Secured Transactions Outline

Pre-Code Security Devices

Pledge: The debtor gives physical possession of the collateral to the creditor until
the debt is paid. The possession perfects the creditors interest.
o Drawback: This only works for tangible assets. Sometimes the assets will be
too big to take, or the asset is something that the debtor needs to make
things run.
Chattel Mortgage: As with real property, the mortgage given by the debtor to
the creditor was recorded in a designated place and index under the name of the
debtor so that other potential creditors could check and see whether the collateral
was encumbered.
o Drawback: You have to file in all areas where the asset is located.
Conditional Sale: the debtors title to the property doesnt vest until full payment
has been made.
o Drawback: If someone buys the property from the debtor before full
payment has been made, they arent on notice as to any other interests.
Trust Receipt: Similar to a certificate of title. Its a document that shows evidence
of the title. The bank holds onto the document and the car dealership holds onto
the collateral.
o Example: A car dealership would ask a bank to buy cars from a
manufacturer. The Bank would then turn them over to the dealer after two
things happened: 1) The bank filed a notice in the appropriate place
announcing its intention to engage in trust receipt financing with this
particular dealer, and 2) The dealer signed the trust receipt, becoming the
trustee, and the bank became the entruster.
Factors Lien: A factor was a selling agent who helped finance the principals
business. Used for financing of inventory.
Field Warehouse: This involved storing goods in a warehouse and having the
warehouse company issue a negotiable warehouse receipt made out to the bearer.
The receipt granted ownership in the property to the bearer, and was transferred
to the debtor upon payment in full.

Introduction to Secured Transactions

Definitions
o Debtor: Owes money on the loan, is a borrower. Gives a promissory note to
the creditor.
o Creditor: Provides money to the debtor.
o Promissory Note: Document that stands for an obligation. It is a negotiable
instrument that the debtor will give to the creditor.
o Guarantor: A person giving a guarantee that the debtor is going to pay his
debt. If the debtor fails to pay, the guarantor is liable to the creditor in the
debtors place.

o Guaranty: The name of the agreement that a guarantor makes with a

creditor if the debtor doesnt pay then I will.
o Security Interest: This is a consensual lien on the debtors personal
property or fixtures.
o Collateral: The property that is subject to a Security Interest or Agricultural
Lien.
o Attachment: The creation of a legal interest in collateral.
o Default: When the debtor fails to pay and the holder of the security interest
collects the collateral.
o Perfection: The process of putting other creditors on notice that you have a
claim on the collateral to protect your interest in the event that other
creditors obtain an interest in the same collateral.
o Filing: This is how an interest is perfected; you file a financing statement in
the correct location.
o Financing Statement: The document that puts other creditors on notice
that you have an interest in certain collateral.
Scope of Article 9: You need to determine what is and what is not a security
interest as defined by Article 9, because you need to know whether to apply the
UCC or Common Law.
o 9-109 Scope: Article 9 applies to
A transaction, regardless of its form, that creates a security interest in
personal property or fixtures by contract
Limitations: This does not apply to real estate, and the contract
must be in writing.
An agricultural lien 9-102(a)(5)
A consignment (as defined by 9-102(a)(20))
A sale of accounts, chattel paper, payment intangibles, or promissory
notes
Outright sales of these still create a security interest, even if
there isnt mention of one. So, there will still be a debtor and a
secured party, even is the seller has no further obligations to the
buyer. The effect of this is that the buyer will have to file a
financing statement, even in an outright sale, to perfect his
interest against future creditors. This is necessary so that
creditors will know if the debtor still has the account or not
(public policy rationale).
A security interest arising under section 2-401 (conditional sale), 2-505
(seller ships under reservation), 2-711(3) (buyers rejection or
revocation), or 2A-508(5) (lessees remedy), but only as provided in
section 9-110 (Priority rule)
1-201(b)(35) states that a 2-401 sale amounts to a security
interest held by the seller.
A security interest arising under section 4-210 (holding a banks right
in a bank account) or 5-118 (document presented for payment under a
letter of credit).
o What ISNT included in Article 9?

9-109(c) Things governed by federal statutes: Article 9 does not

apply to the extent that
A statute, regulation, or treaty of the United States preempts this
article
Another statute of this state expressly governs the creation,
perfection, priority, or enforcement of a security interest created
by this State or a governmental unit of this state
o Example: Philko Aviation v. Schacket federal law
determines priority when it comes to aircraft, the UCC is
preempted.
A statute of another state, a foreign country, or a governmental
unit of another state or a foreign country, other than a statute
generally applicable to a security interest expressly governs
creation, perfection, priority, or enforcement of a security
interest created by the state, county, or governmental unit
The rights of a transferee beneficiary or nominated person under
a letter of credit are independent and superior under section 5144
9-109(d) Article 9 does not apply to
a landlords lien & other statutory liens, other than an
agricultural lien;
o Unless its consensual 9-109(a)(1)
a lien, other than an agricultural lien, given by statue or other
rule of law for services or materials
o But 9-333 applies with respect to priority of the lien;
an assignment of a claim for wages, salary, or other
compensation of any employee;
o Pay attention to the differences between employees and
contractors. Contractors ARE covered under article 9
because the security interest is the result of a contract, not
employment.
a sale of accounts, chattel paper, payment intangibles, or
promissory notes as part of a sale of the business out of which
they arose;
an assignment of accounts, chattel paper, payment intangibles,
or promissory notes which is for the purpose of collection only
o For example, selling a debt to a collection agency.
an assignment of a right to payment under a contract to an
assignee that is also obligated to perform under the contract;
an assignment of a single account, payment intangible, or
promissory note to an assignee in full or partial satisfaction of a
preexisting indebtedness
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
o but 9-315 and 9-322 apply with respect to proceeds and
priorities in proceeds;
an assignment of a right represented by a judgment, other than
a judgment taken on a right to payment that was collateral
a right of recoupment or set-off, but:
o 9-340 applies with respect to the effectiveness of rights of
recoupment or set-off against deposit accounts; and
o 9-404 applies with respect to defenses or claims of an
account debtor
the creation or transfer of an interest in or lien on real property,
including a lease or rents there under, except to the extent that
provision is made for:
o liens on real property in 9-203 and 9-308
o fixtures in 9-334
o fixture filings in 9-501, 9-502, 9-512, 9-516, and 9-519 and
o security agreements covering personal and real property in
section 9-604.
o What about when a promissory note backed up by real
property is being used as collateral? This is STILL governed
by article 9, and the fact that the note is backed by real
property is irrelevant.
an assignment of a claim arising in tort, other than a commercial
tort claim
o but 9-315 and 9-322 apply with respect to proceeds and
priorities in proceeds; or
an assignment of a deposit account in a consumer transaction
o but 9-315 and 9-322 apply with respect to proceeds and
priorities in proceeds

Classifying the Collateral: Article 9 divides collateral into different categories

Goods (things that are moveable upon attachment)

o Consumer goods (personal, household things)
o Equipment : this is also a catch-all category for any goods that do not
fit into the other categories.
Examples: Professional pianists piano, a farmers tractor,
curtains bought by a lawyer for a law office
o Farm products
This includes livestock and things produced by livestock (like
manure, milk, eggs)
o Inventory
Includes what you would normally think of as inventory, as well
as raw material that is consumed quickly, like pencils and paper
in the offices of a large retail store.

Quasi-Tangible Property (pieces of paper used as collateral) the paper

itself has rights, but the right it represents cant be touched. This is not a
category created by the UCC.
o Instruments
o Investment Property (stocks and bonds and right to accounts
containing the same)
o Documents (warehouse receipts)
o Chattel Paper
o Letters of Credit rights
Intangible Property (Property having no physical form)
o Accounts
Includes rights to payment for services rendered
o Health care insurance receivables
o Deposit accounts
o General intangibles (for example, a license)
Payment intangibles
How do we decide which category the collateral fits into?
o We assess
The buyers intended use
At the time of purchase

Creating a Security Interest: Security Agreements and Attachment

A Security Agreement is an agreement that creates or provides for a security

interest; It is the contract between the debtor and the creditor by which the
debtor grants to the creditor (the secured party) a security interest in the
collateral.
o Exception: A security agreement is not required where the collateral is in the
possession of the secured party.
Attachment is the process by which the security interest in favor of the creditor
becomes effective against the debtor.
9-203(b): Requirements for Attachment
o Creditor must provide value to the debtor (usually by a loan or extension of
credit)
o Debtor must have rights to the collateral
o A security agreement is executed
Signed by the debtor, which reinforces that the agreement must be in
writing.
Describes the collateral with sufficient specificity that both parties
know exactly what is being contracted for.
What will a good Security Agreement include? Much more than
9-203(b) requires:
o Identify the parties
o Describe the collateral in detail
o Contain a grant by the debtor to the creditor of an SI in the
collateral
o Specify the contractual understanding of the parties

9-203(a) Timing of Attachment

o A Security interest attaches to collateral when it becomes enforceable
against the debtor with respect to the collateral
I.e., when the last of the requirements of 203(b) is met

Perfecting a Security Interest: Financing Statements

A Financing Statement is a one-page form document that is a description of the

collateral, and is filed in the appropriate public office by the secured party to
perfect that creditors rights against later parties.
9-502(a) What has to be in a Financing Statement
o Name of debtor
9-503 (a) Financing statements are indexed under the name of the
debtor, and those who wish to find financing statements search for
them under the debtors name
(1) If the organization has a name, that name is the correct name
to put on a financing statement. If the organization does not
have a name, then the financing statement should name the
individuals or other entities who comprise the organization
(e) A financing statement may provide the name of more than
one debtor and secured party
9-507-Change of Debtor Name: Financing Statement is still effective
before or within 4 mths after change. Financing Statement not effective
to perfect a Security Interest in collateral acquired by the debtor more
than 4 mths after change
o Name of secured party
o A general description of the collateral
9-108 Sufficiency of Description
(a) a description of personal or real property is sufficient,
whether or not it is specific, if it reasonably identifies what is
described
(b) a description of collateral reasonably identifies the collateral
if it identifies the collateral by:
o specific listing
o category (under UCC)
o except as otherwise provided in subsection (e), a type of
collateral defined in the UCC
o quantity
o computational or allocational formula or procedure; or
o except as otherwise provide in subsection (c), any other
method, if the identity of the collateral is objectively
determinable
9-504 Indication of Collateral: A financing statement sufficiently
indicates the collateral that it covers if it provides
Description of the collateral pursuant to 9-108

Indication that the financing statement covers all assets or

personal property
9-502: The description of the collateral in a financing statement need
only inform, not educate
o (d) The authorization of the debtor (but not their signature)
This means that secured parties can file even before a Security
Agreement is signed, and there are usually tactical reasons for doing
so.
9-516 Other requirements of a financing statement
o Communication of a record to a filing office
o Tender of the filing fee or acceptance of the record by the filing office

Perfection

9-308 If a security interest is perfected, It is senior to most later creditor

interests
o SI must first attach before perfection is possible
o SI must be effective between the debtor and creditor before it has legal
meaning as to other parties.
9-310 Methods of Perfection
o Physical possession of the collateral
o Filing of a financial statement
o Control over the collateral (for specific types only)
o Automatic perfection: Basically limited to a PMSI in CONSUMER GOODS only
(9-309)
Perfection of the Security Interest:

POSSESSIO
N ONLY

FILING
AND/OR
POSSESSIO
N

FILING ONLY

FILING
AND/OR
CONTROL

CONTROL
ONLY

Money

Goods,
Negotiable
Instruments,
Tangible
Chattel Paper

Accounts,
general
intangibles,
commercial
tort claims

Investment
property,
electronic
chattel paper

Deposit
accounts,
letter of
credit rights

9-313 Perfection by possession: If the collateral is in the physical possession of

the creditor, the world at large is alerted to that creditors possible interest in the
property. No other notice is therefore required. Only collateral having a physical
form can be possessed.
o 9-313(c)Escrow: If the property is in the possession of a third party, the
secured party can still perfect its interest in the property by fulfilling certain
conditions
The escrow agent must acknowledge their role in writing.

o Warehouse Receipts/ Promissory Notes

9-312(a) says that you can perfect by filing or possession in a
warehouse receipt/document or a promissory note. In the case of a
warehouse receipt, this would only be true as to possession if the field
warehouse place had true control of the collateral.
9-312(e) if you have a negotiable document that you can perfect
through possession, you have 20 days to actually take possession.
Public policy- to allow for delivery, etc.
9-312(f) The secured party will remain perfected for 20 days if the
secured party makes available to the debtor the goods (that have been
perfected by possession) or documents for the purpose of:
1) Ultimate sale OR
2) Loading, storing, shipping, processing, or dealing w/them in a
manner preliminary to their sale.
9-309 Automatic Perfection
o 9-103 Purchase Money Security Interest in Consumer Goods (PMSI)Automatic perfection given upon attachment. Doesnt require filing or
attachment. This arises when the SP advances money or credit to enable the
debtor to purchase the collateral. Remember that consumer goods
depreciate quickly and there are a huge number of these transactions. Has
to be a consumer good to be automatically perfected.
9-103 comment 3 Close Nexus Is it a PMSI? if they are closely
aligned look at parties intent (that they are closely aligned) and close
in time
Split of Authority on this Issue: of whether the SI is extinguished when
the original purchase money loan is refinanced through a renewal or
consolidation with another obligation.
Automatic Transformation Rule one line of cases holds that
the purchase money security interest (PMSI) is automatically
transformed into a non-purchase money interest when the
proceeds of a renewal note are used to satisfy the original note.
103 e Dual Status Rule- rejects this all or nothing approach
and hold that a lien may be a partially purchase-money and
partially non-purchase money and that the purchase-money lien
is not automatically destroyed by refinancing or consolidation
with debt. The UCC adopts the dual status rule for commercial
goods but leaves it open for consumer goods. Adopted in the
comments so only persuasive.
Case by case- look at the intent of the parties and go by that.
How related are the two loans. Look at their characteristics and
does it make sense to continue it as a PMSI.
o Non-PMSI Automatic Perfection
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 is automatically perfected upon

attachment. There are two tests to determine whether this section
applies:
Percentage Test: The percentage of accounts being sold
Isolated and Casual Transaction Test: How often does the
transaction take place? What is the status/business of the
assignee?
9-309(4) A TRUE sale of a promissory note is automatically perfected
upon attachment
9-308(d) A perfection of a security interest in the collateral also
perfects a security interest in the supporting obligation for the
collateral. So if there is a surety, the secured party is automatically
perfected in its interest in that surety at the time it perfects its interest
in the underlying collateral.
9-310 Perfection by Filing
o Mechanics of Filing 9-501(a)(2) -Central filing (typically in the office of
the Secretary of State) for almost all financing statements, with local county
filing only for matters having to do with realty; minerals to be extracted from
the earth, timber, or fixtures
o Other filings -9-515
(a) A financing statement is effective for 5 years and then it lapses
unless a continuation statement is filed
(d) Continuations must be filed within 6 months before the
expiration of the original filing statement not before or after
(c) If a lapse occurs, then the creditor is treated as if it were
NEVER perfected for purposes of priority. If they file a new
financing statement after the lapse, they go to the end of the
line priority-wise.
Requires the filing office to index the filing under the debtors name
and the file number and associate all related filings to the original filing
o 9-516: What constitutes filing:
Communication of a record to a filing office; AND
Tender of the filing fee OR acceptance of the record by the filing office
o 9-517: Error by filing office does not affect the effectiveness of the filed
record
Termination Notices
o 9-513(c) (Equipment) If there is no obligation existing, then the debtor has
a right to demand a termination of the filing statement. The secured party
has 20 days after they receive a signed demand to send the debtor a
termination statement.
If the secured party fails to send the statement, the debtor can file an
amendment under 9-509(d)(2). The amendment is effectively a
termination statement, but must indicate that it was filed by the
debtor, not the creditor

o 9-513(b) (Consumer Goods) A secured party must file a termination

notice upon the earlier of
One month after the obligation ends (this is considered an affirmative
obligation) OR
20 days after the receipt of an authenticated demand.
o Bogus Filings: If a debtor is subjected to bogus filings, they have a couple
of options. Under 9-513 comment 3, they can send an authenticated demand
to the address that the secured party lists for itself on the filing statement
(and it will be deemed received, even if it never is). The debtor can issue
the termination notice themselves If they receive no response, per 9-502(d)
(2). Finally, under 9-518, the debtor could file a correcting statement.
9-314(a) Perfection by Control
o Security interests in investment property, deposit accounts, letter of credit
rights, or electronic chattel paper MUST be perfected by control of the
collateral
Control means that the secured party has taken the steps described in
these sections so it is obvious to anyone investigating the state of the
collateral that the secured party has rights therein.
9-308(C) Continuity of Perfection
o A security interest or agricultural lien is perfected continuously if it is
originally perfected by one method under this article and is later perfected
by another method under this article, without an intermediate period when it
was unperfected.

Multi-State Transactions/ Choice of Law

9-501 General Rule: You file in the jurisdiction where the law governs perfection
9-301 Which law governs?
o Domicile: look to the law of the debtors location as the state in which steps
for perfection need to be taken
o Location: if the collateral has physical form, the law of the jurisdiction in
which the collateral is located will govern issues involving priority and other
Article 9 matters
This will change as the collateral moves.
o Basically, the secured party looks to the jurisdiction in which the
debtor is located as the place of perfection but the jurisdiction of
the collaterals location as to the effect of perfection.
The parties can agree (by contract) to be bound to the law of any state
or nation that has a reasonable relation to the transaction.

Which jurisdictions law applies:

PERFECTION
(where to file)

EFFECT OF
PERFECTION &

PRIORITY
GENRAL RULE

Debtors Location

Debtors Location

TANGIBLE
NEGOTIABLE
DOCUMENTS, GOODS,
INSTRUMENTS, MONEY
OR TANGIBLE CHATTEL
PAPER

Debtors Location

Collaterals Location

POSSESSORY
SECURITY INTEREST

Collaterals Location

Collaterals Location

9-301

9-301(2)

9-307 Location of the Debtor

o A debtor who is an individual is located at the individuals principal residence
As determined by law look to house, job, ties to a particular place
o A debtor that is an organization and has only one place of business is located
at its place of business
Place of business- an agency, an office; a place actually occupied,
either continually or at regular periods; an occasional use or
occupation of a place for business purposes is not sufficient to
constitute it as a place of business. If it is a registered business, file
where the business is registered. When in doubt, CYA and file
EVERYWHERE.
o A debtor that is an organization and has more than one place of business is
located at its chief executive office
Except registered organizations (see below)
o Types of Businesses:
Registered Organizations: Always file in the state of incorporation,
even if the business has no other contacts there
Individuals/Sole Props: File in the domicile of the owner/sole prop
Organization: File in the primary place of business as defined by 9307(a)
Foreign Entity: If the entitys home country has a similar system, file
there (like Canada). If they do not, file in D.C. The best course of action
is to file in the foreign country and in D.C.
9-316 Continued Perfection of a Security Interest Following a Change in
Governing Law
o (A) A security interest perfected pursuant to the law of the applicable
jurisdiction remains perfected until the earliest of:
The time perfection would have ceased under the law of that
jurisdiction
Expiration of four months after a change of the debtors location to
another jurisdiction

Expiration of one year after a transfer of collateral to a person that

thereby becomes a debtor and is located in another jurisdiction.
o (B) Priority is determined by first to file or perfect in the original jurisdiction.
If there is more than one secured party, and the jurisdiction changes, the
parties will retain their respective priorities as long as both file in the new
jurisdiction within the applicable grace period (regardless of which files in the
new jurisdiction first). If, however, one of the secured parties allows their
perfection to lapse and fails to file within the grace period, they also lose
priority.
Certificates of Title: Things that are covered by a certificate of title are excluded
from Article 9 unless they are PART OF AN INVENTORY
o Motor vehicles are generally excluded, but there are general laws that the
UCC has made about them
o 9-303 says that wherever the VALID certificate of title is, that is what law
governs. It doesnt matter where the debtor lives, or if there is any
relationship between where the collateral is titled and where the debtor lives.
A certificate of title is valid when a valid application and the applicable
fee are delivered to the appropriate authority
Local law covers perfection, the effect of perfection or nonperfection,
and the priority of a security interest in goods covered by a certificate
of title from the time goods become covered by the certificate of title
until the goods ceased to be covered by the certificate of title.

When a 2nd state issues a COT without notation of original SI:

PARTY

RESULT

Lien Creditor

Will take subject to the perfected SI.

9-316(d), 9-317(b)

Purchaser for Value

If SP fails to re-perfect with 4 mths

after issuance of the new COT, the SI
becomes unperfected as against a
purchaser for value under 9-316(e)
likely resulting in the purchaser
taking fee of the SE under 9-317(b)

Buyer IS NOT a person in the

business of selling goods of that kind,
gives value, receives delivery, after
issuance of the COT w/o knowledge
of the original SI

TAKES FREE of original security

interest

New SI that attaches and is perfected

after issuance of the COT w/o
knowledge of the original SI

ORIGNAL SECURITY INTEREST WILL

BE SUBORDINATE to new security
interest 9-337(2)

9-337(1)

What if the collaterals location changes but the debtor never gets a new
certificate of title?
o The perfection continues as long as it would have anyway, up to the end of
the five years, which means the 4 month grace period wouldnt apply.
o 9-303(b) A certificate of title remains valid unless it ceases to be valid under
the new state law or the new state issues a new certificate of title.

Priority

9-317: Basic Priority Rules lists the parties that will prevail over an
unperfected Security interest
9-102(a)(52) Lien Creditor: A creditor that has acquired a lien on the property
involved by attachment or levy. An assignee for benefit of creditors from the time
of assignment. A trustee in bankruptcy from the date of the filing of the petition. A
receiver in equity from the time of the appointment.
o A lien creditor will lose to a perfected secured party
o A lien creditor will win over an unperfected secured party
Exception: If a secured party has filed a financing statement and has
a security agreement, but they remain unperfected for another reason
(like the creditor hasnt yet given value), and they become perfected
after the lien attaches, then the (initially) unperfected secured party
will still win.
9-322 Priorities Among Conflicting Security Interests
o Between two perfected secured parties, first to file or perfect has priority
When you have two perfected secured parties, the first to file has
priority even if the other perfected first. This is true even if the other
perfected security interest hasnt attached yet. But the filing has to be
authenticated (either by a security agreement or written authorization
from the debtor). The rationale here is to protect the filing system.
o Between a perfected and unperfected secured party, the perfected party
wins
o Between two unperfected secured parties, the first to attach wins
9-204(a) After-Acquired Property Clause: The loans made today are secured
by the collateral provided to the creditor today and all collateral of a similar
category obtained by the debtor in the future
o 9-204(b) This clause is NOT valid as to consumer goods unless the debtor
acquires rights to the collateral within 10 days of the secured party giving
value
9-204(c) A security agreement may provide that collateral secures, or that
accounts, chattel paper, payment intangibles, or promissory notes are sold in
connection with, future advances or other value, whether or not the advances or
value are given pursuant to commitment.
o

Future Advances: 9-323(a): The collateral that the creditor takes today secures
the loans made today and loans made in the future. The code protects all loans by
the same lender to debtor, if it is w/in the time of the FS, even though it may not
have been contemplated at the time of the 1 st transaction.

9-322(a)(1)- Priority dates from the earlier of the time a filing covering the
collateral is first made or the SI is first perfected.
Dragnet Clauses: Under this code section, drafters of security agreements may
attempt to expand the security interest to cover unrelated obligations owed by the
debtor to the creditor
Future Loans
Same Class Test: Distinguish between consumer and business debts
they cant be cross-collateralized.
Plain Meaning Rule: UCC uses this test- look at intent through the
document itself. We look to the intent of the document AT THE TIME IT
WAS DRAFTED.
Same Class Plus Test: Same class + so related that crosscollateralization would be inferred
Prior Loans
Specific Reference Test: The collateral must be specifically
referenced in the agreement (In re Wollin)

Super Priority

PMSI have a super priority over other interests. The basic steps are:
o The seller who extends credit to the buyer or the lender who advances the
money to enable the buyer to purchase the collateral has a special equity in
the eyes of the law
o If the parties sign a security agreement, the seller/lender gets a PMSI
o Sellers PMSI gets super priority over other interests in order to encourage
lenders to lend and therefore consumers can buy.
9-324 (a) Where the collateral is CONSUMER GOODS, there are no further steps
required for a PMSI to have super priority.
o Unless it is a vehicle, because they require certificates of title and have their
own rules.
9-324(b) Where the PMSI is in INVENTORY, there are four requirements to get
super priority:
o PMSI must be perfected when the debtor receives possession of the
inventory. No grace period!
This is because inventory, by its nature, turns over quickly
o The secured party sends an authenticated notification to conflicting security
interest holder(s)
o The holder of the conflicting security interest receives the notification within
five years BEFORE debtor takes possession of the inventory
o The notification must describe the inventory
9-324(d) Where the PMSI is in LIVESTOCK, the requirements (but for the grace
period) are the same as for inventory:
o PMSI must be perfected when the debtor receives possession of the
livestock. No grace period!
Farm products, like inventory, turn over quickly
o The secured party sends an authenticated notification to conflicting security
interest holder(s)

o The holder of the conflicting security interest receives the notification within
six months BEFORE debtor takes possession of the inventory
o The notification must describe the inventory
9-317(e)/9-324(a) All other PMSI (most often, EQUIPMENT) must be perfected
either prior to the debtors possession or during a 20 day grace period following
the possession of the goods in order to take advantage of a relation-back of priority
to that date.
o Perfection can occur through possession or filing, depending on what is
appropriate for the collateral.
o For a conditional sale, the 20 day grace period begins to run on the day of
possession
o For a sale on approval, the 20 day grace period begins to run on the day of
acceptance
9-324(g)(1) PMSI v. PMSI
o If two creditors each have a PMSI in the same collateral, then the creditor
that supplied the collateral will have super priority over the PMSI creditor
who only financed (provided money) for the collateral
9-382 Control and Priority: Where perfection occurs by control (think
investments, deposit accounts) the first to gain control has priority.
o Four ways in General:
Filing Statement
For everything except consumer deposit accounts
Hold the account at your own place
Get a control agreement
Become an entitlement holder
This is the best way to get priority in a deposit account get
yourself named on the account.
o Why? Control beats out other forms of perfection
A secured party who has control will prevail over all other claimants
who dont have control. If more than one secured party has control,
then the parties are ranked in priority according to the time of
obtaining control.
Exception: In deposit accounts, priority is determined differently.
Additionally, the right to set-off a deposit account will prevail
over all forms of control EXCEPT entitlement holders.
o Deposit Accounts
You cannot gain control of a deposit account with a filing statement
Order of priority in deposit accounts:
9-327(4) Control through becoming a customer of the bank
where an account is held
o i.e., the secured party puts its name on the account and
becomes a customer of the back with respect to the
account
9-327(3) Control through holding the account
o i.e., moving the account to a financial institution owned by
the secured party

9-327(2) Control through agreement according to priority in time

o Basically, if neither secured party puts its name on the
account or moves the account to a financial institution that
it owns, then the secured party that established control
first will win.
9-107 Letters of Credit
o The issuing bank must consent to assignment of letter of credit rights. This
consent gives control and perfection.

Continuation/Extinguishment of Security Interests

9-315(a) General Rule: A security interest will continue through the sale of
collateral unless the parties say that the interest is removed
9-320(a) BIOCB: A buyer in the ordinary course of business (other than farm
products) takes free of a security interest created by the seller, EVEN IF the
security interest is perfected and the buyer knows of its existence. Whether
someone is a BIOCB is a mixed question of law and fact.
o 1-201(b)(9) Buyer in the Ordinary Course of Business
A person that buys goods in good faith
Without knowledge that the sale violates the rights of another person
in the goods
And in the ordinary course from a person, other than a pawnbroker, in
the business of selling goods of that kind.
o In other words, there are 6 conditions that need to be met to take free of a
security interest:
BOCB of sellers business
Part of being a buyer means that you must give new value. If
anything looks like a trade or a satisfaction of a preexisting debt,
you are not a buyer.
Dont buy in bulk
Who buys from one in the business of selling goods of that kind
Whether the seller is in that business or not is determined by
how the seller holds himself out, and what the buyer reasonably
believes.
In good faith without knowledge of violation of SI
No farm products from farming operation
Creditor must part w/the possession
Competing SI must be one created by the buyers seller
So what if the bank has a perfected security interest in As
collateral, then A sells to B (with knowledge of the interest), and
B sells to C (but doesnt tell them about the banks interest)?
o C will take subject to the banks interest because the
competing interest wasnt created by his seller (B); it was
created by A.

9-320(b) Buyer of Consumer Goods: 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:
o (1) without knowledge of the security interest;
o (2) for value;
o (3) primarily for the buyer's personal, family, or household purposes; and
o (4) before the filing of a financing statement covering the goods.
Buyers Priority Guide:
o Who will have higher priority than a perfected secured party?
9-315(a) Sale authorized free of security interest by the secured party
9-320(a) Buyer in the Ordinary Course of Business
9-320(b) Personal goods buyer (unless the secured party re-files)
9-331(a) Holder in due course of a negotiable instrument
Think bona fide sale of promissory notes or chattel paper
o Who will have lower priority than a perfected secured party?
9-317(e) A buyer who buys subject to a properly perfected PMSI, even
if they buy before perfection (because the secured party has 20 days
to perfect)
9-320(e), comment 8: A BIOCB when the secured party has possession
of the goods.
The comment says that you cant truly be a buyer in the ordinary
course of business if the secured party still has possession of the
collateral.

Consignments

True Consignment: The owner of goods (consignor) sends them to a retailer

(consignee) for sale to the public. The consignees creditors cannot touch the
goods if they are not sold.
o True consignments must be analyzed under 9-102(a)(20) to determine
whether they fall within the scope of Article 9.
o If they DONT fall within the scope of Article 9, then title has been retained
by the consignor, who will win against the secured creditors of the
consignee.
o Factors that indicate a true consignment:
Consignor will repossess goods if theyre not sold
Consignor controls the price
Consignor controls the proceeds from the sales
Consignor bears the risk of loss
Disguised Sale With Security Interest: Seller and Secured Creditor sells goods
to Buyer and Debtor. Buyer is gives a security interest to its other secured
creditors. Buyer gives seller a security interest in the good and the seller gives
buyer credit that extends until the sale.
o If it is a disguised sale, it is not a consignment at all, and the transaction
falls within the scope of Article 9. The seller must comply with the article to
perfect his interest.
o Factors that indicate a disguised sale are:

Buyer keeps the goods if theyre not sold

Buyer controls the price
Buyer bears the risk of loss
9-102(a)(20) Consignments
o Some true consignments fall within the scope of Article 9. These are any
transaction, regardless of its form, in which a person delivers goods to a
merchant for the purpose of sale and:
The merchant
Deals in goods of that kind under a name other than the name of
the person making delivery,
Is NOT an auctioneer, AND
Is not generally known by its creditors to be substantially
engaged in selling the goods of others.
o When the consignee is known to be a consignee, then we
dont care to protect the bank by imposing a filing
requirement, because they should already be on notice
that the consignee doesnt have title to the goods.
With respect to each delivery, the aggregate value of the goods is
$1,000 or more at the time of delivery
The goods are not consumer goods immediately before delivery, AND
The transaction does not create a security interest that secures an
obligation (in other words, it isnt a disguised sale)

Leases

1-203 Leases Distinguished From Security Interest

o (a) Whether a transaction is a lease or a security interest is determined by
the facts of each case.
o (b) A transaction in the form of a lease creates a security interest if the
consideration that the lessee must pay for rights to 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
1-203(e) The remaining economic life of the goods must be
determined with reference to the facts and circumstances at the
time the transaction is entered into.
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,
OR
The lessee has an option to renew the lease for the remaining
economic life of the goods (or become the owner of the goods) for no
additional consideration or for nominal consideration upon
compliance with the lease agreement

1-203(d) Consideration is nominal when it is less than the

lessees reasonably predictable cost of performing under the
lease agreement if the option is not exercised.

*NOTE that the factors above are bright line rules. If the transaction meets
any one of them, it
is a disguised sale.
o (c) A transaction in the form of a lease does NOT create a security interest
merely because:
The present value of the consideration the lessee is obligated to pay
the lessor for the right to possession and use of the goods is
substantially equal to or is greater than the fair market value of the
goods at the time the lease is entered into
The lessee assumes risk of loss of the goods
The lessee agrees to pay, with respect to the goods, taxes, insurance,
filing, recording, or registration fees, or service or maintenance costs;
The lessee has an option to renew the lease or to become the owner of
the goods;
The lessee has an option to renew the lease for a fixed rent that is
equal to or greater than the reasonably predictable fair market rent for
the use of the goods for the term of the renewal at the time the option
is to be performed; OR
The lessee has an option to become the owner of the goods for a fixed
price that is equal to or greater than the reasonably predictable fair
market value of the goods at the time the option is to be performed.
*NOTE that the above are just factors. No single one will create a sale, but
many together may.

2A-307 Priority of Leases

o 2A-307(3) A lessee will take subject to a secured creditor of the lessor
unless
9-317(c) The lessee gives value and receives delivery of the collateral
without knowledge of the security interest before it is perfected. In
other words, a lessee will take priority over an unperfected secured
party.
9-321(c) The lessee is a lessee in the ordinary course of business
2A-103(1)(o) "Lessee in ordinary course of business"
means a person who
o In good faith AND
o Without knowledge that the lease to him is in violation of
the ownership rights or security interest or leasehold
interest of a third party in the goods
o Leases in ordinary course from a person in the business of
selling or leasing goods of that kind.
"Leasing" may be for cash or by exchange of other
property or on secured or unsecured credit and

includes receiving goods or documents of title under

a pre-existing lease contract, but does not include a
transfer in bulk or as security for or in total or partial
satisfaction of a money debt.
The lessor may NOT be a pawnbroker.
9-323(f) The good secures future advances made after the earlier of:
The time the secured party acquires knowledge of the lease OR
45 days after the lease contract becomes enforceable.
This subsection will NOT apply if the advance is made pursuant
to a commitment entered into without knowledge of the lease
and before the expiration of the 45 day period.

Priority of Article 2 Claimants

9-110 Article 9 Scope, covering Article 2 claimants
o A security interest arising under any of the following is subject to Article 9
2-401 Conditional Sale
2-503 Shipment under reservation
2-711(3) Rejection or Revocation by Buyer
2A-208(5) Rejection or Revocation by Lessee
However, until the debtor obtains possession of the goods:
o The security interest is enforceable, even if 9-203(b)(3) hasnt been satisfied
o Filing is not required to perfect the security interest
o The rights of the secured party after default by the debtor are governed by
A2 and A2A; AND

o The security interest has priority over a conflicting security interest created

by the debtor
2-711(3) Buyers Remedies in General; Buyers Security Interest in
Rejected Goods
o On rightful rejection or justifiable revocation of acceptance, a buyer has a
security interest in goods in his possession or control for any payments made
on their price and any expenses reasonably incurred in their inspection,
receipt, transportation, care, and custody and may hold such goods and
resell them in like manner as an aggrieved seller.
o An Article 2 secured creditor who retains control or possession of the
collateral will take priority over an Article 9 secured creditor.
2-702 Sellers Remedies on Discovery of Buyers Insolvency
o A seller who discovers a buyer to be insolvent may refuse delivery except for
cash, including payment for all goods theretofore delivered under the
contract, and stop delivery under 2-705.
o Where the seller discovers that the buyer has received goods on credit while
insolvent, he may reclaim the goods upon demand made within ten days
after the receipt.

If a misrepresentation of solvency has been made to the particular

seller in writing within three months before delivery, the 10 day limit
does not apply. Instead, must make the demand in a reasonable time.
o The sellers right to reclaim is subject to the rights of a BIOCB or other good
faith purchaser. Successful reclamation of goods excludes all other
remedies with respect to them.
If you have a good faith purchaser (which will include an Art 9 creditor),
this section cannot be used as recourse. The only way you can stake a
claim on the goods you sold on credit is if you perfected your interest
in the inventory, per 9-324(b). Then you would have a PMSI and super
priority over competing interests.
A creditor acting in bad faith, however, is going to lose priority.
The competing creditor has remedies outside Article 9 to ensure
that it is made whole, including restitution under 1-103(b).
If the seller CAN reclaim his goods, hed better hope that the goods
recoup all of his costs, because he has no other recourse now. If you
use this section, it is all you get.

Priority of Statutory Lien Holders

9-333 Priority of Certain Liens Arising by Operation of Law

o (a) A possessory lien is one which
Secures payment of an obligation for services or materials furnished
with respect to goods by a person in the ordinary course of the
persons business
Which is created by statute or rule of law in favor of the person, AND
Whose effectiveness depends on the persons possession of the goods.
o (b) Priority of possessory lien: A possessory lien on goods has priority
over a security interest in the goods unless the lien is created by a statute
that expressly provides otherwise
If the lienholder gives up possession, they also give up priority. But the
possession does not have to be continuous. As soon as the collateral is
back in the lienholders possession, the lien reattaches.

Real Property Concerns of Article 9

9-102(a)(41) Fixtures are goods that have become so related to a particular real
property that an interest in them arises under real property law.
o You can create an Article 9 security interest in a fixture.
9-344(a) This security interest does NOT extend to ordinary building
materials
Traditional Test for a Fixture has three elements (George v. Commercial Credit
Corp). Personality becomes affixed to real property when:
o Actual physical annexations to the realty (connectedness), AND
o Application or adaptation to the use or purpose to which the realty is
devoted, AND

o Intention of the person making annexation to make a permanent accession

to the freehold
9-501(a) General Rule: In order to perfect, you must file a fixture filing in every
county in which the fixture is, in the same office where mortgages are filed.
o 9-501(b) Exception to the General Rule for Transmitting Utilities
The office in which to file a financing statement to perfect a security
interest in collateral, including fixtures, of a transmitting utility is the
state office (like the Secretary of State). The financing statement also
constitutes a fixture filing as to the collateral indicated in the financing
statement which is or is to become fixtures.
o Note: It only matters that you file in the real estate records if you are going
to battle with an encumbrance on the real property. If you dont, it isnt
technically a fixture filing, but you can still be perfected against other
creditors.
9-502 Contents of Fixture Filing
o (a) A financing statement is sufficient if it includes:
The name of the debtor
The name of the secured party
A description of the collateral
o (b) A fixture filing must include all of the above, but must also
Indicate specifically that it covers fixtures
Indicate that it is to be filed for record in the real property records
Unless youre using a mortgage as the fixture filing
Provide a description of the real property to which the collateral is
related sufficient to give constructive notice of a mortgage under the
law of this State if the description were contained in a record of the
mortgage of the real property AND
If the debtor does not have an interest of record in the real property,
provide the name of the record owner.
o (c) A record of a mortgage is effective, from the date of recording, as a
financing statement filed as a fixture filing, but only if:
The record indicates the goods that it covers
The goods are or are to become fixtures
The record satisfies parts (a) and (b) of this section, with the exception
that
It neednt indicate that it is to be filed in the real property
records (because its a mortgage, so thats a given)
The record is duly recorded
9-334 Priority of Security Interests in Fixtures
o Keep this in mind: If your security interest gets filed BEFORE a mortgage of
any kind is recorded, then you can walk away from this analysis. The fixture
filing will win.
o (c) General Rule: A security interest in fixtures is subordinate to a
conflicting interest of an encumbrancer or owner of the related real property
other than the debtor.

(e) First to file/perfect Exception to the General Rule

(Mostly)
A perfected security interest in fixtures has priority over a
conflicting interest of an encumbrancer or owner of real property
if:
o (1)The debtor has an interest of record in the real property
or is in possession of the real property, and the security
interest:
Is perfected by a fixture filing BEFORE the interest of
the encumbrancer or owner is of record, AND
Has priority over any conflicting interest of a
predecessor in title of the encumbrancer or owner
(because along with title, the new owner would
inherit priority if some had previously existed)
o (2) BEFORE the goods become fixtures, the security
interest is perfected by any method permitted by this
article and the fixtures are readily removable
Factory or office machines
Equipment that is not used for the operation of the
real property
Replacements of domestic appliances that are
consumer goods
Pay attention to WHOSE appliances these are.
If the Landlord owns them, they arent
consumer goods, they are equipment.
The ones that are consumer goods will usually
qualify under this rule and for super priority as
a PMSI. Since this will probably only be relevant
against a construction mortgagee (so super
priority is trumped), the fact that these are
PMSIs is only relevant to the extent that the
security interest will perfect on attachment.
Unlike the PMSI in part d of this section, you do
NOT have to file to perfect.
o (3) The conflicting interest is a lien on real property
obtained by legal or equitable proceedings AFTER the
security interest was perfected.
o (4) The security interest is
Created in a manufactured home in a manufacturedhome transaction
When dealing with a manufactured home,
despite this code section, you should always
play it safe and file a real estate mortgage, a
fixture filing, and a certificate of title to protect
your interest where possible.

Perfected pursuant to a statute described in 9-311(a)

(2)
(d) PMSI Super Priority Exception to the General Rule
A perfected security interest in fixtures has priority over a
conflicting interest of an encumbrancer or owner of the real
property if the debtor has an interest of record in or is in
possession of the real property and
o The security interest is a PMSI
o The interest of the encumbrancer or owner arises before
the goods become fixtures, AND
o The security interest is perfected by a fixture filing before
the goods become fixtures or within 20 days thereafter
Remember that many fixtures start out as consumer goods
(which will perfect on attachment)- but if you want super priority
in them once they become fixtures, you must ALWAYS file a
fixture filing.
(h) Construction Mortgagee Exception to PMSI Super
Priority: A mortgage is a construction mortgage to the extent
that it secures an obligation incurred for the construction of an
improvement on land, including the acquisition cost of the land,
if a record of the mortgage so indicates.
o A PMSI in fixtures is SUBORDINATE to a construction
mortgage if
The mortgage is recorded before the goods become
fixtures, AND
The goods become fixtures before the completion of
the construction.
o This rule ONLY helps if youre losing to a PMSI. 9-334(e)(1)(4) will still trump a construction mortgagee if they apply.
o (f) Exception to Everything- Priority Based on Consent/Right to
Remove
A security interest in fixtures, whether or not perfected, has priority
over a conflicting interest of an encumbrancer or owner of the real
property if:
The encumbrancer or owner has, in an authenticated record,
consented to the security interest or disclaimed an interest in the
goods as fixtures; OR
The debtor has a right to remove the goods as against the
encumbrancer or owner
o This priority will continue for a reasonable time if the
debtors right to remove the goods as against the
encumbrancer or owner terminates.
o (i) Priority of a Security interest in Crops
A perfected security interest in crops growing on real property has
priority over a conflicting interest of an encumbrancer or owner of the

real property if the debtor has an interest of record or is in possession

of the real property.
9-604 Procedure if Security Agreement Covers Fixtures
o (c) Removal of Fixtures: If a secured party holding a security interest in
fixtures has priority over all owners and encumbrancers of the real property,
the secured party, after default, may remove the collateral from the real
property.
If they dont want to remove the collateral upon default, it is possible
for state law to carve out a remedy for them.
o inre(d) Injury Caused by Removal: A secured party that removes
collateral shall promptly reimburse any encumbrancer or owner of the real
property, other than the debtor, for the cost of repair of any physical injury
caused by the removal.
The secured party need not reimburse the encumbrancer or owner for
any diminution in value of the real property caused by the absence of
the goods removed or by any necessity of replacing them.
A person entitled to reimbursement may refuse permission to remove
until the secured party gives adequate assurance for the performance
of the obligation to reimburse.
9-335 Accessions occur when goods are affixed to other goods
o (a) Creation: A security interest may be created in an accession and
continues in collateral that becomes an accession.
o (b) Perfection: If a security is perfected when the collateral becomes an
accession, the security interest remains perfected in the collateral
o (d) Certificates of Title: A security interest in an accession is
SUBORDINATE to a security interest in the whole which is perfected by
compliance with the requirements of a certificate of title statute.
This is the only type of accession that has its own priority rules. Per 9335(c), all other accessions will follow the standard priority rules.
An example would be tires on a car. If a creditor is perfected in the
entire vehicle, and later, another creditor perfects a PMSI in a new set
of tires, the original secured creditor will win. (A very small minority of
states say that tires arent an accession).
o (e) Removal After Default: After default, a secured party may remove an
accession from other goods if the security interest in the accession has
priority over the claims if every person having an interest in the whole.
o (f) Reimbursement Following Removal: A secured party who is entitled
to remove shall promptly reproduce any holder of a security interest, other
than the debtor, for any physical damage done to the collateral caused by
removal of the accession.
9-336 Commingling occurs when things that initially had separate identities get
totally integrated and become one, losing their separate statuses. Goods become
so combined with other goods that they cant be recovered.

o (b) Lack of Security Interest: No security interest exists in commingled

goods as such. However, a security interest may attach to a product or mass
that results when goods become commingled goods.
o (c) Attachment: If collateral becomes commingled goods, a security
interest attaches to the product or mass.
o (d) Perfection: If a security interest in collateral is perfected before the
collateral becomes commingled goods, the security interest that attaches to
the product or mass is also perfected.
o (f) Conflicting Security Interests in a Product or Mass: If more than
one security interest attaches to the product or mass under subsection c, the
following rules determine priority:
A security interest that is perfected under subsection d has priority
over a security interest that is unperfected at the time the collateral
becomes commingled goods.
If more than one security interest is perfected under subsection d, the
security interests rank equally in proportion to the value of the
collateral at the time it became commingled goods.

Federal Debts and Taxes

Federal Tax Liens apply to all property and rights in property, and the lien is
deemed to arise on the date of assessment.
The Federal Priority Statute: priority for all federal claims, these claims are
paid first when a debtor becomes insolvent.
o This can be trumped by a more specific statute (U.S. v. Estate of Romani)
o Many exceptions follow, including purchasers, security interest holders,
mechanics lien holders, and juridical creditors when those interests win the
race.
o Section 6323h defines the General Rule for a security interest
The collateral has to be in existence
A floating security interest in after-acquired property is
subordinate to a federal tax lien under the general rule. Note
that there is an exception.
It is protected against a judicial lien creditor (therefore perfected)
Value has been given/excludes future advances
Basic Priority
o Generally, it is a race between perfection of the Creditor and notice of the
Federal Tax Lien.
If the Federal Tax Lien gives notice before the Creditor perfects, then
the tax lien wins
If notice of the lien is not filed before the creditor perfects, then the
creditor wins
o If the secured party does not have knowledge of the federal tax lien, then
they will continue to have priority for 45 days.
After Acquired Property (Exception to the General Rule)

o A tax lien will be SUBORDINATE to a security interest in after acquired

collateral under a floating lien if:
A written security agreement is executed BEFORE the tax lien is filed
The security interest is PERFECTED at the time the tax lien is filed
The secured party had made the loan in the ordinary course of her
business
The collateral is acquired by the debtor/taxpayer in the ordinary course
of her business
The loans (or purchases) are made before the 46th day after the date of
the tax lien filing and without knowledge of the tax lien
The lender has 45 days or until he acquires notice of the lien to
make an advance secured by after-acquired collateral
The collateral must be acquired within 45 days after the filing of the
lien. Knowledge is irrelevant.
While loans cant be advanced after knowledge of the tax lien,
collateral can be collected for up to 45 days, no matter what the
parties know about the lien.
o A PMSI in after-acquired collateral will take priority over a federal tax lien.
Future Advances (Exception to the General Rule)
o Potential Future Advance Issues
Applies when there is a competing tax lien, judgment lien, or purchase
against a specific item of collateral
Did the secured creditor have priority generally in that item of
collateral?
Does the secured creditor have priority in future advances against that
item of collateral?
What is the amount of their priority claim?
o Federal Tax Liens: An secured partys interest in the collateral securing a
future advance will be SUPERIOR to a federal tax lien if:
The written security agreement covering the property was executed
BEFORE the tax lien was filed
The security interest was perfected BEFORE the tax lien was filed
The advance was made within 45 days of the filing of the tax lien
The bank had NO knowledge of the tax lien.
o 9-323(d) Buyer of Goods Securing Future Advances
A buyer NOT in the ordinary course of business will take goods that are
being used as collateral to secure future advances free of that security
interest at the time that
The secured party acquires knowledge of the buyers purchase
OR
45 days after the purchase
After the first of those conditions is met, if the secured party makes
any more advances, they are no longer secured by the collateral.
These conditions dont apply if the advance is made pursuant to a
commitment entered into without knowledge of the buyers purchase
and before the expiration of the 45 day period.

o 9-323(b) Lien Creditors Priority in Future Advances

Before 45 days after the lien attaches: Advances in this period
remain secured by property levied against. Any loans made in that 45
days will continue to be secured. Knowledge of the lien is irrelevant. A
creditor , even aware of the lien, can continue to make advances
during these 45 days and they will remain secured.
After 45 days after lien attaches: Advances are subordinate to the
lien unless they are made without knowledge of the lien, or pursuant to
a binding commitment made without knowledge of the lien.

FUTURE ADVANCESS MADE:

FUTURE ADVANCE
MADE:

< 45 DAYS

> 45 DAYS

After Federal Tax

Lien 6323(d)

Advance made without

knowledge are secured
by the item levied
against

Advances are
subordinate to tax lien

After Buyer 9-323(d)

Advance made without

knowledge (or pursuant
to a commitment made
w/o knowledge) are
secured by the
purchased item

Buyer takes free of

future advance

After Judicial Lien

Advances in this period

remain secured by
property levied against

Advances are
subordinate unless
made W/O knowledge or
pursuant to binding
commitment made w/o
knowledge

9-323(b)

Bankruptcy

Bankruptcy gives people a clean slate and discharges a debtor of his or her
debts. The key concern is maximizing what unsecured creditors will get perfected
secured creditors will get their collateral back.
o Automatic Stay: Once bankruptcy has been declared, an automatic stay
puts a freeze on all of the bankrupts creditors, who now cannot get anything
unless they go through the bankruptcy court.
o A Bankruptcy Trustee is the advocate for the unsecured creditors. Only
through bankruptcy are unsecured creditors going to recover collateral in the
event of the debtors insolvency.

Chapter 7 Liquidation: Debtor must turn over all non-exempt assets. Trustee
liquidates the property and provides creditors with the proceeds. Debtor receives a
discharge and gets a fresh start.
Chapters 11, 12, &13 Rehabilitation: Debtor retains her property, court and/or
creditors approve a repayment plan, which may or may not fully pay creditors.
Trustees Power in Bankruptcy: Trustees are given a number of useful rights in
resisting or attacking creditors claims
o 544(a) Strong Arm Clause: The bankruptcy trustee has all the rights a
Lien Creditor had under state law (9-317(a)(2)) as a claim to all other debtor
assets. Basically it allows the trustee to push an unperfected secured
creditor down to the level of a general creditor.
Unperfected secured creditors and unsecured (general)
creditors will receive a pro rata distribution of the bankrupts estate
General Rule: Whether a competing interest is perfected is
determined at the exact moment that the bankruptcy petition is
filed with the court. There is no grace period.
o Exception: When the creditor has a PMSI, the creditor
still has a 20 day grace period. The filing of a bankruptcy
petition within that 20 days wont cut it off.
A perfected secured creditor has priority over unsecured or
unperfected competing interests and will retrieve the value of their
collateral in the event of bankruptcy.
Unperfected secured creditors can always be strong-armed by the
trustee, and they are really the only group that this applies to. If the
creditor is a USP, then there is no need to deal with preference or
fraud. Conversely, if the creditor is completely unsecured or has a
perfected secured interest, this clause doesnt help the trustee at all.
o 547(b) Preference: A transfer (includes the creation of a SI in the debtors
property) made or suffered by the bankrupt to pay or secure a pre-existing
debt within the 90 day period preceding the filing of the bankruptcy petition,
which has the effect of giving the transferee (creditor) a greater payment
than the creditor would get under the usual bankruptcy distribution.
Policy Consideration: Preferences happen when creditors find out
that the debtor is having financial problems, and they try to secure or
better their positions to the detriment of other creditors. The
bankruptcy code sees this as an unfair last minute action.
Preference Requirements: If the transaction meets the following six
elements, then the bankruptcy trustee could have the payment that
was made prior to bankruptcy brought back into the debtors estate.
Note that per 547(g) the burden of proof is on the Trustee to show that
there is a preference.
Transfer of debtors property
o Either money or a Security Interest
To a creditor/claimant
On account of an antecedent debt

o Timing Rule 547(e)(2)(a): When the debtors property is

a security interest, the date of attachment is the date of
transfer, unless perfection occurs more than 30 days after
attachment. Then the date of filing is the date of transfer.
Debtor must be insolvent
o Insolvency is presumed in the 90 days prior to bankruptcy
Transfer itself must have occurred within the 90 days
before Bankruptcy
o An insider who has a relationship with the bankrupt is
subject to a 1 year look-back period, rather than the 90
days.
Creditor receives more than they would have gotten
under normal bankruptcy
o You will never meet the more than requirement if your
creditor is fully secured, meaning it will never be a
preference
If the creditor is perfected, you wont meet this
requirement because the creditor is guaranteed the
value of the collateral
If the creditor is fully secured but unperfected, you
wont meet this requirement because they will be
Strong-Armed by the Trustee pursuant to 544(a)
o if creditor is under-secured or unsecured (not enough
collateral to cover loan), you will always meet the more
than requirement
547(c) Preference Exceptions: If the transaction otherwise fulfills
the requirements of a preference, one of the following exceptions can
make it nonetheless outside the reach of the bankruptcy trustee. Note
that the burden of proof is on the creditor to prove that one of the
following exceptions applies.
(1) Substantially Contemporaneous: The transaction is done
on the same day if
o at the time of the loan that the debtor and creditor
intended the transfer to be substantially contemporaneous
AND
o in fact was substantially contemporaneous (dates are close
enough to be contemporaneous)
Holidays, weekends
(2) Ordinary Course: If payments are made in the ordinary
course of business, they are not a preference
(3) PMSI: A PMSI is not a preference if
o A NEW security agreement is signed having a description
of the collateral
Previously existing Floating Liens can be
preferences, whether they are PMSIs or not.

548

However, floating liens usually apply to inventory,

which have to be analyzed under section (5). Be
careful here.
o For the purchase of collateral
o Debtor acquired such collateral
o Perfected within 30 days of possession
PMSIs still have to be perfected within 20 days to
have super priority over other perfected secured
parties, but they get 30 days to perfect against a
bankruptcy trustee.
(4) Net Result Rule: Any time you have unsecured new value,
you subtract the new value from the preference.
o Policy: We are more sympathetic to the creditor because
they took on more risk.
o Example: In early 2013, JC borrowed $1,000 from BWB; it
was a signature loan (no collateral). On Sept 25 2013, J
made a $500 payment to the bank (assume that his
payment is not in the ordinary course), but on Oct 4 he
borrowed $300 more from the bank, giving it a SI in his
sword collection. The bank never filed a FS, and J filed a
bankruptcy petition on Nov 8, 2013. How much, if
anything can his bankruptcy trustee recover from the
bank?
BWB will get credit for the amount of new credit. The
Trustee can recover $200. The creditor gave new
value of $300 w/o receiving anything in return. $500
(initial preference) - $300 (get credit for) = $200
preference
If they were perfected here, the creditor would have
gotten something in return and they would not have
fallen w/in the exception preference would have
stay the same and they would get the new value
back
o They were unperfected they wouldnt get anything in
return will decrease the value of preference
(5) Picture Rule/ Floating Lien: Applies to inventory and
accounts receivable. Take a picture 90 days before the
bankruptcy and the day of bankruptcy. The creditor has a
preference only to the extent that they are better off on the day
of bankruptcy relative to the position they were in 90 days prior.
(a) Fraudulent Transfers
A trustee may recover funds and add them to the estate from
two types of fraudulent transfers:
o Where the transfer from an insolvent debtor does not give
reasonably equivalent value in exchange

i.e., the transfer was less than fair market value

o The transferor and the transferee have the ACTUAL
INTENT to defraud the debtors creditors
The look-back period on a fraudulent transfer is 2 years. Under
544(b), the trustee can also bring a claim under state law.
Policy: In the interest of fairness, the code will take back the
funds from tainted transfers in order to benefit the other
creditors who acted in good faith.
Non-Consensual Liens and the Trustee
o Judgment Liens are subject to preference attacks as if they were any other
secured creditor.
o Statutory Liens may or may not be valid against a trustee.
545 says that a statutory lien will be valid against a trustee if:
The lien would be good against a Bona Fide Purchaser, whether
or not one actually exists, AND
The lien did not arise only due to insolvency.
o 545(1) Specifically states that liens that arise due to
insolvency or bankruptcy proceedings are VOID against
the trustee.
547(c)(6) says that Statutory Liens are NOT subject to preference
attacks.

Proceeds

9-102(a)(64) Definition of Proceeds

o Whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral
9-102(a)(9) Cash Proceeds: Are defined as proceeds in the form of
money, checks, deposit accounts, or the like.
o Whatever is collected on, or distributed on account of, collateral
o Rights arising out of the collateral
o To the extent of the value of collateral, claims arising out of the loss,
nonconformity, or interference with the use of defects or infringement of
rights in, or damages to, the collateral, OR
o To the extent of the value of collateral and to the extent payable to the
debtor or the secured party, insurance payable by reason of the loss or
nonconformity of, defects or infringement of rights in or damage to, the
collateral.
Continuation of a Security Interest in Proceeds
o 9-315(a)(2) Attachment: A security interest attaches automatically to any
identifiable proceeds of collateral
Even if the owner authorizes a sale of collateral free of the security
interest, the interest in the collateral may be extinguished, but the
interest in the proceeds will continue.
o 9-315(c) Perfection: A security interest in proceeds is perfected if the
security interest in the original collateral was perfected

9-315(d) Continuation of Perfection: Perfection of a security

interest in proceeds only continues for 20 days, unless one of the
following applies
(1) If the following conditions are satisfied, then there is no need
to re-perfect
o (A) A filed financing statement covers the original collateral
o (B) The proceeds are collateral in which a security interest
may be perfected by filing in the office in which the
financing statement has been filed.
In this case, perfection will continue until the
financing statement expires, or for 20 days,
whichever is later.
o (C) The proceeds are not acquired with cash proceeds
These are called Second generation proceeds and
different jurisdictions treat them differently.
(2) Identifiable Cash Proceeds will be perfected indefinitely
o 9-315(b) Identifiable cash proceeds are those which can
be identified by tracing
If the creditor can prove the proceeds were
wrongfully taken and can prove what fund they went
into, we still consider them identifiable
When the debtor withdraws money from a
commingled account, we assume he spends his own
money first
(3) If the proceeds are a type of collateral in which the creditor is
perfected for some reason other than the fact that they were
perfected in the original collateral, there is no need to re-perfect.
o For example: A creditor has a perfected security interest in
all business machines of the debtor, and the debtor trades
a computer (collateral) for a new computer (proceeds).
Since the creditors security interest covers all business
machines, they are perfected in the new computer
regardless of whether they were ever perfected in the
original collateral.
Extinguishing a Security Interest in Proceeds
o 9-315(d) If one of the 3 requirements under this section isnt met, then the
proceeds will become unperfected after 20 days if the creditor doesnt re-file.
o 9-340(a) Recoupment or Set-off
If cash proceeds are held in a deposit account, and the bank exercises
its right to recoupment or set off, then the bank can take the cash free
of any other creditors security interest AT ANY TIME.
This is because cash proceeds can be traced until they fall into
the hands of a bona fide purchaser, and when a bank sets of a
valid debt, it is effectively a bona fide purchaser.

Timing doesnt matter here when a secured creditor goes up

against a set off, they are going to lose.
o 9-332 Transfer of Money or Funds From a Deposit account
Cash proceeds given to a third party will pass to them free of any
security interest, as long as that party isnt acting in collusion with the
debtor to defraud the secured party.
Priority in Proceeds
o 9-322(b)(1) General Rule: The time of filing or perfection as to a security
interest in collateral is also the time of filing or perfection as to a security
interest in proceeds. There is no such thing as super priority in proceeds.
Even when you have a PMSI, or accounts receivable, you still look to the first
in time rule.
Exception: 9-330 Purchaser of Chattel Paper
(a) has priority over a security interest in the chattel paper
which is claimed merely as proceeds of inventory if:
o The purchaser gives NEW VALUE for the chattel paper in
GOOD FAITH and in the ORDINARY COURSE OF BUSINESS,
and either takes POSSESSION of the chattel paper or
obtains control of it in its electronic form AND
o The chattel paper does not indicate that it has been
assigned to an identified assignee other than the
purchaser.
(c)(2) has priority in the proceeds of the purchased chattel
paper or cash proceeds of the specific goods, even if the
purchasers security interest is unperfected.
Policy: Chattel paper financiers grease the wheels of commerce
and keep businesses going. We want to incentivize financing
chattel paper. Secured parties protect themselves against this by
providing that debtors who use chattel paper as collateral are in
default.

Default

9-207 Pre-Default Duties of the Secured Party in Possession of Collateral

o (a) Reasonable care: A secured party shall use reasonable care in the
custody and preservation of collateral in the secured party's possession.
1-302(b) Says that this obligation, along with good faith and diligence,
cannot be waived.
o (b) Expenses, risks, duties, and rights when secured party in
possession: If a secured party has possession of collateral:
(1) reasonable expenses, including the cost of insurance and payment
of taxes or other charges, incurred in the custody, preservation, use, or
operation of the collateral are chargeable to the debtor and are
secured by the collateral;
(2) the risk of accidental loss or damage is on the debtor to the extent
of a deficiency in any effective insurance coverage;

i.e., If the collateral is fully insured, then the debtor owes nothing
in the event of an accident
(3) the secured party shall keep the collateral identifiable, but fungible
collateral may be commingled; and
(4) the secured party may use or operate the collateral:
(A) for the purpose of preserving the collateral or its value;
(B) as permitted by an order of a court having competent
jurisdiction; or
(C) except in the case of consumer goods, in the manner and to
the extent agreed by the debtor.
o (c) A Secured Party having possession or control of deposit
accounts, electronic chattel paper, investment property, or letter of
credit rights
(1) May hold as additional security any proceeds, except money,
received from the collateral
(2) Shall apply money received from the collateral to reduce the
secured obligation OR remit it to the debtor, AND
(3) May create a security interest in the collateral
o (d) Buyer of Rights to Payment: If the secured party is a buyer of
accounts, chattel paper, payment intangibles, or promissory notes or is a
consignor (remember that these sales fall within the scope of Article 9, even
though they are true sales and not security interests)
(1) The duty to exercise reasonable care and preserve rights against
prior parties does NOT apply, unless the buyer is entitled under an
agreement
To charge back uncollected collateral OR
Otherwise to any recourse against the debtor or secondary
obligor based on the nonpayment or other default of an account
debtor or other obligor on the collateral
(2) Subsections b and c dont apply if the buyer has no recourse
against the debtor or anyone else, the buyer alone is responsible for
the collateral and may handle it in any way he likes.
9-210(b) Requests regarding a list of collateral: a secured party, other than a
buyer of accounts, chattel paper, payment intangibles, or promissory notes or a
consignor, shall comply with a request regarding a list of collateral from the debtor
within 14 days after receipt
o Debtors can also request statements of account and accountings of the
unpaid obligation under this section
9-625 Debtors Remedies: In the event of a secured partys breach of duty
o (a) Judicial Orders: If it is established that a secured party is not
proceeding in accordance with this article, a court may order or restrain
collection, enforcement, or disposition of collateral on appropriate terms and
conditions.
o (b) Damages: 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 increased costs of, alternative financing.
o (f) Statutory Damages for non-compliance with 9-210: If a secured
party doesnt fulfill their obligation under 210 to provide the debtor with
records upon request, then they are liable for punitive damages in the
amount of $500 for each instance.
If the creditor never claimed an interest in the collateral, but
nonetheless received requests from the debtor, then the creditor is
excused from complying and is not liable for damages.
o (g) Limitation of Security Interest due to non-compliance with 9210: If a secured party fails to comply with a request regarding a list of
collateral or a statement of account under 9-210, the secured party may
claim a security interest ONLY AS SHOWN IN THE LIST or statement included
in the request as against a person that is reasonably misled by the failure.
Default: The UCC does not define default. Default is generally left to the parties to
define in the security agreement.
o If terms for default are not defined in the security agreement, a default may
occur:
For failure to make timely payments in accordance with the contract
(probably the most common)
If the debtor files for bankruptcy (also pretty universally recognized,
but the rules for bankruptcy will trump the rules under default)
Debtor changing name without notice
Debtor moving without notice
Severe diminution of value of the collateral due to debtors negligence
o If terms of default ARE defined in the security agreement, they can
nonetheless be waived
2-208 Waiver
(1) Where the contract for sale involves repeated occasions for
performance by either party with knowledge of the nature of the
performance and opportunity for objection to it by the other, any
course of performance accepted or acquiesced in without
objection shall be relevant to determine the meaning of the
agreement.
(3) Such course of performance shall be relevant to show a
waiver or modification of any term inconsistent with such a
course of performance.\
Basically, no matter what the contract says, if one party
consistently violates the terms and the other party doesnt object
to it, then the silent party has waived its right to enforcement of
those specific terms
2-209(5) Revocation of a Waiver: Once a party has implicitly
waived its contractual rights, if it wants to eliminate the waiver and put
the original contract terms back in force:

The party must notify the other party in writing that it intends to
reestablish its rights in the original contract AND
The non-compliant party cant have materially changed its
position in reliance on the waiver.
o 1-309 Acceleration Clauses: An option to accelerate payment or
performance under a contract at will, or when the creditor deems itself
insecure. Acceleration is only valid if the secured party in GOOD FAITH
believes the prospect of payment is impaired. Note: Courts do NOT like
acceleration clauses in consumer cases and will usually construe them
against the creditors.
1-201(20) Good Faith has two elements
Honesty in Fact This is a subjective requirement. The creditor
must actually and truly believe that he is insecure
Commercially Reasonable This is an objective requirement
If a creditor attempts to use an acceleration clause to exercise its right
to repossess, the court is either going to require that there has first
been a default, or if there hasnt yet been a default, then the creditor
will be required to give the debtor notice that it is enforcing the clause.
(Klingbiel v. Commercial Credit Corp.)
o 2-609 Adequate Assurances: If reasonable grounds for insecurity arise, a
party may ask for adequate assurance of due performance. Until the party
receives due assurance, they may, if commercially reasonable, suspend any
payment or performance (whatever their contractual obligation is).
What are reasonable grounds? There is no bright line rule, but if
the debtors become unemployed, or have jobs directly related to the
overall economic state, and the economy takes a downturn, that is
probably reasonable. Likewise if the creditor finds out that the debtors
have met with bankruptcy attorneys, or if the debtors are arrested and
face imprisonment.
What arent reasonable grounds? Anything that has nothing to do
with the debtors ability to pay (like the creditors financial state),
anything unverifiable or passed to the creditor through mere rumor or
speculation.
o Creditors Rights Upon Default
A creditor has several concurrent rights upon a debtors default
9-609 Secured Partys Right to Take Possession after
Default (Repossession):
o (a) After default, a secured party
(1) May take possession of the collateral AND
(2) Without removal, may render equipment
unusable and dispose of collateral on debtors
premises
o (b) A secured party may proceed under subsection (a)
(1) Pursuant to judicial process OR

(2) Without judicial process, if it proceeds without

breach of the peace.
9-601 Rights After Default, Judicial Enforcement
o (a) After default, the secured party may
Use any available judicial procedure to obtain a
judgment, foreclose, or otherwise enforce the claim
AND
If the collateral is in documents, may proceed either
as to the documents or as to the goods they cover.
o (e) If the secured party is granted a judicial lien by the
court, for priority purposes, the lien will relate back to:
The date of perfection of the security interest in the
collateral OR
The date of filing a financing statement covering the
collateral
o Collateral seized by judicial enforcement then goes through
an execution sale under state law.
The secured party is free to use either or both of these remedies. They
can exercise their rights under the UCC and repossess as well as go to
court and obtain a judicial lien.
9-601 says this explicitly
In State Bank of Piper v. A-Way, the Illinois Supreme Court said it
too. There is no doctrine of merger in a default. There is also no
res judicata problem the UCC provides for cumulative
remedies.
Sometimes, the creditor might NEED the cumulative remedy:
What if they repossess the collateral, but for some reason, it
doesnt cover the deficiency? They can get a judicial lien on the
debtors other assets and get lien creditor priority in the
deficiency.

Collateral Without Physical Form Collection and Enforcement

o When the collateral is an intangible, such as accounts receivable, the
secured party has a right to collection on those accounts rather than a right
to repossession.
o 9-607(a) In the event of default, a secured party who has a perfected
security interest in a right to payment:
(1) may notify an account debtor or other person obligated on
collateral to make payment or otherwise render performance to or for
the benefit of the secured party;
May just means that the secured party doesnt have to collect
on the defaulted debt if they dont want to. If they want the
account debtors to start paying them, rather than the debtor,
WRITTEN NOTICE IS REQUIRED.
This is also called a cutoff notice

(2) may take any proceeds to which the secured party is entitled under
Section 9-315;
(3) may enforce obligations of the parties who owe the debtor to fulfill
their obligations as they relate to the collateral held by the secured
party
(4) if it holds a security interest in a deposit account perfected by
control under Section 9-104(a)(1), may apply the balance of the
deposit account to the obligation secured by the deposit account; and
(5) if it holds a security interest in a deposit account perfected by
control under Section 9-104(a)(2) or (3), may instruct the bank to pay
the balance of the deposit account to or for the benefit of the secured
party.
o 9-607(c) A secured party MUST proceed in a commercially reasonable
manner if the secured party:
(1) Undertakes to collect from or enforce an obligation of an account
debtor or other person obligated on collateral AND
(2) Is entitled to charge back uncollected collateral or otherwise to full
or limited recourse against the debtor or a secondary obligor
o Account Debtors and Assignees:
9-404(b) Basically, if a secured creditor enforces the right to payment
on accounts receivable that it holds as collateral, it is subject to the
previous agreement between the debtor (assignor) and the account
debtors. Whether or not the obligation is even assignable can be a
huge part of these agreements.
9-406(a) If an account debtor has a valid defense to payment (such as
prior exercise by the debtor of setoff rights against them), then the
account debtor need not pay so long as the defense arose BEFORE IT
RECEIVED THE CUTOFF NOTICE.

Repossession
o 9-609 Authorizes a secured party to take possession of collateral in the
event of default, without notice, and without judicial authorization (also
called self-help), but only if doing so does not cause a breach of the peace.
Breach of the Peace: There is no statutory definition, and
interpretation of this is left up to the courts.
What is ok?
o A certain degree of stealth is fine. The collateral belongs to
the secured party, so if they damage it, its ok (like
breaking a car window or hot-wiring it). If the repossesser
thinks a breach of the peace is about to occur (or one is
occurring), and decides not to take the collateral and
leaves, he may return later and take it without causing a
breach.
What ISNT ok?
o Anything that resembles an altercation will be a breach of
the peace. Constructive force isnt ok either (like bringing a

cop with you). Illegal acts, like trespass, will always be a

breach of the peace.
What may or may not be ok?
o Clause in the contract that provides that the secured party
has a right to enter the debtors premises to remove the
property. Most courts will require concurrent consent even
if this clause is in the agreement. If youre towing a car
from someones driveway, youre probably fine even
though youre on their property. But if youre entering a
private home, this WILL be a breach of the peace. 9-602(6)
says that a debtor cannot waive the breach of the peace
requirement under 9-609, so it doesnt matter what the
debtor signs.
If the secured party lies in order to get possession of the collateral.
Some courts are going to say this is ok, other courts will call it fraud.
Probably not the best idea.
The obligation to not cause a breach of the peace when exercising selfhelp is a non-delegable duty (at least according to every jurisdiction
that has decided the issue). Therefore, even if a secured creditor hires
an independent contractor to repossess the collateral, it is liable for the
contractors actions.
o 9-602 Un-waiveable Rights and Exculpatory Clauses: Secured creditors
will try to avoid responsibilities as much as possible, and so will add clauses
exculpating themselves from liability to security agreements. However, there
are certain rights that a debtor CANNOT waive, no matter what they sign.
One of these is the right to sue for conversion in the event that the
secured creditor takes something that they werent supposed to in the
course of repossession.
Choices for Repossessed Collateral: Once there is a default and the secured
creditor repossesses the collateral, the creditor may have multiple options. In some
cases, the creditor may qualify for the right to and choose to keep the collateral in
satisfaction of the debt, called Strict Foreclosure. If the creditor doesnt qualify for
strict foreclosure or doesnt want to keep the collateral, it can dispose of it. There
are very few cases in which the secured party has a time limit on this decision; 9620 Comment 5 specifically states that a delay in collection or disposition of
collateral does NOT constitute a strict foreclosure. The delay could make the
creditors process commercially unreasonable, however.
o 9-620 Strict Foreclosure: Only applies to consumer goods to prevent strict
foreclosure in commercial transactions, where there may be little debt and
valuable collateral a windfall to the creditor. (That would be bad business)
(a) General Requirements: A secured party may accept collateral in
full or partial satisfaction of the obligation it secures only if:
The debtor consents to the acceptance
The secured party does not receive, in the appropriate time, a
notification of objection to the proposal authenticated by

o A person to which the creditor was required to send a

proposal OR
o Any other person, other than the debtor, holding a
subordinate security interest
If the collateral is consumer goods, the collateral is not in the
possession of the debtor when the debtor consents to the
acceptance AND
The Mandatory Disposal Requirement (section e) does not apply,
or the debtor waives the requirement.
(b) Acceptance of collateral is only effective if:
The secured party consents to the acceptance in an
authenticated record or sends a proposal to the debtor AND
The conditions of part (a) are met.
(c) Debtors Consent
(1) a debtor consents to an acceptance of collateral in partial
satisfaction of the obligation it secures only if the debtor agrees
to the terms of the acceptance in a record authenticated after
default; and
(2) 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:
o (A) sends 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;
o (B) in the proposal, proposes to accept collateral in full
satisfaction of the obligation it secures; and
o (C) does not receive a notification of objection
authenticated by the debtor within 20 days after the
proposal is sent.
(d) Effectiveness of Notification: A notification of objection must be
received by the secured party
(1) in the case of a person to which the proposal was sent
pursuant to Section 9-621, within 20 days after notification was
sent to that person; and
(2) in other cases:
o (A) within 20 days after the last notification was sent
pursuant to Section 9-621; or
o (B) if a notification was not sent, before the debtor
consents to the acceptance under subsection (c).
(e)-(g) Mandatory Disposition of Consumer Goods/ 60% rule:
(e) A secured party that has taken possession of collateral MUST
dispose of the collateral if

o 60% of the cash price has been paid in the case of a PMSI
in consumer goods OR
o 60% of the principal amount of the obligation has been
paid in the case of all other interests in consumer goods
(f) If collateral is subject to mandatory disposition, the secured
party must dispose of it either
o Within 90 days after taking possession OR
o Longer only if the debtor and all secondary obligors have
agreed in a document authenticated after default.
(g) There is no partial satisfaction in a consumer transaction.
o 9-610(a) Disposition after Default: After default, a secured party may
sell, lease, license, or otherwise dispose of any or all of the collateral in its
present condition OR following any commercially reasonable preparation or
processing.
Commercially reasonable preparation or processing is usually
interpreted as if it helps the resale, it should be cleaned.
9-610(b) Every aspect of a disposition of collateral must be
commercially reasonable, including the method, manner, time,
place, and other terms. If commercially reasonable, the secured party
may dispose of collateral by public or private proceedings, by one or
more contracts, as a unit or in parcels, and at any time and place and
on any terms.
9-627(b) Safe Harbor A disposition is commercially reasonable
if made
o In the usual manner in the recognized market, OR
o At the current price in the recognized market, OR
o Otherwise in conformity with reasonable commercial
practices among dealers in the type of property that is
subject to disposition.
9-627(a) Failing to get the greatest amount possible for the
collateral will not preclude commercial reasonableness
Commercially Unreasonable Sales result in the rebuttable
presumption that the secured party is not entitled to any
deficiency.
9-626(a)(2) The secured party has the burden of proof as to the
commercial reasonableness of the sale
9-610(c) Purchase by Secured Party: A secured party may
purchase collateral
(1) Without restriction at a public disposition OR
o Comment 7: A public disposition is one at which the price
is determined after the public has had a meaningful
opportunity for competitive bidding. Meaningful
opportunity implies some form of advertisement or public
notice preceding the sale and the public had access to the
sale.

(2) At a private disposition ONLY the collateral is of a kind that is

customarily sold on a recognized market or the subject of widely
distributed standard price quotations.
o Comment 9- Recognized market and Standard Price
are construed fairly narrowly. If the collateral can vary in
price across markets (like a used automobile, for instance)
a secured party would be taking a huge risk by buying it in
a private sale. The only truly safe bets are things traded on
exchanges, such as investments and commodities.
o Notice of Disposition: If a secured party is going to sell the collateral,
notice is required.
9-611(b): A secured party that disposes of collateral under Section 9610 shall send to specified persons a reasonable authenticated
notification of disposition.
Comment 6- Reasonable means that if the notice is returned
to the creditor by the post office, they should take further steps
to notify the debtor. Have to make a good faith effort to put the
debtor on notice of the sale.
Authenticated means that the notice must be in writing or
electronic
Exceptions to Notice
o 9-611(d) There is no notice required if the collateral is
Perishable OR
Threatens to decline speedily in value OR
Is a type customarily sold on a recognized market.
o 9-611(a)(2) The debtor or any secondary obligor can
waive their right to notice
9-611(c) Persons to be Notified: The secured party shall send an
authenticated written notice of disposition to:
(1) The debtor
o Two debtors living together can get one notice addressed
to either one. Living apart, a single notice addressed to
both with the same address is sufficient.
(2) Any secondary obligor, AND
(3) If the collateral is anything other than consumer goods
o Any other person from which the secured party has
received an authenticated notification of a claim of interest
in the collateral
o Any other secured party or lienholder that, 10 days before
the notification date, held a perfected security interest or
lien on the collateral.
If a party who didnt receive notice objects to the sale, it is up to
the secured party to prove that they complied with this section.
9-612 Timeliness of Notice
(a) Reasonable time is a question of fact based on the
circumstances

(b) Safe Harbor: In a non-consumer transaction, a notice sent 10

days or more before disposition is reasonable.
Contents of the Notice
9-613 General Non-Consumer Goods
o (1) The contents of a notification of disposition are
sufficient if the notification:
(A) Describes the debtor and the secured party;
(B) Describes the collateral that is the subject of the
intended disposition;
(C) States the method of intended disposition;
(D) States that the debtor is entitled to an accounting
of the unpaid indebtedness and states the charge, if
any, for an accounting; and
(E) States the time and place of a public disposition
or the time after which any other disposition is to be
made.
9-614 Consumer Goods
o (A) Requires all of the information above in 613(1) AND
o (B) A description of any liability for a deficiency of the
person to which the notification is sent; AND
o (C) A telephone number from which the collaterals
redemption amount is available AND
o (D) A telephone number or mailing address from which
additional information concerning the disposition and the
obligation secured is available.
o 9-615 Proceeds of Disposition
(a) Priority in Cash Proceeds of Disposition: If the collateral was
sold, any cash proceeds must be given to the following in the following
order:
To the cost of sale and repossession, as well as other
administrative costs
To the principle and interest of the secured debt
If there is any surplus remaining, to the secondary secured
parties (if any)
If there is still surplus remaining, the debtor will receive the
money.
If there is any deficiency, the debtor is liable.
o If the debtor does not pay the deficiency, the creditor may
sue to recover it (and thus obtain a judicial lien in the
debtors other assets)
(e) Proceeds of Rights to Payment: If the underlying transaction is
a sale of accounts, chattel paper, payment intangibles, or promissory
notes
The debtor is not entitled to any surplus AND
The obligor is not liable for any deficiency
Cash Proceeds Received by a Junior Secured Party

(g) 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 superior security interest
o Takes the cash proceeds free of the security interest of the
superior secured party
o Is not obligated to apply the proceeds of the disposition to
the satisfaction of obligations secured by the superior
interest
o Is not obligated to account to or pay the holder of the
security interest for any surplus.
A junior secured party is required under 9-611(c)(3) to notify
any other secured parties of a forthcoming disposition. Upon
notice that a junior creditor is in possession of the collateral, the
senior secured party can immediately repossess it. But if no
senior creditor ever steps forward and the junior creditor doesnt
know they exist, then the senior creditor forfeits their rights to
the collateral and proceeds.
o 9-617 Rights of Transferee of Collateral Pursuant to Disposition
(a) A secured partys disposition of collateral after a default
Transfers to a transferee all rights in the collateral
Discharges the security interest under which the disposition is
made AND
Discharges any subordinate security interests
(b) Rights of a good faith transferee
A transferee that acts in good faith takes free of rights and
interests related to the collateral even if the secured party fails
to comply with Article 9 or a judicial order.
o Debtors Rights in Disposition
9-626(a) Debtor has a right to challenge the commercial
reasonableness of the sales that result in a deficiency in nonconsumer transactions only
(2) If the secured partys compliance is placed at issue, the
secured party has the burden of establishing that the collection,
enforcement, disposition, or acceptance was conducted in
accordance with the code.
(3) If the secured party fails to prove compliance
(reasonableness), the liability of a debtor for a deficiency is
limited to the difference between the secured obligation,
expenses, and attorneys fees and the greater of
o (A) The proceeds of the disposition OR
o (B) The amount of proceeds that would have been realized
had the disposition been conducted correctly.
This amount will be assumed to be all of the debtors
obligations and expenses, effectively eliminating the

debtors deficiency, unless the secured party can

prove otherwise.
9-625 Debtors can go after creditors for damages that result
from noncompliance in either commercial or consumer transactions
(b) A person is liable for damages in the amount of any loss
caused by a failure to comply with Article 9.
o People who are eligible to recover under this subsection
are:
(c)(1) A person that, at the time of the failure, was a
debtor, was an obligor, or held a security interest in
collateral may recover damages for its loss AND
(c)(2) For consumer goods, a person that was a
debtor or a secondary obligor at the time a secured
party failed to comply may recover for that failure.
o People who arent eligible to recover under this subsection:
(d) A debtor whose deficiency is eliminated under 9626 MAY recover damages for the loss of any surplus.
However, a debtor whose deficiency is eliminated or
reduced under 9-929 may NOT otherwise recover
under 9-625(b) for noncompliance relating to
collection, enforcement, disposition, or acceptance.
Basically, this says no double-dipping for the
same injury.
(e) Debtors can go after creditors who fail to comply with certain
code sections for punitive damages, in addition to the actual
damages they recover.
9-623 Redemption: Through the right of redemption, a debtor can get out of
default.
o (a) Eligible persons include any debtor, secondary obligor, or any other
secured party
o (b) Requirements: To redeem collateral, a person shall tender
Fulfillment of all obligations secured by the collateral AND
The reasonable expenses and attorneys fees that the secured party
has incurred in acquiring and maintaining possession of the collateral
o (c) Timing: A redemption may occur at any time before a secured party
Has collected collateral under 9-607 (payments from account debtors
on accounts receivable)
Has disposed of collateral or entered into a contract for its disposition
under 9-610 OR
Has accepted collateral in full or partial satisfaction of the obligation it
secures under 9-622 (Strict Foreclosure)