Secured Transactions Outline 1_.docx.pdf

SECURED TRANSACTIONS

Scope of Article 9...........................................3

Covered by Article 9...................................3

Not Covered by Article 9............................3

Filing Safe Harbor §9-505..........................4

Consignment...............................................4

Leases v. Sale..............................................5

Surety..........................................................6

Supporting Obligations...............................6

Categories of Collateral..................................7

Creation of Security Interest (Attachment)...11

Attachment § 9-203..................................11

Contents of Sec. Agmt. § 9-203(3)(b).......11

Contents of a Finance Stmt 9-502(a)........12

Incorrect / Seriously Misleading §9-50612

Name of the Debtor..............................13

Name Change........................................13

Description of the Collateral.................14

Creation of PMSI § 9-103.........................14

Sale on Approval (Test-Drive)..................14

Owner of Collateral Must Sign S.A..........14

Perfection of Security Interest......................14

Duration of F.S. Perfection §9-515...........14

Lapse and Continuation Stmt §9-515(d)...14

Termination Stmt §9-513..........................15

Mistakes by Filing Office § 9-516............15

Filing Not Necessary 9-310(b).................15

Perfection by Possession...........................15

Field Warehousing................................16

Temporary Perf. of Possess. S.I............16

Automatic Perfection................................16

Perfection by Control................................17

Multistate Transactions.................................18

Where to File............................................18

Location of the Debtor..............................18

If Debtor Moves to a Different State........19

If Debtor Merges and Relocates...............19

Certificates of Title...................................19

Priority..........................................................21

Simple Disputes........................................21

Floating Liens...........................................21

Possessory Perfection...............................21

Dragnet Clauses........................................22

Purchase Money Security Interest............22

20 Day Filing Grace Period §9-324(a). 22

Negative Equity....................................23

PMSI in Inventory § 9-324(b)..............23

Consignments are PMSI in Inventory...23

Control and Priority..................................23

Investment Property..............................24

Deposit Accounts..................................24

Buyers.......................................................25

Buyer in Ordinary Course of Bus.........25

Layaway Protections.............................26

Intermediary Sellers (Deering Rule).....26

Buyer In OC Must Purchase for Value. 26

Appearance of OCB..............................26

“Tricky Buyer” Situation......................27

“Garage Sale” Exception......................27

Lease in the Ordinary Course of Business27

Article 2 Claimants...................................27

Jilted Buyer Revokes............................27

Bad Check Payment..............................28

Discovery of Buyer’s Insolvency.........28

Statutory Lien Holders..............................28

Fixtures.....................................................29

Contents of a fixture filing....................29

Determining if a fixture........................30

Constr. Mortg. Super Priority...............31

Encumbrancer Has Priority in Fixtures 31

Exceptions to Encumbrancer Priority...31

Right to Remove Fixtures, Injury.........32

Tax Lien....................................................33

Federal Priority Statute.........................33

Tax Liens – Basic Priority....................33

PMSI has Priority over Tax Lien..........33

Tax Liens and Floating Lien.................33

Tax Liens and Future Advances............34

Advances...................................................34

Debtor Sells Collateral..........................34

Lien Creditor and Advances.................35

Bankruptcy and Article 9..............................36

Trustee Avoidance Powers § 544(a).........36

The Moment of “Transfer”.......................36

Trustee Preference Avoidance § 547.........37

Exceptions to Preference Avoidance.........38

Floating Liens in Bankruptcy...................39

Fraudulent Transfers §§ 548, 544(b)........39

Proceeds........................................................39

Secured Party’s Rights to Proceeds..........40

Creditor Must Refile F.S. in Proceeds......40

Transferee of Money Takes Free of S.I.....41

Bank’s Right of Set-off § 9-340................41

Insurance and Judgment Awards...............41

Grace Periods................................................41

SCOPE OF ARTICLE 9

§ 9-109(a) General scope of article: this article applies to:

(1) a transaction that creates a security interest in personal property or fixtures by contract;

(2) an agricultural lien;

(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;

(4) a consignment;

(5) a reservation of a security interest (2-401), negotiable bill of lading reserving a security

interest in the goods (2-505), a security interest in goods in buyer’s possession or control, upon

rightful rejection or justifiable revocation of acceptance (2-711(3))…

The UCC explains that a debtor is insolvent if the debtor is unwilling or unable, in the

ordinary course of business, to meet the debtor’s financial obligations as they become due.

U.C.C. § 9-201(b)(23).

Covered by Article 9

-Security interest in personal property. §9-109(a)(1)

-Security interest in fixtures. §9-109(a)(1)

-Agricultural lien. §9-109(a)(2)

oA statutory lien in farm products that secures payment or performance of an

obligation relating to goods or services provided in connection with a debtor’s

farming operation.

-Sale of accounts. §9-109(a)(3)

-Sale of chattel paper. §9-109(a)(3)

-Sale of payment intangibles. §9-109(a)(3)

-Sale of promissory notes. §9-109(a)(3)

-Non-obvious Consignment (owner of goods not generally known by creditors) §9-109(a)(4)

-Negotiable bill of lading per 2-505. §9-109(a)(5)

-Security interest (possessory) arising from buyer’s rejection/revocation 2-711(3). §9-

109(a)(5)

-“Disguised Sale” Lease. §1-203 (if a disguised sale on credit, seller-lessor must perfect S.I.

in sold-leased goods)

Not Covered by Article 9

-Conditional Sales §2-401(1). Any retention or reservation of title is limited in effect to a

reservation of a security interest. This means that seller may later get a security interest in

item purchased by the buyer to cover the original transaction.

-Statutory Lien (e.g. artisan’s lien, mechanics lien, etc.). §9-109(d)(1)-(2)

-Negative Pledge. See Chase v. Gems.

-Obvious Consignments (owner generally known by creditors). §9-102(a)(20).

-Leases. §1-203

-Surety Bonds (surety has superior rights against creditor under right of subrogation). See

New Mexico State Highway & Transp. Dep’t v. Gulf Ins. Co.

-Wage assignments. §9-109(d)(3).

-Security Interests in Real Estate (Mortgages). §9-109(b)

-Non-Financing Assignments (Transfers Incident to Sale of Company). §§9-109(d)(4)-(7)

(transfers of accounts, chattel paper, payment intangibles, and promissory notes).

-An assignment of a right to payment under a contract to an assignee that is obligated to

perform the contract. 9-109(d)(6)

-Accounts sold to debt collection agency. 9-109(d)(5)

-Transfer of single account, payment intangible or promis. note to pay debt. 9-109(d)(7)

-Consumer bank account. 9-109(d)(13)

-Assignment of sums recovered in a lawsuit. 9-109(d)(9)

Filing Safe Harbor §9-505

If a person claims that a transaction is a lease, consignment, bailment, license, or otherwise, but

nevertheless files a financing statement proclaiming a security interest, the act of filing is not

dispositive against the actor to assert that the transaction created a security interest.

CONSIGNMENT

Non-obvious consignments are covered by Article 9; obvious consignments are not. Under

an Article 9 consignment, the consignor (person who owns the goods) is the creditor who retains

a security interest in his goods and the consignee (person who sells the goods on behalf of the

owner) is the debtor.

Under Article 9, a consignment transaction has three basic categories of requirements

governing: (1) the parties, (2) the goods, and (3) the existence of a security interest. First, for the

parties, there must be a person who delivers goods to a merchant for sale. That merchant must be

one that (1) deals in goods of that kind under a name other than the name of the person making

the delivery, (2) is not an auctioneer, and (3) is not generally known by its creditors to be

substantially engaged in selling the goods of others. See id. at § 9-102(a)(20)(A). Second, to be a

qualifying consignment, each delivery of goods both (1) must be worth $1,000 or more at the

time of delivery (in the aggregate) and (2) must not be consumer goods immediately before

delivery. See id. at § 9-102(a)(20)(B) & (C). Third, the transaction must not create a security

interest that secures an obligation. See id. at § 9-102(a)(20)(D). All these requirements must be

met for a transaction to be a consignment under Article 9.

Consignments § 9-102(a)(20)

Consignment means a transaction in which a person delivers goods to a merchant for the purpose

of sale and:

(A) the merchant:

(i) sells goods under a different name than the consignor (the person who gives the merchant

the goods to sell);

(ii) merchant is not an auctioneer

(iii) merchant is not generally known by its creditors to be substantially engaged in selling

goods of others

(B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time

of delivery;

(D) transaction does not create a security interest that secures an obligation.

Consignor is the secured party and will retain title until sale where it will

pass to buyer

Once that happens go through proceeds as normal

Consignee (9-102(a) merchant) is the debtor (9-102(a)(28))

ONCE YOU DETERMINE YOU HAVE A CONSIGNMENT UNDER 9-102, YOU NEED TO

TAKE THE PROPER STEPS TO PERFECT THE INVENTORY

Consignor’s Security Interest in Goods 9-103(d) A consignor retains a purchase money

security interest in goods sold on its behalf, which the consignor may perfect under 9-324(b)

(perfection of PMSI in inventory).

Obvious Consignment: When a creditor generally does know that a merchant sells the goods of

others, and thus is not covered by Article 9, the creditor knows that consignor, not the merchant,

owns the property. Therefore, the cosigner’s property is not subject to a security interest.

LEASES V. SALE

Leases not covered by Article 9, but lease contract can be used as a vehicle to create a security

interest. In that situation, lessor must file a financial statement to perfect its secured interest. in

the collateral that secures the lease payments. §9-109(a)(1)(consensual agreements granting

secured interest)

Sale 2-106(1) consists in the passing of title and possession from the seller to the

buyer for a price. In a true sale, *the seller does not expect to get the property

back once the buyer has made all payments

Lease 2A-103(1)(j) means a transfer of the right to possession or use for a term

in return for consideration, the lessor never plans to give up title, it plans to get

the collateral back and it *should still be economically useful when it does PP:

(lessors are treated better in bankruptcy which is why people do it)

“Disguised sale” leases are covered by Article 9.

- True Lease : Lessor retains property interest in leased equipment, may reclaim property in the

event of default. Lessee creditors may not access lessor’s property to satisfy lessee’s debts.

- “Disguised Sale” Lease : Putative “lessor” does not have property interest in “leased”

equipment, but instead has a security interest in the property to ensure payment for the sale,

enabling recovery if the lessee defaults, so long as they file as a secured party under Article

9. Failure to give notice of security interest means that security interest has not been

perfected, and other creditors may jump in front of lessor’s interest in repayment.

Distinguishing a lease from a SI 1-203: a factual inquiry is required to determine whether a lease

is actually just a sale w reservation of a security interest. (b) It is a sale w. reservation of an

interest if:

§1-203 Lease versus Sale

Prong One: § 1-203(b) A transaction in the form of a “lease” creates a security interest if … not

subject to termination by the lessee [AND]:

Prong Two: § 1-203(b)(1)-(4) There is no economic life left in the leased equipment at the end

of the putative lease arrangement.

(1) the original term of the lease is equal to or greater than the remaining

economic life of the goods;

(2) the lessee is bound to renew the lease for the remaining economic life of

the goods or is bound to become the owner of the goods;

(3) the lessee has an option to renew the lease for the remaining economic life

of the goods for no additional consideration or for nominal additional

consideration upon compliance with the lease agreement; [OR]

(4) the lessee has an option to become the owner of the goods for no

additional consideration or for nominal additional consideration upon

compliance with the lease agreement.

If these arent met, look at (c) to determine if it is a lease, although it is not dispositive, and look

to the economic realities test:

Lease price exceeds economic value of the property: § 1-203(c) That the lease price exceeds the

economic value of the equipment is not, by itself, dispositive in determining that a transaction is

a sale; this analysis is fact specific.

A lease will not create a security interest just because:

(1) the value of the consideration paid is substantially equal to or greater than fair

market value

(2) lessee assumes risk of loss

(3) lessee agrees to pay taxes, insurance, filing, etc

(4) lessee has option to renew lease or become owner for consideration

(5) lessee has option to renew for a fixed rent that is equally or greater than the fair

market rent

(6) lessee has option to become the owner of the goods for fixed price equal or greater

than fair market value

Economic Realities Test: If (1) at the outset, the parties expected the goods to retain some

significant residual value at the end of the lease term and (2) the lessor retains some possibility

of gain or risk of loss of the goods at the end of the lease, then it’s a true lease. If not, it may be a

sale with reservation of a security interest, even if it falls outside of 1-203(b)

Lessee in ordinary course of business takes free of security interest: A lessee takes a leasehold

interest subject to a security interest held by a creditor to the lessor, unless lease take place in the

ordinary course of business, § 2A-307(3), even if the security interest is perfected and the lessee

knows of its existence, § 9-321(c).

Surety

A surety bond does not create a security interest; Sureties have priority over security interests

under the common law right of subrogation.

Supporting Obligations

- Attachment of supporting obligations is automatic. 9-203(f)

- Perfection of supporting obligations is automatic. 9-308(d)

CATEGORIES OF COLLATERAL

The category of collateral is determined by

its primary use from the point of the debtor at

the time of purchase

GOODS (§ 9-102(a)(44) c.f. §2-105) (ALL THINGS MOVABLE WHEN ATTACHMENT)

- Consumer goods §9-102(a)(23)

oPerfection by filing or possession

oNo floating lien in consumer goods past 10 days of attachment

oSecurity agreement must describe consumer goods with particularity

oFamily/household

oMUST BE MORE SPECIFIC IN Security Agreement



- Equipment §9-102(a)(33)

oPerfection by filing or possession

oNo 45 day tax lien grace period for after-acquired equipment in floating lien

oGoods that are not another category. Generally fixed assets with long period of use

(employee uniforms)

- Farm Products §9-102(a)(34)

oPerfection by filing

oFarm products are goods in or close to their natural state. If farm product has undergone

manufacturing process, the farm product becomes inventory. (i.e. hog turns into bacon)

i.e. if farmer grows raw tomatoes and sells canned, the raw will be farm

products and canned will be inventory

oDebtor must be engaged in farm operation under 9-102(a)(35) include crops, livestock,

and supplies used in operation. If products are subject to manufacturing, becomes

inventory. Includes seeds, tractor fuel

oFarm products are goods used or produced by a farmer, including crops and livestock and

their products, and supplies used or produced in a farming operation. U.C.C. § 9-102(a)

(34).

- Inventory §9-102(a)(48)

oPerfection by filing or possession

Debtor 9102a28A: someone with an interest in collateral other than a

security interest

Obligor 9102a59 someone who owes payment/performance subject to a

security interest in collateral (debtors are commonly obligors)

Creditor 1201b13 obligor owes payment to this person

Hypo: T borrows 8K from the bank and signs a promissory note. His sister S also signs the

note and grants the bank a security interest in her car. T is obligor and S is a debtor and

obligor: The bank here is the secured party, T is obligated to pay off the loan so he’s the

obligor. S is the one who puts up car so she’s the debtor and in signing note she also becomes

obliged to pay off debt, but only her car is being put up as collateral, debtor.

    Consumer Goods  

  Goods Farm Products  

    Inventory  

    Equipment  

    Instrument  

    Document  

  Quasi Int.  Chattel Paper  

    Investment Property

Letter of Credit Right

Commercial Tort Claim

    Accounts  

    Deposit Accounts  

  Intangibles   General Intangibles Software

      Payment Intangibles

      Other General

Intangibles

Fixtures

TYPES OF COLLATERAL:

S Certificated Bearer Form

Registered Form

Investment

Property

S Entitlement

S Account

C Contract

C Account

oSpecial rules for PMSI in inventory

First, the PMSI must be perfected when the debtor receives possession of

the inventory. Second, the purchase-money secured creditor must send an

authenticated notification to each creditor with a conflicting security

interest in the inventory. Third, holders of conflicting security interests in

the inventory must receive this notification at any point within five years

before the debtor receives possession of the inventory. Fourth, the

notification must describe the inventory and clearly state that the person

sending the notification has, or expects to have, a PMSI in the described

inventory.

oInventory includes “goods used up or consumed in a short period of time in producing a

product or providing a service” even if goods are not held for sale. §9-102 Office

Comment 4(a).

oGoods which (b) are held by a person for sale or lease… (d) consist of raw materials,

work in process, or materials used or consumed in a business

oA category of tangible goods other than farm products, including items leased, held for

sale or lease, or furnished by a person under a contract of service, as well as raw

materials or materials used or consumed in a business.

QUASI-TANGIBLE PROPERTY (do have a physical form, occupy space, have to be present

and stored somewhere, and can be lost or stolen)

9-102(a)(70) Record: means information that is inscribed on a tangible medium

or which is stored in an electronic or other medium and is retrievable in

perceivable form. Need not be permanent or indestructible, not including oral

communication that is not stored in another way. Any writing is a record

- Instruments §§9-102(a)(47), 3-104 (e.g. promissory note)

oPerfection by filing or possession

oA check or note (3-104) any writing that evidences a right to the payment of a monetary

obligation, is NOT itself a security agreement or lease, and is of a type that in ordinary

course of business is transferred by delivery with any necessary indorsement or

assignment

-An instrument is a writing evidencing a right to payment of a

monetary obligation. U.C.C. § 9-102(a)(47).

- Investment Property §9102(a)(49) (e.g. stocks, bonds, rights to accounts)

oPerfection by control

oA certificated or uncertificated security, securities account

- Documents §§9-102(a)(30) and 1-201(16) (e.g. warehouse receipts, bills of lading)

oPerfection by filing or possession

oDocument of title or a receipt of the type described in 7-201(b), warehouse receipt, bill of

lading

- Chattel Paper (§9-102(a)(11)) (e.g. promissory note coupled with security agreement)

oRecords that evidence both a monetary obligation (secured by the goods or owed

under a lease of the goods, with respect to software used in the goods) and a

security interest in specific goods

oChattel paper is a record evidencing both a monetary obligation and a security

interest in specific goods. U.C.C. § 9-102(a)(11). Article 9 of the UCC includes

the sale of accounts, chattel paper, payment intangibles, or promissory notes. Id.

at § 9-109(a)(3).

Intangible Property (property having no significant physical form)

- Accounts Receivable §9-102(a)(2)

oPerfection by filing

oRight to payment for property that has been or is to be sold, leased, licensed, assigned, or

otherwise disposed of, services rendered or to be rendered, policy of insurance issued or

to be issued, secondary obligation incurred, energy provided or to be, hire of a vessel

under a charter, Arising out of the use of a credit or charge card or information contained

on or for use with the card, Winnings in a lottery or other game of chance

- Commercial Tort Claims §9-102(a)(13)

oPerfection by filing

oCommercial tort claims are tort claims in which either: (1) the claimant is an

organization, or (2) the claimant is an individual, the claim arose in the course of the

claimant’s business or profession, and the claim does not include damages for personal

injury or death. Id.

oMUST BE MORE SPECIFIC IN Security Agreement

- Deposit Accounts §9-102(a)(29)

oPerfection by control

oCreditor cannot take security interest in consumer deposit accounts; however, if

consumer deposit account is used for a business purpose, then the consumer bank account

becomes a business bank account which may be subjected to creditor’s security interest.

oDemand, time, savings, passbook, or similar account maintained with a bank. Does NOT

include investment property or accounts evidence by an instrument

- General Intangibles §9-102(a)(42) (i.e. contract right)

oPerfection by filing

oPersonal property, including things in action, other than accounts, chattel paper,

commercial tort claims, deposit accounts, docs, goods, instruments, investment property,

letter of credit rights, letters of credit, money, oil, gas, or other minerals before extraction.

Includes payment intangibles and software and any personal property.

Software 9-102(a)(76)

- Healthcare Insurance Receivables §9-102(a)(46) (subcategory of accounts)

- Payment Intangibles §9-102(a)(61) (subcategory of “general intangibles”)

- Letter of Credit Rights

oA letter of credit is typically contained on bank stationery and informs potential

beneficiaries that the debtor (the holder of the letter) has a particular amount of

money available for use, whether or not the beneficiary has yet demanded

payment or performance from the debtor.

Account §9-102(a)(2) means a right to payment of a monetary obligation for (i) sale, lease,

license, assignment or other disposition (ii) for services (iii) for insurance (iv) for a secondary

obligation… (vii) credit/debit card charges. The term includes health-care-insurance receivables.

-The term does not include:

o(i) rights to payment evidenced by chattel paper or an instrument

o(ii) commercial tort claims

o(iii) deposit accounts

o(iv) investment property

o(v) letter-of-credit rights or letters of credit, or

o(vi) rights to payment for money or funds advanced or sold, other than rights arising out

of the use of a credit or charge card or information contained on or for use with the card.

Instrument §9-102(a)(47) "Instrument" means a negotiable instrument or any other writing that

evidences a right to the payment of a monetary obligation, is not itself a security agreement or

lease, and is of a type that in ordinary course of business is transferred by delivery with any

necessary indorsement or assignment. E.g. promissory note.

-The term does not include (i) investment property (ii) letters of credit (iii) writings that

evidence a right to payment arising out of the use of a credit or charge card or information

contained on or for use with the card.

Payment intangible §9-102(a)(61) means a general intangible under which the account debtor's

principal obligation is a monetary obligation.

General intangible §9-102(a)(42) means any personal property, including things in action; does

not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods,

instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or

other minerals before extraction. The term includes payment intangibles and software.

General intangibles are any intangible or quasi-tangible personal

property that are not properly classified in another category of

intangible or quasi-tangible property. U.C.C. § 9-102(a)(42).

Promissory note §9-102(a)(65) means an instrument that evidences a promise to pay a monetary

obligation, does not evidence an order to pay, and does not contain an acknowledgment by

a bank that the bank has received for deposit a sum of money or funds.

Copyrights, Patents and Trademarks (Intangibles): A creditor with a security interest in

copyrights, patents or trademarks should file everywhere that might cover the transaction, even

though the law is entirely unclear about where the bank needs to file. §§ 9-109(c) and 9-311(a)

stipulate that if there is either a federal or state set of rules that cover a particular type of

transaction, then those rules follow and the UCC does not apply.

Wage Assignments: If a debtor offers “proceeds from commission from sales” as collateral for a

loan, the creditor should file a financing statement to perfect its security interest in the

commission. Article 9 does not cover wage assignments § 9-109(d)(3); courts have held that

commissions are not wages.

CREATION OF SECURITY INTEREST (ATTACHMENT)

Attachment § 9-203

(a) Attachment. A security interest attaches to collateral when it becomes enforceable against

the debtor with respect to the collateral, unless agreement expressly postpones attachment.

(b) Enforceability. A security interest is enforceable against the debtor and third parties with

respect to the collateral only if:

(1) Value has been given;

Value (has been given) 1-204 person gives value if the person acquires them

In return for a binding commitment to extend credit whether or not drawn upon

A security for satisfaction of a preexisting claim

By accepting delivery under preexisting contract OR

In return for any consideration sufficient to support a simple contract (look for value

flowing from secured party, peppercorn theory applies)

(2) Debtor has rights in the collateral; and

(3) One of the following conditions is met:

(A) Authenticated security agreement.

Authenticate 9-102(a)(7) to sign OR with intent adopt a record attach a sound, symbol or

process (only the debtor must sign, and it doesn’t have to be signed if there’s present intent)

(B) Pledge.

(D) Control.

Agreement 1-201(b)(3) bargain of parties in fact as found in language or inferred through 1-

303. Can be oral

Signed 1-201(b)(37) any symbol adopted with present intention to accept a writing

Writing 1-201(b)(43) printing, typewriting, any other tangible form. Record replaces the term

writing (com.9-9-102(a)(70) and does not need to be permanent. Doesn’t include oral)

Security agreement 9-102(a)(74) Comment 3(b) whether an agreement creates a security

interest does not depend on intent, but whether the transaction meets 1-201

Attachment when Goods Marked for Shipment: If creditor takes a security interest in after-

acquired inventory or equipment, and the debtor then purchases covered property, the creditor’s

security interest attaches to the purchased property once the seller packages and marks good for

delivery to the debtor. Packaging and marking a shipment creates an “insurance interest” in the

goods for the debtor, §2-501(1)(b), to which the creditor’s security interest attaches, §9-203(a).

Contents of a Security Agreement § 9-203(3)(b)

Must be (1) authenticated by the debtor and (2) describe the collateral. §9-203(3)(b)

-Security agmt need not be in any particular form or contain any particular words.

- A good security agreement… will name the events that would constitute default to permit

the creditor to realize on the security interest by repossessing collateral.

-Must typically meet statute of frauds (signed and in writing).

-If security agreement does not adequately describe the collateral, no attachment.

-The debtor has signed or otherwise indicated his assent to a written agreement.

Sufficiency of Description § 9-108

(a) description of collateral is sufficient if it reasonably identifies what is described.

(b) description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) a type of collateral defined in the UCC;

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) any other method, if the identity of the collateral is objectively determinable.

(d) must describe consumer goods with particularity.

SUPER GENERIC DESCRIPTION IS NOT SUFFICIENT

If credit card company executes security agreement with debtor card holder, can the credit

card company take security interest in all goods purchased with the credit card? The

answer to this questions depends on jurisdiction; some courts will find that this lists the items of

collateral with sufficient specificity, other courts will not.

If financing statement covers “inventory and equipment,” does this cover after-acquired

inventory and equipment? The answer depends on jurisdiction. Some courts infer that this

covers after acquired property. Others do not.

After acquired collateral 9-204(a) after acquired collateral can be in the description

except for consumer goods unless debtor acquires rights in them within 10 days after secured

party gives value

Contents of a Financing Statement 9-502(a)

A financing statement is sufficient only if it: (1) provides the name of the debtor; (2) provides the

name of the secured party or a representative of the secured party; and (3) indicates the collateral

covered by the financing statement.

-Description of the collateral can be broad.

-Creditor files financing statement; is authorized to do so by security agreement. §9-509

-ACCOUNTS AND GENERAL INTANGIBLES REQUIRE FILING TO PERFECT

Incorrect Filings / Seriously Misleading §9-506

Effect of Errors or Omissions §9-506

(a) Minor errors and omissions. A financing statement substantially satisfying the requirements

of this part is effective… unless seriously misleading.

(b) Seriously misleading. A financing statement that fails sufficiently to provide the name of the

debtor in accordance with Section 9-503(a) is seriously misleading.

disclose a financing statement that fails sufficiently to provide the name of the debtor, the name

provided does not make the financing statement seriously misleading.

Name of the Debtor

Name of Individual Debtor

§9-503(4) Alternate A (Wisconsin): If the debtor is an individual to whom this State has issued a

driver’s license that has not expired, the creditor should list the name on the driver’s license on

financing statement.

§9-503(4) Alternate B: The creditor should list the debtor’s name by providing (A) the individual

name of the debtor (B) the surname and first personal name of the debtor; or (C) provides the

name of the individual which is indicated on a driver’s license.

Name of Organization Debtor

(1) Sole Proprietorship – use the individual owner’s name, § 9-503(a)(4).

(2) Partnership – use the organization name, §9-503(a)(6)(A); if no organization name, use the

names of the individual partners, §9-503(a)(6)(B); to be safe, include both.

(3) Incorporated Entity (LLC, corporation, non-profit, etc.) – use the organization name as it is

filed in the articles of incorporation. §9-503(a)(1)

Name Change

Name Change for Individual Debtor: If debtor changes her name while the security agreement

is in effect, the creditor does not lose its security interest in the collateral obtained prior to, and

within four months of, the name change. Creditor does lose its security interest in collateral

obtained more than four months after name change, unless creditor amends its financing

statement to reflect new name. §9-507(c).

Name Change from Sale of Debtor Organization: The creditor need not refile to reflect the

change in ownership in the collateral. A filed financing statement remains effective with respect

to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a

security interest or agricultural lien continues, even if the secured party knows of or consents to

the disposition. 9-507(a).

Name Change from Merger of Debtor Organization: The merged company is a “new debtor.”

§9-508(a) perfection of security interest will survive in new debtor. §9-508(b) the security

interest will remain perfected within four months after the merger remains perfected for “new

debtor.”

Creditor Name Change: No requirement to change the name of the creditors on financing

statement, per §9-310(c).

A secured party who fails to file a financing statement in a

debtor’s new state is deemed to have never been perfected at

all, whereas a secured party who fails to file a financing

statement listing the debtor’s new name remains perfected in

collateral acquired before the name change.

Description of the Collateral

§ 9-504 Indication of Collateral: A financing statement sufficiently indicates the collateral that it

covers if the financing statement provides: (1) a description of the collateral pursuant to Section

9-108; or (2) an indication that the financing statement covers all assets or all personal property.

Creation of PMSI § 9-103

- Seller of Goods Retains PMSI: Merchant sells goods to buyer on credit, and executes a

security agreement which gives seller a security interest in the purchased goods.

- Lender Obtains PMSI: Creditor lends money to debtor for the specific purpose of buying

something, and executes a security agreement which gives creditor a security interest in the

thing bought.

oThere must be a “close nexus between the acquisition of the collateral and the secured

obligation (i.e. loan).” §9-103 Official Comment 3.

oTo ensure debtor uses money to buy property, creditor may identify person to whom

instrument is payable, § 3-110 (“payable to” instrument).

Sale on Approval (Test-Drive)

A sale on approval is not subject to the claims of the buyer’s creditors until acceptance. § 2-

326(1)-(2) (see also comment 1).

Owner of Collateral Must Sign Security Agreement

If a borrower offers a third party’s property as collateral for a loan, the owner of the collateral is

actually the debtor under Article 9 and the borrower is the obligor. If the owner of the collateral

did not sign the security agreement, the security agreement contract would not be enforceable –

because the putative “debtor” did not have the legal right to encumber the collateral.

PERFECTION OF SECURITY INTEREST

Perfection by Filing Necessary 9-310(a): Financing statement must be filed to perfect all

security interests and agricultural liens unless the security interest meets an exception.

Attachment is a pre-requisite to perfection 9-308(a).

Financing Statement May be Filed before Attachment 9-310(d)

Duration of Financing Statement Perfection §9-515

-A financing statement is effective for five years and then it lapses unless a continuation

statement is filed, per 9-515.

-9-515(c) if perfected security interest lapses, it is treated as if it were never perfected at all.

-9-308(c) so long as you retain continuous perfection, then you keep priority

Lapse and Continuation Statement §9-515(d)

-A continuation statement may be filed only within six months before the expiration of the

five-year period. §9-515(d)

-A continuation statement not filed within the six-month period is ineffective. §9-510(c).

-Financing statement lapses on the expiration of the period of its effectiveness. §9-915(c).

-If the security interest becomes unperfected upon lapse, it is deemed never to have been

perfected as against a purchaser of the collateral for value. §9-915(c).

Termination Statement (Clearing Security Interest) §9-513

-Once debt has been paid off, a debtor can demand that a secured party file a termination

statement at the filing office if the debtor has met its obligations. § 9-513(c).

-Former debtor can file termination stmt herself, if creditor gives permission. § 9-509(d)(2).

-Debtor can sue bank for non-compliance with demand for termination stmt. § 9-625(b).

-Debtor can sue for stat. damages of $500 for banks failure to file a term. stmt. § 9-625(e)(4).

- Bogus Financing Statements: The “debtor” can get a court order to remove the financing

statements. § 9-518. The innocent debtor may file into the record to make clear that a

particular claim is a bogus filing. UCC 9-513 Official Comment 3.

Mistakes by Filing Office § 9-516

What Constitutes “Filing” § 9-516

(a) Filing occurs when creditor communicates record to filing office and pays fee [or] filing

office accepts the record.

(b) Filing does not occur when filing office refuses to accept because: (1) record is not sent by

appropriate method (2) fee is not paid (3) filing office unable to index record because of defects.

Takeaway: If a creditor files all of the appropriate steps, but the filing offices fails to index

financing statement correctly, then the creditor is protected.

Perfection by Filing Not Necessary 9-310(b)

The filing of a financing statement is not necessary to perfect a security interest:

(1) Supporting Obligation: that is perfected under Section 9-308(d) (supporting obligation), (e)

(lien securing right to payment), (f) (security entitlement), or (g) (commodity account);

(2) PMSI: that is perfected under Section 9-309 when it attaches (PMSI in consumer good, sale

of payment intangible or promissory note, etc.);

(3) Statute: in property subject to a statute, regulation, or treaty described in Section 9-311(a);

(6) Possession: in collateral in the secured party's possession under Section 9-313;

(7) Certificated Security: in a certificated security which is perfected by delivery of the security

certificate to the secured party under Section 9-313;

(8) Control: in deposit accounts, electronic chattel paper, investment property, or letter-of-credit

rights which is perfected by control under Section 9-314;

(9) Proceeds: in proceeds which is perfected under Section 9-315

Perfection by Possession

-Perfection continues only while secured party retains possession 9-313(d)

- Perfection by possession only available for tangible property and quasi-tangible

property. Examples of quasi tangible property that may be perfected via pledge.

oPromissory note

oDocuments of title

oWarehouse receipt

-MUST POSSESS MONEY TO PERFECT

9-313(a) Perfection by possession or delivery: a secured party may perfect a security interest in

negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession

of the collateral.

9-313(c) Collateral in possession of person other than debtor: With respect to collateral other

than certificated securities and goods covered by a document, a secured party takes possession of

collateral in the possession of a person other than the debtor, the secured party, or a lessee of the

collateral from the debtor in the ordinary course of the debtor's business, when:

(1) the person in possession authenticates a record acknowledging that it holds possession of the

collateral for the secured party's benefit; or

(2) the person takes possession of the collateral after having authenticated a record

acknowledging that it will hold possession of collateral for the secured party's benefit.

- E.g. If creditor takes a security interest in debtor’s Picasso painting that is on display in a

museum, the creditor may get the museum to authenticate a record acknowledging that it

holds possession of the Picasso painting for the creditor’s benefit. This would perfect.

Field Warehousing

9-312(c) Goods covered by negotiable document: While goods are in the possession of a bailee

that has issued a negotiable document covering the goods: (1) a s.i. in the goods may be

perfected by perfecting s.i. in the document; and (2) a s.i. perfected in the document has priority

over any security interest that becomes perfected in the goods by another method.

- “If the collateral is in possession of an agent of the secured party for the purposes of

possessing on behalf of the secured party, and if the agent is not also an agency of the debtor,

the secured party has taken actual possession.” 9-313 Official Comment 3.

Temporary Perfection of Possessory Security Interests

Front-end Temporary Perfection § 9-312(e): A security interest in certificated securities,

negotiable documents or instruments is perfected for a period of 20 days from the time it

attached to the extent that it arises for new value under security agreement.

Maintenance Temporary Perfection § 9-312(f): Creditor has a 20 day grace period to maintain

perfect when documentation of title in secured property is in possession of debtor to maintain

property or prepare it for sale. UCC 9-312(f)

Automatic Perfection

Automatic Perfection § 9-309. The following transactions automatically perfect security

interest in collateral.

(1) a purchase-money security interest in consumer goods

(2) an assignment of accounts or payment intangibles

(3) a sale of a payment intangible;

(4) a sale of a promissory note;

(5) a security interest created by the assignment of a health-care-insurance receivable to the

provider of the health-care goods or services;

(10) a security interest in investment property created by a broker or securities intermediary;

PMSI in Consumer Goods: is perfected when attached, except with respect to consumer goods

that are subject to a statute or treaty. UCC § 9-309(1)*** (exceptions for PMSA automatic

perfection explained in §§ 9-311(a)-(b)). In general, a perfected PMSI in inventory has priority

over a conflicting prior security interest in the same inventory.*** Def: of PMSI in §9-301

Supporting Obligation and Proceeds Automatically Perfect

The attachment of a security interest in collateral also attaches supporting obligations 9-308(d)

The attachment of a security interest in collateral also attaches to proceeds from the disposition

of collateral 9-315.

Perfection by Control

For certain types of collateral, the secured party may achieve perfection of the security interest

by gaining control over the collateral. 9-314(a) provides that a “security interest in investment

property and deposit accounts may be perfected by control of the collateral under 9-104, 9-105,

9-106, or 9-107. Control also required for letter-of-credit rights and electronic chattel paper.

Control is the only legitimate method to perfect security interests in deposit accounts and

letter-of-credit rights. U.C.C. § 9-312(b)(1), (2).

MULTISTATE TRANSACTIONS

Article 9 primarily adopts the domicile approach and looks to the law of the debtor’s location as

the state in which the steps for perfection need to be taken. See 9-301(1)

- Choice of law only becomes an issue where jurisdictions depart from UCC.

-Section 1-301 permits party autonomy , so that those involved in a transaction may agree to

be bound by the law of any state or nation bearing a “reasonable relation” to the transaction.

In general, when one debtor transfers collateral to another debtor, the other debtor takes

the collateral subject to earlier-granted security interests. Any security interest the

receiving debtor might later grant in the collateral will be subordinate to any perfected

security interest that was already perfected when the collateral was transferred. If the prior

security interest is not perfected, a later-perfected security interest will take priority.

U.C.C. § 9-325(a). However, if the collateral is transferred to a debtor in a new state, a

secured creditor that has perfected its interest by filing a financing statement must take

additional steps to maintain its perfected interest, just as it must do any time a debtor

changes states.

Where to File

File to perfect in debtor’s location §9-301(1): Rules for perfection are dictated by the law of the

debtor’s location.

If collateral is tangible good 9-301(3): Rules of priority are dictated by the law of place where

collateral located.

If collateral is intangible good 9-301(1): Rules of perfection and priority are dictated by the law

of the debtor’s location.

No need to file pledge 9-301(2): No filing required. Therefore, the rules for perfection and

priority are dictated by law of place where collateral is located.

Location of the Debtor

Individual Debtor: individual debtor is located where he is domiciled. 9-307(b)(1).

Incorporated Entity: debtor is located where organization is registered. § 9-307(e)

Unincorporated Entity: two situations

-If debtor organization has one place of business, debtor is located at that p.o.b. 9-307(b)(2)

-If debtor organization has more than one place of business, debtor is located at chief

executive office. 9-307(b)(3)

Debtor in Foreign Country: the creditor should file in that country if the law of that place

requires filing in a manner similar to Article 9. If the law of that country does not, then the

creditor should file in D.C. § 9-307(c). Most countries don’t have filing equivalent to UCC.

If Debtor Moves to a Different State

Four Month Temporary Perfection § 9-316(a)(2): When debtor moves from one state to another,

creditor has four month grace period to re-file its security interest in new location.

-If creditor re-files within four months, the perfection does not lapse. §9-326(b)

-If creditor does not re-file in time, the perfection lapses; it is deemed never to have been

perfected as against a purchaser of the collateral for value. §9-915(c).

If Debtor Merges and Relocates in Another State

One Year Temporary Perfection §9-316(h): If debtor merges, relocates, and changes name,

creditor has one year grace period to re-file its financing statement and perfect in after

acquired collateral.

Four Month Temporary Perfection §9-316(i): If debtor merges, relocates, but does not change

name, creditor has four month grace period to re-file its its financing statement and perfect in

after acquired collateral.

Certificates of Title

Some states require certain goods to be registered by a certificate of title (such as a car). In those

situations, the law of the state where the title was registered dictates where perfection needs to

take place. The UCC says that when there are problems with certificate of title and a secured

transaction, look to the filing office – because it will likely be their fault. UCC provides little

guidance on how to resolve. Three main principals with certificate of title.

1. If something is covered by certificate of title law, then that certificate of title is the only

method that can be used to perfect a security interest. Filing will not do, creditor must get

their name on the title showing that they have a security interest.

2. If we have certificate of title that is registered in the wrong jurisdiction, we treat it as if it had

been in fact been registered in the correct registration. 9-303(a)-(c).

3. If there is a clean certificate of title that has been issued, and an innocent buyer purchases

that property not knowing that there was a security interest in the property, that innocent

buyer takes free of the security interest. 9-303(b) Exception: A used car dealer (or another

business that regularly deals in the transactions of that type of property) does not benefit

from that rule. It only applies to consumers.

Perfection and Priority in Goods Covered by Certificate of Title § 9-303

(b) When goods covered by certificate of title. Goods become covered by a certificate of title

when a valid application for the certificate of title and the applicable fee are delivered to the

appropriate authority. Goods cease to be covered by a certificate of title at the earlier of the time

the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time

the goods become covered subsequently by a certificate of title issued by another jurisdiction.

are covered governs perfection, the effect of perfection or nonperfection, and the priority of a

security interest in goods covered by a certificate of title from the time the goods become

covered by the certificate of title until the goods cease to be covered by the certificate of title.

PRIORITY

Simple Disputes

Perfected security interest has priority over unperfected security interest. 9-322(a)(2)

First-to-File Rule sets priority in conflicting perfected security interests. 9-322(a)(1)

Financing Statement may be filed before attachment. First-filer priority set by date of filing

regardless of whether or not attachment had taken place by the time of filing. 9-310(d)

PMSI has priority over perfected security interest, regardless of timing. 9-317(e)

Lien creditor has first-in-time priority over perfected security interest; lien creditor has general

priority over unperfected security interest, regardless of first-in-time rule. 9-317(a)(2).

- Lien creditor need not file under Article 9.

Bankruptcy trustee will win out over unperfected security interest, because trustee has status of

lien creditor. 9-322(a)(2).

Good faith buyer, if unaware of security interest, takes property not sold in the ordinary course of

business free of unperfected security interest. §9-317(b).

An unperfected security interest holder may repossess collateral in the event of debtor default, so

long as there is not a priority creditor ahead of him.

Floating Liens

A security agreement may create security interest in after-acquired collateral. § 9-204(a)

A security agreement may not attach to consumer goods acquired 10 days after the creditor gives

value. § 9-204(b)

If creditor enters lending agreement with debtor, with security agreement granting security

interest in collateral to secure future advances, the original perfection covers later advances. §9-

323(a), Official Comment 3. Creditor A enters into lending agreement with Debtor B, secured

by inventory. Debtor B pays off original loan amount. A month later, Creditor A advances

additional funds. That advance is (1) secured by the original agreement and (2) retains its first

filer priority from the date of the original security agreement and perfection.

Possessory Perfection

If creditor has possessory security interest, and creditor gives up possession, the creditor loses

priority and states again from the beginning because perfection lapses. §9-313(d).

- In bailee situations involving documents of title (field warehouses, for instance), a creditor

may have 20 day grace period. 9-312(f).

Dragnet Clauses

Cross-collateralization “dragnet” clauses bring in other debts to be covered by the security

agreement. “This security agreement covers all past, present and future loans.”

-Authority for dragnet clauses comes from 9-204(a) (security agreement may attach after-

acquired property) and 9-204(c) (security agreement may cover future advances).

-The “future advances or other value” need not relate to the purpose of the initial loan in order

for them to be covered by the original security agreement. 9-204 Comment 5.

-In the past, a number of states including Wisconsin determined that sometimes dragnet

clauses go too far. The test to determine validity of dragnet clause was to consider if the loans

covered by the dragnet relate to similar transactions.

Purchase Money Security Interest

-Perfected PMSI has priority over conflicting security interest in the same goods. 9-324(a)

-Perfected PMSI in goods has priority in proceeds. 9-324(a).

-PMSI in consumer goods automatically attaches and perfects. 9-309(1).

-If the seller extends credit to the buyer, ‘retains title to the goods, but does not take security

interest, then seller merely reserves a security interest but does not create a security interest.

-There must be a “close nexus between the acquisition of the collateral and the secured

obligation.” §9-103 Official Comment 3.

-To ensure debtor uses money to buy property, creditor may identify person to whom

instrument is payable. § 3-110 (“payable to” instrument).

-A security interest that arises if a debtor grants a creditor a security interest in property

to secure the loan of the money needed to buy the property being offered as collateral.

-To achieve super priority, a creditor with a purchase-money security interest (PMSI) in

livestock must take four steps. First, the PMSI must be perfected when the debtor

receives possession of the livestock. Second, the purchase-money secured creditor must

send an authenticated notification to each creditor with a conflicting security interest in

the livestock. Third, holders of conflicting security interests in the livestock must receive

this notification at any point within six months before the debtor receives possession of

the livestock. Fourth, the notification must describe the livestock and clearly state that

the person sending the notification has, or expects to have, a PMSI in the described

livestock. See U.C.C. § 9-324(d).

20 Day Filing Grace Period §9-324(a)

§§ 9-317(e) and 9-324(a): PMSI in non-consumer goods must be perfected during a 20-day

grace period following the buyer’s possession of the goods in order to take advantage of a

relation-back of priority to that date.

-If creditor files within 20 day window, then creditor takes PMSI super priority.

-If creditor misses 20 day window, then creditor may later file to perfect security interest

but will lose PMSI super priority.

Negative Equity

Negative equity can be a part of the value given by the creditor in a purchase-money

security transaction. If a debtor trades in property, such as a car, that is worth less than its sale

value because of the outstanding amounts owed on the property (negative equity), the dealer may

pay off the negative equity in the car as part of the value given to the purchaser to buy a new car.

-Old car is worth -$5000; New car is worth $2000

-Debtor trades in old car, buys new car. Creditor then pays off old car, and provides money to

pay for new car. Therefore, the debtor owes $25,000 and the creditor holds a PMSI in the

new car.

Perfection of PMSI in Inventory § 9-324(b)

PMSI holder in inventory has priority over competing claims if:

- PMSI is perfected before debtors receives possession § 9-324(b)(1)

- PMSI holder sends authenticated notification to the holder of conflicting security interest

(i.e. holder of floating lien in inventory) § 9-324(b)(2)

- Holder of the conflicting security interest receives notification within five years before

the debtor receives possession of the inventory; (this means PMSI holder can’t send more

than five years before) § 9-324(b)(3) [and]

- The notification states that creditor has or expects to acquire a PMSI in inventory and

describes the inventory. § 9-324(b)(4)

-NOTE: If creditor fails to satisfy notice formalities, creditor may only take a perfected

security interest in the inventory – not PMSI super priority in inventory – and will lose

against competing previously perfected floating lien in inventory.

PMSI continues in later inventory sales to debtor: When creditor makes arrangement for

PMSI in inventory, the creditor can continue to make PMSI sales to the debtor that have priority

for five years from the date of first delivery. §9-324(b)(3).

No 20 day grace period for filing of PMSI in inventory.

If bank loans purchase money, and takes PMSI in purchased goods, the bank has priority

over PMSI of seller of goods. §9-324(g)(1).

Consignments are PMSI in Inventory

Consignments defined in §9-109(a)(2). Article 9 Consignments are to be treated as PMSI in

inventory. §9-103(d). If consignor duly files financing statement, consignor has priority PMSI in

inventory. §9-324(b)

Control and Priority

“Control” is to intangibles what “possession” is to goods. Taking the steps for control gives the

world some notice at least that the creditor has legal rights in the intangible property that must be

respected. Control requires that the secured party take steps to make sure that it can reach the

rights of the debtor in the event that it needs to foreclose. Control as perfection method only

applies to investment property, deposit accounts and letter of credit rights.

Investment Property

First party to “control” investment property has priority §9-328(2)

Regardless of first-to-control rule, securities intermediary has super priority §9-328(3).

Secured parties may file to perfect, § 9-312(a), or may control to perfect, § 9-314.

-Control beats non-control perfection (9-328(1)).

-Certificated security is perfected by possession simply by holding that stock certificate.

-Securities intermediary has super priority §9-328(3). Control by a securities intermediary

(like a brokerage house) that gets a security interest in the securities account beats control or

non-control perfection by anyone else.

-Securities Entitlement is “ownership” one step removed . A has stock account with B. B holds

stocks in its own account on behalf of A. A has securities entitlement in stocks held by B on

A’s behalf.

oHolder of security interest in security entitlement may perfect by filing or control.

oControl perfection beats financing statement perfection.

-A secured party can demonstrate that it either houses or has the right to dispose of the

investment property for perfectiobn by control

Two Ways to “Control” Securities Entitlements § 8-106(d)

(1) “I am an owner” method § 8-106(d)(1): the secured party may get the securities

account changed so the secured party is the “owner” of the account, which is called

becoming an “entitlement holder” in the case of a security entitlement (def. in 8-501, def.

of “control” in 8-106(d)(1)); or

(2) “Follow my instructions” method § 8-106(d)(2): the secured party may reach

agreement with the intermediary (ie stock broker) and the debtor that the intermediary

will follow any entitlement-type directions or orders (e.g., buy-sell instructions) of the

secured party (8-106(d)(2)).

NOTE: There is no priority between control methods.

-Interests in certificated securities may be perfected by possession per 9-313(a).)

Deposit Accounts

Secured parties may perfect only by control when it comes to deposit accounts (9-312(b)(1)).

-The institution where the deposit account is maintained (e.g., a bank) automatically has

control if it becomes a secured party (9-104(a)(1)).

-The methods for other secured parties to get control are:

o“I am the customer” method § 9-104(a)(3) by changing the account so the secured

party is account holder, or customer, of the institution; or

o“Follow my instructions” method § 9-104(a)(2) by getting the institution to agree to

follow its instructions about the account (withdrawal authorizations, etc.) as if the

secured party was the institution’s customer.

- Bank Super Priority: The institution’s security interest beats all other security interests

except the “I am the customer” method. (9-327(3) & (4)).

-In general, there is no hierarchy between these two types of control (“owner” vs. directing

authority); priority is just based on the order in time in which each party obtains control,

subject to the institution’s supremacy over the 9-104(a)(2) type of control (agreement to

follow instructions).

-A security interest in a deposit account may only be perfected by control. U.C.C. § 9-312(b)

(1). There are three different ways for a secured party to control a deposit account: (1) to be

the bank where the deposit account is maintained, (2) to enter into an agreement with the

debtor and the bank that the bank will comply with instructions regarding the deposit

account’s funds from the secured party without consent from the debtor, and (3) to become

the bank’s customer with respect to the deposit account. U.C.C. § 9-104(a). A secured party

who achieves control by becoming the bank’s customer with respect to the deposit account

beats out any competing secured party who achieves control by some other method. See

U.C.C. § 9-327(3), (4). If no competing secured party achieves control by becoming the

bank’s customer on the deposit account, then the prevailing secured party is the one to

achieve control by being the bank where the deposit account is maintained. See U.C.C. § 9-

327(3), (4). If multiple competing secured parties have achieved control of a deposit account

by the same method, then the secured parties are ranked in priority according to the time in

which they obtained control. See U.C.C. § 9-327(2).

Buyers

A security interest continues in collateral not-withstanding sale, lease, license, exchange or other

disposition thereof unless the security party authorized the disposition free of the security

interest. § 9-315(a)(1)

Security interest stays effective against purchaser of collateral § 9-201(a).

Security interest continues in proceeds from collateral § 9-315(a)(1).

-NOTE: Buyer who purchases goods subject to a security interest may have their property

repossessed if the seller defaults on payments; this is the risk that a buyer takes.

NOTE: Depletion of Secured Position of Creditor. Security agreements typically allow the debtor

to sell collateral, which depletes the secured position of the secured party. To address this, a

secured party may: (1) require maintenance payments, (2) collect proceeds from the sale of

collateral or (3) require additional collateral property to replace sold collateral.

Two main exceptions to the general rule that a security interest continues after sale: (1)

buyers in the ordinary course of business and (2) buyer of “garage sale” consumer goods.

Buyer in the Ordinary Course of Business 9-320(a)

A buyer in the ordinary course of business may take property free of security interests. A buyer in

the ordinary course of business must meet the following conditions: §§1-201(b)(9); 9-320(a)

(1) Buyer must be a buyer in the ordinary course of business

(2) Does not buy in bulk (that is, does not buy more than half of the inventory)

(3) Does not take property as satisfaction of a preexisting debt. (purchase must be for value)

(4) Who buys from one in business of selling goods of that kind (i.e. cars from a car dealer)

(5) Who buys in good faith without knowledge that this purchase is in violation of others’

ownership rights or security interests

(6) Who does not buy farm products from a person engaged in farming operations

(7) Seller’s creditor must part with possession (buyer must have actual or constructive

possession of the property)

(8) Competing security interest must be one “created by the buyer’s seller”

Buyer in ordinary course of business takes property free of security interest; buyer must act in

good faith §1-304, which means without knowledge that this purchase is in violation of others’

ownership rights or security interest.

-If buyer is merely aware of a security interest, than the transaction is still in good faith.

-If buyer is aware that there are restrictions on the alienability of the property, or that his

purchase would somehow deprive a secured party of a right they have obtained, then the

buyer acts in bad faith. Good faith requires honesty in transacting. See International

Harvester.

Layaway Protections

If the buyer has not obtained possession of property for which he has made installment

payments, and the seller becomes insolvent, the buyer may take property he has partially paid for

after paying balance of the amount owed. § 2-502.

-The bankruptcy code also contains protections for layaway purchasers when the seller goes

bankrupt. If buyer made payments for good on layaway, and goods have not shipped, the

buyer can recover up to $2,700 of value that he paid towards the purchase of the good.

Intermediary Sellers (Deering Rule)

The buyer in the ordinary course of business exception will not trump a possessory security

interest in goods. 9-320(e) Example: A sells textiles to B on credit, retains possessory security

interest in the textiles by keeping them in A’s warehouse. B then sells textiles to C in the ordinary

course of business, promising to later deliver the textiles to C. B defaults. Who has priority

interest in the textiles? A wins; he has priority by possession under §9-313.

Textiles Textiles

A B C

Possessory S.I. $$

Buyer In Ordinary Course Must Purchase for Value

If buyer takes property to satisfy a preexisting debt, he is not a buyer in the ordinary course of

business. 1-201(b)(9). Example: Car dealer A owes money to Banker B. To satisfy the debt A

owes to B, he gives B a car. B cannot take the car free of security interest, because he is not a

buyer in the ordinary course of business.

“Sells” car

A B

Forgives debt

Appearance of Ordinary Course of Business; Buyer Gets Benefit of the Doubt

If the transaction appears to be in the ordinary course of business, then the buyer will likely

benefit from ordinary course of business exception and take property free of security interest.

Example. Car dealer A parks his car on his lot. Buyer B sees the dealer’s car, and agrees to buy it.

Although this sale was not in the ordinary course of business, because the dealer’s car was not

part of the inventory, Buyer B will take the car free of a security interest because this sale had the

appearance of the ordinary course of business.

A sells his personal car from the lot to B

A B

B buys car, thinking it was in inventory

“Tricky Buyer” Situation

To qualify for the exception as a “buyer in the ordinary course of business,” the buyer may only

take property free of a security interest “created by the buyer’s seller.” § 9-320(a). Example: A

lends purchase money to B, B buys boat with money and gives PMSI to A. B later sells boat to

boat seller C, informs C of A’s security interest in the boat. Boat seller C then sells the boat to D.

When A does not receive payments on the boat, A is entitled to repossess the boat because D took

bought the boat subject to a security interest not created by their seller (C).

$$ boat boat

A B C D

PMSI (created by B) $$ $$

“Garage Sale” Exception - Buyer of Consumer Goods 9-320(b)

Buyer of consumer good takes property free of security interest if buyer buys: (1) without

knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or

household purposes; and (4) before the filing of a financing statement covering the goods.

Lease in the Ordinary Course of Business

A lessee takes a leasehold interest subject to a security interest held by a creditor to the lessor,

unless lease take place in the ordinary course of business, § 2A-307(3), even if the security

interest is perfected and the lessee knows of its existence, § 9-321(c).

- “Disguised Sale” Leases require the putative “lessor” to file a financing statement in order

to retain a perfected security interest in the “leased equipment.” The lessee’s creditors may

attached a security interest in the “leased equipment,” which in reality is owned by the lessee.

Article 2 Claimants

Jilted Buyer Revokes

Per § 9-110, a buyer who justifiably revokes a sale under § 2-608 may claim a security interest in

the purchased goods per § 2-711(3). In this situation, the jilted buyer is the “creditor” and the

wrongful seller is the “debtor.” When jilted buyer takes security interest in property:

(1) The jilted buyer obtains a security interest in the disputed property, even though no

method of attachment (security agreement, pledge, etc.) has occurred. §9-110(1)

(2) Filing is not required to perfect (perfection by possession). §9-110(2)

(3) Rights of secured party after default are governed by Article 2 (remedies). § 9-110(3)

(4) The jilted buyer’s security interest has priority over all other conflicting security interests

created by the wrongful seller (debtor). § 9-110(4)

Example: A sells luggage to B, retains a PMSI. B then sells luggage to C, asserting that the

luggage is authentic alligator skin. When C learns that luggage is not actually alligator skin, he

rightfully revokes sale and takes possessory security interest in the luggage. C’s security interest

has priority over A’s PMSI.

Sells luggage Sells luggage

A B C

Gives PMSI Revokes, takes possessory S.I.

Bad Check Payment

Tender [of delivery] entitles the seller to acceptance of the goods and to payment according to

the contract, § 2-507(1). Payment by check is conditional and is defeated between parties by

dishonor of the check on due presentment, § 2-511(3).

Discovery of Buyer’s Insolvency

If a seller makes a sale on credit, and learns that the buyer is insolvent, the seller can reclaim

solder property within 10 days after delivery, § 2-702(2).

-If buyer lies about financial condition, seller may reclaim books without 10 day time

limitation, § 2-702(2).

-Successful reclamation excludes all other remedies, §2-702(3).

-The seller’s right to reclaim is subject to the rights of a “good faith purchaser,” § 2-702(3).

Definition of good faith purchaser includes holder of a security interest, § 1-201(b)(29)-(30).

Therefore, if the sold goods are subject to a floating lien on the buyer’s property, the seller

may not reclaim the books.

-What should sellers on credit do to ensure that they are not burned by buyers? They should

retain a PMSI in the goods that they sell.

Statutory Lien Holders

Just as the buyer in the ordinary course of business is a favorite of the law, those doing repairs in

the ordinary course of business are frequently given priority over previously perfected

consensual security interests. §9-333.

§9-333 Possessory Lien (Service Lien)

(a) Possessory lien means an interest, other than a security interest or agricultural lien:

(1) Which secures payment or performance of an obligation for services or materials

furnished

(2) Which is created by statute or rule of law

(3) Whose effectiveness depends on the person’s possession of the goods

(b) A possessory lien on goods has priority over a security interest in the goods unless the lien is

created by a statute that expressly provides otherwise.

-Service lien only perfected while collateral is in possession of the service provider

-If collateral is subject to competing security interest, the debtor does not need to inform

its creditor of the services done on the collateral

-If service lien holder lets debtor take possession of collateral and return it, does it lose its

security interest? Courts disagree. Some say it does, others that is doesn’t.

-If service lienor charges prices that are unconscionably high, the services are not in the

ordinary course of business and therefore are not subject to valid service lien.

Fixtures

Article 9 covers security interests in fixtures § 9-109(a). Fixtures are defined by state law, and

each state has a statute. In general, a fixture is something that is part of an improvement on real

estate (annexed to the land). It is not ordinary construction materials. A fixture hangs in limbo

between chattel and realty attachment. Archetypal examples of fixtures are a furnace or a water

heater. Fixture filing must be made in real property records office. §9-501(a)(1)(B).

If a good later becomes a fixture, the creditor must make a fixture filing to perfect its security

interest in the fixture.

Contents of a fixture filing

9-502(b) Property that is or to become fixtures must:

Satisfy UCC filing requirements (provide (1) name of the debtor, (2) name of the secured party

or representative of secured party, and (3) indicate the collateral covered by the financing

statement) and:

(1) Indicate that it covers this type of collateral (fixtures)

(2) Indicate that it is to be filed in the real property records

(3) Provide a legal description of the real property to which the collateral is related and

(4) If the debtor does not have an interest of record (ownership) in the real property, they must

provide the name of a record owner.

- Note: Only need to file in real estate records office, not secretary of state’s office.

- Note: A lease holder does not have an “interest of record.”

Any security interest in fixtures is usually subordinate to a conflicting interest of a real-property

creditor, often a mortgagee or subsequent purchaser of the real property. There are two

exceptions to this general rule, under which the Article 9 creditor in the fixture will win, not lose,

against the real-property creditor. The first is when an Article 9 creditor has a purchase-money

security interest (PMSI) in the fixture. And the second is when the Article 9 creditor files a

financing statement that predates the interest of any subsequent mortgagee or real-estate buyer.

(d) [Fixtures purchase-money priority.] Except as otherwise provided in subsection (h), a

perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer

or owner of the real property if the debtor has an interest of record in or is in possession of the

real property and: (1) the security interest is a purchase-money security interest; (2) the interest

of the encumbrancer or owner arises before the goods become fixtures; and (3) the security

interest is perfected by a fixture filing before the goods become fixtures or within 20 days

thereafter.

(e) [Priority of security interest in fixtures over interests in real property.] A perfected security

interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real

property if: (1) the debtor has an interest of record in the real property or is in possession of the

real property and the security interest: (A) is perfected by a fixture filing before the interest of

the encumbrancer or owner is of record; and (B) has priority over any conflicting interest of a

predecessor in title of the encumbrancer or owner;

(2) before the goods become fixtures, the security interest is perfected by any method permitted

by this article and the fixtures are readily removable: (A) factory or office machines; (B)

equipment that is not primarily used or leased for use in the operation of the real property; or (C)

replacements of domestic appliances that are consumer goods;

(3) the conflicting interest is a lien on the real property obtained by legal or equitable

proceedings after the security interest was perfected by any method permitted by this article; or

(4) the security interest is: (A) created in a manufactured home in a manufactured-home

transaction; and (B) perfected pursuant to a statute described in Section 9-311(a)(2).

(f) [Priority based on consent, disclaimer, or right to remove.] A security interest in fixtures,

whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of

the real property if: (1) the encumbrancer or owner has, in an authenticated record, consented to

the security interest or disclaimed an interest in the goods as fixtures; or (2) the debtor has a right

to remove the goods as against the encumbrancer or owner.

h) [Priority of construction mortgage.] A mortgage is a construction mortgage to the extent that it

secures an obligation incurred for the construction of an improvement on land, including the

acquisition cost of the land, if a recorded record of the mortgage so indicates. Except as

otherwise provided in subsections (e) and (f), a security interest in fixtures is subordinate to a

construction mortgage if a record of the mortgage is recorded before the goods become fixtures

and the goods become fixtures before the completion of the construction. A mortgage has this

priority to the same extent as a construction mortgage to the extent that it is given to refinance a

construction mortgage.

Construction mortgage issues, 9-334(h), and only 9-334(e) & (f) beat (h)

9-502(c) Mortgage Effective as Fixture Filing A record of a mortgage is effective as a

financing statement filed as a fixture filing if:

(1) record indicates the goods or accounts that it covers;

(2) fixtures described in the record;

(3) the record satisfies the requirements for a financing statement in this section, but

(A) the record need not indicate that it is to be filed in the real property records; and

(B) the record sufficiently provides the name of a debtor, even if the debtor is an individual to

whom Section 9-503(a)(4) applies; and

(4) the record is [duly] recorded.

Determining what is a fixture

In differentiating among goods, fixtures and building materials, courts look to three factors:

(1) Actual physical annexation to the realty

(2) Application or adaption to the use or purpose to which the realty is devoted

(3) Intention to make a permanent accession to the freehold .

-UCC has limited definition: “Fixtures’ means goods that have become so related to particular

real property that interest in them arises under real property law.” 9-102(a)(41)

-A security interest does not exist under this article in ordinary building materials

incorporated into an improvement on land § 9-334(a).

-Pre-code law defining fixtures is important. State law tests range from a pure annexation test

(measure by the difficulty of removal) to an intention of parties test.

-Some courts have developed different categories of fixtures.

oTrade fixtures are items of personal property necessary to the conduct of the tenant’s

business but not permanently affixed to the realty. They remain the tenant’s and may be

removed when the tenancy ends.

oAssembled Industrial Plant doctrine: all items connected with the operation of a going

business are fixtures.

Construction Mortgage Has Super Priority 9-334(h)

-Construction Mortgage: Bank loans money to person to construct/renovate building and bank

retains security interest in the building and fixtures. (Resembles PMSI)

-When a security interest in fixtures attaches pursuant to a construction mortgage, the

construction mortgage character of the security interest locks in and continues even after

construction mortgage transitions into general mortgage.

-Construction mortgage transitions into regular mortgage when construction completes. This

means that after acquired fixtures are not subject to the construction mortgage, but instead

are subject to the creditor’s general mortgage.

- Waiver of Lien Priority 9-334(f): Construction mortgage holder may waive priority.

Encumbrancer Has Priority in Fixtures

General Rule § 9-334(c): A security interest in fixtures is subordinate to a conflicting security

interest of an encumbrancer (mortgagee) or owner of the related real property other than the

debtor. [note: an encumbrancer is typically the holder of a mortgage on the property]

Exceptions to the Encumbrancer Priority

1. PMSI Exception § 9-334(d)

A perfected PMSI security interest in fixtures has priority over a conflicting interest of an

encumbrancer or owner of the real property if (*) the debtor has an interest of record in or

is in possession of the real property and:

(1) Security interest is a purchase-money security interest;

(2) Interest of the encumbrancer or owner arises before the goods become fixtures; and

(3) PMSI security interest is perfected by a fixture filing before the goods become

fixtures or within 20 days thereafter.

PMSI in fixture will not win over construction mortgage, § 9-334(h).

NOTES on FIXTURE PMSI:

-Creditor possessing PMSI in fixtures has 20 day filing grace period, § 9-334(d)(3).

-If consumer good requires installation into real property (e.g. trash compactor), it does

not automatically perfect upon attachment. Instead, creditor-seller must file to perfect

security interest within 20 days after installation. § 9-309 Official Comment 3.

2. Security Interest in Fixture Perfects before Encumbrance Took Effect § 9-334(e)(1)

A perfected security interest in fixtures has priority over a conflicting interest of an

encumbrancer or owner of the real property if:

(1) debtor has interest or possession of the real property and the security interest is:

(A) perfected by a fixture filing before interest of the encumbrancer; and

(B) has priority over any conflicting interest of predecessor in title of the

encumbrancer;

-Pre-existing interest exception will win over construction mortgage, § 9-334(h).

3. Readily Removable Items Exception 9-334(e)(2):

A perfected security interest in fixtures has priority over a conflicting interest of an

encumbrancer or owner of the real property if:

(2) before the goods become fixtures, the security interest is perfected by any method

permitted by this article (fixture filing or article 1 filing) and the fixtures are readily

removable:

(A) factory or office machines;

(B) equipment not primarily used or leased for use in the operation of the real

property; or

-Readily Removable Items exception will win over construction mortgage, § 9-334(h).

-For exceptions in 9-334(e)(2), it is important to look to state law to determine how

courts have defined those (A), (B), and (C) categories of exceptions.

4. First-in-Time Judicial Lien 9-334(e)(3):

A judicial lien security interest in fixtures will win over encumbrancer’s security interest

if the judicial lien on real property was obtained before the encumbrancer’s security

interest was perfected. First-in-Time Judicial Lien exception will win over

unperfected construction mortgage.

5. Waiver of Lien Priority 9-334(f):

A perfected security interest in fixtures will win over the conflicting security interest of

an encumbrancer if the encumbrancer consents to a waiver of its priority position.

Waiver exception will win over construction mortgage.

Right to Remove Fixtures, Injury Caused by Removal of Fixtures

Right to Removal 9-604(c): If a secured party holding a security interest in fixtures has priority

over all owners and encumbrancers of the real property, the secured party, after default, may

remove the collateral from the real property.

Injury Caused by Removal 9-604(d): A secured party that removes collateral shall promptly

reimburse any encumbrancer or owner of the real property, other than the debtor, for the cost of

repair of any physical injury caused by the removal.

-The secured party need not reimburse the encumbrancer or owner for any diminution in value

of the real property caused by the absence of the goods removed or by any necessity of

replacing them.

-A person entitled to reimbursement may refuse permission to remove until the secured party

gives adequate assurance for the performance of the obligation to reimburse.

Tax Lien

Federal Priority Statute 31 U.S.C. §3713

Grants pre-bankruptcy priority for all federal claims (no matter how they arise: tax matters,

contract debts, federal insurance loans, guarantees, etc.), which ensures that these claims are paid

first when a debtor becomes insolvent. Courts have subordinated the federal claim to an earlier

lien (judicial, statutory and consensual) if the lien is choate (complete). The U.S. Supreme Court

has refused to clarify the meaning of choate, so it is difficult to predict when an earlier perfected

lien will be sufficiently choate to prevail over the federal debt.

Tax Liens – Basic Priority

IRS wins out over all parties claiming an interest in taxpayer’s property except “any purchaser,

holder of security interest, mechanic’s lienor, or judgement creditor.” §6323(a) If creditor

has priority over IRS, the IRS may not foreclose on creditor’s collateral property.

-Creditor’s security interest must be choate to prevail over the IRS.

-To prevail over §6323(a) property holders, the IRS must file the tax lien in the appropriate

place designated under state law (usually the Secretary of State’s Article 9 filing system).

-Once filed, the IRS has priority over debtor’s after-acquired property, unless property is

subject to commercial financing security within 45 days after tax lien filing.

-Creditor must lend w/out knowledge of tax lien filing to be protected by 45 day window.

What is choate? Three requirements: (1) The creditor that is competing with the federal

government is clear (2) We know absolutely the property to which the competing interest

attaches (3) We know absolutely the amount of the lien, when the tax lien is filed

PMSI has Priority over Tax Lien

“In view of the legislative history of the Federal Tax Lien Act of 1966, the IRS will consider that

a purchase money security interest or mortgage valid under local law is protected even though it

may arise after a notice of Federal tax lien has been filed.” Rev. Rul. 68-57.

Tax Liens and Floating Lien on After Acquired Property

Tax Lien/Floating Lien Rule covers accounts receivable and inventory but not equipment. A

creditor possessing a commercial financing security has priority over tax lien for property

acquired by debtor within 45 days after the tax lien is filed. I.R.C. § 6323(c) The IRS has

priority for property acquired beyond 46 days after the tax lien is filed.

-Commercial financing security: means (i) paper of a kind ordinarily arising in

commercial transactions (ii) accounts receivable (iii) mortgages on real property and (iv)

inventory, § 6323(c)(2)(C)

-IRS always wins on after-acquired equipment.

-Unlike bankruptcy trustee, the IRS rules do not care if value of inventory or accounts

receivable increase in the 45 day grace period.

[Tax Liens and Commercial Financing Security Floating Lien]

S.I. prevails over T.L. 45 day grace period T.L. wins over S.I.

x x

Creditor enters IRS files tax lien W/in 45 day grace period: After 45 day grace

into security debtor acquires new period: debtor obtains

agreement with property, creditor’s floating new property,

debtor covering lien in after-acquired creditor’s floating lien

after-acquired property wins out loses against tax lien.

property. over tax lien.

To retain priority, creditor must make loan without knowledge of tax lien on the debtor’s

property. I.R.C. § 6323(c)(2)(A). If creditor makes loan and later discovers the tax lien, creditor

does not lose the priority in 45-day period.

Tax Liens and Future Advances

After the filing of a tax lien, the taxpayer’s creditor may make a new loan, expecting it to be

secured by an existing perfected security interest in the collateral listed in the security agreement.

-If the creditor is unaware of a tax lien, and gives an advance, it does not lose priority to the

IRS on its S.I. that secures the advance made w/in 45 days after filing. I.R.C. § 6323(d).

-The advance creditor may only take security interest in the collateral in existence at the time

of the tax lien filing, not after-acquired inventory or accounts receivable.

[Tax Liens and Future Advances]

S.I. prevails over T.L. 45 day grace period T.L. wins over S.I.

x x x

Creditor enters IRS files tax lien W/in 45 day grace period: After 45 day grace

into security creditor gives advance to period: creditor gives

agreement with debtor, S.I. from advance advance to debtor,

debtor covering wins out over tax lien. S.I. from advances

future advances loses against tax lien.

Advances

Debtor Sells Collateral Before Advance

§ 9-323(d) Future Advances and Buyers of Goods: If creditor makes an advance, the creditor

may keep his security interest in collateral that the debtor sold within 45 days prior to the sale –

so long as an existing perfected security agreement covered that collateral. To qualify for the 45

day grace period:

(1) Creditor must not be aware of the sale of the collateral at the time of the advance [and]

(2) Collateral must have been sold within 45 days of the advance.

- Note: This applies to sales of collateral not in the ordinary course of business. If the sale in

OCoB, then buyer takes collateral free of security interest regardless of timing.

- Note: The rule applies to whichever becomes first. If the creditor becomes aware its debtor

sold collateral property less than 45 days after the sale, and the creditor gives debtor an

advance anyway, the creditor does not retain a security interest in the property that was sold.

[Sale of Collateral and Future Advances]

More than 45 day before advance 45 day lookback period

(buyer takes free of S.I)

x x x

Before 45 day window: W/in 45 day window: debtor Creditor gives advance

debtors sells** collateral sells** collateral to third party, to debtor, secured by

to third party, buyer buyer may not take collateral pre-existing perfected

takes collateral free of security interest security agreement in

free of security interest debtor property

* The 45 day look back period may be shortened if creditor is aware of the sale, and proceeds to

advance money to debtor anyway. ** The sale must not be in the ordinary course of business.

a lien creditor may gain priority over a prior-perfected secured

creditor if the lien creditor provides the secured creditor

notice of its judgment lien and then, more than 45 days later,

the secured creditor provides an advance to the debtor under

the terms of a prior secured transaction. See U.C.C. § 9-

323(b).

Lien Creditor in Goods Subject to Security Interest from Advance

§ 9-323(b) Future Advances and Lien Creditors: a security interest is subordinate to the rights

of a person that becomes a lien creditor to the extent that the security interest secures an advance

made more than 45 days after the person becomes a lien creditor unless the advance is made:

-Without knowledge of the lien or

-Pursuant to a commitment entered into without knowledge of the lien.

-Note : If these conditions are not met, then the general priority given to perfected security

interests over non-consensual liens under 9-317(a)(2) applies.

[Lien Creditor and Future Advances]

More than 45 day before advance 45 day lookback period

(J.L. has priority over S.I)

x x x

Before 45 day window: W/in 45 day window: Creditor gives advance

person obtains a judicial person obtains a judicial to debtor, secured by

lien on debtor’s property, lien on debtor’s property, pre-existing perfected

lien holder has priority lien holder does not have security interest in

over S.I. from advance priority over S.I. from debtor’s property.*

advance

* If creditor is not aware of the judicial lien, the creditor may retain priority over the judicial lien

beyond the 45 day window. ** If the creditor gives advance pursuant to commitment entered into

without knowledge of the judicial lien, the creditor may retain priority over the judicial lien

beyond 45 day window.

BANKRUPTCY AND ARTICLE 9

An entity is insolvent when liabilities exceed assets. When insolvent, an entity may attempt to

restructure under Chapter 11. The goal then, for the debtor, is to get as many assets as possible

into their bankruptcy estate. Trustee has powers to defeat claims. Debtor can assume trustee role

by himself and if he does, he is debtor-in-possession (DIP) and has the same powers as trustee.

- 9-317(a) unperfected security interest is subordinate to lien creditor.

- 9-102(a)(52) definition of lien creditor includes bankruptcy trustee.

When a creditor is entitled to recover collateral under the UCC, the bankruptcy court may lift the

‘stay’ on creditor collections, to allow a creditor to repossess collateral.

Trustee General Avoidance Powers § 544(a)

The filing of a bankruptcy petition creates an automatic stay of any further creditor collection

activity. See Bankruptcy Code § 362. Thereafter, creditors must pursue whatever rights they

have in the bankruptcy proceedings only.

- Strong Arm Clause, B.C. §544(a): “Strong arm clause” gives bankruptcy trustee with status

of a judicial lien creditor who acquires a lien on all of the debtor’s property as of the moment

of the filing of the bankruptcy petition. A judicial lien is superior to an unperfected security

interests. § 9-317(a)(2).

- Trustee may assert defenses available to the debtor, B.C. §558: allows the trustee to assert

whatever defenses the debtor would have had against the creditor’s claims (e.g. if creditor’s

claims are barred by statute of frauds or statute of limitations).

The Moment of “Transfer”

When does a “transfer” of a security interest take place? Determining when the transfer takes

place is important for determining if transfer took place in 90 day voidable preference window.

- In General: Transfer occurs at perfection. §547(e)(1)(B).

- Transfer 30 Day Grace Period: If perfection occurs w/in 30 days of attachment, the point of

transfer relates back 30 days to attachment. §547(e)(2)(A).

[Bankruptcy Moment of Transfer]

30 day relate back period, § 547(e)(2)(A) Perfection more than

30 days after attachment

Creditor and debtor Creditor perfects w/in Creditor perfects outside

enter into security 30 day grace period, the 30 day grace period, the

agreement moment of transfer relates moment of transfer is the

back to attachment of S.I. date of perfection.

Trustee Preference Avoidance Powers § 547

If a transfer from debtor to creditor is deemed preferential, the trustee can cancel it. Other

transfers of the debtor’s property (for instance, a cash payment) may be required to be returned to

the bankrupt’s estate at the trustee’s insistence. Preference does not require finding of intent.

-Note: If the creditor is over-collateralized throughout the process, any transfer from

the debtor to the creditor cannot be deemed a preference.

Step One: When did transfer take place?

-If creditor perfects w/in 30 days of attachment, transfer took place on date of attachment

-If creditor perfects outside of 30 days, transfer took place on date of perfection

Step Two: Was the transfer a preference?

(1) Did debtor transfer property/s.i. to creditor?

(2) Was the transfer on account of a preexisting debt?

(3) Was transfer made while debtor was insolvent? (presumed w/in 90 days of b.f.)

(4) Did transfer occur w/in 90 days before b.f.? (one year if creditor is insider)

(5) Did transfer place creditor in a better position than Ch. 7 liquidation?

Step Three: Did the transfer meet an exception to the preference rule?

(1) Transfer substantially contemporaneous to creditor giving new value?

(2) Transfer in the ordinary course of business?

(3) Transfer was PMSI?

(4) Transfer fit under subsequent advance rule?

(5) Floating lien rule?

[Bankruptcy Preference 90 Day Lookback]

More than 90 days

before bankruptcy filing 90 day lookback period

x x

Outside 90 day lookback: W/in 90 day lookback: Debtor files

trustee may not void property to creditor, bankruptcy petition

transfers from debtor trustee may void any

to creditor preferential transfer

Definition of transfer includes the creation of a security interest in the debtor’s property.

-Article 9 creditor who delays perfection until after the 90 days before bankruptcy is

frequently met with a trustee who is wielding § 547 as a weapon.

-If the creation of security interest is deemed preferential, the trustee can cancel it, thus

turning the perfected creditor into an unsecured creditor.

To utilize §547, the Trustee must prove five factors:

(1) A transfer of the debtor’s property to creditor

(2) For or an account of an preexisting debt

(3) Made while the debtor was insolvent (debtor presumed insolvent during 90 day period)

(4) Within 90 days before the original filing of the petition

(5) Which enables the creditor to receive more than it would under Ch. 7 liquidation. If the

debtor is fully secured, there is no preference – because they would have gotten their

money out anyway.

Exceptions to Preference Avoidance Power

Substantially Contemporaneous Rule § 547(c)(1)

-Transfer must be for new value, cannot be continuation of existing agreement.

-Transfer of security interest must be substantially contemporaneous to grant of new value. If

creditor lends to debtor, takes security interest, and after a period of time perfects its security

interest – the transfer may not be deemed “substantially contemporaneous. As a general rule,

only security interests that perfect within the 30 day relate-back window can be considered

substantially contemporaneous.

Ordinary Course of Business Payments § 547(c)(2)

-If transfer from debtor to creditor was pursuant to the conditions of an agreement, and not

extraordinary, then the transfer is not a preference.

PMSI Security Interest § 547(c)(4)

-If the debtor transfers a PMSI to a creditor in exchange for purchase money, the transfer may

not be deemed preferential.

-Note: bankruptcy code gives PMSI creditor 30 day filing period, which is longer than the

normal 20 filing to perfect rule.

Subsequent Advance Rule 547(c)(4)

-If the creditor receives payments from the debtor in the 90 day window, but also advances the

debtor additional funds in the 90 day window, the creditor will only be required to pay back

payments if they, and to the extent that they, exceed the value of advance lent to debtor.

-Example: Debtor A owes Creditor B $3,000. Within 90 day period prior to filing of

bankruptcy, A gives $2,500 to B to repay debt. B subsequently gives A another $1,500

advance. Here, the difference between the payment ($2,500) and subsequent advance

($1,500) is $1,000. Therefore, Creditor A is only required to pay back the trustee $1,000.

Special Rule for Floating Liens in Bankruptcy 547(c)(5)

-Only covers inventory and accounts receivable.

- Does not cover equipment

-If creditor has floating lien on debtor’s property, the creditor is only entitled to the value of

the covered property at the start of the 90 day window prior to bankruptcy filing.

-If the value of the covered property at timing of bankruptcy filing exceeds the value from

90th day prior to filing, the excess value is a preference.

-If the debtor gives a creditor a floating lien security interest within the 90 day period (say 45

days from filing of bankruptcy petition), the comparison will be between the date of the loan

(45 days out) and the filing of the bankruptcy petition.

Floating Liens in Bankruptcy

-Covers only accounts receivable and inventory, but not equipment.

-Bankruptcy trustee will win over creditor’s s.i. in equipment acquired in 90 days before b.f.

- Bankruptcy Trustee Gets Increase In Value: If value of accounts receivable or inventory

increase over 90 day look back period, the increase in value is deemed a voidable preference.

[Special Rule for Floating Lien] $1.5m

value of increase

$1m is a preference

x x x

Creditor takes floating At 90th day prior to At the time of filing

lien security interest filing bankruptcy petition bankruptcy petition,

in debtor’s inventory the inventory is worth $1m. the inventory is worth

$1.5m

Fraudulent Transfers §§ 548, 544(b)

Under § 548 or §544(b), the trustee can avoid any “transfer” that is a fraudulent transfer.

-Uniform Fraudulent Transfer Act (adopted in most states): an existing or later creditor (and

the bankruptcy trustee) may avoid two types of fraudulent transfers:

(1) Those where the transferee from an insolvent debtor does not give “reasonably

equivalent value in exchange” or

(2) Those where the transferor and the transferee have actual intent to defraud the

debtor’s creditors.

-Fraudulent conveyances may be easy to identify.

Non-Consensual Liens and the Trustee § 547(b)

§ 547(b) of the Bankruptcy Code condemns as preferential all judicial liens acquired by a

creditor within the 90 days preceding filing if taken while the bankrupt was insolvent.

-Exception: Statutory Liens (garage mechanics lien, etc.) are effective under §545 at any stage

against the trustee if they (a) would be good against a bona-fide purchaser and (b) they do not

arise only on insolvency.

-“Arise on insolvency” is a lien that kicks in when the debtor becomes insolvent. One

example is a statutory lien on debtor-employees funds for the amounts owed to employees

that take effect when employer becomes insolvent. Congress prohibited these state law

statutes from dictating priority in bankruptcy.

PROCEEDS

9-203(f): attachment automatic in all proceeds

9-315(c): perfecting continues in proceeds. Note: The reason secured party takes interest in both

collateral and proceeds is that, to recoup debt, the creditor might need to take both proceeds and

collateral to be made whole.

§9-102(9) "Cash proceeds" means money, checks, deposit accounts, or the like.

§9-102(64) "Proceeds" means the following property:

(A) property acquired upon sale, lease, exchange, or other disposition of collateral;

(B) property collected on, or distributed on account of, collateral;

(D) claims arising out of damage to the collateral; or

(E) insurance payments by reason of the damage to the collateral.

Secured Party’s Rights on Disposition of Collateral and in Proceeds. § 9-315

(a) Security interest continues in collateral notwithstanding sale, lease, exchange, etc.

Security interest attaches to any identifiable proceeds in collateral.

(b) Proceeds that are commingled with other property are identifiable proceeds if (1) they are

goods or (2) are traceable non-goods (equitable principals apply, i.e. Lowest Intermediate

Balance Rule).

collateral was perfected.

(d) Continuation of perfection: 20 day grace period to perfect.

Creditor Must Refile F.S. in Proceeds w/in 20 Day Grace Period §9-315(d):

A perfected security interest in proceeds becomes unperfected on the 21st day after the security

interest attaches to the proceeds unless:

1.) The debtor swaps collateral for different items (non-cash) §9-315(d). 9-515(d)(1)(b)

To fit this exception, the creditor must swap one item of collateral with another, without a

cash payment in between. This exception requires:

a. a filed financing statement covers the original collateral §9-315(d)(1)(A)

b. the proceeds are collateral in which the security interest may be perfected by

filing in the same office in which the original financing statement has been filed

§9-315(d)(1)(B) [and]

c. the proceeds are not acquired with cash proceeds (i.e. sale of collateral and

repurchase of new collateral). §9-315(d)(1)(C).

NOTE: This does not require the proceeds (newly acquired collateral) be of the same

type or character as the original proceeds. If financing statements covers inventory,

and inventory is traded in for equipment, that creditor need not refile a financing

statement in the equipment proceeds.

EXAMPLE: Borrower traded one of the machines it used for manufacturing to a

smaller company in its industry in return for some items that the smaller company had

manufactured. The items could be resold by Borrower because they were the same

types of items Borrower usually sold when it manufactured them itself.

2.) The proceeds are cash. §9-315(d)(2).

3.) The security interest in proceeds has been perfected by filing, possession or otherwise

within the 20 days period. §9-315(d)(3). This refers to the situation where the original

financing statement covers the type of property that is a proceed from the disposition of

collateral. Example: Creditor has a perfected security interest in “all business machines.”

Debtor trades one business machine for another business machine. The financing

statement already covers the new business machine – even though that new machine is

technically “proceeds” from the original collateral. In that situation, the creditor will not

need to refile.

Transferee of Money Takes Free of Security Interest §9-332

(a) A transferee of money takes the money free of a security interest unless the transferee

acts in collusion with the debtor in violating the rights of the secured party.

(b) A transferee of funds from a deposit account takes the funds free of a security interest in

the deposit account unless the transferee acts in collusion with the debtor in violating the

rights of a secured party.

Bank’s Right of Set-off § 9-340

(a) Exercise of recoupment or set-off: A bank with which a deposit account is maintained may

exercise any right of set-off against a secured party that holds security interest in deposit account.

(b) If bank is creditor, setoff not affected by security interest: The application of this article to

a security interest in a deposit account does not affect a right of set-off of the secured party as to

a deposit account maintained with the secured party.

ineffective against a secured party that holds a security interest in the deposit account which is

perfected by control under Section 9-104(a)(3) (“I am a customer” control perfection), if the set-

off is based on a claim against the debtor.

Insurance Payments and Judgment Awards May Be Proceeds

Insurance payments that qualify as proceeds are regulated by 9-109(d)(8). For example, if the

collateral is a car that is destroyed, and the car owner receives compensation from an insurance

company, the insurance money is proceeds.

-The insurance payment must be made to compensate damage/loss of collateral

-Judgment Award : Like insurance proceeds, a judgment award may be proceeds if the

judgment pertains to the collateral. If the judgment does not directly related to damage or loss

of collateral, then the judgment award is not ‘proceeds’ subject to the security interest of a

creditor.

GRACE PERIODS

20 Day Filing Grace Period for PMSI §§ 9-317(e) and 9-324(a): PMSI in non-consumer

goods must be perfected during a 20-day grace period following the buyer’s possession of the

goods in order to take advantage of a relation-back of priority to that date.

Front-end Temporary Perfection for Certain Quasi-Intangibles and Intangible § 9-312(e):

A security interest in certificated securities, negotiable documents or instruments is perfected

without filing of the taking of possession for a period of 20 days from the time it attached to the

extent that it arises for new value given under an authenticated security agreement..

Maintenance Temporary Perfection § 9-312(f): 20 day grace period where documentation of

title in secured property can be in possession of debtor to maintain property or prepare it for sale.

If Debtor Moves to a Different State, Temporary Perfection § 9-316(a)(2): Creditor has four

month grace period to re-file its security interest in new location (when debtor moves from one

state to another).

-If creditor re-files within four months, the perfection does not lapse. §9-326(b)

-If creditor does not re-file in time, the perfection lapses; it is deemed never to have been

perfected as against a purchaser of the collateral for value. §9-515(c).

If Debtor Merges and Relocates to Another State, Temporary Perfection §9-316(a)(3):

Creditor has 1 year grace period to re-file security interest, if there is change of name of a debtor.

-If name change, creditor perfected for after-acquired property up to one year. §9-316(h)

-If no name change, creditor perfected for after-acquired property for four months. §9-316(i)

45 day grace period for after acquired collateral over tax liens I.R.C. § 6323(c): A creditor

possessing a commercial financing security has priority over tax lien for property acquired within

45 days after the tax lien is filed.

45 day grace period for advances made after filing of tax lien. I.R.C. § 6323(d) gives

protection to future advances made without knowledge of tax lien in the 45 days after its filing.

45 day grace period for advances secured by collateral sold by debtor § 9-323(d): When a

creditor makes an advance that is secured by existing collateral, and the debtor shortly thereafter

sells the collateral in a manner that is not in the ordinary course of business, the creditor retains

its security interest in that collateral if it was sold within 45 days of the advance. (Buyer does not

take free of security interest) If the secured party is aware that the debtor sold the collateral, and

makes the advance anyway, the secured party does not retain a security interest in the collateral.

45 day grace period for advances secured by collateral encumbered by lien § 9-323(b): a

security interest is subordinate to the rights of a person that becomes a lien creditor to the extent

that the security interest secures an advance made more than 45 days after the person becomes a

lien creditor unless the advance is made:

-Without knowledge of the lien or

-Pursuant to a commitment entered into without knowledge of the lien.

30 day grace period for perfection of security interest in bankrupt debtor’s property:

Bankruptcy code gives an additional 30 day grace period for perfection after attachment. If

perfection occurs in the 30 day grace period, the point of transfer relates back to the date of

attachment. § 547(e)(2)(A). This grace period is important, because any transfers from the debtor

to the creditor may be deemed preferential if they took place within 90 days before filing of

bankruptcy petition.

Commingled Goods

A commingled good is physically united with other goods in such a way that it is impossible to

distinguish the original good from the other goods, such as the flour and eggs that go into a cake.

See U.C.C. § 9-336(a). Because the identity of the original good is lost, a security interest does

not exist in commingled goods. U.C.C. § 9-336(b). If a good that is collateral changes into a

commingled good, a security interest attaches to the resulting product or mass—such as the cake

made from the flour and eggs. U.C.C. § 9-336(c).

Super Priority

Super priority means that a creditor can be second in time, yet still be

first in the priority line.

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