Law School Outline - Security Interests Liens- Corneil Stephens

SECURITIES OUTLINE EXAM May or may not have multiple choice Essay--if there are subparts, make sure you answer each subpart separately. Make sure you answer the questions that are asked. Err on the side of over-inclusion, but stick to the question--recognize and analyze. 3 hours open books. Bring anything that you think might be helpful to you. Two theorems predominate. 1. First in time, first in right. 2. Debt collection system is based on liquidation of the debtor's assets. HOW TO GET A LIEN Before a creditor can liquidate those assets, he must acquire an interest in those assets, a lien. 1. Debtor consents to giving creditor a lien--consensual lien (if in real property, governed by real estate laws. If in personal property, governed by art. 9) 2. Statute gives you a lien--statutory lien 3. Court gives you a lien, acquired by the process of suing someone and obtaining a judgment--judgment lien. TYPES OF CREDITORS 1. General (unsecured)--with no interest, only a claim 2. JLC--judgment lien creditor 3. LC--creditor who had obtained and recorded judgment, and has also levied, under art. 9 4. SC (unperfected & perfected)--creditor with a security interest, a consensual lien 5. SLC--statutory lien creditor, by virtue of a special statute 6. Feds--federal government as creditor SECURED CREDITOR--what is needed for SI to attach to the collateral 1. An authenticated security agreement that contains description of the collateral. (In the alternative, the code allows the SP to obtain possession of the collateral with debtor's permission.) 2. SP must give value for the security interest 3. Debtor must have rights in the collateral SECURITY INTEREST MAY BE FIXED OR FLUID 1. Fixed: Definite collateral that secures definite debt 2. Floating: SA contains after-acquired property clause or future advance clause. Under Article 9, the SP automatically has an interest in any proceeds of the collateral. ADVANTAGES OF BEING SP 1. If debtor defaults, then you have the right to seize the collateral, liquidate/dispose of it, and apply proceeds to debt DEFAULT Failure to pay when due; or anything the SA says it is Self help repossession without breach of the peace Replevin, personal property foreclosure--by judicial process DISPOSITION OF COLLATERAL AFTER DEFAULT 1. Debtor has right of redemption, to get property back. Anyone else who has an interest in the property may redeem too. Must be before the property is disposed of. 2. If debtor does not redeem, SP may choose to keep or dispose of the property. if they want to keep it they have to send notice to the debtor, anyone who has filed a FS perfecting their SI in the collateral, and any other party that has interest in the collateral indicating its intent to keep collateral and must say whether this is in full or partial satisfaction of the debt. If the collateral is a consumer good, it will always be in full satisfaction of the debt (debt wiped out). 3. After sending notice, before SP can keep collateral a. debtor must consent or fail to object to SP's keeping of the collateral. Debtor has 20 days after receiving notice to object. b. No one else who has an interest in the collateral objects within 20 days. c. With respect to any remaining debt, SP is unsecured. d. SP takes collateral free of subsequent or subordinate SI or debtor; but subject to prior SPs 4. If SP does not want collateral or someone objects, the collateral must be sold. Code calls this mandatory or compulsory disposition of the collateral. a. Public sale--auction b. Private sale--to someone you decide to sell to c. Must be commercially reasonable in manner, method, time, place, terms d. Notice must be given of sale, within reasonable time before the sale, for a consumer good, 10 days is presumed reasonable. Notice must contain time, place, and date of public sale; time after which sale will take place if a private sale. Consumer good--notice only has to be sent to debtor. Non-consumer good--has to be sent to debtor, any subordinate creditors that SP knows about, and any creditor who has filed FS to perfect SI in the collateral. e. Disposition is how SP is paid. If collateral does not satisfy the debt, there is a deficiency. The foreclosing SP has to sue to get a deficiency judgment (because the foreclosing party is not secured for that amount). f. If SP did not comply with article 9, he may have a problem collecting the deficiency from the debtor. If not a consumer good, the code imposes the rebuttable presumption rule: if SP does not comply, it is rebuttably presumed that had SP complied, there would have been no deficiency. SP must overcome this presumption. If goods are consumer good, code is silent. Some jurisdictions use rebuttable presumption rule, some jurisdictions use the absolute bar rule: the SP cannot recover any deficiency if he does not comply with Article 9. g. 9-625 SP is always liable to any party for failure to comply with Article 9. h. If collateral is consumer good, even if there is no loss to the debtor for SP's failure to comply with Article 9, in a consumer transaction, SP is automatically liable to debtor for the finance charge plus 10 percent of the purchase price, as a penalty. i. When foreclosure sale goes through, compliance or no, administrative expenses are paid first. Then, foreclosing SP is paid, then subordinate SPs in order of their priority, if there is money left over, the surplus goes to the debtor. Unsecured creditors receive nothing. j. Buyer buys collateral free of interest of foreclosing SP, subordinate SPs, and the debtor, however, the buyer buys subject to any interest of prior creditors. Even though prior creditors are not paid from foreclosure sale, their security interest stays in collateral. PRIORITY Affects creditor's rights at foreclosure sale, if debtor goes bankrupt, creditor's status. Is only important if more than one creditor has interest in the collateral. Perfection usually governs priority. PERFECTION 1. Automatic perfection (purchase money security interest in consumer good, sale of account receivable, and proceeds for 20 days), perfected as soon as SI attaches 2. Possession--SP or SP's agent takes possession of the collateral with debtor's consent; also takes place of SA; must be exclusive of debtor's control. 3. Filing of a financing statement, effective for 5 years, most common way. FS must contain name of debtor, name of creditor, and an indication of the collateral. 4. Motor vehicle required to be titled--only method is by making a notation on the title. Except, a motor vehicle used as inventory by a dealer may be perfected by filing. If you perfect by one of those four methods, but the SI has not attached yet, you are not a SP. PRIORITY BETWEEN BUYER AND SELLER OF COLLATERAL SI continues in collateral after the sale unless SP authorizes sale. However, the general rule really is that when one sells collateral, the buyer takes free of unperfected security interests unless he knows about them, but buys subject to perfected security interests. Exceptions: buyer at foreclosure sale subject to prior SI's, unless those prior SPs are unperfected; buyer in the ordinary course of business takes collateral free of all SI's created by the buyer's seller, whether perfected or not, whether knowledge or not; the garage sale buyer--one who buys a consumer good from someone who used it as a consumer good takes free of unfilled SI's and automatically perfected SI's but is subject to filed SI's PRIORITY BETWEEN TWO SP'S 1. Both unperfected--first in time, first in right; whoever attached first has priority 2. One perfected, one unperfected--perfected SP always wins 3. Between two perfected SP's--first to file or first to perfect, whichever comes first. If you file, but no SI has attached, you are unperfected SUPERPRIORITY 1. Purchase money secured party in non-inventory has a superpriority if it perfects its SI within 20 days after debtor receives the noninventory 2. PMSI in inventory gets superpriority if perfected the SI before or at time debtor receives inventory, and if it sends notice to all other parties that it knows about/who have filed who have an interest in the inventory, and that notice describes the inventory. Then it has a superpriority in all the debtor's inventory for 5 years after that notice is sent. PRIORITY BETWEEN SP AND LIEN CREDITOR 1. Pretty much on equal footing--the code reads that an unperfected SP is subordinate to LC, but perfected SP is NOT subordinate to LC/equal to LC. 2. First in time, first in right--perfection of SI, or LC becoming LC? (LC becomes so when he levies) 3. Priority of statutory lien creditor depends on the statute--no general rule. FEDERAL GOVERNMENT 1. Federal priority provision relates to all claims by federal government. Debtor must be insolvent, and when debtor must manifest it in three ways [see class notes]. When those two conditions apply and any of the debtor's property is sold, the feds get paid first except for choate creditors--complete creditors. Choate=has done everything they can do to reach the highest status as a secured creditor. Name, amount subject to lien must both be definite,which means JLC, SP with future advance/after acquired can't be choate. 2. Federal tax lien act. Applies to debts owed feds for unpaid taxes. Arises when IRS assesses that taxes are owed, a letter is sent out demanding payment, debtor fails to pay, and a tax lien is filed. When tax lien arises, it dates back to assessment not filing. General rule is only creditors who have choate lien at time tax lien arose have priority. Exceptions: special parties when tax lien FILED (mechanic's lien holders, JLC's, perfected SP's, and purchasers of the collateral). Protected parties take free of tax lien, period (bona fide purchaser of motor vehicle who does not know of tax lien, buyer in the ordinary course of business, bona fide purchaser of personal property of taxpayer of less than $250, attorney's liens). LIEN QUESTION STRATEGY. 1. Determine the status of each secured party: have all the requirements of SA been met? 2. Classify the collateral: consumer good, inventory, etc. 3. Is it a purchase money security interest? 4. Has it been perfected, if so, how and when? 5. Determine the status of all the other parties: lien creditor, federal government, etc.? 6. Are there any buyers, and what kind of buyer is it? Generic buyer, buyer in foreclosure sale, buyer in ordinary course of business? 7. Apply appropriate priority rules to buyers and creditors. First, classify the creditors, then prioritize them. PSP/LC--apply priority rules USP--will always lose against perfected SP and LC JLC--will always lose against unperfected SP, and perfected SP, and LC GC--will always lose FED--do FTLA or FPP apply? SLC--statute--set aside. ARTICLE 2 PROVISIONS WHAT IF THE CREDITOR IS A SELLER, AND THE DEBTOR A BUYER? The seller is in no better position subject to a few exceptions: 1. Right to withhold goods, 2-703, 2-511 (1) 2. Right to resell the goods, 2-703(d) 3. If seller has reasonable grounds to feel insecure, he can get assurance under 2-609, and if there is no assurance, he can treat the K as repudiated. 4. Refuse to deliver if buyer is insolvent except for cash, 2-702(1) GOODS IN TRANSIT 1. If seller ships something to buyer, and while goods are en route, seller discovers that buyer is insolvent, seller may stop delivery, 2-705(1) If it is a large delivery, the seller may stop for two additional reasons: if buyer repudiates, fails to make a payment, or if for any other reason the seller has the right to withhold the goods. 2. REPLEVIN--An action to get back property that belongs to you that someone else does not want to give back. If goods are delivered to the buyer, and buyer was defrauding the seller, the UCC "assumes" that the K is rescindable. While not addressed, principles of fraud and equity still apply, 1-103(b). It is a shorter judicial proceeding than the judicial lien process, because there is only one issue to decide--who owns the property. You get a trial within 15 days. Other simplified/expedited proceedings include EVICTION and REPOSSESSION. No discovery is allowed--only complaint, answer, and decision. IF THE CODE DOES NOT ADDRESS AN ISSUE, YOU CAN USE COMMON LAW PRINCIPLES. FRAUD--intentional misrepresentation of a past or existing fact. A promise is not a fact because it is a statement about what you will do in the future. INSOLVENT BUYER RECEIVING GOODS ON CREDIT UCC 2-702(2) 1. Seller may recover the goods within 10 days after buyer's receipt of the goods and nonpayment. 2. Under the common law action of replevin if there is fraud. If there is no fraud, you can't get them back under the common law, but you can under the UCC. 3. You can get them back if you demand within 10 days. If buyer misrepresented his solvency within 3 months before receiving the goods, there is no 10 day rule. Reliance is necessary to dispense with the 10 day rule. But for the buyer's misrepresentation, seller would have not sold the goods. 4. If several of the checks were good, but one bounced, the previous checks were a representation of solvency. However, a couple of bounced checks that is not a pattern is not insolvency. 5. If the misrepresentation was made by someone other than the buyer, such as a credit agency--the intent is to keep the buyer from misrepresenting his insolvency; unless the buyer misrepresents insolvency, the buyer's fraud is irrelevant; that is the only time the 10 day rule is dispensed with. The only way the seller can reclaim the goods is if the buyer is insolvent. Seller cannot reclaim goods based on buyer misrepresenting anything else. BILL OF LADING--transfers title from the seller to the buyer, allows buyer to pick up the goods. GOODS SENT COD The buyer cannot retain the goods unless he pays for them, 2-507(2); Basically a replevin action. RECLAMATION MUST BE DONE WITHIN A REASONABLE TIME BECAUSE Under 2-702 and 2-507, seller must reclaim goods within a reasonable time; if seller does not promptly reclaim, he waives his right. Seller is also motivated to be timely because he runs the risk of the buyer selling the goods off to someone else. INVOLVEMENT OF THIRD PARTIES 2-403(1) Voidable title--person who has this is a person who has received goods but has not paid or finished paying for them yet; seller retains power to void the sale. A person with voidable title can transfer good title to a good faith purchaser. A person with void title passes no title. A thief has no title/void title. General rule is all you can convey is what you have--you cannot convey more than what you have; 2-403 is an exception. GENERAL UCC INFORMATION ARTICLE 1 Sets forth definitions of terms used throughout the Code. COMMENTS are like legislative history. They tell you how they think the code should be interpreted in case there is an ambiguity. SECURED TRANSACTIONS CONSENSUAL LIEN UCC ARTICLE 9 A contractural relationship Nothing is exempt, unless agreed by the parties YOU CANNOT IMPLY A SECURITY INTEREST OR A SECURITY AGREEMENT. SECURITES & LIENS Rights of debtors and creditors Debtor--how to avoid payment of a debt Creditor--how to collect a debt No more debtor's prisons--the only thing one can do against a debtor is seize the property, sell it (liquidation) and apply the proceeds to the debt. The debt collection system is based on liquidation of the debtor's assets. You can be a debtor in two ways: you can owe money on a debt, or have an interest in the collateral other than a lien or SI. The person who receives collateral subject to a security interest is a debtor, so a financing statement has to be filed where the debtor is located within a year. If you don't you lose your perfection (the security interest continues). SECURED TRANSACTION A secured transaction is one in which the debtor gives a creditor a consensual lien, an interest in the debtor's collateral. A general creditor is an unsecured creditor. ARTICLE 9 SECURED TRANSACTIONS Covers whether or not a creditor has a security interest in the debtor's property, and does not have to sue. The advantage of being a secured creditor is upon default, the creditor may immediately seize the debtor's property, sell it, and apply the proceeds toward the debt, instead of having to sue. 9-203(b) REQUIREMENTS FOR A VALID SECURITY INTEREST 1. Value--secured party may not gift this; there must be consideration 2. Debtor must have rights in the collateral and the power to transfer rights in the collateral to a secured party--interest 3. An authenticated security agreement that provides for a description of the collateral. You cannot have an oral security agreement. It must be in writing--it must be recorded. RECORD 9-102(a)(69) Information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. [A record need not be in writing, it may be email or recorded voice mail.] AUTHENTICATE 9-102(7) means to sign or to execute or otherwise adopt a symbol…with the intent to identify and adopt the record [to indicate that debtor intends to adopt it] Normally a signature, but it does not have to be. To authenticate a non-written record, you must show intent to adopt the record. Be able to identify the person whose voice is recorded. Email--automatic insertion of your name is not a "present intent" to adopt the record…or, you should have deleted your name. SECURITY AGREEMENT 9-102(73) an agreement that creates or provides for a security interest [it has to contain granting language] (3)(B) Rarely used--instead of a security agreement, alternatively if the debtor allows the secured party to have possession of the collateral, that is sufficient. Normally, debtor wants use of the collateral while he is financing it--pawn shop. SECURITY AGREEMENT must have: 1. Writing or record 2. Authenticated record--signed or otherwise adopted by the debtor with the present intent to adopt 3. Description of collateral--there is no security interest in any not described--if it says "inventory" that includes all; it need not be specific just reasonably identify; see 9-108 Sufficiency of Description 4. Granting language--has to indicate that you are giving an interest in the collateral to secure the debt; no magic words. You cannot imply this. SUFFICIENCY OF DESCRIPTION inventory means inventory--lot just means where it will be, what is covered is inventory, even if the car is off the lot for a test drive; it is sufficiently described as inventory--lot is just location, not description Cases divided "certain automobiles" does not reasonably identify which cars are described; it is insufficient If there is no debt, you cannot be a secured party. THE AMOUNT OF THE SECURITY INTEREST IS THE AMOUNT OF THE DEBT; if it is paid down to zero, there is no security interest. If you call a SI a pledge of K it is still a SI as long as it has all of the parts Lien--A creditor cannot do this unless he acquires an interest in these assets, called a lien. 1. Statutory lien. In GA, as in most states, statutes give a creditor a lien on debtors property that is in creditor's possession for repair (mechanics lien). Generally for services on debtor's property. Can also arise for contractors who perform services on debtor's real property. Creditor provides goods or services to the debtor; creditor generally maintains possession of debtor's personal property. With real property, a statutory lien arises when a contractor provides services on the debtor's property. 2. Consensual--Enter into a contract with a debtor in which the debtor gives the creditor a lien on the debtor's property. For real property, a trust deed or mortgage; governed by real estate laws. For personal property, it is a security interest, governed by Article 9 of the UCC. This is the preferred method, because you don't want to go to the trouble to get the judicial lien. AFTER-ACQUIRED PROPERTY or INVENTORY A security agreement can cover after-acquired property 9-204(a) "Floating lien." Normally is covered only if the agreement says it is, unless it is inventory, then it is automatic. No difference between "inventory," "all inventory" and "present and future inventory" Demand note--a promissory note--a promise to pay when payment is due LEASING PROPERTY If you are a secured party, it is risky getting a security interest in leased personal property, because if the debtor does not pay, you lose the property. IN RE BOLLINGER CORP. They had a financing statement/promissory note but no written security agreement. Even in the absence of the security agreement, they were a secured party for the whole $150,000 based on the transaction as a whole. Normally a financing statement does not meet the four requirements for a valid security agreement. It was not contained in one document, but as a whole the requirements were there. 1. Intent to be bound--if there, you may 2. Look at all the documents as a whole *This has been really criticized--that the code requirements are minimal, and you should satisfy them; if there is not a single document that satisfies the requirements, you don't have it. In Georgia, multiple documents may be used to determine the existence of a contract. When the contract is a security agreement, Georgia has not ruled on it or adopted Bollinger. JUDICIAL LIEN PROCESS 3. Judicial lien--in the absence of a statute or consensual lien. Creditor's process: a. Complaint b. 30 days for debtor to answer; if not timely, default judgment c. Discovery--to see what their defenses and claims are (request for production of documents, depositions, request for admissions, interrogatories) Usually lasts about 6 months d. Maybe 2-4 years later you have a trial e. Court enters judgment--a determination that you are owed money. A judgment does not function as a lien. You are a judgment creditor f. RECORD the judgment--More precisely, you record your writ of execution. In GA, you record this on the General Execution Docket, and you have a lien on all the debtor's property, real and personal. Then you become a judgment lien creditor. Now you have an interest in those assets and can liquidate them. Writ of execution--order the sheriff to execute the property of the debtor. g. Now that you have the writ of execution, you go to the sheriff and ask him to seize everything except exempt property. If it is not the debtor's property, you cannot take it. What if the debtor claims not to have any property? h. Georgia allows post-judgment discovery, limited to the identification, location, and value of any assets, and if debtor does not answer, she is in contempt. i. Levy--seize, execute--all synonymous--you take the debtor's assets, liquidate them, and apply them toward the debt. j. Sale--you are paid--to the extent is less, you have to wait around until the debtor gets more assets; you may end up getting nothing. If it is more, the balance goes to the debtor. UNLESS THE DEBTOR AGREES TO A CONSENSUAL LIEN OR THERE IS A STATUTORY RIGHT, THE CREDITOR HAS TO GO THROUGH THE ABOVE PROCESS AND MAYBE GET NOTHING. EXEMPTIONS FROM JUDGMENT LIENS In each state, there are assets that cannot be levied. Under the federal bankruptcy act, there are different assets that cannot be liquidated. These are totally different and in some states may not even overlap. ARTICLE 9 LIEN CREDITOR A judgment lien creditor who has levied on the property becomes an article 9 "lien creditor." A judgment lien creditor is not a "lien creditor" under the code until he levies. 9-102(a)(52) Definition of lien creditor--includes a "creditor that has acquired a lien on the property involved by attachment, levy, or the like" EXECUTION SALE/FORECLOSURE SALE The collateral is generally sold for much less than it is worth. Even if you have priority, you risk not getting paid. That is why if you are loaning $5,000, it makes no sense to get collateral worth only that much--motivation to be over-secured. PERFECTION 1. Has nothing to do with a valid and enforceable security interest or agreement. If an attempt at perfection is futile or ineffective, that does not affect the security interest, just the attempt at perfection. 2. Financing statements and the filing of them perfect the security interest, which is important when more than one party has an interest in the collateral. 3. Who has the right to take the property first upon default. 4. Whether or not there is a security interest is an entirely different question--the perfection question deals with who has the right to repossess, etc. 5. The act of giving notice to third parties that the secured party has interest in the collateral 6. Allows the secured party in some circumstances to obtain priority, a superior interest over others with an interest in the collateral. Perfection is only important if more than one party has interest in the same collateral, because perfection can determine priority. Priority answers the question, "who has the superior interest" or who gets paid first? But if only one person has an interest in the collateral, then priority is not an issue 4 METHODS OF PERFECTING A SECURITY INTEREST--acts of perfection 1. Filing 2. Automatic perfection 3. Possession of the collateral by the secured party 4. Making a notation on the title where the collateral is required to be titled PERFECTED SECURITY INTEREST REQUIRES TWO THINGS 1. Attachment (means all the elements of a valid security interest have been met) 2. Act of perfection FILING 9-310(a) Except as otherwise provided, filing is the way to perfect a security interest except for the exceptions in (b) Filing may occur at any time, even before there is a security interest. CERTIFICATE OF TITLE STATUTES AND PERFECTION OF SECURITY INTERESTS IN AUTOMOBILES 9-311(2) Any property subject to a certificate of title statute does not need to have a financing statement, and cannot have a filing, to perfect the security interest. The way to perfect a security interest in a car is to look at the certificate of title statute. Most all say that the secured party must make a notation on the title in order to perfect it (some states also require possession of the title). It makes no sense to not maintain possession of title. Filing is ineffective. 9-311(d) EXCEPTION when goods like cars are in the inventory of a dealer in the business of selling goods of that type; then you can perfect by filing. The bank financing the inventory does not have to make a notation on every title, they can file. 3 ways to perfect by possession: 1. Secured party has possession 2. Secured party’s agent has possession and he is not under the control of the debtor 3. An independent 3rd party bailee has possession and acknowledges he is holding the property on behalf of the secured party In order to perfect by possession you need something tangible i.e. the collateral to possess. If the bailee has possession it can also be perfection by possession if it is clear they are holding it for the creditor i.e. written proof/documentation. PERFECTION BY POSSESSION OF ESCROW AGENT An Escrow Agent is an agent for both parties: that means the secured party does not have possession, the escrow agent has it, and is not under the control of the debtor. Perfected security interest 1. Security interest 2. Act of perfection a. Filing b. Automatic--purchase money in consumer good c. SP takes possession of collateral, or SP's agent--not by debtor d. Notation on the title EFFECT OF PERFECTION--BASIC PRIORITY RULES 9-317 If a secured party and lien creditor have interest in the same collateral, what happened first--perfection of the security interest, or levy? First in time, first in right 9-322 If two secured parties have an interest in the same collateral, and both are unperfected, then the first to attach has priority. If one is perfected, then the perfected party, Both perfected--first to file or perfect, whichever first. If at the time of levy the secured party is still perfected, the secured party wins--the lien creditor would of course prefer to wait until day 21 days and pretend there was never perfection; this is not the intent of the UCC. If at some point the collateral becomes unperfected, that does not matter, if at the time of the levy, it was still perfected. No relation back. The code only says otherwise with respect to good faith purchasers. FINANCING STATEMENT 9-502(a) FINANCING STATEMENT REQUIRES THREE THINGS 1. Name of debtor 2. Name of secured party 3. Indication of the collateral covered--A financing statement does not create a security agreement--you don't know what the collateral is by reading the financing statement, because it only has to INDICATE the collateral, it does not need a detailed description as seen in the security agreement. All you know from the financing statement is that certain property MAY be covered. It only tells you whether there is perfection of a security interest; it does not tell you whether or not there is a security interest or security agreement. It gives secured parties a duty of inquiry; it puts people on notice. SUFFICIENCY OF DESCRIPTION OF COLLATERAL FOR FINANCING STATEMENT "certain" motor vehicles is sufficient; it is much more liberal than the security agreement 9-501a WHERE TO FILE left open to states In Georgia, there is a central filing system; in the clerk's office of the superior court of any county in the state 9-506 FINANCING STATEMENT ERRORS This is significant because they are indexed under the name of the debtor; it is crucial that the name of the debtor is exactly correct. Filing in the wrong office has the effect of not filing at all. 9-517 Failure to index correctly by the filing office does not render the financial agreement ineffective; the clerk's office has sovereign immunity. If the secured party files, he should not bear the risk of the clerk's mistake. The second-in-time interests will bear the risk before the first in time parties. 9-503 SUFFICIENCY OF NAMES OF DEBTOR AND SECURED PARTY 503(a)(1) registered organization [or corporation] must be the name under which it was organized 503(c) Debtor's trade name is insufficient Debtor-If it just omits the "inc." or "co" it is seriously misleading under 9-506(b) even if it is "minor," but under 9-506(c) if it is able to be found in the filing office's search program under the correct name Secured party-It is not as important to have it as specific as the name of the debtor. 9-210 REQUEST FOR INFORMATION A secured party must respond to inquiries from the debtor; amount and property subject, but is not required to respond to outside inquiries. Secondbank has to go to the debtor to get information from, or authorize Firstbank to get information. 9-516 WHAT CONSTITUTES FILING 1. Acceptance of the record or 2. Tendering of the filing fee ADDRESSES 9-516(b) Filing does not occur if the filing office refuses to accept the financing statement because it does not include the name AND address of the debtor. 9-520 and if there is a reason set forth in 9-516(b), it must not accept the statement, and it cannot refuse for other reasons. But if they accept it anyway, the financing statement is effective so long as it is legally sufficient (three things above). TIME OF FILING FINANCING STATEMENT you can file at any time, before or after the security agreement FS lapse after 5 years and when to file continuation; 9-515a, c, d; 9-102a27 Continuation preserves the original filing date as effective TERMINATION OF THE FINANCING STATEMENT 9-513 Debtor has the right to demand a termination statement once the debt has been paid. The secured party has 20 days to terminate. The SP of record has the right to terminate the FS. FILING OVERVIEW Name of debtor, creditor, and indication of collateral When you perfect by filing, then filing is effective when you present the financing statement to the filing clerk, or if the filing clerk accepts the financing statement. Either makes it "filed" and therefore an act of perfection. Clerk of superior court in any county in the state of GA; GA has a central filing index under name of debtor. Names: Minor error not seriously misleading--OK. If the minor error concerns the name of the debtor, that is not ok, no matter how small, is seriously misleading. The name has to be identical. However, there is one occasion where it is OK, if the error is such that if you look in the index under the debtor's true name, and the erroneous name would have come up, then it is not seriously misleading and still effective. CHANGES ETC. Even though the name of the secured party is no longer correct, the financing statement does not have to be changed b/c it is indexed by the name of the debtor. A legally insufficient FS is the same as no FS at all, and you're unperfected. It is sufficient if you indicate 1 secured party when there are several and that person will act as the representative of the several It is effective with respect to original collateral, but if you are going to include new collateral such as inventory, then you need to check it every 4 months 9-507(b): if the financing statement is correct when filed, it still is effective even if things have changed which make it seriously misleading PRIORITY RULES "FIRST IN TIME, FIRST IN RIGHT" and "FIRST TO FILE OR PERFECT, WHICHEVER COMES FIRST." Priority is a superior interest; it only means you come first; it does not erase junior interests. If the security interest is perfected before the other with an interest becomes a "lien creditor" via a levy, then the secured party has priority. If the lien creditor levies before the security interest perfects, then the lien creditor has priority. The senior creditor has priority, the junior creditor does not have priority. If the collateral is not worth enough to pay off the junior interests, those without the superior interests get nothing. Between an unperfected secured creditor, and a lien creditor, the lien creditor has priority. 9-322 PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN…THE SAME COLLATERAL (a)(2) A perfected security interest has priority over a conflicting unperfected party (a)(3) The first to attach has priority if others are unperfected, if all are unperfected. (a)(1) If all are perfected, they rank according to earlier of the time a filing was first made or the security interest was first perfected--whichever comes first. Race to the courthouse. File immediately. CIRCULAR PRIORITY DILEMMA LC vs unperfected SP; LC has priority LC vs perfeted SP; SP has priority Between two SPs; perfected has priority over unperfected Most courts will split it up by the pro rata share of each creditor. Some courts divide by "equitable principles" which is against the code. 9-338(1) If your FS has incorrect information, and as a result, a subsequently perfecting SP relies on that incorrect information, the second SP has priority; the first loses priority. If you provide no information, you don't lose your priority, because there is no way for subsequent SP to rely on "no" information. Shellcross case: knowledge is irrelevant in determining priority. Lowry: if the perfected SP acted in bad faith, the court may give the unperfected SP an "equitable lien." Then the court can decide who has priority. Bad faith in the code: sanction possible to lose your priority is consistent with the code (instead of an equitable lien; this is more consistent with the code and is more predictable.) PRIORITY CONTEST BETWEEN LIEN CREDITOR AND SP In order to prevail over a judgment lien creditor, the SP may either (1) perfect first, or (2) file and have a SA before the levy. This protects the SP who finances inventory from a "gap" lien creditor. If you are a PMSP, you have priority over a lien creditor if you perfect within 20 days of debtor receiving collateral-exceptions 9-320; this does not apply to buyers. 9-321; does not apply to lessees of goods or intangibles. PURCHASE-MONEY SECURITY INTEREST PURCHASE-MONEY SECURITY INTEREST 9-317(e); defined 9-103 If a person files a financing statement who has a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the purchase-money security interest has priority over a buyer, lessee, or lien creditor. Occurs when money is loaned or credit is extended in order to enable the debtor to buy the collateral, and the debtor does indeed use the borrowed money to purchase the collateral; the creditor has a security interest in the collateral. Often, there is super-priority for purchase-money secured parties. You don't have to perfect before the lien creditor levies; it is enough to do it within 20 days. "SUPER" PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS; 9-324 (a) A perfected PMSI in goods other than inventory or livestock has priority over a conflicting SI in the same goods…and in its identifiable proceeds also has priority, if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter. Regardless of when you file or perfect, a purchase money secured party comes first, within 20 days of debtor getting the collateral! This does not disadvantage a prior SP who was not a PMSP . An inducement for PMSP to loan money so businesses can expand. (b) Inventory…a perfected PMSI in inventory has priority over a conflicting SI in the same inventory…chattel paper or an instrument….proceeds…. 1. PMSI perfected when debtor receives possession of inventory; no grace period 2. PMSP sends notice to conflicting SPs 3. Conflicting SP receives notice within 5 years before debtor possesses inventory--once notice is sent, superpriority is over the inventory for 5 years after notice. 4. Notice states that PMSP has or expects to have a PMSI in inventory, and describes the inventory. HOW TO BE A PURCHASE MONEY SECURED PARTY 1. loan debtor money to buy collateral 2. debtor does in fact use that money to buy the collateral and not something else 3. get a SI in the collateral When the collateral is sold, first the PMSP gets paid the outstanding balance of the loan, then the non-purchase money SP gets paid, and whatever is left over goes to the PMSP. STEPS TO DETERMINE PRIORITY OF PURCHASE MONEY SECURED PARTY 1. Is either party a PMSP? 2. If so, look at the collateral--inventory or not? 3. Entitled to superpriority under (a) or (b)? 4. If not, apply normal priority rule; first to file or perfect, whichever comes first TWO CONFLICTING SUPERPRIORITIES 1. Seller trumps lender; 9-324(g) 2. Seller and seller or lender and lender; go to the regular first to file or perfect rule TRANSFORMATION RULE / SOUTHTRUST CASE Under the bankruptcy code, if a PMSI includes after-acquired property or future advances clause, it loses its superpriority. The money used to acquire the later property could have been acquired with non-purchase money collateral; dual status-depends on the case whether the PMSI will be transformed to an ordinary SI. Under 9-103, if the SI is not a consumer goods transaction, then the transformation rule does not apply. The code does not express an opinion as to what would happen if it is a consumer good collateral. Look at 9-324(a & b). Some courts may apply the transformation rule in consumer transactions anyway. PMSI IN INVENTORY; 9-324(b)(2 - 4) Secured parties who previously filed FS covering inventory must receive an authenticated notice, describing the purchase-money secured inventory, from the PMSP before the debtor possesses the inventory. Notify conflicting SP's; the notification must be renewed if it continues for more than five years; (b)(3) The 20-day grace period for perfecting PMSI does not apply to inventory--ALSO HAS PRIORITY IN IDENTIFIABLE CASH PROCEEDS OF THE INVENTORY TO THE EXTENT THE IDENTIFIABLE CASH PROCEEDS ARE RECEIVED ON OR BEFORE THE DELIVERY OF THE INVENTORY TO A BUYER, IF… Perfection must occur before the debtor receives the inventory; (b)(1) 1. Unpaid accounts--debts (proceeds of inventory--identifiable--see 9-324(b) 2. Payments by retailers to debtor (identifiable cash proceeds under 9-315(d)(2) SP2 does not have superpriority over the deposit account because they were not received on or before delivery of the inventory to the buyer. These deposits were made some time after the buyer had the inventory, because these were bought on credit. 3. Check for advance payment for inventory that had already been shipped to a buyer (cash proceeds where they had the money before the buyer had the inventory.) SP2 has priority over these proceeds because of (b)(1). CLASSIFICATION OF COLLATERAL Consumer Good: goods which are bought or used primarily for personal, family or household purposes. Most goods it will depend on how you use a given good. Don’t look at what a good is but on how the good is being used. Certificate of title statute doesn’t apply to the tractor….Now used for farming, not personal, purposes. The effect of the change in use: consumer good is either used as a consumer good or bought for use as a consumer good so a bank wanting to win the priority dispute would say that it was bought for use as a consumer good even if it is not being used that way now. CLASSIFICATION OF COLLATERAL 1. How it is being used? and 2. Why was it bought? MONEY 9-312(b)(3): a security interest in money may be perfected only by the secured party’s taking possession Issue; is it money? Non money coins can be perfected by possession or filing AUTOMATIC PERFECTION CHOICE-OF-LAW Personal property is filed in location of debtor, regardless of location of collateral, because FS filed/indexed under name of debtor Real property filed in location of real property Corporation (or other registered organization) filed in place of incorporation A partnership is not a registered organization--file in location of headquarters Where do you file if the debtor is foreign? If it is in a jurisdiction that doesn’t have something comparable to Article 9, then you can file in Washington D.C. If you have perfected by possession then look at where the collateral is. 9-301 contemplates that some states have and others haven’t adopted article 9, but today every state has adopted it The "non-uniform commercial code"--the laws may vary slightly from state to state Where the financing statement must be filed generally, it must be filed where the debtor is located, if an individual, his residence, if a corporation, the state it is incorporated, if foreign, Washington D.C.; if a partnership with one location, at that location; if an organization is located in several states, it is located for filing purposes where its headquarters are. DEBTOR MOVES TO A DIFFERENT STATE Where the debtor is located governs perfection and choice of law rules for perfection, so when the debtor moves from Ohio to California, California law governs perfection; see 9-301(1) "while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection" 9-316(a)(2) four months grace period for continued perfection when the debtor moves to another jurisdiction. WHERE THE COLLATERAL IS LOCATED GOVERNS THE EFFECT OF PERFECTION AND PRIORITY YOU FILE WHERE THE DEBTOR IS LOCATED PERFECTION ITSELF IS GOVERNED BY THE LOCATION OF THE DEBTOR CERTIFICATE OF TITLE AND CHOICE OF LAW 1. For cars and other goods that are covered by a certificate of title, the local law of the jurisdiction where the certificate of title is issued governs perfection. 2. When a new certificate of title in a new jurisdiction is issued, the old ones are ineffective, even if the new one was obtained fraudulently. 3. The old title may no longer cover the car, but the car remains perfected under that old state. When a car is covered by a new title, the new state law controls, but the perfection under the old laws remain until they would have expired under the laws of the old state. 4. Exception to the above. As against a good faith purchaser for value, the goods become unperfected after four months-the bank has a four-month grace period against good faith purchasers for value. Good faith purchasers have special protection throughout the code that others do not have PROCEEDS PROCEEDS are "whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral." Cash proceeds "means proceeds that are money, checks, deposit accounts, or the like." If it is not this, it is "non-cash proceeds." 9-315(a)(1) security interest follows the collateral almost everywhere it goes… 9-315(a)(2) "a security interest attaches to any identifiable proceeds of collateral" automatically, even if it is not described in the security agreement. If you trade your car for the boat, the security interest in the car now attaches to the boat. SP can't collect twice, but it has now two items of collateral, the car and the boat--very beneficial for the creditor. PROCEEDS ARE AUTOMATICALLY PERFECTED FOR 20 DAYS A security interest in proceeds is perfected if the security interest in the original collateral was perfected--this is automatic perfection. This automatic perfection is short lived; under (d) it becomes unperfected on the 21st day after the security interest attached to the proceeds unless: Three ways proceeds can be perfected after 21 days (1) a filed financing statement covers the original collateral (which means that the method of perfection of the original security interest was FILING); (2) identifiable cash proceeds (identifiable means traceable)--filed in the same place are automatically perfected (3) not acquired with cash proceeds CASH AND OTHER COLLATERAL PERFECTED ONLY BY POSSESSION; EFFECT ON PROCEEDS The only way you can perfect a security interest in cash (an instrument, like a check) is through possession, so it does not satisfy 315(d)(1)(B). You can't file to perfect, so in 20 days it is unperfected. Under (d)(2) it is automatically perfected after 20 days if it is IDENTIFIABLE cash proceeds, and a check is cash proceeds. PROCEEDS OF PROCEEDS ARE PROCEEDS, SO LONG AS YOU CAN TRACE TO THE ORIGINAL COLLATERAL 9-315(a)(1) "A security interest…continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest." The security interest follows the collateral wherever it goes, so long as the SP did not authorize the sale (exceptions are throughout article 9). If the debtor sells the collateral and the secured party did not authorize the sale, the security interest continues in both the collateral and the proceeds. If the secured party did authorize the sale, they may collect only from the proceeds. IDENTIFICATION OF PROCEEDS An insurance check is identifiable cash proceeds Court costs not proceeds The secured party has the burden of proving which are identifiable You may want to put in your security agreement that damage to the collateral is a default, to protect the secured party You could cover anything you want as collateral, including insurance payments and attorneys fees awarded, so that they aren't proceeds and you don't have the problem of identifying them. FUNGIBLE GOODS/COMMINGLED GOODS (such as marbles) It does not matter which marbles belong to SP1 and which are SP2 Proceeds don't allow for fungibility; collateral does. Proceeds must be identifiable. It is assumed that whatever you sell, you sell first what you have paid for--the property subject to the SI is deemed to be the last property sold. Dual status--PMSP as to new inventory but an ordinary SP as to used collateral. DIFFERENCE BETWEEN SERVICE AND PROCEEDS If money comes from a service you are providing, is it for the service or because of the collateral? You can make anything collateral under the terms of the security agreement, but generally: Jukebox profits--are not collateral, jukeboxes are a service People riding buses pay for the service--ticket sales not proceeds. If travel agent sells tickets, the accounts of the travel agent are collateral and not proceeds. HOW DO YOU TRACE PROCEEDS THAT ARE DEPOSITED IN A BANK ACCOUNT THAT CONTAINS FUNDS OTHER THAN THE PROCEEDS? problem is with general account in which they are commingled. When funds are withdrawn, is it proceeds or non-proceeds? LOWEST INTERMEDIATE BALANCE RULE: When proceeds are commingled with non proceeds, proceeds are deemed the last funds withdrawn. 9-315b sanctions this approach so long as proceeds are still identifiable 9-102a77 you can collect on car as well as guaranty 9-308 perfection of security interest in collateral also perfects a security interest in supporting obligation to collateral BUYERS & TRANSFEREES TRANSFEREES A transferee of money takes it free of the SI unless collusion Any transferee--does not matter if it is a gift, a loan, or whatever--a transferee of money or check takes free of a security interest. This is to promote the free flow of commerce--that is why the SI does not follow to the transferee. Transferees take proceeds free of SI. The only party who is not a transferee upon disposition of the collateral is the debtor. The subordinate creditors are transferees. The SP has an interest in the collateral, and after it is disposed of, SP has an interest in the proceeds when the debtor has it. Once transferred to someone else, it is not proceeds anymore. BUYERS OF COLLATERAL 1. SI continues in the collateral after sale, unless the SP authorizes the sale free of the SI. * 2. Upon default, SP can collect from either the debtor or the buyer. Another way of saying who has priority. 3. A SI is effective according to its terms between the parties, against purchasers of the collateral, and against creditors. *EXCEPTIONS TO SI CONTINUING IN COLLATERAL AFTER THE SALE 1. A buyer in the ordinary course of business (BIOC--one who buys inventory from a merchant, a dealer) takes free of a SI created by the buyer's seller, even if SI is perfected and buyer knows of SI; if you buy inventory, you are not buying a consumer good. BIOC takes collateral free of a perfected SI created by the seller, even if BIOC has knowledge of the SI; 9-320(a) Unless the SI is perfected by possession; 9-329(e) BIOC is protected from SI only from the immediate seller--if seller purchased the collateral subject to SI, then buyer could be subject to it; 9-307 2. Buyer of consumer goods, the garage sale buyer--to buy used goods from a person who used or bought them takes free of SI; both buyer and seller have to use it as a consumer good--four conditions apply: 1. Without knowledge of SI 2. For value 3. For buyer's personal, family, or household use 4. Before filing of financing statement covering goods (used fridge at garage sale may be automatically perfected under 9309(1) Purchase money security interest in consumer goods automatically perfected) 3. A buyer of goods other than BIOC takes free of SI to the extent that it secures advances made after the earlier of (1) time the secured party acquires knowledge of the buyer's purchase; or (2) 45 days after the purchase. WAIVER, ETC If the SP knows that the debtor is selling collateral that they have no right to sell, some courts will hold that the SP has waived their right to complain about that, or they are estopped from objecting the second time debtor does that, or that there is "implied authorization" of the sale. This is used all the time with respect to inventory. The SP knows that inventory is there for the purpose of selling--sale of inventory is generally free of security interest--it is implicitly authorized. BUYER OF USED EQUIPMENT There is always a problem when a debtor buys used equipment, If you are the SP for that debtor, you need to know that you may not come first--it is much harder to account for used equipment as opposed to new. 9-316(a) A security interest perfected pursuant to the law of the jurisdiction…remains perfected until the earliest of: (3) the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction. If debtor does not comply with the conditions of the security agreement, then the SP can sue the debtor but cannot do anything to the buyer. If the buyer knows of a condition, he is bound by it, and should make the check payable to both the debtor and the secured party. BIOC AND KNOWLEDGE OF SI An agreement between the debtor and a SP which prohibits a transfer of the debtor's rights in collateral or makes the transfer a default does not prevent the transfer from taking effect. Agreement not to transfer the collateral does not void a transfer, however, upon transfer, does the security interest continue? Buyer in the ordinary course of business must buy without knowledge that the sale violates the rights of another person in the goods. Although a buyer may read the FS which is a matter of public record, knowledge here is actual. The buyer did not actually know in fact that the sale was wrongful. If the sale is highly unusual, C is not a BIOC, because part of the definition is that it be "usual or customary practices in the kind of business in which the seller is engaged," what is done normally in the industry, or between a certain buyer and seller. Ask whether there is anything extraordinary about the sale. TWO REASONS BIOC TAKES FREE OF SI 1. They are only subject to SI when SP does not authorize the sale 2. BIOC has to know that sale violates the rights of another in the collateral Even though the general rule is that the SI follows the collateral; it really is that a buyer takes free of unperfected security interests without knowledge of SI. If you know of SI or it is perfected, you are subject to SI. A BUYER TAKES FREE OF SI UNLESS: 1. He knows about SI 2. Or, SI is perfected Unless the code provides otherwise, SI continues in collateral after the sale. 9-315(1) When you buy collateral, you take free of unperfected SI if you don't know about them 9-317 You can buy free of perfected security interests in the two situations in 9-320 (a & b) a-BIOC b-consumer good buyer takes collateral free of un-filed SI Consumer good buyer must buy from one who used it as a consumer good SHELTER PRINCIPLE Buyer acquires whatever seller has. If the seller had interest subject to a security interest, that is what the buyer has, except the rules protecting the buyer. FUTURE ADVANCES FUTURE ADVANCES PRIORITY; 9-323(d - g) Buyers NOT in the ordinary course of business are subject to future advances made before the date the SP knows of the sale, or 45 days after the purchase AFTER-ACQUIRED PROPERTY ARTICLE 9 LIEN CREDITOR SCOPE OF ARTICLE 9 SCOPE OF ARTICLE 9 1. Secured transactions--in which debtor gives creditor interest in collateral to secure a debt; court looks at the essence of the transaction--if it is to secure a debt, it is a secured transaction 2. Does not apply to leases. A lease is not a secured transaction; a true lease occurs when the lessor allows the lessee to possess/use his property for a fee/rent. True lease: the property is never the debtor's property 3. Does not apply to bailments--for a fee, someone is storing your goods. The property is never the debtor's property. No property interest is transferred to the debtor. 4. Does not apply to goods returned after sale 5. Does apply to consignments--when the owner of goods allows a merchant of those goods to take possession of the owner's goods for the purpose of selling them 9-109(a)(4) sets forth scope applying to consignment LEASE LEASES 1. Not an article 9 transaction. 2. Some try to avoid the effect of article 9 by calling the agreement a "lease" DIFFERENCE BETWEEN TRUE LEASE AND SECURED TRANSACTION 1. SI has POWER OF RETENTION: If you pay me, you keep the goods is the essence of a security interest. Retaining title does not mean that it is not a secured transaction. 2. 1-203 Lease distinguished from Security Interest (a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case. (b) A transaction in the form of a lease creates a SI if: Consideration/rent is an obligation for term of the lease and is not subject to termination by lessee, and one of the following conditions is met 1. Original term of lease equal to or greater than remaining economic life of goods 2. Lessee is bound to renew the lease for the remaining economic life of the goods. For example, if there is 30 days notice, and you try to terminate at the 11th month, it is pretty much over by then. The lessee here does not have the right to terminate for all practical purposes. In the 11th month, a security interest arises. 3. Lessee has an option to renew the lease for the remaining economic life of the goods for no additional or nominal consideration upon compliance with lease agreement 4. Lessee has option to become owner of goods for no additional or nominal consideration upon compliance with the lease agreement NOMINAL CONSIDERATION If your right to purchase the goods at the end of the lease term is the same as the fair market value, then it is not nominal, and this is a lease and not a secured transaction. You have to look at the true value of the goods. This is different from general K law and tort law, which look at nominal in an absolute sense--such as a dollar--an insignificant amount to a reasonable person. Here, "nominal" is relative to the value of the goods. Example: Developer leases sprinkler system from Wetco at $1000 per month for three years, with option to purchase at end of term for $10,000; no FS filed; cost of Developer's removal $50K. Option to purchase is nominal compared to cost of removal, so this is a secured transaction. Lean gets an execution lien. If the option is not exercised, the cost of performing is more than the option to own! Removal costs more than the option--so the option price is nominal, making this a security interest not a lease. CONSIGNMENT TRUE CONSIGNMENTS Governed by Article 9 1. To a merchant--cannot be an auctioneer, known as a consignment store, and must be different from owner 2. Must be worth more than $1000 at the time of each delivery 3. Must not have been consumer goods immediately before delivery--thus a clothing consignment shop is not under Art. 9 4. Must be a true consignment not a security interest. MORE ON CONSIGNMENTS 1. The consignor becomes a secured party, and must file to perfect and have priority. 2. The consignee becomes a debtor. 3. Rights and title of consignee with respect to creditors and purchasers--a consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer 4. The security interest of a consignor in goods that are the subject of a consignment is a purchase-money security interest in inventory; consignor has superpriority if they were perfected at the time seller/consignee received possession of the inventory over a conflicting claim to the inventory. 5. Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is…a sale or return if the goods are delivered primarily for resale….any "or return" term…is to be treated as a separate contract for sale within the statute of frauds…REMEMBER that a contract for resale is not within the scope of article 9; a judgment lien creditor has priority. DETERMINE FIRST THE TYPE OF TRANSACTION 1. Is this a sale or return? Why were the goods given to the distributor? What was the essence of this transaction? An immediate sale or delayed sale? After the delay, is it a sale or consignment? If a sale, is it a secured transaction? 2. Is it a security interest, or is it a consignment? Under either one, there would have to be a filing. Whenever a retailer, distributor, or wholesaler has the right to return the goods, the issue may be sale or return, or security interest to secure debt? EXAMPLE Consignor consigns 10,000 widgets to Distributor and will pay within 30 days of delivery; if D fails to pay, consignor gets the widgets back. This is apparently a sale or return case, but consignor retains an interest in getting the goods back. Normal sale and return the buyer has the option to return the goods. By retaining an interest in the goods, the seller has either a SI or a consignment. The easiest thing for consignor to do to protect itself would have been to make sure there was a security interest, and file. BAILMENT BAILMENTS FOR PROCESSING 1. Grower delivers rice to Miller; Miller agrees to pay in three installments; Grower retains title to the rice. This is a security interest because retaining title does not necessarily make it not a security interest and because it is to secure payment of the obligation. 2. Grower delivers rice to Miller; Miller agrees to mill it for a fee and return it to Grower--a bailment not under Art. 9 Lender has SI in all of Miller's inventory and equipment; will the SI attach to the rice? The debtor, Miller, has the same rights in the rice as Grower if Miller is a consignee, but if Miller is not a consignee, then the SI does not attach to the rice. Debtor has no interest in the rice because it is a bailment--thus, the SI does not attach to the rice. 3. Grower delivers rice to Miller; Miller agrees to Mill it for a fee and deliver it at Grower's direction to Grower's customers; the customers are to pay Miller, who will deduct the milling fee and remit the balance to Grower; Is this a security interest, a bailment, or a consignment? Miller is not a consignee because the primary purpose for Miller having the rice is to mill it. If the primary purpose is to sell it, it is a consignment. 4. If Miller delivers the rice to its own customers instead of grower's customers, the primary purpose is to for Miller to sell, so it is a consignment. Lien creditor has priority. INSTRUMENTS, CHATTEL PAPER, ACCOUNTS CHATTEL PAPER A record or records that evidence both a monetary obligation and a SI in specific goods….does not include records that evidence a right to payment arising out of the use of a credit or charge card….a group of records taken together constitutes chattel paper ACCOUNT Except as used in "account for," means a right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold…services rendered…policy of insurance issued…secondary obligation incurred…energy provided…arising out of the use of a credit card….Does not include rights to payment evidenced by chattel paper or an instrument, commercial tort claims, deposit accounts…rights to payment for money or funds advanced or sold, other than…credit card SALE OF RIGHT TO PAYMENT 1. Seller retains no interest; a debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold 2. While the buyer's security interest is unperfected, the debtor has rights and title to the account or chattel paper identical to those the debtor sold. UNTIL THE SI IS PERFECTED, DEBTOR CAN CONTINUE SELLING THE ACCOUNT. You have to file to have priority, and you have to file to stop the debtor from selling it again. PERFECTION OF CHATTEL PAPER, DEPOSIT ACCOUNTS 1. A security interest in a deposit account may be perfected only by control 2. A SI in letter-of-credit right may be perfected only by control 3. SI in money may be perfected only by possession AUTOMATIC PERFECTION 9-309(2) automatic perfection for an assignment of accounts or payment intangibles which does not…transfer a significant part of the assignor's outstanding accounts or payment intangibles PERCENTAGE TEST 9-309(2) An assignment of accounts…which does not…transfer a significant part of the assignor's outstanding accounts or payment intangibles is automatically perfected. However, as in the Tri County case, some courts add some other requirements. Comment 4 says the purpose of (2) is to save from ex post fact invalidation of casual or isolated assignments, which nobody would think to file. Anybody who regularly takes assignments should know better to file! The comments don't really match what the code says. Tri County set the rule that in fact, you have to satisfy both the comments and the code. TRI COUNTY MATERIALS RULE: You have to satisfy three tests: percentage, casual, and isolated. The sale of an account is automatically perfected only if (1) the account sold is a low percentage of debtor's total accounts 9-309(2), (2) if the assignment is casual [oral?] and (3) it must be isolated--the assignee does not normally take assignments of accounts--normally does not buy accounts receivables. The seller of an account receivable is the debtor. INSTRUMENTS PERFECTED BY POSSESSION 1. "Instrument" means a negotiable instrument or any other writing that evidences a right to payment of a monetary obligation, is not itself a SI or lease….does not include investment property, letters of credit, or…credit card… 2. A SP may perfect a SI in negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. A SP may perfect a SI in certificated securities by taking delivery of the certificated securities under 8-301. 3. When possession by or delivery to SP perfects SI without filing: except as provided in (b) a SP may perfect SI in negotiable documents, goods, instruments, money, or intangible chattel paper by taking possession of the collateral…may perfect a SI in certificated securities by taking delivery of the certificated securities under 8-301 WAREHOUSE RECEIPTS 1. A SI perfected in the the warehouse receipt has priority over any other SI 2. Goods covered by negotiable document; while goods are in the possession of a bailee that has issued a negotiable document covering the goods: (1) a SI in the goods may be perfected by perfecting a SI in the document, and (2) a SI perfected in the document has priority over any SI that becomes perfected in the goods by any other method during that time. HOLDER IN DUE COURSE 1. A holder in due course takes free of a claim to the instrument. Any other person is subject to a claim of property or possessory right in the instrument or its proceeds. 2. A holder in due course is one who did not forge the instrument, and took the instrument for value, in good faith, and without notice that the instrument is overdue, dishonored, altered, and without notice of a claim under 3-306 or 3-305(a). "Good faith," except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing. INDORSEMENTS 1. Indorsement: means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of negotiating…restricting payment…incurring indorser's liability… 2. Special indorsement: if the indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a "special indorsement" which may be negotiated only by that person NEGOTIABLE INSTRUMENT An unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order if it (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time (3) does not state any other undertaking or instruction… PROMISSORY NOTE 1. A sale of a promissory note is automatically perfected when the SI attaches [value, debtor's rights, SI] 2. Promissory note means an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgement by a bank that the bank has received for deposit a sum of money or funds 3. No interest retained in right to payment that is sold…a debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold. EFFECT OF PERFECTION BY MEANS OTHER THAN POSSESSION ON PRIORITY UPON SALE 1. Priority of purchaser of chattel paper or instrument….except as otherwise provided in 9-331(a), a purchaser of an instrument has priority over a SI in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the SP. 2. Chattel paper purchaser's priority in proceeds--except 9-327, a purchaser having priority in chattel paper under subsection (a) or (b) also has priority in proceeds of the chattel paper to the extent that: (1) section 9-322 provides for priority in the proceeds; or (2) the proceeds consist of the specific goods covered by the chattel paper or cash proceeds of the specific goods, even if the purchaser's security interest in proceeds is unperfected DEPOSIT ACCOUNTS Deposit account--means a demand, time, savings, passbook, or similar account maintained with a bank…does not include accounts evidenced by an instrument. Is a bank account. A store will sell/assign its accounts receivables/rights to payment to a bank, and then the account debtors will have to pay the bank. Account debtors must receive notice. They may request a proof of assignment; if requested by AD, assignee shall furnish reasonable proof that the assignment has been made. Until the assignee complies, the AD may pay the assignor, even if the AD has received notification. The account debtor can sue for restitution if he had to pay twice. With respect to the account, the account debtor can assert any claims or defenses it could have asserted against the assignor, but only to the extent owed the account, and only if they accrued before the account debtor received notification of the assignment. The rights of an assignee are subject to any other defense or claim of the AD against the assignor which accrues BEFORE the AD receives notification of the assignment. PERFECTION BY CONTROL Deposit accounts, letter-of-credit rights, investment property, and electronic chattel paper may be perfected by control of the collateral. THREE WAYS TO GET CONTROL 1. SP is the bank where the account is 2. Debtor, SP, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the SP. Debtor authorizes the SP to withdraw funds without the debtor's consent. 3. SP becomes the bank's customer with respect to the deposit account. CONSUMER TRANSACTIONS Article 9 does not apply to an assignment of a deposit account in a consumer transaction. Consumer transaction--an individual incurs an obligation primarily for personal, family, or household purposes, a SI secures the obligation, and the collateral is held or acquired primarily for personal, family, or household purposes CUSTOMER Customer means a person having an account with a bank or for whom a bank has agreed to collect items, including a bank that maintains an account at another bank PRIORITY OF SECURITY INTERESTS IN DEPOSIT ACCOUNTS 1. SP having control of the deposit account has priority over a conflicting SI held by SP who does not have control. 2. First in time to control, first in right 3. If SI is held by the bank with which the deposit account is maintained, that bank has priority over a conflicting SI held by another SP 4. SI perfected by control in #3 has priority over SI held by the bank with which the deposit account is maintained. BANK'S RIGHTS AND DUTIES ARE NOT CHANGED BY 1. SI in the account 2. Bank's knowledge of SI 3. Bank's receipt of instructions from SP DEFAULT AND DEPOSIT ACCOUNTS Upon default, SP may apply the balance of the deposit account to the obligation secured by the deposit account. If perfected by control, SP may instruct the bank to pay balance of the deposit account to or for the benefit of the SP. DEFAULT DEFAULT by debtor is what triggers the secured party's ability to take the collateral. If there is no secured interest, the creditor has to sue. The code does not define default. Default is a breach of the agreement, such as failure to make payments when due, or anything else the security agreement says is default. What is default is clear if it is defined as default, but what if there is a breach of the security agreement that is not defined as default? Unless the security agreement expressly says that certain acts constitute of default, a breach of the security agreement may not be a default. A question of fact--what did the parties intend? REMEDIES FOR DEFAULT UNDER THE CODE UCC 9-609(a) Take the collateral Whether the security agreement says so or not, the secured party has the right to repossess the collateral upon default. When the collateral cannot be reasonably removed, the secured party has the right to disable it, such as a piece of machinery that weighs 4 tons. If moveable, you have to seize it. UCC 9-601 RIGHTS AFTER DEFAULT As long as they are legal, whatever is in the agreement, repossession under 9-609, or you can still go to court by any available judicial procedure. You can use common law remedies if the statute says you can. The rights of a secured party are cumulative; article 9 adds to the rights. DEFAULT 9-609(a)(1) gives the SP the right to take possession of the collateral after default. (2) If it is too big to move, you can disable it (b) SP may take possession by (1) going to court (replevin) Was there a security interest, and was there a default only issues. SP sends a summons to the debtor announcing when debtor has to show up to court for a foreclosure hearing. (2) repossess without breaching the peace; also called self-help repossession *The security agreement does not have to express that SP may repossess in event of default; it just has to secure a SI *Default is whatever the SA says it is, plus nonpayment by debtor. If SA does not define default, failure to pay is ALWAYS default. *Waiver doctrine: you waive your contract rights by something you said or did. In GA, it is called "mutual departure" from the K. The K becomes how the parties have acted, not what it says. It also applies to payment of a debt; it applies to any provision that is never complied with. SP is estopped from enforcing the K on the terms that have been waived. *The original terms can be restored, reinstated, if the SP gives reasonable advance written notice demanding strict compliance with the K. *Most agreements for payment of a debt have an acceleration clause that makes the entire unpaid balance due upon event of default. That can be waived if the SP accepts a late payment from the debtor. REPOSSESSION Repossession takes place when 1. repo men have control of the vehicle 2. they moved it from the space--aspertation--some distance, such as pulling out of the driveway CONSTITUTIONAL QUESTIONS 1. Due process: notice and opportunity to be heard before property can be seized; a hearing before a judicial officer 2. Constitution only protects you from the government taking property, not between one person and another, that is why self-help repossession is okay without notice & opportunity to be heard BREACH OF THE PEACE is not defined in the Code 1. Violence or threat to use violence is a breach of the peace Intimidation--reasonable person under those circumstances--it must be an act/affirmative conduct, not just a presence (chills you from your right to object.) Visible gun is intimidation. 2. Once there is an objection to repossession, you can't repossess or that is a breach of the peace. You can't repossess over an objection. Objection is anything a reasonable person would see as an objection, such as you or your dog in the car…but not your frog in the car. Anything a reasonable person would understand as an objection to the car being taken. Inanimate objects in the car are never an objection, it just means they were left in the car. *look at time of objection, must be during the actual repossession--is there a breach of the peace at the time of the repossession? *a sign or recording saying "I object" is not "at the time of the repossession" *"no objection" clause in contract does not prevent you from objecting They should know that you are objecting at the time they are taking the car. Objections cannot be made ahead of time. An objection that prevents repossession can be made by any person who can appreciate what is going on and what they are objecting to--not babies crying, but three year olds saying don't take mommy's car OK--can a dog object? we don't know why dogs bark. You have to draw the line somewhere. A thief or a stranger, one with no interest in the property may object. One objection is usually enough--even if debtor is only objecting to strangers not knowing they are repo men (debtor's argument)…SP would argue that debtor has to know he is objecting to repo men specifically. 3. No entering an enclosed space that has a reasonable expectation of privacy. A house always qualifies whether the door is unlocked or even off the hinges or the windows are open. When it is not a house, look at whether it is really enclosed, and whether it is reasonable to expect privacy. A carport with curtains does not qualify. A car is not considered an enclosed space with the expectation of privacy, except the glove compartment and the trunk. 4. Breaking and entering is always a breach of the peace, but mere trespass is not 5. Lying, stealth, deception, deceit is not a breach of the peace, except in a minority of jurisdictions. In all jurisdictions, you may not impersonate a police officer. CONVERSION (tort action) 1. If one repossesses by breaching the peace, that is wrongful repossession, giving rise to the tort of conversion. --no default is wrongful --breach of the peace is wrongful 2. Measure of damages--reasonable value of property converted, loss of use of it, and punitive damages if willful and wanton. All losses caused by the repossession. STONE MACHINERY V. KESSLER "If you try to repossess this tractor, somebody will get hurt." Finally, the SP got an airplane and spotted the tractor in Oregon at the debtor's job. The SP got the Sheriff to accompany him to Kessler while he was using the tractor. The sheriff informed Kessler "we have come to pick up the tractor." Kessler said do you have the proper papers, and the sheriff said no. Kessler objected but offered no physical resistance because he feared the sheriff, even though the sheriff did not participate. 1. Because there was objection, and the repossession was after the objection, this was conversion. 2. The appearance of a law enforcement authority adds an air of legitimacy--if it is under color of law, it becomes a state action, requiring notice and opportunity to be heard--the constitutional question. Kessler won compensatory damages but the punitive damages were reversed, because the act was not willful and wanton. POLICE PRESENCE Once police are there, even if the debtor has called them, it looks like a state action. It is the presence of police, period that is wrongful repossession. Even if there are just sitting there saying nothing, they are sanctioning the repossession. Police must be unobserved. 1. chills the person's right to object (If the owner is not there to see them, police have to participate more) 2. state action….may depend on owner's awareness… Allowing someone in your house or other enclosed space, without objecting, is implied consent to their entrance. Wade v. Ford Motor Credit Co. The trial court found that there was a breach of the peace, but the Kansas court of appeals reversed because of the time lapse between the objection and the repossession. How long does the objection last? How long does the SP have to wait before he can come back? The courts say a "reasonable time" depending on the facts of the case. An objection probably lasts longer than a second and does not last as long as a month. It does last for the duration of that repossession event. Probably if you hide in the bushes and then try to get the car, that is the same repossession. You have to return for a new repossession. WAIVER & ESTOPPEL Very rarely will a creditor refuse to accept a payment that is one day late. Reservations of rights clause: "we reserve the rights to accept late payments without waiving" However, course of performance can waive that clause too if late payments are accepted consistently. 1-309 Enforcement of lost, destroyed, or stolen instrument. If there is a term in the K that if SP feels insecure, the SP can require additional collateral or accelerate the full balance. All Firstbank would have to do is ask for additional security under this code provision, and if it is not done, then there is a default. Generally, under U3C, if the transaction is a consumer transaction, 5-110, if the default is failure to pay when due. before SP can repossess, SP must send notice that they will repossess. No notice is required when repossession if for some other default.. FAILURE TO COMPLY WITH ART. 9 *What would have been received if the SP had complied? *Loss to debtor because SP did not comply; debtor cannot receive more *Except as provided in 9-628(d) If SP fails to comply under 9-626, that affects SP's ability to get deficiency. Other issue is damages caused by non-compliance 9-625 *9-626 only applies to NON-consumer transactions, which the code does not address. Courts go two ways when there is failure to comply with article 9 and it is a consumer transaction. 1. 9-626 approach: if SP can prove that deficiency was not affected by non-compliance, then SP can recover it to that extent, the rebuttable presumption rule. 2. In consumer transaction, if SP fails to comply, SP cannot recover any deficiency, even if nobody is harmed-the absolute bar rule Exception: 9-628(d) SP is not liable under 9-625(c)(2) for failure to comply with 9-616. Will not give rise to damages because nobody was hurt (so long as you aren't in an absolute bar state). 9-602 Which rules may not be waived by debtor or obligor….Even if SA says debtor waives one thing or another, predefault waivers are not enforceable. Except 9-624: you can waive notice only after default. If waived in the SA it is not effective. Disposition of collateral only after default. Redemption right only after default in non-consumer goods transaction. Other than those exceptions there can be no waiver. DISPOSITION OF COLLATERAL Disposition of collateral Once SP takes the collateral, what to do with it? 9-610 After default, SP may sell, lease, license or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing. Proceeds are applied toward the debt. Ultimately, since it is the debtor's property, SP cannot keep it as if it were its own. Compulsory disposition: SP must sell it. 9-610(b) Every aspect of the sale must be commercially reasonable. SP may dispose of by public or private proceedings. Manner, time, place, and terms. (c) SP itself can purchase the collateral if at a public sale (auction) or it is a private sale but the collateral is the kind that is sold at a recognized market, and are the type subject to a widely distributed standard price quotation. Used cars do not fall into this category because there are too many variables. (2) Private sale--SP must buy it for what it is worth. Code is more concerned with private sale--unless you can show that it is worth what it is worth, SP can't buy it at a private sale. The standard price quotations show you what things are worth. 611 Before there can be a sale of the collateral, notice must be sent to the debtor, to any other obligor like a cosigner, and if the collateral is a consumer good, that is all. (c)(3) if the collateral is not a consumer good, notice must also be sent to any other SP that has given you notice of their SI and any SP who has filed to perfect their SI. 612 Notice must be sent within a reasonable time….however, if not a consumer transaction, 10 days is presumed to be reasonable. 613 Notice of sale must contain… 614 Additional items notice must contain if it is a consumer good Sale--how are proceeds to be distributed 9-615(a)(1) expenses incurred because of the repossession, administrative expenses including atty fees (2) foreclosing SP is paid next (in GA, the sale is called a "personal property foreclosure") (3) subordinate SP or lienholders (who filed or gave notice of their interest) in order of their priority (4) consignor of the collateral is paid (d) Surplus goes to the debtor If, after administrative expenses are paid, there isn't enough to pay the whole amount to the SP, this is a deficiency. Foreclosing SP has to sue for a deficiency judgment. 9-616 Requires that the SP explain to the debtor how SP calculated any deficiency or surplus. 9-617 The buyer gets (1) all the debtor's rights in the collateral; free of the interest of the debtor (2) discharges the SI under which the disposition is made (3) buyer takes free of SI of subordinate creditors Buyer does not take free of any PRIOR creditors who have priority over the foreclosing SP. The buyer does not owe them any money, but the property may still be repossessed by those prior SPs to satisfy another's debts. To get rid of the prior creditors, the buyer needs to subtract that much from his bid price and pay off the prior creditors, or risk getting the goods taken from him. Should there be public or private sale? Some collateral, such as a Learjet, is best sold at a private sale. The kinds of people able to buy it probably would not show up at a public sale. To determine if the manner of the sale is commercially reasonable, look at the collateral. Most of the time, public sale is reasonable. 9-627(a) Determination of whether conduct was commercially unreasonable…the fact that a greater amount could have been obtained does not mean that SP cannot show that the sale was commercially unreasonable. RIGHT TO REDEEM COLLATERAL 9-623 After default and before the collateral is disposed of, the debtor or anyone else with an interest in it may get it back, after paying all expenses incurred in repossession and all obligations secured by the collateral. 9-620 ACCEPTANCE OF COLLATERAL IN SATISFACTION OF DEBT If the debtor can not or does not redeem the collateral, before disposition, SP has the right to propose that the collateral be accepted in full or partial satisfaction of the debt. 1. Debtor consents to acceptance 2. SP did not receive a notification of objection to the acceptance from anyone 9-621 requires notice sent… If SP desires to retain the collateral, on whatever terms full or partial SP provides, it must send notice to anyone with an interest in the collateral, and every creditor that has filed FS. If anyone objects, SP cannot retain the collateral, and must sell it. 3. If consumer goods, is not in possession of the debtor when the debtor consents to the acceptance. The SP must repossess the collateral first. 4. If consumer goods, and debtor has paid more than 60% of the price, SP must sell, unless debtor has, after default, waived right to mandatory disposition. SP must get waiver and consent. Those are different things. If SP gets both of those it is in full satisfaction of the debt. 5. Objection must occur within 20 days. Failure to answer is considered consent. 9-622 EFFECT OF ACCEPTANCE OF COLLATERAL When SP retains collateral 1. Discharges obligation 2. Debtor's rights wiped out; all subordinate creditors interests also wiped out 3. Discharges SI subject of debtor's consent 4. Terminates any other subordinate interest Interest of any prior creditors unaffected. The foreclosing party will take free of all interests except those of prior creditors. SP is like a buyer at a foreclosure sale. Even if subordinate creditors are not notified, that does not make the transfer ineffective and the subordinate creditor's interest is still wiped out, but under 9-625, to the extent that subordinate creditor can show that it was damaged, it can recover damages. BANKRUPTCY INSOLVENT 1-201 1. Do not pay your debts 2. Or unable to pay debts on time 3. Or in the federal bankruptcy sense--you owe more than you own HOWARTH V. UCIT Under Article 9, a trustee in bankruptcy has the same rights as a lien creditor. For this class, all you need to know about bankruptcy is that a trustee is appointed, and the trustee represents all the creditors. When the debtor's property is sold, money is distributed among all the creditors. The problem for the trustee is that a perfected creditor has priority over lien creditors, including the trustee. The trustee does not like that the debtor's assets go to the perfected secured parties first. BC 544(a) Trustee as lien creditor and as successor to certain creditors and purchasers…the trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by…creditor who obtains judicial lien…bona fide purchaser… BANKRUPTCY After debtor files bankruptcy, a trustee is appointed. A trustee stands in the shoes of the debtor. The trustee has the status of a lien creditor vis-à-vis the other creditors. When the trustee sells the debtor's property, it is really like a lien creditor selling the debtor's property. The trustee wants to make as much money available to all the creditors as possible. Trustees do not like perfected secured parties, because they have priority over trustees. So if collateral is sold subject to perfected SI, then there is less money going to debtor's estate, and trustee will be paid less. AUTOMATIC STAY OF ALL OTHER COLLECTION PROCEEDINGS AGAINST DEBTOR Nothing else can be done to the debtor; the filing of bankruptcy fixes everything in time. You can't file a FS after that, and even if you are perfected, you cannot repossess. Debtor files a Ch. 7 bankruptcy petition and has two assets, equipment worth $100k, subject to a perfected SI securing an $80k debt to seller, and real property worth $500k, subject to a recorded mortgage securing a $400k debt to Bank. Debtor also owes $300k to unsecured creditors. How will the assets be distributed? $400k goes to mortgagor $100k goes to debtor's estate $80k to SP $20k goes to debtor's estate ------------------------------------$120k in estate; $300 owed--unsecured creditors get .4 on the dollar What if Debtor had purchased the equipment from Seller on an unsecured basis? The seller would get zero and have to take some of whatever is left along with the other unsecured creditors All the money from sale of the equipment would go to the debtor's estate So now there is $200k in estate, divided by $380k, and now all the creditors get about 52 cents on the dollar. Now the seller gets 52 cents on the dollar, instead of 100 cents on the dollar as he did when he was an SP above. What if the equipment is worth only $70k? SP receives $70k; there is $100k in debtor's estate. To the extent of $10k the SP is unsecured. BC 506(a) would divide seller's $80k claim into two parts: in the amount of the collateral would be secured, the balance would be unsecured. SP can go to the court and ask for a relief from the stay. Any creditor has the right to go to the court and ask the court for relief from the stay. You will get it only if you have priority over the trustee. Unless you are relieved from the stay, you cannot do anything that will effect the debtor's property. The Bankruptcy code makes an exception--normally you can't file FS, but there is an exception when subsequent filing gives you superpriority, where there is PMSI in equipment and filed within 20 days of debtor receiving equipment. Creditor can do nothing to improve its status after bankruptcy unless it is a PMSP and filing would give it superpriority. FIXTURES 9-102(a)(41) So related to particular real property that an interest in them arises under real property law. It is considered to be part of the real estate, such as carpeting. A refrigerator…may not be a fixture. If you buy a hot water heater from Home Depot, and Home Depot has a SI in it, and your house has a mortgage, which has priority over the hot water heater? 9-334 General rule--A security interest in a fixture is subordinate to a lien in real property. Except… 1. PMSI in fixture perfected within 20 days of time fixture becomes part of the real estate; 2. a perfected SI in fixture that arose before the mortgage on the house; a perfected SI in the fixture that became perfected before the good became a fixture, 3. and the fixture is easily removable, such as a light fixture. 4. If the debtor has the right to move the fixture than the Si has priority. 5. A lien creditor also has an interest in real property, but a perfected SP in a fixture always has priority over a judgment lien creditor in real estate. FEDERAL GOVERNMENT AS CREDITOR FEDERAL PRIORITY PROVISION Applies to all debts owed to the federal gov't. Does not create a lien, but gives the gov't priority in payment. The gov't gets paid first. However, it only applies when two thngs are met 1. Debtor insolvent--when either debtor's liabilities exceed his assets, and 2. Debtor must have manifested that insolvency in one of three ways: A-assignment for the benefit of creditors; a statutory process in which debtor can assign assets to a creditor or trustee who is responsible for liquidating assets and paying creditors some amount the creditors agree on B-if debtor commits an act of bankruptcy; files for bankruptcy C-a levy and seizure of the debtor's assets because the debtor was either concealing assets or absconding assets. Many states including GA have a provision that says if you are a creditor that says you must get a lien. If after you file a lawsuit and discover that the debtor is hiding or unloading assets, you can use pre-judgment attachment to prevent the debtor from doing this. If the creditor is allowed to seize the debtor's assets for this reason, then the Federal Priority provision considers this insolvency. 3. There is one class of creditors that has priority over the Feds--CHOATE ("KO-ATE") means complete. A-identity of lienholder must be definite B-amount of lien must be definite C-the property subject to the lien must be definite A judgment lien is never choate, because it is not definite, nor will SI in future advances or after acquired property; most statutory liens such as landlord's lien is not definite FEDERAL TAX LIEN ACT Applies with respect to taxes owed the federal gov't. Gov't has a lien on all property of the debtor for unpaid taxes. 1. assessment by gov't that money is owed on taxes--intra office 2. demand for payment 3. failure to pay upon demand 4. filing by the gov't of a tax lien; lien dates back to date of assessment, not date of filing Priority 1. Choate creditors before tax lien assessed 2. Special parties: perfected SPs, judgment lien creditors, purchasers of collateral, and mechanics lien holders; for purposes of tax lien act, priority dates back to date of filing of tax lien. 3. Protected parties: these parties have priority over the tax lien, period. A-Buyers of motor vehicles in good faith without knowledge of tax lien B-Buyers in ordinary course of business (even if he knows of tax lien) C-Bona fide purchaser of personal property of less than $250--the garage sale buyer--without knowledge--actual D-attorney's liens