Secured Transactions

Question 1

Tangible Goods

Answer 1

4 types:

1. ) Consumer goods (personal, family, household use)
2. ) Farm products (anything used or produced in farming, except standing timber for which there is no K to cut and remove - D’r MUST be engaged in farming operation)
3. ) Inventory (anything besides farm products that are held for sale or lease, furnished under a service K, or consist of raw materials, works in process, or materials used/consumed)
4. ) Equipment (anything that’s not (1)-(3), usually referring to goods used or bought for use primarily in a business such as desks or machinery)

NOTE: Look to debtor’s PRINCIPAL USE in order to classify. The same goods may be classified differently w/r/t different debtors.

WHEN CLASSIFIED: At time of attachment.

Question 2

Rule for Software

Answer 2

Classified as part of the goods in which it is embedded. If not embedded in goods (e.g., sold in separate box), then it’s a “general intangible.”

Question 3

Chattel Paper

Answer 3

One or more records that evidence both a monetary obligation and a security interest in specific goods (or lease of goods)

Either “electronic” or “tangible.”

Question 4

Document

Answer 4

This refers to a document of title conferring ownership rights in goods held by a bailee.

Question 5

Instruments

Answer 5

“Instruments” encompass negotiable instruments, such as promissory notes and checks, as described in Article 3, and nonnegotiable instruments that evidence a right to the payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certificate of deposit from a bank.

When coupled with evidence of a security interest, the two combined constitute chattel paper.

Question 6

Investment property

Answer 6

• both certificated and uncertificated securities such as stock and bonds, security accounts, security entitlements, commodity accounts, and commodity contracts.

Question 7

Accounts

Answer 7

“Accounts” include the right to payment for property sold, leased, licensed, or otherwise disposed of, or services rendered or to be rendered. Also included is a right to payment for the issuance of an insurance policy, the use of a credit or charge card, or winning a lottery. Excluded are rights to payments that are evidenced by another type of collateral, such as an instrument or chattel paper and those that arise out of a transaction that is not contained within the definition of an account. For example, a right to payment arising out of a loan transaction would, if not evidenced by an instrument or chattel paper, be a payment intangible, not an account.

Question 8

Commercial tort claims

Answer 8

“Commercial tort claims” include tort claims possessed by an organization, or by an individual that arose in the course of the individual’s business. Excluded are tort claims by an individual for personal injury or death.

Question 9

Letter of credit rights

Answer 9

A “letter-of-credit right” is a right to payment or performance under a letter of credit, even though the beneficiary has not demanded—nor is the time ripe for —payment or performance.

Question 10

General intangibles

Answer 10

“General intangibles” is the residual category of personal property that is not included in other types of collateral. Included among items that are general intangibles are copyrights, things in action (e.g., legal claims), payment intangibles (i.e., a general intangible under which the account debtor’s principal obligation is a monetary obligation), and software-not-part-of-goods.

Question 11

Rule for leases

Answer 11

Leases are covered under Article 9 only when the transaction, although in the form of a lease, is in economic reality or substance a secured transaction. It is generally determined on a case-by-case basis not by the parties’ characterization of the transaction but by the economic reality of the transaction.

a. Transaction creating a security interest

A transaction in the form of a lease is treated as creating a security interest if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and one of the following four conditions is also met:

i) The original term of the lease is equal to or greater than the remaining economic life of the goods;
ii) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;
iii) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or
iv) The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement.
b. Protective filing

Even though a lease of goods is arguably subject to Article 2A, the lessor may nevertheless take steps to comply with Article 9’s filing rules. The lessor may wish to do so when there is doubt as to whether the transaction constitutes a true lease or a sale with a retained security interest. By making such a protective filing, the lessor is not prevented from asserting that the transaction constitutes a lease, but he will be accorded perfected status in the event that a court later determines that it is not.

Question 12

Consignments

Answer 12

Consignments may fall within the scope of Article 9. If so, the consignor’s security interest in the consigned goods is treated as a purchase-money security interest (PMSI) in inventory. UCC §§ 9-109(a)(4), 9-103(d). In order for a consignment to be subject to Article 9, the following requirements must be met:

i) A person (i.e., the consignor) must deliver goods to a merchant for the merchant to sell;
ii) The merchant (i.e., the consignee) must:
a) Deal in goods of that kind,
b) Not operate under the name of the consignor,
c) Not be generally known by its creditors to be substantially engaged in selling the goods of others, and
d) Not be an auctioneer;
iii) With respect to each delivery, the value of the goods delivered must be at least $1,000 at the time of the delivery; and
iv) The goods must not be consumer goods immediately before the delivery.

Question 13

Sale of accounts, chattel paper, payment intangibles, and promissory notes

Answer 13

Subject to several exceptions, the sale of accounts, chattel paper, payment intangibles, and promissory notes is subject to Article 9. UCC § 9-109(a)(3). Such transactions, however, are not subject to Article 9 if the sale is part of a sale of the business out of which they arose. In addition, the following assignments are not subject to Article 9:

i) The assignment of accounts, chattel paper, payment intangibles, or promissory notes for the purposes of collection only;
ii) The assignment of a single account, payment intangible, or promissory note in full or partial satisfaction of a preexisting indebtedness; and
iii) The assignment of a right to payment under a contract to an assignee who is also obligated to perform under the contract.

Question 14

Providing consideration

Answer 14

Value may be given:

i) By providing consideration sufficient to support a simple contract;
ii) By extending credit, either immediately or under a binding commitment to do so (the debtor need not draw upon the credit);
iii) By, as a buyer, accepting delivery under a preexisting contract, thereby converting a contingent obligation into a fixed obligation; or
iv) In satisfaction of, or as security for, part or all of a preexisting claim.

Question 15

Attachment requirements

Answer 15

For the security interest to be enforceable against the debtor, three conditions must coexist:

i) Value has been given by the secured party (can include future advances, release of interest, new credit);
ii) The debtor has rights in the collateral (only the rights owned by the debtor attach); and
iii) The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement.

Question 16

Consignments and attachment

Answer 16

Generally, if the consignor retains title to the consigned goods, the consignee does not have rights in the consigned goods. Consequently, a security interest in the consignee’s inventory, for example, would not extend to the consigned goods. However, when the consignment is covered by Article 9, the consignee is treated as having the consignor’s rights in the consigned goods.

Question 17

Prohibition on Transfer

Answer 17

An agreement between the debtor and secured party that prohibits a transfer of the debtor’s rights in collateral does not prevent the transfer from taking effect, but may give the secured party rights against the debtor for doing so. (In other words, an agreement between a debtor and a secured party that would void a subsequently created security interest in the same collateral with another secured party is not effective. In fact, the later secured party may even achieve priority over the earlier security interest.) Similarly, an agreement between the debtor and secured party that makes the transfer a default does not prevent the transfer from taking effect, but may nevertheless make the transfer a default.

Question 18

Security Agreement

Answer 18

REQS:

1. ) Be in a record
2. ) Contain a description of the collateral
   - - general descriptions of an art. 9 category (all of d’s equipment) are enough unless consumer goods or commercial tort claim, but super-generic descriptions are not.
   - - must be able to identify the collateral.
3. ) Be authenticated by the debtor.

Question 19

Authentication

Answer 19

Usually, signing or executing. Can also be partial signature.

INQUIRY: Was the symbol executed or adopted by the debtor with the present intention to adopt or accept the record?

Question 20

New debtor rule

Answer 20

THIS APPLIES when there’s an existing security agreement between an SP and a debtor, and a new person becomes bound as debtor to the SA by the original debtor.

A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than Article 9 or by contract:

i) The security agreement becomes effective to create a security interest in the person’s property; or
ii) The person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.

The original authenticated security agreement can serve as the new debtor’s authenticated security agreement with respect to existing and after-acquired property described in the original agreement. The new debtor need not execute another agreement. UCC § 9-203(d, e).

As a consequence, the secured party can file a new or amended financing statement without the need to secure the new debtor’s authorization (see III.B.2. Debtor’s Authorization, infra).

Question 21

Possession or control of collateral

Answer 21

A secured party’s possession of tangible (e.g., goods) or quasi-intangible (e.g., chattel paper) collateral satisfies the Article 9 Statute of Frauds if the secured party’s possession is pursuant to a security agreement, which may be an oral or a written security agreement.

Similarly, for types of collateral that typically have no physical existence (i.e., deposit accounts, electronic chattel paper, electronic documents, investment property, and letter of credit rights), a secured party’s control of the collateral satisfies the evidentiary requirement that the debtor assent to the security agreement, provided the control is pursuant to the security agreement.

Question 22

After-acquired collateral

Answer 22

GENERAL RULE: May apply without new security agreement, if original agreement provided for after-acquired collateral.
– When the parties have left out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is of a type that rapidly changes, such as inventory or accounts), the courts are split on whether to imply it, but the majority of courts have adopted a REBUTTABLE PRESUMPTION that after-acquired property is included.

EXCEPTION TO THE GENERAL RULE: Clause is not effective if the collateral is in CONSUMER GOODS (unless debtor acquires them w/in 10 days after value given), or a commercial tort claim.

Question 23

Proceeds Rules

Answer 23

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

The term “proceeds” means:

i) Whatever is acquired upon the sale, lease license, exchange, or other disposition of collateral;
ii) Whatever is collected on, or distributed on account of, collateral;
iii) Rights arising out of collateral;
iv) To the extent of the value of collateral, claims arising out of the loss, nonconformity or interference with the use of, defects or infringement of rights in, or damage to, the collateral; and
v) To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral.

Question 24

Duties of SP

Answer 24

• Duty of CARE - reasonable care as to the custody and preservation of the collateral. Parties can determine standards for judging such care but cannot K to eliminate it.
• Duty to keep collateral IDENTIFIABLE - generally must keep it IDable but can commingle fungible collateral.
• Duty to relinquish possession or control - upon satisfaction of the security obligation (when no commitment to give value or make advances). Failure here constitutes the tort of conversion.
• • PROCEDURE: SP has ten days from receiving an authenticated demand (time period may be varied by the agreement).

Question 25

Rights of SP

Answer 25

• Charge reasonable expenses (storage, insurance, taxes) incurred in use, custody, preservation, or operation.
• Right to use or operate (may do so for purpose of preserving collateral or collateral’s value) – parties may agree to separate use or operation of collateral (except for consumer goods)
• Right to hold proceeds – may hold any proceeds besides money or funds. MUST be applied to reduce the secured obligation or be remitted to the debtor.

Question 26

Risk of loss or damage

Answer 26

• Rests on the debtor (so debtor is liable to the SP for any deficiency in effective insurance coverage)

Question 27

Assignment

Answer 27

If the debtor assigns his right to receive payment on an account, chattel paper, or a payment intangible, then the secured party, after default or earlier if the debtor so agrees, may notify an account debtor (i.e., a person obligated on an account, chattel paper, or general intangible, but not a person obligated on a negotiable instrument) to make payment to the secured party. The notification must be authenticated by the debtor (i.e., assignor) or secured party (i.e., assignee) and must reasonably identify the rights assigned. Generally, a term in the agreement between the account debtor and the assignor that prohibits or otherwise restricts assignment is ineffective.

EFFECT ON ACCOUNT DEBTOR: Upon receipt of notification, the account debtor may discharge her obligation only by paying the assignee; a payment made to the assignor does not discharge the account debtor’s obligation. Against the assignee, the account debtor may raise, unless waived, claims and defenses that arise from the transaction with the assignor who created the account, even those that accrue after the account debtor is notified of the assignment.

The rights of an assignee are subject to all terms of the agreement between the account debtor and the assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract. Other defenses and claims that the account debtor has against the assignor may be raised only if they have accrued prior to the account debtor’s receipt of notification of the assignment. Unless the account debtor incurred the debt as a consumer, account debtor’s claims and defenses may only serve to offset the amount that the account debtor owes.

Question 28

Rights of Debtor

Answer 28

• Accounting and other information - the debtor may submit a list of collateral and a statement of the aggregate amount of unpaid secured obligations, which the secured party may approve or correct. Generally, the secured party has 14 days to respond after receiving the debtor’s request.
• Notification of account debtors by SP - When there is not an outstanding secured obligation and the secured party is not committed to make advances or otherwise give value, the debtor can demand that the secured party notify account debtors (i.e., persons obligated to the debtor on an account, chattel paper, or general intangible) that they are no longer required to make payments to the secured party. The secured party must send the notification within 10 days after receiving an authenticated demand by the debtor.

Question 29

PMSI

Answer 29

• Only exists as to GOODS and SOFTWARE.
• EXISTS WHEN EITHER – (i) SP gave value (e.g., made a loan) to the debtor and the debtor incurred an obligation to enable the debtor to acquire rights in or use of the goods, and the value given was so used, OR (ii) SP sold goods to debtor and debtor incurs obligation to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit).
• CONSIGNMENT OF GOODS - this is a PMSI in inventory.
• CROSS-COLLATERALIZATION OF PMSIS IN INVENTORY: If inventory subject to a PMSI secures not only its own price or enabling loan but also the price or enabling loan of other purchase-money inventory, then the security interest in the inventory is a PMSI not only to the extent that the inventory secures its own price but also the price of the other inventory.

Question 30

PMSI Dual-Status

Answer 30

In a transaction other than a consumer-goods transaction, a PMSI does not lose its status as a PMSI merely because:

i) The collateral also secures an obligation that is not a purchase-money obligation (e.g., equipment that secures a bank loan to the buyer for the purchase of the equipment is subsequently used as collateral for a second bank loan to the buyer);
ii) The collateral that is not purchase-money collateral also secures the purchase-money obligation (e.g., equipment owned by the debtor prior to the time that the debtor borrows money to buy additional equipment when the previously owned equipment also serves as collateral for the purchase-money obligation); or
iii) The obligation has been renewed, refinanced, consolidated, or restructured.

Under the “dual status” rule, a security interest may be a PMSI to some extent and a non-PMSI to some extent. In such a transaction, the secured party claiming a PMSI has the burden of establishing the extent to which the security interest is a PMSI. Note that for consumer-goods transactions, the treatment of a PMSI as having a “dual status” is left to the courts.

Question 31

Application of payments to PMSIs

Answer 31

When the extent to which a security interest is a PMSI depends on the application of a payment of a particular obligation, the payment must be applied:

i) In accordance with the parties’ reasonable agreement;
ii) If there is no reasonable agreement, in accordance with the manifestation of the obligor before or at the time the payment is made; or
iii) If neither (i) nor (ii) apply, then first to unsecured obligations and then to obligations secured by a PMSI in the order in which the obligations were incurred.

Question 32

PMSI in Software

Answer 32

A PMSI in software exists only when the debtor acquired his interest in software in an integrated transaction in which the debtor also acquired an interest in goods (e.g., a computer), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods. The security interest in the software must also secure an obligation with respect to the goods, and the secured party must hold a PMSI in the goods.

Question 33

Accessions

Answer 33

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost, such as memory installed in a computer, or tires installed on a car. A security interest that is created in collateral that becomes an accession is not lost due to the collateral becoming an accession. Moreover, a security interest can be created in collateral that is an accession. Generally, the description of the collateral in the security agreement will determine whether a secured party acquires a security interest in the whole in the event its collateral becomes an accession.

Question 34

Commingled Goods

Answer 34

There is not a security interest in specific goods that have been commingled. However, a security interest may attach to the product or mass that results when the goods are commingled, such as a security interest in inventory of a manufacturer who makes brass by combining copper and zinc. UCC § 9-336(b).

An existing security interest in collateral that subsequently becomes commingled goods is transferred to the resulting product or mass. Once the goods have been commingled, a security interest cannot be created in separate goods. UCC § 9-336(c).

If the security interest in collateral that subsequently becomes commingled goods is perfected before the collateral becomes commingled, the security interest in the resulting product or mass is also perfected. UCC § 9-336(d).

Question 35

Methods of perfection

Answer 35

1. ) Filing of a financing statement
2. ) possession of collateral
3. ) control over the collateral
4. ) Automatic perfection (temporary/permanent)

Question 36

Perfection by filing

Answer 36

• Applies to anything but deposit accounts, money, or letter-of-credit rights that are not a supporting obligation.
• NOTE: Exclusive method of perfection by an SA in accounts
• REQs:
  1. ) Financing statement w/ (i) debtor’s name, (ii) SP’s name or representative’s name, (iii) collateral covered by the FS, (iv) addresses of both parties, (v) whether debtor is an individual or organization.
  2. ) WHEN RELATED TO RP (as-extracted collateral like gas, timber to be cut, and fixtures): Also, (i) indication that it is to be filed in the real-property records, (ii) indication that it is to cover this kind of collateral, (iii) description of real property, and (iv) name of record owner, if debtor does not have an interest of record in the RP.

NOTES ON ADDRESSES AND IND. v. ORG INFO:
Should the filing office accept for filing a financing statement that lacks such information the financing statement is nevertheless effective. UCC §§ 9-338; 9-520(a), (c).

Under the 2010 amendments to Article 9, a financing statement cannot be rejected by a filing officer for failure to include the debtor’s type of organization, jurisdiction of organization, or the organization’s identification number.

NOTES ON FILING:
3. Person Entitled to File a Financing Statement

Although the secured party or a representative of the secured party usually files the financing statement, any person may do so. The signature of the filing party is not required. UCC § 9-509(a).

4. Filing Location

Generally, for collateral that may be perfected by filing, the financing statement must be filed with the secretary of state (“central filing”) of the state of the debtor’s location. UCC § 9-501(a)(2).

Question 37

Peculiar perfection methods

Answer 37

• SI in money: ONLY by possession
• SI in deposit account of letter-of-credit rights that are not a supporting obligation: ONLY by control.
• SI in accounts: ONLY by filing

Question 38

Security agreement as financing statement

Answer 38

A security agreement usually contains more information than is required of a financing statement. Consequently, a security agreement that contains the information necessary for a financing statement may be filed as a financing statement to perfect a security interest.

Question 39

Debtor name rules

Answer 39

1) Individual debtor

The 2010 amendments to Article 9 provide states with two alternatives for how an individual debtor’s name must appear on a financing statement. UCC § 9-503.

a) “Only-if” rule (Alternative A)

The financing statement must reflect the name on the debtor’s current (i.e., unexpired) driver’s license or state-issued identification card (issued by the state in which the financing agreement will be filed). If the debtor does not have a driver’s license, the filer must use either the individual name of the debtor (i.e., the debtor’s current legal name) or the debtor’s surname and first personal name. A majority of jurisdictions have adopted this approach.

b) “Safe harbor” rule (Alternative B)

Under the “safe harbor” rule, adopted by only a few jurisdictions, the financing statement may include the debtor’s “individual name” (which the UCC does not define), the name on the debtor’s driver’s license, or the debtor’s surname and first personal name.

2) Debtor’s trade name

Identification of the debtor solely by the debtor’s trade name is insufficient. By contrast, failure to include the debtor’s trade name does not affect the effectiveness of the financing statement when the debtor’s name is correctly provided. UCC § 9-503(b), (c).

3) Registered organization

When the debtor is a registered organization, the debtor’s name for purposes of the financing statement must be the name shown on public organic records. A public organic record includes the articles of incorporation or equivalent formation records filed to create a business entity, the record initially filed by a business trust, legislation that creates an organization, or a government-issued charter that forms an organization. UCC §§ 9-102(a)(68), 9-503(a)(1).

4) Name change by the debtor

If the debtor changes its name and the filed financing statement consequently becomes seriously misleading (i.e., the name on the financing statement does not meet the requirement of 9-503), then the secured party has four months in which to file an amendment to the financing statement reflecting the new name. Should the secured party fail to act within this four-month window, collateral acquired by the debtor after the four-month period is not covered by the financing statement. UCC § 9-507(c).

If a new debtor becomes bound by a security agreement, and the difference between the name of the original debtor and the name of the new debtor causes the financing statement to be seriously misleading, then the secured party has a similar four-month window in which to act. UCC §§ 9-508, 9-507(c).

5) Error in the debtor’s name

Because financing statements are indexed under the name of the debtor, a financing statement that fails to accurately contain the debtor’s name is seriously misleading and therefore not effective to perfect the security interest. However, when a standard search of the filing office records under the debtor’s correct name would disclose such a financing statement, the erroneous name does not make the financing statement seriously misleading. UCC § 9-506(b), (c).

6) Error in the secured party’s name

An error in the name of the secured party on a financing statement is usually not seriously misleading and does not affect the perfection of the security interest because the filing system is not geared to a search based on the secured party’s name. However, the secured party who files a financing statement with such an error may be subject to estoppel in favor of a holder of a conflicting claim in the collateral. UCC § 9-506, cmt. 2.

Question 40

Description of the collateral - filing statement

Answer 40

The financing statement must contain a description of the collateral that sufficiently indicates the collateral. This requirement can be satisfied by a description that meets the requirements for the security agreement. See § II.D. Security Agreement, supra. Alternatively, when the security interest covers all of the debtor’s assets or personal property, the financing statement, unlike the security agreement, can contain a broad statement to that effect (e.g., “this financing statement covers all of the debtor’s assets” or “this financing statement covers all of the debtor’s personal property”) without identifying each of the types of collateral covered.

1) After-acquired property and future advances

A financing statement may be effective to cover after-acquired property if such property falls within the collateral described, whether after-acquired property is mentioned as such in the financing statement or even contemplated by the parties at the time that the financing statement was authorized. Similar treatment is accorded to future advances. UCC § 9-502, cmt. 2.

2) Proceeds

A financing statement need not make specific reference to proceeds in order for a security interest in proceeds to be perfected. UCC §§ 9-315(c); 9-502, cmt. 2.

3) Error in the description of collateral

If there is an error with respect to the collateral covered by a financing statement, then the debtor may demand that the secured party prepare a termination statement with respect to the erroneous collateral and provide the debtor with the termination statement for the debtor to file; in the case of consumer goods, the secured party is the one who must file the termination statement. UCC § 9-513.

Question 41

Debtor’s authorization - filing statements

Answer 41

The debtor’s signature is not required on the financing statement. The debtor must authorize the filing of a financing statement for the statement to be effective. If the debtor has authenticated the security agreement, then this authentication constitutes an authorization to file the financing statement with respect to the collateral covered by the agreement (i.e., an “ipso facto authorization”). Alternatively, the debtor may specifically authorize the filing of the financing statement in an authenticated record. (Note: A debtor is presumed to consent to the filing of a financing statement when the secured party seeks to perfect, by filing, a security interest in any identifiable proceeds of collateral, whether or not the security agreement expressly covers proceeds.) UCC § 9-509(a,b).

A person who files a financing statement without the debtor’s authorization is liable for actual and statutory damages. UCC § 9-625(b).

Question 42

Peculiar filing location rules

Answer 42

Local filing (i.e., filing in the office for recording a mortgage on the related real property) is required for a security interest in (i) as-extracted collateral (i.e., oil, gas or other minerals subject to a security interest that is created by a debtor having an interest in the minerals before extracted and that attaches to the minerals as extracted), and (ii) timber to be cut. A security interest in goods that are or are to become fixtures may be perfected through either local filing or central filing but, to qualify as a fixture filing (see IV.D.3. Fixtures, infra), the financing statement must be filed locally. UCC § 9-501(a)(1).

For all collateral not related to real property, the financing statement is filed with the secretary of state (“central filing”) of the state of the debtor’s location.

1) Individual debtor

An individual is located in the state in which he maintains his principal residence. UCC § 9-307(b)(1).

2) An organization

An organization that is not a registered organization (e.g., a partnership) is located in the state in which it maintains its place of business and, if it has more than one place of business, at its chief executive office. UCC § 9-307(b)(2)(3).

3) A registered organization

A registered organization that is organized under the law of a state is located in that state (e.g., a corporation is located in the state in which it is incorporated). UCC § 9-307(e).

Question 43

Length of perfection

Answer 43

A financing statement is generally effective for five years. The financing statement is effective during this period, even though there is no obligation secured by the collateral and no commitment to make an advance, unless a termination statement has been filed.

Question 44

Effective date for perfection

Answer 44

A financing statement is generally effective upon its delivery to the filing office and tender of the filing fee if it contains the basic required information.

Question 45

Effect of the filing office’s refusal to accept a financing statement, effect of incorrect indexing

Answer 45

1) Justified refusal

When the filing office’s refusal to accept a financing statement for filing is justified, the financing statement is treated as having not been filed. Grounds upon which the filing office may justifiably refuse to accept a financing statement include the failure to tender the required fee, the failure to submit the financing statement by an authorized method or medium of communication, and the failure of the record to identify a debtor. UCC § 9-516(b).

2) Unjustified refusal

If the filing office’s refusal to accept a financing statement for filing is unjustified, then the financing statement is treated as having been filed. Such a financing statement is effective except with respect to a purchaser of the collateral who gives value in reasonable reliance upon the absence of the record from the files. UCC § 9-516(a), (d).

b. Effect of the filing office’s incorrect indexing of a financing statement

The effect of the filing office’s incorrect indexing of a financing statement does not affect the effectiveness of the filed financing statement.

Question 46

Continuation statement

Answer 46

The effect of a financing statement may be extended by filing a continuation statement, which extends the effect of the financing statement for another five-year period. The continuation statement must be filed within six months prior to the expiration of the financing statement and requires only the authorization of the secured party, not the debtor. If a continuation statement is not filed, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless the security interest is perfected otherwise. In addition, the security interest (unless otherwise perfected) is treated as never having been perfected as against a purchaser of the collateral for value.

Question 47

Amendments of FS

Answer 47

A person may amend a financing statement, such as by adding or deleting collateral covered by the statement. The amendment is generally effective as to the added item only from the date of the amendment. An amendment does not extend the period of effectiveness of the financing statement.

Question 48

Termination statements

Answer 48

The effectiveness of a financing statement may be terminated by the filing of a termination statement. UCC § 9-513(d).

CONSUMER GOODS: In the case of consumer goods, the secured party must file a termination statement within the earlier of (i) one month after there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value, or (ii) 20 days after the secured party receives an authenticated demand from a debtor.

NON-CONSUMER GOODS AND OTHER COLLATERAL: In the case of other collateral, the secured party must generally file a termination statement or send one to a debtor within 20 days after the secured party receives an authenticated demand from a debtor.

Question 49

Possession and Control - perfection

Answer 49

POSSESSION:
A secured party may perfect a security interest in most collateral by taking possession of the collateral. As a general rule, this security interest remains perfected only while the secured party retains possession. UCC § 9-313(a).

Except for money, collateral that may be perfected by possession may also be perfected by filing. Perfection by filing does not require the secured party to be also in possession of the collateral.

Goods, instruments, negotiable documents, money, and tangible chattel paper are the only types of collateral that may be perfected by possession. A security interest in money may be perfected only by possession. A certificated security may be perfected by the secured party taking delivery of the security.

CONTROL:
A secured party may perfect a security interest in specific collateral by taking control of the collateral. The security interest remains perfected only while the secured party retains control. UCC § 9-314(a).

1. Collateral Perfected by Control

Perfection by control of the collateral may only be achieved with respect to a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents. Gaining control for purposes of attachment also suffices for purposes of perfection. UCC §§ 9-312(a), 9-314(a).

2. Letter-of-Credit Rights

A security interest in letter-of-credit rights, if such rights are a supporting obligation for other collateral (e.g., chattel paper) is perfected by the perfection of the security interest in the other collateral. Otherwise, perfection of a security interest in letter-of-credit rights may be perfected only by control. UCC § 9-312(b)(2).

3. Deposit Account

A security interest in a deposit account can be perfected only by control. UCC § 9-312(b)(1). A secured party has control of a deposit account if:

i) The secured party is the bank with which the deposit account is maintained;
ii) The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
iii) The secured party becomes the bank’s customer with respect to the deposit account.

Question 50

Automatic Perfection, Indefinite

Answer 50

a. PMSI in consumer goods

A PMSI in consumer goods is automatically perfected upon attachment. A secured party does not need to file a financing statement or have possession to have a perfected PMSI in consumer goods. A PMSI in other types of goods (e.g., inventory, equipment) or in automobiles is not automatically perfected. UCC § 9-309(1).

b. Other automatic permanent perfection

Automatic permanent perfection also occurs in other situations, the most important of which for bar exam purposes are:

i) The casual or isolated assignment of accounts or payment intangibles that does not transfer a significant part of the assignor’s outstanding accounts or payment intangibles; and
ii) Sale of a payment intangible or promissory note.

Question 51

Temporary Perfection

Answer 51

a. New value

If new value is given under an authenticated security agreement, a security interest in certificated securities, negotiable documents, or instruments is automatically perfected for 20 days from the time it attaches without filing or the taking of possession. UCC § 9-312(e).

b. Delivery of collateral to the debtor

If the secured party makes the collateral available to the debtor for the purpose of selling or exchanging the collateral, then the security interest in the collateral remains temporarily perfected for 20 days. Collateral subject to this rule includes certificated securities, negotiable documents, instruments, and goods in the possession of a bailee and for which a negotiable document has not been issued. UCC § 9-312(f), (g).

c. Interstate movement

Temporary perfection may also arise when collateral or a debtor moves from one state to another.

1) Movement of the debtor

If a debtor moves to another state, a perfected security interest remains perfected for four months after the debtor’s change in location, unless perfection would have ceased earlier under the law of the debtor’s former state. UCC § 9-316(a), cmt. 2. This four-month grace period also applies to collateral the debtor acquires after the debtor moves, i.e., the filer has perfection for four months in collateral acquired post-move. UCC § 9-316(h).

2) Movement of collateral

If collateral is transferred to a person located in another state who becomes a debtor (i.e., takes the collateral subject to the security interest), then a perfected security interest generally remains perfected for one year after the transfer, unless perfection would have ceased earlier under the law of the former debtor’s state. UCC § 9-316(a), cmt. 2.

3) Possessory security interest—continuous perfection

A perfected possessory security interest in collateral generally remains continuously perfected, despite the movement of the collateral to another state, when the security interest is perfected under the laws of the state to which the collateral is moved. UCC § 9-316(c).

Question 52

Effect of lapse of perfection

Answer 52

If a security interest is not perfected in the second state before the expiration of the applicable temporary perfection period, then the security interest generally ceases to be perfected prospectively (i.e., upon the expiration of the temporary perfection period). However, with respect to a purchaser for value of the collateral after the removal, such a security interest is deemed never to have been perfected. UCC § 9-316(b). A “purchaser” includes a person who takes a security interest in the collateral as well as anyone who acquires an interest in the collateral in a voluntary transaction.

Question 53

Proceeds perfection

Answer 53

• SI in proceeds enjoys temporary perfection.

RULE: When SI in original collateral is perfected, the SI in proceeds is temporarily perfected for 20 days from attachment.

INDEFINITE: May continue to be perfected after 20 days when -

1. ) If the original financing statement is broad enough to encompass the proceeds or the secured party takes the necessary steps to amend the financing statement to cover the proceeds within the 20-day period, the security interest in the proceeds continues to be perfected.
2. ) 2) Cash proceeds

If the proceeds are identifiable cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely, even though the security interest in the original collateral subsequently ceases to be perfected. The identification of cash proceeds is left to common law. UCC § 9-315(d)(2), incl. cmt. 3. Note that cash proceeds include more than just money. They also include checks, deposit accounts, and the like.

3) Same office

A perfected security interest in proceeds may also continue indefinitely when:

i) A filed financing statement covers the original collateral;
ii) The proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
iii) The proceeds are not acquired with cash proceeds.

However, under this option, if the original filing ceases to be effective after the 20-day period, then the security interest in proceeds also ceases to be automatically perfected.

Question 54

vehicles rules

Answer 54

When property is subject to a special statute in lieu of Article 9’s rules on perfection, the statute dictates the manner of perfection. The most prominent of such property subject to separate legislation is a motor vehicle that is subject to a certificate-of-title statute. This type of statute requires that the security interest in a vehicle be noted on the certificate of title or a registry maintained by a state agency (e.g., Department of Motor Vehicles) in order to perfect the security interest. Neither the filing of a financing statement nor possession of the vehicle or the certificate of title is generally sufficient to perfect the security interest, and the rule granting automatic perfection to a purchase money security interest in consumer goods does not apply.

There is a limited exception for dealers under which the Article 9 rules for perfection do apply. When motor vehicles are held as inventory for sale or lease by a person, or leased by that person as lessor, and that person is in the business of sellinggoodsof that kind, such as a car dealership, perfection can be done by filing under ordinary Code rules. Other property, such as civil aircraft, is subject to federal statutory rules for perfection.

Question 55

types of creditors

Answer 55

1. General Creditor (Unsecured)

A general creditor is one who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question (i.e., the collateral). A general creditor has no interest to assert under Article 9; this type of creditor does not have a claim to particular property owned by the debtor.

A secured party will always prevail over a general creditor with respect to the debtor’s collateral. UCC §9-201.

2. Judicial Lien Creditor

A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law.

A judicial lien creditor takes the collateral subject to an existing perfected security interest but generally has priority over an unperfected security interest. However, even if the security interest is unperfected at the time the judicial lien comes into existence (i.e., the value necessary for attachment and perfection of the security interest has not yet been given), the secured party will have priority if the debtor has authenticated a security agreement listing the collateral and a financing statement has been filed (assuming eventual attachment and perfection takes place). Otherwise, if at the time that the judicial lien is created a security interest does not exist, the judicial lien generally has priority over a subsequently created security interest. UCC §§ 9-102(52)(a), 9-317(a)(2).

EXCEPTION: PMSIs - If the secured party has a PMSI that is perfected before or within 20 days after the debtor receives possession of the collateral, then the security interest takes priority over the rights of a creditor that arose between the time the security interest attached and the time of filing. A secured party with a PMSI will prevail over any creditor that obtains a lien within that 20-day period. UCC § 9-317(e).

RULE FOR ADVANCES: A security interest that secures an advance is subordinate to the rights of a person who becomes a lien creditor when the advance is made more than 45 days after the person becomes a lien creditor, unless the advance is made without knowledge of the lien or made pursuant to a commitment entered into without knowledge of the lien. Note that when the advance is made within the 45-day time period, knowledge of the lien does not prevent the holder of a security interest from having priority over the lien creditor.

Question 56

Statutory or Common-Law Lien Creditor

Answer 56

A statutory or common-law lien creditor is a creditor who obtains a possessory lien on the property of another by operation of a statute or common-law rule. Unlike an Article 9 security interest, these are nonconsensual liens. A statutory or common-law lien has priority over a security interest, including a perfected security interest, in goods, provided:

i) The effectiveness of the lien depends on the lien holder’s possession of the goods; and
ii) The lien secures payment or performance of an obligation for services or materials furnished with respect to goods by the lien holder in the ordinary course of that person’s business (e.g., supplier’s lien, mechanic’s lien).

When the lien is statutory and the statute creating the lien expressly provides a different priority rule, such as subordination of the possessory lien to security interests, that rule governs.

Question 57

Priority Rules - Transferees

Answer 57

a. Transferee versus secured party with a security interest

If the collateral is transferred and transferee of the collateral is not a buyer, the security interest generally continues in the collateral unless the secured party authorized the transfer free of the security interest. UCC § 9-315(a)(1).

b. Buyer versus secured party with an unperfected security interest

A buyer, other than a secured party, of collateral that is goods, tangible chattel paper, tangible documents or a security certificate takes free of an unperfected security interest in the same collateral if the buyer:

i) Gives value; and
ii) Receives delivery of the collateral;
iii) Without knowledge of the existing security interest.

UCC § 9-317(b).

If the collateral is intangible collateral, such as accounts, or a general intangible, such as a copyright, then there is no requirement that the buyer receive delivery of the item. UCC § 9-317(b), (d).

c. Buyer versus secured party with a perfected security interest

A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest. UCC §§ 9-315(a); 9-317(b), (d); 9-320, cmt. 6.

2. Buyers in the Ordinary Course of Business (BOCB)

A buyer in the ordinary course of business (BOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who:

i) Buys goods (other than farm products);
ii) In the ordinary course;
iii) From a sellerwho is in the business of selling goods of that kind;
iv) In good faith; and
v) Without knowledge that the sale violates the rights of another in the same goods.

UCC §§ 1-201(9), 9-320.A buyer does not receive BOCB status if the merchant is a pawnbroker. UCC § 1-209, incl. cmt. 9.

a. Knowledge requirement

The requirement that a BOCB take without knowledge means actual knowledge that the sale is in violation of another party’s rights. Mere notice or reason to know is insufficient. UCC §§ 1-201(25), 9-320(a), incl. cmt. 3.

b. New value

The buyer can purchase goods for cash, on credit, or in exchange for other goods, but does not achieve BOCB status if he acquires the goods in total or partial satisfaction of a money debt.

c. Seller of goods

This exception does not apply if the seller is a person engaged in farming operations and the buyer purchases farm products from the seller. UCC § 9-320(a).

d. Subsequent purchaser

If a buyer obtains goods under the BOCB exception free of the security interest in the goods created by the buyer’s seller, the buyer may, in turn, sell the goods to a second buyer who also takes the goods free of that security interest. UCC §2-403(1). The second buyer is not required to qualify as a BOCB.

3. Consumer Buyer

A consumer buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase, the secured party filed a financing statement covering the goods. A consumer buyer is a person who:

i) Buys consumer goods for value;
ii) For his own personal, family, or household use;
iii) From a consumer seller; and
iv) Without knowledge of the security interest.

This is often referred to as the “garage sale” rule, because that type of sale would qualify. UCC § 9-320(b).

a. Value

Unlike the BOCB exception, the “garage sale” exception merely requires a buyer to give value, rather than new value. Consequently, acquisition of the consumer goods in total or partial satisfaction of a money debt constitutes giving value. UCC § 9-320(b).

b. PMSI in consumer goods

A PMSI in consumer goods is automatically perfected. Filing is not required. If a PMSI in consumer goods is not filed, and the consumer buyer does not know of the PMSI, then he will take free of the security interest. If the party holding the PMSI in consumer goods does in fact file, then his security interest will be good even against a consumer buyer. UCC § 9-320.

4. Purchasers of Chattel Paper

The sale of chattel paper can create a security interest in the purchaser. The purchaser of chattel paper has priority over the interest of a secured party who claims the chattel paper merely as proceeds of inventory subject to a security interest provided that:

i) The purchaser gives new value and takes possession or obtains control of the chattel paper;
ii) The purchase is made in good faith and in the ordinary course of the purchaser’s business; and
iii) The chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser.

UCC § 9-330(a).

“New value” means that the purchaser must give new consideration, such as cash or credit, to the transferor. Therefore, parties who take the chattel paper as payment for a debt, or as proceeds of other collateral, are excluded.

The purchaser of chattel paper has priority over all other types of security interests in chattel paper (i.e., a security interest in chattel paper that is claimed other than merely as proceeds of inventory subject to a security interest) provided the same conditions are met except that, in lieu of the lack of an indication of assignment (item iii above), the purchase must be made without knowledge that the purchase violates the rights of the secured party. UCC § 9-330.

5. Buyer of a Negotiable Instrument or Document

The buyer of a negotiable instrument who qualifies as a holder in due course under Article 3, the buyer of a negotiable document of title that has been duly negotiated under Article 7, and a protected purchaser of a security under Article 8 may take free of a perfected security interest in the instrument, document of title, or security. UCC § 9-331. In addition, a purchaser of an instrument has priority over a security interest 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 secured party. UCC § 9-330(d).

6. Buyer Not in the Ordinary Course of Business—Future Advances

A buyer of goods not in the ordinary course takes free of a security interest to the extent that it secures an advance made after the earlier of:

i) The time the secured party acquires knowledge of the buyer’s purchase; or
ii) 45 days after purchase.

The buyer takes subject to the security interest if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchases and before the expiration of the 45-day period. UCC § 9-323(d, e).

7. Transferee of Money or Funds

A transferee of money usually takes the money free of a security interest. Similarly, a transferee of funds from a bank deposit account usually takes the funds free of a security interest in the deposit account. Note that a debtor is not treated as a transferee. UCC § 9-332.

A transferee is not entitled to this favorable treatment if the transferee acts in collusion with the debtor in violating the rights of the secured party. UCC § 9-332, incl. cmt. 2.

8. Article 2 Security Interests

When a buyer or seller has a security interest arising under Article 2, the interest has priority over a conflicting security interest created by the debtor under Article 9, as long as the buyer or seller retains possession of the goods. UCC § 9-110.

Note that an Article 2 security interest is perfected without filing. UCC § 9-110(2).

9. “Clean” Certificate of Title

If a certificate of title issued by one state fails to indicate that goods (e.g., an automobile) are or may be subject to a security interest perfected under the laws of a second state (i.e., a “clean” certificate of title), then the buyer of the goods can take free of the security interest, provided the buyer receives delivery of the goods after issuance of the certificate without knowledge of the prior security interest. Similarly, the holder of a conflicting security interest has priority over such an out-of-state security interest, provided the holder’s interest attaches and is perfected after the issuance of the certificate and the holder does not have knowledge of the out-of-state security interest. UCC § 9-337.

Question 58

Priorities among secured parties

Answer 58

1. General Rules
   a. Perfected security interest versus perfected security interest

When there are two or more perfected secured parties with rights in the same collateral, the first to file or perfect its security interest has priority. In other words, if both security interests are perfected, then priority dates from the time of filing or perfection, whichever occurs first. UCC § 9-322. This means that if both perfected by filing, the first party to file wins whether or not perfection was actually complete when the filing took place.

1) Lapse

When there has been filing or perfection by a secured party, a lapse (i.e., a subsequent period in which there is neither filing nor perfection by that secured party) restarts the clock for that secured party; the date of perfection for that secured party is the earlier of the date of filing or perfection that occurs after the lapse. UCC § 9-322(a)(1).

b. Perfected security interest versus unperfected security interest

If only one security interest is perfected and the other is not, then the perfected interest has priority over the unperfected one.

c. Unperfected security interest versus unperfected security interest

If neither interest is perfected, then the “first in time, first in right” rule applies with the critical time being the time of attachment. UCC § 9-322(a).

1) Knowledge of other security interests

A secured party’s knowledge of another security interest in the same collateral does not affect the secured party’s priority. UCC § 9-322(a)(1), cmt. 4.

2. PMSI Priority Rules

Preference is generally given to a PMSI over a non-PMSI security interest.

a. PMSI in goods other than inventory or livestock

A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if they were previously perfected, if the security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter. UCC § 9-324.

Knowledge by the purchase-money secured party of the conflicting prior security interest does not prevent the priority of the PMSI over the earlier perfected security interest. UCC § 9-324(a), incl. cmt. 3.

Since a security interest in consumer goods is automatically perfected, a PMSI in consumer goods prevails over all other security interests in the collateral without the secured party having to take action to perfect its security interest.

b. PMSI in inventory or livestock

A PMSI in inventory or livestock prevails over all other security interests in the same collateral, even if they were previously perfected, if:

i) The PMSI is perfected by the time the debtor receives possession of the collateral; and
ii) The purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral. The notification must state that the purchase-money secured party has or expects to have a PMSI in the debtor’s inventory or livestock and it must include a description.

UCC § 9-324(d).

Notification is required only when the previously perfected security interest has been perfected by filing. Notification is effective for a renewable period of five years for inventory and six months for livestock. UCC § 9-324(b)-(e), incl. cmt. 5.

If Supplier perfects his security interest by filing before he gives Debtor possession of the inventory and notifies Bank in an authenticated record of his security interest, then Supplier will prevail over Bank in the new inventory that Debtor purchased from Supplier.

c. PMSI versus PMSI
1) General rule

If there are two or more competing PMSIs, then the first-to-file-or-perfect rule generally governs priority. UCC §§ 9-324(g)(2); 9-322(a).

2) A lender with a PMSI versus a seller with a PMSI

If there are two competing PMSIs and one PMSI secures the price of the collateral for the seller of the collateral while the other PMSI secures loans enabling the purchase of the collateral, then the PMSI taken by the seller has priority over the PMSI taken by the lender. UCC § 9-324(g)(1), incl. cmt. 13.

d. Proceeds from a PMSI in goods

The priority of a PMSI in goods generally extends to the identifiable proceeds of the original collateral, but only as to proceeds in which the security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter. UCC § 9-324(a), incl. cmt. 8.

e. Proceeds from a PMSI in inventory

The priority of a PMSI in inventory extends to identifiable cash proceeds received on or before the delivery of the inventory to a buyer if:

i) The PMSI is perfected when the debtor receives possession of the inventory; and
ii) The purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest, revealing the secured party’s intent to acquire a PMSI in the inventory of the debtor and describing the inventory.

The priority of a PMSI in inventory generally does not extend to proceeds consisting of accounts or chattel paper. The priority can, however, extend to proceeds consisting of either chattel paper (as well as chattel paper proceeds) or instruments if the purchase-money secured party otherwise satisfies the requirements for securing a priority (e.g., takes possession of the chattel paper or instruments). UCC §§ 9-324(b); 9-330.

f. Proceeds from a PMSI in livestock

The rule for proceeds from a PMSI in inventory generally applies to proceeds from livestock in which a PMSI is held. In addition, priority extends to identifiable products in their unmanufactured states (e.g., raw milk) in which a security interest is perfected.

3. Fixtures
   a. Security interest in fixtures versus real property interest

Generally, a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor. However, a security interest in fixtures has priority over an interest in the real property with which the fixtures are associated if the security interest in fixtures is perfected by a fixture filing before the real property interest is recorded.

A fixture filing is the filing of a financing statement covering goods that are or are to become fixtures. The financing statement must be filed in the office designated for the filing or recording of a mortgage on the related real property. The fixture filing must state that it covers fixtures, provide a sufficient description of the real property to which the fixture is related, indicate that it is to be filed in the real property records, and provide the name of a record owner if the debtor does not have an interest of record in the real property. UCC §§ 9-102(40),9-334(c), (e)(1), 9-501, 9-502(b).

b. Conflicts with judicial liens

A security interest in fixtures has priority over a subsequent judicial lien on the real property with which the fixtures are associated if the security interest in fixtures was perfected by any method. The method of perfection is not limited to a fixture filing; the judicial creditor who seeks a lien is not a reliance creditor who has searched the real property records. UCC § 9-334(e)(3).

c. Special rule for a PMSI in fixtures

A PMSI in fixtures has priority over a prior interest in the real property with which the fixtures are associated when:

i) The debtor has an interest of record in the real property (e.g., is an owner) or is in possession of the real property (e.g., is a lessee); and
ii) The security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

UCC § 9-334(d).

d. Construction mortgage

A construction mortgage (i.e., a mortgage that secures an obligation incurred for the construction of an improvement on land, including the cost of acquiring the land, and that indicates it is a construction mortgage in the real property records) has priority over a subsequent security interest in a fixture, including a PMSI in a fixture. The construction mortgage must be recorded before the goods become fixtures, and it covers only goods that become fixtures before completion of the construction. UCC § 9-334(h).

4. Proceeds

Generally, the basic rules (e.g., first-to-file-or-perfect) govern priority if there are conflicting security interests and at least one of those interests is claimed as proceeds. UCC § 9-322(a), incl. cmt. 6. Moreover, the filing or perfection date for the original collateral is treated as the filing or perfection date for the proceeds. UCC § 9-322(b)(1).

This rule controls, even when the security interest in inventory is a PMSI, because thesuper-priority of a PMSI in inventory does not extend to proceeds that are not cash.

a. Exceptions
1) Proceeds of non-filing collateral

If the collateral is of a type for which perfection may be achieved by a method other than filing and for which secured parties who so perfect generally do not expect or need to conduct a filing search (e.g., chattel paper, deposit accounts, negotiable documents, instruments, investment properties, letter-of-credit rights), then priority in the original collateral generally continues in the proceeds, provided that:

i) The security interest in the proceeds is perfected; and
ii) The proceeds are cash proceeds or proceeds of the same type as the original collateral.

UCC § 9-322(c)(2), incl. cmt. 8.

2) Filing collateral as proceeds of non-filing collateral

If the proceeds of non-filing collateral are filing collateral (i.e., goods, accounts, commercial tort claims, general and payment intangibles, nonnegotiable documents) and the security interest in the non-filing collateral has been perfected by a method other than filing (e.g., control or possession), then priority among conflicting perfected interests in the filing collateral is determined by the time of filing of a financing statement that covers the collateral (i.e., the first-to-file rule). UCC § 9-322(d).

5. Future Advances
   a. General rule

In determining the priority of a security interest that secures a future advance when there is a conflicting security interest in the same collateral, the first-to-file-or-perfect rule generally applies. Consequently, the time that an advance is made is usually not determinative of priority unless a financing statement was not filed with respect to the security interest and the advance, as value given, constitutes the final step for attachment and perfection of that interest. UCC §9-323, incl. cmt. 3.

b. Exception—Time of perfection determinative

Perfection of a security interest dates from the time that an advance is made to the extent that the security interest secures an advance that:

i) Is made while the security is only automatically or temporarily perfected; and
ii) Is not made pursuant to a commitment entered into before or while the security interest is perfected by any other method of perfection. The advance is made “pursuant to a commitment” when the secured party is obligated to make the advance.

UCC §§ 9-102(a)(68); 9-323(a).

6. Accessions

A security interest in an accession is usually subject to general priority rules. Such a security interest, however, is subordinate to a security interest in the whole collateral that is perfected under a certificate-of-title statute. UCC § 9-335(c), (d).

Example: A security interest in a car radio is subordinate to a security interest in the car perfected by notation of the security interest on the title to the car.

After default, a secured party may remove an accession from other goods if the security interest in the accession has priority over the claims of every person having an interest in the whole. A secured party that removes an accession from other goods must reimburse the holder of a security interest or the owner of the whole or other goods for physical injury to the whole or other goods, apart for the diminution in value of the whole or other goods caused by the absence of the removed accession or by any necessity for replacing it. UCC § 9-335(e), (f).

7. Commingled Goods

A security interest in collateral that is perfected before the collateral becomes commingled goods has priority over an unperfected security interest at the time that the collateral becomes commingled. If more than one security interest is perfected before the collateral becomes commingled goods, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods. UCC § 9-336(f). For purposes of priority, it does not matter which was the first security interest to attached or be perfected.

8. Investment Property, Deposit Accounts, Letter of Credit Rights

A security interest held by a secured party having control of investment property, a deposit account, or letter of credit rightshas priority over a security interest held by a secured party that does not have control of the collateral. UCC §§ 9-327—329.

Question 59

Default Rules

Answer 59

“Default” is not defined by Article 9. Instead, the parties to a security agreement are free to agree to the circumstances that give rise to a default, such as the debtor’s transfer of the collateral without authorization. UCC § 9-601, cmt. 3. In the absence of such an agreement, the only event of default will be the failure of the obligor to make timely payments to the secured party.

Once a default has occurred, the secured party may:

i) Seek possession of the collateral and, in order to satisfy the obligor’s outstanding obligation, either:
a) Sell the collateral; or
b) Retain it in full or partial satisfaction of the obligation;
ii) Initiate a judicial action to obtain a judgment based on that obligation; or
iii) Subject to statutory limitations, pursue any course of action to which the debtor and obligor have agreed.

UCC § 9-601(a).

1. Cumulative Remedies, Simultaneous Exercise

The secured party may pursue any or all of these remedies and may do so simultaneously, provided the secured party acts in good faith. UCC § 9-601(c), incl. cmt. 5.

2. Ignoring Default

The secured party may choose to ignore a default, but such action may constitute a waiver of the secured party’s rights that would otherwise arise upon the default. UCC §§ 2-209(4), (5); 9-601, cmt. 3.

3. Security Agreement Covering Fixtures

When a security agreement covers fixtures, a secured party may proceed as to the fixtures in accord with the rights and remedies with respect to the real property. UCC § 9-604(b), incl. cmt. 3.

When a secured party’s security interest has priority over owners and individuals who encumber real property, that secured party may remove the fixture from the real property. With respect to an owner or encumbrancer who is not the debtor, the secured party is liable for the cost of repairing any physical object damaged by the removal but not for any reduction in the value of the real property due to the removal. UCC § 9-604.

4. Security Interest in Accession

After default, a secured party with a security interest in an accession that has priority over the claims of anyone having an interest in the whole may remove the accession from the other goods. UCC § 9-335.

5. Secured Party and Account Debtors

Upon default, a secured party may notify an account debtor (i.e., a person obligated on an account, chattel paper or general intangible, but not a person obligated on a negotiable instrument) to make payment to the secured party. In addition, the secured party may exercise any rights of the debtor with respect to the obligation of the account debtor. In a commercially reasonable manner, the secured party may collect from the account debtor, and, if the account debtor does not pay, the secured party may enforce the obligation of the account debtor. UCC § 9-607.

Question 60

Possession of collateral upon default

Answer 60

After default, a secured party is entitled to take possession of the collateral. Unless the security agreement provides otherwise, a secured party is not required to give notice of default, nor is he required to give notice of his intent to take possession of the collateral. UCC § 9-609.

1. Limitation on Means of Possession—No Breach of the Peace

A secured party is required to use judicial process (e.g., a replevin action) to obtain possession of the collateral unless possession can be obtained without breach of the peace. “Breach of the peace” is not defined by Article 9, but it is left up to court interpretation. Courts are split on whether trickery constitutes breach of the peace.

a. Criminal act

Anything that would lead to the commission of a crime typically constitutes breach of the peace. An exception generally is made for trespass with respect to the collateral itself (e.g., entering a car) or the debtor’s land (e.g., seizing a car from the debtor’s driveway), but it does extend to trespass of the debtor’s residence or garage. UCC § 9-609(b).

b. Debtor’s permission or objection

Although a secured party generally can seize collateral without breaching the peace after obtaining the debtor’s permission to take the collateral, a seizure based on permission gained under color of law (e.g., participation of a police officer without judicial authorization) or through the use of, or the threat to use, force may be a breach of the peace. If the debtor physically objects to the seizure of collateral, then that seizure constitutes a breach of the peace; courts are divided over whether mere verbal objections constitute a breach of the peace.

Example: B fails to make payments on the car he purchased from A. Although A cannot use any methods to threaten or force B to give up the car, A may take the car from a public street or in front of B’s house without his knowledge. A may not, however, breach the peace during the repossession.

2. Rendering Equipment Unusable

As an alternative to securing possession of the collateral after a default, a secured party may render equipment unusable. This is usually followed by the disposal (e.g., sale) of the collateral on the debtor’s premises. UCC §9-609.

Disposition of Collateral

After default, a secured party may sell, lease, license, or otherwise dispose of all or any of the collateral. Within limits, the secured party may keep the collateral (strict foreclosure) in full or partial satisfaction of the obligation. UCC §§ 9-610(a), 9-620.

1. Commercially Reasonable Standard for Disposition

All aspects of the disposition of collateral (method, manner, time, and place) must be conducted in a commercially reasonable manner. A disposition is commercially reasonable when conducted:

i) In the usual manner on a recognized market, such as a stock exchange, that has standardized price quotations for fungible goods;
ii) At the price current in any recognized market at the time of the disposition; or
iii) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

UCC §§ 9-610(b), (c); 9-627(b), incl. cmt. 4.

2. Price

Article 9 does not mandate a specific price that must be obtained by the secured party in disposing of the collateral. The mere fact that a higher price could have been obtained by disposing of the collateral in a different manner or at a different time does not establish that the disposition was not commercially reasonable. A low price may, however, trigger careful scrutiny by the court of the disposition and its reasonableness. UCC § 9-627(a), incl. cmts. 2, 10.

3. Time of Disposition

Likewise, Article 9 does not mandate a specific time in which a disposition must occur. Instead, circumstances may dictate that the collateral is held due to the collapse of a market for the collateral, or the collateral that is comprised of a large number of a specific items be sold over time in parcels rather than immediately in bulk in order not to depress the market. UCC § 9-610(b), cmt. 3.

4. Type of Disposition

A secured party may dispose of the collateral publicly or privately. A secured party may purchase the collateral at a public sale, but she cannot do so at a private sale unless the collateral is of a kind that is customarily sold on a recognized market (e.g., the New York Stock Exchange) or the subject of widely distributed standard price quotations. A secured party cannot purchase the collateral at a private sale when the prices are individually negotiated or when items are not fungible in a recognized market. UCC § 9-610(c), incl. cmts. 7, 9.

5. Notice of Disposition

A secured party is generally required to send an authenticated notification of disposition. The notification is required to be reasonable as to its content, the manner in which it is sent, and its timeliness. UCC § 9-611(b), incl. cmt. 2.

a. Persons entitled to notice

Notification of disposition is required to be sent to (i) the debtor, (ii) any secondary obligor, and, in the case of non-consumer goods, (iii) any other secured party or lien holder who held a security interest that was perfected by filing or pursuant to a statute, and (iv) any other party from whom the secured party has received authenticated notice of a claim or interest in the collateral. UCC § 9-611(a), (c).

b. Contents of notice

Except in a consumer goods transaction, the contents of a notification of disposition are sufficient when the notification contains:

i) A description of the debtor and the secured party;
ii) A description of the collateral;
iii) A statement as to the method of disposition;
iv) A statement that the debtor is entitled to an accounting of the unpaid indebtedness and the charge, if any, for providing that accounting; and
v) A statement of the time and place of a public disposition or the time after which a private disposition is to be made. UCC § 9-613.
c. Additional information for a consumer goods transaction

In addition to the above requirements for a non-consumer goods transaction, proper notice in a consumer goods transaction must also include:

i) A description of any liability for a deficiency of the person to whom the notification is sent;
ii) The telephone number from which the redemption amount is available; and
iii) The telephone number or mailing address from which additional information concerning the disposition and secured obligation is available.

UCC § 9-614, incl. cmt. 1.

d. Timeliness of notice

In general, the test for the timeliness of a notification of a disposition is reasonableness. The notification should be sent sufficiently far in advance of the disposition to allow the notified party to act on the notification. UCC § 9-612(a), incl. cmt. 2.

In a transaction other than a consumer transaction, when a secured party sends a notification of disposition after default and at least 10 days before the earliest time for disposition set forth in the notification, the timeliness of the notice is reasonable, provided that the notice is sent in a commercially reasonable manner. UCC § 9-612(b), incl. cmt. 3.

e. Exceptions to notification

A secured party is not required to send a notice of disposition when:

i) The collateral is perishable or threatens to decline speedily in value;
ii) The collateral is of a type customarily sold on a recognized market; or
iii) The persons entitled to notification waive the right to notification.

UCC §§ 9-611(d); 624(a).

Waiver of the right to notification (item iii above) can be done only after a default has occurred. Such a waiver cannot be oral but must be manifested by an authenticated agreement. UCC § 9-624(a).

6. Application of the Proceeds From a Disposition a. Cash proceeds

A secured party must apply, or pay over for application, cash proceeds of a disposition in the following order:

i) Reasonable expenses for collection and enforcement, including reasonable attorney’s fees and other legal expenses to the extent permitted by agreement and not prohibited by law; then
ii) Satisfaction of obligations secured by the security interest or agricultural lien; then
iii) Satisfaction of any subordinate security interests, provided that the junior secured party made an authenticated demand for proceeds before distribution of the proceeds is complete; then
iv) The remainder of the proceeds to the debtor.

UCC §§ 9-608(a)(1); 9-615(a).

b. Non-cash proceeds

A secured party must apply or pay over for application non-cash proceeds of a disposition only if the failure to do so would be commercially unreasonable. If the secured party does apply or pay over for such proceeds, then he must do so in a commercially reasonable manner. UCC §§ 9-608(a)(3); 9-615(c).

c. Treatment of a surplus or deficiency
1) Surplus

If, after the required payments and applications of proceeds have been made, there is a surplus, the secured party generally must pay the surplus to the debtor. UCC §§ 9-608(a)(4); 9-615(d)(1).

2) Deficiency

If, after the required payments and applications of proceeds have been made, there is a deficiency, then the obligor generally is liable for the deficiency. UCC §§ 9-608(a)(4); 9-615(d)(2).

3) Sales of accounts, chattel paper, payment intangibles, or promissory notes

When the underlying transaction is the sale of accounts, chattel paper, payment intangibles, or promissory notes, then the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency. UCC §§ 9-608(b), 9-615(e).

4) “Low price” disposition to a secured party

When a disposition of the collateral is made to a secured party, a person related to the secured party, or a secondary obligor, the secured party may lack the incentive to maximize the proceeds of the disposition. If the amount of the proceeds in such a disposition is significantly below the range of proceeds that a disposition to someone other than the secured party, person related to the secured party, or a secondary obligor would have brought, then the amount of the deficiency may be adjusted to reflect the higher price that would have been realized from the other person. UCC §§9-102(63), (64); 9-615(f), incl. cmt. 6.

5) Notice in a consumer goods transaction

In a consumer goods transaction, a secured party must send an explanatory notice to the debtor detailing the deficiency and/or surplus and the basis on which it was calculated. This explanation, which must be in writing, can be demanded by the debtor or consumer obligor, in which case the secured party has 14 days after receipt of the demand in which to send the explanation or, in the case of a deficiency, a waiver of the secured party’s right to the deficiency. A secured party who fails to send such a notice may be liable for any loss caused, plus $500. UCC §§ 9-616; 9-625(e).

7. Transferee’s Rights

A sale of the collateral gives the buyer at the sale all of the debtor’s rights in the collateral. If the transferee/buyer acts in good faith (i.e., honesty in fact and the observance of reasonable commercial standards of fair dealing), then the disposition discharges the security interest being foreclosed and any subordinate security interests and liens, even though the secured party fails to comply with Article 9. However, the transferee takes the collateral subject to any security interests that were senior to the security interest foreclosed. UCC §§ 1-201(20), 9-617, incl. cmts. 2, 3.

8. Warranties

A disposition of collateral includes warranties of title, possession, and quiet enjoyment that generally accompany the disposition of property of the same type as the collateral. These warranties may be disclaimed or modified. UCC § 9-610(d), (e), incl. cmt. 11.

Acceptance of Collateral (Strict Foreclosure)

In lieu of disposing of the collateral, the secured party may usually accept the collateral in full or partial satisfaction of the obligation secured by the collateral. UCC §§ 9-620; 9-622.

1. Full Satisfaction of an Obligation

A secured party may accept collateral in full satisfaction of an obligation secured by the collateral when:

i) The debtor consents, after default, to the acceptance in an authenticated record; or
ii) The debtor does not object to the secured party’s proposal to accept the collateral within 20 days after the proposal is sent.

UCC § 9-620(a)–(c).

2. Partial Satisfaction of an Obligation

A secured party may accept collateral in partial satisfaction of an obligation secured by the collateral if the debtor consents, after default, to the acceptance in an authenticated record. UCC § 9-620(a)–(c).

3. Notification of Parties Other Than the Debtor

In addition to the debtor, a secured party wishing to accept collateral in full or partial satisfaction of the obligation must send his proposal to:

i) Any secured party or lien holder who, 10 days before the debtor consented to the acceptance, held a security interest that was perfected by filing or by compliance with a statute, treaty or regulation; and
ii) Any person from whom the secured party received, before the debtor consented to the acceptance, an authenticated notification of a claim of an interest in the collateral.

A secured party wishing to accept collateral in partial satisfaction must also send its proposal to any secondary obligor. An objection to the acceptance by a person to whom notification was sent is effective if it is received by the secured party within 20 days from the date that the notification was sent to that party. UCC § 9-620(a), (d), incl. cmt. 8.

4. Special Rules for Consumer Debtors
   a. Denial of partial strict foreclose in a consumer transaction

In a consumer transaction, a secured party can accept the collateral only in full satisfaction of the obligation; an acceptance in partial satisfaction of the obligation is not allowed. Any attempted acceptance in partial satisfaction is void. UCC § 9-620(g), incl. cmt. 12.

b. Denial of strict foreclosure for consumer goods—60% rule

If the goods are consumer goods in the possession of the secured party, and the debtor has paid at least 60% of the cash price in the case of a PMSI, or at least 60% of the obligation secured in a non-PMSI case, then the secured party cannot keep the goods in satisfaction of the debt; they must be sold. A debtor may waive this right to force a sale of the collateral, provided it is done after default in an authenticated agreement. UCC §§ 9-620(e), (f), incl. cmt. 12; 9-624(b).

Redemption of Collateral

A debtor, secondary obligor, or any other secured party has the right to redeem collateral. UCC § 9-623.

1. Method of Redemption

To effect a redemption, the redeemer must fulfill all obligations secured by the collateral (e.g., payment of monetary obligations currently due, including obligations resulting from the default) and reasonable expenses, including attorney’s fees, incurred by the secured party in retaking the collateral or preparing for its disposition. UCC § 9-623(b). If the security agreement contains an acceleration clause, then the redeemer must tender the entire balance of the secured obligation. UCC § 9-623, cmt. 2.

2. Time Limitation on Redemption

Redemption cannot occur if the secured party has disposed of the collateral or entered into a contract for its disposition, accepted the collateral in full or partial satisfaction of the obligation secured by the collateral, or collected on the collateral. UCC § 9-623(c).

3. Waiver of Right of Redemption

The security agreement may not contain a waiver of the right to redemption by the debtor or secondary obligor; any such attempted waiver is void. After default, a debtor or secondary obligor may waive the right of redemption in an authenticated agreement. UCC § 9-624(c).

Remedies for Secured Party’s Failure to Comply

1. Basic Remedies a. Injunctive relief

When a secured party has not proceeded in accordance with Article 9 (e.g., has failed to notify the debtor as to a disposition of the collateral), the debtor or other secured party may seek injunctive relief from a court to compel or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions. UCC § 9-625(a), incl. cmt. 2.

b. Actual damages

If a secured party fails to comply with Article 9, then the debtor or other secured party may seek damages for any loss caused by the secured party’s failure. This loss may include losses resulting from the debtor’s inability to obtain alternative financing or from the increased cost of obtaining such financing. UCC § 9-625(b), incl. cmt. 3.

The debtor may seek consequential damages, but she is subject to the duty to mitigate damages.

c. Minimum statutory damages for consumer goods

If the collateral is consumer goods and a secured party fails to comply with the default rules of Article 9, then a debtor or secondary obligor may recover an amount not less than the credit service charge, plus 10% of the principal amount of the obligation or the time-price differential, plus 10% of the cash price, even if the actual damages are less. UCC § 9-625(c).

d. Limitation on deficiency
1) Commercial transactions

If a secured party’s collection, enforcement, disposition, or acceptance is not in accord with Article 9 and the transaction is a commercial—not a consumer—transaction, then there is a rebuttable presumption that the secured party is not entitled to collect a deficiency. The secured party can rebut this presumption in whole or in part by showing that the deficiency would have existed even had the secured party complied with Article 9. To prevent a double recovery, the debtor or secondary obligor may not seek damages if a deficiency is reduced or eliminated because of the secured party’s failure to comply with Article 9 provisions on a secured party’s collection, enforcement, disposition, or acceptance. UCC §§ 9-625(d); 9-626(a)(3).

2) Consumer transactions

If the transaction is a consumer transaction and a secured party’s collection, enforcement, disposition, or acceptance is not in accord with Article 9, then many courts follow the rebuttable presumption rule that is applicable to a commercial transaction. Some courts, however, apply an absolute bar rule, under which the non-complying secured party cannot recover a deficiency. UCC § 9-626(b), incl. cmt. 4.

2. Conversion Action

If a secured party improperly repossesses collateral, then the debtor may be able to pursue a conversion action under tort law, rather than under the UCC. UCC § 9-626, cmt. 2.

3. Non-liability of a Secured Party to an Unknown Debtor or Obligor

A secured party does not owe a duty to a person that the secured party does not know is a debtor or an obligor. Similarly, a secured party does not owe a duty to a debtor or an obligor of whose existence the secured party is aware, but whose identity the secured party does not know, or with whom the secured party does not know how to communicate. UCC §§ 9-604; 9-628.