Secured Transactions Outline2 | Security Interest | Lien

Practice Bar Question - Old Bar Exam Question; Andy’s Promissory Note: o Andy, a resident of Chowan County, N.C., told his friend Barney that George had agreed to loan him $10,000.00, but wanted security for the loan. On September 1, Andy gave Barney a $10,000.00 promissory note payable to bearer and instructed him to hold the note as security for the loan. Barney gave Andy a receipt for the note (“I have received from Andy a $10,000.00 promissory note payable to bearer and dated xx/xx/xxxx – signed Barney) and placed the note in his safe. The same day, Andy exhibited the receipt to George who wrote Andy a check for 10,000.00. Before delivering the check, George called Barney and was advised by Barney that he still held the note. George told Barney that he had given Andy the check and that the note was security for the loan. Barney said he understood that. The following week a judgment creditor of Andy’s secured the issuance of execution in the Superior Court of Chowan County. The sheriff levied on the promissory note to satisfy a judgment dated June 1. o Rules to take away  Perfection: Promissory Note can be perfected by filing or possession, or both.  If a third party holds note, he must hold it for the creditor. Cannot be an agent of the debtor.  3rd party must agree in authenticated agreement that he is holding the note for the creditor.  Note: if the instrument was payable to the order of creditor (non-negotiable) it wouldn’t matter who held it. (wouldn’t need an authenticated agreement) Another Bar Question - Barbara Borrower’s Loan o On April 1, Barbara Borrower who resides in Pender County, N.C., requested a short-term loan of $1,000.00 from her friend, and next-door neighbor, Linda Lender. Ms. Lender agreed to loan the funds provided Ms. Borrower’s ruby-encrusted gold watch was given to her as collateral for the loan. On April 2, Ms. Borrower requested a $5,000.00 loan from Retail Loan Company (“RLC”). RLC agreed to loan the funds provided Ms. Borrower signed a security agreement granting RLC a security interest in all of Ms. Borrower’s jewelry. On April 3, Ms. Borrower received the $1,000.00 from Ms. Lender and gave Ms. Lender possession of the watch as collateral for the loan. On April 4, Ms. Borrower received the $5,000.00 form RLC and signed a security agreement covering all her jewelry. On April 5, RLC correctly filed a sufficient financing statement. o QUESTIONS: o Does RLC have a valid security interest in the ruby-encrusted gold watch?  Yes, b/c it has attachment and perfection o If so, does RLC’s security interest have priority over any claim by Ms. Lender?  No, Lisa Lender was first to perfect. First to file/perfect Multiple-State Transactions: law governing perfection and priority: o Where do you file when you have debtor and creditor in different states?  File in the sec. of state’s office where the debtor is located  Note: if the debtor and the collateral move to another state S.P. has 4 months to refile financing statement.  What law applies of which w/ regard to filing:  The law of the state that the parties agree to in security agreement (generally where the S.P. is located)  Must bear a reasonable relationship to the transaction  If the choice of law is silent in the agreement, law of state that has most appropriate relationship applies.  Appropriate relationship: significant contacts o Law governing perfection  While a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection.  If it is a possessory security interest (creditor holds possession of collateral); the local law

of the jurisdiction the collateral is in governs perfection. o Perfection Concerning Car or truck:  The law of the jurisdiction where the certificate of title is issued governs perfection.  Goods cease to be covered by certificate of title at the earlier of expiration of certificate of title or time when goods become covered by certificate of title under another jurisdiction.  However, as long as secured party in state where title is issued is perfected, the issuance of a certificate of title by another state will not destroy S.P.’s interest even as against purchaser for value.  However, S.P.’s interest will not remain perfected against purchasers for value unless:  Within four months S.P. get certificate of title reissued in new state under their name.  If fails, still perfected against lien creditors.  Note: Generally you cant perfect car by possession due to 9-313(b) certificate of title statute. But there is one exception under 9-316(d)  Allows the secured party to perfect by possession. Secured party can posses the collateral if debtor is in default. Perfected against other creditors  Note: a S.P. can secure interest in a used vehicle by filing financing statement. o General Rule:  Non-possessory security interest: the law of the state where the debtor is located applies  Exception: if the collateral tangible and located in a different state other than where debtor we have bifurcation and the place where the collateral is located is the law that applies. Note: must still be filed in the state of the debtor.  Possessory security interest: the law of the state where the collateral determines perfection. o Continued Perfection of Security Interest following change in Governing Law:  General Rule: A security that is perfected in a jurisdiction remains perfected until the earlier of:  Expiration of the financing statement; good for 5 years.  Can file continuation statement w/in 6 mos of expiration  Passage of 4 months after debtor has moved to another jurisdiction; or  Passage of 1 year after collateral has been transferred to a person that thereby becomes a debtor and is located in another jurisdiction.  If secured party doesn’t refile, or the financing statement expires the S.P. is no longer perfected as against a purchaser for value.  You must be a purchaser for value: someone who take through a voluntary transaction creating an interest in the property.  Lien creditors are not deemed to be purchasers for value; no voluntary transaction.  Subsequent secured parties are considered PFV.  SP would still be perfected against lien creditors but not against SP2 and customers. General rule: debtor should not be able to take away security interest just by selling the collateral: o Exceptions:  Front Door Exception: A BIOC, other than a buyer of farm products from someone engaged in farming, takes free of a security interest created by the buyer’s seller, EVEN IF THE SECURITY INTEREST IS PERFECTED AND THE BUYER KNOWS OF SUCH.  Back Door Exception: secured party authorizes the disposition free of the security interest. Proceeds: o What you get for the disposition of collateral  Proceeds include claims arising out of the loss, nonconformity, or interference with the use of defects or infringement of rights in, or damage to, the collateral.  Proceeds of proceeds are proceeds o Perfection and proceeds:

A security interest in proceeds is perfected if the security in the original collateral was perfected.  Unless the secured party authorized the disposition free and clear of the security interest. o Continuation of perfection in proceeds:  A perfected security interest in proceeds becomes unperfected on the 21st day (therefore good for 20 days) after the debtor takes possession of the proceeds….Unless:  The following conditions are met  A filed financing statement covers the original collateral,  The proceeds are of the type that could be perfected by filing in the office of the state of the original collateral, AND  The proceeds are not acquired with cash proceeds (money, checks, deposit accounts)  The proceeds are identifiable cash proceed; OR  The security interest in the proceeds is perfected prior to the 21st day. o Rights to proceeds are automatic if you had rights in the original collateral; no for after acquired property clause in security agreement to have rights in proceeds. o NOTE: CASH CAN ONLY BE PERFECTED BY POSSESSION IF IT IS THE ORIGINAL COLLATERAL. o IF ITS CASH PROCEEDS YOU DON’T HAVE TO HAVE POSSESSION. o A SECURITY INTEREST IN A DEPOSIT ACCOUNT MAY BE PERFECTED ONLY BY CONTROL IF IT IS ORIGINAL COLLATERAL. IF ITS PROCEEDS IT CAN BE PERFECTED BY MEANS OTHER THAN CONTROL. o Note: a transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion If secured party has possession of chattel paper from debtor, they can directly seek payments from buyer who is making payments to the debtor

Priority o Future Advances SP1 can still prevail over SP2 when he has given a second advance when there is not a future advance clause in the original security agreement if there is a new security agreement entered into tying the second advance to the original collateral covered in the first financing statement. o Lapse  If SP1’s FS lapses then SP1 is still maintains priority as against the Lien Creditor, but not against any later purchases for value.  (remember the idea of circular priority) o Address  Wrong Address (seriously misleading)  SP2 wins if SP1 files a FS that has a seriously misleading address, and SP2, upon reliance gave value .  No Address  There is no reasonable reliance by SP2, therefore SP1 still prevails.  What is a specific address is given?  If the name & address is searched and the debtor’s does not come back in the index, then SP2 is not found to have relied because they should have done more research. SP1 still wins. o Purchase Money Security Interest




Alienability- SP cannot insert a clause prohibiting subsequent PMSI’s. However, SP can say giving a PMSI as default allowing SP to take possession of the collateral.  No PMSI super-priority for a second advance. (for an SP2).  Dual Status Rule- SP maintains priority in non-consumer goods, up to the amount of collateral. PMSI does not lose it’s priority even if collateral also secures a later obligation that is not a PMSI. (security interest that is part PMSI and part not).  If there’s a secured agreement saying where the money should go, that controls. If there is no agreement, there must be some manifestation by the debtor saying where the money is going. If there is no intent by either party, then is goes to the unsecured (non-PMSI portion of the loan), PMSI, then regular secured.  Cross-Collateralization  Have the after acquired property clause  If have this, as long as secured party is a PMSI, he will maintain priority, regardless if he has any items left in the inventory (even if all the goods are gone).  If it is consumer goods, parties may say we should apply cross-collateralization, or do tracing because there is no PMSI (this applies in situations where there is consumer goods, could lose PMSI status through refinancing in consumer goods).  Seller PMSI will prevail over a Lender PMSI, regardless of which came first. True Leases  Lessor does not have to file a FS when there’s a true lease.  If there’s a lease with an option to buy, item does not become collateral under article 9 until a security agreement is signed. SP2 has 20 days to file once the security agreement is signed because they will have PMSI in equipment.  When does possession occur?  When there was a lease, possession was already there.  In a situation where things are being assembled, you have possession where it will be apparent to a potential lender that you have a good that actually functions. Proceeds  If you have a perfected security interest in the original collateral, it continues in the proceeds.  Security Interest in Inventory v Accounts Receivable who wins?  If you have an interest in inventory and no one else does, then you will win the inventory.  Otherwise it is first to file or first to perfect when it comes to accounts receivable and bank accounts.  PMSI in Inventory  If you have an PMSI in inventory, and a continued perfection in the proceeds, You also have a priority in any cash proceeds that are given on or before the delivery of inventory Perfected Security Interests and Buyers of Goods  SP1 does not have to re-file as long as their security interests continues in the equipment. (when there’s a good faith purchaser)  A banks security interest remains perfected in equipment even after the debtor sells it to a GFPFV.  If the bank has language in it’s agreement that the debtor an sell goods free and clear based on a condition, even if debtor does not meet that condition, courts allow that item to be sold free and clear.  If there is no conditional language if equipment (or item) to be sold free and clear, the provision will be upheld.  Waiver and Estoppel  A SP waives their right to object when they are aware of debtor selling off
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unneeded equipment (multiple transactions).  Note  Schultz  Creditor allows things to happen over and over again, you have effectively waived your ability to find default.  45 Day Rule- Secured Party as Against any Purchaser for Value. (refer to above rule on it) Buyer will take subject to secured interest, unless bank had knowledge (which can cut the 45 day period short). Prior commitment to advance will allow SP to still maintain priority. SP v BIOC  A BIOC takes free and clear even if he knows a secured interest lies on the goods. However, the BIOC does not take free if he knows the sell violates the rights of the SP.  BIOC- will not prevail if purchased from a pawnshop.  No distinction between a business and a person who are BIOC’s. As long as they do not know of any violations of SP’s rights they will take free and clear.  Note  Ordinary Course of Business  A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices.  If you have a debt that needs to be paid off, don’t give inventory; give money. Creditor should do a lien check to make sure there is no security interest on the collateral.  BIOC (other than one of farm products) only applies if the security interest was created by the BIOC’s seller (the company they bought the product from).  Any entrusting or possession of goods of the company that deals in goods of that kind gives the rights of the entruster to the BIOC. (Any delivery and any acquiescence)  Only a buyer that takes possession of goods or has a right to take possession of goods from the seller is a BIOC. (if secured party is in possession of the goods, BIOC is out of luck, they will not prevail). Consumer to Consumer Transaction  Consumer takes free unless financing statement is filed. Unperfected Security Interests and Buyers of Goods  Buyer takes free if they give value, delivery, without knowledge, and SP is unperfected.  Once the transaction is confirmed between debtor and buyer, the buyer has clean title and may convey such to subsequent buyer even if seller perfects later on and gives notice.  If value has not been given, there has been no attachment, and SP loses.  If there’s no security agreement there is no drop back rule. The only thing you can be missing is value. Lien Creditors  A PMSI has 20 days after debtor receives collateral to file and perfect, unless you’re a BIOC or buyer in consumer goods. (They take priority over buyers (good faith purchasers for value), lessees and lien creditors)

Priorities Bar Exam Question dealing with priorities • On June 1, Charles Consumer of Chowan County, N.C., purchased a twenty-one foot Crisp Craft pleasure boat for personal use from White Water Boat Sales, a retail dealer in boats. White Water Boat Sales financed all boats as they were acquired from manufacturers with Home Town Bank, which held a security agreement and had properly and timely filed a financing statement covering the Crisp Craft. Charles made a down-payment and executed a note payable in monthly installments over the next three years to White

Water Boat Sales for the balance of the purchase price. A security agreement giving the names and addresses of the parties, describing the boat and granting a security interest in the Crisp Craft was signed by Charles and White Water Boat Sales. No financing statement was ever filed. The boat was delivered to Charles’ home on Albemarle Sound where Charles lived and operated a tractor repair stop. On June 1 of the next year, Charles traded his Crisp Craft for a larger pleasure boat owned by Ike Innocent, a peanut farmer, who wanted a smaller craft for his family. Ike was unaware that Charles was indebted to White Water Boat Sales. The next week while cruising down the river, Charles struck an underwater object which sank his new boat. Charles was disgusted with boating and made no more payments to White Water Boat Sales. Ike refused all demands to surrender possession of the Crisp Craft. QUESTIONS: o 1. Does Home Town Bank have a first priority lien against the Crisp Craft?  My short answer is “no.” o 2. Did White Water Boat Sales have a perfected security interest in the Crisp Craft while in the possession of Charles?  My short answer is “yes.” o 3. Can White Water Boat Sales recover the Crisp Craft from Ike Innocent?  My short answer is “no.” o 4. Would your answer in questions 2 and 3 above change if White Water Boat Sales had properly and timely filed a sufficient financing statement?  My short answer as to change is “no” as to question 2 but “yes” as to question 3. o 5. If Abelina, a judgment creditor of Charles’, had the sheriff levy on the boat before Charles traded it to Ike, who would have priority as to the boat, White Water Boat Sales or Abelina?  My short answer is White Water Boat Sales. o 6. If Charles had granted an enforceable security interest in the Crisp Craft to Finance Company before Charles traded it to Ike, who would have had priority as to the boat, White Water Boat Sales or Finance Company…, assuming, of course, that Finance Company promptly and properly filed a sufficient financing statement?  My short answer is White Water Boat Sales. o 7. If Charles had refloated the sunken pleasure boat that he got in the trade with Ike Innocent, could White Water Boat Sales have repossessed it from Charles upon his default in payment for the Crisp Craft?  My short answer is “yes.”

Fixtures: • “In question 3(b) of the fixture materials/questions you asked who would win between the lien creditor and Highs. Your answer states that lien creditor would win because the furnace was subject to an "unperfected security interest". However, since a furnace would arguably qualify as a consumer good (used primarily for personal, family, or household purposes) wouldn't the furnace be perfected by attachment under the consumer good PMSI provision? High's mistaken belief that the furnace would be a fixture should not matter since they (a) filed a fixture filing statement to protect from real property claims and (b) if not installed, perfection by attachment of a pmsi in consumer goods.” • Here is my response to the question. o “I went back and reviewed that question 3(b), and I readily admit that it appears to beg the reader to apply the PMSI in consumer goods exception! I can't figure out why I didn't apply it, and I have looked at it again and again to figure out the "trick" as to why it is not applicable. I keep coming back to the same conclusion that you are right! I have used this question to explore the law of fixtures for a number of years now, and NO ONE has ever caught that exception - at least if they

did, they just chuckled to themselves and went on through the question. o So I agree with your conclusion and will pass it on to your classmates via Blackboard. o Now what I need to do with the problem to make it work is this: have John and Joan run a business manufacturing whimmydiddles and let them discover that the furnace in their warehouse (where they keep their inventory) is no longer working properly and apparently needs to be replaced. They buy the new furnace from Highs and grant the security interest exactly as before, including making the fixture filing, but an employee fixes the old furnace and the new furnace stays in the box in the warehouse without ever becoming a fixture. o If that fact situation manages to survive the scrutiny of you and your classmates when they read this email, I will amend my fixtures notes to reflect the change. Oh, yes, I will retain the facts that raise the issue of the PMSI in consumer goods (that is a great issue), and then I will add these facts to raise the issue without the PMSI in consumer goods. Default and A-1 Construction • Question 1 - the court should rule favorably on A-1's motion. • Question 2 - the court should rule against both A-1's motion and Bank's motion. • Question 3 - the court should rule favorably on A-1's motion. Loanall equipment hereafter acquired, default provision any other act which renders ability to pay less likely

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