1)
1) Background
a) Secured transaction: a transaction in which a lender reserves an interest in something they sell you or a service they provide on credit for you
b) The security interest reserved by the seller is inchoate (it’s there, but its only important if someone doesn’t pay)
i) Recourse on non-payment:
1) Take item back (b/c of inchoate SI)
2) Threaten to take item back
c) Important points to discuss on exam:
i) How do you get a SI?
ii) What is the SI secured by?
iii) What is your SI’s priority?
iv) How do you enforce your SI?
d) Article 9: goes into effect July 1, 2001
2) What transactions are covered by Article 9?
a) 9-109 scope:
i) security interests:
1) a transaction that creates a security interest
a) “security interest” 1-201(37): interest which secures payment of an obligation
b) lease or sale + SI? 1-201(37)
i) if the lessee have an obligation for the term of the lease AND
no right to terminate the transaction
AND: (at lease one of the following)
1. term of lease is greater than/equal to economic life of the property (useful life) or
2. lessee is bound to (a) buy property or (b) renew lease for rest of property's economic life or
3. can renew lease for rest of economic life for no/nominal ¢
4. can buy property for no/nominal ¢
=> secured transaction
ii) not a security interest just because:
1. lease payments = or more than cost (just b/c you've paid the entire cost doesn't mean you've bought it)
2. just because lessor pays taxes, insurance, repairs, maintenance doesn't mean you own it (though those things are usually incidents of ownership) why? b/c even if lessor pays them, really the lessee is still paying them in the payment amt.
3. existence of an option to buy or renew for rest of economic life
4. lessee has option to buy/renew (at a fmv reasonably predicted at time of option); predict at end lease term (5 years from now) machine worth $3k; if actually appreciates, it's okay as long as you had a rzbl basis to predict price
iii) SI or lease considerations :
1. it’s a case-by-case analysis
2. if price is 20% or less of value, argue it’s a SI, not lease
3. future price: was the price based on a reasonable prediction at the time the price was set?
4. option to buy: consider whether the amount is nominal now (if lease for 5 years, how much is good worth after first 5 years??)
iv) Morris: week to week lease held to be true lease b/c lessee was not bound to lease for full 52 weeks (even though after 52 weeks he would own property)
v) Hypo: Seller leases machine to Bill (borrower) for 10 years. The useful life of machine is 10 years. At the end of 10 years, Bill must return the machine. Sale or lease? Sale b/c conditions are met even though have to give used-up machine back.
vi) Hypo: Lease for 12 mos.; option to purchase at end for nominal consideration. Rt. to terminate at beginning of each month. Lien cr. acquires lien in month 11. Does Lien cr. have priority over Lessor? Probably not b/c there is no more rt. to terminate in month 11 so can argue it’s a sale w/ SI & lessor wins over Lien cr.
vii) Result if true lease
1. not covered by art. 9
2. lessor gets paid in bankruptcy dollars
3. whereas if he was a SP he would get collateral back
2) in personal property or fixtures
3) by contract (not statute 9-109(d)2)
ii) agricultural liens
iii) sale of accounts, chattel paper, payment intangibles, promissory notes
1) sale of accounts receivable does not create a SI, but is covered by art 9
2) exceptions:
a) sale of paper as part of sale of an entire business 9-109(d)4 (rzn: b/c low chance for fraud & plays minor role in commercial financing)
b) assigning paper for collection purposes only (d)5
c) assignment of entire K (performance & payment) (d)6 (exterminator co. assigns payment and duty to exterminate = assignmt. of entire K)
d) assigning a single account in satisfaction of pre-existing debts d(7)
iv) consignments
b) exceptions to 9-109 scope (not covered by art 9): 9-109c&d
i) future earnings (wages, salary) of an employee (d)3; must be of an employee, not an indy contractor
c) federal law preempts art. 9 (b/c that’s state law) if an actual conflict btwn the laws
d) real estate is not covered by art. 9
i) exception: if something is removed from the 1st tier real estate transaction
ii) ex. SI in real estate (not covered) => SI in promise to pay for real estate; this is a SI in promissory note (not real estate), so it is covered by art. 9
3) Classifying Collateral 9-102(a)(9, 12, 28, 72, 73), 9-502
a) Goods (moveable at time SI attaches)
i) Inventory
1) Goods held for sale or lease (incl. raw materials)
2) Provided in connection with a service
3) Sale of type of goods that are in the ordinary course of seller’s bsns.
4) Includes bsns. supplies if consumable
ii) Equipment (catch all)
1) Everything that is not one of the other goods
2) Goods = moveable at time SI attaches
iii) Consumer goods
1) Primary purpose is for personal, HH or family use
2) Predominant purpose test
3) Things for hobbies = consumer goods
iv) Farm products
1) Things produced or consumed in the farming bsns
a) Crops
b) Livestock
c) Supplies or
d) Products of crops/livestock
2) Must be held by a farmer!!!
3) If something is manufactured, no longer a farm product.
b) Quasi-Intangibles: pieces of paper that embody a right to payment or a right to goods (ex. bills of lading); you transfer these rights by passing the paper.
i) Documents
1) Paper that entitles holder to specific goods.
2) ex. Warehouse receipts and bills of lading (“documents of title”)
ii) Instruments
1) Promises to pay.
2) ex. Promissory note
iii) Chattel paper: instrument + security ag. (gives financer the rt. to repossess)
iv) Investment property: stocks, bonds, commodities futures, rts. to brokerage accounts
c) Intangibles
i) Accounts receivable:
1) Generally:
a) Defined: a right to accounts that are yet to be paid.
b) No physical manifestation (no paper) b/c intangible.
2) Healthcare ins. receivables: rt to payment dr. has from insurance co.
ii) Deposit accounts: account at a bank.
iii) General intangibles: (the catch all)
1) Generally:
a) Literary rts., goodwill, etc.
b) Includes commercial tort and K claims (not the jj, but the claim)
i) Torts are excluded from art 9.
ii) Exception: commercial tort claims (9-109(d)12)
1. P is an organization or
2. P is a person and claim
a. Arose in course of P’s bsns/profession and
b. Does not includes PI damages or death.
2) Payment intangibles:
a) Includes tort and K judgments (claim is general intangible)
b) Primary obligation is a monetary payment
d) When do you classify?
i) Lock in the classification at the time the SI attaches (see attachment)
ii) What if debtor lies (about what he will use goods for)? Irrelevant unless you know.
e) Hypos:
i) Tractor used by farmer for bsns: equipment! (not farm product)
ii) Rt to return of security deposit from LL general intangible
iii) Paperboy’s rt. to payment for papers delivered account receivable
iv) Paperboy’s rt to pymt for papers to be delivered account receivable
v) Certificate of deposit form a bank instrument
vi) Elvis’ guitar held to appreciate in value prob. Equipment b/c not really consumer goods b/c not for “HH use”
vii) Purchase a lease chattel paper
4) How to create a security interest:
a) Security agreement
i) Security agreement (K between debtor and creditor)
1) 9-203 SA requirements
a) authenticated by debtor (signed, adopted, acts intended to id the person w/ the paper)
b) describe the collateral 9-108 (sufficient as long as rzbly ID’s; these are safe harbors)
i) can specifically describe (ibm printer 500)
ii) can describe by category (all debtor’s computers) or by code type (farm products)
iii) by quantity (500 bushels of grain)
c) words of grant (this is why a FS alone is not enough; you need an intent to create the SI) (this reqmt. is read in to 9-203)
ii) or possession (called a “pledge”)
b) Financing statement (or automatic perfection) 9-502
i) Purpose: provides notice to 3P’s that cr has an interest in the collateral
ii) If you file correctly, cr’s SI gets priority
iii) Requirements:
1) name of debtor
a) if registered under state law => use name debtor registered under
b) if not registered organization
i) organization (non-registered): use name of org. [ex. if non-registered general partnership, use partnership name]
ii) not an organization: name of individual
iii) rule: a sole proprietorship is not an organization, so they file under their own name
c) if debtor has no name, use names of ppl that comprise the debtor
2) name of secured party (cr)
3) identify collateral (not legal description, can be super-generic; “all personal prop of debtor”)
iv) name hypo:
1) Bob Jones runs a theater; what name for FS?
a) Sole proprietorship: Bob Jones
b) Partnership: Pship name (Bob Jones Pship)
c) Incorporation: Bob Jones, Inc. (registered name)
v) Errors & omissions:
1) If not seriously misleading => error does not make FS ineffective
2) Seriously misleading: using the standard search logic of the filing office, if the name in error will not give you the correct FS => seriously misleading
vi) Name changes: 9-507c
1) If name change does not render FS seriously misleading (b), then don’t have to refile.
2) If name changes make FS seriously misleading:
a) Must refile FS w/in 4 mos. after name change
b) AAP: if you don’t refile w/in 4 mos, AAP clause not effective
3) Even if you don’t refile, SA is still effective, so debtor still has a SI, but loses perfection
vii) Merger 9-203, 9-508 (see prob. 23)
1) Merged company becomes “new debtor.”
2) (a) FS naming original debtor covers new debtor
3) (b) unless FS becomes seriously misleading => 4 mo. rule.
viii) Descriptions:
1) FS must “identify” collateral; can be super generic. ex. all prsnl property you will ever own
2) SA must describe collateral; can be categories like “equipment.”
a) Sometimes better to use name, not category (b/c if you name it wrong, you don’t get SI).
b) Need words of grant for SA. Can use multiple documents to meet all elements of SA. See prob. 30 (can try to put FS and SA together to get debtor’s name in SA).
3) prob. 26 (p. 63) Polly pledges necklace to bank (bank has possession). Bank files FS. Bank gets SA that says “all personal property.” Polly borrows necklace to wear out. Bank not perfected b/c SA is super-generic (but okay for FS). While bank had possession, didn’t need to rely on FS or SA, but once lost possession, bank had no SI.
4) prob. 27 SA says “inventory.” That is specific enough for SA b/c pre-defined category. Does “inventory” include AAP? Argue yes b/c inventory is rolling, by definition. Best to include AAP clause.
5) Attachment:
a) Three requirements for SI to attach:
i) SA.
ii) Secured party must give value.
iii) Debtor has rights in the collateral.
b) Rights in the collateral
i) Note - Cars have COTs (certificates of title). They are not in Art 9 unless they becomes inventory. In Thrift case, cars became inventory and debtor didn’t have rights.
ii) Manger diamond case: possession does not give debtor rights to the collateral.
iii) Prob. 31 K for trumpets that don’t exist yet. No rights. Pre-paid K. No right yet. Trumpets made. No right yet. Trumpets boxed to go to you => SI attaches. 2-501 “when goods identifiable.”
6) Perfection
a) A SI is perfected when:
i) Attaches (SA, value, rights) and
ii) All steps under art. 9. (several methods)
1) Filing
2) Possession
3) Control
4) Automatic
b) Filing: 9-310
i) You can always perfect by filing FS except!
1) Deposit account (must have control)
2) Letter of credit rights (must have control)
3) Money (must have possession) [but see proceeds 9-315]
ii) Requirements for FS 9-502
1) Name of SP
2) Name of debtor
3) Indicate the collateral (can be supergeneric)
iii) Mechanics of filing a FS
1) Where to file 9-501
a) File with SOS unless
b) Fixtures, extracted minerals, or timber to be cut (file in real estate office).
2) Filing by the clerk:
a) Aside from requirements (9-502), you must have items for clerk to accept FS (9-516b, 9-520). If these items are not present, clerk should reject. The items need not be correct! only present.
i) Communicated in method dictated by clerk
ii) Fee
iii) Ability to index (must have debtor’s name and be able to tell which is last name)
iv) Name of SP and address
v) Mailing address of debtor
vi) Whether debtor is individual or org. (type, jx, id#)
b) Missing 516b elements:
i) Clerk refuses: fine (tell filer) see 9-520
ii) Clerk accepts (but shouldn’t have): effective as long as reqmt’s there (name of SP, debtor, indicate collateral)
c) Clerk accepts FS w/ incorrect information => FS not effective against subsequent purchaser for value who rzbly relies on incorrect info
d) Clerk refuses FS even though 516 requirements are there!
i) Deemed effective if 502 reqmt’s are there (SP, debtor, collateral)
ii) Except not effective against subsequent purchaser for value who rzbly relies on the absence of the FS in the records [9-338]
e) Mis-indexed: if FS mis-indexed b/c clerk made mistake, SP still deemed to be filed. Too bad for later party. 9-517
iv) Effective dates: 9-515
1) FS effective for 5 years.
2) Continuation statement: must be filed w/in 6 mos. before or after expiration to avoid lapse.
v) Termination statement 9-513
1) Termination statement’s effect is to make the FS not effective
2) Non-consumer situation => debtor entitled to Termination Stmt but must demand. Must be sent w/in 90 days of demand.
3) Consumer goods => debtor doesn’t have to demand termination stmt
a) SP must send debtor termination statement w/in one mo after there is no further obligation or
b) 20 days after SP received demand for termination statement (the earlier)
vi) Correction statement 9-518
1) If phony FS is filed, ask for termination statement or correction statement
2) If you don’t get termination statement, debtor himself can file termination statement & debtor has civil claims against false filer (and Texas = fine & court procedure to have FS removed from file).
c) Possession: 9-313
i) Only works for tangible goods (e.g. equipment, money, instruments, etc.; not general intangibles, a/r’s) &
ii) SP must actually have possession.
1) Third party control
a) You can have collateral in hands of 3P if
b) 3P works for SP and not debtor (b/c debtor can’t have control).
c) 3P must have authenticated writing that he is holding collateral for benefit of 3P (but you can’t force a 3p to give you that authenticated writing).
d) 3P has no duty to protect the collateral (unless included in the authenticated writing).
2) Escrow control arrangements:
a) Escrow agent is appointed & each party renders perf. to agent (i.e. agent gets possession, buyer gives $ to agent).
b) This was in old art 9; it is not in new art 9 so we don’t know if this will perfect by possession anymore. Be wary.
3) Temporary perfection. 9-312
a) Temporary only lasts for 20 days (all types)
b) Type one:
i) 3P originally possession & SP has perfection by possession (see above).
ii) The SP allows debtor to access goods, but only for 20 days (b/c temp. perfection only lasts 20 days).
iii) If SP doesn’t get possession back after 20 days, you are unperfected starting on the 21st day.
iv) Ex. field warehousing (prob. 33). You sell toys. You borrow money and give inventory of toys as collateral. 3P makes field warehouse (3P fences in toys). If debtor takes possession of some toys (to sell them), this is not regular possession perfection, so must rely on temporary perfection.
c) Type two: SP has SI in goods covered by document of title. SP has 20 days to get possession of the document of title. (Temp. perfection for those 20 days.)
d) Type three: SP has SI in instrument (promissory note). SP can release promissory note for payment to debtor. 20 day temp. perfection.
d) Automatic perfection
i) If you’re in a category that automatic perfection applies to, once you meet the attachment (SA, value, rights) req’s, then you are perfected.
ii) Things that automatically perfect: 9-309
1) PMSI in consumer goods
2) Sale of payment intangible (a/r) casual and isolated only? Wood.
3) Sale of a promissory note
iii) PMSI in consumer goods [9-103 (confusing in code)]
1) Two types:
a) Seller (seller gives loan to buy goods from him)
b) Enabler (bank gives loan to buy goods from seller)
2) PMSI in consumer goods.
3) Does PMSI still apply if enabler (bank) refinances?
a) In non-consumer transactions, refinancing doesn’t extinguish PM status (but remember, these ppl don’t get automatic perfection).
b) In consumer transactions, we don’t know if refi extinguishes PM status.
4) Cross-collateralization: SA includes AAP clause and FA clause.
a) The mere existence of the AAP and FA clauses don’t extinguish the PM status (even though technically, the collateral is securing more than its purchase price). Only in non-consumer goods?
b) Two theories for consumer goods:
i) Transformation rule (5th cir): as soon as the underlying goods actually secure something other than themselves, the PM status is lost (once the AAP or FA clause kicks in!).
ii) Dual Status: [always applies to non-consumer goods]
1. when original purchase price of original goods paid off => PM status extinguished
2. the allocation formula says which goods you are paying on (if you buy washer first, then AAP is dryer, have you paid off all washer and none of dryer or have you paid half of each, so its still a PMSI?). Get allocation formula from state law.
5) Prob. 36 p 91 Company buys rug. Co. pays 10% down & monthly payments to rug store. Co. gets loan to make monthly payments & gives bank SI in rug. Does Bank has auto perfection? No b/c this is not a PMSI b/c Co. already had rug when bank gave loan.
6) Prob 37 p 105 Bank sells promissory notes. This is automatic perfection.
7) Prob 38 If automatic perfection in promissory note, then debtor gets a surety to pay their debt, the automatic perfection extends to surety.
iv) Assignment of accounts or payment intangibles
v) Sale of payment intangibles, or promissory note
e) Control
i) 3 types of collateral require perfection by control:
1) deposit accounts
2) investment property and
3) letters of credit
ii) Deposit accounts:
1) 3 ways to get control; “Control” is the only way to get perfected:
a) if secured party is where the deposit account is located
b) getting authenticated ag. between you, debtor and bank (and bank agrees to do what you tell it to re: the account) w/o any further consent by debtor
c) becomes a customer on the account (have debtor add your name to the account so that it becomes like a jt. account)
2) Priority:
a) Dispute usually between SP saying $ is proceeds & SP in control of account.
b) General rule: control beats FS (FS = proceeds)
c) if both parties perfect by control =>
i) first in priority ( named on account
ii) second in priority ( depository bank where the money is
iii) after that ( first in time
iii) Investment Property
1) Two types of investment property
a) Certificates (stocks)
b) Entitlements (ex. brokerage account; no paper! Commodity contracts)
2) Perfect by FS or control (but control beats FS)
3) How to get control:
a) Certificate: take possession
b) Entitlement:
i) Broker( you have control over account or
ii) Letter ( authenticated ag (you debtor, broker)
iii) Customer ( get listed as customer on account
4) Priority:
a) Broker has first priority
b) Investment property perfected by control always wins over FS
c) Ag or customer ( first in time
iv) Letters of Credit:
1) How to perfect:
a) General rule: Perfect directly only by control.
b) Indirect perfection:
i) You can perfect indirectly by FS (classified as an a/r; when a/r is supported by a LOC, when you perfect a SI in the account, you perfect the SI in the supporting obligation)
ii) Assignment.
f) Supporting obligations always covered by original FS.
7) Choice of Law [very imp. Often missed on exam]
a) In what state do we file the FS?
Pre-July 2001
b) Rules that apply to ordinary goods:
i) Last event test: file FS in jx where good were located at the time the last event occurred on which you base your act of perfection (if the last thing you do to perfect is file the FS you see where the goods are then & file there).
ii) Last event can be:
1) FS
2) Debtor gets rights in the collateral
3) SP gets value
4) SA
c) Rules that apply to mobile goods:
i) Goods that are general used in more than one jx &
ii) Are equipment or goods (inventory) held for lease
iii) ex. road construction machinery, harvesting equipment, packing containers
iv) test is whether they are usually mobile, not whether this good is actually used in more than one jx
v) rule--file FS where debtor located
vi) debtor located:
1) bsns: place of bsns
2) if more than one, at chief executive office (narrow to 2 at most and file both places)
3) individual = residence
New Article IX
d) General Rules 9-301 (what state to file), 9-501 (where to file in state)
i) Individual: at his principal residence
ii) Organization: place of bsns
1) Chief executive office if more than one place of bsns (at most 2)
iii) Registered organization: where org. is registered
e) Exceptions:
i) Fixture filings, timber, extracted minerals (RE office)
ii) Perfection by possession: location of the collateral controls (you don’t file, so don’t worry about where, but look to that state’s local law to determine if you have “possession”)
f) Dispute over who gets the collateral: use law of state where goods are located (even though may have been filed elsewhere).
g) If debtor merges or moves to new jx
i) If debtor moves to new jx, you have 4 mos. to file in new jx. (for rest of your 5 years) Don’t forget to put moving rules in outline!
ii) If debtor merges w/ organization in new jx, have one year to refile. 5 years start over
iii) If you don’t refile w/in deadline, you are unperfected forever (retroactive unperfection) against a purchaser for value can get priority during that time, but not lien or jj cr.
8) Certificates of Title: typically not covered by art 9
a) COT: special requirements of perfecting something covered by COT act; lien is noted on title certificate
b) Things are covered by a state COT Act if you have made application for and paid a fee for a COT (doesn’t matter if issued yet) 9-303 [note cars that are inventory still subj. to art 9]
c) Coverage extends until
i) Not effective under law that issued COT or
ii) New COT title starts to cover the item (b/c you can only have one applicable at a time).
d) Lien noted on old COT & you get new COT: 9-316
i) When you get new COT, old COT no longer covers item
ii) But lien on old COT is still perfected on new COT
iii) Remains perfected until:
1) You would otherwise have become unperfected under original COT or
2) 4 months have passed [note you have 4 mos. to perfect if you change jx, else retroactive unperfection; same w/ COT see 9-316 ex. 8-9]
e) Non-COT to COT state: remain good for 4 mos (same as regular rules)
f) COT to Non-COT state: nothing will ever “trigger” the 4 mos, so you’re okay w/ just the original perfection
g) Note: doesn’t matter what state you get COT in (9-303a says COT good regardless of what jx it is and where the debtor is from) prob. 47
h) If lien not noted on COT, though it should be =>
i) GF purchaser for value wins if no knowledge of SI & gives/receives value
ii) Unless buyer is in the bsns (of buying/selling cars)
9) Priority this only happens when people are fighting
a) General rules
i) Unperfected v. perfected: perfected wins 9-322
ii) Unperfected v. lien creditor: lien cr wins as long as lien cr. shows up before perfection or FS filed (even if lien cr. knows about SI) 9-317
iii) Unperfected v. unsecured buyer: buyer wins if: 9-317
1) buys for value,
2) receives delivery (possession) before perfection or FS filed, and
3) buyer doesn’t know about SI
iv) Unperfected v. lessee: lessee wins if buys for value, receives delivery (possession) before perfection or FS filed, and buyer doesn’t know about SI 9-317
v) Unperfected v. Licensee of general intangibles/accounts: licensee wins if: buys for value, obtains interest (not possession) before perfection or FS filed, and buyer doesn’t know about SI 9-317
vi) Unperfected v. unperfected
vii) Perfected v. Perfected: first in time 9-322
1) From the earlier of the time when FS filed or
2) SI is perfected
viii) Future advances: 9-323
1) General rule: future advance priority dates from priority of original advance
2) Exceptions:
a) Automatic or temporary perfection ( FA date is date the future advance made
b) Lien creditor v. FA ( lien creditor wins if:
i) Advance is made more than 45 days after the lien cr. shows up (property taken away or lien cr. files in RE office) and
ii) SP knows about the lien (actual knowledge).
c) Buyer not in ordinary course (not merchant) v. FA ( FA wins if future advance attaches before: [the earlier of]
i) SP (one who gave FA) doesn’t know about the buyer or
ii) Future advance made less than 45 days after buyer bought goods
3) Examples
a) If original loan paid off => future advance made, FA still dates back to perfection/filing or original loan. Only wiped out if termination statement filed. See prob. 54 p. 119
b) Bank1 perfects goods by possession. Bank2 gets SA & files FS in goods. Debtor takes goods out for 10 days to do maintenance. Who has priority? Bank2 b/c possession perfection lost when debtor gets goods. Prob. 55b 9-312
c) Bank1 perfects goods by possession. Bank2 gets SA & files FS in goods. Bank1 files FS. Debtor takes goods out for maintenance. Who has priority? Bank1. You can change type of perfection as long as there is no lapse. Prob. 55c
4) Dragnet clauses
a) these are wide-reaching FA clauses that say “every other obligation you ever have to SP”
b) courts don’t like these b/c often debtor has no idea
c) enforceable?
i) (Texas) If the FA [in fact] covers collateral in the same “class” as original collateral => passes same class test & clause is valid. Two classes: business & consumer
ii) If FA covers collateral in a transaction related to the original SI transaction (same reason to borrow) => passes related transaction test & valid.
b) PMSI 9-324
i) PMSI v. perfected SI: PMSI wins as long as perfected w/in 20 days of giving purchase money
ii) Special rules: inventory & livestock
1) Inventory: (4 reqs; if you meet all 4, you have PMSI in clothing)
a) must file by the time the debtor gets possession of the collateral
b) Must send notice to anyone who has filed a FS on the collateral you are about to take interest in (before transaction completed)
c) Notice
i) must state you are taking a PMSI in debtor’s inventory
ii) describe the inventory
d) Notice only good for 5 years (can’t be made more than 5 years before you take the PMSI) e.g. could apply if you get a new supplier of inventory
2) Livestock: SP’s must receive the notice w/in 6 months
iii) This is tricky on test (inventory, especially). Remember, a PMSI is collateral specific.
1) You can have a PMSI in inventory, but it (probably) only applies to the inventory the debtor had when the SI was obtained (e.g. not a rolling PMSI and doesn’t cover AAP).
2) Even if a PMSI does cover AAP, you have SI in AAP, but not PMSI priority status.
3) Ex. Bank1 has PMSI in inventory w/ AAP clause. Bank2 takes PMSI in the inventory of fender guitars that debtor just bought from them. Bank1’s SI is not a PMSI regarding the guitars. Bank1 still has a SI, but don’t take special PM priority. Bank2 wins.
4) Prob. 59, p. 133 Lessor leases equipment. Art 9 doesn’t care about this. Lessor has option to buy. Art 9 doesn’t care. Lessor exercises option to buy and gets loan to buy equipment. Now it’s a PMSI & lender has 20 days from date option exercised to file.
5) Seller PMSI wins over Enabler PMSI (if both same type => first in time)
6) Consignment on bar exam; see 3/27 notes.
10) Exceptions to General Priority Rules
a) 9-315 Proceeds: whatever debtor gets from disposition of collateral.
i) Proceeds treated as original SI (if you have PMSI, proceeds from that get PMSI priority)
ii) But the SI continues in original collateral (and the proceeds).
iii) BIOC: BIOC (unless farm equip.) takes free of SI in the seller even if buyer knows about the SI! 9-320 2-201(9)
1) Good faith (honestly in fact in the transaction involved)
2) W/o knowledge that the sale violates the terms of the SA (actual knowledge) [just b/c know it exists, doesn’t violate is not always bad faith]
3) Seller is in the business of selling goods of that kind (except pawn broker)
4) Buy on ordinary terms
iv) Garage sale exception
1) Buy (give value) consumer goods
2) For your own HH purposes (they remain consumer goods)
3) W/o knowledge of the SI (just know it exists is enough; don’t have to know if violates) and
4) Before SI is perfected
v) Prob. 67 p. 157 If one has possession of collateral that has already been sold by debtor, possessor wins, even over a BIOC (so hold on to collateral till pd.!) 9-320e
vi) Remember, BIOC doesn’t count for farm equipment.
vii) Waiver Doctrine (Clovis) You can waive SI under 9-315 per course of conduct:
1) SA provided debtor can’t sell property
2) But SP lets the debtor sell property often, anyway
3) So waiver by course of conduct (if only happened once, prob. not enough).
4) NOTE: SP can still sue debtor for boK
viii) BIOC exception only applies to a BIOC to take free of the SI created in the buyer’s seller.
1) Ex. Buyer1 buys boat from Boatseller who has PMSI. Buyer1 sells to Buyer2, who was a BIOC and takes free of SI.
2) Ex. If Buyer2 was not a BIOC, then sells to Buyer3, who is a BIOC, Buyer3 still takes subject to SI b/c Boatseller was not Buyer3’s seller.
11) Possessory Liens
a) General rule: statutory liens for material/services + possession = priority
12) Chattel Paper 9-330
a) Def: promise to pay + SI [usually created by sale of inventory]; 3 parties: manufacturer, retailer, buyer.
b) Ex. promissory notes + SI that is attached to it; I manufacture washers & give to Ray. Ray sells & gets promissory note & PMSI. Sell that group of paper to financer.
c) two types: direct and proceeds
i) direct: the financer (buyer) of the CP
ii) proceeds: the person who has a SI in the CP as proceeds of his original SI (the manufacturer)
d) A proceeds interest in CP has priority if:
i) purchaser of CP gives new value (financing co. gives new value, not just extinguish pre-existing debt)
ii) GF (is not knowledge; just b/c someone knows about the SI doesn't mean bad faith; GF is "honesty in fact in the transaction involved")
iii) takes possession of the CP from the debtor (e.g. retailer is debtor of the manufacturer)
iv) in the ordinary course of the purchaser's bsns (your CP financing bsns)
v) as long as: there is no legend/marking on the CP that indicates it has been assigned to someone else (e.g. if manufacturer stamps "Manufacturer" on the CP)
e) A direct interest in CP has priority if:
i) purchaser of CP gives new value 9-102
ii) GF
iii) takes possession of the CP from the debtor
iv) in the ordinary course of the purchaser's bsns
v) without knowledge that the sale of the CP violates someone's rights (a legend on the CP constitutes knowledge) [knowing of the SI is not enough]
f) Leases in equipment: if you sell a lease, that is CP 9-102
i) ex. direct v. direct => person with possession wins
ii) ex. if you pledge lease as collateral to bank1 and as collateral for bank2; both direct!!! one with possession wins
g) p. 102 (p. 240) company gets loan for inventory, bank has SI in inventory (incl. AAP); company takes out a loan from bank2, bank2 takes SI in a/r's and CP; bank2 had knowledge of the SI in inventory of bank1; bank2 filed FS for it's SI. Company went bankrupt. Both banks claim interest in a/r's and CP (bank1 says a/r's and CP are proceeds from inventory). Accounts: first in time = bank1, so bank1 wins. CP: first in time is general rule, but look to CP rules. Bank2 has a direct interest in CP and bank1 has a proceeds interest in CP. Bank2 wins (unless legend).
13) Instruments: 9-330(d)
a) Def: a promissory note (w/out a SA)
b) you can sell a promissory note for cash up-front (like CP), & the promissory note becomes proceeds of whomever had the original SI
c) priority: a purchaser of the promissory note gets priority over the person claiming a proceeds in the prom. note when:
i) GF
ii) gives value (does not have to be new value)
iii) takes possession of the promissory note
iv) w/o knowledge that selling the prom. note violates the ag. (actual knowledge, so not enough to just give notice on FS unless they went & check FS's)
14) Negotiable Instruments 9-331 (subcategory of instruments)
a) if you have a neg. instrument (check), then if someone qualifies as a "HIDC" they take free of a SI
b) HIDC requirements:
i) take possession of the neg. instrument (e.g. check)
ii) GF
iii) give value
iv) w/o notice (not knowledge!!)
1) Just having the FS on file is not notice
2) only need notice of the SI (not that it violates)
3) note: no ordinary course of bsns requirement
15) Fixtures [9-334, 335, 336]
a) def.: something that is attached to real property; 3 tests:
i) annexation: has the property become physically attached; how hard it is to move it? (not whether or not it can be moved) (e.g. take wheels of mobile home)
ii) adaptation: how has the fixture changed to be adapted to the purpose of the real property? (e.g. living solely in a mobile home)
iii) intent: this is the most important requirement; common sense
b) How to perfect a fixture: file a fixture filing
i) file FF where you would file a RE mortgage where the fixture is
ii) all elements of a FS (name of debtor, SP, id collateral) and
1) FS covers fixtures
2) say it must be filed in RE records
3) describe RE that fixture is attached to (not legal description)
4) if debtor not owner of property => include name of owner
iii) mortgage: if a mortgage includes SI in fixtures, then file like a FF (except don't have to say "file this in RE office")
c) Fixture Priority!
i) secured party (SI in fixture) v. RE party (person who claims interest in fixture b/c have interest in the RE it is attached to) 9-334
1) general rule: RE party wins unless
2) exceptions
a) first in time:
i) SP does a FF before RE party gets an interest in the RE
b) PMSI
i) PMSI in goods before it becomes a fixture & file before or within 20 days of it becoming a fixture, SP (PMSI) prevails FF
ii) note, no automatic perfection in consumer goods that are fixtures
c) readily removable:
i) goods
1. if readily removable AND
2. office equipment or machines OR
3. replacement domestic appliances that are consumer goods
ii) => perfected and have priority against RE property
iii) as long as you perfected before collateral becomes a fixture any method
d) lien creditor
i) SP wins over lien cr. (w/ lien on real property) as long as SP perfected before lien cr. gets jj any method
ii) super priority exception: if RE party qualifies as a Construction Mortgage Lender, he wins, as long as construction not completed before goods become fixtures (builder takes construction lien against your house while you build; can't be refurbishing)
iii) problems:
1) transmitting utility rule [9-501] only have to file once in each state (see prob. 83, p. 189)
2) SP should file FF if something might become fixture to ensure their priority (e.g. b/c fridge becomes fixture once replaced) (see prob. 85)
iv) Damage done by removing fixtures [9-604]: (see prob. 89)
1) owner is not debtor => can take, but liable for damages (they can make you post bond)
2) owner is debtor => can take fixture
3) remedy: cost of repair or RE law remedies
16) Accession [335] & Commingling [336]
a) accessions: personal property attached to another item of personal property in a way that they can each be identified when put together, but they are intended to be/work together [accession + other goods]
i) dispute: different SP's have SI in each of the two pieces
ii) rules (follow general rules except for attachment or perfection)
1) look to SA to see what is covered (needs to say "if engine put in tractor")
2) (and ensure FS covers the accession; if not, refile; FS can remain super-generic)
3) priority: first in time (engine or tractor first?)
b) commingling: goods that are put together and you can't see the individual goods (certs)
i) priority:
1) SI in whole v. parts => first in time wins;
a) if whole wins => 100% for whole SP
b) if parts win => follow these rules:
2) perfected v. perfected = pro-rata [as long as both parts are perfected when they were combined, you solve the priority dispute on a pro rata basis (get equivalent to ratio of the parts); if engine worth $400 and tractor worth $600, then engine SI gets 40% and person w/ SI in tractor gets 60]
3) perfected v. unperfected = perfected has priority for all 100%
4) 9-335 rule for COT's beats any accession SI (beats everything)
17) Proceeds: 9-315
a) general rule: the SI follows the disposition of the collateral, unless SP authorizes collateral to be transferred free of SI; must be identifiable proceeds (SA doesn't have to say you have interest in proceeds)
b) exception: BIOC
c) def: insurance proceeds, cash, new goods purchased (SP will always require debtor to carry ins., but if they don't, no proceeds, no collateral & you're screwed) [using something up is not proceeds, e.g. pig eats grain => pigs not proceeds of grain]
d) examples
i) prob. 100, p 235: bank has SI in dealer's inventory of cars; lady buys new car & gives dealer 1. trade-in, 2. cash, 3. promissory note. All 3 (trade, cash, note) are proceeds of the bank's SI in car.
e) Cash as proceeds:
i) SI's attach automatically to identifiable proceeds, so cash is problem.
ii) Commingling cash
1) Lowest Intermediate Balance Rule
2) can take as proceeds the lowest amt. between the time proceeds deposited & the freeze
iii) Not commingled cash => use equitable Tracing rules
f) Priority & Proceeds:
i) general rule: if the SI was perfected when debtor disposed of collateral, the SI in the proceeds is perfected
ii) on day 21 of debtor getting proceeds, you remain perfected IF:
1) FS covers original collateral
2) FS covers proceeds (same type) or amend FS
3) proceeds are not acquired with cash proceeds (unless 2d generation proceeds)
iii) cash proceeds (id'able)
iv) PMSI in consumer goods (automatic perfection w/o filing FS); so you can't refile in 21 days (but no one worries about consumer goods in this context)
v) examples: prob. 106: FS says "all bsns machines"
1) trades computer for computer; SP still perfected after 21 days b/c you would file in same place
2) trades comptuer2 for painting; still perfected for 20 days, and perfected after 20 days b/c "all bsns machines" is equipment & painting is equipment, so file in same place
3) trades Xerox machines for car => unperfected after 20 days b/c need lien noted on COT, so "file" in different place (b/c outside art 9)
4) sells calculator for cash to pay for painting => not "all bsns machines" so unperfected after 21 days
5) salvation army: commingling; since they are cash proceeds I don't have to do anything outside 20 days period b/c don't need to be perfected anymore; but BFP will cut off tracing (salvation army doesn't qualify as BFP b/c didn't give value)
6) what if debtor pays electric bill; tracing cut off by utility company b/c BFP
18) Remedies:
a) see notes!
b) Accounting Duty:
i) 9-201 SP has an obligation to account for the collateral to debtor.
ii) Statutory penalty of $500 or to extent debtor can establish additional damages.
iii) ex. Debtor has pledged 150 shares and other stock. Debtor gets notice there is a special dividend split and has to tell co. how many shares you have to get split. Debtor asks bank how much of that did I give you? Bank says 50 shares. Bank has breached accounting duty.
c) Insecurity:
i) rule: under the code, an insecurity clause in allowed, but it can only be invoked if you have a GF basis for the insecurity. 1-208
ii) grounds for invoking the insecurity clause must be debtor specific
d) time is of the essence
i) SA has "time is of the essence" clause in it; the parties way of saying the timely performance of the obligations in this K is a material component of performance; debtor pays 10 days late every mo.; bank accepts for 6 mos, but now repo's. Bank has waived the time is of the essence clause.
ii) reinstate the time is of the essence clause: tell the debtor from now on we are holding you to the terms of the ag. and that means timely performance of your obligations
e) breach of the peace
i) you can breach the peace w/o shooting, breaking down doors; any activity by the SP that would bring consternation, that's enough. If the debtor intercedes "stop what you're doing" => breach the peace (that's why you get repo'd in middle of the night).
ii) you can't use fake law enforcement, you can trick people (bring us your car for a "recall")
iii) you can't go inside house unless debtor says "come in" (but can go into yard, driveway)
iv) if you break into car, that is not breach of peace
f) exculpatory clauses
i) repo man takes car, you pretend there was lots of cash in car. SP says exculpatory clause in the SA. Exculpatory clauses in this context do not work. The more rzbl/responsible the SP acts, the better. If you can prove its a lie, don't worry.
g) deficiency:
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