Secured Transactions OutlinePre-Code Security Devices Pledge: The debtor gives physical possession of the collateral to the creditor until the debt is paid. The possession perfects the creditors interest. Drawback: This only works for tangible assets. Sometimes the assets will be too big to take, or the asset is something that the debtor needs to make things run. Chattel Mortgage: As with real property, the mortgage given by the debtor to the creditor was recorded in a designated place and index under the name of the debtor so that other potential creditors could check and see whether the collateral was encumbered. Drawback: You have to file in all areas where the asset is located. Conditional Sale: the debtors title to the property doesnt vest until full payment has been made. Drawback: If someone buys the property from the debtor before full payment has been made, they arent on notice as to any other interests. Trust Receipt: Similar to a certificate of title. Its a document that shows evidence of the title. The bank holds onto the document and the car dealership holds onto the collateral. Example: A car dealership would ask a bank to buy cars from a manufacturer. The Bank would then turn them over to the dealer after two things happened: 1) The bank filed a notice in the appropriate place announcing its intention to engage in trust receipt financing with this particular dealer, and 2) The dealer signed the trust receipt, becoming the trustee, and the bank became the entruster. Factors Lien: A factor was a selling agent who helped finance the principals business. Used for financing of inventory. Field Warehouse: This involved storing goods in a warehouse and having the warehouse company issue a negotiable warehouse receipt made out to the bearer. The receipt granted ownership in the property to the bearer, and was transferred to the debtor upon payment in full. Introduction to Secured Transactions Definitions Debtor: Owes money on the loan, is a borrower. Gives a promissory note to the creditor. Creditor: Provides money to the debtor. Promissory Note: Document that stands for an obligation. It is a negotiable instrument that the debtor will give to the creditor. Guarantor: A person giving a guarantee that the debtor is going to pay his debt. If the debtor fails to pay, the guarantor is liable to the creditor in the debtors place. Guaranty: The name of the agreement that a guarantor makes with a creditor if the debtor doesnt pay then I will. Security Interest: This is a consensual lien on the debtors personal property or fixtures. Collateral: The property that is subject to a Security Interest or Agricultural Lien. Attachment: The creation of a legal interest in collateral. Default: When the debtor fails to pay and the holder of the security interest collects the collateral. Perfection: The process of putting other creditors on notice that you have a claim on the collateral to protect your interest in the event that other creditors obtain an interest in the same collateral. Filing: This is how an interest is perfected; you file a financing statement in the correct location. Financing Statement: The document that puts other creditors on notice that you have an interest in certain collateral. Scope of Article 9: You need to determine what is and what is not a security interest as defined by Article 9, because you need to know whether to apply the UCC or Common Law. 9-109 Scope: Article 9 applies to A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract Limitations: This does not apply to real estate, and the contract must be in writing. An agricultural lien 9-102(a)(5) A consignment (as defined by 9-102(a)(20)) A sale of accounts, chattel paper, payment intangibles, or promissory notes Outright sales of these still create a security interest, even if there isnt mention of one. So, there will still be a debtor and a secured party, even is the seller has no further obligations to the buyer. The effect of this is that the buyer will have to file a financing statement, even in an outright sale, to perfect his interest against future creditors. This is necessary so that creditors will know if the debtor still has the account or not (public policy rationale). A security interest arising under section 2-401 (conditional sale), 2-505 (seller ships under reservation), 2-711(3) (buyers rejection or revocation), or 2A-508(5) (lessees remedy), but only as provided in section 9-110 (Priority rule) 1-201(b)(35) states that a 2-401 sale amounts to a security interest held by the seller. A security interest arising under section 4-210 (holding a banks right in a bank account) or 5-118 (document presented for payment under a letter of credit). What ISNT included in Article 9? 9-109(c) Things governed by federal statutes: Article 9 does not apply to the extent that A statute, regulation, or treaty of the United States preempts this article Another statute of this state expressly governs the creation, perfection, priority, or enforcement of a security interest created by this State or a governmental unit of this state Example: Philko Aviation v. Schacket federal law determines priority when it comes to aircraft, the UCC is preempted. A statute of another state, a foreign country, or a governmental unit of another state or a foreign country, other than a statute generally applicable to a security interest expressly governs creation, perfection, priority, or enforcement of a security interest created by the state, county, or governmental unit The rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under section 5-144 9-109(d) Article 9 does not apply to a landlords lien & other statutory liens, other than an agricultural lien; Unless its consensual 9-109(a)(1) a lien, other than an agricultural lien, given by statue or other rule of law for services or materials But 9-333 applies with respect to priority of the lien; an assignment of a claim for wages, salary, or other compensation of any employee; Pay attention to the differences between employees and contractors. Contractors ARE covered under article 9 because the security interest is the result of a contract, not employment. a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose; an assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only For example, selling a debt to a collection agency. an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract; an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness a transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment but 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds; an assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral a right of recoupment or set-off, but: 9-340 applies with respect to the effectiveness of rights of recoupment or set-off against deposit accounts; and 9-404 applies with respect to defenses or claims of an account debtor the creation or transfer of an interest in or lien on real property, including a lease or rents there under, except to the extent that provision is made for: liens on real property in 9-203 and 9-308 fixtures in 9-334 fixture filings in 9-501, 9-502, 9-512, 9-516, and 9-519 and security agreements covering personal and real property in section 9-604. What about when a promissory note backed up by real property is being used as collateral? This is STILL governed by article 9, and the fact that the note is backed by real property is irrelevant. an assignment of a claim arising in tort, other than a commercial tort claim but 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds; or an assignment of a deposit account in a consumer transaction but 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds Classifying the Collateral: Article 9 divides collateral into different categories Goods (things that are moveable upon attachment) Consumer goods (personal, household things) Equipment : this is also a catch-all category for any goods that do not fit into the other categories. Examples: Professional pianists piano, a farmers tractor, curtains bought by a lawyer for a law office Farm products This includes livestock and things produced by livestock (like manure, milk, eggs) Inventory Includes what you would normally think of as inventory, as well as raw material that is consumed quickly, like pencils and paper in the offices of a large retail store. Quasi-Tangible Property (pieces of paper used as collateral) the paper itself has rights, but the right it represents cant be touched. This is not a category created by the UCC. Instruments Investment Property (stocks and bonds and right to accounts containing the same) Documents (warehouse receipts) Chattel Paper Letters of Credit rights Intangible Property (Property having no physical form) Accounts Includes rights to payment for services rendered Health care insurance receivables Deposit accounts General intangibles (for example, a license) Payment intangibles How do we decide which category the collateral fits into? We assess The buyers intended use At the time of purchaseCreating a Security Interest: Security Agreements and Attachment A Security Agreement is an agreement that creates or provides for a security interest; It is the contract between the debtor and the creditor by which the debtor grants to the creditor (the secured party) a security interest in the collateral. Exception: A security agreement is not required where the collateral is in the possession of the secured party. Attachment is the process by which the security interest in favor of the creditor becomes effective against the debtor. 9-203(b): Requirements for Attachment Creditor must provide value to the debtor (usually by a loan or extension of credit) Debtor must have rights to the collateral A security agreement is executed Signed by the debtor, which reinforces that the agreement must be in writing. Describes the collateral with sufficient specificity that both parties know exactly what is being contracted for. What will a good Security Agreement include? Much more than 9-203(b) requires: Identify the parties Describe the collateral in detail Contain a grant by the debtor to the creditor of an SI in the collateral Specify the contractual understanding of the parties 9-203(a) Timing of Attachment A Security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral I.e., when the last of the requirements of 203(b) is metPerfecting a Security Interest: Financing Statements A Financing Statement is a one-page form document that is a description of the collateral, and is filed in the appropriate public office by the secured party to perfect that creditors rights against later parties. 9-502(a) What has to be in a Financing Statement Name of debtor 9-503 (a) Financing statements are indexed under the name of the debtor, and those who wish to find financing statements search for them under the debtors name (1) If the organization has a name, that name is the correct name to put on a financing statement. If the organization does not have a name, then the financing statement should name the individuals or other entities who comprise the organization (e) A financing statement may provide the name of more than one debtor and secured party 9-507-Change of Debtor Name: Financing Statement is still effective before or within 4 mths after change. Financing Statement not effective to perfect a Security Interest in collateral acquired by the debtor more than 4 mths after change Name of secured party A general description of the collateral 9-108 Sufficiency of Description (a) a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described (b) a description of collateral reasonably identifies the collateral if it identifies the collateral by: specific listing category (under UCC) except as otherwise provided in subsection (e), a type of collateral defined in the UCC quantity computational or allocational formula or procedure; or except as otherwise provide in subsection (c), any other method, if the identity of the collateral is objectively determinable 9-504 Indication of Collateral: A financing statement sufficiently indicates the collateral that it covers if it provides Description of the collateral pursuant to 9-108 Indication that the financing statement covers all assets or personal property 9-502: The description of the collateral in a financing statement need only inform, not educate (d) The authorization of the debtor (but not their signature) This means that secured parties can file even before a Security Agreement is signed, and there are usually tactical reasons for doing so. 9-516 Other requirements of a financing statement Communication of a record to a filing office Tender of the filing fee or acceptance of the record by the filing officePerfection 9-308 If a security interest is perfected, It is senior to most later creditor interests SI must first attach before perfection is possible SI must be effective between the debtor and creditor before it has legal meaning as to other parties. 9-310 Methods of Perfection Physical possession of the collateral Filing of a financial statement Control over the collateral (for specific types only) Automatic perfection: Basically limited to a PMSI in CONSUMER GOODS only (9-309) Perfection of the Security Interest: POSSESSION ONLYFILING AND/OR POSSESSIONFILING ONLYFILING AND/OR CONTROLCONTROL ONLY

MoneyGoods, Negotiable Instruments, Tangible Chattel Paper Accounts, general intangibles, commercial tort claimsInvestment property, electronic chattel paperDeposit accounts, letter of credit rights

9-313 Perfection by possession: If the collateral is in the physical possession of the creditor, the world at large is alerted to that creditors possible interest in the property. No other notice is therefore required. Only collateral having a physical form can be possessed. 9-313(c)Escrow: If the property is in the possession of a third party, the secured party can still perfect its interest in the property by fulfilling certain conditions The escrow agent must acknowledge their role in writing. Warehouse Receipts/ Promissory Notes 9-312(a) says that you can perfect by filing or possession in a warehouse receipt/document or a promissory note. In the case of a warehouse receipt, this would only be true as to possession if the field warehouse place had true control of the collateral. 9-312(e) if you have a negotiable document that you can perfect through possession, you have 20 days to actually take possession. Public policy- to allow for delivery, etc. 9-312(f) The secured party will remain perfected for 20 days if the secured party makes available to the debtor the goods (that have been perfected by possession) or documents for the purpose of: 1) Ultimate sale OR 2) Loading, storing, shipping, processing, or dealing w/them in a manner preliminary to their sale. 9-309 Automatic Perfection 9-103 Purchase Money Security Interest in Consumer Goods (PMSI)-Automatic perfection given upon attachment. Doesnt require filing or attachment. This arises when the SP advances money or credit to enable the debtor to purchase the collateral. Remember that consumer goods depreciate quickly and there are a huge number of these transactions. Has to be a consumer good to be automatically perfected. 9-103 comment 3 Close Nexus Is it a PMSI? if they are closely aligned look at parties intent (that they are closely aligned) and close in time Split of Authority on this Issue: of whether the SI is extinguished when the original purchase money loan is refinanced through a renewal or consolidation with another obligation. Automatic Transformation Rule one line of cases holds that the purchase money security interest (PMSI) is automatically transformed into a non-purchase money interest when the proceeds of a renewal note are used to satisfy the original note. 103 e Dual Status Rule- rejects this all or nothing approach and hold that a lien may be a partially purchase-money and partially non-purchase money and that the purchase-money lien is not automatically destroyed by refinancing or consolidation with debt. The UCC adopts the dual status rule for commercial goods but leaves it open for consumer goods. Adopted in the comments so only persuasive. Case by case- look at the intent of the parties and go by that. How related are the two loans. Look at their characteristics and does it make sense to continue it as a PMSI. Non-PMSI Automatic Perfection 9-309(2) an assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor's outstanding accounts or payment intangibles is automatically perfected upon attachment. There are two tests to determine whether this section applies: Percentage Test: The percentage of accounts being sold Isolated and Casual Transaction Test: How often does the transaction take place? What is the status/business of the assignee? 9-309(4) A TRUE sale of a promissory note is automatically perfected upon attachment 9-308(d) A perfection of a security interest in the collateral also perfects a security interest in the supporting obligation for the collateral. So if there is a surety, the secured party is automatically perfected in its interest in that surety at the time it perfects its interest in the underlying collateral. 9-310 Perfection by Filing Mechanics of Filing 9-501(a)(2) -Central filing (typically in the office of the Secretary of State) for almost all financing statements, with local county filing only for matters having to do with realty; minerals to be extracted from the earth, timber, or fixtures Other filings -9-515 (a) A financing statement is effective for 5 years and then it lapses unless a continuation statement is filed (d) Continuations must be filed within 6 months before the expiration of the original filing statement not before or after (c) If a lapse occurs, then the creditor is treated as if it were NEVER perfected for purposes of priority. If they file a new financing statement after the lapse, they go to the end of the line priority-wise. Requires the filing office to index the filing under the debtors name and the file number and associate all related filings to the original filing 9-516: What constitutes filing: Communication of a record to a filing office; AND Tender of the filing fee OR acceptance of the record by the filing office 9-517: Error by filing office does not affect the effectiveness of the filed record

Termination Notices 9-513(c) (Equipment) If there is no obligation existing, then the debtor has a right to demand a termination of the filing statement. The secured party has 20 days after they receive a signed demand to send the debtor a termination statement. If the secured party fails to send the statement, the debtor can file an amendment under 9-509(d)(2). The amendment is effectively a termination statement, but must indicate that it was filed by the debtor, not the creditor 9-513(b) (Consumer Goods) A secured party must file a termination notice upon the earlier of One month after the obligation ends (this is considered an affirmative obligation) OR 20 days after the receipt of an authenticated demand. Bogus Filings: If a debtor is subjected to bogus filings, they have a couple of options. Under 9-513 comment 3, they can send an authenticated demand to the address that the secured party lists for itself on the filing statement (and it will be deemed received, even if it never is). The debtor can issue the termination notice themselves If they receive no response, per 9-502(d) (2). Finally, under 9-518, the debtor could file a correcting statement. 9-314(a) Perfection by Control Security interests in investment property, deposit accounts, letter of credit rights, or electronic chattel paper MUST be perfected by control of the collateral Control means that the secured party has taken the steps described in these sections so it is obvious to anyone investigating the state of the collateral that the secured party has rights therein. 9-308(C) Continuity of Perfection A security interest or agricultural lien 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.Multi-State Transactions/ Choice of Law 9-501 General Rule: You file in the jurisdiction where the law governs perfection 9-301 Which law governs? Domicile: look to the law of the debtors location as the state in which steps for perfection need to be taken Location: if the collateral has physical form, the law of the jurisdiction in which the collateral is located will govern issues involving priority and other Article 9 matters This will change as the collateral moves. Basically, the secured party looks to the jurisdiction in which the debtor is located as the place of perfection but the jurisdiction of the collaterals location as to the effect of perfection. The parties can agree (by contract) to be bound to the law of any state or nation that has a reasonable relation to the transaction.

Which jurisdictions law applies:PERFECTION (where to file)EFFECT OF PERFECTION & PRIORITY

GENRAL RULE 9-301Debtors LocationDebtors Location

TANGIBLE NEGOTIABLE DOCUMENTS, GOODS, INSTRUMENTS, MONEY OR TANGIBLE CHATTEL PAPERDebtors LocationCollaterals Location

POSSESSORY SECURITY INTEREST 9-301(2)Collaterals LocationCollaterals Location

9-307 Location of the Debtor A debtor who is an individual is located at the individuals principal residence As determined by law look to house, job, ties to a particular place A debtor that is an organization and has only one place of business is located at its place of business Place of business- an agency, an office; a place actually occupied, either continually or at regular periods; an occasional use or occupation of a place for business purposes is not sufficient to constitute it as a place of business. If it is a registered business, file where the business is registered. When in doubt, CYA and file EVERYWHERE. A debtor that is an organization and has more than one place of business is located at its chief executive office Except registered organizations (see below) Types of Businesses: Registered Organizations: Always file in the state of incorporation, even if the business has no other contacts there Individuals/Sole Props: File in the domicile of the owner/sole prop Organization: File in the primary place of business as defined by 9-307(a) Foreign Entity: If the entitys home country has a similar system, file there (like Canada). If they do not, file in D.C. The best course of action is to file in the foreign country and in D.C. 9-316 Continued Perfection of a Security Interest Following a Change in Governing Law (A) A security interest perfected pursuant to the law of the applicable jurisdiction remains perfected until the earliest of: The time perfection would have ceased under the law of that jurisdiction Expiration of four months after a change of the debtors location to another jurisdiction Expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction. (B) Priority is determined by first to file or perfect in the original jurisdiction. If there is more than one secured party, and the jurisdiction changes, the parties will retain their respective priorities as long as both file in the new jurisdiction within the applicable grace period (regardless of which files in the new jurisdiction first). If, however, one of the secured parties allows their perfection to lapse and fails to file within the grace period, they also lose priority. Certificates of Title: Things that are covered by a certificate of title are excluded from Article 9 unless they are PART OF AN INVENTORY Motor vehicles are generally excluded, but there are general laws that the UCC has made about them 9-303 says that wherever the VALID certificate of title is, that is what law governs. It doesnt matter where the debtor lives, or if there is any relationship between where the collateral is titled and where the debtor lives. A certificate of title is valid when a valid application and the applicable fee are delivered to the appropriate authority Local law covers perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time goods become covered by the certificate of title until the goods ceased to be covered by the certificate of title. When a 2nd state issues a COT without notation of original SI:PARTYRESULT

Lien Creditor

Will take subject to the perfected SI. 9-316(d), 9-317(b)

Purchaser for Value

If SP fails to re-perfect with 4 mths after issuance of the new COT, the SI becomes unperfected as against a purchaser for value under 9-316(e) likely resulting in the purchaser taking fee of the SE under 9-317(b)

Buyer IS NOT a person in the business of selling goods of that kind, gives value, receives delivery, after issuance of the COT w/o knowledge of the original SI

TAKES FREE of original security interest 9-337(1)

New SI that attaches and is perfected after issuance of the COT w/o knowledge of the original SIORIGNAL SECURITY INTEREST WILL BE SUBORDINATE to new security interest 9-337(2)

What if the collaterals location changes but the debtor never gets a new certificate of title? The perfection continues as long as it would have anyway, up to the end of the five years, which means the 4 month grace period wouldnt apply. 9-303(b) A certificate of title remains valid unless it ceases to be valid under the new state law or the new state issues a new certificate of title. Priority 9-317: Basic Priority Rules lists the parties that will prevail over an unperfected Security interest 9-102(a)(52) Lien Creditor: A creditor that has acquired a lien on the property involved by attachment or levy. An assignee for benefit of creditors from the time of assignment. A trustee in bankruptcy from the date of the filing of the petition. A receiver in equity from the time of the appointment. A lien creditor will lose to a perfected secured party A lien creditor will win over an unperfected secured party Exception: If a secured party has filed a financing statement and has a security agreement, but they remain unperfected for another reason (like the creditor hasnt yet given value), and they become perfected after the lien attaches, then the (initially) unperfected secured party will still win. 9-322 Priorities Among Conflicting Security Interests Between two perfected secured parties, first to file or perfect has priority When you have two perfected secured parties, the first to file has priority even if the other perfected first. This is true even if the other perfected security interest hasnt attached yet. But the filing has to be authenticated (either by a security agreement or written authorization from the debtor). The rationale here is to protect the filing system. Between a perfected and unperfected secured party, the perfected party wins Between two unperfected secured parties, the first to attach wins 9-204(a) After-Acquired Property Clause: The loans made today are secured by the collateral provided to the creditor today and all collateral of a similar category obtained by the debtor in the future 9-204(b) This clause is NOT valid as to consumer goods unless the debtor acquires rights to the collateral within 10 days of the secured party giving value 9-204(c) A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment. Future Advances: 9-323(a): The collateral that the creditor takes today secures the loans made today and loans made in the future. The code protects all loans by the same lender to debtor, if it is w/in the time of the FS, even though it may not have been contemplated at the time of the 1st transaction. 9-322(a)(1)- Priority dates from the earlier of the time a filing covering the collateral is first made or the SI is first perfected. Dragnet Clauses: Under this code section, drafters of security agreements may attempt to expand the security interest to cover unrelated obligations owed by the debtor to the creditor Future Loans Same Class Test: Distinguish between consumer and business debts they cant be cross-collateralized. Plain Meaning Rule: UCC uses this test- look at intent through the document itself. We look to the intent of the document AT THE TIME IT WAS DRAFTED. Same Class Plus Test: Same class + so related that cross-collateralization would be inferred Prior Loans Specific Reference Test: The collateral must be specifically referenced in the agreement (In re Wollin)Super Priority PMSI have a super priority over other interests. The basic steps are: The seller who extends credit to the buyer or the lender who advances the money to enable the buyer to purchase the collateral has a special equity in the eyes of the law If the parties sign a security agreement, the seller/lender gets a PMSI Sellers PMSI gets super priority over other interests in order to encourage lenders to lend and therefore consumers can buy. 9-324 (a) Where the collateral is CONSUMER GOODS, there are no further steps required for a PMSI to have super priority. Unless it is a vehicle, because they require certificates of title and have their own rules. 9-324(b) Where the PMSI is in INVENTORY, there are four requirements to get super priority: PMSI must be perfected when the debtor receives possession of the inventory. No grace period! This is because inventory, by its nature, turns over quickly The secured party sends an authenticated notification to conflicting security interest holder(s) The holder of the conflicting security interest receives the notification within five years BEFORE debtor takes possession of the inventory The notification must describe the inventory 9-324(d) Where the PMSI is in LIVESTOCK, the requirements (but for the grace period) are the same as for inventory: PMSI must be perfected when the debtor receives possession of the livestock. No grace period! Farm products, like inventory, turn over quickly The secured party sends an authenticated notification to conflicting security interest holder(s) The holder of the conflicting security interest receives the notification within six months BEFORE debtor takes possession of the inventory The notification must describe the inventory 9-317(e)/9-324(a) All other PMSI (most often, EQUIPMENT) must be perfected either prior to the debtors possession or during a 20 day grace period following the possession of the goods in order to take advantage of a relation-back of priority to that date. Perfection can occur through possession or filing, depending on what is appropriate for the collateral. For a conditional sale, the 20 day grace period begins to run on the day of possession For a sale on approval, the 20 day grace period begins to run on the day of acceptance 9-324(g)(1) PMSI v. PMSI If two creditors each have a PMSI in the same collateral, then the creditor that supplied the collateral will have super priority over the PMSI creditor who only financed (provided money) for the collateral 9-382 Control and Priority: Where perfection occurs by control (think investments, deposit accounts) the first to gain control has priority. Four ways in General: Filing Statement For everything except consumer deposit accounts Hold the account at your own place Get a control agreement Become an entitlement holder This is the best way to get priority in a deposit account get yourself named on the account. Why? Control beats out other forms of perfection A secured party who has control will prevail over all other claimants who dont have control. If more than one secured party has control, then the parties are ranked in priority according to the time of obtaining control. Exception: In deposit accounts, priority is determined differently. Additionally, the right to set-off a deposit account will prevail over all forms of control EXCEPT entitlement holders. Deposit Accounts You cannot gain control of a deposit account with a filing statement Order of priority in deposit accounts: 9-327(4) Control through becoming a customer of the bank where an account is held i.e., the secured party puts its name on the account and becomes a customer of the back with respect to the account 9-327(3) Control through holding the account i.e., moving the account to a financial institution owned by the secured party 9-327(2) Control through agreement according to priority in time Basically, if neither secured party puts its name on the account or moves the account to a financial institution that it owns, then the secured party that established control first will win. 9-107 Letters of Credit The issuing bank must consent to assignment of letter of credit rights. This consent gives control and perfection.

Continuation/Extinguishment of Security Interests 9-315(a) General Rule: A security interest will continue through the sale of collateral unless the parties say that the interest is removed 9-320(a) BIOCB: A buyer in the ordinary course of business (other than farm products) takes free of a security interest created by the seller, EVEN IF the security interest is perfected and the buyer knows of its existence. Whether someone is a BIOCB is a mixed question of law and fact. 1-201(b)(9) Buyer in the Ordinary Course of Business A person that buys goods in good faith Without knowledge that the sale violates the rights of another person in the goods And in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. In other words, there are 6 conditions that need to be met to take free of a security interest: BOCB of sellers business Part of being a buyer means that you must give new value. If anything looks like a trade or a satisfaction of a preexisting debt, you are not a buyer. Dont buy in bulk Who buys from one in the business of selling goods of that kind Whether the seller is in that business or not is determined by how the seller holds himself out, and what the buyer reasonably believes. In good faith without knowledge of violation of SI No farm products from farming operation Creditor must part w/the possession Competing SI must be one created by the buyers seller So what if the bank has a perfected security interest in As collateral, then A sells to B (with knowledge of the interest), and B sells to C (but doesnt tell them about the banks interest)? C will take subject to the banks interest because the competing interest wasnt created by his seller (B); it was created by A. 9-320(b) Buyer of Consumer Goods: A buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods. Buyers Priority Guide: Who will have higher priority than a perfected secured party? 9-315(a) Sale authorized free of security interest by the secured party 9-320(a) Buyer in the Ordinary Course of Business 9-320(b) Personal goods buyer (unless the secured party re-files) 9-331(a) Holder in due course of a negotiable instrument Think bona fide sale of promissory notes or chattel paper Who will have lower priority than a perfected secured party? 9-317(e) A buyer who buys subject to a properly perfected PMSI, even if they buy before perfection (because the secured party has 20 days to perfect) 9-320(e), comment 8: A BIOCB when the secured party has possession of the goods. The comment says that you cant truly be a buyer in the ordinary course of business if the secured party still has possession of the collateral. Consignments True Consignment: The owner of goods (consignor) sends them to a retailer (consignee) for sale to the public. The consignees creditors cannot touch the goods if they are not sold. True consignments must be analyzed under 9-102(a)(20) to determine whether they fall within the scope of Article 9. If they DONT fall within the scope of Article 9, then title has been retained by the consignor, who will win against the secured creditors of the consignee. Factors that indicate a true consignment: Consignor will repossess goods if theyre not sold Consignor controls the price Consignor controls the proceeds from the sales Consignor bears the risk of loss Disguised Sale With Security Interest: Seller and Secured Creditor sells goods to Buyer and Debtor. Buyer is gives a security interest to its other secured creditors. Buyer gives seller a security interest in the good and the seller gives buyer credit that extends until the sale. If it is a disguised sale, it is not a consignment at all, and the transaction falls within the scope of Article 9. The seller must comply with the article to perfect his interest. Factors that indicate a disguised sale are: Buyer keeps the goods if theyre not sold Buyer controls the price Buyer bears the risk of loss 9-102(a)(20) Consignments Some true consignments fall within the scope of Article 9. These are any transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and: The merchant Deals in goods of that kind under a name other than the name of the person making delivery, Is NOT an auctioneer, AND Is not generally known by its creditors to be substantially engaged in selling the goods of others. When the consignee is known to be a consignee, then we dont care to protect the bank by imposing a filing requirement, because they should already be on notice that the consignee doesnt have title to the goods. With respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery The goods are not consumer goods immediately before delivery, AND The transaction does not create a security interest that secures an obligation (in other words, it isnt a disguised sale)Leases 1-203 Leases Distinguished From Security Interest (a) Whether a transaction is a lease or a security interest is determined by the facts of each case. (b) A transaction in the form of a lease creates a security interest if the consideration that the lessee must pay for rights to the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: The original term of the lease is equal to or greater than the remaining economic life of the goods 1-203(e) The remaining economic life of the goods must be determined with reference to the facts and circumstances at the time the transaction is entered into. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods, OR The lessee has an option to renew the lease for the remaining economic life of the goods (or become the owner of the goods) for no additional consideration or for nominal consideration upon compliance with the lease agreement 1-203(d) Consideration is nominal when it is less than the lessees reasonably predictable cost of performing under the lease agreement if the option is not exercised.*NOTE that the factors above are bright line rules. If the transaction meets any one of them, it is a disguised sale. (c) A transaction in the form of a lease does NOT create a security interest merely because: The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into The lessee assumes risk of loss of the goods The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs; The lessee has an option to renew the lease or to become the owner of the goods; The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; OR The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. *NOTE that the above are just factors. No single one will create a sale, but many together may. 2A-307 Priority of Leases 2A-307(3) A lessee will take subject to a secured creditor of the lessor unless 9-317(c) The lessee gives value and receives delivery of the collateral without knowledge of the security interest before it is perfected. In other words, a lessee will take priority over an unperfected secured party. 9-321(c) The lessee is a lessee in the ordinary course of business 2A-103(1)(o) "Lessee in ordinary course of business" means a person who In good faith AND Without knowledge that the lease to him is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods Leases in ordinary course from a person in the business of selling or leasing goods of that kind. "Leasing" may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a pre-existing lease contract, but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt. The lessor may NOT be a pawnbroker. 9-323(f) The good secures future advances made after the earlier of: The time the secured party acquires knowledge of the lease OR 45 days after the lease contract becomes enforceable. This subsection will NOT apply if the advance is made pursuant to a commitment entered into without knowledge of the lease and before the expiration of the 45 day period. Priority of Article 2 Claimants 9-110 Article 9 Scope, covering Article 2 claimants A security interest arising under any of the following is subject to Article 9 2-401 Conditional Sale 2-503 Shipment under reservation 2-711(3) Rejection or Revocation by Buyer 2A-208(5) Rejection or Revocation by Lessee However, until the debtor obtains possession of the goods: The security interest is enforceable, even if 9-203(b)(3) hasnt been satisfied Filing is not required to perfect the security interest The rights of the secured party after default by the debtor are governed by A2 and A2A; AND The security interest has priority over a conflicting security interest created by the debtor 2-711(3) Buyers Remedies in General; Buyers Security Interest in Rejected Goods On rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care, and custody and may hold such goods and resell them in like manner as an aggrieved seller. An Article 2 secured creditor who retains control or possession of the collateral will take priority over an Article 9 secured creditor. 2-702 Sellers Remedies on Discovery of Buyers Insolvency A seller who discovers a buyer to be insolvent may refuse delivery except for cash, including payment for all goods theretofore delivered under the contract, and stop delivery under 2-705. Where the seller discovers that the buyer has received goods on credit while insolvent, he may reclaim the goods upon demand made within ten days after the receipt. If a misrepresentation of solvency has been made to the particular seller in writing within three months before delivery, the 10 day limit does not apply. Instead, must make the demand in a reasonable time. The sellers right to reclaim is subject to the rights of a BIOCB or other good faith purchaser. Successful reclamation of goods excludes all other remedies with respect to them. If you have a good faith purchaser (which will include an Art 9 creditor), this section cannot be used as recourse. The only way you can stake a claim on the goods you sold on credit is if you perfected your interest in the inventory, per 9-324(b). Then you would have a PMSI and super priority over competing interests. A creditor acting in bad faith, however, is going to lose priority. The competing creditor has remedies outside Article 9 to ensure that it is made whole, including restitution under 1-103(b). If the seller CAN reclaim his goods, hed better hope that the goods recoup all of his costs, because he has no other recourse now. If you use this section, it is all you get.Priority of Statutory Lien Holders 9-333 Priority of Certain Liens Arising by Operation of Law (a) A possessory lien is one which Secures payment of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the persons business Which is created by statute or rule of law in favor of the person, AND Whose effectiveness depends on the persons possession of the goods. (b) Priority of possessory lien: A possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise If the lienholder gives up possession, they also give up priority. But the possession does not have to be continuous. As soon as the collateral is back in the lienholders possession, the lien reattaches. Real Property Concerns of Article 9 9-102(a)(41) Fixtures are goods that have become so related to a particular real property that an interest in them arises under real property law. You can create an Article 9 security interest in a fixture. 9-344(a) This security interest does NOT extend to ordinary building materials Traditional Test for a Fixture has three elements (George v. Commercial Credit Corp). Personality becomes affixed to real property when: Actual physical annexations to the realty (connectedness), AND Application or adaptation to the use or purpose to which the realty is devoted, AND Intention of the person making annexation to make a permanent accession to the freehold 9-501(a) General Rule: In order to perfect, you must file a fixture filing in every county in which the fixture is, in the same office where mortgages are filed. 9-501(b) Exception to the General Rule for Transmitting Utilities The office in which to file a financing statement to perfect a security interest in collateral, including fixtures, of a transmitting utility is the state office (like the Secretary of State). The financing statement also constitutes a fixture filing as to the collateral indicated in the financing statement which is or is to become fixtures. Note: It only matters that you file in the real estate records if you are going to battle with an encumbrance on the real property. If you dont, it isnt technically a fixture filing, but you can still be perfected against other creditors. 9-502 Contents of Fixture Filing (a) A financing statement is sufficient if it includes: The name of the debtor The name of the secured party A description of the collateral (b) A fixture filing must include all of the above, but must also Indicate specifically that it covers fixtures Indicate that it is to be filed for record in the real property records Unless youre using a mortgage as the fixture filing Provide a description of the real property to which the collateral is related sufficient to give constructive notice of a mortgage under the law of this State if the description were contained in a record of the mortgage of the real property AND If the debtor does not have an interest of record in the real property, provide the name of the record owner. (c) A record of a mortgage is effective, from the date of recording, as a financing statement filed as a fixture filing, but only if: The record indicates the goods that it covers The goods are or are to become fixtures The record satisfies parts (a) and (b) of this section, with the exception that It neednt indicate that it is to be filed in the real property records (because its a mortgage, so thats a given) The record is duly recorded 9-334 Priority of Security Interests in Fixtures Keep this in mind: If your security interest gets filed BEFORE a mortgage of any kind is recorded, then you can walk away from this analysis. The fixture filing will win. (c) General Rule: 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. (e) First to file/perfect Exception to the General Rule (Mostly) A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of real property if: (1)The debtor has an interest of record in the real property or is in possession of the real property, and the security interest: Is perfected by a fixture filing BEFORE the interest of the encumbrancer or owner is of record, AND Has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner (because along with title, the new owner would inherit priority if some had previously existed) (2) BEFORE the goods become fixtures, the security interest is perfected by any method permitted by this article and the fixtures are readily removable Factory or office machines Equipment that is not used for the operation of the real property Replacements of domestic appliances that are consumer goods Pay attention to WHOSE appliances these are. If the Landlord owns them, they arent consumer goods, they are equipment. The ones that are consumer goods will usually qualify under this rule and for super priority as a PMSI. Since this will probably only be relevant against a construction mortgagee (so super priority is trumped), the fact that these are PMSIs is only relevant to the extent that the security interest will perfect on attachment. Unlike the PMSI in part d of this section, you do NOT have to file to perfect. (3) The conflicting interest is a lien on real property obtained by legal or equitable proceedings AFTER the security interest was perfected. (4) The security interest is Created in a manufactured home in a manufactured-home transaction When dealing with a manufactured home, despite this code section, you should always play it safe and file a real estate mortgage, a fixture filing, and a certificate of title to protect your interest where possible. Perfected pursuant to a statute described in 9-311(a)(2) (d) PMSI Super Priority Exception to the General Rule 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 The security interest is a PMSI The interest of the encumbrancer or owner arises before the goods become fixtures, AND The security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter Remember that many fixtures start out as consumer goods (which will perfect on attachment)- but if you want super priority in them once they become fixtures, you must ALWAYS file a fixture filing. (h) Construction Mortgagee Exception to PMSI Super Priority: A mortgage is a construction mortgage to the extent that it secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land, if a record of the mortgage so indicates. A PMSI in fixtures is SUBORDINATE to a construction mortgage if The mortgage is recorded before the goods become fixtures, AND The goods become fixtures before the completion of the construction. This rule ONLY helps if youre losing to a PMSI. 9-334(e)(1)-(4) will still trump a construction mortgagee if they apply. (f) Exception to Everything- Priority Based on Consent/Right to Remove A security interest in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if: The encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed an interest in the goods as fixtures; OR The debtor has a right to remove the goods as against the encumbrancer or owner This priority will continue for a reasonable time if the debtors right to remove the goods as against the encumbrancer or owner terminates. (i) Priority of a Security interest in Crops A perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record or is in possession of the real property. 9-604 Procedure if Security Agreement Covers Fixtures (c) Removal of Fixtures: If a secured party holding a security interest in fixtures has priority over all owners and encumbrancers of the real property, the secured party, after default, may remove the collateral from the real property. If they dont want to remove the collateral upon default, it is possible for state law to carve out a remedy for them. inre(d) Injury Caused by Removal: A secured party that removes collateral shall promptly reimburse any encumbrancer or owner of the real property, other than the debtor, for the cost of repair of any physical injury caused by the removal. The secured party need not reimburse the encumbrancer or owner for any diminution in value of the real property caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse. 9-335 Accessions occur when goods are affixed to other goods (a) Creation: A security interest may be created in an accession and continues in collateral that becomes an accession. (b) Perfection: If a security is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral (d) Certificates of Title: A security interest in an accession is SUBORDINATE to a security interest in the whole which is perfected by compliance with the requirements of a certificate of title statute. This is the only type of accession that has its own priority rules. Per 9-335(c), all other accessions will follow the standard priority rules. An example would be tires on a car. If a creditor is perfected in the entire vehicle, and later, another creditor perfects a PMSI in a new set of tires, the original secured creditor will win. (A very small minority of states say that tires arent an accession). (e) Removal After Default: After default, a secured party may remove an accession from other goods if the security interest in the accession has priority over the claims if every person having an interest in the whole. (f) Reimbursement Following Removal: A secured party who is entitled to remove shall promptly reproduce any holder of a security interest, other than the debtor, for any physical damage done to the collateral caused by removal of the accession. 9-336 Commingling occurs when things that initially had separate identities get totally integrated and become one, losing their separate statuses. Goods become so combined with other goods that they cant be recovered. (b) Lack of Security Interest: No security interest exists in commingled goods as such. However, a security interest may attach to a product or mass that results when goods become commingled goods. (c) Attachment: If collateral becomes commingled goods, a security interest attaches to the product or mass. (d) Perfection: If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is also perfected. (f) Conflicting Security Interests in a Product or Mass: If more than one security interest attaches to the product or mass under subsection c, the following rules determine priority: A security interest that is perfected under subsection d has priority over a security interest that is unperfected at the time the collateral becomes commingled goods. If more than one security interest is perfected under subsection d, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods. Federal Debts and Taxes Federal Tax Liens apply to all property and rights in property, and the lien is deemed to arise on the date of assessment. The Federal Priority Statute: priority for all federal claims, these claims are paid first when a debtor becomes insolvent. This can be trumped by a more specific statute (U.S. v. Estate of Romani) Many exceptions follow, including purchasers, security interest holders, mechanics lien holders, and juridical creditors when those interests win the race. Section 6323h defines the General Rule for a security interest The collateral has to be in existence A floating security interest in after-acquired property is subordinate to a federal tax lien under the general rule. Note that there is an exception. It is protected against a judicial lien creditor (therefore perfected) Value has been given/excludes future advances Basic Priority Generally, it is a race between perfection of the Creditor and notice of the Federal Tax Lien. If the Federal Tax Lien gives notice before the Creditor perfects, then the tax lien wins If notice of the lien is not filed before the creditor perfects, then the creditor wins If the secured party does not have knowledge of the federal tax lien, then they will continue to have priority for 45 days. After Acquired Property (Exception to the General Rule) A tax lien will be SUBORDINATE to a security interest in after acquired collateral under a floating lien if: A written security agreement is executed BEFORE the tax lien is filed The security interest is PERFECTED at the time the tax lien is filed The secured party had made the loan in the ordinary course of her business The collateral is acquired by the debtor/taxpayer in the ordinary course of her business The loans (or purchases) are made before the 46th day after the date of the tax lien filing and without knowledge of the tax lien The lender has 45 days or until he acquires notice of the lien to make an advance secured by after-acquired collateral The collateral must be acquired within 45 days after the filing of the lien. Knowledge is irrelevant. While loans cant be advanced after knowledge of the tax lien, collateral can be collected for up to 45 days, no matter what the parties know about the lien. A PMSI in after-acquired collateral will take priority over a federal tax lien. Future Advances (Exception to the General Rule) Potential Future Advance Issues Applies when there is a competing tax lien, judgment lien, or purchase against a specific item of collateral Did the secured creditor have priority generally in that item of collateral? Does the secured creditor have priority in future advances against that item of collateral? What is the amount of their priority claim? Federal Tax Liens: An secured partys interest in the collateral securing a future advance will be SUPERIOR to a federal tax lien if: The written security agreement covering the property was executed BEFORE the tax lien was filed The security interest was perfected BEFORE the tax lien was filed The advance was made within 45 days of the filing of the tax lien The bank had NO knowledge of the tax lien. 9-323(d) Buyer of Goods Securing Future Advances A buyer NOT in the ordinary course of business will take goods that are being used as collateral to secure future advances free of that security interest at the time that The secured party acquires knowledge of the buyers purchase OR 45 days after the purchase After the first of those conditions is met, if the secured party makes any more advances, they are no longer secured by the collateral. These conditions dont apply if the advance is made pursuant to a commitment entered into without knowledge of the buyers purchase and before the expiration of the 45 day period. 9-323(b) Lien Creditors Priority in Future Advances Before 45 days after the lien attaches: Advances in this period remain secured by property levied against. Any loans made in that 45 days will continue to be secured. Knowledge of the lien is irrelevant. A creditor , even aware of the lien, can continue to make advances during these 45 days and they will remain secured. After 45 days after lien attaches: Advances are subordinate to the lien unless they are made without knowledge of the lien, or pursuant to a binding commitment made without knowledge of the lien. FUTURE ADVANCESS MADE:FUTURE ADVANCE MADE: < 45 DAYS> 45 DAYS

After Federal Tax Lien 6323(d)Advance made without knowledge are secured by the item levied against Advances are subordinate to tax lien

After Buyer 9-323(d)Advance made without knowledge (or pursuant to a commitment made w/o knowledge) are secured by the purchased item Buyer takes free of future advance

After Judicial Lien9-323(b)Advances in this period remain secured by property levied against Advances are subordinate unless made W/O knowledge or pursuant to binding commitment made w/o knowledge

Bankruptcy Bankruptcy gives people a clean slate and discharges a debtor of his or her debts. The key concern is maximizing what unsecured creditors will get perfected secured creditors will get their collateral back. Automatic Stay: Once bankruptcy has been declared, an automatic stay puts a freeze on all of the bankrupts creditors, who now cannot get anything unless they go through the bankruptcy court. A Bankruptcy Trustee is the advocate for the unsecured creditors. Only through bankruptcy are unsecured creditors going to recover collateral in the event of the debtors insolvency. Chapter 7 Liquidation: Debtor must turn over all non-exempt assets. Trustee liquidates the property and provides creditors with the proceeds. Debtor receives a discharge and gets a fresh start. Chapters 11, 12, &13 Rehabilitation: Debtor retains her property, court and/or creditors approve a repayment plan, which may or may not fully pay creditors. Trustees Power in Bankruptcy: Trustees are given a number of useful rights in resisting or attacking creditors claims 544(a) Strong Arm Clause: The bankruptcy trustee has all the rights a Lien Creditor had under state law (9-317(a)(2)) as a claim to all other debtor assets. Basically it allows the trustee to push an unperfected secured creditor down to the level of a general creditor. Unperfected secured creditors and unsecured (general) creditors will receive a pro rata distribution of the bankrupts estate General Rule: Whether a competing interest is perfected is determined at the exact moment that the bankruptcy petition is filed with the court. There is no grace period. Exception: When the creditor has a PMSI, the creditor still has a 20 day grace period. The filing of a bankruptcy petition within that 20 days wont cut it off. A perfected secured creditor has priority over unsecured or unperfected competing interests and will retrieve the value of their collateral in the event of bankruptcy. Unperfected secured creditors can always be strong-armed by the trustee, and they are really the only group that this applies to. If the creditor is a USP, then there is no need to deal with preference or fraud. Conversely, if the creditor is completely unsecured or has a perfected secured interest, this clause doesnt help the trustee at all. 547(b) Preference: A transfer (includes the creation of a SI in the debtors property) made or suffered by the bankrupt to pay or secure a pre-existing debt within the 90 day period preceding the filing of the bankruptcy petition, which has the effect of giving the transferee (creditor) a greater payment than the creditor would get under the usual bankruptcy distribution. Policy Consideration: Preferences happen when creditors find out that the debtor is having financial problems, and they try to secure or better their positions to the detriment of other creditors. The bankruptcy code sees this as an unfair last minute action. Preference Requirements: If the transaction meets the following six elements, then the bankruptcy trustee could have the payment that was made prior to bankruptcy brought back into the debtors estate. Note that per 547(g) the burden of proof is on the Trustee to show that there is a preference. Transfer of debtors property Either money or a Security Interest To a creditor/claimant On account of an antecedent debt Timing Rule 547(e)(2)(a): When the debtors property is a security interest, the date of attachment is the date of transfer, unless perfection occurs more than 30 days after attachment. Then the date of filing is the date of transfer. Debtor must be insolvent Insolvency is presumed in the 90 days prior to bankruptcy Transfer itself must have occurred within the 90 days before Bankruptcy An insider who has a relationship with the bankrupt is subject to a 1 year look-back period, rather than the 90 days. Creditor receives more than they would have gotten under normal bankruptcy You will never meet the more than requirement if your creditor is fully secured, meaning it will never be a preference If the creditor is perfected, you wont meet this requirement because the creditor is guaranteed the value of the collateral If the creditor is fully secured but unperfected, you wont meet this requirement because they will be Strong-Armed by the Trustee pursuant to 544(a) if creditor is under-secured or unsecured (not enough collateral to cover loan), you will always meet the more than requirement 547(c) Preference Exceptions: If the transaction otherwise fulfills the requirements of a preference, one of the following exceptions can make it nonetheless outside the reach of the bankruptcy trustee. Note that the burden of proof is on the creditor to prove that one of the following exceptions applies. (1) Substantially Contemporaneous: The transaction is done on the same day if at the time of the loan that the debtor and creditor intended the transfer to be substantially contemporaneous AND in fact was substantially contemporaneous (dates are close enough to be contemporaneous) Holidays, weekends (2) Ordinary Course: If payments are made in the ordinary course of business, they are not a preference (3) PMSI: A PMSI is not a preference if A NEW security agreement is signed having a description of the collateral Previously existing Floating Liens can be preferences, whether they are PMSIs or not. However, floating liens usually apply to inventory, which have to be analyzed under section (5). Be careful here. For the purchase of collateral Debtor acquired such collateral Perfected within 30 days of possession PMSIs still have to be perfected within 20 days to have super priority over other perfected secured parties, but they get 30 days to perfect against a bankruptcy trustee. (4) Net Result Rule: Any time you have unsecured new value, you subtract the new value from the preference. Policy: We are more sympathetic to the creditor because they took on more risk. Example: In early 2013, JC borrowed $1,000 from BWB; it was a signature loan (no collateral). On Sept 25 2013, J made a $500 payment to the bank (assume that his payment is not in the ordinary course), but on Oct 4 he borrowed $300 more from the bank, giving it a SI in his sword collection. The bank never filed a FS, and J filed a bankruptcy petition on Nov 8, 2013. How much, if anything can his bankruptcy trustee recover from the bank? BWB will get credit for the amount of new credit. The Trustee can recover $200. The creditor gave new value of $300 w/o receiving anything in return. $500 (initial preference) - $300 (get credit for) = $200 preference If they were perfected here, the creditor would have gotten something in return and they would not have fallen w/in the exception preference would have stay the same and they would get the new value back They were unperfected they wouldnt get anything in return will decrease the value of preference (5) Picture Rule/ Floating Lien: Applies to inventory and accounts receivable. Take a picture 90 days before the bankruptcy and the day of bankruptcy. The creditor has a preference only to the extent that they are better off on the day of bankruptcy relative to the position they were in 90 days prior. 548 (a) Fraudulent Transfers A trustee may recover funds and add them to the estate from two types of fraudulent transfers: Where the transfer from an insolvent debtor does not give reasonably equivalent value in exchange i.e., the transfer was less than fair market value The transferor and the transferee have the ACTUAL INTENT to defraud the debtors creditors The look-back period on a fraudulent transfer is 2 years. Under 544(b), the trustee can also bring a claim under state law. Policy: In the interest of fairness, the code will take back the funds from tainted transfers in order to benefit the other creditors who acted in good faith. Non-Consensual Liens and the Trustee Judgment Liens are subject to preference attacks as if they were any other secured creditor. Statutory Liens may or may not be valid against a trustee. 545 says that a statutory lien will be valid against a trustee if: The lien would be good against a Bona Fide Purchaser, whether or not one actually exists, AND The lien did not arise only due to insolvency. 545(1) Specifically states that liens that arise due to insolvency or bankruptcy proceedings are VOID against the trustee. 547(c)(6) says that Statutory Liens are NOT subject to preference attacks. Proceeds 9-102(a)(64) Definition of Proceeds Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral 9-102(a)(9) Cash Proceeds: Are defined as proceeds in the form of money, checks, deposit accounts, or the like. Whatever is collected on, or distributed on account of, collateral Rights arising out of the collateral To the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of defects or infringement of rights in, or damages to, the collateral, OR To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in or damage to, the collateral. Continuation of a Security Interest in Proceeds 9-315(a)(2) Attachment: A security interest attaches automatically to any identifiable proceeds of collateral Even if the owner authorizes a sale of collateral free of the security interest, the interest in the collateral may be extinguished, but the interest in the proceeds will continue. 9-315(c) Perfection: A security interest in proceeds is perfected if the security interest in the original collateral was perfected 9-315(d) Continuation of Perfection: Perfection of a security interest in proceeds only continues for 20 days, unless one of the following applies (1) If the following conditions are satisfied, then there is no need to re-perfect (A) A filed financing statement covers the original collateral (B) The proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed. In this case, perfection will continue until the financing statement expires, or for 20 days, whichever is later. (C) The proceeds are not acquired with cash proceeds These are called Second generation proceeds and different jurisdictions treat them differently. (2) Identifiable Cash Proceeds will be perfected indefinitely 9-315(b) Identifiable cash proceeds are those which can be identified by tracing If the creditor can prove the proceeds were wrongfully taken and can prove what fund they went into, we still consider them identifiable When the debtor withdraws money from a commingled account, we assume he spends his own money first (3) If the proceeds are a type of collateral in which the creditor is perfected for some reason other than the fact that they were perfected in the original collateral, there is no need to re-perfect. For example: A creditor has a perfected security interest in all business machines of the debtor, and the debtor trades a computer (collateral) for a new computer (proceeds). Since the creditors security interest covers all business machines, they are perfected in the new computer regardless of whether they were ever perfected in the original collateral. Extinguishing a Security Interest in Proceeds 9-315(d) If one of the 3 requirements under this section isnt met, then the proceeds will become unperfected after 20 days if the creditor doesnt re-file. 9-340(a) Recoupment or Set-off If cash proceeds are held in a deposit account, and the bank exercises its right to recoupment or set off, then the bank can take the cash free of any other creditors security interest AT ANY TIME. This is because cash proceeds can be traced until they fall into the hands of a bona fide purchaser, and when a bank sets of a valid debt, it is effectively a bona fide purchaser. Timing doesnt matter here when a secured creditor goes up against a set off, they are going to lose. 9-332 Transfer of Money or Funds From a Deposit account Cash proceeds given to a third party will pass to them free of any security interest, as long as that party isnt acting in collusion with the debtor to defraud the secured party. Priority in Proceeds 9-322(b)(1) General Rule: The time of filing or perfection as to a security interest in collateral is also the time of filing or perfection as to a security interest in proceeds. There is no such thing as super priority in proceeds. Even when you have a PMSI, or accounts receivable, you still look to the first in time rule. Exception: 9-330 Purchaser of Chattel Paper (a) has priority over a security interest in the chattel paper which is claimed merely as proceeds of inventory if: The purchaser gives NEW VALUE for the chattel paper in GOOD FAITH and in the ORDINARY COURSE OF BUSINESS, and either takes POSSESSION of the chattel paper or obtains control of it in its electronic form AND The chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser. (c)(2) has priority in the proceeds of the purchased chattel paper or cash proceeds of the specific goods, even if the purchasers security interest is unperfected. Policy: Chattel paper financiers grease the wheels of commerce and keep businesses going. We want to incentivize financing chattel paper. Secured parties protect themselves against this by providing that debtors who use chattel paper as collateral are in default.Default 9-207 Pre-Default Duties of the Secured Party in Possession of Collateral (a) Reasonable care: A secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. 1-302(b) Says that this obligation, along with good faith and diligence, cannot be waived. (b) Expenses, risks, duties, and rights when secured party in possession: If a secured party has possession of collateral: (1) reasonable expenses, including the cost of insurance and payment of taxes or other charges, incurred in the custody, preservation, use, or operation of the collateral are chargeable to the debtor and are secured by the collateral; (2) the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage; i.e., If the collateral is fully insured, then the debtor owes nothing in the event of an accident (3) the secured party shall keep the collateral identifiable, but fungible collateral may be commingled; and (4) the secured party may use or operate the collateral: (A) for the purpose of preserving the collateral or its value; (B) as permitted by an order of a court having competent jurisdiction; or (C) except in the case of consumer goods, in the manner and to the extent agreed by the debtor. (c) A Secured Party having possession or control of deposit accounts, electronic chattel paper, investment property, or letter of credit rights (1) May hold as additional security any proceeds, except money, received from the collateral (2) Shall apply money received from the collateral to reduce the secured obligation OR remit it to the debtor, AND (3) May create a security interest in the collateral (d) Buyer of Rights to Payment: If the secured party is a buyer of accounts, chattel paper, payment intangibles, or promissory notes or is a consignor (remember that these sales fall within the scope of Article 9, even though they are true sales and not security interests) (1) The duty to exercise reasonable care and preserve rights against prior parties does NOT apply, unless the buyer is entitled under an agreement To charge back uncollected collateral OR Otherwise to any recourse against the debtor or secondary obligor based on the nonpayment or other default of an account debtor or other obligor on the collateral (2) Subsections b and c dont apply if the buyer has no recourse against the debtor or anyone else, the buyer alone is responsible for the collateral and may handle it in any way he likes. 9-210(b) Requests regarding a list of collateral: a secured party, other than a buyer of accounts, chattel paper, payment intangibles, or promissory notes or a consignor, shall comply with a request regarding a list of collateral from the debtor within 14 days after receipt Debtors can also request statements of account and accountings of the unpaid obligation under this section 9-625 Debtors Remedies: In the event of a secured partys breach of duty (a) Judicial Orders: If it is established that a secured party is not proceeding in accordance with this article, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions. (b) Damages: A person is liable for damages in the amount of any loss caused by a failure to comply with this article. Loss caused by a failure to comply may include loss resulting from the debtor's inability to obtain, or increased costs of, alternative financing. (f) Statutory Damages for non-compliance with 9-210: If a secured party doesnt fulfill their obligation under 210 to provide the debtor with records upon request, then they are liable for punitive damages in the amount of $500 for each instance. If the creditor never claimed an interest in the collateral, but nonetheless received requests from the debtor, then the creditor is excused from complying and is not liable for damages. (g) Limitation of Security Interest due to non-compliance with 9-210: If a secured party fails to comply with a request regarding a list of collateral or a statement of account under 9-210, the secured party may claim a security interest ONLY AS SHOWN IN THE LIST or statement included in the request as against a person that is reasonably misled by the failure. Default: The UCC does not define default. Default is generally left to the parties to define in the security agreement. If terms for default are not defined in the security agreement, a default may occur: For failure to make timely payments in accordance with the contract (probably the most common) If the debtor files for bankruptcy (also pretty universally recognized, but the rules for bankruptcy will trump the rules under default) Debtor changing name without notice Debtor moving without notice Severe diminution of value of the collateral due to debtors negligence If terms of default ARE defined in the security agreement, they can nonetheless be waived 2-208 Waiver (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement. (3) Such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such a course of performance.\ Basically, no matter what the contract says, if one party consistently violates the terms and the other party doesnt object to it, then the silent party has waived its right to enforcement of those specific terms 2-209(5) Revocation of a Waiver: Once a party has implicitly waived its contractual rights, if it wants to eliminate the waiver and put the original contract terms back in force: The party must notify the other party in writing that it intends to reestablish its rights in the original contract AND The non-compliant party cant have materially changed its position in reliance on the waiver. 1-309 Acceleration Clauses: An option to accelerate payment or performance under a contract at will, or when the creditor deems itself insecure. Acceleration is only valid if the secured party in GOOD FAITH believes the prospect of payment is impaired. Note: Courts do NOT like acceleration clauses in consumer cases and will usually construe them against the creditors. 1-201(20) Good Faith has two elements Honesty in Fact This is a subjective requirement. The creditor must actually and truly believe that he is insecure Commercially Reasonable This is an objective requirement If a creditor attempts to use an acceleration clause to exercise its right to repossess, the court is either going to require that there has first been a default, or if there hasnt yet been a default, then the creditor will be required to give the debtor notice that it is enforcing the clause. (Klingbiel v. Commercial Credit Corp.) 2-609 Adequate Assurances: If reasonable grounds for insecurity arise, a party may ask for adequate assurance of due performance. Until the party receives due assurance, they may, if commercially reasonable, suspend any payment or performance (whatever their contractual obligation is). What are reasonable grounds? There is no bright line rule, but if the debtors become unemployed, or have jobs directly related to the overall economic state, and the economy takes a downturn, that is probably reasonable. Likewise if the creditor finds out that the debtors have met with bankruptcy attorneys, or if the debtors are arrested and face imprisonment. What arent reasonable grounds? Anything that has nothing to do with the debtors ability to pay (like the creditors financial state), anything unverifiable or passed to the creditor through mere rumor or speculation. Creditors Rights Upon Default A creditor has several concurrent rights upon a debtors default 9-609 Secured Partys Right to Take Possession after Default (Repossession): (a) After default, a secured party (1) May take possession of the collateral AND (2) Without removal, may render equipment unusable and dispose of collateral on debtors premises (b) A secured party may proceed under subsection (a) (1) Pursuant to judicial process OR (2) Without judicial process, if it proceeds without breach of the peace. 9-601 Rights After Default, Judicial Enforcement (a) After default, the secured party may Use any available judicial procedure to obtain a judgment, foreclose, or otherwise enforce the claim AND If the collateral is in documents, may proceed either as to the documents or as to the goods they cover. (e) If the secured party is granted a judicial lien by the court, for priority purposes, the lien will relate back to: The date of perfection of the security interest in the collateral OR The date of filing a financing statement covering the collateral Collateral seized by judicial enforcement then goes through an execution sale under state law. The secured party is free to use either or both of these remedies. They can exercise their rights under the UCC and repossess as well as go to court and obtain a judicial lien. 9-601 says this explicitly In State Bank of Piper v. A-Way, the Illinois Supreme Court said it too. There is no doctrine of merger in a default. There is also no res judicata problem the UCC provides for cumulative remedies. Sometimes, the creditor might NEED the cumulative remedy: What if they repossess the collateral, but for some reason, it doesnt cover the deficiency? They can get a judicial lien on the debtors other assets and get lien creditor priority in the deficiency. Collateral Without Physical Form Collection and Enforcement When the collateral is an intangible, such as accounts receivable, the secured party has a right to collection on those accounts rather than a right to repossession. 9-607(a) In the event of default, a secured party who has a perfected security interest in a right to payment: (1) may notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party; May just means that the secured party doesnt have to collect on the defaulted debt if they dont want to. If they want the account debtors to start paying them, rather than the debtor, WRITTEN NOTICE IS REQUIRED. This is also called a cutoff notice (2) may take any proceeds to which the secured party is entitled under Section 9-315; (3) may enforce obligations of the parties who owe the debtor to fulfill their obligations as they relate to the collateral held by the secured party (4) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(1), may apply the balance of the deposit account to the obligation secured by the deposit account; and (5) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(2) or (3), may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party. 9-607(c) A secured party MUST proceed in a commercially reasonable manner if the secured party: (1) Undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral AND (2) Is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor Account Debtors and Assignees: 9-404(b) Basically, if a secured creditor enforces the right to payment on accounts receivable that it holds as collateral, it is subject to the previous agreement between the debtor (assignor) and the account debtors. Whether or not the obligation is even assignable can be a huge part of these agreements. 9-406(a) If an account debtor has a valid defense to payment (such as prior exercise by the debtor of setoff rights against them), then the account debtor need not pay so long as the defense arose BEFORE IT RECEIVED THE CUTOFF NOTICE. Repossession 9-609 Authorizes a secured party to take possession of collateral in the event of default, without notice, and without judicial authorization (also called self-help), but only if doing so does not cause a breach of the peace. Breach of the Peace: There is no statutory definition, and interpretation of this is left up to the courts. What is ok? A certain degree of stealth is fine. The collateral belongs to the secured party, so if they damage it, its ok (like breaking a car window or hot-wiring it). If the repossesser thinks a breach of the peace is about to occur (or one is occurring), and decides not to take the collateral and leaves, he may return later and take it without causing a breach. What ISNT ok? Anything that resembles an altercation will be a breach of the peace. Constructive force isnt ok either (like bringing a cop with you). Illegal acts, like trespass, will always be a breach of the peace. What may or may not be ok? Clause in the contract that provides that the secured party has a right to enter the debtors premises to remove the property. Most courts will require concurrent consent even if this clause is in the agreement. If youre towing a car from someones driveway, youre probably fine even though youre on their property. But if youre entering a private home, this WILL be a breach of the peace. 9-602(6) says that a debtor cannot waive the breach of the peace requirement under 9-609, so it doesnt matter what the debtor signs. If the secured party lies in order to get possession of the collateral. Some courts are going to say this is ok, other courts will call it fraud. Probably not the best idea. The obligation to not