only take place by a
fixture filing for these two items
ii. Under Louisianas variant of UCC Art. 9: only
special fixture filing with clerk of court (La. R.S.
10:9-502(b); 10:9-334(a))
1. Fixture filing is the only way. No normal
financing statement filings allowed.
2. The additional information required is the
same as that required under the uniform
rule: indication that fixtures are covered,
description of the immovable, and listing
name of the owner of the immovable (if
different from the owner of the fixture).

56
 With the exception: we dont have the rule
of filing the fixture filing in real estate
records.
3. Where to file: with any clerk of court. =the
same rule for regular financing statements.
a. This is counterintuitive to people
from out-of-state.
4. *Louisiana non-uniformities:
a. (1) The perfection of the interest in
the fixture must occur before the
thing becomes a fixture
i. Whereas in any other state,
perfection in a thing can
occur even after the thing has
become a fixture
ii. The Louisiana rationale is
that the thing must be
movable at the time the Art. 9
interest is created
b. (2) Also, the only fixtures in which
Art. 9 interests may be taken are
non-consumer goods
c. (3) Fixture filings are made with any
clerk of court
d. (4) The only way to perfect an
interest in fixtures in Louisiana is
through a fixture filing (not a regular
financing statement)
iii. See Problem Set 20 and Kilborn Problem Re:
Fixtures
iii. Maintaining perfection18
1. Despite a change in the debtors name
a. Explication of the problem
i. The purpose of the debtors name on the financing
statement is to enable UCC searchers to find out
whether the debtor has encumbered certain property
that the searcher wants to take a security interest in.
ii. The question is a policy one: do we place the risk
on the filer to constantly monitor whether the debtor
has changed his name (and then update the filing if
the debtors name changes), or on the searcher to

18
Concerns changes that occur that make the information on the financing statement inaccurate.

57
 inquire from the debtor whether he has ever
changed his name?
b. Article 9s solution (9-507(c))
i. Generally: we place the risk chiefly on the searcher.
1. Definition of debtor: not necessarily an
obligor! Debtor means a person having
an interest in the collateral!
ii. The solution to the pseudo-problem: If the debtor
who owes the obligation transfers the property to
someone else, then the debtor is now the transferee
who has rights in the collateral. Therefore, in some
sense, this is a change of name of the debtor! So we
treat a new owner of the property as a change in the
name of the debtor! Barbaric, but law.
1. Solution: 9-507(a): Not a problem! The
security interest remains attached and
perfected despite the change in name of the
debtor, in the case of a sale. Nothing new
must be done by the filer to maintain
perfection.
2. Note that this places the burden for this type
of pseudo-problem entirely on the UCC
searcher, for reasons of policy.
3. However, the transfer to a new debtor in a
different state has ramifications as a change
in location of the debtor, discussed infra.
Way infra. A few pages infra.
iii. The main solution to the real problem:
1. 9-507(c) If the debtor changes its name such
that a financing statement becomes seriously
misleading
a. Therefore, if the debtors name
change does not make the filing
seriously misleading, then there is no
problem.
2. the filer is protected only for a certain
amount of time, after which the filer begins
bearing the risk of name changes:
a. Rule: (1) Perfection continues as to
collateral acquired by the debtor
before the name change, and
collateral acquired by the debtor

58
 within 4 months of the name change.
(2) For property acquired by the
debtor more than 4 months after the
name change, the filer must refile a
new financing statement to be
perfected in the new property.
b. So note that this rule only addresses
after-acquired property. For property
acquired by the debtor before
attachment and perfection, the rule
does not apply. This rule is only
about acquisition of property after
attachment & perfection. The rule is
about after-acquired collateral only.
i. Therefore, for non-after-
acquired property that was
perfected before the name
change, perfection continues.
This creates a huge problem
for the filing system. Brad
changes his name to Mini
Mahatma. Therefore, when
the new searcher searches for
Mini he will not discover
the original collateral listed
under Brad. The risk is
entirely placed on the
searcher for non-after-
acquired property.
3. How the rule works:
a. Financing statement describes
collateral as after-acquired
equipment.
b. Any equipment acquired before the
name change: perfection continues.
Risk is on the searcher.
c. Any equipment acquired within 4
months of change of name:
perfection continues. Risk is still on
the searcher to discover the change
in debtors name.

59
 d. Any equipment acquired by debtor
more than 4 months after the name
change: perfection does NOT
continue in favor of the secured
party. The risk has shifted to the
secured party. He must refile a new
financing statement including the
new name of the debtor to perfect an
interest in the new equipment.
iv. Changes of name for juridical persons
1. Juridical persons sometimes change their
names in the course of ordinary business
transformations
2. Example: Debtor was a sole proprietorship.
Business form changes to corporation, and
therefore there is a name change from the
name of the individual business owner to the
name of the registered organization.
3. Example 2: Merger. Law requires the
absorbing entity to absorb all the debts and
obligations of the other company. And
Article 9 sometimes treats reorganizations as
if a merger has occurred.
a. Not addressed in 507. UCC 9-
508(b) is the rule. 9-203(d)
determines the scope of the rule: if
(0) there is a merger such that by
operation of law one company must
assume the secured obligation of the
acquiree, or (1) the new debtor by
contract assumes all of the
obligations of the original debtor
[could be a merger or just general
contract], or (2) in a merger, the
acquiring entity assumes all or
substantially all of the assets of the
acquired entity, such that the new
entity assumes all the obligations of
the entity being acquired [and
therefore the acquirer is the new
debtor]; then 9-508(b) applies.

60
 i. 9-508(b) If the nature of the
merger corresponds to this
description, the new acquirer
has become a new debtor.
4. Rule: same as for name changes of
individual debtors: for existing collateral at
time of original filing, there is uninterrupted
perfection; and for after-acquired collateral
there is continuing perfection for all
property acquired until 4 months after the
business reorganization. And after 4 months
after the business reorganization (merger or
other change, including sole proprietorship
incorporating), the filer must refile as to new
property acquired.
5. *Note: With this change-in-debtors-name
rule, if the security agreement does not
include after-acquired property, the rule does
not apply: there is not even any attachment
to the newly-acquired property.
2. Despite a change in the use of the collateral
a. Explication of the problem
i. Example
1. Debtor grants interest in equipment of the
business.
2. Debtor then goes to new secured party and
says that he can give first position in
inventory.
3. In the meanwhile, one of the copy machines
debtor had used is moved into inventory.
Therefore, the use of the collateral as
indicated in the financing statement has
changed. The new secured party will look at
the new copy machine as inventory and
assume it is not collateralized because the
previously filed financing statement only
indicates that there was a perfected interest
in equipment.
ii. Who do we place the risk on: the filer to update the
financing statement when there are changes in use
of collateral, or the searcher to inquire about such
changes?

61
 b. Article 9s solution (9-507(b))
i. Where, had the collateral had the new use at the
start, the financing statement could have been filed
in the same filing office anyway
1. Rule: Attachment and perfection continue
ii. Where, had the collateral had the new use at the
start, the financing statement would have had to
have been filed in a different filing office
1. Recall that certain movables cannot be
subject to Art. 9 interests. For example,
automobiles interests must be granted and
perfected outside of Art. 9. Aircraft,
copyrights, patents, and other movables also
are outside of Art. 9.
2. Therefore, the only change in use that will
create the need for a refiling to obtain
continued perfection is a change in use of a
type of property that would have needed to
be perfected under a different system than
that under which the original filing occurred.
3. Example: Take automobile out of inventory
of car dealer and use it as a consumer good.
As a consumer good, there must be
perfection through the Office of Motor
Vehicles. This is a different system from
that under which the perfection originally
occurred when the car was inventory; thus
the secured party must refile.
4. Rule: in this type of change of use in
collateral, there must be a refiling for there
to be continued perfection
a. Note that the loss of perfection is
instantaneousas soon as the
change in use occurs. So need to do
the refiling before the change in use
occurs.
b. But this problem hardly ever arises
in real life.
3. Despite a change in the form of the collateral (perfection through
transformation of collateral into various kinds of proceeds) (9-
315(d))
a. Explication of the problem

62
 i. Generally: a transformation of the collateral into
proceeds. Attachment jumps onto the proceeds
automatically. But does perfection do the same?
ii. Example: Debtor sells equipment (subject to a
perfected interest) for cash. The new searcher will
not think that the cash is subject to a security
interest; so he will not be warned by the filing that
only mentions equipment.
iii. Who to place the risk on, original secured
party/filer, or the searcher?
b. Article 9s solution
i. Continuing perfection vis--vis the original
collateral (9-507(a))
1. The original collateral is now in the hands of
another person, rather than the debtor
2. Rule: this other person is now the new
debtorremember? Thus perfection
continues even though the collateral belongs
to someone other than the original debtor.
a. This is because Art. 9 interests are
accessory real rights: thus the rights
must follow the thing (the collateral).
ii. Continuing perfection vis--vis the proceeds (9-
315(d))
1. The general rule: 20-day extension of
perfection (9-315(d) clause 1)
a. On the 21st day after attachment of
the security interest to the proceeds,
perfection will end.
b. Note that in the following
exceptions, perfection continues past
20 days and continues forever.
2. Exception 1: Where collateral is exchanged
(barter) (9-315(d)(1))
a. Type 0 Barter: the newly acquired
thing fits within the current
description of the collateral within
the financing statement
i. Example: Trade a copier for
a computer used as
equipment. Financing
statement covers present and

63
 after-acquired equipment.
The thing newly acquired in
the barter fits within the
description in the financing
statement.
ii. Rule: perfection continues
forever.
iii. Rationale: there is no risk
that UCC searcher would be
seriously misled because the
new collateral fits within the
description.
b. Type1 Barter: the newly acquired
thing is not specifically mentioned in
the collateral description in the
financing statement, but the change
would not lead to the thing needing
to be filed under a different filing
system.
i. Similar to a change of use in
collateral that would not
require filing in a different
filing system. This is the
normal case.
ii. Rule: perfection continues
forever.
iii. Note, though that the Type 1
barter does create problems
for the UCC searcher. If the
financing statement
mentioned inventory, and the
newly acquired collateral is
equipment, the UCC
searcher would not assume
that the equipment he sees
is covered under the old
secured partys filing. This
puts the burden on the
prospective secured party, if
he wants to take an interest in
certain collateral, to ask the

64
 debtor how it was acquired
whether through barter or
something else!
c. Type 2 Barter: the newly acquired
thing would need to have an interest
perfected under a different filing
system from Art. 9.
i. Example: trade a copier for
an automobile. The
financing statement refers to
equipment. The interest in
the automobile would have
required perfection outside of
Art. 9, had the automobile
been original collateral.
ii. Rule: perfection is lost on
the proceeds after 20 days.
3. Exception 2: Where collateral is
transformed into identifiable cash proceeds
(cash sales) (9-315(d)(2))
a. Rule: continuing perfection forever
b. The rule only applies as long as the
proceeds (1) remain in cash form and
(2) are identifiable.
4. Exception 3**: Where collateral is
transformed into identifiable cash proceeds,
which are then used to acquire identifiable
non-cash assets (cash sale used to purchase
some other property) (9-315(d)(3))
a. Type 0:19 The newly acquired thing
fits within the description of
collateral in the financing statement.
i. Rule: continuing perfection
forever.
b. Type 1: The newly acquired thing is
not mentioned in the collateral
description in the financing
statement, but the interest would be
perfected in the new thing the same
as in the old thing.

19
The typology is the same as for barter, discussed supra.

65
 i. Rule: loss of perfection after
20 days from the second step,
use of the cash to purchase
the new thing.
ii. Why is the rule different
from a Type 1 barter? See
the Art. 9 drafters. A matter
of compromise.
iii. Hypo: debtor sells the copier
and gets cash. On the 21st
day she buys a new laptop.
This is a cash sale followed
by retransformation. As to
step 1, the cash sale:
perfection continues past 20
days, forever, in the cash. So
on the 21st day, the
perfection in the cash
continued. Step 2: when the
cash is used to purchase the
computer. After purchase of
the computer, then the
secured party has 20 days
from the purchase of the
computer to refile.
iv. This would be the same
outcome if she had sat on the
cash for 4 years. Then after 4
years when the debtor buys a
new computer, that is when
the 20 days begins to run for
the secured party to refile to
get perfection in the
computer!
c. Type 2: The newly acquired thing is
not mentioned in the financing
statement, and the interest would
have to be perfected in the new thing
under a system outside of Art. 9
i. Rule: loss of perfection after
20 days from the second step,

66
 use of the cash to purchase
the new thing.
4. Despite a change in the location of the debtor and/or collateral
a. Generally: the problem is that the debtor may change
address, or transfer the property to another location. The
searcher will search the filings and not realize that property
already has a perfected interest, in that no filing will come
up in the search, although there is a filing in the state from
which the debtor/collateral moved.
i. Example, debtor grants security interest in state A.
Debtor moves to state B. New creditor searches
only Bs records; he would do this because of the
Art. 9 choice of law rules. The choice of law rules
determine where filings should occurin which
state.
b. Prolegomena: what law governs perfection (choice of law
rules) (9-301 et seq.)
i. General rule: location of the debtor (9-301(1))
1. *Where is he/it located? (9-307)
2. Natural person (9-307(b)(1)): individual
debtor is located at his principal residence
3. Juridical person
a. Registered organization (9-307(e)):
located in the state where organized
(i.e., incorporated)
b. Other organizations
i. If only 1 place of business,
then there (9-307(b)(2))
ii. If more than 1 place of
business, then its chief
executive office (9-307(b)
(3)), which is where the CEO
does the work of the
organization
ii. Exceptions: location of the collateral
1. Possessory security interests (9-301(2))
a. Possessory security interests are
perfected through possession/control
b. Rule: The governing state law is the
state where the collateral is located.
i. The collateral would usually
move because the secured
creditor movedbecause he

67
 has possession of the thing,
with a possessory security
interest.
ii. But the rule applies
regardless of how the
collateral moves to a different
state.
2. Fixtures & timber-to-be-cut (9-301(3)
(A)&(B))
a. Rule: State where the fixture is
located; and where timber is located
3. As-extracted collateral (9-301(4))
a. Rule: state where the wellhead is
c. Change-of-location rules (9-316)
i. Change of location of collateral
1. In general: irrelevant
a. Generally, it is the state of location
of the debtor that determines filing
rules.
b. The exceptions are for standing
timber, fixtures, as-extracted
collateral, and possessory security
interests. See next item, infra.
2. Exceptionally (9-316(c)): where property in
which there is a perfected possessory
security interest is relocated to another state,
look to the new states law. If in the new
state possession of the collateral in the new
state would have perfected the interest, then
perfection continues in the new state.
a. *But note that every state is uniform
as to possessory security interests!
Therefore under current law, a
problem will never arise. Because a
perfected possessory security interest
will also be proper in the relocated-to
state. And thus in the case of
relocation for a possessory security
interest, there will be continuing
perfection.
ii. Change of location of debtor
1. Mere change of location (9-316(a)(2))

68
a. Prologue re 4 month rule: notice it is
different from the name change 4-
month rule, because the present rule
deals with not only after-acquired
collateral, but also existing
collateral.
b. Rule: Perfection is lost as to all
collateral (not just after-acquired,
but also original collateral) if the
secured party does not refile a
financing statement in the state of
the debtors new location within 4
months of the relocation
i. Retroactive termination of
perfection (9-316(b)): If the
secured party does not refile
within the proper window,
the security interest is
deemed to never have been
perfected as against
purchasers of collateral for
value (which purchaser does
not include the trustee in
bankruptcy or a lien creditor)
ii. As to lien creditors and
bankruptcy trustees, the Art.
9 secured partys loss of
perfection is prospective only
iii. A secured party qualifies as a
purchaser for value
iv. Note that a retroactive loss of
perfection is extraordinary.
Unless a statute specifically
says that the loss is
retroactive, the loss is only
from that date forward. So
for the other rules (change of
use, change in form, change
in name) the loss of
perfection is only
prospective.

69
 v. Hypo: At time T1 there is
attachment and perfection by
secured party #1. At T2 (1
month later) debtor moves to
a new state. 4 months after
T2 perfection is lost if there
is no filing in the new state.
2 months after the relocation,
a secured party #2 takes a
perfected interest in the same
collateral. 5 months after the
relocation, a secured party #3
takes a perfected interest in
the same collateral. After 4
months, the secured party
#1s perfection was lost. This
loss was retroactive;
therefore, the party who
perfected 2 months after the
debtor-location-change has
first priority now. Note that
if the rule was not one of
retroactivity, there would be
no rewriting of history: when
secured party #2 had
perfected its interest, #1 had
previously perfected its
interest; and in spite of the
loss after 4 months of #1s
interest, #1 would still have
priority over #2.
vi. And also if #1 does not refile
after the 4-month mark, #3
(5-months-later creditor) has
priority over #1.
vii. But remember the
retroactivity is only as to
purchasers for value. So
change the facts: if the 2-
month and 5-month creditors
were a lien creditor, and

70
 bankruptcy trustee,
respectively: As to these two
creditors, who were not
purchasers for value, the loss
of perfection by #1 is
prospective only. At the 2
month mark, #1 was still
perfectedso #1 has priority
over the lien creditor. At the
5 month mark (bankruptcy),
though, #1 had lost perfection
therefore, the bankruptcy
trustee has priority over #1.
2. Change to a new debtor in a new location
(9-302(a)(3))
a. Simple change of debtor
i. Note: if the original debtor
sells the collateral to
someone in a different state,
there is automatically a new
debtor even though the
property hasnt gone across
the border yet! Because the
debtor under Art. 9 is the
party that owns the collateral.
Therefore the debtor is now
a new debtorin a new
location, a different state.
And therefore, the Art. 9
choice of law rule is that the
filing should occur in the
state of location of the new
debtor. Not where the debtor
is located under laymens
terms, but where debtor is
located under Art. 9
which for example would be
the state of incorporation for
a registered organization.
ii. Rule: there must be a filing
in the state of location of the

71
 new debtor within 1 year of
the transfer of the collateral
to the new debtor, in order
for the secured party to
maintain perfection.
iii. Retroactive termination of
perfection (9-316(b)): If the
secured party does not refile
within the proper window,
the security interest is
deemed to never have been
perfected as against
purchasers of collateral for
value (which purchaser does
not include the trustee in
bankruptcy or a lien creditor)
b. Change of debtor as part of business
re-organization
i. Possibility #1: sole
proprietorship in state 1.
Incorporates in state 2.
ii. Possibility #2: debtor is
merged into another business
entity that is located in
another state.
iii. Rule: there must be a filing
in the state of the new debtor
within 1 year of the transfer
of the collateral to the new
debtor, in order for the
secured party to maintain
perfection. (Same rule as for
simple change of debtor.)
iv. Retroactive termination of
perfection (9-316(b)): If the
secured party does not refile
within the proper window,
the security interest is
deemed to never have been
perfected as against
purchasers of collateral for

72
 value (which purchaser does
not include the trustee in
bankruptcy or a lien creditor).
(Same as for simple change
of debtor.)
5. See Problem Set 23 and Kilborn Problems 1 & 2 / 1, 2, & 3
iv. Cessation of perfection
1. Where perfection was accomplished by possession or control: loss
of possession or control
2. Where perfection was accomplished by filing:
a. Lapse (9-515)
i. Cause of lapse
1. Generally
a. If a financing statement is not
continued after 5 years, the
perfection lapses.
2. Rule: perfection lapses 5 years from when
the financing statement is filed, unless
within the 6 month window before the 5 year
mark, the secured party files a continuation
statement.
a. Continuation Statement: an
amendment of a financing statement
which (A) identifies by file number
the initial financing statement to
which it relates, and (B) indicates
that it is a continuation statement for,
or that it is filed to continue the
effectiveness of, the identified
financial statement.
b. 2 relevant time periods
i. Latest date to act: 5 years
from the initial filing
ii. Earliest date to act: 6 months
before 5 years after the initial
filing
3. Reason for the 6-month limitation
a. Filing gives an additional 5 years
from when the original would have
lapsed. Therefore, if we didnt have
the six month limitation, the secured
party could file a continuation

73
 statement the day after filing the
initial filing statement to obtain a
total of 10 years perfection.
b. Contra mortgage law, where the
extension runs from the time of filing
ii. Effect of lapse (9-515(c))
1. If the security interest lapses, it is deemed
never to have been perfected as against a
purchaser for value. Retroactive loss of
perfection.20
iii. Averting lapse: timely filing of a continuation
statement (9-515(c))
1. What to do (9-102(a)(27) & 9-511): file a
continuation statement identifying the file
number of the initial filing statement and
identify the continuation statement as such
2. When to do it: within 5 years after initial
filing, and not earlier than 4.5 years after
3. Where to file: same office as initial filing
4. What it does (9-515(e)): continues
perfection for 5 years
b. Termination (9-513)
i. Definition of termination
1. Generally: Cessation that results whenever
a termination statement is filed
2. UCC definition: amendment of a financing
statement that identifies by file number the
initial financing statement to which it
relates, and indicates either that it is a
termination statement or that the identified
financing statement is no longer effective.
3. Reason: the debtor wants to receive such a
statement as a remedy to give notice that the
secured partys interest has terminated
a. Problem #1: the financing statement
may not have been authorized by the
debtor in the first place
b. Problem #2: the security interest no
longer exists because the principal
debt is no longer owed

20
Important question: so we have the rule for lapse of Art. 9 interestsretroactive loss of perfection. What about
for mortgages? If you fail to reinscribe a mortgage, is the loss of perfection also retroactive?

74
 c. These are problems because the Art.
9 records will show an encumbrance
that doesnt actually exist, and the
debtor will not be able to make
future loans against the collateral
ii. Causes of termination (9-513(a) & (c))
1. The indebtedness secured no longer exists
2. Or the financing statement was filed by
mistake
iii. Means of termination
1. Ordinarily: Debtor requests, and secured
party files the termination statement
a. Note that the secured party has no
obligation to send the termination
statement. The debtor must make
the demand in authenticated form
2. One case in which the secured party has the
affirmative duty to file the termination
statement: where there is a consumer
transaction involved
iv. Effect of termination (9-513(d))
1. The financing statement cases to be
effective
a. But note that where the filing of a
financing statement that was not
authorized, or where the principal
debt is gone, there really is no
perfection. So the drafters should
not have said that the termination
statement filing makes the interest
[cease] to be effective, but that
now as a matter of public record,
the financing statement ceases to be
effective.
2. There really is no effect of the termination
statement. It only puts third parties on
notice that perfection no longer exists.
v. Perfection outside the Article 9 system
1. Generally
a. Art. 9 is the default system for perfecting in movables; but
where other law exists, use that.

75
 b. 9-311(a): The filing of a financing statement is not
necessary or effective to perfect a security interest in
property subject to:
i. Federal law
ii. Certificate-of-title statutes
2. Federal law perfection
a. Intellectual property (patents and copyrights)
i. Copyrights
1. Rule: The filing must be in the U.S.
Copyright Office
ii. Patents and trademarks
1. The federal legislation is unclear
2. Some cases say that only the Patent and
Trademark Office (PTO) is the proper place
of filing
3. Some cases say that perfection in TM can be
under state law
a. The safest thing is to file in both
PTO and under Art. 9
b. Aircraft (other than as inventory)
i. Federal statute
1. Establishes the Federal Aviation
Administration (FAA)
2. An individual who owns a plane must go to
the FAA in Oklahoma to perfect
ii. For aircraft held as inventory, the party must file
under Art. 9 by granting an interest in inventory
3. Perfection under state law certificate-of-title systems: Motor
vehicles (other than as inventory)
a. Generally
i. Every state in the U.S. requires using the certificate-
of-title system to perfect an interest in an
individually-owned automobile
ii. But for autos held as inventory, the party must
perfect an interest under Art. 9
b. Establishing perfection
i. How to perfect
1. The other 49 states
a. Ensure that the Office of Motor
Vehicles (OMV) makes a notation on
the car title that the secured party has
an interest

76
 b. Apply with OMV asking them to
note the security interest on the title
document
2. Louisiana
a. Not through notification on the
certificate of title.
b. Rule: file a special financing
statement with the agency
responsible for issuing the titles
(OMV)
c. The special financing statement: has
all the normal stuff; and the make,
model, and VIN of the vehicle
d. Perfection comes at the moment of
filing with OMV
e. OMV through its own rulemaking
requires not only the financing
statement filing, but also a request
for notation of the interest on the
title. But this extra requirement, if
not followed, will not result in lack
of perfection.
ii. Where to perfect: OMV
c. Maintaining perfection
i. Choice of law (pseudo-)problem: automobiles
move to other jurisdictions when their owner-
debtors move
1. Choice-of-law rule: the rule varies from
state to state. The owner is supposed to
obtain a certificate of title, usually, after x
number of days of residing within a state.
Often 30 to 90 days after setting up a
residence in a new state.
2. Consequences of obtaining title in the wrong
state: nothing, under the Model Act for
certificate of title systems (regardless of
whether this results from either a mistake or
fraud)
3. Consequences of not obtaining a new title
after moving to the new state: nothing,
under the Model Act. Thus this is a very
creditor-friendly regime.

77
 ii. Issuance of new titles problem
1. The problem that occurs is when the debtor
moves to a new state and obtains a title that
does not reflect the security interest under
the prior states law
2. How does this happen? Either mistake or
fraud. Debtor in new state asks for a clean
certificate of title under the new state law
(without any notations of any security
interests), and debtor tells the new states
OMV that the car is unencumbered. The
debtor might do this mistakenly, or
fraudulently (to defeat the prior secured
partys perfection).
a. However, this is unlikely to happen
because the OMV will not issue a
new title unless you give them the
old one. And if the new state OMV
sees encumbrances listed on the old
title, the OMV will list the
encumbrances on the new title.
b. The problem is that if the new debtor
says he lost the old title, the debtor
may be able to still obtain a clean
certificate of title from the new state
3. Effect of issuance of new title: loss of
perfection, unless the secured party gets his
interest noted on the title within 4 months of
issuance of the new title.
a. Loss of perfection is retroactive as
to purchasers for value.
b. **As to bankruptcy trustees and lien
creditors, there is no loss of
perfection, even prospectively
i. Note this is different from
loss of perfection problems
we have previously seenin
which loss of perfection vis-
-vis these types of parties
would occur prospectively.
4. Farm products (crops & standing timber) [La. R.S. 3:3651 et. seq.]
a. Rules

78
 i. Perfection does not occur through Art. 9, but
through the Ag Registry Law, in Title 3 re:
Agriculture
ii. File with the clerk of court in any parish (just as in
Art. 9)
iii. Form:
1. In Art. 9, description of collateral and names
of secured party and debtor are all that are
required
2. Under the Ag Registry law, its an effective
financing statement (EFS)
a. Contents:
i. Name and address of creditor
ii. Name and address of debtor
iii. SSN of debtor (or taxpayer
ID # of debtor)
iv. Description of the collateral
(farm products), including
the amount of such farm
products and the number of
such movables to the extent
applicable, if less than all of
such farm products owned by
the debtor
v. Reasonable description of the
property (farm)
vi. Name of the parish in which
the farm products are
produced or located
b. There is overlap between an
effective financing statement and a
financing statement, but the two are
different
c. All of these Ag law requirements are
biggie requirements!
b. The registry
i. Under Art. 9, the clerks of court forward filings to
the Secretary of State
ii. Under the Ag law, the clerks forward filings to the
Secretary of Agriculture; there is a separate ag
registry for filings in farm products
5. See Problem Set 25
c. Effects of the security

79
 i. Priority21
1. Generally
a. Scenario: two parties want to foreclose on collateral, but
the value of the property is not sufficient to pay both of
them. Priority resolves who will get satisfied first.
b. Apart from a security device, creditors share pro rata in the
debtors assets. But Civil Code Article 3183 says that if
there be cause for a preference, then there is a priority
scheme that discards the pro rata rule.
c. Priority scheme establishes a hierarchy: the first-ranked
gets paid entirely, and only if there is value left over do we
move to lower-ranked secured parties.
2. Articles 9 secured parties inter se
a. The basic rules
i. In general: first to file or perfect ( 9-322(a)(3),
9-317(a)(1), 9-322(a)(2), & 9-322(a)(1))
1. As among unperfected parties: the first to
attach has priority. (a)(3). As among
perfected and unperfected parties: the
perfected party wins. (a)(2). The rest of the
rules all pertain to conflicts among perfected
parties: first to file or perfect. (a)(1).
2. Thus the rule requires looking at two points
in time: the filing, and the perfection; for
each secured party. So really there are 4
pertinent times:
a. Filing of SP1
b. Perfection of SP1
c. Filing of SP2
d. Perfection of SP2
e. Whichever of these 4 events occurs
first determines priority.
3. Understand: it is possible that the first party
to perfect will lose.
4. See Example in course outline.
a. S1 files a financing statement but has
not confected a security agreement.
Then S2 both files a financing
statement and confects a security
agreement. S1 then confects a
security agreement with debtor.
21
Like Noah: rank em 2 by 2 on the final exam. Because you will encounter the Vicious Priority Circle. What is
the outcome of that? WDK. No jurisprudence, because the parties always settle when they encounter the Circle.

80
 Even though S1 did not perfect until
he attached (confecting the security
agreement, which occurred after S2s
perfection), S1 has priority because
he was the first to file or perfect
file in this case.
b. The timeline:
i. Filing by S1
ii. Filing & perfection by S2
iii. Perfection by S2.
c. S2 was the first to perfect and still
loses, because S1 filed earlier. S1
was not perfected when it filed
because attachment had not yet
occurred. But S1 still wins because
it filed first, which came before S2s
filing/perfection.
ii. As applied to . . .
1. Future advances (implication of 9-322(a)
(1))
a. The rule in principle applies to future
advances (involving a revolving line
of credit).
b. Even though the amount of
indebtedness increases, the first to
file or perfect has priority.
2. After-acquired property (implication of 9-
322(a)(1)
a. The rule in principle applies to after-
acquired property
b. Thus, where S1 files against after-
acquired property, and S2 then files
and perfects when the debtor actually
obtains the collateral, S1 has priority
because he filed first (even though
not attached at the time)
3. Proceeds ( 9-322(b)(1))
a. The rule of first to file or perfect
expressly applies to proceeds
b. The first to file or perfect in the
original collateral has priority in the
proceeds
b. Exceptions

81
 i. Security interests perfected against a transferor ( 9-
325)
1. The exception: when collateral is
transferred, priority is given to the secured
party of the transferor/seller.
2. Rationale: a political compromise that
protects the sellers creditor.
3. See Example in course outline.
a. S1 takes security interest in Pascals
equipment, including after-acquired.
S2 perfects a security interest in
Olides horses. Olide then sells
horse to Pascal. Who has priority in
the horse: S2 (the creditor of Olide
as transferor), or S1 (the creditor of
Pascal as transferee)?
b. In this scenario, note who file-or-
perfected first: S1. Under the
general rule, S1 was the first to file
because the financing statement
listed after-acquired equipment.
c. However, the exception of 9-325
applies: the secured party of the
transferor has priority. Therefore, S2
has priority, even though not the first
to file or perfect.
ii. PMSIs
1. Priority of PMSIs in general ( 9-324(a), 9-
324(g), 9-324(g)(2))
a. The exception to the first in time,
first in right general rule applies to
all PMSIs (not just those in
consumer goods):22 a PMSI-secured
party has priority as long as the
secured party perfects within 20 days
of the debtor receiving possession.
b. See Example in course outline.
i. S1 takes an interest in after-
acquired equipment, and
perfects. Debtor buys a horse
and grants an interest (PMSI)
22
Differentiate from the rule of automatic perfection in PMSIs in consumer goods.

82
 to the seller/S2, but S2 has
not yet perfected. Debtor
then grants a security interest
to S3, who promptly perfects.
Then, S2 finally perfects 2
weeks after the sale.
ii. Under the general rule: S1
was the first to file; the after-
acquired description covered
horses. So S1 would have
priority. However, the PMSI
exception applies.
iii. S2 has priority because he
has a PMSI and has perfected
within 20 days of the
attachment.
c. As between 2 PMSI secured
creditors:
i. General: The first of the
PMSI-secured creditors to
perfect or file has priority
ii. Exception: as between a
seller PMSI-secured party,
and a financier PMSI-secured
party (loan money
specifically for the purpose of
facilitating a purchase), the
seller gets priority. [How
would this scenario happen?
Seller only extends partial
credit; financier lends the
rest.]
2. Exceptions23: priority of PMSIs in
a. Inventory ( 9-324(b))
i. Applicability of exception:
Conflict between PMSI-
secured party and inventory-
secured party.
ii. The exception: The inventory
secured lender will beat the
23
These are exceptions to the general rule of PMSIs, which is itself an exception to the general first in time, first in
right rule.

83
 PMSI secured lender, unless
the PMSI secured lender (1)
perfects his interest before
the debtor receives
possession, and (2) sends an
authenticated notice to the
inventory-secured party,
which describes the collateral
and warns the inventory-
secured party that the creditor
will take a PMSI in the item
that is about to become part
of the debtors inventory.
iii. (2) Does the notice have to be
sent before the PMSI party
perfects? WDK!!! But we
do know that the notification
has to be within 5 years
before debtor receives
possession.
iv. Scenario: debtor purchases
new inventory. Upon
purchase, grants PMSI to
seller; and at the same time,
the inventory is becoming
subject to the after-
acquired interest of the
already-secured, inventory-
secured party.
v. Note: under the general rule,
the inventory-secured party
as first to file would have
priority. But under the PMSI
exception, the PMSI party
would win. But then this
exception to the exception
says not so fast: with
inventory, the PMSI party has
to do some other stuff to get
priority. Whereas the PMSI
exception allowed the

84
 creditor to wait 20 days to
perfect after having turned
over the collateral to the
debtor, the exception to the
exception says that the PMSI
creditor must perfect before
the debtor receives
possessionno 20-day grace
period.
vi. See Example in course
outline. Debtor is a retail
vendor of pelts (inventory).
Granted an inventory interest
to S1. Debtor buys pelt1
from S2; no financing
statement filed. Buys pelt2
from S3, who immediately
files a financing statement
but does not contact S1.
Then buys pelt3 from S4;
immediately financing
statement filed, and S4 sends
notice to S1 that he is taking
a PMSI. Who has priority as
to each pelt? Pelt1: S1 (first
to file). This is the inventory
exception; S2 would have
had to perfect by the time
debtor received possession;
this did not occur. Therefore,
the first to file or perfect (S1)
has first priority. Pelt2:
Same outcome: S1 wins
because S3 did not comply
with the inventory
exception applicable to
PMSIs: although S3 did
perfect by the time the debtor
received possession, S3 did
not give any notice to the
inventory-secured party.

85
 Therefore, S1 as first to file
or perfect has first priority.
Pelt3: S4 has first priority.
S4 complied with the PMSI-
inventory exception:
perfected before debtor
received possession, and gave
notice to S1, in writing, that
he planned to take a PMSI in
pelt3.
b. Proceeds ( 9-324(a), 9-324(b))
i. Remember: in principle, the
priority rules apply not only
to original collateral, but also
to proceeds. So if priority in
collateral, then also priority
in proceeds. But this
exception to the PMSI
exception messes with that.
ii. 9-324(b): there are 3
possible types of proceeds of
inventory in PMSI cases, in
which priority in inventory
will be the same as priority in
the proceeds: proceeds that
are (1) chattel paper, (2)
instruments, and (3) cash
(identifiable as proceeds).
For these 3, PMSI secured
party can get superpriority
over inventory-secured party
not only in the original
collateral, but also in the
proceeds. PMSI party must
just meet the (a) notice to
inventory-secured party and
(b) perfection before debtor
possession requirements.
iii. But for proceeds of
inventory, where the proceeds
are outside of these 3

86
 categories (e.g., ACCOUNTS
the ordinary proceeds of
inventory in practice): there
is NO PMSI superpriority.
*There is NO PMSI
superpriority in accounts
that are proceeds of
inventory.
iv. See Example 1 & 2 in
course outline.
v. Ex. 1: Debtor sells pelts.
Grants interest in present
and after acquired accounts
to S1, who perfects. Debtor
buys tanning machine
(equipment) from S2, who
perfects 10 days after
delivery. Debtor resells the
equipment to Buyer on
creditthus creating an
account receivable from
Buyer. Analysis: S1 has an
interest thanks to the original
security agreement (SA).
S2 has an interest because it
has a perfected PMSIand
after the sale, S2 has
continuing perfection for 20
days after the transformation
to proceeds (the account). 9-
324(b) does not apply:
because this collateral is not
inventory, but rather
equipment. The general rule
of PMSIs applies: though S1
was first to file, S2 perfected
within 20 days as a PMSI-
secured party. Therefore, S2
had priority in the collateral.
Under the initial PMSI
exception, which applies to

87
 non-inventory collateral, the
PMSI-secured party
continues to have priority in
the proceeds of the original
collateral. If the collateral
had been inventory, the
exception to the exception
would apply: instead, S1
would have won because the
first to file or perfect rule
would apply to defeat the
PMSI-secured party.
vi. Ex. 2: Debtor is a retail
vendor of pelts (inventory).
Debtor grants S1 an interest
in present and after-acquired
inventory. S1 is the
inventory-secured party.
Each of the 3 pelts is
acquired by the debtor and
each respective secured party
attempts to take a PMSI.
Each pelt is later changed
into proceeds upon sale of
each pelt. Pelt1 is
transformed into cash: S2
took a PMSI but did not
perfect. Therefore, S2 did
not get priority in the original
collateral or the cash
proceeds; S1 (inventory-
secured lender) has priority in
the proceeds (cash). Pelt2 is
transformed into an
instrument; S3 took a PMSI
in Pelt2 but did not contact
S1. S3 did not meet the
requirements for priority in
the pelt: therefore no
priority, either, in the
proceeds (the instrument).

88
 Thus S1 also has priority in
Pelt2. Pelt3 is transformed
into chattel paper; S4 took a
PMSI in Pelt3 and both (1)
gave proper notice and (2)
perfected before debtor
possession. S4 met the
requirements for
superpriority in the original
collateral (the pelt):
therefore, there S4 has
superpriority in the proceeds
of the inventory
(proceeds=the chattel paper).
vii. Ex. 3: Continuation of same
story as Ex.2. Debtor bought
Pelt4 from S5, granting a
PMSI. S5 properly (1) gave
notice and (2) perfected
before debtor possession.
Debtor, in selling thePelt4,
does so on open account,
creating an account as
proceeds. Result: S1 has
first priority. Note the
rationale: the proceeds are
an account. The PMSI
secured party does NOT get
flow-through superpriority in
an ACCOUNT as proceeds of
inventory. Instead, the
general first in time, first in
right rule prevailsso S1
has priority in the account-
proceeds.
iii. Security interests obtained by control
1. Deposit accounts ( 9-327)
a. The exception: control trumps the
perfection by financing statement (or
other means of perfection).

89
 b. Among 2 parties perfected by
control: first in time, first in right.
i. Exception: where party took
control via being the bank at
which the account is held
(automatic control), the
bank beats other control-
secured parties.
ii. Exception to exception: the
secured party who became
listed on the debtors account
beats the automatic control
bank.
2. Investment property ( 9-328)
a. The exception: control trumps the
perfection by financing statement (or
other means of perfection).
b. Among 2 parties perfected by
control: first in time, first in right.
3. Hypo: SP1 perfects through control. SP2
has a PMSI. The control party wins
control beats PMSI superpriority.
iv. Possessory security interests in chattel paper or
instruments ( 9-330)
1. Note: this rule of superpriority via
possession only applies to instruments &
chattel paper.
2. Rule: Perfection by possession trumps other
forms of perfection
a. Note that only one person can have
possession; so there are no priority
issues among possessor secured
partiesbecause there is only one
3. Qualification: to get this superpriority, the
secured party:
a. (1) Must act in good faith
i. What does this mean? WDK.
Honesty in fact is the Art. 1
definition.
b. (2) Must have no knowledge that
possession is a violation of the rights
of the initial secured party

90
 i. What is a violation?
ii. E.g., debtor agrees with
initial secured party to never
turn over possession to
another party, and then does
just that.
iii. But this sort of restriction is
not usually in security
agreements.
iv. If the creditor has knowledge
of such a violation, he gets no
superpriority via possession.
c. See Problem Set 32
3. Article 9 secured parties vs. buyers
a. General rule (1-201(b)(9), 9-315(a)(1))
i. The security interest follows the thing purchased.
ii. The buyer is the new debtor.
iii. Therefore, buyer wins against Art. 9 secured party.
b. Exceptions
i. Authorized disposition exception (315(a)(1)):
secured party authorizes the disposition free and
clear of the security interest
ii. Buyer in ordinary course (BIOC) exception
(9-320(a)) requirements:
1. (1) Buyer must buy in the ordinary course24
a. (a) Buyer must give new value
i. There cannot be past
consideration.
ii. Therefore, for example, the
purchaser cannot buy through
releasing the sellers prior
obligation
b. (b) Seller must be in the business of
selling the type of thing sold, and the
sale must be in the ordinary course
of business
i. A purchase of inventory is
required. A sale of
equipment wont do.
ii. Buying in the ordinary way
(e.g., NOT a fire sale; NOT a
going out of business sale)
24
BIOC is defined in UCC 1-201(b)(9).

91
 c. (c) Buyer must be in good faith
i. Useless requirement.
ii. Honesty in fact.
d. (d) Buyer must not know that taking
the thing is a violation of the secured
partys rights.
i. This requires ignorance of the
fact that the SA prohibited
the seller from selling
without the secured partys
consent.
2. (2) Security interest must have been created
by the buyers seller
a. As opposed to someone further
removed in the chain of title having
granted the interest
b. Purchasing in the ordinary course
will not shield the buyer from
security interests granted by parties
other than the immediate seller
3. (3) The thing sold must not be a farm
product
a. Note that, though, there is a separate
BIOC exception for farm products
within federal legislation
4. (4) The purchase must not have been from
the secured party
a. This requirement makes sense
because the requirement is that the
buyer be buying in the ordinary
courseand purchasing it from the
secured party who has possession is
not a purchase in the ordinary course
of business
iii. Garage sale (consumer-to-consumer) exception
(9-320(b))
1. The Exception: if the buyer buys the thing
from a debtor who used it for personal,
family, or household use [if the seller is
using the thing as a consumer good], then
the buyer will take free if:

92
 a. (1) The buyer takes without
knowledge that the security
agreement exists
b. (2) The buyer gives value
c. (3) The buyer purchases primarily to
use the thing as a consumer good
d. (4) The purchase is made before the
filing of a financing statement by the
secured party
i. Note: chances are that the
security interest will be a
PMSI because this is a
consumer good. Recall that a
PMSI in a consumer good is
perfected automatically
only attachment is needed.
ii. Therefore, in the normal case
in which the garage sale
exception applies, the secured
party will not have filed a
financing statementsuch
that requirement #4 is not a
problem for the purchaser.
iii. However, from the secured
partys perspective: if he
wants to maintain his priority
as to a buyer, he should
double perfect: dont just
take an automatically
perfected PMSI in a
consumer good, but also file
a financing statement.
iv. Future advance exception (9-323(d)(g))
1. Future advances: extensions of credit made
under a revolving line of credit
a. This requires separation of the
original advance from each future
advancefor each future advance
there will be different priority
2. Rule for the secured party to have priority:
a secured party with a revolving line of
credit, will have priority as to a buyer of

93
 collateral, provided that when making the
future advance (1) the creditor has no
knowledge that the buyer has already
purchased the collateral; and (2) files early
(makes the future advance within 45 days
after the sale)
a. Under (1) the secured party must
think that the debtor still owns the
thing
3. Rule for the buyer to have priority (=the
exception):
a. At the time of the advance, the
secured party already knows about
the sale, or
b. The future advance is made more
than 45 days after the sale
4. Hypo
a. At T1 debtor obtains a present
advance of $10k from SP1. At time
T2, the debtor sells the collateral to
buyer. T3 is 45 days after the sale.
The second advance (10k) is made
within the 45 days; the third advance
(10k) is made 50 days after the sale.
b. Present advance: SP1 still has
priority notwithstanding the sale
because no exception applies to
remove the SPs priority as to the
buyer.
c. Second advance: SP has priority (1)
assuming that he did not have
knowledge that the debtor had sold
the thing, and (2) because the
advance has occurred within 45 days
of the sale.
d. Third advance: The buyer has
priority because the advance was
made more than 45 days after the
sale.
e. If foreclosure sale for 25k, how are
the funds divvied up?

94
 i. 10k goes to SP1 as to the first
advance.
ii. If the SP was ignorant of the
sale, then the 10k as to the
second advance would go to
SP.
iii. But the final 5k in value goes
to the buyer because the
secured party did not have
priority as to the third
advance.
c. See Problem Set 36
4. Article 9 secured parties vs. holders of security in immovable
property (e.g., mortgages)
a. Prolegomena: about fixtures and other immovable
property-related collateral
i. Reminders:
1. What are fixtures, etc.
a. Standing timber sold with a view of
being cut, as-extracted collateral, and
fixtures are the 3 types of collateral
were concerned with herethat
might have both a mortgage and an
Art. 9 interest involved
2. How to perfect an Art. 9 security interest in
fixtures, etc.
ii. Why and how fixtures, etc. present special priority
problems
1. Hypo: mortgage on the house with the
chandelier. The mortgage on an immovable
extends to all of its component parts
a. What if before the chandelier was
involved, an Art. 9 party filed a
fixture filing? Then, there are two
interests in the chandelier: the
mortgage, and the Art. 9 fixture
filing interest.
2. The issue is who has priority as between the
immovable-secured party, and the fixture-
secured party
3. Standing timber: Debtor owns the land and
grants a mortgage on the land. The

95
 mortgage extends to the timber because its
a component part of the land. Sale of the
standing timber to Weissproviding that he
must cut it within 6 months. Weiss then
grants an Art. 9 interest. There is then a
conflict between the mortgage holder and
Art. 9 secured party.
4. As-extracted collateral: as to sulphur, the
mortgage on the ground extends to the
sulphur. But an Art. 9 secured party could
have a security interest in the sulphur (that
arises when it comes out of the ground).
b. The priority rules re: fixtures v. mortgages
i. General rule (9-334(c)): the mortgagee beats the
holder of the interest in fixtures
ii. Exceptions
1. Prior perfected fixture-filed fixture security
interest (9-334(e)(1))
a. The exception: The Art. 9 fixture-
secured party wins if the Art. 9
fixture interest was perfected before
the mortgage is of record (before the
mortgage is perfected)
2. Fixture-filed PMSI fixture security interest
perfected before affixment (9-334(d))
a. The exception: even if the mortgage
was perfected before the Art. 9
interest, the Art. 9 interest prevails if:
i. Uniform UCC: the Art. 9
interest is a PMSI and is
perfected within 20 days after
the fixture is affixed.
ii. Louisiana: the Art. 9 interest
is a PMSI (and this assumes
that the fixture filing
occurred before affixment,
because in Louisiana
perfection in fixtures can
only be done if done before
affixment)
3. Consent/disclaimer of mortgagee (9-334(f))

96
 a. The exception: if the mortgagee
consented in an authenticated record
to the fixture interest, or in such a
record disclaimed an interest in the
fixtures, the Art. 9 party has priority
4. Fixture-filed fixture security interest in
crops (9-334(i))
a. In Louisiana: the filing is recorded
in a separate registry
b. Crops includes standing timber.
c. Rule: the security interest beats the
mortgage, regardless of time.
i. As-extracted collateral?
WDK. We cant find the
rule, Trahan says.
c. See Kilborn Equibank Problem
5. Lien creditors vs. Article 9 secured parties
a. Prolegomena: about lien creditors
i. Definition of lien creditor (9-102(a)(52))
1. Text: (1) A creditor that has acquired a lien
on the property involved by attachment
[seizure], levy [seizure pursuant to court
order of fieri facias (fifa)], or the like; or (2)
a trustee in bankruptcy
2. Procedure:
a. (1) Go to court
b. (2) Get a judgment in the creditors
favor (=judgment creditor)
c. (3) Ask the court for a writ, after
proving that the debtor has not
satisfied the judgment
d. (4) Sheriff seizes pursuant to the writ
e. (5) At the moment of seizure, the
creditor goes from judgment creditor
to lien creditor
ii. Inception of lien: when does the lien arise (La. CCP
art. 2292(A))
1. For lien creditors : From the time of the
moment of seizure
a. This is legal, not conventional,
security
2. For the trustee: The date of filing of the
bankruptcy petition

97
 iii. Ranking system: on what basis are the liens of lien
creditors generally ranked (La. CCP art. 2292(B))
1. According to the order of seizures, for lien
creditors. First in time, first in right.
2. How can there be more than one lien
creditor, when you become one by seizing?
Can multiple seizures occur? Yes: even
after the first lien creditor has directed the
sheriff to seize, other creditors can then ask
the sheriff to re-seize the same item.
b. General rule of priority (9-317(a)(2)(A))
i. First in time, first in right, as between a lien creditor
and an Art. 9 secured party.
c. Exceptions
i. (1) Almost perfected25: Still unattached, but as
yet otherwise perfected Article 9 security interests,
provided attachment later occurs (9-317(a)(2)(B))
1. Scenario: The debtor has either
authenticated a security agreement, taken
possession, or taken control; and has filed a
financing statement. The secured party is
not perfected because he is not attached
either (a) the secured party has not given
value, or (b) the debtor doesnt have rights
in the collateral.
2. When would this scenario arise?
a. (b) The debtor doesnt have the
collateral yet. Therefore no rights in
the collateral, so no attachment, thus
no perfection.
b. (a) The creditor has not yet extended
funds. Therefore no value has been
given, so no attachment, thus no
perfection.
i. Perhaps there is a revolving
line of credit that the debtor
has not drawn on yet,
meaning that no value has
been given.
3. The exception: the party above-described
has taken the necessary actions ((1)
25
Proto-perfected, if you will.

98
 authenticated security agreement, control, or
possession; and (2) financing statement
filed) before the lien creditors lien incepted;
therefore, the Art. 9 secured party has
priority over the lien creditor.
ii. (2) Already attached but as yet unperfected PMSIs,
provided perfection later occurs within 20 days of
delivery to the debtor (9-317(e))
iii. (3) Future advances: the secured party prevails if26

1. (a) he makes the advance without
knowledge of the lien at the time of the
advance, or
2. (b) even though he knows of the lien at the
time of the advance, he makes the advance
within 45 days of the liens inception, or
3. (c) even if he knows of the lien at the time
of the advance and he makes the advance
more than 45 days after the inception of the
lien, he committed himself to make the
advance in advance and, at the time of this
commitment, did not know of the lien
d. See Problem Set 28
6. Article 9 secured parties vs. IRS
a. Prolegomena: creation of IRS tax liens
i. Generally: the lien may secure the repayment of
any kind of tax (estate, income, gift, payroll, etc.)
1. In a sense, the IRS is a lien creditor; but the
special rules regarding priority are found in
the Internal Revenue Code (IRC)
ii. Attachment
1. Possibilities (tax assessment=attachment)
a. (1) Debtor filed a return admitting
having unpaid tax liability, in which
case attachment occurs whenever the
IRS agent signs off on the return
b. (2) 90 days after the mailing to the
debtor of a notice of tax deficiency

26
Any of the following three options satisfies this exception. Thus the requirements are alternatives. Contra the
priority rule between a buyer and a secured party (where the requirements are cumulativethe secured party must
make the advance within 45 days of the sale and without knowledge of the sale). Scenario: Lien creditor incepts,
and then debtor makes a new draw on the credit facility (a future advance).

99
 c. (3) Tax Board adjudication that a
taxpayer owes money
2. About the tax lien
a. It is a lien on everythingall
property
b. There are exemptions under the IRC;
but there are much fewer than those
under state exemption laws
iii. Perfection
1. Where to file: IRS must file in two different
places
a. Common law states: (1) with the
Secretary of State for movables; (2)
in the real property records of the
county where the property is located,
for immovables
b. Louisiana: (1) clerk of court of any
parish for movables; (2) clerk of
court in the parish where the
immovable is located, for
immovables
2. What to file: notice of tax lien
b. The priority rules
i. General rules
1. IRC 6323 As between the IRS and other
lien creditors and secured parties, first to
perfect or incept has priority
2. The Almost-perfected27 Rule28
a. Same as for lien creditors: if the
secured party has filed a financing
statement and authenticated a
security agreement (but either the
debtor does not have rights in the
collateral or the secured party has as
of yet given no value), then the prior
filing by the secured party gives him
priority over the IRS tax lien
ii. Exceptions
1. (1) As to after-acquired property (the
choateness doctrine)
a. Theory
27
AKA proto-perfected.
28
Note that this was just an exception to the general rule under the Art. 9 vs. lien creditors portion of the outline.

100
 i. Where the Art. 9 party takes
an interest in after-acquired
property, and then the
property actually comes into
the debtors patrimony later
on, the Art. 9 secured partys
interest attached only when
the debtor obtained rights in
the collateral.
ii. This means that an Art. 9
party only has rights
choately.
iii. The IRS tax lien, though,
even has inchoate rights: the
after-acquired property is
said to already exist in the
debtors patrimony before he
even acquires it. The tax lien
is considered to be incepted
as of the day the IRS filed the
notice of tax lien (even
though the debtor did not
obtain the property until
later).
b. Rule: when it comes to after-
acquired property, the IRS has
priority over secured parties,
always29
2. (2) As to future advances30: the secured
party prevails if and only if
a. he makes the advance without
knowledge of the lien at the time of
the advance (or commits himself to
29
jpc Clarification: remember, though, under the general rule of first to perfect or incept, the secured party will
win as to after-acquired property, if the secured party perfects before the IRS has even filed a notice of lien. For
example: (1) secured party files a financing statement in after-acquired property; (2) then debtor obtains new
collateral; (3) finally, IRS files notice of tax lien. We said that the IRS always wins as to after-acquired property.
Not so, technically. Here, the secured party perfected before the IRS lien even incepted; therefore, under the general
rule, the secured party has priority in this property. After all, the IRS didnt even incept until after the debtor
obtained the new collateral. See also Kilborn at 51 (Therefore, the IRSs lien will generally beat a perfected
security interest in any property the debtor acquires after the filing of the notice of the tax lien.) (emphasis in
original).
30
The exception here is exactly the same as the rule of secured parties vs. purchasers, re: future advances.

101
 make the advance at a time when he
does not know of the lien) AND
b. he makes the advance within 45 days
of the liens inception31
c. See Problems 29 and 38, and Kilborn Problem
7. Article 9 secured parties. vs. State and Local Departments of
Revenue
a. Louisiana State Dept. of Revenues priority re: ad valorem
taxes
i. Ad valorem taxes: Those assessed on immovable
property
1. Tax assessors prepare assessment rolls.
Multiple copies of the roll must be provided
to the recorder of mortgages. This roll
includes those delinquent in paying taxes.
ii. The Lien: From the day the roll is filed in the
recorders office, it shall act as a lien upon each
specific piece of real estate thereon assessed
iii. Priority: This state tax lien has superpriority over
all immovable property security interests except
other ad valorem tax liens from previous years
b. Significance: Art. 9 security interests in fixtures, standing
timber, or as-extracted collateral
c. Rule: the state or local government that has the tax lien
will win, even if the Art. 9 fixture (or other immovable-
related) interest was previously perfected
32
IV. Volitional Real Immovable Security (Mortgages)
a. In General
i. Background
1. In the U.S. we refer to mortgages
2. In other jurisdictions:
a. France: Hypotheque
b. Spain/Latin America: Hipoteca
i. This is why we have the hypothecary action in
Louisiana
ii. Definition
1. The Mortgage: A non-possessory, accessory real right created over
property to secure the performance of an obligation. Art. 3278.
2. The Right: if the secured obligation is not fulfilled, the secured
party has the right to cause the property to be seized and sold in the
31
Note that inception refers to the fact that both attachment and perfection have occurred.
32
Note that under the discussion of legal and judicial mortgages, these are actually types of legal security, but
for pedagogical purposes, we will consider all of mortgage law together: both volitional and legal real immovable
security.

102
 manner provided by law (self-help may not be used), and to have a
preference to claims of others in application of the proceeds. Art.
3279.
iii. Scope
1. Generally
a. Located in Book III. Mortgage is treated as a kind of
contract. Trahan thinks it should be in Book II because
mortgages are real rights.
2. Types of property susceptible of mortgage (Art. 3286)
a. (1) Some corporeal immovables with their component parts
i. An encumbrance of an immovable includes its
component parts. Art. 469.
ii. The component parts encumbered are all, including
after-acquired component parts.
b. (2) A usufruct of a corporeal immovable.
i. The usufruct of a corporeal immovable is an
incorporeal immovable, which may be mortgaged.
c. (3) A servitude of right of use with the rights that the holder
of the servitude may have in the buildings and other
constructions on the land.
i. The right of use is another incorporeal immovable
that may be mortgaged.
1. Example: Railroad right-of-way
ii. Note that only usufruct and right of use are
mentioned as servitudes in which a mortgage may
be granted.
1. Predial servitudes are inseparable from the
dominant estate. They may not be
mortgaged unless the mortgagor also
mortgages the dominant estate.
2. Note also that the right of habitation may
not be mortgagedthis is a policy decision.
iii. Some corporeal movables: other constructions on
the land
1. The buildings are always immovable as a
matter of law
2. Other constructions may include the parts
of the railroad tracks within the right of way
these are included within the right that is
mortgaged.
d. (4) The lessees rights in a lease of an immovable with his
rights in the buildings and other constructions on the
immovable.

103
 i. Lease rights generally
1. Personal rights
2. All personal (credit) rights are by definition
movable rights
3. Therefore, even for a lease of an immovable,
the lease itself creates a personal movable
right
ii. However, the lessees rights in an immovable are
being treated as if immovable rights; they may be
mortgaged.
iii. Some corporeal movables: other constructions on
the land33
1. In order for the lessee to have rights in the
other construction, he must own it and
have installed it with the lessor/owners
consent. In such a case, the other
construction is actually a movable (because
there is no unity of ownership).
2. The lessee can mortgage his right in the
other construction if its a movable in this
instance
e. (5) Property made susceptible of conventional mortgage by
special law.
i. Example: co-ownership interest
1. The other 4 categories do not allow a co-
owner to mortgage his undivided interest in
land, because this is an incorporeal.
2. However, the undivided share of ownership
may be mortgaged under Art. 805 (by
special law within the terms of Art.
3286(5)).
ii. Example: assignment of rents by lessor
1. La. R.S. 9:4401 et seq. is special legislation
allowing for the collateralization of rent
generated from a lease of an immovable.
The rent is technically not subject to a
mortgagebut subject to the interest
provided for by R.S. 9:4401. Its not called
a mortgage, but an assignment of rents.
This is old, old common law terminology.
2. How the assignment is done:

33
Question: is the mortgaged thing the OCPA itself, or just the debtors leasehold interest in the OCPA?

104
 a. The assignment may be incorporated
into the mortgage. Therefore, if the
lessor had mortgaged the land, he
may also describe the assignment of
rents (based on a lease of that same
land) in the act of mortgage.
b. Description of Rents: a general one.
c. Not required: the lease description,
the price, or the immovable property
description.
3. Third party effectivity: recordation of the
assignment in the mortgage records.
b. Preview of classifications
i. According to source (Arts. 3283-3284)
1. Conventional
a. Created by contract
2. Legal
a. Established by operation of law. Art. 3284.
b. Example: the natural tutors mortgage on the pupils
property to secured performance of the tutors obligation to
the pupil
c. Example: the curators mortgage to secure performance of
his obligation re: the interdict
3. Judicial
a. Established by law to secure a judgment. Art. 3284.
i. Before there is a judicial mortgage, there must first
be a judgment
ii. This mortgage favors judgment creditors. The
judgment creditor must record a copy of the
judgment in the mortgage records of the parish
where the debtors property is located.
iii. Note the difference from lien creditors:
1. Elements common to both:
a. Sue
b. Get judgment
2. Lien creditor steps:
a. Go back to court to get some kind of
writ of seizure (e.g., fifa)
b. Sheriff levies in compliance with
writ of seizure
3. Judicial mortgagee steps:
a. Go to clerk of court to file a copy of
the judgment

105
 4. Its possible to be both a lien creditor and
judicial mortgageeyou just have to follow
the steps particular to each.
a. Becoming a judicial mortgagee is
cheaper.
b. But if the debtor has a nice piece of
movable property, the lien creditor
option might be nice.
4. But the fundamental division is between (1) conventional, created
by act of will, and (2) legal/judicial, created by operation of law.
ii. According to special vs. general distinction
1. Analogous to universal vs. particular legacies in the realm of
successions law
2. Special mortgage
a. A mortgage on a particular set of property
b. Conventional mortgages, except for special legislation, are
special mortgages
3. General mortgage
a. Mortgage on all (in space and time) the immovable
property the debtor owns
b. Judicial mortgages and legal mortgages are general
c. Conventional Mortgages
i. Creation
1. As between the parties (mortgagor and mortgagee)34
a. Requirements for creation (Art. 3287-89)
i. (1) Writing
1. Makes this a solemn contract
2. Either act under private signature (AUPS)
or authentic act
a. But the authentic act is preferable for
the procedural advantages obtained
3. What qualifies as a writing?
a. Electronic Transactions Act:
electronic records are included
b. Sound, symbol, etc. adopted for the
purpose of stating that the electronic
record emanates from a person
c. Emails are fine
4. No special words are required
a. Best practice is to use the special
language

34
Note that our law does not talk about attachment and perfection in the law of mortgage. But lawyers understand
and use these terms; and we will use them in this course.

106
 b. Need some language indicating the
mortgagors intent to put a piece of
immovable property up as security
ii. (2) CCCO (because this is a contract)
1. Reality of consent by mortgagor is
especially important
iii. (3) Signed by the mortgagor
1. A contrario, the mortgagee does not have to
sign.
2. Apparently, under the Electronic
Transactions Act, an electronic signature
should work.
3. Further, Art. 3289 expressly states that the
mortgagee need not sign the contract of
mortgage. Further, mortgagees consent is
presumed. Acceptance may be tacit.
4. This is rare to presume intent to accept a
contract in our law. Only the contract of
remission of debt carries a similar
presumption.
iv. (4) Statement of (maximum) amount secured
1. [A]mount of the obligation, or the
maximum amount of the obligations that
may be outstanding at any time and from
time to time that the mortgage secures.
2. Therefore, for (1) a single loan, the
mortgage must state the amount of this one-
shot deal, and (2) for a revolving line of
credit, the mortgage must state the cap on
the amount of indebtedness.
v. (5) Precise and specific description of the property
1. Must state precisely the nature and
situation of each of the immovables or other
property over which it is granted. Art.
3288. But the language of the article is
misleading. Cmt. b. The standard for
specificity and precision is very low.
2. Metcalfe v. Green
a. Jurisprudence is well settled that this
article is complied with if the
description identifies the property
with reasonable certainty and is of

107
 such a character as not to mislead, or
keep in the dark, creditors of the
mortgagor or other persons having
an interest.
b. Roberts: quotes a French egghead:
not too exacting a requirement; it
suffices that the parties employ some
designation that leaves no doubt as to
the immovables identity. Very low
standard.
c. Cases the court cites as being OK:
i. Land situate on a certain river
in a certain parish. Some
boundary description that
wasnt too good. My land.
ii. Tract of land situate in a
certain parish on a certain
bayou, and that is the land
purchased by me from the
probate sale of person x, and
with 500 acres.
iii. Landed interest in a certain
parish, on a certain river, with
x number of acres; owned by
a certain person.
iv. Land of 5 arpents in front, on
frontier of Monroe, by 40
arpents in depth, of which 50
arpents are planted with corn
and cotton, the rest being in 3
actions.
v. [Roman Catholic friendly
case because the archdiocese
was acquiring the land.] A
vast tract of land at the
intersection of Orleans and
Bourbon streets. [Note how
lenient this is!]
d. This case: the problem was not
vagueness, but error. The mortgage
said 19 acres, but it was supposed
to be listed as 1900 acres.

108
 i. Held: no problem. Someone
could still look and figure out
which property was being
referred to.
3. Big point: you can go pretty low with
your property description.
4. Best practices descriptions:
a. These two approaches are not
mutually exclusive.
b. (1) Metes and bounds
i. Meteslengths on a straight
line at a certain compass
angle.
ii. Example: go to the
intersection of two streets,
orient yourself x number of
degrees west of due north,
and proceed y yards. There
is a stump of a tree. At the
stump, change orientation z
degrees and proceed aa
distance. Etc.
iii. This gives a complete
indication of the boundary.
c. (2) Public land survey system
(PLSS)
i. The more modern approach
ii. Federal government created a
system that is a map of the
entire U.S., divided into
different geographical
subsets: townships (6 square
miles), then sections (1
square mile), and ranges
(vertical columns of
townships).
iii. Every piece of property can
be described in terms of
where it fits on the grid.
5. Note: the more specific the description, the
greater the risk of error. However, probably
better to err on the side of specificity.

109
b. Interpretation (what to do with disguised pignorative
contracts)
i. Simulations
1. Relativedressed up to look like contract of
type x, but its actually of type y. Example,
disguised donation inter vivos to look like a
sale.
2. Absolutehas no effect at all.
3. We have relative simulations in the law of
mortgage.
ii. Reason for existence
1. Problem: For a sale on credit, to enforce the
obligation, the creditor has to sue to enforce
or sue to dissolve the sale.
2. These two types of relative simulations fix
this problem through providing alternatives
to the need to foreclose.
iii. Two types of disguised mortgages
1. (1) Conditional sales
a. Defined
i. Sale with provision that title
will not transfer until the
buyer has paid the final
installment payment of the
purchase price
ii. The title is still in the sellers
name, so if the buyer stops
making payments, the seller
just sues to evict the buyer.
This is a HUGE advantage in
Louisiana where the law is
pro-lessor.
b. The ordinary mortgage option: take
a mortgage to secure the purchase
price; so that seller can get the
property back if buyer does not pay.
c. The disguised mortgage (conditional
sale) option: if the buyer resells, the
original seller can still evict the
buyers buyer. Instead of just giving
the seller a mortgage (which requires
foreclosure), just give him a

110
 conditional sale in which title never
leaves the seller. The seller can
therefore avoid foreclosure
procedures, and instead just evict.
2. (2) Sales with right of redemption
a. Situation: bank instead of taking a
mortgage, buys the property, but the
debtor-seller retains the right of
redemption. The debtor gets to
repay the purchase price to get the
property back (a resolutory
condition). Therefore, the bank has
title to the property and doesnt have
to foreclose. And if the debtor fails
to satisfy the condition of paying the
purchase price, the bank holds the
property free and clear.
iv. Actuality: the creditor is trying to obtain security.
He doesnt really want ownership. He wants
security of repayment.
1. Therefore, the parties really intend a security
device.
2. The rule of interpretation: Courts treat
relative simulations as what they really are
a mortgage.
a. Generally: If the relative simulation
does not meet all the requirements
for a mortgage, the contract fails.
b. Conditional sales: Conditional sales
are prohibited as against public
policy, except for some special types
of movables. Thus our law removes
the condition and treats the contract
as an absolute sale. And therefore,
the court finds that the buyer already
has title.
c. Rights of redemption: Art. 2569. If
the surrounding circumstances show
that the parties true intent was to
create security, the law treats the
contract as if a mortgage, so no
conveyance of title to the creditor.

111
 Court will find that no sale took
place; title is still with the
debtor/seller. The bank still may
have a mortgage, but only if the
requirements for forming a contract
of mortgage are met. And most of
the time, these requirements will not
be met; so most of the time, the sale
with right of redemption will not
have any effect at all.
v. Unique case: dation (Guste v. Hibernia)
1. Seller sells to buyers and takes mortgage,
but buyers execute a dation back to the
seller, confessing that they owed the
purchase price.
2. The scheme was meant to avoid the need to
go through foreclosure.
3. Held: no different from a conditional sale,
and therefore unenforceable because
absolutely null, and so the seller got nothing
by virtue of the dation.
4. Security devices are not allowed to transfer
title; but only to give the creditor a
preference for payment of his claim.
vi. Basic rule: If the parties intend to create a security
device, we subject their contract to the law of
security devices.
vii. Exception: bond for deed
1. A permitted type of conditional sale in the
Revised Statutes
2. This is closely regulated to protect buyers
a. Example: Seller has given
mortgages on his house to banks.
Seller sells under bond for deed to
buyer, who will not get title until he
makes the last payment. So the
seller is supposed to take the
payments received and pay off
mortgages. But if he doesnt the
bank will foreclose and the buyer
gets evicted, even though he was
properly making payments.

112
 b. These are really only used when
interest rates skyrocket. The buyer
instead of going through a bank with
high interest rates just does a bond-
for-deed deal with the seller, who
just pays off his own mortgage as the
buyer makes payments.
2. Who may create a mortgage
a. Art. 3290 Only a person having the power to alienate the
property may be a mortgagor.
b. To grant a real right less than full ownership is to
dismember ownership. So to be able to encumber the
property, one must have the power to alienate.
c. By Mandatary: It may also be an owners representative
(e.g., an interdict owners curator).
i. Art. 2996 The authority to encumber must be given
expressly. Therefore, the mandate to allow a
mandatary to mortgage the property must be
express.
ii. There is also a writing requirement in 2993. When
the law prescribes a certain form for an act, a
mandate authorizing the act must be in that form.
The Equal Dignity Rule. The mortgage must be in
writing; therefore, the mandate to authorize the
encumbrance must also be in writing.
3. On what may it be created
a. Already-owned property: permitted
b. Specifically-identified after-acquired property
i. Art. 3292 The effect of the mortgage is suspended
when the mortgage is given over property that the
mortgagor does not currently own.
ii. This is similar to the after-acquired title doctrine in
sales law.
iii. Also, general conventional mortgages are only
allowed when permitted by law. Therefore, no
general mortgage of future stuff is allowed.
iv. There must be a description of the specific piece of
property that may be acquired in the future (to meet
the basic requirement that the property must be
described precisely and specifically).
1. How specific an after-acquired property
description is required?

113
 a. Under the old law, there was an
argument that the person had to be
pursuing the property and have some
hope of getting it to be able to grant
a mortgage in future property. That
dispute under old law was never
resolved.
b. Current statute: Imposes no such
requirement. Thus a literalist (under
the plain meaning of Art. 3292)
would say that there is no such
requirement. Still, there is the
possibility that courts could rely on
the old argument and for a
description of future property to be
effective, the mortgagor must have
an intent to acquire that property and
have taken some steps toward
acquisition.
4. What obligations it may secure
a. Obligations of the mortgagor: any and all
i. Obligations to pay money
ii. Other obligations
1. Art. 3294 A mortgage that secures an
obligation other than one for payment of
money secures the claim of the mortgagee
for damages he may suffer from a breach of
the obligation. The mortgage must state the
maximum amount of damages that may
result from breach of the obligation.
2. Therefore, an amount of damages must be
stated. And this was true under the general
rulethat the mortgage must state the
amount secured.
iii. Future obligations
1. Mortgages may secure future obligations, as
well, including securing a revolving line of
credit
b. Obligations of someone other than the mortgagor:
permitted
i. Art. 3295 permits this.
c. See Kilborn Problems re conventional mortgages

114
5. As against third parties
a. Establishing effectivity: recordation (Art. 3338)
i. The concept
1. Of Registry Title:
a. Found in a newer Title of the Code:
Of Registry. Not found in the Title
on Mortgages.
b. Pulls together all the previously
scattered legislation on how an
interest in immovable property can
be made effective against third
persons.
2. Art. 3338(1) The rights and obligations
created by an instrument that . . . establishes
a real right in or over an immovable are only
effective as to third persons if the instrument
is recorded.
a. A mortgage is a real right in an
immovable.
b. Thus, this article requires recordation
of a mortgage for effectivity against
third persons.
3. Rule: until recordation, there are no rights
of mortgagee against third persons.
a. Our public record statute is a pure
race statute. The first to record will
win, even if the competing ones
know of the interest.
i. Contra other states where
knowledge will also make the
mortgage effective against
third persons.
ii. What to record
1. For leases: an abstract of the lease will
suffice. This is cheaper than paying per
page for every page of the actual lease.
However, to record mortgages, the law is
different. See infra.
2. For mortgages:
a. The instrument, the very writing
claimed to create the mortgage (the

115
 act of mortgage), must be
recorded.
b. There are no other form
requirements. The mortgage may be
an AUPS, and be recorded as such
(though the recordation of an
authentic act has certain advantages).
c. Not required: Paraphs
i. Old rule: to have an effective
mortgage, needed a
promissory note, and on the
back of the note, had to put a
parapha note in standard
form that said ne varietur and
had a certain paragraph with
the signature of a notary. It
essentially just said that that
the promissory note went
along with a certain act of
mortgage.
ii. New rule: the paraph
requirement no longer exists.
But everybody still does this
in Louisiana. Its good
practice; it allows someone to
know what obligation the
mortgage secures.
3. Contents required for the recordation of
mortgage
a. Name of the mortgagor (Art. 3353)35
i. Requirement: not so
indefinite, incomplete, or
erroneous as to be misleading
and the instrument as a whole
reasonably alerts a person
examining the records that
the instrument may be that of
the party. Art. 3353.

35
This is because the registry is indexed by name of mortgagor.

116
 ii. There is no jurisprudence and
little guidance on how to
apply.
iii. This is an F&C test.
b. Other?
i. No. Only what is required to
be in the act of mortgage
(Art. 3286 requirements)
must be present.
ii. The Art. 3352 information
(domicile of parties, marital
status, etc.) is not required for
the recordation to be
effective. Art. 3352(B).
iii. In what records to record
1. Parish: Mortgage records of the parish in
which the immovable is located. Art. 3346.
2. With whom: Mortgage records (NOT
conveyance records) maintained by the clerk
of court.36
iv. The effective moment of recordation: filing
1. Rule: Art. 3347 The effect of recordation
arises when an instrument is filed.
2. When filing occurs
a. The filing is unaffected by
subsequent errors or omissions of the
recorder. Id.
b. The filing occurs when the recorder
accepts the filing for recordation in
his office. Id.
c. Date-time stamp?
i. Until 2006, for recordation to
occur, the recorder had to not
only accept the document,
but also to date-stamp it.
ii. 2006 amendment.
iii. 3348 implies that acceptance
takes place before the date-
36
Note the only parish that differs is New Orleans. There, one set of records is the conveyance records, and the
other set is the mortgage records. Conveyance records contain sales, leases, and other records. Mortgage records
contain mortgages, donations, and certain other records. In every other parish, both records are kept by the clerk of
court (though the mortgage must still be filed in the mortgage records, specifically). In Orleans Parish, must go to
the recorder of mortgages, who maintains the mortgage records.

117
 stamp (Upon acceptance
the recorder shall [date-
stamp].).
iv. 3349 implies the same: If the
recorder after acceptance
fails to date-stamp.
v. Clearly, acceptance and date-
stamping are different.
d. The moment of acceptance, and
filing: handing it over to the clerk of
court. No date-stamp necessary.
e. Prior law (pre-1991): recordation
did not mean filing. It meant
recordation, literally. The
mortgage had to be copied into and
placed into the registry, for
acceptance to occur.
i. The jurisprudence developed:
as long as the mortgage was
recorded within a reasonable
time after filing, then the
mortgage was given
retroactive effect till the
moment of filing.
ii. For an unreasonable amount
of time, then the mortgage
was not perfected! This was
not fair because the filer was
subject to the errors of clerks
of court.
iii. *Dont need to know the old
law.
3. Rule restated: Third party effectivity for a
mortgage = recordation = filing =
acceptance = handing it over to the clerk of
court.
v. The consequences of mis-filing (what happens if the
mortgage, though filed, is erroneously indexed)
1. Types of errors
a. No date-stamp
b. No recordation into the registry
c. Mis-indexing

118
 2. 3347: there is no consequence, as long as
the mortgage is filed.
b. Maintaining effectivity: re-inscription37
i. Duration of effectivity following original
inscription (recordation)
1. General rule: 10 years from date of
mortgage38 (Art. 3357)
a. Under the law, the date on the act of
mortgage is the relevant starting time
periodnot the date of filing.
Though in practice hopefully these
will be the same under a best
practices standard of both executing
the mortgage and recording it on the
same day.
2. Exception: 6 years from the date on which
the secured obligation matures (Art. 3358)
a. Requirements: if the act of mortgage
describes the maturity of any
obligation secured by the mortgage
and if any part of the obligation
matures 9 years or more after the
date of the act of mortgage, the time
period is 6 years after the latest
maturity date described in the act of
mortgage
i. (1) The act of mortgage
describes the obligations
maturity
ii. (2) Any part of the obligation
(including the first
installment) matures 9 years
or more after the date of the
act of mortgage
37
Note how few problems there are with maintaining perfection, as opposed to Art. 9. Art. 9: change of name of
debtor; change of use of collateral; transformation of collateral into proceeds; collateral movement to another state;
and debtor movement to a new state. These are non-issues under the law of mortgage. Change of form is
interesting: but still, we have no rules for proceeds of immovable property. Or for change of use. The only thing
that threatens the effectivity of the mortgage is the passage of time. The mortgage records are self-purging
effectivity ends unless the filer refiles within a certain amount of time.
38
Contrast with Art. 9: from the date of filing. Also contrast: could only refile between 4.5 and 5 years under Art.
9. Instead, with mortgage, can refile whenever you want. See the handout for other Art. 9 vs. mortgage differences
with respect to maintaining effectivity.

119
 b. The exception: 6 years from the
latest maturity date (the final
installment payment)
c. Example: for a 30-year mortgage,
the period of time until lapse will be
36 years
3. **Pre-1993 Law
a. *See handout entitled Duration of
Recordation of Mortgages: Old Law
v. New & Brand New Law39
b. Pertinence: there are still plenty of
extant mortgages subject to this old
law (e.g., 30-year mortgages)
c. Time periods: also were 10 and 6,
like now
d. The 6-year exception
i. NOT focused on whether act
of mortgage refers to
maturity of the obligation
ii. Instead, focus on the maturity
date as described in the
instrument evidencing the
underlying obligation
iii. Different trigger for
applicability: 9 years (or
more) from date of when the
underlying obligation was
contracted (NOT the date on
the act of mortgage, as in the
case under new law)
iv. Thankfully, the 6 year result
is the same (after the latest
maturity date described in the
mortgage)
e. General rule: 10 year trigger from
the date on which the underlying
obligation was contracted
i. Contrast: Its 10 years from
the act of mortgage under the
new law
ii. Extension of effectivity
39
Its much better than whats in this outline, at this point re pre-1993 law.

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 1. Method of obtaining extension: file notice
of re-inscription (Art. 3362)
a. (1) A writing
b. (2) Name of mortgagor as stated in
the original mortgage
c. (3) Re-inscribers signature (usually
the mortgagee)
d. (4) Indication of where in the
registry the original mortgage exists.
A reference to the indexing system,
such that the recorder can locate the
original act of mortgage. Preferably
the registry number of the act of
mortgage.
e. (5) A declaration of intent to re-
inscribe (or extend effectivity)
2. Duration of extension (Art. 3364)
a. 10 years from when the notice of
reinscription is filed
b. Rationale: This is why we dont
have the 4.55 year window as in
Art. 9 (because under Art. 9,
otherwise the secured party could
refile the day after perfection and get
5 years from the later 5 year date of
lapse). But with mortgage
reinscription, the extra time period is
from the date of reinscription only.
iii. Cancellation (recognition of lapse of effectivity)
1. Concept
a. Blotting out the mortgage from the
record books
b. The mortgagor has the interest here
so that future creditors will extend
credit to the mortgagor
c. It might be appropriate to cancel
because (1) the underlying obligation
is extinguished, or (2) the mortgages
effectivity has lapsed due to passage
of time
2. Causes (the same as under Art. 9)
a. At the request of the mortgagee

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 i. Mortgagee is legally required
to request cancellation in
some situations, e.g., where
the principal indebtedness is
paid off
b. At the request of the mortgagor
i. The mortgagor has to provide
documentation if seeking
cancellation on the basis of
the principal obligation being
extinguished (e.g., paid off).
3. What to file (Art. 3366)
a. Requirements: Request to cancel in
writing; identification of mortgage
by reference to the registry system;
signature by person requesting
cancellation (usually the mortgagor)
b. The documentation: 9:5167 et seq.
Not important for our class.
6. See Kilborn Problems re recordation and re-inscription
ii. Transfer of conventional mortgages40
1. Transfer of the mortgage itself
a. How the transfer is accomplished: transfer of the principal
(secured) obligation
i. Art. 2645: Assignment of a right includes its
accessories such as security rights. Art. 3312: A
transfer of an obligation secured by a mortgage
includes the transfer of the mortgage.
ii. Thus, the transfer of a promissory note also
transfers the accessory mortgage right. Art. 2645
cmt. b. The transfer of the mortgage occurs
automatically with the transfer of the underlying
debt.
iii. A mortgage cannot be transferred without
transference of the principal debt, because the
mortgage is an accessory obligation. The moment
the mortgage is separated from the principal debt, is
the moment the mortgage ceases to exist.
b. What rights are transferred
i. In general

40
Question: what about transfer of Art. 9 security interests? Is the same true of the transfer of a debt secured by an
Art. 9 security interest?

122
 1. Principal obligation and mortgage
2. In principle, the transferee-mortgagee
should enjoy the same rights as the original
(transferor) mortgagee enjoyed
ii. The exception: unrecorded limitation on or
modification or cancellation of the mortgage
1. The transferee-mortgagee might actually get
more rights than the transferor-mortgagee
2. Art. 3356 Rule: Unrecorded limitations on
(or modifications or cancellations of)
mortgage rights dont affect transferees of
the mortgage.
3. Examples
a. The original mortgagee released the
debt by sending a letter stating this
release to the mortgagor. But no
recordation of the release of the debt.
If the mortgagee then transfers the
mortgage, the new mortgagee-
transferee can still assert the
mortgage against the mortgagor
because the release of the debt was
not recorded in the public records.41
b. Same rule as an amendment or other
modification of the mortgage that is
unrecorded. For example, if the
transferor- mortgagee agreed to an
amendment with less onerous terms
with the mortgagor, but did not
record this amendmentthe
mortgagor could not assert this
amendment against the transferee-
mortgagee.
c. Effects of the transfer
i. Where the principal obligation is transferred in its
entirety
1. All of the mortgage is transferred to the
transferee.

41
Question: is this correct? We said that the accessory obligation necessarily follows the fate of the principal
obligation. If the principal debt was forgiven, and thus extinguished, wouldnt this mean that the mortgage would be
extinguished? And therefore that there would be no mortgage for the transferee to take?

123
ii. Where the principal obligation is transferred only in
part
1. This is a partial assignment.
2. A partial assignment of principal, leads to
partial assignment of the mortgage
(accessory)
a. Note that the general rule under
obligations law, is that where there is
a transfer of a real right, the
transferors interest is subordinated
to the transferee. Thus, only if the
transferee fully had his claim
satisfied, would the transferor then
recover anything. However, the
mortgage rules detract from this
default rule of obligations in general.
b. Art. 3313: neither mortgagee has
priority, as between the transferor
and transferee. (A transferor of part
of an obligation secured by a
mortgage does not subordinate his
rights to those of the transferee with
respect to the portion of the
mortgaged obligation he retains.)
i. This Article overturns the old
rule.
ii. Under the old law, the
transferor was subordinated.
3. Rule: Art. 3311 In the absence of contrary
agreement, the proceeds realized from
enforcement of the mortgage shall be
apportioned among several obligations
secured by the mortgage in proportion to the
amount owed on each at the time of
enforcement.
a. Plain English: The rule for partial
assignment of mortgages: pro rata
distribution, according to the
percentage of the total debt owed to
each mortgagee. The transferor and
transferee share on equal footing;
neither is subordinated.

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2. Transfer of the mortgaged property
a. Consequences for the mortgagor and mortgagee
i. The mortgage is a real right: therefore transfer of
the mortgaged property carries with it the mortgage
(assuming that the mortgage is still effective as to
third parties)
ii. The mortgagee still maintains his right, and the
mortgagor still has a duty (is personally liable on
the debt)
b. Consequences for the third possessor
i. Definition of third possessor (Art. 3315)
1. Defined: One who acquires mortgaged
property and who is not personally bound
for the obligation the mortgage secures.
a. Occurs, e.g., through sale from
mortgagor to third possessor.
2. The third possessor does not become a co-
obligor on the original loan, unless he
assumed all or part of the original
borrowers indebtedness. The third
possessor is not personally liable; there is an
in rem mortgage. The mortgagee can only
come after the property itself, if the
mortgagor defaults. But the mortgagee
cannot come after the third possessor
personally.
a. This creates a weird scenario in
which the owner of the property is a
different person from the obligor.
This creates a disincentive for the
third possessor to take good care of
the property. Thus, there is
protection given to the mortgagee.
See infra re: duties & rights of third
possessors.
b. On the other hand, if the obligor
remains owner of the mortgaged
property and begins doing
questionable things with it, the
mortgagee has some remedies
available to him (e.g., attachment);
and other contractual remedies to

125
 prevent the value of the collateral
from falling.
ii. Duties & rights of third possessors (Arts. 3316-
3318)
1. Liability for damage or waste (3316)
a. The deteriorations, which proceed
from the deed or neglect of the third
possessor to the prejudice of the
creditors who have a mortgage give
rise against the third possessor to an
action of indemnification.
b. This is strict liability. If the third
possessor caused the damage, or
could have stopped it, then he is
liable to the mortgagee.
c. There is only liability to the extent
there is prejudice
i. If the third possessor causes
the value to decrease, but the
value is still greater than the
amount of the mortgage/debt,
then there is no prejudice
ii. However, if the value of the
collateral is caused/allowed
to drop below the mortgage
value, there is prejudice
2. Right to indemnity for enhancements (3318)
a. Scenario: the third possessor
actually improves the value of the
property, which increases the value
of the mortgagees interest
b. Rule: The third possessor may
recover, from the cost of the sale, his
investment in the property, up to the
extent of the enhanced value (as a
cap on recovery)
i. Note that enhanced value
usually is less than the
amount of expenses spent on
improvements.
c. Hierarchy: mortgagee gets the first
slice, but only the unenhanced value

126
 of the property. Then the third
possessor gets enhanced value. Then
the mortgagee gets his debt satisfied.
And then if there is anything left
over, the third possessor as owner
gets any leftover recovery from the
sale.
iii. Termination of conventional mortgages
1. Causes (Art. 3319)
a. (1) Destruction of the mortgaged thing
i. Hypo: if the house is mortgaged, but there was life
insurance, the mortgage might fall on the home
insurance proceeds.
1. However, the Code Articles dont address
this.
2. There is no law that requires that the
insurance proceeds be turned over to the
mortgagee
3. Of course, the parties could agree to this by
contract
4. But this is a big difference from Article 9,
which by law causes the security interest to
follow proceeds. While our mortgage law
does not provide for attachment to proceeds.
b. (2) Confusion as a result of the obligees acquiring
ownership of the thing mortgaged
c. (3) Prescription of the principal obligation
i. Prescriptive periods for the principal obligation
1. Obligations to pay money
a. Payment of loan
i. Depends on form of loan:
ii. (1) oral loan: 3 years from
the date payment is exigible
(which is usually
immediately, though the
parties can contract for a later
date of exigibility). Arts.
3494-95.
iii. (2) documented loan with
promissory note: 5 years
from the day payment is
exigible. Art. 3498. Not
from the date of the

127
 instrument. If the promissory
note does not state a date of
exigibility, it is due
immediately. But usually the
note will have dates on which
installment payments must be
madeprescription runs
separately from each
installment payment date.
b. Payment of purchase price deferred
under a credit sale
ii. Delay of accrual of prescription
1. Interruption
a. Acknowledgment of the debt
i. Can be express. But most are
tacit, in the secured
transactions context.
ii. Implicit causes of
acknowledgment: payment.
Also: Scott v. Corkern:
where there was a pledge of
the collateral (life insurance
policy) through assigning the
promisee as the beneficiary
and handing over the policy,
and the pledgee was
precariously possessing for
the pledgor, prescription was
continuously interrupted
because the debtor (pledgor)
allowed the creditor
(pledgee) to precariously
possess the collateral. Thus
possession of the collateral
by the secured creditor is a
continuous acknowledgment
of the debt by the debtor.
2. Suspension
d. (4) Discharge through execution or other judicial
proceeding (e.g., bankruptcy)
e. (5) By consent of the mortgagee

128
 f. (6) By termination of the mortgage in manner provided by
Art. 3298(D) (allows unilateral termination for mortgage
designed to secure a revolving line of credit by the
mortgagor, if at the time of termination there are no
outstanding obligations under the line of credit)
g. (7) Satisfaction of [all of] the principal obligation
i. When all the obligations, present and future, for
which the mortgage is established have been
incurred and extinguished.
ii. This follows from the general principle that the
mortgage as accessory obligation follows the fate of
the principal obligation.
iv. Defenses to the enforcement of conventional mortgages
1. Enumeration of defenses against enforcement
a. Generally: To the extent there is a defense to the principal
obligation, there is a defense to the enforcement of the
mortgage. Art. 3282.
b. That the principal obligation is unenforceable: the
mortgage is also unenforceable
i. The principal obligation is absolutely null
ii. The principal obligation s relatively null
c. That the mortgage has been terminated
2. Conditions for asserting a defense to enforcement
a. In general: 3282: The mortgagor may raise any defense to
the mortgage that is a defense to performance of the
obligation secured by the mortgage.
b. Exception
i. Art. 3296 Limitation on 3282 general rule: the
defense can be asserted only if under the law the
defense may be asserted by the obligor against the
mortgagee.
ii. This is really about commercial paper law: holders
in due course (HIDCs)
1. Where the obligee transfers the instrument
to a transferee, the general rule is that the
transferee has the same rights and
limitations as the transferor-obligee.
2. However, HIDC doctrine deviates from this:
a HIDC may have more rights than the
transferor-creditor had.
3. HIDC doctrine: See Pink Handout
(Holders in Due Course)

129
 a. HIDC defined: transferee of a note
or draft, if (1) the instrument does
not bear such apparent evidence of
forgery or alteration and is not so
irregular or incomplete as to call into
question its authenticity, and (2) the
holder took for value, in good faith,
and without notice of claims or
defenses
i. A donee has not given value,
and thus cannot be a HIDC.
b. Defenses that can be asserted against
HIDC: infancy of the obligor;
duress, lack of legal capacity, or
illegality of the transaction; fraud in
the factum; or discharge in
bankruptcy.
c. *Defenses that cant be asserted
against HIDC: fraud in inducement,
error (mistake)
4. Art. 3296: If the note has been transferred
to a HIDC, certain defenses cannot be
asserted against the HIDC (fraud in the
inducement and mistake). Under the
common law these are called personal
defenses.42
a. Thus the mortgagor may not raise
these defenses against the HIDC-
mortgagee.
c. Exception 2: Where the mortgagor has given the mortgage
to secure the obligation of someone else
i. Two defenses that cannot be raised:
1. (1) Discharge in bankruptcy and (2)
incapacity
2. This is the same exception applicable to the
law of suretyship
ii. Rationale: the purpose of the mortgage is to secure
against the risk that the debtor is bankrupt or that he
lacked incapacity
v. Effects of conventional mortgages
42
The concept of personal defenses is narrower than the civil law conception. Were concerned with the common
law because this is the adoption of UCC Article 3.

130
 1. As between the mortgagor and mortgagee
a. No self-help in Louisiana: must go through the court to get
sheriff to seize and sell
2. As between the mortgagee and third parties
a. Ranking
i. Art. 3307(3) The mortgagee is preferred to the
unsecured creditors of the mortgagor and to others
whose rights become effective after the mortgage
becomes effective as to them.
ii. First in time first in right rule
3. See Kilborn Problems re termination and transfer of conventional
mortgages
vi. Varieties of conventional mortgages
1. Mortgage to secure a single contemporaneous advance (the plain
vanilla mortgage)
a. Defined: one-time simple obligation
b. Example
i. Home mortgage loan
ii. 95% of mortgages are of the plain vanilla type
c. Effects
i. The mortgage expires whenever the one-time loan
is paid off
ii. Its an obligation-specific mortgage
2. Mortgage to secure determinate future advances (e.g.,
construction mortgages)
a. Defined: mortgage secures obligation to repay loaned
money that is loaned in installments
i. Not all the funds are disbursed at oncethe loans
are made in stages
b. Instance: construction
i. Borrower is a developer and wants to build on the
land
ii. Mortgage on the land is easy because it already
exists. But for the bank to mortgage against the
value of the building to be built is dangerous
because the building does not yet existthis isnt
very good security.
c. Solution: bank loans the money in installments as the
building is built, in stages
i. Called tranches of debt: slices of the loan
ii. The later tranches will only be released if the bank
inspects the work up to that date and determines
that it is satisfactory

131
 1. Thus if the debtor goes to Vegas with the
loan proceeds, he wont get the later
tranches paid to him for further construction
of the project
iii. Typical division of tranches:
1. Pre-construction
2. Laying the foundation
3. Walls of the building
4. Etc.
iv. The tranche amounts are still predetermined in
certain amounts; its all pre-arranged
3. Mortgage to secure indeterminate future advances (revolving line
of credit)
a. The old law (pre-1993)
i. The problem
1. Revolving credit facility: borrower may
borrow up to a certain cap. As the borrower
pays off borrowed funds, he may continue to
borrow under the same credit facility as long
as he does not exceed the cap.
a. Paying down the debt after reaching
the cap, then the debtor is free to
borrow more.
2. Today its not a problem to use a mortgage
to secure such a loan. But until 1/1/93, this
was not possible in Louisiana.
3. It was a priority problem: If $5M line of
credit, borrower maxed out, but then repaid,
and then took out another advance: that new
advance would not have priority as of the
original date of the mortgage. The parties
had to do a new mortgage that would have a
much later date of priority for that new
advance.
a. Why was this the rule under old law?
The Civil Code rigorously enforced
the accessory follows the fate of the
principal rule.
b. Where the original $5M had been
paid off, the principal debt was gone,
and so the mortgage was
extinguished. It would not secure

132
 any future advances beyond that
$5M.
ii. The solution: the collateral mortgage
1. Prolegomena
a. Trahans thoughts
i. This was something the
courts let lawyers get away
with and should not have
ii. Even with the new law
today, many lawyers still use
the collateral mortgage. Thus
making it relevant. And, of
course, there are many pre-
1993 mortgages governed by
pre-1993 law.
b. Article 9 security interest in chattel
paper
i. Article 9 interests can secure
future indeterminate
advances: any and all future
indebtedness can be secured
ii. Think like a pre-1993 lawyer:
Is there some way to start off
with an Art. 9 interest and
then somehow attach a
mortgage interest with it?
iii. *See the chart re: chattel and
realty paper, and collateral
mortgage. The Hypo: Bucer
extends credit to Andrea.
Andrea gives security in his
cow (for the chattel paper
scenario) and in his land (for
the realty paper scenario).
Thus, Bucer holds a chattel
paper (realty paper) package
(the note and security interest
from Andrea) that Bucer may
then turn around and use as
security for a loan Bucer
wants to get from Calvin.

133
 iv. The holder of chattel paper
(Calvin) does not foreclose
on the cow: he forecloses on
the promissory note made by
Andrea to Bucer and obtains
that. The promissory note is
sold at sheriffs sale (with the
underlying interest in the cow
attached). And then only if
Andrea defaults on the
promissory note, then Calvin
(in the place of Bucer) may
foreclose upon the cow.
v. Its the same analysis with
realty paper, except an
immovable (land) is
involved.
vi. Now that we understand
chattel and realty paper, lets
see how the collateral
mortgage was created. Need
to tack on a mortgage on
realty paper, if were a pre-
1993 inventive lawyer
vii. The problem is that the realty
paper scenario leaves some
issues unresolved: realty
paper requires 3 people,
while we want a mortgage
with 2 people. How to cut
out the third person, the
middleman?
viii. Solution: have the borrower
(i.e., Bucer) play two roles.
Eliminate Andrea. Have
Bucer execute not only the
note to Calvin to get the loan,
but also execute another note
and pledge that other note to
secure performance of the
real indebtedness note.

134
 The pledge of the fake/other
note will secure the
performance of the real
note.
c. Old Louisiana pledge law
i. To accomplish this pledge
aspect of the transaction:
Calvin would foreclose upon
the fake note that is being
pledged to secure
performance of the real
note.
ii. What is weird? There is no
third person! The debtor
executes both the note that is
the debt AND the note that
will serve the realty paper
security function.
iii. Thus in default on the real
note by Bucer, Calvin would
foreclose upon the other
note.
iv. Bucer is the obligor on 2
notes. He defaults on the 1st
one, and Calvin may
foreclose on the 2nd one
which is dumb! How is this
any consolation to Calvin?
Makes no sense: Bucer
cant pay the first note. So
ladies and gents, come bid on
this second note that were
foreclosing on hoping that
maybe Bucer will be able to
pay that one! No, this
would be facetious. But its
not facetiousbecause
theres something that
secures that 2d note. Its a
mortgage****.

135
 v. Thus the collateral mortgage
is an analogy to realty paper.
2. Elements of the collateral mortgage
package: pledge and mortgage elements
a. Pledge element: (1) the collateral
mortgage (ne varietur) note; and (2)
the hand note
b. (1) The collateral mortgage note
(CM Note)
i. The fake note described
above. The middle part of
the transaction. The
fictitious note.
ii. Payable either to the creditor,
or to bearer. Usually payable
to bearer under customary
practice by attorneys.
iii. Note, if we werent playing
these CM games: we
would say that the obligor is
actually liable on 2 separate
notes: that the amounts on
both the hand note (HN)
and the CM Note are both
amounts that are owed by the
maker of the notes. But we
dont say that: See infra (the
CM Note is only a fictitious
debt not really owed).
iv. The CM Note must state the
maximum amount of HNs
that may be outstanding (the
intended line of credit cap)
because it will be secured by
a mortgageand for the
mortgage to be effective the
underlying obligation (CM
Note) must state a maximum
amount of indebtedness.
v. Therefore, the CM Note has
to be drawn up in at least the
amount of the line of credit.

136
 The CM Note when executed
must be in an amount that is
at least the amount of all
potential HNs that may be
executed in the future.
Which is potentially terrible
because, literallyunder the
terms of these notesthe
obligor is liable on both the
HN and the ridiculously big-
amount CM Note! The CM
Note is customarily in the
amount of 150% of the
intended line of credit (to
make sure that there is
security not just for
repayment of the principal,
but also interest and attorney
fees).
vi. Louisiana Courts: the CM
Note is not real; it is
fictitious. It represents no
indebtedness. This is great
for debtors.
vii. (Trahans) Problem: if the
CM Note does not really
represent a debt, its an
absolute simulation that is
NULL! So the courts have
allowed something that is
absolutely null to secure a
real obligation.
viii. Another Problem:
streamlined foreclosure.
With default on the HN, the
courts allow the creditor to
foreclose not only on the CM
Note, but also the Mortgage,
in the same proceeding
ix. What if the CM Note gets
into the possession of a

137
 HIDC in NY, who then tries
to enforce the CM Note as
actual indebtedness?! The
debtor will then say Hey
man, no no no. This is
Louisiana, and the CM Note
is not real indebtedness.
Who would the court side
with? Surprisingly, such a
case has never arisen!
x. (Yet) another problem: An
Art. 9 security interest
involves the debtor having
rights in the collateral. But
the CM Note is bearer
paper. The debtor does not
have rights in it, although
made out to him, because you
cant owe a debt to yourself.
Thus in that the creditor takes
a pledge (possessory) Art. 9
security interest in the CM
Note, he avoids the debtor
has rights in the collateral
requirement for attachment!
c. (2) The hand note
i. These are in substance the
individual draws on the
line of credit.
ii. The real debt. In practice
(and under judicial
interpretation), its only
default under these notes that
will ultimately trigger
foreclosure upon the
mortgage.
d. Mortgage element
i. This is the ultimate aim of the
collateral mortgage package.
ii. Its the mortgage that
technically secures the CM

138
 Note, and practically is in a
pass through way securing
the HNs.
iii. The mortgage must state the
same amount of indebtedness
as the CM Note.
3. The pledge aspect
a. The debtor pledges the CM Note to
the creditor to secure performance of
any and all hand notes up to the
amount stated in the CM Note
b. Because there is a pledge of the CM
Note, this makes any Art. 9 security
agreement somewhat redundant
c. The creditor must make sure he
holds onto possession of the CM
Note, else he will lose perfection
(and thus lose the initial early date of
priority!)
4. Timing and combination of the various
elements of the collateral mortgage
a. Documents involved
i. HN, CM Note, and
Mortgage. But also there will
customarily be a UCC Art. 9
security agreement (which is
redundant because there is
attachment & perfection via
the pledge). There will also
be a loan agreement (the
most basic document in any
loan transaction). If the
creditor wants to double
perfect, he may not only
receive the pledge of the CM
Note, but also file a financing
statement (financing
statement) (and thus there
may also be an authorization-
to-file-a-financing-statement
document).
5. Saving the package from prescription

139
 a. Interruption of prescription on the
collateral mortgage note
i. The CM Note will prescribe
in 5 years
ii. If the debtor made regular
payments on the CM Note
every 5 years, this would
avoid prescriptionbut the
payments are made on the
HNs, not the CM Note.
iii. Could get the debtor to
formally acknowledge the
debt every 5 years.
iv. But now we have legislative
intervention: La. R.S.
9:5807: any payment made
on the HN is deemed to
interrupt prescription as to
the CM Note.
b. Interruption of prescription on the
hand note
i. Pledge constantly
acknowledges the underlying
(secured) debt. Scott v.
Corkern.
ii. Thus, because the CM Note
is pledged, and it secures the
HNs, prescription on the
HNs is constantly
interrupted.
b. The new law
i. Retention of the collateral mortgage
ii. Development of the new multiple-indebtedness
mortgage (MIM) (Art. 3298)
1. The need for something new
2. Explication
a. MIM: concept & effects
i. Concept: a mortgage may
secure obligations involving
future indeterminate
advances. See Art. 3298(A).

140
 ii. The mortgage is effective as
to the parties from the time
the mortgage is established,
and effective as to third
parties from the time of filing
for registry. See id. at (B).
b. MIM form
i. No paraph requirement exists
anymore.
ii. No special form is required
above that required for a
mortgage generally.
iii. La. R.S. 9:5217 There is a
uniform filing fee where this
form is involved: caption the
document a MIM or
multiple obligations
mortgage, as well as have
certain margins and font
sizes. But these form
requirements are about
maximizing filing fees; thus
perhaps this is not required to
have a valid mortgage.
iv. Best practice is to copy the
language in 5217(B).
v. The lack of established form
for the MIM is what makes
creditors nervousthus they
often stick with the CM.
c. MIM cancellation
i. There are no longer any
special rules
ii. Cancel in the same way as
any other mortgage. It is
removal of the mortgage
from the public records.
d. MIM termination
i. The mortgagor can
unilaterally terminate as long
as there are no longer any

141
 outstanding obligations under
the revolving line of credit
3. Assessment of the MIM: its future
vii. See Kilborn Problem re collateral mortgages
d. Legal Mortgages43
i. Definition
1. Established by operation of law for a special purpose
2. Example: natural tutor secures his obligation toward the minor
a. Example: curators of interdicts
ii. Causes
iii. Scope
1. General mortgages: encumbers all immovable property of the
mortgagor in Louisiana
2. Tutorship example: inventory or descriptive list must be filed
before the tutorship. If the natural tutor wants to use the legal
mortgage, he gets a certificate showing the value of the minors
property from the clerk of court. The certificate is filed in every
parish where the tutor owns immovable property. This creates the
legal mortgage in favor of the minor and it covers all immovable
property of the tutor.
iv. Continuing perfection: reinscription
1. Art. 3360 Four years after the tutorship or curatorship terminates,
the mortgage terminates.
2. To keep the mortgage alive, the mortgagee (child or interdict) must
resinscribe by 4 years from the end of the tutorship/curatorship
e. Judicial Mortgages
i. Definition: mortgage established by law to secure a judgment.
ii. Causes
1. File certified copy of the judgment into the public records in every
parish in which judgment creditor wants a judicial mortgage on the
debtors property
2. The judicial mortgage only covers the immovable property of the
debtor where the judgment is filed in the individual parishes where
the property is located
iii. Scope
1. General mortgage: covers all property in the parishes where the
judgment is filed
iv. Continuing perfection: reinscription
1. Art. 3359 The mortgage lapses 10 years from the date of the
judgment
2. Not from the date of filing the judgment, but from the date of the
judgment

43
Once again, this is NOT conventional security. Legal mortgages are hardly ever used in the real world.

142
 a. Note: a judgment itself expires 10 years from the date of
the judgment
b. Thus the creditor needs to not only reinscribe but also
revive, see infra
v. Continuing attachment: revival
1. CCP 3501 Sue the judgment debtor and ask for a judgment
reviving the original. Must be done within 10 years of the date of
the judgment.
f. Ranking
i. Mortgagees inter se
1. In general
a. General rule: Art. 3307(3), 3338(1) Mortgages rank by
time of recordation.
b. MIMs
i. The MIM may be recorded before any advance is
actually made under the revolving line of credit.
1. Normally the first draw on the line of credit
will not occur until some time after the MIM
is recorded.
2. Under general principles: Without a loan,
there is no principal obligation, so there
cannot yet be any accessorythe mortgage
doesnt exist yet as between the parties.
Therefore, even if recorded, the mortgage
cant exist as to third parties.
ii. Art. 3298 The mortgage is effective among the
parties as from the moment the mortgage is
established and as to third persons from the time the
contract of mortgage is filed for registry.
1. Literally, this means that the mortgage is
effective as to third parties from the moment
of filing. And no value must have been
given.
2. **Trahan: there is a debate though.
3. Prof. Crawford view: There are people who
believe that despite the clear language of
3298, because of the theoretical problem
that there is no attachment because no value
given, therefore also no third party
effectivity.
a. Under this view, the problem can be
solved by the mortgagee extending

143
 some nominal amount of value when
he files the MIM
4. Prof. Rubin (majority view): Apply 3298s
clear language: effectivity as to third
persons upon filing, even if no money has
yet been lent.
2. Exception: collateral mortgages
a. New law
i. Problem: There are two different types of security
stuck together. Logically, both parts would have to
be perfected for the whole thing to have third-party
effectivity. And this is the rule under the statute.
ii. R.S. 9:5551
1. Collateral mortgage takes priority from the
earliest moment of concurrence of third
party effectivity of both (a) the mortgage
through recordation, and (b) the interest in
the CM Note (which in Louisiana under our
version of Art. 9 can now only be done by
possession of the CM Note).
2. Example: The mortgage has been recorded.
The pledge of the CM Note has been made
to the creditor. The mortgage is perfected.
However, the interest in the CM Note has
not been perfected: there is no perfection
under Art. 9 until attachment, and there is no
attachment until giving value, and no giving
value under revolving line of credit until
creditor has loaned money. Therefore, there
is no third party effectivity of the collateral
mortgage until there is perfection in the CM
Note.
iii. Solution: At closing on collateral mortgage, have
the creditor give nominal value (e.g., $1).
b. Pre-1990 law
i. At the time, R.S. 9:5551 did not exist
ii. Majority (Rubin): exactly like the new MIM law
1. There is effectivity from the time the
mortgage is filed
2. Peoples Bank & Trust Co. v. Campbell
3. **Use majority view on the exam

144
 iii. Minority (Crawford): there had to be a
disbursement first
ii. Mortgagees vs. IRS tax liens
1. The IRS lien
a. There is no effectivity until the IRS has filed its notice of
tax lien into the public records
b. General lien: falls on all of the debtors property
c. For immovable property, the tax lien must be filed in any
parish or county in which the debtor owns immovable
property, to make the lien effective as to property located in
that parish or county.
2. Ranking
a. General rule: first to perfect or incept
b. Exceptions
i. After-acquired property and the choateness
doctrine: even if the mortgagee perfected before the
IRS, the IRS will have priority
1. The IRSs tax lien is deemed to have fallen
upon the after-acquired property when the
tax lien was filed, while the mortgagees
mortgage falls upon the property when
acquired by the debtor
ii. Future advances: if a secured party makes a future
advance either (a) with knowledge of the IRSs tax
lien, or (b) more than 45 days after the IRS tax lien
is perfected; then the IRS has priority.
iii. Mortgagees vs. other lien creditors
1. Rule: first to perfect or incept
2. Exception?
a. Future advances: there is no exception as to mortgagees.
b. That exception only applies to Article 9 secured parties.
iv. Mortgagees vs. Article 9 fixture secured parties
1. Louisiana law
a. General rule: first to perfect
i. As between fixture interest holder and mortgagee,
the mortgagee wins
ii. But if the fixture secured party perfected before the
mortgage perfected, the fixture secured party wins
b. Exception: an Art. 9 interest that is a PMSI fixture security
interest outranks even prior perfected mortgages
v. See Problems 29 and 38, and Kilborn Problem re ranking of mortgages
V. Legal Real Security (Privileges)
a. Introduction
i. Concept

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 1. Weve already discussed a couple types of legal real security in
this course, for pedagogical reasons
a. Lien creditors liens in seized movables
i. Regular lien creditors who levy on property
ii. Trustee in bankruptcy
iii. The IRS tax lien
b. Judicial mortgages
c. Legal mortgages
2. The remaining legal real security to discuss: privilege (or
statutory lien in the common law)
3. Civil Code Art. 3183 The property of the debtor is the common
pledge of his creditors, and proceeds of sale are distributed ratably
unless there be cause for preference.
a. 3184 There are two lawful causes of preference: privilege
and mortgages.
4. Defined (3186): privilege is a right which the nature of a debt
gives to a creditor and which entitles him to be preferred before
other creditors, even those who have mortgages.
5. There are no implied-in-law privileges. They must given expressly
by the Code (3185).
6. Note: when the thing unencumbered by a privilege is sold, the
privilege is GONE.
ii. Summary of benefits
1. Privileges have superpriority over mortgages (3186)
2. Disadvantages
a. Other secured parties can use executory process, but
privilege holders cannot. Privilege holders must first
obtain a judgment against the debtor and proceed via
ordinary process. Obtain a writ of sequestration to get the
deputy to seize and sell.
b. For many privileges: do not provide a right of pursuit.
i. As soon as the debtor gives the property away, the
privilege is lost.
ii. In other cases, the creditor loses the privilege as
long as he stops possessing the thing.
1. Example: the artisans lien. The privilege
on the automobile in the shop is lost as soon
as the mechanic relinquishes custody of the
thing.
iii. Purpose
1. Kilborn: the Legislature wants to encourage certain types of
commercial activity that are beneficial to society. Give special
privileges to people who engage in these activities.

146
 a. Examples
i. Those who provide funerals. Privilege was
established in the 1800s to address plagues in New
Orleans, and encourage quick burials.
2. Trahan: most are special-interest legislation
a. Powerful economic interests were able to put pressure on
the Legislature
b. The legislation is not very modern
c. Many are not that helpful: the innkeeper has a privilege on
the luggage that the guest brought to the hotel (Art. 3232 et
seq.)
iv. Classifications
1. We study only the most important, and that theoretically are
interesting
2. Movable vs. immovable vs. both
3. General vs. special
a. General: falls on all property of the debtor
b. Special: falls only on certain of the debtors property
4. Possessory vs. nonpossessory
a. Possessory: the creditor has the thing in his hands at the
time the privilege arises. Similar to pledge.
b. Nonpossessory: similar to other security devices.
b. General Privileges
i. Concept
1. Here we look at privileges that fall on both movables and
immovables (Chapter 5 Art. 3252)
2. Art. 3252 structure
a. Its poor!
b. Each of the 6 privileges is not described, however back in
Chapter 1 these privileges are actually described in detail
(Arts. 3191 et seq.)
ii. Enumeration
1. To those owed funeral charges (3192 et seq.)
a. Secured creditor: Provider of the service of burying
b. Debtor: The property that the de cujus had when he died
c. Obligations secured: Expenses of interment
d. Limitation
i. $500
ii. Not adjusted for inflation
2. To those owed law charges (judicial charges)
a. Secured creditor
i. Not the attorney
ii. Its the winning litigant
b. Debtor: The losing litigants immovable and movable
property

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 c. Obligations secured
i. Law charges are such as are occasioned by the
prosecution of suit before the courts. But this
applies only to court costswhich the party cast
has to pay to the party winning.
ii. Not attorneys fees.
iii. Court costs
1. Filing fees
2. Copying costs
3. Costs of the appeal (transcript of trial
proceedings, etc.)
4. Pleadings
d. Limitation
i. Rule: Only costs which are taxed
ii. The judge taxes costs, meaning he in his
discretion assigns responsibility for paying costs to
the pertinent parties (most to the losing party)
3. To medical providers for expenses of last illness
a. Secured creditor: Providers of the medical services
i. Medical services covered (3202): Physicians and
surgeons for their fees, nurses for their wages, and
the apothecary (pharmacist) for medicines supplied
by him
b. Debtor: The property of the decedent
i. Art. 3204 If the child died, the privilege falls not
only on his own property, but also on his parents
property
c. Obligations secured
i. Expenses of the last sickness
ii. Last sickness: that of which the debtor died
d. Limitation
i. Only one year prior to the death (Art. 3201)
ii. If the illness was chronic, the privilege does not
arise until the illness prevents the person from
attending to his business and confines him to his
bed or chamber (Art. 3200)
4. To certain privileged workers for unpaid wages/salaries
a. Secured creditor: Servants, or secretaries
b. Debtor: The employer/payor
c. Obligations secured
i. Wages of servants
1. Servants are people who receive wages and
stay in the house of the employer, including
butlers, valets, footmen, and cooks

148
 2. Limitation: the past full year of service and
whatever has transpired in current year
a. How do we reckon the years? By
calendar? WDK.
ii. Salaries of clerks, secretaries, etc.
1. Who are clerks and secretaries? WDK
exactly.
2. Limitation: current year and all of the prior
year.
d. Note: now federal labor law preempts these privileges to a
large extent
5. To survivors in necessitous circumstances for minimal living
allowance
a. Condition: necessitous circumstances
i. Defined: Possessing less than $1,000
b. Secured creditor: the surviving spouse and children
c. Debtor: movables and immovables of the de cujus
d. Obligations secured
i. Up to an amount of the $1,000; on the estate
e. The privilege is never used
c. Special Privileges
i. Concept
1. Some fall on movables; some on immovables
2. Many of the following enumerated fall on movables only
ii. Enumeration
1. To depositaries for storage/preservation expenses
a. Secured creditor: depositary or other provider of
preservation services
i. The contract of deposit is an underlying trigger
ii. Privilege also to a consignee: consignees expenses
are covered
b. Debtor
i. 3217(6): the debt laid out in preserving the thing
ii. Privilege falls on the thing being stored/deposited
c. Obligation secured
i. Costs of preservation (as is the case with most
privileges). Extraordinarily, in the following noted
cases, also the costs of storage.
ii. For an onerous deposit, privilege falls onto the thing
deposited until the depositary is paid (privilege to
retain)this covers storage costs
iii. Aircraft (R.S. 9:3514)
1. The depositary of the aircraft has a privilege
on the cost of storage (the rent owed)
2. To innkeepers for food and lodging expenses

149
 a. Secured creditor: the hotel
b. Debtor
i. The property of the traveler brought to the inn
(3217(8))
ii. Only the property that the hotel guest brought to the
inn
c. Obligation secured: The things furnished by the innkeeper
(3217(8)), whether lodging or food costs
d. Limitation: amount of the charges
3. To carriers for transport costs
a. Generally
i. When the Civil Code provides inadequate
protection, the Legislature just adds a new R.S. in
Title 9 (Civil Code Ancillaries), and does not
explain how the Code and the R.S. fit together
ii. Possibilities:
1. Last-in-time rule. The R.S. repealed the old
Code law.
2. Cumulative privileges.
iii. This is a recurring problem with these privileges
iv. Kilborn: presume cumulation
1. There is some overlap
2. Each of which must be independently
analyzed
v. This privilege: Art. 3217(9), and R.S. 9:4601
b. Secured creditor: carriers & haulers/truckers
c. Debtor: person having contract with hauler/carrier
d. Obligation secured
i. Code (carriers privilege): Cost of transport and
necessary expenses like preservation and paying
taxes
ii. R.S. (haulers privilege): charges of hauling (which
may be as broad as the Code but WDK)
e. Limitation
i. Code (carriers privilege): privilege is lost as soon
as the carrier delivers the thing
ii. R.S. (haulers privilege): 180 days from the last
day of hauling
f. Ranking issue: The haulers privilege is inferior to the
vendors privilege, a perfected Art. 9 interest, and to a bona
fide purchaser to whom possession has been delivered and
who has paid the price without notice of the haulers
privilege.
4. To attorneys for fees

150
 a. Secured creditor: attorney who provided the services
b. Debtor: the client
i. R.S. 9:5001 any money recovered pursuant to a
judgment
1. Defendants dont recover judgments;
therefore this is really a plaintiff attorneys
privilege
2. Note it does not apply to settlements. Only
to judgments.
ii. R.S. 37:218 attorney may take an interest in a
contingency fee
1. If an attorney takes an interest in the
contingency fee, that interest is protected by
a privilege: in the recovery up to the
amount of the contingency fee
2. This does include settlements
3. This statute also does not help defense
attorneys
5. To cleaner for cleaning charges
a. Secured creditor: dry cleaners, cleaners of carpets and rugs
(R.S. 9:4681 et seq.)
b. Debtor: receiver of the services. The things themselves are
encumbered.
c. Obligation secured
i. Retaining privilege to hold onto the stuff if the
debtor doesnt pay
ii. If the debtor doesnt pay the dry cleaner within 90
days, the launderer may dispose of the property
iii. Costs of cleaning are covered
6. To medical providers for charges incurred in treating injuries
caused by tortious conduct
a. Generally: R.S. 9:4571 et seq. A potentially very
important privilege.
i. The privilege requires the existence of a tort
b. Secured creditor: ambulance services, health care
providers, and hospitals who provide medical services to
the victim of a tort
c. Debtor: the tort recovery from the tortfeasor and/or his
liability insurer or other indemnitor
d. Obligation secured: reasonable charges or fees for medical
care of the injured tort victim
e. Limitation: notice required

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 i. For the privilege to be effective against other
potential payors of the tort damages (liability
insurer, tortfeasor, indemnitor, or even the victim),
the holder of the privilege must provide notice to
that person
ii. Notice must include name and address of tort victim
and medical care provider; certified mail return
receipt requested, or fax
iii. If the hospital wants the tortfeasor to pay the
hospital, the hospital must send notice to the
tortfeasor. The same for any party from whom the
hospital wants to recover its privilege.
1. This may even be the tort victim and his
insurer: so that the hospital can recover the
tort judgment proceeds
iv. It is possible for the privilege to only be effective
against certain parties, based on to whom notice is
sent
f. See Kilborn Problems re Privileges
7. Privileges on crops****
a. Rules
i. For the benefit of those who contribute to the
production of a crop
1. Workers/laborers, overseers (foremen), crop
lenders, providers of supplies on credit
ii. There is a privilege in the Code, and in the Revised
Statutes
1. Code (Art. 3217(1) & (3))
a. Overseers (AKA foremen): salary
for current year, upon crops of the
current year and proceeds (Art.
3217(1))
b. Suppliers of farm equipment and
supplies, and lenders financing the
purchase of the supplies: the amount
of the supply expenses or amount of
lending, on the crops of the current
year and proceeds (Art. 3217(1))
c. Wages of laborers employed, on the
crops of the year (and proceeds), and
on the farm and everything which

152
 serves to the working of the farm
(Art. 3217(3))
2. Revised Statutes
a. Generally: adds specificity to who is
a laborer
b. Laborer: thresherman, combineman,
grain drier, and irrigator
c. The revision: both foremen and
laborers have an interest in crop
proceeds
b. Creation: attachment & perfection
i. Agricultural liens (privileges) have separate
requirements for effectivity between the parties and
for effectivity as to third persons
ii. Perfection: filing an effective financing statement
(EFS)
1. With Art. 9, the Secretary of State maintains
the registry. But the keeper of the ag
registry is the Commissioner of Agriculture.
2. For crops, file an EFS with the clerk of court
of any parish.
3. Requirements (all biggie)
a. Essentially the same as an Art. 9
financing statement
b. A description of the immovable on
which the crop is growing
c. Description of the crop
d. Creditors name and address
e. Debtors name and address
f. Debtors SSN
4. Thus a crop privilege holder must file an
EFS just like an Art. 9 crop interest holder
c. Priority
i. Art. 3217 (Scheme X)
1. The crop privilege outranks even a prior
mortgage
2. The privileges for these different classes of
people are concurrent, except the privilege
of the laborer is ranked first
3. The Code crop privilege is abrogated by the
R.S. . . .
ii. R.S. (Scheme Y: OLD LAW)
1. Order
a. (1) Laborers and foremen

153
 i. This is different from the
priority scheme in the Code
b. (2) Lessors privilege
c. (3) Perfected Art. 9 UCC security
interests in crops
d. (4) Furnishers of supplies
i. Also different from the Code,
in which suppliers rank
concurrently with the other
listed parties
e. (5) Mortgagees?
2. Problem: we cant really have each scheme
be independent of the other. Each scheme
contradicts the other.
3. Solution: the most recent legislative
statement prevails. Thus the Revised
Statutes are the law.
a. Code says that privileges outrank
mortgages, though. Trahan says that
under this scheme, the mortgagee
should be in last position
iii. La. R.S. 9:322(g) (Scheme Z: NEW LAW)
1. Order
a. (1) Agricultural (ag) laborers,
equally ranking (pro rata) among
themselves44
i. Ag laborer: an individual
having a lien for working as a
thresherman, combineman,
grain drier, or overseer
ii. Therefore this includes the
same category as the first
category under the old law
(laborers and foremen)
iii. *However, now an ag lien of
ag laborers upon the crops
and the proceeds is
automatically perfected,
meaning that an EFS need
not be filed to perfect

44
Note: this is a rule of superpriority. Therefore, even if the ag laborers privilege arises years later, after an Art. 9
party perfects (because the laborer works on the crop years later), the ag laborers privilege has superpriority.

154
 b. (2) Perfected lessors lien on the
crops of the lessee
i. If the farm is leased, the
lessor has a privilege on the
crops
c. (3) Perfected other crop privileges
and Art. 9 security interests, with
priority among themselves
i. Other crop privileges:
furnishers of provisions
(supplies)
ii. This change from the old law
bumps up the furnisher of
provisions to have equality
with Art. 9 secured parties
iii. The normal rules for ranking
Art. 9 interests apply here
(First to file or perfect): this
applies to the furnisher of
supplies, and the Art. 9
interests. So the first to file
the financing statement or
EFS will win.
d. (4) Unperfected lessors privilege on
the lessees crops
e. (5) Other unperfected crop privileges
and Art. 9 security interests, as
among each other with priority in the
order they either become perfected
or attached
f. (6) Mortgages
2. Proceeds?
a. The law has changed here too
b. Old law: only the overseer (not
laborers) had the privilege in crop
proceeds
c. New law: both overseers and
laborers have privilege in crops and
proceeds
3. Privilege following the crops if they are sold
to third parties?

155
 a. New law: Crop privileges do not
survive the sale
b. However, there would still be a
privilege on the proceeds of the sale,
for ag laborers
8. To artisans for their services
a. Concept
i. Defined: a privilege available to people who make
or repair things.
1. Artisan: person skilled in some kind of
trade, craft, or art requiring manual dexterity
(e.g., carpenter, plumber, tailor, or
mechanic). Blacks.
ii. Code
1. Art. 3217(2): To a workman or artisan, a
privilege for the price of his labor on the
movable which he has repaired, but only as
long as it continues in his possession.
2. Note that the Code does not include the
costs of parts, but only labor
a. However, the courts have said that
also parts are covered, contrary to
the statutes plain meaning.
b. WDK.
iii. R.S. 9:4501 et seq.
1. 4502 Repairmen generally of movables
a. Privilege on the thing repaired to
cover labor and parts
b. The privilege lasts as a general rule
the longer of (1) 120 days from the
last day repair work was performed,
and (2) when possession is lost
i. Exception: 12 months from
when labor was last
performed, where the thing
repaired is farm equipment
2. 4501 Automobile repairmen
a. An exception to the 4502 rule
b. Covers parts and labor
c. Time period: same
d. Limitation: estimate limit
i. If the auto repairman gave an
estimate of the cost of

156
 repairs, then the privilege is
limited to that amount; unless
the repairman goes back to
the debtor to inform of the
increase in price
b. Scope: persons who are privileged and debts that are
secured
i. In general
ii. Special variants
1. Airplane artisans
a. La. R.S. 9:4512
b. The repairman must file with the
FAA documentation on an FAA-form
that he has done work on the aircraft
and not been paid. If he does this,
hes not limited to the 120-day
pursuit period. The privilege is
indefinitely held.
c. Otherwise, the 120-day period
applies.
2. Farm artisans
c. Priority of artisans privilege
i. (1) Vendors privilege
ii. (2) Previously perfected Art. 9 interests
iii. (3) Good faith purchaser who has paid the price
without notice of the privilege
iv. (4) The artisans privilege
d. See Kilborn Problems re crops and artisans privileges
9. To the lessor for rent
a. Concept, privileged persons, debts secured
i. Concept: the lessors privilege for rent of leased
immovables only
1. Art. 3217(3) The rents of immovables
2. Art. 3219 refers us to the Title on Lease
for the content of the lessors privilege
3. Art. 2707 The lessors privilege secures
payment of rent and other obligations arising
from lease of an immovable. Lessor has a
privilege on [ALL] the lessees movables
that are found in or upon the property
a. In an agricultural lease, the lessors
privilege also encompasses the
fruits (crops) produced by the land

157
 ii. Property covered: Falls on movable property of the
lessee on the leased premises
iii. Debt secured: Secures lessees obligation to pay
rent to the lessor
b. Property encumbered
i. In general
1. Movable property of the lessee
a. ALL movable property of the lessee
found in or upon the leased premises
b. Additional period of pursuit:
lessees movables for 15 days after
they have been removed from the
leased premises, if they remain the
property of the lessee and can be
identified
2. Movable property of the sublessee
a. Lessors privilege extends to these
movables, only to the extent that the
sublessee is indebted to the
sublessor45
b. Therefore, if the sublessee does not
owe the sublessor money, the lessor
does not have a privilege on the
sublessees movables
3. Movable property of others
a. Code: maybe. 2709 Lessor may
lawfully seize a movable belonging
to a third person if it is located in or
upon the leased property, unless the
lessor knows that the movable is not
the property of the lessee.
i. If the lessor does not know
that the property belongs to a
third person, the lessor may
seize it.
b. 2709 continued: The third person
may recover the movable by
establishing his ownership prior to
the judicial sale. If he fails to do so,
the movable may be sold as if it
belonged to the lessee.
45
Of course, the sublessor is the lessee.

158
 i. Thus if the third person
doesnt intervene before the
sale, the lessor is protected.
c. The Rule: if the lessor (1) doesnt
know that its property of the third
person and (2) can get the judicial
sale done before the third person
finds out, there is only then a limited
privilege on the property of third
persons.
ii. Special variants
1. Agricultural leases
a. 2707 In an ag lease, the lessors
privilege also includes fruits
produced by the land (=crops)
b. For third party effectivity: the ag
lessor must file an EFS
2. Leases of self-storage units
a. La. R.S. 9:4756 Self service storage
facilities
b. The self-storage lessor is allowed
self-help
i. If the self-storage lessee is
behind on his rent, after
giving notice, the lessor may
pop the lock, and sell the
contents at public auction
c. Avoidance in bankruptcy
i. Bankruptcy Code: if debtor is a lessee in
bankruptcy, the lessors privilege is extinguished as
a matter of preemptive federal law
d. See Kilborn Problems re Lessors privilege
10. To the seller of a things for its price: vendors privileges
a. Concept, privileged persons, debts secured
i. Concept
1. Movables: Art. 3217(7) The price due on
movable effects, if they are yet in the
possession of the purchaser.
a. Similar to a PMSI: its a purchase-
money privilege!
b. So if the law gives a vendors
privilege, why obtain a PMSI?

159
 Because the vendors privilege
sucks! See infra.
2. Immovables: Art. 3249(1) The vendor on
the estate by him sold, for the payment of
the price or so much of it as is unpaid,
whether it was sold on or without a credit.
a. 3250 Attaches not only to the
immovable sold, but also the beasts
and ag equipment on the land.
ii. *Sellers right to revindicate property through
dissolution of sale distinguished
b. Variations
i. Seller of an immovable
1. **Extra perfection requirement:
recordation
a. Art. 3271 The vendor of an
immovable only preserves his
privilege on the object, when he has
caused to be duly recorded at the
office for recording mortgages, this
act of sale
b. Ordinarily, the buyer, to protect his
interest, will record the act of sale in
the conveyance records.
i. However, 3271 directs the
seller to record in the
mortgage records, if he wants
to preserve his vendors
privilege on the immovable,
as to third parties.
ii. Seller of a movable
1. Special cause of loss of privilege: buyers
possession ends
a. Art. 3217(7) limits the privilege on
sold movables to when the thing sold
is in the possession of the buyer. If
the buyer has relinquished
possession, the privilege is gone.
b. Problem: what is meant by
possession

160
 i. **Alternatives: (1) corpus +
animus, or (2) corpus only, or
(3) ownership!
ii. Historical: the language for
this Article is from the projet
du gouvernmont (sp?). All
the French say the phrase
means ownershipso the
privilege would only exist as
long as the buyer has not
alienated the thing.
iii. Jurisprudence: (1) corpus.
(2) other old decisions
finding it means corpus. (3)
1985 3d Cir.: corpus +
animus.
iv. The law: WDK. Trahan
would go with source
analysis: ownership. A
matter of original intent.
c. If the buyer re-obtains possession
then we know that the privilege does
return.
2. Scope: extraordinary extension of privilege
to fire insurance proceeds46
11. To constructors (see infra)
d. Privileges to constructors (contractors, subcontractors, materialmen, workers) for
the prices of their services and materials****
i. Construction contract practice
1. Example of how a construction project works
a. Architect designs the building
b. Survey the land
c. Grade the land and remove things from the land
d. Drill pylons and do other work to firm up the land
(especially in soggy Louisiana)
e. Plumbers and electricians lay certain stuff in the foundation
area
f. Carpenters build a frame for the slab/foundation
g. Lay the foundation
h. Build frame for the building
i. Install a roof

46
Not on the exam.

161
 j. Bowels of the building constructed: the plumbing, the
drywall, the floors
k. Etc.
2. Point: every conceivable type of worker contributes and all are
protected under our law
3. Relationships among parties
a. Owner hires GC. GC hires subcontractors (e.g., carpenters,
electricians, plumbers). The subcontractors hire workers,
and contract with materialman to furnish materials.
b. Law: ALL of these parties get the privilege,
notwithstanding lack of privity with each other and with the
owner.
ii. Problems with this practice
1. Absent statute, the subcontractor would not have a claim against
the owner because there is no privity of contract
2. Each worker does his work on credit and passes on the risk to the
next worker in the chain. E.g., the owner will pay the general
contractor (GC) after the GC does the work. GC then will not
pay the sub until the sub does its work. And so on.
iii. The solution to the problem: privileges
iv. Difference in legislation
1. Civil Code art. 3249(2)-(3)
a. Architects, undertakers [general contractors], bricklayers,
painters, journeymen, laborershave a privilege on the
building or other work they are repairing or constructing.
i. This creates the incentive for the owner to pay the
worker, to get the privilege off the work.
ii. Were not just concerned with the builders, but also
people who do pre-construction work, like the
architect.
b. Those who have supplied the owner or other person
employed by the owner, its agent or subcontractor, with
materials for construction or repair, have a privilege.
c. However, this does not make the owner personally liable.
It only grants a privilege on the materials and the work
itself. Therefore, there is no Civil Code cause of action
created upon which the privilege could attach as to many of
these categories of laborers.
d. Suppliers rule
i. Some supplies are not building materials, but
equipment placed at the site. For example, a leased
concrete mixing truck.

162
 ii. The lessor of the things used on the site has a
privilege.
e. Hardly anyone talks of the Code privileges any more. The
real law is in the Private Works Act (PWA).
2. La. R.S. 9:4801-4842 (Private Works Act)
a. Applies where the building being built belongs to a private
person
b. The PWA provides a great deal more specificity than the
Code
c. The PWA solves the privity problem, which was not solved
by the Code
d. Every state has a PWA. But in other states, its referred to
as a mechanics and materialmans lien (M&M lien).
i. NY Style M&M
1. Caps liability of the owner at the amount of
the value of the general contract (with the
GC) itself
ii. PA Style M&M: no cap. Owner is liable for the
full value of the claims owed
1. Louisiana has a PA Style PWA.
2. No cap on the amount of the owners
liability.
3. Public Works Act: where the building constructed is a government
building
v. Private Works Act
1. Basic rights of protected parties
a. A claim (right to sue) against the owner (and the GC) in
favor of those constructors who are not in privity with him
i. The debt secured: the amount of money owed
under their contracts
ii. The PWA effectively creates a contractual right of
action
b. A privilege on the immovable to secure payment of the
price of work or materials
i. The privilege falls on the building being built and
the land on which it is built
c. Exception: co-owners
i. The privilege only falls on the co-owners share of
the building and the land
ii. If a single co-owner is the one hiring the GC, this
rule applies
d. Qualification: where the owner is really not an owner
i. For example, hes a 99-year lessee

163
 ii. However, under the PWA he is considered to be an
owner (of the lease rights). Thus the only
claims/privileges would be against the lessee
owner, not the lessor (real owner). And the
privilege would be upon the lease rights in the
immovable and the building.
2. Means whereby the owner can protect against claims and
privileges
a. Generally
i. 2 things are required for the owner to prevent
claims and privileges from arising: (1) construction
bond and (2) notice of contract
b. (1) Filing of notice of contract
i. Defined: filing of notice of the contract between
owner and GC
ii. Requirements
1. (a) Signed by the parties
2. (b) Legal property description of the
immovable (i.e., land if its a new building;
or the building if repairwork is being done)
a. Significance of legal property
description requirement: A street
address is not sufficient
b. Need metes & bounds or township &
range description. Maybe a
subdivision description is sufficient.
3. (c) Identify the parties and give mailing
addresses
4. (d) State price of the work, or cost plus
reasonable margin of profit
5. (e) Due date for paying the GC
6. (f) Describe in general terms the work to be
done
7. (g) State a name for the construction project
iii. Filing of the notice of contract: in the mortgage
records of the parish where the immovable is
located47
c. (2) Procurement of a construction bond (and attachment
of the evidence thereof to the notice of contract)
i. GC is supposed to get the bond, as legal surety for
the work to be performed.

47
Under the PWA, this is where EVERYTHING gets filed.

164
 ii. The bond must be filed as an attachment to the
notice of contract.
iii. The bond must be provided by a legal surety (a bail
bondsman)
iv. Bond must be in the specified amount: a gradation
in amount based on the amount of the GC price
1. **La. R.S. 9:4812(b)(1) gives the bond
amounts:
2. Bond amount is 100% of contract price, for
contract price of $10k or less
3. Bond amount is 50% of contract price (but
not less than $10k), for contract price
between $10k and $100k
4. Bond amount is 33.3% of contract price (but
not less than $50k), for contract price
between $100k and $1M
5. Bond amount is 25% of contract price (but
not less than $333,333), for contract price
over $1M
d. Time for filing notice & bond: before the work begins
i. *If not filed timely, the filing has no effect
ii. Work: very complicated definition
1. See infra for further discussion.
3. Cancellation / erasure of claims and privileges
a. Claims / privileges that were improperly filed or are or
have become ineffective
i. For instance: the owner properly filed notice and
bond on time
1. The claimants may then only receive
satisfaction from the bond. And the owner
would not be liable to the claimants who
have brought the concursus proceeding.
2. The bond is the only relief allowed.
3. Practical effect: the claimants will go away
not fully satisfied. The owner will have
gotten the minimum bond amount required
by statute (e.g., 25% of $2.0M).
b. Claims / privileges that were properly filed and are still
effective
i. Not a preemptive strike, but rather a question of
how to get the privileges off the property
ii. R.S. 9:4841; 4835

165
 1. If the owner pays off the claims, obviously
they go away
2. Other alternatives
a. Put up a bond in the amount of 125%
of the total value of the claims
b. Deposit something of value (cash,
certificate of deposit, government
issued bonds, etc.), in the amount of
125% of the total value of the claims
4. Arising and Preservation of PWA claims & privileges
a. What to do
i. 2 steps. The steps are NOT attachment and
perfection. Both steps are necessary for both
attachment and perfection.
ii. (1) Arising (establishment): the claim & privilege
must arise
1. Claim: arises automatically when the person
has provided labor or capital and hasnt been
paid
2. Privilege
a. General rule: arises automatically as
well (for laborers, and subcontractors
mainly)
b. Exceptions:
i. (1) GC, if the price exceeds
$25k, then has to file an
appropriate notice of
contract.
ii. (2) Lessor of equipment used
at the site (e.g., cement
mixing truck): lease must be
in writing; provide a copy of
the lease to the owner;
provide notice to the GC;
notice must be within 10 days
of when the equipment shows
up on the site.
iii. (3) All other materialmen
(suppliers of other types of
materials): before filing
notice of claim to preserve,
send notice of nonpayment to

166
 the owner at least 10 days
before filing notice of claim.
iv. (4) Surveyors, engineers, and
architects, if they dont have
privity with the owner, must
give notice to the owner
within 30 days of their
written employment
agreement with the GC.
iii. (2) Preserving
1. Filing: a statement of claim
a. To preserve the claim and privilege,
the statement of claim must be filed.
b. Defined: a writing containing (i)
signature of the PWA claimant or his
agent, (ii) legal description of the
immovable (once again, a street
address wont do), (iii) a description
of the work done, reasonably
itemizing elements of the work,
identifying the work or materials
supplied and dollar amount claimed,
and (iv) naming the contractor with
whom the claimant dealt
b. Preservation: Where to file
i. The mortgage records of the parish in which the
immovable property being improved is located
ii. This location rule is the same for every PWA filing
c. Preservation: When to file
i. The trigger
1. Alternatives: (1) substantial completion,
and (2) filing of notice of termination. In
any given case, there will only be one
trigger.
a. If no notice of termination is filed,
then substantial completion will be
the trigger.
b. If the notice of termination has been
filed, only it is the trigger.
2. (1) Substantial completion of the whole
project

167
 a. Defined: When the last work is
performed or materials delivered to
the project, or when the owner
accepts the improvement or occupies
the immovable
b. Punch list: allows the owner to say
whether the work as to individual
aspects is satisfactory or not.
i. After the punch list,
additional work is done
ii. Even after this additional
work is done, there is still
work to be done!
iii. Bright line rule: After the
punch list items have been
addressed, there is substantial
completion.
3. (2) Filing of notice of termination
a. If owner has a good faith belief that
the work is finished, he may file this
notice. Good faith means an
honest and reasonable belief.
ii. The time period
1. Analysis: depends on several factors: (i)
whether a termination statement was filed,
(ii) whether notice of contract was filed, and
(iii) whether a materialman is involved.
2. General rule: 60 days from the trigger date
3. Exceptions
a. 30 days from the trigger date
i. Claimants not in privity with
the owner, if (a) notice of
contract (& bond) was
properly filed, and (b) the
owner filed a notice of
termination
ii. Also, if the 30 day period
applies, there is an additional
preservation requirement:
claimant must send a copy of
statement of claim to the
owner and GC

168
 b. 70 days from the trigger date: only
available for materialmen
i. Only if the GC did not
properly file a notice of
contract to start with
5. Moment of effectivity of PWA privileges48
a. When the notice of contract is filed, or
b. When the work is begun
i. What is work
1. Statute: By placing materials at the site, or
conducting other work, the effect of which is
visible from a simple inspection that
reasonably indicates to an observer that
work has begun
2. Placing materials at the site with an
aggregate value of less than $100 is NOT the
beginning of work. A contrario, if materials
of at least $100 have been delivered to the
worksite, work has begun. This is the type
of event that would lead a reasonable
observer to conclude that work has begun.
Thus this $100 rule is the presumptive
moment of commencement of work.
a. Thus work begins at the earlier of
(1) delivery of $100 of materials to
the site and (2) physical labor done
at the site.
3. Dirt work: not the commencement of
work
a. Defined: pre-material delivery
architectural planning, engineering,
and other preparatory-type work that
takes place before the foundation for
the building has been laid
b. Dirt work is not work. PWA
work requires delivery of materials
to the site or physical labor to be
done on the site.
c. Dirt work as its own separate
work
48
Note: the moment of effectivity for every PWA claimant on a particular project on a particular work (which
excludes dirt workers) is the same moment: the earlier of notice of contract, and when the work began.

169
 i. If the preparatory work is not
within the scope of the GCs
contract, its a separate work
ii. This contemplates the
situation where the dirt work
is done by someone directly
hired by the owner
iii. For these workers who do
dirt work on a separate work,
the moment of effectivity is
the moment of filing the
statement of claim. Thus for
dirt workers on a separate
work, there is a radically
different rule for moment of
effectivity.
iv. Point: dirt workers dont
have the same moment of
effectivity.
ii. Proof of absence of work: the no-work affidavit
1. Relevance: the bank/mortgagee wants to
ensure he has priority over all the PWA
claimants.
2. How to do this
a. If a notice of contract has not been
filed, the bank can perfect its
mortgage and know its safe, only if
work has not yet begun.
b. If a notice of contract has not been
filed, the other possible date of PWA
effectivity is when the works begins.
Thus the bank needs to know when
work has begun, to make sure it
perfects its mortgage before the
works begins.
c. Thus bank will send out an inspector
to the site to make sure that no work
has begun yet.
3. Effect of the no-work affidavit
a. The mortgagee may rely
conclusively on an affidavit made by

170
 the certified inspector, stating that
the inspector saw no work had begun
b. Requirements
i. (1) A qualified inspector
signs the affidavit
ii. (2) The bank must file the
affidavit into the public
records within 4 days of the
date of affidavit execution
iii. (3) The mortgage must be
filed within 4 days of when
the affidavit was filed
c. The effect: as to the mortgagee, it
will be deemed that work did not
begin, and the mortgagee will be
ranked ahead of PWA claimants
d. Note: if work actually had begun,
the Bank still has priority, but the
claimants have a claim against the
affiant if his affidavit was false or
fraudulent.
6. Ranking of PWA privileges
a. In general: La. R.S. 9:4821 gives the order
i. Note that a particular actor may fit in more than one
category. For example, if a subcontractor is also a
laborer, then each fits into each respective
category for the amount of work performed as each
type of actor. He will be ranked in second position
as to the costs of labor, but in fourth position for
other costs.
b. In particular
i. (1) Government ad valorem tax liens
ii. (2) Laborers privileges (pro rata among
themselves)
iii. (3) Prior perfected mortgages, prior perfected
vendors privileges, & prior perfected UCC Article
9 fixtures security interests (first in time, first in
right among themselves)
iv. (4) Subcontractors, materialmen, and lessors of
movables (pro rata among themselves)

171
 v. (5) General contractor + any architects, surveyors,
and engineers hired by the owner (pro rata among
themselves)
vi. (6) All other (later-perfected) mortgages and
privileges (those that became effective after the
moment of PWA privileges effectivitywhether
notice of contract or beginning of the work) (first in
time, first in right among themselves)
7. Extinction of PWA privileges (and how to avoid extinction)
a. The action
i. Preserves the claim as between the owner and the
PWA claimant
ii. The privilege holder must sue the owner no later
than one year from the last day on which he could
have filed the statement of claim
iii. Last day for filing statement of claim: 30, 60, or 70
days from the appropriate trigger (notice of
termination or substantial completion)
iv. This is a type of prescription of the PWA claim
b. The notice of lis pendens
i. Preserves the claim as between the privileged party
and third persons
ii. File in the same place as the action: the mortgage
records of the parish of where the immovable is
located
iii. Time: at the latest, one year from the date on which
the statement of claim was actually filed
1. A trap for the unwary: the notice of lis
pendens must practically speaking be filed
before suit is even filed
2. Thus in reality: the suit and notice of lis
pendens should both be filed by one year
from the date on which statement of claim
was actually filed
c. Hypo
i. No notice of termination was filed, so the trigger is
substantial completion.
ii. The time period for filing the statement of claim is
60 days from substantial completion under these
facts. February 2 was substantial completion. 60
days from then is April 1. April 1 is the deadline for
filing a statement of claim.

172
 iii. PWA claimant actually files the statement of claim
on February 3.
iv. Requirements to avoid extinction:
1. (1) Bring suit against the owner: within one
year from April 1 (from the deadline for
filing the statement of claim).
2. (2) File notice of lis pendens: within one
year from February 3 (from the date the
statement of claim was actually filed).
3. The discrepancy: the law requires notice of
lis pendens to be filed before suit is filed!
vi. See Kilborn Problems re PWA
e. Priority in Privileges49
i. Basis
ii. Privileges on movables
1. Non-farm product movables
a. Privileges inter se
i. Special privileges inter se
1. **Lessors privilege outranks vendors
privilege
2. Vendors privilege vs. other special
privileges
a. One the one hand, it seems that a
vendors privilege should prevail
over all other special Civil Code
privileges, e.g., a CC artisans or
carriers privilege (to the extent that
we draw an a contrario inference:
the Code gives the one privilege that
beats the vendors privilege: the
lessors privilege)
b. However, in an old Orleans App.
case (Cozzo v. Ulrich (1916)),
possessory privileges in the Code
were held to beat non-possessory
privileges. Thus the artisans and
carriers privilege would beat the
vendors privilege under this
jurisprudence.

49
Trahan says, Abandon all hope ye who enter here.

173
 3. A vendors privilege prevails over most (if
not all) R.S. special privileges, including an
R.S. repairpersons privilege and an R.S.
haulers privilege
4. An R.S. repairpersons privilege and an R.S.
haulers privilege prevails over all Code
privileges other than the vendors privilege,
including the lessors privilege
5. ****Vicious Circle of Priority example:
a. Lessor beats vendor.
b. Vendor beats R.S. repairperson.
c. R.S. repairperson beats lessor.
6. Note: we have only ranked a few of the
special privileges in non-farm product
movables. Because WDK how the others
rank! This course only covers what we do
know.
ii. General privileges inter se, in this order:
1. Widow and child
2. Funeral charges
3. Law charges
4. Charges for last sickness
5. Wages of servants
6. Suppliers of provisions
a. Code Article 3191 Supplies of
provisions made to the debtor or his
family, during the last 6 months, by
retail dealers like bakers, butchers,
and grocers; and during the last year,
by keepers of boarding houses and
taverns.
b. A privilege in your tab!
7. Salaries of clerks
iii. General privileges v. special privileges . . .
1. General rule: special primes general
2. Exceptions:
a. Funeral charges privilege beats
lessors privilege (even one that
arose previously)
b. Funeral charges privilege and law
charges privilege beats innkeepers
privilege (even one that arose
previously)

174
 c. Widow and child privilege beats all
special privileges, except the
vendors privilege
iv. **Vicious Circle of Priority example:
1. Lessor beats vendor (specific Civil Code
rule)
2. Vendor beats funeral (under general rule
that special privilege beats general privilege)
3. Funeral beats lessor (under exceptional rule
to special vs. general privileges).
4. Again, we have no judicial resolution, but
Trahan would want a pro rata rule for those
in the vicious circle.
b. Privileges vs. UCC security interests
i. General rule: UCC security interest (even if
unperfected) prevails
ii. Exceptions
1. (1)50 Privileges for artisans, repairmen, and
the like . . .
a. A Code artisans privilege (because
its a possessory privilege) prevails
over all UCC security interests, even
those previously perfected
b. An R.S. repairmans privilege
prevails over UCC security interests
that were not previously perfected
2. (2) Privileges for carriers, transporters, and
the like . . .
a. A Code carriers privilege (because
its a possessory privilege) prevails
over all UCC security interests, even
those previously perfected
b. An R.S. haulers privilege prevails
over UCC security interests that
were not previously perfected
3. (3) An attorneys privilege prevails over all
UCC security interests, even those
previously perfected
c. Privileges vs. lien creditors: at least as a general rule, the
first to perfect/incept prevails (jurisprudential rule)
2. Farm-product movables (crops)
50
Note: (1) and (2) are both based on the rationale that a possessory privilege prevails over all UCC security
interests.

175
 a. Privileges inter se & privileges vs. UCC security interests
i. The privileges of ag laborers rank first
ii. The privilege of the lessor of the farm ranks second,
provided it has been perfected
iii. Perfected UCC security interests and perfected
privileges of furnishers of supplies rank third
1. *Among themselves, these security rights
rank on the basis of the rule first to file or
perfect
iv. The privilege of the lessor of the farm ranks fourth,
provided it has not been perfected
v. Unperfected UCC security interests and unperfected
privileges of furnishers of supplies rank fifth
1. *Among themselves, these security rights
rank in the order in which they become
effective or attach
b. Privileges vs. lien creditors: the first to perfect/incept
prevails
c. Privileges vs. mortgages: a privilege prevails over a
mortgage, even one that was previously perfected
iii. Privileges on immovables
1. Privileges inter se
a. Special privileges inter se: for the only two such privileges
that might possibly arise (1) that of the vendor and (2)
those of contractors, subcontractors, their employees, and
materialmen priority is now determined by the PWA
i. The PWA ranking displaces previous principles that
might have been implicit in the Code
ii. The vendors privilege is in the same class as the
mortgage. Ranked in the third (perfected) and sixth
(unperfected) slots of the PWA.
b. General privileges inter se, in this order:
i. Widow and child
ii. Funeral charges
iii. Law charges
iv. Last illness expenses
v. Wages of servants
vi. Salaries of clerks
c. Special privileges vs. general privileges
i. General rule: special primes general
ii. Exception: the widow and child privilege beats all
special privileges (except for the vendors privilege)
2. Privileges vs. lien creditors: at least as a general rule, the first to
perfect/incept prevails (jurisprudential rule)

176
 3. Privileges vs. mortgages
a. General rule: a privilege prevails over a mortgage, even
one that was previously perfected
b. Exceptions:
i. Against a late-perfected vendors privilege (one not
perfected until after the 7-day deadline has passed),
mortgages rank by time of perfection
ii. A (previously-perfected?) conventional mortgage
beats the widow and child privilege
1. Possible vicious priority circle:
a. Widow and child beats mortgagee.
b. Mortgagee beats vendor (because
vendor perfects too late).
c. And vendor beats widow and child.
iv. See Kilborn Ranking of Privileges Problems
f. Extinction of Privileges
i. Destruction of collateral
ii. Confusion
iii. Extinction of secured debt
iv. Prescription of secured debt
VI. Enforcement of Real Security Rights
a. Introduction: When the secured obligation has not been fulfilled (debtor is in
default), what steps must the secured party take against the debtor?
b. Under State Collection Law
i. Prerequisite to enforcement: default
1. Concept
a. Defined: nonperformance of the obligation that is owed
when the performance is due
b. In most transactions, the loan agreement specifies the
instances of default. Its not just the failure to pay money
on time, but other customarily defined events: any breach
of any warranty, the death of the debtor, the insolvency of
the debtor, collateral is lost or destroyed, bankruptcy,
whenever the creditor in good faith believes that there is a
reasonable possibility that the debtor is unable to perform.
c. The creditor usually has superior bargaining power, and
defines default to be very broad.
2. *Note on acceleration
a. Under the general rule, you have only defaulted on the
payment that you failed to make. But this creates a
problem for the creditor: he will only be able to obtain
from the sale proceeds what is owed.
b. Solution: an acceleration clause: default on one payment
makes the entire indebtedness immediately exigible.

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 i. Acceleration is not provided by law. If the creditor
wants it, he must provide for it by contract.
ii. Default on one missed payment is deemed to be
default on the entire outstanding loan.
c. Restrictions
i. UCC 1-309: Contract must provide for
acceleration, and acceleration must be in good faith.
We have this rule in Louisiana.
ii. What is bad faith?
1. If debtor fails to keep casualty property
insurance on the collateral, this is defined as
default. What about if the debtor defaults,
but has made every payment? The creditor,
to accelerate, may be in bad faith. Why?
Because the rationale for acceleration is that
the creditor feels he wont get paidwhich
would not be reasonable to believe in this
case.
ii. Steps in enforcement
1. *Avoiding enforcement
a. Renegotiate: Give the debtor more time to pay, in
exchange for a higher interest rate.
b. If you have to enforce: either ordinary or executory
process. See infra.
2. (1) Repossession of the collateral51
a. Modes
i. General rule: no self-help in Louisiana
1. The sheriff does the repossessing
2. Contra Texas, in which the creditor may hire
the repo man to legally go snatch the
property. This is permitted in every
common law jurisdiction. But we hate this
notion in the civil law because were
concerned about breaches of the peace.
ii. Exceptions: where self-help is allowed
1. Accounts and deposit accounts
a. Deposit accounts: take the money
and apply it to the debt (because you
have control of the account and have
access to the funds)

51
Really, dispossessing the debtor, Trahan says.

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 b. Accounts (receivable): you can send
a notice to the debtors obligor,
directing him to start paying you!
2. Motor vehicles: using hired repo men!
3. Self-storage units: the creditor may cut the
lock and sell the renters stuff
b. Procedures
i. Ordinary process: Judgment on the loan agreement,
and then ask for writ of fifa (or sequestration) and
go through the entire rigmarole. But this should be
avoided if possible.
ii. Executory process: bringing suit to enforce security
rights
1. As a prerequisite, the creditor must establish
in court that the debtor has in fact defaulted.
Sometimes have to use ordinary process,
sometimes not.
2. When would the secured creditor not need to
use ordinary process to prove the default?
When having done everything in advance.
3. Advantages
a. La. CCP art. 2640 Debtor need not
be served or cited. This saves time
and money.
b. Get the judgment automatically on
the basis of an affidavit. To be able
to get this, meet requirement: the
loan documents must have had a
confession of judgment in which
the debtor swears that he is in
default.
4. Form required: authenticincludes a
security agreement properly executed under
Art. 9, or a civil law-type authentic act.
Therefore, the note and the
mortgage/security agreement must be in
authentic form.
5. Then judge issues writ of sale and seizure.
3. (2) Foreclosure of the right to redeem the collateral
a. Generally
i. Laymens term: cut off
ii. History

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 1. English Chancellor said that even after
creditor repossessed, the debtor had the right
to redeem the property by paying what is
owed. If debtor did that, he could redeem
the property.
2. But at some point, the right to redeem was
foreclosed.
b. Involuntary
i. Through judicial disposition
1. The sheriff who has seized must now sell the
property at a public auction. There is a
minimum bid at the first auction: 2/3 of the
appraised value of the property. At a second
sale, there is no minimum bid.
2. Anybody can bid on the property, including
the creditor. Its usually the creditor who
buys the property (buying in). The
creditor doesnt really have to payhe
credit bids the amount he is owed.
ii. Through creditor disposition
1. This applies if creditor repossessed through
self-help, or debtor turned over custody of
the property to the creditor (voluntary
dispossession).
2. Creditor can sell the property himself,
without having to go through a sheriffs sale.
3. However, creditor must sell commercially
reasonably.
a. Creditor can credit bid, if there is an
external mechanism for determining
if the bid is for a fair price: need a
free market for the collateral (stock,
oil, etc.)
c. Voluntary: collateral for debt exchange: dation en
paiement (giving in payment)
i. The dation is a separate juridical act: an agreement
whereby creditor forgives debt completely in return
for the debtor transferring ownership to the creditor
ii. Called a workout deal in lay terms. At common
law, called strict foreclosure.
iii. There are strict rules in the common law that protect
the debtor, including: creditor must give notice to

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 everyone with an interest in the collateral, and they
have veto power over the dation
1. In Louisiana, we do not have these strict
rules.
4. (3) Collection of the deficiency
a. Defined: proceeds were not enough to pay off the amount
of indebtedness
b. General rule: permitted without restriction
i. The creditor can pursue the debtor for a deficiency.
But this is heavily regulated because of the
common-law influence in Louisiana.
ii. Deficiency Judgment Act imposes requirements
on a mortgagee for getting the rest of the value.
The Act is the exceptions, infra.
c. Exceptions: excluded or at least restricted
i. Under mortgage law
1. Before sale, there must be an independent
appraisal, to later obtain a deficiency
2. Creditor must give the debtor credit for at
least 50% of the appraised value, regardless
of how much the sale actually yields
ii. Under Chapter 9
1. As to some collateral, there can be no
deficiency judgment: accounts, chattel
paper, payment intangibles, and promissory
notes
iii. If the sale was not commercially reasonable, the
deficiency is lost
c. Under Federal Collection Law (Bankruptcy) [skipped]

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