Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
Table of Contents
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
I. Overview
A. Ex Ante versus Ex Post possible schemes
1. Ante
a) Private ordering through contract
1) Article 9
b) Protective Schemes – nonconsensual creditors like tort victims
1) Done with Statutes
2. Post
a) Facts at time of insufficiency determine allocation.
b) Grab method – first come first serve
c) Individualized Assessment of creditors – who needs it?
d) Lottery
B. Questions about these possibilities
1. Private versus public?
a) Favor contractual solutions versus mandatory public orderings?
b) Rent-seeking behavior in public ordering - $ on lobbying, dissipation of any
advantages of public ordering.
2. Costs of Implementation for different schemes?
a) Public method, Individual assessments, expensive
b) Again, rent seeking?
3. Fairness
a) Lottery may have low costs but unfair to individuals
b) Smooths out over total? Do we care?
C. Attachment and Perfection Overview
1. Process
1) Bank lends $ to Debtor
2) D promises to repay loan
3) D grants B security interest in an asset
4) B gives notice to Public of SI
2. Attributes of SI
a) Property Rights (steps 1-3)
1) 9-609: Right to repossess
2) 9-610: Right to sell for proceeds to satisfy debt
3) 9-620: Right to keep in full/partial satisfaction of debt
b) Priority Rights
1) 9-201: Secured Party/Creditory (SP/SC) has priority over Unsecured Creditors
(USC)
3. Reified Priority System: Asset based priority system
a) SA, FS, $ loaned – all based on specific, listed assets
b) Later will see that a missing or deficient description can doom an SI
c) As such, dates and perfection irrelevant to reification
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
1) SI's on different assets do not conflict, and timing, perfection irrelevant
2) Ex.
(A) Corp SA: Inv Finco 10K
(B) Corp SA:EQ Bank 10K
(C) Corp USC CreditCo 10K
(D) Inv – 5K; Eq 15K
(E) F gets Inv to satisfy 5K, B gets Eq to satisfy all 10K.
3) Question is, how to split remaining 5K of Eq?
4) NOTE – F and C are both USC with regards to remaining 5K!!!
d) Possible Distributions of remaining amount to USC's
1) Pro Rata – USED – BR §726(b)
(A) Each creditor gets fraction of leftover assets as its fraction of total
Unsecured debt.
(B) Here, F:C = 1:2. F gets 1/3 = $1,667; C gets 2/3 = $3,333
(C) Final Distribution:
(1) B: 10K
(2) F: 6,667
(3) C: 3,333
2) Equal Asset Distribution
(A) Distribute assets equally until paid off.
(B) Here, F and C split 5K equally, 2,500 each
(C) Final Distribution
(1) B: 10K
(2) F: 7.5K
(3) C: 2.5K
3) Equal Loss Rule
(A) Creditors bear loss equally – hand $ to debtor with greatest debt until
debts equalized, then split equally.
(B) Here, F has loss of 5K, C 10K. Give $ to C until debts are equal – all
to C.
(C) Final Distribution
(1) B: 10K
(2) F: 5K
(3) C: 5K
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
4) HYPO – 3 USC's with debts of 100, 200, 300 respectively. How do different
solutions stack up?
(A) Table shows how assets distributed in different regimes
Pro Rata Equal Assets Equal Loss
100 200 300 100 200 300 100 200 300
A 100 16.67 33.33 50 33.33 33.33 33.33 0 0 100
S 200 33.33 66.67 100 66.67 66.67 66.67 0 50 150
S 300 50 100 150 100 100 100 0 100 200
E 400 66.67 133.3 200 100 150 150 33.33 133.3 233
T 500 83.33 166.7 250 100 200 200 66.67 166.7 267
S 600 100 200 300 100 200 300 100 200 300
Pro Rata Equal Assets Equal Loss
150 150 300 150 150 300 150 150 300
A 100 25 25 50 33.33 33.33 33.33 0 0 100
S 200 50 50 100 66.67 66.67 66.67 16.67 16.67 167
S 300 75 75 150 100 100 100 50 50 200
E 400 100 100 200 133.3 133.3 133.3 83.33 83.33 233
T 500 125 125 250 150 150 200 116.7 116.7 267
S 600 150 150 300 150 150 300 150 150 300
(B) Incentives:
(1) Equal Loss – over encourages high sum lending
(2) Equal Asset – over encourages multiple low-sum loans
(3) Both of these methods create need to investigate the amount
AND distribution of lending. Give incentives to aggregate or
disaggregate own lending. Strategic behavior
(a) Large Claimant: Equal Loss > pro rata > equal assets
(b) Small Claimant: Equal Assets > pro rata > equal loss
(4) Pro Rate – invariance. Irrelevant to ultimate return as to
whether you lend in one sum or in multiple sums. No further
investigation of distribution necessary.
D. Priority Overview: First to File Rule
1. Generally – competing security interests in same property tied to first to file financing
statement in appropriate offices.
a) 9-322(a)(1) – Conflicting perfected SI's rank according to priority in time of filing
OR perfection
b) – Priority dates from earlier of time a filing covering collateral is made or SI is
perfected, if there is no period thereafter when there is neither filing nor perfection.
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2. Hypos
a) SA/FS:Eq on 1/1 > SA/FS:Eq on 2/1
b) SA/FS:EQ on 2/1 > SA:EQ on 1/1, FS:EQ on 2/2 because FS filing perfects for
purposes of priority, not the SA.
c) Bank FS:EQ 1/1, SA:EQ 3/1; Finco SA/FS:EQ 2/1
1) Bank wins
2) FS can be filed BEFORE SA, and even though no SI, no perfection until 3/1,
the filing suffices under 9-322(a)(1) to establish priority.
3) All about notice, as we will see later.
d) F 1/1 – SA:Computer, Possess; B 2/1 SA/FS: Computer
1) B first to file, BUT . . . .
2) 9-322 ranks by filing OR possession, and perfection via possession works
3) F wins.
3. Ostensible Ownership Problem.
a) The use of contract to establish SI creates appearance of "clean" ownership. Possible
to have a "hidden lien" where person cannot "see" SI in owned property.
b) So some people would fix by requiring possession of property to establish SI
c) BUT, still OOP does possession equal ownership? No. So how do we make clear
that possessor has rights in asset? Filing system, contractual SI's.
d) Back full circle, with filing to give notice and kill hidden liens.
e) Possession for perfection can lead to inefficient property usage. Bank has no use for
candy making equipment. Better off in hands of debtor making candy to pay off
loan!!
4. Possession wrinkle.
a) Hypo
1) 1/1 Finco SA, Possess: Computer.
2) 2/1 B SA/FS: Comp
3) 3/1 F gives up possession, files FS
b) 3/1, who wins?
1) Bank filed first, but F's possession perfects first.
2) And, priority dates from earlier of filing or perfection if no period without
filing or perfection. Seems so here.
3) Monitoring cost on lenders? How?
c) 4/1 – PROBLEM – new lender sees distorted priorities. Thinks Bank is first.
1) Could fix with notice of prior possession on F's filing.
2) But likely irrelevant – subsequent lender sees two parties ahead of him, both
are ahead. Doesn't care about how they rank with each other.
II. Attachment / What is a Security Interest
A. Security Interest Defined:
1. 1-201(37) — Interest in personal property or fixtures which secures payment or
performance of an obligation
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2. Security Interest Attachement Generally
a) Attachment = enforceable interest against debtor and other creditors
b) 9-203(a): SI attaches when it becomes enforceable against debtor with respect to
collateral
c) 9-203(b): SI is enforceable against debtor and 3d parties when/if
1) Value has been given
2) Debtor has rights in collateral or power to txfr rights in collateral
3) Authenticated SA that describes collateral (others as well, dealt with later)
d) Example: Bank loans money, gets signed SA stating "grant SA in copy machine
serial # 334 to bank to secure debt evidenced by the promissory note from this date."
1) Money lent = value
2) Debtor owns copy machine, has rights
3) Authenticated SA describing property
3. After-Acquired Property
a) 9-204(a): SA can create/provide for SI in after-acquired property
b) Example
1) 1/1 SA/FS: EQ, Inv, GI, now and after-owned, including Das Kapital
2) Debtor doesn't own Das Kapital until 7/1
3) No SI in Das Kapital until 7/1, then SA creates SI immediately upon getting
DK.
4. Waiving Rights – And still having an SI?
a) Right To Seize Collateral?
1) Still have a Security interest even if you waive/declaim certain rights
associated with SI.
(A) Ex: "D grants SI in EQ but Bank waives right under 9-609 to
repossess after default."
(B) Still has an SI
b) Priority Rights
1) "Grants SI in equipment, but Bank must share value of such equipment pro
rata with USC's in event of default."
2) Still an SI? Yes. No restrictions on how SP can contract distribution of
proceeds.
3) Might raise cost of credit to level almost equal to USC.
4) Might give some order to ex post situation, gives some advantage to Bank –
right to repossess and distribute?
c) Building SI brick by brick?
1) "Bank has right of Part VI of Art 9" or "rights of 9-609 of UCC"
2) SI? Assume description not a problem.
3) Seems there is nothing that prohibits this in Art 9, but risky because so far
outside standard practice.
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
d) In re Clark (43)
1) Clark has liquor license that is not "property" under law. Signs
acknowledgment that LL won't be transferred without Chrysler's permission.
Chrysler files FS on LL.
2) Eventually, law changes to allow SI in LL.
3) Court finds no SI in LL b/c no express intent to grant SI. Only
restriction on alienation. Negative rights only. No positive rights – no right
to act against the property
4) SHOULD – include after acquired SI clause.
5. Negative Pledges as SI Substitutes
a) Clark – acknowledgment is example.
b) Economics are similar. Leverage versus property rights. But courts treat differently.
c) Effects on Distribution?
1) Negative Pledge – Corp promises not to grant a SI in any of its assets.
Corp FinCo
2/1
$200 w/
Negative Pledge
1/1
$100 USC
3/1 CreditCo
$300
SA/FS: All Assets
Bank
3/2: $400 in total assets
2) Shit out of Luck – F as just another USC
(A) C gets its $300
(B) B and F split $100 pro rata:
(1) B: $67
(2) F: $33
3) Some Effect
(A) B > C: SC beats USC 9-201
(B) B = F: Both USC
(C) F = C: If pledge has some effect, then C cannot have advantage over F
(D) Circular priority – inconsistent. Cannot resolve.
4) Picker Possibility – Preserve SI but then allow breach against SC
(A) SC v USC
(1) C gets 300, F:67, B: 33
(B) F sues C – Tortious Interference with K
(1) Pool F and C assets, divide pro rata – simulates F = C
(2) 300 + 67 = 367
(3) F:C = 2:3
(4) F: 147, C: 220 (B:33)
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(5) Remedy attempts to simulate ex post what an intercreditor
agreement would have done ex ante. Agreement to share pro
rata.
(C) May require some tinkering with K privity – how to bind SC?
Knowledge? Messy. No good solution.
(D) Ex Ante, if you could find a way to register negative pledge, this
becomes clearer solution. Find other way to monitor, notify.
5) McBride solution? – Breach giving expectation as to F.
(A) What would F have received if no SI, and all were USC (pro rata as to
400)? 1/3 of $400 equals 133
(B) Take amount necessary to give F 133 from C.
(C) F: 133, C: 233 (B:33)
6) Again – possible circular priority problems. How to sue 3d party –
knowledge, 3d party beneficiary issues.
B. Moral-
1. Positive v Negative Rights:
a) Unclear how much positive rights are necessary in order to get SI under 1-201(37).
But negative rights like Clark will likely fail.
b) Negative rights likely only give right to sue for breach – just another USC then. SI
gives property rights, right to injunction. Can be a significant difference
c) Purchaser knowledge of negative pledge? No privity? Maybe equitable soln.
d) NOT CLEAR there is any significant difference in function.
1) Both secure payment or performance. One does it by leverage – have to buy
off negative covenant. Other does it by affirmative rights – repossess.
e) Circular Priority problems can result depending on Remedy
1) Negative Pledge issues above.
2. Top down versus Brick by Brick
a) Granting SI and taking away certain rights looks good
b) Building SI right by right more problematic.
C. Authenticated Security Agreement
1. 9-203(b)(3)(A): one of the possible ways to establish an enforceable SI is with an
authenticated SA that provides a description of the collateral.
2. What can qualify as a Security Agreement?
a) Express Grant requirement
1) Some courts require a document that uses the language "grant a security
interest."
2) American Card line of cases.
3) Martin Grinding – Formalistic
(A) SA that leaves off inv. and AR that are listed on loan doc's cannot be
enlarged to include them as SI
4) Close to requiring single document for SA – Picker finds not required.
b) Whole Transaction Rule
1) Look to writings as a whole to see if there is intent to grant SI
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2) Amex-Protein – FS alone can create SA
3) Bollinger – FS plus Promissory Note plus letters provides clear intent.
(A) FS alone insufficient – shows intent to reserve place in line, not intent
to create with that doc an SI.
(B) Promissory Note refers to an SA – this can't be the SA
(C) Letters post –deal refer to collateral, list collateral. Court finds this
ties up total package
(D) PICKER finds this "wide of the mark." Not clear it is referring to
formation of a NEW SA instead of just old SA.
c) Picker prefers to keep FS separate from SA – formalities.
1) the placeholding function of FS gives it a clearly separate purpose in
transactions. Collapsing them unnecessarily destroys usefulness of having
them separate (namely, reserve place but give time to work out details of deal
without binding SI).
2) Debtors internalize costs of subsequent deals with third parties – they want
"clean" paper to present for new lenders.
3) Result? Pure one-paper SA with grant language not necessary, but looking to
FS dangerous. ??
D. Description of the Collateral
1. 9-203(b)(3)(A) – SA provides a description of the collateral.
a) Implements the reified system
b) Ultimately a question of K interpretation for courts
2. 9-108 – Sufficiency of Description
a) Must Reasonably identify what is described.
b) Specific examples of what is acceptable – specific listing, category, type defined in
UCC, quantity, computational or allocation formula, any method if identity of
collateral is objectively determinable
c) NOT ACCEPTABLE – Supergenerics like "all assets" or "all personal property" or
similar. Can't do SA. (Picker dislikes – what's confusing here? May protect
unsophisticates)
d) 9-108(e): description by type insufficient for commercial tort claim, plus some thing
in consumer transactions stuff
3. Laminated Veneers (63)
a) Court finds description too generic to include stuff not listed on specific attached
schedule.
b) New Art 9 fixes, allows "equipment" as description.
c) Case misses close reading of description that would have excluded cars anyway –"at
plant" language
4. World Wide Tracers (67)
a) Supergeneric description "all property now and hereafter"
b) Court finds SA doesn't cover AR.
c) The inclusion of a specific schedule listing property futzes with this.
d) New 9-108(c) would make this completely invalid SA.
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
5. LV and WWT raise interpretive issues for descriptions – Rules of Construction
a) First, note that new Art 9 clarifies both cases.
b) Anti Drafter Rule
1) Ambiguity resolved against drafter
2) Lender usually drafts
c) Anti Broad SI Rule
1) Judges often reluctant to enforce broad SI's
2) See LV and WWT
d) More is Less Rule
1) Adding information to a describtion may give judge excuse to limit that
description
2) The addition of schedules to broad SA's in LV and WWT gave "hook" to
judges to limit SA.
e) Tethering
1) Use of accessible sources of definitions mimics what 3d party looking at SA
would have to do
2) Thus, use of UCC definitions to determine what SA defn's mean.
3) Rev A9 does this explicitly.
E. Rights in the Collateral Requirement
1. 9-203(b)(2): SI enforceable only if debtor has rights in property or power to transfer rights
that he can give in an SI.
a) Mona Lisa Hypo – can't give an SI in something you don't own/have
b) Could make SA that would give SI in ML if acquired as AAP.
c) SP's rights are derivative of Debtor's—steps into shoes of debtor.
d) D has lease, can assign lease as SI, but not fee.
2. Whatley
a) Single owner corp used owners personal prop. as collateral as loan, then owner used
as collateral on personal loan. Who wins?
b) Even though Corp had no rights to give, Court finds consent of owner sufficient to
give Corp rights in collateral.
c) PROBLEM –
1) Securing debts of corp with personal property not unusual, but requires some
public documentation of pledge of public property, and FS FILED WITH
RESPECT TO OWNER.
2) The signature of owner on Corp form is INDISTINGUISHABLE from pure
corporate action, no way to find CONSENT from this.
3) Its all about notice – watch the formalities
F. "An Honest to God Security Agreement"
G. Cases
1. Clark – Negative pledge
2. Bollinger – Expansive reading of "written SA"
3. Martin Grinding – Limited reading of SA – no expansion by parol ev.
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
4. Laminated Veneers – More is less in written description
5. World Wide Tracers – "all property" description too generic and more is less interp.
6. Whatley – Can't give rights you don't have. Consent can cure, but court botches formalities.
H. Statute Sections
1. 1-201(37): Security Interest
2. 9-203: Attachment, enforceability
3. 9-204(a): After-acquired property
4. 9-108: Sufficiency of Description
III. Perfection requirements (Reservation of place in line)
A. Introduction
1. Turning unperfected SI's into perfected ones involves multiple sections and ways to do it. 9-
310 to 9-316.
2. Perfection is not about relationship between creditor and debtor, but rather about relationship
between creditor and public, other potential creditors.
3. Statute Overviews
a) 9-308: Security interest is perfected if it has attached and applicable requirements of
310-316 are met. Will perfect when attached if perfection requirements done before
attachment.
b) 309: Things that perfect upon attachment without extra stuff. . . .
1) PMSI's in consumer goods
2) Transfers of accounts or payment intangibles (that aren't txfr of significant
part of transferors total accounts?)
3) Assignment of health care insurance receivable
4) SI in investment property created by broker.
c) 9-310: General Perfection Rule – FILE Financing Statements
1) 310(c): If SP assigns perfected SI, no new filing required to continue
perfected status against creditors of and transferees from original debtor.
2) Go to 502-ish to see rules for what is sufficient for filing.
d) 9-312: Exceptions to filing:
1) MAY file for chattel paper, negotiable documents, instruments, or investment
property
2) 312(b) CONTROL or POSSESSION:
(A) DEPOSIT ACCOUNT ONLY BY CONTROL UNDER 314
(B) Letter of Credit right ONLY by control under 314.
(C) Money only by possession under 313.
e) 9-313: Perfection via Possession
1) May perfect by possession for negotiable documents, goods, instruments,
money, or tangible chattel paper
f) 9-314: Perfection vie Control (Deposit Accounts)
1) As noted above, Deposit Accounts, Letter of Credit Rights only by control
2) May also in investment property, electronic chattel paper.
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Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) Refers to control by methods listed in 9-104 to 107.
Summary of Perfection Methods
Item Method of Perfection
Goods File, possess
Deposit Accounts Control only
Tangible Chattel Paper File, posses
Electronic Chattel Paper File, control
Accounts (AR) File (only?)
General Intangibles File (only?)
Money Possession only
Instruments File, posses
Negotiable Documents File, posses
Investment Property File, control
Letter of Credit Rights Control only
B. Categorizing Collateral
1. Why Perfect – ex ante gives notice to public. Lower txn costs for subsequent creditors,
debtors seeking new capital flow. Ex post, gives an order for distribution of assets.
2. Problem – sometimes dealing with UNCERTAINTY in what the kind of collateral is, and if
you get the category wrong, can screw you on perfection. Solution – cover your bases and
use multiple methods.
3. Example – Newman (95)
a) Loan secured with assignment of an annuity as SI. Lender possessed, but didn't file
FS.
b) Court finds annuity a General Intangible and not an Instrument. Cannot perfect GI by
possession, only Filing. Not perfected.
c) NOTE – should file and possess, because if an instrument, possession gives superior
priority to perfection by filing only. See 9-330(d).
d) Further NOTE – changes in 9-312(a) allows filing instruments, where previously only
possession; no overlap then. This gap filling plugged holes where collateral leaked
to USC. Controversial changes.
4. Vienna Park
a) SI in Escrow Account's residual. Possessed? But no filing. Under old law, is this
Money (possession) or General Intangible (Filing)?
b) Court finds it a GI, required filing. BUT,
c) Revised Article 9 created Deposit Accounts, which this would likely be? Then could
perfect by control. Not sure.
5. Moral of the Story
a) Classify collateral successfully.
b) Design ex ante to reflect uncertainty by using multiple perfection methods. If it
might be GI or $, possess AND file.
11
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
C. Debtor's Name
1. Filing a financing statement requires certain information as part of the notice aspect. The
most important piece of information is the Debtor's Name. Why?
a) Because that is how FS are filed with the state (9-519(c)(1)).
b) When a subsequent creditor looks to see what debtor's encumbrances are, he looks
under the debtor's name. So the debtor's name, as the starting point for all
investigations, must be accurate in order for there to be notice!
2. 9-502: Describes the necessary contents of a financing statement
a) Sufficient only if it
1) provides name of debtor
2) provides name of secured party, or representative of SP
3) indicates collateral covered by FS
3. What is the Scope of Acceptable Names?
a) Burden allocation between filing creditor and searching creditor. Seeking to
minimize the aggregate cost of filing and searching.
1) Narrow Rules would limit to specific, legal names. Would impose more
burden on filer to get name right, limit costs on searcher.
2) Broad Rules – any relevant name. Minimize filer costs, broad search costs,
though.
b) 9-503: SUFFICIENCY of Name of Debtor (and Secured Party).
(a) Name of debtor sufficient
(1) if debtor is registered organization, only if statement indicates legal name
of registration as recorded with state.
(4) in other cases –
-if debtor has a name (like partnership), only if it provides individual or
organizational name of debtor
-if debtor doesn't have a name, only if it provides names of partners,
members, associates, or others comprising debtor.
(c) Debtor's trade name is insufficient.
c) 9-506: So what about MISTAKES? Who bears burden?
1) Minor errors won't render ineffective. Mistakes render ineffective if FS is
"seriously misleading."
2) Screwing up the name under 9-503 is seriously misleading, except. . ..
3) If using the correct name in a search with state WOULD turn up the FS, then
not seriously misleading.
d) It's all about notice. If you get the FS even when filed under wrong name, then you
have notice and can figure it out from there. The big problem is errors that keep you
from ever seeing the FS.
1) So filing under a trade name might not be misleading when you compare it to
legal name,
2) BUT searching under the legal name might never get an FS filed under trade
name, and then you can never make the comparison, and it should be
considered seriously misleading.
12
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) This is the error of Clairmont Pharmacy.
e) Clairmont Pharmacy, Inc. (107)
1) Stands for BIG MISTAKE in significance of name. Court finds name not
seriously misleading because a new creditor would have been able to figure
out who the debtor really was even with the wrong name.
2) BUT the KEY is that creditor would NEVER SEE the FS to make the
comparison because a search under correct name wouldn't reveal the FS.
f) Chemical Bank (108)
1) Hidden lien under incorrect name. Instead of seeking to have FS found
ineffective, pays off lien and sues search firm for negligence in search saying
they should have searched under the incorrect name (it was a variation on
correct name).
2) Search duty – court says yes to searching with or without definite articles, but
not to suearch under misspellings.
3) Interesting from remedy perspective and ex ante payment.
(A) If role of firm is contractual, then consideration is K, and remedy is
expectation Δs (and foreseeable consequential damages (Hadley v
Baxendale)).
(B) If firm is insurance, then have to pay insurance premiums!!!
D. Secured Creditor's Name
1. Not filed under SP's name, so errors not fatal to notice system. Now the Clairmont Pharmacy
logic is more compelling, b/c you WILL have the FS to make a comparison. We should
determine whether name can be figured out from what you see.
2. So things like trade names, address info, all should help searcing creditor make further
inquiry. Can you make leap from wrong name to right name. Balance with little sympathy
for screwing up your own name!!
3. BUT, missing name often fatal. Copper King.
E. Identification of Collateral (Description)
1. 9-502(a)(3) – FS must indicate collateral covered by FS.
a) Broader than SA requirements for description
b) Can be description pursuant to §108; or an indication that FS covers all assets or
personal property (supergenerics that are not allowed under 108).
2. Big Question: To what extent does an FS cover collateral not mentioned in the
corresponding SA, that is covered in subsequent, later SA?
a) Ex. SA: EQ/FS: All Assets; year later SA:INV. Perfected on earlier FS?
b) Quick Answer: Yes. A given FS is valid perfection/priority for all subsequent SI's
on the described assets.
c) Why: FS is notice and place holder. Even if FS doesn't give specific notice of
WHAT SI's exist on what assets, it clearly notifies searching creditor that someone
has staked his claim in line, and everyone knows the rules. Now, incentives for
intercreditor agreement to straighten things out. Simple, too. No confusion of
multiple FS's on overlapping stuff.
13
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3. Ambiguous FS's – the 2 views of FS Descriptions
a) Notice
1) FS adequately covers collateral when it puts subsequent creditor on notice that
there is an SI and he has to make further inquiry.
2) Thorp adopts this view.
b) Independent Sufficiency
1) FS itself contains a reasonable description of the collateral. Gives adequate
description so creditor knows whether desired collateral is covered.
c) We want a reservation, not a match with SA, and we don't want true notice because
when you GO ASK you only get the extent of current SA. FS covers future,
unknown SA's as well
d) Result, FS must be sufficient enough to set out the reservation clearly (extent of
priority in a reified system), and need not be so clear that it matches any SA.
Creditor's must limit losses by making intercreditor agreements to protect from future
SA's that may be covered by FS. Reified Priority System!!
4. Thorp Commercial
a) FS for "Assignment AR and Proceeds." Is that sufficient to cover after acquired AR?
b) Court says FS serves notice requirement – go ask.
c) PICKER – this FS is bad, and would require intercreditor negotiation of what FS
means.
F. Perfection by Possession
1. 9-313: Possession perfects for certain categories of goods.
a) But statute doesn't define possession
b) Can "possess" items held by 3d party/bailees. 313(c)
1) 3d party cannot be debtor, secured party, or lessee of collateral from debtor
2) Person in possession authenticates record acknowledging it holds collateral
for SP's benefit; or
3) Person takes possession after authenticating acknowledgement that it holds for
SP's benefit.
2. Coral Petroleum
a) Shows difference of old rule and new 313(c)
b) Paribas claims First Chicago is holding Note for P's benefit because P sent "notice"
(which if true was sufficient to create SI bailee stuff) to FC.
c) New Statute, would require an acknowledgement from FC, issue solved.
G. Perfection by Control (Deposit Accounts)
1. Deposit Accounts are a new creation under Rev. Art. 9. Framework in statute.
a) 9-203(b)(3): SI in deposit acct attaches when control under 104.
b) 9-104: Control for deposit account when . . .
1) SP is bank with which DA maintained;
2) D, SP, and bank have agreement that bank will comply with SP's instructions
directing disposition of DA; or
3) SP becomes bank's customer with regards to DA.
4) This all remains true even if debtor keeps rights of disposition for acct.
14
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
c) 9-308: Perfects when meets requirements of 310-316, and 314 does control
d) 9-314: Can perfect SI in Investment Property, deposit accounts, letter of credit rights,
and electronic chattel paper by control (DA and LoCR only by ctrl). Perfected when
get control, and remains perfected only while maintain control.
e) 9-327: Priority in Deposit Accounts. Save for later.
2. Frolic & Detour: What is this Chattel Paper and Electronic CP?
a) (Tangible) Chattel Paper. 9-102(a)(11): Record(s) evidence both a monetary
obligation and a security interest in specific goods, a SI in specific goods and
software used in the goods, or a lease of specific goods. . . .
b) Electronic Chattel Paper. 9-102(a)(31): ECP means CP evidenced by record(s)
consisting of information stored in electronic medium.
c) What does that mean?
1) Finco loans $ to D for SA/FS:EQ.
2) Finco now has property consisting of chattel paper (tangible of in paper form,
electronic if a stored SA). It can commit this chattel paper as collateral to
bank for loan.
d) Attachment of CP:
1) TCP: SA under 9-203(b)(3)(A) or possess under 9-203(b)(3)(B)
2) ECP: SA under 9-203(b)(3)(A) or control under 9-203(b)(3)(D).
e) Perfection of CP
1) TCP: File under 9-312(a) or possess under 9-313(a).
2) ECP: File under 9-312(a) or control under 9-314(a) / 9-105.
3) Note – advantage in priority under 9-330 if you possess or control CP.
f) Means of Control of Electronic CP under 9-105
1) SP ctrls ECP if record(s) comprising the ECP are created, stored, and assigned
in such a manner that
(A) Single, authoritative, unique, identifiable copy exists that is unalterable
(except as noted in statute)
(B) Copy id's SP as assignee of record(s)
(C) Copy maintained by SP or designated custodian
(D) Copies or revisions changing the assignee can only be made by SP.
(E) Copy and revision make clear such has happened (no confusion of
copies
3. Frolic & Detour #2: Letter of Credit Rights.
a) Slide 17, Class 9
b) 9-107
4. Benedict v Ratner (151)
a) Old case. Should SP have perfected SI if D retains ability to dispose of collateral and
proceeds.
b) NO. Finds fraud when not control over debtor's actions, possible debtor misbehavior.
c) No longer valid
15
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
H. Cases
1. Newman
2. Vienna Park
3. Clairmont
4. Chemical Bank
5. Copper King
6. Thorp Commercial
7. Coral Petroleum
8. Benedict
I. Statute Sections
1.
IV. Priority (Ordering, Notice)
A. Introduction –
1. Priority
a) Order;
1) Attachment defines rights with debtor
2) Perfection gives notice of rights to world
3) Priority interprets perfection rights with respect to rest of world
b) Even when perfected, may be subject to other perfected interests. So question
becomes, how do we determine the order of access to assets with multiple perfected
interests.
1) Generally, first to file/perfect. A pure, objective timing regime
2) With some modifications. Deposit Accts, e.g., overlays a hierarchical system
that favors control over filing. Same for CP.
2. Frolic & Detour: Modigliani-Miller Theorem
a) MM Irrelevance Theorem.
1) Yogi Berra and the Pizza: Size of the pie is independent of how many slices it
is cut into
2) Corporate Capital structure is irrelevant for the value of the firm. Debt/Equity
ratio of no significance.
b) Why MM is Wrong
1) Debtor's view of ultimate game causes him to underappreciate risk when debt
is involved.
2) The risk of failure with debt is not internalized. He only appreciates risk in
decisions for his own money.
3) Result – bank wants choice of less risky projects to keep debt safe, debtor
wants riskier project with possible larger payoff. Capital Structure sets
incentives for use of assets
c) Consequences
1) Lenders want to control debtor choice of projects – thus need monitoring but
not too much of it.
16
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2) May be able to use priority as instrument for creating proper incentives for
monitoring debtor misbehavior.
(A) SI and priority can give incentives for one and only one lender to
monitor debtor
(B) Prevent misbehavior with lowest cost, overcome risky behavior
B. Between Ordinary Secured Creditors
1. Relevant Statutes
a) 9-322(a)(1). General Priority Rules. Conflicting perfected security interests rank
according to priority in time of filing or perfection. Priority dates from earlier of time
of filing on collateral is first filed or first perfected, if there is no time thereafter
where neither filing nor perfection.
b) 9-322(a)(2). Perfected SC beats unperfected SC.
c) 9-317(a). A SI is subordinate to
1) a SI giving priority under 322.
2) (except for certain PMSIs in (e), ) A Lien Creditor who becomes LC
before earlier of SI being perfected or one of the 203(b)(3) conditions is
met and FS filed.
2. Priority is reified, and is pure first to file FS without regards to SA or knowledge.
3. JI Case v Foos (167)
a) Case mistakenly terminates FS, Bank subsequently files FS, then Case refiles FS.
Bank likely knew of Case's loan, and mistake in termination. Who has priority?
b) First to File Rules. No bad faith or knowledge requirement. Case's termination made
it unperfected. Bank's filing is first, Bank Wins.
c) Article 9 is a pure race statute
d) PICKER – allowing knowledge or bad faith to be relevant would create possible
circular inconsistent priorities. Plus, makes system more expensive to litigate as
knowledge would be pleaded everytime.
1) C mistakenly unperfected. Bank knows, files. F doesn't know, files.
2) B > F on straight 322. F>C on 322(a)(2) SC > UPSC.
3) But C > B because of knowledge.
4. Continuity of Perfection
a) What about Mixed Perfection methods and effect on Priority?
1) F: 1/1 Perfect via possession, 3/1 files FS, gives up possession; B: 2/1 FS;
2) F wins because earlier of time of first filing or perfection so long as no time
without filing/perfection. 9-308(c), 9-322(a)(1).
b) Expiration and FS renewals
1) 9-515(a), (c), (d):
(A) FS good for 5 years, then it expires and SI becomes unperfected unless
(1) A continuation statement was filed pursuant to (d); or
(2) SI is otherwise perfected.
(B) At point of becoming unperfection, deemed to have never been
perfected as against purchaser of collateral for value (but not against
LC's). See Comm.3, Ex. 1,2 (p953)
17
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(C) A continuation statement may be filed only within the six months prior
to expiration of the FS.
2) 9-308(a), (c) - A SI is perfected continuously if originally perfected by one
method and later perfected by another method without any intermediate period
when unperfected.
3) 9-322(a)(1): Priority dates from earlier of time a filing covering collateral is
first made or first perfected, if no period thereafter when neither filing nor
perfection.
4) Hilyard Drilling:
(A) First FS expired, then a few months later filed new FS on same
collateral for same SI.
(B) Court says filing a new FS after expiration is not a continuation. 515
requires filing continuation before expiration, and continuation will
refer to old FS to provide continuity.
(C) On expiration, lost perfection (515), and thus lost priority when
continuity of perfection lost (322).
(D) Wrinkle – letter recognizing jr position might be subordination
agreement. . . .
5. The Nature of Priority
a) Frolic & Detour – Possible Priority Devices
1) Attachment – hard for 3d parties to know it has happened. Could be subject to
certain disputes on whether value given.
2) Perfection – requires attachment and filing or possession. Has same problems
as attachment and no advantage relative to filing.
3) We like filing. But statute allows perfection as well.
b) Frolic & Detour #2 – Knowledge and Texture in Priority Rules?
1) Circularity Problems.
(A) B: 1/1 Bad FS
(B) F: 2/2 FS but knows of B
(C) C: 3/3 FS, not know of B
2) B > F: knowledge
3) F > C: first to file
4) C > B: no knowledge, Perf>UP
5) We don't like knowledge or texture in our Art 9
c) Marshaling – equitable doctrine dealing with overlapping priorities.
1) Example
(A) FS's
(1) B: $100, 1/1 FS:EQ & INV
(2) F: $100, 2/1 FS:EQ
(3) USC: $100
(4) Assets EQ:$100, Inv:$99
18
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(B) B has first dibs on both EQ and Inv. And depending on which it
chooses to use to satisfy its debt, the ability of F to satisfy its debt can
be affected.
(1) B goes after EQ first, it gets 100, and F and USC split the 99
from INV
(2) B goes after INV, it takes 99 and 1 from EQ, and F gets 99
from EQ. USC gets nothing.
2) Marshaling would require B to satisfy its debt from INV. first in order to
maximize the collection of SP's. Definitely a doctrine that favors SP's over
USC's.
3) Marshaling can also occur in untraditional situations where single creditor is
undersecured – to detriment of USC's
4) Why Marshal
(A) Without marshaling we impose additional monitoring costs on other
SC's – they have to take bigger ranges of collateral for FS to protect
interest. Overburden collateral?
(B) Otherwise, uncertain endgame where Primary SC can squeeze extra $
out of competing SC/USC's to influence order. Above, for example,
can squeeze something between 0 and 49.50 from USC to go after EQ
first.
(C) BUT marshaling equitable, not a certainty. Still uncertainty.
5) Result – this extends jr. creditor's SI partially over an additional asset to
detriment of the USC's. Unbargained for SI
d) Computer Room (179)
1) Forces marshaling as to overlapping security interests, so long as no harm to
SC with multiple collateral SI.
2) No requirement to include guarantor's guarantee in marshaling plan.
(A) This would protect USC's by getting jr creditor out.
(B) We only marshal to protect jr creditors, won't extend it to protect
USCs
e) Delaware Truck Sales v Wilson
1) RB has priority on AR from DR, and a secured guarantee from Wilsons. DT
has second position on AR.
(A) When DR starts going under, surrenders AR to DT for satisfying debt.
DT starts collecting AR from customers
(B) RB sues DT for collected AR proceeds.
(C) Settlement – DT buys RB's position, subordinates it to own position.
SI of RB versus DR still survives, and attached gurantee.
(D) Goes after Wilson's guarantee.
2) What is interesting?
(A) If RB had simply required disgorgement of proceeds (presuming it
could under 607?), then the AR would have satisfied RB's debt, and
it's debt would be extinguished. Wilson's off the hook.
19
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(B) By purchasing interest, interest with attached guarantee survives; RB
gets its debt, and DT now can go after Wilsons.
(C) RB can call this private marshaling. RB has SI in AR and guarantee,
and it is preserving jr. creditor (DT's) interest, and even extending it
into the guarantee.
(D) Furthermore, Wilson could have paid off RB and stepped into its shoes
(subrogate).
(E) So it is a market for RB's rights, and Wilsons lost!!! Race.
f) Computer Room, DT are about marshaling, and role of guarantors in marshaling.
C. Between Secured and Unsecured Creditors
1. Statutes
a) 9-102(a)(52): Lien Creditor –
1) Creditor jumps through hoops to become LC.
2) Assignee for benefit of creditors from the time of assignment?
3) Receiver in equity from time of appointment.
b) 9-201(a): SC beats USC
c) 9-317(a). A SI is subordinate to
1) a SI giving priority under 322.
2) (except for certain PMSIs in (e), ) A Lien Creditor who becomes LC
before earlier of SI being perfected or one of the 203(b)(3) conditions is
met and FS filed.
2. Wrinkles thus with Lien Creditors
a) LC always beats an unperfected SC
b) SC beats LC if it is
1) perfected
2) FS + SA
(A) Which normally corresponds to perfection, but could technically lack
other elements like value given, or debtor having rights. Future
advances thus win here, except for the 45 day window of 323(b).
(B) BUT naked FS loses, naked SA loses.
3. SC v LC
a) Perfected SC > new LC
b) SA + FS SC > new LC, but check 323 future advances rules.
c) LC > naked SA
d) LC > naked FS
4. Elements of Equity Rear Their Ugly Head in the Battle of SC v USC.
a) Two areas
1) Negative Pledges creating K actions (Mudge)
2) Unjust Enrichment (Duggan)
b) Mudge (197)
1) Mudge's sell biz to Redding, finance it, get negative pledge from R instead of
SI in sold assets. Redding immediately gave SI on assets to Bank.
20
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2) Court introduces equity, finds bad faith on part of Bank, awards damages to
Mudge.
c) Negative pledges rarely enforced
1) Damages via breach require Tortious Interference, which requires knowledge.
Messy. Circular priority issues.
2) Easier to require filing of negative pledge.
3) See Clark case on acknowledgement, Negative pledges above on page 6'ish.
d) Duggan (201)
1) Norman got inventory (cattle feed) from Duggan, financed by PCA. The bill
went straight to PCA, who pay them under running secured line of credit
advances. PCA had to give approval before each purchase under line of
credit. The SI was in accounts of Norman.
2) When Norman went under, Duggan (USC) claimed PCA had approved
purchases of corn from Duggan that enriched PCA's claim in accounts from
cattle sales of cattle eating the corn. Unjust Enrichment of collateral.
3) Court Says
(A) If SP initiates or encourages txn's with suppliers/USC's and his
collateral benefits from that txn, SP vulnerable to unjust enrichment
claim
D. Purchase Money Security Interests (PMSI's)
1. Statutes
a) NOTE – 9-309(1): PMSI in consumer goods perfects immediately upon attachment.
b) 9-103: PMSI Definitions
1) Purchase Money Collateral: Goods/software securing a purchase money
obligation incurred w/respect to that collateral
2) Purchase Money Obligation: incurred as all or part of price of collateral OR
for value given to enable acquisition of rights in or use of collateral.
3) Purchase Money Security Interests: SI in goods is PMSI
(A) to extent goods are PMC w/respect to that SI
(B) if SI in inventory that is/was PMC, also to extent that SI secures PMO
incurred with respect to other inventory in which SP holds/held PMSI.
c) 9-324(a): Priority in PMSI's generally
1) Perfected PMSI in goods (other than inventory) has priority over conflicting
SI's in same goods
2) A perfected SI in proceeds from PMSI'd goods also has priority
3) IF –
(A) PMSI perfected when debtor received possession of collateral or
within 20 days thereafter. (Note, subject to DA rules of 327).
d) 9-324(b): Inventory PMSI's. A Perfected PMSI in inventory
1) has priority over conflicting SI's in same inventory,
2) has priority in identifiable cash proceeds of inventory to extent i.c.p. are
received on or before delivery of inventory to a buyer,
21
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) IF –
(A) PMSI perfected when debtor received possession of inventory
(B) PMSI SP sends notice to holder of conflicting SI within 5 years before
debtor gets inventory
(C) Notification tells of PMSI and describes inventory
2. Some Mechanics
a) 4-12 (210) Inventory
1) B: 1/1 SA/FS: EQ, Inv, all prop.
2) Supplier: 2/1 sells Inv. to D. Files SA/FS, and gives notice to B
3) Details
(A) Inventory, so in (b)
(B) Must perfect before inventory gets to debtor
(C) Must have notice to B before Inv gets to D
4) Notice C: 322(a)(1) priority
(B) S > B: 324(b) PMSI priority in inventory
(C) BUT, C > S: faulty notice, no PMSI, straight jr SP 322(a)(1)
5) A condition (like knowledge, or negative pledge) good to one but not other
creates circularity
f) Refinancing – Billings
1) Two Regimes Previously
(A) Transformation: The refinancing eliminates the PMSI. New debt to
replace the old debt, therefore the debt not given to secure rights in the
collateral.
(B) Dual Status Role: The PMSI survives to the extent that the actual
PMSI debt is still present. Any additional debt or financing can't
bootstrap into PMSI, but PMSI isn't eliminated. It just carries through.
2) 9-103(f): In non-consumer goods transaction, PMSI doesn't lose status even if
refinancing takes places
3) NOTE – this clause, plus 9-103(h) specifically exempt consumer goods from
this limitation. So courts are still split under the two regimes in situations like
Billings where there is a consumer goods transaction. This is significant
because BR 522(f) allows certain avoidances on household items under liens
(likely consumer goods txns) if there is no PMSI.
3. MBank Alamo: Wrinkles on PMSI or "Waiter, there's a fly in my PMSI."
a) Raytheon sells XRay (inv.) to Howe on credit in return for specific assignments as SI
of AR's on those machines.
1) R claims PMSI's on AR: It advanced machines to enable H to buy AR, so the
SI in AR should be PMSI.
2) Fits language
b) Court say NO. AR excluded from PMSI. Goods, Inv. etc., NO AR.
c) Note – R could take PMSI in machines sold on credit, but once machines sold by H
for Account, lose PMSI.
d) Frolic and Detour: Characterize as Howe as agent for R?
23
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
1) Would = H arranges sale, R finances sale w/customer and gets AR from
customer. Same basic economics, but
2) Procedurally, would mean R qualifies customers, makes credit arrangements.
3) But H could be guarantor?
4) This economically same with different outcome, as now AR's belong to R
immer und ewig. Undermines case!!
4. Billings (221)
a) Refinancing and PMSI's. And consumer goods transaction.
b) Court adopts dual status role, says intent of refinancing to not extinguish PMSI debt
preserves PMSI.
5. Policy MishMash on PMSI's
a) Why have a PMSI and then limit it from AR's in MBank?
b) We like SI's, which favors limiting exceptions.
c) But rigidity makes subsequent lending/capital too expensive, which can impair the
existing capital under SI.
d) SO, we imagine a world where people would contract a compromise, and try to create
ex ante default rules that mimic this to provide a best fit low txn cost regime, and then
allow people to contract out of that (rather than into it, presuming lower cost that
way). A sort of statutory subordination regime.
e) With MBank, or any other AR situation, we imagine M would tell Raytheon to take a
hike, and our rule should do so also.
6. PMSI's and Cross-Collateralization (off book)
a) Normal debt is secured by a class of assets not fixed in time. If you grant a security
interest in equipment now and after acquired on 1/1 for a debt, that equipment
existing then and bought later will secure that debt, and a later debt under that
security agreement is secured by previous and later equipment. Logical.
b) But what about PMSI's? There is a tighter link to a specific purchase. See hypos.
24
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
c) In theory, a PMSI only arises between a debt and collateral when the debt is incurred
as part of price of acquiring the collateral. So a 4/1 debt for 4/1 asset purchase might
be secured under SA by earlier purchase, but it isn't technically a PMSI!!!
d) 9-103(b) turns off this rule only for inventory.
7. CAREFUL – watch your PMSI's and proceeds. See 9-327 cmt 8, 9.
E. Cases
1. JI Case
2. Hilyard
3. Delaware Truck
4. Computer Room
5. Mudge
6. Ninth District
7. MBank Alamo
8. Billings
F. Statute Sections
1.
V. Proceeds & Transfers
A. Proceeds
1. In examining the rights of the SP when collateral is disposed of, we examine the rights in the
proceeds and the continuing rights in the property as it moves from debtor. In each case,
must look to see attachment, perfection, and priority at each step for each fork.
2. Defn
25
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
a) 9-102(a)(64) Proceeds:
1) Whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral.
2) Whatever is collected on, or distributed on account of, collateral
3) Rights arising out of collateral
4) Claims arising out of loss/damage of collateral (more complicated than this),
or insurance payable by reason of loss/damage to collateral.
b) 9-102(a)(9) Cash Proceeds: proceeds that are $, checks, deposit accounts, or like.
c) 9-203(f): Attachment of a SI to collateral gives the proceeds rights outlines in 9-315.
d) 9-322(b) and (c): Priority generally comes from same date as with original collateral.
More specialized rules later.
3. 9-315: Secured Party's rights on disposition
a) Attachment
1) rights ongoing in property unless SP authorized the disposition (or other rights
cleanse the property).
2) SI attaches to any identifiable proceeds of collateral.
b) Proceeds commingled with other property are identifiable proceeds
1) if the proceeds are goods, to extent under 9-336
2) if NOT goods, to extent SP identifies proceeds by method of tracing
OUTSIDE article 9 that is permitted under law, including equitable principles
c) Perfection: SI in proceeds perfected if original SI in collateral was perfected
d) Continuation of perfection: A perfected SI in proceeds becomes unperfected on 21st
day after SI attaches to proceeds unless
1) the following conditions are met
(A) a filed financing statement covers the collateral
(B) the proceeds are collateral that could have been filed on the same way
original collateral was
(C) proceeds are not acquired with cash proceeds
2) the proceeds are identifiable cash proceeds; or
3) the SI in the proceeds is perfected some other way within the 20 days.
4. Attachment of proceeds
a) Automatically happens with regards to identifiable proceeds under 9-315(a)(2).
b) Identifiable?
1) 9-315(b) – goods to extent under 336. Non goods proceeds have to be traced
using some legally recognized method outside Art 9. Equity can come in as
well.
5. Perfection of Proceeds
a) If original collateral was perfected SI, then SI in proceeds is automatically perfected
for a 20 day grace period under 9-315(c).
b) By the end of the 20 days, three ways to continue perfection:
1) Perfect as an original matter in the proceeds. File, possess, control,
something. Under 9-315(d)(3)
26
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(A) 9-509(b)(2) authorizes this
(B) Especially important when intermediate cash proceeds.
2) Perfection is automatic for identifiable cash proceeds under 9-315(d)(2).
(A) NOTE – have to watch identifiability.
(B) SP must be able to trace the $ some way, and commingling can be a
bitch with cash
(C) And watch the priority cluster fuck that pops up below when this SI
starts pissing around with the controlling SI in a deposit acct
containing the $. You lose, is the short answer.
3) Perfection automatic for a certain class of proceeds from collateral originally
perfected by filing, which are not acquired with cash proceeds, and on which a
hypothetical security interest COULD have been perfected by filing. 9-
315(d)(1)
(A) Swap computer for painting. If the computer was perfected by filing,
then paintings, as proceeds not acquired with cash on which a FS
could be filed, is grandfathered on original FS for computer. Fucked
Up.
(B) Rarely relevant. Usually there is an intermediate step where computer
is sold for $, and $ buys new asset. The intermediate $ step violates
(d)(1)'s conditions. No automatic perfection on painting.
c) Hypo
1) Facts
(A) 2/1 B: SA/FS: Painting (& all proceeds)
(B) 6/1 D sells P $2000 checking acct ($1000 in it)
(C) 6/2 $ for computer
2) Painting $
(A) Attaches 9-315(a)(2) assuming we can answer traceability questions of
(a)(2)
(B) Perfected for 20 days under 9-315(c), and thereafter auto under 9-
315(d)(2)
(C) Priority same as before with painting. 322(b)(1).
3) $ checking acct (DA)
(A) Attach. . . .DA acct is cash proceeds. 9-102(a)(9). Proceeds of
proceeds is fine. Need to address identifiability issues in commingled
stuff here!!
(B) Perfected by 9-315(d)(2) again.
(C) Priority same still.
4) DA computer
(A) Certainly purchased partially with proceeds, so proceeds of proceeds
(B) Purchased with cash, so can't d1, must refile within 20 days.
d) Orix Credit (230)
1) If you take a SI in something "not property" like an FCC license (or liquor
license under Clark), what are your rights in the proceeds of that collateral?
27
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2) FCC has simply said YES. And court respects that.
3) Complications.
(A) As a technical matter, there is a "hole" in the SI fabric of this
transaction that has consequences unappreciated as of yet.
(B) SI in proceeds as proceeds
(1) Proceeds is tied to collateral.
(2) The license is never collateral.
(3) Therefore, no derivative proceeds interest can really exist.
(C) So treat proceeds as after-acquired property from license.
(1) Bankruptcy problem. Suppose debtor files for BR, and license
is to be sold as part of BR.
(2) 552(a) says no pre-filing SA can create a SI in property
acquired after filing property received in exchange for
license can't be SI'd like normal afteracquired property.
(3) The exception to this in BR 552(b)(1) is proceeds. BUT this
isn't collateral giving rise to proceeds.
(D) Rock and Hard place?
6. Priority in Proceeds
a) 9-322(b)(1) dates priority in proceeds back to the original priority date via filing or
perfection in original collateral.
1) This creates possible conflicts in reified system. Where no conflict, or
priorities clear, a sale creating proceeds covered by other SA's can lead to
conflict.
2) Diamond Walnut. (235)
(A) Diamond SA/FS in member proceeds from crop earlier than Bank's
SA/FS in crop.
(B) Once crop is sold, Diamond is ahead of Bank.
b) 9-322(c),(d),(e):
1) Way screwed up rules on proceeds of control-based SI's.
2) See hypos below and 9-322 cmts 7-9
c) Priority and Deposit Accounts.
1) Control of Deposit Accounts
(A) 9-104: Requirements for control
(1) SP is the bank where DA is maintained
(2) D, SP, & Bank have authenticated agreement giving SP
disposition ctrl over DA
(3) SP becomes bank's customer on DA
(B) 9-314: Perfection of Deposit Account by Control
(C) 9-327: Priority in Deposit Accounts – Hierarchical system
(1) SP with SI having control under §104 has priority over
conflicting SI held by party without control. (Control > Non-
ctrl)
28
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(2) SI's perfected by control rank according to time of obtaining
control, exceptions in (3) & (4)
(3) An SI in the bank where DA is located wins over other SP's
(4) Except where the conflicting party is SP who becomes
customer of the bank with regards to DA (under 104(a)(3)).
2) Where Does This Matter?
(A) Usually, it's a pissing contest between an original control-perfected SI
in DA and a derivative, proceeds-based SI in money flowing into the
account.
(B) In these cases, the hierarchical 327 system trumps the time based
322(b)(1) and control beats non-control. With exceptions, of course.
3) Hypos
(A) On 3/15: No conflict. Reified system keeps B and F's interest
separate.
(B) 4/1 Debtor Sells Inventory for Account.
(1) Bank has no rights in account. F wins.
(C) 5/1 Customer pays Debtor via check
(1) B has no rights in proceeds of AR.
(2) F can get proceeds rights like above
(D) 5/1 D deposits check in account.
(1) F likely has perfected SI in DA as cash proceeds, assuming
identifiability Q's resolved.
(2) BUT, Bank has original, control-based perfected SI in DA, and
under 327(1) wins as of now
29
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(E) 5/2 D withdraws $ and buys new inventory.
(1) Now we have proceeds of a control-based SI versus a pure
proceeds.
(a) 9-322(c) maintains the CONTROL dominated
hierarchy in proceeds for CERTAIN kinds of proceeds.
(b) Namely, the proceeds (and any intermediates) have to
be cash proceeds (or of same type as original, which is
$ here).
(2) We are not in (c), because these are not cash proceeds, so we
move to 9-322(d) & (e) – proceeds of a filing collateral nature.
(a) Here, the non-temporal priority scheme is gone, and B
loses its 327 priority.
(b) See 9-322 cmt 9
(c) We are now in a pure "first to file" scheme that
overrides 9-322(a)(1)'s "first to file OR PERFECT"
scheme.
(3) Finco (presuming filed on INV) wins under 322(d)
d) Transfers of Money from Deposit Accounts – cutting off proceeds. . . .
1) 9-332:
(A) Transferees of money or funds from a deposit account take the money
or funds free of any security interest in the money or depost account
(B) Unless transferee colluded with debtor to cheat SP.
2) Therefore, even if two creditors, B & F have a certain priority on a deposit
account (say, B>F), if Debtor withdraws money and pays it to F in satisfaction
of his debt to F, then B's SI in proceeds of the DA is likely GONE.
3) WHY – integrity of payment system.
B. Transfers – What happens to the SI on the asset when the asset is transferred?
1. Statutes
a) 9-315(a)(1) — SI continues in collateral notwithstanding disposition.
b) 9-507(a) — A filed FS remains effective with respect to collateral notwithstanding
disposition.
c) 9-320 — Buyers of Goods
1) Generally, a buyer in the ordinary course of business takes free of any SI
created by the seller, even if SI is perfected and buyer knows about it.
2) Generally, a buyer of consumer goods (that seller himself bought as a
consumer good) takes free of a perfected SI IF buys
(A) for value,
(B) with no knowledge of SI
(C) For use as a consumer good
(D) BEFORE filing of a FS on the goods
30
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2. Examples
a) Buyers of inventory of seller by definition take free of SI
b) Resale buys of consumers from consumers will generally win, unless there was a
filing on the original sale first. (Unlikely, as 9-309(1) gives automatic PMSI
perfection on attachement, so no real incentive to file FS.)
3. Wrinkle – Multiple Transfers – 9-320 cmt 3
a) Manufacturer owns equipment subject to perfected SI of Lender. Manufacturer sells
it to Dealer, whose business is buying and selling used equipment (so this is inventory
for him). Dealer sells equipment in ordinary course of business to Buyer.
b) Does B take EQ subject to or free of L's SI?
1) Subject to. 320(a) only applies to SI's created by the buyer's seller, in this
case by M. The SI is one step further upstream at L. SI survives.
2) Not consumer goods, no 320(b)
3) M sold outside the ordinary course of business, so D takes subject.
C. FINAL WORD – The ability to go after proceeds and transfers is a sort of double dipping, or at least
doubling the available options for satisfaction of a debt.
D. Cases
1. Orix Credit
2. Diamond Walnut
E. Statute Sections
VI. Changes
A. Changes of Location and Choice of Law Collateral
1. Most fundamental changes in Revised Article 9.
2. Statutes
a) OLD LAW
1) F9-103(1)(b) – Perfection, and the effect of perfection governed by the law of
the jurisdiction where the collateral is when the last event occurs on which is
based the assertion that the security interest is perfected or unperfected.
(A) "all events" test – a security interest perfected if there was ever a time
when the goods were in a particular jurisdiction and the SP had
satisfied the requirements for perfecting under the laws of that
jurisdiction.
(B) If there is a natural location to collateral – law of that jurisdiction
controls
(C) If not, location of debtor controls.
2) F9-401 – The rules of 103 determine whether filing is necessary in this state.
3) Uncertainty! Moving collateral!
b) NEW LAW
1) 9-301(1) Perfection: Location of debtor determines what law governs
whether or not you are/aren't perfected.
31
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2) 9-301(3) Effects of Perfection: For some collateral (Negotiable doc's, goods,
instruments, money, tangible chattel paper), location of the collateral
determines the effects of perfection/non-perfection and priority.
3) 9-301(1) Effects of Perfection again: For other collateral (AR, GI, ECP), the
location of the debtor ALSO governs the effects of perfection/non-perfection
and priority.
4) 9-307 Location of Debtor:
(A) Individual located at his principal residence
(B) Organization with only one place of business is located at that place of
business
(C) Organization with more than one place of business is located at its
chief executive office
(D) A registered organization is located in the state of registration.
5) 9-501 [Where to File]: If the law of this State governs perfection of an SI, the
office for filing FS to perfect is [the office designated by individual state]
c) Result – instead of having to file in multiple locations of debtor and collateral, simply
find the debtor and file there. Choice of law might change on effects, but filing (and
searching) is only one location.
3. Mechanisms
a) Imagine D is located in State Y, but collateral moved into State X where suit is taking
place.
b) Suit in State X, State X's 9-301(1) says perfection determined by law of location of
the debtor. X's 9-307 tells us where debtor is located. State Y.
c) Look to State Y's law. Y's 9-501 tells us where to file in Y. Presume did so.
Perfected.
d) Who wins? Effect of perfection. Look to 9-301, depending on type of collateral, may
be location of collateral or location of debtor. Let's presume its collateral. X
e) Look to X's 9-201 and 9-317 and 9-322 to see who wins.
B. Changes in Location of Debtor
1. 9-307(b)(3) – Organization with more than one place of business is located at its chief
executive office.
2. 9-316(a) – [Effect on Perfection of change in governing law]
a) A security interest perfected pursuant to law of jurisdiction designated in 301 remains
perfected until earliest of
1) Perfection would have ceased under law of that jurisdiction
2) Expiration of 4 months after a change of the debtor's location
3) Expiration of 1 year after a txfr of collateral to a person that thereby becomes
a debtor and is located in another jurisdiction.
3. Mellon Bank v Metro Comm.
a) Facts
1) Mellon loaned $ to Metro for SI. Mellon filed in MD
2) Metro then moved headquarters to PA, and then later (some amount of time in
dispute) Mellon filed in PA.
32
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) Depending on when Metro moved its offices, Mellon either filed within the
four months and was never not perfected, or it didn't, and Mellon's FS lapsed
and the PA filing would be a reperfection.
(A) This matters b/c Metro went into BR, and reperfection would fall into
547(e) and make the transfer to Mellon of the SI timed as of
perfection, and it would be a transfer for an antecedent debt (the
original loan). Voidable preference under BR 547(b)
(B) If perfection never lapsed, the original perfection would be either
(1) outside the 90 days of preferences, no txfr
(2) close enough to the original loan to avoid antecedence.
b) How do we determine when office moved?
1) Look to public information available to creditors or 3d parties.
2) Mistake to tie move to information inaccessible to creditors, like when
decision actually made.
C. After Acquired Property
1. 9-204(a) [After Acquired Property]: SA can create or provide for SI in AA collateral.
Except in consumer goods and commercial tort claims.
2. Don't NEED AA clause, but clearer to make temporal stuff clean and express.
3. Zartman (265) – 1908 case that disses AA clause under equity. A sort of Ratner-esque no
control no SI argument. Requires a "cushion" of equity for USC. More costly monitoring
requirements under this Jr SC now and forever
b) BUT SC > LC for 45 days, then LC wins unless SC doesn't know.
4. Result, as we mentioned above, once a filing is filed, or perfection occurs, under 322(a)(1) all
future advances against that collateral share the early priority date. Any subsequent lender
takes SI subject to the possibility of unknown future advances.
E. Assignments of Security Interests (related to advances)
1. Hypo:
Debtor 2/15: 10K FinCo
SA/FS:EQ
2/1: 10K
SA: EQ, for all $20 K in
debts forever Total Assets
FS:EQ
3/5
10K USC
Bank CreditCo
33
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
a) Bank can loan Debtor 10K under existing FS for repayment of C, and B gets priority
on all 20 K. That is future advances.
b) So why can't Bank buy CreditCo's 10K of USC debt and get that under existing FS.
They are oversecured.
1) C faces getting nothing, will sell for
34
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
a) Pre-Incorporation Assets
1) 9-315(a)(1) – SI survives txfr
2) 9-507(a) – FS remains effective
3) Bank maintains priority under 322(a)(1), 9-325 subordinates new debtor SI's
on stuff..
b) Post-incorporation acquired Assets
1) Absent a rule, a Bank has no SA with the new entity, and thus now way to get
an SI in assets acquired by the Corp unless done with proceeds of encumbered
old assets.
2) New Rules fix this in theory
c) Statutory Sections
1) 9-102(a)(56) New Debtor
(A) Person bound under 9-203(d) by SA entered into by another person
2) 9-102(a)(60) Original Debtor
(A) Person who entered into SA that under 203(d) is binding a new debtor
3) 9-203(d) –Attachement - A person becomes bound by SA entered into by
another person if by operation of law other than Art 9 or contract
(A) SA becomes effective to create an SI in the person's property
(B) the person becomes "generally obligated" for other person's
obligations, including obligation secured by SA; and person
acquires/succeeds to all/substantially all of assets of other person.
4) 9-203(e) – If new debtor becomed bound as debtor by SA entered into by
another person
(A) The agreement satisfies 203(b)(3) as to after-acquired property of new
debtor to extent property is described in the agreement
(B) no other agreement necessary to make SI in property enforceable.
5) 9-508 – Perfection –
(A) FS naming original debtor perfects SI in new debtor property if FS
would have been effective if original debtor had acquired it.
(B) If New D/Old D name Δ causes old FS to be seriously misleading
(1) FS still effective for 4 months
(2) Within 4 mos, need "initial financing statement" with name of
new debtor. Old one ineffective.
6) 9-507 still a concern? For old property (see 508(c))
7) 9-326 – Priority –
(A) A perfected SI by an FS good under 9-508 SUBORDINATE to SI in
same assets perfected by some OTHER method.
(B) Among debtors of original debtor who are perfected solely by
operation of 508, rank by priority in time of original SA's.
(1) Once refile against new debtor, now in normal priority rules.
(2) See Comment 3 for clarification
(C) I think the result is that SC perfected to new debtor by 508 ALWAYS
loses to an original perfected creditor of the new debtor.
35
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
d) Dilemma – It is not entirely clear when 9-203(d) WILL ever kick in and get the SP in
the door with the new debtor.
1) Incorporations usually only include the business assets of the person's
business. So "all assets" may not be met.
e) Scott (287)
1) Recognizes difficulty leading to 203(d), and that some court's indulge in legal
fictions in order to make it happen, but
2) Court refuses to find a carryover SI in newly acquired assets of new debtor.
2. Mergers
a) Same issues apply.
b) Bank of the West (293)
1) Facts
(A) Subsidiary BCI txfrd assets to subsidiary BIBCO
(B) CCFS had SA/FS:AR with BCI on 1/5/84
(C) Bank had SA/FS:AR with BIBCO on 4/5/82
(D) Who has priority in AR accumulated post txfr?
(1) Court finds CCFS wins?
2) Under Revised Art 9
(A) 9-203(d) applies – ultimately 326(a) subordinates CCFS position and
Bank wins
(B) 9-203(d) doesn't apply – Bank wins anyway. CCFS has no SI in new
AR.
H. Cases
1. Mellon
2. Zartman
3. Fretz
4. Bath Industrial Sales
5. Scott
6. Bank of the West
I. Statute Sections
VII. Default
A. Overview of Default Rights
1. Remember, Security gives certain property rights in the collateral
a) Right to repossess 9-609
b) Right to sell property 9-610
c) Right to Keep property 9-620
2. Key is how to Turn the Collateral into Cash
a) Inventory, Equipment. Debtor holds, won't likely give it up
b) General Intangible. How do you get it? And could you sell a trademark or goodwill
of a company?
36
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
c) Accounts, Deposit Accounts. Rights with siginificant 3d party interest. Could likely
get at through action with 3d party. Debtor doesn't hold it.
3. Statutes Covering Rights – Part 6 Covers Default
a) 9-601: Rights of SP After Default covered in this part
1) No definition of "default." It is usually defined by contract, with a whole list
of events or nonevents constituting default.
b) 9-602: Nonwaivable Rights of Debtor
1) Most important is nonwaivability of breach of peace restrictions.
c) 9-603: Parties can determine standards constituting fulfillment of rights and duties of
parties. Can't change standards for breach of peace.
d) 9-607 Collection and Enforcement – ways to get at accounts, DAs, proceeds.
1) Must proceed in commercially reasonable manner.
2) Must notify any 3d parties of rights
e) 9-608 Application of Proceeds from Collection:
1) Apply to reasonable expenses of collection/enforcement, then to obligations,
then to junior obligations
2) Any surplus goes to debtor, and debtor is liable for any remaining deficiency.
3) No surplus/deficiency if underlying txn is sale of accts, chattel paper, etc.
f) 9-609 Breach of the Peace:
1) After default, SP may take possession of the collateral; and without removal,
may render equipment unusable and dispose of collateral on debtor's premises
under 610
2) And SP can do this either under judicial process, or without judicial process so
long as no breach of the peace. BIG LIMIT
B. Repossession under 9-609 (Breach of Peace Limits)
1. Salisbury Livestock (310)
a) Related third party, private property, rural setting.
b) Early morning, no exchange or confrontation
c) But legitimate jury question despite lack of confrontation.
2. Williams (317)
a) Shared private property driveway.
b) Early morning, "polite" verbal exchange, no "objection"
c) JNOV reversing jury verdict of damages upheld
3. Stone Machinery (322)
a) Prior communication suggesting violence if repo attempted
b) Came with sheriff, to private property. Objects but no resistance.
c) Breach of Peace—nonjudicial use of sheriff was to overcome resistance.
4. Mel Farr Article
a) Electronic on-time device cuts off engine. Pay as you go lease/financing for low
income peoples
b) Electronic repossession? Breach to "cut off." Technology issues.
37
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
1) Possible circumvention of Article 9, with this kind of cut off for anything with
electricity.
2) But different. Not about creditor turning collateral into value. Instead, about
preventing debtor from extracting value from collateral as leverage for
payment
3) Analogize to negative pledge somehow?
5. Where are we left? Inconsistent results
a) Threat of violence or confrontation is important factor.
b) Strong desire to preserve the ability of debtor to FORCE judicial process by resisting.
1) Thus Williams didn't resist, loses.
2) Stone Machinery took away right to resist with Sheriff.
C. Disposition and Commercial Reasonableness under 9-610
1. Statutes about Disposition
a) Key Changes
1) 9-620 now allows
b) 9-610: Disposition after Default
1) After default, SP may dispose of property
2) Every aspect of disposition must be commercially reasonable
3) SP may purchase the collateral at a public disposition, or at private disposition
only if collateral is kind widely sold on recognized market with lots of
standard price quotations.
c) 9-611: Notice Provisions for dispositions
1) Need to notice relevant people before disposing of collateral.
2) Notify debtor, secondary obligors, certain other secured parties.
d) 9-612: Notice Timeliness
1) Fact dependent determination, with a 10-days before disposition safe harbor.
e) 9-613: Form of Notice for Non-Consumer Transactions
f) 9-614: Form of Notice for Consumer Transactions.
g) 9-615: Application of Proceeds – tracks 608's application of collections
1) 615(a) Expenses, secured debt, then jr. secured debts
2) 615(d) Surplus and Deficiency
3) 615(f): When Secured Party (or related party) buys collateral, if the proceeds
are much less than actual value, the surplus/deficiency is calculated based on
what would have been realized if unrelated party had bought collateral.
4) 615(g): If junior party gets cash proceeds in good faith without knowledge of
a superior lien interest, jr party takes the proceeds free of that superior SI,
doesn't have to apply proceeds to satisfy that SI, nor must account to that SP
for surplus.
h) 9-617 Rights of the Transferee of Collateral
1) Transferee steps into debtor's shoes, takes all D's rights
2) Discharges SI under which sold and all JUNIOR SI's.
(A) Does Not wipe out any superior SI's to the disposing SI.
38
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) Good faith txfree gets all this even if SP fucks up on disposition.
2. Key Issue in Disposition is SP Opportunism and Debtor Indifference
a) Debtor gets surplus, SP won't care about surplus. Result, sells for exact amount of
debt. Stone Machinery – SP owed $7448, sold for $7448.
b) SP retains collateral with value in excess of debt.
c) Debtor Indifference
1) Surplus likely goes to other debtors, USC's. D doesn't care about it then.
2) Debtor may not fully know in consumer situations what's going on.
D. Retention of Collateral under 9-620
1. Statutes
a) 9-620 Retention of Collateral
1) SP must consent to retention (b) and debtor and other interested parties can't
object. Objections must be received within roughly 20 days from notification.
2) Retention in full satisfaction of debt
(A) Debtor can expressly accept or simply remain silent.
3) Retention in partial satisfaction of debt.
(A) Debtor must give express acceptance of retention
4) Consumer Goods – some mandatory dispositions and no partial satisfaction.
b) 9-621 Notification Requirements for retention.
c) 9-622: Acceptance terminates SI to extent agreed to by debtor, and discharges all
subordinate interests/liens, and gives all of debtor's rights to SP.
d) 9-623: Redemption
1) Miscellaneous provision whereby Debtor or any other subordinate credit
interest can redeem collateral
2) Must pay entire debt and all expenses/atty's fees. Not used much.
2. Key Change
a) 620 - Now allows retention in partial or full satisfaction of debt. Previously, all or
nothing. Not applicable to consumer situations?
b) 626 – Rebuttable presumption for surplus/deficiency – presume that if done correctly,
disposition would have satisfied debt. In other words, to prove deficiency, SP must
prove all elements of 626's reasonableness requirements.
E. Consequences of Secured Party's MISTAKES
1. Statute Sections
a) 9-625 Damages
1) SP is liable for any damages caused by noncompliance.
2) Debtor can't recover for anything other than lost surplus if 9-626 acts to wipe
out a deficiency.
b) 9-626 Rebuttable Presumption Rule
1) POWERFUL Presumption is in place for non-commercial txns
2) A deficiency is limited to what would result from a reasonable sale, BUT a
reasonable sale is PRESUMED to generate an amount equal to the debt.
3) Burden on SP to prove otherwise.
39
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
(A) Policy – SP ctrls sale, so burden allocated to SP for compliance.
4) For consumer transactions, old confusions of Excello Press remains.
c) 9-627 Commercial Reasonableness Standards
1) Guidelines, but court determined.
2) (b) provides safe harbors and zones of reasonableness.
d) 9-628 Limitations on Liability
2. Excello Press
a) Explains previous confusion regarding commercial reasonableness and deficiencies.
b) How do we establish reasonableness?
c) Court separates procedure of disposition from value obtained. If the proper procedure
is followed, and proper people notified, then the price being below value shouldn't be
relevant, even if ex post someone says they'd have paid more.
d) But if procedure's faulty, then price investigation relevant.
3. Reeves v Foutz & Tanner
a) When can SP sell retained collateral? Court says Art 9's retention only valid when SP
doesn't intend to promptly resell collateral in ordinary course of business.
b) Courts cabin retention because of possible for total abuse.
F. Cases
1. Salisbury Livestock
2. Williams
3. Stone Machinery
4. Excello Press
5. Reeves
6. Mel Farr NY Times Art
G. Statute Sections
VIII. Limits of Article 9
A. Section 9-109
1. 9-109(c) Extent to which Article Doesn't Apply
a) When preempted by US statute, regulation or treaty
2. 9-109(d) – Specific Areas of Inapplicability.
a) Landlord's lien
b) Sale of accounts as part of sale of a business.
c) Txfr of interest/assignment of claim under insurance policy, with exceptions?
d) Real Property interests/liens
e) Right of recoupment or set-offs (with exceptions)
f) Assignment of tort claims
3. 9-311 Perfection/Priority Governed By other systems outside of Article 9
a) FS not necessary to perfect SI subject to a statute whose requirements for obtaining
priority over the rights of a lien creditor preempt 9-310(a).
b) NOTE – F9-302 simply asked, "is there an alternate filing system."
40
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
4. Changes from Former Article 9
a) Scope taken right up to limit of preemption. Less deferential.
B. Intellectual Property
1. Copyrights
a) 17 USC 205 (slide 14 et seq Class 22)
1) First SA wins if filed within a month or before later SA.
2) Otherwise, later SA wins if filed, and no notice of earlier txfr.
3) Index by copyright number, not as convenient as filing by debtor, requires
filing for each item of collateral.
b) Peregrine
1) Must file in Copyright Office
2) UCC A9 doesn't control
3) Not clear under new article 9
2. Patents
a) 35 USC 261 (Slide 32
b) Cybernetic Services
1) Court limits 261's applicability to title transfers, not SI's.
2) No preemption, Article 9 rules patents
3. Bottom Line –
a) File in both systems
b) Copyrights
1) File in Copyright Office under Peregrine
2) New Article 9 statue unclear.
c) Patents
1) File in UCC under Cybernetic Services
2) Just 9th Circuit
d) Trademarks
1) Case law says UCC all the way.
C. Set-Off Rights
1. Definition
a) Set Off:
1) Bank owes customer the $X listed as account balance
2) Customer owest bank the $X of a loan. Let's call it even
3) Looks like bank paying itself out of customer account.
b) Recoupment
1) Fee for services in managing account.
2) Bank pays itself for services out of account balance.
2. Class of rights of bank in the accounts of customers who it loans unsecured money to.
a) Outside article 9. No security interest
b) 9-109(d)(10) clearly exempts set-offs from Article 9.
41
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
c) Grant Gilmore: "Of course a right of set-off is not a security interest and has never
been confused with one: the statute might as appropriately exclude fan dancing."
3. But is largely indistinguishable from an SI in deposit accounts with set-off as a right of
repossession. Harkens back to our earlier discussions on what is a SI, and how do you get
one. In this case, you don't want it but maybe you have it. . .
4. Statutes
a) 9-109(d)(10): Article 9 doesn't apply to set offs and recoupments
b) 9-340: A bank can exercise set-off/recoupment against an account despite presence
of a security interest in that account unless that SI is perfected by control under
104(a)(3) – the SP has become the bank's customer with regards to the account. But
the bank can still do recoupment in that case.
c) 9-341: The bank's rights and duties towards a deposit account at the bank are not
modified by a security interest in the deposit account in any way, except as 340(c)
notes.
5. National Acceptance Corp. (374)
a) B has deposit account for C. NAC has SA in C's ARs. The money in the DA is
proceeds from ARs. Can bank setoff account to satisfy some USC and SC?
b) Under VA law, setoff required good faith, lack of knowledge.
c) Bank knew/should have known. Lost
d) Under Revised Art. 9, Bank's control set off defeats proceeds interest under 340 and
341.
6. Medomak (380)
a) Underwood provides materials to M, who then makes a finished product that it
transfers back to Underwood, and Underwood pays a fee to Medomak. Medomak
failed with both raw materials and finished products still in its possession
Raw Materials
Medomak Underwood
Finished Product
SA: All Sale of
Assets Raw
material
s
DT Supplier
b) How this comes out depends on how we characterize the relationship between U and
M.
1) Sale of raw materials on credit, with sale of finished products back to U paid
for by a fee representing the difference of debts.
2) Bailment of raw materials to Medomak for processing, with return to U and
payment of processing fee (think dry cleaners).
c) Under the former, M owns all materials in its possession, and U is merely an
unsecured creditor who loses to DT. Under the latter, M never had the assets any
more than a dry cleaner owns the shirts brought for cleaning. The assets remain U's,
and upon M's failure they revert back to U.
1) Court found bailment.
42
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
d) The economics are not so different.
e) Try a new hypothetical under above mechanics
1) Facts
(A) U loans M $ for SA in Inv & AR (jr. to DT)
(B) M buys raw materials with $ from Supplier
(C) M sells finished product to U
(D) U pays net of loan (price finished product minus loan debt owed it).
2) Result?
(A) Filing issues, PMSI's, notice
(B) Complicated, but economics same.
D. Leases
1. OLD Law
a) F1-201(37): Inclusion of option to purchase does not of itself make a lease an SI.
And a lease ending option to own for no or nominal consideration does make the
lease an SI.
2. Marhoefer (392)
a) Two sausage stuffers acquired, one a financed sale with PMSI. One a lease.
b) Lease: Two lease ending options
1) Buy for 10K
2) Lease 4 more years and then buy for $1.
c) Lease or SI?
1) Have to look at what happens at end of lease? Court finds neither option at
this point is "nominal" consideration
(A) 10K is lower than actual value of 20K, but not nominal
(B) Lease 4 more years not a nominal option (but choice not really a
lease).
d) PICKER – court respects sophisticated parties who drew clean lines, operated in good
faith.
3. NEW LAW. 1-201(37) Whether a lease is an SI or a true lease . . . factors:
a) Original term of lease is equal/greater than economic life of goods
b) lessee is bound to renew lease for remaining life of goods, or bound to become owner
of goods.
c) lessee has renewal option for remaining economic life of goods for no/nominal
consideration, or option to own for no/nominal consideration.
d) Other factors. . .
4. Why do we care?
a) Bankruptcy.
b) A true lease keeps property out of BR estate, and SC doesn't get muckymucked
around by trustee, with payment delayed, no repossession.
c) Lessor can opt out of BR and keep assets separate.
43
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
5. Final Note – Look to how much of economic value is transferred to lessee. If all of it, more
sale. If not so much of it, more lease. If lessee can return object (meaningfully) more lease.
If option to return is meaningless or nonexistent, more sale.
E. Sales of Accounts and Securitization
1. Statute Sections
a) 9-109(a)(3) – Article 9 applies to sales of accounts, CP, payment intangibles, or
promissory notes. (Except in sale of business situations.)
b) 9-102(a)(61) Payment Intangible – means general intangible undr which the account
debtor's principal obligation is a monetary obligation
c) 9-102(a)(65) Promissory Note – instrument that evidences a promis to pay a $
obligation, doe not evidence an order to pay, and doesn't contain an
acknowledgement by a bank that it has received for deposit a sum of $.
d) 1-201(37) Security Interest – includes interest of a consignor and buyer of accounts,
CP, PI, or PN.
e) 9-102(a)(12)(B) Collateral – accounts, CP, PI, PN that have been sold
f) 9-102(a)(28)(B) Debtor – includes seller of accounts, CP, PI, PN.
g) 9-102(a)(72)(D) Secured Party – person to whom AR, CP, PI, PN have been sold.
h) 9-318 Sellers of Accounts:
1) 318(a) – debtor that sells AR, CP, PI, PN does not retain a legal or equitable
interest in the collateral sold .
(A)
2) 318(b) – Deemed Rights – For purposes of determining the rights of creditors
of (and purchasers for value of ) AR, CP . . . . the selling debtor is deemed to
have rights and title identical to what it sold SO LONG as the buyer's SI
remains unperfected. Note, sale of PI and PN perfect upon attachment. 9-
309(3),(4).
3) See Comment 5.
i) Perfection of Sales of AR, CP, PI, PN.
1) 9-309:
(A) 309(3), (4) – sale of PI's and PN's perfect upon attachment.
(B) 309(2) – the spot sale/assignment of an Account will perfect upon
attachment. But the regular assignment of AR will likely defeat this
provision file.
2) Chattel Paper
(A) TCP – file[312(a)] or possess[313(a)]
(B) ECP – file[312(a)] or control[314(a)]
j) Chattel Paper Purchaser Priority
1) 9-330 gives CP buyer priority over other SI's in CP. Generally requires good
faith, ordinary course of business purchase, etc.
2) See for specifics – some differences for types of SI's in the CP.
44
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
2. When Do We Care
a) Perfected Versus Unperfected Sales
1) If the buyer isn't perfected, even though there are NO LEGAL RIGHTS
remaining in debtor. . .
2) Other creditors and Lien Creditors can jump ahead because of the deemed
rights remaining in the debtor.
3) Simply perfect and not a problem.
b) Surplus and Deficiency
1) Statutes
(A) 9-608(b) and 9-615(e) – If underlying transaction is sale of AR, CO,
PI, PN, debtor not entitled to any surplus or obligated for deficiency
2) Major's Furniture Mart
c) Bankruptcy
1) Accounts as SI go into BR estate. Accounts sold are outside BR estate.
Securitization transactions try to make assets bankruptcy remote by selling
them to special entities.
2) Octagon Gas – fucked with securitization by saying debtor must retain an
interest in unperfected sale, putting sold accounts into BR. New 9-318 kills
this.
3. How do we determine if there is a True Sale?
a) It isn't defined in the UCC
b) Factors involve level of exposure of purchaser to risk of ownership
1) Seller "guarantees" accounts? Less sale
2) Buyer have recourse against seller for uncollectables? Less Sale
3) Seller sells puts guaranteeing buyback? Less Sale
c) Major's Furniture Mart.
1) Lots of warranties and guarantees
2) Not much risk of ownership.;
F. Cases
1. Peregrine Entertainment
2. Cybernetic Services
3. National Acceptance
4. Marhoefer
5. Major's Furniture Mart
6. Octagon Gas
G. Statute Sections
IX. The Secured Creditor in Bankruptcy
A. Source of Trustee Powers
1. Through Debtor: Succeeds to Debtor's rights estate
2. Through Creditors: Avoidance powers to USC and certain USC (544)
3. Through BR created rights: Preference powers (547)
45
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
B. Overview of BR Sections (11 USC ___ )
1. BR 544 – Trustee as LC
a) As of filing date, the trustee has power of hypothetical LC
b) Gets the priority of 9-317, and can preserve subordinate transfers for estate (avoid
transfers), which then makes the subordinated SP equal in a division with USC's, and
unperfected creditors
1) Strips SI for estate, treats SP as USC
2) "sense of rough justice"
2. BR 550/551 – For an avoided transfer, Trustee recovers the property for benefit of estate
from initial transferee or next transferee.
3. BR 547 – Preferences
a) 547(b) Trustee may avoid any transfer of an interest in property
1) to or for benefit of a creditor
2) for or on account of antecedent debt owed by debtor before such transfer
3) made whil debtore is insolvent
4) made on/within 90 days before petition, or within 1 year if creditor was
insider.
5) that enables creditor to receive more than he would have received without the
transfer in a hypothetical liquidation (was he benefited).
b) 547(f) Debtor presumed insolvent for the 90 days before the filing date.
4. BR 547(e) – Timing Transfers
a) Look at (e)(1)(B) for a new, BR definition of perfection. This may matter. Basically,
perfection is whatever you do to get an interest that cannot be trumped by any other
kind of judicial lien.
b) 547(e)(2) is the heart
1) The date of a transfer is effected by WHEN you perfect.
2) You have 10 days after actual transfer to perfect.
(A) If file/perfect within those 10 days, the transfer is dated as of the actual
transfer.
(B) If file/perfect after those 10 days, the transfer gets dated as of the date
of perfection
3) Result, if you miss 10day window, you get antecedence from the debt giving
rise to the SA/FS!!!
c) 547(e)(3) – For the purposes of this section, a transfer is not made until the debtor has
acquired rights in the property transferred.
1) In other words, a SI in afteracquired property under an SA doesn't transfer to
creditor until the date debtor gets the property
2) Built in antecedence for AA property.
5. BR 547(c)(5) – Floating Collateral Exception to Preference Power
a) Trustee may not avoid as a preference a transfer that creates a perfected SI in
inventory or receivable (or proceeds of either)
b) EXCEPT to extent that the total value of the inventory/receivables goes up between
the 90 days before filing and the date of filing. (See 10-8 Slide 15 Class 26)
46
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
6. BR 506 Valuation of Secured Status
a) The secured party's allowed claim is valued in BR based on the value of the collateral
1) The claim is bifurcated into secured and unsecured, with the secured part
being the value of the interest in the collateral, and the rest is unsecured
2) So in perfect world, collateral matches debt and all secured. If undersecured,
lose secured status to extent of shortfall of collateral value.
b) The value of the collateral is determined by last sentence of 506(a) – in light of the
purpose of the valuation and the proposed disposition or use of such property.
c) If oversecured, the creditor can get interest on the claim, plus any fees or charges in
the original SA contract
d) Trustee can collect fees and costs of preserving/disposing of collateral up to the
amount of benefit these actions gave to the SP.
7. 1325 – Cram down definitions.
C. Trustee Avoiding Powers
1. Trustee as Hypothetical Lien Creditor
a) 10-1
2. Preferences in BR
a) When a loan and the corresponding SA/FS all happen on same day, there is no
antecedent debt and the SI is NOT a preference, even when it happens within 90days
of filing.
b) When the loan is separated from the SA/FS, there is an antecedent debt upon the
transfer that is the SI, and a preference that can be avoided.
c) Payment to Secured Creditors
1) Hypo
(A) Assume SA/FS set without antecedence or beyond 90days.
(B) Within 90 days, the debtor sells an asset and pays off the debt to
creditor.
(C) Clearly a qualifying transfer, antecedent debt, but under (b)(5) there is
no extra benefit. SP fully protected and would have collected full.
(D) No preference
2) Think about it:
(A) Possible synergies of assets lost by selling asset that would have been
preserved in estate – value lost, clear disadvantage to other creditors
(B) Creditor avoids hassled, extensions, delays of BR, so some value.
3) 547(b) is underinclusive in that it fails to capture some preference value
benefit and prevent ineffeciencies. May be a purposeful omission.
d) Timing of Filing FS and Preferences
1) Hypo Facts
(A) 2/1: 10K loan with SA
(B) 3/1: FS filed
(C) 4/1 D sells asset to txfr 10K to creditor
(D) 4/2 BR
2) Two Transfers: The SI and the Sale proceeds
47
Class: Secured Transactions Professor: Picker
Book: Douglas Baird, et al., Security Interests in Personal Property (pre-pub.) Term: Fall 2001
3) SI
(A) The filing on 3/1 is beyond the 547(e) 10 day window, so the SI txfr
dated 3/1, for which 2/1 loan is antecedent debt. SI can be avoided,
and creditor is USC.
(B) 4/1 10K has no basis because SI is absent, creditor is USC and clearly
benefits
3. Article 9 Floating Lien in BR – After acquired property (pre-petition)
a) 547(e)(3) kills AA property. It gets preferenced out.
b) Hypo New Property
1) Facts
(A) 2/1 10K loan and SA/FS on all property
(B) 2/12 D acquires new machine
(C) 3/1 D files BR
2) 2/1 Transfer okay – no antecedence
3) 2/12: 547(e)(3) says the SI on the machine occurs when D got it, so it
happens on 2/12. On account of antecedent debt of 2/1. Preference,
avoidable.
c) Hypo Floating Collateral
1) The exception to this is in 547(c)(5) for inventory and receivables, where
there is a floating pool of collateral
2) So long as the value of the pool of collateral doesn't go up between the 90days
before filing and the date of filing, no preference. Avoidable to extent of
value increase.
D. Valuation and Its Consequences
1. SP gets his claim secured up to value of collateral, with collection from any excess of interest
and K charges, fees
2. Value determined based on use, etc. See statute.
3. Rash (465) – Truck as collateral for SI, BR. Question is how to value the truck for 506.
a) Two theories
1) Foreclosure value (less)
2) Replacement value (more)
b) This is a cram down (BR 1325), and debtor is keeping truck. Court jumps from that
to replacement value.
c) But FN6 says replacement value requires determining what parts of replacement costs
are not part of debtor's package received when retaining – like reconditioning,
storage, assorted costs.
d) RESULT – tells us little, and doesn't change the complicated fact dependent valuation
of court practices – using both foreclosure and replacment values.
E. Cases
1. Rash
F. Statute Sections
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