INTRODUCTION

Why Secured Credit?

● Business lending
○ Unsecured creditors face risk that financial position of their borrowers may
deteriorate
■ Transaction costs: unsecured creditors must carefully monitor their
borrowers
● Covenants
● Restrictions on investment activities
● Inventory Financing
○ When a lender finances the seller’s acquisition of inventory (cars) and takes a
SI in the acquired inventory and its proceeds
○ Type of asset based loan
● Consumer lending
Scope of Article 9
● Pre-Revision A9 (1960s)
○ Created to bring uniformity to commercial law + create a single
comprehensive scheme for regulation of SIs
■ Problem: individual states had differing commercial practices/law
○ Where adopted, A9 explicitly supercedes all prior legislation dealing w/ what
had been a series of traditional devices to create a SI in personal property
● 1998 Revised A9
○ All states have adopted Revised A9
○ 9-101
■ Official Comment 1: This article supersedes former UCC A9
○ 9-109(a)(1): this article applies to transactions, regardless of form, that create
a SI in personal property or fixtures by contract
■ What was a chattel mortgage, pledge, etc is now simply an A9 SI
Basic Policies
● Protection of Lenders Complying with Code
○ §9-201: Code guarantees lenders that their security interests will be protected
if they:
■ Follow its language, and
■ Avoid the exceptions therein.
● Prevention of using Systems outside the Code for Protection
 ○ §9-310: provides that, w/ certain specific exceptions, a “financing statement
must be filed to perfect all security interests and agricultural liens.”
○ All inclusive àthis is only way to perfect and protect yourself as a lender
Definitions
● Security Interest [§1-201(b)(35): an interest in personal property or fixtures which
secures payment or performance of an obligation.
● Secured Party [ :
● Debtor [§9-102(a)(28)]:
● Obligor [ :
● Security Agreement [§9-102(a)(74)]: an agreement that creates or provides for a
security interest.
○ A security agreement is the “bargain” of the parties “in fact” [see §1-201(3)]
○ As a practical matter, speakers and writers have gotten into the habit of using
the term “security agreement” to mean a concrete object—a writing that
embodies the intangible but real legal construct of agreement.

ATTACHMENT
Attachment & Perfection
● Attachment: how debtor and creditor create a SI in the debtor’s collateral (SI
becomes “enforceable”)
○ ONLYeffective between the 2 parties
● Perfection: how a creditor makes the security interest in the debtor’s collateral good
against the rest of the world
○ EFFECTIVEbetween the creditor and other creditors (perfected/unperfected)

Security Agreement and Financing Statement

● 2 primary documents used in A9 financing transactions
○ Security Agreement: a contractbetween the debtor and creditor that specifies
the rights and duties of the parties regarding the collateral
■ REQUIRED to for SI to “attach”
■ VERY specific
○ Financing Statement: documentcontaining certain information about creditor’s
SI
■ GENERALLY used to accomplish “perfection” (but not always)
■ May be very general
Why Attachment?
● Attachment [§9-203(a)]: the moment a security interest has been created and
becomes enforceable between the 2 parties—the debtor and the secured party—w/
respect to a piece of property
 ○ SI is not effective against the Debtor until it has “attached”
■ If SI hasn’t attached, creditor is fucked if debtor defaults
○ Creditor cannot perfect SI against EVERYONE ELSE unless it has “attached”
■ If SI hasn’t attached, creditor is fucked against EVERYONE ELSE too
Requirements for Attachment
● Attachment Requirements
○ §9-203(b): SI is enforceable against debtor/3rdparties only if 3 criteria are met:
■ Value was given by the secured party to the debtor [(b)(1)];
■ The Debtor has “rights in the collateral” [(b)(2)]; and
■ One of the following has been met:
● The debtor authenticated a security agreement covering the
collateral and giving a security interest in it to the secured party
[(b)(3)(A)] (Security Agreement)
● Collateral is not certificated security and it is in the possession of
the secured party[(b)(3)(B)](Possession)
● Collateral is a certificated security in registered form and the
security certificate has been delivered to the secured party[(b)(3)
(C)] (Possession)
● Collateral is deposit accounts, electronic chattel paper, investment
property, or letter-of-credit rights and the secured party has
controlof it [(b)(3)(D)] (Control)
○ Timing: when does a Security Interest attach?
■ § 9-203(a): a security interest attaches to collateral when
● it becomes enforceable against the debtor with respect to the
collateral [that is, when all of the criteria of (b)(1), (2), and (3)
have been met]
○ UNLESS an agreement expressly postpones the time of
attachment
■ Coexistence required: SI “attaches” as soon asit becomes enforceable
against debtor
○ Enforceable: a security interest that has “attached”
● Value
○ Contract Theory (§9-203(b)(1): Security Interests are given in exchange for
“value”
■ You don’t get a SI in another’s party for being a nice guy
■ Usually an advance of money or delivery of goods, but may be anything
satisfying the §1-204 definition of value
○ Value [§1-204]: a creditor gives value for a SI in debtor’s collateral by
acquiring the rights:
 ■ In return for immediate extension of creditor binding commitment to
extend credit in the future;
■ As security for, or in partial satisfaction of, a preexisting claim;
■ By accepting delivery under a preexisting contract for purchase; or
■ In return for consideration sufficient to create a K.
● Rights in the Collateral
○ §9-203(b)(2): To grant a security interest in collateral, debtor must have some
ownership interest in or right to obtain possession of the collateral
■ Test: for a Security Interest to “attach,” the debtor must have
● “rights in” the collateral, or
● the power to transfer rights in the collateral + possession of the
collateral
■ Rights in the Collateral [§1-201(36)]: defines rights as an
● Ownership interest in the collateral,
● Right to obtain possession of the collateral,
● INCLUDING remedies.
○ §9-401(b): Security Agreement cannot restrict debtors rights in the collateral
■ Such an attempt is unenforceable
● Authentication
○ Debtor must “authenticate” or “sign” a security agreement
■ Security Agreement does not have to be in writing
● Security Agreement may be either a
○ writing (as required by old A9), or
○ record (as required by revised A9)
■ If Security Agreement is a
● Record a debtor must AUTHENTICATE
○ Record [§9-102(a)(70)]: information that is
■ inscribed on a tangible medium or which is stored in an
electronic medium, and
■ retrievable in a perceivable form.
○ Authenticate [§9-102(a)(7)]: to “sign” or, w/ present intent to
adopt or accept a record, to attach/logically associate w/ the
record an electronic sound, symbol, or process
● Writing a debtor must SIGN
○ Old A9 required Security agreement be a “writing” [see §1-
201(46)]
○ What if creditor forgets to obtain a formal security agreement, yet they file a
financing statement anyway?
■ Composite Document Rule: more than one document, read together,
may satisfy §9-302(b)(3)(A)
 ● BUT ANYTHING NOT INCLUDED IN FINANCING
STATEMENT CANNOT “PERFECT”
● §9-402: a security agreement may serve as a financing statement if
it is signed by both parties
● In re Bollinger Corp
● Description of Collateral
○ In re Grabowski
■ §9-108: Test for Sufficiency of Description of Collateral
● (a) Description of personal or real property collateral is sufficient,
whether or not specific, if it reasonably identifiesthe collateral
○ Only a supergeneric description (e.g., “all debtor’s assets) is
insufficient
○ Must identify collateral by “category” or by “type”
○ (d) a securities account or commodities account must be
described specifically
● 2 lenders file financing statements perfecting their SIs.
○ BOA filed first, describing collateral in general terms and
listed business address rather
● After-Acquired Collateral
○ General Rule [§9-204(a)]: a SI applies not only to collateral the debtor owns
at the time the SI is granted but also to later-acquired collateral IF the parties
include the phrase “now owned or hereafter acquired” in the Security
Agreement
■ No need to include “now owned or hereafter acquired” phrase for SIs in
“inventory” or “accounts receivable”
● In re Filtercorp, Inc.
○ Holding: The law presumes that SIs in “inventory” or
“accounts receivable” include after-acquired inventory or
accounts receivable
■ UNLESS there is evidence of intent to the contrary
○ §9-204(b) – After-Acquired Property Clause Ineffective for
■ Policy of making it easy for creditors to take SIs in after-acquired
property doesn’t extend to
● (b)(1): consumer goods
● (b)(2): commercial tort claims
● Proceeds
○ The description of collateral in the SA AUTOMATICALLY covers proceeds
■ §9-315(c): a perfected SI in the original collateral AUTOMATICALLY
continues in the proceeds whether or not the financing statement
mentions proceeds.
 ■ §9-315(e)(1): SI in proceeds continues until the financing statement
either(1) lapses or (2) is terminated, so long as the proceeds are
● collateral in which a SI may be perfected by filing in the office in
which the FS is filed, and
● not acquired w/ cash proceeds (§9-315(d)(1)
■ §9-315(d)(2): SI in cash proceeds continues indefinitely sol long as they
can be identified
■ §9-315(d)(3): if debtor uses cash proceeds to buy new collateral (e.g.,
inventory and equipment), the SI continues in the collateral for only 21
days
● UNLESS the financing statement indicates the type of collateral
purchased
○ SP must amend the FS w/in 21 days
○ Supergeneric descriptions (“all personal property of the
debtor”) usually covers collaterl purchased by proceeds
● Example: M has SI in W’s car. W sells car for $3k. M has SI in the
$3k. But if W uses the $3k to buy new collateral, M has a SI in it
only if it is the same type described in the original FS
■ If none of §9-315(d)’s conditions are satisfied, the secured creditor must
file a new FS/amend it w/in 20 days
■ Proceeds [§9-102(a)(64)]
● Bona Fide Purchaser (BFP): good faith purchaser
○ Where a 3rdparty BFP(one who in good faith gives value for an item w/o
knowledge it is subject to a perfected SI), the BFP gets top priority
● Value and Rights in Collateral
○ A debtor may have rights in the collateral in cases in which it has less than the
full bundle of ownership rights
○ Swetes Motor Sales, Inc. v. Pruisner

PERFECTION
What is Perfection?
● UCC does not include a definition of perfection
○ Perfection: §9-317 indicates perfection is a set of actions that, when complied
w/, give the SP priority over other 3rdparties w/ an SI in the same collateral.
● To protect its SI to the full extent A9 will allow, a Secured Party must ensure:
○ The security interest has “attached”, and
○ The security interest has been “perfected”
Why Perfection?
● Significance of Attachment
○ A SI that has “attached” is effective between the debtor and the secured party.
 ■ Attachment gives the Secured Party the right, should the debtor fail to
meet its underlying obligation, to get paid what is owed by:
● taking control of the collateral (repossession if necessary), and
● reselling or otherwise disposing of it for gain, retention of the
proceeds, etc.
■ Problem: attachment is NOT enough
● §9-317 Comment 2: section lists parties w/ priority over
unperfected SI
○ For secured creditor, holding an unperfect SI is not ideal
○ Significance of Perfection
■ §9-317(a)(2):“perfected” SI is effective against the world, w/ certain
exceptions.
● Perfection ensures that, should the creditor default, the Secured
Party has better rightsto the collateral than other 3rdparties who
claim a SI in it
■ §9-308
● Comment 2: after perfection, secured party is generally protected
against
○ Creditors and transferees of the debtor, and
○ Any representative of creditors in insolvency proceedings
instituted by or against the debtor
● Perfection is NOT perfect
○ But it gives the secured party the most favorable interest and priority A9
allows
Classification of the Collateral
● Identify the Collateral (as precisely as possible)
○ Identify it in Real Terms
○ Establish how the collateral at issue is to be characterized under A9
■ Pre-Revision: any collateral had to fit w/in one of a handful of types
■ Revised A9: drafters added to the classification scheme a number of new
collateral types
● §9-102(a)
Methods of Perfection
● §9-308
○ (a): A security interest is perfected when it attaches if the applicable
requirements are satisfied before the SI attaches
■ Attachment: a SI cannot be perfected unless/until it has attached.
● The time of perfection can be simultaneous w/ the time of
attachment or it can be some time afterward.
● Perfection can never precede attachment.
 ○ (c): a security interest or agricultural lien is perfected continuouslyif it is
originally perfected by one method under this article and is later perfected by
another method under this article, w/o an intermediate period when it is
unperfected – Comment 4
● 4 Methods of Perfection
○ File a Financing Statement [GENERAL RULE: §9-310 Comment 2]
○ Taking Possession of the Collateral
○ Taking Control over the Collateral
○ “Attachment” of the Security Interest (“Automatic” Perfection)
METHOD 1: FILE A FINANCING STATEMENT [§9-310]
● General
○ Financing Statement: a document that
■ Notes the Secured Party’s interest, and
■ Generally describes the type of collateral included under the Security
Agreement
○ Most common method of Perfection
○ General A9 Principle [§9-310(a)]: a financing statement must be filed to
perfect all SIs governed by A9, EXCEPT as provided in §9-310(b) and §9-
312(b)
■ Comment 2: financing statement is generally required to perfect SIs &
agricultural liens
● The other 3 Methods of Perfection are exceptions
■ Filing is a permissible means of perfection in virtually all collateral
● Exceptions -- filing is insufficient to perfect an interest in
○ §9-312(b)(1): deposit accounts
○ §9-312(b)(3): money
● Filing is the only means of perfecting a SI in:
○ Accounts
○ General Intangibles
○ NOTE
■ §9-502(d): can file FS even though you don’t have a security agreement
to save time
● Requirements
○ Create Initial Financing Statement [§9-502(a)]: Secured Party must create an
Initial Financing Statement meeting the criteria of §9-502(a)
■ Initial Financing Statement (UCC1)
● Creation: an initial financing statement must be created in proper
form, either on paper or electronically
● Submission: an initial financing statement must be submitted to the
proper filing office
 ■ Sufficiency of Initial Financing Statement
● UCC1 MUST PROVIDE:
○ The Debtor’s Name,
■ *see §9-503
○ The Secured Party’s Name, and
○ Indication of the collateral that it is meant to cover
■ *see §9-504
○ Criteria for what must be in initial financing statement
■ §9-502(a)
■ §9-516(b)
● PROPER FORMAT
○ Form UCC1 must be properly filled in
○ UCC1 must be accepted by a filing office
■ §9-516(b): a filing office that accepts written records
may not refuse to accept a written initial financing
statement in the following form and format except for a
reason set forth in §9-516(b)
○ Submit Initial Financing Statement [§9-516]: Secured Party must file Initial
Financing Statement by “communication of a record under §9-516”
■ §9-516(a): except as provided in subsection (b), filing constitutes
● communication of a record to a filing office, and
● tender of the filing fee or acceptance of the record by the filing
office constitutes filing.
■ Record need not be in writing (see §9-521(a) for electronic filing)
● Comment 2 (§9-521): forms laid out in the section are not
mandatory but filers are strongly “encouraged” to use them
○ Purpose: reduce errors inperfection– forms have places for
debtor’s name, SP’s name, and indication of collateral
○ §9-516(b)(3)(c)
● Best Practice: filer should get evidence—an acknowledgement—
that this official filing was carried out as it had to be.
○ §9-523(a)(b): filers are entitled to request and receive an
acknowledgment showing:
■ the unique filing number assigned to it, and
■ the date and time of filing
■ §9-509(a): a person may file an initial financing statement only if debtor
authenticated a record
■ §9-504: supergeneric financing statements are OK, while supergeneric
security agreements are not
■ Progrowth Bank Inc. v. Wells Fargo Bank NA
 ● Global One Bank (GO) lent money to debtor, filed FS w/ wrong K
number and wrong issuer of the K – then files second FS
correcting number but still w/ wrong issuer.
● Debtor gets a different loan from another bank who files FS and
then claims it has priority bc GO’s FS was misleading.
● Holding: GO’s description contained errors but the statements
weren’t materially misleading bc they
■ Proceeds
● §9-315(c): a perfected SI in the original collateral automatically
continues in the proceeds, whether or not the FS mentions proceed
○ §9-315(e)(1): Filed FS covers the proceeds until the FS either
lapses or is terminated
● §9-315(d)(2): SI in cash proceeds continues indefinitely, so long as
they can be identified.
○ If debtor uses cash proceeds to buy new collateral, such as
inventory or equipment, the SI continues in the collateral for
21 days
■ UNLESS the FS indicates the collateral purchased
■ Name of Debtor Rules
● Financing Statements are indexed under the name of the debtor
○ THUS, if a FS contains an incorrect name of the debtor,
searchers will be misled and may not find the FC
àTHEREFORE, FS may not serve its purpose
● §9-503: FS sufficiently provides the name of the debtor if:
○ It gives the name of the individual, not the trade name (when
debtor is an individual)
○ It gives the name of the partnership, not that of the other
partners (when debtor is a partnership), or
○ It gives the name of the organization indicated on the public
records (if the debtor is a corporation)
● Minor Errors Rule
○ A financing statement that fails to sufficiently provide the
name of the debtor in accordance w/ §9-503 is seriously
misleading
■ BUT if other creditors find the correct name (and FS),
they FS did its job, so the party gains priority
● Pankratz Implement Co. v. Citizens National Bank
○ Pankratz attempted to perfect SI but misspelled name. Bank
later attempted to perfect SI in same property, correctly
spelling name.
 ○ Holding: a FS that fails to correctly provide the name of the
debtor is seriously misleading, but it yields priority if another
creditor still manages to find the FS in the database
■ §9-506(b):
● error in the name of the debtor is SERIOUSLY MISLEADING
● error in the name of the secured party is not seriously misleading
■ Electronic Filing
● A9 is “medium neutral” (comment 4h)
○ Revised A9 allows for paperless filings of UCC1
○ §9-525(a): incentivizes electronic filing by providing for
lower filing fees when the filing is other than in writing
● Electronic filing process
○ Fill in Electronic Form (either on computer or special
terminal):
■ Filer provides essentially the same information required
by the paper forms in §9-521
○ Send Electronic Filing Form to Filing Office:
■ Filer transmits info to filing office from a computer at
the office

A9 Filing System - Practicalities

● A9 filing system provides a current listing of
○ what’s on file, and
○ what A9 Security Interests are or may be claimed in a particular debtor’s
property
● Purpose: give noticeof claims made on debtor’s property to other creditors
○ A9 filing scheme assumes financing statements are filed or indexed according
to the Debtor’s name.
■ If Searcher can’t find the debtor by searching his correctname, the
financing statement
● is seriously misleading, and
● it failed to accomplish its purpose
■ Debtor’s Name must be written correctly to ensure the FS
● meets the first criteria of §9-502(a) [that it provide the name of the
debtor], and
● perfects the SI
■ If Debtor’s name is incorrectly rendered, FS won’t perfect the SI
● UNLESS it is a “minor error” and not “seriously misleading
● Mistakes Happen (A9 knows mistakes happen and tries to be friendly to them)
○ §9-506(a): a financing statement substantially satisfyingthe requirements of
this part is effective, even if it has minorerrors or omissions,
 ■ UNLESS the errors/omissions make the FS seriously misleading.
○ In re Hergert
■ A filing officer SHALL refuse to accept a financing statement if it is not
in compliance
● Entitled to reject if it lacks SP’s name or mailing address
■ Name
● A FS substantially satisfying these requirements is effective, even
if it has minor errors or omissions, unless the errors or omissions
make the FS seriously misleading
○ FS that fails to provide the name of the debtor so a search
will in the database will pull it up is seriously misleadingfor
failure to alert other creditors
■ Address
● Function of address is not to identify the SP but, rather, to provide
an address to which others can send required notifications
■ The absence of the correct name or address is grounds for the filing
officer to reject the FS, but if he accepts it the statement will be effective
● Where to File
○ What Office of the State (central or local) should the filing be presented to?
■ Central Filing (BASICALLY 99.999% of Time)
● §9-501(a)(2): Generally, FS is filed in the “Office of the Secretary
of State” (Central Filing)
○ Comment 2:Revised A9 dictates “central filing” for most
situations, while retaining local filingfor
■ real-estate related collateral, and
■ special filing provisions for transmitting utilities
○ Use central filing for:
■ Initial financing statement
■ Amendments
■ Continuation statements
■ Termination statements
■ Types of Records Filed
● Initial Financing Statement
○ Lapses after 5 years UNLESS continuation statement is filed
● Amendment
○ Includes continuation or termination of an existing financing
statement, adding or deleting collateral, or otherwise
changing the information provided
○ If amendment adds collateral or an additional debtor to a
financing statement, the debtor must authorize the filing
● Continuation Statement
 ○ Extends effectiveness of FS 5 years
■ Runs from time FS would have become ineffective
■ CANNOT be filed until 6 mo before FS expires
● If not filed w/in that period, ineffective
● Termination Statement
○ When obligation is paid in full, the debtor may demand that,
w/in 20 days, the SP send debtor a termination statement or
file the termination statement itself
■ No duty to send UNLESS debtor demands one
● Assignment
○ SIs are frequently assigned
○ Example
■ Dealers often take a SI in goods sold and almost
immediately assign the SI to a financer
● FS is commonly filed by the assignee w/ its name
and address as the secured party
■ Original SP becomes the SP of record by filing the
original FS
● Then assigns the SI to an assignee and reflects this
by filing an amendment
● When filing FS becomes effective
○ Filing office indexing errors
■ If the filing office does not correct the record after it is
received
○ Duty of Filing Office to accept or reject FS
■ §9-516(b): filing office shall refuse to accept a FS for a
reason set forth in §9-516(b) and may refuse to accept a
FS only for reasons set forth in §9-516(b)
● THUS, filing office may not impose conditions or
requirements other than those stated in §9-516(b)
■ Local Filing (ALMOST NEVER)
● In rare circumstances, the financing statement is at the county or
town level (Local Filing)
○ In which state is the filing to be made?
■ §9-501(a): filing should be done in the state whose version of A9 we are
consulting “if the local law of this State governs perfection of a security
interest or agricultural lien”
○ Which state’s law governs issues of perfection?
■ General Rule [§9-301(1)]: except as otherwise provided, while a debtor
is located in a jurisdiction, the local law of that jurisdiction governs the
● perfection,
 ● effect of perfection or no-perfection, and
● priority of a security interest in collateral
■ Comment 4: generally, the law governing perfection of SIs, whether
perfected by filing or automatically, is the law of the jurisdiction of the
debtor’s location as determined under §9-307
■ §9-307(b):
● a debtor who is an individual is located at the individual’s principal
residence
● a debtor that is an organization [see §1-201(28)] and has only one
place of business is located at its place of business
● a debtor that is an organization and has more than one place of
business is located at its chief executive office
■ §9-307 Comment 2
● §9-307 defines “place of business”
● Does not define “principal residence” or “chief executive office,”
but Comment 2 provides assistance
■ §9-307(e): a registered organization that is organized under the law of a
State is located in that state
● Registered Organization [§9-102(a)(71)]
● Authority to File
○ §9-510: a financing statement is effective (thereby perfecting SI) only if it was
filed by a person authorized to fileit under §9-509.
■ A UCC1 that is filed w/o the proper authorization has no legal effect
○ §9-509(a)-(c): to be authorized to file an initial filing statement, a person must
get some authenticated record—a writing signed by the debtor or its electronic
equivalent—that by its language authorizes the filing
■ (b)(1): once debtor authenticates a security agreement, the secured party
party thereunder is authorized to file a UCC1 FS to perfect the SI
● Accomplishing the Filing
○ Acceptance of the record by the filing office
○ A secured party sends to the filing office a properly filled out UCC1 form
along w/ the correct filing fee (but the record is wrongfully rejected by the
filing office)
○ §516(d): possibility that a UCC1 that is deemed filed in this way will not be
effective against “a purchaser of the collateral which gives value in reasonable
reliance upon the absence of the record from the files”
○ When may a filing office rightfully rejected an initial financing statement?
■ §9-516(b)
■ §9-516(c)
 ■ §9-520(a): a filing office shallrefuse to accept a record for a reason set
forth in §9-516(b) and mayrefuse to accept a record only for a reason set
forth in §9-516(b)
● Post-Filing Changes
○ Transfer of Collateral
■ §9-315(a)(1): a SI continues in the collateral after the debtor transfers it
to another person unless the secured party authorized the disposition free
of the SI
● (a)(2): the SI attaches to any identifiable proceeds of the collateral
○ i.e., consideration that Buyer gave Debtor for the collateral
○ SP’s FS remains effective as to collateral Debtor sold to
Buyer even if the secured party knows of or consents to the
disposition
■ §9-507(a): when you transfer collateral, it remains subject to the security
agreement (even if the transferee is not part of the security agreement)
● Sale to Customer (won’t apply, special rule)
● Automobile sales (won’t apply)
■ §9-508(a): filed financing statement naming original debtor is effective
to perfect the SI against the new debtor
● Exception - §9-508(b): if the name of the original and new debtor
are so different that the name of the new debtor would be seriously
misleading, it is effective forever in the previously included
collateral and anything acquired 4 months after
○ Name Change
■ §9-507: if you change the debtor’s name, the FS is not seriously
misleading if it is filed w/in 4 months of the change
METHOD 2: PERFECTION BY POSSESSION [§9-313]
● Pledge [§9-310(b)(6)]: Perfection when secured party takes possession of collateral
○ General
■ Earliest and most primitive means of perfection
● If the SP physically possesses an article of collateral belonging to
the debtor, the debtor’s other creditors should be on notice and
have reason to investigate
■ Examples
● Creditor Bank takes debtor’s stamp collection + places it in a vault
■ Pros
● Best way to perfect bc:
○ Solves any Statute of Frauds problems, and
○ Assures perfection
■ Cons
 ● Perfection by possession requires the collateral be
○ Stored,
○ Cared for,
○ And maintained
○ §9-313 Comment 2: no filing is requiredby A9 Creditor to perfect a SI if the
secured party takes possession of the collateral
■ Both attachment (§9-203(b)(3)(b) and perfection §9-313(a) occur when
a SP takes possession of collateral pursuant to the agreement of the
debtor
● What Property may be Perfected by Possession [§9-313(a)-(b)]
○ (a) Except as provided in §9-313(b), a secured party may perfect a SI in the
following by taking possession of the collateral:
■ Goods
■ Money
■ Negotiable documents
■ Certificated Securities
■ Instruments
■ Tangible chattel paper
○ Property that CANNOT be “perfected by possession”
■ General intangibles
● E.g., a liquor license, country club membership, seat on a stock
exchange, or debt
● Means of Taking “Possession”
○ Common Law
■ Possession means: unequivocal, absolute physical controlover the
property sufficient to put 3rd parties on notice of the possessor’s interest
○ UCC
■ Inventory
● Acquire inventory w/ cash
○ §9-315(d)(3):
■ Since financing statement covers inventory, it need not
be changed
○ Acquiring Equipment w/ Cash Proceeds
■ Where cash proceeds are used to acquire equipment,
there is a 20 day grace period to amend FS to keep SI in
the proceeds
● Where collateral is inventory, Creditor often
○ Has the inventory-collateral placed in a warehouse, and
○ Takes possession of the negotiable warehouse receipt(a
document issued by the warehouse)
 ● §7-403(c): no one can get the warehoused goods w/o surrendering
the warehouse receipt, so possession of the document constitutes
possession of the goods [§9-312(c)]
■ Goods in Possession of Bailee
● Secured Party CANNOT directly take possession of goods held by
a bailee
● Secured Party’s options to perfect include:
○ File a Financing Statement to perfect SI in the goods, or
○ Indirectly PerfectSI by possession through bailee by using
one of the following methods
■ Goods covered by negotiable document of title
● SP: negotiate w/ bailee to get doc of title
● §9-312(c) & Comment 7: Possession of the
documentperfects a SI in both the
○ document, and
○ goods covered by the document
■ Goods covered by nonnegotiable document of title
● Nonnegotiable Document of Title: a K by the
bailee to deliver the goods to whomever the
bailordirects
○ SP’s possession of a nonnegotiable
document of title does not perfect SI
● §9-312(d): Secured Party can perfect by:
○ Having the document issued directly to the
SP, or
○ Sending the bailee noticeof the SP’s interest
in the goods
■ Bailment w/ no document of title
● §9-313(c): if goods held by a bailee who hasn’t
issued doc of title SP can perfect by
○ getting the bailee toauthenticate a
recordthat
○ acknowledges that the bailee holds the
goods for the benefit of the SP
● Bailee not required to acknowledge SP
○ §9-313(f): if bailee refuses, SP MUST file
financing statement to perfect SI
○ NOTE: under §9-313(c), SP does not have a perfected SI in
collateral in possession of a 3rdparty bailee unless and until
 ■ the bailee authenticates a record acknowledging that it
holds possession of the collateral for the secured party’s
benefit, OR
■ the person takes possession of the collateral after
having authenticated a record acknowledging that it
will hold possession of the collateral for the SP’s
benefit
● Duration of Perfection
○ §913(d): when SI is perfected through possession, it
■ becomes effective from the time possession is taken, and
■ continues onlyso long as possession continues.
○ Rights and duties of secured party in possession
METHOD 3: PERFECTION BY CONTROL
● General
○ Applies to intangible things (unlike perfection by possession)
■ Deposit accounts (§9-104)
■ Electronic chattel paper (§9-105)
■ Investment Property (§9-106)
■ Letter of Credit Rights (§9-107)
○ Deposit accounts and letter of credit rights à control is only means of
perfection (§9-312(b)
■ Deposit Accounts
● Control can be obtained when
○ The SP is the depository bank at which the account is held
○ The debtor, the SP, and the bank agree in an authenticated
record that the bank will comply w/ the SP’s instructions w/
respect to the deposit account
○ The SP becomes the bank’s customer w/ respect to the
deposit account
● Control over Investment Property
○ Perfection
■ Secured Party may perfect a SI by:
● Filing a financing statement, or
● Getting “control” over the investment property
○ Priority
■ Control > Filing
● §9-328(1): a creditor who perfects by gaining control has
priorityover one who perfected merely by filing.
■ First to control > Second to control
● §9328: if 2 creditors have control, 1stto gain controlhaspriority.
 ○ Methods of gaining control
■ A creditor has control, and therefore perfected his SI, by doing one of
the following things:
● Certificated Securities
● Uncertificated Securities
● The Securities or Commodity Accounts or Rights to Particular
Investments in such Accounts
● Securities Intermediary as Creditor
● Control over Deposit Accounts
○ Bank Accounts
■ §9-312(b)(1): the ONLY way to perfecta SI in a bank account is to get
control over the account.
● *Filing a financing statement is insufficient to perfect*
○ 3 Methods of Control of Deposit Accounts
■ The bank in which the deposit account is maintained automatically has
control over the deposit account when it makes a loan to a customer
using that deposit account as collateral
■ If creditors other than the bank in which the account is maintained want
control, they must use one of the other 2 methods:
● Change the account name to the name of the creditor
○ *safest method of getting control*
● Have the bank agree in an authenticated record that the bank will
follow the instructions of the creditor w/o further consent of the
debtor [§9104]
● Control over Letter of Credit Rights
○ §9-312(b)(2): the ONLY way to perfecta SI in “letter of credit rights” is to get
control over them.
■ *Filing a financing statement is insufficient to perfect*
○ How Creditor gets Control
■ §9-107: a creditor gets control of letter of credit rights by having the
issuer of the letter of credit (“LOF”)
● consent to assign to the creditor the proceedsof the LOF
○ Issuer is not obligated to give consent to assign proceeds to creditor
■ §5-114(c): w/o issuer’s consent, the creditor lacks control of LOF, and
the SI will be unperfected
● Creditor can still perfect its SI in the account that the buyer owes
to the creditor, and this would automatically perfect a SI in the
LOF supporting this account
● Control over Electronic Chattel Paper
○ A secured party may perfect a SI in electronic chattel paper by:
■ Filing a financing statement, or
 ■ Taking control of the electronic chattel paper
○ How Creditor gets Control
■ §9-105: Creditor gains control if the
● creditor can get a single authoritative copy of the electronic chattel
paper marked so that the creditor is the assignee of record, and
● copy is maintained by the creditor in such a way that it can be
changed only w/ the agreement of the creditor.
■ Comment 5: it is debatable whether the technology exists to meet §9-
105’s requirements
METHOD 4: PERFECTION BY ATTACHMENT OF SI (“Automatic Perfection”)
● General
○ §9-308(a): perfection of a SI generally results from the combination of
“attachment” and all other “applicable requirements for perfection”
○ In certain limited transactions, a SI is perfected simply by the attachment of a
SI àupon attachment, perfection occurs automatically
■ If the facts in a particular instance fit w/in one of these situations, the SI
is perfected automatically upon attachment.
● Automatic Perfection Upon Attachment
○ Purchase Money Security Interests in Consumer Goods
■ General Rule [§9-309(1)]: a SI in consumergoods is perfected
automatically upon “attachment”
■ Exception: §9-311(b):
● §9-103(b)(1): a security interest is a purchase-money security
interest “to the extent that the goods are purchase-money collateral
w/ respect to that security interest.”
● Most common instance of automatic perfection
○ Retail merchants typically advance credit in the form of retail
installment contracts (e.g., store credit cards)
● Motor Vehicles
● Fixtures
■ “Purchase money” transactions
● §9-103: a PMSI arises when the secured party advances money or
credit to enable the debtor to purchase the collateral.
● Who holds a PMSI
○ §9-103(a)(2): A purchase money secured party may be either
■ The Seller (who advanced credit for all or part of the
price), or
■ Any other person who gives value to enable the debtor
to acquire the collateral or rights in it
 ● But ONLYif the value is actually used in the
transaction by the debtor.
○ Example
■ A bank lends money to buyer for a Car.
● Bank has a PMSI ONLYif the buyer used the
borrowed money to buy a car
● Security Agreement Required for PMSI
○ §9-203: Creditor must have an authenticated Security
Agreementw/ the debtor to obtain a valid security interest in
the collateral
■ Consumer Goods
● Consumer Goods [§9-102(a)(23)]: goods “used or bought
primarily for personal, family, or household purposes.”
○ Primary Use Test
■ If a particular purchase is primarily for personal,
family, or household purposes, it is a consumer good
■ Sofa Example
● A sofa used at the home is a consumer good
● A sofa used at a lawyer’s reception room is not a
consumer good bc of the business use
○ Creditor may trust consumer
■ Consider lies
● If consumer told creditor the purchase was for
home, but actually used it at business, creditor
still has a SI
● *Estoppel → equity purposes

Choice of Law
● Location
○ Location of Debtor Governs Tangible and Intangible Collateral
■ General Rule [§9-301(1)]: the law of the location of the debtor governs
issues of perfection, the effect of perfection, and priority w/ respect to
both tangible and intangible collateral (whether perfected by filing or
automatically)
● EXCEPTION -- §9-301(2): w/ respect to possessory SIs, the
issues of perfection, the effects of perfection, and priority are
governed by a situs test
○ The location of the collateral controls, not debtor’s location
○ Location of Debtor
■ Individual – debtor: domicile/debtor’s residence
 ■ Organization – debtor:
● Place of business (if it has one)
● Chief executive office (if it has more than one place of business)
■ “Registered organization”: state of organization
● “registered organization” includes:
○ Limited partnerships, LLCs, and corporation
■ “Unregistered organization”: debtor’s chief executive office
○ Change of Location
■ §9-316(a)(2): when debtor changes its location to another jurisdiction,
the SP has 4 months after the removal to file FS in the state of removal
● Goods covered by Certificate of Title
○ Basic Rules of Perfection
■ Filing FS isn’t necessary or effective to perfect SI in goods in which
certificate of title requires an SI to be indicated on the certificate as a
condition or result of perfection
■ Secured party financing dealer’s inventory may perfect SI under normal
rules applying to inventory àw/ a financing statement
● §9-311(d): doesn’t apply to dealers who only lease goods
■ Local law of the jurisdiction under whose certificate of title the goods
are covered governs perfection
○ Change of Debtor’s Location
■ Motor Vehicles àmust have certificate of title
● Perfection of SI in goods covered by certificate of title occurs
EITHER upon
○ Indication of a SI on a certificate of title, OR
○ Receipt by state’s DMV of a property tendered application
for a certificate of title on which the SI is indicated
Chapter 1: Creating a Security Interest
 
A. Why Secured Credit?
● Business lending:
▪ Top level are unsecured loans based on the borrower's projected cash flow and
creditworthiness
● Unsecured creditors face risk that the financial position of their borrowers may
deteriorate
● Reduce these risks by carefully monitoring borrowers
● Covenants
● Restrictions on investment activities
▪ If borrower doesn’t qualify for unsecured credit, may get credit through asset-based loans
● Lender takes a first security interest in the borrower's assets
 
● Inventory Financing:
▪ When a lender finances the sellers acquisition of inventory (Cars) and takes a security interest
in the acquired inventory and its proceeds
▪ Type of Asset Based Loan
 
● Consumer lending
 ▪ Has evolved from the traditional forms of
● Personal loans, secured by household goods
● Purchase money credit (seller takes security interest in the goods sold to secure unpaid
indebtedness)
● Unsecured retail charge account credit (buyers made monthly payments)
 
i. Rights of Unsecured Creditor
 
● Seller v. Debtor
● Historic Principle is that "before judgment (or its equivalent) an unsecured creditor has
no rights at law or in equity in the property of his debtor"
● Seller first must sue on the promissory note and obtain a money judgment against
Debtor
● Then have sheriff seize (levy on) Debtor's assets and sell them
● Seizure results in the transfer from the debtor to the creditor of an interest in the
seized property
● Called a judicial lein
● Seller is now a "lien creditor" and has rights akin to those of a creditor holding
a security interest
● Principle: before judgment an unsecured creditor has no rights at law or in equity
in the property of his debtor(see Grupo Mexicano de Desarollo, S.A. v. Alliance Bond
Fund, Inc. (1999))
● To repossess goods, an unsecured creditor must:
● (1) Obtain money judgement from court,
● (2) Authorize sheriff under state law to seize debtor’s assets and sell them
in payment of the money judgement
● Judicial Lien [§9-102(a)(52)(A)]: the ownership interest a creditor
attains in the debtor’s property after seizure by the sheriff, rendering
the creditor a “lien creditor”
● Example: creditor sells unsecured car to debtor, on debtor’s promise to pay
balance of vehicle w/in 1 year. If debtor defaults, creditor would like to retake the
car but cannot do so w/o wasting money and time going to court.
● Problem:
● this is inefficient and costly (both in terms of time and money)
● Unless the sum sought by Seller is large, the cost of collection makes this
procedure too expensive to pursue
● If Debtor has no unencumbered, non-exempt assets, the judgement is worthless
● Priority among creditors is unfair
● Based on Time of Seizure: whoever has sheriff seize assets first gets them,
regardless of which creditor was lent to first
 
● Seller v. Other Unsecured Creditors and Trustee in Bankruptcy
● "Race to the courthouse"
● If Debtor filed in Bankruptcy after one creditor (C2) became a lien creditor but before
Seller did so…. Seller has only an unsecured claim and will share in the distribution of
the assets of Debtor's estate pro rata with other unsecured creditors
 ● But unless C2's lien creditor status runs afoul of preference law… C2 will be treated
as a secured creditor in bankruptcy and prior to the unsecured claims of C1 and
Seller
 
Secured Credit
● (Scenario #1)
● Seller sells something on Credit
● Debtor has property, Debtor default
 
● What can the Seller do??
● Seller can sue, get a judicial lien
● Use the judicial lien to levy property- Writ of Execution
● Sheriff collects property (seize & sell property)
 
● Lien: Interest in property that can be used to liquidate and satisfy a judgment
 
3 options for an unsecured creditor
1. Sue debtor on Promissory Note (if you get that, you have a judgement lien)
2. 3 types lien
1. Statutory Lien
● Statutory lien: arises based on statute
● Mechanics lien (when a person does work on your roof, they have a statutory
lien on your house)
 
2. Non-consensual lien
● When you get a judgment lien = non-consensual
 
3. Consensual lien
● Security interest
● Debtor consents to the lien
 
 
● (Scenario #2)
● Multiple Lender, Debtor defaults on all
● Likely Debtor will file for Bankruptcy
 
● Automatic stay (after Bankruptcy filed)
● They are left with pro rata division of whatever is left
 
 
ii. Rights of Secured Creditors
 
● Seller v. Debtor
● Seller improve its position against Debtor by taking a security interest
● By acquiring a property right, called a "lien"
● and a typical sort of consensual lien is a "security interest"
● Upon Debtor's default in its payment schedule, Seller could retake the property from
the Debtor, usually without going to court, and resell them at an auction
● Usually no court proceedings are necessary unless the proceeds of the resale are
inadequate to discharge the debt
● Tangible Property: Seller can retake property as long as it doesn’t breach the peach
● Instruct account debtor (party that pays debtor) to pay seller instead
 ● Seller will go to court if the sale is insufficient to collect debt
 
● Seller v. Other Creditors and Trustee in Bankruptcy
● Except as otherwise provided under the Uniform Commercial Code, a security
agreement is effective against purchasers of the collateral, and against creditors
● Secured claims trump unsecured claims, unless special provisions of Article 9
provide otherwise
● Several important instances when Article 9 does provide otherwise:
● An unperfected security interest subordinate to lien creditors
● And since a trustee in bankruptcy acquires lien creditor status from the date
Debtor files in a bankruptcy, Sellers unperfected security interest may be avoided
by a trustee
● Bankruptcy proceedings generally leave unaffected property rights covered by
perfected security interests
 
● (Scenario #3)
● If Lender takes a Secured Interest
 
● Lender can :
● Doesn’t matter whether the security interest is perfected
● REPOSSES (meaning go literally take possession of the property)
● Can you "self help" as long as you don’t breach the peace
● Only works If it is tangible
● What if it is intangible? "Account receivable"??
● Instruct the person who owes the money to pay you directly (Account debtor)
 
● (Scenario #4)
● 2 lenders
● 1 secured party
● 1 unsecured party
 
● IF BANKRUPTCY
● Secured party MAY be able to just take its property out of the Bankruptcy
● Secured party still suffers if there is a Bankruptcy
● Cant get the property right away (if it's under secured)
 
 
 
iii. Is Secured Credit Efficient or Fair?
● Article 9 allows a secured creditor to take a security interest in all of the debtor's personal
property then owned or acquired in the future
● Moreover the security interest may not only extend to the debtor's tangible assets,
such as inventory or equipment, but also to the debtor's stream of earnings or cash
flow
● It is from this stream of earnings that unsecured creditors like trade creditors and
employees expect to be paid
● Article 9, is sweeping away all the historic judicial constraints in the creation of
secured credit, has made it simple for secured creditors to take a priority in all of
the debtor's assets, present and future, to the exclusion of other creditors
● (unsecured claims of trade creditors, as well as tort creditors -- worthless)
  
● Secured Credit Justification
● In general, whatever level of risk he faces (creditor), if his transaction with the debtor is
voluntary one, a creditor may be expected to adjust his interest rate accordingly and to
take whatever risk-reducing precautions he deems appropriate
 
● Challenging the justification view
● Two false assumptions of the justification view on secured credit:
1. Substantial number of unsecured creditors are creditors such as tort victims whose
unsecured status is imposed on them against their will
2. Assumed Voluntary creditors contract for unsecured status with a full awareness of
the consequences
 
● Security interests reduce repayment risk to secured creditors and therefore the effective
interest charge on their loans
● However, the repayment risk is shifted to unsecured creditors who do not adjust the
effective interest rate on their debts accordingly
 
 
 
B. Introduction to Article 9
 
i. Historical Note
● Until early in the 19th century the only security devices which were known in our legal
system were the mortgage of real property and the pledge of chattels
● A transfer of interest in personal property without delivery of possession was looked
at as being in essence fraudulent conveyance
 
Historically
● Mortgages
● 1900's Chattel Mortgages & Conditional Sales
● Condition of the transfer of the Title, was paid debt
 
● 1962 (Supersedes old forms of secured interest)
● Security Interest
● Who benefits?
● Lower interest rate for Debtor
● Secured Party (Creditor)
● Lenders can benefit the most by spreading knowledge to benefit
● Society? Making credit more freely available
 
 
ii. 1962 Article 9
● Article 9 does not abolish pre-code security devices, but renders the formal distinction
among them irrelevant
● 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
 
iii. Article 9 Revision
 ● The Revised Act has now been adopted by all the States
● References to the pre-revision Article 9 = "former"
 
 
● Company - GEORGETOWN STEEL
● Has Shareholders
● Value = 1000X
● Assets - 1200X
● Unsecured Creditors = 200X
● Limited Partnership
● LP contributes 160X
● GP contributes- 40X
 
● Borrow secured 800X
 
● The unsecured 200x become SUBORDINATED when the company takes on the Secured Credit
 
● "Vulture Capitalism" also known as "Private Transactions"
● Rick Perry term
● In some cases it may be "Fraudulent Transfer"
● Transferring funds in order to avoid
● Unsecured creditors tend not to be banks and therefore cannot compensate for the unsecured nature of
the debt with high interest rates
● In private corporations transactions, such as leveraged buyout (example limited partnership buys
a corporation) general partners and insiders with a secured interest benefit significantly more
than shareholders who have unsecured interest
● Mostly small business
 
 
iv. Working Definitions
1. "debtor" - person whose property is subject to the creditor's security interest
● Has rights in the collateral, subject to the security interest
● Debtor [§9-102(a)(28)]: the owner, lessee, etcof goods being used as collateral.
2. "Obligor" - the one who owes payment of the secured debt (usually the same person)
● Obligor [§9-102(a)(59)]: the person who owes the debt to the creditor.
● * Debtor and Obligor are often, but not always,the same person
● § E.g., A borrows money from B and uses C’s truck as collateral
i. A = obligor
ii. B = debtor
iii. C = secured party 
● Example: A "personal guarantee" for someone else to get a loan
3. "secured party"- the creditor in whose favor the security interest is created
1. Secured Party [§9-102]: lender, seller, or person in whose favor there is a security interest
4. "security agreement"- agreement that creates the security interest (tangible or electronic)
1. [§9-102(a)(74)]: an agreement that creates or provides for a security interest, no matter
what it calls itself and regardless of form.
1. Substance over Form
5. Security Interest [§1-201(35)]: interest in personal property that secures payment or
performance of an obligation.
1. Personal Property
 1. §1-201)(b)(36): every interest “in personal property or fixtures that secures
payment or performance of an obligation.”
2. Certain Sales
1. The Code expands the definition to include rights and interests in certain sales that
were not previously considered security interest
3. §9-109: A9 applies to:
1. Transaction that creates “security interest” in personal property, regardless of
form, created by contract
2. Agricultural lien
3. Sale of accounts, chattel paper, payment intangibles, promissory notes
4. Consignment
5. A2 interests
4. Consignments
5. Leases
6. Exclusions from A9 (§9-109(d))
6. "collateral"- the property subject to the security interest
a. may be tangible like goods;
b. intangible property like "accounts," rights to payment arising out of the sale, lease or
licensing of property, "general intangibles," other kinds of right to payment,
c. intangible property like copyright, software
7. "Financing statement"- the record that secured party files in public records
8. "Attachment"- a security interest attaches to collateral when it becomes in enforceable
against the debtor (usually occurs when the agreement and the secured party has given
value to the debtor, either by making a loan or selling property on credit to the debtor)
● Conditions of Attachment:
1. Value has to be given (executory contract is set of mutual Ks) -?
2. Debtor has rights in the Collateral
3. Something else
1. Written security agreement/record
2. Possession
3. control
 
9. "Perfection"- Usually, a security interest is perfected when it has attached and the secured
party has either filed a financial statement or taken possession of the collateral
a. Perfection establishes the secured party's priority in the collateral with respect to third
parties
 
● "Accounts" are rights to payment that are not evidenced by and instrument or chattel paper,
whether or not is has been earned by performance
● "general intangibles" any personal property including things in action other than goods,
accounts, chattel, paper, instruments
● "chattel paper"- writing or writings (can be groups of writing) that evidence both a monetary
obligation and a security interest in or a lease of specific goods
● "note" = promise to pay money, usually want it to be negotiable - one condition of
negotiability is the promise to pay the unconditional. The Note cannot say that it is subject to
any other document (can say that it is secured by a SA)
 ● “proceeds” = property (or cash) acquired by debtor upon sale, lease, license, or other
disposition of [secured] collateral. Could also be unsecured debt obligation “account or
“promissory note.” Security interest in inventory carries over to proceeds.
● “Record” = information recorded on tangible medium (writing) or stored and
retrievable/perceivable form (email, etc).
 
● When can you be a debtor without being an Obligor?
▪ If property is collateral and the debtor transfers the property to someone else, the security
interest continues
▪ OBLIGOR - owes payment! (O-Owes)
● Person acquiring the transfer (persons property subject to the security interest)
● Not an obligor though (cannot hold the transferee personally liable)
● Happens a lot during "bulk transfer"
● Debtor because they hold interest in the property (and the Creditor can go after the
property to sell, but not hold personally liable)
 
● 3 subjects:
1. Attachment
● Debtor and creditor (doesn’t involve 3rd parties)
● Right to self help and the right to foreclose
● Doesn’t depend on perfection
 
2. Perfection
● Doing something additional to notify 3rd parties
 
3. Priority
● Who comes first and second
 
 
● Account Receivable
▪ Money owed on a general account
▪ Not cash
 
▪ May be able to sell the "Accounts Receivable" at a discount to get a loan
● The Account Debtors pay the Lender/Buyer
▪ May be able to borrow against the accounts receivable
▪ How do you know the difference?
● If it’s a sale, the creditor gets the risk
● If it’s a loan, then the individual needing the cash is stuck with the risk
▪ UCC gets rid of the distinction
 
Uniform Commercial Code
● Similar to a Restatement, only more serious
● Who promulgates the UCC?
● UCC is a uniform state law
● National Conference of Commissioners on Uniform State Law
● Group of state officials and legal academics
 ● Recommend laws that make the state laws uniform
● Adopted everywhere
● Becomes a statute within that state
● Who writes it?
● Judges, legal scholars, state officials
● Not elected officials
● Although elected officials do need to vote it into state law
● Lobbyists influence
 
● Swift v. Tyson: Held that there is a general federal common law
● Erie Railroad: Overruled Swift - No general federal common law (state law is to be applied in
diversity jurisdiction cases)
 
● UCC is STATE law and it is STATUTORY LAW
● Unlike State law in that it is nationally unified
● Not like other statutory law in that it covers the type of law usually covered by state
common law
● Article 9 is VERY favorable to secured creditors
 
 
C. Attachment
1. The Security Agreement
● Article 9 makes creating a security interest easy
● Attachment Requirements:
● a SI attaches, becomes enforceable against the debtor when:
1. (1) Secured Party gives Value to Debtor for the SI (contract law concepts)
2. (2) Debtor has rights in the collateral
1. Rights In Collateral Test: does debtor own or have possessory rights of
the collateral?
3. (3) One of the conditions of §9-203(b) is met:
1. Creditor’s possession of the collateral (oral agreement sufficient);
2. Creditor’s control of the collateral (oral agreement sufficient); or
3. A written security agreement or record authenticated by the debtor
that describes the collateral
● The first of these (applies to majority of cases) is that the debtor has authenticated
(agreed to) a security agreement that provides a description of the collateral
 
● Article 9 recognizes that business transactions have become national-- persons can do
business by electronic communications
● The term "record" replaces the terms "writing" from the former act
● RECORD: includes information in tangible form such as on paper as well as
information in an intangible form which is stored in an electronic or other medium
and is" retrievable in perceivable form"
● The debtor authenticates by identifying itself and manifesting acceptance of the
terms of the agreement
 
§ 9-203 (Attachment)
● Don’t have to worry about "time of attachment"
 ● When we say "enforceable" we mean its "attachment"
● Concerns the rights between the DEBTOR and the SECURED PARTY (not
worried about 3rd parties)
● Attachment is a condition of "Perfection"
 
● 3 conditions to attachment
1. Value has to be given by the secured party
a. When the proceeds are dispersed
b. Promise to give loan is enough to give value to it
2. D has rights in the collateral
3. Something else
a. Written security agreement or record
b. Possession
c. Control
 
● As to (a)
● Debtor has to "authenticate" a security agreement
● To sign, execute, or adopt or accept record
 
● "record" --- AUTHENTICATE
● "sign"---- WRITING
● Security agreement does not have to be in writing
● If it’s a WRITING-- must be signed
● If not a writing- must be authenticated by the debtor
● Must be a "record"
● Some kind of medium that is in retrievable form
 
● When dealing with NON-tangible items… must have a security
agreement
 
● As to (b) - Possession
● Goods in transit or in storage, goods in transit (questions of "possession"
come up)
● Mortgage Note (paper represents)
● Can be possessed
● If you have possession (physical possession or deemed possession)… do not
need a record or a written security agreement
● List of things that cannot be possessed
 
● As to (c) Control
 
Problems (p.14)
● ORAL Offer, acceptance, consideration most likely creates a CONTRACT, but NO security
interest (because there is no record)
● If tape recorded a telephone call in its entirety with the debtors consent
● If he did not inform AT ALL… there is no real argument for it being "authenticated"
 
 ● If after an oral conversation an email statement of the agreement, and the debtor
replies "I agree to the terms"-- a record is created & authenticated
● Doesn’t matter if they advanced the loan before he agreed
● If the loan is given AFTER the agreement, the final of the 3 requirements is "Value"
given-- then security interest is complete
 
● Promissory Note is NOT a security agreement
● Note= promise to pay money
● People want it to be flexible, except for the obligation to pay
● Cannot say on its face that it is "subject" to any other document
● Note is NOT a contract
● The point of the Note is to be able to bring to court and introduce the Note--
entitled to a Directed Verdict
● If it’s a Contract, then there is a burden to prove
● Possession is still another way to create and enforceable security interest
(Possession substitutes for a debtors authentication security agreement)
 
2. The Composite Document Rule
● The composite doctrine rule comes from the recognition that despite minimal requirements to
perfect a SI, creditors sometimes forget to obtain formal security agreements, yet they file
financing statements
○ Policy:should creditors be let off the hook or do courts want a bright line rule?
■ §9-402: a security agreement may serve as a financing statement if it is signed by
both parties.
■ Issue: can a signed financing statement serve as a security agreement? Are
composite documents sufficient to create a security interest w/in the terms of the
code?
● Composite Document Rule: more than one document, read together, may satisfy §9-203(b)(3)
(A)
○ Best practice is to expressly cross-reference the other documents and, if practical, attach
them.

In re Bollinger Corp
● Issue:
● Can a creditor assert a claim against the debtor when nor formal security agreement
was ever signed, but where various documents executed in connection with a loan
evince an intent to create a security interest?
● Facts
● ICC made a loan to Bollinger in the amount of $150,000
● As evidence of the loan, Bollinger executed a promissory note and signed a security
agreement with ICC giving it a security interest in certain machinery and
equipment
● Bollinger faithfully met his obligation under the note
● Required additional capital
● Entered into a loan agreement with Z & J
● Z &J undertook as part of this transaction to pay off the $ still owed to ICC in
return for an assignment by ICC to Z & J of the original note and security
agreement between Bollinger and ICC
 ● No formal security agreement was ever executed between Bollinger and
Z&J
● Did record a new financing statement signed by Bollinger containing
a detailed list of the machinery and equipment originally taken as
collateral by ICC
● Bollinger went bankrupt
● Z & J asserted a secured claim although it never signed a security agreement
 
● Analysis
● Under Article 9 of the UCC, 2 documents are generally required to create a perfected
security interest in a debtor's collateral
● 1st there must be a "Security Agreement: giving the creditor an interest in the
collateral
● In order to create a security agreement, there must be:
1. A writing
2. Signed by the debtor
3. Containing a description of the collateral or types of collateral
● The requirements of 9-203(b)(1)(b) further 2 basic policies
● An evidentiary function is served by requiring a signed security
agreement
● A written agreement also obviates an Statute of Frauds problems with
the debtor-creditor relationship
● 2nd document generally required is a "Financing Statement" which is a document
signed by both parties and filed for public record
● The financing statement serves the purpose of giving public notice to other
creditors that a security interest in claimed in the debtor's collateral
● The commercial world has frequently neglected to comply with this simple Code
provision
● The earliest case to consider this question was American Card Co, which held that a
financing statement could not operate as a security agreement because there was
no language granting a security interest to a creditor
● The Ninth Circuit criticized that opinion: "there is no support in legislative history
or grammatical logic for the substitution of the word 'grant' for the phrase 'creates
or provides for'
● It concluded that as long as the financing statement contains a description of
the collateral signed by the debtor, the financing statement may serve as a
security agreement and the formal requirements of § 9-203(1)(b) are met
● Some courts have declined to follow the liberal rule allowing the financial statement
alone to stand as the security agreement, but have permitted the financing statement,
when read in conjunction with other documents executed by the parties, to satisfy the
requirements
● We agree that no formal grant of a security interest need exists before a security
agreement arises, we do not think that the promissory note standing alone would be
sufficient under PENN law to act a security agreement
● We believe, however, that the promissory note, read in conjunction with the
financing statement duly filed and supported by correspondence during the course
 of the transaction between the parties, would be sufficient to establish a valid
security agreement
● When the parties have neglected to sign a separate security agreement, it would appear
that the better and more practical view is to look at the transaction as a whole in order
to determine if there is a writing, or writings signed by the debtor describing the
collateral which demonstrates an intent to create a security interest in the collateral
● The intention of the parties to create a security interest may be gleaned by the
expression of future intent to create one in the promissory note and the intention of
the parties as expressed in letters constituting their course of dealing
 
● Decision
● We hold that a valid Article 9 security agreement existed under PENN law between the
parties which secured Z & J in the full amount of the loan to Bollinger
● The minimal formal requirements were met by the financing statement and the
promissory note, and the course of dealing between the parties indicated the intent to
create a security interest
 
 
NOTE
● The Pro- secured creditor view (majority):
● The requirement of written security agreement is merely evidentiary
● No additional formal security agreement is needed
● If you give a loan + promissory note + description of collateral in FS= Security Agreement
 
● The Pro-trustee in bankruptcy view:
● The secured creditor has a very strong position against other creditors in bankruptcy
● Recognition of a security interest may clean out the bankrupt's estate, leaving
nothing for others
● Since Article 9 requirements for creating an enforceable security agreement are so
minimal and the benefits conferred by secured creditor status are so great, we
should demand that the creditor who seeks these benefits must comply fully with
these simple requirements
 
● Financing statement: doesn’t have to be as detailed in the record
 
In re Bollinger Corp
● This court doesn’t make it clear whether the letter is the key to completing the "composite
document"
● Decided by the 3rd Circuit
● Appeal from the Bankrupcy proceeding below
 
Exam: Whatever is not included financing statement cannot be included ……...
 
If something is not in the security agreement, no matter what is in the fin statement, 3rd party
cannot reach the collateral
Requirement of recorded fin statement, doesn’t operate as a statute of frauds, but does operate
parole evidence rule
  
Financing statement
● Debtor knows it intended to sign a security agreement
● It is misleading to other secured creditors searching
 
Problem (page 22)
● (#1)
● If the financial statement can support a composite document rule...Why cant it expand the
list to the security agreement?
● Financial statements are for 3rd party
● Isnt sufficient to support an expansion of the collateral
● Referencing the financial statement is against the parole evidence rule
● This collection of composite documents satisfies the Statute of Frauds
● For composite document rule:
● Financing Statement intent
● Security agreement is between the 2 parties. Whatever is NOT INCLUDED in the
financing statement will not be included in the judgment because it is now misleading to
3rd parties.
● If something is not in the security agreement, no matter what is in the financing
statement cannot have security interest in something MORE than is in the security
agreement
● Parole evidence rule protects from introducing more evidence than is in the writing
and the financing statement is essentially
 
● (#2)
● why doesn’t the issuance of a credit card with an agreement "purporting" to be a security
agreement
● Consumer doesn’t SIGN anything
● By using the card you agree to the terms stated, you enter into a regular contract, but no
security agreement
● Sears Roebuck
● Customer signs the reciept incorporating the security agreement!
● Security agreement is now valid
● If the merchant requires the signing of a sales slip then it is a secured agreement
 
 
 
1. Description of Collateral
 
In re Grabowski
● Issue
● This case involves a priority dispute between Δ Bank of America and South Point Bank
regarding their security interests in 3 items of farm equipment owned by the debtors
● Facts
● Both lenders filed financing statements perfecting their interests
● BOA, first to file, describing the collateral in general terms and listed the business
address rather than home address where collateral was located
 ● SP, described the collateral more specifically and included debtor's home address
● SP argues:
● BOA's financing statement, although prior in time, was insufficient to perfect the
Bank's interest because it failed to place other lenders on notice of BOA's interest
in the subject equipment
● A subsequent lender would reasonably conclude that the BOA intended
security was the personal property of the debtor's business rather than
equipment used in the debtor's farming operation
 
● Analysis
● The UCC sets forth the requirements for a creditor to obtain and perfect a security
interest in personal property of the debtor
● However, the degree of specificity required of such description depends on the nature
of the document involved--
● Whether it is a security agreement or a financing statement
● While a security agreement defines and limits the collateral subject to the
creditor's security interest, a financing statement puts 3rd parties on notice
that the creditor may have a lien on the property described and that further
inquiry into the extent of the security interest is prudent
● § 9-108 sets forth the test for sufficiency of a description:
● (a) a description of personal property is sufficient, whether or not it is specific, if it
reasonably identifies what is described
● Include identification by "category" or by "type" of collateral
● Only a super generic such as "all debtor's assets" is insufficient
● (even broader standard with regard to a financing statement)
● FS may simply indicate its lien on "all assets" of the debtor
● FS need not specify the property encumbered by a secured party's lien,
but need merely notify subsequent creditors that a lien may exist and
that further inquiry is necessary
● Despite the BOA's description, it was sufficient to notify subsequent creditors that a lien
existed on the debtor's property (was sufficient to perfect its security interest in the
subject farm equipment and that the BOA's interest, being prior in time is superior to
that of SP)
● Article 9's rules for describing collateral are very forgiving; they offer secured parties a
great deal of latitude
● Why does Article 9 allow super-generic descriptions in the financing statement but not in
the security agreement?
● Security agreements and financing statements perform different functions
● The security agreement is an agreement between debtor and creditor
● This agreement must meet evidentiary requirements "in the nature of SOF"
● A description of the collateral in the agreement reduces proof costs
associated with establishing the terms of the parties
● The function of the Financing Statement is to put 3rd parties on notice about the
possibility of a security interest granted by the debtor to a creditor and to establish
priority
 ● An additional function of SA might be to induce creditors to disclose information to
their debtors about precise nature of the assets the security agreement is to cover
where debtors otherwise would remain ignorant
 
In re Grabowski
● Sufficient on 2 grounds:
● Could just say "all the assets" in the financing statements
● Could just describe by type and that would be sufficient
● Irrelevant that Southpoint had a better description (priority is determined by the time of
filing, not by the level of accuracy)
● Security Agreement may NOT say "all assets"-- Super Generic (OK is financing
statements)
● 9-108:
● (a) description of personal or real property is sufficient as long as it reasonably
identifies collateral
● (reasonable identifies by category or type)
● Exception for (d) - securities account (security entitlement) or commodities
account
● Like a share/stock
● Must describe that specifically
● (e) use of description is insufficient for:
● Commercial torts
● Consumer goods
 
● In a security agreement:
● Either be SPECIFIC or GENERAL…. But NOT both!!!
● If you try and be general, but then add specifics, you run into problems
(Example Problems page 29)
● By specifically listing the truck, someone reading the agreement would
assume that OTHER vehicle would not be included unless they were listed!
● LESSON: (in the older cases)
● On safer grounds with a general description, leave out the specific
 
 
Problems
● Omnibus Clause?
● Clause covering "equipment"
 
1. IF the FS states general categories like "equipment" that is specifically defined under the UCC,
then anything that falls under that category is covered (like trucks)
2. IF the FS makes a specific listing of 2010 Oldsmobile, there is a stronger case for exclusion of
things that were not on the list
 
 
4. After-Acquired Collateral
 
a. Under 9-204(a)
 ● Under Article 9 a security interest may not only apply to the collateral the debtor owns at
the time the security interest is granted by also to later-acquired collateral
● Include the phrase "now owned or hereafter acquired"
 
In re Filtercorp, Inc.
● Issue
● Whether a security agreement that grants an interest in "inventory" or "accounts
receivable" without more, presumptively includes after-acquired inventory or accounts
receivable
● Holding
● The law would presume security interests in "inventory" and "accounts receivable" to
include after-acquired property absent evidence of intent to the contrary
● Had a security interest in after-acquired accounts receivable, but not in after-acquired
inventory because the security agreement demonstrated an intent to limit the inventory
collateral by referencing an attached inventory list
● Facts
● The company took out a series of loans from Paulman
● Loans were short term by promissory notes
 
● Analysis
● Principles Governing Security Interest in Inventory and Accounts Receivable
● Whether a security agreement creates a lien on particular assets is a question of
state law
● Split of authority on whether a security interest in inventory or receivables
automatically extended to after-acquired inventory or receivables despite the
absence of an after-acquired property clause
● A minority of jurisdictions require express language evidencing the parties
intent
● Majority of jurisdictions presumptively includes an interest in after-acquired
inventory or accounts receivables
● The rationale for this position rests on the unique nature of inventory
and AR as cyclically depleted and replenished assets
● Because inventory and AR are constantly turning over, no creditor could
reasonably agree to be secured by an asset that would vanish in a short
time in the normal course of business
● (essentially a floating lien on inventory and AR is presumed because the
collateral is viewed in aggregate as a shifting body of assets
● The presumption is of course a rebuttable presumption
● Overcome where the SA language itself manifests an intent to limit the
collateral to specific identified property or where the debtor can
demonstrate that it was engaged in a type of business where the named
collateral does not regularly turn over so that the rationale for the
presumption does not apply
 
● The Security Agreement between Paulman and Filtercorp
● The note (which serves as the SA)
 ● Presumption that after-acquired property is included stands unrebtted as
to the AR
● It is rebutted for inventory by the reference to the attached inventory
listing
 
 
 
Floating Liens:
● Common law is hostile to floating lien
● When one thing replaces another, lien attaches
● After acquired property
● To do this must include an agreement
● Proceeds are subject to the security agreement AUTOMATICALLY (without a
provision in the security agreement)
● The Code seems to say that the after acquired proceeds clause needs to be in
the SA
● If the security agreement doesn’t specifically state "cash" will not be included
in after-acquired property
● 2 exceptions to having to list after-acquired property:
● Consumer goods
● Don’t want consumer goods subject to secured transactions from
bicycles
● Commercial tort claims
 
 
In re Filtercorp
● Rebuttable presumption
● Majority jurisdiction
● Don’t need such a clause if your covering inventory in an accounts receivable
● Because they attached a list of inventory, the presumption was rebutted
● Must include something "whether now owned or hereafter acquired"
● No matter what you say in commercial tort claims & consumer goods CANNOT
acquire after acquired property
● Commercial tort claims:
● Idea is that the secured party should not be able to get an interest in
things that happen in the future
● They arise in the course of business
● Consumer Goods
● Protect the consumer
 
 
b. Under 9-204(b)-- AFTER-ACQUIRED PROPERTY CLAUSE INEFFECTIVE:
● The policy of making it easy for creditors to take security interests in after-acquired
property does not extend to consumer goods collateral
● In a step toward consumer protection, 9-204(b)(1) provides that an after-acquired
property property clause is generally not effective with respect to consumer goods,
and 9-108(e)(2) bars descriptions of kinds of consumer goods only by type
 ● Under 9-204(b)(2), after-acquired property clauses are also ineffective with respect to
commercial tort claims
● Nor, would use of the "type" of collateral, "commercial tort claim" properly describe
the specific claims in question
● Since an after-acquired property clause would not automatically extend Lender's
security interest to cover the damages when they arose, the SA authorized
Lender to amend the SA by adding any specific commercial tort claims when they
were acquired
 
 
 
5. Proceeds
● 2 points:
1. Article 9 continues the rule that the description of collateral in the SA automatically covers
proceeds
2. The definition of "proceeds" in 9-102(a)(64) significantly expands the scope of the
definition
● General Rules
■ §9-315(c): a perfected SI in the original collateral automatically continues in the
proceeds whether or not the financing statement mentions proceeds.
■ §9-315(e)(1): if a filed financing statement covers the original collateral, the SI in
the proceeds continues until the financing statement either lapses or is terminated,
so long as the proceeds are collateral in which a SI may be perfected by filing in the
office in which the financing statement is filed, and the proceeds are not acquired w/
cash proceeds (§9-315(d)(1).
■ §9-315(d)(2): A SI in cash proceeds continues indefinitely so long as they can be
identified.
1. Example: M has SI in W’s car. W sells car for $3k. M has SI in the $3k
indefinitely so long as it can be reasonably identified as the cash from the sale.
■ §9-315(d)(3): If the debtor uses cash proceeds to buy new collateral (e.g., inventory
and equipment), the SI continues in the collateral for only 21 days unless the
financing statement indicates the type of collateral purchased.
1. Example: M has SI in W’s car. W sells car for $3k. M has SI in the $3k. But if
W uses the $3k to buy new collateral, M has a SI in the new collateral only if
it is the same type/category described in the original financing statement.
2. e.g., if the financing statement covers only inventory but the cash proceeds
are used to purchase equipment, the financing statement does not afford
adequate public notice.
1. Thus, SP must amend the financing statement w/in 21 days to include
the new collateral.
3. Supergeneric identification is ok
1. If the financing statement covers “all personal property of the debtor,”
it will be a sufficient indication of most kinds of collateral purchased by
cash proceeds and §9-315(d)(3) poses no problem
■ If none of 9-315(d)’s conditions are satisfied, the secured creditor must take action to
continue its SI in proceeds past 20 days after its SI attached to them
● The assumption that the agreement cover proceeds unless otherwise agreed
▪ The description of collateral need say nothing about proceeds
 ▪ "proceeds" include what is "acquired upon the sale, lease, license, exchange, or other
disposition of collateral "
● Also includes cash or stock dividends that are covered
● Insurance payments arising from such loss or damage are also "proceeds" to the
extent of the value of the collateral
● New inventory the debtor received that was purchased by cash
● The cash realized from the sale of the original inventory is "proceeds"
● When the new inventory is purchased with the cash, both the original collateral
and the cash are considered "collateral" and the new inventory "proceeds"
● Security interest in collateral attach only to "identifiable proceeds" (problematic)
● Some assets are backed or "supported" by other assets
● Guarantees frequently are issued to back accounts receivables
● The guarantees increase the account's value because the obligee of the account
can obtain payment on the accounts from the guarantor if the account debtor
refuses to pay
● Reduce loss to the creditor when the debtor defaults and the supported
collateral is insufficient to satisfy the outstanding debt
● Guarantees are common types of credit enhancement devices
 
● 9-203(f) provides that a security interest that attaches to collateral automatically attaches to
obligations supporting the collateral
● Revised Article 9 treats supporting obligations in the same way it treats proceeds
 
Problems
Money collected- second generation proceeds
 
Letter of Credit-- Undertaking (letter) that says that if someone owes money, doesn’t pay, the bank
will pay
 
Unsecured loan to hospital acquired by a University
● Anticedent debt
Security of a pre-existing claim
 
9-204:
● Value defined
 
● 3rd requirement for the attachment of the security interest: Debtor has rights to collateral
 
● Question of "Title passage"
● When does the title actually pass to the Wheat?
● If the contract doesn’t say anything- DEFAULT RULE
● If the goods are to be shipped, and the contract specifies a point to which they are
to be delivered… Title passes when they are delivered
● If there is no destination, title passes when they are shipped
● If no shipping--- passes at the time and place where the contract is made
 
● The contract can specify when Title passes
  
Problem (Page 39)
● Security Interest? Yes!
● Attached as soon as the debtor had rights to the collateral (when they received shipment)
● Unperfected security interest get prioritized based on attachment
● If shipped at the same time- both share equal priority
● FIRST to FILE or PERFECT gets priority
 
 
Bona fide Purchaser (BFP)- Good faith purchaser idea
● Have someone who has property to begin with
● Transfer to another party ((possible "wrongdoer")
● Anyone would have a claim against this person, but usually not satisfiable
● This person transfers this to a 3rd party
● Good faith
● Gives value
● No notice
● Wrongdoer disappears
● Then the original owner (victim) comes after the BFP
● Bona fide purchaser wins!
● WHY?
● Victim has a better ability to prevent
 
Many of the problems we see are 2 innocent parties (the wrongdoer is not able to respond)
● In Bankruptcy
● The first party wins, later acquired party
● Presumed notice
 
Void/Voidable Transfers
● Difference?
● Voidable title can be taken away, but it also can be transferred
● Defense against the title, but can only against YOU
● If you transfer it, the party gets it without the action
● Failure of consideration
● Entrusting (if you entrust goods to a dealer, and they sell it, it’s a voidable
transaction)
● 2-403(3)
● A person with voidable title can transfer to a GOOD FAITH PURCHASER to create a SI in
favor of a person who takes that security interest in good faith without knowing of its
voidability and for value
● Void = no title
● IPOD you buy in the parking lot
● Theft, stolen car
● The theif has not title to the car, to power to transfer
 
● Unperfected security interests take order when they are ATTACHED
 
  
6. Value and Rights in Collateral
a. Value
● Under § 9-203(b), a security interest does not attach in collateral until value has been given
and the debtor has rights in the collateral
● In the simple case, a SP gives value in a loan transaction when it makes the loan and in
a credit sales when it makes the sale
● "Floating lien" in inventory and accounts financing
● 1-204(2) a creditor gives value by taking a SI "for, or in total or partial
satisfaction of a pre-existing claim"
 
b. Rights in Collateral
● A SI doesn’t attach unless the debtor has "rights in the collateral or the power to transfer
rights in the collateral"
● Not defined
● Usually, debtor owns the collateral outright and there is no issue of rights in the
collateral
 
● A debtor may have rights in the collateral in cases in which it has less than the full bundle of
ownership rights in the collateral
● A debtor's limited rights are sufficient for a SI to attach to whatever rights a debtor may
have (broad or limited as they may be)
 
 
Swetes Motor Sales, Inc. v. Pruisner
● Facts
● P appeals CCC's adjudicated interest in certain automobiles to be superior to the
interest of the P (Swets)
● P is a wholesaler- sold used cars and trucks to Δ (Pruisner)
● Pursuant to an oral arrangement, P delivered vehicles to Δ with
unencumbered certificates of title and was paid by Δ at the time of delivery
for the cars
● 4 checks written by Δ were dishonored
● P filed his petition and obtained a writ of attachment for the seizure of the
vehicles then in Δ's possession
● CCC had in its possession the unencumbered titles to the vehicles in question
● Δ (CCC) had a valid outstanding SA with Δ Pruisner covering new and used
vehicles in the Δ's possession
 
● Analysis
● UCC provides the resolution of the priority problem in this case
● Despite the fact that Δ tendered, for the purchase of the vehicles, a check which was
subsequently dishonored, he could nonetheless, transfer good title to a "good faith
purchaser" for value
● Good Faith is defined as "honesty in fact in the conduct or transaction
● CCC whose SI under the floor planning scheme predated the execution and delivery
to P and the dishonored checks
  
● "purchase" defined as including taking by sale, discount, negotiation,… voluntary
transaction
● CCC acted in good faith and gave value and is a "purchase" within the meaning of
§1-201
 
● P seller could at most have reserved only a SI in the cattle
● Unless otherwise explicitly agreed title passes to the buyer at the time and place at
which the seller completes his performance with reference to the physical delivery
of the goods, despite and reservation of a SI
● In the matter before us here, P did not even reserve a SI in the vehicles in question.
At the time of the delivery of the vehicles, Δ acquired sufficient rights in the same
to permit CCC's SI to attach
● When goods have been delivered, purchaser has power to transfer title to a subsequent
good faith purchaser for value even though the original delivery was procured through
fraud
 
● Hold/Decision
● CCC interest in the automobiles in question was senior and superior to P's claim
 
 
Swets Motor
● May be rightly decided, horrible result (langbein)
● BUY
● Not synonym of purchase
● Purchase: voluntary interest (could be a lien, partial interest, lease)
 
● Someone with a voidable title can create a security agreement-- BFP
● Inventory Floor Plan-- loan
● Any dealer in major merchandise will have it
● Applies to dealers that have a show room floor, but applies to all the inventory (like
car dealership)
● All inventory is secured for the loan
● List of cars in inventory
● When sells the car, must turn proceeds over as payment on the loan
● When it acquires additional inventory, it turns
● Car dealers never have any cash
 
● Buyer exchanges inventory, in exchange for a bad check
● Floor plan lender, claims cars for the inventory loan
● Seller wants the car back
● Chrystler credit wins
 
 
● Article 9:
● Any Fraud obtaining the interest (if sale is fraudulent under the law of the state)=
can treat it as VOID, even if not otherwise VOID
  
● Bank wins because the bailee had voidable title
 
 
 
 
NOTE
● If the owner of collateral allows another to appear as owner or to dispose of the collateral,
such that a 3rd party is led into dealing with the apparent owner as though he were the
actual owner, then the owner will be estopped from asserting that the apparent owner did
not have rights in the collateral
● Inventory Floor Plan:
● Anytime you have a floor plan (car dealership, Sears) there is a Lender--> gives money to
car dealership to buy cars---> anytime someone pays for cars in cash, goes straight to
the lender (that is why dealerships never have cash)
 
 
 
Chapter 2: Perfection
 
A. Introduction
● If a SI has "attached" it is enforceable against the Debtor and unsecured creditors
● In general, attachment occurs when SP:
● Has given value
● Debtor has rights in the collateral
● Debtor has authenticated a SA that provides a description of the collateral
● Order is irrelevant
 
● For a SI to be most favorable with respect to 3rd party claimaints (other SPs, buyers and lien
creditors) it must be perfected
 
● "Perfection" is a legal conclusion that indicates that a SI is enforceable against 3rd parties
 
● Section 9-308 through 9-316 lay out how Security Interests are Perfected:
1. Attachment
2. Possession
3. Control
4. Compliance with other law
5. Filing
 
9-203: Attachment
9-308: Perfection: legal conclusion indicating that a security interest is enforceable against a third party
● BC 544(a)(1): trustee in bankruptcy has the rights of a hypothetical lien creditor
● 9-317(a)(2): unperfected security interest is generally subordinate to the rights of a lien creditor
● If security interest is avoided in bankruptcy, the former secured party is demoted to the status of an unsecured
creditor and must share the assets pro rata with the other unsecured creditors.
● Occurs upon attachment + something else (sometimes)
o   Automatic: circumstances are listed in 9-309
▪ 9-309(1): Traditional rule - PMSI in consumer goods require no filing
 ▪ 9-320(b): If a retailer retains a security interest in goods sold to a consumer, its un-filed
security interest is good as against other secured parties and trustees in bankruptcy, but not
against a subsequent consumer who buys the property from the first consumer (i.e. garage
sale)
o   Possession: 9-313(a) goods and money and instruments representing rights to payment that are
possessed by the secured party constitutes perfection.
▪ 9-312(b)(3): security interests in money can be perfected only by possession, owing to the
negotiability of currency
▪ 9-312(c): Negotiable documents represent rights to goods being stored or shipped
▪ Pure intangibles (i.e. accounts) cannot be perfected by possession
▪ i.e. uncle takes the engagement ring – even though perfection happens at the same time as
possession it is different than automatic perfection
o   Control: the ability to dispose of collateral unilaterally without the cooperation of the debtor
▪ 9-314(a): permissible method of perfection for letter-of-credit rights, investment property,
electronic chattel paper, deposit accounts → Look to the statute (only means anything in
connection with various kinds of property, most specifically intangible)
▪ 9-312(b)(1): only method for deposit accounts (checking or savings accounts maintained with
a bank)
▪ 9-104: control can arise as a result of an agreement among the secured party, debtor, and
bank whereby the bank agrees to comply with instruction of the secured party with respect to
disposition of the funds on deposit, even though the debtor retains the right to direct
disposition of the funds.
● If the funds added to a deposit account are proceeds, a SI perfected in those proceeds
by other means follows into the account to the extent the proceeds are traceable (9-
315)
o   Compliance w. Other Law (Title Statute): 9-311: SI subject to other law can be perfected only in
compliance with that law
▪ Compliance with these laws is equivalent to filing under Article 9 (9-311(b))
▪ Automobile Statute: lender will take possession of the title or stamps the interest on the title.
In those cases the title statute tells you when the interest is perfected (in motor vehicles,
security interest is perfected by notation of the lien on the certificate of title pursuant to the
state vehicle code).  UCC tells you everything else (what perfection means). Look to Title Act
to determine perfection
▪ Copyright Act distinguished: whole question of SI is determined by the Act, not the UCC
o   Filing: 9-310(a) general rule that perfection must be by filing a financing statement, filing is not
necessary to perfect the security interest (9-310(b))
▪ 9-313: unless its in the exception, you have to file a financing statement – but you can file in
respect to the list in the exception (ex: in the possession of the secured party – you can still
file)
▪ You can assign the SI, debtor can transfer the collateral and the file remains good. 9-500
▪ Security interests in accounts and payment intangibles can be perfected only by filing

 
 
 
Perfection
● Perfection occurs when
● Attachment + Something else (sometimes)
● Something else:
1. May be automatic
2. Filing
3. Possession
4. Control (always have to look at statute to see what it means, always has to do
with certain types of intangible property- will be in control, but not
possession)
5. Compliance w/title statute
 
● Sometimes when security attaches, its automatically perfected (9-309)
 
 ● 9-502(d)- can file even though you don’t have a security agreement
● Do this because it takes time
● If someone created a security agreement that attached, takes a period of time before it
shows up
● Even if someone gets a security interest after, the priority will date the date of
filing!
 
Filing 9-502(a) :
1. Sufficient
a. Conditions of being sufficient
1. Names of Debtor
2. Name of Secured Party
3. Indicate collateral covered
2. Effective
3. Filed
 
▪ Need all 3
▪ If its not sufficient-- its not effective
▪ If it has all3, but doesn’t say if the Debtor is an individual or organization
● Erroneous filing (if the office action is erroneous) is still filed!
 
 
▪ Case 1
● (Good information 9-516(b)(5) and the office Accepts)- FILED
▪ Case 2
● (Some bad information 9-516(b)(5), but the office erroneously accepts it)- FILED!
▪ Case 3
● (Good information, but the office rejects- wrongly don’t file it)- FILED effective!
● (Excepts against a person who gives it value and reasonably relied)
● Who might that be?
● 9-516(d)
▪ Case 4
● (Bad information, and the filing office rejects)- NOT FILED EFFECTIVE
 
 
 
B. Perfection by Filing
1. Notice filing
● Under Revised Article 9 we now have a regime under which notice filing and central filing
are fully operative
● Notice filing means that the only record filed is a financing statement that merely
gives notice that a security interest may exist in the debtor's collateral
● Art. 9 filing system has 2 purposes: to allow the filing party to establish a priority in the
debtor's collateral and to provide information to the searching party about security
interests in this property
● Comment to 9-502:
 ● This section adopts the system of "notice filing"… only a simple record providing a
limited amount of information (financing statement)
● Financing statement may be filed before the security interest attaches or
thereafter
● The notice itself merely indicates that a person may have a security interest
● Further inquiry from the parties concerned will be necessary to disclose the
complete state of affairs
● A financing statement is effective to encompass transactions under a security
agreement not in existence and not contemplated at the time the notice was filed, if
the indication of collateral in the financing statement is sufficient to cover the
collateral concerned
● Similarly, a financing statement is effective to cover after-acquired property of the
type indicated and to perfect with respect to future advances
 
● What is remarkable about this is how little information the filer's financing statement
discloses to the searchers
● Security Agreement is not open to public scrutiny
● Unless the debtor or secured creditor is willing to allow searchers to see the security
agreement or reveal the details, only the fragmentary statements in the financing
statement are available to the searcher
● The Obvious source of information is the debtor, and if the debtor is seeking credit from
the searcher, it can be expected to cooperate by showing the searcher the security
agreement and other documents
 
● 9-20 statutory procedure under which SP at debtors request may be required to disclosed
 
 
2. Sufficiency of Financing Statement
● A financing statement is "sufficient" only if it provides the names of the debtor and secured
party and indicates the collateral covered-- it is "effective"
● Name of debtor
● Name of SP
● Collateral Covered
 
● The 3 basic requirements do not include some information that is important to the operation
of a filing system, such as the address of SP and debtor, whether the debtor is an individual
or organization, and the type of organization
● Filing doesn't occur if the filing office refuses to accept a record that lacks this
information
● with respect to a record that a filing office rejects because it lacks this information
● financing statement is effective even if it does not include some of the information
set out (so long as it meets the basic requirements)
 
In re Hergert
● Facts
● Debtor's farming business was originally financed through Pacific
● As part of a merger, all of the assets of Pacific were acquired by the Bank
 ● These assets included 3 secured loans of the debtors
● The UCC1 and the Title identified the SP as Pacific bank
● Accurate when the documents were created and filed
● After origination of the Debtor's loans and before the CH12 filing, Pacific was
merger into the Bank
● Bank has never amended the SP's name or addresses in any of the above
described documents
● Subsequent to the merger, Address expired and the Bank no longer received mail
there
● Undeliverable
 
● Analysis
● A financing statement is sufficient only if it:
● Provides the name of the debtor
● Name of SP
● Indicates the collateral covered
● Fixture filings and timber to be cut must satisfy:
● Indicate that it covers this type of collateral
● It is to be filed in the real property records
● Provide a description of the real property to give construction notice
● If the debtor does not have an interest , provide the name of the record
owner
● Financing statement that covers farm products
● Name and address of debtor
● Debtors signature
● Name, address, signature of SP
● SS#
● Description by category
● Reasonable description of real estate where farm products are produced
 
● A filing officer SHALL refuse to accept a financing statement if it is not in
compliance
● Entitled to reject if it lacks the name or mailing address for SP
● MAY reject a farm product financing statement if it does not contain all the
information specified
● However, protects improper statements so long as they are in fact filed and
contain certain essential information
 
● Name
● A financing statement substantially satisfying the requirements of this part is
effective, even if it has minor errors or omissions, unless the errors or
omissions make the financing statement seriously misleading
● A financing statement that fails to sufficient;y provide the name of the
debtor is seriously misleading
 
● Negative inference would indicate that an error in the name of the SP is NOT
of the same magnitude
 ● Not automatically per se seriously misleading
● No filing is needed to continue the perfected status of a Security Interest after
it is assigned, an error in the name of the SP or its representative will not be
seriously misleading
● An error of this kind may give rise to an estoppel
● (to give rise to such an estoppel, the name in error would have to
actually result in prejudice to a particular searcher that reasonably
relied to its detriment on the error and would be harmed)
 
● While amendments of financing statements can be made, nothing in those
sections appears to indicate that it must be made
 
● Address
● The function of the address is not to identify the secured party of record but
rather to provide an address to which others can send required notifications
● A person required to send notification to the SP may satisfy the
requirement by sending a notification to that address, even if the
address is or has become incorrect
● SP is deemed to have received a notification delivered to that address
 
● For all these reasons, the errors in name or address cannot be viewed as rendering
the filing of that statement ineffective
● The absence of the name or address grounds for the filing officer to reject the
statement, but if he accepts for filing it will be effective
 
● Decision
● Bank has a valid, perfected security interest in the property
 
In re Hergert
● These are Bankruptcy judges
● Pacific One bank is the acquired
● Merger of the 2 banks-- (Creditors)
● Named the right bank when it was originally filed
▪ No requirement that there is an amendment if the name of the Creditor changes
● The party that actually has rights, doesn’t have to be the named party of record
▪ Often the case in retail financing
▪ 9-507 doesn’t allow information changed by post filing events (UNLESS what is
different is the name of the debtor)
 
● If an obligor assigns and Obligation, is the obligor discharged by the assignor and
whether Notice is required
▪ Do they have to tell you they assigned it
▪ If you cant contact the secured party, and the debtor cant tell you…. Shouldn’t
make the loan
 
● Although 502 doesn’t require the address, the filing arent supposed to file--- but if they
do- it is effective
  
9-509(a)- Person may file initial financing statement, only if debtor authenticated record
▪ Authenticate OR "becoming bound"
 
9-203(d)
● "becoming bound"
▪ When a partnership turns into a corporation (incorporate a partnership)
▪ Becoming obligated of the obligations of another person
▪ When assumption of liability:
● Whichever liabilities that were originally secured-- security interest in the
collateral agreement… does not mean that the debtor is bound by the
security interest
● Doesn’t mean that the transferee is bound by the security agreement
● SP is bound by the security agreement
 
● Supposed the corporation impairs the collateral
▪ If you only had 9-315(a)-- the corporations responsibility would come to an end
▪ But with 9-203(d) if that impairment violates the security agreement, can still be
liable
● Corporation assumes the security agreement
 
▪ Mergers do this automatically by law
 
● Financing statement CAN BE BROADER without destroying the security agreement!
▪ If you do this, you may not be able to rely on the signature in the security
agreement for authentication (OR- in other words- get the debtor to sign the
financing statement)
 
 
● 9-504: A financing statement
▪ Super Generic OK (not in security)
 
 
● 9-506(b)- error in the name of the debtor IS SERIOUSLY MISLEADING, but error on the
name fo the SP is not
 
● 9-511- Does not require an amendment for succession in interest, such as by merger
 
 
● Address
▪ The address isnt that important will not be held seriously misleading just because it
is incorrect
 
NOTE
● 9-507(b) doesn’t allow information in an initially effective financing statement to render
the statement ineffective by post-filing events, however seriously misleading the
information becomes
 ● "once effective, always effective"
● Subject to 9-507(c) - change in debtor's name
 
3. Financing Statement Authorized by Debtor
● Article 9 no longer requires that a financing statement be signed by the debtor
● 9-502(a) drops the signature requirement
● Doesn’t meant that all filings are authorized and 9-509(a) provides that a person
(usually the SP) may file an initial financing statement only of the debtor authorizes
the filing in an authenticated record
● Although the debtor doesn’t have to authenticate the financing statement, it
must authorize the filing of the financing statement in an authenticated record
● By signing or otherwise authenticating the security agreement, the debtor
authorizes the SP to file a financing statement covering the collateral described in
the security agreement
 
 
4. Indication of Collateral
a. Original collateral
● The requirement of 9-502(a)(3) that the financing statement must indicate the
collateral covered by the financing statement is met by either a description of the
collateral of an indication that the financing statement covers all assets or all personal
property
● Under notice filing, a financing statement indicates the collateral covered if it provides
notice that the person identified as the SP may have a security interest in the
collateral claimed
● Generic descriptions by types of collateral (e.g. inventory, accounts, equipment)
suffice
● Financing justifies the supergeneric description
 
● Notice filing regime is a huge convenience to secured parties
● In "floating lien" cases involving shifting collateral like inventory or accounts, additional
supplementary financing statements need be filed in only unusual cases in which the
identities of the parties change or the nature of the collateral changes radically
 
● Allowing super-generic descriptions has proved to be one of the most controversial
changes made by the revision in that it is seen as making it even easier for creditors to
take a security interest in all the debtor's assets, to the disadvantage of meritorious
creditors who have dealt with the debtor on an unsecured basis
 
 
ProGrowth Bank, Inc. v. Wells Fargo Bank, NA
● Facts
● Wells Fargo and Global One (Defendants) appeal from grant of SJ in favor of ProGrowth
● This case concerns separate and unrelated loans made by GO and P to Hanson (the
Agency)
● GO and the Agency entered into a Promissory Note and a Security Agreement, pursuant
to which GO loaned the Agency 1 million dollars
 ● As securuty for the loan, Hanson assigned his interest in 2 separate anuity
contracts (valued at 1 million)
● Same day, WF acting as a collateral agent for GO filed a FS with the Secretary of the
State
● FS identifies the debtor as Hanson
● Identifies the incorrect contract number
● Second FS statement correctly identifies the contract number, it once again mistakenly
refers to the issuer of the contract
● One year later, Hanson obtained a loan from PG assigned his interest in the 2 contracts
(same)
● PG filed 2 financing statements and accurately described the collateral
● PG then filed this lawsuit decreeing that its perfected SI in the annuity contracts
are prior and superior to any perfected SI claimed by the Δ
● PG argued that the Δ's SI's are not perfected because the financing statement
filed with respect to those interests is seriously misleading
 
● Analysis
● The parties agree the priority of the Δ's SI is dependent on whether their interests are
perfected in accordance with Article 9 of the Missouri UCC
● Annuity K's are perfected only if the financing statement they filed are sufficient
● SUFFICIENT only if:
1. Provides the name of the debtor
2. Provides the name of the SP or a rep of SP
3. Indicates the collateral covered by the FS
 
● A Financing Statement SUFFICIENTLY INDICATES THE COLLATERAL when it
provides:
1. A description of the collateral OR
2. An indication that the Financing Statement covers all assets or personal
property
● A financing statement substantially satisfying the requirements of this part is
effective even if it has minor errors or omissions, unless the errors or omissions
make the financing statement seriously misleading
● The financing statement serves the purpose of putting the subsequent creditors on
notice that the debtor's property is encumbered
● It is not to identify the collateral and define property… it is to warn other
subsequent creditors of the prior interest
● We view the validity of the financing statement in terms of whether it provides
notice that a person may have a security interest in the collateral claimed
● The UCC allows for imperfect financing statements and it recognizes that sometimes
further inquiry from the parties concerned will be necessary
● PG argues that the FS's ARE seriously misleading because they identify the annuity
contract with a) the wrong issuer and 2) error in the K #
● Were this the only language in the Δ's financing statements we may be inclined to
agree
● These provisions cannot be read in isolation however
● It is necessary to analyze them in their entirety
 ● While such a broad and generic description is insufficient to describe
collateral in a security agreement, it is sufficient to describe collateral in a
financing statement because it puts subsequent searchers on notice that any
item of collateral owned by the debtor may be encumbered, which is the
purpose of the filing system
 
● Decision
● We conclude that the Δ's financing statements satisfy the filing provisions of the UCC
because they indicate coverage over Hansons assets
● It gives an indication that all the assets may be covered
● Thus, any inaccuracies in describing the specific annuity contracts at issue are
immaterial and do not render the statements seriously misleading
● Because the two phrases are separated by a comma and the word "and"
● All of the assets is in addition to the identification of the collateral in the Annuity
Contract
● Where a description can reasonably be interpreted in one of 2 ways- one of which
may cover the collateral at issue and one of which does not- notice filing has
served its purpose of alerting subsequent creditors to the possibility that a piece of
collateral my be covered
● The burden is then on the subsequent creditor to inquire further
● The UCC does not require perfect description- only an indication of such
coverage
 
● Holding
● The relevant question is whether the statement -- judged in their entirety-- are seriously
misleading, not whether one alternative, and ultimately unnecessary, means of
describing the collateral contained therein is seriously misleading
● While Δ's specific description of the annuity contracts contain errors, the statements
themselves are not seriously misleading because subsequent creditor should reasonably
understand that the financing statements may cover all of Hansons assets
● Sufficient to perfect Δ's security interest
 
 
NOTE
● In effect, the court uses a generic clause in the financing statement to cure the effors in a
specific description of collateral that standing alon might have been found seriously
misleading
 
ProGrowth Bank v. Wells Fargo Bank
● Collateral Agent= like a REPO agent (larger lender enforcing right to collateral)
● The result is awful, but the UCC provision language allows for this
 
● Only person that can amend the financing statement is the SP
● Can get an express subordination agreement from the original lender
 
● A subsequent lender. What can they do after this holding??
● They can refinance all the loan
 ● Pay off old loan and take the collateral on everything
 
 
Problems
● (page 67)
● Trustee wins (rare)
 
 
 
a. Proceeds
● How to perfect a security interest in proceeds:
1. A perfected security interest in the original collateral automatically continues in the
proceeds, whether or not the financing statement mentions proceeds (§ 9-315(c))
2. If a filed financing statement covers the original collateral, the security interest in the
proceeds continues until the financing statement either lapses or is terminated (§ 9-
315(e)(1)), so long as
(a) the proceeds are collateral in which a security interest may be perfected by
filing in the office in which the financing statement is filed, and
(b) the proceeds are not acquired with cash proceeds (§ 9-315(d)(1))
3. A security interest in cash proceeds continues indefinitely, so long as they can be
identified (§ 9-315(d)(2))
4. If the debtor uses cash proceeds to buy new collateral, such as inventory or equipment,
the security interest continues in the collateral for only 21 days unless the finanancing
statement indicates the collateral purchased
 
Perfection
● An established
● A security interest attaches to any IDENTIFIABLE collateral proceeds
● Most common collateral that will meet-- money
● Least likely to be identifiable-- money
 
● Problem (page 68-9)
● (a) Even though the financing statement doesn’t specifically cover accounts
● (b) identifiability of cash proceeds- by describing it by putting it in envelopes
● (c)
● If he used the cashiers check and turned it over to another bank in which he owes
money
● There would be a priority dispute
 
 
 
5. Name of Debtor
a. Basic rules
● Financing statements are indexed under the name of the debtor
● If a financing statement contains an incorrect name of the debtor, searchers will be
misled and may not find the financing statement (and it doesn’t provide notice)
 ● Basic rules in § 9-503(a): Financing statement sufficiently provides the name of the
debtor:
1. If the debtor is an individual, by giving the name of the individual, not the trade
name
2. If the debtor is a general partnership, by giving the name of the partnership, not
that of the partners
3. If the debtor is a "registered organization" by giving the name of the organization
indicated on the public records of the debtor's organizing jurisidiction
● General Partnerships are not registered organizations
 
b. Minor Errors Rule
● A financing statement that has a minor errors is effective unless the errors make the
financing statement seriously misleading
● Financing statement that fails to sufficiently provide the name of the debtor in
accordance with § 9-503(a) is seriously misleading
● Making it ineffective as a matter of law
 
● Search Logic Issues
● Different filing offices may use different search logic procedures
● PRE-REVISED ARTICLE 9 court ruling:
● Absolute accuracy in spelling names is not required in a legal document if
the misspelled name and the correct name sound alike
● Computers are just machines and no person should ever become a
servant of a machine
● It will not suffice to perform a word search for the precise corporate
name, rather the interested party should expand its investigation to
include all related entries through which a manual searcher might
have stumbled
 
● Revised Article 9 shifted the burden from the searching creditor to the filing
creditor with respect to the name of the debtor on the financing statement
 
● If you find the name, even if not the registered organization name, the party will be held
with the knowledge that there was security interest
 
 
Pankratz Implement Co. v. Citizens National Bank
● Facts
● Pankratz attempted to perfect its security interest in equipment sold to Rodger
House-- spelled the name a ROGER House
● Bank later attempted to secure the name property using the debtors correct name
 
● Issue
● The sole issue is whether the filing of a financing statement which misspells the
debtor's name is insufficient to render a filed financing statement seriously
misleading under the UCC and therefore ineffective as to other creditors claiming a
security interest in the same collateral?
 ● Trial History
● The Court of Appeals discussed the minor error rile and determined that a search
using the standard search logic under the debtor's correct name would not disclose
the prior security interest of Pankratz
● Places the burden on the filing creditor to list the debtor correctly
● The searching creditor is under no obligation to conduct searches under
variants of the debtor's name
● Error could not constitute a minor error
 
● Analysis
● A financing statement that fails sufficiently to provide the name of the debtor in
accordance with the UCC is seriously misleading
● Pankratz's use of the debtor's misspelled name failed to provide the individual
name of the debtor in accordance with 9-503(a)
● However, in accordance with the safe harbor provision of section (c) the error
may not be seriously misleading if:
● If a search of the records of the filing office under the debtor's correct
name, using the filing office's standard search logic, if any, would
disclose a financing statement that fails sufficiently to provide the name
in accordance with (a)… the name provided does not make the financing
statement seriously misleading
● Pankratz's financing statement using the misspelled name of the debtor, while
prior in time, was seriously misleading
● We believe that the language used by the legislature and the intent behind the
adoption of the most recent amendments had the effect of shifting the
responsibility of getting the name on the financing statement right to the filing
party, thereby enabling the searching party to rely upon that name and eliminating
the need for muliple searches using variation of the debtor's name
● More certainty in the commercial world and reducing the litigation
 
● Decision
● Pankratz failed to satisfy the requirement of using the correct name of the debtor
and thus did not satisfy the name requirement.
● Nevertheless, minor errors will not destroy the effectiveness of the statement
unless the errors make the statement seriously misleading
● P failing to meet the naming requirements is seriously misleading except in
the case where a searching using the debtor's correct name discloses the
defective financing statement
● In this case it did not and therefore remains seriously misleading
● The intent to clarify when a debtor's name is sufficient shows a desire to foreclose
fact-intensive tests, such as those that existed under Former Article 9
● Requiring a financing statement to provide a debtor's legal name is a clear cut
test that is in accord with that intent
 
 
NOTE
 ● An elusive objective of Article 9 Revision has been to settle on a definition of the name
of the debtor on a financing statement when the debtor is an individual
● The Reporter's notes state that the diversity of vies has led to a decision that each State
be asked to chose between 2 alternatives:
● Alternative A:
● Only the name of an individual debtor that appears on the most recent
unexpired license issued by the State in which the debtor maintains the
principal residence is sufficient for a financing statement
● If debtor does not have a drivers license, the financing statement would be
sufficient if it provides the individuals name of the debtor or the surname and
first personal name of the debtor
● Alternative B:
● Provides 3 ways in which a financing statement may be sufficiently provide
the name of the individual who is a debtor
● The individual name of the debtor
● Surname and first personal name of the debtor
● Debtor hold an unexpired license- that name sufficient
 
 
 
6. Post-Filing Changes
● Changes that take place after the filing of a financing statement
 
a. Transfer of Collateral
● Perfection of a nonpossessory security interest requires two things:
● Filing an effective financing statement and
● A security interest that has attached
● Accordingly, Debtors transfer of equipment to Buyer could affect either the continued
effectiveness of SP's financing statement or its attached security interest
● The two possibilities are independent of each other
● If either eventually occurred, SP's security interest would be unperfected
● 9-507(a) deals with the effect of a transfer of collateral on the continued
effectiveness of a financing statement
● What is the duty of a secured party to monitor its debtor with respect to post-filing
changes?
● 9-315(a)(1) states the general rule that a security interest continues in the
collateral after the debtor transfers it to another person unless the secured party
authorized the disposition free of the security interest
● (a)(2) says that the security interest attaches to any identifiable proceeds of
collateral
● i.e. consideration that Buyer gave Debtor for the equipment
● SP's financing statement remains effective with respect to the collateral that
Debtor sold Buyer even if the secured party knows of or consents to the
disposition.
● "debtor" to include a person having an interest in the collateral, it acquired such an
interest
 
● TRANSFER OF COLLATERAL
● Governed by 9-507(a)
● When you transfer collateral, even if transferee is not part of security
agreement, the collateral remains subject to the security agreement
● Sale to a customer (special rule, wont apply)
● Automobile sales (wont apply)
 
● Even if the transferee has taken on the obligation… still cannot assume
that it is a party to the security agreement
● Money Debt (separate obligation) then Security Agreement
● 9-203(f)
● 9-203(d)
● Even if the transferee KNEW about the security agreement,
and ASSUME the debt… still not a party to the security
agreement
● But where there is a whole business transferred, whether or
not you remembered to make the transferee part of the
security agreement- are bound by the security agreement?
● NEW DEBTOR: If the whole business is acquired, and they
assume the debt (NOT, just an individual acquiring the
collateral), they will be a New Debtor
 
● IN a MERGER
● Acquiring Company and Targeting Company become ONE COMPANY
● One survives
● By operation of law
● 9-203
 
● EXAM!!!
● Security Interest sticks around with New Debtor
● As to the target corporations property in existence at the time of Merger
● Financing statement will stay in effect under 9-507(a)
 
 
● EXAM!!!
● Also Inventory Problem & Securitization Problem
 
● 9-508(a)
● Filed financing statement naming original debtor, effective to perfect the
security interest against new debtor
● Had the Original debtor acquired the right
● If this section wasn’t here, the security interest would not be perfected
● 9-508(a) overrides that
● Security Interest perfected solely based on 9-508(a)
● (b)- exception
 ● If the name of the original and new are so different that the name of the new
debtor would be seriously misleading, it is effective forever in the previously
included collateral and anything acquired 4 months after
 
● 9-507
● For a financing statement on the original property-- stays effective because of
9-507, not 9-508
 
● 9-325(a)
 
 
 
 
 
b. Name Change
● 9-507
● If you change the debtors name the financing statement is not seriously misleading
if it is filed within 4 months of the change
 
New Debtor
● Problem (p. 88)
● NAME CHANGE
● Governed by 9-507(c)
● Kacy and Camden Inc --- changed to KC of Camden Inc
● Change that makes it seriously misleading
● Bank has first priority for all the collateral under the security
interest (original) and for anything acquired 4 months after the
change
● Still have security interest in the old collateral and proceeds
● Perfected in any other method (like perfection)
● Have 4 months to refile a perfected financing statement
 
● If Bank takes possession, who has priority?
● First to file or perfect
● Perfection of Bank happens upon possession
● Perfection of Lender dates back to filing
● If the Bank didn’t perfect (file), but took possession 6 months
after the change… they still lose
● Since Lender perfects upon its filing of security agreement,
they have priority
● If there is NO AFTER ACQUIRED clause, the 4 months is irrelevant
 
c. Change in Business Structure
● The original debtor is an individual proprietor who incorporates or is a corporate debtor
that merges into another corporation
● The issues we face are whether a security interest in the collateral of the original debtor
continues in this collateral after it has passed to what Article 9 calls the "new debtor"
 which will have a different name than the original debtor, and whether the security
interest also covers collateral of the new debtor acquired after the change in business
structure
 
1. Pre-Revision Authorities
● Before Revised Article 9: authority was divided
● Bank = original SP w/Debtor as individual
● BW= 2nd SP w/debtor as corp.
● One view:
● Holding that the Bank had no security interest in the inventory
purchased by debtor because the new corporate entity had not entered
into a security agreement with Bank
● Bank retained its security interest only in the collateral transferred
to Corporation and the proceeds of that collateral
● Inventory acquires by Corporation was not proceeds of any of
Bank's collateral
● Bank did not acquire a security interest in the collateral because
Corporation did not sign a security agreement with Bank providing
for a security interest
 
● Second view:
● Rejected as unrealistically strict
● In casein which the old debtor entity merely takes a new legal form, such
as an individual, the creditor community is dealing with the same people
and the same business operations as before
● If the financing statement after the transformation is not seriously
misleading, searchers are not really misled by the change in the
form of the debtor
● New entity usually takes a transfer of all the assets of the old entity
and assumes liability on all its debt, including the security interest
● New entity adopted the security agreement of the old entity
 
2. "New Debtor" Under Article 9
● "new debtor" under 9-102(a)(56) if it becomes bound as debtor under 9-203(d) by
a security agreement previously entered into by another person
● A person may become bound as a debtor on a security agreement entered
into by another person either by contract of by operation of law
● Agree to become liable for all debts of its predecessor at the time when it
receives transfer of its predecessor's assets
● General liability include liability on the predecessor's security agreement
● Another way is by operation of law
● Mergers, state corporate law renders successor entities liable for the debts of the
old entities
● Section 9-203(e) provides that if Corp. is a new debtor, bound by the security
agreement of the individual with Bank, there is no requirement that the new
debtor entered into a new security agreement with Bank
 ● Bank's security interest attaches to all the existing or after-acquired property
of the new debtor (Corp) to the property it is described in the security
agreement with the original debtor
 
● Financing Statement naming the original debtor is effective to perfect a security
interest in collateral of the new debtor to the extent that the financing statement
would have been effective had the original debtor acquired the collateral
● Exception to this rule in cases in which the difference between the names of
the original debtor and the new debtor causes the financing statement to be
"seriously misleading"
● So if the financing statement is not seriously misleading with respect to
Corporation, Bank does not have to re-file against Corporation
● If it has become seriously misleading, Bank does not have a perfected
security interest in collateral acquired by Corporation more than 4
months after Corporation becomes bound unless it re-files before the
expiration of that time.
● Thus the solution to the problem above would seem to be that Bank's security
interest is prior to that of BW (2nd Secured Party) even in collateral purchased by
Corp. from BW after incorporation
 
 
● Article 9 is very kind to filers and tough on searchers
● Burden is on prospective lenders to ascertain whether a prospective debtor
has acquired property that is subject to prior security interest
● Article 9 does not force a secured party that has perfected by filing to monitor
its debtor to learn whether it has transferred collateral to another
 
 
 
C. The Filing System
1. Central Filing
● § 9-501(a)(2) adopts the state's central filing office
● Secretary of State, as the place of filing a financing statement in all cases except those
involving certain real property related collateral (must occur locally in the office where
real property mortgages are recorded)
 
● Filing System
● 9-501(a)(2)
● Secretary of the State
● Local filing is still required for fixture filing and real estate
 
1. Initial financing statement
2. Amendments
3. Continuation statements
4. Termination statements
 
● Financing statement last for 5 years
 ● Termination statement:
● When the debt is paid- obligated to send debtor a termination statement (no
longer appear on record)
 
 
2. Kinds of Records Filed
a. Financing Statement Records
● "financing statement" includes amendments, continuation and termination statements
● Initial Financing statements
● Effective for 5 years and lapses at the end of 5 years unless a continuation
statement is filed
● A person is entitled to file an initial financing statement only if the debtor has
authorized the filing in an authenticated record
● But the debtor's authentication of a security agreement automatically
authorized the filing of a financing statement covering the collateral
described and the proceeds of the collateral
● An unauthenticated filing of a financing statement is ineffective and the
filer is liable for damages
 
● Amendment
● Includes continuation or termination of an existing financing statements,
adding or deleting collateral, or otherwise changing the information provided
● If the amendment adds collateral or an additional debtor to a financing
statement, the debtor must authorize the filing
 
● Continuation Statement
● The effectiveness of a financing statement may be extended for an additional
5 years
● Runs from the time the financing statement would have become
ineffective
● May be filed only within 6 months before expired
● If it is not filed within the 6 months period, it is ineffective
● The filing of an amendment other than a continuation statement does not
extend the period of effectiveness of the financing statement
● The secured party of record may authorize the filing of a continuation
statement without further authorization by the debtor if some part of
the obligation secured by the security interest is still owing
 
● Termination Statement
● When the obligation is paid in full, the debtor may demand that, within 20
days, the SP either send debtor a termination statement or file the
termination statement itself
● No duty until debtor demands one
● Files wont be cluttered because they automatically lose effectiveness
after 5 years unless they are continued
 
● Assignment
 ● Security interests are frequently assigned
● Case #1:
● A common transaction is for a dealer to take a security interest in
goods sold and almost immediately assign the security interest to a
financer
● Financing statement is commonly filed by the assignee with its
name and address as the secured party
● The assignee becomes the secured party of record
● Case #2:
● Original secured party becomes the secured party of record by filing
the original financing statement
● Assign the security interest to an assignee and reflect this by filing
an amendment
 
b. Safe Harbor Form
● A National Form
● The acceptance by the Drafting Committee of the UCC Financing Statement Form
(UCC-1)
● Filing offices everywhere must accept
 
3. When Filing Becomes Effective
a. Filing Office Indexing Errors
● If the filing office does not correct the record after it is received
● Does not affect the effectiveness of the filing even though no public notice is given
● Failure of the Financing Office to file an accepted financing statement does not affect
effectiveness
 
b. Duty of filing office to accept or reject
● A filing office shall refuse to accept a record for filing for a reason set forth in § 9-516(b)
and may refuse to accept a record for filing only for reasons set forth in § 9-516(b)
● Hence, a filing office is not permitted to impose conditions or requirements other
than those stated in § 9-516(b)
● Liability of a filing officer to those harmed by the officers act: State tort law
normally applies to hold the filing officer liable resulting for negligence resulting in
harm to filing or searching parties
● Wrongful rejection by the officer does not cause harm to the filing party
because § 9-516(d) considers the statement effective as a filed record except
as against relying purchasers
● There is no negligence liability
● In other cases, such as negligent issuance of a certification where no
financing statement was filed, filing office acts might cause harm
● Jurisdictions generally take 1 of 3 positions:
1. Allow recovery against the filing officer (negligence)
2. Insulate the officer from personal liability through insurance
3. Insulate the officer from personal liability through state
sovereign immunity
 
  
 
D. Perfection by Possession
 
1. Possession by Agent
● The transaction in which perfection occurs by the secured party's possession is often called a
pledge
● SP perfect security interests by taking possession of goods, instruments (promissory notes)
and documents of title (bills of landing, warehouse receipts)
● A promissory note is a promise to pay money and the promise is exclusively embodied in
the piece of paper and can be enforced only by the holder of the note
● If the SP physically possesses an article of collateral belonging to the debtor, the debtor's
other creditors should be on notice and have reason to investigate
● Both attachment (§ 9-203(b)(3)(B)) and perfection (§ 9-313(a)) occur when a SP takes
possession of collateral pursuant to the agreement of the debtor
● No authenticated SA is required
 
Possession
● Perfection by Possession
● Fungible
● Products that are interchangeable (don’t care about the source of
individual product)
 
 
● Use cash to acquire inventory
● 9-315(d)(3)
● Since financing statement covers inventory, don’t need to change
financing statement
 
● Use cash proceeds to acquire equipment
● Have 20 days grace period to amend financing statement to keep
security interest in proceeds
 
● 9-310
 
 
 
 
In re Rolain
● Discusses limits of perfection by possession of Agent
● Facts
● Bank loaned Rolain and a corporation UW money
● UW executed a promissory note that was later partially guaranteed
● UCM its parent company guarantee was secured by a note of one of its
debtors
● Collateral pledged
 ● The parties agreed that the note would be held by Rolain's attorney, under a
written agency agreement
● Rolain later filed for bankruptcy
 
● Analysis
● Here applicable law is UCC § 9-305:
● When Possession by SP perfects Security interest without filing
● A SI in letters of credit, goods, instruments (other than certificated
securities), money, negotiable documents, or chattel paper may be
perfected by the secured party's taking possession of the collateral
● If such collateral other than goods covered by a negotiable document is
held by a bailee, the SP is deemed to have possession from the time the
bailee receives notification of the SP's interest
● Possession may be by the secured party himself or by an agent
● In the leading case, the court held that an escrow agent, acting for the benefit of
both parties was a "bailee with notice" within the meaning of § 9-305 and that his
possession perfected the creditor's security interest
● However, the holder of the document need not be under the sole control of
the creditor
● Possession by a 3rd party bailee, who is not controlled by the debtor, which
adequately informs potential lenders of the possible existence of a perfected
security interest satisfies the notice requirement of § 9-305
● Once the parties have designated an agent with no interest in the
collateral and the collateral is delivered to him, the debtor no longer has
unfettered use of the collateral and the notice function is served by the
agent's possession
● Attorney's may act as valid 9-305 agents
● (despite A-C relationship)
● Decision
● Attorney acted as a fiduciary and was bound to respect the agency
● Perfected the security interest by holding the note
 
In re Rolaids
● Problem: Agent of secured party
● Possession by agency
● Secured party cannot be in possession of a something in possession of
Debtor
● Disputable rule: says its OK if it’s the Lawyer of the Debtor, so long as there is
a document making him everyones agent
 
Rule (prior)
● Like 9-312(d)
● All the secured party needed to do was notify
● Terms of bailment didn’t matter
 
NOW
 ● Requires that the bailee authenticate acknowledge holds for benefit for
secured party
● PERSON in possession not required to make such acknowledgment
 
 
OLD LAW: Said all you have to notify the bailee about the security interest
NEW LAW: retains that rule only with regards to goods with non-negotiable title ;
in other circumstances, the bailee has to issue an "acknowledgment"
● Acknowledgment doesn’t make any contractual obligation, doesn’t even
have to issue an acknowledgment
● Makes the notice requirement of bailees ficticious
 
 
Problems (Page 104)
1. Bank is over secured; lender has junior security interest
● No because the bank didn’t acknowledge
2. No perfected security interest before returned (rejection is not an
authenticated record); After the Bank returned the Note, yes! (the interest is
Junior to bank regardless)
 
 
 
 
NOTES
● Article 9 does not define "possession"
● Term must be defined by the purpose of the requirement of perfection by
possession
● If the purpose of possession by a secured creditor is to put third parties on notice--
● They have possession when the debtor lacks unrestricted control of the asset
 
 
2. Possession by Bailee
● Under pre-Revision law…
● If the bailee had issued a negotiable document of title covering the goods, perfection
could occur either in the document or the goods
● In all other bailments, perfection could occur if the secured creditor had the bailee issue
a document of title in its name, notified the bailee of its security interest, or filed as to
the goods
● Revised Article9 retains these rules in the case of bailments in which negotiable and non-
negotiable documents of title covering the goods are issued
● Under pre-revision law, the secured creditor could perfect in the bailed property simply
by notifying the bailee that it holds the property for the secured party's benefit (Bailee's
agreement was not required)
● Under § 9-313(c), a secured party does not have a perfected security interest in
property in possession of a third party unless the person acknowledges that it hold
possession of the collateral for the secured party and does so in an authenticated record
(signed or electronic)
 ● If the 3rd person does acknowledge that it holds possession for the secured party,
the nature of its duties and responsibilities is left to the agreement of the parties or
other applicable law
 
● In summary, under 9-313, a SP cannot perfect a SI in property in possession of a non-agent
3rd party unless the party agrees in an authenticated record to hold possession of the goods
for the SP and further agrees as to the nature of the duties and responsibilities under which it
holds the property
 
Perfection by Control
● Applies to INTANGIBLE things:
● Electronic chattel paper
● Deposit accounts
● Security and commodity accounts
● Artificial Concept (8-106; 9-106)
● In deposit/security account, 3 ways to control an account…
1. (if the lender is …. )Be the Bank OR Securities Intermediary Commodity
Intermediary ("broker")
a. If they are the lender, they automatically has control of the account
b. Don’t necessarily have a security agreement (usually have a "right of set
off"- bank has right to collect on any money it owes you)
2. 3-party agreement (Debtor, SP, Bank-broker)
a. SP, debtor, debtor enter into an agreement in which the bank agrees to
take direction from the SP, bank has a security interest in that account,
the bank will have senior interest by virtue of the first principle
3. SP becomes account holder
 
 
 
E. Perfection by Control
● Control is an alternative way of perfecting a security interest in the following types of collateral:
deposit accounts (9-104), electronic chattel paper (9-105), investment property (9-106), and
letter of credit rights (9-107)
● In the case of deposit accounts and letter of credit, control is the only means of perfections
(9-312(b))
● The key to the control concept is that the purchaser has the present ability to have the
securities sold or transferred without further action by the transferor
● For each type of collateral the requirements differ
● Control for letter of credit right requires the issuer of a letter of credit to
"consent" to the assignment of proceeds of the letter of credit
● 8-106(b) control of a certificated security occurs when the certificate is delivered
and endorsed to the purchaser or in blank or registered by the issuer in the
purchasers name
● Delivery and endorsement or registration are more onerous requirements
then "consent"
● The purpose of a requirement of perfection is to cure, the ostensible ownership problem:
 ● The inference of unencumbered ownership 3rd parties draw from the debtor's possession
of collateral
● Control in a deposit account can be obtained in 3 different ways
● When the secured party is the depository bank at which the account is held
● When the debtor, the SP and the bank agree in an authenticated record that the bank will
comply with the SP's instructions with respect to the deposit account
● When the SP becomes the bank's customer with respect to the deposit account
 
 
F. Security Interests in Consumer Goods
1. Consumer transactions under Article 9
(Langbein doesn’t like this section much)
● Compromise (in the Revise Article 9) handed back to the state legislatures the bone of
contention concerning consumer credit protection
● Truth in Lending Act of 1968: uniformity came to consumer credit protection
 
● Revised Article 9
● Excludes consumer transactions from the rebuttable presumption rule, allowing courts
that embrace the "absolute bar rule" to apply it in consumer case
● Similarly, the "transformation rule" which turns purchase-money transactions into non-
purchase money transactions to the advantage of consumers in Bankruptcy, is not
abolished for consumers transactions as it is for commercial transactions
● Greatly improved disclosure for consumers is required by 9-614 for notification before
disposition of collateral
 
2. Perfection of Security Interests in Consumer Goods
● Revised Article 9 continues the rule that a PMSI in consumer goods is automatically perfected
at the time of attachment, with no requirement of filing (9-309(1))
● However, a filing is necessary to perfect a non-PMSI in consumer goods & is required for
priority in consumer to consumer sales
● 2 circumstances reduce the importance of 9-309(1) today
● Automatic perfection does not apply to some of the most valuable kinds of consumer
goods: automobiles, boats
● Usually would be accomplished by listing the security interest on the certificate of
title
● Second, is the advent of credit cards, which has almost entirely taken over the credit
purchase of "small ticket" consumer goods
● Most of the purchases are unsecured
● However, some retailers who issue their own credit cards retain security interest in
sales made pursuant to these cards
 
Security Interest in Consumer Goods
● Truth in Lending Act
● Board of Governors of the Federal Reserve (invested with power)
● (2010) Dodd Frank Act: changes this
● With a few exception, no new substantive changes
● Congress said it will fillibuster any nomination
 ● Shows how hard any changes in consumer protection have been
● Consumer Protection acts
 
● Perfection of consumer goods is perfected upon Attachment
● Consumer goods: household, personal
● What matters is the intention of the debtor
 
 
 
 
G. Choice of Law
1. Location of Debtor Governs Tangible and Intangible Collateral
● Article 9's provisions on choice of law radically simplify the law and make it much easier to
apply
● Moreover, choice of law issues will probably be somewhat less important
● All jurisdictions have virtually identical provisions on perfection, priority and
enforcement of secured transactions in personal property
● Why are we concerned?
1. Jurisdictions develop nonuniform case law interpreting the same model
rules
2. Some nonuniform amendments
3. No national filing office for UCC financing statements
● 9-301(1) which states the general rule that the law of the location of the debtor governs
issues of perfection, the effect of perfection, and priority with respect to both tangible and
intangible collateral, whether perfected by filing or automatically
● This rule is subject to the exceptions
● § 9-301(2) provides that with respect to possessory security interest, the issues of
perfection, the effects of perfection, and priority are governed by a situs test:
● The location of the collateral controls, not debtor's location
● A rather confusing exception is found in (C)(3), which provides that, with respect
to non-possessory perfection of security interests in tangible property, the law of
the situs of the collateral governs the effect of perfection and the priority of the
security interest
 
● In summary, 9-301 retains the traditional rule that the location of the debtor governs the
perfection, effect of perfections and priority of SI in intangible collateral, for intangible
collateral has no location
● For tangible collateral in which perfection is by possession, the law of the location of
collateral governs perfection, the effect of possession, and priority
● But for tangible property in which perfection is by filing. The law of the location of the
debtor governs perfection, but that of the location of the collateral governs the effect of
possession and priority
 
Choice of Law
● Law governing the effect of perfection
● Place located (if tangible)
● Now most of the time, the governing law will be the location of the debtor
 ● Only effect is WHERE the filing takes place (where the debtor is located)
● Doesn’t make much difference because every state has the same law
 
 
 
 
2. Location of the Debtor
● General rule is that with respect to non-possessory Security Interests, the law of the debtor's
location governs
● A debtor who is an organization is located at its place of business if it has one, at its
chief executive office if it has more than one place of business, and at the debtor's
residence if the debtor is an individual
● The exception: which states that a "registered organization" organized under state
law is located in the state of organization
● Registered organization is defined broadly enough to include limited partnerships
and limited liability companies in addition to corporations
● Referred to as the "place of incorporation" test
● The location of the individual debtors and unregistered partnerships continue to be
the debtor's chief executive office
 
● § 9-316(a)(2) provides that when the debtor changes its location to another jurisdiction, the
SP has 4 months after the removal to file in the state of removal
● Corporation doesn’t retain its legal status when it reincorporates or merges
● Reincorporation or merger cant constitute a change of the debtor's location to
another jurisdiction
 
3. Goods Covered by Certificate of Title
 
a. The basic Rules of Perfection
● Filing a finance statement is neither necessary nor effective to perfect a security interest
in goods in which a certificate-of-title law provides for a security interest to be indicated
on the certificate as a condition or result of perfection
● A special rule is made for goods held in inventory for sale or lease by a dealer who
sells goods of that kind
● A secured party financing the dealer's inventory may perfect its security under
normal rules applying to inventory, that is by filing a financing statement
● 9-311(d) does not apply to dealers who only lease goods, even though they
eventually sell the good
 
b. What law governs perfection?
● The local law of the jurisdiction under whose certificate of title the goods are covered
governs perfection
 
 
Meeks v. Mercedes Benz Credit Corp
● Trial History
 ● Trustee appeals court's judgment in favor of MBCC in his adversary proceeding to
avoid MBCC's lien on proceeds form the sale of the truck
● Facts
● Debtor purchased a truck on credit from TCC in TX
● Parties SA indicated that the debtor's home address was AK
● TCC immediately assigned a contract and its interest in the truck to MBCC
● Registered the truck in OK using a business address
● OK subsequently issued a title reflecting the lien in favor of MBCC
● Debtor drove it to AK
● OK law controlled---
● Required indication of a security interest on the certificate of title for
perfection
● MBCC's interest was perfected for purposes of AK law
● Issue
● The issue involved in this appeal is the perfection of MBCC's security interest, not
compliance with AK vehicle registration laws
● Analysis
● Lien holders and 3rd parties should be able to rely upon certificate of title
● Applying the UCC provision enables buyers and lenders readily to ascertain the
existence of liens on vehicles and promotes the purpose of the UCC
● Recognition of security interests which have been noted on certificate of title
 
 
NOTES
● Alternative
● Determination of the effectiveness of a certificate of title depends on the
troublesome issue of fact regarding the quantum of contact that the owner has
with the title jurisdiction
 
 
c. Change of Debtor's Location
● State laws require that motor vehicles have certificates of title and that perfection of
security interest in goods covered by certificates of title occurs either upon indication of
a security interest on a certificate of title OR upon receipt by a state's DMV of a property
tendered application for a certificate of title on which the security interest is to be
indicated
 
 
In re Baker
● Facts
● Baker purchased an Oldsmobile
● Financing was proved by Primus Financing service and the state of NM issued a
certificate of title listing Primus as the lien holder
● Baker moves to WI - never obtained a WI certificate of title
● Filed Chapter 7 petition in Bankruptcy court
 ● Bankruptcy trustee enjoys "strongarm" powers and may seek to avoid unperfected
liens, assert a superior interest in assets and distribute value of those assets to
other creditors
● Trustee argues
● Within 4 months of Baker's move to WI, financer was required to re-perfect
its security interest in her vehicle there
● Did not do so, lien may be avoided
● Primus Counters
● The lien recorded on the NM title remained valid
 
● Analysis
● WI motor vehicle code provides that if a vehicle is subject to a security interest
when brought into the state:
● SI remains perfected until The expiration of 4 months after a change of
debtor's location to another jurisdiction
● While a debtor is located in a jurisdiction, the local law of that jurisdiction
governs perfection, the effect of perfected or nonperfection and the priority
of a security interest in collateral
● Cannot be read without reference to limiting language
● Relevant law on the perfectiion and priority of security interest for
goods covered by certificate of title:
● The local law of the jurisdication under whose certificate of
title the goods are covered governs perfection
● From the time the goods become covered by the certificate of
title until the goods cease to be covered by the certificate of
totle
● THE 4 MONTH PERIOD DOES NOT APPLY TO TITLED
GOODS!
● Under WI law, as long as the NM titled continued to be in
force, it was sufficient to protect the Primus interest
● Holding
● The rule that a security interest must be reperfected within 4 months after a
debtor moves to a new jurisdiction makes sense in the context of untitled goods
● Had Baker retitled in WI, Primus would have to reperfect when its interest became
unperfected under NM law
● Under that valid title, the creditor's interest remains perfected
 
NOTES
● States usually require owners to register their vehicles in the state where the owner is
located and pay regulatory fees in order to obtain license plates or tags
● DMV is required to indicate SP's security interest on the new State B title
● If this is done, SP's security interest continues perfected in the auto pursuant to the
new certificate of title and the former certificate of title is no longer effective
because the auto became covered by certificate of title in another jurisdiction
 
 
Problems (Page around pg. 121-22)
 (a)Where would you perfect with respect to warehouses in NV and AZ? And how would
you perfect?
● Filing in DE where they were incorporated, if you filed anywhere else, you would
have perfected
● Goods
● New Article 9- if registered organization, must file where the organization is
incorporated.
 
(b) Checks
 
● To perfect a security interest in an account, you need to file
● Instrument = any instrument, not a security agreement, includes check (negotiable
instrument), promissory note, has to be a writing (no authenticated record)
● Secured Obligations- what kind of property?
● 9-102(11)- CHATTEL PAPER
● Paper that jointly evidences 2 things= monetary obligation AND
 
● Account: does NOT include instrument or chattel paper
 
How do you perfect equipment??
● Versus inventory
● File DE
 
 
Where do you file for Partnership?
● Principle Place of business= Chief Executive Office
● CA in this case (bc that is where the chief headquarters is)
● Might also be CO- because that’s where Ace goes and calls all the shots
● DO it in both places!
 
 
 
 
Chapter 3: Priority
 
A. Introduction
● Priorities between the interests of UCC secured parties and those of such competing claimants
as other secured parties, buyers, lien creditors (including trustees in bankruptcy), real property
mortgages, statutory lien creditors and others
● A security agreement is effective according to its terms between the parties, against purchasers
or collateral, and against creditors
▪ Even an unperfected security interest is prior to the rights of unsecured creditors and to
any other purchaser or creditor unless the UCC provides otherwise
▪ In greatly strengthening the position of the first party to file, has the Code been overly
protective of banks and other institutional creditors at the expense of other meritorious
claimants
● Tension between efficiency and fairness is evidence
  
Chapter 3: Priority
Rules:
● Perfected versus perfected= Priority in time of filing or perfection (must be
continuous)
● Perfected over unperfected
● Unperfected versus unperfected= first to attach wins
 
 
B. First to File Rule
● The key provisions in any study of UCC priority law are:
▪ § 9-317(a): A security interest or agricultural lien is subordinate to the rights of:
1. A person entitled to priority under § 9-322
2. Except as to PMSI, a person that becomes a lien creditor before the earlier of the time:
A. The security interest of agricultural lien is perfected, OR
B. One of the conditions specified in § 9-203(b)(3) is met and a financing statement
covering the collateral is filed
 
▪ § 9-322(a): Except as otherwise provided, priority among conflicting security interests and
agricultural lines in the same collateral is determined according to the following rules:
1. Conflicting perfected security interests and agricultural lines rank according to priority in
time of filing or perfection. Priority dates from the earlier of the time a filing covering
the collateral is first made OR the security interest or agricultural lien is first perfected, if
there is no period thereafter when there is neither filing nor perfection
 
● Agricultural liens are essentially statutorily created property rights in farm products that secure
obligations incurred by the debtor in connection with its farming operations
▪ Not consensually created
 
9-317- we will talk about 3 types
1. Security interest versus Security interest
2. Security interest versus lien creditor
3. Security interest versus buyer (don’t worry about yet)
 
● 9-317(a)(2)(B)- makes sense of 'first to file of perfect'
▪ June 1- Security Agreement & signed
▪ June 5- Finance statement filed
▪ June 10- Judgment lein is filed/ lein attaches
▪ June 15- SP advances funds
● Security Interest attaches: June 15
● Financing statement irrelevant
● When value is given is when the funds are advanced
● Perfected= when it attaches
● June 15
 
● Who wins the priority between the bank and judgment lien?
● Bank because
 ● Person did not become lien creditor BEFORE The time
● Lien creditor did not meet condition
● If they didn’t sign the SA until June 15
● Provision governs= 9-
● 9-322
▪ Does not govern SP and lien creditor
● 9-323
 
 
 
 
1. Conflicting Security Interest
● The basic priority rule was "first in time, first in right"
● But this is too imprecise to deal with notice filing in which filing an attachment of a
security interest can happen at different times
● Correct statement is "first-to-file-or-perfect" rule
● Perfection by possession is usually infeasible in cases of inventory or equipment
financing as well as in cases of intangibles
 
 
 
Problesm (page 125)
1. Which is prior under 9-22(a)(1)?
● First to file (financing statement)
● Doesn’t matter
 
 
2. Future Advances
● Any debt can be secured
● Some security agreements cover all obligations owed by the debtor to the creditor, however
they arise
● "all obligations" clauses
● Frequently security agreements cover a more limited type of obligation- "future advances"
● Must be distinguished from after-acquired property clauses
● Future advances clauses concern the type of debt (future advances) secured by the
debtor's assets
● After-acquired property clauses concern the collateral (after acquired) that secures the
debt
● Future advances could be secured only by existing collateral, and conversely, after
acquired collateral could only secure existing debt
● If the SP has perfected its security interest in the original collateral, its security interest
becomes perfected in the after acquired collateral when it attaches
● Issue: is whether the priority of the secured party's future advances dates from the time the
secured party first perfected or from the time it made the future advances
● A contractual device frequently used to secure future advances is a dragnet clause
● Dragnet clause is a provision in a security agreement that secured both a specific loan as
well as a future loans made by the creditor to the debtor with the same collateral
 ● EXAMPLE:
● Suppose a creditor makes a secured loan to a debtor as a part of a security
agreement listing particular items of the debtors personal property as
collateral
● The agreement contains a dragnet clause securing "all loans" made by
the creditor to the debtor
● Later the creditor makes an unsecured loan to the debtor
● With the dragnet clause, the later loan is secured by the same collateral
securing the earlier secured loan
● (some courts find dragnet clauses an adhesion contract-
unenforceable to a consumer)-- (most courts enforce them)
 
Problems (page 127)
● Financing statement covering equipment… how should the money be
divided between Bank and Lender?
● Bank gets full $150,000
● First to file
● Doesn’t matter if it said anything about future advances
 
9-323- concerns future advances
● At time of advance… If perfection is based on 9-312 twenty day
temporary advance, perfected when it attaches (limited cases)
 
 
● Relationship of 9-322 and 9323
● Under a proper reading of the first to file or perfect rule of § 9-322(a)(1) it is abundantly
clear that the time when an advance is made plays no role in determining priorities
among conflicting security interests except when a financing statement was not filed
and the advance is the giving of value as the last step for attachment and perfection
● Whether the advances are made pursuant to commitment??
● An advance has priority from the date it is made only in the rare case in which it is
made without commitment and while the security interest is perfected only
temporaly under 9-312
 
● This inventory financing transaction is sometimes described as "floor planning"
● Agreement provided that Financer would maintain a security interest in all cars it
financed under the whole sale finance agreement, and this inventory lien would secure
the full payment of all advances made in the collection or enforcement of the
obligations under the agreement, and each and every other indebtedness
● Dealer argued that the retail and wholesale agreements were separate transactions and
that the industry norm was that the terms of retail finance agreements do not provide
for a security interest in a dealership's general assets
● Financers contended that under 9-204(c) the quoted provision swept in any
obligation that Dealer owed Financer under the retail finance agreement as well as
under the wholesale agreement
 
Problem 128
  
9-322(a) isn't clear on the question
● Most courts said Bank has priority
● In cases where filing has been made, priority dates from the filing
 
3. Financing Statement as an Umbrella
● How far the priority of the first party to file extends in a case in which there was no future
advances clause in the original security agreement and the later advance was made
pursuant to a subsequent security agreement, for which a new financing statement had
been filed
● Differing judicial views on this threshold priority issue
● Held that Lender was prior
● For Bank to enjoy priority for future advances based on its January financing
statement, the January security agreement must have contained a future advances
clause and the advances must be made pursuant to that contract
● Bank's January financing statement is not an "umbrella" giving Bank a priority
with respect to advances made pursuant to subsequent security agreements
covering the same collateral between the same parties
● Most other courts disagreed
● Held that Bank was prior even thought he security agreement did not contain a future
advances clause
● Those courts generally stress the "Notice" or "red flag" function of the code and
hold that a financing statement on file is notice to the entire world of present or
future security interests in the collateral
 
● Even where the parties originally contemplate a single debt, the secured party and the
debtor may enter into further transactions whereby the debtor obtains additional credit and
the secured party is granted more security
● Validity of such arrangements as against creditors, trustees in bankruptcy and other SP
has been widely recognized by many courts
● Future advance and after-acquired clauses
● If they are not used, there is nothing in the code which prevents the parties from
accomplishing the same result by entering into one or more additional security
agreements
● The better view holds that, where originally a security agreement is executed, an
indebtedness created, and a financing statement described in the collateral filed, followed at
a later date by another advance made pursuant to a subsequent security agreement covering
the same collateral, the lender has a perfected security interest in the collateral not only for
the original debt but also for the later advance
● Another court held that:
● In our experience the commercial practice is for the second lender to pay off the first
and so take a first priority as to all of the collateral
● The general rule governs the priority of future advances too
● Under 9-322(a)(1) the time at which value is given doesn’t determine the priority
of the security interest, unless a financing statement hasn’t been filed and the
giving of value is the final perfection event
 ● When a financing statement has been filed, priority is determined by the date
of its filing
● This goes for secured future advances as well
● When the advance was made, therefore, generally is irrelevant for purposes
of priority
 
Cases on page 132
Case #2- Comment to 9-323
● Bank would have priority even if the Bank hadn't advanced funds
under the original agreement
 
Once you have a financing statement, a junior creditor will have a hard
time enforcing
 
 
 
4. Position of First to File Secured Party
● Notice filing allows a secured party to file a financing statement that will be effective for 5
years and may be continued so long as the debt is still outstanding
● FS may indicate the collateral covered by a super-generic indication "all personal property"
● Thus a creditor can take a security interest in all the personal property a debtor now owns or
ever will own to secure all extensions of credit for so long as a financing statement is effective
(which can be forever) and with certain exceptions, this security interest is prior as to
competing SPs
● Allows a secured creditor to clean out a debtor's bankruptcy estate without a penny for
either the unsecured creditors or junior secured creditors
● Allowing the secured party who has filed to make subsequent advances without each
time having to check for subsequent filings as a condition of protection
 
 
5. Operating Under the First-to-File Rule
● The lesson to be learned from this analysis is that secured creditors should never allow
themselves to become involved in a conflict with another Secured creditor who has filed first
unless they have taken the precaution discussed below
● A debtor may grant a SI to a junior creditor only at the sufferance of the senior creditor
● Assuming that the senior creditor does not object to the creation of a junior security
interest, the situations in which a creditor can safely deal with a debtor with respect to
collateral in which another creditor has senior security interests are:
1. The junior creditor has a PMSI
2. The senior creditor has agreed to subordinate its security interest in part or in
whole to that of the junior creditor
3. The junior creditor has bought out the senior creditor
● If the prior secured creditor will not agree to subordination, a subsequent creditor who
wishes to deal with a debtor has no choice but to pay off the prior creditor and have the
financing statement on record terminated
 
 
 Page 135
1. (Case 1) Bank 2's priority?
● Security interest is assigned, but the financing statement is NOT assigned
● Lender has notice
● Unless there is an amendment to the financing statement, Bank 1 can give
another advance and then take priority over Bank 2
 
● If there is a junior security interest, take an assignment
 
(Case 2)- Bank 2 is OK
● Financing statement should be amended, Bank still has priority because they have
an assignment
● 9-310(c)
 
1. Priority of Lender
● 2-10 doesn’t effect
 
§ 9-210:
§ 9-324- PMSS
§ 9-103- definition
(b) purchase money security interest in goods
● Purchase money collateral- goods or software that secured a prucahse money
obligation
 
"all or part of consideration "- "take back"
" for value given to enable"- 3rd party lender
 
 
 
C. Purchase Money Priority
 
1. Collateral Other than Inventory
 
a. Purchase Money Security Interests (PMSI)
● Section 9-324(a) restates the traditional rule that a PMSI has priority over conflicting
security interest in the same collateral
● Note that the PM priority is sometimes pointed to as a welcome means of allowing
debtors to break the monopoly of first party to file over the debtor's credit supply
● § 9-103(a)(2) defines PM obligation as one incurred:
● As all or part of the price of collateral (seller sells goods to buyer and takes a
security interest in the goods to secure the unpaid price), OR
● For value given to enable the debtor to acquire rights in or the use of the collateral
if the value is in fact so used (lender lends money to debtor to enable it to buy
goods)
● We will refer to these as seller purchase money and lender purchase money
obligations
 ● A PMSI in goods other than inventory or livestock has priority over a conflicting security
interest in the same goods and their identifiable proceeds if the PMSI is perfected when
the debtor receives possession of the collateral or within 20 days
 
 
Brodie Hotel Supply, Inc. v. United States
● Facts
● Brodie bought this action against the US to determine which of the parties had
priority to the proceeds of the sale of certain restaurant equipment
● Lyon borrowed 17,000 from the National Bank and as a security for the loan, which
was evidenced by a promisorry note, executed a chattel mortgage covering the
restaurant equipment
● Bank assigns its mortgage to SBA
● Bank filed a finanacing statement, showing SBA as assignee
● Brodie delivered to Lyon a bill of sale covering the equipment
● Same day Lyon executed a chattel mortgage on the equipment naming Brodie
as mortgagee
● This mortgage was given to secure the unpaid purchase price of the
equipment
● Brodie files FS 10 days later
● Analysis
● The general rule of priority, if both interests are perfected by filing is that he SP
who first files a financing statement (in this case SBA as assignee) prevails,
regardless of when his SI attaches
● However, there is a special exception for PMSO in collateral other than
inventory
● (Brodie had such interest)
● PMSI prevails over conflicting interests in non-inventory collateral if the
PMSI is perfected (here it was perfected by filing a FS) at the time the
debtor receives possession of the collateral or within 10 days after the
debtor receives possession
● The term "debtor" as it is used in this priority statute (9-312(4)) means the person
who owes payment or other performance of the obligation secured
● Although Lyon might have been liabel for the reasonable rental of the
equipment or for its return to Brodie, he did not owe performance of an
"obligation secured" by the collateral in question until the bill of sale delivery
date and therefore was not a "debtor" for purposes of 9-314(4)
● Brodie's filing was therefore within the 10 day period and Brodie has priority
over the conflicting security interest held by SBA
● Holding
● The holder of PMSI in non-inventory collateral will have priority over a previously
perfected security interest which includes collateral by virtue of an after-acquired
property clause
● Due to favored status given by the Code to the holder of PMSI in non-inventory
collateral, we are not convinced that the trial court erred in refusing to impose this
Burden on Brodie
 
 2 kinds of purchase money obligations
● Inventory in software, if you finance the purchase of some inventory with one
loan, the secured party has a PMSS in other inventory, the other inventory is
PMC with respect to that loan
 
● 20 day rule
● When does the debtor receive possession of the collateral
● Brodie Hotel Supply v. US
● 20 days starts with
● Whether debtor means you took possession when you were a
debtor
● When debtor was in possession when he/she was a debtor
 
 
NOTES
● § 9-324 awards a creditor a PM priority if the creditor perfects within 20 days after the
debtor recieves possession of the collateral
● The court decided the case on the grounds that the possession must be that of the
debtor and the possessor did not become a debtor until it agreed to buy the goods
● Brodie might have prevented the Bank's loss by filing as soon as possession passed
to Lyon
● The bank might have avoided loss by inquiring of Lyon about its rights in the goods
● The court places the burden on the bank!
 
● Seller or Lender granting credit in a PM transaction gives the debtor "new value"
 
● At issue in Problem 3 (page 142) is priority among multiple PMSI. There are 3 possible
resolutions:
1. Priority goes to the first PMSI to file
2. Priority goes to a favored type of PMSI
3. Or the PMSIs rank equally and priority is awarded on a pro-rata basis
● § 9-324 endorses (2) and awards priorty to Seller
● Relies on justifications that the "equities favor the vendor" and that PM vendors
would not agree to extend credit unless they were given a priority
● After all, the Lender also has provided a valuable financial input into the debtor's
acquisition of the collateral
● The fact that cash rather than a specific asset purchased is provided is
unimportant
● Both are needed for the debtor's acquisition of assets
 
● Priority in investment property under 9-328(1) is given to the secured party who has
control over the collateral
● If 2 or more secured parties have control, 9-328(2) priority is determined by the
order in time in which they obtained control
● § 9-328(6) award priority on a pro rata basis among claimants when perfection
occurs without control and the debtor is a broker, securities intermefiary or
commodities intermediary
● None of these priority rules favors a particular type of security interest
 ● In fact, non recognize purchase money priority at all
 
 
b. The Transformation Rule
● Seller sold goods to Debtor who granted Seller a SI in the goods sold to secure the
unpaid portion of the price
● Does seller's interest remain, in whole or in part, a PMSI?
● Transformation rule in which a security interest in any item securing more than its own
price is transformed into a non-PMSI
● Court Rejected the transformation rule in favor of a "dual status" doctrine, which
holds that the presence of a non-PMSI does not destroy the purchase money
aspect
● A PMSI can remain such to the extent that is secures the price of the goods
even though it secures the price of other items as well
● § 9-103(f) adopts the "dual status" rule for non-consumer goods transactions: a PMSI
does not lose its status as such, even if:
● The Purchase money collateral also secures an obligation that is not a purchase
money obligation
● Collateral that is not Purchase money collateral also secures the purchase money
obligation
● The purchase money obligation has been renewed, refinanced, consolidated or
restructured
 
● 9-201(h) provides that the dual status rule of 9-103(f) does not apply to consumer goods
transactions and prevents courts in such transactions from relying on 9-103(f) to
characterize them
● 9-103(h)'s exclusion does not prevent a court from deciding on independent
grounds to apply the "dual status" rule to consumer goods transactions
● Reflects a compromise between consumer and commercial interests to retain,
for the most part, the status quo concerning consumer protection
 
Problem 143-44 (transformation rule)
1. In re mathews says that this is a new loan
 
 
● Chattel Paper
● Instruments
Proceeds of inventory- Identifiable Cash Proceeds--> Received at or before delivery to
buyer
● Gives priority Purchase of particular inventory
● Must be perfected when the debtor receives possession (no 20 days)
● Notice has 5 year life
 
1-201(36)
● Send and Receive
● Deposit in the mail; doesn’t matter if its received
 
 
3 Types of Conflicts
 1. Other Security Interest
2. Lien Creditors
3. Buyers
 
 
Lien Creditors
● In practice, means you don’t have to have funded the loan
● With after acquired… if your relying on a security agreement for attachment
● First to file is NOT the one who is the first to perfect
 
 
 
2. Inventory
 
a. Requirements for Purchase Money Security Interest in Inventory
● § 9-324(b) states requirements for establishing a purchase money priority in inventory
quite different from those found in 9-324(a) for other types of collateral
● The first major difference is the requirement that the purchase-money secured
party must notify any prior holders of security interests in the debtor's inventory
who have filed financing statements that it intends to engage in PM financing of
the debtor's inventory
● Notice good for 5 year period
● PMSI does not begin to run for goods delivered until the PM secured party
perfects
● The notice requirement for inventory collateral contrasts with non-inventory
financing under 9-324(a)- which has no notice requirement
● The PM secured party does not have to search for prior filings
● The inventory financer is entitled to notice before it makes further
advances that are secured by incoming inventory in which a creditor has
taken a PMSI
● The second important difference is 9-324(b)'s treatment of proceeds
● Under 9-324(a), the PM priority carried over to the proceeds of the original
collateral, but under (b) with certain exceptions with respect to chattel paper
and instruments, it is limited to identifiable cash proceeds received on or
before delivery of inventory to the buyer (cash down payments)
● This effectively deprives PM creditors of a priority in all the usual
proceeds from credit sales of inventory (goods traded-in, accounts, and
cash payments on accounts received after delivery of the goods to a
buyer)
 
 
Southtrust Bank v. Borg-Warner Acceptance Corp
● Facts
● Bank filed a declaratory judgment action to ascertain which of the parties has
priority in the inventory of four debtors
● These debtors are no longer in existence and defaulted on obligations they
owed to one or the other party
 ● Both the Bank and BWAC have perfected security interest in the inventory of the
debtors
● In each case the bank filed the financing statement first
● BWAC contends that as a purchase money lender it falls within the PMSI
exception to the first to file rule and therefore is entitled to possession
of the inventory
 
● Rule
● A Security Interest is a PMSI to the extent that it is:
● Taken or retained by the seller of the collateral to secure all or part of its
price, OR
● Taken by a person who by making advances or incurring an obligation gives
value to enable the debtor to acquire rights in or the use of collateral if such
value is in fact so used
● BWAC engages in PM financing
● Here BWAC purchased invoices from vendors who supplied inventory items to
the debtors
● In the security agreement between BWC and each of the debtors provisions:
● Grants to SP a security interest in all Inventory of Debtor, whether now
owned or hereafter acquired, and all Proceeds and products thereof
● The term "inventory" was defined as "all inventory… now owned and
hereafter acquired when such inventory has been financed by Borg-
Warner Acceptance Corporation
● Issue
● Whether inclusion of an after-acquired property clause and a future advances
clause in BWAC security agreements converted its PMSI into an ordinary security
interest
 
● Analysis
● BWAC argues that almost all cases following the "transformation rule" (i.e.
inclusion of the clauses transforms a PMSO into an ordinary security interest) are
consumer bankruptcy cases
● The rational of those cases, which is to protect the consumer does not apply
to commercial cases
● Nothing in the language of the UCC 9-312 or 9-107 distinguishes between
consumer and commercial transactions or between bankruptcy and nonbankruptcy
contexts
● BWAC argues that mere inclusion of the clauses does not void a PMSI
● We need not reach the issue of whether mere inclusion of unexercised future
advances and after-acquired property clauses voids a unanswered PMSI
because we find that BWAC exercised the clauses here
 
● Holding
● We hold therefore, that BWAC's exercise of futuer advances and after-acquired
property clauses in its security agreements with the debtors destroys its PMSI
● BWAC retains a security interest in the goods
● It merely loses its priority status as a purchase money secured lender
 ● The concept of floating lien under the UCC remains intact
● Hold merely that such a floating lien is inconsistent with a PMSI
● A PMSO requires a one-to-one relationship between the debt and the
collateral
 
● Analysis 2
● Some courts have held that the clauses, even if exercised, do not invalidate a PMSI
id there is some method of determining the extent of the PMSI
● For example, court has held that the PMSI was valid because the security
agreement specified that payments be allocated first to items brought first
● It was easy for the court to ascertain which items had been fully paid for and
hence no longer served as collateral
● Here, however, nothing in the contract in state law allocates payments to
particular items of inventory
● (COUNTER ARG)
● Without some guidelines, legislative or contractual, the court should not
be required to distill from a mass of transactions the extent to which a
security interest is purchase money
● Unless a lender contracutally provides some method for determining the
extent to which each item of collateral secures its purchase money, it
effectively gives up its purchase money status
 
 
NOTES
● Before Southtrust we had thought that the incentive offered purchase money financiers
of inventory by 9-324(b) was meager
● On the debtor's default, a secured party who had filed a financing statement with
respect to the debtor's inventory before the purchase money financer filed would
take precedence in the proceeds of the inventory supplied by the purchase money
financer, leaving the purchase money financer with only the unsold inventory
remaining at the time of the debtor's default
● But Southtrust casts doubt on whether the purchase money financer will even
have priority with respect to unsold inventory
● Whether a security interest is purchase-money under 9-103 is relevant in 2 other
situations
● A PMSI is consumer goods is perfected without possession or filing
● Allows a trustee in bankruptcy to avoid a nonpossessory, non-PMSI in certain
consumer goods
● Southtrust relies on these consumer cases for guidance and adopts the rigid rule that
cross-collateralization destroys the purchase money nature of transaction
● § 9-103 alters the result of Southtrust
● Subsection (f)(2)'s "Dual status" rule preserves a PMSI even if purchase money
collateral also secures non-purchase money obligations
● Thus cross collateralization does not destroy the PMSI status
● Statutorily OVERRIDES SOUTHTTRUST'S requirement that there be a one-
to-one relationship between the debtor and the collateral
 ●Subsection (b)(2) defines a security interest in goods as a PMSI "if the security
interest is in inventory that is or was purchase money collateral, also to the
extent that the security interest secures a purchase money obligation
incurred with respect to other inventory in which the SP holds or held a PMSI
● Each item of inventory covered by BWAC's security agreement is
purchase money collateral for the purchase money obligation it secured,
and the security agreement's cross collateralization clause secures all of
BWAC's other purchase money obligations with each item of inventory
● Thus 9-103(b)(2) considers all of BWAC's security interest in its
debtor's inventory to be PMSI's
● Under that sections rules, a security interest may be purchase
money to some extent and nonpurchase money to some extent,
some method is required for allocating payments between
purchase money and non purchase money obligations
● 9-103(e) in non-consumer goods transactions payments are
applied according to a 'reasonable method' agreed upon by
the parties
● Absent some agreement, in accordance with debtors
manifest intent
● If neither, payments are allocated to unsecured
obligations first
● As between secured obligations, payments are allocated
to purchase money obligations in which they occurred
● A subordination agreement avoids costly litigation over priority issies
● Now often included is a negative pledge clause as well as a covenant on
the borrower's part not to incur additional debt without the banks
consent
● Since breach of these covenants constitutes an event of default,
which results in the debt secured by the inventory becoming
immediately due and payable, the first-to-file creditor may call its
loan if the debtor even attempts to enter into a purchase money
financing with another creditor
 
 
b. Consumer Goods Exception in 9-103
● There are advantages to a SP in having its security interest qualify as a purchase money
● A PMSI cannot be avoided under BC and no financing statement need to be filed to
perfect a PMSI in consumer goods
● Trustees in bankruptcy for consumer debtors have attacked the purchase money
status of secured interests reserved by sellers in add-on sales and revolving charge
account transactions
● If the doctrine of Southtrust is applied an attempt by a seller to retain a PMSI in
goods sold to secure the running balance of the account would fail
● Consumer goods transactions: the courts are free to make their own rules
about the desirability of the dual status and payment allocations rules
 
 
D. Lien Creditors
 
1. Conflict with an Unperfected Security Interest
● An unperfected security Interest is subordinate to the rights of a lien creditor
● Since the trustee in Bankruptcy is a lien creditor… allows a trustee to avoid an
unperfected security interest
 
 
Problems (page 154)
1. Who is prior under 9-317(a)(2)
● The Lien Creditor because the SP wasn’t perfected and didn’t meet the conditions of
9-317(a)
2. Now who wins??
● SP has priority even though doesn’t have a security interest
● Lien creditor attaches in various ways
● If 9 days after a lien attaches, newly acquired property with an after acquired
property clause (Secured party wins even tho the perfection attaches at the
same time)
● This problem is highly hypothetical because so long as the SP knows that the lien has
attached, not going to make an advance
 
9-323- concerns future advances
● If you make an advance after a judicial lien has attached, the advance will take
priority over the lien if
● The reason this is there is because of the Federal Tax Lien Act
● An advance under a security
 
2. Conflict with Future Advance
● Earlier we saw that in a case of conflicting Article 9 security interest, 9-322(a)(1) protects the
priority of the first party to file or perfect with respect to future advances even though the
advances were made after that party had knowledge of a subsequent security interest in the
same collateral
● But when the conflict is between an advance made pursuant to an Art. 9 security
interest and a subsequent lien creditor's rights, 9-323(b) states a rule that recognizes
the priority of the future advance:
i. If the advance is made or committed within 45 days after the lien arises even with
knowledge of the lien AND
ii. If the advance is made or committed after the 45 day period, so long as the
secured party is without knowledge of the lien at the time of the advance
● Subsection only deals with the subordination of future advances under prescribed
conditions, it has no effect on the priority of nonadvance obligations incurred by the
debtor after a lien attaches
● Doesn’t address priority contests between a creditor whose nonadvance
obligations are secured and the rights of a lien creditor
● The secured non-advances are protected when made by a creditor perfected
on or before the lien attaches
 For a buyer,
Sec. Agreement 3-1-17, advance on 9/1/2018
 Lien creditor - dates from 3/1/17 unless the lien is attached after the later of
45 days or knowledge of lien
So if attach on 6/1/17, but lender doesn’t know about lien,
Buyer not in ordinary course of business - couldn’t claim on July 16 but could
on 15.
 
E. Buyers and Lessees
 General rule is 9-317(b) and (e)
1. Buyers and Lessees of Non-Inventory Goods
● Secured parties are in a very strong position with respect to persons who buy or lease goods
from their debtors
● Under 9-317(b) buyers and lessees take subject to perfected security interest, and 9-315(a)
provides that the security interest continues in the goods sold or leases and in any
identifiable proceeds
● (e) grants purchase money secured parties who have not perfected at the time of the
sale or lease a 20 day relation- back perfected at the time of the sale or lease and 20-day
relation back period after the buyer or lessee has received delivery in which to perfect
● Even unperfected security interests are prior to the rights of buyers and lessees
other than those who give value and receive delivery without knowledge of the
security interest
 
Buyers and Lessees
 
Case #1
● 9-317(e)- gives you 20 days, 317(b) buyer must take collateral
● Lender wins
● Is Lender prior?
● No because it wasn’t perfected at the time of delivery
 
Case 2
(i) buyer wins, unperfected after 20 days
(ii) Lender wins, within 20 days of debtor receiving goods.

9-320
BIOCAB-
 
Buyers in the Ordinary Course is limited to
● Selling in bulk 9-320(a) doesn’t apply
 
● If you make an advance after a judicial lien has attached, the advances will take priority
over the lien so long as the advance is made before ACTUAL knowledge on the part of
the SP of the lien creditor, OR 45 days
 
● 9-317(b) buyer takes free of security interest only before it is perfected… if there was a
perfected security interest, the buyer or leases takes subject to SI
● SI continues the collateral notwithstanding the sale
● Buyer has to receive DELIVERY of the good to take free of the security interest
 1 good faith
2 no violation of others rights
3 ordinary course
4 from person in business of selling goods
5 not bulk sale
6 not in satisfaction of money debt

320(a) - seller’s own custom

2. Buyers and lessees of inventory goods
 
a. Buyer in the Ordinary Course of Business
● A major exception to the basic rule that buyers and lessees from a debtor take subject
to perfected security interests is the traditional rule that buyers and lessees of inventory
collateral take free of inventory security interests
● "Buyer in the Ordinary Course of Business" means a person that buys goods in good
faith, without knowledge that the sale violates the rights of another person in the goods
and in the ordinary course from a person in the business of selling goods of that kind
● Rule is restricted primarily to inventory collateral
● This happens even if the buyer of inventory KNOWS of security interest and that it
is perfected
 
Page 157
1. Is the Buyer a buyer in the ordinary course of business?
● no - debtor was accounting firm, not in business of selling machines
2. Is the Buyer a buyer in the ordinary course of business?
● Yes - but dealer didn’t
 
a. What are lenders rights? - has security interest in the machines
b. (2) buyer wins - if it’s a large item, you can assume theres a lien but it does not say
buyer knows about violation.
 
 
Entrusting: Acquiescence, delivery-- regardless of the procuring is LARCENOUS
(giving a car to dealer to do a service, and they sell it- Buyer will win)
● BIOCOB
 
 
1-202(b)- Knowledge means actual knowledge
 
Page 158
1. 1-201 Comment 9
● Who wins?
● Buyer
● Look to state law about constructive possession
● Most discussion is about the usual and customary practices
 
 
 
b. Goods subject to certificate of Title Act
 ● In 9-320(a), that a buyer in ordinary course of business takes free a security interest
created by the buyer's seller even if the security interest is perfected and the buyer
knows of its existence
● In 9-311(a)(2) - except as provided in 9-311(d), the exclusive method of perfecting a
security interest in certain kinds of goods, which include motor vehicles, is by indicating
the SP's lien on the certificate of title
● However, (d) excepts goods held in a dealer's inventory from a certificate of title
perfection
● In such cases, the SP can only perfect by filing
● Om 1-201(b)(9) the definition of buyer in the ordinary course of business requires that
such buyer buys in good faith, without knowledge that the sale violates the rights of
another person in the f]goods, and in ordinary course from a person in the business of
selling goods of that kind
 
c. Waiver
● § 9-315(a)(1) provides "A security interest continues in collateral notwithstanding sale,
lease, license…. Unless the SP authorized the disposition free of the security interest
● Since the purpose of inventory is to be sold, the inventory financer may expressly
authorize the dealer to sell the inventory free of its SI while safeguarding its
interest by imposing controls over the proceeds received by the dealer for the
goods sold
● In such cases, buyers take free of the financer's security interest without
having to rely on 9-320
● Conflicting case law concerning the question of when courts would find the existence of
a secured party's authorization to sell free of a security agreement, particularly in farm
products financing in which there is no buyer-in-the-ordinary course of business
exception
● Authorization to sell without more is insufficient
 
 
3. Buyer of Consumer Goods
● 9-309(1) provides for automatic perfection of a security interest in consumer goods-- use
primarily for "personal, family, or household purpose"
● A retailer who reserves security interests in the consumer goods it sells but does not file
in such transactions has a perfected security interest in those goods and is prior to the
rights of the buyer's trustee in bankruptcy
● Problems for a nonfiling retailer arise under 9-320(b) if its buyer sells the goods to
other buyers
 
Buyers of Consumer Goods
a. Wholesaler has no claim, 320(a) ordinary course of business, interest is created by seller
 
● So long as the buyer bought in good faith, the security interest is EXTINGUISHED (no
longer exists)-- Security Interest in which the Retailer is subject to
● Exists in proceeds
● 9-320(a) overrides 9-315(a)

b. None because under 9-320(b)

 ● Automatically perfected, but doesn’t get priority (didn’t file)
● Retailer doesn’t get any rights under 320(b)
(c ) Retailer has rights to collateral
 
When does a buyer buy?
● Determining when someone becomes a buyer can be important for purposes of 9-320(a) and
(b)
● It can make the difference between taking subject to and taking free of a security
interest in goods purchased
● 1-201(b)(9) defines a buyer in the ordinary course of business to require that he buy without
knowledge that the sale violates the rights of another person in the goods
● It does not specify the point in time at which someone buys and therefore the point at
which the buyer's knowledge is relevant
● Possible dates include:
1. The execution of the sale's contract
2. Identification of the goods under it
3. Passage of title in the goods
4. Delivery of the goods
5. Acceptance of them
● Most courts have sided with the consumer buyer, accelerating the date of
purchase to the point at which the goods are identified to the contract
● The Revised Article requires the buyer take possession or have a possessory
remedy available to it
 
When does a buyer buy? 5 possibilitiess
 
1. Executes a contract
2. Identification of the goods to the contract
3. Passage of Title
4. Delivery (buyer is in possession)
5. Acceptance
 
 
5. Double Debtors
 
Bank of the West v. Commercial Credit Financial Services (superseded by 9-325)
● Facts
● Bank of the West made a loan to Allied and was granted a security interest in all of
the existing and after acquired inventory and accounts as well as proceeds of that
collateral
● The Bank promptly filed a financing statement that perfected that security interest
● 2 years after CCFS entered into a factoring agreement with BCI, made loans
and a security interest in all of its existing and after acquired inventory and
accounts as well as proceeds of that collateral
● CCFS promptly filed a financing statement that perfected that security interest
● Later, BCI sold its beverage business to Allied
 
 
● Issue/Rule
● The Post-Transfer Security Interest
● Whether CCFS's security interest continued after the transfer of the beverage
business to allied?
● 9-306(2) which provides in pertinent part:
● Except where this division otherwise provides, a security interest
continues in collateral notwithstanding sale, exchange or other
disposition thereof unless the disposition was authorized by the secured
party in the security agreement or otherwise, and also continues in any
identifiable proceeds
 
● Analysis
● Neither expressly authorized BCI to transfer its assets to another corporation
● There is no evidence that CCFS otherwise authorized this disposition of its
collateral
● CA courts have made clear that implied authorizations of sales of the debtor's
collateral will not be found absent clear evidence on the prior conduct of the
parties
● Resolving the priority dispute
● Having concluded that both the Bank and CCFS had perfected security interest
in the inventory and accounts actually transferred
● Difficulty is that before the transfer from BCI to Allied, CCFS (the transferor's
creditor) had a perfected security interest in the collateral
● After the transfer, CCFS's perfected security interest is suddenly subordinated
to the perfected security interest of Bank of the West (the transferee's
creditor)
● CCFS, which had taken all steps required of it by the commercial code to
announce its interest in the collateral to potential creditors of the transferor
(BC) now finds its security interest subordinated to that of the transferee's
(Allied) creditors (Bank of the West), whose security interest came into play
only because BCI made an unauthorized disposition of the collateral to which
the Bank's security interest attached solely by operation of an after acquired
collateral clause
● Unsatisfactory result
● 9-312(5) does not contemplate the dual debtor scenario, we must
resolve this priority dispute by returning to first principles
● 9-312(5) places a premium on prompt filing of financing statements as a means of
protecting future creditors of the debtor
● Penalizes a creditor who has a security interest by who does not promptly file
a FS by awarding priority to a later creditor who acquires a security interest in
the same collateral and who promptly files a FS
● But in the present case, the notice giving function does not apply because the Bank
is a creditor of another debtor entity and the Banks interest in the collateral arises
solely out of an after-acquired property clause
● Bank of the West cannot claim that it has relied to its detriment on the
absence of a filed FS by CCFS
 ● Another purpose behind 9-312(5)(a) is an implied commitment to a secured
creditor who has filed a financing statement that, absent special consideration
such as PMSI, no subsequent creditor will defeat and they can make
subsequent advances without each time having as a precondition to check for
filings later than his
● "Claim staking" function of the FS
 
● Holding
● Transferee, Allied, cannot acquire any greater rights in the business assets than its
transferor, BCI had in them
● Security interest follows collateral in the hands of a transferee when there is an
unauthorized disposition by the transferor and the transferee takes subject tot the
security interest
● Because § 9-402(7) preserves CCFS's perfected security interest in the
collateral actually transferred as well as the property acquired 4 months after
the transfer, CCFS's security interest continues to be superior to the Bank
interest during this period, even though Bank insterest is also perfected
 
 
NOTE
● § 9-325 adopts the view of Bank of the West
 
Double Debtor
 
Bank of the West v. Commercial Credit Financial Services
● Superseded by 9-325
 
9-325/6 (ON EXAM!!!)
 
● We have a merger
● 2 companies have security interest
 
● DS---sells ship--> RS
● ST 7/1/09
● SA 7/1/08
 
● DS--> RS
● SP (covers DS)
● Merger
 
● 9-326(a)
● Both security interests continue after the merger
● Both have AA clause
● RS's SI will have priority
● SI created by a new debtor, has priority
 
● As far as the lender is concerned:
● 3 categories of properties (for RS new company)
1. Already subject to the security interest (merger doesn’t effect)
 2. Stuff that comes over from old company (after acquired property)
● However SA is "seriously misleading" because it carries the old
name
● Have to refile
3. After acquired property (after the merger)
● Don’t have to do anything (same name/same debtor)
● Just after acquired
 
● 9-507(a)
● As to DS
1. Property of the new company becomes subject to the old Security
Agreement
● Has or acquires rights 9-508
● Original debtor = DS
● To the extent that the new debtor acquires
● If you didn’t have 9-508
● True as the property acquired after the merger
 
● 9-326
● As to the existing property RS has, subject to both security interest
● A SI that is perfected by a 9-508 is subordinate
● RS SI, whenever filed, takes priority over
 
● Security interest created by a debtor (RS)
 
F. Rights to Payment
● The dollar volume in asset-based personal property financing has shifted from tangible to
intangible collateral
● Most important kinds of intangible collateral are rights to payment, such as accounts,
payment intangibles, chattel paper and instruments (these are often referred to as
"receivables"). Biggest ones now are Intellectual Property rights.
 
Bank participation - limitation on loans to one borrower (large bank loans to companies that are
creditworthy). Large, public companies typically don’t take unsecured loans, and banks hesitate to
refer to other banks, so banks issue loan and sell participations in loans (payment intangibles). Loan is
not payment from league bank to borrower, it’s direct payment from each lender to borrower. Banks
didn’t want to file financial statements. Security interest in payment intangibles is perfected by
attachment.

1. Scope of Article 9
● With respect to rights to payment, 9-109(a) provides that Article 9 applies to:
1. A transaction, regardless of its form, that creates a security interest in personal property
or fixtures by contract, AND
2. A sale of accounts, chattel paper, payment intangibles, or promissory notes
● Difficulty in distinguishing between transactions creating security interest in rights to
payment and those making outright transfers, often referred to as assignments
● With respect to rights to payment, it is convenient to cover 2 conceptually different
transactions in one statute:
● Secured loans
 ● Sales
● Problems of distinguishing between the two transactions are lessened and the
provisions for perfection and priority are appropriate for both
 
2. Reordering of Rights to Payment in Article 9
 
a. The New Definitions
● The definition of "account" in 9-102(a)(2) greatly expands the definition to include rights
to payment arising either from the disposition of any kind of property, including real
property and intellectual property, as well as rendering services
● Does not include rights to payment evidence by chattel paper or instruments or
those for loan advances or commercial tort claim
● "account" includes most unsecured obligations arising from the disposition of
property or the rendering of services that are NOT evidenced by negotiable
instruments
● "Chattel Paper"
● described as consisting of a monetary obligation together with a security interest
in or a lease of specific goods if the obligation and security interest or lease are
evidenced by a record or records (installment sale contracts and leases of goods
are common examples- may either be tangible or electronic)
● "General Intangible"
● Includes payment intangibles and software. Covers important kinds of intangible
property that are not rights to payment, such as rights in software, copyrights,
trademarks, patents, and characterization rights
● Also covers rights to payment that arise in transactions other than those expressly
excluded from the definition of general intangibles
● "Payment intangible"
● Is a subset of a general intangible under which the account debtor's principal
obligation is monetary obligation
● An important example is a bank loan
● When the repayment obligation isn't evidenced by an instrument
● Doesn’t define when an obligation is "principal" and when ancillary can turn on
how the obligation arose
● "Promissory Note"
● An instrument that evidences a promise to pay money
● Excludes checks and certificates of deposit
 
 
b. Sale of Right to Payment
● Asset securitization involves the transfer of assets to an entity usually created for that
purpose and called a "special purpose vehicle" (SPV)
● The asset transferred can be any money generating item, from intellectual
property to franchise fees (often they are accounts, chattel paper and payment
intangibles)
● The entity issues securities that are payable from the stream of revenues produced
by the assets transferred to it, such as collections on the accounts or other money
generating item
 ● The lower cost of capital due primarily to the elimination of financial
intermediaries between investors and borrowers and the reduced business risk
presented by the SPV
● Now 9-109(a)(3) covers virtually all rights to payment, including promissory notes, that
this industry deals with.
● But sales of other kinds of personal property falling within the definition of general
intangibles that are not rights to payments, such as copyrights, trademarks and
software are not covered by Article 9
● The interest of parties in the loan participation market sharply diverged from those
in the asset securitization business with respect to UCC coverage
● Revised Art. Settled on a comprimise between the preferences of the 2 industries
● 9-109(a)(3) extends Art. 9 to cover the sale of payment intangibles
● By implication, sales of other sorts of general intangibles are excluded
● This satisfies the demand of parties operating in the market for asset
securitization for legal certainty
● 9-309(3) sale of payment intangibles is perfected without filing
● By eliminating the need to file and the attendant transaction costs, the
provisions satisfies the concerns of the aprties in the loan participation
market
● "perfection" with respect to sales of loan participation shares is mildly inartful
● A creditor "perfects" a security interest
● Strictly, a buyer does not "perfect" the ownership interest it purchased
● Still the effect of automatically perfecting the buyer's interest in
payment intangible is clear:
● The buyer gets the benefit of Art. 9 perfection and priority rules and
it protected in its sellers bankruptcy proceeding
● Sales of promissory notes are also automatically perfected
● Break the pre-revision category of general intangibles into 3 parts
● The large volume of rights to payment arising from the disposition of real property
and intellectual property are brought within the definition of account and the sale
of these rights is treated accordingly
● Rights to payment that fall within the attenuated definition of general intangibles
but are principally monetary obligations, are treated differently as payment
intangibles
● Other intangible property that is not rights to payment such as software, other
intellectual property, and other personal property that is not goods, is retianed in
the definition of general intangibles, and its sale is not covered
● Because an interest in the sale of a payment intangible is automatically perfected while
a security interest in a payment intangible is not, perfection of a security interest in a
payment intangible still requires filing
● Thus a SALE must be distinguished from a security interest
 
 
History
 
1962-- Telstar, gives rise to cell phones; space; Congress passed investment tax credit (tax
benefits if you bought new property and invested it in tangible property)
 
● GE Capital: Lending Instition-- Equipment leases
● How do you know the difference from an equipment lease and finance lease?
● Finance lease is really loan
● Same as the sale/loan distinction
 
● PROPERTY (financer)----> property goes to User
● Cash comes from FINANCER ---> and goes to a Dealer
● User Pays Dealer
● LIKE A LOAN
● Who loses if payments aren't made?
● Lender has a property interest and a right to receive payment
● Lease, have to return the property
● If you have an option to buy, will exercise the option to
buy when the payment is less than the value of the car
● If there is an absurdly low option price
● Its like a sale (not like a lease)
● By setting the price/risk of fluctuation and value
of the car is on the user
 
● If it is a Market Value Option, then the user can exercise
it at that price
● Then the fluctuation is on the Financer
 
● If you set a very high option price
● Your sure that the user will not exercise the
option price (Lease)
 
 
● GNMA (GinnieMae): Originators which are mostly banks, write mortgages which are
called special purpose vehicles (SPV)
● Had full faith and credit of US government
 
 
● Securitization:
● Say you have 100 mortgages (total worth 5.5 Million, 6% interest)
● Generated 330,000
● Get Special purpose vehicle- 200 people buy securities, each security has a
principle value of $27,500-- $1,650/year
● Security that gives you an undivided interest
● Originator will take 1%, they will get 5%
 
● Basically getting a government bond, with a higher interest rate
● Bank is happy because instead of getting 6%.... It gets the cash back
(and still keeps 1% cut)
● Assignment of documents
● Note (Instrument)
● Those rights are SOLD
 
● If Originator goes into bankruptcy and its sold, they are not dragged in to
Unsecured creditors or FDIC in the bankruptcy
● Controversy attached to "Securitization"
 
● Didn’t exist when the UCC was originated (Leasing, securitization)
● Bank receives the payment and is a service agency, doesn’t own the payment
 
 
 ● With Debt Securities, there is something called "Interest Rate Risk"
● Possibility that interest rates fluctuate
● The valuation of the BOND changes if the interest rate fluctuate
● The return is FIXED
● Value of the bond moves inversely to the interest rate
 
● When a person refinances, the mortgagee takes advantage of lower interest
rate
 
 
● Originators and the SPV transaction
● Same as the merger
● Question is: is it a Sale or a Loan?
● The securities that people bought are Investment property
 
 
● "Swap"
● Fixed (obligation) --- variable (assets)
● Variable (obligation)--- fixed (assets)
● They would switch payments!
● Not a swap of the underlying assets, just the payments
 
● Loan Participation
● One bank wants to make a loan to one borrower and that loan exceeds the
amount allowed by law
● Get other banks to help loans
● Large loans to large borrowers by large banks
● For bankruptcy purposes the portions that are "participationed" out
● Payments made to bank--- they make payments to the OTHER Banks
● THIS IS A PAYMENT INTANGIBLE
  
In re Commercial Money Center
● Issue
● The multibillion dollar securitization industry depends on being able to fractionalize
financial assets, and specifically on stripping payment streams from underlying
transactions such as the equipment leases in this case.
● The issue is whether those payment streams are chattel paper or payment
intangibles
● Decision
● The underlying equipment leases are chattel paper but the payment streams
stripped from the leases are payment intangibles
● This means that the assignment of the payment streams could be automatically
perfected under UCC 9-309(3) but only if the assignment is a sale
● Transactions in this case are loans, not sales, so there is no automatic
perfection
● Unresolved factual and legal issues as to whether perfection was
accomplished by taking possession of the underlying leases through 3rd party
agents
● Facts
● Debtor leased equipment to lessees with sub-prime credit
● It packaged groups of leases together and assigned its contractual rights to
future lease payments to entities like NetBank
 ● To enhance marketability, debtor obtained surety bonds guaranteeing
the payments and its assigned rights under the surety bonds to NetBank
● Debtor granted NetBank a security interest in the underlying leases and
other property
● Debtor assigned NB both an interest in the payment streams and an
interest in the underlying leases, but it seperated the 2 interests
● Terms of agreement called a Sale and Servicing Agreement
● Intend a sale, not a loan: a sale and assignment outright, and not for security
of the transferred assets
● Conveying good title thereto free and clear of any Liens, from Debtor to
NB and that all such property shall not be a part of the estate of Debtor
in the event of Bankruptcy
● On the other hands, SSA characterized the transaction as a loan, not a sale for tax
purposes
● Amounts payable to NB will qualify under tax law as indebtedness of debtor
secured by the leases and other assets described
● Debtor was required to perfect its own security interest in the leased equipment
● It was supposed to list NB in financing statements and lease documents as the
"assignee" of those security interests
● Debtor did not fulfull all of these obligations and NB's interests were never
perfected
● Trustees claim that NB has not satisfied the requirements for perfection of its
interest in the payment streams and therefore its interests are avoidable using his
strongarm powers
● NB's answers alleges
● that Royal had actual and constructive possession before and after the order
which led to NB being perfected with respect to the transferred assets
● More generally, that agents and/or bailees always had possession of the items
in which NB is secured
● That while NB did not file a UCC1 FS, to the extent required Debtor and/or
surety were legally responsible for such filings and
● That any transfers that might otherwise be avoidable as preference were
protected by the ordinary course of business defense
 
● Are the payment streams "chattel paper" within the meaning of UCC?
● Were the transactions at issue loans, rather than sales?
● Analysis
● Trustee's strongarm powers generally enable him to avoid a pre-petition
unperfected transfer by Debtor of an interest in its property
● Perfection under UCC Art. 9 apply not just to security interests for loans but also to
sales of chattel paper and payment intangibles
● Security Interest includes any interest of a consignor and a buyer of accounts,
chattel paper, a payment intangible or a promissory note
● Most perfection is not automatic.
● One exception is sale of a payment intangible (referred to as a security
interest) which is perfected automatically
 
● The payment streams are payment intangibles, not chattel paper
● NB claims that the payment streams are payment intangibles, which is one of
the requirements for automatic perfection
● The other principle requirement is that the transactions be sales
● The language on its face defines chattel paper to mean the "records" that
"evidence" certain things, including monetary obligations
● Payment streams stripped form underlying leases are not records that
evidence monetary obligations-- they are monetary obligations
● Payment streams are not chattel paper
● If not chattel paper, then what are they?
● Most monetary obligations are "accounts" but the definition of
account excludes "rights to payment evidenced by chattel
paper"
● Therefore, the monetary obligations in this case fall within the
payment intangible subset of the catch all definition of general
intangibles
● 3 requirements before something is characterized as chattel paper
● A record
● That evidences both a monetary obligation, and
● A security in or a lease of specific hoods
● Monetary obligation Is defined as a monetary obligation secured by
the goods or owed under the elase
● We do not understand how NB's reading would essentially delete the monetary
obligation requirement from the definition of chattel paper
● That requirement simply describes the type of records involved-- they must
be records that "evidence" a monetary obligation, among other
characteristics
● The leases do that, so they are chattel paper, but the payment streams do not
● As statement above, they are not "records" that "evidence" monetary
obligations, they are the monetary obligations
● UCC aims to provide certainty in financing transactions and some means for 3rd
parties to discover competing interest in property
● UCC does not specifically procide that the transfer of chattel paper transfers
the obligation it represents
● It merely provides in § 9-305 that a SI in chattel paper may be perfected by
the SP's taking possession of the collateral
● Taking possession of the collateral, the chattel paper itself would be
meaningless unless the paper represented the underlying rights which
were transferred by a transfer of the paper
● In other words, delivery of the chattel paper may operate to transfer a
perfected interest in the associated payment streams but that does not
mean that payment streams are chattel paper
● When stripped from chattel paper they are payment intangibles!
● Many transactions fall clearly on one side or the other of the sale versus loan
dichotomy
● When the answer is not clear the UCC contemplates that courts will need to
decide the issue
  
● Holding
● The special priority rule only applies by its terms to an interest "in the chattel
paper"
● We have just held that the payment streams stripped from the leases are not
chattel paper, so arguably this special priority rule is inapplicable
● On the other hand, from the financer's point of view the assigment of an
interest in chattel paper includes the associated payment streams
● For purposes of competing priorities the secret interest may be an
interest in the financer's "chattel paper"
● Decline to resolve this ambiguity
● Plain meaning of the statute: the payment streams seperated from the underlying
lease do not fall within the definition of chattel paper
● Rather, these monetary obligations fall within the payment intangible subset
of the catch all definition of general intangible
● Because the payment streams are payment intangibles, automatically
perfected upon attachment if its transaction with Debtor were sales rather
than loans
● We agree = transactions were loans, not sales
● Not automatically perfected
 
 
In re Commercial Money Center, Inc.
●
Netbank "Assigns" the right to the lease payment to CMC----> leases
receive a lump sum up front equipment
 
● Why would they do this?
● Depreciation reduction is probably faster than the money coming in
● Treated this as a loan for TAX purposes (looks like a loan, borrows money
and pay as it comes it)
● If it is a SALE for tax purposes, they will be taxed on the full amount
when they received it
● Here they want to get money, without being taxed on it
● Up front tax free cash
 
● If it is a secured loans, secured by lease payments-- have to file or perfect in
some way
 
● Net bank has possession through the Surety
● Is that enough?
● If the payments are payment intangibles, it is perfected if it is a sale
● Court holds they are payment intangibles
● But also holds, no sale, it is a loan
● And if it is a Loan, doesn’t matter which they are and it needs
to be perfected
● Court defining what a payment intangible
 
● 9-318
 
Lessor 2 <----------- Lessor
 "assign"
 
● Code says this is a security interest
● 9-318(a)
 
● Then lessor 1 goes bankrupt
● Lessor has no rights in this lease (we are treating it as a security interest, want
lessor 2 to perfect)
● Not reachable by Bankruptcy
● Like 9-318(b)
● We are going to beat the Trustee but not other secured parties
● To determine rights of purchaser or subsequent creditor it WILL be
deemed that lessor has rights
● (only doesn’t have rights because it wants to keep it out of
Bankruptcy)
 
 
 
 
OPINION (may be tested):
● Sophisticated business transactions:
 
● Types of things you can take back: (?)
1. Money
2. Accounts
3. Instruments (certificate of deposit is a note/instrument) -- Must perfect/get possession
4. Chattel Paper-- must perfect/get possession
 
 
---> Sale of those (above) things, makes it a security interest
● Don’t care how you allocated the loss
● Going to treat everything as a loan
● Not always
● But must file a financing statement
● Payment intangibles
 
● Lender <------Dealer
● Payment to lender
● Lender gives dealer money
● Looks like a loan
● Difference is that the money/payment is coming from someone who is obligated to the borrower
 
● Could be a:
● Secured loan
● Sale of obligation
● Movement of money and cash will look similar
● Look at CASH and Property
● What is the difference in substantive terms?
● If there is a sale, the lender suffers the loss
● If there's a loan, the dealer suffers the loss
 
 
NOTES
● Chattel paper is defined as a record that evidences both a monetary obligation and a
security interest in or lease of specific goods
 ● Before assignment of the payments, CMC's property rights with respect to the
leases are classified as chattel paper:
● It possessed written lease forms evidencing both an obligation of the lessees
to make lease payments and a lease of specific goods
● If CMC had sold these leases, the buyer could perfect its interest either by
taking possession of the leases (9-313(a)) or by filing a financing statement (9-
312(a))
● But CMC sold only the monetary obligation of the lessees, the
prospective payment streams, to the investors who did not perfect by
filing and since CMC retained possession of the leases, could not perfect
by taking possession
● Commercial Money Center finds that monetary obligations of lessees sold separately
from leases are payment intangibles, not chattel paper
● However, Case law and Comment suggest that the relevant time for classification
purposes is when the asset first becomes collateral
● Commercial Money Center is highly controversial
 
Payment intangibles versus Chattel Paper
● Commercial Money paper case
● Keeps the character of what it was stripped from
● Understand the questions of
● Payment intangible SA doesn’t have to be filed
● SI created in a Payment intangible does have to be filed
● 9-309
 
● 9-327
● Priority rules for deposit accounts
1. Control beats non-control in all cases (rule is Non-temporal)
● Can get priority by taking control
● 3 forms of getting control
2. Customer
● SP beats bank (or intermediary control)
● Control by 3 party agreement
● Security accounts have same rules as deposit accounts
● Deposit accounts cannot be perfected by filing!!
 
● Money
● Perfect SI in Money= possession alone
 
 
● 9-330
 
 
 
3. Effect of Sales of Receivables
● A goal in setting up a special purpose entity for asset securitization is to make it "bankruptcy
proof"
● The assets transferred to the special purpose vehicle cannot be considered part of the
transferor's estate and subject to jurisdiction of the bankruptcy court
● This requires that then securitization is structured so that the asset's transferred
are isolated from the transferor's creditors
  
● Octagon Gas Systems v. Rimmer
● 10th circuit raised a major problem for the securitization industry by deciding that an
outright sale of accounts leaves a residual interest in the transferor debtor that can be
used by the trustee to drag the accounts back into the debtor's bankruptcy estate and is
dealt with by the debtor's Chapter 11 plan in a manner that transfers the accounts free
of the buyer's interest
● The court erred by failing to identify the limited purpose for which Article 9 covers
outright sales of accounts
● The purpose is filing
● The assimilation requires accounts buyers to give public notice of their ownership
interest in order to protect that interest from the claims of the seller's creditor
● Sales transfer all of the seller's interest to buyers, security interests taken by a
secured creditor do not
 
 
 
G. Accounts and General Intangibles
 
1. Priority in Proceeds
● Accounts and general intangibles, chattel paper, deposit accounts, and cash proceeds
● As a general rule, accounts and general intangibles can be perfected only by filing 9-310(a):
possession is not a means of perfection for intangibles such as these
● Determined by the first to file rule
● Exceptions to the basic rule are found with respect to payment intangibles, security interests
subject to other law
● PMSI can be created only in goods and software and not in accounts
 
Accounts and General Intangibles
● 9-315(a)
● Problems (192)
● 1.(a)
● 9-320(a)
 
Inventory Financer ----->Dealer ---> Proceeds Customer <----- Account financer
 
● Usually let subsequent purchaser win (bona fide purchaser)
● For Account Financer (generally tilt toward letting them win)
● Inventory financer should set up a lock bock to protect itself, so that it gets the
interest from the cash
 
What happened between bank and lender?
● FILED first
● 9-322(b) says that the priority in the collateral extends to the proceeds
● 9-315(a) says the interest in the collateral extends to proceeds
● (c) perfection with respect to interest in collateral
● Lapses after 20 days unless collateral was not acquired with cash
proceeds, perfected when received and proceeds were such that interest
could be perfected by filing
 
1. EXAMMMMMMMMMMMMMM
 ● SPB has priority because it was acquired with cash proceeds (takes it out of 9-315(d)
(1)(c))
● It is property that could be covered by security interest
● After 20 days perfect passed --- IF THE 20 days passed SPB wins
● Don’t confused cash proceeds with the term money
● Checks are instruments but they are cash proceeds
 
● (b)
● 9-315(d)(3) applies
● That collateral is covered by the financing statement
● Doesn’t matter that it was proceeds
 
 
● 9-309(2) & (3)
● Treat P 2 as applying only to accounts
 
 
2. Section 9-309(2) Exceptions
 
In re Tri-Country Materials, Inc
● Fact
● Tri-County Materials, the Debtor below, operated a sand and gravel pit
● LCC was a general contractor which had a contract with the State to construct a
portion of the Interstate
● LCC and TCM entered into a contract
● KMB leased equipment to TCM: initial agreement was oral and later reduced to
writing
● In the agreement, TCM assigned part of its account with LCC to KMB for the
purpose of securing rental charges
● LCM was notified of the assignment
● KMB did not file a UCC financing statement regarding the assignment
● TCM filed a voluntary petition for bankruptcy under Ch. 11
● LCM owed TCM $43K; TCM owed KMB $30K
 
● Analysis
● KMB claims that because TCM assigned its rights to receive payment from LCC to
the extent that it owed money to KMB, it had a security interest in the money
owed to TCM
● § 9-302:
● A financing statement must be filed to perfect all security interest except the
following:
● An assignment of accounts which does not alone or in conjunction with
other assignment to the same assignee transfer a significant part of the
outstanding accounts of the assignor
● KMB not regularly engaged in accounts receivable financing, thus making this is
casual and isolated transaction
● Mere 12% thus making it an insignificant transfer
● Although the Code does not define "significant part" case law has developed 2
tests:
 ● First test is referred to as the percentage test
● This test focuses on the size of the assignment in relation to the size
of outstanding accounts
● Second test is the "casual or isolated" test:
● Purpose of the subsection (e)(1) exemption is to save from ex post
facto invalidation casual or isolated assignment
● Assignment which one would think of filing
● Any person who regularly takes assignments of any debtor's
accounts should
● Look at the totality of the circumstance
● Determines whether an assignment was casual or isolated
● Reasonableness of requiring a secured creditor to file if
assignment of debtor's accounts is a regular part of business
and the corresponding unreasonableness of a filing
requirement for casual or isolated transactions
● BOTH tests must be met
● Assignment was not of the entire LCC account but only that portion of the account
necessary to cover the balance due to KMB
● Amount assigned to the total account was appx 12%
● Figure is surely on the "insignificant" side (first test has been satisfied)
● KMB was not in the business of accepting contract assignment
● This is not the type of "casual" transaction in which reasonable parties would fail to
see the importance of filing
● Rather it was evidenced by a formal, written agreement between 2
corporations
● This is the type of transaction for which the UCC requires filing in order
to perfect
● Decision
● KMB failed to perfect their security interest
 
In re Tri-County Materials
● Still good law
● Percentage test (passed because it was only 12%)
● Casual or isolated (didn’t pass)
● Not clear whether you have to meet both tests
 
 
 
H. Chattel Paper and Instruments

1. Introduction
● Chattel paper is a record or records that evidence both a monetary obligation and a security
interest in specific goods or a lease of goods
● A security interest in accounts and general intangibles can be perfected only by filing, there is
no physical embodiment of the right to payment that a creditor can be given possession of
● However, with respect to instruments and chattel paper-- right to payment and
performance is sufficiently embodied in written agreements so that possession of these
writings gives the possessor control over the obligation
 ● The right to payment is merged into the instrument and the pledge-holder of that
instrument is the only person entitled to receive payment
● Any attempt by the original obligee (payee) to make subsequent assignment of the
right to payment represented by an instrument in possession of a pledge holder is
futile
● Chattel paper is closely related to accounts:
● Priority rule for chattel paper is very different from that prevailing for accounts
 
Chattel Paper and Instruments
● Chattel Paper
▪ Give priority to Account Financer on the condition that:
● Has possession of paper
● Gives new value
● Some standard or blamelessness (lax standard)
 
 

Rex Financial Corp. v. Great Western Bank & Trust

● Facts
● Appellant entered into an agreement with Liberty Mobile Home, a dealer in mobile
homes under which appellant agreed to finance this dealer's inventory of mobile homes
● The dealer delivered to appellant certain manufacturer's certificates of origin on
mobile homes to secure repayment of the loans, and gave appellant a security
interest in the vehicles by way of a security agreement
● 4 mobile homes were sold by dealer in the regular course of his business to certain
individuals on security agreement contract
● Security agreement contracts were then sold and assigned to the appellee, Great
Western, in the ordinary course of its business for a certain sum which was paid to
the dealer
● The dealer did not use these funds to pay off its outstanding loans owed to
the appellant
 
● Analysis
● A question of law concerning the construction and application UCC § 9-308 concerning
the priority between certain secured creditors and purchasers of chattel paper
● A purchaser of chattel paper who gives new value and takes possession of it in the
ordinary course of business has priority over a security interest in chattel paper
which is claimed merely as proceeds of inventory subject to a security interest (9-
306) even though he knows that the specific paper is subject to the security interest
● When a transaction is evidenced both by such a security agreement or a lease and by an
instrument or a series of instruments, the group of writing taken together constitutes
chattel paper
● "chattel paper" clearly must evidence both a monetary obligation and a security
interest in or a lease of specific goods
● Manufacturer's certificates or origin do not meet this definition
● Great Western gave "new value" for the four security agreements it
purchased from the dealer (for the mobile homes)
● In the ordinary course of his business is the definition
 ● The plain language of the statute refers to HIS business (meaning the purchaser of
the chattel paper)
● The term "buyer in the ordinary course of business" with its requirements of good
faith, as used elsewhere in the UCC is to be distinguished from the use here
● Code contemplated a situation such as the instant one where the inventory financer,
Rex Financial Corp has a security interest in the collateral (mobile homes) and the
proceeds upon sale
● The record before us does not indicate that Rex entered into any new transaction
with the debtor/dealer
● Trial court found that the claim was merely to the proceeds of the Inventory
(no error)
● Rex did not place a substantial reliance on the chattel paper in making
the loan, but rather relied on the collateral (mobile homes) and the
proceeds when the collateral was sold
 
2. "Merely as Proceeds"
● Whether a subsection (a) or (b) or 9-330 applies depends on whether the chattel paper is
claimed "merely as proceeds of inventory" OR "Other than merely as proceeds of inventory"
● No definition of these phrases in either the text or comments
 
● Floor planning:
● GMAC lends dealer money to buy cars from the manufacturer, GM, and takes a security
interest, perfected by filing, in the inventory and its proceeds
● When Dealer sells car, it must account to GMAC for the amount loaned against the
car
● Exception to the first-to-file or perfect rule
● Awarded priority to purchasers of the chattel paper against the SP who financed the
inventory
● In 9-330(b) case Finance cannot prevail unless it is without knowledge that the purchase
violates the right of the secured party
● Distinction based on the "merely as proceeds" test was carried over into 9-330
● Chattel paper is primary collateral
● The structure of the deal is such that the chattel paper is part of the primary collateral
for the debt
● That interest extends to any chattel paper subsequently generated by a sale of
inventory whether or not at any particular time the existing inventory is adequate
security for the debt actually outstanding
● "merely as proceeds rule"
● Argument can be made that it rests on a false distinction
● The lenders are always looking substantially to the chattel paper at the time
the loan is made
● If the test is one of substantial reliance on the paper in making the loan,
as followed by the court in Rex Financial, all inventory financers qualify
● The financer who ignores the possibility of having to reach the paper
does not exist
● Chattel paper is always part of the cake and never frosting for inventory
financers
  
 
● Holder in due course
▪ Doctrine says if you issue a note, and you have a defense against the note
● In practice, you buy a lawn mower and you pay for it with a note
● Takes the note to the bank
● Lawn mower blows up
● If they had not assigned the note, could have asserted a defense to
the note based on tort claim
● But since they assigned note, no defense (have to pay)
● Depends on NO KNOWLEDGE of a claim against the note
● Even if the claim asserted is different from the claim they
knew of … still might be enough to defeat the "Holder in due
course" status
 
 
3. Instruments
● Suppose Bank takes a security interest in Debtor's inventory and all the proceeds thereof,
including accounts, chattel paper and instruments
● Bank perfected its security interest by filing a financing statement covering all Debtor's
personal property
● When Debtor sells some items of its inventory, it accepts promissory notes from buyers
in which they promise to pay
● Instruments is broadened to include not only negotiable instruments but also other
written promises to pay money that are treated similarly in the marketplace
 
Review Problems (page 206)
 
1. Must determine what category each one is
1. Credit card receivable - Account
● Bank is prior because they have a SI in inventory and this is proceeds in the
inventory
2. Does it matter that the factory has possession of the receipts
● Factory is unperfected
● Bank perfected (prior)
● Doesn’t matter that factor knew about the security interest
 
3. Promissory note
 
● Promissory note is not a perfected interest
● Negotiable instrument
● Same standards as 9-330(b)
● Factor wins again
● Possession
 
 
1. Lease payments
● It’s a true lease
● Expected items back
● Lease itself does not create a security interest, but the lease is collateral
● Priority with respect to the factor?
● Factor (not bank)
● Same analysis
 ● Chattel paper and its in the possession of factor
● The residual interest in the goods (even though the chattel paper is
assigned-- the chattel paper isn't what gives interest the television
set)
 
 
2. (B) governs
 
 
 
 
I. Deposit Accounts
 
1. Introduction
● The definition of "deposit account" does not include accounts evidenced by negotiable
certificates of deposit
● These are covered in Article 3 as instruments
● The broad definition of deposit accounts sweeps in everything from simple checking accounts
on through savings and trust accounts
● The major reform of Revised Article 9 with respect to security interest in deposit accounts is
bringing them fully within the Act by covering security interests taken in deposit accounts as
original collateral as well as proceeds
● Somewhat frustrated by the exclusion in 9-109(d)(13) of security interests in deposit
accounts as original collateral in consumer transactions, which leaves this area to the
vagaries of pre-Revision law
● This exclusion can be circumvented by turning the consumer's bank account into
either a certificate of deposit or investment property such as a money market
account
● The § exclusion of security interests in deposit accounts as original collateral in
consumer transactions apparently is a response to the concerns of consumer
advocates
● They took seriously the risk that consumers are prone to inadvertently
granting security interest in their savings or retirement accounts
● Exclusion isn't responsive to the problem because it doesn’t prevent consumers from
granting security interests in deposit accounts as original collateral, it only prevents the
transactions from being governed by Art. 9
● Complication 1:
● When customers deposit money in banks, they enter into a debtor-creditor
relationship with the banks in which the deposits are maintained
● The depositor becomes a creditor to the bank and has a right to payment
from the bank in the amount of the deposit
● May use this payment right as collateral but the most common secured
transaction in deposit accounts is one in which the security interest in
the right to payment is created in favor of the depository bank itself
● Hence, the bank itself as, in effect, both the account debtor and the
secured party
● Complication 2:
● The banks traditional right of setoff
 ● Under the common law, a bank that has lent money to a customer has
the right to offset the amount owing on a loan in default against a
deposit account of the customer maintained in that bank
● Parallels any right the bank may have under a security interest in
the account
● Former Article 9 excluded setoff rights from coverage and 9-109(d)
(10) continues this exclusion with 2 exceptions:
● 9-340 which allows the depository bank to exercise setoff
against a secured party who holds a security interest in the
deposit account
● 9-404 relates to defenses or claims of an account holder
 
 
 
2. Priority Rules
 
a. Control
● The drafters adopted the concept of control as the method for both attachment and
perfection of security interest in investment property
● Have applied it to deposit accounts so that attachment, perfection, and priority depend
on whether the SP has "control"
● 9-104:
a. A secured party has control of a deposit account if:
1. The SP is the bank with which the deposit account is maintained
2. The debtor, SP and the bank have agreed in an authenticated record that the
bank will comply with instructions originated by the SP directing disposition of
the funds in the account without further consent by the debtor, OR
3. The SP becomes the bank's customer with respect to the deposit account
 
● Control is the sole method of perfection for security interests created in deposit
accounts as original collateral
 
Deposit Accounts
What constitutes control?
1. Bank in which the deposit account maintains has control
● If Bank has security interest OR if you borrowed money in that bank
2. 3 party agreement (SP, Debtor, bank)
● Not an agreement to subordinate the Banks interest
3. Secured party to become the customer of the bank
● Requires bank
 
CONTROL beats any other kind of perfection!
● Control under 3, beats under any other kind of perfection (3 > 2 > 1)
 
9-327(1)
● Security interest that has control over SI in on without control (applies only where the
competing interest is in the deposit account)
● Can perfect SI in deposit account only by control UNLESS:
● Perfected SI in collateral means SI in proceeds in 9-315 is also perfected
 
 ● Beyond 20 days, that SI cannot continue unless its proceeds
 
● SP is customer of bank
● 9-104(a) the order is 3 > 1 > 2
 
Possession
Control (deposit accts)
 
Control
1. SP becomes customer
2. Be the bank (set off)
3. 3 way agreement
 
 
8-106(a)-(c), (d)
 
 
 
b. Security Interests in Deposit Accounts as Proceeds of Other Collateral
● The priority with respect to deposit accounts are complex and we introduce them in 2
prototypic cases
● Common one in which 3rd party lenders have security interests in deposit accounts
as proceeds of other collateral in which a lender has a security interest
● 9-327(1)
● Provides that a security interest held by a SP having control has priority
over the SI of a SP that does not have control
● SP's perfected SI in the account does not give it control, but Bank has
control under 9-104(a)(1), which provides that if the bank in which the
deposit account is maintained has a SI in the account, it has control
● Security interest in the proceeds is likely to be subordinated to the
bank's security interest
 
Page 213 Questions
● Answers to both questions is YES
 
 
 
c. Security interests in deposit accounts as original collateral
● Even if Bank agrees to grant Lender control over the account under 9-104(a)(2), Bank is
prior under 9-327(3)
● Enables banks to extend credit to their depositors without the need to examine
either the public record or their own records to determine whether another party
might have a SI in the deposit account
● Lender is protected against bank in only 2 instances:
● Lender acquires control by becoming the bank's "customer" with respect to
the account (placed in the name of the Lender)
● Enter into a subordination agreement with bank under 9-339 in which the
rights of Lender and Bank are spelled out in detail
 
d. Critique
 ● Clear that if a 3rd party lender allows its debtor to deposit proceed in a bank, the bank's
interest will almost always take priority over the lender's interest, either because of the
bank's inevitable security interest in the deposit account or its right to set off against
that account
● Since lenders can have a security interest that is perfected by filing in a deposit account
as proceeds of other collateral, there seems little reason to deny perfection by filing for
a security interest in a deposit account as original collateral
 
J. Cash Proceeds
 
1. Priority
 
a. Pre-Revision Background
● The priority of the secured party with respect to those to whom the debtor has made
payments from the deposit account
● What happens to the secured party's interest in the proceeds in the account if the
debtor pays its bills by drawing on the account?
● Recipients of the funds of course take free of any claim which the SP may have in
them as proceeds
● Pre revision case to show the policy conflicts as well as the case law background facing
the drafters when they addressed the issue
 
HCC Credit Corp. v. Springs Valley Bank & Trust
● Facts
● Lindsey sold 14 tractors to a customer and used the proceeds to pay off the debt it
owed Springs Valley Bank
● HCC had financed the purchase of the tractors and held a valid and perfected
security interest in both the tractors and the proceeds from their sales
● Written contract governed, including a security agreement
● At no time did HCC require Lindsey to deposit or segregate proceeds from the
sale of products in a separate account
● Had a valid and perfected security interest in the equitable and proceeds from
the sale thereof
● Linsey filed for Bankruptcy liquidation
 
● Analysis
● UCC streamlines legal impediments to commerce: reducing the burden on
perfected secured parties in the former and reducing the burden on ordinary
course payees in the latter
● Payment will be in the ordinary course if it was made in the operation of the
debtor's business but will not be in the ordinary course if there was collusion
with the debtor to defraud the SP
● As to the awareness of prejudice parameter, it is hard to image the
recipient of the monthly utility of rent payment having any knowledge
that it was being paid with proceeds
● At the other end of the spectrum is actual fraud in which debtor and
recipient have colluded against the SP
 ● Between these poles will fall payments where the recipient knows that a
SI exists but does not know that the payment is being made in violation
of that interest
● A secondary lender whose debt is subordinated to the SP will
generally be presumed to have actual knowledge of prejudice to
the SP
● This occurs because the secondary lender has extended credit to
the debtor with the express understanding that the SP stands in the
superior position to be repaid
● Decision
● Lindsey's payment to the Bank was not in the ordinary course
● The bank was aware that HCC had a valid and perfected SI in the tractor
inventory; took this into account in making its decision to extend credit
● The payment to the bank constituted proceeds of collateral in which HCC had a
valid and perfected SI
● The payment was used to liquidate a substantial secured debt which for the
most part was not due
● Extremely large payment
● And although the bank was not advised that the source of the payment it
received was proceeds the bank knew of the security interest
 
Cash Proceeds
HCC Credit Corp
● Overruled cases
● By 9- 330(2)
● Unless its theft or larceny, once the money's gone it's gone
 
 
 
b. Transferees of Funds Under § 9-322
● Section 9-322 is a bold clarification of the law on this subject
a. 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 security
party (And transferee of funds from deposit account takes free also)
 
● If a depositor withdraws currency from a deposit account in which proceeds are
deposited that are subject to a security interest and transfers it to another person,
9-322(a) protects the transferee against the claim of a secured party
● If a depositor draws a check, protects payee who receives the funds
 
● Collusion occurs when a person either commits a tort in concern with another or knows
that another's act is a breach of duty and gives substantial assistance or encourages
another to commit the tort or give substantial assistance to the other in committing the
tort and in so doing breaches his own duty to the victim.
 
 
c. Transferees of Instruments under § 9-330(d)
● A familiar method of inventory control
 ● Requiring a debtor who has received a check from an account debtor to indorse
the check to the SP, without running it through the debtor's bank account
● SP can be sure that payments are actually being received from account
debtors
● Under 3-306, if a holder takes an instrument in which there is a security interest, it takes
subject to that security interest (a claim of ownership) unless it is a holder in due course
● Holder in due course if it takes an instrument for value, in good faith and without
notice of claims or defenses
● Filing a financing statement under Art. 9 does not constitute notice of a claim
or defenses to the holders or purchasers of instruments
● IF there is ACTUAL knowledge, cannot be a holder in due course
● If qualified as holder in due course under Art. 3, take free of security interest
● Under second relevant provision 9-330(d)
● A purchaser of an instrument has priority over a security interest in the instrument
perfected by a method other than possession if the purchaser gives value and
takes possession of the instrument in good faith and without knowledge that the
purchase violates the rights of the SP
● Rights of a purchaser of instruments are roughly comparable to those of purchasers of
chattel paper, except that the new value and ordinary course of business requirements
are omitted
 
 
2. Lowest Intermediate Balance Rule
● Debtor may commingle the proceeds in the account with nonproceeds, making it difficult for
the SP to identify the proceeds
● 9-315(b)(2) clarifies that proceeds that are commingled with nonproceeds are identifiable
proceeds to the extent that the SP identifies the proceeds by method of tracing (can be any
non-Article 9 law)
● Pre-revision cases used the lowest intermediate balance rule (LIB) and 9-315 approves
the use of this rule
 
Lowest intermediate balance rule
● Not talking about 9
 
Chrysler Credit Corp v. Superior Court
● Facts
● ECD was in business of selling vehicles supplied to it by Chrysler under a SA
● ECD deposited the proceeds from the sales of the vehicles in an account at Bank of
the West to which both it and Christler were signatories
● C agreed to provide financing to ECD for the purpose of purchasing new vehicles
● Gave C a first and prior security interest in every vehicle financed under the
agreement and all proceeds thereof
● C perfected its security interest by filing its financing statement
● ECD began having financing problems and filed CH. 11 Bankruptcy
● BC court authorized ECD to sell vehicles financed by C and deposit into a special
trust account in the name of ECD and C
● With agreement of C, moved the funds to another bank
 ● ECD would initially deposit into a general operating bank account and then
periodically transfer by way of a check into another account
● C didn’t know, but ECD would often overdraft from general account to deposit
into new account
● Funds in which C had a security interest, the proceeds of sales of collateral were
commingled with other funds (tax and labor payments)
● In the meantime, 3rd parties levied against ECD's bank accounts including the second,
cash collateral account
● Issue
● Whether the court erred in determining that C had no perfected SI in the funds in the
cash collateral account, a finding which means that 3rd parties have the right to levy
against those funds and that their claims have priority over any claim C has to funds as
an unsecured creditor
● There is no question but that C had a perfected SI in the collateral (the financed
automobiles)
● Question is whether the funds deposited into the 2nd account- cash collateral
account-- are the "identifiable proceeds" of the collateral such that C's SI attaches
also to them
● Analysis
● The common law rule applicable here is the "lowest intermediate balance rule" used in
tracing trust funds
● When proceeds of a sale of collateral are placed in the debtor's bank account the
proceeds remain identifiable and a security interest in the funds continues even if the
funds are commingled with other funds
● Identifiable proceeds are liberally construed in the creditor's factor by use of the
intermediate balance rule
● This rule provides a presumption that proceeds of the sale of collateral remain in
the account as long as the account balance equals or exceeds the amount of the
proceeds
● Assumption that the debtor spends his own money before he spends the
funds encumbered by the SI
● The SI in the funds on deposit is lowered to the balance, and then it is not
increased if funds are later deposited into the account
● If at the time such a check was written the general operating account had a positive
balance, and if the funds might deemed proceeds under the intermediate balance rule,
the funds taken from the general operating account and deposited into the cash
collateral account were in fact identifiable proceeds
● BUT… when Bank honored the checks that were overdraft, it essentially advanced
its own funds
● C had no security interest in the funds deposited into the cash collateral account
because they were not the proceeds of any sales of collateral; they were funds
loaned by BankoftheWest
● Decision
● Funds in the cash collateral account are not the identifiable proceeds of the sales of
collateral
 
 
  
K. Federal Tax Liens
● Debtors often owe tax obligations to the federal government
● Sometimes also is in default on its obligations to other creditors, the government competes
with other creditors for priority in the debtor's assets
● Federal law, not Art. 9, or state law governs the priority
● § 3713(a) seems to give the federal government unrestricted priority as against other claimants
of the taxpayer
● The FTLA is much more restrictive than the general federal priority statute, subordinating
federal tax liens under prescribed conditions
● The Supreme Court held that Congress intended the FTLA, a more recent, detailed and
comprehensive statute, to apply when it conflicts with § 3713(a)
 
Federal Tax Lien
 
● HYPO:
● New Orleans Saints.
● Proceeds? (the extra payments they receive for hitting/injuring another player?
 
● Federal law imposes to any person who refuses to pay tax-- the amount of the assessed tax is a
lien (lien arises upon operation of law, no need to file)
● Don’t believe the book when it says § 3713(a) may not apply anymore
● And don’t believe the book when it says that the future of FTLA is uncertain (it isn't
uncertain)
● Both apply - old statute and the new statute
 
● When does the tax lien get assessed?
● When you get paid (income tax) to federal government gets paid by your employer on
behalf of you
● When you do your tax return… shows you have tax liability (could have been paid already,
may not pay at all)
● Federal income tax is assessed
● When you send it (self assess)
● And when they audit your tax returns
● Assess deficiency (90 days after the assessment)
● During that time, taxpayer can go to court
● If you don’t pay taxes, lien against your property
 
 
 
1. Creation and Enforceability of Federal Tax Lien
● Provides that the US government has a lien on all real and personal property of the taxpayer
if the taxpayer neglects or refuses to pay after demand
● Reaches after acquired property as well
● Once a tax lien arises, it is enforceable against both the taxpayer and everyone else except
any purchaser, holder of security interest, mechanics lien or, or judgment lien creditor
● To make this lien effective against the excepted classes, the IRS must file a notice of the
lien
● Counterpart to perfection
 
 
In re Spearing Tool and Manufacturing Co., Inc
● Facts
● Spearing Tool and Manufacturing Co. and Crestmark entered into a lending
agreement, which granted C a SI in all of the STM's assets
● Bank perfected its SI by filing a financing statement
● C agreed to purchase accounts receivable from STM and STM granted C a security
interest in all its assets
● STM fell behind in its federal employment-tax payments
● Filed 2 notices of federal tax lien which varied from STM precise registered
name
● C was unaware of the tax lien, advanced more funds
● STM filed Ch. 11 bankruptcy petition
 
● Analysis
● Federal law controls whether the IRS's lien notice sufficed
● The notice here sufficed
● An IRS tax lien need not perfectly identify the taxpayer
● In determining whether an abbreviated or erroneous name sufficiently
identifies a taxpayer is whether a "reasonable and diligent search would have
revealed the existence of the notice of the federal tax liens under these
names
● Decision
● The federal government's interest in prompt effective tax collection trumps the
bank's convenience in loan collection
 
In re Spearing Tool and Manufacturing Co, Inc.
● In a Corporation, you file in the name that is on the Corporation
● Spell exact name of the corporation
● Don’t = & for and
● Don’t = add comma
● Don’t= abbreviate
 
● Opposite result??
 
§ 6323(a)
● Priority
 
 
NOTES
● After Spearing Tool, the Federal court precedent adopts the reasonable diligent search
rule
● Traditional interpretation of the rule as meaning that an incorrect version of the
taxpayer's name on the notice is acceptable so long as a reasonably diligent search
would have turned up the filing
● IRS can pretty well get away with filing under the name of the taxpayer used on its
tax return without looking further for its correct name
● Ironically, since tax returns are not public documents, the searcher has not
way of finding this name
 
  
2. The FTLA's General Priority Rule
● The FTLA doesn’t adopt a "government always wins rule"
● Determines priority essentially according to the order in time in which a competing
interest in the taxpayer's property is obtained
● Interest obtained before notice of the tax lien is filed prevail against the tax lien
● Interest obtained after filing notice of the tax lien occurs are subordinated to the
tax lien
● To hold a security interest at the time of the tax lien filing, 3 requirements must be met:
● The collateral must exist
● The security interest must be protected under local law against a subsequent
judgment lien on an unsecured claim
● The creditor must have parted with money or money's worth
 
Problems 245
4.  
a. If you filed a Financing Statement in Virginia and you were supposed to file in DE,
going to lose because filed in the wrong place
● If you filed in the right place, doesn’t make a difference that there are priority
issues, apply the same way using the law of the state where correctly filed
 
b. Omitting address does not affect perfection
c. No doesn’t change results of (a) -- competing security interest would win, but a tax
lien is a non consensual lien
 
5.  
a. (h)(1)
 
b. If it's considered parted with the moneys worth, then SP win?
● IS this covered by 6323(d) ?
● If not, IRS wins
● Is it "parted with the money or money's worth"???
● Yes, covered by that stat
● Assuming SP did NOT know of tax lien (which would be actual knowledge)
● Giving value is NOT THE SAME as "parting with money or money's worth"
● If it’s a liquidated amount its "money's worth"… but did they part
with it?
 
● These problems are supposed to be review
 
 
3. § 6323(c)-(d)'s exceptions: Post- Lien Transaction
● All post notice advances and post-notice acquisitions of collateral, therefore, would be
subordinate to the IRS's tax lien
● 6323(c) protects a secured creditor's future advances and after-acquired property against
subordination to a tax lien
● 6323(d) also protects its future advances from subordination
● (c)(1) protects security interests in certain types of after-acquired property when the
property is called acquired by the taxpayer within 45 days of tax lien filing
● To have priority, the SO must make the advance without actual knowledge of the tax lien
filing
 ● Secured by collateral existing at the time of the filing
● Must be protected under local law
 
Problems 248
 
● EXAM
● If collateral is subject to protection against a lien under tax are protected
notwithstanding § 2364
 
 
4. PMSIs and Post-Lien Proceeds
● Created exceptions to the FTLA protecting purchase money security interest and post-lien
proceeds
● Judicially created exceptions to the FTLA, the PM creditor has priority over the previously
filed tax lien regardless of whether the security agreement creating the PMSI occurred
● Other judicially created exceptions to tax lien priority concerns proceeds of collateral
● If collateral is "qualifying property" it is protected
● When post notice proceeds are realized from disposal of pre-notice collateral
● And when post notice proceeds are realized from the disposal of post-notice
collateral
 
Problems 250
● Courts tend to be hostile to IRS and tax code
● Bank wins
● Priority
● Deposit acct and trade in are PROCEEDS
● Win with respect to the portion of the truck
 
 
 
Chapter 7: Security Interest in Investment Securities
 
A. Introduction
● Secured transactions in securities under Revised Article 8
● Evolution of Securities Holding Systems
● The traditional securities was traditionally evidence by possession of the certificates, and
changes were accomplished by delivery of the certificates
● Today: Settlement of securities trading occurs not by delivery of certificates or by
registration of transfer on the records of the issuers of their transfer agents, but by
computer entries in the records of clearing corporations and securities intermediaries
● Essentially all of the trading in publicly held companies is executed through the broker-
dealers who are participants in DTC, great bulk of public securities are held by these
broker-dealers and banks on behalf of their customers (Depository Trust Comp.)
● Although the use of a common depository eliminates the need of physical deliveries
● Entries need to be made on the depository's books only for the net changes in the
positions of each participant at the end of the day
● Need for Different legal Rules for the Direct and Indirect Holding Systems
● "direct" securities holding systems (beneficial owners of securities have a direct
relationship with the issuer of the securities
 ● DTC depository system for corporate equity and debt securities can be described as an
"indirect holding" system
● Issuer's records do not show the identity of all the beneficial owners
● The principal mechanism through which securities trades are settled today is not delivery
of certificates or registration of transfers on the issuer's books, but nettled settlement
arrangements and accounting entries on the books of a multi-tiered pyramid of securities
intermediaries
 
 
B. Basic Rules
● Investment securities
● Attachment, perfection and priority of security interests in investment securities are
governed by Art. 9, but important rules and definitions are found in Article 8
● Attachment occurs with respect to certificated securities when delivered to the SP
● And with respect to other investment property when the secured party has control
 
● Perfection occurs either by control
● A SI perfected by control is prior to one perfected by filing whether or not the control
party had knowledge of the filing
● Priority among security interests perfected by control is on a first-in-time basis
● SI held by brokers or banks in securities held by them (the common margin loan
situation) are prior to security interests held by other parties
 
● "certificated security" is one that is represented by a certificate
● "uncertificated security" is one that is not
● "securities account" is an account to which financial assets such as stocks, bonds, and mutual
funds are credited
● "securities intermediary" means a broker or bank that maintains securities accounts for
others
● "securities entitlements" means the rights of the customers of the brokers or banks in their
securities accounts
● These customers are "entitlement holders"
● "investment property" includes securities, whether certificated or not, security entitlements
and securities accounts
● Refer to the kinds of property that are subject to the special rule set out above with
respect to security interest
 
Investment Property
● Commodity contract (9-106(b))
● Commodities account (9-106(c))
● Security
● Certified (1)registered 2)dealer)
● Uncertified
● Security entitlement (8-106(d))
● Securities account
 
Problems 444
 
Priority (§ 9-328)
 1. Control (beats) Non-control
2. Temporal Rule by type of control
3. Control by intermediary wins (9-328(3)-(4))
4. Delivery without control of a certificated security (beats) non-control -- can happen only in
unusual situations (Comment 6)
 
 
9-308(f) says perfection of a securities account also perfected security interest in the securities
entitlement of the securities account
 
Problems 457
1. 8-106 Get the agreement of the issuer
2. Bank perfect by control: could do the same as above; can perfect as an uncertificated security,
(can get the intermediary to comply with instruction)- that would perfect security entitlement
 
 
 
C. What is a security?
● For the property to be a "security" it must, among other requirements, be an obligation or share
of ownership:
● Which:
● Is of the type, dealt in or traded on securities exchange or securities markets, OR
● Is a medium for investment and by its terms expressly provides that it is a security
governed by this article
 
● The interest or obligation must be fully transferable either on transfer books or by bearer or
registered certificate
● Interest or obligation must be divisible as one of a class or series
● DTC may hold the only certificate, the underlying intangible interest is divisible
● Unless an interest in a LLC is traded on securities exchange, interests are usually treated as
general intangibles and security interest are perfected by filing
 
 
D. Certificated Securities
 
1. Held by Owner
 
a. Control in Pledge Transactions
 
NOTE
● A person obtains control by taking whatever steps are necessary, given the manner
in which the securities are held, to place itself in a position in which it can have the
securities sold without further action by the owner
● Secured party with possession of the certificate has a perfected security
interest that is prior to other claims
● Does not turn on temporal sequence or awareness of conflicting security
interests
● Although filing is now a permissible method of perfection, in order to avoid
disruption of existing practices in this business it is necessary to give perfection by
 filing a different and more limited effect for securities than for some other forms of
collateral
 
b. Pledgee duty of reasonable care
 
Lane. v. Bank One
● Facts
● Entered into a loan agreement secured by the shares of company stock
● Agreement included that if the drop in value… a failure to remedy the
situation would be an immediate default and Bank One may exercise any and
all rights and remedies, including at Lender's discretion selling the shares
● Written notice
● Sell the shares without their consent
● Stock price fell considerably such that both loans exceeded their respective ratio
● Wanted additional collateral, which would have cured their default
 
● Analysis
● UCC which states that a SP shall use reasonable care in the custody and
preservation of collateral in the secured party's possession
● In the case of chattel paper or an instrument, reasonable care includes taking
necessary steps to preserve rights against prior parties unless otherwise
agreed
● Reasonable care refers to the physical possession of the stock certificates and does
not impose liability for depreciation in value
 
● Holding
● Conclude that a lender has no obligation to sell pledged stock held as collateral
merely because of a market decline
● If the borrower is concerned with the decline in the share value, it is his
responsibility, rather than that of the lender, to take appropriate remedial
steps, such as paying off the loan in return for the collateral, substituting the
pledged stock with other equally valued assets, or selling the pledged stock
himself and paying off the loan
● Where there is overcollateralization and the pledgor has REQUESTED
LIQUIDATION, the pledgee should respect the pledgor’s interest in the surplus
value
● Decision
● Lender is not under any duty or obligation to sell collateral in its possession merely
because the collateral is declining in value, regardless of whether it is
overcollateralized
 
 
 
 
Asset Management Accounts
● Asset management accounts resemble a bank account (problems with how to categorize
them)
  
 
E. Uncertificated Securities
 
1. Mutual Funds
● 2 types of mutual funds:
● Most common is the open-ended fund which will issue as many shares as investors wish
to purchase, except in unusual cases in which the fund is temporarily closed to new
investors because of perceived lack of attractive securities
● Redeem shares from their shareholders at net asset value as a matter of right
● Closed end funds are much less popular
● They issue a fixed number of shares at the inception of the fund and do not
redeem shares from shareholders
● Shareholders who wish to liquidate must find buyers for their shares
 
 
NOTE
● Mutual funds are almost entirely uncertificated and corporate bonds are also mostly
held in electronic book entry form
● Allow the investor to have its name registered on the issuer's records as the owner but
instead of sending the investor a stock certificate, the issuing company would make an
electronic book entry in its records and send the investor the kind of statement that
mutual investors now receive
 
 
In re Pfautz
● Facts
● Bank and debtors established a loan collateral account to hold securities
● The loan collateral account is administered by a transfer agent designed by the
issuer of the securities
● Agent will only release the securities upon instruction from the Bank
● In order to perfect a security interest in uncertificated securities, the SP must
exercise control over the securities
 
● Analysis
● Under UCC, uncertificated securities are defined as "investment property"
● Investment property means:
● A secured party perfects by controlling the securities
● A security interest in investment property may be perfected by control
● A purchaser, or SP has control of an uncertificated security if it has accepted
delivery, or if the issuer agrees to comply with the purchaser's instructions
without consent from the registered owner
 
● Decision
● Find that Δ granted Bank the right to sell the Uncertificated securities upon their
default and thus they consented to the possibility of such a sale
● This constitutes control
 ● Bank property perfected its SI in the Uncertificated Securities and Trustees motion
denied
 
 
2. Treasury Securities
● The debt of the US is evidenced by debt securities issued by the Treasury ranging from 30
year government bonds to very short term treasury bills
● All of these securities are uncertificated, with ownership rights shown on the books of
the Federal Reserve Banks in favor of "participants" typically banks
● Broker dealers and banks hold Treasury entitlements in securities accounts with the
participants
 
● Although mutual funds and Treasuries are both uncertificated securities there is an important
difference in the manner in which they are held
● Mutual funds Held by individual owners-- provisions on perfection and priority of
security interests is uncertificated securities apply
● Treasury securities are held by securities intermediaries-- perfection and priority of
security interest determined by the rules concerning security interests in securities
accounts
 
 
 
 
Chapter 6: Security Interests in Intellectual Property
 
A. Introduction
● Intellectual property usually fall within the definition of "general intangible"
● Copyright, trademark, patents, and trade secrets
● Perfection and priority rules with respect to general intangibles are simple:
● In order to perfect a security interest, the secured creditor need only reasonably identify
the collateral in the security agreement & file a FS indicating the collateral covered
● "all general intangibles"
● The Secured creditor need only file in one jurisdiction-- the one of the location of the debtor
 
● Altered by the existence of federal statutes
 
 
B. Copyrights
● Perfect a security interest in a copyright and the proceeds stemming from the exploitation of the
copyright
● For the most part, the basic protections of the Copyright Act apply without respect to whether
the copyright is registered
● Registration is necessary when a security interest is granted in a copyright because a
copyright must be registered before a security interest can be recorded in the Copyright
Office and become effective against 3rd parties
 
In re Peregrine Entertainment
● Issue
● Is a security interest in a copyright perfected by an appropriate filing with the USCO
(United States Copyright Office) or by a UCC-1 financing statement filed with the
relevant secretary of state?
 
● Analysis
● The Copyright Act provides that "any transfer of copyright ownership or other document
pertaining to a copyright" may be recorded in the USCO
● A "transfer" under the Act includes any "mortgage" or "hypothecation" of a copyright
whether in whole or in part and by any means of conveyance or by operation of law
● Includes a pledge of property as security or collateral for a debT
● Federal law preempts state methods of perfecting security interest in copyrights and
related accounts receivable
● Uniform method for recording security interest in copyrights
● A secured creditor need only file in the Copyright office in order to give all persons
constructive notice of the facts stated in the recorded document
● Confusion would result if creditors were permitted to perfect security interest
by filing with either the CO or state office
● Expense and delay of conducting searches in a variety of jurisdictions, hinder
the purchase and sale of Copyrights, frustrating Congress's policy that
copyrights be readily transferable in commerce
● A recordation scheme best serves its purpose where interest parties can obtain
notice of all encumbrances by referring to a single, precisely defined recordation
system
● Decision
● Recording in the USCO, rather than filing a financing statement under Article 9 is the
proper method for perfecting a security interest in a copyright
 
 
NOTE
● Revised Article 9's "step back" provisions do not otherwise defer to federal law
● Rather Article 9 and its filing requirement are inapplicable only when federal law
preempts them
 
● Although state law has recognized after-acquired property clauses, they are ineffective
under federal law for security interests in copyrights
 
● Peregrine decided that the CO recording is also the exclusive method for perfecting a
security interest with respect to copyright receivables, that is, the proceeds from
licensing the showing of the debtor's films:
● Arguing the holding has been overruled (by Broadcast Music):
● An assignment of royalties is not, the court opined, an assignment of a
copyright or an interest in a copyright
● The court distinguished Peregrine on the ground that this case does not
involve the creation of a security interest; it is a case of "outright assignment"
of a right to receive royalties for the purpose of satisfying a debt
 ● A more fundamental distinction is that the court in Broadcast reads the statute
narrowly to say that recordation in the CO is necessary only in the case of transfers
(assignments and security interest) in ownership of the copyright itself
● Recordation indicates to prospective creditors and buyers who owns rights in
the copyright itself
● Transfer of royalties has nothing to do with ownership, therefore,
recordation is unnecessary
 
 
In re World Auxiliary Power
● Issue
● Whether federal or state law governs priority of security interests in unregistered
copyrights
● Facts
● This is a bankruptcy contest over unregistered copyrights between a bank that got
a security interest In the copyright from the owners and perfected it under state
law, and a company that bought the copyrights from the bankruptcy trustees after
the copyright owners went bankrupt
 
● Analysis
● Copyright and Bankruptcy law set the context for this litigation, but the legal issue
is priority of security interests
● The bankruptcy trustees sold A their power to avoid any security interest that is
voidable by a creditor that extends credit to the debtor at the time of the
commencement of the case, and that obtains at such time and with respect to such
credit, a judicial lien
● Under this strong arm provision, A has the status of an "ideal creditor" who
perfected his lien at the last possible moment before the bankruptcy
commenced
● Whether A's hypothetical lien creditor would take priority turns on whether
federal or state law governs the perfection of security interests in
unregistered copyrights
● Copyright Act:
● Registration is permissive, not mandatory and is not a condition for copyright
protection
● Provision for recording transfers of copyright ownership (the Act's term
that included security interests) is permissive, not mandatory
● A Copyright work only gets a "title or registration number" that would be revealed
by a search if it is registered
● Since an unregistered work doesn’t have a title or registration number...
recording a security interest in an unregistered copyright in the CO wouldn't
give "constructive notice" and because it would, it couldn't preserve a
creditor's priority
 
● UCC Step Bank Provisions
 ● Article 9 provides that unperfected creditors are subordinate to perfected,
and as between perfected security interest, the first perfected interest
prevails
● The bank perfected first under state law by filing a FS with the SoS on
existing and after acquired copyrights as "general intangible:
● To avoid conflict with the federal law the UCC has 2 "step back" provisions
● Does not apply to a security interest subject to any statute of the US
● Does not exclude all security interests in copyright from UCC
coverage, just those for which the federal Copyright Act governs the
rights of relevant parties
● Second, speaks directly to perfection of security interests
● Exempts from UCC filing requirements security interests with
national registration or which specifies a place of filing different
● Compliance with such a statute is equivalent to filing a financing
statement
● There can be no question that when a copyright has been registered, a
security interest can be perfected only by recording the transfer in the CO
● However, step back as to unregistered copyrights--- conclude that it does not
apply
● As we have explained, there is no way for a secured creditor to perfect a
SI in unregistered copyrights by recording in the CO
● UCC doesn’t defer to the Copyright Act… bc doesn’t provide for the
rights of SP to unregistered copyrights
● UCC governs perfection and priority of security interests in unregistered
copyrights itself
 
● Liens in after-acquired software must attached immediately upon the creation of
the software to satisfy creditors
● Creditors would not tolerate a gap between the software's creation and the
registration of the copyright
● Decision
● Regarding perfection and priority of security interests in unregistered copyrights,
the UCC has not stepped back in deference to federal law, and federal law has not
preempted the ucc
 
Intellectual Property
● Patent/Copyright
▪ Express form of property/protection
● Trade Secrets
● Unprotected
 
● Corporate Profits
▪ Much attributed to intangibles
 
● If a license is
▪ Irrevocable, perpetual, exclusive
▪ All rights have been transferred = sale
▪ Why structure it as a license?
1. Because consideration is often contingent on USE
 2. Why?
● Transaction costs (risks)
● Information impactedness = occurs when one party claims to have
something valuable that they want to transfer to other party, but not in a
position to confirm the PROFFERED VALUE (but the party that owns the
value-- not in a position to disclose the value because it will result in
"appropriation")
● "Appropriation"- if you tell the wrong person what your idea is, they
may take the
● "information impactedness" impairs the IP market
 
● If people have this type of value, they try not to get money from a bank using a secured
transaction
▪ Partner with money
▪ Venture capital (senior equity)
▪ Share the risk
▪ You have contingent consideration (value is hard to determine from the beginning)
● Does not lend itself to the type of fixed financing that goes with secured lending
 
● On the other side, we have marketing intangibles
▪ Problem of transfers is even worse
▪ In place of appropriation risk, we have debasement risks
● Debasement risks
 
● 3 basic Federal Law
▪ Copyright Act
▪ Lanham Act
 
● Only small companies need IP to use as collateral to get cash, Big companies don’t (think
Apple- has lots of cash)
 
 
 
● For the most part, if you are creating a SI in Copyright, you have to go to the Copyright office
(do it under the name of the Copyright, not the Copyright owner name)
 
● Law of the Movie
▪ Someone wants to make a movie
▪ Studio grants distribution rights
▪ Without those rights, movie maker doesn’t have a chance to get a loan
● Bank wants Security in the film so they take unregistered
● The party really financing the movie is the studio, not the bank
 
 
● Trademarks
 
 
 
C. Trademarks
● The owner of a trademark may register at the PTO, and certain benefits flow from such
registration
● But federal registration is permissive, and the owner can also register the trademark in the
states where it is used or can chose not to register at all and rely on a common law
trademark based on its statues as a first users
 ● For federally registered trademarks, recording of assignments is mandatory, but unlike the
Copyright Act, nothing is said about security interests
 
 
In re Together Development
● Issue
● Question of the proper method of perfecting a security interest in trademarks
● Analysis
● The Lanham Act contains no definition of "assignment" thereby casting doubt on
whether the term includes the grant of a security interest
● Statute does not apply to security interest filings
● Conclude that T (who filed with the PTO) does not have a perfected security interest in
the trademark
● Being unperfected, T's security interest is "subordinate" to a person who becomes a lien
creditor before the security interest is perfected
● As debtor in possession, the Debtor has the "rights" and "powers" of a trustee
● Trustee has the rights and powers of, or may avoid any transfer of property of the
debtor that is voidable by a lien creditor
● Hence, T's security interest is subordinate to the Debtor's rights as a lien
creditor, and the debtor may avoid that security interest
● An order has been issued declaring T's security interest in the trademark (as well as
other collateral covered by the parties agreement) invalid by reason of lack of perfection
● Holding
● A party seeking Security Interest in trademark must file under normal UCC procedures
to perfect, not PTO
 
 
D. Patents
● Federal statutes on copyrights, trademarks, and patents are not so comprehensive as to
completely exclude coverage of security interests in these kinds of collateral from the provisions
of Article 9
● Federal filing is the exclusive method of perfecting a security interest in copyrights, and
● Article 9 filing is the exclusive manner of perfecting a security interest in trademarks
● Find that with respect to patents, federal and state law offer parallel system governing
perfection of security interests
 
In re Cybernetic Services
● Issues
● Whether the Patent Act or Article 9 of the UCC requires the holder of a security interest
in a patent to record that interest with the federal PTO in order to perfect the interest
as against subsequent lien creditor
● Analysis
● Article 9 applied to "general intangibles" a term that includes IP
● The statutes text, context, and structure when read in light of Supreme Court
precedent, compel the conclusion that a security interest in a patent that does not
involve a transfer of the rights of ownership is a "mere license" and is not an
"assignment, grant, or conveyance" within the meaning
 ● Only transfers of ownership interests need to be recorded with the PTO
● The transaction that gave Petitioners their interest in the patent did not involve a
transfer of an ownership interest in the patent
● Mere license did not have to be recorded in the PTO
● The phrase "subsequent purchaser or mortgagee" does not include
subsequent lien creditors
● Congress intended to provide constructive notice only to subsequent recipients of
an ownership interest in a patent
● Trustee is a hypothetical lien creditor
● The Patent Act does not require parties to record documents in order to
provide constructive notice to subsequent lien creditors who do not hold
title to the patent
● No federal preemption
● Article 9 step back provision
● Question is whether the Patent Act is a statute which provides for a national or
international registration or which specifies a place of filing different from that
specified in Art. 9
● National registration of what?
● Courts have read it to mean a federal filing is necessary only when there is a
statute that provides for a national registration of security interests
● Decision
● The transaction in this case did not transfer an ownership interest. Therefore, did not
require that petitioners record their security interest with the PTO
● Petitioners perfected their SI in debtor's patent by recording with the SoS. They have
priority over trustee's claim because they recorded their interest before the filing of the
bankruptcy claim
 
Security Interest in Patents
 
In re Cubernet Services
● Competition involved in the case between a purportedly SP and trustee in Bankruptcy
● SP perfected by filing in CA
● Patent Act only deals with an assignment, grant, or conveyance (void
against subsequent purchaser OR mortgagee)
● Creation of a SI is NOT an assignment
● Copyright Act deals with mortgage, hypothecation
 
● This court is oblivious to the competition between SP and trustee
● If you draw from this case that you don’t have to file with the Patent Office, you
will run into problems
● This case does not clarify for all situations-- does not say that Patent Law NEVER
preempts Art. 9
● Ends up making people file in both pages
 
 
● 9-408
● This provision overrides restrictions in the use of license rights as collateral
● Statutory and regulatory provisions
● If there is other law that overrides this provision, the provision will yield
● In the case of a Promissory Note, the licensee is the holder of the note (a law
that requires the obligors consent to license the note, overridden?)
  
● Fixtures- become real property
● Concerned with competition
● Fixtures definition depends on State Law
● "Fixture filing"
● Filing of a financing statement covering goods that are or become fixtures
● Requires additional information and filed in a different place
 
 
● 9-334
● Exceptions are in (b)- file within 20 days of when the fixture becomes a fixture,
● If the fixture filing is earlier in time than the mortgage, then fixture filing win
● If fixture is a readily removable machine, consumer goods, etc. … then
perfection by any method will give the SP priority over the mortgage
● As against a trustee, any perfection wins??
 
Problems 468
1. Trustee should succeed because it is an unperfected SI
2. SI is not subordinated (20 day rule is condition of priority, not a condition of
perfection)
 
Problem page 472
● Debtor wins when classified as real property under the law of the state
 
 
 
 
NOTE
● Cybernetic Services
● Issue of what rights a trustee had against a party who DID file in the PTO (not
article 9)
● Held that the federal statute does not perfect holders of security interests in
patents
 
Circular Priorities
● If you have a financing statement improperly filed (9-520, 9-516 situation)
● SP1 beats judicial lien
● Judicial Lien beats SP2 because its prior in time
 
● 9-604
● If you have priority in a fixture, you can enter the property
 
Maplewood
● Sears SI was limited to the fixtures
 
 
 
 
Chapter 8: Security Interests in Fixtures
 
A. What is a Fixture?
 ●"fixture" means goods that have become so related to particular real property that an interest in
them arise under real property law
● The courts of the different states have varied wildly on what they find to be a fixture
 
 
B. Fixtures and other Filing
● A good that becomes a fixture retains its character as a type of good
● A factor machine bolted to the floor is still equipment even if it also becomes a fixture
● Fixture status simply means that a real estate interest in the good can arise
● Ordinary filed financing statement that perfects a security interest in a good continues to
perfect the security interest after the good becomes a fixture
● A security interest in a fixture also can be perfected by making a "fixture filing"
● Art. 9 doesn’t require that a fixture filing be made to perfect a security interest in fixtures
● A fixture filing differs from a UCC filing both in the information required in the
financing statement and the place at which the financing statement must be filed
● A fixture filing is ineffective against a secured creditor who has perfect a security
interest in the affixed good by making a UCC filing
● Fixture filings are only effective against realty interests that extend to the fixture
 
C. Priority
 
1. Basic Rules
● The classic conflict is the holder of a security interest in goods that are attached to real property
and the mortgagee of the real property to which the goods are attached
 
2. Construction Mortgages
● Construction lending
● The lender customarily records its mortgage on the premises before the work of
improvement commences
● If the developer buys goods on credit which may become affixed to the improvement
and the seller retains a security interest in the goods sold, a priority contest may arise
● Law favors the construction lender over the fixture financer
 
3. Manufactured Homes
● § 9-334(e)(4) gives a security interest in a manufactured home perfected under a state
certificate of title statute priority over conflicting interests of encumbrances or owners of the
real property if the security interest is created in a manufactured home transaction
● A "manufactured home transaction" is defined to mean a PMSI in the home or a SI in
which the home is the primary collateral
 
D. Enforcement
 
Maplewood Bank and Trust v. Sears, Roebuck
● Issue
● Whether a first mortgage lender or a fixture financer is entitled to priority in the funds
realized from a foreclosure sale of the mortgaged premises
● Decision
 ● Hold that a first mortgagee is entitled to priority of the funds
● Analysis
● Sears obtained a PMSI in the fixture to secure full payment
● Sears perfected its SI by filing a financing statement covering the fixtures in the
Clerk's office where the first mortgage held by P was recorded
● SI attached to the goods before they became affixed to the realty as fixtures
● Limited to the fixtures and does not extend otherwise
● Remedies available to a PMSI lien holder upon default by the debtor
● Remove his collateral from the real estate but he must reimburse any
encumbrance or owner of eh real estate who is not the debtor and who has not
otherwise agreed for the cost of repair of any physical injury…. But not for any
diminution in value of the real estate caused by the absence of the goods removed
or by any necessity in replacing them
● Decision
● Not entitled to demand appraisal of fixtures pursuant to sale
 
 
NOTES
● § 9-604(b) makes clear that a security interest in fixtures may be enforced either under real-
property law or other disposition either before or after removal of the fixtures
● Overruling cases holding that a secured party's only remedy after default is removal of
the fixtures from the real property
 
 
Chapter 9: Security Interest
 
A. Overview of Bankruptcy
1. Introduction
● Bankruptcy Code's impact on Article 9 security interests
● Federal law
● The rights in bankruptcy of debtors and creditors are governed in large part by rights under
applicable state law
● Often bankrupts are insolvent= the value of their assets is less than their debts and the
debtor's property is often encumbered
● Creditors can, under some circumstances, force a debtor into bankruptcy by filing a petition
in involuntary bankruptcy against a debtor
● The debtor is generally not paying such debtor's debts as such debts become due
 
2. Types of Bankruptcy
● 2 types
1. Liquidation under Chapter 7
● All of the property of the debtor owned at the date of Bankruptcy becomes part of
the bankruptcy estate
● Individual is entitled to exempt certain property
● Property that may be exempt is in most cases determined by the law of the
state of the debtor's domicile and consists of property that is exempt from
judicial liens in that state
 ● Individuals will normally be discharged of personal liability on all or most pre
bankruptcy debts
● "fresh start"
● Corporations and entities do not need this fresh start… they will simply be
dissolved and liquidated by distributing all its assets to creditors
● In Ch. 7 only an individual can be discharged
 
2. Assets of the debtor need not be liquidated- usually referred to as reorganization or
rehabilitative Bankruptcy (governed by Ch. 11, Ch. 12, or Ch. 13)
● CH. 13 can be used only by a debtor who is an "individual with regular income…"
● Debtor can get the benefits of discharge without losing nonexempt property
● The debtor is required to formulate a plan under which the debtor
proposes to pay, in whole or in part, some or all pre bankruptcy debts
over a period of time (usually 5 years)
● Ch. 11 can be used by both individuals and organizations… but is designed primarily
for business organizations
● Resembled Ch. 13 in that the debtor is normally allowed to retain its assets
and continue operation of its business
● Proposes a plan or reorganization under which creditor will be paid
● Ch. 12 was added for rehabilitation of "family farmers"
● Restructure their debts in bankruptcy while continuing to operate their farms
 
3. Petition in Bankruptcy and the Automatic Stay
● Voluntary Bankruptcy is commenced by the debtor's filing a petition in bankruptcy
● This filing operates as an automatic stay against a variety of acts taken against the debtor or
with respect to property of the Bankruptcy estate:
● Commencement of continuation of judicial proceedings against the debtor to recover
pre bankruptcy claim
● Any act to obtain possession of property of the estate or property held by the estate
● Any act to create, perfect, or enforce any lien against property by the estate
 
4. Trustee in Bankruptcy
● The principal duty of the trustee is to collect the property of the estate, reduce it to money
by selling it, and apply the proceeds to payment of expenses of the bankruptcy and claims of
creditors
● Sometimes requires the trustee to recover property of the debtor that was transferred
before bankruptcy in transactions that are avoidable in bankruptcy because they violate
some bankruptcy policy
● "avoidance powers"
● Maximize the assets available for payment to general unsecured creditors
● Trustee is appointed by the court in Ch.12 or Ch. 13 cases
● No trustee in bankruptcy in Chapter 11 cases
 
 
5. Claims in Bankruptcy
● "creditor" holding a claim that arose before the filing of the petition in a voluntary case
● Claims are classified as either secured or unsecured
 ● To the extent that its debt is not covered by value of the collateral, Bank has an unsecured
claim
 
6. Distribution of Assets to Unsecured Creditors
● After the trustee has disposed of property of the estate in satisfaction of secured claim, the
remaining property will be distributed pursuant to BC 726, which states an order of priority
among various claimants
● With some exceptions, these claims are paid on a pro rata basis to the extent of the property
available
 
7. Discharge
● A debtor who is an individual will normally receive a discharge from pre bankruptcy debts
 
Bankruptcy
● All Bankruptcy is Federal- Concentrated In Title 11 of the United States Code
● Equitable remedy
● Stay of all creditors
● But the rights of the claims stay State claims
 
● Different Types of Bankruptcies
● Chapter 7: "Liquidation Bankruptcy"
● In which the Bankrupt is liquidated
● Individuals cannot be liquidated
● Business assets will be sold to pay back debtors
 
● Chapter 11: "Reorganization Bankruptcy"
● The bankrupt gets the benefit of the 'stay'
● Reorganization
● Debt into equity interest
● If corporation = dissolved
● If individual= discharge (means that personal liability is eliminated on the debts)
 
● Classes of creditors
● Secured creditors one class
● Each class has to approve the plan
 
● Chapter 13:
● Like chapter 11 in that It involves a plan
● Only for individuals
● For financial trouble, but still have regular income
● Plan has to provide for disposition of all of the income over a 3 year period in
payment of the debts
 
 
● Bankruptcy
● Automatic stay stops all lawsuits against debtor
● Stays lawsuits in which debtor is P
● Stays pending lawsuits
● Prohibits enforcement of SI by or against debtor
● Prohibits filing of new lawsuits
● In chapter 11/13 NO TRUSTEE
● Otherwise Trustee is appointed
● Trustee is a "perfect lien creditor"
  
 
Question 493
1. Trustee is right
2. Bank can sue G because automatic stay is only assertable by debtor; G has to pay the bank;
 
● Guarantor is subrogated to the Bank
● May still be a secured claim
 
Discharge in bankruptcy
● Discharges the personal liability of the state
 
 
495
1. Policy for allowing in Chapter 11- because the Bank still gets the money that they sold for; once
you adopt a liquidation plan, cannot discharge the corporation- have to liquidate
 
 
 
 
B. Secured Claims in Bankruptcy
 
1. Meaning of Secured Claim
● In the competition among creditors to share in the debtor's assets in bankruptcy, a secured
claim is the gold standard
 
2. The Automatic Stay
● Creditor having an Article 9 security interest in personal property is barred by the stay from
availing itself of its rights under 9-609 to repossess by either self-help or judicial process
● If the sale of the property had already been completed before the petition, the debtor has no
right under 9-623 to redeem
 
3. Effect of Discharge on Secured Claims
● Discharge is only as to personal liability of the debtor
● It does not affect the debt itself, which remains unpaid
● If 3rd parties are liable on the debt, they remain liable
● Preserves a lien if the lien is not void under BC 506(d) and is not avoided by some other
provision of the code
 
 
C. Treatment of Secured Claims in Ch. 7, 11, and 13
 
1. Consumer debtors
 
a. In Chapter 7
● If debtor did not want to retain (the car), trustee has 2 choices
● Sell the vehicle free of security interest, and the remainder of the balance on the
loan would be unsecured
● Court can lift the stay or allow the trustee to abandon the auto to Debtor and the
Bank can proceed to repossess and conduct a creditor sale
 ● If the debtor wants to retain the car
● Allows debtor to redeem the property of the secured claim, and the remainder is
unsecured claim
● Debtor can enter into a post petition agreement with Bank and reaffirm debt
 
b. In Chapter 13
 
Thomson v. General Motors Acceptance
● Issue
● Buyer defaults on his car payments, a secured creditor seizes the assets, the
buyer files for Ch. 13 Bankruptcy and the question is whether the creditor
must return the car to the bankruptcy estate
 
● Holding
● Upon the request of a debtor that has filed for bankruptcy, a creditor must
first return an asset in which the debtor has an interest to his bankruptcy
estate and then, if necessary, seek adequate protection of its interest in court
 
 
2. Business Debtors
a. In Chapter 7
● There is no issue in Corp. Ch.7's of a debtor's retaining assets of the estate
● The business must dissolve and everything must go to its creditors
● The trustee has its choice of conducting the foreclosure sale of the collateral or, of
lifting the stay or abandoning the property and leaving it to Lender to proceed
under Art. 9
 
3. Valuing Collateral in Bankruptcy
 
Associates Commercial Corp. v. Rash
● Issue
● Dispute over when a debtor, over a secured creditor's objection, seeks to retain
and use the creditor's collateral in a Chapter 13 plan, is the value of the collateral
to be determined by:
1. What a secured creditor could obtain through foreclosure sale fo the property
("foreclosure value")
2. What the debtor would have to pay for comparable property ("replacement
value")
3. The midpoint between
 
● Decision
● Replacement value standard adopted
● The value of the property retained because the debtor has exercised the "cram
down option" is the cost the debtor would incur to obtain a like asset for the same
proposed use
 
● Analysis
 ● If a secured creditor does not accept a debtor's Ch. 13 plan, the debtor has 2
options for handling allowed secured claims:
● Surrender the collateral to the creditor OR
● Under "cram down" option, keep the collateral over the creditor's objection
and provide the creditor, over the life of the plan, with equivalent of the
present value of the collateral
● If the debtor keeps the property and continues to use it, the creditor obtains at
once neither the property nor its value and is exposed to double risks:
● The debtor may again default and the property may deteriorate from
extended use
● Demand for more adequate protection
 
NOTE
● Adopts the "replacement value" measure of value when the debtor's repayment plan
proposes to retain the collateral
 
 
4. Effect of Bankruptcy of After-Acquired Property Clause
● Property acquired by debtor after filing Ch. 11 that would otherwise have been covered by
the security agreement after-acquired property clause becomes available under BC 552(a) for
the debtor in possession who is operating a business to use as collateral to obtain post-
petition credit
 
● BC 552(a) eliminates liens on post petition property that are not proceeds of pre-petition
collateral
● Refuses to give effect to after-acquired property clauses in security agreements
 
 
D. Avoidance Powers of the Trustee
● Under BC 544(a)(1) the "strong arm clause" … if the security interest isn't perfected at the time
the debtor files in bankruptcy, it may be set aside in its totality
● If an insolvent debtor pays an unsecured creditor in preference within 90 days before filing
in bankruptcy, there is a voidable preference
● Under BC 548, if an insolvent debtor within 2 years of filing in Bankruptcy transfers property to
another person without receiving reasonably equivalent value in exchange, the property
transferred may be recoverable as fraudulent transfer
 
1. Strong Arm Clause: BC 544(a)
● Trustee to avoid unperfected security interests: provision is commonly called strong arm
clause
● Power to avoid any transfer of property of the debtor as "voidable" by a hypothetical
judicial lien creditor at the date of bankruptcy
● Courts allow trustee, invoking the powers of a lien creditor to set aside a security
interest in its entirety that is subordinated to a judicial lien
 
2. Subrogation of Trustee Under 544(b)
● If the trustee can find one actual unsecured creditor at the time of the bankruptcy against
whom the debtor's transfer is voidable, the trustee can set aside the entire transfer for the
benefit of all the debtor's estate
● Trustee is subrogated to the rights of an unpaid creditor in existence at the time of the
debtor's filing against whom transfer is voidable under state law
● A right voidable under state law is voidable in its entirety under bankruptcy law, and all
creditors share in the benefit in the right is avoided
● Void against one, void against all
 
§ 544(a) of the Bankruptcy code, Bankruptcy trustee has the powers of a lien creditor
 
Questions 517
1. Can T set aside security interest under 544(a)(1)
● Security agreement hasn’t attached
● Exceptions 9-317:
● Having met one of the conditions & filed a financing statement
 
2. Can set aside Security Interest?
● No because the seller is a PMSI and has20 days to perfect
● 546(b) & 9-317
● Did seller violate automatic stay by filing financing statement?
● NO
● 544(b)- codefies the rule of Moore v. Bay
 
 
Questions 519
1. C has no rights
2. What transfer is voidable
● If someone has unsecured claim against which the secured with is void, then trustee
can avoid against all unsecured creditor
● 544(b)- not much application
● Preferences
 
5 conditions to transfer
1. To or for benefit of creditor
2. While Δ is insolvent
3. With respect to an antecedent debt
4. Within 90 days or 1 year of petition (1 year if the creditor is an "insider"
defined by 101(31)- relative, partner of debtor-- relative of the 3rd
degree:
5. Causes creditor to get more then his chapter 7 distribution
 
Problems 521
● These are mechanical, doesn’t have anything to do with Intent
1. (a)- because your proving something that has past in time, burden of proof:
● Debtor is presumed to be insolvent
● Trustee has burden
● Creditor has burden of proven non-avoidable under (c)--
● Creditor has the burden to prove Non-insolvency
● Doesn’t matter if creditor knew of financial problems
 
(b) yes. 90 days
 
 
 (c) Trustee can avoid It because considered an involuntary transfer and it was more
 
2. Yes- the fact that the loan was made in 90 days, still an antecedent debt
 
What happens under 551 when the bankruptcy purpose is frustrated?
● Both unsecured
 
Problem 526
1. Was there a voidable preference?
● No property of Debtor was transferred
● Yes because contingent right to payment by guarantor
 
(b)- debtor pays obligation within 90 days
● Can trustee pursue guarantor?
● Same thing apply
 
Exceptions of 547(c)
1. If new loan within 90 day period- extension of proceeds to debtor
(contemporaneous exchange)
2. Transfer made in the ordinary course of business
3. Creates SI in property acquired by the debtor, new value given
 
 
2. Mortgage can be avoided because not an intended exchange
● 547(e)(2 & 3)
● Transfer takes effect upon perfection 30 days
● Didn’t in this case
 
● (c)(1) may still apply- intended to be comtemporaneous
 
 
 
F. Fraudulent Transfers: BC 548
 
1. Basic Rules
● Uniform Fraudulent Transfer Act (UFTA) provides hat trustees may avoid certain transfers or
obligations deemed fraudulent that are made or entered into by debtors within 2 years of
bankruptcy
● "transfer" includes a grant of security interest
 
a. Actual Fraud
● Trustee may avoid any transfer if the debtor voluntarily or involuntarily
● May such transfer or incurred such obligation with actual intent to hinder, delay, or
defraud any entity to whicht eh debtor was or became indebted
● Objective indicia that strongl indicate fraudulent intent:
● Insider relationship between parties
● The lack or inadequacy of consideration for the transfer
● Attempt by the debtor to keep the transfer secret
 
b. Constructive fraud
● Requires no fraudulent intent BC 548(a)(1)(B) states this alterantive ground for avoiding
a transfer or obligation
 ● Trustee may do so if the debtor:
● Receives less than a reasonably equivalent value in exchange for such transfer or
obligation, and
● Was insolvent on the date such transfer was made, or the transfer made it
become insolvent
● Was engaged in business for which any property remaining with the debtor
was an unreasonably small capital
● Intended to incur or believed that the debtor would incur, debts that would
be beyond the debtor's ability to pay
● Made such transfer for the benefit of an insider
 
 
2. Reasonably equivalent value
 
a. Indirect Benefit
 
In re Northern Merchandise, Inc.
● Facts
● Challenges that debtor did not receive reasonably equivalent value in exchange for
a security interest it granted to F and thus F was not protected
● Transaction was documented as a loan to Shareholders who then turned the
funds over to Debtor
● Evidenced by a promissory note
● Analysis
● Well settled that "reasonably equivalent value" can come from one other than the
recipient fo the payments, a rule which has become known as the indirect benefit
rule
● If the consideration given to the 3rd person has ultimately landed in the
debtor's hands, or If the giving of the consideration to the 3rd person
otherwise confers an economic benefit upon the debtor, then the debtor's
net worth has been preserved, and the statute has been satisfied-- provided
the value of the benefit received by the debtor approximates the value of the
property or obligation he has given up
● The focus is whether the net effect of the transaction has depleted the
bankruptcy estate
● Holding
● Because Debtor benefited from the loan in the amount of $150,000, its grant of a
security interest to F to secure shareholder's indebtedness on that loan, which
totaled $150,000, resulted in no net loss to Debtor's estate nor the funds available
to the unsecured creditors
 
b. Leveraged Buyout
● A person may want to buy a corporation but lacks the money or collateral necessary to
finance the purchase
● If the target corporation has encumbered assets, it may be possible to use those assets
to provide most of the capital necessary to make the purchase
 ● However, may violate fraudulent transfer law with serious consequences if the
acquired firm subsequently files in bankruptcy
● Law of fraudulent transfer is important for mergers and acquisitions
● Lthough Bank had given value to Target at the time it received the security interest,
the money "merely passed through" Target to Acquirer and ultimately to the
shareholders of Target
● Acquirers note to Target was worthless because Acquirer had virtually no assets
other than the stock of now insolvent Target
● Since Bank knew the purpose of the loan, the 2 transactions were in fact "part of
one integrated transaction"
 
 
E. Preferences: BC 547
 
1. Elements of a Preference
● State debt collection
● Priority goes to the first creditor to receive payment or obtain a judicial lien in the
debtor's property
● But the rule in Bankruptcy is different:
● For the most part, unsecured claims are paid on a pro-rata basis
● 5 elements of a voidable preference BC 547(b)
● Trustee may avoid any transfer of an interest of the debtor in property
● To or for the benefit of a creditor
● For or on account of an antecedent debt owed by the debtor before such transfer
was made
● Made while the debtor was insolvent
● Made
A. On or within 90 days before the date of the filing of a petition, OR
B. Between 90 days and 1 year before the date of the filing of a petition, if the
creditor at the time of such a transfer was an insider
● That enables such creditor to receive more than such creditor would receive if:
A. The case were a case under Ch. 7
B. The transfer had not been made
C. Such creditor received payment of such debt to the extent provided by the
provision of this title
 
 
2. Why preference law?
● A preference is a transfer that enables a creditor to receive payment of a greater percentage
of his claim against a debtor than he would have received if the transfer had not been made
and he had participated in the distribution of the assets of the bankruptcy estate
● Purpose:
1. By permitting the trustee to avoid pre-bankruptcy transfers that occur within a short
period before bankruptcy, creditors are discouraged from racing to the courthouse to
dismember the debtor during the slide into bankruptcy
2. more important, the preference provisions facilitate the prime bankruptcy policy of
equality of distribution among creditors of the debtor
 ● Any creditor that received a greater payment than others of his class is required to
disgorge so that all may share equally
 
3. Effect of avoidance
● If the trustee in Bankruptcy avoids a preferential transfer under BC 547(b) the property
trasnferred by the debtor to the creditor or its value can be recovered for benefit of the
estate
 
4. Preference Period
● Transfer cannot be a voidable preference unless it occurs within what is called the
"preference period"
 
5. Transfers to or for the benefit of a creditor
 
a. Transfer of Debtor's Property
● Basic requirement that the property transferred must be that of the debtor
 
b. To or for the benefit of a Creditor
● Preference law varied from fraudulent transfer law in that a fraudulent transfer is
voidable whoever te recipient is, but a preference is voidable only if the transfer is made
to or for the benefit of a creditor of the debtor-transferee
 
6. Contemporaneous Exchages
● If a bank advances fund to a debtor who intended to secure the loan by granting the bank a
security interest in the debtor's property, and the granting of the security interest is delayed
only a short time, the exchange is substantially contemporaneous and the security interest
cannot be avoided
 
7. Ordinary Course Payment
● Bars the trustee from avoiding a transfer:
● To the extent that such transfer was in payment or a debt incurred by the debtor in the
ordinary course of business or financial affairs of the debtor and such transfers was
A. Made in the ordinary course of business or financial affairs of the debtor and the
transferee, OR
B. Made according to ordinary business terms
 
Ordinary Course Payments
 
In re National Gas
● Shows the problem with the chance
 
 
 
In re National Gas Distributors, LLC
● Facts
● Payments were transfers of the debtor's property made to or for the benefit of
BB&T on account of antecedent debts while NGD was insolvent, and within 90 days
of the date of NGD's bankruptcy petition
 ● Payments enabled BB&T to receive more than they would have received had
the payments not been made
● Trustee may avoid the 2 payments unless BB&T can establish its defense
 
● Analysis
● Concedes that the debts were incurred by NGD in the ordinary course of business
but disagrees that the payments were made according to "ordinary business
terms"
● BB&T has the burden or proving all of the elements of its defense
● "ordinary business terms" has been interpretted by many courts as a part of the
"ordinary course of business defense"
● The defense is now the equal of the ordinary course of business defense
● Now that it is a separate defense, the court must consider the industry
standards of both the debtor and its creditors
● There are general business standards that are common to all business
transactions
● The industry standards must be applied to the factual circumstances of
the transfer
 
8. Floating Lien as Preference
● If the floating lien were upheld in bankruptcy without limitations, there would be nothing left
in the debtor's estate to distribute among unsecured trade creditors who had provided goods
and services to the failed debtor
● The time of the transfer for security interests in bankruptcy is the time of perfection of
the security interest, not its attachment
● Debtor had rights in the item of inventory
● After-acquired inventory was satisifed when the inventory was acquired
● Accounts receivable and inventory normally turn over within a short period of time
● It is likely that at the date of the bankruptcy some receivables or inventory on
hand were acquired by the debtor within the 90 day period
● There might have been a voidable preference if the debtor was insolvent at
the time BC 547(c)(5)
● The trustee may not avoid under this section a transfer
● That creates a perfected security interest in inventory or a
receivable or the proveeds of either except to the extent that the
aggregate of all such transfers to the transferee caused a reduction
of any amount exceeded the value of all security interest for such
debt on the later of
 
● Not important whether the items making up the mass of inventory or accounts receivable at
bankruptcy were identical to the items making up the mass at the beginning of the 90 day
period so long as the volume has not changed
● Within that limitation, any new item that came into existence within the 90 day period
is treated as a subsitute for an item that was disposed of by the debtor during the same
period
 
Floating lien as a Preference
● Floating leins do not survive Bankruptcy petition filing
 ● Limitation of the floating lien preference: Increase in the amount by which the lien is
undersecured
 
 
 
9. False Preferences: Delayed Perfection of Security Interests
● Delayed Attachment
● Cases in which there is a delay between the time when credit is granted and the security
interest intended to secure that credit attaches
● Since the subsequent attaching of the security interest is a transfer of property of the
debtor on account of the antecedent debt arising from the credit, there is a prima facie
voidable preference if the other elements of BC 547(b) are present
 
● Delayed perfection
● Delay between the creation or attachment, of the security interest and the subsequent
perfection of the secuirty interest by filing
● Essentially the issue is fraud on creditors, not preference
● It is a policy against secret liens expressed in the Bankruptcy Act
● Congress discouraged the secret lien by provision in the Bankruptcy Act
preference section
● Conclusive presumption that the lien became effective at the time it was
perfected rather than at the time it was created
● Certain grace periods were allowed for creditor to perfect
● If the creditor didn’t perfect within these periods, the lien was
treated as having been given for an antecedent debt (BC 547(e)(2))
● For refinancing transactions and purchase money transactions are
extended to 30 days
● Art. 9 has extended the relation back period for PMSI's to 20
days
 
False Preferences
 
● § 540-
● Transfer occurs, if you perfect within 30 days, it occurs when
the transfer occurs
● If you perfect after 30 days, then it occurs when the transfer
occurs
 
● Fraudulent Transfers
 
● Bankruptcy Code gives them the right to avoid that has actual fraud
● For constructive fraud (transfer for which the transferor
receives less then the reasonable value, or if your insolvent)--
trustee can avoid that transfer
 
● Can be defeated outside bankruptcy
● Northern Merchandise
● Essentially the same kind "exception to preference law for ordinary
course payments"
● Natural Gas Distributor
● Reasonably equivalent value?
 ● Reaches opposite result than in the Natural Gas case
● Here said they did receive reasonably equivalent value
● Bank was unwilling to make the loan to the corporation
● Corp. had incurred
● Bank got liability with shareholder
● Langbein doesn’t like
 
 
 
Chapter 4: Default and Enforcement
 
A. Introduction
● Remedies to enforce its security interest against a defaulting debtor
● Can take possession of collateral such as equipment
● In the case of rights to payment such as accounts and chattel paper, it can collect directly
from the account debtors the amounts they owe the debtor or sell the rights to payment
 
B. Default
 
1. Meaning of default
● The event that triggers a secured party's rights to enforce its security interest under 9-601(a)
is the debtor's default
● Leaves to the agreement of the parties the circumstances giving rise to a default
● Many agreements have an "acceleration clause"
● Lenders often reserve the right to call the entire loan due on the event of default
 
Chapter 4: Default and Enforcement
 
● Default
● Doesn’t mean just that debtor didn’t make payment
● Can be anything that the loan agreement says is a default
● Declaration of bankruptcy
● Triggers remedies under Article 9
 
 
 
2. Waiver and Estoppel
 
Moe v. John Deere
● Issue
● "default" is not defined under the Code
● Analysis
● Technically, there is a breach of the security agreement and the promissory note
when Debtor didn’t make his payment on the right date
● Creditor would have a right to repossess the tractor… however, creditors right
to default or remedies under breach of contract can be waived or modified
● Whether a "non-waiver" clause is enforceable in this contract
● A majority of states who have considered the issue adhere to the general rule
that a secured party who has not insisted upon strict compliance in the past,
 who has accepted late payments as a matter of course, MUST, before he may
validly rely upon such a clause to declare a default and effect repossession,
give notice to the debtor that strict compliance with the terms of the contract
will be demanded
● The basis for imposing such a duty on the secured party is that the SP is
estopped from asserting his contract rights because his conduct has
induced the debtor's justified reliance in believing that late payments
were acceptable
 
NOTES
● Courts have enforced a nonwaiver clause in a consumer repossession case
● Debtor had repeatedly been later with their payments
● Secured party warned the debtor by letter that their defaults put them at risk of
repossession
 
● Waiver and Estoppel
● Rule is that creditors will take payments
● But when they decide they want to foreclose
● Prevailing rule is that when they have made a practice of allowing late payments, they
must notify the debtor
● Otherwise NO NOTICE requirement
 
 
 
 
C. Enforcement
 
1. Cumulative Remedies
● The rights under the Code for SP's are cumulative and may be exercised simultaneously
 
Okefenokee Aircraft v. Primesouth Bank
● Facts
● A secured creditor that brought an action for money judgment on the note while
holding the collateral
● Decision
● Conclude that a secured creditor can retain a debtor's collateral while seeking an
independent action for money judgment
● Analysis
● The UCC provides that once default has occurred, a secured creditor is authorized
to take or retain possession of the collateral
● The secured creditor may then "reduce a claim to judgment, foreclose, or
otherwise enforce the claim, security interest, or agricultural lien by any
available judicial procedure"
● Nothing in the code prohibits the creditor in possession of the goods
from proceeding in a judicial action on the note
● The existence of a security agreement in no way affects the existence of the debt
● It merely provides the secured party with an immediate source of recovery in
addition to the standard remedies of an unsecured creditor
 ● Code imposes certain duties upon a secured creditor in possession of collateral,
including a mandate that the creditor act in a commerically reasonable manner
 
● Cumulative Remedies
● Creditor in default can invoke enforcement powers OR it can just sue as if it didn’t have an
agreement
 
 
Okefonokee Aircraft: HOLDS very harsh Anti-debtor case
● Debtor seizes airplane and still seeks
● Pay note in full, then sue to get airplane back
 
 
2. Repossession
 
a. Self-Help Repossession
● A secured creditor has a property right in collateral
● The property right includes the right to repossess the collateral upon the debtor's
default without judicial assistance
 
b. Breach of peach
● Under 9-609(b) a secured party may repossess without judicial process only if it can do
so without breach of the peace
● Possible liability has severely limited the use of self help repossession by secured
parties lol
● If the secured party cannot take possession without risking a breach of the
peace, and the debtor will not volutarily relinquish possession, it may have a
judicial officer seize possession under replevin
● A SP need not take possession of collateral in order to sell it
● Case law shows that a SP breaches the peach by entering an enclosed area without
consent
 
 
Williams v. Ford Motor Credit
● Facts
● Damages for conversion arising out of an alleged wrongful repossession of an
automobile
● Analysis
● We have sustained finding of conversion only where force, or threats of force, or
risk of invoking violence accompanied the repossession
 
NOTES
● When a creditor repossesses in disregard of the debtor's unequivocal oral protest, held
to be a breach of peace
● But other courts held that breach of peace connotes conduct which incites or is likely to
incite immediate public turbulence or lead to immediate loss of public order and
tranquility
 
● Repossession
 ● Creditor right to reposses under 609
● Barbarian in that it rewards dishonest creditors and violent debtors
● Breach of the peace
● Entering unlawfully (breaking in)
● Bribery is OK
 
 
 
c. Judicial action
 
Cla-Mil East Holding Corp. v. Medallion Funding Corp
● Facts
● A secured creditor obtained a court order directing a Marshal to recover collateral
located on property of debtor
● Damage caused to the premises when the equipment was removed
● Analysis
● Here, the party to remove the collateral was not the secured party, nor an agent or
employee of
● Marshalls are government officials, nuetral free of any conflict of interest
concerning the removal of collateral and subject to discipline by appropriate
authorities
● They act under direction of the court
 
Cla-Mil East
● If you do have the assistance of the authority, then no liability on the part of
public authority
 
 
 
3. Disposition of Collateral
● The encourage the creditor to resell in private sales at market price… but as a balance to this
freedom of action, the creditor is held to an ex poste standard of "commercial
reasonableness" in all aspects
● § 9-601(a) allows the foreclsoing creditor to "sell, lease, license… collateral
 
● Disposition of the Collateral
● It is about foreclosure
● Once dispossessed, creditor can:
1. Sell at public sale
2. Sell at private sale
● EXAM Can only buy the kind
● Doesn’t mean something like Blue books for cars (which are estimations)
3. Keep it
 
 
● Debtor has certain rights 9-602-- list of provisions that cannot be waived
▪ Cannot repossess with breach of beach
 
● 9-607
● Notice
● Reasonable disposition
 ● Cannot be waived
 
● § 9-624
● The right to notice of the disposition or the right to redeem the property (by paying
off), can be waived ONLY after default
● After default can waive right to notice
● Notice required is specified
 
● Timeliness of notification is a question of fact
 
EXAM: a junior SP can foreclose
● Nothing says you have to have priority!
● But may be liable to senior SP
● But usually the senior party will step in (a junior SP must notify Senior SP)
● And if a senior SP lets junior, then it doesn’t affect its rights
 
● DMoore v. Wells Fargo: HOLDS that debtor waived its right to a commercially reasonable
sale
● Erroneous
● Court vacated its own judgment
 
 
 
 
 
a. Notification before disposition
1. Notification Medium: Mail or Internet
● If the SP choses to foreclose by extra-judicial sale, 9-611(b) and (c) provide that the
SP shall send a reasonable authenticated notification of disposition
● Only prove that notice was DISPATCHED not received
 
● The relevant statue provides that the notice shall state the "time and place" of a
public disposition
● Internet auction in a public sale context is appropriate
 
2. Public or private sale
● If the SP decides to dispose of the collateral, it may do so either by public or private
proceedings
● The method of disposition selected must itself be commercially reasonable
● 2 procedural consequences of the SP's choice
● If a public sale is selected, the notification must state the time and place
of the public sale
● But if the private sale is chose, only the time after which the sale
will be made
● Second, is that most instances a SP may not purchase at a private sale
but it may do so at a public sale
● "public disposition" means that the public has had meaningful opportunity for
competitive bidding
● Advertisement or public notice must precede the sale and the public must
have access to the sale
 ● The only case in which a SP is allowed to buy at a private sale is one in which the
collateral is of a kind that is customarily sold on a recognized market or the subject
of widely distributed standard price quotations
● Blue Books have been held NOT to be a recognized market which a SP could
buy at a private sale
 
 
3. Marshalling
● The doctrine of marshalling allows a junior creditor to require a senior secured
party to proceed against collateral other than assets in which the junior secured
party has a security interest
● The doctrine applies when 3 conditions are satisfied:
1. The 2 aprties are creditors of the same debtor
2. 2 funds are owned by debtor
3. One of the creditors can satisfy its entire claim from either or both of the
funds, while the other can satisfy its claim in only one of the funds
● Only when creditor wouldn’t be prejudiced
 
MARSHALLING- EXAMM
● Mostly a bankruptcy provisions
● If you have 2 SP, same collateral
● One senior but it also has other collateral, must foreclose on the other collateral as to
leave the collateral where the other party has security in only the one part of
collateral
● Leave the part of collateral (if the other part covers the debt), even if the
creditor is junior
 
● Creditor A has Security in $300k in inventory and Security in $200 Equipment (senior)
● Creditor B has only Security in $200k equipment (junior)
● Creditor A has to leave the Equipment alone as long as its debt is covered by the
Inventory
 
 
 
b. Commercially reasonable disposition
● Article 9 focused on procedure rather than the price obtained at the disposition, which
is what debtors are most interested in
● The fact that a higher price could have been obtained at a different time is not of
itself sufficient to preclude the SP from establishing that it was made in a
commercially reasonable manner
 
Commercially reasonable
● Doesn’t mean that you are always examining the price
 
 
c. Liability for Deficiency
1. Nonconsumer transactions
● § 9-615(d) provides that after disposition of the collateral by the SP, any surplus
from the sale goes to the debtor, and the obligor is liable for any deficiency
 ● If the underlying transaction is an outright sale, rather than a security interest in,
accounts, chattel paper, payment intangibles or promissory notes, 9-615(e)
provides that the debtor receives no surplis and the obligor is not liable for a
deficiency
 
● Article 9 adopts the "rebuttable presumption rule" in nonconsumer transactions
● Of the debtor places in issue the SP's compliance, the SP has the burden of
establishing that it has complied with the requirements
● But, even if it cannot prove compliance… it can still recover a deficiency
judgment by providing that the price obtained at the sale was that which
would have been produced at a commercially reasonable resale
 
d. Section 9-615(f)
● Protect debtors by limiting deficiency judgments in cases in which a commercially
reasonable, procedurally correct foreclosure sale:
i. Is made either to the SP, or an affiliate or related to the SP, AND
ii. The price obtained is "significantly below" the range of proceeds that a person
other than the SP would have bought
 
 
4. Acceptance of Collateral in Satisfaction of Debt
● Strict foreclosure
● Article 9 provides a secured party alternate procedures for cutting off the debtor's rights
in the collateral after default: disposition under 9-610 and acceptance by the SP of the
collateral in satisfaction of the secured obligation
● The defaulting debtor who concedes that it cannot pay the secured debt, escapes any
further liability for deficiency
 
9-620 (Strict foreclosure)
● Collateral not sold, just kept by SP
● It is required to consent
● Tricky because obligates debtor to send a proposal and allows the strict foreclosure to
take place unless receives an authenticated objection
● CONSENT by silence
● No requirement of actual receipt of proposal
● Debtor consents if it never receives OR if it sends an objection and it is never
received by
 
● Cuts of lien of junior security interest (crushes)
 
 
● In consumer transactions cannot do strict foreclosure if the consumer has paid 60% of the
obligation
 
 
9-607 gives a SP the right to notify account debtors (party that owes the debtor money under the
assets ) to pay the SP directly (instead of foreclosing in a commercially reasonable manner
● Common that the debtor object and say it unreasonable interferes with the relationships
with customers
● If deposit account, must have control
 
 ● If it’s a true sale, no surplus and no deficiency!
 
 
 
● Consent to accpetance in full satisfation
● SP can enjoy the benefit of strict foreclosure only if after defaul the debtor consents to
the acceptance in satisfaction
● Debtor may consent to EXPRESSLY
● Or may consent by SILENCE
 
● Acceptance In partial satisfaction
● A debtor may consent to acceptance of collateral in partial satisfaction only if the debtor
expressly agrees to the terms of the acceptance in a record authenticated after default
● Acceptance by silence is NOT allowed
 
● Consumer debtors
● 9-602(g) forbids a SO from accepting collateral in partial satisfaction of the obligation it
secures in a consumer transaction
● Nor is acceptance in satisfaction of consumer goods effective if possession of the
collateral is still with the debtor
 
5. Effect of Disposition of Acceptance on 3rd parties
 
a. Transferees
● A person who buys at foreclosure sale is a collateral transferee
● Although the selling party does not "own" the collateral after repossession, 9-
617(a)(1) empowers it to make a transfer of all the debtor's rights to the transferee
 
b. Junior security interests or liens
1. Dispositions
● If buyers are to be induced to bid at a foreclosure sale, they must be able to buy the
property free of any security interest or liens that are junior to the SI that is being
foreclosed
● Secured party whose financing statement is properly filed is entitled to notification
of the disposition, this person is entitled to share in any surplus from the sale only if
the foreclosing SP receives from junior an authenticated demand for proceeds
before distribution of proceeds is completed
2. Acceptance in satisfaction
● Since 9-622(a)(4) allows an accpetance of collateral by the SP with the consent of
the debtor to cut off all junior liens, fairness requires that the junior parties be
allowed to prevent this from happeneing by objecting
 
6. Collection of Rights to payment
● For TANGIBLE property, the selling creditor must be concerned about refurbishing or
repairing the property, selling it in the proper market, and getting a decent price even though
the liquidation value of used goods may be disproportionately low
● Contrast the position of a creditor having a SI in accounts, chattel paper, payment intangibles,
or promissory notes
 
Major's Furniture Mart v. Castle Credit Corp
● Issue
● When a sale is not a sale, but rather a secured loan?
● Analysis
● Article 9 is to govern all transactions in accounts
● If the security agreement secures an indebtedness, the SP must account to
the debtor for any surplus
● The debtor is liable for deficiency
● If the underlying transaction was a sale of accounts, contract rights, or chattel
paper, the debtor isnt liable for any deficiency or entitled to surplus unless
the security agreement provides
● True nature of the tranasction was a secured loan, not a sale
 
§ 615(e)
● Difference between sale of chattel paper
● Retailer gets note/right to payment ($50,000) from customer and pledges them to Lender
for ($40,000), If it’s a payment intangible (perfected on attachment)
● If the customer doesn’t pay, the retailer still owes the obligation
 
● ON THE OTHER HAND, if the retailer SELLS the Note, then it is the lenders loss
● Even if you buy it, you have to perfect
● Risk of loss is the determinitve factor
● Substance of the transaction, not what the agreement calls it
 
● Have to FILE regardless because it is treated as a security agreement!
● But for purposes of it the retailer is entitled to SURPLUS or DEFICIENCY
 
§ 9-626
● Deficiency rules
1. Once debtor places the SP's compliance, the SP has to prove that it complied
1. If doesn’t prove it complied…. SP Has to prove that HAD deficiency it complied
it would have gotten less than its owed
● Double burden
● Rebuttable presumption rule
 
● In NON consumer transactions
 
IN consumer transaction "absolute bar rule"
If SP doesn’t prove it has complied , doesn’t get a second chance to prove
 
Undermined by:
 
 
NOTES
● Major's assumes that under Article 9 the debtor can either transfer absolute ownership
of, or create a security interest in, accounts and chattel paper
● Debtor's sale transfers all of its interest in the accounts or chattel paper sold
● A sale connotes a transfer of ownership
● Security interest does not
 ● The case where the trasnferor continues to bear all the "upside" and "downside"
risks assocaited with the asset transferred (security interest)
● Bearing ALL up and down risks is a good indication of sale
 
Secondary Obligor
2 problems:
● THEY ARE entitled to notice
● Cannot make a pre-default
 
 
 
 
Certificate in Possession of Securities Intermediary
a. Control test
● The most common form of holding securities today is by an intermediary like a broker or
a bank
● The control concept was conceived to deal with security interests in certificates held by
intermediaries