Secured Transactions

	Secured Transactions
Relevant texts	; Secured Transactions: A Systems Approach [Connected eBook with Study Center] (Aspen Casebook) ; ; Problems and Materials on Secured Transactions (American Casebook Series) ; ; Secured Transactions (Examples & Explanations)
Related course(s)

Introduction

1. Scope

Article 9 only applies to personal property; not real property

1. Three preliminary steps

Does this transactions create a security interest
§1-201(35)
Security interest means an interest in personal property or fixtures which secures payment or performance of an obligation
A security interest is the interest of the creditor in the debtor’s personal property as collateral for the obligation the debtor owes and if necessary the right to take the property in payment of the obligation
If it’s a security interest, is it w/in the scope of article 9?
§9-109a (general scope)
Except as otherwise provided in subsections (c) and (d), this article applies to:
(1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment;
(5) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), as provided in Section 9-110; and
(6) a security interest arising under Section 4-210 or 5-118 [1]
9-109(d) – what’s not covered by article 9
(1) a landlord's lien, other than an agricultural lien;
(2) a lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but Section 9-333 applies with respect to priority of the lien;
(3) an assignment of a claim for wages, salary, or other compensation of an employee;
(4) a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose;
(5) an assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only;
(6) an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract;
(7) an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness;
(8) a transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment, but Sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds;
(9) an assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral;
(10) a right of recoupment or set-off, but:
(A) Section 9-340 applies with respect to the effectiveness of rights of recoupment or set-off against deposit accounts; and
(B) Section 9-404 applies with respect to defenses or claims of an account debtor;
(11) the creation or transfer of an interest in or lien on real property, including a lease or rents thereunder, except to the extent that provision is made for:
(A) liens on real property in Sections 9-203 and 9-308;
(B) fixtures in Section 9-334;
(C) fixture filings in Sections 9-501, 9-502, 9-512, 9-516, and 9-519; and
(D) security agreements covering personal and real property in Section 9-604;
(12) an assignment of a claim arising in tort, other than a commercial tort claim, but Sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds; or
HOWEVER, once a claim arising in tort has been settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort.
But commercial tort claims are within the scope of article
(13) an assignment of a deposit account in a consumer transaction, but Sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds.
Has the security interest attached
See §9-203, it’s attached if it’s enforceable

Attachment & Enforcement

1. §9-203b, it’s the requirements for attachment

A security interest attaches when it’s enforceable, 9-203b has the requirements for enforcement

1. 9-203(b) Three requirements for enforcement/attachment

Value has been given
Value is defined in §1-204. Typically, value is given through a loan of money, providing a line of credit or making a credit sale of collateral.
§1-204(1) – in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or drawn upon
Past consideration will work for value. So if a security interest is granted in fulfillment of a pre-existing debt, that will work
Debtor has right in the collateral OR the power to transfer rights in the collateral
Typically this exists if the debtor has full ownership of the collateral. The only time it doesn’t really exist is with a trustee who has bare legal title
Debtor cannot transfer rights in property that the debtor does not possess, so attachment may be postponed until the debtor possesses the collateral
You can use a security interest as collateral for another loan
1-206 – a sale consists in the passing of title from the seller to the buyer for a price
You only have a security interest in the right to receive payment, if that’s what’s being used as collateral; you don’t actually get a security interest in the security interest, b/c if the original party never defaults, then the newly secured party never gets the original collateral
One of the following conditions is met:
The debtor authenticates a security agreement describing the collateral
Security agreement – a security agreement is an agreement that creates or provides for a security interest
DON’T LET THE TITLE OF THE SECURITY AGREEMENT CONFUSE YOU; there’s not set of magic words required
Authenticate means signed. Creditor need not have signed it, only the debtor
Description of collateral
§9-108a – a description of personal property is sufficient, whether or not it is specific, if it reasonably indentifies what is described
b. – a description of collateral reasonably identifies the collateral if it identifies the collateral by … a type of collateral described in the UCC
Article 9 defined types of collateral:
Equipment
Inventory
Accounts
Chattel paper, etc.
Composite document rule
The composite document rule permits other documents to evidence the debtor’s agreement to give a security interest in the absence of an authenticated security agreement
“Although the general rule is that a financing statement cannot by itself, constitute a written security agreement, nothing in 9-203 suggest that an authenticated security agreement must be a single document. Thus, a financing statement together with a promissory note containing a recitation that the debtor intended to create a security interest in collateral described in the financing statement, could constitute an authenticated security agreement.”
First, courts must determine if there is any language in the written security agreement that objectively indicates that the parties intended to create a security interest. If so, the court must then determine whether the parties intended to create a security interest
Look at all the documents that exist in order to evaluate whether a security interest was granted by the parties
It can raise problems, though with authentication if the only thing that the debtor has signed
Remember that the debtor has to authenticate a security agreement that provides a description of the collateral. Courts will be unreceptive to use composite document rule to save a secured party with a defective collateral description.\
The collateral is not a certificated security and is in the possession of the secured party under §9-313
Under 9-313, a secured party can possess tangible negotiable documents, goods instruments, money or tangible chattel paper.
Satisfies the attachment requirement only while the secured party maintains possession
The collateral is a certified security in registered form and the security certificate has been delivered to the secured party under §8-301 pursuant to the debtor’s security agreement
The collateral is in deposit accounts, elec. Chattel paper, etc. and the secured party has control pursuant to debtor’s security agreement

1. Non-traditional methods of creating a security interest:

Reserving title, §2-401(1)
Any retention or reservation of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest
So if the seller claims they retain title but delivers the goods, it’s the equivalent to the retention of a security interest
Attachment requires rights in the collateral. If you don’t receive rights in the collateral until delivery, then attachment is postponed until delivery. But a debtor can still acquire rights in the collateral before they receive it, depending on the terms and nature of the transaction
Leases creating security interests
First question to ask: is this a lease that creates a security interest governed by article 9
It’s a fact determination
§1-203: 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
The original term of the lease is equal to or greater than the remaining economic life of the goods
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
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
The lessee has an option to become the owner of the goods for no additional consideration or nominal consideration upon compliance with the lease agreement.
Under §9-505, the terms of a lease can be used to describe a security interest and agreement
Simply filing a financing statement is not determinative in evaluating whether the lease creates a security interest or it simply is a lease

After acquired property and future advances

1. After acquired property

The security agreements attaches to after-acquired collateral once that collateral is acquired
9-204a – a security agreement may provide or create for a security interest in after-acquired collateral
The value given is the value that was given for the transaction that gave rise to the transaction.
9-204b
An after acquired property clause in consumer goods only applies to goods acquired within ten days of when the secured party gives value
Also, security agreements do not attach to after-acquired commercial tort claims
FTC regulates the secured party’s ability to take a security interest in consumer goods unless the security interest was given as party of a PMSI
Inventory exception
Interests in “all inventory” may not require an after acquired property clause because of the nature of inventory; but this only works for inventory. It’s always best to include the after-acquired property clause, even if it’s “all inventory” just to be safe
If the agreement states “all inventory” it may very well have created a security interest in after-acquired property and future advances See Filtercorp case(“We now hold . . . that security interests in "inventory" and "accounts receivable" presumptively include after-acquired inventory and receivables, subject to rebuttal by evidence that the parties intended otherwise”), but if it refers to the inventory with specificity it may not. See Stoumbos case

1. Future advances

9-204(c) - A security agreement may provide that collateral secures future advances or other value, whether or not the advances or value are given pursuant to commitment
A future advance clause does not obligate the secured party to make a future advance; however it can if there’s a commitment to make sure advances in the future
The value is the same value for the attachment of the initial security interest
The debtor has right in the collateral when the debtor acquires the collateral
The security agreement is the original, authenticated security agreement that includes the future advance clause
Is Dalton v. First National Bank of Grayson good law after section 9-204, Official Comment 5 was adopted in 2001?
ANSWER: It depends if the jurisdiction has adopted the official comments. If they have, the comment states that it rejects other tests for determining the obligations secured by collateral, including the class test. The comment states that “determining the obligations secured by collateral is solely a matter of construing the parties agreement under applicable law.” But the comments are not law, the UCC by itself isn’t law without being adopted. So conceivably a state could adopt the statute without adopting the reasoning or rational behind the wording of the statute, intending instead to apply its own rules of interpretation to the statute. Furthermore, the applicable law would be the law concerning “class of debts”
if you forget to put in an after-acquired property clause, you need to make a new security agreement to attach to future collateral
if a financing statement describes the collateral as “after-acquired” but the security agreement does not, the clause from the financing statement will be ineffective to attach the security interest to after-acquired property

Perfection

1. Perfection is a state of being for a security interest

Attachment of a security interest gives the creditor a superior right to the collateral over the debtor (if the debtor defaults)
Perfection gives the secured party a superior right to the collateral over other secured parties
BUT you can’t have perfection without attachment

1. 90% of security interests are perfected by filing a financing statement (9-310(a))

9-502a: a financing statement is sufficient only if:
It provides the name of the debtor
§9-503: Name of the Debtor and Secured Party
9-503a4
If the debtor has a name, only if the financing statement provides the individual or organizational name of the debtor; AND
DON’T USE ‘DOING BUSINESS AS,’ JUST SIMPLY LIST THE DEBTOR’S NAME
If the debtor does not have a name, only if it provides the names of the partners, members or other persons comprising the debtor
If the debtor’s name is listed in compliance with 9-503a, then the statement isn’t rendered ineffective by a failure to list the debtor’s trade name
9-503c: Trade names are insufficient. If an individual, it has to be the legal name of the individual generally.
If a registered organization, has to be the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization
Can you file multiple financing statements listing the debtor’s different names?
Yes, you want to make sure that you have one financing statement that lists the debtor’s name correctly
If you file a financing statement that incorrectly lists the debtor’s name, you can amend the statement, but the perfection does not happen until the amendment is done which makes the financing statement sufficient to accomplish perfection
There’s no relation back
Provides the name of the secured party
9-503
What about a misdesignation of the secured party?
Because searches are not conducted in the secured party’s name, an error in the secured party’s name will not make the financing statement seriously misleading. See comment 2, to 9-506.
Indicates the collateral covered by the statement
9-504
To be sufficient, the description of collateral must sufficiently describe the collateral
If you improperly describe the collateral so that you only describe part of it (e.g. 20 tables instead of 30), then the security interest is only perfected as to the collateral described in the financing statement, but not exceeding the amount of collateral described in the security agreement
§9-504. “A financing statement sufficiently indicates the collateral that it covers if the statement provides … an indication that the financing statement covers all assets or all personal property”
By signing a security agreement, the debtor authorizes the secured party to file a financing statement (9-509b) or the debtor can authorize the filing of a financing statement with an authenticated record
§9-509b – ipso facto authorization
Thus, even though the financing statement is overly broad and thus exceeds the authorization, it nevertheless perfects the security interest in collateral to the extent that the financing statement was authorized to perfect collateral in the security agreement.
But it’s best to accurately describe the collateral that is the subject of the security agreement to avoid litigation
Anybody can file a financing statement, but that doesn’t mean that the security interest is perfected. There’s a number of problems that could prevent the financing statement from being perfect (unauthorized, misspelled debtor, lapse etc.)

1. Mistakes on financing statement, 9-506

A seriously misleading mistake makes a financing statement ineffective to perfect. If you fail to sufficiently provide the name of the debtor in accordance with 9-503a, then it’s seriously misleading and an ineffective perfection
HOWEVER, if you screw up the debtors name, but using the standard search logic of the filing office, a search with the debtor’s proper name would turn up the misspelled/improper name financing statement, then it’s not seriously misleading
Failure to include the debtor/secured party’s address, is the statement perfected?
Depends if it is accepted.
The filing office has grounds to reject it under 9-516b5 b/c of the failure to list the debtors address. §9-520a indicates that the office is supposed to reject it on this basis, but under §9-520c, a filed financing statement is effective if it meets the 9-502a/b requirements (which we do), even if the filing office is required to refuse acceptance under subsection a.
Change in debtor’s name
9-507
(b)
Except with regards to a debtor’s name, a financing statement is not rendered ineffective if, after the financing statement is filed, the information provided in the financing statement becomes seriously misleading under §9-506.
(C); what if the debtor changes his name?
The security interest is perfected in the inventory acquired on November 15, but not January 15.
9-507c, if a debtor changes its name that a financing statement becomes seriously misleading under 9-506
The financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months, of the change AND
The financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the change, unless an amendment to the financing statement is made, rendering it not seriously misleading.
You get four months to figure out that the debtor changed its name and amend the financing statement

1. Termination statements

Upon filing the termination statement, the financing statement to which the termination statement relates ceases to be effective.
§9-513, termination statement: is it a debt for consumer goods?
Yes, need to file a termination statement b/c it’s a consumer debt, see 9-513a.
9-513a:
You have to file a termination statement if the collateral covered by the financing statement is consumer goods AND there is no obligation secured by the collateral or commitment to make an advance OR the debtor did not authorize the filing of the initial financing statement
9-513b
Must file the statement within one month after there is no obligation secured by the collateral OR within 20 days after demand from the debtor
Not consumer goods, go to 9-513c
For any other debt, the obligation to file a termination statement is only triggered by a demand from the debtor. Termination statement must be filed within 20 days
9-514; failure to comply with filing of termination statement
A secured party who fails to comply with the requirements of 9-513 activates the debtor’s rights to file a termination statement , in addition to being liable for statutory damages under 9-625.

1. Perfection by filing, period of effectiveness, continuation; §9-515

9-515(c), a financing statement lapses on the expiration of the period of its effectiveness (five years). Upon lapse, a financing statement ceases to be effective and any security that was perfected by the financing statement becomes ineffective.
****a security interest in farm products is not an agricultural lien
A purchaser includes a secured party. So anybody who has a security interest is a purchaser for the purposes of § 9-515.
A perfected secured party always wins as against an unperfected secured party
Filing of a continuation statement extends the effectiveness of the perfection by filing for another five years from the expiration date of the effectiveness of the original financing statement, but the continuation statement can only be filed within six months of the lapse of the original financing statement. See 9-515c,e.
If the financing statement lapses without a continuation statement, you have to reperfect the security interest or else you’re unperfected and fucked:
9-515d, a continuation statement may only be filed within six months before the expiration of the five year period specified in (a). So if the security interest lapses, you can’t file a continuation
§9-509b authorizes the secured party to file the financing statement to reperfect the security interest. However, any other party with a security interest that has not lapsed would have priority over the reperfected financing statement
See reading, pg. 93

1. Authorization to file a financing statement

Anybody can file a financing statement, but that doesn’t mean that the security interest is perfected

1. Exceptions to perfection by filing: 9-310(b) & 9-312(b)

9-309: perfection at attachment
PMSI in consumer goods perfects when attached,
sale of payment intangible,
sale of promissory note
9-313
Perfection by possession of collateral (goods, neg. instruments, chattel paper)
Perfection by control
9-312c,d temporary automatic perfection for certain goods, typically commercial paper, in the hands of a bailee
But remember, 9-312a – a security interest in chattel paper, negotiable documents, instruments or investment property may be perfected by filing.
Bottom line is you perfect by filing a financing statement except for those exceptions the code delineates
9-311: Certificate of title goods
9-102(a)(10)- certificate of title means a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.
A financing statement is not necessary or effective to perfect a security interest subject to a certificate of title statute
Basically, for cars under §9-311, then you have to perfect the security interest by filing a lien statement with the county clerk where the collateral is located
Bring county clerk a title lien statement, tender a fee and the secretary of state issues the certificate of title which notarizes the perfection of the security interest
If it’s accomplished within 20 days of attachment, the security interest is deemed perfected on date of attachment
You can only have two perfected certificate of title security interests; any other security interests are unperfected
KRS § 188a065 – it’s what brings cars within the certificate of title classification
Also applies to boats, manufactured homes

Choice of Governing law

1. Choice of law, debtor changes residence after perfection (§9-301, §9-316)

9-301, perfection, effects and priority are governed by the law where the jurisdiction debtor is located, unless the collateral is of a certain class and the collateral is located in a jurisdiction which is different from that of the debtor. In that case the jurisdiction where the collateral is located governs priority and effect of perfection/non-perfection but not perfection itself.
It’s important to distinguish which stage of article 9 shit we’re talking about; the law that governs attachment may be different from that which covers perfection which may be different from the law that governs priority and effect of perfection/non-perfection. See 9-301(1)-(3).
We’re only going to deal with 9-301(1)-(3) on the exam
And 9-303, but we’ll cover that in this class
An organization is anything that’s not an individual, so a partnership is an organization and an organization with only one place of business is located at its place of business.
§9-316 creates rule for when the debtor changes jurisdiction
So you check 9-301 & then 9-316
Bank perfects a security interest in Debtor’s personal art collection by filing a financing statement in Kentucky on March 17, 2009. Debtor is an individual residing in Kentucky. Debtor moves to Indiana on November 2, 2010, owing Bank $1700 at that time. Bank discovers Debtor's change in residence on February 7, 2011 and asks you [its attorney] whether its security interest is perfected. Is it
9-316a – a security interest perfected pursuant to 9-301 remains perfected until the expiration of four months after a change of the debtor’s location to another jurisdiction.
So b/c four months have not expired, the bank’s interest is still perfected
In order to get the four month grace period, you have to have a perfected security interest
But remember, as soon as the debtor moves, the law of the jurisdiction where the debtor moves to becomes the governing law. However, under 9-316a, there is a four month grace period that keeps the security interest perfected.
However four months is the maximum. If there are less than four months remaining on the security interest’s perfection when the debtor moves, the security interest will only remain perfected in the new jurisdiction until the security interest expires under the law of the old jurisdiction
After you determine whether the security interest is perfected, what do you do next to protect Bank?
9-316b
“If a security interest described in (a) becomes perfected under the law of the other jurisdiction before the earliest time or event described in that subsection, it remains perfected thereafter.”
Once the security interest is perfected in the new jurisdiction, a new “clock” begins to run on the security interest, so you get an additional five or seven years from whenever the reperfection of the security interest occurs in the new jurisdiction
Debtor also grants Lender a security interest in the same collateral as the security interest of Bank. Lender perfects its security interest in Kentucky on July 7, 2009. After Debtor moves to Indiana [November 2, 2010], Lender perfects its security interest under Indiana law on January 5, 2011. On March 27, 2011, Debtor defaults to both secured parties. Bank has not filed a financing statement in Indiana. Which secured party has priority?
Lender.
The bank didn’t reperfect the security interest in Indiana within four months, so Lender has priority under 9-316b.
“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.”
Assume Lender first attaches and perfects a security interest in Debtor’s art collection on January 22, 2011 pursuant to Indiana’s Article 9 [Debtor moved on November 2, 2010]. Bank files a financing statement in Indiana on February 12, 2011. Is Bank continuously perfected? If you were Lender’s attorney on January 22, is there anything you would do to protect Lender?
Yes, the bank is continuously perfected because the bank reperfected within four months of the move. The bank had until March 2 to do so.
What could the Lender do to perfect itself?
Other than due diligence in researching the collateral, nothing comes to mind.

1. Certificate of title & governing law, §9-303

Bank perfects a security interest in debtor’s automobile on February 27, 2009 by complying with Kentucky’s certificate of title statute. Debtor moves to Ohio and applies (fee and application tendered to the appropriate office) for an Ohio certificate of title on August 17, 2010. Ohio issues a certificate of title that does not show Bank’s security interest on September 9. Is Bank’s security interest perfected on February 4, 2011? Sections 9-303(b) & (c) provide the rules for determining when Ohio law governs perfection.
9-316d, perfection by certificate of title remains effective, even if another certificate is issued by another state, until it would have expired under the state of issuance of the certificate.
The Kentucky statute indicates that it remains in effect for seven years.
But 9-303 states that a certificate of title ceases to be effective at the earlier time of expiration or the time the goods become covered by a certificate of title issued by another jurisdiction
9-303b- goods cease to be covered by a certificate of title at the earlier of the time the certificate of titles 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.
The law of the new jurisdiction begins to govern, not when the title is issued, but when the lien title statement and fee are tendered
9-303c, the local law under whose certificate of title the goods are covered governs perfection, the effect or perfection or non-perfection 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.
In addition to the facts of # 4, assume Lender perfects a security interest in Debtor’s automobile on January 15, 2011, by complying with Ohio’s certificate of title law. Is Bank’s security interest perfected on that date? Superior to Lender’s security interest?
No, the bank’s security interest is not perfected on Jan. 15, 2011 and Lender has a superior security interest.
9-316e2
“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 are not satisfied before … the expiration of four months after the goods had become so covered.”
****purchase connotes a voluntary transaction. However, a judicial lien is not a voluntary transaction. Thus, this section would not apply to a second creditor who took a judicial lien.
It’s the same thing as above; four months is a maximum. If the old title would have expired before four months after the move, then the SP only gets to the expiration of the certificate of title.

Priority rules

1. Start at §9-322a1

Priority between conflicting security interests or agricultural liens in the same collateral is determined by the earlier date of filing OR perfection

1. Priority before attachment, §9-509.

Under 9-322, priority dates from the earlier date of
Filing OR
Perfection
There are two ways a person has authority to file a financing statement:
A person may file an initial financing statement, amendment that adds collateral or amendments that adds a debtor only if
The debtor authorizes the filing in an authenticated record OR
The person holds an agricultural lien
By authenticating a security agreement or becoming bound as a debtor, a debtor authorizes the filing of an initial financing statement covering:
The collateral in the security agreement AND
Property that becomes collateral under 9-315a2 as proceeds
So if the debtor authorized a financing statement before a security agreement was attached or perfected, the priority date for that collateral will date from the filing of the financing statement
If you a creditor and another secured party has a financing statement covering collateral, what do you tell the debtor to do before you make your loan to them?
The non-filed secured party could demand that the debtor receive a termination statement from filed SP and because the filed SP has not loaned debtor any money to the debtor, the debtor would be entitled to a termination statement b/c the debtor didn’t have any obligation at that point to SP1.

1. Perfected vs. Unperfected

§9-322a2 – a perfected security interest has priority over an unperfected security interest
Notice though, that a security interest can be filed without perfection. “Conflict” refers to the date when the secured parties are going against each other. It’s immaterial, for priority purposes, if perfection has happened on the “priority date;” for this subsection, it’s the conflict date
E.g. an unperfected secured party with an earlier priority date will lose to a perfected secured party with a later priority date ON THE DATE OF CONFLICT
Bank perfects a security interest in Debtor’s 100 shares of stock in Café Vita, Inc., by taking possession of the stock certificate on April 9, 2009 [See 9-313(a)]. Creditor perfects a security interest in the same collateral by filing a financing statement on August 17, 2009. Debtor wants to sell the stock so Bank returns possession of the stock certificate to Debtor on September 5 and files a financing statement covering the collateral on September 6. Who has priority in the stock certificate?
Creditor would have priority if Bank’s SI had lapsed but 9-312(g) causes no lapse, so Bank has priority. Without 9-312(g) the Bank became unperfected on Sept. 5, and would have lost priority. See 9322a “if there is no period thereafter when there is neither filing nor perfection” and 9-322b “a perfected security interest has priority over a conflicting unperfected security interest”
9-312g , there was temporary automatic perfection for 20 days after the certificates were delivered to the debtor, so actually, there was no time when the certificated securities were unperfected
9-313a – a secured party may perfect a security interest in certificated securities (security represented by a certificate) by taking delivery (voluntary transfer of possession) of the certificated securities.
9-313e – the security interest in the certificated security continues until the debtor receives the securities back from the secured party.

1. Priority of unperfected security interests

Priority of unperfected security interests, 9-317 & 9-322a
It no party is perfected, the party with the earliest attachment has priority
9-317 lists the classes of persons who take priority over, or take free of, an unperfected security interest.
9-317a
A security interest or agricultural lien is subordinate to the rights of
A person entitled to priority under 9-322 AND
A person that becomes a lien creditor before the earlier of the time
The security interest or agricultural lien is perfected OR
One of the conditions specific in section 9-203b3 is met and financing statement covering the collateral is filed
Lien creditor vs. unperfected secured party
Debtor applies for a loan from Bank on 10/25/10. Bank searches the UCC index and finds no financing statements filed under Debtor's name. Bank makes an unsecured loan to Debtor on 10/28/10. Previously, Secured Creditor loaned Debtor money and attached a security interest in Debtor's equipment on 3/17/10. Debtor defaults to Bank on 1/2/11 and Secured Creditor, upon learning of that default, files a financing statement on 2/13/11. Which creditor has priority? 9-317(a)(2) Is Bank a "lien creditor?" 9-102(a)(52)
Unsecured loan by bank– 10-28-10
Secured loan by secured creditor – 3-17-10, secured by equipment, unperfected
Debtor defaults to bank on 1-2-11, and secured creditor perfects on 2-13-11
Who has priority?
The secured creditor has priority because the Bank is not a “lien creditor” under 9-317a2.
Lien creditor is defined in 9-102a52 as a creditor that has acquired a lien by attachment/levy, an assignee for benefit of creditors, a trustee in bankruptcy OR a receiver in equity. The bank is simply an unsecured creditor at this point, so they don’t
What if bank was a lien creditor?
If they were a lien creditor, they have a good case for priority because the security interest was unperfected and no financing statement had been filed.

1. Ucc financing statement listing more than two debtors; how do you do it?

You could simply file a financing statement for each debtor or attach an addendum that lists the debtor
I think filing a separate financing statements would work

Proceeds

1. Article 9 [sections 9-203(f) and 9-315(a)] grants a secured party an automatic security interest in any proceeds of the collateral that come into existence, unless the parties agree otherwise (a rare situation).

Proceeds are defined broadly in section 9-102(a)(64) to cover practically any property whose roots are in the collateral of the security interest. The typical situation where proceeds of collateral exist is when the debtor sells the collateral in exchange for receiving something from the buyer—cash, a promise to pay, a promissory note, or perhaps another type of personal or real property.
Because the right to a security interest in proceeds arises by statute, it is not necessary that the security agreement include a grant of a security interest in proceeds. Nevertheless, most security agreements include a grant of a security interest in proceeds.
The proceeds of collateral are proceeds and the proceeds of proceeds are proceeds

1. In general

Proceeds typically arise where the collateral is sold
Proceeds – means whatever is acquired from the sale, exchange, lease, etc. of collateral OR if something is distributed on behalf of that collateral (like payment of a stock dividend)
9-203(f)
The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by 9-315 (which states that a security interest attaches to identifiable proceeds of collateral)
Assuming there is no period of unperfection, the priority date for proceeds relates back to the priority date for original collateral
9-322b – the time of filing or perfection for proceeds of collateral is the same as the time of filing for the collateral;

1. Continued perfection in proceeds

Whether the security interest in proceeds is perfected depends on whether it satisfies the requirements of section 9-315(d). Perfection can be automatic or it can require action. The following problems explore whether the security interest in the proceeds is perfected
Proceeds are automatically perfected under 315c if the original security interest was perfected, but it only lasts 21 days unless the security interest reperfected within twenty days or it falls into the categories in subsection d
D1
Was the original collateral covered by a fiancning statement
Could new collateral be covered by a financing statement
Could the new financing statement be filed in the same jurisdiction as the original financing statement
The proceeds are not acquired with cash proceeds
The proceeds are identifiable cash proceeds
so long as the proceeds are identifiable cash proceeds, perfection continues
What becomes tricky is “identifying” the cash proceeds when the debtor deposits the cash in a bank account of some type
In that type situation, you use the lowest intermediate balance rule to identify the cash proceeds
Lowest intermediate balance rule:
Secured party must prove its cash proceeds were commingled under 9-315(b)
If proven, the rule directs that the debtor’s subsequent deposits of cash do not affect the amount of the proceeds security interest, provided that the total amount of cash is never less than the amount of commingled proceeds
If the balance dips below the amount of the security interest, the SI in proceeds is identifiable only to the amount of the remaining balance and will not increase back to original level
The security interest in the proceeds is perfected other than under 9-315c when the security interest attaches or within 20 days thereafter
This is basically when the proceeds are a type of collateral covered by the original financing statement

1. Variations on perfection for proceeds:

Transferees of cash proceeds take free of SI in the cash proceeds unless they were acting in collusion with the debtors
A debtor deposits its cash proceeds [cash that it receives from its sale of inventory] into its checking account with First Bank. Debtor owes a creditor, $1590, and in payment, writes a check to the creditor on its First Bank checking account. First bank pays the check. Is the creditor’s right to the money it receives when it cashes the check subordinate to NSB's security interest in the money? See 9-332
No
9-332 A transferee of money or funds from a deposit account takes the money or funds free of the security interest unless the transferee was acting in collusion with the debtor
Set-off, 9-340
a right to set-off trumps a security interest in a deposit account
"Set-off” is a bank's right to reduce the amount of a debt the bank owes its customer (when you deposit money in a bank account, the bank is your debtor for that amount) by any amount the customer owes the bank, such as the money a customer borrows from the bank.
Assume Straight from the Heart owes First Bank $18,000 on an unsecured loan. Straight from the Heart maintains a checking account with First Bank into which it deposits proceeds from its sales of inventory. Currently the account balance is $8743.00. Straight from the Heart defaults on the loan to First and First “sets off” the cash proceeds in Straight from the Heart’s checking account against Straight from the Heart’s debt to the bank. Is NSB's security interest in the cash superior to First Bank’s right of set-off? See 9-340
First bank may set-off unless NSB takes control of the deposit account by becoming the bank’s customer
9-340a – a right to set-off trumps a security interest in a deposit account
9-340c – the exercise of a set-off by the bank in a deposit account is ineffective against a secured party that holds a security interest in the deposit account which is perfected by control under 9-104a3, if the set-off is based on a claim against the debtor

Deposit Account Collateral

1. An original security interest in a deposit account is perfected by “control” pursuant to section 9-104. (Because a deposit account is “cash proceeds,” a security interest in a proceeds deposit account can be perfected automatically under 9-315(d)(2)).

9-203(b)3(d) – attachment of a security interest in a deposit account through control
9-312b1 – only can perfected a SI in a deposit account through control
9-314a – only perfect a SI in deposit accounts by taking control

1. “Control” is a method of perfection for the following types of collateral: investment property (such as stocks), deposit accounts, letter-of-credit rights, electronic chattel paper, and electronic documents of title. (9-102(a) defines all these types of collateral.)

The requirements for establishing control, sections 9-104 to 9-107, depend on the type of collateral.

1. What requirements must a creditor take to perfect a security interest in a deposit account?

9-104 – methods for perfection by control
The secured party is the bank with which the deposit account is maintained
The debtor, the secured party and the bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor OR
The secured party becomes the bank’s customer with respect to the deposit account

1. Does a security interest in a deposit account cover certificates of deposit?

No. It’s because the definition of a deposit account doesn’t include CD’s
9-102a29 – a deposit account doesn’t include accounts evidenced by an instrument
Deposit accounts evidenced by an instrument are excluded from the definition of deposit accounts

1. Per 9-327, a security interest perfected by control has priority over a conflicting secuiryt interest held by a secured party without control

So if cash proceeds are deposited into a deposit account held by another creditor with control of the deposit account, the creditor with control has priority over the creditor who has a SI in the deposit account through the deposited proceeds

1. 9-327 Conflicting security interests perfected by control under 9-314 rank according to priority in time of obtaining control

EXCEPT
A SI held by the bank with which the deposit account is maintained has priority over a conflicting security interest held by another secured party
A security interest perfected by control under 9-104a3 has priority over a security interest held by the bank with which the deposit account is maintained

Transfer of collateral

1. Sales in general

Buyers in a sale, 9-315a – a security interest in collateral continue notwithstanding sale, lease, etc unless the secured party authorized the disposition free of the security interest or agricultural lien
You cannot stop the debtor from selling his or her property; it would be an unconstitutional restraint on alienation.
What about a provision in the security agreement that states the debtor shall not dispose of the collateral without the written consent of the secured party?
And the debtor sales and the secured party knows about the disposition but does not take any action with respect to the collateral.
There are a lot of ways to show authorization, and it could be a form of implied authorization
General rule is that you can follow the security interest into the hands of the buyer
If the secured party authorizes the disposition free of the security interest, then the buyer is golden
What about a situation where the security agreement states that the collateral may be disposed free of the security interest provided the proceeds at sale are remitted to the secured party?
Some courts will uphold this, some won’t, it depends on the jurisdiction.

1. The exception, § 9-320a

9-320a – a buyer in the ordinary course of business, other than a person buying farm products from a person engaging 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
Buyer in the ordinary course of business
Means a person that buys the goods in good faith, without knowledge 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. . . . Only a buyer that takes possession of the goods or has a right to recover the goods from the seller may be a buyer in the ordinary course of business.
A buyer has to buy with cash or in exchange of property
From a person in the business of selling goods of that kind
Does a bankruptcy/fire sale comport with the ordinary course of business? Probably not. It’s because of the unique nature of this type of liquidation sale.
Knowledge means actual knowledge under the UCC
This does not include a person that acquires good in a transfer in bulk or as security for or in total or partial satisfaction of a pre-existing debt
Knowledge is irrelevant for 9-320a, but it is relevant for a buyer in the ordinary course of business, which creates something of a dichotomy
Buyer’s seller created the security interest
Secured party cannot create its own security interest

1. §2-403(2) power to transfer, entrusting

any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer of all rights of the entruster to a buyer in the ordinary course of business
every secured party who has
how does this work?
It has to be the secured party who entrusted the collateral to the merchant in order for 2-403 to trump article 9
If the secured party acquiesces to an “entrusting” of collateral to a merchant, then 2-403(2) can apply so that the buyer takes free of the security interest
An entruster cannot grant any greater rights than that which were given to them, unless the secured party acquiesces and thus
Buyer vs. secured party, it’s generally a toss up as to who wins
Buyers of Collateral

1. Secured party vs. buyers of collateral

name="_gjdgxs" a. §9-320

(a) Buyer in ordinary course of business.

name="_30j0zll"a.       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.

1. name="_1fob9te"Entrusting, §2-403

(1) A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though
(a) the transferor was deceived as to the identity of the purchaser, or
(b) the delivery was in exchange for a check which is later dishonored, or
(c) it was agreed that the transaction was to be a "cash sale", or

name="_3znysh7"iv.    (d) the delivery was procured through fraud punishable as larcenous under the criminal law.

name="_2et92p0"                                                            b.      (2) 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 ordinary course of business.

(3) "Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law.
2-403 only really applies to a security interest in inventory because that’s a situation where the secured party would entrust the goods to a merchant who deals in that kind of goods

1. Problem

Vickie Henderson purchased a refrigerator for personal use from Lowe’s, granting Lowe’s a security interest in the refrigerator to secure its purchase price. Six months later Henderson remodels her kitchen and trades the refrigerator to Bargain Barn, a seller of appliances, in part payment for a new stove. Bargain Barn has no knowledge of Lowe’s security interest. Lowe’s is unaware of Henderson's trade of the refrigerator. The Lowe’s/Henderson security agreement prohibits sale of the collateral without its written consent. Bargain Barn sells the refrigerator to Jade Prince, who uses it in her home. Henderson defaults on her debt to Lowe’s, and Lowe’s insists it can enforce its security interest in the refrigerator against Prince. Does Prince or Lowe’s have the superior interest in the refrigerator? 9-320(a) (b), 1-201(b)(9), 2-403(2)
Lowes wins
9-315a – no authorization of the sale, so that doesn’t work
9-320a can’t apply because Prince bought the goods from Bargain Barn, and Bargain barn didn’t create the security interest.
Furthermore, Vickie wasn’t in the business of dealing in goods of that kind, so Bargain barn couldn’t avoid the security interest when it received the refrig. From Vicky
2-403(2) – entrusting
was there an entrustment? 2-403(3) yes
But Vicky wasn’t a merchant, so she couldn’t avail herself 2-403(2)
9-320b- buyer of consumer goods – a buyer of goods from a person who used or bought the goods for use primarily for household purposes takes free of a security interest, even if perfected, if the buyer buys:
without knowledge of the security interest
for value
primarily for the buyer’s person or household use AND
before the filing of a financing statement covering the goods
There’s a lot of hoops for 9-320b to apply. At the least, Bargain Barn didn’t buy the stove for primarily for personal or household use. It also seems likely that a financing statement has been filed to cover the stove, so that Prince cannot avail herself of the requirements of 9-320b.
Double Debtor

1. It’s a situation where the buyer creates a security interest in collateral that is already subject to a security interest from the person the buyer bought the collateral from

It’s because the definition of debtor in article 9 is very broad
“debtor means”
A person having an interest, other than a security interest or lien, in the collateral, whether or not the person is an obligor;
Novation – it’s an agreement where a new debtor/obligor comes in to replace the original debtor/obligor
But if the debtor sells the collateral, then the original debtor would want the buyer to assume it’s obligations to pay for the collateral, but the creditor could still sue the buyer and the original debtor, so the original debtor would want the creditor to be involved in the assumption of the obligation so that their obligation is completely gone.

1. Quirky rules for new debtors:

§9-316a3
When the collateral is bought by a debtor in another jurisdiction, the security interest continues in the collateral for one year under 9-316a3
9-316a2 doesn’t apply b/c the debtor didn’t move, the collateral did
§9-325: priority over another secured party having priority only under 9-322.
9-325 – a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if
the debtor acquired the collateral subject to a security interest
the security interest that was created by the other person was perfected when the collateral was acquired AND
there is no period of unperfection
9-325b – subsection a subordinates a security interest only if the security interest otherwise would have had priority under 9-322 or 9-324 OR if it arose under article 2
Problems:
FirstBank has a security interest, perfected by filing on November 11, 2009, in the existing and after-acquired equipment of Press, Inc., a Pennsylvania corporation. On February 25, 2010, Press sells some of the equipment to Hunt Industries, a Michigan corporation, who buys the equipment subject to the security interest [“Subject to” means a buyer does not take the equipment "free of the security interest." Why does Hunt take subject to?
It’s because 9-320a doesn’t apply because this transaction was not in the ordinary course of business. If it were the ordinary course of business, the collateral would be inventory, not equipment.
Is FirstBank’s security interest in the equipment sold perfected as of October 1, 2010 (more than four months)? 9-507, 9-301(1), 9-307(e), 9-316(a)
Yes. It’s because a year hasn’t expired after the disposition of the collateral under 9-316a3, and Hunt meets the definition of a debtor b/c they have an interest in the collateral, regardless of whether they are an obligor.
9-507a – a filed financing statement remains effective with respect to collateral that is sold, exchanged, etc. even if the secured party consents to the disposition.
Consent to the sale is not consent to sell free of the security interest so that it dissipates
9-301(1) – 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
so immediately, once the collateral is transferred to Hunt, Michigan law covers the security interest
9-307e – a debtor corporation is located in the jurisdiction of its incorporation
HOWEVER, 9-316a – a security interest perfected pursuant to the law of the jurisdiction designated in 9-301(1) or 9-305c remains perfected until the earliest of
the time perfection would have ceased under the law of that jurisdiction,
the expiration of four months after the debtor moves OR
9-316a2 doesn’t apply b/c Press didn’t move, the collteral was transferred to another debtor
the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction
Is Hunt or Press the “debtor” of FirstBank’s security interest in the equipment sold? 9-102(a)(28)
Hunt, because Press no longer has any interest in the collateral.
Press still meets the definition of an obligor though.
Assume Hunt Industries granted a security interest in its existing and after-acquired equipment to CIT in March 2009. CIT perfects by filing a financing statement on March 17, 2009. Does CIT have a perfected security interest in the equipment Hunt purchased from Press?
Yes, assuming they have met all the requirements for perfection and attachment, they do.
FirstBank discovers Press’ sale of the equipment to Hunt and files a financing statement in Michigan on October 7, 2010. What “debtor’s name” should FirstBank indicate on the financing statement. Which security interest has priority? 9-322, 9-325
Firstbank has priority under 9-325
CIT perfected in Mar. 2009, Firstbank perfected in Nov. 2009.
Firstbank has priority under 9-325 because there was never a time when they became unperfected under the described scenario and CIT would have only had priority because they filed a financing statement covering the collateral in this scenario before Firstbank did. (this is part of 9-325b)
9-325 – a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if
the debtor acquired the collateral subject to a security interest
the security interest that was created by the other person was perfected when the collateral was acquired AND
there is no period of unperfection
9-325b – subsection a subordinates a security interest only if the security interest otherwise would have had priority under 9-322 or 9-324 OR if it arose under article 2
New Debtors

1. New debtor/original debtor

It’s when two entities merge, generally
9-102a56 – new debtor means a person that becomes bound as a debtor under 9-203d by a security agreement previously entered into by another person
9-102a60 – original debtor means a person that, as a debtor, entered into a security agreement to which a new debtor has become bound

1. Sections we’re looking at for new debtors:

9-203
9-203d – a person becomes bound as a debtor by a security agreement entered into by another person if, by operation of law other than this article or by contract if the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.
9-203e – if a new debtor becomes bound as debtor by a security agreement entered into by another person the agreement satisfies section b3 with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement and another agreement is not necessary.
9-508
9-508a – a filed financing statement naming an original debtor is effective to perfect a security interest in collateral that a new debtor has or acquires rights to
9-508b – if the difference b/t the name of the new debtor and the original debtor causes a filed financing statement to be seriously misleading, the financing statement is effective to perfect a security interest in collateral acquired by the new debtor before, and within four months after the new debtor becomes bound
It’s important to note though that the security interest does not lapse or become unperfected, it simply is ineffective to perfect the security interest in collateral acquired four months after the new debtor becomes bound.
A financing statement filed after the four months expired is still effective to perfect any collateral acquired between the four months and the newly filed financing statement. HOWEVER, you lose priority if another creditor has a security interest running during that same period

1. Problems

Creditor has a security interest perfected by filing (May 19, 2009) in the existing and after-acquired equipment of CitiBank (Citi), a Delaware corporation. Lender has a security interest perfected by filing (November 1, 2010) in the existing and after-acquired equipment of Bank of America (BOA), a Delaware corporation. The banks merge on February 22, 2011, via an agreement wherein BOA is the surviving entity and it assumes liability for all Citi’s secured and unsecured obligations and succeeds to all Citi’s assets.
Which secured party has priority in the equipment?
Lender, because Creditor’s security interest is perfected against the new debtor only by the method described in 9-508. I’m reassured of my answer because example 1 in official comment 2.
9-326a – a security interest created by a new debtor which is perfected by a filed financing statement that is effective solely under section 9-508 in collateral in which a new debtor has or acquires rights is subordinate to a security interest in the same collateral which is perfected other than by a filed financing statement that is effective solely under 9-508.
Note also, that 9-322 always yields to a special priority rule.
9-508 – a filed financing statement naming an original debtor is effective to perfect a security interest in collateral which a new debtor has or acquires rights to the extent that the financing statement would have been effective has the original debtor acquired rights in the collateral
Does your answer change if Creditor files a financing statement against BOA on March 1, 2011?
In this situation, the creditor is perfected by a method other than described solely in 9-508 and thus the other rules of perfection should apply and under 9-322, that would date from the earlier date of filing.
I’m getting this from 9-326(a)
We don’t need to know this for the exam. There isn’t a clear decision on this issue and the code doesn’t really tell us.
9-509b authorizes a creditor to file a financing statement against a debtor or a new debtor
PMSI

1. Defining PMSI, §9-103

A security interest in goods is a purchase-money security interest:
To the extent that the goods are purchase-money collateral with respect to that security interest
Purchase money collateral means goods or software that secures a purchase-money obligation incurred with respect to that collateral AND
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.
It’s either a credit sale OR a loan to obtain goods

1. PMSI Perfection

If a PMSI is in consumer goods', then it' perfects when it attaches under 9-309.
HOWEVER, for PMSI in all other types of collateral, you need a filing to perfect the security interest

1. Priority with non-inventory PMSI

9-324a – a perfected PMSI in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as provided in 9-327 (deposit accounts) 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
If the PMSI isn’t perfected within 20 days, then 9-322’s normal rules for priority apply
PMSI also has priority in the proceeds of the PM collateral if the PMSI continues in proceeds under 9-315
It almost always will continue

1. PMSI super-priority in inventory

a perfected purchase-money security interest in inventory has priority over a conflicting security interest in the same inventory, has priority over a conflicting security interest in chattel paper or an instrument constituting proceeds of the inventory and in proceeds of the chattel paper, if so provided in Section 9-330, and, except as otherwise provided in Section 9-327, also has priority in identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are received on or before the delivery of the inventory to a buyer, if:
(1) the purchase-money security interest is perfected when the debtor receives possession of the inventory;
(2) the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and
(4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.
What level of description is sufficient?
It’s hard to say; if you’re drafting, it’s probably in your best interests to make the description specific
The purpose of the requirement is simple notice
The more specific your description gets, though, the more you are limiting yourself and you may have to resend new notice
Nowka doesn’t think that simply listing the collateral as “all inventory” is sufficient, but he hasn’t seen a case on this subject matter
Should not describe inventory as “now owned” b/c it conflicts w/ definition of purchase money – also would list it as “all proceeds” because 9-324b only applies to cash proceeds of inventory

name="_tyjcwt"b.      Failure to comply with these requirements takes away super-priority and temporal priority rules of 9-322 apply.

(c) [Holders of conflicting inventory security interests to be notified.]
Subsections (b)(2) through (4) apply only if the holder of the conflicting security interest had filed a financing statement covering the same types of inventory:
(1) if the purchase-money security interest is perfected by filing, before the date of the filing; or
(2) if the purchase-money security interest is temporarily perfected without filing or possession under Section 9-312(f), before the beginning of the 20-day period thereunder.
Problem:
Lender checks financing statement index and finds Bank’s financing statement; 4/6—Lender properly notifies Bank; 4/6—Creditor attaches a security interest and files a financing statement against Debtor’s inventory; 4/7—Lender files its financing statement; 4/10 Bank receives notice of Lender’s purchase-money security interest; 4/15 Lender delivers the purchase-money collateral to Debtor. Does Lender have priority over Creditor? If not, in what order should Lender have taken the steps to comply with 9-324(b)
No, Lender doesn’t have priority over creditor because Lender, presumably, did not send notice to the Creditor and the Creditor was entitled to receive notice. See 9-324c
9-324c – 9-324b2-4 only apply if the holder of the conflicting security interest had filed a financing statement coverning the same types of inventory if the PMSI is perfected by filiing, before the date of filing OR
If the PMSI is temporarily perfected w/out filing or possession under 9-312f before the beginning of the 20 day period thereunder
What the Lender should have done is to perfect their security interest, send notice, wait for the creditor to receive notice, and then deliver the inventory.
STEPS to take:
File
Search index
Notify
Then deliver
Bank perfects a security interest in Debtor’s existing and after-acquired inventory by filing a financing statement on 8/5. Lender perfects a security interest in Debtor's existing and after-acquired accounts by filing a financing statement on 9/25. Credit First takes a purchase-money security interest in inventory it sells to Debtor, perfects by filing on 10/14 before Debtor's receipt of the inventory, and complies with all 9-324(b) requirements. Debtor sells the purchase-money inventory and receives an account. Rank the priorities in the account. 9-324.
Bank has first priority because they were there earlier than Lender and the account acquired is an identifiable proceed of their security interest in the inventory. See 9-322a and 9-315b
Accounts are not cash proceeds; however, deposit accounts are cash proceeds. Make sure you can distinguish between the two.
Lender has second priority because they were there second. See 9-322a.
Credit First has third priority because 9-324b is inapplicable because they debtor didn’t receive cash proceeds and they must abide by 9-322 and they were there last.
Who has priority if the inventory is sold for cash?
Credit First has first priority under 9-324b because 9-324b gives a PMSI in inventory priority in proceeds only if they are identifiable cash proceeds

1. PMSI situations

PMSI with after acquired property clauses
The PMSI then would pick up equipment that was not actually purchase money collateral
§9-103b1 – we had a PMSI but the entire PMSI was refinanced
“to the extent that” goods are purchase money collateral; it’s where the dual purpose purchase money collateral idea came from; thus, goods are PM collateral only with respect to the extent that they are purchase for a PM obligation
Negative equity is often treated as PM collateral
Future Advance Priority

1. Future advances

We’ve seen future advances when we were talking about attachment
Future advance basically says we’ve got value for the security interest today, and at some future point, the creditor is going to make an additional advance to the debtor
The collateral in the security agreement secures the value for the original loan and any future advance made to the debtor
This comes from 9-203(c)

1. Priority of future advances

A security agreement with a future advance clause
You cannot have a security interest until the loan is made, but the code makes it relate back to original security agreement, if it was so contemplated by the security agreement
The general rule is that under 9-322, priority dates from the earlier of a filing or perfection
Under 9-322, you always simply compare priority dates of filing/perfection to determine the priority date
9-323 only applies in the rare case where the advance is made without commitment and while security interest is perfected only temporarily under 9-312 or when it attaches under 9-309.
9-323a will not be on the exam
See 9-322 cmt. 4 & 9-323 cmt. 3. “it is abundantly clear that the time when an advance is made plays no role in determining priorities among conflicting security interests except when a financing statement was not filed and the advance is the giving of value as the last step for attachment and perfection. Thus, a secured party takes subject to all advances secured by a competing security interest having priority under 9-322a1.”
Under § 9-322, the operative thing is the collateral. So even if there is no future advance clause in the security agreement, as long as there is a financing statement covering the collateral, the creditor can make an uncontemplated future loan to the debtor and the priority relates back to the original financing statement. A new financing statement is not necessary to perfect the new loan made to the debtor so long as the original financing statement completely covers the collateral which is the security interest for the new loan
Also, 9-502(d) a financing statement may be filed before a security agreement is made or a security agreement otherwise attaches

1. Buyer’s not in the ordinary course of business & future advs., 9-323(d) & (e)

9-323(d) A Buyer of goods, other than a buyer in the ordinary course of business, takes free of a future advance that secured party makes with knowledge of the buyer or 45 days after the purchase, unless the advance was made pursuant to commitment
9-323(e) – Subsection d does not apply if the advance is made pursuant to commitment entered into without knowledge of the buyer’s purchase and before the expirations of the 45 day period
9-323e is talking about the commitment, not the purchase
It’s irrelevant when the purchase is made, it’s talking about the commitment, when the commitment is entered into
Problem:
On March 10, 2010 SP perfects a security interest in debtor's inventory and equipment, with an after-acquired property clause for each type of collateral and a future advance clause. SP has “committed” (9-102(a)(68)) to making loans to the debtor for inventory acquisition every 60 days. On April 1, 2010 buyer purchases equipment collateral from the debtor.
Determine whether SP’s future advance security interest is superior to Buyer in the equipment buyer purchased.
on 5-10-10 and 7-10-10 SP makes the “committed” advances with knowledge of buyer’s purchase (subsection d doesn’t apply b/c it’s pursuant to commitment)
the 5-10 loan, SP has priority b/c the commitment was entered into before the purchase
the 7-10 loan, Secured Party has priority because the commitment was entered into before the purchase
on 5-5-010 SP makes an uncommitted advance without knowledge of buyer
SP
It’s b/c the SP didn’t have notice of the buyer and 45 days hadn’t expired.
on 5-5-010 SP makes an uncommitted advance with knowledge of buyer
Buyer
It’s b/c the SP had notice of the buyer.
on 6-15-10 SP makes an uncommitted advance without knowledge of buyer
SP
It’s because 45 days have expired and the SP didn’t have notice of the buyer.

1. Lien creditors

§9-323(b) a security interest is subordinate to the rights of a person that becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after the person becomes a lien creditor unless the advance is made:
Without knowledge of the lien OR
Pursuant to a commitment entered into without knowledge of the lien
9-323(c) - subsections (a) and (b) do not apply to a security interest held by a secured party that is a buyer of accounts, chattel paper, payment intangibles or promissory notes or a consignor.
Special Priority Rules

1. Accounts

An account is a type of intangible collateral. Generally, an account is right to payment for the sale of goods or the providing of goods. Article 9 treats sales of accounts as creating a security interest
9-109a – article 9 applies to sale of accounts
1-201b35 – a security interest includes a buyer of account in a transaction subject to article 9
9-102a72 – a secured party means a person to which accounts have been sold
9-102a28 – a debtor means a seller of accounts
An account debtor is the purchaser whose purchase of goods created the account/right to payment
An account is a right to payment
A simple sale with a promise to pay later does not create a security interest. But a purchase of that account, whether or not intended, does create a security interest
Some courts are willing to interpret “accounts” to mean existing and after-acquired accounts. Some courts are not. It depends on the jurisdiction.
Why do we make the sale of an account function as a security interest?
It’s to protect buyers of accounts down the road
Certain account transactions not within article 9’s scope
9-109(d) excludes certain “account transactions” from the scope of article. These exceptions are:
D4 –a sale of accounts (or chattel paper) that is part of a sale of the business out of which they arose
D5 – an assignment of accounts or chattel paper that is for the purpose of collection only
D6 – an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contractual obligation which is the subject of the account
D7 – an assignment of a single account or payment intangible in full or partial satisfaction of a preexisting indebtedness
Account perfection
Accounts are typically perfected by filing a financing statement
9-310a – a financing statement must be filed to perfect a security interest unless one of the exceptions apply
HOWEVER, certain sales of accounts do not require filing for perfections
9-309(2) – an assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles
But it’s always best to just file a financing statement to cover the accounts, this is the best thing to do b/c your don’t have to interpret whether the sale is a significant part of the total outstanding accounts
When would 9-309(2) apply?
When it’s not a significant part of the assignor’s accounts
Suppose Bank makes a loan to RSI, takes a security interest in RSI's existing and after-acquired accounts, and perfects by filing a financing statement on 11/21/10. On 2/1/11, RSI sells goods to Buyer and Buyer promises to pay in 30 days. In accordance with RSI's customary practice, it sells the Buyer account to CIT Finance on 2/3/11. CIT perfects its security interest in the account by filing a financing statement on 2/5/11. Does Bank or CIT have priority in the account? Consider 9-320, 9-322
Bank has priority b/c they filed first under 9-322
9-320 doesn’t really apply here b/c the security interest created isn’t in the goods the buyer bought; it is in the right to payment that RSI has. Section 9-320 is supposed to only apply to goods and is thus inapplicable.
9-322 states that priority is determined by the earlier time of perfection between conflicting secured parties. Under these facts, that would be Bank.
Does your answer change if Bank’s security interest is unperfected? 9-317(d)
9-317d does not apply to a secured party that is a buyer of accounts
9-317(d) – a buyer, other than a secured party, takes free of a security interest if the buyer gives value without knowledge of the security interest and before it is perfected
Remember that 9-109d lists a number of examples where a buyer of accounts is not a secured party. THAT is where 9-317d applies so that the buyer who is not a secured party under the circumstances
But if it did apply and the bank’s security interest were unperfected, then CIT would take free of the security interest if it was unperfected and they did not know about it.
§ 9-318
§9-318 a – a debtor that has sold an account or chattel paper does not retain a legal or equitable interest in the collateral sold
9-318(b) HOWEVER, for purposes of determining the rights of creditors of a debtor that has sold an account or chattel paper, while the buyer’s security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold
Remember that 9-318 only applies when we’re talking about second party who is a “buyer of accounts.” If the second party is secured party taking a security interest in the accounts, 9-318 has no application

1. Chattel paper

It’s a right to payment coupled with a purchase money transaction in the collateral sold which creates the right to payment
So pretty much any time a PMSI is created, there is chattel paper created too
Chattel papers means a record or records that evidence both a monetary obligation and a security interest in specific goods, etc. A 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.
Much like an account, the UCC treats a sale of chattel paper as creating a security interest
1-201b35 – a security interest includes a buyer of chattel paper subject to article 9.
9-109a3 – article 9 governs a sale of chattel paper.
Account debtor would be the debtor whose transaction gave rise to the chattel paper in which another party has a security interest
9-607: Secured party’s rights in the collateral upon default by the debtor
9-607a1 – a secured party 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
9-607a3 – a secured party 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 obligation 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.
Chattel paper purchaser priority, 9-330
With chattel paper priority, you either use 9-330 or 9-322. Remember though that the definition of “purchase” includes taking a security interest, so 9-330 can still be used even if there isn’t a “sale” of chattel paper in the traditional sense
9-330(a) – 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
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 possession of it under 9-105 AND
For 9-330a, you have to give new value, meaning it can’t be in fulfillment of an existing debt
It’s in the ordinary course of a lender/bank’s business to purchase chattel paper
The chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser
9-330(b)' 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 or obtains possession of the chattel paper in good faith, in the ordinary course of the purchaser’s business and without knowledge that the purchase violates the rights of a secured party.
The major difference b/t (a) and (b) is the notice required
You have to not know, under 330b, that taking the chattel paper does not violate the rights of the secured party
Notice under 330a has to be printed on the chattel paper itself; under 330b, the notice doesn’t have to be printed on the paper itself
BUT under 9-330f, if the legend is on the chattel paper, then knowledge can be imputed to the purchaser of chattel paper, so that they cannot get the shelter of 9-330(b)
Inventory is one of the types of collateral that is sold often and typically chattel paper is given in return
Chattel paper is then frequently sold to a chattel paper purchaser but it can be used as collateral for a security interest too
Problems:
ITT Financial Corporation perfects a security interest in AC's existing and after-acquired chattel paper on 2/27. AC sells an item of inventory to Green, on 3/1, who buys with chattel paper. On 3/5, Bank makes a loan to AC and AC grants a security interest in the Green chattel paper to Bank, who perfects by filing on that day. AC defaults to both secured creditors. Who has priority?
We’re dealing with simply taking security interests in the chattel paper, and there is no taking of possession mentioned, that we’re under 9-322, and b/c ITT has the earlier filing date, they will have priority under these circumstances.
Does your answer change if Bank, on 3/5, perfects its security interest by obtaining possession of the chattel paper?
A purchaser means a person taking by purchase and a purchase includes taking a security interest. So Bank could still meet 9-330b’s requirements by taking a security interest in the chattel paper if they took possession of it, as well as meeting 9-330’s other requirements.
A purchaser means a person taking by a security interest, per 1-201b30 & 29.
Even though the bank’s a secured party, if they take possession of the chattel paper, they will satisfy the requirements of 9-330b.
Remember that only one person can have possession of the chattel paper under 9-330, so that two purchasers of chattel paper will never both be able to avail themselves of 9-330 requirements; only one will be able to
PMSI in inventory & Chattel paper priority:
In chronological order: GE has a perfected security interest in Appliance City’s existing and after-acquired inventory. Amana sells an item of inventory to AC and takes a security interest in it to secure the sales price of the item. Amana properly notifies GE of its security interest and perfects its security interest before delivering the inventory to AC. AC sells an item of the Amana inventory to Green who buys with chattel paper. AC defaults to GE and Amana. Who has priority in the chattel paper? 9-330, 9-324(b)
GE has priority under 9-322, as the earlier perfected security interest
GE – PSI in inventory of AC & its proceeds
Why 9-324 doesn’t work here:
Amana – has a PMSI in inventory sold to AC & has complied with 9-324b’s requirements (but not 9-330’s requirements)
9-324b – a perfected PMSI in inventory has priority over a conflicting interest in chattel paper constituting proceeds of the inventory, if so provided in 9-330, if they meet the requirements of 9-324b (which Amanda apparently has).
This means that you have to satisfy the requirements of both 9-330 and 9-324b to get this protection
9-330e – the holder of a purchase money security interest in inventory gives new value for chattel paper constituting proceeds of the inventory
So this gives you “new value” for the purposes of 9-330
HOWEVER, Amana did not take possession of the chattel paper, and thus has not complied with 9-330’s requirements.
Therefore, you go to 9-322, and you look at the earlier time of filing or perfection
Nebraska Furniture Mart (NFM) sells an item of inventory to Green who “buys” the item by executing an installment sales contract (chattel paper). NFM sells the Green chattel paper to ITT, although ITT authorizes NFM to collect the payments from Green and remit them to it. ITT does not file a financing statement or take possession of the chattel paper. One month later NFM creates a security interest in favor of Bank in its existing and after-acquired chattel paper. Bank perfects this security interest by filing a financing statement and asserts the security interest has priority over ITT in the Green chattel paper. Is it correct? 9-318
Yes. A perfected security interest always has priority over an unperfected security interest and NFM was unperfected here when Bank filed their financing statement. (9-322a3). B/c ITT never perfected, the debtor still had the ability to transfer a security interest in the chattel paper to the Bank under 9-318b.
There is no automatic perfection for the sale of chattel paper. You can only perfect by filing a financing statement (9-312a) OR taking possession (9-313)
9-318a – a debtor that has sold an account or chattel paper does not retain legal or equitable interest in the collateral sold.
9-318b – for the purposes of determining the rights of creditors of a debtor that has sold an account or chattel paper, while the buyer’s security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold.

1. Instruments

Under 9-330d, a purchaser of an instrument has priority over a secured party with an interest in the instrument if the purchaser gives value and takes the instrument in good faith w/out knowledge of the secured party.
Scope issue:
9-109d – article 9 does not apply to a single assignment of an instrument, chattel paper, etc. in fulfillment of a pre-existing debt
9-330d – 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 a secured party
1-204 – value defined, a person gives value for rights if the person acquires them as security for or in total or partial satisfaction of a preexisting claim.
Always remember to differentiate between value and new value
They are not the same concepts
Purchasers of chattel paper have to give new value; purchasers of instruments don’t have to give new value
Default

1. 9-601a – after default, a secured party has the rights provided in this part and those provided by agreement of the parties. A secured party

May reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure AND
If the collateral is documents, may proceed as to the documents or as to the goods they cover.

1. What acts of a debtor constitute a default? 9-601, Official Comment 3.

The agreement of the debtor and the secured party determine the circumstances that result in default.
Typical default actions:
debtor’s failure to pay the obligation secured;
debtor’s transfer of the collateral;
attachment of another security interest or lien to the collateral;
debtor’s failure to maintain the collateral;
debtor’s failure to insure the collateral;
failure to notify of change in debtor’s location;
failure to notify of name change;
change in debtor’s organizational structure;
default to any other secured party;
and debtor’s death.

1. Acceleration clauses

§1-309
A term providing that one party or that part’s successor may accelerate payment or performance or require collateral at will or when the party deems itself insecure or words of similar import, means that the party has power to do so only if that party in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against which the power has been exercised
9-602
There are certain rights that the debtor cannot waive:
Requests for accounting
§9-607, with respect to collection and enforcement of collateral
Obligation to repossess collateral without breaching the peace
Certain rights as to disposition of collateral under 9-610, 9-611, 9-613, and 9-614
9-615(f) which relates to the calculation of a deficiency
9-603(a)
However, the parties may determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor and the duties of a secured party under a rule stated in 9-602 if the standards are not manifestly unreasonable

1. Remedies upon default:

Article 9 remedies: repossession
9-609a: after default, a secured party
May take possession of the collateral AND
With removal, may render equipment unusable and dispose of collateral on a debtor’s premises
9-609b: a secured party may proceed under (a)
Pursuant to judicial process OR
Without judicial process, if it proceeds without breach of the peace
Breach of the peace can mean both violent acts and acts meant to induce violence
According to the Henderson case, a breach of the peace has been defined to include both actual violent acts, and acts likely to induce violence.
The Henderson case was where the bank repossessed a debtor’s boat. They had a police officer present. The debtor vehemently objected to the repossession but there was no physical confrontation.

name="_3dy6vkm"2.      Ct. App. Found a breach of the peace b/c even if a mere verbal objection is insufficient to established a breach of the peace, it was apparent that without the officer’s intervention, there would have been a physical confrontation.  . . .  There was not a constructive breach of the peace caused by the mere presence of the deputy.

What if the debtor does not voice objection?
If the debtor does not voice an objection, then that is a fact that cuts in favor of there being no breach of the peace. It would ultimately be a fact question based upon the circumstances, but if there isn’t an objection, it seems to me that there is no breach of the peace.
Professor Nowka thinks that if you have a police officer go along, it forestalls the breach of the peace and makes the repossession unlawful
However, this is not a hard and fast bright line rule
When you use judicial action for repossession, you bring a lawsuit to recover the property, typically called an action in replevin
§9-610
which allows sale, lease etc. of collateral upon default so long as it is done in a commercially reasonable manner
In an action to recover a deficiency (meaning an unsecured portion of the debt), a failure to comply with article 9’s provisions may result in a forfeiture of the deficiency (we’ll get to this later)
What you can do:
You can enter on the debtor’s premises
You can get the car, if the garage door is open
You can’t break locks, doors, etc. in getting to the collateral though
Post-repossession
You either keep the collateral OR (more commonly) you dispose of it

1. Disposition

Notice
9-611(b) – a secured party that disposes of collateral under 9-610 shall send to the persons specified in (c) a reasonable authenticated notification of disposition.
The requirements for a sufficient notification include the contents of the notification, the persons to whom it is sent, and the timeliness of it. Things to be mindful of when giving notice:
Timing
Easy way to make sure you satisfy timing requirement: send the notice after the default and at least 10 days before the disposition of the collateral
9-612(b) - 10 day period sufficient in non-consumer transactions – in a non-consumer goods 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.
Harder part is deciding how much notice is reasonable under 9-612a
Contents
9-613: Contents of notice in a non-consumer goods disposition
What’s the easy way to determine what needs to be in there:
Use the form in 9-613(5)
What has to be in there
Name & address of debtor/obligor
Name & address of secured party
Method of intended disposition
State debtors is entitled to accounting
State the time and place of a public dispos. Or the time after which any other dispos. Is to be made
9-614: Contents of notice in a consumer goods disposition
Have to have everything from 9-613(1) PLUS
A description of any liability for a deficiency of the person to which the notification is sent
A telephone # from which the amount that must be paid to the secured party to redeem the collateral under 9-623 is available
Telephone or additional contact info from which info. Concerning the dispos. Is available
Recipient
Debtor, secondary obligors, other parties with an interest in the collateral, particularly other secured parties who filed a financing statement 10 days before the notification date
The easiest way is to get the secretary of state’s office to send notice, 9-611(e)
You contact the secretary of state no later than 20 days but no 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)
9-611(c) – the secured party shall send notice to:
the debtor
Any secondary obligor AND
If the collateral is other than consumer goods:
Any other person from which the secured party has received an authenticated notification of a claim of an interest in the collateral
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
Identified the collateral
Was indexed under the debtor’s name as of that date AND
Was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date
Any other secured party that 10 days before the notification date, held a security interest in the collateral perfected by a state, regulation or treaty described in 9-311.
Waiver of notice
According to 9-602 & 9-624, a debtor may only waive notice after the default has happened, so a waiver of notice in the security agreement would be ineffective to operate as a waiver of the notice required by 9-611.
9-602(7) – the debtor or obligor may not waive or vary the rules stated in the following listed sections: 9-610-613.
9-624 – a debtor or secondary obligor may waive the right to notification of disposition of collateral under 9-611 only by an agreement to that effect entered into and authenticated AFTER DEFAULT.
9-611(a)(2) notification date means the earlier of the date on which the debtor and any secondary obligor waiver the right to notification.
Notice that you cannot waive notification for other secured parties; you simply have to give them notice
Sample notification:
“If payment is not received by Secured Party on or before 9/18/97, Secured Party reserves all its rights . . . including taking possession of the collateral for the purpose of resale by public auction or private sale.”
Clearly it doesn’t satisfy 9-613 b/c there’s no description of collateral
But would it satisfy 9-611(b)?
The issue is that it doesn’t state the type of disposition that’s going to be used
This would directly violate 9-613(C)

1. Disposition: disparity in market value & proceeds from disposition

A low purchase price should cause a court to scrutinize the disposition
9-610(b) – 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 on any terms.
9-627(a) –
a low price for collateral is not of itself sufficient to preclude the secured party from establishing that the disposition was not commercially reasonable.
(b) – a disposition is commercially reasonable if:
It’s the usual manner on any recognized market
The collateral fetches the price current in any recognized market at the time of the disposition
Or the disposition is otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
What if the secured party makes the “winning” bid at the sale?
If the secured party is putting a bid that’s significantly below what the range of proceeds would have been to a person other than the secured party or a person related to the secured party or a secondary obligor would have brought, then you calculate the deficiency based upon the amount of proceed 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.
9-610(c) – a secured party may purchase collateral at a public disposition OR at a private disposition only if the collateral is of a kind that is customarily sold on a recognized market or the subject of a widely distributed standard price quotation.
9-615(f) – the surplus or deficiency following 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 the secured party, a person related ot the secured party or a secondary obligor if:
The transferee in the disposition is the secured party or a secondary obligor AND
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.

1. Disposition of collateral by junior secured party

A junior secured party may dispose of collateral upon default by the debtor
9-610, cmt. 5. “Disposition rights under subsection a are not limited to first priority security interest. Rather, any secured party as to whom there has been a default enjoys the right to dispose of the collateral under this subsection. The exercise of this right by a secured party does not of itself constitute a conversion or otherwise give rise to liability in favor of the holder of the senior security interest. . . . The holder of a senior security interest is entitled, by virtue of its priority, to take possession of the collateral from the junior secured party.”
Junior secured party disposes without giving notice to senior secured party:
Most security agreements have a provision that a default to any other secured party is a default to the secured party. So, usually when there’s one default, it triggers the rights of a senior secured party, if there is one
9-615g – a secured party that receives cash proceeds of a disposition in good faith and without knowledge that the receipt violates the rights of the holder of a secured interest or other lien that is not subordinate to the security interest or agricultural lien under which the disposition is made
Takes the cash proceeds free of the security interest or lien
Is not obligated to apply the proceeds of the disposition to the satisfaction of obligations secured by the security interest of the lien AND
Is not obligated to account to or pay the hold of the security interest or other lien for any surplus
The question becomes, was the junior secured party in good faith?
Good faith requires honesty in fact and the observance of reasonable commercial practices
Under, 9-611c3B, the secured party making a disposition of the collateral must send notice to any other secured party or lienholder that held a security interest in the collateral perfected by a financing statement that was listed with appropriate office, describing the collateral
So I would argue that the junior secured party wasn’t in good faith b/c they didn’t comply with reasonable commercial practices by fialing to give notice as required by statute
The senior secured party’s interest does not dissipate with the disposition though
Noticeably, the mention of a superior security interest in 9-617 is conspicuously absent, so a Buyer doesn’t take free of a SI interest superior to the Buyer’s seller
So the senior secured party’s interest continues under 9-315a:
a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien
9-617(a) – a secured party’s disposition of collateral after default
Transfer to a transferee for value all of the debtor’s rights in the collateral
Discharges the SI under which the disposition is made AND
Discharges any subordinate SI or lien
(b) a transferee that acts in good faith takes free of the rights and interests stated in subsection (a), even if the secured party fails to comply with this article or the requirements of any judicial proceeding
If the transferee is not in good faith, then the transferee takes subject to:
The debtor’s rights in the collateral
The security interest or agricultural lien under which the disposition is made AND
Any other security interest or lien
Furthermore, there’s warranties of title that go along with a transfer, So if the transferee at a disposition doesn’t take good title, they can sue the transferor for breach of warranty
2-312 – warranties of title – in a contract for a sale, a warrant is created that the seller conveyed good and rightful title AND that the goods shall be delivered free of any encumbrance.
9-610d – a contract for sale, lease, license or other disposition includes warranties relating to title, possession, quiet enjoyment and the like which by operation of law accompany a voluntary disposition of property of the kind subject to the contract.
But under 9-610e, you can disclaim the warranty
The finals scenario of a junior secured party disposing without notice to a senior secured party will look like this:
If Junior Secured Party is able to use 615g, they get the proceeds (it’s not set in stone that failure to give notice is “bad faith”)
Senior secured party can get the collateral bank from the Buyer at the disposition b/c their superior SI wasn’t eliminated by 9-617.
Buyer can then try to sue the Lender for breach of warranty under 610d, which may be successful unless the warranty is disclaimed under 610e.
So that’s how it works generally
Junior secured party disposes without giving notice to junior secured party
In this scenario, 9-617 would dispose of the junior secured party’s security interest in the collateral, meaning the transferee would take free of the security interest
9-617 is a general exception to the rule of 9-315 that a security interests continue regardless of a sale or lease
They could try to bring a suit against the disposing secured party under 9-625, but they would have trouble proving loss caused because they wouldn’t have received anything if they had had notice anyway
9-625b – a person is liable for damages in the amount of any loss caused by a failure to comply with this article. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increase costs of, alternative financing
Doesn’t say anything about getting the collateral back.

1. Notice of deficiency/surplus in consumer transactions: §9-616

§9-616 only applies with a consumer transaction, which means a transaction involving an individual buys goods for consumer use
If there’s a surplus or a deficiency, the secured party has to notify the debtor
9-616b – in a consumer goods transaction in which the consumer obligor is liable for a deficiency or the debtor entitled to a surplus, the secured party shall:
Send an explanation to the consumer obligor after the disposition AND
Before or when the secured party first makes a deman on the consumer obligor after the disposition for payment of the deficiency AND
w/in 14 days after the receipt of the request; OR
in the case of a consumer obligor who is liable for a deficiency, within 14 days after receipt of request, send to the consumer obligor a record waiving the secured party’s right to a deficiency
9-616a – explanation means a writing that state the amount of deficiency
Provides an explanation of how the secured party calculated the deficiency And
States that future expenses, credits, etc. may affect the amount of the deficiency
9-616c – it’s the information that must be included in the writing’s calculation of deficiency
Failure to comply with 9-616:
9-625 – remedies for secured party’s failure to comply
(c) – a person that was a debtor is entitled to recover and if the collateral is consumer goods, a person that was a debtor 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.
What the hell does this mean?
It allows a recovery of all the interest that the debtor has paid
9-628, however, is an limitation
9-628(d) – a secured party is not liable to any person under 9-625(c)2 for its failure to comply with section 9-616
(e)(5) – in addition to any damages recoverable under (b), the debtor, consumer obligor, etc. may recover $500 from a person that fails to comply with 9-616(b)(1) and whose failure is part of a pattern of non-compliance
(e)(6) fails to comply with §9-616(b)(2)
No pattern of non-compliance present here.

1. Non-compliance with part 6

§9-625: Damages for non-compliance with part 6
It’s generally loss caused by the failure to comply (b)
There are also some statutory penalties, usually $500 for each failure to comply with specific provisions

1. Effect of non-compliance upon deficiency

9-615: an obligor shall be liable for any deficiency remaining after disposition of the collateral and proceeds have been applied to the debt
9-626a1: a secured party need not prove compliance with the provisions of this part relation to collection, enforcement, disposition, or acceptance unless it’s placed in issue by the secondary obligor or the debtor
If compliance placed in issue, however, the secured party has the burden of proving compliance with part 6.
If there is non-compliance in the sense that a disposition is not commercially reasonable, what happens to the deficiency?
Typically, the creditor will lose the deficiency unless they can prove that a complying disposition, acceptance etc. would have resulted in less than the amount actually owed
9-626(a)(3) – if a security party fails to prove that the disposition was conducted in accordance with this part, the liability of a debtor 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
The proceeds of the collection, enforcement, disposition, or acceptance OR
The amount of proceeds that would have been realized has the non-complying secured party proceeded in accordance with the provisions of this part.
(4) The amount of the sum 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.
Compliance proceeds = the amount actually owed
How do you rebut this presumption?
Comparable sales
Fair market value of collateral
Expert valuation
What if the creditor fails to notify the debtor of the disposition?
It used to be that forfeiture of deficiency follows a failure to notify
Holt case supports a forfeiture of the deficiency.
the court notes that failure to give notice should always result in a forfeiture of a deficiency.
At the outset, a distinction should be made between the failure to give pre-sale notice of the intended disposition of collateral and other acts of commercially unreasonable behavior.
Notice to the debtor that the collateral is about to be disposed of is so fundamental that no remedy less severe than forfeiture of the deficiency amount would be adequate and this remedy is by no means exclusive. . . .
A secured party who fails to give the notice required by KRS 355.9-504(3) [revised 9-611] denies the debtor an opportunity to assert defenses, contest the amount claimed or pay the indebtedness prior to sale of the collateral.
However, the Holt case was decided before revised article 9’s 9-626 was put into effect
9-626 doesn’t differentiate between levels of non-compliance with part 6
And dispositoin would seem to include notice
Does you answer change if the sale was a commercially unreasonable disposition of consumer goods?
9-626a doesn’t address consumer transactions. There are three general approaches courts have taken in consumer transactions (cmt. 4, §9-626):
Absolute bar to recover a deficiency if the secured party fails to be commercially reasonable
The debtor can offset any claim to deficiency with all damages recoverable from the secured party’s noncompliance
The noncomplying party is barred from recovery unless it overcomes a rebuttable presumption that compliance with former part 5 would have yielded an amount sufficient to satisfy the secured debt.
9-626(b) – the limitation of the rules in 9-626(a) to transactions other than consumer transctions 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 follow established approaches.

1. Acceptance of Collateral, §9-620

It’s a form of strict foreclosure
Once a creditor has accepted collateral, they no longer have to comply article 9, meaning that any disposition of the collateral doesn’t have to be commercially reasonable
Also advantageous when creditor is over-secured or where debtor is close to bankruptcy/through bankruptcy without assets
Debtor or creditor can propose acceptance
9-620(b). A purported or apparent acceptance of collateral under this section is ineffective unless the secured party consents to the acceptance in an authenticated record.
Under 9-620(c), the debtor has to consent to the acceptance of a collateral in partial satisfaction of a debtor in an authenticated writing.
If it’s going to be full satisfaction of the debtor, then the secured party has to jump through more hoops under 9-620(c)
What are the steps secured party must take to accept collateral:
Debtor’s consent
9-620(c), a debtor consents to an acceptance of collateral in full satisfaction of the obligation it secures only if the debtor agrees to the terms of the acceptance in a record authenticated after default OR
The secured party send to the debtor after default a proposal that is unconditional or subject only to a condition that collateral not in the possession of the secured party be preserved or maintained
The proposal provides for full satisfaction of the obligation it secures AND
The secured party does not receive a notification of objection authenticated by the debtor within 20 days after the proposal is sent
Notice of objection w/in 20 days from sending proposal to debtor by:
A party to which the secured party was required to send a proposal under 9-621, OR

name="_1t3h5sf"                                                                                                                                      i.      § 9-621:Persons to which proposal to be sent.

A secured party that desires to accept collateral in full or partial satisfaction of the obligation it secures shall send its proposal to:
(1) any person from which the secured party has received, before the debtor consented to the acceptance, an authenticated notification of a claim of an interest in the collateral;
(2) any other secured party or lienholder that, 10 days before the debtor consented to the acceptance, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:
(A) identified the collateral;
(B) was indexed under the debtor's name as of that date; and
(C) was filed in the office or offices in which to file a financing statement against the debtor covering the collateral as of that date; and

name="_4d34og8"c.       (3) any other secured party that, 10 days before the debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in Section 9-311(a).

(b) [Proposal to be sent to secondary obligor in partial satisfaction.]
A secured party that desires to accept collateral in partial satisfaction of the obligation it secures shall send its proposal to any secondary obligor in addition to the persons described in subsection (a).
Any other person, other than the debtor, holding an interest in the collateral subordinate to the security interest that is the subject of the proposal
If the consumer goods, the collateral is not in the possession of the debtor when the debtor consents to the acceptance AND
Subsection (e) does not require the secured party to dispose of the collateral or the debtor waives the requirement for disposal under 9-624
What’s required to be in the proposal?
9-621 cmt. 4. “A proposal need not take any particular form as long as it sets forth the terms under which the secured party is willing to accept collateral in satisfaction of (a).” But it should specify:
The amount of the secured obligation to be satisfied, state the conditions (if any) under which the proposal may be revoked and describe any other applicable conditions.
Definitions:
Proposal means a record authenticated by a secured party which includes the terms on which the secured party is willing to accept collateral in full or partial satisfaction of the obligation is secures pursuant to 9-620, 621, 622
When is acceptance prohibited:
9-620(e) – mandatory disposition of consumer goods
A secured party in possession of collateral shall dispose of the collateral under 9-610 IF
60 percent of the cash price has been paid in the case of a PMSI in consumer goods OR
60 percent of the principal amount of the obligation secured has been paid in the case of a non-PMSI in consumer goods
When is partial acceptance prohibited:
9-620(f) – you can’t take collateral in partial satisfaction of a consumer transaction
Two types of consent under 9-620
Partial satisfaction consent:
Have to have debtor’s written, authenticated consent
Total satisfaction consent:
Debtor’s written, authenticated consent OR
Constructive consent:
Basically, if the secured party is proposing an unconditional full satisfaction and the secured party sends notice and an objection is not voiced by the debtor within twenty days of sending the notice, the debtor is deemed to have constructively consented.
Effect of acceptance, §9-622
A secured party’s acceptance of collateral in full or partial satisfaction of the obligation is secures
Discharges the obligation to the extent consented by the debtor
Transfer to the secured party all of a debtor’s rights in the collateral
Discharges the security interest or agricultural lien that is the subject of the debtor’s consent and any subordinate security interest or subordinate lien
Terminates any subordinate interest
A subordinate interest is discharged or terminated under this section even if the secured party fails to comply with this article.
Debtor challenging compliance with acceptance’s requirements:
9-626: a secured party need not comply with this part relation to acceptance unless the debtor places the secured party’s compliance in issue. If placed in issue, the secured party has the burden of proving compliance.
If a secure party fails to prove compliance, the liability of the debtor or secondary obligor for any deficiency is limited to an amount by which the sum of the secured obligation, expenses and attorney’s fees exceeds the greater of
The proceeds of the collection, acceptance, disposition etc. OR
The amount of proceeds that would have been realized had the noncomplying secured party proceeded accordingly under this part.
The amount of proceeds that would have been realized is equal to the sum of the obligation secured, expenses and attorneys fees unless the secured party proves otherwise.

1. Objections to acceptance

If anybody objects to the acceptance of collateral, which is usually people entitled to receive notice, then the secured party may not accept the collateral and must dispose of it under 9-610
Acceptance discharges a subordinate security interest, but not a superior security interest
With partial acceptance, there is a deficiency left and the obligor/debtor is liable for that remainder

1. Acceptance problems

An appraiser values the “default sale” value of the collateral at $20,000. Bank decides to propose to Debtor that Bank accept the collateral in partial satisfaction of the debt, i.e., to the extent of $19,000 of the debt (Bank figures its expenses of retaking, storing, and selling will be $1,000.). Accordingly, Bank sends a signed written notice to Debtor informing Debtor that Bank offers “to accept the collateral in satisfaction of $19,000 of the $35,000 debt you owe us.”
is this proposal sufficient?
Probably
9-621 cmt. 4. “A proposal need not take any particular form as long as it sets forth the terms under which the secured party is willing to accept collateral in satisfaction of (a).” But it should specify:
The amount of the secured obligation to be satisfied, state the conditions (if any) under which the proposal may be revoked and describe any other applicable conditions.
9-102 Definitions:
Proposal means a record authenticated by a secured party which includes the terms on which the secured party is willing to accept collateral in full or partial satisfaction of the obligation is secures pursuant to 9-620, 621, 622.
What about a proposal to accept collateral in partial satisfaction for substantially less than its market value?
That may not be a sufficient proposal, b/c it could constitute a breach of good faith
Under 1-203, the obligation of good faith is imposed on a secured party’s enforcement under article 9. So if the proposal is in bad faith, then it won’t be sufficient
After receiving no response from Debtor, Bank sells the collateral to Buyer twenty-five days after sending the proposal. Subsequently, Bank sues Debtor for the remaining balance of the debt. Debtor argues the rebuttable presumption rule of 9-626 applies because Debtor did not consent to Bank’s proposal. Bank defends its action under § 9-620. Who is correct?
The Debtor is correct b/c the proposal was for partial satisfaction, and thus constructive consent will not be adequate.
Furthermore, a secured party may not accept collateral in partial satisfaction of the obligation it secures in a consumer transactions (9-620(g))
Two types of consent under 9-620:
Partial satisfaction consent:
Have to have debtor’s written, authenticated consent
Total satisfaction consent:
Debtor’s written, authenticated consent OR
Constructive consent:
Basically, if the secured party is proposing an unconditional full satisfaction and the secured party sends notice and an objection is not voiced by the debtor within twenty days of sending the notice, the debtor is deemed to have constructively consented.
9-626: a secured party need not comply with this part relation to acceptance unless the debtor places the secured party’s compliance in issue. If placed in issue, the secured party has the burden of proving compliance.
If a secure party fails to prove compliance, the liability of the debtor or secondary obligor for any deficiency is limited to an amount by which the sum of the secured obligation, expenses and attorney’s fees exceeds the greater of
The proceeds of the collection, acceptance, disposition etc. OR
The amount of proceeds that would have been realized had the noncomplying secured party proceeded accordingly under this part.
The amount of proceeds that would have been realized is equal to the sum of the obligation secured, expenses and attorneys fees unless the secured party proves otherwise.
Does your answer change if Bank proposes to accept the collateral in full satisfaction of the debt?
Yes, then you can have constructive consent, which would appear to be the case here.

Bankruptcy

1. Remember, the trustee qualifies as a lien creditor

9-317 – except as otherwise provided in 9-320, 9-321, if a person files a financing statement with respect to a PMSI before or within 20 days after the debtor receies 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
So the secured party would have priority over the trustee if perfected within 20 day in this scenario

Anonymous

Search

Secured Transactions

Namespaces

More

Page actions

Navigation

Navigation

Follow Wiki Law School

Share this page

Wiki tools

Wiki tools

Secured Transactions
Relevant texts	Secured Transactions: A Systems Approach [Connected eBook with Study Center] (Aspen Casebook) Problems and Materials on Secured Transactions (American Casebook Series) Secured Transactions (Examples & Explanations)
Related course(s)

Anonymous

Search

Secured Transactions

Navigation

Wiki tools

Page tools

Categories