SECURED TRANSACTIONS OUTLINE

For: Professor Zubrow

Spring 2001

I.
A. UCC Provisions
1. Article 1
2. Article 2
3. Article 2a
4. Article 8
5. Article 9

Introduction To UCC and Secured Transactions

and Its Interrelationship with Secured Transactions
provides general definitions for the UCC
deals with the sale of goods
deals with leasing of goods
deals with investment securities [private dealings of stock]
deals using personal property to secure credit transactions

B. Overview of What is Personal Property

1. Tangible property [basically goods b/c real estate not included in Art. 9]
2. Qausi-tangible property [E.g., legal rights reified on paper the value is the
legal rights embodied in the paper or electronically; promissory notes,
certificates of deposit; investment securities See Art. 8]

A. Example You own a catering business in DC and asked to put on a

lunch for X. X gives you a deposit and a promissory note for the rest of
the amount due. A promissory Note is a formalized IOU [see Handout
#4]. The note isnt worth anything, it is the legal right embodied in the
note that is of value.

B. Example What if you are short of cash to put on the lunch. You can

3.

go to the bank and request a loan. However, the Bank wants collateral
we will learn that the promissory note can be used as collateral to
secure a loan transaction. Alternatively, you can also sell the note the
sale of a note is also covered under Article 9.
Pure Intangible this is all encompassing category (e.g., trademark rights,
the right of the NFL to be paid by broadcast stations, account receivables,
checking account)

C. What is the Economic Reason for Studying Secured Transactions? Consumer

debt is at an enormous high rate. If the economy goes south, creditors will be
collecting a lot of money.
1. 3 Traditional Forms of Lending
a. Direct lending by institutional creditors (e.g., a Bank)
b. Credit sales
c. Securitization [See Diagram on pg. 3 on Handout #8] this means you
pool credit obligations together; it represents a future stream of income.
These obligations are converted into investments and then sold to the
public. This reduces risk by spreading it out and makes it easier to gage
risk of a group than an individual.
2. Legal Reason we have a new revised Article 9. Hasn't been revised since
1972. The last page on Handout #1 shows which states have adopted;

introduced; or yet to introduce the new Article 9. The transition rules are in
Part 7 of Article 9. The New Article 9 can be found in Appendix Q.
D. Concepts and Definitions Involved In Secured Transactions
1. Security Agreement contract between the debtor and creditor. Its a contract
that conveys a property interest to secure a debt. Because the security
agreement is a contract, it does not go into public records; the document also
tells us the rights of the creditor.
2. Typical Questions that arise: (1) what are the creditors rights; and (2) if have
multiple creditors fighting for the same property, how do we rank the
creditors?
3. Attachment 9-203 is the main provision in Article 9 that tells us what
needs
to go into the security agreement to create a security interest under Article
9.
4. Financing Statement 9-521 talks about the national uniform form for
financing statement, which publicizes the transaction thereby giving notice to
existing or potential creditors and purchasers of the property. 9-210 tells us
how to get more information once you see the Financing Statement.
5. Perfection 9-308 (starting point)a perfected security interest means you
created a security interest that has been publicized. Perfection is sometimes
the deciding factor (but not always and not the general rule) to determine who
wins (priority) when there are multiple creditors.
6. Collateral 9-102(a)(12) means the property subject to a security interest or
agricultural lien. It includes: (A) proceeds to which a security interest
attaches; (B) accounts, chattel paper, payment intangibles, and promissory
notes that have been sold; and (C) goods that are subject of a consignment.
7. Security Interest 1-201(37) means an interest in personal property or
fixtures which secures payment or performance of an obligation. The term
also includes any interest or a consignor and a buyer of accounts, chattel
paper, a payment intangible, or a promissory note in a transaction that is
subject to Article 9. [Refer to pg. 1267 for the revised version]
8. Default not defined by the Code. So you need to look at the security
agreement. Look at Handout #3 for a definition. Part 6 of Article 9 deals with
default issues.
a. 9-609 says that if a Bank believes the debtor is in default, the Bank can
repossess the boat w/out going to court. Under 9-609(b) a secured party
(e.g., the Bank) may proceed without judicial process.
b. Example Assume debtor defaults and the creditor repossess the
collateral. What can the creditor (a.k.a. the secured party) do with the
collateral? Under 9-610, the secured party can sell it to offset the debt.
This Section mitigates loss in the situation of default and reduces
transaction cost in collection. However, if the collateral (for instance the
boat) was used for pleasure, it may be classified as a consumer good and
thus may be protected by other consumer protection laws. Thus, the bank
may be restricted by other laws. See 9-201(b) which allows consumer
protection laws to be applicable to an Art. 9 transaction.

9.

Debtor 9-102(a)(28) is the person who has interest in the collateral; sells the
collateral; and a consignee.
10. Obligor 9-102(a)(59) is the person who owes the obligation (to pay).
a. Sidenote the obligor and debtor can be the same person, but not
always.
b. Example President of a small corporation needs money and goes to bank
for a loan. However, all the assets of the corp. are encumbered in other
creditors. What if you put up personal collateral for the corporation. The
President is the debtor (the person who owns the collateral) and the
corporation is the obligor (the one that has the obligation to pay the loan.)
11. Enabling Security Interest is a purchase money security interest. 9-103
the credit extended to debtor enables the debtor to purchase the good that
serves as collateral. This is a purchase money security interest [e.g., the
boat hypothetical].
a. To determine whether its a Purchase Money Security Interest start
with 9-103(b)(1) is the boat purchase money collateral with respect to
the bank's security interest? 9-103(a)(2) defines Purchase Money
obligation as an obligation of an obligor incurred for value [what bank
gave] given to debtor to enable him to get the collateral the value was so
in fact used.
b. Article 9 favors Purchase Money Security Interests over Security
Interests Unrelated to the Credit extension.
12. Security Interest for Unrelated Debt there is no relationship between
debtors rights in the property served as collateral and the extended credit.
a. Example You want to go to Super Bowl but you need money
($10,000). What do you put up as collateral? The boat. In this case
there is no relationship to the money he receives to go to the Super
Bowl and the rights of the boat.
E. Introductory Example of Secured Transactions
1.

Example: Assume you buy a boat but you only have $10,000 in your
bank account and the boat costs $80,000. You can set the transaction
up in several ways: (1) barter swap exchangeable goods [but hard to
find an appropriate exchange]; (2) cash also difficult because hard to
come about; (3) commercial paper (e.g., certified check or travelers
check) also hard to come about; (4) defer ratification (not likely if you
want the boat now); (5) credit and borrow.
a. What does a sale mean? UCC 2-106 defines a sale as "a passage of title
for a price." UCC 2-401 tells you when title actually passes. If buyer
went to bank and put the boat as collateral, the security agreement would
not have created a security interest because he does not own the boat.
However, at moment you receive the boat, you have title under Article 2.
b. What is the Doctrine of Derivative Title Actual conveyance of property
doesn't take place until you receive it and then has a property interest.

c.

What is Shared Ownership - its limited, in the sense that its for the sole
purpose of securing a loan; and its conditional because the bank cannot
take possession unless the loaner defaults.

Example Handout #1A The debtor is a Farm Corporation (Ralston Purina)

and the secured party is a credit-seller. The credit-seller wears 2 hats: (1)
seller; and (2) creditor. Ralston gives the creditor-seller a promise to pay for
fertilizer seed. Creditor seller wants a security interest and won't take it in the
fertilizer (reminder, if creditor-seller did that would be a "purchase money
security interest" and 9-103 would be the applicable provision). Instead C-S
want's a security interest in the corn crop to secure the loan. The Definition of
Goods does include the term "crops". [2-105 defines good] Assume the value
of the corn is $100,000 and the debt is $80,000 [b/c Ralston gave a $20,000
down payment]; this means the debt-collateral ratio is 80%
[80,000/100,000] This ratio is unrealistically high (usually its closer to 60%).
a. Assume Ralston defaults and under 9-609 the credit seller repossess the
collateral (corn) and under 9-610 sells it to offset the debt. Assume the
foreclosure sale of corn produces $90,000. Does the credit seller get to
keep the $90,000? No, credit seller gets to keep $81,000 [the debt +
expense of foreclosure]. The remaining amount ($9,000) goes back to the
debtor. This $9000 is referred to as "surplus" under 9-615(a) and (d). In
this case the secured party is "over-collateralized" the collateral is
greater than the cost at default. This example also suggests that the limit
on security interest is that it can never be greater than the debt.
b. Assume same facts as above, except the foreclosure sale only produces
$45,000. The entire amount goes to the secured party (9-615) since the
outstanding debt is greater than the amount collected at the sale. There is
a deficiency in this example. This makes the secured party a "general
creditor" for the rest of the debt meaning he has to go to court to collect
the rest. In this example, the secured party is an "under-collateralized
creditor" where the debt is greater than the collateral collected at
default.
c. Side Note: Look at Handout #3 there is a provision within the security
agreement regulating the debt-collateral ratio.
3. Example What can the creditor get from the debtor? There are ex-post and
ex-ante benefits of collateral.
a. Ex Post Benefit of a secured party is the benefit the creditor gets after
default its the mitigation of the loss caused by default.
b. Ex Ante Benefit the benefit arises before default during the loan
repayment period.
1. Example Suppose X (debtor) gives a security interest in Y. What are
the ex post benefits? The bank could use 9-609, 10, and 15
remedies to collect. But those benefits are likely to be low if there is
not a great market for Y. Also transaction costs for caring for Y may be
high. So ex post benefits are minimal. What about ex-ante benefits X
loves Y - it has sentimental value to X. How does that influence X
2.

2.

3.

F.

behavior in advance before default. X will default on another debt or

bill so X can pay the loan.
Example X debtor puts a diamond bracelet up for collateral. The Ex
post benefit here is high because the bracelet is easy to seize and
there is a good resale market. However, the ex-ante benefits are
minimal to the debtor because given by an ex-boyfriend and husband
doesn't appreciate it.
Business Example New Article 9 enables you now to put software up
as collateral for a security interest. The ex-post benefits are low. What
will the bank do with customized software. There is no resale market.
However, the ex-ante benefits are high because seizing the software
can be disruptive to the corp. and the replacement cost for new
software is large.

Chapter 1 Introduction to Text Book

1. Liens A lien is an interest in the debtor's property given by the law to protect
a creditor. Its a charge on property to secure repayment of a debt. There are
two types loans
a. Voluntary Liens
1. Consensual Lien the debtor voluntarily grants an interest
2. Mortgage a consensual lien taken in the debtor's real property
3. Security Interest a consensual lien in personal property or fixtures
b. Involuntary Liens
1. Judicial Lien when the lien arises from judicial proceedings [creditor
sues and recovers judgment and sends the sheriff to seize the debtor's
property]; A creditor that has a judicial lien is a "lien creditor" under
9-102(a).
A. Example I'm a debtor and ask a bank for a $50,000 loan.
No collateral put up. It's a signature loan. But I'm insolvent and
default. How does bank collect debt? Go to court and win a
judgment. The bank will convert the judgment into money by
asking the court to issue a "writ of execution" [see example on
Handout #2] a paper that the creditor takes to the sheriff in the
jurisdiction where debtor's property is located. The creditor will
tell or give directions to sheriff what to seize. The sheriff seizes the
property (called a "levy") and then sells the property (called an
"execution sale") and takes the proceeds and gives it to the bank,
if surplus it goes it goes to debtor.
B. Example 3 Approaches to the Question When Bank Gets a
Judicial Lien: [Remember, judicial liens are Non-UCC laws and
must check ea. state] (1) order of levy jurisdiction bank gets its
judicial lien at moment sheriff seizes the property; there's shared
ownership from that point on creditor no longer a general
creditor, now a lienor. (2) order of delivery it arises at time the
lawyer for bank delivers the writ to the sheriff. (3) order of issue
jurisdiction it arises at moment clerk signs the writ.

2.

2.

3.

C. Example Assume I ask for a $50K loan, but have to put

collateral a high-tech computer system. I sign a loan agreement,
a note, and security agreement that covers the collateral. I default.
The bank wants to go after the collateral. Information assymetry
risk I know I don't own a high tech system but the Bank doesn't.
Does the bank have a property interest in this system I don't own.
According to CL, the Doctrine of Derivative Title says you cannot
give a transferee any greater property rights than the transferor
has. Thus the security agreement is worth nothing. To determine
if there is a security interest (you have to determine if there was
"attachment"] See 9-203 which deals with the creation of a
security interest. Under 9-203(b) it tells us what the parties have
do to create a consensual lien You need: (1) value [it's been
given bank gave $50K] 1-201(44) defines value; (2) debtor has
rights in the collateral [that's what's missing here in the
hypothetical] that 's the Doctrine of Derivative Title; (3) (A) debtor
authenticated a security agreement that describes the collateral;
(B) possession [see 9-313]; (C) collateral is a certificated
security registered form and delivered to secured party under 8301; or (D) collateral is deposit accounts, electronic chattel
paper, investment property, or letter-of credit rights and
secured party has control under 9-104, 105, 106 or 107. Here,
the second element is still satisfied b/c 9-203(b)(2) says "power
to transfer rights in the collateral" this phrase deals with cases
where the debtor doesn't have ownership interest but improved
title (a.k.a. "Doctrine of Improvement of Title" its an
exception to Doctrine of Derivative Title in certain cases the
transferor can give transferee more rights than the transferor has.]
Default Rule Can't give something you don't have.
Statutory Lien is one imposed by statute or CL in favor of certain
creditors the law deems worthy of protection [e.g., liens given to LLs,
artisans, repairing personal property e.g., garage mechanic]; All of
these types of liens are created irrespective of the wish of the debtor.
A. Refer to Example 3 and 4 on Handout 6.
B. Example Federal Tax Lien 6-321

Bankruptcy the bankruptcy has a "strong arm clause" under 544(a) of the
Bankruptcy Clause to put a secured unperfected creditor at the bottom as a
general creditor. However, a creditor with a perfected security interest will not
be strong armed unless a mistake has been made.
Pre-Code Approach To Secured Transactions
A. Pledge In a pledge transaction, the Debtor (called "pledgor") gives
physical possession of the collateral to the creditor (called "pledgee") until
the debt is paid. Basically, a pledge transaction is a "possessory security
interest". Possession perfects the creditor's interest in the collateral b/c
obviously possession gives notice to others. There are 2 drawbacks to

Pledging (1) only tangible objects can be pledged; and (2) for some types
of collateral debtor needs to keep possession. This device still lives on
[better known as taking a possessory security interest]
1. Example Assume you borrow $50K and put a bracelet up for
collateral (worth $100K); So, the debt-collateral ratio is 50%, which
means they are overcollateralized. Once you sign a loan agreement [a
promise to pay], what happens to the bracelet? It goes to the bank;
that is a pledge the creditor is in possession of the collateral. But if
you haven't signed a security agreement, is this transaction (pledge)
covered in Article 9? Start with the core scope provisions 9-109(a)(1)
it applies to a transaction regardless of its form that creates a security
interest in personal property by contract. We know the bracelet is
personal property and we have a contract ("the loan agreement"). But
does the combination of an oral agreement and a written loan
agreement create a security interest? To answer this question you
have to look at 9-203 [the attachment section which governs how
to create a security interest]. Is handing the bracelet over and loan
agreement enough? Apply 9-203(b)(1), (2), (3) (A) Value yes, the
creditor gave the debtor $50K; (B) debtor has rights in collateral yes
you own the bracelet; (C) There is no signed security agreement, but
9-203(b)(3)(B) applies b/c the collateral is in possession of the
secured party pursuant to 9-313. 9-313(a) tells us what type of
goods taken in possession can be perfected tangible goods, includes
bracelets. "Pursuant to debtor's security agreement" means [see 9102(a)(73) and 1-201(3) for "agreement") It says nothing about
writing; just need an agreement to create a consensual lien. This
statement is in place b/c what if drop the bracelet, don't want that to
be an agreement. The oral agreement that delivery manifests my intent
to create a security agreement. So this is w/in the scope of Article 9
under 9-109(a)(1).
2. Remember If setting up a possessory security interest, don't rely on
an oral agreement, always get a security agreement. Satisfy both 9203(b)(3)(A) and (B) act redundant.
3. Advantages/Disadvantages of Pledging The advantages include:
(1) bank doesn't have to seize if default b/c already in possession; so
don't need 9-609; (2) best way to protect collateral. The
shortcomings are (from creditor perspective) include: (1) easy to put a
bracelet in vault but what if collateral to large to be stored; (2) it
doesn't work for all kinds of property only applies to property listed
in 9-313. From the Debtor perspective, the shortcomings are: (1)
when you make a pledge, debtor experiences a substitution of assets
(get $ but give up the bracelet) it's a swap; however, with a nonposessory security interest, you get both; so debtors frequently protest
pledges; and (2) there are some types of collateral that are good for
pledges they are passive income producing assets (e.g., treasury
bills).

4. Notice How do pledges give notice to third parties? Why is notice

important? If debtor delivers property, the secured party gets a
security interest and a perfected security interest if satisfy 9-313.
Notice is important b/c any potential creditor needs to know b/c the
bracelet has been taken out of the pool of assets and is not available
to offset other claims against the debtor. Anyone that wants to
purchase the bracelet, they may pay less if know bank has a security
interest in the property. How does the pledge give notice? "show me
the collateral"; this is a high transaction cost of giving notice b/c you
have to ask to see the property for notice.
5. Conclusion Possessory Security Interests are In Article 9.
6. Recap: Article 9-203(b)(3)(B) covers possessory security interest.
Possesory security interest gives notice to third parties subsequent
creditors or potential purchasers.
B. Chattel Mortgage allow for the creation of non-possessory security
interest (debtor keeps the collateral and credit).
1. Is there a secret lien problem? Yes, if debtor has full possession of
collateral it appears that there is no interest in property. She has full
ownership.
2. Example When buy property, you get a deed and its publicly
recorded. Personal property is not recorded except for cares title of
certification; the problem is there is no public recordation. So when
adopted chattel mortgages, you have to file. We record liens on
personal property.
C. Trust Receipt In trust receipt financing, for example, the car dealer
(trustee) would ask a bank (entruster) to buy the cars from the
manufacturer. The bank would turn them over to the dealer after (1) the
bank filed notice; and (2) dealer signed a trust receipt (thereby becoming a
trustee, and the bank an entruster]. As the dealer sells the car, the
dealer would begin to pay the bank. Problems that could occur included a
sale "out of trust" where the dealer failed to remit the proceeds of the sale
to the bank.
D. Factors Lien The factor was a financing entity who loaned money
against inventory the manufacturer put up as collateral. In return, the
factor was granted a lien (a security interest) in the inventory, but the
factor had to file for perfection purposes. The draw back was that the lien
did not extend to new additions to the inventory ("after acquired property"
see UCC 9-204 you can now in some cases].
E. Field Warehousing In a pledge transaction, where the secured party
takes the collateral into possession, if the collateral is too big it could be
stored in a warehouse and the warehouse CO could issue a negotiable
warehouse receipt made out to the "bearer". The document would have to
be presented before the collateral was surrendered. What happened was
that the warehouse receipt was (used as collateral) pledged to the creditor
in return for the loan of money. Possession of a negotiable document of
title perfected the creditor's security interest. A "field warehouse" is where

the warehouse comes to the goods instead of vice versa. This mechanism
still lives on.

II. The Scope of Article 9

A. Organization Principles For Analyzing Scope Problems
1.

2.

lines
3.

Transactions that are entirely excluded from Article 9 (doesn't involve a charge
on property to secure a debt e.g., signature loan OR a transaction. Where
you put personal property for collateral but its not included Ex. fall on
steps of law school for being un-kept need money to pay medical bills what
do you have as collateral a tort claim. But under 9-109(d)(12) an
assignment of a claim arising in tort (tort claim) is excluded.
A. Remember Just because its not governed by Article 9, doesn't mean you
cannot do it. Even with transactions excluded we will learn the rights of
those parties can be effected by Article 9.
1. Example You borrow money from a bank on a signature basis. But
defaults on 2 different loans. Art. 9 tells us which creditor has priority
when debtor defaults. See 9-201(a). The secured creditor wins out the
party not governed by Art. 9. [there are some exceptions that you will
see later].
Some transactions are partially included in Article 9. The interest is not a
security interest (e.g., agricultural lien) but its brought into Article 9 for
limited purpose under 9-102(a)(2). Agricultural liens are really statutory
but they are actually included in Article 9.
Transaction conceptually has nothing to do with creating a security interest
(like the "sale of a promissory note"). Art. 9 includes some of these types of
sales even though doesn't have issues of shared ownership, etc....

B. Conditional Sale (a.k.a. "credit sale") whereby the buyer gets possession of the
property, but the seller reserved full and complete title to it until the buyer paid in
full. A conditional sale has the Benedict v. Ratner problem of the "debtor-inpossession and a secret lien in the seller's favor, and the fictitious title retention
theory has a shor life here under 2-401.
1.

Problem 1 (Text p. 11) John sold Nancy a used car for $900, to be paid off in
three payments of $300 each. The contract was oral. Nancy (the debtor)
misses the second payment and one of John's EEs repossessed the car and
returned it to the seller. Nancy sues John for conversion. Who should win?
A. Nancy Argues Nancy will argue John could have sued me for breach of
contract and collect damages. Instead, he seized my car and embarrassed
me. Nancy's theory for suit is the "theory of conversion" Nancy will
argue John intentionally and wrongfully exercised dominion over my
property. Nancy says its my car and John has no right to take it.
B. John Argues John will raise 3 defenses: (1) I didn't convert because
Common Law doctrine of fictitious retention of title; (2) I had right to take

because you breached a contract covered by Art. 2 and I have a remedy

the seller's right of reclamation; (3) I have a right to self-help
repossession 9-609 (secured creditors can seize the debtors property).
1. J's First Theory Under 2-106 the passage of title for a price is a
sale. If centered into a credit sale its assumed the party's intent that
seller keeps ownership until debtor pays in full. Nancy had
possession but not ownership because she didn't pay full price. It's a
defense to conversion, she' doesn't have property interest in car
because she didn't pay in full. Nancy's response to that argument is
that theory (doctrine of fictitious retention title) is no longer good law.
See 2-401.
When Title Passes 2-401
Agreement

Goods Identified to K

Physical Delivery

Title Can Pass To Buyer

Title Must Pass

Full Payment

Here, the fight is about title whether Nancy had an ownership right
in the car when John repossessed it. Under 2-401 any retention by
seller of title in goods delivered to buyer is limited in effect [limiting
parties freedom of contract] to the reservation of a security interest.
There are a Number of Events in a Sale Transaction (1) agreement
of sale; (2) goods identified to the contract the basic idea is the
parties know what goods we are talking about here, it was car being
sold; (3) physical delivery; (4) full payment. Under the Doctrine of
Retention of Title from time of agreement to full payment the car is
John's. Under 2-401(1) title to goods cannot pass until goods
identified if identified they can pass but not earlier any retention
in goods shipped is limited to reservation of a security interest this
means that John doesn't have full ownership at moment of delivery.
The Code has divorced payment from the transfer of ownership
that's the effect. Subject to these provisions, title passes in any
manner explicitly agreed on; So, the first two sentences of 2-401 set
out parameters for when title can and must pass. So third sentence
says you can bargain when title passes between those 2 events
identification an delivery. 2-401(2) confirms out understanding of
2-401(1) and default rules rules we should assume if not provided
by the parties. How does this effect John's argument? John can no
longer argue that its not Nancy's car because Nancy has full
possession. We know which car it is (goods identified) and before
Nancy gets possession [that's in between the parameters 2401(1)] [See shipment contract 2-401(2)(a)]
2.

J's Second Argument J argues under 2-702 he has a right of

reclamation defense. [Refer to Handout #1b].

10

3.

(A) Case A On 3/1 oral s/a; car delivered to N; N makes 1st

payment of $3000 to J. 4/1 N misses 2nd payment. 4/2 J
telephones N and makes demand. 4/3 J repossesses. Can J
defend his actions under 2-702 OR is it a conversion? 2-702(1)
does NOT apply, but under 2-702(2) what does it mean to be
insolvent and when do we look? [1-201(23) provides a definition
of solvency NOT paying debts when they come due]. Time Frame:
were the goods received while insolvent? Here, its 3/1. If J knows
on 3/1, Nancy is insolvent he won't deliver the goods; usually, he
will discover later - until Nancy doesn't pay. Assume 3/1 Nancy
was insolvent and J knew about it he may "reclaim upon
demand made w/in 10 days after receipt." What type of demand
J called Nancy not a writing [but, 2-702(2) oral demand is
good enough because doesn't say writing]. Was the demand
preemptory? Yes. Was the demand timely? No, made on 4/2
there's a 10 day requirement. Upon, what event does the 10 day
time pd. begin to run? Demand made 10 days after the
receipt of the goods here the car was recieved on 3/1. So J
would have had to have made the demand by 3/11. But, J did not
know. So, 2-702 is a narrow remedy.
1. Policy Why is the remedy [2-702] so narrow? Doesn't
Nancy seem more culpable? Well there are sometimes
when you make a purchase non-fraudulently believing she
could make payment. Drafters were worried about Nancy's
creditors other than J. J has 2-702 right of reclamation
and Nancy has the car. Other creditors don't know So,
2-702 is a secret remedy there's no notice of J's
possession of the car that's why the remedy is limited.
(B) Case B On 3/1 oral s/a, car delivered to N, N is insolvent. 3/2 N
misses first payment. 3/9 J calls N and makes a demand a
forceful and unambiguous request for payment or return of car; J
repossess. This is an example where J would have the right of
reclamation because Nancy is insolvent; a demand is made w/in
10 days receipt of the goods.
J's Third Argument Can J argue Art. 9-609 defense. Under 9-609 a
creditor can proceed without judicial process and repossess the
collateral. All J needs to show is Nancy didn't pay and repossess
without breaking the peace. 2-611 teaches us that J has to notify
Nancy after he repossess the car and before he sells it. Under 2-401
Nancy argued under the second sentence that when J said in the oral
agreement he was reserving title, the statute says that J reserved a
security interest. So J argues he has an Article 2 security interest and
uses Art. 9 to govern it. Looks like J has a good argument under 9609. What's the problem with this defense? J converts a property
interest under Art. 2 to be remedied under Art. 9. Can J jump from
an Article 2 property interest to an Article 9 remedy.

11

1.

2.

Analysis Lets start with first determining whether J has Art. 9

security interest before determining the question above. You have
to apply 9-203(b) (1) Was there value given? J (creditor) let
Nancy (debtor) use the car without paying in full; (2) Does the
debtor have rights in the collateral Does Nancy have some
ownership in the car? Yes, in a sale of goods when physical
possession goes to buyer and no other agreement there is a
default rule under 2-401 that buyer has rights; (3) the debtor
authenticated a security agreement with description of
collateral No, it was oral No security agreement (writing)
signed. Although no statute of frauds problems under Article 2,
but John has a problem under Article 9; Or is the collateral in the
possession of secured party under 9-313 who had the car?
Nancy, this isn't a possessory security interest; Or the collateral
is a certificated security in registered form and the security
certificate has been delivered to secured party under 8-301; Or
the collateral is deposit accounts, electronic chattel paper,
investment properties, or letter of credit rights held by secured
party. None of the requirements under 9-203(b) have been
satisfied.
Can J jump from an Art. 2 property interest to an Art. 9
remedy? 9-203(c) says subsection (b), how you create a security
interest, is subject to 9-110 on a security interest arising under
Art. 2. 9-110 is a "bridge" Section it also deals with
determination of Art. 9 scope. Handout #1b proves 3 possible
constructions to the language of Article 9-110
(1) holder of only Art. 2 s/i no benefits of Art. 9
(2) holder of only Art. 2 s/i all benefits of Art. 9
(3) holder of only Art. 2 s/i some but not all benefits of Art. 9
You have to do everything right under Art. 9 to get the benefits of
Art. 9. There are two types of benefits (1) collection benefits
against the debtor and (2) priority benefits against other creditors.
Under the first interpretation of 9-110, J loses; Under the second
interpretation, J wins. The third interpretation is a half way
approach. The second sentence of 9-110 has an exception
"until debtor gets possession of goods" exception doesn't apply
because Nancy has the car.
(A). Case C On 3/1 oral s/a; car delivered to shipper [end of
J's responsibility]; Nancy is solvent; title to Nancy; Nancy
pays first payment. On 3/2 Nancy misses second
payment. On 3/8 J telephones Nancy and makes a
demand. Should John repossess the car from shipper
before the car is delivered to Nancy?

12

This is an example where the exception of Art. 9-110

applies. There is a shipment contract J's responsibility
for car ends when he puts it on the car. Immediately we
know J doesn't have a right of reclamation under 2-702.
This case meets 2-401(a) so she has a case for
conversion. The question is while goods are in transit Can
J get the goods off the truck? Under 2-702 No because
Nancy is solvent. Under 9-110 it deals with goods in
transit and you don't need a security agreement. What
kind of benefits defined in subpart B (1) the collection
benefits b/w J and N Under 9-110(3) J's case NOT
within the exception so J's remedies are limited to Article
2 so J can NOT use Art. 9-609.
(B) Case D What good does Art. 9-110 do for J on 3/5
when a Bank makes a loan to Nancy and gets a security
interest in car while in transit. There is a priority conflict
Now 9-110 works for J it beats out the Bank. J's Art. 2
security interest is given some priority benefits against
other creditors but No collection benefits under Art. 9110(3). Ultimately, J cannot jump Articles.
3. Since this problem doesn't fall into the exception of 9-110,
Can we analogize? Had Nancy never got the car, J would be
limited to Article 2 remedy. Since Nancy has possession Is J's
right greater while she has it or while in transit? J's argument is
weaker when Nancy already has the car (in terms of using Art. 9609] rather than in transit? J should be more limited in his
remedies when the debtor has possession because we feel more
sorry for defaulting debtor when she has the goods and used
them. The buyer has other interests when possesses it. There is
much more less of a secrecy problem when goods in transit. So
Art. 9-110(3) limits J's collection benefits when Nancy has
possession because of secrecy issue.
4. Can you create an Art. 9 security interest after default? Refer
to 9-203(b)(1) is J giving value NOW [Value defined under 1201(44) any consideration to support a contract]. If J forgoes his
opportunity to sue for the Art. 9 security interest, is there value?
YES, so then J can get relief under Art. 9-609.
C. Conclusion All 3 arguments raised by John will fail and Nancy will win
her action of conversion.
(A) Prevention What should J have done when making the arrangement
to prevent this from happening? All J needed to do was get an Art. 9
security agreement, then he would have had a security interest, and
then could have used Art. 9-609 when Nancy defaulted on payment.
(B) Advice When Nancy defaulted, what should have J done when he
discovered he didn't have a 9-203(b) security interest. He should have
sued Nancy for breach of contract and then he could have gotten a
judicial lien and sheriff could have seized the property, the car.

13

C. Consensual Liens Contrasted with Statutory Liens

1. Important Definitions
(A) Security Interest 1-207(37)
(B) Scope Provisions 9-109(a)
2. There are 3 Ways to Set up a Credit Sale
(A) Credit sale on "open account" its like a signature loan give money in
return for her promise to pay. No security interest is created by either Art.
2 or Art. 9. You will be a general creditor and thus, paid last.
(B) Credit sale with an Art. 9 Security Interest this is the extreme opposite of
a credit sale on open account. You will get the full benefits of Art. 9.
(C) Credit sale with Oral Agreement and Art. 2 Security Interest (reserving
title) this is problem 1 under conditional sales Art. 2 security interest
does not give the creditor any collection benefits only some priority
benefits in a limited circumstance under 9-110.
3.

Problem 2 Assume state statue gives someone doing repairs a "possessory

artisan's lien" on the property repaired. Mr. B took his car into Mac's garage
for repair but Mr. B could not pay the full bill, and Mac would not let Mr. B
have the car back. Is Mac's artisan's lien an Art. 9 security interest? If prior to
the repair, Mr. B signed a statement giving Mac a right to repossess the car if
the bill wasn't paid, does this agreement create a security interest under the
Code?
A. Analysis Under 9-109(d)(2), Art. 9 does not apply to a lien given by
statute or other rule of law for services or materials [but 9-333 applies w/
respect to priority of the lien]. As to the second part of the question,
under 9-109(a)(1) Art. 9 applies to a transaction [here the agreement to
repair Mr. B's car], regardless of its form, that creates a security interest
in personal property [the car] or fixtures by contract [the second part of
the question tells us Mr. B signs a contract or writing]. So the transaction
would be under Art. 9 whether it created a security interest would be
determined under 9-203(b) (1) Was value given yes Mac fixed Mr. B's
car; (2) the debtor [Mr. B] has rights in the collateral [he owns the car; and
(3) a security agreement was signed. Therefore all three requirements of
9-203 were satisfied, and Mac has successfully created an Art. 9 security
interest.

4.

Problem 1 [Handout #6] NY legislature enacts a statute giving artists a

vendor's lien if they sell art work on credit to an individual for a price greater
than $15,000. Mac is a sculptor and he sells an iron sculptor on credit for
$20,000 to Mr. J. Is Mac's NY vendor's lien also an Art. 9 security interest?
A. Analysis NO, because it is created by statute. But is excluded by Art. 9109(d)(2) it says "liens given by statute...for services or materials." Does
Mac provide services? Not sure. By the term "services" we mean labor,
materials, etc... Those components are usually priced separately. Whereas
here, the sculptor is one set price the value is placed on the end product;
thus, its not a service. By "materials" we mean something incorporated

14

into the end product. [An example where "services and materials" would
apply is in the situation in Problem 2 where Mac was a car mechanic
providing services and materials.] Assuming this lien is NOT excluded by
Art. 9-109(d) it is NOT a statutory line for services and materials, is the
lien covered under Art. 9-109(c)? No, that deals with federal preemption
or where the govt. is the debtor in the transaction. Just because the lien
is not excluded under 9-109(c) and (d), does NOT mean it's w/in the
scope of Art. 9. It just means you have to look at Art. 9-109(a) to see if its
included. This is an example where the lien is not excluded but also not
included in Article 9. Why isn't the sculptor included under 9109(a)(1)? Although the sculptor is "personal property", the lien was not
created "by contract" rather by the NY statute. We know there was a sale
contract, but that did not cover the lien it is the interest that has to be
created by contract.
5.

Problem 3(A) [Priority Battle] Assume Mac's garage is in Maine and Maine
statute creates an artisan's lien in Mac's favor for repair work. To enforce the
lien, Mac must retain possession of Mr. B's car after default. The statute does
not address the priority issue of whether a statutory lien is subordinate to a
consensual lien. Mr. B defaults and Mac refuses to release the car. First
American asks Mac to turn Mr. B's car over to the Bank's "REPO" men as Mr.
B is in default. The Bank explains that it has an earlier perfected "purchase
money" security interest in the car. Mr. B has taken out a car loan from the
Bank for the purchase price of the car; the Bank's security interest is
perfected thru notation on the "certificate of title" for the car. Should Mac give
First American Bank Mr. B's car?
A. Analysis This problem has 2 liens
(1) car loan in exchange for car = purchase money security interest 9-103
certificate of title 9-311
(2) repairman has a statute lien for repairs
Because the debtor defaults, both creditors can sue for breach of contract;
however, neither creditor wants to sue because they both want the car.
So, the question is who comes first [who has priority]? We know that
under 9-109(d)(2) Mac's artisans lien is out of Art. 9 because it is a lien
created by statute for services or materials. We know the Bank has a
purchase money security interest which is within Art. 9. The starting point
is at 9-201(a) golden rule for secured parties. It says a security
agreement [the banks' agreement w/ Mr. B] is effective against creditors
(that's Mac he doesn't have an Art. 9 security interest). But there are
Exceptions According to 9-333 (which is referred to by 9-109(d)(2)],
Mac wins. 9-333(a) a possessory lien means an interest, other than a
security interest or an agricultural lien, which (1) secures payment...for
services or materials furnished w/ respect to goods by a person in the
ordinary course of person's business; (2) which is created by statute...;
AND (3) whose effectiveness depends on person's possession f goods. Mac
clearly satisfies 9-333(a). Then under, 9-333(b) a possessory lien on
goods has priority over a security interest in the goods unless the

15

lien created by statute expressly says otherwise. Under 9-333 MAC

wins.
6.

Problem 3(b) Assume Mr. B purchased his car for $9000; First American
Bank loaned Mr. B $7000 of the price and secured the loan with a purchase
money security interest that has been properly perfected by noting the bank's
consensual line on the certificate of title for the car. Mr. B took the car for
repair at Mac's The repairs cost $3000. After repairs, the FMV of car is $5000.
How should the $5,000 be divided between Mac and First Bank. Assume Mac
has a statutory line that the repairman has a lien on the personal property for
the just and reasonable charges therefor, including any parts, accessories,
materials or supplies furnished in connection therewith, so long as mechanic
retains possession. The statute also says that the lien is subject to the lien of
any security interest in property which is perfected prior to commencement of
work for which a line is claimed unless the work was done with the express
consent of the holder of the security interest, but only for charges in excess of
$2000.
A. Analysis The liquidation value (LV) is $5000. The Bank is owed $7000
and Mac is owed $3000. So, Mr. B's debt = $10,000, which exceeds the
value (worth) of the collateral. The challenge is to figure out what issues
are governed by the UCC and which are governed by the State statute. To
figure out what the consequences are, you have to isolate the variables.
The way you figure out the size of a lien = amount of debt secured and
value of collateral.
(1) Case I What law do we look at to determine the amount of obligation
secured? Non-UCC law. The statute says "just and reasonable
charges". Here, they are $3000. The LV of collateral is $5000. The size
of Mac's Lien is $3000. What about for the Bank? Go back and refer
to Security Agreement in Handout #3 it tells you the amount of
obligation it is the debt outstanding the parties agreed to and the LV
of the collateral. Here, the value of bank's lien is $5000. What priority
rules apply? If apply 9-333(b) Mac would get $3000. But 9-333(b)
doesn't apply because the state statute provides otherwise (its own
priority rule) "unless the work was done with express consent of the
holder of security interest" here, there is No consent Mac's line is
therefore subject to any security interest but only for charges in
excess of $2000. So, Mac gets the first $2000 regardless of whether
Bank consented. SO the Bank would get $3000. Both parties will sue
debtor for the deficiencies.
(2) Case 2 The size of Mac's lien is $3000 and the Bank's is $5000.
Here, the hypo is different because the Bank consented to the repair,
So Mac gets the full amount of charges = $3000 and the Bank will get
$2000 (the remainder). This case illustrates that the important factor
depends on to the extent the charges exceed $2000 because
without it Mac will lose unless the bank consents.
(A) How would you protect Mac under this statute? Say Mac q
says the repair will cost him $5000 (and it is reasonable). What

16

should Mac do? Get permission from the bank? Why? Isn't it Mr.
B's car? Why does Bank have a right to control the debtors
behavior? Who owns the car? The security interest means "shared
ownership" the bank and Mr. B own the car. The idea is that
Mac needs consent of all owners if repair is expensive. The Bank
was the first creditor because it got the lien first but its nonpossessory interest - meaning Mr. B gets the car and can do
whatever he wants. This statute helps the bank control the
debtors future behavior because he may ver extend himself. But
isn't the banks and Mr. B's interest really the same? No, Mr. B
wants a car to drive whereas Bank wants its money back. The
repair will not increase the LV as it costs the bank. The bank
doesn't want to pump money in a way that won't enforce the value
of the car.
(B) How does Mac Know which bank? the name of the bank is on
the certificate title, which perfects the security interest. What if
we were talking about a computer as collateral? How would the
creditor perfect the security? Need to file a Financing Statement.
This is a public record which can be looked up. It is easier for Mac
to find out then for the bank to control Mr. B. That is why if cost
excess of $2000, he must contact the bank.
(3) Case 3 Mr. B agreed in a contract with Mac that repair was $3000.
But what if court determines the value of the repair is only $750. This
means that Mac's lien is only worth $750, NOT $3000. The bank's
lien is still worth $5000. Under 9-333(b) it says you have to go to
Non-UCC law second sentence. Mac will recover $750 and the rest
goes to Bank.
(4) Case 4 Same answer as in Case 3.
(5) Case 5 Mac will get $2500; and Bank will get $2500.
SUMMARY

CASE I

CASE II

CASE III

CASE IV
CASE V

Factual Assumptions

Size of
Mac's Lien

Recovery for
Mac

Size of FA
Bank Lien

BK does not consent; Mac's

charges are $3000 and just
and reasonable.
BK does consent; Mac's
charges are $3000 and just
and reasonable
BK does Not consent; Just
and reasonable charge is
$750
BK does consent;; Just and
reasonable charge is $750
BK consents; Just and
reasonable charge is $2500

$3000

$2000

$5000

Recovery
For FA
Bank
$3000

$3000

$3000

$5000

$2000

$750

$750

$5000

$4250

$750

$750

$5000

$4250

$2500

$2500

$5000

$2500

17

B. Policy Why did state legislature decided that statutory lien was only to
the extent of just and reasonable charges determined by a court? Why not
base it on market? Who is the statute trying to protect? The fight is
between 2 creditors in other words, there's a third party involved. Since
Mac is subordinated by the statute he can sue Mr. B for the rest by breach
of contract.
C. Prevention To prevent Mac from being a general creditor for the rest of
money owed, Mac should get an Art. 9 security interest - he can bargain
for a consensual lien in any agreement. Mac can have more than one lien.
7.

Problem 4 Mac has a garage in Main and the Main statute creates an
artisan's lien in Macs favor for repair work. The statute is silent concerning
priority rules. Mr. B brings in a leased car for $1500 tune up and minor
repairs. The lessor and owner of the car is American Luxury Co. Under the
lease, Mr. B is to contact the lessor if repairs or maintenance is required. The
lessor disclaims any responsibility for or liability for repairs ordered by the
lessee without lessor's consent. Mr. B defaults, and Mac refuses to release car,
and for the first time Mr. B tells Mac the car is leased. What should Mac do?
(A) Analysis Mac has a possessory lien, but the car is leased. The fight is
about the leased car and its between Mac and the lessor. This issue is who
has priority? How does Mac have a statutory lien when he has no property
interest? Refer back to the statute it says "legal possessor of the
property"; Based on this language, Mr. B is an agent of the owner of car;
so when Mr. B asks for repair the property interest create a statutory
interest. Article 2A deals with leases. There is NO Art. 9 secured parties.
(A) 2A-102 deals with scope
(B) 2A-104 exclusions
(C) 2A-103 defines a lease [2A-103(1)(J) = a transferor of right of
possession in use of goods for a term in return for consideration. A
sale is not a lease. The difference between a lease and a sale is that
with the latter the buyer gets physical possession and title [2-106].
With a lease, Mr. B gets NO ownership no title. However, you can
have a lease followed by a sale.
Assuming the transaction between Mr. B and lessor are within Art. 2A.
The priority rule under Art. 2A. is 2A-301 [which is similar to 9-201]. A
lease contract is effective against creditors that means that Mr. B not
authorized to get repair. So under 2A-301 Mac will lose unless 2A-306
applies. If a person in "ordinary course of business" (MAC) a lien upon
goods given by state statute takes priority over any interest of lessor
unless the statute provides otherwise [this language is parallel to 9333(b)], so under 2A-306 Mac wins.
(B) What should Lessor do to protect himself from this priority rule? The
lessor wants to get back into 2A-301. How do you plan around the
priority rule? (1) you can put a clause in the lease agreement may
improve the lessee's rights. The clause in contract that says lessee needs
consent for repair, but its not effective against Mac [put it still in because
sometimes the lessee may obey]; (2) the lessor could make Mac not qualify

18

for the special priority rule how could we say that Mac was "not acting
in the ordinary course of business". What does this phrase mean? There is
no definition provided in the code. We have to analogize under 2A103(1)(A) a mechanic in the ordinary course of business means in good
faith that work he is doing is not violating ownership rights. Mac has to
know its a leased car; and thus he'll know its against the rules to repair
car without contacting the lessor for consent. How could Mac know put a
mark on the car (sticker). If Mac went ahead and repaired a marked car,
he would not be acting w/in course of business. So 2A-306 doesn't apply
and were are back in 2A-301. That means Mac loses.
(C) If Mac has priority under 2A-306, what can Mac do with the car?
Should Mac sell the car? The bill is very small ($1500); Instead of selling
the car, Mac may want to call the lessor telling them he has priority and
ask them to pay. They will pay because they don't want their car
liquidated. They'll pay and lessor will sue lessee for the payment $1500.
This initiative will lower transaction costs. Many of the priority rules are
clear that is why we don't have many Art. 2A and 9 cases. It fosters
informal dispute resolution of suits. The later creditor wins 2A-306 and
9-333(b).
8.

How do you Solve Priority Battles

(1) What is the fight about?
(2) Classify the property? [Refer to Handout #8 pg. 1]
(3) Look at each contestant separately. What is the relationship of contestant
to the property in dispute?
(4) Which priority rule applies depends on property and the relationship of
contestant to property?
What Questions to Ask Creditor
(1) Are the contestants creditors? Lienor v. a general creditor
(2) If Lienor, what type? statutory, judicial, consensual
Under 9-601 you can have more than one lien.
(3) What is the value of the lien? obligation secured and LV of property
(4) Establish the date/time of the lien was created (or "attachment" Or
"effective"].
(5) Did the creditor perfect its lien? Was there public notice?
(6) Finally, look at the priority rules.

9.

Problem 5 Assume Mac is a LL; B is a tenant (T). Under state law, Mac has
a LL lien upon furnishings in the apt. to secure payment of the rent. B has
placed all his furnishings in Mac's apt, including the furniture subject to
Sloan's Furniture Store's purchase money and non-purchase money security
interests. [there is a purchase money s/i w/ respect to the bed and a nonpurchase money security interest in all B's HH goods. The s/i were perfected
before B moved into apt by filing a FS. B defaults on both his rent and on the
debt owed to Furniture store. Furniture store's lawyer wants Mac to allow
Sloan's agents to enter B's apt so that they can peaceably repossess the
encumbered furniture. Should Mac cooperate?

19

(A) Status of Creditors and Transaction

1. What is the fight about? B's furnishings in Mac's Apt. [the real fight
is about the bed]
2. How many creditors? 2
3. Who are they?
(A) Sloan's Do they have a lien? Yes; What type?
a consensual lien under 9-109(a)(1) and 9-203(b)
statutory lien? NO
judicial lien? NO
(B) Mac Do they have a lien? Yes; What type?
statutory lien? some states w/ consumer tenants crates a LL
lien yes
consensual lien on B's furnishings? look at lease may grant an
Art. 9 security interest in your furnishings to secure rent. some
states say Art. 9 security interests in furnishings are not
enforceable for rent. [see pg. 1476].
For our purposes, assume Mac has a statutory lien.
4. Size of the liens?
(A) Sloans Need to look at security agreement. B is a "consumer"
[look at Handout #7 and the Uniform Consumer Credit Code
3.301 [pg. 1476] w/ respect to a consumer credit sale, a seller
may take a security interest in the property sold. But, the seller
may not take a security interest in property to secure the debt
arising from a consumer credit sale. There is Non-UCC law in
consumer transactions. Sloan may therefore only have a purchase
money security interest in the bed. NOT HH goods. Under 9201(b), (c) - only the bed is collateral because of consumer
protection law.
(B) Mac the size is the amount of the obligation back rent owed
and amount of collateral - covers all furnishings in the apt.
5. Perfection?
(A) Sloan's purchase money security interest was perfected by the
FS? Yes.
(B) Mac typically there is no perfection requirements for LLs.
6. Date?
(A) Sloan before B moved into the apt.
(B) Mac when B moved into the apt.
(B) Analysis Sloan does not like Art. 9-333(b) because it will give Mac
super priority. How could sloan keep the battle out of 9-333(b). Refer to
9-109(d)(1) and (2). How would you argue we can't reach 9-333(b). That
section only applies to possessory liens for services and materials. Not LL
liens. Since 9-109(d)(1) and (d)(2) refer to different liens, Mac can't use
9-333(b). Construe 9-333 narrowly. Under the old code, this
arrangement is supported, but there are no new cases. Does 9-333(b)
apply? what are the weak points of this provisions for Mac? Mac didn't
perform services or materials. Sloan will argue LL didn't provide services
or materials with respect to the bed. How would you argue Mac doesn't

20

have possession? Mac will argue he does because he owns the entire
lease space and has a key to the apt.; so mac would argue he has
possession. Remember problem 3 [where Mac was a car mechanic
distinguish the way Mac possessed the car and Mac possesses the bed], if
default, what would Mac do with the car? keeps B from getting at the car
(that's what we mean by retaining possession). The purpose of possession
under 9-333(a)(3) is that it gives notice to others. Here, there's shared
possession of the bed as long as B has access to apt. he has possession
of the bed (not true with possession of car because B cannot get a hold of
it.) Mac says I provide services with respect to B's bed security guard in
building, fire sprinklers those are all services with respect to the bed.
1. Why is the purpose of 9-333(b) limited with respect to services/
materials to the goods? Hypo Hospital lien would not fit under 9333 becuase it provides services to patients not the goods. Refer to 9310 the idea is that this subset of statute lienors who have
possession who provided services / materials that enhance the value
of collateral. The earlier creditor wants the statute lienor to provide
services because it improves the collateral. Does Mac Improve the
bed? well, maybe if on street it may depreciate faster.
(C) Policy Why is 9-333 so limited. Look at Chart A on Handout 6 pg. 16.
Based on the chart, the enhancement of value in collateral attributable to
services provided will increase not decrease. That is the empirical
assumption underlying the reason for 9-333(a)(1).
10. Hypothetical [business example] Assume Debtor is Ikea and Ikea is located t
Potomic mills far from Tysons. They move to Tysons. Ikea goes to Bank#1 to
get money to pay for the move. Bank wants an Art. 9 security interest in Ikea
equipment and inventory. But, the bank does not want to be junior to the
Tyson's mall LL. Virginia law is not clear whether 9-333(b) or 9-201 applies;
Also CL not clear. How do you prevent Bank from risk of being junior to LL as
creditor? Refer to the draft LL-Creditor Agreement. See Handout #6a. Banks
says to Ikea as a condition to get loan they have to get a "subordination
agreement" from Tyson's LL. But unlikely LL will d this. Read 9-339 -anyone with priority can subordinate to a junior creditor. Why would LL agree
it'll be bargained for look how Art. 9 affects the structure of the transaction
you can contract around the uncertainty if you know the problem is there.
Tyson LLis highly likely to have an Art. 9 security interest in Ikea inventory
and equipment and a LL statutory lien. How is it created 9-203(b). Should it
also subordinate the consensual lien the agreement in Handout #6a only
covers statutory lien. Doesn't matter. Don't have to worry because First Bank
will beat LL as to 2 art. 9 security interests because bank was first under
9-322(a)(1).
D. The Special Case of Agricultural Liens
1. Problem 6 Assume Mac owns several 1000 acres of farm land in PA. B is a
dairy farmer who is Mac's tenant. On 6/1/2002 B and Mac sign a lease
giving B the right to use 1000 acres of Mac's land for 5 years. The same day,

21

B moves his cattle, feed, and equipment onto Mac's land. Under non-ucc law,
Mac has a LLs lien for any unpaid rent; Mac's lien covers all crops grown upon
the leased acreage and/or all livestock raised upon and kept on the leased
acreaged during the term of the lease. Under PA case law, the lien is "effective"
from the time the crops are planted or the livestock is moved onto the land.
Also on 6/1/2002 Mac files an Art. 9 FS publicizing his LLs lien. On
12/1/2001 B borrowed money from FF to purchase feed for the cattle. On
12/1/2001, FF gave B the loan and created an Art. 9 security interest in B's
present dairy cattle. FF filed a financing statement publicizing and perfecting
its security interest. On 12/12/2002 B defaults on both the rent owed to
Mac an don the payments owed to FF. Which creditor is senior? Assume 2
facts: (1) all cattle on leased land on 9/1/2002, were owned by B on
12/1/2001; and (2)PA law creates Mac's lien and its silent concerning priority
rules.
(A) Analysis The fight is about the dairy cattle. How do we classify this
collateral? Its a good. What type? [equipment? Inventory? Consumer
goods? No] Its farm products under 9-102(a)(34). FF has a consensual
lien with goods. FF is an Art. 9 creditor under 9-109(a)(1). FF's security
interest attached (when was 9-203 satisfied)? 12/1/2001 value given,
debtors rights, security agreement. Is it a purchase money security
interest? Did the loan enable the buyer to purchase the collateral? No
see 9-103 definition. The loan did not enable the debtor to have rights in
the cattle. The security interest was perfected on 12/12/01 because that
is the day the financing statement was filed. [9-310]. Have to start with
9-308(a) for perfecting a security interest which requires (1) attachment,
which occurred on 12/1 and (2) all applicable requirements for perfection
have been satisfied. As to Mac, he has a statutory line there is an
agriculture lien 9-102(a)(5) (engaging in farm operation, farm
product,
and obligation to support farm operation). Is an agriculture lien in
Art. 9?
1-201(37) defines a security interest and it includes agriculture lien.
9102(a) its included in Art. 9 but it is not an Art. 9 security interest. Its a
statutory lien. Mac's lien becomes effective on 6/1 when cattle moved onto
land. Even though agriculture line in Art. 9, we don't look to 9-203, we
look to non-ucc law to tell us when its attached. The lien was perfected on
6/1 [9-308]. Although creation governed by non-UCC, perfection is
governed by Art. 9-309 [treatment of agriculture lien is All new law]. 9308(B) if effective and all requirements of 9-310 have been satisfied (filing
a financing statement).
(1) Effect of Analysis FF has a perfected SI on 12/12/01 and Mac has
a perfected agricultural lien as of 6/1/02. Art. 9-322 is the broad
provision for priority battles, it covers (1) agricultural lien v. Art. 9
creditor; (2) agricultural lien v. agricultural lien; FF wins according to
9-322(a) because a "conflicting perfected security interests and
agricultural lines rank according to priority in time of filing or
perfection." Don't feel sorry for Mac because he could have found FF
financing statement and had notice f the security interest. He could

22

have put protective measures to take into account or risk. Always

when starting w/ 9-3322(a)(1) start with second sentence. Here, FF
filed and perfected first that's why he wins. But it is not always the
case that date of perfection and filing are the same. Apply 2nd
sentence separately to each creditor, generating a priority date. Then
apply to situation. FF might have filed statement on Nov. 1 (that's
early bird filing see 9-502(d), which says that if negotiating the deal
still, FF can still file early if it had done that, the early of 2 dates
would be the filing Not the perfection date. Thus, second sentence
may provide an earlier date for priority. But that didn't happen here.
(2) Hypo Assume no agriculture lien, what priority battle rule
applies? we'd have to rework the analysis of Problem 5.
(B) What if non-UCC PA law creates a LLs lien that gives him priority?
Under 9-302 is a choice of law rule. We don't have a choice of law rule.
here we need to reconcile 9-322(a)(1) with PA law. 9-322(a) is the
residual rule but there are exceptions 9-322(f) limitations on
subsection a its limited to subsection 9 AND 9-322(g) says Mac wins.
The drafter encourage a first in time approach but if a state wants super
priority for agriculture liens they can do it under 9-322(g).
(C) What if Mac never filed a financing statement? Mac would lose he
could not take advantage of 9-322(g) because he does not have a
perfected agricultural lien and only way to perfect is under 9-308(b)
which requires a financing statement. Mac's status would be an
unperfected, yet effective, agricultural lien. Thus the battle would be
between a perfected secured creditor v. an unperfected agricultural lienor.
Thus, under 9-322(a)(2) Mac loses.
(D) What priority rules should you remember: 9-317(a)(2) and 9-322.
2.

Summary
(A) Rules governing possessory liens and agricultural lines are almost mere
imagery but treatment is VERY different.
(1) Possessory liens are out of Art. 9; need possession to perfect;
9-333(b) gets super priority if statute silent.
(2) Agricultural Lien are in Art. 9; need to file; 9-322 governs priority if
statute silent the default rule is "first in time" wins.
(B) Policy Why did the drafters encompass agricultural liens into Art. 9? to
provide uniformity.

E. Accounts Receivable Financing and Financing Involving Other Similar Rights of

Payment As Collateral
1. Problem 3 [text pg. 15] FB sells its accounts receivables to NFC, which
notified the customers henceforth all payments should be made directly to
them. [This is not a loan, it is a sale; Note if it were a loan and the collectible
accounts exceeded the debt, the surplus would be returned.] However, in an
actual outright sale, NFC can keep any surplus under 9-608(b). Is this sale
an Art. 9 security interest? If so, even though FB has no further obligation s to

23

NF, he would of necessity be termed an Art. 9 debtor. [9-102(a)(28)(B) Then

NF would have to file an Art. 9 FS to perfect its interest against later parties.
(A) Analysis The first question we have to look at is whether sale of account
receivables are in Art. 9? Yes, under 9-109(a)(3). Now we have to
determine if there is attachment? Look at 9-203(b) (1) was there value
given? Yes, money in exchange for the receivables; (2) debtor has rights
(yes they own the accounts); and (3) whether there is agreement or
possession we don't know. If yes, then there is an Art. 9 security
interest.
2.

Review Benedict v. Ratner This case applies to accounts. In the past

there were problems distinguishing b/w transactions in which a receivable
secures an obligation and those in which the receivable has been sold
outright. This problem created a secrecy problem because the creditors did
not know who owned the accounts. New Art. 9 fixed this problem and includes
both loans and out right sales of accounts in Art. 9.

3.

Problem 7A (Handout 6) Assume the principal debtor is FB and during the

past month, FB sold and delivered $400K worth of vegetables to Campbell
Soup and other large food processors. These sales of farm products are on
general credit; the food processors have b/w 30 to 60 days to pay FB,
following delivery. FB needs a substantial amt. of cash immediately to pay its
property taxes. FB sells all of these promises of payment by food processors
with face value of $400K to NFC. NF pays FB $350K. Is FB - NF transaction
w/in the scope of Art. 9? Why or why not?
(A) Analysis Had NF made a loan and FB paid on time in full, what does NF
get as profit? the interest charged on loan. If sale of accounts, NF makes a
profit based on buying it on a discount and it keeps the spread. [see 9608(b)]. If FB defaults, and there is a loan w/ security interest in
accounts, NF will want to foreclose on collateral the accounts. How does
it work (b/c accounts aren't tangible property)? Under 9-609, NF can't
grab accounts because intangible. What is the collection benefit if have a
security interest in accounts? Tell Campbell soup t pay you directly under
9-607 (which tells you how this type of creditor forecloses). Campbell
pays NF $400K but loan is for $350K. Can NF keep $400K. When you
have a loan there is shared ownership of the accounts if there is surplus
it goes back to debtor. But in a sale, NF keeps the surplus in a sale. FB
cannot default by definition because FB doesn't owe anything if sold
accounts to NF. This sale is in Art. 9 under 9-109(a)(3). In a sale, there is
no shared ownership because FB owes nothing, can't default b/c it was a
passage of title for price [2-106].
(B) Definition of Account 9-102(a)(2) Account means a debtors right to
payment of a monetary obligation arising from 7 types of scenarios
listed on page 1039 The term account does not include rights to
payment evidenced by chattel paper or an instrument, commercial tort
claims, deposit accounts, investment property, LC rights or rights to
payment for money or funds advanced or sold (except credit cards). Here,

24

FB sold vegetables and generated the account under 9-102(a)(2)(i) right to

payment of monetary obligation for property that has been or is to be sold.
(C) Policy Why is a sale in Art. 9 when it works different from a loan? When
NF buys accounts NF isn't getting any intrinsic value; it is getting a right
to repayment by FB's customers. Think of a sale as similar to a financing
transaction (1) there are still secrecy problems -- no one knows that FB
sold its accounts; and (2) an account is really a "pure intangible" a right
to payment. For those reasons a sale is included in Art. 9.
(D) NOTICE Even though a sale doesnt seem like it doesnt conceptually fit
in Article 9; nevertheless, some types of sales create secured transactions.
See 9-109(a)(3). It is important to decipher between the types of collateral
because there are some priority rules that only deal with accounts or
chattel paper.
4. Problem 7B Assume the principal debtor is FB and FB owns a patent for a
unique process for husking corn. FB does not have the funds to develop the
technology and decides to lease the technology to Gen. Foods for 5 years in
exchange for $200K/ yr. as rent. The patent license agreement executed by FB
and Gen. Foods complies with all requirements of non-UCC law. FB needs
cash now though to pay taxes. FB sells its right to receive $1 mil from Gen.
Foods under the patent license agreement to NF. NF pays FB $800K. Is FB
NF transaction w/in the scope of Art. 9? Why or why not?
(A) Analysis What is FB selling to NF? Right to future payments generated
from a license in IP. How is that right classified under Art. 9? It may be a
payment intangible under 9-102(a)(61). Gen. Foods has a monetary
obligation. What is a general intangible 9-102(a)(41) only personal
property other than accounts, chattel paper, instruments, money,
payment, intangible. So before you can conclude general intangible, you
have to make sure its not those. Refer to Handout #8 to classify property?
[tangible prop.?, quasi-tangible prop.? pure intangible? w/in this category,
general intangible is the most residual category. Is the promise to pay a
instrument or chattel paper? No, it'd be an instrument if promise
embodied in a promissory note. Not, chattel paper b/c (if FB were selling
vegetables I'll sell to you credit but I want a security agreement on your
equipment) When FB entered into agreement on general credit not a
secured agreement. What about pure intangible? Is there an account?
YES 9-102(a)(1)(i) -(Iv) those are descriptions in which accounts are
generated (right to payment for property that has been licensed). The Code
does not define property. But here its IP that's personal property. [this
definition of account is expanded in New Art 9 because the old article only
included leased goods. [Remember In Example 7(A) FB sold vegetables
and generated the account under 9-102(a)(2)(i).)
(B) Notice Here the property is an account because under 9-102(a)(2)(i)
it is a right to payment for monetary obligation for property that has been
licensed.
5.

Problem 7C Assume the principal debtor is FB and that FB has entered into

25

a K to buy 3 heavy duty farm tractors from John for $300,000. FB paid John
the entire purchase price at the time it placed the order. The tractors have not
been delivered yet. Now FB decides it does not need the tractors; John refuses
to refund the $300,000 and allow FB back out of the deal. So FB decides to
sell its right to receive the tractors to NF. NF pays FB $250,000. Is the FB- NF
transaction within the scope of Art. 9? Why or Why not?
(A) Analysis What is FB really offering to sell NF? The right to receive (the
contract right) the tractors. Why would NF want the tractors (it may buy
the contract right and then resell it to someone who can use them, another
farmer). How do we classify the collateral not a tangible, not quasitangible. Is it a pure intangible? Start with account? No, its the debtors
right to receive money generated in the first transaction. Is it a general
intangible? Yes, it includes everything that is not everything else (it is the
most residual category). Is it a payment intangible? No, because that deals
with monetary obligation. So, this sales is outside of Art. 9. [NF could
have loaned the money and take a security interest in the general interest
rather than buy it). By doing that, it would be in Art. 9 under 9-109(a)(1).
If its a loan NF will only have the tractors if FB defaults. However, there
may be ex ante benefits that will make FB unlikely to default. Under the
this hypothetical case the creditor would have describe the collateral in the
security agreement as including general intangible and tractors because at
time of default FB may have the tractors already.
(B) 109(a)(3) The four types of collateral (which are not seen in this problem) all
require the right to receive money account, chattel paper, payment
intangibles, and promissory notes.
6.

Problem 7D Here, FB is the maker of a note. First Bank is the lead bank
providing a line of general credit of $1.5 million to FB. FB signs a loan
agreement promising to repay the money and 3 negotiable promissory for
$500,000 each. First bank sells off 2 loan participations in the amount of
$500,000 each, to Second Bank and Third Bank. First Bank gives Second
Bank one of the 3 promissory notes signed by FB with a face amount of
$500,000 and also gives Third Bank one of three notes. Second and Third
Bank pay $475,000 each for the notes. Are the transactions between First and
Second and Third Banks within Article 9?
(A) Analysis This is an example of a loan participation deal This is
an EASY case the collateral is a promissory note and it falls within 9109(a)(3) sale of promissory note within Art. 9.

7.

Problem 7D Variation Assume same facts above except that FBs obligation
to repay the money to First Bank is not embodied in promissory notes but is
created by the language of the loan agreement. In this variation, FB is the
account debtor. The sale of loan participations by First Bank to Second and
Third Banks does not involve promissory notes; instead, First transfers by K
its right to be repaid $500,000 by FB to Second and Third Banks. Second and

26

Third pay First Bank $475,000. Are the First Bank Second Bank Third
Bank sale transactions within Art. 9?
(A) Analysis This the more common case. This case illustrates First bank
trying to minimize its risk of the loan by selling an undivided interest in
the deal to the 2 banks. They share profits and risks. This is what a loan
participation deal is. What is First Bank selling to the 2 banks and how do
we classify what is being sold? The central obligation being sold is the
obligation of FB to pay the $1.5 million loan. Its a payment intangible if its
a general intangible unless its an account (Remember: general intangible
is a residual category and you must start by asking first whether its
an account). Thus, you have to exclude the collateral from the definition of
Account to conclude its a payment intangible. First Bank is not selling
goods, energy, chartering business. First Bank is the principal debtor and
is loaning money. Look at 9-102(a)(2) third sentence tells us whats
excluded rights to payments for funds in advance that is what First
Bank is doing. So it is NOT an account, its a payment intangible. [its a
future right to payment, and therefore not an account).
8.

Problem 7E The principal debtor is Browns Rural Health Clinic. The clinic
needs money to purchase better lab equipment. Clinic offers to sell to NF the
clinics outstanding claims against Blue Cross Blue Shield for services
rendered to patients over the last 3 months. The claims have a face value of
$500,000. If NF purchases these claims for $450,000 from Brown Rural is this
transaction within in Art. 9?
(A) Analysis What is Brown offering to sell to NF and how do we classify it?
The promise of Blue Cross to pay for medical services rendered under their
insurance policies up until whats allowed. Is this an account? YES, its a
right to payment for monetary obligation for services rendered. 9-102(a)
(2)(ii). Also, the term account includes health care receivables. So its an
account under Art. 9.
(B) Hypothetical What if instead of Blue Cross we have Medicare as the
payor. This hypo would cause an additional problem under 9-109(c). Art.
9 does not apply to the extent a US statute preempts. We would have to
research federal statutes to see if it preempts the sale of government
receivables (because Medicare is funded by the Government).
(C) Notice In Problem 7B is there a federal preemption problem? What is
the asset FB trying to use in its transaction with NF its the stream of
income generated from license of patent. Patent law doesnt tell you what
to do with the money you get. So its important to see what the asset FB is
selling. Had he been selling the right to patent it may be preempted by
Federal law have to always check the exclusions under 9-109(c) and (d).

9.

Problem 7F The principal debtor is Brown Rural and the clinic needs money
to purchase better lab equipment. Clinic has a claim against its LL for
negligence; the LL failed to repair a pothole in the parking lot resulting in the

27

injury of a clinic EE. The clinic offers to sell its negligence claim against LL to
NF. The clinic believes the claim is worth $300,000. Assume there is no
applicable non-UCC statutory or decisional law prohibiting the sale of clinics
claim. See 9-109(d)(12). NF purchases the clinics claim paying the clinic
$200,000. Is the NF BR transaction in Art. 9?
(A) Analysis BR wants to sell its right of cause of action to NF. How do we
classify this? They are offering to sell the claim itself. See the definition of
commercial tort claim which means a claim arising in tort w/ respect
to which the claimant is an organization; or the claimaint is an individual
and the claim: arose in the course of the claimants business or
profession; and does not include damages arising out of personal injury to
or the death of an individual. See 9-102(a)(13). What is being offered is a
commercial tort claim. Is the sale of this type of collateral in Article 9?
Commercial tort claim doesnt seem to fall in any of the categories
described under 9-109(a)(3) or in Handout #8. It is its own category
and not covered under Art. 9. Its somewhere between deposit accounts
and general intangibles in Handout #8.
(B) Notice If NF wanted to loan BR money and ask for a security interest in
the tort claim then it is covered under 9-109(a)(1)
10. Problem 7F Assume same facts above except that before the sale of the
claim to NF, the clinic and the LL resolve their dispute and enter into a
settlement agreement; the LL will pay the clinic $300,000 in three payments of
$100,000 over the next six months and the clinic will relinquish its negligence
claim. NF purchases the clinics rights under this settlement agreement,
paying the clinic $200,000. Is the NF-BR transaction in Art. 9?
(A) Analysis What is the clinic selling here the right of payments under
the settlement agreement (now its a K right). This is very different from selling
the claim itself. How do we classify the collateral? Is it an account? This is
NOT a sale of a commercial tort claim, its a sale of a contract right to
payment. It is NOT an account. So we have a general intangible; thus, its a
payment intangible and its covered under Art. 9.

F.

Consignments READ TEXT pg. 14-24

1.

Text Book Notes

2.

Class Room Notes Some true consignments are in Art. 9. There are two
types of consignments: (1) true consignments and (2) phony consignments.
True consignments are marketing tools whereas phony consignments are
inventory financing.

28

Refer to Handout #6B This chart is designed to help us understand how new
Art. 9 treats true and phony consignments.
Descriptive Name of
Transaction

Row I

True Cons. Meeting

the reqts of Art. 9
defin. i9-102(a)(20)

Row II

True Cons. Which

does NOT satisfy Art.
9 reqts.
Phony or disguised
consignment

Row III

Economic
Reality of
Transactio
n
A marketing
Device

Legal Treatment under New Art. 9

High fiction drafting in New Art. 9 treats this

trans. As a secured trans for purposes of
perfection & priority. But the true consignors rights
against the consignee in the event that the
consignee defaults (collection benefits) are
governed by non-UCC law (primarily K law) & not
Part 6 of Art. 9.
These true consignments are NOT covered by new
Art. 9 nor by revised Art. 2 BUT instead are
governed by CL property principles. UCC 1-103.
Although the parties may have labeled the
transaction a consignment or otherwise tried to
disguise its true nature, the courts look at the
economic reality of the financing governed by the
new Art. 9 both w/ respect to priority issues and
collection benefits against the debtor/phony
consignee.

A marketing
device
Inventory
financing on
a secured
basis

(A) Hypothetical You tell X you need help selling goods and you hire X to
sell your goods. A boy walks into Xs store and buys a good. The boy is not
really buying it from X, but from you. X keeps a commission and then
sends the rest of the proceeds to you. This is an example of a true
consignment. EXAMPLES of TRUE CONSIGNMENTS
(I) Examples small shops, antique shops, art galleries, gun shops, etc.
(II) Benefits of Consignee They can buy a variety of inventory through
consignment. Also if they dont sell it they send it back to the
consignor. So the risk of not selling the item is on the consignor not
the consignee.
(A) Example Designers of expensive clothing when they sell their
clothes to the department stores, they sell on consignment. The
department store is a marketing agent. They do it this way
because it minimizes the risk of not selling to the good.
(B) Example Book publishing company. If no-one buys the books
its not the retailer who eats it, they are sent back to the publisher.
(C) Example Home Depot they dont own a lot of the goods they
sell. The dont bear the business risk of non-sale.
(B) Hypothetical of PHONY Consignments This type of consignment is
basically financing inventory but its mislabeled by the parties.
(I) Example X is a credit seller (C-S) when it delivers to Y (talking about
a wholesaler to retailer). It doesnt want to sell on open account; so it
takes a security interest in the inventory under 9-109(a)(1). So when

29

the boy buys the jacket he is buying it from Y NOT X. Phony

consignments are just mislabeled inventory financing.
(C) Comparing the Two Types of Consignments Are true/ phony
consignments mutually exclusive? Yes, because in a true consignment a
consignee gets possession but not ownership under 2-401 (title passes at
delivery). However, secrecy problems are created. How does another
creditor know X owns it when its in Ys store. How do they know there is
shared ownership. In both cases, there is a secrecy problem.
(I) CL Treatment Example Bank loans money to Y. Y signs a chattel
mortgage. Banks wants to grab the consignment cloths in Y. X says
bank is Ys creditor, not mine. Y is my marketing agent and he has NO
authority to convey away a lien on my (X) property because Y is just a
marketing agent. A true consignor (X) always WINS no obligation to
deal with secrecy problem. If this is a phony consignment, where the
bank records the chattel mortgage and X did not record the
consignment. The Bank WINS. The main difference is under a true
consignment no Notice is required, but under a phony
consignment, the consignor must publicize (give notice) to
protect itself from the consignees creditors.
(A) Policy Reason Drafters of Art. 9 try to treat the 2 transactions
true and phony more alike. There is a great emphasis on Notice
and less on the Doctrine of Derivative Title (property interest).
3.

Problem 4 (Text pg. 17)

4.

Problem 8A (Handout #6) See Attached Consignment Agreement on this

Handout pg. A. High Octane Fashions (HO) is a designer and mfg Of expensive
clothing. On May 1, 2001 HO consigns a shipment of clothes (retail value =
$75,000) to Urban Escape (UE). Under the consignment agreement, HO
reserves title to the clothes. UE is to receive a 15% commission on any
sale of HO clothes to the public but must remit the 85% balance of the
purchase price to HO w/in 2 weeks after sale. UE has the right to return any
unsold clothes by Oct. 1, 2001. HO never files an Art. 9 financing statement.
UE business is struggling, and it files for bankruptcy on Sept. 15, 2001.
Under 544 of the Bankruptcy Code, the trustee in bankruptcy can claim the
status as a lien creditor a creditor with a judicial lien arising on Sept. 15,
2001, at the time of the filing of the bankruptcy petition. The trustee (who
represents the general creditors of UE) wants the HO clothes in UEs
possession (retail value = $50,000) to be treated as part of UE bankruptcy
estate. If the trustee prevails, the trustee can sell the HO clothes in UEs
possession and distribute the proceeds on a pro rata basis to all UEs general
creditors, including HO. Given UEs state of assets, general creditors are likely
to get no more than 5% on their claims. HO argues that it is NOT a general
creditor but owner of the clothes on May 1, 2001. They argue only the

30

bankrupts property goes into the estate under the doctrine of derivative title.
Who is right HO or the trustee in bankruptcy? [Refer to 1-201(37), 9102, 9-109(a), 9-310, 9-317, 9-319(a)].
(A) Analysis Here the fight is about the clothes that are subject to the true
consignment. What is HOs status? Is it an Art. 9 creditor? See the
definition of consignment under 9-102(a)(2) and under 9-109(a)(4) Art. 9
applies to consignments. However, you must satisfy the Art. 9 definition of
consignment. Under the definition, who is the merchant UE [the
consignee also has to be a merchant see the definition in Art. 2-104].
Under 9-102(a)(20)(c) at what point do we look at the classification of
collateral before delivery what were the clothes to HO what type
of goods? Its inventory Not consumer goods. Under 9-102(a)(20)(D)
trans does not create a SI that secures an obligation this language
means the trans. between HO and UE cannot be a phony consignment
a sale transaction. See Row III of the chart describing a phony
consignment. So, in this problem we have a TRUE consignment.
With respect to terminology, HO (the secured party) is the consignor; UE
(the debtor) is the consignee. The collateral includes consigned goods.
Status of HO
Question of Attachment: When does HO get an attached Security Interest?
Under 9-203(b): (1) Value Ho gave something of value to UE [the right
to get a commission); (2) Debtors rights in the collateral UE has rights
in the collateral or power to transfer rights in collateral; and (3) 9-203(b)
(3)(A) if there is a written consignment agreement, is it enough? A
consignment creates a security interest so if signed consignment
agreement that describes the consigned goods; its satisfied. The problem
here with attachment is presented in (2) if we go to CL, its a bust
because under CL the debtor never has rights theyre just a marketing
agent. By analogy under 2-326(2) Need a signed consignment agreement
AND the delivery of goods. If on May 1, there is a signed consignment
agreement and goods are NOT delivered till May 10, the security interest
does not attach until May 10.
Question of Perfection: Assume HO has an attached security interest, is it
perfected? Always start with 9-308. Nothing in 9-309 (which sets forth
cases where there is automatic perfection) applies here. Its perfect if
attached (under 9-203(b)) and complies with 9-310-316. There are 2
permissible modes of perfection in this case:
(1) Refer to 9-310 File a Financing Statement [Here HO failed to file]
(2) Refer to 9-313(a) Is there possession by secured party? No
Conclusion: HO has a secured but unperfected security interest.

31

Bankruptcy Provisions Under 544

Bankruptcy Provision 544 is the only applicable bankruptcy provision
in this course. There are hard distribution issues in bankruptcy not
enough money to go around who will get paid? How does the
Bankruptcy Priority Rules work? Bankruptcy Priority Rule governs by
enlarge personal property (Art. 9 Rules apply in bankruptcy). The trustee
in bankruptcy closely examines every claim against the bankrupt debtors
property and checks to see if valid. The trustee has a strong arm power
under 544(a)(1) if there is a secured claim and the secured creditor
fails to give notice, the trustee can strong arm that claim and demote the
secured party to a general creditor (who now only gets a pro rata share).
Debtors who file for bankruptcy file because they are over extended and
overextended because there is no filing. The Policy of secrecy is carried
into bankruptcy.
Consequence of 544a If HOs secured interest is strong armed aside,
Ho becomes a general creditor and it will only get $2500 (5% of the retail
value = $50,000). Thus, the trustee in bankruptcy is called the ultimate
enforcer of Art. 9. Because he can strong arm any secured transaction
that is defective in form (e.g., no perfection).
Status of Trustee in Bankruptcy

Attachment: Under 544(a)(1) the trustee in bankruptcy has a judicial lien

as of commencement of the case the case was filed on Sept. 15; so, that
is when the trustee has a judicial lien.
(1) Under CL, A creditor with a judicial lien could not take HO clothes
that are in possession of UE. The Doctrine of Derivative Title says
because UE has no ownership interest in the clothes, the trustee may
not take those clothes.
(2) Under 9-319(a) except as otherwise provided in (b), for purposes of
determining the rights of creditors of, and purchasers for value of
goods from, a consignee, while the goods are in the possession of the
consignee, the consignee is deemed to have rights and title to the
goods identical to those the consignor had or had power to
transfer. BOTTOMLINE: We pretend that the consignee has same
rights as consignor. Basically, its an improvement in title exception to
the Doctrine of Derivative Title.
Conclusion: We know that HO has an unperfected Security
interest whereas the trustee has a judicial lien.
Priority Battle Art. 9 SI v. Judicial Lien

32

Who Wins? 9-322 does NOT apply because there is neither 2 Article 9
security interests OR an Art. 9 security interest and agricultural lien. That
is not what we have here. We have an Art. 9 security interest v. judicial
lien. Under 9-317(e) could be applied to and the trustee wins. But the
main priority rule is 9-317(a)(2)
A security interest or agricultural lien is subordinate to the rights of:
(2) except as otherwise provided in (e), a person that becomes a
lien
creditor before the earlier of the time:
(A) the security interest or agricultural lien is perfected; OR
Conclusion The Trustee wins.
5.

Problem 8A Variation Same Facts as above except a sign is posted. Who

wins? Posting a sign does that give notice for perfection purposes? Between
9-309 and 316 nothing in those provisions talk about posting a sign. It does
NOT work under Art. 9.
(A) Argument Can we argue that posting a sign gives notice. We dont have
a true consignment: No, 9-102(a)(2)(iii) the merchant is not generally
known by its creditors to be substantially engaged in selling the goods of
others; if cannot satisfy this burden of the definition posting a sign
on some goods is not enough. Maybe but it is difficult to satisfy.
(B) Moral You have to Perfect EARLY and has to be perfected by the modes
specified in Art. 9.
(C) Policy Under the old Art. 9 posting a sign was enough to give notice, but
that was eliminated in the New Art. 9.

6.

Problem 8A Variation Same facts above except HO files a financing

statement. Who wins? HO, because he has a perfected security interest and a
perfected security interest beats a judicial lien.

7.

Problem 8B This is problem 4 in the text book on pg. 17. Assume for this
problem that there is a true consignment.
(A) Analysis The fight is between OMB and the dealer and the property in
dispute are antiques. Is this transaction in Art. 9? No, because the
relevant audience Not the purchasers, but the creditors of Antique-R-US
are likely to know that the debtor is selling on consignment. So this Not in
article 9 according to 9-102(a)(20)(A)(iii). This hypothetical is Row II on
the chart on Handout #8B.
(B) Policy Under 2-326(1) some contracts for sale you get exactly what you
bargain for and give it back to seller sale on approval is that what
we have here?
(I) Example D goes to the store to buy X and he brings it home and
tries it out. This is a sale on approval.
(II) Example Selling for the first time this is not resale. This is a sale
of return. This is a true consignment, but not in Art. 9; also not in 2326.
(C) Conclusion Who Wins? Under CL, the dealer wins. When you do not

33

have the benefit of 9-319 the consignee cannot grant a security interest
in the bank because no property to convey.
8.

Problem 8C John recently graduated college and wants to buy a car. He

doesnt have enough money for the down payment on the car but his
grandmother gave him an expensive watch (retail value = $7,000) for
graduation. John decides to sell the watch so he can buy the car. On May 1,
2001, John delivers the watch to Urban Jewelry (UJ), asking them to sell the
watch for him. John and UJ sign an agreement that provides in pertinent part:
(1) John authorizes the store to sell the watch to anyone who offers $6500 or
more, if such a sale transpires, the store is to remit the sale proceeds, less
10% consignees commission, to John. If the store receives an offer b/w
$5000 and 6500, the store is to relay the proposal to John for his
consideration. Finally, if the store does not sell the watch within one year, UJ
has the right to return the watch to John. John never files an Art. 9 financing
statement. UJ files for bankruptcy on Sept. 15, 2001. Johns watch is still in
the store and under 544 of the bankruptcy code, the trustee in bankruptcy
claims the status of a lien creditor. The trustee argues that Johns watch is
part of the stores bankruptcy estate. John argues the watch belongs to him
and should be returned. Who wins?
(A) Analysis This is a true consignment but it is out of Art. 9 because the
watch is a consumer good before delivery; thus, kicking it out of the Art.
9-102(a)(20). Art. 2-326 doesnt apply either (the old one did however); all
cases in book applied under the old 2-326. If not within Art. 9, then CL
governs Johns rights. The battle is between John and the trustee since
under CL cant go to 9-319(a) because thats Art. 9, it doesnt apply.
Under CL, John owns the watch, so trustee cannot get a judicial lien
because John is not the debtor; so, John wins and gets the watch even
though he didnt give notice.
Can We Reconcile the Results of 8(A), (B) and (C)
Policy How do we reconcile this result?
8A HO v. UE Have to file a financing statement
8B Dealer v. Bank Dont have to file
Policy Dont need to file because it would be a redundant act. The
reason its not in Art. 9 is because creditors know the dealer is engaged in
selling goods of others. This situation will come with antiques/ art
galleries everyone knows the goods are on consignment.
8C John v. Trustee Dont have to file
The problem centering these three transactions lies with secrecy. The question
is who has to cure the problem. The bad player in 8A is UE, in 8C its UJ; the
good guys in 8A is Ho and in 8C its John. Where should we put the burden of
giving notice?

34

(1) In 8A the burden is on HO all HO has to do is file a financing state; not

all that burdensome. Think how hard it would be for creditors if they had
to gather information about the clothes How will you know if they are
consigned? Its in UEs best interest not to tell them the truth because you
want the credit. As a consequence there is no objective way to gather
information for subsequent creditors like real property (e.g., mortgage
records).
(A) Comment Most business consignments fall under Row I.
(2) In 8C John is a consumer Not a business. It is not likely that John will
know he has to file a financing statement. So the equities go the other way,
and the burden is on the subsequent creditors to find out who the watch
belongs to.
(A) Example Assume in 8C instead of watch, we are talking about a
$100,000 watch and Bloomingdales. John goes to Bloomingdales and
asks them to sell it. Bloomingdales takes it on consignment (because it
doesnt wan the risk of non-sale) with agreement. Does J need to file to
protect his watch from creditors of Bloomingdales.
(1) Analysis How do we classify the watch still consumer goods.
There is NO cap on consumer goods. So its a true
consignment, but not in Art. 9, so John doesnt have to file.
9.

Comment on Phony Consignments This is Row III on the chart. An

Example: Say HO retains a purchase money security interest in the clothes; so
that there is shared ownership. Say UE goes bankrupt, bringing in the
trustee. HO must file before trustee if it wants to be treated as a secured party
and get paid before the general creditors. The status of HO (if files) it has a
perfected Art. 9 security interest under 9-309, 310. The status of the trustee
under 544(a)(1) he has a judicial lien at the time of commencement of the
suit. Because it was a sale (under 2-401) under Row III, UE has a property
interest. The trustee has a judicial lien and it can to HOs clothes because of
2-401. Under 9-317 if HO files first, it wins; if it doesnt it loses. Notice
that this is exactly the same analysis used in 8A when we assumed it was
a true consignment. The Drafters in the New Art. 9 have closed the gap in
CL. But, if you are in Row II back to CL true consignor doesnt have to give
notice, if phony consignor have to give notice.

G. Leases
1.

Read Text pg. 24-32

2.

Class Notes
(A) True Leases: True Leases involve an entrepreneurial stake in the item
being leased. Also known as residual interest. How do you know if there is
residual interest at the end of the lease: there is either economic value and
returned to lessor OR alternatively the lessee buys the leased good for

35

more than a nominal price with economic value remaining. Either of these
events help establish it is a TRUE Lease.
(B) Phony Leases: Phony leases involve equipment financing on a secure
basis. B sells machine to C and C grants B a purchase money security
interest in equipment to ensure payment of the machine. The rent
payments are installment payments of the sold machine. This is a sale
with a purchase money security interest and thus a phony lease.
(C) What is the difference b/w a True and Phony Lease: The difference is
with a phony lease, at the end of the lease, the lessee buys the equipment
for a nominal price.
(D) Secrecy Problems? Both types create a secrecy problem. With a true
lease, there is secret ownership. With a phony lease, there is shared
ownership. In a true Lease, you get it today and pay rent; In a phony, you
get it today, and make installment payments [credit sale with purchase
money security interest].
Pre-Code Treatment of Leases
(A) For a phony lease, under CL, if B wants to beat out other creditors, B
would have to record to win.
(B) For a true lease, under CL, C signs a lease agreement and C has no
ownership in a true lease, by definition she has possession but No
ownership. So, under CL, if B is a true lessor it will always defeat the
creditors of the lesee. Main Difference If phony, must give Notice.
UCC Treatment
(A) Phony Leases Its a mislabeled transaction where there is a purchase
money security interest. B has to file if it wants to beat the lessees
creditors under 9-322(a)(2). Basically, if phony lease and there are 2
secured creditors but B doesnt file, the other creditor wins under 9322(a)(2). The Effect phony leases are treated the same way as Art.
9 purchase money security interest.
(B) True Leases These are NOT in Art. 9 at all. (unlike consignments). You
have to go to Article 2A.
(1) Under 2A-301 true lessor wins unless 2A-307(1) applies [this
section has been modified refer to page. 1276].
(C) Effect Under the Code, the CL rules have been brought forward (unlike
consignments). True lessors whether leasing a $1 product or $1 mil. Have
NO obligation to give notice. Therefore, it really matters what type of lease
you have because if phony you must file; if true you dont file. Notice
with consignments, you usually have to file.
Summary of Lease Treatment by Article 9 and 2A

Row IV

Descriptive Name of
Transaction
A true lease meeting
the requirements of

Economic Reality of
Transaction
A transfer of possession of
goods for a term in return

36

Legal Treatment Under New Article 9

New Art. 9 does not cover these transactions.
UCC 1-201(37) (revised), para. 2, 3, and 4,

Art. 2A definition in
2A-103

Row V

A phony lease or
disguised lease

for rent where lessor

retains an economically
meaningful residual
interest in the goods.
Equipment financing on a
secured basis

provides guidance on how to figure out if a

given transaction is a true lease or a phony
lease. Art. 2A governs these transactions.
Although the parties may have labeled the
transaction a lease or otherwise tried to
disguise its true nature, the courts look at
the economic reality of the transaction and
treat it like al other equipment financing
governed by the new Art. 9 both with
respect to priority issues and collection
benefits against the debtor/ phony leasee.

3.

Refer to the Following Sections: 1-201(37), 2A- 103(j), and 2A 307(1)

See 1-201(37) below on problem 9
2A-103(j) Lease means a transfer of the right to possession and use
of goods for a term in return for consideration, but a sale, including a
sale on approval or a sale or return, or retention or creation of a
security interest is not a lease. Unless the context clearly indicates
otherwise, the term includes a sublease.
2A 307(1) Except as otherwise provided in 2A-306, a creditor of a
lessee takes subject to the lease contract.
2A 306 If a person in the ordinary course of his business
furnishes services or materials with respect to the goods subject to a
lease contract, a lien upon those goods in the possession of that person
given by statute or rule of law for those materials or services takes
priority over any interest of the lessor or lessee under the lease K or this
Article unless the lien is created by statute and the statute provides
otherwise or unless the lien is created by rule of law and the rule of law
provides otherwise.

4.

Problem 5 (text book pg. 24)

5.

Problem 9A (Handout #6) BIG Machines agrees to provide all maintenance

of the duplicating machine free of charge to the lessee, Connies Printing Shop.
But, the lease agreement also provides that the lessee will pay insurance and
assume all risk of loss while machine in her possession. The lease is for five
years and C may not terminate the lease during that period. The rent for the
machine is $100/month or $1200/year for a total rent of $6000 for the term
of the lease. The FMV of the machine at beginning of leasehold equals the PV
of the total of the rent payments over the period. The parties reasonably
predict at time they entered the transaction the machine will have an
economic life of 5 years. In fact, C has option to purchase the machine at the
end of year (may be able to use it for another year at end of lease). Is this
transaction a true lease or a phony lease governed by Art. 9?
(A) Analysis Need to look at definition of a security interest under 1-

37

201(37) [Para. 1 of this definition has been revised see page 1267]
Security Interest means an interest in personal property or fixtures
which secures payment or performance of an obligation. The term also
includes any interest of a consignor and a buyer of accounts, chattel
paper, a payment intangible, or a promissory note in a transaction thats
subject to Art. 9. Except as otherwise provided in 2-505, the right of a
seller or lessor of goods under Art. 2 or AA to retain or acquire
possession of the goods is not a security interest, but a seller or a
lessor may also acquire a security interest by complying with Art. 9.
The retention or reservation of title by a seller of goods
notwithstanding shipment or delivery to the buyer (2-401) is
limited in effect to a reservation of security interest.
Is this a true or phony lease? 1-201(37) Para. 2
Whether a transaction creates a lease or a security interest is
determined by the facts of each case; but a transaction creates a
security interest if the consideration the lessee is to pay the lessor for
the right to possession and use of the goods is an obligation for the term
of the lease not subject to termination by the lessee, and:
(a) the original term of the lease remaining economic life of goods
(b) lessee is bound to renew lease for remaining economic life of goods
or is bound to become owner of the goods;
(c) lessee has an option to renew the lease for remaining economic life
of goods for no additional consideration or nominal additional
consideration upon compliance with lease agreement; or
(d) lessee has an option to become owner of goods for no
additional or nominal consideration upon compliance with the
lease agreement.
A transaction does not create a security interest merely because it
provides that: [the factors above are NOT dispositive]
(A) PV of the Lease FMV of the goods at time lease was entered
(B) Lesee assumes risk of loss of goods or agrees to pay taxes,
insurance, filing, recording, or registration fees, or service or
maintenance costs
(C) Lessee has an option to renew or become owner of goods
(D) Lessee has option to renew lease for a fixed rent reasonably
predicted FMV of rent for use of goods for term of renewal at time
option is to be performed
(E) Lessee has an option to become owner of goods for a fixed price
reasonably predictable FMV of goods at time option is to be
performed.

38

We must look at each factor in the lease separately to determine whether it

is true or phony.
(1) Maintenance Free of charge para. 3(b) of 1-201(37) says we are not
to assume either way based upon who pays maintenance; however,
it suggests true because there is a residual interest, the lessor cares
how machine is maintained. But, it is not conclusive.
(2) Insurance/ risk of loss Same as answer above; however It suggests
phony, if shes the beneficiary of insurance policy because then it
suggests the machine is hers.
(3) Term 5 years/ no termination clause if can terminate, then it is not
a sale with a security interest because that factor is necessary for
a sale. The fact that the lease has no option to cancel leans to the fact
its phony.
(4) FMV of Machine = PV of Total Rent over life of machine Not phony
just because FMV rent is equal or greater than the total PV of rent. It
can be a true lease where FMV = PV of rent.
(A) Example Under what circumstances would you have a true lease
where someone would be willing to pay the FMV of goods in a lease
(FMV = PV of rent). Lessee gets ancillary benefits from renting
that he wouldnt get from buying. Ex. Professional property tax on
machines owned not rented; if rent, lessee has an offset deduction
against tax liability and when subtracted from PV rent, its less
than the FMV. Other ancillary benefits include below market price
repair services. For these reasons you may have a true lease with a
full payout lease.
(B) 1-201(37)(4)(z) defines PV as the amount as of a date certain of
one or more sums payable in the future, discounted to the date
certain. The discount is determined by the interest rate specified by
the parties if the rate is not manifestly unreasonable at time the
transaction is entered into; otherwise determined by a
commercially reasonable rate.
Calculating todays stream of income in future = PV, which will be less.
FMV at time lease entered = PV of total rent. This called a full payout
lease. A full pay out lease sounds like the lessee is buying the machine.
Why would you ever rent for amount it would cost you to buy unless you
dont think theyll be economic life in the machine at end of lease. If expect
no residual value, it looks like buying a machine rather than a true lease.
In a true lease, youd expect the FMV > than the PV of total rent. Why?
Because there is residual interest in the machine (economic life after
machine is returned). Thus, FMV = PV of rent + PV of re-investment.
Leases place No burden on true lessor. Art. 2A adopted the CL view, thats
why important to determine if true lease or phony. Fully pay out lease =

39

FMV of machine at time lease entered into = PV of rent. That makes it look
like a sale because:
Assume 5 year lease and 3 years economic life left in machine at
end of lease. One would expect the FMV (what paid to buy for 8 years
life) would be greater than PV of rent (which represents the use of the
machine for machine) leaving 3 year residual interest.
This is a strong factor suggesting sale. BU then the code under 1-201(37)
(3)(a) says dont jump to conclusion that its a sale. Why? Drafters are
saying there could be a true lease still have a full pay out. See the example
above it has to do with ancillary benefits accompanied with renting rather
than buying. However, what does the extra year of economic life after the
term suggest contrast 5 year term with what parties predicted economic
life would be. 1-201(37)(2)(a). You compare predicted life with actual
term [DO NOT look at actual life]. Para. 4 of this section tells us look at
what parties anticipated. So, there is a true lease
(B) Recommendations
(1) If equipment is expensive and not sure whether its a true or phony
lease, make a 9-505 precautionary filing (called cheap
insurance) under Art. 9.
(2) If equipment mid-priced (multiple items to multiple lessees), filing
may be seen as too expensive to them. So the lawyer has to
construct the lease so that no later court will construe it as a phony
lease.
6.

Problem 9B Same facts except that the parties would reasonably predict at
the time that the lease was executed that the machine would have an
economic life of 6 years. For this subpart only, consider the following options
to purchase and decide whether the transaction is a true or phony lease:
(A) Option to purchase machine for $1200
(B) Option to purchase for its FMV at end of 5 years as determined by an
independent appraiser acceptable to both parties
(C) Option to purchase the machine for $1000. Of the $1220 yearly rent, $200
is Bs compensation for servicing the machine. The FMV of the machine at
end of leasehold is $1000.
(D) Option to purchase the machine for $650; for $250
(E) Option to purchase machine for the lesser of $200 or the FMV of the
machine at end of 5 year lease
(F) Lease agreement contains a full use clause: C must renew the lease so
long a machine has useful life remaining.
Consideration when is additional consideration nominal? See 1-201(37)(4)
(x)(i), (ii) Additional consideration is NOT nominal if (i) when the option to
renew the lease is granted to the lessee the rent is stated to be Fair Market

40

rent for the use of the goods for the term of the renewal determined at time
option is to be performed, or (ii) when option to become owner of goods is
granted to lessee the price is stated to be FMV of the goods determined at time
option is performed.
(1) Are any of the options described above in the safe harbor of 1201(37)(4)(x)(i), (ii)? Only option (B) we do not have a fixed price option
to purchase the value of machine will be determined at end of lease.
Thats a safe harbor stated is an important word for true leases.
(2) If you have fixed priced option it is more complicated. See 1201(37)(3)(e). Last sentence in Para. 4(x)(ii) deals with option to buy in the
middle of lease. One year into lease you have an option to purchase lease
during repayment schedule.

Nominal Consideration What is Nominal consideration? See chart on

Handout 6 pg. 13.
(1) (2)
(3)
0 $250
$600
bargains

impermissible
nominal
consideration

(4)
$1,000

(5)
much > $1000

option to pay
FMV at
at actual FMV
beginning of
at end of lease
lease
[Payment of full residual value]

Paragraph 3(e) of 1-201(37) tells us that the court is to calculate the range
for permissible fixed priced options it should be based on what parties
reasonably predicted the economic life would be at end of lease. If look at (4)
on the diagram 1 year left is worth $1000. And under (3), FMV would be
60% of that = $600. If fall between $600 and higher that factor alone
doesnt mean it is phony. But if get it between $0 and $250, it is nominal. The
hard case will fall between $250 and $600 dont know what court
will do in terms of re-characterizing the lease option.
Advice Filing a finance statement is the safest way to go, but a safe way to
ensure it is a true lease and not a sale is either to (1) give the lessee an option
to terminate lease (as described in para. 2 of 1-201(37); or (2) if have an
option to purchase dont make it a fixed price option. Use safe harbor
language as described in the option examples (B). And if you have to fix the
option price you want a document showing that the fixed price represents fair
predictable price at end of the lease.

41

Bottomline Leases are treated very different from consignments. Under

consignments, the burden of secrecy is placed on the person who can handle
it; whereas, under a lease (2A-307) true lessor has no obligation of Notice.
H. Exclusions From Article 9
1. Read text pg. 32-47
2. Refer to 9-109(c) and (d)
9-109(c) This article does NOT apply to the extent that:
(1) a statute, regulation, or US treaty (federal law) preempts this Art. 9
(2) another statute of this State expressly governs the creation,
perfection, priority, or enforcement of a security interest created
by this State or a governmental unit of this State; (state is the
debtor)
(3) a statue of another state, a foreign country, or a governmental unit
of another state or a foreign country, other than a statue
generally applicable to security interests, expressly governs
creation, perfection, priority, or enforcement of a security interest
created by the State, country, or governmental unit; or
(4) the rights of a transferee beneficiary or nominated person under a
LC are independent and superior under 5-114.

9-109(d) This Article does NOT apply to:

(1) a LLs lien, other than an agricultural lien;
(2) a lien, other than an agricultural lien, given by statue or other rule
of law for services or materials, but 9-333 applies with
respect to priority of the lien;
(3) an assignment of a claim for wages, salary, or other compensation
of an employee;
(4) a sale of accounts, chattel paper, payment intangibles, or
promissory notes as part of a sale of the business out of which
they arose;
(5) an assignment of accounts, chattel paper, payment intangibles or
promissory notes which is for the purpose of collection only;
(6) an assignment of a right to payment under a contract to an assignee
that is also obligated to perform under the K
(7) an assignment of a single account, payment intangible, or
promissory note to an assignee in full or partial satisfaction of a
preexisting indebtedness
(8) a transfer of interest of an assignment of a claim under a policy of
insurance, other than an assignment by or to a health care provide of
a health care insurance receivable and any subsequent assignment
of the right to payment, but 9-315 and 9-322 apply with respect to
proceeds and priority in proceeds;
(9) an assignment of a right represented by a judgment other than a
judgment taken on a right to payment that was collateral;
(10) a right of recoupment or set-off but:

42

(A)

3.

4.

9-340 applies w/ respect to the effectiveness of rights of

recoupment or set-off against deposit accounts; and
(B) 9-404 applies w/ respect to defenses or claims of an account
debtor
(11) the creation or transfer of an interest in or lien on real property,
including a lease or rents thereunder, except to the extent that
provision is made for:
(A) liens on real property in 9-203 and 9-308
(B) fixtures in 9-334;
(C) fixture filings in 9-501, 9-502, 9-512, 9-516, and 9-519; and
(D) security agreements covering personal and real property in 9604
(12) an assignment of a claim arising in tort, other than a commercial tort
claim, but 9-315 and 9-322 apply with respect to proceeds and
priorities in proceeds; or
(13) an assignment of a deposit account in a consumer transactions, but
9-315 and 9-322 apply with respect to proceeds and priorities in
proceeds
.
Class Notes Remember, that just because it excluded doesnt not mean you
cannot do it.
See US v. Kimbell Foods (attached to Handout #6)
(A) Issue Whether contractual liens arising from certain federal loan
programs take precedence over private liens, in the absence of a federal
statute setting priorities.
(B) Holding the source of law is federal, but that a national rule is
unnecessary to protect the federal interests underlying the loan programs.
Accordingly, we adopt state law as the appropriate federal rule for
establishing the relative priority of these competing federal and
private liens.
(C) Questions The case cites to Clearfield, which basically restates the
principle that priority of lines stemming from federal lending programs
must be determine with reference to federal law. Thus, federal law controls
the governments priority rights. But what does this federal rule (the more
difficult question) mean? Uniformity is one factor when determine the
formulation of controlling federal rules. Apart from uniformity, the court
also has to determine whether application of state law would frustrate
specific objectives of federal programs. Finally, the court must consider the
extent to which application of a federal rule would disrupt commercial
relationships predicated on state law.
(E) Government Argument The govt. argues that effective administration of
its lending programs requires uniform federal rules of priority. It contends
that to resort to any rules other than first in time, first in right and
choateness would conflict with protectionist fiscal policies underlying the
programs. The govt. also argues that applying state laws to these lending

43

programs would undermine its ability to recover funds disbursed and

therefore would conflict with program objectives.
(F) Analysis The court rejects the government argument by saying that
state commercial codes are not inconsistent with respect to providing
adequate protection of the federal interests. Because each application
receives individual scrutiny, agencies can reflect state priority rules. There
are other indications showing state priority schemes doe not burden
current methods of loan processing.

5.

Problem 9 (pg. 39 of text)

(A) Analysis If Jugular is not an EE working for wages, salary or other
compensation but is instead an independent contractor receiving
commissions, Art. 9-109(d)(3) would NOT apply. Instead, Jugular would
be conveying an Art. 9 security interest in accounts to the bank. See 9109(a)(1), 9-102(a)(2). In researching this issue, Jugulars lawyer should
examine the definition of EE in consumer protection statutes limiting wage
assignments. There is no definition in the UCC. See UCC 1-103.

7.

Problem 10 (pg. 40 of text)

(A) Analysis All of the transactions described involve the sale of accounts
by Logan. All of the transactions would be in Article 9 (See 9-109(a)(3))
except that there are applicable exclusions, namely 9-109(d)(4), 9-109(d)
(6), and 9-109(d)(5). Be sure that you can diagram these transactions
(review problem 7, Handout #6), and that you can identify the principal
debtor, the account debtor, the property that is being sold, and the
applicable exclusion. The policy underlying the exclusions is that these
transactions do NOT involve mainstream commercial financing.
(B) Refer to Text Book and Diagram this Problem

8.

Problem 11 (pg. 40 of text)

9.

Problem 10 (Handout #6) Your client, Ventura Secured Lending,

specializes in high risk lending to clients that most institutional lenders would
characterize as belonging to the sub-sub-prime market. A potential borrower,
RMD, wants to borrow $1.5 million and has offered a variety of assets as
collateral, including its one third interest in a 1,000 acre piece of land in the
mountains of CO known as Blue Valley. The value of the land is primarily in
the CO blue spruce trees growing on the property; they were planted 30 years
ago in straight rows for harvesting. Plus, there are numerous virgin groves of
mature aspen trees which could be sold to Denver landscape designers. Does
Art. 9 govern the creation of a consensual lien on the land. On the trees and/
or the timber from the trees? [Refer to UCC 9-102, 9-109]
(A) Analysis Art. 9 does NOT apply to real estate 9-109(d)(11). The first
question Ventura should explore w/ RMD is what RMD means when it
says It owns a 1/3 interest in Blue valley. For ex., if RMD and another

44

entity own the land as tenants in common, to get a consensual lien on

Blue Valley, Ventura will need to get a signed mortgage and to record in
the real estate records. On the other hand, if RMD means that it holds a
1/3 interest in partnership that in turn owns Blue Valley, and if the
collateral offered is RMDs partnership interest, Ventura should comply
with Art. 9: a partnership interest is a general intangible under 9102(a)(42). If RMD means that it owns 1/3 of the stock in a land
development corporation that owns Blue Valley, and RMD is offering that
stock as collateral, Ventura would need to comply with Art. 9 to get a
consensual lien. The stock would be classified as investment property
under 9-102(a)(49). Under the doctrine of derivative title, RMD can only
convey to Ventura what it has
(1) Assumptions: Assuming that RMD owns a 1/3 interest in the land
itself, how should one classify the trees? Depending on whether
the trees are under a contract to be cut, they may be either goods or
real estate. 9-102(a). Is there an argument that the trees are crops
and therefore farm products? Clearly the conservative approach w/
respect to the trees is to treat them as both real estate (and describe
them in any mortgage document) and goods (and describe them in any
security agreement). The moral of this problem is to ask enough
questions to ascertain what property is involved in the transaction.
Acting redundantly and treating property as both personal property
and real estate may be the only conservative option in ambiguous
situations. But such an approach can be expensive. In some states,
there are real estate mortgage registration taxes imposing tax liability
based on a percentage of the assessed value of the real estate subject
to the mortgage.
10. Problem 11 (Handout #6) Assume that the transaction between ONB and
LLC is within the scope of Art. 9. What must ONB do to create an effective
security interest? To perfect its security interest? Does ONB need to file in the
real estate records? [Refer: 9-109, 9-203, 9-308, 9-309(4), 9-310(a), 9312(a), 9-313(a).
Realty Paper Example
Loan Diagram

$
OMB (nat Bk)
O

LLC (orig. inst)

P to P
S/A (R.P)

Creditors of LLC

[This is a secured obligation under

9-109(b)]
P to P
Promissory note, mortgage back realty
(recorded land records)

45

Real Estate
Owners

Creditors of Real
Estate Owners

(A) Analysis Remember under 9-109(a)(1) Art. 9 governs personal property not
real estate property. Also see 9-109(d)(11) which expressly excludes real
property from Art. 9 coverage. This is our first example of a two tier
transaction. Here the collateral is the realty paper. Remember in the
introduction that a mortgage is a consensual lien on real property.
(1)

Low Tier Transaction This is the transaction between LLC and the Real
Estate Owners. This transaction is NOT covered under Art. 9 because it is
real estate under 9-109(d)(11).

(2) Top Tier Transaction This is the transaction between LLC and OMB.
The obligation is secured by real estate. The collateral is NOT the real
estate, it is the bundled of rights generated on the lower tier transaction.
There is no classification scheme for this collateral realty paper. So we
will classify it as a promissory note. Basically, we have a note with a back
up mortgage and Art. 9 applies. It is not real estate, it is the rights
embodied in paper that is the collateral.
(A) Assume: LLC defaults on loan from OMB but the real estate owner
pays on time. Can OMB repossess the property? NO, See Part 6 of Art.
9. Why? Based on CL property doctrines, OMB cannot grab the
property because what rights can LLC give OMB only what they
have since LLC has no right to foreclose on the real estate owner
neither does OMB. So, under what circumstance, could OMB get the
property? Only, if both LLC and the real estate owner default and OMB
would have to be the senior creditor of LLC and LLC would have to be
the senior creditor to the Real estate owner. Need double default and
both creditors must be senior. What is OMBs remedy if LLC defaults?
OMB can foreclose on realty paper by informing the real estate owner
that LLC defaulted and that the real estate owner should pay them.
(B) Assume: LLC owes OMB $200,000 and Real estate owner owes LLC $1
million, and LLC defaults. What happens to the $1 million in
payments. Does OMB have the right to collect a million from the real
estate owner? NO, only the $200,000. We are talking about shared
ownership of real estate owners obligation to pay $1 million. Theres a
surplus here. The remaining $800,000 goes back to LLC. LLC has
shared ownership. No sale, its a security interest with a loan. Look at
9-607 it contains language in subsection (c) statutory justification for
this analysis.
(1) 9-607(a) If so agreed, and in any event after default, a
secured party:
(A) may notify an account debtor or other person obligated on

46

collateral to make payment or otherwise render

performance to or for the benefit of the secured party.
(2) 9-607(c) A secured party shall proceed in a commercially
reasonable manner if the secured party:
(A) undertakes to collect from or enforce an obligation of an
account debtor or other person obligated on collateral; AND
(B) is entitled to charge back uncollected collateral or otherwise
to full or limited recourse against the debtor or a secondary
obligor.
(3) Attachment: How will OMB attach (create a security interest)? We must
look at 9-203(b). [Notice: For collection benefits, dont need perfection
only need a secured transaction (attached security interest); Perfection is
for priority]. The collateral here is the note with a back up mortgage.
Under 9-203(g) there is carry over attachment from the promissory
note to the mortgage. So you only have to satisfy 9-203(b) for
attachment.
(A) Value
(B) Debtor have rights in the collateral
(C) Security Agreement
(4) Perfection: Was notice given and if so was it proper? Under 9-308(e) [good
news for OMB the creditor) its got carry over perfection from the note
to the mortgage. So only have to worry about perfecting the note. There is
more than one mode to perfect a note:
(A) File financing state under 9-310 [doesnt say you cant file an
instrument] Under 9-312(a) security interests in instruments may be
perfected by filing (the preferential mode of perfection).
(1) Does OMB also need to record in the real estate records? NO
See 9-109 Comment 7 (Para. 1 after Example) an attempt to
obtain or perfect a security interest in a secured obligation by
complying with non Art. 9 law, as by an assignment of record of a
real property mortgage, would be ineffective. It is implicit from
subsection (b) that one cannot obtain a security interest in a lien,
such as a mortgage on real property, that is not also coupled with
an equally effective security interest in the secured obligation. See
9-607(b) it suggests the same conclusion as Comment 7. The
Drafters wanted to excuse OMB from recording the mortgage. All
they have to do is file a financing statement.
(A) Does this scheme create a secrecy problem? Theres 2 level
of creditors Assume OBM files under LLCs name and LLC
records the mortgage. Low tier creditors (of the real estate
owner) can find out about LLC and then to OMB. No secret
problem. What is the collateral as to those creditors the
land. What about the top tier creditors (creditors of LLC)?
What is the collateral the realty paper note with a
back up mortgage where will they begin to look? Art. 9
files under LLC name, theyll find OMB financing

47

statement. RESULT: Theres notice of both transactions.

But what if LLC does not record the mortgage, then there is
a secrecy problem. According to the drafters, they think
OMB should be excused and only need to file a financing
statement.
(B) Take possession under 9-313(a) taking instruments in possession

Securitization Diagram
$
Sale

Trust

$
Sale

OMB

Mortgage Co.

Pool of RP

Note
P to P
Recd mtg

Real Estate Owners

Und. Int.
Investors

(A) Analysis Remember a strict real estate transaction is out of Art. 9. On

the other hand here, the mortgage company is selling realty paper to OMB,
and OMB wants to spread the risk and it sells it again to the Trust
(remic real estate mortgage investment conduit) it converts the
realty paper into an investment and then sells undivided interests of the
investment (pass through securities it passes through profits
generated by bottom tier transactions to investors) to investors (the public).
How does Art. 9 figure in? Is the top tier transaction in Art. 9 (OMB v.
Trust)? What is the collateral? bundle of realty papers (instrument with a

48

back up mortgage). This is in Art. 9 under 9-109(a)(3) a sale of

promissory note is in the scope of Art. 9. Also under 9-109(b) the fact
that its a back up mortgage makes no difference.
(1) Attachment: Does the trust have an attached security interest? Under
9-203(b) has the trust given value to OMB Yes; does OMB (the
debtor) have rights in the collateral yes, it bought the realty paper
from the mortgage company; is there a security agreement there is
a written signed agreement. Under 9-203(g) the trust has an attacked
security interest in the note and it carriers over to the mortgage under
9-203(g).
(2) Perfection: Under 9-313(a) possession works since the trust
bought the realty paper it has physical possession. But not always
true because the trust can not service the mortgage. So typically, after
the sale the paper will be left with the mortgage company to deal with
the mortgagee. Under 9-308, filing a finance statement would work.
But under this transaction, you dont need to give notice because
there is automatic perfection under 9-309(4) a sale of a note
does NOT require filing.
(A) Comment 4 (9-309) Para. 2 expands upon the old Art. 9 by
affording automatic perfection to certain assignments of payment
intangibles as well as accounts .The purpose of para. 2 is to save
from ex post facto invalidation casual or isolated assignments
assignments which no one would think of filing. Any person who
regularly takes assignments of any debtors accounts or payment
intangibles should file. In this connection 9-109(d)(4) through (7),
which excludes certain transfers of accounts, chattel paper,
payment intangibles, and promissory notes from this Article,
should be consulted. Para. 3 and 4, which are new, afford
automatic perfection to sales of payment intangibles and
promissory notes. They reflect the practice under old Art. 9.
Under that Art., filing a financing statement did not affect the
rights of a buyer of payment intangibles or promissory notes,
inasmuch as the old Art. Did not cover those sales. TO the
extent that the exception in para. 2 covers outright sales of
payment intangibles, which automatically are perfected under
para.3, the exception is redundant.
When you have securitization transaction they are always set up as
sales in top tier transactions. Who is the weakest actor in the top tier
transaction? The mortgage company and the investors who are buying
the undivided interest in trust dont want to worry losing the
profitability connected to the future stream generated by mortgage. So
dont want to be tied up in a bankruptcy proceeding. So investors can
sell it so who owns the paper the trust company. If the mortgage
company goes bust the trust asset will not be part of the bankruptcy

49

proceeding. That is why we dont have loans instead sales. Thus

securitization is in Art. 9.
(A) How is Risk Spread? At one end you have mortgagor lending
money to individual and on the other hand you have investors
spreading the risk by owning a pool of it.
11. Problem 12 (Handout #6) Debtor asks the bank for a loan and offers a
consensual lien against oil, gas and minerals still in ground on some real
property owed outright by Debtor. Is the consensual lien within the scope of
Art. 9? See UCC 9-102, 9-109.
(A) Analysis Article 9 does NOT apply to real estate. See UCC 9109(d)(11). The definitions make it clear by negative inference that oil, gas
and minerals in the ground are real estate. See UCC 9-102(a)(41), (44).
12. Problem 12B (Handout #6) RMHR borrows $200,000 from First Denver
Bank to make improvements to its rooms and recreational facilities. Guests of
the resort are entitled to use resort tennis courts, golf course, and may sign
up for hikes with RMHR tour guides. The security agreement, drafted by the
bank and signed by RMHR, describes the collateral as contract rights,
account receivables, equipment, and proceeds thereof.
(A) Analysis the issue is whether the money paid by the guests to RMHR
constitutes accounts or proceeds of accounts (Article 9 applies) or is it rent
(Article 9 does NOT apply). See UCC 9-109(d)(11), 9-102(a)(2) and (64).
The weight of authority under the old version of Art. 9 is that hotel and
motel revenues are accounts. See e.g., In re Northview Corp.. If the law is
not clear in the jurisdiction where this issue arises, the creditor should
treat the hotel receipts both as personal property and real property and
do everything necessary under both Art. 9 and real property law to obtain
and publicize a line on the receipts.
13. Problem 13A (Handout #6) David is a radiologist who practices medicine in
CO; her medical practice is run as a sole proprietorship called Mile Hi. Action
on behalf of her business, David approaches Bank for a $400,000 loan to
purchase equipment for the practice. Medical equipment can depreciate
rapidly in value because of changes in medical technology so Bank wants
other collateral in addition to the medical equipment. David offers a
consensual lien in the Mile Hi interest bearing account kept at First Union. At
the time Bank loan, the balance in Mile Hi account at First Union is $500,000.
Would this consensual line be covered by Art. 9?
(A) Analysis What does $500,000 balance mean? Who actually owns the
money? When you deposit money into a bank, who owns it after deposit.
The Bank because they have the right to invest it. You are the depositor,
and a depositor is a creditor of the bank. Who do you get back when you
deposit money the banks promise to pay the balance. What type of
creditor are you? You are a general (rather than lienor) creditor but also

50

protected by FDIC. So when the David deposits $500,000 she gets a

promise to pay (honor her checks and withdrawals).
(1) Top Tier What is David offering Boulder Bank? So when she grants
a security interest to the bank what do we call the banks
promise to pay the David? It is called a deposit account (but really it
is just a payment intangible like in Problem 7). Why did Boulder bank
want a check account as collateral? Under 9-607(a)(5) its easy to
foreclose on just have to call First Union to tell them to pay you. The
problem with collateral is it is highly liquid and inalienable collateral
all it is non-possessory. Article 9 calls it control. See 9-104
there are ways to secure the collateral by limiting Davids ability to
empty the account.
(A) 9-104 Control of Deposit Accounts (a) A secured party has
control of a deposit account if:
(1) the secured party is the bank with which the deposit
account is maintained;
(2) the debtor, secured party, and bank have agreed in an
authenticated record that the bank will comply with
instructions originated by the secured party directing
disposition of the funds in the deposit account without
further consent by the debtor; or
(3) the secured party becomes the banks customer with respect
to the deposit account.
(b) A secured party that has satisfied (a) has control, even if
the debtor retains the right to direct the disposition of funds from the
deposit account.
The issue is whether the top tier transaction between David and
Boulder Bank is in Article? Under 9-19(a)(1) it is a form of
personal property that creates a security interest by contract. It is a
classic secured transaction. Notice there is a possible exclusion
under 9-109(d)(13) [an assignment of a deposit in a consumer
transaction] but it does not apply here because this is a business
transaction.
14. Problem 13B (Handout #6) Everything is the same as 13A except David
offers to grant a consensual lien to Bolder Bank in Davids own personal bank
account kept at First Union of Boulder. [It is not unusual for people who own
small businesses to grant consensual liens on personal assets to obtain
necessary financing for their business ventures). Would this consensual lien
be covered by Art. 9?
(A) Analysis Here the collateral personal bank account is still in
Article 9. Remember the exclusion above does not apply because the
grant of security interest is being used for business purposes and not a
consumer transaction.

51

15. Problem 13C Assume David approaches Boulder Bank for a $50,000 loan to
help pay for her personal vacation she wants to travel the world for six
months. In addition to other personal property collateral, she offers bank her
own personal, interest bearing bank account at First Union (with a balance of
$15,000). Would this consensual lien be covered by Article 9? See UCC 9102, 9-109.
(A) Analysis This transaction is outside of Article 9 because it is a
consumer transaction under 9-109(d)(13).
(B) Policy: Why cant consumers use this asset [deposit account] in a lending
transaction? We are talking about leverage. The worry is consumers wont
understand what they are doing and will over extend themselves. Different
states want different consumer protections so Article 9 doesnt put this
type of transaction in.
(C) NOTE: 9-201(b), (c), and (d) if more protection consumer protection
law it trumps UCC law.
(D) Drafters Intention: The drafters are saying this type of collateral is new
and are worried about disclosure not knowing and no consumer
protection laws. So, the drafters want to wait till consumer protection laws
catch up and they will then address whether it should be put in Article 9.
That is why the consumer transaction described in problem 13c is outside
of Article 9.
I.

Legal Limits on What May Be Collateral

1. Introduction
(A) General Purpose: the general purpose of Art. 9 is to create a
comprehensive security device that can cover any and all personal
property and fixtures. See 1-201(37).
(B) Limitations There are 2 sources of limitation on this general rule.
(1) Law outside Art. 9 may prevent some items of personal property
from serving as collateral.
(2) UCC does not define what constitutes property and there are
some cases holding that items of significant monetary value are not
property and thus cannot be encumbered.
2.

What are the Major Limitations Arising From Law Other than Art. 9?
(A) Limitation #1 there are laws that make difficult or impossible for
creditors to obtain and enforce non-possessory, nonpurchase money
security interests in consumer goods that tend to be highly personal in
nature and have little resale value. 444.2(4) of the FTC Credit Practices
Rule.
(B) Limitation #2 Most states have laws severely limiting the assignment of
future income by debtors to repay existing obligations. An assignment of
wages is, in effect, the grant of a security interest in future income. Art. 9
does not apply to such transactions. See 9-109(d)(3). Hostility to wage
assignments is based on the concern that creditors will have excessive

52

power over debtors in default. Plus, there is the concern the concern that
debtors with encumbered future wages would have reduced incentives to
continue working. Opponents of such restrictions argue that debtors know
best what their preferences are and, in a free society, should be able to
choose what obligations to undertake and what property to offer as
collateral.
(C) Limitation #3 In order for pension funds to qualify for tax benefits,
pension plans must restrict the ability of the beneficiary (debtor) to
alienate or create security interests in the pension fund. These restrictions
on debtor free choice are explained by similar policies as those advanced
to support limits on wage assignments. Those who argue for limits on the
alienation of pension funds point out that the central goal behind the
preferential tax treatment of pension. If debtors borrow against the funds
and default, this objective will not be realized. Opponents suggest that
debtors are the best judge of whether they need immediate credit for
emergency medical care or to save a failing business and that they may
not be able to solve their liquidity problems unless they can grant security
interests in their pension funds.
3.

J.

What type of valuable non-property can not be encumbered by an Art. 9

consensual lien?
(A) Government Issued Licenses the most important category of nonproperty that cannot be encumbered by an Art. 9 consensual lien is govt.
issued licenses, for example broadcast licenses, airport landing rights,
liquor licenses, or taxicab medallions. The govt. body issuing these
licenses declares that they are non-property, retains the right to revoke the
privileges at any time, and theoretically prohibits this transfer. There is a
tangle of cases in this area and this subject is beyond the scope of this
course. But you should be aware that the difficulties in granting a security
interest in most licenses are formidable. The same can be said with respect
to attempts by francisees to create security interests in contract rights that
are explicitly non-assignable under franchise agreements.
(1) How to Circumvent this Exception Even though it may not be
possible to create a security interest in a license or franchise as
original collateral, it is possible to use Art. 9 to create a security
interest in the revenues that debtors derive from the use of the
licenses and franchises. Such transactions also are beyond the
scope of this course.

Recap of Scope
(1) 9-109 weve learned 9-109(a) is the core provisions credit extension and
personal property as collateral is the classic case. A lien created by a
contract kicks out statutory liens. Phony leases and Phony consignments
are in Art. 9-109(a)(1)
(2) 9-109(a)(2) agricultural liens in Art. Even though not created by contract.
(3) 9-109(a)(3) right to be paid money 4 items important to remember
(4) Securitization taking promises to pay and pooling them together and selling

53

(5)
(6)
(7)
(8)
(9)

investment vehicles to public.

9-109(a)(4) consignments (but not all true ones are in, must satisfy
definition).
9-109(a)(5) first problem in class between John and Nancy.
9-109(b) even if in a two tier transaction, the top tier can be in Art. 9 even
if bottom is not.
9-109(c) be alert to federal preemption
9-109(d) exclusions even if in Art. 9-109(a) have to worry about
exclusion taking it out.
III. Creation of a Security Interest in Article 9

A. Classification of Collateral
1. Review the list of collateral on pg. 1 of Handout #8 and applicable
definitions in 9-102(a)
(A) Is the Collateral tangible property?
(1) If so, is the collateral real estate or goods? if real estate it is
excluded under 9-109(d)(11)
(2) If the collateral is goods:
(A) Consumer goods 9-102(a)(23) means goods that are used or
bought for use primarily for personal, family, or HH purposes
(B) Equipment 9-102(a)(33) means goods other than inventory,
farm products, or consumer goods
(C) Farm Products 9-102(a)(34) means goods, other than standing
timber, with respect to which the debtor is engaged in a farming
operation and which are:
(1) crops grown, growing, or to be grown, including crops
produced on trees, vines, and bushes; and aquatic goods
produced in aquacultural operations;
(2) livestock, born or unborn, including aquatic goods produced
in aquacultural operations;
(3) supplies used or produced ina farming operation; or
(4) products of crops or livestock in their unmanufactured states
(D) Inventory 9-109(a)(48) means goods, other than farm products
which:
(1) are leased by a person as lessor;
(2) are held by a person for sale or a lease or to be furnished
under a contract of service;
(3) are furnished by a person under a contract of service; or
(4) consist of raw materials, work in process, or materials used
or consumed in a business.
(E) Manufactured Homes 9-109(a)(53) means a structure,
transportable in one or more sections, which, in the traveling mode, is
eight body feet or more in width or 40 body feet or more in length, or,
when erected on site, is 320 or more square feet, and which is built
ona permanent chassis and designed to be used as a dwelling with
or without a permanent foundation when connected to the required

54

utilities, and includes the plumbing, heating, air conditioning, and

electrical systems contained therein. The term includes any structure
that meets all of the requirements of this para. Except the size
requirements and with respect to which the manufacturer voluntarily
files a certification required by the US Sec. Of Housing and Urban
Development and complies with the standards established under
Title 42 of USC.
(F) Accessions 9-109(a)(1) means goods that are physically united
with other goods in such a manner that the identity of the original
goods is not lost.
(G) Fixtures 9-109(a)(41) means goods that have become so related
to particular real property that an interest in them arises under real
property law.
(B) Is the Collateral Quasi-tangible property?
(1) Instruments 9-109(a)(47) means a negotiable instrument or any
other writing that evidences a right to the payment of a monetary
obligation, is not itself a security agreement or lease, and is of a type
that in ordinary course of business is transferred by delivery with any
necessary indorsement or assignment. The term does not include (i)
investment property, (ii) letters of credit, or (iii) writings that evidence a
right to payment arising out of the use of a credit or charge card or
information contained on or for use with the card.
(A) Promissory Notes 9-109(a)(65) means an instrument that
evidences a promise to pay a monetary obligation, does not evidence
an order to pay, and does not contain an acknowledgement by a
bank that the bank has received for deposit a sum of money or
funds.
(B) Others (including checks and certificates of deposit)
(2)

Investment Property 9-109(a)(49) means a security, whether

certificated or uncertificated, security entitlement, securities account,
commodity contract, or commodity account [9-327 priority rule]
(A) Security (direct holding system)
(B) Security entitlement (indirect holding system)
(C) Security account (indirect holding system)
(D) Commodity contract or account (not covered in this course)
(3) Documents 9-109(a)(30) means a document of title or a
receipt
of the type described in 7-201(2)
(4) Chattel Paper 9-109(a)(11) means a record or records that
evidence both a monetary obligation and a security interest in
specific goods, a security interest in specific goods and software

55

used in the goods, a security interest in specific goods and license

of software used in the goods, a lease of specific goods, or a lease
of specific goods and license of software used in the goods. In this
para., monetary obligation means a monetary obligation secured
by the goods or owed under a lease of the goods and includes a
monetary obligation with respect to software used in the goods. The
term does not include (i) charters or other contracts involving the use
or hire of a vessel or (ii) records that evidence a right to payment
arising out of the use of a credit or charge card or information
contained on or for use with information contained on or for use
with the card. If a transaction is evidenced by records that include
an instrument or services of instruments, the group of records taken
together constitutes chattel paper.
(A) Electronic chattel paper
(B) Tangible chattel paper
(5) Money
(C) Is the Collateral a Pure intangible?
(1) Accounts 9-109(a)(2) except as used in account for, means a
debtors right to payment of a monetary obligation, whether or not
earned by performance, (i) for property that has been or is to be sold,
leased, licensed, assigned, or otherwise disposed of, (ii) for services
rendered or to be rendered, (iii) for a policy of insurance issued or to
be issued, (iv) for a secondary obligation incurred or to be incurred, (v)
for energy provided or to be provided, (vi) for the use or hire of a vessel
under a character or other contract, (vii) arising out of the use of a
credit or charge card or information contained on or for use with the
card, or (viii) as winnings in a lottery or other game of chance operated
or sponsored by a State, governmental unit of a State, or person
licensed or authorized to operate the game by a State or governmental
unit of a State. The term includes health care insurance receivables.
The term does not include (i) rights to payment evidenced by chattel
paper or an instrument, (ii) commercial tort claims, (iii) deposit
accounts, (iv) investment property, (v) LC rights or letters of credit, or
(vi) rights to payment for money or funds advanced or sold, other than
rights arising out of the use of a credit or charge card or information
contained on or for use with the card.
(A) Health care insurance receivable
(B) Other, including credit card receivables
(2) Deposit accounts 9-109(a)(29) means a demand, time, savings,
passbook, or similar account maintained with a bank. The term
does not include investment property or accounts evidenced by an
instrument.

56

(3) Commercial Tort Claims 9-109(a)(13) means a claim arising in

tort with respect to which:
(A) the claimant is an organization; or
(B) the claimant is an individual and the claim:
(1) arose in the course of the claimants business or profession;
and
(2) does not include damages arising out of personal injury to or
the death of an individual
(4) General Intangibles 9-109(a)(42) means any personal property,
including things in action, other than accounts, chattel paper,
commercial tort claims, deposit accounts, documents, goods,
instruments, investment property, LC rights, LC, money, and oil, gas, or
other minerals before extraction. The term includes payment intangibles
and software.
(A) Payment intangibles 9-109(a)(61) means a general intangible
under which the account debtors principal obligation is a moentary
obligation.
(B) Other general intangibles
2.
3.

Refer to text pgs. 40-58

Class Notes
(A) 3 Suggestions For Classification
1. Use Handout #8 to do process elimination of categories of collateral
2. Look at property through eyes of debtor
3. Look at correct time when it attaches
4. If cant classify assume it is more than one classification because
there are cases where it is more than 1.

4.

Problem 12 (text)
(A) Problem 12A
(1) Analysis
(a) Piano tangible property/ goods/ if used at home for
personal
use under 9-102(a)(23) its a consumer good goods used or
bough for personal purpose. [Is it personal purpose if professional
up for debate].
(b) Cattle tangible property/ goods/ if werent fattened for sale,
but
for dinner for family purposes its consumer goods; but, here
its for sale farmer is the debtor so the cattle is farm product.
Notice, it is NOT inventory because under 9-102(a)(48)
inventory means goods other than farm products.
(c) Farmers tractor tangible property/ goods/ equipment.
Notice,

57

it is Not a farm product under 9-102(a)(34). It is a supply,

thus an equipment. Farm product would be fertilizers for the field
where as the tractor is farm equipment.
(d) Chicken Under 9-102(a)(23) it does not say other than farm
products. If farmer acting as consumer we want consumer
protections to attach. If eaten by family, chicken would be farm
product. Under 9-102(a)(35) need to satisfy this to have a farm
product under 9-102(a)(34). Need to engage in farming
operations.
(e) Maneur How do we classify maneur under 9-102(a)(34)(c) or (d)
products of livestock in an unmanufactered state.
(f) Mobile Home Is it a manufactured home or a consumer good?
Need more facts.
(B) Problem 12B
(C) Problem 12C
(D) Problem 12D
(1) Analysis A right to sue someone for breach of K is a general
intangible. A right to sue someone for negligence may be either a
commercial tort or a general intangible. A right to sue for interference
with an employment K is likely to be a commercial tort. The right to be
paid under the structured settlement agreement is a payment
intangible. Review your class [review your class notes from Handout
#6 problem 7].
(E) Problem 12E
(1) Analysis Pencils inventory/ 9-102(a)(48) materials used or
consumed in a business/ if it is inventory it is NOT equipment.
The major difference between inventory (pencils) and equipment
(tractor) is that inventory is used up more quickly short
enough economic life. Whereas, equipment has long economic
life.
(F) Problem 12F
(1) Analysis liquor license not tangible good/ is it a pure intangible?
Account NO under 9-102(a)(1); deposit account No. Its not
even propert at all If non-property, it is not in Art. 9. If this
restriction doesnt exist, it is a general intangible. This also applies to
broadcast license.
(2) Analysis right to return of security deposit/ IKEA has the right of
security deposit but needs money now. What is the right of return
of security deposit? Its a payment intangible unless you can argue it
is an account (but it is a stretch).
(A) How could it be an Account? Under 9-102(a)(2), it is a right to
payment of monetary obligation. Is the debtor IKEA
rendering a service which is to be paid by LL 9-102(a)(2)(ii).
IKEA has to clean up space so it has to render services to get
payment back therefore its an account. Notice, the exact
language of Account, even if the services were to be delivered

58

in the future, it would still be account because it is services

rendered or to be rendered.
(G) Problem 12G
(1) Analysis Curtains/ are they fixtures? If shutters, then a fixture, but
if drapes it is equipment. What if curtains then used as home.
When did particular secured partys security interest attach? If
attached when inoffice, it is equipment. But if attached after hung in
home, its consumer goods.
4.

Problem 13 (text)
(A) Analysis Another example of health care insurance receivables which
are accounts. [review your class notes from Handout #6 problem 7]

5.

Problem 14 (text)
(A) Analysis credit card receivables is the collateral. See Diagram on
Handout 8 page 3. The top diagram illustrates a loan transaction whereas
the bottom shows securitization.
Credit Card Receivables Example
Loan Diagram

Bank
S/a [cardholders
P to P passport]

Passport

Cardholders
P to P passport @ end
Of billing cycle
Slip

Slips

Goods

Immed. Pymt.
(fee)

Merchants

(A) Analysis the CC application is an agreement where passport promises to

pay authorized charges on credit card and the cardholder promises to pay at
end of billing cycle. Cardholder buys clothes from merchant, and cardholder
signs slip. Passport (the issuer) pays merchant immediately (that is the
diagonal line). What really happened Passport has made a loan to
cardholder and merchant has been paid and cardholder has goods. Is it a
general or secured loan. Assuming cardholder has got good credit, it is a
general loan (we arent studying secured credit cards). Passport needs money,
Passport goes to the bank and bank wants collateral. Passport has all the
promises to pay from cardholders. These promises to pay are called credit card
receivables. What is this collateral under Art. 9 they are accounts under 9102(a)(2) its another case of pure intangible in personal property.

59

Securitization of CC Receivables
d Trust

$
Sale

Bank

$
Sale

Passport

Pool of CC
Receivables
$

CC Loans

P to P CC bill
@ end of cycle

undivided interests
Cardholders

Investors

(A) Analysis Is the loan between passport and cardholder (securitization) in

Article 9? No, It is a general credit transaction. But in the top tier of this
transaction, passport (bank) and trust (bank), there are 2 sales. What is trust
selling to investors credit card backed securities. Are the top tier
transactions in Art. 9? Yes, look to scope Art. 9-109 its a sale of accounts
under 9-109(a)(1). The purpose of sale is to get it into a bankruptcy safe
entity. Under 9-318(a), reminds federal bankruptcy judges, it is not the
property of bank (or in past LLC). The Basic Rule is when you sell it, you no
longer own it. But, under 9-318(b) (which should remind you of 9-319(a) for
consignments) says the debtor may have rights its important that trust
has perfected so it can be a bankruptcy remote entity. So investors are safe in
the event Passport goes under. For perfection, start with 9-308(a) under
9-309 (automatic perfection) and 9-309(3) payment intangible and
promissory notes. There is NO automatic perfection for sale of accounts .So
you have to file financing statement for perfection.
(B) Policy Sale of accounts have always been in Art. 9 so should know that you
have to give notice.
(C) Risk Is there more risk investing in CC backed securities or mortgaged
back? CC back securities are more risk because default more likely (the risk is
on bottom tier transaction based on general credit).
6.

Problem 15 (text)
(A) Problem 15A
(1) Analysis Farm products; Here, grocery store asking for a loan from
bank and asking bank to take milk as collateral that is inventory.
(2) Analysis Debtor is the customer grocery store, I buys 2 cartons of
milk and offers it as collateral for loan consumer good.
(3) Analysis I owe a restaurant and use milk to cook. If restaurant is
the debtor, it is inventory.
Moral Story: Must look @ collateral through eyes of debtor.
(B) Problem 15B
(C) Problem 15C
(1) Analysis Rare coins are tangible property. If its goods, its consumer

60

goods because its a hobby. Is there an argument that it is NOT goods?

(A) Argument Under 9-102(a)(44), GOODS means all things that
are movable when a security interest attaches. The term includes (i)
fixtures, (ii) standing timber that is to be cut and removed under a
conveyance or K for sale, (iii) the unborn young of animals, (iv) crops
grown, growing, or to be grown, even if the crops are produced on trees,
vines, or bushes, and (v) manufactured homes. The term also includes a
computer program embedded in goods and any supporting information
provided in connection with a transaction relating to the program if (i) the
programs is associated with goods in such a manner that it customarily
is considered part of the goods, or (ii) by becoming the owner of the
goods, a person acquires a right to use the program in connection with
the goods. The term does not include a computer program embedded in
goods that consist solely of the medium in which the program is
embedded. The term also does not include accounts, chattel paper,
commercial tort claims, deposit accounts, documents, general
intangibles, instruments, investment property, LC rights, LC,
money, or oil, gas, or other minerals before extraction.
Basically, the definition of goods says money is NOT goods. Need to look
at definition of money in Art. 1. If the money is NOT goods, then what
are they? Money is NOT a general intangible. It is a quasi tangible
property because the rights are embodied in the money.
(D) Problem 15D
(1) Analysis the tax refund is a general intangible.
(E) Problem 15E
(1) Analysis Under 9-102(a)(49) investment property means (i) a
security; (ii) a security entitlement; and (iii) security account we
are talking about financial assets (bonds or stocks publicly traded).
What is the difference between bond and stock. A bond is a debt
(debenture bond is a bond on general credit corp. is the debtor and
its like giving a signature loan to the corp.). Whereas, stock is equity
(shared ownership of corp.). Bonds/ stocks all included in investment
property. Art. 8 governs private dealings involving stocks (how do you
use these financial assets in credit transactions).
(A) 2 Basic Ways Stock/Bonds Are Held:
(1) Stock assume X is the debtor and Y is a creditor. Assume X
wants to use stock as collateral. X can hold stock in two ways (1)
direct holding system or (2) indirect holding system. When you
have a paper stock certificate in direct holding this means a
direct relationship between x and the corp. the stock is
certificate security under 8-102(a). That means dividend
payments and other information come straight from corp. No
intermediaries in between. Most stock held in indirect holding
system. Under 8-102, definitions, if I hold stock or bonds in
direct holding it is called a security. Under 8-102(a)(15) security

61

means an obligation of an issuer (thats debenture bonds) or a

share (directly held).
(1) Indirect Holding System See Handout 9 page 8
diagram. If
I own 100 shares indirectly, X has a security account with
broker and in the account X has a credit, Corp. doesnt know
who X is, but X still enjoys the benefits but indirectly. Instead
of having a direct legal claim against corp. you have a claim
against security medium (broker).
Gabriels Indirect Ownership of Intel Stock
Example
Intel the stock issuer

Direct

Ownership

NY Banks and Clearing Houses

Accounts

Accounts

First Union securities

Investment
accounts
Gabriel

Other
Customers

AGE

Investment
Accounts

Customers

Accounts
Rushmore

Investment
Accounts
Customers

(A) Analysis Bottom tier of diagram, the customer is an entitlement

holder under 8-102(a)(7). Assume customer has a security account
under 8-501(a). At top tier we have corp. (the issuer) in between we
have intermediaries under 8-102(a)(4) (called security
intermediaries). The customer holds stock indirectly and any claims
are against AGE. Under 8-102(a)(7) entitlement holder suppose
customer decides to buy the stock AGE may have a position in the
stock (they may actually own some of stock) but if dont AGE has a
security account with a clearing house and that House has a direct
relationship with the corp. and will purchase stock indirectly for
customer. The customer can grant an Art. 9 security interest in the
security which is part of investment property. Also 8-102(a)(17)
grant security interest in entitlement interest (rights against AGE) or
grant a security interest in entire security account under 8-501(a).
These are subcategories of investment property security entitlement
rules of perfection are different depending on what type of security.
7.

Problem 16 (text)

62

(A) Analysis collateral Elvis Presley guitar held for investment its
tangible but Not an instrument it is either inventory (holding it so it
will appreciate when he sells it) or equipment. Here, it is equipment.
Under comment 4a if it is inventory it has to be held for sale in ordinary
course of business. Since Sam doesnt sell instrument, it is equipment.
8.

Problem 17 (text)
(A) Analysis This is a true lease. DAM goes to bank and gives leasing
agreements as collateral. Is the lower transaction (the true lease) in Art. 9?
No, it is in Art. 2A. If it is a phony lease, it is in Art. 9. But we are
assuming it is a true lease. What is the collateral in the top tier
transaction? Chattel paper under 9-102(a)(11) there is a monetary
obligation (bottom tier rights generated in the lower transaction) and
lease of specific goods (rental cars).

9.

Problem 2 (handout #8) _This connection is in connection with problem

12(A) and In Re Morton (pages 51-54) Nellie Newton (NN) is a computer
programmer and amateur violist at the time that she purchases an

expensive red viola from Alex Antique (AAI) on credit). The purchase
price is $400,000; NN makes a $100,000 down payment and grants AAI
purchase money security interest in the viola to secure the $300,000
balance outstanding on the installment sales K. NN indicates to AAI
that she intends to play the viola at home and with a group of her
friends who play string quartets for pleasure. NN uses the viola
consistently w/ her representations to AAI for three months following
the credit purchase. In part b/c of the wonderful sound of the red viola,
NN practices long hours and resigns from her regular job in order to
pursue her dream to play professionally w/ the National Symphony
at the Kennedy Center. NN needs more $ to maintain her lifestyle
professional musicians make less than computer programmers. NN
applies for and obtains a $150,000 loan from First American Bank.
Without informing the Bank about AAIs earlier interest in the viola, NN
gives the bank a nonpurchase money security interest in the red viola.
NN tells the bank she is using the viola in her work as a professional
musician. Bank promptly files a financing statement. Several years
later, N misses payments owed both to AAI and to the Bank, thereby
defaulting on both obligations. Both creditors want to repossess the red
viola. Which creditor has the senior interest in the viola?
In answering this question, assume that if the viola is classified as consumer
goods, then AAIs purchase money security interest is automatically perfected
when the security interest attaches. See 9-309(1). Accordingly, if the viola is
consumer goods, AAI wins. See 9-324(a). Otherwise, Bank wins. 9-322(a)
(2).

63

(A) Analysis As suggested in In Re Morton (decided under the old Art. 9 and
in the text), the viola is consumer goods as to the earlier credit seller AAI
and is equipment as to the later outside lender, First American Bank.
Thus, AAI wins the priority battle. Where there is a change in use of the
collateral by the debtor, in order to figure out how to classify the collateral,
you should ask:
What was the best evidence available to the particular creditor, at
the time the security interest was created (attached under 9-203(a),
(b)), concerning the debtors primary use of the personal property?
Extrinsic circumstances as well as the debtors stated intent should be
taken into account.
Both creditors face practical difficulties where there is a change in use of
collateral. As illustrated by this problem, the initial creditor does not want
to have to monitor the buyer/debtor (NN) after the sale to ascertain how
she will use the viola (a large ticket consumer good) in the future.
On the other hand, the subsequent creditor has no objective source of
information concerning how NN used the viola in the past. The debtor has
every incentive to not disclose the existence of the earlier security interest;
if she is acting in good faith, she may believe that she will repay both
creditors and may accordingly have no qualms about exaggerating the
size of her pool of unencumbered assets. Under the approach followed by
cases under the old Ar. 9, and not likely to change under the new Art. 9,
the entire risk of a post attachment change in the use of multipurpose
collateral is allocated to subsequent searchers here first American
bank.
In terms of precautionary behavior, it is a good idea on large ticket items,
for the initial creditor (often a credit seller as in the problem) to get a
written statement from the debtor (NN) about how she plans to use the
collateral in the future; such a statement provides useful evidence should
there be a priority battle following a default. As for later creditors relying
upon used multipurpose collateral, they should question the debtor
thoroughly about her earlier uses of the collateral.
10. Problem 5 (handout #8) Refer back to problem 17 in the text (p. 58).
Assume as shown on the diagram that during the month of July 2001, GMAC,
the originating institution, makes 500 car loans to individuals to enable these
500 customers to buy GMAX cars from various car dealerships. In each case,
the GMAC car buyer written agreement includes: (1) the car buyers promise
to repay GMAC (the balance outstanding on the car loan w/ interest over
time); and (2) language conveying to GMAC an Art. 9 purchase money security
interest in the new GMAC car bought with the GMAC credit. GMAC takes all
necessary steps under Art. 9 so that it obtains attached and perfected Art. 9
security interests in the 500 new GMAC vehicles. On Aug. 1, 2001 GMAC
borrows 2 million dollars from Bank. GMAC signs a security agreement
conveying a security interest to Bank in GMACs rights based on the 500

64

transactions with the 500 buyers of new GM cars. How would you classify the
collateral in each of the transactions between GMAC and the car buyers? Are
those 500 transactions w/in the scope of Art. 9? How would you classify the
collateral in the Bank GMAC loan transaction? Is that transaction w/in the
scope of Art. 9? Under what circumstances can Bank foreclose on the new
cars?
Example of Automobile Paper

Loan
Principal debtor

Bank

GMAC

P to P s/a in chattel
Paper [the bundle of
Rights generated in
Bottom tier chattel
Paper]

Creditors of GMAC

Bottom Transaction
P to P s/a (cars),
certificate of title

Creditors of Buyers

500 Buyers GM

Account Debtor

(A) Analysis How do you perfect a security interest in a car? Start at 9-308
and sift through to 9-311(a), which says filing a financing statement is NOT
good enough. Need notation on certificate of title. 9-311(d) limits the rule, but
that limit does not apply here. The bottom tier transaction is in Art. 9. The top
tier transaction collateral is chattel paper (9-102(a)(11)), which is in Art. 9, 9109(a)(1). Attachment is satisfied under 9-203(b). Also notice under 9-203(g)
there is carry over attachment to the cars a security interest in a security
interest. Perfection for top tier transaction can be done with a financing
statement because the collateral is not the cars it is the chattel paper. Notice
under 9-308(e) there is carry over perfection of a security interest in the
underlying security interest. The collateral in the bottom transaction is cars
goods in Art. 9. In top tier transaction, collateral is chattel paper, which means
a record of a monetary obligation (here the lower tier obligation) and a security
interest is specific goods (namely here the cars). If GMAC defaults and I own a
GMAC car can Bank repossess my cars? Under 9-607 how can the bank
repossess need default in both transactions (both tiers) and bank has to be
senior to GMACs creditors, and GMAC has to be senior creditor to the senior
buyers.

Trust

Securitization

Bank

GMAC
65

Sale
Pool of Auto paper

Sale
Pool of Auto paper

Undivided Interests

investors

P to P
s/a cars
certificate title

500 car buyers

(A) Analysis In the bottom tier, GMAC sells auto paper to bank, and then bank
sells auto paper to the trust, a bankruptcy remote entity under 9-318(a) and
(b). Under 9-109(a)(3) this is a sale of chattel paper, the top tier of the bottom
transaction is in Art. 9. How will trust perfect have to file a financing
statement. There is NO automatic perfection under 9-309.

B. Technical Validity of the Forms: Security Agreements & Financing Statements

(1) Review Handout #3
(2) Read text pg. 58-65
(3) Class Notes
(A) Security Agreement 9-203(b)(3)(a) How to make a technically correct
security agreement. Its also one of the requirements for attachment. An
authenticated security agreement that provides a description of the
collateral, and if the security interest covers timber to be cut, a description
of land concerned.
(B) Financing Statement 9-310, 312, 521 (uniform form for F/S) its an
effective mode of perfecting most but not all security interests.
(C) 9-308 ties security agreement and financing statement together a
security interest is perfected if attached (s/a) and notice given (f/s).
(D) Refer to the following Sections

9-502(a)(1) Subject to (b), a financing statement is sufficient only if it:

(1) provides the name of the debtor; (2) provides the name of the secured
party or a representative of the secured party; and (3) indicates the
collateral covered by the financing state.

9-503(a) A financing statement sufficiently provides the name of the

debtor: (1) if the debtor is a registered organization, only if the financing
statement provides the name of the debtor indicated on the public record
of the debtors jurisdiction of organization which shows the debtor to
have been organized; (2) if the debtor is a decedents estate, only if the
financing statement provides the name of the decedent and indicates
that the debtor is an estate; (3) if the debtor is a trust or a trustee acting
w/ respect to property held in trust, only if the financing statement: (A)
provides the name specified for the trust in its organic documents or, if

66

no name is specified, provides the name of the settlor and additional

information sufficient to distinguish the debtor from other trusts having
one or more of the same settlers; and (B) indicates in the debtors name
or otherwise, that the debtor is a trust or is a trustee acting with respect
to property held in trust; and (4) in other cases: (A) if the debtor has a
name, only if it provides the individual or organizational name of the
debtor; and (B) if the debtor does not have a name, only if it provides the
names of the partners, members, associates, or other persons
comprising the debtor.

9-503(b) A financing statement that provides the name of the debtor

in accordance with (a) is not rendered in effective by the absence of: (1) a
trade name or other name of the debtor or: (2) unless required under (a)
(4)(B), names of partners, members, associates, or other persons
comprising the debtor.

9-503(c) A financing statement that provides only the debtors trade

name does not sufficiently provide the name of the debtor.

9-506
(a)

minor errors and omissions a financing statement

substantially satisfying the requirements of this part is effective,
even if it has minor errors or missions, unless the errors or
omissions make the financing statement seriously misleading.

(b)

Seriously misleading except as otherwise provided in (c) a

financing statement that fails sufficiently to provide the name of the
debtor in accordance with 9-503(a) is seriously misleading.

(c) Not seriously misleading if a search of the records of the filing

office under the debtors correct name, using the filing offices
standard search logic, if any, would disclose a financing statement
that fails to provide the name of the debtor in accordance with 9503(a), the name provided does not make the financing statement
seriously misleading.
(d) debtors correct name for purposes of 9-508(b) the debtors
correct name in (c) means the correct name of the new debtor
(3) Problem 19 (text)
(A) Analysis The sales agreement is written security agreement with in
the meaning of 9-203(b)(3)(a). There is an objective manifestation of intent
to create a consensual lien.
(8) Problem 27 (text)

67

(A) Analysis Most courts hold that the security agreement expressly
provides that it covers replacement inventory. Some courts have been
willing to read financing statements more generously to cover
replacement collateral of the type that turns over frequently even if the
words after acquired are omitted. A careful attorney when drafting
descriptions of collateral for the security agreement or the financing
statement always should include the words now owned and after
acquired for all types of collateral described unless the intent of the
parties is to exclude after acquired collateral from the coverage of the
consensuallien.
(9) Problem 28 (text)
(A) Analysis Although the description equipment would be adequate,
various equipment or various equipment, see attached list (with not list
attached) are not adequate. Why?
(10) Problem 29 (text)
(A) Analysis The secured party will argue that no one is hurt by allowing
the broader definition in the f/s to control, so the court should reform the
security agreement to conform to the intent of the parties as expressed in
the testimony of the debtor and the secured party. In the case cited, the
court rejected this argument and the secured party lost over $200,000
because of this scriveners error. Several policies support the courts
decisions (1) a later searcher would be hurt who only saw a copy of the s/a
provided by the debtor and thus never searched the Art.9 files; (2 ) a later
searcher, if not hurt, could be inconvenienced because once it discovers
that the two documents contain different descriptions of collateral, the
subsequent searcher must make further inquiries to determine the scope
of the first creditors consensual lien; and (3) allowing discrepancies in
collateral descriptions to be retroactively repaired by the courts could
diminish confidence in the integrity of the filing system.

(13) Problem 7 (handout #8) Barbara Song is a sole proprietor who owns a
residential construction company called Songs Homes. She borrows
$400,000 from Octopus National Bank (ONB) in order to purchase new heavy
equipment, including a crane, bachoe, and tractor with box grader and
bushhog attachments. Song sings a written security agreement describing the
collateral as present and after acquired equipment. ONB completes and files a
written financing statement, using a form identical to the model one found in
9-521. The filed financing statement describes the collateral as present and
after acquired equipment, accounts, and general intangibles. ONB never asks
Song to review the financing statement it later files nor does ONB ask Song to
sign or otherwise authenticate the f/s.
(A) 7A Is it necessary for song to sign the f/s in order for the f/s to be
effective? No, see 9-502(a)(1) [provides the name of the debtor] and 9-516
(b) [filing does not occur w/ respect to a record that a filing office refuses to

68

accept b/c: (1) the record is not communicated by a method or medium of

communication authorized by filing office; (2) an amount equal to or greater
than applicable filing fee is not tendered; (3) the filing office is unable to
index the record b/c: (A) in the case of an initial f/s, the record does not
provide a name for debtor; (B) in case of an amendment or correction
statement, the record: (i) does not identify the initial f/s as required by 9512 or 518, as applicable; or (ii) identifies an initial financing statement
whose effectiveness has lapsed under 9-515.]
(1) Policy why under old Art. 9 was a signature required and the
drafters left it out in the revised Art. 9. Assume you want to file f/s
electronically, it facilitates electronic filing. Concerned about valid
electronic signatures. We can assume that although may be a good
idea now, we may want to bring signature requirement back if legal
standards are employed for electronic signatures. From the parties
perspective, electronic filing saves money and from filing office
perspective, now work inputting in f/s.
(2) Notice: Problem 7 would not arise under old Art. 9 because the
debtor would not sign (which was required) when discovered that
description of collateral is broader in f/s than in s/a.
(B) 7B Is the f/s effective as to all collateral described? As to part of the
collateral described? See 9-510(a) and 9-509(a). Look at handout #8a
there are 4 types of collateral described. We dont have the debtor in a
separate signed writing authorizing a f/s. Under 9-509(b) thats the key
provision for the problem: Property in Songs possession, at time of her
default on ONB loan:
(1) Various items of construction equipment owned and used by Song,
including cranes and backhoes Original collateral (collateral
described in s/a) This crane is equipment and thus in security
agreement. Go to 9-509(b)(1) the signing of s/a of
equipment means creditor can file to cover equipment.
(A) One Caveat is this F/S effective? We need to worry about 9311 sometimes have to worry about certificate of title.
(2) Hazel Constructions promise to pay Song 200,000. Hazel owes Song
the money because Hazel purchased a used crane from Song on
open account, after the closing of the ONB loan but before Songs
default. The collateral here is the promise to pay. Issue # 1 is
whether this is proceeds? We need to classify to see if in
security agreement and f/s. Assume its just a K right for sale of
equipment? Its an account. The term account not used in
security agreement, but in f/s we have a problem, we have a
form of collateral described in f/s but not security interest.
Does this f/s work for the security interest? Under 9-502(b)(1)
ipso facto 9-315(a)(2) which tells us a security interest attaches
to only identifiable proceeds of collateral. When OMB gets a nonpossessory security interest in equipment, theres always a risk

69

during rempayment period. Song will sell collateral. So when such a

sale occurs generating proceeds (here account) it is assume the
account attaches to security interest to substitute the crane. 9203(f) attachment gives right to proceeds. The code assumes the
secured party will have a right to proceeds. So OMB has an
automatic right to account under 9-315 assuming its
identifiable. Since S agreed to a security interest, Song also agreed
to authorization of f/s of account and thus OMB has an effective
F/S to the account.
(3) GWs promise to pay Song $500,000. GW owes Song the money for
construction work done by Song on the new law school building, after
the closing of the ONB loan but before Songs default. The
collateral is promise to pay $500,00 generating an account.
Same problem as #2. Is the f/s valid as this account. See 9102(a)(64) proceeds proceeds are what debtor gets upon
disposition of collateral. Here song is using equipment
getting paid to work. No disposition so no proceeds; so F/S
not effective.
(4) Songs right to receive a $100,000 tax refund from the state; this
right arose before the closing on the ONB loan. The right to a tax
refund is a payment intangible. Is it original collateral? No ,
not described in the security agreement. Is it proceeds? No, is
it described in F/S. Yes, but F/S not effective because not
described in security agreement. We have a situation where f/s
is over broad and covers collateral but not authorized by debtor
or proceeds in s/a.
(C) 7C Apart from carelessness, why might ONB want to file a f/s that contains
a broader description of collateral than the s/a? How might such action by
ONB hurt Song, the debtor? To scare away other creditors create a cloud
over Songs accounts and payment intangibles. See Example 2 of 9-509
sometimes it is necessary for f/s to contain language describing what proceeds
are. Need to have legitimate purpose and proceeds in form of accounts and
payment intangibles. Commentary on vigilante filing. Bogus f/s to create a
cloud on title to their personal property.
(1) How does the cloud on title (over broad filings) hurt the debtor? Fails on
GW case (ex. #3) assume Song defaults and OMB wants to foreclose
can they call GW and ask GW to pay OMB and not Song. If OMB asked
GW to pay directly (they can under 9-607 if had a security interest in the
account) but dont then OMB would be liable for converting Songs
property. All OMB did was give notice of something they didint have; so
cant foreclose because itd be conversion. So where is the harm from

70

overbroad f/s? It creates a cloud over Songs title but can dissipate
because all Song has to do is show the security agreement.
(C) 7D What remedies does Art.9 afford Song? Under old Art. 9, Song was
required to sign the f/s. Why is revised Art. 9 different, eliminating the
requirement of the debtors signature on the f/s? Do you think this
revision is an improvement? What prophylactic steps should a debtors
lawyer take to avoid some of the new risks under revised Art.9? What steps
should careful creditors take in order to avoid litigation? See UCC 9-502,
9-509, 9-510, 9-513, 9-518.
(1) 9-513 this is most appropriate here termination
(2) 9-518(a) correction statement
(3) 9-625(b) if OMB doesnt cooperate Songs has a claim for statutory
damages.
(4) Best Remedy: Is not to let this happen because there are transaction
costs for dissipating the cloud. Prevention Debtor can require
in security agreement that he has right to review final form of F/S and
must sign off on It as part of deal of the security interest. [thats the
old Art. 9 method] The secured party can include in provisions in
security agreement bringing into 9-509(a)(1) giving broad
authorization from debtor to file F/S. Look at handout #3 security
agreement Para. N this is a pro-creditor clause. How would you
revise if represented the debtor?
Debtor hereby authorizes secured party to file such f/s as secured
party deems necessary to perfect its security interest in the collateral,
including a copy of this agreement (and authorizes the secured party to
adopt on debtors behalf any symbol required for authenticating any
electronic filings.
(14) Problem 8 (handout #8) 1/1 Song borrows $50,000 from ONB to start her
business; she is a sole proprietor. ONB retains a floating lien on Songs
inventory and equipment. On 1/1 ONB files a properly completed f/s. On 2/1,
Song marries Dancer; they both change their last names to Song-Dancer. On
4/1 Song incorporates and names her business Barb. Song owns most of the
corps stock. As of 4/1 Barbs assumes all of Songs prior business obligations
including ONB loan; moreover, on 4/1 virtually all of the earlier businesss
assets are transferred to the new corp. On 7/1 Barb purchases a large forklift
to use in the business; assume that forklift is not governed by applicable
certificate of title status. On 7/15, Barb borrows an additional $50,000 from
FFC, granting FFC a security interest in present and after acquired inventory
and equipment. FFC files a f/s the same day.
(A) What is a Floating Lien?
After acquired
Future adv. ($100K)
inventory

71

Wholesalers of inventory

Future adv. ($50K)

Song

ONB
(creditor)

Debtor

$ or P to P

P to P; floating lien
[inv.], f/s
Inventory

proceeds

Customers
Analysis 3 Building Blocks of Floating Liens
(1) After Acquired Property 9-204(a)
(2) Proceeds 9-203(f)

9-102(a)(64)
9-315(a)(2)
(3) Future Advances 9-204(c)
(B) Does the original security agreement, signed by Song on 1/1 in her
capacity as sole proprietor, give ONB an attached security interest in the
forklift purchased by the successor corp. Barbs? Is the original f/s filed by
ONB effective giving ONB a senior interest in the forklift, despite Sons
name changes. [See 9-203, 9-507, 9-508]
(1) Analysis The problem presented here is that there is a post filing
name change of debtor (see 9-519) and f/s is under debtors name.
There is a secrecy problem. They would check for corp. name, not
the debtors name for f/s. So search under corp. is unlikely to
discover the filing under the individual name. So who gets stuck
with secrecy problem? Where does burden line? (1) Does OMB have
to catch post name changes? Or (2) does FFC have to grill debtor
and get all her names and then search?
(2) Rules 9-503 all the rules what name you use
9-503(a)(4) individual name of debtor used
9-503(c) trade names do not work
9-503(a)(1) corp. charter name of corp.
(3) Attachment Song signs security agreement. Barb never signed
ONB security agreement and Song buys new equipment. Does ONB
have an attached security interest in new equipment the forklift?
Under 9-203(d)92) corp. is a separate entity from Song. This
section was satisfied because the corp. took on the obligations of
Song (not always the case), the sole proprietor original debtor,
corp. new debtor. See 9-203(d). Also see 9-203(e) if new debtor
(corp.) becomes bound to the original security agreement. See 9204(a) for after acquired equipment.
(A) Hypo : Assume no name changes, when did the security
interest attach as to after acquired collateral. See 9-203(b)
rights of the after acquired property clause doesnt vie secured
party interest until Barb gets it. 7/1 9-204(a).

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(B)

Hypo What happens if there is a name change 9-203(d)

and (e) treats the whole thing as if there was no name change
so long as 9-203(d) is satisfied it attaches on 7/1.
(4) Perfection: Is the f/s valid? Ok. 9-507(c) does not apply. But 9508(b) applies (virtually the same rule). F/s is effective.
(A) 9-508(b) to determine whether the f/s is seriously
misleading have to go to 9-508(c)
(1) Example If you represent FFC, what name do you
search to see if f/s is seriously misleading (under facts of
problem 8) look at debtors correct name (barb) under
9-506(d) say you do that search and it pulls up Song
that means its not misleading. Why? Youve got the
OMB f/s, what else do you do? You know some debtor in
past you question the debtor in front of you ask them
if operated as sole proprietor before and whether they
assumed those debts. It means you got a lead. So not
misleading.
(2) Example But what if after search, you dont find any earlier

f/s. Then it is misleading. Have to go to 9-508 to find out if f/s

is effective. What is the result in Problem 8b the four month
period begins to run when the new debtor becomes bound under
9-203(d)(1) Yes it is effective.
(5) RECAP on NAME CHANGES There are two types of name
changes (1) where debtors identity doesnt change, but different
names [e.g., Song is sole proprietor, Song changes her last name
but still sole proprietor 9-507(c) deals with this type of name
change; (2) where there is a structural change plus name change
that is governed by -508(b) if difference between name of original
debtor and that of new debtor you have different legal entities.
This is the case where you have a merger or like this problem 2
different names, 2 different debtors.
(C) Problem 8C Would the result be different in 8b w/ respect to validity of
original ONB f/s if Song bought the forklift on Aug. 15. Suppose that on
7/25, ONB learned Song had incorporated and that the corp. intended to
purchase an expensive forklift on Aug. 15. What steps should ONB take to
try to preserve its priority date of 1/1?
(1) Analysis The f/s is Not effective because after 4/1. What do you
have to do to protect OMB in this case file a new f/s with the new
debtors name. Whats the latest date you can file under 9-508 3
months and 29 days, it means you can if by 7/31.
(D) Problem 8D Would the result be different in 8b w/ respect to validity of
original ONB f/s if Song bough the forklift before 1/1?
(1) Analysis the f/s is effective.

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(2) Advice: Make sure you check your debtors name every 4 month. Its
worse for ONB under new Art. 9 you want effect f/s for priority
battle and you dont know how much resources to put in to
monitor f/s because dont know if theyll be a priority battle. The
difficulty under new Art. 9 is that a f/s rescued under 9-508
works for some priority battles and not for others. Under 9326 priority rule tells you which ones work.
(3) Priority Battle Scenarios on Handout 8A whether 9-508
rescues work for priority under 9-326 ;
(A) Scenario 1
(B) Scenario 2
(C) Scenario 3
(D) Scenario 4
(4) Given this uncertainty what do you tell your client ONB will get
stuck if post name file change w/ sometimes a 4 month grace
period. How do you monitor subsequent name changes by your
debtor? Suggestions
(A) Tell the debtor to inform creditor if she changes her name if
read s/a in Handout #3 included is a clause stating debtor
must inform creditor of either (1) structural or (2) name
change immediately and if fails to do its a default event. So
when you get information, immediately file a new f/s in the
new name.
(B) If debtor fails to report, ONB gets stuck because the agreement
only between ONB and debtor; FFC not a party to it and
doesnt effect 9-326.
(C) Who is likely to pick up a name change? The accounting
department? Since the name on check. So have accounting
inform counsel of name change. Stationary may give you a
clue to a name change.
(D) You could set up a billing stub you send to debtors and require
the debtor to write here name on paper make it a part of
payment routine so you are notified every month if subsequent
name change.
(E) Business Reason for ONB to closely monitor the debtor
and you may not need to take extra steps like the ones
described in A D.
(1) Example Floating Lien [see diagram
After acquired
inventory

Future adv. ($100K)

Future adv. ($50K)

ONB
(creditor)

Song

Debtor

P to P; floating lien
[inv.], f/s

74

Wholesalers of
Inventory
$ or P to P

Inventory

proceeds

Customers
(A) Analysis A floating lien where the debtor is receiving inventory
financing this is a case where youd have close monitoring. Say B owns
a hardware store and there is a constant stream of goods moving in and
out of store. She gets proceeds (9-315). ONB wants to give B all money at
once its a way of controlling the debtors spending (it controls risk). So
ONB will make advancements every span period. If Bs collateral is
inventory you can get a floating lien.
(B) Three Blocks of Floating Lien
(1) After acquired property 9-204(a) security interest in present
and after acquired inventory (after the act which authenticates
the s/a). How does that work?
(A) Example assume ONB made the loan on 1/1 and got s/a on
1/1. And on 2/1 B gets new inventory. When does ONB
get an attached security interest to the new inventory. On 1/1
who owns the inventory? The wholesaler, so security interest
cant attach on 1/1. See 9-203(b)(3) requirements for Art. 9
attachment: (a) Value 1/1; (b) s/a 1/1; (c) debtors rights
in collateral in new inventory 2/1 (under 2-401 title passes
when goods are delivered). So security interest does not attach
until 2/1 and cant perfect until 2/1. ONB does not have to
create a new s/a. What ONB has to do @ instant B gets rights
in the new inventory its s/a expands to treat collateral ONB
security interest attaches.
(2) Proceeds 9-203(f), 9-102(a)(64), 9-315(a)(2)
(A) Example Assume B sells new inventory and on 3/1 she gets
a check from customer (its proceeds under 9-315(a)(2) its
identifiable proceeds). Security interest doesnt attach until 3/1.
The benefit is that one s/a doesnt need to be renegotiated at any
time; she sells and gets proceeds. The security interest expands. So
w/ one s/a you create a charge that floats on present and after
acquired inventory and proceeds with one document.
(3) Future Advances 9-204(c) the effect when does security
interest attach?
(A) Example Assume on 4/1 ONB makes a future advance, when
does security interest attach. On 4/1 because under 9203(b)91) you need value. The benefit is not renegotiating on
4/1.
(C) Business Reason for Monitoring: With a floating lien the debt collateral
ratio fluctuates. So ONB will monitor the debtor. So because they have to
monitor the ration, they can simultaneously monitor the name change.
This event usually occurs with large loans. Dont have post name problems
when have post deals like this one.
(15) Problem 9 (handout #8) This problem deal with land. The Easterbrooks

75

need help. They are farmers in MD who raise tobacco. 4 years ago (1997) they
borrowed $200,000 from MNB, and granted a security interest in crops
growing on debtors farm in St. Marys County, and all farm equipment located
on the farm. For the purpose of this problem , you should assume that MNB
took all necessary steps to perfect its security interest and that its consensual
lien will be senior to the lien of subsequent Art. 9 secured creditors with nonpurchase money security interests. The Easterbrooks have paid down the MNB
loan to $25,000. The Es are short on funds this year, theyd dont have enough
money to bring in this years crop of tobacco, to make necessary repairs on
their farm equipment, and to repair the roof on their farm house. They also
need funds to prepare the fields for next years planting. They would like to
borrow against their current, unharvested, year 2001 crop, but MNB has
severely curtailed its lending to tobacco farmers. Given the increasingly
burdensome taxation of tobacco products, MNB believes that tobacco farms
can no longer operate profitably. MNB, accordingly, refuses to give Es any
additional financing. The Es have approached a second lender, FF which
continues to finance tobacco growers. But FF refuses to give the Es a loan b/c
FF will not make a crop loan when its lawyers advise that FF would be junior
to another creditor in the event of default. The Es explain that they always
assumed that MNB security interest encumbered only the 1997 crop, that
crop was harvested and sold years ago.
(A) Analysis Is MNB or FF right? What should Es do?
FF wont loan against 2001 crop because dont want to be second creditor
because under 9-322(a)(1) conflict Art. 9 security interest. FFC would be
second in time if MNB s/a covers the 2001 crop. Assume E says the s/a
was only for the 1997 crop. Could you put E on the stand to testify to
that? No, its a parol evidence issue. You can only submit oral evidence
if the K clause is ambiguous. MNB will argue crops growing is not
ambiguous thus parol evidence rule applies. If arguing for E, its
ambiguous because of doctrine because you construe the document in
four corners. Assume E can testify? Whats the problem? Who will MNB
bring to the stand the loan officer hell rebut testimony we never
make loans with 5 payment reschedule with one year of crops. This a long
shot so how do we deal with construing language crops growing. E
could argue ambiguity is construed against the drafter. What about
construing the K with custom (1-205) should have used the term
hereinafter. None of these arguments are a slam dunk and unlikely
will put E on the stand. This is a problem because E cant get credit.
(1) Suggestions: Say you talk to creditors on behalf of E who would
you talk to first FF or NMB? Need to look at the benefits and
negatives:
(A) NMB if talk to NMB, what is the upside? What would you
get out of the talk? Youll be asking them to redraft the s/a to
re-describe the collateral highly unlikely. Whats the
downside? insecurity clause (or acceleration clause look at
default clause on Handout #3) If creditor is unsecure of the
good faith repayment of loan, they can recall the debt early. So

76

instead of helping your client to get more financing, you get

the creditor to call the loan.
(B) FFC If talk to FF, lay out the argument above and throw a
sweetner (well pay a higher interest rate or higher condensed
repayment period). Downside they say No. But that doesnt
affect the current debt. Upshot talk to FF first.
(2) Other advice: What else can E do to persuade a later creditor to
loan them the money? They have to pay off the first loan. You might
persuade FF to refinance the loan (only a $25K balance) or maybe
can borrow against or put on credit card. Once pay debt, theres no
security interest under 1-201(37). They can then under 9-513
they can get a termination statement. Effect: If you create a s/a
with a vague, overbroad collateral s/a other creditors will
construe it unfavorably to debtor.
(3) Prevention How would you prevent this problem: Collateral
covers only the year (e.g., 1997) of the crop. Be very careful how you
describe the collateral.
(B) Problem 9B The Es also raise llamas on their farm. They sell the wool
as well as baby llamas. They would like you to give them a written opinion
letter stating that neither the llamas nor their wool are covered by the
MNB security interest. W/ the letter, perhaps FF will make a loan against
the llamas. Should you provide the opinion?
(1) Analysis Clearly the llamas and baby llamas are out of Art 9
because not a crop or equipment. But what about the wool? Is it a
farm product under 9-102(a). Webster Dictionary includes wool in
crops. But under UCC crops does not include wool.
(2) Prevention Correct the s/a and state 1997 tobacco crop and
then no-one could argue wool was covered by original s/a.
(16) Problem 10 (handout #8) Your client, National Cell (NC), which
manufactures various components for cell phones, recently won a judgment
(w/ your able assistance) for trademark infringement against NC, also a
manufacturer of cell phone components. The judgment, after four years of
litigation, is for $2 million dollars. Immediately after the judgment was
rendered in your clients favor, the lawyer for the D (NC) told you, in the hall
outside the courtroom, Your client might as well forget about collecting
anything on the judgment, my client has no valuable encumbered assets.
During the post judgment discovery, you learn that the D, NC, owns no real
estate; its manufacturing operations have been conducted in rented space.
Plus, VA Bk, which provided financing for the Ds operating expenses, has an
Art. 9 security interest against all the Ds present, and future inventory,
fixtures and equipment and proceeds. You conduct an independent search of
the UCC files and discover 3 f/s, each showing VA Bk as the secured party.
Each of the F/s describe the collateral as all past, present, and future
inventory, equipment, fixtures, and proceeds thereof located at and then
gives one of three addresses where NC has been manufacturing office
supplies. Further investigation reveals that NC also is manufacturing cell
phone components at one additional rented site, namely at 100 N. King street,

77

Ruckersville, VA. That address does not appear on any of the f/s and there are
not other public records revealing any lien against the inventory, fixtures and
equipment at N. King St. site. Later you speak w/ LL at N. King St.; she tells
you NC installed only new fixtures and equipment at the N. King St. plant.
(A) In order for f/s to be effective, is it necessary for VA Bank f/s to show all
addresses where debtor is conducting business? Must the f/s at least
provide a mailing address for the debtor? [See 9-338, 9-502(a), 9-516,
and 9-520] First thing to do, is to hire an investigator to see what assets
are available. Assume no insurance against trademark liability. No real
estate owned (they rent). You check Art. 9 files 3 f/s all filed by VA Bk
cover all past, present, and future you discover its an order of levy
jurisdiction (judicial lien arises when sheriff seizes property) You discover
9-317 governs battles between judicial lienors and Art. 9 secured creditors.
What do you do? Is it necessary for VA Bk. To contain the addresses where
debtor doing business? No, not necessary. See 9-502, 9-504, 9-516
nothing says to include where debtor does business.

Chart Describing 3 Types of F/S in Terms of Complying W/ Technical

Requirements
Perfect F/S
Satisfies all requirements
in 9-502(A) and
9-516(B)

Should filing officer

reject the F/S
If Filing Officer Accepts
the F/S, is F/S effective

Slightly Defective F/S

Satisfies all requirements in
9-502(A) but is defective
under 9-516(B)

No, can infer from

9-528

Maybe

Yes, It works in any

priority battle where
it works

Sometimes

Seriously
De
fec
tiv
e
F/
S
Does not satisfy
requirements in
9-502(A)
No
No

Good F/S Do everything right on 9-502, 9-516(b). You need to include

mailing address of debtor, but not places of business.
Little Mistake Do everything right under 9-502 , but make a mistake
with 9-516(b) the officer is suppose to reject so you can fix. (so you
lose time and time is everything for priority battles). What if officer
accepts, but fails to include mailing address according to 9-520(C)
f/s its effective for most priority battles except where other creditor is hurt
by defect.

78

Seriously Defective Reject and Not effective

How do you use the information in F/S? Start with you as lawyer for NC
do you know if VA Bk made a loan to debtor No; do you know if theres
an authenticated s/a no. Why would there be a f/s if no s/a? You can
under 9-502(d) make an early bird filing and never reach a deal. So all
we know is that there are 3 papers in file; 9-513 NC should gotten a
termination statement, but didnt. We dont know if theres a loan
outstanding (or the amount)?
What should NC do? What are the options?
(1) Tell the sheriff to levy all property off debtor [if VA bk senior, theyll
get it}
(2) Get more information who has the information need to know if
loan, amount, collateral, etc) Can ask the debtor or bank?
(3) go ahead and levy at the one location, King St., which was not
described in F/S (this is the middle approach)
(B) Question: Should NC ask the sheriff to levy on the inventory of office
supplies, fixtures, and equipment at the N. King St. plant? Is there any
othe rinfo you should obtain before you advise your client to take this
step? NC will be unhappy if it has to pay for more litigation before it
recovers anything on the trademark judgment you have just won. For the
purpose of answering this question, assume that these events take place
in an order of levy jurisdiction. Further assume that if VA Bk holds a
perfected article 9 security interest in the inventory, fixtures, and
equipment at 100 N. King St., VA Bk has priority over your client NC. [See
9-108, 9-317(a)(2), 9-502, 9-504.
(1) Analysis
(A) Hypo: Assume worst case scenario to debtor say debtor
owes more money than the collateral is worth and s/a is very
broad (so that includes all collateral but no geographic
description under 9-108 dont have to be adequate
description). This is the converse of problem 7 s/a is
broader than f/s (in Problem 7 its the opposite where the f/s
is broader than s/a). Assume 1/15 VA Bk loans money to NC
and s/a authenticated but no geographic modifier, and 3 f/s
filed. On 2/15 you tell sheriff to levy at King Street. Who wins
priority and why? Need to look at status of both creditors?
(1) NC (creditor for $2 mil) when did it get its lien (order of
levy jurisdiction) 2/15 when sheriff grabs property
thats when judicial lien arises.
(2) VA Bank when does it have an attached security
interest 1/15. Perfected when? Not on the property
dispute because it doesnt describe King location because
of geographic modifiers. When VA bank filed the

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(B)

(C)

(D)

description of collateral which was comprehensible was

limited by inclusion of words located at. So the 3 f/s
dont cover this case. So VA bank has an unperfected
security interest. This f/s is under inclusive and creates
a secrecy problem. VA bank will argue thats not what we
intend the words to mean its helpful information but
not required. If I were judge, you should rule for NC
because words matter.
(3) Outcome: If NC is correct, who should win the priority
battle? Under 9-317(a)(2) a security interest (held by VA
Bank) is subordinate (loses) to rights of a person who
becomes a lien creditor (NC) before earlier time. Security
interest is perfected or one of conditions of 9-203(b) was
satisfied and f/s covering the collateral in dispute
thats NCs argument ) so send sheriff.
Hypo Option #2: Say instead of sending sheriff yet, you get
more information. You call VA bank and ask them to send you
a copy of the s/a for NC. What will VA bank do? Check the file
and find a broad s/a (that looks good, and copies of F/s and
find a mistake 4th location not covered). So VA will attempt
to amend the f/s do you need debtor to sign to amend? No,
9-509(b)(1) ipso facto authorization. So, dont do that
because you are not a lienor yet. Dont tip off your adversary.
Hypo Option #3: Assume the s/a had geographic modifiers _
this time description of collateral in s/a matches w/ f/s.
Should you send sheriff to King St.? Bigger mistake this time.
Now VA bank doesnt even have an attached security interest
to King St. theyre a general creditor. This isnt even in Art.
9 its general creditor v. judicial lienor. So send the sheriff. If
we tipped off the VA bank the time they need debtor to amend
because cant amend s/a to include more property without
debtor. Why would debtor encumber additional collateral?
Theres 2 creditors who want the property. Debtor would most
prefer to keep property free and clear. But that wont happen.
So, if you know the 2 creditors after it, VA Bank is your buddy
it provides financing whereas NC won a $2 mil judgment
against debtor. So debtor more likely to help VA Bank.
How can VA bank get an attached security interest if Value
has been given already in 1/15. Could the earlier debt serve
as value for expanded s/a? YES, 1-201(44) value a
person (VA Bank) gives value for new if Va Bank acquires
security interest as security for a pre-existing claim; so, VA
bank doesnt have to give more value. But you should give
more value because there is a statute under uniform
Fraudulent Act be careful it doesnt look like fraud, but
under Art. 9 no problem with value.

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(C) Recommendations:
(1) Dont include superfluous language in s/a
(2) Dont believe adversary if debtor says all property encumbered
(3) If judicial lienor, use Art. 9 files and priority rules to shake
collection efforts
(4) When doing pre-trial discovery think about collection and copies of
s/a early. But problem with tip off after judgment given then
looked for s/a May get in discovery without tipping off.
(17) Problem 11 (handout #8)
C. Attachment of the Security Interest
(1) Read text pgs. 66-75
(2) Problem 2 consider when the banks security interest will attach to Gabriels
accounts receivables in the following cases:
(A) 2A 1/10, FVB agrees to loan G $500,000 and the money is deposited
the same day in his business account at FVB. G signs a loan agreement
and a security agreement on 1/10; the collateral is Gs present accounts
receivables. The G-FVB s/a includes the following language:
in the event G shall be in default in payment of principal or interest under
the loan agreement and s/aand if said default shall not be cured w/in 5
days after receipt by G of notice thereof from FVB, then at the end of the five
day period, FVBs rights and obligations with respect to the collateral shall
be those of a secured party holding collateral under the provisions of Art. 9
of the UCC as in effect in VA.
On 1/11, FVB files a properly completed f/s. On 9/1 G, whose business
has expanded too rapidly, defaults on the FVB loan. On 9/2, FVB sends G
a notice of default which he receives on the same day. G does not make
any further payments to FVB. When does FVB first obtain a perfected
security interest in Gs accounts receivable? [9-203, 9-308(a), 9-310(a)]
(1) Analysis Does VA bank get a perfected article 9 security interest?
Remember secured creditors want to perfect as soon as possible to win
priority battles. When is there attachment? (a) Value 1/10; (b)
debtors rights in collateral 1/10 (says present accounts what he
has now); (c) s/a w/ adequate description 1/10. When is there
perfection? 9-310(a), 9-312 financing statement. 9-308 need
attachment and perfection to have perfected security interest.
(A) Words Matter Look at indent quotation what does it mean?
Sounds like parties postponed attachment of security interest. 9203(a) enforceable and 9-203(b) unless agreement expressly
postpones time of attachment. It postpones attachment (dont do
this because it will make your client VA bank a general
creditor. It puts FVB in position of judicial lienor. The clause tried

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to remind debtor that if defaulted they had Art. 9 remedies. So

perfection is on 9/7 not 4/11.
(B) 2B On 1/10, FVB agrees to loan G $500,000 so that he can buy the
inventory of PMS. The FVB G loan agreement provides, in pertinent part:
FVB is under no obligation to loan the $500,000 to G unless he first submits
to FVB a binding, written sales agreement executed by PMS. If such an
agreement is submitted, G has the option of receiving the loan proceeds but
is not committed to take the $500,000.
A valid s/a is signed on 1/10, providing that the FVB loan will be secured
by Gs present accounts receivables. On 2/1, G and P execute an
agreement of sale which is submitted to FVB by Go on the same day. On
3/1, FVB credits Gs business account at FVB w/ $200,000, the amount
requested by G. When does FVBs security interest attach to Gs accounts
receivable? [See 9-203, 1-201(44); see generally 9-102(a)(68).
(1) Analysis Attachment: there is no question 9-203(b)(3) s/a satisfied
on 1/10. Debt collateral on 1/10. The issue is whether value was
given when did Va Bank give value it would say 3/1. But VA bank
wants it earlier. Can you argue VA Bank gave value earlier? Is 2/1
agreement a condition precedent? Well theres 2 condition precedents
for bank giving value (1) he has to ask for it; and (2) has to perform.
Teacher says value is given on 1/10? Why? Remember illusory
promises (1-201(44)(d) value bank gives value if it gives any
consideration to support a K.
(A) Hypo #1 I promise to pay you $100K if moa my lawn. Is this
consideration? Yes because the person that controls the condition
is the promisee.
(B) Hypo #2 I promise to pay $100K if I feel like it; that is an
illusory promise not consideration. Who controls this condition,
the promisor.
Outcome Here, both conditions on bank to pay are in control of G.
Because of that fact, theres consideration to support a K and thats
when security attaches (1/10). Why didnt we use 1-201(44)(1)? Not
used because we have to figure out if binding (who controls condition
precedent 1-201(a)(44)(d).
(C) 2C 1/10 FVB explains to G that it is willing to loan him up to $500,000
on the terms set forth in problem 2b. But the FVB officer suggest that
neither the loan agreement nor the security agreement be signed until a
later closing date (after G submits the executed sales agreement.) On 2/1,
G and P execute an agreement of sale which is submitted to FVB by G on
the same day. On 2/2, G and FVB execute the loan agreement and the
security agreement. On 3/1, FVB credits Gs business account at FVB w/
$500,000, the amount requested by G. When does FVBs security interest
attach to Gs account receivable?

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(1) Analysis The banks security interest attaches on 2/2.

(D) 2D When does FVB give value if it gives G an unauthenticated record
which states in pertinent part:
FVB will give you $100K by 1/30, if our loan committee concludes that you
satisfy our standards for credit worthiness.
If the banks standards are sufficiently objective, at the time G receives
the letter; otherwise, on 1/30.
(E) 2E Does FVB give value if it sends G a letter (whichhe receives) stating
in pertinent part: You owe FVB $100K on a signature loan we extended to
you last year and which was due yesterday. FVB will refrain from calling
that loan and exercising its rights as a general creditor if, and only if, you
execute a security agreement by 2/12 granting FVB a security interest in
your present accounts receivable to secure repayment of the balance owed
on last years loan?
Yes. See UCC 1-201(44).
(F) 2F Does FVB give value if it sends G a letter which states in pertinent
part: You have informed FVFB that you have an overdue loan with state
Bank and you have asked for FVBs help. FVB cannot make you a loan but
FVB will serve as a third party guarantor of your obligation to pay state
bank. In exchange, you must pay FVB $ as a fee and must sign the
attached s/a giving FVB a consensual lien on your sail boat and automobile
to secure your obligation to repay FVB should FVB need to pay State Bank
on the FVB guaranty.
Yes, aguarantee is consideration sufficient to support a simple K. See UCC
1-201(44).
(3) Problem3 Boeing leases a jet to GA. The lease is a true lease; at the end
of the 5 year lease term, the parties intend that the jet will be returned to the
lessor, Boeing. Texaco, your client, is the principal supplier of fuel to GA.
Texaco does not want to make future deliveries of fuel to GA on credit unless
GA grants a security interest in personal property of value (Texaco is
concerned about the long term financial viability of GA).

Boeing

Jet

p to p rent

83

GA

oil
p to p; s/a

Texaco

(A) 3A Question If GA agrees to sign a s/a for Texaco that describes the
collateral as Boeing jet, leased by GA from Boeing on 9/1/2000, will
Texaco have an enforceable lien against the jet to secure GAs obligation to
pay for the Texaco fuel. Will 9-203 be satisfied?
(1) Analysis There is a true lease which means Boeing has a stake in
the jet because itll get it back at end of lease. Texaco does NOT
have an Art. 9 security interest on the jet because GA doesnt have
rights in the jet (GA has no ownership interest). Look at definition to
see what rights GA has under a lease. 2A-103(J) the right to use the
jet no property interest. So what happens it Texaco assumes it has
a security interest in the jet. Say GA defaults and Texaco grabs the jet
and Boeing sues Texaco for conversion. Who wins? Boeing. Look at
2A-301, 2A-307(1) clearly Boeing wins.
(B) 3B Question If Texaco s/a prepared for GAs signature describes the
collateral as Gs interest under the B-G lease agreement of 9/1/2000
for 5 year lease of Boeing jet, will Texaco have an enforceable lien? If so,
against what collateral? How ould the collateral be classified under Art. 9?
IF GA defaults on its fuel bill can Texaco seize and sell the jet? 9-609, 9610. If GA defaults on its fuel bill, can Texaco use the jet for the remainder
ot the term of the lease? Would it make a difference if the lease agreement
b/w G and B requires G to take out insurance for the jet and to certify
that any pilot flying the jet has a minimum of 500 hours flying time on a
jet during the last year? Is the analysis different if B-G lease agreement
prohibits G from assigning its interest under the lease? If the lease
agreement makes such an assignment an event of default? Does it make a
difference if GA defaults on the Texaco obligation? See UCC 2A-303, 9407.
(1) Analysis How do we classify the collateral? It isnt chattel paper?
9-102(a)(11) theres no monetary obligation GA is not the
lessor (remember: that DA was lessor and owed the right to payment)
Here, the debtor is the lessee and doesnt have a right to payment. The
collateral here is a general intangible. Does Texaco have an Art. 9
security interest?
(A) Assume I: the lease is silent on question whether GA can grant an
Art. 9 security interest?
(1) Under this scenario, GA can create an Art. 9 security interest
because there is nothing in Art. 9 or 2A from prohibiting
this. But Texaco can seize the jet but not sell it. It can
foreclose on collateral, but the collateral is not the jet, the
collateral is the use of the jet the rights of the lessee.
Assume Texaco seizes, does Texaco have to pay rent to Boeing?
Yes. Texaco will have to also follow all conditions of the lease.

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Its as if Texaco stepped in GAs shoes as lessee. Assume at

time GA defaults they owe $200K to Texaco. Why would Texaco
want the collateral? How would it help Texaco by using the jet?
Will rights under the lease pay off the debt of GA? Need to
know what the FMV rent of jet is versus the rent paid for jet.
Assume debt equals $200K, and FM rent (the cost it would to
rent another jet or sublease is $75,000/year) Rent of lease
$50K/year. So at end of lease, Texaco would take the $25K
and deduct it from debt. Sometimes, the rights of a lease will
help offset debt but not always depends on FM rent. Boeing
not happy about this arrangement because GA made Texaco a
successor lessee in effect GA chose the lessee not Boeing.
Boeing would much rather the excess benefit of $25K by
kicking out GA and re-leasing capturing the difference.
FMV Rent > Rent of Lease = when the rights help offset debt
Dont feel sorry for B on these facts because they should have
included a clause in lease saying you cant assign the lease.

(B) Assume II: leases says its an event of default if GA tries to grant a
security interest;
(1) Analysis B anticipates the problem above an puts in lease
saying a security assignment of rights is an event of
default. Assume GA breaches Lease K by signing a S/A with
Texaco, but GA continues paying Texaco. GA hasnt defaulted
on Texaco. B says GA defaulted and can kick lessee out.
Whats the consequence of this language whats the
consequence of signig the s/a? you would think if GA
breached the lease, B could grab the plane under 2A-525,
but thats not the case. See 9-407(a). Why are we in 9-407
restrictions in creating a s/a. A term in lease agreement
is ineffective if creating security interest clauses default _
thus this case makes no difference as long as GA is paying
the words mean nothing B cant grab the plane. But
9-407(b) says if GA does not pay Texaco and then texaco
repossesses the jet (uses the jet and captures the
difference b/w FMV rent and rent of lease) the language of
default is EFFECTIVE this is bad for Texaco. See 2A303 whats the consequence of this language being effective
this has been amended. See page 1272 subsection (2) a
provision is lease agreement makes default effective taking
you to (4) takes you to remedies 2A-501(2) and 2A-525 and
523.

85

Except as provided in subsection (3) and 9-407, a provision in

a lease agreement which (i) prohibits the voluntary or
involuntary transfer, including a transfer by sale, sublease,
creation or enforcement of a security interest, or attachment,
levy, or other judicial process, of an interest of a party under the
lease K or of the lessors residual interest in the goods, or (ii)
makes such a transfer an event of default, gives rise to the
rights and remedies provided in (4), but a transfer that is
prohibited or is an event of default under the lease agreement is
otherwise effective. 2A-303(2)
2A-303(4) Subject to subsection (3) and 9-407:
(a) if a transfer is made which is made an event of default
under a lease agreement, the party to the lease K not making
the transfer, unless that party waives the default or otherwise
agrees, has the rights and remedies described in 2A-501(2).
(b) if para. (a) is not applicable and if a transfer is made that (i)
is prohibited under a lease agreement or (ii) materially
impairs the prospect of obtaining return performance by,
materially changes the duty of, or materially increases the
burden or risk imposed on, the other party to the lease
contract, unless the party not making the transfer agrees at
any time to the transfer in the lease K or otherwise, then ,
except as limited by K, (i) the transferor is liable to the party
not making the transfer for damages caused by the transfer
to the extent that the dmages could not reasonably be
prevented by the party not making the transfer and (ii) a
court having jurisdiction may grant other appropriate relief,
including cancellation of the lease K or an injunction against
the transfer.
Whats consequence of the language in 2A-303(2)? Boeing
can cancel the lease and repossess, but transfer is otherwise
effective.
Policy: Why is the default language effective? The idea is there
is no real harm to Boeing just because GA signed a s/a. Boeing
would argue otherwise sure I am hurt _ I amore uncertain
about my future rights countervailing policy argument is free
alienability of rights and the real danger wont occur until
real transfer.
Assumption: this is the Hard case Texaco lawyer says its an
event of a default if GA signs s/a and there is a huge difference
between FM rent and lease rent and Boeing fussy about who it
leases its jets too. We know that if GA defaults and Texaco seizes,

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B will cancel lease. Is there any benefit to Texaco taking this

collateral? Difference between ex ante and post ante benefits
discussing priority rule _ so who ends up with the jet? From GAs
eyes, it doesnt care who wins it cares about keeping the jet and
when GA gives s/a to Texaco can inflict immediate harm on GA if
it defaults. So Texaco has pre-default leverage. If you were Texaco
and you had a choice between collateral Texaco may never want
to foreclose and may never view this pre-default leverage as useful;
but it doesnt. 2A-303 the last sentence makes it clear that
Boeing has to act immediately if not then s/a is effective.

(C) Assume III: GA prohibited from giving an Art. 9 security interest.

(1) Analysis Start with 9-407 are we in (a)(1) or (a)(2) [Case II
was in (a)(2)). Here we are in (a)(1). 9-407(b) cross
references only to (a)(2) that tells us that we are in (a)(1) the
language is ineffective and its thus the lease was silent and
Texaco can repossess without worrying about Boeing will
cancel lease.
(D) Advice:
(1) If lessors lawyer: (a) have to determine whether you want
lessee to assign rights; (b) to prevent security interest
have to say its an event of default.
(3) If Texacos lawyer, (a) read lease; (b) think about whether its worth
to take collateral thats the determination between FM rent and
Rent of lease.
(4) Problem 4A G, the sole proprietor of Gs music store, needs money to
finance the addition of a wine bar to his shop. G asks FVB for a $300,000
loan. The loan officer wants an attached security interest on a variety of
personal property owned by G, including Gs collection of antique mandolins,
worth $150K. What steps must FVB take to obtain an Art.9 consensual lien
covering this valuable collection of musical instruments? What are the
options? Is a security agreement necessary if G enters into a pledge
transaction w/ FVB, delivering the collection of antique mandolins to the bank
officer. See 9-203.
(A) Analysis Its goods what type? Not sure? Does the bank have an
attached security interest? Bank can either use an authenticated s/a or
take a possessory security interest. See 9-203(b)(3)
(5) Problem 4B G, the sole proprietor of Gs music store, needs money to
finance the addition of a wine bar to his business. G asks FVB for a $300,000
loan. The loan officer wants to obtain an attached security interest on a
variety of collateral, including Gs business checking account at FVB (with a
current balance of $100K) and his business savings account at Musicians
Credit Union (MCU) (with a current balance of $200,000). What steps should

87

FVB take to obtain art. 9 security interest in each of these two accounts? See
9-102, 9-203.
(A) Analysis the collateral is both deposit accounts. Is a credit union a
bank? Generally no, but art. 9 uses the definition of bank to include credit
union. See 9-109(d)(13) not a consumer transaction; 9-203(b)(1) value
given; debtor has rights; whats the banks options of setting (1) to use
9-203(b)(3)(A) authenticated s/a describing the collateral; and (2)
better choice is under 9-203(b)(3)(d) how does a secured party get
control of a deposit account. 9-104 gives 3 ways to get control:
(1) FVB has to do nothing 9-104(a)- because deposit account
maintained there. Does that mean every time GA gets a loan from
FVB hell create an security interest Art. 9 automatically in his deposit
account w/ bank that maintains account? 9-203(b)(3)(d)
pursuant to debtor s/a dont need to be in writing or signed but G
must manifest consent.
(2) Credit Union control of deposit account: 9-104(a)(1) doesnt work
because account not maintained there. 9-104(a)(2) whos
instructions? FVB what does that mean? S/a b/w FVB, G, and
CU depository bank will comply. See Handout 11 (pg. 1) control
agreement for deposit account. Para. 1 agreement for control.
Assuming tripart s/a signed FVB can call CU and tell them to wire
funds to FVB? Control means a lot of power. Does FVB have a legal
right to demand CU transfer money to its deposit account? If G hasnt
defaulted. No legal right to empty account unless debtor defaults but
they have power to dispose debtors property serving as collateral
(emptying the account). 9-104(a)93) new agreement saying FVB
is the customer. In all three cases think about the power of the
secured party FVB has the power to dispose account without
consent of debtor. However, control does not = possession.
(B) Notice: The code specified way to dispose intangible property its similar
to possessory security interest. Core idea control is surrendered over
the asset.
(6) Problem 4C For this subpart, assume that G wants the $300,000 FVB loan
to pay for college expenses for his son (who is a junior in college) and his twin
daughters (both of whom are freshmen). FVB wants an Art. 9 security interest
on Gs personal checking account at Crestar Bank. What steps must FVB take
to obtain an Art. 9 security interest on this personal account? 9-102, 9-109,
9-203.
(A) Analysis Cant do it under Art. 9 its a consumer transaction; see 9102(a)(26) and 9-109(d)(13).

(7) Problem 5 This problem concerns the attachment of security interests

to stocks and bonds.
(A) Refer to the following :
(1) 8-102(a)(2)
(2) 8-102(a)(4)

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(3) 8-102(a)(7)
(4) 8-102(a)(9)
(5) 8-102(a)(14)
(6) 8-102(a)(15)
(7) 8-102(a)(17)
(8) 8-102(a)(18)
(9) 8-301
(10) 8-501(a)
(11) 9-102(a)(49)
(12) 9-102(b)
(13) 9-203
(B) Problem 5a 1/10, FVB agrees to loan G $500,000 to purchase new
inventory for his business; the loan proceeds are deposited the same day
in his business account at FVB. G signs a loan agreement and a security
agreement, also on 1/10; the collateral is described, in pertinent part, as
Gs 100 shares of Ceridian stock. The stock is represented by stock
certificates. The stock certificates indicate on their face that they are
owned by G as sole proprietor of the music store. The certificates are kept
in Gs business safe. How is this collateral classified under Arts. 8 and 9?
When does FVB first obtain an attached security interest in this collateral?
What other options are available to FVB if it wants an attached security
interest in this collateral?
(1) Analysis The collateral is registered certificated securities (registered
because Gs name is on it rather than saying bearer). What are
the options for satisfying 9-203(b) (1) sign a s/a under 9-109 so
you know how to describe collateral; (2) 9-203(b)(3)(c) see 8-301
purchase broad enough to include secured creditor under 1-201;
(3) 9-203(b)(3)(d) collateral investment property and secured
party has control whats control 9-106 takes us to 8-106 (pg.
1280) because stock had Gs name whereas 8-106(b) deals with
registered form. What is required in addition to delivery has to be
endorsed.
(A) Notice difference is that certificates have to be endorsed in
9-203(b)(3)(d) and delivered under 9-203(b)(3)(c). But
have to comply with 8-106. This difference will make a big
difference for priority battles.
(2) Class Notes we classified the stock as registered certificate
securities. You can have a signed s/a; the secured party can take
possession under 9-203(b)(3)(c) (does not require endorsement of
stock under 8-106); or the secured party could get control of stock by
getting possession or delivery (8-301; 8-106) plus endorsement. Which
of the three options is the best for debtor signing a s/a because you
want to keep and control your collateral. Why dont you want to
surrender control (the most extreme option) the secured party has
the power to dispose of stock. Why not trust the secured creditor? We
are not always talking about a bank (creditor could be a friend, or
family member). Also there can be disputes about whether default has

89

occurred (so the secured party can be disposed based on his view of
default). Thos of the concerns of the debtor. What is the best option for
the secured party you want control. Why? Exactly the same right
power dichotomy. If the debtor is left with the stock (the classic nonpossessory security interest), the debtor does not have the legal right
to sell the stock without secured partys consent; but debtor can
(because he has possession).
(C) Problem 5b 1/10, FBV agrees to loan G $500,000 to purchase new
inventory for his business; the loan proceeds are deposited the same day
in Gs business account at FVB. G signs a loan agreement a security
agreement, also on 1/10; the collateral is described, in pertinent part, as
Gs 100 shares of Intel stock in First Union Securities. Gs investment
account at First Union Securities is a business account. How is this
collateral classified under Art. 8 and 9? When does FVB first obtain an
attached security interest in this collateral? What other options are
available to FVB if it wants an attached security interest in this collateral?
(1) How do you classify collateral? Its a securities entitlement
(subcategory of what Art. 9 calls investment property stock held
in the indirect holding system diagram pg. 8) The creditor will get
an attached security interest on 1/10. The only issue as to adequacy
is the description of the collateral in the s/a check under [9-108(d)].
What are the debtors other alternatives for attachment the only
possible alternative is 9-203(b)(3)(d) collateral is investment property
and secured party has control. How does secured party get control of a
security entitlement (start with Art. 9-106(a) tells us that a person
has control of a security entitlement as provided in 8-106 (need to
look at revised 8-106 on page. 1280] what has to be done to get
control of a security entitlement [put aside subsection (3)]:
8-106(d)(1) [because we are talking about security entitlement] if
purchaser [ the bank] becomes the entitlement holder. [purchaser
defined in Art. 1 how would the purchaser become the entitlement
holder the core idea of security entitlement is its just an electronic
credit in Gs account so what theyll do is that they will have an
investment account also at that bank and the debit Gs account and
credit the banks account OR the bank may have an account at
another brokerage house and just conduct an electronic credit and
debit.
The second alternative is 8-106(d)(2) securities intermediaries (first
union) has agreed to comply originated by purchaser (the bank)
without further consent of entitlement holder. [same with respect to
deposit account]. Get a tripartite agreement. [Look at last page of
Handout 11] Also make sure you read 8-106(f) [like 9-104(b)] allows
the debtor to have some access to the collateral

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8-106(f) a purchaser satisfying (d) has control even if the entitlement

holder retains the right to make substitutions for uncertificated
securities or entitlements or otherwise to deal with the security
entitlement [deal includes voting the stock]. [example in handout 11
showing an agreement between debtor and creditor where debtor gets
some access to the collateral]. It all depends on the bargaining power.

(D) Problem 5c 1/10, FVB agrees to loan G $500,000 to purchase new

inventory for his business; the loan proceeds are deposited the same day
in his business account at FVB. G signs a loan agreement and a security
agreement, also on 1/10; the collateral is described, in pertinent part, as
Gs First Union Securities investment account #3333. The investment
account at First Union Securities is a business account. How is this
collateral classified under Articles 8 and 9? When does FVB first obtain an
attached security itnerst in this collateral? What other options are
available to FVB if it wants an attached security interest in this collateral?
(1) Analysis: How do we classify the collateral? Its Not an uncertificated
security (however there may be uncertificated security in the
account this type of collateral means a direct holding system if
uncertificated, there is no paper but its all in the direct holding
system]. What is being offered is the entire account that G has First
Union. Again under Art. 9 its an investment property and then under
8-106 its a securities account. [8-501(a) defines what a security
account is] FVB will have an attached security interest assumed there
is an adequate description in s/a [9-108]. What are the other options?
9-203(b)(3)(b), (c), doesnt apply; but, 9-203(b)(3)(d) does apply you
can get control of a securities account. How do you get control? [(b)(3)
(b) doesnt apply because it is hard to get possession or delivery of a
securities account]
Look at 9-106(c) a secured party having control of all has control
over the security account sending us back to 8-106(d) so
everything in security account has to be transferred to an account
owned by First union or a tripart agreement.

(E) Problem 5d Everything is the same as in 5(c) except FVB describes the
collateral, in pertinent part, as all securities accounts. How is this
collateral classified under Arts. 8 and 9? When does FVB first obtain an
attached security interest in the stocks and bonds in Gs sole business
investment account which is maintained at First Union Securities?
(1) Analysis What is an adequate description of collateral to satisfy 9203(b)(3)(a) is it good enough? See 9-108 if have a consumer

91

transaction where the description is inadequate, you need specificity.

General classification used in this example is OK in a business context.
(F) Problem 5e Everything is the same as in 5(d) except G, a young
dot.com millionaire, borrows the money from FVB to build and furnish a
new beach house in the Hamptons. The security agreement describes the
collateral, in pertinent part, as all personal securities accounts. Gs
investment account at First Union Securities is a personal account. Does
FVB hold an attached security interest in the stocks and bonds in Gs
investment account at First Union Securities?
(1) Analysis language not good enough because its a consumer
transaction and needs to be more specific.

(8) Review on Formal Requirements for Getting an Attached Security Interest:

(A) 9-203(b)(3) provides the evidentiary tests to see whether debtor actually
consents to the lien: We have studied the following modes for attachment:
(1) Authenticated security agreement 9-203(b)(3)(a)
(2) Delivery / possession of collateral to secured party 9-203(b)(3)(b), (c)
[where the evidentiary act is simply the delivery of possession of
collateral to secured party]
(3) Debtor surrenders control 9-203(b)(3)(d) [secured party put in a
position where it can dispose collateral w/out getting further consent
from debtor.]
(B) NOTICE: 9-203(b)(3)(b), (c), and (d) also work for perfection purposes.
So even if you get a security agreement you may need to satisfy (b), (c) or
(d) to get a perfected security interest. See 9-313 (which deals with
possession) and 9-314 (which deals with control).

IV.

Perfection of the Security Interest

A. Perfection by Possession
(1) Read text pg. 78-80
(2) Class Notes
A. Modes of Perfection:
1.

File f/s 9-310, 312(a) how does it given notice

2.

Possession of collateral 9-313(a), 9-312 tells us when that will work

(when its a permissible mode) How does it give notice: subsequent
searcher does a visual inspection of collateral where is it?

3.

Secured party can take control 9-314, 9-104-107 (which spell out
what you do for control under art. 9) How does this mode give notice?
W/ control the secured party in position to sell the asset without debtor

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giving prior consent. How does it help subsequent searcher [control will
only work for deposit account and investment property]. How do you give
notice: if you know control works for collateral need to ask more questions
assume collateral is a deposit account in a bank who do you ask if
control the depository bank check to see whos name is in the deposit
account; is there a tripartite agreement.
4.

Automatic perfection 9-309, 9-312 (e)(f)(g)(h) how does it give notice? It

doesnt (there is always a countervailing policy argument raised.)

5.

Notation of the lien on the certificate of title (for cars) 9-311; how does it
give notice you ask the debtor to show the certificate of title and check.

B. Notice: with respect to deposit account you can only perfect with control

(see 9-312(b)). But with all other types of collateral can be perfected with one or
more modes. It depends on factors of the case because some modes win priority
battles. Trust is also a factor.
Perfection by possession (problem 32 and problem 1, 2) 9-313(a) [in hard cases the
secured party does not have physical possession, an agent of secured party does] All
three problems deal with the issue whether a person other than the secured party
can satisfy the requirement of possession in order for the secured party to get
attachment (and perfection).
(3) Problem 32 (text pg. 78)A museum (not secured creditor) has possession of
collateral (diamond). MB promises to pay G the balance of purchase price and
signs a s/a covering the diamond. Assume there is an adequate description of
collateral, and MB wants the diamond for investment purposes. Also assume
under s/a its an event of default if MB were to sell the diamond and parties
agree MB gets title before possession (parties can bargain for title to pass after
identification of diamond but before delivery 2-401). Can G perfect a security
interest in diamond but simply calling the museum tell them to hold the
diamond for his benefit until MB pays in full; thus creating an escrow
arrangement.
Before we can answer this question we must look at the easier cases:
A. Case 1 11 A.M. MB-G sign sales and s/a and makes down payment. At
12 P.M. G calls museum and tells them he is going to pick up diamond at
1:00 P.M. G arrives and gets the diamond. When does G have a perfected
security interest? When he is actually handed the diamond look at 9313(a) classify the diamond as equipment and goods a secured party
may perfect security interest in goods if gets possession. If G has got it in
his hands, thats possession.
B. Case 2 G has a personal secretary, James. 11 A.M. closing on the sale
and at noon G phones the museum and tells them his secretary James
going to pick up diamond at 1:00. Say James gets diamond and doesnt get

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back till 3:00 P.M. When does G have a perfected security interest? Under
9-313(a) if James is an actual agent of G, then perfection is when
James received the diamond. [an agent is someone that has the power to
bind their principal by their acts in deed]. Clearly, here James is an agent.
The comments of new Art. 9 suggest that possession by an agent is the
same as possession of secured party.

C. Case 3 No museum, instead diamond imported by a jewelry shop. G

bought diamond and paid cash and got title. But he didnt take the
diamond. Now MB comes along and wants to buy Gs diamond that is still
in the store. At 11 AM, closing of sale. At 11 AM, does G have a perfected
security interest in diamond that never left the store. Is the jewelry stores
continued possession of diamond enough so that we can say G, the
original owner (and also the credit seller) has a perfected security interest
in the diamond that is still in the store? We are not in 9-313(a). G is not
in actual possession of diamond nor is the store an agent. The store is a
non-agent bailee, someone to whom the bailor delivers the property for a
very specific limited purposes. So the store is not Gs agent, but it is a
bailee. SO the question is what has to be done to perfect an Art. 9 security
interest when diamond in hands of a bailee? Look at 9-313(c) (this is the
clear case of subsection (c)) secured party (G) takes possession of diamond
when diamond in possession of a person (the store) other than the debtor
(MB) other than the secured party (G) when subsection (1) the person
(store) in possession authenticates a record acknowledging it holds
collateral of secured party. So G can do this but needs to take an
additional step by getting an authenticated record by jeweler saying he is
holding the diamond on behalf of G.

D. Compare Case 2 and Case 3 Why does agent have possession, but the
bailee does not under 9-313(a). What is the policy reason? Here, the store
could have the diamond for one reason only to fix it for G. There is no
necessary explanation of the stores possession as a collateral agent as
someone who is holding it on behalf of G for purpose of giving notice and
maintaining perfection. Idea is we dont want litigation why the store is
holding the diamond. This why we require a signed record to prevent
litigation the signed record is also likely to give notice to others.
E. Museum Case (Problem 32) Is this case more like Case 2 or Case 3. Its
closer to Case 3 (the jewelry store case). What a museum might be willing
to do, its unlikely they are willingly to become an agent much more
likely to become a bailee. If they are a bailee (and documents are
consistent) then again under 9-313(C) its not enough for G to call, you
need an authenticated record showing museum is holding the diamond on
behalf of G.

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F.

What is an escrow agent: its an agent who owes a fiduciary obligation to 2

principals. Here, its G and MB. Again the agent can bind both its
principals by its acts and words within its scope of its authority.
Assuming Museum is an escrow agent, does G need an authenticated
record that says the museum is holding the diamond on Gs behalf. In an
escrow arrangement, you are still in 9-313(a) dont need an
authenticated record acknowledging the possession (but you will always
have a writing saying the escrow agent holds the collateral). Since we
dont know how these provisions will be applied. A good idea is to get this
kind of writing whether you are talking about museum, store, or James if
inexpensive. Also a way out, G could just file a f/s for perfection.

G. Recap of 9-313 possession by agent works for purposes of 9-313(a);

but if have a non-agent bailee you go to 9-313(c) and need an
authenticated record. See Handout 9A which provides samples of clauses
you would put in this record by the bailee.
(4) Problem 1 (handout #10) When you work problem 32 (p. 78) make the
following assumptions:
[this is a typical escrow arrangement involving
stock]
1(a)(i)

the G-B sale and security agreement contains an adequate

description of collateral;
1(a)(ii) B does not intend to wear the diamond but wants to keep it in her safe
for investment purposes, hoping to later sell it at an appreciated price;
1(a)(iii) the default clause in the G-B sale and security agreement states that
it is an event of a default if the debtor sells or otherwise disposes
of the collateral during the credit repayment period w/out Gs prior
consent; and
1(a)(iv) the G-B sale and security agreement states that B receives title to the
diamond (subject to Gs security interest) at time that she makes
the down payment on the price. (To understand the importance of this
assumption review 2-401 and 9-203(b)(2)).
Problem 1(b)(i) Assume for this problem that your Client Archibald G wants
to sell 100 shares of C stock, in the form of stock certificates, to MB (who does
not invest in or like diamonds). The sale is on credit. G is worried that may
default. To persuade G to sell the stock on credit, B agrees to grant G a
purchase money security interest (in the stock) and to set up an escrow
arrangement. AA, a local lawyer in town who has not done work for either G or
B, is to serve as the escrow agent. In preparation for the sale, G exchanges his
C sock (showing Gs name as owner) for new certificates (issued by C)
indicating that MB is the owner of the 100 shares. On 2/1/01 G and B signa a
sales ands/a that grants to AC a si in 100 shares of C stock to ensure
payment of the full purchase price for said stock. Under this agreement, B also
promises to pay for the stock in full and to make the 1st pmt. Of 25% of the
purchase price at the time of the execution of the sales agreement. When G
receives 25% down pmt. On 2/1 he delivers stock certificates to B. Later the

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same day, pursuant to the sales and s/a, B indorses the stock in blank and
delivers the the stock certificates to escrow agent. The escrow agent is
instructed to return stock if B pays in full and on time and if B fails to pay, the
bearer stock is to be delivered to AG. By 7/30/01 B is in default on her pmts
to G and other creditors. She files for bankruptcy on 7/31/01. The escrow
agent is still in possession of the stock certificates. In a battle b/w the trustee
in bankruptcy (asserting strong arm under 544(a)(1)) and G who wins? Why?
(1) Analysis Here G wants to sell stock in the form of stock certificates. This
stock is a certificated security and at the outset what G does is G gets the
corp. issuer to issue the stock in the buyers name (MB) so we would say
its registered certificated securities (because it has MBs name not
bearer). G gets MB to sign a s/a, but that is not enough. SO he sets up
an escrow agent ( a lawyer not on retainer to either party). So on Feb. 1, G
and MB sign a sales agreement; MB signs s/a; MB makes a down
payment; and then all three sign the escrow agreement which is always in
writing. G is suppose to indorse the stock and give to the escrow agent.
Escrow is to hold the stock during the loan repayment period if pays full
give to MB; if default give to G.
Assume Feb. 2, G files a f/s; July 30 MB defaults and July 31 MB files for
bankruptcy. The question is who wins? (we could have thrown the
trustee of bankruptcy into problem 32).
What is the status of the trustee in bankruptcy? At time MB files
bankruptcy, he has a judicial lien (541(a)(1) this the strong arm
power).
What is the status of G? Does he have an attached security and if so
when? Under 9-203(b) Yes, on Feb. 1.; What about perfection? 9-308(a)
there are two modes: (1) possession (9-313(a) second sentence
describes this collateral by taking delivery under 8-301) dont need to
worry about 9-313(c) because doesnt apply to certificated securities or
goods secured Look 8-301 (pg. 1285) defines delivery [what delivery
are we looking at? Be careful with the word purchaser here we are
looking to see if G through the escrow agent has possession (the
purchaser here is G). Again we have the problem of deciding whether we
are in 8-301(a)(1) or (a)(2) here the escrow agent is closer to an agent
than a bailee so we are in (a)(1). But pay attention to (a)(2) it does not
say the acknowledgment has to be in writing or authenticated (so it is
different from 9-313(c). So what do you do if you represent G get a
signed writing (most likely the escrow agreement will work).
A. Assume the escrow agent happens to be MBs son in law,
and the agent does all legal work for MB. Does G have a
perfected security interest by possession? Does it matter
that agent is related to MB? What will trustee in bankruptcy

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say the relationship is too close and not an agent, which

means who is in possession, the debtor and that is not
perfection (the core idea is to deal with the secrecy
problem). But if agent is related and MBs lawyer that
connection is too close to resolve the secrecy problem, that
means G if relied solely on perfection, G would only have an
attached security interest and would lose to the trustee
becoming a general creditor.
B. Does the F/S help the possession problem so as to perfect
the security interest. How do you know filing a F/S will
work to perfect security interest in certificated securities.
See 9-312(a). Yes.
C. Under these facts, G will have control too. We would start
with 9-314(a) (p.1112). Go to 9-106(a) sends you to 8106 (the revised version on pg. ) 8-106(a) says a purchaser
(G) has control over a certificated security if the security is
delivered to purchaser. 8-106(b)(1) would also apply. Note
the word delivery, which sends us back to 8-301 (must
satisfy delivery whether relying on possession or control to
beat the trustee in bankruptcy).

(2) What would be the result if G had filed a properly completed f/s on
2/2/01? [in resolving this priority battle, consider all 3 permissive modes
of perfecting a s/a in this collateral, namely possession, control and
filing)? See 9-312(a) Yes she would have a perfected security interest.
(3) See the following Sections:

(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)

544(a)(1)
8-102
8-106
8-301
9-106
9-203
9-312
9-313
9-314
9-317(A)
9-328

Problem 1(b)(ii) Assume that AG does not set up an escrow arrangment nor
does he sell the C stock to MB. Instead, B has owned the C stock for years.
The stock certificates, on their face, show MB as owner; the certificates are in
her possession. G is a venture capatilist. He agrees to loan B $100K for the
opera co. she owns and operates. On 2/1/01 G and B sign a loan agreement

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and a security agreement and agree on the lang. In the form financing
statement; all 3 docs contain an adequate description of the C stock as
collateral. G gives B the $100K loan proceeds on the same day. G files the f/s
on 2/2/01. On 3/28/01, B , who cannot meet her current business expenses
persuades ONB to make her a short term, $50,000 secured loan, to enable her
to meet opera payroll. On 3/28, ONB gives B $50,000 loan proceeds; at the
same time, B signs an ONB s/a describing collateral as 100 shares of C stock
and delivers the C stock certificates to ONB to serve as collateral for loan. By
7/31/01 B is in default on her obligations to both G and ONB. Which creditor
has a senior claim to the C stock? Why ? Does the answer to this question
depend on whether B indorses the stock to bearer before delivering the
certificates to ONB? See 9-322(a), 9-328.
(A) Which Creditor has a senior claim to the C stock? Why? Here we have
registered certificated securities held in the direct holding system.
What is the status of G? When does she get an attached security
interest? Feb. 1 (value, s/a w/ adequate description under 9-108, rights
in collateral). When if any is there perfection? G got a perfected security
interest in 2/1 even though filed on 2/2/01. Look at 9-312(e) temporary
automatic perfection a security interest in certificated securities is
perfected without filing or the taking of possession for a period of 20 days
from the time it attaches to the extent it arises for new value given and an
authenticated security agreement. So from 2/1 to 2/20 without doing
anything G is automatically perfected is there a secrecy problem; yes,
what is the countervailing policy read the comments for the
convenience of the secured creditor because getting possession takes time.
Look at 9-312(h) after 20 day period expires perfection depends on Art. 9
G filed a f/s so he is perfected under 9-308(c).
What is the status of OMB? They get an attached security interest 3/28. It
also has the benefit of automatic perfection, but does it do enough to get
permanent perfection? They took possession under 9-318(a) taking
physical delivery of certificated securities will work whether or not you
indorse. So if they wanted control, what would OMB have to do on 3/28?
Possession doesnt require indorsement, but for control on these facts,
they would need MB indorsement (8-106(b)(1)). Both modes serve to
perfect the security interest on 3/28.
What is the Priority Rule? Start with residual rule of 9-322(a)(1) (this is
the rule you go to when have 2 conflicting security interests) when
applying this section, start with second sentence and generate a priority
date Start w/ G Feb. 1 because of automatic perfection; OMB 3/28
do you feel sorry for OMB? Couldnt they find out. They should have
checked the files and adjusted this behavior. If this were the right priority
rule, but under 9-322(f)(1) subsection (a) is subject to the other
provisions of Part 3 of Article 9 is there a specific priority rule that

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governs this battle that might give a different result. Look at 9-328
(priority of security interests in investment property which covers
certificated securities) under subsection (5) if OMB relies on possession,
it wins. But what if OMB got control as its mode of perfection, under 8106(b)(1) OMB also wins. What if OMB had filed a f/s, who would win? G
would win under 9-322(a)(1) because its who filed first. Remember, some
modes of perfection win other priority battles even though all 3 modes are
permissible and will beat the trustee under 9-317. But if G relies on f/s,
it is the least preferred mode of perfection when talking about priority
battles with investment property.
Policy: Whats the reason for the result above. The drafter suggest 2
reasons: (1) first, they say this is a transition rule weve been
transitioning from 1994 before 1994 people who dealt with securities
were not use to checking the art. 9 files, so filing a f/s and checking for a
f/s is irrelevant because most people will take control; (2) second, (slightly
more persuasive) they say it gives the system more flexibility. The idea is if
you have a credit worthy debtor you may perfect only with a f/s. Debtor
doesnt mind because debtor gets to keep control and possession of
property. Alternatively, if worried about the status of debtor, you would
insist on taking control or possssion, which might mean you might have to
charge a slightly lower interest rate to give the debtor an economic interest
to agree to surrender control and possession. The idea is you have
different levels of perfection, which provides more flexibility. The cost is
that if you have 3 modes of perfection, the subsequent creditor has to
search all 3 modes.

(B) Does the answer to this question depend on whether B indorses the stock
to bearer before delivering the certificates to ONB? [See 9-322(a), 9-328]
Analysis Endorsement of the stock may in this case because if the
stock is not indorsed, but delivered ONB has possession and beats the
other creditor under 9-328(5). If ONB gets the stock indorsed and meets
the other requirements of control 8-106(b)(1), and still under 9-328
ONB will win. Therefore endorsement is not a factor.

More Facts 1(b)iii Assume everything is the same as above in 1(b)(ii)

immediately above except that B does not deliver the C stock to ONB on
3/28/01. Instead, B keeps the stock in her safe and ONB files a f/s on 3/28.
Does G or ONB hold the senior claim to the stock? Why?
(A) Analysis Since there is no possession or control in this hypothetical, the
mode of perfection used here is filing a finance statement. 9-322 governs
battles between two secured creditors (its the first in time rule). Under 9-

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322(a)(1), G wins because it perfected its security interest on 2/1 whereas

ONB perfected on 3/28/01. Therefore, G was first.

Problem 1(c) Please read 9-312(b)(1) which describes the only effective way
to perfect a security interest in deposit account collateral, namely by control
under 9-104. Review your analysis and class notes on how to obtain control
of a deposit account in connection with Handout #9, problem 4 (refer to page
76 of outline).
(A) Analysis Basically 9-104 tells us how a secured creditor can get control
of a deposit account; there are basically three ways: (a) where the account
resides in the bank of the secured creditor; tripartite agreement between
debtor, secured party, and institution holding the account (e.g., credit
union); and (c) see 9-104(c).

(5) Problem 33 (text pg. 78)

33A How you perfect a negotiable document of title? Is 9-203(b) satisfied?
There was no signed s/a, how was attachment satisfied (value
bank gave $; debtor owns the collateral (the receipt); but what about
9-203(b)(3) was it satisfied? If dont have attachment dont have
perfection. Look at 9-203(b)(3)(b) collateral in possession of secured
party if negotiable document is described in 9-313(a), which it does.
So, the bank has an attached security interest in the receipt before
bankruptcy. Is there perfection in the receipt, yes under 9-313(a).
Does the bank have a security interest in the toys? (we know it does in
the receipt) this is the important question. Look at 9-312(c)
contains a perfection rule in (c)(1) a security interest in goods may
be perfected by getting perfection in the documents. It looks like the
answer is yes, but what will the trustee in bankruptcy argue to say the
bank did not have a perfected security interest in the toys why isnt
there carry over perfection? Whos minding the store someone who
is an EE of the debtor; so if the connection is close you wont get carry
over perfection under 9-312(c)(2) and then the trustee can strong arm
you under 544(a)(1) and the bank becomes a general creditor.

(6) Problem 2 (handout #10) In addition to problem 33 (p.78) work the following
problems, making the assumption that Fred is in charge of the day to day
operation of the field warehouse. Consider 9-312, 9-313, 9-322.
(A) Problem 2(a) 1/10, MSB and KD sign a s/a covering KDs inventory of
toys. On the same day, MSB gives KD loan proceeds of $50,000 and files a
f/s covering the inventory. On 1/20, KD, w/out MSBs knowledge, stores

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some of the encumbered inventory in a field warehouse run by Fred. Fred

issues a negotiable warehouse receipt to the order of KD. On 1/21, KD
needs more money and borrows $80,000 from SF. As part of this
transaction, KD gives SF a signed s/a covering both the 1/20 negotiable
warehouse receipt and the underlying inventory. On 1/22, SF takes
possession of the warehouse receipt. Later KD defaults on both MSB loan
and SF loan. MSB and SF are fighting over who has the senior right to the
inventory in Freds field warehouse. What result?
(1) Analysis The bank wants collateral, but inventory is difficult to loan
against because the debtor needs it to sell to then pay back the
loan. Debtor will not want to surrender the toys. The bank could have
created a floating lien (refer to Barb problem). But the bank doesnt
want to do a floating lien because requires a lot of monitoring. Instead,
the bank creates a field warehouse (this mode is use a lot in
agriculture and small businesses).
A. We are looking at the receipt of warehouse as collateral. Fred
sets up a field warehouse (e.g., a fenced in area, a locked room
some physical space in which Fred has control of goods). So
KD gives the toys to Fred and Fred locks them in a room. Fred
gives Kd a negotiable warehouse receipt (this is a subset of a
document of title so its quasi tangible property we are
only studying negotiable warehouse receipt see e.g., attached
to Handout 10) Negotiable means easily transferable and
complying with Art. 7 standards. Now Fred gives KD this receipt
which shows she has delivered the toys. KD gives the bank a
promise to pay, a s/a encumbering the receipt, and usually
actual physical possession of the receipt. The bank loves this
because its a lot better storing the paper rather than toys. The
receipt represents ownership, so when MSB has the receipt,
essentially the value is locked up in the paper and no-one (not
KD) can get access from Fred unless MSB gives consent. So,
bank in effect has what looks like a possessory security interest
but doesnt have the costs of this transaction. So, the bank may
say to Fred the debt collateral ratio is 60%, once a week you
take inventory and KD in meantime is paying debt, if debt
collateral ratio drops then KD can take some more toys out. The
receipt provides for a very fluid situation and easy to monitor
and the bank does not have the difficulty of possession.
B. What if KD defaults See 9-601 they can get the goods and
sell them.
C. If KD pays the debt in full the warehouse is dismantled and KD
gets the toys.

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D. Recap on Field Warehouse: Remember some modes of

perfection work better for priority battles than others.
E. Recap Analysis for 2A In all of problem 2 the fight is about
inventory (the toys), which are goods.
Status of MSB 9-203(b) attachment occurs on 1/10. When
did perfection in the toys occur 1/10 (they filed a f/s, which
is an appropriate permissible mode of perfecting a security
interest in goods).
Status of SF 9-203(b) attachment 1/21 of the receipt. When
was the security interest in the receipt perfected (clearly on
1/22 it took possession, but 9-313(a) first sentence says a
secured party may perfect a security interest in negotiable
documents by possession (could have made the problem harder
by including an escrow agent). But SF perfected on 1/21 (how is
that possible didnt file or take possession on that day)
because there is temporary perfection 9-312(e) (a receipt is
a negotiable document) an this type of collateral is
automatically perfected temporarily for 20 days. But it got
permanent perfection on 1/22.
Priority Rules conflicting security interests go to the
residual rule of 9-322 first (under 9-322(a)(1) second sentence
we are to look at the contestants separately MSB filed and
perfection on 1/10 and SF perfected 1/21 and filed on 1/22
(9-322 does not distinguish between temporary or permanent
perfection). The creditor who files or perfects first wins Here,
MSB wins. Dont feel sorry for SF because they could have
checked the Art. 9 files.
But under 9-322(f)(1) if there is any other provision of this
part (that part being PART 3) that produces a different result
and applies to this collateral, we have to go to that rule the
only realistic possibility is 9-312(c) this provision contains
both a rule about how to perfect (thats (c)(1) and a priority rule
(which tells us who wins). Look at the priority rule 9-312(c)(2)
by another method (a method other than what? when
they say another method they must be referring to something
they just described in this provisions what does (c)(2) says
perfected in the document they must mean other than
perfecting in the document and then say during that time
(what time? have they described a time period in this section
earlier than the words we just quoted? Now we know while
goods in possession of bailee) In this problem, was there a
creditor who perfected in the goods by another method? Did

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either of these creditors perfect in the toys by another method?

(another method means perfecting other in the document)
what did MSB f/s say? how did it describe the collateral and
what did the s/a say? MSB did not mention the document,
there was no document at time of perfection (the toys didnt go
into the warehouse on 1/10) So, clearly MSB perfected the
goods by another method (but was it during that time? 1/10
was before that time) SO this priority rule does not apply. So,
9-322(a) applies and MSB wins.
Policy Think about Doctrine of Derivative Title; at time toys
went into warehouse they were encumbered by a publicized
security interest because MSB did everything right on 1/10. SO
when the value of the toys get locked up in this receipt. Nothing
more can be locked up than what debtor has, and it already
had a perfected security interest in the toys.
(B) Problem 2b On 1/10, KD stores its inventory of toys w/ Fred. Fred
issues a negotiable warehouse receipt to the order of KD. On 1/15, in
anticipation of extending credit to KD, MSB files a f/s w/ respect to the
inventory of toys. On 2/1, SF takes possession of warehouse receipt from
KD and extends credit to KD in the amount of $80,000. A s/a is signed in
favor of SF describing the negotiable warehouse receipt. On 2/5, MSB loan
of $50,000 is made and a s/a creating the MSB security interest in the
toys is signed. KD defaults on both loans. Which lender has superior
rights in the inventory of toys? What if everything is the same except that
the toys went into the warehouse on 1/16 (instead of 1/10)?
(1) Analysis Look at the status of each creditor:
(A) MSB Status attachment not till 2/5 under 9-203(b). Perfection
in the toys occurred on 2/5. (look at 9-308(a) second sentence
says a security interest is perfected when it attaches and ).
(B) SF Status attachment 2/1; perfection in the receipt on 2/1. (see
9-313(a), 9-312(e))
(C) Priority If 9-322 (the residual rule were the correct rule who
would win) applies, who wins MSB priority dates 1/15 (because
that is when they filed their f/s See 9-502(d) a case where
filing is different from the date of perfection) and SF priority date
is 2/1. MSB wins.
a. Policy: Do you feel sorry for SF? Remember all that
happened was that MSB filed a f/s (the deal may not have
closed), but at least SF knows there is a potential

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relationship between MSB and KD, which covers the toys.

This information is enough so that SF can respond, and it
didnt and this why they get screwed under 9-322(a)(1).
9-312(c) if it applies it trumps 9-322. Did either of these
creditors perfect by another method. Yes, MSB perfected directly in
the toys, it didnt say anything about the document. The toys went
into the warehouse on 1/10, and MSB perfected on 2/5. So who
wins, SF. This time even though SF is second in time in terms of
giving notice, it beats MSB.
(D) Hypo: Assume MSB f/s says receipt and s/a says receipt. Would
MSB still have a perfected security interest in the receipt on 2/5?
Yes, filing is an appropriate mode of perfecting a security interest
in a negotiable document. Look at 9-312(a) (you can do it either
way). SO, you have a choice, possession, filing, or temporary
perfection in appropriate cases. Does 9-312(c)(2) apply did
either of these creditors perfect in the goods by another method?
NO, both of them perfected in the documents (one by taking
possession the other by filing a f/s that describes the document).
Does 9-312(c)(2) apply? One person who perfects in the
document and another who perfects in the goods by another
method? No, because they both perfected in the documents and
we go back to priority rule 9-322(a)(1) and MSB wins.
(E) POLICY Why are the drafters favoring perfection in the
documents when goods are in the warehouse - whenever there is
both a receipt and goods outstanding there is a potential for
confusion because there is two physical embodiments in the
goods. So they want to encourage dealing in the documents. In
problem 2(a) they couldnt deal with the goods because there was
no warehouse. In problem 2(b) SF wins under -312(c)(2) what
advice would you give MSB so it doesnt get trumped by a later
creditor? What should they do before they file a f/s on 1/15? [the
problem is they dont know the goods have or will be put in the
warehouse] go look. In other words, on 1/15 MSB should check
the Art. 9 files, and make a visual inspection of the inventory (the
collateral) and if went to look they would see Freds warehouse set
up; so they have notice.
(F) Hypo Assume the toys went into the warehouse on 1/31
everything else in 2(b) is the same. If MSB does everything we said
should be done (check art. 9 files and visual inspection of no
warehouse receipt). Who wins? MSB loses because they perfected
on 2/5 by another method during the period the goods were in the
warehouse because went in 1/31. So MSB still loses. So when
should MSB do visual inspection of inventory the instant before

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they perfect so that would be the instant before you give the
debtor money (because earlier wont protect MSB from being
trumped). Remember there are two modes of perfection
(there is a preference for perfecting in the document when
goods are in the warehouse.
(G) 9-312(c)(1) if perfected in the receipt, then perfected in the
toys.
(C) Problem 2c MSB and KD sign a s/a on 1/10 describing the negotiable
warehouse receipt. KD tells MSB that it will take 7 days to get the receipt
from KDs safe deposit box. MSB agrees to the delay and gives KD the loan
proceeds. 1/18 passes but no receipt is delivered. ON 2/1 KD borrows
money from SF; a s/a is signed describing the toys (which are now in
Freds warehouse). SF files a f/s describing the toys the same day. On 2/3,
MSB realizes that it never received the receipt. KD explains to MSB that
KD could not locate the receipt. MSB asks KD to sign a f/s which descries
the negotiable warehouse receipt. MSB files that f/s the same day.
(1) If KD defaults on both loans, who will get the toys? In this case, the
collateral is described as a receipt. You dont need the debtors
signature to file f/s (because of ipso facto because the debtor signed
the s/a).
(A) Status of MSB attachment on 1/10; perfection on (remember
temporary perfection 9-312(e) it applies) 1/30. So, perfection
lapses, and 9-312(h) perfection depends on compliance with the
article. And on 2/3 MSB re-perfects. (Notice the gap between 1/31
and 2/2).
(B) Status of SF attachment and perfection both on 2/1
(C) Priority Rule start with the residual rule of 9-322(a)(1)
MSBs priority dates (there is a period when there is neither filing
nor perfection theres a gap had they acted with in the 20
day period their priority date would be 1/10; so there date is 2/3.)
and SF priority date is 2/1. If this is the right priority rule, SF
wins.
Is 9-322(a)(1) the right priority rule or should we apply 9-312(c)
(2) did either of these creditors perfect by another method? Yes,
SF perfected in the toys not in the document. Did SF perfect by
another method during that time? Yes, because during that time
means when the toys were in the warehouse (and theyve been in
the warehouse the whole time). So, 9-312(c)(2) applies and MSB
wins. Both creditors made mistakes:

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(1) MSB lets its period of temporary perfection lapse. Didnt

catch the problem during the 20 period day; and that
cost them losing the priority battle. Because what
happened during the gap along came another creditor
(SF).
(2) SFs mistake was that it perfected in the toys (the less
preferred mode of perfection while the toys were in the
warehouse) They should have done the visual inspection
before perfection).
(3) Which mistake is worse the drafters think the worst
mistake is to file against the toys because 9-312(c) does
not take into account the temporal sequence of events. It
matters who does it correctly. That is why MSB wins
under 9-312(C)
HYPO: Assume instead of SF perfected in toys it f/s and
s/a said receipt. Where is our priority rule now? GO to 9322(a)(1). Here both creditors perfected in the documents. 9312(c) only applies when one perfects right and the other
doesnt. So back to 9-322(a)(1) and because MSB let the
perfection period lapse, MSB loses and SF wins.
(2) If KD had returned the receipt as promised on 1/18, what priority
date could MSB claim under 9-322(a)(1)?

(7) Problem 4 (handout #10) Sally Student owns a $5000 car. She needs $9000
for tuition. SF makes the loan but requires Sally to surrender the car as
collateral. Sally signs a standard form s/a which contains no provision
concerning insurance for the car. SFs insurance policy covers all collateral in
its possession against destruction by fire up to $2500. There is a fire and
Sallys car is destroyed (her insurance does not cover the loss.) Sally has not
repaid any of the loan and is in default. SF sues Sally for the $9000 balance
outstanding and wins. What will Sally have to pay? See UCC 9-207.

(A) Analysis Sally will argue that she should pay no more than $4000.
Why? Spurwink Finance will argue that Sally should pay $9000; it does
not want to file a claim under its insurance policy because it fears a rate
increase. See 9-207() indicates Spurwink can collect only $6500. Why? If
you represent a debtor in a pledge transaction, remember to bargain about
who is to provide insurance for the collateral.

(8) Problem 34 Assume that the s/a was signed by Karate on 3/1 and that NF

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took possession of the notes on 3/10. In this problem, consider whether the
trustee in bankruptcy can strong arm aside NFs security interest under
544(a)(1). Here NF makes a loan to Karate (debtor); the collateral is

36 notes ( Karate provides lessons to its customers and they give him
notes for promises to pay for the lessons). On 3/1 NF gets s/a and 3/10
Karate delivers the notes to 3/10; and 4/6 Karate requests NF to give
them one note back and on 10/12 Karate folds and files for bankruptcy;
and the bankruptcy trustee comes into the problem and they want to
try to strong arm aside NFs security interest.
(A) Analysis Does NF have a good enough position to beat the bankruptcy
in trustee. Separate the 35 notes from the other note.
a. Analysis for 35 Notes the promissory notes is under quasi tangible
property and its part of instruments. When does attachment occur
in the 35 notes? Under 9-203(b) [Value 3/1; rights in collateral
3/1 (Karate owned the notes); 3/1 s/a) attachment occurred on 3/1.
What about perfection? 3/10 (how do you know taking possession is
a permissible mode of perfection in taking notes see 9-313(a)
notes fall under instruments). But NF really perfected on 3/1
because of temporary perfection 9-312(e) a security interest in
instruments is automatically perfected for 20 days. So as to the 35
notes, NF was perfected from 3/1 to 3/20 and it took possession
within that 20 day period, which is permanent perfection under 9313(a); So it was permanently perfected until 10/12 when K filed for
bankruptcy. The status of bankruptcy of trustee got a judicial lien
on 10/12. Who wins the priority battle (9-308(c) NF was
continuously perfected up until the bankruptcy filing). Which
priority rule applies? (9-322 applies only conflicting security
interests here it doesnt apply because one of the creditors has a
judicial lien). 9-317(a)(2) applies a security interest (NF) is

subordinate to a lien creditor (bankruptcy trustee) before the

security interest is perfected. Here not true, so by negative
implication NF wins because it perfected before the trustee
became a judicial lienor.

b. Analysis for 1 Note Everything the same, but on 4/6 NF released

the note; so it no longer has possession and under 9-313(d) it says
if perfection depends on possession, perfection continues only while
the secured party retains possession (and NF released it). If look at
9-312(g) there is another 20 day period of temporary perfection
that snaps in, but that only takes us to the middle of May, so the
period lapses under 9-312(c) and so when Karate files for
bankruptcy NF has an attached security interest but unperfected
and is strong armed by the trustee becoming a general creditor.

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c. Counting Days Do not carry the first day of the period, but count
the second day. Dont count holidays. For instance, when
attachment on 3/1, the twenty day period lasts until 3/21 (not 3/20
because we dont count the first day).

B. Automatic Perfection
(1) Read text pages 80-105
(2) Class Notes 9-309 most important provision for automatic perfection
(focus on 9-309(1) ) Whenever there is automatic perfection, there is a
secrecy problem; therefore there is a countervailing policy argument for 9309(1) it would be too expensive to file a f/s for consumer goods every time;
also it is thought there werent be that many subsequent searchers because
used consumer goods arent very useful collateral because their arent effective
resale markets, depreciation great. If you think about this rationale, it is not
necessarily true. What about ebay and all those auction sites which create
effective resale markets for used consumer goods. Some states have taken this
into account and have modified 9-309(1) and have put a monetary cap on it
[e.g., in Maryland they put a cap on certain consumer goods).
(3) Problem 35 (p.81) 8/4 Bilko enters into an agreement with Browns. S/a
covers the currently owened consumer goods plus those acquired in the
future, and 9/1 the siding put up. Browns go to FF on 9/25 to get money to
purchase a sewing machine and they sign a s/a that signs the sewing
machine. On 10/11 Browns get sewing machine, and 10/12 Browns file for
bankruptcy.

(A) Analysis The fight is about the sewing machine [classified as goods and
consumer goods]. The trustee has a judicial lien under 544(a)(1) on the
day of filing for bankruptcy. What is Bilkos status? Is he a general creditor
or secured creditor? Does he have an attached security interest in the
sewing machine? Start with 9-203(b) [Value given on 8/4 promise to put
up siding under 1-201(44); s/a 8/4; debtor has rights incollateral on
10/11 (2-401]; So it looks like there is an attached security interest; but
look at 9-204(a), but there are limitations in 9-204(b) clearly since the
Browns did not own the machine on 8/4, Bilko has to rely on the after
acquired property clause to consumer goods when given as additional
security unless the debtor acquires rights in 10 days after secured party
gives value here, secured party gave value on 8/4 that is when the 10
day period begins to run, since rights not given until 10/11; there is no
attachment. This is one of the few consumer protection clauses. The
drafters are limiting the bargaining of the parties, even though Browns
agreed that agreement is ineffective under 9-204(b)(1). Thus, Bilko is a
general creditor.

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What about FF? Do they have a security interest in the machine? 9203(b) [Value on 9/25; rights in collateral 10/11; s/a 9/25] Now, 10/11 is
more than 10 days after 9/25, do we need to worry about 9-204(b)(1) as to
FFs security interest? Is FF also a general creditor. No, 9-204(b)(1) does
not apply because the sewing machine was not given as additional
security the sewing machine is the only security. We are not talking
about attachment about an after acquired property clause; its the only
collateral; So, 9-204(b) doesnt apply. Does FF have a perfected security
interest? Yes, we have a purchase money security interest and under 9301(1) its automatically perfected because its consumer goods. So, who
wins FF (10/11 attachment) and Trustee (10/12)? FF wins under 9317(a) thats the priority rule that tells us that a perfected secured creditor
beats a judicial leinor. As to Bilko, he loses because he is a general
creditor.
(B) Policy What is the policy reason for 9-204? The author tells us that
the reason that the clauses are not enforced because they have inter
rorum effects. Whats the interrorum effect on an after acquired property
clause on consumer goods? If the repossess the debtors goods and the
debtor still owes money, and the debtor goes out and gets more goods to
replace those taken, the secured party can keep coming back and
repossess those goods because there was a s/a signed on after acquired
goods. That is the interrorum effect.
Hypo: Assume we are talking about X, who is a carpenter, who does work
for a wealthy couple and they consumer luxury consumer goods (e.g.,
cases of wine, paintings), and X does work on credit. Shouldnt X be able
to get a security interest in this couples after acquired luxury consumer
goods. Debtors and creditors come in all sizes and shapes and if you have
a friend like X, there is a lot of rich debtors who dont pay their bills while
they are consuming. So the issue is do we like 9-204(b)(1) its too
broad and too narrow: To narrow because it doesnt protect Ms. Browns
present consumer goods (she should have more protection); its too broad
because it doesnt cover luxury consumer goods. This provision is a
subcategory of consumer protection provisions.
What are the Arguments On the Issue of Whether we Should Have
Consumer Credit Protection:
(1) Best Argument for Creditors as to why debtors ought to grant s/I in
their consumer goods: Creditors would start out by reminding us that
debtors have a legal obligation to pay their debts; and that the
obligations dont mean anything unless there are effective remedy.
Theyll say let us take s/I in consumer goods because if not it will
lower (or limit) their bad-debt losses. How? We talked about ex-anti
effects [e.g., Texaco and Global talking about leverage to get them to
pay their debts] or interrorum effect which lower bad debt losses. The
ex-poste benefits can offset bad debt losses. Taking security helps

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them judge credit worthiness of the debtor because the debtor

wouldnt pledge it unless they have a serious intention to pay because
they know the secured party can foreclose. So by these 3 methods,
bad-debt losses can be lowered; who will get the benefit? They would
say this benefit is passed forward in the form of lower interest rates
and more available credit. You pay lower interest rates because there is
lower risk; not only will interest rates be lower; more credit will be
available to those who cant get it because there is lower risk. This is
the economic argument. They will also argue freedom of K offer
debtors two different deals: (1) low price deal (where you get security);
(2) high price deal (borrow on general credit); The creditors say let the
debtor choose; debtors know better than the credit to know what deals
will maximize their utility; dont block us because then we cant offer
the cheap deal. Finally, creditors will argue that the debtors should
not be left with nothing; Make these transfers directly to people who
dont income, but dont distort the credit markets in attempt to protect
low income individuals. Give us free reign to take s/I where debtors
want them, but provide income assistance to the Browns. Dont tell
them how to use it by rejecting the availability of credit. [these are the
arguments against 9-204(b)(1)).
(2) Debtors Argument: Sure there is a legal obligation, but sometimes
default comes about outside the control of the debtors. In those
circumstances, the consequence of default should be proportionate to
the moral turpitude of the act involved. That defines a just society. It is
out of proportion for Ms. Brown (in the case of consumer goods) to face
losing a lot of their HH goods because they default. The counsumer
advocate would argue in humaine society we dont want the Brown put
to this choice namely paying off their creditors (using their food
money) or alternatively losing present/ and after acquired goods (its
mal proportioned). Second, they will argue that we understand it
makes credit more expensive, but thats allright thats the price we pay
for consumer credit protection. They will also argue creditors bear
some responsibility for default and therefore their remedies should be
slightly limited. The basic idea is creditors dont check carefully
enough about their debtors credit worthiness. The consumer response
is look creditors you can lower your bad debt losses in another way by
doing more careful checking before extending credit. They will also
argue in the context of a consumer debtor it is illusory to talk about
freedom of K. The Browns dont shop for credit and they dont
understand the agreement; therefore the freedom of K argument is
bogus.
(3) Problem 5 (Handout #10)Consider whether FF would have a purchase
money security interest in the following variations on problem 35
A. Problem 5A The Browns borrow $80 from FF for the state purpose of

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buying a sewing machine w/ a purchase price of $80. When the Browns

arrive at the sewing machine store, the salesman persuades them to buy a
$300 model. The Browns use the FF loan proceeds to make the down
payment. Does FF need to file a financing statement to perfect its security
interest in the $300 sewing machine.
(1) Analysis No, if the sewing machine is goods
B. Problem 5B The Browns borrow $80 from FF for the stated purpose of
buying a loan mower to cut the grass around their home. The Browns sign
a s/a describing the mower. After the Browns purchase the mower, they
discover that they can make substantial money by renting the mower to
neighbors six out of seven days per week. Does FF hold a perfected
security interest in the mower?
(1) Analysis Yes
(4) Regulation Z
A. 226.2(25)
B. 226.17
C. 226.18
(5) FTC Credit Practices Rule
A. 16 C.F.R. 444.2(4)
(6) Problem 36 (p. 91) This is a direct take out loan. 3/1/98 ONB gets a
floating lien over motors on present and after acquired equipment and f/s.
4/1 TOP provides a rug to Faade for a trial period. 5/1/01 assume Faade
wants the rug (its a sale on credit). 5/3/01 NF loans money to Faade and
gets a s/a and f/s. There is a default.
A. As soon as Facade Gets Possession (here 4/1) and before it makes its
mind up does OMB earlier floating lien attach to the rug? The
attachment question requires us to go to 9-203(b) [Value 3/1/98;
s/a 3/1/98; debtors rights?]; the rug is equipment which is ok: the
question is when the debtor gets the rights in the collateral? Does
Faade have enough rights to transfer the run see 2-326 (revised
on pg. 1269); this describes two types of sales (sale on approval or
sale on return] We have a sale on approval because goods delivered to
faade for use; goods on approval not subject until acceptance under
2-326(2); When did faade accept the rug? Not until 5/1/01 [2-606
defines acceptance]. So from 2-326(2) we can conclude Faade doesnt
have rights in the run to which OMB s/I can attach until 5/1/01.
B. Does NF have a purchase money security interest in the rug? NF
loaned the exact amount of money to make the installment
payments on the price. Read the Case assigned. [you got inverted

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purchase money events]. Look at 9-103 there are two issues here:
(1) did NF make the loan to enable the debtor (look a NFs purpose] to
buy the rug; (2) was the money so in fact used? In the comments to 9103, there is a flat statement that says this can never be [if you have
an inverted purchase money chronology] the idea is that this loan
enables Faade to pay off any debts it wants to pay off. There are two
separate transactions there is a sale on general credit and then a
later loan to the buyer of the loan. But there is a lot of case law under
old Art. 9 which suggests it can be a purchase money security interest
if you have certain info. That suggests that there was reliance on the
money to help Faade to make the payments [the closer in time the
loan the more it looks like a loan; did TOP know that debtor would
turn around and get a loan; had NF made a commitment to Faade
that said if they buy the rug theyll advance the loan]
C. Assuming it is a purchase money security interest does NF get
automatic perfection if it doesnt file a financing statement? Yes,
under 9-309 a purchase money security interest in consumer
goods. Faade is a car dealer and is going to use it in his dealer. Here,
the rug is classified as equipment. So there is no automatic perfection.
So why do we care if NF has a purchase money security interest.
Under 9-322(a), who would win the priority battle between OMB and
NF (assuming NF files a f/s on 5/3). Both are art. 9 secured creditors
they can use the earlier of the time of a filing is first made or s/I is
first perfected. So OMB priority date is 3/1/98 [thats importance of
anticipatory filing] and NF priority date is 5/3/01. So, NF will lose
unless it has a purchase money security interest. [we will learn under
9-324(a) which would apply because we have equipment NF will win if
it has a purchase money security interest, but will lose if it doesnt]
That is why its important to know if the direct loan is a purchase
money security interest.
(7) Problem 7 (Handout #10)In connection with problem 36 and GECC v.
Spartan Motors (p.91) consider how ONB could distinguish the facts in
problem 36 from the facts in Spartan Motors. Also contrast UCC 9-322(a)(1)
with UCC 9-324(a).
(A) Analysis
C. Perfection by Filing
(1) Review UCC Sections: These sections deal with filing a financing statement
and perfection.
A.
B.
C.
D.

9-201
9-501
9-502
9-503

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D.
E.
E.
F.
G.

9-504
9-516
9-521
9-210
9-501 [tells us where you file a f/s] filing will take place in a single
central location in the state [probably in the secretary of states office][the
idea is that when combined with electronic filing and searching, it will
reduce transaction costs]

(2) Read text pages 106-109

(3) Problem 39HC borrows $100K from EFC and gives it a security interest in
the corporations equipment. The parties properly filled out a f/s; The clerk in
the Secretary of States office files the statement under Shakespeare instead of
Hamlet. One year later, another finance company loans HC more money,
taking a security interst in the same equipment [thy checked the statement
under Hamlet and found nothing) Since priority of creditors in this situation
depends on order of filing [See 9-322(a)(1) first in time rule] did EFC file first,
or did it bear the risk of the clerical error? See 9-516(a), 9-517 [and the
official comment 2]. Whichever creditor loses should sue the state for
negligence. Some states have set aside a fund from the filing fees with which to
pay judgments against the filing officer.

(A) Analysis Elsinore Finance Co. is not responsible for clerk Ophelia
Nunnerys mistake in indexing the financing statement.
(4) Problem 40 ONB has a security interest in the equipment of the WCC for
which it filed a f/s on 5/1/02. ANB took a security interest in the same
collateral and filed a f/s on 5/2/01, in the same place.
(A) Problem 40A How long is the financing statement effective?
(1) Analysis 9-515(a) it is effective for 5 years. If you have a loan
with a repayment period of more than 5 years, you need to worry
about the f/s lapsing. See 9-515(c).
(B) Problem 40B If ONB files a continuation statement on 5/1/06 is its
perfected position continued. No, See 9-515(d) and 9-510(c). This problem
illustrates the problem of premature renewal.
(1) Analysis The filing of a continuous statement 5/1/06 does not
sustain its perfection position because it must be done 6 months prior
to the lapse. This is a premature renewal. It has to be renewed 6
months before lapse. See 9-515(c). Also 9-510(c) confirms f/s wont
work. But if OMB filed its continuation statement on 3/1/07 it would
work because within 6 month of the 5 year period proscribed in 9515(c).

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(5) Problem 41 Portia Moot pays her debt of $3000K to LNB for a computer she
bought for her law office [and taken a purchase money security interest
therein, for which a proper f/s was filed]. Does PM have the right to demand
LNB correct the records at the filing office. See 9-513. What if they ignore her
written demands for a termination statement? See 9-615(b) and (e)(4).
A. Analysis Portia has the right to get the financing statement out of the
file by demanding the bank file a termination statement. UCC 9-513(c),
9-5133(d). If the bank fails to comply with her legitimate request, Portia
can also file a termination statement herself under 9-509(d)(2). Moreover,
she can recover actual damages and $500 in statutory damages from the
recalcitrant secured creditor. Se UCC 9-625(b), 9-625(e)(4).
B. Note: Open Drawer Concept of file searches this means that later
searches are given absolutely everything related to the original f/s
(amendments, assignments, deletions, continuation, and terminations
statements, etc) when they do a search, so that they have complete info
as to the current status of the filed transaction. Note the definition of a f/s
includes an original filing and all related amendments; 9-102(a)(39). 9519(c) requires the filing office to index the filing under the debtors name
and the file number, and associate all related filings to the original filing.
Thus, when a later searcher request the f/s per 9-523(c), the entire file
will be forthcoming. 9-522(a) requires the filing office to maintain all
filings until at least one year after the filing has lapsed w/ respect to all
secured parties of record; 9-519(g) prohibits the removal of a debtor name
from the index until one year after lapse. When you put all this together,
you have the open drawer system where a drawer is created for each
new f/s into which all related filings are deposited.

(6) Problem 42 When lawyer SA handled a divorce for a client, he incurred the
wrath of her ex-husband, AA, president of FCLM, a group that does not
recognize the authority of the state or federal govt. The irate ex-spouse filed 42
phony financing statements in the public records showing that all of Sams
assets were security for various non-existent loan in favor of AA, the secured
party of record. What can Sam do to clear up these clouds on his title to his
property? See 9-513, its Official Comment 3, 9-518, and 9-615(b) and (e)(4).
A. Analysis Using the same sections as cited above in the answer to
problem 41, Sam can remove the cloud on his title and get these bogus
filings terminated.

(7) Problem 8 (Handout #10) The transactions involved in this problem are
similar to those described and diagramed in problem 5, Handout 8.
Specifically, on July 1, 01 GMAC, the originating institution, makes 500 car

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loans to individuals to enable the customers to buy GM cars from various car
dealerships. 80% of these car loans (400), those to higher risk borrowers, are
secured. Each of these 400 GMAC car buyers sign written agreements
including the buyers promises to repay GMAC (the balance outstanding with
interest over time) and language conveying (to GMAC) Art. 9 purchase money
security interests in the new cars purchased with GMAC credit. Plus, these
400 borrowers execute negotiable promissory notes payable to the order of
bearer which are delivered to GMAC. GMAC and these 400 high risk car
buyers follow all required formalities under Art. 9 for attachment and
perfection. The other 20% of the GMAC car loans (100) are made to blue chip
borrower/ buyers. In these transactions, GMA makes purchase money loans
on general credit. The buyers sign sales contracts but do not sign promissory
notes or security agreements. On Aug. 1, 2001, GMA borrows two million
dollars from First Bank. GMAC signs a s/a conveying a security interest to
First Bank in GMACs rights arising from the 500 transactions with both high
risk and blue chip car buyers.
(A) Problem 8A What steps should First Bank take to ensure that it has a
perfected Art. 9 security interest in this collateral?
(1) Analysis The collateral is chattel paper; There are two modes of
perfection for the high risk borrowers: (1) possession; and (2) filing
a financing statement. For the low risk borrowers, the collateral is
payment intangible and the only mode of perfection is to file a
financing statement.
(B) Problem 8B Would your advice for First Bank be different if the First
Bank agreement with GMAC contained the following language:
First Bank does hereby deposit to GMACs bank account #3333 2
million dollars. In consideration, GMAC does hereby assign and transfer
to said bank all of GMACs rights arising from the 500 car loans
described in attachment A, including GMACs rights to receive all
payments on said loans.
(1) Analysis Here, the sale in the top tier transaction is not a loan. If
its a sale, nothing has changed with respect to the high risk
borrowers. But for low risk borrowers you may be able to rely on
automatic perfection under 9-309.
(C) Problem 8C Would your advice for First Bank be different if the First
Bank agreement with GMAC contained, in addition to the language in
problem 8(b) the following language:
Should any of the 500 obligors (the car buyers) on the 500 car loans
default w/in 6 months from the execution of this agreement, GMAC

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agrees, in further consideration for the 2 million dollars, to buy back any
such car loan at the same price paid earlier by First Bank to GMAC.
(1) Analysis These facts suggest that maybe there isnt really a sale;
if not a sale, the answers to problem 8a governs.
(8) Problem 11 (Handout #10) You are an associate in a law firm and a partner,
who specializes in real estate financing but not asset based financing, asks for
your help in setting up the following transaction for First Bank. First Bank
wants to make a $500,000 loan to LEZ so she can expand her health food
store to include both a pharmacy and a juice bar/restaurant. Part of the
collateral for the loan will be LEZs equipment and inventory. Because of the
vacation schedule of the principals, it will take several weeks for the parties to
negotiate the final terms of the security agreement and the loan agreement.
First Bank is concerned that while negotiations are on-going, LEZ might
encumber some of her property. The partner wants to know whether it is
possible for First Bank to file the f/s before the s/a is authenticated. If the
anser is yes, she also wants to know whether the UCC record search should be
done before or after the filing of the f/s. What do you think and why? See 9502, 9-519(a), 9-519(h), 9-523(c), 9-523(e).
(A) Analysis The financing statement can and should be filed in advance
of the signing of the s/a, thereby giving the bank an earlier
priority date (based on the time of filing) in some priority battles. See
UCC 9-322(a). It is usually a good idea to file the Banks financing
statement before the Bank orders the search of the index of filings.
The only way for the Bank to be sure that the search will reveal all
filings before the Banks filing is if the search reveals the Banks own
filing. This problem arises because the code gives the filing office
several days to enter an effective filing into the index. The Bank does
not want its search to miss earlier filings still in the basket awaiting
indexing. To be exact, the Banks search should not be ordered until
the third business day after the Banks own financing statement is
accepted for filing.
D. Perfection by Control
(1) Read text page 109
(2) Read Handout #11
(3) Review Problems in Handout #10
V.

Priority Problems Outside of Bankruptcy

A. Simple Disputes
(1) Read text pg. 117-119

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(2) Review of Priority Battles

Priority Sections
9-201
9-317(a)(2)
9-333(b)
9-322(a) or (g)
9-322(a)(1)
9-328
9-312(c)(2)

9-326; 9-508
2-326(2)
2A-301
2A-301(7)
2A-306

Battles Between
Golden rule that says Art.9 secured creditors beat out other creditors
Deals with Art.9 secured creditor and a judicial lienor
Deals with Art.9 secured creditor and a statutory lienor with a
possessory lien
Deals with Art.9 secured creditor and agricultural lienor
The residual rule dealing with 2 Art.9 secured creditors
Deals with two Art.9 secured creditors where collateral is investment
property
Deals with 2 Art. 9 secured creditors and the collateral is a negotiable
document [the KD problem where one creditor perfects in the document
and the other in underlying goods)
Deals with 2 Art.9 secured creditors where one relies on a financing
statement that is seriously misleading but rescued under 9-508
Deals with sale on approval or sale on return
Golden rule that says the lessor wins [counterpart to 9-201]
Governs battle between true lessor and creditors of lessee
Deals with lessor and statutory lienor [remember the Mac hypothetical
in Handout #6]

A. Todays Focus is on 9-317:

9-317(a) deals with an Art. 9 secured creditor and someone else
9-317(b) deals with an Art. 9 secured creditor and someone who buys
the collateral of the debtor
9-317(c) deals with secured creditor and someone who leases the
collateral from the debtor
9-317(d) deals with secured creditor and someone who is a licensee or
buyers of certain collateral
9-317(e) deals with purchase money secured creditors and buyers,
lessors, or judicial lienors.
(2) Problem 50 (p. 117) Epstein borrows $10K from ONB signing a s/a giving
the bank a floating lien over inventory. ONB never files a f/s. MT was an
unpaid creditor of Epstein, and it sued on the debt and recovered a judgment
against the store. It then had the sheriff levy on the inventory. ONB learns of
this, call their attorney. Does ONB or MT get paid first when the inventory is

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sold? If, instead, of a judgment creditors seizing the goods, Epstein files a
bankruptcy petition while ONB was still unperfected, what result?
(A) Anlaysis: Under 9-102(a)(52) a lien creditor is a creditor that has
acquired a lien on the property involved by levy. Therefore, MT is a lien
creditor. ONB is has a secured attached, but unperfected security interest.
Under 203(b): a) value was given ($10K), b) s/a; and c) debtor had rights
in the collateral (inventory). It is not perfected under 9-308 b/c ONB fails
to file a f/s. Based on the priority rules, MT wins under 9-317(a)(2)
because a security interest is subordinate to the rights of a person that
becomes a lien creditor before the earlier of the time the security interest or
agricultural lien is perfected. Here, ONB loses because it did not perfect.
(B) Alternative Hypo: If there is a bankruptcy proceeding, then another
creditor enters into the equation, and that is the trustee in bankruptcy and
under 544 of the bankruptcy code, the trustee can strong arm an art. 9
creditor if un-perfected and make them into a general creditor. Therefore, ONB
would be subordinate to MT. As between MT and the trustee in bankruptcy, it
looks like we have to lien creditors MT acquired its lien upon the levy (if
order of levy jurisdiction) and the Trustee acquired its lien upon
commencement of the bankruptcy proceeding.

(3) Problem 1 (Handout #12) Make the following assumptions: MT provides

services to Epstein on 12/15/2000; On 1/3/2001 Epstein borrows the
$75,000 from ONB. On 1/15/2001, MT sues Epstein on the debt. On 2/1, the
state court issues a writ of execution which MTs lawyer delivers to the sheriff
on same day. On 2/15/2001, ONB files a f/s. On 3/1/2001, the sheriff levies
on Epsteins inventory on behalf of MT and later sells the books. All books
seized were in bookstore on 12/15/2000.

(A) Problem 1(a) Does ONB or MT get paid first out of proceeds from sale of
inventory. Assume events take place in an order of levy jurisdiction
(judicial lien acquired when levy is accomplished).
(1) Analysis Octopus National Bank wins under 9-317. 9-317(a)(2)
says a security interest is subordinate to the rights of a person that
becomes a lien creditor before the earlier of the time: (A) the security
interest is perfected or (B) one of the conditions specified in 9-203(b)
(3) is met and f/s covering the collateral is filed. Here, MT gets a
judicial on 3/1/2001. Whereas, ONB gets an attached security
interest under 9-203(b) on 2/15/2001 [value and s/a on 1/3/2001;
rights in collateral 12/15/2000;], OR ONB satisfied 9-203(b)(3)
condition by getting s/a and f/s covering collateral filed on 2/15. So
under (A) or (B) the priority date is 2/15/2001 which beats out MTs
judicial lien. Therefore, ONB wins.

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(B) Problem 1(b) MT provides services to Epstein on 12/15/2000. Assume

on 1/3/2001 ONB gives Epstein $75K but no security agreement is
signed. On 2/1/2001, MT obtains a judgment based on 12/15/2000
obligation. On 2/2/2001 clerk of the court issues a writ of execution and
it is delivered to sheriff. On 2/15/2001, ONB files a f/s. On 3/1, the
sheriff levies for MT. All books seized where in bookstore on 12/15/2000.
On 3/2/2001, Epstein signs ONBs s/a, covering present and after
acquired inventory. The events take place in order of levy jurisdiction. Does
ONB or MT get paid first after the judicial sale of Epsteins inventory seized
by sheriff?
(1) Analysis The fight is over Es books, and books are goods, and
classified as inventory. It looks like we have 2 creditors: Martin
Travel (MT) and OMB. What is MTs status they became a lien
creditor on 3/1. It doesnt have an Art. 9 security interest, does not
have a statutory lien, but it has a judicial lien (order of levy
jurisdiction so it arises on 3/1). What is OMBs status
consensual lienor with an art. 9 security interest which attaches
under 9-203(b) on 3/2 (b/c s/a not signed till 3/2]. When did
OMB perfect? On 3/2 because under 9-308 you need attachment
to perfect and attachment did not occur until 3/2 (signed s/a) even
though filing was done on 2/15/2001.
Priority Rule 9-317(a)(2)(A), (B) Apply both subsections even
if they produce the same result; What was the time when OMB
satisfied (a)(2)(A) on 3/2; what about (a)(2)(B) also 3/2. Here, both
of the dates are the same. So OMBs priority date is 3/2, therefore
MT wins because its date is 3/1.
Hypo: Assume same facts, but MT did get a security agreement in
the books on 12/15 and it didnt rely on sheriff to levy on 3/1, but
instead on 3/1 it filed a financing statement [these are big changes
because now its a battle between 2 art. 9 secured creditors]. ONB
analysis stays the same, but MTs status has; it gets an attached
security interest on 12/15 (value, s/a, debtor = 12/15]. Perfection
occurred on 3/1. The priority rule that governs is 9-322(a)
under second sentence of this section what is the priority date for
OMB 2/15 [the earlier of the date of perfection; here, filing]; For
MT, its 3/1; Here, OMB wins. Upshot: OMB has to do less when MT
is a secured creditor just get a financing statement and thats
enough for OMB to stake out a priority battle. This is not true to
beat a judicial lienor. What is the minimum OMB needs to do to
beat a judicial lienor if it hasnt perfected? It needs do more than
filing, but less than perfection. See 9-203.
Policy Both creditors have the opportunity to file. But MT as a
judicial leinor certainly doesnt have that opportunity. So the rules

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make it a fairer fight if you dont allow the bear financing statement
to suffice for OMB to beat a later judicial lienor.
(C) Problem 1(c) Assume on 1/3 ONB gives Epstein money and Epstein
signs s/a covering present and after acquired inventory. On 1/10, MT
performs services on credit; 2 days later on 1/12, Epstein defaults. ON
1/15, MT files a complain. On 2/1 MT obtains judgment. The next day a
writ of execution is issued, and on 2/15 ONB files a f/s. On 3/1, the
sheriff levies on Epsteins books and sells them. All of the books seized
were in the store since 12/15/2000. These events take place in an order
of issue jurisdiction. Assume that MT knew about ONBs security interest
in the books on 1/10. Does ONB or MT get paid first after judicial sale?
(1) Analysis Martin wins; his knowledge is irrelevant in this pure
race statute. The statute was designed to avoid litigation on the
issue of knowledge. MT is still a judicial lienor and ONB is a art.9
creditor. MT becomes a judicial lienor on the date the writ was
issued 2/2. Under 9-317(a)(2)(A), ONB gets an attached security
interest on 1/3, but doesnt perfect until 2/15; and under 9-317(a)
(2)(B), ONB meets the 9-203(b)(3) condition (s/a) on 1/3 but files
on 2/15. Either way, ONB loses.
(D) Problem 1(d) This is a more realistic case than in problem 1(b).
Everything is the same as in problem 1(b) except that on 1/3/2001,
Epstein signs a s/a, but ONB does not give Epstein the loan proceeds or
even make a commitment to extend money; instead, the loan proposal and
docs are sent to ONBs Loan Approval Committee for further review. On
32/2001, the loan is approved (ONB does not know about MTs levy) and
Epstein receives the money. Does NOB or MT have the senior claim to
inventory in the hands of sheriff?
(1) Analysis The collateral is still Es inventory. When does MT get
its judicial lien on 3/1 (upon the levy). No art. 9 security interest.
What about OMB [notice a s/a is signed before the loan is
extended] it gets an attached security interest on 3/2 [Rights in
collateral 12/15; s/a 1/3; value 3/2]. When did they perfect? For
perfection, you need not just the notice giving act but also
attachment, so not until 3/2. Who wins? 9-317(a)(2) what is the
earlier of the two dates? (a)(2)(A) perfection 3/2 or (a)(2)(B) 9-203(b)
(3) one of those conditions met and filing done [9-203(b)(3)
satisfied 1/3 b/c s/a signed and filing done on 2/15] so the earlier
of two dates is 2/15. Therefore, OMB wins. Notice opposite result
from problem 1(b).
(2) New Addition: 9-317(a)(2)(B) is the new provision. And it makes it
easier for the Art. 9 secured creditor to win. It is a very Art. 9 pro
secured creditor rule. Do you think the new Art. 9 priority rule is

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better or worse than the old one. Certainly it is more favorable to

secured creditors. Explore this question by looking at how far each
of these creditors have gone to collect the debt.
i. MT committed its resources on 12/15, and when the debtor
didnt pay, MT did everything right [it went to court and got a
judicial lien to enforce its collection]. Even though it did
everything right, it lost. Look at OMB, it started to negotiate
on 1/3 but didnt even promise to give money [it did all the
necessary steps to get an art. 9 security interest] without
giving money yet. The unfairness is that OMB had the last
opportunity to correct the priority battle [they should have
made a visual inspection of the goods and they would have
discovered that the goods were gone because the sheriff levied
them]. Why? The Drafters made this change because there
was an inconsistency with the rules governing future
advances and first advances. [Not studying rules of future
advances]. 2 ways to cure inconsistency make the rules of
future advance more friendly to judicial lienors OR make the
rules of first advances more friendly to secured parties. They
chose the latter.
(E) Problem 1(e) On 1/3 Harriet, an EE of Epstein, falls in the store and is
seriously injured. Epstein is at fault, and Harriets lawyer files a complaint
against E. On 3/1, ONB loans E $75K and obtains a s/a covering present
and after acquired inventory. ONB files a f/s on same day. In Nov., E
defaults on his payments to ONB. On Nov. 28, H obtains judgment against
E. On Nov. 29, the court issues a writ of execution. Hs lawyer delivers the
writ to the sheriff on the same day. On Nov. 30, E receives a delivery of
antique books (rare books) worth as much as his entire existing inventory
of modern books (ordinary books). On 12/1 the sheriff levies on all books,
ordinary and rare, to satisfy Hs judgment. Should H or ONB get paid first
out of the proceeds of the judicial sale? Assume first these events occur in
an order of levy jurisdiction. Next consider an order of delivery
jurisdiction. Consider the rare books and the ordinary books separately.
Are the Art. 9 rules fair to tort victims and other involuntary creditors?
Would you feel differently about the outcome if H were suing to collect
back pay b/c she had been wrongfully discharged by E b/c of
discrimination? Would the outcome be different?
(1) Analysis Make sure you can apply 9-312(a)(2). If its an order of
levy jurisdiction over the regular books, order of levy and rare
books, order of delivery and regular books; order of delivery and
rare books. ONB wins all four battles. Make sure you analyze all
four battles separately, because the time the lien arises and
attachment changes.

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(A)

(B)

(C)

(D)

Order of Levy and Ordinary Books: Hs judicial lien arises on

12/1 the day of levy. ONB gets an attached security under 9203(b) [value, s/a , 3/1; rights in collateral ? assume 3/1] on
3/1; its perfected on 3/1 because that was date of filing.
Under 9-317(a)(2)(A) ONB has a perfected security interest on
3/1 and (a)(2)(B) it meets one of the 9-203(b)(3) conditions
[s/a] on 3/1 and files on 3/1. Either way, 3/1 beats out 12/1
and therefore ONB wins.
Order of Levy and Rare Books: Same assessment for H. But for
ONB, its date of attachment changes to 11/30 because that is
when it acquires rights in the collateral [title passes on
delivery under 2-401], and perfection occurs not until
attachment is satisfied under 9-308; so perfection is on
11/30. Under 9-317(a)(2)(A) ONB has a perfected security
interest on 11/30 and (a)(2)(B) ONB satisfies a condition of 9203(b) [s/a on 3/1] and files and f/s on 3/1. Either date is
before 12/1, and therefore ONB wins again.
Order of Issue and Ordinary Books: Hs judicial lien arises on
Nov. 29. ONB gets an attached security under 9-203(b) on
3/1 and its perfected on 3/1. Under 9-317(a)(2)(A) or (B),
ONBs perfection date (3/1) and 9-203(b) [s/a] and filing (3/1)
are before Nov. 29, and therefore ONB wins again.
Order of Issue and Rare Books: Hs judicial lien arises on Nov.
29. ONB gets an attached security interest under 9-203(b) on
11/30; and it perfects on 11/30. Under 9-317(a)(2)(A) its
perfection date is on 11/30 [under this section it looks like MT
would win] BUT, under (a)(2)(B) ONB satisfies a condition
under 9-203(b) [s/a on 3/1] and files [3/1]. Therefore, 9317(a)(2)(B) is satisfied and ONB beats out MT again.

(2) Policy Is it fair to Harriet (the tort victim). She is not a voluntary
creditor like MT. She is an involuntary creditor (we should have
more empathy for Harriet than MT since she is an involuntary
creditor and has no choice in getting the security agreement]. Look
what happens to Harriet, she first becomes an involuntary creditor,
and then the debtor Epstein enters into two voluntary transactions
which diminishes her opportunity of recovering on her claim. Here
is Epstein giving ONB a floating lien on all present and after
acquired inventory; moreover, he takes money from his account and
converts it into rare books and these rare books are covered under
ONBs security interest. Harriet doesnt get a say in those
transactions, and Epstein has every motive to favor OMB. Is this
rule really favor? How can we make a better rule?
(3) What about super priority for tort victims with judicial liens will
beat out Art. 9 secured creditors. So what will you as a creditor do
before you loan money to Epstein ensure there are safe working

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conditions. This is Calebreisi Resource Allocation Law it shifts

the cost of the behavior on the person who causes the problem.
Assume tort victims win regardless earlier or later before OMB
loans money it checks the workplace to ensure safety, if OMB
concludes its not a safe place, how will it affect its lending to
Epstein? It wont offer the cheap deal (low interest limited collateral
deal); they will charge a high interest rate close to general credit
because cant rely on collateral because you know you may be
trumped. The theory is that if the market is competitive, which it is,
Epstien will be driven out and this is good because they had an
unsafe work environment. Basically, the rule will only discourage
lending to bad actors.
i. American Bankers Opinion They will have a lot of
complaints about this hypothetical super priority rule for tort
victims. Another answer to this problem, we have workers
comp (EE insurance) and insurance companies, and direct
govt. regulation (OSHA). The creditors will argue dont make
us responsible for taking care of all these problems. Shift the
burden to those who are capable. [this argument is similar to
the one made above in problem 36].
ii. Any time you sue and you get a judgment you face Harriets
problem under 9-317(A)(2). Not only does this rule not help
judicial lienors, it makes their situation worse under 9317(A)(2)(B).
(F) Problem 1(f) this is a battle between an article 9 secured creditor and
judicial lienor. HS is a designer of clothes. UE is a retail shop. On
1/3/2001, UE asks HS to sell it $200K of clothes on credit. HS agrees and
UE signs a sale agreement and s/a describing the collateral as HS spring
fashions sold in Jan. 2001. The HS clothes are delivered to UE on 1/5.
UEs business is struggling. In Dec. 2000, it lost a battle w/ UO over the
UE trademark; UO obtained a judgment of $500K against UE. After
unsatisfactory attempts to get UE to pay, UO asks the sheriff to levy. The
sheriff seizes HS clothes out of UE store on 1/23/2001. UE calls HS on
1/24 to inform them about the levy. HS discovers that it has not yet filed a
f/s for the 1/3/2001 credit sale; she makes a filing that day. Will UO or
HS get paid first out of the proceeds from the judicial sale? Assume you
are in an order of levy jurisdiction. Is the outcome of this problem fair?
Efficient?
(1) Analysis The fight is over the clothes in the retailer (therefore
inventory). What is Urban Outfitters status (UO) they have a
judicial lien and it arises on the levy (order of levy jurisdiction)
1/23. What is High Spirit (HS) status it has an attached security
interest under 9-203(b) [value gave them clothes in advance of

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giving credit 1/3/01 consideration to support a simple K; s/a

1/3/01; rights in the collateral 1/5 [when delivered under 2-401]
so attachment is 1/5/01 and perfection occurred when they filed in
1/24/01.
(2) Outcome of Battle If we were to apply 9-317(a)(2) [NOT the
correct rule], what would the result be? If we were to apply 9-317(a)
(2), UO would win because it became a creditor before HS under (a)
(2)(A) and (a)(2)(B). The correct rule 9-317(e) If a person (HS)
files a f/s with respect to a purchase money security interest (9103 there is a purchase money security interest b/c under 9103(b)(1) the goods are purchase money collateral with respect to
the security interest and (a)(1) purchase money collateral is
something that secures a purchase money obligation and (a)(2)
obligation of an obligor (here, its UE) incurred as price of collateral
this means HS wears 2 hats] within 20 days [1/5 to 1/26] and
etcTheres a 20 day grace period for HS, and HS wins b/c she
filed on 1/24 [with 2 days left in the 20 day period].
(3) Is there a Secrecy Problem for UO? On 1/23 will UO be able to
learn UEs property is encumbered? If you check the files, theres
no file; therefore, no notice. Theres a secrecy problem. The reason
for this is part of the preference for purchase money security
interests. Why might UE call HS on 1/24 [this is what triggered HS
to file, and win the priority battle]. If HS doesnt know about the
levy, they cant go to the sheriff and ask him to pay them first
according to the priority rules. If you represent UE, why might you
not call? If you call HS knows you are in default of the agreement
[theres a clause in the s/a that if someone levies the collateral, this
is a default event]. UE might think if the levy is not too devastating,
they wont tell HS and just keep paying HS and get back on track. S
(G) Problem 1(g) Everything is the same in 1(f) except that HS and UE sign a
consignment agreement on 1/3/2001,under which HS reserves title to
the clothes. UE is to receive a 20% commission on any sale of HS to the
public but must remit 80% balance w/in 2 weeks of the sale. UE has the
right to return any unsold clothes by 9/1/2001. HS does not file its f/s
until 1/24, after UE phones HS about the levy. Does UO or HS have the
senior claim to HS fashions?
(1) Analysis The only difference is that the relationship between HS
and UE is different. There is a consignment agreement [9102(a)(2) there is a true consignment under Art. 9 b/c there is
enough value involved]. If its a true consignment its in art. 9
under 9-109(a)(4) and if look at the definition of secured party and
debtor it includes true consignor and consignee. What priority
rule do you go to 9-317(e). This is what we mean when true

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consignments are in Art. 9, they are swept in. How do you know if
the there is a purchase money security interest [if there is no
purchase money security interest they lose under 9-317(a)(2)].
But, under 9-103(d) it tells us that it is a purchase money
security interest. Therefore, under 9-317(e), HS wins because
there is a 20 day grace period for filing for purchase money
security interests.

(4) Problem 51 (p. 118) CTA used its accounts receivables as collateral for a
loan from the MSB, but the bank failed to file a f/s. 6 months later, CTA
needed another loan and applied for one from BNB, which searched the files,
discovered there was no f/s recorded for CTA as debtor, and took a security
interest in their accounts receivable. BNB did not file a f/s in the proper place.
Which Bank has the superior interest in the collateral?

(A) Analysis Bentham National Bank wins. The author refers you to an 9317 official comment 3 to answer this question. Where is the statutory
support for this conclusion?
9-322 states general rules for determining priority among conflicting
security interests and refers to other sections that state special rules of
priority in a variety of situations. The security interests given priority under
9-322 and other to which it refers take priority in general even over a
perfected security interest. A fortiori they take priority over an unperfected
security interest. Paragraph of (a)(1) of 9-317 so states.
Under 9-317(a)(1) a security interest is subordinate to the rights of a
person [here BNB] entitled to priority under 9-322. 9-322(a)(2) A perfected
security interest or agricultural lien has priority over a conflicting
unperfected security interest.
(5) Problem 2 (Handout #12) Security interest in promissory notes [quasi
intangible property, which is part of subcategory of instruments]. Various
large commercial customers of CTA give them promissory notes in payment for
services; the notes are negotiable. See 3-104. On 1/3, CTA gives MSB a
security interest in the notes in exchange for a loan. As part of the loan deal,
CTA promises to deliver the notes to MSB w/in one week after the CTAs
receipt of the MSB loan proceeds on 1/3; CTA explains it needs time to collect
the notes from the safe deposit boxes at a number of branches of FUB. CTA
never delivers the notes to MSB. On 1/8,CTA engages in double financing and
gives BNB a security interest in the same notes in exchange for a loan. BNB
also insists on delivery of the notes and CTA promises to deliver the notes
w/in 1 week of receipt after receipt of BNB loan proceeds. CTA also does not
satisfy this delivery development. On 2/1, CTA defaults on both loans. Which

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creditor has the senior lien on the notes, which remain in CTAs safe deposit
boxes on at various branches of FUB at time of default?

(A) Analysis The collateral is classified according to the status of the

creditors. What is MSBs status between 1/3 and time of default (2/1).
When does MS get attachment 1/3? When is there perfection in the
notes? See 9-312(e) [in the exam take up all 5 modes of perfection to
ensure you dont miss something] there is automatic perfection, but at
time of default the automatic perfection lapses. What is BNB status?
Attaches on 1/8; perfection lapses by time of default and under 9-312(h)
neither creditor took steps to re-perfect. We have two art. 9 secured, but
unperfected creditors. Go to 9-322(a)(3) the first security interest to
attach if conflicting security interests are unperfected. Therefore, MBS
wins.
(B) What if default is 1/26? MSB is unperfected; but BNB is still perfected;
and under 9-322(a)(2) BNB wins.
(C) What if Default is 1/10? Both are still perfected. So, MSB wins under 9322(a)(1) [first in time rule] MSB perfected first.
(D) What if on 1/6 MSB files a f/s and default is on 1/26? MSB wins because
it has temporary perfection and during that time it gets continuous
perfection (no lapse). BNB has temporary perfection, but under 9-322(a)
(1), MSB wins because it has the earlier date of perfection (1/3 when
temporary perfection started).
(E) Lesson: Always file a financing statement because of the concern that the
notes dont arrive. The other important point from this problem is the
importance of figuring out at what time do look at the status of the
various contestants, because their status keeps changing. And depending
on the priority rule, you may look at a different time. Some rules tell you
what time to look (9-317(a) tells us to look at the secured partys status
when at the time the other contestant becomes a lien creditor if its a
battle between the trustee we look at 544(a)(1) at time of
commencement of bankruptcy; under 9-312(c)(2) we saw the critical time
period was when the goods were in the warehouse; 9-322 does NOT tell us
explicitly when to look, but we see in this problem that the time is when
you look at the mutual default.
(6) Problem 52 (p. 118) JE ran a clothing shop and needs money. JE goes to 2
banks, FNB and SSB, and asks each for a loan using his inventory as
collateral. They each make him sign a s/a and f/s. FNB files first on 9/25, but
did not loan EJ any money (nor any commitment to do so) until Nov. 10. On
10/2, SSB loans JE the money and files f/s. JE pays neither bank.
(A) Analysis: Did both banks have a perfected security interest, assuming they
filed in the proper place? In other words, is it possible for 2 creditors to

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have perfected security interests in the same collateral? YES, under

comment 1 of 9-322, two or more people may claim a security interest in
the same collateral. 9-322(a)(1) governs the priority of competing
perfected security interests.
(B) Analysis: Remembering that attachment is a pre-requisite to perfection,
9-308, and that attachment cannot occur until the creditor gives value,
decide which bank has the superior right to the inventory. See Example 1
in official Comment 4 to 9-322.
When there is more than one perfected security interest, the security
interests rank according to priority in time of filing or perfection. Filing refers
to filing an effective f/s; whereas, perfection refers to acquisition of a
perfected security interest, one that has attached and as to which any
required perfection step has been taken. 9-308, 309.
Example of 1 of Comment 4: On 2/1, A files a f/s covering a certain item of
debtors equipment. On 3/1 B files a f/s covering the same equipment. On
4/1 B makes a loan to Debtor and obtains a security interest in the
equipment. On 5/1 A makes a loan to Debtor and obtains a security interest
in the same collateral. A has priority even though Bs loan was made earlier
and was perfected when made. It makes no difference whether A knew of
Bs security interest when A made its advance.
This example illustrates anticipatory filing under 9-502. The justification
for determining priority by order of filing lies in the necessity of protecting
the filing system that is, of allowing the first secured party who has filed
to make subsequent advances w/out each time having to check for
subsequent filings as a condition of protection. Note, however, that this first
to file protection is not absolute. For example,9-324 affords priority to
certain purchase money security interests, even if a competing secure party
was the first to file or perfect.
(7) Problem 3 (Handout #12)
(A) Problem 3(a) Assume JE signs both s/a and f/s on 9/1JE does not
receive $ from either that day. Neither bank gives him a firm loan
commitment. On 9/25, FNB files; On 10/2, SSB gives Jay $ and files. On
11/10, FNB gives JE its proceeds. Which bank has the senior lien on JEs
inventory? When did each perfect its security interests?
(1) Analysis The s/a is in the debtors inventory. There is no
commitment to extend credit by either bank on 9/1. When does
FNB get attached security interest on 11/10 because under 9203(b) you need value. When did FNB perfect on 11/10 because
under 9-308 need attachment to perfect. For SSB, attachment
and perfection occur on 10/2. SSB perfects before FNB, but they
lose. Go to 9-322(a)(1) because we have 2 art. 9 conflicting secured

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creditors. The filing for FNB is 9/25 so they beat out SSB. This is a
case where anticipatory filing works.
(2) Policy Do you like this priority rule (is there secrecy)? From SSB
standpoint, is there notice? It will find the f/s. If you represent SSB,
what more would you like to know whether to extend the credit
[what can you find out on 10/2]? You call FNB and want to know
how much they are going to loan the debtor; all you know is there is
a potential relationship that may occur that may involve the
collateral you are looking. Because you are unsure about this other
relationship, SSB will charge a high interest rate close to general
creditor rate because of the possibility that there may be an earlier
lien on the collateral? Some think this is a bad result because in
effect it gives FNB a situational monopoly on the opportunity to
extend credit in the future; no one can compete with FNB because
no one has the information; thus they will have to charge a higher
rate. There are a lot of reasons why the debtor may want to have an
exclusive relationship with one bank; but should the law require no
choice. Assume the exclusive bank starts putting more honerous
provisions on the debtor, at that point SSB may be able to compete;
but SSB will require the debtor to pay off the debt; Thus, the result,
is the debtor now has an exclusive relationship with another
problem. These are the problems with anticipatory filing it gives
a bank situational monopoly. It makes no sense because it gives no
notice.
(B) Problem 3(b) Everything is the same as above except that on 9/25,
FNB takes possession of JEs encumbered inventory. Which bank has the
senior lien? Why?
(1) Analysis Second State Bank wins. Early bird taking of possession
has NO impact on the application of the second sentence of UCC 9322(a)(1).
(C) Variation of Problem 3(b) Everything is the same as in 3(a) except before
Nov. 10, FNB receives a copy of SSBs s/a and f/s. Which bank has the
senior lien?
(1) Analysis Although First National Bank has the last clear chance to
avoid the priority battle, actual knowledge is not taken into account
under 9-322(a)(1) and, accordingly, First National Bank wins. Why is
knowledge ignored?
(D) Problem 3(d) Everything the same in problem 3(A) except there is a
third creditor and some of the dates are different. JE signs only the SSB
s/a on 9/1; JE signs the FNB s/a on Nov. 10, immediately before he
receives the loan proceeds; and on 10/15, Walmart, which has won a
judgment against JE for failure to pay for a $15K credit purchases, has the
sheriff levy on JEs inventory. These events occur in an order of levy

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jurisdiction. The inventory is not worth enough to pay all three creditors in
full. The sheriff sells the inventory. In what order should the sheriff
distribute the sale proceeds?
(1) Analysis:
a.
SSB v. Walmart: Walmart has a judicial lien on 10/15; SSB
has an art. 9 security interest that attaches under 9-203(b)
[s/a 9/1; value 10/2; rights in collateral ?] assume 10/2 and
perfection occurs on 10/2. Under 9-317(a)(2), SSB wins
because it perfected before OR met 9-203(b)(3) condition and
filed before Walmart.
b.

FNB v. Walmart: Same goes for walmart; FNB has an art. 9

security interest that attaches under 9-203(b) [s/a, value
11/10; collateral?] Assume 11/10 date of attachment; and
perfection occurs on 11/10 also [even though filing on 9/25]
because need attachment to perfect under 9-308. Under 9317(a)(2)(A) FNB perfects on 11/10 or satisfies (a)(2)(B) [s/a
on 11/10] and files [9/25]. Either way FNBs priority date is
11/10, and that means Walmart wins.

c.

SSB v. FNB: Both banks are art. 9 secured creditors, and

therefore the correct priority rule is 9-322. Under 9-322(a)
(1), SSB perfects on 10/2 and filed on 10/2. As for FNB, they
perfected on 11/10, but filed on 9/25. Therefore under the
first in time rule in 9-322(a)(1), FNB beats SSB.

(2) Anticipatory filing Problem There is a circular outcome and the

judge will have to figure out which policy is more important to break
the outcome. If favor anticipatory filing hell pick FSB first, SSB,
then Walmart. If you are more worried about judicial lienors (the
policy surrounding Harriet), the judge might pay SSB, Walmart,
and FNB. You have to break the priority rule in order to figure out
who gets paid first.
(8) Problem 4 The following problem involves priority battles but the collateral
in dispute is over shares of stock held in the indirect holding system in AGE.
Review Diagram on pg. 8 of Handout 9 concerning the indirect ownership
of stock. Also study 8-102(a)(7), 8-102(a)(8), 8-102(a)(14), 8-102(a)(17),
8-106 [revised section], 8-501(a), 8-501(b), 8-507, 9-106, 9-312, 9-314, 9324, 9-322, and 9-328.

(A) Problem 4(a) Everything is the same as in problem (3)(a) except that
when JE goes to the banks he offers as collateral the 100 shares of stock
that he keeps in his account at AGE. Both banks describe the collateral in
their s/a and filing statements as 100 shares of Intel stock in the Debtors

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account at AGE; JE defaults on both loans in Dec. DO both banks have

perfected security interests, assuming that they filed in the proper place?
Which bank has the senior lien on JEs stock at AGE?
(1) Analysis The collateral is (not a security b/c not a direct holding
system, not a security account) a security entitlement, which is part of
a security account, and which is investment property. FNB attaches
on 11/10. When does perfection occur for FNB? [Is filing a f/s a proper
mode for perfecting a security entitlement? if its inappropriate, then
FNB will have an attached, but unperfected security interest; but
under 9-312(a) filing a financing statement will work and its perfected
on 11/10; For SSB they have perfection and attachment on 10/2.
(2) Priority Battle Under 9-322(f) special provisions trump the residual
rule of 9-322(a). Go to 9-328 (1) and (2) does not apply
because no control; (3) doesnt apply because neither is a security
intermediary; not a commodity intermediary, not a certificated
security; wrong debtor; but (7) applies and it sends us back to 9-322
FNB wins again because under 9-322(a) first in time rule makes FNB
the winner.
(B) Problem 4(b)(i) everything the same except on 10/2 instead of filing SSB
wants it to be transferred to security account. Is SSB still perfected on
10/2. Yes, under 8-106(d)(1) there is control; so its perfected. The priority
rule under 9-328(1) governs which says the one that has control wins.
So, SSB wins.
a. Policy How does FNB get notice. What would you advise FNB to do
before handing over the money the issue raised how do you the
equivalent of a visual inspection of goods when talking about
investment property? Ask the debtor to provide a current statement
of its security account (the stock wont show up because in SSBs
account].
(C) Problem 4(b)(2)(ii) Assume JE is uncomfortable with transferring the
stock into SSBs brokerage account, but does know and trust the firm
Astor an York which is on retainer to SSB. JE and SSB agree that Mr.
Astor will act as a collateral agent for SSB in this transaction. JE
instructs his broker at AGE to transfer the 100 shares in his account to
Astors account at FUS. The shares are to remain I that account during
the loan repayment period unless JE is in default. JEs broker effectuates
this transfer electronically on 10/2/ Which bank has the senior lien?
Why?
a. Analysis This is like the diamond case. If Mr. Astor is in effect
closely related to SSB (so closely related so that he is like an alter
ego) then control by Astor is equivalent to control by SSB. And go to
8-106(d)(1) (pg. 1280) the purchaser (SSB) has become the

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entitlement holder; but MR. Astors lawyer may seem more neutral
(like a bailee) if that is the case, then under 8-106(d)(3) to see if
there is control another person has control of the security
entitlement on behalf of SSB and acknowledges that it has control
[need to know if the lawyer acknowledges control]. So there will be
control either under 8-106(d)(1) or (3). The outcome of priority is
(D) Problem 4(c) Everything is the same as in (4)(a) above except that SSB
does not file a f/s. JE does not like the idea of transferring the stock into
SSBs brokerage account at AGE. Instead, JE proposes that SSB send a
letter to AGE, consigned by JE, notifying AGE that SSB holds a security
interest covering the 100 shares of the Intel stock out of JEs brokerage
account during the loan repayment period w/out the written consent of
SSB. IF his procedure is followed, who wins after JEs default?
a.

Analysis Does SSB have a perfected security interest? No, under 8106(d)(2) is the only possibility, but they have not become the
entitlement holder, and no other person with in the meaning of (d)(3),
so the only possibility is a tripartite agreement, but what is missing
[who has to agree? The securities intermediary has to agree here the
debtor, SSB agreed but not AGE and that is a fatal mistake for SSB,
which means they have an unperfected attached security interest,
which means they will lose against FNB and the trustee in
bankruptcy. Why does the intermediary have to agree? They handle a
lot of buy/sell orders and they need time to enter the system to punch
in instructions to obey SSB orders not FNB.

(E) Problem 4(d) Everything is the same as in (4)(a) above except that SSB
does not file a f/s. JE does not like the idea of transferring the stock into
SSBs brokerage account at AGE. Instead, on 10/2, a 3 party agreement is
executed by JE and representatives of AGE and SSB which provides, in
pertinent part: (1) that the stock will not at this time be transferred out of
JEs brokerage account; (2) that AGE will comply with all entitlement
orders originated by SSB w/out further consent by JE; (3) that so long as
the Stock remains in JEs brokerage account, JE (as well as SSB) will
receive monthly statements from AGE and AGE will send all dividends and
proxy statements to JE; and (4) that during the loan repayment period,
JE, with the consent of AGE but w/out consulting SSB, may substitute a
security entitlement of IBM stock (of equal market value at time of
substitution) for the 100 shares of Intel stock. Which bank wins the
priority battle when JE defaults on both obligations in December?
(1) Analysis: The collateral is classified as investment property under
Art.9, more specifically [100 shares of stock in AGE] and under
Art. 8 its a security entitlement. FNB gets an attached security
interest under Art. 9-203(b) [value 11/10, rights collateral 9/1; s/a
9/1] on 11/0. Did FNB perfect the right mode of perfecting a
security entitlement filing will work under 9-312; so its perfected

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on 10/12. SSB gets an attached securities interest on 10/2. One way

to perfect is to get control under 9-313, takes us to 9-106, to 8-106(d)
(2) a tripartite agreement will work for control. So SSB gets perfection
on 10/2.
Priority Rule: If the residual rule of 9-322(a) applied, FNB would win
because it filed earlier 9/25. But, 9-328 applies. Under 9-328(a) a
secured party that has control will beat the other secured creditor. So,
SSB wins.
Problem: Debtor has rights in the collateral [e.g., to get the dividends,
proxies] under 8-106 thats ok, it doesnt destroy control on the part of
SSB. What about voting rights? Need to ask whether the objectives
would be the same in terms of the issues they would be likely to vote
on. At first blush, you think they have the same interests [the both
want the stock to maintain value], but their time frames might be
different [assume its a 1 year loan, and JE wants to hold the stock for
30 years that will affect how one may vote on the stock; Also the
bank may have tax considerations which also would affect how they
might vote]; So their objectives may not be the same; The parties could
agree not to vote during the loan repayment period. The broader point:
is the CODE does NOT tell you what to do control does not have to
be exclusive for it to work to give a perfected security interest.
(F) Problem 4(e) Everything is the same as in (4)(a) except that this time,
FNB does not file a f/s. Instead, on 11/10, when FNB makes its loan, FNB
enters into a tripartite agreement w/ JE and AGE. The agreement provides
that AGE, during the loan repayment period, will follow FNBs orders,
respecting the 100 shares of Intel stock in JEs account, as though those
orders were issued by JE. On 10/2, slightly more than 1 month earlier,
SSB executed a comparable tripartite agreement w/ JE and AGE covering
the same 100 shares of Intel stock in JEs account. SSB also did not file a
f/s. Which bank has the senior lien? Why? Why would AGE enter into both
of these tripartite agreements? What should each of these banks do to
avoid this difficulty in the future? To protect against this problem?
(1) Analysis: The collateral is still security entitlement. FNB gets an
attached and perfected security interest on 11/10. [same analysis as
above 9-203(b) and control under 9-313] and SSB gets attached and
perfection on 10/2. Is there a collateral specific priority rule that
governs? 9-328(1) doesnt apply because both parties have control
and this subsection only assumes one party has control. But, under
9-328(2) says conflicting security interests where each has control
ranked in priority of time of subsection (B)(ii) whoever obtains
control first under 8-106(d)(2) (see page 1280 its revised). Therefore,
SSB wins because they get control first.

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(2) Policy: It seems contradictory to have two parties have control of the
security interest. Clearly FNB is first on the fault of AGE not
carefully checking. FNB will not only sue J, but also AGE on the
theory that they should check. But the court suggests that this isnt
AGEs problem its not per se negligence. So if you represent SSB or
FNB and want to protect against this result when get the tripartite
agreement you bargain for protections against this result (e.g., AGE
has searched his files and doesnt know of any earlier third party claim
to this security entitlement; AGE has not signed an earlier tripartite
agreement; and AGE will not sign any future control agreement to this
account]. W/ this language, then FNB could sue AGE.
(9) Handout 12A: Why Allow Secured Transactions?
(a) Why do we allow secured transactions?
(1) Hypo: Assume J is the debtor, and in effect, by entering a secured
transaction, has entered into a K with Creditor #1. That K is
embodied in the s/a and f/s. Its a private deal and the effect of J
entering into this secured transaction w/ Creditor #1, is that J and
Creditor #1 demote the claims of Creditor 2, 3 , and so on all these
future contestants. They are not parties to the deal, but the effect of
the transaction is to demote the claim of strangers to the deal. Why do
we let people do this? Or is this the wrong question Should we
disallow secured transactions? Is there a principal basis for
saying we dont want J and creditor #1 by private agreement to
demote claims of strangers to the deal?
a.

Freedom of K View: Utility argument: wont enter the K unless it

will maximize his utility. Since he knows his utility, we dont
let the govt. decide, thats why we allow freedom to enter into
deals. Also the freedom to enter into a deal, is part of our liberties.

b.

3 Rationales:
1. Secured transactions are unfair this deals with the question
of whether you feel sorry for the other creditor. Its not
unfair if you have an adequate notice system. Dont feel sorry
if there is an opportunity of notice. But there are deficiencies
in notice in Art. 9. We saw when there is a change in the name
of the debtor, theres a problem with notice; Anticipatory filing
little notice given; true lessors dont give good notice; 9-309
(automatic perfection) dont provide notice. But all these
problems could be fixed if we had the will. Do you feel sorry if
there is notice? NO, there are lots of strangers to Ks who are
hurt by the fact that 2 parties make a deal. Example I want
to sell my horse, and you offer $10K and sister offers $15K.
You sell it to me, my sister is hurt because she offered a better

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price; but this not unfair in a system of freedom of Ks. There

are a few cases where secured transactions can be unfair
Example involuntary creditors (Harriet the judicial lienor,
she has no choice whether there is notice or not); unfairness if
J is a consumer and doesnt know what he is doing when [9204(b) there is some protection of consumer debtors so that
they dont become extended.] There is no problem to the
unfairness question IF there is NOTICE.

2.

Secured transactions are inefficient [losses exceed gains] Is

this system a good system will there be more cheap
credit available? Any priority rule reduces transaction costs
[think how expensive it would be for the debtor to enter into
separate bilateral agreements, so you dont have to bargain the
problems of conflicting creditors]. Under 9-339 you can create
a subordination agreement.
Ex Anti Benefits and Post Benefits to Creditor
We have learned that taking security leads to ex anti benefits
for the Art. 9 secured creditor [e.g., taking security is a sorting
mechanism helps evaluate the debtors credit worthiness;
there is the pre-default leverage effect (interrorum effect) of
taking security (debtor knows if it defaults, creditor has the
power to inflict immediate harm); if f/s filed it may scare away
other potential creditors preventing the debtor from overextending [fewer creditors more likely creditor one will be
paid]; fewer creditors means the debtor may have to put more
money in the venture, which means less likely to take a risky
chance.
Ex Post Benefits to Creditor Talking about post default,
dont need to go to court, get a judgment, you have something
to collect out of.
Some argue these benefits should be passed on to lower
interest rates on extending credit. So does that mean J is
better off. One would expect if the cost of secured credit is less
than general credit, J would want to secured his debts. The
problem is that debtors cant meet all their credit needs by
using secured transactions. Debtors dont have enough
collateral to put forth. So most businesses and individuals use
a combination of secured debt and general credit. As the
debtor increases the amount of secured credit he uses, youd
expect the amount of general credit to increase, because all
the assets which are encumbered are removed from the pool of

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assets available to general creditors, [see 9-201(a)]. Is this

just a zero sum game for creditors.
Refer to the formula at the bottom of Handout 12A.
3.

c.

Secured transactions have unacceptable distributional

consequences. In general secured creditors are
institutional and sophisticated; and general creditors are
unsophisticated; so they dont know when the debtor increases
secured debt thereby reducing the property subject to general
credit pool. If they dont know then they cant raise the rates,
and then they will be charging too little, which will eventually
drive those creditors out.
Conclusion: If we assume the 3 rationales are correct, what does
the new Art. 9 do. It encourages the use of secured credit. It
makes the use of secured credit as easily possible. How, in the face
of this uncertainty? (1) it reduces formalities look at 9-203(b),
this procedure is simple and cheap to get a security interest in
property. (2) Art. 9 allows the floating lien 9-204, very few
formality; (3) the scope of Art. 9 keeps expanding it covers
securitization, new forms of collateral; (4) priority rules saves cost;
(5) anticipatory filing making it easy for creditor #1 to beat out
judicial lienors under 9-317; (6) powerful remedies under 9-609.
All these components reduce the cost of entering into a secured
transaction.

B. Priority Battles Involving Purchase Money Security Interests

(1) Read text pg. 129 to 147
(2) Relevant Sections: 9-324 this is the main priority rule for purchase money
secured creditors, which beats out earlier Art. 9 secured creditors with floating
liens. It reverses the first in time priority rule in 9-322, and it ignores the
notice issues because we dont go in first in time. There are two traditional
reasons for the super priority of purchase money security interests: (1) it is
said that the earlier creditor who loses is NOT hurt and may in fact be helped
by the fact that there was later infusion of purchase money credit [e.g., in
problem 2a where Abe beats out FB, FB is not hurt and is helped as
consequence of the purchase money transaction]. Why is the earlier creditor
helped? The empirical assumption is that the value of the purchase money
collateral at time of default will be greater than owed by the purchase money
security + later investment. (2) Purchase money credit is an important source
of secondary credit, and it would dry up if all we had was the residual rule of
9-322(a)(1). Why? Anticipatory filing creates the situational monopoly on the
opportunity to extend credit in future making it harder for subsequent
creditors to compete. By giving super priority, it allows subsequent creditors to
compete. Why be skeptical of these two rationales? Why dont we just fixed the
problems, then we wouldnt need the super priority rule.

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(2) Problem 2: (Handout #14)

(A) Problem 2A: On 6/1 Lucio, a consumer, borrows $ from FB.
L authenticates a written s/a describing the collateral as present and after
acquired paintings. FB files a f/s the same day. On 6/8, L buys 5 paintings
from Abes Interiors (a sole proprietorship) on credit. Lucio picks up the
paintings on the same day (she has told Abe that she intends to hang the
paintings in her apt.). Abe takes a security interest in the paintings, but does
not file a f/s he never does. If L defaults on her obligation to FB and to Abes
Interiors, which creditor has the senior right to the paintings?
(1) Analysis FB gets an attached, perfect non-purchase money security
interest on 6/8 [b/c debtor needs rights in collateral which doesnt occur
until 6/8 based on 2-401]. Abe gets an attached, perfected purchase
money security interest on 6/8. If we apply 9-322(a)(1), FB wins because
it can use the earlier of date of filing or perfection. Here, FB filed on 6/1.
And Abe gets automatic perfection under 9-309(1). The anticipatory filing
would give FB a victory under 9-322(a)(1). But the correct priority rule is
9-324(a) which covers purchase money security interests, here Abe wins
because the purchase money security interest was perfected when the
debtor received possession of the collateral [automatic perfection on date
of attachment, here 6/8] or within 20 days thereafter.
(2) Alternative Question: The paintings are still goods, but its equipment if
she hangs them in her office. [We also know Abe files on 6/25, which he
has to because automatic perfection under 9-309(1) it has to be
consumer goods]. Under 9-322(a)(1), FB wins. When does the 20 day
period begin to run in 9-324(a) it runs after possession (he has until
6/29). Abe would win again because Abe was perfected within 20 days
thereafter the debtor received possession of collateral. [But if Abe doesnt
file until 7/25, we are out of the 20 day priority, no super priority, we go
back to 9-322(a)(1), and FB wins because its date is the earlier date of
perfection or filing.]

(B) Problem 2B:

6/1 L gets money from FNB; S/S describes collateral as present and
after acquired shares of Walmart and Intel Stock; F/S filed
6/8 Abe sells L 100 shares of Walmart registered certificated stock;
Stocks delivered to L and endorsed: F/S filed.
Who wins the battle over the 100 shares of Walmart stock if Lucio defaults
on her obligations to both FB and Abe?
(2) Analysis: Status of FNB: The collateral is investment property; more
specifically registered certificated security because it is in the
direct holding system. FNB gets an attached security interest under

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9-203(b) on 6/8, and perfection on 6/8 because need attachment to

perfect under 9-309. And filing is a proper mode of perfection under
9-312(a). Status of Abe: Abe has a purchase money security interest
because under 9-103, Abe is enabling the debtor, L, to purchase the
stock via credit. Abe gets an attached purchase money security
interest on 6/8. There is no automatic perfection under 9-309(1)
because consumer goods are not involved. But there is temporary
perfection under 9-3312(e) for a 20 day period from time it attaches
(6/29) and another 20 day from time of delivery under 9-312(g)(1) for
20 days from delivery [So Abe is perfected till 6/29] and Abe also gets
permanent perfection (filing which is a permissible mode under 9312(a)) by filing on 6/8.
Priority Battle: At instance, L gets rights in the stock (8-302(a) thru
endorsement); in terms of perfection, we have a tie. Under 9-322(a)(1),
FNB wins because it filed first (6/1). Notice 9-324 does not apply since
Abe enabled the debtor money to purchase the stock. It doesnt apply
because its not goods. Look 9-324(a) deals with goods other than
inventory and livestock; (b) deals with inventory; (f) software. And under
9-103 purchase money only applies to goods and software. Under 9324(5) perfected by taking deliver did either creditor take physical
possession of the stock? Abe had physical delivery, but when he sold it
to L, he gave it to L. L never gave it back to L or FB. Nothing in 9-328
applies. So you go to the residual rule of 9-322(a)(1), which means
FNB wins because it filed first.

Policy: Look at comments on page 1143 that explains why there is no

purchase money priority the control rule of paragraph 1 provides for
the ordinary cases in which persons purchase securities on credit.
What the drafters are saying is that this scenario does not happen
usually.
How Could Abe Prevent This Situation: Perfect by getting into 9-328(5)
[in other words Abe would re-insist L re-deliver the stock] or get control
under 9-328(1) [which requires Abe to get control of the stock, which
means Abe would need L to endorse the stock].
(C) Problem 2C: Assume Lucio does not hold any of her stock directly. Instead,
she holds her stocks and bonds in a securities account at AGE. On 6!,
Lucio signs a s/a for FB describing the collateral as Debtors present and
after acquired investment property held in her business investment
account at AGE. She receives the FB loan on the same description of
collateral on 6/1. On 6/8 Lucio asks AGE to purchase 100 shares of
Walmart stock for her account. Lucio does not have sufficient funds to pay
for stock. AGE agrees to finance the purchase, retaining a security interest
in the Walmart stock, as well as other investment property in Lucios

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business account at the brokerage. AGE also handles the mechanics of

purchasing the stock for Lucio. By the end of the day, AGE indicates, by an
enry in its books, that Lucios business investment account now includes
100 shares of walmart stock. Lucio later defaults on both the FB loan and
the loan made by AGE. Which creditor has the senior claim to the 100
shares of walmart stock? Who wins as to the other investment property in
Lucios AGE investment account, for ex. Her security entitlement to 200
shares of Cisco stock purchased last year w/ money she saved form her
pay check? What prophylactic steps would you recommend that FB take if
it wants to protect itself against potential competing claims to Lucios
financial assets in her business investment account at AGE whether the
later contestant in AGE or outside creditor?
(1) Analysis: Problem 2C demonstrates the ordinary case when
buying stock on secured credit. Review 14A Handout, which gives a
detail example of how this case would work [margin loans].
Analysis Pertaining to W Stock:
The collateral is classified as a security entitlement under Art. 8
since we are in the indirect holding system. [It could be a security
account?] Status of FB: FB obtains an attached security interest
on 6/8, and it is not perfected until 6/8 since 9-308 requires
attachment for perfection. Status of AGE: AGE obtains an attached
security interest on 6/8. There is automatic perfection under 9309(10) when a security interest in investment property is created by
a broker or securities intermediary. 8-102(14)(ii) AGE is a
securities intermediary. So, AGE gets perfection upon attachment,
which occurs on 6/8. [Purchase money security interest involves
goods not investment property].
How Does Control work under 8-106? In this problem (a)
and (b) dont apply because there is no certificated security;
(c) doesnt apply because we dont have a security; (d) also
doesnt apply; but (e) does apply because the entitlement
holder (the debtor L) gives the purchaser (AGE) rights in the
security entitlement. Thus, AGE has control.
Priority Battle: Under the residual rule of 9-322(a)(1), FB would
win again because first in time to file. But, the correct priority rule
is 9-328(3), which says that a security interest held by a securities
intermediary in a security entitlement or security account
maintained w/ the securities intermediary has priority over a
conflicting security interest held by another secured party. This
means AGE wins with respect to the W stock. Also under 9328(1) AGE wins because it has control. There is automatic
perfection as to control under 9-328(1) applies and AGE wins as
to the walmart.

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Analysis Pertaining to the Other Stock: The collateral is still

security entitlement in the account. FB Status: FB obtains an
attached security interest on 6/1 and perfection also occurs on
6/1. AGE Status: AGE obtains an attached security interest on
6/8 and there is automatic perfection under 9-309(10) on date of
attachment here 6/8. [Perfection 9-314, 9-106, 8-106(e)] by
control [BUT there is NO control]. Priority Battle: Under 9-322(a)
(1) FB wins, but under 9-328(3) AGE wins because Art. 9 favors
security interests created by securities intermediaries.
Assume: FB wants to make the loan but wants to beat AGE at
least as to the Cisco stock (and possibly the future stock). FB tries
to get control. With respect to the Cisco stock, on 6/1 in addition
to making loan, f/s/ s/a it gets a tripartite agreement signed by
them, AGE, and L. Remember 8-106(d) talking about someone
other than a securities intermediary; (d)(2) purchaser (FB).(p.
1280). So now FB has an attached and perfected by control
security interest in cisco stock. AGE doesnt get automatic control
until 6/8. So, 9-328(1) doesnt apply, but 9-328(3) applies, and
AGE wins. 9-328(3) is an exception to subsection (2) the
difference is that one of the secured parties is a secured
intermediaries.
Policy: What else can FB do to win? AGEs non-purchase money
security interest will beat out a purchase money security interest
under 9-328(3). FB could bargain for a subordination agreement
or bargain with AGE so they dont take a security interest in the
stock. That is what the drafters intended. The explanation given is
that AGE has to handle all kinds of stocks (transactions) everyday
in which lending is only one, and FB and other banks that loan
against stock know that most keep their stock in brokerage
houses; So FB has can find out about AGE (by asking the debtor).
And, then knowing about these very favorable rules, you are
suppose to bargain with AGE before you make the loan. Will AGE
give up some of this priority? Why would they do? Maybe they
have no intention to ever loan L, maybe L has stock valued well
over the debt (grossly over collateralized), or L is a very important
customer and AGE doesnt want to lose L (b/c make a lot of
commissions). SO they will bargain, and give up priority as to or
both forms of stock.
(3) Problem 57 Paramount homes finished building U, its newest apt.
complex. The clubhouse had to be furnished, so Bill went to Sophys, furniture
store, where he made $2000 worth of credit purchases and signed a s/a on
behalf of Paramount Homes in favor of the seller. The agreement was signed on
6/8; the goods were delivered that same day. Bill failed to mention that all his

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ERs assets (equipment and inventory) were designated as collateral on an

existing s/a and f/s in favor of SNB. The agreement contained an after
acquired property clause, stating that later a similar collateral coming into
the buyers estate would automatically fall under the banks security interest.
(See 9-204(a)). The policy of Sophys was not to file f/s for its credit furniture
sales.
(A) Analysis: Why might it have such policy? Is it wise here?
(B) Analysis: On 6/10, which creditor will have priority in the furniture?
(C) Analysis? On 6/30, which creditor will have priority in the furniture?

(4) Problem 3 (Handout #14) Make the following additional assumptions

Paramount obtains its loan from SNB on 6/1. SNB files its f/s on the same
day. Bill is a part owner of Paramount. Does SNB or Sophy have the senior
interest in the furnishings in each of the following 3 cases: [Refer to 9102(a), 9-324]

(A) Problem 3A: Bill buys 1 $2,000 sofa and puts it into the apt. he will live in
as manager.
(1) Analysis: The sofa is consumer goods and if the contest is joined on
6/30, Sophy wins.
(B) Problem 3B: Bill buys 10 identical $200 sofas and tells Sophys sales clerk
he intends to place them in furnished rental units.
(1) Analysis: The sofas are inventory and if the contest is joined on
6/30, Sophy loses.
(C) Problem 3C: Bill buys 1 $2,000 sofa and places it in the clubhouse for the
apt. complex.
(1) Analysis: The sofa is equipment and if the contest is joined on 6/30,
Sophy loses.
(4)

Problem 4 (handout #14): On 9/1 MI borrows $100K from VSB to expand its
dining facilities. MI gives VSB a perfected security interest in all of its present
and after acquired equipment on 9/1. On 9/30, MIs agent, C, locates a
computer (to keep track of accounts) at Track. She explains to the salesperson
that although MI wants to purchase a computer, it first wants to use the
computer for a trial period before making a final purchase decision. Track
agrees. On 9/30, an agreement is executed giving MI temporary possession of
the computer selected by C, but reserving title in Track. MI is given an option
to purchase the computer at the end of a 30 day trial period. During the trial
period, MI is to pay a reasonable rental per day for the use of the computer.
The computer is delivered to MI on 10/1. ON 10/30, MI decides to purchase

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the computer, on credit, and signs a s/a (describing the computer as

collateral) and f/s prepared by Track. Track files the f/s on 10/1 in proper
place.
(A) Problem 4A: If MI fails to pay both VSB and Track, which creditor gets the
computer?
(1) Analysis: The interpretative difficulty under 9-324(a), faced by Track,
is that MI first received the computer on 10/1; accordingly, more than 20
days elapsed b/w receipt and perfection. See 2-103(1)(3) [definition of
receipt of goods]. Tracks most persuasive arguments are: (1) that MI is
not a debtor until 10/30 under 9-102(a)(28)(A); (2) that the computer is
not collateral until 10/30 under 9-102(a)(12); an (3) that 2-326(2)
provides that MI cannot subject the computer to the claims of its creditors
until 10/30 and therefore there is no need for earlier notice. The argument
for VSB is that the secrecy problem arises on 10/1. If the drafters were
sympathetic to the Banks concern, how would they change the code? In
particular, how could they amend 2-326? Tack wins here. See Brodie
Hotel Supply v. US.
(B) Problem 4B: Assume that on 9/30, MI rents the computer under a true
lease. On 10/30, MI decides to exercise an option to purchase the
computer under the lease. The purchase price is to be paid in
installments. On 19/30, C, executes a s/a (describing the computer as
collateral) and f/s prepared by Track computer. If Track wants to be senior
to competing creditors including VSB, how much time does it have, if any,
to file its f/s?
(1) Analysis: Tack wins if it files w/in 20 days after 10/30. See 2A307(1), 9-324(a).

(C) Problem 4C: Assume on 9/30, MI signs a lease for the computer but the
transaction is in fact a disguised installment sale. On 10/30 MI decides to
exercise its option to purchase the computer. On 10/30, C executes s/a
(describing the computer as collateral) and a f/s prepared by Track. If
Track wants to be senior to competing creditors including VSB, how much
time does it have, if any , to file a f/s?
(1)

Analysis: Tack wins if it files w/in 20 days after 9/30. 1-201(37), 9324(a).

(5) Handout 14A: Margin Loans talking about the events on 6/8 when L goes
to AGE and requests a margin loan. How does a margin loan work? The first
thing you need to know is that AGE cannot loan more than of the purchase
price because (federal law says so) of the stock crash where stock lost its value

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very quickly [L is trying to use her stock to buy more stock]. So, L will have to
put forth half the purchase price. Under the Margin Loan Agreement (see
Handout 11 for e.g.) there is a margin maintenance requirement (a.k.a. debt
collateral ratio). The debt collateral ratio required is 65%. When she gets the
100 shares her debt collateral ration is 20%, but that changes quickly when
the market drops and the interest accrues daily. Now, Ls Debt collateral ratio
is 98.2%. And under the agreement, AGE can make a margin call, which
means that L has to contribute cash or stock to bring the account back in the
margin. Realistically, AGE would make a margin call way before this happened.
But, what does L have to do? Get back into the margin, she has to come up
with $1825 to get into the maximum. But that doesnt solve her problem
because the interest is accruing everyday. So its highly unlikely that she will
be able to meet the margin call. This is what happens when you borrow
against stock and the stock falls. If L cant meet the margin call, there is a
default event and she has to repay the loan. AGE is a secured creditor and
thus under 9-609, 610 foreclose and sell the stock at a bargain basement
price that created the problem; So L would have to liquidate virtually her
entire portfolio locking in her losses because of the drop to pay back the loan.
Critics of Margin Lending: This result floods the market with supply, forcing
the price of stock even lower [the same thing happens on the way up if
collateral becomes more valuable and prices are inflated, she can borrow more
on the margin and buy more stock at a higher price, driving prices higher].
This is how margin lending exacerbates market fluctuation.
Why Does AGE Make Money on Purchases of Stock on the Margin: Profit
from the interest rate, commissions on the purchase of stock (when L buys it),
if L sells it, they get a commission on sale; also, under Art. 9 AGE can buy the
stock themselves in the foreclosure sale under (9-609(c)). So, AGE can hold it
until the market improves. This is why AGE makes the margin loans and this
is why it is the most common form of secured purchases of common stock.
This is high risk purchasing for borrowers.

(6)

Problem 5 (Handout #14)

(A) Problem 5A: This example involves inventory financing
12/1/00 MCA obtains a perfected security interest in Hs present and
after acquired inventory [floating lien]; MCA files a F/S
12/10/00 H contracts to purchase $4,000 worth of Bs clothes
B has a purchase money security interest in the clothes
Clothes identified in the contract, but not delivered [2-401]
12/11/00 B files a F/S
B notifies via e-mail MCA about the credit sale and her Art. 9

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security interest
MCA replies to Bs email and objects
12/12/00 Delivery [H receives clothes]

Analysis: The collateral is classified as inventory. Status of MCA: MCA

obtains an attached art. 9 security interest on the after acquired clothes
on 12/12. Perfected on 12/12 because need attachment.

Rights in collateral [title may pass on 12/10, but for sure

12/12]; under 2-501 title may pass if goods identified. But we
didnt study this rule (minority view); rights in collateral will be
when debtor gets physical possession.

Status of B: B obtains an attached purchase money security interest

on 12/12; perfected on 12/11. If the parties did not agree on title
passing when goods identified, attachment would be on 12/11, which
means perfection would be 12/12 because of 9-308
Priority Battle: Under 9-324(c)(1) MCA filed a F/S covering the same
types of inventory before (12/1) B filed on 12/11. This means that
subsections (b)(2) through (4) in 9-324(b) apply.
Subject to (c), a perfected purchase money security interest in inventory
has priority over a conflicting security interest in the same inventory
if
(1)

the purchase $ security interest is perfected when debtor

receives possession of the inventory [Yes, 2-401 title passes
on delivery, filed 12/11]
9-324(a) gives a 20 day grace period for perfection, notice
(b) is more stringent no grace period.

(2)

the purchase $ secured party sends an authenticated

notification to the holder of the conflicting security interest
[Yes, if email is considered to be a method of providing
authenticated notification; see 9-102(a)(74); authentication
(signature or symbol) 9-102(a)(7)(B).
Email raises 3 questions: (1) will email work (is it the same
as sends an authenticated notification; (2) who needs to
authenticate the email; and (3) how do you authenticate
email?

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 Sending email will work under 9-102(a)(74) [send,

record, and notification in Art. 1]
Who authenticates (9-102(a)(7)(B) the purchase
money secured creditor [the code is unclear, should have
both B and debtor authenticate] but, new Art. 9 doesnt
require debtor to sign F/S, which is a notice paper; by
analogy, the debtor may not have to sign the email. Why
should B authenticate? The idea is to notify MCA to not
make a future advance.
How do you authenticate email? Under 9-102(a)(7),
authenticate means to sign, or to execute or adopt a
symbol, or encrypt or similarly process the record. So,
you should check the state where transaction takes
place and see if it adopted the Uniform electronic
transaction Act or the Electronic Signature Act (E-Sign)
and any other state law, to figure out how to
authenticate. Assume, if B types her name at end of
email, it is good enough to authenticate the email
for purpose of 9-324(b)(2).
(3)

(4)

the holder of the conflicting security interest receives the

notification w/in 5 years before the debtor receives
possession in the inventory [Yes, 12/11]
the notification states that the person sending the notification
has or expects to acquire a purchase money security interest
in inventory of the debtor and describes the inventory [Yes]

Result: Under 9-324(b), It looks like B wins even though MCA

filed first. Under 9-322(a)(1), MCA would win because filed first in
time.
(B) Problem 5B Analysis: Without notification, the priority rule governing this
transaction will be 9-322(a)(1), which means that MCA wins because it
was first in time to file on 12/1. See Comments 4 of 9-324(b). Under 9102(a)(74), notification is not sent.
Notes: No matter the state of e-commerce law is, under UCC 9-324(b)(2),
this email has not been sent; and under 9-324(b)(3) the notice has not
been received. [These terms are defined in the code] As a consequence, B
is in real trouble unless she can establish that MCA was not entitled to get
the notification. See 9-324(c) defines who the set of creditors are who are
entitled to get this special notice. Is MCA entitled to get the notification.
Under 9-324(c), MCA is entitled to the notice because since B perfected
through filing, (b)(2) through (4) applies since MCA filed before the
purchase money secured creditor (B). MCA was entitled to the notice, and
did not get the notice. And accordingly, B does no t have a qualified

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purchase money security interest. So we go to 9-322(a)(1), MCA wins

because they filed before B.
Policy: What is the purpose of requiring B to file a f/s to get super priority.
The purpose is to give notice to later creditors, purchasers. And the
purpose of the notification is to let earlier creditors know about the
purchase money security credit. Whats the purpose of notification isnt
it too late for MCA to adjust their behavior (they gave the debtor the
money)? So, MCA wont give the debtor any more money. The reason why
the requirements under 9-324(b) are more stringent than 9-324(a), you
are more likely to have a floating lien on inventory, and that means that
the earlier creditor is more likely to rely on the after acquired property and
give more future advances.
(6)

Problem 6 (Handout #14)

12/11/00
B notifies in writing
MCA receives the writing
The writing specifies future sales and deliveries to H
Bs S/A contains No future advance clause]
12/31/01

B obtains a second valid S/A and F/S

Files F/S

1/1/02

Clothes delivered to H

12/31/05

B obtains a third valid S/A and F/S

Files F/S

1/1/06

Clothes delivered to H

Analysis: 9-324(b)(3) requires that notification be within 5 years before the

debtor receives possession of the inventory. As for the second delivery, the
notice conforms to the 5 year period, but the third transaction is outside the 5
year parameter. Therefore, I would suggest, B send another authenticated
notification to MCA before deliver of the third shipment of clothing. She must
provide notice by 12/31/05 (that day).
Notes: The real question does B need to take additional steps to ensure she
keeps her super priority as to the later sales of credit. No notification required
as to the second delivery, but the third delivery is beyond the deadline. So 9324(b)(3) was not satisfied as to the last delivery of the clothes. The idea is
that this special notice lasts for 5 years, just like a F/S lasts for five years.
Policy: The secrecy problem arises when the debtor gets the new clothes, that
is why we require perfection at that moment under 9-324(b)(1).

(7)

Problem 7 (Handout #14)

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VB

HO owes $500K
Holds a perfected floating lien covering all past, present, after
acquired inventory and accounts of HO
Value of collateral is 400K

SLFG Provide HO short term financing for HOs acquisition of

spring/summer inventory
Collateral in Spring/Summer Inventory and accounts generated
by this inventory.
(A) Analysis:
Recommendations:

Purchase money security interest in the inventory

S/A should say inventory and proceeds.
To get priority in inventory, satisfy the requirements under 9-324(b)
With regard to the accounts see the explanation below
Party financing the inventory on a purchase money basis makes a
contractual arrangement that that the proceeds of receivables
financing by another be devoted to paying off the inventory security
interest. [Comment 8 of 9-324]

Notes: Notice the security interest is under collateralized (the debt is worth
more than the value of the collateral). Assume these dates:
3/00 VB f/s; s/a; value
3/10/01 paperwork
3/15/01 HO purchase
4/1 HO
Notes: To get into 9-324(b), SLFG needs a purchase money security
interest. So start with 9-301 how can you be sure you have a
purchase money security interest. Look at 9-103(g), SLFG will have the
burden of showing it is a purchase money security interest. Also need to
look at 9-103(a)(2) looking at the purpose of the lender in making the
loan (if value so in fact used). Need to worry about two issues with respect
to making it clear that you have a purchase money security interest (1)
spell purpose out in the S/A and Loan agreement (that the $ is for
purchasing these goods) and (2) [how do you ensure the $ is used for that
purpose] you could do a joint proceeds check (with the debtor and
sellers names).
Now you go to 9-324(b). How do you satisfy this with respect to the
clothes? Look at (b)(1) the term when means before or when (advice: file
before attachment at an earlier time; before debtor receives possession; of
course notification has to be received before same moment under 9324(b)(2)). You want to have all the requirements done in 9-324 before HO
purchases the clothes. How will you know when HO will purchase the

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clothes and get possession. How do you control timing? Dont give HO the
money until all the paper work is done (the filing, the notices, etc). This
will prevent SLFG messing up on the timing. Say you do all this, is there
still a problem created by the acts just suggested above? What about VB
when they get the notice? If there is an acceleration or default clause in
the S/A, VB will declare default and this is a real problem for SFLG
because they have to deal with the debtors collateral in bankruptcy
proceeding.
Look: (1) SLFG can follow the code and end up w/ the situation above; (2)
It can say to HO, VB needs to be at the table (maybe no loan made); OR (3)
dont send the notice to VA bank. If you really think HO is Ok for the short
term, you dont need priority over VA Bank (you are taking a risk that you
will be second in time (problem 5(B)), but if you think they can repay, VA
bank will never know). The cost of getting priority (notification to earlier
creditor) may be too great. That is exactly the result the drafters wanted
because they wanted to break up the mini monopoly the earlier creditor
had, but imposing minimal protections.

(8)

Problem 8 (Handout #14)

3/28 - H borrows $15,000 from MDNB
S/A describes inventory to be purchased
F/S filed
MDNB sends an adequate authenticated notification under 9324(b)(2)
H purchases $30K of inventory from Std. Auto
H makes a down payment
Std. Auto finances the rest taking a security interest in inventory
Std. Auto files F/S
Std. Sends MDNB an adequate authenticated notification [received
same day]
4/2 - Inventory delivered to H

Problem 8A: MDNB gets attached and perfect on 4/2; Std. Auto gets attached
and perfected on 4/2. They both have attached perfected pmsi, under 9324(g)(1), the vendor is favored over the outside lender. Std. Auto wins.
Notes for 8A: Does it matter who wins, because the collateral is worth
$30,000, and the 2 creditors should be able to get their money in default; but
what about the issue of bargain sales at foreclosure, expenses, interest,
depreciation. So, priority does matter. 9-324(b) does not govern this battle
because it deals with cases you have a purchase money security interest v.
another type of creditor. 9-324(g) deals where you have 2 purchase money
secured creditors that have super-priority under (a), (b), etc Std. Auto wins

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under (g)(1). This section is referred to as the vendor preference rule; The
seller gets preference over the outside lender.
Problem 8B
3/28 MDNB loans $15,000 (11:00)
No notification sent
F/S filed (11:30)
H borrows $15,000 from CF (2:00 PM)
S/A and F/s (2:30)
CF sends notification to MDNB, which is received that day
H signs sales agreement with Std. Auto purchasing $30K of inventor
(4:00 PM)
No security interest, because H paid in full
4/2 Inventory delivered
Problem 8B Analysis: Under 9-324(c), subsections (b)(2) through (4) do NOT
apply to MDNB because they perfected by filing before CF. This means to
satisfy 9-324(b), MDNB only has have a perfected purchase money security
interest when H receives the collateral, which is true. As for CF they also meet
9-324(b) requirements for priority. So we go to 9-324(g) 9-324(g)(1) does
not apply because both security interests secure enabling loans [No vendor in
this problem] But 9-324(g)(2) applies, which brings us back to the residual
rule of 9-322(a)(1); therefore MDNB wins because the filed before CF.
Problem 8C: MDNB wins because there is no conflicting purchase money
security interest that qualifies for super priority under 9-324(b)(1). Only
MDNB satisfies (b), so they win. Under 9-322(a)(1), MDNB would also win.
But the better priority rule is 9-324(b).
Std Auto: Attaches on 4/2, but perfects 4/3. Under 9-324(C)(1), (b)(2)
through (4) applies because MDNB filed before Std. Auto. But Std. Auto does
not meet (1), which means they dont qualify for super priority, which means
9-324(g) doesnt apply.
MDNB: Attached and perfected on 4/2. Under 9-324(c)(1), (b)(2) through (4)
does NOT apply because MDNB filed before Std. Auto. This means that they
only have to satisfy (b)(1), which is met.

Policy Reason for the Chart: Notice that these three rules were employed under
old Art. 9 depending on the jurisdiction you were in. Notice the vendor
approach rule is the rule adopted by the new Art. 9. Look, the most neutral
rule is the equitable rule; the residual rule favors the outside lender whereas

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the vendor preference rule favors the seller. Which approach do you like the
best in terms of policy?
Equitable Rule: Its the best rule. If you agree there ought to be super
priority for purchase money secured creditors, the equitable rule is the
fairest. It doesnt matter whether the creditor is an outside lender or
seller. They are both critical players for H being able to buy auto parts. If
you dont like its pro rata formula, since each creditor will know of their
existence, they can bargain for another rule. So this is a good starting
point.
Vendor Rule: Look at page 1138. The quote the Restatement of Real
Property. So the vendors hazard of losing real estate previously owned is
greater than the lenders hazard of being unable to collect from its
property interest in real estate. In other words, the hazard faced by Std.
Auto (its risk) they risk losing property (e.g., auto parts) if the debtor
defaults, and that loss is different from MDNBs loss their loss is
money (it risks not getting the money back). The Drafters distinguish it,
but common sense makes it hard to distinguish. Maybe it works well in
the real estate world loses real property (b/c of the uniqueness of the
property) v. money. But when you are talking about auto parts, the
rationale doesnt translate. Under this rule, you need two priority rules.
Because there may be a situation where both creditors are outside
lenders, which sends them back to the residual rule. If you are serious
about encouraging purchase money security interest, there is a problem
with 9-324(g)(1) and (2).
3 Possible Approaches to Resolving the Priority Battle Involving 2
Purchase Money Secured Creditors In Compliance w/ 9-324(b)
[The Table Explores the Policy Reason for 9-324(b)]
Case I
$20,000
Liquidity Value of the Collateral
M Bank: Loan Balance Outstanding $15,000
Standard Auto: Credit Balance
$15,000
Outstanding
Residual Rule: 9-322(a)(1)
(a) Recovery of M Bank
$15,000
(b) Recovery of Standard Auto
$5,000
Equitable Rule:
(a) Recovery of M Bank
$10,000
(b) Recovery of Standard Auto
$10,000
Vendor Preference Rule: 9-324(g)
(1)

Case II
$10,000
$16,000
$4,000

$10,000
$0
$8,000
$2,000

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(a) Recovery of M Bank

(b) Recovery of Standard Auto

I.

$5,000
$15,000

$6,000
$4,000

Residual Rule: 9-322(a)(1) governs, and MDNB because first in time to file
3/28 (11:30).

Status of MDNB: MDNB obtains an attached purchase money security interest on 4/2
because debtor does not have rights in collateral until 4/2. MDNB perfects not until
4/2 because under 9-308 you need attachment to perfect.

Value on 3/28 [11 A.M]

Debtors Rights in Collateral on 4/2 [could be earlier if goods identified in K]
S/A on 3/28 [11:30 AM]
Perfection [Filing] on 3/28 [11:30 AM]

Under 9-322(a)(1) MDNB relevant dates are 3/28 (11:30) filing and 4/2 (perfection)
Status of Std. Auto: Std. Auto obtains an attached purchase money security
interest on 4/2; And perfects on 4/2
Value is given on 3/28 [K right] (2:00 P.M)
Debtors Rights in Collateral on 3/28 (2:00) [if goods identifiable in sales K]
S/A on 3/28 (2:00 PM)
Perfection [Filing] on 3/28 (2:30)
Under 9-322(a)(1) Std. Auto relevant dates are 3/28 [filing] (2:30) and [perfection]
(2:00)
II.

Equitable Rule: Formula

C1 = $15,000
$30,000 (15 +15) = ($20,000) = $10,000
C1 = $16,000
$20,000 (16 +4) = 4/5 ($10,000) = $8,000
C2 = $15,000
$30,000 (15 +15) = ($20,000) = $10,000
C2 = $4,000
$20,000 (16 +4) = 1/5 ($10,000) = $2,000
III.

Vendor Preference Rule: Purchase $ Vendor should beat purchase $ outside

lender. Since Std. Auto is the purchase money vendor, it beats out the outside
lender, which is MDNB.

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Recap on Policy: In most of the cases where you have 2 purchase money secured
creditors, they will know about each other and bargain. So the priority rules will rarely
come up. The vendor rule makes sense because the vendor is not in the business of
loaning money; it means that it is less likely to gage the risk in the transaction, protect
themselves, and spread the risk if it suffers the loss as contrasted to the OUTSIDE
lender, which tends to be an institutional creditor. SO it makes sense to put the loss,
the default rule, on the one who can better protect themselves the institutional
lender. But the teacher says the equitable rule is the better rule.
(9)

Problem 62 (p. 147)

C. Priority Battles Involving Perfection by Control

1.
2.

Read Text page 147-149

Problem 64 (p. 149) This is modified in Handout 14(b). Out debtor is PR
and wants to borrow money for IB. It offers as collateral its bank account from
LNB. IB asks you how to perfect its security interest. How do you perfect a
security interest that involves deposit accounts. Focus on two factors: (1)
minimizing the danger that the debtor (PR) will empty the bank account; and
(2) maximizing the opportunity for your client, IB to win future priority battles
to other creditors. Obviously what we suggest to IB, the debtor may not agree
upon, but IB is our client.
A. Analysis: We have studied 5 modes of perfection, which will work for
deposit accounts? Control is one possibility, and the ONLY mode of
perfection that will work for deposit accounts. See 9-312(b) says
except as provided for proceeds, a security interest in deposit account may
only be perfected by control. Classify the collateral first as a deposit
account, and now we know there is only one mode of perfection. Start with
9-314, which sends us back to 9-104. Review the options under 9104:
1. Secured party has control if the secured party is the bank where the
account is maintained (9-104(a)(1)). The account is now at LNB, so
debtor would have to move the account to IB.
2. Secured party would have to get a tripartite agreement under 9104(a)(2).
3. 9-104(a)(3) The account would stay at LNB, but instead of PR
being the customer, IB would be the customer, and would require
LNB to execute a new deposit account agreement, which would
substitute IB for PR as the customer and all of LNB responsibilities
would run not to PR any more, but to our client IB. 9-104(a)(3).
Which option under 9-104 is best for IB and worst for IB. Option 1 and 3
would be the best because [debtor could not dissipate the fund because
IBs name is on the account; so debtor cant write checks]. Clearly, option
2 is the least safe option because money stays at LNB because LNB agrees

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to the instructions, but they can make mistakes. Option 1 is in the middle
because you trust your tellers better than LNB.
Future Priority Battles: Handout 14B provides hypothetical.
D. Priority Battles Involving Deposit Accounts As Original Collateral
1.

Case I 2/1 IB credit; s/a; control [method of control not specified];

perfection
3/1 sheriff serves writ of garnishment (works just like writ of
execution) but you use that when you go after a third person
to pay a promise to pay a monetary obligation. Serving is the
just like levying, when we get a judicial lien.
Look at 9-327 [smart place to start because says priority for deposit
accounts]. Do we have conflicting security interests. Does the judicial lienor
hold a security interest in the deposit account. No its a judicial lien. So 9327 doesnt apply. Where do we go where there is a perfected secured creditor
v. a judicial lienor 9-317(a)(2)(A) [default rule], IB wins. It had a perfected
security interest by negative inference. It does not matter which of the three
modes of perfection IB uses within the definition of control for this battle.
Same would be true if IB were fighting the trustee in bankruptcy (because 544
takes us to 9-317].

2.

Case II Here there is a tripartite agreement control under 9-104(a)(2).

2/1 IB credit; s/a; control by triparti
3/1
This time we have a conflicting security interests. Are both creditors
perfected? Yes, under 9-104(a)(2) IB has control; As to LNB they have control
under 9-104(a)(1) because they hold the account. So we have two art. 9
creditors both of which who are perfected by control. If 9-322(a)(1) were the
priority rule, IB would win because it perfected first. But the priority rule that
governs in this case is 9-327. 9-327 trumps 9-322 because it is the
collateral specific rule. 9-327(3) tells us that LNB would win because they
hold the account. So, the later creditor beats the earlier creditor because of
the choice of the mode of control under 9-104(a). That is the lesson of 9327(3).
Policy: Why does the later creditor win? IB had the opportunity to get control
under 9-104(a)(1), but it chose not to. IB knows LNBs identity because that
is where the account is. So IB could negotiate a subordination agreement with
LNB. This should remind you of 9-328(3), where we saw the securities
intermediary had a leg up in priority battles and beat outside creditors. But
now we are seeing the bank where deposit maintained has a leg up against
outside creditors. The idea is that we want to encourage lending by banks to

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their customers just like securities intermediaries to their customers. So, the
outcome suggests the tripartite method is the worst option because will lose in
priority battles.

3.

Case III IB becomes the customer on the LNB bank account method of
control. 9-104(a)(3).

We have 2 conflicting security interests where both creditors have control.

Under 9-322, IB would win. But under 9-327(4) (the correct rule), IB would
win. 9-327(4) says control under 9-104(a)(3) trumps the bank that holds the
account.
Policy: Does LNB have notice? Yes, because IB cannot become a customer
without LNB not knowing we are switching the names on the account
which requires the signing of a new agreement. Clearly, LNB knows and when
it made the loan it should have checked. Dont feel sorry for LNB.
4.

Case IV IB perfects by 9-104(a)(3) and LNB by 9-104(a)(1)

Both creditors have perfected security interests by control. Under 9-322(a),
LNB would win because it perfected first. But under 9-327(4), a security
interest perfected by 9-104(a)(3) beats a security interest held by the bank.
So, IB wins, the one that became the customer.
Policy: Do we feel sorry for LNB, because they became the creditor first. No,
because you needed their approval to switch the customer. LNB has to sign off
on the switch, and it wont if it already has an outstanding loan. So these
rules take into account notice.

D. Priority Battles Where One Claimant Purchased the Collateral From the Debtor
This is an entire new subject [these our battles between Art. 9 secured
creditors and buyers of collateral on the other side]. Previously we focused
on 2 secured creditors.
1.
2.

Read Text pages 151 to 181

Problem 66 In all these problems the debtor is the bad actor. Look, by
selling the collateral in a way inconsistent with the s/a the debtor has
increased ONBs risk after ONB has committed the money to the deal and now
suddenly the collateral is being sold in a way contrary to the agreement. W/
respect to Betty, she thought she was buying the TV free in clear. The TV is
subject to ONBs security interest. Both ONB and Betty can sue the debtor;
ONB can sue for breach of contract; conversion [no right to sell the TV];
Betty can sue for breach of contract; breach of warranty of title [2-312

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 you warranted I was getting a good title to the TV, but in fact it is
encumbered in a prior security interest].
Methodology for Battles between Buyers and Creditors:
1. Classify the collateral
2. Status of both contestants
a. Secured Creditor: attachment and perfection
b. Buyer: make sure the person is a buyer [sometimes not clear she
may be a general creditor a financing purchaser]
3. Priority Rules Start with 9-315(a)(1)
a. 9-315(a)(1) a security interest (here ONB) continues in the
collateral (the TV) notwithstanding sale [so the security interest
continues in the original collateral as it goes from the debtor to the
buyer] unless the secured party authorizes the disposition free of the
security interest. If ONB authorized the sale free of the security
interest, end of story. Betty owns the TV free and clear. There is no
priority battle and Betty has no personal liability to ONB [she doesnt
become bound like under 9-203(e). ONB cannot go after purchasers
of collateral or individuals getting it as a gift if they authorize the sale
or transfer. The security interest is extinguished when the secured
creditor authorizes the sale or transfer.
b.

When you have a sale out of trust [the collateral is encumbered by a

security interest], the starting point is 9-201(a). Except as otherwise
provided, a security agreement is effective against purchasers of the
collateral. That is bad news for Betty. That means ONBs security
interest in the TV is effective against Betty unless otherwise provided.

c.

Exceptions: Art. 3, 8, and 9 apply for buyer protection priority rules.

All of these rules override 9-201(a). But you dont get to them unless
you have a sale out of trust. Break the exceptions in 2 categories:
1.

There are buyer protection priority rules that are triggered if the
secured party did not perfect the security interest [NO notice
given]. 9-317(B) is a good example of this type of buyer protection
priority rule [but it must be a sale out of trust].

2.

There are buyer protection priority rules that are triggered even
though the secured party did everything right. For example, focus
on the nature of the collateral [different rules for stock,
instruments, consumer goods]. We look at expectation of buyers;
the ability of the secured party to prevent the unauthorized sale.
These factors are relevant in the analysis.
a. 9-320 buyer of goods
b. 9-330 buyer of instruments (plus Art. 3)

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c. 9-331 buyers of stock [plus Art. 8-302, 8-303, 8-502]

d. 9-332 transferees who get money out of a bank account
e. Federal Food Security Act where farm products are
involved.

a.

Case 1 [Handout 15a] A sale out of trust [violates the security

agreement the sale is inconsistent with the clause in the security
agreement].Here the fight is between a secured creditor and the buyer.
Analysis: Focus on 9-315. Say Secured creditor authorized the debtor to
sell the TVs in any way. So we have an authorized sale [this is always a
question of fact customs w/ this particular debtor; always a good idea
to have an express clause in the s/a]. 9-315(a)(1) tells us that Betty takes
the original collateral completely free of the security interest. So how does
ONB collect? It can foreclose on other TVs that the Debtor hasnt sold yet,
other collateral still in the debtors hands. Look at 9-315(a)(2) a
security interest attaches to any identifiable proceeds of the collateral. So
presumably when Betty got the TV, she paid money and if the Debtor has
the money, ONB can go after the proceeds. Isnt that good enough? Why
would ONB want to go after the TV proceeds tend to dissipate quickly
b/c very liquid. Even in the case of the authorized sale, ONB can get
proceeds in the hand of the debtor. 9-315(a)(1) priority battle Betty
wins because the sale was authorized and thus she hasnt assumed the
personal liability of the seller.
1.

Hypo: No credit sales on TVs less than $1000. Betty buys on

credit. This is an unauthorized sale [a sale out of trust]. This
means ONBs security interest continues in the hands of betty
according to 9-315(a) essentially ONB and Betty have shared
ownership of the TV. So now we have to look at another priority
rule. Under 9-201(a) ONB would win, but there may be a buyer
protection rule for Betty. Look at 9-320(a) perfection makes no
difference, Betty wins as long as she is a buyer in ordinary
course of business under 1-201(9) [has been revised].
POLICY: Do you like this result? Why did we go to 9-320(a)
instead of (b)? We went to (a) because it has to be a consumer good
both in the hands of the buyer and seller. We are not in 9-320(b).
If Betty were buying real estate (e.g. house), would you require
her to check the records? YES, you know we expect consumers to
check the records when they buy real estate; So, why dont we
require Betty the consumer here to check? The transaction costs
seem very hard to check for low price items. But what about an
item that really expensive there is no cut off amount on
consumer goods. Whenever its a consumer buying irrespective of

155

the amount of the money you would like the consumer not to have
a burden of inquiry because of the consumers expectation of
getting the goods free and clear.
b. Case II [Handout 15a] this is a case about a sale out of trust. ONB
might be nervous about the debtors business practice you can sell TVs
on credit only if the customers pay 50% down. It is a way of monitoring
risk improving the debtors business practice. [This explains how a
retailer can sell out of trust]. Say Debtor sells the TV to Betty with only 5%
down this is a sale out of trust. ONB can also establish a debt-collateral
ratio. This time how does ONB collect. Under 9-315(a)(1) ONB has a
security interest in Bettys TV and the proceeds, the money in debtors
hand. So it can collect from two sources. This is assuming there is no
special buyer protection priority rule.

1.

c.

Hypo: Betty hangs out at a bar and there is a TV in the Bar. Betty
asks what happen to the old TV? The bar asks Betty if she wants
to buy it. She buys it and brings it home. Later she gets a letter
from ONB and it states that they have an attached and perfected
security interest on the TV and the Bar defaulted on its loan; and
we want the TV. Assume this is a sale out of trust. Also assume
under 9-201(a) ONB will win UNLESS otherwise provided. So the
issue remaining is whether Betty can get protection under 9-320?
Bettys expectation is the same as the hypo above. To qualify
under 9-320(a) Betty must be a buyer in ordinary in the course
of business [1-201(9) on page 1267 which defines this
term as the buyer in good faith and doesnt check the Art. 9
files and in the ordinary course, not a pawn broker, and in the
business of selling that good. Here, the bar is not in the
business of selling TVs, rather they sell beer and food. Here the
seller is not in the business of selling these goods. [Controversial
Cases Rent-a-Cars who sell some of their cars rather than rent
courts split on whether they qualify as a person in the business
of selling the cars rather than only leasing. Bottom-line: Should
Betty win in this case? If Betty loses, she is left with a law suit
against the bad actor, the bar.

Case III [Handout 15a] You can have an authorized sale, but where ONB
says the collateral passes to the third party subject to their security
interest. This comes up where the debtor is a wholesaler and Betty is a
retailer (2 businesses involved.) SO you have a tripartite agreement where
everyone agrees that the security interest continues with the sale. So ONB
can go against both under 9-315(a)(1) collateral and (a)(2) proceeds of
collateral.
1. Hypo: ONB providing inventory financing to debtor. Here the buyer
is a multi-million dollar corporation that runs assisted living

156

communities. They just bought 1500 TVs for the price of

$600,000. If the buyer were loaning money to the debtor they
would check the art. 9 files, BUT here the buyer is not loaning
money, rather they are buying the TVs. Would the buyer win
against ONB? If they got a really low ball price, you may argue
they were acting in bad faith, but here it sounds like they are
paying a FMV amount. The first question is (1) is it a sale out of
trust? Yes, because there may be a s/a clause that says if you sell
over a certain amount to one buyer you need the secured partys
consent (Why? It may be a signal of going out of business) so
we go to 9-315(a) which tells us that the corp. gets the TVs
encumbered with ONB security interest. Then 9-201 tells us ONB
would win unless there is some other buyer protection rule so
we go to 9-320 the issue is whether the corp. is a buyer in the
ordinary course of business? Is this term limited to consumers?
NO. 1-201(9) [page 1267] it seems that you may be able to
make an argument for ONB on the second sentence if it is
typical that the debtor doesnt usually sell to large. Corps. In a
high volume (or its just extraordinary) you may be able to argue
they are not a buyer in the ordinary courts. But the mere volume
does not disqualify the corp. as a buyer. So under 9-320, the
corp. will win.
Policy: This seems unfair because the least cost avoider is the
corp. ONB did everything right by filing a notice and its difficult
for them to control the debtors selling behavior. All the corp. had
to do was check the art. 9 files.
d. Case IV: (Handout 15a) Here Bart saves his money and wants to buy a
vending cart. The debtor is offering to sell a vendors cart. Bart calls the
debtor and offers $12,000 to the debtor. The debtor agrees to sell the cart
to Bart. Suddenly, Bart gets a letter from ONB telling him about the
security interest in the cart and that the seller has defaulted on the loan.
What advice do you give Bart?
1.

Analysis: First thing you do is read the s/a to see if the sale was
authorized. IF you can find a way to construe the agreement as
authorizing the sale, then Bart is OK. But assuming it is out of trust,
then the security interest continues in the vendors cart into Barts
hand under 9-315(a). There may be another attack check the state
law on certificate of title; but lets assume there is proper perfection. So
go to 9-320 can Bart win? 9-320(b) doesnt work because not
consumer goods rather its equipment in the buyer and debtors hands.
Here, Bart loses.
Policy: Should Bart lose?

157

e.

How do we Rationalize the Results From Case I to Case IV: In case I and
III, the corp. and consumer win irrespective of the amount and whether
they are a consumer or corp. In case II and IV, the consumer and
proprietor lose. It is a VERY big deal if you lose the collateral because then
the person is out of money and the good. What were the drafters doing?
The drafters are trying to protect retailers and wholesalers who sell
these types of goods in the ordinary course. The notion is
[encouraging commerce} you want whether individuals or corps. When
they go to buy from people in the business to not have to endure the
transaction cost of checking to see if there are earlier liens and that
promotes commerce. This raises 2 questions: (1) do we need
consumer protection in addition to this; and (2) do you think in the
case of corporate buyers (who have lawyers) ought to have the same
protections as consumers (if they are the least cost avoider when the
secured party has done everything right).
If the creditor is an institutional creditor, institutional creditors may be
better gauging risk, but what if the creditor is a wholesaler, who is not in
the business of loaning money. Another problem with 9-320 should we
analyze on a case by case the buyers reasonable expectation this
approach may result in more just outcomes but there is a shortcoming
and that is it is not a very certain rule and makes it difficult for creditors
to gauge the risk of unauthorized sales and increase litigation. Another
approach may be to separate buyers the Code approach: if buy from
someone in the business then you are protected or another approach
monetary cap or you can separate types of goods. Unfairness can arise
from each of these approaches.

f.

Problem 66(B): Would make a difference if Betty knew about the security
clause. Here are 2 different scenarios:
1.

Case I: Betty walks into the TV store and the owner tells Betty that
there is a lien on the store and backed by his mortgage. Under 9320(a), would Betty win? Look at 9-320(a) it says takes free of a
security interest even if security interest is perfected and the
buyer (betty) knows of its existence. So even though the owner
notifies Betty that everything is encumbered, Betty wins.

2.

Case II: Betty walks into the TV store and the owner says he just got a
loan from ONB and they have a lien on the entire store. Betty asks the
owner she would like to see the s/a? Betty discovers that if she buys
the TV at the discounted price that would violate an express term of
the s/a. But, Betty buys the TV and the debtor defaults. ONB asks
Betty for the TV. In this case Betty loses because she learned that
the sale violated the terms of the s/a and Betty is no longer
considered a buyer in the ordinary course when she knows the

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sale violates the agreement. See the lang. without knowledge

that the sale violates another persons interest in the goods. [See
the COMMENTS].
3.

Case III: What about the corp.? You want to be willfully blind you
dont want to inquire [totally contrary to the way we treat creditors
in priority battles]. Here the best advise you can give a buyer in
the ordinary course is Dont Ask.

POLICY: Is that the rule you want dont ask? 1-203 and 1-201(9) you
need to act in good faith. But the very intention of 9-320(a) says
even if you know of the existence, you win. Personally, should be
trouble with the case II and IV that they lose and in III the corp. wins.
[think about these four scenarios and the policy possible exam
question].If you are buying from a person in the business, then there
is no burden inquiry.
4.

3.

Hypo: Assume the loan goes to the debtor and then debtor sells the
cart to a broker for money and then the broker sells the cart to broker.
Assume the broker is in the business of selling carts. Go to 9-320(a)
says now Bart is arguably a buyer in the ordinary course of
business the buyers seller here the security interest was not
created by the buyers seller, it was created by the debtor. So, 9320(a) wont help Bart. In fact there is nothing in Art. 9 that will
protect Bart on these facts and if it is a sale out of trust Bart will lose.
9-320(a) is limited to the protections of the sellers financier.

Problem 1 (Handout #15) Chart [stems off case II of Handout 15a] this is
the case where there is equipment financing and there is a sale out of trust
and there is no question that Betty will lose because the bar is not in the
business of selling Tvs, and thus she is not a buyer in the ordinary course of
business. This problems explores in real numbers the consequence of these
rules to Betty.

Priority Battles Where One Claiminat Purchase the Collateral From the Debtor
Case I
Case II
Overcollateralized
Undercollateralized
Balance Owned by ONB by Bar
Value of System Sold to Betty
(What Betty paid)
ONBs Recovery At Foreclosure Sale
[After Expenses]
Proceeds From That Sale To ONB
Proceeds From That Sale To Betty
Recovery if Betty sues Bar (and Bar is
Non-Judgment Proof)

$5,000
$10,000

$12,000
$10,000

$7,000

$7,000

$5000 [9-615(a)(1) and (2)]

$2000 [9-615(d)]
$8000 + Expenses

$7,000 [all of it goes to ONB]

$0 [Betty gets nothing]
$10,000 + expenses

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Recovery if ONB sues Bar (and Bar is

non-judgment proof)
Recovery if ONB sues Betty (and Betty
is not judgment proof)
Bettys loss if Bar is judgment proof
a.

$0 [b/c paid in full from the

foreclosure of sale]
$0 [Betty has no personal
liability 9-615(d)(2) b/c
Betty is not the obligor
$8000

$5,000 [See 9-615(d)(2)]

$0 [even if there is an outstanding
deficiency, Betty is not an outstanding
obligor]
$10,000

In a case where there is over-collateralization, the efforts must be commercially

reasonable under 9-610 (thats a broad term); the creditor may not have expertise
in marketing; bidders come to these sales looking for bargains; the good may not be
in season when the sale.
1.

9-615(d) (pg. 1237) talking about a surplus (the extra $2000); secured
party shall pay the debtor for any surplus. Remember under the New Art. 9,
debtor means the person who owns the collateral; and obligor means the
person who owes the obligation. In almost all cases weve seen, weve used the
term debtor for both. This is not true here. The debtor (owner) is Betty and the
obligor (owes the money to the creditor) is still the bar. So there are two
different people. And you would rely on 9-615(d) for support for giving the
$2000 to Betty.

b. Second Chart, the only question is what should Betty do as the losing
party. There are 3 options: (1) Betty can turn over the collateral; (2) Betty
can refuse to turn over the collateral and force ONB to sue her; or (3)
negotiate with ONB for a compromise.
1.

Column 1 and 2 involved the case where ONB is over collateralized. In

column 1, Betty says NO to ONB and in column 2 Betty surrenders
the collateral to ONB.
a.

Result of Column 1: Betty loses nothing in the initial transaction

($0). There is no loss in the initial transaction. But now she will
get sued. What will the damages be in a conversion action? Betty
is engaging in an unlawful exercise of dominion over in effect
ONBs property. The courts have said FMV of the property (at
time of conversion) + interest up until the time of trial. But there is
a cap for the secured party the cap is the debt outstanding (if
talking about a secured party). So, here it would be $5,000; So
Bettys total loss (damages) would be $5000 if she keeps the TV
and forces ONB to sue. This is not a good outcome because she
has expended $15,000 for a TV only worth 10,000.

b.

Result Column II: Betty loses $8,000 [$10,000 2,000]. She does
better here when she surrenders the TV. There is a $3,000
difference [8,000 5,000]. What happened to the $3,000 of value
its the loss in the foreclosure sale [the FMV of the TV was
$10,000 but it only brought in $7,000 in a liquidation sale]. Who
got the $3,000 windfall whoever bought the TV at the

160

foreclosure; who pays for the windfall (when there is an

overcollateralized creditor) Betty it comes right out of her
recovery and increases her loss by $3,000]. If Betty can settle with
the bank any where in close to $5,000 it makes sense.
c.

Result Column III: Debt is under-collateralized. Betty loses $0 in

the initial transaction (she keeps the TV). What are her damages
in the suit? $10,000 [FMV at time of conversion + interest, capped
by the debt outstanding]]. $10,000 is Bettys loss.

d. Result Column IV: Bettys loss is also $10,000.

1.

Policy: In an under-collateralized debt, who eats the loss? Its

not Betty. The Bar unless they are judgment proof. That $3,000 is
part of the deficiency that the obligor (bar) owes to ONB.

Summary of Column Results Above

ONB Over-collateralized
Case I
Betty keeps the TV and
is sued for conversion by
ONB

ONB Under-Collateralized

Case II
Betty voluntarily
surrenders the TV at
ONBs request (same as
case I on chart above)
Bettys loss, if any, in the
initial transaction with
the Bar:

Case III
Betty keeps the TV
and is sued for
conversion by ONB

$0

She pays $10,000 for a

TV that she keeps
despite ONBs request

$0

She pays $10,000 for a

TV that she surrenders to
ONB to avoid action for
conversion

$0

She pays $10,000 for a

TV that she keeps
despite ONBs request.

$0

She pays $10,000 for TV

that she surrenders to
ONB to avoid action for
conversion

Damages that Betty

must pay to ONB after
ONB wins its action for
conversion against
Betty:

Proceeds received from

ONB following the
foreclosure sale of the TV:

Damages that Betty

must pay to ONB after
ONB wins its action
for conversion against
Betty:

Proceeds received from

ONB following the
foreclosure sale of the
TV:

$10,000

$10,000

Bettys loss, if any, in

the initial transaction
with Bar:

$5,000

161

Bettys loss, if any, in

the initial transaction
with the Bar:

Case IV
Betty voluntarily
surrenders the TV at
ONBs request (same as
case II on chart above)
Bettys loss, if any, in
the initial transaction
with the Bar:

Bettys Total Loss:

Bettys Total Loss

$5,000

4.

____________

__________________

Bettys Total Loss

Bettys Total Loss

$10,000

$10,000

Problem 2 (Handout #15)

a. Problem 2(c)(i) ONB has a floating lien covering the jeeps (inventory
and equipment) Did everything right. The debtor enters a sale
agreement with Betty. This case is a little different because the car
(the jeep) has not been manufactured yet (its not in existence yet);
since it is made to order the debtor requires a pre-payment (75% of
the purchase price). On 11/15, jeep delivered to debtor; on 11/16
debtor defaults; and on 11/17 ONB repossess the cars including the
made to order jeep.
1.

How is this case different from the cases above? Betty hasnt taken
possession or paid the full price yet. What has she done by 11/16
(when debtor defaults on the ONB loan thats the critical time
when the contest begins)? She signed the contract arguably
under 2-501 the car is identified in the contract does Betty
have title to the car by 11/16? Where would you look for title? NO,
if there is a certificate of title in existence, she doesnt have it and
under 2-401, Betty doesnt have physical possession of the car
the car is in the possession of the dealer to the bank. So the
question is if you are a buyer [this is same problem in 66(d)]
and signed the contract and car identified and dont have title
or possession, can you be a buyer in the ordinary course in
that car and cut off the rights of the earlier secured creditor
under 9-320(a)?
If Betty is NOT a buyer (b/c she didnt close the sale), what is
she? She is a general creditor for the 75% she paid down
+ any damages she suffered for getting a substitute. She is
NOT a secured creditor because she doesnt have a s/a
whereby specifying the dealer as the debtor. Here, betty is a
financing purchaser how far do you have to go to be a
buyer is she a buyer or a general creditor. If she is a buyer,
she wins; if she is a general creditor, she loses.

2.

Analysis: [Review the timeline at top of Handout 6] Important

events: (1) sales agreement; (2) identification in K; (3) Title passes;
(4) delivery and possession; and (5) full payment. At time of 11/15

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we have partial payment, sales agreement, identification in K, BUT

NO title and physical possession. The issue is if you have not
completed the sale [All these events] can you qualify as a buyer in
the ordinary course of business? This makes a huge difference
because if you are a buyer dont have to worry about earlier
secured creditors and if you are not you have constructive notice.
A. How Does New Art. 9 Deal With this Issue? Basically, imagine that this
fight is just between Betty and her seller (the dealer), ignore ONB. In that
battle, did Betty get far enough in the sale so that if the dealer repudiated
the K (did not give her the jeep) she would have a right to go to court and
recover that jeep [a right like specific performance against her seller].
The drafters say that if she has that RIGHT then Betty also has the right
to qualify as a buyer in ordinary course and beat the sellers creditor. On
the other hand, if Betty does not have the RIGHT to beat the seller [if her
only remedy is to bring a breach of K for damages but not recover the jeep
itself] then in her fight against ONB she is treated like a creditor for
damages a disappointed creditor.
Procedure for Analyzing: Start with the following :
1.

2-105(2) distinction b/w existing goods and future goods

existence means in physical existence (assembled) and
future suggests not assembled (to be manufactured). See
Definitions in (2) goods must be both existing (as a matter of
fact good has to be in physical existence) and identified (as a
matter of fact) before any interest can pass. Goods which are not
both existing and identified are FUTURE goods. If you want to be
an existing good (to satisfy definition) a good MUST be BOTH (1)
in physical existence and (2) identified (specify in K). A property
interest can NOT pass in a Future good ONLY in an existing
good.

2.

2-501 tells us when the legal event of identification occurs. 2501(1) must be construed with 2-105(2) its major purpose is to
tell us what a buyer gets when the legal event of identification
occurs. (2) says the buyer obtains a special property and
insurable interest in goods by identification as a matter of law of
existing good. This means a property interest (consistent with
2-105(2) first sentence) it tells us this what a buyer gets. In the
absence of an explicit agreement, identification occurs when (1)
when the K is made if for the sale of goods already existing as a
matter of fact and identified as a matter of fact.
a.

Problem 2(c): On 11/1 the jeep is future good because its not
in physical existence. Does Betty get a property interest
under 2-501(1) on 11/1? NO, because it only happens w/

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respect to existing goods. Does 2-501(1)(a) apply on 11/1?

NO. The parties never said anything about the events of
identification, but cant be here when sales agreement signed.
[A case where it would be assume on 11/1 Betty wants a
standard car but not present at the dealer but they locate one
in a dealer in another state; so Betty makes a pre-payment
and buys the car. Nobody says anything about when goods are
identified in the K? When is the car identified? Under 2501(1)(a) when the K is made the goods are identified
(Betty agreed to buy the car in the other dealer) and its in
existence (not manufactured in the future). That would be a
case in 2-501(1)(1), but that is not our case here.
b.

Does 2-501(1)(b) apply here? when who receives the jeep

[we dont have enough facts] its says when goods are
shipped by seller, marked, or otherwise designated by seller
so it may be way back when the jeep was at the plant (but
unlikely), it may be when the dealer received the jeep (at that
point its no longer a future good) for 2-501(1)(b) the good
is no longer future because it is marked. So either on 11/15
when jeep arrived that the dealer wrote the ID number on the
K or may have put a sign sold all they have to do is
designated, but the dealer may have done it later. So we dont
know when identification occurred.
(1) Assume identified on 11/15. Is Betty a buyer in ordinary
course of business to beat ONB? Start w/ 1-201(9) [pg.
1267] look at 4th sentence only a buyer that takes
possession of the goods OR a right to recover the goods
from the seller under Art. 2 may be a buyer in the
ordinary course of business. If Betty didnt get possession
(go all the way through the legal events), Betty needs a
right to recover specific performance (get jeep from seller).
Where do we go in Art .2 to find out whether Betty has the
RIGHT to recover specific performance from the dealer?
2-502 the comments suggest 2 sections to tell us when
the Buyer has this RIGHT 2-502 [revised on pg.
1271] subsection (1) even if goods NOT shipped to Betty, a
buyer who has paid in part in which Betty has a special
property under the provisions of the immediate
proceeding [which means as a matter of law the goods
are identified to the K under 2-501], Betty may recover
the jeep from the seller if the car was bought for personal
use and the seller repudiates or breaches the K [here ONB
reposseses the car]. Look at 2-502(2) this means at
time of ID. If on 11/15, under 2-502 and 501 Betty got a
special property interest and jeep identified in K, Betty

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can be a buyer in ordinary course of business; then

under 9-320(a) betty wins and has no burden of inquiry.
(2) Assume the Dealer NEVER Identifies the jeep? Can Betty
still be a buyer in the ordinary course of business under
1-201(9)? She can go to 2-716 [revised on page 1271]
subsection (1) goods are unique not easy to satisfy the
burden that goods are sufficiently unique to justify
specific performance by a seller. In this problem we are
talking about a somewhat unique jeep, and Betty may be
able to persuade the good and if it is held to be unique she
can be a buyer in the ordinary course and thus she can
win under 9-320(a).
Policy: (1) There is a certain logic to the approach above the idea
is that Betty has gone far enough to insist that the seller hand
over the jeep to be a buyer in ordinary course; (2) its limited under
2-502 to buyers of consumer goods [If betty is a consumer buyer,
it is highly unlikely you think of yourself as a creditor]; (3) 2-502
will provide no protection to a business buyer [so in case III of
handout 15a the corp. would not be a buyer in ordinary course;
same result under IV]; Problems: This rule creates a secrecy
problem this is explore in problem 2(c)(ii).
Notes: See 2, 716, 2-501, 2-502 for right of reclamation. If the
buyer has a special property interest, then under 2-502, she has
a right to recover of the seller and that is enough to be a buyer in
the ordinary course.
b.

Problem 2(c)(ii) This is the secured creditors problem. They should

send inspectors to the dealers to see what number and value of cars
on the lots. These should be unannounced visual inspections. With
the new definition of buyer in the ordinary course of business the
creditors are worry that the will over count and subject to claims of
buyers that are not in visible protections.
1.

Should the creditor be worried? Yes, they will lose against buyers
who could get possession under 2-716 or right of reclamation
under 2-501/502.

2.

How could the creditor gauge the risk better? How do they deal
with this problem?
a.

Obviously, include a provision in the s/a that its a sale out of

trust if sell to a pre-pay buyer or report to the secured
lender the number of sales to pre-paid buyers and which
cars. We know provisions in the s/a dont help that much

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(influence good debtors), but it doesnt improve ONBs rights to

the buyer if the debtor breaches the s/a.

3.

b.

Can the inspectors count in a different way to reflect the

change in the new law? You could require the inspectors to
search the books and see if they can tell which ones are prepaid buyers. That is an expensive method. Do you have to
locate all pre-paid buyers (e.g., a pre-paid buyer of a car for a
business)? Yes, you need to look at whether a business prepaid buyer is protected? 2-716 doesnt work; and only 2501/502 protects the business in a Narrow case. Look at
revised 2-502 even though the goods are not shipped
may recover from the seller if: (b) in all cases where the seller
becomes insolvent [this should remind you of 2-702]. All you
need to worry about is consumer buyers. If you are going to
inspect the books only look for consumer buyers.

c.

With respect to customized vehicles, what do you tell the

instructors to do? Dont count customized vehicles. But there
is no complete answer.

d.

Creditors will need to develop some data get statistics on

what percentage of the cars are consumer or business sales;
and what percentage in standard cars goes to pre-paid
consumer buyers. If you could develop that data, you may
develop a discount factor to figure out the risk. But there is no
solution to the creditor because pre-paid buyers have right to
possession.

HYPO: Say you pre-pay a car that is located in Denver. As a prepaid buyer what should you do to protect yourself, so that you
dont end up losing the car to the secured creditor. How do you
make sure (protect) yourself to make sure you have 2-501/502
rights in the standard car, which will make you a buyer in the
ordinary course of business to beat the sellers creditors? (Notice
2-716 doesnt work for standard cars.]. What does the buyer want
in the contract? She wants it to be clear its a consumer car and
the K to show she has a special property interest? How do you
make sure you satisfy 2-501 (special property interest)?
a. 2-501 since we are talking about standard goods already
in physical existence, 2-501(1)(a) says you have a special property
interest if the goods are existing and identified at time of K. So
the buyer would want the VIN # to be specified in the K. So from
the moment you hand over the deposit, you have a special
property interest and thus you are a buyer in the ordinary course.

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4.

HYPO: Assume Debtor is a mfg. Of expensive equipment used by

hospitals. And assume Betty is a hospital. Betty wants to buy a $1
million dollar piece of equipment. Debtor doesnt assemble and
build the equipment automatically, they only build on order. Also,
the debtor needs the money to manufacture the equipment. So
Betty is a true financing purchaser. Also, the machine is
standard.
a. How does Betty protect herself? If its standard equipment, 2716 and 2-502 dont help. You cannot win under 9-320(a) b/c
cant qualify as a buyer in ordinary business until you get the
equipment and that will be too late because the debtor could
have defaulted. Under 2-502 it has to be consumer goods to
have a right to recover, and here this equipment is not
consumer goods. IF you cant be a buyer in ordinary course of
business, how do you protect yourself?
1.

5.

What do you do before you buy? Check the art. 9 files. Its
the opposite advice we gave in the corp. hypo above. You
ask for the s/a; you see its a sale out of trust. If you want
to buy the machine, you go to ONB and get a
subordination agreement b/c you understand the priority
rules.

Problem 69 Art is a sales person at a dealership and he bough t his

own personal car from the dealer and signed a s/a. The dealer noted its
lien on the certificate of title. Look at 9-301, there is an exception for
cars covered by certificate of title, so the dealer did everything right. But
there is a sale out of trust. The only question is who wins (no problem
with buyer in ordinary course). We know the car is a consumer good;
the dealer has a perfected and attached security interest; its a sale out
of trust (9-315(a)(1)) and 9-201(a) tells us that the dealer wins unless
there is a buyer protection priority rule.
A. Analysis: Is there a buyer protection rule that overrides 9-201(a)? Start with 9320 because we are talking about goods. There are 2 possibilities under 9-320
either (a) or (b). If you were Annes lawyer, (a) is much more promising than
(b). Start with 9-320(b) What are the difficulties Anne faces under this
provision: (1) one question is whether she has knowledge of the security interest
how does she have actual knowledge notice of the lien on the certificate of title
(Art. Handed her the certificate of title, and had she read it she would be notified
and be out of 9-320(b)). Assume, Anne didnt read the title. What is the effect of a
notation on the certificate of title? Go to 9-311(b) noting the lien on the
certificate of title is equivalent to filing a financing statement. So she loses under 9320(b)(4). What is Annes problem under 9-320(a) Anne is arguably not a
buyer in the ordinary course because its Arts car. Go to 9-201(9) [page. 1267]
assume Anne in good faith, no knowledge, and in the ordinary course of the seller
in the business of selling these goods. Here, Art is not in the ordinary business. On
these facts, however, Anne wins.
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Policy under 9-320(a). The idea is to make it easier for retailers or

wholesalers to people who walk in; and when you go to a store you ought
to be able to rely on the store that you are getting the goods free and clear.
So when you interpret the requirements you ought to look at the
reasonable facts. Here, it looked like Anne was going to a used car dealer
and buying a used car. So it looks like she was a buyer in the ordinary
course.
Compare: Under 9-320(a) Anne wins. Under 9-320(b) if Anne is a pre-paid
buyer she loses because she has to take delivery; in addition she loses
under (b) if the secured creditor noted its lien on the certificate title or filed
a financing; in other words she loses on constructive knowledge. Why the
difference? Drafters care about promoting sales in ordinary course by
business sellers, not the sale b/w consumer seller and consumer buyer.
6.
7.

Problem 70
Problem 3 (Handout #15)
A. Problem 3(a): Instead of goods we have notes as the collateral. This is a
sale out of trust. The creditor claims conversion.
1.

Analysis: We know notes are instruments; they are quasi-tangible

property. S is a secured creditor and ONB is a buyer in notes.
Under 9-313(a) possession works for instruments. When ONB
released the notes to W, there is temporary perfection; but we dont
know when the sale took place.
A. Sale took place while S temporary perfected. S security interest
continues in the collateral under 9-315(a)(1) if sale out of trust [9315 applies to all personal property]. Then we go to 9-201, which
says its against purchasers of the collateral. So if ONB is to win it
needs a buyer protection priority rule. There are 2 possibilities: (1)
9-330 [Priority of Purchaser of an Instrument] and (2) 9-331
[Priority of Rights of Purchasers of Instruments, Docs, and
Securities]. So 9-331 is the broadest provision.
1.

9-331 this article does NOT limit the rights of a holder in

due course of an instrument OR a protected purchaser of a
security. The Drafters want to make it clear that in these
other articles where there are protected buyers, that Art. 9
does NOT undercut those buyers rights created under other
articles of the code. But, Art. 9 may increase the rights of
such buyers, but not limit their rights.
a.

3-302 defines a Holder in Due Course the first issue

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is whether ONB is a holder in due course? Holder in

due course is similar to a buyer in ordinary course or a
protected purchaser of stocks. We are talking about
burden of inquiry on part of the buyer you are
responsible for looking at the note. Is there value [under
Art. 3 there is a narrow definition of value]? There is
value with respect to cashier check (but not with respect
to the promise to pay); we have good faith; etc Assume
ONB is a holder in due course.
b.

Art. 3 has its own priority rule. [the author is wrong] You
go to 3-306 a person having rights of a holder in
due course takes free of the claim to the instrument.
So ONB wins.

B. Assume S filed a f/s before releasing the notes: See 9-302(b) and

9-331(c) Filing itself is NOT enough to give notice. What would

disqualify you from being a holder in due course? What if they saw
the financing statement? The best view is that ONB would be a
holder in due course unless they saw the f/s, saw the s/a, and
saw the clause that said this was a sale out of trust OR S told
them this sale violated the s/a. A few courts have said that if ONB

knows of the existence of a financing statement, then they are not a holder
in due course. But the professor thinks this is the wrong position.
If ONB is not a holder in due course under Art. 3, it loses, but it
could win under Art. 9. See 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: . POLICY: Even if
you assume ONB is not a holder in due course, ONB will win unless
they know its an authorized sale. This is consistent with 9-320(a)
and 1-201(9) for buyer in the ordinary course.
What advice would you give S? Its very important to identify the
secured party. Look at 9-330(f). ONB already has the burden of
inquiry to check the notes. Dont rely on the markings of the note to
protect yourself from another creditor. You better put another f/s
because if not you will lose to another creditor/or trustee.
Review of Buyers of Instruments: Purchasers of instruments are
protected under 3-302 and 306 if holder in due course. This
protection is under Art. 3. and 9-330(d) if good faith purchaser for
value if dont qualify as holder in due course under 3-302. There
only burden of inquiry was to look at the face of the instrument

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Art. 3 Policy: Art. 3 of free circulation is more important than art. 9

concern that notes serve as collateral.
C. Problem 3(b): collateral is registered certificated security. (stock held
in direct holding system). Under 9-315(a)(1) if sale is
unauthorized (here it is it violates the anti-alienation clause) then the
security interest continues in the stock certificates to ONB. We know
under 9-201(a) ONB will lose unless there is a buyer protection rule.
a. Analysis: 9-331(a) this Art. Does not limit (it can increase) the
rights of a protected purchaser of a security. Now we go to Art.
8 Transfer of Certificated Securities (part 3) 8-302 and 8-303.

1. Start with 8-302 (revised on pg. 1285) subsection (a) says a

purchaser of a certificated security acquires all rights in the
security that the transferor had (thats the doctrine of derivative
title). Does subsection (a) help ONB in its fight against the
secured creditor (CSB)? Who would win a battle b/w CSB and
the transferor? CSB because they have an attached and perfected
security interest in the stock. So if we say that ONB gets what the
transferor gets, thats not enough for ONB to win.
2. Go to 8-303 (not revised) subsection (B) in addition to
acquiring rights of a purchaser, a protected purchaser also
acquires the So if ONB is a protected purchaser and the claim is
adverse, then ONB wins. Is there an adverse claim (8-102(a)
(1) for it to be an adverse claim it must be a sale out of trust
(just like 9-328). So clearly there is an adverse claim. Is ONB a
protected purchaser? Yes because it has given value (remember
art. 3 has its own definition of value), no notice of adverse claim
(art. 8 has its own definition of notice, and finally obtains control
(since we have a certificated security and ONB has physical
possession and the stock was endorsed, ONB has control had
it not been endorsed and only delivered, ONB would not be a
protected purchaser See 8-106 to determine if control exists,
which it does).
3. 8-105 Defines Notice. Under subsection (b) (similar
to 3-302(b)), if ONB saw the financing statement thats not
enough, but had it seen the s/a and realized its a sale out of trust,
it would be enough notice under (a)(1) or (a)(2) (willful
blindness). Assuming that ONB is a protected purchaser it
would win under 8-303(b). But if it had actual notice under 8105, it would just be a purchaser and it would lose under 8-302.
4. Policy: The statute tells us that CSB will lose if ONB is
a protected purchaser. So , how do you prevent ONB from
becoming protected purchaser? Under 8-105(d)(2) you would
advise CSB to mark the stock. What else could CSB do? You
want to make it impossible for ONB to become a protected
purchaser? One alternative is to mark the stock; You could also
make the secured party a protected purchaser; You could make
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the debtor endorse the stock to CSB (making CSB have control;
and thus ONB couldnt have control); how do you keep ONB
from not getting physical possession require CSB to keep the
stock CSB could say to the debtor that during the loan
repayment period it wants to keep possession of the stock. If the
debtor is concerned about the right-power dichotomy. You could
set up an escrow account. Reason backwards from 8-303(a)
there would be no delivery. The preferable approach is to keep
possession rather than marking the notes. Why? There is a
transaction cost with marking the notes, you will have to find
ONB if they have the notes transaction costs involved with the
battle. If keep the notes, there would be no protected purchaser
and there would be no battle.
D. Problem 3(b)(ii): The collateral was a security entitlement. Start with 9315(a) its a sale out of trust so security interest continues in the security
entitlement into the hands of ONB (read 8-501 essentially, there will be
a debt in debtors account and a credit in ONBs security account). So we
know under 9-201(a) CSB wins unless otherwise provided. Under 9-331(a)
only place to go for a buyer protection rule is Art. 8. So we go to 8-502
(part 5 because we are talking about indirect holding of stock). [notice Art.
8 left out good faith on the buyer but they beefed up the notice
requirement).
A. Analysis: How do you protect CSB this time? There is nothing to
mark? CSB could set up an escrow arrangement (in other words
they could take control its a way to perfect a security interest in
investment property). The safest mode of control is possession because
tripartite agreement the debtor could still sell the stock and under 8502 you lose.
B. HYPO: Say CSB perfects by filing a f/s and later on the debtor is in
financial difficulty. So CSB sends a letter to AGE letting them
know that the debtor is experiencing financial difficulty and they have
a security interest in the stock (send a copy of s/a highlighting the
sale out of trust clause); then debtor sells stock to ONB and AGE
obeys debtors order.
1. CSB wont sue debtor because he has nothing; wont sue ONB b/c
theyll lose under 8-502. So CSB wants to sue AGE because
they gave him notice. Who wins? AGE look at 8-115 AGE is
an innocent converter of property. 8-115 is very protective of
securities intermediaries.
2. Policy: They are not a signatory to the s/a or f/s. They dont want
to have to find out if the agreement is valid, they handle
thousands of exchanges. The code creates a way for CSB to
communicate with AGE. There is only one way that is only
through an effective tripartite agreement; anything else wont
work.

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8.
9.
11.
12.

Problem 71
Problem 72
Problem 73
Problem 4 (Handout #15) [spin off of problem 73] This problem refers to goods.
There is a sale out of trust in violation of an anti-alienation clause in the
agreement. The goods is stereo (no problem of pre-paid buyer). Now ONB
goes after Used Stereo Haven.
Problem 4(a)(i)

A. Analysis: ONB has an attached, but unperfected security interest. The

collateral is equipment (stereo). There is a sale out of trust under 9-315.

The security interest continues; and under 9-201 ONB will win unless
there is a buyer protection priority rule. Since talking about goods start
with 9-320. Does subsection (a) provide any protection to Used Stereo
Haven? A buyer in ordinary course of business takes free of a security
interest created by the seller even though security interest is perfected.
Is Used Heavan a buyer in the ordinary course? No because Pop
doesnt sell used stereo he is in the business of performing. So under 1201(9) no buyer in ordinary course; Under 9-320(b) wont work
because goods not consumer goods (not in personal use of either party).
What about 9-317(b) another buyer protection rule takes free of
security interest if buyer gives value and receives delivery without
knowledge and before it is perfected. So the answer to problem 4(a)(ii)
will depend on whether ONB perfected before 2 events occurred: (1)
delivery to the buyer and (2) the buyer gave value. ONB perfected on
4/10 (thats when they filed). Used received the equipment on 4/8 and
gave value on 4/8; Therefore, Used would beat ONB assuming ONB had
not yet filed a f/s. Assuming a non-purchase money security interest,
had they filed before the sale, Used would lose because no protection
under 9-320(a) or (b) and no protection under 9-317(b). So, ONB would
win.
1. Policy: Used loses if ONB files first before the sale (more precisely
before they give value and receive delivery) and Used wins if
ONB doesnt perfect. Do you like the result (its very different from
9-320(a)). A buyer in ordinary course does have a burden of
inquiry, but you wont lose if not a buyer in ordinary course and
check the files and there is nothing to see (its just like 9-322
there is a burden on the later creditor). Any business that sells
used goods from people not in the business selling will have to
check the art. 9 files to avoid the result of losing.
2.

Would the result be different if the stereos were consumer goods?

No, dont fit in 9-320(b). What if ONB argued it had automatic
perfection under art. 9-309. The problem for ONB is that it waited
to long to file its f/s. Does automatic perfection help ONB? Is there
automatic perfection if this is a consumer good in case of 4(a)(i).

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Only if there is a purchase money security interest. Which it is

not. So it makes no difference. The result is the same.

Problem 4(a)(ii)

B. Analysis: Assume there is a purchase money security interest. Now we

go to 9-317(e). There is a 20 day grace period (start with 4/2). ONB
would win. Again we see the preference for purchase money secured
creditors.

C. HYPO: Everything is the same except Pop is not a rock star; he is a

wholesaler who sells in the ordinary course of business stereo equip. to

retailers, like Used Heaven. Assume the dates are the same. Under 9317(e) it looks like ONB wins. But under 9-320(a) it looks like Used wins
because they are buyer in ordinary course. Which one applies?
1. How did we know to go 9-317(e) in problem 4(a)(ii)? Why didnt
we apply 9-317(b)? Except as otherwise provided in (e)
(theres a cross reference). Does that help you in figuring out
which rule to apply here? It makes you check 9-320 which
suggest that is the rule that trumps the 9-317(e) rule. 9-320
itself has no special favortism showed to purchase money secured
creditors. Also in addition 9-320(a) is saying that Used wins even if
ONB is perfected at time of sale; and all 9-317(e) tells us is that
ONB has a 20 day period to perfect, but that makes no difference
under 9-320(a). 9-317(e) adds more buyers to wins but it doesnt
subtract. That is what comment 1 under 9-317(e) is trying to
explain.

13. Problem 75
14. Problem 5 (Handout #15)

A. Working Problem 5 Under the UCC: the collateral is food products. The

buyer is a buyer in ordinary course under 1-201(9). This is a sale out of

trust, and under 9-315 the security interest continues. Is there a buyer
protection rule?
1. 9-320 specifically excludes food products. So ONB wins because
there is no special buyer protection rule. The entire loss is on
the buyer in ordinary course of business.
2. History: In the past, agricultural financiers tended to be small
local banks that would loan to all farmers w/in the
community. They took big risks and relied on farm products for
collateral. If it were a bad crop year, there is no collateral. There
was a real problem. On the other hand, who buys farm products?
The large food processors, and they are represented by agents or
brokers and have much more bargaining power than the local

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banks. They thought if anyone needed protection were the small

banks not the large buyers. So, the way it worked in practice was
that before they would buy the crops theyd go to the bank and
make sure it wasnt a sale out of trust and usually they would
write a joint proceeds check to both the bank and the debtor and
let the bank and debtor decide how they would divide the
proceeds. So it worked really well. The buyer didnt end up paying
twice. Then things changed. Large national banks began doing
agricultural financing and so did the govt. through FHA. Everyone
began to think this version of 9-320(a) (exclusion of farm products)
made no sense. So the states began to drop the exclusion clause of
9-320(a). In 1985 Congress stepped in and enacted the Food
Securities Act.

B. Working Problem 5 Under the Food Security Act (pg. 1409) How does the
Food Security Act work? (very complex solution to an easy problem).
1631(a) gives the purposes for the rule. Look at 1631(d) the only thing
we needed if we thought the fed. Govt. could intervene at all (at least
according to the professor) takes free of a security interest even
though its perfected (its the lang. Of 9-320(a) just including the farm
products as collateral).Basically it removes the exclusion of farm
product from 9-320(a). That would have been fine, but instead they
decided there would be 3 cases notwithstanding 1631(e) the purchaser
should lose even though the purchaser might satisfy definition of a
buyer of a farm product.

3 Exceptions Where Buyer Will Lose Under the Food Security Act:
1631(e)
(1)
1631(e)(3) (pg. 1412) a state that has a central filing system
(Created an entire separately filing system for f/s dealing with
farm products 1631(c)(2)). Basically, 20 states have central filing
systems that have been approved by the Dept. of Agriculture. It
doesnt have to be approved, and we will see the consequence of
not having certification.
1631(c)(2)(a) assume a state has a certified filing system and
ONB wants to file a f/s; the secretary of state is suppose to create
a master list of all the f/s that come each month and organize
them by farm products (e.g., Idaho donkeys and burrows, fox
and pelts). Go to 1631(c)(2)(d)(1)(e) if you buy farm product, you
are suppose to register with the secretary of state and there is a
master list organized by product. Under 1631(c)(2)(E), the
secretary of state is suppose to distribute the pages of the master
list that relate to farm products you are buyer of farm products.
Start with 1631(e)(3), these are cases where the secured
creditor wins. The buyer receives a written notice (the pages of the

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master list) and does not secure a waiver from the secured party
by performing any payment obligation. So the idea is if you are a
buyer of corn products from Farmer and you have registered and
ONB has filed a f/s and the secretary state sends the pages to you
[the list will identify the creditor] and you dont contact ONB and
either pay off the farmers obligation to ONB or somehow get a
waiver, the buyer loses. [this is a bigger burden on the buyer then
under 9-320(a)]
(2) 1631(e)(2) also where there is a central filing system the buyer
has failed to register and the secure party has filed an effective
f/s.
Policy: Why would you fail to register? Maybe a consumer buyer or
small buyer who is unaware or economically worth it wont
register. If you dont register and are in a central filing statement,
you lose because dont work something out with the secured
creditor.
(3) 1631(e)(1) the only exception that applies if NOT in a state that
has a central filing system (one of the 30 states that has not
got the Dept. of Agriculture certification they dont create
master lists etc). A buyer of farm products loses if w/in one year
before the sale the buyer has received from secured party written
notice of the security interest organized to the farm product. So
the idea is that for ONB to win in these states notwithstanding
6321(d) it has to send a notice to the buyer within one year before
the sale.
How Do You Know Who All the Potential Buyers will be in the
next year? One thing you will do is ask the farmer (debtor) and
compile a list of past buyers; trying to identify who the largest
buyers of such farm products are in this locale, and then you do
what the lenders call the blizzard approach send notices to all
potential buyers of the debtor. If you are lucky and the notice gets
to the buyer, who wins? 1631(e)(1)(B) must meet the
requirements as in the other exceptions, the buyer has not
performed the farmers payment obligation to the extent ONB
insists that those obligations be paid. The idea is that you have to
work it out and if the debtor is late on payment, you have to take
subject to the security interest.
15. Problem 75: Illustrates the problem where a state doesnt not have a central
filing system. Farmer gives ONB a list of potential buyers. Farmer sold to
World, a grain merchant, that was not on the list and Farmer didnt tell ONB
of this off list sale and ONB asks the buyer to pay in cash. We are also told
that the buyer did know that Farmer had borrowed money from ONB. Who

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wins when farmer later defaults and ONB goes after the collateral in Worlds
hands?

A. Analysis: Not in any of the exceptions because 1631(e)(1) doesnt apply

because no notice. The only issue is whether ONB can satisfy 1631(d).
We must determine whether there is a buyer in the ordinary course of
business. No mention of good faith, of notice (although we have some
help in 1631(d) itself. 1631(d) tells us it doesnt matter that the buyer
knows of the existence of the security interest. Here, World is probably
a buyer in the ordinary course unless you can say buying in cash is
so unusual to make it not a buyer in ordinary course. So 1631(d)
doesnt work. What about 1631(h) [creditors dont think this is a great
benefit] a person (farmer) violating paragraph 2 shall be fined $5000
or 15% of the value of the benefit received for such farm product (which
ever is greater). There is one other hooker apart from the problem
that the buyer may not have the money who gets the fine? (h)(1) tells
us the s/a can require the debtor to furnish the list; (h)(2) says nothing
that helps here; (h)(3) selling off list have to pay the fine, but it doesnt
say whom. The Dept. of Agriculture takes the position that they collect
the fine.

B. Large Buyers: When you advise your client you need to first check if
the state has a central filing system and you have to act
accordingly. With states w/out filing system, the BUYER will win; in
most cases its like 9-320 because it is very hard for the creditor to
hit the off list seller. If in the filing system chance, the creditor has
a good chance of winning under one of the exceptions. What weve
seen is the difficulty of allocating the risk of bad behavior by
debtors b/w creditor and buyers.

E. Priority Problems Involving Leases

1.

Read Text Page 181-182

Methodology: (1) classify collateral; (2) analyze status of contestants (a)
creditor analysis of 9-203(b) and (b) party to a lease make sure if its the
lessor or lessee (b/c priority rules are different; (3) then go to 9-315 to see if
whether the lease is authorized; if the lease is authorized, the security interest
is extinguished; if NOT authorized (a lease out of trust), then we go to the
priority rules 9-201(a) does NOT apply because a lessor/lessee are NOT

purchasers (check definitions of 1-201(a)) or creditors. We go to 2A-301 (thats the

equivalent of 9-201(a)) its a default rule there the party to the lease wins. So if
cant find another protection rule, its the party to the lease who wins against the
creditor.
2.

Problem 1 (Handout 16) Problem 1(a) is the combination of problem 77.

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Problem 1(b): You have delayed delivery of physical possession under a lease.
Here Hybid and Newcomer lease on 2/1/01 with this agreement for delayed
delivered. On 10/1/00 ONB loans $ to Hybid. On 1/2/01 it delivers the
equipment. And on 2/1/01 Hybid defaults. Assume this is a lease out of trust
and go to 2A-301 that tells Newcomer wins. SO then we go to 2A-307(3)
(revised pg. 1276) we know (1) and (2) doesnt apply, but (3) says a lessee
takes a leasehold interest subject to a secrutiy interest held by a creditor of
the lessor. When does the lessee take its leasehold interest? When you take a
lease hold interest.
A. 2A-103(1)(m): leasehold interest when does a lessee get an interest
under lease K? It depends what we mean by the word interest. It cant
mean a property interest, because dont get a property interest under a
true lease. It means the K right (thats the interest of a leasehold right).
So, Newcomer gets its K right on 2/1/00. So does 2A-307(3) apply? A
lesee takes the interest held by a creditor of the lessor. When does ONB
security interest arises? Not until 10/1/00 so 2A-307(3) does NOT
apply. So we have to go to the default rule under 2A-301 and Newcomer,
the lessee wins.
Policy: From Newcomers perspective, do you like the result? (there is a big
secrecy problem for ONB) but Newcomer would never find anything about
the deal? When does their reliance on their rights begin? They start
relying when they sign the lease (b/c stop looking for alternatives), and
may sign a K with some else relying that they will have the equipment on
such a date. But there is huge problem for ONB? Their problem on
10/1/00 is that they are NOT aware of the lease, and who has possession
of the equipment? Hybid. (they see it after a visual inspection). Also you
dont file a f/s for a true lease and even if it did it would be filed under
Newscomers name (permissive filing under 9-505). So the only way for
ONB to know is to ask Hybid and ask if there are outstanding lease
agreements with respect to the equipment (and we know that is not a good
safety net for ONB to rely on).

3.

Problem 77 (See Diagram on Handout 16A) It illustrates the real business

risks to the transaction of a lease. Assume from the outset, the type of
equipment is not covered by a certificate of title statue (otherwise we would
have to worry about 9-311). Hybid is in a jam with labor and it brings in a
new construction company to do the job. The new construction doesnt have
enough equipment, but Hybid says it will lease them their equipment.
A. If You were Representing Hybid: You would want at least 3 agreements: (1)
make sure that there is an agreement b/w Hybid and University that
releases Hybid from any obligation to complete the construction (dont
want Hybid guaranteeing Newcomers work); (2) the second agreement b/w
Newcomer and the University (Newcomer promises to work; University
promises to pay; (3) the lease agreement b/w Hybid and Newcomer

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Hybid is likely to give Newcomber a good deal (make below market price
because Hybid is getting out of the K with the University and Newcomer
doesnt have any use for the equipment).
B. Risks: The risk for Newcomer is that after signing the agreements, Hybid
defaults on the ONB loan. What happens? ONB goes to Newcomer and
grabs the equipment. Who is stuck? Newcomer b/c liable to the K with
the university, doesnt have equipment, and will have to pay premium to
rent new equipment on a emergency basis. This is the risk to Newcomer,
the lessee in this type of arrangement.
C. Analysis:
1.

What is ONBs status? They have an attached but unperfected

security interest in equipment.

2.

Newcomer is an Art. 2A lessee.

3.

Start with analysis of 9-315(a)(1) this lease is a lease out of trust

and therefore the security interest continues into Newcomers hands.

4.

Priority Rules Start with 2A-301 (pg. 181) A lease contract (the
agreement b/w Hybid and Newcomer) is effective against creditors
of Hybid; this means Hybid wins UNLESS otherwise provided there
is some secured protection priority rule. Weve looked at 2A-306,
which doesnt apply it deals with liens arising by operation of law;
but 2A 307 (revised on pg. 1276) Start with 2A-307(1) a
creditor of a lessee takes subject to a lease K doesnt apply; 307(2)
doesnt apply because liens are not art. 9 security interests; 307(3)
subject to a security interest held by the creditor of the lessor
that tells us that ONB wins; so it overturns the default rule. But we
need to worry about the exceptions in 9-317, 321, 322. Starting with
9-317? Is it relevant to our dispute Newcomer would win under 9-

317(c) it says that except as otherwise provided in subsection (e) [ONB

doesnt have a purchase money security interest, if it did you would have to
worry about (e)] , a lessee takes free of clear if gives value, delivery without
actual knowledge, and before perfection. Need to test knowledge at two times:
(1) when it gives value and (2) delivery 1-201 gives a definition of
delivery and receipt in Art. 2 if read two together receipt occurs at point
of physical possession; assuming Newcomer doesnt know anything,
Newcomer wins. But if ONB files at outset of transaction, ONB would win
because there is actual knowledge b/c go back to 2A-307(3) which says
that ONB wins.
Outcome: (1) if ONB doesnt file and Newcomer doesnt have knowledge,
Newcomer wins; (2) if ONB files at outset, they win.

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4.

Hypo: Say Dawn leased the car when she got to Maine. She is driving the
rental car. You stop at a light, ONB wants to repossess the car b/c this lease
violated Hybid Budget cars s/a and they defaulted.
A. Analysis: Dawn will win. Assume ONB filed a f/s, so you cant rely on 9317(c). So you would argue 9-321(c) it says Dawn a lessee in
ordinary course of business takes a lease hold interest (see definition
under art. 2A) free of a security interest created in goods by lessor, even if
perfected and Dawn knows of its existence. So most consumer lessees will
be protected under 9-321(c). This should make us feel better in the
outcome above. Why doesnt 9-321(c) protect Newcomer b/c they are
not a lessee in the ordinary course of business b/c they are leasing from
Hybid who is not in the business of leasing equipment. Read the
definition, since Hybid is in the business of construction and not leasing,
Newcomer cannot take advantage of 9-321(c).

Problem 78
5.

Problem 2 (Handout 16)

Last class: (missed ) the losing party under the UCC priority rules, they seek to
change the result to change the outcome by arguing fraud. Under the Uniform
fraudulent transfer act (a state statute) the problem is the UCC drafters dont want
fraud challenges to ordinary business transactions. So we learned the UCC has gatekeeping rules, which limit your access to fraud rules. We saw these rules in three
cases:

Its very difficult to get fraud in a lease because you have to produce facts that show
that ONB (buyer/lessee) was in bad faith and showing any value will eliminate the bad
faith argument.
3 Step Approach: UCC Analysis, Gate Keeping Provision, FTA (See Below)
Handout Problem 16 Problem 2 (See Diagram At end of Handout 16a)
1.

1994 AMB makes it loan to Hybid and gets a floating lien covering present and
after acquired equipment; also files a financing statement.

2.

June 5, 01 Hybid promises to pay the 300,000 for a crane from Catfield.

3.

Jan. 2002 Hybid is in financial distress. (this is the point where potential fraud
increases).

4.

Feb. 1 2002 we have a work out agreement (lease back of the crane). Essentially
Hybid has bought the crane and is now leasing it back to Catfield. The lease
transaction is unusual b/c Cat is not paying any rent; instead the dealer is

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canceling 50% of Hybids obligation to pay the purchase of the crane. This the way
Cat is paying for the lease. This is a sweet deal for Cat b/c it knows that
NewComer wants to lease the crane and they are willing to pay $20,000.
5.

Feb. 10, 2002 Subleases the crane to NewComer. Its a sweet deal b/c Cat is
getting $15,000 from Hybid and $20,000 from NC (extra $5,000).

6.

AMB finds out whats going on 3/1/02 both leases are out of trust and they
want to get the crane from NC (the sublessee) [Notice that financing statements
only last for 5 years and ONB did not file a continuation within 6 months of the
gap]. This is why it files again on 3/1/02.
AMB is the plaintiff and NC is the defendant. Will the work out arrangement hold
up or can AMB pull it apart.

UCC Analysis: (1) classify the collateral in the hands of the debtor equipment, and
not covered by certificate of title statute (b/c if did you would have to worry about
9-311). What is AMBs status? When do they get an attached security interest in
the crane that is the subject of the dispute? Attachment means 9-203(b) must be
satisfied: (a) Value 1994 (b) Rights in Collateral 6/5 (c) S/A 1994. But
attachment on 6/5/01. Was there perfection on 6/5/01? N0, because the f/s
lapsed. So AMB is secured but unperfected.
NC is a sublessee (so its rights are derivative to Cat). So its really a battle between
AMB and Cat. Is Cat a lessee or a lessor? Cat is a lessee b/c the owner of the
crane is now Hybid. So Hybid is the lessor and both Cat and NC are the lessees.
The next step is we go to 9-315 to see if a its a lease out of trust? Yes, both of
them were so AMBs security interest continues in the 2 leases.
Who Wins Under the UCC? Start with 2A-301 it tells us a lease K is effective
according to its terms against creditors. This suggests Cat (the lessee) wins. Then
you need to look in Art. 2A to see if otherwise provided (a special priority rule). Go
to 2A-307 (revised on). We are in 2A-307(3) thats what takes us to 9-317
because we are talking about a lessee a lessee takes a lease subject to a security
interest held by a creditor of the lessor. So now we go to 9-317(c), which tells us
on what day do we test the lessees knowledge? When they get delivery and give
value? Both times would 2/1/02. Assume no knowledge? Was AMB perfected? No,
because it lapsed (the critical time is when Cat gave value and when they received
delivery 2/1/02). AMB did not re-perfect until later (result would be different if
perfected in january), therefore NC wins because NCs rights are derivative to Cat.

Policy: Yes, AMB made a mistake, but had there not have been this work out (the leaseback)
AMB could beat Hybid and Cat. Explain Why? Why could AMB beat Cat if there was no lease
back? How would you characterize Cat a general creditor for the balance of the purchase
price (they sold a machine on general credit). The priority rule that would apply if no leaseback
would be 9-201(A) secured party beats a creditor. Also, had the leaseback not had happened,
AMB would beat Hybid. Why? Because you dont need a perfected security interest to beat a
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debtor, just need attachment (9-203(b). AMB is very upset, so they want to argue fraud. Is there a
gatekeeping rule to argue fraud.
Gate Keeping Rules For Fraud:
2A-308 subsection (1) doesnt apply because the lessor is not in possession (NC is). What
about subsection (3) no (in problem 78 Hybid was a seller/lessee), here they are a
buyer/lessor. What about subsection (2) pre-existing claim for money (YES) Cats claim
for the balance of the purchase price. So AMB can claim fraud.
Policy: Never an ordinary course transaction when working out a preexisting claim. When doing
lease backs, the UCC does not limit AMBs resort to the fraud laws.
Fraudulent Transfer Act:
What case can AMB make under FTA?
5(deals with constructive fraud) what 2 elements must AMB satisfy to show fraud: (1)
AMBs claim arose before the transfer (the transfer is the leaseback); so AMB has standing and
needs to show (a) reasonable equivalent value; and (b) insolvency.
Assume Hybid by January 2002 is insolvent within in the meaning of FTAs 5 definition. Only
question is whether there was reasonably equivalent value? The value was 50% discount of
15,000 dollars a month. Is this reasonable equivalent value for the transfer (giving Cat the right
to use the crane)? Cat turned around and subleased this lease (the crane) for $20,000 a month,
but it only took $15,000 of of Hybids bill thats not reasonably equivalent. (You could argue
there are transaction costs, but you are talking close to 25% 5,000 on 20,000). So, this can be
challenged as fraud. If fraud is found, the court may require Cat to discount the purchase even
further or they may rescind the lease.
So you can challenge on the basis of fraud this is the analysis you use for lease backs.
HYPOS:
1.

Say AMB did everything right (f/s is good) and Cats lawyer knowing FTA isnt too greedy
and just gives Hybid a $20,000 discount on its purchase price. This helps AMB if Hybid gets
a $20,000 cancellation because Hybid will have more money to pay back the loan from
AMB. On these facts there is no constructive fraud challenge. Under the UCC, who wins?
Under 2A-301 then go to 2A-307(3) and we wouldnt get to 9-317(c) and AMB
would win. So if there was a f/s at time of the lease back was done AMB would win.

2.

Say Cat knows by 1/2002 of AMB assuming no fraud. Will 9-317(c) protect Cat? Start with
2A-301 2A-307(3) says except as provided the lesee takes the leasehold subject to a
security interest held by a creditor of the lessor. Then go to 9-317(c) wont help in either of
the 2 hypos b/c the lessee doesnt take free if at time lessee gives value and delivery it either
has knowledge or there is a financing statement. And 9-321 wont help either because there
is no lessee in the ordinary course of business. So, AMB wins.

What Should You do If You Are the Lawyer for CAT working out a LeaseBack:
1. It can be challenged under the FTA so dont bee too greedy.
2. Before you do the deal, check the files. If find nothing, go ahead. If no nothing about AMB
go ahead but dont be greedy. But if find a f/s then under the UCC rules you have to deal
with AMB, so you bring them into the bargaining and work something out between all three
181

parties. That is the interplay b/w the fraud and UCC rules would shape a leaseback
agreement.
F.

Priority Battles Where One Claimant Has Rights Under Article 2

1.

Read Text page 182 to 184

2.

Problem 79: (refer to Handout 16(b)) Good review of rejection and revocation of
acceptance. Marc is being deceived: (1) sale out of trust; and (2) he got lizard
luggage instead of alligator. Classifying the collateral in Jacks hands is
equipment (b/c uses it in his business) and ALF has an earlier security
interest and under 9-315 it continues because it is sale out of trust. Marc is a
different type of buyer, he is a revoking buyer.
Art. 9 Secured Creditor v. Revoking Buyer

A. Variation A (Business Example) Jack is a wholesaler and Marc is a blacksmith.

Marc orders a drill press to stamp designs. It costs $30,000 and has to order
and put a down payment of 10,000 and has to wait 4 weeks.
1.

Case I: Asks for a drill press in gray. 4 weeks later it arrives and its bright
orange. Jack says they dont make the press any more in gray. Jack says
hell give him a 15% discount if he takes it in orange. Assume Marc says
Ok. Under Art. 2 lang., Marc has accepted a non-conforming good with the
defect. See 2-601 and 602.
Analysis: He cant revoke. If you accept with notice of a defect, then under
2-607 he has no right to revoke. He could have rejected, but he didnt. The
standard is higher for revocation of acceptance. See 2-607(2).

2.

Case II. He orders a fancy attachment with the drill press. It comes and
there is no attachment. Jack says take it the way it is and I will order the
attachment and because of the disruption, I will give you a 1 year free
maintenance. Marc says Ok. 3 weeks later Jack calls and says there is a
problem they dont sell the attachment separately. Instead Jack will give
you another 20% discount. Marc says I dont want it, I need the
attachment. I want my deposit back I want to revoke my acceptance.
This is acceptance with notice of a defect.
Analysis: Here, 2-608(1)(a) applies. Because he thought the defect would
be cured, he could reject. For revocation of acceptance, only the cases
specified in 2-608 can you reject. Revocation of acceptance the seller
has to take back used goods.
What are Marcs remedies if he has properly revoked? Start with 2-608(3)
then go to 2-711 he has all of the remedies he would have had if had
rejected in the beginning. Under 2-711(1), Marc would be able to cancel
the K (out of this deal) and recover his deposit, recover cost of substitution

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and other damages. Assume Marc does all this and Jack says give me the
machine back? Why would Marc not want to hand over the machine back
to Jack? Because he wants to get repaid. How would you describe Marcs
status after he has revoked acceptance he ends up being a creditor and
2-711(3) he is a secured creditor. Look at 2-711(3) a buyer has a security
interest in goods in his possession (has to keep them) for any expenses
incurred; he can sell it and use the drill press as collateral for the money
owed by his seller. However, Marc is not alone. There is another earlier Art.
Secured perfected creditor. Assuming the buyer keeps physical
possession, you get an Art. 2 security interest. Make sure you know why
its an Article 2 security (its not a consensual lien the parties didnt
agree to it, its created by operation of law its part of the remedy of
section of the buyer). Under Article 9-109(a)(5) article 2 security
interests are swept into Art.9.

3.

1.

Does Marc have an Art. 9 security interest? Not under 9-203 because
subsection (b) isnt satisfied (Jack didnt sign a S/A for his buyer).
Under 9-109(a)(5) says we are in art. 9 and sends us to 9-110(1) the
Art. 2 security interest is enforceable even if 9-203(b) hasnt been
satisfied, and filing is not required to perfect the security interest. If we
were to stop at 9-110(2) (old Art. 9) who would win? ALF because they
perfected first under 9-322(a)(1). Under new article 9, Marc wins
because under 9-110(4) whether earlier or later Marc wins.

2.

Article 9-110 gives the art. 2 favorable status dont need to file a f/s
(no secrecy problem b/c buyer has to keep possession); also favorable
priority rule in 9-110(4)

Case III. Marc gets everything. But after 2 weeks, Marc realizes that the
good has faulty wiring. Marc doesnt want it. He wants his cost of cover.
This would be acceptance without notice with a latent defect (this is the
case where most controversy arises).
Analysis: Same as above.

B. Variation B: It gives a more realistic example where everything is ordinary

course except there is a problem in the machine (assume there is a latent
defect). Al Bank is providing inventory financing on 4/1 to Jack a wholesaler;
and Jack in the ordinary course of business sells a drill press to Marc on
4/10. Marc pays the full price of $30,000 (b/c it looks like the drill press is
fine latent defect not discovered until 4/15 5 days later when he revokes
and he does everything right I dont want this machine).
See Handout 16B and the Chart attached.
1.

Assume Jack is judgment proof; so if Marc keeps the machine and goes

183

after Jack for damages, he wont get anything b/c Jack is broke. Jacks
debt to the financier is $150,000 (much more than the value of the
machine). So when you focus on the machine, Aligator Bank is undercollateralized. But its expensive enough that they may go after Marc, and
it may be in Jacks interest to tell the bank who owns the various drill
presses. Under 2-711(1) March can get the purchase price + damages. See
rest of assumptions on the handout.
Table on the Chart: There are two columns: column I is designed to show the
outcome of priority battles under the old art. 9; column II shows the
outcome under the new art. 9. This explains what 9-110(4) does. This is
the only new thing that we will talk that is new to new article 9 is the
addition of 9-110(4). In other words, under the old art.9 once you have
concluded that Marc had an art. 2 security interest included in art.9 you
went to art. 9 default priority rules to determine who wins, because no
special rules.
There are 4 different cases:
Case A and B: Marc is a buyer in ordinary course of business. See 1-201(9).
Case C and D: Marc is not a buyer in ordinary course of business.
We will explore the losses to Marc under these facts: Its too late to reject
because he accepted; he has two options: (1) keep the machine with the defect;
or (2) revoke his acceptance.
Case A: He is a buyer in ordinary course of business. It is a straight forward
seller from a wholesaler to a business person. Marc paid $30,000.
1.

Old Art. 9: He is out $30,000. Marc is in a battle with AL bank against the
machine. The $20,500 is described because the professor thinks he will
win the battle. If Marc keeps the drill press, he is a buyer in the
ordinary course. Start with 9-315 9-201 9-320(a) as a buyer in
ordinary course even if AL bank is perfected and knows of the security
interest, he wins. So if he keeps it, he gets $20,500. He gets nothing from
Jack, because judgment proof. So he totally loses (30 20, 500) = 9,500 if
he keeps the press.

2.

New Article 9 same result as old.

Case B: Justifiably revokes his acceptance and is a buyer in ordinary course of

business.
1.

Old Article 9: He has paid out $30K. The value of press to Marc is 0. Why
0? You must think Aligator Bank can beat Marc in a fight over the drill
press. Why? (remember under old art. 9 there is no 9-110(4)). What is the
status of Marc if he justifiably revokes acceptance? Marc is a secured
perfected creditor under under art. 2-711 and 9-109(a)(5). So who wins?

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Aligator banks under 9-322(a)(1) b/c they were perfected first (4/1) and
Marc was perfected on (4/10). Once Marc revokes he is no longer a buyer,
rather he becomes the equivalent of art. 9 secured creditor because of art.
9-110. Jack is judgment proof; so no damages. Marcs total loss is
$30,000.
Policy: If Marc keeps the machine he only loses 9,500; but if he justifiably
revokes, he loses the full $30K and we havent even talked about damages
for cover. This should strike you as very Odd! We say to Marc, as a buyer
of ordinary course, dont check the files you can rely on Jack that he sells
goods of this kind; he loses an important remedy, namely the remedy to
revoke acceptance if there happens to be an earlier art. 9 secured creditor.
He loses his remedy; it has no meaning because he cant collect in the face
of this early secured creditor; who he shouldnt know is there since he
doesnt have to check the files because he is a buyer in the ordinary
course of business and we want to encourage people like Marc to buy
goods from sellers in the ordinary course (b/c it promotes commerce).
Although Marc has a security interest it is worth nothing b/c there was
earlier perfected security interest.
2.

Under NEW Art. 9 (we have 9-110(4) this is a new addition). Again there is
a $30,000 loss. The value of the press to Marc is $20,000. Why? Because
under 9-110(4) Marc will win against the bank. Again he is a later secured
creditor, but look what 9-110(4) says. It is very generous to the revoking
buyer. Look: the art. 2 security interest has priority over a conflicting
security interest created by the debtor, Jack. Its 20,000 because Marc
doesnt want the machine hes kept the machine as collateral to cover
his loss so he will sell the press at a foreclosure sale (like any secured
creditor would). Its only 20,000 because the foreclosure sale discounts the
price. So, Marcs total loss is $10,000.
Policy: If March keeps the machine and revokes under New Article 9, the
result is very similar. The advantage of new Art. 9, Marc can make the
decision b/w those 2 remedies: keep it or sell it without worrying about an
earlier secured creditor. His choice is not driven by an earlier secured
creditor, which he didnt have to worry about when he bought the
machine.

Case C: Marc is NOT a buyer in ordinary course of business.

1.

Old Article 9: Marc keeps the drill press. Purchase price paid out is $30,000
(loss). Value of the press with latent defect to Marc who is in a battle with the
bank is $0. Why? Because the bank will beat Marc. If Marc decides to keep the
machine, then he remains a buyer. He bought it and he is keeping it; so his
status stays buyer. But he is a buyer not in ordinary course. Under 9-315 the
banks security interest continues and under 9-201(a), bank wins and there is

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no other special provision for buyers not in ordinary course. So, Marcs total
loss is $30,000.
Policy: (remember the example where the hospital bought a medical machine)
Whats the danger if they keep the machine with the defect? You lose.
2.

New Article 9: Same Result.

Case D: Not a buyer in ordinary course, but revokes acceptance.

1.

Old Article 9: $30,000 paid out. The value to Marc is $0? Why? Who wins?
Aligator bank wins because the same rationale. Now Marcs status if he
revokes is a creditor with an art. 2 security interest (in art. 9). It doesnt help
b/c he is second in time to debtors earlier creditor. Under 9-322(a)(1) Marc
loses the full $30,000.
Policy: This result shouldnt bother you. Because they should have known
they were not a buyer in the ordinary course. Knowing that you should have
check the art. 9 files and you would know about the bank. You should have
got a subordination agreement from Bank.

2.

New Article 9: $30,000 paid out. If Marc justifiably revokes, the value of the
drill press to Marc is $20,000. Why? Because Marc will beat the bank. Now
Marc is a perfected secured creditor and under 9-110(4), Marc beats Aligator
Bank. It protects Marc whether he is a buyer in ordinary course OR NOT a
buyer in ordinary course.
Policy: The addition of 9-110(4) cured the anomaly we saw b/w the $9,500 and
the $30,000 when Marc was a buyer in ordinary course. But it went so far
that they created an anomaly the other way that benefits buyers NOT in
ordinary course of business.
Advice If Representing Buyer: Check art. 9 files and discover the f/s. Tell them
to revoke because if you revoke you beat the bank, but if you keep the machine
you lose. And that seems crazy to the professor. Whats the rationale? We are
going to protect you if you buy in ordinary course b/c we want to
promote commerce, but if you buy outside ordinary course and a defect
arises, we will rescue you. Art. 9-110(4) provides an opening for buyers to
take advantage of this scheme when making a decision to keep or revoke
the machine.
How Long Can You Marc Hold On to the Machine Before He Goes to the
Foreclosure sale without risk being turned on Characterizing Him as Keeping
the Machine: The standard is commercially reasonable.
If up to the professor, she would limit recourse of 9-110(4) to only buyers in
ordinary course.

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G. Fixtures: The main challenge is again harmonizing two bodies of law. Here the
bodies of law, both of which are state law, are art. 9 financing law and state real
estate law dealing with real estate financing. Both apply to fixtures.
1.

Notes:
a.

9-102(a)(4) Fixture means goods that it becomes so related to real property

that an interest arising in them under real property law. Essentially, the
classification issue whether its a fixture or not is punted from art. 9 to
real estate law. Its real estate law that determines whether you have a
fixture. There are 3 general categories of property:

(1) At one extreme you have goods that are so thoroughly merged into
real property that they lose their independent physical identity as
separate goods (9-333(4)(a) building materials a security
interest does not exist in ordinary material buildings these are not
fixtures they are real estate (e.g., the window incorporated in a
building, a steal beam, bricks in the faade).
(2) The middle approach: Examples, the black board, wall to wall carpeting,
chair lift at a skii area integrated into the land (affixed) yet maintains its
identity as goods (not totally merged) We treat both as personal property
and real estate. If you want a consensual lien you can either get a
mortgage and record it or get an art. 9 security interest.
(3) Goods attached to real estate but there attenuous that no one would
think they are part of the real estate (e.g., a painting hanging on a
wall, curtains). Again its a affixed to a building, but its attenous and
the goods maintain their identity. These goods are regulated by art.
9. If you want a consensual lien, you comply with 9-203(b) and
perfection rules. Real estate law doesnt apply at all. These are nonfixtures.

Classification of Fixture: (1) degree of physical (how difficult is it to

remove the good for real property the more difficult it is the more it
looks like a fixture) (2) intent of the debtor who owns the property; (3)
reasonable expectation of the third party; (4) the extent to which the
presence of the goods is critical to the use of the real estate (ex. The
chair lift is it attached affixed to the real estate? Yes; the intention of

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parties to leave it till its full ecn. Life; The lift is critical to the real
estate. Most courts would say a chair lift is a fixture.
2 Approaches to Getting a Consensual lien in fixtures:

1.

Article 9 Approach: Nothing special as to attachment (9-203 and 9-108);

Perfection: (1) act as if its not a fixture and file f/s, take possession...; or (2) do
a fixture filing (9-502(b) tells us what to include in the filing), its filed in a
different place (its filed under 9-501 in the local real estate records
county-wide basis whereas standard f/s are filed centrally often in the Sec.
States office). Which Method do you choose? What we will learn in problem 5
is that you will win more if you do a fixture filing than if you rely on standard
art. 9 perfection modes.
Art. 9 Approach: Begin with 9-334(a) a security interest may attach to
fixtures. Go to 9-203 and 9-108 for attachment. You just have to identify it
just like any other collateral. How do you perfect? 2 choices: (1) you do the
standard UCC filing of a f/s that complies with 9-502(a) and 9-516(b) and file
it centrally as you do for all other art. 9 property (9-501(a)(2)); (2) the other
alternative is you do is what is called a fixture filing it requires more go to
9-102(a)(4) look at 9-502(b) it tells you what more you have include in the
paper that goes to the records: you have to indicate it covers fixtures, indicate
it has to file with real estate records; provide a description of the related real
property; and if the debtor doesnt have an interest you have to give???. You
file it locally, county-wide in the land records (in same place a mortgage would
be filed) 9-501(a)(1)(b)

Real Estate Approach: Ignore Art. 9 and just go to state real estate law and
find out what formalities you need to follow to create a mortgage on real estate
(make sure description on mortgage is broad enough to include fixtures) and
record it just like dealing with traditional real estate. There will be secrecy
problems (this should remind you of negotiable documents if one party
views it as personality and perfects under Art.9 and the other views it as real
estate, there is a huge problem).

2.

1.

Read test 185 to 200, and narrative in problem 3 on Handout 16

2.

Problem 83: This question raises the issue what approach you should take
for securing a fixture?
Facts: ONB wants a consensual lien on the RR tracks (its a fixture b/c they
are attached to real property but have a separate identity). Assume ONB wants
to use the article 9 approach (this makes sense here for reasons that will
become apparent below so it follows 9-203(b)). The only question is what it
should do to perfect the fixture?

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a. Analysis: Transmittal utility under 9-102? Yes. Since they can get a
fixture filing by filing centrally, they will file one per 12 states. This is an
exception for transmitting utilities under 9-502(b). The idea is that a
subsequent searcher (even if they view the RR tracks as real estate would
know that there are special rules for transmitting utilities and so they will go
to this central statewide office to check filings).
3.

Problem 4 (Handout 16) This extends the analysis in problem 83.

a.

Problem 4(a): ONB wants to rely on the land and easements as well as the
pipeline for collateral. What should they do? Assume the pipe line is a
fixture. The pipeline also falls under the definition of transmitting utilities;
so as to the pipeline itself, your client would have the option to file in the
office, whichever designated, for transmitting utilities under 9-502(b).
What about the land and the easements?
1.

Will these fixture filings in the 12 states perfect ONBs consensual lien
on the land? No Put aside the easements where Monopoly owns
the land will the filing of the 12 fixture filings give your creditor a
perfected lien in the land? See 9-501(b) does it say anything about
perfection in real estate? No, in fact article 9 doesnt even talk about
real property. Article 9 doesnt tell us how you create a lien on straight
real property. It only tells us about this narrow case of fixtures, where
the law overlaps. So if you represent ONB and you want a perfected
lien on the land and pipeline, ONB will have to record their mortgage
to get a perfected interest in the land (it will be filed in the county
office). SO ONB has to file 2 separate recordings.

2.

The book problem only illustrated the fixture. Problem 4 illustrates a

problem where the creditor wants land. So, here, ONB would use the
real estate approach making it broad enough to cover fixtures and
the underlying related real estate. So you can see article 9 only helps
to fixtures not to real property. It would be easier to use real estate
approach and only file one f/s.

b. Problem 4(b): This time BFX owns the land and Monopoly (debtor) owns
the tower and leases it and ONB is interest in getting a consensual lien
just on the tower. This may be a case where you may not want to use real
estate law at all b/c the debtor doesnt own it.
1.

Classify the Tower: A fixture. If a fixture, it could be a transmitting

utility. If it werent a fixture, it would probably be equipment. But
there is an argument that it could be inventory (items held for lease
and thats what Monopoly does with it). So, we have three possible
classifications.

2.

3 Modes of Perfection : If its a fixture, but not a transmitting utility?

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 file under 9-501 in the local records office. If its transmitting

utility, then you go back to the special central office for transmitting
utility. If its equipment or inventory, file a f/s under art. 9-501. Result:
File all 3 f/s and your client is safe.
a. Argument Why its Not a Transmitting Utility : Debtor is NOT
primarily in the business of transmitting communications; rather it
is in the business of leasing towers. Rather BFX is in the business of
transmitting. But you could argue it does.
c.

Problem 4(c):
1. Classification: Looks like fixtures and equipment.
2. Perfection: For equipment file one in each state (so 12); for the
fixtures, you have to file in every county real estate record. In this case you
have to do both, OR take a chance (that the debtor wont default and wont
need a perfected security interest).

5.

Problem 5: This problem deals with priority battles with fixtures.

(a) Problem 5a
1. Analysis: Always start with what the fight is about? The fight isnt
about the real estate (b/c both creditors dont have an interest in
the land); the only fixtures that are subject to dispute are those that
are in the apartment building.
a. Status: They both are creditors with perfected liens.
b. Priority Battle: Start with 9-201 a s/a is effective against other
creditors; So FCC wins. Then we go to 9-334(c) (default rule)
clearly FCC is the party with a security interest in the fixture and
ONB under this is the encumberancer (when talking about real
estate, the mortgagor is the debtor; whereas encumbrancer is the
creditor). So 9-334(c) default rule says FCC loses unless otherwise
provided.
1.
2.

Can FCC use 9-334(d)? No, because FCC doesnt have a

purchase money security interest.
Can FCC use 9-334(e)? Does FCC have a perfected security
interest in fixtures (yes, by 12/3)? Does the debtor have a real
interest in the recorded property? The debtor is Simon (the owner
of the building) and he has a deed in the record (thats critical so
he has an interest of record). Who wins turns on the mode of
perfection. Assume there was a fixture filing on 12/3 (before the
interest of the encumbrancer is of record here ONB its interest
of record occurred on 12/15]. So under 9-334(e)(1) assuming we
have a fixture filing FCC wins and overturns the default rule. If it
werent a fixture filing, then 9-334(e)(1) would not have applied.

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3.
4.
5.
6.
7.

Not readily removable so 9-334(e)(2) doesnt apply

It involves a judicial lien so 9-334(e)(3) doesnt apply.
(f) and (g) doesnt apply because ONB didnt consent
(h) doesnt apply b/c no constructive mortgage.
So then we go back to default rule under (c) and ONB wins.

Policy: If you are a real estate lender (a mortgagee) you dont need to
check the art. 9 files except with transmitting utilities.
(b) Problem 5b Everything the same except this is a sale of notes with
backed up mortgage (realty paper). But thats not our problem b/c the
fight is not over realty paper, its over fixtures.
1.

Analysis: Assume its a fixture filing and under 9-334(c) ONB will win
under the default rule unless FCC can take advantage of one of
the exceptions above. 9-334(d) doesnt apply b/c no purchase money
security interest; 9-334(e)(1) doesnt work b/c in (e)(1)(b) essentially,
analyze the battle b/w FU and FCC and figure out who wins thats
what (e)(1)(b) says you have to do. Start with default rule FU beats
FCC. None of the exceptions apply (e)(1)(a) wont help b/c FU filed
before FCC. B/c FCC would lose to FU, it also loses to ONB.

2.

Policy: Dont worry about FCC b/c they could have found out about
FUs interest by looking the land records. So we learned that the
Fixture financier (FCC) has a burden of inquiry they have to look in
the land records and if they had they wouldnt have realized the sale
took place but they would have found out about FU and then would
have found out about the sale to ONB.

(c) Problem 5c Whats different is that FCC doesnt get a signed s/a until
12/18. So, the question is who wins?
1.

Analysis: ONB wins. Start with 9-334(c), it tells us ONB wins. Now you
could check the exceptions why doesnt (e)(1) work? Isnt filing first in

time enough? No, FCC loses because (e) is not satisfied b/c under (e)(1)(a)
says the security interest is perfected by a fixture filing (when is perfection
for FCC need attachment for perfection, here its 12/18 its perfection
under 9-334(e) which tells us that there is no anticipatory filing for a
fixture financier when its in a battle with a mortgagee like ONB; it would
work for another creditor under art. 9 under 9-322(a) or other lienors like
judicial lienors under 9-317). Why did they eliminate anticipatory filing?
2.

Policy: Why did they eliminate anticipatory filing? Can the mortgagee
anticipatorily file you would have to check real estate law (but
the professor hasnt seen one that allows it for mortgages). We are
trying to mesh two systems it wouldnt make sense to impose
anticipatorily filing on 50 different versions of real estate law. Lesson:
Need to perfect early (dont rely on anticipatory filing).

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(d) Problem 5d This is a sale out of trust as to FCC, it violates its S/A.
Should M Developer pay the debtors bill to FCC? Who wins?
1.

Analysis: M Developer would win. Start with 9-315 b/c we know with
respect to any collateral if its an authorized sale FCC would lose
its security interest; but b/c its a sale out of trust the security
interest continues. Then we go to 9-334(c), M Dev. Wins under the
default rule (conflicting interest of whom? Is M Dev an
encumberancer? No they are the owner). What about 9-334(d)? No; 9334(e)(1)? Depends. A perfected security interest in fixtures has
priority if the debtor has an interest of record in real property (as of
Dec. 15, it is M Dev that has the interest of record but we are
talking about the period when FCC was dealing with Simon); and the
s/I is perfected by a fixture filing before If FCC filed a fixture filing
on 12/3 and 12/15 M Dev. Records? FCC wins. But if its a normal f/s
M Dev. Wins.

Recap: We learned fixture filings provide better protection for fixture financiers than
regular art. 9 filings.
(e) Problem 5e This example deals with a purchase money loan; and a
fixture filing statement was filed. Who wins? Good Real Estate Law Case
1.

Analysis: If started with residual rule of 9-334(c) ONB would wins. Do

any of the exceptions in 9-334 apply? (e) doesnt help because FCC
is second in time with respect to perfection.
9-334(d) says a perfected security interest in fixtures (clearly FCC
has perfected before default) has priority over a conflicting interest of
an encumerancer and Simon has a deed and security interest is
purchase money (yes under 9-103 definition value given to enable
the debtor to purchase the pumps and furnaces that serve as
collateral). (d)(2) says the interest of the encumberancer arises before
the goods become fixtures on what does it arise here? Why Oct. 5
and not Oct.1? Its Oct. 5 on these facts but only b/c of N.C. Real
estate law when the statute says interest arises thats the
attachment question (when this consensual lien on real estate is
created); when the UCC (the statute) and 9-334 says the interest
is recorded that means notice is given on a interest that has
already arisen, but under NC real estate law the mortgagor (the
debtor Simon) but from the time of registration so in this state
no interest arises (is even created) until Recordation. (in other
states you may have two separate time a time of attachment
and time of giving notice.). When it says the interest of the
encumberancer arises you assume it meant the interest of the

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encumererancer in the underlying or related real estate. Its

impossible for the encumberancer to have an interest in the
goods before they become fixtures why is it impossible? The
mortgage covers fixtures while there still goods theyre not
fixtures so it would be impossible to satisfy 9-334(d)(2) unless
you read it as an interst in the underlying real estate thats
correct reading and under 9-334(d)(3) thats satisfied when
does the 20 day period run? They became fixtures on the 12/4 so
it would go till 12/24. FCC WINS.
Policy: Secrecy problem arises when the goods are installed, and
that is why we allow the 20 day period. Its in ONBs interest to have
FCC to provide the financing because ONB in for the long term (better
heat more likely to have more occupancy and thus likely to pay his
mortgage more quickly) In addition, public interest in the proper
maintenance of real estate. This super priority rule is NOT unfair to
ONB.
(f)

Problem 5f Another example of purchase money. This example

demonstrates the problem of a 3rd creditor. How do we rank the creditors?
When you have 3 creditors a way to analyze the problem is to separate
the contests.

1.

Analysis: Start with FCC v. ONB Under 9-334(c), ONB will win;
again under 9-334(e)(1) wont help FCC b/c its second in time in terms of
perfection of its interest in fixtures. Is there another provision that helps
FCC? 9-334(d)
(1) purchase money security interest
(2) satisfied
(3) perfection Ok
Under 9-334(d) FCC beats ONB.
ONB v. State Bank this is a battle b/w 2 mortgagees. Does 9-334(c)
apply? Because we have 2 encumberancers and no art. 9 creditors. So
where do we go? A mortgagee has a consensual lien on real estate art. 9
wont help we go to real estate law. From the general principles and the
NC statute it should be clear who wins? ONB wins b/c they recorded first.
Record in first in time.
FCC and State Bank now we are bank in article 9. Under 9-334(c), State
Bank wins. Will 9-334(e)(1) (first in time rule help FCC)? No because FCC
perfected after State bank recorded. What about 9-334(d) because FCC is
a purchase money lender (1) pmsi yes; (2) interest of encumberancer
arises before the goods become fixtures? No (when did interest of state

193

bank arise under NC law? 12/11/01 goods became fixtures before that
date). So, 9-334(d) doesnt work. State bank wins.
Look what happens we have a circular outcome. You can see what causes
this circular outcome look, FCC beats ONB, but FCC loses to State
Bank. FCC beats the earlier mortgagee but loses to the later.
Policy: Whats the policy behind that result (the requirement in (d)(2))?
Why does FCC lose to State Bank? Think about notice neither state
bank or ONB has notice if they check land records b/c FCC filed after both
them committed their resources to the deal. FCC acted within the grace
period (12/4-12/24) and that enables him to beat the earlier creditor but
not the later creditor. Had State Bank grilled the debtor do you have any
fixture financers at least State bank could have found out about FCC
whereas its impossible for ONB. Why did the drafters do that? Why should
there be a different outcome when both mortgages gave money and
couldnt find out about the previous security interest.
(1) If in the shoes of State bank check records dont find the f/s. Make
a visual inspection of the building when you saw the building you
would see the fixtures. (For ONB, on the other hand, they would not
have seen the fixtures). You could argue State Banks reliance interest
is greater. In other words, State bank saw new fixtures in the building
and no fixture filing; therefore, unless the debtor tells State bank
about FCC state bank might loan more than it would otherwise. ONB
however didnt rely on the fixtures as collateral because they didnt
exist; therefore for that reason the 2 are treated differently. That tells
us something about the grace period dont count on it b/c you dont
know when a second mortgagee will come around if you depend on the
grace period. There is an alternative for FCC just have to file a
fixture filing on 12/2 and FCC would beat both mortgages this time
under 9-334(e)(1).
(2) 3 ways to break the circle:
1.
2.
3.

Pay ONB first, State bank, FCC [under this scenario FCC cant
use the grace period]
State bank, ONB, FCC (this option wont be upheld b/c it would
upset the real estate recordation system).
FCC, ONB, State Bank [under this scenario the distinction
drawn above b/w the 2 mortgagees is unimportant the
reliance interest argument and we will treat State bank the later
mortgagee just like ONB and the purchase money secured creditor
gets super priority).

Courts usually invoke 1 or 3.

(g) Problem 5g Priority Battle involving fixtures (art. 9 creditor v.

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encumbrancer) Here, ONB makes a construction loan. It records on Oct. 5;

Dec.2 FCC provides purchase money to the debtor; Debtor receives
delivery on 12/3; Installed 12/4; on 12/10 FC files a fixture financing
statement. Debtor defaults. Who wins?
1.

Anlysis: One factual issue is when was the construction completed;

another issue is what the construction mortgage recording
actually said. Look at 9-334(h) it says a mortgage is a construction
mortgage to the extent itif a recorded record of the mortgage
indicates. So first inquiry is whether the Oct. 5 record said
constructive mortgage. Assume it did.
a.

Say construction mortgage completed 11/15/01 this would

mean it was completed before goods became fixtures and FCC
wins by having a purchase money security interest under 9334(d). Policy for this conclusion is see in problem 5(e).

b.

If construction was ongoing till Dec. 31/01 ONB would win

under 9-334(h).

c.

Policy: If ONB is a construction mortgage and its on going at time

the fixtures are installed ONB wins. Why? Is ONB a purchase
money creditor here in a sense? Yes, for the whole project its big
purchase money creditor they are providing all the money to
create the building; so really what you have with a construction
mortgage is 2 purchase money secured creditors (1) in land and
most of the building and (2) in just the fixtures. For those reasons,
if the construction is on going at time fixtures installed ONB wins.
ONB will be an active participant if they are a constructive
mortgagee.

d.

What Advice Would You Give to FCC Given ONBs Active

Involvement: Assume Debtor comes to FCC and you advises
FCC to check the land records and discover ONBs recording; it
says construction mortgage. What do you do? Before you try to get
ONBs consent under 9-334(f), you should first see if the
construction is on going because if its completed you just go ahead
with the loan. SO you do a visual inspection. When you see the
construction is on going, the you go to ONB and under 9-334(f)
you get a subordination agreement, which makes sense because
ONB is managing all the suppliers. This priority rule makes it
difficult for the debtor to bypass the major purchase money
creditor in the deal. It forces later purchase money creditors to
talk to ONB. Why would ONB agree? They want the construction
to finish they made the big loan and there are cost-over runs
(too much money already given out).

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(h) Problem 5g(2): Everything is the same except ONB made the Oct. 1 loan to
refinance a 1990 construction loan by Second State Bank. Who wins?
1.

Analysis: Need to know what the mortgage recorded says and whether
the construction is ongoing. Does the ONB mortgage need to say
construction mortgage or just State Banks mortgage? [We saw in 9334(h) to be a construction mortgage it must so indicate in the
records] Its not totally clear from the statute, but you could argue that
9-334(h) doesnt say a construction mortgage has this priority, it just
says a mortgage which seems to suggest that the ONB mortgage does
not need to say construction, but clearly State Banks record must.
Does the construction have to be ongoing on 12/4/01? Yes (its not
totally clear but if think of the rationale behind the rule it makes
sense once ONB is a regular mortgage the other rules would apply
and cant take advantage of (h)). Its unlikely here that the construction
is ongoing because it started 1990 to 2001. But we dont know?

(i)

Problem 5g(3): Instead of 12/4/01, ONB records on 12/15/01. Who wins?

9-334(e) trumps 9-334(h) (while 9-334(h) trumps 9-334(d) see in 5g(1)).
Here FCC perfects by fixture financing before ONB records; thus FCC
wins. This makes sense because even if the project is ongoing at time
fixtures installed, if ONB doesnt give notice here in any way FCC cant
adjust its behavior to respond to the risk (like ask for a subordination
agreement). SO FCC wins in a just straight in time rule.

(j)

Problem 5h ONB records on 10/5; 12/2 FCC advances purchase

money; etc.. This time in (h) we are told that whats purchase is some
fancy replacements of dishwater to be put in the penthouses. The
construction is ongoing through the end of 12/31/01. So again ONB is
our construction financier and the construction is ongoing. FCC deals
with the debtor. The fight is over the dishwashers.
1.

Analysis: Start with 9-334(c) (the residual rule) that tells us ONB
wins. What about 9-334(d)? Because after all FCC has a purchase
money security interest, it would win. But ONB wins under 9-334(h).
9-334(e)(1) wont work because FCC is second in time. What about 9334(e)(2) purchase money has priority if before the goods become
fixtures the security interest is perfected and the fixtures are readily
removable replacements of appliances that are consumer goods.
Theres 2 problems with (e)(2) (1) if the security interest is perfected
before goods became fixtures (12/4) and perfection wasnt till (12/10)
not satisfied; (2) consumer goods requirement its a replacement
of a domestic appliance, but is it a consumer good? Is the dishwasher

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a consumer good as to Debtor? No, its equipment (used in operation of

his business leasing apartments.) SO ONB will win under 9-334(h).

6.

7.

Problem 86: CSB makes a construction loan and getting a mortgage on the
building. Construction is over; BI files a fixture financing statement in the
furnace; the furnace is installed. An attorney who did work for debtor sues
him for owed judgments. There are levies on the fixtures. There are three
creditors (1) CSB; (2) BI; (3) Lawyer.
a.

Analysis: CSB v. BI Who wins? BI will win under 9-334(d) because it is

a purchase money security interest. CSB v. Attorney (under fight of
building) these are both encumbrancers so have to go to real estate
law (mortgagee v. judicial lienor) CSB would win because they got their
lien first and recorded first; Finally BI v. the Lawyer (fight over the furnace
thats the only property BI has a claim to) BI wins because under 9334(e)(3). Once we are in (e), we can ignore (h) because (e) trumps (h). It
doesnt matter that BI filed a fixture f/s; it would win if it just filed a
standard f/s too. Why? To win in (e)(1) and (e)(2) it was required to file in
the real estate records. Why is it different for (e)(3)? Where will the
attorney look? Shell look in all the records. So whether BI filed in the land
records or in the Art. 9 files, if the lawyer is looking shell find it. Thats
why we dont require a fixture financing statement under 9-334(e)(3)

b.

Policy:

Problem 87 CSB construction mortgage and records; the building is

completed. TT moves into the building and says to Simon to take the
refrigerator out and shell buy the replacement. The debtor agrees and TT buys
a replacement refrigerator and buys on credit (gives a purchase money
security interest and no filing). The refrigerator is installed and then Simon
(debtor) defaults. There is a battle b/w CSB and the Store that sold the
refrigerator. Assume state real property laws permit CSBs mortgage to reach
fixtures installed by lessee (thats a big assumption because who is the debtor
who signs the mortgage document Simon; but who owns the refrigerator TT).
The question is can a document signed by Simon convey an interest (a
property interest) in property owned by someone else (TT)? Here Real Estate
Law assumes that Simon can convey an interest in TTs refrigerator (that is
odd they must have something in mind? Simons interest in the refrigerator
is more than mere possession its TTs refrigerator in his building, but he
probably has a greater interest b/c allowing her to install it is the idea that
she will leave it there if she terminates the lease. The baseline assumption is
that when a TT puts improvements in leased property they leave them then
this makes sense b/c Simon does have a property interest and can convey an
interest to CSB under the mortgage document).

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a.

Analysis: Now that we understand Simon has a property interest in the

replacement refrigerator, who wins? The first question is whether Easy
Credit perfected before installation (run through 9-203(b) there is
attachment and automatic perfection under 9-309(1) because its a
purchase money security interest in consumer goods). Then you go to 9334(e)(2)(C) and rest is satisfied assuming this is a consumer good. Easy
Credit wins.

b. Policy: why should you classify the refrigerator as a consumer good (why
view it through TTs perspective and not Simon how do we know by
looking at 9-334(e)(2) what time period are we suppose to focus on?
Before the goods become fixtures b/c after they are fixtures they are no
longer consumer goods they are fixtures. The time period before the goods
became fixtures there was only one debtor and one creditor here TT and
Easy Credit. This why Easy Credit wins. Why does Easy Credit win? This
is a trickle down benefit to consumers make it easier for Easy credit to sell
to tenants and then making it easier for tenants to buy. Easy Credit gets 4
breaks under art. 9 (1) doesnt have to check land records; (2) automatic
perfection; (2) doesnt have to file a fixture statement; and (4) doesnt have
to bargain with ONB. All of these benefits is designed to help TT.
8.

Problem 5
(a) Problem 5i like 87, but the refrigerator is not a replacement, its a
second refrigerator. The question is assuming you have a default and the
fight is b/w Easy Credit and CSB who wins. TT is worried b/c of the real
estate law that she may not want to stay in the apartment and so she gets
in writing from Simon and CSB an agreement that says she has a right to
remove the refrigerator if she leaves. Who wins?
1.

Analysis: She has a right to remove the goods against the

encumbrancer or owner. Thus Easy Credit wins under 9-334(f)(2).
If there was no agreement, CSB would win because cant get in 9344(e)(2)(C) because not a replacement. What about 9-334(e)(2)(B)? it
doesnt help.

(b) Problem 5j: 10/1/99 ONB makes a loan to debtor; record 10/5/99; On
1//15/01 debtor enters into a K with K&D to install heating equipment.
12/2/01 K&D purchases the equipment from Loews. K&D buys on credit.
[K&D gives Loews a purchase money security interest; next day the
furnace is delivered on 12/3; installed on 12/4; on 12/10 Loews files a
fixture filing]. On 2/1/01 debtor defaults. There are three creditors: (1)
Debtor to K&D; (2) K&D to Loews; and (3) Loews to ONB.
(1) Analysis: We start with 9-334(c)(residual rule), we know ONB will win
(security interest in fixtures overpowers an encumbrancer). Is
there an argument that Loews doesnt have a security interest in the

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heat pumps (this would say we dont need 9-334(c)? Separate the
transactions Loews extending credit to K&D and K&D selling the
equipment to debtor. In a battle between Debtor and Loews, is there an
argument that Loews doesnt even have an interest in the equipment
(putting aside fixture law)? We dont know if there is a sale out of trust
(in other words, if Loews is selling to a contractor, you know they wont
keep it theyll sell it and it may very well be an authorized sale, and
with an authorized sale on 9-315 the security interest may not
continue]. Lets assume, however, there is a sale out of trust. Then
under 9-334(c), we know ONB will win. 9-334(e)(1) wont help b/c
Loews is in second in time; (e)(2) wont help b/c fixtures not readily
movable; (e)(3) no judicial liens; (f) wont work because NO consent, (h)
no constructive mortgage. So only hope to Loews is 9-334(d) at
beginning of (d) if the debtor has an interest of record in OR is in
possession of the real property but Loews debtor is K&D and K&D
doesnt have an interest in the real estate and doesnt have physical
possession. [But what about T&T problem? T&T was in possession of
her apt. so in that sense she was different; Also in problem 7 we will
see the debtor is in possession]. So 9-334(d) wont work here
because K&D doesnt have possession. What can Loews do to
protect themselves? They could ask K&D whose building are
these fixtures going into and check out the files and then work
out a deal with ONB. But this doesnt sound practical if the
equipment is low price. They could take other property as
collateral; not extend credit; OR they may have under state real
estate law a statutory lien (mechanics Lien) basically this
type of lien is a lien on real estate created by statute which is to
protect individuals or companies which either provide materials
that goes to improving real estate or services (e.g., those who do
the labor). If Loews had such a statutory lien, 9-334 wouldnt work
we would have a battle between 2 encumbrancers and real estate
law governs. The point is that art. 9 wont tell us a lot about this type
of battle.
9.

Problem 6: Instead of the situation where we are considering who wins the
priority battle, we are focusing on remedies available to the winner. We are
to assume Blast, who has a perfected security interest in irrigation pumps.
Blast wants to know whether it has to pay to compensate the farmer or the jr.
mortgagee (CSB) or damages which are caused when it forecloses on the
pumps. Thats the issue. We are told there is 15K damage to the loan and it
will cost 20K to farmer to replace the irrigation pumps that have been
removed. What does Blast have to pay, if anything?

a.

Analysis: Under 9-604(d), Blast would have to pay 15K to CSB to

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compensate harm to the real estate and wouldnt have to pay anything to
the farm (no payment of 20,000). 9-601(a) after a default, so you could
have the remedies provided by statute as well as supplemental. Then you
go to 9-604(c) which gives Blast its right to removal (they have priority
over all owners, farmer, and encumbrancers, CSB subject to other
provisions 9-609 it has to be done without breach of peace. 9-604(b)
says the secured party has to reimburse the encumbrancer for any
damages caused by removal. Dont compensate for replacement costs of
the pumps, however. Only for damages to the area.
Under 9-609, if cant move the pumps without a breach of peace, the
secured party can go to court because cant move with breaking peace.
b.

Policy: Why doesnt Blast have to pay 15K to farmer? Farmer granted a
security interest in the pumps to Blast; but Blast has caused damages to
farmers land. Why shouldnt farmer be compensated? Its an assumption
of risk if grant a security, too bad if dont want a risk dont grant a security

interest in a fixture difficult to remove. The farmer assumed the risk. Why then
does Blast, who is senior to CSB, have to pay $15,000 to the mortgagee? This is the
first case where a senior creditor has to compensate a junior creditor? CSB has a
consensual lien on the real estate and after acquired equipment. In exercising its
remedy against the pumps, its caused damage to land. So as to CSB who is senior
in the land OR as to a non-debtor (owner of the land, we dont have one) you are
entitled to compensation b/c Blasts interest doesnt extend to the land.
c.

9-604(c) Policy whats wrong with this remedy. Imagine you have a
security interest in an elevator and you can pull it out if there is a default. Its not
very practical, it creates a lot of inefficiency have to reimburse the non-debtor
owner, costs of removal, re-affix the replacement (often there are cross default
clauses a default on fixtures is a default for mortgagee so you two people
seeking remedies.). What do people really do when the debtor defaults? The
mortgaee (CSB) and secured party (Blast) are likely together, preferably before
default, and they usually agree that there will be a single foreclosure sale of the real
estate with the fixture attached; this makes better sense then removing the fixture.
In the agreement, they will try to figure out the value added to the real estate by the
fixture (e.g., an elevator adds 10% of value to the apt. building). They also agree
how the foreclosure proceeds will be divided. This creates another problem
which is illustrated in the MapleWood Case(comments of 9-604) sometimes
you have the mortgagee selling the real estate before an agreement is reached
the question is whether the secured party has a legal right to demand part of the
proceeds. Under old Art. 9, they couldnt demand. But as a matter of practice, they
usually agreed, but NO legal right; Now under NEW art. 9 (tried to solve this)
see 9-604(b)(2) solve the Maplewood problem if the s/a covers goods that
are fixtures, the secured party (blast) may proceed in accordance with the
rights with respect to real property [the difficulty is that the fixture
financier has no rights to the real property: it raises two issues: (1) does it mean
that if CSB doesnt want to sell the land, Blast can? In other words, does it
mean that Blast can sell the fixtures with land attached? Isnt that absurd?
Cant mean that? The courts will read the language to mean that if they dont
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enter into an agreement in advance of the foreclosure sale where you have the
mortgagee initiating the foreclosure sale if the creditor has a senior claim
under 9-334(c) will have a right to the proceeds from the foreclosure sale. This
is what it must mean if real estate foreclosure, Blast gets a share of the proceeds
and this would result in the sensible outcome of courts ordering the mortgagee if its
junior to pay a share of foreclosure to the senior fixture financier. But we havent
seen any cases on this point yet.
11. Problem 7: City is our client and wants to sell a sound system to debtor for his
business. City wants to be sure that they can get the system back if debtor
defaults. Thats there major concern. You should know you cant assure City
that they will be able to do that. There is NO way you cant make that
guarantee b/c of the breach of peach provision (it is very easy for the
debtor to precipitate a breach of peace e.g., stand in the door and not let the
REPO man in) under 9-609. Also, City would want to know the obligation to
reimburse the obligation to reimburse non-debtor owners (here, Universal
realty who owns the building) and should there be other mortgages they may
have to be reimbursed if exercise right to remove. Assuming City wants to go
ahead with those 2 caveats, you want City to assert a purchase money
security interest with a fixture filing made in advance before the installation of
the system (assuming the system is a fixture since there is wiring and
bolted speakers, its highly likely its a fixture). You also want to do a visual
inspection b/c we know 9-334(h) trumps 9-334(d) if construction on-going.
Also, do you need to know the name of the landlord? You need to do a fixture
filing to win under 9-334(d) does a fixture filing require the name of the LL?
We would look under 9-502(b)(4) you need to know the LL if going to make
a fixture filing, which you need to do. You also want to know the name of the
owner of Real estate b/c of the right of reimbursement and if something goes
wrong you want an agreement on how to divide the proceeds because 9-604(b)
(2) gives no instruction to courts about how to divide the proceeds from
foreclosure sale. You want to have it worked out in advance and in an
agreement. Do you want to know the names of the mortgages? Yes,
particularly b/c if anything goes wrong you want to know who you are dealing
with.

12. Problem 8

I.

Accounting and Commingling (Liens) see Handout 17(a)

1.
2.
3.

All private contestants in the course will be subject to a battle with IRS
Federal government has a tax lien for collection of taxes
A failure to pay federal taxes leads to a delinquency assessment which
automatically leads to the creation of a federal tax lien. Federal tax law tells
us how its create (attachment) and who wins the priority battles (IRS v.
purchasers, Art. 9 secured creditors, and others).

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How does federal tax lien arise: 3 steps: (1) assessment; (2) demand and (3)
failure to pay.
o Assessment: They file and in it they say they owe x, but they are only
paying 7 (they admit in their filing that they are not paying full tax).
Assessment can also occur when taxpayer underestimates his liability
on return (maybe the IRS discovers it through an audit and then you
contest it if lose then it becomes an assessmnt).
o Formal Demand that you pay is the next step.
o Third step is you dont pay.
Federal Tax Lien Statutes (Pg. 2088)
1. Failure to pay 6321
2. 6322 (attachment) it arises when assessment made and continues
until payment made. [whats important in priority battles is when IRS
gives Notice tax lien filing see 6323(f) there is a form for a
notice of tax lien and its filed its not the same place where you file real

estate records or Art. 9 security records; so when worrying about tax liens,
have to do a separate search for tax liens).
3.

Pay roll taxes (see handout 17(a)) You get your check and you see
withholding and ER w/holds supposedly to pay fed., state, and social
security. The ER is accruing a liability to the fed. Govt, they are going into
debt and they pay it usually quarterly. So what happens during the 3 months
the taxpayer or govt. doesnt get the money, but in effect your ER gets the
opportunity cost of using the money b/c not being paid to anyone yet. When an
ER is in financial distress (tax liens arise from pay roll usually), they have to
figure out which creditor to pay first b/c dont have enough cash? Who do they
pay first? Lots of times they choose not to pay the federal govt. first. They do
that for a very good, practical reason because, they think it is less likely
the fed. Govt. will discovery quickly that they havent paid and the govt. is
less likely to be tough on them if dont pay, and govt. will work with them
then the other creditors who will either cut them off or leave their job. So
they will either underestimate their liability or admit their liability. At
some point the fed. Govt. discovers the non-payment. Usually, the govt. will
file a notice of tax lien and thats the major endorsement tool used to collect
these back taxes and collect penalties. This is a major concern for other
creditors. Who has priority once a notice of tax lien is filed?

Priority Battles of Federal Tax Liens: Generally, what the federal govt. has done
is to play by the same rules (of course with exceptions); basically if the fed. Govt
wants to win, it has to give notice first. This is surprising because the govt. could
have created a super-priority rule, but it didnt. Incidentally, some state govts. Take
the position that state tax liens take priority but not federal tax liens. Why? The
answer in legislative history that there was a concern that if the govt. didnt play by
the same rules there would be impediment of private lending (it would reduce the
amount of lending by private lenders).
Problem 1A: On 3/1/01 ONB lends money and s/a; On 4/15 IRS makes
and assessment and a formal demand. On 5/15/01 IRS files a tax lien

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and comes after the equipment to pay the tax liability. The question is who
wins?
a.

Analysis: We know under article 9 ONB has an attached

security interest in equipment but NOT perfection (theres no
automatic perfection) on 3/1. The IRS on the other hand we know that
under 6321 and 6322 at time of assessment which is earlier than
4/15 attachment occurred and notice was given on 5/15.

b.

Priority Rules 6323: The default rule is that the IRS wins (but
statute doesnt say it). Then you go to 6323 to see if there is an
exception where the IRS loses. 6323(a) is the most general exception
and based on notion of notice; under subsection (b) through (d) refine
and expand subsection (a). SO the order with which we go is that (1)
IRS wins then you go (2) to 6323(a) and then to the next exceptions.
6323(a) the lien shall NOT be valid as against any holder of
security interest until NOTICE has been filed. What does this
mean? It means you look at the time the private contestant becomes a
holder of a security interest by that time had the IRS filed a
notice of tax lien. If it has NOT, then its notice of tax lien is NOT
Valid its subordinate to the holder of security interest. Here,
when did ONB get its security interest and was it before the NOTICE of
tax lien was filed? If we applied art. 9 security interest, ONB wins. But
you have to look at the definitions in the Federal Tax Lien (it
defines a security interest broader (b/c it covers real estate) and
narrow (b/c it doesnt cover all things in art. 9). The Federal Tax Lien
security interest is defined as: (6323(h)(1) any interest in
property (it includes real property) acquired by contract for
purposes of securing payment of an obligation (talking about
consensual liens created by contract on property). When does ONB get
a property interest acquired by K? ON 3/1/01 (thats what s/a does).
A security interest exists at any time (a) if such time the property
is in existence (distinction b/w present and future goods) here the
goods are present and the interest has been protected in local
law against the subsequent judgment lien (what does judgment lien
mean its a judicial lien that covers both liens on real property and
personal property (execution lien). Local law means Article 9 law. So
the question we are asked to answer is what is the earliest date
when ONB would beat a subsequent judicial lienor in a fight over
this equipment under article 9? The answer is that ONB would not
beat a judical lienor (say they came on 5/14/01) because according to
9-317(a) and (b). ONB would lose to any subsequent judicial lienor on
these facts because to win it would have to satisfy 9-317(a) or (b) and
it cant because it didnt perfect or file a financing statement. So, ONB

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does NOT have a security interest according to Federal Tax Lien

6323(h)(1). [Also Federal Tax Lien has a definition of value last
sentence in 6323(h)(1)]. In any case, ONB does not have a security
interest under the Federal definition of the term security
interest. So you go back to 6323 is NOT satisfied and bounce back
to the default rule and ONB loses.
Problem 1(a) Alternative: Same facts except ONB files a f/s on 5/14/01.
a. Analysis: Under 6323(h)(1) when does ONB get a interest in property?
As
soon as you have attachment, which is on 3/1/01. A security I
interest
exists if the interest has been protected under art. 9 against a subsequent
judicial lien. What is the earliest date that ONB could beat a later judicial lienor?
Here it would 5/14 because under 9-317(a)(2)(a) perfection is enough to beat a
judicial lienor. Now we have to go to value was there money worth? Yes, because
they gave money back on 3/1. So what day does ONB have a federal tax lien
security interest when all three requirements are satisfied 5/14/01. We
Know there is an exception under 6323(a) lien shall not be valid against holder
of security interest until tax lien notice has been filed (5/15/01). Thus, ONB wins
this is a first in time rule.
Problem 1(b): 3/1/01 ONB gives s/a; f/s/ but no commitment of $; 4/15 IRS
sends demand; 5/15 IRS files notice; and 5/20 ONB gives value.
a.

Analysis: Status of ONB no attachment until 5/20 (9-203(b) because

value not given until 5/20) and perfection is also on 5/20 (9-308(a) cant
have perfection without attachment). IRS lien arises before the demand
but it doesnt give notice until 5/15 of its tax lien.
6323(h)(1) On what day did ONB get an interest in property in this
equipment. Not till 5/20 because value wasnt given until 5/20. The
interest has become protected under article 9 against a subsequent
judicial lienor what is the earliest time ONB could beat a later judicial
lienor under art. 9-317? There is a weak form of early bird filing in 9317. ONB could win under 9-317(a) if it perfects so as to any
judicial lien comes after 5/20 ONB wins; can ONB argue it has an
earlier date 9-317(a)(2)(b)(3) one of the conditions satisfied (s/a
on 3/1) and files f/s (3/1) so under new article 9 ONB could beat a
subsequent judicial lienor under 9-317(a)(2)(b) from 3/1. But, we need
to finish the rest of the security interest definition of Federal Tax
Lien Law look at 6323(h)(1)(b) and to the extent at such time the
holder has parted with money or moneys worth so on 3/1 had
ONB parted with money? NO. There was no commitment to extend
credit on 3/1. [Money means cash or a binding commitment to
extend credit according to Federal Regulations]. So what is the date

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when ONB becomes a holder of security interest 5/20 because need

to satisfy all three sentences in 6323(h)(1); therefore, under the
default rule IRS wins.
Problem 1(c): This question requires us to construe two federal laws: (1)
federal tax lien law and (2) federal bankruptcy code. Focus on 544(a) of the
bankruptcy code. On 4/15 IRS makes a demand; 9/14 debtor goes into
bankruptcy.
a.

Analysis: What is the trustees status under 544(a)(1)? How do we describe

their status? The trustee is a judicial lienor (as of the commencement of
the case which is 9/14). Under this implicit default rule we would say IRS
wins unless there is an exception under 6323. Is there an exception that
protects the trustee in bankruptcy? Start with 6323(a) as trustees
lawyer you would argue that the IRS never filed the lien shall NOT be
valid as against a judgment lien creditor until NOTICE thereof has
been filed. So, the trustee at the commencement of the case no notice was
filed. So IRS loses and trustee can strong arm aside this tax lien. Does this
make sense? Yes, the federal govt. is playing by the same rule. The
reason that the trustee has strong arm power is to encourage
creditors in pre-bankruptcy period to give notice so that debtors
wont become over-extended. This policy works for the IRS also. If
want a tax lien that is good in bankruptcy, you need to give notice
promptly or else you will lose because everyone needs to know about
the lien.

Problem 1(d): 4/15 IRS makes a demand; 4/17 ONB gives $/s/a and f/s; 5/15
IRS files notice and 5/30 the debtor gets new tools and that is what the fight is
about.
a.

Analysis: ONB doesnt have an attached security interest under 9-203(b) until
5/30 because debtor doesnt have rights in the collateral until 5/30. Notice the
goods werent bought until after IRS filed its tax lien. Perfection isnt until
5/30 again because under 9-308 you need attachment. IRS lien arose at time
of assessment before 4/15 and notice given 5/15.
When does ONB get a security interest under 6323(h)(1)? When did ONB get
an interest in the new tools created by K to secure payment of debt? On 5/30
because that when the debtor had rights in the collateral. At such time,
the interest has become protected under local law (art. 9) against a subsequent
judicial lien? What is the earliest time on these facts under 9-317 of the new
art. 9 when ONB could win this battle? 4/17 because you dont need
perfection under 9-317(a)(2)(b) all you need is a signed s/a and a f/s
before the other party becomes a judicial lienor (this is a weak form of
anticipatory filing). How about VALUE? Money is given on 4/17 as well. If

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look at all three requirements above, then when does ONB have a federal tax
lien law security interest? On 5/30 because that is the first moment that ONB
had an interest in property under art. 9. Federal Govt wins.
When does IRS get a tax lien on the new tools? At the same instant as
ONB. Look at 6321 all property belonging to such person you dont get
a tax lien on someone elses property. So we have a tie here. This is the
situation in McDermott case (see Handout 17).
McDermott: Basically, there bank had a judicial lien on real estate. IRS filed
its notice and then taxpayer purchased a new real estate. The court said it was
a tie. The supreme court held that the IRS wins in the event of a tie.
There were three reasons: (1) statutory argument; (2) structural argument;
and (3) policy argument.
Policy: If you agree we have a tie, and weve seen other situations where we
have had ties what do you do? You either give victory to the first creditor
who gave notice or a pro-rata distribution of the debt outstanding. The funny
thing about McDermot if just look at notice, ONB gave notice first. ONB in
effect made an anticipatory filing.
Supreme Court Analysis:
(1) Statutory Argument: According to 6323(a) it says the lien shall NOT
be valid as against a holder of security interest until notice is filed. Court
says it does not say a lien shall not be valid until notice of an attached
federal tax lien is given. It just says notice is given. (the professor thinks
this argument is weak). This is a weak argument because look at the
words following the lien the lien imposed by 6321 and that
says its only imposed on the taxpayers property.
(2) Structural Argument: (Good Argument) Basically, court says 6323(c)
and (d) deal with exactly this problem the problem of after acquired
property (after the filing of the tax notice) and if you give victory to ONB
based on anticipatory filing you will in effect make those special exceptions
redundant. You wouldnt need them the general rule would swallow the
exceptions.
(3) Policy Argument: (See page 4284 on Handout 17 at end of opinion) A
strong first to record presumption may be appropriate under ordinary statutes
creating private liens. But the govt. cannot indulge in the luxury of this
requirement. Notice doesnt enable govt. to protect itself. [Remember Harriet
the tort victim and 9-317(a)(2)(b) and its form of anticipatory filing
letting an earlier creditor who is a consensual lienor and filing a f/s
and beat a jucial lienor like Harriet (who is an involuntary creditor).] This
is the courts argument the fed. Govt. is a creditor for taxes it cant
change its behavior based on anticipatory filing. The govt. is like Harriet.

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Problem 1(e): There is a demand on 4/15/01; A notice of tax lien is filed on

5/15/01. And on 5/20 there are various terms and ectc
1(e)(1): Car sold and Ricardo pays in full and doesnt know about the tax lien and
certificate of title endorsed to him and assume Ricardo takes physical possession.
The problem is that the IRS wants the car. The question does Ricardo have to
surrender the car to the federal govt.
a.

Analysis: Start with general rule that IRS wins. 6323(a) doesnt help Ricardo
because he bought the car after the notice. But is there a buyer protection
priority rule Ricardo can rely on? 6323(b)(2) it says even though notice of a
lien has been filed such lien shall not be valid with respect to a motor vehicle
as a against a purchaser of a motor vehicle if at time of purchase there was
notice and before he obtained notice he had possession and he has not
relinquished possession of the car. Why does Ricardo have possess this car?
We are worried about laundering cars through tax liens through innocent
third parties.

b.

Policy: Federal Tax liens are not noted on certificate titles of car. So there is
problem of notice for buyers if they didnt have this protection.

1(e)(2): What if Smiles was a lessee?

a.

Analysis: 6323(a) or (b) do NOT mention lessees of cars. Under the language of
Article 9 Ricardo would be a lesse in the ordinary course of business. Under
art. 9 there would be protection under 9-321(c). But how about under the
federal tax lien law? Is there any protection for a lessee? If go to definition of
purchaser the term lessee is included. 6323(h)(6) a lease of property shall
be treated as an interest in property. We are to pretend that a lessee is a
purchaser for the purpose of subsection (a) NOT (b). In subsection (a) a
lessee is treated as a purchaser; that means a lessee will beat the govt. if
the govt. has NOT yet filed a notice. But if you are late like you are in the
case (where notice has been filed) you need to get into subsection (b)(2) to
win and the cross reference doesnt get us there. We saw under article 9
most business lessees have a burden of inquiry to check files; the only
person who will do worse in a fight against the tax lien is a lessee in
ordinary course of business. Thus, lessees have a burden of inquiry to
check files.

1(e)(3): Smiles sold family car to Ricardo and paid in full; he had no notice of tax
problem.

a. Analysis: 6323(a) doesnt apply because he bought the car after the tax
lien. First, thing to notice is that if he did get the certificate of title
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Ricardo wins (thats more generous to the buyer than article 9 is). Here,
Ricardo is NOT a buyer in ordinary course under article 9 and under 9320(b) he would lose. Under federal tax lein, it protects a buyer NOT in
ordinary course even if come after the filing Why? Because tax liens
dont appear on the certificate of title; thus, problem with notice. If
Ricardo does NOT get the certificate of title, he has a serious problem
under federal tax lien law. To win under (b)(2), Ricardo has to be a
purchaser. To be a purchaser, (h)(6), among other things, a person who
gets an interest in property which is valid under local law against
subsequent purchasers without actual notice. Assume Smiles first sold
the car to Ricardo, he takes possession and pays, but doesnt get the
certificate of title. Say Smiles sells the same car to another person and
gives that person the certificate of title. The question is who would win
under non-federal law (certificate title law) against Smiles and the other
person. The other person wins because he has the title.
1(e)(4): Ricardo buys the car from Smiles Motors (so the purchase is from a dealer);
but, Ricardo only pays 60% of the list price.

a. Analysis: The issue is whether its moneys worth. 6323(h)(6) the

term purchaser means a person who for adequate and full
consideration acquires an interest. So the factual issue is whether 60%
is adequate and full consideration. Is it reasonably equivalent value? It
is an issue of fact that one must litigate. If Ricardo is not a purchaser,
Ricardo will lose.
b.

Policy: Why is there a greater emphasis of value in tax lien law than under
article 9. There is a greater fear of sham transactions. We are more worried
about Smiles not getting enough money b/c the hope is that the IRS can get
the proceeds. If Ricardo gets a windfall, who pays? All the taxpayers because if
Smiles doesnt get reasonable equivalent value the IRS has no proceeds to go
after.

1(e)(5): What happens when Mia takes her car to the repair garage. Mac refuses to
release the car until she pays her bill. Along comes the IRS and finds the car
in Macs garage and demands him to relinquish the car.
a.

Analysis: Mac is NOT a purchaser, a holder of a security interest, not a

mechnics lienor, not a judgment lienor, but there is still an exception that
applies under 6323(b)(5) even though notice is filed such lien not valid with
respect to tangible personal property subject to lien under local law securing
reasonable amount of repairs. The Federal govt. says Mac will only win as to
reasonable charges irrespective of state law. As long as there are reasonable
charges and Mac has continuous possession, he will win.

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1(e)(6): Fed. Govt. going after a buyer. Tumor bought a 1000 share of IBM stock
from Smiles Motor. Under art. 8, these 1000 shares would be a security
entitlement its held indirectly. What does the federal tax lien law call this
security entitlement to 1000 shares? It calls it a security. [Under art. 8 a
security means stock in direct holding system see the difference].
6323(h)(4) security means share of stock. Who wins? Tumor wins
6323(b)(1) people who owns stock not expected to search the files.
Would it be different if the stock was given as a charitable donation. Yes. It has
to pay tax bills before it gives money away as a donation.
1(e)(7): New car radio sold and no knowledge of tax problems. Is there a buyer
protection rule? 6323(b)(3) personal property purchased at retail. The tax
lien law allocates the risk the question who gets stuck suing the debtor.
With respect to tangible personal property purchased at retail (retail means
buying for your own ultimate use and usually in a relatively small
quantity).
1(e)(7): cell phone hypo. Ricardo wins under 6323(b)(4). 6323(b)(4) provides for a
monetary cap. With respect to HH goods and personal effects or property (e.g.,
tools of trade of small businesses), purchase in a causal sale (a sale by
someone not in business of selling those goods) but only if there is no actual
notice and sale must be less than 1000. [we saw in 9-320(b), you loses if
secured party files].
Policy: not one of a series of sales what does that mean? There is a
concern that people will sell al their valuable property by trying to avoid
paying taxes.
ONB wins they would have a si on 5/20 which is after the notice of tax lien, but
ONB wins b/c of 6323(b)(1)(b). Why are we in (b)(1) dealing with securites
because securities includes NOTICE. Remember (b)(9) applies to NOTes
ONB has a security interest in deposit account on 5/20. ONB has automatic
perfection under 9-104. Is that security interest beats tax lien. Under 6323(b)
(10). Remember (b)(10) applies to deposit accounts.

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