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Secured Transactions(5)

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					                                          Secured Transactions
                                               Fall 2006

Goal of secured transactions: to create a transaction that will survive in bankruptcy so that your client
will receive the goods or their value in security

An unsecured loan must be attached some way to property; attachment occurs by:
   - Judgment
          o Issued by a “precipae”
   - Then, go to county clerk/chancery office
          o Judgment lien is recorded in roll
   - Public sale: like an auction; property would be disposed of and money would go to appropriate
      people (“first in time, first in right”)
*** Applies to real property, not to personal property ***

For personal property:
   - Judgment
   - Take it to sheriff’s office
          o Must get a bond
          o Must have judgment “writ” (execution request)
          ** If sheriff finds personal property, they will impound it
   - Public sale
          o Money goes to appropriate people
*** Usually takes long time

In order to skip the above steps, make a secured transaction (Article 9):
    - Attached by contract
            o You declare, NOT court
            o You repossess, NOT sheriff
            o You can retain property or sell it privately
            o You apply contract provided
    - Occurs within 30 days

Definitions/ideas:
   - Attachment: gives immediate contract right to property
   - Perfection: public notice step; also called notice filing; the price you pay for the attachment
        right; no secret liens
   - Lien: right given, by law (statute or case), to personal property
   - Guarantees: also called co-signing or suretyship or accommodation parties
   - Ostensible ownership: equity idea; cured by possession
   - Accounts: not tangible personal property; no ostensible ownership to be cured because it is
        intangible




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                     Lien  non-consensual




               Lien                    Lien 
               Consensual               consensual
               for personal             for real
               property                 property




Types of liens:
   - Non-consensual
           o Statute or case law provides right to transaction
           o Examples: mechanic’s lien, laborer’s lien
   - Consensual
           o Can be for real or personal property
           o Personal property can be tangible or intangible
                  Personal property is covered by Article 9

Levels of adequacy:
   - Signature
   - Guarantee/co-signing/suretyship/accommodation parties
   - Security “lien”/security interest
           o Chattel mortgage: good for only one particular item
           o Factor’s lien – factor = someone who finances business
           o Pledge: similar to pawn shop; debtor gives up physical possession
           o Conditional sale
           o Trust receipt
           o Field warehousing

Introduction:
    - Generally
           o Secured transaction: intentional creation of a security interest in personal property or
              fixtures
           o Purpose: to avoid secret liens where debtor sells and resells collateral multiple times
              without notice to creditors
           o Addressing Article 9 problems
                   Does Article 9 apply?

                                                                                                        2
                            Only personal property
                            Was there intent to create a security interest?
                            Is there an exception?
                  Has there been attachment?
                            Value given
                            Debtor must have interest in collateral
                            Authenticated security agreement
                  Has the security interest been perfected?
                            Filing, possession, automatic
                  Who has priority?
                            Preferred parties (PMSI holders), BFP, bankruptcy trustee
   -   Changes in Article 9
           o Expanded scope: includes more intangible property
           o Choice of law changes: must determine which law governs filing
           o Filing requirements: now simpler, can be done electronically
           o Blanket description allowed in financing statement
           o Expanded differences in treatment between consumer and commercial transactions
   -   Bankruptcy
           o Article 9 is designed to avoid the risks of bankruptcy
                  Goal: to draft a contract which avoids bankruptcy
                  Article 9 is the “anti-venom” to bankruptcy
           o Priority: who gets what when
                  Construction mortgages
                  PMSI
                  Regular Article 9 who filed in real estate records
                  Article 9 who did NOT file in real estate records
                  Judgment lien creditors
                  Unperfected
   -   Pre-Code security devices
           o Benedict
                  Reservation of property with dominion inconsistent with the transfer of title; this
                      is a purported sale, not actual sale and so void
           o Pledge: creditor gets physical possession until debt paid
           o Conditional sale: no repossession absent evidence of insolvency and valid security
             interest

SCOPE of ARTICLE 9
Generally:
   - Covers transactions that create security interest in personal property
   - Security interest: interest in personal property or fixtures which secures payment for
      performance or obligation [§ 1-201(35)]
           o Very broad definition
           o Any interest includes title, lease, license, etc.

Does Article 9 apply?
   - The parties intended to create a security interest in personal property or fixtures
   - The collateral is of a type covered by Article 9
           o “Goods”: consumer goods, inventory, farm products, or equipment

                                                                                                     3
                      “Equipment” is a catch-all for goods not falling in the other three categories
            o “Quasi-intangibles”: pieces of paper used as collateral
                      Examples: stocks and bonds; negotiable and non-negotiable instruments;
                        documents of title; or chattel paper
            o “Intangibles”: accounts receivable; letter of credit rights; deposit accounts; or general
                 intangibles
    - The transaction is of a type covered by Article 9
** If the facts seem to show that Article 9 applies, consider whether there are any applicable
exclusions

Consignments:
   - Article 9 problem
         o While goods are in hands of shop, they appear to be inventory but are not
         o 1999 changes made all true consignments fall under Article 9
   - Consignors do NOT have to protect their interest
         o Sale on approval: can take home without buying to decide
         o Sale on return: goods delivered primarily for resale
   - Requirements for consignment
         o Merchant deals in goods under another name
                  Not auctioneer
                  Not known to sell goods of others
                        Fabers (not consignment and rug dealer loses because retailer not known
                          to be dealing in goods of others)
         o Worth $1,000 or more
         o Non-consumer goods
         o Not security interest that secures obligation

Leases:
   - A lease is actually a secured interest if :
            o Obligation is not subject to termination by lessee (In re Millworks) and one of these
               four factors is present:
                    Term of lease equal to remaining useful life of goods,
                    Lessee bound to renew lease for remaining useful life,
                    Lessee has option to renew for life of goods for nothing or nominal
                       consideration, OR
                    Lessee has option to own goods for nothing or nominal consideration
   - If an agreement offers ownership of the goods for an amount that no reasonable business
        person would turn down, then it is a sale
   - If it’s a true lease, then there will be value left at the end of the term
   - If lease is a sale, then lessee must comply with Article 9 to protect goods from claims of others
   - Look at § 1-203 when deciding whether a lease is a secured transaction
            o Use a case-by-case analysis

Exclusions from Article 9:
   - Federal pre-emption: Article 9 does not overrule federal statutes in areas such as aviation,
       admiralty, etc.
   - Non-consensual liens: landlord liens, agricultural liens, etc.
   - Non-financing assignments

                                                                                                          4
          o Sale of business
          o Transfer solely for collection
          o Transfer of obligation to perform
          o Single account transferred for settling pre-existing debt
   -   Real estate – but real estate note transfer is included

CREATION OF A SECURITY INTEREST
Security interest:
   - Parts of a security interest [§1-201(35)]:
            o Interest
            o In personal property or fixtures
            o Which secures
            o Payment or performance
   - § 9-109 adds to the definition
            o Includes “by contract”
                    Consensual
            o Also adds
                    Agricultural liens
                    Sales of accounts, chattel paper, payment intangibles, or promissory notes
            o Subsection (d) lists exclusions
                    Material liens
            o Regardless of form, any consensual agreement that falls within § 9-109 is a secured
               transaction

Classification of collateral
   - Important because Article 9 treats different types of property differently
            o When in doubt, file under numerous categories
   - The debtor’s announced use of the collateral determines its classification
   - Categories of collateral
            o Goods: all things movable when security interest attaches
                    Consumer goods: goods that are used or bought for use primarily for personal,
                        family, or household purposes
                             Can argue both ways for “household purposes”
                    Farm products: used in farming operations; not standing timber [§ 9-102(a)(34)]
                    Inventory: something with a “shelf life”; something leased or sold; used up
                        quickly
                    Equipment: catch-all category; goods other than inventory, farm products, or
                        consumer goods; used in business, stays around {DEFAULT}
            o Fixtures: related to real property
            o Quasi-tangible property: symbolic of goods; pieces of paper used as collateral
                    Instruments: evidence of right to payment; not itself a security interest or lease;
                        usually a negotiable instrument, like a check [§ 9-102(a)(47)]
                             Promissory notes [§ 9-102(a)(68)]
                    Investment property: securities, stocks, bonds, etc. [§ 9-102(a)(49)]
                    Documents: documents of title, receipts [§§ 9-102(a)(30), 1-201(15)]
                             Warehouse receipts
                             Bills of lading


                                                                                                       5
                   
                 Chattel paper: reflects debt and security interest in goods securing debt [§ 9-
                 102(a)(11)]
               Letters of credit rights
        o Intangible property
               Accounts: right to payment for goods or services not evidenced by interest or
                 chattel paper whether or not earned by performance
               Deposit accounts: typical bank account
               Health care insurance receivables: right to payment when right claimed under
                 policy
               Payment intangibles: not evidenced by written obligation to pay
               General intangibles: all intangibles not falling into another category; catch-all
                 for intangibles; literary rights, etc.
** YOU CAN CLASSIFY COLLATERAL AS MORE THAN ONE CATEGORY WHEN FILING **

More on classification:
  - Goods are almost always treated the same
          o Attachment can vary
          o Perfection – financing statement
          o All are subject to possession
  - For intangible property, the only way to perfect is filing – you can NOT possess
  - Accounts have no paper necessity at all
  - Instruments have some formality
  - Chattel paper is both a chattel and a paper [§9-201(a)(11)]

Hierarchy of sophistication:
   - Chattel paper – most sophisticated
   - Instrument
   - Account – least sophisticated

Order of actions:
   - File financing statement
   - Make sure there are rights in the collateral
   - Security agreement
   - Turn over value

Technical validity of the forms:
   - Security agreement: contract between debtor and creditor/secured party assigning interest in
       property; attachment occurs with this agreement [§§ 9-201 & 9-203]
           o Concerned with “attachment”/contract validity
           o Between parties, not general public
           o Requirements [§ 9-203]:
                    Must be authenticated by debtor (signed)
                            Until debtor signs, he is not bound
                    Must describe collateral [§ 9-108]
                            Very specific description – “reasonably identify”
                            If intent is to create security interest in after-acquired property, then it
                              must be specifically stated
                            Future advances are automatically covered

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                          Current classification of the collateral
          **A good security agreement will spell out much more than § 9-203 requires**
          o Not requirements, but still good ideas:
                   Include loan amount
                   Identify parties – ask if debtor has had any other names
                   Include a clause stating “I grant you an interest in collateral”
                   Specify the contractual understandings of the parties
                   Include a default provision (defining “default” and what constitutes one)
          o Intent is most important evidence
   -   Financing statement: notice document to rest of world; usual method of perfection; also called a
       UCC-1 [§§ 9-501 & 9-502]
          o Gives public notice and cures ostensible ownership problems
          o Establishes priority
          o Requirements:
                   Must include name and address of debtor [§ 9-503]
                   Must include name and address of name secured party or his agent
                   Must identify the collateral [§ 9-504]
                          Does NOT need to be as specific as in security agreement – just enough
                              to put people on notice to inquire further
                          Does NOT need to state intent to create interest in after-acquired
                              property
                          Future advances are automatically covered
                   See also § 9-516 for other things that need to be in it before filling office will
                      accept it

Debtor’s identity:
   - Corporate debtor must be named exactly as in its organizational document creation
   - Still effective as to previously owned collateral and within 4 months of name change
           o At that point, creditor must file amendment
   - Later filing secured party bears the risk that the debtor has changed its name
   - Time line: 4 months is the key (anyone coming within the 4-month grace period loses to the old
       creditor)

Collateral              Name change                 4 months later
Old creditor gets it                                 ***New creditor gets it

** Regardless of name change, a creditor needs to refile the financing statement every 5 years **

Attachment:
    - Covered in § 9-200s
    - Makes security agreement enforceable between debtor and creditor
    - Pre-requisite for perfection
    - Does NOT require filing
    - Elements [§ 9-203]:
          o Enforceability against debtor
                  “Granting” clause
                  Value has been given,
                  Debtor has rights in collateral, AND

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                     One of the following
                          Debtor has authenticated security agreement that has description of
                             collateral [§ 9-108]

Perfection:
    - § 9-300s establish what it takes for perfection
    - Conflicts of law rules [§§ 9-301 through 9-307]
    - A person can file and NOT be perfected
    - Last events test: creditor may want to perfect before attachment; must perfect AND attach [§
        9-308]
    - A financing statement must be filed to perfect all security interests [§ 9-310]
            o Exceptions are in subsection (b)
    - Where to file?
            o § 9-501: non-uniform section
                   Usually Secretary of State’s office [§ 9-501(2)]
                           Comply with subsection (2) unless already complied with subsections
                              (1)(A) or (1)(B)
    - Possession = perfection
            o Giving up possession destroys perfection
    - Temporary perfection lasts 20 days after attachment [§ 9-312]
    - Methods of perfection [§§ 9-308 through 9-310]:
            o § 9-309: automatic perfection
                   The secured party need only make sure that its security interest has attached
                           Perfection is thereby accomplished without the need for any further steps
            o § 9-310: filing rule; when filing is required
            o § 9-311: exception for federal and international laws
            o § 9-312: possession; when it is permissive
            o § 9-313: possession in very special circumstances
            o § 9-314: variation of possession; control of investments
            o § 9-315: proceeds

Perfection:
    - Makes the security interest enforceable against the rest of the world, protects secured party
        from subsequent creditors
    - Attachment must come before perfection
    - Ways to perfect:
            o Filing a finance statement [§ 9-310]
                   Most common
            o Possession [§ 9-313]
            o Automatic [§ 9-309]
                   The secured party need only make sure that its security interest has attached
                           Perfection is thereby accomplished without the need for any further steps
                   Only for certain types
            o Control [§ 9-314]
                   Deposit accounts [§ 9-104]
                   Electronic chattel paper [§ 9-105]
                   Investment property [§ 9-106]
                   Letters of credit [§ 9-107]

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Possession:
   - Creditor that retains property has a perfected interest in tangible objects
   - Only continues as long as possession continues
   - Principles of agency apply to determine possession
   - With money, only possession creates a security interest

Automatic perfection [§ 9-309]:
   - Certain types of collateral where perfection occurs as soon as attachment does
   - Most common type is purchase money security interest (PMSI)
          o Not cars, which require notation of lien on title for perfection
          o PMSIs are important because they add value
                   They are higher priority than regular SIs
   - PMSI for consumer goods is exception to first in time, first in right rule
   - Careful creditors file anyway to be on the safe side
   - § 9-309 includes accounts receivable

Things that are automatically perfected [§ 9-309]:
   - PMSIs – most important
   - Assignment of accounts or payment intangible (receivable) – most important
   - Sale of payment intangible
   - Sale of promissory notes
   - Etc.

Automatic perfection:
   - PMSIs in consumer goods [§ 9-103(b)]:
          o Either
                   Seller sells and retains interest OR
                   Obligor advances money and takes interest (acquisitional interest)
          o Consolidation tests:
                   All or nothing: no PMSI after re-financing because does not literally meet
                      statutory test
                   Dual status: if there was PMSI debt before refinancing, still there afterward –
                      now applies to non-consumer goods transactions
          o Payment:
                   First-in, first-out approach where oldest debt is paid first
          o Must be “close nexus” between loan and purchase to qualify as PMSI – factors in
              “closely allied” rule:
                   Temporal closeness
                   Intent of parties
                  ** Order does NOT matter
   - Certain accounts and other intangibles
          o Other items also automatically perfected in certain situations
                   A significant part of account OR
                   A casual or isolated transaction

Perfection by filing – generally:
    - WHEN IN DOUBT, FILE EVERYWHERE
    - Clerical error has no effect on whether filing is proper
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           o § 9-517(a): “the failure of the filing office to index a record correctly does NOT affect
              the effectiveness of the filed record”
   -   Financing statement effective for 5 years
           o Exceptions – both are good for 30 years
                   Public finance transactions [§ 9-102(a)(67)]
                   Manufactured home transactions [§ 9-102(a)(53)]
   -   § 9-516(a): “…communication of a record to a filing office and tender of the filing fee or
       acceptance of the record by the filing office constitutes filing”
   -   Type of collateral is important – different requirements for different types
   -   Pre-mature filing kills your security interest
           o Do NOT prematurely file
   -   Debtor may request termination statement upon payment of debt

Perfection by control:
    - Creditor makes interest in collateral obvious, only available to tangible property
    - Choice of law rules:
           o State where debtor located dictates as to place of perfection (where to file)
           o Location of collateral governs as to rules of perfection and priority

Special perfection issues:
   - § 9-333: “possessory” artisan’s lien wins; special method of perfection
   - § 9-317: if you fail to perfect, judgment lien creditors will beat you

Last thoughts on perfection:
   - § 9-301’s key ideas
            o “governing perfection” [§ 9-501]
            o “effect of perfection or non-perfection”
            o “priority of a security interest in collateral” [§ 9-322]
                    All three are judged on the law of this jurisdiction
                             Debtor’s location  all three, except otherwise provided
                             Collateral’s location  all three WHERE it is a possessory security
                                interest
                             Tangible negotiable documents, goods, instruments, money, or tangible
                                chattel paper’s location  local law governs
                                    o Perfection of security interest in goods by filing a fixture filing
                                    o Perfection of security interest in timber to be cut
                                    o Effect of perfection or non-perfection and priority of a non-
                                         possessory security interest in collateral
                                              Perfection is left out because debtor’s location determines
                                                  perfection
   - Innocent buyers are truly covered under § 9-337
   - Certificates of title [§ 9-303(b)]: “goods become covered by a certificate of title when a valid
        application for the certificate of title and the applicable fee are delivered to the appropriate
        authority”

Priority:
    - § 9-400s deal with relative priority


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   -   § 9-322: priority among conflicting security interests in the same collateral  for perfected
       security interests
           o First in time, first in right rule
                    First to file OR perfect wins
           o Conflicting perfected security interests rank according to priority in time of filing OR
               perfection
           o Perfected security interests beat unperfected security interests
           o Attachment beats other unperfected security interests
           o Along with §§ 9-201, 9-315, and 9-320 creates a monopoly
   -   Other important section:
           o § 9-317  for unperfected security interests
                    “An unperfected security interest loses to (1) a perfected security interest or (2)
                       one of the conditions in § 9-203(b)(3) is met and a financing statement covering
                       the collateral is filed”
                    Lose to
                            § 9-322 secured parties
                            Lien creditors
                                   o Until perfection or filing
           o § 9-324: priority of PMSIs
                    20-day grace period (for perfection) after debtor receives possession of collateral
                            A trumping provision
                    PMSI in inventory
                            Send notice before possession is taken
                            Notice must include
                                   o PMSI – state parties are entering into PMSI
                                   o Description
                            Notice must be within 5 years before possession
                            Financing statement must be before possession
                    In equipment, you must check files – in inventory, you will get a letter in the
                       mail
           o § 9-328: priority of security interests in investment property
                    Control is important
                            Control gets more priority than a basic security interest
                    Control trumps perfection
           o § 9-103(d): consignment rule; consignment equals PMSI
   -   Future advances have same priority as regular advances
           o Future advance cross-collateralization is a big problem for small businesses (In re
               Wollin)
           o Do NOT sign dragnet clauses

Priority:
    - § 9-317: general priority rules
          o General creditors with no lien are subordinate to creditor with security interest
          o Buyers, lessees, licensees who know of unperfected security interest
          o As between unperfected security interests  first to attach
    - First in time, first in right rule & future advances
          o Advances go back to original filing against intervening lien if advance is perfected as
               long as same property is being encumbered

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                Always put in future advances clause
       o Future transaction must be so related to primary loan that the consent of the debtor to its
           inclusion may be inferred
-   PMSI [§ 9-309]
       o General rules
                Automatic perfection upon attachment for PMSI in consumer goods
                For all others, 20-day grace period following buyer’s possession
                        Secured party must perfect during that time or priority is lost
       o Inventory and livestock
                Perfected PMSI in these is superior to others before them in time if they perfect
                   before debtor takes possession and they give correct notice
                        No 20-day grace period
                Holder must
                        Perfect
                        Send notification to holder of conflicting security interest
                        Conflicting holder notified within 5 years before debtor gets inventory
                        Notification gives accurate description of inventory
-   Control and priority
       o Control is the method of perfection for certain types of property, mainly intangibles like
           investment property, electronic chattel paper, etc. [§ 9-328]
       o Investment property: filing or control, but control trumps filing
                Control: delivery with any necessary endorsements
                Control is only effective as long as it is maintained
       o Deposit accounts: creditor must get control in order to perfect
                Consumer accounts can NOT be used as collateral for consumer debts, but can
                   for non-consumer debts
       o Letter of credit rights: bank gives letter of credit to beneficiary; bank promises seller of
           goods it will be paid
                Control: consent to assignment of proceeds
       o § 8-106: control; look at subsections (b) – (d) because (a) is so rare; (d) is most common
                Certificated and bearer: must have possession
                Uncertificated and registered: must have name on it
                Uncertificated and not registered: must get intermediary to comply
                Security entitlement: must get compliance
       o Assent or control beats basic filing
-   Buyers
       o A security interest survives the sale of the secured property, generally unless there’s an
           exception as for a buyer in the ordinary course of business
       o BIOC:
                Buyer without knowledge of security interest
                Gives new value
                        Can NOT be pre-existing debt
                For personal purposes
                Good faith
                        NO knowledge of security agreement
                Not farm products
                Created by the buyer’s seller


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          o In priority disputes, a holder in due course has possession and will beat someone who
              has only filed
          o § 9-320 protects BIOCs
   -   Leases
          o A true lease is NOT an Article 9 transaction
                   A sale disguised as a lease is an Article 9 transaction
          o Test for whether lease is sale; it is a lease if
                   Obligation is not subject to termination by lessee (In re Millworks) and one of
                     these four factors is present:
                           Term of lease equal to remaining useful life of goods,
                           Lessee bound to renew lease for remaining useful life,
                           Lessee has option to renew for life of goods for nothing or nominal
                             consideration, OR
                           Lessee has option to own goods for nothing or nominal consideration
          o Critical question: what is the interest – Article 2A or Article 9?
                   To be a genuine lease, see § 1-203
                           NOT a genuine lease if
                                 o Subject to termination
                                 o Useful life equals payments (which is a sale)

Fixtures [§ 9-334]:
    - “Fixture”: so related to real property that an interest in them arises under real property law
    - Fixtures are connected to real estate
            o Part of the structure but still removable
                    Different from ordinary building goods
                    Accessions
    - Tests for determining whether something is a fixture
            o Affixation: if it is affixed, then it is a fixture
                    NOT commonly followed
            o Institutional: connected and necessary to the function of the institution
                    NOT commonly followed
            o Intentional: look at intent of parties; whether it is connected to something that would be
               mortgaged
                    Majority rule – MS follows, too
    - § 9-334
            o General rule is first in time, first in right except for
                    Readily removable perfected goods
                    Manufactured home perfected by another
                    Consent of the debtor
            o Security interest in fixtures subordinate to mortgage holder
            o PMSI wins over mortgage lender if it arose before property became fixture and filed
               within 20 days of it becoming a fixture
            o Super PMSI for construction mortgages if filed before the goods became fixtures and
               before completion of the construction
            o Remedy: first cut of proceeds
            o Does NOT pre-empt real property law, but real estate lenders should beware of § 9-334
               interests


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                      Real property (mortgages and encumberances) usually have priority –
                       exceptions:
                           If debtor is “record” person AND
                                  o (1) secured party’s interest is a PMSI,
                                  o (2) mortgage interest arises before goods become fixtures, and
                                  o (3) the security interest is perfected by a fixture filing before
                                      goods become fixtures or within 20 days
                           If it is a construction mortgage, real estate secured party wins if goods
                              became fixtures while construction occurred
                           § 9-334 (e) and (f)
                                  o (e): “readily removable”
                                          Fit Fir rule in real estate records
                                  o (f): subordination
                                          § 9-339 also deals with subordination

Perfection for fixtures:
    - File in regular records – permissible
    - File in real estate records – better
           o Benefit: you beat real estate creditors

Commingling:
  - Accession: property attached to other goods
  - Commingled goods that are inseparable

Federal priorities for debts and taxes:
   - Statutes
           o General federal priority statute [31 USC § 3713]
                     Dates from 1797
                     Idea is US gets paid first from estate
                     Sounds worse than it actually is
           o Federal Tax Lien Act – part of the Internal Revenue Code §§ 6321-6323
                     Pay government first subject to liens, security interests, mortgages, etc.
                              Liens and security interests (both are perfected) should not fear the IRC
                     Strictly, a Fit Fir idea
                     “Choate” is important
                     When US’s lien arises is questionable
                     Article 9 filing is best protection against US
                     §§ 6323 and 9-323(b) follow each other with the 45-day period
   - General rule: debts to federal government have pre-bankruptcy priority
   - Federal government wins except against choate claims, which are definite in 3 respects
           o Identity of lienor
           o Amount
           o Description of property
   - Tax liens arise automatically on assessment
   - Commercial financing security exemption
           o A security interest from a previously existing perfected security agreement will have
                priority over filed federal tax lien as to after-acquired property acquired within 45 days
                of the filing of the tax lien

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                  IRS lien subordinate to prior existing commercial agreement in ordinary course
   -   Future advances
          o Protected without knowledge of lien if made within 45 days of filing of the lien
                  Must have pre-existing perfected security interest in the debtor’s property

Bankruptcy and Article 9:
   - General rules
          o Delay between debt and security interest can NOT be within 90 days
          o Should not delay between attachment and financing statement
                  Concerned with 90-day period
   - Trustee’s status
          o Becomes hypothetical lien creditor as of day of filing
                  Automatic stay on payments
                  Has interest superior to other unperfected interest holders and has power to
                     assert all defenses the debtor could
   - Provisions
          o § 544 – similar to § 9-317 (SmashMouth “loser” rule)
                  Strong Arm statute – works with § 547
                  When a trustee (as lien creditor) files, he also
                           Lent money
                           Judgment is taken
                           Levied
                           Executed
                           Became a bona fide purchaser in real property
          o § 546
                  States that a secured party’s rights continue
          o § 547
                  Preferences statute – works with § 544
                  An elemental statute
                           Transfer – discussed in (e)
                           Benefits to creditor
                           Antecedent debt
                           90 days
                                  o Insiders must worry for 1 year
                           Insolvent
                           More than in liquidation as an unsecured creditor
                  A transfer is made
                           At the time of attachment, if perfected within 30 days, OR
                           At the time of perfection, if after 30 days, OR
                           Petition date
   - Hypotheticals
          o Example #1
                  On June 1, creditor makes loan to debtor
                  90 days later, on September 1, debtor files bankruptcy petition
                           Creditor wants to be paid [§ 544], but he is not paid immediately
                           He gets paid with all other unsecured creditors
                                  o Unsecured creditors lose to lien creditors (trustees)
                  Transfer has occurred at September 1
                                                                                                  15
        o Example #2
                Same facts, but on August 5, debtor pays $10K to creditor
                § 544 will not prevent this, BUT § 547 will
                        $10K was a preferential transfer
                        It benefited the creditor
                        It was for antecedent debt
                        It was within 90 days
                        Debtor was insolvent
                        Creditor got more in transfer that it would have in liquidation
-   Preferences
        o As to certain transfers occurring before bankruptcy filing, trustee can reverse them if
           they are preferential (transfers made within 90 days before petition)
        o A “preference” is
                A transfer of any property of the debtor (including the perfection of an
                   unperfected security interest)
                Made to or for the benefit of a creditor
                On account of an antecedent debt
                Made by the debtor while insolvent and within 90 days before the filing of
                   the bankruptcy petition
                The effect of which transfer is to allow the creditor to obtain a greater
                   percentage of the debt than the creditor could otherwise have received in
                   the bankruptcy proceeding
        o Preference period for insiders is 1 year
        o Exceptions
                Contemporaneous exchange for new value given; takes place on perfection
                Transfer takes place in ordinary course of business
                PMSI perfected on or before 20 days after debtor takes possession

Monopoly:
- Creation
     o Fit Fir rule
     o AAP [§ 9-203]
     o Proceeds [§ 9-315]
- Exceptions/limitations
     o BIOC [§ 9-320]
     o PMSI [§ 9-324]

Proceeds [§ 9-102(a)(64)]:
- Security interest in collateral continues in identifiable proceeds from that collateral
- In order to get proceeds, you don’t have to do anything in the SA or the FS – automatic
- Types of proceeds
       o Anything received for sale, lease, license, or exchange of collateral
       o Collections on collateral (accounts receivable)
       o Rights from collateral
       o Claims for loss, defects to, damage, infringement on collateral
               Insurance proceeds/money
       o Proceeds can be part of inventory so long as creditor does not improve its position in 90
           days prior to bankruptcy if creditor is fully secured [§ 547(c)(5)]

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   -   Perfection
           o Security interest is perfected if perfected in original collateral 20 days or earlier if
               financing statement lapses
           o No 20-day limit on cash proceeds
           o Some must be re-filed for perfection
   -   Priority
           o Debts paid in ordinary course of business are okay
           o If not okay, then creditor must disgorge
           o Narrowly defined to protect secured parties
           o Test
                    Extent to which payment normal and routine in business
                    Extent to which actor knew he is hurting another – collusion

Other proceeds issues:
   - § 9-330
          o Between bank and chattel paper purchaser, the latter wins UNLESS
                   Bank sets out “chattel paper” specifically in security agreement and financing
                       statement
                   Bank stamps “Property of Bank” on chattel paper so that purchaser is not a good
                       faith BIOC
   - For accounts receivable, Fit Fir rule applies
          o There is no exception like the one for chattel paper
   - § 9-315(b)
          o Presumption that non-proceeds are taken first before proceeds in commingled money
                   Lowest intermediate balance rule
   - Trumping provisions
          o § 9-340 – bank trumps because it has control
          o § 9-332 – unless collusion, a transferee wins
   - § 9-340
          o Bank’s right to set-off as long as it has a “choate” interest

Default:
   - When two companies merge, look at:
         o Attachment
                 Impaired title: when you pick up collateral from another entity, you also pick up
                    the debt
         o Perfection
                 Idea of 4 months to re-perfect if name changes [§§ 9-203, 9-501, and 9-502]
                 See also §§ 9-507 (name change) and 9-508 (new debtor)
                         Transferred collateral continues
                         After-acquired property also continues UNLESS seriously misleading
   - Pre-default duties of secured party
         o Default not defined by UCC
                 Usually spelled out in contract
                         Drafting a default clause
                                o Define “default”  “Default means…”
                                        Characterize collateral
                                        Names and update – honesty in both [§ 9-507]

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                                       Changes in merger entity status [§ 9-508]
                                       Care for collateral
                                       Deposit accounts accounting
                              o What makes secured party insecure
                              o Acceleration
                              ** Should have a “default” paragraph: “including, but not limited
                              to….if I ever, in good faith, deem myself insecure, I can accelerate”
                                       Good faith [§§ 1-201(20), 1-304, 1-309]
                                                Debtor has to prove “bad faith” [§ 1-309]
                                                Under Article 1, “good faith” is both subjective
                                                  and objective
                                                § 1-309: you cannot make up your own rules;
                                                  must follow reasonable commercial standards
               Failure to pay is recognized judicially
       o Reasonable care
               Interpreted loosely
       o Creditor has little duty to undertake affirmative acts
               Do NOT have to sell stock, even if instructed
-   Default
       o On default, creditor may repossess and sell
               Seek deficiency judgment if proceeds don’t equal debt
       o Acceleration clause: creditor may require all payments to be made on debt immediately
       o Remedies
               Article 9 foreclosure
               Judgment on notes
               Ability to repossess
              ** § 9-601: “cumulative” remedies – do NOT fear res judicata
               Secured party can cut out middle man and get customer/account debtor to pay it
                  directly [§ 9-607]
                       § 9-404: rights acquired by assignee; claims and defenses; exceptions
                       Notice date is important
                       § 9-403: carefully preserves rules of law that protect consumers from
                          waiving their rights to assert their defenses against assignees of their
                          obligation [(f) is important]
                              o Any obligations under Article 9 can NOT be exculpated
-   Repossession and resale
       o Theme: no breach of peace
               § 9-609: secured party’s right to repossess after default
                       Article 9 is largely about self-help remedy
               Article 9 does NOT require creditors to give debtors notice that they are in
                  default before repossessing
       o Reasonable person with good faith is standard for creditors
               Must also give sufficient notice (Klingbiel)
       o Pattern on late acceptance is a waiver [§ 2-208]
               If you accept late payments, then you waive the right to accelerate due to later
                  payments that are late
               Way to reinstate: § 2-209
       o Upon default, secured party may take possession, or render equipment unusable

                                                                                                 18
o Repossessor may NOT breach peace
       If asked to stop, he must stop
       Stealth is always permitted, so no breach of peace
                NOT the amount of noise, but the foreseeable response to the noise
       Constructive force is usually considered a breach of the peace
       A certain amount of trickery is okay – must be reasonable and not humiliate
o Creditor liable for actions of independent contractor since repossession is an inherently
  dangerous activity (Williamson v. Fowler Toyota, Inc.)
       There is a non-delegable duty on the creditor to refrain from breaching the peace
           when repossessing secured collateral – therefore, the creditor is liable for any
           breach of peace by the independent contractor
o Notice [§ 9-611]
       The debtor, any secondary obligor, and any other secured party are entitled to
           notice
                Notice to all junior secured parties: anyone on record 10 days or more
                  before notification date
       Junior secured party must give notice to a senior secured party [§ 9-608]
o Strict foreclosure: retaining collateral in satisfaction of debt [§ 9-620]
       No deficiency judgment in this case
       Prohibited if consumer has paid more than 60% of debt
o Sale must be in commercially reasonable manner [§ 9-610(b)]
       Give debtor notice with reasonable time before sale
                Consumer goods: what is reasonable is dictated by common law
                Non-consumer goods: at least 10 days [§ 9-612]
       § 9-610: meaningful opportunity for competitive bidding; to be a public sale,
           must be an auction; must give notice in a reasonable period of time
       Warranties
                When a secured party repossesses goods and sells them at a foreclosure
                  sale, it gives rise to an Article 2 sale warranty being made to the
                  purchaser at the sale [§ 9-610(d)]
                       o Secured party can disclaim warranty though [§ 9-610(e)]
       §§ 9-613 & 9-614: forms for notices
o Non-compliance: absolute bar on deficiency judgment if secured party does NOT
  comply with obligations
       § 9-625: damages for non-compliance with Article 9 (i.e. – breach of peace)
       § 9-615(f): a low price by a secured party can be a factor in proving bad faith – a
           debtor must prove that the goods could be sold at a higher price
o Surplus and deficiency
       § 9-626 sets up what to do with failure
       If secured party messes up Article 9, then presumed to have no deficiency or
           surplus rights in non-consumer cases
                In consumer cases, some courts say complete bar, but some courts say
                  presumption
o Waiver
       A party cannot waive any mandatory provisions under Article 9, but it can set
           standards/specify behavior [§ 9-602]
       Guarantors can NOT waive rights either


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