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UCC 9 Security Devices

Spring 2003
Professor Kilborn

I. General Introduction
• UCC 9 governs security interests in movables in every state that has adopted it. All U.S.
states have adopted it, including LA, but many states have made small changes to it.
II. Creation of Security Interests
A. Formalities for Attachment
• When does security interest attach to collateral? [§ 9-203(b)] Three requirements for
attachment:
1. value has been given (not necessarily to debtor);
2. debtor has rights in collateral or power to transfer rights in the collateral to a secured
party; AND
3. (A) debtor must have authenticated a security agreement that provides a description of
the collateral. (This is the most common third requirement met; there are three other
possibilities that do not apply as often.)
• Value defined very broadly.
• 9-102(a)(7) defines “authenticate” to mean to sign; or to execute or otherwise adopt
a symbol, or encrypt or similarly process a record in whole or in part, with the present intent
of the authenticating person to identify the person & adopt or accept a record.
• The three other possibilities given in 9-203(b)(3) that are not as commonly used as
the one set out above are:
 (B) pledge: no written agreement necessary
 (C) if stock certificate is collateral, pledge of registered securities (stocks or bonds)
 (D) specific types of collateral & creditor has control
• Security agreement can be extremely simple; just must be authenticated by the
debtor.
• Promissory note must be signed by the debtor; but the secured party’s signature is
not required.
• Note must contain a description of the collateral to attach a security interest;
incorporating another document not attached to the note is not sufficient.
• Composite document rule: if financing statement contains a description & is attached
to the security agreement that contains a debtor’s signature but not a collateral description,
the judge may be convinced under the composite document rule that the requirements for
security interest attachment are satisfied.
• Security interest attaches at moment the last of the three requirements is met.
• Often times, if the collateral description is left blank at the time of signing but is
added within a short time of the signing of the security agreement, security interest will be
considered to have attached upon the adding of the description; however, if you wait too

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long, most courts will say this is a minor oversight that cannot be corrected to have
attachment occur.
B. Description of Collateral in Security Agreement

• § 9-108(a)  collateral description is sufficient, whether or not it is specific, if it


reasonably identifies what is described.

• § 9-108(b)  examples of reasonable identification. A description reasonably


identifies collateral if it identifies the collateral by specific listing; category; type of collateral
defined in UCC; quantity; computational or allocational formula or procedure; or any other
method, if the identify of the collateral is objectively determinable.

• § 9-108(c)  A description of collateral as “all the debtor’s assets” or “ all the


debtor’s personal property” or using words of similar imports does not reasonably identify
the collateral. Such a description can be used in the financing statement, but not in security
agreement description.
• You can take security interest in all debtor’s property, but you must specifically
identify it.

• In re Shirel  a security interest against a consumer needs a fairly specific


description. “All merchandise bought on charge card” was too broad for consumer security
agreement. Likely would have been sufficient for commercial security agreement.
• Description can apply to after-acquired property. Very common to do this. Just must
say “after-acquired” in description.
• Collateral can secure obligations to arise in the future as well.
• After-acquired security interest in consumer property can only attach to good
acquired within 10 days of agreement. Rationale: to protect the consumer.
• It is important to look at the intent of the parties & the saviness of the debtor when
analyzing whether a collateral description covers subsequently acquired assets.
• It is a good idea to say in security agreement that all terms used have the definition
given in UCC & both parties have agreed to this to prevent the judge from throwing a
dictionary definition up in your face.
• If after-acquired language is not used, new equipment is not covered by security
agreements; however, some judges will let this requirement slide if the equipment is
something that turns over frequently.
• Super-generic descriptions are not sufficient under 9-108, so to be covered, list every
category of possible collateral. A description that says “all the debtor’s property” is invalid
b/c we want debtors to know just what they are giving away.
• The Article 9 revision broadened the definition of “account.” Is the revision
retroactive? In La., old article 9 definition would apply to security agreements entered into
before revision unless parties agreed to new definition later on. You should not be allowed
to expand your collateral based on a subsequent change in the law.
C. Proceeds, Products & Value-Tracing

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• Most creditors are smart enough to take a security interest in collateral and
“proceeds, products, rents, profits, & offspring.”
• § 9-102(a)(64) defines proceeds as the following property:
A. whatever is acquired upon the sale, lease, license, exchange, or other disposition of
collateral;
B. whatever is collected on , or distributed on account of, collateral;
C. rights arising out of collateral;
D. to the extent of the value of the collateral, claims arising out of the loss,
nonconformity, or interference with the use of, defects or infringement of rights in, or
damages to, the collateral; or
E. to the extent of the value of collateral & to the extent payable tot he debtor or the
secured party, insurance payable by reason of the loss or nonconformity of, defects or
infringement of rights in, or damage to, the collateral.

• § 9-315(a)(2)  gives creditor security interest in proceeds automatically without


mentioning proceeds in security agreement if they are identifiable. But only applies to
proceeds. Does definition of proceeds include the others? Possibly, but best to include
those words to be safe since courts like to interpret security agreements against the drafter.
• Must be able to trace the proceeds if the debtor commingles them with other money
(BOP on secured creditor).

• Product  something that collateral produces

• Profit  excess of revenues of business over expenses

• Rent  money paid for temporary use of collateral

• Proceeds must be identifiable, so this makes tracing an issue. The burden of proof is
on the secured party. Method of tracing: lowest intermediate balance rule  the amount of
the secured creditor’s collateral remaining in a bank account is equal to the lowest balance
of all funds in the account between the time the collateral was deposited & the time the rule
is applied.
• Not only does the security interest stay with proceeds, it also stays with collateral
that is sold, unless the secured party consents to its sale & waives the security interest.
• Description of collateral as “accounts” does not include deposit accounts; they are
specifically excluded from the definition of accounts.

• § 9-332  a transferee of money takes the money free of a security interest unless
the transferee acts in collusion with the debtor in violating the rights of the secured party. A
transferee of funds from a deposit account takes the funds free of a security interest in the
deposit account unless the transferee acts in collusion with the debtor in violating the rights
of the secured party. So security interest does not continue in cash paid out as proceeds of
collateral.
III. Default, Acceleration & Cure under State Law

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• “Default” is not defined in Art. 9; it is instead defined in the individual security agreement.
Common causes of default include the following: failure to make timely payments, failure to
keep insurance, etc.

• There is an implied limit on the creditor’s right to seek a remedy  good faith. Beyond that,
default & remedy is governed by contract between the parties. The creditor cannot exercise its
remedies until the debtor actually defaults. If creditor exercises too early, he runs the risk of
being liable for damages.

• UCC Art. 1-103  sets forth the obligation of good faith. Louisiana’s definition of good faith
in defined to mean the same thing as it does in the Civil Code, which is very ambiguous. Good
faith is essentially the absence of bad faith.
• If the agreement does not contain an acceleration clause, the creditor must sue the debtor
for each missed payment. So if no acceleration clause in an agreement in which the debtor
agrees to pay back loan in 10 monthly installments & misses one, the creditor can only sue for
that one payment. All 10 installments are treated as 10 separate obligations. Creditors insert
acceleration clauses so that they do not fall into this default rule. These clauses state that in
the event of a default by the debtor , the creditor may at its option, declare all of the payments
immediately due & payable. So creditor could then enforce all 10 payments in one lawsuit.

• § 1-208  if security agreement allows you to accelerate for insecurity, you cannot exercise
this right in bad faith

• Lender Liability  lender acted in bad faith & bank made some oral manifestation that
things would be OK, & then bank “pulled the plug.” Lender liability has become less of an issue
(See La. R.S. 6:1122-24). Loan agreement will govern regardless of oral promises by bank
officers.

• KMC v. Irving Trust Co.  every obligation governed by UCC has an implicit obligation of
good faith. This has NOT been changed by lender liability statutes. Revised Article 9 defines
good faith as “honesty in fact & the observance of reasonable commercial standards of fair
dealing.”
IV. Prototypical Secured Transaction
• Problem Set 15, page 270
15.2 If BB had been up to following tricks, how would D have discovered them?
a. B in about to go BK. She holds big sale, sells as many boats as possible
in a week, wires money to account in Bahamas, withdraws money, and
disappears.
Take notice of big sale. Stay in close contact with B’s business. Requiring info
does not work well for those trying to scam you. Maybe periodic surprise on-site
inspections, but consider cost/benefit. Best to do random rather than scheduled
visits. Really tough to catch overall.

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b. B offers to store boat for customer who buys, then B does not report
sale & when checker comes to take inventory, they sold boat is still
counted in inventory.
Look to see if B still has title.
15.3 Archer insists on personal guarantees from individuals who own any closely
held business they finance. They have lost several customers to
competitors b/c they require personal guarantee. Archer never usually gets
any collectible judgments from these guarantees. What do you advise?
If person has no non-exempt assets, requiring personal guarantee is pretty much
worthless. If may not be worth losing business to require these guarantees of very
little value anyway. BUT, don’t discount the value of the personal guarantee…even if
person is judgment-proof, people do have pride. Having personal guarantee gives
creditor some leverage.
15.4 B is found 5 boats short upon inspection & D puts B in default & demands B
surrender remaining boats in her possession.
a. Does D have right to boats?
Yes, they can take boats under UCC 9-609 & under security agreement. But must
follow required procedures.
b. If B gives up boats w/o fight, what happens to her?
She has to pay deficiency if their selling of the boats does not get amount equal
to amount owed. In sheriff sale, they will not get much…but remember the
Shoreline agreement.
c. Does B have power to keep boats? How & for how long?
B can keep since on her property until the Bank follows the correct procedure.
They will have to get a writ of seizure.
d. Advice to B?
Cooperate & try to negotiate with bank if possible. Look at relationship with bank.
Bank cannot promote such acts so that other customers will see the
consequences. Another option would be to file BK. Automatic stay will kick in,
but it also sends message to word that she really has big problems. She may also
still face criminal liability that BK § 362 will not stay.
15.5 D seeks to enforce provisions of wholesale financing agreement. Dealer
argues contract is void for lack of consideration & illusory b/c nowhere does
D agree to make loan or do anything else. What do you think of argument?
Reject lack of consideration argument b/c contract was contingent upon them making
the loan. Is future promise valid consideration?
15.6 B consults you prior to signing agreement with D. Answer these questions:
a. What interest rate will B pay on outstanding balance?
To be defined by statement of transactions, so it is impossible to figure out from
the wording on the contract.

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b. Will D have security interest in B’s lease of boatyard? In her bank
accounts?
Boatyard is immovable, so not covered by Article 9. But agreement can provide
for security interest in the boatyard. A leasehold (if yard is leased) can be
movable, but 9-109(d)(11) says any interest in a leasehold interest is excluded
from Art. 9. Bank accounts? 9-102 definition of accounts excludes bank
accounts. May be included if the bank account is proceeds of sales of inventory
(which is covered by security agreement).
c. Would B violate her agreement with D by permitting an employee to
take boat for test ride? If she did, would that give D the right to call the
loan?
Demonstration requires written consent in agreement, so violating this is a
breach of the agreement.
d. Given that S has agreed to buy repossessed boats from D at full amount
owing on them, does that mean B need not worry about a deficiency
judgment on a repossessed boat?
Boats may lose value, Shoreline may not pay full value, so she would have to pay
the deficiency. Agreement does not require Shoreline to pay full price & they
don’t have to sue Shoreline.
15.7 B is not in breach, but D wants out of security agreement. Can D get out of
this deal? How? What will be the effect on B?
It would have to be pursuant to the agreement. § 12 30-day written notice gives no
more advances. Still have to finish deals already in place. Also, good to avoid lender
liability.
V. The Creditor-Third Party Relationship
A. Personal Property Filing Systems
• What is priority? If one secured creditor has priority over another creditor in same
collateral, that creditor is the senior or prior lien holder. The other is junior or subordinate.
• Consensual secured creditors get priority by perfecting their security interests.
• If the value of collateral is insufficient to pay all of the liens against the collateral, the
junior liens yield to the senior ones.

• Perfection  who, as between two secured creditors, wins. Filing financing


statement is usually the way to perfect.
• Consensual secured creditors get priority by perfecting their security interests.
1. Security interest must attach (see 3 requirements of 9-203)
2. Secured creditor gets preference over other secured creditors by perfecting. To perfect,
one must file a UCC financing statement to put third parties on constructive notice of
their claim to the collateral.
• Louisiana is ahead of other states in the filing area b/c they have a statewide filing &
searching system, so you can file & check a security interest in any Louisiana courthouse.
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• Some types of collateral have specific filing rules:
1. security interest in copyright  PTO (Patent & Trademark Office)
2. security interest in aircraft  FAA
3. security interest in vehicles  outside La: need lien noted on title certificate; in La: file
financing statement with Dept. of Motor Vehicles (does not have to be noted on title
certificate in La.).
• Generally, as to movables, a security interest is perfected by filing a financing
statement in UCC filing office.
• If you have a security interest in a patent or trademark, etc., to be safe, it is best to
file in PTO & UCC filing system.

• § 9-311(d)  lays out a special rule dealing with perfection of security interest in car
dealer inventory  file in UCC as “inventory.” If cars held by dealer not for sale, file in UCC
as “equipment.”

• § 9-502(d)  allows you to file first before you conduct search for prior security
interest(s) on record. Allows you to file so other do not attach while you are searching. You
can attach to perfect 2-3 days later.
B. Article 9 Financing Statements: The Debtor’s Name

• § 9-502  financing statement is sufficient to perfect only if it provides the name of


the debtor, name of the secured party, & a description of the collateral. Problems often
arise with debtor’s name.
• Debtor’s name is very important because other have to be able to get information
about debtor from the UCC system.
• § 9-503 deals with the sufficiency of the debtor’s name.
1. If the debtor is a registered organization, must give the name of debtor indicated on
public record of debtor’s jurisdiction of organization which shows debtor has been
organized [use name as listed on organizational documents; “registered organization is
defined in 9-102(a)(70) are organization required to have an agreement on file such as
corporation, LLC, Ltd. P/S, etc.]
2. Hard part is dealing with sole proprietorships. Trades names are neither necessary
nor sufficient.
3. For P/S, best to list under all individual partners’ names.

• § 9-506  error in debtor’s name is OK as long as it is not “seriously misleading.” If


you put the debtor’s correct legal name in search engine, will it find the name with the error
in it? If can’t be found this way, you are NOT perfected.
• When you are searching the UCC filing system, search under debtor’s name. In
Louisiana, UCC filing searches can be done in any parish courthouse.

• § 9-519  Numbering, Maintaining & Indexing Records

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a) The filing office will assign a number to each FS, create a record, maintain the record
for public inspection, and index the file record.
h) The filing office shall perform these acts no later than 2 business days after the filing
office receives the record in question.

• 9-523(c)  the filing office shall communicate or otherwise make available in a


record to any person that requests the information: whether there is on file on a date & time
specified by filing office, but not a date earlier than 3 business days before the filing office
receives the request, any FS that designates a particular debtor, the date & timing of filing
of each FS, & info provided in each FS.

• 9-523(e)  filing office shall perform the acts required in subsection c at the time &
in manner prescribed by filing office rule, but not later than 2 business days after the filing
office receives the request.
• Often good before attaching security interest to collateral to file FS, wait 3 days, and
then search under the legal name of the debtor to see if prior security interests exist in the
collateral.
C. Article 9 Financing Statements: Other Info
• 9-502 sets out 3 requirements for FS:
1. debtor’s name
2. secured creditor’s name
3. indication of collateral covered
• If not contained, not effective. If contained, but incorrect, the seriously misleading
test applies. If found to be seriously misleading, it will render it ineffective. [9-506(a)]

• Secured creditor’s name  problems with name/address do not generally matter.


Only possibility is a person trying to get a copy of security agreement to check on collateral
covered & mistake means the 3rd party cannot get info b/c secured creditor’s name is wrong.

• Collateral description  FS is a simple notice document, so the specificity of


description is not as important. Most time security agreement description is copied into FS.
But FS can describe collateral as “all debtor’s assets” or give a description of the collateral.
Super-generic description is allowed in FS (not allowed in security agreement). Why? FS’s
only purpose is to give notice, does not give away rights.
• FS is often called a UCC-1. Only gives notice, whereas a security agreement gives
away rights & control in what property interests have been given away.
• If filing office refuses a FS that contains all necessary info, the security interest is still
perfected. Filing means tendering document(s) & filing fee. Creditor will be perfected
against lien creditors & others can only defeat you if they can show they searched & were
unable to find info of your security interest & relied on the absence of your filing.
• The filing office has no right to review the accuracy of information submitted for
filing. Filing office can only reject if one of spaces in FS is left blank.

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• If filing office wrongfully accepts  effective but if someone can prove they relied on
inaccurate info to their detriment, you may not be perfected as to that party.
• Only the security agreement must be signed. The FS does not have to be signed.
Authorization is all that is required. The FS need not be authenticated. By authenticating
the security agreement, the debtor authorizes the filing of the FS. If the FS’s filing has not
been authorized, it is ineffective. [9-509 & 510]
• If info provides is incorrect, it is still perfected. But it is best to amend to give correct
info b/c otherwise, future secured creditors who prove they relied on the incorrect info to
their detriment will have superior priority over you.
• TIB & lien creditors cannot beat a wrongfully accepted FS. Other secured creditors
can if they prove reliance to their detriment.
• If you want to file FS before getting security agreement signed (which would
authorizing filing of FS), get debtor to sign some kind of record authorizing you to file the FS
before the security agreement is signed.
D. Exceptions to the Article 9 Filing Requirement
• There are 3 other ways to perfect a security interest other than filing:
1. Possession (Pledge in La.)  A secured creditor can perfect a security interest by
taking possession of the collateral. [9-313] But if secured party loses possession, he
loses perfection as well.

 9-313(c)  if employee or agent in possession, you need authenticated


document saying this person holds (possesses) on behalf of the creditor.
 If collateral is money or a collateral mortgage note, it can only be perfected by
possession.
 Money is defined as any kind of currency, not necessarily US dollars.
2. Control
 If you can perfect by filing or by control, it is always better to perfect by
control. The next best is possession.

 Bank accounts & life insurance policies (only in La.)  control is only way to
perfect.
 Control of (deposit account) bank account achieved in 3 different ways: [9-
104]
(a) The secured party is the bank with which the deposit account is maintained.
(b) Creditor is not bank maintaining deposit account, so control is obtained
through agreement among debtor, secured party & bank saying bank will follow
instructions of secured party w/o consent of debtor. Agreement must be by
authentic record.
(c) Secured party becomes bank’s customer with respect to account. Ex: secured
party gets his name on the account.

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 Life insurance policies are governed by Article 9 only in LA. Control over life
insurance policy can be achieved if: (1) secured creditor is the insurance company
that secures the policy or (2) the insurance company authenticates a record that they
have notice that the debtor has informed them that the secured creditor has security
interest in the policy.
3. Automatic Perfection
 9-309 lists the types of security interests that are perfected upon attachment.
Kilborn only really talked about 9-309(1).

 9-309(1)  a purchase money security interest (PMSI) in consumer goods


perfects upon attachment.

 Consumer good defined in 9-102(23)  good used or bought for use primarily
for personal, family, or household purposes.

 PMSI  secured repayment of money used to buy the collateral. 2 ways


debtor could be obligated:
(a) Seller sold on credit to debtor, or
(b) Bank loan to buy & use that money to buy the thing. Debtor must actually
use those funds to buy collateral or PMSI is not established. Usually, bank will
issue funds directly to seller of merchandise to assure PMSI status.
• UCC does not cover security interests in some types of collateral. But La. brings
some items omitted in UCC back into its own Art. 9. Under its Art. 9, LA allows as collateral:
1) Life insurance policies
2) Judgments
3) All tort claims (outside La., only commercial tort claims are under Art. 9)  file
financing statement, but collateral description must be specific; best to include any
settlements in description even though it may be proceeds of claim.
4) All bank accounts
• 9-330(d)  to perfect security interest in UCC instrument, you can do so by filing or
by possession, but possession is actually better. Filing instrument only perfects against
certain people. A purchase of an instrument has priority over a security interest in the
instrument perfected by a method other than possession if the purchaser gives value &
takes possession of the instrument in good faith & w/o knowledge that the purchase violates
the rights of the secured party.

• To perfect as to a stock certificate  control, possession, or filing, but control is best


way.
• Note + security agreement = chattel paper which can be perfected by filing or
possession, but possession is better.

• 9-313(f)  party in possession has no duty to acknowledge they hold for the secured
party’s benefit.
E. Land & Fixtures Recording Systems
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• Louisiana’s word for “fixture” is “component part.”
• What is a fixture? UCC drafter deferred to real estate law. They defined “goods” to
be “fixtures” when they “have become so related to particular real property that an interest
in them arises under real property law.
• There may be a battle between the security interest holder in the fixture & the
secured party of the immovable it is attached to. Anything included in immovable property
becomes subject to that mortgage, which extends to after-acquired property. To avoid this
problem, the security interest holder in the fixture files a fixture filing before the fixture is
incorporated into the immovable. These are filed in the mortgage records of most states. In
La., file fixture filing in normal UCC filings.

• Just as you can take a security interest in a note & movable collateral (chattel paper),
you can take a security interest in a note & mortgage. This is called realty paper. Article 9
controls this transaction. Better off taking possession of realty paper, but you can file to
perfect. To foreclose, you must go to mortgage law.
• A right in immovable property is filed in mortgage records.
• To perfect a security interest in shares of stock, you can file in UCC filing, but better
to establish control(put your name on stocks, too) or even better to take possession of stock
certificates.
• Timber on property is component part of land in Louisiana, so file in mortgage
records. If there is a timber conveyance, this makes trees a separate conveyance in LA.
Then, file as fixture filing in UCC filing system.
• Requirements for security interest are very informal. As long as the requirements
are met (debtor has rights in property, value given, & collateral described, debtor signed),
security agreement can even be written on a napkin.

• 9-108 deals with sufficiency of collateral description  Identity of collateral must be


objectively determinable.
F. Characterizing Collateral for Perfection Purposes
Goods (Movables) Documentary Intangible Property
Collateral
Corporeal movables Rights Accounts
Inventory Instruments (Prom. Deposit accounts
Notes)
Equipment Certificates of Deposit Tort claims
Farm products Chattel paper General intangibles
Fixtures Investment property
Negotiable documents
of title
• Goods category is the default category.
1) Inventory  raw materials, works in progress, and goods not yet sold.
2) Consumer goods  includes cars in Louisiana

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3) Equipment  catch-all category (goods that are not inventory, farm products, or
consumer goods). These goods are not used up in the business.
4) Farm products  inventory of farmer. Crops are unprocessed farm products (eggs,
milk, etc.). Once processed, it becomes inventory (ready for sale).
• Documentary collateral are incorporeal rights, but market recognizes that some
document embodies that right.
1) Instruments  include promissory notes, checks & CDs.
2) Chattel paper  evidences both obligation to pay money and security interest or
lease.
3) Investment property  limited to paper investment property in UCC; gold, silver, etc.
are considered goods. Primarily stocks & bonds. Broker usually holds your entitlement
to stock rights in computer; generally no stock certificates anymore.
4) Negotiable documents of title  documents defined in UCC (warehouse receipt, bill of
lading, bailment relationship evidence, etc.)
• Intangible property
1) Accounts  old article 9 defined as debtor’s right to payment when it sells, leases, or
provides services. New article 9 includes old article 9’s definition & adds credit card
receivables, lottery winning, or licensed gambling winning.
2) Deposit account  bank account. Outside La., only commercial deposit accounts are
included. In La., commercial & consumer accounts are included.
3) Tort claims  no judgment or settlement yet. In La., all tort claims covered by Article
9; outside La., only commercial tort claims are covered.
4) General intangibles  catch-all intangible category. Includes right to receive
payment under contract, contract action, settlement agreements, judgments (but only in
La.).

• 9-109(d)(11)  lease of real property is not covered by UCC, so to perfect, file in mortgage
records.
• To perfect in general intangibles, you file in UCC filings.

• 1-201(37)  whether a transaction creates a lease or a security interest is determined by


the facts of each case. Parties will want to structure as lease rather than as security interest
primarily for tax purposes. Lease term: something of value must be left at the end of the lease.
To avoid security interest status, make lease a little short than useful life. Also, to be a lease,
there must be a right in debtor to buy anything leftover at the end of the lease. Amount of rent
is virtually irrelevant. Only question is whether useful life remaining at lease’s expiration.
VI. Maintaining Perfection
A. Maintaining Perfection through Changes of Name, Identity, & Use
• There are 3 main issues:
1) Debtor changes way he is using property

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 Ex: tractors are inventory. After properly perfected, one tractor is converted
to equipment. Now FS just says it covers inventory. Rule: just b/c described
inaccurately in FS does not matter. Can’t rely on how being used to determine if
property is covered by FS. Change in use of collateral does not affect
perfection or attachment.

 § 9-507(b)  A FS is not rendered ineffective if, after the FS is filed, the


information provided in the FS becomes seriously misleading under 9-506.
2) Debtor’s name changes
 For existing collateral, it has no effect. Still effective to perfect collateral up to
4 months after the name change. Will not be perfected as to collateral acquired by
debtor 4 months after name change.

 9-507(c)  if a debtor so changes its name that a filed FS becomes seriously


misleading under 9-506: (1) the FS is effective to perfect a security interest in
collateral acquired by debtor before, or within 4 months after the change; and (2) the
FS is not effective to perfect a security interest in collateral acquired by the debtor
more than 4 months after the change, unless an amendment to the FS which renders
the FS not seriously misleading is filed within 4 months after the change.
 9-507(a) deals with the transfer of the collateral to a new debtor. A filed FS
remains effective with respect to collateral that is sold, exchanged, leased, licensed,
or otherwise disposed of & in which a security interest or agricultural lien continues,
even if the secured party knows of or consents to the disposition. So if debtor
transfers the collateral, & the security interest was already perfected, the perfection
follows the property.
3) Collateral changes form  debtor exchanges collateral
 9-315(a)  secured creditor’s interest continues in thing transferred away &
proceeds in debtor’s hands.

 315(d)  A perfected security interest in proceeds becomes unperfected on


the 21st day after the security interest attaches to the proceeds unless:
1) the following conditions are satisfied: [creditor remains perfected in proceeds
after 20 days after transfer]
(a) a filed FS covers the original collateral;
(b) the proceeds are collateral by which security interest can be perfected
by filing; and
(c) proceeds are not acquired with cash proceeds;
2) the proceeds are identifiable cash proceeds [after 20 days, if collateral is
identifiable cash proceeds, it is automatically & continuously perfected]; or
3) the security interest in the proceeds is perfected other than under subsection
c when the security interest attaches to the proceeds or within 20 days
thereafter. [Most commonly used; if #’s 1 & 2 are not met, you must perfect

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again within 20 days to maintain perfection. If new collateral is covered by
original security agreement, you are OK. Ex: after-acquired clause already
contained in FS.]
B. Maintaining Perfection through Relocation of Debtor or Collateral
• Generally, it does not matter since UCC is pretty much uniform all over US. But
watch out for non-uniform provisions in state law.

• Big change  9-501: where filing should be made. Different in every state.

• Governing law for perfection is law where debtor is located. Where debtor is located
is governed by 9-307.
1) If debtor is individual, located at individual’s principal residence.
2) If debtor is (non-registered) organization & has only one place of business, located at
its place of business.
3) If debtor is (non-registered) organization & has more than one place of business,
located at its chief executive office.
4) If debtor is registered organization, principal residence is state where organization is
registered even if all operations take place in some other state. [9-307(e)] A registered
organization is one that must file paper with state office to organize. [9-102(a)(70)]

• 9-307(c)  only applies if (b) does not give an answer. If subsection (b) does not
apply, the debtor is located in the District of Columbia.
• The same 4-month rule that is used for debtor’s change in name applies to when the
debtor or the collateral relocates.

• 9-301(1)  while a debtor is located in a jurisdiction, the local law of that jurisdiction
governs perfection, the effect of perfection or non-perfection, & the priority of a security
interest in collateral.

• 9-301(2)  while collateral is located in a jurisdiction, the local law of that jurisdiction
governs perfection, the effect of perfection or non-perfection, & the priority of a possessory
security interest in that collateral. [Ignore this provision b/c law of collateral only applies if
possessory.]

• 9-301(3)  all corporeal movables located in jurisdiction, local law governs perfection
of security interest in goods by fixture filing, perfection of security interest in timber to be
cut, & effect of perfection & priority of non-possessory security interests in collateral (this
will not change). [This is land-related.]
C. Maintaining Perfection in Certificates of Title Systems
• Louisiana is the only state that does not require notation of a lien on the face of a
car’s certificate of title. To perfect security interest in car in La., file FS with DMV. Need
VIN#, make, model of car. Secured creditor may not is not required to have lien notes on
certificate of title.
• Cars are outside the certificates of title system of UCC in Louisiana.

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• If debtor moves to a new state, debtor has to get a new certificate of title noting lien
on its face. If not listed & not corrected within the 4-month period, the secured creditor will
become unperfected.
• Outside La., you perfect a security interest in a car by taking the original certificate of
title to the Secretary of State, & ask for the reissuance of title certificate with lien noted on
the face of the title certificate.
• Before a car is given a certificate of title, it is considered inventory of dealer. Dealer
must file FS with Secretary of State.

• 9-316(a)  a security interest perfected pursuant to law of jurisdiction designated in


9-301 remains perfected until (1) the time perfection would have ceased under the law of
that jurisdiction, (2) the expiration of 4 months after a change of the debtor’s location to
another jurisdiction, or (3) the expiration of one year after a transfer of collateral to a person
that thereby becomes a debtor & is located in another jurisdiction.

• 9-316(c)  a possessory security interest in collateral, other than goods covered by a


certificate of title & as-extracted collateral consisting of goods, remains continuously perfect
if: (1) the collateral is located in one jurisdiction & subject to a security interest perfected
under the law of that jurisdiction; (2) thereafter the collateral is brought into another
jurisdiction; and (3) upon entry into the other jurisdiction, the security interest is perfected
under the law of the other jurisdiction.

• 9-316(d)  a security interest in goods covered by a certificate of title which is


perfected by any method under the law of another jurisdiction when the goods become
covered by a certificate of title from this State remains perfected until the security interest
would have become unperfected under the law of the other jurisdiction had the good not
become so covered.
VII. The Creditor-Debtor Relationship
A. Remedies of Unsecured Creditors under State Law
• Very difficult to turn unsecured claim into money, especially against a consumer.
• Unsecured creditor must get a writ of fifa to execute a judgment. Gets sheriff to
seize some property (must be unencumbered & non-exempt) of some value & sells it to
satisfy the debt you were owed. Costs money to enforce your unsecured claim.
• Security interests are contractual way for creditor to enhance its position.
• It is difficult to make a judgment into money b/c of exemption statutes. Certain
consumer property is exempt from seizure of unsecured creditors.

• Louisiana Exemptions  only applies to consumers; does not protect assets of non-
consumers.
1) Debtor’s income  state & federal law protect the debtor’s wages. Generally, a
minimum of 75% of the debtor’s wages for personal services is exempt from seizure. If
debt is alimony or child support, only 50% will be exempt.

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2) Personal property (LA R.S. 13:3881)  no money limitation, but car not exempt
unless used in your job. Exemptions include:
• Tools of trade
• Books of trade
• Clothing, bedding, living room, bedroom, & dining room furniture, etc.
• Family portraits
• Musical instruments played by a family member
• Pets
• Wedding or engagement rings of either spouse, provided ring does not exceed
$5,000 in value
3) Homestead exemption (Title 20)  $25,000 exempt. If there is a mortgage on the
home, the secured creditor is paid first, then the costs of the sale, then the 25,000
exemption, and then the unsecured creditor gets whatever is left, if anything. Also, in
order for the $25,000 exemption to apply, the house must be the debtor’s principal
residence.
• Unsecured creditors cannot invoke self-help remedies. They need a judgment to
proceed against their debtors. If they pursue self-help remedies such as seizing property of
the debtor, they can face criminal liability as well as civil liability to the debtor for
conversion. In Louisiana, even if you are a secured creditor, you cannot invoke self-help
remedies; such remedies are available to secured creditors outside La.
• If assets are non-exempt, especially if highly liquid, unsecured creditor must act fast
to seize.
• Secured creditors have advantages as to
1. debtors  faster enforcement rights on default & leverage points
2. other creditors  unsecured creditors are last in line to get paid
3. also protected in bankruptcy
B. Security & Foreclosure
• Once you establish that you are a secured creditor & the debtor defaults, the next
steps are repossession & foreclosure.
• Enforcing a security interest in movable property is governed by Part 6 of UCC 9.
Immovable property governed by mortgage law.

• UCC 9-601  rights of secured party after default. Options:


1) Renegotiate with debtor
2) Judicial foreclosure  get a judgment on amount owed even though you have a
security interest in specific property. Might do this to get privilege on all debtor’s
property.
3) Pursue foreclosure under Article 9 (should be simpler process than judicial
foreclosure).

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• Once creditor decides to go the Article 9 route, they repossess the property &
prepare it for sale.

 Outside La: 9-609(a)  after default, secured creditor can repossess property by any
means so long as he avoid a breach of the peace. No necessity to involve the sheriff.
However, “breach of peace” is an ambiguous standard, so often, secured creditors do
involve law enforcement in the repossession process.
 Louisiana law strictly prohibits self-help repossession. Kilborn says this is good
policy. Must have official step in & take repossession of property of debtor.
 LA 9-609 says secured creditor can get collateral himself ONLY:
1) If debtor abandons collateral or debtor surrenders collateral to secured party;
[never happens]
2) With debtor’s consent given after or in contemplation of default [cannot agree
as initial matter in security agreement]; or
3) Pursuant to judicial process [get writ of fifa & have sheriff repossess].

 Louisiana developed executory process as the middle ground  instead of having to


get a judgment, take petition with security agreement & other required documents & get
a writ of seizure & sale right away. Then executory process is much quicker & cheaper
than judicial process.
 In Louisiana & outside: if collateral is accounts, creditor can engage in self-help by
notifying account debtor (bank) that he is foreclosing; then account debtor is supposed
to pay secured party rather than debtor.

• 2nd step is foreclosure  legal process of cutting off debtor’s right of redeeming the
property you have seized. Outside La., there is no reason to involve the sheriff in foreclosure
process; only repossession process. Secured creditor in better position to sell property than
sheriff. Kilborn says avoiding self-help foreclosure is not good.
• If a debtor gives creditor a consensual security interest in property, the normal
exemptions no longer apply. They are effectively waived.
• Also, cannot avoid the effects of Article 9 by formatting a sale as a lease. Under 9-
109(a)(1), Article 9 applies to transactions, regardless of its form, that creates a security
interest in personal property or fixtures by contract. As to which transactions give rise to a
“security interest,” the definition of that term in 1-201(37) must be consulted. When a
security interest is created, this Article applies regardless of the form of the transaction or
the name that parties have given to it. 1-201(37) keeps sales that are disguised as leases
from escaping the scope of Article 9. If lessee does not expect to get anything back at end
of lease of value to lease to someone else, it is not a lease, so covered under Article 9. So
such a lease would be re-characterized as a security interest, but the creditor will not
actually have a security interest. So not perfected either against other secured creditors or
other unsecured creditors who have made claims in collateral.
C. Judicial Sale & Deficiency

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• Foreclosure is the way creditor prevents the debtor from exercising his right to
redeem collateral from creditor’s claims. Until foreclosure steps are completed, the debtor
can redeem. [See 9-623] To redeem collateral, a person must tender fulfillment of all
obligations secured by collateral & reasonable expenses & attorney fees. It is very rare for a
debtor to redeem.
• Judicial disposition (required in La.). Outside La., creditor disposition is allowed.
Foreclosure is considered complete upon the sale at public auction.
• At judicial sale, creditor can bid, but in negative dollars (gives debtor credit against
amount owed). Debtor remains personally liable for deficiency in collateral proceeds.
Creditor becomes unsecured as to deficiency though.
• Self-help foreclosure is a good thing b/c it maximizes the price received for collateral.

• If in public sale, there is a 3rd party bidder who bids close to the value of the property,
it is probably best for creditor not to outbid them since cash is always betters than ending
up with property & having to sell it. Avoiding inconvenience of having to sell yourself may
be worth a lot.
D. Article 9 Sale & Deficiency

• If collateral already in hands of creditor, then there is a 2nd way to foreclose using
self-help foreclosure by:
1) Strict foreclosure  keeping collateral in satisfaction of debt, or
2) Sell the property
• Strict foreclosure
 Carefully regulated so debtor is aware of rights he is giving up.
 3 requirements for strict foreclosure:
(a) If creditor is willing to accept collateral for complete or partial satisfaction of
debt, the debtor’s consent must be received. [Cannot have partial satisfaction in
consumer case outside La.] Creditor must send proposal in writing to debtor, &
debtor must consent. Debtor must object in writing within 20 days of creditor
sending proposal; otherwise, the proposal is deemed accepted. If the debtor wishes,
it can assent to strict foreclosure in writing after default w/o proposal by creditor, but
usually the creditor initiates this process.
(b) Creditor must also send notice to anyone else with an interest in collateral of
the proposal. If none of them objects within the 20 days from creditor sending
notice, the strict foreclosure process proceeds.
(c) If collateral is consumer goods, strict foreclosure is not allowed if debtor has
already paid off 60% of original debt; in that situation, the collateral must go up for
auction.
• Next way to foreclose is to dispose of collateral (another self-help foreclosure
process)

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 Under Article 9, the sale can be public, private, in pieces, of the whole, etc…
maximum flexibility available to creditor. However, every aspect of the sale must be
“commercially reasonable.” This is a very vague term.
 Secured creditor has burden of proving reasonableness if debtor asserts sale was
unreasonable.
 Revised Art. 9 gives some guidelines of things that are presumptively commercially
reasonable. This is a safe harbor for creditors. [See 9-627] Just because a better price
could have been chosen does not mean the creditor’s actions were commercially
unreasonable because any way of selling likely better result than sheriff’s sale.
 Creditor can bid at its own sale, but only if public auction. If sale is private, creditor
can bid if collateral is of kind sold in really wide market where prices determined by
actors in market (ex: stock & commodities markets). Can then bid at public commodity
price.
 Before sale takes place, creditor must give notice to others with interest in the
collateral.
 In disbursing the sales proceeds, the expenses of sale are paid first. Then, the
secured creditor is paid for everything he is owed (including administrative expenses,
interest, etc.). Then, if anything is left, debtor gets balance, but this will seldom produce
a surplus to pay debtor. [9-615]
 If creditor doe not follow rules for sale, the creditor loses the right to seek deficiency,
either in whole or in part. The sale itself is not set aside. [9-625 & 626]
 9-613 & 9-614 set out forms for giving notice to other interested creditors of sale.
 If the sale of property results in a surplus over the amount the creditor is owed, the
balance goes back to the debtor. Then, the debtor can decide whether to distribute to
unsecured creditors. If secured creditor pays surplus to unsecured creditors, the secured
creditor will have committed conversion.
 Notice of sale can be waived by the debtor, but only after the default, not before. [9-
603] It is best to send notice & be done with it even though it may not serve any real
purpose.
VIII. The Treatment of Secured Creditors in Bankruptcy
• Secured creditors have guaranteed protections in BK.
• Once BK has been filed, creditors cannot file suit or try to recover through self-help
remedies. The creditor can only file a one-page proof of claim.
• Calculating Amount of Unsecured Claim:
 It is the amount owed of the debt outside BK as of the moment the BK petition was
filed.
 Attorney fees accrued prior to BK are only included in claim if the contract between
debtor & creditor so provided.

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 Interest accruing once BK is filed is NOT included in claim. Also, post-petition
attorney fees not included either.
• Once an unsecured claim is calculated, chances are slim to none to his actually collecting
much of his claim. Once secured creditors are paid, the remaining assets of debtor (non-
exempt) are pooled. Then unsecured claims are paid pro rata from this balance of assets.
[(unsecured claim /total unsecured claims) * total assets of debtor remaining after paying
secured creditors & exemptions]
• Calculating Amount of Secured Claim:
 Determine amount owed outside BK including pre-petition interest & attorney fees (if
included by contract).
 Then, the secured creditor’s claim is limited to the value of the collateral. All excess
over the value of collateral is unsecured claim.
 Post-petition attorney fees & interest can only be accrued to the extent that the
value of the collateral exceeds the secured claim (oversecured creditor).
• After confirmation, the interest rate set by the court will determine what rate of interest the
debtor owes the secured creditor as he pays off his debt to secured creditor.
IX. Competitions for Collateral
A. Lien Creditors Against Secured Creditors: The Basics

• 9-203: Attachment & enforceability of secured interest  secured interest when last
of these 3 occurs:
1. Value given
2. Debtor has rights in collateral
3. Debtor has authenticated security agreement providing description of collateral.
• Attachment occurs when security interest becomes enforceable. Attachment creates
rights of secured creditor against the debtor.
• In order to protect against other creditors, the secured creditor must perfect the
security interest. Generally perfect by filing FS. Exceptions: automatic perfection of PMSI in
consumer goods; deposit accounts require control to perfect.

• Rules Governing Priority  §§ 9-317 & 9-322

1. As between 2 unperfected security creditors  1st to attach wins.


2. 2 subparts:
a. As between a perfected & unperfected secured creditor  perfected one wins
regardless of timing of attachment.
b. As between a lien creditor & unperfected secured creditor  lien creditor wins.
Exception: If only reason not perfected is that attachment has not occurred b/c value
not yet given, as long as FS filed, the unperfected secured creditor still wins.
 Lien creditor must get judgment attached to property to have priority. Until
attachment, a lien creditor is not secured.

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 Suppose FS filed & security agreement signed but no value given yet. Then
judgment creditor executes lien on property. Then value given by secured
creditor. Now attachment of secured creditor’s claim occurs & perfection
relates back to filing date. Outside LA, secured creditor beats anyone whose
rights arose after filing of FS. In LA, need consensual security agreement & FS
to beat lien creditors.
3. As between 2 perfected secured creditors  1st to file or otherwise perfect wins.
• Exception to rules  9-317(e)

 Any PMSI perfected within 20 days of the debtor receiving the collateral beats all
other creditors. The law allows this to encourage secured creditors to finance the sale of
new goods.
 However, if the goods the debtor is acquiring are inventory, there are special rules
applicable.
 A PMSI in consumer goods is automatically perfected; if not consumer good, you
must perfect PMSI in 20 days to beat everyone.
 PMSI priority only beats people whose rights arise after attachment but before
perfection.
B. Lien Creditors Against Secured Creditors: Future Advances
• Hypothetical problem: Bank gives X a loan for $20,000. Loan secured by collateral
worth $30,000. Security agreement contained a future advances clause, which says that
the collateral secures any future advances of creditor to this debtor. Must be included in
security agreement; it does not arise as a matter of law. A few days later, a $7,000 lien
arises. Debtor then gets another $10,000 loan under the future advances clause. Secured
creditor is then perfected as to both loans secured by the $30,000 collateral. This is
considered fair according to 9-323 (b). The perfected secured creditor will win unless:
1) Advance made 45 days after lien arises, AND
2) Secured creditor had knowledge that lien exists (actual knowledge required). BOP
likely on judgment creditor to prove knowledge of secured creditor.
C. TIB Against Secured Creditors: The Strong Arm Clause
• TIB has same rights as a lien creditor. Has priority over unperfected & improperly
secured creditors. The TIB is the creditor secured creditors fear most.
• TIB represents all unsecured creditors. His job is to collect as many assets as
possible, sell them, & distribute proceeds to unsecured creditors. TIB looks for technical
errors of secured creditors in attachment or perfection to destroy their secured claims.
• At BK, all activity is stayed by operation of law to improve a creditor’s position.

• § 544(a) of the BK code is the Strong Arm Clause  The TIB beats secured creditor
not properly perfected.

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• Cannot perfect after BK day; violates automatic stay. Secured creditor would be
treated as unsecured. Any action violating the § 362 automatic stay is void (not just
voidable).
• If FS lacks some information or contains errors, it will be deemed effective as long as
it is not seriously misleading. If search under legal name of debtor will pull up the FS, it is
not seriously misleading.
• FS only effective for 5 years; then to maintain, you must file a continuation. If FS
expires after BK day, you cannot file continuation b/c of automatic stay, but lapse of FS will
not be effective as to the TIB; it would be effective retroactively to purchasers.
• If security agreement lacks a collateral description, the security interest did not
properly attach by BK day, so security interest becomes unsecured claim.
• If PMSI is not filed by BK day, there is an exception: You have up until 20 days to
perfect & deemed perfected as of purchase. This creditor is protected against TIB.
• Cannot levy on property after automatic stay has kicked in.
D. TIB Against Secured Creditors: Preferences
• Generally, BK Code § 547(b) allows the TIB to avoid some security interests as preferences.
Policy: don’t want creditors putting pressure on debtors close to BK time to get a preference
over unsecured creditors.
• 2 issues:
1) Is there a preference as defined in § 547(b)?
2) If yes, does the preference fit into an exception making the preference unavoidable
under § 547(c)?
• To be avoidable, a transfer must be a preference, which has 6 required elements:
1) Transfer
2) To a creditor
3) On account of an antecedent debt  debt arising before the transfer of the security
interest ( party receving transfer must have been a creditor before the transfer).
4) While the debtor was insolvent  there is a presumption that debtor is insolvent 90
days before BK filing. Creditor must affirmatively prove solvency to escape the
presumption’s application.
5) Within 90 days of debtor filing BK  the period is one year if you qualify as an
insider. The actual transfer of the security interest must be within 90 days, not the
actual loan. [Insider defined in BK code § 101.]
6) Allowing the creditor to be better off than without the transfer  creditor receives
more in transfer than he would in BK (liquidation).
• The transfer of a security interest is made when the security interest is perfected (normal
rule). But if the security interest is perfected within 10 days of attachment, then the
security interest is deemed transferred at attachment, so if you perfect within 10, it is not a
preference since no antecedent debt.

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• 547(c) exception to preference rules: if PMSI is perfected within 20 days of debtor receiving
collateral, then it is not an avoidable preference.
E. Secured Creditors Against Secured Creditors: The Basics

• The general rule regarding priority among secured creditors is found in 322(a)(1)
 Between the holder of 2 security interests in the same collateral, first to file or perfect
wins. If neither is perfected, the 1st to attach wins.
• If PMSI in goods other than inventory is perfected within 20 days of delivery of collateral to
the debtor, the PMSI has priority over a conflicting security interest in the same collateral.
[324(e)]
• As between 2 PMSIs, 324(g)(1) gives the seller’s PMSI priority over the cash-lender’s PMSI.

• If PMSI is in inventory  324(a) permits PMSI priority in inventory only on these conditions:

 The PMSI must be perfected when the debtor takes delivery to beat other secured
creditors, AND [There is no relation back period.]

 The PMSI financier must give advance notice to the inventory lender that it expect to
acquired a PMSI in the inventory. To give this notice, the PMSI lender must 1 st search
the filing system for the name & addresses of all secured parties with a filing against
inventory of the type it plans to sell. The lender then sends a notice, to each of the
inventory lenders. The notice expires at the end of 5 years.
• PMSI would normally extend to collateral & its proceeds, but for inventory, the superior
priority of PMSI only extends to instruments, chattel paper, & identifiable cash proceeds
received by the debtor prior to delivery of inventory. This limitation prevents PMSI status
from flowing into other kinds of proceeds, most notably accounts.
• You cannot get a PMSI in accounts, but you can have customer sign notes evidencing the
accounts which will qualify as instruments, allowing you to get PMSI in proceeds of
inventory.
• 325 subordinates security interests perfected against transferee to those perfected against
the transferor. [Security interest created by debtor is subordinate to security interest
created by someone else.]
• If secured creditor gets new collateral but the previously filed FS description will cover that
collateral as well, there is no need to file another FS even if a new security agreement is
required. Priority will relate back to filing of that FS.

• Accessions  goods combined but neither losing their separate identity. Ex: engine put in
car. Both pieces are accessions; both combined called the whole in Art. 9. May present a
secured creditor battle. The 1st to file or perfect in either of accessions will win as to the
whole. But security interest noted on title certificate in car beats all. You can’t remove the
accession if removal will destroy the whole.

• Commingling  goods combined to lose individual identity. End product: the mass. Ex:
sugar & eggs in donuts
 SI in goods carries over into the mass & mass itself may be subject to SI.
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 1st to file or perfect in products or mass wins.
 As between the secured creditors of commingled goods  perfection in commingled
goods is not possible after the commingling. 1 st to perfect as to their individual good
wins against mass, if filed before the goods combination.
 If both commingled goods creditors were perfected before combination, then they
share ratably in proportion to value of their respective goods to the mass. [Can never
get more than they are actually owed though.] Ex: Sugar ($400) + Eggs ($200) =
Donuts ($900). Who gets the $900? If both are perfected before the combination,
they each share ratably, so the sugar creditor gets 400/600 * 900 = $600. Eggs
creditor gets 200/600 * 900 = $300.

• Hypo: On 1/1, Bank One files. On 1/5, Bank Two filed, signed security agreement, &
advanced money. On 1/7, lien creditor comes in. On 1/10, Bank One signed security
agreement & advances money. Who has priority? Bank One beats Bank Two b/c Bank One
was the first to file or perfect as between 2 secured creditors under 322. Bank Two beats
lienholder b/c they filed & perfected before the lien arose. In LA, the lienholder beats Bank
One. 322 is not applicable to lien holder. In LA, the lienholder beats Bank One b/c Bank One
had not yet filed & gotten security agreement before the lien arose. Outside LA, Bank One
would beat lien holder, b/c all secured creditor has to do outside LA to beat lien creditor is
file. Rule in LA: as between secured creditor & lien holder  first to perfect or file & get a
security agreement wins. As between 2 secured creditors, the 1st to file or perfect wins.
F. Buyers Against Secured Creditors

• General Rule  if debtor sells collateral subject to a security interest, SI & perfection follow
collateral into hands of buyer. However, under 9-315(a)(2), a SI does not continue in the
collateral is the secured creditor authorizes the disposition free of the SI.
• 2 important exceptions:
a) 9-317  buyer of tangible collateral beats an unperfected secured creditor if they pay for
& take delivery of collateral before perfection.
b) 9-320(a)  buyers in the ordinary course of business take free of even perfected security
interests. Buyer in ordinary course defined in 1-201. 5 elements of this definition
1) buyer in ordinary course of business
 new value must be given for the thing
 Forgiveness of money debt is not new value; new value can be
cash, note, or even promise of future services.
 buyer must buy in good faith (no dishonesty)
 buyer cannot have knowledge that the sale violates someone else’s SI
rights in collateral
2) collateral must be inventory in hands of seller (seller must be in business of
selling this type thing)
3) SI of which the buyer takes free of must have been created by the buyer’s seller.
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Ex: creditor finances manufacturing facility that makes forklifts. Buyer 1
(distributor) can be a buyer in ordinary course. SI of creditor was created by
buyer 1’s seller. Buyer 2 is consumer. Assume B1 is not a buyer in ordinary
course. B2 cannot be a buyer in ordinary course b/c the creditor’s SI was not
created by B2’s seller. If B1 took free of the SI as a buyer in ordinary course,
there is no SI for B2 to worry about.
4) Thing bought cannot be farm products
5) Thing has to be in seller’s possession; cannot be in creditor’s possession.

• Garage Sale Exception  if consumer sells goods to another consumer, the 2nd consumer
could take free of all SI if no knowledge of SI & creditor was not perfected.
• If SI is perfected & follows the collateral into a buyer’s hands, the secured creditor can
repossess the collateral & is not responsible for refunding buyer’s money since cash is
proceeds of collateral. Buyer then likely has an action against his seller for lack of
merchantable title.
G. Competition Involving Federal Tax Liens: The Basics
• Tax liens arise against the debtor as soon as the tax is assessed. Also, the normal
exemptions from seizure are not applicable to the IRS. There are more limited exemptions
from tax seizure.
• Tax liens attach to all debtor’s property & rights to property, whether real or personal. So it
reaches all property the debtor owns.
• Tax liens are perfected only when the notice of tax lien is filed. In LA, filed in like a security
interest with clerk of court. Once perfected, the perfection relates back to the assessment
time.
• Priority:
 A filed tax lien beats all unperfected secured creditors.
 Before tax lien is filed, tax lien loses to perfected secured creditors who perfected
before the tax lien was filed, judgment creditors who have levied already, and
purchasers who have completed their sale.
 A properly perfected mortgage beats a tax lien filed after, especially to property
already owned by debtor when it was filed.

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