Download MAKING SURE THE BAD GUYS PAY

SECURED TRANSACTIONS OUTLINE
MAKING SURE THE BAD GUYS PAY
OVERVIEW
I.
SECURITY CONCEPTS AND DEFINITIONS
a. General Definitions
i. ENTITLEMENTS. Security interests in personal property
ii. INTANGIBLE. Legal rights treated as personal property
iii. JUDGMENT CREDITOR. Person that is owed the money
iv. JUDGMENT DEBTOR/ Person obliged to pay
v. SECURITY INTEREST. An interest in personal property or fixtures which
secures payment or performance of an obligation
1. Fixtures. Goods that become so related to the real property that an
interest in them arises as part of that property (fridge)
vi. GOODS. All things which are moveable.
1. In order for an interest to pass in goods, they must be both existing
and identified [Goods which are not are considered to be “future
goods”]
vii. MERCHANT. A person who deals in goods of the kind or otherwise by his
occupation holds himself out as having knowledge or skill peculiar to the
practices or goods involved in the transaction or to whom such knowledge
or skill may be attributed by his employment as an agent to someone who
holds himself out as having knowledge
viii. COLLECTION OF MONEY JUDGMENT
1. Writ of Execution. Judgment creditor sues to get this and the
sheriff may size what property is necessary to sell and settle the
debt
2. Levy of Execution. Actual seizing of the property
3. Execution Lien. Attaches to the property like a security interest,
where the creditor becomes a lien creditor.
4. Lien Creditor. A creditor that has acquired an interest in the
property by attachment, levy or the like
ix. TRANSFERABILITY. Security interests are a property interest which is freely
transferable.
b. Classifications of collateral. Any form of personal property can be used as an
obligation.
i. GOODS. All things moveable and includes “embedded software.” The
category of the good is determined by the principal use or function in the
debtor’s hands. [Sometimes a category is determined by the intent of the
debtor upon purchase and the collateral remains classified as such even if
the debtor later changes the primary use]
1. Consumer Goods. Those goods used primarily for personal,
household, or family purposes.
2. Farm Products. Goods with respect to which the debtor engages in
farming operations.
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ii.
iii.
iv.
v.
a. Crops, livestock, supplies used, supplies produced, and
products of crops of livestock in their un-manufactured
state
3. Inventory. Goods held by the debtor for sale or leased, furnished
under contracts of service, raw materials, work in progress, and
goods used up relatively quickly (computer paper)
4. Equipment. Goods bought and used primarily for business
purposes
a. Default provision – if not fall into any other category.
COMMERCIAL RECEIVABLES. Right to be paid money at a future time
1. Paperized Rights to Payment. Right is embodied in paper form
2. Chattel Paper. Evidences both a monetary obligation and a security
interest or lease in the goods
3. Instruments. Negotiable notes, promissory notes, drafts, or checks
INTANGIBLE RIGHTS TO PAYMENT. When a commercial receivable is not
embodied in a piece of paper (in some cases there may be evidence of the
obligation in written form but the paper form is not the agreement
obligation itself)
1. Accounts. Such as keeping an account with the supplier, which
holds a continuing duty to pay the supplier for goods dispersed
over time.
a. Does not include the right to be repaid a loan of money
2. Deposit Accounts. A bank account that is treated differently than
accounts
a. An account where money is deposited such as in a savings,
but not a rolling line of credit that must be repaid to a
supplier
3. Commercial Tort Claims. Amount owed due to a court judgment
4. Letter of Credit Rights. When the lender authorizes a future grant
and in turn obligation of money
INVESTMENT PROPERTY
1. Investment Securities (Covered by Article 8)
a. Uncertified and Certified Securities
b. Securities Account
c. Securities Entitlement
2. Investment Securities (Not covered by Article 8)
a. Commodity Account
b. Commodity Contract
MISCELLANEOUS: GENERAL INTANGIBLES.
1. Intellectual Property. Residuary category that includes the right to
repayment of a loan of money not evidenced by an instrument or
chattel paper.
a. Includes the right to be paid for various intellectual
property licenses
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b. Embodied software – if so intertwined with the thing than it
falls under the same category as the thing – otherwise
would be intellectual property
2. Money. General intangible because it represents currency and not
in itself valuable due to its form
3. Documents
c. Purchase money security interests. A security interest in goods is a purchase
money interest if the goods are purchase money collateral
i. “Purchase Money Collateral” – Goods or software that secures a purchase
money obligation incurred with respect to that collateral
ii. “Purchase Money Obligation” – 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 the rights in or use of the collateral if the value is in fact so
used.
DETERMINING WHO HOLD TITLE
I.
GENERAL RULE. Unless specifically agreed, title passes to the buyer at the time and
place at which the seller completes his performance, such as physical delivery, and
seller cannot get the goods back
a. Title passes. Title passes even if the seller retains a security interest or delivers
that actual title to the goods at a later time
b. Must be identified. Goods cannot pass under a contract of sale prior to their
identification to the contract and the buyer receives this identification.
c. Remedies. Generally the seller can only get civil remedies for breach of contract
for failing to pay
II.
EXCEPTIONS. There are limited circumstances in which the seller can reclaim the
goods
a. Insolvency. Where the seller discovers the buyer to be solvent he may reclaim or
stop delivery of the goods.
i. Three tests of insolvency
1. Ceased to pay debts in ordinary course of business
2. Cannot pay his debts as they become due
3. Insolvency as defined by the federal bankruptcy code
b. Misrepresentation of Solvency. If the seller discovers that the buyer received
goods on credit, while insolvent he may reclaim the goods upon demand within
10 days.
i. Proposed Amendment. Suggests that 10 day requirement should be
replaced with reasonable time.
ii. Exception. The seller cannot reclaim the goods if a “buyer in the ordinary
course” or other “good faith purchaser” has bought the goods from the
buyer.
1. GOOD FAITH PURCHASER. Purchaser for value without knowledge
of the prior interest
2. BUYER IN THE ORDINARY COURSE. A person that buys in good
faith, without knowledge that the sale violates the rights of another
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III.
person, and in the ordinary course from a person other than a
pawnbroker
a. A person buys in the ordinary course if the sale to the
person comports with the usual customary practices in the
kind of business in which the seller is engaged
b. Buyer takes free of any security interest even if the buyer
knows of its existence
3. ENTRUSTER. Any entrusting of possession of goods to a merchant
who deals in goods of that kind gives him power to transfer all
rights of the entruster to a buyer in the ordinary course
a. If a merchant sells such a thing that you entrust him with,
the purchaser takes full title so long as the entruster is in the
business of selling such a thing.
c. Misrepresentation of Identity. If the buyer misrepresents his identity, the title
does not transfer and the buyer has no rights to the goods.
i. VOIDABLE TITLE. The seller may retrieve the goods, because buyer will
have voidable title
ii. CONTRACT RESCISSION. Under common law equity remedy the seller has a
right to rescind the contract and make a claim for replevin/conversion
1. Rescission revests title in the seller.
iii. MATERIAL MISREPRESENTATION. The representation to the seller must
have been material and the seller must have relied on such
misrepresentation.
d. Bounced Check. Check bouncing revests title in the seller.
e. Reservation of Title. Creates a security interest in the good. Assuming that all of
the formalities of a security interest have been met, then a security interest may be
enforced by the seller in an action of replevin.
f. Purchase Money Security Interest. Creates a security interest in the goods to
secure payment and seller may file a replevin action if formalities have been met
SCOPE OF TITLE
a. General Rule. A Purchaser of goods acquires all title which his transferor had or
had power to transfer [this means that if the seller has a limited interest, the buyer
will only receive that limited interest as well]
i. Voidable Title. A person with voidable title has the power to transfer a
good title to a good faith purchaser for value. Title is considered void if—
1. The transferor was deceived as to the identity of the purchaser
2. The delivery was in exchange for a check that was later dishonored
3. The delivery was procured through fraud punishable as larcenous
ii. Void Title. Void title is the absence of any title and therefore the seller
does not transfer any interest even if the purchaser purchased under good
faith for value
1. Ex. If A stole a car, even if B was an unknowing purchaser, B
would not have title and the original owner could reclaim the
goods from B.
2. WARRANTY OF TITLE AGAINST INFRINGEMENT. Creates a cause of
action for the innocent purchaser of goods with void title.
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b. Good Faith Purchaser for Value
i. Good Faith. Look to what the buyer knew, or what they should have
known
1. Should have known can be determined by what is reasonable under
the circumstances or what is commercially reasonable
2. May include a duty to investigate
ii. Value. It is considered value if –
1. In return for a binding commitment to extend credit or continue a
previous agreement for credit
2. Security for partial or total satisfaction of a pre-existing claim
3. Accepting delivery pursuant to a pre-existing contract, or
4. Any consideration sufficient to support a simple contract
ATTACHMENT OF SECURITY INTERESTS: Whether there an agreement to secure the obligation
has been made.
I.
CREATION AND ENFORCEABILITY OF SECURITY INTERESTS. A security interest
attaches [or is created] only if the parties agree to do so.
a. Generally. A security interest is created and enforceable only when the
agreement is said to have attached to the collateral.
b. Creation of an enforceable security Interest. A security interest is enforceable
against the debtor and third parties with respect to collateral only if—
i. AGREEMENT. One of the following acts must occur to show agreement.
1. Authentication. Debtor must authenticate a security agreement that
provides a description of the collateral.
a. Agreement. Agreement means the bargain of the parties in
fact as found from their language
i. Implications of circumstances including course of
dealing and usage of trade
ii. Maybe oral or derived from the circumstances
iii. Bollinger – Even though no formal agreement for a
security interest was written and signed, there was
enough evidence to support the existence of such an
agreement
1. Financing Agreement: A filing of the
agreement alone is not sufficient to evidence
a security agreement [statement may be
legally filed before the existence of a
security agreement]
2. Promissory Note [stating that loan would be
secured, still not alone enough because
parties could change mind]
3. Course of Dealing: Combined with the
above, the group of letters supporting a
course of dealing consistent with the
existence of a security agreement may be
enough
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b. Authentication. Means to sign or otherwise execute as a
symbol, or similarly process a record, with the present
intent of the authenticating person to adopt or accept the
record
i. Record – Any information transcribed on a tangible
medium which is stored in an electronic or other
form
ii. Contemplates email or other electronic devices, but
usually done in a written format
c. Description. The description must be sufficient to
reasonably identify what it describes
i. Reasonable identification – A description of
collateral reasonably identifies the collateral if
description is by—
1. Specific listing
2. Category
3. UCC collateral type
4. Computation or allocational formula
5. Other method of objectionable
determination
ii. Supergeneric Description – Cannot be so supergeneral as to say “all of the property of someone”
2. Delivery. The collateral is delivered to the secured party. [if a
certified or uncertified security
3. Control. The collateral is deposit accounts and the power is in the
hands of the secured party
ii. VALUE. Value must be given for the interest in the collateral
1. Generally. Any consideration sufficient to support a simple
contract
2. Binding Commitment. In return for a binding commitment to
extend credit
3. Pre-existing Claim. In partial or full satisfaction of a pre-existing
claim
iii. RIGHTS IN THE COLLATERAL. Debtor has rights in the collateral or the
power to transfer the collateral to a secured party
1. After-acquired Inventory – If a bank has a security interest in all
current or after-acquired inventory, the debtor cannot create a
security agreement in the inventory that it does not have yet.
Accordingly, attachment does not occur until the debtor has
interest in the inventory
iv. CONTAIN BASIC COMPONENTS. A security agreement must provide that
there is both collateral to be secured and an obligation for payment.
1. Collateral. Must have property that is subject to a security interest,
consisting of either—
a. Single item;
b. Existing category or type; or
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c. After-acquired collateral
2. Obligation. There must be a duty that arises out of the agreement
to make payments in return for the loan, consisting of—
a. Particular loans as identified;
b. Future advances; or
c. All obligations.
i. All obligations clause: Debtor agrees that the
collateral will provide an security for all obligations
owed to that creditor [both past and future]
1. Same class/relatedness test – to determine if
an obligation is secured by this collateral,
the test looks at how related the obligations
were
a. Continuous line of credit that fixes a
home, purchases inventory, etc. is
alike enough that should be secured
by the same collateral and to have
the intent of the parties cover these
loans with such
ii. Cross-collateral clause – all items of collateral
secure all obligations of the debtor
c. Failure to Meet the Requirements. If fail to meet the requirements then the
security interest does not attach and the loan is unsecured.
i. FAILURE. This does not mean that the creditor does not have a remedy
under contract law, only that it has not created an interest in the property.
PERFECTION OF SECURITY INTERESTS: Whether the world has been notified of the agreement
sufficient to protect subsequent creditors.
I.
PERFECTION IN GENERAL.
a. Purpose. Determines who gets priority in the sale of collateral. Process by which
the creditor puts the world on notice that he has a prior interest in the collateral
b. Methods of Perfection
i. Filing a Financing Statement
ii. Possession
iii. Automatic Perfection
iv. Temporary Perfection
v. Perfecting Under Federal Law
vi. State Certificate of Title Statutes
vii. Control.
viii. Delivery.
c. When Perfection Occurs. A security interest is perfected when—
i. The security interest has been properly attached
ii. The interest is perfected by the required method
iii. At the time in which the last step is completed
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II.
d. Continuity of Perfection. If start with one method and switch to another method
of perfection, the relevant date will be the date the in which the last step was
completed for the first perfection.
PERFECTION BY FILING
a. General Method. It is the most common and preferred method of perfecting
security interests.
b. What to File. Completed financing statement (UCC Form 1).
i. REQUIREMENTS. A financing statement is sufficient if it includes:
1. To be legally sufficient:
a. Name of the Debtor. The name of the debtor must be exact
i. Four Categories
1. Individual: Must use full legal name
2. Sole-proprietorship: Use the full legal name
of person who owns and operates the
business
3. Registered organizations: Use full legal
name of the organization listed in the
registration (LLP, Corp, etc.)
4. Unregistered Organizations: Use an
organizational name if there is one –
otherwise the members in charge
(partnership, j/venture, etc.).
ii. No trade names
b. Name of the Secured Party. Statement must list either the
name of the secured party or a representative of it
c. Description. Must be an indication of the collateral that is
covered by the security agreement
i. EXACTLY LIKE THE S.A. Burden is on the secured
party to make sure that the financing statement
continues a description of the security interest
sufficient to describe the collateral
1. Best way to do this is to use the same or a
substantially similar description as is in the
security agreement
ii. TOO BROAD. If the financing statement is too broad,
the financing statement will perfect the security
interest with respect to the collateral, however
because the creditor went beyond its scope of
authority, the debtor has a cause of action against
the creditor
iii. TOO NARROW. If the description does not cover all
of the collateral, then the security interest is
perfected only to the extent of collateral described
and the creditor’s interest is deemed unperfected as
to the remaining unmentioned collateral.
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iv. SUFFICIENT NOTICE. The collateral must be
described in a way sufficient to put creditors on
notice to the security interest
1. UCC descriptions of collateral are sufficient
to create a security agreement, however may
not be enough to put someone on notice as
to whether in includes “After-acquired” stuff
(ex. Inventory)
2. Ex. “certain motor vehicles” not sufficient to
describe which motor vehicles.
2. Additional Requirements. The filing office requires additional
information even though without this information, the statement
would still be legally sufficient
a. Mailing Address of the Debtor
b. Mailing address of secured party
c. Whether debtor is an individual or an organization
i. If the debtor is an organization then add:
1. Type of organization
2. Jurisdiction of the organization
3. Organizational identification number
ii. NOTICE FILING
1. Function of Notice. A filed financing statement indicates only that
there might be a security interest affecting the indicated property
2. Request for Information. Because the financing statement only puts
the creditor on notice of a possible interest in the collateral, a
subsequent creditor may seek more information
a. Right to Make a Request. Debtor has the right to request a
list of all of the secured collateral, and an accounting of
such.
b. Failure to Comply. If a secured party fails to comply with
the request, the debtor has a cause of action for damages
against it
c. When to File. A secured creditor should file as soon as possible to protect his
interest in the collateral, but not before the secured creditor has permission by the
debtor as evidenced by—
i. REQUIREMENT
1. Authenticated Agreement. An agreement authorized in some way
by the debtor authorizing the secured creditor to file a financing
statement
2. Signed Security Agreement. A signed security agreement is
sufficient authorization to file a financing statement
ii. FAILURE TO MEET REQUIREMENT. Failure to meet the authorization
requirement may result in the debtor having a conversion suit against the
creditor
d. Where to File. A financing statement must be filed in the appropriate office to be
effective
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i. DEBTOR’S RESIDENCE. The financing statement must be filed in the State
where the debtor resides
1. Failure to file in the proper state results in an unperfected security
interest
e. How to File. Secured Creditor must communicate the financing statement to
filing office by the proper medium
i. Some offices require hard copy, others electronic form
f. When Filing is Effective. When the financing statement has been filed and the
filing fee has been paid
g. Errors in Filing
i. ERRORS
1. Secured Creditor Errors.
a. Failure to Properly Name Debtor. While the office will not
investigate whether the proper name of the debtor is listed,
failure to use the legal name of the debtor results in an
unperfected security interest
i. Seriously Misleading. A financing statement that
fails to provide the name of the debtor correctly is
seriously misleading [resulting in an unperfected
security interest]ii. Substantial Compliance. If a search of the record
using the standard search knowledge of the agency
would disclose the financing statement, despite the
failure to accurate state the debtor’s name, the
financing statement is not seriously misleading
b. Generally Incomplete Statement. The filing office must
refuse to accept a financing statement that lacks any of the
required information.
i. Properly refused - financing statement results is not
effective to perfect a security interest
ii. Substantial Compliance – A financing statement
substantially satisfies the requirements even if it has
minor errors or omissions so long as they are not
seriously misleading.
1. Would a reasonable person be able to figure
it out?
2. Filing Agency Errors. If the filing agency improperly
a. Improperly Refused – if the agency rejects the form and
should have accepted it, then the security interest is
considered perfected
i. However a later BFP may not be subject to the
security interest [no notice]
b. Improper Filing – the failure of the filing office to index a
record correctly does not affect the effectiveness of the
security interest
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i. Buyer Beware – it is up to the subsequent creditor
searching the file to locate this misfiled statement
ii. Considered perfected, imposes the risk of filing
errors onto new creditor
c. Acceptance of an Incomplete Statement. Even if the filing
agency fails to reject a financing statement, the secured
creditor may lose priority.
i. Lack of information – considered perfected
completely
ii. Incorrect Information – if a subsequent creditor
relies on this incorrect information, then it is that
later creditor that will have priority
ii. CHANGES.
1. Name Change. If a debtor so changes his name that filed financing
statement becomes so seriously misleading, the financing
statement is still effective to perfect the interest in the collateral for
up to four months after the change
a. An amendment to the financing statement must be made
within four months after the change to perfect the interest
longer
2. Collateral Transfer. A filed financing statement remains effective
with respect to collateral that is sold, exchanged, leased, or
otherwise disposed of and in which a security interest continues
even though the secured party knows or consents to the disposition
i. Unless. Sold to a buyer in the ordinary course of
business
3.
h. Lapse and Termination of Filing
i. LAPSE OF INITIAL FILING STATEMENT. A filing statement is effective for
five years after the date of filing, at expiration of which, the statement
lapses.
1. Upon lapse, a financing statement ceases to be effective and any
security interest that was perfected becomes unperfected.
2. It is deemed upon lapse to never be perfected.
ii. CONTINUATION STATEMENTS. The effectiveness of the filed financing
statement lapses on the expiration of the period of its effectiveness unless
before its lapse a continuation statement is filed.
1. Timely Filing. A continuation statement must be filed prior to the
expiration of five years before the expiration of the term.
a. Timely filing of the continuation statement continues the
original file date
2. Meeting the Formal Requirements.
a. Cannot be re-filed prior to 6 months before expiration
b. Box on the form must be checked showing continuation
c. Identify original financing statement number that wish to
continue
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III.
iii. TERMINATION STATEMENTS. [AND RELEASE OF COLATERAL.] Form of an
amendment made by the secured party showing that he no longer has an
interest in the collateral
1. Generally. A termination statement should be filed so that later
creditors do not believe that the creditor still has an interest [or that
the debtor still owes an obligation] in the collateral
2. Consumer Goods. The law requires that a secured creditor file a
termination statement upon the termination of the consumer’s
obligation when—
a. There is no longer an obligation secured by the collateral
and no commitment made in advance regarding another
obligation that the collateral will secure; OR
b. The debtor has not authorized the filing of the initial
financing statement
3. Time for Compliance. Such termination statement must be filed
within one month after the obligation is satisfied
a. If the debtor makes a demand for a termination statement to
be filed, this must be done within twenty days
4. Remedy.
PERFECTION BY POSSESSION AND CONTROL
a. When Permissible and When Mandatory. Perfection by possession is limited to
assets that are embodied in a single physical form [not include accounts]
i. PERMISSIVE. Any assets that allows a person to take physical possession
and allows the secured party to control such asset
1. Certificate of Title. With respect to goods covered by a certificate
of title issued by the state, the security interest may be perfected by
taking possession of the goods
a. Choice of Law Problems. A secured party who holds a
security interest perfected under State A in goods that are
subsequently covered by a State B certificate of title may
have a problem (§9-311 comment 7)
i. Solution - §9-613(d) A security interest may be reperfected by taking possession of the collateral
ii. MANDATORY. A security interest in money or instruments (other than
chattel paper) can be perfected only by the secured party taking possession
of it [not include temporary automatic perfection]
1. Money
b. Concept of Possession. A secured party may perfect a security interest in
negotiable documents, goods, instruments, money or intangible chattel paper by
taking possession of the collateral
i. SCOPE.
1. Time of Perfection by Possession. If perfection of a security
interest depends upon possession of the collateral by a secured
party, perfection occurs no earlier than the time the secured party
takes possession and continues only while the secured party
remains in possession.
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2. Time of Perfection by Delivery. A security interest in a certified
security in registered form is perfected by delivery when delivery
of the certified security occurs and remains perfected until the
debtor obtains possession of security certificate
ii. POSSESSION BY THE SECURED PARTY. Possession by taking physical
possession of the thing acts to perfect a security interest
1. Not Possession. Collateral in the hands of the debtor, debtor’s
agent, lessee of the debtor, or anyone else closely linked with the
debtor
iii. POSSESSION BY THIRD PARTIES
1. Collateral in Possession of Person Other Than Debtor. Even if a
third party is holding the collateral, a secured party may be
considered to have possession sufficient to perfect his interest if—
a. The person in possession authenticates a record
acknowledging that it is or will be holding such collateral
for the benefit for the secured party
b. Acknowledgement Not Required. A person in possession of
collateral is not required to acknowledge that it holds
collateral for a secured party
c. Effectiveness of Acknowledgement. If a person does
acknowledge that it holds possession for a 3rd party’s
benefit –
i. Acknowledgement is effective even if it violates
rights of the debtor, and
ii. The person does not owe any duty to a secured
party and is not required to confirm the
acknowledgement to a 3rd party
2. Secured Party’s Delivery to Person Other Than Debtor. The
secured party does not lose possession even though they hand the
collateral off to another person, so long as that other person is not
the debtor and they are instructed before or during delivery that
they—
a. Are to hold the collateral for the secured party’s benefit, or
b. Are supposed to redeliver the collateral to a 3rd party
3. Bailment. When the collateral is no longer in the hands of the
debtor, nor the creditor, it is said to be a bailment [jeweler has your
watch]
a. Considered a Debtor. Anyone said to have an interest in
the property is considered a debtor
i. Bailor has an interest in the property even if only
for a short time
b. File Financing Statements for All Debtors. A financing
statement may be filed under the name of all persons who
have an interest in the property [all debtors]
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IV.
V.
i. Accordingly, a financing statement in the name of
the bailor would perfect the security interest while
the collateral is in the hands of the bailor
c. Acknowledgement. The bailor may authenticate a record
acknowledging that he is just holding it for the secured
creditor, in that case, no filing necessary
i. Cmt 4. May also perfect secured party’s interest in
the collateral by notifying the person holding the
collateral of the secured party’s interest.
HOWEVER, the bailee must acknowledge receipt
of the secured party’s interest
c. Perfection by Control. When the law gives control to a secured party, that
control will serve to perfect the security interest
i. TYPES
1. Investment Property
2. Deposit Accounts
3. Chattel Paper
AUTOMATIC PERFECTION
a. Purchase-Money Security Interest in Consumer Goods
i. APPLICATION. A purchase money security interest is one where there is a
security interest in the collateral that is being financed by the loan.
Accordingly, the security interest attaches upon delivery of the thing.
b. Certain Assignments of Accounts and Intangibles
i. Assignment of an interest in a trust
ii. Assignment for the Benefit of all creditors
iii. Assignment of Health Insurance Receivables
c. Certain Additional Sales
d. Investment Property
PERFECTION IN DOCUMENTED GOODS. Goods covered by Negotiable & NonNegotiable Instruments
a. Negotiable Instruments. [Least common document covering goods] While the
goods are in possession of a bailee that has issued a negotiable document covering
the goods, a security interest may be perfected by-i. Perfecting a security interest in the document by filing a financing
statement in the document, OR
1. Such as security interest has priority over any security interest that
becomes perfected in the goods by another method during that time
ii. Filing a financing statement as to the goods
b. Non-Negotiable Instruments. [Majority of goods covered by this document]
While goods are in possession of a bailee that has issued a non-negotiable
document covering the goods, a security interest may be perfected by—
i. Issuance of a document in the name of the secured party;
ii. Bailees acknowledgement of a receipt of knowledge of the secured party’s
interest in the goods; OR
iii. Filing as the goods
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VI.
SPECIAL PERFECTION RULES
a. IN PROCEEDS:
i. Generally
1. DEFINITION. “Proceeds” means:
a. Whatever is acquired upon the sale, lease, license,
exchange, or other dispositions 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 the collateral, claims arising
out of loss, non-conformity, or interference with the use of
e. To the extent of the value of the collateral, any insurance
proceeds as a result of loss, damage, or nonconformity
2. QUESTIONS.
a. Does the original security interest extend to proceeds?
b. Was it perfected?
c. Does security interest have priority?
3. EXAMPLE.
a. Original collateral = inventory in cars
b. If sold a car for chattel paper = Chattel paper is 1st
generation proceeds
c. If sold Chattel paper for a check = Check in the hands of
MM is 2nd generation proceeds
d. Depositing the check into a bank account for credit = 3rd
generation proceeds
i. At a certain point, the proceeds are no longer
traceable
ii. Types of Proceeds
1. CASH PROCEEDS §9-102(a)(9). Cash proceeds are proceeds
including money, checks, deposit accounts, or the like.
iii. Examples
1. ARE PROCEEDS:
a. Insurance claims
b. Tort Claims re: product went wrong and the product that
used to be inventory is now
c. Lease and lease payments may be proceeds
i. Lease is chattel paper if written and accounts if
lease – both are proceeds
2. NOT PROCEEDS:
a. Services – like jukeboxes – where half the money goes to
the holder of the juke.
b. Bus tickets – selling the right to travel and the actual bus
tickets are just the proof of the purchase then these are not
proceeds
iv. Secured Party’s Rights on Disposition of Collateral and in Proceeds.
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1. Disposition of Collateral. A security interest continues despite a
sale unless the secured creditor agrees that the sale is free of the
security interest
a. Right to the Proceeds §9-203(f). The attachment of a
security interest in collateral gives the secured party the
right to the proceeds (as allowed by §9-315) and is also
attachment of a security interest in a supporting obligation
for the collateral.
i. §9-315(a) & (b) – A security interest continues in
collateral regardless of sale or disposition and a
security interest attaches to any identifiable
proceeds of collateral
2. When co-mingled proceeds are identifiable. Proceeds that are
commingled with other property are identifiable proceeds—
a. If the proceeds are goods
b. If not goods, to the extent that the secured party identifies
the proceeds by a method of tracing
3. Perfection of a security interest in proceeds. A security interest
in proceeds is a perfected security interest if the security interest in
the collateral was perfected
4. Continuation of perfection. A perfected security interest in
proceeds becomes unperfected 21 days after the attachment to the
proceeds unless:
a. The following conditions are satisfied:
i. A filed financing statement covers the original
collateral;
ii. 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
iii. The proceeds are not acquired with cash proceeds
b. The proceeds are identifiable cash proceeds; OR
c. The security interest in the proceeds is perfected other than
through the collateral
5. When perfected security interest in proceeds becomes
unperfected. The proceeds becomes unperfected on the earlier of
21 days or the date the financing statement for the collateral would
have lapsed
v. Security Interests In Proceeds (Generally p.21)
1. ATTACHMENT. A security interest in original collateral
automatically attaches to any identifiable proceeds of the original
collateral
a. “Identifiable” means that the secured creditor can prove
that the property in the hands of the debtor is “proceeds” of
the original collateral
2. PERFECTION.
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a. Temporary Automatic Perfection. A perfected security
interest in original collateral automatically continues in
identifiable proceeds for at least 20 days from the date the
security interest attaches to proceeds.
b. Continuous Perfection. The perfection in the proceeds
continues beyond the 20 days by—
i. Automatic Continuous Perfection.
1. “Same Place Rule” – a filed financing
statement covers the original collateral and
the proceeds are collateral in which a
security interest can be perfected by filing,
OR
a. No intervening cash phase
b. The proceeds cannot be acquired
with cash (ex. if trace proceeds to a
check that has been deposited into a
bank account, while there is a
perfected interest in that amount
while in the account, if cash is taken
out to purchase something – then that
something is not automatically
perfected because it was bought with
cash and the 3rd generation proceed
is lost)
2. The proceeds are identifiable cash proceeds
ii. Action Taken to Perfect Proceeds. The security
interest in the proceeds are independently perfected
within 20 days after attachment
1. Ex. if perfect by taking possession of the
proceeds, filing, control, etc.
vi. Tracing Proceeds. The rule is that proceeds even if come into the account
first, are last to leave the account (WILO: “Whenever in last out)
b. CERTIFICATE OF ORIGIN. The certificate of origin is not a state issued certificate
of title, nor is it a document sufficient to perfect upon perfection [like an invoice
would be]. Accordingly, a financing statement must be filed in order to perfect the
security interest.
i. See §9-310(a) General rule is a financing statement must be filed to
perfect a security interest, except under §9-310(b) where the filing of a
financing statement is not necessary to perfect a security interest—
1. Those interests that perfect upon attachment [purchase money
security interest in consumer goods; assignment of payment
intangibles (accounts); sale of promissory notes, payment
intangible; etc.];
2. Property subject to treaty/federal law [Certificates of title]
3. Goods in possession of a bailee;
4. Certificated securities in the control of the secured party
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5. Collateral in physical possession of the debtor
6. Deposit accounts, chattel paper, investment property, or letter of
credit rights in the hands of the secured creditor
7. Proceeds that are properly perfected under §9-315
ii. When the new cars are sold to Consumers, then the lender perfects by
placing his name on the certificate of title --- the difference in this problem
is that First Bank is trying to perfect the security interest in the cars as
inventory. Thus, requiring a financing statement to be filed
iii. Purpose of the certificate of origin – needed in most states for the
consumer to get a certificate of title from the title agency – if First Bank
holds these, then it can insure payment made to them when the car is sold
to the consumer
c. PROGRESS PAYMENTS. The contract calls for the homebuyer to make progress
payments to the builder. It is these progress payments to the builder that First
Bank has a security interest in.
i. What UCC classification does the payments fall under?
1. NOT an instrument – because this right to progress payments is not
of the type that is usually signed in written form and delivered (not
the type of agreement that is readily resold on the market like a
deed)
2. NOT a general intangible – because this is a default classification
and if another more specific classification fits, then that must be
used
3. IS an Account – it is accounts receivable or due to the builder.
ii. How can they be perfected?
iii. Accounts may not be perfected by possession, as a result §9-310 requires
that a financing statement be filed
d. BANKRUPTCY.. In bankruptcy proceedings, the bankruptcy trustee can avoid a
security interest that has not been perfected by the initiation of the bankruptcy
proceedings. Accordingly, the first question to be answered in problem 3.3.22 is
whether and when the perfection occurred
i. (a) First Bank perfected as to the accounts receivable by filing the
financing statement, so the security interest is superior to the trustee
1. Answer to question (d). Because a financing statement is the only
way to perfect an account, the failure to file the financing
statement would result in an unperfected security interest.
2. Because the collateral is an account, possession will not perfect the
interest nor preserve First Bank’s interest in it above the
bankruptcy trustee
ii. (b) Promissory note is an instrument and may be perfected by filing a
financing statement
1. The filing of a financing statement would preserve First Bank’s
interest as against the bankruptcy trustee
2. However, if Main Motors were to sign the promissory note and sell
it to a BFP or buyer in the ordinary course, then First Bank would
have an interest subordinate to the BFP
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VII.
3. Answer to question (d). First Bank may take possession of the
promissory note, preserving its interest as superior to that of the
Bankruptcy trustee
iii. (c) Purchase Money Security Interest – can file a financing statement to
preserve this interest
1. Answer to question (d). First Bank may take possession of the
promissory note, preserving its interest as superior to that of the
Bankruptcy trustee
CHOICE OF LAWS: MULTI-STATE TRANSACTIONS (PG. 186-196)
a. Federal Pre-emption. If an international treaty or federal law is in place, it will
supercede the state adopted Article 9 – To the extent that the law is the same in
every state, it is irrelevant which law is applied.
b. Three Major Conflicts Issues. When conflict of laws in Article 9 transactions
matter:
i. Creation of the security interest
1. Which elements are needed to create a security interest
2. What’s required for attachment
3. Interpretation of the security agreement
ii. Perfection
1. How must perfection happen
2. If by filing, which office
iii. Priority or the effect of non-perfection
1. Which law determines who gets the stuff
c. Picking a State - Generally
i. GENERAL RULE. Party’s can agree that any state’s laws will govern their
agreement
ii. PUBLIC POLICY EXCEPTION. Cannot use the laws of another state to defeat
the “correct” state’s “fundamental public policy.” – Meaning cannot
contract under the laws of another state that may be more favorable to you,
when the favorability that it provides violates the deeply held public
policy of the state the debtor is residing in.
d. Which Law Governs §9-301 - §9-307
i. RULES
1. General Rule §9-301. The following rules determine the law
governing perfection, the effect of perfection or nonperfection, and
the priority of a security interest in collateral:
a. The jurisdiction in which the debtor resides governs the
security agreement, effect of perfection and the priority of
the interest
b. The jurisdiction that the collateral is located in determines
perfection, effect of nonperfection and priority in THAT
collateral
c. If tangible negotiable documents, goods, instruments,
money, or tangible chattel is located in a jurisdiction, then
the local law of that jurisdiction governs (timber to be cut,
fixtures)
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d. (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.
e. Generally. Unless specifically listed in the statute,
wherever the debtor resides is the correct choice of law.
2. §9-302 Agriculture. Correct Jurisdiction is where the farm
product/land is
3. §9-303 Certificate of Title. 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.
4. §9-304 Deposit Accounts.
a. Agree to Bank’s Jurisdiction. If the parties in the agreement
that the bank’s jurisdiction should be considered X, it is
X’s state law that applies
b. Agree to Another Jurisdiction. If the parties expressly agree
that another jurisdiction’s law governs the agreement, that
law applies
c. Office Account is Maintained In. If not otherwise agreed, it
is the jurisdiction that the account is agreed to be
maintained it
d. Bank’s Actual Jurisdiction. If no agreement as to the above,
then the jurisdiction that applies is where the account
actually sits
5. §9-305 Investment Property
a. Where a security certificate is issued
6. §9-307 Determines Where the Debtor is located
a. (a) Place of Business. In this section “place of business”
means a place where a debtor conducts his affairs
b. (b) Debtor’s Location: General Rules. The following
rules determine the debtor’s location:
i. A debtor who is an individual is located at the
individual’s principal residence.
ii. A debtor that is an organization and has only one
place of business is located at its place of business.
iii. A debtor who is an organization and has more than
one place of business is located at its chief
executive office
c. (e) Location of Registered Organization. A registered
organization is located where it is registered
ii. OTHER NUANCES
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1. No Perfection. Where a security interest is not perfected at all,
then the rule is that the location of the debtor governs perfection
[§9-301(1) & §9-307
2. File Everywhere. If a secured creditor has a secured interest in all
of the belongings of a company, a filing statement may need to be
filed in several places
a. Debtor’s residence – file in the place where the company
has registered – this will cover most of the collateral
i. §9-307(e) Defines the location of the debtor [i.e.
registered organization resides where registered]
b. Property Location – Should file everywhere that the
company has personal property
e. Recap.
i. FILE CENTRALLY. The financing statement should be filed in a central
location (where the debtor resides/where the debtor company is
incorporated.
ii. FORUM. Apply the law of the forum.
1. Whatever forum that a lien creditor receives a court order to attach
to goods is the forum that controls (1) What it takes to create the
security interest (2) Perfection of that interest, and (3) Priority
a. Ex. If the collateral is in Michigan, look to Michigan law:
i. Attachment – Also looks to UCC and that allows by
a security agreement having the requirements
ii. Perfection - Michigan has adopted Article 9 which
allows for a central filing – accordingly if the
financing statement was filed where the company’s
registered then the interest was properly perfected
iii. Finally Priority – According to Michigan law a
perfected security interest will take priority over a
lien creditor
iii. FOREIGN CORPORATIONS. A corporation in Germany is likely to also be
registered in the US (should file in both places).
1. Look to Germany’s laws –forum
DEFAULT
I.
DEFAULT AND IT’S CONSEQUENCES
a. Determining Default. The UCC does not define what default is. That is left up to
the parties and is evidenced by the security agreement
i. GENERALLY. Default clause should list those actions, occurrences, or
conditions which will trigger the secured parties rights under the contract
1. Without the occurrence of the act, the creditor has no right to
possession of the collateral
2. If collateral is taken without default, then debtor has cause of
action in conversion/replevin to reclaim goods
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ii. WAIVER OF DEFAULT. There may be a defense by the debtor that the
creditor waived default by accepting late payments or delaying in
proceeding with its remedies
iii. INSECURITY AND ACCELERATION CLAUSES.
1. Insecurity
2. Acceleration. Those contracts that have acceleration clauses will
require the entire amount of the obligation due in its entirety upon
default.
b. Remedies Available Under Default
i. CREDITOR REMEDIES. When the debtor has breached the terms of the
contract, stated to be a condition of default, then the secured creditor may
seek to enforce his rights
1. Judicial Enforcement.
a. Rights of Secured Party After Default. A secured party
may seek to seek judicial enforcement of the agreement
terms by:
i. Reducing the Claim to Judgment. Creditor may
choose to disregard the fact that he has a security
interest and instead have a court return a judgment,
allowing it to be applied to property other than the
stated collateral
ii. Foreclosure Proceedings. Secured creditor may
take possession of the collateral as mandated by the
court and sell at foreclosure sale
iii. Other Available Judicial Procedure. Secured
creditor may have the court order a repossession
and have sheriff accompany creditor to debtor’s
location to retrieve the property, may be a resulting
sheriff’s sale where proceeds will first be assessed
to pay off the debtors obligation to the secured
creditor.
b. Rights of Secured Party in Possession or Control. The
debtor has the right to use or operate the collateral
c. Cumulative Rights. The right to pursue judicial
enforcement and use or operate the collateral are
cumulative remedies and may be exercised simultaneously
2. Possession. After default, a secured party may take possession of
the collateral AND without removal, may render the equipment
unusable even on the debtor’s premises.
a. By Judicial Process. A secured party may seek possession
by an order of the court
b. Self-Help. A secured party may reclaim the collateral
himself by repossession, so long as do not violate breach of
the peace.
22
i. Breach of the Peace. Where there is no court order
in place to reclaim the property and the debtor does
not consent to the taking of the property
1. Territorial * Territory of an undefined area
around the person where peace must be kept
a. No enclosed areas – cannot enter
enclosed areas around and in the
home such as fenced in areas,
garages
b. Cannot enter any area where a
person has a reasonable expectation
of legal protection from unauthorized
entry
2. Social Condition * Prevention of Violence
a. No direct use of force against the
debtor
b. No actual or implicit use of force
c. No misrepresentation of false legal
authority such as the presence of an
officer
d. Maybe enough that tell the repo man
to stop
ii. Defense to Breach: Consent. If debtor agrees to the
taking of the vehicle than there is no breach of
peace
1. Consent in the absence of “specific
objection” may be constructive consent
2. Probably in best interest of debtor to allow
repo man to take collateral, unless not really
in default, because debtor must pay
collection costs
iii. Vicarious Liability. Creditor is liable for the
wrongful acts of his agent, the repo man
II.
ii. DEBTOR REMEDIES
1. Right to the Collateral. Even if the property was wrongfully taken,
the creditor still has the right to the collateral if there was a default
a. In this case, the debtor may sue only for the damages he
received from the loss of use of the property that he would
have had, had the property not been wrongfully taken
b. Damages are to be determined by fair market value or thing
minus the amount owed to the creditor (including repo
costs)
2. Conversion Suit for Damages. If the creditor had no right to the
collateral, then debtor has civil remedy for conversion action
(result would be damages)
FORECLOSURE PROCESS
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a. Disposition of Collateral
i. STANDARD OF COMMERCIAL REASONABLENESS. Every aspect of the
disposition of collateral, including manner, time, place, and other terms
must be commercially reasonable
1. Definition.
a. Dispositions that are commercially reasonable. A
disposition of collateral is commercially reasonable if—
i. If it is done in the usual manner on any recognized
market;
ii. At the price current in any recognized market at the
time of disposition; or
iii. Otherwise in conformity with reasonable
commercial practices among dealers in the type of
property that was subject to the disposition
b. Approval by the Court on Behalf of the Creditors. A
collection or enforcement is commercially reasonable if it
has been prior to the sale approved in a judicial proceeding
or by a recognized committee charged with making these
types of decisions
c. Smith Factors of Commercial Reasonableness. Other
factors used to determine if the disposition was reasonable:
i. Adequate advertising and display
ii. Relevance of customary commercial practices for
selling this type of asset
iii. Circumstances under which the sale was conducted
iv. Appropriateness of the method of sale (public [one
in which the price is determined after the public has
a had a reasonable opportunity for competitive
bidding]/private)
1. Whenever commercially reasonable, a
creditor may choose private or public sale
2. CMT 7: There a two basic distinctions
between private and public sales:
a. Presence. A secured party may be
present at a public sale but not a
private one
b. Notice. For a public sale, debtor is
entitled to notice of the time and
place of the sale; For a private sale,
the debtor is only entitled to receive
a time after which the collateral will
be sold
v. Preparation of collateral prior to sale
vi. Passage of time between repossession and sale
vii. Whether sold as a unit or individually
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d. Price as Indicator of Commercial Unreasonableness. The
fact that a greater amount could have been obtained by a
collection (or other disposition) using a different method or
conducting the sale at a different time is not in itself
sufficient to make unreasonable
i. CMT 10. While a low price in itself is not
“unreasonable” it is one factor to consider
ii. NOTICE OF SALE
1. Those Entitled to Notice. The secured creditor who plans to
dispose of the collateral must give notification to all persons with
an interest in the collateral
a. This extends to lien holders, other secured party’s, etc.
2. Form and Content of Notice. Except in consumer goods
transactions, the following rules apply:
a. The contents of the notification of disposition are sufficient
if the notification—
i. Describes the debtor and the secured party
ii. Describes the collateral that is subject to disposition
iii. States that the debtor is entitled to an accounting for
the unpaid indebtedness and states the charge for
such an accounting
iv. State the time and place of a public disposition or
the time after which disposition may be made for a
private disposition
b. Substantial Compliance
i. Whether a notice that lacks any of the above
information is sufficient notice is a question of fact
ii. The particular phrasing of the notification is not
required
iii. DISPOSITION OF COLLATERAL
1. Generally. A secured party’s disposition of collateral after
default—
a. Transfers to a good faith purchaser, all of debtor’s rights in
the collateral (including residual ownership still held by the
debtor)
b. Discharges the security interest under which the disposition
is made; and
c. Discharges any subordinate interest or lien
2. With Good Faith. A transferee that acts in good faith takes free and
clear of the rights and interests named above, even if the secured
party fails to comply with proper foreclosure procedures
3. No Good Faith. If the purchase is not made in good faith, the
transferee takes subject to—
a. Debtors rights in the collateral
b. Security interest or lien under which the disposition is
made, and
25
c. Any other security interest or lien on the collateral
b. Debtor’s Rights/Remedies
i. RIGHTS IN FORECLOSURE
1. Foreclosure and Bankruptcy. If a bankruptcy is filed before the
sale of the collateral, then the sale of such collateral is stayed until
the resolution of the bankruptcy estate
a. Filing of bankruptcy after the collateral is sold does nothing
and the sale remains in effect
2. Foreclosure and Redemption. The debtor carries the right to
redeem the collateral until the foreclosure is complete. Once the
collateral is sold, the debtor may no longer get the stuff back
3. Policing Rights. The debtor is notified of the date and time of the
sale so that he may monitor the reasonableness of it
ii. REMEDIES FOR A COMMERCIALLY UNREASONABLE SALE
c. Strict Foreclosure. The secured party and the debtor may agree that default will
result in strict foreclosure – meaning that the secured party will take the collateral
in full or partial satisfaction of the debt –effectively avoiding the “commercial
reasonableness” sale requirement
i. GENERALLY. If a secured creditor takes the property under strict
foreclosure, he is exempt from Article 9 requirements. Upon foreclosure,
he may dispose or not dispose of the property as he sees fit without a
requirement of an accounting to the debtor
1. Full satisfaction – means that the obligation is considered to be
fully satisfied and there can be no deficiency [also no surplus]
2. Partial Satisfaction – Debtor must agree to the amount that the S.C.
is saying the collateral satisfies, then the debtor is still liable for
any deficiency
ii. EFFECTIVE STRICT FORECLOSURE
1. All provisions for strict foreclosure must be satisfied:
a. Debtor and all those interested must be notified
b. All must affirmatively agree or not effectively object
c. If any one person objects than may not proceed with strict
foreclosure
iii. NON-CONSUMER GOODS.
1. Partial Satisfaction. Debtor must agree in an authenticated record
AFTER default
a. It is sufficient that the other creditors just don’t object
2. Full Satisfaction. S.C. sends proposal to do this to everyone
interested and may proceed so long as no one timely objects
iv. CONSUMER GOODS
1. Partial Satisfaction. – NO partial satisfaction
2. Full Satisfaction. Only available if collateral is not in the
possession of the debtor when he consents to strict foreclosure
a. If a sale only covers a percentage of what is owed, then the
secured creditor must sell the stuff unless the debtor waives
his right to sale (must be signed AFTER default)
26
III.
v. CONSTRUCTIVE FORECLOSURE. Used to be that if the secured creditor held
collateral after default for an unreasonable time, then he was deemed to
take it in full consideration of the debt and would be considered a
constructive foreclosure
1. Now treated as a violation of Article 9 and may be a defense to a
deficiency suit
CONSEQUENCES OF CREDITOR MISBEHAVIOR
a. Statutory Damages. Any failure to comply with Article 9 allows the debtor
certain remedies
i. JUDICIAL ORDERS CONCERNING NON-COMPLIANCE. If it is determined that
a secured party is not proceeding in accordance with Article 9, the court
may order or restrain collection, enforcement or disposition of the
collateral
ii. DAMAGES FOR NON-COMPLIANCE. A person is liable for damages in the
amount of any loss caused by a failure to comply.
1. This loss may include any resulting from the debtor’s inability to
obtain or the increased costs of financing
2. Ex. If failed to file a termination statement or went beyond scope
in the case of a financing statement the debtor did not receive
financing because of it
iii. CONSUMER GOODS TRANSACTIONS. A person that at the time of the failure
was a debtor, obligor or held a security interest in the collateral may
recover damages for its loss AND (if consumer goods) an amount not less
than the credit service charge plus 10% of the principal or time-price
differential
1. Credit Service Charge + 10% of the principal. Whatever charge the
bank required to pay for costs of the loan and 10% of the original
amount borrowed (principal)
2. Time-price differential + 10% of the cash price. The amount of
interest charged (or a similar service fee) plus 10% of the total
amount the collateral cost before down-payment
a. The second could result in more money because focuses on
the amount of the collateral and not necessarily the amount
borrowed for the collateral
b. Deficiency Judgment. The general rule is that any amount still owed the creditor
beyond what the disposition of collateral made, is still owed
i. CONSUMER GOODS.
1. Notice Generally. In a consumer-goods transaction in which the
debtor is entitled to a surplus or is liable for a deficiency, the
secured party shall—
a. Send an explanation to the debtor
b. After disposition
c. Explaining the calculation, and
d. Before a demand of payment is made by the creditor
2. Contents Notice. The writing must provide the following
information in the following order:
27
a. Aggregate amount of obligations as calculated by the date
specified
b. Amount of proceeds from disposition
c. Aggregate amount of obligation after calculate proceed
d. Amount of expenses of disposition
e. Amount of credits
f. Final amount of deficiency or surplus
3. Substantial Compliance. There does not need to be particular
phrasing of the notice –it is sufficient so long as not misleading
and there are only minor errors
4. Lack of Notice. A person is liable for damages in the amount of
any loss caused by a failure to comply with Article 9. May include
loss or increased costs of receiving financing
a. Non-compliance results in at least $500 in damages
ii. NON-CONSUMER GOODS. NOTICE AND CALCULATION. §9-626(a)(5).
Leaves it up to the courts to determine the sufficiency of the calculation or
what result for failing to comply with any rules in Article 9
c. Basic Issues. Two basic issues arise in deficiency
i. Did secured creditor comply with Article 9?
1. FAILURE TO COMPLY
a. Self-help if breaches the peace
b. Foreclosure procedure problems (notice)
c. Foreclosure sale was not commercially reasonable (private
when should have been public)
ii. What result if breach?
1. NON-CONSUMER
a. PRESUMPTION OF COMPLIANCE
i. §9-626(b). Presumes that in non-consumer
transactions, the secured creditor complied with the
provisions of article nine
1. Burden. Burden on the debtor to show that
secured creditor did not comply.
2. Rebuttable presumption. One the debtor
shows that the S.C. was not in compliance,
then there is a rebuttable presumption that
would the S.C. have fully complied with
Article 9 then the sale would have equaled
the obligation and no deficiency would have
resulted
3. Experts. S.C. then need to put on evidence
from expert that no such result-still would
have been a deficiency.
28
4. Debtor need to refute this evidence with
own experts - due to such expense, debtor
usually cannot afford litigation
2. CONSUMER. If it is a consumer transaction under §9-626(b). It is
left to the court to decide the remedy. However, but there are three
common law approaches that existed before Article 9 and may now
be used today
a. Debtor Burden. Debtor must prove violation and actual
damage [likely that lack of resources will prevent debtors
from ever recovering] [minority of minority]
b. Absolute Bar Rule. If debtor shows that s.c. violated a
provision of article nine, the result is an absolute bar from
the s.c being able to claim any deficiency [majority]
i. Administratively easy but results in complete
forfeiture of large amounts in some cases for just
small infractions
c. Rebuttable Presumption. Same as in article 9.
iii. Generally – This section applies only when the secured creditor has
brought an action against the debtor for the deficiency. The debtor than
counter-sues for a violation of Article 9
PRIORITY. When everyone has followed the rules, which person gets the stuff?
I.
FIRST TO FILE OR PERFECT. §9-322(a). [General Rule].Priority among conflicting
security interests in the same collateral is ranked according to the time of filing or
perfection.
a. Unperfected Security Interests. A perfected security interest has priority over an
unperfected security interest.
i. If neither security interest is perfected, the first one to obtain perfection
wins
b. After-acquired Property. If one of the perfected security interests was a blanket
“all existing and after acquired” type clause, then look to the perfection date of
that security interest. It is likely that it dates back and that may have priority over
a later-acquired security interest
i. FUTURE ADVANCES. §9-323(a). Perfection of a security interest in
advances dates from the time the first advance is made so long as the
security interest is still perfected.
1. Regardless of Notice. This means from the first advance, the
creditor has priority over other people’s advances to the debtor,
including subsequent advances by the first lender. This is true even
if A had notice of B’s advance
ii. ALL OBLIGATIONS CLAUSES. makes the date of filing apply to later
obligations for the purposes of competing interests even if later security
interests arise and are filed before another obligation arises.
II.
SUPER-PRIORITY PMSI. . §9-324(a). Excluding consumer goods transactions, a
purchase money security interest gets priority even if it is not the first to file
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a. Requirements. If the PMSI is in goods and software, other than inventory, then
there are three requirements before the PMSI holder gets priority:
i. NOTICE. The person holding the PMSI must give notice to prior secured
parties in the same collateral, OR
ii. GRACE PERIOD. The PMSI must be perfected when the debtor receives
possession of the collateral or within 20 days thereafter
*Double-check b. Inventory. §9-324(b). In order to have priority in a PMSI for inventory, the
these
above requirements must be met, along with meeting the following:
requirements for
i. NO GRACE PERIOD. The PMSI must be perfected prior to the debtor
non-inventory
receiving possession of the inventory
PMSI priority.
ii. AUTHENTICATED NOTICE. The PMSI holder must send an authenticated
notice to the holder of the security interest
1. Timing of Notice. The above notice must be sent to the secured
party and received prior to the debtor receiving the inventory but
not earlier than five years
2. Contents of Notice. Notice must state that the person sending the
notice has or expects to acquire a PMSI in the inventory of the
debtor and describes the inventory
c. No Loss of Status. §9-103(f) Other than a consumer goods transaction, a PMSI
does not lose status if—
i. SECURES ANOTHER OBLIGATION. A PMSI will retain its priority even if
the PMSI also secures an other non-pmsi obligation
ii. IS COMBINED W/NON-PMSI COLLATERAL. Collateral that is not purchased
by the PMSI money may also secure the PMSI without it losing priority
iii. RE-FINANCED. Even if the PMSI is re-financed, renewed, consolidated or
restructured, it will still retain its priority.
III.
PROCEEDS
a. Temporal Priorities.
i. RELATION BACK. The time for perfection in proceeds dates back to the
perfection of the original collateral.
ii. FIRST TO FILE/PERFECT. The general rule applies to proceeds in that the
first to file or perfect (using the original collateral perfection for proceeds)
has the priority in the collateral
b. Exception: Non-Temporal Priorities.
i. PMSI IN ORIGINAL COLLATERAL. §9-324(a). Other than inventory or
livestock, priority of the original PMSI collateral will extend to
identifiable proceeds if perfected when the debtor receives possession of
the collateral or within 20 days thereafter.
1. Perfection Requirement. In order for the proceeds to have the
priority that its PMSI collateral had, the proceeds must be
independently perfected.
ii. PROCEEDS FROM INVENTORY. The general rule of first to file or perfect is
observed, however proceeds in certain forms may have different rules:
1. Chattel Paper/Check. §9-324(b). The check is identifiable cash
proceeds and have priority to the extent that they are received prior
to the delivery of the collateral
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IV.
2. Account. CMT §9-324. Congress is silent as to the issue of
accounts as proceeds, and thus this super-priority only extends to
those proceeds that are listed in the statute
a. First to File. Because no super-priority extends to accounts,
the first to perfect or file rule applies
3. Bank Account. First to file or perfect.
CHATTEL PAPER AND INSTRUMENTS. Possession as Priority
a. Chattel Paper Review.
i. PERFECTION. Can perfect a security interest in chattel paper either by filing
or by possession.
ii. SALE. The sale of chattel paper by the owner is treated as though it created
a security interest so the perfection and priority rules apply as soon as sold
b. Possession as Priority. §9-330. The secured party who has possession of the
chattel paper has priority
i. DELIVERY. Delivery marks the time that the buyer of chattel paper gets
priority
1. Default Before Delivery. If the debtor defaults before the buyer of
chattel paper takes delivery then the first secured creditor has
priority
ii. REQUIREMENTS. First, must determine the type of financer by asking them
to what extent they rely on the proceeds in determining whether to extend
money (may look beyond the face of the financing statement to other
circumstances)
1. Pure Inventory Financer. Applies to a claimant of chattel paper
who is claiming the chattel paper merely as proceeds of inventory
(Proceeds not as important to them as the inventory); Must meet:
a. Good Faith Purchaser
b. Who takes possession of the chattel paper
c. In return for new value
d. In the ordinary course of business, AND
e. No indication of Assignment
i. The chattel paper cannot have notes on it stating
that another person holds an interest in the chattel
paper
2. Comprehensive Inventory Financer. This financer relies on both
the inventory and the proceeds in running its business; requires
a. Good Faith Purchaser
b. Who takes possession of the collateral
c. In return for new value
d. In the ordinary course of business, AND
e. **Without knowledge that they are affecting another
person’s rights
i. This is a higher standard, because even if on the
face of the chattel paper it must say that in buying
this chattel paper it violates someone’s rights
ii. Must actually see it get knowledge
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V.
iii. Where knowledge will be obtained
1. Filed financing statement
2. Face of Chattel paper
PURCHASERS OF COLLATERAL. What happens to the security interest when someone
purchases the collateral?
a. General Rule. §9-201. A security agreement is effective against purchasers of
collateral. Moreover, a security interest continues in the collateral notwithstanding
sale.
b. Perfection Requirement. In order for a security interest to retain priority after
sale, the security interest must be perfected.
i. LOCATED IN THE SAME STATE. §9-316(a). If the business debtor and the
purchaser are located in the same state, then the financing statement
remains effective to perfect a security interest after purchase, and is
considered perfected as of the day of the original filing. Such perfection
remains until –
1. Time perfection would have ceased under original F.S.
2. Expiration of four months after debtor changes residence
3. One year after a transfer of collateral to a person that becomes a
debtor and is located in another jurisdiction.
ii. DIFFERENT STATES. If the business debtor and the purchaser are located in
different states, then such perfection remains for one year after the transfer
of collateral (unless lapse first)
1. If secured creditor files a financing statement in the name of the
new debtor before that time, that the interest remains perfected
iii. LOSS OF PERFECTION. As soon as lose perfection, now at the bottom of the
pile and lose priority
1. Unperfected Security Interest. §9-317(b). When dealing with an
unperfected security interest, the buyer takes free of the security
interest if –
a. Buyer/Lessee Gives Value.
b. Receives Delivery of the Collateral Before it is Perfected
c. Without Knowledge of the Security Interest. Knowledge is a
stronger standard than mere notice
i. Anything less than knowledge means that the buyer
takes free of the security interest
iv. EXTENSION OF FILING. §9-507(a). The original filing of a financing
statement will extend to the secondary-buyer even though the name of the
new debtor is not accurately representing on the financing statement
c. Exceptions.
i. AUTHORIZATION. §9-315(a)(1). A buyer may take the collateral free of a
security interest when the creditor gives the debtor permission.
1. Residual Ownership. The debtor has a residual ownership in the
collateral, which she may transfer to a subsequent purchaser.
However, unless the debtor has authorization to transfer the
property, the purchaser will get it subject to the security interest.
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2. Sufficiency of Authorization. Authorization from the creditor may
either be in the form of an express release or conditioned
authorization.
a. Express Authorization. The debtor may expressly authorize
a subsequent transfer to occur, freeing the buyer from a
security interest in the collateral
i. Occurs often to help perpetuate the debtor’s
business
b. Conditioned Authorization. (Ambiguous Release). If the
release is ambiguous as to what it is authorizing, the courts
will try to resolve.
i. “On Condition That Debtor Immediately Remits
Price.” Courts will generally separate the condition
from the release –stating that the debtor has the
authorization to transfer the property free of the
security interest but has a duty (facing breach of
contract ) to pay the creditor right away
ii. “So long as the Security Interest Continues as
Against the Secondary Buyer”. A condition that
allows the debtor to sell the collateral so long as it
continues against the new buyer is enforceable
1. Just a restatement of the status of the law
iii. Defenses.
1. Acquiescence. The debtor or secondary
buyer may argue acquiescence. (that the
creditor has not enforced this against
secondary buyers before and accordingly
cannot do so now)
2. Course of Dealing.
3. Implied Authorization.
ii. BUYER IN THE ORDINARY COURSE. §9-320(a).
1. Rule. Where the buyer is in the ordinary course of business, he
takes free of a security interest created by the buyer’s seller
a. Customary Practices in the Industry. The sale comports
with how the industry or the seller does his normal business
b. Seller Sells Goods of That Type. Must be of the type of
goods that he normally sells
c. Good Faith Buyer Without Knowledge. The buyer must not
know that he is impeding on someone else’s rights.
2. Exceptions.
a. Pawnbrokers. If purchase from a pawnbroker, still take
subject to a security interest
b. Transfers in Bulk. Still take subject
3. Prior-Approval Sale Clause. This clause has no effect on the seller
because so long as this buyer in the ordinary course did not know
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VI.
he was violating any rights, he takes fee and clear of any security
interest
4. Extends to Lessee. If the buyer is a lessee in the ordinary course of
business, he also takes free of security interest if w/out knowledge.
5. Only Seller’s Security Interest. If the creditor is in the business of
selling this collateral and then a buyer in the ordinary course of
business buys it from them…what result
a. A buyer in the ordinary course of business only takes free
of a security interests CREATED BY THE SELLER – in
this case the seller was the debtor and did not create the
security interest – thus exception does not apply.
b. Implied Warranty in sale of goods 2-312
iii. ENTRUSTER. §2-403(2) Any entrusting of goods to a merchant gives the
merchant power to transfer the goods without the security interest
1. Includes Acquiescence. . §9-315(a)(2). Includes acquiescence in
another’s possession – if knew about the possession and did
nothing about it – if they allowed the creditor to hold it for an
extended period of time that will be considered entrusting and that
entrusting allows the creditor to pass the goods free of the security
interest
iv. CONSUMER GOODS FROM CONSUMER SELLER. §9-320(b). If the buyer buys
primarily for household goods or purposes and then sells it to someone
who is going to use the collateral the same way
1. Lease. Month to month lease follows under the same thing
2. Business as Buyer. A business may be a buyer in the ordinary
course of another buyer’s business – custom and practices of the
particular seller OR in the industry
a. A prior arrangement between the people may demonstrate
that this is how the seller runs her business §9-320(a)
3. Being a Buyer. Taking the collateral in satisfaction of an
antecedent debt is not buying
a. While it is a purchase, it is not buying
4. Creditor Protection. What could the losing party have done to
protect itself? Structure it as a purchase “buying” of the collateral
SECURED PARTY PROTECTIONS. The secured party may do any of the following to
secure his priority status against possible subsequent super-priorities
a. Subordination Agreement. §9-339.The first secured creditor may agree that a
second secured creditor get priority as to some or all of the worth of the collateral
b. Second S.C. Payoff. The debtor may borrow the balance of what he owes the first
creditor from the second creditor, so that the only obligation now lies with the
second creditor.
c. Assignment of Obligation. First S.C. obligation is assigned to the 2nd S.C. so that
#2 holds the entire obligation.
d. Negative Pledge Clause. §9-401. Cannot have a clause that says the debtor is
prohibited from taking any additional secured interests in the collateral.
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i. Ineffective as against the debtor and creditor, however it may a provision
triggering default, and upon the 2nd secured interest the entire amount may
be due
BANKRUPTCY
I.
BACKGROUND. The acid test for a security interest is whether or not it will survive
bankruptcy
a. Effect of Federal Law. The bankruptcy code is federal law which trumps the
state adopted UCC where the terms conflict – most times there will be no
confliction
b. Types.
i. LIQUIDATION. [Straight Bankruptcy – Chapter 11].Taking all of the assets
of the debtor that is not exempt from sale. Then after all assets are sold,
then they are distributed to the creditors in accordance with the bankruptcy
priorities
1. Distinctions made between natural individuals and businesses
a. Business – businesses get no exemptions and there is no
such thing as a fresh start for a business
b. Individual – Bankrupt individual will lose most of his
assets (other than some exemptions) and the debt will be
paid off to the extent that the money covers it. –Then the
remainder of the debt will be discharged
i. Gives the bankrupt debtor a fresh start
ii. REHABILITATION./RE-ORGANIZATION Chapter 13.
1. Individual. (Rehabilitation) Under the authority of the federal
court, get a rescheduling of the debt of the wage earner (maybe
new interest rates, and spread payments off)
2. Business. (Re-organization) There is a chance that this company
can make it
a. If we can save a firm from destruction – good things, save
jobs
b. Must sell the company to the creditor’s basically trying to
get them to wait for or get less
iii. IMPORTANT TERMS
1. Commencement Date. The date of filing marks the commencement
of the case and is thus the date used when considering priority
2. Estate In Bankruptcy. All of the debtor’s property goes into the
bankruptcy estate
3. Trustee. Appointed by the court to collect and administer the assets
c. Procedure
i. FILES PETITION. Debtor goes bankrupt by filing “petition in bankruptcy”
with federal bankruptcy court.
ii. AUTOMATIC STAY. §362. On filing of bankruptcy petition and
commencement of case, everything against debtor is “stayed”. No new
suits can be filed against debtor. Enforcement of judgments against debtor
are also stayed
1. Rule. No creation, perfection, enforcement or security interests
35
II.
2. Exception. Except a PMSI created within 20 days before
bankruptcy can be perfected within those 20 days
3. Relief. On application, the bankruptcy court may grant relief from
automatic stay
TRUSTEE’S AVOIDING POWERS. While usually the trustee cannot include perfected
security interests in the bankruptcy estate, he has the power to avoid both unperfected
security interests and under certain circumstances some perfected security interests
a. Unperfected Security Interests. §544(a). Unperfected security interests may be
avoided by the trustee
i. EFFECT OF AVOIDANCE. If a security interest in the bankrupt debtor’s
property is avoided, the formerly secured creditor does not lose her claim
against the bankrupt debtor’s estate, but instead becomes an unsecured
creditor, sharing pro-rata with the members of the same bankruptcy class.
ii. STRONG ARM CLAUSE. §544(a)(1). Under the strong arm clause, the
bankruptcy trustee is given the rights and powers of a hypothetical lien
creditor at state law, with a judicial lien on all of the property of the debtor
as of the commencement of the case.
1. Prior as if Lien Creditor. §9-317(a)(2). The trustee can avoid any
security interest in the property of the debtor as to which the alien
creditor would be prior.
2. Allows Priority over Unsecured. Just as a lien creditor would, the
trustee has priority over unsecured transactions, even though will
have been created before bankruptcy
3. Except No Priority over PMSI. §317(e) / §546(b). A PMSI
perfected within 20 day grace period after debtor gets possession
of collateral –even though theoretically it may not be perfected by
the time of commencement of bankruptcy, the grace period works
to save it during that time
b. Perfected Security interests. §547 (VOIDABLE PREFERENCES). Allows the trustee
to avoid certain transfers of interests in the debtor’s property made within 90 days
before bankruptcy (or one year if an insider) which transfers are preferential to
transferee creditors and prejudicial to other creditors
i. REQUIREMENTS
1. Collateral. There must be some property that the debtor has an
interest in
a. Collateral cannot be transferred under this section before
the debtor has interest in it.
2. Transfer. Every mode of parting with an interest in property—
absolute or contingent, voluntary, involuntary, including the
creation and/or perfection of a security interest in the debtor’s
property, and including the seller’s retention of a security interest
in property sold to the buyer
a. Perfection. A perfection operates to give the perfected
secured creditor priority in the debtor’s collateral over the
claims of other creditors of the debtor, so this is considered
a transfer
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b. Creation of a Security Interest. The creation of a security
interest in something is considered a transfer
3. To or For the Benefit of a Creditor. Anyone with a legal right to
payment from the debtor has a claim against the debtor, and is a
creditor
a. Thus, any of those transfers will be considered to or for the
benefit of a creditor
4. For or On Account of Antecedent Debt. There must be some debt
owed by the debtor before this transfer is made
a. Contemporaneous Transfers. Any transfer to the creditor at
the same time that the debt is created is not said to be made
on account of antecedent debt.
5. Preferential to Receiving Creditor. The creditor must have gotten
more by this transfer than they would have had they been a
member of the unsecured party group during the bankruptcy
6. Prejudicial to Other Creditors. The
a. Fully Secured Creditor Exception. If the value of the
collateral exceeds amount of secured debt, it is almost
always not preferential because they do not prejudice other
creditors
7. Presumption of Insolvency. In order to void one of these
transactions, the debtor must have been solvent at the time of the
transfer –there is a presumption that a debtor is solvent within 90
days of filing bankruptcy
ii. EFFECT OF INSIDER. If the person the transfer is made to is considered an
insider (family, within the directors or officers of a corporation, partners in
a firm) then those transactions can be voided for up to one year
iii. EXCEPTIONS. §547(c). There preferences, that for policy reasons, we do
not wish to avoid.
1. Substantially Contemporaneous Exchange. Those Exchanges that
happen at the same time like created a security interest or
transferring money (like a check) at the same time that receive
delivery of the goods
2. Ordinary Course of Business. If a debt is incurred in the ordinary
course of business, according to ordinary business terms, such as
utility bill
3. PMSI Perfected w/in 20 Days. If perfected w/in days after receive
possession (Does this mean that any PMSI even if commences
after the 90 day period is ok if perfected within 20 days?)
4. Net Out Preferential Payment. Net out preferential payment to
creditor followed by same creditor’s extension of new value,
unsecured
5. Improvement in Position. Improvement of position test for floating
lien in inventory and receivables.
a. If the creditor can show that the debtor is in a better
position at the time of bankruptcy than was at transfer.
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c. Timing of Transfers.
i. TWO REASONS NEED TO KNOW WHEN MADE.
1. Whether the transfer was made on account of a transfer made
before
2. 90 days of for insider one year before bankruptcy –
ii. WHEN TRANSFER TAKES PLACE. §547(e). Timing of when a transfer of
property is made
1. Debtor Acquires Rights. (3) Not made until the debtor has acquired
rights in the property transferred
a. Includes security interests in after-acquired property
2. When Transfer Takes Affect/Perfected. (2) The transfer of security
interests and when it is made –when a transfer of a security interest
takes effect and when it is perfected
a. Transfers when takes effect and takes effect when it
attaches under Article 9
b. Some transfers of security interests are made when it is
perfected
c. If a security interest is perfected within 10 days after it
attaches then the transfer is made at the time of attachment
d. If after 10 days then the security interest is transferred at
the time of perfection
e. That means that they are deemed to have happened at the
same time and thus no antecedent debt –otherwise if not
within the ten day period than the transfer is made on the
day of perfection – making it a separate transfer and thus a
transfer due to an antecedent debt
f. Grace period of the PMSI and put that into the bankruptcy
code with the same grace period
38