Secured Transactions

Prof. Mussleman
Fall 2000

Chapter 1 – Introduction

Subject matter of secured transactions under the UCC – rights relating to personal property
collateral

Article 9 is primary source of relevant law

- deals generally with all “security interests” in personal property and fixtures (no real estate or
leases)

Secured transaction – an arrangement between a “debtor” (9-105(d)) and a “secured party” (9-
105(m)) which gives the secured party a limited interest in some or all of the debtor’s personalty
and fixtures
- this property interest is called a “security interest” (1-201(37) – an interest in personal
property or fixtures which secures payment or performance of an obligation
- the property subject to the security interest is called collateral (not defined by UCC)
- security interest serves to ensure the payment or performance of an obligation – if payment is
made or the obligation is performed, the property interest disappears; if payment is not made
or the obligation is not performed, the secured party may use that property interest to seize
possession of the collateral; secured party may retain the collateral or sell it and apply the
proceeds to the debt; if the proceeds are insufficient to satisfy the debt, secured party may
then sue the debtor to recover a “deficiency judgment”

Security interest is valuable for at least 3 reasons:

(1) ease of seizure - gives the secured party specific rights in specific property of the debtor;
allows secured party to seize collateral without going to court through self-help repossession

(2) priority against other creditors - the rights given by a security interest are given priority
over most other rights, including most rights of the debtor’s other creditors and transferees;
priority means primarily that when the collateral is sold, the net proceeds of the sale will be
applied first to the secured party’s debt; if and only if it is paid in full will any money go to
pay the other creditors

(3) protection in bankruptcy - the rights created by a security interest can give the secured
party priority over the rights of other creditors even if the debtor goes into bankruptcy; while
most unsecured creditors receive nothing at all in a bankruptcy case, secured creditors are
normally entitled to payment of the entire amount of their secured claim; secured party also
has rights during pendency of bankruptcy case (e.g. the value of the collateral must be
protected)

Pledge – exists when the debtor has given the secured party physical possession of the collateral
- this was the only type of personal property security interest tolerated by the common law
because a non-possessory security agreement can mislead third parties
- “secret lien” problem - non-possessory security agreement allows debtor to retain physical
possession of the collateral and use it; third parties assume from debtor’s continued
possession and use of the property that debtor is the owner of the property, with the power to

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 transfer it; based on that assumption, a third party may lend money to debtor on secured or
unsecured credit or buy the property assuming debtor can transfer good title

Solution to secret lien problem:

Recordation – permits non-possessory security interests but requires that a public record of the
interest be made; failure to record invalidates the interest or renders it subordinate to various third
party rights; this was adopted by UCC Article 9

2 simple steps to create and to give priority to any type of security interest:
(1) Art. 9 secured party obtains a security interest through “attachment” via a security
agreement
(2) Secured party obtains priority over third party claimants to the collateral by “perfection”
-Perfection involves public notice of the security interest, usually by filing a “financing
statement” in the appropriate county or state offices

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 Chapter 2 – Scope of Article 9

9-102 – Art. 9 governs any transaction (regardless of its form) which is intended to create a
security interest in personal property or fixtures

Security interest (1-201(37)) – any interest in personal property or fixtures which secures
payment or performance of an obligation

True leases are not covered by Art. 9, but leases that are really disguised sales (the lease is in fact
obtaining ownership of the property which does not occur in a true lease) are covered

Problem 2-1

(a) see 9-102 for scope of Art. 9

(1) are parties intending to create security interest in personal property? Here, coin collection
= personal property
(2) what is a “security interest”? see 1-201(37)
-here, clearly they are creating some interest in the personal property (coin collection)
-is it for the payment or performance of an obligation or debt? Yes, Michelle owes Lee $4,000; in
substance, there is an intent that Lee get the coin collection in return as security for the debt)
-effectively, Lee is not getting outright title; therefore, this is a pledge. As a result, Art. 9 applies

What does this mean (Art. 9 transaction applies)?

Means Lee has to properly create this security interest and comply with Art. 9 provisions and Lee
must find way under Art. 9 to give notice to the world that he has possession of the property
Underlying policy: people should not be able to take secret interest in personal property; others
wouldn’t know and there could be fraud problems

Ways to give notice: (1) possession of the property; (2) file some notice in some public office
(gives world constructive notice)

Once Art. 9 applies, burden put on creditor to give notice (“perfect” the transaction)

(b) Does Art. 9 apply? Title isn’t passing (seller retaining title)
9-102(1)(a) – not looking at form; are the parties creating an interest in the personal property to
secure an obligation or debt?
- here, there is an obligation - $3500 due within 30 days
- 1-201(37) says the retention or reservation of title by seller of goods notwithstanding
shipment or delivery to the buyer is limited in effect to a reservation of a “security interest” –
therefore, seller not retaining title of property (masks)

Jester v. State of Alabama

Issue: whether a father who lent his son money to buy an automobile was a “bona fide lienholder”
whose interest was not subject to forfeiture when the State moved to condemn the vehicle after
the son’s arrest for possession of marijuana

Automobile subject to certificate of title – father listed as “first lienholder”

Father claimed his interest in the vehicle was protected from forfeiture by virtue of Alabama
statute 20-2-93(h)

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State argued to be a bona fide lienholder, you have to be a secured party under Art. 9
--contended father was not a secured party and therefore not a bona fide lienholder because the
document signed by the father and son did not create a security interest in the vehicle and
therefore the document was not a security agreement

Why was it important for the document to create a security interest (i.e. why couldn’t party just
testify to that)? Why would anything have to be in writing?
Art. 9 concept re: notice (i.e. give constructive notice to the world of your security interest in the
property)

security agreement (9-105(1)(l) – an agreement which creates or provides for a security interest

security interest (1-201(37)) – an interest in personal property or fixtures which secures payment
or performance of an obligation

9-102(1)(a) – Art. 9 applies to any transaction (regardless of its form) which is intended to create
a security interest

White & Summers Test to Determine Whether a Security Agreement is Established:

(1) whether language embodied in the writing objectively indicates that the parties may have
intended to create or provide for a security agreement
-no parol evidence admissible
If yes to part 1,
(2) whether the parties actually intended to create a security interest
-parol evidence admissible

Note: no magic words necessary or precise form required to evidence a possible security interest
- court refers to general contract law to determine whether the parties intended to create a
security interest
- the language of the instrument “need only lead to the logical conclusion that it was the
intention of the parties that a security interest be created”
- court will determine intent “from the transaction as a whole”

p. 13 Question – doesn’t matter if know Art. 9 exists

- look objectively and subjectively at parties’ intent

II. Specific Exclusions from Coverage (9-104)

9-104 specifically excludes certain transactions regardless of whether an interpretation of 9-102

would dictate coverage (e.g. entire transactions or parts of transactions which are governed by
federal law are excluded)

Problem 2-2

Interest in farm is NOT subject to Art. 9 – see 9-104(j) – real estate transactions not included in
coverage
- see also 9-102(1)(a) – personal property (not real estate)
Art. 9 does NOT apply to Bank’s mortgage because it is also real estate (see cites above)

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Problem 2-3

(a) 9-105(1)(h) says definition of goods includes “growing crops”

- crops are not real estate for purposes of Art. 9

(b) landlord’s lien is NOT subject to Art. 9 under 9-104(b)

- what if the landlord had Kelley sign a lease agreement specifically providing for it? Art. 9
generally only applies to “consensual” liens (i.e. the debtor agrees to the lien to secure
payment)
- if Kelley signs the lease agreement and agrees to give landlord interest in her personal
property to secure payment of the lease, this is a consensual lien and IS covered by Art. 9

(c) Bank’s right of setoff is NOT subject to Art. 9 under 9-104(i)

(d) A transfer of an interest in any deposit account (defined in 9-105(1)(e)) is NOT subject to
Art. 9 under 9-104(l)

(e) A transfer of an interest in or claim in or under any policy of insurance is NOT subject to Art.
9 under 9-104(g)

(f) A transfer of any claim arising out of tort is NOT subject Art. 9 under 9-104(k)

In Re Berry

A trustee in bankruptcy must search for any transfer, etc. that he can invalidate and preserve for
the debtor’s bankruptcy estate for the benefit of all unsecured creditors
- the trustee is paid a percentage of the property he is able to bring in

11 U.S.C. 544 (“strongarm statute) – allows trustee to invalidate any unperfected security interest
(here, it was unperfected because the financing statement was not filed with the Sec of State or
other registry)

Trustee argued transaction was a security interest under Art. 9 and Bank failed to file a financing
statement; therefore, Bank had an unperfected security interest and the trustee could invalidate
based on the strongarm statute

Bank said it was an absolute assignment that did not create a security interest; therefore, the Bank
is the outright owner and there was no need to file a financing statement under Art. 9

Art. 9 is written to apply to a broad, wide-range of transactions

- Reason: drafters trying to avoid creditors creating “secret liens” and allow debtor to
misrepresent to 3rd parties that no one else had interest in their personal property (i.e. gives 3rd
parties a way to find out that these interests exist)

Is it possible to create a security interest in the renewal commissions? Yes. This was structured
as an outright assignment
- remember, it is not the form of the transaction but the substance of the transaction that you
must focus on

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9-106 – defines “account” as any right to payment for goods sold or leased or for services
rendered which is not evidenced by an instrument or chattel paper

Therefore, these renewal payments were accounts under Art. 9 and they are personal property and
not excluded under 9-104; therefore, they are subject to Art. 9

Court distinguishes absolute assignments from assignments intended as security

BUT, court could have avoided all this discussion – 9-102(1)(b) states Art. 9 applies to any sale
of accounts; 9-102(2) states Art. 9 applies to security interests created by contract including
assignment

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 Chapter 3 – Attachment and Classification of Collateral

I. Introduction

A security agreement is created upon “attachment”

Attachment, under 9-203(1), requires:

(a) agreement – debtor must agree to give a security interest in personal property or fixtures to
the creditor

(b) value – creditor must give value for the security interest; and

(c) rights in the collateral – the debtor must have rights in the collateral (the personal property or
fixtures subject to the security interest)

The Security Agreement

An agreement is required because there must be an intent to create a security interest

- no formal document is necessary; the requisite agreement may be oral if the secured creditor
has possession of the collateral with the consent of the debtor (i.e. no writing requirement if
creditor retains possession with debtor’s consent)

The necessary consent for an oral agreement to suffice is consent by the debtor to grant a security
interest in the collateral

If the creditor does NOT have possession of the collateral with the debtor’s consent, the creditor
must have a written security agreement, signed by the debtor, and it must contain a description of
the collateral
- if the collateral includes crops, growing or to be grown, or timber to be cut, the agreement
must contain a description of the land on which the crops or timber are located (9-203(1))

Form and Formality

In Re Hance

Issue: did the saleschecks (sales receipts) by themselves satisfy the security agreement
requirement of 9-203(1)(a)?

Debtor claimed the sales receipts (checks) by themselves did not equal a security agreement

The creditor (Sears) claimed the sales receipts and the purchasing history between the parties
evidenced an intent by the parties to create a security interest in the collateral

Court cites rule from Bollinger – when the parties have neglected to sign a separate security
agreement, the better and more practical view is to look at the transaction as a whole in
order to determine if there is a writing or writings signed by the debtor describing the
collateral which demonstrates an intent to create a security interest in the collateral.

2 Policies Satisfied by Looking at the Transaction as a Whole:

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(1) evidentiary function is served (shows intent, relationship, between the parties)
(2) a written agreement obviates any statute of frauds problems with the debtor-creditor
relationship (this is primary reason for written requirement of security agreement; prevents
fraud being committed on 3rd parties)

Hoffman v. Schlegel

Issue: did the documents, taken together, qualify as a security agreement?

Bankruptcy trustee claimed: (1) financing statement and agreement do not constitute a security
agreement because neither document contained language explicitly granting a security interest in
the debtor’s fixtures and furniture; and (2) no valid description of the collateral existed in the
agreement

Court said the 2 documents signed by the debtor did constitute a security agreement
- court applied the Composite Document Rule

Composite Document Rule – there need not be a separate document labeled “security
agreement” but rather all relevant loan documents may be examined to determine whether a
security agreement exists (i.e. a security interest has been granted)
- several documents signed by the debtor, may, taken together, constitute the execution of a
security agreement
(note: this is the same rule from Bollinger, cited in In re Hance)

Remember: no “magic,” formal words are required; just read the documents and look at whether
the parties objectively intended to create a security interest in the collateral

Gibson Co. Farm Bureau Coop. Assn v. Greer

Issue: whether a financing statement may also serve as a security agreement under Art. 9

Purpose of the security agreement requirement is to show a security interest came into existence
between the secured party and the debtor

Purpose of the financing statement is to perfect the security interest and to put the whole world
(3rd persons) on constructive notice that the secured party may have an interest in the collateral

Requirements for attachment of a security interst (9-203(1)(a)-(c)):

(a) secured party has possession of the collateral or debtor has signed security agreement which
contains a description of the collateral;
(b) value has been given; and
(c) the debtor has rights in the collateral

When does a security interest attach? 9-203(2) – a security interest attaches when it becomes
enforceable against the debtor with respect to the collateral (i.e. as soon as all of the events in 9-
203(1) have taken place)

When is a security interest perfected? 4 requirements (3 requirements for attachment plus

9-303 – says security interest perfected when already attached and any necessary/applicable steps
required for perfection have been taken

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- either later of filing (9-302) or when it attaches
- 9-402(1) says a party may file a financing statement before a security interest has attached
(when a party files before attachment, the perfection occurs at time of attachment)

9-402 gives requirements of a financing statement

9-402(1) - A security agreement may serve as a financing statement if it contains the information
required of a financing statement and is signed by the debtor.

The UCC is silent, however, about whether a financing statement may serve as a security
agreement

Most courts have said you can’t just have a financing statement standing alone to create a security
interest; you need something else to satisfy the intent

This court doesn’t follow the majority of courts, but uses the White & Summers test:
(1) objective intent to create a security interest (language in the writing indicates intent); and
(2) subjective intent (actually intended to create a security interest)

Court said they met part (1) for the objective intent based on the writing, the UCC-1 financing
statement)

For subjective prong, court said they could look at any evidence and that the trial court found the
parties intended to create a security interest so therefore unless appellate court thinks the trial
court was wrong, this ruling stands

Mussleman says this case probably goes too far

- reasoning: under 9-402(1), financing statement can be filed before attachment; if this is done
under 9-303(1), the interest is perfected immediately because filing has already been made
and upon attachment, it is perfected

Why would secured party want to get signed financing statement and file it even before security
interest attaches or before they even have a deal?
So nobody “beats him to the courthouse” for priority purposes as to the collateral. The date of
filing the financing statement is important in establishing priority

Does execution of a financing statement, by itself, indicate intent for a security agreement?
Not necessarily

Best rule – financing statement with probably anything else can equal a security agreement (i.e. it
describes collateral adequately, signed by debtor, etc. PLUS must have something showing
present intent to create a security interest

Signature Requirement

Problem 3-1

Is this a proper signature? (1 spouse signs where both are debtors)

9-203(1)(a) requires a debtor to sign the security agreement
9-105(1)(d) defines “debtor”

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Other issues that arise: contract law, agency principles (apparent/actual authority), community
property law

This problem points out that the debtor has to sign the security agreement and that other issues
arise

Description of Collateral

1. Classification of Collateral

Collateral is the item or items of personal property and/or fixtures which are subject to a security
interest
- both the security agreement which may be needed for attachment (9-203) and the financing
statement (9-402) require an adequate description of collateral, met by specifically describing
the collateral

Why do we need to classify collateral? For perfection purposes, priority rules, attachment
purposes

There are 9 different types of classifications of collateral under Art. 9

Problem 3-2

Note: everything is goods under 9-105(1)(h) in this problem – you must go to 9-109 to sub-
classify the goods

Note: goods in 9-109 are classified entirely on how they are used

(a) Inventory under 9-109(4) (goods held for sale)

(b) Inventory under 9-109(4) (goods held for sale or lease)

(c) Consumer goods under 9-109(1) (fishing trips = personal purposes)

(d) Have to ask who the debtor is:

If company is debtor – auto is equipment under 9-109(2) (used primarily in business)
If president is debtor – auto is consumer goods under 9-109(1) (used primarily for personal
purposes)

(e) Inventory under 9-109(4) (note: not farm products because slaughtering does not fall under
farming operations)

(f) Farm products under 9-109(3) (livestock produced in farming operations)

- note: the size of the farm (small or large, incorporated doesn’t matter; farming operation =
farming operation)

(g) Chicken soup is inventory under 9-109(4) (held for sale); chickens are farm products under 9-
109(3) (livestock used in farming operations)

(h) Inventory under 9-109(4) (paint is raw material because it is incorporated into the product)

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(i) Equipment under 9-109(2) (see comment 3 – machinery used in manufacturing is equipment
and not inventory)

(j) Is timber even a good? Yes; 9-105(1)(h) – “goods” also include standing timber which is to
be cut and removed under conveyance or contract for sale
-if it is, it is a good
-assuming it is, sub-classify it under 9-109 – could be a “farm product” if timber could be
considered a crop
-but crops and timber have been distinguished in 9-105(1)(h)
-therefore, probably inventory under 9-109(4)
(Mussleman pointed out there was a case which held trees on a Christmas tree farm were a crop)

(k) Equipment under 9-109(2); the primary use of the tractor was as equipment (i.e. it was
equipment for most of its life and they are not selling tractor in ordinary course of business)

(l) Inventory under 9-109(4); not farm products because comment 4 states if put into possession
of a marketing agency for sale or distribution, they become inventory)
(m) Issue raised is how boat is used – here, partly used for business and partly for personal
- when dealing with multi-use property, the key is its principal use – here, 5 days a week of
business so its equipment under 9-109(2)
- What if debtor makes misrepresentation to the lender as to how he will use it? Doesn’t make
much difference for attachment purposes; for perfection, it is what it was when it attaches

(n) Equipment under 9-109(2); it is fixed asset, expect it to last, not held for sale

(o) Inventory under 9-109(4); it is raw material, held to be purchased

Problem 3-3

Collateral for Azar is chattel paper under 9-105(1)(b) – a writing or writings which evidence both
a monetary obligation and a security interest in or a leas of specific goods
The first transaction between Azar and CD is a secured transaction (specifically, a purchase
money security interest (PMSI)); the loader would probably be classified as equipment under 9-
109(2)
Chattel paper comes into play when Azar goes to the bank to borrow funds and uses CD’s debt
(i.e. Azar’s right to the payment of money) as collateral
The retail installment contract used by Azar as collateral is a 2nd secured transaction (Azar
becomes debtor; bank becomes creditor)
Azar created chattel paper when it sold the loader to CD on credit
- but don’t care about it until Azar uses it as collateral to borrow from bank
- Azar’s collateral = chattel paper

Problem 3-4

What is the collateral? CD’s right to the progress payments from the City to be earned from time
to time

How do you characterize this collateral for this 2nd secured transaction? Account under 9-106 –
any right to payment for goods sold or leased or for services rendered which is not evidenced by
an instrument or chattel paper, whether or not it has been earned by performance

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-note: it doesn’t matter if the right to payment has been earned yet or not

Why is it not chattel paper? There is no security interest (CD’s right to the progress payments is
not secured by anything; if it was, the 2nd transaction would be chattel paper)

Why is it not an instrument? See 9-105(1)(i) – it is not a promissory note or check; it is a contract

Problem 3-5

Everything falls under general intangibles under 9-106 – any personal property (including things
in action) other than goods, accounts, chattel paper, documents, instruments, investment
property, rights to proceed of written letters of credit, and money
Why? General intangible is the catchall – if no other place to put them in the other categories

Note: in part (d) for the right to share in gate receipts, if this was shared by the band who
provided the service, it would be an account under 9-106

Problem 3-6

Document under 9-105(1)(f); see also 1-201(15) for “document of title” – includes bill of lading

Problem 3-7

Instrument under 9-105(1)(i); instruments include promissory notes and checks

2. Sloppy Descriptions

Creditor uses wrong classification term to describe the collateral; description is faulty because it
is too narrow (e.g. including equipment in the description but failing to list inventory which was
also intended collateral)

A description of collateral is required both in the security agreement (9-203) and in a financing
statement (9-402) if a financing statement is filed for perfection of the security interest

Problem 3-8

This is a bad way to define collateral (“all debtor’s assets) – debtor can move stuff around, even if
only intended the equipment at 310 South Vine
- should just say “all equipment” or specifically describe by serial number

Here, they did not properly describe the collateral on Elm Street; therefore, this collateral should
not attach
- secured creditor should say it was his intent and then use the tests: White & Summers and
Composite Document Rule

Overbroad Descriptions – such description as “all debtor’s assets” has been declared too broad

3. Change of Use

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What happens when the use of collateral changes so that it apparently is some new type of
collateal?
9-401(3) – provides that the place for filing does not change merely because the debtor’s use of
the collateral changes
- there is no similar language in Art. 9 specifically concerning the issue as to change of use and
how that affects the “description” of the collateral in either the security agreement necessary
for attachment or the financing statement, which is necessary for perfection

General rule: a creditor can ignore changes in collateral classification

Problem 3-9

Deals with what happens when you take a security interest and classify collateral as one thing and
then debtor later changes the way he is using it
- probably not a whole lot of changes from security agreement perspective
- becomes more important when it comes to “perfection” issues (i.e. where you file becomes
important)
- under Art. 9, once you’ve perfected it, changed use doesn’t affect the perfection
- there may be an estoppel argument if the creditor knew about the change, but generally it’s
not an issue and not available

4. Description of Real Estate

9-110 – for purposes of Art. 9, any description of personal property or real estate is sufficient
whether or not it is specific if it reasonably identifies what is described
- purpose is to allow people to tell what it is (what is trying to be desribed)

Problem 3-10

The issue is how good does the description have to be for real estate in a security agreement
where you have to describe it

Is a legal description required? No. Just have to adequately describe the real estate so you can
figure out what it is
- “360 acres more or less in Clay County” is probably not adequate enough
- “360 acres at the corner of County Road ‘J’ and County Road 3” is better and may be
adequate enough

Debtor must have “Rights in the Collateral”

Trust Co. Bank v. Gloucester Corp.

Trust’s argument – their property interest defeated the defendant’s because Gloucester could not
acquire “rights in the collateral” before obtaining FDA release of the scallops (i.e. Gloucester
didn’t have title in the scallops because the contract had a condition about an FDA release, and
the condition hadn’t been satisfied; therefore, no sale, so no title)

“Rights in the collateral” is not defined in the UCC

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Rule: while a debtor’s mere possession of goods usually is not enough to satisfy the “rights in the
collateral” requirement of 9-203(c), where a debtor gains possession of collateral pursuant to an
agreement endowing him with any interest other than naked possession, the debtor has acquired
such rights as would allow a security interest to attach under 9-203.

Rule: A debtor’s possession of goods with contingent rights of ownership gives the debtor rights
in the collateral

Rule: If the goods are entirely owned by a 3rd party, mere acquisition of possession by the debtor
will not be enough
- but, where the debtor acquires less than the full ownership, courts hold this is enough for
attachment to the extent of the value of the rights
- almost any rights in the collateral will suffice under 9-203

Here, court looks to UCC Art. 2 to govern the provisions of the sale and that Gloucester obtained
rights through the sale (2-501(1) recognizes that, from the moment goods are identified to a
contract of sale, the buyer has a special property and an insurable interest)
- the delivery of the scallops by Sigma to Gloucester pursuant to their sales agreement gave
Gloucester “rights in the collateral” for purposes of 9-203
- the agreement of sale made the sale and payment subject to inspection by a government
agency; that condition, if not satisfied, may have relieved Gloucester of its obligation to pay,
but the condition did not negate the existence of an actual sales agreement between
Gloucester and Sigma
- note: the UCC emphasizes that the concept of “title” is immaterial to whether a security
interest attaches

Lessor wins over Bank because lessor has title to the property, even assuming Bank and lessee
created a security agreement with a security interest in the leased property
Lessee clearly has property interest to grant security interest to Bank
What does lessee really have as security agreement (own or power to convey)? All you can
convey is what you own, unless statute says power to convey more (e.g. entrustment doctrine in
2-403, which discusses power of merchant to convey title they don’t have).
Art. 9 does not say this; therefore, lessee can grant a security interest in the leased property equal
to the lessee’s interest in the property (no lessor interest can be conveyed to the Bank)

After Acquired Collateral – 9-204(1) states except as provided in (2), a security agreement may
provide that any or all obligations covered by the security agreement are to be secured by after
acquired collateral

Most commercial credit transactions are designed so that the creditor may have a continuing
security interest in the debtor’s collateral as the debtor acquires new items of collateral
- creditor insures that the security interest attaches not only to items in which the debtor has
rights at the time of original attachment but also in items of collateral that are acquired later
than the original transaction (i.e. after acquired collateral)

Since the agreement must describe collateral, the UCC requires, as a general rule, that the
creditor’s intent to take after acquired collateral be noted in the description of collateral in the
security agreement
- “all equipment now owned and hereafter acquired by debtor”

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Some courts have held that with respect to certain types of collateral—inventory and accounts—
no after acquired clause is deemed necessary in the security agreement
- rationale is that such security interest in this type of collateral is presumed to include after
acquired collateral because it is assumed that the debtor will regularly be acquiring new
collateral within this description (transaction assumes debtor knows the security interest is to
attach to later acquired items within these types of collateral)

No after acquired description is ever necessary in the financing statement (see comment 5 to
9-204)

Proceeds – 9-306(1)
- “proceeds” are whatever is received by the debtor when the debtor disposes of the collateral
- cash proceeds are money, checks, deposit accounts and the like
- non-cash proceeds are all other types of proceeds

9-306(2) – a security interest continues in collateral notwithstanding sale, exchange or other

disposition thereof unless the disposition was authorized by the secured party in the security
agreement or otherwise, and also continues in any identifiable proceeds including collections
received by the debtor.
- attachment in proceeds depends upon identification and that in turn depends upon tracing the
disposition through to the property claimed as proceeds
- no mention of proceeds is necessary in the security agreement
- attachment occurs upon identification even though the creditor authorized the disposition of
the original collateral

Creditor Must Give “Value”

Secured party has to give value to the debtor – value is the obligation that is secured (i.e. that the
debtor owes to the creditor)

Problem 3-11

“Value” is defined in general definitions in 1-201(44)

- 1-201(44)(b) – a person gives “value” for his rights if he acquires them as security for or in
total or partial satisfaction of a pre-existing claim
- therefore, “value” is satisfied by securing a pre-existing debt; the security interest continues
to be effective

Problem 3-12

Perfection – when security interest attaches and other steps – i.e. security interest attaches under
9-203(2) when the last of the 3 requirements are satisfied

This problem goes to the timing of value

1-201(44)(a) says a person gives “value” for rights if he acquires them in return for a binding
commitment to extend credit . . . whether or not drawn upon . . .

Therefore, value was given when they extended the credit – December 10, 1998
- value can be given before money is actually transferred

15
- the binding commitment itself constitutes value (they made a binding commitment on
December 10, 1998)

Hill v. Farmers & Merchants Bank of Waterloo

Bank argues that Hill did not give value as required by 9-203(b) to create a security agreement
because the $25,000 Hill loaned Sharp and Agee had been payable to her father, not to her (i.e. it
was Hill’s father, not Hill, who have “value” and that Hill’s security interest never attached

Court rejects this argument

Rule: Generally, any consideration sufficient to support a simple contract is sufficient “value” to
establish a security interest (1-201(44)(d))

Rule: a contract is not rendered invalid merely by the fact that the underlying consideration is
provided by an uninvolved 3rd party

Future Advances
9-204(3) – obligations covered by a security agreement may include future advances or other
value whether or not the advances or value are given pursuant to commitment

Future advances are advances of value by the creditor that occur subsequent to the creditor’s
additional advance of value (i.e. after the advance of value that was necessary for initial
attachment of the security interest)
- the issue as to attachment and future advances is whether the attachment of the original
security interest—its enforceability—is good as to only the amounts remaining on the initial
advance or also as to amounts owing on the later future advance.

9-203(3) – specifically states that obligations covered by a security agreement may include future
advances, whether or not the advances are given pursuant to the creditor’s earlier commitment to
give advances in the security agreement

To ensure attachment continues to the extent of the future advance, a clause should be included in
the security agreement noting that the debtor intends to give a security interest in collateral for
payment of future advances as well as initial advances
- if there is no future advance clause in the original security agreement, the creditor must have
the debtor execute a new security agreement or an agreement modifying the original security
agreement at the time a later advance is made

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 Chapter 4 – Perfection

Introduction

Attachment – gives rise to the creditor’s right to enforce the security interest against the debtor
(i.e. creates the interest)

Perfection has nothing to do with issues that arise between the secured party and debtor
Perfection relates to rights you have as a secured party with respect to property (collateral)
against 3rd parties claiming an interest in the same property (collateral)
Attachment is important with respect to gaining Art. 9 rights both against the debtor and against
3rd parties in priority disputes.
While perfection is very important to priority disputes, it is not relevant to disputes between the
secured party and the debtor

Perfection, therefore, involves a priority battle between a secured party and 3rd party(ies)

Purpose of perfection: for secured party to maximize its rights under Art. 9 to the property
(collateral)

In order to be “perfected,” the secured creditor must show:

(1) attachment; and
(2) an applicable step of perfection (i.e. “perfecting act”)

3 Alternative Applicable Steps of Perfection (need at least 1 along with attachment to

achieve perfected status):

(1) filing a financing statement

(2) possession by the creditor of the collateral
(3) automatic perfection which, when available, occurs at the moment of attachment

I. Perfection by Filing Under Article 9

A. When to File

Some security interests may be perfected without filing

Some perfection is outside Art. 9
9-304(1) – no security interest in money or instruments may be perfected by filing

Where filing under Art. 9 is an applicable step for perfection, the sooner it is done the better

9-402(1) – provides that a financing statement may be filed before a security interest is attached
(note: filing a financing statement before attachment would not create perfection because 9-303
requires both an applicable step such as filing plus attachment)
B. What to File

9-402 provides what has to be in the financing statement – a financing statement is sufficient if it:
(1) gives names of secured party and debtor;
(2) is signed by the debtor
(3) gives an address of the secured party
(4) mailing address of the debtor

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(5) contains a statement indicating the types or describing the items of collateral

Problem 4-1

Issue here is does it sufficiently give the name of the debtor as required by 9-402? No. She is
signing as an individual instead of as the debtor corporation
- Molly may be able to use the agency theory to get around this problem

Problem 4-2

9-402(2)(a)-(d) provides instances where the debtor is not required to sign the security agreement

Here, 9-402(2)(a) applies – a financing statement which otherwise complies with subsection (1) is
sufficient when it is signed by the secured party instead of the debtor if it is filed to perfect a
security interest in collateral already subject to a security interest in another jurisdiction when it is
brought into this state, or when the debtor’s location is changed to this state.

Problem 4-3

Wrong street on the financing statement. Is it still valid? Probably still valid – 9-402(8) allows
minor errors (“a financing statement substantially complying with the requirements of this
section is effective even though it contains minor errors which are not seriously
misleading”)
- the party searching usually knows the address of the debtor
- most courts will likely uphold a financing statement even if the address is wrong
- a question like this is very fact intensive

Problem 4-4

9-402(1) states the financing statement must include the name of the debtor
9-402(7) states a financing statement sufficiently shows the name of the debtor if it gives the
individual, partnership or corporate name of the debtor, whether or not it adds other trade names
or names of partners
- this doesn’t help here because they didn’t use the actual corporate (legal) name of the debtor;
they just used the trade name (would be okay if used both)
The name is much more important because under 9-403(4) the financing statement is indexed by
the debtor after it is filed
- i.e. people search for name and can’t find it because some discrepancy in it – this isn’t
effective notice
BUT, if they didn’t comply with it because of the wrong name – see “no harm no foul” rule in 9-
402(8) – financing statement substantially complying with requirements is effective even though
it contains minor errors not seriously misleading

Factors to Determine Whether Error Renders Financing Statement Misleading and

Ineffective:

(1) Size of the jurisdiction covered by the filing office (central – Sec of State; local – Harris Co.)
- will you still find it even if not filed under the right name (if the jurisdiction contains vast
amounts of files, the error is more misleading)

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(2) Filing and searching procedures at the filing office – computer or manually?

(3) How major or minor the error is

Bottom line: some courts have just searched under correct name
- if they find it = minor error; if can’t find it = major error

American Restaurant Supply Co. v. Wilson

Issue: was collateral description in security agreement sufficient?

Rule: a security agreement cannot be enforced against the debtor or 3rd parties unless the
collateral is in the possession of the secured party or the security agreement contains a description
of the collateral

Rule: the description of collateral is sufficient whether or not it is specific if it reasonably

identifies what is described (9-110)

Note: 9-110 regarding sufficiency of description applies to security agreements and financing
statements

Test of sufficiency of a description: that the description do the job assigned to it that it make
possible the identification of the thing described

Court says a description of collateral sufficient for a financing statement might not be sufficient
in a security agreement
Why? The financing statement and the security agreement serve different purposes

Purpose of the financing statement – to provide notice of a possible security interest in the
collateral in question
9-402 – requires that the financing statement contain a description indicating the types of
collateral in which the secured party may have a security interest

Rule: the description of collateral in a financing statement is sufficient if it reasonably informs 3rd
parties that an item in the possession of the debtor may be subject to a prior security interest, thus
putting the parties on notice that further inquiry may be necessary
- just effectively put you on notice what it might be; don’t have to fully describe the collateral
– just must effectively put on notice what it might be
- just using the applicable “type” is okay in the description
- there is a duty of inquiry on 3rd party for purposes of the financing statement – 1st thing look
at is security agreement and any loan documents; under 9-208 party can request statement
from secured party as to what they think they have security interest in

Security agreement – the contract between the parties; specifies what the security interest is
- greater particularity in the description of the collateral is required in the security agreement
than in the financing statement

Rule: a description of collateral in a security agreement is sufficient if the description makes

possible the identification of the items in which a security interest is claimed

19
- security agreement should describe the collateral with details sufficient for 3rd parties to be able
to reasonably identify the particular assets covered

Here, the court said the financing statement description was okay, but the general description of
the collateral in the security agreement was inadequate
- specifically, they didn’t cover all of the food service equipment and supplies (i.e. it was
underinclusive and not specific enough)
- therefore, the security interest never attached

Thorp Commercial Corp. v. Northgate Industries

Function of security agreement – defines what the collateral is so that, if necessary, the creditor
can identify and claim it, and the debtor or other interested parties can limit the creditor’s rights
in the collateral given as security; the security agreement must describe the collateral

Function of financing statement – puts subsequent creditors on notice that the debtor’s property is
encumbered so that they may make further inquiry; description of collateral does not function to
identify the collateral and define property which the creditor may claim, but rather to warn other
subsequent creditors of the prior interest; the financing statement must contain a description only
of the type of collateral

Art. 9 does not require that the financing statement describe anything more than the type of
collateral and leaves to interested parties the burden of seeking more information

Purpose of allowing a broad financing statement: to allow a creditor that envisions an ongoing
financial arrangement to protect the priority of its interest by filing at an early date a notice to 3rd
parties which will cover the existing arrangement and broad range of potential future
modifications

Comment 2, 9-402 – the financing statement is valid to cover after-acquired property and future
advances under security agreements whether or not mentioned in the financing statement

C. Where to File

9-401(1) contains 3 alternatives regarding the proper place to file in order to perfect a security
interest

Alternative 2 is the only one used for the exam!

Your security interest is unperfected if filed in the wrong place (1 exception – 9-401(2)

If there is any doubt where to file the financing statement (i.e. difficulty in classifying the
collateral), just file it in multiple places to cover it

Problem 4-5
Use 3rd alternative to 9-401(1)

(a) 1. farm tractor used by farmer in her business – county (9-401(1)(a))

2. farm tractor held for sale by a farm implement dealer – it is inventory (9-401(1)(c)) so file
with Sec of State and possible local filing
3. farm tractor held for sale by a farm tractor manufacturer – same as 2

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 4. small farm tractor used by a homeowner for mowing and garden work – it is consumer
goods (9-401(1)(a)) so file with county

(b) consumer goods – 9-401(1)(a) so file with county

(c) account – 9-401(1)(c) so file with Sec of State; 2 places of business in state so no county
filing

(d) if this is fixture – 9-401(1)(b); fixture filing is more than local filing; filed in real estate
records

(e) equipment – 9-401(1)(c) so file with Sec of State; do they do business in more than 1 state?
If so, no local filing

(f) 9-103 – in which state is it proper to file

- 9-401 of the particular state; its inventory so 9-401(1)(c) – file in Sec of State and probably
local filing

Problem 4-6
Use 2nd alternative (know this alternative for exam!)

(a) 1. farm tractor used by farmer in her business – county (9-401(1)(a))

2. farm tractor held for sale by a farm implement dealer – it is inventory (9-401(1)(c)) so file
with Sec of State and possible local filing
3. farm tractor held for sale by a farm tractor manufacturer – same as 2
4. small farm tractor used by a homeowner for mowing and garden work – it is consumer
goods (9-401(1)(a)) so file with county

(p) consumer goods so 9-401(1)(a) – county

(q) account so 9-401(1)(c) – Sec of State only

(r) fixture so 9-401(1)(b) – office where a mortgage on the real estate would be filed

(s) equipment so 9-401(1)(c) – Sec of State only

(t) inventory so 9-401(1)(c) – Sec of State only; see 9-103 for which state!

D. Mechanics and Duration of Filing

“Filing” is accomplished by delivering a certain number of copies of the financing statement to

the appropriate recording office with the appropriate fee
The filing officer then numbers the financing statement, and stamps it with the date and time of
filing
Most local filing offices merely retain 1 or more paper copies of each financing statement and file
them by the debtor’s name in alphabetical order

Who bears the risk of a misfiling, a late filing, or an erroneous search? The subsequent creditor
The drafters of Art. 9 opted for a purely “race” statute – with very rare exceptions, the creditor
who is the first to file a proper financing statement to the right clerk has first priority

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9-403(2) – generally, a financing statement is effective for 5 years from the date of filing,
although the parties may by agreement reduce (but not extend) this period
- secured party can extend the duration of the effectiveness of a financing statement by filing a
"continuation statement" at any time during the 6 months prior to the expiration of the 5-year
period; a subsequent continuation statement will extend the effectiveness of the filing for a
further 5 years

The only things which cause a filing to lapse are:

(1) the expiration of the 5 year period;
(2) the filing of a termination statement by the secured party; or
(3) the removal of the collateral from the state
- if the debtor changes the collateral’s location within the state, no new filing is required
- if the debtor changes its name, no new filing is required to continue perfection of the security
interest in the original collateral

9-402(7) – a financing statement sufficiently shows the name of the debtor if it gives the
individual, partnership or corporate name of the debtor, whether or not it adds other trade names
or names of partners.
Where the debtor so changes his name or in the case of an organization its name, identity or
corporate structure that a filed financing statement becomes seriously misleading, the filing is not
effective to perfect a security interest in collateral acquired by the debtor more than 4 months
after the change, unless a new appropriate financing statement is filed before the expiration of
that time.
A filed financing statement remains effective with respect to collateral transferred by the debtor
even though the secured party knows of or consents to the transfer.

This rule only applies to after-acquired collateral (the original financing statement remains
effective for that collateral)
This rule affects perfection

Problem 4-7

(a) March 1 – still perfected; under 9-402(7), it is still within the 4 months after the name
changed
August 1 – still perfected if no new collateral is acquired; if new collateral acquired, security
interest is not perfected

(b) Yes for both; still within the 4 months after the name changed

(c) No for both; it has been more than 4 months since the name changed

(d) (1) No. It is Friendly’s responsibility to monitor the name change—that is why there is a 4
month grace period; the burden is on the secured party
(2) No. 9-402(2)(d) says secured party can sign instead of the debtor; debtor doesn’t have to sign

(e) (1) Yes, but only as of September 1; it is perfected when filed; problem is someone could
come in and file financing statement during this gap in time (they lose priority to anyone else
who comes in after July 1 (when financing statement lapses) and before September 1 (when
new financing statement is filed)); there is a gap in perfection
(2) Yes, but only as of September 1; same problem with gap in perfection

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In re Taylorville Eisner Agency

Trustee objected to Bank’s claim as to inventory acquired after the 4 month period based on the
second sentence in 9-402(7) because no new financing statement was filed

There was a perfected security interest that attached in the equipment

The equipment was transferred by individual debtors to a corporation; no new equipment was
obtained; therefore, it was transferred collateral

Mussleman says have to determine whether you continue to have a security interest in the
transferred collateral (the security interest in the collateral can become detached in the transfer) –
for transfer, have to ask if secured party knew of the transfer (authorized it); if so, security
interest is cut off

Here, Bank didn’t know of transfer, therefore, security interest continues and perfection is
automatic (perfected in first place)
- clearly here, security interest in equipment continued

Was the inventory transferred?

After-acquired inventory had to be bought from somewhere else (they sold all other inventory
that was originally transferred)

The appellate court was wrong in saying inventory was transferred; therefore, don’t apply the 3rd
sentence of 9-402(7)

For 2nd sentence of 9-402(7) to apply, they would have to argue they changed their form
(reorganized) – name change by debtor or corporation changed its corporate structure

Mussleman says they set up entirely new/different entity

- if can successfully argue that it was a reorganization under 9-402(7) second sentence, Bank
wuold have had to file new financing statement and since they didn't – trustee wins as to the
inventory

If 9-402(7) doesn’t apply – need security agreement, signed by debtor describing the property,
and value given

The corporation assumed debtor’s obligation to the Bank (i.e. assume debtor’s obligation under
the security agreement)
Is it perfected? They must file a financing statement covering inventory in the name of the
corporation
They didn’t do it so no perfection

Important Points:
(1) 2nd sentence of 9-402(7) does NOT APPLY to a TRANSFER of collateral
(2) 3rd sentence only applies to a TRANSFER of collateral

Problem 4-8

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(a) 9-403(2) – financing statements only effective for 5 years from date of filing; here, it is a 5
years and a day, so it has lapsed

(b) 9-403(3) – continuation statement must be filed within 6 months prior to the expiration of the
5 year period (here, after December 1, 2001)
- they’ve filed the continuation statement too early; not timely, so it has lapsed

(c) Yes. 9-403(2) – if a security interest perfected by filing exists at the time insolvency
proceedings are commenced by or against the debtor, the security interest remains perfected until
termination of the insolvency proceedings and thereafter for a period of 60 days or until
expiration of the 5 year period, whichever occurs later.

(d) see 9-404(1) regarding Termination Statements for consumer goods (last sentence) – if the
affected secured party fails to file such a termination statement as required by this subsection, or
to send such a termination statement within 10 days after proper demand therefor, he shall be
liable to the debtor for $100, and in addition for any loss caused to the debtor by such failure
-therefore, if collateral is consumer goods – liable to debtor for $1000 and any loss caused to
debtor
- if not consumer goods – no automatic termination statement; only when debtor requests one
through written demand

II. Perfection by Possession

Except where the collateral is accounts or general intangibles, perfection may be accomplished by
possession (see also Ch. 11)

III. Automatic Perfection

When the secured party has the advantage of automatic perfection, perfection occurs immediately
upon attachment

IV. Defining Purchase Money Security Interests

9-107 – a security interest is a “purchase money security interest” to the extent that it is
(a) taken or retained by the seller of the collateral to secure all or part of its price (seller’s PMSI);
or
(b) taken by a person who by making advances or incurring an obligation gives value to enable
the debtor to acquire rights in or the use of collateral if such value is in fact so used (lender’s
PMSI)
- must advance credit, give value to enable debtor to have rights in or use collateral I such value
is in fact used

The form of security interest is important for perfection; if you have a PMSI in consumer goods,
9-302(1)(d) says the security interest is automatically perfected upon attachment (no additional
step to perfect the security interest)

PMSI is also important for priority; 9-312(3),(4) gives greater priority rights for PMSIs
Problem 4-9

(a) This is a seller’s PMSI under 9-107(a)

24
What if the secured party assigns its interest to someone else—does the assignee also have a
PMSI? Yes. The assignee steps into the shoes of the assignor and obtains the same interest
- assignee also does not have to re-perfect – 9-302(2)

(b) No PMSI. The money loan was not used to buy the thing they took a security interest in (the
security interest was taken in the front-end loader, not the concrete mixer)

(c) This is a lender’s PMSI under 9-107(b)

(d) No PMSI. Mary already owned the bulldozer; it was not “to enable the debtor to acquire
rights in or the use of collateral”

(e) Yes. Now Mary merely has possession, not ownership. This is a lender’s PMSI under 9-
107(b) because it was “to enable the debtor to acquire rights in or the use of collateral”

25
 Chapter 5 – Introduction to Priorities

Priority rules vary depending upon the types of parties involved

- first need to figure out who the parties are (secured party, other party)
- then figure out what priority rule applies

Problem 5-1

Who are the parties?

Mike – Art. 9 secured party with an unperfected security interest
Dentist – unsecured creditor
See 9-201- a security agreement is effective…against creditors
Therefore, Mike has priority
- here, he doesn’t even need to perfect (do not have to perfect your interest to have priority
over unsecured creditors)

Problem 5-2

Mike – Art. 9 secured party with an unperfected security interest

Molly – lien creditor under 9-301(3) – when sheriff executes a writ and seizes the property, a
judicial lien is attached to that seized property
Secured party with unperfected interest v. lien creditor
Priority rule: 9-301(1)(b) – an unperfected security interest is subordinate to the rights of a person
who becomes a lien creditor before the security interest is perfected
- you become a lien creditor when the lien attaches (i.e. when sheriff seizes that property)
Therefore, Molly has priority

Problem 5-3

Mike – Art. 9 secured party with an unperfected security interest

Trustee in bankruptcy – lien creditor under 9-301(3)
When does a trustee in bankruptcy become a lien creditor? When the petition in bankruptcy is
filed
Secured party with unperfected interest v. lien creditor
Priority rule: 9-301(1)(b) – an unperfected security interest is subordinate to the rights of a person
who becomes a lien creditor before the security interest is perfected
Therefore, trustee has priority

Problem 5-4

Mike – Art. 9 secured party with an unperfected security interest

Frank – Art. 9 secured party with a perfected security interest
Art. 9 secured party v. Art. 9 secured party
Priority rule: 9-301(1)(a) – an unperfected security interest is subordinate to the rights of persons
entitled to priority under 9-312

9-312(5) is basic rule for priority between two Art. 9 secured parties – priority to the first to file
or perfect

26
-here, Frank has perfected; therefore, he has priority

Problem 5-5

Time for perfection is governed by 9-303 – perfected when attachment and filing
9-203 – when did security interest attach?

Mike didn’t give value until July 16, when he loaned the money
Frank perfected June 16, but Mike filed June 15

Mike has priority – Rule: 1st to file or perfect, whichever comes 1st
- this means filing always controls because filing will occur before or at same time of
perfection (never after)
- Pure Race Statute!
Once Mike filed, he can attach at any time
Frank’s options: he has constructive notice; put burden on debtor to get termination statement to
remove the 1st filed financing statement

Problem 5-6

This is an exception to the 1st to file rule

John – has a lender’s PMSI under 9-107(b) and has priority under 9-312(4)
9-312(4) – a PMSI in collateral other than inventory (i.e. goods) has priority over a conflicting
security interest in the same collateral or its proceeds if the purchase money security interest is
perfected at the time the debtor receives possession of the collateral or within 10 days thereafter

Here, debtor got possession of the crane on May 16, 1998

Did John perfect his PMSI within 10 days of this? Yes; on May 22, 1998
Therefore, John has “super priority” over First Finance

27
 Chapter 6 – Equipment Financing

I. Introduction

Static financing – financing in which the creditor requires equipment and motor vehicles as
collateral; the extension of credit is most commonly secured only by specific items of collateral
- Did my security interest attach?
- Am I perfected?
- Is the collateral properly insured/maintained?
- Has my debtor transferred the property to someone else?
- Did my debtor have clear title to the equipment when the security interest attached/was
perfected?

Floating lien or blanket financing – financing which uses accounts or inventory as collateral; in
nearly all cases the extension of credit is secured not by specific goods but by a type of property

II. Basic Priority Rules

“First in time/first in right”

Problem 6-1

(a) No PMSI here, so apply the general rule 9-312(5) – first to file or perfect
Under 9-312(5), Friendly was the first to file – he has priority and gets $1 million
Bob’s Bank gets what’s left over - $500,000

(b) (1) Bob’s Bank security interest is NOT perfected – they only filed in 1 place; Friendly filed
in the right places so they did perfect
BUT, what about 9-401(2) (no harm no foul rule) – Bob’s filing is still effective
- requires “good faith” – defined in Art. 1 as subjective honesty
- also requires Friendly to have knowledge; 1-201(25) says knowledge means actual subjective
knowledge of contents of the financial statement
Here, Friendly did have knowledge—they found Bob’s local filing
Bob’s security interest, therefore, is perfected ONLY AS AGAINST FRIENDLY and they have
priority over Friendly
(2) Bob’s has priority and would get the $1 million; Friendly would get the $500,000 left over

(c) They would both be unsecured creditors; Mussleman says this almost never happens

III. Future Advance Issues

Allis Chalmers Credit Corp. v. Cheney Investment, Inc.

Priority battle between 2 Art. 9 secured parties over farm equipment

9-312

11/16/70 – debtor (Catlin) signs a retail installment contract for combine #1 with Ochs, Inc.
(defined debt as $10,000 obligation; NO future advance clause in the contract)

28
contract was assigned to Allis-Chalmers, who financed the transaction (note: assignee steps into
the shoes of secured creditor and isn’t required to do anything else)

11/27/70 – Allis-Chalmers’ financing statement #1

12/19/70 – Cheney made cash advance to Catlin, taking a security interest in combine #1

12/24/70 – Cheney filed financing statement

9/17/71 – Catlin purchased combine #2 from another Highway Garage; Allis-Chalmers rolled
debt over from 1st transaction into new retail installment contract and created security interest in
combine #1 and #2
(new contract canceled 1st contract)

9/29/71 – Allis-Chalmers’ financing statement #2

2/16/72 – Allis-Chalmers notified Cheney of its claim to a senior security interest on combine #1,
as Cheney had taken possession of it when Catlin defaulted on his loan to Cheney

5/30/72 – Allis-Chalmers and Cheney execute letter agreement to allow combine #1 to be

returned to Catlin (debtor) with each party to notify the other if Catlin defaulted on either
financing agreement

Debtor defaults; Allis-Chalmers sues Cheney for conversion of combine #1, claiming priority

Trial court ruled for Cheney – said contract #1 was canceled when contract #2 was entered into;
said contract #1 included no future advance clause; said contract #2 was not covered by the
original financing statement; therefore, the only good financing statement was #2, which came
after Cheney financing statement

Appellate court reverses in favor of Allis-Chalmers; said it had priority over Cheney

Majority rule: where originally a security agreement is executed, an indebtedness created, and a
financing statement describing the collateral filed, followed at a later date by another advance
made pursuant to a subsequent security agreement covering the same collateral, the lender has a
perfected security interest in the collateral not only for the original debt but also for the later
advance.

App. Court said 9-312(7) controlled the outcome

Also, 9-402 comment 2 and 9-204 comment 5 state the financing statement doesn’t require
mention of future advances/after acquired collateral

But what about the security agreement making no mention of future advances?

9-203(1)(a) doesn’t require a description of the obligation at all BUT value must be given to have
a security interest
- must be able to relate obligation to collateral that secures it so most security agreements
describe the obligations

9-204 – security agreement can provide for future advances (future advance clause)

29
Can do a 2nd security agreement which describes new loan and same collateral to cover a future
advance
- security agreement will attach to secure 2nd obligation

1st financing statement contains all requisite info to perfect 2nd security agreement; may file before
security interest attaches
- so 1st financing statement has priority because first to file wins

Doesn’t matter when future advance is made as long as you have a security interest that attaches
in the same collateral with respect to the new obligation. Will always have priority because first
to file financing statement

BUT 9-301(4) – if subsequent creditor is a lien creditor, then have priority only in future
advances (1) made before party becomes a lien creditor (when lien attaches; when property levied
by sheriff); later of: (2) made within 45 days after lien attaches; or (3) made without actual
knowledge of the lien

9-307(3) – same rule for buyer with respect to future advances; whichever first occurs: (2) or (3)
above

Sale of collateral – who has priority? Buyer or secured party?

Generally, purchase of collateral does NOT defeat security interest
9-306(2) – security interest continues in collateral unless secured party authorizes sale

IV. Superpriority Rights of Certain Purchase Money Security Interests

9-312(4) – exception to the first to file rule in 9-312(5)

- a purchase money security interest (PMSI) in collateral other than inventory (i.e. goods) has
priority over a conflicting security interest in the same collateral or its proceeds if the
purchase money security interest is perfected at the time the debtor receives possession of the
collateral or within 10 days thereafter

In re Prior Brothers, Inc.

Bank was 1st to file
IH was claiming exception to 1st to file rule that they had a PMSI and filed it within 10 days (9-
312(4) – PMSI in collateral other than inventory)
IH had a seller’s PMSI under 9-107(a)

IH argued it was a sale on approval (2-326); PBI did not become a debtor under the code until it
had signaled its acceptance of the contract and made the down payment, and that it did not
possess the tractor as a debtor until that time; claimed it had 10 days from Apr. 22, 1976, the date
it received PBI’s down payment, to perfect its PMSI; since its financing statement was filed on
Apr. 27, 1976, 5 days after receipt of the down payment, it did file within the 10 days allowed
under 9-312(4) and its security interest is prior to the Bank’s.
- IH focused on the language in 9-312(4) of “at the time the debtor receives possession of the
collateral …” (i.e. PBI was not debtor until contract was final—until PBI accepted the contract
and tractor wasn’t collateral until that same time)

30
Bank argues the sales contract signed by Prior on Apr. 8, 1976 was the complete agreement
between the parties and that the financing statement should have been filed within 10 days of
Apr. 8 in order to enjoy protection of –312(4)

Court said PBI became the debtor in possession of the tractor collateral when it accepted the
conditional contract of sale on Apr. 22, 1976; thus IH’s financing statement was timely filed on
Apr. 27, 1976

If its an absolute sale on Apr. 8, 1976, the Bank wins

If it was a sale on approval – IH wins

Problem 6-3

(a) Beta has a seller’s PMSI under 9-107(a); but Bucksa doesn’t have a PMSI (debtor Alpha
already had the collateral)
Use 1st to file rule – Friendly has priority over Bucksa

(b) Yes. If Bucksa took an assignment from Beta’s PMSI interest, the take an assignment in the
PMSI (i.e. Bucksa steps into the shoes of Beta and thus has a seller’s PMSI)
The PMSI has super priority so Bucksa would win

(c) The 2nd loan of $25,000 is NOT a PMSI

-Bucksa is not the seller, they are the lender – but 9-107(b) does not apply
9-312(7) – future advances doesn’t apply because it is for purposes of 9-312(5) (the 1st to file
rule)
-future advances for PMSIs don’t get the same status as those under the 1st to file rule

Problem 6-4

Is it a lender’s PMSI under 9-107(b)? The value was not used to buy the collateral that Village
took a security interest in; therefore, Village does not have a PMSI

- have to show the money lent to the debtor was used to obtain that collateral that was subject
of the security interest
- Gigantic didn’t use the money to buy the robots (collateral)
Some courts would say that destroyed the PMSI nature of the $1 million– i.e. Village would have
a security interest but not the PMSI and since Chaste filed 1st, it has priority over Village
Other courts are more lenient

Way to solve this problem: make check out themselves to seller of robots or make it out jointly

Note: the special priority for PMSIs under 9-312(4) extends not only to the collateral subject to
the PMSI but to all PROCEEDS of that collateral
- so in the last problem, if Village has priority in the robots and the robots are later sold for
$500,000, Village also has priority in the $500,000

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 Chapter 7 – Inventory

I. General Principles

Inventory financing typically involves not specific items of collateral, but a shifting pool of
collateral

Floating lien – a security interest in a type of generically described collateral, which attaches to
whatever property of that type the debtor happens to have at any given time

II. Basic Priority Rules

The basic priority rules for inventory are the usual first-in-time, first-in-right rules that apply
throughout Art. 9

Fleetwood Credit v. RI Hospital Trust

Fighting over $62,000 proceeds from Hospital Trust to debtor

- both Hospital Trust and Fleetwood were claiming interest in the proceeds
Secured party v. secured party
-usual rule: 9-312(5) – first to file rule (here Hospital Trust would win based on this rule)

Fleetwood has to argue an exception: 9-312(3) – priority in inventory and in “identifiable cash
proceeds”

Issue: does Fleetwood qualify under 9-312(3)?

Requirements under 9-312(3):

(1) PMSI – yes, Fleetwood had a lender’s PMSI under 9-107(b)
(2) PMSI is perfected at time the debtor receives possession of the inventory – yes, this is
satisfied
(3) PMSI secured party gives notice in writing to holder of conflicting security interest

Burden of proof on Fleetwood to prove notice

9-312(3) - A perfected purchase money security interest in inventory has priority over a
conflicting security interest in the same inventory and also has priority in identifiable cash
proceeds received on or before the delivery of the inventory to a buyer if the following conditions
are met:
(a) the PMSI is perfected at the time the debtor receives possession of the inventory; and
(b) the purchase money secured party gives notification in writing to the holder of the conflicting
security interest if the holder had filed a financing statement covering the same types of
inventory (i) before the date of the filing made by the purchase money secured party, or (ii)
before the beginning of the 21 day period where the PMSI is temporarily perfected without
filing or possession (9-304(5)); and
(c) the holder of the conflicting security interest receives the notification within 5 years before
the debtor receives possession of the inventory; and
(d) the notification states the person giving the notice has or expects to acquire a PMSI in
inventory of the debtor, describing such inventory by item or type.

The burden of proof is on the party claiming the PMSI

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This case boils down the PROCEEDS – 9-306
- who had priority over the $62,000 cash proceeds?? Same as who had priority over the RVs

9-312(3) –super priority extends to proceeds from the inventory PMSI

Note
Why is burden of proving that notice was given on the 2nd secured party? Because they are in a
better position to prove (its impossible to show you didn’t receive notice)
How would this burden be met? 1-201(26) – person gives notice to another by taking such steps
as may be reasonably required to inform the other in ordinary course whether or not such other
actually comes to know of it.

III. Rights of Buyers and Lessees

9-306(2) – a security interest continues in collateral notwithstanding sale, exchange, or other

disposition thereof unless the disposition was authorized by the secured party in the security
agreement or otherwise, and also continues in any identifiable proceeds including collections
received by the debtor

- if transfer was authorized by the secured party, the security interest is forever cutoff as to the
transferee and all other parties

9-307(1) - A buyer in the ordinary course of business (defined in 1-201(9)) takes free of security
interest created by his seller (has to be the debtor) even though the security interest is perfected
and even though the buyer knows of its existence

Problem 7-1

(a) No, under 9-307(1)

Buyer in the ordinary course (BOCB) – see 1-201(9)
Is Ruth a BOCB? 4 Requirements
1) good faith – 1-201(19) – means subjective good faith (note: most courts use the objective test
—reasonable person test)
2) without knowledge – can’t know that you’re violating the security interest in some way (i.e.
violating terms)
- can still know of a security interest – 9-307(1); just no knowledge that you’re violating the
terms of the security interest
- 1-201(25) – knowledge means actual knowledge
3) buys in the ordinary course
4) from a person in the business of selling goods of that kind (not incl a pawnbroker)

There is a question of ordinary course of business – does Ruth ordinarily sell 1,919 socks at a
time?
Also, under 1-201(9), is this a “transfer in bulk”? Look at case law to determine

If transfer not authorized under 9-306(2), look to 9-307(1)

Who is “his seller” in 9-307(1)? The debtor
This doesn’t apply to remote buyers (it does in 9-306(2)); only applies to 1st transfer from debtor
to 1st buyer

33
(b) Yes. Joe is not in the business of selling computers; therefore, not a buyer in the ordinary
course under 1-201(9); therefore, 9-307(1) doesn’t apply so Friendly still has its security
interest

(c) 9-402(7) – security interest remains perfected even though collateral has been transferred,
even if given with consent to it (it is subject to the secured party’s interest)
- no re-perfection required; 1st financing statement filed is sufficient

Sears Consumer Financial Corp v. Thunderbird Products

Sears sues for conversion

- their options: 1) go after collateral; 2) try to find proceeds from sale of collateral
(identifiable); 3) conversion of right of possession to the property (as soon as debtor defaults)
– measure of damages = value of property at time of conversion and sale (note: this is what
Sears did – they had to show priority over Thunderbird)

Priority Battle:
1) Identify your parties/what type of party?
Sears – Art. 9 secured party (their security interest is unperfected)
Thunderbird – Art. 9 secured party (as assignee of ITT who was Art. 9 secured party; they step
into ITT’s shoes; note: ITT had perfected its security interest, so Thunderbird didn’t have to take
any additional steps)
2) What are they fighting over?
Boat

9-312(5) First to File Rule – Thunderbird has priority based on ITT’s assignment
- you can really only apply 9-312 when both secured parties have received a security interest in
the same collateral from the same debtor
- here, 9-312 doesn’t work because there are 2 debtors

Anytime collateral is transferred, you have to look at transfer rules

- ways transferees can get priority over Art. 9 secured parties

General rule: you can only transfer rights in what you own unless some statute/rule gives you
power to transfer more than what you own

Debtor can transfer collateral free of the security interest:

(1) 9-306(2) – if secured party somehow authorized the transfer (here there was no authorization
by Thunderbird to D&J to sell the boat)

(2) 9-307(1) – made to BOCB, defined in 1-201(9), by the ORIGINAL debtor in the transaction
and didn’t create the security interest (here, this doesn’t apply because D&J wasn’t original
debtor—it was transferor)

Under 9-307(1) – security interest is cut off as to any BOCB (1st transfer)
- as to any subsequent transferees from the BOCB, courts have struggled
- most courts say subsequent transferees are NOT covered by 9-307(1) because it will never be
seller that created the security interest
- this doesn’t make sense given the shelter doctrine in 9-306(2)

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Where do you go since 9-307(1) or 9-306(2)??

Court looked at entrustment doctrine in 2-403(2)

- Thunderbird entrusted the boat to D&J
- D&J is a merchant who deals with goods of that kind; therefore, D&J had “power” to transfer
all rights of Thunderbird to a BOCB

Was Abernathy a buyer in the ordinary course of business (BOCB) as defined in 1-201(19)??
- court didn’t get into it, but probably was
- there may be some question about good faith

Problem 7-2

Sears doesn’t control here because there was no entrustment

- could argue Bank sort of entrusted it to Bennets when took security interest but left it in the
Bennets possession
- this doesn’t trigger 2-403(2) so Art. 9 applies

9-306(2) – doesn’t apply because the Bank didn’t authorize the transfer
9-307(1) – doesn’t apply because Bennets are not in the business of selling boat as required by 1-
201(9); therefore, Collins is not a BOCB

SUMMARY OF ANALYSIS
1) 9-306(2) – if authorized the disposition, security interest is cut off forever and transferee
takes free (so do subsequent transferees)
IF NO AUTHORIZATION,
2) 9-307(1)
3) 9-301(1)(c), (d)
4) 9-307(3) – future advances

Note: the authorization for purposes of 9-306(2) does not have to be explicit; it can be implied
through course of dealing between the parties, for example

Problem 7-3

(a) Douglas is transferee

-does Douglas get priority based on 9-307(1)? No. Problem is Zifel didn’t create the security
interest (original debtor is Hooterville)
- 9-307(1) only applies to 1st transfer from debtor (here, that is Zifel)
- shelter doctrine doesn’t apply to subsequent transferees, even if you are BOCB

In these situations, some courts have bent over backwards to show that 9-306(2) applies
(authorization of the transfer by the secured party – shelter doctrine would then apply)

Here, Friendly required prior approval and Hooterville didn’t obtain it; therefore, it was an
unauthorized transfer
- conditions on authorization of sale must be followed

35
General rule: courts have looked at these conditional authorizations and have upheld these
conditions

(b) Yes. Some courts hold that a condition imposed on an authorization to sell is ineffective
unless the buyer can control performance of the condition (Pillsbury case)

(c) see 1-205 – Course of dealing and usage of trade; see also Gretna case

Production Credit Ass’n of Baraboo v. The Pillsbury Co.

Conditional authorization

By conditioning the authorization, a secured party may preserve its security interest even after an
authorized sale

Where conditions to a sale are imposed by the secured party, a sale by the debtor in violation of
the conditions is unauthorized, and the security interest continues

But if the condition imposed on an authorization to sell is ineffective, the authorization is

unconditional and the security interest does not survive the sale

Majority rule: a condition imposed on an authorization to sell is ineffective, unless performance

of the condition is within the buyer’s control
- the buyer who inquires regarding authorization to sell can structure the sale to comply with
the condition and avoid taking subject to the security interest

Minority rule: the buyer who inquires and learns of a condition not within the buyer’s control
must risk taking subject to the security interest or refuse to buy

Northern Commercial Co. v. Cobb

Was there an impliedly authorized sale that cut off the security interest?

A retained right to proceeds does NOT indicate an implied authorization to sell the collateral

The mere absence of a restriction on sale in the security agreement does not constitute implied
authorization to sell

Consent to a sale must consist of more that mere absence of restrictions

- implied agreement to sale should be found with extreme hesitancy and should generally be
limited to the situation of a prior course of dealing with the debtor permitting disposition
- a transferee of collateral should bear the burden of showing that the sale was authorized

9-306(2) is silent as to whether you have to say something to prohibit sales in your security
agreement
- the assumption is that the security interest will continue unless something else is otherwise
provided in the security agreement

9-306(2) does 2 things:

1) continuing security interest in collateral sold, exchanged or otherwise disposed of

36
2) automatically attached security interest in proceeds

Mussleman agrees this case is the better view – purchaser can easily protect himself by:
1) checking the records for any security interests in the item
2) requiring proof of consent
3) making payment directly to the creditor

Gretna State Bank v. Cornbelt Livestock Co.

Gretna sued Cornbelt for conversion, claiming Cornbelt sold dairy cattle in which Gretna had a
perfected security interest.
Cornbelt claimed that Gretna had consented to and authorized the sales
Gretna never enforced the provision in the security agreement which expressly prohibited the sale
of the collateral without the prior written consent of Gretna

Court held Gretna’s course of conduct constituted a waiver of its security interest in the cattle

9-306(2) states a security interest continues in collateral notwithstanding sale, exchange, or other
disposition thereof unless the disposition was authorized by the secured party in the security
agreement or otherwise…

The “otherwise” language in 9-306(2) includes prior course of conduct constituting authority to
sell pledged collateral

Rule: performance under a security agreement, including the failure of the secured party to
rebuke the debtor or object to the debtor’s conduct in selling collateral in violation of the terms of
the security agreement, may amount to a waiver of the lender’s contractual right to require its
written consent to a sale of collateral.

Problem 7-4

Waivers can be retracted. River Bank must notify its debtors in writing that it is now going to
start enforcing the condition

Note: 9-307(1) doesn’t help Pillsbury, Cobb, or Gretna cases because they all involve sales of
farm products; therefore, courts will try to help with 9-306(2) authorization

37
 Chapter 8 – Motor Vehicles and Other Titled Goods

I. Introduction

9-302(3)(b) – The filing of a financing statement otherwise required by Art. 9 is not necessary or
effective to perfect a security interest in property subject to any certificate of title statute covering
automobiles, trailers, mobile homes, boats, farm tractors, or the like…

Certificate of title system – basic principle is that every vehicle has but 1 certificate of title issued
by an appropriate state

Motor vehicles held as inventory are not subject to certificate of titles until they are sold

If an item of personalty is a motor vehicle covered by certificate of title statutes, perfection must
be by having the lien noted on the certificate of title (no filing a financing statement or automatic
perfection)

Creditor typically sends an application to the DMV for the issuance of a new title with the
creditor’s lien noted thereon
If the application and fee are appropriate, the DMV is to issue a title with the lien noted (typically
on the back of the title)
Generally, perfection is deemed to exist from the time the fee and application arrive plus a
reasonable time specified in the motor vehicle statutes designed to allow processing of the title
and notation of the lien
The creditor retains possession of the title with the lien

II. “Buyers in the Ordinary Course” v. Article 9 Secured Creditor

Remember these statutes:

9-307(1) – a buyer in the ordinary course of business (other than person buying farm products
from a person engaged in farming operations) takes free of a security interest created by his seller
(the debtor) even though the security interest is perfected and even though the buyer knows of its
existence

1-201(9) – “buyer in the ordinary course of business” means a person who in good faith and
without knowledge that the sale to him is in violation of the ownership rights or security interest
of a 3rd party in the goods buys in the ordinary course from a person in the business of selling
goods of that kind but does not include a pawnbroker
- buying does not include a transfer in bulk or as security for or in total or partial satisfaction of
a money debt

DBC Capital Fund v. Snodgrass

Trial court said Snodgrass was under 9-307(1) as a BOCB

General rule: if there are grounds for suspecting that a security interest is being imperiled by the
mode of dealing, a transaction cannot be considered in the ordinary course of businss

Here, court said DBC failed to prove that the mode of dealing was grounds for such a suspicion;
therefore, Snodgrass was a BOCB under 9-307(1) and took free of the security interest held by
DBC

38
This case represents the majority opinion that buyers of vehicles take free of any security interests
created by the seller.

Problem 8-1

Relief of a debt is not “buying” under 1-201(9) – (buying does not include a transfer in bulk or as
security for or in total or partial satisfaction of a money debt)

Was Jake a BOCB? Was Jake in good faith (1-201(19) – good faith means honesty in fact in the
conduct or transaction concerned)?
He was former partner; familiar with business dealings – he probably knew about the security
agreement; he probably also knew Mary was not paying the debt
Therefore, Jake probably knew he was violating the rights of a 3rd party and so he would not be in
good faith
First Bank would win

Schultz v. Bank of the West, C.B.C.

Issue: whether a consumer, who purchases a used motor home from a dealer who was selling the
motor home on consignment, acquires that vehicle free of a creditor’s prior perfected security
interest in it

If Gateleys were seller, plaintiffs could be BOCBs, BUT the Gateleys didn’t create the security
interest (they were not the original debtor as required by 9-307(1))

If Muirs were seller, they did create the security interest, BUT the Muirs weren’t in the ordinary
course of selling RVs.

Plaintiffs claimed they were BOCBs because Gateleys were Muir’s agent and as such Gateleys do
sell RVs in the ordinary course of business

But the Muirs were the real sellers because they had title and therefore they created the security
interest

Bank claimed the seller in 9-307(1) should be the same as in 1-201(9)

Court agrees with Plaintiffs

- says 1-201(9) does NOT require that the “person” from whom the goods are purchased have
title (i.e. they don’t have to be the “seller” as under 9-307(1))
- court uses “seller” in 9-307(1) and says “seller” under this is the one who possesses legal title
to the goods
Holding:
A BOCB is NOT required to buy directly from the “seller”; a buyer may buy in the ordinary
course, so long as the person who holds out the goods for sale is one who is in the business of
selling goods of that kind
It is not necessary that the person holding the goods out for sale have actual title to the goods; the
seller may entrust the goods to the person
But when it comes to the security interest, 9-307(1) requires that the “seller” be the one who
created the security interest (the original debtor)

39
Dissent says Muirs were seller of motor home, but since they were not in business of selling
them, 9-307(1) doesn’t help plaintiffs

Who’s right from policy perspective—majority or dissent?

Successive sales cases – secured party takes security interest in boat of debtor—debtor sells boat
to buyer 1—buyer 1 sells boat to buyer 2
- majority rule– says buyer 2 can NEVER take free of security interest because his seller
(buyer 1) didn’t create the security interest in 9-307(1), even if buyer 2 is a BOCB
- dissent says in this situation the Gateleys (buyer 1) selling to Schulzes (buyer 2) would never
take free of the security interest in sales case so why should it be different if it was a
consignment case

Question (p. 154)

Would 9-307(2) have been any help to the Schulzes?

9-307(2) – property has to be consumer goods in hands of seller and buyer (“garage sale”
provision)

If have PMSI in consumer goods, you don’t have to file under 9-302(1)(d); but under 9-307(2),
you will lose the security interest in it if sold to someone else as consumer goods

None of this applies to goods covered by certificate of title because no financing statement is
filed; therefore, 9-307(2) would never help someone like the Schulzes
-the security interest would be noted on the certificate of title

40
 Chapter 9 – Statutory Liens

9-310 – when a person in the ordinary course of his business furnishes services or materials with
respect to goods subject to a security interest, a lien upon goods in the possession of such person
given by statute or rule of law for such materials or services takes priority over a perfected
security interest unless the lien is statutory and the statute expressly provides otherwise.

Problem 9-1

Under 9-310, Cattleman’s would have priority if it retains possession

Priority if Cattleman’s returns the embryos?
This cause problems—courts interpret 9-310 2 different ways:
1) Art. 9 secured party has priority because no possession—9-310 applies to every security
battle
2) 9-310 doesn’t apply here; only applies for possessory lien
- if 9-310 doesn’t apply, then Art. 9 doesn’t apply
- start at statute or common law rule to see if they provide for priority

Brazier Forest Products v. Northern Transport

This case represents the MAJORITY view

Were the liens possessory liens?

Lien claimants – said non-possessory liens are outside scope of 9-310
Bank – argued 9-310 does apply to all conflicts between Art. 9 secured party and lien holder,
including non-possessory lien holder

Court agreed with lien claimants – said 9-310 only applies to possessory liens
- non-possessory liens are outside the scope of 9-310; therefore, look to the law outside the
UCC

If 9-310 doesn’t apply, most lien claimants will win (unless lien statute says otherwise, which
they usually don’t)

41
 Chapter 11 – Possessory Security Interests

I. Introduction

Focus here is on what possession means and the duty of care of a creditor as to collateral within
its possession whether the possession is by consent of the debtor or because of a repossession
upon default

9-305 – a security interest in goods, instruments, money, negotiable documents, or chattel paper
may be perfected by the secured party’s taking possession of the collateral
- a security interest in the right to proceeds of a written letter of credit may be perfected by the
secured party’s taking possession of the letter of credit
- if such collateral other than goods covered by a negotiable document is held by a bailee, the
secured party is deemed to have possession from the time the bailee receives notification of
the secured party’s interest
- a security interest is perfected by possession from the time possession is taken without a
relation back and continues only so long as possession is retained

9-304(1) – a security interest in chattel paper or negotiable documents may be perfected by filing.
- A security interest in the rights to proceeds of a written letter of credit can be perfected only
by the secured party’s taking possession of the letter of credit.
- A security interest in money or instruments (other than instruments which constitute part of
chattel paper) can be perfected only by the secured party’s taking possession

II. Meaning of Possession

In re Allen

Trustee in bankruptcy has status of a lien creditor

Issue: was security interest perfected?

Trustee argued no perfection because failed to take possession of the note and deed of trust (i.e.
no perfection under 9-304(1))

Why was possession necessary?

9-304(1) states a security interest in money or instruments can be perfected only by the secured
party’s taking possession of the collateral
(remember: a promisory note is an instrument under 9-105(1)(i)

There was no physical possession of the note, but Casa Grande argued “constructive” possession,
which satisfies 9-305

Rule: if a security interest in instruments is held by a bailee, the secured party is deemed to have
possession from the time the bailee receives notification of the secured party’s interest (9-305)

Comment 2 to 9-305 – possession may be by the secured party himself or by an agent on his
behalf; however, the debtor or a person controlled by him cannot qualify as an agent for the
secured party

9-305 allows for 2 forms of constructive possession:

42
1) through a bailee
2) through an agent

Some courts require that the holder of the instruments be within the secured party’s exclusive
control

Other courts are satisfied by a showing that the holder is not within the debtor’s exclusive control,
so long as the holder has notice of the secured party’s interest

Why can’t debtor be secured party’s agent? (see last part of Problem 11-1)
Because of concept of notice to the world of the security interest; if debtor still had possession,
this would not give others notice

Problem 11-1

What does secured party have to show to have priority over the judicial lien creditor?
9-301(1)(b) – the secured party has priority over the judicial lien creditor as long as they
perfected before the other party became a judicial lien creditor

Does Hank have perfected security interest in the Lincoln?

The problem with perfecting security interest in Lincoln by possession is that its probably
covered by a certificate of title; therefore, you would have to comply with the certificate of title
statute and perfection is not completed by possession

Does Hank have perfected security interest in the watch?

What about the fact that there was no security agreement signed? Doesn’t matter; it perfects and
attaches because he has possession of collateral

If Hank had agreed to take possession of the watch but to let Johnny use it as long as he told
everyone that he was holding it for Hank, this would not be sufficient possession by Hank; the
debtor cannot be an agent for the secured party (comment 2 to 9-305)

III. Care of Collateral in Creditor’s Possession

The creditor who is in possession of the debtor’s collateral has obligations with respect to such
collateral
9-207 – a secured party must use reasonable care in the custody and preservation of collateral in
his possession. In the case of an instrument or chattel paper, reasonable care includes taking
necessary steps to preserve rights against prior parties unless otherwise agreed
Problem 11-2

Look at 9-207 (obligations of the secured party when secured party has possession of the
collateral)

What did she do wrong? The Art. 3 note was not presented for payment
9-207(1) – secured party must use reasonable care in custody and preservation of collateral in its
possession

Maria is probably liable for failing to present it—the fact that she was on the cruise likely does
not excuse her

43
Problem 11-3

Did the secured party, through some unreasonable behavior, cause the debtor to have some loss as
to the value of the collateral?
(note: this happens a lot as to market instruments—securities, stocks, etc)

Courts have differed:

Depending on whether the value of the collateral exceeds the debt – courts sometimes hold in
favor of debtors
Or value of collateral less than the debt – courts have ignored the debtor’s claim

Theory is 1-203, which imposes good faith obligation (good faith in failing to sell the collateral)

Problem 11-4

9-207(2)(b) – the risk of accidental loss or damage is on the debtor to the extent of any deficiency
in any effective insurance coverage
BUT, court will inquire into the duty of reasonable care by the secured party
- if debtor can show negligence by the secured party caused the damage, the secured party is
liable

Problem 11-5

There is negligence involved (not secured to ground bolts); there was constructive possession
The sheriff was acting on the bank’s behalf (agent); therefore, any negligence by sheriff is
charged to the bank and the bank is therefore liable

44
 Chapter 12 – Fixtures and Realty-Related Interests

I. Borderline Collateral

When a fixture is used as collateral, the parties may use either Art. 9 or general real estate law.

Article 9 secured parties v. claimants of interest in real estate under state real property laws

Mixed collateral – real property and personal property (e.g. the use of a note secured by a
mortgage as collateral for a loan)

Rodney v. Arizona Bank

Does Art. 9 apply to creation and perfection of a security interest in a promissory note when the
note itself is secured by a deed of trust on real property?

Promissory note = personal property under Art. 9

Deed of trust or mortgage = interest in real estate; Art. 9 doesn’t apply

Court says the mortgage goes with the note

A debt for purchase of real property (and the promissory note that is evidence of that debt) cannot
be separated from the mortgage (or deed of trust) securing that debt

9-102(3) – the application of Art. 9 to a security interest in a secured obligation is not affected by
the fact that the obligation is itself secured by a transaction or interest to which Art. 9 does not
apply

Comment 4 to 9-102(3) – Art. 9 is intended to apply in some measure to a security interest

transfer of a note and mortgage; Art. 9 governs perfection of a security interest in the note and no
action need be taken with regard to the mortgage, nor any filing be done in the real estate records

9-104(j) - Art. 9 does not apply to the creation or transfer of an interest in or lien on real estate

9-105(1)(i) – promissory note = instrument

Art. 9 applies to creating the security interest in the note; then look to real property law for what
is required to be done with regard to the real estate

Problem 12-1

Lessee has interest in real estate lease

Lessor is owner of real estate – has the right to payments from lessee
- use right to royalty payments as collateral (interest in personal property – Art. 9 does apply)

How would you perfect a security interest of this type?

It is a general intangible (doesn’t fit any other category)

Similar to land-sale installment contract – agreement where seller sells and buyer buys but seller
retains title to it until its all paid off

II. What on Earth (in Earth?) is a Fixture?

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9-313(1)(a) – goods are fixtures when they become so related to particular real estate that an
interest in them arises under real estate law

3 Possibilities that Property Could Fall Into:

(1) if related to real estate in casual, non-permanent way so that attached casually – personal
property
- Art. 9 applies (e.g. washer)

(2) incorporated something into real estate so completely that have to destroy the thing to get it
out (considered part of real estate and Art. 9 does NOT apply) – ordinary building
materials
- 9-313(2) – (e.g. driveway)

(3) incorporated something into real estate in such a way that an interest in the state real estate
law (i.e. whoever acquires interest in real estate also acquires interest in this property - fixture
- 9-313 applies to determine who gets priority over the fixture

Primary Issue: with whom is the Art. 9 secured party competing?

If the competing party is a real estate claimant, then 9-313 is applied
When 9-313 applies, it normally requires the 9-313 party to perform a fixture filing (9-313(1)(b))
(it is a real estate filing)

9-313(1)(b) – fixture filing is the filing in the office where a mortgage on the real estate would be
filed or recorded of a financing statement covering goods which are or are to become fixtures and
conforming to the requirements of 9-402(5)

9-402(5) – tells what a fixture filing must include – must show that it covers this type of
collateral, must recite that it is to be filed in the real estate records, and must contain a description
of the real estate

9-313(4)-(7) are the basic priority rules for fixtures

In re Gain Electronics Corp.

2 Tests for Determining Whether an Item was a Fixture:

(1) traditional test – intention of the parties is the dominant factor; did they intend them to be
fixtures?

(2) institutional doctrine – test is whether the chattel is permanently essential to the
completeness of the structure or its use; chattel is a fixture if its severance from the structure
would cause material damage to the structure or prevent the structure from being used for the
purposes for which it was erected or for which it has been adapted

Court doesn’t use either of these 2 tests—says the proper test is (3) will its removal cause
irreparable or serious physical injury or damage to the freehold (irreparable injury test)

The burden of proof rests with the part who asserts that the items are fixtures

46
Lewiston Bottled Gas Co. v. Key Bank of Maine

Issue: were the 90 units fixtures?

Key Bank will win if it’s a fixture – they would have an interest in them under real estate law and
only if they are fixtures
LBG’s fixture filing was inadequate – not appropriate name
If goods aren’t fixtures, LBG wins because Bank has no interest in the property (only an interest
in them under real estate law if they are fixtures)

3 Prong Test to Determine if Goods are Fixtures: (combines both the traditional and institutional
tests)

(1) property is physically annexed to the real estate;

(2) property is adapted to the use to which the real estate is put (the personal and real property
are united in the carrying out of a common purpose); and

(3) property is annexed with the intent to make it part of the realty

Court here looks at the intent of the parties objectively based upon what they did (not the parties’
subjective intent)
- structure and mode of attachment
- purpose and use for which the annexation has been made
- the relation and use of the party making it

Note p. 199 – given the confusion regarding fixtures, if a secured party is not sure if it is a fixture
or not, they should do a fixture filing and an Art. 9 filing

Problem 12-2

(a) institutional test – they are fixtures; seats are integral to the operation of the theater
traditional test – intent? It is objective intent – probably did intend for them to become fixtures
In re Gain (irreparable injury test) – maybe not fixtures

(b) Would want to know how the cash register is installed

- if just plugged in – probably no fixture under any test (it would be equipment)
- if easy to remove, it would be hard to find it as a fixture, even though integral to the operation
- if permanently installed – maybe more like a fixture (would it cause damage?)

(c) Central A/C contains a number of components; sits out on a concrete slab
- institutional doctrine – maybe a fixture since integral
- to remove the piping (electrical) – may cause severe damage; could be ordinary building
materials and a part of the real estate if built into the wall (real estate law and not Art. 9
applies)

(d) Just plugging it into wall and its on wheels – not a fixture

(e) Depends on the kind of pool and how you had to remove it
- if cemented in and would cause damage – probably ordinary building material
- if could take it out without destroying it and leave hold in ground – maybe a fixture

47
(e) would have to destroy it to get to it – ordinary building material

III. Perfection in Fixtures/Fixture Filing

9-402(5) - To qualify as a fixture filing, the financing statement must:

(1) contain a description of the real estate to which the fixture is attached;
(2) include a statement that it covers fixtures
(3) have a recitation that it is to be filed in the real estate records; and
(4) if the debtor does not have an interest of record in underlying real estate, it must give the
name of the record owner

9-401(1) – the fixture filing must be made in the office where a mortgage on the real estate would
be filed or recorded

IV. Priorities in Fixtures

See 9-313(3)-(7)

Problem 12-3

(a) Under 9-313(4)(d) O’Hara has priority – a perfected security interest in fixtures has priority
over the conflicting interest of an encumbrancer or owner of the real estate where the
conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after
the security interest was perfected by any method permitted by Art. 9
- a fixture filing is NOT required; perfected by “any” method permitted by Art. 9
- can do anything Art. 9 allows for perfection for personal property or a fixture
- just need to file before conflicting party obtains lien

Why “any” method? They are not going to look in real estate records, property records—they
have a judgment and won’t look
(compare to requiring a fixture filing because the competing party will be looking in the real
property records)

(b) 9-313(a),(b) require fixture filing – here, none was made so they don’t help; therefore, 9-
313(7) (default rule) applies and owner (Kennedy) wins

(c) O’Hara has priority if dishwasher is not a fixture

- if fixture, under 9-313(4)(c) – if domestic appliance which is consumer good, you can perfect by
any method permitted by Art. 9
- is dishwasher a readily removable replacement; a domestic appliance; a fixture; it must be a
consumer good (note: not a consumer good if renting the house)
- if 9-313(4)(c) is satisfied – security interest has priority

What if they hadn’t filed?

PMSI in consumer goods is 9-302(1)(d) and automatically perfected

Problem 12-4

First question: has the mobile home now become a fixture (by attachment to the real estate)?

48
If no, then just apply Art. 9 – property subject to certificate of title; to perfect, note the interest on
the certificate of title

Does 9-313 apply?

If no fixture filing, 9-313(a) or (b) doesn’t help; 9-313(c) doesn’t work unless “construction
mortgage”
If none of these apply, then the owner would have priority

Issue: does certificate of title still control the goods?

9-302(3) &(4) – certificate of title statute governs for perfection
But does certificate of title here still control? Look to certificate of title statute to see if it answers
the question

9-401(3) – changing use of collateral

- Mussleman says not applicable here; says 9-401(3) is meant to apply when collateral remains
personal property (NOT becomes a fixture)

Problem 12-5
Helpful has a seller’s PMSI under 9-107(1)(a)
Helpful has priority under 9-313(4)(a) because it satisfies all 4 requirements: 1) security interest
is a PMSI; 2) interest of the encumbrancer or owner arises BEFORE the goods become fixtures;
3) security interest is perfected by a fixture filing before the goods become fixtures or WITHIN
10 days thereafter; and 4) debtor has an interest of record in the real estate or is in possession of
the real estate

When do goods become fixtures?

When they are actually attached/installed to the real estate

49
 Chapter 13 – Accounts

I. General Principles

9-106 – account means any right to payment for goods sold or leased or for services rendered
which is not evidenced by an instrument or chattel paper, whether or not it has been earned by
performance

The account creditor can either sell the account to a 3rd party factor or use it as collateral for a
loan

Think of purchasing the accounts as a LOAN; think of the assignment of accounts for money as
granting a security interest

II. Applicability of Article 9 Rules

In re B. Hollis Knight Co.

Since an account need not be earned by performance, the retainage was properly classified as part
of BHK’s outstanding accounts although it would not be paid until the job was satisfactorily
completed

9-302(1)(e) – a financing statement must be filed to perfect all security interests except an
assignment of accounts which does not alone or in conjunction with other assignments to the
same assignee transfer a significant part of the outstanding accounts of the assignor

The determination of whether an assignment constitutes a significant part of the assignor’s

outstanding accounts must be made on the basis of the facts available at the time of the
assignment
The term “significant part” is not defined by the UCC

2 Tests in Interpreting What is a “Significant Part” of the Debtor’s Accounts Receivable:

(1) casual or isolated test – requires a court to examine the circumstances surrounding the
transaction, including the status of the assignee, to determine whether the assignment was
casual or isolated; if a court finds that the transaction was not part of a regular course of
commercial financing, it will not require filing
- policy: it would not be unreasonable to require a secured creditor to file if he regularly takes
assignments of a debtor’s accounts; but it would be unreasonable if this was not the usual practice

(2) percentage test – focuses on the size of the assignment in relation to the size of the
outstanding accounts; attempts to define the term “significant part” in a manner that is
consistent with the statute and that promotes certainty in application
- based on language of 9-302(1)(e)
The court here applied both tests (statutory and policy)
Chapter 14 – Chattel Paper and Leases

I. Introduction

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Chattel paper – comprises a writing or writings which evidence both an obligation to pay and
either a security agreement or a lease of personal property
The holder of the chattel paper can sell or obtain credit on the paper

In re The Bennett Funding Group

9-105(1)(b) – chattel paper means a writing or writings which evidence both a monetary
obligation and a security interest in or a lease of specific goods

Personal property leases always = chattel paper

Attachment – 9-203(1)
1) security agreement or possession of the collateral by the secured party;
2) value has been given; and
3) debtor has rights in the collateral

9-102(1)(b) – Art. 9 applies to outright sales involving chattel paper

Perfection
9-305 – secured party takes possession
9-304(1) – filing a financing statement
9-401(1) – tells where to file financing statement
9-402 – tells formal requisites of a financing statement

Banks claim – they hold a perfected security interest in both the leases and the income stream
derived therefrom b virtue of their having filed proper financing statements, as well as being in
possession of the original leases

Trustee claim – in some instances the security interests of the Banks may not have been properly
perfected and that as a hypothetical lien creditor pursuant to 544(a) he is entitled to avoid the
security interests

Are the leases chattel paper? Yes

Chattel paper – monetary obligation owed to the debtor

How do you create a security interest in chattel paper?

Must have either possession of the collateral or a security agreement signed by the debtor
describing the collateral; value must be given; debtor must have rights in the collateral

Was there a security agreement? The bill of sale will constitute a security agreement

How do you perfect a security interest in chattel paper?

Either by filing a financing statement or by taking possession of the chattel paper – 9-304

II. Secured Parties and Third-Party Assignees

Problem 14-1

TCC’s interest – transferee of the checks

Bank’s interest – perfected security interest in the checks

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But the checks are proceeds of chattel paper
9-306(2) – security interest in collateral continues notwithstanding sale, exchange, or other
disposition and also continues in any identifiable proceeds

The Bank has a perfected security interest in the checks and therefore has priority over TCC

checks = commercial paper under Art. 3

9-309 – Art. 9 does not limit the rights of a holder in due course of a negotiable instrument (3-
302)
3-302 – defines “holder in due course” of an instrument
3-104 – defines instrument (negotiable instrument = checks)

Would result change if Southfence had paid Tarp by checks drawn on its own bank account?
Now the debtor is not endorsing the checks (no holder in due course issue)

(diagram)

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Problem 14-2

See diagram above – River Bank = C; Mary Belles = A; Lovejoy = B

Does River Bank still have a security interest in the table?

The security interest in the table was cut off when Mary Belles sold the table to Lovejoy (9-
306(2) or 9-307(1))
Mary Belles repossess the table – can River Bank reacquire a security interest in the table?
(Assuming Mary Belles is in default and still has possession of the table)
Not under any after-acquired property clause, BUT 9-306(5)(a) – River Bank’s security interest
reattaches

What if Mary Belles sells the chattel paper to Finance Co?

River Bank claiming a security interest in the repossessed table and Mary Belles is in default as to
both River Bank and Finance Co

Finance Co = secured party in chattel paper

Does Finance Co have security interest in table and does it have priority over River Bank?
9-306(5)(a) – security interest reattaches for River Bank
9-306(5)(b) – Finance Co also has security interest in the goods
(both are Art. 9 secured parties)

Who has priority? See 9-306(5)(b) – prior to security interest asserted under 9-306(5)(a) to the
extent that the transferee of the chattel paper was entitled to priority under 9-308
Now look to 9-308 – whoever wins as to the chattel paper under 9-308 wins as to the table under
9-306(5)(b)

River Bank has perfected under 9-306 as to proceeds

- chattel paper is proceeds of the retail installment contract inventory

See if 9-308(b) applies 1st

9-308(b) applies whenever secured party (River Bank) has security interest in chattel paper
ONLY because it is proceeds of inventory subject to security interest; purchaser (Finance Co)
gets priority regardless of knowledge as to the chattel paper
9-306(5)(b) then says Finance Co gets priority as to the table because of their priority under 9-
308(b) of the chattel paper

9-308(a) only applies when secured party has interest actually in the goods; purchaser (Finance
Co) must act without knowledge or River Bank’s security interest

GMAC v. 3rd National Bank in Nashville

Priority battle between GMAC and 3rd National Bank over the truck

GMAC lost its original security interest in the truck under 9-307(1)
Look to 9-306(5) to see if GMAC has interest in the truck
- GMAC has perfected security interest under 9-306(5)(a) – security interest reattaches
- 3rd National Bank has perfected security interest under 9-306(5)(b)

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Battle between 2 Art. 9 secured parties

Note: 9-312 1st to file rule only applies if some other rule doesn’t apply
- here, 9-308 does apply so 9-312 does not

Now look to 9-308 to see who has priority as to the chattel paper
- whoever has priority to the chattel paper then has priority under 9-306(5)(b) as to the goods
(truck)

9-308
GMAC only as security interest in inventory; therefore, only way can assert security interest in
chattel paper is through the proceeds of the inventory (truck); therefore, 9-308(b) applies
Because 9-308(b) applies, 3rd National Bank’s knowledge of GMAC’s security interest doesn’t
matter
Because 3rd National bank has priority over chattel paper in 9-308, it also has priority under 9-
306(5)

Problem 14-3

1. Friendly is purchaser of chattel paper

- note: sale or assignment of chattel paper is treated as secured transaction – 9-102(1)(b)
Except for 9-104(f) exceptions, sale/assignment of accounts or chattel paper is treated as secured
transaction
Therefore, Friendly is also a secured party
NUTS is also a secured party under Art. 9 because perfected security interest
If 9-308 is not satisfied – go to 9-312 (1st to file rule)
Does 9-308 apply? Not 9-308(b) because NUTS didn’t take security interest in the proceeds of
inventory (there isn't even a security interest in inventory)
Look to 9-308(a) because they are claiming a security interest in the chattel paper
Here, Friendly took with knowledge of NUTS’ financing statement so 9-308(a) may not be met
BUT, comment 3 to 9-308 states “mere knowledge of an Art. 9 filing against chattel paper does
not give knowledge of the existence of a security interest in the chattel paper”
Why? Knowledge means actual knowledge – it could be different chattel paper (must have
knowledge of security interest in the particular chattel paper that they are buying)

2. What could NUTS have done to protect themselves?

Taken possession of all chattel paper they were taking a security interest in
If debtor (Muck) keeps possession of the chattel paper – see comment 3 of 9-308 – Friendly can
stamp or note on the paper the fact that it has been assigned to them

Problem 14-4

Village Bank – security interest in all inventory and chattel paper of Reliable
Reliable sells to Bucksa Bank $500,000 of the chattel paper
Bucksa knows the chattel paper is subject to Village Bank’s security interest
Priority between Village and Bucksa?
9-308(a) doesn’t apply because Bucksa has knowledge
9-308(b) – what does “merely as proceeds…” mean?
Look at facts – what are they really claiming a security interest in – chattel paper or inventory

54
Courts would look to fact that Village never taken possession of/examined Reliable’s chattel
paper and doesn’t require Reliable to account for its chattel paper
Really looks like Village claiming a security interest in proceeds of inventory; therefore Bucksa’s
knowledge doesn’t matter
III. Leases

Credit sale v. lease

Look to 1-201(37)
- is it really a lease (Art. 2A would apply – lessor doesn’t have to give any notice to purchaser)
or a credit sale with a security interest (Art. 9 would apply – must give notice)

Problem 14-5

Is this really a lease or a sale with retention of security interest to secure payment of the purchase
price?

Start at 1-201(37) – whether a transaction creates a security interest or lease is determined by the
facts of each case

2 Requirements under 1-201(37) to conclusively establish that the transaction creates a security
interest:
1) lessee cannot terminate lease prior to the initial term of the lease; and
2) either (a)-(d)

Other factors if the 2 requirements aren’t met and lessee can’t terminate prior to lease term
- see (a) – (e) on p. 31 of Code (right side)

Here, you have to treat each term like a separate lease – here it is 5 year 1st term
-look at 1-201(37)(a) – has to pay $7000 at end of term; therefore, it retains its economic life
1-201(37)(c) – is $200 nominal consideration to renew the lease? Probably not
Here it cannot be conclusively determined from the 1st set of rules that the transaction is a sale
(i.e. neither (a) – (d) seems to apply)
Then must look at all facts and circumstances of the case
Most important factor courts look at: whether lessor is retaining reversionary interest in the good
that has significant value to the lessor

Problem 14-6

Don’t look at this as a big 52-week lease because they have option to return it each week
-look at it as series of 52 1-week leases (i.e. 52 separate leases)
1-201(37)(a)-(d) aren’t satisfied for 1st week
(d) will kick in for the last week – therefore, only the last week looks like a sale; the other 51
weeks are probably true leases

Addison v. Burnett

Circumstances that create a security interest as a matter of law – 2 part test:

(1) if the lessee does not have the right to cancel the purported lease prior to the expiration of its
term, the parties will be considered to have entered into a security agreement; if the
relationship is terminable by the lessee at any time, the instrument is a true lease

55
(2) at least 1 of the 4 enumerated conditions must be present

If none of the enumerated conditions are present, a security interest will not conclusively be
found to exist
The court will then look at the facts of the case to determine whether the lessor has retained a
“meaningful residual interest” in the goods
- if so, a lease will be found
- if lessor cannot reasonably expect to receive back anything of value at the end of the lease,
the lease creates a security interest
Court looked at 2 features to determine this – any option to purchase and any provision for the
lessee's acquisition of equity in the goods

Option for executive at end of lease term controlled ultimate outcome – executive didn’t have to
sell the car at end of lease term; they could appraise it, sell it or keep it
- court said, therefore, he had a reversionary interest and it was a true lease

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 Chapter 15 – Instruments, Investment Securities, General Intangibles

I. Instruments

9-105(1)(i) – instrument means a negotiable instrument (3-104) or any other writing which
evidences a right to the payment of money and is not itself a security agreement or lease and is of
a type which is in ordinary course of business transferred by delivery with any necessary
indorsement or assignment

Problem 15-1

Stamping something (notice) on the chattel paper to make sure anyone who gets possession of the
chattel paper will have notice

What if Friendly detached the notes from the security agreement?

- if person is holder in due course under 3-302, they may get priority under 3-306
To prevent this from happening, could do something to make it a non-negotiable instrument
under Art. 3 – e.g. put statement in there “This note is not negotiable”)

What if they were promissory notes? These are instruments, so can only perfect security interest
in an instrument by possession

In re Investors & Lenders, Ltd.

Non-negotiable notes = instruments

(all notes are probably treated as instruments)
Instruments can only be perfected by possession
Why?
It’s kind of like money; want it to flow through commerce like money

The defendants argued that the notes were not negotiable and therefore Art. 9 did not apply
Court looked to 9-102(3) and said that application of Art. 9 to a security interest in a secured
obligation is not affected by the fact that the obligation is itself secured by a transaction or
interest to which Art. 9 does not apply
Does instrument include non-negotiable note and therefore fall under Art. 9?
Yes. Instrument under 9-105(1)(i) includes non-negotiable instruments

II. Investment Securities

Note: we did not go over this section in class

III. General Intangibles

9-106 – general intangibles means any personal property (including things in action) other than
goods, accounts, chattel paper, documents, instruments, investment property, rights to proceeds of
written letters of credit, and money

catch-all category for Art. 9 collateral

examples include literary rights, performance rights, copyrights, trademarks and patents

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Brown v. Yousif

Rule: while perfection is generally needed to enforce a security agreement covering general
intangibles against other secured creditors, it is not needed against transferees who either did not
give value or had knowledge of the security interest (9-301(1)(d))

Here, Yousif (transferee) did give value, but he had knowledge of Brown’s security interest;
therefore, Brown did not have to file

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 Chapter 16 – Multi-State Transactions

Introduction

Determining which state’s rules apply to the perfection of a security interest (choice of law rules)

See 9-103

1-105 – codifies recognition by the law of contractual freedom of choice of law (i.e. parties can
include in contract their own choice of law)

2 Issues:
1) How to perfect a security interest in collateral (9-401 tells where to file)
- here, the focus is on WHICH STATE to file the financing statement in
- 9-103 provides some rules

2) Once initially perfected, what happens if the debtor moves the collateral to a new state?

The rules in 9-103 depend on the type of collateral – there are 6 types/subsections
1st step is to figure out which subset you are in

Problem 16-1

(a) Goods under 9-105(1)(h) and inventory under 9-109

What about under 9-103?
When you have goods, look to subsections 2,3 & 5 first to see if applicable
If not, subsection 1 ordinary goods applies
- here, 2,3 or 5 doesn’t apply so it is ordinary goods under 9-103(1)(a)

(b) accounts under 9-103(3)(a)

(c) cars are problematic under 9-103

- look at subsections 2 & 3
Are cars subject to certificate of title? 9-302(3) – goods covered by certificate of title; certificate
of title law controls for perfection
- new cars aren’t until sold
- used cars are
If cars (new or used) held as inventory by dealer – must file financing statement
Are they mobile goods under 9-103(3)? No
Then go to default rule 9-103(1)
Note: cars held for ordinary sale by dealer are ordinary goods

(d) personal property leases are chattel paper and fall under 9-103(4)

(e) certificated security = investment property under 9-103(6)

NOTE: this type of collateral will not be on the exam!

(f) right to royalty payments = accounts; accounts fall under 9-103(3)

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Documents, Instruments, and Ordinary Goods

9-103(1) – documents, instruments, letters of credit, and ordinary goods

- the choice of law rules are based on the location of the collateral, not the debtor
- usually look to the location of the collateral at the time of the transaction when asking where
to perfect initially
- when the collateral is moved to another state, the secured party has a limited time to re-
perfect in that state

Problem 16-2

9-103 – 1st characterize the collateral

Tractor – look at 9-103(2)? NO; 9-103(3)? NO
Bull – 9-103(2)? NO; 9-103(3)? NO
Both are mobile? But look at the definition of mobile goods – must be mobile and normally used
in more than 1 jurisdiction
Therefore, they both fall under the default rule as ordinary goods under 9-103(1)

Where do you file to perfect 1st?

General rule: 9-103(1)(b) – “Last event test” – where is collateral at the time the last event
occurred which perfects? It is that state’s rules which govern
What events are we talking about?
Events that must take place for perfection
9-203 (attachment) – need 3 events; plus any other necessary steps for perfection

When did events in 9-203 occur and when did perfecting act occur?
Whatever the last of these 4 events is the triggering date

Tractor – 9-203
1) security agreement on March 1
2) value given – when was tractor transferred (when did debtor really get title to the tractor) –
possibly March 1, even though no physical delivery
When was financing statement filed? March 4 in Virginia
If security interest attached on March 1 and was filed on March 4, it was perfected on March 4
If security interest didn’t attach until March 8 (filed on March 4), it was perfected on March 8

“Last event test” doesn’t really matter for tractor because it never left Virginia
9-103(1)(b) – collateral location test

But the issue does come up for the bull

Last event? Same analysis as above – question is when was value given (when did debtor get
title to the tractor) – March 4 or 8?
Where was bull when last event occurred? Under March 8 – bull was in Virginia so no problem
because filing was in Virginia; if March 4 – there is a problem because the bull was in N.
Carolina on this date

Other Example of “Last Event Test”

There is an after-acquired property clause in the security agreement – debtor and lender are in TX
Financing statement is filed in TX
Debtor wants to buy $100,000 piece of equipment from manufacturer in California

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By arrangement, debtor takes title to the equipment in California at the shipping point
Is the financing statement filed in TX effective to perfect the security interest in the equipment
that debtor is taking title to in California?
Analysis: equipment is ordinary good under 9-103(1) so “last event test” applies
When is last event? When debtor gets title (rights in the collateral)
Where is equipment when debtor gets title? California
If apply 9-103(1)(b) technically – filing is inappropriate in TX – debtor should file in California
Mussleman says this result is ludicrous
- courts that have looked at this situation say, while collateral is outside TX, that security
interest is in fact unperfected (White & Summers position also)
- once collateral actually arrives in TX, you’re fine
- therefore, you are only unperfected for a while

Note: the 4-month rule in 9-103(1)(d) only applies when there is perfection somewhere 1st
Note: the exception to the “last event test” in 9-103(1)(c) only applies to a PMSI in goods

Gennet v. Fason

9-103(1)(d) – when goods subject to a perfected security interest in 1 state are transferred to
another state, the security interest remains perfected if, within 4 months after the transfer, the
goods are perfected in the transferee state
- the creditor loses his perfected status if he does not re-perfect his interest in the transferee
state within the 4-month period

How to continue perfection: 1) take possession of the collateral; or 2) refile in the destination
state

Note: each item of collateral gets a separate 9-103(1)(d) 4-month application

What are the rights when someone takes a security interest within the 4 months (the grace
period)?
It depends on who they are
9-103(1)(d)(i) – if 4 month period of time to re-perfect and don’t do it within this grace period, if
other party is a purchaser your security interest is unperfected as to the time the collateral was
moved

Who is a purchaser?
1-201(33) – defines purchaser (but not very helpful)
see also 1-201(32) – defines purchase
Art. 9 secured party is included in the definition of purchaser under 1-201(33) because they have
a “voluntary transaction creating an interest in property”
Note: a lien creditor, including a trustee in bankruptcy, is NOT included within the definition of
purchaser in 1-201(33)

Secured party gets absolute protection from someone who is not a purchaser, even if they
don’t re-perfect within the 4-month grace period

Good Covered by Certificates of Title

9-103(2) – certificate of title

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Orix Credit Alliance v. Heard Family Trucking

2 Requirements for 9-103(2) to apply:

(1) must be a certificate of title issued somewhere
(2) a certificate of title statute must require the security interest be noted on the certificate of title

Trustee argued the Mississippi certificate of title law, not the UCC and since no security interest
noted on the Mississippi certificate of title, it was unperfected

The court fins an exception to the statute

This case is an example of a court saying that a state’s certificate of title law is superior to Art. 9
of UCC – i.e. they just ignored 9-103(2)

Drafters intended that certificate of title be issued by any state and the security interest be noted
on that certificate of title
- doesn’t matter which state issued it

What happens if more than 1 certificate of title?

e.g. certificate of title in debtor’s car issued by Ohio; security interest noted on the certificate of
title; debtor moves to TX; new certificate of title on car
What should happen? TX should require debtor to surrender the Ohio certificate of title and note
the Ohio security interest on the new TX certificate of title (once you surrender Ohio certificate of
title, it is over under 9-103(2)(b))
If TX fails to note security interest on the new TX certificate of title:
- look to 9-103(2)(b) – the security interest is instantly unperfected

What if TX issues new certificate of title but does not require debtor to surrender the Ohio
certificate of title (no liens noted on the TX certificate of title)?
Which state’s laws govern?
Most courts have said that the last certificate of title outstanding is effective
- here, secured party is screwed – unperfected security interest
Why? Protects innocent 3rd party in TX who buys it later without knowing the secured party’s
interest

Chrysler Credit Corp. v. Religa (In re Males)

What does it mean to “register” in another jurisdiction under 9-103(2)(b)?

Majority rule: the term “register,” under 9-103(2)(b), means registering and obtaining a new
certificate of title
- it is the certificate of title which should control notice to 3rd parties as to the existence of a
secured lienholder, not registration or other documentation which may fail to list the security
holder’s interest

Accounts, General Intangibles, and Mobile Goods

9-103(3) – for accounts and general intangibles, UCC looks to the location of the debtor to
determine choice of law; the debtor’s state determines the rules for perfection; and if the debtor

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moves to another state, the secured party has the usual 4-month grace period to re-perfect in the
new state
- the same rule applies to mobile goods, which are goods ordinarily used in multiple
jurisdictions

Problem 16-4

Multi-state problem
9-103(3) applies because there are 2 types of collateral: 1) equipment and 2) receivables
Receivables = accounts
Harvesting equipment = mobile goods (e.g. “commercial harvesting machinery” is an example of
a mobile good noted under 9-103(3)); note it also must be leased or held for lease by the debtor –
here it is (goods used in debtor’s business)

General rule for determining where to initially file the financing statement for 9-103(3):
9-103(3)(b) – the law of the jurisdiction where the debtor is located governs the perfection
- see 9-103(3)(d) – the debtor shall be deemed located at his place of business if he has one, at
his chief executive office if he has more than one place of business
- chief executive office – defined in comment 5(c) p. 651 of the Code (“the place from which
in fact the debtor manages the main part of his business operations”)
MUST file – Kansas
SHOULD file – if have some doubt whether ordinary goods (9-103(1)) – use “last event test”
-file anywhere you think appropriate just to be safe

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 Chapter 17 – Proceeds

General Considerations

9-306 – proceeds includes whatever is received upon the sale, exchange, collection or other
disposition of collateral or proceeds
- insurance payable by reason of loss or damage to the collateral is proceeds
- any payments or distributions made with respect to investment property collateral are
proceeds
- money, checks, deposit accounts, and the like are “cash proceeds;” all other proceeds are
non-cash proceeds

A security interest continues in any identifiable proceeds including collections received by the
debtor (automatic attachment) if secured party has security interest in the collateral

Defining Proceeds

Problem 17-1

(1) $4000 down payment ($2500 check; $1500 cash) – these are cash proceeds under 9-306(1)
(2) trade-in computer – non-cash proceeds under 9-306(2)
(3) promise to pay the remaining $28,000 in a retail installment contract – non-cash proceeds
under 9-306(2) because not within the definition of cash proceeds in 9-306(1)
- this is chattel paper under 9-105(1)(b)

Note: you can have proceeds of proceeds – these are second generation proceeds

In re Mintz

Issue: whether the debtor’s distribution rights were proceeds under Art. 9
Court says these distribution rights were general intangibles under 9-106; therefore, you must file
to perfect (9-302)

Proceeds includes whatever is received upon the sale, exchange, collection or other disposition of
collateral or proceeds (9-306(1))

Court says: (1) the future payments are not as a result of the sale or exchange of the distribution
rights; (2) “collection” in the UCC context relates to accounts, as in 9-502(1), not relevant to
these facts; (3) “other disposition” must be limited to the phrases which preceded it, under the
principle of ejusdem generis

Therefore, the court holds that the future payments are NOT proceeds
- Mussleman says most courts hold this way
- Rental income is not proceeds

Citizens Savings Bank v. Miller

9-312(5) – 1st to file rule would apply

Bank arguing they had PMSI in 15 cattle and had “super priority” under 9-312(4)

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Court rejects this argument – says the son’s 15 cattle were not identifiable because they weren’t
even around anymore, even though there were still cattle in the herd
Bank then argues that even though they can’t identify the original 15 cattle, there were cattle in
the herd that were “proceeds” of the 15 in the herd

Court rejects this – says only replacement cattle can meet definition of “proceeds,” but not the
herd’s offspring; court says Bank hasn’t been able to prove replacement cattle

Offspring are not proceeds because there has been no disposition under 9-306(1)

What Bank should have done – dad could have assumed all of son’s debt under son’s original
security agreement, rather than create another security agreement

Attachment

Problem 17-2

(a) Insurance proceeds = proceeds under 9-306(1)

- security interest continues automatically in collateral and any identifiable proceeds under 9-
306(2)

(b) $100,000 is cash proceeds

- as long as can trace the $50,000 into race horse – can have proceeds of proceeds (2nd
generation proceeds)

(c) Offspring are not proceeds – there has been no disposition under 9-306(1) (see Miller case
above)
- secured party would have to describe the offspring in the security agreement

(e) No, because there has been no disposition or sale of the racehorse
- this is similar to coins in a slot machine – this is earnings or income from the collateral)

Bombardier Capital v. Key Bank of Maine

Tracing proceeds through bank account

“Lowest Intermediate Balance Rule” – this rule is used to trace money through bank accounts
when funds have been commingled; this is the most common tracing rule used
How does it work?
Debtor sells inventory for $20,000; deposits it into bank account (these are proceeds)
- the proceeds sink directly to the bottom of the account
- as money is withdrawn from the account, it is skimmed off the top
- keep track of proceeds vs. non-proceeds in the account
If account balance before the $20,000 proceeds was $5,000 – account = $25,000 ($20,000
proceeds; $5000 non-proceeds)
If debtor withdraws $3000 from the account – it is non-proceeds
- you have account balance of $22,000; still have $20,000 of proceeds
If debtor puts $8000 in account of non-proceeds
- $30,000 account balance ($20,000 proceeds; $10,000 non-proceeds)
If debtor takes $12,000 out of the account

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- $18,000 account balance – all are proceeds

Perfection

9-306(3) – continuously perfected security interest only continues 10 days unless a, b, or d

Problem 17-3

Security interest in computer inventory

Invoice from sale of computer – classified as an account under 9-106 (right to payment for goods
sold)
Bank does have a security interest under 9-306(2)
Is it continuously perfected under 9-306(3)(a) or (b)?
It is non-cash proceeds so look to 9-306(3)(a)
Determine where to file financing statement covering same collateral – 9-401
(see 9-103 if multi-state transaction)
Here, Sec of State would be proper location to file financing statement to perfect security interest
for inventory
- also file financing statement for accounts in Sec of State (same office where original
financing statement was filed)
If you do account financing, just be aware that if another secured party has security interest in
inventory, you will be second banana

Problem 17-4

Should secured party list accounts or chattel paper in its financing statement? Not necessary to
have perfected security interest in proceeds – 9-306(2) & (3)(a)
- if rely only on security interest for chattel paper as proceeds of _ and someone else purchases
it, then secured party will lose (9-308(b)); but could get priority if name in financing
statement as original collateral and indicate on chattel paper then _ under 9-308(a)
- may help maintain perfection if security interest in chattel paper or accounts in certain
circumstances

Problem 17-5

(a) S has security interest in bulldozer under 9-306(2) because it is proceeds under 9-306(1)
because it was from the exchange of tractor which is original collateral
- perfected security interest for 10 days – 9-306(3)
- may not be continuously perfected because under 9-401(1) alternatives 2 &4, farm equipment
is filed locally and regular equipment is filed centrally so if bulldozer is equipment, would
need to file centrally; so original financing statement re-filed in place where financing
statement on equipment needs to be filed; so 9-306(3)(a) does not apply
- if under alternative 1, then okay because both farm equipment and regular equipment filed
centrally; if bulldozer is consumer goods then filed both locally so would be perfected

(b) S has security interest in TV under 9-306(2) because received cash proceeds for original
collateral and TV is proceeds of proceeds (2nd generation proceeds) – 9-306(1)
- since can trace cash proceeds into what was purchased, still have identifiable proceeds
- S does not have perfected security interest - TV is consumer goods and under 9-401(1)
alternatives 2 &3, consumer goods and farm equipment filed locally; BUT since TV was

66
 acquired with cash proceeds, there needs to be a description of the collateral in the financing
statement since financing statement does not cover consumer goods; therefore, he is not
perfected with respect to the TV
(c) S has security interest in$10,000 originally as cash proceeds – 9-306(3)(b) – must show that a
filed financing statement covers the original collateral and the proceeds are identifiable cash
proceeds
-account is still cash proceeds and is identifiable because the balance is greater than $10,000 so
he has perfected security interest in account – 9-306(3)(b)
- use lowest intermediate balance rule – the $10,000 can still be traced

Problem 17-6

(1) Bank has security interest in account as proceeds from inventory sale (9-306(1),(2))
Voltaire has security interest in account as proceeds from living room set
Bank is 1st to file and original financing statement covered after-acquired accounts so it has
perfected security interest (9-303(a))
Voltaire has perfected security interest because accounts and inventory both filed centrally under
9-401(1); it is automatically perfected under 9-306(3)(a)

Priority – 9-312
- normally 9-312(5) 1st to file
- under 9-312(8) – only have PMSI in identifiable CASH proceeds of inventory
- account is not cash proceeds so Voltaire does not have PMSI in accounts
Therefore, Bank has priority as 1st to file

(2) Bank and Voltaire have security interest in chattel paper as proceeds and perfected – 9-306(3)
(a)
- like above, Voltaire as 1st to file would win (9-312(5)) because Voltaire does not have PMSI
in non-cash proceeds
- 9-306(5)(a) – when goods sold for chattel paper and returned to seller then if seller debt still
unpaid, original security interest re-attaches; therefore, Voltaire would win as a PMSI in
inventory (9-312(3))

9-306(5)(a)
1) goods are collateral at time of sale
2) debt still unpaid
3) sale of collateral results in account or chattel paper
4) repossessed by seller or secured party
- then original security interest reattaches and is continuous from the time the goods sold and
remains perfected
Therefore, Voltaire reattaches PMSI in inventory
Bank has regular perfected security interest in inventory
Voltaire has priority – 9-312(3)

Problem 17-7

Analyze the interests of the deposit account

Bank – perfected security interest under after-acquired property clause; the security interest in the
cash proceeds is perfected
Pinwriter – PMSI in the machinery – this continues to the cash proceeds

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Both have perfected security interests – 9-312 applies
- 9-312(4) – Pinwriter has super priority and gets all $3000

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 Chapter 19 – Bankruptcy

Introduction

Secured parties, if properly perfected, have a favored spot in insolvency proceedings and in fact
are likely to get nearly all of the available property

Bankruptcy is federal law; UCC is state law

- Bankruptcy code wins out when the 2 conflict under the Supremacy Clause

2 Types of General Bankruptcy:

1) Liquidation (Ch. 7) – all of debtor’s non-exempt assets are sold or liquidated and the
proceeds are distributed to creditors

2) Reorganization (Ch 11 & 13) – debtor keeps most or all of assets and proposes plan to pay
back over time

Effect of Filing—General

Debtor-in-possession – same as trustee

Effect of Filing—After-Acquired Property

§ 552 Bankruptcy Code – restricts the effectiveness of an after-acquired property clause

- the only property acquired post-petition that is subject to the security interest is proceeds,
product, offspring, or profits of pre-petition collateral
- to have security interest in proceeds post-petition – the security agreement has to provide for
this

Effect of Filing—Bifurcation of Undersecured Obligations; Interest on Claims

Creditors file claims with the Bankruptcy court

- secured or unsecured claim

Secured claim – gets paid in full (creditor wants this)

Unsecured claim – generally get paid much less (often nothing)
To the extent any money is left over after secured claims are paid, the unsecured claims get paid
based on priority by the Bankruptcy Code

Generally, from the time the petition is filed until the time that the case is either closed or a plan
of reorganization begins, no interest is payable on any claim
- if there is a plan of reorganization, interest will be payable on both claims during the plan
period—i.e. during the time the debtor is making payments on the plan

Exception to the “no interest on claims” rule: if the obligation underlying the claim is
oversecured, then interest will continue to run until the surplus is completely exhausted

Oversecured claim – value of collateral is GREATER THAN what the debtor owes the creditor

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-these are entitled to interest during the Bankruptcy proceeding (interest rate based on what
debtor and creditor agreed to in the security agreement)
Trustee in Bankruptcy represent the unsecured creditors’ interest (NOT the secured creditor)
- trustee compensated based on value of property obtained for benefit of the estate (i.e. the
unsecured creditors) – avoiding payment of security claims

Problem 19-1

How do you classify a claim in a bankruptcy proceeding?

§ 506 (pp. 352-53)
- basically it’s a secured claim – Art. 9 security interest (perfected and filed) up to and not
exceeding the value of property at time of bankruptcy proceeding
- issue: what really is the value of the property – this determines whether they (Bank) have
fully secured claim or not
If trustee is right – all that is really going to happen is that once the property is sold, the secured
party (Bank) is going to get all of it (even if $800,000)
§ 554 – the trustee would probably abandon the property to the creditor and let creditor do what
he wants to do (note: under §554(b), the court can ORDER the trustee to abandon)
- this is probably what trustee would do here
- if trustee thinks a sale would be more than $1 million - §721 – trustee can OPERATE the
business

Effect of Filing—Automatic Stay

A. Introduction

Under §362 of the Bankruptcy Code, bankruptcy triggers a stay of virtually any private action
against the debtor or the debtor’s property

B. Scope of the Stay

§362 – once bankruptcy petition is filed, virtually everything is stayed

Problem 19-2

(a) §362(a)(1) – would stay it (very broad; covers most actions); §362(a)(6) may also act to stay
the continuation of the lawsuit
(b) same as (a); probably §362(a)(1) would stay it
(c) §362(a)(3) – would stay it; §362(a)(4) would also stay it; §362(a)(5) may be violated if taking
action against property of the DEBTOR
Note: once debtor files bankruptcy petition – property becomes estate property; any property
acquired by debtor after filing is debtor’s property; §362(a)(6) may also apply
(d) stayed – can’t ask for it; send bill or statement (considered act to collect debt under §362(a)
(6)
(e) stayed under §362(a)(1); BUT, exceptions to stay in §362(b)
- see §362(b)(1) – no stay of a commencement or continuation of a criminal action or
proceeding against the debtor
(f) stayed under §362(a)(1) or (6)
any exceptions? §362(b)(4) – governmental units’ police and regulatory power – does collecting a
debt constitute this – probably not so it’s stayed

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(g) §362(b)(4) would probably applied so it’s stayed (governmental units’ police and regulatory
power)
(h) debtor = corporation; this is an action against the president of a corporation and has nothing
to do with bankruptcy of the corporation
- §362 does not apply so it’s not stayed
- if president himself was in bankruptcy – would be stayed under §362(a)
- any exception? Yes §362(b)(2)(B) – to qualify under §362(b)(2)(B), have to be an action to
collect back alimony that was not paid AFTER the filing of the petition
- back alimony not paid BEFORE filing – it’s stayed; would have to collect from the estate
(i) §362(b)(9)(a) – not stayed
(j) §362(a)(8) – stayed

Commercial Credit Corp. v. Reed

Deals with violation of a stay and what constitutes a violation

Remedy for violation of an automatic stay – motion for contempt
§362(h) – remedy for willful violation of a stay – actual damages including costs and attorney’s
fees and in appropriate circumstances, punitives

Basic Rule – a refusal or failure to take action may constitute an act within the scope of the
automatic stay; thus, an entity which has violated the stay has an obligation to restore the status
quo by undoing its previous action and preventing the continuation of the consequences of the
stay violation

An entity’s failure to comply with its duty to restore the status quo and undo its previous actions
which violated the stay may constitute a willful violation of the stay
- a creditor must act IMMEDIATELY to restore the status quo once it learns it has violated the
stay

Here, creditor argued it acted “reasonably” in returning the car back to the debtor after 19 ½
hours

Appellate court said reasonable is element of restoring debtor to status quo, including seeking
legal advice, as long as no delay in seeking this advice

C. Duration of the Stay

In most cases, the stay continues until the case is closed or dismissed - §362(c)
- if property is abandoned from the debtor’s estate, the stay terminates with regard to that
property

Way to prematurely lift the stay (§362(d)) – go to court to seek relief from the stay (takes 30 days
usually; file motion with Bankruptcy Court)

D. Termination of the Stay

§362(d) – options creditor has when debtor files for bankruptcy and wants relief from the
automatic stay

3 Ways (we focus on §362(d)(1)&(2))

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(1) adequate protection – see §361 (based on theory that holder of secured claim should get that
property at some point; court can award some kind of relief so creditor gets their secured
claim)

(2) (A) collateral must be worth less than what the debtor owes AND (B) Ch. 7 doesn’t apply
here (this subsection is difficult to show because most property IS necessary to
reorganization)

United Savings v. Timbers of Inwood Forest Assoc.

Undersecured = less collateral than your debt

Court said if collateral was declining in value, creditor is entitled to adequate protection based
upon declining amount of their secured claim

Undersecured creditor is NOT entitled to interest during the pendency of the claim, not even as
adequate protection

§506(b) – equity cushion = difference between debt (claim) and value of collateral (if value of
collateral is higher than debt = oversecured creditor)

value of collateral __________________

equity cushion

debt (claim) ___________________

Under §506(b) – creditor is entitled to interest to the extent of the equity cushion

Adequate protection does not equal interest on the debt

Here, United could not get relief under §362(d)(2) so they tried to argue that they were not
getting adequate protection under §361
United argued they were undersecured and could therefore not get interest and should get
adequate protection
Court said not entitled to adequate protection
Under §506(b), you can’t get interest up to the amount of the equity cushion if you are
oversecured
Court said since Congress did not allow undersecured creditors to get interest, they were not
going to change this

Problem 19-3

Start with §362(d)(2) – if trucks are $3.7 million, debtor does have equity in them (not clear here
for §362(d)(2)(A))
Even assuming no equity, the debtor probably needs these trucks for effective reorganization
(§362(d)(2)(B))
Then look to §362(d)(1) – if value of trucks is $3.7 million, there is equity cushion and therefore
no need for adequate protection

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If the trucks are equal or less than $3.5 million and trucks are declining in value – clearly, under
United Savings they would be entitled to adequate protection
What type of adequate protection? Pay creditor from extra cash around to make up difference in
declining value of the property
- court could grant substitute lien on different property

If no extra money or property to adequately protect creditor – court will grant relief from the stay
Why? Constitutionally, security interest has to be protected because it is a property interest

E. Penalties for Violation of the Stay

Majority of courts have said all actions in violation of the stay are VOID (they have no legal
effect of any kind)

A knowing violation of the stay is punishable as contempt of court’

§362(h) – an individual injured by willful violation of a stay shall recover actual damages,
including costs and attorneys’ fees, and possibly punitive damages

VII. Delayed Perfection and Attachment—Strong-Arm Clause, Preferences, Etc.

Trustee’s job is to invalidate any liens (i.e. invalidate security interest) on estate to increase the
amount that will be distributed to unsecured creditors

Trustee’s Power to do this:

(1) §558 – steps into shoes of debtor and has any defense debtor would have against any
obligation or contract
- secured party has to show, therefore, that its security interest has attached and has done
nothing to invalidate or defeat its security interest

(2) §903(1)(d) & §554(a)(1) – trustee gets all rights of a hypothetical lien creditor as of time of
filing for bankruptcy
- statutory scheme of priority between trustee in bankruptcy (lien creditor under Art. 9)
- if not perfected security interest at time of bankruptcy filing, security interest is gone because
trustee is lien creditor

(3)Avoidance – even though properly filed and perfected security interest

- §101(54) – “transfer” = grant of security interest in property
- allows trustee to avoid transfer of grant of security interest
- §554(b) – trustee can avoid (terminate) any transfer of an interest of debtor in property
avoidable under state law (important when fraudulent transfer of security interest in property
by debtor)
- if fraudulent under state law, trustee, if can find unsecured creditor who could avoid the
fraudulent transfer, can step into that unsecured creditor’s shoes and avoid
§548 – trustee can avoid fraudulent transfer made from 1 year of date of bankruptcy filing

§547 – Preferences

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- §547(b) = basic rule
- prevents debtor from preferring 1 creditor over others; if preferences, can avoid the security
interest
Exceptions to §547(b) in §547(c)

Start analysis with §547(b) – what is a preference

Problem 19-4

Issue: was the June 1 transaction an avoidable preference

- go to §547(b)
(1) transfer of property
(2) to or for benefit of creditor
(3) for or on account of pre-existing debt owed by debtor before such transfer made
(4) transfer made while debtor was insolvent
(5) transfer made on or within 90 days before date of filing of petition
(6) transfer enables such creditor to receive more than such creditor would receive (will always
be the case because if no transfer – you are unsecured creditor and probably get nothing from
bankruptcy)

You must know when the transfer was made!

§547(e)(2) – says when transfer is made (3 choices) – need to see when security interest was
perfected and attached
§547(e)(2)(A)(B) or (C) – determine when transfer is made

When did security interest attach (9-203)?

Attachment occurred on June 1
Perfection occurred on June 7
Therefore, §547(e)(2)(A) applies and transfer deemed made when ATTACHED (here June 1)

Now go back to §547(b)

- if transfer made after the debt occurred, trustee can avoid

Here, loan and transfer are exactly contemporaneous; therefore, it was NOT transfer on account
of pre-existing debt so trustee can NOT avoid

(k) Start when transfer was made

Perfection didn’t occur until 14 days later
§547(e)(2)(A) – not applicable (not at or within 10 days)
§547(e)(2)(B) – case of delayed perfection – no maintaining “secret lien”
Trustee can avoid
Policy: don’t want debtor frustrating distribution scheme of bankruptcy – no preferring by debtor
to certain creditors

(l) 9-203 – attached on June 1

Transfer occurred on June 15 when it was perfected
Debtor didn’t file for §547(e)(2) bankruptcy within 90 day period of transfer
Trustee cannot avoid

(m) Attach – 9-203 – security agreement executed June 6

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Perfected on June 15 – financing statement filed; made within 10 days so apply §547(e)(2)(A)
Transfer date is June 6
Trustee can avoid because transfer for or on account of pre-existing debt
Delayed attachment is the problem here
(n) Transfer didn’t occur because occurred before debtor was insolvent
Trustee cannot avoid

VIII. Preference Exceptions

A. Introduction

§547(c) – focus on §547(c)(1) & (5)

B. Substantially Contemporaneous Exchanges

§547(c)(1) – a preference is not avoidable if the parties intended a “contemporaneous exchange

for new value given to the debtor” AND the exchange was “in fact a substantially
contemporaneous exchange”

Dye v. Rivera (In re Marino)

Under §547(g), as party asserting the contemporaneous exchange defense, Rivera has burden of
proving 1) that the parties intended the transfer to be a contemporaneous exchange for new value;
2) that the exchange was in fact contemporaneous; and 3) that new value was given

First determine if trustee can avoid under §547(b) – look to §547(e)(2) to determine when transfer
was made

Under §547(c)(1) – the trustee can not avoid to the extent that the transfer was 1) intended by the
debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous
exchange for new value given to the debtor; and 2) the transfer must be in fact a
SUBSTANTIALLY contemporaneous exchange

Rule: when the delayed perfection of a security interest can be satisfactorily explained, the
transfer may still be characterized as substantially contemporaneous in fact

The intent requirement is generally easily satisfied with all new loans
Was the transfer substantially contemporaneous with the transfer? The court looked to the
shortness of the delay and also that the delay was outside of the secured party’s control

Note: there is a split in authority:

1) §547(c)(1) is not available for delayed perfection cases
2) (Dye case) inquires into all circumstances of case – circumstances beyond secured creditor’s
control - length of delay, reason for delay, intention of parties, etc.

§547(g) – trustee has burden of proof to show transfer is avoidable

- if all elements of §547(b) are met, burden shifts to creditor to show §547(c) exception applies

Problem 19-5

Delayed perfection problem

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Transfer was July 27
Trustee will argue under §547(b)(2) – assuming the trustee can avoid under §547(b)(2), the
creditor will argue that the exchange was contemporaneous under §547(c)(1)
§547(c)(1)(A) – intention is pretty easy to show
Big question: was transfer in fact substantially contemporaneous with the loan?
Note the 2 lines of cases re: delayed perfection problem
Assuming Dye v. Rivera jurisdiction – how long was delay? 22 days (probably not too long)
Reason for delay? When did courthouse close? Bank couldn’t have filed because it was closed

C. Purchase Money Security Interests

§547(c)(3) – provides a 20-day grace period during which perfection may be accomplished
without subjecting the security interest to avoidance as a preference

D. Floating Liens

§547(c)(5) – applies ONLY to security interest in INVENTORY and ACCOUNTS

§547(b) – Key is when the transfer was made

- look to §547(e)(2) to help figure this out
§547(e)(3) – a transfer is NOT made UNTIL the debtor has acquired rights in the property
transferred
§547(c)(5) – net result rule or improvement in position rule
- take 2 dates: date that is beginning of preference period
- did secured party improve his position during bankruptcy with regard to the debtor
- to extent he did improve his position, debtor’s trustee may avoid this amount

How do you figure out if secured party improved his position?

Begin with preference period – how much a debtor’s obligation (what is collateral worth)

90 days before
Bankruptcy Bankruptcy

D’s obligation to
Secured party =

Value of collateral =

1) if oversecured 90 days before bankruptcy, you’re done—trustee can’t avoid because

impossible to improve position before end of 90 days
2) if undersecured 90 days before bankruptcy, look to date of bankruptcy filing and ask D’s
obligation to secured party and value of collateral

Problem 19-6

(a) Value of collateral = $80,000

D’s obligation = $100,000
Look at §547(b) to see if trustee can avoid something
- only way is if debtor acquired new inventory during 90-day period – Looks like yes

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Will §547(c)(5) help to disallow this avoidance
-here secured party is undersecured by $20,000
Now go to bankruptcy filing date – D’s obligation = $74,000; collateral = $69,000; secured party
is undersecured by $5000
Did secured party improve his position during this 90-day period? Yes, improved position by
$15,000
Trustee can avoid the secured party’s claim by $15,000
$69,00 - $15,000 = $54,000 (this is secured claim)

(b) secured party oversecured by $5000 so STOP – position can not be improved
-whatever secured claim on bankruptcy filing is what you get - $35,000
-anything that happens during the 90 days – ignore it for purposes of §547(c)(5)

(c) There was no after-acquired property during 90-day preference period; therefore, §547(b)
doesn’t apply because no transfer
Trustee can’t avoid
Ask 1st: to what extent were there transfers during the preference period

(d) 90 days before bankruptcy - $250,000 undersecured

At time of bankruptcy - $250,000 undersecured
No improvement of position therefore no avoidance
Court doesn’t worry about any other exceptions when dealing with §547(c)(5)

Galloway v. First Alabama Bank (In re Wesley Industries)

Bank is $937,000 undersecured at beginning of 90-day period

Bank is $964,000 undersecured at time of bankruptcy
Bank is really worse off; therefore, bank didn’t improve its position so nothing to avoid by trustee

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 Chapter 20 – Default, Foreclosure, and Sale

Introduction

Dealing with issues between the secured party and the debtor – no issues of priority

Default

See 9-501

Art. 9 does not define default

- depends on basic contract law and how you define it in the security agreement

Problem 20-1

(a) courts will generally enforce what parties define default in the security agreement
- some exceptions to this re: consumer credit
- therefore, these provisions will generally be enforceable in commercial context

(b) (1) – (3) non of these constitute default according to Mussleman

(4) this clause occurs a lot (e.g. farm agreements); debtor just taking chance the secured party
won’t exercise its discretion under this clause
Any limitations on right of the secured party for this clause:
1-208 – secured party has to act in “good faith”; definition of “good faith” in 1-201(19) –
honesty in fact (this is subjective and not helpful)
Most courts in applying good faith standard will use objective, reasonableness standard under
commercial standards

Under 1-103 – all areas of law are applicable (fraud, duress, capacity)
Debtor can argue that not in default, even though he has done something which under the security
agreement looks like default (e.g. waiver, estoppel)

9-503 – gives secured party, on default of debtor, the right to take possession of the collateral

Debtor has action against secured party for wrongful repossession if not in default at time of
repossession

Cobb v. Midwest Recovery Bureau Co.

Suit for wrongful repossession

Debtor argued that the secured party let the debtor make late payments and therefore waived its
right to declare default based on late payments as described in the security agreement
Trial court gave debtor a lot of damages

What rights does the secured party have to repossess collateral without notice?

Majority view - Some courts have held that the acceptance of late payments does NOT waive or
otherwise affect the right of a creditor to repossess without notice after subsequent late payment
defaults

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Minority view - Other courts have imposed a duty on the creditor to notify the debtor that strict
compliance with the time for payment will be required in the future or else the contract remedies
may be invoked

This court held that the repeated acceptance of late payments by a creditor who has the
contractual right to repossess the property imposes a duty on the creditor to notify the debtor that
strict compliance with the contract terms will be required before the creditor can lawfully
repossess the collateral (Minority view)

Alternatives Upon Default

Proceed under Art. 9 or under common law

- bring a breach of contract action

Repossession

9-503 – right of repossession

Secured party has right on default to take possession of collateral
In taking possession of collateral, secured party may proceed without judicial process if it can be
done without breaching the peace

What constitutes a “breach of the peace”?

Every jurisdiction has a different standard

Williams v. Ford Motor Credit

This is the Arkansas standard for what constitutes “breach of the peace”

Breach of peace occurs where force, or threats of force, or risk of invoking violence accompany
the repossession

The majority held that there was no breach of peace because she would have had to object to the
men repossessing the vehicle in order for a breach of peace to have occurred

Mussleman says the Dissent probably states the better rule (i.e. the Majority rule)
- in case of any confrontation of any kind by the debtor or other, the repossessor should
stop and retreat

Once there is a confrontation (e.g. person says don’t take the good), anything that happens after
that point is probably not good
- don’t wait until breach of peace actually occurs

Problem 20-2

(a) Friendly is not stealing it – they have a right to repossess it and can do so only by peaceful
means
How far can they go? Every court would say this is okay, even if have to break a window – as
long as no confrontation occurs in the process

(b) Private driveway? It’s okay as long as no confrontation by debtor

Unlocked private garage? Depends

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Locked private garage? Is it attached to house – part of private home? Was garage door down or
locked?
Fenced backyard? Questionable breach; some courts may let you; most wouldn’t
Home of debtor? BREACH OF PEACE!

Note: the closer you get to the private home of the debtor – more trouble or closer you get to
breaching the peace according to almost all courts
(Stay away from private homes to repossess collateral!!)

Some courts hold breaking and entering a business premises is a breach of peace

(c) Probably okay as long as doesn’t get someone’s attention

(d) No. Any torts committed by agent are your torts – can’t avoid liability by contracting

Problem 20-3

This is breach of peace given devastating disaster

Lying to get property – some courts say repossession by fraud, trick or deception is a breach of
peace

Problem 20-4

(a) If you have property of someone else – you are involuntary bailee and owe operation of
reasonable care until can get it back to the debtor
(b) Same as in (a); may have security interest in CB under rule of accession (9-314)
(c) Did they know or should they have known? Did they do reasonable inspection? If not,
they’ve breached their duty of ordinary care as involuntary bailee
(d) Describe the security interest broadly enough to include the contents
- otherwise, take reasonable care if don’t

Intangible payment obligation (accounts or instruments) – 9-502

Secured party under 9-502 may collect on accounts or instruments directly from the underlying
obligor upon the debtor’s default
- gives this right to the secured party even in circumstances where the security agreement did
not
- requires that the secured party account to the debtor for any surplus if the underlying
transaction merely created a security interest in the accounts or other collateral
- if the underlying transaction was a sale of accounts or chattel paper, the debtor is ordinarily
not entitled to any surplus

Disposition of Collateral

9-504 – selling the collateral to satisfy the debt

Debtor must ordinarily be given notice of the resale
Occasionally, other secured parties must also be given notice, if and only if the collateral is not
consumer goods and the secured party making the sale has received written notice from the other
secured party of its interest in the collateral

9-506 – debtor has a rarely-used right to redeem

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Sale may be a public sale (auction) or a private sale
All that is required is that the sale be “commercially reasonable”
- the sale proceeds used to 1st pay the expenses of the sale, then applied to each claim in order
of priority
- if any surplus from the sale (rare), secured party must pay surplus to debtor
- when sale doesn’t produce enough to pay the secured obligations, the secured party is entitled
to sue the debtor for the deficiency

Hall v. Owen County State Bank

2 main issues

1) Notice is required when have possession – give debtor opportunity to protect himself
9-504(3) – what kind of notice has to be given?
Reasonable notification of time and place of any public sale or of time after which any private
sale
What type of notice?
Is it a public sale or private sale?
Waiver of notice has to be in writing after default

What is “reasonable notification”? Not defined anywhere in UCC

Notice – 1-201(26)
How much notice? Reasonable under the facts and circumstances

1-201(38) – defines “send”

Most courts hold this definition implies that the notice has to be in writing (TX – can give oral
notice)

What happens if secured party fails to do something they are supposed to do under part 5 of Art.
9 – what is debtor’s remedy?
9-507 – debtor is entitled to recover damages
What are debtor’s damages? Have to show sale of collateral brought too low of a price; debtor
has to prove actual value of collateral at time of sale (this is problem because debtor doesn’t have
control of the sale – secured party has possession of the collateral)

Courts have developed 2 separate rules to apply whenever secured party has done something
wrong re: repossession and disposition

1) absolute bar rule (TX rule) – no deficiency judgment for secured party if they’ve done
something wrong

2) rebuttable presumption rule (majority rule) – secured party allowed right to deficiency
judgment against debtor; there is presumption that actual value of collateral at sale was equal to
the debt (i.e. there is no deficiency); burden on secured party to rebut the presumption and show
value of collateral was true value at time it was sold
- Policy: secured party in best position to do this (i.e. determine value of the collateral)
- This is the fairer rule according to Mussleman
How do you rebut the presumption?
Other credible evidence of value besides value received from sale or from secured creditor’s
employee’s testimony

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Sale in deficiency judgment must be commercially reasonable
What is “commercially reasonable” manner?
9-507(2) – examples of what would be commercially reasonable sale (note: not an exclusive list)
- this is a question of fact
- burden of proof on secured party
List of Factors:
1) price received at sale (most important factor)
- but see 9-507(2) – this 1st factor is not in and of itself sufficient to show not commercially
reasonable
2) if buyer of collateral at foreclosure sale subsequently resells it and gets a higher price for it
3) the market – retail vs. wholesale market (wholesale market is usually the proper market given
the expense of selling on the retail market)
4) in private sale – the number of bids
public sale – time and place of sale; advertisement

Problem 20-5

What did VMI do wrong in repossessing and reselling?

2 Issues:
1) no notice given to debtor
- is notice excused under 9-504(3)? Doesn’t look like it (not perishable, not sold on recognized
market)
- did debtor waive right to notice? No; no written statement waiving right to notice

2) commercial reasonableness of all aspects of the sale

- only involved 1 buyer
- sold for 25% of its retail price (selling at retail vs. wholesale market)

VMI could argue BFB was logical purchaser

Remedies for debtor? Absolute bar rule – VMI not entitled to deficiency action v. rebuttable
presumption rule (burden on VMI to establish what the value of the collateral was at the time of
the sale)
9-507(1) – debtor has to prove up his damages

Problem 20-6

9-504 – did they act in a commercially reasonable manner in all respects?

Illegally injecting horse is not commercially reasonable
What is debtor’s remedy? 2 approaches (absolute bar rule v. rebuttable presumption rule)

Problem 20-7

9-506 (rarely ever used) – debtor’s right to redeem collateral

- to redeem, have to pay ALL DEBT owed (entire obligation)
- Here, debtor didn’t pay all debt (obligation) so Bank’s actions were proper

Strict Foreclosure

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9-505 – secured party can usually elect to keep, rather than to resell, the collateral
- notice must be given to the debtor and to those secured parties who have given the
foreclosing secured party written notice of their interests
- if no objection is made within 21 days, the secured party may keep the collateral and the debt
is satisfied
9-505(1) – use when dealing with CONSUMER GOODS
9-505(2) – use when dealing with ANYTHING OTHER THAN CONSUMER GOODS
If debtor objects to this within 21 days – secured party must proceed under 9-504

Reeves v. Foutz and Tanner, Inc.

Issue: can a secured party who sends notice of intent to retain collateral sell the collateral in its
regular course of business without complying with 9-504?

This is a pawn shop transaction = pledge under Art. 9

The value of the jewelry far exceeded the value of the loan

Defendant argued that once it complied with 9-505(2) and sent notice of intent to retain, it could
do as it pleased with the property once the 30 days had elapsed without objection

Plaintiffs argue that the trial court was correct in applying 9-504 to require that any surplus from
the sale of collateral be returned to the debtor (i.e. what should control when secured party sends
out notice of intent to retain collateral is secured party’s true intention)

Court held that the defendant can do as he pleases with the property, but where he intends to sell
the property in the regular course of his business, which is in substance selling the property as
contemplated by 9-504, he must account for a surplus in conformity with 9-504
Can only exercise 9-505 when you truly intend to KEEP the collateral

Court found secured party did not act in good faith

Criticism of this case – rather than looking to intent of the secured party at time of notice to keep
the collateral, if going to sell, can’t use 9-505
- look to 1-203 – obligation of good faith; if secured party doesn’t act in good faith, punish
them

Purpose of 9-505:
Works when value of collateral somewhat less or closely approximates the value of the debt
Secured party doesn’t have to worry about bringing a deficiency judgment
Debtor want this when no surplus or little surplus and helps avoid being sued for deficiency
judgment

Problem 20-8

(a) look at 9-505 – does Bank have right to keep cab in satisfaction of the obligation or are they
required to sell it
Is this cab a consumer good at time of transaction?
Probably equipment under 9-101 when 1st bought
Later, being used for personal use (consumer goods)
9-401(3) – important time for classifying collateral is when it attached

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Probably perfected when cab was equipment used in debtor’s business – change in use of good
doesn’t matter

Bank – will argue they made loan in reliance on debtor claiming he was using the cab in a
business
Debtor – will argue the time collateral was repossessed, it was consumer goods

Mussleman says secured party argument probably better

(b) Is this a waiver by debtor under 9-505? No. debtor has to be in default, waiver has to be
clear, and in writing
- here, the waiver is NOT in writing (if it was, Bank may have better argument)
- also, “you guys keep it” is not real clear as to whether debtor is waiving

Problem 20-9

(a) Focus on good faith

1-203 – every contract or duty under the UCC imposes obligation of good faith
Debtor’s argument – obligation on Bank to advise him of new appraisal
Mussleman says debtor probably has best chance of winning based on underlying policy of 9-505

(b) Jewelry Co = merchant dealing with goods of those kind

Art. 1 – subjective standard applies to Art. 9 transactions
Art. 2 – objective standard only applies to Art. 2 transactions
Courts have said Art. 1 standard applies only to Art. 9; Art. 2 standard applies only to Art. 2
But in practice, it doesn’t matter – courts have used objective standard; therefore, focus on
OBJECTIVE STANDARD of good faith
Secured party will probably be found to have NOT acted in good faith, regardless of Bank or
Jewelry store

(c) Once secured party elects under 9-505(2) to retain it, it can’t sue for deficiency; it has no
obligation to turn over the surplus
- here, they’re just screwed

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