BLSA Commercial Outline

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Secured Transactions Outline

I. Nature of the Security Interest

a. Article 9 as an Assets Reservation System

b. The Key Attributes of Security Interests

i. Property rights good against the debtor

ii. Priority rights good against third parties

c. Article 9 as a Reified Priority System

i. Not general priority, but priority as to designated assets

d. The First-to-File Rule

i. Priority is usually, but not always, tied to the date of filing of a

financing statement

e. Possible Distribution Rules for USC

1. Pro Rata - proportional

2. Equal Asset – assets paid out equally until debt is satisfied

3. Equal Loss – assets pd out to distribute losses as evenly as

possible

ii. Equal Asset and Equal Loss make both total other debts and

distribution of those debts matter

iii. Under Pro Rata, only total matters

iv. EA or EL would increase monitoring: good if we want to, bad if

we do not

f. 9-322(a)(1) Priority Rule –

i. (ignoring perfection through possession), the first to file a FS wins

g. Ostensible Ownership Problem

i. inference of ownership from possession

h. Two Key Problems with Possession as perfection method

1. Loss of use of goods

2. Put goods in third-party hands and didn’t own, so no

solution

i. Perfection through Possession

i. Holdover

ii. Adds complexity to 9-322: early of first to file or perfect

iii. Can create misleading record of priority in FS record

II. Attachment Requirements

a. Decription requirement - 9-203(b)(3)(A)

b. Interest can be limited in scope- 1-201(37) says nothing about the scope of

the positive rights that are required to have an interest in property

c. After-Acquired Property:

i. Clark (the wrong way)

1. Facts: At time of transaction license is NOT property, so

debtor cannot grant SI. Instead signs acknowledgement to

creditor that will not sell or transfer license. Subsequently

state passes law that recognize rights in license as property.

2. Issue- Could acknowledgement suffice to create security

interest. And if so, when did SI attach?

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3. Ct held SI failed -Court seems to suggest mere leverage not

enough

ii. The Right Way – creat interest in after-acquired property in the

SA.

1. SI attaches at the time property is received by the debtor,

not before.

iii. The Interest in Property Requirement

1. Organize cases along lines of positive rights v. negative

rights in property

a. Securing Payment or Performance

i. Court seems to suggest mere leverage not

enough

ii. Why not? Accomplishes goal; secured

creditor doesn’t want to grab the property

and often can’t

2. Top Down v. Bottom Up Approaches

a. Top down = Assume full rights then take

specifically enumerated rights away

b. Bottom up = specifically enumerate positive rights

c. Top down approach probably better, easier

3. Negative Pledges-

a. Do not grant SI, instead just contractual right

b. Why the NP? Debtor might prefer it, and if done

correctly, may serve as anti-later SI commitment

c. If allowed SI to be granted, possibility of

inconsistent priorities pairwise (crops up a lot)

4. Separating SA’s and FS’s

a. Key design feature

b. SA grants interest, FS reserves spot in line vis-à-vis

other creditors

c. consequences: file first before pursuing SA to

reserve place in line

iv. When is an interest granted?

a. Two approaches Bollinger and Martin Grinding

i. Bollinger says: Sort through all of the

relevant documentation and the course of

dealing between the parties to see if

something can be pieced together that will

satisfy the written security agreement

requirement

ii. Marting Grinding says:

1. Close to insisting that a single

document memorialize the secured

arrangements between the parties

2. Nothing in Article 9 supports this

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iii. Martin Grinding is probably better because

easier for 3rd parties to know when there is

a security interest

1. But not clear because presumably the

debtor would internalize these costs

2. No real answer

d. Formalities and Descriptions

i. 9-203’s Description Requirement

1. Implements Article 9’s reified priority system

2. Defines the collateral between the parties

ii. 9-108 Description Rules

1. Must reasonably identify collateral

2. Revised statute blesses Article 9 categories

3. Supergenerics barred, but brick-by-brick SI in all assets is

OK

iii. Laminated Veneers and Worldwide Tracers

1. Lamintated Veneers – Oldsmobiles were not considered as

“equipment” pledged under SA’s omnibus clause. Ct.

found

a. cars not typically considered EQ

b. specific listing of truck implied exclusion of other

vehicles

2. Worldwide Tracers – creditor described property as “any

property”. Ct. held this did not perfect SI in intangible

property because

a. creditor should have said “any property, tangible or

intangible” and

b. description was found with list of tangible property

iv. 9-203 and Rights in the Collateral

1. Debtor cannot grant interest in rights it doesn’t have or

control – Monalisa hypo

a. The Whatley problem - In closed corp setting, need

to be sensitive to right way for creating and

perfecting SI in pledged assets of owner of corp

i. SA signed by individual as such

ii. FS filed against individual

III. Perfection

a. Creates independent second source of information about the underlying

transaction

b. Implementing Perfection

i. Three key methods:

1. file,

2. possess,

3. control

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c. Must classify successfully – different classifications of collateral require

different methods of perfection

i. 9-310 – general rule is that a FS must be filed to perfect

ii. 9-312 – exceptions to 9-310 general filing requirement

Filing Possession Control

Goods Yes Yes No

Tangible Chattel

Paper

Yes Yes No

Negotiable Docs Yes Yes No

Instruments Yes Yes No

Investment Property Yes No Yes

Deposit Account No No Yes

Letter-Of-Credit No No Yes

Money No Yes No

General Intangible Yes No No

Electronic Chattel

Paper

Yes Yes

Certificated

Securities

Yes Yes No

iii. 9-313 – When Possession Perfects

iv. 9-314 – When Control Perfects

1. Newman – Ct. held annuity contract was not an

“instrument” under UCC, but a “general intangible”

creditors interest was NOT perfected through possession,

filing of FS was required.

a. Key defs:

i. 9-102(a)(47): Instrument

1. A negotiable instrument or any other

writing that evidences a right to the

payment of a monetary obligation, is

not itself a security agreement or

lease, and is of a type that in

ordinary course of business is

transferred by delivery with any

necessary endorsement or

assignment.

ii. 9-102(a)(42): General Intangible

1. any personal property, including

things in action, other than accounts,

chattel paper, commercial tort

claims, deposit accounts, documents,

goods, instruments, investment

property, letter-of-credit rights,

letters of credit, money, and oil, gas,

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or other minerals before extraction.

The term includes payment

intangibles and software.

2. Vienna Park – Ct held Right to receive funds from escrow

was not “money” under UCC, but instead was a “general

intangible” creditor’s interest was not perfected through

possession, but required filing.

a. Key defs:

i. 1-201(24): Money

1. a medium of exchange authorized or

adopted by a domestic or foreign

government as a part of its currency.

d. Names:

i. Debtor’s Name

1. Financing statements are indexed in debtor’s name (9-

519(c)(1))

2. 9-506(a) – minor errors and omissions do not affect

sufficiency of FS, unless “seriously misleading”

3. 9-506(b) – An FS is seriously misleading if it does not

contain the debtor is not named in accordance with 9-

503(a)

4. 9-506(c) - If you can find the statement using the incorrect

name and the search system of the filing office, then the FS

is valid.

5. Comparing legal name and filed name irrelevant if you

would never find the statement in the first place

6. RA 9-503 ties down debtor name rules

a. No trade names (9-503(c))

b. Legal names for corporations (9-503(a)(1))

7. Clairmont- Correct name = Clairmont Pharmacy; FS under

Clairmont Skyline Pharmacy. Ct says ok b/c substantially

similar. Under new statute all that would matter is whether

you would find it under filing search.

ii. Secured Party’s Name

1. Not critical for finding financing statement

2. Should expect greater room for errors under 9-506(a) –

minor errors and omissions do not affect sufficiency of FS,

unless “seriously misleading”.

3. But little sympathy for getting own name wrong

4. Omitting the name is fatal

5. Chemical Bank and Copper King – both cases the secured

party’s name was not correct, but court held FS was valid.

[could fill in more detail here if time.

e. Description of Collateral

i. The Independent Importance of the Description in the Financing

Statement -Defines extent of priority over collateral

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ii. Notice ala Thorp not particularly meaningful

1. Thorp – Ct held that description of collateral as

“assignment of accounts receivable” was sufficient to

include AR incurred after the date of the FS, because it put

future creditors on notice that they should inquire.

a. Ct rejected alternative theory that description should

be independently sufficient on its own terms

iii. Subsequent SP needs to negotiate to deal with scope of prior FS

f. Third-Party Possession 9-313(c)

i. Key change in 9-313(c): Move from possession occurring at time

bailee receives notice of SP’s interest under F9-305 to requiring an

acknowledgment by the bailee

ii. Coral Petroleum [complicated case. Ct held SI was not perfected.

Fill in detail later, if necessary]

g. Control as Third Method of Perfection

i. Relevant to

1. investment property,

2. deposit accounts,

3. electronic chattel paper and

4. letter-of-credit rights

ii. Exclusive means of perfection for deposit accounts (9-312(b)(1))

and letter-of-credit right (9-312(b)(2))

iii. Priority rules give better rights if you possess or control chattel

paper. See 9-330

iv. Control and Benedict v. Ratner

1. Court focuses on dominion debtor has over proceeds of

AR. Finds no SI because creditor was not policing the use

of funds in which it claimed an SI. This is not an ostensible

ownership theory; instead, this a control theory

2. Rejected by statute generally and but see esp. 9-104(b) on

deposit accounts.

IV. Priority

a. Theory: Modigliani-Miller - capital structure cannot influence firm value

i. MM Theory is wrong - Use of Assets Depends on Capital

Structure

1. Debtor will choose projects with debt that it would reject in

all-equity capital structure

a. Example each project requires $100 investment

Project 1

Good: 50%: worth $146

Bad: 50%:worth $84

Expected value = +15

Project 2

Good: 10%: worth $635

Bad: 90%: worth $40

Expected value = -.05

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Society wants 1, but debtor will choose

2. Creditors need to police this.

b. Secured Credit and Monitoring

i. Can use security interest to allocate debtor monitoring burden

among creditors

ii. Need monitoring to control debtor, but fears of creditor grab may

lead to over-monitoring

iii. Instead, grab ex ante through security interest to reduce over-

monitoring incentive

iv. [bunch of stuff about the “monitoring game”, upshot is that the Art

9 system maximizes benefit. Put more in here if it looks like need

to know. See slides from Class 10].

c. The First-to-File Rule

i. Very strict. First to file wins even if SA came later. Pure Race

statute

ii. JI Case – Illustrates pure-race nature of priority rules

1. Facts: FS filed by Creditor in 1980. Creditor mistakenly

terminated FS 11/82. Bank secures same collateral with FS

in 12/82. There is evidence that Bank knew of the mistake.

Creditor discovers mistake and refiles in 1983.

2. Ct held: Bank wins, even if it knew about mistake. “In

short, this statute was intended to be and is a ‘pure race’

type statute. This means the secured creditor who wins the

‘race’ to the appropriate filing office has priority without

regard to the prevailing creditor’s state of mind and

knowledge.”

3. introducing knowledge into the equation could result in

inconsistent priorities between parties, because some

parties may have knowledge while other don’t A>B, B>C,

C>A

4. introducing knowledge into system would be expensive in

terms of litigation costs

d. Continuity of Perfection

i. General rule: SP must remain continuously perfected to keep place

in line.

ii. Continuation of Perfection by different methods – ok if no lapse.

1. 9-322(a)(1): Earlier of the time a filing covering the

collateral is first made or the security interest is first

perfected, if there is no period thereafter when there is

neither filing nor perfection

iii. Continuation of Financing Statements-

1. Relevant Statutory Framework

a. 9-515(a,c,d): (a) FS lapses after 5 years; (c) unless a

continuation statement is filed before the lapse; (d)

if FS lapses SI is no longer, and never was,

perfected

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b. 9-308(a,c): (a) an SI is perfected if it has attached

and if all the requirements for perfection have been

met; (c) an SI is continuosly perfected if there has

been no lapse between periods of different methods

of perfection

c. 9-322(a)(1): conflicting SI’s rank according to time

of perfection, priority dates from the time of filing

or when SI was first perfected.

2. Hilyard –Facts: Instead of continuing FS, 1st creditor filed

a new FS before the old one lapsed. It also had received an

acknowledgement from the 2nd creditor that it’s lien was

junior.

a. Ct held that 1st creditor’s interest was not perfected

and thus 1st creditor lost to 2nd creditor

i. Contractual right via acknowledgement does

not = priority right via Art 9

ii. NBC lost because and FS did NOT refer to

first FS. Subsequent secured party couldn’t

look back and see chain. Failure to refer

back is core problem.

b. Idea behind 5-yr limit was to keep FS’s from

hanging around forever, but the downside is that

some creditors let them fall through the cracks or

don’t continue correctly as in this case.

e. Nature of Priority

i. First to File or Perfect wins

1. In filing situations, first to file

2. Attachment is bad option because is hard for third parties

to to see

3. Textured rules, contemplating facts such as knowledge,

introduce inconsistencies

f. Marshaling

i. Marshaling equitable doctrine. It may be invoked when

1. There are two or more creditors of the same debtor

2. There are two of more funds belonging to the same debtor

3. One of the creditors alone has right to resort to both (or

more) funds

ii. Marshaling doctrine = Senior creditor must exhaust fund, to which

junior creditor has no claim, before resorting to fund on which

junior creditor also has claim, so that junior creditor can collect

more of fund with overlapping claims. NB: senior creditor is only

required to marshal if it will not prejudice itself in so doing.

iii. Implicitly partially extends priority from one asset class to second

untaken asset class

iv. Computer Room- Ct answers whether Sr. Creditor must marshal.

1. Yes, as to Two Security Interests

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a. Traditional doctrine applies in situation where one

secured creditor has access to only one fund, second

secured creditor has access to two

b. Done only if no harm to two-funds creditor

2. No, as to Guarantee:

a. Trustee in bankruptcy is looking to reduce claims

against bankruptcy estate

b. But guarantor may just substitute in for creditor

v. Delaware Truck – more complex marshaling case and a lot of

other issues. At issue was a settlement between two creditors

which effectively gave one creditor the opportunity to foreclose on

a mortgage granted the other creditor. Court though this might be

improper. [probably not worth the effort to fill in. See later]

g. Secured Creditors vs. Unsecured and Lien Creditors

i. The Lien Creditor:

1. 9-102(a)(52) “Lien creditor” means:

(A) a creditor that has acquired a lien on the property

involved by attachment, levy, or the like [i.e jump

through state hoops];

(B) an assignee for benefit of creditors from the time of

assignment;

(C) a trustee in bankruptcy from the date of the filing of the

petition; or

(D) a receiver in equity from the time of appointment.

ii. Priority of Lien Creditors vis-à-vis Secured Creditors

1. The statute 9-317(a)

(a) [Conflicting security interests and rights of

lien creditors.] An unperfected security interest

or agricultural lien is subordinate to the rights

of:

(1) a person entitled to priority under

Section 9-322; and

(2) except as otherwise provided in

subsection (e), a person that becomes a

lien creditor before the earlier of the

time:

(A) the security interest or

agricultural lien is perfected or a

financing statement covering the

collateral is filed; or

(B) one of the conditions specified

in Section 9-203(b)(3) is met

and a financing statement

covering the collateral is

filed.[this provision means that

an SA must be in place,

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possession, or control of

certain types of collateral must

happen to keep a lien creditor

from jumping ahead of an SC.

A naked financing statement is

not enough

Unsecured

Creditor

Lien

Creditor

Unperfected

Secured

Creditor

UPSC wins

(9-201) (TRICKY

BOX) IS tricky box really

that important? No, if

parties are paying attention USC will turn

itself into a lien creditor,

or UPSC will try to perfect

LC wins (9-317)

Perfected

Creditor

PSC wins

(9-201)

1st wins (9-317)

iii. This is a little loose 9-317(a)(2)(B) gives priority even if not a PSC

but merely have SA and FS without value extension

1. Old statute a lot turned on whether perfected. Turned on

whether had lent a single dollar.

iv. PSC v. LC Future advances rule must be consulted; see 9-323

v. Particularly important given the hypothetical lien creditor power in

bankruptcy

vi. Unperfected Secured Creditor loses to Lien Creditor. Key way for

to for one-time USC to jump ahead of SC

h. Negative Pledges –

i. Under Art 9- no priority. Just a contractual issue.

ii. Mudge – Ct upheld verdict that Bank had tortiously interfered with

another creditor’s conduct by inducing debtor to breach negative

pledge.

iii. Rarely specifically enforce limitations on alienability;

1. compare 9-401(b) –[Agreement does not prevent

transfer] An agreement between the debtor and secured

party which prohibits a transfer of the debtor’s rights in

collateral or makes the transfer a default des not prevent the

transfer from taking effect.

iv. So should just be breach and issues is damages

v. Tortious interference action requires knowledge. Difficult to know.

Circular priority possibilities

vi. Requiring filing of neg pledge would be cleaner

i. Unjust enrichment

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i. Where a USC can show unjust enrichment, SC may be obligated to

pay USC out of secured collateral.

ii. To show unjust enrichment USC must show that SC initiated or

encouraged the transaction, and that the SCs collateral was

enhanced by the transaction.

iii. Ninth District- SC had SI in AR. Debtor’s suppliers would present

invoices to SC for payment. Debtor’s customers would pay SC,

and SC would credit payments against debtor’s debt. USC supplier

brought action against SC for payment.

1. Ct. Held: “Where a secured creditor is benefited by a

transaction between its debtor and an unsecured creditor

that enhances the value of the secured collateral, and the

secured creditor initiates or encourages the transaction, the

secured creditor can be held liable to the unsecured creditor

on the theory of unjust enrichment.”

j. PMSI (Purchase Money Security Interests)

i. Definition basically when debtor is loaned $ to purchase collateral,

the entity that loaned debtor the money for the purchase receives

an SI in the collateral up to the price of the collateral

ii. Statute Definition– 9-103(a) [Definitions.] In this section:

(1) “purchase-money collateral” means goods or software that

secures a purchase-money obligation incurred with respect to

that collateral; and

(2) “purchase-money obligation” means an obligation of an

obligor incurred as all or part of the price of the collateral or

for value given to enable the debtor to acquire rights in or the

use of the collateral if the value is in fact so used.

iii. Application of pmt 9-103(e) [Don’t really understand this]

[Application of payment in non-consumer-goods transaction.]

In a transaction other than a consumer-goods transaction, if the

extent to which a security interest is a purchase-money security

interest depends on the application of a payment to a particular

obligation, the payment must be applied:

(1) in accordance with any reasonable method of

application to which the parties agree;

(2) in the absence of the parties’ agreement to a reasonable

method, in accordance with any intention of the obligor

manifested at or before the time of payment; or

(3) in the absence of an agreement to a reasonable method

and a timely manifestation of the obligor’s intention, in

the following order:

(A) to obligations that are not secured; and

(B) if more than one obligation is secured,

to obligations secured by purchase-

money security interests in the order in

which those obligations were incurred.

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iv. Priority of PMSI over other secured interests. 9-324(a): Priority of

PMSI

(a) [General rule: purchase-money priority.] Except as

otherwise provided in subsection (g), a perfected purchase-

money security interest in goods other than inventory or

livestock has priority over a conflicting security interest in

the same goods, and, except as otherwise provided in

Section 9-327, a perfected security interest in its

identifiable proceeds also has priority, if the purchase-

money security interest is perfected when the debtor

receives possession of the collateral or within 20 days

thereafter.

v. Key timing and notification differences for inventory and goods

other than inventory under 9-324(a,b)

1. PMSI in Goods –

a. No notice required

b. Must be perfected [presumably through filing. Ask

– how perfect a PMSI?]

2. PMSI in Proceeds of goods

a. No Notice required

b. Must be perfected within 20 days after debtor

receives possession of goods

3. PMSI in Inventory

a. Notice to other SC required

i. Notice must be received by SC within 5

years before debtor receives possession of

INV

ii. Notice must state that sender expects PMSI

status

b. Must be perfected prior to debtor receiving

possession of inventory

4. PMSI in “identifiable cash proceeds” of INV if

a. Identifiable cash proceeds are received on or before

buyer takes delivery.

b. All above requirements for INV

c. NB: “identifiable cash proceeds” DO NOT EQUAL

Accounts Receivable. See MBank Alamo

vi. PMSI and multiple debts (such as interest and attorney’s fees that

are included in price)

1. New statute is clear that all of these charges are part of the

purchase-money obligation under 9-103(a)(2); see

comment 3

vii. Time of possession of collateral important and can matter in

sequential lease/sale deal

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1. If collateral is leased first, “Possession of collateral” for

purposes of PMSI status does not occur until the purchase

agreement is completed.

viii. Notice scheme for INV introduces chance of circular priority

ix. MBank Alamo- Three key take-away points

1. priority in inventory does not extend to priority in the AR

as proceeds of the inventory (9-324(b))

2. Need to track the progress of the collateral and possible

changes in priority

3. Alt agency structure suggested by the court would undercut

MBank’s position; secured creditor needs to be aware of

possible restructuring of underlying arrangement and

consequences for position

x. No loss of status of PMSI status (to the extent the original PMSI

debt survives) in non-consumer-goods transaction. 9-103(f). No

loss of PMSI even if:

1. the purchase-money collateral also secures an obligation

that is not a purchase-money obligation;

2. collateral that is not purchase-money collateral also

secures the purchase-money obligation; or

3. the purchase-money obligation has been renewed,

refinanced, consolidated, or restructured.

a. Billings – PMSI survived assignment and

refinancing (which meant new note and new SA).

xi. Important to note that Bankruptcy Code gives preferential

treatment to PMSI’s by not allowing those liens to be avoided even

for household items, professional items, and health aids that

ordinarily are exempted under BC 522(f)

xii. Cross-Collateralization

1. Security agreement terms will often look forwards and

backwards; Language will cover now assets and future

assets; Also now debts and future debts

2. All done through single SA and single FS

3. Need to track PMSI status

a. Generally only PMSI status for then assets and then

debts; Not for cross-collateralization: past or future

debts for now assets or past or future assets for now

debts

4. General rule often called off for inventory (9-103(b)(2)) –

PMSI status for all debts under FS.

V. Proceeds

a. Proceeds Perfection Mechanics

i. 20 Days Automatic Perfection (9-315(c), (d))

ii. After 20 days perfection will continue IF one of the following tests

of 9-315(d) can be met:

(1) filed FS covers original collateral; AND

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a. the proceeds are the type of collateral that can be

perfected by filing in the same office where the

original FS was filed; AND

b. the proceeds in question have not been acquired

with cash proceeds (i.e. cannot be proceeds of cash

proceeds) ***

(2) – the proceeds are IDENTIFIABLE CASH PROCEEDS. 9-

315(b) defines when commingled proceeds are identifiable.

(3) – the security interest has been perfected in a manner other

than the automatic perfection of 9-315(c).

iii. NB

1. Identifiable cash proceeds automatically perfected

2. Filing usually necessary if intervening cash proceeds.

iv. Has the consequences of making an FS valid even if the

description is wrong. Computer- painting swap problem. Good

news fairly unusual transaction.

v. I in original collateral may file FS for proceeds without additional

consent of debtor. Sp is authorized under 9-509(b)(2)

vi. Orix/Beach TV – Ct held that creditor could have a security

interest in the proceeds of FCC licenses

b. The Collateral Cycle and Changes in Priority

i. Changes in collateral classification can change priority

ii. INV can be sold on credit and become AR. In this situation could

have 2 SP’s with a claim on the assets. One will have a claim on

AR as original collateral. The other will have a claim on proceeds

of INV. Earliest to file/perfect wins.

1. Diamond Walnut is one example of this. Growers’ Co-op

had a claim on member’s proceeds (from sale of walnuts).

Bank had claim on crop and proceeds. Growers’ Co-Op

pre-dated Bank, so Co-op wins. Before crop was sold, co-

op had no claim. Once sold Co-Op had claim. Even though

parties signed agreement saying sell the walnuts and sort

out the priority issues later. Shows how collateral cycle can

affect priority.

c. Priority over Deposit Accounts

i. 9-327(1) implements non-temporal priority scheme: control beats

non-control

1. Arises most frequently in dispute between secured creditor

with control of deposit account and second with proceeds

interest ultimately tied to financing statement

ii. Priority conflicts over proceeds and control

1. 9-327(1) generally control beats non-control

2. 9-322(c) If SP has priority of collateral also has priority

over proceeds if (1) the SI is perfected; (2) the proceeds are

cash proceeds or the same type as the collateral; and (3) for

proceeds of proceeds, all intervening proceeds must be

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either cash proceeds or proceeds of the same type as the

collateral.

3. BUT for conflicts regarding proceeds from chattel paper,

deposit accounts, negotiable documents, instruments,

investment property, or letter of credit rights – control does

not trump filing, instead go to first-to-file rule.

a. BUT if the proceeds in questions are cash proceeds,

chattel paper, negotiable documents, instruments,

investment property, or letter of credit rights – the

above restriction does NOT apply and control

DOES trump filing. [??? Not sure this is right]

d. Proceeds and Senior and Junior Creditors

i. 9-332 has strong cleansing powers for cash and for transfers from

deposit accounts

ii. Junior secured creditor can jump in line

iii. Driven by desire to preserve integrity of the payments system

VI. Transfers of Collateral Subject to a Security Interest

i. General rule is SI survives transfer unless SP authorized transfer

free and clear (9-315(a)(1))

ii. 9-320 limits this rule in many important situations, including most

normal sales from inventory

1. 9-320(a) “buyer in the ordinary course of business” takes

good free and clear of an SI. (Even if buyer knows of

existence of SI.) Only if the person selling the goods to the

buyer was the one who created the SI.

a. “buyer in the ordinary course of business” means

buying from someone who is engaged in the

business of selling that item. 9-307(1)

2. 9-320(b) someone who buys from a person who used the

goods primarily for household use takes free of SI if:

a. buyer has NO knowledge of the SI

b. buyer buys for value

c. buyer buys primarily for personal, family, or

household use

d. BEFORE the SP files FS covering the goods.

iii. Double Dipping?

1. Note that SP will often have rights as to both transferred

collateral and proceeds received in exchange

VII. Location and Choice of Law

a. Location of Collateral and Choice of Law

i. Most fundamental change in Revised Art 9.

ii. Summary of Old 9-103

1. Property With Natural Location

a. Where the property has a natural location, the

substantive law of the jurisdiction where the

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property is located controls. This covers ordinary

goods. (9-103(1)(b))

2. Property Without a Natural Location

a. Where the property does not have a natural location,

the location of the debtor controls. This covers

accounts, general intangibles, and mobile goods. (9-

103(3))

3. The Last Event Test

a. For a secured party, the “last event” test means

essentially this:Unless some other rule provides

otherwise, a security interest is perfected if there

was ever a time when the goods were in a particular

jurisdiction and the secured creditor had satisfied (at

or before that time) the requirements for obtaining a

perfected security interest under the laws of that

jurisdiction.

4. Old regime focused On Where the Collateral Has Been

a. Note that the only jurisdictions in which the

collateral has been located may be relevant.

b. Old 9-401 Required Filing in That State

c. If any of those jurisdictions are chosen to supply the

substantive law, that version of Old 9-401 will

require a filing in that state for perfection.

d. Only Hope for SP: Collateral Located in State with

FS on File

e. Thus, the secured creditor will have no claim to

being perfected if the collateral is never in a

jurisdiction in which there is on file an effective

financing statement.

f. Introduced unanticipated movement of collateral

problem among other things. Id debtor moved

collateral, could cause problems determining what

law to apply, and could in effect make SP lose its

SI.

iii. Under New 9-103 – Focus on location of debtor for perfection and

location of location of collateral for effect of perfection. (not

including accounts and GI, see below)

1. Under 9-301(1), local law of debtor’s location governs

perfection

2. Under 9-301(1) and 9-301(3)(C), collateral type determines

which local law governs consequences of perfection or

nonperfection and priority

a. For goods and many others, local law of location of

collateral (9-301(3)(C)

b. For accounts and general intangibles, local law of

location of debtor controls (9-301(1))

17

b. Location of the Debtor Under 9-307

i. Entity specific

1. Corporations located where incorporated (9-307(e))

a. Key Consequence of Shift from Old Statute. Old

statute required filing in location of collateral for

collateral having a natural location. If corporate

debtor had goods in many states, file in each state.

Now, file once, where corporate debtor incorporated

ii. Changes of the Location of the Debtor

1. Still possible to lose priority

2. Need to act within four months of the change (9-316(a)(2))

3. Loss of perfection, even with reperfection, raises

preference issues under BC 547

4. Corporate debtors change location only through re-

incorporation; relatively rare

5. Old cases, such as Metro, on understanding location of

CEO, matter for some non-corporate entities (9-307(b)(3)

a. Should tie CEO location issued to third-party

observables, and not the unobservable, such as

where decisions are made

i. Two-part test under old statute:

(1) from which place does the debtor

manage the main part of its business

operations; and

(2) where would creditors reasonably be

expected to search for credit

information?

VIII. Changes: Debts and Debtors

a. After-Acquired Property (AAP) Mechanism

i. Under 9-204 (a) SP can take an interest in after-acquired property.

1. This was a contentious issue, but A9 has embraced. Cases

like Zartman held interests in AAP void because “one

cannot grant what he does not own, actually or potentially”

2. 9-204(b) No interest in AAP can be taken in

a. consumer transactions (some exceptions, see

statute): and

b. commercial tort claims

ii. Single Financing Statement, Multiple Loans

1. Future Advances

a. SP v. SP

i. No limit on extent to which subsequent

advances can subordinate SP2. A single FS

gives notice for all SA’s covered by it.

ii. 9-323 Comment 1 Under a proper reading of

the first-to-file-or perfect rule of Section 9-

322(a)(1) (and former Section 9-312(5)), it

18

is abundantly clear that the time when an

advance is made plays no role in

determining priorities among conflicting

security interests except when a financing

statement was not filed and the advance is

the giving of value as the last step for

attachment and perfection. Thus, a secured

party takes subject to all advances secured

by a competing security interest having

priority under Section 9-322(a)(1).

b. SP v. LC

i. SP1 protected for greater of 45 days or time

acquires knowledge of position of LC

ii. SP has absolute right over LC without

knowledge

iii. LC can create knowledge and limit to 45 day

window by giving notice.

iv. Why give LC’s this protection. LC’s are

raising red flags about financial health of

debtor and providing valuable signaling

service. Want to provide them incentives to

do this.

c. Fretz [we spent a lot of time on this, but I don’t

understand the problem very well. It has something

to do with USC’s selling positions to SP’s which

effectively allows th unsecured debt to jump ahead

of junior SP’s. I really don’t understand this, should

talk to Picker]

IX. Name Changes

a. Generally Post-Filing changes that render a FS seriously misleading have

NO EFFECT on the FS. The SI on collateral acquired by the debtor

BEFORE the change remains perfected. 9-507(b)

i. Potential SP’s must inquire into source of title of debtor’s

collateral to insure that there is not a pre-existing SI in the

collateral.

ii. SI remains perfected even if debtor disposes of the property. 9-

507(a) Again potential SP’s should check chain of title.

b. Collateral acquired by the debtor AFTER the change is subject to the 4-

Month Rule of 9-507(c) –

i. SP remains perfected for collateral acquired after the change for 4

months.

ii. Within 4 months after change, SP must amend FS so that it is no

longer seriously misleading – or SP will no longer have a perfected

SI in collateral acquired after the change

c. Obviously all of the above only applies if name change renders FS

seriously misleading

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d. Name change of debtor is key given indexing rules for financing

statements

e. Burden allocation issue between initial secured parties and subsequent

secured parties

i. Unlike case of mistakes in initial filing, name changes are not that

difficult for subsequent SP’s to track down. So ok to allocate some

of burden to SP2.

ii. 4 month deadline allocates some burden to SP1 to monitor

changes, without creating excessive burden.

iii. In this case some party must bear the costs. Most important thing

here is to clearly allocate the costs so that parties know for sure

what their responsibilities are.

f. Practically - Secured creditor aware of pending change is wise to file in

both names

g. Woods/ Bath Industrial Sales –[ SP1 knows of impending name change,

but files under old name. SP2 files under new name. Who has priority in

after-acquired inventory?]

i. Bad decision. Ct subordinates SP1’s interest to SP2’s. Ct says SP1

did not act in “good faith”.

1. BUT: Never know schedule of name changes, would have

been dumb for SP1 to file under new name that did not

exist

2. Introduction of “good faith” generally messes up the

system. Creates possibility of circular priority.

X. Name and/or Entity Structure Changes

a. Incorporations – Individual Incorporates into typically Sole Proprietorship

(Joe Joe Inc.)

i. What happens as to Transferred Collateral?

1. Attachment of SI should continue under 9-315(a)(1)

2. Financing statement remains effective under 9-507(a)

ii. What happens as to New Collateral (After-Acquired Assets)?

1. Under the old statute, SP of individual had no way to claim

security interest in new property acquired by new corp

2. New statute mechanism

a. 9-203(d) makes “new debtor” liable in some

circumstances; real question is scope

i. 9-203(d): By operation of law other than

this article or by contract:

(1) the security agreement becomes

effective to create a security interest in

the person’s property; [corp name

change scenario]

(2) the person becomes generally

obligated for the obligations of the other

person, including the obligation secured

20

under the security agreement, and

acquires or succeeds to all or

substantially all of the assets of the

other person. (this last clause could

potentially limit the scope dramatically;

remains to be seen. Many times there

will be a good argument that

substantially all of the assets were not

transferred)

b. 9-508(a) makes old FS effective as to new debtor,

but …

c. Frequently will have name change issue, and 9-

508(b) makes standard 4-month rule applicable

d. 9-326 addresses priority and generally subordinates

FS’s tied to 9-508

i. Don’t like it? File against new entity

b. Scott – Illustrates incorporation problem under old A9.

i. Scotts grant SI to Bank as individuals

ii. Scotts incorporate as Business

iii. Business grants overlapping SI to Finco

iv. Ct holds Bank loses because it did not have an SA with the new

entity Business

v. Under bew A9 – Still Not clear whether Scotts Business would

fall into 9-203(d)

c. Bank of the West

i. Parent has two subs, Sub1 and Sub2

ii. Sub1 grants SI to Bank in INV. Bank duly files FS

iii. Later Sub2 does the same with Finco

iv. Sub2 transfers assets to Sub1 including INV

v. 3 months later, who has priority, Bank or Finco?

1. Another example where change re collateral could have

priority consequences (recall Diamond Walnut)

2. Court looks to avoid those consequences and bends statute

to hold for Finco

3. New A9 does not clearly resolve problem. Probably

stronger case that Bank of the West wins, since new statute

expressly considers the new debtor situation, but by no

means certain

4. Comment 7 acknowledges that many transactions will be

excluded:

a. “In many cases, paragraph (2) will exclude

successors to the assets and liabilities of a division

of a debtor.

BREAK NEW OUTLINE

21

Default

I. Property rights of the SC: property rights describe the special rights the SC

acquires against its debtor. The SC receives property rights against the D in

order to short-circuit the collection process faced by the USC.

A. Default rights are an integral part of the SC’s property rights, for SCs have

an advantage over USCs: the ability to use these default rights against a

debtor without going through the USC’s collection process (which usually

involves getting a judgment and an execution lien

B. Note: because a SP’s default rights involve implementation of property

rights, and not priority rights, they concern primarily the rights of the SP

against the D, not against third parties (even though those rights are

inevitably implicated)

C. Thus, Part 6 of A9 is applicable whether or not the SP has taken step to

perfect its SI

II. Overview of Default Rights

A. The following rules protect the SC’s property right after default:

1. Right to repossess the collateral. 9-609

2. Right to sell the collateral to collect the debt. 9-610

3. Right to retain the collateral in satisfaction of the debt. 9-620 –

9-622

B. No definition of default:

1. Part 6 of A9 is applicable after default (9-601(a)), but default is

not defined anywhere. This was intentional so that parties would

define the events constituting default

2. Most SA provide that upon default, either the SP may accelerate

the unpaid balance or the unpaid balance accelerates

automatically. Without such a clause, balance cannot be

accelerated but by relying on Article 2, SP with rights associated

with anticipatory repudiation can acclerate if the underlying

transaction involves goods. 2-610

3. 9-602 sets forth an extensive set of nonwaivable debtor rights

III. Collection Mechanisms of 9-607 and 9-608

A. Must notify third parties of rights and collect. 9-607(a)

B. Must do so in commercially reasonable matter. 9-607(c)

C. SP may deduct from the collections reasonable expenses of collection, and

enforcement, including reasonable attorney’s fees and legal expenses. 9-

607(d)

D. Have duty to deliver surplus to debtor and right to pursue deficiency

1. 9-608(a)(4): when turn the collateral into cash, two things can

happen:

a. You have a surplus and must give surplus to debtor

b. You have a deficiency, which means you may pursue the

excess owed as an USC

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2. 9-608(b): if the underlying transactions is a sale of accounts, CP,

payment intangibles, or promissory notes the D isn’t entitled to

surplus, and obligor is not liable for deficiency

IV. Repossession Under 9-609: The Breach of the Peace Limitation

A. 9-609After default, a secured party: 1) may take possession of the

collateral; and 2) without removal, may render equipment unusable and

dispose of collateral on a debtor’s premises under Section 9-610. A SP

may do the aforementioned pursuant to judicial process or with out

judicial process if it proceeds without breach of the peace. 9-609

B. Key issue: actually turning collateral into cash may be difficult hard for

collateral possessed by debtor, such as inventory and equipment, easier for

accounts and deposit accounts.

C. Threat of confrontation or violence seems critical

D. Cases:

1. Salisbury Livestock Co., page 310: Related 3rd

party private

property (father’s ranch); rural setting, early in the am, no

exchange or confrontation with anyone. Crt said there were two

main factors which need to be presented to the jury: potential for

immediate violence and the nature of the premises intruded upon

2. Williams v. Ford Motor Credit, page 317: Shared private

property (driveway); early in the am, “polite” verbal exchange bt

Williams (single female) and the repo man. JNOV affirmed,

reversing the jury judgment in favor of Williams: Williams did

not raise an objection to the taking, and the repossession was

accomplished without any incident which might tend to provoke

violence

3. Stone Machinery, page 322: prior communication with the debtor

suggested that confrontation was possible (debtor said someone

would get hurt if try to repo), so Creditor tried to solve the

breach of the peace problem by bringing a sheriff with him.

Debtor wins: presence of police officer prevented Debtor from

exercising his right to resist by all lawful and reasonable means a

nonjudicial take-over

4. Mel Farr and his cars: Mel Farr provides cars to people with bad

credit; have to make weekly payments; if don’t pay, the car shuts

off. Issues raised:

a. Is this a secured transaction?

b. Is when the car shuts off the equivalent of a repossession

and if so, is it a breach of the peace if the car shuts off in an

inopportune time (eg in traffic)?

c. Shutting off the car is more about the threat of value

(infliction of harm on debtor may induce them to pay) than

the creation of value

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5. Recap: To some extent the threat of violence is not really the

main issue; it’s more about requiring the SP to go through the

judicial process to get the collateral

V. Two Key Mechanisms:

A. 9-610: Disposition After Default: (a) After default, secured party may sell,

lease, license or otherwise dispose of any or all of the collateral in its

present condition or following any commercially reasonable preparation or

processing; (b) every aspect of a disposition of collateral, including the

method, manner, time place and other terms, must be commercially

reasonable. If commercially reasonable, a SP may dispose of collateral by

public or private proceedings, by one or more contracts, as a unit or in

parcels, and at any time and place and on any terms

1. Notice Provision: 9-611(b) and (c):...a SP that disposes of

collateral under 9-610 shall send the Debtor, any secondary

obligor (such as guarantor) and if the collateral is other than

consumer goods, other SPs, a reasonable authenticated

notification of disposition

2. Notice Time periods: In a transaction other than a consumer

transaction other than a consumer transaction, a notification of

disposition sent after default and 10 days or more before the

earliest time of disposition set forth in the notification is sent

within a reasonable time before the disposition

a. Whether notice is sent in a reasonable time is a question of

fact

b. Additional safe harbors—forms in 9-613, 614

3. Application of Proceeds to Disposition: 9-615

a. Tracks the discussion of 9-609 collections:

i. (a) expenses, then secured debt is pursued, then

junior secured debts

ii. (c) noncash proceeds rules

iii. (f) calculation of surplus or deficiency in

disposition to person related to SP: where the SP

buds and buys at a low price, the sale can be

challenged after the fact (this represents a

compromise)

iv. (g) cash proceeds received by Jr. SP

B. Retention of Collateral in Full or Partial Satisfaction of Debt:

1. 9-620: a secured party may accept collateral in full or partial

satisfaction of the obligation only if (1) the debtor consents to the

acceptance…

a. Mechanism for indicating consent: Can only agree to retain

in partial satisfaction if there is recorded consent—silence

doesn’t work. 9-620(c). This contrasts with full

satisfaction where SP gives notice and of no response

within 20 days the collateral will be accepted in full

satisfaction

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b. This is not applicable in consumer situation

c. Note: this is a change; before it was all or nothing (ie

before could only retain in full satisfaction of debt; now

allows retention in partial satisfaction)

d. Reeves, page 343: Native Americans pawned jewelry for

money loan; promised to pay in 30 days. They defaulted

and SP sold jewelry, which was worth a lot more than the

amount loaned. Issues: If a secured party retains collateral,

when can it subsequently sell the collateral? If SP does so,

must the SP account for any surplus to the debtor? Crt says

that SP was allowed to sell, but must account to the debtor

for any surplus

2. 9-621: This section expands the group entitled to receive notice

of the proposed retention to include certain SC and certain

secondary obligors

3. 9-622: a secured party’s acceptance of collateral in full or in

partial satisfaction of the obligation it secures:

a. dischargers the obligation to the extent consented by the

debtor;

b. transfers to the SP all of the debtor’s rights in the collateral;

c. discharges the SI or agricultural lien that is the subject of

the debtor’s consent and any subordinate SI or other

subordinate lien; and

d. terminates any other subordinate interest

e. a subordinate interest is discharged or terminated under the

aforementioned sections even if the SP fails to comply

with this article

VI. One Noteworthy right

A. 9-623: Right to Redeem Collateral: a debtor or any other SP or lienholder

may redeem collateral. To redeem collateral, a person shall tender…

1. This means that if the collateral hasn’t been fully disposed of, the

debtor has right to give SP money and get the collateral back

2. Requirements for Redemption:

a. Must pay all obligations;

b. And reasonableness expenses and attorney’s fees

c. I.e. can’t hand over the payments that you missed—you

have to pay out the remaining balance

3. Can be useful in some personal situations (see Salisbury where

Salisbury hands over check from his dad to get his cars back),

but requirement to pay full debt weakens utility of mechanism.

In other words, this rule is not that important because the Debtor

is rarely in a position to pay off debt in full anyway

VII. Key Issues: Secured Creditor Opportunism and Debtor Indifference:

A. Examples of SC Opportunism:

1. Debtor is entitled to surplus left over after the disposition; SP

won’t care about the size of the surplus.

25

a. Stone Machinery, page 322: SP was owed $7448 and sold

the tractor for $7448

b. The issue is how to control for the fact that the SP therefore

won’t care to really maximize the amount it sells for since

it doesn’t share in the surplus

2. Reeves, page 344: SP tells debtor will keep collateral in

satisfaction of debt when collateral is worth much more

B. Debtor Indifference:

1. Debtor may not get to keep the surplus anyhow

2. Just goes to other creditors, so why would the Debtor care

whether the SP’s sale of collateral accrues a surplus?

3. Thus, need to get those with a stake in this disposition of

collateral involved

4. Possible Solutions: Excello Press (page 330) and the Rebuttable

presumption:

a. Excello Press: Crt says “main question in a deficiency

action is the commercial reasonableness of the disposition

of collateral. Oral notification producing actual knowledge

is notice. If debtor did not receive notice, the crt may use

the omission (along with other factors) to inform its

assessment of commercial reasonableness. Only if SP

cannot establish the commer reasonablenss of its sale need

it try to prove the mkt value using secondary evidence,

such as appraisals

b. 9-626 adopts the rebuttable presumption, so if party screws

up notice or reasonablenss, if has complied with statute, the

amount you would have realized would have paid off the

debt entirely—this you can rebut

C. Debtor Ignorance

1. In consumer settings, debts may not fully understand

consequences of decisions

VIII. Secured Party Mistakes in Implementing Part 6

A. 9-625: Damages for noncompliance: a person is liable for damages in the

amount of any loss caused by a failure to comply with this article…

B. 9-626: Rebuttable Presumption Rule: creates presumption of zero

deficiency and puts burden on secured party to overcome that (ie SP has

burden of showing compliance); this is done by presuming that the amount

that would have been realized in complying with disposition equals the

amount owed to the secured party. In other words, Debtor will be

credited the difference bt what would have been realized if provisions had

been complied with and what was realized. In the absence of proof, it is

assumed that there is a zero deficiency; ie that the proceeds from the sale

equals the amount of the debt

C. 9-627: Commercial Reasonableness Standards

1. Safe Harbors:

26

a. Usual Manner;

b. At price current on recognized market

c. Approval by a group of creditors

2. In re Excello Press, page 330 How should we establish

commercial reasonableness? Main question in a deficiency

action is the commercial reasonableness of the disposition of the

collateral, with the secured party bearing the burden of

persuasion. Oral notification producing actual knowledge is

“notice.” If the debtor did not receive notice, the court may use

the omission (along with other factors) to inform its assertions of

commercial reasonableness. Only if the secured party establishes

the commercial reasonableness of its sale need it try to prove the

market value using secondary evidence, such as appraisals and

sales of similar equipment. If the secured party can prove that

sale was commercially reasonable, it has proved the market value

of the collateral

D. 9-628: Limitations on Liability

The Limits on Article 9 I. 9-109 and Excluded Areas

A. The Main Rule is 9-109(c): This article does not apply to the extent that:

1. a statute, regulation, or treaty of the US preempts this article;

2. another statute of this State expressly governs the creation,

perfection, priority, or enforcement of a SI created by this state

or a governmental unit of this State

3. a statute of another state, foreign country or a governmental unit

of another state…expressly governs creation perfection, priority,

or enforcement of a SI created by the state, country of

governmental unit

B. Inapplicabilty of Article: 9-109(d): this article does not apply to:

1. a landlord’s lien, other than an agricultural lien

2. a lien, other than an agricultural lien given by statute or other

rule of law for services or materials…

3. an assignment of a claim for wages, salary, or other

compensation of an employee…

4. (10) says: a right to recoupment or set-off, but

a. Section 9-340 applies w/ respect to the effectiveness of

rights of recoupment or set-off against deposit accounts

b. Section 9-404 applies with respect to defenses or claims of

an account debtor

5. (11): on the whole A9 does not apply to real estate

C. 9-311: Step-Back provision: Extent to which A9 is limited by Federal

Law: Except as otherwise provided in subsection (d), the filing of a FS is

not necessary or effective to perfect a SI in property subject to: 1) a

statute, regulation, or treaty…

27

1. In other words, FS aren’t effective to perfect when there is a

federal law which dictates when priority is acquired over the

rights of a lien creditor

2. This is different from the old scheme, which focused on whether

there was a parallel/ alternative recordation scheme. Now the

focus is what the fed scheme says about the posture of a lien

creditor as to priority

II. Intellectual Property

A. Copyrights:

1. 17 USC 205: Recordation of transfers and other documents

a. Conditions for Recordations: Any transfer of copyright

ownership or other documents pertaining to a copyright

may be recorded in the Copyright Office if the document

filed for recordation bears the actual signature of the person

who executed it…

b. (c): Recordation of a document in the Copyright Office

gives all persons constructive notice of the facts stated in

the recorded doc, if—

a. the doc or material specifically identifies the

work…

b. registration has been made for the work

c. (d): Priority bt Conflicting Transfers: As between two

conflicting transfers, the one executed first prevails if it is

recorded , in the manner required to give constructive

notice under subsection c, within one month after its

execution in the US or within two months after its

execution outside the US, or at any time before recordation

in such a manner of the later transfer. Otherwise the later

transfer prevails if recorded first in such a manner and if

taken in good faith, for valuable consideration or on the

basis of a binding promise to pay royalties, and without

notice of the earlier transfer

2. 17 USC 101: a transfer of copyright ownership is an assignment

mortgage,…or any other conveyance, alienation or

hypothecation of a copyright of any of the exclusive rights

comprised in a copyright, whether or not it is limited in time or

place of effect, but not including a nonexclusive license

3. Knowledge Matters: In the Copyright regime, knowledge matters

but in A9 knowledge is irrelevant, so there is an issue of which

system controls:

a. In re Peregrine Entertainment, page 351: Issue was

whether a SI in a copyright was perfected by filing in the

Copyright Office; crt says that recording in the Copyright

Office rather than filing a FS under A9 is the proper

method for perfecting a SI

28

b. The knowledge requirement creates the problem of circular

priority.

i. Footnote 10 of Peregrine, page 356: Filing

under the Copyright system creates a lot of

debtor monitoring; have to search every

individual copyright rather than searching for

debtor names. In comparison to A9 this is

confusing and expensive.

B. Patents

1. Does a SI have to be filed with the Patent Office in order to

perfect?

a. 35 USC 261: an assignment, grant, or conveyance shall be

void against any subsequent purchaser or mortgagee for a

valuable consideration, without notice, unless it is recorded

in the Patent Office

b. In re Cybernetic Services, Inc, page 360 Because 35

USC 261 concerns only transactions that effect a transfer of

an ownership interest in a patent, the Patent Act does not

preempt A9, thus their SI was perfected by filing a FS; so

just have to fill in UCC (this is the same for trademarks)

i. Note: this is just 9th

circuit, but it is the leading

decision

C. Bottom Line: for intellectual property, uncertain where to file, file in both

1. Copyrights

a. Peregrine says must filed with Copyright Office

b. Status under Revised Article 9 unclear and limited to one

court anyhow

c. Change to lien creditor focus in 9-311 might matter here

2. Patents

a. Cybernetic Services says file in UCC records

b. Just 9th Circuit

c. By limiting key provision in 35 USC 261 to title

transactions, avoids application of federal scheme to SI

recording

3. Trademarks

4. Caselaw says file in UCC records

III. Set-off Rights and Leases

A. Set-offs – Rights arise nonconsensually outside of A9

1. New A9 brought in deposit accounts which made it necessary to

provide a setoff exclusion again

2. Previous version of A9 did not have a setoff exclusion because it

did not seem necessary; “might as well exclude fan dancing”

3. Section 9-109(d)(10) provides that this article does not apply to a

right of recoupment or set-off

29

a. Recoupment arises as to debts (I owe you, you owe me),

while set-off relates often to fees involved in the

management of an account

4. 9-340: Implements a regime that is protective of recoupment and

set-off rights:

a. (a) A bank with which a deposit account is maintained may

exercise any right to recoupment or set-ff against a SP that

holds an interest in the deposit account

i. This subsection states the general rule and

provides that the bank may effectively exercise

rights of recoupment and set-off against the SP.

The exception to this rule is contained in (c)

b. (b)…the application of this article to a SI in a deposit

account does not affect a right of recoupment or set-off of

the SP as to a deposit account maintained with the SP

i. this means that a bank may hold both a right of

set-off against and an A9 SI in the same deposit

account. By holding a SI in a deposit account, a

bank does not impair any right of set-off it

would otherwise enjoy

c. (c) The exercise by a bank of a set-off against a deposit

account is ineffective against a SP that holds a SI in the

deposit account which is perfected by control under 9-

104(a)(3), if the set-off is based on a claim against the

debtor

i. this is the exception: if the SP has control under

9-104, (ie if it has become the bank’s customer),

then any set-off exercised by the bank against a

debt owed by the debtor (as opposed to a debt

owed to the bank by the SP) is ineffective. The

bank may, however, exercise its recoupment

rights effectively

5. National Acceptance, page 374 Issue: whether the Bank’s right

of set-off was subordinate to the P’s SI in the proceeds deposited

in the debtor’s deposit accounts. Crt stated that Bank chose to

ignore evidence which would have led a reasonable man to

conclude that the funds deposited in the deposit accounts were

encumbered by the liens of third parties, or at least to inquire

whether such interests existed. This knowledge or notice was

30

sufficient to preclude any right of set-off it might otherwise have

had and rendered its actions unlawful…

a. Applying the Law: Old Article 9

b. Was this a setoff? There were some questions regarding

scope of prior set-off exclusion

c. Once outside of Article 9, many states applied a knowledge

test, barring setoff if the bank knew of or should have

known of the rights of the security party in the deposit

account

d. Here

i. If within Article 9, Old 9-201 controlled, and

secured party wins

ii. If outside Article 9, under Virginia common

law, bank with deposit accounts had knowledge,

and SP wins

e. Applying the Law: New Article 9

f. Focus on two situations: original collateral interest arising

through control and proceeds interest

g. Original Collateral Control Interest

i. Presumably a question of contract; see 9-340(c)

h. Proceeds Interest

i. SP will lack control of deposit account; 9-340

and 9-341 suggest that setoff will be effective

i. Here

i. Bank with set-off right would win

B. Drawing the line between a transaction governed by A9 and a transaction

outside of A9 when no specific statutory attention has been paid to the

problem:

1. Medomak, page 380 Nov 19-21 –

2. Different ways of structuring transaction, where underlying

economics is the same, lead to dramatically different priority

rights

3. Underlying transaction:

a. Underwood gets raw materials from supplier

b. Underwood sends raw materials to Medomak

c. Medomak processes raw materials and sends them back to

Underwood.

d. Medomak has granted a SI to Bank for all assets and AAP

e. Question is: If Medomak goes belly-up can Bank take an

interest in the raw materials?

i. Set-off

i. If Underwood “sells” the raw materials on

credit; and

ii. Medomak “sells” the finished product back

on credit; and

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iii. Underwood applies set-off to its loan and

pays Medomak the difference

1. Then NO SI for bank. This is a setoff

ii. Bailment

i. Underwood lends raw materials to

Underwood for processing and then pays a

processing fee.

1. Then NO SI for bank because

Medomak has no rights in the

collateral.

iii. USC loan

i. Underwood lends $ to Medomak to buy the

raw materials which it purchases from the

supplier; and

ii. Buys finished product from Medomak

1. Then YES bank has SI because

Underwood hasn’t filed.

C. Leases:

1. In re Mahoefer Packing, page 392 Issue is whether a written

agreement bt the trustee of the bankrupt D and the SP covering

the equipment is a true lease under which the SP is entitled to

reclaim its property from the bankrupt estate, or whether it is

actually a lease intended as security in which case the SP’s

failure to file a FS to perfect its interest renders it subordinate to

the trustee. Crt says that when the lessee has the right to

terminate the transaction, it is not a conditional sale, and thus

concluded that the agreement was a true lease. I.e. should focus

on what we think people will do at the end of the lease: a) in

situations where we think that lessee will keep property, then this

sounds like a sale; b) if we know they’ll give up the property,

then sounds like a true lease (then don’t have to file a FS)

2. Leases

a. No filing required for true lease, so SPs seeking to avoid

filing, if any, could mold secured transactions into leases

b. 1-201(37) provides extensive guide for distinguishing true

leases from false leases

c. Consequences of false lease status is that “lessor” will be

treated as having sold the property and having attempted to

reserve title, giving rise to a deemed security interest under

1-201(37)

d. No filing will have been made usually, so the SI will be

unperfected

e. Key for determining false lease is whether “lessee” is on

the hook to pay under the lease for the remaining economic

life of the goods

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3. More important issue – if debtor goes bankrupt, positions of

leasor and SP very different. Leaseholder can opt out of

bankruptcy. SP cannot.

IV. Included Transactions: Sales of Accounts and Securitizations

A. 9-109(a)(3): General Inclusion of Sales of Accounts, CP, Payment

Intangibles and Promissory Notes

1. Traditionally, difficulty with separating SIs in accounts and sales

lead to desire to require filing for both

2. This was done by including sales of accounts and chattel paper in

Old Article 9

3. Revised Article 9 expands this

B. Corresponding changes to key definitions: security interest, debtor,

secured party, collateral Definitions:

1. Payment intangible means a general intangible under which the

account debtor’s principal obligation is a monetary obligation.

9-102(a)(61)

2. Promissory note means an instrument that evidences a promise to

pay a monetary obligation, does not evidence an order to pay and

does not contain an acknowledgement by a bank that the bank

has received for deposit a sum of money or funds. 9-102(a)(65)

3. Collateral means the property subject to a SI…and includes

accounts chattel paper payment intangibles, and promissory

notes…9-102(a)(12)

4. Debtor means a person having an interest, other than a SI or

other lien in the collateral whether or no the person is an obligor

or a seller of accounts, chattel paper, payment intangibles or

promissory notes… 9-102(a)(28)

5. Secured party means (a) a person in whose favor a security

interest is created or provided for under a SA, whether or not any

obligation to be secured is outstanding; ….a person to which

accounts, chattel paper, payment….have been sold..9-102(a)(72)

C. Article 9 Does Not Define a True Sale 9-109 Comments 4 and 5 1. Comment 4: neither this Article nore the definition of security

interst delineates how a particular transaction is to be classified.

2. Comment 5: nothing in this section or any provision of A9

prevents the transfer or full and complete ownership of an

account, chattel paper, an instrument, or a payment intangible in

a transaction of sale

D. Perfection and Path Dependence

1. Perfection rules for sales of accounts and CP as before: file as to

accounts, either as to CP, but as to CP, possession or control can

be better (see 9-330)

2. Price of bringing Payment Intangibless and Promissory Notes

into the statute: automatic perfection (9-309(3,4))

E. Consequences of Failing to Perfect a Sale

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1. What is an “unperfected” sale?

a. Octagon Gas: Debtor/seller must retain an interest in the

“sold” property. This had bad implications for bankuptcy

2. 9-318: Not So

a. Sub a says sale is complete

b. Sub b says debtor is deemed to have equivalent rights to

those held prior to sale

3. This will support superior position for lien creditor or secured

creditor or subsequent purchaser (see example below 9-318

comment 3)

a. Bottom line: Other creditors can still go after Buyer if

buyer does not perfect. But this does not affect the rights

as between the Seller and the Buyer. Seller retains no

interest.

4. Important to clearly state that Seller retains no interest because:

a. Surplus and Deficiency

i. Debtor/seller has no right to surplus or

deficiency (9-608(b), 9-615(e))

b. Bankruptcy

i. Sold assets are not part of bankruptcy estate.

Ordinary collateral is part of the estate.

ii. This would defeat the entire purpose of

secuitization which is to make assets

bankruptcy remote. 5.

i. Octagon Gas Systems, page 410: Octagon

refused to recognize any interest that was held

by Rimmer in the System gas sale proceeds

(they claimed that because Rimmer was not a

party to the Agreement, that they do not have an

enforceable interest) and failed to pay them.

Court found that Rimmer had an account; that

Rimmer should be treated like a SP because

under A9 a sale of accounts is treated as if it

creates a SI in the accounts and accounts sold by

a debtor prior to filing for bankruptcy remain

property of the debtor’s bankruptcy estate. Thus

court was wrong in saying that A9 was

inapplicable to Rimmer’s interest. New A9

repudiates holding b.

F. Summary: given the difficulty in separating sales and true SIs when would

it have mattered whether we could distinguish the two?

1. Bankruptcy: Octagon Gas; and

2. Surplus and Deficiency:

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a. Major’s Furniture Mart, page 407: Issue is to distinguish

whether the accounts transferred to Castle were to secure

Major’s indebtedness, which would mean that Castle was

obligated to account for and pay over the surplus proceeds

to Major, or whether this was a sale of accounts, in which

case Castle is entitled to all of the proceeds received from

the accounts because the agreement did not indicate

otherwise.

b. Crt found that since Castle tried to shift all of the

obligations of ownership to Major and none of the risks in a

sales relationship existed, this was a SI and Castle needs to

fork over the surplus

c. Key Issues for Separating True Sales from Sec Trans

i. Exposure to risks of ownership: Does “buyer”

have recourse against “seller” or guarantee from

seller

ii. If so, less like ownership or true sale, more like

secured transaction

iii. If not, more likely to find true sale

Security Interests and Interests Arising Outside of A9 I. Liens:

A. State Liens

B. Federal Tax Liens

1. General Rule: 26 USC 6321: If any person liable to pay any tax

neglects or refuses to pay…the amount shall be a lien in favor of

the US upon all property and rights to property, whether real or

personal will belong to the US.

2. When does the lien arise/ attach?

a. IRC 6322: “…the lien imposed…shall arise at the time the

assessment is made and shall continue until the liability for

the amount so assessed is satisfied or becomes

unenforceable by reason of lapse of time”

b. This assessment consists of a “nonpublic administrative

act”; which is problematic since 3rd

parties would not be

aware of the lien.

c. This is solved by IRC 6323(a): the lien is not valid against

a purchases, holder of SI…until notice thereof which notice

thereof which meets the requirements of (f) has been filed.

d. Tax lien filing is effective for 6 years from the date of the

assessment of the tax.

3. Where to file:

a. For personal property, filing should be made in the office

that the State law in which the property that is subject to the

lien designates. IRC 6323 If state law does not designate

an office, then file in office of the clerk of the US dist crt

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for the judicial district in which the property is subject to

the lien

b. Personal Property whether tangible or intangible is situated

at the residence of the taxpayer; for corp is it’s the principal

executive office where the business is located.

4. Summary of the system:

a. Gov takes lien to satisfy debt

b. Lien arises when the debt is assessed, but is not valid

against a competing SC until a public filing is made

c. SIs that arise prior to tax lien filing have priority, while

those that arise afterwards are subordinated

5. This makes the system pretty severe: the “in existence”

restriction in the definition of a SI coupled with IRC 6323 means

that if there is a change in the debtor’s property, the SP could

lose priority to the IRS lien. Even though IRC 6323(d) allows a

45 day window after notice of lien has been filed, it is not valid

against a SI that came into existence after the tax filing and

before the 46th

day after the filing (that is if there is no

knowledge), need to cut-back:

a. Protections for commercial transactions and financing

agreements

iv. Rice Investment, page 426: Issue of whether or

not the SI or the federal tax lien had priority;

Since the SP had a SI in D’s after-acquired

inventory, the SI in the inventory had not

acquired at the time of the filing of the tax lien

and thus the tax lien prevails

v. Choateness: “the SP could not prove that the

property was in existence and owned by the D

on the day the lien was filed, which means that

the SP’s SI in the property was not sufficiently

choate on the date of the tax lien filing”

II. Fixtures

A. Basic limit of A9 is that it defines rights in personal property; an important

class of SIs are not covered: mortgages of real estate. Issue is policing the

boundary bt these two.

B. Article 9 claimant v. real estate claimant:

1. 9-334: First to file in the real estate records wins

C. Definition of fixture:

1. A9 defines fixture as goods that have become so related to

particular real estate that an interest in them arises under real

estate law. 9-102(a)(41)

2. A fixture filing is defined as a filing of a FS covering goods that

are or to become fixtures….”

3. Wyoming State Farm, page 437: Issue: if pipe has become a

fixture on the irrigated real property, then SP’s SI in after-

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acquired farm equipment can only take priority if there was a

timely fixture filing. However, if the pipe is a good, and not a

fixture, then SP has the only valid SI in the pipe.

a. Crt applies following criterion for a fixture: 1) real or

constructive annexation to the realty; 2) appropriation or

adaptation to the use or purpose of that part of the realty to

which it is connected; 3) intention of the party to make the

article a permanent accession. Crt states the real issue is

whether the debtor showed a sufficient subjective intent to

make the pipe a fixture and thus decides that it is not a

fixture (it was removable and the D did not treat the pipe as

part of the realty in other financial situations)

The Secured Creditor in Bankruptcy I. Three important issues re position of SC in bankruptcy

A. The filing alters the opportunities available to the SC

1. The filing creates an automatic stay of actions against the debtor

and its property. BC 362. Thus, SC is barred from repossessing

collateral under 9-609 or selling it under 9-610.

a. Instead, automatic stay under BC 362(d)

B. The filing means that transactions that took place before the bankruptcy will

be examined (avoiding powers of trustee: the trustee gets powers that the D

doesn’t’ get)

C. How to value the collateral

II. Preferences:

A. Preferences are transfers that favor one existing creditor over another

B. A transfer is a voidable preference under BC 547(b) if:

1. The transfer must be to or for the benefit of a creditor

2. The transfer must also be for an account of an antecedent

debt owed by the debtor before the transfer is made. As long as the

transfer was made at the same time as the debt was incurred or before

the debt was incurred, there can be no voidable preference

3. The transfer must also have been made while the debtor

was insolvent. A debtor is insolvent when its debts, at fair valuation,

exceed the fair value of the property. BC 101(32). A debtor is

presumed to be insolvent on and during the 90 days immediately

preceding the date of the filing. BC 547(f)

a. A transfer of a SI is deemed to have taken place at

the time the interest takes effect as bt the parties (time of

attachment) provided that the interest is perfected within 10

days of the time it takes effect. BC 537(e)(2)(A). Note: a

transfer is not made until the debtor has acquired rights in

the collateral. BC 547 (e)(3)

b. If perfection takes place at a later time, the transfer

is deemed to take effect at that time, and the transfer is

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deemed to take effect just before the filing of the petition, if

the SI is not perfected by the time the petition is filed or

w/in 10 days of the time the transfer takes effect bt the

parties. BC 547(e)(2)(B) and (C)

c. Perfection, for personal property and fixtures is

when the creditor on a simple K cannot acquire a judicial

lien that is superior. BC 547 (e)(3).

4. The transfer must have been made on or within 90 days of

the filing or w/in 1 year of the filing if the petitioner is an insider

5. Must make the creditor better off than if not transfer had

been made and the creditor had only enjoyed the what rights it had in

the collective proceeding

III. Floating Collateral

A. BC 547(e)(3) solves the problem that is raised by floating collateral by postponing

the moment of transfer until the D acquires rights in the collateral; thus, this

essentially becomes an issue of whether or not the transfer is a avoidable

preference because it improved the position of the creditor

B. Thus, the question in a floating lien is whether any of the exceptions in BC 547(c)

apply:

1. There is no voidable preference unless the new SI improves the position of

the SC; and

2. that improvement of position is to the prejudice of other creditors holding

unsecured claims. BC 547(c)(5)

IV. Valuation

A. 11 USC 506: “An allowed claim of a creditor secured by a lien on property in

which the estate has an interest…is a secured claim to the extent of the value of

such creditor’s interest in the estate’s interest in such property….”

B. Determining Value:

1. Rash, page 465: The court states that under BC 506(a), the replacement

value standard (cost that the debtor would incur to obtain a like asset for

the same proposed use) rather than the foreclosure value standard should

be used (what the creditor could realize if it sold the estate’s interest in the

property according to the SA)