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Sec'd Transactions & Bankruptcy by justinkerner

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Fall 2009 outline for Professor Taggart's "Secured Transactions & Bankruptcy" course. While some of the heading numbers are messed up, the material is well-organized.

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									                             IB.     ATTACHMENT (CREATION OF A SECURITY INTEREST)

      9-201           A SA is effective, according to its terms, “against the world.”

      To create a security interest in collateral – to attach it to collateral – three things must happen:

          1- 9-203(b)(1)       The Secured Party must give the Debtor value.
              -   Under 1-204, a person gives value:
                     1) In return for a binding commitment to extend credit or for the extension of
                         immediately available credit; or…
                     4) In return for any consideration sufficient to support a simple contract.

          2- 9-203(b)(2)       The Debtor must have rights in the collateral.
              -   Comm. 6 to 9-203: “Rights” need not be ownership – any rights will do. But note
                                    that the debtor may only transfer the rights he actually holds.

          3- 9-203(b)(3)       One of the following must be met:
                      -    9-203(b)(3)(A)       Debtor authenticated a Security Agreement that provides a
                                                description of the collateral.
                                   Authenticating a Record
                                  9-102(a)(7)(1),(2) Authenticate: to sign, -or- to otherwise execute with a
                                                      symbol or encryption, with the present intent of the
                                                      authenticating person to identify the person and adopt
                                                      a record.
                                  Comm. 9 to 9-102: A record need not be written. But conversations are
                                                     not records unless they are somehow recorded. “The
                                                     information must be stored on paper or in some other
                                                     medium. . . . *M+emory does not qualify as a record.”
                                                     A record need not be permanent or indestructible.
                                  Describing Collateral
                                  9-108(1)-(4)        specific listing (Serial #)
                                                       Category
                                                       UCC type
                                                       or any other method where the collateral is objectively
                                                       determinable

                      -    9-203(b)(3)(D)       When the collateral is deposit accounts, electronic chattel
                                                paper, investment property, letter-of-credit rights, or other
                                                electronic documents, and SP has control under {7-106, or 9-
                                                104 through 9-107}


Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                     Page 1
                           IA.    ATTACHMENT (CREATION OF A SECURITY INTEREST)



        -   The Composite Document Rule
            In re: Bollinger Corp., 614 F.2d 924 (3d Cir. 1980)
                     Although the parties didn’t have a formal security agreement, the court inferred its
                     existence from the totality of the circumstances (from other documents the parties
                     created). Here, a promissory note reference its existence and, further, the secured
                     party filed a financing statement.



        -   The Filter Principle
            When a security agreement exists, a financing statement cannot expand the SP’s interests.



        -   After Acquired Property clauses (AAP)
            9-204(a)       Security agreements may create or provide for an SI in AAP
            9-204(b)       AAP clauses are ineffective with respect to consumer goods and tort claims.
            In re: Filtercorp, 163 F.3d 570 (9th Cir. 1998)
                      This case expresses the majority view that security agreements are implicit in security
                      agreements that deal with inventory or accounts financing.
            Otherwise, failure to include an AAP clause can be fatal!
                   … unless there are 2 agreements. Then the later agreement relates back to the earlier
                   agreement.



        -   Future Advance clauses (FA)
            9-204(c)      Security agreements may create or provide for future advances.
                             Comm. 3 to 9-323 clarifies that a FA relates back to the original perfection date.



        -   Proceeds
            9-203(f),        A security interest in collateral automatically attaches to identifiable proceeds.
            9-315(a)(2)

            9-102(a)(64)     Proceeds are defined as:
                             A) Whatever is acquired from the sale/disposition of property
                             B) Whatever is collected on, or distributed on account of, collateral
                             C) Rights arising out of collateral
                             D) …
                             E) …


Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                      Page 2
                                                     IIA.     PERFECTION

      9-308(a)        A SI perfects if it has attached to collateral and all the requirements for perfection
                      (as set forth in §§ 9-309 through 9-316) have been satisfied.

      Methods of Perfection:
      9-309         Automatic perfection on attachment
      9-310         Filing
      9-311         Perfection under other state laws (e.g., certificate of title laws)
      9-312(a)      Perfection in CP, Instruments, and certain payment intangibles by filing
      9-313(a)      Perfection by possession (without filing) in tangible chattel paper, instruments, or goods
      9-314(a), 104 Control of deposit accounts
      9-315         Proceeds


                                                   IIA.     CHOICE OF LAW


      9-301(1)        The law of the location of the Debtor governs perfection, the effect of perfection, and
                      priority.

      Location of the Debtor is…

              9-307(b)(1)     For an individual, “Location of the Debtor” is the individual’s principal residence.

              9-307(b)(2)     For a registered organization with only 1 place of business, “Location of the
                              Debtor” is the place of business.

              9-307(b)(3)     For a registered organization with several places of business, “Location of the
                              Debtor” is the organization’s chief executive’s office.

      9-301(2)        When dealing with possessory interests, the law of the location of collateral controls.



                                            IIB.          PERFECTION BY FILING

      9-310(a)        the general rule that permits filing to perfect nearly all SI and liens

      9-501(a)(2)     You file in the State’s Central Filing Office: generally, office of the Secretary of State

      9-502(d)        Permits pre-filing.
             WJT:     To avoid issues, be sure to advance value only after filing to perfect.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 3
                                      IIB.    PERFECTION BY FILING

                    SUFFICIENCY OF A FILING STATEMENT (IN MOST CASES, A UCC1)

      9-521      Provides the UCC1.
                 States that a filing office may not refuse a UCC1 except for the reasons stated in 9-516.

      9-502(a)   To be effective, the UCC1 must include:
                 1- The Debtor’s name
                          9-503(a)(1) – If the Debtor is a registered organization, the name must
                             match the name on the formation documents in Debtor’s home jurisdiction
                          9-503(a)(4)(A) – If the Debtor is an individual, the individual’s name
                          9-503(a)(4)(A)-(B) – If the Debtor is a partnership, either by providing the
                             name of the Partnership (if it has one) or by providing the names of the
                             individual partners.
                          9-503(c) – Merely providing the Debtor’s trade name is insufficient
                          9-506(a)-(c) – Seriously Misleading Financing Statements. Under 9-506(a), a
                             financing statement with minor errors satisfies the Article 9 requirements so
                             long as the errors don’t make it seriously misleading. Under 9-506(b), failing
                             to provide the name of the debtor in accordance with 9-503(a) is seriously
                             misleading. However, under 9-506(c) it is not seriously misleading if a
                             lender could find it by using the filing office’s standard search logic.
                                   In re Mines Tire Co., 194 BR 23 (Bkrtcy W.D.N.Y. 1996):
                                      An exact computer search likely isn’t good enough. You have to use
                                      all of the variations that a “manual searcher” would use.
                                   Pankratz, 130 P.3d 57 (Ks 2006):
                                      Article 9 requires searches to use only the filing office’s standard
                                      search logic – not others.

                 2- The Secured Party’s name, or the name of the SP’s representative

                 3- The Collateral Covered by the financing statement
                         9-504 – An effective description of the collateral either describes it:
                                 In a manner covered by 9-108, or as “all assets / personal property.”

                            Comm. 2 to 9-504: The financing statement doesn’t need to describe the
                             collateral in detail, but it should put others on notice that it may be
                             encumbered by liens and that more follow up is necessary.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                  Page 4
                                              IIB.     PERFECTION BY FILING

      9-516(b)         The filing office may reject a financing statement for the following reasons:
      9-516(b)(1)      the record was communicated by an unauthorized method or medium (set locally)
      9-516(b)(2)      the Secured Party tenders less than the set filing fee
      9-516(b)(3)(A) in an initial filing statement, it does not include the Debtor’s name
      9-516(b)(3)(D) in an initial filing statement, it does not provide a sufficient description of collateral
      9-516(b)(4)      in any filing statement adding a SP of record, it does not list the SP’s name and address
      9-516(b)(5)      in any filing statement adding a debtor, it does not:
                                record the debtor’s address
                                note whether the debtor is an individual or organization
                                if the debtor is an organization, list the type, home jurisdiction, and org. ID #
      9-516(b)(7)      in a continuation statement, if the record is not filed within the 6-month period set forth
                       in 9-515(d)

      9-515(a),(c)     If it lapses, it is propspectively unperfected against all and retroactively against
                       purchasers for value.

      9-516(d)         If the parties file a financing statement with the appropriate filing fee and the filing
                       office rejects it for some other reason, the financing statement is effective against
                       everyone except a BFP who gives value and relies on the lack of a filed record.

                               NOTE: 9-338 talks about priority relating to filing statements with incorrect
                                information under 9-516(b)(5):
                                    o If the financing statement is deficient under 9-516(b)(5), SP1 will be
                                       subordinate to a later-filed SP2 who gave value and relied on the
                                       incorrect information in SP1’s filing.
                                    o If the financing statement is deficient under 9-516(b)(5), a purchaser
                                       (other than a SP) takes free if the purchaser gave value, relied on the
                                       incorrect information in SP1’s filing, and, in the case of tangible ,chattel
                                       paper, documents, goods, instruments} receives delivery.
                                    o WJT: A judgment lien creditor isn’t a purchaser. Further, this section
                                       does not apply to JLCs (or trustees, who act as JLCs) because they
                                       cannot “rely” on the incorrect information in the filing.

      9-516(a)         If the parties file a financing statement with the appropriate filing fee and the filing
                       office accepts it – despite deficiencies which would otherwise have rendered it
                       ineffective – it’s an effective filing.

      9-517            If the filing office indexes a record incorrectly, it’s still an effective filing.
                       The Secured Party is not held responsible for the filing office’s error.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                          Page 5
                                              IIB.     PERFECTION BY FILING

                                           When May the Secured Party File?

      9-509(a)         Only if the secured party authorizes it in an authenticated record. But…
      9-509(b)         …An authenticated security agreement automatically authorizes filing.

      Comm. 3 to 9-509:         Authenticating a security agreement usually ratifies a pre-filing –
                                determined by state law.


                 What Recourse Does a Debtor Have if a Secured Party Makes an Unauthorized Filing?

      9-625 (b)        The Debtor is entitled to damages resulting from SP’s failure to comply with this article –
                       including damages resulting from the Debtor’s inability to obtain, or increased cost to
                       obtain, alternative financing.
      9-625(e)(3)      The Debtor is entitled to statutory damages of $500 from anyone who files an
                       unauthorized filing.
      9-513(c)(4)      The Debtor may demand that the Secured Party file a “Termination Statement.”
                       The Secured Party must send it within 20 days after receiving the request.


                     Amendments: True Amendments, Continuation and Termination Statements


      9-102(a)(39)     The term “financing statement” includes the initial financing statement, amendments,
                       continuations, and a termination statement.
      9-515(a)         The initial financing statement is only effective for 5 years.
      9-515(d)         The secured party may file an amendment to extend in the 6 months prior to lapse.
                       If filed before lapse, it extends for 5 years from the lapse (expiration) date.
                       No additional authorization needed to file – see 9-515(d)(1).
      9-515(c)         If the continuation is filed after lapse, it’s ineffective.
      9-521(b)         [Safe Harbor Amendment Form]
      9-511            If an amendment adds new collateral or new debtors, it must be authorized.


                                                        Assignments

      9-310(c)         When SP1 assigns to SP2, no filing is necessary to continue perfection.
      9-514            Only the SP of Record can file Amendments. Thus, in situations where the SP plans to
                       assign the interest immediately after filing, it can list the assignee as the SP of record.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 6
      THE DEBTOR MAY REQUEST INFORMATION ABOUT THE SI, OR REQUEST A TERMINATION STATEMENT
      9-210

      9-210(a)(2)   the Debtor may request, by authenticated record, an accounting of the unpaid secured
                    obligation. He must reasonably identify the transaction that is the subject of the
                    request.
                    - [9-210(e)] If Debtor requests an accounting from an SP that once had but now
                        disclaims an interest, the SP must:
                            1- Reply by authenticated record and disclaim the interest; and
                            2- If known to SP, provide the name and address of the assignee or successor
                                to SP’s interest.

      9-210(a)(3)   the Debtor may, by authenticated record, ask the SP to approve or correct a submitted
                    list of collateral that Debtor believes secures the existing obligation.
                    - [9-210(c)] If SP has an interest in an entire category of collateral – e.g., “all
                         equipment, now owned or hereafter acquired – he must respond with an
                         authenticated statement to that effect.
                    - [9-210(d)] If Debtor requests a list of collateral from an SP that has a disclaimed
                         interest, the SP must:
                              1- Reply by authenticated record and disclaim the interest; and
                              2- If known to SP, provide the name and address of the assignee or successor
                                  to SP’s interest.

      9-210(a)(4)   the Debtor may, by authenticated record, ask the SP to approve or correct a submitted
                    statement of aggregate debt remaining outstanding, secured by collateral as of X date.
                    - [9-210(e)] If Debtor requests a statement of the debt that is still outstanding from
                        an SP that once had but now disclaims an interest, the SP must:
                            3- Reply by authenticated record and disclaim the interest; and
                            4- If known to SP, provide the name and address of the assignee or successor
                                to SP’s interest.



      9-210(b)      the Secured Party has 14 days to respond by authenticated record after receiving a
                    §9-210 request.

      9-210(f)      the Debtor gets one free 9-210 request from each SP in any 6-month period. Beyond
                    that, secured parties may charge the Debtor up to $25 for each additional response.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                 Page 7
                                          IIC.     PERFECTION OF PROCEEDS



      9-315(c)         Regardless of whether the financing statement mentions proceeds, perfection in
                       collateral automatically continues in proceeds.



      9-315(e)         This automatic perfection continues until perfection in the original collateral lapses or
                       until the 21st day after the security interest attached to the proceeds.



      9-315(d)         Perfection does not end on the 21st day after the security interest attaches where:
      9-315(d)(2)      Identifiable cash proceeds;
                       - See 9-102(a)(9): cash proceeds include cash, checks, deposit accounts, and the like
      9-315(d)(3)      SP can perfect his interest in proceeds by some mechanism other than 9-315(c) when
                       the SI attaches or in the 20 days that follow; or
      9-315(d)(1)      Where:
                (a)    A filed financing statement covers the original collateral;
                (b)    Same Office Rule: The proceeds are collateral which the SP could have perfected an
                       interest in by filing in the same office as where he filed upon the original collateral; and
                 (c)   The proceeds were not acquired with cash proceeds.



      NOTE: if the debtor uses cash proceeds to buy new collateral, the SP’s interest expires on the 21st day…
              UNLESS: the SP can capture the new collateral under this or another SA under 9-315(d)(3).




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                          Page 8
                                         IID.  POST-FILING CHANGES:
                              DISPOSITION, CHANGE IN JURISDICTION, AND CHANGE IN NAME



                                                   1. DISPOSITION

      Debtor transfers collateral to a transferee in the same jurisdiction:
      9-507(a)        When Debtor disposes of collateral, a filed financing statement remains effective – even
                      if the SP knows of and consents to the disposition.
      9-315(a)        A SI continues in personal property, despite sale or disposition



      Debtor transfers collateral to a transferee that thereby becomes a debtor in another jurisdiction:
      9-316(3)        SP retains a perfected interest for 12 months; after that, SP’s interest unperfects.

      When it unperfects, there is a prospective loss of perfection versus all competitors and a retroactive loss
      of perfection against purchasers for value.



                                              2. CHANGE IN JURISDICTION

      Debtor moves to a new jurisdiction:
      9-316(2)        SP is perfected in collateral acquired before the move and for 4 months afterward; after
                      that, SP’s interest unperfects.

      When it unperfects, there is a prospective loss of perfection versus all competitors and a retroactive loss
      of perfection against purchasers for value.

      Note: once the debtor is in a new jurisdiction, the old UCC1 cannot capture collateral acquired after the
      move. Thus, the change in jurisdiction has a pretty serious impact on after acquired property clauses.



                                                 3. PURE NAME CHANGE

                      If the name change is not seriously misleading, nothing happens.

      9-507(c)        If the name change makes the original filing seriously misleading, the financing
                      statement remains effective for 4 months; after that, SP’s interest unperfects.

      When it unperfects, there is a prospective loss of perfection versus all competitors. But the name
      change does not retroactively unperfect any interests, even against purchasers for value.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                        Page 9
                              IID.     POST-FILING CHANGES: NEW DEBTOR PROBLEMS

                                                4. NEW DEBTOR PROBLEMS
                                                 IN THE SAME JURISDICTION

      Under 9-203(d)-(e) & Comm. 3 to 9-508, there are 2 examples:
             - by Statutory Merger
             - by voluntarily assuming all of the Debtor’s liabilities (including SI) and acquiring or
                 succeeding to all or substantially all of the Debtor’s assets

      9-203(e)(2)      No new SA is necessary.

      OLD DEBTOR’S COLLATERAL: New Debtor purchases it subject to the existing liens. Old Debtor’s
      interest has priority over New Debtor’s SPs’ interests. See 9-325.

      NEW DEBTOR’S COLLATERAL (ACQUIRED BEFORE OR 4 MONTHS AFTER TRANSFER): Old SP perfects in
      this collateral under 9-508. Under 9-326, however, Old SP is subordinate to new SPs.

      NEW DEBTOR’S COLLATERAL (ACQUIRED > 4 MONTHS AFTER TRANSFER): Old SP is not perfected in
      this collateral, unless Old SP files a new initial financing statement to capture it. In that case, New SP
      would have priority under the tradition 9-322 first-to-file-or-perfect rule.

      If the New Debtor’s name is not “seriously misleading,” the existing liens continue to apply and, if the
      New Debtor acquires new collateral, the existing liens attach to that collateral. See 9-508(a).




                                       NEW DEBTOR IN A DIFFERENT JURISDICTION

      OLD DEBTOR’S COLLATERAL: New Debtor purchases it subject to existing liens. Nonetheless, under
      9-316(a)(3), Old SP only remains perfected for 12 months. It may file in the new jurisdiction to retain
      continuous perfection.

      NEW DEBTOR’S NEW COLLATERAL: If Old SP hadn’t perfected an interest in it before the transfer to a
      new jurisdiction, Old SP does not have a perfected security interest. The code does not afford him
      protection. See Comm. 5 to 9-508 and Comm. 2, Example 5, to 9-316.
              Note: by virtue of the authenticated security agreement, Old SP would still be attached to that
              collateral. He could file to perfect his interest and simply be subject to 9-322 (first-to-file rule).




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                           Page 10
                                            IIE.    PERFECTION BY POSSESSION



      9-313(a)            A secured party may perfect an interest in {goods, instruments, tangible chattel paper}
                          by taking possession of it.

      9-313(b)            Where goods are covered by a state-law certificate of title statute, possession of the
                          goods isn’t good enough – you likely also need to possess the certificate of title.

      Possession may be either by the Secured Party or by the Secured Party’s agent.
              See Comm. 3 to 9-313; In re Rolain, 823 F.2d 198 (Minn. 1998):
                  - Debtor cannot be the Secured Party’s agent.
                  - “under appropriate circumstances, a court may determine that a person in possession is
                     so closely connected to or controlled by the debtor that the debtor has retained
                     effective possession, even though the person may have agreed to take possession on
                     behalf of the secured party.”
                      -
      9-313(d)            Perfection begins with the SP (or SP’s agent) takes possession of the collateral and ends
                          when SP no longer possesses it.

      9-313(f)            A 3rd Party that holds collateral doesn’t have to acknowledge that he’s holding it for the
                          SP. In many cases, in fact, he may not be: e.g., garages, storage facilities. (see Comm. 8)

      9-313(g)            A 3rd Party that holds collateral for the SP isn’t bound to act at SP’s direction absent a
                          private agreement or controlling state law.

      9-316(c)            Addresses continuous perfection where SP has possession and takes it to another
                          jurisdiction. SP is continuously perfected if, upon entering the new jurisdiction, SP’s
                          interest is perfected under the law of the new jurisdiction.



                                             IIF.     PERFECTION BY CONTROL

      Control is the only method to perfect an interest in a deposit account. See 9-312(b)(1); 9-314(1); 9-104.

      Under 9-104, there are three ways to control a deposit account:
             1- When the Secured Party is the Bank where the deposit account is maintained;
                 2-


                 3- When the Debtor, Secured Party, and the Bank agree (in an authenticated record) that Bank
                    will comply with the Secured Party’s instructions directing disposition of funds in the deposit
                    account without any further consent by Debtor; or
                 4- When the Secured Party becomes the Bank’s customer.
                      See Comm. 3 (3rd ¶) to 9-194; §§ 4-401(a), 4-403(a)



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                            Page 11
      PERFECTING SECURITY INTERESTS IN CONSUMER GOODS


      9-309(1)         A PMSI in consumer goods automatically perfects when it attaches.

      What are consumer goods?
      9-102(a)(23): goods that are used or bought for use primarily for personal, family, or household use




      9-320(b)         Assume that B1 bought consumer goods subject an SI perfected under 9-309(1). When
                       B2 buys these goods from B1, B1 takes them free of any perfected security interests if:
                               1) B2 bought them without knowledge of the security interest;
                               2) B2 gave B1 value;
                               3) B2 bought the goods primarily for use as consumer goods; and
                               4) B2 bought the goods from B1 before SP filed a financing statement.

                       See also Comment 5 (2nd ¶) to 9-320.




      So there’s an advantage for the seller (let’s assume that it’s a Retailer) to file if the goods carry a high
      enough value. Because if the Retailer files, all subsequent buyers would take subject to Retailer’s lien.
      See 9-320(b)(4).




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 12
                                                   III.    PRIORITY

                                                      …GENERALLY

      9-317(a)(1),    A perfected security interest has priority over an unperfected security interest.
      9-322(a)(2)

      9-317(a)(2)     A judgment lien creditor has priority over an unperfected security interest, UNLESS
      9-317(a)(2)(B) the unperfected secured party has met one of the conditions in 9-203(b)(3)
      9-203(b)(3)    [most common: (A) authenticating a security agreement; (B) possessing tangible chattel
                      paper or instruments; (C) taking control of a deposit account]
      NOTE:           under 9-102(a)(52)(C), a trustee in Bankruptcy is treated as though he’s a lien creditor.

      9-322(a)(1)     between perfected security interests, the first to file or perfect has priority.

      9-322(a)(3)     between unperfected security interests, the first to attach has priority.




                                    …WHEN DEALING WITH FUTURE ADVANCES

      BETWEEN SECURED PARTIES:
      Comment 3 to 9-323:
           “Under a proper reading of the first-to-file-or-perfect rule of §3-322(a)(1), it is abundantly clear
           that the time when an advance is made plays no role in determining priorities among conflicting
           security interests except when a financing statement was not filed and the advance is the giving
           of value as the last step for attachment and perfection.”
      Thus, the perfection date for Future Advances relates back to the original filing or perfection for
      purposes of establishing “first-to-file” under 9-322(a)(1). See Comm. 3 to 9-323, Example 1.

      When lenders cross-collateralize loans, the second loan relates back to the first: it benefits from the
      earlier perfection date. This is the majority view. See James Talcott, Inc., 194 N.W.2d 784 (Minn. 1972).



      BETWEEN A SECURED PARTY AND A JUDGMENT LIEN CREDITOR:
      9-323(b)     If it’s ≤ 45 days after JL: SP with FA Clause wins
                   If it’s > 45 days after JL: JLC wins UNLESS advance was made without knowledge
                                               of the judicial lien and pursuant to a commitment made
                                               without knowledge of the lien.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                      Page 13
                                                 III.     PRIORITY

                             …PURCHASE MONEY SECURITY INTERESTS, GENERALLY

      9-103(a)(2)    a “purchase money obligation” is incurred as all or part of the price of collateral, to
                     enable the debtor to acquire rights in or use of the collateral
      Comm 3 to 9-324: such obligations include all costs stemming from purchase – not just purchase price.

      9-324(a)       A PMSI in NON-INVENTORY GOODS comes with a 20-day safe harbor period, beginning
                     when Debtor receives the goods.
                     A PMSI in non-inventory has priority over conflicting SI in both collateral and proceeds.

      9-317(e)       If a PMSP files within the safe harbor period, the PMSP also has priority over buyers or
                     lien creditors who appear between attachment and filing.


      9-324(b)       A PMSI in INVENTORY has priority over conflicting security interests if:
                     1- The PMSI is perfected when the debtor receives possession of the inventory;
                            II. Someone who is in possession but does not incur an obligation to pay for
                                 goods isn’t a Debtor and, as such, doesn’t meet this part of the test. See
                                 Brodie Hotel Supply, Inc. v. United States, 431 F.2d 1316 (9th Cir. 1970).
                     2- The PMSP sends authenticated notice to the other secured party;
                     3- The other secured party receives notice in the 5 years before Debtor receives
                        possession of the inventory; and
                     4- The notice explains the PMSP reserves a PMSI in the inventory and provides a
                        description of the inventory.

      9-324(b)       Priority only extends to: (1) the inventory; (2) chattel paper and instruments that are
                     proceeds of the inventory; (3) proceeds of that chattel paper; and (4) identifiable cash
                     proceeds received on or before delivery of the inventory to a buyer (down payments).

      9-324(g)       IF MULTIPLE PMSI CONFLICT,
              (1)    Seller PMSI have priority over Lender PMSI
              (2)    Otherwise, 9-322 applies.


                            TRANSFORMATION RULE v. THE DUAL-STATUS DOCTRINE

      9-103(f)       Adopts the “Dual-Status Doctrine” for non-consumer goods. Hence, an SI may be both
                     PMSI and something else. See Pristas, 742 F.2d 797(3d Cir. 1984) (PMSI may remain
                     such even though it secures price of goods and other debts).

      9-103(h)       9-103(f) doesn’t apply to consumer goods – leaves question of Transformation Rule v.
                     Dual-Status Doctrine in consumer goods cases to state courts.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                     Page 14
                                                      III.      PRIORITY

                     SECURED PARTIES AGAINST SUBSEQUENT PURCHASERS OF COLLATERAL

      PURCHASERS OF NON-INVENTORY COLLATERAL (EQUIPMENT, ACCOUNTS)
      9-317(b)        A purchaser takes free of SP’s interest only if:
                      1- The buyer gives value and receives delivery,
                      2- (Without knowledge of SP’s security interest)
                      3- Before SP perfects his security interest.

                      Note: the requirement is PERFECTION, not FILING. If SP files before Buyer buys, but
                      finances after buyer buys, SP loses to buyer. Filing doesn’t equal perfection – the SP
                      must also attach to the collateral.
                      Also note: If SP was already perfected, Buyer “loses” the battle under the 3rd prong.


      PURCHASERS OF INVENTORY :: Different Rules for Purchasers of Consumer and non-Consumer Goods
      9-320(a)        applies to Purchasers of non-Consumer goods.              Buys in good faith, w/out knowledge that
                                                                                 a sale violates a 3rd party’s rights, and in
                      A buyer in the ordinary course of business
                                                                                 ordinary course of the seller’s business.
                      takes free of an SI created by the buyer’s seller,                         1-201(b)(9)
                      even if the SI is perfected and the buyer knows of its existence.

      9-320(b)        applies to Purchasers of Consumer goods. The Purchaser takes free of any SI if:
                              1) Purchaser bought them without knowledge of the security interest;
                              2) Purchaser gave the seller value;
                              3) Purchaser bought the goods primarily for use as consumer goods; and
                              4) Purchaser bought the goods from Seller before SP filed a financing
                                  statement.

      What are consumer goods?
      9-102(a)(23): goods that are used or bought for use primarily for personal, family, or household use


      POTENTIAL EXAM QUESTION: (149-1)
         - Bank takes and perfects a security interest in Debtor’s equipment.
         - In violation of a Bank/Debtor agreement, Debtor sells some of the equipment to Wholesaler.
                - NOTE: Wholesaler takes this equipment subject to Bank’s lien under 9-315(a). He does
                    not qualify for exemption under 9-317(b) because SP already perfected. He does not
                    qualify for exemption under 9-320 because he did not purchase it as inventory.
         - Wholesaler sells it to Purchaser.
                - Purchaser takes subject to Bank’s interest. He does not qualify for exemption under 9-
                    320(a) because, while he purchased inventory as a buyer in the ordinary course of
                    business, the interest was not created by his seller.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                                    Page 15
                                                 III.     PRIORITY

                 GOODS SUBJECT TO CERTIFICATE OF TITLE ACTS (GENERALLY, MOTOR VEHICLES)

      9-311(a)       Subject to 9-311(d), the exclusive means of perfection for goods covered by a Certificate
                     of Title statute are: (1) possession of the certificate of title; (2) marking the certificate
                     with the appropriate legend and notations.

      9-311(d)       There’s an exception for goods in a dealer’s inventory: inventory financiers can file to
                     perfect.
                     If a buyer was buying it as a consumer good, they would take subject to the inventory
                              financier’s lien if the inventory financier filed.
                     If a buyer was buying it for business purposes, he would take free so long as he didn’t
                              know that the purchase violated a Dealer/Lender agreement.




                                     THE DOUBLE DEBTOR PROBLEM
              WHO HAS PRIORITY WHEN 2 DEBTORS CREATE SECURITY INTERSTS IN THE SAME COLLATERAL?


      9-325
      9-325(a)       A security interest created by the debtor is subordinate to a security interest in the
                     same collateral created by another person if:
                     1- Debtor acquired the collateral subject to the security interest created by the other
                         person;
                     2- The SI was perfected when Debtor acquired it; and
                     3- The SI didn’t thereafter become unperfected



      EXAMPLE:
         - In 2003, B granted SP-B an interest in equipment. SP-B filed to perfect.
         - In 2004, A granted SP-A an interest in equipment. SP-A filed to perfect.
         - In 2005, A sells all of its equipment to B.
                - Under 315(a) and 317(b), SP-A’s security interest continues in the collateral.
                - B does not qualify for exemption under 9-320(a) because he’s not a buyer in the
                     ordinary course of business.
                - Thus, B takes the equipment subject to the lien A created (which is perfected by filing).
         - In this circumstance, SP-B’s interest in the collateral would be subordinate to SP-A’s.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 16
                                                  III.     PRIORITY

                                       RIGHTS TO PAYMENT: INSTRUMENTS

      Since instruments are tangible, you can perfect either by filing or by possession.
      9-310          Filing
      9-313(a)       Possession

      9-318(a)        A Debtor that sells an instrument does not retain a legal or equitable interest in it

      9-309(3)        A security interest automatically perfects in the sale of a payment intangible.

      9-309(4)        A security interest automatically perfects in the sale of a promissory note.



      Problem 180-1:
          - Debtor lends money to a friend, who gives Debtor a note evidencing the obligation to repay.
          - Debtor sells the note to Bank, and documents the sale in an authenticated record.
          - But Debtor retains possession.
          - Later, Debtor grants Lender a security interest in the note. Lender immediately files to perfect.
      Bank has priority.
      Under 9-318, Debtor did not retain any rights in the note; and under 9-203(b)(2), Debtor can only
      transfer rights that he actually has. (See Comment 2 to 9-203). Lender never actually had an SI.




                 …BETWEEN A PURCHASER OF AN INSTRUMENT AND ANOTHER SECURED PARTY

      9-330(d)        A purchaser of an instrument has a security interest that…
                      …is subordinate to an interest of someone who perfected their interest by possession.
                      …is superior to an interest perfected by a means other than possession, so long as:
                              1) The purchaser gave value & took possession in good faith,
                              2) Without knowledge that the purchase violates the rights of the secured
                                  party




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                    Page 17
                                                  III.     PRIORITY



                                    … IN ACCOUNTS, AS ORIGINAL COLLATERAL

      Accounts are intangible, so you must file to perfect. Accordingly, priority determined by 9-322.

      9-318(a)        A Debtor that sells an account does not retain a legal or equitable interest in it

      Unless: someone has already perfected the interest and has assigned the interest to you:
      9-309(2)        A security interest automatically perfects in an assignment of accounts so long as the
                      assignment doesn’t transfer a significant part of the assignor’s outstanding accounts.
                          - In re Tri-County Materials, 114 B.R. 160 (C.D. Ill. 1990) give 2 tests to determine
                              when a “significant part” of the assignor’s outstanding accounts are involved:
                              1) Percentage test:
                                   size of the assignment in relation to the size of all outstanding accounts
                              2) The “Casual / Isolated” Test:
                                   Comm. 4 to 9-309 provides that “*a+ny person who regularly takes
                                   assignments of any debtor’s accounts or payment intangibles should file.”




                                … IN ACCOUNTS, AS THE PROCEEDS OF COLLATERAL

      9-203(f)        When SP attaches to collateral, SP also attaches to identifiable proceeds.
      9-315(a)(2)     A security interest attaches to identifiable proceeds of collateral.
      9-322(b)(1)     If SP’s interest in collateral was perfected, SP’s interest in proceeds has perfected.
                      The time of perfection in the proceeds relates back to when the interest in collateral
                      perfected.

      Problem 181-1(a):
          - Debtor sells goods to Retailer, who agrees to pay n/90 upon delivery.
          - Bank periodically advances funds to Debtor, as inventory financing. Filed to perfect in inventory,
              now owned or hereafter acquired
          - Later, Debtor grants Lender a security interest in accounts, now owned or hereafter acquired.
          - Neither the security agreements nor the financing statements mention proceeds.
      Bank has priority in the accounts.
      Bank’s perfected interest in the original collateral carries through to identifiable proceeds (9-203(f); 9-
      315(a)(2)). Its interest survived the safe harbor period (9-315(d)(1)) and relates back to when the
      interest in collateral perfected (9-322(b)(1)). Thus, Bank has priority (9-322(a)).




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                        Page 18
                                                 III.     PRIORITY

          …BETWEEN A PURCHASER OF CHATTEL PAPER AND SOMEONE WHO CLAIMS AN EXISTING S.I.

      9-102(a)(11)    (1) a monetary obligation and SI in specific goods, or (2) a lease.

      9-318(a)       A Debtor that sells chattel paper does not retain a legal or equitable interest in it

      9-330(a)       A purchaser of chattel paper has priority over another Secured Party who claims an
                     interest in the chattel paper merely as the proceeds of inventory when the purchaser:
                     1- Purchases in good faith,
                         Buys in the ordinary course of the Buyer’s business,
                         Gives New Value,
                         Takes possession, or obtains control under 9-105, and
                     2- The chattel paper doesn’t indicate that it has been assigned to an identified
                         assignee other than the purchaser.



      9-330(b)       A purchaser of chattel paper has priority over another Secured Party who claims an
                     interest in it as something other than merely as the proceeds of inventory when he:
                         Purchases in good faith,
                         Buys in the ordinary course of the Buyer’s business,
                         Gives New Value,
                         Takes possession, or obtains control under 9-105, and
                         Buys without knowledge that the purchase violates the Secured Party’s rights



      Permanent Editorial Board (P.E.B.) Commentary No. 8:
            Where a lender considers chattel paper when it calculates the lending formula – where it relies
            on the value of the chattel paper as an independent asset – it is something other than the mere
            proceeds of inventory.



      Comm. 11 to 9-330: RESIDUAL INTERESTS IN LEASES
            - Assume the facts in problem 195-1: Bank financed Debtor’s inventory and filed to perfect its
                interest in inventory and proceeds. Debtor subsequently sold its interests in receivables to
                Factor, including leases. Factor took possession of the leases.
            - In one lease, Debtor had reserved a residual interest in the leased goods, such that the
                lessor had to return them at the end of the lease.
            - Because Factor meets the requirements set forth in 9-330(a), it has priority in the lease.
            - Bank, however, retains priority in the residual interest.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                   Page 19
                                                   III.     PRIORITY


                               HOW TO PERFECT AN INTEREST IN A DEPOSIT ACCOUNT

      9-312(b)(1)      Control is the only method of perfection for Deposit Accounts.

      9-104(a)         A Secured Party has control of a deposit account if:
                       1- the SP is the Bank where the deposit account is maintained;
                       2- the Bank, Debtor, and SP agree that the Bank will follow SP’s direction; or
                       3- the SP becomes the Bank’s customer with respect to the deposit account.

      9-104(b)         A party is a SP under 9-104(a), even if Debtor retains the right to direct the disposition
                       of fund from the deposit account.



       … BETWEEN SP IN CONTROL OF A DEPOSIT ACCOUNT AND A SP WITH INTEREST IN IT AS PROCEEDS

      9-327(1)         The SP in control has priority



                    … BETWEEN MULTIPLE SECURED PARTIES IN CONTROL OF A DEPOSIT ACCOUNT

      9-327(3)         Between a Bank in control under 9-104(a)(1) and another Secured Party in control under
                       9-104(a) (2), Bank has priority.

      9-327(4)         Between a Bank in control under 9-104(a)(1) and another Secured Party in control under
                       9-104(a)(3), the other Secured Party has priority.

      9-327(2)         Between multiple Secured Parties in control under 9-104(a)(2)-(3), priorities rank by
                       time of obtaining control.



                                   … BANK’S RIGHT TO RECOUPMENT OR SET-OFF

      9-340(a)         Except as otherwise provided, a Bank with control under 9-104(a) may set-off against a
                       secured party that holds a security interest in the deposit account.

      9-340(c)         The Bank may not exercise its right to set-off if the set-off is based on a claim against the
                       Debtor, and the Secured Party has control under 9-104(a)(3).




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                           Page 20
                                                   III.     PRIORITY



            … BETWEEN A SECURED PARTY AND A RECIPIENT OF CASH PAYMENTS FROM THE DEBTOR?

            Re-phrased: what interest does SP retain in cash once the Debtor pays it out to third parties?

      9-332(a)        Transferee of money takes free, so long as he doesn’t collude with the Debtor to violate
                      the rights of the Secured Party.

      9-332(b)        Transferee of funds from a deposit account takes free, so long as he doesn’t collude
                      with the Debtor to violate the rights of the Secured Party.

      Article 9 doesn’t provide a good explanation of collusion. Instead, it refers to an Article 8 definition.



       WHAT RIGHTS DOES A SECURED PARTY HAVE IN CASH PROCEEDS THAT HAVE BEEN INTERMINGLED?

      9-315(b)        Proceeds are identifiable proceeds (which the SP has rights to under 9-315(a)(2)) to the
                      extent that the secured party can identify them by a method of tracing, including
                      application of equitable principles, that is permitted under law other than this article
                      with respect to commingled property of the type involved.

      Comm. 3 to 9-315 the Lowest Intermediate Balance Rule:
      The SP can only have a lien equal to the lowest balance of identifiable proceeds on the Balance Sheet.

      Problem 223:
      Bank has a perfected security interest in Debtor’s existing and after-acquired accounts. The loan was
      effected by Bank crediting Debtor’s operating account – which Bank held in control under 9-104(a)(1).
      When Debtor defaulted, Factor tried to garnish the account.
      Bank has priority, generally, under 9-327(3), Bank has priority over Factor – but under 9-315(b)(2),
      Bank’s interest in the proceeds of the account is limited to the extent it can identify them.
                                                                                                  LOWEST
                               DESCRIPTION OF THE
           DATE                                                ACCOUNT BALANCE                 INTERMEDIATE
                                  TRANSACTION
                                                                                          BALANCE IN PROCEEDS
      5/01              LOAN FROM BANK: $ 10,000                     $ 15,000                         --
      5/20              ACCOUNT PAID: $ 1,000                         $ 16,000                     $ 1,000
      5/22              WITHDRAWAL: $ 2,000                          $ 14,000                      $ 1,000
      6/01              WITHDRAWAL: $ 13,500                            $ 500                       $ 500
      6/04              WITHDRAWAL: $ 100                               $ 400                       $ 400
      6/10              INVENTORY SOLD FOR $ 500                        $ 900                       $ 400
      6/15              ACCOUNT PAID: $3,000                           $3,900                      $3,400



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                      Page 21
                                                  III.  PRIORITIES
                                                FEDERAL TAX LIEN ACT

      PRELIMINARY STUFF
      FTLA §6323      Any unpaid taxes constitute a federal tax lien (FTL) for the U.S. Government upon
                      all property or rights to property belonging to the taxpayer.

      FTLA §6322      An FTL arises when assessed and runs through full satisfaction or lapse.
                           - The assessment date is when the I.R.S. records the deficiency.
      If you don’t pay the deficiency, that’s when the I.R.S. files against your property.


      GENERALLY: FTLA ADOPS THE FIRST-TO-FILE RULE
      FTLA §6323(a) An FTL is not valid against ,purchaser / SP / JLC / mechanic’s lienor- until notice is filed.
      WJT            §6323(a) doesn’t mention unsecured creditors. Thus, an FTL always beats unsecured
                      creditors, whether filed or not.


      IMPACT ON PRE-FILING – A SIGNIFICANT DEPARTURES FROM TREATMENT OF JLCs UNDER ARTICLE 9
      §6323(h)        For a {purchaser / SP / JLC} to have priority, that party must advance
                      “money or money’s worth” before the FTL is filed. Mere pre-filing will not suffice.

      HYPO #1 :: Bank wins
         1/1       Bank & Debtor authenticate SA; Bank files; Bank advances funds
         2/1       FTL filed

      HYPO #2 :: FTL Wins
         1/1        Bank & Debtor authenticate SA; Bank files
         2/1        FTL filed
         3/1        Bank advances funds


      IMPACT ON FUTURE ADVANCE CLAUSES
      §6323(d)        The FTL automatically has priority over FA made 46+ days after the FTL is filed.
                      The SP with a FA clause has priority during the initial 45 day window,
                      UNLESS: SP had knowledge of the FTL.


      IMPACT ON PROCEEDS
      Not addressed by the FTLA – instead, addressed in 26 C.F.R. § 301.623(c)(1)(D):
      When SP has priority in collateral, he also has priority in “identifiable proceeds.” For purposes of
      establishing priority under the FTLA, proceeds are “acquired” on the same date as the original collateral.
      Here, identifiable proceeds don’t include money & checks co-mingled with other cash proceeds.


Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                        Page 22
                                                       III.  PRIORITIES
                                                     FEDERAL TAX LIEN ACT


            AAP GENERALLY LOSE TO THE FTL…
            6323(h)(1)(A)   The FTL squelches AAP clauses – AAP clauses are ineffective under the FTLA.


            …BUT AAP CLAUSES FOR INVENTORY AND ACCOUNT FINANCING WIN
            If SP has an AAP clause covering accounts or inventory, SP has priority for 45 days after the FTL filing.
            §6323(c)(1)     FTL not valid against a later SI that:
                            A- is in qualified property, covered by the terms of a written agreement entered into
                                before FTL filed, and constituting –
                                     i) a commercial transactions financing agreement, and
                            B- is protected under local law against a judgment lien arising, as of the time of the FTL
                                filing, out of an unsecured obligation

            §6323(c)(2)     A- A “commercial transactions financing agreement” is an agreement entered into by a
                                   person in the course of his trade or business:
                                   i) to loan D/TP money, secured by commercial financing security acquired by
 WJT suggested that                    the Taxpayer in the ordinary course of Taxpayer’s business
 §6323(c)(2)(B) might              ii) to purchase non-inventory commercial financing security acquired by the
   impose a “without                   taxpayer in the course of his trade / business
       knowledge”
                            B- Qualified Property includes only commercial financing security acquired by the
requirement. At best,
                               Taxpayer before the 46th day after filing.
  it’s possible that SP
might lose priority if he   C- Commercial Financing Security means:
    know of the FTL.              i) paper of a kind ordinarily arising in commercial transactions
                                  ii) A/R
                                  iii) …
                                  iv) Inventory
                                v)




            SP WITH PMSI HAVE PRIORITY OVER THE FTLA
            A later filing relates back to the onset of temporary perfection afforded by the Safe Harbor period.
            Hypo :: Bank wins
               1/1        Bank & Debtor authenticate SA; Bank advances $$ for D/TP to purchase equipment
               1/15       FTL Filed
               1/20       Equipment Delivered
               1/26       Bank files (within the “20 days after delivery” PMSI Safe Harbor Period under 9-324)
            According to I.R.S. Revenue Rule 68-57, PMSI defeat the FTLA even if they arise after the FTL is filed!
            A PMSI defeats the FTLA, regardless of when it arises!



 Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                            Page 23
                                                  IV.     REMEDIES

      GENERALLY
      After default, parties may pursue their claims through the courts (9-601(a)(1)) or extra-judicially. Most
      parties choose to pursue extra-judicial claims to save time and expense. The 3 most common forms are:
          1) 9-610            SP may make a commercially reasonable sale at a public or private sale and,
                              under 9-615, apply the sale proceeds to satisfy the debt, costs, and interest.
          2) 9-607            Where SP’s interest is a right to payment, the SP may in a commercially
                              reasonable manner notify the account debtor to pay SP directly.
          3) 9-620            SP may accept the collateral either in full or partial satisfaction of the debt.

      601(c)          SP may pursue multiple, simultaneous methods of collection if he acts in good faith.
      Comm. 5         Nonetheless, simultaneous exercise may be a tort, so SP should be cautious.



      SELF-HELP REPOSSESSION
      9-609(a)-(b)    After default, a SP may take possession of collateral if he does so either:
                      1- pursuant to judicial process, or
                      2- without judicial process, if it proceeds without a breach of the peace
      Case law defines breach of the peace. Majority view:
         - SP breaches the peace by entering an enclosed area without consent.
         - No breach, however, when SP repossesses vehicles parked in driveways or on the street

      9-602(6)        Debtor cannot waive 6-609 to the extent it requires SP not to breach the peace

      9-603(a)        While the parties may, by contract, set standards / definitions…
      9-603(b)        …they may not do so for “breach of the peace” under 9-609

      9-604(d)        A SP that removes collateral is liable for damages caused by removal…

      WJT            SP may be able to lie to repossess. Jurisdictions handle the situation differently.
                      It’s probably ok for the repo man to tell a mechanic that he’s picking up a car for the
                      owner, but not okay to lie directly to the debtor and invite a violent incident.

      SEIZURE BY JUDICIAL ACTION
      9-609(b)(1)     “…pursuant to judicial process”
                      - Depending on state law, you likely get a writ of possession, have the police seize it,
                         and then either deliver it to you or sell it at s sheriff’s auction.

      Cla-Mil E. Holding Corp. v. Medallion Funding Corp., 6 N.Y.3d 375 (Ct. App. 2006):
      Even though SP could be liable for damages under 9-604, he’s not liable for the same damages if the
      sheriff or another state actor causes them during the course of a seizure by judicial action.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                      Page 24
                                                     IV.     REMEDIES

      SELLING COLLATERAL AT PUBLIC OR PRIVATE SALES
      (DISPOSITION OF COLLATERAL TO SATISFY DEBT)
      9-610(a)           After default, a SP may dispose of collateral to satisfy the Debtor’s obligation.
      9-610(a)           The SP may dispose of it in its “present condition or following commercially reasonable
                         preparation.”
      9-610(b)           Every aspect of disposition, whether public / private, must be commercially reasonable.
      9-611(b)           If SP chooses to dispose of collateral, SP must provide reasonable, authenticated notice
                         to. . .
      9-611(c)           . . .the Debtor and any secondary obligors. Further,
      9-611(c)           if the goods in question are not consumer goods, the Debtor must also notify:
                              - other SP who, ten days before notification, had filed a proper financing
                                  statement
                              - any other party who notifies SP if its interest by authenticated record.
                     -


      9-613(5)           FORM
      9-613              Notice requirements in non-consumer cases:
                             - who the Debtor is
                             - who the SP is
                             - description of the collateral
                             - method of disposition
                             - notice that Debtor is entitled to an accounting
                             - if it is a public sale, time & place of disposition
                             - if it is a private sale, time after which property will be sold
                     -


      9-614              Additional notice requirements in consumer cases:
                            - the possibility that Debtor will be liable for any deficiency
                            - phone # to get the amount needed to redeem the collateral
                            - phone # and/or mailing address to get more information, generally

      9-624              Debtor may waive notice of disposition, but it must be authenticated and after default.
                     -


      9-612              Addresses “commercially reasonable” timing of notification: a question of fact.
      Comm. 2            Notice sent so near disposition that a reasonable person couldn’t be expected to act on
                         or take account of it would be unreasonable.
      9-612(b)           In non-consumer cases, it must be after default and ≥ 10 days before disposition

      9-617(a)-(b)       Even though SP doesn’t have rights in the collateral, he may sell it and transfer Debtor’s
                         existing rights to the transferee. A transferee in good faith and for value takes it free of
                         all liens, even if the secured party failed to comply with one of the notice requirements.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                            Page 25
                                                  IV.      REMEDIES

      9-610(c)        SP may only purchase the collateral: (1) at a public sale, or (2) at a private sale when the
                      collateral is customarily sold on a recognized market (e.g., stock).

                      Comment 9 to 9-610 states that “a market in which prices are individually negotiated or
                      the items are not fungible is not a recognized market, even if the items are subjects of
                      widely disseminated price guides or are disposed of through dealer auctions.” Thus,
                      cars are not sold on a recognized market, despite existence of the Kelly Blue Book.



      COMMERCIAL REASONABLENESS
      9-627(a)        All of SP’s actions must be commercially reasonable.
      Comm. 2:        “…a low price suggests that a court should scrutinize carefully all aspects of a disposition
                      to ensure that each aspect was commercially reasonable.”

      9-627(b)        Disposition is commercially reasonable if it is made:
                      1- in the usual manner on any “recognized market;”
                      2- in the price current in any recognized market at the time of disposition; and
                      3- “otherwise in conformity with reasonable commercial practices among dealers in
                          the type of property that was the subject of disposition

      Is it necessary to hire an Expert?
            - Liberty National Bank & Trust Co., 540 F.2d 1375 (10th Cir. 1976):
               SP seized and sold an oil rig, but knew nothing about oil rigs. SP had it appraised for between
               $60-80K and sold it for $42K. Later, the purchaser resold it for $77K.
            - Here: WJT suggests that the SP should have hired an expert. They didn’t know what the
               “reasonable commercial practices among dealers in the type of property” were (9-627(b)).

      9-610(a): REASONABLE PREPARATION OR PROCESSING
      Comm. 4 confirms:      “A secured party may not dispose of collateral ‘in its then condition’ when,
                            taking into account the costs and probable benefits of preparation or processing
                            and the fact that the SP would be advancing these costs at its risk, it would be
                            commercially unreasonable to dispose of the collateral in that condition.”



      9-602(7)        Debtor may not waive a commercially reasonable disposition. . .
      9-603(a)        . . . but the parties may, by contract, agree to set the standard for it.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 26
                                                IV.      REMEDIES

      DEBTOR’S LIABILITY FOR DEFICIENCIES
      9-615(d)(2)   The debtor is liable for any deficiencies.
      9-615(d)(1)   If there’s a surplus, the debtor gets it.

      9-626(a)      In Non-Consumer Transactions where it is alleged that the SP failed to follow Article 9’s
                    “commercial reasonableness” requirements and SP failed to prove otherwise. . .
      9-626(a)(3)   . . . Debtor’s liability for deficiency is limited to the extent to which
                    *the Secured Obligation, Expenses, and Attorney’s Fees+ exceed
                    [the amount that would have been realized had SP complied with Article 9]
      9-626(a)(4)   The amount that would have been realized is presumed to be the full amount owed
                    (including expenses and attorney’s fees) unless SP proves otherwise.

      9-615(f)      If either SP or a related party purchases collateral, the calculation for surplus /
                    deficiency is based on what an unrelated party would have paid.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                    Page 27
                                                    IV.   REMEDIES

      ACCEPTANCE OF THE COLLATERAL IN SATISFACTION OF THE DEBT
      (this is often called “strict foreclosure”)
      Debtors must consent to strict foreclosure.


                                         FULL SATISFACTION                       PARTIAL SATISFACTION

                                 9-620(a)(1): Debtor may accept, or          9-620(c)(1): Debtor may accept
        NON-CONSUMER
                                    9-620(c)(2): Accept by silence             NO ACCEPTANCE BY SILENCE

                                 9-620(a)(1): Debtor may accept, or
          CONSUMER **                                                            NOT PERMITTED AT ALL
                                    9-620(c)(2): Accept by silence


      ** This is only true if the consumer has paid < 60% of the principle.
      ** Under 9-620(e), if consumer has paid ≥ 60%, the Secured Party must dispose of the collateral.
         9-620(f)       Requires mandatory disposition within 90 days after SP takes possession.



      THE EFFECT OF ACCEPTANCE
      9-622(a)        When the SP accepts collateral in satisfaction of the debt, it:
                      1- discharges the obligation to the extent consented to by the debtor
                         (full or partial)
                      2- transfers all of the Debtor’s rights in the collateral to the Secured Party
                      3- discharges both the SP’s interest and any subordinate liens, and
                      4- terminates all other subordinate interests

      9-622(b)        Acceptance discharges all subordinate interests, even if the SP fails to comply with
                      Article 9’s commercial reasonableness requirements.

      9-625           Jr. Lenders may, of course, bring an action against the SP for damages stemming from
                      the non-compliance.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                  Page 28
                                               IV.     REMEDIES



      SP MAY CLAIM DEBTOR’S INTERESTS IN RIGHTS TO PAYMENT
      9-607(a)      After default, a SP may notify account debtors to pay the SP directly.
      9-607(a)(2)           - SP may claim proceeds
      9-607(a)(3)           - SP may enforce account debtor’s obligations (he can force them to pay)


      9-607(a)(4)   If the SP = Bank, and SP has control of Debtor’s deposit account under 9-104(a)(1), SP
                    may apply the balance of the deposit account to the debt SP secured.


      9-607(a)(5)   If the SP controls debtor’s deposit accounts under 9-104(a)(2) or 9-104(a)(3), SP may
                    instruct the bank to pay the balance of the deposit account to or for SP’s benefit.



      PARTY’S RIGHTS TO REDEEM COLLATERAL AFTER DEFAULT
      9-623(a)      Debtors, secondary obligors, other Secured Parties, and Lienholders may redeem
                    collateral.

      9-623(b)      To redeem, a person shall:
                    1- pay off all obligations secured by the collateral; and
                    2- pay SP for the reasonable expenses and attorney’s fees described in 9-615(a)(1)

      9-623(c)      A party may redeem collateral at any time before the Secured Party has:
                    1- collected it, if it’s a right to payment, under 9-607
                    2- disposed of the collateral or contracted to dispose of the collateral, under 9-610; or
                    3- accepted the collateral in full or partial satisfaction of debt under 9-622




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                    Page 29
                                                  V.      BANKRUPTCY

      BC §541          In Bankruptcy, all of the Debtor’s property becomes property of the estate.

      BC § 362         Once a bankruptcy case is filed, the Automatic Stay stops all pending and potential
                       future actions against the debtor.
                       - The automatic stay only protects the debtor. It doesn’t protect other obligors, such
                           as a guarantor.
                       - BC §524(e): secondary obligors are still liable despite bankruptcy discharge.


      VALUE OF CLAIMS
      BC §506(a)   In Bankruptcy, a secured creditor holds a secured claim only to the extent of the
                   debtor’s interest in the collateral.

      BC §506(b)       An oversecured creditor may collect post-filing interest on collateral, to the extent that
                       the collateral’s value covers it.

      468-1: Illustration BC § 546
         - Assume that Debtor’s collateral is worth $150,000
         - If before Bankruptcy SP had a security interest worth $100,000, he would have a secured claim
               for $100,000. The remainder would go into the pool for the unsecured creditors. We refer to
               this as an “oversecured creditor.”
         - If before Bankruptcy SP had a security interest worth $200,000, he would have a secured claim
               for $150,000. He would also have an unsecured claim for $50,000. We refer to this as an
               “undersecured creditor.”


      VALUE OF COLLATERAL
      In Chapter 7, the value of collateral equals its liquidation value.

      In Chapters 11 and 13, the value of collateral is harder to determine.
          - Associates Commercial Corporation v. Rash, 520 U.S. 953 (1997):
              when the debtor retains possession, the value of collateral is the replacement value. Whether
              replacement value is retail, wholesale, or some other value depends on the Debtor and the
              property in question.
          - This accords with the second sentence of BC §506(a)(2), which directs courts to consider the
              purpose of the valuation and the proposed use or disposition of the collateral.


      ABANDONMENT
      BC §554(a)       If the trustee cannot draw any value from collateral for the unsecured claimants, he
                       may abandon the property to the secured / oversecured claimant.



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                        Page 30
                                             V.      BANKRUPTCY


      REDEMPTION, REAFFIRMATION, and “RIDE-THROUGH”
      BC §722      Debtor may redeem collateral. But Debtor doesn’t have to pay the full debt – to
                   redeem, debtor only has to pay the value of the collateral. But he has to pay it now…

      BC §524(a)   Debtor may reaffirm the debt – he reaffirms his obligation to pay the debt and loses the
                   right to discharge it, but he gets to retain it…


      THE EFFECT OF BANKRUPTCY ON AAP CLAUSES
      BC §552(a)   AAP Clauses are ineffective to capture collateral acquired after filing.
                   WJT  …so that the Debtor can get post-petition financing.

      BC §552(b)   AAP Clauses are effective on any property acquired before filing, and any proceeds from
                   that property.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                  Page 31
                                                V.       BANKRUPTCY



      AVOIDANCE POWERS
      BC §544(a)      Once the Debtor files for bankruptcy, the trustee has all the powers of a lien creditor
                      under UCC 9-317.

      Thus, at the moment that the Debtor files, it’s as though the trustee is a judgment lien creditor who’s
      competing against the parties.

      Thus, when the trustee competes with…
      An attached but unperfected security interest                      the trustee wins.
      A SP who both filed and advanced                                   the trustee loses.
      A SP who filed but did not yet advance                             the trustee loses.
      A PMSI , later perfected during the 9-317(e) safe harbor
      but after a Bankruptcy petition was filed                         the trustee loses.
       When read together, BC §§ 362(b)(3) and 546 allows the Safe Harbor to continue:
          the SP does not violate the Automatic Stay by filing to perfect during Safe Harbor



      BC §544 IS THE BANKRUPTCY CODE’S “STRONG ARM CLAUSE”
      It allows the trustee to turn Secured claims into Unsecured Claims
      BC §544(a)      If the trustee “wins” – if the trustee has priority – the trustee can avoid the entire claim.
                      The entire thing is treated as an unsecured claim!

      BC §544(b)      If the trustee can find at least 1 unsecured creditor who can void the secured party’s
                      interest under state law – most frequently, by a state law fraud claim – the trustee can
                      avoid the secured party’s claim.

      BC §550(a)      Allows the trustee to avoid things for the benefit of all unsecured creditors.




      BC §551         The trustee may not avoid something under BC §544 unless it benefits the estate!




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                          Page 32
                                                                                                 Under BC §101(54), the term
                                                                                             “transfer” includes payments, liens,
                                                        V.       BANKRUPTCY                     and created security interests.

            PREFERENCES
            BC §547           Allows the trustee to avoid a transfer:
         INSIDERS             1- made to or for the benefit of a creditor;                       Under BC §547(g), Debtors are
                              2- made for or on account of an antecedent debt;                 presumed insolvent. It’s up to the
For an individual:            3- made while the debtor was insolvent;                        “preferred party” to prove otherwise.
- Relatives
- Partners
                              4- made 90 days before filing,
- Corp. controlled by             or 1 year before filing if the debtor is an “insider”; and
  Debtor                      5- that enables the creditor to receive more than he would have in
                                  a Chapter 7 liquidation
For a corporation:
- Directors, Officers
- Person in control           A basic but unstated principle behind BC §547 is that the transferred property must be
- Relatives of those people
                              property of the estate!




            INDIRECT PREFERENCES
            Debtor borrowed $1M from Bank and Guarantor became a secondary obligor.

            If Debtor pays off the loan, Guarantor has an Indirect Preference – because his obligation to repay
            Debtor’s loan (upon default) goes away.

            A trustee could recover the $1M from either Bank or Guarantor. If he recovers it from Guarantor,
            Guarantor has a claim against the bank.




            BC §551           The trustee may not avoid a preference unless it benefits the estate!




            BC §541(a)(3)     When the trustee avoids preference payments in cash, it should recover cash.
                              If the preference is an SI or judicial lien, it’s converted to an unsecured claim.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                                Page 33
                                                 V.      BANKRUPTCY

       PREFERENCE DEFENSES – BC §547(c)
   (1) CONTEMPORANEOUS EXCHANGES
       It was intended to be (and substantially was) a contemporaneous exchange. For example, Bank and
       Debtor intend to enter into a security agreement. Bank advances, but the security interest isn’t created
       until a short time later. This would not be a preference. See Dean v. Davis, 242 U.S. 438 (1917).

   (2) ORDINARY COURSE OF BUSINESS
       Debts paid in the ordinary course of the debtor’s business, made accordingly to ordinary business terms,
       should not be treated as preferences.
          - A new form of payment (switch to C.O.D.) may be outside the ordinary course.
          - If the debtor regularly makes late payments, that would be in the ordinary course of business.

   (3) PMSI Defense
       547(c)(3)(A) If Debtor and SP authenticate a security agreement and SP advances funds so that
                    Debtor can acquire collateral --- and Debtor actually acquires rights in that collateral ---
                    SP may claim a “PMSI Defense” to a preference action, so long as…

       547(c)(3)(B)    …SP perfected his interest within 30 days after the debtor receives possession of such
                       property.

   (4) THE NEW VALUE DEFENSE (designed to protect trade creditors)
       To the extent that Creditor received a transfer and then gave Debtor New Value that
               1- Wasn’t secured by an avoidable security interest, and
               2- On account of which the debtor didn’t make another transfer,
       the trustee cannot avoid it as a preference.

   (5) THE FLOATING LIEN DEFENSE (it deals with security interests in inventory, because inventory rotates)
       BC §547(e)    SI “transfer” when they perfect. An interest in After-acquired inventory doesn’t perfect
                     until Debtor acquired it (had rights in it). Thus, this arises in the 90 day preference zone.

       BC §547(c)(5)   This section deals with the difference between [the debt] and [the value of collateral].
                       If the Debtor acquires “after-acquired” inventory such that it reduces the difference
                       between these, to the prejudice of the unsecured, the transfer of an SI is avoidable.

       Examples:
   -   At the beginning of the 90 day period, Debtor owed $100 and had $60 in inventory. On the petition
       date, he now had $80 in inventory. The trustee can avoid the $20 in SI.
   -   At the beginning of the 90 day period, Debtor was oversecured. There cannot be a preference!
   -   At the beginning of the 90 day period, Debtor owed $100 and had $60 in inventory. On the petition
       date, he owed $90 and had $80 in inventory. There are 2 preferences. One is the payment of debt,
       possibly defensible under BC §547(c)(2). The other is an avoidance preference of $20 (SI in inventory).



Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                         Page 34
                                                V.       BANKRUPTCY

      FALSE PREFERENCES

      BC §547(e)      Under the Code, security interests are deemed created when:
                      (A) When the actual transfer takes effect, so long as the Creditor perfects his interest
                          within 30 days
                      (B) When the Creditor perfects his interest, if he does it more than 30 days after the
                          actual transfer.
                      (C) Immediately before the bankruptcy petition was filed, if the transfer wasn’t
                          perfected by the later of
                              (i)      the commencement of the case, or
                              (ii)     30 days after the transfer takes effect

      The whole idea here is to punish folks who don’t give other creditors notice of their dealings with the
      Debtor. It makes the “transfer date” – the date considered for preferences – later.

      It’s meant to encourage Creditors to deal fairly and to give other Creditors notice as quickly as possible.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                        Page 35
                                              V.      BANKRUPTCY

      FRAUDULENT TRANSFERS

      548(a)(1)(A)   Actual Fraud
                     - Actual intent was to “hinder, delay, or defraud any” current or future creditor of the
                         debtor.

                                                                               Reasonably Equivalent Value may be
      548(a)(1)(B)   Constructive Fraud
                                                                               property or security interests.
                     - the Debtor must have received less than
                        reasonably equivalent value                            Keep in mind – if you’re insolvent, a
                        in exchange for the transfer or obligation; and        gift would trigger this provision!

                     -   the Debtor was either insolvent when the transfer was made;
                     -   the Debtor was rendered insolvent by the transaction;
                     -   the Debtor was engaged or was about to engage in some business or transaction for
                         which its remaining assets were unreasonably small capital; or
                     -   the Debtor intended or believed that he would incur debts beyond his ability to
                         repay as they matured.



      In re Northern Merchandise, Inc., 371 F.3d 1056 (9th Cir. 2004)
      - S/H of corporation borrow money and pledge assets of corporation as security.
      - They immediately turn the loan proceeds over to the corporation – the corporation was the entity
           that really needed the funds, but couldn’t get it because of bad credit.
      - In fraudulent conveyance cases, courts are going to look both to the actual transferee and the
           party that benefited from the transfer
                   o (here, the S/H and the corporation)



      Corporate Guarantees are presumptively void as fraudulent conveyances.
      - Downstream          (parent guarantees sub)
      - Upstream            (sub guarantees parent)
      - Cross-stream        (sub guarantees sub)




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                     Page 36
                                                 V.      BANKRUPTCY

                                           CHAPTER 11 REORGANIZATIONS

      The Debtor retains possession of the assets (D.I.P.).

      There’s a three part test for judicial confirmation of a Chapter 11 plan:

          1- If all *classes of creditors+ and *all members of each class+ accept the plan, it’s confirmed.
             See §§ 1129(a)(7)(A), 1129(a)(8)

          2- If a member of a class objects, the payout to the objector’s class is tested under the Best
             Interests Test. If it passes, the plan is confirmed.
             See § 1129(a)(7)(A)(ii)

                  -   Best Interests Test: would the class get more in liquidation than in reorganization?

          3- If a class of unsecured creditors or equity interest holders doesn’t accept the plan, the court
             apples the Absolute Priority Test.
             A non-accepting class may be forced to accept the plan – and we call this Cram Down -- only if:
                  - Higher-ranking classes receive no more than the amount of their claims and no junior
                       class participates, -or-
                  - The non-accepting class gets its full claim paid.
                       (If paid in installments, they get interest)
             See § 1129(b)



      For a class of unsecured claimants to accept the plan, you need 2/3 by amount and 1/2 of the claimants.
      However, you only go by those members who actually voted.

      For a class of equity holders to accept the plan, you need 2/3 of the shares of each class.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                    Page 37
                                               V.      BANKRUPTCY

                                     CHAPTER 13 PERSONAL REORGANIZATION



      The Court determines whether or not the Debtor meets the “Means Test.”
      This determines whether they can file for Chapter 7, or whether they must go to Chapter 13.

      The court also determines whether your budge is ‘reasonable.’ In any case, you must include all
      disposable income for the life of the repayment period.



      BC §522(b)(1) If State law permits, the Debtor may elect exemptions either under state law or under
                    the Bankruptcy Code.

      Note: marries couples who file a joint petition get to double all of the following amounts…

      BC §522(d)(1) Up to $20,200 in home equity

      BC §522(d)(2) Up to $3,225 in a motor vehicle

      BC §522(d)(3) Up to $525 in any one item and up to $10,775 in the aggregate for household goods &
                    items

      BC §522(d)(4) Up to $1,350 in jewelry

      BC §522(d)(5) Up to $1,075 in other property – plus up to $10,125 if unused exemption from
                    §522(d)(1).

      BC §522(d)(6) Up to $2,025 in professional books or tools.

      WJT            Exemptions don’t strip existing liens – what a debtor exempts is what’s left after the
                      lien is paid off.




Prof. Taggart * Secured Transactions & Bankruptcy * Fall ‘09                                                   Page 38

								
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