Secured TransactionsKeyed to Lopucki & Warren, Secured Credit: A Systems Approach, 5th Ed.

Fall 2006, STCL, Prof. Musselman

Assignment 1: Remedies of Unsecured Creditors Under State Law

Problem Set 1P1.1. A year ago, the local Fun Furniture Outlet was having a liquidation sale. Lisa Charney wanted to buy some redwood lawn furniture but didn’t have the cash. Her friend and neighbor, Jeffrey Reed, lent $1,000 to Lisa. Jeff and Lisa were good friends, and Lisa said she would pay him back in a couple of months. When she did not, Jeff’s reminders became increasingly acrimonious. Now Lisa and Jeff haven’t spoken for two months, and she still hasn’t paid anything.

Jeff is a journeyman electrician whose union has legal insurance entitling Jeff to four hours of consultation a year with your firm. Jeff came in today, showed you Lisa’s signed IOU for the loan, and asked if he could just go over and take the lawn furniture Lisa had purchased with his money. The furniture is out in the backyard, and he says it looks really nice. Jeff is sure it is worth less than the amount Lisa owes him, but he says he’d be satisfied if he got it. What do you tell him?

Jeff cannot use self-help remedies if he is an unsecured debtor. If you go out and use self-help you may be liable for conversion. What can Jeff do? He could sue on the debt, get a judgment. Then get a writ of execution, to see if you can find personal property that the debtor owns. If found, get the sheriff to take the personal property and sell it, giving the proceeds to the unsecured creditor. Perhaps, garnish someone’s wages.

If the property is exempt property, you cannot take the property.

Texas has no $ limit on homestead exemption.

P1.2. The following debt collection story appeared in David Morgolick’s New York Times column, “At the Bar”:Lobster-Con. Stephen King punks guy for lobster. Probably going to get sued for conversion, prosecuted for criminal fraud.

P1.3. Karen Benning is a successful dentistDentist who loaned money to day care center. 10K loan to owner payable under certain terms. The center has never missed a payment. With rumors that the day care center isn’t doing very well, Dentist wants to collect early or take over the business and put in the old manager. What to do?

If she wants to take over, she needs a loan agreement which details these rights. She doesn’t have that in this situation. She’ll have to wait until he has missed payments and then begin the long run of an unsecured creditor through the writ etc.Banks will put in things like insecurity clauses, which allows the Bank to exercise in good faith the acceleration of payments or a de facto default. On this happens, she can go to court.

Creditor: Anyone owed a legal obligation that can be reduced to a money judgment. Unless a creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be unsecured.

Methods of Compelling PaymentI. Levy under writ of execution (see Vitale)

II. Writ of garnishment on third party when third party is in possession of debtor’s property or owes money to debtor

Limitations on Compelling PaymentI. No self-help repossession

a. A prohibited seizure of debtor’s property may constitute the tort of conversionII. No “fishing expeditions” by showing up at debtor’s place of business

III. Exemption statutes may prevent creditors from reaching assetsa. Property exemptionsb. Homestead exemptions

Additional problems arise when you note that the loan was made to a person, but for the purposes of a business corporation which probably owns all the assets. Collection from the person is far more difficult than collection from the corporation.

You can file a motion requiring the debtor to come down on the stand and give testimony about what he owns.

P1.4. Six months have passed since the preceding problem. The day care center has folded

P1.5. Assume now that Knopf is living in Wisconsin. During his deposition, Knopf testifies that he owns the following property, all free and clear of any liens or security interests:

Must look to see what property is exempt in the state. Cars are exempt up to 1200, and if he wants to use his consumer goods exemption of 5000.

Lesson from Assignment One: Don’t be an unsecured creditor.

Class Notes:-Know the places in which there is conflict between the UCC and the Bankruptcy Code.-Focus on the application of the UCC to the problems

Secured Transaction: personal property financing, debtor creditor relationship. Involves secured debt. Secured debt is when there is property to be used as collateral when secures the debt.

Security interest: interest in property that you convey for a secured debt.

Locate the PropertyIdentify what property you’re trying to create an interest in

Assignment 2: Security and Foreclosure

Problem Set 2P2.1. In a parallel universe,

a. Karen Benning will be allowed to pursue the Toyota’s full value as payment for her debt.b. A homestead is real estate, but as a security agreement, the home-owner has waived their rights under exemption statutec. The equipment from the daycare, worth $10,000 would be fully available for foreclosure, because it would be a secured debt.d. $2,265.95 in the bank account, would be available for foreclosure.

Note how having a security interest that covers the property gives the secured creditor much greater ability to recover their interest.

P2.2. Bonnie Brezhnev§1-201(b)(35): Determines if the transaction gives rise to a security interest.§1-203: If there is a lease, determines whether the lease is a secured transaction.

Under 1-201(37), we must determine whether or not the transaction creates a security interest. There is personal property, the car, which secures the performance of an obligation, to pay monthly for the use. However, 1-201(b)(35) instructs us to look to §1-203 in the event of a lease. Under 1-203, whether a lease creates a security interest is “determined by the facts of each case.” There are two requirements which a lease must meet before creating a security interest. [1] “(b) . . If the consideration the lessee pays the lessor for the right to possession and use of the goods is an obligation for the term of the lease, and is not subject to termination by the lessee,” AND [2] (one of 4 possibilities). Here the applicable possibility is under “(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.”

§ 9-109(a)(1): [Article 9] applies to a transaction, regardless of its form, that creates a security interest in personal property…Comment 2 to § 9-109: When a security interest is created, this Article applies regardless of the form of the transaction or the name that the parties have given to it.

Brezhnev’s intent would seem to be to create a substitute for a secured transaction, similar to Baisle v. Erhal. The lease requires monthly payments and is not subject to termination by the lessee, which meets the 1 st requirement of 1-203. The $10 purchase price at the end of the lease would constitute nominal consideration. Therefore, Bonnie’s lease transaction would constitute a security transaction, and she would need to comply with the regulations of Article 9.

§9-109(a)(1): Article 9 applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.

Class Notes:

Assignment 3: Repossession of Collateral

Problem Set 3P3.1. Look back at Problem 1.1. Now assume that Jeffrey produced a second paper at your meeting with him. He explained that he had gone

Under §9-102(a)(72), (73), Jeffery has created a security agreement and is a secured party. Therefore under § 9-609 at default, the secured party may take possession of the collateral without judicial proceedings so long as there is no breach of the peace (of course, the S/P may still also choose to act within judicial process).

P3.2. Faye Maretka

(a) Sites where there is neither a guard nor a fence,Just walk in and disable the bulldozer. If there’s no protest then there’s problem. There may be an issue of trespass, but generally the security agreement gives consent to the secured party on the debtor’s premises.

(b) Sites where there is a fence but no guard, andIf you can get over the fence without damaging or leaving the property open, disable the bulldozer.

(c) Sites where there is a guard.Ask the guard if you may disable the bulldozer, and if not leave. A confrontation with the guard is a breach of the peace.

(d) The debtor keeps the bulldozer in a locked, steel building on the debtor’s own property.If you can do it without a breach of the peace, then everything will still be okay. Be sure to bring another lock!

(e) As CF’s regular counsel, you should also considerYou can put provisions in the S/A authorizing the S/P to enter the debtor’s property after default for purposes of securing or repossessing the collateral. But note 9-602, where a debtor cannot waive the requirement of no breach of peace (under 9-609).

If they can get on the property and walk away with nothing happen, then it will be ok. A security interest in property allows a secured creditor to trespass.

P3.3. Salvatore Ferragamo is the sole owner of Ferragamo Construction Company. §9-609, requires no breach of peace.§9-201 security agreement is effective according to its terms between parties, against purchasers or the collateral, and against creditors.§9-602(6), cannot waive no breach of peace provision.§9-603 parties may agree to standards.

I. A S/P may use self-help repossession:a. § 9-609: After default, a S/P may take possession of the collateral or render it unusable if they proceed without

breach of the peace.i. The duty to refrain from breach of the peace is a non-delegable duty, making S/P liable for acts of

independent contractors (think repo men)b. S/P’s use of law enforcement officer may be presumptive breach of the peacec. Duty to not breach the peace cannot be waived by the debtor (see § 9-602(6))

Salvatore wants to delay until he has time to get the collateral together. He must do something to make sure that there is a breach of the peace. 1st he will have to tell the secured creditor that he does not agree and the repossession it not something to which he acquiesced. May have a guard. Get a Dog. Do things to ensure that any attempt to repossess the equipment is a breach of the peace.

Brings the sheriff - the case law would seem to automatically qualify the attempt as a breach of the peace.

P3.5. Deare Distributors sells farming equipment There are all types of property which may be used as collateral. One of which is accounts payable or receivable, that a business generates in the ordinary course of trade. This is more commonly referred to as accounts financing. Using the accounts owed, one may use this right to future income as collateral for securing credit. §9-102(a)(2): account means the right to payment of a monetary obligation.

Why and how could Deare cheat: the debtor (deare), the customer (account debtor, 9-102(a)(3)). [1] D sells goods to the customer and keep the money, [2] Fake receipts, [3] D keeps some of the payments, and pay off debts that come due, [4] What if the transactions between D and the account debtor are unsecured transactions?, [5] What if the equipment is bad and the account debtors have claims and valid defenses of Warranties.

Solutions: Set up a lock-box: have the account debtors send all payments to a bank account with the Bank’s name on it.

One way to protect yourself is to have audit provisions in the contract, spot check invoice samples, contact customers, have customers pay directly to secured party (to hide payment receipt from customer have customer send payment to a bank account at lender bank, or post office box controlled by lender).

P3.6. A year after the preceding problem,

(a) Horne’s Feed and Seed, one Yes, Firstbank may collect from account debtors who owe accounts to the debtor.§9-406(a) : discharge of account debtor; effect of notification§9-607(a): authorizes the secured creditor to notify and require the account debtor’s payments to be directed to the secured creditor.Assignor, or assignee could provide notification to the account debtor.

(b) Another account debtor, Wilson’s Farming Goods, 9-404(a): Assignee’s rights subject to terms, claims, and defenses; exceptions. The Assignee steps into the assignor’s shoes, and is subject to all the claims.

P3.7. 9-609: Secured Party’s right to take possession after default.

P3.8. Your firm represents Stanley Zabriskie and Zabriskie Autos.Under 9-609, a S/P may repossess only after default. Here there is some risk. If the reason she’s missed payments are valid, she may not be in default. Since default is not defined in Article 9, you must look to the S/A and state law to define when a party defaults.

Assignment 5: Article 9 Sale and Deficiency

PROBLEM SET 5P5.1. The bank repossessed Maxwell’s silver Mercedes and sent him notification that the bank would sell it in a private sale “after ten days from this notice.” The balance owing on the loan, including principal, interest, attorney’s fees, and expenses of sale is $10,000.

(a) If the fair market value of the car is $8,000, but it sells for $7,000 in a commercially reasonable sale, what is the proper amount for the court to award as a deficiency? UCC §§ 9-615(d) and 9-626(a)(3) and (b).

Under 9-615(d) the surplus is paid to the debtor, while the obligor remains liable for any deficiency. 9-626(a) the debtor must complain to bring the issue of deficiency or surplus in issue. Technically 626(a) may not apply, because 626(b) says a court may pretty much make up the rules for a consumer transaction. This here looks like a consumer transaction. A consumer transaction is defined in § 9-102(a)(26) = personal buying.

As long as bank follows all the rules, they can collect a deficiency judgment (see § 9-615(d)(2)). It's $3k ($10k - $7k).

Section 9-626(b) applies to consumer transactions.First, the debtor has to complain (§ 9-626(a)(1))Second, the creditor must show that everything was commercially reasonable (§ 9-626(a)(2))

If the creditor can't show reasonableness then see § 9-626(a)(3), which limits deficiency judgment by the actual proceeds or what the proceeds would have been.

(A) Obligation - proceeds(B) Obligation - what proceeds would have been

(§ 9-626(a)(4)) creates presumption that proceeds would have been equal to obligation.

Even if the car is worth 8K, and the sale is for 7K, it was a commercially reasonable sale so he would still owe $3k.

(b) How much would Maxwell have to pay to redeem the car? UCC § 9-623.Section 9-623 is the right of redemption. It states that a person must fulfill the obligation and the reasonable expenses and attorney’s fees. Since $10k includes the total obligation and expenses and fees, that’s the amount he owes.

(c) If Maxwell has enough money to redeem the car, would you recommend that he do so or that he purchase another car just like it for $8,000?

Careful here! First, it looks like $8k is less than $10k so you’d recommend that he purchase the new car. But if he purchases the new car, his old car will be sold and he’ll be stuck with the deficiency of $3k. Including the deficiency,

SaleI. § 9-610(a): After default, a S/P may sell or otherwise dispose of the collateral in its present condition or following any

commercially reasonable preparation.a. A S/P may purchase the collateral

i. At a public dispositionii. At a private disposition only if

1. customarily sold on a recognized market or2. subject of widely distributed standard price quotation

II. § 9-610(b): Sale must be commercially reasonable a. § 9-610(b) elaborates: every aspect of the disposition must be commercially reasonable (time, manner,

method, place, terms, etc.) (see Chavers)III. § 9-611: Notice

a. Exceptions (§ 9-611(d)). No notice required for:i. Perishable goodsii. Threatens to decline speedily in valueiii. Customarily sold on a recognized market

SatisfactionI. § 9-620: Allows the S/P to retain the goods in full or partial satisfaction of the debtor’s obligation

a. Partial Satisfaction: debtor must consent after default in an authenticated recordb. Full Satisfaction: debtor must consent within 20 days to an unconditional proposal in an authenticated record

made after default

RedemptionI. § 9-623: A debtor has the right to redeem the collateral by paying the outstanding obligation and reasonable expenses

and attorney’s fees

the act of purchasing the new car costs $8k + $3k = $11k, which is greater than the cost of redeeming the car at $10k. So, the better recommendation is that he redeem the car.

(d) At Maxwell’s prompting, a friend of his offers $8,000 for the car. The bank refuses the offer because they follow a policy of selling all the cars they repossess through auto auctions. The friend can’t go to the auction, because it is only open to dealers. At the auction, the car sells for $7,000. Now how much should the deficiency be? UCC §§ 9-626, 9-627.

Private sale goes to commercial reasonability. While the sale price itself is below market, it doesn’t mean it’s sold in a commercially unreasonable manner. 9-627(b)(3) offers a safe harbor provision to potential dealers.

P5.2. Your firm represents Wewoka State Bank, which recently repossessed and sold the inventory and equipment of an auto parts store.

9-615(a): Order of Distribution- (1) expenses of the sale, process, taking, holding the collateral, etc.; and attorney’s fees in the agreement, (2) secured party who is foreclosing on their collateral, (3) Subordinate security interests if: (a) S/P receives notice before distribution, (b) if consignor . . . .9-203(b)

(a) The highest bid at the auction was $47,136. (1) $6250, opinions, process (2) Bank loan & interest, 60,886 (3) There would be a 20K deficiency.

(b) If the highest bid at the auction had been $75,000, to whom should you pay the money? Is the bank either required or permitted to pay Auto Parts Depot from the proceeds?

In the event of a surplus, because the Auto parts store is an unsecured party they get nothing.

P5.3. East Bank does a steady business in the repossession of automobiles.Under 602(7) a debtor can’t waive their right to notice. The S/P must give notice to the debtor as described in 9-611.This is required, but there are certain exceptions in 9-611(d). Those are for perishable goods, goods that threaten to decline speedily in value, or goods customarily sold on a recognized market. None of these exceptions really meets the facts of this problem. The recognized markets exception doesn’t apply based on comment 9 to § 9-610 discussing a recognized market (fungible goods where prices not subject to individual negotiation).

However, notice of disposition may be waived by the debtor – but only by an agreement entered into and authenticated after default (see § 9-624(a)).

9-602(7): debtor/ Obligor may not waive these rights: 9-610(b), 9-611, 9-613, 9-614.9-603(a): Parties may determine standards measuring fulfillment of the rights of a debtor. & duties of a secured creditor under 902, if the standards are not manifestly unreasonable.9-611: Notification occurs when [earlier of] (1) a secured party sends notification to debtor and 2ndary obligor, OR (2) debtor and 2nd waive right to notification.9-612: Notification depends on reasonableness. In non-consumer transactions, 10 days is presumptively reasonable.9-613: What constitutes notification in non-consumer goods: 9-614: Notification must provide: (1) everything under 9-613(1), (2) description of liability, (3) phone # of secured creditor, (4) phone # or mailing address from which additional info is available.9-624(a): Debtor or secondary obligor may waive right to notification of disposition of collateral under 9-611 only by agreement entered into and authenticated after default. 3 different situations in which a debtor may waive rights. 9-624.9-610 comment 9: recognized market = when the items sold are fungible and not subject to individual negotiation. Dealer auctions are not included under author intent of the comments.

P5.4. Your client, Grizzly Bear Bank, is on a run of bad luck.

(a) Grizzly would like to know if it is all right to throw the hull away. If not, what is the Bank supposed to do with it? See UCC §§ 9-610(a), 9-620, 9-626, and Comment 4 to § 9-610.

9-610(a): secured party may dispose of collateral in present condition or any commercially reasonable manner.9-620: Secured party may accept collateral in full or partial satisfaction of the obligation when: [1] debtor consents, [2] secured party doesn’t receive notification to objection authenticated by (series of factors).9-626: when there’s a deficiency or surplus.9-610 comment 4: secured creditor may be required to prepare the collateral to satisfy the commercially reasonable manner standard. A balancing test9-102(64): 9-626(a)(3): when a secured party fails to prove that they complied with all Article 9 rules, liability is limited to amount:

The Greater of [1] (Secured obligation +expenses, attorney’s fees) – (Collateral sale price), or [2] (Liabilities) – (Commercially reasonable Sales price).

Answer: Is it commercially reasonable to dispose of property by throwing it away? Almost always no. The bank wants to keep their deficiency judgment; and sue the 4 wealthy people. If the bank doesn’t send proper notice, and act in every respect in a commercially reasonable manner, they would have to sue

(b) Assume that Grizzly throws the hull away and the guarantors later prove that if Grizzly had spent $245,000 to install electronics in the hull it would have been able to sell the helicopter for $345,000.

Debt= 345K,Proceeds = 09-626: Presumption that the proceeds = amount of the debt, liabilities, and attorney’s fees. Therefore the courts would assume that the helicopter was worth 345K. Then the Bank would have to prove the value of the helicopter. Note: some courts have held that under 9-610 a secured creditor may be required to prepare the collateral. Addressed under 9-610 comment 4 which instructs courts to take a pragmatic approach and determine what is in the best interests. Here the debtor took all the parts out, and helped render the helicopter unusable. Such actions would likely make the court side with the secured creditor and hold the installation of 245K worth of parts to be commercially unreasonable, allowing the SP to trash the copter for below cost. Under 9-601: the secured creditor has a right just to sue on the debt and elect to forget about their security interest.

Here’s a good answer: give the hull back to the debtor. This way, you’re not accepting anything as full or partial satisfaction. Then, file a claim and get a judgment against the debtor (see 9-601(a)(1) which lets you do this). Notice that under 9-601(e) your judgment lien will relate back to the date of perfection of your security interest! Also read Comment 6 to § 9-601.

P5.5. Your client, Pedro Perez-Ortiz, bought a retail storeFirst, note that 9-610 does not require the sale or other disposition of collateral. That section merely allows that the secured creditor “may” dispose of the property. The alternative is 9-620, where the S/P may accept the collateral in full or partial satisfaction of the obligation (read Comment 2 to 9-620: acceptance of the collateral in full or partial satisfaction is not a sale or other disposition under Section 9-610).

It looks like they’re trying to get partial satisfaction, but they didn’t get the debtors consent in an authenticated record. The debtor should place the creditor’s Article 9 compliance in issue, and claim that the creditor did not follow the commercially reasonable standard set forth in § 9-626. This places the burden on the creditor, and creates a presumption that the collateral given is equal to the amount of the outstanding debt.

Aren’t they obligated to sell the collateral? No, under 9-610 the. The alternative is under 9-620, where the secured party may keep the collateral in full or partial satisfaction. However, 9-620 referred to strict foreclosure because there are requirements which must be met to keep such collateral. Requirement #1 is that the debtor consent, which must be of record in the terms of acceptance after default. Here, the secured creditor hasn’t complied with article 9, which would invoke 9-626. Under 9-626: The debtor could put Article 9 compliance in issue, and then the creditor would have to prove that they acted in the most commercially reasonable manner. A court would likely look upon the lack of attempt to sell the business as a commercially unreasonable manner. Then the creditor would have to prove that the value of the business is what they say it is. Danger is that a court would find the value of the business to be the value of the debt.

P5.6. You represent Chavers, who have repossessed another Lear jet similar to the one they previously repossessed from the Frazier group.

(a) What should they do? UCC §§ 9-610, 9-611, 9-620, 9-621.They could accept the jet as full satisfaction of the obligation. They would have to comply with 9-620. Here the company wants to take the jet in full satisfaction. 1st: try to obtain the debtor’s consent, if that doesn’t work submit a proposal. If the company doesn’t receive a notification of objection by the debtor within 20 days, then it is presumed that the debtor accepted.

(b) What if the debtor objects9-619: Under 9-619: transfer of record or legal title: [look this up]

9-622

Answer: If the debtor doesn’t consent, and objects, you must sell the collateral. If you ignore it, when the company tries to encumber or sell the plane later, they will be subject to suit. Under 9-625, If a debtor feels damaged he may file a suit against the creditor. Here, the debtor has no damages, so he wouldn’t really recover.

(c) What if the Chavers simply announce that they have sold the jet to themselves for $800,000? UCC §§ 9-610(c), 9-617.This is fine, as long as the sale was in a commercially reasonable public or private disposition. Looks like a private disposition to themselves, and since the amount of the proceeds is equal to the FMV of the jet, it’s probably commercially reasonable.

Note the consumer protections provided in § 9-620.Consumer Transactions dealing with 9-620(g): no retention of collateral in partial satisfaction. -Once the debtor has paid so much money in a consumer transaction, the secured party must dispose of the collateral. Think almost paid off car, and then S/P sent out notices)-

Synopsis: What we’ve dealt with is the rights and remedies of a secured creditor. The next couple of assignments are a deviation, to the bankruptcy code.

Assignment 6: Bankruptcy and the Automatic Stay

PROBLEM SET 6P6.1. You have been counsel to CompuSoft, a computer software

Because “these guys” are in bankruptcy, they are protected by the provisions of the bankruptcy code. Specifically, § 362 creates an automatic stay against many actions, including the collection of claims against the debtor that arose before the commencement of the case (362(a)(6)). Once a creditor has knowledge that the debtor has filed bankruptcy, a creditor can do nothing. The automatic stay protects the bankruptcy estate and the debtor personally. Everything is protected. Also note that §362(k) provides for damages for violation of the automatic stay – including punitive damages. They just don’t mess around with violating automatic stays.

Instead, CompuSoft can file a proof of claim under BkCd § 501(a). Under § 502, these claims are allowed unless a party (usually the debtor) objects. Even if the debtor objects, § 502(b) allows CompuSoft’s claim to be heard by the court, and the court will determine whether the claim is allowed and the the amount of the claim.

Section 362(a) sets up eight very broad prohibitions of actions against the debtor, while 362(b) sets up the exceptions (28 of them).

P6.2. You have been working for Kansas Savings Going forward with the repo is probably a violation of BK § 362(a)(5) (“any act to … enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case”). You don’t want to do that (see § 362(k) to find out why). Note also that now the grain-processing equipment is property of the debtor’s bankruptcy estate as defined in § 541(a)(1) (“all legal or equitable interests of the debtor”).

And note that the sheriff is a governmental unit, part of the description of “entity” in § 101(15).

Automatic StayI. BK § 362(a): Creates an automatic stay against almost all activity designed to create, perfect, enforce, or collect on

any obligation of the debtorII. Relief from Automatic Stay

a. A party may request relief from the automatic stay under BK § 362(d):i. For lack of adequate protection (see BK § 361)ii. If the debtor has no equity in the property and the property is not necessary for an effective

reorganizationIII. Violations of the Automatic Stay

a. BK § 362(k) allows for damages, costs, attorney’s fees and even punitive damages for willful violationsb. Courts take violations of the automatic stay seriously so don’t do it!

Court must always lift the stay if the debtor doesn’t provide adequate protection,

Court must lift the stay if (1) the debtor has no equity in the collateral that an unsecured creditor might realize, AND (2) the collateral is not necessary to an effective reorganization.

2 reasons for retaining collateral: the debtor has an equity in it or that it is necessary to an effective reorganization.

Answer: secured creditors right is to file for relief under §362(d):

P6.3. You are the senior in-house counsel for BankWest, a commercial bank in northern California. Prime cuts owes $250,000 to Bank West, and the loan is secured by a particular restaurant. While the loan officer recommends to foreclose as soon as possible, Prime Cuts has filed chapter 11, which invokes the automatic protections under §362(a). §362(a): Automatic Stay – against any proceedings or acts to recover a claim that arose before the commencement of the case (6). Additionally, the stay will operate against all property of the estate and continued until certain time requirements are met. §362(c): (1) stay against acts to the property of the estate continues until no longer property of the estate. (2) stay under §362(a) continues until the earliest of: time case closed, time case dismissed, or if a case under Chapter 7,11,12, or 13 the time a discharge is granted.The best option is to file a request to lift the stay and at the court hearing. After the filing.

§362(e): 30 days after request by a secured party for terminating the automatic stay, the court must hold a hearing with notice, and determine the stay is to be continued, or it is automatically terminative. The determination must be that the Party opposing termination of the stay has a reasonable likelihood of prevailing at the final hearing.

Answer: They can’t foreclose. If they file a motion under 362(e) for relief, then go under 362(d)(2)- the debt has to be greater than collateral= no equity. Here the secured creditor can prove that the debtor has no equity in the property, and the property is not necessary to an effective organization. Here the property isn’t necessary for a reorganization because it’s a weak location and was voluntarily closed before filing bankruptcy.

P6.4. Another of the BankWest files you received is that of Sprouts Up, a Riverside chain of fast-food health-food stores. They too have filed under Chapter 11. Sprouts Up owes $210,000 and has missed four payments. BankWest has begun foreclosure proceedings on the mortgage it holds on the building where the corporate headquarters are located. The building is in a good area, and it is appraised at about $600,000 fair market value. Even at a sheriff’s sale you are confident that there would be bidding in excess of your outstanding mortgage. The loan officer anticipates an “agonizingly long reorganization while the corporate officers fight among themselves.” She wants the bank to get out as quickly as possible so the bank can loan this money elsewhere. What is your advice? See Bankr. Code §§ 362(a), (d).

The stay against any act to recover the collateral is automatically stayed when the corporation files Bankruptcy. §362(a): Automatic Stay. The secured creditors can file for relief under §362(d), however it would appear the outstanding value of the building would guarantee adequate security for the secured party, additionally the estate has a equity interest in the building as it may be used to pay off unsecured creditors.

Adequate protection for property under §362(d) is a constitutionally protected property right. So long as there is substantial equity cushion, the court will consider this to be adequate protection.

P6.5. The same afternoonParadise Boat leasing, rents a yacht. The yacht was bought with funds financed from BankWest. Yacht loan is in good shape. But Paradise seems to be in trouble. Value of the yacht is 350K, the loan is valued at 175K. Paradise has defaulted on the loan. Paradise has filed for bankruptcy and as such is protected by an automatic stay. 11 USC §362)a). Here the secured party may file a right to lift the stay under §362(d), because Paradise has no insurance, and cannot adequately provide security for the boat.

If you can’t get insurance is there something this company could offer to offset the risk? Look to §361- which details things that would suffice for adequate protection.

P6.6. Your firm does some debtor’s work as well, and you are working on Hill Farms Industries, a food processing§361: adequate protections may be provided by (1) requiring trustee to make a cash payment or periodic cash payment that lien decreases in value, (2) granting an extra lien to secured the diminution in value of the original lien, (3)§362(a)§362(c)§362(e)

(a) The first caller was the attorney for Watson Investment, a company from which Hill Farms borrowed $126,000 unsecured. He was upset that Hill Farms is now six months behind on the loan with no plans to make any payments until it gets a plan confirmed.

The unsecured creditor must talk to the hand. Unsecured creditor’s are not entitled to relief under § 362(d), because they do not have an interest in property. They are the amoeba of the Bankruptcy court, and the lowest form of life.

(b) The second call was from the attorney for Macklin Mortgage. Macklin has a security interest in Hill Farms sterilization equipment to secure a $50,000 debt Hill Farms owes Macklin. She is upset because she just received an appraisal showing the equipment, which was appraised at $50,000 as of the commencement of the case, is now worth only about $40,000.

As a representative of the debtor you must argue that the debtor will need the equipment for an effective reorganization. In fact, you want to be nice to this attorney, and work with them as much as possible. They would still have a claim under §362(d)(1) for the failure to provide adequate protection. They will argue that they need to be compensated for the decline in value.

The value of their claim was 50K at the time of filing bankruptcy. The value of the collateral is falling, this triggers a claim of no adequate protection.

Constitutionally they are required to get the value of their claim as of the time of filing of a motion for relief. [Majority Rule]

Assignment 7: The Treatment of Secured Creditors in Bankruptcy

Problem Set 7P7.1. You are still counsel to CompuSoft (see Problem 6.1).

First, you must start with the date of filing for Bankruptcy. Here, the date is September 15. Then we must find the actual value of the debt at the time of filing, which is $30,000. Next, you must add the interest accrued up to the date of filing. The contract provides for interest from the date of billing, and interest accrues until the date of filing (6 months later). At 18% (1.5% interest per month) on $30,000 = $2,700.

How about interest that accrues after the filing date? Only secured creditors may get post-filing interest (pendency interest) under § 506(b). Unsecured creditors NEVER get pendency interest.

P7.2. Several months after the meeting in Problem 7.1, Elkins called you to say that she just received the trustee’s Final Report and Account showing that after payment of the expenses of administration and the other priority debt, there will be $59,575 available for distribution to general unsecured creditors in the Chapter 7 case. Unsecured claims (including CompuSoft’s) total $1,191,500. She wants to know what that means for CompuSoft.

The amount available to each unsecured creditor is the percentage of assets to liabilities. Here, $59,575 / $1,191,500 = 5%. So of the $32,700 claim from P7.1, the claimant will get $1,635.

BankruptcyI. Bankruptcy Estate

a. BK § 541(a)(1): The bankruptcy estate is comprised of all legal or equitable interests of the debtor as of the commencement of the case

II. Claimsa. BK § 501(a): A creditor may file a proof of claim. An equity security holder may file a proof of interest.b. BK § 502: A claim is allowed up to the amount claimed

i. Exceptions: no un-matured interest (BK § 502(b)(2))c. Secured claims

i. BK § 506: Bifurcates secured and unsecured portions of a claimii. Claim is secured up to the value of the collateraliii. Secured creditor may receive interest on claim (called pendancy interest)iv. Secured creditor may receive any reasonable costs and attorney’s fees provided by agreement

d. Unsecured claimsi. Unsecured creditors share proceeds of the estate with each other pro rata

§ 726- general unsecured creditors get paid pro rata according to their claim in total to all unsecured claims. (59,757 divided by 1,192,500) X (30K)= they’re going to get 5%

Anybody with a lien at the time of bankruptcy filing, is treated as a secured creditor.

P7.3. Another of your firm’s most active clients is Commercial Investors,

(a) Assuming that the collateral value holds up in bankruptcy court, how much is CI’s claim? Bankr. Code § 502, 506.CI’s claim- 340K + (interest-20,400) = 360,400. §506(b)- allows creditors with a security interest that is over-secured to collect any reasonable fees, costs; OR charges provided for under he agreement.

(b) If the court also used a 12 percent 360,400 + [pendency interest]; the pendency interest is applied to the amount of the claim. 360,400x3month/interest= 10,812.There is 10,812 in pendency interest.Total = 371,212

§1129(b)(2)(A)(i)(II)- interest applied as the effective date of the plan continues, but it doesn’t use the contract rate. The interest rate that it uses is determined by the court.

Pendency Interest only applies if you are over-secured.

(c) How much should CI expect 1 more year pendency interest, which totals up to be 414,460. However, you only get pendency interest to the point that you are over secured. Your secured claim can never grow more valuable than the collateral.

P7.4. Wu is back in your office about a week later. She had the property reappraised, and it seems that the fair market value is more like $325,000. (The earlier appraisal was wrong.) She has learned that the debtor estimates that there will be sufficient assets to pay the unsecured creditors about 10 percent of their outstanding claims.

(a) Describe CI’s claim now. Bankr. Code § 502, 506.Section 506(a)(1) states that an interest is only secured up to the value of collateral and unsecured for rest of the amount. At the time of bankruptcy (p. 118) 340k*(.12*6/12) = 360.4k.(In class answer: The claim as of the filing date was 360400 in last prob. Do they get interest here? No, under 506b, you only get post bank interest to the extent….exceeds the value of the claim. We’re undersecured so no pendency interest. We have 2 claims in this type of sit. Under 506a. limited to the value of collateral but claim in excess is unsecured so unsecured claim is 35400 which equals 360400. So you have 2 claims, 1 secure and 1 unsecure.

(b) What should CI expect to be paid under a plan of reorganization?See b. of problem 7.3 b. deferred cash payment at least equal Paid out over plan of 325k + interest as discussed in till case. The unsecured will be the same amount as every other unsecured creditor so 10% of 35400 = 35401%/month * 360400 * 3 months = 360400 * 10812 = 371212 [1129(b)(2)(A)(i)(II)]

(c) Does it matter to CI whether the plan is confirmed today or a year from today?Yes, because they’re not receiving pendancy interest on their debt. Really losing money while waiting for plan to be confirmed, and interest not covered by any value in excess of debt in collateral.

P7.5. Another week passes and Wu is back again. At your request, she had been searching her records for a copy of the security agreement. She has finally come to the conclusion that no security agreement was ever signed.

(a) Now what is the nature of CI’s claim? See Bankr. Code §§ 502, 506.Becomes unsecured creditor since can pass test to show have a security interest in the collateral so will only get that 10% pay out. 506(a) doesn’t say anything about signing a security agreement.

(b) If the 10 percent payout for unsecured creditors persists, what should CI expect under a plan of reorganization? See Bankr. Code § 726(a).

Looks like they’ll be limited to the 10% of their claim ($36,040).

P7.6. As a member of the US Panel of Trustees, you

(a) If you are able to sellStart by figuring out the amount of the secured party’s claim. $85k + (($85k*10%/12)*6months) = $89,250.$100k – $89,250 = $10,750 - $1,000 – $100k*0.06 = $3,750.

(b) Interest can eat up the extra money, but trustee has authority for cost [506(c)].

(c) Can First Capital prevent you from trying to sellIf inconsequential to the estate 554(b).

The trustee will try to sell property and issue trying to raise is what about the selling expenses? Debt is 85k (principal and interest) so this is the claim. When sell, have to pay 6% interest + 7k. So if can sell in 6 mo, what happens. If can sale for 100k: 7k comes out upfront at closing so all we get is 93 and that’s how much money trustee has to distribute. Secured creditors get paid first and since oversecured, get pendency interst. 506c has provision about expenses of disposing or preserving property. The secured creditor gets 89250 and trustee gets what’s leftover. Don’t know where he got 4250 from—maybe pendency interest?

554 allows trustee to abandon property that’s of no value to the estate

Assignment 8: Formalities for Attachment

Assignment 8Attachment of a security interest just means it is now enforceable. 3 basic requirements: value has been given: secured creditors gives value to the debtor (if this doesn’t happen, then there’s nothing to secure anyway), Debtor has to have rights in collateral (again a no brainer. You either have to own, power to convey, or…partial interest?), a security agreement exists. Authenticated security agreement that provides description of the collateral. The purpose of a security agreement is completely different tan a financing statement. A financing statement doesn’t even have to be done to be enforceable against the debtor. Therefore, that alone doesn’t suffice. Perfecting a security interest: file a financing statement under ucc 1 w/ secretary of state. Its point is to just give notice to the world—they have constructive notice—that you have this interest.

Problem Set 8P8.1. You are working as a law clerk

Each document standing alone would not be enough. The note is signed by debtor but doesn’t have a collateral description. Plus, it even says there is another doc that is the security agreement. Financing statement describes the collateral but the Ace case told us a financing statement alone isn’t enough to create a security agreement. Letter: it isn’t signed by debtor.

Composite Document Doctrine: documents that are inadequate standing alone, might suffice when read as a whole. Signed by debtor, describing the collateral, and language that leads to the logical conclusion that it was the intention of the parties that a security interest be created. (presently intended to create an interest). So the docs read together could probably create an interest. Describe collateral, signed by debtor, and create an intent. Does each doc have to

AttachmentI. § 9-203(b): Requires three elements before a security interest will attach to collateral

a. Value (§ 1-204)i. The S/P must give value to the debtor

1. Value may be for pre-existing debtb. Rights in the Collateral

i. The debtor must have rights in the collateralc. Security Agreement

i. Authenticated security agreement describing the collateral (§ 9-203(b)(3)(A))ii. Possession or control of collateral pursuant to a security agreement (allows oral agreements) (§ 9-

203(b)(3)(B),(C),(D))iii. Composite Document Doctrine

1. Look to the transaction as a whole to determine if there are writings, signed by the debtor, describing the collateral and evidencing an intent to grant a security interest in the collateral

II. A financing statement is not required for attachment

be signed by debtor for purposes of composite doctrine rule? Some courts say yes, others say as long as one is signed by debtor or reference each other.1-20144: If it’s a security agreement b/c it creates one even though not called one, still one. If you sale property to someone on credit, but you retain title,

P8.2. You recently joined the legal department at First NationalSecurity interest attaches to collateral when it becomes enforceable. A security interest is enforceable when §9-203(b)(3)(A): debtor has given value, the debtor has rights in the collateral, and a security agreement exists. If they don’t all happen at the same time, they won’t have attachment until all 3 are satisfied and the last thing happens. 2-501(1): Insurable Interest in Goods; Manner of Identification of Goods§1-204: Value- (any 1 of these 4 there will show value has been given)a person gives value for rights if the person acquires them(1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge back is provided for in the event of difficulties in collection. [Basically a binding agreement to loan money, or entering into a K to loan money unconditionally, or grant a line of credit],(2) as security for, or in total or partial satisfaction of, a preexisting claim; (K law wouldn’t allow this but ok here)(3) by accepting delivery under a preexisting contract for purchase; or(4) in return for any consideration sufficient to support a simple K

The First National Bank’s security interest attached to the Fisherman’s Pier restaurant when Pablo signed the promissory note for 60K and the preprinted security agreement. When Stella delivered a bill of sale for the restaurant property. WRONG- the promissory is not for value because only the debtor has signed the note, and therefore the creditor is not obligated to pay the money, therefore there is no transfer of value.

Class Answer: When all three requirements are met then you have an attached and enforceable security interest. Value given- value is 1st given when the Bank delivered the check to the seller’s creditor ($39,839), Debtor had rights in the collateral- When Pablo has his restaurant subject to the 60K liensecurity agreement exists- he signed a security agreement.

So overall, probably when the check to the bank was given for $39,839.

P8.3. When you arrived at the Pablo Escobar closing, you pulled from your fileSigning the Security agreement without the description of the collateral.

(a) Did the bank, at that moment, have a security interest enforceable against Pablo?The bank did not at that exact moment have a valid security interest because the security agreement lacked a description. Under §9-203(b)(3)(A), the debtor must authenticate a security agreement that provides a description of the collateral. You may argue that under the composite document doctrine there may be other documents which reference each other internally and therefore may be read together and bring in the description of the restaurant equipment.

(b) Two weeks later, In putting a description in later, the agreement is unenforceable, because the “debtor has authenticated a security agreement that provides a description of the collateral.” [COURTS ARE SPLIT]. This is the attorney from the debtor who is sending the list.

Mussleman believes that the best reading of the CODE implies that when all 3 things happen, the security interest attaches. So he disagrees with GA, and agrees with courts in Blundell and Allen.

Yes, all the requirements of § 203(b) are met. The timing delayed the attachment of the security agreement, but now that all documents are together it is attached. This assumes that a court will use the Composite Document Rule.

(c) Would it have made any differenceNo, 2 years after the fact would not seem to matter. The thing to notice is when the security interest attached.

(d) What if she discoveredIf she discovered it after Pablo filed for bankruptcy, this would be considered an act to create, perfect, or enforce any lien against the property of the estate; and is barred by the automatic stay under § 362.

P8.4. Early in your second year of solo practice,Financing can never be a security agreement. The financing agreement is there ONLY to provide NOTICE.

Send a bunch of documents over to the trustee and make an argument under the composite document doctrine.

Other option is to fill in the blank on the security agreement.

P8.5. Assume that in the previous problemNote that Mestre did not lie. He’s no longer your client, and you do not have an obligation to tell anyone the truth of when the description was filled in.

Assignment 9: What Collateral and Obligations Are Covered?

Description of Collateral

After-Acquired Property

Problem Set 9P9.1. Robert and Mary Gillam

(a) Who is right on the point of law?The answer will be however the courts interpret the contract language. In interpreting what the parties meant in the security agreement, first look to the language of the contract. If the terms are unambiguous, use the plain meaning rule. If the terms are ambiguous, they construe it against the drafter and admit parol evidence.

Here the K language,

(b) What should the Gillams do? UCC §§ 9-108(a), (b), 9-203(b)(3)(A), 9-204.§9-108(a): Sufficiency of description- §9-203(B)(3)(A)§9-204- After-Acquired Property; Future Advances

P9.2. The Gillams are also raising sheepUnder 9-108, you can describe collateral by type. Here, they used the term “crops” to describe the collateral. Under 102(a)(35) describing farm products “crops” could be stretched to mean the sheep.

P9.3. Richard Cohen, a client of your firm, asked Sandra Bernhard, the partnerUnder 9-204 specifically authorizes that a security agreement may create or provide for a security interest in after-acquired collateral. Here the terms are fairly ambiguous, and you must make a determination as to what the terms mean. When the terms are ambiguous it should be construed against the drafter.

The term “additions” used in the security agreement probably does not include or identify the newly acquired equipment. The S/P should know better and must use unambiguous language for after-acquired property (i.e. use a collateral description reasonable enough to describe the property to be used as collateral).

Is this description broad enough to include after acquired property? No, the use of all is too broad. “Additions”: does this mean additional equipment bought after the security agreement was entered into . . .? this is an ambiguity, bring in the parol evidence, and determine the intent of the parties. The court said that this language does not appear to include after acquired property, as the word was listed along with replacement parts and what not which would indicate that the agreement was for property already acquired and fixed.

Note that courts are more willing to imply an after-acquired property clause in Inventory and other cyclically disposed and replenished property (such as accounts).

P9.4. You are practicing with a small firm in Oklahoma that does all the legal work for Walter’s Department Store (Walter’s).

9-102(a)(23)9-203(b)(3)(A)9-108(e)-

Shirel- the CC application had a provision for security interest in ‘all merchandise’ the debtor purchased on the cc. This broad description deprived notice to any 3rd party,

9-108: Sufficiency of Description.

The solution is to include a security agreement on the receipt, which would contain a description. Describe it more specifically: “grant a security interest in refrigerators, tv’s, cars, appliances”

P9.5. This morning you met with Sharon Hammacher, general counsel for the Sun Bank chain.This will probably be successful as a work-around for 108(c). That section says you can’t use super-generic descriptions. But here, since the description is limited to exclude certain items it’s arguably not super-generic. You can make this security interest, except for the exceptions under 9-108(e) (protecting consumer goods).

Question: When a creditor executes the security agreement vis-a-vi a receipt, if the debtor has already used the collateral in a previous security agreement what happens.

Assignment 10: Proceeds, Products, and Other Value-Tracing Concepts

Proceeds

Problem Set 10P10.1. Firstbank has a perfected security interest in all of the “equipment, inventory, and accounts” of Polly Arthur, who is doing business as Polly’s Plumbing. The contract makes no mention of proceeds, products, offspring, substitutions, additions, or replacements. Are they included? UCC §§ 9-102(a)(64), 9-201(a), 9-203(f), 9-204(a).

Proceeds is defined under §9-102(a)(64). To have a security interest in proceeds, under 9-203(f) proceeds are automatically included in any security agreement, as long as there is attachment under 9-315.

ProductsOffspringSubstitutionsAdditions, or replacements

You can make the argument 9-102(a)(64)(c) - that they arise out of the collateral. For substitutions, additions, and replacements: make a tracing argument that this property was acquired from the proceeds of collateral in the security interest. Maybe make an argument that the after acquired property agreement is implied, in the additions to the inventory and accounts.

P10.2. Which of the following are collateral of9-102(a)(2), (64), 9-315(a)

(a) The money now in Polly’s bank account.Account does not include a bank account. (a)(29) - is defined to include bank accounts as a deposit account, however, 9-102(a)(2) excludes deposit accounts from the term account. The bank account would not be included under bank account. You would have to make an argument that it was proceeds, for example sold the collateral for a check, the check is deposited into the account, the bank account becomes collateral to the extent that the money is part of the bank account. What if there is other money, i.e. co-mingled. This would be a tracing problem. We would have to trace money into the account, to separate what would be collateral and what would not.

(b) A parrot that Polly took in payment of an overdue account.Section 9-102(a)(2), things taken for payment, collected on for collateral, constitutes proceeds. The parrot would have to be an account under 9-102(a)(2) and then would automatically become proceeds. See 102(a)(64)(B).

(c) A new computer that Polly bought to replace the computer she owned at the time she granted the security interest to Firstbank.

This fits under the category of equipment 9-102(a)(33); and the security agreement includes equipment, which is original collateral. The problem now becomes whether the equipment is proceeds? Was the computer traded in, but if she sold the computer and you can show she used the money. But the court will not imply an after acquired property agreement to equipment.

(d) A Myna bird that Polly took fromPets are consumer goods. In this case, the security agreement doesn’t include consumer goods, and you can’t imply an after acquired property agreement in consumer goods. However, this is payment for an account. An the bird is a collection for the account.

An account presupposes a credit transaction, that there will be an outstanding credit obligation. A simultaneous or near simultaneous action would not create an account.Issue becomes whether an account came into existence during this one day period?

P10.3. A few months ago, Equipment Leasing Partners9-102(a)(64)102(64)(c) proceeds arising out of the collateral. Wiersma case on 163 discusses this case. 64(a)(c) appears to be incredibly broad. The court that dealt with it thought it was very broad. The purse would not be collateral under previous provisions, but under the new code revisions it would seem to be included as collateral.

Comment 12a on pg 697- distributed on account of supporting obligations: distributed on account of = investment property. This probably wouldn’t apply. The terminology of “profits and products” = in the language of the K, would imply the purse won at the track as a profit.

P10.4. Joey Teigh contracted Yes, it could all possibly be attached under the doctrine of proceeds of proceeds of proceeds.

Yes, FirstBank's inventory collateral probably covers the proceeds of inventory, which flow into the accounts receivable account (§ 9-102(a)(64)(A)). Any proceeds used from the disposition inventory to purchase furniture, fixtures, or equipment would be encumbered by FirstBank's security interest.

P10.5. (a) ELP consultsa. At this exact point in time, the right to collect the insurance constitutes proceeds, and is clearly collateral. b. when insurance company paid ELP, and then ELP transferred the 35K to the bank account. The bank account, to the extent that the money can be traced, is now proceeds of collateral. Because the money was co-mingled, it will need to be traced.

9-315(b)(2): in order to make a claim for proceeds the proceeds must be identifiable.

c. 38K left. With the co-mingling problem. After writing a 2K check. Use the lowest intermediate balance rule. Think of proceeds as the heaviest, and most dense liquid in a vat of liquid.

d. the 6K is proceeds. In taking 32K out, he took out all the non-proceeds, and used most of the proceeds to pay the IRS. Under 9-332(b)- a transferee of funds takes the funds free of the security interest in the account, unless that party conspired to defraud the creditor.

Assignment 15: The Prototypical Secured Transaction

Problem Set 15P15.1. As an attorney for

The problem is that oil floats on water. Billy Saul Estes- showed same pile of grain to bankers

P15.2. What could the bank lenders

- How to protect yourself against being defrauded.

Double Collateralized vehicles- Floor plan financing fraud-

Each time there is a new car they can search the UCC to see if anyone else has a security interest in these cars.

Cars- certificate of titleIf the cars are new, they won’t have any titles any way, the first title is issued when the car is bought.

9-311(a)(2):9-311(d)- any time you are taking a security interest in

Fraudulent Statements to Banks/ CheckersTrain the checker to stay until all cars are in.

Calling the Cars in to be checkedCheck the mileage,Random Floor Checks

Obtained loans for forged sales documents-

P15.3. The law firm you work for is outside counsel toPersonal Guarantees. What’s the point of getting guarantees on closely held corporations? The guarantees are usually unsecured, however, this is big leverage to get them to help you. The more the corporation pays back, the less the personal guarantor has to lose.

Assignment 16: The Personal Property Filing Systems

Problem Set 16P16.1. Leonard Drapkowski’s only valuable possession is his

§9-102(a)(52): defines the term lien creditor. A creditor who has acquired a lien on the property by attachment, levy, or the like.§9-317(a)(2)9-311(b)§9-201: unless otherwise indicated in this code, the secured agreement is effective against the world at the time of execution.

(a) Now where does Felicia stand? UMVCTA § 20(b). UCC §§ 9-102(a)(52), 9-317(a)(2), and 9-311(b).Does she have a judicial lien on the car? No, she is still an unsecured creditor and has not gotten a writ of execution to levy on the car [judicial liens are created and perfected at the time of levying]. Note that her judgment lien was created after Bernie perfected his interest by notation on the certificate of title.

(b) Can you go ahead with execution levy? If you can, should you? UCC § 9-401.Can she still execute the levy? If you have the writ of execution and levy the car, this would make her a lien creditor. §9-102(a)(54). How do you decide between Bernie and Ex-Wife?? Got to 9-317(a)(2): applies to conflicts between secured parties and lien holders “A security interest is subordinate to a lien creditor” if the secured party can [1] perfect interest, or [2] filing a financial statement, before the person becomes a lien creditor.

Here Bernie has perfected his security interest and gotten a security agreement/ and financial statement.

9-311(a)(2): provides that the filing of a financial statement requirement is ineffective, if the property is governed by any certificate of title statue

Cars that are inventory

To perfect a security interest in the car, you need to have it on the certificate of title.

The other problem is . . .Is that 12,000 a real debt? Or is it more likely that this secured transaction was an attempt to defraud creditors of collecting.

P16.2. Three Rivers Legal Services referred Sergio Morales to you. Sergio is a Salvadoran immigrant who has been §1-103(b)- you can go outside the UCC and use various cause of action described.§1-304: Obligation of Good faith: every K implies an obligation of good faith.§9-314(a)(1): Perfection by Control§9-201(a)§9-315(a)(1)- secured interest continues in collateral notwithstanding sale, lease, license, exchange, or other disposition unless authorized by the secured party.

9-317(b)- a buyer of goods, other than a secured party, takes free of a security interest if the buyer gives value and take possession of the property, without knowledge of the security interest, if the security interest has not been perfected.

Peerless Packing- virtually fraudulent conduct ???? WTF.

(a) What do you plan to tell him? See UCC § 1-103 (Rev. § 1-103(b)), 1-203 (Rev. § 1-304), 9-201(a), 9-315(a)(1), and the footnote to the Peerless Packing case.

No, under the UCC, Sergio is F-ed.

(b) If you discovered that GFC repossessed three vending carts in the past 12 months, each time from a defrauded buyer, would that help your case?

Under 1-103, Sergio can make an argument that there is some common law breach perpetrated by GFC.

P16.3. As the most junior attorney in a firm that represents9-109, 9-310: , 9-501(a) Keith Pipes, an auto mechanic

This is the creation of a security interest, and would therefore fall under the scope of art. 9 §9-109. The tools would seem to fall outside the range of property which does not require a financing statement, and would therefore need a financing statement. Search under the name of the debtor, in the state, etc.

The tools may become a fixture by becoming a part of the real property, i.e. a sale of such real property is considered to include the fixture.

Musselman: [1] Classification of Collateral. Look to 9-102 4 types- consumer goods (a)(23), equipment (a)(33), farm products (a)(34), inventory (a)(48).

(b) Bernie Wolfson, an inventor who lives in San Diego§9-311(a)(1), 9-109(c)(1). Under §9-109(c)(1): article 9 does not apply to the extent that a statute, regulation, or treaty of the US preempts this article. §9-311(a)(1)- Where a system of filing has been established under federal law, Perfection can only occur through compliance with that system.

Mussel/Man- Patents are filed in the state system In re Pasteurized Eggs.

A patent would likely be a general intangible

(c) Your client is a New York bank that plansSearch the UCC state filing offices in New York. United States Copyright Office.

With regard to copyrights or receivables generated by copyrights, the US Copyright Office preempts Art. 9, therefore one must file in the Copyright office to perfect. -Copyright requires that you must file a financing statement for each copyright, here it would be 119 separate filings.

(d) Your client is an Indiana bank planning to 9-311(b):

(1) Dealer’s inventory: must get the status of the cars. Cars are pre-empted by the car title system, you must comply with that certificate of title statute. You must perfect on each certificate of title. Unless they are a dealer – then this doesn’t apply 9-311(d).(2) Automobiles not for sale- here you need to get the certificates of (3) accounts receivable from the sale of automobiles- this would be an account under 9-102(a)(2). (4) Federal filing neither required or permitted for trademarks.

How to know which cars are covered by financing statement and which ones are not? Look at the car titles for each car, and

Cars- New car inventory- have a manufacturer’s certificate of origin.Used Cars- has seller sign power of attorney to transfer the title.

P16.4. The lawyer who assigned the Indiana bank case to 9-502(d): allows for pre-filing. You can file a financing before you have the security agreement. This gives you an earlier filing date, and time to search.

9-516(a): Once you’ve taken it down there, and gotten it filed, it is effective, even though it won’t appear on the index.

HOW TO GET AROUND PROBLEMS WITH FILING[1] FILE THE STATEMENT,[2] ASK WHAT THE BACKLOG IS, WAIT A COUPLE OF DAYS AFTER THE BACKLOG DATE PASSES, AND GET A SEARCH.

Assignment 17: Article 9 Financing Statements: The Debtor’s Name

Problem Set 17P17.1. Your client, Center Bank and Trust (CBT), plans

§9-503- if the debtor is a registered organization, the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized. 9-102(a)(70)- registered organization defined. MUST BE EXACTLY THE SAME as the corporate name.If not a registered organization go to 9-503(a)(4)

1 You will need to find out whether or not this is a registered organization?2 When Corp get a list of assets, and make sure that the corporation owns the collateral. Hire an accounting firm, that demonstrate title to accounts, inventory, see who the buyers were2 b. If not a corporation, “trade name”- under 9-503(c) the trade name is insufficient to give notice to the world . Instead, use the exact legal name of the debtor, 9-503(a)(4)(A). The problem is what is the exact legal name? Your actual legal name is what you are known by generally in the community for non-fraudulent purposes. Safe harbor might be

§9-506: Minor Errors and Omissions. If you can determine the correct name of the debtor, then run a search, if the financing statement turns up, it is not seriously misleading.

Hypo: Say we find out his correct exact legal name is actually Robert Joseph McErny. Should we search under variations? HELL NO, we did everything right, every other financing statement filed would be seriously misleading.

Debtor’s NameI. § 9-503: A financing statement sufficiently provides the name of the debtor:

a. Exact legal name of registered organizationi. See definition of registered organization in § 9-102(a)(70): essentially, a corporation

b. Legal name of individual or organizationi. An individual’s legal name is the name by which he is generally known, for non-fraudulent

purposes, in the communityii. Trade names are insufficient

We’re focusing on the name of the debtor, which is the most important, because it’s how you index records. The most common way of perfecting a security interest is to file a financing statement. So it’s important that a financing state comports with all requirements.

17.2- How are you going to do these searches? Under 9-502 you can search under the legal names. Here, because you have a hard copy,

(1) Susan Alexander- If you have the exact legal name that you submit – and nothing comes up, then you are free and clear. Here we have a hard copy, what’s the standard? Look to every Alexander? With a hard copy you can see everyone’s name. How far do you have to go to conduct a “reasonably diligent search”??? Compare the address you have to the names containing Alexander. If the court implies a duty of reasonable diligence, then the financing statement is under 9-506(c).(2) John Phillip (“Jack”) Smith- there will be a ton of hits.(3) Tessie’s Tire City- You need to decide whether this is a trade name, LLC, corporation, etc.? Corp look in SOS public records, Gen Part- look for partnership agreement and see what the name of the partnership is, or if just a sole proprietor, trade names are insufficient, therefore need to get their legal name.

17.3- Let’s assume John Phillip Smith is the exact legal name of the debtor. You would probably need to search all 112 filings, because §9-506(c) says that every single one of those filings is effective notice to you as a potential secured creditor.

17.5- TIME REQUIREMENTS- filing office is supposed to comply with. If the financing statement is received on Wednesday, under 9-519(h) must file by 2 business days after receiving the statement, in this case Friday. To make the financing statement searchable, they have 2 business days under §9-523(e). They have 2 business days to get the search back to you after request.How can you be sure you don’t ask for a search before your financing statement appears? Under 9-523(c), “3 business days before the search request is made”- te filing office can specify an effective date earlier than they are actually conducting the search. They can specify a retro-active date. You file a request on Thursday, they have until Monday of week 2 to get the search back, but the filing office has the option to make the search effective on Monday of Week 1.

The rule is WAIT 3 BUSINESS DAYS AFTER YOU FILE A FINANCING STATEMENT TO REQUEST A SEARCH.

What happens if the filing office doesn’t comply with the 519 rule? NOTHING, as long as they have exercised reasonable diligence.

17.6Isabelle Sterling, closing set for 16 days from today. One weeke agaa. 1st- file the financing statement. 2nd-b. File the statement. How long to get results back? 1st you have to wait 2 weeks to search. Request a search. And however long it takes for them to get it back to you.Musselman would say, hey let’s go ahead and close, and withhold funding, until the search clears.

Assignment 18: Article 9 Financing Statements: Other Information

Filing Office ErrorsI. Wrongly Accepted Filings

a. If the financing statement meets § 502(a) then it is effective even if it does not meet § 516(b)II. Wrongly Rejected Filings (§ 516(d))

a. The financing statement is effectiveIII. Filer Errors in Accepted Filings

a. Incorrect information is insufficient reason for rejection

Problem Set 1818.1

a. 9-520(a): Filing office has to reject acceptance for reasons set forth in 9-516(b). They have to accept it if all requirements of 9-516(b) are met.9-516(b)(5)§9-516 comment 3If you don’t know the ID number for an organization, just put in your license plate number, because the filing office is nor required nor encouraged to ensure that the substantive information is correct, just that these items appear on a financing statement.

b. What if they don’t accept, even though it has all the requirements? You are still perfected, under §9-516(d) except as to purchasers of value who gives value in reasonable reliance on the absence of the record from the files.***Notes- 1-201(29 & 30)- define purchaser. Purchaser is defined to include secured party. Therefore if a secured party relies upon the absence of your rejected financing statement, before you can resubmit a financing statement which is accepted, the new secured creditor will jump you in line.

c. Accepted the financing statement with incorrect information does not perfect the security agreement. 9-520(c): filed financing statement is effective even if the office is required to reject it, and they do in fact accept it. However, any incorrect information prohibit the perfection of the security agreement. Under §9-338: if a purchaser gives value in reasonable reliance upon the incorrect information, and received delivery (if required) then he takes the property free of the security interest. In the case of a organizational ID number, a court would likely hold it to be unreasonable to rely upon a wrong # as the only evidence relied upon when so much other information suggests notice.

18.2a. absence of local address for national company. Under 9-520(a)- filing office shall refuse to accept any record for reasons set forth in 9-516(b). Here the address is for the secured party, not the debtor, and under 9-516(b)(4), the secured party’s address is required. This is a wrongly accepted filing. Now its on the record. The effect is to make the financing statement effective, under §9-520, and 9-502.

We don’t use 9-338 it only applies to 9-516(b)(5) requirement, and does contain incorrect information. Here this is a b(4) requirement and the information is missing.

9-520: the filing is effective as a wrongly accepted filing statement. 9-338: only applies to information that is incorrect that is required by 9-516(b)(5).

b. irregularity = incorrect mailing address for the debtor – Under 9-516(b)(5), a mailing address of the debtor is required. Under 9520(c) sends us to 9-338, if someone reasonably relied upon the information to their detriment in executing a secured interest, they would gain priority over the prior secured creditor. The mailing address is a distinct identifier of persons with similar names, and therefore the incorrect mailing address would likely be a seriously misleading error. However, this is a trustee in bankruptcy, [1] he doesn’t search the finance statements, therefore he isn’t reasonably relying upon the incorrect information, [2] a trustee is a lien creditor, which is not covered under 9-338. 9-338 requires a purchaser (someone who gets their property voluntarily from the debtor). This is a perfectly good financing statement good against the trustee.

c. use of the secured creditors trade name- §9-506 comment 2: error in the name of the secured party or its representative will not be seriously misleading. §9-503(a), (b), (c)- requires the debtor’s name. § 9-502 requires the secured party’s name. Here the secured party has screwed up their own name. §9-502 requires the secured creditor’s name to appear on the financing statement. However, secured party’s will search under the correct legal name of the debtor, and will provide notice to the world of a security interest. Knowing who is the secured party is less important, and a misspelling or trade name is a “minor error or omission” under 9-506; argument being that the mailing address is still present, and a reasonable person may be

Rare is the instance that a error in the name of the secured party or its representative will not be seriously misleading.

d. Secured creditor’s name is completely wrong- In writing the wrong name entirely, 9-5Look to Comment 2, §9-506: in an appropriate case, an error of this kind may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral. In inquiring upon the name of the debtor, the name of the

secured party will come up as non-existent, which should put you on reasonable inquiry notice that the name of the secured creditor is wrong.

e. Description of the collateral contains the wrong address of where the collateral is - §9-504, 9-108. Purpose of the financing statement is different than the security agreement. Purpose of the financing statement is to give notice, and create a duty to inquire. If a 3rd Party found this financing statement, they could reasonably conclude that the security agreement only applied to everything at the address listed. Because the address is wrong, one could conclude that only Pickle Logging: the requirement for collateral in the description on the financing statement doesn’t have to be as good as the security interest, however, if it is too specific it could lead to reasonable reliance on the part of the 3 rd party secured creditor. Teal case- when the address doesn’t exist, the 3rd party creditor has a duty to inquire further. This thing could go either way. **If this was a security agreement, this would probably be harsher on the creditor, and probably not give a security interest at all.

Crappy Collateral description = using the location, is dumb and dangerous.

9-108:9-504: reasonable, super-generic description of collateral in financing statements is OK.

f. complete absence of description of the collateral, correct addresses of the creditor and debtor.Under 9-502: this would make the financing statement completely ineffective. This doesn’t put the world on notice of anything.

Under 9-520, only required to refuse for elements listed under 9-516(b), where description of collateral is nowhere to be found, so the filing office will accept, but it will be ineffective.

18.6Pablo applies to borrow money against his restaurant. Bank filed financing statement per §9-521. Pablo didn’t sign the financing statement. Search conducted on March 1st. Gave money on March 15. At closing, Pablo signed security agreement. 2nd bank Financing statement was filed march 10. a.- what’s the record to authenticate financing statement? §9-502(d): financing statement may be filed before a security agreement, §9-509(a) & (b)- debtor’s signature of a security agreement is authorization of a financing statement. §9-510(a)- a filed record is effective only to the extent is was filed by a person that may file it under 9-509; here they weren’t authorized to file the agreement until Pablo signed the security agreement. Pablo’s oral agreement was insufficient - he must make an authenticated agreement.b.- How should 1st bank change its procedures- 1st bank should require the debtor to sign his authorization of a filing statement, then hold the money after the signature of a security agreement and condition it upon a search.

Assignment 19: Exceptions to the Article 9 Filing Requirement

Possession

Control

PMSI in Consumer Goods

Problem Set 19P19.1. What are the permissible ways to perfect in each of these items of collateral? Be prepared to describe the physical processes.

a. Cash into debtor’s register each day - §9-312(b)(3): a security interest in money may be perfected only by the secured party’s taking possession under §9-313. Money-interest may only be perfected by possession. Possible solution is to hire the people working the cash registers or getting them to authenticate a record that it holds possession for the Secured party’s benefit.

2 methods of possession

§9-313(c): collateral in possession of person other than debtor- authenticate a record that it holds possession for the Secured party’s benefit.“Agency principle clause”- [comment 3]

b. Negotiable promissory note.§9-102(47): instrument means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment. [3 exceptions], §9-312(a): a security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing.§9-313(a): Perfection by possession or delivery: a secured party may perfect a security interest in . . .instruments . .by taking possession of the collateral.

Here we have options as to what type of perfection the secured creditor may undertake. In the case of a instrument, a purchaser of the instrument has priority over a security interest perfected by a method other than possession (must give value and take possession in good faith). §9-330(d). Clearly, Possession is the superior method of perfecting when dealing with an instrument.

c. Money debtor keeps in bank account, §9-102(a)(29): Deposit account defined. Most likely this money is in a deposit account, however it may be an investment or negotiable instrument (if it’s a CD or something), which are excluded as deposit accounts.§9-312(b)(1): the only method of perfecting a security interest in a deposit account as original collateral is by control.§9-314(a) and (b): Perfection by Control- Where to find the sections that define control for certain property, and (b) define the time of perfection by control.§9-104: Control of a deposit account,

1. [Secured Party can be the bank]2. [Debtor secured party and the bank can authenticate a record]3. [Secured party can become the bank’s “customer, account in SP’s name.]

d. Shares of stock in GM, for which certificate has been issued. §8-102(a)(4): certificate security means a security that is represented by a certificate.[Control] §8-106(b): Purchaser has control of a certified security if delivered AND [(a) indorsed to the purchaser/ left blank, or (b) registered in name of the purchaser] §9-106(a), Control of a certified security is controlled by §8-106.[Filing] §9-312(a)- interest in investment property may be perfected by filing. §9-102(a)(49)- certified security is investment property.[Possession] §9-313(a)- a secured party may perfect a security interest in certificated securities by taking delivery under §8-301.

Are any of these ways preferable 9-328 (1) a security interest held by secured party having control of investment property under §9-106, has priority over any other method.

e. obligations of customer in used car lot to pay for the cars they purchased. Obligations are evidenced by promissory notes and security interests in the cars purchased. §9-102(a)(11) Chattel paper- record that evidences both a monetary obligation and a security interest in specific goods. Here the monetary obligation is represented by the note that secures the cars. The question becomes, are the cars goods? Goods are any tangible personal property and clearly these cars are goods. §9-312(a), security interest in chattel paper may be perfected by filing§9-313(a)- security interest in chattel paper may be perfected by possession.

Why isn’t the promissory note an instrument? Look to §9-102(a)(11): . . .if a transaction is evidenced by records that include an instrument or a series of instruments the group of records taken together constitutes chattel paper. Instrument + security agreement = chattel paper.

The preferred method of perfection in regards to chattel paper is to have possession, §9-330(a) & (b).

19.2- Bank is lending money using the contractual right to payments as collateral

a. How to Perfect?b. What if document gives security interest in the franchise, and its perfected properly at the time of sale.

§9-102(a)(2)-account- right to payment of a monetary obligation . . . for property has been sold . .. but does not include rights to payment evidence by chattel paper or an instrument.(42)-general intangible- any personal property, includes payment intangibles.(47)- instrument- 61- payment intangible- general intangible under which the account debtor’s principal obligation is a monetary obligation);

Classification: [1] Look to see if its anything else, iff you can’t fit it in then it’s a general intangible.a. This can’t be chattel paper, because while the contract for payment references a monetary obligation, but it doesn’t contain a security interest in specific goods. Here, this is a franchise, which is intangible, and could never be goods. Maybe an instrument? This could be a writing that evidences a right to the payment of a monetary obligation, is not itself a lease or security agreement, and is of a type in the ordinary course of business is transferred by delivery with any necessary indorsement or assignment. However, it is not in the ordinary course of business that would allow a contract to be transferred with merely an indorsement. Not an instrument. Let’s go to accounts. Accounts means a right to payment of a monetary obligation . . . for property that” BINGO. This is an account. This contract would likely be held to be an Account.

2. How to perfect a security interest in Accounts?

File –While §9-312(a & b) doesn’t list accounts. Under §9-310, except as otherwise provided in (b) and §9-312(b), a financing statemetn must be filed to perfect all security interest and ag liens.

For every other piece of property other than Accounts, general intangibles, and commercial tort claims you MUST FILE. It is the only way. §9-310(b), §9-312(b). Default Rule.

b. §9-102(a)(11). Chattel Paper

§9-310, §9-313(a), §9-330(d)- 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 w/o knowledge that the purchase violates the rights of the secured party.

.What happens when 3 rd party has possession of instrument?

19.3 - What if the K for payment was only a negotiable promissory note, that was an instrument within the meaning of §9-102(47). Garp Assoc; is holding the note. Want to perfect the security interest, so that they are secured.

§9-312(a)-Perfection by filing permitted for chattel paper, negotiable documents, instruments, or investment property.§9-313, comment 3 & 4- [3] debtor cannot be an agent for the secured party for possession§9-330(d)

Since we can’t get possession of the note, are options are to go through article 9, and to buy the bank’s interest. Under §9-313(c) & the comments: get the 3rd party to authenticate an acknowledgement that it holds possession of the collateral for the secured party’s benefit.

What if they release the note, and don’t tell us? They are given safe harbor under §9-313(g): there is no duty unless the person agrees or law provides.

19.4 – Looking into proposed collateral to determine if there might be liens against the collateral that wouldn’t show up on even a diligent search. What do you advise? “discovering Automatic Perfection”

§9-104§9-309(1)- Automatic Perfection §9-311(b)§9-313: When Possession by or Delivery to a Secured Party Perfects Security interest Without filing.

a. 20K mobile home- located in remote corner, state law doesn’t allow for issuance of certificate of title for a mobile home. Search the article 9 filing records, and maybe the real estate record if it’s a fixture. The lack of certificate of title, indicates that we don’t need to look at the certificate of title. What about an automatically perfected security interst? Look to §9-309.PMSI? 1 st - IS this a consumer good? 9-102(a)(23). Based upon how the property is used. 2nd – Is this a Purchase Money security Interest? §9-103: Defines PMSI- Look to how the mobile home was acquired. Was the mobile home acquired in a credit transaction, or bought from the dealer itself with a security interest?

2 ways- [1] Sellers PMSI, ex: you go to sears and buy a washer & dryer on your sears credit card, you grant a security interest in the goods, to get the purchase price.[2] Lenders PMSI- go to a bank to buy a boat from the boat dealer. You grant the bank a security interest in the boat to secure the money.

Notes: need to ask for the original documents to check if the lender loaned against the property,

b. rare book collection- Under §9-313(c) a 3rd party may hold possession of collateral for the secured party. Or under comment 3 a third-party may hold possession as an agent for the principal party (secured creditor). To determine whether or not the LOC is a agent in possession for a SP we would need to ask them. Do they have to tell? Under §9-313(f) a person in possession of collateral is not required to acknowledge that it holds possession for a secured party’s benefit.

§9-210: This section gives the right to request information to the debtor only.§9-625(f & g): [f-Statutory Damages]: debtor or consumer obligor may recover actual damages, §9-625(b) + $500 in each case where a person fails to comply with a §9-210 request.

Issues: Does the LOC has a security interest in the goods?

c. Mercedes-Benz: The certificate of title is clean, specifically exempted under §9-309(1).You can’t have a automatically perfected security interest in collateral covered by 9-311. 9-311 covers a certificate of title statue, of which automobiles are covered in all 50 states. Therefore you will always have to perfect an automobile on the certificate of title.

d. solid gold ingot and 20 unset diamonds: No this, doesn’t appear under 9-309(1) as a category of goods that may be automatically perfected. Equipment vs. inventory. You want to see that the debtor has possession of the property. You should file a financing statement, check to see he doesn’t have possession, then you are 1 st in line and good as gold.

e. computer equipment: The cost of the computer is immaterial as to determining whether this is a consumer good or something else. In defining a consumer good, the principle use of the property determines whether it is a consumer good or not. Here the property is used to review stock quotations and is stored at Kettering’s office. These facts seem to indicate that this would likely be used in Kettering’s business, and would likely be equipment. If equipment, you’ll need to file a financing statement.However a second issue arises: the intended use at the time of purchase vs. actual use theories. These differing theories: under the intended use at the time of purchase theory, Kettering may have purchased the computer with the intention using it as a family. We’ll need to check the documents, contact the vendor, to see if the good was purchased with the intent of making this a consumer good. If not this would make the computer something other than consumer goods: either inventory or equipment.

Under actual use theory- Pig Example on why this is bad. Farm, equipment, consumer good, inventory.

4 categories of goods: Inventory, farm products, consumer good, equipment

f. checking account: Deposit Account. Collateral such as a deposit account is best held under control then filing, §9-310(b)(8). Control is established using 9-314, which directs us to §9-104. A secured party has control of a deposit account if: (a) Secured Party can be the bank, (b) Debtor secured party and the bank can authenticate a record, (c) secured party can become the bank’s “customer, account in SP’s name.To find out if the Bank is a secured party, we would need to contact the Bank. Finding out about a record, we would need to ask again.

Always be concerned about the Bank’s Common Law Right of Set-Off.

9-109: Scope section, tells you what Art. 9 applies or does not apply to. d(13)- Art 9 doesn’t apply to assignment of a deposit account in a consumer transaction. This doesn’t preclude a security interest from attaching forever, it just prevents article 9 from applying.

19.5Janet wants to use a lawsuit against her former broker investor guy as collateral for a loan from her brother for 100K.

1st- Does article 9 govern this suit? Commerical v. Non-Commercial Tort Claim.§9-109(d)(12)- Article 9 does not apply to an assignment of a claim arising in tort, other than a commercial tort claim. NOTE: once a claim arising in tort has been settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort.§9-102(a)(2)- defines account, to not include commercial tort claims (13) – “Commercial Tort Claim” : claim arising in tort where: (a) claimant is an organization, or (b) the claimant is an individual and the claim: (i) arose in the course of claimant’s business or profession, AND (ii) does not include damages arising from personal injury or death.(24)- “Consumer Goods Transaction”- goods used or bought for use primarily for personal, family, or household purposes in which: (A)- individual occurs obligation primarily for personal reasons AND (B) a security interest in consumer goods secures the obligation.

In making a determination, the claimant (Janet) is an individual, the question becomes whether this is her business or profession. If commercial tort claim- you can only perfect by filing, §9-310(a)- must file a financing statement to perfect all security interests, 9-310(b)- nothing discusses commercial tort claim as an exception,

If non-commercial: put judicial notice in the court file.

Contract Breach- If suing under the Contract theory, the property rights to proceeds fro the suits would likely be classified as a general intangible.

Commercial Tort Claims, Accounts, and General Intangibles = YOU MUST FILE TO PERFECT, IT IS THE ONLY WAY.

Assignment 20: The Land and Fixtures Recording Systems

Fixtures

Problem Set 2020.1- (SLP) lends to people banks won’t touch. They want to lend 1.5 mil to Pacific Interests.

a. How should SLP perfect in 1/3rd interest in 160 acre tract of land?Does the form in which title is held matter? Corporation vs. individually: Need to find out if there is a partnership/ joint venture or if held as a joint tenancy. If held as a partnership- you would be taking a security interest in the partnership interest, and a partnership interest is personal property, hence governed by Art. 9. NOTE: Interest in a trust is personal property. How to perfect? The partnership interest would likely be a “general intangible”, because it is an intangible property right embodied this partnership interest, and as such may only be perfected by filing.

§9-109(a)- Article 9 applies to transaction regardless of form that creates a security interest in fixtures by contract.(d)(11)- Article 9 does not apply to creation or transfer of an interest in or lien on real property except as applied under 9-203 & 9-308, 9-334: fixtures, fixture filings, 9-604.

If they have a co-tenancy, joint tenants with interest in the real estate itself. . . could they perfect by a fixture filing? The issue is whether the land has fixtures, 9-109(d)(11), if so they could make a fixture filing, if not, has to be recorded in the real estate.

e.- Pacific Interests hold 200K mortgage and note from Mark VI Partners. PI recorded the mortgage and the note in the real estate recording system; original is in possession of PI, How to perfect9-102(a)(2):(47):9-109(b):

9-308(e):9-310(a):9-312(a)9-313(a)9-330(d): Possession is best, because we can lose priority to someone else with filing.

This is a promissory note, which happens to be secured by a lien on real estate. Under 9-102(a)(65) a promissory note is defined. The question is what type of Collateral is a promissory note? In this case probably an “Instrument” under 9-102(a)(47), and perfection can be achieved by filing or possession. Security interest in the mortgage is itself an interest in real estate.

Under 9-109(b)- we can take a security interest in the property Article 9 applies to, irregardless of the fact that the property is secured by something outside the scope of Article 9.9-109(d)(11)- . . . . . .9-203(g): attachment of a security interest in a right to payment or performance by perfecting the security interest in the promissory note, you are perfected in the mortgage without doing anything more.

Might not be an instrument. Look to definition of a negotiable instrument: “ . . .look to local business practices . . probably not a negotiable instrument because not the kind of document where you bundle all this together. What could it be? Account- right to payment of a monetary obligation that is secured by property be sold, if an account file a financing statement, and if unsure (which we are), take possession.

Record an assignment of the mortgage? Only if you’re nervous Nelly.

If this had been secured by = chattel paper.

h. “Store fixtures” offered as collateral in Pet World. Store fixtures consist of shelving, counters, cages, cash registers, and similar items. Some are bolted to the building, some are free standing. Lease gives Pet’s World right to remove fixtures at the end of the lease.9-102(a)(41) – Fixtures: goods that have become so related to particular property that an interest in them arises under real property law.9-501(a)- Filing Office- Local, State, or both(a) File in the State Office if personal, (b) File in the locally declared office for real property if:

(1) collateral is timber to be cut, or (2) fixture filing financing statement,

(c) [Wherever the State directs] in all other cases where the collateral is goods that are or about to become fixtures, AND the financing statement is not filed as a fixture filing.9-502(b)- What a Real Property Related Financing statement must contain:

(1) name of the debtor(2) name of the secured party(3) describe the collateral covered by the financing statement(4) indicate that it covers real property collateral (fixture, etc.)(5) indicte that it is to be filed in the real property records(6) description of the real property, sufficient to give constructive notice, AND(7) if debtor doesn’t have interest in the property, the name of the record owner.

A: 1st, could any of these items be fixtures? We’ll need to look at the definition. §9-102(a)(41). In the definition, the drafters are deferring to real property law to decide state by state what a fixture is. Texas follows the MI rule of the Cliff’s Ridge case, and the objective intent of the parties is the most controlling fact. If not a fixture then it would be characterized as a good. See definition of goods. What’s the logical thing to do if you’re not sure? File it under the UCC as if it was goods, and file it as a fixture filing as well. How do you perfect a security interest in fixtures? 9-501(a)- tells us where to file when we need to perfect.

If you just perfect under article 9 and it turns out it’s a fixture, then you are subject to some limitations which we will discuss later. You can also perfect as a fixture. How to do that? Look to 9-501(a)(1)(B). a fixture filing is filed in the real property records. Under 9-502(b)- You filing statement must contain all 7 pieces of information.

20.3- You represent Folds mobile homes. When Folds sells a mobile home, it has the buyer execute a promissory note, security agreement, and a standard financing statement. The description is always [brand] mobile home, and serial number. Files in the SOS.

Barker bought a mobile home, put it on a lot. Pacific brought foreclosure proceedings on the lot, as they financed his purchase. Pacific argues the home is a fixture, and belongs to the lot.

a. Is Fold’s interest perfected? If a fixture, you can perfect a security interest in a fixture under article 9, therefore a limited perfection (this is not a fixture filing). If a consumer good, then it would be a seller’s PMSI, and automatically perfected. If a good, they are perfected under Article 9.b. Fold’s Win or lose? §9-334(e)(1) - Priority of Security interests in Fixtures: (e) a perfected interest in fixtures has priority over a conflicting interest in fixtures if: debtor has a interest of record in the real property or is in possession of the real property and the security interest: . . . If we had made a fixture filing before the other creditor had recorded and their interest we would have priority??????If you don’t make a fixture filing, and don’t perfect as to goods, the only people you’ll beat are the lien creditor and trustee.PSF is not a lien creditor or trustee, if this was a fixture we would lose to PSF.c. What if the challenger was a trustee in Bankruptcy? §9-334(e)(3): even if we didn’t make a fixture filing we would still control over a lien creditor. We would’ve perfected as a good, and under e3 we perfected any way.d. How should Folds perfect in the future? §9-102(a)(41), 9-502(a) & (b)

What if the mobile home is not a fixture? PSF had its mortgage filed before the financing statement. All PSF has is a interest in real property, therefore we don’t care because they couldn’t have an interest in the mobile home.

Main Point: You can perfect in a fixture under Article 9, or as a fixture filing in the real estate records. Fixture Filing protects you against more creditors.

Assignment 22: Maintaining Perfection Through Lapse and Bankruptcy

Problem Set 2222.1 – Bank of East Paltaka perfected on Dec. 30, 2001. filed a continuation statement on Jul. 7, 2006. Today, Mar. 22, 2010, loan officer asks:

a. Did the bank file at the proper time? §9-515: YES. a financing statement is effective for only 5 years after the date of filing. But a continuation statement must be filed 6 months prior to the expiration date. Here the 6 month window begins on Jun. 30, 2006.

b. When should Bank file the next continuation statement for the filing? Here the Bank may start filing upon Jun. 30, 2011.

c. Debtor files Chapter 11, the case will be extended for 2 years, does this change advice for filing the banks next continuation? BRC §362(b)(3), §9-515.NO, the automatic stay problem is expressly allowed under 362(b)(3) and 546(b)(1)(B) which allow the maintenance of a security interest to which the trustee is subject to.

22.2 Juan Gomez. Filed his financing statement 5 years and 2 months ago. Gomez has sold his restaurant and taken a security interest in all the restaurant equipment, including after acquired property. The note was amoritized over 12 years, with balloon payment after 6. There is no continuation statement on file. What to do?

§9-102(a)(39)- financing statement means a record or records composed of an initial financing statement and any files record relating to the initial financing statement

§9-509(b)- a debtor who becomes bound by a security agreement, authorizes the filing of an initial financing statement, and an amendment covering: (1) collateral in the security agreement AND (2) property that becomes collateral under §9-315(a)(2), whether or not expressly covered.§9-510(c)- a continuation statement that is not filed within the 6 month period(§9-515(d)) is ineffective§9-515- Duration and Effectiveness of financing statement§9-516(b)(7)- filing does not occur if a officer refuses to accept if the continuation statement is not filed within the 6 month window.

A: What about filing a new financing statement? We can’t file a new financing statement, even if we want to. What if we sneak it by them? 9-510(c) says that it is still ineffective. What to do? File a financing statement, we’ll call it FS #2? It wouldn’t be a valid continuation statement, but you would get priority as of that date. Nobody has a security interest in it yet, so we would take our interest and keep on rocking and rolling, kicking and cooling.

Uh oh, what about Hays pg 376?? The court treated it as a 2nd financing statement before any contravening statement had been filed. The court stringently read the code to say that once a financing statement lapses there is no way to revive your perfection. MODERN- you can re-perfect by filing another financing statement, it merely gives you a later date of priority.

You’re going to need authenticated record or use 9-509(b) to get authorization to file another financing statement. This could be a problem, because 9-509(b) only gives you implicit authorization from the security agreement as to the 1 st financing statement, not the 2nd. Could put language” the debtor agrees to all authorization for filing financing statements for perfecting all and future interests.

What if we search, find intervening interests? Does it matter if those interests we acquired before or after the financing statement lapsed??? -9-515(c): financing statement is deemed never to have been effective, upon expiration, as to any purchaser of value. Purchasers are buyers, secured creditors, and any voluntary party. This is not the rule for non-purchasers. Non-purchasers are trustees and lien creditors.

22.3Circus filed Bankruptcy. Your client holds 120K 1st Security interest. AFP also has security interest in the same property for 1 million. Your client filed 1st. AFP had possession on the day filings made. Does this make any difference?

§9-515: Duration and Effectiveness of Financing Statement; Effect of Lapsed Financing Statement§9-308(c): When Security Interest or Ag Lien is perfected; continuity of perfection. [Continuous perfection ; perfection by different methods. A security interest is perfected continuously if it is originally perfected by one method under this article and is later perfected by another method under this article, without an intermediate period when it was unperfected. As long as AFP has maintained possession of the circus goods, then you can perfect by possession. These would be goods, and they would’ve already had a perfected interest by possession, when we filed. §9-313. §9-322(a)(1): fist in time rule for priority.

At some point the circus would need their assets, and when AFP released them to the circus, wouldn’t this help our client? NO- under 9-308(c): the first date of perfection can be one way [possession], and then perfected by another way [filing], and if there is no inter-period where the interest was un-perfected, it counts as perfected from the earliest date of perfection. Therefore their filing perfection relates back to the date of perfection in possession.

How can this problem be avoided???Ask where the stuff is? Possession is notice, and if they don’t have possession this puts you on notice. Burden is on you to demonstrate that you had possession.

This issue came up in the Worthen Bank Case on pg 373. In that case, NBC who filed a financing statement in regards to debtors accounts receivable. Worthen filed a financing statement in respect to same collateral. NBC filed a 2 nd

financing statement covering the same collateral. NBC FS#1 collapsed, and debtor filed bankruptcy. NBC made argument that FS#2 related back to FS#1 under 308(c). Why didn’t this work??? 9-308 only applies when you perfect by one way, and is then perfected a second different way during the time the first perfection is still applicable.

22.5a. First Bank. Bank’s security agreement covers 12 fork lifts, a stamping machine, and all “replacements or additions.” The bank lent $400K to Beaver Manufacturing, balance stands @ $210,174. Financing statement filed describe collateral as equipment. Beaver wants to borrow against drill press, and wants First Bank to file a release to the drill press and office furniture, which isn’t covered by security agreement. There are no provisions governing release of collateral. Does 1 st bank have to give Beaver the release?

§9-513: Termination Statement

Under 9-513, to force someone to grant a release, there must be a provision in the security agreement. Here (c) applies, because this is not consumer goods. The issue becomes, under (c); SP shall file termination statement, if there is no obligation secured by the collateral covered by the financing statement. Here the financing statement does cover collateral still secured by the collateral in the security agreement. Therefore we cannot force them to file a termination statement.

§9-512: Amendment of Financing StatementCan we force them to file an amendment? No, under 9-512: the language is “may” not “shall”, the permissive language allows the secured party to choose whether or not to amend.

b. If not, will Beaver be able to assure another lender that it will have the 1 st filed security agreement against the drill presses. Could Beaver solve its problem, demanding 1st Bank to issue written statement of collateral, and show it to new Lender

§9-210: Debtor can request the list of collateral, and force them to list everything. (a)(3)- list of collateral defined. (b)(2)- Secured Party shall comply with this request 14 days after receipt.§9-401(b): an agreement between the debtor and SP which prohibits a transfer of the debtor’s rights in collateral, or makes the transfer a default, does not prevent the transfer from taking effect.§9-502(d): financing statement may be filed before a security agreement is made or a security interest otherwise attaches.§9-322(a)(1): first in time priority rule

You can get them to issue a list of the collateral, and it demonstrates that they don’t have a security interest in the drill press. This is done by §9-210. Why wouldn’t someone issue a security agreement and lend money against the drill presses and furniture??? Say we do loan them money, and 6 months later they need more money. They go to the 1 st Bank, get a loan against the drill presses, Now we’re in a fight for the drill presses. Do we have priority? No, because First Bank would have filed first. Look to 9-502(d). Whoever perfects first, wins, the financing statement relates the date of perfection, for the collateral covered, to the date the financing statement was filed.

Anything the new lender can do? Can they call 1st Bank and make an agreement? Maybe, its legal, but up to 1st Bank. What about agreement with debtor, that’s just stupid, cause if he breaches it puts you back where you started.

The moral of the story: if the debtor thinks he might want to borrow in the future, he needs to not-authorize such broad language in the financing statement.

Assignment 23: Maintaining Perfection Through Changes of Name, Identity, and Use

Assignment 23 = all hell breaking loose.

23.1GBT finances BBWs inventory under a financing statement that describes the collateral as “inventory, accounts, and chattel paper.” The agreement contains no restriction on BBW’s ability to finance equipment or real estate elsewhere.

a. Contrary to provisions of the security agreement, Bonnie kept a boat and used it personally. Assuming no transfer of ownership, did the interlude have any effect on perfection of the bank’s security interest?

§9-506(a): [Minor errors and omissions]: valid unless they make the financing statement seriously misleading.§9-507(b): [Information becoming seriously misleading]: except as otherwise provided [change in debtors name/ 9-508] a financing statement is not rendered ineffective if the information becomes seriously misleading under 9-506.

What’s the problem with bonnie keeping a boat at her house? It will change the boat from inventory to [X]. [X] cannot be consumer goods because there was no transfer of ownership, therefore the corporation still owns the boat. So its probably equipment. As such it would make the financing statement seriously misleading, because the financing statement doesn’t cover equipment.

Start with 9-506(a): do the errors make the financing statement misleading, yeah probably. Then go to 9-507(b): except for changes in debtor’s name, and when a new debtor comes in, a financing statement remains effective despite being seriously misleading under 9-506. It means, if the debtor uses the collateral in a different way than described in the financing statement, who cares, it doesn’t matter, it’s not affected.

So its not misleading. If the goods are subject to certificate of title, and they are not being used as inventory, they need to re-perfect under notation of title, 9-311. If its being used as equipment, they have to re-perfect by the appropriate method, otherwise they have an unperfected security interest. Immediately UNPERFECTED when the use changes.

b. Assume, this occurred in a jurisdiction which doesn’t issue certificates of title for boats. If Bonnie transferred ownership of the boat from her corporation to herself before she took the boat home, what evidence would exist of that fact. If Bonnie did transfer ownership is GBT still perfected?

§9-507(a): financing statement remains effective, in which a security interest continues even if the SP knows or consent to the disposition. 9-315(a): security interest follows into the hands of the transferee.

IF bonnie did transfer ownership, the boat would now be a consumer good. Assuming it’s used for personal, household use. The financing statement now covers inventory that isn’t owned by the corporation anymore. A financing statement is still good.

c. BBW traded one of the boats for a forklift. BBW uses the forklift to move the boats in and out of storage. GBT assumes they own the collateral, but wonders whether we need to do anything about perfection?

§9-315(a) & (d)

Forklift would now be equipment. The corporation took a boat that was inventory and exchanged it for a forklift, that is now equipment. We don’t have a interest in equipment, but the forklift is proceeds. It is received upon disposition of the boat. A security interest automatically attaches to the 9-203(f), and under 9315(a)(2) we automatically get a security interest.

How do we decided if our interest in proceeds is perfected? Proceeds has its own rules about perfection. Under 9-315(c)- a security interest in proveeds is a perfected security interest if the security interest in the original collateral was perfected. 9-315(d) a perfection interest in proceeds becomes unperfected on the 21 st day after the security interest attaches to eh proceeds unless: (a) Following conditions are satisfied:

[1] a filed financing statement covers the original collateral; [2] proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed;[3] the proceeds are not acquired with cash proceeds,

d. Would it make any difference if BBW bought the forklift using cash it had received from customer who bought a new boat? §9-315(a) & (d).

Yes, because this would be proceeds acquired with cash proceeds, and therefore this continuation of perfection would not apply for (d)(1). (d)(2) wouldn’t apply either. What about (d)(3)? (d)(3) requires that we perfect other than (c), which basically means that we would file a financing statement that would include the new “collateral”. (d)(3) isn’t automatic perfection, it basically says that you have to re-perfect by the appropriate method, within 20 days of the change.

Is there a situation where d(1) doesn’t apply, (d)(2) doesn’t apply, and we’re looking at (d)(3) and we do have to do anything? If the collateral was of a type described in the financing statement. This is where overbroad descriptions in the financing statement really help the secured party out.

e. 2 boats suffer storm damage. Security Agreement provided BBW would insure the boats against storm damage, and require GBT be named as loss payee. GBT was not named loss payee. Since storm BBW changed insurers, GBT is name loss payee on new policy. Does GBT have a perfected security interest in the claim against the former insurer, and if not what do they need to do to get one?

There is no way to claim this insurance policy as collateral under Article 9. They are unperfected outside of article 9. But you could probably make the claim that this is a proceed. Insurance claims can still be proceeds under 9-102(a)(64). The question becomes, is this perfected for a security interest in proceeds under 9-315? The collateral was a boat, and the filing statement perfected the security interest under the 2 boats. Automatic Perfection under (c) which goes for 20 days. Now we’ll have to find a way under (d). Under (d)(2) Is this a case of identifiable cash proceeds? No, insurance proceeds don’t look like any of those things. What about (d)(1)- no we can’t file a claim for insurance in the SOS office, because article 9 doesn’t apply to this. To claim a security interest in this claim, we need to figure out how to do this within the 20 day period.

Boat’s get destroyed, claim pending. Might take a couple of months. If you have a security interest in these boats, you have a security interest in the claim, which will be pending.

Can GBT simply wait until the claim gets paid, and then use (d)(2) for automatic perfection of cash proceeds? No, you can’t resurrect perfection, after 20 days the perfection in the claim expired. Once continuous perfection gets broken, you cannot resurrect perfection. You will still have an interest in the cash proceeds, but your interest won’t be perfected. Say if the guy then filed bankruptcy, you would lose to the trustee.

Proceeds are included in the definition of collateral, as soon as something becomes proceeds it becomes collateral.

23.2 SW appliance Corp, changed its corporate name to SW General 6 months ago. Is there anything we can do to make sure GBT remains perfected in all its collateral.

9-502(a)(1)- financing statement must have the name of a debtor9-503(a)(1)- financing statement provides the name of the debtor if the debtor is a registered organization, if the name is the exact name which appears on the public record under which they were organized.9-5129-507(c)- if a debtor so changes its names that it becomes seriously misleading under 9-506, then Financing statement is effective to perfect a security interest in collateral acquired by the debtor within 4 months after the change, and financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change unless an amendment to financing statement which renders it not seriously misleading is filed within 4 months after the change.9-506- 9-509(b)- Authorization Section- by executing a security agreement the debtor agrees to the filing of a financing statement and amendments.

Is the name change seriously misleading? Your always ok to collateral owned at the time and four months after the name change. These rules really only deal with after acquired property. What’s the problem in our case now? If there is high turn-over in their inventory we lose our perfection as to all the equipment. This is a continuous perfection problem. While we lose our perfection, if we file an amendment , it would restart the clock on our financing statement at the date of filing the amendment. This would leave a 2 month window of exposed vulnerability.

If an intervening interest did come in during the 4 month period after the name change, our security interest is still perfected.

23.3 - a. how often to check corporate records to make sure she could amend GBTs financing statements to avoid loss of collateral: at least before then end of every 4 months. Conservatively, every 3 months.

b. does a continuation statement have to include the new name of debtor that changed its name since the original filing? 9-102(a)(27), 9-512(a), 9-516(b)(3) & (5), form for amendments in 9-521. NO, a continuation statement doesn’t even have to have a name on it. 9-521 doubles as a continuation statement and an amendment, which is why the form has a place for a name on it. You’ll need the file #, which suffices for the name.

c. How can a old change of name be relevant. §9-515(e)? What if someone comes in and wants to borrow money, how far back do you need to explore? Is there some point that a financing statement becomes ineffective? 5 years, but you could have continuation statements on file. You need to look at what type of collateral you’re taking a security interest in, and figure out when he acquired this collateral. If there’s a lot of big machinery, how long has he owned it, does it have a 30 year life? Probably going to need to look back 10-15 years to see if he changed his name.

23.5a. ONB lent 1 million to Beaver, which produces and services commercial pumping equipment. Loan included a security agreement and financing statement, which describe the collateral as equipment, inventory, accounts, chattel paper, general intangibles, fixtures, money, and bank accounts.: One of Beaver’s assets is a bank account which contains 85,097. Does ONB have a security interest in the account?

Would this be original collateral under the s/a they signed? Look to the language of the s/a, it would seem that it is included under bank accounts. What about making an argument under proceeds? That the money in the bank account comes from the sale of something in which we had a security interest. It’s possible to claim an interest as original collateral, and proceeds. Does this 2 way claim help us? Yeah, gives us 2 bites at the apple.

9-203(f)- automatically have an interest in proceeds9-1099-109(d)(13

9-102(a)(29) and (64)

b. If ONB has a security interest in the bank account is it perfected? A bank account is a deposit account, under 9-102(a)(29), and you can only perfect a security interest in a bank account by control. By filing a financing statement with SOS they’re still unperfected. If they can trace proceeds from other collateral, do they have a perfected interest? Under 9-315(c) they would have a perfected interest for 20 days, the question becomes, do they have a perfected security interest under (d). Under (d)(2), the bank account would be cash proceeds, and we have continuous perfection forever as to cash proceeds.

c. Does it Matter if the proceeds have been in for more than 45 days? No, d. What if Beaver commingled $100 of its own money into the GBT Account? Perfection is automatic under 9-315? Must trace to prove that the money in the account is

Assignment 24: Maintaining Perfection Through Relocation of Debtor or Collateral

Assignment 24- collateral moving around

24.1- You file financing statement for 1st bank. Collateral is the equipment, accounts, and inventory of Shatner engineering. He’s sole owner, and his ex-wife runs the business. Has a permanent tenured job at University of Missouri in KC, school is in Missouri. Lives in an apartment on the Kansas Side of the line. During summers, Shatner returns to house in Tucson.

a. In what states should you file? 1st look to who is the debtor, individual v. organization? If he’s sole proprietor- §9-301: Look to the principal residence of the debtor, and file there. Local law governs perfection. Under §9-307: use to determine where a debtor is located. Here we use §9-307(b): a debtor who is an individual is located at the individual’s principal residence. The official comments, under 2, says that principal residence is not defined. In this problem, Shatner probably lives in Kansas. We should file in Arizona and Kansas because he has homes in both states, and the home in AZ could become his principal residence. Additionally, filing in Missouri would be a good idea. If you have enough money, I would file in Hawaii.

Is the debtor an organization? No because this is a sole proprietor and an organization requires more than one person. What if you find out he and his ex-wife are partners? Look to §9-307(a) place of business is a place where the debtor conducts its affairs. Where is the organization conducting its affairs? Clearly wherever Shatner lives or stays is going to be in play. Kansas is certainly one. Look to (b)(3): a debtor that is an organization and has more than one place of business is located at its chief executive office (note a place of business is anywhere there is business operations taking place). How is this determined? Author quotes the “nerve center test”. The safe side says perfect in AZ, KS, MO.

b. What debtor names should be listed on each of the filings?If individual =Must use the exact legal name of the debtor, if an organization = use the corporation’s exact name.

c. If Shatner formed a Nevada Corporation under the name S. Engineering Products, Now where do you file?Is this the real debtor? 9-307(e) applies to registered organizations, and include corporations, which is a registered

organization, you must perfect in the state of incorporation, regardless of the location of the business operations. If the corporation owns the assets, then the corporation is the debtor, and you would have to file in Nevada.

d. What if the business is unincorporated and Louise owns a 1.3 rd interest as a tenant in common. . . .What states to file in? What names to list?

See part a.24.2a. What should 1st bank do to monitor the locations of the debtor? §9-316(a) &(b)

b. How would the answer change if loan were for $25 million?We’re assuming they’ve perfected their security interests where they were initially suppose to. What can happen if

they are individuals? He can move from state to state- as an individual he can move his principal residence and your security interest will lapse after the expiration of 4 months under §9-316(a)(2). If the debtors location changes, you would need to file within 4 months to keep the perfected security interest. Essentially you have 4 month period to find out the debtor moved. Transfers the collateral to someone located in another jurisdiction §9-316(a)(3). Intrastate transfers are continued, as long as the debtor didn’t agree the collateral would be transferred free of security interest, under 9-507, but if transferred to another jurisdiction ( an inter-state transfer), the creditor has one year to find out, 9-316(a)(3). If the security interest lapses, under 9-316(b), the security interest is deemed never to have been perfected against a purchaser of the collateral for value.

What to do to monitor the location? Monitor the individuals principal residence, must figure out a way to find a debtors principal residence. Because we have wind that he may want to move to MO, go ahead and file in MO.

What if it’s a corporation? We know the corporation is incorporated in Nevada. Is there anything we need to be aware of? Mergers, or the sale/ transfer of assets. Any merger would wipe out their assets under the particular state, and would require a new filing under the state in which the corporation was reincorporated. Here the SOS makes it a little bit easier for us. They monitor, and are required to post such mergers. Because a merger is treated as a transfer of assets, Article 9 gives us ONE Year to find out. What if they sold the assets? They could form a new corporation and sell their assets to the new corporation in another state. How to find that out? This is more than likely going to be an internal transaction, and won’t show up.

What if this is an organization? If William and his wife are partners in a joint venture. The Key issue for an organization is the location of their business operations, and if there is more than one location, what is the location of their chief executive office. You would need to monitor where their business operations are located, and also the internal structure of the company. The operations can move solely to AZ or to Mo. Where are decisions being made? Must also monitor if there are two partners, what if one dropped out? Its going to change the filing to principal residence.

24.3- Global Bank lending 1.9 million to Tang Aluminum to purchase inventory, equipment, accounts, and general intangibles of Argon. Bank expects 1st security in those assets. What U.C.C. searches will you make? In what names will you search? In which filing systems?

§9-301(1): Law governing Perfection and Priority of Security Interests. Subject to exceptions: while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfections, the effects of perfection or non-perfection, and priority.9-307(a-e) Location of a Debtor:

(a) place of business(b) General rules(c) limitation of applicability(d) continuation of location: cessation of existence(e) location of registered organization organized under State law

9-316(a)9-507(a)9-507, comment 3

Search under Tang’s name, because it’s possible someone didn’t file against Tang. Why search under Argon? Because if Argon is a debtor in a secured transaction, and they’ve granted security interest in all this collateral, the security interest granted will follow into Tang’s hands if it is a intrastate transaction. Even if it’s an intrastate transaction, the perfection would continue for a year after the transfer. Going to have to look under Argon.

Anything Else? Where Argon got this property from. Because if Argon acquired this with security interests attached, those security interests would still be valid if it was a intrastate transfer, if intrastate those security interests would be valid forever. If Argon acquired it from someone else in another jurisdiction, those security interests would still be valid for a year. You’ll need to decided how far to go back. For $250K not that far, but for $25 million, uber-far back.

Anything else? how about if either corporation has resulted form some kind of interstate merger? Need to check to see if they’re the survivor of an interstate merger, the security interest would still be perfected for one year. If it was an intrastate merger, 9-508 applies and it treats it like a name change, the rules under 9-307(c) would apply. If it happened in TX: would have to look under the name of the old corporation, because the security interests are still perfected for 4 months. How about a name change? Have Tang or Argon changed their name? The filing statements would be good as to all the collateral acquired for the following 4 months, and good as to any of the collateral acquired before the name change.

Assignment 25: Maintaining Perfection in Certificate of Title Systems

25.1a. First Bank lends $65K to Kahled to purchase Jaguar. First Bank perfects by notation on WI certificate of title and akes possession of he certificate. Kahled moves to ‘Bama, obtains new clean certificate from that state. One month after new title issued, Kahled borrows $50K from Secondbank. Secondbank takes security interest and perfects on the AL certificate. 6months after new certificate, Kahled borrows $45K from Thirdbank. Thirdbank takes SI and perfect on the AL certificate. 7 months later K files bankruptcy. Is Firstbank perfected?

So we’ve got security interest by FB in WI. Debtors goes to AL, no security interest is noted on it. Under article 9, specifically 9-316(d): subject to (e), a security interest in goods covered by a certificate of title which is perfected by any method under the law of another jurisdiction . . . . .So long as there is a certificate of title issued anywhere, Goods become covered by certificate

9-303: comment 4: the fact that the law of one state ceases to apply under (b), does not mean that a security interest perfected under that law becomes unperfected automatically. In most cases, the security interrset will remain perfected. See 9-316(d) & (e)

Firstbank is still perfected assuming the WI certificate of title is valid under WI law. Then we need to go to 9-316(e): a SI interest under (d) becomes unperfected as against a purchaser of the goods for value 4 months after the new certificate of title is issued, and is deemed never to have been perfected against purchasers of value is we don’t refile in the appropriate state during that 4 month window. We’re covered against the trustee, (not a purchaser of value) but as to Secondbank and Thirdbank. The COT was issued and 7 months have passed.

§9-337: also applies to this situation. “This state” will refer to AL in this problem. If AL requires that all certificates of title state that they may be subject to other security interests not shown on the certificate, 9-337 will not apply. However, if the state doesn’t, and the debtor had sold the car in AL under the AL COT, then if the buyer gave value and received delivery of the goods without knowledge of the interest, they take free. So if there’s a good faith purchaser, he would be protected under 9-337. Note, that if 9-337 applies, the 4 month rule doesn’t apply, and the secured creditor’s security interest is immediately cut-off upon sale to a non-dealer.

b. Change one fact: Firstbank learned of the issuance of the new certificate 3 months after issuance. Firstbank immediately demanded that Secondbank apply for notation of Firstbanks’ lien on the AL certificate. Secondbank promptly complies, and Firstbank’s lien was noted on the AL certificate. Between Firstbank and Secondbank who has priority 9-316(d) & (e).

Who has the priority? Firstbank, because they found out about it, went to AL and perfected within the 4 months. Therefore their interest dates back to the WI COT perfection. What about 9-337? Let’s assume we’re in a state that doesn’t require “subject to prior liens” put on the title. Walk through: perfected under WI, AL issues certificate of title, the security interest is subordinate to Secondbanks, as long as Secondbank didn’t know of Firstbank’s security interest. Assuming the facts of b., Secondbank wins as to Firstbank, but Firstbank wins as to Thirdbank.

25.2- Babs lives in Missouri, and owns a Nissan that is titled in Missouri. UMB financed purchase o fthe car, lien is noted, and has possession of certificate. Babs moved to NY without notifying the bank of her move.

a. 4 months have passed since move. Is the bank’s SI still perfected? For how long?9-303: it doesn’t make any difference if the goods are covered by COT in any jurisdiction, it doesn’t matter if the car is in NY or anywhere else. Its perfected forever as long as no new COT is issued and she

b. suppose she registers the car in NY and gets NY plates a week after she arrives. NY doedsn’t issue COT, and Bank still has MO COT, is the Bank still perfected? How long?Missouri COT is still valid and still covers the car.

c. Suppose Babs has the COT. Babs applies for NY COT. She surrenders the old COT in NY. Does this change anything?Yes. 9-303(b) goods ceased to be covered by COT at the earlier of [lists things] local law- MO law probably holds that

when a COT is surrendered is no longer valid, this would un-perfect their security interest at that time.

d. This is 25.1 redux.

25.4

Assignment 26: The Concept of Priority: State law

26.1

26.3a. 9-611c)(3): if the collateral is other than consumer goods, notification must be sent to (a)

9-617(b): rights of a good-faith transferee in the transfer of collateral. takes free of rights and interests, 9-625(b): a person is liable for damages caused by a failure to comply with Article 9, subject to exceptions.

b. 9-615(a): it doesn’t make any sense to bid more than 27K, any left overs go to the secondary lien holders.

c. 9-609(a)- after default, a secured party may take possession of collateral. Dispose of collateral under 9-610.9-401: d.

Interest is attached and perfected when you get a judgment and the sheriff gains possession through the writ of execution.

Assignment 28: Lien Creditors Against Secured Creditors: The Basics

28.19-317(a): Interests that take priority over or take free of security interest or agricultural lien9-201(a):

You could bring suit, but they’re probably going to levy on the property, and be first in time and first in right. Book points to 9-317, try to get a security interest in all or some of the debtors property: Under 9-317(b) either, (1) perfect Security interest before the person becomes a lien creditor. A person becomes a lien creditor when their lien attaches, and it doesn’t attach until the sheriff seizes the property. (2) something under 9-203(b)(3): get an signed security agreement AND file a financing statement covering the collateral, if done before they execute a lien, you have priority.

Under 9-609 you have a right of possession. If you show al the proper documents to the sheriff, and you are owed more money than the property is worth, then you get the property. This is the Grocery Supply case.

28.2- a.9-308: security interest is perfected if it has attached9-203(b): Priority between lien creditor and non-purchase money Art. 9 secured depends on whether the lien creditor becomes a lien creditor before the secured creditor (1) perfects its security interest OR (2) files a financing statement and complies with 9-203(b)(3)b.9-317(a)

Here, she’s filed, has a security agreement, and also a promissory note. But she hasn’t disbursed yet. In Mar. 10 th, they start plastering. Is Phyllis perfected, no. Under 9-308(a): a security interest is not perfected unless it has attached and all the requirements are satisfied. One of the requirements is that she has to give value, which she hasn’t done. 9-308 requires 4 things for perfection. 9-203 has 3 things required for attachment.

She hasn’t given value, which is defined under 1-204. Which is sometimes defined as a binding commitment to extend credit, and also security for a preexisting claim. Look to this section to see if she has made some sort of commitment, she probably hasn’t because the whole point of the searches was to inquire if she was going to loan the money.

However, Phylliss will have priority over the lien if she lends the money and meets one of the requirements under 9-203(b)(3); 9-317(a)(2)(B). Under 9-203(b)(3) if she executes a security agreement she’ll satisfy the section and gain priority over the lien creditor.

28.39-317(a)(2)9-203(b)

Between the time they’re searching alien creditor could come in an execute a judgment.

Possession goes to notice, and satisfies 9-203(b).

9-317(b)(2)Once the sherrif releases the property he releases the lien. At that point, if he takes it back the next day, that’s a new lien. So before you lend any money, make sure the debtor has possession of the collateral.

28.6Can she get the boat back from the sheriff today.

9-102(a)(23)- defines consumer goods

9-308(a)- Perfection of a security interest9-309(1)9-317(a & e)9-609

Since it’s a boat, you’ll need to know if they’re in a certificate of title jurisdiction. Assum it’s a Non-COT, the proper way to file is to file a financing statement. Question becomes is this a PMSI- in a consumer good? 9-309(1) says you are automatically perfected in a consumer good with a purchase money security interest. How to know if this is a purchase-money security interest? A PMSI if the money lent to purchase collateral. Seller’s PMSI, if you sell the goods are credit and execute a security interest as to the collateral to secure payment of the purchase price.Lenders’s PMSI is when you lend money from a Bank, use the money to buy collateral. This is probably a Seller’s PMSI. Is this a consumer good? Use of the collateral is determinative of whether it is a consumer good, if used for personal household, or family then consumer good. It is a consumer good most likely

What if it’s a consumer good? Automatically perfected, if the security interest has attached. What are the requirements for attachment? Has there been value given? Yes. Then security interest is perfected, and under 9-317(a)(2)(a). we win.

What if the boat used for business, then its equipment. Not a consumer good, therefore no PMSI-consumer good automatic perfection. We haven’t filed a financing statement, so 9-317(a)(2)(b) won’t work. Look to 9-317(e). for any PMSI, there is a 20 day grace period in which to file a financing statement after the debtor receives delivery of the collateral.

The advice is to file a financing statement right now. Then, go to the sheriff, and gain possession of the collateral under Grocery Supply.

28.7Edith didn’t sign the security agreement. The good news is that she’s in the office and will sign the security agreement

if you say its ok. Is there a problem? Here our security interest hasn’t attached, because we don’t have possession, and we haven’t executed a security agreement. Therefore, 9-317(e) won’t protect us, because it only protects as to between the time the security interest attaches and the time of filing a financing statement.

Tell her to go ahead and sign it, and file the financing statement. Go to the Sheriff and get the boat back, under Grocery Supply.

28.9

Assignment 29: Lien Creditors Against Secured Creditors: Future Advances

29.1 [real estate law]PRioriy battle between mortgagee and someone who has recorded a judgment on the property. Mortgagee certainly

has priority as to the 50K original mortgage. The issue is the 25K future advance, the 10K interst, and the 5K in attn’y’s fees. The schuste Case is the MODERN Rules: all amounts have priority with respect to lien creditor have priority over the lien creditor’s. Minority Rule: distinguishes between optional and obligatory advances, if it was optional not entitled to priority. Uni-Imports (466), these are considered –non-advances. They get priority if the debt to which they’re related has priority to the extent they are related.

29.2Debtor borrows 50K from secured party, executes a note and security agreement. To what extent will the future

advances gain 9-323(b): 3 ways a secured party may gain priority over a lien creditor in regards to future advances. More like the minority rule. Have priority over anything owed at the time of the levy, but as a general rule you must exempt your future advances to gain priority.

29.3A year ago, Carol lent 1000 to bob. Bob gave a security interest in his 32’ boat, and saw her financing statement was

duly filed. BCA recovered a judgment against Bob in the amount of 45K. Yesterday they levied the boat. It’s now in the sheriffs compound.

Bob wants an additional advance of 31K. Carol asks whether this will work.

If she does nothing . . . .Her senior lien would survive the judicial sale, and this $1000 would survive the sale. Bidders would probably bid at least, $31K because its subject to her 1000 lien. BCA is owed $45K, so they will likely try and bid up to the value of the boat, so that they can recover their If Carol makes the advance . . . . will she get priority with the $31K? There are 3 ways to “bootstrap” a future advance to the earlier date of priority: 9-323(b): (1) not know about the advance, Carol has knowledge of the levy, and therefore actual knowledge. (2) make the advance pursuant to a commitment when you didn’t know, . . . . She knows. And (3) If the advance was made within 45 days of the levy? What about the 45 days? She can probably do it, and have priority.

What if all she does is give him the 31K and have him sign a note? The basic issue becomes, is this a secured or unsecured loan? For a secured loan there has to be a security agreement which describes the collateral, and describes the obligation. Somewhere you have to describe the obligation that is secured by the collateral. What could the security agreement have in it to make the advance secured? What the original agreement to contain a clause which is a “dragnet” clause, to cover future advances. If the security agreement only describes the $1000 agreement then it would only operate as to the $1000 not any future advances.

What if no future Advance clause? You could execute a new security agreement, describe the collateral, the obligation. Will this give Carol priority? 9-317 & 9-323 are the priority rules. A Security interest is subordinate to a lien creditor only if the security interest wasn’t perfected before the person became a lien creditor. The financing statement is on file, perfecting her security interest in the boat. She will get the boat from the sheriff.

The issue becomes that this is done to defraud the lien creditor. Fraud issue comes up under fraudulent transfer act. A transfer of a property interest includes the conveyance of a property interest. UFA. Constructive fraud can only apply if Bob doesn’t get a reasonable value for the property in exchange for the interest. BCA could try to show actual fraud: that the whole reason this was done is to defraud BCA.

If she executes that security agreement within the 45 day period of the levy,

29.4Assume you represent BCA, and decdied the boat’s worth 32K. In preopartion for bidding, you conducted a UCC

search found Carol’s financing statement. Call carol to see how big her interest is. . . she doesn’t tell.a. How do you plan to get the information? §9-210, only applies to the debtor, who can request this type of information. BCA is a creditor so they have they right to do some discovery. Let’s assume they discover, and find out how much the interest is.

Bob owes Carol 5K. Does this help them, in finding out how much to bid? Not really. Future Advances can increase the amount of Carol’s Interest, within that 45-day window. What if the sale is held 28 days after the levy, and there’s a buyer @ the sale, who pays $31K. Let’s say, on April 3rd, Carol advances 31K to Bob, and this is made a secured loan, secured by the boat. The buyer has the boat.

Does Carol’s security interest for continue through to the Buyer’s hands? Yes, it does as long as the seller doesn’t authorize otherwise. The basic security interst will definitely go through. Can she expand the amount of her interest to the buyer? §9-323(d)- says that a buyer of goodsother than a buyer in ordinary course of business takes free of a security interest to the extent it secures advances made after the earlier of: (1) the time the SP acquired knowledge of the buyer’s purchase, OR (2) 45 days after the purchase. This 45 day period is different than 9-323(b) because it is the “earlier of” language rather than the absolute 45-day period.

Does Carol have any interest in the sale of the boat? Yes, under 9-315(d)(2) identifiable cash proceeds, she has a security interest. Can she expand her interest in the Cash proceeds up to 45 days after the levy, Yes. If the boats sold, still less than 45 days after levy, Carol can make a future advance and assert priority over those identifiable cash proceeds.

This seems Nuts doesn’t it? Fully conduct a sheriff’s sale, and up to the time of the 45 day period, the future advances will be covered. Why in the hell would drafter’s do this? Beat the IRS, and the Federal Tax lien act.

b. If you can’t get the information, what will be your bidding strategy at the sale UCC 9-323(b) & (d).

Assignment 30: Trustees in Bankruptcy Against Secured Creditors: The Strong Arm Clause

Under 30, the trustee, also a lien creditor, Assignment 30- focusing on priority battles between Trustee in Bankruptcy and Secured Creditors. The very second the debtor files bankruptcy, the trustee instantly has the status of a lien creditor.

30.1 Which of the following can the trustee avoid under the BRC §544(a)? Bankruptcy filed on April 15, as Chapter 11. Converted into Chapter 7 on October 15.

a. Wyandotte Bank financed G’s acquisition of new machinery 8 months prior to Bankruptcy filing. Paralegal filed the signed financing statement in the attorney’s office, not the filing office. Attorney filed the FS on April 22.

The Trustee may avoid the secured creditor because filing the financing statement on April 22 would violate the automatic stay under §362(a)(4). The trustee is treated as a lien creditor who was granted a judgment and levied on the date of the bankruptcy filing.

Automatic Stay Exception §362(b)(3) – to the extent that the trustee’s rights and powers are subject to perfection under §546(b)

b. Same facts, but Bank filed financing statement on April 14.The Bank’s interest would be A-OK.

c. Torgeson, secured creditor by interest in front loaders. Omitted all the information on his financing statement required by §9-516(b)(5) As result financing statement shows up under correct name of debtor, but impossible to tell its agasint the organization reather than a trade name.

Filing office should’ve rejected the filing. But since it has been accepted, it is applicable only to the extent that it is a sufficient financing statement. §9-502. Name problem, it is exempted under 9-506(c) which satisfies 9-502(b). Wrongfully accepted financing statement that satisfy 9-502(b) are effective. However, 9-338 would seem to help the trustee, but it only applies to purchasers for value. SO as against the Trustee, the financing statement is effective.

d.Glass co didn’t file a continuation statement. They had a security interest in other equipment of G, filed a financing statement 5 years prior to July 15. Its now Oct. 15.

On July 15, the security interest became unperfected as the financing statement was no longer valid. Filing a continuation statement won’t help us, even though it wouldn’t be a violation of the automatic stay. However, 9-515(c)- the effect of a financing statement lapses, upon lapse a financing statement ceases to be effective and any interest becomes unperfected, and is deemed never to have been perfected against a purchaser of value. The only question is was the security interest perfected when the bankruptcy is filed? It was.

Giddy up! We beat the Trustee.

e. FNB made a loan to Gargantuan 2 years before filing of the Chapter 11 case. G signed a promissory note, a security agreement, and a financing statement BUT Description of collateral in the security agreement was left blank. Lawyers filled it in, but not before a lawyer resigned.

In this case, the Article 9 problem is perfection. Question when is a security interest perfected? A security interest in perfected is when it has attached & filing of a financing statement, 9-308. Attachment occurs when value is given, debtor has rights in the collateral, and a security agreement. The absence o the description creates the absence of attachment because the description is necessary for attachment of a security interest. This would create an unperfected security interest during the bankruptcy, and any act to enforce the lien would be in violation of the automatic stay. More than likely the court will void this security interest as unperfected at the time of filing for bankruptcy.

f. April 6, 9 days before chapter 11 is filed, G bought a new Lexus for use by its executives. G signed a security agreement in favor of Union Bank, but at the time of filing of the petition, UB application fore a COT showing its lien, was still sitting on someone’s desk at the bank. On April 25, UB delivered the application to the DMV.

Did UB’s delivery of the application violate the automatic stay? 1st Did UB security interest attach along the way? Yes, they had a security agreement, they financed the purchase of the car. What do they have to do to perfect? Here you;ll need to perfect on the certificate of title because it’s a car, 9-311(b). This was done on April 25. So when Bankruptcy was filed they were unperfected. Does the application for title violate the automatic stay?

Lets look to §362(a)(4)- automatic stay provision. Then, §362(b)(3)- any act to maintain of perfect an interest of property to the extent that trustees power is subject to under §546(b), is allowed. §546(b) “permits perfection of an interest in property to be effective against the trustee that acquires rights in such property before the date of perfection.”

PMSI? Allows a 20 day grace period after delivering the collateral.. How to decide if this is a PMSI? 2 kinds, this would be a lender: the money would have to be used to purchase the collateral, AND have to have a security interest in that property that was purchased. The bank financed the purchase, and if they can prove the debtor borrowed the money to buy the car, and they have a SI n the car. Here they’re in the grace period of 9-317(e). Their

interest arose when BR was filed. Attachment occurred on the 6 th. Filing occurred on the 26 th. Filing occurred between BR and the grace period.

This basically means we didn’t violate the automatic stay.

In 9-311, the relation-back periods for the certificate of title statutes are ignored by the courts in favor of Article 9. The 20-day grace period over the 10 day grace period.

9-317(e) refers to filina financing statement, and filing a financing statement isn’t necessary for perfection in a car. Check out Comment 8 to 9-317.

FORGET THE UMVCTA IF YOU WANT TO DO WELL ON THIS FINAL.

30.2- Senior Partne asks you to review and comment on the firms procedures for closing on sales of business. One of the problems is that What happens if we’ve already disbursed the proceeds of sale and the purchaser files bankruptcy before the documents are received and recorded by the filing offices.

PMSI’s v. Non-PMSIsNon-PMSI’s don’t have a grace period and would give other creditors priority over us. If we left something out? Filing officer has to reject it, and that would enables us to re-perfect.

If you really want to be safe, you have to wait for confirmation from the filing office that they’ve received our paperwork, and everything is OK.

Assignment 31: Trustees in Bankruptcy Against Secured Creditors: Preferences

Problem Set 3131.1 – As the newest associates at a glamorous, big-city bankruptcy firm, you have been assigned Gargantuan Industries bankruptcy. G filed under Chapter 11 on Sept. 1st, On Dec. 30, the case was converted to Chapter 7. The trustee asks you to review the following transactions for possible avoidances as preferences.

a. On Aug. 15, Gargantuan borrowed 300K for 1st bank. G executed the loan documents on that day. They included a security agreement and financing statement. 1st bank filed the FS the following morning.

Question becomes can the trustee avoid this security interest? At first blush notice that the security interest was perfected before bankruptcy, therefore Trustee can’t avoid it, unless it can be avoided as a preference. Attachment occurred on August 15, and perfection occurred on August 16.

There are 6 requirements for avoidance. All 6 must be satisfied. (1) There has to be a transfer of the interest of the Debtor in property (always satisfied). (2) The transfer has to be to or for the benefit of a creditor (always satisfied).(3) the transfer has to be for or on account of a pre-existing debt (prior to when the transfer occurred). (4) The transfer has to be made while the debtor is insolvent (Generally a debtor is insolvent when its debts exceed its assets, 547(f) creates a presumption of insolvency for the 90 day period before filing)(5) The transfer had to be made within the 90 day period before the bankruptcy was filed (expands to 1 year when the person is an insider).(6) The transfer must’ve enabled the creditor to receive more value than if the transfer had not been made and the debtor had just filed bankruptcy. (always be satisfied, A security interest will always allow a creditor to get more out of a debtor than anything else)

Way to analyze these cases is to say WHEN WAS THE TRANSFER MADE? b(2, 3, 4, 7) require that you need to know when the transfer was made. Look to 547(e)(2)- a transfer is made (a) at the time the transfer takes effect between the transferor and the transferee,; “takes effect” when the security interest attaches. Here the security interest attached on Aug. 15. If the perfection occurs within 30 days after it attached, the time of transfer is the date of attachment.

Let’s go through the requirements: The 1st requirement, is the interest a transfer of the debor yes, 2nd is it to a creditor, yes. 3rd- The transfer was a contemporaneous transaction, and the trustee cannot satisfy §547(b)(2).4th – Insolvent= the presumption is that the debtor was insolvent when the transfer occurred. 5th – The transfer did occur within the 90 day period before bankruptcy was file.6th- did the transfer enable the creditor to receive more? Did the granting of a security interest give them greater claim than if they had been unsecured? YES.

What if the debtor could prove that the security agreement wasn’t signed until the date of perfection? Can we now say the transfer occurred on August 15? NO, its August 16 th, because signing the attachment on 16th moves the attachment to 16th. Date of transfer is deemed to occur when the security interest attaches, if perfected within 30 days of attachment. In this case, transfer would be on account of a pre-existing debt, because the date of transfer was AFTER a security interest was granted.

§547(c)- is a safe harbor provision which allows us to pre-empt the trustee’s avoidance under (b). The language of the statute says, that such to the extent that such a transfer was intended by the debtor and the creditor that the transfer was made to be contemporaneous exchange for new value given to the debtor, AND is in fact a substantially contemporaneous exchange. Here, the parties intended the exchange to be contemporaneous because it’s a security interest agreement, parties to a secured transaction always want the transfer to be contemporaneous. The longer the security agreement goes unsigned, the harder it is to say that the parties intended a contemporaneous exchange. Question of Fact for the court.

b. On Feb. 7th the debtor borrowed 300K from 3rd bank on unsecured one-year promissory note. On Jul. 11th, the debtor signed security agreement for 300K loan. Immediately perfected by filing financing statement on same day. Can the Trustee avoid that interest.

1st Question is When was the transfer made? Have to go to §547(e)(2). Transfer was made at the time when the security interest takes effect. A security interest takes effect when it attaches. The security interest attached on Jul. 11, because that was when the security agreement was signed (last of the 3 req.). The attachment and perfection occurred on the same day, which is well within the 30 day allowed by (e)(2). The transfer occurred on Jul. 11th.

On or account of a pre-existing debt? When was the transfer made, and When did the debt come into existence? Transfer on 11th, and debt came into existence on Feb 7. Made on account of a Pre-existing debt.

During preference period? YesInsolvent? Presumed§547(c)(1) has no application because the loan was made when it was unsecured

The trustee can avoid the transfer.

c. Feb. 7th borrowed 300K from 3rd bank on a secured note. G signed and executed s/a on Feb 7th. 3rd bank attempted to file F/S but it was lost in the mail. 5 months later, the office received the envelope and accepted the filing.

When was the transfer made? 547(e)(2)(a). When did it attach? Feb. 7 th b/c that is the date s/a signed, value given, and debtor has rights in collateral. Was it perfected within 30days? No. Where to look if perfection hasn’t occurred within 30 day transfer period? §547(e)(2)(B)- which state that the time of transfer is @ the time of perfection. In this case the time of perfection was Jul. 11th. Now this is a pre-existing debt. This would be avoidable by the trustee.

What about 547(c)? Intended as a contemporaneous exchange? Yes, the f/S was mailed the same day. Then was it in fact a substantially contemporaneous exchange? Hell NO, this is a 5-month delay. Courts have held in a case of delay, because it wasn’t intended to apply to a case of perfection outside the 30-day grace period. §547(c) will not save this transfer. The trustee will be able to avoid it.

(d) On July 21, Gargantuan purchased network software and hardware from the Electronic Machine Shop (EMS). Gargantuan financed the purchase with a $30,000 loan from Fourthbank. Gargantuan signed a promissory note for the $30,000, a security agreement granting Fourthbank a security interest in the network, and a financing statement. Fourthbank issued the $30,000 check to EMS on July 21. EMS delivered the network to Gargantuan the following day. Fourthbank mailed the financing statement to the office of the Secretary of State, where it was received and accepted for filing on July 30.

We start with, when was the transfer made? This is determined by the date of attachment if the s/a is perfected within 30 days. Here value was given. There might be an issue as to when the debtor acquired rights in the collateral; it might be jul 21st or jul. 22. So attachment occurred either on 21 or 22. In this problem it doesn’t make any difference because the transfer was made, and the filing statement was filed with the 30 day preference period, and the transfer relates back to the day of attachment.

Is the SI avoidable under 547(c)? The 3 main requirements: Did the transfer occur on account of a pre-existing debt? If the transfer occurred on the 22nd then the transfer can avoided. But does anything save it? 547(c)(1)- will save the transaction, because the parties intended that this would be a contemporaneous exchange.

HYPO: What if the filing statement wasn’t filed until August 25th? the goods weren’t delivered until jul. 29th, Bankruptcy on sept. 1st, and attachment on July 21st.

The 1st question on avoidibility: when’s the transfer occur? Here the transfer occurs on August 25, because the date of attachment only controls if the security interest was perfected within 30 days of attachment. It is avoidable under (b)? Yes, the transfer’s on account a previous existing debt, its within the 90 presumptory period of insolvency, and

547(c)(3)- Safe harbor, if the security interest secures new value, given at or after signing of s/a that contains description of property as collateral, given by or on behalf of sP under such agreement [FIND THE REST OF THIS SECTION AND MARK IT AS A SAFE HARBOR]

(e) Would the result be different if, 4thbank issued the check, and Gargantuan had used the other funds to purchase the network?

(Think Not a PMSI) If the money wasn’t used to buy the equipment, then §547(c)(3) doesn’t apply, and the transfer may be avoided.

(f) On March 9, Gargantuan did not have the money to make its payroll. It solved the problem by borrowing $300,000 that day from Elsa Cohen, the wife of Gargantuan CEO, president, and 30% shareholder, Michael Cohen. Mike promised Elsa that the loan would be secured, but he didn’t get the papers over to her for signing until April 12. The financing statement was filed late in the afternoon of April 12. Elsa has never been involved in the management of Gargantuan.

Step 1 is to determine the date of the transfer. Under § 547(e)(2) a transfer is made when the interest attaches if the interest is perfected within 30 days (§ 547(e)(2)(A)), or when the interest is perfected if after 30 days (§ 547(e)(2)(B)). The security interest attaches when the elements of § 9-203(b) are met. Here, Elsa gave value on March 9, but the other elements were not met until she signed the SA on April 12. Attachment occurred on April 12, and perfection (filing the financing statement) was the same day. Thus, transfer under 547(e)(2) occurs on April 12.

Here the transfer was on 4.12. Requirements for avoidance: Insolvency, for a pre-existing debt, transfer made within 90 day before bankruptcy filed.Pre-exisitng debt? Yes. Made within 90 days? No.

Insider creditor. However, look to §547(b)(4)(B)- between 90- days and 1 year, if such creditor was an insider at the time of the transfer. “Insider defined in the definitions” She is an insider. Here the Trustee would have to prove that the debtor was insolvent. For 547(c)(1) to apply you have to show there was a substantially contemporaneous exchange. Generally, within the 30 day grace period is okay, but this was pretty long.

P31.2. Filed a suit a year ago, on an unsecured promissory note. Won a verdict. Day after verdict, 4 other creditors filed financing statements and recorded mortgages. Yesterday the judgment became final. §303(a)- involuntary bankruptcy act.

Do we get any advantage to forcing the debtor into bankruptcy? Yes, because it’s been about 2 months. That’s less than 90 days. The trustee could then probably avoid those security interests when there is a presumption of insolvency. Is there any problem with this strategy? WE only get pro-rata. Is there a better way? Go to the debtor and threaten to force the debtor into bankruptcy unless given a security interest.

The better answer is to go to the creditors and threaten to screw them by gong to bankruptcy unless they give a more equal share.

P31.3. Swissbank holds a perfected security interest in the inventory of Gift of Love. On June 1, the outstanding balance on the loan was $250,000 and the value of the inventory was $120,000. By August 29, Gift of Love was petitioned in to Chapter 7, the loan balance had been reduced to $150,000 and the inventory to $70,000. Every item in the inventory at the time of bankruptcy was acquired by Gift of Love on unsecured credit after June 1. Does the trustee have any rights against Swissbank? Does it matter that all $70,000 of the inventory remaining at the time of the filing of the petition was purchased by Gift of Love less than 90 days before the petition was filed?

In this problem, we must assume that attachment and perfection occurred in the past. But note that attachment cannot occur until the debtor acquires rights in the collateral (§ 9-203(b)(2)). With an after-acquired property clause, attachment cannot occur until the debtor has acquired it. Every time a new piece of inventory is acquired, the perfection and attachment is immediate.

Here the problem is that the entire inventory was acquired during the 90 day period previous to the filing for bankruptcy. For each item of inventory, the transfer occurred on the date of acquisition of the item (because attachment and perfection occurred that same date – § 547(e)(2) and also note § 547(e)(3)). The Trustee has the

potential to avoid all of the security interests if they meet the criteria of § 547(b). Any time you have a security interest in after-acquired collateral this will be result.

But see § 547(c)(5). Notice it doesn’t apply to all collateral, only to inventory or a receivable. Starts off saying (b) doesn’t apply to accounts receivable or inventory EXCEPT: [Court Gobbledygook]

Conceptually (c)(5) treats inventory and receivables as if the creditor has a interest in a singular mass. This allows the trustee to avoid the security interest to the extent that the Creditor improved their position within the 90 day period prior to Bankruptcy. The way courts do this is through the TWO Point TEST.

First point, prior to Bankruptcy, what was the Secured Creditor’s position? Loan balance - value of inventory = 250K – 120K= 130K.

Figure out how much the creditor is unsecured at the first point (the beginning of the 90 day period). This is the difference between the amount of the loan and the value of the collateral.

Second Point, 8/29, loan balance = 150K -70K = 80K.Figure out how much the creditor is unsecured at the second point which is the end of the 90 day period (the date of the bankruptcy petition).

Test= First point – Second point. 130-80= 50K. Because it’s a positive #, the Trustee can avoid this amount.

Swissbank will have a secured claim of 70K, and an unsecured claim of 80K for a total claim of 150K. However, because the Trustee can avoid 50K, they can knock the 70K secured claim down to 20K. This will give SwissBank a secured claim of 20K, and an unsecured claim of 130K.

Be sure to apply §547(b) before you apply §547(c)

Caveats- What if the loan balance was originally 100K, and then ended up being 250K. The value of inventory was 120K, and ended up being 170K.

FP1: FP2LB = 100K LB = 250KV/I = 120K V/I = 170K

Here in FP 1, he’s over-secured. (Don’t ever use negative numbers in the 2-point test). He can never improve his position from 0, so (c)(5) doesn’t apply.

Change it up again . . .

FP1: FP2LB = 250K LB = 250KV/I = 120K V/I = 50K

1st What’s the claim in BR? The claim is 250K. 50K of which is secured, 200K is unsecured. §506 Bi-furcate the claim.

2nd Look to see if (c)(5) applies. Yu’re not better off because you are more in debt.

Assignment 32: Secured Creditors against Secured Creditors: The Basics

Summary: Basic rule is the first to file or perfect rule of 9-322(a)(1). Generally, once a secure party has a financing statement, it will

have priority over any other later secured party who files a financing statement. The other point is that the 1st secured party will also have priority in regards to any extensions of credit whenever that is done,

as long as it is secured by a security interest.

Ex: Assume on March 1 Secured Party executes a security interest in the debtor’s equipment, and then filed a financing statement, loaning money $10,000. Sometime after that the debtor acquires a computer. Then sometime after that SP2 executes a security interest in the computer, and files a financing statement. Even Later SP1 executes a loan, $20K, on the condition that they have a security interest in the computer.

Is there any way that SP1 can ensure that they will have a security interest in the computer for the total 30K. Check to make sure the security agreement covers after-acquired property. If it doesn’t we’ll have to draft a new security agreement that will cover the property. This will still gives us priority over SP2

because of our earlier financing statement. To make sure our 30K is secured, we need to have a future advance clause. If the original SA doesn’t have a future-advance clause,

Problem Set 32P32.1. In late July, Dawgs & More (Dawgs) applied to Bank One for a loan against its lawn dog manufacturing equipment. Without committing to make the loan, on August 1 Bank One filed a financing statement against Dawgs showing the equipment as collateral. Also in late July, Dawgs applied for a similar loan from Bank Two. On August 5, Bank Two approved the loan and filed a financing statement against Dawgs showing the equipment as collateral. Bank Two and Dawgs signed a security agreement on August 5 and Bank Two advanced funds to Debtor. On August 7 C-Dogs, a supplier and judgment creditor of Dawgs, became a lien creditor by levying on the equipment. On August 10, Bank One received the report of their UCC search showing their financing statement to be in first position. They approved the loan to Dawgs. Bank One and Dawgs signed a security agreement, and Bank One advanced funds against the equipment. As soon as the check from Bank One cleared, the owners of Dawgs wired the Bank One loan proceeds to Freeport in the Bahamas, where they paused only long enough to join the proceeds from the Bank Two loan, and then continued on to places unknown. Who has priority in the equipment? UCC §§ 9-203(b), 9-308(a), 9-317(a), 9-323(b), 9-3232(a)(1).

Time LineAug 1 B1 filed a FSAug 5 B2 files a FS for equipment, gets SA and loans fundsAug 7 C-Dogs becomes lien creditor by levying against equipment (§ 9-317)Aug 10 B1 gets SA and loans funds

There are three parties fighting over the same collateral here. You essentially have 3 different priority battles.§ 9-308 covers the rules for perfection.

B1 (Art 9 SP) v. C-Dogs (Lien Creditor) (§ 9-317)B1 had filed, but the interest did not attach until after C-Dogs became a lien creditor. So C-Dogs wins here.

B2 (Art 9) v. C-Dogs (Lien Creditor) (§ 9-317)B2 wins because they perfected before C-Dogs became a lien creditor.

B1 v. B2 (§ 9-322)B1 was the first to file. (the rule says file, the only time perfection pays a role here is when perfection is by a method other than filing). If you file first then filing controls, if you wait to file until you perfect, then you perfected when you filed and filing controls again.

Bk 1 v. C-Dogs = C-DogsBk 2 v. C-Dogs = Bk2Bk 1 v. Bk 2 = Bk1

The bank should file and check who has possession of the collateral on the filing date. The bank should check who has possession again on the day they sign the SA and loan the funds. This will protect the bank from a lien creditor who has levied and taken possession.

Circular priority problem: Who has priority over the other? They sometimes occur because the priority rules vary among the types of competition, i.e. rules between lien creditors and secured parties. This generally happens in situations like this (where one of the parties is subject to different priority rules than the others). There is nothing in Article 9 to help courts deal with this; they generally say that public policy favors one party depending on the facts and equities of the case.

The key thing to remember is that this problem does a good job of pointing out THERE ARE DIFFERENT RULES.

P32.2. A year ago, Centurion National Bank loaned Flight Analysis, Inc. $250,000, took a security interest in “flight simulation equipment,” and filed a financing statement using those words as the description of collateral. Centurion filed its financing statement on September 21. A few days ago, Centurion learned for the first time that First National Bank had filed a financing statement against the same collateral on July 21 of the same year. Centurion’s chief loan officer, Harley Davidson, sees what is coming and is scrambling for a way out. He recalls that Centurion took and perfected a security interest in some flight simulation equipment owned by Pilots Unlimited, including after-acquired equipment, and perfected that interest by filing a financing statement on March 21 of last year describing the collateral as “flight simulation equipment.” Harley now proposes to get Flight Analysis to sell its flight simulation equipment to Pilots Unlimited. Harley figures that once Pilots Unlimited owns the collateral, “Centurion will be first because we will have the earliest financing statement on file that covers the collateral.” Will this work? UCC §§ 9-322(a)(1), 9-325, and 9-507.

Timeline:Mar. 21: CNB files FS and gets SA against PilotsJul. 21: FNB file FS against FlightSep. 21: CNB files FS against Flight

Because under § 9-322 priority is determined by first to file or perfect, CNB is worried since FNB was the first to file.

The proposed plan is to get FA to sell the equipment to PU. Under 9-315(a)(1) both security interests will follow the security interests to PU. CNB would pick up an extra security interest from their after-acquired property clause in PU.

9-322(a)(1) First secured party to either file a financing statement or perfect his security interest before the other secured party does either has priority. Here this means that 1 st national will have priority unless something else is done.

The fact that FNB has a security interest in FAs equipment will allow the security interest to follow the collateral under 9-315(a)(1): unless the secured party specifically agrees the transfer is free of their interest it will follow the collateral. Under 9-507(a) also provides that the financing statement of FNB is unaffected, because the transfer has no effect on the financing statement. FNBs security interest is alive and well.

Who has priority? In selling the equipment to Pilot’s Unlimited, CNB will be the secured creditor of the transferee.

It is just unfair the FNB should lose their security interest, because when they filed their FS against Flight, they searched for prior interests. They could never know that some other company with a perfected interest in all after-acquired property would become the owner of the collateral. The courts used to use property law, but 9-325 codified the fair result of this situation.

Under 9-325, the security interest created by a debtor is subordinate to a security interests created by another person. The “debtor” for the purposes of this paragraph is PU.

There are 3 requirements under 9-325(a):(1) the debtor acquired the collateral subject to the security interest created by the other person;(2) the security interest created by the other person was perfected when the debtor acquired the collateral; and(3) there is no period thereafter when the security interest is unperfected.

So in this case the debtor has to be PU because they acquired the collateral subject to the security interest created by FA, the other person. This means that the security interest created by PU is subordinate to the security interest created by FA.

Prior to 9-325, some courts reasoned that the after-acquired property clause allows the transferee to grant the interests only to the extent they have rights in the collateral. The transferee acquires the collateral subject to the existing liens of the transferor.

P32.3. A year ago, George Sol Estes borrowed $7,500 from Octopus National Bank (ONB) to purchase a computer for his dry cleaning business. The security agreement he signed at that time provided that the collateral would consist of the computer and any “substitutions, replacements or accessions.” The security agreement contained no provision regarding future advances, because none was contemplated at the time. ONB filed a financing statement indicating that the collateral was “equipment.”

ONB has just approved a $40,000 line of credit for George, to be secured by the dry cleaning equipment in his shop. Molly Parker, the loan officer at ONB, tells you that she knows she must prepare a new security agreement, but wonders if she must also file a new financing statement. UCC §§ 9-322(a)(1), 9-502(d).

Musselman’s inserted fact: Assume another secured party came along and took a security interest in just the dry-cleaning equipment, and they filed a financing statement perfecting their security interest.

As we do our new deal, what do we need to have the debtor do? Have to prepare a new security agreement. A s/a must have a description of the collateral, and the previous one didn’t cover the after-acquired property. Question is does she need to file a new financing statement.

Can we somehow make an argument that the original financing statement covers our present security agreement? Under 9-502(d) A financing statement can be filed before a scurity agreement is made or a scurity interest otherwise attaches.

Here, ONB, would’ve filed first and the first filed financing statement covering equipment would cover any interest in equipment that they gained. Therefore they would have priority.

How to fix this if you are secured party # 1? What about having a subordinate agreement? Or paying off the lien for the computer equipment and getting them to file a termination statement.

P32.4. (a) A year ago, Carol Dearing lent $1,000 to her friend, Bob Muzzetti. Bob gave her a security interest in his 32-foot Bayliner boat and saw that her financing statement was properly filed in accord with the law of the state. About a month later, Business Credit Associates (BCA) lent Muzzetti $45,000, taking a security interest in several items of collateral, including the boat. BCA also filed an effective financing statement. Muzzetti fell behind in his payments to BCA and yesterday, March 1, BCA repossessed the boat. The boat now sits in the repo agent’s compound, behind an eight-foot cyclone fence that is topped with concertina wire.

Now Bob is back to ask another favor of Carol. What Bob wants is an additional advance of $31,000 “to protect the boat from sale by BCA and prevent BCA from collecting.” Carol, who has been your client for years, asks whether this will work. What do you tell her? UCC §§ 9-322(a)(1), 9-609(a).

Carol filed and perfected her security interest before BCA perfected or filed. If she makes an advance now, can she get priority over BCA, YES. She has to make the advance, and make a new security agreement. If she does that, then she’ll have priority over the boat.

Again, there might be a fraud issue. Bob’s statement about preventing.

(b) Assume that Carol had filed a financing statement against Bob before BCA repossessed, but Bob had not authorized a security agreement and Carol had not lent any money. Would the scheme work under these circumstances? Comment 4 to UCC § 9-322.

The scheme would work even if she had only filed a financing statement, no security agreement, nor given value - as long as the financing statement description is broad enough.

P32.5. On the heels of its bad experience with Bob Muzzetti, your client, BCA, has sensed the need for a change in the way it does business. While its high-risk lending remains profitable overall, BCA does not want to continue being victimized by the likes of Bob Muzzetti and Carol Dearing. Restricting its loans to first security interests is not a practical solution because nearly all of BCA’s borrowers have given security interests in their collateral and the creditors who have taken them want to retain their current priority until they are paid. Is there anything else you can suggest? UCC § 9-339.

UCC § 9-339. Priority Subject to Subordination.This article does not preclude subordination by agreement by a person entitled to priority.

BCA can ask the other creditors to obtain subordination agreements, especially as to any future advances she might make.

Here we take a break and do a review and discussion of security interests and priority.

Assume on March 1, SP1 takes a security interest in Debtors equipment. Debtor signs a security agreement, and SP1 files the financing statement and gives a $10k loan to Debtor that day. Debtor later acquires a computer. On April 1, SP2 takes a security

interest in the computer (again with a security agreement and by filing a financing statement). Finally, on May 1, SP1 loans Debtor an additional $25k by taking a security interest in the computer.

SP1’s Security Interest in the Computer:(1) They should have had an a/a/p/c (after-acquired property clause) in the first S/A.(2) They can get a new S/A describing the computer.

SP1’s Future Advance:(1) They should have a future advance clause in the first S/A. That way, any amount the debtor will owe in the future relates back to the date of the first S/A.(2) They can also get a new S/A describing the new advance.

P32.6. Harley Davidson is under a lot of pressure in his job at Centurion National Bank. Davidson’s freewheeling lending policies have generated a number of “nonproducing assets.” (To put it as politely as possible.) “One more,” Harley says, “and I may no longer be viable in my current position.”

Harley tells you this in the context of a discussion of the Paul Grumman loan. Until yesterday, Grumman’s deteriorating financial condition looked like it would be the bale of straw that broke the camel’s back. Centurion’s loan to Grumman is in the amount of $150,000 and is unsecured. The financial statements Grumman has given Centurion from time to time have always shown Centurion’s principal competitor, First National Bank, as the holder of a $1.5 million security interest in all of Grumman’s assets (principally equipment, inventory, and accounts). In the event of liquidation, Harley is sure the assets will yield less than $1.5 million. Two weeks ago, desperate for ideas Harley ran a UCC search under Grumman’s name.

Yesterday, a miracle happened. Harley received the Secretary of State’s search report in the mail. The certificate, which Harley has laid gently on the desk in front of you, shows no filings against Paul Grumman. Harley says he is sure that the assets are in Grumman’s possession and that “Paul Grumman” is the correct name of the debtor – sure enough to bet his career on it.

To seize his opportunity, Harley has tentatively cut a deal with Grumman. Centurion is to advance an additional $100,000 to Grumman. In return, Grumman will grant a security interest in favor of Centurion that will secure both the $150,000 advance already outstanding and the new $100,000 loan. “The way I figure,” Harley says, “that will leave us with a $250,000 first on almost a million five in collateral.”

The bankruptcy expert in your firm tells you that the old $150,000 advance will remain vulnerable as a preference for 90 days, but the new $100,000 advance will not. From her point of view, Centurion has something to gain and nothing to lose by making the new loan – provided that Centurion will have priority over First National. Harley would like you to give your opinion that Centurion will have priority. If Harley loses his job, you worry that the firm may not be able to hang onto Centurion’s business, perhaps putting your job in jeopardy as well.

(a) Is there any way that First National could have an effective financing statement that doesn’t show up on an official search in the state in which Grumman’s business is located? UCC §§ 9-316(a) and (b), 9-338, 9-502(d), 9-506(c), 9-507(a), 9-515(c), 9-516(d), 9-517.

If the debtor has recently moved, there could be a security interest in another jurisdiction. Under 9-316(a), a security interest remains perfected for four months after a debtor moves jurisdictions.

It could be we’re searching under the wrong name. Paul Grumman may not be the proper name to search under (especially if Grumman is not the entity that owns the collateral).

It could be that the financing statement was wrongfully rejected by the filing office. See § 9-517 and 9-516.9-517: Effective as to everyone except a purchaser for value in reasonable reliance upon the absence of anything in the SOS files.

The first inquiry is to figure out who owns the collateral, and what kind of entity the debtor is. Remember, the owner of the collateral is the “debtor” as defined in 9-102. The type of entity will determine the proper name and residence of the entity. See § 9-307

If he has moved within the last four months, there could be a effective financing statement. §9-316(a) & (b). KNOW THE RULES FOR 9-307, 9-301.

Has he moved within the last 4 months? Are you sure you have the right name? If FNB has a filing under a wrong name and it doesn’t turn up under

What if FNB has filed it under the right name but it was wrongfully rejected? Improperly filed? We couldn’t reasonably rely because we knew about the prior interest.

(b) How can you find out if such a financing statement exists, without shooting yourself in the foot? UCC § 9-322(a)(1) and Comment 4 to that section. For example, what if your search under “Gruman” (an incorrect spelling) and find First National’s filing?

Don’t ask First National. Obviously, if you ask them they will immediately act to correct any mistake there might be. Is there a way to eliminate this risk, and by the time of the loan be certain that we’re ok?

(c) What should you do?First, file a financing statement in your state. Get it authorized by 9-509(b). Second, call FNB and ask if they have a security interest in the collateral. Tell them that you think you have priority because you searched and didn’t find their financing statement.

(d) Is there an ethical issue here?Let’s assume FNB doesn’t have an effective filing, they’ll threaten to sue you because you did a sneaky thing. You don’t want to have to litigate, so you can ask them to pay off your unsecured loan and take it as a future advance. Option 2 is to agree to subordinate as to any future advances you will make. If they won’t back down, I would advise them to do the deal and litigate, because you’ll win.

P32.7. Sara Wisnewski has been manufacturing high-quality speakers for audio systems since 1979. Her speakers are among the best available and her prices are reasonable. For the past few years, orders have been running in excess of her manufacturing capacity and she has been unable to fill all she receives from dealers.

At the same time, she has been losing a considerable amount of money on bad debts. In your initial conference, she told you about a case in which she sold $15,000 worth of speakers to a dealer, who promptly filed bankruptcy. The dealer still had most of her speakers in stock when it closed its doors, but the bankruptcy court gave them to the inventory lender. Sara literally ended up having to buy her own speakers back from the bank to fill other orders. Her attorney in the bankruptcy case explained to her that “the bank got the speakers because they had the first security interest.”

(a) Sara thinks she should have the first security interest and she’d like you to tell her what she needs to do to get it. What do you tell her? UCC §§ 9-102(a)(48), 9-324(a) and (b).

Just real quick, take a look at 9-103 where PMSI is defined.

Musselman calls the 9-324 provisions “super-priority.”Under 9-324(a) a PMSI takes priority in goods other than inventory if the PMSI is perfected within 20 days after the debtor receives possession. The problem is that here, since Sara is selling to dealers of speakers, the speakers are inventory in the hands of the dealers. Thus, 9-324(a) does not apply to the goods.

However, 9-324(b) may apply. That section says a PMSI in inventory will take priority over conflicting security interests if the holder of the PMSI meets the four requirements of 9-324(b) (perfection and notification to conflicting party).

To summarize the thought process here for 9-324: 1st- Do we have a PMSI? Check 9-1032nd- Is the PMSI in inventory, consumer goods, or non-inventory.3rd – (a) if non-inventory: 20 day grace period to perfect 9-324(a) (b) If inventory: 9-324(b)

[1] PMSI must be perfected (s/a, filed financing statement, give money) when the debtor receives possession of the inventory.[2] PMSI s/p send authenticated notification to the holder of the conflicting security interest. [3] the holder of the conflicting S/I receives the notification within 5 years before the debtor receives possession of the inventory; and[4] The notification must state that the person sending the notification has or expects to acquire a PMSI in inventory, and describe the inventory.

4th – Priority of a PMSI holder who gives notice and perfects before the debtor receives possession extends to chattel paper, proceeds of the inventory, and in proceeds of the chattel paper. Also Identifiable Cash Proceeds, etc.

(b) What problems do you foresee? What can Sara do about them?According to the reading, many inventory lenders put a clause in their security agreement that any subsequent security interests, including PMSIs, constitute a default. So here, the PMSI could push them into default with inventory lender.

9-324(a): applies to goods other than inventory or livestock. Would give priority over the first to perfect rule IF the security interest is perfected within 20 days after the debtor gets possession. Under this section, priority extends to ALL PROCEEDS.

Here Musselman puts a hypo in the board for us to think about, and which we will discuss in the next class:On March 1, Debtor signs an S/A with A granting an interest in all his accounts. The S/A has an after-acquired property clause, as well as a future-advances clause. A perfects its security interest by filing a financing statement.

On April 1, Debtor grants a security interest to B in all his inventory. The S/A has a a/a/p/c and a f/a/c. B perfects by filing a financing statement.

Later Debtor sells inventory to G on credit. This generates an account receivable, payable from G to Debtor. Since A has a security interest in “accounts,” A’s interest automatically attaches and perfects.

Finally, Debtor defaults to both A and B.

(a) Does B even have a security interest in the account?Yes, because the inventory was sold for proceeds, under § 9-315(a)(2) (a security interest attaches to any identifiable proceeds of collateral), B’s security interest will continue.

The question becomes, does B’s interest remain perfected?§ 9-315(c) says a security interest in proceeds is a perfected interest if the security interest in the original collateral was perfected. Thus, B’s interest remains perfected, but § 9-315(d) may require some action or the perfection will lapse.

Then must look to § 9-315(d). One of the three must be satisfied in order to maintain perfection beyond 21 days. Looking to (d)(1): (A) is satisfied because the financing statement is filed, (B) yes, filing in inventory takes place at the SOS, and so does a filing for account, (C) Yes, the proceeds weren’t acquired with cash proceeds.

A has a perfected security interest in accounts, and B has a perfected security interest in accounts. Therefore, first to file controls.

(b) What if B’s S/I was a PMSI in the inventory?Look to § 9-324(b) which is the super-priority rule for PMSIs in inventory. That section gives PMSI in inventory super-priority over conflicting interests in (1) the same inventory, (2) chattel paper or other instrument, (3) identifiable cash proceeds. Note that none of these give PMSI super-priority over accounts! Thus, B would not get super-priority over A’s perfected interest in the accounts.

(c) What if the inventory was sold on credit and Debtor got a promissory note secured by the inventory sold?The proceeds would now be chattel paper, 9-102(a)(11). The promissory note would be an instrument. Have to redo the analysis. These are still proceeds, are they still perfected under 9-315(d)?Same answer as to accounts under 9-315(d)(1), B has a perfected security interest in them. Let’s also assume, A has an interest in chattel paper as well. Who has priority?In the first one we said that A won, because B’s super priority didn’t extend to accounts. Heres its chattel paper. What 9-324(b) does is say that the priority does extend to chattel paper but only to the extent that 9-330 allows it.

9-330(d): the only was if B had a super-priority under the PMSI that extends EXCEPT if there was a purchaser of the instrument has priority if he takes possession and gives value of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party. If this is the case then A wins, but if the instrument is in the possession of the debtor B wins.

Ex:A takes a s/i in D’s inventory. After acquired property clause. D buys inventory from B, on credit and grants B a s/i in the inventory that he bought from B (seller’s pmsi). B has priority over A if he complies with 9-324(b). The debtor sells some of the inventory, that it bought from B, to whomever, and got CASH back. Now A & B have a priority battle over the cash.

A- has a s/I because they are proceedsB has a s/I in this particular inventory, and have an interest in the proceeds as well

Both have perfected security interests. Who wins? B, under 9-324(b) he has priority as to cash proceeds.

Assignment 33: Secured Creditors against Secured Creditors: Land and FixturesWhat we’re dealing with in this chapter is Art. 9 secured parties taking a security interest in a fixture, but the fixture is attached to some real property. It’s attached in such a way that state real property law says an interest in the fixture arises under real property and anyone who has an interest in real property. § 9-102(a)(41) (definition of fixture).

Problem Set 33.P33.3. George Onasis, the trustee in bankruptcy for William Miller, has retained you to advise on avoidance matters. Eighteen months before filing bankruptcy, Miller bought a mobile home on credit from Folds Mobile Home Sales (Folds). Folds took a security interest in the mobile home, and filed a non-fixture financing statement in the office of the Secretary of State. The state in which this took place does not issue certificates of title for mobile homes. Under its laws, the mobile home was a fixture even before Folds filed its financing statement. Onasis asks your opinion as to whether the estate has priority over Folds. UCC §§ 9-102(a)(40), (41), and (52); 9-317(a) and 9-334(e)(3) and (4); 9-501(a). Comment 4 to UCC § 9-501.

To start, § 9-102(a)(40) defines “fixture filing” as the filing of a financing statement covering goods that are to become fixtures; and § 9-102(a)(41) defines “fixture” as a good that has become so related to real property that an interest arises under real property law.

You have four options with a fixture: (1) filing a F/S under Article 9 that perfects a security interest in the good that became a fixture (filed with SOS), (2) make a fixture filing in the real estate records, (3) PMSI in consumer goods, (4) if you own the real estate upon which the good becomes a fixture.

Since the mobile home is a fixture, and financing statement has been filed in the SOS office, does he have a perfected security interest? 9-501(a), if perfection is going to be by filing, you must file it in the appropriate office, which is (see below).

The general rule is described in § 9-334(c): 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. Thus, the real estate interest generally wins by default. Whenever, there is an Article 9 secured party going against someone with an interest in the real estate, the real estate interest wins UNLESS AN EXCEPTION APPLIES.

Exceptions: most applicable is Comment 9: or 9-334(e)(3): the conflicting interest is a lien on the real property obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by this article; OR

If the goods were certain type of fixtures: “readily removable”

P33.4. (a) Two months ago your client, Sound City, Inc., sold a sound system to Jake’s Bar and Restaurant during Jake’s remodeling. The installer spent three days on the site, running wiring from the stage to the control booth and from there to speakers throughout the premises. Most of the wiring is above the drop ceiling, but some was fished through the conduits used in the electrical wiring of the building. Speakers are bolted to walls and ceiling beams; some

of the control panels are built in. Jake was supposed to pay for the sound system as soon as it was installed. Instead, he complained about the quality of the sound and had the installer back every few days. Now the installer says that Jake’s complaints are bogus and “he’s just stalling for time.” Sound City has neither promissory note nor security agreement. What do you recommend?

(b) You discovered that the reason Jake was stalling for time was that he was in the process of refinancing the bar and restaurant. Before you could do anything, the new lender, Mercantile Bank, recorded their mortgage. Assuming that the Bank acted in good faith and without knowledge that Sound City had installed the sound system, where does this leave you?

Mechanics Lien: important to understand the concept. In general how do you get one and what rights do you get? File a claim a lien: you get a lien on the real property, basically allows a lien to be obtained for labor to be preformed or property to be furnished. Usually these liens are threatened to be filed. The point is that if you file one, you get a lien on the entire real property; and you can foreclose this through some sort of judicial process.

If they threaten to file a mechanics’ lien, the debtor may offer an Article 9 security interest. Should they accept an Article 9 security interest in the sound system?

Look at § 9-604. This is the remedy provision for security interest in fixtures if there has been a default. If your security interest has priority over ALL OTHER owners and encumbrancers, then you may remove the collateral. But, under subsection (d) you must reimburse the other owners and encumbrancers for any damage caused by removal (but not for a reduction in the value of the property because of the removal of the collateral).

-How to determine priority with a mechanic’s lien? In general is there something you can do to get ahead of a newly recorded mortgage?

[SKYLINE properties case]

Is this erection & construction- we can get priority over the bank, if alteration no priority over the bank

9-334(d)- the PMSI exception to the first to file rule as it applies to fixtures:A perfected security interest in Fixtures has priority over a conflicting interest of an encumbrancer or owner of

the real property if the debtor has an interest of record in or is in possession of the real property AND 3 requirements

Analyzing the problem under § 9-334. The general rule in subsection (c) is that the fixture interest will be subordinated to the real estate interest. In subsection (d) a perfected security interest in the fixture has priority over a conflicting interest if:

(1) the debtor has an interest of record in or is in possession of the real property,(2) the security interest is a PMSI,(3) the conflicting interest arises before the goods became fixtures, and(4) the security interest is perfected by a fixture filing before the goods became fixtures or within 20 days

thereafter.In subsection (e)

The key is that under (d) or (e)(1) you must file a financing statement if you even hope to get priority.

P33.5. Sound City has contracted for another installation. The job is similar to the one they did for Jake’s Bar and Restaurant, except this time the customer is Dub’s Lounge. No remodeling will be done, and the customer will pay in installments over a period of 18 months after installation. Bill Sauls, the owner of Sound City, says he wants at least the right to “rip everything back out if they don’t pay for it.” In response to your questions, he says he doesn’t know whether Dub’s owns the place where the installation will be done or whether they rent it. Nor does he know whether there are mortgages outstanding against the property.

(a) Assume Sound City installs a sound system on Dub’s authority and Dub’s doesn’t pay for it. Will Sound City be entitled to a mechanic’s lien? If it is, will that be an adequate remedy?

We didn’t spend any time on this question. Mechanic’s liens don’t usually work in these situations (installment loans). Musselman doesn’t want to go into that, so he wants to skip this question.

(b) Assume Sound City decides to make a fixture filing. Whose authorization does Sound City need? UCC §§ 9-102(a)(28), 9-203(b), 9-502(b)(4), 9-509, 9-604(c), and 9-334(f). For example, if it turns out that Dub’s has the premises under a

long-term lease from Realty Partners Ltd., do you have to have a contract with Realty Partners, or can Sound City do the deal on Dub’s signature alone? UCC §§ 9-334, 9-502(b)(4).

First, note that the debtor is defined as a person who has an interest in the collateral (§ 9-102(a)(28)). The person who has authorization to allow the filing of the financing statement is the debtor under § 9-509(a)(1). Thus, Dub’s, as the owner of the collateral, is the debtor and has the authority to authorize the filing of a financing statement.

What if we go ahead and do a fixture filing and there are other owners of interest in the property (mortgagors, owners)? We’ll have a conflicting interest; will we be able to get priority by a fixture filing now? This scenario may meet the fixture priority exception under 9-334(d). The debtor is in possession of the property under the lease, the security interest is a seller’s PMSI, and it satisfies the other requirements under (d) if we file a fixture filing within to 20 days after installation.

Can we rip it out? Yeah, subject to 9-604 which says we have to reimburse for the damage we cause.

(c) Does your answer to part b. change if Sound City is installing a sound system in a new building that is under construction? UCC §§ 9-334(d), (e), and (h). In the construction scenario, would Dub’s consent in writing to removal of the sound system in the event of default be of help? UCC § 9-334(f).

First, it looks like the fixture will take priority under § 9-334(d). This would meet all the criteria. However, look at § 9-334(h): a construction mortgage is superior to a security interest in fixtures if a record of the mortgage is recorded before the goods become fixtures and goods become fixtures before the completion of the construction, SUBJECT to 9-334(e) and (f). Thus, a construction mortgage is superior to 9-334(d) [PMSI].

Note that under subsection (f) the conflicting interest holder (here the construction mortgage) must consent to give the fixture interest priority.

Would Dub’s consent to removal help? NO, because it has to be the consent of the construction mortgagee (the conflicting party).

There is a process in 9-334. Start with subsection (c), where the owner or encumbrancer always wins. Then look to the exceptions in (d), (e), and (f).

Assignment 36: Buyers against Secured Creditors

Gen Rule- 9-315(a)(1): Buyer always takes subject to the security interest unless the s/c authorizes.This assignment is the list of exceptions:

Problem Set 36 (p. 592)P36.1. Davis Department Store sold a combination TV-stereo-VCR-popcorn popper to Beavis on credit for $1,925. Beavis paid no money down, but signed a promissory note, security agreement, and financing statement. Davis filed the financing statement in the statewide UCC records. The security agreement provided that Beavis agrees not to sell the collateral. Six months later, Beavis lost his job at the meat processing plant and moved to Tennessee. Before leaving, he held a garage sale at which he sold the entertainment unit to his friend Butthead for $960. Butthead didn’t know about the security agreement with Davis Department Store and (wouldn’t you know it?) made the mistake of paying by check. Davis identified Butthead as the buyer from Beavis’ checking account records. Davis asks whether it is entitled to repossess the entertainment unit from Butthead. If so, do they have to refund his $960? UCC §§ 1-201(9)(Rev. § 1-201)(b)(9)), 9-315(a), 9-320, 9-401(b).

Starting with 9-315(a)(1) the security interest continues because the secured party did not authorize the disposition free of the security interest.

9-320(a) is an exception to 9-315(a)(1). It says that a BIOC (buyer in ordinary course) takes free of a security interest. A BIOC is defined under § 1-201(b)(9), which lays out four basic requirements:

(1) Must purchase in good faith,(2) Without knowledge that the purchase violates the rights of another,(3) Seller has to sell the collateral in the ordinary course of business,(4)

Under 9-401 can’t prevent a party from selling property, but can have consequences. Rather than track down the debtor wan to track down the equipment. We also have an interest in the proceeds.

1st look to 9-315(a)(1): because if the secured party did authorize the transaction the S/I is gone.

Then look to the exceptions under 9-320(a). Does the buyer qualify under 9-320? No, because this is for a buyer in the ordinary course of business. Buyer in the ordinary course of business is defined under 1-201(b)(9). There are 4 basic requirements:

Next look to § 9-320(b): it is known as the Garage Sale Exception. Note that this section says that the S/P will lose if they did not file a financing statement – so a S/P who takes an automatically perfected PMSI in consumer goods, may lose their security interest! But Davis did file a financing statement.

One last exception . . . 9-317(b): if the secured party’s S/I was unperfected when the buyer received delivery of the collateral, the buyer will have priority over the secured party if he paid value for the collateral and if he bought the collateral without knowledge of secured party’s security interest. Davis was already perfected, so Butthead loses under this provision as well.

Davis is not required to refund the $960.

P36.2. Your client, University City Bank (UCB), has a security interest in the inventory of Sound City, Inc. Sound City sells sound systems at retail to consumers and businesses. The security agreement between UCB and Sound City authorized sales only in the ordinary course of business, prohibited sales on credit, and required that “Debtor deposit all proceeds of sales of collateral to Debtor’s account #937284 at University City Bank.” UCB perfected the security interest by filing a financing statement. On October 20, Sound City, Inc. filed under Chapter 7 of the Bankruptcy Code. The trustee abandoned the inventory, the debtor surrendered it to UCB, and UCB sold it and applied the proceeds to the inventory loan. A deficiency of $36,000 remains owing to UCB on the Sound City loan. Through discovery, you learned of the following transactions that took place before the filing of the bankruptcy:

(a) Sound City sold a sound system to Rhonda Fried for $12,000. Rhonda paid $2,000 in cash and signed a negotiable promissory note for the remaining $10,000. There is no evidence that she knew of the restrictive provisions of the security agreement. Sound City deposited Rhonda’s check to an account with a bank other than UCB and used the money to pay a utility bill. About a month later, Sound City sold the Rhonda note for $9,200. UCB has been unable to determine what Sound City did with the proceeds. Is UCB entitled to repossess the sound system from Rhonda? UCC §§ 9-315(a), 9-320, 9-323(d) and (e), 1-201(9) (Rev. § 1-201(b)(9)).

Remember the handout Musselman gave you? Look at it, specifically Section III(C).

First, apply § 9-315(a)(1). That section says the S/I will continue unless authorized by S/P. Here, there is a conditional authorization (no sale on credit, and proceeds must be deposited in specific account). Even though the Debtor violated the conditions, a court might find that the condition was waived if there was evidence that the S/P knew that the Debtor regularly violated the conditions and the S/P didn’t enforce the condition.

Then there is conditional authorization, 2 lines of cases: (1) if there is a condition in the language of the K, it has to be satisfied to comply with a

waiver of authorization. (2) Know that under RFC, this was not an authorized sale because the conditions weren’t satisfied, so the security interest continues. Will this make a difference? No, because most of the time under 9-320(a), the buyer is buying in the ordinary course of business of inventory.

OCB- (1) Have to be buying from a dealer, (2) in good faith, (3) without knowledge that the sale violates the rights of another, (4) in the ordinary course of such a transaction as done by the seller. +Seller must’ve created the s/i.

(3)- you can know the security interest exists, and that’s o; but you cannot know that they way you’re buying it would violates the rights of a secured party. What could Rhonda know that wouldn’t allow her to buy? If Rhonda knew of the conditions in the contract

Second, apply § 9-320(a). This is the BIOC exception to 9-315(a).

Third, apply § 9-320(b).

Fourth, apply 9-323(d) and (e).

Fifth, apply 9-317(b).

(b) George Paulos is a lawyer who has been representing Sound City for several years. As of July 17, Sound City owed George $16,458 for legal services rendered in two employment discrimination suits. George agreed to accept a $14,000 sound system as partial payment and Sound City installed it in his home. Is UCB entitled to repossess the sound system from George? UCC §§ 1-201(9)(Rev. § 1-201(b)(9)), 9-315, 9-320, 9-323(d) and (e).

In the last sentence of 1-201(9), total or partial satisfaction of an antecedent debt is specifically defined as not a buyer in the ordinary course of business.

P36.3. Alecia Card bought a used 1992 “Lindy Delux Housecar” (the Lindy) from the used car lot of Sunrise R.V. She paid for the recreational vehicle with a $23,000 cashier’s check and drove it home. The salesman at Sunrise assured her that she would receive title to the Lindy directly from the Division of Motor Vehicles within two weeks. When the title did not arrive as promised, Alecia complained to Sunrise.

Eventually, she learned the history of the Lindy. A man named Kenneth Eddy purchased it from All Seasons R.V. over a year ago. Eddy granted All Seasons a security interest in the Lindy to secure a part of the purchase price. In the security agreement, Eddy agreed “not to transfer any interest in the vehicle.” A few weeks ago, Eddy violated the security agreement by trading the Lindy to Sunrise R.V. (Sunrise) for another recreational vehicle. At the time he sold the Lindy to Sunrise, Eddy still owed All Seasons $17,000 of the purchase price. Sunrise bought the Lindy subject to that lien and agreed to pay it. Instead, Sunrise deposited Alicia’s $23,000 to its operating account and spent the money on rent and other expenses. Alecia also learned that Eddy did not notify All Seasons that he was selling to Sunrise and did not obtain All Seasons’ permission to sell.

(a) Alecia wants to sue to remove All Seasons’ lien from the title to the Lindy. How good is her case? UCC §§ 9-315(a), 9-320(a).

This is a priority battle between Alecia and All Seasons. They are the people that care, because they stand to lose money. Eddy doesn’t give a crap because he already his new car and is off on vacation somewhere. Sunrise doesn’t give a crap either.

This is a double transaction. In such cases, you have to analyze each one separately in chronological order. This is because of the Shelter Doctrine from property law. That doctrine says you get good title to something if your title was “sheltered” by someone ahead of you in the chain of title. If Sunrise had acquired title free of security interest, then everything would be cool for Alecia. If not, then you have to analyze if she took free of the security interest. Because there are two transactions, Alecia has two bites at the apple to show that she took free of any S/I.

Start with Sunrise, and apply 9-315(a). Clearly, All Seasons did not consent to the sale free of the security interest; so 9-315(a) does not clear the title.

Next apply § 9-320(a). This doesn’t work either because Eddy is not in the business of selling RVs. Therefore, Sunrise is not a BIOC.

What about 9-320(b)? No, Sunrise didn’t take it for personal use; this provision would never work in the case of sale to dealers.

What about 9-317(b)? Again, no, because All Seasons’ S/I was perfected.

S/I goes through, now look to AC.

Note that Alecia meets the requirements of BIOC.9-320(a): NO, because Sunrise didn’t create the S/I in the RV. That provision 9-320(b): NO, its inventory in Sunrises hands – they didn’t buy it primarily for personal use.9-317(b): NO still perfected.

SHES SCREWED. She trusted Sunrise and because of the way this came about, she’s screwed.

(b) If Alecia had insisted on seeing the certificate of title for the Lindy before she paid her $23,000, what would she have learned? See UCC § 9-311(d) and Comment 4 to that section; form for motor vehicle certificate of title in Assignment 25.

How to protect herself? She should’ve asked to see the certificate of title before she paid - she would’ve seen the lien. Also, would’ve seen the title is not in the dealer’s name, which is not that big a deal, because most used cars are in someone else’s name. She would have seen the lien in favor of All Seasons. Then she could have contacted All Seasons, and asked them what they need to release the lien.

P36.4. Alecia Card is back to see you for the fourth time since you represented her in the All Seasons case. Although she is a bright, energetic, friendly person, she has been asking questions that seem… well, a little too basic. Even before today, you had been suspecting that Alecia might be showing signs of paranoia. In your meeting this morning, Alecia explained that she has been shopping for a piano, has found a reconditioned one she likes for $5,000 at American Piano Company in the Galleria Mall, and would like you to “represent her at the closing.” Covering your surprise, you told her that most people who buy things in the mall just represent themselves. “Yes,” she replied matter-of-factly, “but they haven’t been through what you and I have.” You told her you’d think about it and give her a call this afternoon.

(a) Is there anything to her fears? UCC § 9-320(a).You have to wonder, where did AMP get that piano? YES, she has valid fears. She could buy a piano subject to a S/I that she doesn’t know about. Also, it’s more difficult to determine whether there is an S/I covering the piano because there is no title or many times no financing statement for a piano.

(b) Can the problem be dealt with by a thorough search of the public records? UCC § 9-507(a), including Comment 3.No. One way to deal with the problem is to pay cash and not leave any way for AMP to identify her.

(c) Should you recommend a psychiatrist or try to deal with this yourself? If you try to deal with it yourself, what will you say to Alecia and what will you do to get ready for the “closing”?

(d) Is this a problem that is unique to used goods, or could it occur with respect to new goods as well?This is a problem that is more likely to happen to used goods. With new goods it’s LESS LIKELY, because acquired from Manufacturer. Under 9-320(a), if it was bought, then it was free of the security interest.