Article 9 Secured Transactions

Deals w/the creation of security interests in personal property. A. UNSECURED CREDITOR 1. Does not have a right to self-help. He must a. file a lawsuit b. Obtain a judgment (by default or trial) c. if you get the judgment, doesnt mean you can collect, so d. You have to go to Sherrifs office and have them seize property, sell it @ auction, and out of that $ you pay the Sherriffs fees and then the debt is paid off. BUT: 2. Exemption Laws. Every state has them. Certain property cant be seized to satisfy a debt. (i.e. tools of trade, homestead) 3. You cant follow the property. If debtor sold property before a levy was done and the debtor spent the $, you cant go after the subsequent BFP to get the value or property (unless the sale was done in a fraudulent manner in order to avoid seizure). This means you get an in personam right (you can go after the person), not an in rem right (following the property). 4. If insolvent/bankrupt, theres no particular priority. B. SECURED CREDITOR/SECURED PARTY (SP) B/C of this, many creditors will only take a security interest (SI). Might do so via 1. As mortgagee (not governed by UCC) holding security interest in real property 2. As an Article 9 security interest in personal property 1. SECURED CREDITOR ADVANTAGES 1. Right to self-help. It applies if it can be asserted w/o breaking the peace. They can repossess the car from the street in front of your house, but cant get into a locked garage to take it. 2. Not subject to exemption laws. Exemption laws specifically state theyre for unsecure creditors. 3. In rem right. Creditor can go after subsequent BFP, even if they were innocent of the lien. 4. Priority in event of bankruptcy. Get paid in full before rest of $ is distributed. I. Mechanics of Attachment 3 steps for an Article 9 SI to attach (can be in any order) STEP 1. must be a written security agreement, signed by debtor which has a description of the collateral.

STEP 2. secured party must give value to debtor. There must be $/considerationcant be a gift. STEP 3. Debtor must have rights in the collateral. (Doesnt have to have it @ time maybe I get the ownership later). When these 3 steps area met, theres attachment. However, theres still no public record/notice yet. So, Article 9 also requires. II. Perfection. To get perfection you need Financial statement/UCC 1: filing of public notice in a public office. Contains: a) Name and address of secured party b) Name and address of debtor c) Brief description of collateral d) Signed by debtor e) Filed under debtors name in public office, usually the office of the Secretary of that State. (MD its the state department of taxation and assessment) Effective for 5 years. Can be renewed by refilling w/in 6 months of expiration. To release it after debt is paid off, must file a termination notice. NOTE: car loans are noted as liens on the automobiles title, rather than as a filing of a financing statement. III. Steps in getting a SI: 1. sign a promissory note: I agree to pay $ to the bank. Obligation to pay $. Its unsecured interest. Represents your in personam indebtedness. 2. sign a security interest (this is where the process of attachment will be done). Giving the bank a SI in the car. 3. Then the bank will complete the perfection stage by having their name listed on the title as a lien holder (called notation). Different Types of Property that can be Art. 9 collateral I. TANGIBLE/GOODS 1. Types of tangible goods: a) inventory goods: held for sale or lease. i) materials intended to be consumed immediately in a biz, such as pencils, paper, etc. b) consumer goods: things bought for personal, family, household use. c) equipment: property used in a biz, but not for sale for the bizs use. d) farm products: aggie collateral. Ex. Grain, livestock, tractor is farm product statutorily, not equipment. 2. 2 types of SI for goods: a) Purchase Money Security Interest (PMSI): a SI taken by the person lending you the $ to buy a specific thing. These have superior rights to non-PMSIs. 2 types of PMSIs:

i. SI retained by the Seller of the thing ii. SI retained by a 3rd party lender whos $ is used to buy the thing b) Non PMSI: all else. EX. Lends you $ and takes interest in something you already own, like a 2nd mortgage. IV. WHAT IF YOU DEFAULT? Alternative 1. Sell it. SP repossesses, theres a statutory obligation to sell it. If theres a surplus, (they get more $ for it than you owe), you get that remaining money. If they get less than you owe, you still are liable for a deficiency (lender becomes Unsecured (USP)). Alternative 2. Strict foreclosure. Requires debtors consent. They take collateral and it wipes the slate clean. If theres a surplus you dont get it, if theres a deficiency, they cant come after you for it. If debtor demands a sale however, they must sell it. Alternative 3. Partial strict foreclosure. Agreement to allow car to be a trade-in for a reduction in the debt. Bank says if you let us keep the car, well knock $5k off your debt. Alternative 4. Right of redemption. At any time between repo and sale, D (debtor) can pay off the remaining/entire debt and get the good back. Usually an acceleration clause requires payment of the entire debt once repoed for redemption to be effected. II. GENERAL INTANGIBLE PROPERTY A. Deposit Accounts: (They get access to your bank account) B. Accounts: (Payments outstanding) EX: customers bought things w/Sears credit card; $ owed are Sears accounts receivable. C. Problems w/using accounts as a SI: 1. 2. 3. 4. 5. Dribs and Drabs. $ comes in little bits over long period of time Cant collect b/c of valid s. If Sears couldnt collect bank cant collect either. Its an SI in an UNsecured interest. Accounts US by definition. Could never be able to collect b/c it never comes into being Self-destructing collateral. Accounts get paid off. Get after acquired property clause

B/c of these problems, usually a bank will only lend on a certain % of accounts, & a loan officer will also exclude from the computation delinquent or disputed accounts (so only the good ones). C. Other General Intangible Property This not for goods sold or services rendered; Rights to payment for intellectual property

III. GENERAL INTANGIBLE PROPERTY A. Chattel Paper SI in a secured obligation, but like an account. EX: A car. Dealer finances, has a SI (PMSI) in the car. Assume its payable over 3 years, so its still outstanding. Like credit cards (an account but unsecured), but the dealers interest is a Secured Interest. Gets a SI loan from a bank using these SI in the car as collateral. Chattel papers= double level SI. Stage 1: SI in goods Secured party=dealer. Consumer=buyer. Stage 2: Secured party in stage 1 becomes debtor in stage 2, and uses his SI as collateral to another secured party. Stage 3: Bank gets a SI in the dealers SI called a SI in chattel paper. SO IMPORTANT (if you as an attorney dont put this in, its malpractice!) get the after acquired property clause!!! Ex. Dealer sells car. Buyer (B) puts down payment and finances rest w/Dealer (D). D has PMSI in the car thru attachment (1. written security agreement; 2. value given; and 3. debtor gets rights); then D perfects by notation on certificate of title. Here its just the PMSI. Then, D needs cash (say wants to expand dealership). Doesnt want to wait to receive the payments owed b/c they come in dribs and drabsneeds $ now. D goes to bank & offers: 1. To sell his chattel paper (say the face value of the installment ks are $10mil over 4 yrs.; D will sell it to a factor for $5mil now). This is a pure sale. If he paid $5mil and gets the $10mil, he keeps it. If he only gets $2mil, D is not liable for the deficiencies and hes not entitled to the surpluses. 2. Other thing D can do is borrow $ from the bank and give them a SI in the chattel paper. 3 characteristics of a sale transaction: 1. A sale of a discreet package already in existence 2. Immediate notification/default not relevant 3. No seller responsibility for deficiency nor entitlement to a surplus (sometimes certain clauses are added, like $ back guarantee) Characteristics of the SI in the chattel paper: 1. Here, by definition, after acquired property clause would be required. 2. Bank cant do anything unless/until D defaults to bank 3. Bank would owe D any surplus and D would remain liable for deficiencies if liquidated b/c of Ds default 4. Bank cant repossess cars unless/until customer defaults Art. 9 governs BOTH sales of chattel paper AND SI in chattel paper When Art. 9 talks about debtor aka seller of chattel paper Secured Party aka buyer of chattel paper Security Agreement sale of chattel paper

(remember though that Art. 9 sales have to be commercially reasonable)

How do you create a SI (including sales) in chattel paper? 1st, the same 3 steps of attachment; 1. Security Agreement 2. Value given 3. Debtor (seller) must have rights in chattel paper Then, how do you perfect SI? 1. Take physical possession of the chattel paper; Docs car buyers signed (the originals). Delivery of those papers to bank/factor perfects. 2. Filing of financing statement indexed under name of debtor (the D whos selling the chattel paper/borrowing $). Alternative: Stage 1 SI in goods (art. 9) Personal Property Lease. D leases cars also. In a lease theres a stream of payments. So, D can do same thing w/leases (sell the rights in the lease (assignment) or grant a SI in the leases). However, this alternative to stage 1 is NOT governed by Art. 9 (though Art. 9 does apply at stage 2). 4 types of chattel paper: 1. Personal Property LeaseSale of Lease (NOT Art. 9) 2. Personal Property LeaseSI in lease (NOT Art. 9) 3. Art. 9 SI in goodsSale of SI (Governed by Art. 9) 4. Art. 9 SI in goodsSI in the SI (Governed by Art. 9) B. Consignment Take goods to a consignment shop. You create a bailment. They act as your agent (they dont own the property). Some assets are stores own goods, some are other peoples (consigned). Should we require consignors to file Art. 9 financing statements so lenders are on notice b/c lenders give $ not knowing not all the assets they see are not the property of the consignee. Art 9-109(a): What must consignors do under Art. 9? Every time you create a consignment, youre treated as if youre a SP lending $ and taking a SI in the property; (Its as if youre a SP taking a SI in the property that belongs to the consignee (even though technically its your property, this is how its treated so it can be covered by Art. 9)) For consignment, its as if the thing you have a SI in, is the consignees goods and you (consignor) only has a SI in the goods, and you must perfect by filing an Art. 9 financing statement (indexed under consignees name). C. Leases Art. 9 doesnt generally govern leases. Whatre the advantages of one over the other? Some are taxation issues. Lease payments are 100% deductible as biz payments if used for the companys biz. Advantage for sale is you get a depreciation allowance; lease you

get maintenance taken care of, etc. Conceptually, the diff is do you accrue equity/ownership as you make payments? (Some leases are actually sales, such as if the lease is for the life of the item, or you can purchase at end for a nominal fee) 1. Both involve stream of payments, and 2. If a default, there can be repossession BUT 1. During sale, you build equity as you go along 2. Lease you get no ownership 3. Art. 9 applies to the sale but not the lease. disguised leaseIf its really a sale, youd better perfect for a SI, just to make sure. 1-201 (37): SI in a lease must comply w/art 9 if: 1. Lease is for the items expected economic life; (treated as an Art. 9 sale). OR 2. Mandatory renewal: for the remaining economic life of the good (must renew) or lease requires item to be bought upon completion of the lease OR 3. & 4. If at the end of the lease, I have option to get the goods for 0 or nominal consideration, its a disguised sale, not a lease. NOTE: Art. 9 says if a lessor isnt certain if its a sale or a lease, he may be safe and file; but its NOT an admission that its a sale. -if its a lease, and theres a default, you pull out remainder of lease, but keep the surplus. If its a sale, you pull out remainder owed but it theres a surplus, youd owe it back to the lessee. D. Mortgages 9-109 (d)(11). Art. 9 doesnt cover creation of a mortgage. E. Instruments 9-109(b) and comment 7. You can grant a SI in an instrument (art. 9 collateral). A promissory note/instrument is valid art 9 collateral whether I sell my notes, or give a SI in the notes, (creation or sale of instrument/note and creation of SI in note). Perfect by taking possession or filing a financing statement. 9-109(b) - fact that the note is secured by something not covered by art 9 doesnt matter/prevent an art 9 SI from existing in the note. Changes: 1. Art 9 covers note transactions even if sold 2. Art 9 gives 2 options in perfection 3. Perfection in either way carries over to a mortgage w/o having to comply w/real estate law. The mortgage is a supporting obligation.

CREATING A VALID SECURITY INTEREST: Stage 1 Attachment; when SI enforceable Agreement; debtor has rights; value given For maximum protection against 3rd parties, you need to go through Stage 2 Perfection Ways to Perfect The 6 modalities of Perfection 1. Small category of SIs that are automatically perfected, nothing else beyond attachment is needed PMSIs in consumer goods; patent royalties. 2. Temporary - 9-312f: A perfected SI in goods in possession of a bailee remains perfected for 20 days w/o filing if the SP makes available the goods for sale, exchange, loading, unloading, etc. (specific purposes). If SP releases for periods of < 20 days (and only for specific purposes) and then takes possession again, theyre the beneficiaries of continuity of perfection (they never lost their perfection). 3. Perfection by possession - Collateral by physical possession called a pledge. Physical delivery of collateral into the hands of the SP is always a means of perfection. Always valid perfection of notes (called instruments) KIM sales of notes are automatically perfected, but a SI in notes is not automatically perfected) and possession is effective for chattel paper (its the best way). 4. Perfection by control - give bank SI in your bank account; SI in things like stock certificates/security entitlements (give authority to liquate your portfolio if you default) 5. Perfection by filing - For accounts and intangibles, its the only way. 6. Perfection by notation - Notation of lien is on the title itself; used for cars KIM: Priority is preserved via date of filing/perfection. If new things are added, they are only perfected as of that new date, while the older items are still perfected from the old date. EX: You take my stamp collection as collateral (perfect by possession). I take back for 2 days to add more stamps, and returned it to you yesterday. You perfect for the old stamps from the 1st date, but for the new stamps, only as of yesterday. Details of the Filing System 4 things you can file: 1. Financing Statement 2. Continuation Statement 3. Amendment

4. Termination Statement 1st Question: Where do you file a financing statement? Sub-Question (a): What state do you file in? New Code = perfection is governed by the state of the debtors location. Ex. SI in Sears inventory. Inventory is kept in 25 different states. So you have to determine where Sears is located... 1st if that store only has one place of biz, thats where youd file. If not, then 2nd youd look to where the corp has its chief executive office (this is for an unincorporated biz w/more than 1 place of biz) 3rd If it is incorporated, then its the state of incorporation. 4th if the chief executive office is in a foreign country, and its incorporated in a foreign land, you file in D.C. Sub-Question (b): Where within that state do you file? Ex Debtors location is in MD. So, where in MD do you file? 1. Usually its in the Office of the Secretary of State 2. In MD, its in the State Department of Assessment and Taxation (SDAT) (What you do is check the states UCC to find out where in that state youd actually file) There are some exceptions: 1. Fixture filings: SI in goods that are physically attached to real property you file in the Office of Recorder of Deeds (in the property records) in the county where the real estate is located. Contents of the Filing Statement Name and address of debtor and SP, and a brief description of the collateral (even all assets if its in everything would be fine) In many bizs, its trade name isnt often its legal name. 99 Code says you must use the legal name (get it from the articles of incorporation). Errors not seriously misleading in the name (like spelling mistakes, etc) dont invalidate. 99 Code goes on saying if the standard search logic would unearth the wrong name, its not seriously misleading. Fees (in MD) the filing fee = $20 if 8 or less pages. >8= $75. Electronic filing=straight $20. Other states levy a % of the indebtedness. Effectiveness For 5 years from the date of filing. After 5 years the filing lapses (the SI would become unperfected). If $ is still owing, you can file a continuation statement w/in 6 months. If you do so, you get another 5 years (You can keep doing it). If dont do this, you have to refile anew and youll have a gap in your perfection.

Amendment Can add/delete a debtor, SP, collateral; statement of assignment. Termination Statement For this, there has to be (1) No outstanding debt, and (2) No further obligation by SP to make a future loan. If these are met, you have a duty to file the termination statement. 1. for consumer goods: it is incumbent upon the SP to file w/in 1 month (irrespective of demand). 2. for SI other than consumer goods: no duty until debtor requests it. Even then, SP just has to sign it and debtor has to file it. 3. KIM: you only have to file a termination statement if theres been a financing statement 4. A SP who refuses to cooperate w/a termination statement is liable to debtor for damages resulting Changes Doctrine of Continuity. Code gives a 4 month grace period. If you take corrective action w/in that 4 months, youre deemed to be continuous in your perfection. If you dont, you have to refile (and itll only be valid from the date of the new filing). The Q of PRIORITY If there are multiple claims against the same object, and the value of the collateral is not sufficient to satisfy all of those claims in full, who gets paid 1st ? Part 3 of 9 Perfection and Priority 9-322, and 9-324 special PMSI rules EX: Unperfected SP v UnSP w/Judicial Lien: 9-317(2): one who holds a judicial lien = a lien creditor. Anyone who becomes a lien creditor before filing or other perfection wins over an unperfected SI. A. THE BIG PRIORITY RULE (THE FIRST TO FILE RULE): When there are multiple 9 SP, both of whom have perfected by filing a financing statement, priority is awarded NOT to the 1st to attach, and NOT 1st to perfect, but rather the 1st to give notice/1st to file. 1st qualification to the 1st to file rule: If D moves states, and you have to refile (continuity), you must do it w/in 4 months, or else you become UnSP, or have to file anew and lose the perfection from the original date. Think about that in addressing problems. 2nd qualification: Doesnt work very well when one creditor is not required to file a financing statement (PMSI in consumer goods). In a case where one of the SP was able to perfect w/o filing (where hes not required to file), he will win if his perfection was before the other persons filing.

3rd: If theres a financing statement on file against you, but you dont actually owe them any $, can I lend you $, and actually get 1st place? NOT ENOUGH. Since priority is based on 1st to file, as long as there is a financing statement on file, a new lenders priority will be based (date wise) upon others. The 1st to file rule is designed to operate when BOTH parties are perfecting via the filing system. MAIN JIST: If both sides are in the filing system look at the filing date. If one side didnt have to file to perfectlook at the perfection date B. Priorities involving PMSIs: Basic priority rule that works is the 1st to file rule. But 1st to file can be changed if the 2nd person is the holder of a PMSI. There are in turn exceptions: o PMSI in inventory o PMSI in every other property than inventory Even if I know Im 1st to file, theres no guarantee that Ill automatically beat out someone else who comes along later if theyre a PMSI meeting 9-324. THE 9-324 exception: I lend you $; take SI in your accounts receivable (Im filer #1). If another lender comes along, he would lose1st the file rule. SP2 gets SI and files on inventory; SP2 advanced the $ that purchased the inventory, so SP2 has a PMSI in the inventory. That inventory is sold and generates accounts receivable. SP1 filed directly on the accounts receivable (and before SP2 came along); SP2 filed on the inventory, which was later sold and generated accounts receivable. 9-324 inventory PMSI wont work, b/c that protects only the inventory itself or if its sold for cash. But if the sale generates accounts, the exception doesnt apply. If SP1 files on accounts receivable he cant be undercut by anybody who comes along later. One of the policies behind these rules is the facilitation and encouragement for the creation of accounts receivable. If more than 1 SI qualifies for priority in the same collateral as under a,b,c,d,or f (if you have more than 1 PMSI) priority of PMSI seller overrides the priority of PMSI lendereven if lender filed 1st . The 9-322 exception: 9-322 has so many exceptionscheck them. One rule deals w/bank accounts. Way to perfect SI in the account is by getting control over the account (put in your name, or bank follows lenders instructions). Priority rules are subject to the rule of deposit accounts. 9-320 Buyer of goods. Buyer takes free of a SI even if the SI is perfected and the buyer knows of its existence. The Buyer In Ordinary Course Rule (BIOC) (a buyer who purchases in the ordinary course of the sellers business).

1-201 to be a BIOC, you must purchase in good faith and w/o knowledge that the sale is wrongful (Just b/c you know theres a SA, theres no reason for you to assume that its passing to you is wrongful). 9-320(a) you take free of a SI created by the Buyers seller. You take free of a SI the dealer gave to the bankyou never take free of a SI you yourself created. 9-320(b) for Consumer buyer. B Buys from D NOT in the ordinary course of biz (say D isnt a retailer, and this is sold at yard-sale), but B still unaware/without notice, B will take clear (and SP must not have filed a financing statement). General rule about NON-BIOC is they lose to a perfected SI, but win vis a vis an unperfected SI except for the consumer buyer exception: a/k/a: The Garage sale exception, (9-320b), Bs from Ss not in ordinary course of biz who: 1. buy for personal use, 2. take possession, 3. give value, and 4. dont have knowledge of outstanding SI will win over perfected SP unless perfected SP filed a financing statement. When looking at priority questions, identify your fighters so you can plug in the right rule. Double Debtor Problem Use the Buyer Rules, not the 1st to file. D2 in biz of selling equipment (SP2 has a SI in his stuff). D2 sells to D1 (SP1 has a SI in his inventory w/after acquired property clause). Both default. SP2 cant get D2s equipment back from D1 b/c D1 was a BIOC. Forget the 1st to file rule, and use the Buyer rules. In the SP v Buyer issue, if Buyer wins, B keeps everything and SP gets nothing. If SP wins, SP pulls out his debt, and B gets surplus. In SP v SP the first one pulls out his debt and the rest goes to the other SP. Proceeds Issue 1st concept: Basic Rule 9-315. What do we mean by proceeds? Whatever is received upon sale, exchange, lease, destruction, replacement stuff of collateral. Replacement stuff can be stuff, or monies, barter items (non-cash proceeds), or they can be intangibles like goods sold that generate chattel paper. Whatever debtor has thats traceable to the collateral no matter how many generations removed.

Includes proceeds of collaterals, and proceeds of proceeds, and so on. Bank has SI in dealership. Dealer sells a car (check, trade-in, and credit agreement). Bank doesnt have a SI in the car anymore b/c the buyer was a BIOC. If dealership defaults, bank cant repo the car. Bank has a SI in the proceeds of the car. What are they? The check received, the trade-in, and the chattel paper generated. Dealership defaults, bank has right to get check, repo the trade-in, and take over

the chattel paper by notifying the customer. Proceeds include tangible and intangible. If dealership gets payments, the status of the checks are the proceeds of chattel paper that are the proceeds of the inventory in which the bank had a SI. Danger is that once the checks get into the bank account and someone else gets control, it could destroy priority.

I have a perfected SI in your equipment. You sell equipment to a buyer, but the buyer doesnt qualify as a BIOC b/c youre not in the ordinary biz of selling things. When you default, I can still repossess the item of equipment. I can go after the collateral, or I can choose instead to go after the proceeds, or go after both but I can only get a single satisfaction. Proceeds doesnt automatically mean you lose the right to the collateral. So if sold to BIOC (9320) lender loses right to go after the collateral. Proceeds rule gives SP an extra place to go after, it doesnt deprive access to collateralthat would depend on priorities. When SP claims proceeds, SP has burden of showing that proceeds can be identified to his collateral. If you sold collateral, got $ for it, put it in an account, I have to show that my proceeds $ is still in the account. UCC says method of ID used to show your collateral is in the account is based on C/L principles. The most common formula used is lowest intermediate balance rule (LIBR). When collateral is sold and generates $ and the $ is co-mingled into a bank account where theres proceeds and non-proceeds, he gets whatever he can establish via the LIBR. LIBRProceeds $ and general $ in a bank account. Assume account has $10,000, all of which is non-proceed. Day 2 $5,000 proceeds $ deposited. Day 3 $7,000 withdrawl, leaving account now to $8,000. LIBR says we treat nonproceeds as water and proceeds as oil, so any withdrawl less than the $10,000 (the non-proceeds $) is coming out of the non-proceeds. Proceeds $ of $5,000 is still there. It gives SP the benefit of depletion by saying until the account dips below $5,000 youre covered. If it dips below $5,000, but more non-proceeds $ delivered, youll be entitled to get the lowest point it reached unless more proceeds $ came in. 9 requires identification and then it goes into C/L.

2nd basic concept: Generally, a SI that attaches to collateral will automatically attach to the proceeds. You dont need a specific clause in the SA. Perfection Requirements? Perfected SI on collateral. Its then converted into proceeds. DO you have to re-perfect? Basic rule is NOa perfected SI on original collateral will continue to be on proceeds.

BUT there are specific rules:

Initially, your automatic rollover is only for 20 days unless a # of conditions are met (3): 1. Same place of filing rule: If you perfected your SI in the original collateral by filing a financing statement, and the proceeds are collateral for which if you were to file on that proceeds would be in the same office as you did file for the collateral, you dont have to do anything. a. Same place of filing rule wouldnt work if you perfected original in a manner other than filing. Ex. PMSI in consumer goods (bought a computer from CC). Automatically perfected. B exchanges that computer for a boat. Does CC have perfected SI in the boat? Yes for 20 days, but unless they file a new one that covers the boat, theyll become unperfected.

b. Also doesnt apply to 3rd generation proceeds where 2nd was cash. Lets say I sold you a computer system (you buy as equipment). I take perfected SI in that. You then sell the computer for $ and you use the $ to buy some other thing, the cash intermediary breaks the chain to the 3rd thing, so I only have 20 days. SLA I perfect w/in the 20 days Ive got continuity of perfection. c. When you perfect by filing a financing statement, you should have as broad a description as possible, so that you get the benefit of the doubt for the same place of filing rule. 2. With respect to cash proceeds. Cash, checks, bank accounts, you never have to reperfect. If I have a perfected SI however, I automatically have a perfected SI in cash proceeds. Where you get in trouble is when the cash buys item 3. 3. If youre not in a position to use the other means, you have to do it by day 21. KIM: 9 separates perfection from priority. Your perfection may carry over but it doesnt mean that your priority carries over as well. EX, collateral sold, proceeds go into account; your perfection carries, but say another party had control over that account they get priority. EXAMPLE: Bank lends you $10k to buy a car. They perfect by noting lien on the Certificate of Title. (Not by filing). You sell the car. (Youre not a dealer, so Buyer not a BIOC). You default, bank wants to go after proceeds. If $ was simply put into your bank account, it qualifies as cash proceeds, and bank has a perfected SI in that $ up to the LIBR. What if you deposited it, then you cleaned out the account and bought a lot of stuff. Do they have a SI in those other things? NO b/c (1st) same place of filing rule cant cover generation 3 b/c it wasnt done via filing and (2nd) intervening cash proceeds. When a car is sold in a barter example (car for boat), the same place of filing rule wont be appropriate. Bank would have to file w/in 20 days of debtor getting boat.

Basic priority rule is 9-3221st to file rule. Sub-rule says when youre 1st to file on collateral, youre considered to be 1st to file on proceeds too. Under 9-315 theres also continuity of perfection (you have to have this). Another rule is 9-330- A purchaser is NOT same as a Buyer. Purchaser is broader than Buyer. Can mean a B of chattel paper, or a lender of chattel paper who takes a SI in chattel paper. Purchaser of chattel paper has priority over a SI in that chattel paper which is claimed merely as proceeds of inventory if: (1) In good faith (youre not aware theres a transfer restriction) and (2) In the OC of PURCHASERs Biz (part of purchasers biz to make loans on chattel paper), (3) Gives new value (not if D were to transfer its chattel paper b/c of a past debt owed) Ultimate lessonif youre a lender against chattel paper, dont rely on filing as a means of perfection. Take possession. Basic rule is if you win b/c of chattel paper rule, that gives you superior right not only to chattel paper, but also to proceeds of chattel paper and to the goods (this is implicit). 9 perfected SI vs a right of set-off (this is where you have $ in an account, and you owe the bank $ for a loan. If you dont pay them on time, they have right to take it out of your account.) 9 provides that right of set-off has priority over even a perfected 9 SI. This is analogous to how it deals w/multiple SPremember whoever gets control of the bank account 1st trumps 1st to file rule; technically the bank already has control of the account unless SP gets control of the account before the bank. Fixtures 9-334. Basically, all tangible property will be real estate, personal property. Essentially personal property physically attached to real estate. Generally, when you sell a house, unless you otherwise indicate, the fixtures are sold w/the house. A/C unit, hot water heaterthese are removable things, but they are fixtures to the house. The issue is HOW connected is it? KIM that it can vary from state to state, but its really about a degree of affixation. UCC says an 9 SI cant be created in real estate, but CAN be created in a fixture, or a personal property that becomes a fixture. IF I buy a heating system, and BG&E takes a SI in it, it can be subject to 9. 1st qualification it doesnt apply to building materials used to build the house. 2nd qualification theres a special type of financing statement required to be filed. Its called a fixture filing. 2 things that distinguish a fixture filing from a regular filing 1. Where you file-these are local filings and have to be filed in the land records office where youd file a mortgage statement

2. Certain requirements for content must contain a legal description of the land where the fixture is. Fixture filings are NOT mandatory. Theoretically I could perfect by a non-fixture filing, or by not filing at all if its a PMSI in a consumer good. Perfection can occur by a regular 9 filing, or where theres a PMSI in consumer goods, or by automatic perfection. BUT it will tend to be very vulnerable w/o a fixture filing. Will my SI survive a bankruptcy if I dont file, the answer is YES, but you probably wont beat real estate filings. 9-334: What are rights of 9 SP, that has a SI in a fixture vs the holder of a real estate mortgage on the entire house? I own a house. Ive installed a # of appliances and systems which I bought on credit, and I granted PMSIs to various lenders. I also have a SA w/the bank who helped me buy the house. Clearly, if the mortgagee is foreclosing on its mortgage, the mortgagee wants all the stuff to stay w/the house. If fixture person has priority, he could remove heating and A/C units, sell them separately. Or he could demand an allocation sell the house but figure out how much goes towards the heating system. If mortgagee has priority fixtures cant be removed. If fixture guy has priority, he can remove items, or allow foreclosure sale and take out whats owed to him.

9-334e3: a perfected SI in fixtures has priorities over a conflicting interest if the conflicting interest is a lien on the real property obtained by legal/equitable means after it was perfected by any means permitted by this article. Perfection by any method permitted by this article includes a fixture filing, automatic if PMSI in consumer goods, or a filing in the land office. As long as fixture filing was perfected before the judgment lien arose the fixture filing prevails. Ways a 9 will win over a pre existing real estate mortgage: Rule 1: If you perfect by a fixture filing before real estate mortgage has been properly recorded, the fixture filing will always win. Rule 2: A PMSI in a fixture will prevail over a real estate mortgage if the holder of the PMSI makes a fixture filing before affixation or w/in 20 days thereafter. NOTE: this requires there be a FIXTURE filing (automatic perfection wont help). There are 2 exceptions to this rule: 1. Depends on type of mortgage. When its a non-construction mortgage (I borrow $ to buy a pre-existing house) apply the PMSI rule as above. Special favortism granted to a construction mortgage ($ was lent for purpose of new construction) that says the construction mortgage wins vis a vis goods that become fixtures before the completion of construction .

EX: You install fixture on Day 1. Day 2 mortgage recorded. Day 3 you file your fixture filing. Even though you filed your fixture filing w/in 20 days, youll still lose b/c mortgage was filed after, not before. Mortgagee filing after affixation is relying on those fixtures being there for the valuation of his risk as a source of collateral. If fixture filing done before mortgage filing, fixture filing always wins. However, where mortgage filed 1st, the PMSI undercutting wont happen if (1) construction mortgage and installed before completion, and (2) even if non-construction but mortgage filed after affixation. Next Group of Exceptions: 1. Dealing w/fake fixtures. Fake fixtures go to 9 person; fixture filing must have been made before affixation; In many states, the very fact that its readily removable means its NOT a fixture at all and not subject to a real estate mortgage. 2. Replacements. If the jurisdiction would say something was a fixture, but then you replace it, 9 protects the 2nd replacement fixture, but not the 1st, original fixture. The initial installation of fixtures during construction will always go to the construction mortgagee unless see above. EX: Im a construction lender. No fixture filing on file. Im essentially guaranteed that Ill have a priority in fixtures, even if theyre sold on a PMSI basis and even if theyre readily removable as to the initial installation. SUMMARY: 1. 9 SI in a fixture has priority over a real estate mortgage when a. PMSI priority even where mortgage filed 1st, 9 SI may still have priority if i. its a PMSI ii. A fixture filing was made iii. 20 day rule iv. BUT that exception doesnt apply where the competing mortgage is a construction mortgage, and the fixtures are installed during that construction. v. Also doesnt apply after fixtures were installed. vi. You NEED a fixture filing. b. First to file priority absolute. If a fixture filing was made before mortgage recorded, no ifs ands or buts, the fixture will always have priority. You NEED a fixture filing. c. Fake fixtures priority where theyre fundamentally fake (they more or less resemble pure personal property) then well allow the 9 SI to have priority. For this exception, the 9 doesnt have to perfect by a fixture filing, it can be perfected by any means (including automatic PMSI perfection). Any method of perfection/filing will suffice. There are 3 categories of fake fixtures (e), and all must be readily removable. i. Factory or office machines; ii. Readily removable equipment not connected to the operation of the real estate iii. Replacements of domestic appliances that are consumer goods

Main point about 9-334 on Fixtures. 1st one in should win. Special favoritism we give to PMSIs. If its not a fixture anyway, why should the 9 person win? If they really would not be fixtures, but are personal property, you really wouldnt need this category. You just need the fake fixture section for those jurisdictions that do consider it a fixture. Default rule in 9-334 is mortgage wins, unless (one of the 3 exceptions above). Construction lender will usually beat out the PMSI lender. Vast majority of these cases, the mortgages file first, and we give the construction lender the benefit. However, say the mortgage wasnt a construction mortgage. I borrow $ and give bank mortgage on the house, and I put in a refrigerator, the PMSI lender will be able to get back the fridge. Construction lending is a very great risk, and so we want to give them lots of protection to encourage construction lending. PART 6 OF 9 PRACTICAL MECHANISMS OF REPOSSESSION AND SALE (How do you enforce a SI) 9 SI in physical goods (including inventory, consumer, farm products, equipment) Rule 1 SP cant do ANYTHING until theres a default (what SA defines it as being) Usually SA have acceleration clauses, saying if I miss a payment, they can demand the entire debt. SP has to have honest faith belief of insecurity in debt. Section called events of default (a/k/a representations, warranties, covenants) list additional things: Cross-Default if youre in default to anybody, youre also in default to me. Bankruptcy Default Clause if you go into bankruptcy, you are in default to me. Impairment of Net worth You say that your net worth will always be 125% of my liability. If I dip below that, lender may want to say then youre in default Debtor moving collateral, etc. if you move it, etc. thats an event of default STEP 1 IS DEFAULT STEP 2 AFTER DEFAULT: Repossession of collateral. Can be done by SP or his agent. Doesnt require prior notice (SP self-help not unconstitutional). No requirement that one goes to court to repossess (self-help repossession). Major exception to this is where repossession would involve a breach of the peace.

STEP 3 TO SELL COLLATERAL OR TO KEEP THE COLLATERAL Selling the collateral. Must give notice to debtor. Collateral can be sold at a public sale (auction), or it can be sold in a private sell (S by himself or thru a broker finds a B willing to pay a good price). Providing the amount was commercially reasonable. A SP cant be the B at his own private sale, but he can be at a public sale. 1. Distribution of proceeds of the sale: 1st the cost of the sale; the cost of the repossession; cost of the auctioneer; administrative costs of the sale 2nd to the principle and interest of the secured debt 3rd if theres a surplus, and if theres a Jr SP giving the Sr SP notice (and ONLY IF giving notice), it goes to Jr SP. 4th Anything left over after this, would go back to debtor. 2. This presupposes that theres a surplus. What if theres a shortfall? Sr SP pulls out the $ he gets from sale and applies towards debt owed. The remainder of the debt becomes an UnSecured claim (no more collateral left to cover it). Jr would have to under-file (send Sr note saying if theres any more $, its owed to me). 3. What if Jr repossessed? If D defaulted to Sr also, Sr can repo from Jr. Maybe D defaulted to Jr, but not SrSr cant collect unless a cross-default clause or something. Jr keeps what he gets from sale, and Srs SI is NOT extinguished (b/c UCC says sale extinguishes SI for seller and all juniors). Sr perceives Jrs sale as a non-event b/c it doesnt effect him. A B at a UCC sale is definitionally not a BIOC. 4. Sales must be commercially reasonable. Whod say it wasnt? D may use sale as a total/partial in an action for a deficiency; Jr who under-files; surety or guarantor. (2ndary obligors people who have to pay off the SP if the debtor didnt). If SP brings action against D for deficiency, and D raises sale commercially unreasonable, SP has burden of proof. If D brings action saying shouldve been a surplus (or Jr does), they have POE burden.

Article 2 - Sales of Goods (tangible personal property) Many 9 transactions would also be 2 sales. I sell a car, and I retain a PMSI, my PMSI rights are determined by 9, but the sale is governed by 2. Seller is a SP (under 9), and hes a Seller (under 2). Buyer is a Debtor (9), and a Buyer (under 2)
Part 1 is general construction. Part 2 is form, formation and readjustment (how do you create/modify a contract of sale?) Part 3 is what are the obligations of a contract once formed? (what are you required to do)

Part 5 is how does one perform those obligations? Part 6 is about breach. Part 7 details specific remedies when a breach occurs Part 2 of 2 formation of a contract. Section on Statute of Frauds 2-201 and the Parole Evidence Rule 2-202 Both involve a writing being more important than something not in writing SOF= k not enforceable unless its in writing Parole Evidence Rule - once a k is in writing, to what extent can it be interpreted, varied, changed, supplemented, by some oral agreement that doesnt appear in the writing itself (oral supplements) Both are de facto disfavored today. 2-201 UCC Statute of Frauds Normally, a contract for sale of goods for more than $500 wont be enforceable if not in writing, with of course many exceptions

Trigger is the price of goods. SOF activated if price of goods is $500 or more. When SOF is activated, how must it be satisfied? The contract need not be in writing; you just need a writing that indicates a contract was made signed by party against whom enforcement is sought (Im looking forward to getting what we talked about on Monday). Potential for asymmetrical enforcement. B followed up w/a signed writing. S will be able to enforce contract against B b/c B signed. B cant enforce against S b/c S DIDNT sign; can only be enforced against one who signed a writing indicating contract was made Writing doesnt have to have entire contract. You could use PE to show writing is inaccurate, or other things. The one thing which must be accurate in the writing is the quantity. If the writing says 500 pounds, and one party says agreement was for 600 pounds, you cant second guess the 500 pounds. If no signed writing, contract is unenforceable against the non-signer.

Subsection 2: Sometimes a writing signed by one party may be sufficient to satisfy SOF even against other party. Requires a signed writing, but allows it to be used against non-signer. Between Merchants (professional sellers) such as a whole-seller to a retailer. B and S have oral agreement to purchase $1,000 of goods. After meeting S sends B letter saying thank you for your order of $1,000 of goods. S is bound by this. If B is a merchant and is aware of what this is about, and he does nothing for 10 days, he becomes bound and cant raise SOF as a . Say memo says Thanks for order for $1,000, and B doesnt respond. 2 weeks later, B realizes that deal was for $800. Can B bring in E to contest accuracy of that writing? Some courts have said no, b/c it must have been in 10 days. Thats incorrect b/c only issue subsection 2 is concerned w/ is whether a party can raise of SOF. If I receive a memo and dont contest it, I cant raise my failure to sign a writing as a thats what I lose. But I still have my right to bring in PE. I can still

show it doesnt accurately represent what was agreed to. Similarly, general C/L rule is you cant be forced into acceptance by silence. Assume as a merchant I send PO to S. He fails to respond to my PO w/in 10 days. B tries to argue I sent you a memo, were merchants, you failed to respond, we have a contract. INCORRECT. It has to be a writing in confirmationmeaning it follows up an offer and acceptance. A PO is an offer you havent accepted. This doesnt change the C/L rule. 2 court mistakes therefore are (1) use to prevent a recipient to challenge accuracy and he should have that right, and (2) misapply to offer and acceptance and it really should only be applied to confirmation of previously agreed to offer and acceptances. Lets say I send written notice of rejection. Im not bound to yours, Im bound to mine. Youd have to say I hereby decline to consider this writing evidence of a contract; I dont acknowledge a contract b/w us.