Remedies for Unsecured Creditors by gjmpzlaezgx

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									                                  Remedies for Unsecured Creditors

I.     Types of Creditor debtor relationships
       a. Bank-Debtor (usually governed by K)
       b. Judgment Holder-Defendant
       c. Driver-Other Driver (automobile liability)

II.    In order to collect, unsecured creditors must:
       a. Bring a lawsuit
       b. Get a Judgment. To collect on a judgment, you must:
                i. Secure a writ
                       1. of execution
                       2. of attachment: debtor owns the property
                       3. of garnishment: used to seize assets belonging to the debtor that are held by a
                           third party.
                               a. Classic example is a bank account. If you’re lucky enough to find a bank
                                   account, get a writ of garnishment immediately.
               ii. Find the stuff you can direct the Sheriff to take
                       1. this usually occurs through formal discovery
              iii. Sheriff must levy the goods
                       1. you can have successive levies on a single writ
                       2. It is generally reasonable to have the sheriff collect at any time during the day,
                           and some (but not unreasonable) danger may be expected
              iv. When the writ is returned, the Sheriff can take no more goods on it.
                       1. Sheriff returns the writ when there is nothing left to reasonably collect, or three
                           months have passed.
                       2. Must then get an alias writ or additional writ to get anything more
               v. Amercement
                       1. If the creditor can prove that the sheriff has completely failed to perform his duty,
                           he can hold the sheriff liable for failure to collect. This is a fairly rare
                           occurrence—courts are going to be sympathetic to the sheriff.

III.   Limitations on Collection
       a. Self-Help Remedies
               i. Are generally forbidden by law for unsecured creditors, and will result in a claim for
                  conversion or larceny.

       b. Movement of Assets
              i. A debtor is free to move their assets, and even to secret away funds. Usually, the only
                 probable recourse is a charge of perjury during discovery.
             ii. Generally, you cannot seize assets that the debtor has transferred to third parties.
                     1. Fraudulent Conversion: You may be able to claim fraudulent transfer if the
                         transfer was done solely for the purpose of thwarting the ability of the creditor to
                         collect.
                     2. Payment of other debts, even if it leaves nothing for another judgment creditor, is
                         not fraudulent.
            iii. Assets moved or located to another state: must file to get a writ in the state where the
                 assets are located, and the sheriff levying it must be from that state.

       c. Debtor Protection Statutes

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               i. Exempts certain items from execution in the collection process. Often includes certain
                  homestead exemptions.
              ii. If the value of an item (e.g., a car) exceeds the protected limit, you would sell the item,
                  and give the debtor the exempted amount.

IV.    Efficient System of Secured Credit:
       a. Process = Cheap. If the secured credit system is to work, we have to be able to avoid all those
           costs and constant process, pleadings, discovery, etc., inherent in the unsecured collection world.
       b. “Money at the end of the rainbow.” We need there to be something at the end that we can take
           and use from which we can recover the debt.

                                       Security and Foreclosure

I.     Definitions
       a. Security Interest: Any lien created by contract between a debtor and creditor
               i. 1-201(35): interest in personal property that secures performance of an obligation
       b. Lien: An interest in the property of another to ensure performance of an obligation

II.    Types of Liens
       a. Judicial: Where a lien attaches to property after a judgment from the court
       b. Statutory:
               i. Tax Lien: If you don’t pay your taxes, the federal government has an interest in your
                  stuff (and that lien has super-priority).
              ii. Mechanic’s Lien: If someone does work to your house and you do not pay, they can
                  follow a process and take a lien by statute, rather than via judgment.
       c. Security interests
               i. Voluntary/consensual liens entered into by contract
              ii. In real property, these are mortgages
             iii. In all other (personal) property, these are security interests. This is ARTICLE 9.

III.   The “Duck” Rule 9-109(a)
       a. We look to form over substance in determining if a security interest exists.
       b. Essentially, a security interest is anything to ensure that a debtor follows through on an
          obligation.

       c. 1-203: Lease vs. Security Interest
              i. A lease is a security agreement if:
                     1. The lessee has an option to become the owner of the goods for no additional
                        consideration, or for nominal consideration
                     2. The original term of the lease is equal or greater than the remaining economic life
                        of the goods.

IV.    Equity of Redemption
       a. When something is a security interest, certain legal processes have to be followed—a security
          interest takes something from law to equity, and equity abhors a forfeiture.
       b. Generally, equity of redemption allows that until the sale of the property, the debtor can get his
          stuff back.
       c. If there is a security interest, the rights of redemption apply. In order to get rid of the equity
          or redemption, you must foreclose


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             i. The one exception: If someone voluntarily gives someone property in exchange for being
                released from their obligation. Since this is an immediate transfer, the equity of
                redemption does not apply.

V.   Types of Foreclosure [don’t flashcard these, know UCC process]

     a. Judicial Foreclosure
             i. Accomplished by entry of a court order
            ii. Usually requires the holder of the mortgage/security interest to file a civil action against
                the debtor
           iii. Court then enters a final judgment of foreclosure and sets a date for the foreclosure sale
                (which must be advertised)
           iv. Sale must be confirmed by the court
            v. After confirmation, the sheriff or clerk disburses the proceeds
           vi. Creditor can request a deficiency if the proceeds are not sufficient to cover the debt.

     b. Power of Sale Foreclosure (also called deed of trust)
             i. Not allowed in all jurisdictions
            ii. Must be included in the security agreement
          iii. Deed of sale is given to a trustee
           iv. If debtor doesn’t pay loan, creditor can inform trustee
            v. Debtor then has a set period of time (usually 90 day) to make good
           vi. If debtor does not pay, trustee transfers deed to the creditor
          vii. If there are irregularities, debtor still has power to bring suit

     c. UCC Foreclosure through sale
            i. 9-610
           ii. Deals with personal property.
          iii. After default, the secured party may use self help to sell, lease, license, or otherwise
               dispose of the property
          iv. Debtor has a right to redeem until the creditor sells the property. Sale forecloses the right
               to redeem. 9-623.
           v. Easier because real property is the foundation of our country. Personal property does not
               always share this distinction.
          vi. Disposition of the property must be in a commercially reasonable manner.

     d. Deed In Lieu of Foreclosure
            i. In order for a deed in lieu of foreclosure to be effective, it must be effective immediately.
           ii. If D gives C a deed in lieu of foreclosure, with the understanding that C will record in 1
               year, if D has not fulfilled his obligation, this is a security interest, and equity of
               redemption will apply.
          iii. Often is an exception to the rule in most states where it is required that you foreclose on
               real estate through judicial or power of sale.

                                   Creation of Security Interests

I.   Major elements of the security interest process
     a. Attachment
            i. The rules that must be followed before a bank’s interest “attaches” to a debtor’s property
     b. Perfection
            i. The notice part of the law
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             ii. Communication to other potential lenders that there is an interest in the property
      c. Priority

II.   Requirements for Attachment 9-203:
      a. Value has been given (1-204)
             i. This can be any kind of consideration, including past consideration, including:
                    1. A binding commitment to extend credit, or the extension of immediately available
                       credit
                    2. Security for, or in total or partial satisfaction of, a preexisting claim
                    3. Accepting delivery under a preexisting contract for purchase
                    4. In return for any consideration sufficient o support a simple contract.

      b. Debtor has rights in the collateral
             i. A limited interest can attach, but the debtor cannot give an interest in more than they
                have.
            ii. There must be some sort of right to control
           iii. Anything is a right if it is legally enforceable—the right does not have to be fully vested.

      c. Debtor has authenticated a security agreement that provides a description of the collateral (9-
         203(b)(3)(A)) or the collateral is in the possession of the debtor (if an oral agreement is made—
         9-203(b)(3)(B))
             i. Authenticate 9-102(a)(7): to sign, or to execute or otherwise adopt a symbol, or to
                encrypt or similarly process a record in whole or in part—essentially allows electronic
                signature.
            ii. Security agreement: an agreement that creates or provides for a security interest (9-102,
                1-201(35))
                    1. Definitions
                            a. Agreement 1-201(3): is not as formal as contract—it means a bargain of
                               the parties in fact, as found in their language or inferred from other
                               circumstances, including course of performance, course of dealing, or
                               usage of trade
                            b. Security interest: 1-201(35): interest in personal property that secures
                               performance of an obligation
                    2. What makes an agreement a security agreement?
                            a. Subjective intent: Did the parties actually intend to create a security
                               interest?
                            b. Objective intent: Is there language in the document that indicates that
                               intention?
                            c. There must be language in the instrument that leads to the logical
                               conclusion that it was the intention of the parties that a security interest
                               was created.
                                    i. This is language that specifically says something along the lines of
                                        “I am giving you rights.” There is a big difference between
                                        subjective and objective intent.
                                             1. Ex. Unsigned financing statement accompanied by a signed
                                                 writing authorizing the secured party to file to protect their
                                                 rights is not sufficient, because there is no actual language
                                                 granting rights.
                            d. What documents are an “agreement”?
                                    i. We can look at any evidence—ALL documents—of the bargain of
                                        the parties using the definition of “agreement” under § 1-201(b)(3).
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                                             1. We must find, in those documents, an authenticated
                                                  security agreement.
                                             2. Parole evidence may be used to clarify the scope of the
                                                  agreement, but you have to be able to show a signed
                                                  agreement was entered into in the first place.
                                      ii. The Internal Relations Test: if there is a signed document that
                                          specifically creates a security agreement, or refers to another
                                          document creating a security interest, it is sufficient.
                                             1. The signed document MUST refer to the security
                                                  agreement.
                                             2. Documents may incorporate other documents that are not
                                                  authenticated.
                                     iii. Documents later attached—courts vary
                                             1. Ex. “I grant a security interest in the collateral described in
                                                  attachment A,” and signed. Attachment A is not added for
                                                  three weeks. Courts are divided on whether or not a
                                                  security agreement exists.

III.   Collateral and Obligations Covered
       a. 9-108(a) A description of collateral is sufficient if it reasonably identifies what it describes.
               i. Functional Test: Basically, the language must be sufficient to allow a third party to
                   know which items are secured.

       b. Examples of reasonable identification (9-108(b))
              i. Specific listing
             ii. Category
            iii. Except as otherwise provided, a type of collateral defined in the UCC
            iv. Quantity
             v. Computation or allocational formula or procedure
            vi. Except as otherwise provided, any other method, if the identity of the collateral is
                 objectively determinable.

       c. The overbreadth exception 9-108(c)
              i. A “supergeneric” description of collateral as “all the debtor’s assets,” or “all the debtor’s
                 personal property,” or using words of similar import does not reasonably identify the
                 collateral.
             ii. “all furniture, housewares, clothing, appliances purchased with the credit card” probably
                 does not fall within this exception. “Import” means “meaning” here; it does not mean
                 “effect”—you can grant an interest in all your stuff; just be specific about it.

       d. Description by type insufficient 9-108(e)
             i. Description only by type of collateral is an insufficient description of:
                     1. A commercial tort claim; or
                     2. In a consumer transaction, consumer goods, a security entitlement, a securities
                        account, or a commodity account.

       e. After acquired property
              i. General Rule: Specific “after acquired” language is needed to secure an interest in
                 property obtained after the security agreement is made.
             ii. Exception: Where items are constantly changing, but remain stable in identity and value
                 as a whole.
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                     1. This only includes inventory and accounts for the purposes of the final.
                         Equipment is not generally included.
            iii. Definitions:
                     1. Inventory (9-102): Means goods, other than farm products, which
                             a. are leased by a person as a lessor
                             b. are held by a person for sale or lease to be furnished under a contract of
                                 service
                             c. are furnished by a person under a contract of service
                             d. consist of raw materials, work in process, or materials used or consumed
                                 in a business
                     2. Goods (9-102(a)(44)): all things movable when a security interest attaches.
                     3. Account (9-102(a)(2)): the right to payment of a monetary obligation.
                     4. Equipment (9-102(a)(33): goods other than inventory, farm products, or
                         consumer goods.
                     5. Money: in some situations can be inventory. In other situations, after acquired
                         language is needed.
            iv. Always look at specific language. “Crops” suggests an item constantly changing but
                 stable as a whole, while “crops growing” refers to a particular crop on a particular land.
             v. Future Advances:
                 E.g., Bank loans Debtor $1 million secured by inventory & equipment. Bank later loans
                 D an additional $500,000.
                     1. On those facts alone, Bank can recover only $1 million from Debtor’s inventory
                         & equipment, because that’s all that’s provided for in the documents.
                     2. If Bank and Debtor include a Security Agreement in their $500,000 loan papers
                         that says it’s also secured by the inventory & equipment, then Bank can recover
                         their full amount from the collateral.

IV.   Proceeds
      a. Here, we are assuming that a valid security agreement has attached.
      b. Except as otherwise provided, a secured party’s interest continues in collateral after the debtor
         disposes of it, unless the secured party authorized the disposition. 9-315(a)(1).
             i. Thus, the security interest remains, even when the collateral is in the hands of a third
                person.

      c. The security interest also attaches to any identifiable proceeds of the collateral. 9-315(a)(2), 9-
         203(f) (provides that a proceed is collateral).

         Therefore, always ask:
             i. Is it a proceed?
                     1. A proceed is a right “arising from the collateral.” 9-102(a)(64).
                     2. It can also mean “whatever is collected on, or distributed on account of, the
                         collateral”
                     3. This could go as far to mean coins in a slot machine (but you could also argue that
                         the coins arise there from possession; not the collateral itself).
                     4. This also includes insurance payments.

             ii. Is it identifiable (i.e., Is it attached)?
                      1. Money is identifiable as a check, in its own account, or possibly cash, if it the
                          check is cashed, and used directly to purchase another item. It is not identifiable
                          in a commingled account.

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                      2. The lowest intermediate balance test: the last money to be spent out of any
                         account is proceed money.
                             a. Definition: The amount of secured creditor’s collateral remaining in a
                                bank account is equal to the lowest balance of all funds in the account
                                between the time the collateral was deposited to the account, and the time
                                when the rule was applied. 9-315(b) Cmt. 3.
                             b. 9-322(a): a transferee of money takes the money free of a security interest
                                unless the transferee acts in collusion with the debtor in violating the
                                rights of the secured party.
                             c. This rule only tells us how much of a proceed is identifiable, not how
                                much money is attached as a proceed. (although the amount attached
                                would be reduced if the account had dipped into proceed money—those
                                proceeds are no longer identifiable, thus not attached)
                      3. Using the lowest intermediate balance test, if you want to set up a consignment
                         agreement, always
                             a. Require a segregated account
                             b. Report all sales to the manufacturer.

                                                Default

I.     What is Default?
       a. A security interest secures an obligation. Default determines when the creditor may collect on
          the collateral.
       b. Default is governed by contract. Typical contract provisions of prompting default can include:
               i. Wasting the collateral
              ii. Selling the collateral
             iii. Not insuring the collateral
             iv. Anything else the creditor wants and the debtor will agree to (see General Rule, below)

II.    General Rule and Protections
       a. General rule is freedom of contract.
       b. Backside Protections
               i. Estoppel
                     1. Reasonable reliance
                     2. Some courts may allow a party to argue that they reasonably relied on the past
                         conduct of the lender to their detriment when the creditor suddenly declares a
                         default when they have not in the past. Easterbrook would tell you to go to hell.
              ii. Waiver
                     1. Intentional relinquishment of a known right.
                     2. Acceptance of late payments in the past will not generally constitute waiver
             iii. Bad Faith
                     1. Accepted by some courts, but not by others. Many courts will say that as long as
                         there is not express good faith, the contract governs
                     2. You should assert the insecurity clause only if you really believe the debtor cannot
                         pay. Sneaky conduct is not enough: the creditor must usually want to harm the
                         business.

III.   Acceleration Clauses
       a. When there is default, the creditor can only collect those payments that are outstanding
       b. An acceleration clause provides that when default occurs, the secured creditor can collect the
          entire amount due.
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           c. Cure: before the creditor elects to accelerate, a debtor can typically cure by making past
              payments. Once acceleration has occurred, this is no longer sufficient.
                 i. Debtor can redeem however until the equity of redemption is foreclosed.

Perfection
   I.      A system of giving notice in order to determine priority

   II.     Mainly accomplished through filing a financing statement in the filing system established in part 5
           of article 9
           a. 9-509(b): by authenticating a security agreement, the debtor authorizes filing of a financing
               statement.

   III.    A financing statement is sufficient only if it provides the name of the debtor, name of the creditor,
           and a description of the collateral. A financing statement must contain these items to be valid.

           a. Name of the debtor
                 i. Who is the debtor?
                        1. Debtor: 9-102(a)(28): A debtor is a person who has a right in the collateral, other
                            than a security interest or other lien, whether or not the person is an obligor.
                        2. Person: 1-201(27): includes people, corporation, business trust, estate, trust,
                            partnership, LLC, association, joint venture, government, agency, public
                            corporation, or any other legal or commercial entity.

                  ii. Sufficiency of Debtor Names 9-503
                         1. Registered organizations
                                 a. Anything required to register with the Secretary of the State pursuant to
                                     statutory law
                                 b. Financing statement is sufficient only if it provides the name of the debtor
                                     indicated on the public record of the debtor’s jurisdiction which shows the
                                     debtor to have been organized. 9-503(a)(1)
                                 c. The debtor’s trade name is not sufficient 9-503(c)
                         2. All other cases: financing statement must provide the “individual or
                              organizational name of the debtor” 9-503(a)(4)
                                 a. Organization: means a person other than an individual. 1-201(25).
                                 b. General rule: the name to file is the name by which the entity is generally
                                     known in the community. However, with individuals, there is a strong
                                     preference for formal individual name (best option is to use the both
                                     names, the formal and a D/B/A)
                                 c. If the debtor does not have a name (e.g., a general partnership): the
                                     financing statement must provide the names of the partners, members,
                                     associates, or other persons comprising the debtor. This means all
                                     partners, including silent ones, as they too “comprise” the debtor. 9-
                                     503(a)(4).

                 iii. Effect of Mistakes in the Debtor’s Name
                          1. The financing statement is sufficient even with minor errors if it is not seriously
                              misleading. 9-506(a).
                          2. A financing statement that does not sufficiently provide the name of the debtor is
                              seriously misleading 9-506(b), unless:


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                            a. A search of the records using the debtor’s correct name, using the filing
                               office’s standard search logic, would disclose the flawed financing
                               statement. 9-506(c)
                                    i. Basically, imperfect names are okay if they would be revealed by
                                       the search
                                   ii. This will depend on the search logic used by the filing office.

      b. Name of the creditor
            i. Sufficient so long as it is not seriously misleading. 9-506(a)

      c. Description of the Collateral
             i. 9-108: a description of the collateral must reasonably identify what the collateral is.
            ii. This can be very vague, such as “all assets”(9-504)—the purpose of the financing
                statement is to give you the information you need to look further, such as at the actual
                security agreement.
           iii. The majority rule is to protect the filer, requiring more inquiry from the searcher.
                However, more and more courts are requiring certainty in the filing statement, protecting
                the searcher.
           iv. However, if the address of the collateral is completely wrong, it is likely seriously
                misleading. (Failure to provide any address at all is probably not)
            v. Note: description of collateral is not a reason for which the filing office may reject, if
                they did accept a filing statement with no description of collateral, it would not be
                effective per 9-520(a).

IV.   Other requirements for financing statements 9-516(b)
      a. The mailing address of the secured creditor
      b. The mailing address of the debtor
      c. An indication of whether the debtor is an individual or corporation. If an organization, provide
              i. The type of organization
             ii. The debtor’s jurisdiction of organization
            iii. The debtor’s organizational identification number

V.    Improper Rejection
      a. 9-520(a) A filing office may only reject a financing statement for failure to provide the
         information required in 9-516(b), or other reasons listed in 9-516(b):
               i. Failure to provide the name of the debtor
              ii. Failure to provide the name of the secured creditor
            iii. Failure to provide a description of the collateral
             iv. Failure to provide the mailing address of the secured creditor
              v. Failure to provide the mailing address of the debtor
             vi. Failure to state whether the debtor is an individual or corporation, or failure to list:
                      1. The type of organization
                      2. The debtor’s jurisdiction of organization
                      3. The debtor’s organization number
            vii. Failure to communicate the record by a method or medium of communication recognized
                  by the filing office
           viii. Failure to pay the filing fee
      b. Note that this information does not have to be correct—it simply has to be provided.
      c. A record that is rejected for any reason other than that set forth in 9-516(b) is improperly
         rejected, and is valid as a filed record except against a purchaser of collateral which gives
         value in reasonable reliance upon the absence of records in the files. 9-516(d)
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               i. The other party must actually search the records
              ii. “purchase” is widely defined by 1-201(29), and does include other secured creditors.
             iii. This means that the financing statement will be effective against all lien creditors, who
                  don’t search.

VI.    Improper Acceptance
       a. In general, so long as a financing statement provides the requirements of 9-502(a) it is effective,
          even if the office is required to refuse to accept it for filing. 9-520(c).
               i. Exception: 9-338 applies to errors in the information contained by 9-516(b)(5):
                      1. The mailing address of the debtor
                               a. This need only be a means of contacting the debtor.
                      2. Whether the debtor is an individual or organization, and:
                               a. The type of organization
                               b. The jurisdiction of organization for the debtor
                               c. The organizational number for the debtor.
              ii. 9-338 provides that a security interest or agricultural lien is subordinate to a conflicting
                  perfected security interest in the collateral to the extent that the holder of the conflicting
                  security interest gives value in reasonable reliance on the incorrect information.
                      1. Your financing statement “wins” against all other creditors except for those who
                          reasonably, detrimentally relied upon the incorrect information. Reasonable
                          detrimental reliance requires that a reasonable person would not have inquired
                          any further.
                      2. Lien creditors never “win” when you have incorrect information.
             iii. 9-338 does not apply if the 9-516(b)(5) information is left blank—only if there is an
                  error. (See Comment to 9-520(c)). If the information just isn’t there, then the statement
                  is valid so long as 502 is met.
       b. Errors in 9-516(b)(4) information: name and address of the secured creditor
               i. Financing statement is completely valid, unless the error in the name of the secured party
                  is seriously misleading, in which case the financing statement would fail under 9-502/9-
                  506.

VII.   Exceptions to the Article 9 filing requirement
       a. 9-310(a) Provides that you must always file, unless the item falls within one of the following
          exceptions.

       b. [Note 9-313 gets into the issues of possession by third parties, etc. Whether a party has
          possession will not be an issue on the test]
              i. Essentially, you may possess through a third party, so long as the third party has signed
                 an agreement stating that they are possessing on your behalf.

       c. Instruments 9-102(47):
          Perfect by: filing, or possessing per 9-313. 9-310(b)(6)
          However, in the rules of priority, possession beats filing 9-322.
               i. A negotiable instrument, or
                     1. Essentially, you get paid without any other obligations to the payee (a check or
                          loan. A student loan wouldn’t count, because the holder owes you all sorts of
                          notice and process requirements)
              ii. Any other writing that
                     1. evidences a right to the payment of a monetary obligation
                     2. is not a security agreement or lease; AND

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               3. Is of a type in the ordinary course of business that is transferred by delivery with
                  any necessary endorsement or assignment (basically, is endorsed on a signature to
                  others in the general course of business
       iii. Term does not include
               1. Investment property
               2. Letters of credit, or
               3. Writings that evidence a right to payment arising out of the use of a credit card or
                  information contained on or for use with that card.

d. Goods 9-102(44)
   Perfect by: filing or possessing per 9-313. 9-310(b)(6)
       i. All things movable when a security interest attaches. Includes:
              1. Fixtures
              2. Standing timber that is to be cut and removed under a conveyance or contract for
                   sale
              3. The unborn young of animals
              4. Crops grown, growing, or to be grown (includes those grown on trees or bushes)
              5. Manufactured homes
              6. [some computer crap. Frantically look this up if Geisinger is mean enough to put
                   this on the test]
      ii. Does not include
              1. Accounts, Chattel Paper, Commercial tort claims, deposit accounts, documents,
                   general intangibles, instruments, investment property, letter of credit rights, letters
                   of credit, money, oil, gas, or other minerals before extraction.

e. Chattel Paper 9-102(11)
   Perfect by:
     Tangible: Perfect by filing (9-312(a)), or possess per 9-310(b)(6).
     Electronic: perfect by filing (9-312(a)), or by control per 9-314(a).
       i. A record or records that evidence both:
              1. A monetary obligation and a security interest in specific goods
                      a. Ex: you buy a car from Bob, and take out a loan from Bob. Bob’s interest
                          in the loan and the car is chattel paper.
                      b. This does not include charters of a vessel, or records evidencing right of
                          payment arising out of a credit card.
              2. A security interest in specific goods and a license of software used in the goods
              3. A lease of specific goods
              4. [Note: a negotiable instrument could never be chattel paper, because it is only the
                  document of a loan—the right to payment]
              5. Can be paper or electronic.
                      a. With electronic, you sign on a screen and this is held in electronic form,
                          separate from any copies.

f. Deposit Account
       i. Essentially a checking account at a bank.
      ii. Perfect only by taking control per 9-314. 9-312(b)(1)
             1. Establishing control
                     a. 9-104(a)(3): Control is established if the secured party becomes the bank’s
                         customer with respect to their deposit account. A bank need not put any
                         restrictions on the account.

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     g. Money
           i. Perfect only by taking possession. 9-312(b)(3)

     h. General Intangible 9-102(42)
            i. Any personal property, including things in action, other than:
                   1. Accounts [Receivable]: a right to payment
                   2. Chattel paper
                   3. Commercial tort claims
                   4. Deposit Accounts
                   5. Documents
                   6. Goods
                   7. Instruments
                   8. Investment property
                   9. Letter of credit rights
                   10. Letters of credit
                   11. Money
                   12. Oil, gas, or other minerals before extraction.
           ii. Perfect by: filing. No exceptions are in 9-310, thus you must file.

     i. Purchase Money Security Interest in a Consumer Good
            i. Perfection is automatic—nothing need be done to perfect.
           ii. Remember—this is a rule of perfection—you still need a valid attached security
               agreement.
          iii. 9-103(a)(1-2)
                   1. Purchase money collateral:
                           a. Goods or software that secures a purchase money obligation incurred with
                               respect to that collateral
                   2. Purchase money obligation: obligation 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.
          iv. Essentially, two types:
                   1. Seller is also lender:
                           a. Ex. Buy an mp3 player at Target with your Target card. Target has a
                               PMSI in the player.
                   2. A third party loans money for the specific purchase of a consumer good. 9-
                       103(a)(2).
                           a. Trickiest part is showing tracing the value. Third party will have
                               difficulty if the third party deposits in their checking account and then
                               buys the item.
           v. Consumer Goods
                   1. 9-102(a)(23): goods used or bought for use primarily for personal, family, or
                       household purposes.
                   2. Courts usually look to intent at the time of the transaction. If the party lies, the
                       company hoping for a PMSI will have a fraud claim, but they will not be
                       perfected.

                                              Fixtures

I.   9-102(a)(41) Fixtures are goods that have become so related to particular real property that an
     interest in them arises under real property law.
     a. Basically, you shake the world, and everything that doesn’t fall off is a fixture.
                                                   12
       b. Only goods can become fixtures.
              i. Money is not a good, and therefore could not be a fixture, even if it was somehow
                 attached to a wall.
             ii. Virgin timber is real property

II.    When does a Good Become a Fixture?
       a. Cliff’s Ridge Test:
               i. Property annexed or attached to the realty,
              ii. Property adapted or applied to the use of the realty, AND
             iii. Intended that the property will be permanently attached to the realty
       b. Integrated Industrial Plant Doctrine
               i. The position of some authorities is that any and all machinery essential to the proper
                  functioning to a plant, mill, or similar manufacturing is a fixture, or is at least so
                  presumed to be, irrespective of the manner in which it is annexed to the realty, even
                  though it is not attached thereto at all.

III.   Ways to perfect fixtures

       a. Normal UCC process
              i. Perfects against the fixture as a good (because a fixture is a good and real property)
             ii. This perfection loses to any perfection that occurs in the land recording system

       b. Mortgage/Property Law
              i. File against the fixture in the state property recording system
             ii. The record should indicate that it covers fixtures in order for it to be a financing
                 statement recognized by the UCC. 9-502(c)
                     1. Includes language such as “fixtures, appurtenances, etc.”
            iii. Otherwise, UCC rules do not apply—this is dealt with by the state system (the state
                 system may not even require fixture to be listed)

       c. Make a “Fixture Filing” per UCC rules
              i. 9-102(a)(40): Fixture filing means the filing of a financing statement covering goods that
                 are, or are to become, fixtures and satisfying the requirements of 9-502(a & b).
             ii. This includes the standard requirements:
                     1. Names of the debtor and the secured party
                     2. Signature of the debtor
                     3. Mailing address of the debtor
                     4. Address of the secured party
                     5. Description of collateral
            iii. In addition, 9-502(b) requirements for financing statements in fixtures must:
                     1. Indicate that it covers fixtures
                     2. Recite that it is to be recorded in the real estate records
                     3. Contain a description of the real estate where the fixtures are located or to be
                         located, which is sufficient to provide constructive notice under state mortgage
                         law.
                     4. If the debtor does not have an interest of record in real estate, the owner of record
                         must be disclosed.
            iv. The financing statement must also be filed where a mortgage on the real estate would be
                 recorded. 9-502(a)(1)(B).


                                                   13
                                        Maintaining Perfection

I.     General Rule: except as otherwise provided, a financing statement is not rendered ineffective if, after
       the financing statement is filed, the information providing in the financing statement becomes
       seriously misleading. 9-507(b)

II.    Changes in the name of the debtor 9-507(c):
       a. If the debtor so changes its name that the change is seriously misleading:
                i. The financing statement is effective to perfect a security interest in collateral acquired by
                   the debtor before, or within four months after the change; and
               ii. The financing statement is not effective to perfect a security interest in collateral
                   acquired by the debtor more than four months after the change, unless an amendment to
                   the financing statement which renders the financing statement not seriously misleading is
                   filed within four months of the change.
                       1. This means that so long as you file re-file within four months, the new statement
                           will relate back to the date of the old statement for the purposes of priority.
                       2. If you file an amendment after the four month period, you are perfected in any
                           new collateral acquired, but only from the date of the new filing.
                               a. Remember that anything acquired within the four month period is still
                                   perfected under the old financing statement.

III.   Changes Affecting Description of the Collateral

       a. Changes in use
              i. Type 1: A change that does not alter the place of filing, but makes the collateral difficult
                 to identify.
                     1. Ex. A loader is part of inventory, but then is used for equipment.
                     2. This interest remains perfected per 9-507(b)—no exceptions apply.
             ii. Type 2: The change controls where the perfecting financing statement would have been
                 filed.
                     1. Ex. A car is inventory, and is used for equipment. Because most states have
                         separate filing systems for cars, an original financing statement would have been
                         filed there if the car was in use.
                     2. Holder of the security interest must re-file to perfect. 9-311(b).
                              a. Whether or not perfection relates back depends on the law governing the
                                 new financing system.
            iii. Generally: in all cases involving a change in use, the financing statement remains
                 effective, so long as the change in use doesn’t implicate a state statute regarding filing.

       b. Exchange of Collateral
              i. Remember, always ask:
                     1. Is there attachment?
                     2. Is it a proceed?
                     3. Is it identifiable?
             ii. General rule: 9-315(d) A perfected security interest in proceeds becomes unperfected on
                 the 21st day after the security interest attaches to the proceeds unless:
                     1. The following conditions are satisfied:
                             a. A filed financing statement covered the original collateral
                             b. The proceeds are collateral that can be perfected by filing in the same
                                 office as the original financing statement
                             c. The proceeds are not acquired with cash proceeds
                                                    14
                     2. the proceeds are identifiable proceeds
                     3. The security interest remains perfected if the party re-perfects within 20 days of
                        when the security interest attaches to the proceed.

            iii. Collateral to Non Cash Proceeds
                    1. Type 0: Proceeds received in exchange for the collateral fall within the collateral
                        already described by the financing statement.
                            a. Any interest remains perfected without any additional action.
                    2. Type 1: an exchange of collateral for non cash proceeds where the proceeds are
                        property not covered by the original financing statement, but which could be
                        perfected by filing in the same office.
                            a. Ex: debtor trades a pallet of widgets (inventory) for a loader (equipment).
                                Original security agreement covers inventory only.
                            b. The Elephant Rule: any interest remains perfected without any additional
                                action. 9-315(d)(1)
                    3. Type 2: An exchange of collateral for non cash proceeds of a type where filing is
                        required an office other than the one in which the original collateral was
                        perfected:
                            a. Ex: Exchange of widgets for a car.
                            b. To perfect, you must re-file—not covered by 9-315(d)(1).

            iv. Collateral to Cash Proceeds
                   1. You remain perfected per 9-315(d)(2)
                   2. 9-102(a)(9): Cash proceeds include money, checks, deposit accounts, or the like.
             v. Collateral to Cash Proceeds to Non Cash Proceeds
                   1. Type 0: Collateral to cash to an item covered by the original financing statement .
                           a. Interest remains perfected, because the items are covered in the original
                               financing statement
                   2. Type 1: Collateral to cash to an item not covered by the original financing
                       statement, but that could be perfected in the same office.
                           a. You must re-file within 20 days to remain perfected. 9-315(d)(3)
                   3. Type 2: Collateral to cash to an item not in the original statement, and covered
                       within the office of the original financing statement.
                           a. You must re-file in the appropriate office.

      c. Disposition
             i. 9-507(a) A filed financing statement remains effective with disposed collateral, even if
                the secured party knows of , or consents to, the disposition.
                    1. However, this only addresses perfection.
            ii. The interest remains attached only if the secured party did not authorize the disposition.
                9-315(a)(1).

IV.   Governing Law and Relocation of Debtor or Collateral

      a. Relocation when perfection is through possession
             i. The law of the state where the collateral is located applies. 9-301(2)
            ii. Essentially, you will always be perfected, because every state UCC will say that you can
                perfect through possession.



                                                  15
b. Relocation when perfection is through filing
       i. Governing law:
              1. File in the secretary of state’s office where the debtor is located 9-301(1)
                     a. Registered organizations are located in the state of
                          registration/incorporation. 9-307(e)

                      b. Non registered organizations-two separate possibilities:
                            i. One place of business: debtor is located wherever that place of
                                business is. 9-307(b)(2)
                           ii. Multiple places of business: Debtor is located at its chief executive
                                office. 9-307(b)(3)
                                    1. Nerve Center Test: chief executive office is where
                                        managerial decisions are made. Sometimes, this can
                                        change depending on where the CEO is.

                      c. Individual debtors
                              i. Are located at their place of principal residence 9-307(b)(1)
                             ii. A principal residence is more than location, but less than domicile.
                            iii. Sole proprietors are individuals.

       ii. Movement of the debtor
             1. Movement matters when the person/entity/nerve center moves to another state.
             2. Individuals
                    a. When an individual changes his principal place of residence, secured
                        creditor has four months in which to file in the destination state 9-316(a)
                            i. 3-316(a) essentially provides that a secured creditor remains
                                perfected until the earliest of:
                                    1. The time perfection would have ceased under the law of the
                                        original jurisdiction
                                    2. The expiration of four months after a change of the debtor’s
                                        location to a new jurisdiction
                                    3. The expiration of one year after a transfer of collateral to a
                                        person that becomes a debtor, and is located in another
                                        jurisdiction.
                    b. If the creditor re-perfects within four months, the financing
                        statements merge, and date back to the filing date of the original
                        financing statement. 9-316(b).

                      c. If the secured creditor does not perfect in the new jurisdiction, it becomes
                         unperfected after four months, and is deemed never to have been perfected
                         as to a purchaser of the collateral for value. (this includes secured
                         parties) They still are perfected for those four months against lien and
                         judgment creditors). 9-316(b).
                              i. Example: Bank1 takes a security interest in Bob’s equipment and
                                  file in Florida, Bob’s principal residence on 1/1/00. On 3/1/00,
                                  Bob moves to Washington.
                                       1. If Bank1 re-files in WA on 4/1/00, they remain
                                           continuously perfected.
                                       2. If Bank2 files in WA on 5/1/00, and Bank1 does not re-file,
                                           Bank2 would win, because they were a purchaser for value,
                                           so it is as if Bank1 was never perfected.
                                             16
                                              3. If Bank1 does not re-file, and a lien creditor had levied on
                                                 5/1/00, Bank1 would still win, because a lien creditor is not
                                                 a purchaser for value.
                      3. Corporations
                            a. If a corporation re-incorporates in another jurisdiction, the rules are
                               essentially the same as the rules for individuals, except now the grace
                               period is one year. 9-316(a)(3).

                                                  Priority

I.     Essentially, determining who gets paid, and whose interest in the collateral survives. The sheriff is
       always paid first.

II.    General Rule: Superior interests survive the sale of the collateral by the lower priority party. They
       are extinguished as to inferior parties.
       a. Example:
                i. Bank1 has a 200K loan secured in debtor’s loader on 1/1/00
               ii. Bank2 has a 200K loan secured in the same loader on 2/1/00
              iii. Bank3 has a 100K loan secured in the same loader on 3/1/00.
              iv. Lien creditor has a judgment for 150K.
               v. The value of the loader is 350K
              vi. If Bank2 forecloses:
                      1. A logical bidder would be willing to pay up to 150K for the loader (value, less
                         Bank1’s 200K interest)
                              a. In reality, know that there will be attys costs, etc. if there is a dispute with
                                  Bank1. Always make a deal with a superior interest holder b/f bidding.
                      2. If the loader sells for 150K:
                              a. Sheriff gets 5K costs
                              b. Bank2 gets 145K, pluse a 55K deficiency judgment (they now have the
                                  same status a judgment creditor)
                              c. Bank3 and Lien Creditor’s interests disappears
                              d. Bank1’s interest follows the collateral.
                      3. If Bank1 didn’t want Bank2 to foreclose, they could make debtor a 150K
                         advance. Then a reasonable bidder would bid nothing.

III.   Basic Rules of Priority
       a. General Rules
               i. Priority interests survive foreclosure by junior parties
                      1. All interests in the collateral more junior than the foreclosing party are wiped out
                      2. Example:
                              a. Bank 1 = $150K
                                  Bank 2 = $100K
                                  Lien Cred = $150K
                                  in two loaders with market value of $200K
                              b. If B2 forecloses, they’d bid $50K, and arrange with Bank 1 to pay off the
                                  debt.
              ii. Senior foreclosing party gets paid first (after the sheriff).
                      1. Example:
                              a. Bank 1 = $380K
                                  Bank 2 = $210K

                                                     17
                         Lien Cred = $150K
                         in all equipment with market value of $500K
                     b. If B2 is the foreclosing party… the senior interest is $380, leaving us with
                         $120K that you would bid, and then you’d have to work with B1 to pay
                         off the rest of that interest
                     c. Assuming $120K is the winning bid:
                         $5K would go to the sheriff
                         $115,000 would go to B2
                         B2 would get a deficiency judgment for the remaining $95K they’re owed
                         Lien Creditor is out of luck.
               2. Remember that the sheriff’s costs are a “red herring.” Those costs do not affect
                  what you’re willing to bid; it only affects the distribution of your bid.
               3. Example:
                     a. Bank 1 = $100K
                         Bank 2 = $500K
                         Lien Cred = $200K
                         in collateral worth $700K
                         Sheriff’s costs = $5K
                         B2 foreclosing
                     b. You would bid up to $600K.
                         Is there any interest for B2 to be a bidder in addition to being a foreclosing
                         party? Yes—B2 wants to protect itself from low bids. There’s equity
                         there. How much does B2 bid to make sure it’s paid in full? $505K. If
                         you bid $505K, anyone above that you’re fine with because you still get
                         paid in full. But that way no one bidding less than that will come in.

b. Right to Possess Collateral
       i. Generally, a senior secured party may exercise its right to possess collateral. This
           essentially means that in some cases, they can trump the right of the lesser party to
           foreclose (no one will want to buy property that they cannot possess)
      ii. Varying Rules
               1. Frierson says that if you possess collateral, you must foreclose.
               2. The book suggests that one could still sell property, even if it was possessed by
                   someone else
               3. In order to stop senior creditors from abusing their position, most courts have held
                   that
                        a. The party’s ability to possess the collateral is really limited to those
                           situations when they face the collateral suffering waste or distribution.
                           But when there is no potential for waste (i.e., the senior party will have a
                           traceable interest in the collateral), the senior party may not continue to
                           possess to stop a foreclosure; or
                        b. Collusion standard: if there is a good faith lack of collusion (usually with
                           the debtor), the senior party may continue to hold the collateral.

c. Lien Creditor v. Lien Creditor
       i. When does a party actually become a lien creditor?
              1. When the writ is executed—the creditor levies on the collateral.
      ii. State approaches to priority
              1. Majority Rule: first to levy has priority
                     a. Policy is that this gives actual notice.
              2. Minority Rule: first to deliver the writ to the sheriff has priority
                                           18
                       a. Policy: this takes care of problems regarding lazy sheriffs and loss of party
                          control.

d. Lien Creditor v. Secured Party
        i. Always measure from the date that the lien creditor becomes a lien creditor—the date that
           they levy.
       ii. 9-317(a): A security interest is subordinate to a person who becomes a lien creditor:
               1. Before the security interest is perfected (attachment + filing); or
               2. The secured party authenticates a valid security agreement and a financing
                   statement is filed.
                       a. The security interest has not yet attached, because value has not been
                          given. This allows a bank to ensure that it is perfected before it dispenses
                          any money.
      iii. In other words, a secured party wins if it is secured + perfected, OR 9-203(b)(3) + Filing
           Stmt filed, BEFORE the lien creditor levies.

e. Secured Party v. Secured Party
        i. In general: covered by 9-322(a)
       ii. Always examine the status of the parties first (at the date the question is being asked),
           then apply the appropriate rule:
               1. Perfected v. Perfected: priority to the first party to file or perfect. 9-322(a)(1)
                       a. Don’t ask whether they were perfected when the filing occurred
                       b. Ask if they are perfected now
                       c. File means what it says: filing (even if the jurisdiction was originally
                          incorrect)
               2. Perfected v. Attached: perfected party has priority. 9-322(a)(2)
               3. Attached v. Attached: First party to attach has priority. 9-322(a)(3).
     iii. After acquired collateral
               1. Interest relates back to the time of filing (but watch out for PMSIs) 9-322(a)(1)
      iv. Exceptions
               1. Security interests in transferred collateral
                       a. 9-325(a) Security interest of the transferor takes priority over the interest
                          of the transferee if:
                                i. the transferee debtor acquired the collateral subject to a security
                                   interest created by a creditor of the transferor;
                               ii. the security interest created by the transferor creditor was perfected
                                   when the transferee debtor acquired the collateral; and
                              iii. there is no period thereafter when the security interest is
                                   unperfected.
                       b. Example:
                                i. Bank1 perfects in debtor1’s equipment and after acquired
                                   equipment on 1/1/00.
                               ii. Bank2 perfects in debtor2’s loader on 4/1/00.
                              iii. Debtor2 sells his loader to debtor1 on 5/1/00. Bank2 does not
                                   authorize the disposition.
                              iv. Even though both parties are perfected, and Bank1 has was first to
                                   perfect, Bank2 has priority.




                                             19
f. Purchase Money Security Interests (applies to secured parties and lien creditors)
      i. 9-317(e): A creditor who files a financing statement within 20 days of a debtor receiving
         delivery of purchase money collateral takes priority over the rights of a buyer, lessee, or
         lien creditor arising between the time the interest attaches and the time of filing.
             1. This means that so long as the PMSI creditor files within 20 days, he takes
                 priority over all other creditors.
             2. The purpose of this rule is to get the debtor out of the thumb of any original bank
                 that may have a security interest with blanket after acquired language.
             3. Remember—this is a rule of priority, not perfection—the PMSI must still properly
                 attach.

       ii. Consumer Goods: PMSI’s automatically perfect, so filing is not required.

      iii. Exceptions
              1. PMSIs in inventory
                      a. 9-324(b) The only way a party make take a PMSI in inventory is if:
                              i. The party wishing to take a PMSI perfects no later than the time
                                 the debtor receives possession of the collateral; and
                             ii. Provides advance notice to any inventory lenders that it expects to
                                 acquire a PMSI in inventory
                                     1. This includes searching the filing system to determine if
                                         there are any potential inventory creditors.
                      b. Purpose of this rule is to protect inventory lenders. Example:
                              i. Bank1 is an inventory lender to debtor Best Buy. They have filed
                                 a financing statement listing BB’s inventory as collateral.
                             ii. BB usually buys 100K in inventory from Sony at a time. They
                                 show the inventory to Bank1, and Bank1 deposits money into their
                                 account, with the understanding that they will pay Sony. Because
                                 of the co-mingled accounts, Bank1 could not claim PMSI status.
                            iii. Sony, however, could claim PMSI status while the inventory
                                 payment was outstanding, and their claim would have priority over
                                 Bank1’s.
                            iv. Rule 9-324(b) provides that unless Sony gives Bank1 notice, Sony
                                 will not have PMSI status.

      iv. PMSIs and Proceeds
            1. General Rule: PMSI priority flows into proceeds. 9-324(a) Follow the regular
               rules of proceeds. (See maintaining perfection, above).
            2. Exception
                   a. 9-324(b) When inventory PMSIs are at issue, PMSI priority only flows
                       into:
                            i. Chattel paper
                           ii. Money
                          iii. Instruments
                   b. The big deal here is that this does not include accounts.




                                           20
IV.   Future Advances

      a. Secured Party v. Lien Creditor
              i. 9-323(b): Except as otherwise provided, a security interest is subordinate to the rights of
                 a person that becomes a lien creditor to the extent that the interest secures an advance
                 made more than 45 days after the person becomes a lien creditor, unless the advance is
                 made:
                     1. Without knowledge of the lien
                     2. Pursuant to a commitment/agreement entered into without knowledge of the lien.
             ii. Within the 45 day time period after lien creditor levies secured party and debtor can enter
                 into a new security agreement, and secured party will have priority, so long as the
                 collateral is covered by the original financing statement.
           iii. Secured party will continue to have priority after the 45 day period in advances made
                 without knowledge of the lien, or pursuant to a commitment made without knowledge of
                 the lien.
            iv. Always pay attention to the type of collateral. If a security agreement is entered after the
                 judgment creditor levies for equipment not covered by the original financing statement,
                 lien creditor will have priority, because secured creditor would be second to perfect.

      b. Secured Creditor v. Secured Creditor
             i. All advances made by the secured creditor the debtor have priority as of the filing of the
                financing statement. 9-322(a)
            ii. Example:
                    1. 1/1/00: Bank1 and debtor authenticate a security agreement to loan up to 1
                       million; Bank1 files financing statement in equipment and after acquired
                       equipment (no dollar amount limit is given on the financing statement).
                    2. 2/1/00: Bank2 perfects in debtor’s inventory and equipment.
                    3. 4/1/00: Bank1 and debtor enter a new security agreement to loan up to 2 million
                       dollars.
                    4. Bank1 has priority over Bank2 for 3 million dollars of equipment, because the
                       new security agreement relates back to the time of filing.
                           a. Watch the language. If the 4/1/00 agreement was just a loan agreement,
                                and not a security agreement, the equipment would not have been
                                attached.
           iii. Example:
                    1. 1/103: Bank 1 agrees to loan up to $1 million, and executes a Security Agreement
                       with debtor in debtor’s inventory
                    2. 1/15/03: Bank 1 loans debtor $500K
                    3. 2/1/03: Bank 2 perfects in debtor’s inventory
                    4. 3/20/03: Bank 1 loans debtor the other $500K
                    5. Bank 1 has priority in the $1 million because Bank 1’s filing statement filed on
                       1/1/03 gives it priority in all future advances.

                                                 Buyers

I.    General rule: security interest follows the collateral
II.   Exception:
      a. Buyer in the ordinary course of business can assert an affirmative defense to stop a lender bank
         from seizing the collateral.


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