Secured Transactions Outline I. Nature of the Security Interest a. Article 9 as an Assets Reservation System b.

The Key Attributes of Security Interests i. Property rights good against the debtor ii. Priority rights good against third parties c. Article 9 as a Reified Priority System i. Not general priority, but priority as to designated assets d. The First-to-File Rule i. Priority is usually, but not always, tied to the date of filing of a financing statement e. Possible Distribution Rules for USC 1. Pro Rata - proportional 2. Equal Asset assets paid out equally until debt is satisfied 3. Equal Loss assets pd out to distribute losses as evenly as possible ii. Equal Asset and Equal Loss make both total other debts and distribution of those debts matter iii. Under Pro Rata, only total matters iv. EA or EL would increase monitoring: good if we want to, bad if we do not f. 9-322(a)(1) Priority Rule i. (ignoring perfection through possession), the first to file a FS wins g. Ostensible Ownership Problem i. inference of ownership from possession h. Two Key Problems with Possession as perfection method 1. Loss of use of goods 2. Put goods in third-party hands and didnt own, so no solution i. Perfection through Possession i. Holdover ii. Adds complexity to 9-322: early of first to file or perfect iii. Can create misleading record of priority in FS record Attachment Requirements a. Decription requirement - 9-203(b)(3)(A) b. Interest can be limited in scope- 1-201(37) says nothing about the scope of the positive rights that are required to have an interest in property c. After-Acquired Property: i. Clark (the wrong way) 1. Facts: At time of transaction license is NOT property, so debtor cannot grant SI. Instead signs acknowledgement to creditor that will not sell or transfer license. Subsequently state passes law that recognize rights in license as property. 2. Issue- Could acknowledgement suffice to create security interest. And if so, when did SI attach? 1

II.

3. Ct held SI failed -Court seems to suggest mere leverage not enough ii. The Right Way creat interest in after-acquired property in the SA. 1. SI attaches at the time property is received by the debtor, not before. iii. The Interest in Property Requirement 1. Organize cases along lines of positive rights v. negative rights in property a. Securing Payment or Performance i. Court seems to suggest mere leverage not enough ii. Why not? Accomplishes goal; secured creditor doesnt want to grab the property and often cant 2. Top Down v. Bottom Up Approaches a. Top down = Assume full rights then take specifically enumerated rights away b. Bottom up = specifically enumerate positive rights c. Top down approach probably better, easier 3. Negative Pledgesa. Do not grant SI, instead just contractual right b. Why the NP? Debtor might prefer it, and if done correctly, may serve as anti-later SI commitment c. If allowed SI to be granted, possibility of inconsistent priorities pairwise (crops up a lot) 4. Separating SAs and FSs a. Key design feature b. SA grants interest, FS reserves spot in line vis--vis other creditors c. consequences: file first before pursuing SA to reserve place in line iv. When is an interest granted? a. Two approaches Bollinger and Martin Grinding i. Bollinger says: Sort through all of the relevant documentation and the course of dealing between the parties to see if something can be pieced together that will satisfy the written security agreement requirement ii. Marting Grinding says: 1. Close to insisting that a single document memorialize the secured arrangements between the parties 2. Nothing in Article 9 supports this

iii. Martin Grinding is probably better because easier for 3rd parties to know when there is a security interest 1. But not clear because presumably the debtor would internalize these costs 2. No real answer d. Formalities and Descriptions i. 9-203s Description Requirement 1. Implements Article 9s reified priority system 2. Defines the collateral between the parties ii. 9-108 Description Rules 1. Must reasonably identify collateral 2. Revised statute blesses Article 9 categories 3. Supergenerics barred, but brick-by-brick SI in all assets is OK iii. Laminated Veneers and Worldwide Tracers 1. Lamintated Veneers Oldsmobiles were not considered as equipment pledged under SAs omnibus clause. Ct. found a. cars not typically considered EQ b. specific listing of truck implied exclusion of other vehicles 2. Worldwide Tracers creditor described property as any property. Ct. held this did not perfect SI in intangible property because a. creditor should have said any property, tangible or intangible and b. description was found with list of tangible property iv. 9-203 and Rights in the Collateral 1. Debtor cannot grant interest in rights it doesnt have or control Monalisa hypo a. The Whatley problem - In closed corp setting, need to be sensitive to right way for creating and perfecting SI in pledged assets of owner of corp i. SA signed by individual as such ii. FS filed against individual Perfection a. Creates independent second source of information about the underlying transaction b. Implementing Perfection i. Three key methods: 1. file, 2. possess, 3. control

III.

c. Must classify successfully different classifications of collateral require different methods of perfection i. 9-310 general rule is that a FS must be filed to perfect ii. 9-312 exceptions to 9-310 general filing requirement Filing Yes Yes Yes Yes Yes No No No Yes Yes Yes Possession Control Yes No Yes No Yes Yes No No No Yes No No No Yes Yes Yes No No Yes No

Goods Tangible Chattel Paper Negotiable Docs Instruments Investment Property Deposit Account Letter-Of-Credit Money General Intangible Electronic Chattel Paper Certificated Securities

Yes

iii. 9-313 When Possession Perfects iv. 9-314 When Control Perfects 1. Newman Ct. held annuity contract was not an instrument under UCC, but a general intangible creditors interest was NOT perfected through possession, filing of FS was required. a. Key defs: i. 9-102(a)(47): Instrument 1. A negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment. ii. 9-102(a)(42): General Intangible 1. any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, 4

or other minerals before extraction. The term includes payment intangibles and software. 2. Vienna Park Ct held Right to receive funds from escrow was not money under UCC, but instead was a general intangible creditors interest was not perfected through possession, but required filing. a. Key defs: i. 1-201(24): Money 1. a medium of exchange authorized or adopted by a domestic or foreign government as a part of its currency. d. Names: i. Debtors Name 1. Financing statements are indexed in debtors name (9519(c)(1)) 2. 9-506(a) minor errors and omissions do not affect sufficiency of FS, unless seriously misleading 3. 9-506(b) An FS is seriously misleading if it does not contain the debtor is not named in accordance with 9503(a) 4. 9-506(c) - If you can find the statement using the incorrect name and the search system of the filing office, then the FS is valid. 5. Comparing legal name and filed name irrelevant if you would never find the statement in the first place 6. RA 9-503 ties down debtor name rules a. No trade names (9-503(c)) b. Legal names for corporations (9-503(a)(1)) 7. Clairmont- Correct name = Clairmont Pharmacy; FS under Clairmont Skyline Pharmacy. Ct says ok b/c substantially similar. Under new statute all that would matter is whether you would find it under filing search. ii. Secured Partys Name 1. Not critical for finding financing statement 2. Should expect greater room for errors under 9-506(a) minor errors and omissions do not affect sufficiency of FS, unless seriously misleading. 3. But little sympathy for getting own name wrong 4. Omitting the name is fatal 5. Chemical Bank and Copper King both cases the secured partys name was not correct, but court held FS was valid. [could fill in more detail here if time. e. Description of Collateral i. The Independent Importance of the Description in the Financing Statement -Defines extent of priority over collateral 5

IV.

ii. Notice ala Thorp not particularly meaningful 1. Thorp Ct held that description of collateral as assignment of accounts receivable was sufficient to include AR incurred after the date of the FS, because it put future creditors on notice that they should inquire. a. Ct rejected alternative theory that description should be independently sufficient on its own terms iii. Subsequent SP needs to negotiate to deal with scope of prior FS f. Third-Party Possession 9-313(c) i. Key change in 9-313(c): Move from possession occurring at time bailee receives notice of SPs interest under F9-305 to requiring an acknowledgment by the bailee ii. Coral Petroleum [complicated case. Ct held SI was not perfected. Fill in detail later, if necessary] g. Control as Third Method of Perfection i. Relevant to 1. investment property, 2. deposit accounts, 3. electronic chattel paper and 4. letter-of-credit rights ii. Exclusive means of perfection for deposit accounts (9-312(b)(1)) and letter-of-credit right (9-312(b)(2)) iii. Priority rules give better rights if you possess or control chattel paper. See 9-330 iv. Control and Benedict v. Ratner 1. Court focuses on dominion debtor has over proceeds of AR. Finds no SI because creditor was not policing the use of funds in which it claimed an SI. This is not an ostensible ownership theory; instead, this a control theory 2. Rejected by statute generally and but see esp. 9-104(b) on deposit accounts. Priority a. Theory: Modigliani-Miller - capital structure cannot influence firm value i. MM Theory is wrong - Use of Assets Depends on Capital Structure 1. Debtor will choose projects with debt that it would reject in all-equity capital structure a. Example each project requires $100 investment Project 1 Good: 50%: worth $146 Bad: 50%:worth $84 Expected value = +15 Project 2 Good: 10%: worth $635 Bad: 90%: worth $40 Expected value = -.05 6

Society wants 1, but debtor will choose 2. Creditors need to police this. b. Secured Credit and Monitoring i. Can use security interest to allocate debtor monitoring burden among creditors ii. Need monitoring to control debtor, but fears of creditor grab may lead to over-monitoring iii. Instead, grab ex ante through security interest to reduce overmonitoring incentive iv. [bunch of stuff about the monitoring game, upshot is that the Art 9 system maximizes benefit. Put more in here if it looks like need to know. See slides from Class 10]. c. The First-to-File Rule i. Very strict. First to file wins even if SA came later. Pure Race statute ii. JI Case Illustrates pure-race nature of priority rules 1. Facts: FS filed by Creditor in 1980. Creditor mistakenly terminated FS 11/82. Bank secures same collateral with FS in 12/82. There is evidence that Bank knew of the mistake. Creditor discovers mistake and refiles in 1983. 2. Ct held: Bank wins, even if it knew about mistake. In short, this statute was intended to be and is a pure race type statute. This means the secured creditor who wins the race to the appropriate filing office has priority without regard to the prevailing creditors state of mind and knowledge. 3. introducing knowledge into the equation could result in inconsistent priorities between parties, because some parties may have knowledge while other dont A>B, B>C, C>A 4. introducing knowledge into system would be expensive in terms of litigation costs d. Continuity of Perfection i. General rule: SP must remain continuously perfected to keep place in line. ii. Continuation of Perfection by different methods ok if no lapse. 1. 9-322(a)(1): Earlier of the time a filing covering the collateral is first made or the security interest is first perfected, if there is no period thereafter when there is neither filing nor perfection iii. Continuation of Financing Statements1. Relevant Statutory Framework a. 9-515(a,c,d): (a) FS lapses after 5 years; (c) unless a continuation statement is filed before the lapse; (d) if FS lapses SI is no longer, and never was, perfected 7

b. 9-308(a,c): (a) an SI is perfected if it has attached and if all the requirements for perfection have been met; (c) an SI is continuosly perfected if there has been no lapse between periods of different methods of perfection c. 9-322(a)(1): conflicting SIs rank according to time of perfection, priority dates from the time of filing or when SI was first perfected. 2. Hilyard Facts: Instead of continuing FS, 1st creditor filed a new FS before the old one lapsed. It also had received an acknowledgement from the 2nd creditor that its lien was junior. a. Ct held that 1st creditors interest was not perfected and thus 1st creditor lost to 2nd creditor i. Contractual right via acknowledgement does not = priority right via Art 9 ii. NBC lost because and FS did NOT refer to first FS. Subsequent secured party couldnt look back and see chain. Failure to refer back is core problem. b. Idea behind 5-yr limit was to keep FSs from hanging around forever, but the downside is that some creditors let them fall through the cracks or dont continue correctly as in this case. e. Nature of Priority i. First to File or Perfect wins 1. In filing situations, first to file 2. Attachment is bad option because is hard for third parties to to see 3. Textured rules, contemplating facts such as knowledge, introduce inconsistencies f. Marshaling i. Marshaling equitable doctrine. It may be invoked when 1. There are two or more creditors of the same debtor 2. There are two of more funds belonging to the same debtor 3. One of the creditors alone has right to resort to both (or more) funds ii. Marshaling doctrine = Senior creditor must exhaust fund, to which junior creditor has no claim, before resorting to fund on which junior creditor also has claim, so that junior creditor can collect more of fund with overlapping claims. NB: senior creditor is only required to marshal if it will not prejudice itself in so doing. iii. Implicitly partially extends priority from one asset class to second untaken asset class iv. Computer Room- Ct answers whether Sr. Creditor must marshal. 1. Yes, as to Two Security Interests 8

a. Traditional doctrine applies in situation where one secured creditor has access to only one fund, second secured creditor has access to two b. Done only if no harm to two-funds creditor 2. No, as to Guarantee: a. Trustee in bankruptcy is looking to reduce claims against bankruptcy estate b. But guarantor may just substitute in for creditor v. Delaware Truck more complex marshaling case and a lot of other issues. At issue was a settlement between two creditors which effectively gave one creditor the opportunity to foreclose on a mortgage granted the other creditor. Court though this might be improper. [probably not worth the effort to fill in. See later] g. Secured Creditors vs. Unsecured and Lien Creditors i. The Lien Creditor: 1. 9-102(a)(52) Lien creditor means: (A) a creditor that has acquired a lien on the property involved by attachment, levy, or the like [i.e jump through state hoops]; (B) an assignee for benefit of creditors from the time of assignment; (C) a trustee in bankruptcy from the date of the filing of the petition; or (D) a receiver in equity from the time of appointment. ii. Priority of Lien Creditors vis--vis Secured Creditors 1. The statute 9-317(a) (a) [Conflicting security interests and rights of lien creditors.] An unperfected security interest or agricultural lien is subordinate to the rights of: (1) a person entitled to priority under Section 9-322; and (2) except as otherwise provided in subsection (e), a person that becomes a lien creditor before the earlier of the time: (A) the security interest or agricultural lien is perfected or a financing statement covering the collateral is filed; or (B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed.[this provision means that an SA must be in place, 9

possession, or control of certain types of collateral must happen to keep a lien creditor from jumping ahead of an SC. A naked financing statement is not enough Unsecured Creditor Lien Creditor

LC wins (9-317) Unperfected UPSC wins (9-201) (TRICKY Secured BOX) IS tricky box really Creditor that important? No, if
parties are paying attention USC will turn itself into a lien creditor, or UPSC will try to perfect

Perfected Creditor

PSC wins (9-201)

1st wins (9-317)

iii. This is a little loose 9-317(a)(2)(B) gives priority even if not a PSC but merely have SA and FS without value extension 1. Old statute a lot turned on whether perfected. Turned on whether had lent a single dollar. iv. PSC v. LC Future advances rule must be consulted; see 9-323 v. Particularly important given the hypothetical lien creditor power in bankruptcy vi. Unperfected Secured Creditor loses to Lien Creditor. Key way for to for one-time USC to jump ahead of SC h. Negative Pledges i. Under Art 9- no priority. Just a contractual issue. ii. Mudge Ct upheld verdict that Bank had tortiously interfered with another creditors conduct by inducing debtor to breach negative pledge. iii. Rarely specifically enforce limitations on alienability; 1. compare 9-401(b) [Agreement does not prevent transfer] An agreement between the debtor and secured party which prohibits a transfer of the debtors rights in collateral or makes the transfer a default des not prevent the transfer from taking effect. iv. So should just be breach and issues is damages v. Tortious interference action requires knowledge. Difficult to know. Circular priority possibilities vi. Requiring filing of neg pledge would be cleaner i. Unjust enrichment 10

i. Where a USC can show unjust enrichment, SC may be obligated to pay USC out of secured collateral. ii. To show unjust enrichment USC must show that SC initiated or encouraged the transaction, and that the SCs collateral was enhanced by the transaction. iii. Ninth District- SC had SI in AR. Debtors suppliers would present invoices to SC for payment. Debtors customers would pay SC, and SC would credit payments against debtors debt. USC supplier brought action against SC for payment. 1. Ct. Held: Where a secured creditor is benefited by a transaction between its debtor and an unsecured creditor that enhances the value of the secured collateral, and the secured creditor initiates or encourages the transaction, the secured creditor can be held liable to the unsecured creditor on the theory of unjust enrichment. j. PMSI (Purchase Money Security Interests) i. Definition basically when debtor is loaned $ to purchase collateral, the entity that loaned debtor the money for the purchase receives an SI in the collateral up to the price of the collateral ii. Statute Definition 9-103(a) [Definitions.] In this section: (1) purchase-money collateral means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and (2) purchase-money obligation means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. iii. Application of pmt 9-103(e) [Dont really understand this] [Application of payment in non-consumer-goods transaction.] In a transaction other than a consumer-goods transaction, if the extent to which a security interest is a purchase-money security interest depends on the application of a payment to a particular obligation, the payment must be applied: (1) in accordance with any reasonable method of application to which the parties agree; (2) in the absence of the parties agreement to a reasonable method, in accordance with any intention of the obligor manifested at or before the time of payment; or (3) in the absence of an agreement to a reasonable method and a timely manifestation of the obligors intention, in the following order: (A) to obligations that are not secured; and (B) if more than one obligation is secured, to obligations secured by purchasemoney security interests in the order in which those obligations were incurred. 11

iv. Priority of PMSI over other secured interests. 9-324(a): Priority of PMSI (a) [General rule: purchase-money priority.] Except as otherwise provided in subsection (g), a perfected purchasemoney security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchasemoney security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter. v. Key timing and notification differences for inventory and goods other than inventory under 9-324(a,b) 1. PMSI in Goods a. No notice required b. Must be perfected [presumably through filing. Ask how perfect a PMSI?] 2. PMSI in Proceeds of goods a. No Notice required b. Must be perfected within 20 days after debtor receives possession of goods 3. PMSI in Inventory a. Notice to other SC required i. Notice must be received by SC within 5 years before debtor receives possession of INV ii. Notice must state that sender expects PMSI status b. Must be perfected prior to debtor receiving possession of inventory 4. PMSI in identifiable cash proceeds of INV if a. Identifiable cash proceeds are received on or before buyer takes delivery. b. All above requirements for INV c. NB: identifiable cash proceeds DO NOT EQUAL Accounts Receivable. See MBank Alamo vi. PMSI and multiple debts (such as interest and attorneys fees that are included in price) 1. New statute is clear that all of these charges are part of the purchase-money obligation under 9-103(a)(2); see comment 3 vii. Time of possession of collateral important and can matter in sequential lease/sale deal

12

viii. ix.

x.

xi.

xii.

1. If collateral is leased first, Possession of collateral for purposes of PMSI status does not occur until the purchase agreement is completed. Notice scheme for INV introduces chance of circular priority MBank Alamo- Three key take-away points 1. priority in inventory does not extend to priority in the AR as proceeds of the inventory (9-324(b)) 2. Need to track the progress of the collateral and possible changes in priority 3. Alt agency structure suggested by the court would undercut MBanks position; secured creditor needs to be aware of possible restructuring of underlying arrangement and consequences for position No loss of status of PMSI status (to the extent the original PMSI debt survives) in non-consumer-goods transaction. 9-103(f). No loss of PMSI even if: 1. the purchase-money collateral also secures an obligation that is not a purchase-money obligation; 2. collateral that is not purchase-money collateral also secures the purchase-money obligation; or 3. the purchase-money obligation has been renewed, refinanced, consolidated, or restructured. a. Billings PMSI survived assignment and refinancing (which meant new note and new SA). Important to note that Bankruptcy Code gives preferential treatment to PMSIs by not allowing those liens to be avoided even for household items, professional items, and health aids that ordinarily are exempted under BC 522(f) Cross-Collateralization 1. Security agreement terms will often look forwards and backwards; Language will cover now assets and future assets; Also now debts and future debts 2. All done through single SA and single FS 3. Need to track PMSI status a. Generally only PMSI status for then assets and then debts; Not for cross-collateralization: past or future debts for now assets or past or future assets for now debts 4. General rule often called off for inventory (9-103(b)(2)) PMSI status for all debts under FS.

V.

Proceeds a. Proceeds Perfection Mechanics i. 20 Days Automatic Perfection (9-315(c), (d)) ii. After 20 days perfection will continue IF one of the following tests of 9-315(d) can be met: (1) filed FS covers original collateral; AND 13

a. the proceeds are the type of collateral that can be perfected by filing in the same office where the original FS was filed; AND b. the proceeds in question have not been acquired with cash proceeds (i.e. cannot be proceeds of cash proceeds) *** (2) the proceeds are IDENTIFIABLE CASH PROCEEDS. 9315(b) defines when commingled proceeds are identifiable. (3) the security interest has been perfected in a manner other than the automatic perfection of 9-315(c). iii. NB 1. Identifiable cash proceeds automatically perfected 2. Filing usually necessary if intervening cash proceeds. iv. Has the consequences of making an FS valid even if the description is wrong. Computer- painting swap problem. Good news fairly unusual transaction. v. I in original collateral may file FS for proceeds without additional consent of debtor. Sp is authorized under 9-509(b)(2) vi. Orix/Beach TV Ct held that creditor could have a security interest in the proceeds of FCC licenses b. The Collateral Cycle and Changes in Priority i. Changes in collateral classification can change priority ii. INV can be sold on credit and become AR. In this situation could have 2 SPs with a claim on the assets. One will have a claim on AR as original collateral. The other will have a claim on proceeds of INV. Earliest to file/perfect wins. 1. Diamond Walnut is one example of this. Growers Co-op had a claim on members proceeds (from sale of walnuts). Bank had claim on crop and proceeds. Growers Co-Op pre-dated Bank, so Co-op wins. Before crop was sold, coop had no claim. Once sold Co-Op had claim. Even though parties signed agreement saying sell the walnuts and sort out the priority issues later. Shows how collateral cycle can affect priority. c. Priority over Deposit Accounts i. 9-327(1) implements non-temporal priority scheme: control beats non-control 1. Arises most frequently in dispute between secured creditor with control of deposit account and second with proceeds interest ultimately tied to financing statement ii. Priority conflicts over proceeds and control 1. 9-327(1) generally control beats non-control 2. 9-322(c) If SP has priority of collateral also has priority over proceeds if (1) the SI is perfected; (2) the proceeds are cash proceeds or the same type as the collateral; and (3) for proceeds of proceeds, all intervening proceeds must be 14

VI.

VII.

either cash proceeds or proceeds of the same type as the collateral. 3. BUT for conflicts regarding proceeds from chattel paper, deposit accounts, negotiable documents, instruments, investment property, or letter of credit rights control does not trump filing, instead go to first-to-file rule. a. BUT if the proceeds in questions are cash proceeds, chattel paper, negotiable documents, instruments, investment property, or letter of credit rights the above restriction does NOT apply and control DOES trump filing. [??? Not sure this is right] d. Proceeds and Senior and Junior Creditors i. 9-332 has strong cleansing powers for cash and for transfers from deposit accounts ii. Junior secured creditor can jump in line iii. Driven by desire to preserve integrity of the payments system Transfers of Collateral Subject to a Security Interest i. General rule is SI survives transfer unless SP authorized transfer free and clear (9-315(a)(1)) ii. 9-320 limits this rule in many important situations, including most normal sales from inventory 1. 9-320(a) buyer in the ordinary course of business takes good free and clear of an SI. (Even if buyer knows of existence of SI.) Only if the person selling the goods to the buyer was the one who created the SI. a. buyer in the ordinary course of business means buying from someone who is engaged in the business of selling that item. 9-307(1) 2. 9-320(b) someone who buys from a person who used the goods primarily for household use takes free of SI if: a. buyer has NO knowledge of the SI b. buyer buys for value c. buyer buys primarily for personal, family, or household use d. BEFORE the SP files FS covering the goods. iii. Double Dipping? 1. Note that SP will often have rights as to both transferred collateral and proceeds received in exchange Location and Choice of Law a. Location of Collateral and Choice of Law i. Most fundamental change in Revised Art 9. ii. Summary of Old 9-103 1. Property With Natural Location a. Where the property has a natural location, the substantive law of the jurisdiction where the

15

property is located controls. This covers ordinary goods. (9-103(1)(b)) 2. Property Without a Natural Location a. Where the property does not have a natural location, the location of the debtor controls. This covers accounts, general intangibles, and mobile goods. (9103(3)) 3. The Last Event Test a. For a secured party, the last event test means essentially this:Unless some other rule provides otherwise, a security interest is perfected if there was ever a time when the goods were in a particular jurisdiction and the secured creditor had satisfied (at or before that time) the requirements for obtaining a perfected security interest under the laws of that jurisdiction. 4. Old regime focused On Where the Collateral Has Been a. Note that the only jurisdictions in which the collateral has been located may be relevant. b. Old 9-401 Required Filing in That State c. If any of those jurisdictions are chosen to supply the substantive law, that version of Old 9-401 will require a filing in that state for perfection. d. Only Hope for SP: Collateral Located in State with FS on File e. Thus, the secured creditor will have no claim to being perfected if the collateral is never in a jurisdiction in which there is on file an effective financing statement. f. Introduced unanticipated movement of collateral problem among other things. Id debtor moved collateral, could cause problems determining what law to apply, and could in effect make SP lose its SI. iii. Under New 9-103 Focus on location of debtor for perfection and location of location of collateral for effect of perfection. (not including accounts and GI, see below) 1. Under 9-301(1), local law of debtors location governs perfection 2. Under 9-301(1) and 9-301(3)(C), collateral type determines which local law governs consequences of perfection or nonperfection and priority a. For goods and many others, local law of location of collateral (9-301(3)(C) b. For accounts and general intangibles, local law of location of debtor controls (9-301(1)) 16

VIII.

b. Location of the Debtor Under 9-307 i. Entity specific 1. Corporations located where incorporated (9-307(e)) a. Key Consequence of Shift from Old Statute. Old statute required filing in location of collateral for collateral having a natural location. If corporate debtor had goods in many states, file in each state. Now, file once, where corporate debtor incorporated ii. Changes of the Location of the Debtor 1. Still possible to lose priority 2. Need to act within four months of the change (9-316(a)(2)) 3. Loss of perfection, even with reperfection, raises preference issues under BC 547 4. Corporate debtors change location only through reincorporation; relatively rare 5. Old cases, such as Metro, on understanding location of CEO, matter for some non-corporate entities (9-307(b)(3) a. Should tie CEO location issued to third-party observables, and not the unobservable, such as where decisions are made i. Two-part test under old statute: (1) from which place does the debtor manage the main part of its business operations; and (2) where would creditors reasonably be expected to search for credit information? Changes: Debts and Debtors a. After-Acquired Property (AAP) Mechanism i. Under 9-204 (a) SP can take an interest in after-acquired property. 1. This was a contentious issue, but A9 has embraced. Cases like Zartman held interests in AAP void because one cannot grant what he does not own, actually or potentially 2. 9-204(b) No interest in AAP can be taken in a. consumer transactions (some exceptions, see statute): and b. commercial tort claims ii. Single Financing Statement, Multiple Loans 1. Future Advances a. SP v. SP i. No limit on extent to which subsequent advances can subordinate SP2. A single FS gives notice for all SAs covered by it. ii. 9-323 Comment 1 Under a proper reading of the first-to-file-or perfect rule of Section 9322(a)(1) (and former Section 9-312(5)), it 17

is abundantly clear that the time when an advance is made plays no role in determining priorities among conflicting security interests except when a financing statement was not filed and the advance is the giving of value as the last step for attachment and perfection. Thus, a secured party takes subject to all advances secured by a competing security interest having priority under Section 9-322(a)(1). b. SP v. LC i. SP1 protected for greater of 45 days or time acquires knowledge of position of LC ii. SP has absolute right over LC without knowledge iii. LC can create knowledge and limit to 45 day window by giving notice. iv. Why give LCs this protection. LCs are raising red flags about financial health of debtor and providing valuable signaling service. Want to provide them incentives to do this. c. Fretz [we spent a lot of time on this, but I dont understand the problem very well. It has something to do with USCs selling positions to SPs which effectively allows th unsecured debt to jump ahead of junior SPs. I really dont understand this, should talk to Picker] IX. Name Changes a. Generally Post-Filing changes that render a FS seriously misleading have NO EFFECT on the FS. The SI on collateral acquired by the debtor BEFORE the change remains perfected. 9-507(b) i. Potential SPs must inquire into source of title of debtors collateral to insure that there is not a pre-existing SI in the collateral. ii. SI remains perfected even if debtor disposes of the property. 9507(a) Again potential SPs should check chain of title. b. Collateral acquired by the debtor AFTER the change is subject to the 4Month Rule of 9-507(c) i. SP remains perfected for collateral acquired after the change for 4 months. ii. Within 4 months after change, SP must amend FS so that it is no longer seriously misleading or SP will no longer have a perfected SI in collateral acquired after the change c. Obviously all of the above only applies if name change renders FS seriously misleading 18

X.

d. Name change of debtor is key given indexing rules for financing statements e. Burden allocation issue between initial secured parties and subsequent secured parties i. Unlike case of mistakes in initial filing, name changes are not that difficult for subsequent SPs to track down. So ok to allocate some of burden to SP2. ii. 4 month deadline allocates some burden to SP1 to monitor changes, without creating excessive burden. iii. In this case some party must bear the costs. Most important thing here is to clearly allocate the costs so that parties know for sure what their responsibilities are. f. Practically - Secured creditor aware of pending change is wise to file in both names g. Woods/ Bath Industrial Sales [ SP1 knows of impending name change, but files under old name. SP2 files under new name. Who has priority in after-acquired inventory?] i. Bad decision. Ct subordinates SP1s interest to SP2s. Ct says SP1 did not act in good faith. 1. BUT: Never know schedule of name changes, would have been dumb for SP1 to file under new name that did not exist 2. Introduction of good faith generally messes up the system. Creates possibility of circular priority. Name and/or Entity Structure Changes a. Incorporations Individual Incorporates into typically Sole Proprietorship (Joe Joe Inc.) i. What happens as to Transferred Collateral? 1. Attachment of SI should continue under 9-315(a)(1) 2. Financing statement remains effective under 9-507(a) ii. What happens as to New Collateral (After-Acquired Assets)? 1. Under the old statute, SP of individual had no way to claim security interest in new property acquired by new corp 2. New statute mechanism a. 9-203(d) makes new debtor liable in some circumstances; real question is scope i. 9-203(d): By operation of law other than this article or by contract: (1) the security agreement becomes effective to create a security interest in the persons property; [corp name change scenario] (2) the person becomes generally obligated for the obligations of the other person, including the obligation secured 19

under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person. (this last clause could potentially limit the scope dramatically; remains to be seen. Many times there will be a good argument that substantially all of the assets were not transferred) b. 9-508(a) makes old FS effective as to new debtor, but c. Frequently will have name change issue, and 9508(b) makes standard 4-month rule applicable d. 9-326 addresses priority and generally subordinates FSs tied to 9-508 i. Dont like it? File against new entity b. Scott Illustrates incorporation problem under old A9. i. Scotts grant SI to Bank as individuals ii. Scotts incorporate as Business iii. Business grants overlapping SI to Finco iv. Ct holds Bank loses because it did not have an SA with the new entity Business v. Under bew A9 Still Not clear whether Scotts Business would fall into 9-203(d) c. Bank of the West i. Parent has two subs, Sub1 and Sub2 ii. Sub1 grants SI to Bank in INV. Bank duly files FS iii. Later Sub2 does the same with Finco iv. Sub2 transfers assets to Sub1 including INV v. 3 months later, who has priority, Bank or Finco? 1. Another example where change re collateral could have priority consequences (recall Diamond Walnut) 2. Court looks to avoid those consequences and bends statute to hold for Finco 3. New A9 does not clearly resolve problem. Probably stronger case that Bank of the West wins, since new statute expressly considers the new debtor situation, but by no means certain 4. Comment 7 acknowledges that many transactions will be excluded: a. In many cases, paragraph (2) will exclude successors to the assets and liabilities of a division of a debtor.

BREAK NEW OUTLINE 20

Default
I. Property rights of the SC: property rights describe the special rights the SC acquires against its debtor. The SC receives property rights against the D in order to short-circuit the collection process faced by the USC. A. Default rights are an integral part of the SCs property rights, for SCs have an advantage over USCs: the ability to use these default rights against a debtor without going through the USCs collection process (which usually involves getting a judgment and an execution lien B. Note: because a SPs default rights involve implementation of property rights, and not priority rights, they concern primarily the rights of the SP against the D, not against third parties (even though those rights are inevitably implicated) C. Thus, Part 6 of A9 is applicable whether or not the SP has taken step to perfect its SI Overview of Default Rights A. The following rules protect the SCs property right after default: 1. Right to repossess the collateral. 9-609 2. Right to sell the collateral to collect the debt. 9-610 3. Right to retain the collateral in satisfaction of the debt. 9-620 9-622 B. No definition of default: 1. Part 6 of A9 is applicable after default (9-601(a)), but default is not defined anywhere. This was intentional so that parties would define the events constituting default 2. Most SA provide that upon default, either the SP may accelerate the unpaid balance or the unpaid balance accelerates automatically. Without such a clause, balance cannot be accelerated but by relying on Article 2, SP with rights associated with anticipatory repudiation can acclerate if the underlying transaction involves goods. 2-610 3. 9-602 sets forth an extensive set of nonwaivable debtor rights Collection Mechanisms of 9-607 and 9-608 A. Must notify third parties of rights and collect. 9-607(a) B. Must do so in commercially reasonable matter. 9-607(c) C. SP may deduct from the collections reasonable expenses of collection, and enforcement, including reasonable attorneys fees and legal expenses. 9607(d) D. Have duty to deliver surplus to debtor and right to pursue deficiency 1. 9-608(a)(4): when turn the collateral into cash, two things can happen: a. You have a surplus and must give surplus to debtor b. You have a deficiency, which means you may pursue the excess owed as an USC 21

II.

III.

2. 9-608(b): if the underlying transactions is a sale of accounts, CP, payment intangibles, or promissory notes the D isnt entitled to surplus, and obligor is not liable for deficiency IV. Repossession Under 9-609: The Breach of the Peace Limitation A. 9-609After default, a secured party: 1) may take possession of the collateral; and 2) without removal, may render equipment unusable and dispose of collateral on a debtors premises under Section 9-610. A SP may do the aforementioned pursuant to judicial process or with out judicial process if it proceeds without breach of the peace. 9-609 B. Key issue: actually turning collateral into cash may be difficult hard for collateral possessed by debtor, such as inventory and equipment, easier for accounts and deposit accounts. C. Threat of confrontation or violence seems critical D. Cases: 1. Salisbury Livestock Co., page 310: Related 3rd party private property (fathers ranch); rural setting, early in the am, no exchange or confrontation with anyone. Crt said there were two main factors which need to be presented to the jury: potential for immediate violence and the nature of the premises intruded upon 2. Williams v. Ford Motor Credit, page 317: Shared private property (driveway); early in the am, polite verbal exchange bt Williams (single female) and the repo man. JNOV affirmed, reversing the jury judgment in favor of Williams: Williams did not raise an objection to the taking, and the repossession was accomplished without any incident which might tend to provoke violence 3. Stone Machinery, page 322: prior communication with the debtor suggested that confrontation was possible (debtor said someone would get hurt if try to repo), so Creditor tried to solve the breach of the peace problem by bringing a sheriff with him. Debtor wins: presence of police officer prevented Debtor from exercising his right to resist by all lawful and reasonable means a nonjudicial take-over 4. Mel Farr and his cars: Mel Farr provides cars to people with bad credit; have to make weekly payments; if dont pay, the car shuts off. Issues raised: a. Is this a secured transaction? b. Is when the car shuts off the equivalent of a repossession and if so, is it a breach of the peace if the car shuts off in an inopportune time (eg in traffic)? c. Shutting off the car is more about the threat of value (infliction of harm on debtor may induce them to pay) than the creation of value

22

V.

5. Recap: To some extent the threat of violence is not really the main issue; its more about requiring the SP to go through the judicial process to get the collateral Two Key Mechanisms: A. 9-610: Disposition After Default: (a) After default, secured party may sell, lease, license or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing; (b) every aspect of a disposition of collateral, including the method, manner, time place and other terms, must be commercially reasonable. If commercially reasonable, a SP may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms 1. Notice Provision: 9-611(b) and (c):...a SP that disposes of collateral under 9-610 shall send the Debtor, any secondary obligor (such as guarantor) and if the collateral is other than consumer goods, other SPs, a reasonable authenticated notification of disposition 2. Notice Time periods: In a transaction other than a consumer transaction other than a consumer transaction, a notification of disposition sent after default and 10 days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition a. Whether notice is sent in a reasonable time is a question of fact b. Additional safe harborsforms in 9-613, 614 3. Application of Proceeds to Disposition: 9-615 a. Tracks the discussion of 9-609 collections: i. (a) expenses, then secured debt is pursued, then junior secured debts ii. (c) noncash proceeds rules iii. (f) calculation of surplus or deficiency in disposition to person related to SP: where the SP buds and buys at a low price, the sale can be challenged after the fact (this represents a compromise) iv. (g) cash proceeds received by Jr. SP B. Retention of Collateral in Full or Partial Satisfaction of Debt: 1. 9-620: a secured party may accept collateral in full or partial satisfaction of the obligation only if (1) the debtor consents to the acceptance a. Mechanism for indicating consent: Can only agree to retain in partial satisfaction if there is recorded consentsilence doesnt work. 9-620(c). This contrasts with full satisfaction where SP gives notice and of no response within 20 days the collateral will be accepted in full satisfaction 23

VI.

VII.

b. This is not applicable in consumer situation c. Note: this is a change; before it was all or nothing (ie before could only retain in full satisfaction of debt; now allows retention in partial satisfaction) d. Reeves, page 343: Native Americans pawned jewelry for money loan; promised to pay in 30 days. They defaulted and SP sold jewelry, which was worth a lot more than the amount loaned. Issues: If a secured party retains collateral, when can it subsequently sell the collateral? If SP does so, must the SP account for any surplus to the debtor? Crt says that SP was allowed to sell, but must account to the debtor for any surplus 2. 9-621: This section expands the group entitled to receive notice of the proposed retention to include certain SC and certain secondary obligors 3. 9-622: a secured partys acceptance of collateral in full or in partial satisfaction of the obligation it secures: a. dischargers the obligation to the extent consented by the debtor; b. transfers to the SP all of the debtors rights in the collateral; c. discharges the SI or agricultural lien that is the subject of the debtors consent and any subordinate SI or other subordinate lien; and d. terminates any other subordinate interest e. a subordinate interest is discharged or terminated under the aforementioned sections even if the SP fails to comply with this article One Noteworthy right A. 9-623: Right to Redeem Collateral: a debtor or any other SP or lienholder may redeem collateral. To redeem collateral, a person shall tender 1. This means that if the collateral hasnt been fully disposed of, the debtor has right to give SP money and get the collateral back 2. Requirements for Redemption: a. Must pay all obligations; b. And reasonableness expenses and attorneys fees c. I.e. cant hand over the payments that you missedyou have to pay out the remaining balance 3. Can be useful in some personal situations (see Salisbury where Salisbury hands over check from his dad to get his cars back), but requirement to pay full debt weakens utility of mechanism. In other words, this rule is not that important because the Debtor is rarely in a position to pay off debt in full anyway Key Issues: Secured Creditor Opportunism and Debtor Indifference: A. Examples of SC Opportunism: 1. Debtor is entitled to surplus left over after the disposition; SP wont care about the size of the surplus. 24

a. Stone Machinery, page 322: SP was owed $7448 and sold the tractor for $7448 b. The issue is how to control for the fact that the SP therefore wont care to really maximize the amount it sells for since it doesnt share in the surplus 2. Reeves, page 344: SP tells debtor will keep collateral in satisfaction of debt when collateral is worth much more B. Debtor Indifference: 1. Debtor may not get to keep the surplus anyhow 2. Just goes to other creditors, so why would the Debtor care whether the SPs sale of collateral accrues a surplus? 3. Thus, need to get those with a stake in this disposition of collateral involved 4. Possible Solutions: Excello Press (page 330) and the Rebuttable presumption: a. Excello Press: Crt says main question in a deficiency action is the commercial reasonableness of the disposition of collateral. Oral notification producing actual knowledge is notice. If debtor did not receive notice, the crt may use the omission (along with other factors) to inform its assessment of commercial reasonableness. Only if SP cannot establish the commer reasonablenss of its sale need it try to prove the mkt value using secondary evidence, such as appraisals b. 9-626 adopts the rebuttable presumption, so if party screws up notice or reasonablenss, if has complied with statute, the amount you would have realized would have paid off the debt entirelythis you can rebut C. Debtor Ignorance 1. In consumer settings, debts may not fully understand consequences of decisions Secured Party Mistakes in Implementing Part 6 A. 9-625: Damages for noncompliance: a person is liable for damages in the amount of any loss caused by a failure to comply with this article B. 9-626: Rebuttable Presumption Rule: creates presumption of zero deficiency and puts burden on secured party to overcome that (ie SP has burden of showing compliance); this is done by presuming that the amount that would have been realized in complying with disposition equals the amount owed to the secured party. In other words, Debtor will be credited the difference bt what would have been realized if provisions had been complied with and what was realized. In the absence of proof, it is assumed that there is a zero deficiency; ie that the proceeds from the sale equals the amount of the debt C. 9-627: Commercial Reasonableness Standards 1. Safe Harbors: 25

VIII.

a. Usual Manner; b. At price current on recognized market c. Approval by a group of creditors 2. In re Excello Press, page 330 How should we establish commercial reasonableness? Main question in a deficiency action is the commercial reasonableness of the disposition of the collateral, with the secured party bearing the burden of persuasion. Oral notification producing actual knowledge is notice. If the debtor did not receive notice, the court may use the omission (along with other factors) to inform its assertions of commercial reasonableness. Only if the secured party establishes the commercial reasonableness of its sale need it try to prove the market value using secondary evidence, such as appraisals and sales of similar equipment. If the secured party can prove that sale was commercially reasonable, it has proved the market value of the collateral D. 9-628: Limitations on Liability

The Limits on Article 9

I. 9-109 and Excluded Areas A. The Main Rule is 9-109(c): This article does not apply to the extent that: 1. a statute, regulation, or treaty of the US preempts this article; 2. another statute of this State expressly governs the creation, perfection, priority, or enforcement of a SI created by this state or a governmental unit of this State 3. a statute of another state, foreign country or a governmental unit of another stateexpressly governs creation perfection, priority, or enforcement of a SI created by the state, country of governmental unit B. Inapplicabilty of Article: 9-109(d): this article does not apply to: 1. a landlords lien, other than an agricultural lien 2. a lien, other than an agricultural lien given by statute or other rule of law for services or materials 3. an assignment of a claim for wages, salary, or other compensation of an employee 4. (10) says: a right to recoupment or set-off, but a. Section 9-340 applies w/ respect to the effectiveness of rights of recoupment or set-off against deposit accounts b. Section 9-404 applies with respect to defenses or claims of an account debtor 5. (11): on the whole A9 does not apply to real estate C. 9-311: Step-Back provision: Extent to which A9 is limited by Federal Law: Except as otherwise provided in subsection (d), the filing of a FS is not necessary or effective to perfect a SI in property subject to: 1) a statute, regulation, or treaty 26

1. In other words, FS arent effective to perfect when there is a federal law which dictates when priority is acquired over the rights of a lien creditor 2. This is different from the old scheme, which focused on whether there was a parallel/ alternative recordation scheme. Now the focus is what the fed scheme says about the posture of a lien creditor as to priority II. Intellectual Property A. Copyrights: 1. 17 USC 205: Recordation of transfers and other documents a. Conditions for Recordations: Any transfer of copyright ownership or other documents pertaining to a copyright may be recorded in the Copyright Office if the document filed for recordation bears the actual signature of the person who executed it b. (c): Recordation of a document in the Copyright Office gives all persons constructive notice of the facts stated in the recorded doc, if a. the doc or material specifically identifies the work b. registration has been made for the work c. (d): Priority bt Conflicting Transfers: As between two conflicting transfers, the one executed first prevails if it is recorded , in the manner required to give constructive notice under subsection c, within one month after its execution in the US or within two months after its execution outside the US, or at any time before recordation in such a manner of the later transfer. Otherwise the later transfer prevails if recorded first in such a manner and if taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, and without notice of the earlier transfer 2. 17 USC 101: a transfer of copyright ownership is an assignment mortgage,or any other conveyance, alienation or hypothecation of a copyright of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license 3. Knowledge Matters: In the Copyright regime, knowledge matters but in A9 knowledge is irrelevant, so there is an issue of which system controls: a. In re Peregrine Entertainment, page 351: Issue was whether a SI in a copyright was perfected by filing in the Copyright Office; crt says that recording in the Copyright Office rather than filing a FS under A9 is the proper method for perfecting a SI 27

b. The knowledge requirement creates the problem of circular priority. i. Footnote 10 of Peregrine, page 356: Filing under the Copyright system creates a lot of debtor monitoring; have to search every individual copyright rather than searching for debtor names. In comparison to A9 this is confusing and expensive. B. Patents 1. Does a SI have to be filed with the Patent Office in order to perfect? a. 35 USC 261: an assignment, grant, or conveyance shall be void against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent Office b. In re Cybernetic Services, Inc, page 360 Because 35 USC 261 concerns only transactions that effect a transfer of an ownership interest in a patent, the Patent Act does not preempt A9, thus their SI was perfected by filing a FS; so just have to fill in UCC (this is the same for trademarks) i. Note: this is just 9th circuit, but it is the leading decision C. Bottom Line: for intellectual property, uncertain where to file, file in both 1. Copyrights a. Peregrine says must filed with Copyright Office b. Status under Revised Article 9 unclear and limited to one court anyhow c. Change to lien creditor focus in 9-311 might matter here 2. Patents a. Cybernetic Services says file in UCC records b. Just 9th Circuit c. By limiting key provision in 35 USC 261 to title transactions, avoids application of federal scheme to SI recording 3. Trademarks 4. Caselaw says file in UCC records III. Set-off Rights and Leases A. Set-offs Rights arise nonconsensually outside of A9 1. New A9 brought in deposit accounts which made it necessary to provide a setoff exclusion again 2. Previous version of A9 did not have a setoff exclusion because it did not seem necessary; might as well exclude fan dancing 3. Section 9-109(d)(10) provides that this article does not apply to a right of recoupment or set-off 28

a. Recoupment arises as to debts (I owe you, you owe me), while set-off relates often to fees involved in the management of an account 4. 9-340: Implements a regime that is protective of recoupment and set-off rights: a. (a) A bank with which a deposit account is maintained may exercise any right to recoupment or set-ff against a SP that holds an interest in the deposit account i. This subsection states the general rule and provides that the bank may effectively exercise rights of recoupment and set-off against the SP. The exception to this rule is contained in (c)

b. (b)the application of this article to a SI in a deposit account does not affect a right of recoupment or set-off of the SP as to a deposit account maintained with the SP i. this means that a bank may hold both a right of set-off against and an A9 SI in the same deposit account. By holding a SI in a deposit account, a bank does not impair any right of set-off it would otherwise enjoy c. (c) The exercise by a bank of a set-off against a deposit account is ineffective against a SP that holds a SI in the deposit account which is perfected by control under 9104(a)(3), if the set-off is based on a claim against the debtor i. this is the exception: if the SP has control under 9-104, (ie if it has become the banks customer), then any set-off exercised by the bank against a debt owed by the debtor (as opposed to a debt owed to the bank by the SP) is ineffective. The bank may, however, exercise its recoupment rights effectively 5. National Acceptance, page 374 Issue: whether the Banks right of set-off was subordinate to the Ps SI in the proceeds deposited in the debtors deposit accounts. Crt stated that Bank chose to ignore evidence which would have led a reasonable man to conclude that the funds deposited in the deposit accounts were encumbered by the liens of third parties, or at least to inquire whether such interests existed. This knowledge or notice was

29

sufficient to preclude any right of set-off it might otherwise have had and rendered its actions unlawful a. Applying the Law: Old Article 9 b. Was this a setoff? There were some questions regarding scope of prior set-off exclusion c. Once outside of Article 9, many states applied a knowledge test, barring setoff if the bank knew of or should have known of the rights of the security party in the deposit account d. Here i. If within Article 9, Old 9-201 controlled, and secured party wins ii. If outside Article 9, under Virginia common law, bank with deposit accounts had knowledge, and SP wins e. Applying the Law: New Article 9 f. Focus on two situations: original collateral interest arising through control and proceeds interest g. Original Collateral Control Interest i. Presumably a question of contract; see 9-340(c) h. Proceeds Interest i. SP will lack control of deposit account; 9-340 and 9-341 suggest that setoff will be effective i. Here i. Bank with set-off right would win B. Drawing the line between a transaction governed by A9 and a transaction outside of A9 when no specific statutory attention has been paid to the problem: 1. Medomak, page 380 Nov 19-21 2. Different ways of structuring transaction, where underlying economics is the same, lead to dramatically different priority rights 3. Underlying transaction: a. Underwood gets raw materials from supplier b. Underwood sends raw materials to Medomak c. Medomak processes raw materials and sends them back to Underwood. d. Medomak has granted a SI to Bank for all assets and AAP e. Question is: If Medomak goes belly-up can Bank take an interest in the raw materials? i. Set-off i. If Underwood sells the raw materials on credit; and ii. Medomak sells the finished product back on credit; and

30

ii.

iii.

iii. Underwood applies set-off to its loan and pays Medomak the difference 1. Then NO SI for bank. This is a setoff Bailment i. Underwood lends raw materials to Underwood for processing and then pays a processing fee. 1. Then NO SI for bank because Medomak has no rights in the collateral. USC loan i. Underwood lends $ to Medomak to buy the raw materials which it purchases from the supplier; and ii. Buys finished product from Medomak 1. Then YES bank has SI because Underwood hasnt filed.

C. Leases: 1. In re Mahoefer Packing, page 392 Issue is whether a written agreement bt the trustee of the bankrupt D and the SP covering the equipment is a true lease under which the SP is entitled to reclaim its property from the bankrupt estate, or whether it is actually a lease intended as security in which case the SPs failure to file a FS to perfect its interest renders it subordinate to the trustee. Crt says that when the lessee has the right to terminate the transaction, it is not a conditional sale, and thus concluded that the agreement was a true lease. I.e. should focus on what we think people will do at the end of the lease: a) in situations where we think that lessee will keep property, then this sounds like a sale; b) if we know theyll give up the property, then sounds like a true lease (then dont have to file a FS) 2. Leases a. No filing required for true lease, so SPs seeking to avoid filing, if any, could mold secured transactions into leases b. 1-201(37) provides extensive guide for distinguishing true leases from false leases c. Consequences of false lease status is that lessor will be treated as having sold the property and having attempted to reserve title, giving rise to a deemed security interest under 1-201(37) d. No filing will have been made usually, so the SI will be unperfected e. Key for determining false lease is whether lessee is on the hook to pay under the lease for the remaining economic life of the goods 31

3. More important issue if debtor goes bankrupt, positions of leasor and SP very different. Leaseholder can opt out of bankruptcy. SP cannot. IV. Included Transactions: Sales of Accounts and Securitizations A. 9-109(a)(3): General Inclusion of Sales of Accounts, CP, Payment Intangibles and Promissory Notes 1. Traditionally, difficulty with separating SIs in accounts and sales lead to desire to require filing for both 2. This was done by including sales of accounts and chattel paper in Old Article 9 3. Revised Article 9 expands this B. Corresponding changes to key definitions: security interest, debtor, secured party, collateral Definitions: 1. Payment intangible means a general intangible under which the account debtors principal obligation is a monetary obligation. 9-102(a)(61) 2. Promissory note means an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay and does not contain an acknowledgement by a bank that the bank has received for deposit a sum of money or funds. 9-102(a)(65) 3. Collateral means the property subject to a SIand includes accounts chattel paper payment intangibles, and promissory notes9-102(a)(12) 4. Debtor means a person having an interest, other than a SI or other lien in the collateral whether or no the person is an obligor or a seller of accounts, chattel paper, payment intangibles or promissory notes 9-102(a)(28) 5. Secured party means (a) a person in whose favor a security interest is created or provided for under a SA, whether or not any obligation to be secured is outstanding; .a person to which accounts, chattel paper, payment.have been sold..9-102(a)(72) C. Article 9 Does Not Define a True Sale 9-109 Comments 4 and 5 1. Comment 4: neither this Article nore the definition of security interst delineates how a particular transaction is to be classified. 2. Comment 5: nothing in this section or any provision of A9 prevents the transfer or full and complete ownership of an account, chattel paper, an instrument, or a payment intangible in a transaction of sale D. Perfection and Path Dependence 1. Perfection rules for sales of accounts and CP as before: file as to accounts, either as to CP, but as to CP, possession or control can be better (see 9-330) 2. Price of bringing Payment Intangibless and Promissory Notes into the statute: automatic perfection (9-309(3,4)) E. Consequences of Failing to Perfect a Sale 32

1. What is an unperfected sale? a. Octagon Gas: Debtor/seller must retain an interest in the sold property. This had bad implications for bankuptcy 2. 9-318: Not So a. Sub a says sale is complete b. Sub b says debtor is deemed to have equivalent rights to those held prior to sale 3. This will support superior position for lien creditor or secured creditor or subsequent purchaser (see example below 9-318 comment 3) a. Bottom line: Other creditors can still go after Buyer if buyer does not perfect. But this does not affect the rights as between the Seller and the Buyer. Seller retains no interest. 4. Important to clearly state that Seller retains no interest because: a. Surplus and Deficiency i. Debtor/seller has no right to surplus or deficiency (9-608(b), 9-615(e)) b. Bankruptcy i. Sold assets are not part of bankruptcy estate. Ordinary collateral is part of the estate. ii. This would defeat the entire purpose of secuitization which is to make assets bankruptcy remote. 5. i. Octagon Gas Systems, page 410: Octagon refused to recognize any interest that was held by Rimmer in the System gas sale proceeds (they claimed that because Rimmer was not a party to the Agreement, that they do not have an enforceable interest) and failed to pay them. Court found that Rimmer had an account; that Rimmer should be treated like a SP because under A9 a sale of accounts is treated as if it creates a SI in the accounts and accounts sold by a debtor prior to filing for bankruptcy remain property of the debtors bankruptcy estate. Thus court was wrong in saying that A9 was inapplicable to Rimmers interest. New A9 repudiates holding b. F. Summary: given the difficulty in separating sales and true SIs when would it have mattered whether we could distinguish the two? 1. Bankruptcy: Octagon Gas; and 2. Surplus and Deficiency:

33

a. Majors Furniture Mart, page 407: Issue is to distinguish whether the accounts transferred to Castle were to secure Majors indebtedness, which would mean that Castle was obligated to account for and pay over the surplus proceeds to Major, or whether this was a sale of accounts, in which case Castle is entitled to all of the proceeds received from the accounts because the agreement did not indicate otherwise. b. Crt found that since Castle tried to shift all of the obligations of ownership to Major and none of the risks in a sales relationship existed, this was a SI and Castle needs to fork over the surplus c. Key Issues for Separating True Sales from Sec Trans i. Exposure to risks of ownership: Does buyer have recourse against seller or guarantee from seller ii. If so, less like ownership or true sale, more like secured transaction iii. If not, more likely to find true sale

Security Interests and Interests Arising Outside of A9

I. Liens: A. State Liens B. Federal Tax Liens 1. General Rule: 26 USC 6321: If any person liable to pay any tax neglects or refuses to paythe amount shall be a lien in favor of the US upon all property and rights to property, whether real or personal will belong to the US. 2. When does the lien arise/ attach? a. IRC 6322: the lien imposedshall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time b. This assessment consists of a nonpublic administrative act; which is problematic since 3rd parties would not be aware of the lien. c. This is solved by IRC 6323(a): the lien is not valid against a purchases, holder of SIuntil notice thereof which notice thereof which meets the requirements of (f) has been filed. d. Tax lien filing is effective for 6 years from the date of the assessment of the tax. 3. Where to file: a. For personal property, filing should be made in the office that the State law in which the property that is subject to the lien designates. IRC 6323 If state law does not designate an office, then file in office of the clerk of the US dist crt

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for the judicial district in which the property is subject to the lien b. Personal Property whether tangible or intangible is situated at the residence of the taxpayer; for corp is its the principal executive office where the business is located. 4. Summary of the system: a. Gov takes lien to satisfy debt b. Lien arises when the debt is assessed, but is not valid against a competing SC until a public filing is made c. SIs that arise prior to tax lien filing have priority, while those that arise afterwards are subordinated 5. This makes the system pretty severe: the in existence restriction in the definition of a SI coupled with IRC 6323 means that if there is a change in the debtors property, the SP could lose priority to the IRS lien. Even though IRC 6323(d) allows a 45 day window after notice of lien has been filed, it is not valid against a SI that came into existence after the tax filing and before the 46th day after the filing (that is if there is no knowledge), need to cut-back: a. Protections for commercial transactions and financing agreements iv. Rice Investment, page 426: Issue of whether or not the SI or the federal tax lien had priority; Since the SP had a SI in Ds after-acquired inventory, the SI in the inventory had not acquired at the time of the filing of the tax lien and thus the tax lien prevails v. Choateness: the SP could not prove that the property was in existence and owned by the D on the day the lien was filed, which means that the SPs SI in the property was not sufficiently choate on the date of the tax lien filing II. Fixtures A. Basic limit of A9 is that it defines rights in personal property; an important class of SIs are not covered: mortgages of real estate. Issue is policing the boundary bt these two. B. Article 9 claimant v. real estate claimant: 1. 9-334: First to file in the real estate records wins C. Definition of fixture: 1. A9 defines fixture as goods that have become so related to particular real estate that an interest in them arises under real estate law. 9-102(a)(41) 2. A fixture filing is defined as a filing of a FS covering goods that are or to become fixtures. 3. Wyoming State Farm, page 437: Issue: if pipe has become a fixture on the irrigated real property, then SPs SI in after35

acquired farm equipment can only take priority if there was a timely fixture filing. However, if the pipe is a good, and not a fixture, then SP has the only valid SI in the pipe. a. Crt applies following criterion for a fixture: 1) real or constructive annexation to the realty; 2) appropriation or adaptation to the use or purpose of that part of the realty to which it is connected; 3) intention of the party to make the article a permanent accession. Crt states the real issue is whether the debtor showed a sufficient subjective intent to make the pipe a fixture and thus decides that it is not a fixture (it was removable and the D did not treat the pipe as part of the realty in other financial situations)

The Secured Creditor in Bankruptcy

I. Three important issues re position of SC in bankruptcy A. The filing alters the opportunities available to the SC The filing creates an automatic stay of actions against the debtor and its property. BC 362. Thus, SC is barred from repossessing collateral under 9-609 or selling it under 9-610. a. Instead, automatic stay under BC 362(d) The filing means that transactions that took place before the bankruptcy will be examined (avoiding powers of trustee: the trustee gets powers that the D doesnt get) How to value the collateral Preferences: Preferences are transfers that favor one existing creditor over another A transfer is a voidable preference under BC 547(b) if: 1. The transfer must be to or for the benefit of a creditor 2. The transfer must also be for an account of an antecedent debt owed by the debtor before the transfer is made. As long as the transfer was made at the same time as the debt was incurred or before the debt was incurred, there can be no voidable preference 3. The transfer must also have been made while the debtor was insolvent. A debtor is insolvent when its debts, at fair valuation, exceed the fair value of the property. BC 101(32). A debtor is presumed to be insolvent on and during the 90 days immediately preceding the date of the filing. BC 547(f) a. A transfer of a SI is deemed to have taken place at the time the interest takes effect as bt the parties (time of attachment) provided that the interest is perfected within 10 days of the time it takes effect. BC 537(e)(2)(A). Note: a transfer is not made until the debtor has acquired rights in the collateral. BC 547 (e)(3) b. If perfection takes place at a later time, the transfer is deemed to take effect at that time, and the transfer is 36 1.

B.

C. II. A. B.

deemed to take effect just before the filing of the petition, if the SI is not perfected by the time the petition is filed or w/in 10 days of the time the transfer takes effect bt the parties. BC 547(e)(2)(B) and (C) c. Perfection, for personal property and fixtures is when the creditor on a simple K cannot acquire a judicial lien that is superior. BC 547 (e)(3). The transfer must have been made on or within 90 days of the filing or w/in 1 year of the filing if the petitioner is an insider 5. Must make the creditor better off than if not transfer had been made and the creditor had only enjoyed the what rights it had in the collective proceeding Floating Collateral BC 547(e)(3) solves the problem that is raised by floating collateral by postponing the moment of transfer until the D acquires rights in the collateral; thus, this essentially becomes an issue of whether or not the transfer is a avoidable preference because it improved the position of the creditor Thus, the question in a floating lien is whether any of the exceptions in BC 547(c) apply: 1. There is no voidable preference unless the new SI improves the position of the SC; and 2. that improvement of position is to the prejudice of other creditors holding unsecured claims. BC 547(c)(5) Valuation 11 USC 506: An allowed claim of a creditor secured by a lien on property in which the estate has an interestis a secured claim to the extent of the value of such creditors interest in the estates interest in such property. Determining Value: 1. Rash, page 465: The court states that under BC 506(a), the replacement value standard (cost that the debtor would incur to obtain a like asset for the same proposed use) rather than the foreclosure value standard should be used (what the creditor could realize if it sold the estates interest in the property according to the SA) 4.

III. A.

B.

IV. A.

B.

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