SECURED TRANSACTIONS -

Kaufman 2017
 UNSECURED CREDITORS
 Unsecured = General or ordinary creditor, owner of an obligation of another
o Includes lenders as well as tort victims. It is a creditor who is owed money not
secured by an asset.

REMEDIES
 SELF-HELP IS PROHIBITED!
o If an unsecured creditor attempts to execute on an obligation owed to him, he will
be liable for conversion (wrongful exercise of dominion over another’s property)
or larceny in a criminal law context.
 If the property seized under a writ of execution belongs to a third party,
the judgment creditor will be equally liable for conversion and resulting
damages
o Does not include “setting off” a debt to a creditor through a debt that he is owed
by another debtor. The creditor will subrogate his debtor, stepping into his shoes.
 How do Unsecured Creditors Extract Payment?
(1) File a complaint with the appropriate court
 An unsecured creditor (absent bankruptcy) cannot enforce a debt against
the debtor without a judgment. Although assets can be seized to satisfy the
debt, it must be judicially recognized through a court proceeding
(2) Get a judgment
 The judgment is the judicial cognizance of the obligation owed. Until there
is a judgment, the debtor has control of the assets.
(3) Writ of Execution
 The judgment is taken to the court clerk who gives the creditor a writ of
execution covering the amount of the money judgment
 The writ is then delivered to the sheriff with specific instructions on the
assets that can be levied upon by the sheriff to satisfy the judgment
 The judgment creditor must do preliminary discovery to instruct
the sheriff exactly what to seize and when, including any necessary
depositions or adversarial procedures
 The creditor cannot do a fishing expedition and show up at the
debtor’s residence to find assets. It must obtain the information
before any action of execution is taken
 Statement of a debtor  writ of garnishment  service to the banks
(or wherever the assets are) must be swiftly done before the debtor
withdraws assets.
 To preempt the preceding, a writ could be prepared and served
while the deposition is underway (e.g., ask for a coffee break in
between). Sole requirement is the presentment of the writ and

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 sufficient time for the employee in charge of overseeing the account
to be instructed as such.
(4) Levy
 Under the instructions of the writ, the sheriff levies the assets as instructed
by the creditor by force (if necessary). The sheriff can levy more than once
under a single writ of execution to satisfy the judgment
 In most jurisdictions, a LIEN is attached at the moment of seizure, but it is
backdated to the date of the writ for purposes of priority – the
previously unsecured creditor can become a lien creditor only with a levy
under a writ
 A minority of jurisdictions attach a lien at the time of judgment
 A lien for real property seized under by a judgment creditor is
attached at the time of judgment. It is ultimately recorded in the real
estate records but has a priority date as of the time of the judgement
 If the sheriff fails to properly levy on the property, the creditor can enforce
the debt against the sheriff personally through an action of AMERCEMENT
o Vitale v. Hotel California: Creditor had a writ of execution
for a business that operated during early morning hours and
with significant security. The sheriff failed to levy under a
writ of execution due to fear of confrontation. Court held the
sheriff personally liable for the debt
 Limitations
o The debtor can sell all his assets to avoid seizure, subject to fraudulent
conveyance laws
 Prevents the transfer made “with actual intent to hinder, delay, or defraud
any creditor” – intent can be inferred according to the circumstances,
especially when the transfer was made “without receiving a reasonably
equivalent value in exchange.”
 If a bona fide purchaser takes the assets for value and without notice, the
creditor will be limited to recovery against the original debtor, not the
transferee, unless it obtains a “writ of attachment” if the debtor is
fraudulently transferring property during the lawsuit
o State Exemption Statutes: Limiting recovery under judicial liens to certain types
of assets.
 Only available to individuals, does not include a corporation or other
association or collective group;
 Homestead exemptions: Exempt certain real property up to spatial
boundaries (e.g. “so much of the land surrounding it as is reasonably
necessary for its use as a home.”); some jurisdiction have no limits on
homestead.
 Automobiles: Usually motor vehicles not exceeding a monetary threshold,
meaning the creditor can execute and the debtor has guaranteed equity;

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 physical possession results in a lien (priority) is attached on a piece of
property since the moment of the seizure.
 Huge property (un-seizable): Hiring a sheriff’s deputy to maintain
physical presence at the property ensures that debtor would be prohibited
from withdrawing the assets to elsewhere.
 Real property: Entry of judgment per se provides the creditor with a lien
in the real estate.
 Certain items of personal property: In some states (CA, IL, etc) give lien
on personal property even without a levy (judgment lien creditor at the
time of entry of judgment for general unsecured creditor), although most
states required “levy.”
o Wisconsin Statute Annotated (2015): §815.18—Property Exempt from
Execution
 “Exempt” means free from any lien obtained by judicial proceedings and is
not liable to seizure or sale on execution or on any provisional or final
process issued from any court, or any proceedings in aid of court process.
 Debtor’s interest in or right to receive the following property is exempt:
(a) provisions for burial (cemetery lots, aboveground burial facilities, etc);
(b) Business and farm property (Equipment, inventory, farm products, and
professional books used in the business of the debtor or the business of a
dependent of the debtor, not to exceed $15,000 in aggregate value);
(d) Consumer goods (Household goods and furnishings, wearing apparel,
keepsakes, jewelry, etc not to exceed $12,000 in aggregate value);
(g) Motor vehicles (Not to exceed $4k; Any unused amount of the aggregate
value from para (d) may be added to this to increase the aggregate exempt
value of motor vehicles);
(h) Net income (75% of the debtor’s net income for each one week pay
period);
(k) Depository accounts (Depository accounts in the aggregate value of
$5k).
 6(a) A debtor shall affirmatively claim an exemption (either at the time of
seizure of within a reasonable time thereafter); A debtor waives his
exemption rights by failing to follow the procedure; A contractual waiver
of exemption rights by any debtor before judgment on the claim is void.
 (12) Limitations on exemption: Exemption cannot be claimed against claim
or interest of security interest holder.
o Homestead Exemption §815.20: An exempt homestead (defined as dwelling
including building, condo, mobile home, etc. and so much of the land surrounding
it as is reasonably necessary for its use as a home) selected by a resident owner
and occupied shall be exempt from execution, from the lien of every judgment and
from liability for the debts of the owner to the amount of $75k less mortgages,
laborers’, mechanics’ and purchase money liens and taxes.

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 CREATION OF SECURITY INTERESTS
SECURITY INTEREST: Conditional right of repossession of an asset on the event of
default under the terms of the agreement.
Security interest attaches to the property when it is created and enforceable* between
two parties, i.e., *when the secured party can foreclose on the collateral in the event of
default.
Attachment is insufficient for a secured creditor to have a priority over other creditors. The
creditor must perfect the interest by having the debtor authorize a financing statement.

ATTACHMENT FORMALITIES §9-203(b)

(1) “VALUE” must be given
o §1-204 – Extremely broad definition of value. Includes pre-existing debts and a
binding commitment to extend credit (i.e. future Advances)
o Lending money is giving value; and a binding obligation to make a loan is value
sufficient to support a security interest. Consideration in the form of a promise is
value.
(2) The debtor must have RIGHTS IN THE COLLATERAL
o The rights must be vested for the security agreement to attach. If the debtor only
has the interests for only a period of time (e.g. leasehold), then the security
agreement attaches only for that period of time.
(3)(A) The debtor has AUTHENTICATED a security agreement with a DESCRIPTION
of the collateral; or
(3)(B) The creditor takes possession of the collateral pursuant to an oral
agreement creating security interest.
o “Authenticated record” = A signed writing or a document record of consent.
 General written documentation that indicates the parties’ intent to create
a security interest. It could be an electronic record.
 Composite Document Doctrine = Examining all the documents executed
between the debtor and a creditor to determine if taken together whether
the writing or writings establishes an agreed upon security interest.
 The documents must refer to each other in order to establish a
sufficient written foundation of intent in combining the documents
o In re Giaimo: Application for the certificate of title was
signed by the debtor, but the security agreement and the
perfecting document together were not. The court combines
the application and the certificate of title to complete one
authenticated agreement. The court reasons that the debtor
would not sign the application without a sale unlike a
preemptive financing statement

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  Once the security agreement has been authenticated, §9-203(b)
authorizes the filing of the financing statement covering the collateral
described in the security agreement, perfecting the security interest. §9-
509(b).
 Alternatively, a secured creditor may create a security interest by taking
possession of the goods pursuant to an oral agreement to create the
interest. E.g., Pawnshops or field warehousing.
 In re Schwalb (Bankr. D. Nev. 2006): Schwalb received a $4,000
loan from Pioneer, secured by Schwalb’s Infiniti as collateral. Upon
collecting the loan proceeds, Schwalb signed a pawn ticket that
included a description of the collateral and the terms of the loan.
The ticket provided that if Schwalb failed to repay the loan +
interest, title to the vehicle would be forfeited to Pioneer.
Additionally, before describing the vehicle, the pawn ticket stated,
“You are giving a security interest in the following property.”
Pioneer did not keep possession of the vehicle, which Schwalb
continued to drive. Schwalb eventually defaulted on the loan.
Held: By signing the pawn ticket, Schwalb acknowledged and
adopted the act it described—giving a security interest.
N.B. The creation of a security interest does not require the use of
specific language and will be valid and enforceable if the parties
clearly intended to create a security interest.
o “Description”
 §9-108(a) – “any description of personal property is sufficient whether
or not it is specific if it REASONABLY IDENTIFIES what is being
described.”
 The interpretation of the security agreement depends on the
tolerance of the courts to contracts of adhesion.
 Broad, vague or imprecise descriptions are insufficient – must
be able to give notice to a reasonable third parties about what is
being covered.
 §9-108(b) E.g.: (1) Specific listing; (2) category; (3) UCC-defined
collateral; (4) quantity; (5) computational formula or procedure;
(6) objectively determinable by any other method.
o §9-108(c) – “All of the debtor’s assets” (or any supergeneric
description) will never suffice.
o §9-108(e) – “All commercial tort claims” cannot suffice
without more specificity; consumer transactions cannot be
described by a UCC-defined collateral type.
 In re Murphy (Bankr. D. Kan. 2013; Majority View): Debtor applied
for a credit card with Creditor. The credit application contained 7
pages of single-spaced small print and was signed on the first page

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 by the Debtor. There was a language on page 4 purporting to give
security interest on “Goods purchased on your account.” Debtor
used the credit card to purchase a refrigerator.
Held: “Goods purchased on your account” is not a type of collateral
defined in the UCC so not in violation of §9-108(e).
o Minority View: Compare In re Shirel (Bankr. W.D. Okla.
2000) where “all merchandise purchased with the credit
card” was inadequate because it did not sufficiently describe
the collateral so that a third party could reasonably identify
the items.
 Courts are split as to whether the description can be completed
AFTER the authorization of the security agreement.
o Many courts allow completion of the description after the
fact so long the creditor can prove that it is in accordance
with the intention of the debtors, making the “sequence of
events immaterial.” (In re Blundell, In re Allen). Other courts
hold that security agreements are unenforceable unless
completed upon signing (In re Couch).
o UCC §9-203(b)(3)(A): “the debtor has authenticated a
security agreement that provides a description of the
collateral.” Kaufman thinks this means the description must
be filled in when the debtor signs. Many courts take the
position that the secured creditor is getting such a bonanza
w/r/t the debtor’s property at the expense of other creditors
by complying with Art 9.
 After-Acquired Property
 Property the debtor acquires after the security agreement is
authenticated or attached on a rolling basis (“a floating lien”)
 General rule is that the inclusion of after-acquired property must
be explicit in the security agreement, but it may sometimes be
implied based on the type of collateral and the reasonable
interpretation of the contract.
o Stoumbos v. Kilimnik (9th Cir. 1993): Court holds that
“equipment” does not automatically incorporate after-
acquired “equipment.” However, “inventory” that is
cyclically depleted and replenished may imply after
acquired inventory because of the commercial context of
frequent inventory turnover.
 “Accounts” and “inventory” are frequently interpreted to include
after acquired property. The accounts and inventory as an
identifiable group of collateral rather than a discrete unchanging
quantity.

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 Which Obligations Are Secured?
o Virtually any obligation can be secured without a high degree of specificity so long
as the intention of the parties is made clear.
o §9-204(c) – Security agreements can include future advances (an obligation that
will come into existence as a result of an additional extension of credit).
 Provisions in security agreements are normally called “dragnet clauses”
and are valid under Article 9 requirements.
 “Non-advance” provisions: Adding amounts to the secured indebtedness
such as attorney’s fees or expenses of collection.

 Real Estate Mortgages

o Formalities for attachment differ by state, but each jurisdiction does generally
require the mortgage be signed with a witness and notarization.
o Descriptions in a mortgage do not need to have the same degree of specificity as
personal property under Article 9 (E.g.: “all grantor’s property in the county”).
o In real estate practice, the debtor executes a separate mortgage document each
time the debtor adds land to the secured creditor’s collateral. Real estate law
recognizes a doctrine of after-acquired title that applies to mortgages and permits
an earlier mortgage document to convey a security interest in land later acquired
by the mortgagor.
o Automatically includes after-affixed property – mortgages cover all fixtures
attached to the realty as a matter of course.

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PROCEEDS & VALUE TRACING CONCEPTS
 The secured creditor wants its security interest to continue in the property despite
the identity of the owner or its current form. Otherwise, the debtor could unilaterally
deprive the secured creditor of its interest by transferring it or selling it.
 Creditor can hedge against the risk of collateral disposal by (a) encumbering all of the
debtor’s property; or more practically, (b) employing value-tracing concepts
(security interest follows the value in prescribed ways)—e.g., proceeds, products,
rents, profits, and off-springs.
 §9-203(f) provides automatic attachment of a security interest to the “rights to
proceeds provided by §9-315.
 §9-315(c): A security interest in proceeds is a perfected security interest if the
security interest in the original collateral was perfected.
 It assumes that the parties intend to extend S/I to the proceeds even if the security
agreement is silent.
 PROCEEDS
o §9-102(a)(64):
 (A) Whatever is acquired upon the sale, lease, license or exchange
or other disposition of the collateral
 The creditor will get the ENTIRE VALUE of the proceeds even if
it exceeds the value of the debt – Proceeds is an all or nothing
concept.
o E.g.: Creditor finances $500 for purchase of furniture.
Debtor sells the furniture for $1000. Although the debtor
contributed to the increase in the value, the creditor has
a security interest in the entire proceeds, not just a pro
rata proportion of it.
o E.g., If a debtor sells the collateral and denominates the
transaction a lease: Lease is a security agreement taken
by the debtor and is chattel paper, itself constituting a
proceed.
o N.B. “Disposition”—If the debtor merely uses the
collateral in its business, the revenues of the business are
not proceeds.
o McLemore v. Mid-South Agri-Chemical (1984): Debtor,
who granted security interest in “all crops now planted
or hereafter to be grown,” received government subsidy
in exchange for not growing any crops. Held: Receipt of
subsidy disposed of the collateral; ergo proceeds of crops
never grown.

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  De minimis collateral significantly smaller than the proceeds
will often not carry over. E.g.: corn crops grown from financed
seeds are not proceeds.
 (B) Whatever is collected on, or distributed on account of,
collateral. E.g., cash or stock dividends.
 (C) Rights arising out of the collateral
 Very creditor friendly. Could conceivably cover almost anything
connected to the collateral
 In re 1st Source Bank: For rights to “arise out of” collateral, they
must have been obtained as a result of some loss or
dispossession of the party’s interest in that collateral, not
simply by its use.
 In re Wiersma (Bankr. D. Idaho 2002): Settlement award for the
injury to dairy cows subject to electric shocks constitutes
proceeds of the collateral (herd and the milk it produced).
Compare Helms v. Certified Packaging Corp. (7th Cir. 2008):
Compensation for a claim of failure to obtain a business-loss
insurance cannot constitute proceeds (“business loss” vs. loss of
collateral).
 (D) To the extent of the value of the collateral, claims arising out of
the loss, nonconformity or interference with the use of, defect or
infringement of rights in or damage to the collateral.
 (E) To the extent of the value of the collateral, INSURANCE payable by
reason of the loss of the collateral
 If the insurance claim is paid just to the debtor, it is proceeds.
The secured creditor does not need to become the loss-payee of
the insurance policy.
 However, the secured creditor will not be able to litigate
coverage because it will not be named under the policy.
 If the secured creditor is the loss-payee, then it can insist on a
motgagee clause that does not subject the payee to the
defenses against the insured party, keeping the insured from
invalidating the payout to the payee.
 Proceeds of proceeds are collateral (§9-102(a)(12): Proceeds are
collateral under UCC).
o §9-315(a)(2) Proceeds must be IDENTIFIABLE, or the secured creditor will
lose its security interest
 Burden is on the creditor to identify the proceeds under §9-315.
Although creditors may find this unfair because of the impossibility of
keeping track of it, the creditor can contractually ensure it can identify
the proceeds.

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 Commingled Proceeds – Identifiable when (1) They are goods; or (2)
if they are not goods (money), to the extent the secured party identifies
the proceeds by a method of tracing, including application of equitable
principles (§9-315(b))
 LOWEST INTERMEDIATE BALANCE RULE
o If the proceeds are in a commingled bank account, the
court will assume that the debtor uses his personal
money first before the proceeds, meaning that the
secured creditor’s collateral remaining in a bank account
after the deposit of proceeds is the lowest balance of all
funds in the account from the time of the deposit to
the completion of the transaction – the debtor is
presumed to spend first from the debtor’s own funds;
whatever remains is proceeds.
o In re Oriental Rug Warehouse Club, Inc. (Bankr. D.
Minn. 1997): Oriental agreed to sell creditor’s rugs and
pay a total consignment price and apply the proceeds
received from resale to the outstanding amount. Over the
course of retail business, Oriental used the proceeds to
revamp its own inventory. Creditor retook possession of
its own carpets in Oriental’s possession.
Held: It was functionally a floor plan arrangement
(secured financing agreement)—thus governed by UCC
Art. 9. Creditor bears the burden of proving that the
Debtor’s current assets constitute identifiable proceeds
arising from the disposition of its original collateral and
the proceeds were properly perfected under §9-315.
Creditor’s claim is unsecured if he can’t identify the
proceeds. He should have protected himself by carefully
monitoring the debtor’s inventory and by requiring
the debtor to maintain segregated accounts for the
deposit of the proceeds.
o §9-332(b) – cash emerging from the account will be free
of the security interest unless the buyer acts in collusion
with the debtor in violating the rights of the secured
party (exception to floating of the security to purchasers)
o What if only a portion of the proceeds from a
commingled account were used to purchase more goods?
 Proceeds of proceeds are still proceeds! Many
think that the secured creditor will have a
security interest in the entire purchase.

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  Proceeds is ALL OR NOTHING. Proceeds can
over-collateralize the debt if done right.
 However, there might be a view that the security
interest only continues to the proportion of the
goods that the proceeds used, especially if it was
de minimis E.g. $1 of proceeds used to purchase a
$30,000 copy machine.
 Best solution for the creditor would be to have a segregate bank
account for the cash to go upon sale of the assets. Otherwise, the
creditor runs the risk of losing everything through its own
carelessness

 Termination of Security Interest in the Collateral Per Authorization

o §9-315(a)(1): If a secured creditor authorizes, the buyer takes free of the
security interest and the secured creditor can look only to the debtor and the
proceeds.
o Authorization is given when: Explicit in the security agreement; explicitly
given post-signing/closing; implicit when the agreement is silent despite
secured creditor’s knowledge of the potential disposal.
o Creditor’s security interest will attach to price paid (if sold), in the form of
cash, promissory note or account; NOT on the revenues (if used in business).
 Termination of Security Interest in the Collateral Despite Non-authorization
o Some states have made it criminal to collecting unauthorized purchase price
of a collateral and spending it without putting it toward the loan amount.
o UCC §§ 9-315(a)(1), 401: Debtor has the power to transfer ownership to a
buyer under a security agreement that expressly prohibits sale (in breach of
the security agreement); BUT the buyer will own the collateral subject to
the security interest AND creditor has security interest on the proceeds,
too. NOT a value tracing, but a multiplication.
 Other Value Tracing Concepts
o “Products” = Something the collateral produces (milk from cows, wool of
sheep)
o “Profits” = excess of revenues over expenses, including rents paid for
temporary use of the collateral or offspring from animals
o However, the proceeds concept has expanded so much that other concepts are
not really necessary. “Rights arising out of the collateral” encompasses any
other value tracing concept imaginable

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 PERFECTION
Matter of a secured party’s priority vis-à-vis other creditors or lien holders, not the
relationship between the creditor and debtor.
Perfection is necessary to fend off claims of 3rd parties by giving them constructive notice
of the existence* of the security agreement. It is in the best interest of the creditor to perfect
the security. The security agreement makes the creditor a secured creditor, but perfection is
necessary to claim the security above anyone else. This is to establish priority of the lien

§9-502(d) – Financing statement can be filed BEFORE a security agreement attaches

o Incentivizes a filing before any formal agreement ever comes to fruition. That way
the would-be secured party is guaranteed perfection and due to the general
requirements of filing statements, it need not have the level of specificity of a
security agreement (e.g. description of collateral).
*A filing

FILING SYSTEMS
 Depending on what the collateral is, the creditor may have to file according to the filing
system of that particular asset
 For creditors, a good lawyer will file everywhere there could be possible doubt unless it
can be made certain that automatic perfection (e.g., PMSI in consumer goods) applies.
o UCC Filing System
 Includes all personal property under the concept of “goods” as defined by
Art. 9
 §9-102(a)(44) – “equipment,” “inventory,” “chattel paper,” “payment
intangible,” “general intangible”
 The filing system is run by the Secretary of State of that specific
jurisdiction.
o Department of Motor Vehicles (DMV)
 Art. 9 incorporates the requirements of other statutes for perfection in
other types of assets - §9-311(b)
 Generally, perfection is made through the filing of a certificate of title with
the mentioning of the outstanding security interest on the certificate.
 Whether the car is “inventory” (say in the context of a dealership) matters
as to where to file to perfect.
 “Equipment”: Inventory not for sale, but if there is a certificate of
title, then perfection needs to be made with the department of
motor vehicles.

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  Automobiles as inventory will likely have a manufacturer’s
statement of origin to prove title, but perfection will still need to be
made in the UCC filing system absent taking possession.
o Real Property
 State law registry of deeds is where a mortgage or perfection of a security
interest in real property is filed. Includes fixtures, so long as a “fixture
filing” is made in the real property filing system
 §9-501(a)(2) – Personal property later to become fixtures can be
recorded under the state UCC filing system even in the absence of a
fixture filing in the real property system (see Fixtures).
o Patents
 Filing for patent ownership and assignment = USPTO
 Filing for patent as security = UCC State law filing
 In re Pasteurized Eggs Corporation (Bankr. D.N.H. 2003): patent Act does
not preempt the UCC w/r/t perfection of security interests because the
Patent Act addresses filings only w/r/t transfer of ownership but not w/r/t
security interests. CA UCC governs the method for perfecting a security
interest in patents as Art. 9 applies to “general intangibles,’ including
intellectual property.
o Trademarks (Lanham Act)
 Filing for trademark ownership and assignment = USPTO
 Filing for trademark as security = UCC-1 State law filing.
 Lanham Act covers only assignment and not hypothecation, which includes
pledging of something as security without delivery of title or possession.
In re Pasteruzied Eggs Corporation.
o Copyrights (Copyright Act)
 Both filings for ownership and security at the US Copyright Office.
 In re Cybernetic – The copyright act preempts state law for filing of
“transfers” of copyrights, which includes “hypothecation” or a
security interest
 In re Peregrine (Cal. 1990): The US Copyright Office is the proper
place of filing for security interests in copyrights. The Copyright
Act preempts state law (field preemption) and provides for
recordation of any transfer of copyright ownership or other
document pertaining to a copyright.
 A transfer under the Act includes: mortgage & hypothecation of a
copyright, which in turn includes pledge of property as security
or collateral for a debt.
 A separate filing for each item copyrighted is necessary, but this
defect is for the legislature to rectify.
 A secured creditor need only file in the Copyright Office in order to
give all persons constructive notice. 17 USC §205(c).

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  Royalties as security is not a document pertaining to a copyright and not
recordable in the Copyright office. UCC State law filing system. Broadcast
Music v. Hirsch (9th Cir. 1997).
o Aircraft and Railroads
 Federal Aviation Act and other federal law mandates the federal
government to provide for a central place for the filing of liens as well as
title registration and ownership certificates.
 Searching
o Lawyer must file first then search! If you file immediately, then you can be sure
not to lose any priority through the “first in time, first in line” rule. That way you
see your filing with all possible ones that came before it. If you search first, the
time between the search and receiving the results leaves an opening for
competing creditors.
o “AS OF DATE” = The financing statements that the search found effective as of a
specific date
 §9-523(c): Only authorizes filing officers to respond to requests with
search reports of statements that have been indexed (i.e., on file).
 Financing statements are effective as of the moment of filing, not the
moment of indexing, but a search will only yield financing statements that
have been indexed “as of” a specific date.
 Likely, the office has many financing statements it has yet to process (could
take ~ 2 weeks to process). They are undiscoverable and are “in the
basket.” Thus, a search may only come up with financing statements up to
two weeks prior to the search, depending on the filing office and time of
indexing
o UCC Filing & Indexing Compliance
 §9-519(h): Statements must be filed at most 2 days after submission.
 §9-523(c)(1): Search must be returned with statements indexed “as of” at
most 3 days prior to the request.
 Cmt. 8 to §9-523 – The failure to comply has no effect on the private
rights of persons affected by the filing of records!
 UCC technical compliance almost never happens, and it is of no
consequence to creditors with financing statements on file.

 Laws Governing Priority

o §9-301(1) – Except as otherwise provided in §9-307, when a debtor is located
in a state, the law of that jurisdiction governs.
 §9-307: Location of the debtor:
 (b)(1) an individual debtor is deemed to be located at the
individual’s principal residence.
o More than presence but less than domicile. Intent to remain
for a period, but not necessarily permanently.

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  (b)(2): an unregistered organization with only one place of
business is deemed to be located in that place of business
o Place of Business = where the debtor conducts its affairs.
 (b)(3): an unregistered organization with multiple places of
business is deemed to be located at its CEO’s office or “nerve
center.”
 (e): a registered organization that is organized under the law of a
state is located in that state (“State of incorporation”).
o §9-301(2): Location of the collateral governs if the security interest is
possessory. Fixture filings are to be made in the office designated for the filing
or recording of a mortgage on real property located in the county where the real
property is located.

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FINANCING STATEMENTS

 UCC filing systems are not searchable by text, and although financing statements have a
number assigned to the statement, the goal is to find the financing statement through the
debtor’s name.
 Financing statements are designed to provide other possible creditors and 3rd parties
with evidence of an outstanding security agreement through giving notice.
o It is the searcher’s job to find the security agreement to figure out definitively
what the security agreement evidenced by the financing statement covers.

 Debtor’s Name
o UCC filing systems are indexed by the NAME OF THE DEBTOR - §9-519(c)
 §9-503 – Name of the Debtor
 (a)(1): If the debtor is a registered organization, the name on the
financing statement must be the name indicated on the
jurisdiction of organization’s public record.
o Organizations that are brought into existence require that
financing statements made against them have exactly the
same name on the corporation’s public record.
o A corporation can only have a single correct name at any
given time; this can be examined by the Corporate Division
of the secretary of state.
o Maj: Corporate name must show that the entity is a
corporation by adding a permissible designator. E.g., Corp.,
Corporation, Inc., Incorporated, LLC, etc.
o Others (incl. CA and DE) don’t require corporate names to
include the exact organization abbreviation (Inc., Co., etc.).
o No state will permit the formation of two corporations with
the same name or confusingly similar names.
 (a)(4): for individuals, name on the individual’s DRIVER LICENSE
is a requirement (Alternative A) or a “safe harbor” (Alternative B).
o In either case, the individual name must include the surname
and the first personal name of the debtor if the debtor does
not have a driver’s license.
o The debtor may have many versions of a “correct” name for
purposes of Article 9 if there is no driver’s license.
 (a)(5): for unregistered organizations, the name is that of the
partners or what the partnership is generally known in the
community (you should do both!)
o Because general partnerships are recognized through course
of conduct, there may be no partnership name at all, making

16
 filing against the partnership’s assets difficult without filing
under all the names of the possible partners as debtors.
o LLPs are not registered organizations. The state registration
for an LLP does not organize the partnership, it only grants
limited liability.
 (b)(6): Trade names are neither necessary nor sufficient to
identify a debtor.
o In re EDM Corporation (8th Cir. B.A.P. 2010): Adding the
trade name to the name of the debtor corporation (“EDM
CORPORATION D/B/A EDM EQUIPMENT”) made the
financing statement seriously misleading and thus
unenforceable.
 Trade or other names may be added as other or
additional names on a financing statement, but not
in place of, or as part of, the debtor’s organizational
name.
 §9-102(a)(28): “Debtor” is a person, including an individual, corporation,
or any other legal or commercial entity.
 Any entity can be the debtor even if it is not legally recognized or
independent under the applicable state law.
o Error’s in the Debtor’s Name
 The validity of the notice the financing statement is meant to provide is
entirely contingent on the SEARCH LOGIC of the particular filing office.
 Although there are model search logic requirements (not case
sensitive, disregard punctuation, ignores spaces, no middle name
significance), the official search logic of the office does not need to
follow any other office.
 §9-506(b) – The financing statement is effective despite minor errors or
omission unless errors make it “SERIOUSLY MISLEADING.”
 §9-506(c) NOT “seriously misleading”: If a search of the records
of the filing office under the debtor’s correct name, using the filing
office’s standard search logic would disclose a financing statement
that fails sufficiently to provide the name of the debtor in
accordance with §9-503(a) [debtor’s name], the name provided is
not seriously misleading.
 §9-517 – The incorrect recording of the filing office in indexing does
not affect the effectiveness of the filed record.

 Authorization
o §9-509(a)(1) – Secured creditor must obtain authorization from the debtor to file
a financing statement in an authenticated record.

17
  By authenticating the security agreement or binding oneself as debtor,
a debtor authorizes the filing of an initial financing statement &
amendment covering the collateral described in the security agreement -
§9-509(b).
 There is no need to sign the financing statement, the authenticated record
can be made up of a definitive intent to give the secured creditor to file the
financing statement.
 Financing statement unauthorized at the time of filing is ineffective. §9-
510(a).
 This is because when a property’s title is encumbered (i.e., “clouded”), it
interferes with the debtor’s ability to borrow.
o Because the financing statement can be filed before the authorization of the
security agreement, the financing statement will become authenticated upon
authorization of the security agreement.
 The time of filing controls, even if the authorization is given later – the
policy favors the records on its face despite the flaw that authorization was
given afterwards.

18
EXCEPTIONS TO FILING REQUIREMENTS
 Perfection of a Security Interest Without Filing:
o Possession of the collateral, e.g., field warehouse;
o Taking control of the collateral; or
o Perfection by operation of law.

 POSSESSION — “Possession fulfills enforceability (9-203) and perfection (9-313)”

o Possession-gives-notice theory.
o §9-313(a) – Possession MAY perfect an interest in chattel paper, negotiable
documents, goods, instruments, or investment property.
o §9-203(b)(3)(B) renders the security agreement of a possessing creditor
enforceable even though there is no signed writing or other authenticated record.
 Possession depends ultimately on the legal right of the would-be possessor
(when the legal right is devoid of physical control, some courts refer to the
possession as “constructive”).
 Possession can be made via an agent – Cmt. 3, §9-313
 Perfection through possession is an alternative means of perfection.
Security interest in the above goods can be made either through filing
or possession.
 Instrument: A negotiable instrument or any other writing that
evidences a right to the payment of a monetary obligation. §9-
102(a)(47).
 Chattel Paper = A record(s) that evidences both a monetary
obligation and a security interest in specific goods … or a lease of
specific goods. §9-102(a)(11).
 Negotiable Instruments do not include negotiable promissory
notes. §9-102(a)(30), 1-201.
o §§9-330(d), 9-331(a): Perfection by possession of instruments and chattel
paper trumps perfection by filing.
 §9-330(b): A purchaser of chattel paper has priority over a security
interest in the chattel paper claimed in a non-possessory method if the
purchaser gives new value and takes possession or obtains control in
good faith, in the ordinary course of business, and without knowledge
that the purchase violates the rights of the secured party.
 Losing priority through possession can be prevented if the chattel
paper is “stamped” with an indication of the security interest
and the identity of the secured party.
 §9-330(a): S/I in chattel paper claimed as proceeds—new
purchaser trumps if given new value; took possession; in the
ordinary course of the purchaser’s business; and the chattel paper
does not indicate red flags.

19
 §9-330(d): A purchaser of an instrument is perfected over a security
interest perfected by non-possessory method if the purchaser gives value
and takes possession in good faith and without knowledge that the
purchase violates the rights of the secured party.
o §9-312(b)(3): Security interest in money (other than a security interest in
proceeds) can ONLY be perfected through possession
o Cmt 2 to §9-313(a): Security interest in accounts, commercial tort claims, and
general intangibles is perfectly only by filing or automatically.
 Accounts: A right to payment of a monetary obligation, whether or not
earned by performance for property sold or services rendered. Excludes
deposit accounts. §9-102(a)(2).

 CONTROL
o §9-314(a): Control MAY perfect an interest in deposit accounts, electronic
chattel paper, investment property, and letter-of-credit rights as a substitute
for filing.
 §9-312(b)(1): A security interest in deposit account may ONLY be
perfected by control (except if it is proceeds).
 A party with control over a deposit account has priority over a
secured party not in control. §9-327(1).
 Deposit Account: Generally a bank account. §9-102(a)(29).
 Control (§9-104):
o (1) The secured party is the bank where the account is
maintained.
o (2) The secured party, the debtor, and the bank authenticate
a record indicating the bank to comply with the secured
party’s instructions.
 Debtor will be able to write checks and withdraw on
the account. The “control” contemplated by the U.C.C.
is potential control, not actual control
o (3) The secured party becomes the bank’s “customer” by
putting the account in the name of the secured party.
 Investment Property: A security, security entitlement, securities account,
commodity contract, or commodity account. Securities must be (1)
transferable, (2) divisible, and (3) a type of medium that is traded on a
market or exchange. §§9-102(a)(49), 8-102(a)(15).
 Control can be exercised by obtaining delivery of the certificate
or registering itself as the owner of the security on the records of
the corporation.
 A purchaser of securities can register its ownership with the issuing
corporation (direct holding) or a brokerage firm (securities
intermediary) can buy the securities on their behalf and

20
 acknowledge the investor’s ownership in a monthly statement of
account (indirect holding).

 AUTOMATIC PERFECTION in CONSUMER GOODS PMSI

o §9-309(1) – Purchase-money security interests in consumer goods are
automatically perfected without the need for control, possession, or filing.
 §9-103 Purchase-Money Security Interest: A security interest that is:
 (A) an obligation to pay the purchase price of the collateral; or
o Often when the seller requires only a portion of the purchase
price in exchange for a promissory note for the remainder.
The note is secured and perfected automatically.
 (B) an obligation to repay a loan, the proceeds of which were
intended to be used and were actually used to pay the purchase
price of the collateral.
o Secured party will be well advised to pay for the goods
directly by conveying the value to the seller instead of the
buyer. That way it can ensure that the value was “in fact so
used” to purchase the collateral.
 Consumer Goods: Goods that are used or bought for use primarily for
personal, family, or household purposes. §9-102(a)(23).
 It is not the nature of the goods that determines their definition. It
is their use.
o In re Lockovich (1991): Debtor purchased a watercraft and
granted the seller a security interest in the boat. Gallatin paid
to the seller the sum on Debtor’s behalf. The 22-foot boat
purchased considered a consumer good because of the use
or intended use of it, not the nature or description.
 If the use changes, courts are split on whether that the intention at
the time of purchase or the actual use controls.

 NOT COVERED BY §9
o §9-109(d)(3): Wage claims
o §9-109(d)(8): Insurance policies and claims are governed by 2 competing rules
 Traditional rule: First to notify the insurer has priority.
 Other rule: First assignment has priority regardless of notification. Rose v.
AmSouth Bank (2d Cir. 2004).
o §9-109(d)(11): Real property interests
o §9-109(d)(12): Non-commercial tort claims
o Bluxome Street Associates v. Fireman’s Fund Insurance Co. (Cal. Ct. App. 1988)
 Facts: Woods won a settlement resulting from a legal malpractice suit.
Settlement proceeds were deposited into a trust account held by Hassard
law firm. Woods thereafter granted security interest in the settlement to

21
 Flynn, another law firm. Flynn subsequently filed a financing statement
with the UCC filing office. Woods filed a motion for an order determining
the priorities of the claimed liens.
 Held:
 CA Civil Code allows creation of liens by contract or by operation of
law  Flynn has a valid contractual lien.
 Wood’s interest in settlement is tort action not governed by Art. 9
[UCC §9-109(d)(12)]. Flynn’s financing statement did not operate
to provide notice or to perfect the lien.
 But since there’s no statutory authority on the creation or
enforceability of this type of lien, Flynn’s lien is valid and
enforceable.
 N.B. The court could have reached any of the following three
conclusions:
o Flynn was perfected because there was no law requiring him
to do more (holding);
o Flynn was unperfected because there was no law specifying
means to perfect; or
o Court enunciates reasonable requirements for perfection.

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LAND & FIXTURE FILINGS
 REAL PROPERTY RECORDING
o Recording of deeds and security interests in real property are both in the state
real estate recording system. UCC filings are ineffective for interests in real
property.
o “Real property” includes (a) land; (b) certain interests in land (e.g., easement);
and (c) permanent structures on land (fixtures).
o Real estate recording system contains not only documents evidencing liens
against real estate, but also documents evidencing transfers of ownership, i.e.,
deeds. This enables users of the real estate system to determine who owns
property as well as who has liens against it.

 WHAT IS RECORDED
o Creditor must record the actual mortgage document, not merely a notice of its
existence.
 Mortgage must be signed in front of a witness and notarized (i.e.,
acknowledged before a notary public or some such official, who
authenticates the debtor’s signature by affixing the official’s own signature
and seal).
 Public record informs searchers not only of the existence of the mortgage
but its terms.
 When collateral is added or deleted, or when other important terms
change, an additional recording may be necessary.
o Signed by the debtor
o Containing a description of the debt secured and the collateral securing it.

 FIXTURES
o §9-102(a)(41) “Fixtures” are goods that have become so related to particular
real property that an interest in them arises under real property law.
 Prof. Steve Knippenberg: “You take the world, you shake it, and everything
that doesn’t fall off is a fixture.”
 State law determines whether a particular item of personal property
becomes real property.
 Many states use a 3-prong test: (1) annexed or attached to the
realty; (2) the attached property adapted or applied to the use of
the realty, and 3) intended as permanent attachment.
o In re Cliff’s Ridge Skiing Corp (Bankr. W.D. Mich. 1991):
 Ski chairlift is classified as a fixture.
 Creation & perfection can take many forms:
 Real estate law system (It is a salutary rule
that whatever is affixed to a building by an
owner to facilitate its use and occupation
23
 becomes a part of the realty albeit capable of
removal without injury to the building).
Mortgage covers fixtures even when they
are not explicitly mentioned in the
mortgage.
 Language regarding after-acquired fixtures in
a prior recorded mortgage is sufficient to
create and perfect its interest in the fixture.
 Perfection of a personal property interest in
a fixture with UCC filing system. In addition to
§9-502(a)(1)—(3) [identity of the debtor,
secured party, and collateral], it must satisfy
§9-502(b)(1)—(4) [stating (1) that it covers
this type of collateral, i.e., fixtures; (2) that it
is to be filed/recorded in the real estate
records; (3) a description of the real estate
where the fixtures are located or to be located
sufficient to provide constructive notice]. And
per 9-501(a)(1)(B), financing statement
covering fixtures (or goods to become
fixtures) must be filed where a mortgage
would be recorded.
o Methods for Perfecting Fixtures
 (1) Mortgage: A mortgage automatically covers fixtures without
expressly mentioning it in the mortgage on file.
 (2) Fixture Filing: File a “fixture filing” covering goods to become fixtures
in the real property records. §9-501(a)(1)(B).
 (3) Ordinary UCC Filing: The financing statement will not qualify for a
fixture filing but it does have limited effectiveness. It will prevail against
the trustee in bankruptcy and later fixture filings, even those made in
the real property records. (§9-334(e)(3)).
 ALL DEPENDS ON STATE LAW: If the state deems the property to require
a certificate of title (e.g. mobile home – In re Renaud), the certificate of title
will be the exclusive means of perfection.
 For a lawyer, you must file as both a fixture filing in the UCC and
Real Property filing systems. It might be unclear whether it is real
or personal property so err on the side of over-filing.
o If the property is owned by a partnership, it is an interest in the organization.
UCC filing is the only way to perfect, and it cannot be perfected through a fixture
filing in the real property records.
o Timber: “Goods” include “standing timber to be cut and removed under a
conveyance or contract for sale.” §9-102(a)(44). Even if there is no standing

24
 contract for sale, timber can still qualify as a fixture to be perfected in the real
property records.
o Security Interest in a Security Interest
 Article 9 allows for the attachment of the security interest in a mortgage
through the attachment of the promissory note
 §9-109(b) – A security interest in a secured obligation (the note) is
not affected by the fact that the note is secured by an interest to
which Article 9 does not apply (the mortgage).
 §9-203(g) – Attachment of a security interest to a right of payment
secured by a security interest or other lien on personal or real
property is also attachment of a security interest in the security
interest, mortgage, or lien.

 Personal Property Interests in Real Property

o Direct vs. Indirect Ownership
 Direct ownership interests in land is real property; indirect ownership
isn’t.
 E.g., A’s ownership of Blackacre in fee simple is categorically real property;
A’s sole ownership of Blackacre Co. that owns Blackacre is personal
property (stock).
o Mortgage—Security Interest in a Security Interest
 A mortgagee can sell his interest in the mortgage or borrow against it. But
mortgagee does not own the land: it merely has a mortgage (security
interest) against the land.
 Art. 9 deems a security interest in a mortgage to be that in a note, i.e.,
personal property  Art. 9 governs.
 §9-109(b): A security interest in a secured obligation (note) is not affected
by the fact that the note is secured by an interest to which Art. 9 does not
apply (the mortgage).
 §9-203(g): Attachment of a security interest to a right of payment secured
by a security interest or other lien on personal or real property is also
attachment of a security interest in the security interest, mortgage, or lien.

25
CHARACTERIZING COLLATERAL & TRANSACTIONS
 Characterization of collateral particularly matters when chattel paper, instruments,
and accounts are involved. The secured party is attempting to use a right to repayment
in another debt as collateral for the debt of the debtor.
o Chattel paper & instruments are tangible assets, either in paper or electronic
form. An account is just a right to payment in a monetary obligation.

 LEASE vs. SECURITY AGREEMENT

o Lease: A true lease is not a secured transaction and thus not subject to Art. 9.
Leases are, however, often structured so as to entitled the lessee to purchase the
leased goods at the end of the term. The question then arises as to whether it was
a true lease or a financing statement designed to protect to seller by maintaining
title in the seller as security for complete payments.
 Factual Inquiry: Lease is in fact a security interest if: (a) no right to
terminate by the lessee; (b) goods have no value when the lease ends; (c)
lessee can purchase goods for little or nothing.
 Lease as a “Chattel Paper” (record evidencing both a monetary obligation
and a security interest in goods or a lease of goods)
 In re Purdy (6th Cir. 2014):
 Facts: Sunshine loaned 435 cows to Purdy to milk. In return, Purdy
was to pay a monthly rent to Sunshine. Purdy was also to cull cows
as deemed necessary, and Sunshine was to, upon expiration of the
lease, receive 435 cows back.
 Held: It passes bright-line and economics-of-the-transaction tests,
i.e., lease.
 Lease involves payment for temporary possession, use and
enjoyment with the expectation that the goods will be returned
to the owners with some expected residual interest of value
remaining at the end of the lease term; Sale involves an
unconditional transfer of absolute title to goods with security
interest only an inchoate interest contingent on default and
limited to the remaining secured debt.
 Bright-line Rule: Transaction in the form of a lease creates a
security interest if the consideration that the lessee is to pay the
lessor for the right to possession and use of the goods is an
obligation for the term of the lease and is not subject to termination
by the lessee and the original term of the lease is equal to or greater
than the remaining economic life of the goods.
 THEN Economics-of-the-Transaction Test: Whether the lease
contains a nominal purchase option price; and the lessee develops
equity in the property such that the only economically reasonable
option is to purchase.
26
  N.B. Lease need not be perfected. §9-505 permits precautionary filing for
a lease, nonetheless.
o UCC §9-309: Security interest can be perfected upon attachment if
 PMSI in consumer goods;
 Assignment of accounts or payment intangibles which does not by itself
or in conjunction with other assignments transfer a significant part of the
assignor’s outstanding account or payment intangibles;
 Sale of payment intangibles.
o §9-310(c): If a secured party assigns a security agreement, filing is not required
to continue the perfected status of the security interest against creditors of and
transferees from the original debtor.
 Does NOT include the ASSIGNMENT OF LEASES! The transferee must
perfect against the lease and the reversionary interest.
 Transferee must perfect to have priority over creditors of
assignor. §9-310(c) only allows the transferee to step into the
shoes of the original creditor and continue perfected status against
creditors or transferees of the original debtor.
 Security interest in a lease does not embody the ownership rights
of the property: the reversionary & payment rights are separate;
security agreement in the lease covers only the right to
payment.
 This necessitates double perfection: the reversionary interest &
payment rights (chattel paper).
 If the payment streams split from the lease through an assignment
of the rent, that agreement is NOT chattel paper, but rather a
payment intangible because there is only a monetary obligation.
o Commercial Money Center (9th Cir. 2006): CMC leased out
equipment to clients and assigned contractual rights &
separate S/I in the actual lease to Bank. Bank took a S/I in
the S/I of CMC.
 If the payment streams are stripped from the
underlying leases, then there is no record for which
there to be a secured collateral attached to the
monetary obligation.
 Bank should perfect S/I in S/I (When CMC defaults,
Bank can’t go after the lessee).
 If the assignment is a payment intangible, it can be
perfected automatically if it is a “sale,” not a “loan.”
(§9-309(3)). If it is chattel paper, perfection must be
made by filing or possession.
o BUT cmt. 5d, §9-102: Expressly overrules Commercial
Money Center. Payment is inextricably bound with the

27
 “ancillary rights” of the lease. When the secured creditor
takes an assignment of just the lease, the lessor cannot strip
the payment streams from the ancillary rights of the lease
the come with the default of the lessee.
 If a lessor’s rights under a lease constitute chattel
paper, an assignment of the lessor’s rights to
payment under the lease also constitutes chattel
paper.
 Perfection must be done by filing or possession (§9-
312(a), §9-313(a)).
 If what was being assigned was for a security agreement, not a
lease, then the assignment does not require additional filing to
maintain perfection against transferees of the original debtor - §9-
310(c)
 Payment Intangibles, Accounts, Instruments and Chattel Paper
o Chattel Paper: Record(s) evidencing both a monetary obligation and a security
interest in specific goods or a lease of specific goods. §9-102(a)(11)
Payment Intangibles o Instruments: Negotiable instrument or any other writing
Account
Instrument
evidencing a right to the payment of a monetary obligation not itself a
security agreement or lease. §9-102(a)(47)
Chattel Paper
o Accounts: Right to payment of a monetary obligation for
property sold or service rendered. BUT if this right to payment is
evidenced by chattel paper or instrument, it’s not an account. §9-
102(a)(2)
o Payment Intangibles: General intangible under which the account debtor’s
principal obligation is a monetary obligation. §9-102(a)(61)

 SALE vs. LOAN

o Sale: Removal of ownership and risk
 If it is a sale, then the sale of payment intangibles is automatically
perfected - §9-309(3)
 Payment Intangibles: A general intangible under which the
account debtor’s principal obligation is a monetary obligation. §9-
102(a)(61)
 Thus, sale of payment streams of a lease makes the purchaser
automatically perfected without filing. However, if the entire
lease is the collateral, that is chattel paper (with differing
consequences depending on whether the ancillary rights can be
split from the payment rights). Perfection is not automatic in that
event.
o Loan: Separating ownership benefits from advantageous risk allocation

28
MAINTAING PERFECTION
 REMOVING FILINGS FROM THE PUBLIC RECORD
o Real Property
 “Satisfaction”: When the underlying mortgage debt is paid, the
mortgagee (lender) executes a satisfaction of mortgage document in
the recording. The mortgage no longer clouds title.
 Closing normally involves a simultaneous exchange of
repayment and satisfaction of mortgage to the
seller/mortgagor.
 Many states have statutory penalties for mortgagees who fail to
record the satisfaction in the record in a timely manner.
 “Release”: Secured creditor can release some or all of the property
from the mortgage lien if the mortgage has not been paid in full.
 Unlike satisfaction, absent any release provision in the
mortgage, the mortgagee is under no obligation to accept
partial payment for partial release.
 However, in real estate development transactions, it is common
for there to be a release price for a lot or part of the entire
development, normally to the amount that does not require the
developer to sell all of the units to pay off the entire debt
 §9-512(a): Release of collateral from the coverage of a
financing statement is accomplished by amending the
financing statement. It must identify, by file number, the initial
financing statement and must indicate it is no longer effective.
Errors subject to the “seriously misleading” test of §9-506.
o Personal Property Under Art. 9
 §9-513(c)(1): If the debtor has paid the entire debt and there is no
more lending, then the debtor can demand that the secured party file
a termination statement within 20 days of the demand.
 The secured creditor will suffer statutory fines if it fails to do so.
§9-635(b), (e)(4).
 The termination statement becomes part of the financing
statement to which it relates. §9-102(a)(39). Thus, errors in
the termination statement are subject to the “seriously
misleading” test that could render the entire financing
statement ineffective. §9-506(a).
 §9-512: Release of the collateral can be accomplished by amending
the financing statement, but the secured creditor is under no obligation
to do so
o If you’re in a jurisdiction where you don’t know if you have an affirmative
duty to alert your past clients about the continuation requirement, put it
on your calendar. See Barnes v. Turner (Ga. 2004).
29
 o In re Motors Liquidation Co. (2d Cir. 2015)
 Facts: GM arranged to pay off a synthetic lease (secured by real estate).
A paralegal mistakenly included the primary UCC financing statement
Mayer Brown prepared a closing checklist and UCC-3 termination
statements that their paralegal mistakenly included terminating
another term-loan financing statement ($1.3-billion secured loan).
JPMorgan STB approved the documents, and the UCC-3 termination
statements were filed.
 Held: Although JPMorgan never intended to terminate the Main Term
Loan UCC-1, it authorized the filing of a UCC-3 termination statement
that had that effect. One need not have an intention to terminate a
security interest if a termination statement is in fact filed.

 SELF-CLEARING & CONTINUATION

o §9-515(a) – A filed financing statement is only effective for a period of 5 years
after the date of filing.
 At the end of the 5-year effectiveness, the financing statement lapses,
i.e., ceases to be effective. It is up to the secured party to monitor the
financing statement timeline. §9-515(c)
 “LAPSE”: Deemed never to have been perfected as against a
purchaser of the collateral for value.
o Lien creditors are NOT purchasers: A lapsed financing
statement is still effective against subsequent lien
creditors.
 Filing of continuation statement does not violate automatic stay.
o §9-515(d) – A continuation statement must be filed within 6 months prior
to the expiration of the original filing and must be signed by the secured
party, identify the original statement number, and state that the original
statement is still effective.
 “WINDOW”: Only the 6 months prior to the date of termination (five
years after the date of filing). The continuation statement cannot be
filed before or after that window, otherwise it is ineffective.
 §9-522 requires the filing officer to maintain lapsed records for
an extra year, only for the purpose of making sure that if the
filing office gets behind it can make the termination statement
effective before the financing statement is removed from the
record.
 Filing a continuation statement provides for another 5 years of
perfection from the date of lapse of the original financing
statement - §9-515(e)
 So long as the financing statement is filed within the window,
the financing statement will continue for another 5 years,

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 starting from the date it would have lapsed, not the date the
continuation was filed.
 New Financing Statements ≠ Continuation
 If a new statement is filed, then the date of perfection is not
backdated to the time of the original filing. It is a separate filing
and is subject to subordination of other creditors who had
security interest in the 5 year interim.
 Authorization?
o There is a question of whether a creditor will have
authorization to file a new financing statement if the
original has lapsed.
o Signing a security agreement only authorizes the filing of
“an initial financing statement.” §9-509(b). However,
the UCC interprets words in the singular to include
words in the plural. §1-106(1). There is a possible
argument that there can be multiple initial financing
statements.
o Regardless, many security agreements contain
provisions that authorize “all documents necessary to
make effective or continue the effectiveness of the
agreement,” contracting around the problem.
o Different Perfection Methods
 §9-308(c): A security interest that is perfect one way and later
perfected another is continuously perfected if there is no
intermediate unperfected period (e.g. possession → filing).
 §9-312(f): Perfection via possession is lost when the creditor loses
possession, but there is a 20-day cushion after the lapse to regain
possession or perfect through another method.

 CHANGES IN DEBTOR’S NAME

o §9-507(c): If the change in the debtor’s name makes the financing statement
seriously misleading, it nevertheless remains effective for:
 (1) The collateral owned by the debtor at the time of the change;
and
 (2) collateral acquired by the debtor in the first 4 months after the
change
 The seriously misleading F/S is not effective to perfect a S/I in
collateral acquired by the debtor more than 4 months after the
change.
 If a name change makes filed F/S seriously misleading, secured
creditor must file an amendment to be perfected in any
collateral acquired by debtor four months after change.

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  Effectively keeps the risk of a latent financing statement in the
debtor’s old name always present. Although many security
agreements require the debtor to notify the creditor of a name
change, that only leads to civil liability with minimal damages
payable to the creditor and doesn’t insulate the risk to searchers

 TRANSFERS OF COLLATERAL
o “Debtor”: Owner of collateral. Separate from “obligor” as the person who is
required to repay the debt
 “New Debtor”: A person who steps into the shoes of the original
debtor. Typically involves someone who assumes the debtor’s secured
loan obligations and agrees to be bound by the security agreement.
o §9-507(a): A financing statement is still effective if the collateral is sold,
exchanged, leased, licenses or otherwise disposed of and which a security
interest continues, even if the secured creditor knows of or consents to the
disposition.
 §9-508(c) – A financing statement filed against the original debtor
remains effective against the new debtor for the collateral covered by
the security agreement.
 §9-508(b) – If the new debtor’s name is different from the original
debtor, then the financing statement remains effective for collateral
acquired four months after the change.

 CHANGES IN DESCRIPTION OF THE COLLATERAL

o Type 1 Change: A change in circumstance that does not control the place of
filing, but that does make the collateral difficult for the search to identify.
 §9-507(b): Even if the changes have made the financing statement
seriously misleading, the financing statement remains effective.
 E.g., Equipment → inventory
o Type 2 Change: A change in circumstances that is sufficient to change the
method of perfection.
 Art. 9 only excuses seriously misleading statements, not failures to file
in the correct system (e.g. DMV, real estate). The secured creditor is
unperfected! - §9-311(b)
 E.g., Goods → automobile

 EXCHANGE OF COLLATERAL (Perfecting Identifiable Proceeds)

o Barter Transactions
 Type 0—The proceeds received fall within the description of
collateral in the original financing statement.
 §9-203(f): Perfected security interest attaches to the new item
without any additional filing.

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  Type 1—Proceeds are property not covered by the description in the
financing statement but are property which could be perfected by
filing in the office where the secured creditor’s financing
statement is on file.
 §9-315(d)(1): Secured creditor remains perfected without
needing to make an additional filing (“same office rule”).
 This places a larger burden on the searcher in figuring out what
collateral the financing statement covers.
 Type 2—Proceeds of a type which filing is required in another filing
office than where the original financing statement is filed.
 Secured party must REFILE. To be continuously the secured
party must make a new filing within 20 days from the time the
debtor receives the proceeds. §9-315(d)(3).
o §9-509(b)(2): No additional authorization needed to
file the necessary financing statement to cover the
proceeds.
 In re Seaway Express Corporation (9th Cir. 1990)
o Facts: NBA loaned to Seaway with S/I in all Seaway’s
inventory and ARs, including any “proceeds” from the
sale of either. Seaway later sold back the accounts to the
client in exchange for a parcel of real property. NBA,
albeit aware of the transaction, did not approve or
disapprove, and Seaway refused to record a deed of trust
on the property in NBA’s favor.
o Held: To perfect an interest in real property under WA
law, a party must record a deed signed by the grantor. An
unrecorded interest in property is not binding on a
subsequent purchaser in good faith. NBA’s perfected S/I
in the account did not extend to the property even if
it was a “proceed.”

 COLLATERAL → CASH PROCEEDS → NON-CASH PROCEEDS (When traceable)

o Type 0: Still perfected. §9-315(d)(3).
o Type 1: Secured creditor must file a new financing statement within 20 days
of debtor’s receipt of the property to be continuously perfected. Same office
rule of barter does not apply.
o Type 2: Creditor must re-file within 20 days for continuous perfection. §9-
315(d)(3)

 COLLATERAL → CASH PROCEEDS

o §9-315(d)(2): Secured party is continuously perfected so long as the cash
proceeds are sufficiently identifiable.

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 Relocation of the Debtor
o For unregistered organizations and individuals, principal residence and CEO
can change across state boundaries, thus changing the jurisdiction required
for filing to be perfected.
 §9-316(a)(2): When a debtor changes state of principal residence, the
secured creditor has four months to file in the required jurisdiction.
 If the secured creditor fails to refile, the security interest is deemed to
have never been perfected as against a purchaser of value*
(Retroactive effect). §9-316(b)
 *Still takes priority over lien creditors and the trustee in bankruptcy

 Transfer of Collateral to “New Debtor” in Different Jurisdiction

o Often occurs in corporate settings where there is a reincorporation through
a sale of assets or merger from a legally different entity in a different
jurisdiction
 §9-316(a)(3): The secured creditor has one year to discover the
merger and file in the proper jurisdiction. Applies to any transfer to a
new debtor in a different jurisdiction.

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 REMEDIES
Lien: A charge against or an interest in property to secure payment of a debt or performance
of an obligation
Foreclosure: The process by which the creditor compels payment of a defaulted debt by
seizing ownership of the collateral and extinguishing the rights of the debtor in the
property.
Security Interest: Any lien created by contract between the debtor and creditor
 The right to the collateral is contingent upon default. Once default of the debt has
occurred, the creditor has access to remedies.
Non-Consensual Liens: Liens granted by statute (e.g. mechanic’s liens, tax liens) or liens
obtained by unsecured creditors through the judicial process (e.g. judgment).

“INTENDED AS SECURITY” DOCTRINE

 §9-109(a)(1): Art. 9 applies to “any transaction, regardless of its form, that creates a
security interest in personal property.”
o Substance > Form: Creditors will often attempt to structure a transaction to
avoid the necessity of foreclosure, instead attempting to gain ownership through
a forfeiture. Courts are reluctant to enable creditors to circumvent the foreclosure
process.
 Transaction INTENDED AS SECURITY
o Basile v. Erhal Holding: Deed in lieu of foreclosure is not a deed if the recording
of the deed is contingent on the repayment of a debt.
 Conditional event of non-payment makes the transaction a security
interest requiring foreclosure (in real property).
o §2-401(1): Any retention or reservation by the seller of the title in goods shipped
or delivered to the buyer is limited in effect to a reservation of a security interest.
 If the seller attempts to retain an interest upon a purported sale, it is a
security interest. Such conditional sales are in the form of a security
agreement that gives the buyer possession and the creditor a right to
foreclose upon default
o §9-109(a)(3): Art. 9 applies to Sales of Accounts, Chattel Paper, and Payment
Intangibles as well as security interest in accounts.
 Adopted to finesse a problem with purchasing accounts from a debtor and
requiring the debtor to personally guarantee (a right of recourse) the
accounts of its own account debtors. Thus, if the account debtors do not
pay, it is in substance a secured loan.

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FORECLOSURE
 Real Estate: State law
 Judicial Foreclosure: Secured creditor who holds the mortgage files a civil action for
foreclosure, complaint is served giving time for the debtor to raise defenses, and the court
enters judgment and conducts the sale.
o Upon sale, the debtor must surrender possession to the purchaser.
o The court can issue a writ of assistance (aka writ of possession) on the request
of the purchaser to direct the sheriff to remove the debtor from possession.
 Many states give the creditor power of sale foreclosure. Some states that
have “deed of trust” regulations concerning mortgages put the power of
sale in a 3rd party.
o Wrongful sale: If the debtor can prove that the sale did not follow state law, then
he can file a judicial action seeking damages in the form of a reduction in the
deficiency
o If the sale does not reach the amount of the debt, the creditor has an unsecured
claim for the deficiency. However, that deficiency is contingent on the sale of the
property being lawful. Many jurisdictions prevent the ability to seek a deficiency
altogether if the sale was improperly conducted.
o Right to Redemption: The majority of States allow the debtor to redeem the
entire debt any time before the sale. The mortgagee is obligated to accept full
payment before then.
o Deed in Lieu of Foreclosure: If there are NO other outstanding liens or interests
in the collateral, the debtor can transfer the property over to the creditor to avoid
a foreclosure sale any time before the sale. The consideration is the
extinguishment of the mortgage.
 Many creditors want to do this because it will allow the creditor to take
the land and sell it at a profit without having to return the equity to the
debtor.
 However, debtors will often attempt to extract extra money from the
creditor because they are buying the equity.
 As a lawyer, you should be wary of debtors seeking a deed in lieu of
foreclosure without counsel of their own. Advise them that you do
not represent them, you speak on behalf of the creditor, and
disclaim that you are explaining the document from the view of the
creditor in writing.

 UCC Foreclosure by Sale

o Art. 9 governs the foreclosure of security interests in personal property.
o §9-610(a): Upon default, the secured party may sell, lease, license, or otherwise
dispose of the collateral.
 §9-623: The sale will foreclose the debtor’s right to redeem and
extinguish the creditor’s security interest in the property.

36
 Unlike real estate foreclosure laws, the sale is totally within the power of
the creditor. Alternatively, the creditor can choose to conduct a judicial
sale (or any available judicial process) if it wishes, but it is not obligated
to. §9-601(a)

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REPOSESSION
 Although the creditor may have the right to possession upon default, state law requires
the creditor to abide by certain procedures to gain possession. Who will have possession
is important for determining access, value, the use of the collateral after default, the
preservation of the collateral, and the relative bargaining leverage of the parties.

 SELF-HELP REPOSSESSION
o §9-609: Immediately upon default, the secured creditor has the right to take
possession of the collateral.
 “Writ of Replevin”: The secured creditor can immediately go to the court
and ask for repossession through a writ. It directs the sheriff to take
possession from the debtor and give it to the creditor
 Usually the creditor will have to prove it will likely prevail in court
and post a bond on the event that the creditor does not actually have
possession. The debtor can attempt to regain possession after
replevin and contest the repossession through filing an action and
posting another bond, but likely the debtor is in financial difficulty
and the action will go uncontested.
 The goal is possession, not sale. Foreclosure will occur once the
collateral is in the possession of the creditor
 NOTICE before regaining possession is NOT required!
o Del’s Foods v. Carpenter Cook: On the same day the judge
issued a writ of replevin, creditor and sheriff went and took
possession of the collateral. First notice of the action was
when the sheriff arrived to take possession. Court holds
there is no due process violation because the bond and
seizure hearings were sufficient procedural safeguards.
 LIMITS of SELF-HELP: BREACH OF PEACE
o §9-609(b)(2): The secured creditor may repossess without causing a breach of
the peace
 Breach of the peace varies widely between jurisdictions. It is a highly
factual circumstance that depends on the control of the debtor, the actions
of the creditor, and the involvement of the state.
 Key factors are the potential for immediate violence and the nature of
the premises intruded upon
 Ultimately an informed debtor will oppose self-help repossession
enough in hopes of creating a breach of the peace. This stalls
creditors and requires them to seek a writ of replevin. Often
provides opportunities to defraud creditors when repossession is
delayed.

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  Compliance with repossession procedures is non-delegable. The creditor
will not be able to avoid liability by contracting repossession to an agent
(or repo agencies).

 SELF-HELP AGAINST ACCOUNTS

o §9-607: Secured Creditor who knows the identity of account debtors can send
them written notices to pay the creditor directly following default.
 This may not be in the interest of the secured creditor. Account debtors
might be concerned about the financial health of the debtor and cut off
business, leaving the creditor high and dry if it cannot find the account
debtor or the account debtor no longer seeks financing from the regular
debtor.
o §9-406(c): An account debtor who is concerned about whether the person
sending the notice is actually entitled to the account is entitled to request proof
of the assignment.
o §9-406(a): The account debtor who does receives notice can discharge his
obligation only by paying the secured creditor.
 The account debtor at its own risk must determine who to pay. If the
account debtor fails to pay the right person or is wrong about the rights of
the secured party who tendered notice, it will be liable for the payment and
may have to pay twice

 Right to Possession PENDING FORECLOSURE – REAL PROPERTY

o The debtor remains entitled to possess real property until the court forecloses
the debtor’s right to redemption and the sheriff sells the property.
 Exception: Mortgagees never become entitled to possession of mortgaged
property, they are only entitled to the proceeds of the sale.
o In many jurisdictions the purchaser of the property at the sale is entitled to a
court ordered ejectment or eviction. The purchaser is the only party that is
entitled to possession after foreclosure.
o “Receiver”: Court appointed official to preserve the value of the collateral prior
to the sale.
 The receiver has a fiduciary duty to all individuals who have an interest
in the property. He will have the right to collect rents, use proceeds to
maintain the building, rent any units necessary, and temporarily retain
rents in excess of the amount necessary to maintain the property.
 Receivers will only be available when the remedies at law are inadequate,
usually when the value of the property is inadequate to satisfy the
mortgage upon a sale or the mortgagor is so insolvent that a deficiency
judgment is uncollectable.

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JUDICIAL SALE & DEFICIENCY
 STRICT FORECLOSURE:
o Strict Foreclosure: Foreclosure that does not result in a sale.
 Cutting off the debtor’s equitable (common law) rights to redemption
by having the creditor become the owner without a sale.
 Unlawful in many jurisdictions. Even if it is contracted for, the law will
attempt to avoid having the debtor forfeit his equity in the property.

 FORECLOSURE SALE PROCEDURE

o Right to Redeem: Time period in which the debtor can pay the mortgage
(including interest and attorney’s fees) and redeem the property before the time
of sale. Some jurisdictions have a statutory right to redeem after the sale (by
reimbursing the purchaser the precise price he paid for the property).
o The right to redeem is transferrable.
 The debtor can sell rights to redeem and the purchaser can execute them.
 Depending on the equity in the home, it may be a substantial windfall for
the purchaser or the rights.

 DEFICIENCY
o If the sale price does not meet the value of the debt, then the creditor can file an
action for a deficiency judgment which will be unsecured.
o Debtor can always contest the sale procedure to set aside the sale because of an
inadequate price stemming from an improper sale procedure.
o Valuation
 Valuation of the foreclosed property occurs on the date of the
foreclosure sale and the sale price is conclusive of the property’s value.
 If the superior lien is not paid in full, then all junior liens are
extinguished. Junior liens will only get paid in excess to the debt being
foreclosed on.
 Foreclosure price < FMV is not determinative.
 This is normal. So long as the sale was according to statutorily
defined procedures, it will be upheld and the deficiency will be
calculated from the difference.
o First Bank v. Fischer & Frichtel, Inc. (Mo. 2012): Debtor let
the judicial sale stand, but attempted to limit deficiency to
[Amount of debt – FMV of property].
o Held: Missouri has a notoriously high threshold to shock the
conscience and set aside the value (20% of FMV). Here, there
were cogent reasons for a lower bid (due to the depressed
real estate market and the bulk nature of the sale, etc.).

40
  In order for the price itself to cause the sale to be set aside, it must
be so low that it shocks the conscience of the court.
 The sale can also be set aside for inadequate advertising, inadequate
notice, or a general hostile environment that made the process
inadequate.
 General Procedures:
 Advertising the property in a public location for a defined period
of time (fixed by statute or judgment of foreclosure) in a manner
calculated to attract potential buyers.
 Notice of auction at a specified location and time
 Carried out by a public official (court clerk or sheriff)
 Confirmation of sale post-auction

 Risks to Outside Buyers

o Because the debtor is entitled to remain in possession of the property until the
sale, prospective bidders (even the creditor) do not have a right to inspect the
premises.
 Most mortgage contracts have clauses giving the creditor the right to enter
upon default (and right to inspect). Otherwise, the valuation of the
property will be impacted if the creditor does not know the condition of
the property.
o Prospective buyers are subject to caveat emptor with respect to the state of the
title. The buyer takes the property subject to any defects or clouds in the title
that they could have discovered in searching the public records.
 The buyer also takes the property subject to any liens that are superior
to the one being foreclosed on. It is the buyer’s responsibility to find out
what superior liens will survive following the purchase
 Marino v. United Bank of IL:
o Buyer asked the mortgagee’s attorney whether the property
had any encumbrances, but she claimed ignorance and said
she was not aware of them.
o Held: Lack of certainty in the attorney’s statement was
sufficient to put a reasonable person on inquiry (it was not a
false statement of material fact, thus not a fraudulent
misrepresentation). Buyer takes all the risk for a mistake
or defect of the title at the sale.

 Anti-Deficiency Statutes
o Some states prohibit or severely limit deficiency judgments in certain
circumstances, the large majority of them giving courts discretion to refuse or
limit them. Such statutes don’t address the loss of equity in the property, but
rather the circumstance where the sale price is less than the debt owed.

41
 o It is common where the statute credits the debtor for the FMV of the property
even if the sale brings a lower price.
 E.g., Debt is $100,000, FMV is $80,000. Sale gets $45,000. With the statute,
the deficiency judgment is only $20,000. Without it, the deficiency is
$55,000.

 CREDIT BIDDING AT JUDICIAL SALES

o The secured creditor is permitted to bid at the foreclosure sale, giving it a distinct
practical advantage: It likely knows when the sale is early in advance, is familiar
with the debtor, the title, and the condition of the property, and may have an
enforceable right to inspect the property.
o “Credit Bid”: The bid is credited against the creditor. The creditor need not pay
money for any bid, it is essentially paying its debt for the property.
 Credit bid allowed up to any amount that, upon confirmation of the sale,
would be payable to the secured creditor.
 The creditor has an enormous incentive to bid up to the debt. If it gets out-
bid, then its debt is paid off. If not, then it has full possession of the property
and can resell it a FMV with the possibility of making a profit (windfall).
 If Debt > FMV: The creditor will want to first bid all the way up to
the FMV, but it only loses the opportunity to get a deficiency
judgment if it bids up to the debt. It can still recover the FMV upon
resale and will minimize any chance of an inadequate price
 If FMV > Debt: Ideal position for the secured creditor. Make a full
credit bid on the first instance. If it goes farther, the creditor gets
its full repayment and any surplus goes to junior creditors or back
to the debtor. No downside in making a full credit bid.
 Junior creditor cannot bid its debt until the debt of the superior creditor
has been bid. The creditor with priority gets paid first no matter who bids.
o When a purchaser at a sale is unable to pay, many state statutes uphold the next
highest bidder. There is a great incentive for the creditor to bid its debt as quick
as possible or it risks attempting to collect a deficiency that cannot be paid as
recompense

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ARTICLE 9 SALE & DEFICIENCY
 ACCEPTANCE OF COLLATERAL
o McDonald v. Yarchenko (D. Or. 2013)
 Facts: McDonald, member of an LLC, loaned to Yarchenko, who pledged his
1/6 interest in the LLC as security for the loan. Yarchenko defaulted, as
a result of which McDonald issued a demand notice and proposed twice (in
a letter form) that Yarchenko sign over his share of the LLC in exchange for
cancellation of his debt. Yarchenko twice did not respond.
 Yarchenko argued that McDonald failed to dispose of the collateral in a
commercially reasonable manner under UCC §9-610 and to properly notify
Yarchenko of his alleged disposition of the collateral under UCC §9-611.
 Held: Under §9-620, strict foreclosure, a procedure by which the secured
party acquires the debtor’s interest in the collateral without the need for a
sale or other disposition under §9-610, should be encouraged.
 Yarchenko’s collateral shall be foreclosed in full satisfaction of the
obligation. Under §9-620 debtor consents to an acceptance of
collateral in full satisfaction of the obligation it secures if the
secured party:
 (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;
 (b) in the proposal, proposes to accept collateral in full
satisfaction of the obligation it secures; and
 (c) does not receive a notification of objection authenticated by
the debtor within 20 days after the proposal is sent.
 §9-620 cmt. 11: Proposals and acceptances should not be second-guessed
on the basis of the value of the collateral involved. Windfall for McDonald
argument rejected.

 SALE REQUIREMENT
o §9-610(b): After default, the secured creditor may sell, lease, license, or
otherwise dispose of any or all of the collateral in a COMMERCIALLY
REASONABLE MANNER.
 Secured creditor conducts sale per “commercially reasonable” procedure.
 Secured creditor gives the debtor prior notice of the sale. §9-611(c)(1).
 Debtor may redeem the collateral prior to sale by paying the full amount of
debt, including secured creditor’s attorney’s fees & sale expense. §9-623.
 There is no statutory right to redeem after the sale.
 Good-faith purchaser at a UCC sale can buy with confidence that it will not
lose its bargain. §9-617(b).
 Debtor is responsible for deficiency (unsecured claim).

43
 Exception: Secured party buys the collateral or sale does not comply
with Art. 9 requirements.
o §9-602(7): The sale and foreclosure process cannot be contractually waived or
varied.
 §9-603(a): However, the parties may determine in their agreement the
standards for the fulfillment of Article 9 duties only if the standards set
forth are not manifestly unreasonable (although it is rarely ever done).
 The creditor can retain the collateral through acceptance and consent
(express or implied) from the debtor, the debtor has a right to have the
collateral sold after default regardless of the contractual language.
 §9-610(a): A secured creditor may dispose of the collateral in its present
condition OR following any commercially reasonable preparation or
processing.
 Art. 9 may require the secured creditor to take commercially
reasonable restoration measures to sell the collateral in a
commercially reasonable manner.
 However, the drafters thought that a secured party MAY NOT
dispose of the collateral in its present condition if, when taking
into account the costs and probable benefits of preparation and the
fact that the costs would be advanced at the secured creditor’s risk,
it would be commercially unreasonably to sell it. May mean
throwing it away or taking onerous measures to restore it –
Comment 4, §9-610

 ACCEPTANCE OF COLLATERAL
o §9-620: After default, the debtor can consent to the secured party retaining the
collateral in full or partial satisfaction of the obligation secured
o §9-620(c)(2): Consent can be implied if the secured party sends the debtor a
proposal for retention of the collateral in full satisfaction and does not receive a
notification of objection within 20 days. Oral objection is insufficient
 EXCEPTIONS
 §9-620(a)(2): There must be no objection from other lien holders
on the same collateral.
 §9-620(g): Acceptance in partial satisfaction is not permitted in a
consumer transaction
o “Consumer Transaction”: Transaction in which (i) an
individual incurs an obligation primarily for personal,
family, or household purposes, (ii) a security interest
secures the obligation, and (iii) the collateral is held or
acquired primarily for personal, family, or household
purposes.

44
  §9-620(a): If the collateral is consumer goods, the debtor can
consent in writing or by silence to strict foreclosure only after
repossession.
 §9-620(e): Strict foreclosure is not permitted if the debtor has paid
60% of cash price of consumer goods purchased on credit or
60% of the loan secured by the consumer goods
o §9-625(a): If the secured party attempts an improper acceptance without
consent, the court can order monetary damages for non-compliance. Typically
this is brought when the creditor procrastinates on the sale.

 Sale Procedure
o §9-610(b) – EVERY ASPECT of the sale must be conducted in a commercially
reasonably manner by the creditor.
 As opposed to real property foreclosure sales, the creditor runs the sale
and the method by which it can dispose of the repossessed collateral.
 The creditor has broad latitude in determining the method and timing of
the sale. Depending on the circumstances, the sale can be conducted by
auction, fixed price, or negotiation with interested parties
 The sale procedure requirements are directed at getting a good price for
the collateral. If there is a better market to achieve that beside the
equivalent of a foreclosure auction, §9-610 requires the creditor to pursue
it (and incentivizes it through the fear of having an unsecured deficiency
judgment)

o NOTICE
 §9-611 – Creditor is required to give the debtor prior notice of the sale,
enabling the debtor to observe the sale, participate in it, or otherwise
protect its rights.
 §9-624(a): Notice can be waived only after default
 §9-611(d): Notice is not required if the collateral is perishable or
threatens to decline speedily in value or is of a type customarily
sold on a recognized market
o “Recognized Market”: One in which items sold are fungible
and prices are not subject to individual negotiation. For
example, a commodities market is a “recognized market” but
a dealers-only car auction is not. Cmt. 9, §9-610 (In re
Downing)
 §9-625(c)(2): If the collateral is consumer goods, statutory
damages for failure to give notice is 10% of the debt plus a credit
service charge.
 §9-613: Contents of the notice include (1) Description of the debtor and
secured party, (2) Description of the collateral, (3) Method of intended

45
 disposition, (4) Statement that the debtor is entitled to an accounting of
unpaid indebtedness, and (5) The time and place of the public sale or the
time after which other disposition is made.

o REDEMPTION
 §9-623 – Incorporation of the right to redemption if the debtor pays the
full amount of the debt and non-advances, including the secured
creditor’s attorney’s fees and expenses before the moment of the sale.
Once the secured creditor contracts for the collateral’s disposition, the
right to redeem is foreclosed

 DEFICIENCY JUDGMENTS
o §9-615(d): Generally, the obligor of a secured debt is liable for any deficiency
remaining after application of the sale proceeds.
 LIMITATIONS:
 §9-615(f): If the secured party buys the collateral at the sale, the
deficiency is calculated from the amount that would have been
realized in a complying sale to a third party as if it were the
actual sale price.
 §9-626(a)(3): If the sale does not comply with Article 9
requirements (i.e. “commercially unreasonable”), the deficiency is
calculated from the amount that would have been realized in a
complying sale as if it were the actual sale price

 PROCEEDS OF SALE
o Order of Disposition of Proceeds: (§9-615(a))
 (1) Reasonable expenses from the retaking, holding, preparing for
disposition, processing, and dispossession, and to the extend
provided by agreement, reasonable attorney’s fees; then
 (2) Satisfaction of obligations secured by the security interest under which
the disposition is made; then
 (3) Satisfaction of obligations of subordinate security agreements.
o EXPENSES: Paid first upon the sale. Debtor pays from his equity if the collateral
is valued more than the debt, meaning his equity shrinks as the sale process
continues. The debtor bears the cost of sale by either a reduction of the equity or
an increase in the deficiency. §9-615(a).

 PROBLEMS WITH ART. 9 SALE PROCEDURE

o FAILURE TO SELL COLLATERAL
 §9-610: Because the secured party “may” sell the collateral, there is no
fixed time in which the sale must occur or requirement that the collateral
must be sold after default.

46
  §9-620(f): Consumer goods must be sold 90 days after taking
possession.
 §9-626(a): If the delay in selling is commercially unreasonable, the
secured creditor’s deficiency will be limited to the amount that would
have been left owing if the sale had been commercially reasonable.
 §9-625(a)-(b): If the court determines that the secured creditor is
attempting to take full possession of the collateral without a sale, a court
may order a sale and award monetary damages.

o FAILURE TO GIVE NOTICE

 Does not fully invalidate the sale, but it can have the effect of reducing the
deficiency
 Some states deny the right to a deficiency judgment altogether if
strict compliance with notice requirements are not followed (In re
Downing)

o ‘COMMERCIALLY UNREASONABLE’ SALE

 Generally, the debtor’s right to set aside the sale for reason that it was in a
“commercially unreasonable manner” is constrained, but the deficiency
may be reduced or limited - §9-626(a)(4)
 Fact specific inquiry that depends on the nature of the collateral, the
parties, and the sale that was actually conducted. Failure to get the
best price possible does not equate to the sale being commercially
unreasonable.
 §9-626(a)(4): If the sale is “commercially unreasonable” or otherwise
does not follow the requirements of Article 9 (i.e. failure to give notice),
then there is a rebuttable presumption that the collateral was at least
equal to the value of the debt + expenses.
 The creditor can always carry its burden otherwise, but the creditor
must defend its valuation beyond the preponderance of the
evidence.
 §9-626(b): Presumption is not applicable to consumer
contracts. It is left up to the courts to resolve the consequences of
failure (court split on the matter – many deny deficiency
altogether).

47
 REMEDIES IN BANKRUPTCY
Federal Bankruptcy Law supersedes state collection laws, rights, and procedures,
but recognizes properties as they exist in state law prior to Bankruptcy

FILING
 A bankruptcy can be initiated voluntarily, or involuntarily by the debtor’s creditors.
 Immediately upon filing, 2 things occur:
o (1) A bankruptcy estate is created consisting of all property of the debtor.
§541(a)(1)
o (2) An automatic stay is imposed halting any collection activities of creditors.
§362(a)
 Chapter 7: Liquidation and Discharge
o Deal that the debtor surrenders all of its nonexempt assets to the bankruptcy
trustee (acting on the behalf of unsecured creditors) and in exchange receives a
discharge of all dischargeable debt
o Exemption is often determined by state law, but some states permit the debtor to
choose between state law exemptions and exemptions contained in the
Bankruptcy Code (§522(d))
 Chapter 13: Individual Reorganization
o Available only to individual debtors whose unsecured debts are less than
$337,000 and whole secured debts are less than ~$1 million.
o Debtor proposes a plan to pay all of its disposable income to unsecured creditors
for a period of 5 years or less depending on the debtor’s income. The proposed
payments must be at least as great as the creditors would have received under a
Chapter 7 filing. Creditors do not vote for the plan
 Chapter 11: Business Reorganization
o Debtor nearly always remains in possession of the estate during the pendency
of the case. The business continues to operate as creditors and the debtor
restructure the debt, change the terms, or both.
o Creditors must approve the plan, but the court may “cram down” objecting
creditors only if the plan respects priority rights among creditors and
shareholders and promises to pay at least as much as the creditor would have
received under a Chapter 7 filing.

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AUTOMATIC STAY
 UNSECURED CREDITORS
o Bankruptcy is a collective remedy and proceeding for unsecured creditors. Each
unsecured debt is not separated from the others.
 Once the estate has been gathered, the unsecured creditors share pro rata
with other unsecured creditors any debtor’s assets discovered and
included in the estate.
 Once the bankruptcy case has been filed, all further actions by unsecured
creditors against the debtor must be collective actions taken on behalf of
all the creditors.
 §362(a): The automatic stay is applicable to all entities against any act to collect a
prepetition debt
o Applies to both direct collection attempts (levy) as well as indirect attempts
(initiating a lawsuit to establish judgment on an outstanding debt as prerequisite
for collection)
o §362(c)(1): The stay stays in effect until the conclusion of the bankruptcy case.
o The stay does not halt criminal actions against the debtor. The debtor also remains
subject to government actions to abate continuing violations of federal law.
§362(b)(4)

 SECURED CREDITORS: Lifting the Stay

o Secured creditors in bankruptcy are given the right to participate individually
in the bankruptcy proceeding rather than be subject to collective treatment. They
are entitled to the value of the collateral or money of equivalent value as an
unsecured claim.
o Lifting the Stay:
 §362(d)(1): The stay must be lifted if the trustee or debtor does not
provide the creditor with adequate protection
 The debtor must protect the secured creditor against loss as a result
of the delay in foreclosure caused by the stay. Decline in value of the
secured creditor’s collateral without alternative compensation or
“adequate protection” must result in lifting the stay allowing the
secured creditor to foreclose on the debt.
 Insurance: Lack of insurance against the collateral is almost always
conclusive evidence that the debtor does not have adequate
protection against the collateral. The creditor will not be able to
recover the proceeds of entire loss if there is no insurance (See
§552(b) allowing tracing of proceeds during bankruptcy).
 Equity cushion: The protection from decline in value for the
secured creditor. If the debtor has equity, then the creditor is
protected. Worry occurs with the secured creditor whose claim is
under water (i.e. where the debt exceeds the value of the collateral).
49
 o Equity will decrease during the bankruptcy case because of
the accrual of interest. Interest on the debt continues to run
(and attorney’s fees if the contract calls for them) up to the
value of the collateral, so the equity cushion must be
substantial to provide reassurance to a secured party
(§502(b)).
 What constitutes “adequate protection”?
o Factual determination: Up to the court to decide.
o Monthly payments that compensate for declines in value
o Additional lien against property worth at least the declines
in value
 Valuing Collateral to Determine “Adequate Protection”
o (1) Time of Petition to Present (In re Craddock Terry)
 The collateral is valued at the time the bankruptcy
case. If it has declined since the time of petition, then
the amount of adequate protection will equal the
value at the time of the filing – time of decision
o (2) Time of Motion to Present (Majority rule)
 The adequate protection will equal the difference
between the value of the collateral at the time of the
motion and the time of decision. Incentivizes
creditors to move for adequate protection early.
o (3) Time of Hearing to Present
 No retroactive adequate protection at all.
Incentivizes the creditors to file to lift the stay as soon
as possible to grant any possible future decline in
value.
 §362(d)(2): (1) Debtor has no equity in the collateral; and (2) The
collateral is not necessary to an effective reorganization.
 “Necessary”: Collateral that is required for the debtor to realize
income and remain in business. The debtor will be entitled to retain
such collateral if the retention of it serves a bankruptcy purpose.
The protection of the estate is the key consideration.
 §362(e): Stay is automatically terminated 30 days after the secured
creditor moves to lift the stay unless the court enters an order continuing
the stay pending resolution of the issue.

50
BANKRUPTCY PROCESS
 CALCULATING AN UNSECURED CLAIM
o At the inception of the bankruptcy case, creditors must file a one-page proof of
claim describing the debt and stating that it remains outstanding. If no one
objects, the claim is deemed to be “allowed” into the bankruptcy process. §502(a)
 Claims against the estate are accelerated as a result of the bankruptcy
filing. The whole debt must be resolved in the bankruptcy process, not just
the payments due. §502(b)(1).
o Unsecured Claim: The amount owed on the debt under non-bankruptcy law
as of the moment the bankruptcy petition is filed. §502(b)
 Fees (incl. attorney’s fees) will be included in the amount of the claim if it
is contractually mandated between the debtor and creditor. §502(b)(1)
 Interest does NOT accrue for unsecured creditors during bankruptcy as
a result of the collective nature of unsecured claims. §503(b)(2)

 CALCULATING A SECURED CLAIM - §506

o The claim is only a “secured claim” to the extent of the value of the collateral.
The remainder is bifurcated to an “unsecured claim” at the start of the
bankruptcy case. §506(a)(1) (See Calkett, Dewsnup)
o §506(b): The secured creditor is entitled to post-filing interest, attorney’s fees,
and cost on its claim IF:
 (1) The attorney’s fees and costs are reasonable;
 (2) Payment of the attorney’s fees and costs by the debtor MUST be
“provided for under the agreement or state statute under which the
claim arose”; and
 (3) Interest, attorney’s fees, and costs can be accrued only to the extent
that the value of the collateral exceed the claim secured (“over-secured,”
i.e., there is extra money left after paying off the creditor with the
proceeds).

 SALE PROCESS
o A Ch. 7 trustee can sell the collateral in whatever manner the trustee thinks will
maximize the net proceeds of the sale. However, the trustee can only sell the
debtor’s equity, meaning the sale is subject to the secured creditor’s lien -
§541(a).
 §362(c)(1): The sale terminates the automatic stay and the secured
creditor is free to foreclose its lien on the collateral against the buyer at the
trustee’s sale.
 In certain circumstances, the trustee will be able to sell the collateral “free
and clear of liens” (see §363(f)) such that the proceeds go directly to the
secured creditor. The secured creditor will likely allow the trustee to sell

51
 on its behalf because it will secure a higher price (See Priority in
Bankruptcy)
o ABANDONMENT
 §554(a): The trustee is free to abandon property of the estate that is
burdensome or of inconsequential value to the estate
 Such property ceases to be property of the estate and reverts back
to the debtor.
 However, the secured creditor must still move to lift the stay in
order to foreclose on its lien. §362(a)(5) (The automatic stay
protects the debtor and the estate).
o SALE EXPENSES: Who Pays?
 §506(c): In a sale free and clear, the trustee is authorized to recover those
costs from the property he has incurred if they are reasonable and
necessary costs and expenses of preserving, or disposing of property
securing an allowed secured claim.
 These expenses can be recovered from the secured creditor only
if the secured creditor benefitted from the sale (i.e. those costs
that the secured creditor would have paid anyways) (Wine
Boutique)
o In re Wine Boutique: See what would have happened if the
stay was lifted and secured creditor was allowed to liquidate
the collateral in deciding whether there was a “benefit.”
 Trustee’s sale of under-secured creditor’s collateral
will ordinarily benefit that creditor and be deducted
from its recovery; but not if the creditor was over-
secured (because creditor would have been
reimbursed from equity for sale expenses if he
himself conducted the sale).
o Over secured – NO ‘benefit.’ The creditor would have been
protected from the cushion anyways because it would have
been reimbursed from the equity.
o Under secured – ‘Benefit.’ Fees will be deducted from the
secured creditors proceeds because it benefited from the
expenses by achieving the best price possible
o CHAPTER 11 & 13
 Payments from a plan must reflect the time value of money. The present
value of future payments must be discounted by the market rate of interest

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 PRIORITY
General Rule = “First in time, first in right”

FORECLOSURE SALES
 Priority in Foreclosure
o ANY LIEN may foreclose on the debtor if the debtor is in default. A junior lien
holder can foreclose on its lien even if it and the primary lien holder can both
foreclose.
 No lien holder is compelled to foreclose if the debtor is in default. There is
no requirement that foreclose be in order of priority
 State law will determine the application of proceeds, which is
determined by the relative priority of all lien holders.
o §9-617(a): Foreclosure sale discharges from the collateral the lien under
which the sale is held and all subordinate liens
 Sale does NOT discharge liens with priority over the one being foreclosed
on. The buyer must take the property subject to any superior liens.
 Often the sale will be an instance of default and the secured creditor
will likely foreclose on the buyer from the sale. Thus, the buyer must
be prepared to pay off the secured creditor and deduct from the
purchase price the expenses of the outstanding debt.
 E.g., Equipment at sale has a value of $1,000. Lien being foreclosed
on is subject to an outstanding prior lien to the value of $800. Buyer
should only bid up to $200 because it will have to pay the senior
creditor upon buying the property (correct bidding strategy).
 However, the senior creditor cannot enforce the debt on the purchaser.
The purchaser does not assume the debt or agree to pay it. The only
recourse is to enforce its lien until it is paid.
 If property is significantly under water, it may be worth it to purchase it
for an absurdly low price, use it for a while, and allow for repossession.
 E.g., Rolls Royce worth $80,000 but with $100,000 outstanding debt
prior to the foreclosing lien. No one will buy it because the
purchaser takes subject to prior S/I. However, if the purchase price
is cheap enough, it could provide some enjoyment for a time before
the secured parties repossess.
 CREDIT BIDDING: Secured creditor is only allowed to credit bid to the
extent they are entitled to the proceeds of the sale.
 Therefore, a senior creditor cannot credit bid on the sale of a lien
for a junior creditor.

53
 §9-615(a) Proceeds Distribution:
o (1) Expenses of retaking, holding preserving, and selling the collateral, and
attorney’s fees only if provided for in the Security Agreement;
o (2) Payment of the lien under which the sale was held;
o (3) Payment of subordinate liens in order of priority;
o (4) §9-615(d)(2): The remaining surplus is paid to the debtor.

54
RIGHT TO POSSESSION BETWEEN LIEN HOLDERS
 General Rule: Junior lien holder surrenders possession of the repossessed collateral to
the senior lien holder
o Grocers Supply (Tex. 1990)
 Held: prior perfected creditor had a right to take possession of the
collateral from an officer who levied the same collateral under a
judgment.
 Junior lien creditor who seizes collateral for forced sale upon
debtor’s default without giving notice to senior secured party is liable
for conversion and the primary secured creditor is entitled to damages
for being out of possession
 Right of a prior perfected creditor to take possession of its collateral
is superior to any right of a mere judgment creditor.
 Prior perfected secured creditor may regain possession of the
collateral from an officer who has levied on the property at the
direction of a judgment creditor.
 Rationale: Debtor is likely in default upon the repossession or levy of a
subordinate lien holder. If so, the primary creditor by its priority status
(first in time, first in right) can prevent the sale and take possession.
 Senior creditor will want to prevent the sale because it does not
want the collateral to go to the hands of a 3rd party they cannot
monitor regardless of the status of the lien.
 Worry that the purchaser at the sale will damage or destroy the
collateral entirely without the creditor’s knowledge and without an
insurance policy to recoup as proceeds
 Junior creditor can gain some assurance in filing a declaratory judgment
action to prevent any roadblock in its foreclosure process. However, that
depends on the applicability of Grocers Supply.
 Compare Frierson (8th Cir. 1988)
 Held: Senior creditor cannot prevent another creditor from
executing on the debtor’s property perpetually. It cannot impair
the status of other creditors by preventing them from exercising
their rights under valid liens in contravention of the spirit and letter
of the UCC.
o §9-401 does not state whether unsecured creditor who has obtained a judgment
against debtor can levy on collateral encumbered by another creditor’s S/I. It
merely provides that the issue is governed by applicable law other than Art. 9.
 (1) Senior lien holder must foreclose or stand aside so junior lien holders
can foreclose. Senior creditor cannot maintain right to possession for the
purpose of leaving the debtor in business and frustrating collection by
junior lien holders.

55
  (2) Grocers Supply requires junior lien holder to surrender possession to
senior, but it does not bar the junior from continuing with the sale.
 UCC Notice of Sale §9-611
o The foreclosing secured party is required to give notice of the sale to lien
holders who have properly indexed financing statements on file or who have
perfected by compliance with a federal statute or state certificate of title statute.
o Only those lien holders who are easy to find.
o Foreclosing secured party requests a search of UCC filing system 20 - 30 days
before the notification date and sends notice to lien holders named in the search
results. If so done, all subordinate liens are discharged.

56
PRIORITY IN BANKRUPTCY
 Bankruptcy Procedure
o (1) DIP (Debtor in Possession) or trustee in bankruptcy sells subject to all liens.
 Purchasers of the collateral will offer any amount less the amount they
expect to pay later to secured creditors to clear the title to the property.
 If liens against collateral > FMV, no one may be willing to buy it subject
to the liens. It becomes “burdensome” (§554) to the estate and can be
abandoned.
 A secured creditor, obtaining a stay-lift, can foreclose the collateral
following abandonment.
o (2) DIP or trustee in bankruptcy sells free and clear of all liens. §363(f).
 Liens are transferred to the sale proceeds.
o *Debtor in Possession (DIP): Individual or corporation that has filed for Chapter
11 bankruptcy protection and remains in control of property that a creditor has a
lien against, or retains the power to operate a business.

 SELL “FREE AND CLEAR” §363(f)

o §363(f)(3): Trustee can sell collateral free and clear of liens and encumbrances
only where the sale price > aggregate value of ALL liens on such property.
 “Value”: FMV of the collateral (Onieda Lake Develop’t) (Maj. rule)
 Effectively, the “value” of a secured claim is the market value of the
time of the sale.
 If the sale price exceeds the market value of the collateral (say by
$1), then the collateral can be sold free and clear.
 The face value of the debt does not determine the ability to sell
free and clear.
o The sale will always comply if $1 above market price is
obtained. If the collateral depreciates, the §363(f) sale would
never occur.
o Oneida Lake Development Inc. (NY 1990)
 Bankr. Code §363(f): Trustee may sell property free
and clear of any interest in such property ONLY IF
such interest is a lien and price > aggregate value
of all liens, where lien means charge against or
interest in property to secured payment of a debt or
performance of an obligation (Bankr. §101(37)).
 It’s the current actual value of the liens that count,
not the contractual (face) value.
 Rationale: Immediate sale of an asset not needed for the debtor’s
business may preserve value for unsecured creditors. But if the
debtor has no equity in the property, then the secured creditor is
denied any appreciation in value later.

57
 Protection of Subordinate Creditors
o Dewsnup v. Timm (US 1992): If a claim has been allowed pursuant to §502 and
is secured by a lien with recourse to the underlying collateral, it does not come
within the scope of §506(d).
 §506(d) provides that to the extent that a lien secures a claim against the
debtor that is not an allowed secured claim, such lien is void.
 §§502(a)-(b): Secured claim is “allowed” if no interested party objects or
the Bankruptcy Court determines it should be allowed.
 §506(a)(1) provides that “[a]n allowed claim of a creditor secured by a
lien on property is a secured claim to the extent of the value of such
creditor’s interest in such property,” and “an unsecured claim to the
extent that the value of such creditor’s interest is less than the amount
of such allowed claim.”
 The reasoning of Dewsnup dictates that a debtor in a Ch7 bankruptcy
proceeding may not void a junior mortgage lien under §506(d) when the
debt owed on a senior mortgage lien exceeds the current value of the
collateral.
o BoA v. Caulkett (US 2015)
 The junior creditor is still entitled to any value from the sale above the
allowed secured claim even if the collateral appreciates.
 Applying Dewsnup and §506(d)
 Held: A secured claim is “allowed” and determined at the commencement
of the case in relation to the value of the collateral. The claim is then
bifurcated if the creditor is underwater. Even if the creditor is completely
underwater at the initiation of Bankruptcy, subsequent appreciation
will go to the creditor at the sale.
 However, at the sale, if the collateral has appreciated or gotten a
better sale price since what would have been available at the
commencement of the case, then under Caulkett and Dewsnup, the
junior creditor will get that value, not the trustee.
 Incentivizes junior creditors to postpone the sale to realize greater
value after the commencement of the case
 Does NOT overrule Oneida! – Debtor in possession can still force
a sale and get around Dewsnup.

 “SUPER PRIROTIY” Post-Bankruptcy Lien §364(d)

o Exceptions to first-created-and-perfected-first-priority—later created liens
having priority over preexisting S/Is:
 Property taxes against the collateral;
 Mechanic’s liens in some states;
 Post-petition lender §364(d).

58
o The trustee or debtor in possession can borrow additional money from a post-
petition lender and secure that loan with a priority above existing creditors
 The trustee or debtor in possession must notify the holder of the first
lien of its intention.
 If the lien holder objects, the court can allow a hearing and will determine
the application of priority if 2 prerequisites are met:
 (1) The estate is unable to borrow the money without granting
a superior lien; and
o Debtor must show that alternate financing is unavailable
because it made an effort to no avail to seek such an
alternative
 (2) There is adequate protection of the interest of the secured
creditor whose lien is being displaced
o There must be a significant cushion of equity to allow for
this. However, the depreciation of collateral poses a grave
risk for the former primary lien holder.
o §364(d) is mandating that the secured creditor effectively
stand closer to the precipice of nonpayment, but no so close
that it won’t fall off entirely.
o In re 495 Central Park Avenue Corporation (NY 1992)
 Facts: Debtor, who filed Title 11 bankruptcy, sought additional funds to
make improvements to the property but was unable to find a lender.
 Held: It was sufficiently proven that the trustee could not find source of
funds elsewhere. Since the projected property improvements made
with the requested credit will exceed the amount of the loan,
preexisting S/I will be adequately protected.

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LIEN vs. SECURED
 Lien Creditor: Any creditor who has acquired a lien on the property created by
attachment, levy, or the like. §9-102(a)(52)
o Unsecured creditor wins a judgment against the debtor, obtains a writ of
execution, and then obtains a lien by levying on specific property of the debtor.
o Garnishment: Process by which a judgment creditor reaches debts owing from
a third party to the debtor that is in the hands of the third party.
 The garnishing creditor becomes a lien creditor at the moment the writ of
garnishment is served on the third party.
o Recordation: Recordation of a judgment (for money damages) in the real
property recording system creates and perfects a lien against all real property
owned by the debtor within the County.
 The judgment lien thus created will also reach after-acquired property
while the judgment lien remains perfected.

 PRIORITY AMONG LIEN CREDITORS

o Majority: The date of levy by the sheriff determines the date of priority.
 Jurisdictional split on physical possession (hauling) vs.
constructive/symbolic possession.
o Minority: The date of delivery of the writ of execution, attachment or
garnishment to the sheriff with instructions for levy determines the date of
priority regardless of the date of levy (FL; IL).
 In some states, the priority date will be the date of delivery, but the lien
will only come into existence on the levy. Thus, the levy will make the
creditor a “lien creditor,” but the lien will relate back to the date of
delivery (IL). Such an approach avoids the possibility that the sheriff
unilaterally decides the priority by foregoing the levy.
 Date of service of writ of garnishment on the 3rd party.
 Date of recordation of the judgment in the real property records.

 LIEN vs. Non-PMSI SECURED CREDITORS

o §9-317(a)(2): Secured creditor will be subordinate to a lien creditor if the lien
creditor becomes a lien creditor before the secured creditor does the earlier
of:
 (A) Perfection of S/I; or
 (B) Filing of a financing statement and compliance with conditions of
§9-203(b)(3):
 (1) Authenticates a security agreement (even though no value has
been given; functions like a future advance) that provides a
description of the collateral;
 (2) Possession of the secured party; or

60
  (3) Control if the collateral is deposit accounts, electronic chattel
paper, investment property, letter-of-credit rights, or electronic
documents.
o People v. Green (Cal. 2004)
 A perfected security interest has priority over an unperfected security
interest, which has priority over an unsecured creditor’s claim (§§9-
322(a)(2); 9-201(a)).
 Even if sheriff had possession of the collateral for the purpose of search-
and-seizure, and the judgment is later made against the defendant, victims’
liens would be junior to a lien creditor who took steps in an attempt to
perfect.
 Takeaway: Seizure and demand of retainer is insufficient to create lien
rights. The unsecured creditors must levy.

 LIEN vs. PMSI

o Exception to the general “first in time, first in right” rule – a PMSI creditor can gain
priority (or “prime”) a prior lien creditor in certain circumstances
o §9-317(e): If a PMSI attaches to the collateral before the creditor obtains its
lien, the PMSI creditor has 20 days during which to perfect its security interest
thereby defeating a lien creditor that came into existence between the time of
attachment and perfection.
 Policy: Makes it possible for the seller to give immediate delivery of
the collateral without first filing a financing statement, making sales
of personal property and inventory financing more efficient.
 If sheriff levies the purchased goods on day 2 and sells it on day 15,
purchaser owns the goods subject to the risk of secured creditor’s
filing financing statement (any time before day 20) and his priority
back-dating to day 1.
 Consumer goods: AUTOMATIC PERFECTION, defeating any prior
lien creditor automatically at the moment of attachment.
 Conflicting Grace Periods?
o The UMVA has a 10-day grace period for PMSIs. It is question
of which state law to comply with, which will not be
immediately obvious.

 LIEN vs. MORTGAGE

o State real estate law governs.
 It generally gives priority to the first lien created, but reverses the result
only if the failure to perfect offends the state’s recording statute. This gives
even unrecorded mortgages priority over those in the record.
 A judgment lien creditor against real property is not entitled to the benefit
of the recording statute.

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 LIEN vs. SECURED: FUTURE ADVANCES
o §9-323(b): Secured creditor’s future advances (draws) have priority over
subsequent lien creditors, PROVIDED:
 (1) Creditor had no knowledge of the lien;
 (2) The future advance was made within 45 days after the lien’s
creation, even if the secured creditor knew of the lien; OR
 If made after 45 days after the lien’s creation, the secured creditor
can still have priority after a future advance if it had NO
KNOWLEDGE of the lien.
 (3) Made pursuant to a commitment made without the knowledge of
the lien.

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TRUSTEE vs. SECURED – STRONG ARM CLAUSE
 Per §544(a), the bankruptcy trustee has the power to remove most kinds of security
interests that remain unperfected as of the time of bankruptcy. If the strong arm
clause can be applied, then the trustee has the power to “avoid” those interests.
- Once security interests are avoided (either through the strong arm clause or the
preference limitation), then that interest is preserved for the benefit of the
estate. §551. The trustee steps into the shoes of the unperfected secured creditor
and enforces the security interest indirectly for the benefit of the unsecured
creditors
- “Transfer”: Each mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with property or with an interest in
property. §101
 Broad enough to encompass any voluntary grant of a security interest or
the involuntary assessment of a judicial or statutory lien.

 Hypothetical Judicial Lien Creditor

- §544(a)(1): Trustee can hypothesize himself into the shoes of a “creditor that
extends credit to the debtor at the time of the commencement of the case, and
that obtains at such time and with respect to such credit, a judicial lien on all
property on which a creditor on a simple contract could have obtained such a
judicial lien.”
 It is as though the trustee were a judgment creditor who exercised every
remedy available to unsecured creditors under state law against all of the
debtor’s property at the moment of the filing of the bankruptcy case – the
trustee will win any competition that such a judgment creditor will win.
- Typically revolves around one question: Was the secured creditor perfected as
of the moment of bankruptcy?
 Lapse During Bankruptcy?
 If the security interest was perfected at the commencement of
the case but later lapses, the strong arm clause CANNOT be used to
avoid the interest. Although the secured creditor is deemed to be
unsecured upon lapse, it is deemed never to have been perfected
only against a purchaser of collateral for value, not lien
creditors. §9-515(c)
 In re Duckworth (7th Cir. 2014)
 Held: The security agreement granted a security interest in
debtor’s crops and farm equipment in exchange for the promissory
note. However, the security agreement referenced a promissory
note dated December 13, 2008. No such note existed. When debtor
filed for bankruptcy, security agreement was held ineffective.
 Held: The court rejected the bank’s argument that its security
interest was enforceable against the trustee because the
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 transaction satisfied the requirements of the IL version of UCC §9-
203 for enforcing a security interest, namely, that value was given,
the debtor had rights in the collateral and the debtor had signed the
security agreement.
 The court agreed with the trustee’s reliance on UCC section 9-
201(a) which requires enforcement of the security agreement as
written. Since the security agreement referenced the December 13,
2008 nonexistent debt, the bank did not obtain a valid security
interest.

 Hypothetical Creditor with an Execution Returned Unsatisfied

- §544(a)(2) – Trustee can hypothesize himself into the shoes of a “creditor that
extends credit to the debtor at the time of the commencement of the case, and
obtains, at such time and with respect to such credit, an execution against the
debtor that is returned unsatisfied at such time.”
- This was included to remedy a shortcoming of §544(a)(1) which could not avoid
some fraudulent transfers that occurred prior to bankruptcy.

 Hypothetical Bona Fide Purchaser of Real Property

- §544(a)(3) – If the property in dispute is real property other than fixtures, the
trustee can step into the shoes of a hypothetical bona fide purchaser who bought
and paid for the property (i.e., “perfected such transfer”) at the time of the
commencement of the bankruptcy case (for fixtures, trustee is limited to powers
of the lien creditor).
 Allows the trustee to prevail over a competing creditor for an interest in
real property where the creditor failed to perfect its lien at the moment for
bankruptcy
 Turns on STATE REAL ESTATE LAW.
 Midlantic National Bank v. Bridge (NJ): Creditor has a lien on real
property through a mortgage. The mortgage was refinanced, but the
second mortgage was not recorded although the original was
marked satisfied. π claimed that the doctrine of equitable
subrogation put them in the shoes of the original mortgage. Court
holds although equitable subrogation is applicable, a bona fide
purchaser takes the property free of an unrecorded equitable lien
under state law. Thus, the trustee can avoid the lien under
§544(a)(3).

 Implementing the Strong Arm Clause

- §544(a) does NOT require the trustee or debtor in possession to avoid a
vulnerable security interest. Rather, the trustee or debtor in possession “MAY”

64
 exercise its strong arm powers. Strong arm powers require a lawsuit to avoid the
security interest.
 Chapter 7: Because the trustee gets paid in relation to how much value is
in the estate, it is incentivized to “eat what you kill” and avoid any
avoidable interest it can.
 Chapter 11: Debtors in possession under Chapter 11 tend to be managers
of a corporation, making the shareholders the lowest unsecured creditors.
Even if an interest can be avoided, that still does not benefit the
shareholders. Instead, DIPs often take efforts to negotiate with the secured
creditor to keep the business going, keep the secured status, and negotiate
down the debt
 A creditor’s committee can petition the court to require the DIP to
avoid preferences or unperfected security interests under §544(a).
In some cases, the court may allow the committee to sue for the
avoidance of a security interest in place of the DIP if the DIP fails to
uphold its fiduciary duties to the estate.

 Grace Periods
- An unperfected creditor at the time of bankruptcy may still take advantage of
grace period / relate back provisions if the commencement of the bankruptcy
case occurs during that period.
- E.g.: §9-317(e) 20-day grace period for PMSI creditor; UMVCTA §20(b) 10 day
PMSI grace period; §9-323(b) 45-day provision for future advances.
 §546 – Post-filing perfection is permissible if the perfection would be good
against any entity prior to filing.
 §362(b)(3) – The post-filing perfection actions are exempt from the
perfections of the automatic stay.

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TRUSTEE vs. SECURED – PREFERENCES
 Priority among unsecured creditors
o Priority under state law: Unsecured creditor establishes his priority by either of
the following ways: (a) levy on the asset; (b) deliver a writ of attachment or
execution to the sheriff with instructions to levy on the asset; (c) record a
judgment in the appropriate public record; or (4) serve a writ of garnishment on
a third party who owes money to the debtor or holds property of the debtor.
o Priority under bankruptcy law: The moment bankruptcy is filed, the automatic
stay bars unsecured creditors from further collection efforts—unsecured
creditors are then expected file claims against the estate. Unsecured creditors
under §507(a), e.g., domestic support claimants, taxing authorities, wage
claimants, etc., are paid before any other unsecured creditors per §726(a).
 To the extent that general unsecured creditors are paid at all, they are paid
pro rata.
 Once the debtor is in bankruptcy, neither debtor nor trustee can take any
action to prefer one pre-petition unsecured creditor over another.
o Reconciling the state and bankruptcy policies: State policy encourages unsecured
creditors to see priority over others of their same class; bankruptcy policy
prohibits it.
 Bankruptcy law supersedes state policy upon filing of bankruptcy.
 Bankruptcy law imposes equal treatment retroactively for a 1-year
period against creditors who are “insiders” of the debtor and 90-day
period for creditors who are not.
 §547 allows trustee to avoid any transfer mad eduring the preference
period that would have the effect of preferring one unsecured creditor over
others.
 §547(b): Trustee may avoid any “transfer” (voluntary or involuntary; defined by
§101) of an in interest of the debtor in property as a preference. This includes creation
and perfection of a security interest is clearly a transfer.
o (1) To or for the benefit of a creditor AND for or on account of an antecedent
debt.
 E.g., If Bank agrees to lend $100K to Debtor on a secured basis, Debtor
executes a security agreement & financing statement, Bank files financing
statement and then makes the $100K advance, the S/I is not voidable
because it was not made for or on account of an antecedent debt.
 To silence arguments re: time issues (existence of debt preexisting singing
of the security agreement/financing statement), §547(c)(1) prohibits
avoidance of a transfer that was intended to be a contemporaneous
exchange for new value and that was in fact a substantially
contemporaneous exchange.
 Excludes security interests that coincide with new value. E.g., perfected
within 30 days of attachment.

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  Judgment lien creditors always perfect an antecedent debt. Debt begins
at the time of injury or in the case of contractual nonpayment – default.
If the lien is created within the preference period, a judgment lien will most
always be a preference.
o (2) Made while the debtor was insolvent
 §547(f) – Debtor is presumed insolvent 90 days before the filing of the
bankruptcy case (the length of the preference period) unless the secured
creditor can prove solvency to avoid the trustee.
o (3) “Made” within the preference period
 90 Days for normal secured creditors.
 1 Year for insider creditors.
o (4) Improves the creditor’s position
 The transfer must have enabled the creditor who received it to recover
more than the creditor would have if the debtor had been liquidated under
Ch. 7
 Nearly all transfers of a security interest improve the position of a creditor
with an antecedent debt.
 When does the Transfer Occur?
o The crucial question in evaluating a potential preference. Even if the preference
occurs within the preference period, if it coincides with new value, then it will not
be on account of an antecedent debt. Additionally, the transfer could be made
outside of the preference period even if the date of perfection occurs within the
period.
 §547(e)(2)(A) – A transfer is “made” when the transfer takes effect, i.e.,
when security interest attaches, if such transfer is perfected within 30
days of attachment.
 Crucial relate-back provision. If the secured creditor files a
financing statement within 30 days from authorizing the security
agreement, then the transfer takes effect when it attaches,
making the transfer a contemporaneous exchange of new value.
Just before a debtor goes into bankruptcy, he could start paying off
or giving S/I
 §547(c)(3): Also a 30-day grace period for PMSI (exemption from
preference avoidance provided that the secured creditor disburses
the loan proceeds at or after the signing of the security agreement
& perfects the interest within 30 days after the debtor receives
possession of the collateral).
 N.B. If the transfer is made at a later date, (a) the transfer may be
regarded as made for an antecedent debt; or (b)
 §547(e)(2)(B) – If perfection does not occur within 30 days from when
the transfer takes effect, then the transfer is made when it is perfected.

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  §547(e)(1) – Refers to state law in determining when a security
interest is perfected:
o Real property – when it is too late for a bona fide purchaser
to acquire a superior position
o Personal Property and Fixtures – when it is too late for
lien creditors to acquire a superior interest (§9-317(a); 9-
323(b))
 When the S/I is perfected within the Art. 9 meaning
or at such earlier time that a security agreement is
executed and a financing statement is filed.
 Possible that bankruptcy allows perfection if no value
is given but not Article 9
 §547(e)(3) – A transfer is NOT considered to be “made” until the debtor
has acquired rights in the property.
 The effect of this is to eliminate retroactive protection for after-
acquired property
 E.g.: S/A provides “equipment owned and after-acquired” and it is
authorized on April 1. Financing statement is filed that day.
Bankruptcy is filed on August 1. New equipment is shipped on June
1. Although initial equipment owned is outside of the preference
period and was not made on account of an antecedent debt, the later
acquisition was not (creditor’s S/I attaches to the new equipment
on June 1), thus constituting a preference because the transfer was
made 30 days after attachment.

 EXCEPTIONS - §547(c)
o (1) to the extent the transfer was intended to be a contemporaneous exchange
for new value and is in fact a substantially contemporaneous exchange
 Situation in which the loan was given before the signing of the security
agreement and filing, but not too much earlier. It is a question of intent
o (2) To the extent such transfer was in payment of a debt incurred by the debtor
in the ordinary course of business or financial affairs of the debtor and such
transfer was made in the ordinary course or business (e.g. credit card bills,
electricity bills).
 The corresponding debt and the transfer (security interest) must both be
in the ordinary course of business.
 Deals with the argument that such bills are not contemporaneous
exchanges because they are often issued more than a month after the debt
is actually incurred.
o (3) A PMSI if it is perfected within 30 days after the debtor receives
possession of the collateral.

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 o (4) The transfer of new value not secured by an otherwise unavoidable security
interest can wipe out a prior preference.
o (5) Inventory and Accounts Exception
 Because inventory and accounts are consistently turning over, the
requirement that the debtor have rights in the property for the transfer to
be made is problematic and hard to track. Instead, accounts and inventory
are seen as a single item of collateral.
 Because collateral and inventory are treated as single units, only increases
in value of the receivables or inventory as a whole that exceed the
accompanying increase, if any, in the amount of the secured creditor’s
claim are vulnerable to preference avoidance.  To avoid creditor’s
bonanza.
 Two-point test:
o (1) Difference between the debt and the value of the
collateral 90 days before bankruptcy.
o (2) Difference between the debt and the value of the
collateral at the time of filing.
o If (1) > (2), then the extent of the increase is a preference.
Effectively, any improvement in the creditor’s position
between the 90 days before bankruptcy and the filing of the
petition is a preference.
 If creditor is fully secured 90 days before the petition,
then the creditor will never be subject to preference
avoidance in accounts or inventory. This applies even
though the collateral appreciated in value
substantially. The amount of under-secured interest
has moved from 0 to 0.
 Unclear whether the exception also applies to chattel paper, which is
often replenished at a high rate in inventory financing in equipment.

 §551 – Effect of Avoidance

o If the transfer is avoided (either by preference or strong arm power under §544),
the transfer is preserved for the benefit of the estate.
 This means that if the trustee can avoid the transfer as a preference, it can
step into the shoes of that creditor and take priority over any other secured
creditor even if that creditor did not take a preference.
 E.g.: 1) 7/1 – Bank loan and subsequent SI on equipment on Debtor; 2) 7/2
– JCR levies on equipment; 3) 7/10 – Bank files on equipment; 4) Debtor
files bankruptcy
 Judgment lien is a preference! Because it is within the preference
period, it can be avoided by the trustee. Once avoided, the trustee
takes the lien and steps into the shoes of the JCR under §551.

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Trustee thus takes priority over the bank because of §9-317(a). The
entire proceeds of the equipment will go to the estate to the extent
of the judgment.

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SECURED vs. SECURED
 General Rule: The first to file or perfect has priority - §9-322(a)
o This allows a party to file first and maintain its priority date even if the details of
the lending relationship are unclear. For secured creditors, the first action
should be to file, then search the records at the appropriate date to ensure the “as
of date” is the date of filing, and then lend according to the place in line
 Because it is the first to file or perfect, potential lenders always must
worry about possession. The secured creditor should conduct an
inspection the moment of filing.
 The record may also be misleading because a secured creditor
previously in possession can file later and be continuously perfected.
§9-308(c). This is an ever-present risk in the record that cannot be
avoided.

 Transferee – Transferor Exception - §9-325

o A security interest in a transferee is subordinated to that of a transferor even if
the transferee filed first if both financing statements cover the same collateral
through an after-acquired property clause in favor of the transferee
 E.g., 1st Bank files financing statement in “equipment now and after-
acquired” against Transferee. 2nd Bank then files a financing statement in
“equipment” owned by Transferor. Transferor sells equipment to
Transferee not in the ordinary course of business and not authorized by
2nd Bank. 2nd Bank’s interest continues to encumber the equipment
in priority over 1st Bank. §9-325 (Per §9-322, 1st Bank filed first a
financing statement sufficiently broad to cover the equipment but 2nd Bank
perfected in the particular equipment before it was transferred).
 Rationale is a protection of the record. Secured lenders should rank in
perfection so that lenders can discover the security interests they will be
subordinate to. Without §9-325, secured lenders will be unable to protect
against losing priority because it could not discover the competing interest
ex ante

 After-Acquired Property in the Same Debtor

o If different lenders are competing for the same collateral, each lender will be
ranked in priority from the time of filing even if the superior creditor gains its
position through an after-acquired property clause - §9-322(a)(1)
 Most common use of the after-acquired property clause is inventory
financing. For an inventory lender, currently owned and after-
acquired inventory are perfected as of the date of filing.

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 Future Advances
o Provided that the secured creditor’s financing statement “covers the collateral”
all advances made by the secured creditor to the debtor have priority as of the
filing of the financing statement - §9-322(a)(1)
 The record put searchers on notice for present and future interests. The
record conveys notice of a possible security interest, not merely presently
existing ones
o A single financing statement is adequate to perfect any number of security
interest to the extent of the description of the collateral in the financing
statement. A secured creditor can thus authorize a new security agreement
under an existing financing statement. Both present and future advances under
the same collateral described in the financing statement have a priority date as of
the time of filing - §9-322(a), §9-502(d)
 If the secured creditor does in fact file a new financing statement because
it worries about the effect of the old one on the new advance, it runs the
risk of the possible waiver of the protections of the old financing statement.

 Control of Deposit Accounts

o §9-327 – Control over deposit accounts will trump all other rules of priority,
even PMSI secured status.

 PURCHASE MONEY SECURITY INTEREST PRIORITY

o General Rule: PMSI in collateral other than inventory has priority over a
conflicting prior security interest in the same collateral if the PMSI is perfected no
later than 20 days after the debtor receives possession of the collateral. §9-
324(a)
 The purchase money secured creditor is first in a different sense than the
creditor perfected in the record – it either supplied the collateral or made
advances to “enable the debtor to acquire the collateral.” Effectively, the
PMSI creditor increased the debtor’s assets without harming
presently perfected secured creditors - §9-103(a), (b)
 Anyone lending in non-inventory collateral must worry that the debtor in
possession of the collateral received its new property in the past 20 days
and PMSI lenders have subsequently perfected or has yet to perfect but the
20-day period has not lapsed.
 Non-PMSI lenders commonly make the granting of a PMSI an event
of default, causing repossession of the collateral.
o Conflicts Between PMSI Creditors
 §9-324(g)(1) – The Seller PMSI is given priority over a cash-lender PMSI
 E.g., Debtor wants to buy $10,000 equipment. Seller offers to take a
down payment of $2,000 with an $8,000 promissory note. Bank

72
 loans debtor $2,000 which is then used to pay the down payment.
Seller has priority over the bank.
 Cmt. 13, §9-324: The law is more sympathetic to the vendor’s
hazard than to a 3rd party’s risk of not being able to collect from
collateral that it never previously owned.
 §9-324(g)(2) – For two cash-lender PMSI, the first to perfect determines
priority.
o Inventory PMSI
 §9-324(a) – 20-day grace period INAPPLICABLE when the property sold
will be inventory in the hands of the buyer.
 The custom of inventory lending is to make an advance once proof
that the debtor is in possession of the inventory is given. This is
based on the understanding that the inventory will have only one
lender. The advances may or may not be used to pay for the
inventory, but the understanding is that the debtor will not grant a
PMSI.
 §9-324(b) – A PMSI will take priority in inventory ONLY IF:
 (1) The purchase-money financier perfects no later than the time
the debtor receives possession of the collateral; and
 (2) The financier gives advance notice to the inventory lender that
it expects to acquire a PMSI. The lender sends the notice to each
inventory lender in the record. The notice expires at the end of 5
years like any financing statement.
o PMSI in Proceeds
 §9-324(a) – PMSI priority status extends to proceeds, so long as the PMSI
creditor continues perfection according to §9-315(d) (i.e., the proceeds
are a change in the form of collateral that does not fall within the collateral
that is perfected by filing in the same office)
 It will have purchase-money priority over a competing security interest
perfected by an earlier filing against the debtor naming those proceeds
as original collateral.
 E.g., Bank1 has perfected a S/I in the equipment of Davis Industries
and Bank2 has perfected S/I in the accounts of the same. Seller sells
a piece of equipment to Davis Industries, retaining a PMSI. Seller
perfects within the 20-day grace period of UCC §9-324(a), thereby
obtaining priority over Bank1. Davis later sells the piece of
equipment to Buyer, resulting in an account owing from Buyer to
Davis that is proceeds of the equipment. Seller has S/I in the account
as proceeds of the sale of its collateral. §9-315(a)(2).
 EXCEPTION: §9-324(b) – PMSI status in inventory flows ONLY
into chattel paper, instruments, and cash proceeds. This does
NOT include “accounts” (facilitates account financing)

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 COMMINGLED COLLATERAL
o Collateral is commingled when it is mixed with other property. E.g., Debtor
deposits cash collateral to a bank account that also contains funds that are not
proceeds; debtor mixes corn purchased from one supplier with corn purchased
from another, or it may occur when a debtor manufactures a car using steel
purchased from one supplier and aluminum purchased from another.
o §9-336(c): General rule that when the collateral is commingled, perfected status
continues in the “new product of mass.” This is applicable where the identity
of the collateral is lost by commingling the collateral in a mixture of different
items
 If more than one perfected interest attaches to the mass because of the
commingling, the interests rank equally and share in the proportion
from the proceeds of the sale.
 E.g., Farmer Green sells wheat to Processing Co. for $20K and Farmer
Brown sells wheat to Processing Co. for $80K. Processing Co. commingles
the two shipments. Farmer Green’s wheat is subject to S/I in favor of PCA
in the amount of $20K and Farmer Brown’s wheat in favor of WestBank in
the amount of $20K.
 PCA and WestBank have equal priority in the amount of $20K (they
will share in proportion to the two farmers’ contributions, not in
proportion to the obligations owing them).
 PCA will be entitled to 20% of any proceeds from the sale of the
commingled wheat; WestBank to 80%.
o §9-335(e) – Any secured party with an interest in an accession or identifiable
part in a larger product will only have a security interest in the accession, but
any prior secured party over the whole can prevent removal over the accession.

 CIRCULAR PRIORITY
o In situations with 2 secured creditors and a lien creditor, it is possible to have
circular priority (each party has priority over another). This can occur if the SC1
files but does not comply with §9-203(b)(3), SC2 files and perfects after SC1 files,
and LC levies before SC1 complies with §9-203(b)(3).
 There are no rules to break the circle. Without a subordination
agreement (Cliff’s Ridge), the court can divide the proceeds of the
collateral equally (pro rata) or do some equity to continue in the
disposition of the collateral.

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PRIORITY IN FIXTURES
 §9-334(c): Security interest in fixtures is subordinate to a conflicting interest of an
encumbrancer (mortgagee) or owner of the related real property other than the debtor.
Fixture filings and mortgages rank in the order in which they are recorded in the real
estate recording system.
 Priority in Fixtures Incorporated During Construction
o Case 1: Debtor, Inc. is building an apartment building on its property. During
construction, Debtor buys water heaters from H2O. If H2O delivers the water
heaters to the construction site, H2O has a mechanic’s lien against the land and
building that it can perfect by recording a claim of lien (even though the parties
did not sign a security agreement).
 The mechanic’s lien will have priority as of the commencement of
construction, which may be months before the purchase of heaters.
 Mechanic’s lien will have priority over construction mortgage ONLY if
construction commenced before recordation of the construction mortgage.
o Case 2: Debtor, Inc. and H2O execute an agreement granting H2O Art. 9 S/I in the
water heaters. Because the heaters will become fixtures, H2O should perfect
through fixture filing. Since construction mortgage has priority over H2O’s S/I,
the holder of the construction mortgage can prevent H2O from removing water
heaters.
 Priority in Fixtures Incorporated Without Construction
o Art. 9 fixture filings and mortgages rank in the order in which they are recorded
in the real estate recording system. §9-334(c); (e)(1).
 Generally, the non-purchase-money fixture financier will be subordinate
to whatever mortgages existing at the time of fixture filing.
 The fixture financier may wish to seek the mortgagee’s consent to S/I. §9-
334(f)(1).
o EXCPETIONS (fixture filing’s priority over mortgage)
 (1) Debtor has the right under the mortgages to remove the fixtures.
 (2) PMSI §9-334(d): S/I in a fixture has priority over a mortgage
(conflicting interest of an encumbrancer or owner of the real property) IF:
 (A) Security interest in the fixture is a PMSI;
 (B) The interest of the encumbrancer of the real property arises
before the goods become fixtures; and
 (3) Perfection within 20 days after the goods become fixtures
or before the goods become fixtures.
 (3) Non-PMSI §9-334(e)(1): IF
 (A) Fixture interest is perfected by a fixture filing before the
interest of the encumbrancer or owner of record; and
 (B) it also has priority over any conflicting interest of a
predecessor in title of the encumbrancer or owner.

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 o “Predecessor in title”: Expression of the usual rule that the
owner cannot transfer an interest in what he does not have.
This condition almost never occurs unless it is a PMSI.
Priority is transferred from one owner to another by “sale”
as one of the rights of ownership
o Fixture is subordinate to an earlier mortgage which is later
assigned. The assignee of the mortgage has priority even
though it is a later recorded instrument.
o Fixture security interest is subordinate to the rights of
an owner. The fixture will then be subordinate to a
subsequent grantee of the owner and a subsequent
mortgagee of the owner (mortgagor must be able to confer
his bundle of stick of rights; mortgagee steps into the shoes
of the mortgagor, who has superior priority).
 §9-334(f): The secured creditor can negotiate with the encumbrancer or
owner of the real property for priority in the fixture.
 Priority in Real Property Based on Personal Property Filing
o Fixture filing: Financing statement filed in the real property recording system
that meets the requirements of §9-502(b).
 Secured creditor can perfect in fixtures by:
(1) by making a fixture filing;
(2) by recording a mortgage against the real property to which the fixtures
are attached;
(3) by filing an ordinary financing statement in Art. 9 filing office.
 §9-334(c): Personal property filings against fixtures are subordinate to
real property owners & encumbrancers (mortgage holders)
 Personal property (UCC) filing against fixtures has priority over:
(1) Lien creditors, including trustee in bankruptcy. §9-334(e)(3).
Generally, a judgment creditor is not a reliance creditor who would
have searched the records.
Trustee in bankruptcy, per §544, has strong-arm powers of a
hypothetical lien creditor.
(2) Owner or encumbrancer with respect to certain kinds of readily
removable fixtures.
UCC leaves the definition of fixtures to the State real estate law (broad).
Readily removable: factory or office machines, equipment not
primarily used in operation of the real property, or replacement
domestic appliances.
E.g., Personal property filing could enable sellers of replacement
kitchen appliances obtain priority over the mortgages against the
homes in which the kitchen appliances are later installed.
(3) Later fixture filings.

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 §9-322 awards priority among competing filers without distinguishing
between fixture filings and personal property filings against
fixtures. The first to file wins.

 §9-501(a)(2) – A non-fixture filing in the Article 9 records is sufficient to perfect a

security interest in the goods before they become fixtures.
o They are just as effective as fixture filings in the real property records in that they
are perfected against later fixture filings - §9-322 does not draw a distinction
between those that file in the real property records and those that use Article 9
o Searchers must look at both the real estate records and the Article 9 records in
non-fixture filings of the same goods to file properly against the goods to become
fixtures
o Non-fixture Article 9 filings are also good as against the trustee in bankruptcy -
§9-334(e)(3)

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CROSS-COLLATERALIZATION & MARSHALLING ASSETS
 CROSS-COLLATERALIZATION: A single piece of collateral securing more than one debt
o E.g., 2 race horses, A and B, secure two different loans, L1 and L2. Without cross-
collateralization, each loan would have separate collateral and limits of recovery.
If the race horses are cross-collateralized, both secure either loan. So on default
of either, the secured creditor can foreclose according to his discretion.
 This causes the need for marshaling. If the primary creditor can choose
which collateral it can foreclose on first, then it might do so to eliminate a
junior creditor’s lien on one piece of collateral that is not on the other.
 Every item of collateral would secure every dollar of debt.

 SECURED CREDITOR’S RIGHT TO CHOOSE ITS REMEDY

o Debtor-Enforceable Limits on the Secured Creditor’s Right to Choose its Remedy
 Limits are rare.
 A few states (e.g., CA) have “single action” rules: A secured party might
bring so many separate foreclosure actions against a debtor that the court
would bar further actions as a nuisance.
 Single action rule (one action to enforce payment on a debt secured
by a mortgage on real property) does not apply to personal
property.
 MARSHALING
o General Rule: Secured creditor has a right to choose when it will foreclose against
which item of collateral when it is cross-collateralized (§9-604(a)(1)) even if the
foreclosure forces the debtor into bankruptcy subject to marshaling limitations.
o “Marshaling”: Equitable doctrine limiting the secured creditor’s choice over the
foreclosure of an item of collateral encumbered by junior liens.
 Generally, the doctrine requires the creditor to look for recovery from
non-encumbered assets by junior liens first before recovery from
over-encumbered assets.
 To the benefit of the junior lienor: The junior creditor must force the
marshaling, but this can be to the detriment of the trustee (and thus
unsecured creditors)
 In re Robert E. Derecktor of Rhode Island Inc.
 The junior secured and senior secured creditors shared a secured
interest in part of the debtor's property. Other creditors held
unsecured interests in the debtor's property. The senior secured
creditor received most of its interest from the sale of property that
was not shared with the junior secured creditor. The junior secured
creditor requested the marshaling of the debtor’s assets in order to
provide it with adequate protection.
 Held: There are two funds available for the junior and senior
creditors and that the senior secured creditor could satisfy its claim
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 from all of the debtors funds while the junior creditor could only
look to certain assets for payment. The court ruled that the junior
creditor had bargained for its security on its loan, while the
unsecured creditors had not, and that the junior secured creditor
was entitled to realize the benefits of its bargain.
 To apply marshaling doctrine, 3 elements must be present:
(1) The existence of two creditors of the Debtor;
(2) The existence of two funds owned by the Debtor; and
(3) The ability of one creditor to satisfy its claim from either or both
of the funds, while the other creditor can only look to one of the
funds.

o Limits on Marshaling
 Marshalling is only allowed if the secured creditor is not prejudiced (In
re Woolf Printing), i.e., secured creditor is not prejudiced by delay and/or
expense of foreclosure.
 Equitable Assignment: Even if the court denies marshaling and
allows the secured creditor to recover from the encumbered first, it
may order the secured creditor to assign its senior security interest
in the un-foreclosed asset to the junior creditor prejudiced. The
court can elect to use it or not as it sees fit.
 In Matter of Woolf Printing Corp.
 Facts: Senior creditor had a security interest in the proceeds of a
life insurance policy and also in the debtor’s personal property, incl.
furniture, fixtures, equipment, inventory, and A/Rs. Junior creditor
had a security interest only in the proceeds of the life insurance
policy. Insured-debtor deceased.
 Held: For SC to satisfy its debt, it would have to have relief from the
automatic stay, then sell the property. In light of the characteristics
of the two funds, marshaling would injuriously affect the SC.
Equitable relief of marshaling denied.
 Cannot be used to compel foreclosure against the homestead. BUT
Secured creditor (with a mortgage interest) can foreclose against the
homestead to accomplish the same result as marshaling (pay the secured
creditor to induce him).
 SPLIT: Whether one junior creditor can prevent recovery by another
junior creditor if the second junior creditor was perfected later than the
first junior creditor.
 Trustee:
 Majority: Trustee cannot prevent marshaling against lien
creditors in favor of unsecured debtors.

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  Minority: Trustee can prevent marshalling to increase the
bankruptcy estate’s size, but only in the circumstance where some
of the collateral is owned by a person other than the debtor.
 N.B. Trustee in bankruptcy is secured by statute and occupies the
status as a lien creditor with security.
 Unsecured creditors are injured by marshaling. If secured creditor
sold an asset with junior security interests, that would have made
available other assets (expiration of junior interests upon sale).

o Marshaling Against Property Owned by 3rd Parties

 When a creditor takes S/I in property that does not belong to its debtor.
 SPLIT: Because the assets being marshalled must be in the hands of a
common debtor, courts are split on whether the funds or assets needs to
be in the hands of that common debtor or whether it is sufficient that the
debtor just needs to have an obligation against both creditors.

 Effect of Cross-Collateralization on PMSI Status

o §9-103(a): Security interest is considered purchase money only to the extent that
the collateral secures an obligation that is the purchase price of the
collateral.
 “DUAL STATUS”: A security interest may be part purchase money and
part non-purchase money, but the PMSI applies only to the amount of the
debt used to secure the purchase (§9-103(f)(1))
 E.g., Buyer had a previous promissory note with seller for $300,000.
Buyer buys a new race horse for $40,000. The parties cancel the
existing note and create a new one for $340,000.
o §9-103(g): When part of the debt is paid off, the burden is on the secured creditor
to prove what part of the remaining balance is secured by a PMSI showing what
payments were made.
 §9-103(e): If the parties agree to a method of applying payments, it must
be upheld. If they have not, then the PMSI debtor can direct the application
of the payments. If he does not, the creditor must apply the payment to
obligations that are unsecured before applying them to payments that are
secured. The creditor must apply it to more senior secured obligations
first.
o §9-103(b)(2): For a PMSI in inventory, multiple PMSI obligations can secure the
same item of collateral even though they may not have been purchased at the
same time.
 “Negative Equity”: Outstanding debt from a previous obligation being
carried over to another obligation, often in the case of an automobile trade-
in.

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 Many courts refuse to classify the negative equity as part of the
“package deal” that comes with the PMSI. Thus, the PMSI status
would not apply to the antecedent debt being held in the collateral
(In re Penrod).

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BUYERS vs. SECURED
 BUYERS OF REAL PROPERTY
o All purchasers of real property are on constructive notice of the record. Each is
presumed to have consulted the record before purchasing, so a prior recorded
mortgage will trump any subsequent unrecorded interest (with the only
exception in a race notice recording act)

 BUYERS OF PERSONAL PROPERTY: General Rule

o The buyer takes goods subject to pre-existing security interest. A security interest
is effective against subsequent purchasers and continues in the collateral
notwithstanding the sale even in the absence of a provision in the security
agreement - §9-201, §9-315(a)

 EXCEPTIONS:
o (1) BUYER IN THE ORDINARY COURSE OF BUSINESS §9-320(a)
 A buyer in the ordinary course of business can take free of a security interest
created by its seller [in an unauthorized disposition].
 “Ordinary Course”: Purchasing from a person in the business of selling
goods of that kind. Buying in the ordinary course of the seller’s business,
not the buyer’s.
 Buyer’s Knowledge
 §1-201(b)(9): A buyer in the ordinary course is still protected
even though he knows of the security agreement’s existence.
o However, the protection will not extend to buyer who
knows that the sale to him is in violation of the security
interest of a third party. Thus, if the buyer merely knows
there is a security agreement without knowing its
content, it will take free of the security interest.
o If you’re buying inventory, off the hook (general knowledge
of the inventory being financed by a secured creditor).
o Knowledge that his purchase would violate conditional
authorization would not protect the buyer per §1-201(b)(9).
 Created by the Buyer’s Seller
 A debtor gives a security interest to the creditor, thus the debtor
creates the security interest. A seller will have to be the original
debtor in order for the buyer to take free of the security interest.
o E.g., RV Dealer 1 → Dude 1 → RV Dealer 2 → Buyer
 Dude 1 and Dealer 1 have a security agreement.
 Dude 1 and RV Dealer 2 are not in the ordinary course
of business, so RV Dealer 2 takes subject to the
security interest.

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  Although Buyer is in the ordinary course with RV
Dealer 2, the seller here did not create the interest,
thus the Buyer takes subject to the security
interests created by the predecessors in title.
 However, the initial creditor will have to comply with perfection
rules to maintain perfection (e.g. although the security agreement
remains effective against new debtor, §9-508(b), if the new debtor
is in a different jurisdiction it has 1 year to refile, §9-316(a)(3)).
 §2-403 “Entrusting”: Any entrusting of goods to a merchant who
deals in goods of that kind gives him the power to transfer all rights
to the buyer in the ordinary course of business. (E.g., a watch maker
who repairs watches can sell a watch under repair)
 “Buyer”?
 Traditionally, one became a “buyer” for purposes of §9-320(a) once
he took title.
 UCC: UCC does not attach much importance to title throughout.
“Ownership” is the key consideration, and it may be conferred
once one has rights in the property irrespective of the record.
 Daniel v. Bank of Hayward: Buyer contracted with seller for
delivery of a mobile home specified in the contract, but it was set to
be delivered by the manufacturer at a later date. Before delivery,
seller became insolvent and the bank called the seller’s loans. Court
holds that once the goods under contract are identified pursuant
to §2-501(1), the buyer obtains an interest in the goods.
 §1-201(b)(9) (After Daniel): Only a buyer that takes possession
of the goods or has a right to recover the goods from the seller is
a buyer in the ordinary course of business.
 UCC §2-502 still gives consumer-buyers the right to recover from
their sellers goods that have been identified to the sale contract.
 In re Western Iowa Limestone, Inc.: Sale contract was made for
agricultural lime but it was stored at seller’s place of business along
with all of the lime owned by the seller in a fungible pile. Court held
“constructive possession.”
 FNB of El Campo v. Buss: Titles of used cars were in the hands of
the bank-creditor. Buyers paid for and took possession of them but
left the application forms filled in the debtor-dealer’s office. Buyers
were held to be buyers in the ordinary course of business under Art.
9 and to the extent that Art. 9 was in conflict with certificate of title
act, UCC superseded.
 §9-320(e): Security interest in possession (even by means of an
agent) of the secured party is not affected by the ordinary course
exception.

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 o §9-320 (a) and (b) do not affect a security interest in goods
in possession of the secured party under §9-313.
o This rejects Tanbro Fabrics v. Deering’s “bill and hold” sale
where seller went insolvent following an authorized sale
from the creditor (goods in creditor’s possession) but prior
to delivery to seller for the buyer).

o (2) NOT IN THE ORDINARY COURSE - §9-317(b)

 A buyer not in the ordinary course of business can take free of an
unperfected security interest if the buyer gives value and receives
delivery without knowledge of the security interest.
 Future advances will disqualify the exception so long as they are
appropriately perfected from an earlier filing.

o (3) CONSUMER-CONSUMER - §9-320(b)

 When the goods are consumer goods (held for personal, family, or
household purposes) in the hands of the seller before the sale and
consumer goods in the hands of the buyer after the sale, buyer
takes free of the security interest if:
o (1) The buyer had no knowledge of the security interest
o (2) The sale occurred before a Financing Statement
covering the goods was filed (exception only covers
consumer PMSI automatic perfection under §9-309(1))

o (4) AUTHORIZED DISPOSITION - §9-315(a)(1)

 The security interest does NOT continue in the collateral if the secured
party authorized the disposition free of the security interest – if it is
authorized, then the Ordinary Course exception does not need to be
considered.
 “Authorization”
o Express authorization
o Implied authorization through waiver (although waiver
clauses expressly limit the waiver for each particular
transaction)
 Gretna State Bank v. Cornbelt Livestock Co.
 Security agreement expressly prohibited sale
of the collateral without the prior written
consent of the bank.
 Debtor repeatedly sold collateral and the
Bank, despite the knowledge thereof, let it slip
(had not objected or rebuked the debtor).
 Held: Waiver.

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o Conditional authorization
 E.g., only if all the obligations are paid off; only to an
ordinary consumer, only to certain dealers, etc.
 Some courts hold conditions are ineffective if
fulfillment is not within the buyer’s control.
 Other courts uphold all contractual conditions as
binding.
 RFC Capital Corp. v. EarthLink, Inc.
 “Upon performance by debtor of all its
obligations under the loan agreement the
lender agrees to release its security interest in
the purchased accounts.”
 Regardless of the nature of the condition, no
authorization exists e=where the debtor fails
to satisfy the conditions of the creditor’s
conditional consent.

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FEDERAL TAX LIENS
 CREATION
o When the IRS assesses the tax owing, the IRS can then notify the taxpayer of the
assessment constituting a demand bringing the tax lien into existence, relating
back to the time of assessment I.R.C. § 6321
 I.R.C. § 6321: The Federal Tax Lien attaches to ALL PROPERTY whether
real or personal belonging to the taxpayer
 This is the ultimate floating lien, but it is unperfected following the
demand on the tax payer.
 VALIDATION (Perfection)
o I.R.C. § 6323(a): The lien become “valid” against secured creditors, subsequent
purchasers, and subsequent judgment lien creditors when the IRS files notice of
its lien according to the system of the operative state law.
 Where to File? Depends on the Jurisdiction (I.R.C. § 6323(f))
 Real Property (NY): Office of the county clerk which the real
property is subject
 Corporation or Partnership (NY): Office of the secretary of state
where the principal executive office is located
 Individual Personal Property (NY): Office of the county clerk
where the lienee / taxpayer resides at the time of filing.

 REMEDIES
o If the taxpayer does not pay 10 days after notice, then the IRS can levy on the
taxpayer’s property. The IRS is not required to use the services of the sheriff or
marshal to levy.
 State exemption laws do not apply against the IRS (upheld to a different set
of exemptions under the Federal Tax Lien Act).
 The IRS sells as soon as practicable the seized property at a public auction
to go to the outstanding amount of taxes unpaid, subject to prior liens
and discharging any subordinate liens filed on the same property.
o The IRS can also serve a notice of levy on the debtor’s bank where it has an
account or some 3rd party is in possession of the debtor’s property.
o The IRS can also prosecute the delinquent payroll taxpayer for converting the
payroll “trust fund.” This rarely happens, but it is a valuable point of leverage.

 TAX LIEN vs. JUDGMENT LIEN CREDITOR

o After Acquired Property
 As a matter of federal law, a security interest does not attach until
property is acquired.
 If the judgment lien creditor files first and gains an interest in an after-
acquired property as a matter of state law; and tax lien is filed before the
possession of certain property, both attach at the same time.
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  Tax lien is then given priority over the prior judgment lien creditor!
(US v. McDermott)
 If a creditor’s judgment lien was perfected before US filed its tax
lien: end of the matter (creditor’s lien prevails).
 But a security interest in an after-acquired property is generally not
considered perfected when F/S is filed but only when S/I has
attached to particular property upon the debtor’s acquisition of that
property.
 The filing of notice renders the federal tax lien extant for “first in
time” priority purposes regardless of whether it has yet attached to
identifiable property.

 TAX LIEN vs. SECURITY INTEREST

o I.R.C. § 6323(h)(1): A security interest “exists” for purposes of a tax lien when:
 (A) The property is in existence and the interest has become protected
against a judgment lien under local law (essentially abiding by §9-
317(a)); and
 (B) The holder has parted with money or other value, the repayment of
which is secured (eliminating perfection for future advances)
o Future Advances Exception – I.R.C. § 6323(d)
 A secured creditor with a prior financing statement and security
agreement but no exchange of value has 45 days to make an advance after
the filing of the Notice of Tax Lien or, if earlier, before the secured
creditor had actual notice or knowledge of the tax lien filing (§
6323(d))
 Must be able to defeat judgment lien creditors under local law!
(§ 6323(d)(2))
o §9-323(b) provides the same protection of future
advances made after a subsequent lien creditor. In either
case, the 45-day period provides the ability to overcome an
earlier lien. However, under §9-323(b), a future advance can
take priority even despite actual knowledge. I.R.C. §6323(d)
requires ignorance of the tax lien.
o Commercial Financing Exception – I.R.C. § 6323(c)
 A secured creditor with a “commercial financing security” will have
protection for after acquired property AND future advances made
within 45 days after the filing of the Notice of Tax Lien (§6323(d))
(exception to McDermott rule)
 “Commercial Financing Security”: accounts, inventory, chattel
paper, and mortgage paper
o Does not include the Article 9 catchall of “equipment”!

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  Knowledge / Actual Notice?
o After acquired property protection does NOT have an
actual notice or knowledge limitation (§6323(c)(2)(B) –
“qualified property”)
o Future advances in commercial financing security
agreements must be made before actual notice or
knowledge (§6323(c)(2)(A)).
o PMSI Exception
 Subsequent PMSIs take priority over a prior tax lien! (First Interstate
Bank of Utah v. IRS: PMSI creditor provides new value by enabling the
debtor to acquire rights in the property)
 There is no provision in the Federal Tax Lien Act providing protection for
subsequent PMSI secured creditors, but this is uniformly viewed as a
drafting error.
 The PMSI creditor does not diminish the available assets for
recovery. It adds to the property of the delinquent taxpayer and
there is no harm in protecting the person that provided the value of
the purchase of the asset
o Nonadvances Exception
 Nonadvances: Interest, attorney’s fees, and other expenses incurred by a
secured creditor in protecting and recovering its collateral and collecting
the amount owing from the debtor
 I.R.C. § 6323(e): Nonadvances are given equivalent protection as
the security interest so long as it is provided for in the security
agreement and such expenses are reasonable. They will then be
added to the prior security interest over the tax lien

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