Secured Transactions PRIORITY (Secured Creditor against othersnot debtor) May 24, 1999 Class I. Introduction (p.

1): A) 20 to 30 pages for each class B) Contact him and he will meet on an as need basis. C) Exam will be multiple choice as well as essay questions. Can bring the code into the exam and write in the code book. Bring the statutes to the class. D) Article 1, 9 and bankruptcy code. (Selected commercial statutes from Commercial paper) E) Treatise by Aspen, Volume 4 is on Secured Transactions. May 26, 1999 Class II. Scope of Article 9 (p. 7): 9-102, 1-201(37), 9-104 and 9-105 A) Rules of construction and application ( 1-101, et. seq.) B) General definitions and principles of interpretation (1-201, et. seq.) 1) General Principles (9-102, 1-201(37), 9-104 & 9-105)(p. 7) A) Applicability and definitions ( 9-101, et. seq.): The aim of Article 9 is to provide a simple unified structure within which the immense variety of present day secured financing transactions can go forward with less cost and with greater certainty. B) Subject matter of Article 9 ( 9-102) Transactions in which the parties intend to create security interests in personal property or fixtures including goods, documents, instruments are included within the scope of Article 9. (1) 9-102(1)(a): The scope of Article 9 is directed toward a discrete type of encumbrance on property or fixtures. Security Interest is defined in Article 1 as an interest in personal property or fixtures which secures payment or performance of an obligation. C) Perfection of security interests in multiple state transactions ( 9-103) D) Article 9 (9-102): governs any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures. E) 1-201(37): defines security interest as any interest in personal property or fixtures which secures payment or performance of an obligation. The two part test is that: (1) a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of goods is an obligation for the term of the lease not subject to termination by the lessee; and (2) factors in the second part of the tests are (a) that the original lease equals or exceeds the remaining economic life of the goods, (b) upon compliance with terms of the lease, the lessee has the option to become the owner of the goods or to renew the lease for the remaining economic life of the goods. (1) The essential elements of secured transactions and leases are distinguishable: 1

(a) Secured party retains a security interest in goods sold essentially passes conditional title to the buyer/debtor; the buyer can retain the goods if the payment obligations are satisfied.. In the event of default the secured party can repossess the goods. The secured party must disposes of the goods and applies the proceeds to the outstanding indebtedness. Any surplus proceeds belong to the buyer/debtor. A retained security interest is limited to a contingent interest. (b) Lessors always retain a residual interest in the leased goods. A lessor can also repossess the goods following a default by the lessee. Unlike the secured party, the lessor is not required to dispose of the goods and need not distribute any proceeds from their disposition to the lessee. Secured Creditor v. Other Claimant Secure Creditor v. Debtor 1) Scope of interest 1) Scope of interest 2) Intent 2) Intent 3) Attachment (9-203) 2) Attachment (9-203) (a) Either possession by creditor w/ debtors agreement or a Written Security agreement which must contain: (1) Signature by debtor (2) Description of collateral or real estate (b) Value given (creditor gives value) (c) Debtor must have rights in collateral Problem 2-1 (p. 8) (a) Article 9 applies per 9-102(1)(a) and looking at the definition of a security interest in 1-102(37). (1) There was personal property (2) There was an objective intent to create a security interest. (b) Article 9 applies per 9-102(1)(a) and looking at the definition of a security interest in 1-102(37). (1) There are goods (2) Intent is objective test (3) 1-201(37) specifically states that security interest is created when the bill says Seller retains title until the goods are paid for Jester v. State of Alabama (p. 8) In this case the court looked to the intent of the father and son to whether there was a security interest. In this case, the father had to show that he has a bona fide lienholders interest, (2) and whether the lienholder could not have obtained by the exercise of reasonable diligence knowledge of the intended illegal use of the property so as to have prevented such use. The father showed this and he could hold the government from taking the car. Questions (p. 13) The father has a security interest in personal property (the car). This prevented the government from having first right on the car. (There 2

may have been a federal statute preemption?) The father probably didnt have any idea what his Article 9 rights were. 2) Specific Exclusions From Coverage (p. 13) A) Excluded transactions (see 9-104) (a) If in a federal court case and an Article 9 issue comes up, and it is a state issue the court will decide which states version of Article 9 should be used. However if no state issue then court would look at UCC Article 9 as Federal common law. (b) Some areas that are preempted by government include: airplanes, federally registered ships, copyrights, etc. . The Federal government will get involved in this because of interstate interests. B) Definitions; account; purchase money security interest ( 9-105, 9106, 9-107) C) Classification of goods ( 9-109) D) Including sufficiency of description ( 9-110) E) Including security interests arising under Article 2 ( 9-113) F) Priority of consignments ( 9-114) Problem 2-2 (p. 14): No interest. The code only applies to interest in personal property. (9-102(a)) Limits to personal property. Also since this is real property (the farm), this would not come under Article 9 (9-104(j)). Same reason why the mortgage on the real estate from the bank would not be covered by Article 9. Problem 2-3 (p. 15): (a) Yes it could under 9-109(3) farm products are goods if they are used or produced in farming operations and are in the possession of the farmer/debtor. This is only in effect if the farm products have not gone through a manufacturing process (9-109 Comment 4) (b) I believe that Article 9 doesnt apply to landlord liens (9-104(b)), or to a lien given by statute for services or materials (9-104(c)). If the landlord had her sign an agreement that specifically provides that the tenant agrees to give the landlord an interest to secure payment then Article 9 could apply under 9-102(2). Therefore Article 9 does not apply to liens arising from statutes or common law, but does apple under contract. (c) 9-104(i): The right of set-off is explicitly excluded. Proceeds involve a further scope issue. (d) 9-105(e) defines a deposit account and under 9-104(l) excludes deposit accounts. (e) I9-104(g) excludes a transfer of an interest or claim in or under any policy of insurance. (f) 9-104(k) does not allow a transfer in whole or in part of any claim arising out of tort. In re: Berry (p. 15) This case involves a trustee in bankruptcy v. a creditor. The trustee in bankruptcy represents the unsecured creditors and he can knock out a secured creditor if the secured creditors interest was perfected before the bankruptcy. The trustee said this was a wage assignment by an employee (9104(d)) the court did not agree because the bankrupt party was an independent 3

contractor, not an employee. The commissions are a form a personal property interests, and therefore they could fall under Article 9. Therefore it was not excluded under 9-104(d). Note on Scope of Revisions (p. 22) June 2, 1999 Class III. Attachment and Classification of Collateral (p. 23) A) Introduction (p. 23) ((9-203, 9-204 both define attachment), 9-201, 9-104, 9-105, 9-106, 9-109, and 9-110): 1) 9-203: security interest can be created only if the parties enter into a security agreement (9-203(1)(a). If the collateral is in possession of secured party then an oral agreement is sufficient. If the secured party does not take possession of the collateral (a non-possessory security interest), the security agreement of the parties must be embodied in a writing signed by the debtor (9-203(1)(a) that contains a description of the collateral. In some instances it must also describe any land that may be affected. It must be signed by the debtor and the creditor must have given value, and the debtor must have some rights in the property. Secured Creditor v. Other Claimant Secure Creditor v. Debtor 1) Scope of interest 1) Scope of interest 2) Intent 2) Intent 3) Attachment (9-203) 3) Attachment (9-203) (a) Classification of collateral (1) after acquired collateral (2) (b) Either possession by creditor w/ debtors agreement or a Written Security agreement which must contain: (1) Signature by debtor (2) Description of collateral or real estate (c) Value given (creditor gives value) (d) Debtor must have rights in collateral B) The Security Agreement (p. 23): (9-105) Regardless of the manner in which a transaction is structured an agreement which creates or provides for a security interest is called a security agreement. (9-105(1)(h)) 1) Formality and Form (p. 24) a) Necessity of a Writing: Whether a written security agreement is required depends on whether the secured party has possession of the collateral. (1) If the secured party has possession of the collateral to which the security agreement attaches, a written security agreement is not required. A security agreement is still necessary for attachment but it may be oral since the collateral is pledged (9-203(1)(a). (2) If the secured party is not in possession of the collateral, the security interest will be valid only if there is a written security 4

agreement signed by the debtor and containing a description of the collateral (9-203(1)(a)) b) Financial Statements, by themselves are not enough to satisfy the requirement of a signed security agreement. The reason is that (1) the security agreement is on that creates a security interest (9-105(1)) by language granting the creditor an interest in the collateral and a financial statement usually does not purport to create a security interest. It merely serves as notice to 3rd parties that a security interest is claimed. (2) Financial statements also are not sufficient because they are filed before the financing arrangements are complete. In re: Hance (p. 24) The key to a security agreement is intent. In this case the debtor claimed that Sears was an unsecured creditor. The Court found that in order to create a security agreement there must be (1) a writing, (2) signed by the Debtor, (3) containing a description of the collateral or the type of collateral. The court found that the sales-check or invoice by itself created this kind of security agreement in the merchandise listed on it and is evidence of intent to create a security interest. Questions (p. 26): Hoffman v. Schlegel (p. 27): What qualifies as a security agreement? The debtor signed two documents, one was an UCC-1 financial statement filed with the state and the other was an agreement between the parties. The Financial statement identified the corporation as the debtor, the D as the secured party, and all fixtures and equipment owned by the Debtor as collateral. The states 9105(1)(l) defines security agreement as an agreement which creates or provides for a security interest. 9-203(1) requires for it to be enforceable if the collateral is not in the possession of the secured party (the case here) for it to be in writing signed by the debtor and containing a description of the collateral. P argued that the Financial statement and agreement alone do not constitute a security agreement because the language in both was not explicitly granting a security interest in the Debtors fixtures and equipment. D said it was the intent of the parties by the Agreement that she would acquire a security interest in the debtors equipment. You cannot have a security interest unless there is a document that the debtor intent grants a security interest in the collateral. You dont have to have just one document if there are more than one document that shows the intent (composite document rule). The court found that intent was enough, and that they looked to the transaction as a whole in order to determine a security interest. Gibson Co. Farm Bureau Cooperative Assn v. Greer (p. 29): As long as debtor has signed a writing (financial statement) which contains description of collateral and, if collateral consists of crops or timber, of land concerned, it is question of fact for trier of fact whether parties intended the writing to create a security agreement (9-203(1)). Although financial statements alone will not, as a matter of law, qualify as security agreement, and although use of bare-bones financial statement as security agreement is not encouraged, as long as 5

financing statement contains description of collateral and is signed by debtor, it is question of fact for jury whether parties intended to create security interest (9203(1)). The finding of the trial court was upheld and the appellate court overturned. This S.C. of Indiana found that the financing statement alone will not suffice, but the intent in the whole deal (other documents (e.g. promissory note, loan contract, probably showed this). Question and Note (p. 36): 2) Signature Requirement (p. 36) The debtor must sign the security agreement. (9-203(1)). This may be done by any means satisfying the requirements of 1201(39). Any symbol used by a party to authenticate a writing is sufficient e.g. a typed signature if affixed with the requisite intent to authenticate the writing. It is not necessary that the secured party sign the security agreement. Problem 3-1 (p. 36): In order to make it a valid security agreement the court would have to find that If the secured party is not in possession of the collateral, the security interest will be valid only if there is a written security agreement signed by the debtor and containing a description of the collateral (9203(1)(a)). In order to validate the security agreement that in order to create a security agreement there must be (1) a writing, (2) signed by the Debtor, (3) containing a description of the collateral or the type of collateral. Secured Creditor v. Other Claimant Secure Creditor v. Debtor 1) Scope of interest 1) Scope of interest 2) Intent 2) Intent 3) Attachment (9-203) 3) Attachment (9-203) (a) Either possession by creditor w/ debtors agreement or a Written Security agreement which must contain: (1) Signature by debtor (2) Description of collateral or real estate (b) Value given (creditor gives value) (c) Debtor must have rights in collateral 4) Types of collateral a) 4 Goods (9-109) (1) Consumer Goods (2) Equipment (3) Farm Products (4) Inventory b) 5 Intangibles (1) Chattel paper: (you either have 2 secured creditors or 1 creditor and 1 lessor/ or2 debtors or 1 debtor and 1 lessee). There has to be a writing that evidences a monetary obligation and a security interest in specific goods. (2) 3) Description of Collateral (p. 37): 9-402(l): A financial statement must contain a statement indicating the types, or describing the items of collateral. The test for determining the sufficiency of a property description required under 6

Article 9 is in 9-110: Any description of personal property or real estate is sufficient whether or not is specific if it reasonably identifies what is described. (a) Classification of Collateral (p. 37) 9-109 Classification of Consumer Goods, Equipment, Farm Products, Inventory. Where uses are mixed, it is classified as its primary use. Problem 3-2 (p. 38): (a) Inventory 9-109(4) (b) Inventory 9-109(4) (c) Consumer Goods 9-109(1) (d) Equipment (look to debtor) 9-109(2) (e) Inventory 9-109(4) (f) Farm Products 9-109(3) (g) Inventory 9-109(4) (h) Inventory 9-109(4) (i) Equipment 9-109(2) (j) Farm Products 9-109(3) (k) Equipment 9-109(2) (l) Inventory 9-109(4) (m)Equipment 9-109(2) Not to 3rd parties, there is an estoppel theory that would kick in. As between an innocent 3rd party. (n) Equipment 9-109(2) (o) Inventory 9-109(4) Problem 3-3 (p. 38): Azar would have collateral in chattel paper. Retail installment contract contained a writing that evidences a monetary obligation and a security interest in specific goods. The first debtor in this case was CD who agrees to purchase and gives a security interest in the front end loader to Azar in the retail installment contract. This is a property interest in the hands of Azar. The value (property right) to Azar is the payment and interest because of CDs agreement. This is a contract right. This (the property right in the retail installment) can be assigned or kept by Azar. Azar could sell or assign the property right to someone else, or give a security interest in this piece of paper (retail installment agreement). The outright sale will create an Article 9 right under 9-102(1)(b). The sale of a chattel paper creates an Article 9 security interest. Azars bank would have a security interest in the retail installment. It is only chattel paper when a 3rd party takes interest in the monetary obligation and the interest in specific collateral. ONLY BECOMES RELEVANT WHEN A DEBTOR BECOMES OBLIGED TO A CREDITOR AND A CREDITOR SELLS IT OR USES IT AS COLLATERAL TO ANOTHER CREDITOR. Problem 3-4 (p. 39): Bank takes a security interest in an account. An account debtor means a person who is obligated on an account, chattel paper or general intangible. CD construction has a contract to serve (construct) and the city of Newport has a contract to pay. The contractor could sell the promise to pay by Newport, assign it or grant a security interest and get a loan. 9-203(1)(b) says the sale of an account creates a security interest. 9-106 says it is an account 7

because it is any right to payment for goods sold or for services rendered whether or not it has been earned by performance. The 3rd party has no greater right than the party they received the account from. THE ABOVE ARE TWO TYPES OF COLLATERAL THAT ARE USED QUITE HEAVILY BY CONSTRUCTION COMPANIES, RETAILERS, MANUFACTURERS. June 7, 1999 Class Chattel Paper (9-105(1)(b): This is a security agreement and a right in specific goods Intangible Personal Property No Writing (1) Account (9-106): Is a security agreement in intangibles. Any right to payment for goods sold evidenced by an instrument or chattel paper whether or not it has been earned by performance. (2) General Intangibles (9-106): Personal property, that is not goods, accounts, chattel paper, document and instruments. (a negative category, if not in the others, it is in this). (a) Liquor license, trademarks, copyrights, patents, royalties, right to money from real estate sold, etc. Problem 3-5 (p. 39): General Intangibles Problem 3-6 (p. 39): (Bill of lading tells who has the rights to the goods that are being held by a carrier)Chattel Paper under 9-105(1)(f) Problem 3-7 (p. 40): (Promissory note (payable to order/on demand of a specific sum evidences right of payment and is not itself a security interest) Chattel Paper under 9-105(1)(f): Sloppy Descriptions (p. 40): 9-203: says must have description of the collateral 9-110: says only need to have enough description to reasonably identify: (1) All debtors property; All consumer goods; All personal property; All debtors assets. = too broad Address of place must be sufficient to describe or creditor out of luck. Problem 3-8 (p. 40): No. This does not reasonably identify the collateral (9110). Change in Usage (p. 41): See page 4 of outline (CL estoppel) also see 1-103 which says where the code doesnt say you can use CL Problem 3-9 (p. 41): The estoppel theory makes a lot of sense. Problem 3-10 (p. 42): Both descriptions (if true) are adequate under the UCC. The test for determining the sufficiency of a property description required under Article 9 is in 9-110: Any description of personal property or real estate is sufficient whether or not is specific if it reasonably identifies what is described. C) Debtor Must Have Rights in the Collateral (p. 42): Before a security interest can attach, the debtor must have rights in the collateral. This makes sense since a debtor can hardly grant a security interest in property in which the debtor has no interest. 9-203(1)(c)). Right of collateral is not defined by the code, but it seems to mean that the debtor must have some ownership 8

interest or right to obtain possession. The term rights is defined to include remedies 1-201(36). Trust Co. Bank v. Gloucester Corp. (p. 42): Scallops were sold by Sigma to Gloucester. The invoice was assigned to the Bank. The sale was conditional on the terms of net 30 days after FDA approval. Sigma went belly up. Bank filed to recover interest against the secured creditors of Sigma for conversion. The buyer (Gloucester) had rights in the scallops when they were identified there were sufficient rights in the credit buyer in those scallops. 2-501(1): When an item is identified to the K, then there are rights in the collateral. After Acquired Collateral 9-204(1): (p. 44): If intend to have security interest in after acquired collateral (any collateral that the debtor gets after attachment, then must state this in the security agreement. (1) Financial Statement: does not need description of the after acquired collateral in the financing statement. Exceptions: (a) Minority view: dont need description of after acquired collateral for some types of collateral (rationale: SI in this type of collateral is presumed to include after acquired collateral because it is assumed that the debtor will regularly be acquiring new collateral w/I this description): Account Inventory (a few courts) Farm products (2) Security Agreement: can attach by saying: all (equipment) now owned and hereafter acquired by debtor NOTE: never need a description of an afteracquired collateral in the financing statement (9-204) (3) Proceeds: 9-306(1): (a) = whatever is received by the debtor when the debtor disposes of the collateral. 2 types: Cash proceeds: 9-306(1) = money, checks, deposit accounts and the like (money from leasing of collateral) Non-cash proceeds: i.e. trade truck for boat. (b) Rule SI attaches in proceeds upon disposition of the collateral (if collateral identifiable). Has to be shown that the proceeds are traceable back to the original collateral (identified). Identification can sometimes be a problem (i.e. cash proceeds in an account w/ other funds). D) Creditor Must Give Value (p. 46): The security interest cannot attach until the creditor has given value (9-203(1)(b). This is usually an advance of money or a delivery of goods, but may be anything satisfying the definition of value in 1-201(44). Under this section, a person gives value for rights in collateral by acquiring them: 1) In return for any consideration sufficient to support a simple contract; 2) As security for a preexisting claim or in partial or total satisfaction thereof; 3) By accepting delivery under a preexisting contract for purchase; or 9

4) In return for a binding commitment to extend credit whether or not the credit is ever drawn upon. Page 5 of outline ends at Future Advance (p. 48 of book) June 9, 1999 Class (pp. 50-72) IV. Perfection (p. 50): A creditor or seller retaining a security interest in some of the debtors personal property may later learn that other parties claim a competing interest in the same property. The step that a secured party can take to enhance their position with respect to other potential competing claimants is called perfection. A) Introduction (p. 50): The methods for attaining perfection are in 9-302 thorough 9-306. In most cases the secured party may obtain perfection either by filing (i.e. with Secretary of State) or by taking possession of the collateral. When the collateral is held by a bailee who has not issued a negotiable document of title, perfection by notification is possible; e.g. the secured party may obtain perfection by notifying the bailee of the secure partys interest. For a few special situations the Code provides that a security interest is perfected w/o any of the above actions on the part of the secured party. Such perfection is called automatic perfection, or perfection by attachment. B) Perfection by Filing Under Article 9 (p. 51): 9-303: Perfection = attachment + applicable perfection steps: A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been take. Perfection= (1) Attachment (9-203) (SaVeD) (a) Signed writing w/ description of collateral (unless collateral in possession of the creditor). (b) Value given. (1-201(44)) (c) Debtor has rights in the collateral (2) + Applicable steps for perfection. 3 types of steps (FAP): (a) Filing of financing statement (most common) (b) Automatic (rare, because it gives no notice) (one case this is allowed under 9-302(1)(d) purchase money security interest in consumer goods) (c) Possession of creditor Applicable steps for perfection described in: (1) 9-115: Investment Property (2) 9-302: When filing is required to perfect security interest; security interests to which filing provisions of Article 9 do not apply. (3) 9-305: When possession by secured party perfects security interest w/o filing. (4) 9-306: Proceeds; secured partys rights on disposition of collateral. 9-304(1): provides that no security interest in money or instruments may be perfected by filing. 10

9-302: (assuming 9-203 attachment) a financing statement (commonly called a UCC-1) must be filed to perfect all security interests except the following: (1) a security interest in collateral in possession of the secured party under 9-305. (2) A security interest in consumer goods, but filing is required for motor vehicle required to be registered; and fixture filing is required for priority over conflicting interests in fixtures to the extent provided in 9313. (a) Only have to file UCC-1 for motor vehicles which are not yet titled. 9-302: Relevance of perfection to Disputes (steps needed to make security interest binding: Creditor/Debtor Priority Scope Scope Attachment Attachment Perfection 1) When to File (p. 51): 2) What to File (p. 51): 9-402: A financing statement is sufficient if it gives the names of the debtor and the secured party, is signed by the debtor, gives an address of the secured party from which information concerning the security interest may be obtained, gives a mailing address of the debtor and contains a statement indicating the types, or describing the items, of collateral. A financing statement may be filed before a security agreement is made or a security interest otherwise attaches. When the financing statement covers crops growing or to be grown, the statement must also contain a description of the real estate concerned 9-402(7): What debtor name needs to be in the financing statement? A financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or names of partners (1) If debtor is: (a) individual, then need individuals name (b) partnership, then need partnership name (c) corporation, then need corporation name 9-402(2): Both debtor and creditor need to sign the UCC-1 unless: (1) debtor moves to another state (2) after name change of debtor, for new financing statement for afteracquired collateral. (3) Proceeds under 9-306 if the security interest in the original collateral was perfected. This financing statement must describe the original collateral. 9-402(8): Financing Statement Saving Clause (like 9-110 is for the security agreement). 11

(1) A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading. (a) Address, Name on UCC-1 Minor errors which are not seriously misleading not fatal (i) Definition of minor errors 1) mistake in address if debtor well known, not as serious 2) TEST: the more the court feels that someone could find the debtors name, the more it will let the error slide 3) NOTE: no address at all is fatal. 4) Rationale: the financing statement is there to allow other potential creditors know that there is a Security Interest in the collateral. The potential creditor must at lest be able to find a UCC-1 on file regarding the potential debtor. (b) Description of Collateral in the financing statement (a) RULE: description of the collateral on the financing statement does not need to be as specific as the description on the security agreement (See American Restaurant below) Problem 4-1: (p. 51) Notes: (p. 51) Revised Article 9s Treatment of Debtors Signature: Problem 4-2: (p. 52): Problem 4-3: (p. 52): Notes: (p. 52) Revised Article 9 and Address Requirement: Problem 4-4: (p. 52): Notes: (p. 52): Revised Article 9s Treatment of Name Requirement: American Restaurant Supply Co. v. Wilson: (p. 52): Thorp Commercial Corp. v. Northgate Industries, Inc.: (p. 54): In this case Franklin National Bank made several loans to Northgate pursuant to a security agreement between them. There was a future advance clause in the security agreement which served as a basis to establish that Franklin National Bank was a secured party in the same collateral with respect to future loans. Because the bank had already filed a financing statement with the Minnesota Secretary of State with respect to the collateral and it preceded the filing by Thorp Commercial Corp., Franklin National Bank prevailed even with respect to future advances (9-312(7)). Description on the UCC-1 can be very broad, only has to contain a description of the type of collateral (here assignment accounts receivable) Only warns subsequent creditors, not identify the collateral exactly. Only has to identify the type of collateral 9110. Note: attempt to limit collateral in the UCC-1 may fail. (Holding that the description of the collateral of assignment accounts receivable did not limit the collateral to exclude after acquired collateral. Questions: (p. 61): Notes on Revised Article 9: (p. 61): 3) Where to File (p. 62): 9-401: Where is the proper office(s) to file a Financial Statement? 12

(1) 3rd alternative subsection (most common one used) (a) Identify type of collateral, then use (a), (b), or (c) category: (i) For all other types of collateral, category (c). 1) If place of business in only one county = dual (Sec. Of State and local county) 2) If places of business in more than one county, In Sec. Of State office (no local filing if more than one place of business) Problem 4-5: (p. 62): Problem 4-6: (p. 63): 4) Mechanics and Duration of Filing (p. 63): (1) filings by clerk 9-405, 9-406, 9-407, 9-403, 9-404 (a) Rule: if creditor does everything correctly and filing officer messes up, creditor not liable (used to sue filing officer, but now there are immunity statutes). Subsequent creditors bear risk (Like a race statute). (2) Filing lapse What causes a filing lapse? (a) 9-403: expiration of 5 year period (b) 9-404: filing of a termination statement by the secured party. (c) Removal of the collateral from the state. (3) If debtor changes location w/I the state, no new filing required w/ regard to original collateral. If debtor changes name, no new filing required to continue perfection of the security interest of the original collateral. BUT: (a) After Acquired Collateral: (received by the debtor after attachment) New filing of financial statement necessary to prevent lapse of perfection in cases where the security interest covers after-acquired collateral. (b) 9-407(7): Where the debtor so changes his name or in the case of an organization its name, identity or corporation structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change, unless a new appropriate financing statement is filed before the expiration of the time. (c) 9-402(7): A finalized financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer. (d) Problem: Often have transfer and name change at same time when a new corporation is formed (see Taylorville) Problem 4-7: (p. 65): In Re: Taylorville Eisner Agency, Inc. (p. 65): Use (b) or (c) above in this case? Majority rule: apply (c), and thus no new financing statement needed to keep perfection. NOTE: Prof. Disagrees w/ the rule, in that if the secured party knows of the name change, 1-103 should be allowed to estopp the creditor from asserting that it did not 13

need to file a new financing statement in a priority dispute (because other creditor did not get notice to its detriment when it relied on the lack of action, w/ knowledge of the secured party). Minority Rule: should require new financing statements in these dual cases where the secured party is aware of the change in name. Question and Note: (p. 70): How long does financing statement last before it lapses? (a) 9-403(2): 5 years (b) 9-403(3): Continuation statement: if filed w/I 6 months prior to expiration of the 5 yr. Period, secure party can file a continuation which will renew the financing statement another 5 years. (c) 9-404(1): Termination statement: Problem 4-8: (p. 70): C) Perfection by Possession (p. 71): (i) not possible for accounts or general intangibles (ii) the secured party can only perfect by taking possession w/ the consent of the debtor. (iii) possessory security interest are rare. D) Automatic Perfection (p. 71): 9-302(1)(d): a PMSI in consumer goods is automatically perfected 9-302(1)(e): an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor. E) Defining Purchase Money Security Interests (p. 71): (i) Critical to determine if SI is a PMSI in priority disputes (automatic perfection if PMSI in consumer goods). (ii) 9-107: PMSI two types: (1) Seller If a SI taken or retained by the seller of the collateral to secure all or part of its price; or (2) Creditor If SI taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used. (a) NOTE: If creditor lends money to pay for something already purchased and takes a SI, this is not a PMSI. (b) NOTE: IF creditor lends money to help debtor purchase, and another creditor does the same, they both have a PMSI. (c) NOTE: Money lent to buy something which is already in the possession of the debtor is still PMSI if the item not purchased until the creditor gives value. Example 1: May has possession of a dozer on 10/22/98 on approval, but had not agreed to buy the dozer until 12/1/98, at which time she obtained the secured loan from the Bank = PMSI Minority Rule: pre-possession + agreement to buy = purchase, so would be no PMSI in above example. (iii) Assignment of PMSI: 14

(1) Any time a purchase money security interest is assigned, it retains PMSI status (assignee retains what the assignor has). Problem 4-9: (p. 71): June 14, 1999 Class Review: I. Secured Creditor v. Other Claimants A) Status of secured creditor B) Status of other Claimant 1) Attachment (same questions if a) 9-203 also secured creditor) b) Classification of collateral (1) after acquired collateral C) If other than secured cred. (2) Future Advances (must ask other quest.) (3) PMSI (4) Proceeds of Collateral D) Resolve priority dispute 2) Perfection 9-303 a) Filing b) Poss. c) Auto. V. Introduction to Priorities (p. 73): Problem 5-1: (p. 73) The dentist (as a creditor who failed to take all the steps required by law to create or protect his interest in the office equipment) might still prevail under the theory that the creditor has an equitable lien (i.e. one that would be recognized by courts of equity). However, under 9-203, Comment 5, equitable liens are not recognized. 9-201 explains the dentists position. Problem 5-2: (p. 74) In this case, Molly would be a unsecured general creditor who acquired a lien on Sallys property by judicial process and she is now a judicial lien creditor. The variable to look at here is when did the lien creditors interest arise? It typically arises at the time the sheriff levied (the sheriff seized the property). In some states the levy could be construed as being when the court clerk issued the writ of execution. since Mike is an unperfected secured creditor he wont have a protected security interest against Molly per 9301(1)(b). 9-312(5)(a): [for two secured, perfected creditors] first to file or perfect win Problem 5-3: (p. 74) For the trustee in bankruptcy, a judicial lien was automatically created on all the Sallys nonexempt property at the moment the bankruptcy petition was filed. 9-301(1)(b) (Same as above) 1) Was trustee a lien creditor? (9-301(3)and 544(a) of the Bankruptcy Code tells status of trustee; 2) 9-301(1)(b). Problem 5-4: (p. 74) The general rule would be that the priority would go to whichever secured party is the first either to file or perfect the security interest (whichever is earlier), provided there is no period thereafter when there is neither filing nor perfection. 9-312(5). This would give the party who files first top priority even though a Mike, as the first creditor, perfected later by taking possession 15

after Franks filing. Conversely the interest perfected by Mike, by possession rather than filing is entitled to priority over a filed interest only if the non-filing creditor in fact perfected before the other creditors filing. Problem 5-5: (p. 74) The interest perfected by Frank, by possession rather than filing is entitled to priority over a filed interest only if the non-filing creditor in fact perfected before the other creditors filing. Problem 5-6: (p. 74) In this case John advanced money to Marvin so that Marvin could acquire an interest in a crane. John would have a purchase money security interest (9-107) and would stand in a different position than First Finance. The Code states that a purchase money security interest (in collateral other than inventory) takes priority over conflicting security interests in the same collateral if the interest (as it was done in this case) was perfected when Marvin took possession of the crane or within 10 days (20 days in some states) thereafter. 9-312(4).

Perfection= (1) Attachment (9-203) (SaVeD) (a) Signed writing w/ description of collateral (unless collateral in possession of the creditor). (b) Value given. (1-201(44)) (c) Debtor has rights in the collateral (2) + Applicable steps for perfection. 3 types of steps (FAP): (a) Filing of financing statement (most common) (b) Automatic (rare, because it gives no notice) (c) Possession of creditor VI. Equipment Financing (p. 76): A) Introduction (p. 76) B) Basic Priority Rules: (p. 77): First in time; first in right general section = (a) 9-312(5)(a): [for two secured, perfected creditors] first to file or perfect wins. (b) 9-312(5)(b): if two unperfected creditors, first to attach wins. (1) Winner takes all = one who has priority will get enough pay what the creditor owed him + expenses, and whats left goes to the next creditor in line of priority. (2) 9-401(2): If good faith mistake in filing financing statement (a) if more than one type of collateral, the filing is sufficient to satisfy any of the types as to which the filing did comply. (b) The filing is effective against any person who had knowledge of the contents of the filing statement 16

Knowledge = (definition in 1-201 Notice = subjective, reason to know) Knowledge = subjective, really knew. 1) must have knowledge of the contents of the financing statement = have to know more than just that there is a SI, need to know contents FS as stated in 9-402(1), which is 1) description of the collateral; 2) names and addresses of the parties. 2) Knowledge of the contents of the security agreement is not knowledge of the financing statement, BUT a) if prospective party knew debtor by name, and say SA w/ description of collateral, could be enough (may not need to know the addresses) 9-401(2). b) Good faith = subjective test throughout Article 9. Problem 6-1: (p. 77) (a) The general rule would be that the priority would go to whichever secured party is the first either to file or perfect the security interest (whichever is earlier), provided there is no period thereafter when there is neither filing nor perfection. 9-312(5). This would give the party who files first top priority even though a Friendly Finance, as a later creditor, perfected first by filing on 8/1 and Bobs Bank did not file properly until 9/15. Therefore Bobs interest is perfected. (Friendly = $1MM / Bob = $500K) (b) 9-401(2) A filing made in good faith, but not in every place required is effective as to any collateral for which the filing did comply with the requirements of the Code. If is also effective against any person who has knowledge of the contents of the improperly filed statement. In this case Bobs Bank has a perfected security interest, and Friendly Finance had knowledge of the incomplete filing. Therefore Bob would have an interest of $1MM in SDIs equipment. If Friendly Finance had no knowledge of Bobs filing, then they would have the larger security interest. (c) 9-312(5)(b): So long as conflicting security interests are unperfected, the first to attach has priority. Friendly had a signed agreement, gave value, and debtor had rights in property on 8/1/ where Bobs has a signed agreement, gave value and debtor had rights n the property on 7/1. Therefore Bob would win the priority battle C) Future Advance Issues (p. 78): FA = advances of value by the creditor that occur subsequent to the creditors initial advance of value that is, the initial advance of value necessary for initial attachment of the security interest. (1) 9-204: must have a FA clause in the SA, or if want to get FA later the debtor must execute another SA to show intent to give up interest in the collateral. (a) RULE: w/o FA clause, the SA only provides an interest in the original collateral. (b) After acquired collateral clause indicates the intent to extend the SI to collateral acquired by the debtor after the date of the original attachment. (2) As between two secured creditors, who will have priority as to future advances? i. 17

(a) 9-312(7): As between two secured creditors, whoever has filed or perfected first has priority IF: i. there was a FA clause in the SA, or ii. the debtor issued a new SA at the time of the FA 1) w/ no FA clause in the original SA, the alter agreement would be necessary to document the debtors intent to extend the SI in the collateral beyond the initial extension of value by the creditor. iii. If there was a FA clause in the original SA, some courts hold that the SA is only effective if the FA covers the same class of collateral (i.e. consumer goods, then FA on equipment would not be acceptable. (3) Secured Creditor v. Lien Creditor: 9-30(4): (a) w/ knowledge of the lien creditor, the secured creditor has 45 days to make advances as long as there is a FA clause or a new SA. (b) After that, no protection as to the future advances if he has knowledge of the secured creditor (see 9-301(4)). Allis Chalmers Credit Corp. v. Cheney Investment, Inc. (p. 78) There was a financing purchase at Ochs who sold a tractor to a farmer (Katlin). Katlin entered into the agreement, there was a security agreement and the contract was assigned to Allis Chalmers. They filed a Financial Statement and carried the paper. A month later, Katlin enters into another transaction to borrow money from Chenney Investments who to a SI into the tractor. Katlin then purchased a new piece of equipment, which AC combined both financing agreements together. Katlin defaulted. AC must prove that they had the same status in the future advance as they had in the initial advance. Cheney is trying to show that AC only has priority in the amounts of the initial advance. Question: Does a SC have to have a FA clause in a SA to establish they Rule: As between two secured creditors, who will have priority as to future advances? 9-312(7): As between two secured creditors, whoever has filed or perfected first has priority IF: (1) there was a FA clause in the SA, or (2) the debtor issued a new SA at the time of the FA (3) w/ no FA clause in the original SA, the alter agreement would be necessary to document the debtors intent to extend the SI in the collateral beyond the initial extension of value by the creditor. (4) If there was a FA clause in the original SA, some courts hold that the SA is only effective if the FA covers the same class of collateral (i.e. consumer goods, then FA on equipment would not be acceptable. Finding: The priority was with AC up to the amount still owed on the initial agreement. A financing statement that was valid and ongoing can be used to set the date as to set the date as to the perfected secured creditors priority against another perfected secured creditors claim. In this case, AC used the original security agreement to show this. Note: (p. 87) Problem 6-2: (p. 88): In this case, since the initial security agreement showed the contemplation of the debtor to pay the debt to AC. AC was the first to file and would be 18

seen as the first to perfect based on the filing of the initial agreement. Therefore under 9-301(b) the lien creditor would not take priority over the perfected secured interest of AC. There is a cutoff time on lien creditors under 9-301(4) but this would not be relevant if both creditors were secured creditors. June 16, 1999 Class ASPEN SERIES ON SECURED TRANSACTIONS BY CRANDALL D) Superiority Rights of Certain Purchase Money Security Interests (p. 88): i. Two types of PMSI described at 9-107 ii. 9-312(4) PMSI in collateral other than inventory (1) has priority in the collateral (or its proceeds) over a conflicting security interest where the other party filed first in cases where: (a) The PMSI is perfected at the time the debtor receives possession of the collateral, or w/i 10 days thereafter (b) When does 10 day period start? (i) No problem usually, debtor buys at same time gets possession. BUT 2 views for sale on approval-(defined in code): 1) of courts say in sale on approval agreement the 10 days do not start until buyer gives approval and agrees to buy. 2) of the courts say in sale on approval agreement the 10 days starts as soon as the buyer gets possession. 3) See In re Prior Brothers. (c) PMSI can be assigned assignee gets exactly what the assignor has (d) PMSI as to future advances? NO!!! Value is not given there to purchase anything 9-107 says you are a PMSI to the extent that you meet the definition. (e) What if money given to buy something, there is a PMSI intended, and then this money is put in bank and other funds go to buy the item? (i) This is factual question money going in the bank is always being shifted around. Probably will not say the money did not in fact go to allow the debtor to get value in the collateral, unless significant time lapse. 1) Ultimate protection for secured creditor, to see that the value given goes to in fact allow the debtor to get the collateral, then creditor can make check out directly for the collateral, or debtor bring bill over and have it paid directly. (2) Proceeds does the secured creditor w/ super-priority have that priority extended to proceeds? (a) 9-314(4): - PMSI in collateral other than inventory = yes (b) 9-314(3): - PMSI in inventory only extends to cash proceeds. In Re: Prior Brothers, Inc. (p. 89) Note (p. 95) Problem 6-3: (p. 95) Problem 6-4: (p. 96) VII. Inventory (p. 98) 19

A) General Principles (p. 98) 1) Different from other types because the inventory has to be sold, involves a shifting pool of collateral. 2) Floating Lien = a SI in a type of generically described type of collateral, which attaches to whatever property of that type the debtor happens to have at any given time. (Accounts and chattel paper use this type also.) B) Basic Priority Rules (p. 100) 3) Basic Priority Rules: (1) 9-312(1)(a) for the non PMSI SIs in inventory (2) 9-312(3) for PMSIs in inventory (most SIs in inventory are PMSIs). Rules for inventory PMSI to have priority over another secured creditor: (a) the PMSI must be perfected at the time the debtor receives possession of the inventory. (b) Notification in writing must be given to the holder of the other SI IF that person has filed a financing statement. (c) The holder of the conflicting security interest must receive the notification before the debtor receives possession of the inventory (if his does occur, the notification will be good for 5 years); and (d) The notifier must state that he has or expects to acquire a PMSI in the inventory of the debtor, and describe the inventory by item or type (must be a specific description, not enough to just say I am going to get a PMSI in the debtors collateral) (i) What is notification? --1-201(26) (Defines notification and receive) 1) 1-201(26) notificationa person notifies or gives a notice or notification to another by taking such steps as may be reasonably required to inform the other in ordinary course whether or not such other actually comes to know of it. 2) 1-201(26) receivesa person receives a notice or notification when: (a) it comes to his attention; or (b) it is duly delivered at the place of business through which the contract was made or at any other place held out by him as the place for receipt of such communications. Revision Note: (p. 101) Secured Creditor v. Buyers and Lessors of Inventory (p. 101) (1) Relevant Sections are: 9-307(1), 9-306(2), 9-307(2), 9-301(1-c), 9103(2), 9-308, 9-309, 9-201 (default section). (2) Biggest problem for financier of inventory is: What happens to the SI when the goods are sold or leased? Fleetwood Credit v. RI Hospital Trust (p. 101) (3) 9-306(2): starting pointSI continues in collateral not withstanding sale, exchange or other disposition (see problem 7-8) UNLESS: (a) the disposition was authorized 20

9-306(2): will give basic rule on whether the SI continues. This is true regardless of who has priority (e.g. under 9307(1). Example: A finances Bs inventory and takes a SI which is perfected. B sells some of the inventory to C, and the sale is not authorized (this, under 9-302(2), the SI continues). However, C is s BOCB, and takes free of the SI under 9-307(1). D, a BOCB buys the collateral cannot use 9-307(1), since the SI was not created by his seller. (ii) If the transfer is authorized, then the SI is gone for good. (iii) 3 kinds of buyers protected under 9-306(2): 1) NON-BOCB 2) Buyer of Farm Products (excluded from 9-307(1)), 3) Buyers who are BOCB but who do not buy from a seller who created the SI (A BOCB takes free of a SI created by his seller If SI not created by his seller, then BOCB does not take free of the SI.) Note and Questions: (p. 104) C) Rights of Buyers and Lessees (p. 104) (4) 1-201(9) Definition of BOCB (KNOW FOR EXAM) (a) a person who in good faith (b) without knowledge that the sale to him is in violation of the ownership rights or security interest of a 3rd party in the goods (c) buys in the ordinary course of business (d) from a person in the business of selling goods of that kind, (but does not include pawnbroker. All persons who sell minerals and the like [including oil and gas] as well-head or mine-head shall be deemed to be persons in the business of selling goods of that kind) (e) Buying may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a pre-existing contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt. (i) bulk transfer does not apply to sales of inventory (these usually indicate that the seller is in trouble, so no BOCB in that situation. However, it is normal to have bulk transfers in inventory, so these are excluded from the definition). (5) 9-307(1) Protection of Buyers of Goods (a) A BOCB (other than a person buying farm products from a person engaged in farming operations) takes free of a security interest created by his seller (even though the SI is perfected and even though the buyer knows of its existence.) (i) Does not protect any BOCB who does not buy from seller who created the SI (A BOCB takes free of an SI created by his seller Problem 7-1: (p. 105) 21

(i)

Sears Consumer Financial Corp. v. Thunderbird Products (p. 106) (ii) Any way to protect the remote BOCB? 1) 2-403(2) says Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a BOCB. (a) Only applies in context of where the Secured Creditor himself entrusts the collateral. (b) Example: A has a SI in Bs boat. B defaults and A asks C, a seller of boats, to repo the boat and store it. C puts the boat up for sale, and D buys it. Can A repo boat? Held: No. The SI continues under 9-306(1) because the sale was not authorized. However, D is not protected by 9-307(1), because D did not buy the boat from a seller who created the SI. D is a remote seller. But A, the secured party, entrusted the boat to B, so under 2-403(2), A must bear the risk of loss. RULE: Where the Secured Party itself entrusts the collateral, or acquiesces in it entrustment, as occurred here, 2-403(2) governs. (c) Example: A purchases a motorboat with money borrowed from Bank. Bank takes a SI in the boat. A sells the boat to C, a Marina boat seller, who then sells it to D. A defaults and Bank traces his boat to D, and sues him for conversion. Ds lawyer points to 2403 and requests that the case be dismissed. Who wins? Held: Bank does. 2-403(2) does not apply except where the secured creditor himself entrusts the collateral to a seller of items of that kind. Question and Note: (p. 113) Problem 7-2: (p. 113) Problem 7-3: (p. 114) (b) 9-307(2) (Crandall says this is one of the most common sections that students dont understand) (i) In the case of consumer goods (as held in the hands of the debtor, not buyer), (ii) A buyer takes free of a SI even though perfected if he buys w/o knowledge of the SI (w/o knowledge of it period) (iii) for value, (iv) for his own personal, family, or household purposes (the buyer here, not the debtor) (v) unless prior to the purchase the secured party has filed a financial statement covering such goods.

22

1) called the garage sale section because have to look at both the way the collateral is being held by the debtor, and used by the buyer. (c) 9-201 default section (i) If buyer loses under 9-306 and 9-307, this section controls. Says that the holder of the SI takes priority over the purchasers of the collateral. (d) 9-306(2) What is Authorization? (i) Especially in sales of inventory, the SC will authorize some sale of the collateral, because the sales will be needed to allow the debtor to pay the SC. (ii) 9-306(2) SI continues despite transfer, sale or other disposition of the collateral UNLESS the disposition was authorized in the SA or otherwise. 1) If SA is silent as to authorization, this does not mean that there is no authorization. The courts will look to see if authorization is implied (CD, CP, waiver, etc.) Production Credit Assn of Baraboo v. The Pillsbury Co. (p. 114) 2) Can be explicit authorization, but usually this is not the case. Most of the time there is a condition under which the sale will be authorized. Split opinion as to these: a) Majority Rule = If there is any type of condition on the sales at all, this must be met or no sale is authorized. b) Minority Rule = look at the type of condition. If it is: (1) One in which the seller is obligated to do something (i.e. seller must get prior approval, or seller must get prior approval, or seller must pay the proceeds to the SC) then if the condition does not occur, the sale is still authorized, because condition is not in the control of the buyer. (The purchaser pays the debtor, but cannot control what is done with the proceeds.) (2) One in which the buyer has to do something (i.e. the SP notifies all buyers of the collateral that they should make the check out directly to the SC.) In that case, the condition is in the control of the buyer, and if the condition not met, there is no authorization. (3) Rationale is to not make the buyer an insurer for the actions of the debtor. Question: (p. 116) Northern Commercial Co. v. Cobb (p. 116) (a) Validity of Summary Judgement Based on Authorized Sale (p. 117) 1) Based on Security Agreement and Financing Statement (p. 117) 23

2) Based on Other Evidence in the Record (p 119) Questions: (p. 120) (iii) Analysis for authorization under 9-306(2) 1) Is there a condition? a) Majority says no authority period unless fulfilled. b) Minority says if condition no fulfilled, will still find authorization unless condition was in control of buyer (buyer had to fulfill condition). 2) If not authorization in SA (silent on matter, or says no authorization), then look to see if there has been an implied authorization or waiver (intentional relinquishment of a known right). Gretna State Bank v. Cornbelt Livestock Co. (p. 120) a) waiver occurs after the SC knowingly allows the condition to slide maybe 3-4 or more times. Example: a bank finances all of a farmers cows, and takes a SI in them. The SA says that there is no authorization to sell without prior written consent of the SC. However, the SC never enforced this, and the debtor sold cows many times, with the full knowledge of the SC. Held: this is a wavier of the condition, and there was authorization for the sale. b) What if SA had anti-waiver clause? Majority view is that this can also be waived. c) How can you re-establish the condition after waiver? Person already affected under a SA, would be hard to change, because already waived. But, send out letter to those not yet affected , say condition will be strictly enforced, and hold to it. And for other already affected under their SA, at time of new SA reasserts condition, must hold to CP which sticks to the condition. d) Absence of authorization the absence itself is only one factor. Look to the CP and CD of the parties to see if authorization implied. Notes and Question: (p. 125) Problem 7-4: (p. 125) June 18, 1999 Class D) Commingled Goods, Processed Goods, and Accessions (p. 125) Farmers Cooperative Elevator Co. v. Union State Bank (p. 126) Problem 7-5: (p. 129) E) Article 2 Rights (p. 129) In Re MacMillan Petroleum (Arkansas), Inc. (p. 130) Questions: (p. 134) F) Consignment (p. 134): (4) Secured Creditor v. Consignor 24

(a) 2-326(3)Consignment = a sale or return K, since the goods are delivered primarily for resale. If goods are sold, they are paid for; if they are not sold, they are returned. Consignor retains title: (i) Not a SI in theory, because does not fit 1-201(37) definition a property interest that secures payment or performance of an obligation. Because delivered for sale, and because the consignor retains title, acts in a way like a SI (1-201(37)) says the retention or reservation of title by a seller of goods not withstanding shipment or delivery to the buyer is limited in effect to a reservation of a security interest (ii) 2-326 consignees creditors may seize the goods despite the consignors ownership unless certain requirements met: 1) sign law (put up sign notifying customers of the consignment) not in use much today. 2) Demonstrate that the consignee was generally known by his creditors to be substantially engaged in selling the goods of others. 3) Comply w/ Article 9 filing provisions: a) filing provisions are 9-114. Basically identical w/ 9312(3). Must file a financing statement and give prior notice to the inventory financier of the consignment. b) As practical matter, t be totally protected, treat the consignment as if it were an inventory PMSI. Follow 9-114. In Re: Creative Goldsmiths of Washington, D.C. (p. 135) Notes and Questions: (p. 139) Problem 7-6: (p. 139) June 21, 1999 Class Title of a Vehicle: This is a means of knowing and proving ownership of the motor vehicle. The creditor keeps the title until you have paid for the motor vehicle. In order to get a new title you have to prove that the motor vehicle is paid for. Registration of a Vehicle: This is a taxing instrument for the state. This can take place in more than one state. VIII. Motor Vehicles and Other Title Goods (p. 141): A) Introduction (p. 141):How to perfect a motor vehicle. If titled perfection must be by lien noted on the certificate of title. 1) Filing a financing statement will not suffice when the vehicle is covered by 2) B) Ohio new car vehicles use 9-401 (Alternative 3) C) 9-302(3)(b): If cars should be titled when new and inventory or not. D) When buying a new car the owner will get a certificate of title and E) Buyer in the Ordinary Course v. Article 9 Secured Creditor (p. 144) 1) Where titling and reg. is in a state 25

DBC Capital Fund, Inc. v. Snodgrass (p. 144):Is one who buys a vehicle but does not get title not Problem 8-1: (p. 147): To prove the subjective test of honesty, you can only prove this indirectly by using objective evidence. This is basically done by what a group of reasonable persons would think in the same circumstances. 1-201(9) states that the buyer is not a BOCB because the buyer is not buying because it is for the partial satisfaction of debt. A BOCB must give new value. The new value could be argued the $15K he paid in cash. The person in this case is a BOCB to the extent of $15K and the creditors would get priority of $700, the BOCB to $15K, and creditors for anything beyond this. Schultz v. Bank of the West, C.B.C. (p. 147): 1987, the Muirs bought a MH. In 1988 Muirs took a loan out from Bank and gave the Bank a SI, which the bank perfected. 1992 Muirs put MH on consignment w/Gatley Motors. Gatley was in the business of selling goods like this. Schultzes bought the MH from Gatleys, and did not know of the SI, not what that the MH was being sold on consignment. Gatley did not forward any money to Muirs. Gatley then filed for bankruptcy. Schultzes learned of the SI at that time, and brought suit to declare that they took free of the SI. 9-201: says that unless otherwise provided security creditor wins against all others unless we look at exceptions. Issue: can the Shultzes claim 9-307(1) and take free from the Bank? Held: Yes. 1-201(9) does not require the person the buyer is buying from and anticipates that this may be an agent of the one holding title. The Schultzes bought from one in the business of selling goods of that kind. The Schultzes bought from a seller who created SI (created by his seller) because in 9-307, the seller is the one who holds title. The Schultzes take free of the SI created by his seller. Dissent: argues that the seller has to be the same person in both 9-307 and 1-201(9). Professor agrees with majority on this case. IX. Statutory Liens (p. 156) X. Security Interests in Agricultural Transactions (p. 166) 1) 2) June 23, 1999 Class (pp. 169-202): How is this section set up to preserve the rights of the secured creditor and the buyer (Food Security Act in the back of UCC book). 3) Buyers of Farm Products v. Secured Creditor (p. 169) A) Problem: 9-307(1) excluded buyers of farm products from that section. Such persons could not claim BOCB (Buyer in the Ordinary Course of Business) and take free of a SI. (1) Meant that buyers of farm products often had to pay twice: 1) for the products; 2) to the holder of SI, when that secured creditor sued the buyer for conversion, UNLESS: 9-306(2): the sale was authorized (then the SI would not continue, and the buyer would not be liable) (a) Auctioneers or other parties selling for the seller were also liable for conversion against the superior security holder. 26

(b) filing for farm products was also local, and buyers would therefore have to check the county in which they were grown in order to see if there was a SI. (2) Food Security Act, 7 USC 1631: response to problems w/ excluding buyers of farm products from 9-307(1). Congress passes act to protect farm product buyers. (a) Policy: why shouldnt entire Article 9 be a matter of federal law? Professor thinks that: (b) Purpose of Act: to provide protection of buyers in the ordinary course of business against secured creditors whether their interest is perfected and whether or not the buyer knows of the existences of such an interest (like 9-307(1). Also applies to auctioneers. (3) 2 options given in the Food Security Act: (a) Central Filing: 1) must be filed in addition to the Art. 9 financing statement. File w/ Secretary of State. Has more extensive requirements than financing statement. 2) statement must contain (b) Debtor to Provide the Secured Creditor w/ a list of Prospective Buyers (and selling agents of the debtor)[other States adopted this option]; (c) NOTE: 9-306(2) still has effect if creditor authorizes a sale in the security agreement or otherwise the buyer would take free of the SI even if the buyer had notification. (d) NOTE: nothing in the Food Security Act affects 9-301(1)(c): Buyers of farm products take free of unperfected SIs. (e) Only one protected under the Food Security Act = 1) buyers of farm products; 2) auctioneer (seller) of farm products (commissioned merchants: Food Services of America v. Royal Heights, Inc. (p.170) Facts: Royal ran an orchard and agreed to deliver its crops to America to process and sell. America is a commission merchant who sells farm products on commission. America loaned royal $100K and obtained a perfected security interest in Royals crops as collateral on the loan. Later Zirkle leant $100K to Royal and filed a financing statement 6 months after America and claimed they had a secured interest in Royals crops. Zirkle sold the crop and applied the proceeds against the loan. America argues that Royal failed to repay the loan, and later sued both Royal and Zirkle. The trial court granted a summary judgment in favor of Zirkle, basing its decision on the Food Security Act. Court of Appeals reversed and remanded for trial. Court of Appeals felt Zirkle was both a commission merchant and a junior lienholder. Said the Federal Act did not provide Zirkle in its capacity as a lender with priority over a prior perfected lienholder. Findings: The Food Security Act, in this case, does not preempt the state law rules on creation, perfection, or priority of a security interest. In this case there was no protection for a commission merchant (or auctioneer, who acts as one) if that merchant also lends 27

to the seller of the farm products. In such case, the lender who takes a SI is competing against any other secure creditor under 9-312(5)(a) (first to file or perfect wins). 4) Revised Article 9. (p. 178) XI. Possessory Security Interests (p. 180) 1) Introduction (p. 180): a) Types of collateral which may be perfected by possession b) Types of collateral which cannot be perfected In re: Allen (p. 180): Allen sold his interest in some real property to Partnership. He took a promissory note and Deed of Trust as payment. TCA title company held the note and Deed of Trust, with Allen as the beneficiary. TCA was the collection agent for the debtor (Partnership). Later, Allen assigned his interest in the note and Deed of Trust to Casa Grande. Casa Grande notified TCA, and recorded its interest in the County Recorders Office. Allen filed for bankruptcy, and Casa Grande asserted priority in the note and Deed of Trust against the bankruptcy trustee (who is treated as a lien creditor status 9-301(3) as of the time of filing of bankruptcy or in 544 of the bankruptcy code). The trustee asserted that the SI was not perfected (under 9-301(1)(b)); because Casa Grande did not take possession., and therefore, it had priority over the unperfected SI under 9-301(1)(b). Issue: Was there possession? Held: Yes. Because the 3rd party had possession and Casa Grande, the new beneficiary, notified the 3rd party. Therefore, TCA was a proper agent of Casa Grande under 9-305, and there was perfection by possession. (of which an instrument, according to 9-304, can only be perfected by possession). Problem 11-1 (p. 183): The Rolex is probably perfected by Hank under 9-305 where goods, may be perfected by possession. However, in the case of the limo, is not perfected by possession. A Motor Vehicle must be perfected by lien noted on the title. There still could be perfection on the watch if there had been a filing of financing statement. Hank would have automatic perfection for 21 days. If Johnny does not give the watch to Hank, Hank must refile (9-304(5)). Under 9-304(4) Hank would also have21 days temporary automatic perfection after attachment to take possession or file. 3) Care of Collateral in Creditors Possession (p. 184) Problem 11-2 (p. 184): 9-207(1) Maria had duty of reasonable care. The burden would be on Maria and she must show that the loss could not be foreseen or prevented by her returning on the day the note was due. In this case Maria probably would lose the money she loaned Miguel. She knew that the money was due on 3/1 and opted for a vacation. Problem 11-3 (p. 184): 9-207(1) Fluctuating values of collectibles, the general rule would be that the credit union is not responsible for the ring that Bill (debtor) wanted back because the market was volatile. There is no liability on the part of the credit union and they cannot be forced to give the ring back (except by payoff of the SI). Problem 11-4 (p. 184): 9-201(1) & 9-201(2)(b). In this case First Federal Loan 28

XII.

would have to show that they exercised reasonable care. They would have to show that the loss could not be foreseen or prevented by the exercise of reasonable precautions. Problem 11-5 (p. 185): 9-201(1) The Bank took the plane (collateral( by filing suit and having the sheriff levy execution on the plane. Rebecca may be within her rights, because the Bank has the duty to show reasonable care was taken with the collateral. Creditor cannot absolve itself from liability by possession of a 3rd party. Fixtures and Realty-Related Interests (p. 186): 3 issues: a) What happens when we have a Real Estate document, and then use that as collateral? b) What is the definition of Fixture? c) What are the limits of the priority disputes in fixtures? (9-313) 1) Borderline Collateral (p. 186) a) Real Estate is excluded from Article 9. b) Use of a note secured by a mortgage as collateral for a loan is governed by Article 9. c) Types of borderline transactions: Buyer ---------------------------promise to pay-----------------------Seller Can be: Note + Deed of Trust; Note + Mortgage; or Land Contract d) 9-104(j) says Article 9 does not apply to the creation or transfer of any lien on real estate, including a lease or rent.

Rodney v. Arizona Bank (p. 186): Vasquez gave a promissory note to Clonts and also a Deed of trust to secure the mortgage. Vasquez and Clonts agreed that State Title would hold the agreements. Clonts wants to get paid now, so he sells his interest to the Fidlers. Fidlers assigned their interest to Security Pacific Bank. Security Pacific notified State Title that they have they have Fidler (Clonts) interest. Fidlers sold their interest again (a big no no) to Rodney. Rodney files an interest in the Deed of Trust with the county recorders office. Security Pacific has a priority dispute between them and Rodney. The question here is was Rodney perfected? Rodney argues they perfected under real estate law, and Security Pacific has a perfected security interest under Article 9 (the payments by Vasquez). When Fidlers gave an interest in the note = the deed of trust to secure the repayment of loan from Security Title created a security interest and therefore an Article 9 interest. At this stage there was the creation of an article 9 security interest. The right of payment from real estate (in the form of a promissory note) creates a security interest 1-201(37). Rodney had an outright sale. You dont perfect under Article 9 by filing in the real estate court. Possession is the only way to perfect the instrument (promissory). Where the holder of evidence for the right of payment for real estate uses the right to secure payment, he has created a security interest under Article 9. The definition of collateral is the property (in this case the instrument) subject to a security interest, and includes accounts and in this case it is a general intangible by default. 29

e) Land Contract = general intangible, 9-304, cannot perfect by possession. Problem 12-1 (p. 191) 2) What on Earth is a Fixture ? (p. 191): a) what is a fixture? In re: Gain Electronics Corp. (p. 192) (IGNORE THIS CASE): Lewiston Bottled Gas Co. v. Key Bank of Maine (p. 196): Problem 12-2 (p. 199) see the book 3) Perfection in Fixtures/Fixture Filing (p. 199): b) 9-313: Only applies to the holder of real estate + fixture v. holder of SI in fixtures. 4) Priorities in Fixtures (p. 200) c) 9-313: Priority disputes: (1) 9-313(7): Default rule: A fixture filing is not generally needed. In cases not covered by 9-313(1-6), a SI in fixtures is subordinate to the conflicting interest of an encumbrancer or owner of the related real estate who is not the debtor. (a) Exceptions: 9-313(1-6) (2) 9-313(8): one who has priority in fixtures can repossess them, but cannot June 25, 1999 Class (Friday) (pp. 201-239) Problem 12-3 (p. 201): Buyer buys furnace, installs seller retains a SI. Bank has the mortgage on the house (mortgage states it covers fixtures). (a) Under 9-313(4)(d) If the central air conditioning system is considered an appliance, described as replacement appliances used by the debtor or his family , then OHara, as the secured party financing the replacement (since this is new AC it is assumed that there was old) of domestic appliances in non-commercial owner-occupied contexts need not concern himself with real estate descriptions or records. The priority of a mortgage would have no effect on the perfection by OHara. This is a PMSI 9-107(a) (b) 9-313(7): (DEFAULT RULE) OHaras security interest would not have priority over any conflicting interest by Kennedy, as predecessor in title of the owner and he would continue to have an interest of record in the RE. (There was no fixture filing so Kennedy would win. If there had been a fixture filing ) (c) 9-313(4)(c): OHara would win in this case.

REVIEW THIS PROBLEM IN DETAIL: Problem 12-4 (p. 201): If this can
be considered a fixture under 9-313(1)(a) then 9-401(3):does not affect this case if the property can become a fixture and is classified as such. 9-201 would really gives validity of the security agreement over any other section. Use 9313(4)(b) for a fixture filing 9-401(2) and 9-401(5) and 9-313(1)(b) would give the details of how to file. Even though the mobile home was attached and become part of real estate in the transaction the filing on the certificate of title continues effective even though the use of the collateral (mobile home) has changed (permanent structure), which controlled the original filing has changed. 30

Therefore Acme Bank would still have priority9-307(2) is not applicable because a consumer buyer from a consumer cannot win. Problem 12-5 (p. 202): 9-313(4)(a): Since the SI is a PMSI, and the interest was perfected by a fixture filing within 10 days (6/7 to 6/15 = 8 days), Helpful Hardware has an interest in the RE. That Perfected Interest in the furnace has priority over the conflicting interest of Chaste Bank. If the mortgage was a construction mortgage, the SC would lose under 9-313(1)(c), and 9-313(6). 5) Rights of the Secured Party Upon Default (p. 202): Default Rule: 9-313(7): (In cases not covered by 9-313(1-6), a SI in fixtures is subordinate to the conflicting interest of an encumbrance or owner of the relate estate who is not the debtor. Exceptions are 9-313(1-6) 9-313(8): one who has priority in fixtures can repossess them, but cannot just barge in and breach the peace. a) must pay for any damages done to the building b) do not have to pay for the lowered value of the RE which occurs because the fixtures are removed. c) No right to the proceeds of the fixtures (Capital Federal) Cant get cut out of proceeds on the sale of the fixtures, only have a right to repossession. Rationale: to give an interest in the proceeds of fixtures would give an interest in RE, and that is outside the scope of Article 9. Capital Federal Savings & Loan Association v. Hoger (p. 202) Problem 12-6 (p. 210): Use 9-313(4)(b) for a fixture filing 9-401(2) and 9-401(5) and 9-313(1)(b) would give the details of how to file. Based on the rights under 9-313(8) that when the secured party in fixtures and accessions has priority over other interests in the real property and the secured party is entitled to remove the collateral, I would advise that they enter into a negotiation or Western Resources should remove its collateral. The effect would be that they would be liable for any damages or repair necessitated by removal, but not for any diminution of the value of the property caused by removal (9-313). Practically (in Kansas) the house could not be sold without an furnace and AC and therefore of less value to the Bank. XIII. Accounts (p. 211) 1) General Principles (p. 211) (1) 9-106: Account means any right to payment for goods sold or lease or for service rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Non-recourse Financing: This is an outright sale. (Credit Card Issuer is the creditor and the Business which allows the credit card use is the seller). Recourse Financing: 30 day line of credit, this could be sold to a bank, but the right to payment could be purchased back. (a) If someone takes an interest in someone elses right to receive a stream of payments, this may be an account.

31

if the right to payment is embodied in a note, then not an account, but a promissory note, or instrument (commercial paper rules would apply) (ii) If the right to payment is embodied in chattel paper, then not an account, but chattel paper (9-105) (a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific goods) (iii) If it is a right to payment for real estate sold or leased, then not an account, because account is only a right to payment for goods sold or leased, and real estate is not a good. 2) Applicability of Article 9 Rules (p. 213) (2) Attachment of accounts: (a) 9-203: signed writing w/ a description of the collateral, value given, debtor has to have rights in the collateral. (i) if intent to have SI in after acquired collateral, should put an after acquired collateral clause in the SA, but if fail to put this in for an account, it may be OK (financing statements never need after acquired collateral clause). (3) Perfection of Accounts: (a) cannot be perfected by possession, 9-305 (nothing to possess, since not represented by a writing) (b) account must be perfected by filing, 9-401, 3rd section, 1(c) central and local filing. (c) Automatic Perfection of an Account: (i) 9-302(1)(E): Can have automatic perfection of an account if the assignment of the account does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor. (ii) How to tell if the assignment account is not a significant part of the outstanding accounts of the assignor, and therefore automatically perfected? Majority Rule: Must satisfy two tests: 1) casual or isolated test: if the creditor is not the assignee of many accounts, and the assignment in issue is a fairly unusual, or casual or isolated occurrence, then this test satisfied (hard to have a bank meet this test) 2) percentage test: the $$$ amount of the debtors overall accounts assigned (numerator) compared to the total amount of the outstanding accounts (denominator). If below 10% then there is no problem, most say 20% no problem. Over 20% is definitely considered a significant amount, and you would have to file a financing statement. a) Note: some courts do not allow accounts which the creditor knows to be uncollectible to be part of the overall part of the debtors outstanding accounts and they knew that they were 32

(i)

uncollectible. (e.g. if the debtor has a total amount of outstanding accounts of $1MM, but only $300K are known to be collectable, then the denominator would be $300K) (d) 9-104(f): Article 9 does not apply to the following types of accounts: (i) accounts that are a part of a sale of a business (ii) accounts which are assigned for purposes of collections. In re: B. Hollis Knight Co. (p. 214): Trustee in Bankruptcy (status of lien creditor 544 of Bankruptcy Code, 9-301(1)(b)). Was the bank perfected as to the accounts. The bank filed a finance statement and the issue was that the SCs mistake in attempting to file the finance statement failed to list BHK as a creditor and had no valid local filing. (Local and General filing were required in this state). Was there automatic attachment. Where there is attachment and there is no necessity for filing then there is automatic attachment. This is applicable under 9-302(1)(b) where the accounts assigned are not a significant part of the assignor (debtor). If the debtor assigns/sells accounts to an Article 9 Secured Creditor the transaction is not required to file. The tests used was two part in this case: casual or isolated test: if the creditor is not the assignee of many accounts, and the assignment in issue is a fairly unusual, or casual or isolated occurrence, then this test satisfied (hard to have a bank meet this test) and percentage test: the $$$ amount of the debtors overall accounts assigned (numerator) compared to the total amount of the outstanding accounts (denominator). If below 10% then there is no problem, most say 20% no problem. Over 20% is definitely considered a significant amount, and you would have to file a financing statement. The bank got into problems because they screwed up in the filing of the financing statement. This case said you only have to meet one of the tests, but majority says to meet both tests. June 28, 1999 Class (pp. 217-254) 3) Subrogation Rights of 3rd Parties (p. 217): 1-103: Supplementary General Principles of Law Applicable: Unless the UCC displaces them, the principles of law and equity apply. 9-104 (h) (i) (j): Judgements, setoffs, rights, and tort claims generally do not serve as collateral in commercial transactions. National Shawmut Bank of Boston v. New Amsterdam Casualty Co. (p. 218): Case involves a contractor who took out a surety bond for a government contract pledging earnings from the contract. This assignment was not recorded. Then the Contractor obtained a line of credit from the bank and the bank filed a financing statement covering this assignment in compliance with various laws. No written notice was given to the surety, even though the Assignment of Claims act required it. Contractor defaulted on the project and loan, bringing the performance bond into play and defaulted on the loan. The Bank filed a complaint naming the surety as D when both tried to satisfy their respective claims. Trial court in Mass., w/o a jury dismissed the complaint by the bank and ordered judgement for the surety. Issue: What extent, if any does the doctrine of subrogation survive the passage of Article 9 of the UCC. Holding: Under the UCC the surety is looked at as an insurer of the contractor, and logically it would be looked at as one of the contractors creditors and would be subject 33

to priorities as listed in the UCC. (unsecured creditor v. secured creditor). The surety has acted as more than an insurer of the contractor, they have also insured the government for a completed project, the suppliers and laborers for payment, and the contractor. Court felt that equitable subrogation was the key and the finding for the surety was upheld. The collateral in this case is an Account (right to progress payments). 9-106 The equitable right of subrogation is superior to Article 9 according to the court, because the code does not discuss this. A Surety has the right of subrogation to the extent that it pays off the principle debtors obligation. (The surety has whatever rights the debtor had) Surety is subrogated to the rights of the contractor. XIV. Chattel Paper and Leases (p. 224): 1) Introduction (p. 224) (1) What is Chattel Paper? 9-105(b): (a) A writing or writings which evidence both a monetary obligation and a security interest in specific goods or a lease of goods (typical example is an installment K, or Conditional Sales Contract or Retail Installment Contract and Security Agreement) (i) When the transaction and by an instrument (or series of instruments), these writings together constitute chattel paper. 1) Must attach the security agreement to the note (stapling OK, paper clip probably not) (ii) Lease A lease + SI = chattel paper also. In re: The Benefit Funding Group, Inc. (p. 226): BFG and 4 related corporate entities leased equipment. Several Banks claimed they had security interests in the leases of the equipment. Issue: The question that was asked was whether the Banks had perfected their interest in chattel paper. This can be done be filing or possession. Holding: Trustee alleged that the possession was faulty because the Banks did not have the original documents, and the court agreed. The Banks also needed to have evidence that the security interest was in specific goods, and there had been some turnover in the equipment (there was substitute equipment and not the original equipment) Goods are not interchangeable in chattel paper. If there was perfection by filing the issue was that filing under a trade name. In fact the bank filed under the trade name and corporate name per 9-402(7). The trustee said that the trade name must come first. The court said that it does not matter which name comes first (The code does not really say which name comes first, so the filing officer will normally cross file both names. If the filing officer screws up, it is still considered that the filing was proper per the secured creditor). 2) Secured Parties and 3rd Party Assignees (p. 234) (2) How does a SI in Chattel paper arise? (a) Seller sells TV on installment K. Then Seller wants to get loan form the Bank, uses the K as collateral the Bank takes a SI in Chattel Paper. (i) Can also sell installment K, and the buyer would be buying Chattel paper. 34

1) If sale of Chattel Paper, the buyer is secured creditor, since gets rights in equipment. 2) If sale, usually the buyer has to follow the terms of the writing (CP) that he buys (i.e. must follow terms of the original installment K.) Usually the new assignee collects payments, but the assignor can still do this upon agreement. 3) If Chattel Paper 2 SIs exists: a) the original one in the original installment K (which is the chattel paper) + b) the security interest the subsequent secured creditor has in the chattel paper. (b) When does a SI arise in Chattel Paper? (i) Document: (When it is sold or used as collateral) (ii) Lease -(3) How does one perfect a SI in chattel paper? (a) Filing: 9-401 (b) Possession: 9-304 (c) NO AUTOMATIC PERFECTION IN CHATTEL PAPER (4) Priority Disputes in Chattel Paper: (a) Dispute arises where there are two buyers of the chattel paper who wins in the situation? (i) 9-312: first to file or perfect 1) Do chart if both perfected by filing, whichever was first to file or perfect. 2) If one perfects by possession, one by filing, then look at the earliest date of perfection earliest one to perfect wins. Problem 14-1 (p. 235) Payments on account and payments on chattel paper are proceeds. Bank has no security interest on the accounts, only on the chattel paper. Another way to argue this might be that under 9-312 Marshall was the first to file and perfect they would win. Even though Tarp perfected by possession earliest to perfect would win. If both parties had taken a security interest in chattel paper and Marshall Bank had priority as to the Chattel paper. If Southfence took the checks in as payment on the chattel paper and paid Tarp with the checks then Tarp would be a HIDC as long as they had no notice of any claims or defenses. 3-302(6) and 9-309 (Rights of a HIDC) NOT TESTABLE AREA. Problem 14-2 (p. 236): 9-306(5)(a) If the table was collateral at the time of sale for an indebtedness of Merry Belles which is still unpaid, the original security interest attaches again and continues as a perfected SI. General Motors Acceptance Corp. v. Third National Bank in Nashville (p. 236): Pick up truck was sold by dealer and received a promissory note (chattel paper) and installment contract (promise for payments) as proceeds to the sale of inventory. The installment contract taken in by debtor (auto dealer) said he would hold onto the paper until the promissory note is paid off, but it is sold to Bank instead. GMAC has a 35

perfected interest in the chattel paper. The truck is turned back in. The Bank as an unpaid transferee of the chattel paper has a SI in the goods against the transferor. Such SI is priority to the SI asserted under 9-306(5)(a) to the extent that the Bank has priority under 9-308(b) (from 9-306(5)( b) Problem 14-3 (p. 239): (1) This never fit the description of the financial statement 9-312 is applicable NUTS is not perfected and Friendly is perfected. Since MUCK has financing arrangements with NUTS (secured party financing inventory) and Friendly (purchaser of chattel paper). Problem 14-4 (p. 239):9-308(b) Bucksa Bank has priority in the chattel paper because as purchaser of chattel paper, Bucksa gave new value and takes possession of it in the ordinary course of business and has priority over a security interest in the chattel paper or instrument which is claimed merely as proceeds of inventory subject to a SI (9-306) even though he knows that the specific paper or instrument is subject to the SI. 3) Leases (p. 239): Lease or Sale? 1-201(37) (p. 240) (1) Issue is it a real lease, or is it a sale on credit (Hard to Distinguish) (a) Basic distinction a sale transfer ownership, a lease does not. (b) Problem that complicates can file an Article 9 financing statement for a lease because there is so much uncertainty: If the lease is determined to truly be a sale, the lessor is covered in a priority dispute. Problem 14-5 (p. 241): (1) Lease under 1-201(37) (2) Problem 14-6 (p. 241): Lease under 1-201(37) This is a true lease because the lessee has the right to terminate without penalty. Addison v. Burnett (p. 241): In this case the failure to recognize that a lease was involved by the lessee was the dispute. If under lease Article 2A, if secured creditor part 5 of Article 9. The secured creditor (lessor) has to dispose of the leased item. Lease as an Alternative to a Credit Sale (p. 249) (c) 1-201(37): Rules to determine if lease or sale: (i) If the lease can be terminated at-will, then it is a true lease 1) If not terminable at will, then may or may not be a lease. (ii) If at the end of the lease term, the lessee becomes the owner of the goods, then it is a sale. (iii) If the lease term is equivalent to the useful value of the goods (time) then it is a sale (A lease must retain some ownership value). (iv) If at the end of the lease term, the lessee can obtain ownership of the goods for no or nominal consideration, then it is a sale. 1) How to determine nominal? Less than 20% of the FMV of the item at the time of transfer of ownership. Problem 14-7 (p. 252): XV. Instruments, Investment Securities, General Intangibles (p. 253) 36

1) Instruments: 9-105(1)(i) (p. 253): An instrument is a promissory note a writing which evidences a right to the payment of money and is not itself a security agreement or lease. Problem 15-1 (3-104(1), 3-302(1), 9-304, and 9-308) (p. 254) (Dont do) June 30, 1999 Class (pp. 261-275 and pp. 276-299) 3) General Intangibles (9-106) (p. 261): A general intangible is something which does not fit in with any other classification of collateral. (a) a liquor license is a general intangible (so is a gaming license)\ (i) but, if SC gets the license, cannot just open his own store, still has to independently meet state requirements (b) Federal regulatory type of licenses can be general intangibles (i.e. FCC license cannot automatically operate under it, but could control it.) Brown v. Yousif (p. 262): State Street Bank and Trust v. Arrow Communications Inc. (p. 266): Question: (p. 275) XVI. Multi-State Transactions (p. 276) 1) Introduction: (1-105, 9-103) (p. 276): (a) EXTREMELY IMPORTANT: must know which state law applies, so know how to perfect (filing, etc.) If file in wrong state, then not perfected, and would lose priority dispute. (b) Must include this as part of analysis: (c) How do you tell which states law is applicable? (i) First ask, what kind of collateral do I have under 9-103 (doesnt Problem 16-1 (p. 278) (a) Inventory: 9-103(1)(d) Even though the SI was property perfected in the state where the collateral was originally located, if the Circuit City moves the collateral to another state (w/ or w/o the SCs knowledge or consent), a reperfection in the new state would be required w/I 4 months of removal. Under 9-303(2) as long as the SC re-perfects the SI in the new state w/I the 4 month period (by a new filing or taking possession), the interest is deemed perfected from the date of the original perfection i.e. there is a relation back as against subsequent interest holders. (b) Accounts: 9-103(3) has no readily visible home base and for these assets the Code provides that SI must be perfected under the laws where the debtor is located. (c) Inventory of New (9-103(1)(a)) & Used Cars (9-103(1)(b)): 9-302(3) expressly exempts from any filing requirement any personal property covered by certificate of title under state law. 9-302(4) provides that in states having certificate of title systems, compliance with those laws is the only way in which a SI can be perfected in collateral subject to the laws. (d) Chattel Paper: 9-103(4): The location of the chattel paper rules, since perfection is by possession. Where the SI interest in chattel paper is perfected by filing, the Code reverts to the rule applicable to general intangibles that the filing must be in the debtors location. The rationale for 37

this is that chattel paper is readily transportable, and there may even be duplicate copies of the paper, therefore, the safest place to search for such filing is at the debtors location, rather than checking each state in which the debtor may have assets. (e) Investment Property: 9-013(6)(b): if sub (f) of this section does not apply since it is assumed that this is not a publicly traded security, but it is certificated, during the time that a security certificate is located in a jurisdiction, perfection of a SI, the effect of perfection or non-perfection, and the priority of a SI in the certificated security represented are governed by the laws in which the security is located. (f) General Intangible: 9-103(3) Royalty is not an account because it is not for services rendered. They are considered general intangibles. 2) Documents, Instruments, and Ordinary Goods (9-103(1) (p. 278) Problem 16-2 (p. 278): This depends as to when the collateral was identified to the contract is when dealers interest was perfected. But assuming that the financing statement identified the specific tractor at the filing on March 4 th then 9-103(1)(b) governs the perfection of the SI on Willie. The rule states that except as otherwise provided in this subsection, perfection and the effect of perfection or non-perfection of a SI in collateral are governed by the law of the jurisdiction where the collateral is when the last event occurs on which it based the assertion that the SI is perfected or unperfected. The event on which the dealer can base its assertion that it is perfected under 9-203 are the conditions of attachment (SC gives value, debtor gave rights to the collateral), plus the other steps taken by the dealer to perfect. The last effect test looks to the law of Virginia, the state where Willie is physically located (the situs) when the last events occur to determine whether the SC has perfected properly. Willie was located in North Carolina when the financing statement was filed. The law of perfection is determined where the last situs of Willie was. Therefore there would have to be a filing in North Carolina under their 9-401 (locally). The dealer could refile on March 7 in Virginia to perfect in Willie. KNOW WHERE THE COLLATERAL IS LOCATED. Gennet v. Fason (p. 279) The trustee argued that the time for re-filing started to run when review this case. July 12, 1999 Class (pp. 286-306 ) Problem 16-3 (p. 286): 3) Good Covered by Certificates of Title (9-103(2)) (p. 286) Not under 9103(2) unless the goods are titled. Orix Credit Alliance, Inc. v. Heard Family Trucking, Inc. (p. 287) Just because the people lived in a state under where the title was not issued. Chrysler Credit Corporation v. Religa (In Re Males) (p. 290): Males (debtors) lived in New Hampshire and the Chrysler Credit Corporation (secured party) properly obtained a New Hampshire certificate listing its lien on their cars. The debtor then moved to New York, where they registered the cars and obtained license plates. The State of New York, however, never issued a new certificate and the secured party thus was never contacted and asked to surrender its old certificate. More than 4 months after they 38

moved, the debtors filed for bankruptcy relief and their trustee argued that the secured party had become unperfected under 9-103(2)(b). The 2nd Circuit held that the car had not been registered in New York within the meaning of the Code, even though the debtors had advised that state of their presence and had obtained license plates. According to the court, registration requires that the new state issues a certificate of title upon being advised of a debtors presence, not just issue license plates. Unless a new certificate is issued to the debtor, the rights of the 3rd parties will not be prejudiced. As a policy matter the drafters were probably worried that another state might issue a clean certificate to the debtor, who could then use it to mislead 3 rd parties. 4) Accounts, General Intangibles, and Mobile Goods (9-103(3)) (p. 299) Problem 16-4 (p. 299):Assuming the collateral (equipment) is changing locations during the attachment and perfection, the last-event test may get sticky as to where the property is located. If a judgement creditor of WCI levies on the equipment not in the jurisdiction of last event, before the equipment is returned to Kansas, the creditor would ;obtain a priority over Friendly Finance. The last-event test directs that a filing must be in Kansas, Missouri, and Nebraska, a filing in Kansas alone would not be enough. Under the other states priority rules, if they are the same as Kansas, if 9-103(1)(b) is in effect in all states, the judgement creditor would qualify as alien creditor and take priority over the unperfected secured party. In this case look at 9-103(3)(d) the debtors ( WCI) chief place of business (home office) in Kansas is where financing statement should be filed. XVII. Proceeds (p. 300) 1) General Considerations (9-306 & 9-203) (p. 300) 2) Defining Proceeds (p. 300) Problem 17-1 (p. 300) In re: Mintz (p. 301) Citizens Savings Bank, Hawkeye, Iowa v. Miller (p. 303): Off-springs are not a proceeds in the place 3) Attachment (p. 305) Problem 17-2 (p. 305) July 14, 1999 Class (pp. 306-330, 347-352, 354-359, 382-388) Bombardier Capital, Inc. v. Key Bank of Maine, et. al. (p. 306): The proceeds arose from the disposition of collateral in which one SC#1 had a SI in and the other SC#2 had SI in. In this case the court said that where the proceeds arose from multiple creditors and you have to look at it on a pro rata case. LOWER INTERMEDIATE BALANCE. (i.e. $100K is owed to one and $50K to another then any proceeds 1/3 and 2/3 would be the split). 4) Perfection (p. 311): Perfection attempts to provide notice to third parties of the security interest. Three basic methods of perfection exist: filing a UCC-1 financing statement; filing a copy of the security agreement; or taking possession or control of the collateral. Perfection under the UCC The UCC distinguishes between different types of collateral. In turn, the appropriate method of perfection turns on the type of collateral. 39

The most common method of perfection is filing a UCC-1 financing statement with a central authority, such as the Secretary of State. A financing statement is not the security agreement (although it can be); it need only contain the names of the parties and a summary description of the collateral, among other things. See UCC 9-402(1). With some types of collateral, most often fixtures (personal property attached or affixed to real property, such as the chairs in class) and farm products, you must also file locally with someone like the county recorder. Finally, a secured creditor can perfect by taking possession of the collateral. Pawn shops engage in this brand of perfection. Indeed, with some types of collateral such as negotiable promissory notes, perfection is the only acceptable method of perfection. Perfection and Real Property Perfection of an interest in real property typically requires recordation of the entire security agreement (the mortgage) in the place where real property deeds are recorded. In addition to execution and delivery, state law often requires acknowledgement (having the signatures notarized or otherwise attested to). Assignment of real property rents presents a problem. Under the law of many states, the secured creditor must exercise or attempt to exercise some dominion and control over the rents in order to perfect (or, technically, to make choate) the interest in the rents. Appointment of a receiver, or the sending of notices to tenants to pay all rents to the secured party directly, typically satisfies this requirement. Problem 17-3 (p. 311): The sales slip that Sam signed was an account. Since there was only a SA on the inventory and not the account there is no attachment or perfection in that type of Karens collateral. However, since this is also proceeds of the inventory, according to 9-306, there is an attachment since it is identifiable, and there would be perfection as well, since 9-306(3)(a) and 9-301, the filing for the inventory and for the account would be in the same place. Problem 17-4 (p. 311): However since the SA mentioned only inventory, any account which Karen has which did not arise as proceeds would not be attached (9-306(2)) and perfected (9-306(3)(a))(if the proceeds are acquired with cash proceeds, the description of collateral in the financing statement must indicate the types of property constituting the proceeds..) as well. Problem 17-5 (p. 311): (a) The bulldoze is equipment and as such must be filed in two places where the other equipment only had to filed in one location, according to 9-306, there is an attachment since it is identifiable, and there would be perfection as well, since 9-306(3)(a) and 9-301, the filing for the tractor et.al. and for the tractor would be different. 40

(b) (c) 9-306(3)(b) The lowest intermediate balance rule would apply. Problem 17-6 (p. 311): Problem 17-7 (p. 312): The question here is who has priority? Both have perfected SI uner 9306(6)(b) PMSI would have a super priority under 9-312(4). In re: Kerner Printing Company, Inc. (p. 312): 1) Although 9-406 allows a SC to file a release as to the financing statement you have to make sure this is what you want to do. In this case the SC did this in certain equipment that was sold by the debtor and then turned around and claimed a SI in the proceeds. The courts said you cant do this. Once you lose the SI in the original collateral, you cant claim attachment to a proceed when you have lost your attachment to the original collateral. 2) The SC was still able to win as to the chattel paper because the debtor made an assignment of the chattel paper to the original SC. This would be found under 9-102(2)(b). 5) Security Interest in Proceeds v. Banks Right of Setoff (p. 321): a) Cash Proceeds (1) Identifiable? 9-306(4)(a-c) (a) 9-306(4)(a): if perfected as to cash proceeds under (3), then are perfected here (also if single account containing identifiable proceeds) (b) 9-306(4)(b): identifiable cash proceeds, not commingled (does not happen very often). (c) 9-306(4)(c): checks which have not been deposited yet in an account. (2) Co-mingled? Then only have perfection under 9-306(4)(d) (a) 9-306(4)(d): (i) Can never get more than what was deposited less than 10 days before bankruptcy. (ii) Have to show that the proceeds were from this disposition of the collateral (iii) Have to apply the lowest indeterminable balance rules (iv) Bank has set-off rights- (where bank is also a creditor, can draw on the account) Majority Rule: Bank usually loses under 9-201 against the secured creditor. Minority Rule: If Bank makes set-off right notation on the account before the SC becomes perfected SC, then first in time rule applies, and the Bank wins. Pennsylvania National Bank & Trust Company v. CCNB Bank, N.A. (p. 322): Bank of Kansas v. Hutchinson Health Serv., Inc. (p. 325)

July 19, 1999 Class (REVIEW 547 of the BANKRUPTCY CODE) PREFERENCES SHOULD BE LOOKED AT AND IS DEFINED IN 547(b). The Trustee has no right to avoid a SI unless there is a preference as defined in 547(b). The TRUSTEE MUST MEET ALL 5 AREAS OF PREFERENCES TO MEET THIS. 41

ANTECEDENT MEANS DID THE DEBT OF THE DEBTOR AFTER THE DEBT? 547(e): WHEN THE TRANSFER OCCURS 547(c): EVEN IF A PREFERENCE IS DETERMINED, THE EXCEPTIONS ARE LISTED HERE. XVIII. IRS Liens: A) To make this affective the IRS must file the lien. If a SC is first in filing, they are first In regards to collateral. Future advances the SC must make the advance w/o knowledge and w/I 45 days or the SC has no priority as respect to the future advance. XIX. Bankruptcy (pp. 347-352; 354-359; 382-388): Governed by the Federal Bankruptcy Code KNOW CHAPTER 544 and 547 FOR EXAM A) Introduction (p. 347): 1) Chapter 7 deals with liquidation (straight bankruptcy). 2) Chapter 9 Limited to municipalities 3) Chapter 11 reorganization, business will continue to have time to pay its debts many big businesses have used this. a) debtor handles (call Debtor in Possession, or DIP) B) Effect of Filing Automatic Stay 1) Bankruptcy Code 362 imposes an automatic stay of virtually all actions that might affect the bankruptcy proceedings. a) Prevents the SC from taking from repossessing, perfecting, taking judicial action C) Unperfected SI

D) Effect of Filing General (p. 352) E) Effect of Filing After Acquired Property (p. 352) b) Scope of the Stay 362(a-b) (p. 354) Problem 19-2 (p. 354) Commercial Credit Corp. v. Reed (p. 355) F) Delayed Perfection and Attachment Strong Arm Clause, Preferences, etc. 9-301 and Bankruptcy Code 544(a).(p. 382) Problem 19-4 (p. 387) PREFERENCE: B.C. 547(b): Determine if there is a preference 1) Determine if there was a preference a) 547(b)(1) grant of a SI occurs when there is attachment b) 547(debt that is created must be prior to the transfer for there to be a 42

c) Transfer must occur when 547(f) debtor is insolvent (debts exceed your assets or you are unable to pay your debts) 2) Dd Review 19-4 (p.387 see notes) 574(b) with (e) was designed to see if the debtor during the period of insolvency tried to better their position. When can a trustee defeat an Art. 9 security interest because it improves the position of the creditor (547(b). 547(e) tells you the time of the transfer by looking at when attachment and perfection occurred.

19-4 (p. 387) (a) 1) When was debt created? 6/1 2) Attachment created? 6/1 3) Perfection? 6/7 4) When did transfer occur? 547(e)(2)(B) transfer occurred on date of perfection 5) Transfer made on account of an antecedent debt? Debt occurred on 6/1.. Transfer on 6/1. This was made while the debtor was solvent. NO. (b) 1) When was the debt created? 2) Attachment created? 3) Perfection? 4) When did the transfer occur? 547(e)(2)(B) transfer occurred more than 10 days after debt occurred, therefore this is an antecedent debt. The time of transfer was when the debtor was insolvent. The time of transfer was within the 90 days preceding the filing of bankruptcy. All of 547 is met, therefore the Bankruptcy Trustee would win. (c) 1) When was debt created? 2) Attachment created? 3) Perfection occurred? 6/15 4) When did the transfer occur? 547(e)(2)(B) transfer occurred more than 10 days after the debtor occurred, therefore it is an antecedent debt. The time of transfer was when the debtor was insolvent. The time of transfer was before the 90 days preceding the filing of bankruptcy. Therefore no preference to the Trustee (d) 1) When was debt created? 6/1 2) Attachment created? 6/6 3) Perfection? 6/15 4) Bankruptcy filing 8/15 5) When did transfer occur? 6/6 6) True transfer occurred when Attachment = value+debtor has rights in collateral 43

7) This is a transfer for an antecedent debt. 547(e)(2) debt occurred before the time of transfer. 547(e)(2)(A): Time of transfer was while the debtor was insolvent and within the 90 day window. (e) 1) Time of transfer 6/4 2) This was for an antecedent debt, but it occurred before the debtor was insolvent. Therefore there was no preference and the Trustee would lose. There is no preference. 547(c): EXCEPTIONS TO PREFERENCE (c)(1): Substantially Contemporaneous :

PROCESS FOR SECURED TRANSACTIONS: Secured Creditor v. Other Claimant Secure Creditor v. Debtor 1) Scope of interest 1) Scope of interest 2) Intent 2) Intent 3) Attachment (9-203) 2) Attachment (9-203) (a) Classification of collateral (b) After acquired (c) Proceeds (d) Perfection (fixture filing, dont assume that filing perfected look at all ways to this) side rules to fixtures and proceeds 9-306(3-5) are all about how to perfect in proceeds, multi-state issues, is there a PMSI (e) Either possession by creditor w/ debtors agreement or a Written Security agreement which must contain: (1) Signature by debtor (2) Description of collateral or real estate (b)Value given (creditor gives value (b) Debtor must have rights in collateral Other Claimants: 1) Another SC go through above steps.9-312 (priority) 9-308, 2) Buyer 9-201 , 307(1-2( 301(1)(c)( 306(2) 3) Trustee in Bankruptcy 4) Statutory Lien Holder 5) Lien Creditors 6) Creditors of a consignee 7) Surety is treated like a debtor 8) Surety with an equitable subrogation right against a SC (not in Art. 9) Priority Section is applied

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June 21, 1999 Class (1 factor pattern and a-h off of the fact pattern) XX. Default (Chapter 20) Secured Creditor and Debtor: A) 5 of the UCC Perfection not relevant is a matter between the SC and the debtor, so only need proper attachment (9-203). So, in analysis, always check for attachment before checking for default. B) Default not defined in the UCC 9-503 says in default under a SA, so default is usually defined directly in the SA. 1) No right to cure usually there is no right to give extra time given, if one payment missed = default. 2) Good Faith and Subjective Catchall provision: usually in SA a provision says creditor may declare itself to be in default. A creditor cannot exercise such a provision unless has GF. 3) GF and objective Default: What about foreclosure after debtor objectively defaults, i.e. misses one payment? a) Maj. Rule: GF not relevant to how creditor acts when debtor does objective breach. b) Min. Rule: GF is relevant 4) Waiver/Estoppel in code1-103 a) Waiver: intentional relinquishment of a known right. b) Estoppel: where one changes position to their detriment in reliance on your actions, you can be bound to those actions and what they implicitly or explicitly declare (intent not relevant) (1) easier to prove than waiver (no intent needed) c) Anti-Waiver Clause are they binding? Maj. says yes. d) Retraction of Waiver by telling other party that it will now be expected to hold to the literal conditions of the agreement (gets it back ot square one). C) 9-503 Creditors Option on Default 1) Judicial Repossession/Replevin (detinue) 9-503 defined as judicial process in 9-503. Is an action for only the collateral (not full secured debt) called a replevin action. a) (1) 2) Self Help Repossession 9-503 says party can get the collateral as long as he does not breach the peace. a) What is breach of the peace? b) Duty of reasonable care - 9-207 duty of reasonable care applies when the SC repos the collateral. c) Items of Personalty in Vehicle must return these promptly or will be liable for conversion. 3) Lawsuit (9-503 judicial action): can bring a lawsuit for the amount due (which, if there is an acceleration clause, but upon any other property of the debtor. 4) Collection 9-502 If the collateral is accounts, according to 9-502(1) the SC has the right to notify the account debtor (the person who owes 45

money to the debtor) that he is from now on to pay the SC and not the debtor. D) 9-504 Disposing of the Collateral after repo 1) SC can sell or lease or otherwise dispose of the collateral. Proceeds of the sale go to: a) 9-504(1)(a): to the expenses for the repo, the paying of the lawyer, etc. b) 9-504(1)(b): to pay off the creditor debt. c) 9-504(1)(c): to any 2nd in line SI (if the 2nd in line gives notice prior to distribution of the proceeds) d) If any left after the above, then: (1) 9-504(2) debtor gets the surplus (usually nothing left) e) If the collateral did not suffice to pay off the creditor debt, the SC can sue the debtor for the deficiency 9-504(2) (1) If the underlying transaction was a sale of account of chattel paper, the debtor liable for any deficiency ONLY if the SA so provides. E) 9-504(3) How SC may dispose of collateral 1) How sale must be conducted: SC can sell, lease, or dispose of any or all of the collateral in its then condition of following any commercially reasonable preparation or processing. Disposition is subject to several restrictions: a) Commercially reasonable: (1) Notice: 9-504(3), the notice must be given (unless falls under exceptions), (2) If commercially reasonable sale the rebuttable presumption is that in a sale there was enough money in the sale (Creditor can show this is not true) (3) Ohio says in consumer goods case that if there is a deficiency in the sale, the sale is still commercially reasonable. (4) Accounting for surplus: 9-504(2) -b) Adequate price: (1) Could a better price have been gotten? (2) Wholesale or Retail Standard to be used? (a) (3) Self-Dealing by the SC (a) Any sign of self-dealing or unfairness by the SC is likely to result in the sale being declared to be commercially unreasonable. SC bids-in at a sparsely attended auction, gets the collateral, then sells it for much higher shortly thereafter. Held: This is commercially unreasonable. SC knows that some possible bidders are interested in collateral, but does not give them notice, and gets it himself. Held: this is commercially unreasonable. (4) Private Sale:

46

(a) If the SC decides to sell the collateral at a private sale, he should generally procure more than one bid, or could be Commercially un-reasonable. F) 9-505 Strict Foreclosure G) 9-506 Debtors Right to Redeem Collateral: q < H) 9-507 Consequences for the SC who does not follow 5 correctly

47