SECURED TRANSACTIONS FINAL REVIEW

1. INTRODUCTION TO SECURED TRANSACTIONS

A. many pre-code devices existed for liens on property before Article 9

B. bankruptcy the context of many secured transaction disputes (and trustee

can avoid security interest if it is not properly perfected)

C. Article 9 seeks to make most transactions in the public notice avoids

secret liens

2. THE SCOPE OF ARTICLE 9

What does it mean if Article 9 applies to a transaction?

It usually means your security interest must be perfected or it is at risk.

What transactions does Article 9 apply to? (i.e., what is the scope of Article 9?)

It applies, primarily, to all transactions that create a security interest in personal

property or fixtures by contract. 9.109(a)(1).

However, it also applies to certain other transactions for public policy, notice-
filing reasons:

1) an agricultural lien

2) a sale of accounts, chattel paper, payment intangibles, or promissory notes

3) a consignment (as defined in 9.102(a)(20))

A. Security Interest Defined

An interest in personal property or fixtures that secures payment or

performance of an obligation. 1-201(35).

Security interest is also defined to include, again for public policy,

notice-filing reasons:

1) interest of a consignor, and

2) interest of a buyer of accounts, chattel paper, a payment intangible, or

a promissory note

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 B. Consignments

When a transaction is a consignment for purposes of being included in

the 1.201(35) definition of a security interest, and being included in the
scope provision of 9.109, is defined by 9.102(a)(20).

C. Leases

Special problem area: sometimes a purported lease can really be a security

interest. Look at 1-203. In general, these three rules apply:

1) If at the end of the lease period the lessee becomes the owner of the
property for little or no consideration, it is a security agreement, not a
lease.

2) If the contract allows the lessee to terminate early at any time, and also
terminate the obligation to pay, and return the goods, its a true lease.

3) If contract is for entire economic life of goods, its a security

agreement.

Corrollary: if the lessor retains an economically significant

reversionary interest, its a lease.

D. Other Transactions

(learned about equitable subrogation narrow rule; dont worry about any
others for this class).

E. Exclusions from Article 9

These are provided for in 9.109(c)-(d):

1. Federal Statutes (see 9.109(c)(1))

2. Landlords Lien and other Statutory Liens (see 9.109(d)(1)-(2))
3. Wage Assignments (see 9.109(d)(3)) an assignment of a claim for
wages, salary, or other compensation of an employee; (if are
independent and not an employee then article 9 applies)
4. Non-Financing Assignments (see 9.109(d)(4)-(7)):
a. a sale of accounts, chattel paper, payment intangibles, or
promissory notes as part of a sale of the business out of
which they arose (d)(4)
b. (d)(5) an assignment of accounts, chattel paper, payment
intangibles, or promissory notes that is for the purpose of
collection only;

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 c. assignment of right to payment along with obligation to
perform (d)(6) (ie assign the payment for a job you were
supposed to do to someone else but to get payment you
have to the job)
d. (d)(7) an assignment of a single account, payment
intangible, or promissory note to an assignee in full or
partial satisfaction of a preexisting indebtedness; (ie debtor
assigning a single right of payment owed to debtor to a
creditor to satisfy debt owed to creditor)
e. (d)(13) an assignment of a deposit account, other than a
nonnegotiable certificate of deposit, in a consumer
transaction, but Sections 9.315 and 9.322 apply with
respect to proceeds and priorities in proceeds (ie a bank
taking a SI in a personal bank account held with the bank)
5. Real Estate (see 9.109(d)(11))
but note 9.109(b): Article 9 can apply to a security interest,
even though it is granted in a non-Article 9 real estate
mortgage. (ie a bank giving another bank possession as
collateral the real property mortgages and accompanying
promissory notes given to the bank by its borrowers) Ex.
Of exclusion: the monthly rental obligations owed to a
landlord, who wants to use
these obligations as collateral for a loan

3. THE CREATION OF A SECURITY INTEREST

A. Classifying the Collateral

The various definitions of collateral are contained in 9.102(a), along with

other definitions.

Goods 9.102(a)(44): physical, movable stuff

Subcategories of goods include:

1) consumer goods 9.102(a)(23) Ex: a mobile home (Actually

could be inventory in the hands of a mobile home seller, of
course), milk in the hands of grocery stores customer who is
buying for consumption, rare coins bought by a hobbyist for
addition to his collection (depends if dealer, if dealer then
inventory), a computer program (if part of a computer)
2) farm products 9.102(a)(34) Cattle fattened by a farmer for
sale, the farmers chickens, Manure from the dairy herd,
3) inventory 9.102(a)(48) Ex: A professional pianists piano,
pencils and other stationery supplies used by Sears or a similar

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 large retailer in its credit offices (b/c are materials used or
consumed in a business), milk in the hands of a grocery store,
milk in the hands of a restaurant,
4) equipment 9.102(a)(33) catchall category for goods, the
farmers tractor, curtains bought by a lawyer for the law office

Although quasi-tangible property is not a definition in the Code,

Whaleys categorization of pieces of paper used as collateral is a helpful
one, including: pieces of paper that embody a right to payment or a
right to goods (ex. bills of lading); you transfer these rights by passing
the paper

1) instruments 9.102(a)(47) (usually a doc. reduced to writing),

C.D. issued by a bank,
a. promissory notes 9.102(a)(65) Ex: the promissory
notes signed for the tenants to pay their rent
2) investment property (stocks, bonds and rights to accounts
concerning same) 9.102(a)(49) Ex: a debenture bond issued
by a corporation, a right to 100 shares of stock recorded on the
books of the debtors stockbroker
3) documents (bill of lading) 9.102(a)(30) Ex: airbill issued by
an airline as a receipt for frozen shrimp shipped by air, the
receipt given to a farmer by a silo operator when the farmer
storedgrain there,
4) chattel paper 9.102(a)(11) Ex: car lease contracts that Dime-
A-Minute Rental Cars uses as collateral when it borrows
money from a bank?
a. electronic chattel paper 9.102(a)(31)
5) letters of credit rights 9.102(a)(51)

Again, the non-UCC definition of intangible property helps describe

these categories of collateral having no significant physical form:

1) accounts 9.102(a)(2) Ex: a newspaper carriers right to

payments for papers already delivered, you are bank and have
issued credit cards which are a right to payment of a monetary
obligation and can use those as collateral.
a. health-care insurance receivables 9.102(a)(46)
2) deposit accounts 9.102(a)(29) Ex: the checking account you
have down at your bank (consumer accounts excluded from Art
9)
3) commercial tort claims 9.102(a)(13) Ex: a right to sue a
corporation for wooing away a trusted employee
4) General Intangibles 9.102(a)(42) a catchall category
a. things in action not defined: Ex: a right to sue
someone for breach of contract, a liquor license

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 b. payment intangibles 9.102(a)(61) Ex: a security
interest in a lawsuit plaintiff has already won and that
has been reduced to a settlement agreement, a right to
the return of a security deposit held by a landlord, (the
right to a) tax refund if not in check form (if in check
form then is a doc)
c. software 9.102(a)(75) a computer program (if by
itself)

Some key rules for collateral classification:

1. it is the debtors intention for the collateral that determines

its classification i.e., what it is as to the debtor.

2. you classify the collateral at the point in time when the

security interest is created

3. its the debtors principal use of the collateral that is

determinative (when there is more than one use)

B. Technical Validity of the Forms

Two forms involved in creating and perfecting a security interest:

1) Security Agreement, and

2) Financing Statement

1. The Security Agreement: contract b/n D and SP

9.203(a)-(b): generally requires that it be in writing and

authenticated (i.e., signed) by the debtor, and have a description
of the collateral.

a. 9-203. . . . (b) . . . a security interest is enforceable . . . only

if . . . the debtor has authenticated (signed) a security
agreement . . . . (debtor must authenticate the SA for it to be
enforceable)

b. 1-201(35): Security Interest. . . . . The retention or

reservation of title by a seller of goods notwithstanding
shipment or delivery to the buyer under Section 2.401 is
limited in effect to a reservation of a "security interest." (ie
if the secured party reserves in a written doc. title to an
item until paid and the doc. is signed by debtor this is

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 sufficient to create a SA even though the doc does not
specifically say that this is an attempt to secure a security
interest)

c. 9-204(c). Future Advances: A security agreement may

provide that collateral secures . . . future advances or other
value, whether or not the advances or value are given
pursuant to commitment.
A financing statement is effective to encompass
transactions under a security agreement not in existence
and not contemplated at the time the notice was filed, if the
indication of collateral in the financing statement is
sufficient to cover the collateral concerned. Similarly, a
financing statement is effective to cover after-acquired
property of the type indicated and to perfect with respect to
future advances under security agreements, regardless of
whether after-acquired property or future advances are
mentioned in the financing statement and even if not in the
contemplation of the parties at the time the FS was authd
to be filed.

d. Note: What happens when Debtor pays off existing loan

but no termination statement has been filed and then the
same lender lends again taking SI in the same collateral as
before. Is the existing FS still effective or need to file
another one? As long as the existing FS is still on record
and still effective, it protects all loans made by the same
lender to the same debtor, even if the original loan is paid
off before the new loan is made, and even if the new loan
was not contemplated at the time the original FS was filed.

2. The Financing Statement: rights b/n SP and the world

a. contents of the financing statement

9.502(a) requires it to include:

i) the name of the debtor

ii) the name of the secured party or
representative of secured party, and
iii) an indication of the collateral covered

Note: it is not required to be signed

b. persons entitled to file a financing statement

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 9.509(a)-(b) provide the rules. In general:

i) the debtor can authorize it in a separate

authenticated record (ie, signed writing), or

ii) the debtor is deemed to authorize filing a financing

statement covering the collateral in any
authenticated security agreement (by the debtor
signing the SA he is effectively granting permission
for the filing of the FS)

3. The Debtors Identity

i) 9.503 provides the rules for what name to use:

- real name, either individual, or registered name
- not trade names alone (though its OK if theyre added
just cannot be only the trade name)
- names of members if the entity has no name

ii) 9.506 provides rules for when the wrong name (or any error, for
that matter) renders the financing statement seriously misleading
and thus ineffective ---

Note: for errors in names, any mistake makes it seriously

misleading per se, subject to the search logic
exception. (ie Michael A. Erwin vs. Mike Erwin absent
other facts would be seriously misleading per se, thus
insufficient)

iii) 9.507 provides rules on the effect of certain events on the

effectiveness of a financing statement (including a name change,
debtor merges and changes name that is seriously misleading, etc)
4 month rule:

- remain perfected in all existing collateral, and that

acquired within 4 months of the change
- unperfected for collateral obtained after 4 months, unless
the financing statement is modified

iv) 9.508 provides similar rules as 9-507 on the effect of a new

debtor (ie old debtor sells company and with it his debts)
becoming bound by a security agreement, and the effectiveness of
the filed financing statement (also a 4 month rule)

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 Note: see also 9.203(d)-(e) for related rules as to security
agreement effectiveness basically, for new debtors, the
old SA usually satisfies 9-203 requirements.

Note: for Article 9 purposes, the person that owns the

collateral is the debtor (9.102(a)(28) and he must sign the
SA, while the person that owes the money is the obligor
(9.102(a)(59)) usually, of course, the same person but
sometimes a 3rd party will put up his property as collateral
for someone else to get a loan. The person who actually has
rights in the collateral is the one who needs to sign the SA
even though the other person is the obligor (the obligor in
this scenario does not need to sign the SA b/c he has no
rights in the collaterl)

Note: Make sure is actually a new debtor and not just a

name change

4. (The Secured Partys Identity)

9.310(c) provides that a financing statement is still effective as to

the original secured party, even if it assigns the security interest to
a new secured party (ie, without amending the financing statement
to show the new secured party) ie, an amendment is not required.

9.511, however, permissively allows the secured parties to amend

the financing statement to show the true state of affairs after such
an assignment.

5. The Description of the Collateral (different reqs. For SA and FS)

a. 9.203 requires security agreements to have a collateral

description.

b. 9.502 requires financing statements to have a collateral

description

c. Security Agreement: 9.108(a) Except as otherwise provided in

Subsections (c) . . ., a description of personal or real property is
sufficient, whether or not it is specific, if it reasonably
identifies what is described. Security agreement (fairly
tailored) all property will not work

- ex. all inventory, accounts receivable, equipment,

instruments, general intangibles, and personal property is
not a good enough description for a SA

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 - ex. the Abacus-12 plus all other equipment, all
equipment, particularly the Abacus-12, or simply all all
equipment is sufficient for the SA
- After-acquired collateral: the SA must separately
specify if after-acquired collateral is covered, per 9.204
(exception: courts generally hold otherwise as to inventory
and accounts. Courts have held, with respect to inventory
and accounts receivable, that the very nature of this
property (constant revolving) is such that a reasonable
person would assume that it means all after-acquired
property, as well as existing. Note: This wouldnt be true
for most other things, like equipment.).

d. Financing Statement: 9.504 provides the requirements for the

collateral description in the financing statement (much broader
all property will suffice)

- general description of collateral presumed to include

after-acquired collateral, per 9.502 OC 2 (3rd ), even if the
FS doesnt use the words after-acquired.
- Supergeneric descriptions ok in the FS but not for the
SA
- Note: If the collateral is not included in the written SA
itself, but included in the FS, then there is no contractual SI
in the property not mentioned. And the FS cannot grant
any larger interest than what is given by SA in the first
place (ie the SA says machinery, fixtures and the FS adds
inventory and account receivables, what will hold is what
the SA says not what the FS says)

C. Attachment of the Security Interest

Attachment is the process by which the SI in favor of the creditor

becomes effective against the debtor.

(as opposed to perfection becoming effective against world)

9.203 provides 3 basic requirements for attachment:

1. a SA must be signed (unless SP has possession and an oral

agreement)
2. the creditor must give value (if value given at later date then
attachment does not occur until that date); and
3. the debtor must have some rights in the collateral

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 9.204(b) provides that a security interest does not attach under an after-
acquired property clause to:

1. consumer goods (unless w/in 10 days after value given), or

2. commercial tort claims

When can a debtor have rights in the collateral?

1. he owns it
2. he has possession of it under a contract. (see Thrift)
3. he leases it
4. he owns partial share of it
5. he has power to transfer rights in it

-also see 2-501: rules for when goods arent identified at

time of K. Basically attach as to these when they are
identified, or shipped. (ie have a K for goods with a
distributor, when the goods are identified or shipped is
when they attach)
- Note: A FS can be filed before attachment, under 9-
502(d): A financing statement may be filed before a
security agreement is made or a security interest otherwise
attaches.

Special note: 2.326, which provides a distinction between a sale on

approval (when goods for use) and a sale or return (when goods for
resale). The former are not subject to security interests granted by a buyer
until acceptance, whereas the latter are. Translated no SI in the former
attaches until acceptance, whereas a SI in the latter attaches immediately
upon buyers possession.

4. PERFECTION OF THE SECURITY INTEREST

Why should a secured party perfect its security interest?

Because such perfection will give it an advantage over other
creditors or claimants in any subsequent priority dispute over the
collateral.

9.308(a) provides that a security interest is perfected if it has attached, and one of
the applicable requirements for perfection has been satisfied (possession, filing,
control, automatic perfection, etc.)

9.308 provides other rules relevant to perfection generally:

(c): a security interest is continuously perfected if it is perfected one way,

and then later another way, without any gap in perfection

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 (d): automatic perfection in supporting obligations

(e): automatic perfection in accompanying security interests with

perfection in a right to payment (e.g., automatically perfected in a lien or
mortgage if you have a security interest in a note secured by the lien or
mortgage)

(f) (g): automatic perfection in security entitlements/commodity

contracts when perfected in a security or commodity account. (e.g., if you
are perfected in Ds account at A.G. Edwards (a security account), you are
automatically perfected in 100 shares of IBM stock (a securities
entitlement) in the A.G Edwards account).

A. Perfection by Possession (Pledge)

9.313 provides that you can perfect by possession for documents, goods,
instruments, money, or tangible (as opposed to electronic) chattel paper.
(only works for tangible collateral)

Usually, the SP takes actual, physical possession, in order to effect the

perfection.

Possession is deemed sufficient notice to the world at large of the

creditors interest in the property.

When SP does not itself take the possession: for anything but certificated
securities and document goods, possession by a 3rd party on behalf of the
SP is sufficient only if the 3rd party authenticates a record acknowledging
it holds the collateral for the SP. (9.313 (c)).

When SP relinquishes possession: generally, this causes a gap in

perfection (9.313(d)), unless the SP relinquishes it to a non-debtor 3rd
party, and instructs the 3rd party to either hold it for SP, or redeliver it to
SP. (9.313(h)).

When the goods are covered by a document: the manner in which you
gain perfection in the goods depends on whether the document is
negotiable or non-negotiable:

1. if negotiable, you perfect a security interest in the goods by

perfecting a security interest in the document (by filing, or by
taking possession of the document) 9.312(c)

2. if non-negotiable, you can perfect a security interest in the

goods in one of 3 ways: (a) get the document in the SPs name,

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 (b) notify the bailee of the security interest, or (c) file as to the
goods 9.312(d)

Remember the applicable documents are usually bills of lading

or warehouse receipts.

Temporary release of document goods to debtor: as to perfected sec.

interest in negotiable document goods, or in non-negotiable goods with a
bailee, SI is temporarily perfected for 20 days if goods are made available
to debtor for: (1) sale, or (2) pre-sale processing of some kind 9.312(f).
(If SP can protect itself beyond the 20 days by filing if document is not
returned within 20 days) Similar rule applies for certificated securities and
instruments in SPs possession under 9.312(g).

B. Automatic Perfection

1. PMSI in consumer goods

9.309(1) provides that a PMSI in consumer goods is

automatically perfected when it attaches (i.e, without need to file
or do anything else).

exception PMSI in a car, which requires lien notation on

a certificate of title. So, except for cars/certificate of title
goods, a purchase money security interest in consumer
goods is perfected automatically upon attachment --- no
filing, possession, or other act is required:

2 step analysis:

1) is it consumer goods?
2) is it a purchase money security interest?

What is a purchase money security interest? This is defined in

9.103. Basically, it means a seller which finances the purchase
price of an item directly, or a lender which loans money to allow a
debtor to acquire rights in the collateral with the loan proceeds
(and the loan money is in fact used for that).

Note: What if tell bank loan is to purchase a consumer good but

use the bank money for something else but still purchase the good
with other money? No, it is not a PMSI because the loan value was
not in fact so used to acquire the good. Banks can protect
themselves by issuing loan proceeds as joint checks, requiring two
endorsements under UCC 3-110(d).

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 Usually, the money will be loaned before the goods are acquired,
though the order of events could be reversed if it is very short in
time duration (i.e., you buy the stuff and get a loan within a day
after to cover your check)

know the limitations of 9.103(b) you can have a dual

status PMSI/non-PMSI transaction, and PMSI inventory is
cross-collateralized as to PMSI status.

2. Assignment of accounts and sale of certain other

obligations/intangibles

9.309(2)-(4) provide for automatic perfection in the assignment

of certain accounts, and the sale of either a payment intangible
or a promissory note.
Note: An assignment of accounts is only automatically perfected
when it is not a significant part of the assignors outstanding A/R,
either by itself or in conjunction with other assignments.

9-308(d). Perfection of a security interest in collateral also

perfects a security interest in a supporting obligation for the
collateral.
- The interest in this supporting obligation is automatically
perfected, by virtue of the properly perfected security interest in
the account.

B. Perfection by Filing

The default method of perfection, unless another method is allowed or

required, is by filing a financing statement, per 9.310(a). The times
when perfection can occur other than by filing are generally set out in
9.310(b).

Where do you file? the secretary of state, unless its minerals, timber or
fixtures (in which case its the county real estate office) 9.501.

How long does a financing statement last? 5 years, unless terminated

sooner. It can be continued for another 5 years by filing a continuation
statement, which must be filed within the last 6 months of the end of the
5-year period 9.515 (filing a continuation statement before the 6 months
is ineffective)

Note: If there is a lapse in perfection and there is a junior filing on

same collateral then the junior jumps ahead of senior filing b/c the
senior filing allowed FS to lapse.

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 Note: An attorney who fails to file a continuation statement is
guilty of malpractice if he fails to give appropriate tickler
(reminder) letters to guard against such liability.

Can the FS be amended, and how? Yes, by adding or deleting collateral,

or by changing the names of the debtor or secured party. It has to identify
the initial financing statement by filing number 9.512

Can the FS be assigned? Yes, by the secured party of record filing an

amendment that contains the initial financing statement filing number, and
that provides the name of the assignor, and the name and address of the
assignee 9.514.

Can a financing statement be terminated before 5 years? Yes, by filing a

termination statement. SP generally files these. For consumer goods, a
SP is required to file one automatically within a month after debt is paid,
or within 20 days after a consumer requests it, if sooner. For non-
consumer goods, when debt is paid, within 20 days after a demand (not
automatically) 9.515

Under 9.509(d)(2), debtor can file a termination statement himself

if the SP fails to do so after demand. Also, actual damages are
recoverable for such a failure under 9.625(b), and a $500 penalty
under 9.625(e)(4).

What if a financing statement is misfiled by clerk? 9-517. The failure of

the filing office to index a record correctly does not affect the
effectiveness of the filed record.

(b) The filing of a financing statement is not necessary to perfect a

security interest:
(1) that is perfected under Section 9.308(d), (e), (f), or (g);
(2) that is perfected under Section 9.309 when it attaches; (PMSI
in consumer goods)
(3) in property subject to a statute, regulation, or treaty described
n Section 9.311(a);
(4) in goods in possession of a bailee that is perfected under
Section 9.312(d)(1) or (2);
(5) in certificated securities, documents, goods, or instruments
which is perfected without filing, control or possession under
Section 9.312(e), (f), or (g);
(6) in collateral in the secured party's possession under Section
9.313;
(7) in a certificated security that is perfected by delivery of the
security certificate to the secured party under Section 9.313;

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 (8) in deposit accounts, electronic chattel paper, electronic
documents, investment property, or letter-of-credit rights that is
perfected by control under Section 9.314;
(9) in proceeds that is perfected under Section 9.315; or
(10) that is perfected under Section 9.316;

C. Perfection by Control

This is a method of perfection applicable to investment property, deposit

accounts, letter-of-credit rights, and electronic chattel paper. Its like
possession of intangible collateral.

i. Investment property: You get control over investment property by

either having it physically delivered to you, endorsed over to you
(or put in your name), or, as to security entitlements: (1) becoming
the entitlement holder, (2) having the existing securities
intermediary agreeing to abide by the SPs directions w/o checking
with D, or (3) a 3rd party gets control of the entitlement on behalf
of the SP (usually another intermediary) 9.106 and 8.106.

Note: can also perfect by filing (but getting control is superior)

ii. Deposit accounts: You get control over a deposit account in one of
three ways: (1) when SP is the bank (home-court), (2) D, SP, and
bank have authenticated agreement SP can direct w/o Ds consent,
or (3) SP becomes the deposit account customer 9.104

Note: control is the only way to perfect in a deposit account; cant

file. 9.312(b)

iii. Letter-of-credit rights: You get control over a letter-of-credit right

by having the D/beneficiary assign the right to L/C proceeds to the
Ds SP. The issuer of the L/C has to consent to this 9.107.

Note: control is the only way to perfect in a L/C right; cant file.
9.312(b).

Also, L/C terms which prevent assignment are void; so, you can do
it, but any such assignment in the face of such non-assn terms is
only enforceable against the beneficiary who grants the SI, not
against the issuer or applicant. (so, would not be perfected by
control if issuer doesnt consent just have an enforceable SA as
b/n D/beneficiary and SP; SP will rely on D for enforcement)
9.409.

5. MULTI-STATE TRANSACTIONS

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 The general rule is 9.301. Subject to certain exceptions, the applicable law is
where the debtor is located, or where the collateral is located (only when there is a
possessory security interest involved). 9.301(2)-(3). (if debtor is located in state A
then must file in State A, but if the collateral is located in state B, still have to file
in State A but State B law governs concerning any disputes) Make sure this is
right.

Remember, the major effect of Texas law being applicable is it will

mean you file in Texas to perfect the security interest all states have
adopted Revised Article 9.

Exceptions for special collateral:

1) certificate of title goods law of the state which issued the C/T
applies per 9.303(a) This section applies to goods covered by a
certificate of title, even if there is no other relationship between the
jurisdiction under whose certificate of title the goods are covered
and the goods or the debtor. . . . (it applies to goods covered by a
certificate of title, even if theres no relationship between the
goods, the debtor, and the state where the title is issued).

2) deposit accounts the law of the jurisdiction where the bank is

located applies per 9.304 (series of rules which determines where
bank is located)

3) investment property per 9.305, the law where certificated

security is located, where the issuer is located (where registered)
for non-certificated securities (see 8.110(d)), or the law of the
jurisdiction where the securities or commodity intermediary is
located (just like bank rules under 9.304) see 9.305 and 8.110(e).

4) letter-of-credit rights the law of the jurisdiction where the issuer

is located, per 9.306

For priority disputes, the law of the state where the collateral is physically located
applies 9.301(3). (This will only cause a problem when a state has some non-
uniform, non-UCC statute which applies, like a consumer statute)

Where is the debtor located? An individual is located at his principle

residence, a non-registered organization is located at its single office or chief
executive office, and a registered organization is located in the state it is
registered. 9.307

What if the debtor changes locations? This is governed by 9.316. It provides a 4-

month grace period of perfection after a debtor changes location to another

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 jurisdiction (one year if there is a transfer of collateral to someone who becomes a
debtor usually going to be a new debtor by assignment or merger). Similar
rules apply to certificate of title goods (9.316(d)-(e)) and control collateral
(9.316(f)-(g)).

Special rule for buyers of C/T goods: under 9.337, innocent

buyers (not in business of selling cars) or intervening SPs who
deal with a car and note their lien under a newly moved state C/T
which doesnt have an existing lien noted thereon when new C/T is
issued, take free of the prior security interest.
Ex.: Debtor buys car in one state and gets C/T from that
state. Then goes to another state and files C/T in this state
but fails to put Sellers lien interest on new C/T. Then debtor
sells car to innocent person, innocent person wins over
Seller (SP) b/c took w/o knowledge of SI that Seller had in
car).
Ex.: Debtor buys a good that should be covered by a C/T
but the all the requires is that if file, then goes to another
state where C/T is required. Buyer has 4 months to get a
C/T or will lose perfection. If the opposite were to happen
then would remain perfected indefinetly.

Possessory security interests: the security interest stays perfected when the
collateral changes locations, as long as it is perfected when it comes into
the new location 9.316(b) (usually, if SP has possession, they will have
possession if they move around)

6. PRIORITY

A. Simple Disputes

Who defeats an unperfected (but attached) secured party? (9.317)

1) a perfected secured party

2) a lien creditor. "Lien creditor" means a creditor that has

acquired a lien on the property involved by attachment,
levy, or the like . . . . (only have to have file and have one
of the three 9-203 attachment requirements (e.g., file and
have a SA, file and give value, etc)

Remember a lien creditor is defined to include a trustee in

bankruptcy. Here, the bankruptcy trustee is given the same
rights as a hypothetical lien creditor, meaning the trustee
would also have superior rights to the property over an
unperfected SP, under 9-317(a)(2)(A).

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 3) a buyer (not a SP) or lessee who: (a) gives value, (b)
receives delivery, (c) w/o knowledge, (d) before perfected.

But note: 9-317 allows for PMSI protection by filing within

20 days after debtor receives collateral, even as against an
intervening buyer, lessee, or lien creditor.

Who wins (generally) between competing secured parties? (9.322(a)-(b))

1) perfected vs. perfected first to file or perfect (even if one

attached before the other, can file before attach under 9-
502(d)

Note: time of filing or perfection as to collateral is also

time of filing or perfection for proceeds and supporting
obligations

Note: What happens when Debtor pays off existing loan

but no termination statement has been filed and then the
same lender lends again taking SI in the same collateral as
before. Is the existing FS still effective or need to file
another one? As long as the existing FS is still on record
and still effective, it protects all loans made by the same
lender to the same debtor, even if the original loan is paid
off before the new loan is made, and even if the new loan
was not contemplated at the time the original FS was filed.

Note: Effect of Gap in Perfection: 9-308(c): A security

interest . . . is perfected continuously if it is originally
perfected by one method under this chapter and is later
perfected by another method under this chapter, without an
intermediate period when it was unperfected. (If there is a
gap in perfection and there is junior perfected SP then that
SP may jump ahead of the earlier SP that allowed a gap in
perfection to occur

2) perfected defeats unperfected

3) unperfected vs. unperfected first to attach

B. Purchase Money Security Interests

1. The Basic Rule (Equipment and non-Livestock Farm Products)

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 A PMSI is given priority over other perfected security interests
(though earlier in time), so long as perfection occurs within 20
days after D receives possession. (9.324(a))

2. Inventory and Livestock

A PMSI in inventory or livestock is given priority over other

perfected security interests (though earlier in time), if:

a. the PMSI is perfected before possession

b. the PMSI SP sends an authenticated notification to any

other SPs who have filed as to inventory/livestock, before
possession (a notification is good for 5 years for inventory;
6 months for livestock)

c. the notification must state that the person has or expects to

acquire a PMSI in inventory, and describe it (9.324(b)-(f))

Remember 9.103(d) says a consignors SI in goods is a PMSI in

inventory.

3. PMSI vs. PMSI priority disputes

Basically, a seller wins over a lender. If there are 2 or more lenders

(presumably there could be only 1 seller), then the first to file
rule of 9.322 applies. (9.324(g))

C. Control and Priority

Priority in investment property: (9.328)

1) control wins over non-control (i.e., filing)

2) control vs. control first to control wins, except that a

securities intermediary with control over one of its accounts
wins over another SP which has control in the account

Note: Securities Intermediary v. Bank (w control):

Securities Intermediary wins under 9-328(3), b/c it is the
securities intermediary that maintains the securities account
in which the SI is granted (i.e., it took a SI in its own
customers account its the home institution.).
Consistent with common law right of setoff.

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 Priority in deposit accounts: (9.327)
1) control wins over non-control (i.e., unperfected)
2) control vs. control: first to control wins, except:
a. a bank with a security interest in one of its own
accounts wins over another SP with control (home
institution rule), and
b. a SP which has become the customer as to the
deposit account wins over a security interest held by
the bank where the account is (ie the bank becomes
the customer on the bank account instead of debtor)

Priority in letter-of-credit rights: (9.329)

1) control wins over non-control
2) otherwise, first to control wins

Remember: when L/C is a supporting obligation, perfection in the

original collateral automatically perfects a SI in the L/C (but this
will be non-control)

D. Buyers

In general, per 9.315(a)(1), unless there is an exception in Article 9

elsewhere, a security interest continues in collateral, even though it is sold
to a buyer (or otherwise disposed of), if the secured party does not consent
to the disposition.

Note: 9-315(a)(1): a security interest . . . continues in collateral

notwithstanding sale, lease, license, exchange, or other disposition
thereof unless the secured party authorized the disposition free of
the security interest . . . .
The consent can be implied through time when there is a failure
to object to sales, notwithstanding a provision in the security
agreement requiring express consent.

Buyers in ordinary course: one of the exceptions. A BIOC takes free of

a security interest created by the buyers seller, even if the security interest
is perfected and the buyer knows of its existence. (9.320(a))

What is a buyer in the ordinary course? Basically, its a buyer of goods

from someone in the business of selling goods of that kind. The buyer
must do so in good faith, and without knowledge that the sale violates the
rights of someone else, including the sellers secured party. A person
which acquires goods in bulk or in satisfaction of debt is not a BIOC.
(1.201(9)).

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 Note: This does not apply to goods which are perfected by
possession with the sellers secured party (9.320(e))

Note: Does not apply to farm products bought from a farmer.

But, under the federal Food Security Act this result is reversed, and
buyers of farm products do take free of a security interest, unless
they have received a notification of the security interest from the
lender, which specifies payment obligations which must be
complied with (and they fail to comply with them; if they comply,
they still take free). (even if are aware of SPs interest)

Note: Lay-away Rule: If buy in lay-away and store goes bankrupt,

BIOC has option to pay off remaining balance or sue store for
damages but Bank gets to keep the good.

garage sale rule a consumer buyer from a consumer seller, who takes
w/o knowledge, gives value, and before a financing statement covers the
goods (normally no FS for consumer goods), takes free of a security
interest in the goods (9.320(b))

Buyer-NOT-in-the-ordinary-course v. non-perfected party: 9-317(b)

provides that unperfected SPs lose to an intervening buyer, regardless of
whether such purchase is in the ordinary course:

E. Leases

In general, under 2A.307, a security interest (granted by the lessor)

continues in goods that are leased (just like goods that are sold).

Exception: However, there is a lessee in the ordinary course of business

exception, which is similar to the BIOC exception 9.321(c) A lessee in
ordinary course of business takes its leasehold interest free of a security
interest in the goods created by the lessor, even if the security interest is
perfected and the lessee knows of its existence. (this applies only if are
leasing from someone who is in the business of leasing out goods)

A creditor of the lessee generally takes subject to the lease 2A.307(a)

F. Article 2 Claimants

Rejecting buyer security interest: Under 2.711(c), a rejecting buyer with

possession of goods (after delivery) has a deemed security interest in the
goods to secure payment of the refund due from the breaching seller.

Pursuant to 9.110, this Article 2 security interest is granted priority

over a contractual, consensual Article 9 security interest.

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 Sellers right of reclamation: not a security interest, but a right of a seller
to reclaim certain goods under Article 2. Specifically, if a seller discovers
he sold goods to buyer while buyer was insolvent, seller can make
demand for return of goods received (covers goods sent up to 10 days
before buyer receives letter 10 day limitation n/a if written
misrepresentation of solvency was provided within 3 months before
delivery) (2.702)

In order to be subject to reclamation, the goods must still be

identifiable and cannot have been processed into other goods that
is, obviously, the debtor must still possess the goods in their
current form.

Note: getting goods back is the only remedy, cannot get money for
cost of shipment, etc

Per 2.702(c), the sellers right of reclamation is subject to a good

faith purchaser, which has been held to include a secured party
with a security interest in goods held by the buyer (which would
attach as soon as buyer got possession). If a bank had a perfected
SI in the goods, they would qualify as a purchaser under 2-
703(3), and thus Sellers reclamation rights against Buyer are
subject to (inferior to) the banks SI.

G. Statutory Lien Holders (9.333)

A possessory lien is one which secures payment for services or materials

furnished, created by statute, and which depends on possession of the
goods.

If such a lien arises, it always has priority over a conflicting security

interest in the same goods (usually, while lienholder maintains possession)

H. Fixtures
9-102(a)(41). "Fixtures" means goods that have become so related to
particular real property that an interest in them arises under the real
property law of the state in which the real property is situated.

General Test For Determining if Fixture: A frequent state law case test
for whether something is a fixture is that it cant be removed without
damage to the real estate.

9.334 governs disputes between Article 9 security interests in fixtures and

interests in real estate (owners or encumbrancers)

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 Remember: whether something really becomes a fixture is a threshold
inquiry, and is only determined by looking to state real estate law. Article
9 does not determine this it only dictates what happens as between
security interests in goods determined to be fixtures, and interests in real
estate.

9.334(c) default rule - if none of the rest of 9.334 applies, then the realty
interest wins over the fixture interest (not applied often one of the
other rules almost always applies).

9.334(d) the PMSI rule - Except for construction mortgages, a perfected

purchase money security interest in fixtures has priority over any earlier
arising real property interest (mortgage or owner), if the security interest is
perfected by a fixture filing either before the goods become fixtures or
within 20 days thereafter.

Note: the PMSI rule doesnt apply to later real property interests,
only earlier ones. If the FSI gains priority over an earlier realty
interest via PMSI, then it will generally gain priority over a later
realty interest via the first-to-file rule (see below).

The construction mortgage exception is found in 9.334(h). The

special priority given to construction mortgages only lasts while
the construction is ongoing (its basically construction PMSI
winning over an individual fixture PMSI) if fixtures attach after
construction is completed, only the other rules apply, so that a
PMSI could gain priority if done after construction is completed.
In order to gain the special priority, the construction mortgage has
to be recorded before the goods become fixtures.

9.334(e)(1) the first-to-file rule - An interest in fixtures perfected by a

fixture filing has priority over a later-filed real estate interest
(encumbrancer or owner i.e., buyer), provided that the fixture interest
had priority over the realty interests predecessor-in-title (usually through
PMSI priority).

9.334(e)(2) the readily removable rule: The rule is straightforward if

a SI arises in fixtures before they becomes fixtures (note that this will also
almost invariably be a PMSI), it has priority over a realty interest if
perfected by any method, and the fixtures are readily removable: 1)
factory or office machines, 2) equipment not primarily used in operation
of real property, 3) replacements of domestic appliances that are consumer
goods.

9.334(e)(3): a SI in fixtures which is perfected by any method prevails

over a later-acquired judicial lien.

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 9.334(e)(4): a SI in a manufactured home (sometimes held to be a fixture)
which is perfected by notation of the security interest on a certificate of
title prevails over a mortgage interest in the real estate connected to the
manufactured home.

9.334(f)(2): a SI in fixtures (whether perfected or not) prevails over a

conflicting mortgage or ownership in real property if the debtor has the
right to remove the goods i.e,, usually a tenant.
9.334(i): a perfected security interest in crops prevails over a mortgage or
ownership interest in the underlying real property.

What is a fixture filing? Where required by 9.334, the fixture filing rules
are provided for in 9.501 and 9.502:

1) under 9.501(a)(1)(B), the place to file is the county real

estate record office (as opposed to the secretary of state).

2) under 9.502(b), the contents of the fixture filing must

consist of the ordinary requirements (name of D, name of
SP, and description of collateral), but also:

a. indicate it covers fixtures

b. indicate its to be filed in the county real estate
records
c. provide sufficient description of real property
d. name of owner of real property (if not the debtor)

How is a security interest in fixtures enforced? Under 9.604, the

following rules apply:

1) if a secured party has interest in both fixtures and real

property, he can proceed as to either the fixtures, or real
property, or both

2) if a secured party has an interest in fixtures, he can proceed

under Article 9 default procedures, or he can proceed under
state real property foreclosure laws

3) a party with a security in fixtures may remove the fixtures

from the real property, and must pay physical injury
damages caused by removal (but not reduction in value to
real estate).

I. Accessions and Commingling

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 1. Accessions

Accessions are to other goods theyre attached to, as fixtures are to

land theyre attached to. The accession can, and often does,
become part of larger, unified whole, but nevertheless the
accession is still readily identifiable its identity is not lost.
(9.102(a)(1))
- Exception: If the whole is covered by a certificate of title law
(e.g., engine in a car) then, the C/T interest in the whole prevails
over the smaller accession. (interest in the car would prevail over
the interest in the engine)

The rules governing accessions are set forth in 9.335. The rules
governing priority of competing security interests are governed by
other law (9.322 or 9.324),

2. Commingling

Unlike accessions, which retain their identity, 9.336 provides that

commingled goods, by definition, lose their identity in a product
or mass. (e.g., eggs in a cake, or ball bearings in a wheel or
motor).

You can have a security interest in goods that eventually become

commingled goods, before theyre commingled (e.g., the eggs, or
the ball bearings). However, once commingled with other goods,
you lose a SI in those pre-commingled goods, but you do get a SI
in the resulting product (e.,g., the cake, or the motor)

Other regular priority rules apply, except for 9.336(f) when you
have two or more SIs in pre-commingled goods, which each
become SIs in the resulting product, you apply the pro rata rule.

J. Federal Priorities for Debts and Taxes

1. Tax Liens Basic priority

A federal tax lien which is filed before a security interest is

perfected takes priority, and vice versa.

2. Tax Liens and After-Acquired Property

IRC 6323(c) provides that the Art. 9 SP still has priority over the
IRS-filed lien for 45 days after the filing, regardless of knowledge.

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 After that point, if the debtor acquires more property, the tax lien
prevails over such later-acquired property after the 45th day (or
knowledge).

Some further aspects to it:

1. This section requires the SP to have been perfected (i.e.,

filed) as of the time the IRS files its tax lien.

2. This section requires the SA b/n debtor and SP to have been

entered into before the tax lien filing.

3. Only valid for this additional SP priority over IRS as to

property acquired in the ordinary course of business .

4. Only valid as to commercial financing security, which is:

(i) commercial paper, (ii) accounts, (iii) mortgages, and (iv)
inventory.

3. Tax Liens and Future Advances

IRC 6323(d) says that the perfected Art. 9 SP (which entered the
SA before the tax filing) still has priority as to any advances made,
over the IRS-filed lien, for 45 days after the filing, or when the SP
discovers the tax lien filing, whichever is earlier. After that point,
if the SP makes more advances, the tax lien prevails over such
later-incurred indebtedness after the 45th day (or knowledge). (any
inventory or any advances acquired after 45th day, tax lien would
have priority over even the SP)

PMSI v. Tax Liens: the cited Revenue Ruling provides that a

validly perfected post-tax lien PMSI will have priority over the
prior filed tax lien. Says PMSIs will be protected with super-
priority just like Article 9.

4. Special UCC rules on future advances

Lien creditors: a perfected SP will beat a lien creditor to the extent

of a FA if its made before 45 days after the j/m lien arises
(regardless of knowledge the 1st 45 days are absolute). After 45
days, the SP loses to the extent of a FA unless he makes the FA w/o
knowledge of the lien, or the FA was made pursuant to a
commitment (entered into w/o knowledge of the lien no problem
b/c usually the commitment will arise at the time of the original
SA). If there was a commitment w/o knowledge, SP will win over

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 a lien creditor as to a FA, regardless of how far in the future the FA
is made. (9.323(b))

Buyers (not buyers in ordinary course): a perfected SP will beat a

non-BIOC buyer, to the extent of a FA, so long as the FA was made
before the earlier of 45 days after purchase or when the SP knows
about the buyers purchase (i.e., as to non-BIOC buyers, the SP
does not have an absolute 45 day period where his knowledge
doesnt matter). If there is a commitment made w/o knowledge,
the SP is always going to beat the non-BIOC buyer, just like lien
creditors.

7. BANKRUPTCY AND ARTICLE 9

Bankruptcy operates, in part, to protect perfected secured creditors. If

a creditor is secured, and perfected, then its property interest will be protected
and validated in the bankruptcy proceeding (i.e., they will get paid or
get their collateral back).
However, several bankruptcy protections limit the effectiveness
of a secured partys interest, especially insofar as perfection is
concerned.

A. Trustees Status

Under Bankruptcy Code section 544, the trustee in bankruptcy succeeds to

the interest of a hypothetical (judicial) lien creditor, and may avoid any
inferior security interests in property.

The inferior security interests which the trustee defeats are

unperfected security interests, per 9.317(a)(2). (Must have been
fully perfected in order to defeat the trustee)

PMSI v. Trustee: PMSI still gets the 20 day period to file after Debtor
receives the goods. As long as files before 20th day, even if there is a
bankruptcy petition filed before, PMSI still has super-priority.

B. Preferences

What is a preference? Its when a debtor prefers one creditor over

another by paying the preferred creditor and not paying the unpreferred
creditor. This can happen expressly, of course, but sec. 547 also arbitrarily
sets aside any last minute (90 days before BR) payments of money or
transfers of property to creditors, subject to exceptions.

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 Under 547 of the Bankruptcy Code, the trustee can avoid preferences,
which are defined as any transfers of property by the debtor to a creditor
to pay on an antecedent (pre-existing) debt within the 90-day period
prior to filing bankruptcy, if the transfer would be more than the
creditor would get in a straight Chapter 7 liquidation if the payment
hadnt been made (will virtually always be the case,
unless youre a fully secured (the collateral has equal or greater value than
loan amount) and perfected creditor receiving cash payments on debt). (if
are fully secured, under a bankruptcy this SP would have received all his
share before anyone else anyways. The SP is not getting more than would
have gotten under bankruptcy proceeding.

When is the date of the transfer? A transfer, for preference purposes,

can be a transfer of cash (i.e., a payment on a debt), or a transfer of a
security interest. Under 547(e), the transfer occurs:

1) when it happens, if it is a single event (like a cash payment), or

when the transfer of a security interest takes place (i.e.,
attachment), if it is perfected within 30 days thereafter
2) for a transfer of a SI, at the time of perfection (the later event), if
the transfer of the security interest (attachment the earlier event)
is perfected after 30 days.
3) immediately before bankruptcy is filed, if it is never perfected,
or if not perfected by later of bankruptcy filing or 30 days after
transfer
PROBLEM 101 DOES NOT MAKE SENSE
What are the defenses to a preference action?

1) contemporaneous exchange for new value

2) to the extent that such transfer was in payment of a debt
incurred by the debtor ordinary course of business
3) PMSI exception
4) new value

C. The Floating Lien in Bankruptcy

When there is an after-acquired collateral clause in a security agreement,

the security interest attaches to property acquired by the debtor in the 90
days before bankruptcy, and thus there is a transfer. Perfection (filing)
obviously happened well before this after-acquired property was
acquired. Thus, to address the extent of preferential exposure, Congress
enacted 547(c)(5), which requires that the secured creditor not improve its
debt/collateral ratio between: (1) 90 days before petition (or when loan
was made if later), and (2) petition date. To extent of improvement, there
is a preference.

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 E. Fraudulent Transfers

Bankruptcy Code section 548 (one-year lookback) and section 544(b)

(incorporating state law fraudulent transfer statutes often 4 year statute
of limitations) both allow the trustee to avoid fraudulent transfers.
Typically, there are 2 types of fraudulent transfers:

1) those where the transfer is actually intended to defraud the debtors

creditors, and
2) those where the transferee from an insolvent debtor does not give
reasonably equivalent value in exchange constructively
fraudulent

F. Non-Consensual Liens and the Trustee

A judicial lien is pretty much always preferential youre always getting a

lien long after the debt was incurred.

Statutory liens (i.e., mechanics liens) are generally effective against the
trustee so long as they are not created to arise automatically on
insolvency.

8. PROCEEDS

A. Meaning of Proceeds

Proceeds are basically anything you get from the sale or other disposition
of the original collateral. Under 9.102(a)(64), it includes anything
received, including insurance proceeds from a policy insuring the
collateral.

A security interest attaches to proceeds upon disposition, unless some

specific provision of Article 9 provides otherwise, per 9.203(f) and
9.315(a)(2). It also continues in the original collateral, unless elsewhere
provided otherwise (i.e., 9.320(a) BIOC rule).

B. Priorities in Proceeds

A security interest which is perfected in original collateral, is

automatically perfected in the proceeds 9.315(c). For priority purposes,
the time of filing as to the original collateral is the time of filing as to the
proceeds 9.322(b)(1).

This automatic perfection, however, is only temporary, and will lapse after
20 days unless one of the tests of 9.315(d) is met:

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 (d)(1) if filed financing statement covers the original
collateral, its filed in right place, and proceeds not acquired
w/cash proceeds

Examples: The debtor traded another computer for a

painting to be hung in the office. The debtor traded another
computer for a computer.

(d)(2) if the proceeds are cash proceeds (indefinitely)

(d)(3) if the proceeds were acquired w/cash proceeds, OK if

you have a filed financing statement covering the type of thing
acquired (which would also likely make the item perfected
pursuant to an applicable after-acquired clause in a security
agreement). (ie have FS that covers equipment and use cash
from sale of equipment to buy more equipment).

Example of when test above is not met: The debtor traded a duplicating
machine for a used car (and state law requires a lien interest in a vehicle to
be noted on the certificate of title as the sole means of perfection). The SP
must get noted on the cars certificate of title. None of the 9-315(d) rules
operate to automatically extend perfection (no FS b/c its a car, not cash,
not otherwise perfected unless the lien notation is made).

Example 2 when test above not met: The debtor sold a calculator to a
friend for cash and that same day used the cash to buy a painting. The SP
must file an additional FS, or its perfection in the painting proceeds will
lapse. 9-315(d)(1) doesnt work, b/c there was intervening cash. 315(d)(3)
doesnt work because the existing FS only covers all business machines
doesnt cover paintings (probably equipment).

Some special rules that apply:

1. Purchasers of chattel paper (9.330)

Under subsection (a), a purchaser (can include a new

secured party obtaining a security interest) of chattel paper
prevails over a secured party claiming the same chattel
paper merely as proceeds of inventory if the purchaser
takes in good faith, in ordinary course, gives new value,
and takes possession of the chattel paper. Also, the face of
the chattel paper cant provide its been assigned to
someone besides the purchaser.

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 Ex: Bank 1 has a floating lien on present and after
acquired inventory (ie store that sells stereo
equipment) and bank 2 has an interest in the chattel
paper (the debts owed from customers who bought
the stereo equipment) from that inventory. If store
defaults Bank 1 can claim the chattel paper as
proceeds but since bank 2 has a direct interest in the
chattel paper (plus reqs from above) Bank 2 will
win b/c has the direct interest in the chattel paper
and Bank 1 had direct interest in only the Inventory.

- In regards to accounts from inventory, bank 1

would have priority if filed their original SA before
Bank 2.

Chattel Paper contd; 9-330(c). Except as otherwise

provided in Section 9.327, a purchaser having priority
in chattel paper under Subsection (a) or (b) also has
priority in proceeds of the chattel paper to the extent
that:
(2) the proceeds consist of the specific goods
covered by the chattel paper or cash proceeds of
the specific goods, even if the purchaser's
security interest in the proceeds is unperfected

Example: Bank has lien over inventory of car dealership

and proceeds from that inventory. Dealership sells car and
then gives the K promising to pay car (ie chattel paper) to
another lender. If car is returned by customer w/o paying
lender who has interest in the K (ie chattel paper) has
priority over bank b/c the chattel paper proceeds (ie the car)
was what was specifically covered by the chattel paper.

2. Transferee of money or funds (9.332)

A transferee of money (cash) or funds (like the recipient of

a check) always takes free of any security interest in the
money or funds from deposit account, unless it colludes
with the debtor to violate the secured partys rights.
- (b) A transferee of funds from a deposit account takes
the funds free of a security interest in the deposit
account unless the transferee acts in collusion with the
debtor in violating the rights of the secured party.

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 3. Bank Set-off: Have a bank account with Bank 1 and also have a
loan w/ Bank 1. Have proceeds in there from the sale of Bank 2s
collateral. Debtor Defaults on both loans. Then the bank were the
debtor has his account has priority to the funds first. (Common law
rule)

- What can the bank with the interest in the proceeds do to protect
itself?
Answer: Become the deposit account banks customer,
thereby taking control of the account under 9-104(a)(3). 9-
340(c) gives this right priority over the common law right
to setoff.

9. DEFAULT

A. Pre-Default Duties of the Secured Party

Either before or after default, a secured party in possession of collateral

has to use reasonable care in the custody and preservation of the collateral,
per 9.207(a). 9.207(b) provides specific examples of things this entails:
expenses incurred (insurance, taxes, repair), deficiency in insurance
coverage, and requirement to use collateral periodically to keep it in
good working order.

9-207(b)(2), while a secured party has possession of

collateral, one of the duty/preservation rules is that the risk of accidental
loss or damage is on the debtor to the extent of any deficiency in any
effective insurance coverage.

* 1-302(b) prohibits the bank from generally contracting away liability for
its own negligence (i.e., cannot disclaim its obligations of good faith and
care).

Under 9.207(c), a secured party having possession or control of collateral

may hold non-cash proceeds as additional security, but as to cash or funds
must either: (a) give it to debtor, or (b) apply it to the debt.

9.210 requests for accounting, or requests regarding list of collateral or

statement of accounts: A secured party must respond to these requests
from debtor within 14 days. The response can be either the requested
response, or a response to a list of collateral request that all of a particular
type of collateral is subject to a security interest, or a response that no
interest is claimed any longer (and the contact information of the assignee,
if applicable).

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 What damages are recoverable if a secured party fails to comply with
these provisions?

1) actual damages for these, or any violation of Article 9

provisions, actual damages incurred as a result of the violation
are recoverable 9.625(b)

2) 9.210 damages in addition, special rule for 9.210; if a creditor

fails to comply with a 9.210 request, theres a $500 recovery
per case, regardless of actual damages caused. Exception
someone who never had an interest is not liable for this penalty
9-625(f).

B. Default

A secured partys rights to repossess and dispose of its collateral only arise
upon the default of the debtor. 9.601 and 9.609. This is a matter of
contract, although a failure to make scheduled debt payments will always
be a default.

9-601(a). After default, a secured party has the rights provided in this
subchapter and, except as otherwise provided in Section 9.602, those
provided by agreement of the parties. A secured party:
(1) 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, may proceed either as to the
documents or as to the goods they cover.

The basic point: An Article 9 secured creditor may, after

default, proceed with its judicial remedies, or with its self-help
remedies, or both. The rights are cumulative. Doing one
doesnt waive your right to do the other.

Special acceleration/impairment rule: under 1.208, any provision in a

security agreement or loan document which allows the secured party to
declare a default and accelerate when it deems itself impaired/insecure,
is only exercisable in good faith. (has to be due to debtors actions) (use
and objective standard)

Examples when can properly accelerate: bank has SI in mobile home: The
confiscation of the mobile home and the arrest of the debtor for
possessing marijuana?

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 Under 1-303: Course of Performance Rule: previously accepting the
late payments could also be said to be a course of performance under the
K, which either interprets the meaning of the K, or supplements it, or
waives it. (ie always accepting late payments and then all of a sudden on a
late payment consider default when have not notified lender prior that no
longer will accept late payments. Would have to give reasonable notice not
longer will accept late payments and hence forth reinstating date due
and time is of the essence clause.

C. Repossession and Resale

After a debtor has defaulted, it may repossess, or render equipment

unusable. However, unless it utilizes the court system, it can only proceed
without a breach of the peace 9.609.

This duty of the creditor not to breach the peace is nondelegable.

It is also nonwaivable, along with most of the other Part 6 rights
and remedies, pursuant to 9.602. Note also that only certain rights
are waivable post-default, and then only in an authenticated writing
(9.624).

Notice required before repossessing? No, nothing in Article 9 requires pre-

repossession notice to the debtor.

How does a creditor repossess accounts or similar collateral? By

notifying the underlying account debtor to pay the secured creditor,
instead of the secured creditors debtor (to whom the account was
originally due) 9.607(a). (account debtors can insist on proof of the
security interest also have same defenses against payment under
9.404(a)) This is referred to as collection, and 9.608 provides the rules for
application of monies received from such collection on collateral:
1) expenses of collection
2) pay off the collecting creditors debt
3) pay off subordinate secured debts
If whats collected is more than enough to pay debts, debtor gets the
excess money (surplus); if its not enough, debtor is still liable for the
balance (deficiency).

Disposition of tangible collateral: Under 9.610, after repossession (if

necessary), the secured creditor can sell or otherwise dispose of collateral
called a disposition. All aspects of the disposition must be commercially
reasonable. (low price by itself is not conclusive evidence is commercial
unreasonableness 9.627(a)) Sales can be public (bidding) or private. A

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 creditor may purchase the collateral at a public sale, but not a private one
(unless its market-type collateral i.e., stocks).

Notice of sale: Notice must generally be sent before disposition

(exceptions: perishables or market-type goods) 9.611 9.614
provide the basic rules:

1) who must get notice? (9.611)

a. debtor
b. guarantors
c. persons who have made a written claim on
collateral
d. secured creditors who have filed a financing
statement (within the window to search)
e. secured creditors with a lien noted on a
certificate of title

2) how much notice must be given? (9.612)

a. reasonable amount of time (look at facts and
circumstances)
b. non-consumer safe-harbor 10 days

3) what must notice say?

a. rules for non-consumer notice are in 9.613
i. identify D and SP
ii. describe collateral
iii. method of sale
iv. state D is entitled to accounting
v. time and place for public, time after
which for private
b. rules for consumer notice are in 9.614
i. (all the above)
ii. specific mention of potential liability for
deficiency, who to call to redeem
collateral, and who to call in general
about the disposition

Application of proceeds after disposition: 9.615 provides the rules for

application of monies received from the disposition of collateral:
1) expenses of collection
2) pay off the disposing creditors debt
3) pay off subordinate secured debts
If whats collected is more than enough to pay debts, debtor gets the
excess money (surplus); if its not enough, debtor is still liable for the
balance (deficiency). For consumer goods transactions, the creditor must
send an explanation of the deficiency by the time the consumer demands

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 it, or the secured creditor is liable for actual damages, and additionally for
a $500 penalty if part of a pattern under 9.625(e)(5).

Effect of disposition on interests in collateral: Under 9.617, a disposition

transfers title to the good faith buyer at the sale (the transferee), and it
discharges the selling creditors security interest and all subordinate
security interests (note: not superior ones).

Secured creditors compliance with Article 9 rules and effect on deficiency

and/or damages owing to debtor:

As stated above, actual damages caused by violations are generally

recoverable. In addition, when the creditor seeks to recover the
deficiency, the D may claim SP didnt comply with one or more provisions
of Article 9. If so, in non-consumer cases there is a rebuttable
presumption that, had the creditor so complied, the sale proceeds would
have at least equaled the debt (ie, no shortage or deficiency). Creditor can
only rebut this by proving it wouldnt have received that much, even if the
rules had been followed. Unless it does so, it loses the right to recover the
deficiency 9.626

Note: Per 9.626(b), the rebuttable presumption rule doesnt

apply under Article 9 in consumer cases its left to the
courts. In Texas, the court rule (Tanenbaum) is that a
creditors failure to comply with Article 9, or conduct a
commercially reasonable sale, results in an absolute bar to a
deficiency (i.e., its a conclusive, rather than rebuttable,
presumption).

There is also a special rule for when the secured party is the buyer
at a sale, which brings a price significantly below what would have been
realized had someone else been the buyer. Under 9.615(f) and 9.626(a)
(5), the debtor may limit the creditors deficiency to what it would have
been had the higher price received from a 3rd party buyer.

Under 9.625(d), a debtor whose deficiency is eliminated is limited

in the recovery of actual damages, to the loss of any surplus which would
have been received had the SP complied with Article 9, but no other actual
damages. Note that this doesnt affect the right to recover the consumer
statutory minimum damages under 9.625(c)(2), or any of the penalties
under 9.625(e)-(f).

D. Redemption and Strict Foreclosure

1. Redemption

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 When there is a default, and the creditor has repossessed the
collateral, the way for the debtor to get it back is to redeem it by
paying whats owed. In general, what must be paid is everything
thats owed (including the entire balance if accelerated lawfully),
plus expenses and attorneys fees incurred to date.

The collateral can be redeemed by the debtor up until it has been

disposed of (i.e., sold), or accepted in satisfaction of the debt (see
below) 9.623.

2. Strict Foreclosure

A creditor may wish, instead of disposing of collateral on the

debtors account (i.e., with the sale affecting the surplus or
deficiency), to accept it in full or partial satisfaction of the debt. If
its done in full satisfaction, then the creditor gets the collateral,
and there is neither surplus nor deficiency both sides walk away.
(if only in partial satisfaction, then this in effect sets the amount
of the deficiency by agreement in advance).

Note: Just like a disposition at a sale, acceptance of

collateral in satisfaction discharges the accepting creditors
debt, and also subordinate debts (but not superior ones)
9.622

How does creditor do a strict foreclosure? (9.620) The creditor

must itself consent in an authenticated writing no implied strict
foreclosures. (9.620(b)) The creditor must also get the following:

1. debtors consent: can be by signed agreement, or, in

case of full satisfaction, debtors failure to object to
such a written proposal within 20 days

2. no objection from other parties (who must be notified):

they must also object within 20 days after being
notified by creditor. Who must be notified? (9.621):

a. persons who have made a written claim on

collateral
b. secured creditors who have filed a financing
statement (within the window to search),
c. secured creditors with a lien noted on a
certificate of title
d. (if only partial satisfaction proposed) also
must send to secondary obligors

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 e. (anyone else holding a subordinate interest
9.620(a)(2)(B))

3. if consumer goods, cant still be in consumers

possession

4. cant be required to be disposed of under the consumer

60% rule of 9.620(e)-(f)

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