Secured Transactions Fall 2010 Paul A. Mariano Chapter 1: Creating a Security Interest a. The Security Agreement i.

. 9-203(a): a security interest attaches to collateral when it becomes enforceable against the debtor ii. How though? 1. See 9-203(b) a. Value given (i.e. giving a loan) b. The debtor has rights in the collateral c. One of four other requirements that have the function of the statute of frauds (These are laid out in 9-203(b)(3)) i. The most common is (a) the debtor has authenticated a security agreement that provides a description of the collateral (you can authenticate by signing the thing) ii. Does it have to be in writing? 1. Lacy says it does have to be in writing or in some other medium that can be retrieved in a tangible form 2. Key definition is authenticate; whats it mean? a. To sign or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record ( 9-102(a)(7)) b. The definition of sign is found at 1-201(b)(37) using a symbol executed or adopted w/ present intention to adopt or accept a writing c. The definition of record is found at 9-102(a)(69) info inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form d. So it takes a long time to figure out where the writing requirements of a statute of frauds are b. The Composite Document Rule (Bollinger Case) a. Can you use composite documents to demonstrate whether a sufficient security agreement was around? i. What does intent to create a security agreement mean????

1. check out the promissory note: it mentions that there would be a future Security Agreement 2. however, the court holds that the note, by itself, is not sufficient (b/c of the future language) ii. So yeah, intent 1. Do the writings taken together show an intent to create a security interest? 2. intent test page 26: a writing(s) that adequately describe the collateral, are signed by the debtor, and establish that a security interest was agreed upon would satisfy both the formal requirements of the statute and the policies behind it 3. Z & J argued that the financing statement, in and of itself, was enough to constitute a security agreement a. The court notes the requirements for both documents are very similar and checks out other cases to see how this was ruled upon b. Virtually every decision has held that a financing statement standing alone wont constitute a valid security agreement i. 9-502(d): a financing statement may be filed before a security agreement is executed or a security interest attaches ii. Because secured creditors can file as soon as negotiations begin establishes the fact that a financing statement doesnt necessarily represent a security agreement (lenders can pull out) iii. Also noteworthy is the fact that Section 502 doesnt require the other party to sign the financing statement 4. So what was the critical document? a. Letter that establishes substitution for items of collateral (if there was no security interest, there would be no need for such a document) c. Description of Collateral i. General notes: 1. 9-203(b) requires the security agreement to be a writing and include a description of the collateral that reasonably identifies the collateral 2. 9-108 indicates when the collateral description in a security agreement is ok (when it reasonably identifies) 3. in 9-108, a description is effective if it reasonably identifies what is described a. examples of collateral descriptions occur in 108(b) b. 108(c) outlaws supergeneric descriptions in Security Agreements

4. in addition, 9-502(a) requires a financing statement to indicate the type of collateral covered 5. 9-504 indicates when a financing statement sufficiently indicates collateral covered; FS may use supergeneric descriptions like all assets of debtor or all personal property of debtor d. After-Acquired Collateral i. General: 1. in 9-204(a) & (b) allows a security agreement to create or provide for a security interest in after-acquired property/collateral 2. How specific must the description be to create SI in a/a/p? e. Proceeds i. 9-102(a)(64) defines proceeds; related definition in (a)(12) 1. traditionally includes whatever the debtor gets on the disposition of collateral ii. So if the debtor sold a piece of secured collateral in exchange for some sweet cash, this cash would be proceeds and the secured party automatically has a secured interest in the proceeds iii. 9-203(f) and 9-315(a)(2) taken together provide that a SI that has attached to collateral automatically attaches to any identifiable proceeds of the collateral. iv. Hypo: 1. Feb 1 debtor grants security interest in a JD tractor 2. Files financing statement listing collateral "1 JD tractor" 3. July 1 debtor sells tractor to a third party for cash and opens a new bank account w/the cash proceeds from the sale 4. No other deposits/withdrawals from the bank account 5. July 15 debtor buys MF tractor with a check from this bank account 6. Does the secured party have an security interest in the new tractor? a. Yes, 9-102(a)(64) defines proceeds b. 9-315(a)(2) says that the security interest will continue in the proceeds from the sale of the collateral as long as the proceeds are identifiable; identifying the proceeds can be a problem w/cash proceeds but not in this case b/c they opened the new account and did not deposit any additional money into that account c. 9-102(a)(12) tells us that collateral includes proceeds to which a security interest attaches; so the cash constituted proceeds to which the proceeds attached and the cash became collateral; in exchange for that collateral, debtor received new tractor which becomes proceeds subject to the security interest under 9-315(a)(2) so the new tractor becomes collateral f. Value and Rights in Collateral i. Value

1. 9-203(b): a SI does not attach in collateral until value has been given and the debtor has rights in the collateral 2. 2-501(1) talks about a buyer acquiring a special property on the identification of goods to a K for sale. 3. In some cases, the SI can attach when the debtor does not have possession of the collateral. 4. An obligation to make a loan that would arise under a SA, even if conditional upon approval by the credit committee is still sufficient value to support a SI ii. Rights in Collateral 1. Swets Motor Sales, Inc. v. Pruisner a. Swets is going out and purchasing used cars and would resell them to Pruisner. Swets would give to Pruisner the actual vehicle and the certificate of title covering the vehicle. Pruisner would then write checks drawn on his deposit account payable to Swets. Pruisner was operating a car dealership, and he had a floor plan agreement w/ Chrysler Credit under which Chrysler Credit was financing Pruisners inventory of new and used cars. Chrysler had a SA covering the inventory, motor vehicles and afteracquired property. Chrysler also filed a financing statement to perfect its security interest. Perfection by stating on certificate of title. Swets is upset b/c Pruisners check bounced. Chrysler asserts they have security interest in the cars and they almost certainly made advances against each of these cars. Did Chrysler have a security interest in these cars when the check that Pruisner gave for the cars was dishonored? If Chrysler has a security interest, does it prevail over any claim by Swets? b. Could say that Swets shouldve taken a SI. Maybe so, but 2-507(2) gives Swets a sort of right to reclaim the goods. It tells us that a buyers right to retain and dispose of the goods is conditional upon making the payment when due. c. 2-511(3) tells us that a payment by check is conditional until the check is declared good. d. Now the question becomes, how does that reclamation right fair against a secured party of the buyer. Ct doesnt really get into this issue. e. The ct. really gets into a priority rule. 2-401(1) tells us that if a person has voidable title, that person can transfer a good title to a good faith purchaser for value. Whats voidable title? Code doesnt really define it but it gives us some illustrations. - A person has voidable title if they pay for goods with a check that is subsequently dishonored. f. Here, Pruisner had voidable title even though his title was no good as against Swets.

g. Is Chrysler a good faith purchaser for value? (Honesty in fact in the conduct or transaction concerned) Yes h. Did Chrysler give value? It gave a loan to Pruisner and made advances against the cars to which Pruisner had voidable title? i. Is Chrysler a purchaser? 1-201(33). A purchaser is anyone who obtains an interest in personal property in a consensual transaction. Chrysler is a purchaser. j. B/c Chrysler was a good faith purchaser, it has priority over Swets. k. Court ignores problem: in general, if you want to transfer an interest in property, normally you cant transfer better title than youve got. Pruisner may have right sin the collateral but argument that those rights could be subject to Swets right of reclamation l. 9-203 has been a revision to make people more comfortable with this decision: (b)(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party. 2. A. Lassberg & Co. v. Atlantic Cotton Co., Inc. a. Lassberg is creditor of Mahaffey who is a cotton broker. M owes L 400K. In order to secure this debt, M enters into a SA w/ L secured by after-acquired property. M enters into a transaction with Pecot in which M would look for buyers for Pecots cotton. P would ship cotton to M who would get money from the buyer, take his commission and send the money to P. L is arguing that it has a SI in this cotton M when stored some of it for 4-5 days. b. Ct says that just b/c youre in possession as a bailee of someone elses property does not give you rights in the collateral to encumber it. c. M was more than a bailee he was authorized to make sells on behalf of P. Court says not sufficient. Chapter 2: Perfection A. Introduction a. Notes: i. If a secured interest remains unperfected, it is subordinated against a lien creditor (including the bankruptcy trustee) ii. Just b/c you perfect an interest, doesnt mean youve established priority quite yet b. Ways to do it: i. Attachment 1. secured party doesnt have to give any public notice 2. example: purchase money security interest; retailer retaining a security interest in goods sold to a customer

(good against other secured parties, but not against subsequent customers) 3. this appears contrary to the basic premise of the Code 4. 9-309 ii. Possession 1. if the debtor doesnt have the stuff anymore, then it indicates that the collateral isnt unemcumbered 2. problems: cant perfect intangibles (many forms of collateral are pure intangibles and there is nothing to take possession of); debtor might need possession of the collateral to conduct business iii. Control 1. Only in specifically defined situations. In general, control is the ability to dispose of collateral unilaterally, w/out the cooperation of the debtor. iv. Compliance with other law 1. other federal statutes or state ones 2. motor vehicles are perfected by notation of the lien on the certificate of title pursuant to the state code v. Filing 1. 9-310(a), filing is the primary method for perfecting a FS g. Perfection by Filing i. Notice Filing 1. Problems (page 55) a. raises the provision 9-210 (supposed to put interested third parties on notice) i. so how do we get more information when youre interested in making a loan and you find a financing statement? 1. Interested third parties have no right to request information from a secured party; that right only remains with the debtor ii. So, and HMO is wicked indebted to some crooked physicians like Jaymes dad; docs want their money back but find a loan from a lender to the HMO 1. 9-210 wont allow them to get some sweet info about the loan, only the debtor can do this (and they wont b/c they dont want to facilitate a judgment against their property) 2. The contract between the lender and the HMO almost certainly included a provision that states when a conflicting lien attaches, the HMO would be in default and all of their stuff goes back to the lender h. Sufficiency of Financing Statement (In re Hegert)

i. Section 9-502(a): a financing statement is sufficient only if it contains: 1. Name of the debtor 2. Name of representative of the secured party 3. Indicates the collateral covered ii. Section 9-502(b) for fixtures iii. Look at the UCC 1 form (or check out 9-521)it has lots of blanks for more info than is required under 9-502(a) iv. 9-516: if the filing office rejects the financing statement for any of the reasons listed in the statute, filing does not occur 1. basically this brings up the question of what happens when the financing statement omits information 2. What happens if the filing office makes a mistake? v. 9-516(b) refusal to accept record; filing does not occur vi. 9-520(a) states that filing does not occur w/ respect to a record that a filing office rejects b/c it lacks this info vii. Why separate the provisions required in 9-502 and 9-521? 1. It happens in situations where a filing office submits a filing statement that omits info. As long as you have the required info under 9-502(a) its effective and if the filing office accepts and files the statement, then it is effective to perfect the SI in debtors collateral. viii. These provisions apply only to the Omission of information. ix. Problems with a financing statement: 1. Omissions (item is left blank); can still file the statement though if the filing office accepts it; 9-520(c) 2. Error on the financing statement when it is filed; 9-506(a) 3. Error because of subsequent events; 9-507(b) a. Perhaps a name changed after filing 4. Omissions v. Error: a. If youve got an omission problem then the Q typically will come up: if despite the omission the secretary of state has accepted statement for filing. Although it should have been refused, it was accepted, then its effective to perfect security interest unless omitted info is from 9-502 b. If youve got an error in address or name of SP then youve got a different problem. Youve got a situation where the financing statement has been accepted but the info is erroneous. 5. Errors two types: a. Erroneous at time of filing: i. 9-506 - minor errors not seriously misleading do not interfere with perfection; fatal errors typically relate to the name of the debtor ii. 9-338 - if someone reasonably relies on the incorrect information, the security interest of the

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erroneous party is subordinate to the person who relied on the wrong information b. Subsequent events render information erroneous: i. 9-507(b) says if the UCC was correct when filed, the fact that subsequent events have rendered it seriously misleading is irrelevant, it remains effective for perfection even though the name and address of secured party has changed 6. Other provisions to look at: a. 9-506 minor errors or omissions are Ok, however, if the errors are seriously misleading then this can make the financing statement ineffective b. 9-338 this kicks in when somebodys relied upon the incorrect info. If you reasonably rely upon the erroneous information, then the security interest of the party who perfected the erroneous financing statement is going to be junior to you. c. Under 9-516(b), the financing statement must give address of debtor. What happens if its wrong? Is it still effective? This will be decided under 9-506. d. The fatal errors in info typically relate to the name of the debtor and not really to anything else. Financing Statement Authorized by Debtor i. No longer has to be signed by the debtor in the hope that everything will eventually become electronic in nature (stupid old Article 9 required this) ii. However, the debtor must still authorize the filing of the financing statement in an authenticated record; 9-509(a) 1. under 9-509(b), the debtor, by signing the security agreement, authorizes the secured party to file a financing statement covering the collateral described in the security agreement iii. 9-625(b) allows the debtor to collect damages if the secured party files a financing statement without the requisite authorization by the debtor; 9625(e) provides for a $500 penalty recoverable by the debtor iv. 9-513(c)(4) the debtor can demand a termination statement from SP that must be sent w/in 20 days after demand is received v. 9-509(d) debtor can file termination statement himself if SP filed unauthorized FS Indication of Collateral i. Original Collateral 1. supergeneric descriptions are ok in FS (not in SA) b/c it gives creditors notice to look more closely; hard to really mess this up 2. 9-504 a. (1) suggests that a sufficient description of collateral in the SA may be used to indicate the collateral in the FS, and often drafters use the same description in both records

b. (2) the description of collateral is sufficient if it is either a description pursuant to 9-108 (SA) or an indication that the FS covers all assets or personal property ii. Proceeds *SOMETIMES ON BAR EXAM* 1. when the debtor defaults, does the secured party have an interest in the inventory, accounts, cash, or equipment 2. 9-102(a)(64) - proceeds 3. 9-315(c) a perfected SI in the original collateral automatically continues in the proceeds, whether or not the FS mentions proceeds 4. 9-315(e)(1) If a FS covers the original collateral, the SI in the proceeds continues until the FS either lapses or is terminated so long as a. The proceeds are collateral in which a SI may be perfected and b. The proceeds are not acquired w/ cash proceeds (9315(d)(1) 5. A SI in cash proceeds continues indefinitely, so long as they can be identified (9-315(d)(2) k. Name of Debtor i. Basic Rules 1. see 9-503(a); a financing statement must sufficiently provide the name of the debtor 2. Why is everything so rigorous? a. Obviously because theyre indexed according to the name of the debtor; see 9-519(c)(1) b. For example, if youre an interested party, you submit a request for a search under 9-523(c)(1)(A) ii. 9-503: Name of the Debtor and Secured Party 1. different rules for different types of parties a. for instance, in terms of registered organizations, the debtors name is what appears on that organizations articles of incorporation b. (a)(4) usually applies to everyone else iii. Minor Errors Rule 1. Some idiot will always misspell things 2. 9-506 tells courts how to approach the problem a. A tolerant rule: if a financing statement has a minor error, its still effective unless the error makes it seriously misleading b. 9-506(b): failure to sufficiently provide the name of the debtor is seriously misleading (unless afforded protection by the 9-506(c) safe harbor) l. Post-Filing Changes i. Transfer of Collateral

1. are the goods in the possession of the buyer still subject to the secured partys security interest; if so, is the security interest perfected 2. Example: a. On 7/1 SP and D enter into a SA over equipment; there is a no sale auth. Clause b. The debtor, in violation of the SA, sells some equipment to the buyer c. Debtor files bankruptcy d. Does the SP have a security interest in the equipment, and is it perfected e. 9-315(a)(1): a security interest continues in collateral unless the secured party has authorized the sale free of the security interest i. This sale was definitely not authorized so the security interest will continue ii. The buyer may try to argue that he paid value and took in good faith but this super tough luck f. What about the financing statement? i. See 9-507(a): the financing statement remains effective 3. Sweet Variation: a. Assume that on 7/1/06 Bank files a FS in NC; the SA precluded the debtor from sales; debtor sold to the Buyer (an SC corp.) and a lender is thinking about lending to the Buyer b. Two things have happened: i. A transfer and a change in governing law ii. The Buyer is a debtor and is located in SC; normally to perfect you would just need to file in SC iii. See 9-316(a)(3): transfer of collateral to a debtor in another jurisdiction 1. the filing in the old jurisdiction remains effective for a period of one year 2. if the Bank can track down the collateral, the Bank is authorized to file a financing statement under 9-509(c) 3. if the Bank files in the one-year period, things remain continuously perfected; if not, tough ii. Name Change 1. American Furn. Corp. changes its name to AFC, Inc. a. SA Inventory a/a/p b. SP1 F.S. Am. Furn. Corp. 7/1/06 c. 1/1/08 name change to AFC, Inc.

i. Who has the secured interest in inventory after the name change? ii. Filed F.S. has become seriously misleading iii. 9-507(c) F.S. filed against Am. Furn. Corp. will remain effective for SI in inventory for 4 months after the name change (5/1/08) 1. but wont attach to the inventory acquired after 1/1/08 d. SP1 has to monitor the debtor and update its F.S. within the 4 months and the credit searcher has to monitor to see if there are any SPs iii. Change in Business Structure 1. Problem page 85 a. 5/1/2004 Bank enters into a SA with the Scotts (individuals); Scotts grant the Bank a SA in all of their inventory, equipment, & accounts; also an a/a/p clause; Bank files a FS under the individuals names b. In 7/2004, the Scotts decide to incorporate as KC of Camden, Inc., which assumes all their business assets and debts; c. In 8/2004, BW agreed to supply inventory to the Corp. in exchange for a security interest in all of its current and after acquired inventory; BW perfects by filing a FS that lists KC of Camden, Inc. as the debtor d. Bankruptcy on 2/1/05 e. Which party, the Bank or BW, has priority? f. Three Groups of Inventory: i. Group A: stuff owned by the Scotts on 7/1/2004 and transferred to the Corp. - 9-315(a)(1), 9-320(a), 9507(a) ii. Group B: inventory acquired by the Corp. from third parties before 11/1/2004 7/1/04 to 10/31/04 iii. Group C: stuff acquired after by the Corp. from third parties after 11/1/2004 or to 1/31/05 these are the issue ones g. 1st Step: i. Determine whether a security interest has attached nd h. 2 Step: i. If there is a security interest, was the interest perfected i. 3rd Step: i. If both parties have perfected interests, which party has priority? 2. Resolution of the Problem Special Priority Rule a. Under 9-315(a)(1): security interest continues unless the Bank authorizes a sale free of the security interest

i. Buyer could try to argue that buyer in ordinary course and they take free of the Banks security interest 9-320(a) & 1-201(b)(9) but the provision specifically excludes bulk sales sale here is outside the ordinary course of business must know about the perfected security interest ii. Therefore, the Bank still has an interest in Group A inventory iii. However, is it perfected? 1. No way BW ever finds this; the Banks F.S. & interest has become seriously misleading but has it become unperfected? a. Nope; 507(a) says perfection continues, also look at 507(b) 2. So both BW and the Bank have perfected interests 3. Priority between BW and the Bank creates a double debtor problem and the Bank wins here bc the Bank perfected against the transferor, the Scotts, over the party that perfects against the Transferee, KC. iv. This is a transfer problem b. What happens to inventory that the Scotts never owned (after they incorporated) Groups B & C i. Clearly BW has a perfected security interest in this stuff ii. What about the Bank? New Debtor Rules 1. first question is whether the Corp. is a new debtor; test found in 9-203(d)(2) for Attachment: the person becomes generally obligated for the obligations of the other personand acquires or succeeds to all or substantially all of the assets of the other person a/a/p clause in the Banks S.A. with the Scotts is effective to create a SI in the property acquired by KC 2. if there is a new debtor 9-203(e) says that you dont have to have a revised security agreement 3. KC of Camden probably a new debtor 4. 9-102(a)(56) new debtor, 9-102(a)(60) original debtor iii. So if there is a security interest, is it perfected? 1. 9-508(a) Perfection: says perfection continues; however

2. 9-508(b): says that if the difference in names causes the FS to become seriously misleading, perfection will only apply to collateral acquired by the new debtor before, and within four months a. Therefore, the Bank wouldnt have a perfected interest in Group C stuff because it was over 4 months 9508(b)(2) Bank would have filed within the 4 month period Bank is perfected in Group B and unperfected in Group C c. So the Bank and BW both have a perfected interest in Group B stuff; who has priority? i. 9-322(a)(1) Priority: would suggest the Bank would have priority because filed first ii. 9-322(f)(1) states that there is an exception for other provisions of this part which means that if you can find another priority rule in the 300 section then that priority rule preempts the residual rule of 9-322. It means that only if there is not a special rule that applies then you go to the residual rule of 9-322. iii. 9-326(a) subordinates the interest of a new debtor who has a FS effective solely under 9-508 to any perfected interest that is perfected other than by a filed FS effective solely under 9-508. iv. This view is slightly different than under prerevision Article 9 because it still allows the Bank to defeat lien creditors (namely the Bankruptcy trustee) even though it is subordinate to BW. d. Group C Resolution: i. If the Bank does nothing, its security interest will be unperfected ii. So the Bank should be monitoring the Debtor iii. Assume that on 10/1/2004 the Bank gets things together and files a FS with the new name: 1. A reasonable question is to ask whether the Bank is authorized to file against KC? Only have relationship with the Scotts. a. 509(b) gives them sweet authorization 2. So what happens now? a. Obviously, the Bank will have a perfected interest but will it change things under 9-326(a) priority rule?

i. Comment 2 says this section wont apply when a new initial financing statement is filed. Comment 1 in updated UCC. ii. So the Bank has priority b. If there is no subordination under 9326 then there is no special priority rule under 9-322(f) and therefore it goes back into 9-322(a)(1). Change from prior law. 3. Pre-Revision Authorities a. Under old Article 9, courts would say the Bank never entered into an agreement with the corporation and therefore does not have an enforceable security interest 4. New Debtor Under Article 9 a. Look under 9-203(d) to determine if there is a new debtor i. The person becomes generally obligated for the obligations of the other person including the obligation secured under the SA, and acquires or succeeds to all or substantially all of the assets of the other person. b. 9-203(e) if a new debtor becomes a debtor in a SA entered into by another person, the SofF is satisfied w/ respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement m. The Filing System i. Central Filing ii. Kinds of Records Filed 1. 9-515(a): a financing statement remains effective for 5 years and lapses at the end of this term 2. What are the consequences of lapse? a. upon lapse, a financing statement ceases to be effective and any security interest that was perfected becomes unperfected 3. What can the secured party do to avoid lapse? a. file a continuation statement; see 9-515(e) b. see the UCC-3 form (the Swiss Army Knife of forms) i. easy to do, and the only trick is as to when it can be done ii. 9-515(d): can only be filed during the final 6 months of the prior financing statement iii. If an untimely continuation statement is accepted, 9510 says it will still be ineffective n. Choice of Law

i. Location of Debtor Governs Tangible and Intangible Collateral ii. Location of the Debtor 1. Example: on 3/1 Bank and Debtor (NC) enter into a SA for equipment; where does the Bank file to perfect? a. 9-307(b)(1): individual is located in the state in which they reside b. Bank should file in NC c. Assume that on 7/1 the Debtor relocates to SC i. See 9-316 (deals with a change in governing law) ii. Assuming debtor files bankruptcy on 12/1, will the banks security interest be perfected? 1. 9-316 indicates that the filing will be effective for four months after relocation; however, this is after 4 months so it will become unperfected iii. This sucks hard for the bank b/c they now have to monitor the debtor to determine if theyve established a sweet, new residence o. Goods Covered by Certificate of Title i. The Basic Rules of Perfection 1. Security interests are noted on certificates of title; big issue deals with motor vehicles 2. 9-311(a)(2) & (b): a security interest in a motor vehicle covered by a certificate of title statute must be perfected under that statute and the filing of a FS is ineffective a. Two exceptions to 311(b): i. 9-311(d): applies to inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind 1. If they arent in the business of selling goods of that kind, you need to perfect on the certificate of title ii. Collateral pursuit provisions when multiple authorities have a issued a certificate of title for the same car 9-313(b) & 9-316(d) & (e) b. There is a box for lien holders on the certificate of title c. If you want to register a car you have to have a certificate of title in your name d. There is an exception for inventory: i. If you sell new or used cars and grant an interest in inventory, that interest must be perfected by filing: 9-311(d) ii. Also, during the time the dealer holds the vehicles for sale or lease, no certificate of title has yet been

issued, and 9-311(d) states that during this time 9311 does not apply e. Normally, when you buy a car, the dealer retains a security interest by applying, on your behalf, for a certificate of title (the title lists you as the debtor, etc.) f. The normal problems involve some sweet fraud g. Example: i. On 1/10/09 SP-1 has a SA in a motor vehicle; the debtor lives in NC so the SP sends it all there ii. 9-309(1) SI perfects when it attaches iii. NC issues a COT listing the debtor as the owner and listing the SP-1 as the lien holder iv. What messes everything up is when the debtor gets a COT from another jurisdiction that doesnt disclose the interest of SP-1 v. 2/1/09 - SC issues a COT no liens - If D got SC to issue a COT, it wont show the lien of SP-1 vi. Four subsequent events: 1. Debtor files bankruptcy a. Either 4/1/09 or 9/1/09 b. 9-316(e) is N/A 2. Debtor sells to used-car dealer a. 9-315(a)(1) b. 9-320 if BOC takes free but no good bc not a BOC 1-201(b)(9) debtor not a car dealer c. Have to look at 9-316(d) perfection by possession w/n the 4 months d. Can beat the car dealer if you come in and perfect within the 4 months can take the car to perfect- dealer is at risk for the first 4 months after SC issues the COT e. Dealer should just trace the VIN# 3. Debtor sells car to a consumer a. Consumer buys on 3/1/09 b. SP 4/1 repossess c. What if the car is just sold to some random dude? i. 9-337(1): will probably help out the consumer buying the car (lots of requirements though; clean COT is the most difficult) d. If this is just a case of a used car dealer, SP 1 will win because 337

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xii.

says other than a person in the business of selling goods of that kind 4. Debtor uses the car for collateral for a loan (SP-2) cash for title type of business a. 3/1/09 SP-2 - SI - SC COT b. 9-337(2) First look at 9-316(e) a security interest described in (d) becomes unperfected as against a purchaser of goods for value and is deemed never to have been perfected as against a purchases of the goods for value if the applicable requirements for perfection under 9-311(b) or 9-313 are not satisfied before the earlier of: 1. The time the SI would have become unperfected under the law of the other jurisdiction 2. The expiration of 4 months. 9-303(b) and (c) envision a situation like this: 1. (b) Tells us goods cease to be covered at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time the goods become covered subsequently by a certificate of title issued by another jurisdiction. a. Goods were covered on 4/1 but ceased to become covered by NC certificate of title on 7/1 when SC issued a certificate of title. 2. (c) Tells us the applicable law. Things dont look good for SP1 b/c on 7/1 this car ceased to be covered by NC certificate of title. Is SP-1 unperfected now? Remember 9-316 and the four-month rule. 9-316(d) and (e) have similar rules that affect certificate of title. 9-316(d) tells us the NC perfected SI remains perfected as long as it would have remained perfected in NC had SC not issued a certificate of title. This relates back to 9-303. 9-316(e)(2) is similar to the four-month rule under (b), but its still different. 1. 9-316(b) does not equal 9-316(e) 2. Its as if, to the trustee, that the SC title had never been issued.

ii. What Law Governs Perfection? 1. 9-303(c) states: The local law of the jurisdiction under whose certificate of title the goods are covered govern perfection, the effect of perfection or nonperfection, and the priority of a security interest in the goods covered by a certificate of title from the time the goods became covered by the certificate of title until the goods cease to be covered by the certificate of title. p. Perfection by Possession i. Possession by Agent 1. The transaction in which perfection occurs by the secured partys possession is often called a pledge a. See UCC 9-310(b)(6) 2. An oral agreement is ok as long as the secured party has possession of the collateral a. both attachment (9-203) and perfection (9-313(a)) occur when a secured party takes possession of collateral b. no authenticated security agreement is required 3. Additional issues; a. Why does a secured party have a perfected interest if it has possession? i. The notion is that the debtors lack of possession puts third parties on notice that the debtor does not have unencumbered possession of the collateral supposed to give notice to third parties ii. Ct. in Rolain never really follows through on this idea iii. See comment 3, 9-313 1. a court may sometimes determine that a person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party q. Possession by Bailee i. What does the secured party have to do to establish a perfected interest when the collateral is in the actual possession of a third party? 1. Collateral not covered under a document of title a. 9-313(c) 2. Goods are in the possession of a bailee that has issued a negotiable document of title a. Documents of title are viewed as locking up all the property interests in goods into a piece of paper b. Example: farmer gets his cotton ginned and bailed and transfers possession to a state warehouse in exchange for a negotiable warehouse receipt (evidences that the possessor

has rights to the cotton and shows that the warehouse has taken possession) i. You deal with the goods through the receipts c. Whats the magic and significance of negotiability? i. See 9-312(c) ii. Significance is that the only way to get possession of whatever is in the receipt is to give them the document 3. goods covered by a non-negotiable document of title a. Example: 4/15 debtor enters into a security agreement with a bank i. Agreement: 1. Debtor makes bats, sends them to a field warehouse; warehouse gives a nonnegotiable instrument in the name of the bank, who then makes a loan to the debtor b. 9-312 tells us how to perfect a non-negotiable receipt i. One way is to have the thing issued in the name of the secured party ii. What do we do when the debtor wants to sell the bats? 1. he makes a payment on the loan; bank issues a release order to the warehouse when then delivers the bats back to the debtor On 5/1 assume that debtor sends the month of April production to the r. Perfection by Control i. Control is alternative way to perfect in: (see 9-314(a)) 1. Deposit accounts (9-104) 2. Electronic chattel paper (9-105) 3. Investment property (9-106) 4. Letter-of-credit rights (9-107) ii. Control is only way to perfect in: 1. Deposit accounts as original collateral (9-312(b)) 2. Letter-of-credit rights other than as supporting obligations (9313(b)) iii. Requirements for control: 1. Requirements differ for each different type of collateral s. Security Interests in Consumer Goods (PMSI/purchase money obligation Matthews case) i. Consumer Transactions Under Article 9 1. 9-204(b) severely limits the use of a/a/p clauses to prevent people from mortgaging their future 2. Article 9 isnt really drafted to prevent abuse of consumers a. there are, however, some protections

b. 9-201(b): the Code falls back to be subordinate to consumer protection laws c. 9-103: cross collateralization i. However, this rule wont apply to consumer transactions ii. Courts have to fashion their own rules 3. 9-309(1): lists a set of transaction in which a secured partys interest is perfected on attachment a. One of which is purchase money security interests 4. 9-312 and 313 a. Instruments b. Goods ii. Perfection of Security Interests in Consumer Goods 1. One of the traditional themes in Article 9 is that to perfect a security interest, one must provide notice to the outside world (filing, possession, etc.) 2. However, 9-309(1) presents situations when Automatic Perfection occurs a. Seems fundamentally against the policies of Article 9 no notice 3. 9-301(1) does not apply to goods described in 9-311(a) motor vehicles need to be under certificate of title statute a. Limited to purchase-money security interests (PMSI) (defined in 9-103); must also be limited to consumer goods (defined in 9-102(a)(23)) i. Cant look at a lawn tractor and say that it is a consumer good 1. If held by a dealer then it is inventory 2. If held by a landscape person then it is equipment 3. Only consumer good if held by the debtor and held for usual family purposes ii. Have to look at the purpose for why debtor holds the good b. Purchase-money obligation 9-103(a)(2) i. Seller sells good to buyer and retains an interest in the good for buyer to pay the seller ii. Third party obligation buyer gets loan from the bank to buy a good from the seller. When buyer got the loan it granted a SI in the good to the bank. The loan must be made for the buyer to purchase the good or be what is AKA an enabling loan. Loan will typically be a check made payable to the buyer and the seller so in theory the buyer cant use the loan for anything else than buying the good from the seller.

iii. The goods would be a consumer good, the lender is a purchase-money obliger and the elements of 9103 are met and it is automatically perfected. iii. Example time: 1. Case #1: somebody wants to buy an awesome green tractor to mow the lawn; debtor goes to the seller and needs financing to get the tractor; seller gives the mower on credit with the agreement that he has an SI in the tractor 2. Case #2: debtor still wants the awesome green tractor; seller says tough, we dont do credit; debtor rolls to a finance company and explains the situation; finance company gives the debtor a loan/check to acquire the tractor if they grant them a SI in the tractor; debtor just endorses the check to the seller and the debtor gets the sweet tractor, which they then paint red because is gay iv. Lets look at some definitions: 1. 9-103(b)(1): purchase money security interest a. To the extent that the goods are purchase money collateral with respect to that security interest b. What the deuce is purchase money collateral? i. 9-103(a)(1) 1. Means goods that secure a purchase money obligation c. So do the goods secure a purchase money obligation? i. 9-103(a)(2) 1. Obligation incurred as all or part of the price of the collateral (Case 1) or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so use (Case 2) 2. Case 2 is really called an enabling loan d. The goal is to fit everything into the definitions v. Super Example: 1. 7/1 debtor purchases Item #1 from the seller and grants a security interest in Item #1 to secure the purchase price which is debt #1. a. Purchase money SI. 2. 9/1 debtor wants some more stuff and this will be a secured arrangement giving the seller an SI in Item #2; supposedly this covers debt #2 as well as the remainder of debt #1; in addition the collateral is Items 1 & 2. It will invariably have this crosscollateralization clause in the agreement which says that Item #2 covers debt #1 and that debt #2 is also covered by item #1. 3. What is the effect of the cross-collateralization? a. Many times it destroys purchase money status b. 9-103(h) seems to say keep applying the transfer rule 4. One final thing with PMSI in consumer goods

a. Debtor gets loan from Sears and gives Sears a PMSI. Say Sears says that Debtor cant sell tractor without prior written consent. Debtor sells anyway. Has a garage sell to do this and Buyer buys. Debtor probably defaults on payments. Sears decides to go after the Buyer. Does Sears have priority as SP over the Buyer of the collateral? i. Sears SI in tractor will continue despite sale 9315(a)(1) ii. 9-320(a) buyer in ordinary course and takes free 1. But to be buyer in ordinary course 1201(b)(9) needs to be a seller in the ordinary business of selling tractors so 9-320(a) is N/A iii. 9-320(b) possibly protect the buyer buyer can take free of Sears SI if five conditions are met iv. 9-309(1) is Sears going to rely on automatic perfection? If so then it will lose to Buyer at the yard sale. v. 9-320(b)(4) if Sears perfected by filing a F.S. then it will prevail over the Buyer. 1. Probably not feasible for Sears to file a F.S. on small items. Chapter 3: Priority t. Conflicting Security Interests i. Problem 1 p.119 1. 2/2 Bank files a FS covering Debtors equipment and submits a request for more information; after this, Debtor applies to Lender for a loan and signs a SA on 2/5 granting the Lender an SI covering all of its equipment (also files a FS on this date); 2/9 the filing office tells the Bank no other weird things were on file as of 2/2; Bank advances loan proceeds on 2/9 a. There are two protected SIs b. Who has priority? i. 9-322(a)(1) says that conflicting SIs rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the SI is first perfected. c. In this case, the Bank doesnt perfect until 2/9, but it files on 2/2 and can rely on this date ii. Problem 2 p.119 1. Debtor applies to Bank for a loan; Debtor gives a valuable jewel for collateral on 2/2 and bank advances the funds; Debtor, on 2/5, wants money from the Lender and grants Lender an SA in various items including the jewel; this is perfected by filing a FS a. Who wins?

i. The bank again because they perfect by possession this time ii. Of course the Lender will never find this but they shouldve asked to see the collateral first u. Future Advances i. 9-204: things can cover any other debt that the debtor owes to the secured party ii. 9-204(c): says if the parties so provide, any future advances will be covered by the original agreement iii. Problem 1 1. Bank makes a loan of $100k for an SA in equipment with the provision that any additional loan will also be secured by the equipment; a FS is filed on 10/1 2. on 11/1, Lender shows up and determines the collateral is worth more than the amount of the Banks loan and makes a loan of $75,000; also, they file a FS 3. on 12/1 makes a future advance of $100k 4. Debtor defaults and the collateral is only worth $150k 5. Who wins? a. Bank clearly gets the initial $100k; what about the additional amount? v. Operating Under the First to File Rule i. Problem 1 (mid p.128) 1. Bank one and Lender has SIs perfected in debtors collateral (assume that on 7/1/05 Bank one enters into a SA for equipment with an a/a/p and f.a. clause and files a FS; on 7/1/06 lender does the same thing) 2. Bank Two comes b/c Bank One is tired of the debtors nonsense; two ways to do it a. Bank Two makes a loan to debtor to pay off Bank One that erases all of Bank Ones SI and stuff; Bank Two claims a SI in the equipment; in this case, the debtor is entitled to receive a termination letter and eliminate the effect of Bank Ones nonsense b. Another way is for Bank Two to pay off Bank Ones stuff and take an assignment of all Bank Ones rights c. An assignment is obviously better b/c that way Bank Two gains priority over the stupid lender d. See discussion after Bollinger, supra ii. Problem 2 (bottom p.128) 1. on 2/1 bank advances a loan of $50k with an SA for the equipment and files a FS; on 6/15 debtor wants some more money from another lender, who wants some more info

2. debtor files a 9-210 request for information and the Bank says on $50k is owed 3. Lender concludes the equipment is worth a lot more and advances another $40k and files a FS 4. on 7/1 Bank enters into SA #2 with the equipment and $60k 5. Who has what kind of priority? a. Bank obviously wins with the first $50k b. Lender was pretty stupid b/c the bank will always win 6. There is no liability to anyone according to 9-210 because the inquiry says nothing about the Bank not lending anymore w. Collateral Other Than Inventory (Brodie Hotel Supply) i. Purchase Money Security Interests 1. Example: a. On 7/1/05 Bank gets an SA with an a/a/p in equipment for a loan and files a FS b. On 7/1/07 debtor wants some sweet new equipment but Bank refuses; the dealer of the equipment wants to sell it but wants priority in the equipment i. This is a problem b/c the Bank has already filed ii. Super gay b/c it gives the Bank an unjustified ability to control the debtors credit iii. So the Code creates purchase money priority; see 9103 and 9-324 c. If the seller perfects within 20 days of the debtor getting the equipment, the seller will get priority over the Bank i. So we need to establish a PMSI and perfect within 20 days x. Inventory (Southtrust v. Borg-Warner) i. Requirements for PMSI in Inventory 1. Section 9-324(b) a. Harder to do than section (a) i. You have to perfect before the person receives possession ii. You must send authenticated notice to any other secured creditor holding an interest in the inventory (must tell the party that PM financer expects to acquire PMSI in the debtors inventory, and must describe the inventory). 1. This notice must be received before the debtor gets possession of the inventory 2. Have all these hoops bc the first filer is going to rely on the inventory in making f.a.s on the loan agreement b. 9-103(h) equipment cross collateralization c. 9-103(f) equipment courts read too much into this section according to Lacy

d. 9-103(b)(2) real protection for purchase money seller i. Is the SI in item one a PMSI in a cross collateralization situation? 1. (b)(2) tells us it is a. Item 1 is inventory b. Item 2 was PM collateral at some time c. Security obligation that was PM obligation i. Item 1 now secures Debt 2, bc Item 2 is going 2. (b)(2) was to overturn Borg-Warner y. Lien Creditors i. Conflict with an Unperfected Security Interest 1. p.146 Problem 1 a. 2/1 SP entered SA w/collateral equipment and provided a loan b. 2/5 creditor levied execution c. 2/9 SP filed FS d. 9-317(a)(2)(A) security interest is subordinate to rights of creditor who becomes lien creditor before security interest was perfected e. Assume SP took pmsi in equipment and delivered it to debtor on 2/1. 9-317(e) if SP has pmsi in new equipment, if SP files w/in 20 days after debtor gets possession, SP wins. 9-317(e) protects SP from losing to intervening lien creditor. ii. Conflict with a Future Advance 1. in a conflict btw advance made pursuant to A9 SI and subsequent lien creditors rights, 9-323(b) recognizes priority of the future advance a. if the advance is made or committed w/in 45 days after the lien arises even with knowledge of the lien; and b. if the advance is made or committed after the 45-day period so long as the secured party is without knowledge of the lien at the time of the advance or commitment. z. Buyers and Lessees i. Basics: 1. When a debtor sells an item of collateral to a Buyer, were worried about whether a secured partys SI still is attached to the item 2. How do you determine if the SI continues in the collateral? a. Two issues: i. Does the SI continue notwithstanding the sale? 1. 9-315(a)(1): the SI will continue in the collateral notwithstanding the sale unless the

SP has authorized the debtor to sell free of the SI a. the debtors authority to sell is almost always addressed in the SA and these agreements will almost always require permission; this will always be so in consumer goods b. inventory will be different; the debtor cant generate cash unless it sells the inventory; so in an inventory financing arrangement the debtor will likely be authorized to sell the collateral (however, the SA sometimes requires the financers approval before the sale can occur) 2. for instance, if a buyer bought a mobile home (down payment and installment payments); the inventory financer will require the mobile home dealer to assign or transfer the chattel paper to it 3. waiver: if the inventory financer knows the debtor has historically sold inventory without permission, such behavior constitutes waiver of the SA and consent wont be required ii. If the SI continues notwithstanding the sale, does the buyer still take free of the SI? 1. 9-317(b) a. the buyer takes free only of unperfected SIs; there are some other requirements as well b. if this is no help, then you roll on to 9-320(a) 2. 9-320(a) 3. 1-201(b)(9) aa. Buyers and Lessees of Non-Inventory Goods i. Case #1 1. Lender has a SI in debtors equipment to secure a loan of $100k on 2/1; the SA says unauthorized sales constitute default; on 3/1 debtor contracts to sell 2 pieces of equipment to Buyer (in violation of the SA); Buyer pays $10k down and agrees to pay the remaining $15k at delivery; Lender realizes they are dumb and files a FS on 3/15; Buyer pays the $15k on 4/1 and gets the equipment

a. Buyer probably does a UCC search because the debtor doesnt really do this in the ordinary course and wont find anything on 3/1 b. Does the Buyer take free of the SI? i. Under 9-317(b) buyer gives value and doesnt know of the security interest but doesnt receive delivery before Lender perfects ii. Case #2 1. What happens if on 3/10 the Buyer pays the rest and takes possession? a. The buyer would win against the unperfected SI 2. What if the Lender had lent money to the Debtor that enabled Debtor to buy the equipment that it later sold to Buyer? a. 9-317(e) tells the Lender that if they have a PMSI and they perfect within 20 days of when the Debtor gets possession of the collateral they will prevail over intervening lien creditors and buyers b. However, we would need to know when the debtor took possession of the collateral (because the Lender would have to file within 20 days of this) 3. Does the PM priority create a problem for the Buyer? a. Yes, he could still be junior to the priority of the Lender bb. Buyers and Lessees of Inventory Goods i. Buyer in the Ordinary Course of Business 1. buyers and lessees of inventory collateral take free of inventory security interests; see 9-320(a) (ordinary course of business) 2. Problem 1: a. Lender takes a SI in Debtors equipment (business machines) by filing; again, sale without consent constitutes default; Debtor, in violation, sells some of the machines to Dealer; Dealer buys and sells used business machines and sells the machines in question to Buyer for cash (Buyer purchases to use in his business); neither Dealer or Buyer knows of Lenders SI i. 9-317(b) is of no help b/c Lenders SI was perfected before Dealer got his stuff 1. everyone will win if they are a buyer in the ordinary course b/c no one knew of Lenders SI ii. Is Dealer a buyer in the ordinary course of business? 1. 1-201(b)(9) a. Must be in good faith b. In the ordinary course (selling stuff is the ordinary course)

c. Take possession or have a right to possession d. Must give new value e. No knowledge of a SI violation f. You have to purchase from someone whos in the business of doing this (in the business of selling goods of that kind) 2. this is all weird b/c under the definition you cant know the sale violates someone elses rights but you can know of the existence of the security interest 3. dealer will lose b/c he didnt purchase from someone in the business of selling goods of that kind and thus, hes not a buyer in the ordinary course of business iii. Is Buyer a buyer in the ordinary course of business? 1. presumably acted in good faith, gave value, and took possession; never heard of Lender and seems to purchase from a used equipment dealer (a person in the business of selling goods of that kind) 2. however, the Buyer only takes free of SI created by the buyers seller a. the SI were talking about is Lenders and was created in a K between Lender and the initial debtor; the buyers seller was not a party to this transaction b. therefore buyer would only take free of some SI that dealer himself created; still subject to Lenders SI iv. What are the Lenders rights with respect to the machines now in Buyers possession? 1. Comment 3 to 9-320 cc. Goods Subject to Certificate of Title Acts a. were going to generally be worried about whether or not the buyer is in the ordinary course b. 260 S.E.2d 712 i. A Dodge dealership had all of its stuff financed by Chrysler credit and had a little truck they leased from another dude; a guy needs a truck and purchases the leased truck; he never gets the COT ii. Court held that even though the guy was familiar with car transactions he was still a buyer in the ordinary course iii. If the owner of goods puts them in possession of someone who deals in goods of that kind, then the merchant can still transfer good title

c. 690 F.2d 422 i. Guy (Irvin) that drove to VA to get used cars brought them down and sold them to a guy that auctioned them off ii. Irvin entered into agreements with the dealer in VA, who would transfer possession to him but retained the COT; Irvin then sold the cars to Rawls who paid Irvin with a check; theoretically Irvin was supposed to pay the dealers who then released the COT; Irvin of course didnt pay and blew the money on coke and whores iii. Rawls argues that he can prove he owns the cars without having COT and establish his status as a buyer in the ordinary course (saying the dealer entrusted the cars to Irvin) iv. So the issue was whether Rawls was buyer in the ordinary course ( 1201(b)(9)) 1. Ct. said he wasnt acting in the ordinary course of business and the VA dealer won dd. Double Debtors i. Seebrite v. Transouth Financial Corp. 1. Partnership enters into a SA with Transouth under which Transouth takes a SI in inventory and a/a/p; debtor cant sell without prior written consent; perfected by filing a financing statement 2. Partnership enters into a transaction where it sells a bulldozer (an item of inventory) to one of the 3 partners; partner finances the acquisition of the new bulldozer by going to a retail lender (Seebrite); Seebrite makes a loan that enables the partner to acquire the bulldozer; Seebrite has an SA and perfects five days after the guy gets the bulldozer 3. Partnership conceals this transaction from Transouth and didnt use the proceeds to pay them; partner defaults to Seebrite and partnership defaults to Transouth; both think they have a perfected SI in the bulldozer 4. What do we do here? a. BOW applied 9-312 (old one, now its 9-322) b. First of all, Seebrite has a PMSI i. Under 9-324, a PMSI would have priority if this isnt inventory c. You must purchase with good faith and without notice that the sale violates another SI i. Partner is not a BOC bc obviously knows with only 3 of them and is subject to Transouth SI. d. How does SC Sup. Ct. resolve this dispute? i. Court reverses the lower court that found for Transouth. ii. Court concludes like 9th Cir. That priority rules of Art. 9 dont apply so they look to first principles.

1. Bc the court gave Seebrite priority it appears that the Court does not apply the Doctrine of Derivative Title as the first principle which is the 9th Circuits first principle. 2. Says that Seebrite is in the same situation as a good faith purchaser for value. 3. SC Sup. Ct. appears to be saying that the partner who is a bad guy has the right the power to convey title better than Transouths to Seebrite bc of good transfer negotiation. 4. Seebrite would need to show that Transouth authorized the sale but cant do this and argues that this would put a burden on commerce 5. SC Courts good faith purchaser for value is first principle not the derivative title as 9th Cir. 6. And that if they did apply Art. 9 then Seebrite should win under 9-324(a). e. What rule is right? i. Created by the buyer/seller limitation 1. Protection does not extend to buyer/seller f. What does revised Art. 9 do? i. 9-325 - Special Priority Rule - addresses the Double Debtor problem 1. See the Bar outline p. 50 ii. Bank of the West v. Commercial Credit Financial Services, Inc. 1. on similar facts they applied 9-312 2. 9-315(a)(1) sale from BCI to Allied was not authorized by CCFS. Allied not a BOC under 1-201(b)(9) bc not making a bulk sale. SA would remain effective under 9-507(a). CCFS retains a SI in the inventory. 3. Bank also has SI in the inventory under a/a/p and it is perfected bc they filed a FS covering the inventory. Court is presented with two perfected SI in the inventory and has the resolve the priority. a. D.Ct. looked to 9-312(5)(a) of 1972 code which is the same as 9-322(a)(1) first to file or perfect generally prevails D.Ct. concludes that since Bank filed in 1982 before CCFS then it prevails. b. Say that SA filed by Bank did not provide any notice to CCFS. 4. Doctrine of Derivative Title Court thinks that the correct result is reached in this case by applying the common sense notion that a creditor cannot convey to another more than it owns.

5. 9th Cir. Awards priority to CCFS based on the Doctrine of Derivative Title based on the fact that Article 9 does not cover the issue with the first to file rule ee. Rights to Payment i. Scope of Article 9 1. 9-109(a) a. Article 9 applies to a transaction that creates a security interest in personal property or fixtures by contract; and b. a sale of accounts, chattel paper, payment intangibles, or promissory notes ff. Reordering of Rights to Payment in Article 9 i. The New Definitions ii. Sale of Rights to Payment 1. In re Commercial Money Center, Inc. a. Debtor owns a piece of property and leases it to a 3rd party; lessee is obligated to pay rent for however long the lease is for; obviously the lessor has the right to take possession if there is default b. If the owner of the equipment leases things and assigns the lease to a secured party; the lease is still chattel paper of course, but the buyer gets a fairly limited interest (title remains in the owner); the buyer gets the right to lease the goods to someone else for the remainder of the lease term (no right to liquidate and take proceeds from the sale) c. If youre taking this assignment you really want the right to receive rent; you dont really care so much about the ability to lease to someone else d. This is posed as question of perfection: i. The lessor was supposed to go about making sure the SIs were perfected; the lessor sold the monetary obligation to a 3rd party in one transaction; this monetary obligation will be used to back things in the commercial market ii. Would have made sense for the equipment leases to go into possession of a bailee and for FSs to be filed e. NetBank is arguing that theyve stripped out just the payment stream from the chattel paper and under 9-309(3) they will be automatically perfected b/c its a sale of a payment intangible f. The court eventually held that the payment stream was way different than chattel paper i. This didnt evidence a monetary obligation, but was a monetary obligation g. However, the court later held that even though this involved a payment intangible, the case involved a lease, not a sale, and automatic perfection did not occur

h. This thing creates at least two problems: i. Assume on 3/1 Debtor sell a payment intangible to SP1 (automatically perfected); on 5/1, Debtor sells chattel paper from which the payment intangible has been stripped to SP2 ii. So theres a dispute over who is entitled to the monetary obligation iii. SP1 will say they perfected first under 9-322(a) by automatic perfection; SP2 will claim perfection by possession of the chattel paper but wont take effect until 5/1 iv. SP2 will bring up 9-330(b): they are a purchaser giving new value in the ordinary course; theres a problem with this argument though 1. 9-318(a): if a debtor sells accounts, chattel paper, etc., and the buyers SI is perfected then the debtor retains no legal or equitable interest in the property 2. Once the debtor sold the payment intangible, SP1 will argue that the debtor had no interest left to assign to SP2 gg. Effect of Sales of Receivables: The Octagon Heresy i. The court said that even if you have a true sale, the interest of the buyer is a SI (seller is a debtor; buyer is a SP; receivables although sold are collateral); there is a residual interest sufficient to draw assets back into reorganization stuff ii. What does Article 9 say about things? 1. If you have a sale of notes or chattel paper and the buyer perfects, 9-318(a) says the debtor sold the chattel paper retains no legal or equitable interest and the receivables are outside the reach of the bankruptcy trustee. a. The language comes from the definition of property of the estate in BC 541(a); basically to overrule the Octagon case ii. Accounts and General Intangibles hh. Basics: i. Retailer sells good to Buyers on unsecured credit accounts; these accounts are valuable collateral and the Retailer can enter into relations with a Finance Company (Finco); Finco gives the Retailer a loan in exchange for a SI in the accounts ii. Additionally, Finco might just buy the accounts (paying the Retailer cash); Finco has acquired all of the debtors rights in the accounts 1. this stuff is still in the scope of Article 9 (despite the fact that the Retailer has no interest left); see 9-109(a)(3) 2. Why? a. b/c sometimes its hard to tell what happened

iii. So Finco must perfect so good ii. Priority In Proceeds i. Problem 1, Part A: 1. assume that on 3/1 Bank enters into a SA for inventory and a/a/p for a loan with a FA clause; filed a FS the same day 2. Lender rolls up on the scene on 7/1, does a UCC search and finds that no one has filed against the debtors accounts a. So lender enters into a SA with the debtor and takes an SI in the accounts (with a/a/p) and files a FS in the accounts 3. debtor defaults of course 4. under 9-102(a)(64)(A & B) declares that all of these accounts are proceeds, which means that the bank has an SI in all the stuff (automatically protected for 20 days and they filed in the local SofSs office to extend their perfected) 5. So who has priority? a. 9-322(b)(1) says the date for filing for the collateral is the same for the date of filing for proceeds b. So their interest in the accounts as proceeds perfected on 3/1 ii. Section 9-309(2) Exception 1. In re Tri-County Materials, Inc. a. KMB and Tri-county enter into an assignment where Tricounty assigns its right to receive payment from Ladd Construction Company b. the assignment is in writing but KMB doesnt file a FS c. before things are paid off, Tri-County files bankruptcy and the trustee argues that the remaining amount is an unperfected security interest d. What arguments could KMB make? i. Argue the thing wasnt under Article 9 1. This would be true under 9-109(d)(7) if there was the assignment of only one account to KMB 2. Therefore Common Law would apply ii. 9-309(2) 1. An assignment of accounts that doesnt by itself or in conjunction with other assignments transfer a significant part of the assignors outstanding accounts or payment intangibles e. So the court looks at how much is transferred: i. The amount transferred was only 12% of outstanding debts to Tri-County and thus, it wasnt a significant part f. Things dont here though i. Check out comment 4 to 9-309

ii. Theres a second part to the analysis fun; it looks like an isolated incident but notes that this is a classic secured transaction and they wont allow such a creditor to get priority without filing iii. Nothing in the code really justifies the casual and isolated test or that a classic secured transaction is immune to perfection jj. Chattel Paper and Instruments (Rex Financial v. Great Western/Financial America v. Galaxy) 1. Introduction a. 9-102(a)(11), 9-102(a)(31), 9-102(a)(78) b. Security interests i. Assignee of Dealers PMSI 9-310(c) ii. Chattel paper 9-109(a)(3), 9-313(a) c. 9-315(c) SI in chattel paper as proceeds will be automatically perfected for 20 days d. 9-315(d) if you filed FS to perfect SI and would have filed in same office to perfect in proceeds, SI continues beyond 20 days e. Is there a special priority rule that will preempt the residual rule? 9-330(a) and (b) special priority rules that protect certain purchasers of CP. Did Rex obtain SI in CP merely as proceeds or other than merely as proceeds? i. (a) merely as proceeds ii. (b) other than merely as proceeds iii. Commentary No. 8 concluded that if the SI in CP is claimed by a floor-planner, it is merely as proceeds. Availability lenders are other than merely as proceeds. Only difference btw a and b is fatal knowledge. iv. Under revised A9, more protection to inventory financer 9-330(a)(2) knowledge requirement. If conditional sales contract indicated that it had been assigned to someone other than GW, even though GW met the conditions, they would not have priority over the inventory financer. v. 9-330(a) is the applicable provision 1. this is the basic idea of inventory floor planning vi. anyways, were in this section b/c inventory floor planners 9-315(c) & (d)(1) take SI in chattel paper merely as proceeds 9-315(a)(2) vii. So for the finance company to establish priority for merely as proceeds need to prove: 1. 9-330(a)(1):

a. Act in good faith b. In the ordinary course of his business c. Give new value d. Take possession of the chattel paper e. *Fatal knowledge 2. as long as the contract didnt include language that indicated it had been assigned to someone, finance company will be super fine kk. Deposit Accounts i. Security Interests in Deposit Accounts as Proceeds of Other Collateral What right does a bank have to set off against a deposit account that contains identifiable cash proceeds to pay back loans bank made to debtor? (p.200-201) 1. Relationship btw bank and customer of the bank; customer deposits funds into checking account at the bank, giving rise to a debt that bank is obligated to repay 2. Customer might borrow money from the bank also and customer owes the bank the loan balance. Suppose deposit account is 3K and bank loaned customer 10K. 3. Bank has a right of setoff, bank will take the balance in deposit account and apply it towards satisfaction of loan obligation if it is in default. This is a bank's right as a matter of law, not contract or A9. customer has to be in default on the loan. 4. What if the customer borrowed the money personally but the customer opened the deposit account as trustee for some beneficiary. In this situation, bank is not entitled to set off. Relationship must be mutual, customer must be creditor of the bank in same status as he is as the debtor of the bank. 5. Suppose the customer is a business and has granted SP a SI in inventory and SP has perfected the SI. The debtor sells inventory for cash and SP has SI in cash proceeds. Debtor then takes cash proceeds and deposits them into his bank account. SP will have to take into account principals of tracing and identification. Assume SP can establish that funds in account are identifiable cash proceeds. Suppose the bank sets off against the money in the account. Who wins the priority conflict? Majority view was that bank is unsecured creditor of the debtor and SP holds a SI in identifiable cash proceeds and is perfected. Most courts would say SP wins. Terms of SA are binding on debtor and on 3d parties and creditors unless code otherwise provides and majority view was that code did not. 6. Under Revised A9, applies to the priority of right of setoff. 9340(a) bank exercising common law right to setoff will in most cases have priority over SP claiming perfected SI in identifiable cash proceeds. Opposite result.

ll. Security Interests in Deposit Accounts as Original Collateral To what extent can a SP, particularly bank at which debtor maintains deposit account, establish an A9 SI in the deposit account? How does it perfect that interest? Is bank's SI in deposit account going to be granted priority over conflicting claims? i. 9-102(a)(29) defines deposit account, any type of savings/checking account that is held at a bank. ii. 9-109(d)(13) A9 does not apply to the creation of a SI in a deposit account created in a consumer transaction. In all transactions other than consumer transactions, debtor can grant A9 SI in a deposit account. iii. 9-203(b)(3)(D) - statute of frauds iv. 9-312(b)(1) and 9-314(a) - perfecting SI in deposit account as original collateral with control what is control of a deposit account? Concept borrowed from Art. 8. See 9-104 below. v. 9-327 - priority rules vi. 9-104 - all three of the above determinations relate to control, if SP has control over deposit account, satisfies statute of frauds; only way you can perfect in deposit account as original collateral is by taking control of the account; SP who perfects by control has priority over SP who has perfected in some other manner. y Most important is 9-104(a)(1) SP has control over deposit account if SP is bank with which deposit account is maintained. y Control satisfies SoF, perfects bank's SI in deposit account, and establishes bank's priority over other secured parties y 9-104(a)(3) if SP becomes customer of the bank then they get control as customer. mm. Fixtures i. 9-604(d) ii. Lamp is pure personal iii. HVAC is a fixture iv. Bricks is on the verge of real property v. Pure real property 9-334(a) vi. Hard to draw the line between fixture and real property vii. Many times need to make a fixture filing 9-102(a)(40) under 9-502(a) & (b) viii. Part (c) 1. 9-334(e)(3) 2. 9-334(d) 3. 9-334(h) since construction mortgage cant assert the PM priority these are the things that are going on 4. 9-334(e)(2) readily removable fixture or machine r/r/f/m a. No 20 day grace period nn. Circular Priority i. Problem page 451 1. Value of real property without sprinkler system was 2 million dollars 2. Assume that the value of sprinkler system alone is 100K

3. 7/1/08 2d Bank SA with debtor covering sprinkler system debt of 80K a. FS in SOS b. Defective fixture filing 4. 9/1/08 3d Bank SA with debtor covering sprinkler system debt of 80K a. FS in SOS b. Effective fixture filing in appropriate ROD office 5. 7/1/09 first bank makes loan to debtor secured under mortgage encumbering this real estate debt of 2,060,000 a. Bank records the mortgage 6. Defaults on all loans a. Two funds here i. 2 million in real property ii. 100K in sprinkler system fund b. Doctrine of marshalling bank must assert its claim on the fund that it has its lien first and then on the other fund to the extent that the first doesnt cover its amount owed 7. What about 2d bank v. 3d bank a. Both banks dont have real property encumbrances but have Art. 9 SIs i. 9-322(a)(1) - 2d bank over 3d bank 8. 1st bank v. 2d bank a. 9-334(c) 9. What about 1st bank v. 3d bank a. 9-334(e)(1) 3d over 1st b. Circular priority ii. 2d Bank $80K if you assume that 2d banks fixture filing was effective iii. 3d Bank $20K iv. 1st Bank 0 v. But if the 2d bank fixture filing is defective then 1st bank steps into 2ds position and gets the $60K owed to it, but 2d bank will get $20K left over. 3d bank still gets the $20K. 3d bank neither benefits nor suffers from 2d banks mess up. Common way that courts resolve circular problems. Casebook doesnt particularly like it though. vi. BRC 551 deals with circular problem as well oo. Cash Proceeds i. Priority 1. Pre-Revision Background a. HCC Credit Corp. v. Springs Valley Bank & Trust 2. Transferees of Funds under Section 9-332 3. Transferees of Instruments under Section 9-330(d) ii. Lowest Intermediate Balance Rule 1. Basics a. Two rules:

i. Rule #1: spend non-proceeds first; if you have a bank account w/proceeds and non-proceeds, assume non-proceeds are used up first to make purchases ii. Rule #2: unless express intent to make restitution made by trustee/debtor, subsequent deposits of nonproceeds do not replenish the invasion, they do not compensate for spent proceeds. b. When could you argue successfully that a deposit was made w/express intent to make restitution? i. When a trustee has knowingly spent beneficiary's money, knows that he shouldn't have done it, and then makes a deposit of his own money back into the account. The deposit will be viewed as having the intent to make restitution. Chapter 4: Default and Enforcement A. Introduction B. Default C. Enforcement a. Cumulative Remedies b. Repossession c. Disposition and Collateral d. Secondary Obligors e. Acceptance of Collateral in Satisfaction of Debt f. Effect of Disposition or Acceptance on Third Parties g. Collection of Rights to Payment i. Majors Furniture Mart, Inc. v. Castle Credit Corp. 1. Majors sold its receivables to Castle Credit; the question was over sale versus loan but the reason it was litigated was b/c of a surplus a. Basically the credit people collected a lot more money than it paid to the furniture mart b. If all they had done was grant an SI in the receivables, the debtor would have been entitled to the surplus c. In contrast, if the transaction was viewed as a sale, the finance company would have been entitled to receive the surplus 2. the court eventually held that the transaction was really a loan 3. What does the court look at in a case like this? a. They focus on the right of recourse i. If the finance company had truly bought all of this stuff, the risk of deficiency would have been transferred to the finance company b. So the court checks out the contract super close and concludes that the finance company has complete recoursethus the thing was a loan 4. method of perfection

a. automatic perfection would apply to sales but not to SIs on loans (generally) ii. Asset Securitization: 1. Dealer sells a lot of junk under conditional sales contract; they want to transfer the chattel paper to a special purpose entity; we want this to be a sale 2. the special purpose entity will issue publicly traded debt securities backed by a pool of this chattel paper to the capital markets in exchange for cash a. the capital market people will want to buy these things at low interest rates if they can be assured that the installment payment will go directly to the indentured trustee who holds the securities for the benefit of the people b. so you want to eliminate credit riskwhich translates into lower interest rates 3. the idea of asset securitization is to take an originator, eliminate their credit risk other than the credit risk of the individual people entering into the conditional sales contracts (they want to only face the credit risk of the account debtors) 4. How do you pull this off? 5. What is the bankruptcy risk? a. Forgetting to perfect your interest and becoming unsecured b. The real problem is the originator filing under Chapter 11 i. People under Chapter 11 really need some sweet cash flow (early in the reorganization process) ii. Courts have held that the originator has legal title to the stuff mentioned above, and its considered to be property of the estate iii. They might have access to the property then c. We really want to avoid having an originators bankruptcy mess things up i. If the transaction really is a sale, then its beyond bankruptcy ii. If the purported sale turns out to be a loan secured by the financial assets, then the accounts and chattel paper will be property of the originators estate and can be sucked into the reorganization Chapter 5: Leases and Consignments (Georgetown Steel) A. Leases B. Consignments a. Common Law Consignments i. Traditionally the dealer had no ownership interest in the goods that could be reached by creditors ii. Known as the true consignment b. Consignments under Article 2 and now Article 9

i. Definition: see 9-102(a)(20) 1. True consignment: a transaction that creates a real article 9 security interest that secures the obligation of a dealer (a sale designed as a consignment); basically the dealer has title 2. security consignment: 1-201(b)(35) 3. Article 2 sale or return; 2-326(1)(b) a. A situation in which goods are sold by the manufacturer to the dealer b. Buyer has the option of paying the purchase price or returning the goods c. How is this different from a true consignment? i. In a sale the dealer has the immediate responsibility for paying the purchase price ii. In a true consignment, the dealer never assumes an obligation to pay the price of the goods (the dealer is just a bailee with certain fiduciary duties) 1. these are real bailments iii. Pretty tough to tell the difference in the real world unless people drafted their documents carefully 4. Article 9 security consignment: a. If you have a consignment as defined under 9-102(a)(20) i. If you have a true consignment that falls under this definition, then under 9-109(a)(4) Article 9 will apply ii. Thus, the manufacturer (consignor) will be viewed as having a security interest in the goods that have been delivered iii. Under 9-103(d) the SI of a consignor is a PMSI in inventory; a purchase money inventory interest iv. De minimis exception v. Not all true consignments are under the statute b. Consumer goods exception: 9-102(a)(20)(C) 1. SC case: 614 SE2d 648 (2005) a. Bentley granted a SI in his current and after acquired inventory of used cars; plaintiff was an owner of a used car and wanted to sell (dealer didnt want to buy; owner parked it on the lot and dealer agreed to show it; if an offer was made, the dealer would communicate with the owner b. Of course the dealer was in financial trouble and defaulted; financer tried to seize everything c. Ct. of appeals said it wasnt a consignment b/c it was consumer

goods held by the owner immediately before the delivery c. Security Consignment Exclusion i. 9-102(a)(20(D) if the interest of the consignor in the inventory in possession of consignee creates an obligation on the consignee then it creates a regular Article 9 security in the inventory but not a consignment security interest.