Académique Documents
Professionnel Documents
Culture Documents
Secured Transactions
Note to self: This outline contains some numbers, some not-numbers.. That's because I outlined
course following the book. But then, I took some liberty where the book's topic sequencing/grouping
seemed strange.
Chapter 1 - Creating a Security Interest
Introduction
What is a Secured Transaction? (9-109)
Party has lent money to debtor, taken back interest in debtors assets (personal property) as
a secured interest
Party (now a Secured Party) holds onto this secured interest in the property until the
secured party is paid in full.
If the debtor defaults in some manner, the secured party can repossess (take the debtors
entire bundle of rights in that property), sell property, and use proceeds against the debt
Why Secured Credit?
Advantages
For Secured Party
Secured party [creditor] charges lower interest to debtor (risk of not getting paid is
much lower since they have that secured interest)
Secured party [creditor] has priority if debtor defaults, can foreclose upon debtor (as
opposed to unsecured parties, who must go to court to obtain judgment)
Secured party [creditor] has leverage over debtor (I have a secured interest over all of
your assets)
Having a secured party [creditor] signals to the rest of the world [other creditors] that
you are a confident debtor
Disadvantages to SP
What is an Unsecured Transaction?
e.g. credit card transactions
Advantages
For Unsecured Creditor
Creditor can charge higher interest rate
Lower transaction costs (unsecured credit/transactions are common, day-to-day
activities
For Debtor
Property stays unencumbered by debt obligations
Disadvantages
For Unsecured Creditor
No collateral
No priority in case of default or bankruptcy
Key Terms in Creating a Security Interest
Security Agreement: [9-102(a)(73)] = The agreement that creates the security interest. The
medium may be either tangible or electronic.
Security Interest [1-201(b)(35)] = The interest in property that secures payment of the debt.
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Financing Statement [9-102(a)(39)] = The record (tangible or electronic) that the secured
party files in public records, usually the states filing office
Collateral [9-102(a)(12)] = General term for ANY property subject to a security interest;
collateral may be tangible property or intangible (increasingly popular) property
Examples of Tangible Property
Inventory (Goods held for sale)
Consumer Goosd (Goods used for family/household purposes)
Farm Products
Equipment
Note: These categories are from the perspective of the DEBTOR
Categories are MUTUALLY EXCLUSIVE. Debtor can only classify goods one way, e.g.
inventory OR consumer goods.. depends on Debtor's perspective
Example
If the debtor is a Retailer, its collateral (e.g. furniture) may be the Inventory it sells
(which customers take home, as consumer goods)
If the debtor is an individual its goods (e.g. furniture bought from the Retailer) is a
consumer good
Examples of Intangible Property
Accounts
Intellectual Property (e.g. copyrights, trademarks, etc)
General Intangibles (other rights to payment, but NOT accounts, chattel paper, deposit
accounts, commercial tort claims, etc.) (see 9-102(a)(42) (see Visualizing Secured
Transactions, p. 12)
1. Rights of Unsecured Creditor
Seller vs Debtor
(Historic) Rule: Before judgment (or its equivalent), an unsecured creditor has no rights at
law or in equity in the property of his debtor.
i.e. to collect from Debtors, seller must:
Sue Debtor and obtain money judgment
Do whatever required under State law to authorize sheriff to seize (levy on) D's assets
Sell assets in payment of the judgment debt (subject to certain exemptions that allow Ds
to protect assets from creditors)
Notes
Seizure can be physical taking of property, or symbolic (e.g. by filing papers)
Once the seizure occurs, the seller/creditor has an interest in the seized property
The interest is called a "judicial lien"
Seller is known as a lien creditor (i.e. one who holds a judicial lien)
Seller vs Other Unsecured Creditors and Trustee in Bankruptcy
First in time, first in right
Example
S1, S2, and S3 all sell to D on unsecured credit
D defaults on the debts on all 3 sales
S2 follows the procedures required to collect from Debtors (see Seller vs Debtor)
Sheriff, acting under the judgment for S2, seized all of D's assets (including those sold by
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S1 and S3)
D now has no more unencumbered assets
Priority among JUDGMENT creditors is based on the time the sheriff seizes the assets
Therefore, S1 and S3 are subordinate to S2's interest
Note: These rights suck. That's why it's better to be a secured creditor
2. Rights of Secured Creditor
Seller vs Debtor
Seller has power to re-take collateral from Debtor
Seller sells wine barrels to D. D promises to pay via Promissory note
i.e. Seller has given value; Debtor owes a debt
Seller enters into written security agreement w/ Debtor
Sec agmt grants security interest in collateral
Sec agmt can be electronic (e.g. e-mail); Debtor authenticates the sec agmt (by signing
paper, or replying to e-mail)
ie Debtor has authenticated sec agmt in an authenticated record. At this point, sec
interest has "attached" -- it's enforceable wrt collateral (9-203(a))
But note: The sec int is not PERFECTED yet
If D defaults, Seller can retake collateral and sell it at auction
Usu doesn't require going to court unless the proceeds of sale don't cover the
deficiency and Seller wants to recover the difference
If so, Seller must sue D and obtain a judgment for the deficiency
Seller vs Other Creditors and Trustee in Bankruptcy
Secured Party is prior to other Unsecured Parties under 9-201(a)
UNPERFECTED Secured Party is subordinate to Lien Creditors
9-317(a)(2)(A) - Until Seller PERFECTS sec int, the unsecured sec int is subordinate to
lien creditors
Note: This is an example of Art 9 providing "otherwise"
Attachment
Who are the Parties to a Secured Transaction?
Debtor (9-102(a)(28))
1. Person having an interest (e.g. ownership, but NOT a security interest) in collateral;
OR
2. Seller of Accounts, Chattel Paper, Payment Intangibles, or Promissory Notes; OR
3. Consignee (we didn't cover consignment)
Obligor (9-102(a)(59))
Person who
1. Owes payment/performance of secured obligation; OR
2. Has provided property other than collateral to secure SP's secured obligation; OR
3. Is "otherwise accountable" for payment/performance of secured obligation
Secured Party (9-102(a)(72))
1. Recipient of Security Interest; OR
2. Person holding agricultural lien; OR
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3. Consignor; OR
4. Purchaser of accounts, chattel paper, payment intangibles, or promissory notes; OR
5. Representative receiving sec int/ag lien; OR
6. Person holding security interest under Art 2, 2A, 4, or 5
NOTE!! The Debtor and the Obligor CAN BE SEPARATE PEOPLE/ENTITIES; though
they're usually the same
Secured Party
9-203(b) Security interest attaches when:
(1) Secured party gives value; AND
"Value" means:
A binding commitment to extend credit, or the extension of immediately available
credit; OR
A pre-existing claim; OR
Delivery under a pre-existing contract; OR
Any consideration sufficient to support a simple contract
(2) Debtor has rights in collateral (RIC) or the power to transfer RIC to a secured party; AND
(3) Another thing (see 9-203(b))
9-203(b)(3)(A) Authenticated Security Agreement (9-203(b)(3)(A)) that describes the
collateral (and, if timber is involved, describes the land), OR
Definition: Agreement that creates or provides for a security interest (9-102(a)(73));
Signed by debtor
(B) SP has possession of the collateral (under 9-313), and the collateral is not a
certificated security in registered form (e.g. car deed?); OR
(C) The security IS a certificated security in registered form and the security certificate
has been delivered to the SP (under 8-301); OR
(D) the collateral is deposit accounts, electronic chattel paper, investment property, or
letter-of-credit rights, and the secured party has control under Section 9-104, 9-105,
9-106, or 9-107 pursuant to the debtor's security agreement
1, The Security Agreement
What is the Security Agreement?
An agreement that creates or provides for a security interest (9-102(a)(73))
Key Guidelines for Sec Agmt Formation
Should always include the magic language (debtor grants a SI in X which secures $$$)
Must be either written or done via an electronic medium
Authentication [9-102(a)(7)] = Includes either signing a record or adopting a symbol or
encrypt with the present intent of the authenticating person to identify that person and to
adopt/accept the record
2. The Composite Document Rule
A signed fin stmt may operate as a sec agmt (see Bollinger), if combined w/ other
documents to show intent to create sec agmt
In re Bollinger Corp (Majority View) (CA3 1980)
FP
ICC loaned Bollinger $150K. ICC filed financing statement. Z&J made loan to
Bollinger, agreeing to pay off ICC loan in exchange for the assignment of ICCs
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original promissory note and SA to Z&J. Bollinger then executed a promissory note
to Z&J, evidencing the agreement (and referring to the SI). No formal SA was ever
executed between the parties, but Z&J did file a financing statement in connection
with the promissory note. When Bollinger declared bankruptcy, administrator
refused to recognize Z&Js SI in the machinery and equipment that had originally
secured ICCs loan
I
Can a signed financing stmt operate as a security agreement?
RAH
HELD: the minimal formal requirements of 9-203(1)(b) were met by the Fin stmt and
the p note; and the crs of dealing btwn parties indicated the intent to create a
security interest
RULE: Multiple documents taken together may create a security if intent to create
a sec int is shown
Although there is no formal SA, the collection of documents here (FS +
promissory note + course of dealing documents) provide enough evidence of
parties' intent
American Card (Minority View)
HELD: A writing CANNOT operate as a SA unless it contains some words
UNEQUIVOCALLY and SPECIFICALLY granting a security interest
Two views re: existed of valid security agreement:
Pro-Secured Creditor View:
The requirement of a written sec agmt is merely for evidence
i.e., If (1) Creditor advances money to Debtor, (2) Debtor signs promissory note, and
(3) the fin stmt describes the collateral, then a sec interest has been created. (i.e.
No need for a formal sec agmt)
A-1 Paving
FP
Port Royal entered into a Sales Contract with A-1, selling equipment and motor
vehicles to A-1 in exchange for repayment in monthly installments. The Sales
Contract specified that any disputes should be governed pursuant to IN law.
Port Royal then filed a UCC-1 FS and attached Exhibit B which provided a
description of the equipment/vehicles transferred under the Sales Contract.
I
Whether Port Royal and A-1 created a valid SI in the assets that Port Royal
contracted to sell to A-1?
RAH
HELD: COURT: YES
RULE: A properly-filed UCC Fin Stmt creates an effective SI under Article 9 (of
Indianas UCC) if
(1) that financing statement satisfies the formal writing requirements under
9-203 AND
(2) the finder of fact determines that the parties intended the FS to serve as
a security interest(parol evidence ADMISSIBLE as to this prong)
Note: This holding is very far-reaching
Pro-Trustee in Bankruptcy View:
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The secured creditor has a very strong position against other creditors in bankruptcy
Note: A security agreement may serve as a financing stmt if signed by both parties
(9-402)
3. Description of Collateral
Description of Collateral in the Security Agreement
9-108(a) - Description of personal property is sufficient, whether or not it is specific IF
IT REASONABLY IDENTIFIES WHAT IS DESCRIBED
Examples of what "Reasonably Identifies" collateral
For Investment Properties e.g. Security Entitlement, Securities Account, or
Commodity Account (9-108(d))
Use of those terms, OR
Use of the term, "Investment Property", OR
Description of underlying financial asset or commodity contract
For Other Collateral (9-108(b))
Specific Listing
Category
Type of collateral defined in the UCC
Quantity
Computational/allocational formula or procedure; OR
ID "by any other method" IF the identity of the collateral is objectively
determinable
What is NOT sufficient to reasonably ID collateral
"Super-generic" descriptions, such as "all the debtor's assets" or "all the debtor's
personal property" - 9-108(c)
i.e. Sec Agmt MUST be specific in naming collateral
POLICY
Debtor's property is at risk
A description only by "type of collateral" for (9-108(e))
Commercial Tort Claim (defined in 9-102(a)(13)); OR
In a consumer transaction, description "by type" for Consumer Goods, A security
entitlement, a securities account, or a commodities account
Financing Statement: A financing stmt sufficiently indicates the collateral it covers if it
provides
(1) a description of the collateral pursuant to 9-108 (the Security Agreement rules); OR
(2) an indication that the financing stmt covers all assets or all personal property
NOTE: The fin stmt CAN have super-generic description of collateral
POLICY
This broader standard is consistent with the purpose of a FS needs to merely
notify subsequent creditors that a lien may exist and that further inquiry is necessary
Security Agreement vs Financing Statement
Security Agreement MAY NOT use "super-generic" descriptions, e.g. "all assets"
Financing Stmt MAY use "super-generic" descriptions
In re Grabowski (SD Ill 2002)
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FP
Priority dispute between Bank of America and South Pointe Bank regarding their
SIs in three items of farm equipment owned by the debtors. B of A claims a prior SI
in the equipment by virtue of a SA signed by the debtors in Dec. 1998; B of A then
filed a FS listing the debtors business address and describing the collateral as All
Inventory, Chattel Paper, Accounts, Equipment, and General Intangibles. South
Pointe then obtained a lien on the debtors equipment in January 2000; South
Pointe filed a FS describing the collateral specifically.
I
South Pointe alleges that B of As FS, although prior in time, was INSUFFICIENT to
perfect the Banks SI because it did not mention any specific items of equipment or
even make reference to farm equipment or farm machinery
RAH
HELD: COURT: B of As FS SUFFICIENT to perfect its SI in the subject farm
equipment (and, therefore, the Banks interest, being prior in time, SUPERIOR to
that of South Pointe)
B of As FS, although providing a general description, was SUFFICIENT to notify
subsequent creditors that a lien existed on the debtors property
6. Value and Rights in Collateral
9-203(b): Sec int does not attach in collateral until value has been given and debtor has
rights in collateral
a. Value
"Value" means:
A binding commitment to extend credit, or the extension of immediately available
credit; OR
A pre-existing claim; OR
Delivery under a pre-existing contract; OR
Any consideration sufficient to support a simple contract
1-204(4): Any consideration sufficient to support a simple contract
9-102(a)(57): "New value" --> money, property, or new credit given up front
b. Rights in Collateral
"Rights in collateral"
Need not be FULL property rights
9-203, Cmt 6: A debtor's limited rts in collateral, short of full ownership, are
sufficient for a sec int to attach
e.g. A lessee of personal property doesn't OWN the leased the property, but may
create a sec int in its valuable rights under the lease
"Power to transfer rights in collateral"
9-203, Cmt 6: This lang allows a debtor to transfer, and a sec int to attach to,
greater rights than the debtor has
Swets Motor Sales, Inc. v. Pruisner
FP
Swets Motor Sales, Inc. v. Pruisner (IA 1975) Swets sold used cars/trucks to
Pruisner, a retail auto dealer. Pursuant to an oral agreement, Swets delivered
vehicles to Pruisner with unencumbered certificates of title and was paid by
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POLICY
Rests on the unique nature of inventory/accounts receivable as cyclically
depleted and replenished assets.
In re Filtercorp, Inc (Majority Approach) (CA9 1998)
FP
In re Filtercorp (9th Cir. 1998) Filtercorp took out a series of loans from
Paulman. The loans were memoralized by promissory note, which
provided for a security in the accounts receivable and inventory of
FilterCorp. The parties never executed a separate SA, but Paulman
perfected his interest by filing a FS. Despite the notes reference to an
inventory listing, none was attached to the note or the FS.
I
Did the parties intend to secure AFTER-ACQUIRED inventory/accounts
receivable with the 1992 promissory note?
RAH
HELD: Ct adopts majority view (rebuttable presumption)
Presumption that after-acquired property is included STANDS unrebutted
as to accounts receivable; no evidence of intent -> Paulman has a SI in
after-acquired accounts receivable of Filtercorp.
Presumption that after-acquired property is REBUTTED for inventory by
the reference to the attached inventory listing (even though it was never
actually attached)
Minority Approach
Require EXPRESS language evidencing the parties intent to cover afteracquired inventory or accounts receivable
POLICY
It's neither onerous or unreasonable to require a SA to make clear its
intended collateral
New Sec Agmt needed for Consumer Goods Collateral under 9-204(b)
Sec int in after-acquired property does not extend to consumer goods collateral
RULE: 9-204(b)(1) - An after-acquired property clause is not effective wrt consumer
goods
BUT! The after-acquired property clause IS effective wrt consumer goods if the
debtor acquires rights in them within 10 days after the secured party gives value
e.g. when a consumer buys a stove from a retailer on secured credit, the retailer's
sec int does not also extend to other consumer goods purchased later
RULE: 9-204(b)(2) - An after-acquired property clause is not effective wrt
commercial tort claims
5. Automatic Attachment of Sec Int to Proceeds of Collateral
Revised art 9 assumes (as did former Art 9) that the parties intend that the sec agmt
covers proceeds unless otherwise agreed
9-203(f) + 9-315(a)(2) ==> sec int attached to collateral automatically attaches to any
identifiable proceeds of the collateral
"Proceeds" means:
1972 version: whatever is received when collateral is sold, exchanged, collected,
or otherwise disposed of
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provided in 9-311)
(2) an assignment of accounts or payment intangibles which does not by itself or in
conjunction with other assignments to the same assignee transfer a significant part of the
assignor's outstanding accounts or payment intangibles;
(3) a sale of a payment intangible
9-102(a)(61): "Payment intangible" means a general intangible under which the
account debtor's principal obligation is a monetary obligation.
(4) a sale of a promissory note
(5) a security interest created by the assignment of a health-care-insurance receivable to
the provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until the
debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section 9-206(c);
(10) a security interest in investment property created by a broker or securities
intermediary;
(11) a security interest in a commodity contract or a commodity account created by a
commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent
transfers by the assignee thereunder; and
(13) a security interest created by an assignment of a beneficial interest in a decedent's
estate.
By Possession or Delivery of Collateral (9-313)
9-313(a): Possession of collateral by the Secured Party constitutes perfection with respect
to:
Goods
Instruments (e.g. promissory notes, checks)
Negotiable documents (e.g. bills of lading, warehouse receipts)
Chattel paper (leases of personal property, sales contracts reserving a sec int)
Money (currency), AND
Certificated securities (stocks, bonds)
i.e. the above types of collateral can be physically possessed
Instruments, chattel paper, and certificated securities are all represented by essential
writings, which are tangible
General Intangibles and accounts are NOT represented by essential writings
By Control (ability to dispose of collateral unilaterally, w/o further authorization from Debtor)
"Control" = ability to dispose of collateral unilaterally (i.e. w/o cooperation of the debtor)
Types of collateral that REQUIRE control:
9-312(b)(1): Control = only method of perfecting a sec int in a deposit acct (e.g.
checking/savings accounts at a bank)
Compliance with Other Law
9-311 -- Sec ints subject to other law can be perfected ONLY in compliance w/ that law (i.e.
not in compliance w/ Art 9)
e.g. Motor vehicles -- sec ints in vehicles comply w/ state vehicle code
e.g. sec ints in Registered Copyrights must be recorded in the Copyright Office in Wash DC
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Filing
9-310(a) -- BASIC RULE: Perfection must be by filing a financing statement (except for
when filing isn't necessary)
9-502(d) -- Financing Stmt may be filed BEFORE sec agmt or sec int attaches
A financing statement may be filed before a security agreement is made or a security
interest otherwise attaches.
9-310(b) -- Lists cases when filing is NOT necessary to perfect sec int:
(1) sec int is perfected under 9-308(d), (e), (f), or (g)
9-308(d) [Supporting Obligation]: Perfection of a security interest in collateral also
perfects a security interest in a supporting obligation for the collateral.
9-308(e):
(2) sec int is perfected under Section 9-309 when it attaches;
(3) sec int is in property subject to a statute, regulation, or treaty described in Section
9-311(a);
(4) sec int is in goods in possession of a bailee which is perfected under Section
9-312(d)(1) or (2);
(5) sec int is in certificated securities, documents, goods, or instruments which is
perfected without filing or possession under Section 9-312(e), (f), or (g);
(6) sec int is in collateral in the secured party's possession under Section 9-313;
(7) sec int is in a certificated security which is perfected by delivery of the security
certificate to the secured party under Section 9-313;
(8) sec int is in deposit accounts, electronic chattel paper, investment property, or letterof-credit rights which is perfected by control under Section 9-314;
(9) sec int is in proceeds which is perfected under Section 9-315; or
(10) sec int is perfected under Section 9-316.
Automatic Perfection By Attachment
Some Sec Ints Perfect Automatically When They Attach
(1) Purchase-Money Security Interests (PMSIs) in consumer goods (except as otherwise
provided in 9-311)
(2) an assignment of accounts or payment intangibles which does not by itself or in
conjunction with other assignments to the same assignee transfer a significant part of the
assignor's outstanding accounts or payment intangibles;
(3) a sale of a payment intangible
9-102(a)(61): "Payment intangible" means a general intangible under which the account
debtor's principal obligation is a monetary obligation.
(4) a sale of a promissory note
(5) a security interest created by the assignment of a health-care-insurance receivable to the
provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until the
debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section 9-206(c);
(10) a security interest in investment property created by a broker or securities intermediary;
(11) a security interest in a commodity contract or a commodity account created by a
commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent transfers
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9-521(a) Safe Harbor Initial Financing Statement Form (accepted by all filing offices)
What is REQUIRED on init fin stmt (9-516(b)(5)(C))
Type of Organization
Jurisdiction of Organization
Organizational ID
What data is OPTIONAL on init fin stmt
Social Security # (see 9-516(b))
Addendum (Form UCC1Ad)
When the Addendum is Required:
If collateral is real property-related collateral such as timber to be cut or goods
that are to become fixtures
What Constitutes Filing
9-516(a): Except as otherwise provided in subsection (b), communication of a record
to a filing office and tender of the filing fee or acceptance of the record by the filing
office constitutes filing.
NOTE! This means that if the filing office accepts a filing that is missing info (e.g.
addresses), it still counts.
9-520(c): The fin stmt is "effective" if it contains the debtor name and collateral
2. Sufficiency of Financing Statement
See 9-521(a) -- Sets out the Safe Harbor Financing Stmt form
9-502(a): Fin stmt is "sufficient" ONLY IF it:
Provides the name of the debtor AND
(see below for more about what constitutes a sufficient statement of the debtor's
name)
The name of the secured party (or its representative) (9-503), AND
Indicates the collateral covered by the fin stmt (9-504)
Indication of collateral as described in 9-108 (for security agreements) 9-504; OR
Statement that Financing Stmt covers "All assets" or "All personal property"
Note: Super-Generic descriptions of collateral ARE allowed in the FIn Stmt
(9-108(b)(3))
NOTE: Even if the fin stmt is suficient, filing may not have taken place, because the
filing office may still refuse the fin stmt. see 9-516
4. Indication of Collateral
a. Original Collateral
9-502(a)(3): Fin stmt MUST indicate the collateral covered by the fin stmt
Description of Collateral (9-504(2)) is met by:
Description of Collateral (under 9-108), OR
An indication that the fin stmt covers "all assets or personal property"
(9-108(b)(3))
POLICY
Generic descriptions of collatearl are allowed in fin stmt because fin stmt
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only serves to notify the world that there may be a sec int in D's property
ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A.
F
I
RAH
b. Proceeds
Basic Rules:
1. A perfected security interest in the original collateral AUTOMATICALLY
continues in the proceeds, WHETHER OR NOT the fin stmt mentions proceeds
(9-315(c))
2. If a filed fin stmt covers the original collateral, the sec int in the proceeds
continues until the fin stmt either lapses or is terminated (9-315(e)(1)), AS LONG
AS:
(a) the proceeds themselves are collateral in which a sec int may be perfected
by filing (in the office in which the fin stmt is filed) AND
(b) the proceeds are not acquired with cash proceeds (9-315(d)(1))
3. A sec int in cash proceeds continues INDEFINITELY
4. If the debtor uses cash proceeds to buy NEW collateral (e.g. inventory or
equipment), then the sec int continues in the new collateral for only 21 days.
(9-315(d)(3)); See also 9-315, Cmt 5
HOWEVER, if the fin stmt indicates the type of collateral purchased,
then the sec into continues in the new collateral until fin stmt lapses or expires?
5. Name of Debtor
a. Basic Rules
9-503(a): A fin stmt "sufficiently provides the name of the debtor if":
(1) If D is INDIVIDUAL: By giving the name of the individual, NOT THE D/B/A or
trade name (9-503(a)(4)(A))
(2) If D is a GENERAL PARTNERSHIP: By giving the name of the
PARTNERSHIP, not the names of the parters
BUT!! If the partnership doesn't have a name (e.g. no formal p-ship agmt), then
use the partner's individual names
(3) If D is REGISTERED ORGANIZATION: By giving the name of
the organization indicated in the pub records of the D's organizing jurisdiction
(9-503(a)(1))
"Registered Organization": 9-102(a)(70) -- Organized under the law of a state
or fed govt that requires the maintenance of a public record showing the
organization to have been organized
Examples: Corporations, LLCs, Limited Partnerships
NOT Included in Registered Organizations: General Partnerships (see 9-503,
cmt 2)
b. Minor Errors Rule
9-506 - Resolves disputes regarding minor errors on fin stmt
9-506(a) - A Fin stmt w/ minor errors IS EFFECTIVE... UNLESS!! the errors
make the fin stmts "seriously misleading"
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9-509(a) -- A person (usu the Secured Party [SP]) may file a fin stmt ONLY IF debtor
authorizes the filing in an authenticated record
9-509(b) -- By authenticating, the debtor/new debtor authorizes the filing of an initial fin
stmt, and an amendment covering (1) the collateral described in the SEC AGMT and
(2) property that BECOMES collateral later under 9-315(a)(2), whether or not the sec
agmt expressly covers proceeds
9-510(a) -- A Filed record is effective only to the extent it was filed by a person who
may file it under 9-509
POLICY
Dropping the signature requirement allows for electronic filing
Damages: If SP files fin stmt w/o required auth by Debtor
9-625(b): Debtor can collect in the amt of loss caused by SP's act
9-625(e)(3): Provides for $500 recoverable by Debtor
9-513(c)(4): Allows Debtor to demand a termination stmt from SP (e.g. back out of sec
int)
Term stmt must be sent w/in 20 days after it receives the demand
But also: 9-518 -- Allows for the filing of a correction stmt to fix an incorrect filing
3. When Filing Becomes Effective
When does filing "occur"? (9-516(a))
(a) when a fin stmt is presented to the filing office w/ tender of filing fee, OR
(b) when the filing office accepts the record
a. Filing Office Indexing Errors
9-517 - Failure of filing office to index a record correctly does not affect the
effectiveness of the filing
See also 9-519(h), 9-523(a).
b. Duty of Filing Office to Accept or Reject
When the Filing Office MUST refuse to accept a record (9-520(a))
For a reason set forth in 9-516(b)
i.e. the filing office CANNOT refuse for a reason other than in 9-516(b)
When the Filing Office MAY refuse to accept a record
ONLY for a reason set forth in 9-516(b)
i.e. the filing office CANNOT refuse for a reason other than in 9-516(b)
9-516(b)
Filing does not occur with respect to a record that a filing office refuses to accept
because:
(1) the record is not communicated by a method or medium of communication
authorized by the filing office;
(2) an amount equal to or greater than the applicable filing fee is not tendered;
(3) the filing office is unable to index the record because:
(A) in the case of an initial financing statement, the record does not provide a
name for the debtor;
(B) in the case of an amendment or correction statement, the record:
(i) does not identify the initial financing statement as required by Section
9-512 or 9-518, as applicable; or
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interest gives value in reasonable reliance upon the incorrect information; and
(2) a purchaser, other than a secured party, of the collateral takes free of the
sec int or ag lien to the extent that, in reasonable reliance upon the incorrect
information, the purchaser gives value and, in the case of chattel paper,
documents, goods, instruments, or a security certificate, receives delivery of
the collateral.
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jurisdiction
a. Transfer of Collateral
For Transfers Not Affected by a Change in Governing Law/Jurisdiction
9-315(a)(1) - Effect of DISPOSITION of Collateral on the Security Interest
(unless otherwise provided in 2-403(2)) a security interest or agricultural lien
continues in collateral notwithstanding sale, lease, license, exchange, or other
disposition thereof UNLESS the secured party authorized the disposition free of
the security interest or agricultural lien
9-315(a)(2) - The sec int also attaches to "any identifiable proceeds of collateral"
9-507(a) - Effect of Transfer of Collateral on the Continued Effectiveness of a Fin Stmt
A filed financing statement remains effective with respect to collateral that is sold,
exchanged, leased, licensed, or otherwise disposed of and in which a security
interest or agricultural lien continues, even if the secured party knows of or consents
to the disposition.
POLICY
Saves the SP monitoring costs; imposes search costs on 3rd parties dealing w/
transferees in collateral
For Transfers to a Person Who Becomes a Debtor and Is Located in a New Jurisdiction
The sec int remains perfected for ONE YEAR after the transfer 9-316(a)(3)
i.e. the SP must monitor the collateral
b. Name Change
"Pure" Name Change: Only the businesss name changes; i.e. Business entity has not
changed
9-507(b) - Name Changes Are Generally Not Misleading
(Except as otherwise provided in subsection (c) and Section 9-508) A financing
statement still effective, even if after the financing statement is filed, the information
provided in the financing statement becomes seriously misleading under Section
9-506.
9-507(c) - Change in Debtor's Name
If a debtor so changes its name that a filed financing statement becomes seriously
misleading under Section 9-506:
(1) the financing statement is effective to perfect a security interest in collateral
acquired by the debtor before, or within four months after, the change; and
(2) the financing statement is not effective to perfect a security interest in collateral
acquired by the debtor more than four months after the change, unless an
amendment to the financing statement which renders the financing statement not
seriously misleading is filed within four months after the change.
c. Change in Business Structure
9-102(a)(56) - Definition of New Debtor
A person/org is a New Debtor if it "becomes bound as debtor" under 9-203(d) by a sec
agmt previous entered into by another person
POLICY
The New Debtor rules benefit the secured creditor of the original debtor -- makes
their lives easier
N.D. is bound to the original O.D.'s sec agmt, and the O.D.'s sec int remains
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perfected in old and newly acquired collateral w/o the filing of a new fin stmt, for at
least 4 months
Attachment
A person becomes bound as debtor by a security agreement entered into another
person (i.e. a "new debtor") if, by operation of law other than this article or by contract:
9-203(d)
(1) the security agreement becomes EFFECTIVE to create a SI in the persons
property; OR
(2) the person becomes generally obligated for the obligations of the other person,
including the obligation secured under the security agreement, and acquires or
succeeds to all or substantially all of the assets of the other person
9-203(e) - Is a New Sec Agmt Necessary for New Debtor?
(2) If Org/Person B is a New Debtor, bound by the sec agmt by Org/Person A, then
B does NOT need to enter into a new sec agmt w/ SP
(also, (1) - the agreement satisfies subsection 9-203(b)(3) with respect to existing or
after-acquired property of the new debtor to the extent the property is described in
the agmt)
NOTE: This would really only come into play if there are no other secured parties, no
bankruptcy in this case, you could still pick up your secured interests without
perfection
A common manner for a successor entity to become bound as a debtor is for it to
agree to become liable for all debts of its predecessor at the time when it receives
transfer of its predecessors assets
Perfection
9-508(a) - Is a New Fin Stmt Necessary for New Debtor?
The fin stmt naming the ORIGINAL DEBTOR is EFFECTIVE to perfect a sec int in
the collateral of the NEW DEBTOR, to the extent that the fin stmt would have been
effective had the original debtor acquired the collateral.
This includes existing collateral held by the new debtor covered by the original
debtor's sec agmt, not just the collateral acquired from the original debtor
BUT EXCEPTION -- 9-508(b) - Fin Stmt Becoming Seriously Misleading
If the difference between the name of the original debtor and that of the new
debtor causes a filed financing statement that is effective under subsection (a) to
be seriously misleading under Section 9-506:
(1) the financing statement is effective to perfect a security interest in collateral
acquired by the new debtor before, and within four months after, the new
debtor becomes bound under Section 9-203(d); and
(2) the financing statement is not effective to perfect a security interest in
collateral acquired by the new debtor more than four months after the new
debtor becomes bound under Section 9-203(d) unless an initial financing
statement providing the name of the new debtor is filed before the expiration of
that time.
9-508 - Effectiveness of Fin Stmt if New Debtor becomes bound by sec agmt
"New debtor" means a person that becomes bound as debtor under Section
9-203(d) by a security agreement previously entered into by another person.
(9-102(a)(56))
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Pre-Revision
If Debtor's property was in possession of a non-agent bailee, the D and SP could create a
perfected sec int in the property
How to Perfect
Negotiable Documents of Title
Perfection could occur either in the document or in the goods
All other bailments
Perfection could occur if
1. secured creditor had the bailee issue a document of
2. notified the bailee of its sec int, OR
3. filed as to the goods
Post-Revision
What types of collateral can have perfected sec ints?
9-312(a) -> A sec int in the following types of collateral may be perfected BY FILING
Chattel Paper
Negotiable Documents
Instruments
9-102(a)(47) - means a negotiable instrument or any other writing that evidences
a right to the payment of a monetary obligation, is not itself a security agreement
or lease, and is of a type that in ordinary course of business is transferred by
delivery with any necessary indorsement or assignment.
Investment Property
How to Perfect Sec Int in goods held by 3rd party
9-313(c) - SP does NOT have a perf sec int in property that a 3rd party possess
UNLESS:
1. The person acknowledges that it holds possession of the collateral for the SP
AND
2. The acknowledgement is in an authenticated record (i.e. signed writing OR
authenticated electronic record)
Goods covered by negotiable document
9-312(c) - While goods are in the possession of a bailee that has issued a
negotiable document covering the goods:
(1) a security interest in the goods may be perfected by perfecting a security
interest in the document; AND
(2) a security interest perfected in the document has priority over any security
interest that becomes perfected in the goods by another method during that time.
Goods covered by non-negotiable document
9-312(d) - While goods are in the possession of a bailee that has issued a
nonnegotiable document covering the goods, a security interest in the goods may
be perfected by:
(1) issuance of a document in the name of the secured party; OR
(2) the bailee's receipt of notification of the secured party's interest; OR
(3) filing as to the goods.
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State or the United States and as to which the State or the United States must
maintain a public record showing the organization to have been organized.")
9-307(c) - Limitation to 9-307(b)'s location of debtor rule for debtors outside US
9-307(b)'s location test applies to non-US debtors only when the foreign jurisdiction's
law generally requires public record notice of nonpossessory security interests as a
condition of priority
If (b) does not apply (and US debtor), then Location of Debtor = D.C. (District of
Columbia)
If Debtor of Collateral Moves to a Different Jurisdiction
9-316(a) - Continuation of Perfection
A security interest perfected pursuant to the law of the jurisdiction designated in
Section 9-301(1) or 9-305(c) remains perfected until the earliest of:
(1) the time perfection would have ceased under the law of that jurisdiction;
(2) the expiration of four months after a change of the debtor's location to another
jurisdiction; or
(3) the expiration of one year after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction.
3. Goods Covered by Certificate of Title
a. The Basic Rules of Perfection
How to Perfect
9-311(a)(2) Fin Stmts ineffective
Filing a fin stmt is neither necessary nor effective to perfect a sec int in goods
9-311(b) Must Comply w/ Cert of Title Statutes
Compliance w/ such a statute is the equivalent to filing a fin stmt. A sec int in such
property may be perfected ONLY by compliance
Duration of Perfection
9-311(c) Governed by Cert of Title Statutes
Inapplicability to Certain Inventory
9-311(d) - During any period in which collateral subject to a Cert of Title statute is
inventory held for sale/lease by a person or leased by that person as lessor, and that
person is in the business of selling goods of that kind, this section does not apply to a
security interest in that collateral created by that person.
e.g. car dealer
BUT NOTE!! 9-311(d) does not apply to dealers who ONLY lease goods. Even
though they eventually may sell the goods, they should not be considered "in the
business of selling goods of that kind." 9-311, cmt 4
b. What Law Governs Perfection?
9-303(c) - The local law of the jurisdiction under whose cert of title the goods are covered
governs (1) perfection, (2) the effect of perfection or nonperfection, and (3) the priority of
a sec int in the goods covered by a cert of title from the time the goods become covered
by the cert of title until the goods cease to be covered by the cert of title"
Meeks v. Mercedes Benz Credit Corp
FP
I
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RAH
c. Change in Debtor's Location
In re Baker
FP
I
RAH
See also 9-316(d)
See also 9-316(e)
See also 9-337(1)
NEW SECTIONS ADDED IN 2010 AMENDMENTS (see supp book), p. 931
9-316(h)
9-316(i)
Example 9
Chapter 3 - Priority
A. Introduction
Default Priority Rule: Security Interests are Primary
9-201(a) - Except as provided "otherwise" in the UCC, a sec agmt is effective according to
its terms btwn the parties, against purchasers of the collateral, and against creditors
i.e. even an unperfected sec int is prior to the rts of unsecured creditors and to any other
purchaser or creditor, unless the UCC provides "otherwise"
B. First-to-File Rule
Goals
Idenfity the property claimed
Identify the priority of claimants
1. Conflicting Security Interests
Under Traditional Law
Basic priority rule was: First in time, first in right
Problem is: this dictum is too imprecise to deal w/ a notice filing sys in which filing &
attachment of sec int can happen at diff times
Current Law
Basic priority rule is: "first to file-or-perfect"
9-322(a) - Except as otherwise provided in this section [9-322], priority among conflicting
sec ints/ag liens in the same collateral is determined as follows:
(1) Perf vs Perf: Conflicting PERFECTED sec ints/ag liens rank according to priority
in time of filing OR perfection. i.e. priority is given to the earlier of the time of first
filing or first perfecting
Note: Priority Rules govern ag liens
Ag lien = statutorily created property rts in frm products that secure obligations
incurred by the debtor in connection w/ its farming ops
Not consensually created sec ints; but Rev Art 9 considers the holder of an ag
lien to be a "secured party"
Other law (not UCC) governs ag lien creation. But Art 9 governs perfection and
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priority
(2) Perf vs Unperf: A perfected sec int/ag lien has priority over a conflicting
unperfected security interest or agricultural lien.
(3) Unperf vs Unperf: If all conflicting SPs (sec ints/ag liens) are unperfected, the
first sec int/ag lien to attach or become effective has priority.
9-317(a) - A sec int/ag lien is SUBORDINATE TO the rights of
(1) a person entitled to priority under 9-322; AND
(2) except as otherwise provided in subsec (e) [wrt PMSIs], a person who becomes a
lien creditor before the earlier of:
(A) the time the sec int/ag lien is perfected; OR
(B) one of the conditions in 9-203(b)(3) is met AND a fin stmt covering the collateral
is filed
Proceeds
9-322(b) The time of filing or perfection of a sec int in collateral is deemed to be the
time of filing or perfection of the sec int in the proceeds
Supporting Obligations
9-322(b) The time of filing or perfection of a sec int in collateral supported by a
supporting obligation is deemed to be the time of filing or perfection of the sec int in the
supporting obligation
2. Future Advances
Definition:
Art 9 doesn't define "advance"
The term connotes value given by the creditor to the debtor, or from which the debtor
benefits
i.e. "advance" is similar to "value"
"Future Advance" is NOT "after-acquired property"
Future advances concern the type of debt (future advances) secured by the debtor's
assets
After-acquired property clauses concern the collateral (after-acquired) that secures the
debt
Rules
See 9-203 and 9-204: If a sec agmt includes both (1) an after-acquired property clause
and (2) future advances clause, then:
1 - the sec int automatically attaches to any after-acquired property at the time when
the debtor acquires rights in this collateral, AND
2 - the collateral secures all future advances made by the sec party to the debtor
How to secure Future Advances
Dragnet clause
A provision in a sec agmt that secures both (1) a specific loan and (2) future loans
made by creditor to debtor w/ same collateral
Clause provides for "cross-collateralization": collateral securing the specific loan also
secures future advances
Dragnet clauses are generally considered valid unless specific grounds for
invalidating them exist
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See 9-323, cmt 3 - Explains Relationship of 3-22 and 3-23 (titled Future
Advances), CB p. 128
Shelby County State Bank v. Van Diest Supply
FP
Debtor filed for bankruptcy. Van Diest (SP#1) takes a SI in debtors inventory based on
executed SA which provided for a blanket lien on all inventory, notes and accounts
receivable, etc. Two years later, SP#1 and Debtor entered into new SA, which
described the SI as being in all inventory, including but not limited to agricultural
chemicals, fertilizers, and fertilizer materials sold to Debtor by Van Diest Supply Co.
whether now owned or hereafter acquired Bank (SP#2) then takes a SI in all of
debtors inventory pursuant to an executed SA and a filed FS.
I
Who has priority?
RAH
HELD: SP #1 HAS PRIORITY IN INVENTORY sold to Debtor by Van Diest (SP#1)
Under typical Article 9 priority rules, SP #1 would have priority in EVERYTHING -But,
Bank successfully points out that the language of the second SA indicates that the
SP#1s SI is only in all inventory sold to Debtor by Van Diest (phrase sold to Debtor by
Van Diest modifies including but not limited to)
Court agrees that this language is ambiguous -> language should be construed
AGAINST the drafter (SP#1); Thus, SP#1s SI should be restricted to inventory sold to
Debtor by Van Diest
Supported by evidence from several notices indicating that Van Diest was only
interested in having a PMSI only in the inventory it sold to Debtor
SA should provide clear notice to the world as to what property encumbered
See also 9-312
3. Financing Statement as an Umbrella
Previous views
One view
In order for a subsequent future advance clause to have 9-312 priority, the original sec
agmt must have a future advance clause (Coin-o-matic case, CB pp. 129-130)
Another view: Fin stmt = umbrella -- the fin stmt gives the world notice of present and
future sec ints in the collateral
Where (1) an original sec agmt is executed, a debt is created, and a fin stmt describing
collateral is filed; and (2) a later advance is made with a sec agmt covering the same
collateral as the original sec agmt, the lender has a perfected sec int in the collateral
for both the original debt and also the later advance
Policy stated on CB p. 131
Current View
A sec int can be perfected by a future advance; thus 9-322 gen rule governs priority of
future advances
i.e. priority is generally NOT based on the time when the future advance is given
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Proceeds
PMSI is limited to identifiable cash proceeds received on or before delivery of
the inventory to the buyer
Priority Rules for PMSI in Inventory
see above--requirements for PMSI in inventory
b. Consumer Goods Exception in 9-103(h)
No PMSI Avoidance by Trustee in Bankruptcy
A PMSI cannot be avoided under BC 522(f)(1)(B)
Perfecting a PMSI in Inventory
9-309(1) - No financing stmt needs to be filed to perfect a PMSI in Consumer Goods
A Seller has a PMSI in goods purchased only when the sec int is taken SOLELY to
secure all or part of its price
D. Lien Creditors
What is a lien creditor?
(A) a creditor that has acquired a lien on the property involved by attachment, levy, or the
like;
Generally, this refers to a judgment lien creditor Example: D owes X $5,000
(unsecured); D doesnt pay X, so X sues D and receives judgment, which X then enforces
the judgment (places a lien on an asset)
(B) an assignee for benefit of creditors from the time of assignment; OR
(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.
1. Conflict with an Unperfected Security Interest
An unperfected sec int is subordinate to the rights of a lien creditor - 9-317(a)(2)
A trustee in banktrupcty can avoid (i.e. defeat) an unperfected sec int
A trustee in bankruptcy IS a lien creditor under 9-102(a)(52)(C) together with BC
544(a)(1) and BC 550(a)
Note: This is perhaps the most important conflict treated by Article 9
2. Conflict with a Future Advance
The Future Advance has priority (9-323(b))
(1) if the advance is made or committed within 45 days after the lien arises (even with
knowledge of the lien), AND
(2) if the advance is made or committed after the 45-day period, as long as the SP does
NOT have knowledge of the lien at the time of the advance or commitment
Non-Advance Obligations (incurred by debtor after a lien attaches)
What is a nonadvance?
e.g. collection and interest charges
e.g. attorney's fees
What law governs nonadvances?
9-317(a)(2) controls these -- the secured non-advances are protected when made by a
creditor perfected ON or BEFORE the lien attaches
The date on which the non-advance is made does not affect priority
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9-323(b) does NOT address priority contests btwn a creditor whose NONadvance
obligations are secured and the rights of a lien creditor
A sec int is subordinate to those rights to the extent that the specified
circumstances occur (9-323, cmt 4)
Priority contests btwn a nonadvance secured obligation vs a lien creditor is not a
"specified circumstance"
Note: Unlike advances, non-advance obligations can easily be incurred by a debtor
AFTER a lien attaches
It is important (for purposes of the Federal Tax Lien Act) to establish under state law an
absolute priority for a future advance over a lien creditor for 45 days even if made w/
knowledge of the lien - 9-323, cmt 4
Note: This conflict is "much less significant" than the Lien Creditor vs Unperfected Sec Int
conflict (CB p. 154-155)
E. Buyers and Lessees
SPs are in a strong position compared to persons who buy or lease goods from the debtors
1. Buyers and Lesses of Non-Inventory Goods
Perfection
Purchase-money secured parties who have not perfected at the time of sale or lease
have 20 days (after the buyer/lessee has RECEIVED delivery) in which to perfect 9-317(e)
Priority
Perfected Sec Ints (Perfected Secured Parties' interests) are prior to buers and lessees
(9-317(b))
Unperfected Sec Ints are prior to the rights of buyers/lessees EXCEPT FOR those who
1. give value, AND
2. receive delivery w/o knowledge of the security interest
Continuation of Sec Int
Sec int continues in the goods sold or leased AND in any identifiable proceeds (SP vs
buyers of collateral) (9-315(a))
2. Buyers and Lessees of Inventory Goods
a. Buyer/Lessees In The Ordinary Course of Business (BIOCOBs/LIOCOBs)
What is a BIOCOB/LIOCOB?
BIOCOB means a person who buys
1. Buys in good faith
2. Does not know that the sale violates the rights of another person in the goods
3. In the ordinary course of business
4. From a person in the business of selling goods of that kind.
See also 2-716
See also 2-502
Priority
Buyers/Lessees of inventory collateral take free of inventory sec ints
A BIOCOB takes free of a sec int created by the byer's seller, EVEN IF the sec int is
perfected and buyer knows of its existence - 9-320(a)
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A Retailer (PMSI) is prior to the rights of the Buyer's (e.g. the Shopper's) trustee
in bankruptcy (and other lien creditors?) - 9-309(1)
e.g. a Retailer is prior to the rights of a shopper's trustee in bankruptcy
Priority of Wholesaler vs Buyer's Trustee? (when Wholesaler -> Retailer -> Buyer)
A buyer (Buyer) of goods from a person who bought consumer goods (Retailer,
who bought from Wholesaler) takes free of a sec int, even perfect, if the buyer (Buyer)
buys: (9-320(b))
(1) without knowledge of the security interest;
(2) for value;
(3) primarily for the buyer's personal, family, or household purposes; AND
(4) before the filing of a financing statement covering the goods.
4. When Is a Buyer Considered a BIOCOB (for 9-320(a) and (b))?
Possible Dates when buyer becomes BIOCOB, and therefore, the buyer's "knowledge" of
SP's right is relevant
(1) Date of execution of sales contract (2-103(1)(a), 2-106)
(2) Date of Identification of the goods under the sales contract (2-501)
(3) Date of passage of title in the goods (2-401(2) - (3))
(4) Date of delivery of the goods
(5) Date of acceptance of the goods (after delivery) (2-606)
Majority Court Rule
The date when the buyer becomes BIOCOB is the date on which the goods are identified
to the contract (option (2) above)
Art 9 Rule (probably use this on exam)
For non-Consumer goods
Only a buyer that (1) takes possession of the goods or (2) has a right to recover the
goods from the seller under Art 2 may be a BIOCOB (9-201(9))
For Consumer goods
A consumer is a BIOCOB when it has a right of replevin (which occurs when the
goods are identified to the sales contract) (2-716(3))
"Replevin" is A legal action to recover the possession of items of Personal Property.
5. Double-Debtors
Prof said this topic would make for a good final exam question.....
Rule
Double-Debtor only applies when
1. there are 2 SPs and 2 Ds
2. equipment-to-equipment sale
9-322 - regular priority rules
9-326
9-306
Example
Scenario: SP 1 loans D1 money and takes back a SI in equipment, current and after
acquired; files a financing statement in 2004. SP 2 loans D2 money and takes back a SI
in equipment, current and after acquired; files a financing statement in 2003. D2
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not by itself or in conjunction with other assignments to the same assignee transfer a
significant part of the assignor's outstanding accounts or payment intangibles - 9-309(2)
In re Tri-County Materials, Inc.
FP
Ladd was a GC which had a construction contract with the state of IL. Ladd and
Tri-County entered into a contract by which Tri-County would supply Ladd with
$250,000 worth of sand and gravel. In order to complete its contractual obligations,
Tri-County needed certain equipment to process the sand and gravel; in turn,
Tri-County leased from KMB equipment valued at $30,484. Tri-County filed for
bankruptcy; at this time, Ladd owed Tri-County $43,413.
I
KMB then asserted it had a SI in the funds due from Ladd to Tri-County (KMB owed
$30,484).
RAH
HELD: KMB did NOT have a perfected SI
RULE: The assignment must be both a "small percentage" AND ALSO a "casual &
isolated (rare)" assignment
KMB did NOT file a FS
Applied both the percentage test and casual/isolated test -Percentage test -> 12% of
the contract ($250,00) INSIGNIFICANT
Casual/isolated transaction test -> NO; Both parties sophisticated, this was a formal,
written agreement between two corporations
H. Chattel Paper and Instruments
1. Introduction
"Chattel Paper" means a record or records that evidence both (1) a monetary obligation and
(2) a security interest in specific goods or a lease of goods
Possession/Control of Chattel Paper
Instruments and Chattel Paper can be given to a creditor (i.e. creditor can possess the
paper)
Possession of these writings gives the possessor control over the obligation
Perfection
Perfection of SI in chattel paper is by physical possession/delivery (9-313(a))
Perfection of SI in electronic chattel paper is by control
Priority
Priority in Chattel Paper
A purchaser of chattel paper has priority over a sec int in the chattel paper that is
claimed "merely as proceeds of inventory" subject to a sec int if: (9-330(a))
1. Purchaser acts in good faith
2. Purchaser acts in the ordinary course of Purchaser's business
3. Purchaser gives "new value"
4. Purchaser takes possession of or obtains control of the chattel paper (see 9-105
5. The chattel paper is unstamped (i.e. the chattel paper does not indicate that it
has been assigned to an identified assignee other than the purchaser.)
A purchaser of chattel paper has priority over a sec int in the chattel paper that is
claimed "other than merely as proceeds of inventory" subject to a sec int if (9-330(b))
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deposit account:
(1) A security interest held by a secured party having control of the deposit
account under Section 9-104 has priority over a conflicting security interest held
by a secured party that does not have control.
(2) Except as otherwise provided in paragraphs (3) and (4), security interests
perfected by control under Section 9-314 rank according to priority in time of
obtaining control.
(3) Except as otherwise provided in paragraph (4), a security interest held by the
bank with which the deposit account is maintained has priority over a conflicting
security interest held by another secured party.
(4) A security interest perfected by control under Section 9-104(a)(3) has priority
over a security interest held by the bank with which the deposit account is
maintained.
Rex Financial Corp. v. Great Western Bank & Trust
Note: We did not cover this case in class
FP
Rex had an SI in Debtors inventory (automobiles). Debtor sold its inventory on credit
to a number of parties and took back an SI (via SA) in those automobiles. Debtor then
sold these SA contracts to Great Western in the ordinary course of its business. The
SA contracts constitute chattel paper (evidence a monetary obligation AND a SI in
specific goods) here, Great Western is the chattel paper purchaser.
I
RAH
HELD: Great Western has SUPERPRIORITY
RULE
A later chattel paper purchaser can step ahead of an earlier secured party
Whether you fall under (a) or (b) depends on the status of the COMPETING party,
not the chattel paper purchaser
-Took physical possession; gave new value (new money NOT intended to satisfy
pre-existing obligations); purchased in OCOB
-SI claimed by Rex is claimed merely as proceeds -> Rex had a SI in the collateral
and the proceeds upon the sale
-Rex did NOT place a substantial reliance on the chattel paper in making the loan
(instead, relied on the collateral/proceeds)
2. "Merely as Proceeds"
How to Determine whether 9-330(a) or (b) Applies
Depends on whether the chattel paper is claimed "merely as proceeds of inventory", or
"other than merely as proceeds of inventory"
See CB pp. 201 - 202
Note: Think of "merely as proceeds" as SP merely wants proceeds from inventory, not the
actual chattel paper
Note: Think of "other than merely as proceeds" as SP actually wants the chattel paper,
e.g. for the purpose of selling contracts
3. Instruments
What are "Instruments"?
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Negotiable Instruments, and other written promises to pay money that are, in effect,
treated similarly in the market place (9-102(a)(47))
"Instruments" EXCLUDES:
Security Agreements
Leases
Writings that in ordinary course of business are transferred by delivery with any
necessary indorsement or assignment
Investment property
Letters of credit
Writings that evidence a right to payment arising out of the use of a credit or charge
card or information contained on or for use with the card.
Priority
Between Bank and Someone who purchases an instrument from Debtor
Except as otherwise provided in Section 9-331(a), a purchaser of an instrument has
priority over a security interest in the instrument if: (9-330(d))
1. The sec int is perfected by a method other than possession
2. The purchaser gives value
3. Purchaser takes possession of the instrument
4. Purchaser acts in good faith and without knowledge that the purchase violates the
rights of the secured party.
Filing (fin stmt) under Art 9 does NOT constitute notice of a claim or defense to
the holders or purchasers of instruments. 9-331(c)
The exceptions in 9-331(a):
Art 9 does not limit the rights of a holder in due course of a negotiable instrument
A holder in due course of a negotiable instrument take priority over an earlier
security interest, even if perfected, to the extent provided in Articles 3, 7, and 8
What is a Holder in Due Course?
see 3-302
I. Deposit Accounts
We consider the priority of the SP in proceeds deposited in a deposit account
What Is A Deposit Account?
It's a demand, time, savings, passbook, or similar account maintained with a bank.
9-102(a)(29)
e.g. checking accounts, savings accounts, trust accounts
It does NOT include investment property or accounts evidenced by an instrument. These
are covered by Article 3
"Bank" means "savings bank, savings and loan assoc, credit union, trust
company. 9-102(a)(8)
Creating Security Interest in Deposity Accounts
Pre-Revision law was non-uniform (9-109, cmt 16)
Post-Revision law
Deposit Accounts as Collateral is Difficult
9-109(d)(13) excludes security interests in deposit accounts as original collateral in
consumer transactions (leaves this area to the vagaries of pre-Revision law
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(9-109(d)(13))
1. When customers deposit money in banks, the depositor become a creditor of the
bank (see CB p. 209)
Customer may use right to payment (from accct) as collateral (payment intangible?),
but usu the sec int in the rt to payment is created in the bank itself
2. Bank setoff rights (see CB p. 209)
How to Perfect an Interest in Sec Int in Deposit Accounts
Perfection by Control
Control is the SOLE method of perfection for sec ints created in deposit accts as
original collateral (9-312(b)(1); cmt 2 to 9-104)
Filing a fin stmt is not necessary to perfect a sec int in deposit accounts perfected by
control 9-310(b)(8)
A security interest in deposit accounts may be perfected by control of the collateral
under Section 9-104. (9-314(a))
1. A SP has control of a deposit account if: (9-104(a))
1. the SP is the bank with which the account is deposited, OR
2. the 3 parties (debtor, secured party, and bank) have agreed in an authenticated
record that the bank will comply with instructions originated by the secured party
directing disposition of the funds in the deposit account without further consent by
the debtor; OR
3. the secured party becomes the bank's customer with respect to the deposit
account.
Priority Rules for Deposit Accounts
a. Note: There is no "a." Shut up your face. I took creative liberty in rearranging the
book's outline (ok, fine.. "a." is up above in "Perfection by Control")
1. An SP having 9-104 control of the deposit account always beats a SPS lacking 9-104
control (9-327(1))
Once proceeds are deposited in a dep acct in which the depositary bank has a sec int,
the sec int in the proceeds is likely to be suborndiated to the bank's sec interest
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method other than possession IF the purchaser gives value and takes possession of
the instrument in good faith and without knowledge that the purchase violates the
rights of the secured party.
2. Lowest Intermediate Balance Rule
Risks to SP w/ Deposit Accounts
D may drain acct by payments to transferees who take free of SP's interest (9-332(d))
D may commingle proceeds w/ non-proceeds, making it difficult to identify proceeds in
compliance with 9-315's reqs (proceeds must be identifiable for sec int to continue in the
collateral)
Proceeds that are commingled with non-proceeds are identifiable to the extent that the SP
identifies the proceeds by a method of tracing (9-315(b)(2))
Tracing methods include the application of equitable principles
Lowest Intermediate Balance Rule (see CB p. 232)
1) Debtor is always deemed to have spent non-proceeds first! (from the mixed account)
2) Additions of non-proceeds do NOT replenish lost proceeds
3) Additions of proceeds INCREASE level of proceeds
4) The beneficiary can have his prior lien only on the lowest intermediate balance left in
the account
The LIB is allowed as an equitable remedy/tracing method (cmt 3 to 9-315)
Chrysler Credit Corp. v. Superior Court
FP
Chrysler had a SI in East County Dodges vehicles. The two parties formed an
agreement whereby East County Dodge would place proceeds (from vehicle sales)
into a trust account (bearing BOTH the Debtor and SPs names). In violation of this
agreement, Debtor placed funds into its general operating account (if $$$ placed
into general operating account would have then been directly transferred to the trust
account, NO problems -> proceeds identifiable). But, here, Bank of the West did
sweeps of Debtors general account, took it out and re-loaned to Debtor (pursuant to
a credit agreement).
I
RAH
HELD: Chrysler stuck with the Lowest Intermediate Balance (probably close to zero)
-Throughout most of the time, General Operating Account maintained zero/negative
balance (and any funds in there were likely funds loaned by BOW)
-Remedy: Chrysler should have been more vigilant, could have also argued that
BOW had knowledge/did not act in good faith (since they helped the parties set up
the trust account)
Chapter 4 - Default and Enforcement
A. Introduction
B. Default
1. The Meaning of Default
Default is not defined in Art 9. It is the event that triggers a SP's right to enforce its sec int,
based on whatever the agreement btwn SP and D says (generally a failure to make
payment) (9-601(a)).
The Uniform Consumer Credit Code defines default (UCCC 5-109)
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Acceleration Clauses Should the debtor default, SP can accelerate the ENTIRE balance of
loan
Example: Debtor owes $12,000 to SP; Debtor supposed to pay $1,000/month. If Debtor
misses an installment (default under the SA), SP can accelerate the entire balance
-If SP does NOT have an acceleration clause, he/she must wait for each missed payment to
sue for the $1,000 owed each month
The SP's Rights After a Default (9-601(a))
(1) SP may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security
interest, or agricultural lien by any available judicial procedure; AND
(2) If the collateral is documents, SP may proceed either as to the documents or as to the
goods they cover.
"Proceed" against the collateral means:
1. Selling
Under 9-610, make commercially reasonable reasonable sale of collateral and
collection of rights to payment
then under 9-615, apply the proceeds of the sale to the satisfaction of the obligation
secured by the sec int.
2. Collect based on rights to payment
SP may proceed in a commercially reasonable manner under 9-607 to collect the
amount owed (e.g. payment from the D's account) by notifying the acct debtor to
make payment to the SP
3. Take the collateral
SP may accept the collateral in full or in partial satisfaction of the amount still owed
(under 9-620), but ONLY IF the debtor consents to the acceptance in the manner
prescribed by the statute.
(3) Except as otherwise provided in Section 9-602 (waiver), the SP has any rights provided
by agreement of the parties
The SP's Rights and Duties (9-601(b))
A secured party in possession of collateral or control of collateral under Section 9-104,
9-105, 9-106, or 9-107 has the rights and duties provided in Section 9-207. (see 9-207)
2. Waiver and Estoppel
Rule
Risk for SP is that behavior could be construed as "ordinary course of dealings", or as
waiver
Art 9 does not define what kind of conduct constitutes waiver, or the effect of non-waiver
clauses
Moe v. John Deere Co.
Sig: Example of the trend of authority regarding what constitutes waiver
FP
Moe v. John Deere Company (SD 1994) Deere financed Moes tractor purchase
(Moe was to make annual installments for 5 years). On several occasions, Moe
made late payments; these late/full payments were waived. After Moe missed a
revised payment deadline, Deere contacted Moe and the parties developed a new
payment agreement (with no specific deadline). Several months later, Deere
repossessed the tractor. Before repossession occurred, Moe did NOT receive any
notice. SA contained a non-waiver clause stating that waiver or condonation of any
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breach or default shall NOT constitute a waiver of any other or subsequent breach
or default Deere argues that this non-waiver clause is effective (such that
previous waivers/modifications of contract terms do NOT effect future rights of
default/repossession)
I
RAH
HELD: Adopted MAJORITY VIEW: Creditor must give notice that contract must be
complied with in the future (if late payments previously accepted)
Here, Deeres conduct induced Moes justified reliance that late payments
acceptable
Notice MUST be given whether or not there is a non-waiver clause
C. Enforcement
1. Cumulative Remedies
SP may disregard its in rem rights against its collateral and proceed outside Art 9 to obtain
an in personam judgment against the debtor as thought the debt were unsecured
(9-601(a)(1))
The SP's rights under 9-601(a) and (b) are cumulative and may be exercised
simultaneously. 9-601(c)
9-601(e)
9-610(b)
9-620(e)-(f)
Okefenokee Aircarft, Inc. v. Primesouth Bank
FP
I
RAH
2. Repossession
Self-Help Repossession
SP has property rights in collateral, which include the right to repossess the collateral w/o
judicial assistance
RULE
SP may repossess collateral. (9-609(a))
If equipment, SP may choose not to remove, but to render the equipment unusable on
the debtor's premises, under 9-610. (9-609(a))
SP may repossess/disable without judicial process, AS LONG AS SP does not breach
the peace (9-609(b))
Breach of Peace
What is Breach of Peace?
If SP Fears Breach of Peace
SP can have judicial officers seize possession under a replevin action (or similar), with
the costs passed to the debtor under 9-608(a)
Damages for Breach of Peace
Art 9 Damages
SP is liable for damages in the amt of any loss suffered by debtor 9-625(b)
Consumer Transactions
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D is entitled to statutory damages "not less than the credit service charge plus 10%
of the principal amt of the obligation or the time-price differential + 10% of the cash
price" 9-625(c)
Other-Law Damages
Tort Law: Wrongful repossession is the tort of "conversion of property" (i.e. stealing?).
Tort law supplements D's right to recovery for breach of peace (cmt 3 to 9-625)
Punitive Damages
Punitive damages are only recoverable by operation of other law (UCC 1-305)
D may qualify for punitive damages if the repossessing party's conduct falls within the
jurisdiction's laws of e.g. malic, oppression, or fraud
Williams v. Ford Motor Credit Co.
FP
I
RAH
HELD/RULE: NO BREACH OF THE PEACE where Williams did not raise an
objection to the taking, and the repossession was accomplished without any incident
which might tend to provoke violence
Judicial Action
RULE: SP may take (repossess) collateral by judicial action (9-609(b)(1))
If the collateral is repossessed or sold by judicial officers, the Art 9 limitations do not apply
to the removal or sale. The reqs of "commercially reasonable" disposition don't apply;
whether a SP may bid at the judicial sale is governed by other state law. Cmt 8 to 9-601
Examples of actions (state actions):
1. Replevin; Claim and Delivery; Writ of Possession
Levying officer (sheriff or marshal) seizes property; delivers it to SP; SP then
disposes of property under Art 9 (e.g. sell for $$)
2. SP reduce its claim to judgment
Reduce the claim to judgment; levy on the collateral; execute on its judgment by a
judicial sale under 9-601(a)
3. Judicial foreclosure
Court sells the collateral under a judicial sale, similar to the execution sale on a
money judgment
Cla-Mil East Holding Corp v. Medallion Funding Corp.
Sig: Demonstrates an important advantage to SPs in opting for judicial action
FP
I
RAH
3. Disposition of Collateral
Traditional Rule
Required a public auction sale to the highest cash bidder after public notice of the sale
Current Rule
The foreclosing creditor can sell, lease, license or otherwise dispose of the collateral
(9-610(a))
a. Notification Before Disposition
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was made
1. in the usual manner on a recognized
2. on a recognized market
3. at the price current in that market
4. and conformed to reasonable commercial practices among dealers in the
type of property sold
Art 9 adopts the "Rebuttable Presumption" rule - 9-626(a)(3) and (4)
RULE (cmt 3, 9-626)
Unless the SP proves that compliance w/ the relevant provisions would have
yielded a smaller amt, under 9-626(4), the amt that a complying collection,
enforcement, or disposition would have yielded is deemed to be equal to the
amt of the secured obligation, together w/ expenses and attorney's fees.
The SP must prove that compliance w/ the relevant provisions would have
yielded a smaller amt under 9-626(4).
The SP may not recover any deficiency unless it meets this burden
(2) Consumer Transactions
RULE:
No wholly satisfactory solution to the deficiency judgment problem has been worked
out (see CB p. 300)
9-625(c)
9-626(a)
9-616
d. Section 9-615(f)
Protects debtors by limits deficiency judgments in cases in which a commercially
reasonable, procedurally correct foreclosure sale
(i) is made to (A) the SP; (B) a person related to the secured party (e.g. an affiliate), or
(C) a secondary obligor (such as a guarantor of the debt); AND
(ii) the price obtained at the sale is significantly below the range of proceeds that a
complying disposition to a person other than the secured party would have bought
e. Transfer Statements
5. Acceptance of Collateral in Satisfaction of Debt
Strict Foreclosure
9-620
Full Strict Foreclosure
Full satisfaction SP takes collateral, calls it even
-Benefits: SP escapes judicial scrutiny (and with it, notice & commercially
reasonable disposition provisions), SP may be able to sell collateral (keep surplus)
SPs can enjoy strict foreclosure only if after default, the debtor consents to the
acceptance in satisfaction
How Debtor is Deemed to Consent to Acceptance
By expressly agreeing to the terms of the acceptance in a record authenticated after
default. 9-620(c)(2)
By silence (if after 20 days after SP's proposal to accept is sent) (9-620(c))
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BC 1325(a)(5) allows D to redeem proprty by paying the creditor its present value in
installments
Chapter 9 - Security Interests in Bankruptcy
A. Overview of Bankruptcy
1. Introduction
Bankruptcy is federal law (11 U.S.C. 101, et. seq)
But the rights in bankruptcy of debtors and creditors are governed largely by state law
2. Types of Bankruptcy
1. Chapter 7 (Liquidation, i.e. selling all yo sh'yit)
"Liquidation" is The collection of assets belonging to a debtor to be applied to the
discharge of his or her outstanding debts.
All of the debtor's property owned at the date of bankruptcy becomes part of the
bankruptcy estate (BC 541)
An "individual" (non-organization) debtor may exempt certain property from the
bankruptcy estate
See 522(d)?
2. Chapter 11, 12, or 13 (Rehabilitation/Reorganization)
Chapter 13 is only for a debtor who is an "individual w/ regular income who owes, on the
date of the filing of the petition in bankruptcy, noncontingent, liquidated, unsecured debts
of less than $360,475 and noncontingent, liquidated, secured debts of less than
$1,081,400 (BC 109(e))
Chapter 11 can be used both individuals and organizations, but is primarily for biz orgs
Chapter 12 is for "family farmers", defined in BC 101
3. The Petition in Bankruptcy and the Automatic Stay
Voluntary bankruptcy begins w/ the Debtor filing a petition in bankruptcy to the Bankruptcy
Court (BC 301)
The filing acts as an automatic stay against certain acts taken against the D or wrt
bankruptcy estate property (BC 362(a))
About the Stay
The stay insulates the D from certain actions to collect pre-bankruptcy debts; e.g.
commencement/continuation of judicial proceedings against D to recover a
pre-bankruptcy claim
enforcement of any pre-bankruptcy judgment against D or against property of the
estate
any act to obtain possession of property of the estate or property held by the estate
any act to create, perfect, or enforce any lien against property of the state
Creditors' Rights Against the Stay
something BC 362(d)
4. The Trustee in Bankruptcy (TIB)
Chapter 7
Trustee in Bankruptcy administers the bankruptcy estate
Can be an individual or corporation (BC 321)
Trustee's duties are fiduciary: (BC 704)
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Main duty is: Collect the property of the estate, reduce it to money by selling it, and
apply the proceeds to payment of bankruptcy expenses and creditors' claims
In collecting property, trustee has power to "avoid" some pre-bankruptcy transfers that
violate bankruptcy policy
Chapter 11
Usu no trustee in Chapter 11; only appointed in "unusual" cases e.g. fraud or gross
mismanagement by debtor (BC 1104(a))
Instead, the debtor continues to possess its property and acts as trustee (BC 1107(a) and
BC 1108)
Chapters 12 and 13
Primary duty is to disburse creditrs payments due under bankruptcy
Trustee is appointed by bankruptcy ct, or is a "standing trustee" appointed to all Chap 12
and 13 BC cases in the district
5. Claims in Bankruptcy
Chapter 7
After TIB collects BR estate and sells it, proceeds are applied to pay bankruptcy
expenses and creditors' claims
Definition: "Claim" is the creditor's basis for receiving payments from the BR estate
Creditor files "proof of claim" w/ BR ct (BC 501 and Bankruptcy Rule 3001)
NOTE: "Claims" only apply to D's obligations BEFORE bankruptcy
Claims can only be paid if "allowed" (BC 502)
Secured Claims
BC 506(a)(1)
BC 541(a)(1)
Unsecured Claims
6. Distribution of Assets to Unsecured Creditors
Chapter 7
Unsecured creditors receive distributions AFTER the TIB disposes BR estate property in
satisfaction of secured claims (BC 726)
Order of priority is:
1. The ten priority claims set out in BC 507 (in the order of priority set out in 507) (BC
507)
2. Administrative expenses described in BC 503
Chapters 12, and 13
BC 507
For chapters 12 and 13, the plan must provide for payment in full of all priority claims
Deferred payment can be made, with interest, over the pd of the plan
Chapter 11
BC 507
Plan must provide for payment in full of all priority claims
Some priority claims must be paid in cash on the eff. date
Some priority claims can be paid, w/ interest, over time
7. Discharge
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Chapter 7
A debtor who is an individual will normally receive discharge from pre-bankruptcy debts
(BC 727(b))
A debtor who is a corporation or partnership may NOT be discharged from
pre-bankruptcy debt
Sometimes debtor does not qualify for discharge (BC 727(a))
e.g. If D has received a discharge under Chapter 7 in a case commenced w/in 8 years
of the time the current case was commenced
e.g. misconduct by debtor
Sometimes, the debt itself is a type that cannot be discharged. (BC 523(a))
e.g. if creditor has equity in the property greater than the debtor does; creditor may
have a claim against the debtor that survives bankruptcy
Chapter 11
A debtor who is a corporation or partnership MAY be discharged from debt
Chapter 11 discharge for non-individual debtors is NOT subject to the special
exceptions to dischargeability under BC 523(a)
Chapter 12
A debtor who is a corporation or partnership MAY be discharged from debt
Chapter 13
B. Secured Claims in Bankruptcy
1. The Meaning of Secured Claim
When a D whose property is subject to an Art 9 sec int files bankruptcy, the SP becomes a
"Secured Claim" (9-506(a)(1))
The collateral is the property of the debtor's estate (under 541(a))
The claim is governed by Federal Bankruptcy Law
RULE
Secured claim is prior to unsecured claims
Secured claims take "off the top," before distribution to unsecured creditors (BC 725)
Is an allowed claim Secured or Unsecured? (BC 506(a)(1))
The claim must be "allowed"
The claim must be made by a SP; i.e. a creditor secured by a lien on:
1. property in which the estate has an interest, OR
2. property that is subject to setoff under BCC 553
If the above 2 requirements are true, the claim is:
a secured claim to the extent of
the value of such creditors interest in the estates interest in such property, OR
the amount subject to setoff, as the case may be, AND
an unsecured claim to the extent that
the value of such creditors interest, OR
the amount so subject to setoff is less than the amount of such allowed claim.
NOTE: one claim may have a secured AND unsecured portion
2. The Automatic Stay
Automatic stay restricts the enforcement of a security interest in bankruptcy property (BC
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326(a))
Pre-petition secured creditors may not enforce their security interests in the property of the
estate or of the debtor (BC 362(a)(5))
Thus, an Art 9 SP is barred from repossession (9-609), including both self-help AND
judicial process
The automatic stay is a form of injunction
Damages
Violators may be held in contempt of court and assessed damages
An "individual" injured by a will violation of the stay may recover actual damages, costs
and attorney's fees (and possibly even punitive damages) BC 326(k)(1)
"Individual" means natural person, not legal entities (e.g. corporations and
partnerships)
When does the automatic stay end?
When the case is closed or dismissed (BC 362(c)(2))
Or, even earlier wrt property that is no longer property of the estate (BC 362(c)(1))
Secured Claim RIghts Against the Stay
Court may terminate or modify the stay on certain grounds BC 362(d)
3. The Effect of Discharge
On Secured Claims
Compare to Article 9
SP had 2 rights after default of the debtor: 9-601(d)
1. Hold debtor personally liable on the secured obligation
2. Enforce security interest against the collateral
Bankruptcy Approach
Chapter 7
If debtor is granted discharge under BC 727(b), then
1. Debtor is NOT personally liable on the obligation
2. Debtor is still under the secured obligation (SP still has righst?)
i.e. the discharge transforms a "recourse" debt into a "non-recourse" debt (i.e.
non-recourse against the debtor personally) (BC 524(a))
So then, who IS liable if debtor is not?
A surety or other guarantor is liable even though the principal debtor is released
by discharge (BC 524(e))
An insurance carrier is still liable even though the insured person is discharged
If a debt is secured by property of a 3rd party, that property can be reached to the
full extent of the security agmt
If the discharged debt was secured by a lien in the debtor's property, the
debtor's property is still 'take-able'
BC 506(d) preserves Long v. Bullard (see p. CB 494)
A lien not void under BC 506(d) will survive bankrupcty (see CB p. 494)
On Unsecured Claims
D. Avoidance Powers of the Trustee
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"Avoidance Powers" means the TIB's power to nullify a pre-petition secured transaction (see
BC 541(a)(3))
1. Strong-Arm Clause (BC 544(a))
If the security interest isn't perfected at the time the debtor files in banktruptcy, it may be set
aside totally
A trustee may avoid any transfer of property of the debtor that is "voidable" by a hypothetical
judicial lien creditor at the date of bankruptcy (544(a)(1))
The rights of a lien-creditor are given by UCC 9-317(a)(2)
Courts have held that the trustee, invoking the rts of a lien creditor, may set aside a
security interest in its entirety that is subordinated to a judicial lien by 9-317(a)(2)
BUT! Perfection after bankruptcy can defeat the Trustee's rights avoidance rights IF Article
9 gives retroactive effect to perfection (BC 546(b))
2. Preferences
If an insolvent debtor pays an unsecured creeditor in preference to other creditors w/in 90
days b4 filling for bankruptcy, the payment may be recovered as a voidable preference (BC
547)
E. Preferences (BC 547)
What is a preference?
Insolvent debtors who can't pay all unsecured creditors in full may "prefer" one over the
other (e.g. pay utilities instead of credit card bill)
Bankruptcy law prevents debtors from making payments to preferred creditors onn the eve
of bankruptcy (in order to upset the pro rata bankruptcy distributions) (see BC 547)
1. Elements of a Voidable Preference (BC 547(b))
Except as provided in 547(c) and (i), the trustee may avoid ANY transfer of an interest of the
debtor in property
1. to or for the benefit of another creditor
2. for on on account of an antecedent debt owed by the debtor before such transfer was
made
3. made while the debtor was insolvent
4. made
(A) on or within 90 days before the date of the bankruptcy petition; OR
(B) between 90 days and 1 year before the date of bankruptcy petition filing , IF such
creditor at the time of such transfer was an insider; AND
5. that enables such creditor to receive more than such creditor would have received if
(A) the case were under Chapter 7 (Bankruptcy Code)
(B) the transfer had not been made; AND
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title
2. Basic Applications of Preference Law
Note: CB Problems 1 and 2 are important, according to the casebook authors (p. 521)
BC 547(b)(5)
3. Policy behind Preference Law
Equitable Distribution to Creditors (prevent debtor from "preferring" one creditor over
another)
Prevent creditors from racing to the ct house to dismember the debtor during his slide into
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bankruptcy (protects the debtor by preventing the creditor from jockeying for preference)
4. The Effect of Avoidance
If TIB avoids a preferential transfer under BC 547(b), the property transferred by debtor to
creditor or its value can be recovered for the benefit of the estate (BC 550(a))
If Preference Occurred when D paid in Cash
TIB may recover an equivalent amount, which becomes part of the bankruptcy estate (BC
541(a)(3))
If Preference Occurred when Creditor obtained a lien in D's property
Assuming the property to which the lien applies is property of the bankruptcy estate
Avoidance of the preference usu means the creditor's lien is nullified
See BC 551?
5. Preference Period
To be voidable, the preference must have occurred during the "preference period" (BC
547(b)(4))
The "insider" thing -- "insider" preferences are fraudulent (see CB p. 525)
6. Transfers to or for Benefit of a Creditor
a. Transfer of Debtor's Property
RULE: To be a preference, the property transferred must be that of the debtor (BC
547(b))
b. To or for the Benefit of Another
Preference law is different than the law of a fraudulent transfer
DIfference is
A fraudulent transfer is void no matter who the recipient is
Preference is only voidable if the transfer is made to or for the benefit of a creditor
of the debtor-transferor (BC 547(b)(1))
Exceptions to the Law of Preferences
7. Contemporaneous Exchanges
One element is that the transfer must be for or on account of an antecedent debt
Thus, if an insolvent buyer (within 90 days of bankruptcy) buys goods and pays for them
at the time of sale by transferring money/other property to the seller, there is NO
PREFERENCE b/c the buyers obligation to pay for the goods and the transfer of property
to satisfy the obligation arise CONTEMPORANEOUSLY
-Courts will also prohibit preference if there is a SUBSTANTIALLY contemporary advance
If a bank advances funds to a D who intends to secure the loan by granting the bank a
sec int in D's property, and the granting of the sec int is delayed only a short time, the
exchange is essentially contemporaneous, and the sec int cannot be avoided BC
547(c)(1)
8. Ordinary Course Payments
The trustee cannot avoid a transfer if the transfer was in payment of a debt incurred by D
in the ordinary course of business or financial affairs of the debtor AND: BC 547(c)(2)
(A) the transfer was made in the ordinary course of business/financial affairs of D and
transferee; OR
(B) the transfer was made according to ordinary business terms
In re National Gas Distributors, LLC
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FP
I
RAH
9. Floating Lien as a Preference
Generally refers to the trustees ability to avoid SPs SI in after-acquired property
(pursuant to an after-acquired property clause in the SA)
-BC 547(c)(5) governs, deals with inventory and receivables
-Does NOT cover equipment or consumer goods
RULE 9-547(b)(5)
The trustee may not avoid a transfer that creates a perfected sec int in inventory or a
receivable, or the proceeds of either,
EXCEPTION
The trustee MAY avoid the portion of a transfer that creates a perfected sec int in
inventory, or a receivable, or the proceeds of either, to the extent that:
as of the date of the filing of the petition and to the prejudice of other creditors
holding unsecured claims, the aggregate of all such transfers to the transferee
caused a reduction of any amount by which the debt secured by such sec int
exceeded the value of all sec ints for such debt on the later of:
(A)
(i) wrt to a transfer under 547(b)(4)(A), 90 days before the filing of the
petition; OR
(ii) wrt to a transfer under 547(b)(4)(B), one year before the date of the filing
of the petition; OR
(B) the date on which new value was first given under the sec agmt creating
such sec int
General Approach: Two-Point Net Improvement Exception
(1) On day 90, you look at amount of debt secured and subtract off the value of
the collateral (including any identifiable proceeds) -> this is amount X
If on day 90, the calculation results in a negative, SP is over-secured (STOP
the analysis!)
(2) Do the same calculation on day 0 -> this is amount Y
(3) Subtract X-Y -> this is the amount of the preference that the trustee CAN
AVOID; if this number is zero or negative, there is NO preference
10. False Preferences: Delayed Perfection of Security Interests
Delayed Attachment
There may be a delay between the time when credit is granted and the sec int
intended to secure that credit attaches
Since the subsequent attaching of a sec int is a transfer of the debtor's property on
account of the debt, there may be a voidable preference if the other elements of BC
547(b) are present
If the delay is very short, the sec int may be saved by BC 547(c)(1) as a
contemporaneous transfer
If the credit was for the purpose of enabling the debtor to acquire collateral that
secures the debt, the sec int may be saved if there was compliance w/ BC 547(c)(3)
Delayed Perfection
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A problem arises when the granting of credit and the creation of the sec int are
contemporaneous, but there is a delay before perfection
Secret lien?
Example:
D in financial trouble wants to conceal its true financial condition from general
creditors
D obtains an emergency loan from a creditor and grants a mortgage or real
property, or a sec int in personal property to secure the loan
The property involved might be most of D's previously unencumbered assets
If public notice of the transaction were given, other creditors would be deterred
from giving the debtor further unsecured credit (because of the lack of
unencumbered assets)
So D might not record the mortgage or file the fin stmt
Issue is fraud on creditors, not preference
BC 547(e)(2) defines when a transfer is made
For the purposes of this section (547), except as provided in paragraph (3) of this
subsection, a transfer is made
(A) at the time such transfer takes effect between the transferor and the
transferee, if such transfer is perfected at, or within 30 days after, such time,
except as provided in subsection (c)(3)(B); OR
(B) at the time such transfer is perfected, if such transfer is perfected after
such 30 days; OR
(C) immediately before the date of the filing of the petition, if such transfer is
not perfected at the later of
(i) the commencement of the case; OR
(ii) 30 days after such transfer takes effect between the transferor and the
transferee.
For the purposes of this section, a transfer is not made until the debtor has acquired
rights in the property transferred. BC 547(e)(3)
BC 547(e)(1) defines "perfection"
(1) For the purposes of this section (547)
(A) a transfer of real property other than fixtures, but including the interest of a
seller or purchaser under a contract for the sale of real property, is perfected
when a bona fide purchaser of such property from the debtor against whom
applicable law permits such transfer to be perfected cannot acquire an interest
that is superior to the interest of the transferee; AND
(B) a transfer of a fixture or property other than real property is perfected when a
creditor on a simple contract cannot acquire a judicial lien that is superior to the
interest of the transferee.
PMSI
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