Secured Transactions

Introduction
- This class covers the use of personal property as collateral security for indebtedness. (Article 9). The Rights of Unsecured Creditors - Encouraging Debtor to Pay Voluntarily: o Dunning Letters: When the claim is small, the creditor may wish to avoid the expense and delay inherent in legal proceedings and it thus may write one or more dunning letters that demand payment and threaten suit if payment is not forthcoming immediately. o Collection Agencies: Rather than collect the claim itself, a creditor may refer the claim to a collection agency which, for a fee, will attempt collection. - Forcing Debtor to Pay Through Judicial Process: o Judgment Debtor: When the Creditor obtains a judgment against the debtor, either by default or trial, the debtor becomes a judgment debtor. A judgment entitles the creditor to dispossess the debtor from property (other than property that is exempt from the reach of creditors) and cause the property to be applied toward the satisfaction of the claim. o To Collect a Judgment: 1. One must obtain a judicial lien on particular property of the judgment debtor. A lien is a property interest, but the lienor may only use the property that is subject to the lien for the purpose of satisfying the debt it secures. A lien may be acquired in one of two ways: o Execution Lien: A creditor may obtain, from the clerk of the court, a writ of execution, instructing the sheriff to levy upon (seize) assets of the judgment debtor located within the sheriffs jurisdiction. (In the majority of states the creditor acquires an execution lien on whatever property the sheriff levies upon before the writ expires, while in the minority of states an inchoate execution lien arises on all property of the judgment debtor within the jurisdiction when the writ is delivered to the sheriff; however, the inchoate lien cannot be enforced against specific property until the sheriff levies upon the property and the lien becomes consummate. If the sheriff fails to levy before the write expires, the inchoate lien is discharged.) Advantages: Extends to personal property. Provides a means for applying the judgment debtors property to satisfaction of the judgment. Enables the creditor not only to apply particular property toward the satisfaction of its claim against the debtor but also to reach the property to the exclusion of other, competing creditors who have not obtained liens. (Note: When more than one execution lien is attached to particular property, liens will generally rank in temporal order; meaning, the holder of the debt secured by the earliest lien is entitled to be paid first from the proceeds of the sale of the property.) o Judgment Lien: A creditor may obtain such a lien by recording a memorandum or abstract of the judgment in the real estate records or

(depending on local law) having the court clerk enter the judgment in the docket book. Upon the recordation or docketing, a judgment lien arises on all of the debtors interests in real property in the county. However, in only a few states does the judgment lien extend to personal property. 2. One must turn the lien into cash: This is usually accomplished by the sheriff selling the judgment debtors property at a sheriffs sale. Forcing Debtor to Pay Based on Agreement o Consensual Lien: When the creditor extends credit, or thereafter the creditor could have attempted an agreement with the debtor that would give the creditor a limited interest in particular property. So that if the debtor failed to pay, the creditor could take the property back (as long as it does not breach the peace) and cause the property to be sold and apply the proceeds to the satisfaction of its claim without the need to incur the costs and delay involved in obtaining a judgment. When the property is personal property, this lien is called a security interest. A secured creditor has won the race of diligence in advance (if a lien creditor gets the sheriff to seize the property, the secured creditor can request the property back from that lien creditor).

Background
Secured Creditors v. Unsecured Creditors: o Rights: A secured partys rights include the right to take possession of the collateral upon the debtors default in payment or performance of the obligation secured. See UCC-9-609. Unsecured creditors, on the other hand, have no property rights in the debtors property until they obtain a judgment against the debtor and a lien through the judicial process. o Priority: Secured creditors are senior to later-in-time secured creditors (including judicial lien creditors). An unsecured creditor is junior to earlier-in-time secured creditors and must obtain a judicial lien in order to take priority over later-in-time secured creditors. Federal Bankruptcy Code (Title 11, U.S. Code) o A bankruptcy case is commenced when a petition is filed by or against a debtor. One important and immediate effect of such a filing is the automatic stay of virtually all activities of creditors that are directed at collection of their debts. o Chapter 7 Filings: Chapter 7 involves liquidating the debtors nonexempt assets and distributing the proceeds to creditors. An interim trustee will be appointed to collect and reduce to money the property of the estate and distribute the money to creditors. o Chapter 11 Filings: Chapter 11 involves a reorganization of the debtors enterprise; meaning that claims against the debtor will be scaled down or extended or both. The debtors management ordinarily stays in control of the enterprise as the debtor in possession. A trustee normally is appointed only when the management has been guilty of fraud, dishonesty, incompetence, or gross mismanagement. o Differences between Secured and Unsecured Creditors in Bankruptcy: Unsecured creditors share pro rata in the debtors assets that remain after secured creditors are paid, while secured creditors are paid the value of their security interest (collateral).

A Roadmap to Secured Transactions under UCC Article 9 - Scope of Article 9: o UCC 9-109(a)(1): Article 9 applies toa transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. o UCC 1-201(37): Definition of a Security Interest; A security interest is an interest in personal property or fixtures which secures payment or performance of an obligation. o The scope of Article 9 is limited by various exclusions in UCC 9-109(c) and (d). - Terms: o Security Interests in collateral: UCC 9-102(a)(12): Definition of Collateral; The property subject to a security interest is the collateral. A security interest that secures an obligation can be measures in two dimensions: the value of the collateral and the amount of the obligation secured. o Secured Party: The secured party is a person in whose favor a security interest has been created. UCC 9-102(a)(72). Definition of a Secured Party

o Debtor: The debtor is the person having an interest, other than a security interest or other lien, in the collateral. UCC 9-102(2)(28). Creation of a Security Interest: Attachment; How a Security interest is Attached to Collateral o UCC 9-203. Attachment and Enforceability of a Security Interest (a) [Attachment.] A security interest attaches to collateral 1. when it, the security interest, becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones time of attachment. (b) [Enforceability.] Except as otherwise provided in subsections (c) through (j), a security interest is enforceable against a debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: o (A) the debtor has authenticated a security agreement that provides a description of the collateral OR (B) if the collateral is not a certificated securityit is in the possession of the secured party under Section 9-313 pursuant to the debtors security agreement; OR (C) if the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 8-301 pursuant to the debtors security agreement; OR (D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 9-104, 9-105, 9-106, or 9-107 pursuant to the debtors security agreement. o The debtors agreement must address the obligation that is secured by collateral- otherwise one of the two dimensions would be missing. UCC 9-204(c): A security agreement may provide that collateral secures future advances or other value. UCC 9-204(a): A security agreement may create or provide for a security interest in after-acquired collateral. However, no security interest can attach to collateral under UCC 9-203(b) until the debtor has rights in it. Types of Collateral: o Goods: Consumer Goods Equipment Farm Products Inventory o Intangibles: Accounts Deposit accounts General Intangibles

- Perfection and Priority

o UCC 9-201: Security Agreements have priority; Except as otherwise provided in the UCC, a security agreement is effective according to its terms between the parties, against the purchasers of the collateral, and against creditors. (Meaning, an attached security interest in collateral will be senior to conflicting claims unless a provision in the UCC provides otherwise.) o Perfection: A security interests priority over other conflicting claims to collateral will depend on whether the security interest is perfected. UCC 9-308(a): Perfection occurs when a security interest has attached and when the applicable steps specified in Article 9, Part 3 (9-310 through 9-316) have been taken. If those steps are taken before attachment, perfection occurs upon attachment. How do you perfect? Two principal means of perfection: you can perfect by o (1) the filing of a financing statement; and o (2) the secured partys taking possession of the collateral. Goods can be perfected by either filing or possession, while accounts can be perfected only by filing, and money can be perfected only by possession. o Unperfected Security Interests: UCC 9-317: Certain non-ordinary course, good-faith buyers of collateral, when they buy the collateral take it free of a security interest if there was an attached but unperfected security interest in the collateral. Also, an attached but unperfected security interest is subordinate to the rights of a lien creditor. (A lien creditor is a creditor with a judicial lien.) o Perfected Security Interests: UCC 9-322(a)(1): First in time rule: UCC 9-320(a): Enforcement (Part 6 of the UCC Article 9) o Enforcement rights arise upon a debtors default. (UCC 9-602 prohibits debtors from waiving certain of their rights before default.) o What is Default? A default is defined by the agreement between debtor and secured party but usually includes failure to make payment, insolvency of the debtor, bankruptcy, breach of a loan covenant, and

 the existence of a conflicting lien on the collateral. o Secured partys enforcement tools: The right to collect on intangible collateral, such as accounts, from the obligors (called account debtors). UCC 9-607. The right to take possession of collateral on default. UCC 9-609. The right to dispose of collateral (typically by sale or lease). UCC 9-610. If they do this, The secured party must give advance notice of the disposition to the debtor and certain junior secured parties. UCC 9-611(b). And every aspect of the disposition must be commercially reasonable. UCC 9-610(b). o A debtor is entitled to redeem collateral at any time before the secured party disposes (or contracts to dispose) of the collateral, collects upon the collateral, or accepts the collateral in satisfaction of the secured obligation. UCC 9-623.

- Attachment of Security Interests

o 9-203. Attachment and Enforceability of a Security Interest (a) [Attachment.] A security interest attaches to collateral when; it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones time of attachment. (b) [Enforceability.] Except as otherwise provided in subsections (c) through (j), a security interest is enforceable against a debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: o (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; o (B) the collateral is not a certificated security and is in the possession of the secured party under Section 9-313 pursuant to the debtors security agreement; o (C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 8-301 pursuant to the debtors security agreement; or o (D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 9-104, 9-105, 9-106, or 9-107 pursuant to the debtors security agreement. o 9-203(b) (above): There is a security interest when the interest attaches. The security interest attaches when it becomes enforceable, A Security interest becomes enforceable when: Value has been given- Firstbank has given money to GM.

The debtor has rights in the collateral- When the cars are on the premises, Main Motors has rights. Authenticated security agreement that provides a description of the collateral (in order to meet statute of frauds). But if there is an agreement and the secured party is in possession then you dont need an authentication. (9-101 defines authenticate (which includes signed) and record). Note: Default is what the security agreement says that it is, there is not a definition of default. 9-601(a): [Rights of a secured party after default.] After default, a secured party has the rights provided in this part and, except as otherwise provided in 9-602, those provided by agreement of the parties. A secured party: o (1) may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure; and o (2) if the collateral is documents, may proceed either as to the documents or as to the goods they cover. 9-609. Secured Partys Right to Take Possession After Default. (a) [Possession; rendering equipment unusable; disposition on debtor's premises.] After default, a secured party: o (1) may take possession of the collateral; and o (2) without removal, may render equipment unusable and dispose of collateral on a debtor's premises under Section 9-610. (b) [Judicial and nonjudicial process.] A secured party may proceed under subsection (a): o (1) pursuant to judicial process; or o (2) without judicial process, if it proceeds without breach of the peace. 9-610. A Right to Dispose of the Collateral After the Default in a commercially reasonable manner. (a) [Disposition after default.] After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. (b) [Commercially reasonable disposition.] Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms. 9-607. The Secured Party Can Collect or Enforce from the Debtor. (a) [Collection and enforcement generally.] If so agreed, and in any event after default, a secured party: o (1) may notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party; o (2) may take any proceeds to which the secured party is entitled under Section 9-315;

o (3) may enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral; o (4) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(1), may apply the balance of the deposit account to the obligation secured by the deposit account; and o (5) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(2) or (3), may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party. 9-203 requires an authenticated record of a security agreement for a security interest to attach. 9-102(a)(7): Authenticate means o (A) to sign; or o (B) to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in with the present intent of the authenticating person to identify the person and adopt or accept a record. 9-102(a)(69): Record, information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. Thus, Firstbank does not have an enforceable security interest since there is not an authenticated record. 9-502(d) [Filing before secure agreement or attachment.] A financing statement may be filed before a security agreement is made or a security interest otherwise attaches. 9-322(a) [General priority rules.] Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules: o (1) Conflicting perfected security interests are ranked according to priority in Who filed the financing statement first OR Who Perfected the Security Interest First. o Priority dates from the earlier of the time a filing of a financing statement covering the collateral is first made or when the security interest is first perfected, if there is no period thereafter when there is neither filing nor perfection. 9-108. Sufficiency of Description (a) [Sufficiency of description.] Except as otherwise provided in subsections (c), (d), and (e), a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

(b) [Examples of reasonable identification.] Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code]; (4) quantity; (5) computational or allocational formula or procedure; or (6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable. (c) [Supergeneric description not sufficient.] A description of collateral as all the debtors assets or all the debtors personal property or using words of similar import does not reasonably identify the collateral. (b) Would the Dealer Inventory Security Agreement cover the slip-up? Yes, the agreement covers inventory and inventory is defined by the UCC and is thus reasonably identified and the car would be considered inventory. o Definition of inventory (c) Would your answer to part (b) be the same if paragraph 5 contained no subparagraphs and covered only all Dealers personal property, of ever kind and nature whatsoever? o This is not vague, but 9-108(c) states that supergeneric descriptions are not sufficient. Note: a financing statement must also describe the collateral, but it may say supergeneric terms such as all of the debtors assets. (See 9-504). 9-504(2); a financing statement sufficiently indicates collateral that it covers where it says it covers all assets or personal property (d) Would your answer be the same if paragraph 5 contained no subparagraphs and covered only certain motor vehicles? Note that Article 9 classifies goods into four types: consumer goods, equipment, farm products, and inventory. This does not reasonably identify the collateral, because one would not know which motor vehicles. o 9-204(a): [After-acquired collateral.] Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral. In this case the security agreement creates a security interest in now owned or hereafter acquired property. Thus, even though the cars arrive later its alright since there was already an authenticated record describing the collateral. Note: the agreement can also cover future advances (money paid out into the future by Firstbank) according to 9-204(c). Also note that 9-204(b) limits after-acquired collateral coverage in cases of consumer goods and a commercial tort claim. Would it make any difference if the only references to collateral in the Dealer Inventory Security Agreement and the Financing Statement were to all inventory?

o See 9-108 (above): It would be sufficient because all inventory reasonably identifies the collateral as inventory is define 9-102(48) inventorymeans goods which aresee next page o 9-102(48): "Inventory" means goods, other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a contract of service; (C) are furnished by a person under a contract of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business. o 9-102(44): "Goods" means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term does not include a computer program embedded in goods that consist solely of the medium in which the program is embedded. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction.

Types of Goods Consumer goods Farm Products Inventory Equipment o 9-102(75): "Software" means a computer program and any supporting information provided in connection with a transaction relating to the program. The term does not include a computer program that is included in the definition of goods. Software is a kind of general intangible. (b) Here the computer program is embedded in a good that consists solely of the medium in which it was embedded. Thus, it is not a good according to the definition of goods. Instead, its software. (c) Does Firstbank hold a security interest in Mains loaners? o The Security Agreement created a security interest in inventory and this may or may not be considered inventory. These loaners could be considered equipment. (d) Does Firstbank hold a security interest in the Monte Carlo that Main owns but allows Mains president to use as part of his compensation? If they lease it to the President then it would be inventory and they would indeed have a security interest in it

o 9-407. Restrictions on Creation or Enforcement of Security Interest in Leasehold Interest or in Lessors Residual Interest. (a) [Term restricting assignment generally ineffective.] Except as otherwise provided in subsection (b), a term in a lease agreement is ineffective to the extent that it: (1) prohibits, restricts, or requires the consent of a party to the lease to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in an interest of a party under the lease contract or in the lessor's residual interest in the goods; or (2) provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the lease. (b) [Effectiveness of certain terms.] Except as otherwise provided in Section 2A-303(7), a term described in subsection (a)(2) is effective to the extent that there is: (1) a transfer by the lessee of the lessee's right of possession or use of the goods in violation of the term; or (2) a delegation of a material performance of either party to the lease contract in violation of the term. (c) [Security interest not material impairment.] The creation, attachment, perfection, or enforcement of a security interest in the lessor's interest under the lease contract or the lessor's residual

interest in the goods is not a transfer that materially impairs the lessee's prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of Section 2A-303(4) unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the lessor.

o In re Cheqnet Systems, Inc. (1998) Facts: On June 18, 1993 and again on July 24, 1994, the debtor signed promissory notes in favor of Citizens Bank that granted the Bank a security interest in the property described in the documents executed in connection with the note as well as other property designated as security for the loan now or in the future. It was not until 3 years after the first note was signed that the debtor and bank executed a UCC financing statement listing other collateral. On January 31, 1997 the debtor filed for chapter 7 bankruptcy. The trustee filed this proceeding alleging that the bank does not enjoy a perfected security interests because the documents do not properly reference the collateral. See, 9-203: In order to have a perfected security interest, the secured party must demonstrate that: (1) the debtor has rights in the collateral; (2) the debtor signs a security agreement in favor of the secured party which contains a description of the collateral; (at issue here) (3) value is given by the secured party to the debtor; and (4) a valid financing statement is properly recorded. A security agreement is an agreement that creates or provides for a security interest. Whether a security interest exists is generally considered to be a question of fact, because it is the intent of the parties that determines the existence and nature of a security interest. The bank argues on alternative grounds that the note constitutes a security agreement, that the financing statement constitutes a security agreement, and that, under the composite doctrine rule, the note and financing statement taken together constitute a security agreement: The Note as Security Agreement: The note may constitute a security agreement because it grants a security interest, contains a description of the collateral, and is signed by the debtor. However, if the note is the security agreement, the banks security is that collateral described in the agreement- the note itself. The Financing Statement as Security Agreement: The majority of jurisdictions, hold to the rule that a financing statement, standing alone, does not create a security interest in the debtors property. The Composite Doctrine Rule: This rule provides that there need not be a separate document labeled security agreement, but that all relevant loan documents may be examined to determine whether a security agreement exists and what collateral is covered. The language in the instrument must lead to the conclusion that the parties intended that a security interest be created, thus, the court looks as the transaction as a whole to determine if there are writings signed

by the debtor which describe the collateral and which demonstrate an intent to create a security interest in particular collateral. o Notes on Attachment Unless and until a security interest attaches to particular property, the secured party has no enforceable security interest, and thus no enforceable property right, in the collateral. 9-203(b) provides that a security interest is enforceable against the debtor or third parties with respect to the collateral only if the following conditions are met: Value has been given 9:203(b)(1): By definition, a security interest secured payment or performance of an obligation. See 1-201(37). Before a security interest can attach, there must be an obligation (usually a money debt) to secure. Rights in collateral 9-203(b)(2): A second condition for attachment is that the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party, since a debtor can give security interest in collateral only if it has rights in that collateral. Debtors agreement 9-203(b)(3): A third condition to attachment is the debtors agreement that a security interest be created. o 9-102(a)(73): A security agreement is an agreement that creates or provides for a security interest. o 9-203(b)(3)(A) is satisfied when: 1. The debtor has authenticated a security agreement The definition of authenticate in 9-102(a)(7) means not only to sign (which requires a writing, see 1-201(39) but also to execute or otherwise adopt a symbolwith the present intent of the authenticating person to identify the person and adopt or accept a record. Thus, a security agreement may be in any authenticated record, meaning it may be inscribed on a tangible medium orstored in an electronic or other medium, provided that the information is retrievable in perceivable form. See 9-102(a)(69). This definition excludes information in unrecorded oral communications. Many cases have held that a debtors signature on a financing statement is not sufficient when the financing statement meets only the minimum requirements for a financing statement (9-402) and does not contain additional language constituting an appropriate agreement (1-201(3)). Sometimes the court will find that a group of writings, taken together, are sufficient to comprise a security agreement (Composite document rule of In re Cheqnet). 2. The agreement provides a description of the collateral. 9-108(a) provides that a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described. o 9-108(b)(3) expressly validates descriptions by Article 9 type, such as equipment or inventory. o 9-108(c): super-generic descriptions such as all personal property or all assets are insufficient.

o 9-204(a) provides that a security agreement may create or provide for a security interest in afteracquired collateral. Nonetheless, some courts have refused to uphold claims to after-acquired property in the absence of an explicit reference in the security agreement. o Under 9-203(b)(3)(B) (b)(3)(C), and (b)(3)(D), even an oral security agreement is sufficient if the secured party has possession or control of the collateral pursuant to that agreement. o Ordinary rules of contract interpretation 1-103 provides that unless displaced, principles of law supplement the UCC. o o Note on Obligations (Including Future Advances) Covered by Security Agreements The UCC legitimizes future advance provisions and puts no restrictions on what obligations can be secured. However, some courts have stated that only future advances that are similar and related to an initial, principal obligation should be given the benefit of a broad future advance and all obligations provisions. However, 9-204(c) was intended to countermand these close relatedness tests, and make dragnet clauses enforceable.

- Perfection of Security Interests:

o 9-201 provides that security agreements are effective according to terms between parties, against purchasers of the collateral, and against creditors. The rationale is that this is fair since others have notice of such agreements due to the public records that are created when the security interest is perfected. o (A) Perfection by Filing 9-522(a): The filing office shall maintain a record of the information provided in a filed financing statement for at least one year after the effectiveness of the financing statement has lapsed under Section 9-515 with respect to all secured parties of record. The record must be retrievable by using the name of the debtor and by using the file number assigned to the initial financing statement to which the record relates. 9-515. Duration and Effectiveness of Financing Statement; Effect of Lapsed Financing Statement. o (a) [Five-year effectiveness.] Except as otherwise provided in subsections (b), (e), (f), and (g), a filed financing statement is effective for a period of five years after the date of filing. o (b) [Public-finance or manufactured-home transaction.] Except as otherwise provided in subsections (e), (f), and (g), an initial financing statement filed in connection with a public-finance transaction or manufactured-home transaction is effective for a period of 30 years after the date of filing if it indicates that it is filed in connection with a publicfinance transaction or manufactured-home transaction. o (c) [Lapse and continuation of financing statement.] The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed pursuant to subsection (d). Upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by

the financing statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value. 9-203(b)(3) o The debtor authenticated the security agreement and filed the financing statement OR o The collateral is in possession of secured party and a financing statement was filed

9-317. Interests that Take Priority Over or Take Free of Security Interest o (a) [Conflicting security interests and rights of lien creditors.] A security interest or is subordinate to the rights of: (1) a person entitled to priority under Section 9-322; and 9-322; priority rules o 1. a person with a security interest that filed a financing statement or perfected it earlier o 2. This person has a perfected security interest and the other one doesnt o 3. This persons security interest attached first (2) except as otherwise provided in subsection (e), a person that becomes a lien creditor before the earlier of the time: (A) the security interest is perfected; or (B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed. o See above for the things listed in 203(b)(3) 9-102(52) Lien creditor means o (A) a creditor that has acquired a lien on the property involved by attachment, levy, or the like; o (B) an assignee for benefit of creditors from the time of assignment; o (C) a trustee in bankruptcy from the date of the filing of the petition; or o (D) a receiver in equity from the time of appointment. 9-308. When Security Interest is Perfected; Continuity of Perfection o (a) [Perfection of security interest.] Except as otherwise provided in this section and Section 9-309 (those things that are automatically perfected when they attach), a security interest is perfected if it has attached AND all of the applicable requirements for perfection in Sections 9310 through 9-316 have been satisfied. OR A security interest is perfected when it attaches if the applicable requirements in 9-310-316are satisfied before the security interest attaches. o (b) [Perfection of agricultural lien.] Not Necessary

o (c) [Continuous perfection; perfection by different methods.] A security interest is perfected continuously if it is originally perfected by one method under this article and is later perfected by another method under this article, without an intermediate period when it was unperfected. o (d) [Supporting obligation.] Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral. o (e) [Lien securing right to payment.] Perfection of a security interest in a right to payment or performance also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right. o (f) [Security entitlement carried in securities account.] Perfection of a security interest in a securities account also perfects a security interest in the security entitlements carried in the securities account. o (g) [Commodity contract carried in commodity account.] Perfection of a security interest in a commodity account also perfects a security interest in the commodity contracts carried in the commodity account. 9-310. When Filing Required to Perfect Security Interest or Agricultural Lien; Security Interests and Agricultural Liens to Which Filing Provisions Do Not Apply. o (a) [General rule: perfection by filing.] Except as otherwise provided in subsection (b) and Section 9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens. o (b) [Exceptions: filing not necessary.] 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; (3) in property subject to a statute, regulation, or treaty described in Section 9-311(a); (4) in goods in possession of a bailee which is perfected under Section 9-312(d)(1) or (2); (5) in certificated securities, documents, goods, or instruments which is perfected without filing or possession under Section 9312(e), (f), or (g); (6) in collateral in the secured party's possession under Section 9313; (7) in a certificated security which is perfected by delivery of the security certificate to the secured party under Section 9-313; (8) in deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights which is perfected by control under Section 9-314; (9) in proceeds which is perfected under Section 9-315; or (10) that is perfected under Section 9-316. o (c) [Assignment of perfected security interest.] If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor.

9-502(a) [Sufficiency of financing statement.] Subject to subsection (b), a financing statement is sufficient only if it: o (1) provides the name of the debtor; o (2) provides the name of the secured party or a representative of the secured party; and o (3) indicates the collateral covered by the financing statement. o o o o o o o o o o 9-322. Priorities Among Conflicting Security Interest in and Agricultural Liens on Same Collateral. (a) [General Priority rules.] Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules: (1) Conflicting perfected security interests and agricultural liens 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 security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection. (d) May file a suit against the Secretary of State since there is a duty under 9519(c) to index a filing statement according to the name of the debtor as well as a duty under 9-523(c) to communicate this information to one requesting it. o 9-317(e): [Purchase-money security interest.] Except as otherwise provided in Section 9-320 and 9-321, if a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing. Purchase-money security interest: A security interest that arises because the secured party is putting up the money to allow the debtor to get the goods. The classic example is when one goes to the store to purchase equipment on credit but needs it right then and the person gives a down payment in such a case there is a 20 day grace period for filing the financing statement. That way they do not have to wait to get the equipment until after the financing statement is filed. This protects the security interest against the lien creditor. o What is not a purchase-money security interest? When the collateral is not goods. Notes on Perfection by Filing The Concept of Perfection

o A security interest is perfected when the security interest has attached and all of the applicable requirements for perfection in Sections 9-310 through 9-316 have been satisfied. 9-308(a). o The various elements of perfection and attachment can occur in any order. For example, a secured party might first comply with 9-310 by filing a financing statement. Next the debtor might sign a security agreement describing collateral in which the debtor has rights. Finally, the secured party might give value to the debtor. (Upon the last step, the security interest would simultaneously attach and become perfected). Priority Rules and Conveyancing Principles o Although an attached but unperfected security interest is enforceable against the debtor, such a security interest may be defeated by other claimants: An unperfected security interest is subordinate the rights of a lien creditor. 9-317(a)(2).

o o

o o

However, 9-317(e) provides an exception to 9-317(c). In the case of purchase-money security interests, a secured party who files a financing statement after a lien has attached to the collateral may achieve priority over the lien creditor. A purchase-money security interest is where a security interest is perfected by filing before or within 20 days after the debtor receives delivery of the collateral. In such a case, the interest is senior to the interest of lien creditor between the time the security interest attaches and the time of filing. Even worse, from the secured partys perspective, an unperfected security interest will not be effective in the debtors bankruptcy. 9317(a)(2). Security interests are prioritized under the first-to-file-or-perfect rule. Meaning, a security interest may become senior to a conflicting security interest that was created and attached first, just because the financing statement was filed first. See, 9-322(a)(1). 9-502(a)(3) provides that financing statement is sufficient only if it indicates the collateral covered. 9-504: A financing statement sufficiently indicates the collateral that it covers if the financing statement provides: (1) a description of the collateral pursuant to Section 9-108; or (2) an indication that the financing statement covers all assets or all personal property. 9-108 provides that a description is sufficient if it reasonably identifies what is described. Types of collateral that are defined in the UCC reasonably identify the collateral. A debtor (like Main Motors) can find out about what collateral is secured according to section 9-210. Then the secured party (Firstbank) has to

reply within 14 days. A potential lender can find out about any secured interests in the debtors property by asking the debtor to make this request. 9-210. Request for Accounting; Request Regarding List of Collateral or Statement of Account.

Organizations o 9-503(a) [Sufficiency of debtor's name.] A financing statement sufficiently provides the name of the debtor: (1) if the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized; o 9-506. Effect of Errors or Omissions. (a) [Minor errors and omissions.] A financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. (b) [Financing statement seriously misleading.] Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading. (c) [Financing statement not seriously misleading.] If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a), the name provided does not make the financing statement seriously misleading.

(d) ["Debtor's correct name."] For purposes of Section 9-508(b), the "debtor's correct name" in subsection (c) means the correct name of the new debtor. o Thus, even if the name is incorrect per 9-503(a)(1), it is still ok if the financing statement would be discovered while searching under that name, since the name would not be seriously misleading. See 9-506(c). (Not misleading if it is found under search logic, thus one must only search under the real name) In re Spearing Tool and Mfg. Co. (6th Cir.) o Here the federal government had a tax lien on the debtors assets. Tax liens can supersede all state law liens. A federal tax lien adequately identified a tax payer, notwithstanding substitution of an abbreviation for a part of the name and had priority over a competing security interest even though the secured creditor could not locate the financing statement after making an electronic search. Thus, one must make sure there has not been a tax lien filing by searching under more than just the real name. 9-503(c): A financing statement that provides only the debtors trade name does not sufficiently provide the name of the debtor. a fake name. Notes on the Adequacy of Financing Statements: UCC 9-502(a) sets fort the three formal requisites for a sufficient financing statement. Except with respect to filings covering collateral related to specific real property, a financing statement is sufficient only if it (1) provides the name of the debtor; (2) provides the name of the secured party or a representative of the secured party; and (3) indicates the collateral covered by the financing statement. o 9-503 elaborates upon the first two requirements (the names of the parties), and 9-504 elaborates upon the third requirement (the indication of the collateral). Then, 9-506 provides additional guidance with respect to errors. o Debtors Name: Filing officers index financing statements according to the name of the debtor. 9-519(c)(1). Corporations: If the debtor is a corporation or other registered organization (as defined in 9-102(a)(70)) a financing statement sufficiently provides the name of the debtor only if the financing statement provides the name of the debtor indicated on the public record of the debtors jurisdiction of organization which shows the debtor to have been organized. 9-503(a)(1). Error: Minor errors ordinarily do not render a financing statement ineffective, unless the error makes the financing statement seriously misleading. 9-506(a). However, when it comes to errors in debtors names, any name that does not comply with the requirements of 9-503(a) is seriously misleading as a matter law per 9-503(b), unless a search of the records of the filing office under the debtors correct name, using the filing offices standard search, would disclose a financing statement. In regard to corporations and other organizations, many courts have held that filing against a trade name instead of a real name is insufficient.

The UCC deals with the sufficiency of a trade name like any other name, its misleading unless it comes up in the search. 9-503(c). However: One may find it prudent to search under more than just the debtors correct name. Filing statements filed before the effective date of Revised Article 9 may remain effective even if the name is incorrect. Also, in some states notices of judicial liens and federal tax liens are filed and indexed in the UCC filing offices and the law governing those liens (which is not Article 9) controls the adequacy of the debtors name in a filing. See, Spearing Tool. Individuals: While 9-503(a)(4)(A) states that the filing statement provide the individualname of the debtor, the Bankruptcy Appellate Panel of the Tenth Circuit stated that this requires the statement to be filed against the individuals legal name. A legal name would be what is provided on ones birth certificate or passport. o Secured Partys Name; Secured Party of Record: The second formal requirement for a sufficient financing statement is that it must provide the name of the secured party or a representative of the secured party. 9-502(a)(2). The persons whose name is provided is the secured party of record. 9-511(a). The secured party of record has the power to authorize certain amendments to a filed financing statement, including the power to terminate the financing statements effectiveness. 9-509(d)(1). When there is one secured party, the financing statement usually provides the secured partys name. The secured party and the secured party of record are the same person. An error in this name will not render the financing statement ineffective. 9-506, Comment 2. Where many lenders are involved all of the secured parties names may be provided, in which case there will be multiple secured parties of record, each of which has the power to affect its own rights. Or, the statement may provide the name of a representative of the secured parties. o Reference to Collateral: The third formal requirement is that a filing statement must indicate the collateral covered by the financing statement. 9502(a)(3). An indication is sufficient if it satisfies the purpose of conditioning perfection on the filing of a financing statement, i.e., if it provides notice that a person may have a security interest in the collateral indicated. 9-504, Comment 2. UCC 9-504 provides two safe harbors: A description of collateral under 9-108 reasonably identifies the collateral. Thus, a financing statement that lists the items of collateral, identifies the collateral by category, or refers to collateral by a defined UCC type provides a sufficient indication.

An indication that a financing statement covers all assets or all personal property is a sufficient indication. (Supergeneric terms are not, however, sufficient as a description in a security agreement. 9-108(c)). o Authorization: A financing statement does not have to be signed to be sufficient. 9-502(a). However, a financing statement is not effective unless the filing is authorized by the debtor in an authenticated record. 9509(a). o Additional Information: Addresses of the debtor and the secured party are not required for perfection. 9-502. However, a filing office is required to reject a financing statement that does not provide an address for each of the parties. 9-520(a); 9-516(b). If the financing statement indicates that the debtor is an organization, the filing office must reject the filing unless it provides the type of organization (corporation, partnership, etc.), a jurisdiction of the organization, and an organizational identification number (or indicates that the debtor has none).

o Perfection by Means Other Than Filing

9-309. The following security interests are perfected when they attach: (1) a purchase-money security interest in consumer goods, except as otherwise provided in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in Section 9-311(a). Note: Financing statements are meant to give notice to other creditors and purchasers of the collateral. Article 9 is intended to encourage people to give certain kinds of secured credit, and the more knowledge the lenders have the more willing they will be to lend the money. It is less risky that way. But we dont people to put a security interest on used consumer goods unless they were the ones who helped finance the purchase. So if one checks the files there will not be a financing statement since one is not required in the case of purchase-money security interests. However, in the case of extremely expensive consumer goods, it would be better for the store to file a financing statement, since the purchaser could sell it to another and the financing statement would allow the store to then get it back from the new consumer. o 9-311. Perfection of Security Interests in Property Subject to Certain Statutes, Regulations, and Treaties

(b) You have to look and see what the certificate of title law covers. Here this is not consumer goods, thus 9-309 would not apply. Meaning, it is not perfected automatically and a financing statement must be filed. (c) Now the tractor would be consumer goods and 9-309 would apply and the interests are perfected when they attach. No financing statement needs to be filed. (d) (Thus far weve seen perfection by filing, perfection by a purchase-money security interest, and perfection due to a certificate of title). The Pledge: Under 9-313(a), a security interest in most tangible collateral, including goods, may be perfected by the secured partys taking possession of the collateral. Possession by Agents and Bailees: Other Benefits of Taking Possession of Collateral: o Taking possession before default reduces the risk that the secured party will have to resort to use of the judicial process in order to recover any value from the collateral upon default. o Taking possession prevents the debtor from disposing of the collateral, either outright or to the holder of a senior security interest. o However, taking possession is not the best option when the risk of the debtor wrongfully disposing of the collateral is small and the benefit of the debtor of retaining possession is quite high (since it needed in order for debtor to repay the obligation), as in the case of security interests on equipment or inventory. Under such circumstances, the secured party may contract with a specialist in watching over the ebb and flow of the inventory by creating a field warehouse. 9-502(b): Rights and Duties of Secured Party in Possession of Collateral: 9-207 affords certain rights to and imposes certain duties upon, a secured party who perfects a security interest by possession. The most significant of these duties is a requirement to use reasonable care in the custody and preservation of collateral in the secured partys possession. 9-207(a). As will all obligations of care in the UCC, that duty may not be disclaimed by agreement. 1-102(3). 9-317(a)(2): A security interest or agricultural lien is subordinate to the rights of a person who becomes a lien creditor before the earlier of the time: (A) the security interest or agricultural lien is perfected; or (B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed. 9-308: A security interest is perfected if it has attached and all of the applicable requirements for perfection in 9-310 through 9-316 have been satisfied. 9-203:

Perfection by Possession

(a) A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral (b) A security interest is enforceable with respect to collateral only if: o Value has been given o The debtor has rights in the collateral o One of the following conditions is met Security agreement Possession 9-310: Filing statement must be filed, but one of the exceptions is when the collateral is in the secured partys possession under 9313. 9-313. When Possession by or Delivery to Secured Party Perfects Security Interest without Filing. (a) [Perfection by possession or delivery.] Except as otherwise provided in subsection (b), a secured party may perfect a security interest in negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. A secured party may perfect a security interest in certificated securities by taking delivery of the certificated securities under Section 8-301. Here, the coin collection would be considered either money or goods. o (b) One may perfect a security interest in goods by filing a financing statement. But a financing statement will not perfect a security interest in money. Thus, it must be decided whether the collection is money or goods. 9-312. Perfection of Security Interests in Chattel Paper, Deposit Accounts, Documents, Goods Covered by Documents, Instruments (a) [Perfection by filing permitted.] A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing. (b) [Control or possession of certain collateral.] Except as otherwise provided in Section 9-315(c) and (d) for proceeds: o (1) a security interest in a deposit account may be perfected only by control under Section 9-314; o (2) and except as otherwise provided in Section 9308(d), a security interest in a letter-of-credit right may be perfected only by control under Section 9314; and o (3) a security interest in money may be perfected only by the secured party's taking possession under Section 9-313.

o (c) This is not an effective way since the collection may still be considered to be in possession of the debtor. The debtor may not be the agent. The lawyer may be the agent, however. 9-313 Comment 3: be created in an instrument by filing. 9-310 o (c) 9-102(11): "Chattel paper" means a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. In this paragraph, "monetary obligation" means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. The term does not include (i) charters or other contracts involving the use or hire of a vessel or (ii) records that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card. If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper. 9-312(a): A security interest in chattel papermay be perfected by filing. o (d) What if the financing statement had not been filed? For instruments and chattel paper you can take possession either by filing or taking possession.

- Multi-State Transactions: Law Governing Perfection and Priority

o Where to File a Financing Statement: Choice-of-Law Rules. General Rule: UCC 1-105(1) states that the parties enjoy a the right to agree that the law of any state bearing a reasonable relation to the transaction shall govern their rights and duties; absent such agreement, the law of the forum will be applied as long as the forum has an appropriate relation to the transaction. Rules for Perfection and the Effect of Perfection or Non-Perfection: Rules 9-301 through 9-307 govern notwithstanding an agreement of the parties to the contrary. See 1105(2). 9-301. Law Governing Perfection and Priority of Security Interests. o Except as otherwise provided in Sections 9-303 through 9-306, the following rules determine the law governing perfection, the effect of

perfection or nonperfection, and the priority of a security interest in collateral: (1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral. (General Rule). (2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral. (3) Except as otherwise provided in paragraph (4), while negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs: (A) perfection of a security interest in the goods by filing a fixture filing; (B) perfection of a security interest in timber to be cut; and (C) the effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral. (4) The local law of the jurisdiction in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral. 9-302. Law Governing Perfection and Priority of Agricultural Liens. o Note: An agricultural lien is a statutory lien that gives the supplier of seeds and fertilizers for farms a lien on the farm crops that the farmer will grow. Some states have this law, Ohio does not. This is not a voluntary lien (like a security interest). Article 9 then covers that involuntary security interest that the dealer has. 9-304. Law Governing Perfection and Priority of Security Interests in Deposit Accounts. o (a) [Law of bank's jurisdiction governs.] The local law of a bank's jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank. o (b) [Bank's jurisdiction.] The following rules determine a bank's jurisdiction for purposes of this part: (1) If an agreement between the bank and the debtor governing the deposit account expressly provides that a particular jurisdiction is the bank's jurisdiction for purposes of this part, this article, or [the Uniform Commercial Code], that jurisdiction is the bank's jurisdiction. (2) If paragraph (1) does not apply and an agreement between the bank and its customer governing the deposit account expressly

provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction is the bank's jurisdiction. (3) If neither paragraph (1) nor paragraph (2) applies and an agreement between the bank and its customer governing the deposit account expressly provides that the deposit account is maintained at an office in a particular jurisdiction, that jurisdiction is the bank's jurisdiction. (4) If none of the preceding paragraphs applies, the bank's jurisdiction is the jurisdiction in which the office identified in an account statement as the office serving the customer's account is located. (5) If none of the preceding paragraphs applies, the bank's jurisdiction is the jurisdiction in which the chief executive office of the bank is located. 9-305. Law Governing Perfection and Priority of Security Interests in Investment Property. o If perfection by filing, its the law where the debtor is located 9-306. Law Governing Perfection and Priority of Security Interests in Letterof-Credit Rights. 9-307. Location of Debtor. o (a) ["Place of business."] In this section, "place of business" means a place where a debtor conducts its affairs. (b) [Debtor's location: general rules.] Except as otherwise provided in this section, the following rules determine a debtor's location: (1) A debtor who is an individual is located at the individual's principal residence. (2) A debtor that is an organization and has only one place of business is located at its place of business. (3) A debtor that is an organization and has more than one place of business is located at its chief executive office. (e) [Location of registered organization organized under State law.] A registered organization that is organized under the law of a State is located in that State. All business that arent partnerships are registered. Therefore, you need to determine where the business is incorporated to find out where to file the financing statement 9-316. Continued Perfection of Security Interest Following Change in Governing Law. o (a) [General rule: effect on perfection of change in governing law.] A security interest perfected pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) remains perfected until the earliest of: (1) the time perfection would have ceased under the law of that jurisdiction; (2) the expiration of four months after a change of the debtor's location to another jurisdiction; or

(3) the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction. (b) [Security interest perfected or unperfected under law of new jurisdiction.] If a security interest described in subsection (a) becomes perfected under the law of the other jurisdiction before the earliest time or event described in that subsection, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earliest time or event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. (c) [Possessory security interest in collateral moved to new jurisdiction.] A possessory security interest in collateral, other than goods covered by a certificate of title and as-extracted collateral consisting of goods, remains continuously perfected if: (1) the collateral is located in one jurisdiction and subject to a security interest perfected under the law of that jurisdiction; (2) thereafter the collateral is brought into another jurisdiction; and (3) upon entry into the other jurisdiction, the security interest is perfected under the law of the other jurisdiction. (d) [Goods covered by certificate of title from this state.] Except as otherwise provided in subsection (e), a security interest in goods covered by a certificate of title which is perfected by any method under the law of another jurisdiction when the goods become covered by a certificate of title from this State remains perfected until the security interest would have become unperfected under the law of the other jurisdiction had the goods not become so covered. (e) [When subsection (d) security interest becomes unperfected against purchasers.] A security interest described in subsection (d) becomes unperfected as against a purchaser of the goods for value and is deemed never to have been perfected as against a purchaser of the goods for value if the applicable requirements for perfection under Section 9-311(b) or 9-313 are not satisfied before the earlier of: (1) the time the security interest would have become unperfected under the law of the other jurisdiction had the goods not become covered by a certificate of title from this State; or (2) the expiration of four months after the goods had become so covered. (f) [Change in jurisdiction of bank, issuer, nominated person, securities intermediary, or commodity intermediary.] A security interest in deposit accounts, letter-of-credit rights, or investment property which is perfected under the law of the bank's jurisdiction, the issuer's jurisdiction, a nominated person's jurisdiction, the securities intermediary's jurisdiction, or the commodity intermediary's jurisdiction, as applicable, remains perfected until the earlier of: (1) the time the security interest would have become unperfected under the law of that jurisdiction; or

(2) the expiration of four months after a change of the applicable jurisdiction to another jurisdiction. o (g) [Subsection (f) security interest perfected or unperfected under law of new jurisdiction.] If a security interest described in subsection (f) becomes perfected under the law of the other jurisdiction before the earlier of the time or the end of the period described in that subsection, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earlier of that time or the end of that period, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.

Rules Regarding International Transactions

According to 1-301, in international business-to-business transactions, the parties may for the law of a jurisdiction to apply even though the jurisdiction does not have a reasonable relation to the transaction in question. 1-301. Territorial Applicability; Parties' Power to Choose Applicable Law. o (a) In this section: (1) "Domestic transaction" means a transaction other than an international transaction. (2) "International transaction" means a transaction that bears a reasonable relation to a country other than the United States. o (b) This section applies to a transaction to the extent that it is governed by another article of the [Uniform Commercial Code]. o (c) Except as otherwise provided in this section: (1) an agreement by parties to a domestic transaction that any or all of their rights and obligations are to be determined by the law of this State or of another State is effective, whether or not the transaction bears a relation to the State designated; and (2) an agreement by parties to an international transaction that any or all of their rights and obligations are to be determined by the law of this State or of another State or country is effective, whether or not the transaction bears a relation to the State or country designated. o (d) In the absence of an agreement effective under subsection (c), and except as provided in subsections (e) and (g), the rights and obligations of the parties are determined by the law that would be selected by application of this State's conflict of laws principles. o (e) If one of the parties to a transaction is a consumer, the following rules apply: (1) An agreement referred to in subsection (c) is not effective unless the transaction bears a reasonable relation to the State or country designated. (2) Application of the law of the State or country determined pursuant to subsection (c) or (d) may not deprive the consumer of the protection of any rule of law governing a matter within the scope of this section, which both is protective of consumers and may not be varied by agreement: (A) of the State or country in which the consumer principally resides, unless subparagraph (B)

applies; or (B) if the transaction is a sale of goods, of the State or country in which the consumer both makes the contract and takes delivery of those goods, if such State or country is not the State or country in which the consumer principally resides. o (f) An agreement otherwise effective under subsection (c) is not effective to the extent that application of the law of the State or country designated would be contrary to a fundamental policy of the State or country whose law would govern in the absence of agreement under subsection (d). o (g) To the extent that [the Uniform Commercial Code] governs a transaction, if one of the following provisions of [the Uniform Commercial Code] specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified: (1) Section 2-402; (2) Sections 2A-105 and 2A-106; (3) Section 4-102; (4) Section 4A-507; (5) Section 5-116; [(6) Section 6-103;] (7) Section 8-110; (8) Sections 9-301 through 9-307.

oMotor Vehicles and Certificates of Title

We have seen that a security interest in automobiles and other goods covered by a certificate of title normally may not be perfected by filing a financing statement; rather, it may be perfected only by compliance with a certificate-of-title statute. See, UCC 9311(a),(b). But which jurisdictions certificate-of-title statute must be complied with? 9-303. Law Governing Perfection and Priority of Security Interests in Goods Covered by a Certificate of Title. (a) [Applicability of section.] 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.

(b) [When goods covered by certificate of title.] Goods become covered by a certificate of title when a valid application for the certificate of title and the applicable fee are delivered to the appropriate authority. Goods cease to be covered by a certificate of title 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. (c) [Applicable law.] The local law of the jurisdiction under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

Fraud: The general rule is if there is no fraud and one moves from one jurisdiction to Ohio, he or she must get a new title in Ohio; and if the previous jurisdiction had a security interest on it, then it should be put on the Ohio title. But what happens when with fraud, or without fraud, a couple of different titles exist? The security interest becomes unperfected???

- Proceeds of Collateral
o 9-315. Secured Partys Rights on Disposition of Collateral and in Proceeds. (a) [Disposition of collateral: continuation of security interest or agricultural lien; proceeds.] Except as otherwise provided in this article and in Section 2-403(2): (1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien; and (2) a security interest attaches to any identifiable proceeds of collateral.

(b) [When commingled proceeds identifiable.] Proceeds that are commingled with other property are identifiable proceeds: (1) if the proceeds are goods, to the extent provided by Section 9-336; and (2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article with respect to commingled property of the type involved. (c) [Perfection of security interest in proceeds.] A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. (d) [Continuation of perfection.] A perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless: (1) the following conditions are satisfied: o (A) a filed financing statement covers the original collateral; o (B) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and o (C) the proceeds are not acquired with cash proceeds; (2) the proceeds are identifiable cash proceeds; or (3) the security interest in the proceeds is perfected other than under subsection (c) when the security interest attaches to the proceeds or within 20 days thereafter. (e) [When perfected security interest in proceeds becomes unperfected.] If a filed financing statement covers the original collateral, a security interest in proceeds which remains perfected under subsection (d)(1) becomes unperfected at the later of: (1) when the effectiveness of the filed financing statement lapses under Section 9515 or is terminated under Section 9-513; or (2) the 21st day after the security interest attaches to the proceeds. o 9-102(a)(64): Proceeds, except as used in Section 9-609(b), means the following property: (A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; (B) whatever is collected on, or distributed on account of, collateral; (C) rights arising out of collateral; (D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or (E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. o Introduction Creditors who have ongoing relationships with business debtors often secure their loans with interests in the debtors inventory. When the inventory is sold, the creditors security interest rarely can be asserted against the buyer. See 9-320(a). Instead, the secured party must enforce its security interest against the proceeds of its collateral whatever is received upon the sale. See 9-102(a)(64); 9-315(a)(2). Creditors who finance inventory and accounts expect that their collateral will be sold or collected; thus, for them the creation of proceeds is normal and desirable. In contrast, for those who finance the acquisition of equipment, the creation of proceeds may signal a breakdown in the financing relationship; it may mean that

the debtor has disposed of the collateral in violation of the security agreement. Even though the security interest in the equipment may survive the sale (see 9315(a)(1)), the secured party may be unable to locate the collateral to enforce its security interest. Thus, the secured partys only remaining hope for protection may lie in the proceeds. o

Automatic, Perfected Security Interests (proceeds)

Attachment: 9-203(f) provides that the attachment of a security interest in collateral gives the secured party the rights to proceeds provided by section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral. Perfection: Moreover, under 9-315, filing against the original collateral is filing against the proceeds, since 9-315(c) states that a security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. However, a perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds, unless: (1) the following conditions are satisfied: o (A) a filed financing statement covers the original collateral; o (B) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and o (C) the proceeds are not acquired with cash proceeds; (2) the proceeds are identifiable cash proceeds; or o 9-102(a)(9): Cash proceeds mean proceeds that are money, checks, deposit accounts or the like. o Note: This is different than after-acquired collateral since a security interest in certain types of collateral can normally only be perfected in particular ways: A security interest in a non-consumer deposit account may be perfected only by control. 9-312(b)(1). (And consumer deposit accounts are excluded from Article 9). A security interest in money may be perfected only by taking possession. 9-312(b)(3). Thus, continued perfection provides greater protection for cash proceeds would be available under the after-acquired collateral approach. (3) the security interest in the proceeds is perfected other than under subsection (c) when the security interest attaches to the proceeds or within 20 days thereafter.

o o

oWhat Constitutes Proceeds

9-102(a)(64) contemplates that proceeds are to some extent acquired in place of and in substitution for the original collateral, which has been disposed of or reduced in value (such as by collections). o Tracing Proceeds to Original Collateral

According to 9-315(a)(2) a security interest attaches to any identifiable proceeds of collateral. Tracing is permitted under 9-315(b)(2) when equitable principles allow. General Electric Capital Corp. v. Union Planters Bank (9th Cir. 2005) Facts: o Machinery was in the business of renting, selling, and servicing equipment. Machinery financed its purchase of equipment with GECC and UPB and gave them security interests in the inventory. UPB was also Machinerys lender on an operating note, secured by a blanket lien on all of Machinerys property. GECC and UBP entered into a subordination agreement in which UPB subordinated its security interest in GECCfinanced inventory to the interest of GECC, as well as its interest in all cash, rents and non-cash proceeds arising from the same property. o UPB and Machinery set up a cash management system where Machinery would deposit the funds it had collected from equipment rentals, sales, and service into the parent account. However, Machinery did not identify which items of inventory, if any, generated the funds o GECC filed suit against UPB claiming that UPB wrongfully swept proceeds of GECC-financed inventory from Machinerys parent account in order to pay down the balance Machinery owed on its line of credit to other creditors. In order to prevail on its conversion claim, GECC would have to prove that it had a security interest in the particular funds that UPB received from the parent account. But proving that link is quite difficult when funds from numerous sources are deposited and credited to a single account, from which the depositor makes withdrawals and orders payments. They are going to have to employEquitable Tracing Equitable tracing is only appropriate when the payee receives funds out of ordinary course or otherwise in collusion with the debtor (in bad faith). o A transferees knowledge of a prior security interest in proceeds does not, by itself, indicate that the transfer of those proceeds occurred outside the ordinary course of the debtors business. In the ordinary course means that the plaintiff must establish more than a defendants knowledge of a superior security interest: It must establish either a lack of good faith or that the payee knowsthat the payment is in violation of some term in the security agreement not waived by the words or conduct of the secured party. Was the money identifiable or not?if it is, then the interest remains perfected o if it is NOT identifiable, then the security interest is not perfected Notice: they didnt sue the other creditors (all of whom received their money) IDEA: o Collusion: idea that they tried to cheat GECC o Didnt apply, due to the time of the eventsbut essentially the idea backing Elements of Equitable Tracing: o Show proceeds went INI o Quantify Proceeds taken by the bank o Show that there was BAD CONDUCT in taking the money

How they trace: o 9-315(b) Tells you that you CAN use an equitable tracing method, but not HOW to do it o Lowest Intermediate Balance; CB 223 Leave the proceeds IN Where the balance is ZERO go to the next sweep Once the proceeds are GONEthey are GONE Do it over a span of time

Tracing Method: Lowest Intermediate Balance Rule (LIBR) (the district court erred in applying this

rule since they found zero): Proceeds are always the last funds withdrawn from an account. Other money is paid out first. 9-332. Transfer of Money; Transfer of Funds from Deposit Account (a) [Transferee of money.] A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party. (A higher standard than that in GECC v. UPB). (b) [Transferee of funds from deposit account.] 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. 9-340. Effectiveness of Right of Recoupment or Set-Off Against Deposit Account. (a) [Exercise of recoupment or set-off.] Except as otherwise provided in subsection (c), a bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account. (b) [Recoupment or setoff not affected by security interest.] Except as otherwise provided in subsection (c), the application of this article to a security interest in a deposit account does not affect a right of recoupment or set-off of the secured party as to a deposit account maintained with the secured party. (c) [When set-off ineffective.] The exercise by a bank of a set-off against a deposit account is ineffective against a secured party that holds a security interest in the deposit account which is perfected by control under Section 9-104(a)(3), if the set-off is based on a claim against the debtor.

Analysis of 9-340: When you deposit money in a bank, the bank now owns the money, but you are the creditor and the bank is the debtor and thus you have a claim against the bank for that money.

Set-off occurs when there are two relationships. There is the bank account for $1,000 (where bank is debtor and individual is creditor), and then the relationship of the person borrowing $5,000 from the bank (bank is creditor and individual is debtor. The common law right of set-off provides that when the individual defaults on the bank loan the bank may exercise its right of set-off by wiping out the $1,000 bank account and reduce the loan balance from $5,000 to $4,000. o Article 9 does not apply to the set-off situation even though this looks like a secured transaction. o In 9-340, Article 9 is stating who would win when one person has a right of set-off and another has a security interest. (Similarly, a lien creditor does not have an Article 9 interest, but there are sections dealing with priority between the lien creditor and an Article 9 secured creditor if perfected the lien creditor loses). The right of set-off now prevails against a security interest. In GECC v. UPB, UPB had a right of set-off, thus today GECC should have a better subordination clause or should take over the leases so that they would have more control over the payments. o Since 2001, a bank account can be used as original collateral (not just as proceeds). This requires a 3-way agreement where the bank must be involved. Banks do not only rely on their common law right of set-off but they also usually agree for a security interest as well. Banks win on Article 9 grounds as well in that case. The only way to beat the banks priority is to become the banks customer. Recoupment occurs when there is only one relationship such as where one gives money in advance for a bill that is owed later. Supporting Obligations o If you have a security interest in collateral then you also have a security interest in the proceeds of that collateral (by operation of law). And not only that, but if the security interest in the collateral is perfected, then the security interest in the proceeds is perfected (yet may become unperfected after 21 days). So you also have a security interest in what is substituted for, and what the collateral evolves into. A supporting obligation means a guaranty. Extenders of credit frequently require, as a condition of extending credit, that a financially responsible third party guaranty payment of the debt. In Article 9, a thirdparty guarantor is a secondary obligor. A secondary obligors secondary obligation is a supporting obligation if it supports one of the types of collateral specified in the definition of the term. According to UCC 9-203, Comment 8, under subsection (f), a security interest in a supporting obligation automatically follows from a security interest in the underlying, supported collateral. Moreover, according to 9-308(d), if the security interest in the underlying collateral is perfected, then the security interest in the supporting obligation is perfected as well. 9-203(f): [Proceeds and supporting obligations.] The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by Section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral. 9-308(d): [Supporting obligation.] Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral.

Conflicting Claims to Collateral

Competing Security Interests: The claimant with priority, the senior claimant, is entitled to have its claim satisfied first from the value of the collateral involved. The junior claimant, then, can look to the remaining value, if any. o First-to-File-or-Perfect Rule UCC 9-322(a)(1) in dealing with competing perfected security interests, gives legal priority to a security interest that is prior in time in respect to either filing or perfection. The rule states both filing and perfection for the following reasons: Security interests can be perfected without filing according to 9-310(b). And, in certain situations, filing may precede perfection (such as in the case of after-acquired property and if the bank files a financing statement before it gives the loan/value). - Thus the current rule affords secured parties the opportunity to fix their place in line by filing a financing statement even before the details of a secured loan have been finalized. 9-308 provides that a security interest is not perfected unless it has attached. According to 9-203(b) there are a series of requirements for enforceability and thus for attachment: (a) authentication of a security agreement (or the secured partys possession or control of the collateral pursuant to a security agreement); the giving of value by the secured party; and (c) the debtors having rights in the collateral. o 9-322. Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral. (a) [General priority rules.] Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules: (1) Conflicting perfected security interests and agricultural liens 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 security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection. (2) A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien. (3) The first security interest or agricultural lien to attach or become effective has priority if conflicting security interests and agricultural liens are unperfected. o 9-310(b)(6): The filing of a financing statement is not necessary to perfect a security interest in collateral in the secured partys possession under Section 9-313.

o Guarding Against Prior Security Interests

Checking the public records will not, alone, give a potential lender the assurance it desires. (Since under 9-310 filing is not always necessary for another party to create a perfected security interest). The potential lender must take a few steps: o 1. Ascertain that the debtor is in possession of the collateral; and o 2. Check the public records to make sure that no other creditor has filed a financing statement. o 3. Consider whether the collateral, or the situation, is of a type that might fall within one of the other exceptions from the filing requirement that are listed in 9-310(b) (most are limited either as to type of collateral or as to the period of temporary perfection).

o Future Advances
Collateral may secure future as well as past or present advances if the parties so agree. (See 9-204(c)). Generally, all of the advances under the security agreement will enjoy the same priority, according to 9-322(a)(1). However, UCC 9-323(a) sets forth narrow circumstances under which the priority of an advance does not date from the time of filing or perfection: (1) when the security interest is perfected only automatically under section 9-309 or temporarily under 9-312(e), (f), or (g); or (2) when the advance is not made pursuant to a commitment entered into while the security interest was perfected by another method. o The Role of Knowledge in Priority Contests Shallcross v. Community State Bank & Trust Co. (NJ 1981) Facts: (Involved two disinterested lenders) Plaintiff owned a wysong shear and defendant owned an RAS shear. Defendant wanted to purchase plaintiffs shear but could not afford it. It was agreed that plaintiff would deliver the shear to defendant, and if defendant paid the purchase price within six months, then plaintiff would transfer title to him. It was also agreed that if defendant sold its RAS shear within the six-month period, plaintiff was to be paid at that time. On Feb. 25th, Defendant took possession of the wysong shear. Then in January, Defendant sold its RAS shear and Plaintiff sought payment for the wysong shear. The parties agreed to monthly payments; on June 29th the security agreement was signed, and on July 12th the financing statement was filed. Defendant later defaulted on payments. Additionally, the bank entered into a loan transaction and security agreement with Defendant on June 19th. The wysong shear was listed as collateral for the loan. Pursuant to the agreement, the bank loaned defendant $50,000 on the date of the agreement and $40,000 in December. The financing statement was filed on June 23rd. The bank sold the wysong shear to offset the debt under the terms of the agreement. Then plaintiff attempted to obtain possession of the shear but was unable to do so. Priority between conflicting security interests in the same collateral shall be determined in the order of filing if both are perfected by filing (regardless of which security interest attaches first and whether it attaches before filing). o Here, the bank filed first in time and therefore the senior interest. o Plaintiff argues that the banks knowledge of his prior interest in the collateral prevents the bank from obtaining priority. However, knowledge of a prior interest does not affect the priority provisions of the UCC.

Rationale: o Subjective knowledge is hard to prove, while the objective filing of a financing statement is easier to prove. Also, it is desirable that perfection of interest take place promptly (thus it is appropriate to provide that a secured party who fails to file runs the risk of subordination to a later but more diligent party. General Insurance Co. v. Lowry (SD Ohio 1976) Facts: Defendant executed a promissory note, along with others, to the Plaintiff and listed stocks in his corporation as collateral. Further, the parties entered into a Memorandum Agreement regarding the collateral. (Thus, Plaintiff had a security interest in the stock). However, at no time were the shares of stock ever delivered to the plaintiff. (Thus, not perfected). Throughout the proceedings, defendant was represented by Myers, a sole practitioner and shareholder of Kusworm & Myers Co. LPA. Defendant later executed a promissory note to Kusworm & Myers for attorneys fees and to secure the note defendant signed an agreement pledging 19 shares of stock in his corporation. The stock was subsequently transferred on the books to Kusworm & Myers. (Here, perfected). Further, Myers had knowledge of the agreements that were signed between plaintiff and defendant regarding the stock and the fact that such stock had not been previously transferred. By taking possession of the stock (a certificated security, which may be perfected by either filing or possession), Kusworm & Myers did perfect their security interest; thus their rights in the stock prevail over plaintiffs unperfected security interest. But, Myers is not just a disinterested creditor who attempted to protect his commercial interests; he is the defendants attorney and he and his client as witness and obligor respectively signed the memorandum agreement. The UCC does not preclude the imposition of an equitable lien under appropriate circumstances. When the parties signed that agreement, the plaintiff obtained an equitable lien against the 19 shares that was superior in priority to the later perfected security interest of Kusworm & Myers. o All of the prerequisites to the establishment of an equitable lien by plaintiff are present here: 1. All of the parties intended that the stock then in Defendant Lowrys possession be given to the plaintiff as security for the debt; 2. An agreement was signed by the parties memorializing this intent; and 3. The present holder of the stock, Myers (who was highly interested), had knowledge of the agreement. Note: The Court could have just decided the case on good faith grounds, but decided to focus primarily on the creation of an equitable lien.

Notes:

The Pure Race Priority Rule of UCC 9322(a)(1): In holding that knowledge of an earlier, unperfected security
interest is irrelevant to a priority contest governed by the first-to-file-or-perfect rule, Shallcross is in accord with the majority of decisions that have considered this issue. A recording system (such as UCC 9-322(a)(1)) that awards priority to the first party to file irrespective of that partys knowledge of an unfiled, earlierin-time interest is called a pure race system. Notice and Race-Notice Priority Systems o In a notice system, a subsequent purchaser who takes with notice of an earlier-in-time claim is subordinated to that claim even if the earlier-intime claimant has failed to give any public notice, such as by filing. Example: 9-337(1) affords priority to certain buyers of goods covered by a certificate of title only if they act without knowledge of the security interest. Additionally 9-317(b), (c), and (d) give certain non-secured party transferees priority over an unperfected security interest only if the transferees do not have knowledge of the security interest at the specified relevant time. o In a race-notice system, a subsequent claimant becomes senior to an earlier, unperfected security interest only if the subsequent party takes its interest without notice or knowledge of the earlier interest and also is the first to perfect its interest. Non-temporal Priority Systems: Afford priority without regard to whether a security interest was perfected before or after a competing claim to the collateral. Most of these rules relate to specialized collateral, such as deposit accounts and investment property. Also, with respect to goods, purchase-money security interests are eligible for non-temporal priority; see 9-317(e). Circular Priority. It is possible that C-1 prevails over C-2, C-2 prevails over C3, and that C-3 prevails over C-1. Race-notice and notice systems are particularly likely to generate circular priorities since they can enable a later claimant to take priority of some, but not all, earlier claims.

oPurchase-Money Security Interests

What is a PMSI? PMSIs only apply to goods and software. To be eligible to be the subject of a PMSI, software must be associated with goods in the manner specified in 9103(c): the debtor must acquire an interest in the software in an integrated transaction in which the debtor acquires an interest in the goods, and the debtor must acquire an interest in the software for the principal purpose of using the software in the goods. Professor Buckleys definition: A loan that is given in order to purchase the car and that is secured based on the car. It is not a PMSI if one just later gets a loan that they secure with their car. Its when you use goods as security for the money owed on those goods. For a security interest to qualify as a PMSI, the value (i.e. the loan) (i) must be given for the purpose of enabling the debtor to acquire the collateral and (ii) must actually be used for that purpose. 9-103. Purchase Money Security Interests o (a) [Definitions.] In this section: (1) "purchase-money collateral" means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and (2) "purchase-money obligation" means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. o (b) [Purchase-money security interest in goods.] A security interest in goods is a purchase-money security interest: (1) to the extent that the goods are purchase-money collateral with respect to that security interest; (2) if the security interest is in inventory that is or was purchasemoney collateral, also to the extent that the security interest secures a purchase- money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest; and (3) also to the extent that the security interest secures a purchasemoney obligation incurred with respect to software in which the secured party holds or held a purchase-money security interest. PMSIs in Goods: 9-103(b)(1): A security interest in goods is a purchase-money security interestto the extent that the goods are purchase-money collateral with respect to that security interest. The section provides for two types of PMSIs in goods: 1. Those held by a seller to secure an obligation incurred as all or part of the price of the collateral, and 2. Those taken by a lender to secure an obligation incurred for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.

Comment 3 to 9-103: A security interest does not qualify as a PMSI if a debtor acquired property on unsecured credit and subsequently creates the security interest to secure the purchase price. (Even if the security interest is a PMSI, in many cases the delay would disqualify the security interest from enjoying purchase-money priority under 9-324). Transformation and Dual Status Rules: o Several cases have supported the retention of PMSI status for a security interest in PMSI-financed collateral when that collateral also secured obligations other than the purchase-money obligation. Those cases recognize security interests having a dual status: they are part PMSI (to the extent that they secure the price or an enabling loan) and part nonPMSI (to the extent that they secure other indebtedness). o However, other cases have held that a PMSI is transformed into a nonPMSI whenever the PMSI-financed collateral secures any obligations other than the price or an enabling loan or whenever other collateral, in addition to the PMSI-financed collateral, secures the purchase-money obligation. o 9-103(f) rejects the transformation rule as to non-consumer-goods transactions. In those transactions, a PMSI does not lose its status as such, even if the purchase-money collateral also secures an obligation that is not the purchase-money obligation, collateral that is not the purchase-money collateral secures the purchase-money obligation, or the purchase-money obligation has been renewed, refinanced, consolidated, or restructured. Note on Cross-Collateralization (read) o 9-103(b)(2) explains that with PMSIs in inventory you do not have to trace everything. If you have a security interest in A and later finance B and C, you have a security interest in A, B, and C. Its still a PMSI in A and B and C. Every item secures every dollar. Perfection: 9-309(1): A purchase-money security interest in consumer goods, except as otherwise provided in 9-311(b), is perfected when it attaches. (Note: a car, however, has a 20-day period to perfect). Priority: Priority over buyers, lessees, and lien creditors: o 9-317(e): Except as otherwise provided in Sections 9-320 and 9-321, if a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.

Priority over conflicting security interests when the collateral is consumer goods: o Goods (other than inventory and livestock): 9-324(a): [General rule: purchase-money priority.] Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter. Thus, 9-324 overrides the otherwise-applicable first-to-file-orPperfect rule of UCC 9-322(a)(1). o Inventory and Livestock: A perfected PMSI in inventory must be perfected when the debtor receives possession of the inventory in order to have priority over a conflicting security interest; there is no 20-day period of grace. 9324(b)(1). Similarly to a perfected PMSI in inventory, a perfected PMSI in livestock must be perfected when the debtor receives possession of the livestock, in order to have priority over a conflicting security interest in that livestock. 9-324(d). Notification: 9-324 requires that for inventory and livestock collateral, a secured party holding a PMSI must give a written notification to the holder of the conflicting security interest, which states that the person sending the notification has or expects to acquire a PMSI in the inventory or livestock. The notification must be received before (but not more than five years before) the debtor receives possession of the inventory or livestock. Rationale for PMSIs PMSI priority ameliorates the situational monopoly of a first-to-file creditor who has the benefit of an after-acquired property clause. It provides a means for a debtor to obtain additional secured financing when the first-to-file secured party is unwilling to provide it or is only willing to provide it with extremely high rates. Consumer Goods The Federal Trade Commissions Rule on Credit Practices makes it an unfair practice for a lender or retail installment seller to obtain from a consumer a nonpossessory, non-PMSI in household goods. And an after-acquired clause is invalid unless the consumer receives the goods within 10 days? 9-103(h) states not to draw inferences about the fact that (e), (f), and (g) exclude consumer goods. The drafters wanted to leave to the court the determination of the proper rules in consumer-goods transactions.

oProceeds and PMSIs

Introduction Proceeds of inventory will generally be cash, but may also be accounts receivable when things are bought on credit. Receivables are considered more valuable than the inventory itself since they are the obligations of others who owe money, while who knows what the inventory is worth when one is going out of business (so accounts are considered high quality collateral). 9-324 provides that except as otherwise provided, a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods and except as otherwise provided a perfected security interest in its identifiable proceeds also has priority, if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter. 9-102(a)(64) Proceeds, except as used in section 9-609(b), means the following property: o (A) whatever is acquired upon the sale, lease, license, exchange or other disposition of collateral 9-322 provides that conflicting perfected security interests rank according to priority in time of filing or perfection and that the time of filing or perfection as to a security interest in collateral is also the time of filing or perfection as to a security interest in proceeds. o Here, SP-1s interest in accounts receivable was filed/perfected first. Thus, it has priority and SP-1 loaned $50,000 and has a security interest in accounts receivable thus it would get the $25,000 in the accounts as well as the proceeds from accounts that are perfected within 21 days (see 9-315) or that otherwise fit in the exception and the bank account would be identifiable cash proceeds? SP-2 would likely have the security interest in the inventory unless it can be shown that the inventory is traceable to the accounts receivable and that it was perfected within 21 days. Overview, an inventory financer will have priority over a PMSI holder later on with respect to accounts, since the PMSI inventory priority will not carry through with accounts, it will only carry through with payments made in advance. A purchase-money security holder does have priority as to inventory or whatever it helps to purchase, though, even when someone filed for inventory first.

Buyers of Goods o If a security interest is not perfected, certain buyers of goods can prevail under 9-317(b). But when the security interest is perfected (usually by filing), then 9-201 and 9-315(a)(1) provide that the security interest will prevail against the buyer. o 9-201(a): o 9-315(a): o 9-317(b): o 9-320: o Perfected Security Interests and Buyers of Goods National Livestock Credit Corp. v. Schultz (1982) Issue: Whether the terms of a cattle security agreement regarding the sale of cattle, designed for perfected lenders protection, were waived by the creditors long-term course of conduct inconsistent with the protective provisions. Facts: Schultz financed its operations with funds from loans obtained through National. The security agreement gave National a security interest in Schultzs herd, including after-acquired cattle and proceeds. The security agreement further provided that Schultz will not further encumber, conceal, remove or otherwise dispose of the same without the written consent of the Secured Party; however, permission is granted for the Debtor to sell the property for fair market value providing that payment is made jointly to the Debtor and the Secured Party. On various occasions, Schultz sold cattle without prior written consent or knowledge of National and in every instance the check was made payable to Schultz and then Schultz would mail the check to National or issue a new check to National. Schultz sold cattle to Wilson and IBP and used the proceeds to pay other creditors. National filed this action against Wilson and IBP claiming the unauthorized sales to them were in derogation of its security interest. Terms in a security agreement may be waived by a creditors long-term course of conduct that is inconsistent with the terms. o The UCC provides that its provisions shall be supplemented by principles of law and equity unless these principles have been displaced by particular provisions of the act. o An agreement is defined by the UCC as a bargain of the parties in fact as found in their language or by implication from other circumstances including course of performance as provided in this Act. o The UCC provides: except where this Article otherwise provides, a security interest continues in collateral, notwithstanding sale, exchange or other disposition thereof, unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. Nationals course of conduct was an otherwise authorization of the sale that resulted in defendant purchasers taking the cattle free from Nationals security interest.

Notes on Authorized and Unauthorized Dispositions Authorized Dispositions. o 9-315(a)(1) provides that 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. Thus, a disposition of the collateral causes a security interest to terminate if the secured party has authorized the disposition free and clear of the security interest, but the security interest survives a disposition of the collateral if the secured party has authorized the disposition subject to the security interest. Consequences of an Unauthorized Disposition o A secured party whose security interest survives an unauthorized disposition may take possession from the debtor, the purchaser, or any other junior party following the debtors default. 9-609. Further, pursuant to 9-315, the secured party is entitled not only to the continued security interest in the original collateral but also to the identifiable proceeds in that collateral. But the secured party will be entitled to only one satisfaction of the secured debt. o A secured partys continuing security interest following an unauthorized disposition also will be effective against the purchasers creditors and transferees. o Continued Perfection The secured party is not obligated to file a new financing statement, even though no one searching against the buyers name would discover the filing against the original debtor. However, when the collateral is sold or otherwise transferred to a person who becomes an Article 9 debtor, how long the security interest retains its perfected status depends on where the buyer or other transferee is located. If the buyer is located in the jurisdiction in which the financing statement has been filed, then the security interest remains perfected until lapse. But if the buyer is located in another jurisdiction, the security interest becomes unperfected one year after the transfer, unless the security interest is perfected under the law of the transferees jurisdiction before the year expires. See 9316(a), (b). If within the year the secured party fails to file or otherwise perfect in the jurisdiction where the buyer is located, the security interest is deemed to never have been perfected as against a purchaser of the collateral for value. 9-316(b). Thus, a buyer who has bought subject to a security interest that was perfected normally will take free of the security interest, which becomes unperfected.

o Waiver, Estoppel, Course of Performance, and Course of Dealing

o Waiver: A secured party may waive its security interest in the collateral after its disposition. Waiver is the voluntary, intentional abandonment of a known legal right, advantage, or privilege. Essential elements of the doctrine are both knowledge of the facts basic to the exercise of the right and the intent to relinquish that right. o Estoppel: A secured party might be estopped from asserting that its security interest continues in collateral following a disposition. In order to silence and inaction to estop a person from pressing some right or claim, there must have been a timely opportunity for the person to speak or act and, in addition, an obligation to do so. o Conduct (Course of Performance/Course of Dealing): Because buyers usually lack the evidence necessary to establish a true waiver or an estoppel, they often argue that an authorization should be inferred from a secured partys conduct. An alternative holding in the Schultz case is that the secured partys conduct, repeatedly failing to insist on the debtors compliance with a requirement that checks for livestock sold be made jointly payable to the debtor and secured party, constituted an authorization under 9-315(a)(1). The Schultz court also pointed to the secured partys conduct as evidence of a course of performance sufficient to constitute a waiver of the particular provisions of the security agreement. A course of dealing may provide another rationale for an authorization. A course of dealing is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding their expression and other conduct. But when a course of dealing and the express terms of an agreement cannot reasonably be construed as consistent with each other, the express terms prevail. o Conditional Authorization of Sales: The security agreement in the Schultz case gave the debtor permission to sell collateral for the fair market value thereof, providing that payment for the same is made jointly to the Debtor and the Secured Party. Implicit in the courts opinion is the belief that when a debtor fails to comply with the condition, a buyer acquired the goods subject to the security interest. Otherwise, the courts reliance on the secured partys conduct as authorizing the sale would not have been necessary. o Farm Products Exception to Former 9-307 Farm products were excluded from the general rule of Former 9307(1) that protected buyers in the ordinary course of business.

This led to many courts invoking common-law concepts of implied consent, waiver, and estoppel Since 1985, Section 1324 of the Food Security Act has preempted the farm products exception of Former 9-307(1) and 9-320(a).

Buyers in the Ordinary Course of Business:

The Buyers Seller Rule 9-320(a) provides that a buyer in ordinary course of business takes free only of security interests that are created by the buyers seller. Meaning, that an inventory lender takes the risk that its own debtor will cute off the security interest by selling to a buyer in the ordinary course of business, but does not risk losing its security interest if the collateral is sold by some other merchant. o Exception: Where a secured party entrusts the collateral to another party pursuant to 2-403, and that party sells to a third party, the secured partys security interest ends, despite the fact that it was not the buyers sellers security interest. See, 9-325 which makes clear that 2-403 is an exception to the general rule that a security interest survives disposition of the collateral. Buyers Who Do Not Take Possession According to 1-201(b)(9), only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. Right to Recover Goods from Seller: o 2-716(1) affords a right to specific performance of the sale contract where the goods are unique or in other proper circumstances. o 2-716(1) also would authorize a court to decree specific performance of a nonconsumer contract if the parties have agreed to that remedy. o 2-716(3) affords a right to replevin of goods identified to the contract in two limited circumstances: 1. the buyer is unable to effect cover for the goods (or the circumstances reasonably indicate that such effort will be unavailing); or 2. the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. o Rights of a buyer who has paid for the goods: 2-502(1)(a): A buyer of consumer goods who has paid a part or all of the price of goods identified to the contract has a right to recover the goods from a seller who repudiates or fails to deliver, if the buyer makes and keeps good a tender of any unpaid portion of the price. o 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. o 9-320. Buyers of Goods. (a) [Buyer in ordinary course of business.] Except as otherwise provided in subsection (e), a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the

buyer's seller, even if the security interest is perfected and the buyer knows of its existence. (b) [Buyer of consumer goods.] Except as otherwise provided in subsection (e), a buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods. o Note: 9-320(b) applies when one consumer sells to another consumer. Also, 9-320(b)(4) requires prior to the filing of a financing statement despite the fact that the section also deals with perfection since perfection can occur without filing including PMSIs in consumer goods since they are automatically perfected. One may still want to file a financing statement with items that may be automatically perfected since when purchaser sells the collateral to another consumer, the financing statement will beat the other consumer. o 1-201(b)(9): "Buyer in ordinary course of business" means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. "Buyer in ordinary course of business" does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt. o Elements of a buyer in ordinary course of business: Buyer buys in good faith Without knowledge that the sale violates the rights of another person in the goods From a person in the business of selling goods of that kind And the sale comports with the usual or customary practices Buyer takes possession of the goods or has the right to recover the goods from the seller under Article 2

And does not acquire goods as security for or as satisfaction of money debt.

o Unperfected Security Interests and Buyers of Collateral 9-317(b): Except as otherwise provided in subsection (e), a buyer, other than a secured party, of tangible chattel paper, documents, goods, instruments, or a security certificate takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected. Intangible Collateral 9-317(d): A licensee of a general intangible or a buyer, other than a secured party, of accounts, electronic chattel paper, general intangibles, or investment property other than a certificated security takes free of a security interest if the licensee or buyer gives value without knowledge of the security interest and before it is perfected. Note: Unlike 9-317(b), this section does not have a delivery requirement, since the collateral cannot be delivered or possessed.

- Lien Creditors
o 9-317(a)(2) A security interest is subordinate to the rights of, except as otherwise provided, a person that becomes a lien creditor before the earlier of the time: o (A) the security interest or agricultural lien is perfected; or o (B) one of the conditions specified in 9-203(b)(3) is met and a financing statement covering the collateral is filed. 9-203. Attachment o (a) [Attachment.] A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. o (b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if : (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; (B) the collateral is not a certificated security and is in the possession of the secured party under Section 9-313 pursuant to the debtor's security agreement; (C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 8-301 pursuant to the debtor's security agreement; or (D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 9-104, 9-105, 9-106, or 9-107 pursuant to the debtor's security agreement. 9-308. o (a) [Perfection of security interest.] Except as otherwise provided in this section and Section 9-309, a security interest is perfected if it has attached and all of the applicable requirements for perfection in Sections 9-310 through 9-316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.

o (b) [Perfection of agricultural lien.] An agricultural lien is perfected if it has become effective and all of the applicable requirements for perfection in Section 9-310 have been satisfied. An agricultural lien is perfected when it becomes effective if the applicable requirements are satisfied before the agricultural lien becomes effective. Thus, perfection requires attachment and in order for collateral to attach, the party must have given value. o 1-204. Value: Except as otherwise provided in Articles 3, 4, [and] 5, [and 6], a person gives value for rights if the person acquires them: (1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; (2) as security for, or in total or partial satisfaction of, a preexisting claim; (3) by accepting delivery under a preexisting contract for purchase; or (4) in return for any consideration sufficient to support a simple contract. (b) No, because a requirement of 9-203 is met and the financing statement was filed before Lean became a Lien Creditor. (c) Yes, because then one of the requirements of 9-203 was not met.

Scope of Article 9: Article 9 applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. UCC 9-109(a)(1).
1-201(35): "Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. "Security interest" includes any interest of a consignor and a buyer of accounts, chattel paper (retail instalment contract SI in particular goods), a payment intangible, or a promissory note in a transaction that is subject to Article 9. "Security interest" does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2-505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a "security interest", but a seller or lessor may also acquire a "security interest" by complying with Article 9. 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." Whether a transaction in the form of a lease creates a "security interest" is determined pursuant to Section 1-203. Bailments o Introduction Secured transactions are not the only occasion for nonpossessory interests in goods. These interests can arise in a wide variety of settings. Individuals often leave goods with third parties. Nonpossessory security interests: The Articles solution to the problems of nonpossessory security interests: Security interests as to which no public notice has been given generally are unperfected, see 9-308(a), and unperfected security interests generally are subordinate to the rights of third parties who claim an interest in the collateral. See 9-317(a)(2), (b); 9-322(a)(2). But to what extent does the UCC impose this solution on transactions that create nonpossessory interests in goods but that are not for security? As for enforcement rights, Article 9 affords debtors certain rights and imposes upon secured parties certain duties that cannot be waived. See, 9-602. Nonpossessory interests in goods: No public notice requirement. Third parties take subject to a nonpossessory interest even if the holder of that interest does not publicize it. But in 2-403(2), a buyer in ordinary course takes the rights of the entruster of goods. Many of the transactions that create nonpossessory interests in goods are bailments: a delivery of a thing in trust for some special object or purpose, and upon a contract express or implied, to conform to the object of the trust.

oLeases
Distinguishing Leases from Security Interests: 1-201(b)(35) and 1-203 afford some guidance on the question whether a particular lease is a security interest subject to Article 9 or is a lease (i.e., a true lease) subject to Article 2A. True Lease: Leases may be confused with security interests since both a lease and a security interest may involve a person in possession of property of the supplier and the user making payments to the supplier. If the user fails to make payment, the supplier may take the property back. What is the difference between an article 2 sale and article 2a lease? If its a sale of the goods the goods are not returned to the supplier and if it is a lease the goods are returned to the supplier. If there is no meaningful residual interest in the goods that is going back to the lessor, then there is a sale. Lease for Security: The lessors interest in goods under a lease for security is an Article 9 security interest. To protect its interest against claims of third parties, the lessor must file a financing statement; otherwise the lessors security interest will be unperfected and the competing claimant probably will take priority over the lessor. See 9-317(a)(2),(b); 9-322(a)(1). Further, the lessor must comply with Part 6 of Article 9 upon the lessees default. 1-201(b)(35): "Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. "Security interest" includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9. "Security interest" does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2-505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a "security interest", but a seller or lessor may also acquire a "security interest" by complying with Article 9. 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." Whether a transaction in the form of a lease creates a "security interest" is determined pursuant to Section 1-203. o 1-203. Lease Distinguished From Security Interest. (a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case. (b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee (its not a

lease that you can get out youre locked in for the duration), and: (1) the original term of the lease is equal to or greater than the remaining economic life of the goods; (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods; (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. Elements: A lease creates a security interest if: o The lessor is obligated to pay consideration for the term of the lease and may not easily get out of the lease, and: 1. the original term of the lease is equal to or greater than the remaining economic (a.k.a. useful) life of the goods. The rationale is that with a sale the owner does not get the goods back, while with a lease the owner does get the goods back. Here the owner is not going to get the goods back with a future economic life, thus the owner is getting nothing back, like a sale; 2. the lessee is bound to renew the lease for the remaining economic life of the good, or the lessee is obligated to become the owner. Thus, this is equivalent to a sale and would create a security interest; 3. the lessee has an option to renew the lease for the remaining economic life for no consideration or for nominal consideration.; or 4. the lessee has an option to become the owner of the goods for no consideration or for nominal consideration. The question is whether there is any residual value returning to the supplier. Nominal consideration: Any reasonable person would pay the consideration since its so low. (c) A transaction in the form of a lease does not create a security interest merely because: (1) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into; (2) the lessee assumes risk of loss of the goods; (3) the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs; (4)

the lessee has an option to renew the lease or to become the owner of the goods; (5) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or (6) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. Note: 1, 5, and 6 are similar in that it states that just because the lessor is paying too much for just a lease, does not create a security interest. (d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if: (1) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or (2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed. (e) The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

(b) o Section 1-203(b) provides that a transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. o 1-203(d): Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised o Here there is 9 more years of life and the lessee could buy it for $10, this is nominal consideration. Thus, the transaction creates a security interest. (c) This is not nominal consideration. The machine seems to be worth this amount. o 1-203(d) provides Additional consideration is not nominal if: (1) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or (2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

(d) A security interest is created pursuant to 1-203(b) since Jones is obligated to pay the consideration for the term of the lease and the original term of the lease is equal to the remaining economic life of the goods, since the goods have a life of ten years and this lease period is ten years. (e) A security interest is created pursuant to 1-203(b) since Jones is obligated to pay the consideration for the term of the lease and has an option to renew the lease for the remaining economic life of the goods for nominal additional consideration upon compliance with the lease agreement. (f) A security interest is created pursuant to 1-203(b) since Jones is obligated to pay the consideration for the term of the lease and the original term of the lease is equal to the remaining economic life of the goods, since the goods have a life of ten years and this lease period is ten years. In re: Pillowtex, Inc. (2003) Issue: Whether the District Court correctly determined that the MESA entered into between Pillowtex and Duke prior to Pillowtexs bankruptcy filing was a secured financing arrangement rather than a true lease (if its a lease then they have to make lease payments, if not then they do not). Duke contends that the transaction was a lease based on the intent of the parties, but the court finds that intent is not important in this analysis. Pillowtex has two types of arguments, the bright-line argument and the economic reality argument. The court rejects that second and fourth factors are present here. Where none of the four factors set out in section 1-201(37) are present, courts are to consider the economic reality of the transaction in order to determine, based on the particular facts of the case, whether the transaction is more fairly characterized as a lease or as a secured financing arrangements. What youre mainly looking for is whether there will be any residual value coming back to the supplier (Duke). o Duke has no choice but to abandon the goods since to take it away would cost a fortune and the goods would no longer have an economic life. Note: A bankruptcy trustee has the same rights as a lien creditor. If the transaction is a security interest that has not been perfected, then the bankruptcy trustees interest will be senior. So ordinarily the question is perfection, but here the question is whether the transaction was a security interest. But the supplier wants to be a lessor. Under 9-505 one can file a financing statement, just in case, and write that they are the lessor. That way you can cover yourself with a financing statement, while not making some kind of admission against interest. o 1-203(c): A transaction in the form of a lease does not create a security interest merely because the lessee has an option to renew the lease or to become the owner of the goods. o This would create a security interest if the lessee had the option to renew or become an owner for no additional consideration or for nominal additional consideration. Additional consideration is not nominal if when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed. (Thus, one must predict what the fair market value would be at the time of the option, thus at the end of the 3 years). Since we do not know what the fair market value would be at the

end of the three years, we do not know if the $500,000 is nominal. It does not matter how much it was to lease the goods. -

Article 9 also applies to: o Sales of accounts, chattel paper, payment intangibles, or promissory notes; o Pursuant to 9-109(b) a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply. Thus, a big banks security interest in a promissory note is not affected by the fact that the homeowners obligation is secured by a transaction or interest that was not governed by article 9 (a mortgage that was entered into between the homeowner and the small bank before the promissory note was sold to the big bank). - Exclusions from Article 9 or its Filing Provisions o 9-109(c) o 9-109(d) o Security Interests in Real Property 9-109(a)(1) provides that Article 9 applies to a transaction that creates a security interest in personal property or fixtures. Then, 9-109(a)(11) provides that Article 9 does not apply to the creation or transfer of an interest in or lien on real property other than fixtures. Security interests in real property (mortgages, trust deeds) are governed by real property law. o Particular Types of Nonconsensual Liens 9-109(d) specifically excludes from the applicability of Article 9 two types of nonconsensual liens: landlords liens and liens given by statute or other rule of law for services or materials (other than agricultural liens). o Wage assignments o When Preempted 9-109(c)(1) provides that Article 9 (state law) does not apply to the extent that a statute, regulation, or treaty of the United States preempts the article. Examples: Article 9 does not apply to registered copyrights. o Securities Interests Governed by a Government or Governmental Subdivision or Agency However, such interests are excluded from Article 9 only if another statute expressly governs the creation, perfection, priority, or enforcement of the security interest. o Life Insurance Policies However, Article 9 does apply to any assignment of health-care-insurance receivables by or to a health-care provider. Such assignments are automatically perfected. o True Consignments: such as consignments of consumer goods Security Interests in Rights to Payment, Investment Property, and Other Intangibles - The secured financing of intangible property raises many of the same considerations as the financing of goods:

o The secured party must insure that its security interest is enforceable, i.e., that conditions for attachment in 9-203 have been met. o To prevail over subsequent judicial lien creditors and secured parties, the security interest must be perfected, often by filing a financing statement. See, 9-317(a)(2), 9-322(a)(1), and 9-310(a).

Financing Receivables o Parties: To every accounts receivable operation there are necessarily three parties: (1) the lender upon, or purchaser of the accounts (known as the assignee, lender, or secured creditor); (2) the borrower upon, or seller of, them (known as the assignor or borrower); and (3) the debtor upon the accounts assigned account-debtor. o The word assignment includes granting people security interests and selling things. One must look at the terms. If there is no recourse (essentially assignor sells its accounts to the assignee) that looks more like a sale, while if there is recourse (the assignor is required to pay back borrowed money with interest) it looks more like a loan of money (the assignor gives the assignee future rights to payment in returns for the assignee paying the assignor money upfront, which is similar to a loan being given by an assignee to the assignor since the assignor has complete responsibility for the assignee getting its money back). o Receivables: Rights to payment. o Two requirements to the payment of any accounts receivable: 1. The assignor must comply with the terms his agreement with the account-debtor (merchandise risk) since if the assignor does not comply then the debtor will not pay. 2. The account-debtor must be financially able and willing to pay (credit risk) or else the debtor will not pay. o Two types of accounts receivable financing: recourse and non-recourse. In both the assignor retains the merchandise risk since the fabrication of the goods or the rendition of services rests within his control. In recourse financing the assignor also retains the credit risk; he guarantees to the assignee that the account will be paid at its maturity. In non-recourse financing the assignee assumes the credit risk, and in legal consequence the operation constitutes a purchase. o A Prototype: Carguys is a Delaware corporation that sells automobile parts and offers automobile repair services to both consumers and commercial customers. Carguys provides repair and maintenance services and sells parts and equipment on open account i.e., on unsecured credit. Also, Carguys requires financing since it lacks the capital necessary to extend credit to its commercial customers while also meeting its operating expenses and other current obligations. Therefore, Carguys entered into a Revolving Credit Agreement with Eastinghome, where Carguys is entitled to borrow, repay, and reborrow throughout the term of the agreement, so long as the aggregate outstanding loan balance does not exceed the lesser of the Commitment (defined as $25,000,000) or the Borrowing

Base (the sum of 75% of the Base Accounts and 60% of the Base Inventory) at any time. (Note: this is purely a loan).

o Sales of Receivables
Article 9 is not limited to transfers of an interest which secures payment or performance of an obligation. It also applies to a sale of accounts, chattel paper, payment intangibles, or promissory notes. See 9-109(a)(3). However, there are a set of exclusions from Article 9, as well as set exemptions from the filing requirement. Its often hard to tell the difference between a sale and an assignment. Perfected Upon Attachment Payment intangibles and promissory notes are perfected upon attachment. See 9309(3). Payment intangible: Exclusions: The assignment of a right to payment as part of a sale of the business out of which the receivable arose. See 9-109(d)(4). The assignment of a right to payment under a contract to an assignee who is also obligated to perform under the contract. See 9-109(d)(6). The assignment of a single account, payment intangible, or promissory note to as assignee in full or partial satisfaction of a preexisting indebtedness. See 9-109(d) (7). Securitization Transactions Securitization involves the creation of debt securities that are backed by pools of receivables (rights to payment). Almost any kind of receivable can support securitization financing. Before making their investment, the investors must be assured that neither the SPVs (special purpose vehicle: a corporation, partnership, or trust that is organized for the specific purpose of participating in the financing) nor the originators insolvency will interfere with the collection of the receivables and the application of those collections to payments to the investors.

o Public Notice of Security Interests in Receivables 9-109 9-309(2)

Assignments includes a sale. Thus, one should also look at 9-109. If 9-309 applies then one does not have to file a financing statements. In re Vigil Bros. Construction, Inc. (1996) Facts: Woods, a general contractors, entered into a construction contract with ASU. Woods subcontracted with Vigil and Vigil in turn subcontracted with CECO. CECO fulfilled its obligations under the contract and billed Vigil. Vigil executed an assignment to CECO of the Woods account receivable not to exceed $49, 385.56. CECO did not file a financing statement. Article 9 applies to assignments of accounts and thus the assignee must file a financing statement to perfect its security interest. However, one does not have to file when there is an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts to the assignor. See, 9-309(2). Such assignments enjoy automatic perfection. The assignee has the burden of proving insignificance. Courts have recognized three tests in determining significance: o 1. The percentage of accounts test: The Court asks what percentage of the total accounts of the assignor were assigned and whether that percentage constitutes a significant part of the whole. Courts have found that an assignment of 20% of an assignors accounts is significant and that 40% of an assignors accounts is significant. Here 40% of Woods accounts were assigned. o 2. the casual and isolated transaction test: The Court asks whether the assignee or assignor is in the business of commercial financing and whether the assignee regularly takes assignment of any debtors accounts as part of its business. Even if the assignee is not in the business of accepting assignments, or had not done so in the past, as assignment still may fail the casual and isolated test if it is a classic secured transaction. o 2. a combinations of (1) and (2). Both the percentage test and the casual and isolated test must be met for it to be insignificant. Any other interpretation would allow a debtor to assign 100% of its accounts in a casual and isolated transaction, without requiring the assignee to give notice to other creditors. Note: Other courts say that you only have to meet one of the tests for it to be insignificant. o Collection of Receivables (from the account debtor or other obligor) The assignor (debtor) assigns a debt, which is owed by the account debtor (obligor), to the assignee (secured party). Thus, the assignee is anticipating getting paid by the account debtor. There are two ways that this can be worked out at the outset: The assignor may notify the account debtor to make payment to the assignee (note the assignor may want to keep it a secret that the money is being paid directly to the assignee, since when the obligor/customer can pay directly to the assignor the customer might be happier since they may do regular business with the assignor and feel like they could have the assignor cut them some slack); or

Others are done on a non-notification basis, but even then upon the assignors default, the SP is entitled to require obligated persons to make payment directly to the SP. Provisions 9-403. Agreement Not to Assert Defenses Against Assignee. o Can be contractual provision between acct debtor and assignor that acct debtor cannot assert any defenses against an assignee Would act essentially as a negotiable instrument So the acct debtor would have to pay the assignee and then go after the assignor o The benefit to the acct debtor is a lower price charged to him by the assignor because the assignee will charge a lower price to the assignee because he can collect directly from the acct debtor, which will, therefore, be passed on to the acct debtor

Account Debtor: Not every person obligated to pay a receivable is an account debtor. Rather the term is limited to a person obligated on an account, chattel paper, or general intangible. See, 9-102(a)(3). Thus it excludes persons obligated on a promissory note or other instrument. Secured Partys Rights to Payment: An agreement between the secured party and the debtor (assignor) that the obligated person should make payment to the secured party (the assignee) is enforceable and the secured party may notify the obligor. See 9-607(1). Also, upon the debtors (assignors) default the secured party is entitled to require obligated persons to make payment to the secured party, regardless of whether the debtor has agreed to the procedure. The Obligated Persons Problem: Whom to Pay? Section 9-607(a) governs the secured partys right, as against the debtor, to notify a person obligated on a receivable, it does not govern the obligation of the person receiving the notification. Account Debtors o Section 9-406 sets forth the circumstances under which the account debtor must pay the secured party: If an account debtor pays the wrong party, the account debtor does not discharge its obligation on the contract and will have to pay again. 9-406(a) provides that an account debtor is obligated to pay an assignee upon receipt of a notification that the amount due or to become due has been assigned and that payment is to be made to the assignee. Persons Obligated on a Promissory Note

o If the promissory note is negotiable, then Article 3 determines whom the maker (or other person obligated on the instrument) must pay to discharge its obligation. o If the note is non-negotiable, then law other than the UCC determines whom a person obligated on the instrument must pay to discharge its obligation. The Secured Partys Problem: Claims and Defenses of the Obligated Person. Account Debtors: o The assignee (secured party) generally takes its interest in the account subject to the defenses of the account debtor. 9-404(a). But by notifying the account debtor of the assignment, the assignee may deprive the account debtor of certain defenses that may arise in the future. 9-404(a) (2). Also, an assignee may take free of nearly all defenses if the account debtor agrees. 9-403(b). o Pursuant to 9-404(b), the claim of an account debtor against an assignor may be asserted against an assignee under subsection (a) only to reduce the amount the account debtor owes. Persons Obligated on a Promissory Note: o A person who makes a negotiable instrument waives most claims and defenses as against a holder in due course. o A claim of an obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought. Consumer Account Debtors: The account-debtor rules in UCC 9-403 through 9-406 are subject to non-Article 9 law that establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes. Problem 6.1.6. (a) Factor is out of luck because there was no notice to the account debtor (customer). (b) If there is notice that complies with 9-406, then the account debtor must pay the assignee or else it will end up having to pay twice. Nonetheless, it could try to get its money back from the assignor. (c) Courts differ but to be safe the assignor should put the additional language directing payment to the assignee (d) Anti-alienation provisions are generally ineffective. See . The reason is to protect assignees since the provision would be used by the account debtor to refuse payment to the assignee.

- Purchasers of Chattel Paper, Instruments, and Documents

o HTWANDOTHBDN: A holder to whom a negotiable document of title has been duly negotiated. These holders, as well as holders in due course, take free of competing claims to negotiable instruments and negotiable documents. This status differs from a holder in due course in that it had to be purchased in the ordinary course of business or financing. o Two common documents of title (which can be issued in negotiable or non-negotiable form): Bills of Lading Warehouse receipts o 9-331. Priority of Rights of Purchasers of Instruments, Documents, and Securities Under Other Articles; Priority of Interests in Financial Assets and Security Entitlements under Article 8. (a) [Rights under Articles 3, 7, and 8 not limited.] This article does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security. These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in Articles 3, 7, and 8. Article 3 HDC Article 7 - HTWANDOTHBDN (b) [Protection under Article 8.] This article does not limit the rights of or impose liability on a person to the extent that the person is protected against the assertion of a claim under Article 8. (c) [Filing not notice.] Filing under this article does not constitute notice of a claim or defense to the holders, or purchasers, or persons described in subsections (a) and (b). o 9-330. Priority of Purchaser of Chattel Paper of Instrument.

(a) [Purchaser's priority: security interest claimed merely as proceeds.] A purchaser of chattel paper has priority over a security interest in the chattel paper which is claimed merely as proceeds of inventory subject to a security interest if: (1) in good faith and in the ordinary course of the purchaser's business, the purchaser gives new value and takes possession of the chattel paper or obtains control of the chattel paper under Section 9-105; and (2) the chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser. (b) [Purchaser's priority: other security interests.] A purchaser of chattel paper has priority over a security interest in the chattel paper which is claimed other than merely as proceeds of inventory subject to a security interest if the purchaser gives new value and takes possession of the chattel paper or obtains control of the chattel paper under Section 9-105 in good faith, in the ordinary course of the purchaser's business, and without knowledge that the purchase violates the rights of the secured party. (c) [Chattel paper purchaser's priority in proceeds.] 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: (1) Section 9-322 provides for priority in the proceeds; or (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. (d) [Instrument purchaser's priority.] Except as otherwise provided in Section 9-331(a), a purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party. (e) [Holder of purchase-money security interest gives new value.] For purposes of subsections (a) and (b), the holder of a purchase-money security interest in inventory gives new value for chattel paper constituting proceeds of the inventory. (f) [Indication of assignment gives knowledge.] For purposes of subsections (b) and (d), if chattel paper or an instrument indicates that it has been assigned to an identified secured party other than the purchaser, a purchaser of the chattel paper or instrument has knowledge that the purchase violates the rights of the secured party. Note: The first to file or perfect rule has exceptions, and this is one of them. Certain people who take possession of chattel paper or a promissory note have the benefit of this provision. So taking possession of these things is better than filing a financing statement.

o Purchasers of Instruments
Perfection of instruments: A security interest in an instrument may be perfected by either filing or possession. Unlike the case of accounts or chattel paper, a security interest arising from the sale of a promissory note (a type of instrument) is automatically perfected upon attachment. (If a buyer of accounts or chattel paper fails to perfect its security interest on the other hand, the seller retains the power to resell the accounts or chattel paper to a third person, buyer number 2, who can acquire good title to them. Holders in Due Course: If the note is negotiable and is negotiated to a secured party under circumstances such that the secured party becomes a holder in due course, then the secured party will take free of all claims to the instrument, including competing security interests. See 9-331(a) and 3-306.

A purchaser who acquires a negotiable instrument with knowledge of an earlier security interest cannot be a HDC, and thus would not be entitled to priority under 9-331. Under 9-330, however, the purchase may obtain priority over the earlier security interest notwithstanding the purchasers knowledge. A purchaser who acquires a nonnegotiable instrument cannot be a HDC. Thus, an instrument differs from an account and payment intangible in that a second-intime purchaser can achieve priority over an earlier-perfected security interest by taking possession of the paper under 9-330(d), or, if the interest is negotiable, by becoming a HDC under 3-302. Those who finance electronic notes are subject to the first-to-file-orperfect rule, like those who finance other non-paper-based receivables (accounts, payment intangibles). Electronic Documents As with electronic notes, an electronic document of title will become a transferable record, to which UETA applies, only if the issuer expressly agrees that it is to be considered a transferable record. Revised Article 7 applies to any document of title stored in an electronic medium. Control of an electronic document under Article 7 serves the function of indorsement and possession of a tangible document and so is a method of perfecting a security interest in an electronic document. See 9-314(a). Filing is an alternative method of perfection. See 9-310(a)

Purchasers of Chattel Paper

Conflicting Priorities in Chattel Paper o 9-330 provides strong protection for a purchaser who gives new value and takes possession of chattel paper in good faith and in the ordinary course of its business. Subsection (b) gives the purchaser seniority over an earlier-in-time perfected security interest in chattel paper if the purchaser acts without knowledge that the purchase violates the rights of the secured party. Pursuant to 1-201(25), knowledge means actual knowledge. However, 9-330(f) imputes knowledge for the purposes of subsection (b): if chattel paper indicates that it has been assigned to an identified secured party other than a purchaser, a purchaser of the chattel paper ipso facto has knowledge that the purchase violates the rights of the secured party. It is thus in the secured partys interest to stamp the chattel paper with assigned to Firstbank (or whoever the secured party is). Or, Main Motors and Firstbank could agree that the buyer of the cars would make its check out to both Main Motors and Firstbank. Notwithstanding the existence or assertion of knowledge, the purchaser can achieve priority over a competing security interest which is claimed merely as proceeds of inventory subject to a security interest if that chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser. 9330(a). (Note: As between Carguys and Eastinghome, whenever Carguys sold a car it did not have to account to Eastinghome,

while Main Motors has to account to Firstbank. Eastinghome relies much less on the proceeds or receivables. Firstbank in the prototype even if it said chattel paper in the agreement would be claiming it as merely proceeds). o The requirements for achieving priority as a purchaser of chattel paper under 9-330(a) or (b) are more stringent that the requirements in 9-330(d) for a purchaser of an instrument: A purchaser of an instrument need not take possession in the ordinary course of the purchasers business, nor need the purchaser give new value; for instruments, and value, even old value, will do. Chattel paper includes leases of personal property. What about when there are many copies, how do you take possession? Make sure that the one you take possession of states that it is the original. Electronic chattel paper: Chattel paper which (thus it has the same characteristics of chattel paper but that is electronic rather than written). One can perfect by filing a financing statement, since it is a sort of chattel paper and filing suffices for chattel paper, it will work. One can also perfect by getting control of the electronic chattel paper: There has to be a system that shows that there is only one official copy. See, 9-105.

- Security Interests in Investment Property (stocks, bonds, and similar property)

o Investment property can be held in two different ways: (1) directly, as where the debtor is the holder of a security certificate registered in the debtors name; and (2) indirectly, through a broker or other securities intermediary. o The Structure of Revised Article 8 Parts 2, 3, and 4 of Revised Article 8 govern holdings in which the owner of the security has a direct relationship with the issuer. In these situations the stock is classified as a security, see 8-102(a)(15). Such securities may be deemed either certificated or uncertificated. Part 5 applies when the owner holds through a securities intermediary. In these situations the stock is classified as a security entitlement, see 8-102(a)(18). o Creation and Perfection of a Security Interest in Investment Property One does not need to describe each particular security entitlement in order for attachment to occur. See, 9-203(h). Further, perfection as to the securities account automatically perfects as to each security entitlement carried in the account. See, 9-308(f). There are two principal methods for perfecting a security interest in investment propertyfiling and control. 9-312(a), 9-314(a). The meaning of control varies depending on whether the collateral is a certificated security, an uncertificated security, or a security entitlement. 9-104(a), 8-106. Although perfection by any method will achieve priority over a subsequent judicial lien creditor, perfection by control affords priority over more different types of competing claims than does perfection by filing. See 9-317(a)(2)

(competing lien creditor); 9-328 (competing secured parties). Further, a interest perfected by control has priority over a security interest perfected by filing. 9328(1). Perfection by control carries with it the ability to have the securities sold or transferred without further action by the transferor. A certificated security may be perfected by taking delivery. 9-313(a), 8-301(a). Delivery occurs when the secured party acquires possession of the security certificate. 8-301(a) (1). Also, a security interest in investment property may be perfected automatically under limited circumstances. 9-309(b)(9)-(11). Temporary perfection may be available with respect to certificated securities. 9-312(e), (g). o Certificated Securities (often used in closely-held corporations) May be perfected by either delivery or control. 9-313 9-106 8-106. Control. o Good-Faith Purchase of Securities and Security Entitlements A secured party who qualifies as a protected purchaser of a security not only acquires the rights in the security that the debtor had or had power to transfer but also acquires its interest in the security free of any adverse claim. 8-308(b). A protected purchaser need not be a holder, thus one can be a protected purchaser of an uncertificated security. 8308(a). Although one cannot be a protected purchaser of a security entitlement, a purchaser for value of a security entitlement typically takes free of adverse claims. 8-502; 8-510(a). o When youre dealing with a broker you have a security entitlement with respect to the broker. In this indirect holding there are certificated shares. o Suppose a person buys stock from a broker on credit (gets credit from the broker) so if you dont buy the stock in full you owe money to the broker. The broker will ask you to grant a security interest in the stock. The broker has control. Under 9-328, people who have control beat people who do not have control. The broker/financial intermediary (a bank can also be a financial intermediary) will beat others then because it has control. If you really want control you will have the broker subordinate itself to you if the broker is lending money to you later. o A brokerage account can have more than just stocks, it can have money, since as the money sells the stock it will get money and this will become a part of the account. If you grant a security interest in your security entitlement the person with the interest will also get the money and that will not be a deposit account. Security Interests in Deposit Accounts (checkings, savings, and other deposit accounts) o Free Flow of Funds: Transferees of funds from a deposit account take free of a security interest in the deposit account, even if they actually know of the security interest and even if they give no value. 9-332(b). The only exception is for a transferee who acts in collusion with the debtor in violating the rights of the secured party. (This rule applies as well to security interest in money). 9-332(a). o Consumer Deposit Accounts: Assignments of deposit accounts in consumer transactions are excluded from Article 9. See 9-109(a)(13). o Perfection by Control:

A security interest in a deposit account as original collateral may be perfected only by control; it may not be perfected by filing a financing statement. 9-312(b)(1); 9-314(a). A security interest in a deposit account that is proceeds of most other types of collateral may be perfected by filing against the original collateral. 9-315(c), (d)(2). Control of a deposit account is defined in much the same way as control of a security entitlement. There are three different options: 1. A secured party has control of a deposit account if the debtor, secured party, and bank with which the deposit account is maintained agree in an authenticated record that the bank will comply with the instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor. 9-104(a)(2). 2. A secured party has control if the secured party becomes the banks customer with respect to the deposit account. 9-104(a)(3). 3. If the secured party is the bank with which the deposit account is maintained, the secured party automatically has control. 9-104(a)(1). Control either by the secured party entering to a k with the bank where the bank agrees to follow orders with the secured party with respect to the money in the account or where the secured party becomes a customer of the bank. o Priority The bank with which the deposit account is maintained enjoys priority over a third party who enters into a control agreement with respect to the deposit account. 9-327(3). A secured party who has control by virtue of having become the banks customer with respect to a deposit account obtains priority over the bank. 9-327(4). This is different than security entitlements where a third party who wishes to achieve priority over the security interest of the securities intermediary must induce the securities intermediary to enter into a subordination agreement. 9-328(3). o Enforcement If the secured party is the bank with which the deposit account in maintained, after default the bank may apply the balance of the deposit account to the obligation secured by the deposit account. 9-607(a)(4). A third-party secured party with control under 9-104(a)(2) or (3) may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party. 9-607(a) (5). As for a secured party who perfects the security interest in an account that constitutes proceeds of other collateral by filing, he or she may notify a person obligated on collateral to make payment...to or for the benefit of the secured party and enforce the obligations of a person obligated on collateral and exercise the rights of the debtor with respect to the persons obligation. 9-607(a)(1), (3). But 9-607 does not determine whether a bank or other person obligated on collateral owes a duty to a secured party. 9607(e). Thus, unless non-UCC law otherwise provides, a secured party who lacks control of a deposit account must resort to judicial process to obtain the funds on deposit. o Recoupment and Setoff Setoff: if a person owes $100 (debtor) and the bank owes $20 (creditor), then the bank can setoff the 80 from the debtors account. Recoup: is only one relationship if customer does something against its K, the bank can take the appropriate amount of money from the customers account

Under 9-340(a), the bank may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account. An exception is made in 9-340(c), however; if the secured party has perfected its security interest by itself becoming the banks customer on the deposit account (see 9-204(a)(3)), then the bank may not effectively exercise setoff based on a claim against the debtor. Section 9-340(b) provides that Article 9 does not affect a right of recoupment or set-off of the secured party as to a deposit account maintained with the secured party. (Thus, the banks recoupment or setoff rights are unimpaired).

Real Property-Related Collateral: Fixtures and Receivables

Article 9 generally does not apply to the creation or transfer of an interest in or a lien on real property, including a lease or rents thereunder. 9-109(d)(11). Article 9 does apply to the extent that provision is made forfixtures in Section 9-334. Fixtures: Goods that have become so related to particular real property that an interest in them arises under real property law. 9-102(a)(41) essentially leaves it up to property law. In addition, no Article 9 security interest exists in ordinary building materials incorporated into an improvement on land. 9334(a). (Things that used to be personal property and that again could be personal property but have become real property.). Examples: Elevators, furnaces, kitchen stoves, refrigerators, and air conditioners. Note: Address it in the real estate contract what is fixtures; if something is a fixture then it would go along with the real property in a sale. o 9-334. Priority of Security Interest in Fixtures and Crops. (a) [Security interest in fixtures under this article.] A security interest under this article may be created in goods that are fixtures or may continue in goods that become fixtures. A security interest does not exist under this article in ordinary building materials incorporated into an improvement on land.

(b) [Security interest in fixtures under real-property law.] This article does not prevent creation of an encumbrance (real estate mortgage or lien) upon fixtures under real property law. (c) [General rule: subordination of security interest in fixtures.] In cases not governed by subsections (d) through (h), a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor. (The real estate interest wins unless you can find where it loses in sections d through h. Thus in d through h there are situations where the secured party in the fixture can beat the mortgage owner). Unless an exception exists in (d)-(h), the encumbrancer wins over a person w a security interest in a fixture (d) [Fixtures purchase-money priority.] Except as otherwise provided in subsection (h) (this wont work against a construction mortgage), a perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and: (1) the security interest is a purchase-money security interest; (2) the interest of the encumbrancer or owner arises before the goods become fixtures; and (3) the security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter. Fixture filing filing in real estate records. (e) [Priority of security interest in fixtures over interests in real property.] A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if: (1) the debtor has an interest of record in the real property or is in possession of the real property and the security interest: o (A) is perfected by a fixture filing before the interest of the encumbrancer or owner is of record; and o (B) has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner; (2) before the goods become fixtures, the security interest is perfected by any method permitted by this article and the fixtures are readily removable: (any method would mean an article 9 filing or a fixture filing): o (A) factory or office machines; o (B) equipment that is not primarily used or leased for use in the operation of the real property; or o (C) replacements of domestic appliances that are consumer goods; (3) the conflicting interest is a lien on the real property obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by this article; or (f) [Priority based on consent, disclaimer, or right to remove.] A security interest in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if: (1) the encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed an interest in the goods as fixtures; or (2) the debtor has a right to remove the goods as against the encumbrancer or owner.

(h) [Priority of construction mortgage.] A mortgage is a construction mortgage to the extent that it secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land, if a recorded record of the mortgage so indicates. Except as otherwise provided in subsections (e) and (f), a security interest in fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction. A mortgage has this priority to the same extent as a construction mortgage to the extent that it is given to refinance a construction mortgage. Like a PMSI in itself. There is nothing there at first and the debtor is being financed to construct a building. So, if thereafter a PMSI was filed and such became a fixture, the construction mortgage would have a senior interest. o Perfection Can perfect by an Article 9 filing. Can perfect by a fixture filing in a real estate filing office. Real estate records are usually in the county where the real estate is located. The general priority rule is that a real property interest, whether that of an owner or encumbrancer, is senior to an Article 9 security interest in fixtures. See 9-334(c). Exceptions, in which an article 9 secured party may achieve priority: PMSIs under 9-334(d) priority depends on the secured partys having perfected by a fixture filing. The debtor has an interest of record in the real property priority depends on the secured partys having perfected by a fixture filing Certain readily removable goods under 9-334(e)(2) and liens on real property obtained by legal or equitable proceedings under (e)(3) the security interest may be perfected by any method permitted in this article. Fixtures are goods, and thus the obvious method of perfection against goods is filing a financing statement. If the financing statement is filed as a fixture filing, it must e filed in the office in which a mortgage on the related real property would be recorded. 9-501(a)(1). However, if the financing statement is not filed as a fixture filing, the regular UCC filing office (the Office of the Secretary of State) is the proper place to file. 9-501(a)(2). Also, a financing statement filed as fixture filing must provide more information than an ordinary financing statement. 9-102(a)(40); 9-502(a), (b). Note that a fixture filing is not effective to perfect a security interest in nonfixtures, thus it is safe to file both filings since it may be uncertain whether or not property is a fixture. Real Property Receivables o 8.3.6 (a) bank takes possession of note, should do anything else? Yes, they should obtain a preemptive assignment so it can enforce a judicial sale instead of getting an assignment subsequent to default With regard to the land installment contract, you would turn it into a mortgage to avoid potential inequity of paying most of contract and then being completely out of luck due to default o Realty Paper Owner of blackacre receives money and gives a note to the mortgage of blackacre as collateral to lender 9-203 if SI in note w mortgage then you have a SI in both. Super lender acquires the note in the mortgage as collateral for transaction with Lender

9-308 - Perfection of the realty paper is achieved by taking possession of it Reason you want to take possession of the note is so that you dont get screwed if the debtor sells the note to a bona fide purchaser o Installment Land Sale Contracts Essentially like a lease to own owner wont receive title until it has made all the payments The potential inequity is if owner makes 90% of payments and then default, potential owner is out of luck To rectify this courts have termed this a mortgage and you have a right to equity in what youve paid o Real Property Leases and Rents This is not article 9

Bankruptcy
o Introduction A secured party is entitled to receive from the bankruptcy its collateral or the value of its collateral up to the amount of its claim. Holders of unsecured claims share pro rata in whatever unencumbered assets remain after payment of secured claims, expenses of administering the bankruptcy case, and unsecured claims entitled to priority of payment. o Problem 7.1.1 (a) Property will be sold and what its liquidated for will be paid to the mortgagor bank, in the amount of 400k The equipment will get paid the collateral The amount remaining, 120k, will be distributed pro rata to the remaining unsecured parties (means distributed in relation to what the parties are owed)

(b) Here, the bank will still get its 400k, but 200k must be distributed to the unsecured creditors, who are owed 380k

Even if your undersecured, you will receive 100% of the amount of the collateral, then you also receive the percentage your owed pro rata from the left over between the unsecured creditors o The Trustees Avoiding Powers: The Bankruptcy Code affords the trustee the power to avoid (undo) certain otherwise valid pre-bankruptcy transfers, including transfers of security interests. If trustee succeeds in avoiding the transfer of a security interest, the may recover the property transferred (i.e., the security interest) for the benefit of the estate. The Strong Arm Clause BC 544(a)(1) affords to the trustee the rights of a hypothetical creditor who has obtained a judicial lien on the property. If under 9-317(a)(2), at the commencement of the bankruptcy case, the judgment creditor of the debtor who obtained an execution lien acquired rights superior to Sellers unperfected security interest then the trustee will do so and render Seller unsecured. o BC 544(a)(1) through 9-317(a)(2) has power over all the property of the debtor Problem 7.2.1. o Trustee is able to avoid the SI on the equipment, so the unsecured parties are entitled more of a pro rata share Problem 7.2.2 o Seller wants to get 100% of what he is owed and to do so the SI would need to be perfected Wins because its a PMSI SI that trustee cant avoid b/c its automatically protected o Trustee wants to add this to the pot of unsecured creditors Wants to sell it off and add that amount to the pro rata share unsecured creditors are entitled to. Problem 7.2.3. The Trustees Power to Avoid Preferences Preference law addresses prebankruptcy transfers that have the result of affording a particular creditor more than its pro rata share. BC 547 enables the bankruptcy trustee to avoid certain of these preferential transfers. Under BC 550, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of the property. BC 547(c) excepts from avoidance certain otherwise preferential transfers. BC 547. Preferences o (b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; Means debt in existence before the time it was paid

(3) made while the debtor was insolvent; Rebutable presumption that the debtor was insolvent for 90 days before bankruptcy (4) made (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and o Insider certain actual relatives (family members), certain affiliates, parent corp, etc. (5) that enables such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; o Could be chap 11, so you must make believe its a title 7 (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. o Creditor would have received more due to the transfer than he wouldve received had the bankruptcy simply gone through o (c) The trustee may not avoid under this section a transfer (1) to the extent that such transfer was (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange; (2) to the extent that such transfer was in payment for a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms; (3) that creates a security interest in the property acquired by the debtor (A) o (f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. (Note: This is a presumption that can be rebutted but it is extremely rare for someone to attempt to rebut this presumption). BC 101. Definitions o (54) The term transfer means: (A) the creation of a lien; (B) the retention of title as a security interest; (C) the foreclosure of a debtors equity of redemption; or

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with: (i) property; or (ii) an interest in property.

Problem 7.2.4. o Yes, the trustee can recover the payment from Firstbank. There was a transfer of an interest to the benefit of a creditor, 12k For an antecedent debt, Debt from June 1 Made while the debtor was insolvent (see (f)). Presumption that there was insolvency Made on or within 90 days before the date of the filing of the petition; That enables such creditor to receive more than such creditor would receive if the transfer had not been made. Depends upon whether the debtor is insolvent or not do the debtors liabilities exceed the assets o If assets are 80k and liabilities are 100k, then the creditor would not receive 100 cents on the dollar, which would satisfy this element. Problem 7.2.5. o Here, the debtor granted the creditor a perfected security interest in equipment one month prior to the debtor filing for bankruptcy. This is a transfer according to 101(54). Is this avoidable by the trustee? Yes. There was a transfer of an interest of the debtor to the benefit of the creditor, For an antecedent debt, Made while the debtor was insolvent (see (f)), Made on or within 90 days before the date of the filing of the petition; That enables such creditor to receive more than such creditor would receive if the transfer had not been made. Problem 7.2.6. o No, here the transfer of the security interest was not on account of an antecedent debt. If the security interest is made at the time the loan is made then the transfer is not subject to a preference attack. Problem 7.2.7. o Here there are two transfers. The creditor gave the loan (and received a security interest), and then the debtor repaid the loan a month later. Thus, There was a transfer of an interest of the debtor to the benefit of the creditor, For an antecedent debt, Made while the debtor was insolvent,

Made on or within 90 days before the date of the filing But would this enable the creditor to receive more? If you are a fully secured creditor then you dont have anything to worry about under preference law. Thus he did not receive more than he would have under a Chapter 7 distribution. (But now the equipment is no longer subject to the security interest and the other creditors can look to that equipment thus the debtors estate did not change, it went down in cash but up in equipment). The other transfers would not harm the unsecured creditors because although the cash of the debtor went down, there is no longer a SI on the equipment, which adds value through the equipment (loss of cash, increase in equipment)

Delayed Perfection BC 547(e) provides the way to date the transfer. Paragraph (2) states that a transfer is made: (A) at the time such transfer takes effect between the transferor and transferee, if such transfer is perfected at, or within 30 days after such time; or (B) at the time such transfer is perfected, if such transfer is perfected after 30 days. Paragraph (1)(B) provides that a transfer of personal property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. Thus one must look to 9-317(a)(2) and 9-310(A) to decide. Thus, if there is delayed perfection it is bad since if the money is loaned earlier and not on account of an antecedent debt but the perfection is delayed then that can bring the date of transaction to a way later date even though they had a security agreement entered into in the beginningmeaning now the transfer is on account of an antecedent debt and it may be within 90 daysthus the trustee would win. The preference rules undo transfers of money and transfers of security interests. Therefore, it pays to perfect quickly. Problem 7.2.12. o This was not perfected until September 1st and thus thats when the transfer was perfected under 547(e). Yes, the trustee can avoid it since now the transfer would be for an antecedent debt. Problem 7.2.13. o It is not avoidable since the transfer was not made on or within 90 days before the date of the filing of the petition. Problem 7.2.14. o It is not avoidable since it was not for an antecedent debt. According to 547(e) the transfer was made at the time it took effect between the transferor and the transferee since it was perfected within 30 days. It took effect here on January 2nd since thats when the money was loaned and a security agreement was answered into. Thus, the transfer was on January 2nd as was the debt (thus it was not antecedent). Problem 7.2.15. o Now there is an unperfected security interest! Now the trustee can just use the strong arm rule under 544. On January 8th the bankruptcy petition was filed and thus the trustee acquired the rights of a lien creditor.

The Floating Lien: A floating lien is where there is a security interest in all receivables or all inventory which is after-acquired, since the collateral is constantly changing. 9204(a) provides explicitly that a security agreement may create or provide for a security interest in after-acquired collateral. The filing of a single financing statement covering inventory and accounts is sufficient to perfect a security interest in inventory and accounts that the debtor acquires after filing, even if the financing statement does not refer to after-acquired property. Before starting 547(e), you must look to 547(b) and determine whether there has been a transfer o Ex. If golf bars appreciated in value in 90 day period, that increase would not be available to trustee b/c there was no transfer 547(e)(3) supersedes (e)(2) and provides that a transfer is not made until the debtor has acquired rights in the property transferred Note this is like attachment. So first you look to 547(e) to see when the transfer occurred, then you go to 547(b) to see whether the transfer can be avoided, then you look at 547(c)(5) to see if that exception applies. o 547(c)(5): A trustee may not avoid under this section a transfer that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such party exceed the value of all security interests for such debt on the later of: (A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or (ii) with respect to a transfer to which subsection (b)(4)B) of this section applies, one year before the date of the filing of the petition; or (B) the date on which new value was first given under the security agreement creating such security interest.

o Analysis of 547(c)(5): The section focuses on whether the aggregate of preferential transfers of security interests caused a reduction in the secured partys unsecured claim. You look at the situation on the 90th day back and look at the situation at the date of bankruptcy to see if there has been an improvement since the 90 days. If there has been an improvement then the trustee wins the amount of the improvement. If debtor is oversecured, then a secured creditor does not have to worry about losing anything to the trustee o Problem 7.2.21

The bankruptcy petition was filed on March 31, 2006 and thus the reach back period is December 31, 2005. (a) How much, if any, of the security interest in the inventory constitutes a preference under 547(b)? The security interest was transferred when the debtor acquired rights in the property. It was transferring during the 90-day period (all the inventory had changed.) Thus, all of the security interest was subject to avoidance under 547(b). (b) Under 547(c)(5) a trustee may not avoid a transfer that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of the transfers caused a reduction, as of the debt of the filing, of any amount by which the debt secured exceeded the value of all security interests from either 90 days ago or from on year ago when (b)(4)(B) applies. - Youre looking for a reduction in the excess of debt over the value of collateral. Here there is no excess at either point in time. The debt is less than the value of the collateral at both times. Thus, the trustee cannot except anything and therefore loses. A good floating lien is one where there is no improvement in position there was a debt of $70,000 with a value of collateral of $75,000 (over-secured). If there is no improvement in position, then the trustee cant do anything bad to you. There is a $70,000 secured claim and the secured party will get either the property or the money in this amount. o Problem 7.2.22 On March 31, 2006 there is a debt of $70,000 with inventory valued at $60,000 and on December 31, 2005 the debt was $70,000 with the inventory valued at $55,000. There has been a reduction of $5,000 in the excess between the amount owed and inventory, thus an improvement of position. The secured party was undersecured by $15,000 in the beginning, and now the secured party is only under-secured by $10,000. You dont look in between the 90 days, only compare the amount right at 90 days and when bankruptcy petition is filed. (a) The trustee can go after the improvement in position- $5,000pursuant to 547(c)(5). The secured party will get $55,000 what it had 90 days ago, it does not get the improvement over the 90-day period. (b) This question asks where did the 5k improvement come from? this points out that tracing could be necessary

Default; Enforcement of Security Interests

Taking Possession of Collateral: o 9-609 entitles a secured party to take possession of collateral following a default (default is an undefined term left to agreement of the parties).

9-609. Secured Partys Right to Take Possession After Default. (a) After default, a secured party: o (1) may take possession of the collateral; and o (2) without removal, may render equipment unusable and dispose of collateral on a debtors premises under 9-610. (b) A secured party may proceed under subsection (a): o (1) pursuant to judicial process; or o (2) without judicial process, if it proceeds without breach of the peace. (c) If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available o Methods of taking possession: Judicial Process Nonjudicial Process: A secured party may take possession nonjudicially only without a breach of the peace. Stone Machinery Co. v. Kessler (1970) o During a non-judicial take over, a debtor has a right to resist by all lawful and reasonable means. This right is violated when a sheriff acting colore officii participates in the repossession. Acts done by an officer which are of such a nature that the office gives him no authority to do them are colore officii (such as where the sheriff deputy does not have legal papers, such as a court order empowering the sheriff to seize the tractor). Such unauthorized actions amount to constructive force, intimidation and oppression constituting a breach of the peace and conversion of the debtors property. (Defendant received compensatory damages in the amount of $18,586 since in a conversion claim one gets the value of the property that was converted). o Note: This is a warning to secured parties to not involve law enforcement officers in the repossession. o Compare: Barrett v. Harwood where the court found that the police officer was merely exercising his duty to prevent violence and was not taking an active role to assist in the repossession or to intentionally intimidate the debtor from exercising the right to object. o Also, as in Wade the secured party (or the one doing the repossessing) may inform the police that they are going to repossess just in case the police are called about an alleged theft.

Thrash v. Credit Acceptance Corp. (2001) o Facts: CAC employed GCRS to repossess the Thrashes automobile. GCRS poured liquid dishwashing soap on the driveway in order to remove the vehicle. Mr. Thrash then fell due to the liquid. The Thrashes allege that CAC should be held liable for GCRSs negligent or wanton act of leaving a clear liquid on the floor as well as the wrongful repossession.

o Issue: Whether GCRS was acting as CACs agent in repossessing the automobile and therefore CAC can be vicariously liable for GCRSs wrongdoing. The test for determining whether a person is an agent or employee of another, rather than an independent contractor with that other person, is whether that other person has reserved the right of control over the means and method by which the persons work will be performed, whether or not the right of control is actually exercised. Here CAC had control over the manner that GCRS conducted the repossessions. You cant just hide behind the repossession company when there is a breach of the peace. o Issue: Whether GCRS committed a breach of the peace (and thus the repossession was improper and constituted a conversion). It is unlawful for a repossession to be accomplished in a manner that creates a substantial risk of injury to the debtor parties or to any innocent bystanders. (Breach of the peace). Here, GCRS created a substantial risk of injury to the Thrashes. Wade v. Ford Motor Credit Co. (1983) o Issue: Does the repossession of a car, when there is no contact or confrontation between the repossessor and the debtor at the time and place of repossession, constitute a breach of the peace when there has been a prior threat of deadly violence by the debtor if the repossession is attempted? o No a debtor threatening the repossessor does not immunize the debtor from a future repossession. A repossessor may not repossess though when the debtor is there at the time trying to resist the repossession. o Damages for Wrongful Repossession: Compensatory damages for loss of the use of the collateral and possible punitive damages. Conversion and value of collateral?? o Problem 9.1.1. (a) The secured party may repossess without judicial process if it can do so without a breach of the peace. It does not appear that there was a breach of the peace in this case. (b) Courts have found that once a creditor has gained sufficient dominion over his collateral, objection by the debtor will be of no avail. (c) The less polite she is the better for her since if violence is imminent then there is a breach of the peace. If she is shouting they should withdraw. (d) This would deter her from objecting and just like Stone Machinery (where the police were present) and thus could still be a breach of the peace since the debtor did not have the right to object. (e) The police were present in this case because she called them. Their presence alone would not create a wrongful repossession, it depends on what the police said and what went on. Police may be present in order to prevent violence, according to the second circuit, even when the repo men call them. Disposition of Collateral: (Note most of the UCC provisions governing disposition may not be waived according to 9-602) A secured party in possession of tangible collateral following a default

typically wishes to sell the collateral and then to apply the net proceeds of the sale to the secured obligation. If the proceeds are insufficient to satisfy the secured obligation, the secured party may wish to pursue the debtor to collect the deficiency. Contrarily, the secured party will pay over any surplus to the debtor (or in some cases, to junior claimants). A secured party seeking a deficiency judgment bears the burden of proof as to compliance with Part 6, including the commercial reasonableness of a disposition and the reasonableness of notification: o Disposition must be commercially reasonable: 9-610. Disposition of Collateral after Default. (a) [Disposition after default.] After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. (b) [Commercially reasonable disposition.] Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms. (c) What is a commercially reasonable disposition? A commercially reasonable disposition is one in which all aspects of the disposition are reasonably calculated to bring a reasonable and fair price for the collateral. The commercial reasonableness of a disposition normally is a question for the trier of fact. According to General Electric Capital Corp. v. Stelmach Construction Co. (2001) when determining whether the sale of collateral was conducted in a commercially reasonable manner, the trial court should consider all of the relevant factors together as part of a single transaction. The following factors should be taken into account: (1) the duty to clean, fix up, and paint the collateral; (2) public or private disposition; (3) wholesale or retail disposition; (4) disposition by unit or in parcels; (5) the duty to publicize the sale; (6) length of time collateral held prior to sale; (7) duty to give notice of the sale to the debtor and competing secured parties; (8) the actual price received at the sale; and (9) other methods, including the number of bids received and the method employed in soliciting bids, the time and place of sale. Low Price o Although a court must examine the price obtained for the collateral, the fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner. (See 9-627(a); General Electric). o Comment 2 to 9-627: While not itself sufficient to establish a violation of this Part, a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.

o However, if the secured party or another insider was the one who purchased the collateral, pursuant to 9-615, when the proceeds are very low compared to the proceeds that would have been received in a disposition to an unrelated third party, the surplus or deficiency is calculated not only the actual proceeds received but on the proceeds that would have been received in a complying Vornado PS, LLC v. Primestone Investment Partners, L.P. (2002) o The secured party hired an expert to dispose of the collateral. o While private sales are generally encouraged since they frequently result in higher realization on collateral, where the secured party is one of the most interested and able potential purchasers, a public sale is appropriate, since the secured party may only make a bid at a public sale. Court Approval o A secured party who desires enhanced certainty of compliance can obtain court approval of the terms of a disposition. 9-627(c). o Notification: A secured party is required to give a debtor, a secondary obligor (such as a guarantor), and certain other persons a reasonable authenticated notification of disposition. Rationale: The debtor has a right under the UCC to get the collateral back by paying the entire secured obligation and that right expires when the collateral has been disposed of, thus this notification informs the debtor the amount of time left to do so. See 9-623. Further, the debtor may want to declare bankruptcy in order to prevent the collateral from being disposed of because it wants to keep it or protect its interest in it for the bankruptcy case. Also, the debtor wants to be able to maximize the amount of money that is yielded when the collateral is sold so that it does not have to pay a deficiency or so that it can get the surplus (make sure it is being done in a commercially reasonable fashion). 9-611. Notification Before Disposition of Collateral. (a) ["Notification date."] In this section, "notification date" means the earlier of the date on which: o (1) a secured party sends to the debtor and any secondary obligor an authenticated notification of disposition; or o (2) the debtor and any secondary obligor waive the right to notification. (b) [Notification of disposition required.] Except as otherwise provided in subsection (d), a secured party that disposes of collateral under Section 9-610 shall send to the persons specified in subsection (c) a reasonable authenticated notification of disposition. Discharges the security interest (c) [Persons to be notified.] To comply with subsection (b), the secured party shall send an authenticated notification of disposition to: o (1) the debtor; (not the debtor in this situation) o (2) any secondary obligor; and o (3) if the collateral is other than consumer goods: (A) any other person from which the secured party has received, before the notification date, an authenticated notification of a claim of an interest in the collateral; o (anybody says they got a claim) (B) any other secured party or lienholder that, 10 days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:

Anybody else whos got a financing statement on file. Want to dispose of the collateral youve gotta check the files. (i) identified the collateral; (ii) was indexed under the debtor's name as of that date; and (iii) was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date; and (C) any other secured party that, 10 days before the notification date, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in Section 9-311(a). (d) [Subsection (b) inapplicable: perishable collateral; recognized market.] Subsection (b) does not apply if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. (e) [Compliance with subsection (c)(3)(B).] A secured party complies with the requirement for notification prescribed by subsection (c)(3)(B) if: o (1) not later than 20 days or earlier than 30 days before the notification date, the secured party requests, in a commercially reasonable manner, information concerning financing statements indexed under the debtor's name in the office indicated in subsection (c)(3)(B); and o (2) before the notification date, the secured party: (A) did not receive a response to the request for information; or (B) received a response to the request for information and sent an authenticated notification of disposition to each secured party or other lienholder named in that response whose financing statement covered the collateral. 9-612. Timeliness of Notification Before Disposition of Collateral (a) [Reasonable time is question of fact.] Except as otherwise provided in subsection (b), whether a notification is sent within a reasonable time is a question of fact. (b) [10-day period sufficient in non-consumer transaction.] In a transaction other than a consumer transaction, a notification of disposition sent after default and 10 days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition. (Safe Harbor). Comment 2: A notification that is sent so near to the disposition date that a notified person could not be expected to act or take account of the notification would be unreasonable. 9-613. Contents and Form of Notification Before Disposition of Collateral: General. Except in a consumer-goods transaction, the following rules apply: o (1) The contents of a notification of disposition are sufficient if the notification: (A) describes the debtor and the secured party; (B) describes the collateral that is the subject of the intended disposition;

(C) states the method of intended disposition; (D) states that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; and (E) states the time and place of a public disposition or the time after which any other disposition is to be made. o (2) Whether the contents of a notification that lacks any of the information specified in paragraph (1) are nevertheless sufficient is a question of fact. o (3) The contents of a notification providing substantially the information specified in paragraph (1) are sufficient, even if the notification includes: (A) information not specified by that paragraph; or (B) minor errors that are not seriously misleading. o (4) A particular phrasing of the notification is not required. 9-614. Contents and Form of Notification before Disposition of Collateral: Consumer-Goods Transaction. In a consumer-goods transaction, the following rules apply: o (1) A notification of disposition must provide the following information: (A) the information specified in Section 9-613(1); (B) a description of any liability for a deficiency of the person to which the notification is sent; (C) a telephone number from which the amount that must be paid to the secured party to redeem the collateral under Section 9-623 is available; and (D) a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available. o (2) A particular phrasing of the notification is not required. o Application of Proceeds of Disposition: Right to Surplus or Obligation for Deficiency 9-615. Application of Proceeds of Disposition; Liability for Deficiency and Right of Surplus (d) [Surplus or deficiency if obligation secured.] If the security interest under which a disposition is made secures payment or performance of an obligation, after making the payments and applications required by subsection (a) and permitted by subsection (c): o (1) unless subsection (a)(4) requires the secured party to apply or pay over cash proceeds to a consignor, the secured party shall account to and pay a debtor for any surplus; and o (2) the obligor is liable for any deficiency. (e) [No surplus or deficiency in sales of certain rights to payment.] If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes: maskovyak o (1) the debtor is not entitled to any surplus; and o (2) the obligor is not liable for any deficiency. (f) [Calculation of surplus or deficiency in disposition to person related to secured party.] The surplus or deficiency following a disposition is calculated based on the amount of proceeds that would have been realized in a disposition

complying with this part to a transferee other than the secured party, a person related to the secured party, or a secondary obligor if: o (1) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor; and o (2) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought. Explanation: A secured party must send a written explanation of its calculation of a surplus or deficiency to a debtor in a consumer-goods transaction or to a consumer obligor. 9-616. o Post-Default Debtor Waivers; Agreed Standards. After default, a secured party may seeks the debtors agreement that the secured party need not notify the debtor of a proposed disposition. 9-624. o Effect of Secured Partys Noncompliance Non-Consumer Transactions: Rebuttable Presumption 9-626(a) creates a rebuttable presumption that compliance with Article 9 would have yielded an amount sufficient to satisfy the secured debt. (If you did it correctly, the amount received equals the total obligation due.) 9-626(a): [Applicable rules if amount of deficiency or surplus in issue.] In an action arising from a transaction, other than a consumer transaction, in which the amount of a deficiency or surplus is in issue, the following rules apply: o (1) A secured party need not prove compliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance unless the debtor or a secondary obligor places the secured party's compliance in issue. o (2) If the secured party's compliance is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in accordance with this part. o (3) Except as otherwise provided in Section 9-628, if a secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with the provisions of this part relating to collection, enforcement, disposition, or acceptance, the liability of a debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the secured obligation, expenses, and attorney's fees exceeds the greater of: (A) the proceeds of the collection, enforcement, disposition, or acceptance; or (B) the amount of proceeds that would have been realized had the noncomplying secured party proceeded in accordance with the provisions of this part relating to collection, enforcement, disposition, or acceptance. o (4) For purposes of paragraph (3)(B), the amount of proceeds that would have been realized is equal to the sum of the secured obligation, expenses, and attorney's fees unless the secured party proves that the amount is less than that sum. Consumer Transactions: No Interference

o 9-626(b): [Non-consumer transactions; no inference.] The limitation of the rules in subsection (a) to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions. The court may not infer from that limitation the nature of the proper rule in consumer transactions and may continue to apply established approaches. o Damages 9-625(b): General Rule: An injury caused by a secured partys noncompliance is normally limited by the monetary value of the collateral. Consumer Goods 9-625(c)(2): If the collateral is consumer goods, a person that was a debtor or a secondary obligor at the time a secured party failed to comply with this part may recover for that failure in any event an amount not less than the credit service charge plus 10 percent of the principal amount of the obligation or the time-price differential plus 10 percent of the cash price. o Problem 9.2.1. (a) You do not have party choice when it comes to perfection; the filing statement had to be filed in Arkansas. However, perfection is not at issue here. Thus, the agreement of the parties will be recognized and Georgia law will apply. (b) If it is a public disposition then the secured party can acquire the property (it can also do so if its a private sale and stock)?? A public sale is an auction that is held at a certain time and place, while a private sale is almost anything else. The secured party would have to find out how best to dispose of it. The secured party could request a declaratory judgment and declare that idea to be commercially reasonable. The secured party would have to advertise the airplane. The secured party would also want to get it appraised as well. (c) (i) if the debtor is cooperative, then you can ask for the debtors help; (ii) if the debtor is not cooperative, then the debtor will be very critical of what you do, then send a letter to the debtor and ask for the debtors comments or suggestions since if the debtor does not respond then it looks like he must approve. The debtor would in a sense be estopped from complaining. The secured party could also go to court and have the court agree that the method is commercially reasonable. (e) You can put things in the security agreement that certain methods would be commercially reasonable dispositions (how many places to advertise, etc.). (f) The provision in 9-207 might not apply since this may not be considered a deficiency in any effective insurance coverage. Further, even if the risk of loss is on the debtor that is not helpful since the debtor does not have money. Maybe tell them you made a mistake. (g) The debtor is going to claim that he is entitled to the surplus that he should have gotten. A settlement would be a good idea. o Problem 9.2.2. (a) 9-625(c). The rebuttable presumption is that the amount received equals the total obligation due. The secured party would be trying to show that the price it got, $5,000, was the correct price. So Lee shows Main didnt comply and now Main rebutted the presumption. But Lee can still get damages under 9-656(c)(2). Thus, instead of Main collecting, they would owe Lee $1,100+ (the statutory damages minus the amount that

she owed them still) for failing to send the notice. These are statutory damages that are intended to impress upon the secured party the need to comply. (b) Absolute bar: The deficiency is wiped out and then there may be statutory damages on top of it. Main would owe Lee the statutory damages (the total $5,600). (c) Lee would owe the $4,400 (the deficiency). Rights of Guarantors on Secured Debt: A third party can lend support to an obligation of another either by giving a guaranty of payment or by being a hypothecator, giving a security interest in property that it owns to support the others obligation. (In the latter situation the third party would not be a debtor with respect to the other partys collateral since third party would not have an interest in that collateral). o Entitled to Notification: Even when a secondary obligor is not a debtor, the secondary obligor is entitled to notification of a disposition. 9-611(b), (c). Rationale: Such obligors would like to make sure that the disposition is done correctly since they are liable for any deficiency. o Rebuttable Presumption: A secondary obligor who suffers loss as a result of a secured partys noncompliance with Article, such as from the secured partys failure to dispose of the collateral in a commercially reasonable manner, may obtain the benefit of the rebuttable presumption rule of 9-626(a), or, in a consumer transaction, any deficiency-reducing rule the court may impose. o Deficiencies and Surpluses: A secondary obligor is liable for any deficiency. But one who hypothecates but does not undertake personally to pay the debt and would not have a deficiency with respect to the obligation. Any surplus, on the otherhand, would go to the hypothecator, since he or she would be the debtor with respect to that collateral. o Problem 9.3.1. Telli did not receive a notification, and he should have. According to 9-611(b) and (c) a secondary obligor is entitled to notification. However, Telli waived the right to notice. According to 9-624(a) one may waive his or her right to notice after default. Other than that, a debtor or secondary obligor may not waive right to notice. See 9-602(7). This was not after default. What damages would he get? This is not a consumer-goods transaction (so he cant get the consumer statutory damages). He would have to show that the failure to show him the notice, even though he saw it, harmed him in some way. It didnt do any harm, though. So there is a right to damages but the damages are the loss that he was caused and there wasnt loss. Competing Secured Parties o Duties of Senior Secured Parties to Junior Claimants Notification: 9-611(b) requires an enforcing secured party to send a reasonable authenticated notification of disposition and 9-611(c) specifies those parties to be notified, including the debtor, any secondary obligor, and certain other persons claiming an interest in the collateral, as specified in (c)(3). Allocation of Proceeds: After payment of (i) the reasonable expenses of the disposition and (ii) any reasonable attorneys fees and legal expenses incurred by the secured party, the proceeds are to be applied first to the satisfaction of the indebtedness secured by the security interest under which the disposition is made and, if any proceeds remain, then to the satisfaction of obligations secured by any subordinate security interest or other lien on the collateral if the secured party has received an authenticated demand for proceeds before distribution of the proceeds is completed. o When a Junior Takes Control and Proposes a Disposition:

Seniors Right to Notification: The junior secured party must give notification of a disposition to a senior secured party. 9-611(c). Seniors Right to Recover Collateral from Transferee at Juniors Sale: The transferee cutes off only the security interest under which it is made and any security interest or lien subordinate thereto. 9-617(a)(3). If the senior did not authorize the disposition and if its security interest is perfected, the seniors security interest would continue notwithstanding the juniors disposition. The senior would be entitled to take possession of the collateral from the juniors transferee. 9-315(a)(1); 9-317(b). Rights to Proceeds: A junior secured party can retain cash proceeds without the duty to apply them to the seniors obligation or to account to or pay the senior, as long as the junior acts in good faith without knowledge that the receipt of the proceeds violates the rights of the holder of the senior interest. 9-615(g). Nonetheless, the juniors act of taking possession of the collateral may make the junior liable to the senior for conversion. o Determining Who Is Senior o Problem 9.3.2. Tuleight is a trade creditor (unsecured creditor with small claims), a smaller creditor, who was given a junior security interest in Schmellis office equipment. (a) It would have to give notice other secured creditors and would thus need to do a file search. Yesrequest to search Arkansas files. (b) (i) Tuleight will not be liable for taking possession. Its ok for the junior to take possession. 9-609. (ii) The default sections in security agreements usually state that someone else getting a lien on or taking possession of the collateral is a default. It matters whether or not there has been a default since that determines whether AIB has a right to possession. AIB does not have a right to possession before the debtor defaults. If Tuleight does not give the collateral back then it may be liable for conversion. (iii) The buyer takes free of the security interest that handles the sale and subordinate security interests, but not senior security interests who were not a part of the sale. Thus, AIBs security interest is still in tact and could still go after the transferee. The buyer could go after Tuleight for a breach of the warranty of title. (Note: this is not an ordinary course of business sale). (iv) This may not be a commercially reasonably sale under 9-610(b). Does it matter? There has been a failure to comply, but has this caused loss to AIB? Regardless, AIB is still owed all of its money and still has a security interest in its equipment and can still get the equipment back. (v) 9-615(g) applies here. The junior can keep the proceeds if the junior acted in good faith without knowledge of the seniors interest. Thus, if AIB does not speak up then the junior can keep the proceeds. (But if AIB did not receive notification because they did not speak up then AIB would have a claim against Tuleight for this failure to notify). (vi) AIB should go after Schmelli. It was AIBs collateral that was sold. Redemption: Section 9-623 gives a debtor, any secondary obligor, or any other secured party or lienholder a right to redeem collateral by tendering fulfillment of all obligations secured by the collateral together with related expenses incurred by the secured party. The right of redemption must be exercised before the secured

party has collected on collateral (9-607), disposed of collateral or entered into a contract for disposition (9-610), or accepted the collateral in full or partial satisfaction of secured obligations (9-622). - Acceleration: If the entire balance of a secured obligation has been accelerated, it would be necessary to tender the entire balance. This is a right that is provided for in the security agreement and such provisions may become effective when the accelerating party in good faith believes that the prospect of payment or performance is impaired. 1-309. However, a secured party may waive its right to invoke such a clause by accepting late payments on several prior occasions. Dunn v. General Equities of Iowa (1982). - Waiver of Redemption Rights: Although 9-602(11) generally prohibits waiver of redemption rights before default, 9-624(c) permits waiver by agreement entered into and authenticated before default. - Williams v. Ford Motor Credit Co. (1983) o When an obligor is late and the creditor takes the late payments and the creditor does not declare a default over a period of time and then eventually the creditor either repossesses or creates an acceleration, the question becomes whether the creditor has waived his rights. If the creditor wants to take the late payments, the creditor should be clear that it is not a change in the contract and that it is not waiving its rights that it has upon default. - Problem 9.4.1. o The amount of the secured obligation is now the accelerated amount. Thus, that is the price of redemption. Consumer laws very often give people one chance, or more, to get back on track and make up payments. Collection from Account Debtors - Problem 9.5.1. o (a) Notify the account debtors to pay AIB directly. o (c) You can do this but you would have to notify Schmelli and Telli. o (d) A provision that said that in the event of default, it is commercially reasonable for the secured party, in its discretion, to compromise accounts with account debtors and obligors (since the alternative is suing the account debtor for $50,000 since they wont pay it). Also, it should say at the end of the list of things that are commercially reasonable that the list is not exhaustive. Look at Carguys agreement with Eastinghome. o (e) The obligor on the note only has to pay the holder and AIB is not the holder unless Schmelli signs it over or there is court order. Strict Foreclosure: Debtor and creditor agree that the secured party will take the collateral and that the debtor will either owe nothing or have its debt reduced by a certain amount.