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Secured Ts Cichon H11 Exam: 30 MC Qs; 4 essays 4 essay Qs based on those facts Essay Tips: Outline facts in chrono

ono order If not an issue, dont address it, e.g., if not scope issue then dont get into scope o Talk about scope if lease or consignment or kick-out issue Dont outline dump! Only state a definition if it is critical to your answer! Classify the parties o Attachment go through elements of 9-203 (SA, value, rights) If given a description of collateral in SA address whether it was sufficient 9-108 reasonable identification test Can use A9 types as a description but should only do so when you can say all equip/inventory bc how much is unclear w/ just the category o But if you cant put the all, specify the amount, but most courts are ok w/ just the A9 type o Perfection: Filing if facts say the filing is fine, you dont need to get into where the FS should be filed and what is in a FS, etc. Just say you are allowed to file a FS to perfect in inventory/equip (if thats what the collateral is) Possession/Control o Then get into proceeds issue if applicable Define what a proceed (only use definition if it is critical to your answer!) whatever received on dispo of the collateral Say what kind of proceeds they are Chattel paper: record that evidences both a (1) monetary obligation & (2) a SI Attachment 9-203(f) prop attached in original collateral = properly attached subject to 9-315(a)(2) need to be identifiable proceeds Perfection 9-315(c) & (d) run through the reqs

Battle: o 9-322 start w/ race rule w/ section (a) and then go to applicable exceptions Cite to authority! Make sure it is correct!

I. Introduction
9-102 Definitions (52) Judgment Lien Creditor (LC): (A) a creditor that has acquired a lien on the prop involved by attachment, levy, or the like; (B) an assignee for the benefit of creditors from the time of assignment (C) a trustee in bankruptcy from the date of filing the petition; OR (D) a receiver in equity from the time of appointment (72) Secured Party (SP)the creditor (A) a person in whose favor a Security Interest (SI) is created or provided for under a security agreement (SA), whether or not any obligation to be secured is outstanding; (B) a person that holds an ag lien; (C) a consignor; (D) a person to which accounts, chattel paper, pyt intangibles, or promissory notes have been sold; (E) a trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a SI or ag lien is created or provided for; OR (F) a person that holds a SI arising under 2-402, 2-505, 2-711(3), 2A-508(5), 4-210, or 5-118. (12) Collateralthe prop subject to a SI or ag lien. The term includes: (A) proceeds to which a SI attaches; (B) accounts, chattel paper, pyt intangibles, & promissory notes that have been sold; and (C) goods that are the subject of a consignment. (28) Debtorperson who owes $ (A) a person having an interest, other than a SI or other lien, in the collateral, whether or not the person is an obligor; (B) a seller of accounts, chattel paper, pyt intangibles, or promissory notes; or (C) a consignee. (59) Obligorperson who owes $ - A person that, w/ respect to an obligation secured by a SI or an ag lien on the collateral, (i) owes pyt or other perf of the obligation, (ii) has provided prop other than the collateral to secure pyt or other perf of the obligation, OR (iii) is otherwise accountable in whole or in part for pyt or other perf of the obligation. - The term does not include issuers or nominated persons under a letter of credit. SI: a prop right that the lender has when the debtor defaults, so if default occurs, lender (creditor) can get the prop Benedict v. Ratner pg. 6 Ratner loans carpet people (Hubb) $---right to pyt on goods or services (accounts receivable). Ratner uses this to secure the loan, want SIs to all accounts that you open up w/ customers now and in the future. Ratner can come in and take the $ that those customers have paid if Hubb does not pay its debt. Hubb did not keep this $ separate, and could use it for anything. Leave nothing in case of a default. The court was worried about the possibility of other creditors that they wouldnt be put on notice that Ratner has SI in accounts receivable. So when Hubb goes to get other loans, the lender has no idea that Ratner has an 2

interest on all the accounts.secret lien or ostensible ownership---it looks like Hubb has all ownership of the accounts, when in fact he does not, it = secrecy. - The court was afraid that Hubb was going to defraud other lenders. If creditor does not exercise any control over the accounts, then going to say the SI is fraudulent. o The court had a loophole, if the creditor exercises some obvious control over the accounts, then that control will give the world notice that he has interest in the accounts and w/ that notice it will be ok. Case refers us to 9-205 comment---this repeals the rule of Benedict v. Ratner how could they do this-bc the court is interpreting state law. A9 requires notice of SIwhole objective of A9 is to give notice to the world, and thats what the article is about Several security devices enacted in every state w/ diff rules on notice: Pledge: where debtor gives physical possession of the collateral to the creditor.---no notice problem, bc gives good notice. But are impractical, bc debtor will usually have to keep the collateral, like his biz equip that he needs to run it. And theres some collateral that is intangible, like account receivable, bc it is a right to pyt which is intangible. Chattel mortgage: similar to real prop mortgage. Conditional Sale: seller holds the title until it is paid offsell good on credit, but keep title until it is paid off. Is there a secrecy problem w/ conditional sale? Probably, bc it looks like the buyer has full control of the prop, but the lender doesnt know that there are title problems, so the State has to make a filing system for conditional sales. So A9 was developed to have all of the rules in one place, so every state by adopting their own version of A9, we now have a version that all states use. Bank gives loan and will make the debtor sign loan K, promissory note and SAdebtor says that for the term of the loan that he will give a SI in the prop. When the note is signed the SI attachesattachment means that SI becomes enforceable. SI attaches to PP. Have valid SI and if debtor defaults, there are A9 remedies. Gives lender the right to collateral from the debtor. - One remedy is to repossess the propdont have to notify the debtor, get cops to do it or anything. To get priority for SI: - Give notice of your SI to the world bc if you do this then everyone is on warning and if they know they have a SI in the car, then they have interest secondary to you. - But you have to follow A9 ways to get notice, usually by a filing statement (FS) w/ a public office. - Once you file notice then you are perfected, done everything you have done. Giving notice is perfecting the SI. Must properly attach SI and properly give notice. A9 is set up like a timeline--look at index--7 chapters to A9, set up from the beginning of the transactions (T) to end of the T. - 9-100s (scope): 2 parties have to figure out if their T is governed by A9 - 9-200s (creating SI): addresses rights and duties of 2 parties to the agreementcreditor and debtor 3

9-300s (perfection): perfect it by giving notice so you can have priority over the other creditors 9-400s (rights of 3rd parties): assignment of SIs--creditors transferring SIs from creditors to creditors 9-500s filing FS 9-600s remedies if there is a default 9-700s (transition rules): for transition from old A9 to new A9.what happens to those Ts b/t the transitions?

Secret for getting an A in the class---every couple of weeks, go through notes, code book and outline. Flow chart #s w/ words on what the is about---spend about 10 minutes each week on it.

II. 9-109 scope of A9


A. OVERVIEW:
9-109(a) sub will get you into A9but (c) and (d) will kick you out of it. Problem 2 pg. 17: SI defined Assume that a state statute gives someone doing repairs a possessory artisans lien on the prop repaired. Mr. Baker took his car into Macks Garage for repair, but, being strapped for funds, couldnt pay the full bill, and Mack wouldnt let him have the car back. Is Macks artisans lien an A9 SI? See 9-109(d)(2). - This is a lien that comes from the state statute, and while it gives Mack security, it is not A9 SI, bc A9 SI are agreed on by both parties, i.e., its consensual If prior to the repair work, Mr. Baker signed a statement giving Macks Garage a right to repossess the car if the bill wasnt paid, does this agreement create a SI under the code? See 9-109(a)(1) - Yes, this is A9 SI bc it was consensual. Problem 3 pg. 18 To raise $, Farmer Browns Fresh Vegetables Roadside Stand sold all of its accounts receivable to Nightflyer Finance Co., which notified the customers that henceforth all pyts should be made directly to Nightflyer. (Note that this is not a loan from the finance co. to the farmer w/ the accounts put up as collateral; it is an outright sale. If it were a loan, and if the collectible accounts exceeded the amount of the loan, the excess would be returned to Farmer Brown; in an actual sale Nighflyer can keep the surplus. See 9-608(b)) Is this sale nonetheless an A9 SI? See 9-109(a)(3). - Not an SI bc its an outright sale, the finance co. is buying at a discount. Is this type of sale governed by A9? - A3sale of accounts, chattel paper, pyt of intangibles, etc.---if you have outright sale of accounts (debtor definition includes seller of accounts) Here farmer (debtor) selling to finance co. (creditor). This is included in A9 bc if no notice is given, the farmer may sell the accounts again to someone else. Want to prevent the secrecy, so it is included in A9-109(a)(3), finance co. has to give notice of its ownership rights and if they dont and the farmer defrauds another creditor, then that creditor may have priority over the finance co.. It is critical to know if the T entering into is covered by A9 or not, bc if you are covered by A9, than you must comply w/ it.

B. CONSIGNMENT
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Consignment: when you have something you want to sell and bring it to a shop and they sell it for you---it is a marketing procedure. The retailer gets a commission, and there are advantages for the consignor and the consignee (retailer). Title still remains w/ the artist (consigner), who controls the terms of the sale and can tell the retailer how much to sell the paintings for. The risk of loss stays w/ the consignor. - Is there an ostensible ownership problem w/ consignment? Secrecy problem? o Yes bc the retailer might put up a line of credit and use the paintings as collateral, even though they dont own them. At CL there was no requirement of anyone giving notice of consignments, which was a problem. Q to ask: - Is it a true consignment? Or - Is it a sale/SI disguised as a consignment?---trying to prevent consignees creditors from being defrauded. So A9 drafters included consignments in UCCrequire notice of consignments in UCC article 2-326, which requires notice of true consignments. When revised A9, include consignments under scope of A9. o 9-109(a)(4) applies to consignments but one qualification---a lot of consignments are minor in nature, so drafters said only apply A9 to most important types of consignments---so must meet definition of A9 consignment 9-102(a)(20) 7 reqs for consignment: 9-102(a)(20) 1. a person delivers goods to a merchant for the purpose of a sale 2. merchant deals in goods of that kind under a diff name than the cosigner 3. merchant is not an auctioneer 4. merchant is not generally known by its creditors to be substantially engaged in selling the goods of others 5. for each delivery the aggregate value of the goods is $1k or more 6. the goods are not consumer goods immediately before the delivery 7. the T does not create a SI that secures an obligation. Problem 4 pg. 20: Antiques R Us was the largest antiques store in the city, well known as a place where antique dealers could hire out space and exhibit their wares, w/ the store handling the sales and taking a commission on each one, and returning to the dealers items that remained unsold. When the store takes out a loan from ONB and uses as collateral all its prop, will the banks SI reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under A9? See 9-102(a)(20)(A)(iii). ASK Is it a true consignment or not, and if it is, is it large enough to be included in A9? - Are we dealing w/ a true consignment or dealing it w/ a disguised SI and sale? o True consignment bc the consignor retains title, and Antiques R Us only gets a commission as opposed to all profit, they can also give the goods back if it is not selling - Is it important enough to be included in A9? o 7 reqs of consignment under 9-102(a)(20) 902(a)(2)(iii)----merchant is not generally known by its creditors to be substantially engaged in selling the goods of others

1. A person delivers goods to a merchant for the purpose of a sale---delivery has to be to a merchant. A9 does not have definition of merchant, but it is defined in A2 as a person who deals in that kind of goods. 2. Merchant deals in goods of that kind under a diff name than the person making the delivery---so if an artist delivers paintings to retailer, retailer has to be dealing in a name diff than artists name. 3. merchant is not an auctioneerbc everyone already knows 4. merchant is not generally known by its creditors to be substantially engaged in selling the goods to others 5. for each delivery the aggregate value of the goods is $1k or more 6. the goods are not consumer goods immediately before the delivery---consumer good is for your own personal use. Generally used consumer goods are not very valuable and depreciate quickly so not worth A9 protections 7. the T does not create a SI that secures an obligation.---this is here to reiterate the fact to check twice to make sure not a sale and SI.---this is what you begin w/, if the answer is that it is a true consignment then look to the other 6 to determine if it is w/n the scope of art. 9. Not all consignments are in A9 just the important ones, and there are diff remedies b/t true consignment and sale disguised as a consignment In re Fabers, Inc. page 20 take facts of the case and apply to definition in A9 - Court said that it was intended that the agreement was for security bc of the risk of loss---if the risk is on Fabers then it indicates a SI bc generally in a consignment the risk is on the consignor. Commingling the $ from sales of proceeds from sale of carpets. - However arguments for true consignment would be: o Mehdi set the price o Advertising it as Mehdis carpets o Title stayed w/ Mehdi o Every time Fabers sold the rug, they would have to give the $ to Mehdi o Court called the T as sale or return, if Fabers could not sell the carpets, then he could return them back to Mehdi So this seems to be a true consignment not a sale and SI. Court applied 2-326 which is the law for a true consignment but threw around terms sale and SI. Once you find a true consignment, you have to find out if it is important enough to be in A9: 1. Mehdi did deliver the carpets to a merchant for sale 2. merchant has to deal those rugs under a diff name other than person making delivery---Fabers is dealing under Fabers World of Carpets, court says it is like Sears dealing Maytag washers, so this requirement is met. 3. Fabers is not an auctioneer 4. Fabers has to NOT be generally known by creditors to be substantially engaged in selling the goods of others---dont know that creditors read the newspapers, its like Sears saying they sell Maytag washers when in fact Sears owns them 5. assume rugs worth more than 1k 6. rugs not consumer goods before delivery---this is met 7. is it really a disguised sale and SI---we already met this 6

This is a true consignment included in A9 and Medhi failed to comply w/ A9 and so trustee could take the carpets. Consignments: 2 types that we will come across 1. True consignments: consignee is a true agent 2. When parties just call the T a consignment---consignor selling goods on credit and label as consignment to avoid A9. First: is it T a true consignment or disguised sale and SI? - Factors Indicating A Consignment (Also on pg. 9 of syllabus) 1. the consignor reserves title to the delivered goods until they are sold; 2. the consignor reserves the right to demand the return of the goods at will; 3. the consignee has the right to return the goods which are not sold; 4. the consignor exerts control over the sale price; 5. The consignee is obligated to segregate the consigned goods from its own inventory; 6. the consignee is obligated to hold the proceeds of sales and forward them to the consignor; 7. the consignee is required to keep separate books and records pertaining to the goods; 8. the consignor has the right to inspect the goods and the books, records, and premises of the consignee; 9. shipping papers and other docs refer to the T as a consignment; 10. The risk of loss remains w/ the consignor. Problem 5 pg. 22: Luke Skywalker inherited a valuable sword collection from his father, he took it down to Weapons of the World (WOW), a large gun and weapons dealer, which mostly sold items that it either manufactured itself or bought from other dealers around the globe. The collection was appraised as being worth over $25k. Luke asked WOW to sell the collection for him. Is this an A9 consignment so that Luke needs to take A9 steps to protect himself from WOWs other creditors who have an interest in the stores inventory? Assuming it is a true consignment, then go to 9-102(a)(2) - Factor 6--how is Luke using the swords. It is a personal collection so probably mean it is a personal use so will not be A9 true consignment--only have to miss 1 of the reqs to kick it out of A9, and consignee doesnt have to worry about the reqs of A9 & so worry about complying w/ state law

C. Lease:
2A-103(p) L - Transfer of right to possess and use - For a term - Consideration When people enter into a L: - lessor has the risk of loss, not the lessee. - Car dealerships would rather L then sell bc when L, tax benefits, and if default, then lessor can enforce any remedy in the L agreement (leased car has to be returned and lessee is still responsible for all L obligations as damages) Article 2A---deals w/ Ks for the leasing of goods 7

L: is transfer of right to possess and use goods for a certain term of time w/ consideration.(definition) In true L, lessor gets the reversionary interest o Secrecy problem---looks to the world that lessee owns the good, and what prevents them for putting good up for collateral? o Is a true L governed by A9 so we can give notice? 9-109 does not cover a true L If trying to determine if T is in A9 or not: o Have to determine if true L (not under A9); OR o Disguised credit sale w/ SI and parties are calling it a L.

How do we distinguish a true L from a disguised credit sale (sale and SI disguised as a L?)? 1-203: Why does it look like a sale as opposed to a true L? - L pyts equal how much it is worth at the beginning of the L and a nominal option to purchase at the end of the L term makes it look like a sale. o But if there is a clause that allows termination of L at any time indicates a L - Article 2-A made so attys would know how to draft a true L, instead of sale and SI. 1-203 Guidance: L Distinguished from SI 1-203(b) a SI is created in a L: 1. if the lessee has an obligation to continue paying consideration for the term of the L; AND 2. if the obligation is NOT terminable by the lessee; AND 3. any one of the following 4: a. the original term of the L is equal to or greater than the remaining economic life of the goods; b. the lessee is bound to renew the L for the remaining economic life of the goods or is bound to become the owner of the goods; c. the lessee has an option to renew the L for the remaining economic life of the goods for no additional or for nominal additional consideration upon compliance w/ the L agreement; OR d. the lessee has an option to become the owner of the goods for no additional or nominal additional consideration upon compliance w/ the L agreement. In Re Winstonin packet: Term of the L is 48 months at $545/month Option to PM8391.30---but must give 30 days notice, which she tells them that she wants to exercise option but before makes pyt, she declares chapter 13 bankruptcy. - chapter 13 is reorg bankruptcy---debts far exceed assets, but set minimum income and debt under certain amount, do chapter 13---keeps all prop but must put together pyt plan, plan to pay all creditors a certain amount of $. Court reviews the plan and court agrees, then plan is implemented---runs 3-5 yrs. Once you comply w/ the plan all remaining debts are discharged and you get a clean start. Party arguments: - Winston claims credit sale w/ SI disguised as a L, which means she really owns the car and if she owns it, then it is part of her estate = part of pyt plan. - Chrysler argues that it was a true L w/ the option to buy at the end. o L says I the debtor, agree that this is a L. 8

Court looks at the 1-203(b) test: 1. Court asks whether the lessee could terminate the L at will. a. If the lessee has no right to terminate, then go to step 2 b. If there is a right to terminate, then it is all over, then it is a true L 2. Must meet one of the following 4 a. The original term of the L is equal to or greater than the remaining economic life of the goods: i. Original term of the L is 4 yrs, and when looking at remaining economic life (sub e)--must be determined w/ reference of facts and circumstances at the time the T was entered into. 1. Here (b)(1) is not present ii. Under this part of 1-203 no reversionary interest to lessor b. The lessee is bound to renew the L for the remaining economic life of the goods or is bound to become the owner of the goods i. Here not met, bc she was not bound to renew the L and was not bound to become the owner---had an option to become the owner. ii. Under this part of 1-203 no reversionary interest to lessor c. The lessee has an option to renew the L for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance w/ the L agreement i. Here this was not present. ii. Under this part of 1-203 no reversionary interest to lessor d. The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance w/ the L agreement. i. nominal consideration 1-203(d) 1. If they have to pay fair market rent for use, then it is not nominal 2. Become the owner---if fmv of the goods at the time you exercise the option (at the end of 4 yrs here) then it is not nominal. 3. If $8391 is Fmv, then it will not be nominal The court looks at diff fmv: - Trade in value: $8725 - Loan: $7875 - Retail: $11025 - $12k Winston contends this is the value of the car $8391 is close enough to $12k, so $8391 is not nominal. If option price is w/n 70% of FMV then it will not be nominal that is what this court is saying. - since $8391 is not nominal then step 2 of test (meeting 1, 2, 3, or 4) is not met, then true L. Court also considered: - Winston is saying that she paid the fees, interest, insurance---factor indicating sale and SI. If you meet step 1 but dont meet step 2, then you are not done. It means you are back to fall back GR in (a) to balance all facts and circumstances---and can do this in sub (c) 6 factors if present the court should consider---strong evidence of sale and SI if have 2 or 3 factors but not each one in itself is determinative of sale and SI. 9

1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the FMV of the goods at the time the L is entered into; a. MAY BE EVIDENCE OF A SALE BUT IS NOT DETERMINATIVE IN & OF ITSELF. 2. The lessee assumes the risk of loss of the goods; a. Risk of loss usually retained by lessor, but lessee may be willing to take it on if pyts are smaller 3. The lessee agrees to pay, w/ respect to the goods, taxes, insurance, filling, recording, or registration fees, or service or maintenance costs; 4. The lessee has an option to renew the L or to become the owner of the goods; 5. The lessee has an option to renew the L for a fixed rent that is equal to or greater than the reasonable predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or 6. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable cost of performing under the L agreement if the option is not exercised. Option to renew or option to buy indicates a true L.

Problem 6 pg. 23: B.I.G. Machines, Inc. leased a duplicating machine to Connies Print Shop. The L was for 5 yrs, and the rental pyts over this period exactly equaled the current market price of the machine. The L K further provided that at the end of the 5 yrs Connies Print Shop might purchase the machine outright by paying BIG Machines $5.00. BIG Machines did not file an A9 FS. Thereafter Connies Print Shop borrowed $ from the ONB and signed a SA w/ the bank granting it an interest in all of the print shops equip. ONB duly perfected its SI by filing a FS in the appropriate place. When Connies Print Shop failed to repay the loan, ONB seized all the shops equip, including the duplicating machine. In the lawsuit ONB v. BIG Machines, Inc., who gets the machine? Read 1-203. - Is it a true L or disguised SI? - Apply 2 part test in 1-203(b) o Step 1: is there or is there not right to terminate? There is no right to terminate---if this is NOT met, meaning there is right to terminate then it is a true L! If there is right to terminate, then you are done and it is a true L If no right to terminate, then go to step 2 o Step 2: going to 1, 2, 3 and 4 to see if any are met (1) at the time L entered into it is equal to or greater than the economic life of the goods (2) lessee is bound to renew (3) lessee option to renew (4) does lessee have option to become owner for no additional or nominal consideration? In problem 6 it was for $5. To know if nominal or not: o Compare pyts to fmv---go to (d) o Under Winston if option price is w/n 70% then $5 is not nominal. o If it is nominal then, it is a sale bc both steps are met! So sale and SI. Problem 7 pg. 25: 10

Biz Corp leased a massive copier from Copies, Inc. for a 5-yr period. At the outset of the L the copier had a fmv of $300k and a predicted 10-yr useful life. Over the course of the 5-yr L the rental pyts would total to $330k. The L provides that Biz Corp. has the option to become the owner of the copier at the end of the 5-yr period by paying Copies, Inc. the amount of $10k. Is this a true L or a secured sale? Would we reach a diff result of the copiers useful life were only 5 yrs? FMV at beginning of L $300k - Life: 10 yrs - Term: 5 yrs - Pyts: 330,000 - Option: 10,000 1. Is there a right to terminate? a. Assume no right to terminate 2. Look at 4 following steps to see if any are met. a. Original---no b. Bound to renew--no c. Option to renew--no d. Option to become owner i. Is it w/n 70% of 10,000 ii. What is the fmv of the good after 5 yrs? 1. look at depreciation 2. want to prove fmv 3. if w/n 70% of fmv, then it is not nominal, if it is not nominal, then it means that step 1 of test is met but step 2 is not met, so go back to (a) to consider facts and circumstances---to do this use (c). a. present value of the consideration i. She is agreeing to pay $30k more, it is evidence of sale, but by itself is not enough. ii. Discounting to Present value of the consideration---definition in code---if she pay 300k up front then it is out of pocket, but if she has to pay 330k in 5 yrs, she would invest the remaining 30k, and the interest over 5 yrs would be more than 30k b. Lessee assumes risk of loss c. Lessee agrees to pay, w/ respect to the goods, taxes, insurance, filing, recording or registration fees, or service or maintenance costs d. The lessee has an option to renew the L e. The lessee has option to renew f. The lessee has an option to become the owner. If you meet step 1 then you go to step 2. If one of the 4 factors is met in step 2 then it is a sale & SI If you meet step 1 but not step 2, then go to step (a) which will take you to sub (c)---to balance, if find 2 or 3 then court might decide that it is sale instead of true L, but remember that (c) is not an exclusive list. If there is a right to terminate w/ a penalty---applied to 2 part test---right to terminate w/ penalty is equivalent of no right to terminate!!!!!! 11

Whenever in doubt, give notice under A9 to terminate!!!!! For true L, you do not have to comply w/ A9, but why not file FS to give notice anyway, which will make you safe under A9. - But what are the downsides of this? o IRS will say, if you wanted the tax advantages of true L, why didnt you file o 9-505: if you play it safe and make a precautionary filing, it is not evidence of a sale. Encourages you to file under A9 & it covers you & gives people notice about what is going on. In true L situation, if you dont give precautionary notice, and court says it is true L then you are ok, bc you dont need to file under A9. ----there is a secrecy problem, but it is not under A9.

D. Other Ts
Problem 8 pg. 34: When Mercy Hospitals administrators decided to build a new addition, they hired a general contractor named Crash Construction and required it to get a surety to guaranty the perf of the construction job and the pyt of all the workers and material suppliers (to avoid a mechanics lien on the hospital). Standard Surety issued such a perf and pyt bond covering Crashs obligation to Mercy Hospital. To finance the construction, Crash borrowed $ from ONB and gave as collateral the right to collect the progress pyts from Mercy Hospital as they came due. ONB dully filed an A9 FS. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, by virtue of the CL right to subrogation (the equitable right given to sureties to step into the legal shoes of persons they have paid), Standard Surety claimed a superior right to unpaid monies retained by Mercy Hospital, which were to be paid to Crash. ONB also claimed this fund, pointed to its filed SI, and stated that Standard Suretys subrogation right was only an unfiled A9 SI. Who should win? Mercy Hospital wants addition on hospital and hires Crash as general contractor. Under state construction law, if general Contractor does not pay suppliers, then suppliers have a lien against the owner to get back the benefit the owner received from supplies. This means suppliers can sue owner to get the $ that general Contractor didnt give them. So owner hire surety to guarantee (standard) and they have to put up a bond. We favor sureties, the more sureties we have the more lending---CL. Equitable CL right to subrogation---(If the surety has to pay off the debt of the principle (Cash) then subrogation allows surety to step into shoes of person they pay (the bank) and to exercise the rights of that bank---means that the surety can go after the car under the SA) Crash doesnt pay for supplies, so Standard steps into shoes of suppliers and pays them off and exercises right to $ that Mercy was supposed to pay Crash that Crash was to pay suppliers. However, here Standard wants the $but also someone else wants that $! Crash gave bank SI in $ that is owed to them by Mercy (this is an account receivable collateral). So bank takes SI in the account---PP---A9 applies---and then file to perfect. Priority battle b/t Bank and Standard: - bank argument: bank gave notice & perfected the title & SI & standard didnt give notice to anyone o Standard will say nothing in the law says surety has to give notice 12

Bank replies: Standards right to subrogation is an A9 SI interest in PP to secure their might label T at surityship, 9-109(a)(1) regardless of the form.

Is it A9 security? - No bc it is not consensual. Subrogation comes from CL, not the agreement of the parties. Although it is security, it is not governed by A9, which means that CL would govern it. Surety will win bc Sureties are favored under CL. What sureties do to cover themselves, they will write the subrogation into the K, so if dont get equitable subrogation, they will then exercise contractual right to subrogation which would be governed by A9---under scope. 9-109(a)(1) Once determine w/n A9---under 9-109(a). But once in 9-109, you might be kicked out by 9-109(c) or (d) - (c)(1) fed law supersedes state law---Shacket case pg. 36 Philko Aviation, Inc. v. Shacket pg. 36 Main issue: Shacket argues that in IL there is state law that says when you buy a plane you can do it through a purely oral K, and not required to file. SC looked at policy of fed act: congress wanted one office to look to see if title to plane is encumbered and to do that EVERY plane must be sold by paper and filed w/ the office. Fed law supersedes state law. 9-109(d): 13 situations that dont want you in A9 so will kick you out: 1. A LL's lien, other than an ag lien; 2. A lien, other than an ag lien, given by statute or other rule of law for services or materials, but 9-333 applies w/ respect to priority of the lien; 3. An assignment of a claim for wages, salary, or other compensation of an employee; 4. A sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the biz out of which they arose; 5. An assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only; 6. An assignment of a right to pyt under a K to an assignee that is also obligated to perform under the K; 7. An assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness; 8. A transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment, but 9-315 and 9-322 apply w/ respect to proceeds and priorities in proceeds; 9. An assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral; 10. A right of recoupment or set-off, but: a. (A) 9-340 applies w/ respect to the effectiveness of rights of recoupment or set-off against deposit accounts; and b. (B) 9-404 applies w/ respect to defenses or claims of an account debtor; 11. The creation or transfer of an interest in or lien on real prop, including a lease or rents thereunder, except to the extent that provision is made for: a. (A) liens on real prop in 9-203 and 9-308; 13

b. (B) fixtures in 9-334; c. (C) fixture filings in 9-501, 9-502, 9-512, 9-516, and 9-519; and d. (D) SAs covering personal and real prop in 9-604; 12. An assignment of a claim arising in tort, other than a commercial tort claim, but 9-315 and 9-322 apply w/ respect to proceeds and priorities in proceeds; or a. Ex.: personal tort suit cannot be collateral 13. An assignment of a deposit account in a consumer T, but 9-315 and 9-322 apply w/ respect to proceeds and priorities in proceeds. a. Ex. bank issued debtor a credit card took collateral in the form of debtors personal checking account = A9 doesnt apply b. Businesss can use their accounts as collateral c. Individuals can use their accounts as collateral for biz loan Problem 9 pg. 41: When Christopher Morley opened his bookshop, the landlord wanted security for the rent. They signed a L agreement providing that all the inventory (the books) would be subject to a lien in the landlords favor and could be seized and sold if Christopher defaulted in rent pyts. Is the landlords lien required to be perfected under A9? Is landlords lien covered by A9 so landlord has to give notice? - 9-109(d)(1): A9 does not apply to landlord liens---why? Bc this is sloppy drafting and doesnt mean what it says.look at comment 10---indicates when drafters used the term landlords lien, they were talking about typical landlord lien that arises from landlord tenant law in state statutes. Courts have held that in situation like problem 9, A9 will apply bc it was talking about Contractual lien not lien from state statute. Problem 10 pg. 41: Carl Jugular was an independent insurance agent who sold policies for many companies, though his primary sales were the life and automobile policies of the Montana Insurance Association (MIA). In order to float a loan to buy a car, Carl gave the lending bank a SI in all present and future commissions earned or to be earned from MIA. Does A9 cover this assignment? It starts in A9 but does it get kicked out? - 9-109(d)(3)---no SI in wages, salary or other compensation---comments indicate a lot of social concerns when granting SIs in wages. Employers dont want to do it. If you have a lot of kids at home and wages are garnished that are supposed to feed 10 kids.comments say leave this to local law, let communities or individual states legislate this the way that they want to. If they are not a typical employee, like an independent Contractor, then not covered by this provision. - independent Contractors - people who get commissions---people dont rely on commissions as much as they do as promise to pay under employment K. Independent Contractors are not employees under this and commissions are not the type of compensation that this is referring to!!! 9-109(a)(3): sale of accounts---when it is an outright sale, no typical creditor or debtor, so why is it included in A9? Bc there is a secrecy problem bc accounts are intangible in nature. But there are some sales which are so minor or have such little to do w/ commercial financing that we just kick them out of A9 - These situations in problem 11----deal w/ 9-109(d)(4-7) 14

Problem 11 pg. 41: When Michael Logan sold his lucrative art biz to John Pivarski, he sold not only all the tangible assets but his outstanding accounts receivable as well. Must the buyer take steps required by A9 of a SP? See 9-102(a)(72) (D) and 9-109(d)(4). - (d)(4) sale of accounts as part of sale of biz is excluded. If Logan received a commission to paint the portrait of the citys mayor but decided he was too busy to perform the task and (w/ the mayors permission) transferred the job (and the right of pyt) to another artist, must the new artist take A9 steps? See 9-109(d)(6). 2nd Part of problem 11---part of transfer of account but 9-109(d)(6)----no secrecy problem here so not A9 steps

When one of Logans clients refused to pay for a delivered painting, Logan sold the account to Trash Collection Agency. Must Trash comply w/ A9? See 9-109(d)(5). 3rd part of 11: Collection agency doesnt have to comply w/ A9 bc by the time they file, the account will be gone.

Finally, pressed by his art supplies store for pyt of his outstanding tab, Logan transferred to the store the $ due him from a client whose portrait he had painted the month before. Must the art supplies store take A9 steps? See 9-109(d)(7). 4th part of 11: transfer of account but (d)(7) says when only ONE account is assigned, the moment it is assigned it will be cashed in, so no secrecy so dont bother w/ A9. Problem 12 pg. 43: Local Loan Co. (LLC) needed to borrow $, and ONB agreed to loan it the requisite amount, taking into ONBs possession as collateral the real prop mortgages and accompanying promissory notes given to LLC by its borrowers. Need ONB do anything either in the real prop recording office or under the UCCs A9 to protect its interest in this collateral? Compare 9-109(d)(11) and 9-109(b); read Official Comment 7 to 9-109; and see 9-203(g) and 9-308(e). Loan co. wants collateral, so say put up your house (mortgage). Does the loan co. have to comply w/ A9 bc it has SI? No, bc it is real prop 9-109(a)(1) says only PP. But do have kick out that reiterates fact that A9 does not apply to liens or interest in real prop----(d)(11). Loan co. has promissory notes from customers, so how about SI in notes to get a loan from the bank. If the bank has SI in notes, then the bank doesnt need subrogation bc A9 SI in the notes, and bank can say to customers you make the pyts to us (bank) and not to loan co.. Bank is really cautious and so loan co. will put up mortgages as SI. So having SI in mortgage, then they can go after the house if customer defaults too. 15

Does the bank have to comply by A9 and give notice? 9-109(b) SI in secured obligation: o To a SI in a secured obligation---means SI in the notes. Bank has to comply w/ A9 for the notes bc it is PP. Do they have to comply w/ A9 for the mortgages? Is there a secrecy problem regarding the mortgages if the bank has given notice regarding the notes? - No, the loan co. will take mortgages and offer it up as collateral to another lender---will that lender be fooled? o No bc when lender is offered the mortgage they will say, where is the note? Only way you can exercise the interest in mortgage is when the debt is defaulted on, and when they see the note, they will be on notice bc the bank has SI in the note. o If the bank properly attaches SI to the note, then they are automatically attached to the underlying mortgage. 9-203(g) says that under A9 when you attach to the note you are automatically attached to the mortgage. When you perfect in the note, then automatically deemed to have given notice to mortgage (9-308(b)).

II. Creation of the SI


A. Collateral
Collateral has diff categories and the collateral categories are how you perfect the SI. Memorize the categories. - look at how the debtor is using it at the time of the classification 1. Goods 9-102(44): a good is something that is moveable, physical, tangible, see and touch, and it is movable at the time the SI attaches. If it is tangible and moveable it is a good. a. Goods are subdivided into 4 categories w/ definition in 9-102(44) i. Consumer goods ii. Inventory iii. Farm productsmust meet 2 reqs: good still have to be in hands of farmer iv. Equipcatchall category for goods Some prop that is not physical in nature, but the right to the prop is wrapped up w/n 4 corners of piece of paper---paper is tangible but right is intangible. Classifications of these: - Instruments, including promissory notes (IOU) can be sold from person to person (i.e., right to get paid) Prop that has no physical form whatsoever, although right to prop can be evidenced by writing it down and put on paper, the right is not wrapped up in the paper. - Account: right to pyt, intangible in nature - Deposit accounts Problem 17 pg. 42: (a) PianoEquip 9-102(33) (b) Cattle fattened by a farmer for salefarm products OR inventory 9-102(48) - Farmers tractornot supplies under farm products bc it is not something that can be used up = equip - Farmers chickensfarm products - Manurefarm products 9-102(34)(D) or (C) as a supply to put on crops 16

(c) Mobile Homedepends on what the debtor is using it for. (d) Manufactured home 9-102(53)prefabricated homes. It is not a category of collateral in of itself. It is simply a type of good. If its on a lot to be sold, it is inventory. If it is used as a home, then a consumer good. The subcategory of good depends on how the debtor is using it. A right to sue is called a chosen action---if it is based on K it is called a Contractual chosen action. In A9 it is called 9-102(42) General Intangible---catch all category for all of the classifications, if it is not a good, and not anything else, call it general intangible. It is a right that has no physical characteristics. a. Right to sue for auto accidentchosen tort action---here it is a personal tort claim (not a commercial tort claim) so it can still be a general intangible. This is risky though bc if debtor loses lawsuit, then it is worthless. 9-109(d)(12)---only kicks out personal tort claims. PERSONAL TORT CLAIMS CANNOT BE USED AS COLLATERAL!!! What is a commercial tort claim? 9-102(a)(13)---generally for economic damages not personal damages. i. Commercial tort claim is its own category of collateral. b. Settlement agreement: can the settlement agreement be used as collateral? We already know that personal tort claims cannot be used as collateral. Once a claim arising in tort has been settled and becomes contractual, the personal tort claim becomes a contractual settlement and we call that a pyt intangible---9-102(61). i. Pyt intangible is not a category in of itself---type of general intangible (sub-category of general intangible). It is a right to $. Contractual right to pyt, which also means account (a right to pyt for goods and services). So way to distinguish this, Contractual rights to pyt is called a payment intangible and goes under the general intangible category. c. General intangible is a catchall category---means everything but, and list all categories, so this paragraph in sub 42 lists all A9 categories together. Pull out each of the terms and find the definition for it to learn the categories. Pencils and other stationary supplies: Official comment 4A in 9-102(a)(48)(D) materials consumed in biz. This is diff than a tractor bc that doesnt get used up quickly like pencils and stationary (inventory) tractor is equip bc used for a long time. a. Type of inventory that you sell has a high turnover rate. This is like the stuff you use in biz thats quickly used up. Bc both types of goods turnover quickly then going to lump them together b. Fixed asset is taxabletractor you might have to pay taxes on. If it lasts a long time then it is equip Liquor License: if there is a default, the bank could exercise its interest in liquor license by selling it to someone else and make a profit---but have to get city or state approval. If use as collateral it would be called General Intangible, bc cant fit it in anywhere else and purely intangible right. a. Right to return of security deposit as collateral for a loan: payment intangible which is subcategory of general intangible. Payment intangible is a brand new term. The reason for it is because courts were confused regarding payment for services. A right to payment of a monetary obligation for something other than goods and services. b. Newspapers right to pyt for delivery of papers: account--right to pyt for services rendered. Account can include right to pyt for services that have not yet been rendered--more risky for collateral. curtains for law office as collateral: equip. If you take the curtains home they change to consumer goods. For equip you have to file w/ the town clerk. To perfect for consumer goods you will have to file for a separate office--secretary of state. Do they become unperfected bc of change in the use?

(e)

(f)

(g)

In Re Troupe: pg. 43 17

Problem 18 pg. 49: Mercy Hospital needs financing and calls you, its atty, w/ this Q. Many of its patients are members of various health plans and when they come in for treatment they sign paperwork authorizing the hospital to seek pyt from their health insurance coverage provider. The hospital always has a large number of such receivables in the collection process. When the hospital borrows $ can it use the monies due it from the various health plans as collateral? See 9-109(d)(8) and 9-102(a)(46). 9-102(a)(46) Health care insurance receivable---right to pyt for goods or services provided. o Subcategory of Account! o Kick out 9-109(d)(8)---cant use health insurance as SI personally, but hospital can. When he has a claim from Blue Cross he needs the $ to pay off doctor. But once he has the goods or services he can assign the claim over to the hospital that can use accounts as collateral. Once assign the right to pyt to the hospital already have the right to services, so hospital can use those insurance receivable as collateral bc they are owed the $. Health care insurance claims; health care insurance receivables---hospitals right to claim $ after the person has received services.

Problem 19 pg. 49: Passport Credit Card Co. issued millions of credit cards internationally, sending them to cardholders, who then used them in millions of Ts w/ merchants. The merchants would then send the resulting paperwork to Passport for reimbursement (minus Passports fee). You are the atty for Passport. When it needs to borrow $, can it use these credit card Ts as collateral? See 9-102(a)(2). Remember that the outright sale of such prop by Passport is also an A9 T; 9-109(a)(3). - Yes bc they have a right to pyt from the customers for goods and services so merely classified as an account. 9-102(a)(2)(vii) tells of rights to credit card pyts Problem 20 pg. 49-50: Milk in hands of farmer: farm products, bc in hands of farmer and product of livestock in un-manufactured state. - If the farmer pasteurizes the milk, does it take it out of category of farm products bc been subject to manufacturing process? No, comment 4, 6th paragraph. What is and is not manufacturing operation. At one end of spectrum some processes are so close to farming that not constitutes manufacturing process, but extensive canning operation would be manufacturing process. So if farmer puts milk into cartons then it is manufacturing process---depends on how the farmer uses it when SI attaches---if family will drink it = consumer goods, if he sells it then it is inventory. - Same milk in hands of grocery store: inventory bc held for sale - Same milk in hands of restaurant: inventory bc it is still held for sale. But what if using milk to bake cakes it would be inventory still bc it would be consumed quickly. Either way restaurant uses the milk would be inventory bc it turns over quickly. You can have same piece of collateral and it can be in diff classifications at diff times depending on how person uses it. But if you pick it at one time, then it can only be one classification. If you are in doubt about classification, how would you protect yourself for perfection purposes? - file it under both classifications. When in doubt do it under all classifications that it may fit under. - Under new code generally file in one type of office for collateral. 18

Cert of Deposit issued by a bank: 3-104 defines a negotiable instrument (it is an unconditional promise or order to pay a fixed amount of $). If the instrument is filled out in a particular way and using particular language then qualifies as negotiable instrument---meaning it can go b/t person to person. Right to pyt is wrapped up into piece of paper. - Promise to pay $: check and promissory note. - Cert of deposit is negotiable instrument bc it is merely a promise to pay by the bank at particular time w/ particular amount of interest. If you put it up as collateral---how would bank classify it in A9 terms? 9-102(47) Instrument = negotiable instrument is classified as an instrument. Air Bill issued by an airline as a receipt for frozen shrimp: Doc 9-102(29)---doc of title 1-201(16) Receipt given to a farmer by silo operator: doc (doc of title refers to warehouse receipt 9-102(a)(42) Right to the goods that are being stored/shipped is wrapped up in the warehouse receipt, so they are valuable. Difference b/t instrument and doc - Instrument is a piece of paper that contains right to pyt - Doc is simply a receipt to the goods, but is valuable bc allows you to get to the goods bc it is a right to the goods. Rare coins bought by hobbyist for coin collection: coin collection cannot be a good under the definition and so it cannot be a consumer good. 1-201(24) $ definition---medium of exchange currently authorized or adopted by a govt. While it is a coin collection, it is not $, and if it is not $, then it can be a good, and then it can be a consumer good, inventory, or equip. What if Sears puts up the $ they have in their vault as collateral? - This is $ bc being used as a medium of exchange so it cannot be a good. So what is it? $ under A9 is called $, it is its own category. Money is its own A9 classification. Tax refund: pyt intangible, which is a general intangible---right to pyt for something other than goods or services. It is a general intangible. Debenture bond issued by a corp: 8-102(15) obligation of corp of issuer is called security. But in A9 collateral it is investment prop 9-102(49)---means a security. A bond is a security so we call it investment prop. Investment properties are very, very limited 100 shares of stock recorded on the books of the debtors stockbroker: security entitlement in article 8.---your entitlement to stock held by your broker---in A9 it is called a security. So entitlement to 100 shares of stock is called investment prop. Checking account at the bank: Deposit account---9-102(29) 9-109(d)(13)---cannot use as A9 collateral an assignment of a deposit account in a consumer T. Whenever the debtor is a consumer you cannot use your deposit accounts as collateral. - Exception: debtor is a biz then they can use their deposit account as collateral Computer Program: General Intangible----but it can be a good too. If you are purchasing pure software not associated w/ a good yet then it is a general intangible. However if it is embedded in goods (like a computer) then it is a good. 19

Monthly rental obligations owed to landlord who wants to use obligations toward loan: - 9-109(d)(11) not included in A9---kicks out the creation or transfer of an interest in or lien on real prop, including a L or rents there under. o it is not an account bc drafters didnt want to bc prop law already covers it; so leave it to real prop law and not deal w/ it under A9. - 9-102(a)(2)(i) for prop that ---type of prop talking about is PP, not real prop Morgan County Feeders, Inc. v. McCormick, pg. 50: Allan and McCormick had an agreement where Allen would sell McCormick 56 head of cattle. But Morgan County Feeders had perfected a SI in the cattle, so they seized the cattle before they were delivered to McCormick. Allen defaults on pyts to Morgan. If a debtor sells collateral w/o permission of creditor, generally SI continues into the hands of the buyer. To protect run of the mill buyers and to encourage buying from retailers there are some s that protect buyers. If the cattle in the hands of Allen is inventory, then McCormick is protected as a buyer. But if the cattle is anything else, Morgan wins. How do we classify the cattle in hands of Allen? - Debtor Allen is not a farmer and to be a farm product there needs to be a farmer. So if you are in position of McCormicks atty, the only way he will win is if the cattle which Allen doesnt normally sell, it would inventory.---How can it be inventory? Life of the cattle is so short so type of goods that used up quickly in business. But court doesnt buy this bc cattle used in recreational cattle drives are not used up quickly, so the cattle are equipment, and Morgan will win. Problem 21 pg. 52: Sam Ambulance was a lawyer who loved speculative investments. When Elvis Presley died, Ambulance managed to acquire one of the singers guitars. He decided to keep it for yrs and let it appreciate in value (he did not himself play the guitar). If Ambulance uses the guitar as collateral for a loan needed to run his law practice, how is the gain classified? - Guitar is being held as an investment---but not investment prop bc it is limited and only applies to stocks and bonds. - What about equipment, bc using $ to run law office?---use of guitar is not the use of the business--doesnt matter how using the loan $---look at how the debtor uses the collateral itself. - Inventory---good held for sale---Comment 4---to be inventory you have to be in the biz of selling that item, Sam not in biz of selling guitars, so not inventory. - Must fit in definition of good---so it would be consumer good. Problem 22 pg. 52-53: How would you categorize the car L Ks that Dime-A-Minute Rental Cars use as collateral when it borrows $ from a bank? - If Dime a Minute defaults, then the bank can call up the people who have the L and tell them to make the pyts to them. So this is good collateral---but how do you categorize the L K? It would be chattel paper 9-102(a)(11)---piece of paper when taken together made up of 2 things: o (1) it is a monetary obligation---obligated in L K to pay monthly rentals; o (2) has to evidence either a SI or a L. - Only time to worry about chattel paper is when first creditor goes to another creditor for a loan. Chattel Paper is a monetary obligation (like a promissory note) + SA or if it is a L then the L. 20

Classifying collateral in A9 terms----important to put collateral in correct category b/c determines how to perfect the SI. Problem 23 pg. 53 The state of Montana has enacted a statute giving unpaid crop dusters a lien on the crops of the farmer. This, of course, is a statutory lien (bc it arises by statute and is not created by the consent of the debtorfarmer). Is this nonetheless an A9 T requiring compliance w/ the usual A9 rules? See 9-102(a)(5) and 9-109(a)(2) and (d)(2). Liens 9-109(a)(2)--ag liens--created by state statute, once created the lien holder has to comply w/ A9

B. Attachment of SI
Once youve categorized the collateral, next have to fill out some papers. To bring SI to life, there are reqs parties have to meet. When reqs are met, SI attaches to the collateral, i.e., it becomes legally enforceable. Once it attaches the secured creditor is A9 creditor and if default, then secured creditor has A9 remedies. - To get priority over other creditorstake additional stepsperfection 9-203(b) reqs for attachment: 1. Value has to be given: the creditor gives value to the debtor in return for the SI. Normally this is giving the loan. a. Definition of value in 1-204: anything that would suffice as consideration of a K is value--promise can be consideration, so promise can be giving value 2. Debtor has to have rights in collateral or at least the right to transfer rights in the collateral. -How can someone grant a SI in collateral he doesnt have any right to, so the debtor has to have rights in the collateral. 3. One of the following conditions have to be met: all the conditions tell you that the 3rd requirement is you have to have a SA (you have to have a K). 4 subs: a. (B) deals w/ a pledge: debtor gives physical possession of collateral to creditor.---doesnt say anything about a writing implies in pledge situation SA can be oral if you want it to be. b. (D) implies that SA doesnt have to be in writing---creditor has possession or control then dont need a writing c. (C) very limited---collateral as paper stock cert (today it is almost always electronic)---paper has to be given to the creditor. When creditor has paper, it is much like a pledge, so can have oral SA d. (A) debtor keeps the collateral. Debtor has to authenticate (sign) a SA. SA has to provide description of collateral and timber stuff. When debtor keeps collateral then the SA has to be in writing and signed by the debtor (authenticated) and describe what the collateral is. Statute of Frauds---reason why creditor keeps the collateral and reason why for the debtor to have possession of collateral, then there has to be a written SA. Problem 24 pg. 54: When Frederick Bean bought a new computer on credit from Centerboro Office Supply, before he could take it home the store made him sign a Conditional Sale K, by which he agreed that title to the computer would 21

remain w/ the store until he had fully paid for his purchase. The K described the computer, but nowhere did it mention a SI. Does the K qualify as a SA under 9-203? See 1-201(35) last sentence of the first paragraph, and 2-401(1), second sentence. - Is this T even governed by A9? Scope 9-109---SI = interest in PP to secure the credit pyts. o 2-401(1): conditional sale K---seller delivering goods to buyer under credit K, and purport to retain title, seller doesnt have title at all even if though he has the papers bc buyer has constructive title. All the seller has is a SI. Seller taking SI---issue is, do we have a Security Agreement? All you need is a signature by the debtor, a description of the collateral, assume that bc it is a K, you have to have words of grant where debtor says to creditor that giving interest in prop. So meets all the reqs, dont need magic words to make a SA---as long as parties intending to make one and meet the reqs then it will be SA. 9-203(3) SA can be oral if the seller keeps the collateral. If debtor keeps the collateral, then SA must be in writing. 1. Signed by Creditor 2. Debtor has rights in collateral 3. SA

C. Perfection of SI
You want priority over 3rd parties in collateral--to get it, you have to give notice to the world of your SI the way A9 says, and then you have perfected the SI. Perfection means that you gave notice of your SI by following A9. - There are several ways to give notice depending on the type of collateral - General way is filling out a FS that you file w/ the public office. Purpose of the form is to warn other people that you have SI---so it doesnt need much info. o 9-502(a) tells you the basic info that you need in a FS. Need the name of debtor Name of the secured creditor or its representative Description of the collateral - Whenever you read 9-502(a), you must also read 9-516(b) and 9-520 w/ 9-502(a) - Must have info listed in 9-516(b) o Extra info for financial statement (FS) and if the info is not in the FS it wont be accepted. But if filing officer does accept it w/ info missing then: 9-520 says that as long as the basic info (9-502(a) info) is there and the extra 9516(b) is not there, it will still be ok for the court bc it does put them on warning. It will be enough to perfect, bc it will put them on warning, even though it is nice to have the extra info in 9-516(b). Problem 25 pg. 55: Harry Fellini ran a movie theater called Fellinis Art Theater, but, bc he was the sole proprietor, that was the trade name. He gave a SI in the businesss equip to Sharkteeth Finance Co.. The FS calls for a listing of the debtors name. 1. Should the parties use the biz name or individual name? Read 9-503. a. When dealing w/ a sole proprietor, the biz is the individual. When he goes to borrow $ for theater, what name does he use bc his name is boring. 9-503(c) says that a debtors trade name is insufficient. So you use the individuals name. 22

i. Reading 9-503(a)(4) is the GR. ii. 1-3 deal w/ specialized situations, but (4) says a FS sufficiently provides the name of the debtor: if the debtor has a name, only if it provides the individual or organizational name of the debtor. iii. Comment 2 says how to read sub (4)(a) if the debtor is an individual, use the individuals name, but if the debtor is an org then you use orgs name. 1. Individual is sole proprietor or someone not a biz 2. Org is individuals, other than sole proprietorship. b. Here, he is the individual, and sole proprietor, then has to use individual name. 2. 9-506 allows for minor mistakes in financial statements, as long as they are not seriously misleading. Any mistake in the debtors name, even a minor mistake, is considered, as a matter of law, seriously misleading. If search run under debtors correct name produces financing statement with the incorrect name, then FS is sufficient. What if he incorporates the biz and is only shareholder---now does he use Art Theater Inc or Harry Fallini: - Org is an entity unto itself, separate to shareholders, and a corp is an org. - sub 9-503(a)(1): if debtor is a registered org, there are certain businesses called registered orgs, in order to come to life, biz has to make public filing w/ the state and w/o it, it is not a biz. - 2 other types of registered orgs: limited liability co. and limited liability partnership - 9-503(a)(2) deals w/ situation where debtor has died and have to deal w/ estate - 9-503(a)(3) deals w/ trust and trustee 3. If the theater were run as a partnership, would the partnerships name be used as the debtors name? See 9-503(a)(4) and its Official Comment 2. a. Use the partnerships name under 9-503(a)(4) bc it is an org. Problem 26 pg. 56: The debtors correct name was Raymond F. Sargent, Inc., but the FS listed the debtors name as Raymond F. Sargent Co., Inc., and it was so indexed. Is the FS effective? See 9-506. - Danger here is if the searcher searches under correct name & cant find it bc it is under incorrect name - 9-506(a) says that FS substantially satisfying reqs will be effective even w/ minor errors or omissions unless errors or omissions makes it seriously misleading. - 9-506(b) any goof up in debtors name is by matter of law considered seriously misleading---only way to bail out is if you meet sub (c) - 9-506(c): if bring correct name and the office using standard searching technique still finds it w/ the mistake, it will be ok. In this case, the court held it was a serious error bc filing office had ancient computer system that only searched under name as given and small error turned up nothing.

In re Johns Bean Farm of Homestead, Inc.: pg. 56: Problem 27 pg. 63: Barbra Song borrowed $50k from ONB in order to start a biz called Barbs Interiors, interior design being her specialty. ONB and Ms. Song signed a SA showing her as the debtor and giving ONB an interest in the inventory and the equip. ONB duly filed a FS. Subsequently, Ms. Song married Fred Dancer, and she changed 23

her name to Barbra Dancer. She borrowed another $50k from the Nightflyer Finance Co., which loaned her the $ after searching the records under Dancer and finding no prior encumbrances on the businesses inventory and equip. Did ONB lose its SI bc it failed to refile when her name changed? See 9-507(c) and its Official Comment 4. - Who bears the risk? Are we going to require original creditor to change the name or will the full burden be on the searcher? Her SI was in inventory---there is a problem of SI in inventory---sell collateral. Is inventory financing worthwhile? Yes, but use something called after-acquired property (AAP) clause in SA governed by 9-204(a) which says SI bar, in all inventory on floor right now and all inventory in the future so when all this inventory is sold the SI will go to the newly acquired inventory (also called a floating lien). o Normally after acquired clause used w/ inventory that is turned over and accounts receivable. But you can have after acquired clause w/ any type of collateral. She changed her name. How can creditor discover that there is a SI. o there is a grace period to discover the name change---9-507(c) o open SI covering inventory now owned and after acquired. Then name change. All inventory on floor before name change is still around will be perfected. SAME is true of all inventory that gets in the next 4 months after the name change is safe. Any collateral that she gets in after 4 months, SI in that collateral will be unperfected unless during the 4 month period the creditor discovers the name change and amends its filing.---so it is a compromise. Shared burden b/t the creditor and the searcher. It is not the debtors responsibility to notify of name change, it is the creditors responsibility to find out. o Creditor might motivate debtor to tell you of name change---if you dont tell them of name change, then it constitutes as a default and can exercise A9 remedies against debtor.

Problem 28 pg. 64: The LNB filed a FS in the proper place to perfect its SI in the accounts receivable of the American Electronics Store. When the latter ran into financial difficulty, its assets were sold to a new electronics concern, Voice of Japan, which moved into the same retail location. Must LNB refile to keep its SI perfected in (1) the accounts actually transferred by American Electronics to Voice of Japan; OR Issue is will LNB have to amend its filing to reflect Voices name instead of American Electronics? o 9-507(a) says that LNBs filing remains good despite the sale, exchange, L---and this is true even if they KNOW about the transfer. o Searchers only need to do is trace title to the prop that is offered to them---look at original papers to the accounts and see the original partys and then search under all of the people who sold the collateral---burden is placed solely on the searcher---any creditor would check to see that there is clean title and trace the title. (2) accounts thereafter acquired by Voice of Japan? See 9-507(a) and its Official Comment 3. Does LNB have to do anything to protect interest in new accounts? LNBs SI does not cover the new accounts, only covers what was agreed to w/ American. It is only brand new accounts opened by American, not by Voice. Voice doesnt take on responsibilities of Americans SA unless they agree to it. Or if Voice agrees to accept all of Americans liabilities that means that they would agree to take up the SA. 24

Do we get the same result if American Electronics Store merges w/ Voice of Japan and the new entity is called Voice of Electronics, Inc.? See 9-102(a)(56), 9-203(d) and (e) and its Official Comment 7, and 9-508. here we have American that was original debtor and then they merge w/ Voice and now brand new corp called VE. Issue: if VE opens up new accounts, are those accounts now under LNBs SA? o This is a secrecy problem bc no ability to trace the title, so is the new entity (debtor) responsible for the old SA opened by American when it comes to their brand new accounts? Does the AAP clause apply to the new accounts opened up by Voice or the new corp? Only if they agree to it or if there is some law that forces them to take it on. 9-102(a) (56) definition of a brand new debtor, which says that a new debtor means a person that becomes bound as debtor under 9-203(d) by a SA previously entered into by another person---key is does the new corp or Voice become bound as a new debtor under 9-203(d) New debtor becomes bound on someone elses SA in one of 2 situations: 1. if they agree to it/by K 2. if there is some other law other than A9 that forces them to take on that SA. Same for the new corps---only way after acquired clause of old SA will extend is only if they agree to take on the SA or if they are forced to by state law. o if the state law says that the co. that merges takes on the old co.s liability then that new co. would be a new debtor.

Distinguish b/t old debtor and new debtor - New debtor words are not applicable to a transferee - When Voice agrees to take on old SA or is forced to by some other law, then they become a new debtor under the SA---debtor means someone responsible under SA. 9-203(e) and 9-508 address 2 issues---when new entity (new debtor) takes on old SA, the only problem of that agreement is it lists the debtor as American and not VE. So do they have to re-write the SA to put VEs name on as debtor? - No, they dont have to if they dont want to bc they know that they are in biz w/ each other and no 3rd parties are affected. But what about the old filing? Old filing has old debtors name on it and if VE opens new accounts, the searcher traces title and it will only go back to VE, so will not find Americans name.so another rule 9508(a). - Says that if the difference b/t old debtors name and new debtors name makes the filing seriously misleading under 9-506, then we go back to the 4 month compromise. o Filing will remain effective to perfect the new accounts for 4 months from the new debtor taking over (those will be perfected for LNB ) but accounts opened after 4 months then for LNB to keep perfected in those they have to discover the new debtor and change the filing to perfect the new debtors name. - HANDOUT from 5-26-11

25

What if the opposite happens, and the debtor remains the same, but LNB assigns its interest in the debtors accounts to ONB? Need the records be changed? Read 9-310(c) and 9-511. - Does finance co. or LNB have to amend filing? The purpose of filing is to notify 3rd parties. o Can 3rd parties be fooled? No secrecy when you change the creditors - 9-310(c) says that original filing remains good, dont have to change it bc 3rd parties will not be fooled by it. LNB will have to refer them to finance co. o 9-504: so if these parties want to they can change the filing to reflect the new creditors name, but dont have to if dont want to. Scope of A9 covers sale of accounts as a secured T even if no debtor and no collateral bc it still presents a secrecy problem. Finance co. is now going to have to file to comply w/ A9 to protect its interest in the accounts. This is how the secrecy problem is solved. Problem 29 pg. 64: When Robin Oakapple found out that he could not get a loan unless he had collateral, he received permission from his foster brother, Richard Dauntless, to use Richards yacht as collateral. Should the lender make both sign the SA (only Robin signed the promissory note)? - Remember under attachment reqs, if you have written Security Agreement the debtor has to sign it (be authenticated by the debtor). When you have a filing, it is filed under the debtors name. Issue here is who has to sign the Security Agreement and Financial Statement? Robin bc he is taking out loan and is making pyts or Richard bc if Robin defaults, they go after Richards boat. - Which of these parties is the debtor and which is the obligor? Compare 9-102(a)(28)(A) and 9102(a)(59). o Richard is debtor: 9-102(a)(28)(A) debtor is defined as person who has received the interest in the collateral, ownership interest or whatever---it is the person who has the collateral. o Robin is obligor: 9-102(a)(59)---Robin owes the pyt, person who has to make pyts on obligation. Under whose name should the FS be filed? Robin is not the debtor at all which means that RICHARD has to sign SA and RICHARD has to be listed as debtor in FS. Robin probably has to sign loan K and promissory note 95% of the time the obligor and debtor is the same person.

Description of Collateral: - 9-203(b) and 9-504 state that you have to indicate what the collateral is. We need a description of the collateral for statute of frauds issues---to prevent overreaching by the creditor. But dont want to require too much info. How much is enough to constitute a description in SA. - description in the filing is to warn someone, just enough to put someone on warning so they can look further. - Description also protects both parties from the other over-reaching claims of what is covered Problem 30 pg. 65 Peter Poor signed a SA and FS in favor of the Total Finance Co., giving the co. a SI in all PP the debtor now owns or ever owns or ever hopes to own b/t now and the end of the world or his death, whichever occurs first. Does this perfect an interest in his guitar? Compare 9-108 and 9-504. 26

Talking about perfection here so this is in the FS. Would this be enough in a filing or do we require more? - 9-504 Indication of Collateral: filing covers all PP, must look to see if it include the guitar. Dont want 3rd parties to be able to strike down filing bc it was not specific. Want the SA to be specific, but filing doesnt have to be specific. So here, the description is fine for the filing. - SA description: 9-108(a) general test---except as otherwise provided in the exceptions, description will be ok as long as it reasonably identifies prop described. How much is enough to be reasonable? o The description of the prop is not reasonable bc 9-108(c) says super-generic or descriptions of all the debtors assets or PP is not enough for SA. It is enough for FS but not for SA--have to be more specific for SA. o 9-108(e) description by type is insufficient---type means: deals w/ situation that is more specific then all PP. In re Grabowski: pg. 65: Problem 31 pg. 69: Polly Travis owned a clothing store that was doing quite well, so she decided to open branches all over the state. She borrowed $ to do so from Longhorn State Bank, which took a SI (according to the filed FS) in all inventory, accounts receivable, equipment, instruments, general intangibles, and PP. The bank also made her pledge her extensive collection of jewelry to the bank, making her bring it from her home and putting it in the vault. A yr later she asked to have the jewelry back so that she could wear it on a social occasion, and the bank gave it to her. Before she could return it to the bank, another creditor seized it by judicial process. You are the lawyer for Longhorn State Bank. Is their interest in the jewelry perfected by the filed FS? What will be your argument? LC beats unperfected secured creditor. Did the bank give up their interest in the jewelry bc gave up perfection by possession? o It says PP---is all PP too broad for FS? 9-504 covers all PP.---ok describing collateral as all PP. o What if you dont have SI in all PP but just in the jewelry? His thought is that court will not allow all PP unless all PP is covered. Court has not said this yet though. No case about it. o If you put this same description in SA, it would not fly bc it would be super-generic description under 9-108(c)

SA deals w/ actually having SI in the collateral---an attachment Filing means giving notice. Problem 32 pg. 69-70: The SA and the FS both described the collateral as inventory. Does this limit the SI to existing inventory only, or does the SI extend to replacement for the original collateral? - Suppose have SA and creditor describes debtors (retail store) as inventory. Is that sufficient description for SA in 9-108(b) sets forth examples of what is reasonable. o (b)(3) says that if you leave an A9 category then it will be sufficient. What does category mean? Be careful of these examples bc pulled lists from old code but in old code it was in context and the context is not here. In the SA, if you want to use an A9 type, only do so when your interest covers ALL of that type! 27

Q answer: would all inventory be enough to cover present and future inventory? when talking about inventory it rolls over---just saying inventory it implies present and after acquired. Some courts say no though, they say that if you are going to create it then you have to say it. Split of authority. In the comments, comment 3 to 9-108, this is untracked interpretation and so leave it to court decisions in that particular state. If you want your SI to cover both present and after acquired collateral, then say so in SA.

If the SA had said inventory now owned or after-acquired, but the FS has simply mentioned inventory, does this perfect a SI in after-acquired inventory? See official comment 3 to 9-108 and official comment 2 to 9-502. - It is enough to put them on notice just to put inventory. Comment 2 to 9-502 says dont have to put after acquired clauses in FSs, bc then the person is warned and can look to the SA. Problem 33 pg. 70: The FSs description said Various Equipment, see attached list. No list was attached. Is the statement sufficient to perfect a SI in the debtors equipment? - Is this good enough to perfect or not? o Yes, this is ok, it does say equipment, which is more specific than all PP, and so then searcher can just investigate further. - But what if it was in the SA---various equipment, see attached list? o It would allow the creditor or the debtor to reach too far, so that is not ok. In the SA this would not be good enough. Problem 34, pg. 70: The SA stated that the collateral was machinery, equipment, furniture, and fixtures. To this list the FS added inventory and accounts receivable. The parties are all willing to testify that the loan was intended to be secured by inventory and accounts receivable as well as by the items listed in the SA. Other creditors object. Does the SPs interest reach inventory and accounts receivable? See 9-203(b) and 793 F2d 592 - SPs interest does not reach the inventory and accounts receivable bc if they are not included in an unambiguous SA the FS cannot expand that In re Martin Grinding o If we look to CL K rules, 3rd party creditors wouldnt be prejudiced in this case, so if you are arguing that the stuff should be included, look to CL rules Problem 35, pg. 71: The loan officer at ONB has sent you, the banks atty, an email w/ the following Q. The bank is planning to make a loan to Luddite Technology, Inc., and wants to take a SI in all of the equip of the debtor. However, Luddites most important piece of equip is the very expensive Abacus-12, which makes computer hardware. Should the SA be drafted to say that the debtor grants a SI in the abacus-12 plus all other equipment, all equipment, particularly the Abacus-12, or simply all equipment? Or do you have a better phraseology? - all 3 would be just fine but 2nd one is the best 9-108(3) Problem 36 pg. 71: The SA stated that the tractor buyer granted a SI to _____, but the seller forgot to fill in his name. The seller later filed a FS showing he had a SI in the buyers tractor. Is the purported doc w/ the blank a 9-293 SA? What about the FS? What about both? See In re Bollinger, 614 F2d 924. - hard to make it ok, case cited got lucky and said: o Do not need the name bc a formal grant of a SI; look at the totality of the circumstances including the FS, course of dealing, and correspondence b/t the parties 28

Attachment of the SI - Attachment is the process by which the SI in favor of the creditor becomes effective against the debtor. - Perfection is the process by which the creditors SI becomes effective against most of the world. - Steps for attachment in 9-203. Border State Bank of Greenbush v Bagley Livestock Exchange, Inc.: pg 72 Problem 37 pg. 77: Roy Gabriel decided to go into the music biz and borrowed $35K from ONB in order to open his shop named Gabriels Trumpets. On January 6, he signed a SA w/ the bank, giving ONB an interest in all existing and after-acquired inventory in the store. The same day he received the $. On January 6, his inventory consisted of four guitars and a pitch pipe. Gabriel did have a K w/ Triumphant Trumpet Manufacturing Co. (TTMC) to sell him 40 trumpets, which he paid for in advance of the delivery date (March 30). On March 15, TTMC packaged the 40 trumpets and marked them For Shipment to Gabriels Trumpet Store. On March 30, TTMC shipped them to Gabriel, who received them that day and displayed them in the store. a) On what day or days did the banks SI attach (i.e., become effective) to the guitars, pitch pipe, and trumpets? See 9-203(a) and read 2-501. - The guitar and pitch pipe attach on January 6th bc the bank gave value that day, SA and he already owned the guitars and pitch pipe (had rights in them) What about trumpets? When does buyer in credit sale actually get rights for what they are buying? o 2-501(1) states that a credit buyer gets rights in the goods he is buying when the goods are identified as the goods to that K. The parties can agree when that identification occurs. To be identified you have to have a K and party agreement when and on what event identification occurs. If they dont specify when identification occurs then have to go to (a) (b) or (c). a. (a) means buyer and seller decide what goods they are going to sell and buy, but dont have a price or K. But when the K is made there is automatic identification at that point. i. Here they already have a K but trumpets not in existence b. (b) if the K is for future goods then it is when goods are shipped, marked, or designated i. So here it looks like March 15

9-203(a) says that SI attaches against collateral when it becomes enforceable by debtor under (b), unless the agreement expressly postpones the time of attachment. o But parties can agree when it will attach too. So if they agreed that attachment is when the goods arrived, then March 30

b) Does your answer change if we add the fact that the bank filed a proper FS covering Gabriels inventory on January 7? - Jan 6 SA and value Rights arise---guitar and pitch pipe on Jan 6 bc he owned them Rights arise for Trumpet on March 15. Filing on Jan 7 does not make a difference here. Filing only deals w/ perfection and has nothing to do w/ when it attaches. 29

Can a FS be filed before the SA is signed? Attached? See 9-502(d). - Yes, FS can be filed before a SA is made or a SI attaches. Why would a creditor wish to file a FS before the SI had attached? See 9-322(a)(1). - In some instances if there is a priority battle w/ another secured creditor, sometimes priority dates from filing not attachment. c) If the bank did not advance any $ until March 31 (the date the bank actually saw the trumpets in the store), and if the bank did not make any commitment (see 9-102(a)(68)) to advance any $ until that date, when did the SI attach? - no value is given until March 31, so that is when the attachment would be. Definition of value is broad: more than giving loan $; it is anything that would constitute consideration for a K--- making a promise/commitment is consideration and giving value. 9-102(a)(68)----this is definition of making a commitmentpromising or obligating yourself. - So if the bank did not loan any $ on the 31st but made the promise do to so, this would suffice as giving value. Problem 38 pg. 78: Daniel lends Jennifer $ to buy a car. They agree over the phone that the car will be collateral for the debt. After Daniels sends a form to the Registry of Motor Vehicles, he is listed as an accreditor on the cars cert of title. Does he have a SI in the car? See 346 BR 220 (holding no SI where, although a lien appears on the title to her vehicle, the parties never executed a written SA.). Not valid bc only an oral SA and creditor not in possession of car Problem 39 pg. 78: ACRO owes considerable funds to its bank. The bank happens to get possession of valuable promissory notes belonging to ACRO, bc the Ts were closed in the banks offices and the notes put in the vault. Do the notes become collateral for ACROs debt to the bank? See 357 BR 785 Maybe the notes become collateral for ACROs debt to the bank bc it depends on extrinsic evidence, but prob not here bc doesnt look like it was ACROs intent to have the notes as collateral and since they were acquired by the bank later, they prob were not listed/described in the FS In re ACRO Biz Fin. Corp. In re Howell: another attachment case pg. 78 Howell and Tradex both sell rice. A customer, Bar Schwartz, wanted to buy some rice and pay for it w/ a commercial letter of credit. But Bar Schwartz could not buy rice from Howell bc Howell would not accept the commercial letter of credit as pyt. But this way of pyt was acceptable to Tradex, but Bar Schwartz refused to buy rice from Tradex. So Howell and Tradex came up w/ a plan: Tradax would sell its rice to Bar Schwartz under Howells name. Howell borrows $ from the bank and the bank takes SI in its accounts and Howell listed the letter of credit as one of its accounts. Who gets the letter of credit rights? - Bank who argues that they have perfected SI bc it is an account, or 30

Tradex bc they have right to get paid?

Letters of credit: can be used as collateral under A9 - Used when buyer and seller live in diff cities and seller doesnt want to ship goods until assured they will get paid and buyer does not want to give out any $ until they inspect the goods - So buyer goes to bank to get letter of credit and the bank backs up the promise to pay in the letter of credit the buyer will have to pay fee to bank to get the letter and then the buyer will send letter of credit to seller. - Seller takes the goods to shipper and shipper gives seller a bill of lading which is a valuable receipt (no one can get those goods w/o the bill of lading). So seller gives the bill of lading to buyers bank - So when goods arrive, the buyer inspects, goes to the bank, asks for a bill of lading, and then the bank pays the seller and gets reimbursed from buyer. Here, before the letter of credit is paid off, Howell goes bankrupt, so who gets the right to pyt? - Letter of credit belongs to Tradex. Howell should not have used it on their books. This is a rights to the collateral case. Under the new code, a letter of credit is not an account receivable, a letter of credit is ITS OWN TYPE OF COLLATERAL!

III. Perfecting the SI


Reqs of Perfecting: begins w/ 9-308: (a) before you perfect you must have attachment! How can you perfect something that doesnt exist? o But you can take steps for perfection before the attachment, e.g., you can file before attachment, and if you do that then perfection occurs at the moment of attachment. Steps to take to perfect: 4 diff steps the method for perfecting SI depends on the type of collateral 1. Most common way to perfect is to file a FS 9-310 (GR) o 9-310(a) states that except as otherwise provided in (b) and in 9-312(b), you must FILE a FS in order to perfect a SI. Those s are the exceptions. Exceptions 3 other ways to perfect (1) Pledge: possession by creditor (2) Control: Some types of collateral that cannot be physically possessed but there are ways to exercise control (3) Automatic Perfection: when perfection is automatic upon attachment Look at chart that tells us how to perfect for each type of collateral!

2. Perfection by possession (pledge):


o To pledge, the collateral has to be physical in nature. 9-310(b)(6) gives the exception dealing w/ possession and refers to 9-313, which tells you what types of collateral can be perfected by possession. o what does possession mean? Could 3rd party possess collateral on behalf of the secured creditor? 31

Problem 40 pg. 84: Your client, Archibald Gracie, owns The White Star of England, a famous large diamond that is currently on display at the Astor Museum in New York. Molly Brown, a wealthy Colorado investor, has agreed to buy the diamond from Gracie, and she has made a substantial down pyt and an agreement to make three more pyts before she gets possession. Gracie and Brown have signed the purchase agreement, which contains a clause granting him a SI in his own diamond until she has made all the required pyts. His Q: can he perfect a SI in the diamond by simply notifying the Astor Museum of the sale and telling the museum to hold it for his benefit until she makes pyt in full, thus creating an escrow arrangement in which possession is held by the escrow agent? See 9-313(c), (f), and (g). - 9-313(c): in order to validly possess the 3rd party that has collateral has to agree to do so in an authenticated record. - 9-313(f): they dont have to if they dont want to. The museum can say no to the creditor. - Draw distinction, if the museum says yes, in CL terms museum would be a bailee (they are holding the diamond on behalf of a creditor) but there are also situations where a creditor can have an agent possess it for him. If that is the case, then dont need acknowledgement bc agent is stepping into shoes of the secured creditor. But the museum is not an agent so they would have to give out acknowledgment. Problem 41 pg. 84-85: Kiddie Delight, Inc., is a manufacturer of toys, wanted to borrow $ and use its inventory of toys as collateral. It called up Freds Field Warehouse Co., and Freds came to the plant, put the inventory in a locked room, and posted a sign on the door saying Contents of Room Under Control of Freds Field Warehouse. Freds then issued a negotiable warehouse receipt deliverable to the order of Kiddie Delight. Freds hired Mort Menial, the Kidding Delight janitor, as their local warehouse custodian (Mort was paid $1.00 a week by Freds to mind the goods; he continued to receive his normal paycheck from Kiddie Delight). Kiddie Delight pledged the warehouse receipt (a doc) to MSB in return for a loan. Kiddie Delight went bankrupt shortly thereafter. a) By having possession of the doc, did the bank have a perfected SI in the inventory? See 9-312(c) and Official comment 3 to 9-313. There is a SA and attachment how will the bank perfect the toys? - For goods you can file or possess. Bank says we can file a FS but the problem is we dont have physical control in case Kiddie decides to sell, no physical possession. o But bank has nowhere to store it. Bank can get control of toys w/o having to have them shipped over. Bank tells Kiddie to hire a warehouseman to warehouse the toys---warehouse receipt made out to Kiddie. It is very valuable bc right to goods are wrapped up in the receipt and whoever has it has the rights to the toys. In A9 terms warehouse receipt is a doc. o So Kiddie assigns the doc over to the bank. o So how does the bank perfect in a doc? Possess or file. So bank takes possession of doc. But what about the toys in the doc? What does the bank have to do to perfect in the toys? Could file, but filing in of itself does not allow them to control the toys. 9-312(c): as long as the goods are in possession of bailee who issues the doc, then you can perfect in the goods simply by perfecting in the doc o The warehouse receipt. Since the bank has possession of it, then they have perfection---perfected SI in the goods. Bank can get SI in toys and perfect it and have control over toys simply by having a piece of 32

paper. No secrecy problem bc if Kiddie tried to offer toys to anyone else, they would see warehouse and ask for warehouse receipt and then be on notice that the bank has the receipt. What does possession mean? 9-312(c) says only possession when true possession If the bank loses out bc court says Fred didnt have possession--who can the bank recover from? Fred.

What if close to Dec. 1 and Kidde has advertised that toys will be on sale in showroom by that day. And it is Nov. 21. - Must prepare the toys for sale so go to bank and ask bank for receipt so can get receipt and get into warehouse to assemble toys. - If the bank gives up possession of the receipt will they become unperfected? o 9-312(f): 20 day grace period---if the debtor needs to prepare the goods for ultimate sale or exchange, then can give up receipt for 20 days, better get receipt back w/n 20 days or they become unperfected unless they file FS, but they will want the receipt back bc it gives them physical control over the toys. Problem 42 pg. 85: ONB makes a loan to Pi Solutions, secured by Pis patent on a solar powered night light. ONB learns that its unsettled whether a SI is perfected by filing in the state UCC office or the fed patent and trademark office. ONB has a brainwaive. Rather than filing, can ONB perfect w/ a pledge taking possession of Pis patent cert? See In re Coldwave Systems, 368 BR 91 No, a patent-right is incorporeal prop, not susceptible of actual delivery or possession Problem 43 pg. 85-86: Karate, Inc. was a self-defense training school. It pledged 36 of the promissory notes given it by its customers to Nightflyer Finance Co. in return for a loan. The parties signed a SA, and the finance co. took possession of the notes. A month later Karate, Inc.s president, Arnold Sun, asked Nightflyer to let him have back one of the notes so that he could present it to the customer for pyt (an article 3 presentment). The finance co. gave him the note on April 6. Sun put it in his desk at the school and forgot about it. On October 12 the karate school went bankrupt. Does the bank have a perfected SI in any or all of the promissory notes? See 9-312(g) and (h). Promissory note is an instrument---to perfect instrument you need file or possess here bank takes possession of promissory notes so it has a perfected SI in the notes in possession for the note not in possession 9-312(g) provides a 20 day grace period in order to have the instruments paid off---can give up the note to debtor so debtor can present it to the maker and have it paid off. Bank has 20 days to make sure they get the note back but if it becomes unperfected upon expiration of the 20th day, unless file a FS. But they want possession back bc instruments are negotiable and the right to pyt is wrapped up in the note, so the bank does not want the debtor to sell the note to someone else.

3. Automatic Perfection
9-310(b)(2) exception---dont have to file if your SI is perfected automatically upon attachment. 9-309 shows the types of collateral when perfection is automatic when attaches. o 9-309(1) SI is perfected upon attachment if it is a PMSI in consumer goods. PMSI (purchase money security interest): whenever you buy something on credit, the thing that the seller is selling (i.e., the seller has a SI in). 33

9-103(b)(1) PM collateral---defined in 9-103(a)(1) goods or software that secures a purchase-money obligation incurred w/ respect to that collateral So you can only get a PMSI in GOODS & SOFTWARE then PM obligation which is defined in 9-103(a)(2) an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. o PM creditors get more rights than regular A9 sellers 9-309 tells us that although you can have PMSI in goods or software, the only ones that are perfected automatically are PMSIs in consumer goods.

Why allow automatic perfection: 1. sellers sell many types of goods on credit every day, if we require a filing for every single one of them then filing system would be overran 2. if you offer consumer good as collateral, consumer goods usually are not the most valuable types of collateral, usually there will be no other creditor willing to take SI in beat up consumer goods Allow secrecy for PMSI in consumer goods - Remember 9-309 begins by saying there is an exception in (a)(1) 9-311(b) governs certain types of security goods that are very valuable and do not depreciate quickly---like cars/automobiles---so for cars perfection is not automatic.

a. PMSI
Problem 44 pg. 87: Bilko Siding, Inc. put aluminum siding on Mr. and Mrs. Browns home. They signed a K on August 4, giving the co. a SI in all their currently owned consumer goods plus those acquired in the future. On September 25, the Browns went to First Finance Co. and borrowed $80 for the stated purpose of buying a sewing machine. They signed a SA w/ the finance co., granting it a SI in the machine. First Finance did not file a FS. The Browns bought the machine on October 11. They filed for bankruptcy on October 12. Bilko, First Finance, and their trustee all claim the machine. (a) Did Bilkos SI attach to the sewing machine? See 9-204(b) Courts are very suspicious of SIs that say all consumer goods. Consumers are bullied by retailer to grant SI in everything they own in order to terrorize the consumer into making the weekly pyts. So courts will examine the SIs and use CL K doctrines to make sure consumer knows what he is really getting into. Is this description of collateral all consumer goods now owned and later acquired a sufficient description in the SA? Assuming we get by those two problems, 1. When did Bilkos SI attach to the sewing machine? - Creditor can have an after acquired clause in consumer goods but it is limited to consumer goods that the debtor gets w/n 10 days after it gave value. o What day did Bilko give value? They extended the credit for PMSI on August 4, Bilkos SI does not touch the sewing machine bc the Browns did not buy the machine until October 11---which is well out of the 10 days. This doesnt apply to accessions, which is a good that is attached to another good If he takes SI in a snowmobile and includes all after acquired goods put on the snowmobile---so if put DVD player on snowmobile that DVD player is an 34

accession---but didnt do it until 2 months after acquired clause---10 day limitation does not apply bc it is an accession---this is not too burdensome on debtor bc it is only those that are attached to the snowmobile and not everything that he owns. 2. (b) Did the loan agreement create a PMSI even though First Finance was a lender and not the seller of the machine? See 9-103(a)(2). o two types of PM creditors: PM seller and PM Lender under 9-103(b). First Finance is PM lender. 3. (c) Would First Finance have been a PMSI if the Browns had used the $80 to pay a liquor bill and had used $80 from their savings account to buy the sewing machine? - It does matter - 9-103(b) definition of PM lender key to definition is in 9-103(a)(2) PM obligation: value given to acquire rights, or use of collateral if the value is in fact so used. o Value is in fact so used---you have to use the exact loan $ given to buy the collateral and if you dont then no PMSI. o How can finance companies protect---make check payable to both the debtor and sewing machine store, and in order for that check to be cashed both parties have to sign---to ensure the debtor takes the check to the store 3-110(d) o Who gets the machine? Trustee v. Bilko: prob the trustee bc Bilko did not have SI attach under 9-204(d) 10 day requirement First Finance v. Trustee: if the secured creditor is unperfected the trustee will win. But it was a PMSI, which is automatically perfected bc it is a consumer good. First Finance was automatically perfected at attachment and attachment happened before bankruptcy, so it will win. In re Short, pg. 88 Shorts buys furniture and gave a PMSI to seller who assigns to American. Then Shorts goes and gets another loan and has a yr to pay off---they go back to American and say they cant make this much in pyts, how about refinance, and give longer time to pay w/ smaller pyts. So grant another loan and this loan is used to pay off the first loan. Papers state that 2nd loan is still secured by PMSI in the furniture and the rest of the loan is secured by regular SI in all of the Shorts household goods. Shorts make a few pyts. And then they go under. Now under bankruptcy code, when we have a liquidation bankruptcy the debtor can normally keep the household goods, but a lot of household goods may have SI, so in order to allow the debtor to keep their goods, there is a in bankruptcy code that says SI in household goods are taken off the goods, and creditor can take what they are owed into bankruptcy court. - But there is an exception, if the SI is PMSI, then it cannot be destroyed bc debtor would not have had goods to begin w/ if it had not been for PM seller. - So they can still get the $2880 from furniture, but the rest will be thrown into the pot w/ the other creditors. Shorts argues that American doesnt have PMSI in the bedroom furniture anymore. - So how do they argue that it is a SI but it is no longer a PMSI in the furniture? o Definition of PM lender or seller in 9-103(a)(1)/(2) dealing w/ a loan so it is a PM lender 35

The $ is not being used to acquire the rights in the bedroom furniture. The 2nd loan is not used by the debtors to acquire rights in furniture---they already own it under K for sale, the 2nd loan is used to pay off previous debt, not to get the furniture

Transformation rule: it is in support of the debtor & some courts have adopted it. As soon as a PM loan is refinanced, it is no longer PM in character. Duel status rule (the rule the court adopted): refinanced loan can be PM and non-PM (it can have a duel status)---the balance on the PM part of original obligation still goes into the loan---$2880 is still PM and the rest of it is not and is regular SI, so refinanced loan still has duel character---so at least in $2880 American will be saved and still be able to get the 2880 bc PM. First in, first out: two loans combined, first pyt applied to earlier loan. The first obligation here was PM part---$2880 is reduced to $24something, and this amount is considered PM American will still be able to get out of the estate in bankruptcy but the rest of the loan have to share w/ creditors. Under the new code---drafters tried to solve the split in authority - 9-103(f) adopting duel status rule, but this does not apply to consumer goods!!!!! o Duel status rule is for businesses, NOT CONSUMERS! - 9-103(h) says that when it comes to consumers leave it to the courts to apply whatever rule they think it is appropriate. o So can allow transformation rules for consumers or can allow duel status rule or may come up w/ new rule. When new code does apply duel status rule, there is a new way to allocate the pyt in sub (e)---but we are not responsible for this. Problem 45 pg. 96 Faade Motors decided to buy an expensive Oriental rug for its main office. It selected one from the stock of Treasures of Persia, Inc., which let Faade Motors take the rug back to the office to try it out to see if it wanted to buy the rug. All of the equip of Faade Motors was covered by a perfected security floating lien in favor of ONB. As soon a Faade gets possession of the rug (and before it makes up its corporate mind whether it wants to buy it) Does the banks lien attach? See 2-326(1) and (2). - 2-326 explains a T that is a sale on approval: seller says to buyer, if not sure that good will work for you, so take it back and try it out, and if you dont like it well take it back. The makes it clear that while the buyer is trying it out, none of the buyers creditors interests will attach. - But here buyer likes it and wants to buy it. Is Nightflyers loan a PM loan or not? 9-103(a)(2) o it is not bc they are using loan $ to get the rug but are they using the $ to acquire rights in the rug? When you enter into credit K, even though you owe $, you still have full ownership rights to what you are buying. If you default on pyts, seller will sue you under K. Bc already own rug, loan is not used to acquire rights in collateral. o Nightflyer will say that it gave the loan the day after the sale, isnt it close enough? This is whats at issue in next case. GECC v. GMAC: pg. 96 Spartan owes a lot of $ to GECC, so later GECC says they want collateral in the loan so Spartan grants SI in all inventory now owned and later acquired. Is this PMSI? 36

9-103(a)(2) bc it is a loan you are in the second clause---the loan $ isnt used to buy the collateral, so it is a regular secured loan, not a PMSI. $ was not used to buy inventory, it was to renovate the dealership.

Spartan needs $ to buy more inventory and goes to GMAC and says that they will give them SI in the inventory that they buy w/ the $ loaned. So GMAC is a PM lender and have PMSI. Spartan wants to get 2 Mercedes but uses their own $ to buy and GMAC reimburse. Law favors PM secured creditors over regular secured creditors---PM creditor has priority over even previously perfected secured creditors. GECC says cannot be PM bc loan was given AFTER Spartan bought the cars so cant get 2 cars under loan $ GMAC says close is close enough - Court applies closely allied doctrine: o Balancing Factors: Closeness in time: how close the loan was given to the actual purchase Here it was close, reimbursement b/t 2 and 6 days Here court favors GMAC bc loan closely allied to purchase Obligation that GMAC had to Spartan before the sale: if already committed to make reimbursement, then closely allied Intent: did the parties, GMAC and Spartan, intend the $ to be a PM loan---look at the language of the K---in their K GMAC would only be considered PM if they give the $ directly to the car distributor as opposed to the dealer---court said this language was vague and course of perfwhat they are doing, can overcome the K. Look at course of perf: what was done by the parties and what is done by the trade Has title passed at the time make loan: against GMAC bc Spartan has title before reimbursed Court said here that close was close enough and GMAC is PM lender and so have priority over GECC for the 2 cars and the rest of the inventory that was bought w/ GMAC loans. NOTE: comment 3 to 9-103 last paragraph says: the concept of a PMSI requires a close nexus b/t the acquisition of the collateral (which is the sale of the Mercedes) and the secured obligation (which is the loan). Thus, a SI does not qualify as a PMSI if the debtor acquires prop on unsecured credit and subsequently creates the SI to secure the purchase price. - This is the closely allied doctrine. b. Automatic Perfection for Assignment of Accounts or Pyt Intangibles 9-309(2): automatic perfection for an assignment of accounts or pyt intangibles that does not by itself or in conjunction w/ other assignments to the same assignee transfer a significant part of the assignors outstanding accounts or pyt intangibles. o So take SI in someones accounts---if only take SI in small part of the accounts then dont have to file.

37

Comment 4: is the assignment casual and isolated anyone who regularly takes assignments in accounts should file, but if you dont usually take assignments in accounts, chances are you dont need to perfect by filing a FS. seems to be 2 diff tests.

In re Wood, pg. 105: Trustee will say that Larkin was unperfected and did not file a FS. Larkin wants to come under an exemption. The court says the burden of proof is on the assignee. So does he have to meet the burden of both tests or just one. - Did Larkin meet the burden of proof? o He did not present evidence on the first test (significant percentage) so he fails on this test. What about the second test. - The appellate court says that this was a one-time deal, it was casual and isolated so he meets this test. - Fails one test and meets the other, so he is exempted. The court says that if you go though both tests, you just have to pass one in order to be exempted from filing a FS. - But there is language in the opinion that says that if you fail the % test, the casual and isolated test will not allow the exemption and vice versa. - Most courts say that both tests have to be reviewed and both tests have to be met! - In meeting both tests when you say you are not taking a significant percentage, does this mean number amounts or dollar amounts? o The courts have looked at dollar amounts, not the number of accounts. Look at the dollar amount percentage. o The test is hard to meet, so dont rely on it. Just file to be safe. Problem 46 pg. 108: ONB sold all the promissory notes it was holding in its vault to LNB. Remember that the sale of promissory notes is an A9 T (w/ the seller being the debtor and the buyer the SPsee 9-109(a)(3)). Must LNB file a FS or make sure it has possession in order to perfect its SI in the notes? See 9-309(4). Sale of promissory notes---outright sale of promissory notes is a secured T---governed in the scope . Normally the buyer of the notes is considered the creditor and has to give notice, but 9-304 says that you dont have to take any steps to give that notice, you are automatically perfected. o No secrecy problem bc promissory notes are negotiable instruments and the right to pyt is wrapped up in the paper---whoever has the paper has the right to pyt.

Problem 47 pg. 109: When Nightflyer Finance Co. loaned $20k to Portia Moot to enable her to expand her law practice, she gave the finance co. a SI in her accounts receivable (the monies her clients owed her), which Nightflyer promptly perfected by filing a FS in the appropriate place. One of these accounts has a surety, the mother of the client, who promised Portia that she would pay the debt if the client did not. What must NFC do to perfect its interest in the surety obligation of the mother? See 9-102(a)(77), 9-102(a)(71), 9-203(f), and 9-308(d). Biz loan, SI in the accounts. One of the accounts must have a surety. Mom of client signed on as a surety. What must finance co. do to get interest in surety: - Supporting obligation: a secondary obligation that supports/backs up primary obligation. - Here the client has primary obligation and mom has secondary obligation. 38

Do you want SI in suretyship rights? You want this in case the other person doesnt pay. If you have SI in surety obligation then can go after the surety. To perfect SI in surety obligation---9-203(f) says if you properly attach to accounts, then you are automatically attached to supporting obligation. What about perfection---do you have to describe the suretyship right in the filing statement---9-308(d) automatic perfection, perfection of a SI in collateral also perfects a SI in a supporting obligation for the collateral.

4. PERFECTION BY FILING:
9-310: filing is the general way to perfect a SI. 9-501(a)(2) is the rule that applies most of the time: you file in the office of_____. State code says one central office to make all filings and state will fill it in. Only exception is (1)---file in real prop office for land. GR is you only need to make one filing in one office. Problem 48 pg. 110: Hamlet Corp borrowed $100k from the Elsinore Finance Co. and gave it a SI in the corps equip. The parties properly filled out a FS; W. Shakespeare was mentioned on the FS as president of Hamlet Corp. Elsinore gave the FS and the filing fee to a clerk at the Secretary of States office. The clerk, Ophelia Nunnery, had just announced her intention to quit to her fellow office workers and was not paying attention to her job as she indexed the FS under Shakespeare instead of Hamlet. One yr later another finance co. loaned Hamlet Corp more $, taking a SI in the same equip (the second finance co. checked the records and found nothing under Hamlet Corp.). Since priority of creditors in this situation depends on the order of filing (9-322(a)(1)), did Elsinore file first, or did it bear the risk of clerical error? See 9-516(a), 9-517 and its official comment 2. Filing officer goofs up your filing. Filing officer misfiles under the wrong name---bad bc a secrecy problem. Is the first creditor perfected due to goof up in filing---risk on the searcher or is the risk of filing office error on original filer? - 9-516(a) tells you what constitutes a filing---if you properly fill out FS and properly give fee, then youve done what you can. - 9-517 failure of financing office to correctly file does not affect the filing---the risk is on the searcher (Official Comment 2). o If the searcher is a victim of secrecy then they should sue the state for the mistake. - 9-523 says you are allowed to bring a copy w/ you and have it certified so that if the filing office loses your filing, you will have proof that you did it correctly---file for your records. Problem 49 pg. 111: ONB had a SI in the equip of the Weekend Construction Co. for which it filed a FS in the proper place on May 1, 2002. Antitrust National Bank took a SI in the same collateral and filed its FS on May 2, 2002, in the same place. (a) How long is a FS effective? See 9-515(a). - 9-515(a)---FS expires 5 yrs from the date of filing. (b) If ONB files a continuation statement on May 1, 2006, is its perfected position continued? See 9-515(d), 9510(c). Pre-revision decisions called this problem of premature renewal. - 9-515(d) to be effective continuation statement has to be filed w/n 6 months of expiration. 39

(c) If ONB never files a continuation statement at all, after May 1, 2007, does it nonetheless retain its priority over ANB (who, after all, always thought itself a junior to ONBs prior filing and would get a windfall if it suddenly prevails)? See 9-515(c). - do the priorities flip flop here? o 9-515(c) last sentence, if they do allow FS to expire, then it becomes unperfected and it is deemed never to have been perfected as against a purchaser of the collateral for value. But the perfection as against a purchaser of collateral for value. 1-201(29) purchase means buying something and includes any voluntary T where you get an interest in someone elses prop. Bc SI gives you an interest in someones prop, then you are considered a purchaser here. Other points regarding continuation statements: - when filing is going to expire, cannot file a brand new FS, must file a CONTINUATION statement 9515(d). o Must file a continuation statement, and if you do w/n the 6 month period, then you are renewed for another five yrs NOT from when you file continuation statement, but from when your original expired. - If you mess up and expire, you cannot file a continuation statement, you have to file a new Financial Statement. Problem 50 pg. 112: When Portia Moot paid off her debt to LNB, which had loaned her $3k to buy a computer for her law office (and taken a PMSI therein, for which it had duly filed a FS), she wanted the bank to clear up the records down at the filing office. Does she have this right? See 9-513. Once a debtor has paid off the obligation, it is wise to terminate the filing. So termination of the filing is needed---who has responsibility to do it? Creditor or debtor? - Bc FS expires after 5 yrs, there is no general duty for the creditor to file a termination. - 9-513: gives the debtor the power to make sure the filings are terminated. Difference b/t biz debtors 9513(c) and consumer debtors. o biz debtors can make a demand (writing) of termination---and w/n 20 days, the SP has to file the termination statement themselves, or send termination statement to debtor - If it files consumer goods, then consumer gets more protection. 9-513(a) and (b) says the burden for consumer is on secured creditor---after obligation is paid off and no other obligations remain, creditor has 30 days to terminate the filing. Unless the consumer is smart and makes a demand then they have 20 days to terminate the filing. o Debtor can recover loss from the creditor not terminating---9-625: can sue for damages and there is also a $500 PUNITIAVE damage award. Release from SA: - way to do it is in 9-512 9-514: address situation where creditor makes loan to debtor making SI, and later the creditor assigns SI to another creditor. Bc no secrecy problem, original filing does not have to be changed. - 9-514 says if they want to, they can amend the filing to reflect new creditors name so old creditor wont have to refer to new creditor. 40

Problem 51, pg. 113: When atty Sam Ambulance handled a divorce for a client, he incurred the wrath of her ex-husband, Andrew Anarchist, president of the Freeman CL Movement, a group that did not recognize the authority of the state or fed govt. The irate ex-spouse filed 42 phony FSs in the public records showing that all of Sams assets were security for various non-existent loans in favor of Anarchist, the SP of record. What can Sam do to clear up these clouds on his title to his prop (which the CL would have regarded as defamation)? See 9-513, its official comment 3, 9-518, its official comment 3, and 9-625(b) and (e)(4). - 9-518: is how to make corrections to a FS---how you amend it. - 9-513: (c)(4) even though the filings are bogus, you can still terminate filings---send authenticated demand to all addressed of SPs on bogus filings. Probably wont get a reply bc fake secured creditors o comment 3 states that a creditor is still deemed to have received the demand, so by not sending termination statements if you can find bad guy you can sue for damages. How do you get rid of bogus filings though? Comment 3 cites you to 9-509(d)(2) 9-509(d)(2): normally debtors cannot file termination statements, but in this situation of bogus filings we do allow the debtor to file termination statement, but the debtor has to put on the termination statement that the debtor filed the termination statement. Open filing system: 9-523: says that once a security of filing is made on a debtor, it is put into an open file, and every type of filing on the debtor is put in the same file. When the obligation is paid off the filing office keeps the file for an additional yr.

5. Perfection by Control
Only 4 types of collateral that can be perfected by control: investment prop, deposit accounts, letter-ofcredit rights, or electronic chattel paper 9-314 o Control generally means that the SP has taken the steps described in s 9-104, 9-105, 9-106, and 9-107, so its obvious to anyone investigating the state of the collateral that the SP has rights therein.

6. State Law Governing Perfection


Which state laws govern your perfection? If debtor lives in one state and creditor lives in another--which state laws control the T? o UCC has its own conflict of laws rule 1-301: tells you that the parties to a T can agree on which states laws will govern the T. o If the parties forget to agree, then 1-301 says have to follow the conflict of laws principles--figure out which state has the closest relationship to the T? o 1-301(g) says however there are certain provisions of the UCC that bc perfecting SI gives notice to parties, 1-301 states that you have to follow rules in 9-301 to 9-307, which are the same in every state. When it comes to perfection need one set of rules bc 3rd parties need to know where to look.

Problem 52 pg. 116: Mary Bush lived in a home she owned in Cheyenne, Wyoming, but she also wanted to buy a large sailboat in Cleveland, OH, and planned to keep the boat there after the purchase. OH law provides that whenever a consumer has paid more than 75% of a debt secured by consumer goods, the creditors SI automatically is 41

stripped from the consumer goods, but Wyoming has no such rule. If a creditor loans Mary the $ to buy the sailboat and takes a SI in it, where should the creditor file the FS? - How do you perfect in a sailboat? This would be a Purchase Money SI in a consumer good auto perfection. If boats in OH are covered by cert of title, then you will follow cert of title rules. But pretend that creditor will have to file---so where do they file? - 9-301 creditor should file o Perfection: under 9-301---technical steps you have to take to actually perfect, like filing a FS o Effect of Perfection or Non-perfection under 9-301: means effect is about legal status the secured creditor gets by being perfected or unperfected. o Priority under 9-301: referring to laws governing battles b/t secured creditor and 3rd parties who also want collateral 9-301(1) is the GR subject to exceptions in 2, 3 and 4. While a debtor is located in a juris, the local law in that juris governs perfection, effect, and priority. - GR says that you should file where the debtor is located, even if the collateral moves around Exceptions: - 9-301(3) if the collateral is one of the types mentioned, you have to use this! Type of collateral--tangible types of collateral (that you can feel and touch like goods) or pieces of paper where right is wrapped up in the paper, like negotiable docs and negotiable promissory notes. o deals w/ fixtures o deals w/ timber o is most common---law of state where the collateral is. 3(c) only deals w/ effect and priority, does not deal w/ perfection. This means that when talking about where to file, regardless of where operating w/ tangible collateral, still talking about (1) bc 3(c) doesnt talk about where to perfect. When talking about technical steps or perfection, even when dealing w/ tangible collateral still in #1. But if you are dealing w/ effect or priority rules, and it is a tangible type of collateral then under 3(c) you look to where the collateral is located and deal w/ that states laws. Comment 7 explains application of 1 v. 3(c)---want to read 1 and 3(c) together.

What if debtor lives in Wyoming and puts up copyright for collateral but copyright is recorded in OH. - If priority battle where do you look? o Copyright is a general intangible. Bc it is a general intangible, it means you go back to (1). (3) is not activated at all---not relevant bc dealing w/ intangible. So go to Wyoming where the debtor is located. The debtor lives in Wyoming and puts up car as collateral, but car is kept in OH? - Where do you file FS? o Talking about perfection---so it is under (1) o But cars have cert of title so ignore 9-301(1) and go to (3). 9-301(2) deals w/ pledges---where creditor has possession of collateral---for everything, perfection, effect and priority, always look to (2) where the creditor is. 42

possessory SI: it is a pledge, where creditor has possession of collateral

9-301(4) collateral dealing w/ wells and mines---look to where the collateral is located. When dealing w/ specialized collateral may not be in 9-301 at all: - 9-303 deals w/ goods covered by cert of title - 9-304 bank accounts, savings check accounts, perfection, effect, and priority deal w/ where bank is located - 9-305 investment prop---stocks and bonds---as GR look to where prop is located for perfection, priority, and effect - 9-306 letter---perfection, effect, and priority are all governed by state where bank is located. Problem 53 pg. 116: Peripatetic Corp was organized under the laws of the State of Delaware but has its large retail store outlet in New Jersey. Further, the corp was really a husband and wife type of biz, and they did all the corporate paperwork at their home in Baltimore, MD (where they also kept the corp records). Their corp stationary used their home address. When the corp borrows $ against its accounts receivable, in what state should the FS be filed? See 9-307(b) and (e). Where do you file---where the debtor is located or where the collateral is located??? - It is an intangible. So 9-301(3) will not apply. Takes you back to 9-301(1) which says to file where the debtor is located, absent a pledge. - Where is the debtor located? 9-307 tells us where debtor is located. o 9-307(b) GR 9-307(b)(2) org is a biz other than a sole proprietorship. Says when only have one place of biz 9-307(b)(3) when have more than one place of biz, its located at chief executive office. Comments say that chief executive office is where the biz is managed from. Here it would be Maryland, where they are located o 9-307(e) if it is a registered org then located wherever the org is registered. Registered, in order to come into existence have to register w/ in the particular state--only types of businesses is LLC, LLP, and Corp. Here have corp, so would qualify as registered org, so would be in DE. What if the corp was registered in Jahala---a pacific island nation? - 9-307(c) if it is not in a juris that has a public notice system then it is presumed to be in DC - Since it says it is a registered org in Jahala would it be in (e)? It says registered org under state law---to be registered org has to be registered in one of the 50 states.

Problem 54 pg. 118: Factory, Factory & $ is a legal partnership that has its only place of biz in Chicago, Il, where ONB, which has a SI in the accounts receivable of the firm, had filed its FS. If the law firm makes a permanent move to D.C., on Jan 1, 2013, does the bank lose its perfection, or does it have a grace period in which to refile in the new juris? Read 9-316(a). 9-301(1), we will file where the debtor is located. 43

Does the bank lose its perfection? 9-316(a) shorter of: (1) the amount of time that is left on the expiration period, or (2) 4 months from the move If the law firm merges: - 9-316(a)(3) gives more time when dealing w/ someone else who becomes debtor o 1 yr of transfer of collateral to the new person. So a yr or the time left under (1)---how much time is left until expiration---whichever is earlier. Problem 55 pg. 118: Suppose that Factory, Factory & $, the Chicago law firm in the last Problem, had two creditors before its permanent move to D.C., both of which had a perfected SI in the firms accounts receivableONB, which had filed its FS first and LNB which had filed second, both creditors filing in Chicago early in the yr of 2012. When the move occurred on January 1, 2013, LNB promptly refiled in D.C. before the end of March of that year, but Octopus National was careless and didnt realize that the firm had moved until that September. If it files in D.C. in September, will it retain its priority over LNB? See 9-316(b) and its official comment 3. Note the definitions of purchase and purchaser in 1-201(29) and (30). 9-316(b) Change in governing law. If you meet your grace period by filing before it expires in the new state, then you are good for another 5 yrs. If you miss your grace period, it becomes unperfected into the future. - Once you expire, you are unperfected not only into the future, your unperfection will relate backward, and pretend that you never were perfected as to any 3rd party claim if they qualify as a purchaser. - 1-201(29) purchaser is a person who takes an interest in prop to any voluntary T---this is what a SI is. If it does expire, will ONB retain priority over LNB even though LNB knows it would have been # 2? - No, so ONB is second in line to LNB. - 9-316(a)(2) Hypo 1: Octopus is perfected in IL. Debtor moves to NB on 1/1. So grace period will expire on 5/1. ONB lets grace period expire and on 5/3 LC puts lien on collateral. B/t LC and ONB, who gets the collateral? - LC bc 9-316(a)(2) there is a 4 month grace period. - 9-316(b) tells you consequences of missing grace period: o If they do not perfect before the SI they become unperfected. (1st Clause) What if on 4/1 the debtor went to a new lender in NB and offered up the collateral and that is when the new creditor becomes a secured creditor. ONB lets grace period expire. Default, and priority battle b/t new creditor and ONB. - New creditor wins bc 9-316(b) ONB let 4 months expire so became unperfected and was deemed to never have been perfected against a purchaser of collateral for value. (clause 2) If it was a Lien Creditor on 4/29 unperfection only relates back for the benefit of purchasers for value ---and LC doesnt qualify as a purchaser for value---not voluntary T, (they sued). So LC will lose to ONB, even if ONB is just lazy. 44

Purchasers get the advantage of retroactive unperfection but not non-purchasers bc when talking about a purchaser, which is someone who does a voluntary T w/ debtor, debtor goes to the person and agrees to put up collateral. - But LCs just sue, get judgment, and have sheriff levy as soon as possible. They are not defrauded like purchasers. LCs dont need as much protection as purchaser. Definition of purchaser also says LC they will lose to the collateral but can get everything else. - An example is a LC under purchaser definition what they meant here was if the state has any voluntary type creditors---but not talking about LCs. What if the LC waited until 5/2, day after expiration of grace period to get the lien. Now who wins? - The LC would have priority interest bc 9-316(b) applies clause 1. If the SI does not become perfected under the law of the juris (like ONB here) it becomes unperfected.---use clause 1 when someone comes in after the expiration. So LC will win. Hypo 2: Move on 1/1. Grace period expires on 5/1. On 5/10 ONB files. On 5/11 a second secured creditor takes SI in same collateral and perfects. Priority battle takes place, so who will win. ONB or Second secured creditor? - ONB refiled again, so they will win. A. -

Certificate of Title:
Cars have cert of title---in MI get it at Secretary of State office o Evidences ownership of the car 9-310, 9-311---goods covered by cert of title are treated differently---excluded. 9-311 lists every good that is subject to cert of title in that state o In MI---automobiles, snowmobiles, ATVs When they are inventory in dealers stock---A9 still applies o Distinguish new car/boat---cert title statute applies o Inventory A9 applies to a new car until it is sold bc no title has been issued yet.

FS not necessary or sufficient to perfect SI in a good that is covered by law of state for cert of title--instead have to look at that states law. MI law noting the lien on cert of title puts the world on notice (so consistent w/ A9). Governing Law: Multi-state Ts - 9-303(c) law of the juris that issued cert of title that COVERS the good governs perfection - Goods become covered by cert of title as soon as you submit application and fee to appropriate authority 9-303(b)----coverage continues forever except when 2 things happen: o When it ceases to be effective under the law of the issuing juris o The time the goods become covered subsequently by cert of title issued by another juris o THESE ARE THE ONLY 2 TIMES THAT INITIAL CERT OF TITLE WONT GOVERN. If neither of these two things happen, then initial title will cover (but this is not perfection). Coverage not the same thing as perfection. 2 inquires. Perfection in MI is when you note the lien on title---not the same thing as admitting application fee to the state. 45

Coverage is when the state issues cert of title---when application and the fee are received by the state office It is not perfected unless the lien is noted on the cert of title. Only one valid cert of title.

Problem 56 pg. 119: Lyle Saylor was a trucker who lived and worked in the state of MI. When his old rig wore out and he decided to buy a completely new truck, he went to PA and purchased a truck on credit from Ringer Truck City. Bc the State of IN charged a great deal less for licenses and other registration fees, Saylor told the dealership that he lived in IN and that the truck would be domiciled there. He gave Ringer Truck City the address of his sister, who did live in IN. IN law requires that the lien interest be noted on the cert of title, a step that Ringer Truck City duly took when it procured the IN Cert. When Saylor went bankrupt a yr later, the trustee in bankruptcy argued that Ringer Truck City was unperfected since it had not gotten a MI cert of title and had its lien interest noted thereon, as MI law required. Ringer Truck City argued that it was entitled to believe the debtor when he told the co. that he lived in IN. How should this come out? See 9-303(a). Bankruptcy trustees goal is to maximize the amount of assets available for general creditors--try to void all SIs. What law governs? - 9-303(c) local law of the juris under whose cert of title the goods are covered only 2 things make the coverage end: o Another state issues cert of title o It becomes ineffective under cert of title state law Here no other state issued cert of title and the cert of title was not ineffective under IN law---so IN law governs. Problem 57 pg. 125: On May 10, Holly Tourist, a resident of Dallas, TX, bought a new car on credit while on vacation in Norman, OK, from Norman Car Sales (NCS), Inc. OK law required lien interests to be noted on the cert of title as a condition of perfection, which NCS did on May 12. On May 14, Holly drove the car to Dallas, and that same day she re-registered the car there and got a TX cert. Somehow she was able to do this w/o surrendering the OK cert (though TX law apparently required her to turn in the old cert before a new one should have been issued). TX required lien interests to be noted on the cert of title as a condition of perfection, but the TX cert showed no liens of any kind thereon. On May 26, Holly sold the car to her neighbor, William Innocent, who paid full value therefore w/o knowledge of NCSs interests. On May 28, learning of the sale to William, NCS arranged for the car to be repossessed from in front of his house. Assuming that her resale of the car was a default so as to entitle NCS to repossess, decide which of them is entitled to the car. See 9-303 and its Official comment 6; 9-316(d) and (e) and its official comment 5; 9-337 and its official comment. As of May 28, which certificate of title is valid? - Texas As of May 12 what law applies? - OK title is still good May 14 what law applies? - TX bc TX issued a new cert 9-303---TX law covers so TX governs cert of title. - new cert doesnt indicate that there is a SI in the car on the title. - Is it perfected? 9-316(d) which tells us to look to OK lawTX law says to look to OK law. o 9-316(d) SI remains valid as long as it would be valid under the law of the state that issued it. o So look to OK cert to see how long the SI is valid. OK law says 9-316(e) 46

o 9-316(e): if it is noted on the lien, SI is valid UNLESS it would have become invalid under OK law for some reason or after 4 months have expired. So Norman has 4 months to find the title and note the lien on it. Purchaser for value is pretty much everyone but LC. Norman only took 2 weeks, so they are perfected. William Innocent bought car and paid full value and Norman has superior interest bc it was not 4 months. - Dont forget under 1-103 can make equitable arguments - 9-337(1) protects non-professional buyers if certain conditions are met: o Step 1: car is brought into new state while subject to perfected SI from old state o Step 2: state 2 issues cert of title that is clear (doesnt list state 1 lien) o Step 3: buyer is not in biz of selling such goods o Step 4: buyer gives value o Step 5: buyer receives delivery of good after new state issued clear title and w/o knowledge of SI. Want to protect buyers who got ripped off. If William can show these 5 then he takes free of Normans lien (if the person who buys it can demonstrate these 5 things they prevail no matter what!) 9-337(2) protects subsequent secured parties.

Problem 58 pg. 125-26: Joseph Armstrong bought a yacht in a state (NB) that did not use certs of title for boats and that required the filing for perfection in such collateral, which step the financing bank, ONB duly took. Armstrong then moved to a state (MI) that required all SIs on boats to be noted on certs of title issued by the state, but he never took the trouble to get such a cert. Does ONBs perfection in the second state last as long as its filed FS is still effective or for only 4 months? See 9-316. State has no cert of title statute, so how will lender perfect SI? FS what happens when Joe goes to another state? Go to the change in location law. Does ONBs perfection in the second state last as long as its filed FS is still effective or for only 4 months? See 9-316. 9-316(d) and (e) only apply if there is a cert of title. If you go from non-cert state to cert state have to go to 9301, and 9-303 doesnt apply bc the state did not have a cert of title statutes, so must use 9-301. Since there is a change in location, go to 9-316(a) only perfected for 4 months. So if start out in cert of title state, cert of title issued on it and moves to new statewhat law governs? - The state that issued the title governs the boat---lasts forever until new title is issued or something happens in first state to invalidate the original title. 9-303 If you start out in cert of title state, and move to non-cert of title state, the lien will remain perfected until it becomes unperfected in title of state that you are perfected in. You do not have to file in second state bc lien under original title still remains valid. 47

Read Cert of Title section of the Understanding Secured Transactions book!

IV. Priority
Priority Problems: this is the core of the class---battles b/t 2 parties for claiming an interest in the same collateral. - Unsecured creditor v. unperfected creditor o Unsecured creditor: at the bottom level o Unperfected creditor has SI, but it is not perfected. As long as creditor has SI it is protected against the debtor o Perfected secured creditor is protected against the whole world. Perfection of Priorities are in 9-300s 100s general stuff 200s SIs and how they attach 300s perfection and priorities 400s we dont talk about 500s formalistic stuff for FS 600s remedies 9-201 General Rule: except as otherwise provided in UCC, SA is effective according to term b/t parties against purchasers of the collateral and against creditors - if you have SI you win, unless you can find something else in UCC that says you lose. - if you have SP against unsecured party, go to 9-201. 9-317: always think LC, it covers more than LCs but whenever you have LC battling someone 317 is good starting point. (a) SI is secondary to the rights of: (1) a person entitled to priority under 9-322; and (2) except as otherwise provided (a) a person that becomes a LC before SI becomes perfected LC beats unperfected SP if LC is first in time; OR (b) if you have SA AND file a FS will beat LC. Otherwise LC wins. Problem 59 pg. 127: Epsteins Bookstore borrowed $10k from ONB, signing a SA giving the bank a floating lien over the stores inventory. ONB, due to negligence, never got around to filing the FS. Martins Travel Service (MTS) was an unpaid creditor for the bookstore that sued on the debt and recovered a judgment against the store. It then had the sheriff levy on the inventory. ONB learned of this and calls you, ONBs atty. Does ONB or MTS get paid first when the inventory is sold? See 9-317(a)(2), and the definition of Lien Creditor in 9-102(a)(52). Who is battling here? What are they fighting over? - Want to get the inventory and sell it. Who gets the proceeds? - Step 1: Classify the claimants: o Bank is unperfected secured creditor. o Travel co. is Judicial Lien Creditor (LC). 48

Step 2: Find the Relevant Priority Rule: Who wins LC v. unperfected secured creditor? o 9-317: banks SI falls below LCs interest if the LC became a LC before (a) SI perfected; OR (b) Have SI and filed FS. o So here the LC prevails.

If instead of a judgment creditor seizure Epstein files bankruptcy while ONB is unperfected. - Date the debtor files bankruptcy is the cut off for them to file 9-102(a)(52)(c) Hypo 1: Feb. 1: a debtor signs a SA, granting the bank a SI in its equipment Feb. 1: The bank files a FS, but wants to check the debtors credit. It doesnt issue a commitment to loan.--key phrasethis means didnt give value, which means SI didnt attach, no commitment to loan = no value. Feb 3: A LC arises Feb 5: The bank makes the loan. How do you classify the claimants? - Bank: perfected secured creditor - LC - Which party has priority? The bank 317(a)(2)(b)---here a FS was filed and SA executed before judicial lien arose. Creditor can have priority over LC even if doesnt perfect SI until after judicial lien arose. What if the bank had filed FS but SA didnt attach? Then there is no battle bc nothing is owed to the bank. 317 doesnt require perfection. It requires perfection or FS and SA are given but not attached yet. (a)(2) (b) Problem 60 pg. 128: Coke Travel Agency used its accounts receivable as collateral for a loan from the Mansfield State Bank, but the bank failed to file the FS that Coke Travel Agency had signed bc the banks atty lost the statement in the maze of papers on his desk. Six months later, Coke Travel Agency needed another loan and applied for one from the Bentham National Bank, which searched the files, discovered that there were no FSs recorded for Coke Travel Agency as debtor, and took a SI in the agencys accounts receivable. Bentham National Bank did file a FS in the proper place. Which bank has the superior interest in the collateral? See 9-322(a)(2) and official comment 3 to 9-317. Classify the claimants: - Manfield: unperfected secured creditor - Bentham: perfected secured creditor - Who wins battle 9-317(a)(1) references 9-322 o 9-322 priorities among conflicting SI 9-322(a)(1) perfected v. perfected first to either perfect OR file 9-322(a)(2) perfected v. unperfected perfected wins 9-322(a)(3) unperfected v. unperfected 1st to attach wins Problem 61 pg. 128: 49

Jay Eastriver ran a clothing store and needed $. He went to two banks, the FNB and the Second State Bank, and asked each to loan him $ using his inventory as collateral. They each made him sign a SA. FNB filed its FS first, on September 25, but did not loan Eastriver any $ (nor did it make any commitment to do so) until November 10. On October 2, Second State both loaned East River the $ and filed its FS. Eastriver paid neither bank. Answer these Qs: (a) Did both banks have a perfected SI, assuming they filed in the proper place? That is, is it possible for two creditors to have perfected SIs in the same collateral? If they dont commit then there is no value = no perfection Pre-9/25: Eastriver goes to FNB and SSB and signs a SA and a FS 9/25 FNB files its FS but gave no value or did not commit to give value = no perfection 10/2 SSB files and perfects 11/10 FNB loans the $ 11/20 Debtor defaults

Who are the parties: - 2 perfected secured parties. So 9-322(a)(1) governs. Who files or perfected first? o FNB filed first so they win! 9-308 and 9-502(b) states that you can pre-file Hypo 2: 9/25 FNB and Debtor have: - Unsigned SA - File FS - Makes a loan 10/2 SSB and debtor - Signed SAsame collateral - File FS - Makes loan 11/3 FNB v. SSB (unsecured v secured) who wins? SB wins under 9-201, FNB does not have a perfected SA bc it was unsigned no SI unsecured. Problem 62 pg. 129: When FNB took a perfected SI in the inventory of Jay Eastrivers clothing store, the SA provided that the inventory would secure not only the current loan, but all future advances of whatever kind. Six months later FNB loaned Eastriver an additional $10k and had him sign a new promissory note for that amount. Do the existing filed FS and SA need to be altered in any way, or are they sufficient to protect the bank? See 9-204(c) and its official comment 7. Future advance clause---means whatever collateral he put forth on day 1 will secure future loans as well under 9-204. - In SA, debtor is saying to creditor in advance clause---if you make me loans in the future, Im agreeing right now that this collateral that you are using for current loan will also be collateral to be used for any future loans. 50

Floor financing: when you have an after acquired and a future advance clause banks give periodic loans to retailer and all loans are secured by incoming inventory (security due to after acquired clause).

No they dont have file a new SA 9-204(c): you dont have to give future advances but you can. Does FNB have to file a new FS for every advance? No bc the purpose is to just give notice to the world, if there is already a FS then you are already putting them on notice.

Hypo 3: May 1: the bank and the debtor enter into SA w/ future advance clause May 1: bank makes initial $500 loan May 1: bank files FS May 15: bank makes 2nd $500 loan May 25: bank makes 3rd loan A SI doesnt attach to the 2nd loan until May 15 and doesnt attach to 3rd loan until May 25. Problem 63 pg. 129: Assume that in the last problem that after FNB made Eastriver the first loan and filed its FS, he then borrowed more $ from the Second State Bank, using the same inventory as collateral, and this lender also filed a FS in the correct place. Eastriver then paid off the loan to FNB completely, but the bank never filed a termination statement. A month later, FNB loaned Eastriver more $. The parties signed a new SA, but no new FS was filed. FNBs atty reasoned that the earlier FS would protect the later loans priority, even though this loan was not contemplated when the first FS was filed. Is this right? Second State would prefer that the court rule that the first FS was spent when the underlying debt was paid off, and could not be used to give a top priority to a later uncontemplated loan. See 9-323(a) and its official comment 3, Example 1. FNB assumes that first FS was sufficient even though they make new SA and used old FS. Did they have to file a new FS? - There is already a FS out there, world is already on notice = dont need to file a new FS unless there is new collateral, i.e., if there is new collateral, then you have to file a new FS. Notes for this problem: - They dont need new FS bc there was existing FS covering IDENTICAL collateral. If there is diff collateral then you need a new FS. - Needed new SA bc the first doesnt cover after agreements (future advance). If there is no future advance agreement in first SA then you need a new SA for the new loan. Problem 64 pg. 129-130 Phillip Philately pledged his valuable stamp collection to the Collectors National Bank (CNB) in return for a loan (he gave CNB an oral SI in the collateral; no FS was signed). The bank put the stamp collection in its vault. Philately later borrowed $ from his father, Filbert Philately, and gave him a signed SA in the same stamp collection. The father filed a FS in the proper place. Answer these Qs: 51

(a) Who has priority b/t CNB and the father? Can have oral agreement if it is a pledge; pledge = possession = dont have to file a FS.

Both parties are perfected secured partiesso who wins? - 9-322(a)(1): the first to file or perfect wins. Here the bank was the first to perfect, bc it perfected by possession before the dad filed = bank wins Philip goes to bank and takes away stamp collection to add new stamps to it? Does bank lose perfection? - 9-313(d): as soon as bank gave up the stamps they lose perfection. - 9-312(f): does it help the banktemporary perfection---even if you give up possession your perfection will remain if you give up possession for ultimate sale or exchange or prepare them for sale, will be perfected for 20 days? - But 9-313(d); 9-312(f) is not relevant bc the stamp collection is not for sale or exchange Does the bank regain priority when it regains possession? - No, dad has had continuous perfection and the bank did not have continuous perfection, they lost it. - Bank shouldve filed another FS Hypo 4: May 1: Phil and bank sign SA May 3: dad gets SI in stamps and files FS May 8: bank makes second loan Does the bank need a new SA? - Is there a SI in 2nd loan---need rights in collateral, did bank give value, is there an agreement? There is an agreement but does it apply. It applies if there is a future advance provision. It depends on whether there is a future advance provision in the old agreement. - If no FA Provision, then they still have possession and they are still perfected - Who has priority then b/t the dad and the bank in the second one? o Possession is not the same as automatic o Possession gives notice o The bank still has possession and then perfection first = they are still are first Dragnet Provisions: When you get a credit card, one provision says that if you default on the card, they can take any collateral that we have given for any other loan that they have given. If there is any sort of loan, that is what provisions say. Problem 65 pg. 130: Howard "Red" Poll decided to go into the cattle biz and borrowed $65k from the Brangus National Bank to finance part of the purchase of the initial herd. Poll signed a SA using the cattle as collateral for this "and all other obligations now or hereafter; owed to the bank." A FS covering this T was filed in the appropriate place. 2 yrs later Poll received a charge card from the same bank and used it to finance a trip to Australia to look over cattle ranching there. When he failed to pay the credit card bill, the bank repossessed the cattle (even though his pyts on the cattle purchase loan were current). Did the bank's SI in the cattle encompass the credit card obligation? 9-204(c) future advance clauses are allowed in SAs 52

o Courts usually find that this clause is open to interpretation. Courts are more sympathetic to individuals rather than big businesses, so the answer depends, but it is prob encompassed

In Re Wollin pg. 131: 2 couples received consumer lines of credit, loans to purchase vehicles and credit cards from the same bank. Both granted the bank a PMSI in their vehicles. Both SA have dragnet provisions. Debtors testify that didnt read loan docs and creditor did not discuss dragnet provision.

Tests used to determine if dragnet clause is permitted: - Plain Meaning Rule: What UCC adopted---courts will uphold unambiguous clauses. o Court rejected it and found that OR the Supreme Court adopted same class test - Same class test: if the debts are of the same class then you can have cross collateralization. If the two debts are of the same class then same collateral can be used for diff loans. There are diff levels of class: consumer good, equipment, etc. o Loans were not of the same class. o If you can satisfy same class test, then you satisfy the knowledge requirement. It is the same class, can infer that they knew about it. A9 rejects this though in Comment 5 to 9-204: this article rejects the holdings of cases decided under formal A9 that applied other tests and goes w/ the Plain Meaning Rule, but note that Comments are not the law, so argue for whichever test you want - Same specific use test: o Some courts said 2nd purpose has to be same purpose as 1st loan to uphold the FAC Courts will enforce this provision against sophisticated biz people but hesitate to enforce it against consumers. This case has been overruled by A9 bc this case used same class rule but the code rejects this. Problem 66 pg. 136: Aware of difficulties w/ cross-collateralization clauses, rancher Howard Poll was always careful to keep his consumer obligations (from his Visa card, using the objects purchased as collateral) w/ a diff bank than the one that financed his ranching operations (w/ a traditional loan, using his cattle as collateral). Both banks had him sign SAs that provided that the collateral nominated for each debt would also protect "any and all debts, now existing or after acquired" owed to the same creditor. Howard was therefore distressed to learn that when the two banks merged, the new bank's loan officer now insisted that his cattle also protect the debts he owed on his Visa card. Is that right, he subject to cross collateral provision? - If this was on exam you would have to argue both ways bc there is no bright line o Argue equity, K, to avoid language of UCC

A. Purchase Money Security Interest (PMSI):


A loan $ to buy a good and take a SI in that good. o Ex.: I borrow $ to buy a good, and I give SI in that good to the lender (a PMSI) Or I buy a good and borrow $ from seller and give SI to the seller.

Non-consumer good PMSI T equip, inventory - Code gives special treatment to PMSI lenders---they get priority 53

Why we allow PMSI? It is fair bc person wouldnt have had the equip unless the bank gave them the $. Having the equip can advance the biz and increase probability that both will be paid back. It doesnt harm the first bank in any way bc not dipping into old collateral that first bank had.

Problem 67 pg. 137 When Paramount Homes finished building "Utopia, Ltd.," its newest fancy apartment complex, it had to furnish the clubhouse, so it sent its construction manager, Bill Gilbert, to Sophy's Interiors, a furniture store, where he made $2k worth of credit purchases and signed a SA on behalf of Paramount Homes in favor of the seller. The agreement was signed on June 8; the goods were delivered that same day. Bill failed to mention that all his employer's equip was designated as collateral on an existing SA and FS in favor of Sullivan National Bank. This agreement contained an "after-acquired prop" clause, which stated that later similar collateral coming into the buyer's estate would automatically fall under the bank's SI. (See 9-204(a)) The policy of Sophy's Interiors was not to file FSs for its credit furniture sales. (a) Why might it have such a policy? Is it wise here? Classify claimants: - Sullivan: previously perfected secured creditor and its interest included this prop (after acquire prop)---had rights in the furniture, so as soon as attached it was perfected - Sophy Interiors: 9-324 a PMSI in goods other than inventory has priority over conflicting SI in same goods o Must file FS w/n 20 days If you perfect w/n 20 days then have priority. - If Sophy doesnt perfect its SI w/n 20 days Sullivan will win. 9-324 priority of PMSI In re Wild West World, LLC, Debtor: pg 137 - Application of 9-324 Problem 68 pg. 142 Video Wonder, an electronics store, had granted a floating lien over its inventory and equip to LNB, which perfected its SI by filing a FS in the appropriate place. Needing a guard dog for the store, Video Wonder's manager responded to an ad in the newspaper placed by Agatha Shaw, who was selling her beloved German shepherd, Fang. She had bought him for protection when he was but a pup, but he had proven too much for her, having seriously injured a meter-reader and two mailmen. She checked out the store carefully before agreeing to sell Video Wonder the dog, saying she wanted a good home for Fang. He cost the store $1,200. The manager agreed to send her $100 a month until the dog was paid for, at which time she agreed in writing to sign over Fang's papers. Ms. Shaw and the manager agreed that the store would not get any title to Fang until all the pyts had been made. Fang proved to be a fine watchdog for the store, but when Video Wonder stopped making pyts to all creditors two months later, LNB seized all of the store's assets, including Fang. Agatha Shaw is upset. She calls you, her atty. Is there any hope for her? How do you classify parties? - LNB: perfected secured creditor in inventory and equip including after-acquired - Shaw: PM secured creditor

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Parties agreed that Shaw would not get title to dog until Shaw paid in full which is a conditional sale agreement and they are always invalid. Can she argue that the bank's SI only attached to Video Wonder's equity in the dog, or that until Video Wonder had paid the entire debt, it had no prop interest to which the bank's floating lien could attach? There is nothing in A9 that provides portioning equity. She just loses. Otherwise PMSI seller would have an advantage over PMSI Lender. Problem 69 pg. 143 Hart Farm Equip leased a construction backhoe to Farmer Bean for a six-month period w/ the understanding that Farmer Bean would be given the option to purchase the backhoe at any time during that period, and, in fact, the L at one point called this a "sale on approval." Farmer Bean's equip was already subject to a perfected floating lien in favor of ONB. Three months after the delivery of the backhoe, Farmer Bean agreed to buy the backhoe, and Hart Farm Equip filed its FS the next day, claiming its PMSI. Who wins in the priority battle b/t Hart Farm Equip and ONB? See 2-326(2); Comment 3 to 9-324. This problem turns on last 2 lines of 9-324(a) if the PMSI is perfected when the debtor receives possession of collateral w/n 20 days---when did farmer receive possession of collateral? Hart has to file w/n 20 days. - When does the equip become collateral---definition of collateral is subject to SI. Argument is backhoe doesnt become collateral until sale, when SI attaches. - Hart filed w/n 20 days after sale so perfected PMSI - Key here: when does the debtor receive possession of the collateral Hypo 5: Aug 7: seller sells equip to the debtor and takes PMSI Aug 17: a LC levies on equipment Aug 22: the seller files its PMSI Would 9-324(a) protect seller against LC? - 9-324(a) only governs battles b/t PM secured creditors and other secured creditors. 9-317(a)(2): normally they get a 20 day grace period. LC wins as long as its lien is perfected by its SI. 9-317(e) gives them same 20 day grace period---in this case seller prevails bc grace period relates back. 9-201 Golden Rule: gives you the basic rights of secured creditor - 9-201(a) states that if you have an attached SI, even if unperfected, you beat the world unless the code says otherwise. Steps when have priority battle 1. classify the priorities---who is fighting 2. go to the rule that governs the battle---there is a rule governing every priority battle - unperfected secured creditor fighting a LC, 9-317---fights b/t secured parties & other types of interests o 9-317(a)(2) tells us that LCs who get their lien before a SI is perfected, then the LC has priority but a perfected secured creditor beats LC. Use 9-322 for priority b/t SIs Perfected secured creditor v. unperfected secured creditor, 9-322(a)(2)---perfected beats unperfected. 55

Hypo 1: Go to 1st bank on Monday and say need loan. Fill out SA and file FS and then will call if grant you a loan. Wednesday go to 2nd bank, who gives loan and fill out SA and file statement. Friday 1st bank grants loan. 1st bank SI attaches must have SA, rights in collateral, and value given. Value was not given until Friday. 1st bank attaches on Friday. When does first bank perfect? Under 9-308 cannot be perfected unless you attach, so dont perfect until Friday. Can take steps for perfection before attachment though. 2nd bank o SI attached Wednesday bc SA, value, and rights = perfected on Wednesday. So who has priority? o 9-322(a)(1) if you have perfected secured parties, the first to file OR perfect will have priority o 1st bank will win, even though they were the 2nd to attach and the 2nd to be perfected, they were the first to file so they have priority.

How can 2nd bank help themselves in order to get priority over 1st bank? - Subordination agreement, for the $ that they loan they will get 1st place---2nd bank call first bank. - 2nd bank is put on notice of the filing of first bank. Hypo 2: - 5/1 debtor grants the bank SI in equipment, bank loans $ and files a FS and have after-acquired clause in SA (creditor takes SI in equip you have on hand today and any equip you get later) - 5/10 debtor goes to seller & buys a machine, grant SA w/ seller w/ machine as collateral & file FS - 5/20 debtor default. 1. Classify Parties a. Bank: perfected secured creditor b. Seller: PM secured seller (PMSI), only PMSI in consumer goods are auto perfected 2. Go to 9-324(a) priority of PMSIs where collateral is NOT inventory or livestock: a. PM creditor has priority over other secured creditors if it files when debtor receives possession of the collateral OR w/n 20 days of the debtor receiving possession Hypo: Same facts as above except the collateral was consumer goods and PMSI seller sells consumer goods to debtor on credit. Will the PMSI still win if the collateral is consumer goods? - Auto attachment so creditor doesnt have to file under 9-510 - 9-204(b) puts a 10 day limit on after-acquired clauses floating over consumer goods. The debtor has to obtain the goods w/n 10 days of the creditor getting value for the goods to be covered by the afteracquired clause covering consumer goods. What happens if have 2 secured creditors and neither one bothered to file or perfect---2 unperfected secured creditors? 9-322(a)(3) first to attach wins 56

Hypo: Inventory worth $20k 5/1: bank takes SI in inventory---SA w/ after acquired clause and future advance clause and then file ($5k) 5/5: need $ to fix up store, bank doesnt want to give loan, so go to finance co. and finance co. gives SA and loan and files w/ collateral being same inventory as banks collateral ($5k) - If there was a default and priority battle b/t the bank and the financing co., who would win? o Classify the parties: Bank is perfected secured creditor Financing co. is also perfected secured creditors o Theres a default and the parties are fighting over inventory, who has priority? 9-322(a)(1) who filed or perfected first? The bank filed first. o So the bank as priority to the 1st w loans of each party Hypo: Inventory worth $20k 5/1: bank loans $5k to debtor and takes SI in debtors inventory---SA w/ after acquired clause and future advance clause and then file ($5k) 5/5: need $ to fix up store, bank doesnt want to give loan, so go to finance co. and finance co. gives SA and loan for $5k and files w/ collateral being same inventory as banks collateral 5/10: bank makes another loan for $5k There is an advance clause in the original SA so the bank did not have to enter into a new SA on 5/10. The bank does not need to file a new FS, the purpose of filing is to put the world on notice that the collateral is subject to SA, and the collateral to be used is the same collateral = no new FS.

What about battle of financing co. on 5/5 and bank advance on 5/10? - 9-323 Priority of Future Advances o (a)(1) perfection of SI dates from the time the advance is made but only to the extent that the SI secures and advance that is made by automatic perfection or temporary periods of perfection. 9-323(a)(1) only applies in rare circumstance where initial perfection of bank is not filed (it is automatic or temporary periods where there is no notice) only then will they say if the bank makes an advance will their priority date from the advance bc it is only fair bc finance co. would have never discovered the SI bc there is no filing. If the bank filed to perfect to begin w/, then 9-323 is not an issue, back to 9-322(a)(1) perfection is from the earlier of the time it is filed or perfected. - So the bank will continue to have priority for any further advances they make as long as use the same collateral under the advance clause. PM Creditors: - Exception for inventory and livestock is much harder to meet then when not dealing w/ inventory or livestock 9-324 Priority of PMSI - 9-324(a) Except as otherwise provided in subsection (g), a perfected PMSI in goods other than inventory or livestock, has priority over a conflicting SI in the same goods, and, except as otherwise provided in 9-327, a perfected SI in its identifiable proceeds also has priority, if the PMSI is perfected when the debtor receives possession of the collateral or w/n 20 days thereafter 57

9-324(b) PM creditor has priority in inventory if: o (1) the PMSI is perfected when the debtor receives possession of the inventory; o (2) the PM secured party sends an authenticated notification to the holder of the conflicting SI; o (3) the holder of the conflicting SI receives the notification w/n 5 yrs before the debtor receives possession of the inventory; and o (4) the notification states that the person sending the notification has or expects to acquire a PMSI in inventory of the debtor and describes the inventory. 9-324(d) PM creditor as priority in livestock if: o (1) the PMSI is perfected when the debtor receives possession of the livestock; o (2) the PM secured party sends an authenticated notification to the holder of the conflicting SI; o (3) the holder of the conflicting SI receives the notification w/n 6 months before the debtor receives possession of the livestock; and o (4) the notification states that the person sending the notification has or expects to acquire a PMSI in livestock of the debtor and describes the livestock

Problem 71 pg. 144: The Merchants Credit Assn held a perfected SI in the inventory of Harolds Clothing Store. Harold went to a fashion showing in NY and contracted to buy $4k worth of new clothes for resale; the seller was to be Madame Belindas Fashions, Inc., which took a PMSI in the clothes on 12/10, the date of the sale. Madame Belinda herself wrote Merchants Credit Assn on 12/11 and informed the credit manager of the sale. He protested but did nothing. Madame Belinda filed on 12/11; the goods were delivered to the store on 12/12. 1. (a) Who has priority? Under general race rule when have 2 perfected secured creditors racing each other the first to file/perfect wins and Belinda would lose. So she needs to meet the elements of 9-324(b) - 9-324(b)(1): the PMSI is perfected when the debtor receives possession of the inventory - 9-324(b)(2): authenticated notice (cannot be oral, must be signed writing or electronic record that is confirmed) o Were told that Belinda did send notice. There is a qualification to having to send notice in (c) 9-324(c) PM creditor only has to send notice if the holder of the earlier SI had filed before PM creditor had filed its FS. Here this is the case, so Belinda has to give notice. - 9-324(b)(3): holder of conflicting interest has to receive the notice w/n 5 yrs BEFORE the debtor gets possession of inventory creditor also has to receive notice before debtor gets possession of the collateral o This is problematic under facts bc she did not send notice until the 11th and the debtor received possession of the goods on the 12th and that notice will probably not get to the debtor w/n one day, but here we assume that notice arrived same day as she sent it bc they protested. If the notice does not get there before then wont have priority. However, the definition of send in 9-102: means if you put on right address and right postage, that it is sent, even if it was never received, it was properly transmitted 3 uses diff term holder of conflicted interest has to RECEIVE o A1 defines receive: other party actually gets the notice.

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So if the drafters just wanted to require a sending why didnt they just say so in 2 and not talk about receiving or if they wanted receiving to be requirement, why did they use send in 2? Most courts would lean to receipt of the notice. Other courts look at PMSI holder and hold that bc sending is all the PM creditor can do as long as they send it before turning over the goods, it will be ok bc 99% of the time it will only take a day to receive and will not give debtor time to defraud original creditor. If you are PM seller drop notice in the mail, and send a fax or email and do all that to qualify for the exception - 9-324(b)(4): tells you what the notice must say that you are taking a PMSI in the inventory and then describe the inventory. If the notice was received on 12/11, as above, is it sufficient to permit Madame Belinda to keep selling goods to Harold for an indefinite period thereafter or only for this one T? See 9-324(b)(3). - 9-324(b)(3) states that when Belinda sends the notice she can keep selling the inventory described in the notice for 5 yrs before having to send another notice (bc her FS if effective for 5 yrs). When it is time to renew the filing all she has to do is send a new notice at that time. Kunkel v. Sprage Bank pg. 144: deals w/ livestock 9-324(d) 9-324(d)(3)---five yr notice period is reduced to 6 months for livestock Hoxie is in the biz of financing and selling cattle and operating a feedlot near Hoxie, Kansas. In 5 Ts b/t February and April 1994, the Morkens purchased interests in 1900 head of cattle from Hoxie. Hoxie financed Morkens cattle purchases. For each T, Morken executed a loan agreement and promissory not in favor of Hoxie and a SA granting Hoxie a PMSI in the cattle, which were identified by lot number when the docs were executed. Hoxie did not file a FS but instead perfected its SI by taking possession of the cattle pursuant to the feedlot agreements b/t Morken and Hoxie. Hoxie could sell the cattle in its own name but needed Morkens authority to sell and Morken determined the selling price of the cattle. On June 10, 1994, Morken filed Chapter 11 Bankruptcy. After Bankruptcy proceedings commenced, Hoxie sold the cattle and then deducted amounts owed to Hoxie for care and feeding of the cattle and about $550k in sale proceeds remained. It is the $550k that is the subject of competing claims by Sprage and Hoxie. Hoxie did not send its statutory notification to Sprague until March 1995, long after the cattle had been sold and the proceeding commenced. Hoxie under 9-324(d) has to send notice to the bank, and never did that until after litigation started. Can they get around the notice requirement and if so why? - Possession: Hoxie never turned physical possession over to Morkins Hoxie will hold onto physical possession of cattle under feed lot agreement. Once he gets $ from the sale, he will take commission and pay expenses and turn rest of $ over to Morkins. Bc Morkins never received physically possession of cattle, Hoxie says that they dont have to send notice to the bank. This is what the court held too. What is the purpose of the notice? It is to prevent fraud by Morkins on the bank---try to prevent the Morkins from offering cattle up for collateral as advance---but Morkins dont have physical possession of cattle---and this will notify the bank when they ask to see the cattle that it is in possession of 3rd party.

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Comment 5 to 9-324 states that if the debtor never receives possession, the 5 yr or 6 month period depending on livestock or inventory will never begin.

Problem 72 pg. 154: Hans Racing Equip bought much of its inventory from Standard Auto Wholesales, Inc., which always took a PMSI in the goods sold to Hans and which filed a FS that same day. Hans also borrowed $ from the Matching Dishes National Bank (MDNB) to finance the purchase of inventory from wholesalers, part of which was used to pay off Standard Auto. MDNB filed a FS, claiming a SI in Hans inventory. On March 28, Hans contracted to buy $3k in goods from Standard, making a down pyt and giving Standard a PMSI in the goods for the rest. On the same day he borrowed the $1,500 down pyt from MDNB and also gave the bank a PMSI in the same goods. Both creditors knew of the other, so they both sent written notice to each other. The goods were delivered to Hans on April 2. Which creditor has priority? See 9-324(g) and its official comment 13. Here 2 PM secured creditors are fighting, one is PM seller and other is PM lender. They both send notice to each other. Who has priority if both parties meet reqs under 9-324? - 9-324(g) conflicting PMSI---the seller beats the lender! o 9-324(g)(1) price of collateral is seller---seller beats the lender o If 2 lenders tie, who wins? Under (g)(2) go back to race rule---first to file/perfect Problem 73 pg. 155: Barbara Shipek was pleased and flattered when Tim Isle, owner of Isles Fine Art Works, asked her if he could exhibit and sell some of her pottery. She gave him 5 of her favorite pieces. The next day she took a party of friends down to the store to see the display and was astounded to learn that ONB, which had a perfected floating lien on the stores inventory, had foreclosed and seized everything up in the store including Barbs pottery. Can ONB do this to her? Is this a true consignment or is Barb merely disguising it as consignment: go to factors from In re Favors and the handout and balance. Lets assume that the court determines it is a true consignment. What law governs under priority battle? - 9-109(a)(4) says that A9 covers true consignments, but it has to meet the reqs in 9-102 o Suppose that all reqs are met and it is a true consignment under A9. Tim goes to bank and gave bank a SI in all inventory now owned and after acquired---after acquired clause. Tim defaults and bank comes and repossesses everything in Tims store including Barbs pieces. Priority b/t Barb and the bank. Classify the parties: - Bank: perfected secured creditor w/ after acquired clause - Barb: she will say that she is the true owner of the goods 9-319: says that Tim as consignee has rights in the consigned pottery---he will be considered to have the same rights that Barb has---this means that since the debtor has rights in the collateral, the banks SI attaches. Barb is classified as 9-103(d) - Look at definition of SP: 9-102(72) states that secured creditor includes an A9 consignor. - Even though Barb is really not a secured creditor, we are pretending that she is a secured creditor. 60

9-103(d) states that pretend SI of consignor in a consignment is going to be considered a PM secured creditor in the pottery. Barb will protect her pottery by notifying the bank under 9-324(b) and do the other steps---since she is considered a PM secured creditor in INVENTORY then she can look to 9324(b) for protection o So if she sends notice to the bank before turning pottery over to Tim then she will have priority o Here she did not do this, so sent back into the race rule under 9-322.

PERFECTION BY CONTROL: - 3 types of specialized collateral where you can perfect by taking control over the collateral (does not mean taking possession): o Investment prop (stocks and bonds) Perfect by either control or by filing under the perfection s Go to 9-328 when 2 secured creditors fighting over investment prop If one perfected by control and the other by filing, then control beats filing. 9-106 explains on how to take control over investment prop o Your referred to A8, which governs stocks and bonds. But if the investment prop is in paper certs, they have to be delivered to secured creditor for control. o If it is more common type of investment prop that is electronic in form, then taking control means that the creditor makes agreement w/ broker that broker will not dispense any of the stock w/o the secured creditors permission. o Bank deposit accounts 9-312 (b) states for this the only way to perfect is by control Consumers cannot use bank accounts as collateral but businesses can Consumers are kicked out in scope 9-203 attachment (must give value, debtor has to have rights in deposit account, and need SA) 9-203(d) where you have control, the SA can be oral, but dont suggest it. How do you perfect? GR in 9-310 is perfect by filing unless it meets exception listed in 9-310(b) or 9-312(b) In 9-312 for bank deposit account the only way to perfect is by taking control. How do you take control over bank deposit accounts? 9-104 Problem 75 pg. 157: Computer World, Inc. desires to borrow $ from Investment Bank of America, which will grant it a revolving line of credit, secured in part by the bank account that Computer World maintains at LNB. You are the atty for Investment Bank of America. Advise the bank how it can perfect its SI in this bank account and which of the methods of control specified in 9-104 would be the safest form of security. 9-104 states that there is 3 ways for the investment bank to take control 1. 1st way: you as secured creditor, are also the bank where the account is maintained, so you are automatically perfected! a. This is not true for investment bank 61

2. 2nd way: if debtor, investment bank and bank where account is contained, all get together and make an authenticated agreement and say that LNB will not dispense any funds w/o IBs permission---but not many of these agreements will be entered into bc this opens up K liability 3. 3rd way: if investment bank puts their name on the account as an account holder, they become a customer on the account a. So IB put their name on the account w/ Computer World, which means that Computer World cannot withdraw w/o IBs signature too. If Computer World later borrows $ from LNB and grants the bank a SI in account carried there, would LNB have priority over your client? 9-104(1) SP is the bank where the account is maintained. LNB is the bank in control bc the deposit account is in their bank.

What if there is default on both obligations to both banks? Who has priority? Classify the parties: o IB is a perfected secured creditor perfected by control; o LNB is perfected secured creditor perfected by control 2 perfected secured creditors Deposit accounts have their own priority rule 9-327 o 9-327(1) perfected beats unperfected o 9-327(2) perfected v. perfected back to race rule---rank according to priority of who had control 1st! 9-327(3) is an exception to (2) says that LNB will win even though losing under #2 race rule bc they are the bank where the account is maintained. 9-327(4) is an exception to (3): says if becoming a customer (getting a name on the account) then they will have priority over where the account was maintained. So IB will be given priority bc they were a customer on the account. o Letters of Credit 9-312(b) says that the only way to perfect is by control. Problem 77 pg. 159: Betty Consumer bought a television set from Distortion TV, Inc., a retail store. A month later Distortion went bankrupt, and a minor functionary from the ONB showed up on her stoop and asked her to turn over the set. He explained that ONB held a perfected SI in all of Distortions inventory and that since Distortion had not paid off its debts to ONB, the bank was repossessing. (a) What should Ms. Consumer tell the banks flunky? See 9-320(a). 9-201(a) says that a SA is effective according to its terms against purchasers of the collateral - 9-315(a)(1) read together w/ 9-201(a): looking at these 2, a SI does continue w/n collateral notwithstanding party unless the SP authorized the dispo of the collateral free of the SI. o If you can determine that the bank authorized to sell free of SI then the sale itself cuts off the SI and its ok---so look at SA to determine if the bank authorized sale free of SI. 62

This is usually true 99.9% of the time, bc if you cant sell free of the SI, no one would buy from you.

9-320 protects buyers of goods: this is the exception in case the bank does not provide in SA that seller cant sell free of the SA. If the sale was not authorized or was authorized subject to SA and what the buyer bought was a good then look to 9-320. 1. (a): a buyer in the ordinary course of biz takes free of the SI a. 102(a)(9) Buyer in the ordinary course of biz: 1-201(9) i. Person buys in good faith ii. W/o knowledge that the sale violates the SA 1. Just bc you know about the SI, doesnt = you know about a violation of the SA iii. Sale in ordinary course 1. A person buys good in ordinary course if the sale comports usage of trade or the sellers own customary practices (course of perf) 2. Must be a run of the mill sale that they engage in every day iv. From a person who is in the biz of selling goods of that kind v. Buyer that takes possession or has right to possess vi. Must give new value for the good 1. Cant go there and buy the good to satisfy a debt that the store has owed to you. 2. Does not include someone who buys the biz She would have been protected here bc she was a buyer in the ordinary course of biz. o She was in good faith, didnt know anything about banks SI (most private consumers dont know about them), its an ordinary sale from someone who normally sells it, took possession, and gave new value cash for it.

International Harvester Co. v. Glendenning: pg. 159 International tells its dealers that they can sell free of the SI if they sell for the particular FMV, if they sell under it, then it is not free of the SI. Barnes filled out papers incorrectly and said that he traded in 4 tractors and paid some cash. This is not what happened. International asked Glendenning if he traded in tractors & paid in cash & he said he did even though he did not. International is going after Glendenning. They are arguing that the sale was not authorized free of SI bc Barnes sold it for $16k, which is well below FMV. Glendenning argued that he was a buyer in ordinary course of biz: - Bought in good faith - Run of the mill type of sale that Barnes engages in every day, Barnes in biz of selling tractors - Glendenning took possession The court said: - Glendenning had sold tractors before as a dealer for International for many yrs and knows that they have SI and knows that they demand FMV to take free of SI and he knew that he lied = not good faith o When determining good faith, consider any type of wrongdoing, such as lying. How A9 protects buyers: 63

9-201 golden rule together w/ 9-315(a)(1) are read together, gives the basic rights of the secured creditor SI will continue into the hands of the buyer unless the creditor has authorized the sale free of the SI. o In situations where the sale is not authorized, the sale is not authorized free of SI, so the buyer will need additional protection If what is sold is a good then go to 9-320 which protects buyers in the ordinary course of biz (common everyday buyer) as defined in 1-201(9) 6 reqs: 1. Buy in good faith; 2. W/o knowledge of violation; 3. Buy in ordinary course; 4. In ordinary sale that seller usually conducts or is common in trade; 5. Buyer has to take possession of goods or at least have the right to goods; and 6. The buyer has to give new value.

Problem 78 pg. 164: Deering Milliken was a textile manufacturer. It routinely sold textiles on credit to Mill Fabrics, a firm that finished the textiles into dyed and patterned fabrics. It was Mill Fabrics practice to resell the fabrics to Tanbro Fabrics, a wholesaler. While the textiles were still in Deerings warehouse, Mill Fabrics contracted to buy them from Deering, signing a SA to that effect and giving Deering a FS that it duly filed. In turn, Mill Fabrics sold the textiles to Tanbro, which paid Mill Fabrics for them but delayed taking delivery for a few weeks, so that the fabrics remained in Deerings possession. Deals of this kind were common in the textile industry, and all parties knew of the others interest. Unfortunately, Mill Fabrics became insolvent and never paid Deering for the textiles and Deering therefore refused to deliver them to Tanbro. Tanbro sued. Who should prevail? See 9320(e) and its official comment 8. When litigated, the court found Tanbro is a buyer in the ordinary course. Under the revised code, would buyer Tanbro have good title? - 9-320(e): subsections (a) & (b) do not affect a SI in goods in the possession of the SP under 9-313 o So the buyer is not protected here. In re Western Iowa Limestone, Inc., pg. 164 Rule: constructive possession satisfies the possession requirement for buyer in ordinary course of biz Problem 79 pg. 173: ONB had a perfected SI in all cars on Smiles Motors lot. Smiles owed $5k in past due insurance premiums to its insurance agent, Howard Teeth, who showed up one morning to buy a new car from Smiles. The president of Smiles first gave Howard a check for $5k, but Howard endorsed it back over to Smiles when he saw a new car he wanted to buy. Is Howard a 1-201(9) buyer in the ordinary course of biz so as to take free of ONBs SI? He did not give new value when he paid w/ the check so under A3 and A4 the delivery of the check is not pyt, pyt occurs when you actually cash the check. Therefore, when Smiles gave Howard the check, the debt was still outstanding, so when Howard took the car, he took it in pyt of the outstanding debt. Problem 80 pg. 173: Arthur Greenbaum bought a new car on credit from Lorri's Car City, which took a PMSI in the vehicle, perfecting same by notation of its lien interest on the cert of title, as required by state law. Arthur was a used car dealer by profession, but he had purchased the car for his own private use. Nonetheless, he frequently parked 64

the car on his lot, and one day sold it for cash to Ann Matheson, a customer in search of a good used car. Arthur did not mention to her that it was his personal car. When everyone learned what had happened, Ann sued Lorri's Car City, demanding that it release the title. What result? Is Ann Protected? Look at first step: 1. Was the sale authorized free of the SI? i. Doubtful bc Lorries thought that they were selling the car to Arthur 2. So Ann has to go to 9-320 i. What problematic reqs of buyer in ordinary course that Ann may or may not meet? 1. When cars are inventory on the lot they have no cert of title, so Ann probably thought it was ok bc Author probably did not show her the cert of title 2. In ordinary course of biz if it was his own personal car, then the buyer would not be buying in the course of the dealerships biz. a. Could argue that when he bought the car and parked it on the lot, his intent was to sell it as inventory, so protect the buyer and Lorries can go after Arthur for violating the SA 3. Most likely Ann will lose. Problem 81 pg. 173-74: Wonder Spa, Inc., pledged 50 of its promissory notes to the Conservative State Bank and Trust Co. (CSBTC) in return for a loan. The bank took possession of the notes. The spa asked to have 10 of the notes back for presentment to the makers for pyt, and the bank duly turned over the notes, which Wonder Spa sold (discounted) to ONB, a bona fide purchaser w/o knowledge of CSBTC's interest. This resale was in direct violation of spa's agreement w/ CSBTC. Which bank is entitled to the instruments? Read 9-312(g) & 9-331 The sale of the notes violated the SA, so under 9-201 & 9-315(a)(1) its not an authorized sale, so SI continues into the hands of the buyer and the buyer needs additional protection. Would 9-320(a) protect the buyer? - Have to be buying in the ordinary course of the biz of selling those types of goods. The spa is in the biz of selling spas not notes - 9-320 only applies when the debtor sells goods and here what is being sold is instruments not goods. So in this problem, 9-320 doesnt apply 1. Classify the parties: a. Conservative bank is secured creditor and perfection by possession, 9-312(g) says that they can turn over the notes for 20 days before losing perfection. 2. Then look to what is being sold: a. 9-320 is only for goods b. 9-331 is for rights of purchasers of instruments, docs, & securities: i. (a) if you qualify under this protection then you beat a perfected secured creditor. 1. There must be a negotiable instrument being sold 2. Buyer has to be a holder in due course. 65

a. A3 holder in due course is someone who buys a negotiable instrument (rights to pyt wrapped up w/n whoever has the instrument has the right to pyt) and they have to buy for new value w/o any knowledge of any problems (any type of claim or defense w/ that paper) i. So if they dont know about the SI, then they can qualify as holder in due course b. A3 says if you are a holder in due course you are a super-holder and take free of most claims and defects including a perfected SI. i. Being a holder in due course is like being a buyer in the ordinary course of goods Conservative Bank: secured creditor, but are they perfected in the 10 promissory notes that they gave up possession i.e., bank took possession for perfection purposes, couldve filed but didnt, and then gave up possession of the notes, and is there perfection still good? 9-312(g) gives them 20 days ---so after 20 days they would not be perfected. Is the buyer protected? 9-331 it looks like ONB is a holder in due course so ONB takes free of the SI. Is there anyway Conservative could have protected themselves from a holder in due course? They shouldve stamped the notes w/ their SI before they were released to the debtor, so when sold to ONB, ONB will see the SI and under A3 they cannot be a holder in due course bc they will have that knowledge. Problem 83 pg. 174-175: Andy Audio bought a stereo receiver on credit from Voice of Japan, Inc., an electronics store, giving it a PMSI in the receiver. Voice of Japan did not file a FS. 6 months later, when Andy still owed Voice of Japan $300, he held a garage sale and sold the receiver to Nancy Neighbor for $200 cash. If Andy stops making pyts to Voice of Japan, can it repossess the receiver from Nancy? See 9-320(b) and its official comment 5. 1. Classify parties: a. Nancy: buyer b. Voice of Japan: PM creditor who is perfected, it is a PMSI in consumer goods Is Nancy protected? Voice probably did not authorize Andy to sell free of the SI so the SI travels to Nancy and Nancy needs protection from it. She is not a buyer in the ordinary course of biz bc Andy is not in the biz of selling the stereo (run of the mill sale from a biz that deals in those kind of goods in an ongoing basis), so 9-320(a) will not help her 9-320(b) buyer of consumer goods elements o The seller has to be using the good as a consumer good o The buyer buys w/o notice of the SI o The buyer buys for value o It is a consumer to another consumer type of sale o Buyer not protected if the secured creditor had filed a FS covering the goods If 2 yrs later when the seller still owes the store $, the filing protects it from garage sale buyer 66

Problem 83 pg. 174: The Repossession Finance Co. (RFC) had a perfected (filed) SI in the equip of White Truck Ice Cream (WTIC), Inc. (the co. sold ice cream to children from trucks that traveled through the city's neighborhoods). Though technically a corp, WTIC was actuality a family biz, and Bill White-Truck himself frequently drove one of the trucks. One day while making his rounds, Bill met Frank Family, a consumer who asked about buying an ice cream-making machine for his family. Bill promptly sold him one of the machines the co. owned, for which Frank paid cash. When WTIC failed to make its pyts, RFC lived up to its name and repossessed all equip. When Frank refused to turn over the ice cream machine, RFC sued him for conversion (a tort that does not require scienteror guilty knowledge for its commission). Answer these Qs: (a) Does Frank lose? Compare 9-201, 9-401 (b), and 9-315(a)(1) Sale not authorized free of SI so Frank has to look for protection Will 9-320(a) protect Frank? No, bc he did not buy from a person who deals w/ goods of that type. 9-320(b) wont work either bc it is not consumer goods So look at the rights of the creditor under 9-201 and 9-315---he is not protected from the SI, RFC will have priority over Frank.

(b) what if finance co. unperfected at the time of the sale? 9-317(b) applies when secured creditor fighting some other type of claimant, like a buyer o Buyer, other than SP, will take free of SI if: buyer gives value, receives the collateral w/o knowledge of SI, and receives it before the SI is perfected Unperfected secured creditor is going to lose to the buyer even if the buyer is not in the ordinary course of biz

(c) Would we get a diff result if the finance co. knew and approved of the sale? Compare 9-315(a)(1). Sale has to be approved and approved free of the SI. Creditors can still approve a sale subject to SI.

Problem 84 pg. 175: Paul Pop was a rock singer to whom ONB loaned $8k so he could buy stereo equip for his road show. On April 2, Paul purchased the equipment, and on April 10, ONB filed its FS in the proper place. However, in the interim, on April 8, Paul sold the equip to Used Stereo Heaven, which bought w/o knowledge of the bank's PMSI. Does ONB or Used Stereo Heaven have the superior claim to the equipment? Compare 2-403, 9-201, and 9-317(e). 4/2 PMSI 4/8 buyerPaul sold to a new buyer who bought w/o knowledge of PMSI 4/10 file FS Code favors PM creditors. PM creditors can beat buyers even though they are not perfected at the time of the sale, as long as file w/n 20 days of the buyer giving the goods, their priority will relate back and will beat the intervening buyer. 9-317(e).

Problem 85 pg. 175: 67

When Farmer Bean borrowed a large amount of $ from Farmers Friend Financing Co. (FFFC), he was required to sign a SA by which he promised not to sell the crop that was the collateral for the loan w/o the written consent of FFFC. Nonetheless, every yr he sold the crop to the same buyer and remitted the proceeds to FCC w/o getting its written consent. Does the buyer take free of the SI of the SP under 9-320(a)? 9-320 doesnt apply to a person buying farm products or a person engaged in farming operations buyers of farm products will not be buyers in the ordinary course.

Clovis v. Thomas pg. 176 Bank takes SI in farmers cattle and SI expressly said that farmer could not sell the cattle unless received the banks consent first. Every yr the farmer sold w/o banks consent and bank never said anything bc farmer always turned around and paid the bank. But one yr the bank did not get paid. Bank sues the auctioneer for conversion. - Guilty of conversion bc there was a statute saying that auctioneer was personally liable o Why have a statute like this? The auctioneer bc of the principle/agent---auctioneer is a selling agent of the farmer. Pg. 168 says that the auctioneer is merely the selling agent of the farmer and under agency theory the auctioneer steps into the shoes of the farmer and is deemed to be responsible like the farmer is, so if the farmer isnt allowed to make the sale, his agent isnt allowed to make the sale either---so auctioneer responsible for discovering the SI Auctioneer gets around it under 1-103(b) CL principles still apply under the code---so court applied doctrine of waiver. If the bank never complained yr after yr even though farmer selling w/o their consent, they will not be able to change their mind. Buyers of farm products are not protected like buyers of inventory are: why? - Buyers of farm products are normally big corporate food processing companies who have lawyers and the financer is usually a small town bank, so drafters wanted to protect small town bank rather than the big corps. - Also encourage banks/creditors to lend $ to farmers, by knowing that they will have this extra protection, they are more likely to loan $ to farmers. Bc of these reasons buyers are more hesitant to buy from farmers so courts: - Instituted doctrine of waiver - Food Security Act on pg. 1540: act intended to provide protection for both creditors of farmers and buyers of farm products - How the act works: o States have the option of adopting one of 2 systems (1) Individualized notice system (adopted by 32 states) When farmer goes to creditor to get a loan, creditor says give me a list of all buyers and agents. Bank then sends notice to all buyers and notice on the list describing creditor, buyer, products subject to SI, and pyt instructions. If the buyer follows pyt instructions it takes free of SI o Pyt instructions are usually buyer has to make check payable to buyer and the creditor If buyer does not follow pyt instructions then take subject to SI 68

Problem: farmer sells off the list---sells to someone not on the list and buyer never received notice of SI. So buyer remains protected under act and secured creditor to lose out To motivate farmers to not to sell off list, they levy a fine that is really large that they will have to pay (2) Central filing system (adopted by 18 states) All creditors who lend $ to farmers file what is called an effective FS w/ secretary of state. o Effective FS is not an A9 FS o It describes creditor, who farmer is, products subject to SI, but it does not contain pyt instructions All buyers who want to be protected also have to register w/ secretary of state Periodically secretary of state sends notice to all buyers who the secured creditors are and what products subject to SI. Buyer is then required to call secured creditor and get the pyt instructions. If they follow instructions then take free of SI and if violate instructions take subject to SI.

Note: 3 reqs under FSA are completely separate from A9. - Complying w/ FSA means creditor will be protected from buyers of farm products (buyers in ordinary course of farm products, which has its own definition) only protect buyers from creditors if the buyers obey pyt instructions. - If the secured creditor wants to protect SI from any other type of claimant (other secured creditors, LCs, etc.) must still comply w/ A9 filing Problem 86 pg. 183 Farmer Bean borrowed $ from ONB, which had him sign a SA covering his crops. The SA forbade him the right to sell his crops w/o the banks written consent. It also required him to give the bank a list of potential buyers to whom he had sold his Farmer Bean did so. The list was of the 5 buyers to whom he had sold his crop (or parts thereof) in the past. The bank sent a written notice complying w/ 1631(e)(1) to each of the listed buyers, telling them that all payments for Farmer Beans crops should be by check made payable to ONB. One buyer not on the list was Rural Silo, Inc., a grain merchant that contracted to buy all of Farmer Beans 2010 wheat crop. Rural Silo knew that Farmer Bean had borrowed $ from ONB and that ONB had filed a FS to perfect its SI (the state had not created an FSA central filing system). It bought the crop from Farmer Bean and paid him cash for it at his request. Is Rural Silo, which after all knew all about ONBs SI, a buyer in the ordinary course as defined in 1631(c)(1)? See 752 F. Supp 329 and 426 SE2d 63 Yes 1631(c)(1) Does rural take free of ONBs SI? Yes, 1631(d) Does the bank have any other remedy here? Yes ONB can have farmer fined for 5k or 15% of the value or benefit received for such farm product described in the SA, whichever is greater 1631(h)(3) Farm Credit Bank of St. Paul v. F & A Dairy: pg 184 Problem 87 pg. 188: 69

Mr. and Mrs. Halyard purchased a large sailboat w/ $ borrowed from the Boilerplate National Bank (BNB), which took a SI therein and promptly filed a FS in the proper place. The Halyards sold the boat to Oil Slick Boat Sales, Inc., a used boat concern, telling Oil Slick of the banks interest and of the necessity of making monthly pyts to the bank. Oil Slick turned around and resold the boat to Mr. and Mrs. Blink, innocent people who paid full value for the boat believing Oil Slick had clear title. When BNB did not receive its usual monthly pyt, it investigated, found the boat, and repossessed it. Has the Blinks prop been converted or do they fit into 9-320(a)? Halyards want to buy a boat---go to bank to get loan. Bank says use boat as collateral to secure the loan. This is a PMSI in consumer goods so the bank does not have to file. But the bank files anyway. Why did they file in addition to automatic perfection? - 9-320(b) consumer buyer: so if Halyards sell the boat to another consumer then they should file to be protected from the next consumer, so bank filed to be protected from future consumers Halyards decide to sell the boat to Oil Slick, a used boat dealer---tell Oil Slick about SI and that Oil Slick should make SI pyt to the bank. Oil Slick sells to Blink, bona fide purchaser. - Will 9-320(a) protect Blinks as buyers in the ordinary course o Bought in good faith w/o knowledge of violation o Run of the mill sale of someone who sells in the biz of new boats o They took possession o And paid new value - But Blinks , the buyer, only takes free of a SI created by the buyer's seller: o The SI has to be created by the BUYERs Seller! Buyer is only protected from SI created by the seller. Oil Slick did not create the SI in the boat, the Halyards did. So Blinks are not the buyers in the ordinary course. The Blinks could always trace title, it is easier for them to protect themselves than the bank bc the bank would have to keep tabs on their debtors. - What Blinks could do bc they lost title: o 2-403(1) a person w/ voidable title (Oil Slick bc their title is encumbered w/ SI) still has the power to transfer clean title as long as it is a good faith purchaser for value This protects most buyers from claimants that have some type of claim But when claimant has a SI, 2-403 will not apply. When A2 refers to LCs it also means secured creditors When a good faith buyer fights an A9 secured creditor they have to rely on 9-320, not A2 o 2-312 warranty of title: says that any time a seller sells a good, they warranty to the buyer that the buyer gets clean title, unless the buyers know otherwise. Breach of warranty of title too Problem w/ warranty of title is that warranties can be disclaimed if the seller disclaims them in the proper manner----so if you buy a used good from a seller that disclaims warranty of title, then dont buy!

Repair Person Priority Statute:


9-333 (repair person priority statute statutory lien holders) Sets out priority rule when you have a repair person who gets a lien on repaired goods through state law & a secured creditor also has SI in same goods, priority battle b/t statutory lien holder & secured creditor Bc we want to encourage repairs, A9 gives priority to repair person but only when they meet certain reqs 70

3 reqs have to be met for statutory lien holders to have priority 1. The repair has to be a run of the mill repair in the repair persons course of biz a. Cant be out of the ordinary 2. The lien has to be created by statute or law in favor of that person a. This lien arises by some other state law b. Usually every state has statutes for repair persons liens 3. It has to be a possessory lien a. The repair person has to be in possession of the repaired good to prevent secrecy If repair person meets these 3 reqs, the repair person will have priority through 9-333(b), unless the statute that created the lien says otherwise. Hypo: The Repossession Finance Co. (RFC) had a perfected SI in Hattie Mobiles car (RFCs lien was noted on the cert of title as required by state law). The car broke down on the interstate one day, and Hattie had it towed to Mikes Greasepit Garage, where it was repaired. State law gave a possessory artisans lien to repairpersons. The garage told Hattie it was claiming such a lien, but when she pleaded w/ the manager, he let her drive the car to work after she assured him that she would return the car to the garage for storage every night (fortunately, she lived across the street). Repossession found out about this practice and, deeming itself insecure (1-309), accelerated the amount due and repossessed the car from the parking lot in front of Hatties place of business. (a) Which creditor has the superior interest in the car under 9-333? Even if the lien reattaches when the car comes back to him in his garage, does the garage get the priority back? - While she has the car back that is repaired, what is to prevent her from going to another creditor and get another loan? Secrecy problem---they dont know about the repair persons lien. - Most courts have held that once you have given up possession of the car, even if they get possession back, they do not get priority of their lien back over previous interests. Lose possession, lose priority. Therefore, do not give up possession of the good.

Priority Battle of Fixtures


A9 does not apply to SI in real prop so youll never have battle b/t mortgagee and A9 creditor 9-109 says A9 applies to SI in PP and fixtures. Fixture definition 9-102(a)(41): a good, but NOT an A9 classification, fixture is real prop label. o The A9 classification for any fixture is a good. So fixtures could be inventory, equip, farm product, or consumer good. You want to classify fixture as a type of good. A fixture is a good, but when does a good become a fixture? o Comment 3 to 9-334: 3 types of items considered as fixtures: (1) Pure goods: items that are tangible, movable, you can identify and touch it. (2) Goods so integrated into real prop that they lose character as goods and become part of the real prop. Like a 2X4 to build a house, loses character of good & becomes part of realty (3) Goods that when put into realty are attached in such a manner that if the real prop is sold, title to the good goes w/ it. 71

Like a hot water heater in the basement, you can still point to it and say there it is but it is so attached. o Fixtures can be covered by the mortgage mortgage can cover the building and all things (fixtures) attached to the building Problem is that before the fixture was put into the building it was a pure good. So might have priority battle over the hot water heater b/t real prop encumbrancer and the PMSI in the water heater. Drafters of A9 state that we will handle the priority rules in A9 9-334 When priority battle over fixture is b/t two A9 creditors, dont go to 9-334!! Use 9-322 race rule and 9-324. If battle over fixture is b/t two real prop creditors, then real prop law governs priority battle. 9-334 is only activated when 2 steps are met: 1. Battle is over a fixture; and 2. When classifying the parties you have a real prop creditor (mortgagee) v. A9 creditor. When does a good become a fixture: - Goods that have become so related to particular real prop o Has to be attached in some way to real prop - Interest in them arises under real prop law o Have to look to state prop law here George v. Commercial Credit George v. Commercial Credit pg. 202: This involves the sale and default of a mobile home. HWY sales wants to secure credit pyts so take the mortgage under real prop law and it is assigned to Commercial Credit. Before mortgage is paid, debtor files for bankruptcy. Trustee fights Commercial Credit for mobile home. - How we classify Commercial Credit depends on how we classify mobile home o If the state classifies mobile home as a fixture then Commercial Credit will be ok bc mortgage would win o But trustee argues that its not a fixture Commercials only hope is that court looks to state law and not A9 that mobile home qualifies as fixture Wisconsin Fixture Test: 1. Physical attachment to prop; 2. Adapting the good to the use of the land; and 3. Intent of the person attaching good to realty to see if he is intending to make it permanent. a. Court: intent is the most important part of the test. i. This is one test to prove intent and prong 1 and 2 are 2 ways to show intent objectively. o Physical annexation: connect w/ power lines, septic tank, took wheels off, on concrete blocks, and connected natural gas. o Adaptation: the land is a trailer park, so is the good being adapted to use as permanent home in the trailer park yes; putting up a porch, putting utilities on it, home insurance policy, etc. o These objective factors go to proving intent. 72

IN WI a mobile home is a fixture, which is good for Commercial Credit, its mortgage will cover the mobile home Point of case: - To determine if the good is a fixture you have to look to state prop law! A lot of states have this test. - Anytime you want to use a fixture in a security you have to abide by the rules in A9, but exception in 9334(b): o One other way to get an encumbrance on fixture, through real prop law instead of A9 How do you perfect for a fixture? - File a fixture filing in the real prop office to receive the most protection available. - If you are not concerned about real prop creditors, you can make a regular A9 filing for fixtures & still become perfected, but regular perfection will not give you as much protection as a fixture filing - 9-102(a)(40): fixture filing: filing of FS and satisfying s 9-502(a) and (b) o 9-502 tells us what info has to be in a FS (a) need name of debtor, name of SP, and an indication of collateral (b) when dealing w/ fixture you also need: description of real prop that the good is affixed to. And other info from (b): Except as otherwise provided in Section 9-501(b), to be sufficient, a FS that covers as-extracted collateral or timber to be cut, or which is filed as a fixture filing and covers goods that are or are to become fixtures, must satisfy sub (a) and also: o (1) indicate that it covers this type of collateral; o (2) indicate that it is to be filed [for record] in the real prop records; o (3) provide a description of the real prop to which the collateral is related [sufficient to give constructive notice of a mortgage under the law of this State if the description were contained in a record of the mortgage of the real prop]; and o (4) if the debtor does not have an interest of record in the real prop, provide the name of a record owner. 9-501(a)(1) must file in the same office where you file mortgages in your state, which is usually the county recorders office. Reason for this is so that mortgagees will discover A9 SI in fixtures. If required fixture filings to be put right into mortgage filings, then real prop creditors will discover them. Fixture filing has more info and is filed in diff office. Fixture filing perfects you against all other claimants. Gives you more protection as against real prop creditors. Some debtors have PP that runs throughout the state, such as a railroad or utility co.. So if that co. puts up that prop as collateral then secured creditor has to file under 9-501(b) (b) [Filing office for transmitting utilities.] The office in which to file a FS to perfect a SI in collateral, including fixtures, of a transmitting utility is the office of [ ]. The FS also constitutes a fixture filing as to the collateral indicated in the FS which is or is to become fixtures. Problem 94 pg. 204: 73

In differentiation among goods (subject to UCC filing), fixtures (subject to UCC and realty filing), and ordinary building materials (subject only to realty filing), courts look to three tests (1) actual physical annexation to the realty, (2) application or adaption to the use or purpose to which the realty is devoted, and (3) intention of the person making annexation to make a permanent accession tot eh freehold. Decide how each of the following would be characterized: 1. The furnace that heats the building & water fixture 2. The pipes that carry the hot water through the walls most likely a fixture 3. A couch that has been sitting in the living room for 20 yrs good 4. A lavish designer bathtub, handcrafted and carefully set in the corner could be a fixture Problem 95 pg. 205: Monopoly Railway went to ONB and asked to borrow $, using as part of the collateral its extensive network of railroad track (rails and ties), which winds through 12 western states. ONB consults you. The track is installed in 117 counties. Must it file a FS in each county? See 9-501(b) and 9-102(a)(80). Are RR tracks considered fixtures in each of the 12 states? Look at state prop law and assuming they are fixtures in all 12 states, we have to determine which state laws govern perfection: o Look to 9-301(3)(a) perfection is where the goods are located for fixture filing So make filing where the collateral is located not where the debtor is located. 9-501 tells you where to file in states and it would be under 9-501(b): fixtures of transmitting utility covered under this. o Filings are to be made in the state office, you only have to make 1 filing in each state in the office that the particular state designates, look at states version of 9-505(b) Which states law would govern effect and priority? - Look at 9-301(3)(c) the effect of perfection and priority is where the good is located. o If you have a transmitting utility like the RR co. and the RR defaults on the loan and you have priority battle, would it make sense to say for priority to look to where the collateral is located, here collateral is located in 12 states. So professor thinks that it would have to be where the debtor is located. He will let us know next week. Problem 96 pg. 205: Simon Mustache decided to erect an apartment building on a vacant lot he owned, so he borrowed $4M from Construction State Bank (CSB), to which he mortgaged the real estate and all appurtenances or things affixed thereto, now present or after-acquired. Simon and CSB signed the mortgage, which contained a legal description of the realty, and the mortgage was filed in the real prop recorders office. Is the mortgage effective as a FS? See 9-502(c). - In some states A9 provides better remedies than real prop law does, so a lot of real prop creditors file also under A9 to get the better remedies. o But A9 can only cover the fixtures and not the real prop. o So theyll take a mortgage covering real prop and fixtures, which they record & take A9 SI in fixtures so if theres a default in fixtures theres a choice b/t real prop remedies & A9 remedies So fill out A9 SA for fixtures which they attach to mortgage or write in same paper. So have mortgagee who is also A9 creditor in the fixtures. - Asked in problem does the bank really have to fill out separate fixture filing form or can it just use a mortgage as not only perfection of mortgage but also for fixture filing. 74

o 9-502(c) says you can use a mortgage as fixture filing but have to meet 4 reqs: (1) indicate the goods that it covers, so you need a description (2) real prop that the fixtures are related to has to be described (3) recorded mortgage must provide all info in 9-502(a) and (b) (4) has to be duly recorded in county recorders office. Comment 6 explains these reqs. In order for 9-334 to be applicable, have to have mortgagee fighting A9 creditor over the fixture. Bc the mortgage covers fixtures and SI would be 9-334.

9-334(c) - (h) priority rules governing a battle b/t A9 creditor and a mortgagee - 9-334 is a race statute GR of 9-334 is 9-334(e)(1) = race rule - Interest of record: debtor is owner or part owner of the real prop. If the debtor does not own the real prop they have to be at least in possession of it. o Then it says that SI will win if perfected by a fixture filing before the interest of the encumbrancer or owner is of record If A9 creditor makes fixture filing before mortgagee records mortgage, A9 creditor wins, so it is a race to county recorders office. If the mortgagee records before the A9 creditor makes a fixture filing, then the mortgagee will win o Exceptions 9-324(e)(1): exceptions that we deal w/ most of the time will be in (d) PMSI: must meet 4 reqs to have priority (1) perfected SI in fixtures will have priority if debtor has an interest of record in or is in possession of real prop (2) SI is a PMSI (3) interest of the mortgagee arises before the goods become fixtures (4) SI has to be perfected by a fixture filing before goods become fixtures or w/n 20 days thereafter 20 day grace period to file that runs from the time the good is attached and becomes a fixture. Good way to approach 9-334 is pretend that you are an atty for A9 creditor bc all exceptions favor A9 creditor. One type of real prop creditor who is super creditor that will take priority over even PMSI in 9-334(d) is a construction mortgage 9-334(h). 9-334(h) is an exception to the 9-334(d) exception. - Construction mortgagee is a person who lends the $ so the building will be built. Its a super-duper PM creditor bc its loan went to build the building in the first place, and w/o the building there would not be a good in the first place to attach to the building. - Must meet 2 reqs in order for a SI in fixtures to be SUBORDINATE to construction mortgagee 1. If a record of the mortgage is recorded before the goods become fixtures; and 2. The goods have to become fixtures before the completion of the construction. How to analyze 9-334: 1. Make sure it applies: a. The battle is over a fixture b. The battle is b/t mortgagee and A9 creditor 2. Pretend that your representing an A9 creditor and go to the race rule in 9-344(e)(1) 75

a. If the A9 creditor wins under 9-334(e)(1) then done. b. But if A9 creditor loses then have to go to exceptions 3. Find an exception: a. 9-334(d) PM creditor exception: i. If you qualify under the exception check 9-334(h) bc still might be in trouble if fighting construction mortgagee Problem 96 pg. 205 continued: During construction of the apartment building, Simon Mustache bought a furnace on credit from Blast Home Supplies, giving Blast a SI in the furnace that described the real estate. Where should Blast file its FS? See 9501. - Does Blast even need to file? PMSI in consumer good is automatically perfected. o How do you classify a consumer good? Is Simon using the furnace for own personal purposes? Here classified as equip so have to file = not subject to auto perfection - Where should he file? o Make a fixture filing, have all info in 9-502(a) and (b) and file in county recorders office. Is there a technical sentence that needs to be filed in FS - 9-502(b): need sentence that says this fixture filing is to be filed along w/ the mortgages o They do this to make sure it is filed correctly to ensure that real prop mortgagee will discover Will Blast prevail over claimant? - Classify the parties: o Blast is A9 creditor and bank is mortgagee and fighting over fixture (furnace) so go to 9-334. To find out that if it is a fixture look to state prop law. - Look to race rule in 9-334(e)(1): o Bank wins under the race rule bc filed the mortgage before the building even went up, so A9 creditor loses, so look to an exception - 9-334(d): is Blast a PM creditor? o The debtor has to have an interest of record or be in possession met bc Simon owns building o SI has to be a PMSI Blast has it bc debtor Simon purchased it on credit o Interest in encumbrancer owner arises before, it says that mortgage winning under race rule o File fixture filing before the good becomes fixture or 20 days after, so if they file then theyll win unless the bank is a construction mortgagee. 9-334(h) Construction Mortgagee must meet the reqs: Recorded before the goods became fixtures (recorded before building built) Goods become fixtures before completion of construction So here, the bank will win. What can Blast do to ensure that it will have priority: - Ask for subordination agreement under 9-339 - The bank will agree to one bc if they dont then Blast wont sell the furnace If the banks interest is not recorded, will Blast prevail? - Yes bc under the race rule in (e) Blast will win. Problem 97 pg. 206: 76

Would your answer to the last problems priority disputes change if the object in Q were a refrigerator? What if it were a computer that Simon had purchased for use in his office (which is located in the apartment building?) (Note: some states would consider the computer a fixture under the industrial plant doctrine.) See 9-334(e)(2) and (f)(2) and Official comment 8. Go through analysis again: 1. Check to see if in 9-334 A9 creditor (Blast) v. real estate mortgage (bank) and fight has to be over fixture. Look to state law to see if refrigerator is a fixture, assume that it is a fixture 2. Race rule in 9-334(e)---bank wins bc bank recorded before building went up 3. Does Blast have an exception to race rule? a. 9-334(d) Blast would win under (d) here, but construction mortgagee will win over Blast if there is construction mortgage. Bank is the construction mortgagee. b. 9-334(h) Bank has to meet reqs under (h) i. Bank recorded before building went up ii. But did the refrigerator become a fixture before completion of construction? Most likely But can Blast also be protected under 9-334(f)? - 9-334(h) provides that (e) and (f) are exceptions to (h). So what they are saying is that 9-334(h) only trumps 9-334(d)!!! 9-334(e)(2): readily removable exception---explained in comment 8 1. Perfected by ANY method; 2. Fixture is readily removable and a. (A) a factory or office machines; b. (B) equip that is not primarily used or leased for use in the operation of the real prop; or c. (C) replacements of domestic appliances that are consumer goods; In this problem (C) would not be met bc it has to be a replacement and it is the original here, and it has to be in the hands of the debtor (comment 8) Simon is the debtor and it would not be in his hands. - This rule will only protect A9 creditor who replaces consumer good in the hands of the debtor o 9-334(e)(2)(c) only protects replacement consumer good. - (e)(2)(a) and (b), what if Simon buys a computer? Is the computer a fixture look to state law, assuming that qualifies as fixture goes through rest of analysis. When get down to where construction mortgagee who beats secured creditor, the secured creditor can argue under (e)(2) that it is readily removable office machine and then beat the construction mortgagee. - When dealing w/ readily removable items, usually what happens is when secured creditor sells the machine, dont think about it being fixture and file regular FS---on the other hand mortgagee bank takes a mortgage and encumbers it w/ building and all fixtures, they dont think of readily removable fixtures as being security for mortgage---dont rely on computer or microwave as security only thinking about big fixture---so this gives priority to the A9 creditor so balancing we have (e)(2)(A) and (B) - 9-334(e)(2)(B) equip not being used to operate the building as an apartment building. o Talking about a microwave that Simon uses to make his lunch---not being used to run apartment building, its used to feed him. Would a mortgagee rely on this type of equip as security for its mortgage? Always make fixture filing bc it will give you most protection possible. 77

Look at how your state defines what is readily removable---if it is not readily removable, is it the type of fixture that a mortgagee would rely on to secure the mortgage? - If they would rely, then it is not readily removable. - If they would not rely then it is probably readily removable. Lewiston Bottled Gas Co. v. Key Bank: pg. 206 DiBiase owns land and wants to build motel on it. He goes to bank and gives bank a mortgage covering the land and all of its attachments and future attachments. - Key Bank is properly recorded real estate mortgager DiBiase wants to create a corp to run the motel and oversee building the motel. Incorporates it as Grand Beach and goes to LBJ to buy air conditioners, and LBJ take SI in units. Units will remain DiBiases PP according to SA, so LBJ becomes PMSI of the units. So Lawyer for LBJ files FS and fixture filing, but it is under the name Grand Beach. DiBiase needed more $ and goes back to bank and says needs another loan and DiBiase said take second mortgage on building and bank runs search under DiBiases name and does not discover PMSI and so have battle b/t bank and LBJ over the air conditioning units. Then DiBiase defaults. Are the air conditioning units fixtures? They used the same 3 part test from WI. - FIXTURE TEST: o (1) Physical annexation Air conditioners attached to wall by holes in walls o (2) Adaptation Will make the customers stay comfortable o (3) Intent of party making attachment DiBiase said in SA that the units were to remain PP and not part of hotel, so his intent is not there. The 3 part test is subjective in nature and prove subjective intent by objective factors of physical annexation and adaptation. It is an objective test to prove subjective intent. Attack Outline: How to analyze 9-334: 1. Make sure it applies: a. The battle is over a fixture and state law shows its a fixture b. The battle is b/t mortgager and A9 creditor 2. Pretend representing A9 creditor and go to race rule in 9-334(e)(1) a. If the A9 creditor wins under 9-334(e)(1) then done. b. But if A9 creditor loses, then have to go to exception i. Here the bank wins under the race rule so go to step 3 3. Find exception: a. 9-334(d) PM exception i. Is 9-334(d) applicable? 78

1. Go to 9-334(d) pull out reqs and apply to facts 2. Does the debtor have possession or an interest of record of the real prop? a. Yes he has possession of prop and owns it 3. Is the SI a PMSI? a. Yes 4. Did the interest of the encumbrancer or owner arise before goods become fixtures? When did the interest of mortgagee arise and when did goods become fixtures? If the interest in the mortgagee is first then requirement is met. a. Person who has real prop encumbranced they are meaning real prop creditor (generally mean mortgagee---the bank here) i. This requirement is redundant bc simply repeating that construction mortgagee wins under race rule b. Fixture filing before the goods become fixtures or w/n 20 days thereafter i. They put the wrong name here and did it wrong, did not put it under DiBiases name too---need to have name of the co. and the name of the person who owns the landDiBiase 1. 9-519 says cross index under debtor and owners name. ii. 9-334(h) construction mortgagee exception: 1. If you qualify under the exception of 9-334(d) check 9-334(h) bc still might be in trouble if fighting construction mortgagee 2. Except as provided in 9-334(e) and 9-334(f) a SI in fixtures is subordinate to a construction mortgage if: a. If a record of the mortgage is recorded before the goods become fixtures; AND b. The goods become fixtures before the completion of the construction Problem 98 pg. 210: Simon Mustache failed to pay his atty, Susan Mean, so she sued him, recovered judgment, and levied on the apartment building and its contents. Will Simons creditors holding SIs in the fixtures prevail if they have perfected by fixture filings? See 9-334(e)(3). Here the atty does have encumbrance on real prop and its contents and gets interest by judgment lien. Lets assume A9 creditors did not make fixture filing but did perfect under A9 before Susan got a judgment lien. - Perfected secured creditors beat LCs, - 9-334(e)(3) states that a perfected SI in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real prop if the conflicting interest is a lien on the real prop obtained by legal or equitable proceedings after the SI was perfected by any method permitted by this article o Making fixture law consistent w/ 9-317(a) Problem 99 pg. 210: After the building was complete, Tuesday Tenant moved in. Not liking the refrigerator Simon had installed, she had him remove it, and she bought another refrigerator on time from Easy Credit Department Store, which reserved a SI therein but never filed a FS. Assume that state real prop laws permit CSBs after-acquired prop mortgage to reach fixtures installed by lessees (if they dont, Easy Credit will always prevail, see 9-334(f)(2)) Will Easy Credit be entitled to priority if it is forced to repossess? See 9-334(e)(2)(C) and Official Comment 8 third paragraph. - Can the bank look to 9-334(h) for protection as construction mortgagee? 79

o No, bc the building is already completed by the time the refrigerator goes in. Bank wins under race rule of (e)(1) but Easy is PMSI. Will Easy still take priority? - Not under 9-334(d) bc they didnt make a fixture filing under (d)(3). So Easy needs another exception - 9-334(e)(2) would probably work assuming the juris would deem fixture to be readily removable 9334(e)(2)(C) replacement of domestic appliances that are consumer goods. Under (e)(2) can perfect under ANY method of A9, so allows automatic perfection. 9-334(f)(2) says SI in fixtures perfected or unperfected will still have priority over real estate creditor if the debtor has the rights to remove the goods - Situation is if tenant purchases refrigerator out of its own funds and fixture in her own apartment o 9-334(f)(2) says if state prop law allows a tenant who installs fixture at own expense to remove the fixture and take it free of real prop mortgage, then the mortgage does not attach to the fixture---so the only interest in the fridge is that of the A9 creditor. But have to check the state law to see if fixture can be taken free of real estate mortgage. Problem 100 pg. 210: Assume Tuesday bought a trash compactor on credit from Easy Credit and had her kitchen area remodeled to accommodate it. It was installed on May 5. Easy Credit comes to you on May 7. Is it entitled to automatic perfection of its SI in consumer goods here? See Official Comment 3 (Last sentence) to 9-309. Auto perfection: appears consumer good in the hands of the debtor, will this help Easy or not? - 9-334(e)(2)(c): if you rely on exception in (e)(2) you can rely on any method of perfection; a trash compactor built into counter top is probably not readily removable. - PM creditor (Easy) has 20 days to file a fixture filing. Should the filing contain Simons name? - It needs to be in the owner of record of real prop, when make fixture filing, must comply w/ 9-502(a) and (b) required info in fixture filing. Comments have explanation for readily removable exception, which is 9-334(e)(2) Problem 101 pg. 210-11: Assume that Blast Home Supplies held a perfected SI in Simons furnace and that this interest was entitled to priority over CSB, the real estate mortgagee. If Simon defaults on his pyts, what liability does Blast have to CSB if removal (repossession) of the furnace will do $1k damage to the buildings structure and if to replace it Simon (or CSB) will have to spend $8k? See 9-604 and its official comment 2. 9-604(c) remedy is repossession they must pay for the physical damage, but dont have to pay for diminution in value. Have to pay for the cost of repair 9-604(d) - Does the $ go to the owner of the building or the mortgagee? o 9-604(d) pay the encumbrancer (mortgagee) other than the debtor, the reason you dont give $ to Simon is that he was responsible for the default and the damage to the building reduces the value of the collateral, so give the $ to secured creditor to raise up the value of the collateral. One priority rule that we havent looked at: 80

Comment 5 Residual Rule (fall back rule): if none of these other priority rules work for one reason or another, then go back to sub 9-334(c), which says the real estate mortgagee wins (the title to (c) calls it the GR, but it is the fall back rule, not the GR)

Maplewood Bank v. Sears: pg. 211 Maplewood Bank gave a PM mortgage to the Capers on September 20, 1988 and recorded it on October 5, 1988. On May 31, 1989, Sears filed a FS covering a completely new kitchen installed in the mortgaged premises at the request of the Capers after they executed a SA. August 18, 1989 the Capers executed a 2nd mortgage on the previously mortgaged premises through New Jersey Savings Bank which was recorded on August 23, 1989. The Capers defaulted on their pyts due to Maplewood and Sears and Maplewood declared that the entire balance was due which Capers did not pay so the bank foreclosed on November 5, 1990. It is undisputed that the new kitchen Sears installed and financed was a fixture and that Sears obtained a PMSI in the fixture to secure full pyt. Sears SI is limited to the fixtures and does not extend to the real estate. The PMSI that Sears had in the fixtures gave them super-priority as to those goods or chattels which became fixtures. Sears needs exception 9-334(d) PMSI must make fixture filing w/n 20 days. In real life the problem is the remedy. The remedy is repossessing all the fixtures---and would cause a lot of physical damage to the house itself and so dont want to do that bc have to pay for the physical damage they cause 9-604(d). The debtors can be sued for the deficiency. They defaulted bc they were broke. What is the remedy that Sears tried to invoke? They said to the bank to sell the house and instead of pulling out fixtures give us the difference in value of the house w/ old fixtures and the house w/ new fixtures. This makes sense but there is no authority for the remedy bc it is not in the former code---go to the legislature if you want it, so you can only repossess. Sears should have negotiated this w/ the bank before going to court. - Today under revised code they may be able to get the difference in value remedy but depends on state prop law9-604(b)can exercise A9 remedy or any remedy under state real prop law. Problem 102 pg. 215: Farmer Bean had a filed a mortgage on his home in favor of Rural State Bank. The mortgage stated that it extended to the realty and all things growing on, or attached thereto, now in existence or in the future. When Farmer Bean borrowed $ to plant this years crop, he gave a SI in the crop to Seeds, Inc., the PM lender. If the latter files its FS in the appropriate place, will it prevail over Rural States mortgage lien? See 9-334(i) and official comment 12. Fixtures are something related or attached to real prop. What about farmers crops that are attached to land? - Drafters decided that real estate mortgage can cover crops, and on other the hand can have A9 SI in growing crops as goods. Battle b/t A9 creditor and mortgagee---9-334(i)---A9 creditor always wins bc want to encourage PM loans to farmers. Problem 103 pg. 215: When Farmer Bean bought a doublewide trailer from Traveling Homes, Inc. for $100k, he had it towed to a vacant lot on his farm w/ police protection in route, and large WIDE LOAD signs attached. That was the only trip doublewide made in its life. It was then placed on a foundation that had been built on the vacant lot, attached to various utilities for electricity and water, and Farmer Bean built a fancy deck that he extended out the front door of the trailer. If you are the atty representing the bank that loaned Farmer Bean the $ to buy 81

doublewide, what steps should be taken to perfect its PMSI in the collateral: a real estate mortgage, a fixture filing under A9 of the UCC, or a notation of the banks interest on a cert of title used for the doublewide? See 9-334(e)(4). If you are the A9 creditor who loaned the $ so the farmer could buy the trailer what is the advised action? - cert of title---assuming that your state has cert of title. If you are lending $ for farmer to buy the trailer should you take a mortgage or A9 SI? - These types of attached homes were considered real prop, so you would take real estate mortgage in the house and all its fixtures and A9 SI in fixtures too---this is what happened. But when revised A9, Manufactured Homes Seller Association, decided that if they sell this and there is a default dont want to be stuck w/ real prop remedies, wanted A9 remedies. So drafters did this---and put in a definition in 9-102 of manufactured home---complicated definition---mobile home has to meet specifications and if qualifies then it is a manufactured home defined under A9 so can take A9 SI instead of real estate mortgage.what is the best way to perfect SI? o Note interest under cert of title if the state allows this 9-334(e)(4) bc if you end up fighting real prop creditor who has interest in land and all fixtures, then you will win bc they are second in line bc people should be able to rely on cert of title. So have priority even if state allows real estate mortgage to also cover this. o Lot of problems w/ this provision---politics. Did not think it through so theres a ton of problems in it, but we wont have to address them on the exam. o If the state does not cover them w/ cert of title, how do you perfect? Real estate mortgage If it is a fixture in the state---can perfect under A9 fixture filing.

V. Tax Liens
Trustee in bankruptcy is biggest and baddest creditor. But theres one bigger---tax person (IRS) - If a person owes fed tax and does not pay it then this lien is created covering all prop, all rights to prop, real and personal belonging to that person---covers everything you own - 6322 tells you when the lien is created and when it terminates---it arises on the date that it is assessed. o Assessment occurs when they sign an assessment form o Once assessed it remains effective until you pay your taxes, or the govt sues you, gets a judgment and you satisfy the judgment, or statute of limitations has run (6 yrs generally). - 6323(a) is priority rule: says that tax lien beats the world even if it is second in line. o Only exceptions are for the claimants listed 6323(a) o In order for the tax lien to beat these listed claims it has to be filed before one of the claims arises. (tax lien filed, not assessed.) Every state has an office where fed tax liens are filed. Whenever you deal w/ fed statute must use fed statute definitions, not A9 definitions. - IRS has own definition of secured creditor 6323(h) o SI qualifier: in order to have SI must meet 3 reqs (1) prop (collateral) has to be in existence at the time of tax lien filing (2) SI has to be protected under state law against LCs 82

This means, you have to be perfected under A9. If not perfected, then you dont have a SI at all according to IRS. (3) value has to have been given---creditor has to have given the value. o These 3 reqs present problems PROBLEM 105 pg 227: ONB had a perfected SI in the inventory, accounts receivable, instruments, and chattel paper of an automobile dealership named Smiles Motors, to which the bank made periodic loans. Smiles Motors failed to pay its fed taxes, and the IRS filed a tax lien in the proper place on 10/1. On the first days of November and December new shipments of cars arrived at Smiles lot, and all during the yr Smiles continued to sell cars on credit, generating chattel paper and accounts receivable. Does the filing of the tax lien cut off ONB's floating lien in whole or in part? Is this issue in any way affected by the bank's knowledge of the tax lien filing? A9 SI w/ after acquired clause. Bank takes SI in auto dealerships inventory, accounts, instruments, and chattel paper. Assume bank perfects. Then on 10/1, feds file a tax claim against dealership. (difference b/t assessment and filing). Oct, Nov, Dec dealership gets new collateral. Issue: know under priority rule of IRS that SI of bank will have priority over tax lien, but what about SI in collateral from after acquired clause---is that cut off by intervening tax lien---does tax lien have priority? - Looking at feds definition of SI---must be in existence---after acquired collateral was not in existence. o So exception---6323(c) look at the reqs on page 2 1. A written SA exists a. Bank did this 2. The SI is perfected before the tax lien is filed 3. The SP must have made the loan in ordinary course of biz 4. Collateral (feds call commercial financing security) must be acquired by tax payer in his ordinary course of biz 5. The loan on which the after acquired SI are based has to have been made before or w/n 45 days of the tax lien filing 6. Most problematic requirement: the later acquired collateral has to be obtained by the debtor w/n 45 days of the tax lien filing a. So that means here that all the collateral coming in during Oct and first half of Novemberthat acquired SI takes priority over tax lien and then the tax lien comes in and takes priority. The one situation that the feds never thought about is presented in problem 126: Problem 106 page 234: Six months after the IRS filed a tax lien against her, Charlene McGee bought a fire extinguisher system for her horse stables. She purchased the system on credit from King Protection Enterprises, which reserved a PMSI in itself and perfected it. Is the IRS's lien superior to King's PMSI? - Remember that a tax lien only covers prop that tax payer owns. - Tax lien is filed covering all debtors prop but debtor goes and buys fire extinguisher that has PMSI. Will PMSI beat the tax lien? o The tax lien and PMSI get to fire extinguisher at the same time---feds say if the PMSI perfects before turning over possession of collateral to the debtor PMSI wins. 83

o If you are PMSI creditor, make sure you perfect before you turn the good over---if it was consumer good, dont have to worry bc automatic perfection, but this was not consumer good here. Problem 107 pg 235 Marie Medici owned a hat factory. She financed her biz through a series of loans from the Richelieu State Bank pursuant to an agreement by which she gave the bank a SI in all of the factory's equipment, and the bank agreed to loan her $ from time to time "as it thinks prudent." A FS covering the equip was filed in the proper place. On August 1 she owed the bank $1,500 (having paid back most of the prior loans). The equip consisted of two machines: the Habsburg Hat Blocker (worth $7k and the Huguenot Felt Press (worth $5k) . On that date the United States filed a fed tax lien against all of Medici's prop. On 8/31, the bank loaned her another $10k. Answer these Qs: a. Assuming the bank did not know of the tax lien on 8/31, does the bank or the US have priority in the equip, and to what amount? See I.R.C. 6323(d). What if the bank did know? As of 8/1: $1,500 balance o Collateral: (1) $7k machine (2) $5k felt press 8/1: tax lien filed 8/31: $10k advance If you look up IRS definition of SI: value has to be given. Here the advance, as far as initial SI value of the loan was given, but the $10k value was not given until after tax lien was filed, so IRS says no SI in 10k. - Compromise enacted 6323(d), which is reprinted in handout: 4 reqs o (1) collateral has to be covered by written SA before tax lien filed o (2) the SI has to be perfected as of tax lien filing o (3) the advance must be made w/n 45 days of the tax lien filing and o (4) the SP better not have knowledge of the tax lien when it makes the pyt *It is either the expiration of 45 days or actual knowledge when tax lien has priority!!! Tax liens, GR 6323(a) if you perfect your interest before tax lien is filed then you have priority. - Special rules for future advance and after acquired. o After acquired 6323(c) reqs must be met. o If future advance must meet 4 reqs of 6323(d). Rest of problem 107 moves away from tax liens and what happens instead is same situation: 8/1 debtor owes $1500 on loan, collateral $12k on 2 machines 8/15 w/o permission debtor sells 5k machine to buyer 8/31 bank makes advance of $10k Will the buyer be protected from the SI arising from the advance? - Bank is owed $11,500 after advance. - Priority battle b/t A9 creditor and buyer of goods---go to 9-320 o Does buyer qualify under 9-320(a), buyer in ordinary course of biz? No. o What about 9-320(b)? Not a consumer good. o So are there any protections for the buyer? 9-323 deals w/ the priority of SI arising from future advances. 84 -

9-323(a) and (b) does not protect the buyer. But the buyer might still get protection from SI in the advance? 9-323(d) Except as provided in (e) a buyer in goods other than ordinary course of biz will win and take free of a SI to the extent that it secures the advance made after the earlier of: o (1) the time the SP acquires knowledge of the buyers purchase; or o (2) 45 days after the purchase

Lets assume that creditor does not have knowledge of the sale and makes the advance before 45 days---they will win bc 45 days have not expired and they did not have knowledge. What if the creditor does have knowledge of the sale but the advance still is made w/n 45 days---then the buyer wins bc it is the earlier of----knowledge will kill the secured creditor---either knowledge or expiration of 45 days. The only way the creditor can still be protected is under 9-323(e): if he makes advance pursuant to commitment w/o knowledge of sale and before expiration of 45 days---pursuant to commitment 9-102(68): means pursuant to secured parties obligation---they promised to make that advance. Usually will find this or lack of this right in the SA but sometimes on a separate piece of paper. - In the problem it says as the bank deems appropriate----this is not a commitment or a promise. Another change. If instead on 8/15 the buyer buying collateral we have a LC. We know the bank will beat for the 8/1 $1500 but what about the advance on 8/31? It says that the advance was made w/ knowledge of the lien. Who has priority over the $10k advance? - 9-323(b) LC v. future advance secured creditor----except as provided in (c) a secured creditor will lose but only to the extent that SI secures an advance made more than 45 days after the person becomes a LC unless the advance is made w/o knowledge of the lien or pursuant to commitment entered into w/o knowledge of the lien. 9-323(d) starts out by saying buyer takes free of SI but under (b) that secured creditor wins if they make advance ---w/n the 45 days, knowledge is irrelevant here! But if you exceed the 45 days then you still will win under (1) if you still dont have knowledge of the lien, but if you have knowledge, while it does not affect protection w/n 45 days, it will affect you if you make an advance after 45 days---after 45 days and knowing about lien, the secured creditor will lose. But if the secured creditor has made a promise before they knew about the lien then they will still win. Handout rewords the reqs of (b) and (d) from wk 11.

VI. BANKRUPTCY:
Look at debtors who are so insolvent that theyll never be able to pay off creditors, so bankruptcy code gives them a way to get fresh start and provides a vehicle to give at least something to all unpaid creditors. Code Revisions: there was abuse of the bankruptcy actso revised the codebut revisions were made by people w/ no expertise of bankruptcy law, so revisions are bad and do put some major restrictions on consumers to file for bankruptcy. Many types of bankruptcies: - Most prevalent is liquidation bankruptcy covered by Chapter 7. 85

o Trustee is appointed and then goes in and gets all non-exempt assets, sells them off and w/ that $ gives a little bit of something to all unpaid creditorspro rata equitable distributions. o Some creditors will be able to take full obligation off the top before anyone else shares it, if they do everything correctly o Most creditors are not paid in full, and debtor receives full discharge on all debts Rehabilitation bankruptcy: o Do not liquidate debtors prop o Debtor keeps prop,(instead of it getting repossessed) continues biz, and enters into pyt plan. The plan is the debtors proposal on paying something to all of his creditors from postbankruptcy earnings. Plan usually runs from 3-5 yrs, and once debtor complies, debtor is discharged from all bankruptcy debt o No trustee o The powers normally given to trustee to attack the claims. But the debtor is given these powers---DIP---debtor in possession of his prop. Chapter 13: Rehabilitation bankruptcy used by individual debtor o Only way to rehabilitate, have to owe under certain amount and must have minimum income, and if meet all reqs, come up w/ pyt plan approved by court, once you comply w/ the plan, then your discharged from bankruptcy Chapter 11: rehabilitation plan entered into by biz, rather than individual o Propose reorg plan to the court and discharged from bankruptcy once they fulfill that plan Chapter 12: farmer bankruptcy---rehabilitation for family farmer

*Were concerned w/ the powers the code gives the trustee to attack claims of creditors bc the trustees goal is to destroy A9 creditors The rules we will learn are for all types of bankruptcies. Steps of bankruptcy: 1. Fling of bankruptcy petition: (DOB) date of bankruptcy a. Chapter 7 is 99% are voluntary. Some are forced though by creditors but mostly voluntary b. 362 kicks in & everything that debtor owns is frozen, no one can touch it. Anything after date of filing is free and clear. But 362 is automatic stay on prop, which means debtor cant pay any unpaid creditors, debtor cant grant any SI on the prop or get judicial lien on prop c. US Trustee will appoint an interim trustee to look over the prop & make sure no one touches it. d. In the meantime creditors meetingin the meeting they make their claims and select a permanent trustee e. Once trustee is elected, in liquidation bankruptcy, he gathers up all non-exempt prop and sells it, so have a lot of $ in the bankruptcy pot, and trustees job is to get as much $ in the pot as possible and distribute it on equitable basis to all the creditors f. There are some creditors who are preferred, can come in, and get full obligation out of the pot and w/o sharing i. One is the A9 secured creditor who has done everything correctly. Trustee is an advocate for all of the general creditors, so if the SP goofs up then the trustee can take away from secured creditor. Trustees goal is to destroy A9 secured creditors. Bankruptcy code gives the trustee special weapons to attack secured creditor. 1. Trustees 1st Weapon: 86

544(a) of bankruptcy code (strong arm statute): all it says is at the moment the bankruptcy petition is filed, we know the trustee wants to grab up prop, the trustee needs legal interest in prop and 544(a) gives the interest upon the filing, the trustee takes the status of a hypothetical Judicial LC (LC). - Whenever you use 544(a) 2 step process: o (1) Go to 544(a), which gives trustees status of LC o (2) See what the powers are for LC bc state law shows this State law involving priority b/t A9 secured creditor and LC Priority rule is 9-317(a)(2): says LC beats unperfected secured creditor, thus a secured creditor beats a LC. 9-102(52) definition for LC states that trustee is LC. 544(a) is called the Strong Arm Statute bc the trustee will hunt down secured creditor who did not properly file its SI and destroy it. Difference b/t real life LC and trustee: Ex.: - Debtor has prop worth $1k - Debtor grants SI to bank for $500 loan but the bank forgets to file, so unperfected - LC gets judgment for $300 and has sheriff seize $300 worth of prop - Debtor owes grocery store $100---general creditor. - All want a piece of prop, who takes first? o LC bc of 9-317(a)(2) LC beats unperfected secured creditor o Unperfected secured creditor, 9-201 says that secured creditor wins even if unperfected, unless the code says otherwise (fall back rule) o General creditor will come last.- secured creditor gets thrown into the pool (need to be perfected before bankruptcy Is filed.) 544(a) says that if the LC has priority over unperfected secured creditor, it doesnt merely subordinate secured creditor taking second, it destroys the SI. The unperfected secured creditor now becomes a run of the mill general creditor for $500. Trustee strong arms unperfected SIs into oblivion. So in the example above the unperfected secured creditors SI is destroyed and becomes a general creditor. 558: gives trustee the benefit of defenses that the debtor will have against claims of other creditors, e.g., if creditors claim is barred by SoL, the trustee can step in debtors shoes & exercise that defense 544(b): says that trustee also has the power to step into the shoes of any of the debtors general creditors and exercise whatever rights those general creditors would have had to destroy other creditors claims. - This power is not used much by the trustee bc it is worthless. General creditors are on the bottom of the totem poll. But there are a few instances where they can do this & 558 allows it. Problem 108 pg. 239 Lew Sun, a Korean, moved to Chicago and opened a Korean restaurant called "Seoul Food." He had many unsecured creditors (food sellers, linen services, employees, etc.). On 4/17, he applied to the International State Bank for a loan of $10k, and, signing a SA and a FS in favor of the bank, secured by an interest in Sun's equip. On 4/18, one hr before the bank filed the FS, Sun filed a bankruptcy petition in the fed court. a. If no new general creditors came into existence b/t the loan on 4/17 and the petition filing on April 18, can the trustee avoid the bank's SI under 544(a) of the Code? 87

4/17, SI in equip and signs FS 4/18, one hr before filing FS, debtor files for bankruptcy. Who would win under strong arm statute? - Classify the parties: o 544(a) says trustee gets status of hypothetical LC - Look to state law to see the powers o 544(a) trustee wins over unsecured creditor bank o If the bank had filed 2 seconds before bankruptcy then the A9 creditor goes into bankruptcy being perfected and would have been protected against trustees powers under 544. If the bank had PMSI - Suppose on 5/1 debtor takes loan and grants creditor PMSI in equip - 5/3 bankruptcy petition is filed - 5/4 PMSI perfected by filing Under 544(a) trustee becomes a LC - 9-317(e) as long as PMSI filed w/n 20 days of turning the goods over to debtor, will beat intervening LC Fed law supersedes state law so the only way the state law will win is if the fed law allows it: - 546(b) says if you have generally applicable state law, such as state law grace period, can use it against trustees powers under 544. allows you to use the state law grace period to use against trustees power under 544- can only use it because federal law says you can use it. If you are a secured creditor, perfect SI as soon as possible, bc if you are perfected = protected against 544(a), you never know when debtor will file for bankruptcy. Bankruptcy REVIEW: - One of the claimants is a bankruptcy trustee who is classified as a LC, and falls below a perfected SP who filed before the bankruptcy. - Bankruptcy code gives the trustee special powers (more than general LC): o Strong Arm Statute: if you are unperfected secured creditor, trustee can turn you into a general creditor. o Bankruptcy trustee can also step into shoes of the debtor and raise the debtors defenses on his behalf 2. Trustees other weapons: a. Preferential Transfers: pg 239 i. Section 547 of the Bankruptcy code ii. For a transfer to seem preferential have to look to 547(b)Background: once bankruptcy petition is filed, all debtors prop up to the date of filing is frozen, which means before petition is filed it isnt frozen and debtor can transfer it to anyone who wants it and trustee has no power to undue those transfers. But debtors see bankruptcy coming bc it is a gradual deterioration, and at some pt debtor knows it will have to file for bankruptcy. So what will prevent the debtor from paying off some creditors in full and then filing for bankruptcy and leaving all other creditors to have less $.

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Or suppose during gradual slide under, all of the general creditors are working w/ debtor to help keep above water, but 1 general creditor decides enough and runs to court and gets a judicial lien. Now we have real life LC v. trustee (hypothetical LC)b/t 2 creditors, the first to get the lien wins. Also, debtor might be going under & 1 of the general creditors realizes this & persuades him to grant a SI before filing for bankruptcy. Perfects just before bankruptcy just above the top of all the other general creditors. The drafters of the code enacted s to allow trustee to undo certain pre-petition transfers bc of this unfairness. - Transfer 101(54) every mode of disposing of or parting w/ prop or an interest in prop. Trustee has the power to undo transfers if certain reqs are met. All of the above examples were transfers. - Preventing debtor from, during slide under, favoring certain creditors over others in a certain manner, and preventing fraud. o Types of transfers: SI Gift Judicial lien - Power we are concerned w/ is trustees power to undo preferential transfers---pre-petition preferential transfers---transfers that prefer one creditor over others before the estate goes bankrupt---Trustee has the power to UNDO pre-petition preferential transfers, but to be preferential transfer must meet all 6 reqs of preferential transfer in 547(b) Trustees ability to avoid preferential transfer: - Want creditors in the same position on the day of bankruptcy as they were 90 days before it - Debtors typically dont decide to file bankruptcy and usually try to avoid it. - Recognize that the debtor might want to favor certain creditors and try to pay them off before bankruptcy which is why they cannot do this 90 days before the bankruptcy. If you want the creditor to get the $ and keep it, you must pay them before 90 days before filing for bankruptcy. Trustee is worried every time something goes out of the estate, the amount to creditors gets smaller. Want the amount in the estate to be more than at the time of bankruptcy or at least the same as at the time of bankruptcy. Elements of a Preferential Transfer 547(b): 1. (b)(1) the debtor transfers prop OUT of the estate 2. (b)(2) to or for the benefit of a creditor/claimant a. A debtor makes a transfer to anyone who has a right to pyt 3. (b)(2) for a debt incurred before the transfer a. Antecedent (pre-existing) debt a transfer made during the 90 day period before bankruptcy was filed for a debt that arose before the transfer. i. Transfer was made as a result of a debt that incurred before the transfer. ii. Not a contemporaneous debt: when paid on the same day as you incur a debt. 4. (b)(3) while debtor was insolvent a. It is presumed that the debtor was insolvent w/n the 90 days before filing [547(f)] b. Burden on debtor to prove that it was solvent i. This is the only element where the burden of proof is not w/ the trustee 5. (b)(4) w/n 90 days of filing (DOB), and a. Exception if you are an insider the trustee can go back 1 yr. i. Insiders: someone close to the debtor 89

6. (b)(5) the creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. 2 step process: i. (1) how much would he have received w/o transfer? Usually pennies on the dollar if unsecured creditor, i.e., a general creditor ii. (2) how much w/ transfer? Usually more b. The only time this wont be true is if the creditor is fully collateralized (collateral is worth the amount owed or more); therefore, any pyts made to the creditor will not impact final result. i. Creditors want to be as collateralized as possible. Hypo 1: basic preferential transfer. - 3/1 a bank makes $1k unsecured loan to debtor - 10/1 debtor pays back $900 [not in the ordinary course] - 10/15 debtor files for bankruptcy protection Does this satisfy all the reqs of preferential transfer? 1. The debtor transfers prop out of the estate a. Yes, pay $900 2. To a creditor/claimant a. Yes, pay to bank 3. For a debt incurred before the transfer a. Yes, debt on 3/1 4. While it was insolvent (presumed for 90 days before filing) a. Presume insolvency 5. W/n 90 days of filing, and a. Yes, paid on 10/1 bankrupt on 10/15 6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. How much would this creditor have gotten in bankruptcy cents on the dollar. b. Creditor received it all here Hypo 2: Debtor transfers a SI to a creditor - 2/1 a bank makes a $5k loan to the debtor - 2/6 the parties enter into a SA, but the bank doesnt file a FS = doesnt perfect its SI - 2/7 the SI attaches when the debtor gets rights in the collateral - 2/12 the debtor files for bankruptcy protection 1. The debtor transfers prop a. SI transfer complete on 2/7 when debtor received rights in collateral 2. To a creditor/claimant a. Made to the bank 3. For a debt incurred before the transfer a. Yes, debt was $5k and incurred on 2/1. Transfer not until 2/7 4. While it was insolvent (presumed for 90 days before filing) a. Presume the debtor was insolvent 5. W/n 90 days of filing, and a. Transfer made on 2/7 and bankrupt on 2/12 90

6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. Creditor received more than would have under normal bankruptcy situation. BUT i. In bankruptcy the creditor would have gotten strong armed into being general creditor. b. IN THIS SITUATION, HAVE UNPERFECTED CREDITOR, AND WHENEVER YOU HAVE UNPERFECTED CREDITOR, YOULL NEVER GET TO PREFENETIAL TRANSFER Qs BC THE STRONG ARM STATUTE WILL APPLY! i. Always start by asking if the strong arm statute would apply. Hypo 3: - 2/1 bank makes a loan and perfects its SI - 2/10 debtor files for bankruptcy Can the trustee avoid this under the strong arm statute? - No, bc perfected SP. Is it a preferential transfer? 1. The debtor transfers prop a. Yes, SI on 2/1 2. To a creditor/claimant a. To the bank 3. For a debt incurred before the transfer a. Debt and transfer on the same day, so no. The loan was the same day that SI went out, so it is not an avoidable preference bc it all happened on the same day. The collateral was equal to the amount of the loan so it does not affect the amount of $ in the estate. b. On the exam, you may want to finishing going through preferential transfer elements but here there is no voidable preference bc everything happened on the same day, i.e., same day that the transfer went out of the circle a loan went back into the circle. Hypo 4: - 2/1 (Friday) bank makes a $50k loan to the debtor o [Gap 1- b/t loan and attachment/perfection] - 2/4 (Monday) the banks SI attaches and is perfected - 2/12 the debtor files for bankruptcy Can the trustee avoid this under the strong arm statute? - No, bc perfected SP. Preferential transfer? 1. The debtor transfers prop a. Transfer of prop transfer of a SI on Monday 2. To a creditor/claimant a. Yes to the bank 3. For a debt incurred before the transfer a. Debt on 2/1, transfer on 2/4 b. But, what if party intended for everything to happen on Friday but didnt finalize paperwork until late Friday after everything was closed. Is that fair? 91

i. 547(c)(1) Substantially Contemporaneous Doctrine (weekend exception): closes gap 1 from when the loan was made and the prop transfer was made 1. Only applies if: 2. (1) the parties intend for the loan and the SI to be exchanged at the same time 3. (2) the debt was created and SI was transferred, in fact, substantially and contemporaneously. c. Here well assume that no intent for same day exchange 4. While it was insolvent (presumed for 90 days before filing) a. Presume insolvency 5. W/n 90 days of filing, and a. Transfer on 2/4, bankrupt on 2/12 = less than 90 days 6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. Loan made on Friday, transfer & perfection on Monday all w/n 90 days of bankruptcy = yes they would get more bc perfected Hypo 5: - 1/5 bank makes a loan and SI attaches o [Gap 2b/t attachment and perfection] - 5/5 bank perfects SI - 5/7 debtor files for bankruptcy Can the trustee avoid this under the strong arm statute? - No, bc perfected SP. Preferential Transfer? 1. The debtor transfers prop a. Transfer on 5/5 2. To a creditor/claimant a. Transfer to bank 3. For a debt incurred before the transfer a. Debt on 1/5, transfer on 5/5 4. While it was insolvent (presumed for 90 days before filing) a. Presume insolvent 5. W/n 90 days of filing, and a. No, more than 90 days b. Normally this is not a preferential transfer, but here, there is no evidence of the loan in the public records and concerned that debtor and creditor are working together fraudulently. Debtor says they need $ bc in trouble and if they file bankruptcy they will let the bank know so they can file and become perfected. Dont want the debtor to have ability to defraud other creditors. i. GR: 547(e)(2) transfer is when the creditor perfects, unless perfection is w/n 30 days of attachment, then the transfer date moves to the date of attachment; therefore, if perfection is more than 30 days from attachment = transfer is the date of perfection 1. Which would make this a preferential transfer bc the date of transfer is shifted to 5/5 creating a preferential transfer, creating pre-existing debt and allows the trustee to avoid the transfer. c. Date of transfer is very important! 92

6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. Yes Two diff gaps: 1. B/t when transfer is made and when debt is incurred 2. B/t when transfer is made and perfection occurs (i.e., b/t attachment and perfection) Hypo 6: - 8/1 bank makes a loan and its SI attaches - 8/22 bank perfects SI - 8/24 debtor files for bankruptcy Gap 1? - B/t when transfer is made and when the debt is incurred? o Both happened on 8/1 Gap 2? - B/t transfer and perfection? o No, it was w/n 30 days so date of transfer is 8/1. Hypo 7: 3/5 (Friday) bank makes a loan 3/8 (Monday) SI attaches 5/28 bank perfects SI 6/30 debtor files bankruptcy

Have both gaps here! Can we close gap 1 from when debt was incurred and prop was transferred? - Yes, argue weekend transfersubstantially contemporaneous doctrine should be able to close the gap eliminating pre-existing debt. Then bank waited over 2 months to perfect. - So move date of transfer to May 28 and re-creates the pre-existing debt. While substantially contemporaneous can close gap 1, bc the bank waited 30 days to perfect, it opens gap 2 and trustee can avoid it. Hypo 8: - 8/1 bank makes loan, SI attaches but does not perfect - 8/6 debtor files for bankruptcy Who has priority? - Strong arm statute applies unperfected creditor so the trustee can turn them into a general creditor. Hypo 9: - 2/1 bank makes $3k loan that it secures w/ $6k collateral and then it perfects its SI. - 3/1 debtor makes unscheduled $1k pyt [not in ordinary course] - 4/1 debtor files for bankruptcy 93

Does strong arm statute apply? - No bc perfected SI Preferential Transfer? 1. The debtor transfers prop a. SI - yes b. Pyt yes 2. To a creditor/claimant a. SI yes b. Pyt - yes 3. For a debt incurred before the transfer a. SI no (but keep going w/ the reqs) b. Pyt yes 4. While it was insolvent (presumed for 90 days before filing) 5. W/n 90 days of filing, and a. SI yes b. Pyt yes 6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. SI no b. Pyt no i. (1) w/o transfer creditor would get 3k bc he is a secured creditor and fully collateralized ii. (2) w/ transfer creditor would get 2k (what debtor owes after the 3k) Fully (over) collateralized here: when trustee sells collateral get $6k, and gives creditor $2k. Bank will get $3k total, since the bank already received $1k on 3/1, the trustee will give them $2k more. Black Letter Rule #1: if perfected secured creditor is fully collateralized, a pyt on the debt made w/n 90 days before the date of bankruptcy will not be preferential = it will not make it better off.

Debtor is making 2 transfers: 1. 1st giving SI which is contemporaneous w/ the loan 2. 2nd when makes $1k pyt---could be contemporaneous. If we switch around collateral and loan number, $6k loan and $3k in collateral, then it is preferential transfer bc then the creditor is undercollateralized. Black Letter Rule #2: if perfected secured creditor is undercollateralized (if the collateral has less value then the amount of debt), pyts w/n 90 days make it better off and the transfer (pyt) is preferential

547(c)(2) exception to 547(b) requirement: creditor can receive conventional debt pyts and they are not preferential, even if made w/n last 90 days. If pyt is in ordinary course of biz (in terms of parties agreement) OR if you make pyt consistent w/n industry practice, then it is not preferential. - This is debt you incur in ordinary course of biz, e.g., every month you make a rent pyt - If you own your biz and need to get truck fixed, it is not preferential to make the pyt to get the truck repaired. 94

Ex. that doesnt meet reqs debt to bank, 1k pyt supposed to be made on 1st of every month, debtor makes 4 payments, bank gets scared about debtors finances and makes debtor pay 8k, so that is a pyt not in ordinary course of biz = 1k creditor keeps and 7k is returned

Gap 1 eliminates preferential transfers: saying the parties wanted to do it at the same time and basically did it at the same time Gap 2 creates preferential transfers: if the creditor waits 30 days before perfection then move the date of transfer to the date of perfection Problem 109 pg. 242-43: On 6/8, Biz Corp borrowed $80k from ONB and gave the bank a SI in its equip (worth $100k). On 7/18, ONB filed a valid FS in the proper place. The next day, 7/19, Biz Corp filed its bankruptcy petition. Can the trustee destroy ONB's secured position and turn it into a general creditor under the theory that the delayed perfection is a preference? Yes, bc of Gap 2---shift date of transfer to date of perfectiondate of perfection is 7/18. Bank waited more than 30 days to perfect SI, so the date of transfer will be moved to date of perfection. Could try & argue that substantially contemporaneous: it is over collateralized! Obviously we intended to perfect on the same day. Not going to get $100k of collateral for $80k debt, want to make sure that immediately perfect. In the scheme of the T 30 days was not a lot of time. If ONB had perfected on 6/8 but the debtor made some extraordinary pyts to ONB in the 90-day period before the filing of the petition, could the trustee use 547 to make ONB pay that $ back into the estate? Does strong arm statute apply? - No bc perfected SI Preferential transfer? 1. The debtor transfers prop a. Yes, SI 2. To a creditor/claimant a. Yes to bank 3. For a debt incurred before the transfer a. Yes 4. While it was insolvent (presumed for 90 days before filing) a. Presume insolvent 5. W/n 90 days of filing, and a. Yes 6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. No Black Letter Rule # 1 over collateralized so it cant be preferential. b. We want all creditors on date of bankruptcy to be in same position as they were in 90 days before bankruptcy. If over-collateralized, they will be, if-under collateralized then they wont be. Changing facts of the problem: If collateral only worth $60k instead of $100k youd have a diff story. Or if paid in ordinary course, then diff story, pyts on long term debt are in ordinary course and cannot be preferential (SC case cited in problem). 95

Problem 110 pg. 243: On 11/1 the Piggy Natl Bank loaned Kermit $1k to buy a banjo he wanted for his nightclub act, making him sign a SA and a FS. He bought the banjo on 11/15, and the bank filed the FS in the proper place on 11/20. Kermit filed his bankruptcy petition the next day. Is the transfer of the SI in his banjo a preference? See 547(c)(3). - 11/1 Piggy Natl Bank loaned Kermit $1k to buy banjo - 11/15 Kermit bought banjo - 12/5 Piggy filed FS - 12/6 Kermit filed bankruptcy Piggys SI attaches on 15th---need rights, value, and agreement. Does strong arm statute apply? - No bc perfected SI Preferential transfer? 1. The debtor transfers prop a. Transfer on 11/15 2. To a creditor/claimant a. Yes, to a bank 3. For a debt incurred before the transfer a. Debt incurred on 11/1 4. While it was insolvent (presumed for 90 days before filing) a. Assume insolvency 5. W/n 90 days of filing, and a. Yes 6. The creditor received more than going through bankruptcy having received the transfer than it wouldve received in bankruptcy w/o the transfer a. W/o SI creditor will get pennies on the dollar b. W/ SI creditor will get all 1k Preferential transfer in this case, BUT PMSI exception: - 547(c)(3) trustee cannot void transfer that creates SI in prop that Kermit acquires o (A) to the extent that SI gives new value 1) the bank has a SA describing collateral, 2) enable Kermit to acquire collateral, and 3) Kermit did acquire the collateral; and o (B) the bank perfected in 30 days - 547(c)(3) asks if it is PMSI and perfected w/n 30 days of the date debtor receives possession of the collateral, PM creditor beats LC (trustee) o So even the bankruptcy code favors PMSI lenders Problem 111 pg 243: In early 2013 John Carter borrowed $1k from the Barsoom World Bank; it was a signature loan (i.e., no collateral). On Sept 25, 2013, John made a $500 pyt to the bank (assume that this pyt is not in the ordinary course), but on Oct 4 he borrowed $300 more from the bank, giving it a SI in his sword collection. The bank never filed a FS, and John filed a bankruptcy petition on Nov 8, 2013. How much, if anything, can his bankruptcy trustee recover from the bank? See 544(a)(2), 547(c)(4). 96

Normally $500 pyt would be a preference under the 6 reqs, BUT . . . 547(c)(4) exception Net Result Rule: transfer cant be avoided as a preference if 3 reqs are met: 1. Transfer made to creditor 2. To the extent the creditor gave new value to debtor after the transfer 3. Debtor did not give creditor anything (solid SI or anything else of value) in return for new value Here Carter borrowed $1k, made pyt, after pyt Carter borrowed $300 more (he received new value w/n 90 day period). Did Carter give new value for $300 loan? He gave SI in sword collection, but it was unperfected, so it would be voided by strong arm statute. - Net Effect on Estate: estate is depleted by only $200 so trustee can only void $200 of the $500 loan repyt, we are giving credit for the $300 that came back into the estate. He made $500 preferential pyt that would otherwise be voidable by the trustee, but bc the party from who the trustee can collect the $ from already returned $300, it will be a credit. Idea is that the net result would be the same. - Net result is the same on 90th day before bankruptcy, Carter owed $1k to bank, then paid $500 (preferential pyt) then borrowed $300 more so now owes $800. Want him in same position on the day of bankruptcy as he was in on 90th day. On 90th day he owes $1k. On date of bankruptcy give the trustee the same ability to return to the same position, he owes $1k so only make the bank return $200. - Trick to remember: anytime you find a preferential transfer (meets all 6 reqs), later (w/n the 90 days) that same creditor gives debtor more value think about 547(c)(4)! 3. FLOATING LIENS: NOT TESTED ON 547(c)(5)!! - Almost all SAs have after-acquired clauses, if you get a loan from the bank it is standard form language in the agreements that you sign. - Bankruptcy has to give special treatment, otherwise there would never be financing for inventory. Hypo: Feb 2001: loan, SA w/ after-acquired prop clause, and filing June 2001: debtor acquires new inventory July 2001: debtor files bankruptcy W/o any special rule, trustee has to go through each inventory shipment and test each one. It is not possible to do this. Each time you get inventory shipment, debtor is transferring prop bc SI goes out SA automatically attaches when they get new inventory. These transfers in the last 90 days, the new shipments of inventory received, are all preferential transfers. All transfers w/n last 90 days and all fail preferential transfer Congress added special provision 547(c)(5): bottom line is that a trustee cant void a transfer resulting from after-acquired prop clause if these reqs are met: o Exception applies only when collateral consists of inventory, or accounts, or proceeds of either; sometimes see equipment o Want each creditor to be in same position on bankruptcy that they were in 90 days before bankruptcy; under 547(c)(5) trustee should check the position of each creditor w/ afteracquired clause at 2 pts in time; 90th day before bankruptcy and the date of bankruptcy bc worried about some under-collateralized creditor will pressure debtor to increase the inventory or accounts receivable outside the ordinary course. o It says that if on the 90th day before filing bankruptcy, the creditor was in certain position that was better than position in on bankruptcy, then this is ok, bc did not get any gain to all after acquired prop. But if they are in better position on date of bankruptcy (under- collateralization 97

on date of bankruptcy than on 90th day) then bankruptcy can void those transfers. Trustee looks at the debt collateral ratio on the 90th day before and on date of bankruptcy o Ex.: 90th of before bankruptcy $100 debt $200 collateral on date of bankruptcy $100 debt $300 in collateral Here creditor is fully collateralized. They are the same. Creditor will get in bankruptcy $100. Fully collateralized on both pts in time. If bankruptcy occurred on the 90th day, they would have gotten $100.

Diff hypo 90th day: $200 debt, $100 collateral Bankruptcy day: $200 debt, $175 worth of collateral Is creditor in better or worse position? Better position bc how much is creditor going to get if bankruptcy occurred on 90th day? $110. If on date of bankruptcy they would end up w/ 177.50 + 25% as general creditor. Better off in 2nd situation bc they have more collateral. Rule is worried about under-collateralized parties. Black Letter Rule #3: If there is full collateralization on 90th day (if the debt is equal to or less than collateral) then trustee cannot void transfer of the SI during those 90 days which results in equitable of collateral. I.e., if you have enough collateral to satisfy debt before 90th day then the trustee cannot void anything bc you cant get anything better than fully collateralized. Problem 112 pg. 245: LNB had a perfected SI in the inventory of Epstein Bookstore, which owed the bank $20k. On March 1, the inventory was worth $8k. On May 28, when Epstein filed for bankruptcy, the inventory was worth $20k bc the store had purchased several new shipments for cash in the interim. What can the trustee do about the banks claim? In last 90 days, value of inventory went way up. As trustee, we want to put creditor in same position as creditor was in 90 days before. May 28, fully collateralized and in a better position, preferential buildup of $12k in the last 90 days. Trustee can avoid banks interest w/ respect to the buildup. Bank has gained $12k over 90 day period. Trustee can distribute only $8k to the bank and other $12k will be treated as general creditor. So if instead at 90 days $12k---preferential buildup is $8k, so bank will get the $12k and lose the $8k as general creditor. 4. FRAUDULENT TRANSFERS: 98

548 of Bankruptcy Code lists conveyances that the code considers fraudulent and trustee can avoid any of the transfer made w/n 1 yr before date of bankruptcy. 2 most common types: - (1) transfers that the debtor makes w/ actual intent to defraud creditors o Hard to prove bc have to show actual intent - (2) presumed fraudulent transferstrustee must show: o (a) lack of reasonable consideration o (b) debtor made transfer while it was insolvent or transfer made debtor insolvent Trustee has to prove insolvency o Presume bad intent here, trustee doesnt have to show bad intent, just has to show that the transfer actually took place: Ex.: during the last yr you sold this painting for $5k while you were insolvent and the painting is actually worth $5M. - These 2 are factual inquiries and trustee initiates the action Most states have adopted Uniform Fraudulent Transfer Act (UFTA) and the trustee can use this to supplement bankruptcy code the effect of this is that it extends SoL from 1 yr to 4 yrs. Problem 113 pg. 253: When Arnold Austin retired as an international diplomat, he was famous but much in debt. He decided to make $ by writing his memoirs, which were certainly best-seller material. He gave a SI in the right to receive royalty pyts from his publisher to his wife as collateral for the many debts I owe her, and she filed a FS in the proper place 5 months before Arnold filed his bankruptcy petition. Can the trustee avoid this SI? - At CL, one of the badges of fraud---situations in which fraud is presumed---was a voluntary transfer made by the debtor to a family member. Can the trustee avoid the SI? Look to 548: is this a presumed fraudulent transfer? He was insolvent when made it, was it w/ lack of consideration? How much effort she made might be considered consideration? Could also attack it as preferential transfer if there were actual debts owed Could look to 544(b) and see if any state conveyance statutes help you This problem is just trying to get us to look at fraudulent transfers. 5. Nonconsensual lien: 2 types 1. Judicial Liens: a. Safe, exempt from strong arm statue b. Subject to preferential transfer act i. If can show that judicial lien occurred w/n 90 days prior to bankruptcy, then it will be preferential transfer and trustee can avoid it. c. Ex. judgment on 5/1; LC on 6/1; 6/3 DOB i. Preferential transfer reqs are met so 6/1 LC is struck down 2. Statutory Liens: a. 547(c)(6) exempts statutory liens b. STATUTORY LIEN IS NOT SUBJECT TO PREFERENTIAL TRANSFER bc it would discourage repairs c. All that is required is that: i. Under state law liens are good against bona fide purchaser 99

ii. Not the type of lien that arises only when debtor is insolvent 3. 547(c)(7) alimony and support pyts w/n the 90 days will not be subject to being avoided 4. 547(c)(8) consumer transfers under $600 w/n the 90 day period are not subject to being avoided bc not worth the trustees time/hassle 5. 547(c)(9) same as (c)(8) but for businesses and the amount is $5k instead of $600

VII. PROCEEDS
Proceeds 9-102(64): GR in (a) if the debtor distributes, disposes of collateral, anything the debtor gets in return for collateral is a proceed (if takes proceed and dispenses w/ it, then that is a proceed) - If put up piece of machinery for sale, $ you receive is proceeds. - (b)-(e) address particular types of proceeds. o If collateral is damaged and debtor gets insurance pyt, then the pyt is a proceed. 9-315 governs proceeds: (a)(1) deals w/ collateral (a)(2) deals w/ proceeds (SI attaches to any identifiable proceeds of the collateral) Proceeds are whatever replaces the economic value of the collateral 2 types of proceeds o Cash proceeds: $, checks, deposit accounts, etc. Cash proceeds is a term of art not a classification of collateral. o Non-cash proceeds: proceeds that are not cash proceeds

If you are a SP, you want to know if debtor sells your collateral for cash, or trades for furniture, do you have a right in the proceeds? 1. Does a SI attach in proceeds? a. If no SI attaches, no right to the proceeds as a secured creditor, but still have a general creditor right to proceeds b. If attaches then secured creditor 2. If yes, is the SI perfected? a. If it is perfected then perfected secured creditor 3. How does it impact your priority? Does the SP have right in proceeds? Go to: 203(f) proceeds and supporting obligations: o 9-315(a) SI continues notwithstanding 9-315(a)(2) SI attaches to any identifiable proceeds of collateral States that SI automatically attaches even if the SI goes out of the collateral o I.e., if buyer in ordinary course buys something, your SI is gone in the collateral but still have SI in the proceeds. Hypo 1: Creditor 1 has perfected SI in inventory Creditor 2 perfected SI in accounts receivable o Debtor sells inventory on credit 100

o The sale generates accounts receivable Creditor 1 claims an interest in account receivable as proceeds of inventory Creditor 2 claims interest in the accounts as accounts

How do we classify creditors? Does first creditors perfection continue in proceeds? Perfecting SI in proceeds 9-315(c) automatic perfection in proceeds if you have perfected SI in the collateral 9-315(d) automatically perfected but only lasts 20 days unless you satisfy one of these: o (1) same filing office rule (A) Filed FS covering original collateral (B) SI in proceeds can be perfected by filing FS in same office (C) Didnt receive cash proceeds for the collateral o (2) identifiable cash proceeds rule Ex.: Cash, checks, deposit accounts Arises when receives cash or check for inventory problem is it is hard to track, so can require distinct account. Have a special bank account just for those proceeds. o (3) cash phase rule SI in proceeds is perfected other than under sub (c) when SI attaches to proceeds or w/n 20 days thereafter Basically if original FS covers it and it was obtained by identifiable cash proceeds. If original FS doesnt cover it, then have to file another FS w/n 20 days Difference b/t (d)(1) same filing office rule and (d)(3) cash phase rule: - (d)(1) original FS doesnt have to cover same collateral. - Under (d)(3) it is only continuous perfection if the description in FS would cover the old and new collateral. Depends on how broad the scope of original FS is. Problem 114 pg. 261: When Rosetta Stone bought a new car from Champollion Motors, Inc., she traded in her five-year-old car, made a $200 down pyt by giving the dealer her check, and signed a promissory note for the balance payable to the dealership. Rameses National Bank had a perfected SI in Champollion Motors' inventory. a) Does that SI continue in the car once it is delivered to Ms. Stone? See 9-320(a). a. NO, she is the buyer in the ordinary course (9-320(a)). She buys the car free of the SI---can probably rely on 9-315(a)(1) as long as the SP authorized the dispoas a GR, car dealer financers authorize them to sell cars free of SI b) Under 9-315(a) the bank's SI will continue in proceeds, as defined in sub (1). What are the proceeds of the car sale? a. Proceeds: old car (trade-in), promissory note, and $200. c) Is the attachment of the creditor's SI in the proceeds automatic, or must they be claimed in the original SA? See 9-203(f). a. 9-203(f) says that attachment of SI in collateral gives to the SP rights to the proceeds in 9-315. b. 2 step process i. Attachment is automatic under 9-203(f) 1. But only relates to proceeds that are identifiable 9-315 101

c. Here SI automatically attaches in all 3 of those. i. As long as attachment to original collateral is identifiable, attachment is automatic. What about perfection? 9-315(c) deals w/ initial perfection in proceedssecured creditor in good shape if properly perfected in original collateral then that perfection is automatic in proceeds. 9-315(d) says that automatic perfection will only continue for 20 days and will not go any longer unless you meet (1), (2), or (3) First consider traded-in car: to continue perfection under 9-315(d) perfected SI in proceeds will be unperfected in 20 days unless 9-315(d)(1) the following conditions are satisfied o (A) filed FS covers the original collateral o (B) proceeds are collateral in which SI MAY be perfected by filing in office in which FS has been filed 2 parts: (1) proceeds are collateral may perfected proceed is type of collateral where if you were to perfect you would do so by filing FS (2) filing would be in the same office where the original filing for the collateral was made. o (C) proceeds not acquired w/ cash proceeds. Debtor sells the collateral and gets cash and uses the cash to get something else. Car is inventory so no cert of title is needed, which means you need to file. In this instance, this is met bc traded-in car was not acquired for cash, it was acquired for the new car. Bc (1)(a), (b), (c), are met, the banks perfection is continued beyond 20 days.

$200 check (down pyt) this is a negotiable instrument, so you can file or possess. 9-315(d)(1) o (a) met bc original file o (b) could file in same office o (c) instrument not for cash proceeds acquired for original collateral 9-315(d)(2) the proceeds are identifiable cash proceeds o 9-102(a)(5) cash proceeds are either cash or substitutes for cash A check is substitute for cash---so can go to (d)(2) here bc check is identifiable cash proceed Promissory note instrument so (d)(1) will be met here. (d)(2) doesnt work for promissory note, it is not cash proceed, just promise to pay. 9-315(d)(3) default provisions---says that if your perfection is not continued under 1 or 2 then you have to take necessary action to continue your perfection beyond those 20 days. Farmers Cooperative Elevator Co. v. Union State Bank pg 262

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Farmer grants SI in livestock and supplies. Bank has perfected SI in these. Farmer buys feed from Co-op who wants collateral, so farmer grants SI in feed and hogs. Default by farmer and both bank and Co-Op go after feed and hogs. CO-OP: says PMSI 9-324(a)as long as file w/n 20 days of turning feed over to farmer they can get around the race rule. - Does this argument apply to hogs? o No, Co-op did not sell him the hogs, so this is a regular SI. So bank would beat Co-op under race rule here o So Co-op says that proceeds from the feed ingested by the hogs, so the hogs are proceeds bc the feed fattens the hogs Court rejects the argument on all 4 hooves. How could Co-Op structure the T so they would be protected? - Get a subordination agreement from the bank, but this is unlikely unless Co-op says that if you dont sign subordination then we will not sell the feed and then hogs get skinny and wouldnt sell for much - Ask farmer to put up a diff type of collateral Problem 115 pg 265 ONB makes a loan to Dairy, secured by Dairys equip. The equip is then sold to Cheeseworks, who later sells the equip to Buttercups. Is the $ that Cheeseworks receives as proceeds of the sale subject to ONBs SI? Yes bc the cited case states whatever is acquired is still proceeds see 535 F3d 779 Brenda P. Helms v Certified Packaging Corp: pg 265 GR: replacing a biz loss is not restoring the value of damage collateral GR: the claim of a secured creditor to the proceeds of collateral cannot exceed the value of the collateral Problem 116 pg. 267-68: Farmers' Friend Credit Assn loaned Farmer Bean $ secured by his crops. In 2011 the fed govt paid Farmer Bean not to grow any crops that year. Is the govt pyt the "proceeds" of the crop? - Most courts stated that bc the pyt is basically a substitution of the collateral it could be deemed a proceed of the collateral---it is taking the place of the collateral (see cited case) Problem 117 pg. 268 analyzed like exam The Aquarius Auto Audio Shop (AAAS) sold and installed stereo systems in cars. Its inventory was financed by the Canis Major Bank and Trust Co., which had a perfected SI in present and after-acquired inventory. When Aquarius sold the systems, it sometimes was paid cash, sometimes extended credit w/o signed Ks, and sometimes made credit customers sign Ks promising pyt and granting AAAS a SI in the systems. When Aquarius needed further financing, it took a later loan from the Cassiopeia Finance Co., granting the lender a SI in its accounts receivable and its chattel paper. Cassiopeia knew all about the prior loan and inventory SI of the Canis Major Bank at the time it filed its FS in the proper place. Aquarius defaulted on both loans, and both secured parties claimed the accounts and chattel paper (only Canis Major claimed the inventory). Canis Major's theory was that the accounts and chattel paper were proceeds of the inventory. The chattel paper was in Cassiopeia's possession; it had not yet collected any of the accounts receivable. Who should prevail? See 9315, 9-330(a), 9-322(a) and (b). This is priority battle: 103

Bank has SI in inventory and an after acquired clause Finance co. has SI in accounts receivable and AAAS PMSI in loan Ks and SAswhich is chattel paper (monetary obligation and SA) finance co. has SI in chattel paper perfected by possession and in accounts receivable.

Classify the parties: - Bank: SI in inventory and SI attaches in proceeds from inventory. o 9-102(a)(64) definition of proceedsexplain what a proceed is and explain that accounts and chattel paper were proceeds from the inventory o Attachment of proceeds: 9-203 says you need a SA to have attachment, and bank did nothing to describe proceeds in SA. 9-315(a) says SI attaches to any identifiable proceeds of collateral and 9-203(f) says attachment in proceeds is automatic under 9-315, which adds that proceeds have to be identifiable o Perfection: 9-315(c) auto perfection as long as properly perfected in original collateral assume that bank was, so it was automatically perfected in proceeds. 9-315(d) puts 20 day period on auto perfection to remain perfected over 20 days you must meet either (d)(1), (2), or (3) Chattel paper: (d)(1)(A) filed FS covers original collateralyes (d)(1)(B) must decide if the proceed is a type that may be perfected by filing-chattel paper can perfect by either filing or possession. Also, can you file in the same place as the original filing of the inventory 9-501 says yes, file both in one central office---so this is met (d)(1)(C) the proceeds are not acquired by cash proceeds, yes, the chattel paper was acquired from inventory, not for cash. Accounts: (d)(1) is also met so the banks perfection in the accounts is continuous beyond the 20 day period. - Classify the Finance co. o Chattel paper ---file or possess to be perfected---they possess o Accountsfiling so perfected Now Priority battle: 9-322 first to file rule: for proceeds 9-322(b)(1) if the bank properly perfected in the proceeds, then that perfection will relate back to the perfection in the inventory. But 9-330---finance co. qualifies as a purchaser activating 9-330 - They would have priority over SI in chattel paper, if the chattel paper is claimed by the bank merely as proceeds of inventory subject to SI. So this is met. - Purchase has to be in good faith---they had knowledge of the banks SI - Purchase in the ordinary course of their own biz saying that normally purchase this type of thing in your biz, and finance companies often take SI in chattel paper. - Purchaser has to give new value---gave loan $ - Take possession of chattel paper---they took possession - Chattel paper must not indicate that it has already been assigned to someone else o If all are met then finance co. would be protected. o Was it in good faith---finance co.s knowledge is irrelevant and has nothing to do whether they knew of SI. 104

9-320(a) buyer in ordinary course could still take free of SI even if they knew about SI so we encourage buying---that is the same idea here bc want to encourage purchase of chattel paper.

To qualify under 9-330 finance co. has to show that chattel paper is merely proceeds of the inventory. 9-330 says must take possession of the chattel paper. How can bank protect itself in chattel paper: Bank could take possession of the chattel paper & the finance co. could never be perfected bc couldnt have possession. Or the bank could stamp the chattel paper so then under 9-330(a)(2) finance co. will see the stamp that proceeds have been assigned to them. Bank could also in original SA list inventory and accounts now own and later acquired---making it original collateral and not just proceeds. 9-330 only protects purchasers of chattel paper & instruments. Does not protect accounts!

A. Tracing
9-315(b)(2): if the proceeds are not goods, to the extent that the SP identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article with respect to commingled prop of the type involved. 9-315(a)(2) makes it clear that if you want SI to cover proceeds, they have to be identifiable. - If the debtor sells the collateral, gets cash, and the cash is deposited into bank account, are the proceeds identifiable? o No, not usually o But tracing: a victim of fraud can go after and recover prop so CL developed tracing fictions to help the victim trace to his prop. A9 allows you to use tracing principles in trying to trace to the proceeds. - Cash proceeds that are commingled w/ other cash remain identifiable even in reality they are not: o Tracing fiction: fn 1 in HCC credit case if the creditor can prove that cash proceeds were wrongfully taken and can identify the particular commingled fund that they went into, then the proceeds are still considered to be identifiable so you have to prove a trail. - What happens when debtor withdraws $ and spends it, deposits, withdraws, etc. o Lowest Intermediate Balance (LIB) Rule (another tracing rule): as long as the account balance does not drop below the amount of proceeds put into the account (deposited), then we consider that all of the proceeds are w/n that balance; tracing fiction is the debtor spends his own $ first. 1/1 debtor has $1k in bank account. 1/02 put $11k in proceeds making it equal $12k 1/02 $2k deposit now equal $14k 1/04 withdraw $2k so total is $12k Priority battle 11k proceeds are still in the commingled account 1/05 withdraw $10k and $2k is left 1/06 $6k deposit leaving $8k Now priority battle 105

Here just $2k---second part of the rule, once the balance in account drops below the amount of proceeds, the SI drops w/ balance and is not increased by later deposits. o So here, that would be $2k LIB. Once the account dropped below the amount of proceeds, the SI drops to that level too. 1/07 debtor withdraws $7,999 leaving $1 SI in the $1 1/08 debtor deposits $5M leaving balance of $5M and 1 dollars so LIB is $1 The reason for this, is creditor is supposed to police the proceeds and not allow the debtor to commingle them, so UCC will help the creditor but only LIB when commingling. Creditor gets the $2k, but for the other $9k you are owed you have to do what all the other general creditors have to do and go to court and get a judgment lien. LIB doesnt mean that creditor wont get what he is still owed, it just means that he has to jump through the hoops like any other unpaid creditor, and this is their punishment for allowing the proceeds to be commingled. It is very difficult to trace and burden of proof sometimes dictates who wins, so courts says that secured creditor has the burden to prove that his proceeds were wrongfully taken and to identify the account that proceeds put in. If secured creditor can do this much, then give creditor that benefit of presumption that LIB is what is currently in the account and burden of proof shifts to the debtor to prove there was a LIB

How can creditors ensure that debtors will not commingle cash proceeds: - Set up separate bank deposit account for cash proceeds only & then cash proceeds are never commingled - Debtor puts the funds in a safe/strong box and creditor comes and picks it up a couple times a wk Problem 118 pg 268: Shadrach Heating and Air Conditioning, Inc., borrowed $15k from the Meshach Merchants Financing Assn (MMFA) in order to purchase a new furnace for its own home office. When one of its important clients needed an identical furnace in a hurry, Shadrach Heating sold it its own new furnace, which it installed in the client's place of biz. The $17k check it received in pyt was put into Shadrach's checking account (balance prior to this deposit: $81.00 w/ the Abednego State Bank. Thereafter, Shadrach made one further deposit of $5k, followed a week later by a withdrawal of $5,040. 1. (a) Are proceeds from the furnace sale still in the bank accounts? Bank probably did not authorize the sale, so the SI would continue in collateral and buyer would need protection in 9-320 buyer probably qualifies as buyer in ordinary course bc did buy from someone who sold furnaces and in the ordinary course for the buyer. Problem is that the $ was commingled. - $81 in account - $17k in proceeds leaving $17081 - $5k deposit leaving $22081 - Withdraw $5040 leaving $17041 How much would creditor get out of account? - LIB: once the balance in the account drops below the amount of proceeds deposited, the SI drops w/ the balance and does not increase w/ subsequent deposits. o At no time did the balance drop below the amount of proceeds so the creditor will get all of his proceeds (17k) bc the balance did not drop below the amount of proceeds 106

If the debtor tries to argue that he withdrew from the proceeds, then go to the rule that debtor spends his own $ first

2. (b) If Shadrach Heating defaults on its loan repyt to MMFA and also on an unsecured promissory note currently held by the Abednego State Bank, can the bank exercise its CL right of setoff and pay itself out of the checking account, or is its setoff right junior to MMFA's SI in the proceeds? See 9-340. a. CL Set-Off Rule: if you owe bank $ and dont pay them back when it is due, they can go to your account and take $ from it b. What if bank wants to set-off the account but the secured creditor has perfected SI in the proceeds in that same account? i. 9-340(a) bank can set-off the account to the prejudice of the secured creditor bc at the point of set-off bank might not know about secured proceeds. ii. HCC case which we did not read, problem: debtor who takes proceeds and debtor is a factory and grants bank SI in all of equip and bank perfects. W/o permission of the bank, factory sells equip and gets cash proceeds. So identifiable cash proceeds that creditor can go for. But instead of putting in bank debtor pays off a supplier who uses the $ to pay off manufacturer who goes to bar. If the bank can trace the $ can they take it from the bar? a. 9-332(a) says a transferee of $ (supplier or Kellys) takes $ free of SI unless transferee acts in collusion w/ debtor. Absent fraud the transfer of $ of proceeds cuts off SA. Otherwise many Ts would have to be undone, disrupting the economy. Comment 3 we place high value on finality of cash Ts, bc to not do so means they would all have to be undone. Problem 121 pg. 279 On 8/2, when the filed FS in favor of LNB covered all biz machines, the debtor engaged in the Ts listed below. Decide for each T if the bank should take action before 8/22 or if the FS is sufficient as filed: a. Trade comp for comp LNB is ok under 9-315(d)(1) b. Trade comp for a painting to be hung in the office bank is ok under 9-315(d)(1) c. Trade duplicating machine for a used car (State law requires notation on cert of title) Bank must take action under 9-315(d)(3) bc (d)(1)(B) & (2) are not met = you have to put interest on cert of title before 20 days are up d. Debtor sold a calculator to a friend for cash and used the cash to buy a painting that same day proceeds are identifiable but bank will have to take action before 8/22 bc 9-315(d)(1)(C) and (d)(2) are not met, so under (d)(3) you would have to file on the painting, i.e., amend FS to include painting a. What if SA said all equipment and painting was going to be hung in office = it is equipment i. (d)(1) & (2) wouldnt work = under (d)(3) you will be good bc the all equipment will save you e. Debtor sold an adding machine for $500 and put the cash in a bank account at a diff bank; on 8/2, that bank exercised its right of set-off against the account bank would have to take action in the form of getting a SI in and taking control of the deposit account see 9-340 f. Debtor sold coffee maker for $200 and gave the $ to salvation army volunteer that same day bank would have to take action but it still wouldnt help see 9-332(a) transferee of $ takes the $ free of a SI unless the transferee acts in collusion w/ the debtor in violating the rights of the SP (see comment 3 for policy reason behind this)

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VIII. Default: We were not tested on default.


Duties a SP takes on when it has physical possession of collateral through a pledge or after there is a default. 9-207 sets forth the duties: Problem 123 pg. 281 Andy Doria was the owner of 100 shares of Titanic Telephone, which he pledged to the Morro Castle National Bank as collateral for a $10k loan. At the time of the pledge, the stock was selling for $100 a share. The SA was oral, and the bank filed no FS. 1. (a) If the stock began to fall in value and if on 11/4, when it was selling at $80 a share, Andy called the bank and told the bank to sell, is the bank responsible if it does not and the stock bottoms out at $1.50 a share? Read 9-207. - Is the bank under a duty to sell and if they dont, should they be held liable for damages? o 9-207 says all creditor has to do is take physical care of prop pledged to them. So if the stock goes down in value, the bank has no duty to not sell it. o But if the debtor goes to the bank and asks them to give him the stock so he can sell it before it drops more, then good faith duty of care that bank must allow debtor to do this. 2. (b) Can bank avoid duty by putting exculpatory clause in its agreement? a. No, 1-302(b) says that in any T under the entire UCC, the duty of reasonable care cannot be waived by the parties. 3. (c) Andy's dealings w/ the bank became more complicated, and eventually the bank held, as pledgee, Andy's stocks in 5 diff companies. One of these, Lusitania Foundry, offered a stock split option that had to be exercised by 12/31, so Andy wrote the Morro Castle National Bank and, explaining that his records had become confused, asked the bank how many shares of Lusitania Foundry it held. The bank replied that it possessed 50 shares (this was a typographical error; it actually held 150). Andy tendered 50 shares of equivalent stock to the bank in exchange for a return of 50 shares of Lusitania Foundry, on which he then exercised the stock option, which proved very profitable. On 1/3, Andy learned he owned 100 more shares that the bank held but it was too late to take the stock option on these shares. a. Does Andy have a cause of action under 9-207? i. Doubtful, only extends to duty of reasonable care in custody & preservation of the collateral b. What about 9-210? i. 9-210 debtor can request certain info from the creditor to help his potential lenders ii. Comment 3 suggests that courts dont require a secured creditor to give out biz details to anyone who asks for them (like other lenders), so the debtor has to request it from the creditor, not another lender iii. Debtor can make written request to creditor for: a. How much he owes on everything b. List of collateral c. Amount he owes on a certain T c. What damages can he recover? See 9-625(b) and (f). i. If creditor does not reply accurately w/n 14 days then debtor can sue for any actual damages ii. 9-625 says debtor can get actual damages and punitive damages. a. Damage to biz is actual damages---giving the wrong info when ask for list of stock violates duty of reasonable care in 9-210 and so go after lost profits under 9-625 (actual damages) 9-207(b) sets forth the list of responsibilities and duties of parties when the creditor is physically possessing the collateral. 108

Problem 124 pg. 282: Mazie Minkus borrowed $2k from the Mount Brown State Bank and, as collateral, pledged to the bank her stamp collection (valued at $2k). She used the $ for a South American vacation. While she was away, the bank, which was located in an unstable geological area, was destroyed in an earthquake. The stamp collection went w/ it. Fortunately, the bank was fully insured by a policy w/ the Gibbons Insurance Co., which, inter alia, paid the bank $2k for the loss of the stamp collection. Gibbons then notified Mazie that she should pay the $2k debt to the insurance co., which was using the doctrine of subrogation to step into the shoes of the bank. Need she pay? See 9-207(b)(2). - 9-207(b)(2) risk of accidental loss/damage is on debtor but only to extent of deficiency of any insurance coverage, no deficiency here. So bank is reimbursed by insurance co, debtor loses stamp collection but $2k obligation is discharged, & banks out $2k, insurance co takes this risk through policy Default is governed by the 9-600s State Bank of Piper v. A-Way: pg. 282 Bank took SI in grain held by bailee A-Way. Debtor defaulted, and instead of exercising A9 remedies, sues in K and gets judgment in amount that is owed. In proceeding to collect on judgment, entitled to ask for 5,141 bushels in grain and instead asks for 5,141 dollars! A-way says ok. Bank realizes in audit their mistake. CL Election of Remedies doctrine: if you have several remedies to pursue, you must pick one and if you dont win, then you cant ever bring anything again. However: - 9-601: overrules CL election of remedies doctrine. After a default, SP has rights provided in A9 and except as otherwise provides, those remedies provided in agreement by parties, SP may reduce claim to judgment, foreclose, or otherwise enforce the claim under any remedy written into SA. - 9-601(c) rights under (a) are cumulative. If you pursue one remedy and it doesnt work out, then you can pursue other remedies this gets you around res judicata and merger. If sue in K and lose then can sue under A9. A9 does not have a definition of what constitutes a default. Code leaves it to secured creditor and debtor to define it, think about any event or action/conduct by the debtor that might jeopardize your clients interest. If they forget to do it then the courts only make failure to pay on time as a default. 1. Define default as: - Name change - Change of location - Moving the collateral out of state - Destruction/sale of collateral - Granting another SI in same collateral - Judicial lien on collateral - Bankruptcy - Death of debtor 1-309 Option to Accelerate at Will. A term providing that one party or that party's successor in interest may accelerate payment or performance or require collateral or additional collateral "at will" or when the party "deems itself insecure," or words of similar import, means that the party has power to do so only if that party in good 109

faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against which the power has been exercised. 1-201(a)(20) Good Faith honesty in fact and the observance of reasonable commercial standards of fair deal objective standard Problem 125 pg 287 When Mr. & Mrs. Bankruptcy bought a mobile home from Nervous Motors (NM), they signed a PM SA in favor of the seller that contained the following acceleration clause: The parties agree that if at any time the SP deems itself insecure bc in good faith it believes the prospect of payment or perf is impaired it shall have the rights to declare a default & accelerate payment of all unpaid sums or perf or, at its option, may require the debtor to furnish addl collateral. Which of the following events, in your opinion, is sufficient to trigger the proper use of the clause? 1. (a) A very bad financial quarter for NM? No 2. (b) A serious drop in the state of the economy? No 3. (c) Knowledge that the Mr. & Mrs. Bankruptcy have been talking to a layer? Depends on the circumstances of speaking w/ a lawyer, well-known bankruptcy atty? If yes, then may be sufficient a. Could the seller here make use of 2-609? i. NM has the right to request adequate assurances if reasonable grounds for insecurity b. See what your state says about it Klingbiel v. Commercial Credit Corp.: pg. 288 Court went out of its way to help the debtor. Under A9 no duty at all for creditor to notify debtor of default and repossession. But court looked at way atty drafted default clause. Atty said acceleration (has right to go to debtor and say pay me full amount due or give collateral back (car)) was permitted w/o notice to the debtor on occurrence of 2 events: - (1) default or - (2) if creditor deems itself insecure So 3 weeks before first pyt due, creditor deemed itself insecure, accelerated and repossessed the car. Court said repossession was wrongful and gave actual damages and punitive. - Atty wrote to debtors that he had to make a demand, when decide insecure, creditor could not simply go in and repossess, had to accelerate but had to call the debtor and tell them that they have the option to return the full amount owed or give back car. And the people did not do this. Creditor was required to give notice, but didnt so the court took the debtors side and gave debtor actual & punitive damages Also, in the agreement, atty did not define insecurity as a default. Problem 126 pg. 292 Natty Birdwhistle bought a car w/ $ borrowed from Repossession Finance Co. (which perfected its interest in the car). The SA provided that "time was of the essence" (any type of late pyt is considered breach) and that the acceptance by the finance co. of late pyts was not a waiver of its right to repossess. Natty always paid 10 to 15 days late. One month Repossession Finance had had enough, and it sent a man out who took the car (using a duplicate set of keys) from the parking lot of the factory where Natty worked. Has a default occurred? See 2208 1-103(b) says that CL applies unless code says otherwise. 110

Courts will refuse to let creditors change conduct at will, even when biz w/ sophisticated debtor (large business). If you accept many late pyts, you waive your right to repossess bc of that. 2-209(5) make written demand saying no more late pyts, which will undue the waiver.

Williamson v. Fowler Toyota, Inc.: pg 293 Repo man broke into debtors fenced in lot to repo his car breach of the peace! Rule: Creditor has a nondelegable duty to exercise its right to self-help by repossessing the secured collateral w/o breach of the peace (i.e., creditor is liable for anyone it hires to repo) Debtors can sue in tort for breach of the peace (here they sued for trespass) Problem 127 pg 299 Don Jose was in charge of repossession for Carmen Motors. One Monday morning the dealership told him that cars owned by 4 debtors (E, M, Z, and M) were to be picked up bc the buyers had missed payments. Look at 9609, and answer this question: Is Carmen Motors required to give the debtors notice that they are in default before repossessing? - No notice is necessary unless you give debtor the right to the notice 9-609(b)(2) Don Jose visited each of the debtors with the following results: - (a) Don Jose found Es car parked in his driveway at 2:00 a.m., he broke a car window, hot-wired the car, and drove it away. Has a breach of the peace occurred? o No, look at the totality of the circumstances objectively to determine whether a breach of the peace has occurred, here no confrontation, late at night, no one tried to stop him from taking the car see 560 SE2d 557 o What if E heard the window break, rushed out, and began yelling? May Don continue the repossession or must he quit? May he try again later if he goes away? Yes, Don must quit bc he is breaching the peace but he may try again on another day see 668 P2d 183 (coming back after a period of 1 month was ok when no breach of the peace occurred that time) - (b) Don showed up at Ms house accompanied by his brother (an off-duty sheriff who was wearing his Sheriffs uniform). Don told M he was repossessing the car and she said nothing. Has a breach of the peace occurred? o Yes bc even though there was no evidence that the officer actually said or did anything he is still in uniform (fraudulent use of public official, which courts hate) see 463 P2d 651 (constructive force was used where officer actually participated in the repossession by saying we come to repossess the tractor) - (c) When no one was at home, Don broke into Zs garage through the use of the services of a locksmith. The garage lock and door were undamaged. A clause in the K provided that the SP had the right to enter the debtors premises to remove the prop. Does the repossession comply w/ 9-609? See 9-602(6); 872 NE2d 1039 o No, under 9-602(6), debtor/obligor cannot waive the rule that creditor has the duty to exercise its right to self-help peaceably and this was probably a breach of the peace see 872 NE2d 1039 o Courts say that entering a debtors structure is usually going too far = breaching the peace - (d) Don calls M and said that the car was being recalled bc of an unsafe engine mount. M brought the car in that morning. When the time came to pick up the car, Don smiled and said April Fool, its been repossessed! and refused to return it. Is the repossession valid? See 213 SE2d 475 (lawful to use trickery in this case so no breach of the peace) and 351 So. 2d 557 (could be conversion) 111

o Answer: valid repossession (maybe) Hillman v Cobado: pg 300 Creditor seized the collateral (cattle) and did not listen to the debtors pleas or a Sheriff telling him to stop herding the cattle Rule: breach of the peace it is a disturbance of public order by an act of violence, or by any act likely to produce violence, or which by causing consternation and alarm, disturbs the peace and quiet of the community Only need a threat of altercation to breach the peace Court deemed the retaking of Ps cattle as a breach of the peace based on the facts listed on pg 303 in the 3rd to last paragraph of the case Problem 128 pg 303 ONB financed Melodys purchase of a new car, in which it perfected its SI. The loan agreement provided that on default, the bank had all the rights listed in part 6 of A9 of the UCC and that the parties agreed that the bank would not be liable for conversion or otherwise if there were other items in the car at the time it was repossessed. M missed a payment, and ONBs agent took the car in the dead of the night from its parking place in front of her home. She protested the next day, claim that the golf clubs were in the trunk. ONB looked there but couldnt find the clubs. When she sued, ONB defended on the basis of the SAs exculpatory clause. Is it valid? - No see 503 SW2d 853 If ONB finds the clubs and returns them promptly on her demand, is the bank still guilty of conversion? - No see 324 F Supp 108 Problem 129 pg 303 Chambers quietly repossesses a Ford Expedition, which was sitting w/ its motor running on the street. Less than 1 minute later, he realizes that there are two children in the backseat, so he rapidly and safely returns them and the vehicle to their parents. Is Chambers in violation of A9? - Yes, see 267 SW3d 386. Problem 130 pg 303 ONB declares default on Ns car loan, and N shows up at ONB to surrender the vehicle. May ONB decline to take it and instead sue N for the debt? - Yes, creditor does not have a duty to retake possession in lieu of other default remedies see 490 F. Supp. 2d 536 Problem 131 pg 304 Wonder Spa gave ANB a SI in its accounts receivable and chattel paper in return for a loan. When Wonder missed 2 payments in a row, ANB notified the spas customers that future payment should be made directly to the bank. Does the bank have this right? Read 9-607 and its Official Comment 2, see 9-406(c). - Yes the bank may do this comment 2 to 9-607 If the spa stops opening its doors, need its former customers keep paying ANB? (The spa Ks did not mention the possibility that the Ks would be assigned.) See 9-404(a). - Yes bc their obligations will not be discharged if they dont pay ANB after they received the notification 9-404(a) 112

9-610: Dispo of Collateral After Default After creditor repossesses, it can Take the collateral in full satisfaction strict foreclosure; or o No partial satisfaction for consumer Ts o Can have partial satisfaction for non-consumer Ts o 60% - anytime consumer has paid 60% or more of obligation = no strict foreclosure o Creditor has to notify the debtor and other creditors that wouldve received notice under 9-611 (other creditors/claimants that may have an interest) Creditor must then wait 20 days & if someone objects w/n that time = creditor has to sell Sell the collateral and collect deficiency o Sale must be commercially reasonable 9-610(b) Q of fact 9-612 Creditor can do a public sale or private sale 9-611: Notice must be given to debtor regarding the sale Need time and place of public sale Private sale: creditor cannot buy from itself unless price is set by the market Content of notice 9-613 for non-consumer Ts; 9-614 for consumer Ts How $ is applied after sale 9-615: 1st pay off expenses from the sale 9-627 how to do the sale right Waiver: 9-602: rights that are not subject to waiver except for what is stated in 9-624 9-625: rights that can be waived by a writing and the waiver has to entered into after the default (i.e., waivers in the SA are not good), such as rights to notice of the sale Damages: 9-626: Rebuttable Presumption Rule o Presume that had creditor not committed the violation, the sale would have brought in enough to pay creditor off presumption of no deficiency o Shifts burden of proof to the creditor 9-625: entitles debtor to any actual damages that can be proved, which is usually minimal o Punitive damage remedies: (c)(1): only for consumer debtors o (e) Auto $500 when creditor doesnt comply w/ certain A9 rules Problem 132 pg 306 After Nightflyer Loan Co. had repossessed Lynns car, it decided to advertise it for bids in a local newspaper. Is this a private or a public sale? - Public bc it was advertised in a medium that the public had access to 9-610 Official Comment 7 How much in advance of the resale must she be given notice? 9-611 and 9-612 - Bc this is a consumer T, it must be a reasonable time, which is a Q of fact, but it needs to be more than 10 days 9-612 What should the notice say? 113

Info from 9-613(1): description of any liability for a deficiency of the person to which the notification is sent; phone # from which the amount that must be paid to the SP to redeem the collateral under 9-623 is available; and a phone # or mailing address from which additional info concerning the dispo and the obligation secured is available o No particular phrasing in the notification is required 9-614(2) o 9-614(3) example of a form of notification that, when completed, provides sufficient info

After the resale, Nightflyer simply sent her a statement saying that the amount she now owed was $3,200. She is unsure how Nightflyer came up w/ this figure, and comes to you, her atty/cousin, for advice. What are her rights here? - Debtor should have been given an explanation of the calculation (9-616(a) & (b)), so bc the creditor did not give a calculation, thereby not complying w/ A9, debtor can receive damages under 9-625(c) & (e) The price obtained at the resale seems suspiciously lower to her. How relevant is that? - Taken into consideration but not in and of itself enough to prove that the creditors collection, enforcement, dispo, or acceptance was made in a commercially reasonable manner 9-627(a) She suspects that the reason the sale brought so little is that the only bidder was Nightflyer itself. Can they do that? - Debtor has the burden to show that what the SP bought it for was significantly below the range of prices that a complying dispo to a person other than the creditor would have brought 9-626(a) If she succeeds in reducing the amount she owes, can she also get actual damages for the harm they have caused her? - Yes, unless she recovers under 9-626 (action in which deficiency or surplus is in issue), if she does recover under 9-626, she cannot recover damages for noncompliance under 9-625(b) see 9-625(d) If the car were to be sold in an Internet auction, would it be sufficient to give notice of the Web address of the auction and the physical address of the action co.? - Yes, the cited cases stated that that was sufficient even though debtor did not know the physical location of where the auction was conducted see 903 NE2d 525 Problem 133 pg 306-07 Mr. and Mrs. Miller decided to open a restaurant, for which purpose they needed 80k, so they went to ANB, which agreed to loan them $ if they (1) received a surety, (2) signed an agreement giving the bank a SI in the restaurants equip and inventory, and (3) pledged to the bank addl collateral having a value of 20k or more. The Millers got Mrs. Millers father (Mr. S) to sign a surety; they signed the SA; and they borrowed 20k worth of stock from Mr. Millers cousin, Mr. L. The stock was registered in Ls name at the time it was pledged to the bank, but the bank had it reregistered in the banks name so that it could be sold easily in the event of default. The bank did, however, file its FS in the appropriate office. Subsequently, the Millers borrowed another 5k from NCU, which also took a SI in the restaurants equip, and filed a FS. The restaurant then became involved in an unfortunate food poisoning incident, and biz fell of dramatically. The Millers (who were in the midst of divorce) missed 2 payments on the loan. The bank sent its collection agent, Mr. C, out to the restaurant, and he repossessed the assets he found there. Mr. C sent a written notice to Mr. Miller (who he knew was now living at a hotel), telling him that the stock would be sold on the open market (no specific date given) and that the restaurant equip would be sold at public auction on 12/1 at the offices of CCA. Mr. C phone Mr. S (the surety) and told him the same thing. He sent a written notice to Mr. L (the stock owner), but the letter came back 114

marked Moved No Forwarding Address. If asked, either Mr. or Mrs. Miller wouldve supplied Mr. C w/ Mr. Ls new address. Mr. C sold the stock for 10k on the open market (that was its current selling price) and auctioned off the restaurant equip on 12/1 for $500 (only one bid was received Mr. C himself was the bidder; he later resold the equip to other restaurants for 10k). Mr. C turned over the proceeds from the 2 sales (10,500 total) to ANB, which then brought suit against the Millers and Mr. S for the deficiency. Answer these Qs: - (a) Is a surety entitled to a notice under 9-611? Yes bc he is a secondary obligor 9-611(c), 9-102(a) (71). Is he a debtor? No. Was Mr. Layden a debtor too? Yes comment 2 to 9-102. Does the oral notice to Mr. Stuhldreher satisfy 9-611(b)? No bc it was oral = cannot be authenticated. - (b) Were any parties entitled to notice of the stock sale? No bc stock is not the type of collateral requiring notice - 9-611(d) o How about the sale of the equip? Yes notice was required - 9-611(c) o If no notice was sent to NCU before the equip was sold, did Mr. C himself take free of its SI when he bought the equip at the foreclosure sale? No he did not take free of the SI - 9-617. Did the buyer from Mr. C? Yes see 2-403(1). - (c) Is the notice sent to Mr. Miller sufficient as to Mrs. Miller? No bc he knew that Mr. Miller lived in a hotel away from Mrs. Miller, therefore, assume that he knew Mrs. Miller wouldnt get notice 291 NE2d 180 - (d) Does 9-611 require the creditor to whom a notice is returned by the post office to take further steps to notify debtor? It is up to judicial resolution to decide whether, based upon the facts of each case, the requirement of reasonable notification requires a second try - (e) If the restaurant equip is also named as collateral in a junior filed FS, must the bank notify that SP of the resale? Yes see 9-611(c) and (e) - (f) Who has the burden of proof as to the commercial reasonableness of the sales? SP 9-626(a)(2) - (g) If Crowley had given the equip sale no publicity, has a public sale occurred, and if so, was it commercially reasonable? No public sale bc the public did not have a meaningful opportunity for competitive bidding 9-610, Official comment 7 - (h) When a SP repossesses goods and sells them at a foreclosure sale, will this give rise to the A2 sales warranties being made to the purchaser at the sale? Yes see 2-312, 9-610(d) & (e), and the latters official comment 11 (to 9-610) R & J Tennessee, Inc. v. Blankenship-Melton Real Estate, Inc.: Issue of good faith disposition of collateral and what is commercially reasonable. Rules: SP is not required to prove that the secondary obligor actually received the notice Two standards for sales of collateral: o In exercising his rights upon default the SP is bound by the good faith requirement application throughout the UCC o Every aspect of a dispo of collateral, including the method, manner, time, place, and other terms, must be commercially reasonably Good faith and commercially reasonable depend on the facts of each case Burden: the SP has the burden of proving that the sale was commercially reasonable Factors that may be measured when determining commercial reasonableness: o Type of collateral involved; o Condition of the collateral; o # of bids solicited; o Time & place of sale; o Purchase price received or the terms of the sale; and 115

o Any special circumstances involved. Problem 134 pg 324: The Bunyan State Bank (BSB) held a perfected SI in the logging equip of the Blue Ox Timber Co. When BO defaulted on its loan repayment, BSB repossessed the equip. The sale was held the next day in the middle of a snowstorm. The equip sold for very little (there was only one bidder, and he complained that it was hard to know the condition of the equip bc it was so dirty, being covered w/ mud from the backwoods). BSB sued BO for the amount still due. Answer these Qs: (a) Was the notice period too short? Yes bc it was the next day instead of 10 days or more afterwards 9-612 (b) Is the SP required to wash the collateral prior to sale? May not be required to wash it if it was in that condition when the SP repossessed it, the fact that they did not wash it is evidence relevant to commercial reasonableness see 274 Or. 343 (c) Did it violate 9-610(b) to conduct the sale in the snowstorm? Depends, the snowstorm is a relevant factor but may not be enough in and of itself to violation 9-610(b) see 540 F2d 1375 (The trial court found that it was not commercially reasonable in this instance to proceed to sell it as one unit. Also, the sale was conducted in a snowstorm in an inconvenient place using methods not designed to produce the best results.) Problem 135 pg 324: When you explained to your client, Repossession Finance Co., all the rights that debtors have when the creditor seizes the collateral and resells it, the president of the co. asked you to draft a clause in the SA waiving these rights. How should you do this? You shouldnt see 9-602(6), (7), (8), & (9) and its official comment 2. Can guarantors (as opposed to the primary debtor) waive these rights? Debtors waiver restrictions also apply to obligors see 9-602 and official comment 4 Problem 136 pg 324: Faade Motors (FM) granted a SI in its inventory to ONB, which duly perfected by filing a FS in the proper place. Subsequently FM granted an identical SI to Nightflyer Finance Co. to get short-term credit. When FM failed to repay the 2nd debt, Nightflyer repossessed the inventory and sold it. Must Nightflyer somehow account to ONB for the proceeds of the resale? No see 9-608 and its official comment 5; official comment 5 to 9-610 Does the buyer at the resale take free of the SI of the senior creditor? No, unless the senior SP has authorized the dispo free and clear of its SI, its SI ordinarily will survive the dispo by the junior and continue under 9-315; if the senior enjoys the right to repossess the collateral from the debtor, the senior likewise may recover the collateral from the transferee see official comment 5 to 9-610; note 9-617 good faith purchaser takes free; 9-610(d) & (e) regarding warranties in dispo and disclaiming them Problem 137 pg 325: Faade Motors repossessed the car that Portia Moot used in her law practice but failed to send her any notice of the foreclosure sale, which brought only half the amount she still owed on the car. May it still sue her for the deficiency?

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Yes but it will have to prove that the dispo complied w/ the rules if debtor brings a notice issue (which it should); if unable to meet this burden, the deficiency will be calculated under 9-626(a)(3) see 9-626(a) and its Official Comments

What are Portias rights? 9-625(a) seek a judicial restraint on the disposition o (b) receive damages o (c) look to (b) o (d) other statutory damages doesnt apply here o (e) doesnt apply here If Portia had purchased the car for her personal use, what is the rule? It is up to the courts to determine the proper rules in consumer Ts see 9-626(b) Why would the drafters have done this? o Coxall v Clover Commercial Corp.: D repossessed Ps car and requested a deficiency to be paid. Court looked at reasonable notice and commercial reasonableness. Rules: SP who chooses to sell the collateral must meet 2 overriding reqs: A reasonable authenticated notification o Purpose is to give the debtor an opportunity to protect his interest in the collateral by exercising any right of redemption or by bidding at the sale, to challenge any aspect of the dispo before it is made, or to interest potential purchasers in the sale, all to the end that the merchandise not be sacrificed by a sale at less than the true value o Timeliness: 9-612 Question of fact Can be only 10 days before dispo if non-consumer T Here consumer T & notice was sent on 2/20 for dispo on 3/3 11 days wasnt timely w/ no evidence that required a prompt sale Post Office-Stamped Certificates of Mailing are sufficient to establish that the notice is sent First Class w/ Cert of Mailing is a manner of service that is commercially reasonable o Contents of notification: Consumer T a notification that lacks any of the prescribed info is insufficient as a matter of law Non-Consumer T a notice that does not include all the prescribed info may still be found sufficient as a matter of law The sale must be commercially reasonable (CR) o Fact intensive inquiry and D did not present any evidence of commercial reasonableness o Private dispos are encouraged bc they bring higher sales Comment 2 to 9-610 o Dipso of collateral is made in a CR manner if it is made in conformity w/ reasonable commercial practices among dealers of the type of prop that was the subject of the dispo 9-627(b) o NY courts need to act in good faith and to the parties best advantage 117

o SP has the burden of proving commercial reasonableness when seeking a deficiency from the debtor o A low price by itself is not sufficient to establish that the dispo was not CR, but the court will scrutinize the dispo more carefully Comment 9-627 Deficiency: o 3 Approaches: Absolute Bar: no recovery of deficiency where noncompliance by the SP Adopted by A9 for consumer Ts Offset: debtor can offset against a claim to a deficiency all damages recoverable under former 9-507 resulting from the SPs noncompliance Rebuttable Presumption: noncomplying SP is barred from recovering a deficiency unless it overcomes a rebuttable presumption that compliance would have yielded an amount sufficient to satisfy the secured debt Adopted by A9 for non-consumer Ts Damages: o Damages for violation of the reqs of the statute are those reasonably calculated to put an eligible claimant in the position that it wouldve occupied had no violation occurred comment 3 to 9625 o Exceptions/Limitations: A debtor whose deficiency is eliminated or reduced under 9-626 may not otherwise recover for noncompliance w/ the provisions relating to enforcement Eliminates double recovery or other overcompensation Bc 9-626 doesnt apply to consumer Ts, the statute is silent as to whether double recovery or other overcompensation is possible in consumer Ts o See 9-625 Comments (3) & (4) P/debtor may be entitled to the value of the personal prop that was contained in the vehicle when it was possessed if debtor introduces admissible evidence regarding that prop Holding: court found for P in this case bc the notification was not reasonable and the sale was not CR Problem 138 pg 337-38: When Paul Morphy (P) borrowed $2k from the Lasker State Bank (LSB) in order to finance a trip to Iceland, the bank made him sign an agreement giving the bank a SI in Ps private yacht. He agreed to repay the loan at the rate of $200 a month. He took the trip and on his return made the 1st payment on time. He failed to make the 2nd payment on the due date, and the next day the bank repossessed the yacht. P raced to the bank w/ the late payment. He had $200 in cash, which he tendered. The bank refused to take the $. The banks loan officer, A, pointed to an acceleration clause in the SA that made the entire amount due if a payment was missed. A demanded the total unpaid balance. Need P pay off everything? o If they are letting him redeem even though they have already collected the collateral (yacht) then yes 9-623 and its comment 2 Problem 139 pg 338: Art Auctions, Inc. (AAI), sold Dudley Collector a $5k painting by Smock Pallet, a famous artist. Dudley paid $1k down and agreed to pay over $1k a month thereafter. The finance charge was $151.20; the annual percentage rate was 18%. The K contained a clause saying that in the event of default, AAI could repossess the painting and keep it w/o reselling it or, at its option, could resell it and sue for the deficiency. Dudley made 3 118

more payments and then missed the last one, being temporarily short of funds. AAI, w/o notice, sent one of its agents to Dudleys home. Dudleys teenage son let the agent in, and he simply removed the painting from the wall and walked out saying, thank you. Dudley immediately tendered the $1k to AAI and demanded the painting. AAI refused (the painting is now worth $7k). 4 months later, Dudley filed suit. What is the basis of his cause of action? Failure to comply w/ 9-620(e) & (f) by not disposing of the prop w/n 90 days after taking position bc 60% of the cash price had been paid see 9-620(e) & (f) What relief is he entitled to? o Damages for any loss suffered for noncompliance w/ A9 see 9-625(b) o Damages under (b) and may recover for that failure in any event an amount not less than the credit service charge plus 10% of the principal amount of the obligation or the time-price differential plus 10% of the cash price see 9-625(c) If Dudley had made only one payment and then defaulted, causing AAI to repossess, could AAI have sent him a proposal that it would keep the painting and forgive half the remaining debt only? No, in a consumer T, a SP may not accept collateral in partial satisfaction of the obligation it secures see 9-620(g) Problem 140 pg 338-39: When Repossession Finance Co. (RFC) declared a default and repossessed all the office equip of atty Moot, as allowed by the SA, the co. then did nothing w/ the collateral except let it sit in a storage room for 17 months. Finally, it conducted a resale w/ appropriate notices and then sued Moot for the deficiency. She defended by arguing that actions speak louder than words and that, in effect, by doing nothing for such a long period, RFC had constructively elected strict foreclosure and had forfeited any right to a deficiency. Is this correct? No, SP must consent to the acceptance in an authenticated record or send a proposal to the debtor, and meet the conditions of 9-620 see 9-620(b) and comment 5 o Delay only relates to whether the SP acted in a commercially reasonable manner for purposes of 9-607 and 9-610 see Official Comment 5 to 9-620 Reeves v. Foutz & Tanner, Inc.: Debtors received a loan and put up collateral that was for 3x the amount of the loan (over-collateralized). Creditor took possession of the collateral. Debtors defaulted and creditor sent out notices of intent to retain the collateral, though debtors said they didnt get any notices but the case assumed proper notice was given and neither objected w/n 30 days. Creditor sold the jewelry but gave no account to Ps of any surplus. Rules: SP who sends a notice of intent to retain collateral, in conformance w/ 9-620, must sell the collateral in its regular course of biz in compliance 9-610 (Dispo of collateral after default rules) SP in possession has 2 options upon the default of the debtor: o SP may sell the collateral but if the SI secures any indebtedness, he must account to the debtor for any surplus in conformity w/ 9-610 (and debtor must account for any deficiency) This case creditor should have given an accounting for the surplus! o SP can retain the collateral in satisfaction of the obligation Must give written notice to debtor if intends to keep the collateral in satisfaction of debt Debtor is then given 30 days to object to the proposed retention and require sale of the prop according to 9-610 119