SECURED TRANSACTIONS OUTLINEFor: Professor Zubrow

Spring 2001

I. Introduction To UCC and Secured Transactions

A. UCC Provisions and Its Interrelationship with Secured Transactions1. Article 1 — provides general definitions for the UCC2. Article 2 — deals with the sale of goods3. Article 2a — deals with leasing of goods4. Article 8 — deals with investment securities [private dealings of stock]5. Article 9 — deals using personal property to secure credit transactions

B. Overview of What is Personal Property1. Tangible property [basically goods b/c real estate not included in Art. 9]2. Qausi-tangible property [E.g., legal rights reified on paper — the value is the

legal rights embodied in the paper or electronically; promissory notes, certificates of deposit; investment securities — See Art. 8]

A. Example — You own a catering business in DC and asked to put on a lunch for X. X gives you a deposit and a promissory note for the rest of the amount due. A promissory Note is a “formalized IOU” [see Handout #4]. The note isn’t worth anything, it is the legal right embodied in the note that is of value.

B. Example — What if you are short of cash to put on the lunch. You can go to the bank and request a loan. However, the Bank wants collateral — we will learn that the promissory note can be used as collateral to secure a loan transaction. Alternatively, you can also sell the note — the sale of a note is also covered under Article 9.

3. Pure Intangible — this is all encompassing category (e.g., trademark rights, the right of the NFL to be paid by broadcast stations, account receivables, checking account)

C. What is the Economic Reason for Studying Secured Transactions? — Consumer debt is at an enormous high rate. If the economy goes south, creditors will be collecting a lot of money. 1. 3 Traditional Forms of Lending

a. Direct lending by institutional creditors (e.g., a Bank)b. Credit salesc. Securitization [See Diagram on pg. 3 on Handout #8] — this means

you pool credit obligations together; it represents a future stream of income. These obligations are converted into investments and then sold to the public. This reduces risk by spreading it out and makes it easier to gage risk of a group than an individual.

2. Legal Reason – we have a new revised Article 9. Hasn't been revised since 1972. The last page on Handout #1 shows which states have adopted;

introduced; or yet to introduce the new Article 9. The transition rules are in Part 7 of Article 9. The New Article 9 can be found in Appendix Q.

D. Concepts and Definitions Involved In Secured Transactions1. Security Agreement – contract between the debtor and creditor. Its a

contract that conveys a property interest to secure a debt. Because the security agreement is a contract, it does not go into public records; the document also tells us the rights of the creditor.

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2. Typical Questions that arise: (1) what are the creditors rights; and (2) if have multiple creditors fighting for the same property, how do we rank the

creditors?3. Attachment – §9-203 is the main provision in Article 9 that tells us what

needs to go into the security agreement to create a security interest under Article 9.

4. Financing Statement – §9-521 talks about the national uniform form for financing statement, which publicizes the transaction thereby giving notice

to existing or potential creditors and purchasers of the property. §9-210 tells us how to get more information once you see the Financing Statement.

5. Perfection –– §9-308 (starting point)a perfected security interest means you created a security interest that has been publicized. Perfection is

sometimes the deciding factor (but not always and not the general rule) to determine who wins (priority) when there are multiple creditors.

6. Collateral –– §9-102(a)(12) means the property subject to a security interest or agricultural lien. It includes: (A) proceeds to which a security interest

attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and (C) goods that are subject of a

consignment.7. Security Interest – §1-201(37) means an interest in personal property or

fixtures which secures payment or performance of an obligation. The term also includes any interest or a consignor and a buyer of accounts,

chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9. [Refer to pg. 1267 for the revised version]

8. Default – not defined by the Code. So you need to look at the security agreement. Look at Handout #3 for a definition. Part 6 of Article 9 deals

with default issues.a. §9-609 says that if a Bank believes the debtor is in default, the Bank can

repossess the boat w/out going to court. Under §9-609(b) a secured party (e.g., the Bank) may proceed without judicial process.

b. Example –– Assume debtor defaults and the creditor repossess the collateral. What can the creditor (a.k.a. the secured party) do with

the collateral? Under §9-610, the secured party can sell it to offset the debt. This Section mitigates loss in the situation of default and reduces

transaction cost in collection. However, if the collateral (for instance the boat) was used for pleasure, it may be classified as a consumer good and thus may be protected by other consumer protection laws. Thus, the bank may be restricted by other laws. See §9-201(b) which allows consumer protection laws to be applicable to an Art. 9 transaction.

9. Debtor – §9-102(a)(28) is the person who has interest in the collateral; sells the collateral; and a consignee.

10. Obligor – §9-102(a)(59) is the person who owes the obligation (to pay).a. Sidenote – the obligor and debtor can be the same person, but not

always.b. Example – President of a small corporation needs money and goes to

bank for a loan. However, all the assets of the corp. are encumbered in other creditors. What if you put up personal collateral for the corporation. The President is the debtor (the person who owns the collateral) and the corporation is the obligor (the one that has the obligation to pay the loan.) 11. Enabling Security Interest – is a purchase money security interest. §9-103 the credit extended to debtor enables the debtor to purchase the good that serves as collateral. This is a purchase money security interest [e.g., the boat hypothetical].

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a. To determine whether its a Purchase Money Security Interest – start with §9-103(b)(1) – is the boat purchase money collateral with respect to the bank's security interest? §9-103(a)(2) defines Purchase Money

obligation as an obligation of an obligor incurred for value [what bank gave] given to debtor to enable him to get the collateral the value was so in fact used.

b. Article 9 favors Purchase Money Security Interests over Security Interests Unrelated to the Credit extension.

12. Security Interest for Unrelated Debt – there is no relationship between debtors rights in the property served as collateral and the extended

credit.a. Example – You want to go to Super Bowl but you need money

($10,000). What do you put up as collateral? The boat. In this case there is no relationship to the money he receives to go to the

Super Bowl and the rights of the boat.

E. Introductory Example of Secured Transactions

1. Example: Assume you buy a boat but you only have $10,000 in your bank account and the boat costs $80,000. You can set the transaction

up in several ways: (1) barter – swap exchangeable goods [but hard to find an appropriate exchange]; (2) cash – also difficult because hard

to come about; (3) commercial paper (e.g., certified check or travelers check) – also hard to come about; (4) defer ratification (not likely

if you want the boat now); (5) credit and borrow. a. What does a sale mean? UCC §2-106 defines a sale as

"a passage of title for a price." UCC 2-401 tells you when title actually passes. If buyer went to bank and put the boat as collateral, the security agreement would not have created a security interest because he does not own the boat. However, at moment you receive the boat, you have title under Article 2.

b. What is the Doctrine of Derivative Title – Actual conveyance of property doesn't take place until you receive it and then has a property

interest. c. What is Shared Ownership –- its limited, in the sense that its for the sole

purpose of securing a loan; and its conditional because the bank cannot take possession unless the loaner defaults.

2. Example Handout #1A –– The debtor is a Farm Corporation (Ralston Purina) and the secured party is a credit-seller. The credit-seller wears 2 hats: (1)

seller; and (2) creditor. Ralston gives the creditor-seller a promise to pay for fertilizer seed. Creditor seller wants a security interest and won't take it in the fertilizer (reminder, if creditor-seller did that would be a "purchase money security interest" and §9-103 would be the applicable provision). Instead C-S want's a security interest in the corn crop to secure the loan. The Definition of Goods does include the term "crops". [§2-105 defines good] Assume the value of the corn is $100,000 and the debt is $80,000 [b/c Ralston gave a $20,000 down payment]; this means the debt-collateral ratio is 80% [80,000/100,000] This ratio is unrealistically high (usually its closer to 60%).

a. Assume Ralston defaults and under 9-609 the credit seller repossess the collateral (corn) and under 9-610 sells it to offset the debt. Assume the

foreclosure sale of corn produces $90,000. Does the credit seller get to keep the $90,000? No, credit seller gets to keep $81,000 [the debt + expense of foreclosure]. The remaining amount ($9,000) goes

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back to the debtor. This $9000 is referred to as "surplus" under §9-615(a) and (d). In this case the secured party is "over-collateralized" – the collateral is greater than the cost at default. This example also suggests that the limit on security interest is that it can never be greater than the debt.

b. Assume same facts as above, except the foreclosure sale only produces $45,000. The entire amount goes to the secured party (§9-615)

since the outstanding debt is greater than the amount collected at the sale. There is a deficiency in this example. This makes the secured party a "general creditor" for the rest of the debt – meaning he has to go to court to collect the rest. In this example, the secured party is an "under-collateralized creditor" –– where the debt is greater than the collateral collected at default.

c. Side Note: Look at Handout #3 – there is a provision within the security agreement regulating the debt-collateral ratio.

3. Example –– What can the creditor get from the debtor? There are ex-post and ex-ante benefits of collateral.

a. Ex Post Benefit – of a secured party is the benefit the creditor gets after default – its the mitigation of the loss caused by default.

b. Ex Ante Benefit – the benefit arises before default – during the loan repayment period.

1. Example – Suppose X (debtor) gives a security interest in Y. What are the ex post benefits? The bank could use §§ 9-609, 10, and 15

remedies to collect. But those benefits are likely to be low if there is not a great market for Y. Also transaction costs for caring for Y may be high. So ex post benefits are minimal. What about ex-ante benefits – X loves Y - it has sentimental value to X. How does that influence X behavior in advance before default. X will default on another debt or bill so X can pay the loan.

2. Example – X debtor puts a diamond bracelet up for collateral. The Ex post benefit here is high because the bracelet is easy to seize and

there is a good resale market. However, the ex-ante benefits are minimal to the debtor because given by an ex-boyfriend and

husband doesn't appreciate it.3. Business Example –New Article 9 enables you now to put software

up as collateral for a security interest. The ex-post benefits are low. What will the bank do with customized software. There is no resale market. However, the ex-ante benefits are high because seizing the software can be disruptive to the corp. and the replacement cost for new software is large.

F. Chapter 1 –– Introduction to Text Book1. Liens – A lien is an interest in the debtor's property given by the law to

protect a creditor. Its a charge on property to secure repayment of a debt. There are two types loans ––

a. Voluntary Liens1. Consensual Lien – the debtor voluntarily grants an interest2. Mortgage – a consensual lien taken in the debtor's real property3. Security Interest – a consensual lien in personal property or fixtures

b. Involuntary Liens1. Judicial Lien – when the lien arises from judicial proceedings

[creditor sues and recovers judgment and sends the sheriff to seize the debtor's property]; A creditor that has a judicial lien is a "lien creditor" under § 9-102(a).

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A. Example –– I'm a debtor and ask a bank for a $50,000 loan. No collateral put up. It's a signature loan. But I'm insolvent and default. How does bank collect debt? Go to court and win a

judgment. The bank will convert the judgment into money by asking the court to issue a "writ of execution" [see example on Handout #2] – a paper that the creditor takes to the sheriff in the jurisdiction where debtor's property is located. The creditor will tell or give directions to sheriff what to seize. The sheriff seizes the property (called a "levy") and then sells the property (called an "execution sale") and takes the proceeds and gives it to the bank, if surplus it goes it goes to debtor.

B. Example –– 3 Approaches to the Question When Bank Gets a Judicial Lien: [Remember, judicial liens are Non-UCC laws and must check ea. state] (1) order of levy jurisdiction –bank gets

its judicial lien at moment sheriff seizes the property; there's shared ownership from that point on – creditor no longer a general

creditor, now a lienor. (2) order of delivery – it arises at time the lawyer for bank delivers the writ to the sheriff. (3) order of issue jurisdiction – it arises at moment clerk signs the writ.

C. Example –– Assume I ask for a $50K loan, but have to put collateral – a high-tech computer system. I sign a loan

agreement, a note, and security agreement that covers the collateral. I default. The bank wants to go after the collateral. Information assymetry risk – I know I don't own a high tech system but the Bank doesn't. Does the bank have a property interest in this system I don't own. According to CL, the Doctrine of Derivative Title says you cannot give a transferee any greater property rights than the transferor has. Thus the security agreement is worth nothing. To determine if there is a security interest (you have to determine if there was "attachment"] See § 9-203 which deals with the creation of a security interest. Under §9-203(b) it tells us what the parties have do to create a consensual lien – You need: (1) value –[it's been given – bank gave $50K] §1-201(44) defines value; (2) debtor has rights in the collateral [that's what's missing here in the hypothetical] – that 's the Doctrine of Derivative Title; (3) (A) debtor authenticated a security agreement that describes the collateral; (B) possession [see § 9-313]; (C) collateral is a certificated security registered form and delivered to secured party under § 8- 301; or (D) collateral is deposit accounts, electronic chattel paper, investment property, or letter-of credit rights and

secured party has control under §§ 9-104, 105, 106 or 107. Here, the second element is still satisfied b/c § 9-203(b)(2) says "power

to transfer rights in the collateral" this phrase deals with cases where the debtor doesn't have ownership interest but improved title (a.k.a. "Doctrine of Improvement of Title" – its an

exception to Doctrine of Derivative Title – in certain cases the transferor can give transferee more rights than the transferor has.]

Default Rule –– Can't give something you don't have.2. Statutory Lien – is one imposed by statute or CL in favor of certain

creditors the law deems worthy of protection [e.g., liens given to LLs, artisans, repairing personal property – e.g., garage mechanic]; All of these types of liens are created irrespective of the wish of the debtor.

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A. Refer to Example 3 and 4 on Handout 6.B. Example – Federal Tax Lien §6-321

2. Bankruptcy – the bankruptcy has a "strong arm clause" under §544(a) of the Bankruptcy Clause to put a secured unperfected creditor at the bottom as a general creditor. However, a creditor with a perfected security interest will

not be strong armed unless a mistake has been made.3. Pre-Code Approach To Secured Transactions

A. Pledge –– In a pledge transaction, the Debtor (called "pledgor") gives physical possession of the collateral to the creditor (called

"pledgee") until the debt is paid. Basically, a pledge transaction is a "possessory security interest". Possession perfects the creditor's interest in the collateral b/c obviously possession gives notice to others. There are 2 drawbacks to Pledging – (1) only tangible objects can be pledged; and (2) for some types of collateral debtor needs to keep possession. This device still lives on [better known as taking a possessory security interest]

1. Example –– Assume you borrow $50K and put a bracelet up for collateral (worth $100K); So, the debt-collateral ratio is 50%, which

means they are overcollateralized. Once you sign a loan agreement [a promise to pay], what happens to the bracelet? It goes to the bank; that is a pledge – the creditor is in possession of the collateral. But if you haven't signed a security agreement, is this transaction (pledge) covered in Article 9? Start with the core scope provisions §9-109(a)(1) – it applies to a transaction regardless of its form that creates a security interest in personal property by contract. We know the bracelet is personal property and we have a contract ("the loan agreement"). But does the combination of an oral agreement and a written loan agreement create a security interest? To answer this question you have to look at § 9-203 [the attachment section – which governs how to create a security interest]. Is handing the bracelet over and loan agreement enough? Apply § 9-203(b)(1), (2), (3) – (A) Value –yes, the creditor gave the debtor $50K; (B) debtor has rights in collateral yes – you own the bracelet; (C) There is no signed security agreement, but §9-203(b)(3)(B) applies b/c the collateral is in possession of the secured party pursuant to § 9-313. § 9-313(a) tells us what type of goods taken in possession can be perfected – tangible goods, includes bracelets. "Pursuant to debtor's security agreement" means [see §9- 102(a)(73) and §1-201(3) for "agreement") – It says nothing about

writing; just need an agreement to create a consensual lien. This statement is in place b/c what if drop the bracelet, don't want that to be an agreement. The oral agreement that delivery manifests my intent

to create a security agreement. So this is w/in the scope of Article 9 under §9-109(a)(1).

2. Remember –– If setting up a possessory security interest, don't rely on an oral agreement, always get a security agreement. Satisfy both § 9- 203(b)(3)(A) and (B) –– act redundant.

3. Advantages/Disadvantages of Pledging ––The advantages include: (1) bank doesn't have to seize if default b/c already in possession; so don't need § 9-609; (2) best way to protect collateral. The shortcomings are (from creditor perspective) include: (1) easy to put a bracelet in vault but what if collateral to large to be stored; (2) it doesn't work for all kinds of property – only applies to property listed in §9-313. From the Debtor perspective,

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the shortcomings are: (1) when you make a pledge, debtor experiences a substitution of assets (get $ but give up the bracelet) – it's a swap; however, with a non- posessory security interest, you get both; so debtors frequently protest pledges; and (2) there are some types of collateral that are good for pledges – they are passive income producing assets (e.g., treasury bills).

4. Notice –– How do pledges give notice to third parties? Why is notice important? If debtor delivers property, the secured party gets a

security interest and a perfected security interest if satisfy §9-313. Notice is important b/c any potential creditor needs to know b/c the bracelet has been taken out of the pool of assets and is not available to offset other claims against the debtor. Anyone that wants to purchase the bracelet, they may pay less if know bank has a security interest in the property. How does the pledge give notice? "show me the collateral"; this is a high transaction cost of giving notice b/c you have to ask to see the property for notice.

5. Conclusion –– Possessory Security Interests are In Article 9.6. Recap: Article §9-203(b)(3)(B) covers possessory security interest.

Possesory security interest gives notice to third parties – subsequent creditors or potential purchasers.

B. Chattel Mortgage –– allow for the creation of non-possessory security interest (debtor keeps the collateral and credit).

1. Is there a secret lien problem? Yes, if debtor has full possession of collateral it appears that there is no interest in property. She has

full ownership.2. Example ––When buy property, you get a deed and its publicly

recorded. Personal property is not recorded except for cares – title of certification; the problem is there is no public recordation. So when adopted chattel mortgages, you have to file. We record liens on personal property.

C. Trust Receipt –– In trust receipt financing, for example, the car dealer (trustee) would ask a bank (entruster) to buy the cars from the

manufacturer. The bank would turn them over to the dealer after (1) the bank filed notice; and (2) dealer signed a trust receipt (thereby becoming a trustee, and the bank an entruster]. As the dealer sells the car, the dealer would begin to pay the bank. Problems that could occur included a sale "out of trust" where the dealer failed to remit the proceeds of the sale to the bank.

D. Factors Lien –– The factor was a financing entity who loaned money against inventory the manufacturer put up as collateral. In return, the

factor was granted a lien (a security interest) in the inventory, but the factor had to file for perfection purposes. The draw back was that the lien did not extend to new additions to the inventory ("after acquired property" –– see UCC §9-204 you can now in some cases].

E. Field Warehousing –– In a pledge transaction, where the secured party takes the collateral into possession, if the collateral is too big it could be stored in a warehouse and the warehouse CO could issue a negotiable warehouse receipt made out to the "bearer". The document would have to be presented before the collateral was surrendered. What happened was that the warehouse receipt was (used as collateral) pledged to the creditor in return for the loan of money. Possession of a negotiable document of title perfected the creditor's security interest. A "field warehouse" is where the warehouse comes to the goods instead of vice versa. This mechanism still lives on.

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II. The Scope of Article 9

A. Organization Principles For Analyzing Scope Problems

1. Transactions that are entirely excluded from Article 9 (doesn't involve a charge on property to secure a debt –– e.g., signature loan OR a transaction. Where you put personal property for collateral but its not included –– Ex. fall on

steps of law school for being un-kept – need money to pay medical bills – what do you have as collateral –– a tort claim. But under § 9-109(d)(12) an

assignment of a claim arising in tort (tort claim) is excluded.A. Remember –– Just because its not governed by Article 9, doesn't mean

you cannot do it. Even with transactions excluded we will learn the rights of those parties can be effected by Article 9.

1. Example –– You borrow money from a bank on a signature basis. But defaults on 2 different loans. Art. 9 tells us which creditor has priority when debtor defaults. See §9-201(a). The secured creditor wins out the party not governed by Art. 9. [there are some exceptions that you will see later].

2. Some transactions are partially included in Article 9. The interest is not a security interest (e.g., agricultural lien) but its brought into Article 9 for

limited purpose under §9-102(a)(2). Agricultural liens are really statutory lines but they are actually included in Article 9.

3. Transaction conceptually has nothing to do with creating a security interest (like the "sale of a promissory note"). Art. 9 includes some of these types of

sales even though doesn't have issues of shared ownership, etc....

B. Conditional Sale (a.k.a. "credit sale") –– whereby the buyer gets possession of the property, but the seller reserved full and complete title to it until the buyer paid in full. A conditional sale has the Benedict v. Ratner problem of the "debtor-in-

possession and a secret lien in the seller's favor, and the fictitious title retention theory has a shor life here under §2-401.

1. Problem 1 (Text p. 11) John sold Nancy a used car for $900, to be paid off in three payments of $300 each. The contract was oral. Nancy (the debtor)

misses the second payment and one of John's EEs repossessed the car and returned it to the seller. Nancy sues John for conversion. Who should win?

A. Nancy Argues – Nancy will argue John could have sued me for breach of contract and collect damages. Instead, he seized my car and

embarrassed me. Nancy's theory for suit is the "theory of conversion" –– Nancy will argue John intentionally and wrongfully exercised dominion over my property. Nancy says its my car and John has no right to take it.

B. John Argues –– John will raise 3 defenses: (1) I didn't convert because Common Law doctrine of fictitious retention of title; (2) I had right to

take because you breached a contract covered by Art. 2 and I have a remedy – the seller's right of reclamation; (3) I have a right to self-help ––

repossession §9-609 (secured creditors can seize the debtors property).

1. J's First Theory–– Under §2-106 the passage of title for a price is a sale. If centered into a credit sale its assumed the party's intent that seller keeps ownership until debtor pays in full. Nancy had possession but not ownership because she didn't pay full price. It's a defense to conversion, she' doesn't have property interest in car

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because she didn't pay in full. Nancy's response to that argument is that theory (doctrine of fictitious retention title) is no longer good

law. See § 2-401.When Title Passes §2-401

Agreement Goods Identified to K Physical Delivery Full Payment

Title Can Pass To Buyer Title Must Pass

Here, the fight is about title –– whether Nancy had an ownership right in the car when John repossessed it. Under §2-401 any retention by seller of title in goods delivered to buyer is limited in effect [limiting

parties freedom of contract] to the reservation of a security interest.

There are a Number of Events in a Sale Transaction –– (1) agreement of sale; (2) goods identified to the contract –– the basic idea is the parties know what goods we are talking about – here, it was car being sold; (3) physical delivery; (4) full payment. Under the Doctrine of Retention of Title – from time of agreement to full payment the car is John's. Under § 2-401(1) title to goods cannot pass until goods identified –– if identified they can pass but not earlier –– any retention in goods shipped is limited to reservation of a security interest –– this means that John doesn't have full ownership at moment of delivery. The Code has divorced payment from the transfer of ownership – that's the effect. Subject to these provisions, title passes in any manner explicitly agreed on; So, the first two sentences of §2-401 set out parameters for when title can and must pass. So third sentence says you can bargain when title passes between those 2 events –– identification an delivery. §2-401(2) confirms out understanding of §2-401(1) and default rules – rules we should assume if not provided by the parties. How does this effect John's argument? John can no longer argue that its not Nancy's car because Nancy has full possession. We know which car it is (goods identified) and before Nancy gets possession [that's in between the parameters §2-

401(1)] [See shipment contract –– §2-401(2)(a)]

2. J's Second Argument –– J argues under §2-702 he has a right of reclamation defense. [Refer to Handout #1b]. (A) Case A – On 3/1 oral s/a; car delivered to N; N makes 1st

payment of $3000 to J. 4/1 N misses 2nd payment. 4/2 J telephones N and makes demand. 4/3 J repossesses. Can J defend his actions under § 2-702 OR is it a conversion? §2-

702(1) does NOT apply, but under §2-702(2) what does it mean to be insolvent and when do we look? [§1-201(23) – provides a definition of solvency – NOT paying debts when they come due]. Time Frame: were the goods received while insolvent? Here, its 3/1. If J knows on 3/1, Nancy is insolvent he won't deliver the goods; usually, he will discover later –- until Nancy doesn't pay. Assume 3/1 Nancy was insolvent and J knew about it – he may "reclaim upon demand made w/in 10 days after receipt." What type of demand –– J called Nancy not a writing

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[but, §2-702(2) – oral demand is good enough because doesn't say writing]. Was the demand preemptory? Yes. Was the demand timely? No, made on 4/2 –– there's a 10 day requirement. Upon, what event does the 10 day time pd. begin to run? –– Demand made 10 days after the receipt of the goods – here the car was recieved on 3/1. So J would have had to have made the demand by 3/11. But, J did not know. So, §2-702 is a narrow remedy.

1. Policy –– Why is the remedy [§2-702] so narrow? Doesn't Nancy seem more culpable? Well there are sometimes when you make a purchase non-fraudulently believing she could make payment. Drafters were worried about Nancy's creditors other than J. J has §2-702 right of reclamation and Nancy has the car. Other creditors don't know – So, §2-702 is a secret remedy –– there's no notice of J's possession of the car that's why the remedy is limited.

(B) Case B – On 3/1 oral s/a, car delivered to N, N is insolvent. 3/2 N misses first payment. 3/9 J calls N and makes a demand ––a forceful and unambiguous request for payment or return of car; J repossess. This is an example where J would have the right of

reclamation because Nancy is insolvent; a demand is made w/in 10 days receipt of the goods.

3. J's Third Argument ––Can J argue Art. 9-609 defense. Under §9-609 a creditor can proceed without judicial process and repossess the collateral. All J needs to show is Nancy didn't pay and repossess without breaking the peace. §2-611 teaches us that J has to notify

Nancy after he repossess the car and before he sells it. Under §2-401 Nancy argued under the second sentence that when J said in the oral agreement he was reserving title, the statute says that J reserved a security interest. So J argues he has an Article 2 security interest and uses Art. 9 to govern it. Looks like J has a good argument under §9- 609. What's the problem with this defense? J converts a property interest under Art. 2 to be remedied under Art. 9. Can J jump from an Article 2 property interest to an Article 9 remedy.

1. Analysis – Lets start with first determining whether J has Art. 9 security interest before determining the question above. You

have to apply §9-203(b) –– (1) Was there value given? J (creditor) let Nancy (debtor) use the car without paying in full; (2) Does the debtor have rights in the collateral – Does Nancy have some ownership in the car? Yes, in a sale of goods when physical possession goes to buyer and no other agreement there is a default rule under §2-401 that buyer has rights; (3) the debtor authenticated a security agreement with description of collateral – No, it was oral – No security agreement (writing) signed. Although no statute of frauds problems under Article 2, but John has a problem under Article 9; Or is the collateral in the possession of secured party under §9-313 – who had the car? Nancy, this isn't a possessory security interest; Or the collateral is a certificated security in registered form and the security

certificate has been delivered to secured party under §8-301; Or the collateral is deposit accounts, electronic chattel paper,

investment properties, or letter of credit rights held by secured 10

party. None of the requirements under §9-203(b) have been satisfied.

2. Can J jump from an Art. 2 property interest to an Art. 9 remedy? §9-203(c) says subsection (b), how you create a

security interest, is subject to §9-110 on a security interest arising under Art. 2. §9-110 is a "bridge" Section – it also deals with determination of Art. 9 scope. Handout #1b proves 3 possible constructions to the language of Article §9-110 ––

(1) holder of only Art. 2 s/i –– no benefits of Art. 9(2) holder of only Art. 2 s/i –– all benefits of Art. 9(3) holder of only Art. 2 s/i –– some but not all benefits of Art. 9

You have to do everything right under Art. 9 to get the benefits of Art. 9. There are two types of benefits –– (1) collection benefits

against the debtor and (2) priority benefits against other creditors. Under the first interpretation of §9-110, J loses; Under the second interpretation, J wins. The third interpretation is a half way approach. The second sentence of §9-110 has an exception –– "until debtor gets possession of goods" –– exception doesn't apply because Nancy has the car.

(A). Case C – On 3/1 oral s/a; car delivered to shipper [end of J's responsibility]; Nancy is solvent; title to Nancy; Nancy pays first payment. On 3/2 Nancy misses second payment. On 3/8 J telephones Nancy and makes a

demand. Should John repossess the car from shipper before the car is delivered to Nancy?

This is an example where the exception of Art. §9-110 applies. There is a shipment contract – J's responsibility for car ends when he puts it on the car. Immediately we know J doesn't have a right of reclamation under §2-702. This case meets §2-401(a) – so she has a case for conversion. The question is while goods are in transit Can

J get the goods off the truck? Under §2-702 No because Nancy is solvent. Under §9-110 – it deals with goods in

transit and you don't need a security agreement. What kind of benefits defined in subpart B –– (1) the collection benefits b/w J and N –– Under §9-110(3) J's case NOT within the exception – so J's remedies are limited to Article 2 – so J can NOT use Art. §9-609.

(B) Case D –– What good does Art. §9-110 do for J on 3/5 when a Bank makes a loan to Nancy and gets a security interest in car while in transit. There is a priority conflict – Now §9-110 works for J –– it beats out the Bank. J's Art. 2 security interest is given some priority benefits against

other creditors but No collection benefits under Art. §9-110(3). Ultimately, J cannot jump Articles.

3. Since this problem doesn't fall into the exception of §9-110, Can we analogize? Had Nancy never got the car, J would be limited to Article 2 remedy. Since Nancy has possession – Is J's right greater while she has it or while in transit? J's argument is weaker when Nancy already has the car (in terms of using Art. §9- 609] rather than in transit? J should be more limited in his

remedies when the debtor has possession because we feel more 11

sorry for defaulting debtor when she has the goods and used them. The buyer has other interests when possesses it.

There is much more less of a secrecy problem when goods in transit. So Art. 9-110(3) limits J's collection benefits when Nancy has possession because of secrecy issue.

4. Can you create an Art. 9 security interest after default? Refer to §9-203(b)(1) – is J giving value NOW [Value defined under § 1- 201(44) – any consideration to support a contract]. If J forgoes his opportunity to sue for the Art. 9 security interest, is there value?

YES, so then J can get relief under Art. 9-609. C. Conclusion –– All 3 arguments raised by John will fail and Nancy will win

her action of conversion. (A) Prevention – What should J have done when making the

arrangement to prevent this from happening? All J needed to do was get an Art. 9 security agreement, then he would have had a security interest, and then could have used Art. §9-609 when Nancy defaulted on payment.

(B) Advice – When Nancy defaulted, what should have J done when he discovered he didn't have a §9-203(b) security interest. He

should have sued Nancy for breach of contract and then he could have gotten a judicial lien and sheriff could have seized the property, the car.

C. Consensual Liens Contrasted with Statutory Liens1. Important Definitions

(A) Security Interest –– §1-207(37)(B) Scope Provisions –– §9-109(a)

2. There are 3 Ways to Set up a Credit Sale ––(A) Credit sale on "open account" – its like a signature loan – give money in

return for her promise to pay. No security interest is created by either Art. 2 or Art. 9. You will be a general creditor and thus, paid last.

(B) Credit sale with an Art. 9 Security Interest – this is the extreme opposite of a credit sale on open account. You will get the full benefits of Art. 9.

(C) Credit sale with Oral Agreement and Art. 2 Security Interest (reserving title) –– this is problem 1 under conditional sales – Art. 2 security

interest does not give the creditor any collection benefits only some priority benefits in a limited circumstance under §9-110.

3. Problem 2 –– Assume state statue gives someone doing repairs a "possessory artisan's lien" on the property repaired. Mr. B took his car into Mac's garage for repair but Mr. B could not pay the full bill, and Mac would not let Mr. B have the car back. Is Mac's artisan's lien an Art. 9 security interest? If prior to the repair, Mr. B signed a statement giving Mac a right to repossess the car if the bill wasn't paid, does this agreement create a security interest under the Code?

A. Analysis – Under §9-109(d)(2), Art. 9 does not apply to a lien given by statute or other rule of law for services or materials [but §9-333

applies w/ respect to priority of the lien]. As to the second part of the question, under §9-109(a)(1) Art. 9 applies to a transaction [here the agreement to repair Mr. B's car], regardless of its form, that creates a security interest in personal property [the car] or fixtures by contract [the second part of the question tells us Mr. B signs a contract or writing]. So the transaction would be under Art. 9 whether it created a security interest would be determined under §9-203(b) –– (1) Was value given – yes Mac fixed Mr. B's car; (2) the debtor [Mr. B] has rights in the collateral

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[he owns the car; and (3) a security agreement was signed. Therefore all three requirements of §9-203 were satisfied, and Mac has successfully created an Art. 9 security interest.

4. Problem 1 [Handout #6] NY legislature enacts a statute giving artists a vendor's lien if they sell art work on credit to an individual for a price

greater than $15,000. Mac is a sculptor and he sells an iron sculptor on credit for $20,000 to Mr. J. Is Mac's NY vendor's lien also an Art. 9 security interest?

A. Analysis – NO, because it is created by statute. But is excluded by Art. §9- 109(d)(2) – it says "liens given by statute...for services or materials." Does Mac provide services? Not sure. By the term "services" we mean labor, materials, etc... Those components are usually priced separately. Whereas here, the sculptor is one set price – the value is placed on the end product; thus, its not a service. By "materials" we mean something incorporated into the end product. [An example where "services and materials" would apply is in the situation in Problem 2 where Mac was a car mechanic providing services and materials.] Assuming this lien is NOT excluded by Art. 9-109(d) – it is NOT a statutory line for services and materials, is the lien covered under Art. §9-109(c)? No, that § deals with federal preemption or where the govt. is the debtor in the transaction. Just because the lien is not excluded under §§9-109(c) and (d), does NOT mean it's w/in the scope of Art. 9. It just means you have to look at Art. §9-109(a) to see if its included. This is an example where the lien is not excluded but also not included in Article 9. Why isn't the sculptor included under §9- 109(a)(1)? Although the sculptor is "personal property", the lien was not created "by contract" rather by the NY statute. We know there was a sale contract, but that did not cover the lien – it is the interest that has to be created by contract.

5. Problem 3(A) [Priority Battle] – Assume Mac's garage is in Maine and Maine statute creates an artisan's lien in Mac's favor for repair work. To

enforce the lien, Mac must retain possession of Mr. B's car after default. The statute does not address the priority issue of whether a statutory lien is subordinate to a consensual lien. Mr. B defaults and Mac refuses to release the car. First American asks Mac to turn Mr. B's car over to the Bank's "REPO" men as Mr. B is in default. The Bank explains that it has an earlier perfected "purchase money" security interest in the car. Mr. B has taken out a car loan from the Bank for the purchase price of the car; the Bank's security interest is perfected thru notation on the "certificate of title" for the car. Should Mac give First American Bank Mr. B's car?

A. Analysis –– This problem has 2 liens –– (1) car loan in exchange for car = purchase money security interest 9-

103certificate of title – §9-311

(2) repairman has a statute lien for repairsBecause the debtor defaults, both creditors can sue for breach of

contract; however, neither creditor wants to sue because they both want the car. So, the question is who comes first [who has priority]? We know that under §9-109(d)(2) Mac's artisans lien is out of Art. 9 because it is a lien created by statute for services or materials. We know the Bank has a purchase money security interest which is within Art. 9. The starting point is at §9-201(a) –– golden rule for secured parties. It says a security agreement [the banks' agreement w/ Mr. B] is effective against creditors (that's Mac – he doesn't have an Art. 9 security interest).

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But there are Exceptions ––According to §9-333 (which is referred to by §9-109(d)(2)], Mac wins. §9-333(a) –a possessory lien means an interest, other than a security interest or an agricultural lien, which (1) secures payment...for services or materials furnished w/ respect to goods by a person in the ordinary course of person's business; (2) which is created by statute...; AND (3) whose effectiveness depends on person's possession f goods. Mac clearly satisfies §9-333(a). Then under, §9-333(b) a possessory lien on goods has priority over a security interest in the goods unless the lien created by statute expressly says otherwise. Under §9-333 MAC wins.

6. Problem 3(b) –– Assume Mr. B purchased his car for $9000; First American Bank loaned Mr. B $7000 of the price and secured the loan with a

purchase money security interest that has been properly perfected by noting the bank's consensual line on the certificate of title for the car. Mr. B took the car for repair at Mac's The repairs cost $3000. After repairs, the FMV of car is $5000. How should the $5,000 be divided between Mac and First Bank. Assume Mac has a statutory line that the repairman has a lien on the personal property for the just and reasonable charges therefor, including any parts, accessories, materials or supplies furnished in connection therewith, so long as mechanic retains possession. The statute also says that the lien is subject to the lien of any security interest in property which is perfected prior to commencement of work for which a line is claimed unless the work was done with the express consent of the holder of the security interest, but only for charges in excess of $2000.

A. Analysis –– The liquidation value (LV) is $5000. The Bank is owed $7000 and Mac is owed $3000. So, Mr. B's debt = $10,000, which exceeds the

value (worth) of the collateral. The challenge is to figure out what issues are governed by the UCC and which are governed by the State statute. To figure out what the consequences are, you have to isolate the variables. The way you figure out the size of a lien = amount of debt secured and value of collateral.

(1) Case I – What law do we look at to determine the amount of obligation secured? Non-UCC law. The statute says "just and reasonable charges". Here, they are $3000. The LV of collateral is $5000. The size of Mac's Lien is $3000. What about for the Bank? Go back and refer to Security Agreement in Handout #3 – it tells you the amount of obligation – it is the debt outstanding the parties agreed to and the LV of the collateral. Here, the value of bank's lien is $5000. What priority rules apply? If apply §9-333(b) Mac would get $3000. But §9-333(b) doesn't apply because the state statute provides otherwise (its own priority rule) –– "unless the work was done with express consent of the holder of security interest" –– here, there is No consent – Mac's line is therefore subject to any security interest but only for charges in excess of $2000. So, Mac gets the first $2000 regardless of whether Bank consented. SO the Bank would get $3000. Both parties will sue debtor for the deficiencies.

(2) Case 2 –– The size of Mac's lien is $3000 and the Bank's is $5000. Here, the hypo is different because the Bank consented to the

repair, So Mac gets the full amount of charges = $3000 and the Bank will get $2000 (the remainder). This case illustrates that the important factor depends on – to the extent the charges exceed $2000 – because without it Mac will lose unless the bank consents.

(A) How would you protect Mac under this statute? ––Say Mac q says the repair will cost him $5000 (and it is reasonable).

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What should Mac do? Get permission from the bank? Why? Isn't it Mr. B's car? Why does Bank have a right to control the debtors behavior? Who owns the car? The security interest means "shared ownership" –– the bank and Mr. B own the car. The idea is that Mac needs consent of all owners if repair is expensive. The Bank was the first creditor because it got the lien first but its non- possessory interest –- meaning Mr. B gets the car and can do whatever he wants. This statute helps the bank control the debtors future behavior because he may ver extend himself. But isn't the banks and Mr. B's interest really the same? No, Mr. B wants a car to drive whereas Bank wants its money back. The repair will not increase the LV as it costs the bank. The bank doesn't want to pump money in a way that won't enforce the value of the car.

(B) How does Mac Know which bank? the name of the bank is on the certificate title, which perfects the security interest.

What if we were talking about a computer as collateral? How would the creditor perfect the security? Need to file a Financing Statement. This is a public record which can be looked up. It is easier for Mac to find out then for the bank to control Mr. B. That is why if cost excess of $2000, he must contact the bank.

(3) Case 3 – Mr. B agreed in a contract with Mac that repair was $3000. But what if court determines the value of the repair is only $750.

This means that Mac's lien is only worth $750, NOT $3000. The bank's lien is still worth $5000. Under §9-333(b) it says you have to go to Non-UCC law second sentence. Mac will recover $750 and the rest goes to Bank.

(4) Case 4 – Same answer as in Case 3.(5) Case 5 – Mac will get $2500; and Bank will get $2500.

SUMMARYFactual Assumptions Size of

Mac's Lien

Recovery for Mac

Size of FA Bank Lien

Recovery For FA Bank

CASE I BK does not consent; Mac's charges are $3000 and just and reasonable.

$3000 $2000 $5000 $3000

CASE II BK does consent; Mac's charges are $3000 and just and reasonable

$3000 $3000 $5000 $2000

CASE III BK does Not consent; Just and reasonable charge is $750

$750 $750 $5000 $4250

CASE IV BK does consent;; Just and reasonable charge is $750

$750 $750 $5000 $4250

CASE V BK consents; Just and reasonable charge is $2500

$2500 $2500 $5000 $2500

B. Policy –– Why did state legislature decided that statutory lien was only to the extent of just and reasonable charges determined by a court? Why not base it on market? Who is the statute trying to protect? The fight is

between 2 creditors – in other words, there's a third party involved. Since Mac is subordinated by the statute he can sue Mr. B for the rest by breach of contract.

C. Prevention – To prevent Mac from being a general creditor for the rest of money owed, Mac should get an Art. 9 security interest - he can bargain

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for a consensual lien in any agreement. Mac can have more than one lien.

7. Problem 4 –Mac has a garage in Main and the Main statute creates an artisan's lien in Macs favor for repair work. The statute is silent

concerning priority rules. Mr. B brings in a leased car for $1500 tune up and minor repairs. The lessor and owner of the car is American Luxury Co. Under the lease, Mr. B is to contact the lessor if repairs or maintenance is required. The lessor disclaims any responsibility for or liability for repairs ordered by the lessee without lessor's consent. Mr. B defaults, and Mac refuses to release car, and for the first time Mr. B tells Mac the car is leased. What should Mac do?

(A) Analysis ––Mac has a possessory lien, but the car is leased. The fight is about the leased car and its between Mac and the lessor. This issue is

who has priority? How does Mac have a statutory lien when he has no property interest? Refer back to the statute – it says "legal possessor of the property"; Based on this language, Mr. B is an agent of the owner of car; so when Mr. B asks for repair the property interest create a statutory interest. Article 2A deals with leases. There is NO Art. 9 secured parties.

(A) 2A-102 deals with scope(B) 2A-104 exclusions(C) 2A-103 defines a lease [2A-103(1)(J) = a transferor of right of

possession in use of goods for a term in return for consideration. A sale is not a lease. The difference between a lease and a sale is

that with the latter the buyer gets physical possession and title [§2-106]. With a lease, Mr. B gets NO ownership – no title. However, you can have a lease followed by a sale.

Assuming the transaction between Mr. B and lessor are within Art. 2A. The priority rule under Art. 2A. is §2A-301 [which is similar to §9-

201]. A lease contract is effective against creditors – that means that Mr. B not authorized to get repair. So under §2A-301 Mac will lose unless §2A-306 applies. If a person in "ordinary course of business" (MAC) – a lien upon goods given by state statute takes priority over any interest of lessor unless the statute provides otherwise [this language is parallel to §9- 333(b)], so under §2A-306 Mac wins.

(B) What should Lessor do to protect himself from this priority rule? The lessor wants to get back into §2A-301. How do you plan around the

priority rule? (1) you can put a clause in the lease – agreement may improve the lessee's rights. The clause in contract that says lessee needs consent for repair, but its not effective against Mac [put it still in because sometimes the lessee may obey]; (2) the lessor could make Mac not qualify for the special priority rule –– how could we say that Mac was "not acting in the ordinary course of business". What does this phrase mean? There is no definition provided in the code. We have to analogize under §2A- 103(1)(A) – a mechanic in the ordinary course of business means in good faith that work he is doing is not violating ownership rights. Mac has to know its a leased car; and thus he'll know its against the rules to repair car without contacting the lessor for consent. How could Mac know – put a mark on the car (sticker). If Mac went ahead and repaired a marked car, he would not be acting w/in course of business. So §2A-306 doesn't apply and were are back in §2A-301. That means Mac loses.

(C) If Mac has priority under §2A-306, what can Mac do with the car? Should Mac sell the car? The bill is very small ($1500);

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Instead of selling the car, Mac may want to call the lessor telling them he has priority and ask them to pay. They will pay because they don't want their car liquidated. They'll pay and lessor will sue lessee for the payment – $1500. This initiative will lower transaction costs. Many of the priority rules are clear that is why we don't have many Art. 2A and 9 cases. It fosters informal dispute resolution of suits. The later creditor wins §2A-306 and §9-333(b).

8. How do you Solve Priority Battles ––(1) What is the fight about?(2) Classify the property? [Refer to Handout #8 pg. 1](3) Look at each contestant separately. What is the relationship of

contestant to the property in dispute?(4) Which priority rule applies depends on property and the relationship of

contestant to property?What Questions to Ask Creditor ––(1) Are the contestants creditors? Lienor v. a general creditor(2) If Lienor, what type? –– statutory, judicial, consensual

Under §9-601 you can have more than one lien.(3) What is the value of the lien? –– obligation secured and LV of property(4) Establish the date/time of the lien was created (or "attachment" Or

"effective"].(5) Did the creditor perfect its lien? Was there public notice?(6) Finally, look at the priority rules.

9. Problem 5 –– Assume Mac is a LL; B is a tenant (T). Under state law, Mac has a LL lien upon furnishings in the apt. to secure payment of the rent. B has

placed all his furnishings in Mac's apt, including the furniture subject to Sloan's Furniture Store's purchase money and non-purchase money

security interests. [there is a purchase money s/i w/ respect to the bed and a non- purchase money security interest in all B's HH goods. The s/i were perfected before B moved into apt by filing a FS. B defaults on both his rent and on the debt owed to Furniture store. Furniture store's lawyer wants Mac to allow Sloan's agents to enter B's apt so that they can peaceably repossess the encumbered furniture. Should Mac cooperate?

(A) Status of Creditors and Transaction –1. What is the fight about? – B's furnishings in Mac's Apt. [the real fight

is about the bed]2. How many creditors? –– 23. Who are they? ––

(A) Sloan's – Do they have a lien? Yes; What type?–– a consensual lien under §9-109(a)(1) and §9-203(b)––statutory lien? NO––judicial lien? NO

(B) Mac – Do they have a lien? Yes; What type?––statutory lien? some states w/ consumer tenants crates a LL

lien – yes––consensual lien on B's furnishings? look at lease – may grant

an Art. 9 security interest in your furnishings to secure rent. ––some states say Art. 9 security interests in furnishings are not enforceable for rent. [see pg. 1476]. For our purposes, assume Mac has a statutory lien.

4. Size of the liens?(A) Sloans – Need to look at security agreement. B is a "consumer"

[look at Handout #7 and the Uniform Consumer Credit 17

Code §3.301 [pg. 1476] –w/ respect to a consumer credit sale, a seller may take a security interest in the property sold. But, the seller may not take a security interest in property to secure the debt arising from a consumer credit sale. There is Non-UCC law in consumer transactions. Sloan may therefore only have a purchase money security interest in the bed. NOT HH goods. Under §9- 201(b), (c) –- only the bed is collateral because of consumer protection law.

(B) Mac –– the size is the amount of the obligation – back rent owed and amount of collateral - covers all furnishings in the apt.

5. Perfection?(A) Sloan's – purchase money security interest was perfected by the

FS? Yes.(B) Mac –– typically there is no perfection requirements for LLs.

6. Date?(A) Sloan – before B moved into the apt.(B) Mac – when B moved into the apt.

(B) Analysis ––Sloan does not like Art. §9-333(b) because it will give Mac super priority. How could sloan keep the battle out of §9-333(b). Refer

to §9-109(d)(1) and (2). How would you argue we can't reach §9-333(b). That section only applies to possessory liens for services and materials. Not LL liens. Since §9-109(d)(1) and (d)(2) refer to different liens, Mac can't use §9-333(b). Construe §9-333 narrowly. Under the old code, this

arrangement is supported, but there are no new cases. Does §9-333(b) apply? what are the weak points of this provisions for Mac? Mac didn't perform services or materials. Sloan will argue LL didn't provide services or materials with respect to the bed. How would you argue Mac doesn't have possession? –– Mac will argue he does because he owns the entire lease space and has a key to the apt.; so mac would argue he has possession. Remember problem 3 [where Mac was a car mechanic – distinguish the way Mac possessed the car and Mac possesses the bed], if default, what would Mac do with the car? keeps B from getting at the car (that's what we mean by retaining possession). The purpose of possession under §9-333(a)(3) is that it gives notice to others. Here, there's shared possession of the bed – as long as B has access to apt. he has possession of the bed (not true with possession of car because B cannot get a hold of it.) Mac says I provide services with respect to B's bed –– security guard in building, fire sprinklers – those are all services with respect to the bed.

1. Why is the purpose of §9-333(b) limited with respect to services/ materials to the goods? Hypo – Hospital lien would not fit under §9- 333 becuase it provides services to patients not the goods. Refer to §9- 310 – the idea is that this subset of statute lienors who have

possession who provided services / materials that enhance the value of collateral. The earlier creditor wants the statute lienor to provide services because it improves the collateral. Does Mac Improve the bed? well, maybe if on street it may depreciate faster.

(C) Policy –– Why is §9-333 so limited. Look at Chart A on Handout 6 pg. 16. Based on the chart, the enhancement of value in collateral attributable

to services provided will increase not decrease. That is the empirical assumption underlying the reason for §9-333(a)(1).

10. Hypothetical –[business example] Assume Debtor is Ikea and Ikea is located t Potomic mills far from Tysons. They move to Tysons. Ikea goes to Bank#1 to

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get money to pay for the move. Bank wants an Art. 9 security interest in Ikea equipment and inventory. But, the bank does not want to be junior to the Tyson's mall LL. Virginia law is not clear whether §9-333(b) or §9-201 applies; Also CL not clear. How do you prevent Bank from risk of being junior to LL as creditor? Refer to the draft LL-Creditor Agreement. See Handout #6a. Banks says to Ikea as a condition to get loan they have to get a "subordination agreement" from Tyson's LL. But unlikely LL will d this. Read §9-339 -- anyone with priority can subordinate to a junior creditor. Why would LL agree – it'll be bargained for – look how Art. 9 affects the structure of the transaction – you can contract around the uncertainty if you know the problem is there. Tyson LLis highly likely to have an Art. 9 security interest in Ikea inventory and equipment and a LL statutory lien. How is it created §9-203(b). Should it also subordinate the consensual lien – the agreement in Handout #6a only covers statutory lien. Doesn't matter. Don't have to worry because First Bank will beat LL as to 2 art. 9 security interests because bank was first under

§9-322(a)(1).

D. The Special Case of Agricultural Liens1. Problem 6 –– Assume Mac owns several 1000 acres of farm land in PA. B is a

dairy farmer who is Mac's tenant. On 6/1/2002 – B and Mac sign a lease giving B the right to use 1000 acres of Mac's land for 5 years. The same

day, B moves his cattle, feed, and equipment onto Mac's land. Under non-ucc law, Mac has a LLs lien for any unpaid rent; Mac's lien covers all crops grown upon the leased acreage and/or all livestock raised upon and kept on the leased acreaged during the term of the lease. Under PA case law, the lien is "effective" from the time the crops are planted or the livestock is moved onto the land. Also on 6/1/2002 Mac files an Art. 9 FS publicizing his LLs lien. On 12/1/2001 B borrowed money from FF to purchase feed for the cattle. On 12/1/2001, FF gave B the loan and created an Art. 9 security interest in B's present dairy cattle. FF filed a financing statement publicizing and perfecting its security interest. On 12/12/2002 B defaults on both the rent owed to Mac an don the payments owed to FF. Which creditor is senior? Assume 2 facts: (1) all cattle on leased land on 9/1/2002, were owned by B on 12/1/2001; and (2)PA law creates Mac's lien and its silent concerning priority rules.

(A) Analysis –– The fight is about the dairy cattle. How do we classify this collateral? Its a good. What type? [equipment? Inventory? Consumer goods? No] Its farm products under §9-102(a)(34). FF has a consensual lien with goods. FF is an Art. 9 creditor under §9-109(a)(1). FF's security interest attached (when was §9-203 satisfied)? 12/1/2001 – value given, debtors rights, security agreement. Is it a purchase money security

interest? Did the loan enable the buyer to purchase the collateral? No – see §9-103 definition. The loan did not enable the debtor to have rights in the cattle. The security interest was perfected on 12/12/01 because that is the day the financing statement was filed. [§9-310]. Have to start with §9-308(a) for perfecting a security interest which requires (1) attachment, which occurred on 12/1 and (2) all applicable requirements for perfection have been satisfied. As to Mac, he has a statutory line – there is an agriculture lien §9-102(a)(5) –– (engaging in farm operation, farm product, and obligation to support farm operation). Is an agriculture lien in Art. 9? §1-201(37) defines a security interest and it includes agriculture lien. §9- 102(a) its included in Art. 9 but it is not an Art. 9 security interest. Its a statutory lien. Mac's lien becomes effective on 6/1 when cattle moved onto land. Even though agriculture line in Art.

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9, we don't look to §9-203, we look to non-ucc law to tell us when its attached. The lien was perfected on 6/1 [§9-308]. Although creation governed by non-UCC, perfection is governed by Art. 9-309 [treatment of agriculture lien is All new law]. §9- 308(B) if effective and all requirements of §9-310 have been satisfied (filing a financing statement).

(1) Effect of Analysis –– FF has a perfected SI on 12/12/01 and Mac has a perfected agricultural lien as of 6/1/02. Art. 9-322 is the broad

provision for priority battles, it covers (1) agricultural lien v. Art. 9 creditor; (2) agricultural lien v. agricultural lien; FF wins according to §9-322(a) because a "conflicting perfected security interests and agricultural lines rank according to priority in time of filing or perfection." Don't feel sorry for Mac because he could have found FF financing statement and had notice f the security interest. He could have put protective measures to take into account or risk. Always when starting w/ §9-3322(a)(1) start with second sentence. Here, FF filed and perfected first that's why he wins. But it is not always the case that date of perfection and filing are the same. Apply 2nd sentence separately to each creditor, generating a priority date. Then apply to situation. FF might have filed statement on Nov. 1 (that's early bird filing – see §9-502(d), which says that if negotiating the deal still, FF can still file early – if it had done that, the early of 2 dates would be the filing – Not the perfection date. Thus, second sentence may provide an earlier date for priority. But that didn't happen here.

(2) Hypo –– Assume no agriculture lien, what priority battle rule applies? we'd have to rework the analysis of Problem 5.

(B) What if non-UCC PA law creates a LLs lien that gives him priority?

Under §9-302 is a choice of law rule. We don't have a choice of law rule. here we need to reconcile §9-322(a)(1) with PA law. §9-322(a) is the

residual rule but there are exceptions ––§9-322(f) limitations on subsection a – its limited to subsection 9 AND §9-322(g) says Mac

wins. The drafter encourage a first in time approach but if a state wants super priority for agriculture liens they can do it under §9-322(g).

(C) What if Mac never filed a financing statement? Mac would lose – he could not take advantage of §9-322(g) because he does not have a

perfected agricultural lien and only way to perfect is under §9-308(b) which requires a financing statement. Mac's status would be an

unperfected, yet effective, agricultural lien. Thus the battle would be between a perfected secured creditor v. an unperfected agricultural lienor. Thus, under §9-322(a)(2) Mac loses.

(D) What priority rules should you remember: §§9-317(a)(2) and 9-322.

2. Summary(A) Rules governing possessory liens and agricultural lines are almost mere

imagery but treatment is VERY different. (1) Possessory liens are out of Art. 9; need possession to perfect;

§9-333(b) gets super priority if statute silent.(2) Agricultural Lien are in Art. 9; need to file; §9-322 governs priority if

statute silent – the default rule is "first in time" wins.(B) Policy – Why did the drafters encompass agricultural liens into Art. 9? to

provide uniformity.

E. Accounts Receivable Financing and Financing Involving Other Similar Rights of 20

Payment As Collateral1. Problem 3 [text pg. 15] – FB sells its accounts receivables to NFC, which

notified the customers henceforth all payments should be made directly to them. [This is not a loan, it is a sale; Note if it were a loan and the

collectible accounts exceeded the debt, the surplus would be returned.] However, in an actual outright sale, NFC can keep any surplus under §9-608(b). Is this sale an Art. 9 security interest? If so, even though FB has no further obligation s to NF, he would of necessity be termed an Art. 9 debtor. [§9-102(a)(28)(B) Then NF would have to file an Art. 9 FS to perfect its interest against later parties.

(A) Analysis The first question we have to look at is whether sale of account receivables are in Art. 9? Yes, under §9-109(a)(3). Now we have to

determine if there is attachment? Look at §9-203(b) –– (1) was there value given? Yes, money in exchange for the receivables; (2) debtor has rights (yes they own the accounts); and (3) whether there is agreement or possession – we don't know. If yes, then there is an Art. 9 security interest.

2. Review – Benedict v. Ratner –– This case applies to accounts. In the past there were problems distinguishing b/w transactions in which a

receivable secures an obligation and those in which the receivable has been sold outright. This problem created a secrecy problem because the creditors did not know who owned the accounts. New Art. 9 fixed this problem and includes both loans and out right sales of accounts in Art. 9.

3. Problem 7A (Handout 6) –– Assume the principal debtor is FB and during the past month, FB sold and delivered $400K worth of vegetables to Campbell

Soup and other large food processors. These sales of farm products are on general credit; the food processors have b/w 30 to 60 days to pay FB,

following delivery. FB needs a substantial amt. of cash immediately to pay its property taxes. FB sells all of these promises of payment by food processors with face value of $400K to NFC. NF pays FB $350K. Is FB - NF transaction w/in the scope of Art. 9? Why or why not?

(A) Analysis ––Had NF made a loan and FB paid on time in full, what does NF get as profit? the interest charged on loan. If sale of accounts, NF makes

a profit based on buying it on a discount and it keeps the spread. [see §9-608(b)]. If FB defaults, and there is a loan w/ security interest in accounts, NF will want to foreclose on collateral –– the accounts.

How does it work (b/c accounts aren't tangible property)? Under §9-609, NF can't grab accounts because intangible. What is the collection benefit if have a security interest in accounts? Tell Campbell soup t pay you directly under §9-607 (which tells you how this type of creditor forecloses). Campbell pays NF $400K but loan is for $350K. Can NF keep $400K. When you have a loan there is shared ownership of the accounts – if there is surplus it goes back to debtor. But in a sale, NF keeps the surplus in a sale. FB cannot default by definition because FB doesn't owe anything if sold accounts to NF. This sale is in Art. 9 under §9-109(a)(3). In a sale, there is no shared ownership because FB owes nothing, can't default b/c it was a passage of title for price [§2-106].

(B) Definition of Account —— §9-102(a)(2) Account means a debtor’s right to

payment of a monetary obligation — arising from 7 types of scenarios listed on page 1039 —— The term account does not include rights to payment evidenced by chattel paper or an instrument, commercial tort claims, deposit accounts, investment property, LC rights or rights to

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payment for money or funds advanced or sold (except credit cards). Here, FB sold vegetables and generated the account under § 9-102(a)(2)(i) right to payment of monetary obligation for property that has been or is to be sold.

(C) Policy –– Why is a sale in Art. 9 when it works different from a loan? When NF buys accounts NF isn't getting any intrinsic value; it is getting a right to repayment by FB's customers. Think of a sale as similar to a financing transaction – (1) there are still secrecy problems -- no one knows that FB sold its accounts; and (2) an account is really a "pure intangible" – a right to payment. For those reasons a sale is included in Art. 9.

(D) NOTICE — Even though a sale doesn’t seem like it doesn’t conceptually fit

in Article 9; nevertheless, some types of sales create secured transactions.

See §9-109(a)(3). It is important to decipher between the types of collateral because there are some priority rules that only deal with accounts or chattel paper.

4. Problem 7B –– Assume the principal debtor is FB and FB owns a patent for a unique process for husking corn. FB does not have the funds to develop the technology and decides to lease the technology to Gen. Foods for 5 years in

exchange for $200K/ yr. as rent. The patent license agreement executed by FB and Gen. Foods complies with all requirements of non-UCC law. FB needs cash now though to pay taxes. FB sells its right to receive $1 mil from Gen. Foods under the patent license agreement to NF. NF pays FB $800K. Is FB – NF transaction w/in the scope of Art. 9? Why or why not?

(A) Analysis –– What is FB selling to NF? Right to future payments generated from a license in IP. How is that right classified under Art. 9? It may be a payment intangible under §9-102(a)(61). Gen. Foods has a monetary obligation. What is a general intangible §9-102(a)(41) – only personal property other than accounts, chattel paper, instruments, money, payment, intangible. So before you can conclude general intangible, you have to make sure its not those. Refer to Handout #8 to classify property? [tangible prop.?, quasi-tangible prop.? pure intangible? w/in this category, general intangible is the most residual category. Is the promise to pay a instrument or chattel paper? No, it'd be an instrument if promise embodied in a promissory note. Not, chattel paper b/c (if FB were selling vegetables I'll sell to you credit but I want a security agreement on your equipment) When FB entered into agreement on general credit not a secured agreement. What about pure intangible? Is there an account? YES §9-102(a)(1)(i) -(Iv) those are descriptions in which accounts are generated (right to payment for property that has been licensed). The Code does not define property. But here its IP – that's personal property. [this definition of account is expanded in New Art 9 because the old article only included leased goods. [Remember — In Example 7(A) FB sold vegetables

and generated the account under §9-102(a)(2)(i).) (B) Notice —— Here the property is an account because under §9-102(a)(2)

(i) it is a right to payment for monetary obligation for property that has been licensed.

5. Problem 7C — Assume the principal debtor is FB and that FB has entered into

a K to buy 3 heavy duty farm tractors from John for $300,000. FB paid John the entire purchase price at the time it placed the order. The tractors have

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not been delivered yet. Now FB decides it does not need the tractors; John refuses to refund the $300,000 and allow FB back out of the deal. So FB decides to sell its right to receive the tractors to NF. NF pays FB $250,000. Is the FB- NF transaction within the scope of Art. 9? Why or Why not?

(A) Analysis — What is FB really offering to sell NF? The right to receive (the contract right) the tractors. Why would NF want the tractors (it may buy the contract right and then resell it to someone who can use them, another farmer). How do we classify the collateral — not a tangible, not quasi-tangible. Is it a pure intangible? Start with account? No, it’s the debtor’s right to receive money generated in the first transaction. Is it a general intangible? Yes, it includes everything that is not everything else (it is the most residual category). Is it a payment intangible? No, because that deals with monetary obligation. So, this sales is outside of Art. 9. [NF could have loaned the money and take a security interest in the general interest rather than buy it). By doing that, it would be in Art. 9 under §9-109(a)(1). If it’s a loan NF will only have the tractors if FB defaults. However, there may be ex ante benefits that will make FB unlikely to default. Under the this hypothetical case the creditor would have describe the collateral in the security agreement as including general intangible and tractors because at time of default FB may have the tractors already.

(B) 109(a)(3) The four types of collateral (which are not seen in this problem) all require the right to receive money —— account, chattel paper, payment intangibles, and promissory notes.

6. Problem 7D — Here, FB is the “maker of a note”. First Bank is the lead bank providing a line of general credit of $1.5 million to FB. FB signs a loan agreement promising to repay the money and 3 negotiable promissory for $500,000 each. First bank sells off 2 loan participations in the amount of $500,000 each, to Second Bank and Third Bank. First Bank gives Second Bank one of the 3 promissory notes signed by FB with a face amount of $500,000 and also gives Third Bank one of three notes. Second and Third Bank pay $475,000 each for the notes. Are the transactions between First and Second and Third Banks within Article 9?

(A) Analysis — This is an example of a “loan participation deal” — This is an EASY case — the collateral is a promissory note and it falls within §9-109(a)(3) — sale of promissory note within Art. 9.

7. Problem 7D Variation — Assume same facts above except that FB’s obligation to repay the money to First Bank is not embodied in promissory notes but is created by the language of the loan agreement. In this variation, FB is the account debtor. The sale of “loan participations” by First Bank to Second and Third Banks does not involve promissory notes; instead, First transfers by K its right to be repaid $500,000 by FB to Second and Third Banks. Second and Third pay First Bank $475,000. Are the First Bank – Second Bank – Third Bank sale transactions within Art. 9?

(A) Analysis — This the more common case. This case illustrates First bank trying to minimize its risk of the loan by selling an undivided interest in the deal to the 2 banks. They share profits and risks. This is what a loan participation deal is. What is First Bank selling to the 2 banks and how do we classify what is being sold? The central obligation being sold is the obligation of FB to pay the $1.5 million loan. It’s a payment intangible if

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it’s a general intangible unless its an account (Remember: general intangible is a residual category and you must start by asking first whether its an account). Thus, you have to exclude the collateral from the definition of Account to conclude it’s a payment intangible. First Bank is not selling goods, energy, chartering business. First Bank is the principal debtor and is loaning money. Look at §9-102(a)(2) third sentence tells us what’s excluded — rights to payments for funds in advance — that is what First Bank is doing. So it is NOT an account, it’s a payment intangible. [it’s a future right to payment, and therefore not an account).

8. Problem 7E — The principal debtor is Brown’s Rural Health Clinic. The clinic needs money to purchase better lab equipment. Clinic offers to sell to NF the clinic’s outstanding claims against Blue Cross Blue Shield for services rendered to patients over the last 3 months. The claims have a face value of $500,000. If NF purchases these claims for $450,000 from Brown Rural is this transaction within in Art. 9?

(A) Analysis — What is Brown offering to sell to NF and how do we classify it? The promise of Blue Cross to pay for medical services rendered under their insurance policies up until what’s allowed. Is this an account? YES, it’s a right to payment for monetary obligation for services rendered. §9-102(a)(2)(ii). Also, the term account includes health care receivables. So its an account under Art. 9.

(B) Hypothetical — What if instead of Blue Cross we have Medicare as the payor. This hypo would cause an additional problem under §9-109(c). Art. 9 does not apply to the extent a US statute preempts. We would have to research federal statutes to see if it preempts the sale of government receivables (because Medicare is funded by the Government).

(C) Notice —— In Problem 7B is there a federal preemption problem? What is the asset FB trying to use in its transaction with NF — it’s the stream of income generated from license of patent. Patent law doesn’t tell you what to do with the money you get. So its important to see what the asset FB is selling. Had he been selling the right to patent it may be preempted by Federal law have to always check the exclusions under §9-109(c) and (d).

9. Problem 7F — The principal debtor is Brown Rural and the clinic needs money to purchase better lab equipment. Clinic has a claim against its LL for negligence; the LL failed to repair a pothole in the parking lot resulting in the injury of a clinic EE. The clinic offers to sell its negligence claim against LL to NF. The clinic believes the claim is worth $300,000. Assume there is no applicable non-UCC statutory or decisional law prohibiting the sale of clinic’s claim. See §9-109(d)(12). NF purchases the clinic’s claim paying the clinic $200,000. Is the NF –BR transaction in Art. 9?

(A) Analysis — BR wants to sell its right of cause of action to NF. How do we classify this? They are offering to sell the claim itself. See the definition of “commercial tort claim” — which means a claim arising in tort w/ respect to which the claimant is an organization; or the claimaint is an individual and the claim: arose in the course of the claimant’s business or profession; and does not include damages arising out of personal injury to or the death of an individual. See §9-102(a)(13). What is being offered is a commercial tort claim. Is the sale of this type of collateral in

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Article 9? Commercial tort claim doesn’t seem to fall in any of the categories described under §9-109(a)(3) or in Handout #8. It is its own category and not covered under Art. 9. Its somewhere between deposit accounts and general intangibles in Handout #8.

(B) Notice — If NF wanted to loan BR money and ask for a security interest in the tort claim then it is covered under §9-109(a)(1)

10. Problem 7F — Assume same facts above except that before the sale of the claim to NF, the clinic and the LL resolve their dispute and enter into a settlement agreement; the LL will pay the clinic $300,000 in three payments of $100,000 over the next six months and the clinic will relinquish its negligence claim. NF purchases the clinic’s rights under this settlement agreement, paying the clinic $200,000. Is the NF-BR transaction in Art. 9?

(A) Analysis — What is the clinic selling here — the right of payments under the settlement agreement (now it’s a K right). This is very different from selling the claim itself. How do we classify the collateral? Is it an account? This is NOT a sale of a commercial tort claim, it’s a sale of a contract right to payment. It is NOT an account. So we have a general intangible; thus, it’s a payment intangible and its covered under Art. 9.

F. Consignments —— READ TEXT pg. 14-24

1. Text Book Notes

2. Class Room Notes —— Some true consignments are in Art. 9. There are two types of consignments: (1) true consignments and (2) phony consignments. True consignments are marketing tools whereas phony consignments are inventory financing.

Refer to Handout #6B This chart is designed to help us understand how new Art. 9 treats true and phony consignments.

Descriptive Name of Transaction

Economic Reality of Transaction

Legal Treatment under New Art. 9

Row I True Cons. Meeting the req’ts of Art. 9 defin. i§9-102(a)(20)

A marketing Device

“High fiction” drafting in New Art. 9 treats this trans. As a “secured trans” for purposes of perfection & priority. But the true consignor’s rights against the consignee in the event that the consignee defaults (“collection benefits”) are governed by non-UCC law (primarily K law) & not Part 6 of Art. 9.

Row II True Cons. Which does NOT satisfy Art. 9 req’ts.

A marketing device

These true consignments are NOT covered by new Art. 9 nor by revised Art. 2 BUT instead are governed by CL property principles. UCC §1-103.

Row III Phony or disguised consignment

Inventory financing on a secured basis

Although the parties may have labeled the transaction a “consignment” or otherwise tried to disguise its true nature, the courts look at the economic reality of the financing governed by the new Art. 9 – both w/ respect to priority issues and collection benefits against the debtor/phony consignee.

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(A) Hypothetical — You tell X you need help selling goods and you hire X to sell your goods. A boy walks into X’s store and buys a good. The boy is not really buying it from X, but from you. X keeps a commission and then sends the rest of the proceeds to you. This is an example of a true consignment. EXAMPLES of TRUE CONSIGNMENTS(I) Examples — small shops, antique shops, art galleries, gun shops, etc.(II) Benefits of Consignee — They can buy a variety of inventory through

consignment. Also if they don’t sell it they send it back to the consignor. So the risk of not selling the item is on the consignor not the consignee.(A) Example — Designers of expensive clothing — when they sell

their clothes to the department stores, they sell on consignment. The department store is a marketing agent. They do it this way because it minimizes the risk of not selling to the good.

(B) Example — Book publishing company. If no-one buys the books its not the retailer who eats it, they are sent back to the publisher.

(C) Example — Home Depot — they don’t own a lot of the goods they sell. The don’t bear the business risk of non-sale.

(B) Hypothetical of PHONY Consignments — This type of consignment is basically financing inventory but its mislabeled by the parties. (I) Example — X is a credit seller (C-S) when it delivers to Y (talking

about a wholesaler to retailer). It doesn’t want to sell on open account; so it takes a security interest in the inventory under §9-109(a)(1). So when the boy buys the jacket he is buying it from Y NOT X. Phony consignments are just mislabeled inventory financing.

(C) Comparing the Two Types of Consignments — Are true/ phony consignments mutually exclusive? Yes, because in a true consignment a consignee gets possession but not ownership under §2-401 (title passes at delivery). However, secrecy problems are created. How does another creditor know X owns it when its in Y’s store. How do they know there is shared ownership. In both cases, there is a secrecy problem.(I) CL Treatment Example — Bank loans money to Y. Y signs a

chattel mortgage. Banks wants to grab the consignment cloths in Y. X says bank is Y’s creditor, not mine. Y is my marketing agent and he has NO authority to convey away a lien on my (X) property because Y is just a marketing agent. A true consignor (X) always WINS — no obligation to deal with secrecy problem. If this is a phony consignment, where the bank records the chattel mortgage and X did not record the consignment. The Bank WINS. The main difference is under a true consignment no Notice is required, but under a phony consignment, the consignor must publicize (give notice) to protect itself from the consignee’s creditors.

(A) Policy Reason — Drafters of Art. 9 try to treat the 2 transactions — true and phony — more alike. There is a great emphasis on Notice and less on the Doctrine of Derivative Title (property interest).

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3. Problem 4 (Text pg. 17)

4. Problem 8A (Handout #6) — See Attached Consignment Agreement on this Handout pg. A. High Octane Fashions (HO) is a designer and mfg Of expensive clothing. On May 1, 2001 HO consigns a shipment of clothes (retail value = $75,000) to Urban Escape (UE). Under the consignment agreement, HO “reserves title to the clothes”. UE is to receive a 15% commission on any sale of HO clothes to the public but must remit the 85% balance of the purchase price to HO w/in 2 weeks after sale. UE has the right to return any unsold clothes by Oct. 1, 2001. HO never files an Art. 9 financing statement. UE business is struggling, and it files for bankruptcy on Sept. 15, 2001. Under §544 of the Bankruptcy Code, the trustee in bankruptcy can claim the status as a lien creditor — a creditor with a judicial lien arising on Sept. 15, 2001, at the time of the filing of the bankruptcy petition. The trustee (who represents the general creditors of UE) wants the HO clothes in UE’s possession (retail value = $50,000) to be treated as part of UE bankruptcy estate. If the trustee prevails, the trustee can sell the HO clothes in UE’s possession and distribute the proceeds on a pro rata basis to all UE’s general creditors, including HO. Given UE’s state of assets, general creditors are likely to get no more than 5% on their claims. HO argues that it is NOT a general creditor but owner of the clothes on May 1, 2001. They argue only the bankrupt’s property goes into the estate under the doctrine of derivative title. Who is right — HO or the trustee in bankruptcy? [Refer to §§ 1-201(37), 9-102, 9-109(a), 9-310, 9-317, 9-319(a)].

(A) Analysis — Here the fight is about the clothes that are subject to the true

consignment. What is HO’s status? Is it an Art. 9 creditor? See the definition of consignment under §9-102(a)(2) and under §9-109(a)(4) Art. 9 applies to consignments. However, you must satisfy the Art. 9 definition of consignment. Under the definition, who is the “merchant” — UE [the consignee also has to be a merchant – see the definition in Art. 2-104]. Under §9-102(a)(20)(c) at what point do we look at the classification of collateral — before delivery — what were the clothes to HO — what type of goods? Its inventory Not consumer goods. Under §9-102(a)(20)(D) “trans does not create a SI that secures an obligation” — this language means the trans. between HO and UE cannot be a phony consignment — a sale transaction. See Row III of the chart describing a phony consignment. So, in this problem we have a TRUE consignment.

With respect to terminology, HO (“the secured party”) is the consignor; UE (the “debtor”) is the consignee. The collateral includes consigned goods.

Status of HO

Question of Attachment: When does HO get an attached Security Interest? Under §9-203(b): (1) Value — Ho gave something of value to UE [the right to get a commission); (2) Debtor’s rights in the collateral — UE has rights in the collateral or power to transfer rights in collateral; and (3) §9-203(b)(3)(A) if there is a written consignment agreement, is it enough? A consignment creates a security interest — so if signed consignment agreement that describes the consigned goods; its satisfied. The problem here with attachment is presented in (2) — if we

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go to CL, it’s a bust because under CL the debtor never has rights they’re just a marketing agent. By analogy under §2-326(2) Need a signed consignment agreement AND the delivery of goods. If on May 1, there is a signed consignment agreement and goods are NOT delivered till May 10, the security interest does not attach until May 10.

Question of Perfection: Assume HO has an attached security interest, is it perfected? Always start with §9-308. Nothing in §9-309 (which sets forth cases where there is “automatic” perfection) applies here. It’s perfect if attached (under §9-203(b)) and complies with §§9-310-316. There are 2 permissible modes of perfection in this case:(1) Refer to §9-310 — File a Financing Statement [Here HO failed to file](2) Refer to §9-313(a) — Is there possession by secured party? No

Conclusion: HO has a secured but unperfected security interest.

Bankruptcy Provisions Under §544

Bankruptcy Provision — §544 is the only applicable bankruptcy provision in this course. There are “hard distribution issues” in bankruptcy — not enough money to go around — who will get paid? How does the Bankruptcy Priority Rules work? Bankruptcy Priority Rule governs by enlarge personal property (Art. 9 Rules apply in bankruptcy). The trustee in bankruptcy closely examines every claim against the bankrupt debtor’s property and checks to see if valid. The trustee has a “strong arm power” under §544(a)(1) — if there is a secured claim and the secured creditor fails to give notice, the trustee can strong arm that claim and demote the secured party to a general creditor (who now only gets a pro rata share). Debtors who file for bankruptcy file because they are over extended and overextended because there is no filing. The Policy of secrecy is carried into bankruptcy.

Consequence of §544a — If HO’s secured interest is strong armed aside, Ho becomes a general creditor and it will only get $2500 (5% of the retail value = $50,000). Thus, the trustee in bankruptcy is called the ultimate enforcer of Art. 9. Because he can strong arm any secured transaction that is “defective” in form (e.g., no perfection).

Status of Trustee in Bankruptcy

Attachment: Under §544(a)(1) the trustee in bankruptcy has a judicial lien as of commencement of the case — the case was filed on Sept. 15; so, that is when the trustee has a judicial lien.(1) Under CL, A creditor with a judicial lien could not take HO clothes

that are in possession of UE. The Doctrine of Derivative Title says because UE has no ownership interest in the clothes, the trustee may not take those clothes.

(2) Under §9-319(a) except as otherwise provided in (b), for purposes of

determining the rights of creditors of, and purchasers for value of goods from, a consignee, while the goods are in the possession of the consignee, the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer. BOTTOMLINE: We pretend that the consignee

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has same rights as consignor. Basically, its an improvement in title exception to the Doctrine of Derivative Title.

Conclusion: We know that HO has an unperfected Security interest whereas the trustee has a judicial lien.

Priority Battle — Art. 9 SI v. Judicial Lien

Who Wins? §9-322 does NOT apply because there is neither 2 Article 9 security interests OR an Art. 9 security interest and agricultural lien. That is not what we have here. We have an Art. 9 security interest v. judicial lien. Under §9-317(e) could be applied to and the trustee wins. But the main priority rule is §9-317(a)(2) —

A security interest or agricultural lien is subordinate to the rights of: (2) except as otherwise provided in (e), a person that becomes

a lien creditor before the earlier of the time:(A) the security interest or agricultural lien is perfected; OR

Conclusion — The Trustee wins.

5. Problem 8A Variation — Same Facts as above except a sign is posted. Who wins? Posting a sign — does that give notice for perfection purposes? Between §§9-309 and 316 nothing in those provisions talk about posting a sign. It does NOT work under Art. 9. (A) Argument — Can we argue that posting a sign gives notice. We don’t

have a true consignment: No, §9-102(a)(2)(iii) — the merchant is not generally known by its creditors to be substantially engaged in selling the goods of others; — if cannot satisfy this burden of the definition — posting a sign on some goods is not enough. Maybe but it is difficult to satisfy.

(B) Moral — You have to Perfect EARLY and has to be perfected by the modes specified in Art. 9.

(C) Policy — Under the old Art. 9 posting a sign was enough to give notice, but that was eliminated in the New Art. 9.

6. Problem 8A Variation — Same facts above except HO files a financing statement. Who wins? HO, because he has a perfected security interest and a perfected security interest beats a judicial lien.

7. Problem 8B — This is problem 4 in the text book on pg. 17. Assume for this problem that there is a true consignment.(A) Analysis — The fight is between OMB and the dealer and the property in

dispute are antiques. Is this transaction in Art. 9? No, because the relevant audience Not the purchasers, but the creditors of Antique-R-US are likely to know that the debtor is selling on consignment. So this Not in article 9 according to §9-102(a)(20)(A)(iii). This hypothetical is Row II on the chart on Handout #8B.

(B) Policy — Under §2-326(1) some contracts for sale you get exactly what you bargain for and give it back to seller — “sale on approval” — is that what we have here?(I) Example — D goes to the store to buy X and he brings it home and

tries it out. This is a sale on approval.(II) Example — Selling for the first time — this is not resale. This is a

sale of return. This is a true consignment, but not in Art. 9; also not in §2-326.

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(C) Conclusion — Who Wins? Under CL, the dealer wins. When you do not have the benefit of §9-319 the consignee cannot grant a security interest in the bank because no property to convey.

8. Problem 8C — John recently graduated college and wants to buy a car. He doesn’t have enough money for the down payment on the car but his grandmother gave him an expensive watch (retail value = $7,000) for graduation. John decides to sell the watch so he can buy the car. On May 1, 2001, John delivers the watch to Urban Jewelry (UJ), asking them to sell the watch for him. John and UJ sign an agreement that provides in pertinent part: (1) John authorizes the store to sell the watch to anyone who offers $6500 or more, if such a sale transpires, the store is to remit the sale proceeds, less 10% consignee’s commission, to John. If the store receives an offer b/w $5000 and 6500, the store is to relay the proposal to John for his consideration. Finally, if the store does not sell the watch within one year, UJ has the right to return the watch to John. John never files an Art. 9 financing statement. UJ files for bankruptcy on Sept. 15, 2001. John’s watch is still in the store and under §544 of the bankruptcy code, the trustee in bankruptcy claims the status of a lien creditor. The trustee argues that John’s watch is part of the store’s bankruptcy estate. John argues the watch belongs to him and should be returned. Who wins?

(A) Analysis — This is a true consignment but it is out of Art. 9 because the watch is a consumer good before delivery; thus, kicking it out of the Art. 9-102(a)(20). Art. 2-326 doesn’t apply either (the old one did however); all cases in book applied under the old §2-326. If not within Art. 9, then CL governs John’s rights. The battle is between John and the trustee — since under CL can’t go to §9-319(a) because that’s Art. 9, it doesn’t apply. Under CL, John owns the watch, so trustee cannot get a judicial lien because John is not the debtor; so, John wins and gets the watch even though he didn’t give notice.

Can We Reconcile the Results of 8(A), (B) and (C)

Policy ——How do we reconcile this result?8A — HO v. UE — Have to file a financing statement8B — Dealer v. Bank — Don’t have to file

Policy — Don’t need to file because it would be a redundant act. The reason its not in Art. 9 is because creditors know the dealer is engaged in selling goods of others. This situation will come with antiques/ art galleries — everyone knows the goods are on consignment.

8C — John v. Trustee — Don’t have to file

The problem centering these three transactions lies with secrecy. The question is who has to cure the problem. The bad player in 8A is UE, in 8C its UJ; the good guys in 8A is Ho and in 8C its John. Where should we put the burden of giving notice?

(1) In 8A the burden is on HO — all HO has to do is file a financing state; not all that burdensome. Think how hard it would be for creditors if they had to gather information about the clothes — How will you know if they are consigned? Its in UE’s best interest not to tell them the truth because you want the credit. As a consequence there is no objective way to gather information for subsequent creditors like real property (e.g., mortgage records).

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(A) Comment — Most business consignments fall under Row I.

(2) In 8C John is a consumer Not a business. It is not likely that John will know he has to file a financing statement. So the equities go the other way, and the burden is on the subsequent creditors to find out who the watch belongs to.(A) Example Assume in 8C instead of watch, we are talking about a

$100,000 watch and Bloomingdales. John goes to Bloomingdales and asks them to sell it. Bloomingdales takes it on consignment (because it doesn’t wan the risk of non-sale) with agreement. Does J need to file to protect his watch from creditors of Bloomingdales.(1) Analysis — How do we classify the watch — still consumer goods.

There is NO cap on consumer goods. So it’s a true consignment, but not in Art. 9, so John doesn’t have to file.

9. Comment on Phony Consignments — This is Row III on the chart. An Example: Say HO retains a purchase money security interest in the clothes; so that there is shared ownership. Say UE goes bankrupt, bringing in the trustee. HO must file before trustee if it wants to be treated as a secured party and get paid before the general creditors. The status of HO — (if files) it has a perfected Art. 9 security interest under §9-309, 310. The status of the trustee — under §544(a)(1) he has a judicial lien at the time of commencement of the suit. Because it was a sale (under §2-401) under Row III, UE has a property interest. The trustee has a judicial lien and it can to HO’s clothes because of §2-401. Under §9-317 — if HO files first, it wins; if it doesn’t it loses. Notice that this is exactly the same analysis used in 8A when we assumed it was a true consignment. The Drafters in the New Art. 9 have closed the gap in CL. But, if you are in Row II back to CL — true consignor doesn’t have to give notice, if phony consignor have to give notice.

G. Leases

1. Read Text pg. 24-32

2. Class Notes(A) True Leases: True Leases involve an entrepreneurial stake in the item

being leased. Also known as residual interest. How do you know if there is residual interest at the end of the lease: there is either economic value and returned to lessor OR alternatively the lessee buys the leased good for more than a nominal price with economic value remaining. Either of these events help establish it is a TRUE Lease.

(B) Phony Leases: Phony leases involve equipment financing on a secure basis. B sells machine to C and C grants B a purchase money security interest in equipment to ensure payment of the machine. The rent payments are installment payments of the sold machine. This is a sale with a purchase money security interest and thus a phony lease.

(C) What is the difference b/w a True and Phony Lease: The difference is with a phony lease, at the end of the lease, the lessee buys the equipment for a nominal price.

(D) Secrecy Problems? Both types create a secrecy problem. With a true lease, there is secret ownership. With a phony lease, there is shared ownership. In a true Lease, you get it today and pay rent; In a phony,

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you get it today, and make installment payments [credit sale with purchase money security interest].

Pre-Code Treatment of Leases(A) For a phony lease, under CL, if B wants to beat out other creditors, B

would have to record to win.(B) For a true lease, under CL, C signs a lease agreement and C has no

ownership in a true lease, by definition she has possession but No ownership. So, under CL, if B is a true lessor it will always defeat the creditors of the lesee. Main Difference — If phony, must give Notice.

UCC Treatment(A) Phony Leases — It’s a mislabeled transaction where there is a purchase

money security interest. B has to file if it wants to beat the lessees creditors under §9-322(a)(2). Basically, if phony lease and there are 2 secured creditors but B doesn’t file, the other creditor wins under §9-322(a)(2). The Effect — phony leases are treated the same way as Art. 9 purchase money security interest.

(B) True Leases — These are NOT in Art. 9 at all. (unlike consignments). You have to go to Article 2A.(1) Under §2A-301 — true lessor wins unless §2A-307(1) applies [this

section has been modified refer to page. 1276].(C) Effect — Under the Code, the CL rules have been brought forward

(unlike consignments). True lessors whether leasing a $1 product or $1 mil. Have NO obligation to give notice. Therefore, it really matters what type of lease you have because if phony you must file; if true you don’t file. Notice — with consignments, you usually have to file.

Summary of Lease Treatment by Article 9 and 2ADescriptive Name of Transaction

Economic Reality of Transaction

Legal Treatment Under New Article 9

Row IV

A true lease meeting the requirements of Art. 2A definition in §2A-103

A transfer of possession of goods for a term in return for rent where lessor retains an economically meaningful residual interest in the goods.

New Art. 9 does not cover these transactions. UCC §1-201(37) (revised), para. 2, 3, and 4, provides guidance on how to figure out if a given transaction is a true lease or a phony lease. Art. 2A governs these transactions.

Row V A phony lease or disguised lease

Equipment financing on a secured basis

Although the parties may have labeled the transaction a lease or otherwise tried to disguise its true nature, the courts look at the economic reality of the transaction and treat it like al other equipment financing governed by the new Art. 9 — both with respect to priority issues and collection benefits against the debtor/ phony leasee.

3. Refer to the Following Sections: §§ 1-201(37), 2A- 103(j), and 2A –307(1) See §1-201(37) below on problem 9 § 2A-103(j) —Lease means a transfer of the right to possession and

use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.

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§ 2A –307(1) — Except as otherwise provided in §2A-306, a creditor of a lessee takes subject to the lease contract.

§ 2A –306 — If a person in the ordinary course of his business furnishes services or materials with respect to the goods subject to a lease contract, a lien upon those goods in the possession of that person given by statute or rule of law for those materials or services takes priority over any interest of the lessor or lessee under the lease K or this Article unless the lien is created by statute and the statute provides otherwise or unless the lien is created by rule of law and the rule of law provides otherwise.

4. Problem 5 (text book pg. 24)

5. Problem 9A (Handout #6) — BIG Machines agrees to provide all maintenance of the duplicating machine free of charge to the lessee, Connie’s Printing Shop. But, the lease agreement also provides that the lessee will pay insurance and assume all risk of loss while machine in her possession. The lease is for five years and C may not terminate the lease during that period. The rent for the machine is $100/month or $1200/year for a total rent of $6000 for the term of the lease. The FMV of the machine at beginning of leasehold equals the PV of the total of the rent payments over the period. The parties reasonably predict at time they entered the transaction the machine will have an economic life of 5 years. In fact, C has option to purchase the machine at the end of year (may be able to use it for another year at end of lease). Is this transaction a “true lease” or a “phony lease” governed by Art. 9?

(A) Analysis — Need to look at definition of a security interest under §1-201(37) — [Para. 1 of this definition has been revised see page 1267] —

Security Interest means an interest in personal property or fixtures which secures payment or performance of an obligation. The term also includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that’s subject to Art. 9. Except as otherwise provided in §2-505, the right of a seller or lessor of goods under Art. 2 or AA to retain or acquire possession of the goods is not a “security interest”, but a seller or a lessor may also acquire a “security interest” by complying with Art. 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (§2-401) is limited in effect to a reservation of security interest.

Is this a true or phony lease? — §1-201(37) Para. 2 —

Whether a transaction creates a lease or a security interest is determined by the facts of each case; but a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and:

(a) the original term of the lease remaining economic life of goods

(b) lessee is bound to renew lease for remaining economic life of goods

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or is bound to become owner of the goods;(c) lessee has an option to renew the lease for remaining economic

life of goods for no additional consideration or nominal

additional consideration upon compliance with lease agreement; or

(d) lessee has an option to become owner of goods for no additional or nominal consideration upon compliance with

the lease agreement.

A transaction does not create a security interest merely because it provides that: [the factors above are NOT dispositive](A) PV of the Lease FMV of the goods at time lease was entered(B) Lesee assumes risk of loss of goods or agrees to pay taxes,

insurance, filing, recording, or registration fees, or service or maintenance costs…

(C) Lessee has an option to renew or become owner of goods(D) Lessee has option to renew lease for a fixed rent reasonably

predicted FMV of rent for use of goods for term of renewal at time option is to be performed

(E) Lessee has an option to become owner of goods for a fixed price reasonably predictable FMV of goods at time option is to be performed.

We must look at each factor in the lease separately to determine whether it is true or phony.

(1) Maintenance Free of charge — para. 3(b) of §1-201(37) says we are not

to assume either way based upon who pays maintenance; however, it suggests true because there is a residual interest, the lessor cares how machine is maintained. But, it is not conclusive.

(2) Insurance/ risk of loss — Same as answer above; however It suggests

phony, if she’s the beneficiary of insurance policy because then it suggests the machine is hers.

(3) Term 5 years/ no termination clause — if can terminate, then it is not

a sale with a security interest because that factor is necessary for a sale. The fact that the lease has no option to cancel leans to the fact its phony.

(4) FMV of Machine = PV of Total Rent over life of machine —Not phony just because FMV rent is equal or greater than the total PV of rent. It can be a true lease where FMV = PV of rent.

(A) Example — Under what circumstances would you have a true lease where someone would be willing to pay the FMV of goods in a lease (FMV = PV of rent). Lessee gets ancillary benefits from renting that he wouldn’t get from buying. Ex. Professional property tax on machines owned not rented; if rent, lessee has an offset deduction against tax liability and when subtracted from PV rent, its less than the FMV. Other ancillary benefits include below market price repair services. For these reasons you may have a true lease with a full payout lease.

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(B) §1-201(37)(4)(z) defines PV as the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate is not manifestly unreasonable at time the transaction is entered into; otherwise determined by a commercially reasonable rate.

Calculating today’s stream of income in future = PV, which will be less. FMV at time lease entered = PV of total rent. This called a “full payout lease”. A full pay out lease sounds like the lessee is buying the machine. Why would you ever rent for amount it would cost you to buy unless you don’t think they’ll be economic life in the machine at end of lease. If expect no residual value, it looks like buying a machine rather than a true lease. In a true lease, you’d expect the FMV > than the PV of total rent. Why? Because there is residual interest in the machine (economic life after machine is returned). Thus, FMV = PV of rent + PV of re-investment. Leases place No burden on true lessor. Art. 2A adopted the CL view, that’s why important to determine if true lease or phony. Fully pay out lease = FMV of machine at time lease entered into = PV of rent. That makes it look like a sale because:

Assume 5 year lease and 3 years economic life left in machine at end of lease. One would expect the FMV (what paid to buy for 8 years life) would be greater than PV of rent (which represents the use of the machine for machine) leaving 3 year residual interest.

This is a strong factor suggesting sale. BU then the code under §1-201(37)(3)(a) says don’t jump to conclusion that it’s a sale. Why? Drafters are saying there could be a true lease still have a full pay out. See the example above it has to do with ancillary benefits accompanied with renting rather than buying. However, what does the extra year of economic life after the term suggest – contrast 5 year term with what parties predicted economic life would be. § 1-201(37)(2)(a). You compare predicted life with actual term [DO NOT look at actual life]. Para. 4 of this section tells us look at what parties anticipated. So, there is a true lease

(B) Recommendations —(1) If equipment is expensive and not sure whether it’s a true or phony

lease, make a §9-505 precautionary filing (called “cheap insurance”) under Art. 9.

(2) If equipment mid-priced (multiple items to multiple lessees), filing may be seen as too expensive to them. So the lawyer has to

construct the lease so that no later court will construe it as a phony lease.

6. Problem 9B —Same facts except that the parties would reasonably predict at the time that the lease was executed that the machine would have an economic life of 6 years. For this subpart only, consider the following options to purchase and decide whether the transaction is a true or phony lease:(A) Option to purchase machine for $1200 —

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(B) Option to purchase for its FMV at end of 5 years as determined by an independent appraiser acceptable to both parties —

(C) Option to purchase the machine for $1000. Of the $1220 yearly rent, $200

is B’s compensation for servicing the machine. The FMV of the machine at end of leasehold is $1000.

(D) Option to purchase the machine for $650; for $250 (E) Option to purchase machine for the lesser of $200 or the FMV of the

machine at end of 5 year lease (F) Lease agreement contains a full use clause: C must renew the lease so

long a machine has useful life remaining.

Consideration — when is additional consideration nominal? See § 1-201(37)(4)(x)(i), (ii) — Additional consideration is NOT nominal if (i) when the option to renew the lease is granted to the lessee the rent is stated to be Fair Market rent for the use of the goods for the term of the renewal determined at time option is to be performed, or (ii) when option to become owner of goods is granted to lessee the price is stated to be FMV of the goods determined at time option is performed. (1) Are any of the options described above in the safe harbor of §1-

201(37)(4)(x)(i), (ii)? Only option (B) — we do not have a fixed price option to purchase – the value of machine will be determined at end of lease. That’s a safe harbor — “stated” is an important word for true leases.

(2) If you have fixed priced option it is more complicated. See §1-201(37)(3)(e). Last sentence in Para. 4(x)(ii) deals with option to buy in the middle of lease. One year into lease you have an option to purchase lease during repayment schedule.

Nominal Consideration — What is Nominal consideration? See chart on Handout 6 pg. 13.

(1) (2) (3) (4) (5) 0 $250 $600 $1,000 much > $1000 bargains impermissible option to pay FMV atnominal at “actual FMV beginning ofconsideration at end of lease” lease

[Payment of full residual value]

Paragraph 3(e) of § 1-201(37) tells us that the court is to calculate the range for permissible fixed priced options — it should be based on what parties reasonably predicted the economic life would be at end of lease. If look at (4) on the diagram — 1 year left is worth $1000. And under (3), FMV would be 60% of that = $600. If fall between $600 and higher — that factor alone doesn’t mean it is phony. But if get it between $0 and $250, it is nominal. The hard case — will fall between $250 and $600 — don’t know what court will do in terms of re-characterizing the lease option.

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Advice — Filing a finance statement is the safest way to go, but a safe way to ensure it is a true lease and not a sale is either to (1) give the lessee an option to terminate lease (as described in para. 2 of §1-201(37); or (2) if have an option to purchase — don’t make it a fixed price option. Use safe harbor language as described in the option examples (B). And if you have to fix the option price you want a document showing that the fixed price represents fair predictable price at end of the lease.

Bottomline — Leases are treated very different from consignments. Under consignments, the burden of secrecy is placed on the person who can handle it; whereas, under a lease (§2A-307) true lessor has no obligation of Notice.

H. Exclusions From Article 91. Read text pg. 32-472. Refer to §§ 9-109(c) and (d)

§ 9-109(c) This article does NOT apply to the extent that:(1) a statute, regulation, or US treaty (federal law) preempts this Art. 9 (2) 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; (state is the debtor)

(3) a statue of another state, a foreign country, or a governmental unit

of another state or a foreign country, other than a statue generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the State, country, or governmental unit; or

(4) the rights of a transferee beneficiary or nominated person under a

LC are independent and superior under § 5-114.

§ 9-109(d) This Article does NOT apply to:(1) a LL’s lien, other than an agricultural lien;(2) 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;

(3) an assignment of a claim for wages, salary, or other compensation

of an employee;(4) a sale of accounts, chattel paper, payment intangibles, or

promissory notes as part of a sale of the business out of which they arose;

(5) an assignment of accounts, chattel paper, payment intangibles or promissory notes which is for the purpose of collection only;

(6) an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the K

(7) an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness

(8) a transfer of interest of an assignment of a claim under a policy of insurance, other than an assignment by or to a health care provide of a health care insurance receivable and any subsequent

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assignment of the right to payment, but §9-315 and §9-322 apply with respect to proceeds and priority in proceeds;

(9) an assignment of a right represented by a judgment other than a judgment taken on a right to payment that was collateral;

(10) a right of recoupment or set-off but:(A) §9-340 applies w/ respect to the effectiveness of rights of

recoupment or set-off against deposit accounts; and(B) §9-404 applies w/ respect to defenses or claims of an

account debtor(11) the creation or transfer of an interest in or lien on real property,

including a lease or rents thereunder, except to the extent that provision is made for:(A) liens on real property in §9-203 and 9-308(B) fixtures in § 9-334;(C) fixture filings in § 9-501, 9-502, 9-512, 9-516, and 9-519;

and(D) security agreements covering personal and real property in

§9-604(12) 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

(13) an assignment of a deposit account in a consumer transactions, but §§ 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds

.3. Class Notes — Remember, that just because it excluded doesn’t not mean

you cannot do it.

4. See US v. Kimbell Foods (attached to Handout #6)—(A) Issue — Whether contractual liens arising from certain federal loan

programs take precedence over private liens, in the absence of a federal statute setting priorities.

(B) Holding — the source of law is federal, but that a national rule is unnecessary to protect the federal interests underlying the loan programs. Accordingly, we adopt state law as the appropriate federal rule for establishing the relative priority of these competing federal and private liens.

(C) Questions —The case cites to Clearfield, which basically restates the principle that priority of lines stemming from federal lending programs must be determine with reference to federal law. Thus, federal law controls the government’s priority rights. But what does this federal rule (the more difficult question) mean? Uniformity is one factor when determine the formulation of controlling federal rules. Apart from uniformity, the court also has to determine whether application of state law would frustrate specific objectives of federal programs. Finally, the court must consider the extent to which application of a federal rule would disrupt commercial relationships predicated on state law.

(E) Government Argument — The govt. argues that effective administration of its lending programs requires uniform federal rules of priority. It contends that to resort to any rules other than first in time, first in right and choateness would conflict with protectionist fiscal policies underlying the programs. The govt. also argues that applying state laws to these lending programs would undermine its ability to recover funds disbursed and therefore would conflict with program objectives.

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(F) Analysis — The court rejects the government argument by saying that state commercial codes are not inconsistent with respect to providing adequate protection of the federal interests. Because each application receives individual scrutiny, agencies can reflect state priority rules. There are other indications showing state priority schemes doe not burden current methods of loan processing.

5. Problem 9 (pg. 39 of text) —(A) Analysis — If Jugular is not an EE working for “wages, salary or other

compensation” but is instead an independent contractor receiving commissions, Art. § 9-109(d)(3) would NOT apply. Instead, Jugular would be conveying an Art. 9 security interest in accounts to the bank. See §§9-109(a)(1), 9-102(a)(2). In researching this issue, Jugular’s lawyer should examine the definition of EE in consumer protection statutes limiting wage assignments. There is no definition in the UCC. See UCC §1-103.

7. Problem 10 (pg. 40 of text) —(A) Analysis — All of the transactions described involve the sale of accounts

by Logan. All of the transactions would be in Article 9 (See §9-109(a)(3)) except that there are applicable exclusions, namely §9-109(d)(4), 9-109(d)(6), and 9-109(d)(5). Be sure that you can diagram these transactions (review problem 7, Handout #6), and that you can identify the principal debtor, the account debtor, the property that is being sold, and the applicable exclusion. The policy underlying the exclusions is that these transactions do NOT involve mainstream commercial financing.

(B) Refer to Text Book and Diagram this Problem

8. Problem 11 (pg. 40 of text)—

9. Problem 10 (Handout #6) ——Your client, Ventura Secured Lending, specializes in high risk lending to clients that most institutional lenders would characterize as belonging to the “sub-sub-prime market”. A potential borrower, RMD, wants to borrow $1.5 million and has offered a variety of assets as collateral, including its “one third interest” in a 1,000 acre piece of land in the mountains of CO known as Blue Valley. The value of the land is primarily in the CO blue spruce trees growing on the property; they were planted 30 years ago in straight rows for harvesting. Plus, there are numerous virgin groves of mature aspen trees which could be sold to Denver landscape designers. Does Art. 9 govern the creation of a consensual lien on the land. On the trees and/ or the timber from the trees? [Refer to UCC §§9-102, 9-109]

(A) Analysis — Art. 9 does NOT apply to real estate §9-109(d)(11). The first question Ventura should explore w/ RMD is what RMD means when it says It owns a 1/3 interest in Blue valley. For ex., if RMD and another entity own the land as tenants in common, to get a consensual lien on Blue Valley, Ventura will need to get a signed mortgage and to record in the real estate records. On the other hand, if RMD means that it holds a 1/3 interest in partnership that in turn owns Blue Valley, and if the collateral offered is RMD’s partnership interest, Ventura should comply with Art. 9: a partnership interest is a general intangible under §9-102(a)(42). If RMD means that it owns 1/3 of the stock in a land

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development corporation that owns Blue Valley, and RMD is offering that stock as collateral, Ventura would need to comply with Art. 9 to get a consensual lien. The stock would be classified as investment property under §9-102(a)(49). Under the doctrine of derivative title, RMD can only convey to Ventura what it has…(1) Assumptions: Assuming that RMD owns a 1/3 interest in the land

itself, how should one classify the trees? Depending on whether the trees are under a contract to be cut, they may be either goods or real estate. § 9-102(a). Is there an argument that the trees are crops and therefore farm products? Clearly the conservative approach w/ respect to the trees is to treat them as both real estate (and describe them in any mortgage document) and goods (and describe them in any security agreement). The moral of this problem — is to ask enough questions to ascertain what property is involved in the transaction. Acting redundantly and treating property as both personal property and real estate may be the only conservative option in ambiguous situations. But such an approach can be expensive. In some states, there are real estate mortgage registration taxes imposing tax liability based on a percentage of the assessed value of the real estate subject to the mortgage.

10. Problem 11 (Handout #6) — Assume that the transaction between ONB and LLC is within the scope of Art. 9. What must ONB do to create an effective security interest? To perfect its security interest? Does ONB need to file in the real estate records? [Refer: §§ 9-109, 9-203, 9-308, 9-309(4), 9-310(a), 9-312(a), 9-313(a).

Realty Paper Example

Loan Diagram

$ O

P to PS/A (R.P) [This is a secured obligation under

§9-109(b)]

P to PPromissory note, mortgage back

realty (recorded land records)

(A) Analysis — Remember under § 9-109(a)(1) Art. 9 governs personal property not real estate property. Also see §9-109(d)(11) which expressly excludes real property from Art. 9 coverage. This is our first example of a two tier transaction. Here the collateral is the realty paper. Remember in the introduction that a “mortgage” is a consensual lien on real property.

(1) Low Tier Transaction — This is the transaction between LLC and the Real

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OMB (nat’ Bk) LLC (orig. inst)

Real Estate Owners

Creditors of LLC

Creditors of Real Estate Owners

Estate Owners. This transaction is NOT covered under Art. 9 because it is real estate under §9-109(d)(11).

(2) Top Tier Transaction — This is the transaction between LLC and OMB. The obligation is secured by real estate. The collateral is NOT the real estate, it is the bundled of rights generated on the lower tier transaction. There is no classification scheme for this collateral — realty paper. So we will classify it as a promissory note. Basically, we have a note with a back up mortgage and Art. 9 applies. It is not real estate, it is the rights embodied in paper that is the collateral.

(A) Assume : LLC defaults on loan from OMB but the real estate owner pays on time. Can OMB repossess the property? NO, See Part 6 of Art. 9. Why? Based on CL property doctrines, OMB cannot grab the property because — what rights can LLC give OMB — only what they have — since LLC has no right to foreclose on the real estate owner neither does OMB. So, under what circumstance, could OMB get the property? Only, if both LLC and the real estate owner default and OMB would have to be the senior creditor of LLC and LLC would have to be the senior creditor to the Real estate owner. Need double default and both creditors must be senior. What is OMB’s remedy if LLC defaults? OMB can foreclose on realty paper by informing the real estate owner that LLC defaulted and that the real estate owner should pay them.

(B) Assume : LLC owes OMB $200,000 and Real estate owner owes LLC $1 million, and LLC defaults. What happens to the $1 million in payments. Does OMB have the right to collect a million from the real estate owner? NO, only the $200,000. We are talking about shared ownership of real estate owner’s obligation to pay $1 million. There’s a surplus here. The remaining $800,000 goes back to LLC. LLC has shared ownership. No sale, it’s a security interest with a loan. Look at §9-607 it contains language in subsection (c) statutory justification for this analysis.

(1) §9-607(a) — If so agreed, and in any event after default, a secured party: (A) 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.(2) §9-607(c) —A secured party shall proceed in a commercially

reasonable manner if the secured party: (A) undertakes to collect from or enforce an obligation of an

account debtor or other person obligated on collateral; AND

(B) is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor.

(3) Attachment: How will OMB attach (create a security interest)? We must look at §9-203(b). [Notice: For collection benefits, don’t need perfection only need a secured transaction (attached security interest); Perfection is for priority]. The collateral here is the note with a back up mortgage. Under §9-203(g) there is carry over attachment from the promissory note to the mortgage. So you only have to satisfy §9-203(b) for attachment.

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(A) Value (B) Debtor have rights in the collateral(C) Security Agreement

(4) Perfection: Was notice given and if so was it proper? Under §9-308(e) [good

news for OMB the creditor) its got carry over perfection from the note to the mortgage. So only have to worry about perfecting the note. There is more than one mode to perfect a note:(A) File financing state under §9-310 [doesn’t say you can’t file an

instrument] Under §9-312(a) security interests in instruments may be perfected by filing (the preferential mode of perfection).(1) Does OMB also need to record in the real estate records? NO

See §9-109 Comment 7 (Para. 1 after Example) —an attempt to obtain or perfect a security interest in a secured obligation by complying with non Art. 9 law, as by an assignment of record of a real property mortgage, would be ineffective. It is implicit from subsection (b) that one cannot obtain a security interest in a lien, such as a mortgage on real property, that is not also coupled with an equally effective security interest in the secured obligation. See § 9-607(b) it suggests the same conclusion as Comment 7. The Drafters wanted to excuse OMB from recording the mortgage. All they have to do is file a financing statement.

(A) Does this scheme create a secrecy problem ? There’s 2 level of creditors Assume OBM files under LLC’s name and LLC records the mortgage. Low tier creditors (of the real estate owner) can find out about LLC and then to OMB. No secret problem. What is the collateral as to those creditors — the land. What about the top tier creditors (creditors of LLC)? What is the collateral — the realty paper — note with a back up mortgage — where will they begin to look? Art. 9 files under LLC name, they’ll find OMB financing statement. RESULT: There’s notice of both transactions. But what if LLC does not record the mortgage, then there is a secrecy problem. According to the drafters, they think OMB should be excused and only need to file a financing statement.

(B) Take possession under §9-313(a) —taking instruments in possession

Securitization Diagram

$ $Sale Sale

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Trust OMB Mortgage Co.

Pool of RP

Note$ P to P

$ Rec’d mtg

Und. Int.

(A) Analysis — Remember a strict real estate transaction is out of Art. 9. On the other hand here, the mortgage company is selling realty paper to OMB, and OMB wants to spread the risk and it sells it again to the Trust (“remic” — real estate mortgage investment conduit) — it converts the realty paper into an investment and then sells undivided interests of the investment (“pass through securities”— it passes through profits generated by bottom tier transactions to investors) to investors (the public). How does Art. 9 figure in? Is the top tier transaction in Art. 9 (OMB v. Trust)? What is the collateral? bundle of realty papers (instrument with a back up mortgage). This is in Art. 9 under §9-109(a)(3) a sale of promissory note is in the scope of Art. 9. Also under §9-109(b) the fact that it’s a back up mortgage makes no difference.(1) Attachment: Does the trust have an attached security interest? Under

§9-203(b) has the trust given value to OMB — Yes; does OMB (the debtor) have rights in the collateral — yes, it bought the realty paper from the mortgage company; is there a security agreement — there is a written signed agreement. Under §9-203(g) the trust has an attacked security interest in the note and it carriers over to the mortgage under §9-203(g).

(2) Perfection: Under §9-313(a) possession works — since the trust bought the realty paper it has physical possession. But not always true because the trust can not service the mortgage. So typically, after the sale the paper will be left with the mortgage company to deal with the mortgagee. Under §9-308, filing a finance statement would work. But under this transaction, you don’t need to give notice because there is automatic perfection under §9-309(4) — a sale of a note does NOT require filing.

(A) Comment 4 (§9-309) — Para. 2 expands upon the old Art. 9 by affording automatic perfection to certain assignments of payment intangibles as well as accounts .The purpose of para. 2 is to save from ex post facto invalidation casual or isolated assignments — assignments which no one would think of filing. Any person who regularly takes assignments of any debtor’s accounts or payment intangibles should file. In this connection §9-109(d)(4) through (7), which excludes certain transfers of accounts, chattel paper, payment intangibles, and promissory notes from this Article, should be consulted. Para. 3 and 4, which are new, afford automatic perfection to sales of payment intangibles and promissory notes. They reflect the practice under old Art. 9. Under that Art., filing a financing statement did not

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Investors

Real Estate Owners

affect the rights of a buyer of payment intangibles or promissory notes, inasmuch as the old Art. Did not cover those sales. TO the extent that the exception in para. 2 covers outright sales of payment intangibles, which automatically are perfected under para.3, the exception is redundant.

When you have securitization transaction — they are always set up as sales in top tier transactions. Who is the weakest actor in the top tier transaction? The mortgage company and the investors who are buying the undivided interest in trust don’t want to worry losing the profitability connected to the future stream generated by mortgage. So don’t want to be tied up in a bankruptcy proceeding. So investors can sell it — so who owns the paper — the trust company. If the mortgage company goes bust the trust asset will not be part of the bankruptcy proceeding. That is why we don’t have loans instead sales. Thus securitization is in Art. 9.

(A) How is Risk Spread? At one end you have mortgagor lending money to individual and on the other hand you have investors spreading the risk by owning a pool of it.

11. Problem 12 (Handout #6) — Debtor asks the bank for a loan and offers a consensual lien against oil, gas and minerals still in ground on some real property owed outright by Debtor. Is the consensual lien within the scope of Art. 9? See UCC §9-102, 9-109.

(A) Analysis — Article 9 does NOT apply to real estate. See UCC § 9-109(d)(11). The definitions make it clear by negative inference that oil, gas and minerals in the ground are real estate. See UCC §9-102(a)(41), (44).

12. Problem 12B (Handout #6) — RMHR borrows $200,000 from First Denver Bank to make improvements to its rooms and recreational facilities. Guests of the resort are entitled to use resort tennis courts, golf course, and may sign up for hikes with RMHR tour guides. The security agreement, drafted by the bank and signed by RMHR, describes the collateral as “contract rights, account receivables, equipment, and proceeds thereof.”

(A) Analysis — the issue is whether the money paid by the guests to RMHR constitutes accounts or proceeds of accounts (Article 9 applies) or is it rent (Article 9 does NOT apply). See UCC §9-109(d)(11), 9-102(a)(2) and (64). The weight of authority under the old version of Art. 9 is that hotel and motel revenues are “accounts.” See e.g., In re Northview Corp.. If the law is not clear in the jurisdiction where this issue arises, the creditor should treat the “hotel receipts” both as personal property and real property and do everything necessary under both Art. 9 and real property law to obtain and publicize a line on the receipts.

13. Problem 13A (Handout #6) — David is a radiologist who practices medicine in CO; her medical practice is run as a sole proprietorship called Mile Hi. Action on behalf of her business, David approaches Bank for a $400,000 loan to purchase equipment for the practice. Medical equipment can depreciate rapidly in value because of changes in medical technology so Bank wants other collateral in addition to the medical equipment. David

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offers a consensual lien in the Mile Hi interest bearing account kept at First Union. At the time Bank loan, the balance in Mile Hi account at First Union is $500,000. Would this consensual line be covered by Art. 9?(A) Analysis — What does $500,000 balance mean? Who actually owns the

money? When you deposit money into a bank, who owns it after deposit. The Bank because they have the right to invest it. You are the depositor, and a depositor is a creditor of the bank. Who do you get back when you deposit money — the bank’s promise to pay the balance. What type of creditor are you? You are a general (rather than lienor) creditor but also protected by FDIC. So when the David deposits $500,000 she gets a promise to pay (honor her checks and withdrawals). (1) Top Tier — What is David offering Boulder Bank? So when she grants

a security interest to the bank — what do we call the bank’s promise to pay the David? It is called a “deposit account” (but really it is just a payment intangible like in Problem 7). Why did Boulder bank want a check account as collateral? Under §9-607(a)(5) its easy to foreclose on – just have to call First Union to tell them to pay you. The problem with collateral is it is highly liquid and inalienable collateral – all it is non-possessory. Article 9 calls it “control”. See §9-104 — there are ways to secure the collateral by limiting David’s ability to empty the account.

(A) §9-104 —Control of Deposit Accounts —— (a) A secured party has control of a deposit account if:

(1) the secured party is the bank with which the deposit account is maintained;

(2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or

(3) the secured party becomes the bank’s customer with respect to the deposit account.

(b) A secured party that has satisfied (a) has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.

The issue is whether the top tier transaction — between David and Boulder Bank — is in Article? Under § 9-19(a)(1) — it is a form of personal property that creates a security interest by contract. It is a classic secured transaction. Notice — there is a possible exclusion under §9-109(d)(13) [an assignment of a deposit in a consumer transaction] but it does not apply here because this is a business transaction.

14. Problem 13B (Handout #6) — Everything is the same as 13A except David offers to grant a consensual lien to Bolder Bank in David’s own personal bank account kept at First Union of Boulder. [It is not unusual for people who own small businesses to grant consensual liens on personal assets to obtain necessary financing for their business ventures). Would this consensual lien be covered by Art. 9?

(A) Analysis — Here the collateral — personal bank account — is still in

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Article 9. Remember the exclusion above does not apply because the grant of security interest is being used for business purposes and not a consumer transaction.

15. Problem 13C — Assume David approaches Boulder Bank for a $50,000 loan to help pay for her personal vacation — she wants to travel the world for six months. In addition to other personal property collateral, she offers bank her own personal, interest bearing bank account at First Union (with a balance of $15,000). Would this consensual lien be covered by Article 9? See UCC §9-102, 9-109.

(A) Analysis — This transaction is outside of Article 9 because it is a consumer transaction under §9-109(d)(13).

(B) Policy: Why can’t consumers use this asset [deposit account] in a lending

transaction? We are talking about leverage. The worry is consumers won’t understand what they are doing and will over extend themselves. Different states want different consumer protections so Article 9 doesn’t put this type of transaction in.

(C) NOTE : §9-201(b), (c), and (d) if more protection consumer protection law it trumps UCC law.

(D) Drafter’s Intention : The drafters are saying this type of collateral is new and are worried about disclosure — not knowing and no consumer protection laws. So, the drafters want to wait till consumer protection laws catch up and they will then address whether it should be put in Article 9. That is why the consumer transaction described in problem 13c is outside of Article 9.

I. Legal Limits on What May Be Collateral1. Introduction

(A) General Purpose : the general purpose of Art. 9 is to create a comprehensive security device that can cover any and all personal property and fixtures. See §1-201(37).

(B) Limitations — There are 2 sources of limitation on this general rule. (1) Law outside Art. 9 may prevent some items of personal property

from serving as collateral.(2) UCC does not define what constitutes “property” and there are

some cases holding that items of significant monetary value are not “property” and thus cannot be encumbered.

2. What are the Major Limitations Arising From Law Other than Art. 9?(A) Limitation #1 — there are laws that make difficult or impossible for

creditors to obtain and enforce non-possessory, nonpurchase money security interests in consumer goods that tend to be highly personal in nature and have little resale value. §444.2(4) of the FTC Credit Practices Rule.

(B) Limitation #2 — Most states have laws severely limiting the assignment of future income by debtors to repay existing obligations. An assignment of wages is, in effect, the grant of a security interest in future income. Art. 9 does not apply to such transactions. See §9-109(d)(3). Hostility to wage assignments is based on the concern that creditors will have excessive power over debtors in default. Plus, there is the concern the concern that debtors with encumbered future wages would have reduced incentives to continue working. Opponents of such restrictions argue that debtors know best what their preferences are and, in a free

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society, should be able to choose what obligations to undertake and what property to offer as collateral.

(C) Limitation #3 — In order for pension funds to qualify for tax benefits, pension plans must restrict the ability of the beneficiary (debtor) to alienate or create security interests in the pension fund. These restrictions on debtor free choice are explained by similar policies as those advanced to support limits on wage assignments. Those who argue for limits on the alienation of pension funds point out that the central goal behind the preferential tax treatment of pension. If debtors borrow against the funds and default, this objective will not be realized. Opponents suggest that debtors are the best judge of whether they need immediate credit for emergency medical care or to save a failing business and that they may not be able to solve their liquidity problems unless they can grant security interests in their pension funds.

3. What type of valuable “non-property” can not be encumbered by an Art. 9 consensual lien? — (A) Government Issued Licenses — the most important category of non-

property that cannot be encumbered by an Art. 9 consensual lien is govt. issued licenses, for example broadcast licenses, airport landing rights, liquor licenses, or taxicab medallions. The govt. body issuing these licenses declares that they are non-property, retains the right to revoke the privileges at any time, and theoretically prohibits this transfer. There is a tangle of cases in this area and this subject is beyond the scope of this course. But you should be aware that the difficulties in granting a security interest in most licenses are formidable. The same can be said with respect to attempts by francisees to create security interests in contract rights that are explicitly “non-assignable” under franchise agreements.

(1) How to Circumvent this Exception — Even though it may not be possible to create a security interest in a license or franchise as original collateral, it is possible to use Art. 9 to create a security interest in the revenues that debtors derive from the use of the licenses and franchises. Such transactions also are beyond the scope of this course.

J. Recap of Scope (1) §9-109 — we’ve learned §9-109(a) is the core provisions – credit extension

and personal property as collateral — is the classic case. A lien created by a contract — kicks out statutory liens. Phony leases and Phony consignments are in Art. 9-109(a)(1)

(2) §9-109(a)(2) — agricultural liens in Art. Even though not created by contract.

(3) §9-109(a)(3) — right to be paid money — 4 items important to remember(4) Securitization — taking promises to pay and pooling them together and

selling investment vehicles to public.

(5) §9-109(a)(4) — consignments (but not all true ones are in, must satisfy definition).

(6) §9-109(a)(5) — first problem in class between John and Nancy.(7) §9-109(b) — even if in a two tier transaction, the top tier can be in Art. 9

even if bottom is not.

(8) §9-109(c) — be alert to federal preemption47

(9) §9-109(d) — exclusions — even if in Art. 9-109(a) have to worry about exclusion taking it out.

III. Creation of a Security Interest in Article 9

A. Classification of Collateral1. Review the list of collateral on pg. 1 of Handout #8 and applicable

definitions in §9-102(a)(A) Is the Collateral tangible property?

(1) If so, is the collateral real estate or goods? — if real estate it is excluded under §9-109(d)(11)

(2) If the collateral is goods:(A) Consumer goods — §9-102(a)(23) —means goods that are used or

bought for use primarily for personal, family, or HH purposes(B) Equipment — §9-102(a)(33) —means goods other than inventory,

farm products, or consumer goods(C) Farm Products — §9-102(a)(34) —means goods, other than

standing timber, with respect to which the debtor is engaged in a farming operation and which are:

(1) crops grown, growing, or to be grown, including crops produced on trees, vines, and bushes; and aquatic goods produced in aquacultural operations;

(2) livestock, born or unborn, including aquatic goods produced in aquacultural operations;

(3) supplies used or produced ina farming operation; or(4) products of crops or livestock in their unmanufactured

states(D) Inventory— §9-109(a)(48) means goods, other than farm products

which: (1) are leased by a person as lessor;(2) are held by a person for sale or a lease or to be furnished

under a contract of service;(3) are furnished by a person under a contract of service; or(4) consist of raw materials, work in process, or materials

used or consumed in a business.

(E) Manufactured Homes — §9-109(a)(53) means a structure, transportable in one or more sections, which, in the traveling mode, is eight body feet or more in width or 40 body feet or more in length, or, when erected on site, is 320 or more square feet, and which is built ona permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein. The term includes any structure that meets all of the requirements of this para. Except the size requirements and with respect to which the manufacturer voluntarily files a certification required by the US Sec. Of Housing and Urban Development and complies with the standards established under Title 42 of USC.

(F) Accessions —§9-109(a)(1) — means goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.

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(G) Fixtures —§9-109(a)(41) —means goods that have become so related to particular real property that an interest in them arises under real property law.

(B) Is the Collateral Quasi-tangible property?(1) Instruments — §9-109(a)(47) — 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. The term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.

(A) Promissory Notes — §9-109(a)(65) — means an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgement by a bank that the bank has received for deposit a sum of money or funds.

(B) Others (including checks and certificates of deposit)

(2) Investment Property —§9-109(a)(49) — means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account [9-327 priority rule](A) Security (direct holding system)(B) Security entitlement (indirect holding system)(C) Security account (indirect holding system)(D) Commodity contract or account (not covered in this course)(3) Documents —§9-109(a)(30) means a document of title or a

receipt of the type described in §7-201(2)

(4) Chattel Paper — §9-109(a)(11) — means a record or records that evidence both a monetary obligation and a security interest

in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. In this para., “monetary obligation” means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. The term does not include (i) charters or other contracts involving the use or hire of a vessel or (ii) records that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with information contained on or for use with the card. If a transaction is evidenced by records that include an instrument or services of instruments, the group of records taken together constitutes chattel paper.

(A) Electronic chattel paper(B) Tangible chattel paper

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(5) Money —

(C) Is the Collateral a Pure intangible?(1) Accounts — §9-109(a)(2) — except as used in “account for”, means a

debtor’s right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a character or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated or sponsored by a State, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health care insurance receivables. The term does not include (i) rights to payment evidenced by chattel paper or an instrument, (ii) commercial tort claims, (iii) deposit accounts, (iv) investment property, (v) LC rights or letters of credit, or (vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card.

(A) Health care insurance receivable(B) Other, including credit card receivables

(2) Deposit accounts — §9-109(a)(29) — means a demand, time, savings,

passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.

(3) Commercial Tort Claims — §9-109(a)(13) — means a claim arising in tort with respect to which:

(A) the claimant is an organization; or(B) the claimant is an individual and the claim:

(1) arose in the course of the claimant’s business or profession; and

(2) does not include damages arising out of personal injury to or the death of an individual

(4) General Intangibles —§9-109(a)(42) —means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, LC rights, LC, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.(A) Payment intangibles — §9-109(a)(61) —means a general

intangible under which the account debtor’s principal obligation is a moentary obligation.

(B) Other general intangibles

2. Refer to text pgs. 40-5850

3. Class Notes — (A) 3 Suggestions For Classification

1. Use Handout #8 to do process elimination of categories of collateral

2. Look at property through eyes of debtor3. Look at correct time when it attaches 4. If can’t classify assume it is more than one classification because

there are cases where it is more than 1.

4. Problem 12 (text) (A) Problem 12A —

(1) Analysis —(a) Piano — tangible property/ goods/ if used at home for

personal use under §9-102(a)(23) it’s a consumer good — goods used

or bough for personal purpose. [Is it personal purpose if professional — up for debate].(b) Cattle — tangible property/ goods/ if weren’t fattened for

sale, but for dinner for family purposes — its consumer goods; but,

here its for sale — farmer is the debtor — so the cattle is farm product. Notice, it is NOT inventory because under §9-102(a)(48) inventory means goods other than farm products.(c) Farmers tractor — tangible property/ goods/ equipment.

Notice, it is Not a farm product under §9-102(a)(34). It is a

supply, thus an equipment. Farm product would be fertilizers for the field where as the tractor is farm equipment.

(d) Chicken — Under §9-102(a)(23) it does not say other than farm products. If farmer acting as consumer we want consumer

protections to attach. If eaten by family, chicken would be farm product. Under §9-102(a)(35) need to satisfy this to have a farm product under §9-102(a)(34). Need to engage in farming operations.

(e) Maneur — How do we classify maneur under §9-102(a)(34)(c) or (d) — products of livestock in an unmanufactered state.

(f) Mobile Home — Is it a manufactured home or a consumer good? Need more facts.

(B) Problem 12B —(C)Problem 12C —(D)Problem 12D —

(1) Analysis —A right to sue someone for breach of K is a general intangible. A right to sue someone for negligence may be either

a commercial tort or a general intangible. A right to sue for interference with an employment K is likely to be a commercial tort. The right to be paid under the structured settlement agreement is a payment intangible. Review your class [review your class notes from Handout #6 problem 7].

(E) Problem 12E —(1) Analysis —Pencils —inventory/ §9-102(a)(48) materials used or

consumed in a business/ if it is inventory it is NOT equipment. The major difference between inventory (pencils) and equipment (tractor) is that inventory is used up more

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quickly — short enough economic life. Whereas, equipment has long economic life.

(F) Problem 12F—(1) Analysis —liquor license — not tangible good/ is it a pure intangible?

Account — NO under §9-102(a)(1); deposit account — No. Its not even propert at all — If non-property, it is not in Art. 9. If this restriction doesn’t exist, it is a general intangible. This also applies to broadcast license.

(2) Analysis — right to return of security deposit/ IKEA has the right of security deposit but needs money now. What is the right of

return of security deposit? It’s a payment intangible unless you can argue it is an account (but it is a stretch).(A) How could it be an Account? Under §9-102(a)(2), it is a right to

payment of monetary obligation. Is the debtor –IKEA — rendering a service which is to be paid by LL —§9-102(a)(2)(ii). IKEA has to clean up space — so it has to render services to get payment back therefore its an account. Notice, the exact language of Account, even if the services were to be delivered in the future, it would still be account because it is “services rendered or to be rendered.”

(G)Problem 12G—(1) Analysis — Curtains/ are they fixtures? If shutters, then a fixture, but

if drapes it is equipment. What if curtains then used as home. When did particular secured party’s security interest attach? If attached when inoffice, it is equipment. But if attached after hung in home, its consumer goods.

4. Problem 13 (text) —(A) Analysis —Another example of health care insurance receivables which

are accounts. [review your class notes from Handout #6 problem 7]

5. Problem 14 (text) — (A) Analysis — credit card receivables is the collateral. See Diagram on

Handout 8 page 3. The top diagram illustrates a loan transaction whereas the bottom shows securitization.

Credit Card Receivables Example

Loan Diagram

S/a [cardholders P to P passport @ end P to P passport] Of billing cycle

Slip GoodsSlips Immed. Pymt.

(fee)

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Bank Passport Cardholders

Merchants

(A) Analysis — the CC application is an agreement where passport promises to pay authorized charges on credit card and the cardholder promises to pay at end of billing cycle. Cardholder buys clothes from merchant, and cardholder signs slip. Passport (the issuer) pays merchant immediately (that is the diagonal line). What really happened — Passport has made a loan to cardholder and merchant has been paid and cardholder has goods. Is it a general or secured loan. Assuming cardholder has got good credit, it is a general loan (we aren’t studying secured credit cards). Passport needs money, Passport goes to the bank and bank wants collateral. Passport has all the promises to pay from cardholders. These promises to pay are called credit card receivables. What is this collateral under Art. 9 — they are accounts under §9-102(a)(2) — its another case of pure intangible in personal property.

Securitization of CC Receivables

d $ $Sale Sale

Pool of CCReceivables P to P CC bill

$ CC Loans @ end of cycle undivided interests

(A) Analysis — Is the loan between passport and cardholder (securitization) in Article 9? No, It is a general credit transaction. But in the top tier of this transaction, passport (bank) and trust (bank), there are 2 sales. What is trust selling to investors — credit card backed securities. Are the top tier transactions in Art. 9? Yes, look to scope Art. §9-109 — it’s a sale of accounts under §9-109(a)(1). The purpose of sale is to get it into a bankruptcy safe entity. Under §9-318(a), reminds federal bankruptcy judges, it is not the property of bank (or in past LLC). The Basic Rule — is when you sell it, you no longer own it. But, under §9-318(b) (which should remind you of §9-319(a) for consignments) — says the debtor may have rights — its important that trust has perfected so it can be a bankruptcy remote entity. So investors are safe in the event Passport goes under. For perfection, start with §9-308(a) — under §9-309 (automatic perfection) and §9-309(3) payment intangible and promissory notes. There is NO automatic perfection for sale of accounts .So you have to file financing statement for perfection.

(B) Policy — Sale of accounts have always been in Art. 9 so should know that you have to give notice.

(C) Risk — Is there more risk investing in CC backed securities or mortgaged back? CC back securities are more risk because default more likely (the risk is on bottom tier transaction based on general credit).

6. Problem 15 (text) —(A) Problem 15A—

(1) Analysis — Farm products; Here, grocery store asking for a loan from

bank and asking bank to take milk as collateral — that is inventory. 53

Trust Bank Passport

CardholdersInvestors

(2) Analysis — Debtor is the customer grocery store, I buys 2 cartons of milk and offers it as collateral for loan — consumer good.

(3) Analysis — I owe a restaurant and use milk to cook. If restaurant is the debtor, it is inventory.

Moral Story: Must look @ collateral through eyes of debtor.

(B) Problem 15B(C) Problem 15C—

(1) Analysis — Rare coins are tangible property. If its goods, its consumer

goods because it’s a hobby. Is there an argument that it is NOT goods?

(A) Argument — Under §9-102(a)(44), GOODS means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or K for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the programs is associated with goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term does not include a computer program embedded in goods that consist solely of the medium in which the program is embedded. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, LC rights, LC, money, or oil, gas, or other minerals before extraction.

Basically, the definition of goods says money is NOT goods. Need to look at definition of money in Art. 1. If the money is NOT goods, then what are they? Money is NOT a general intangible. It is a quasi tangible property because the rights are embodied in the money.

(D) Problem 15D —(1) Analysis — the tax refund is a general intangible.

(E) Problem 15E—(1) Analysis — Under §9-102(a)(49) investment property means (i) a

security; (ii) a security entitlement; and (iii) security account — we are talking about financial assets (bonds or stocks publicly traded). What is the difference between bond and stock. A bond is a debt (debenture bond is a bond on general credit — corp. is the debtor and its like giving a signature loan to the corp.). Whereas, stock is equity (shared ownership of corp.). Bonds/ stocks all included in investment property. Art. 8 governs private dealings involving stocks (how do you use these financial assets in credit transactions).(A) 2 Basic Ways Stock/Bonds Are Held :

(1) Stock — assume X is the debtor and Y is a creditor. Assume X wants to use stock as collateral. X can hold stock in two ways (1) direct holding system or (2) indirect holding system. When you have a paper stock certificate in direct holding — this means a direct relationship between x and the corp. — the stock

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is certificate security under §8-102(a). That means dividend payments and other information come straight from corp. No intermediaries in between. Most stock held in indirect holding system. Under §8-102, definitions, if I hold stock or bonds in direct holding it is called a “security.” Under §8-102(a)(15) security means an obligation of an issuer (that’s debenture bonds) or a share (directly held).

(1) Indirect Holding System — See Handout 9 page 8 diagram. If

I own 100 shares indirectly, X has a security account with broker and in the account X has a credit, Corp. doesn’t know who X is, but X still enjoys the benefits but indirectly. Instead of having a direct legal claim against corp. – you have a claim against security medium (broker).

Gabriel’s Indirect Ownership of Intel StockExample

Direct Ownership

AccountsAccounts Accounts

Investmentaccounts

Investment Investment Accounts Accounts

(A) Analysis — Bottom tier of diagram, the customer is an “entitlement holder” under §8-102(a)(7). Assume customer has a security account under §8-501(a). At top tier we have corp. (the issuer) in between we have intermediaries under §8-102(a)(4) (called security intermediaries). The customer holds stock indirectly and any claims are against AGE. Under §8-102(a)(7) entitlement holder — suppose customer decides to buy the stock — AGE may have a position in the stock (they may actually own some of stock) but if don’t AGE has a security account with a clearing house and that House has a direct relationship with the corp. and will purchase stock indirectly for customer. The customer can grant an Art. 9 security interest in the security which is part of investment property. Also — §8-102(a)(17) grant security interest in entitlement interest (rights against AGE) or grant a security interest in entire security account under §8-501(a). These are subcategories of investment property — security entitlement rules of perfection are different depending on what type of security.

7. Problem 16 (text) —

(A) Analysis — collateral — Elvis Presley guitar held for investment — its tangible but Not an instrument — it is either inventory (holding it so it

55

Intel — the stock issuer

NY Banks and Clearing Houses

First Union securitiesAGE Rushmore

Gabriel Other Customers Customers

Customers

will appreciate when he sells it) or equipment. Here, it is equipment. Under comment 4a if it is inventory it has to be held for sale in ordinary course of business. Since Sam doesn’t sell instrument, it is equipment.

8. Problem 17 (text) —(A) Analysis — This is a true lease. DAM goes to bank and gives leasing

agreements as collateral. Is the lower transaction (the true lease) in Art. 9? No, it is in Art. 2A. If it is a phony lease, it is in Art. 9. But we are assuming it is a true lease. What is the collateral in the top tier transaction? Chattel paper under §9-102(a)(11) — there is a monetary obligation (bottom tier — rights generated in the lower transaction) and lease of specific goods (rental cars).

9. Problem 2 (handout #8) _—This connection is in connection with problem 12(A) and In Re Morton (pages 51-54) — Nellie Newton (NN) is a computer programmer and amateur violist at the time that she purchases an expensive red viola from Alex Antique (AAI) on credit). The purchase price is $400,000; NN makes a $100,000 down payment and grants AAI purchase money security interest in the viola to secure the $300,000 balance outstanding on the installment sales K. NN indicates to AAI that she intends to play the viola at home and with a group of her friends who play string quartets for pleasure. NN uses the viola consistently w/ her representations to AAI for three months following the credit purchase. In part b/c of the wonderful sound of the red viola, NN practices long hours and resigns from her regular job in order to pursue her dream — to play professionally w/ the National Symphony at the Kennedy Center. NN needs more $ to maintain her lifestyle — professional musicians make less than computer programmers. NN applies for and obtains a $150,000 loan from First American Bank. Without informing the Bank about AAI’s earlier interest in the viola, NN gives the bank a nonpurchase money security interest in the red viola. NN tells the bank she is using the viola in her work as a professional musician. Bank promptly files a financing statement. Several years later, N misses payments owed both to AAI and to the Bank, thereby defaulting on both obligations. Both creditors want to repossess the red viola. Which creditor has the senior interest in the viola?

In answering this question, assume that if the viola is classified as consumer goods, then AAI’s purchase money security interest is automatically perfected when the security interest attaches. See §9-309(1). Accordingly, if the viola is consumer goods, AAI wins. See §9-324(a). Otherwise, Bank wins. §9-322(a)(2).

(A) Analysis — As suggested in In Re Morton (decided under the old Art. 9 and in the text), the viola is “consumer goods” as to the earlier credit seller AAI and is “equipment” as to the later outside lender, First American Bank. Thus, AAI wins the priority battle. Where there is a change in use of the collateral by the debtor, in order to figure out how to classify the collateral, you should ask:

What was the best evidence available to the particular creditor, at the time the security interest was created (attached under §9-203(a), (b)), concerning the debtor’s primary use of the personal

56

property? Extrinsic circumstances as well as the debtor’s stated intent should be taken into account.

Both creditors face practical difficulties where there is a change in use of collateral. As illustrated by this problem, the initial creditor does not want to have to monitor the buyer/debtor (NN) after the sale to ascertain how she will use the viola (a “large ticket” consumer good) in the future.

On the other hand, the subsequent creditor has no objective source of information concerning how NN used the viola in the past. The debtor has every incentive to not disclose the existence of the earlier security interest; if she is acting in good faith, she may believe that she will repay both creditors and may accordingly have no qualms about “exaggerating” the size of her pool of unencumbered assets. Under the approach followed by cases under the old Ar. 9, and not likely to change under the new Art. 9, the entire risk of a post “attachment” change in the use of multipurpose collateral is allocated to “subsequent searchers” — here first American bank.

In terms of precautionary behavior, it is a good idea on large ticket items, for the initial creditor (often a credit seller as in the problem) to get a written statement from the debtor (NN) about how she plans to use the collateral in the future; such a statement provides useful evidence should there be a priority battle following a default. As for later creditors relying upon used multipurpose collateral, they should question the debtor thoroughly about her earlier uses of the collateral.

10. Problem 5 (handout #8) — Refer back to problem 17 in the text (p. 58). Assume as shown on the diagram that during the month of July 2001, GMAC, the originating institution, makes 500 car loans to individuals to enable these 500 customers to buy GMAX cars from various car dealerships. In each case, the GMAC — car buyer written agreement includes: (1) the car buyer’s promise to repay GMAC (the balance outstanding on the car loan w/ interest over time); and (2) language conveying to GMAC an Art. 9 purchase money security interest in the new GMAC car bought with the GMAC credit. GMAC takes all necessary steps under Art. 9 so that it obtains attached and perfected Art. 9 security interests in the 500 new GMAC vehicles. On Aug. 1, 2001 GMAC borrows 2 million dollars from Bank. GMAC signs a security agreement conveying a security interest to Bank in GMAC’s rights based on the 500 transactions with the 500 buyers of new GM cars. How would you classify the collateral in each of the transactions between GMAC and the car buyers? Are those 500 transactions w/in the scope of Art. 9? How would you classify the collateral in the Bank — GMAC loan transaction? Is that transaction w/in the scope of Art. 9? Under what circumstances can Bank foreclose on the new cars?

Example of Automobile Paper

Loan $ Principal debtor

$

P to P s/a in chattel Bottom TransactionPaper [the bundle of P to P s/a (cars),

57

Bank GMAC Creditors of GMAC

Rights generated in certificate of titleBottom tier —chattelPaper]

Account Debtor

(A) Analysis — How do you perfect a security interest in a car? Start at §9-308 and sift through to §9-311(a), which says filing a financing statement is NOT good enough. Need notation on certificate of title. §9-311(d) limits the rule, but that limit does not apply here. The bottom tier transaction is in Art. 9. The top tier transaction collateral is chattel paper (§9-102(a)(11)), which is in Art. 9, §9-109(a)(1). Attachment is satisfied under §9-203(b). Also notice under §9-203(g) there is carry over attachment to the cars — a security interest in a security interest. Perfection for top tier transaction can be done with a financing statement because the collateral is not the cars it is the chattel paper. Notice under §9-308(e) there is carry over perfection of a security interest in the underlying security interest. The collateral in the bottom transaction is cars — goods in Art. 9. In top tier transaction, collateral is chattel paper, which means a record of a monetary obligation (here the lower tier obligation) and a security interest is specific goods (namely here the cars). If GMAC defaults and I own a GMAC car can Bank repossess my cars? Under §9-607 how can the bank repossess — need default in both transactions (both tiers) and bank has to be senior to GMAC’s creditors, and GMAC has to be senior creditor to the senior buyers.

Securitization$ $

Sale SalePool of Auto paper Pool of Auto paper

P to P$ Undivided Interests $ s/a cars

certificate title

(A) Analysis — In the bottom tier, GMAC sells auto paper to bank, and then bank sells auto paper to the trust, a bankruptcy remote entity under §9-318(a) and (b). Under §9-109(a)(3) this is a sale of chattel paper, the top tier of the bottom transaction is in Art. 9. How will trust perfect — have to file a financing statement. There is NO automatic perfection under §9-309.

B. Technical Validity of the Forms: Security Agreements & Financing Statements(1) Review Handout #3(2) Read text pg. 58-65(3) Class Notes —

(A) Security Agreement — §9-203(b)(3)(a) — How to make a technically correct

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500 Buyers GMCreditors of Buyers

Trust Bank GMAC

investors500 car buyers

security agreement. Its also one of the requirements for attachment. An authenticated security agreement that provides a description of the collateral, and if the security interest covers timber to be cut, a description of land concerned.

(B) Financing Statement — §9-310, 312, 521 (uniform form for F/S) — its an effective mode of perfecting most but not all security interests.

(C) §9-308 ties security agreement and financing statement together — a security interest is perfected if attached (s/a) and notice given (f/s).

(D)Refer to the following Sections —

§9-502(a)(1) —Subject to (b), a financing statement is sufficient only if it: (1) provides the name of the debtor; (2) provides the name of the secured party or a representative of the secured party; and (3) indicates the collateral covered by the financing state.

§9-503(a) — A financing statement sufficiently provides the name of the debtor: (1) if the debtor is a registered organization, only if the financing statement provides 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; (2) if the debtor is a decedent’s estate, only if the financing statement provides the name of the decedent and indicates that the debtor is an estate; (3) if the debtor is a trust or a trustee acting w/ respect to property held in trust, only if the financing statement: (A) provides the name specified for the trust in its organic documents or, if no name is specified, provides the name of the settlor and additional information sufficient to distinguish the debtor from other trusts having one or more of the same settlers; and (B) indicates in the debtor’s name or otherwise, that the debtor is a trust or is a trustee acting with respect to property held in trust; and (4) in other cases: (A) if the debtor has a name, only if it provides the individual or organizational name of the debtor; and (B) if the debtor does not have a name, only if it provides the names of the partners, members, associates, or other persons comprising the debtor.

§9-503(b) —A financing statement that provides the name of the debtor in accordance with (a) is not rendered in effective by the absence of: (1) a trade name or other name of the debtor or: (2) unless required under (a)(4)(B), names of partners, members, associates, or other persons comprising the debtor.

§9-503(c) — A financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor.

§9-506 —

(a) minor errors and omissions — a financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or missions, unless the errors or omissions make the financing statement seriously misleading.

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(b) Seriously misleading — except as otherwise provided in (c) a financing statement that fails sufficiently to provide the name of the debtor in accordance with §9-503(a) is seriously misleading.

(c) Not seriously misleading — if a search of the records of the filing

office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails to provide the name of the debtor in accordance with §9-503(a), the name provided does not make the financing statement seriously misleading.

(d) debtor’s correct name — for purposes of §9-508(b) the debtor’s correct name in (c) means the correct name of the new debtor

(3) Problem 19 (text)—(A) Analysis — The sales agreement is written “security agreement” with in

the meaning of §9-203(b)(3)(a). There is an objective manifestation of intent to create a consensual lien.

(8) Problem 27 (text)—(A) Analysis — Most courts hold that the security agreement expressly

provides that it covers replacement inventory. Some courts have been willing to read financing statements more generously — to cover replacement collateral of the type that “turns over frequently” even if the words “after acquired” are omitted. A careful attorney when drafting descriptions of collateral for the security agreement or the financing statement always should include the words “now owned and after — acquired” for all types of collateral described unless the intent of the parties is to exclude after acquired collateral from the coverage of the consensuallien.

(9) Problem 28 (text)—(A) Analysis — Although the description “equipment” would be adequate,

“various equipment” or “various equipment, see attached list” (with not list attached) are not adequate. Why?

(10) Problem 29 (text)— (A) Analysis — The secured party will argue that no one is hurt by allowing

the broader definition in the f/s to control, so the court should reform the security agreement to conform to the intent of the parties as expressed in the testimony of the debtor and the secured party. In the case cited, the court rejected this argument and the secured party lost over $200,000 because of this “scrivener’s error.” Several policies support the court’s decisions (1) a later searcher would be hurt who only saw a copy of the s/a provided by the debtor and thus never searched the Art.9 files; (2 ) a later searcher, if not “hurt”, could be “inconvenienced” because once it discovers that the two documents contain different descriptions of collateral, the subsequent searcher must make further inquiries to determine the scope of the first creditor’s consensual lien; and (3) allowing discrepancies in collateral descriptions to be retroactively repaired by the courts could diminish confidence in the integrity of the filing system.

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(13) Problem 7 (handout #8)— Barbara Song is a sole proprietor who owns a residential construction company called “Song’s Homes.” She borrows $400,000 from Octopus National Bank (ONB) in order to purchase new heavy equipment, including a crane, bachoe, and tractor with box grader and bushhog attachments. Song sings a written security agreement describing the collateral as “present and after acquired equipment. ONB completes and files a written financing statement, using a form identical to the model one found in §9-521. The filed financing statement describes the collateral as “present and after acquired equipment, accounts, and general intangibles.” ONB never asks Song to review the financing statement it later files nor does ONB ask Song to sign or otherwise authenticate the f/s.

(A) 7A — Is it necessary for song to sign the f/s in order for the f/s to be effective? No, see §9-502(a)(1) [provides the name of the debtor] and 9-516 (b) [filing does not occur w/ respect to a record that a filing office refuses to accept b/c: (1) the record is not communicated by a method or medium of communication authorized by filing office; (2) an amount equal to or greater than applicable filing fee is not tendered; (3) the filing office is unable to index the record b/c: (A) in the case of an initial f/s, the record does not provide a name for debtor; (B) in case of an amendment or correction statement, the record: (i) does not identify the initial f/s as required by §9-512 or 518, as applicable; or (ii) identifies an initial financing statement whose effectiveness has lapsed under §9-515.]

(1) Policy — why under old Art. 9 was a signature required and the drafters left it out in the revised Art. 9. Assume you want to file f/s electronically, it facilitates electronic filing. Concerned about valid electronic signatures. We can assume that although may be a good idea now, we may want to bring signature requirement back if legal standards are employed for electronic signatures. From the parties perspective, electronic filing saves money and from filing office perspective, now work inputting in f/s.

(2) Notice : Problem 7 would not arise under old Art. 9 because the debtor would not sign (which was required) when discovered that description of collateral is broader in f/s than in s/a.

(B) 7B — Is the f/s effective as to all collateral described? As to part of the collateral described? See §9-510(a) and 9-509(a). Look at handout #8a there are 4 types of collateral described. We don’t have the debtor in a separate signed writing authorizing a f/s. Under §9-509(b) that’s the key provision for the problem: Property in Song’s possession, at time of her default on ONB loan:

(1) Various items of construction equipment owned and used by Song, including cranes and backhoes —Original collateral (collateral described in s/a) This crane is equipment and thus in security agreement. Go to §9-509(b)(1) — the signing of s/a of equipment means creditor can file to cover equipment. (A) One Caveat — is this F/S effective? We need to worry about

§9-311 — sometimes have to worry about certificate of title.

(2) Hazel Construction’s promise to pay Song 200,000. Hazel owes Song the money because Hazel purchased a used crane from

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Song on “open account,” after the closing of the ONB loan but before Song’s default. The collateral here is the promise to pay. Issue # 1 is whether this is proceeds? We need to classify to see if in security agreement and f/s. Assume its just a K right for sale of equipment? Its an account. The term account not used in security agreement, but in f/s we have a problem, we have a form of collateral described in f/s but not security interest. Does this f/s work for the security interest? Under §9-502(b)(1) ipso facto — §9-315(a)(2) which tells us a security interest attaches to only identifiable proceeds of collateral. When OMB gets a non-possessory security interest in equipment, there’s always a risk during rempayment period. Song will sell collateral. So when such a sale occurs generating proceeds (here account) it is assume the account attaches to security interest to substitute the crane. §9-203(f) attachment gives right to proceeds. The code assumes the secured party will have a right to proceeds. So OMB has an automatic right to account under §9-315 — assuming its identifiable. Since S agreed to a security interest, Song also agreed to authorization of f/s of account and thus OMB has an effective F/S to the account.

(3) GW’s promise to pay Song $500,000. GW owes Song the money for construction work done by Song on the new law school building, after the closing of the ONB loan but before Song’s default. — The collateral is promise to pay $500,00 generating an account. Same problem as #2. Is the f/s valid as this account. See §9-102(a)(64) — proceeds — proceeds are what debtor gets upon disposition of collateral. Here song is using equipment — getting paid to work. No disposition — so no proceeds; so F/S not effective.

(4) Song’s right to receive a $100,000 tax refund from the state; this right arose before the closing on the ONB loan. —The right to a tax refund is a payment intangible. Is it original collateral? No , not described in the security agreement. Is it proceeds? No, is it described in F/S. Yes, but F/S not effective because not described in security agreement. We have a situation where f/s is over broad and covers collateral but not authorized by debtor or proceeds in s/a.

(C) 7C — Apart from carelessness, why might ONB want to file a f/s that contains

a broader description of collateral than the s/a? How might such action by ONB hurt Song, the debtor? —To scare away other creditors — create a cloud over Song’s accounts and payment intangibles. See Example 2 of §9-509 — sometimes it is necessary for f/s to contain language describing what proceeds are. Need to have legitimate purpose and proceeds in form of accounts and payment intangibles. Commentary on vigilante filing. Bogus f/s to create a cloud on title to their personal property.(1) How does the cloud on title (over broad filings) hurt the debtor? Fails on

GW case (ex. #3) — assume Song defaults and OMB wants to foreclose — can they call GW and ask GW to pay OMB and not Song. If OMB asked

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GW to pay directly (they can under §9-607 if had a security interest in the account) but don’t then OMB would be liable for converting Song’s property. All OMB did was give notice of something they didin’t have; so can’t foreclose because it’d be conversion. So where is the harm from overbroad f/s? It creates a cloud over Song’s title — but can dissipate because all Song has to do is show the security agreement.

(C) 7D — What remedies does Art.9 afford Song? Under old Art. 9, Song was required to sign the f/s. Why is revised Art. 9 different, eliminating the requirement of the debtor’s signature on the f/s? Do you think this revision is an improvement? What prophylactic steps should a debtor’s lawyer take to avoid some of the new risks under revised Art.9? What steps should careful creditors take in order to avoid litigation? See UCC §9-502, 9-509, 9-510, 9-513, 9-518. — (1) §9-513© this is most appropriate here — termination(2) §9-518(a) — correction statement(3) §9-625(b) — if OMB doesn’t cooperate Song’s has a claim for statutory

damages. (4) Best Remedy: Is not to let this happen because there are transaction

costs for dissipating the cloud. Prevention — Debtor can require in security agreement that he has right to review final form of F/S and must sign off on It as part of deal of the security interest. [that’s the old Art. 9 method] The secured party can include in provisions in security agreement bringing into §9-509(a)(1) — giving broad authorization from debtor to file F/S. Look at handout #3 security agreement Para. N —this is a pro-creditor clause. How would you revise if represented the debtor?

Debtor hereby authorizes secured party to file such f/s as secured party deems necessary to perfect its security interest in the collateral, including a copy of this agreement (and authorizes the secured party to adopt on debtor’s behalf any symbol required for authenticating any electronic filings.

(14) Problem 8 (handout #8) — 1/1 Song borrows $50,000 from ONB to start her

business; she is a sole proprietor. ONB retains a floating lien on Song’s inventory and equipment. On 1/1 ONB files a properly completed f/s. On 2/1, Song marries Dancer; they both change their last names to Song-Dancer. On 4/1 Song incorporates and names her business Barb. Song owns most of the corp’s stock. As of 4/1 Barb’s assumes all of Song’s prior business obligations including ONB loan; moreover, on 4/1 virtually all of the earlier business’s assets are transferred to the new corp. On 7/1 Barb purchases a large forklift to use in the business; assume that forklift is not governed by applicable certificate of title status. On 7/15, Barb borrows an additional $50,000 from FFC, granting FFC a security interest in present and after acquired inventory and equipment. FFC files a f/s the same day.

(A) What is a Floating Lien ?After acquired

Future adv. ($100K) inventoryFuture adv. ($50K)

Debtor $ or P to P63

Wholesalers of inventory

Song

P to P; floating lien(creditor) [inv.], f/s

Inventory proceeds

Analysis — 3 Building Blocks of Floating Liens(1) After Acquired Property — §9-204(a)(2) Proceeds — §9-203(f)

§9-102(a)(64)§9-315(a)(2)

(3) Future Advances — §9-204(c)

(B) Does the original security agreement, signed by Song on 1/1 in her capacity as sole proprietor, give ONB an attached security interest in the forklift purchased by the successor corp. Barb’s? Is the original f/s filed by ONB effective giving ONB a senior interest in the forklift, despite Son’s name changes. [See §9-203, 9-507, 9-508]

(1) Analysis — The problem presented here is that there is a post filing name change of debtor (see §9-519) and f/s is under debtor’s name. There is a secrecy problem. They would check for corp. name, not the debtor’s name for f/s. So search under corp. is unlikely to discover the filing under the individual name. So who gets stuck with secrecy problem? Where does burden line? (1) Does OMB have to catch post name changes? Or (2) does FFC have to grill debtor and get all her names and then search?

(2) Rules — §9-503 — all the rules what name you use§9-503(a)(4) individual name of debtor used§9-503(c) trade names do not work§9-503(a)(1) corp. charter — name of corp.

(3) Attachment — Song signs security agreement. Barb never signed ONB security agreement and Song buys new equipment. Does ONB have an attached security interest in new equipment — the forklift? Under §9-203(d)92) corp. is a separate entity from Song. This section was satisfied because the corp. took on the obligations of Song (not always the case), the sole proprietor — original debtor, corp. — new debtor. See §9-203(d). Also see §9-203(e) if new debtor (corp.) becomes bound to the original security agreement. See §9-204(a) for after acquired equipment.(A) Hypo : Assume no name changes, when did the security

interest attach as to after acquired collateral. See §9-203(b) —rights of the after acquired property clause doesn’t vie secured party interest until Barb gets it. 7/1 §9-204(a).

(B) Hypo What happens if there is a name change — §9-203(d) and (e) treats the whole thing as if there was no name change so long as §9-203(d) is satisfied it attaches on 7/1.

(4) Perfection : Is the f/s valid? Ok. § 9-507(c) does not apply. But §9-508(b) applies (virtually the same rule). F/s is effective.(A) §9-508(b) to determine whether the f/s is seriously

misleading have to go to §9-508(c) (1) Example — If you represent FFC, what name do you

search to see if f/s is seriously misleading (under facts of problem 8) look at debtor’s correct name (“barb”)

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ONB

Customers

under §9-506(d) — say you do that search and it pulls up Song — that means its not misleading. Why? You’ve got the OMB f/s, what else do you do? You know some debtor in past — you question the debtor in front of you ask them if operated as sole proprietor before and whether they assumed those debts. It means you got a lead. So not misleading.

(2) Example — But what if after search, you don’t find any earlier f/s. Then it is misleading. Have to go to §9-508 to find out if f/s is effective. What is the result in Problem 8b — the four month period begins to run when the new debtor becomes bound under §9-203(d)(1) — Yes it is effective.

(5) RECAP on NAME CHANGES — There are two types of name changes (1) where debtors identity doesn’t change, but different names [e.g., Song is sole proprietor, Song changes her last name but still sole proprietor — §9-507(c) deals with this type of name change; (2) where there is a structural change plus name change — that is governed by §-508(b) if difference between name of original debtor and that of new debtor — you have different legal entities. This is the case where you have a merger or like this problem — 2 different names, 2 different debtors.

(C) Problem 8C — Would the result be different in 8b w/ respect to validity of original ONB f/s if Song bought the forklift on Aug. 15. Suppose that on 7/25, ONB learned Song had incorporated and that the corp. intended to purchase an expensive forklift on Aug. 15. What steps should ONB take to try to preserve its priority date of 1/1?

(1) Analysis — The f/s is Not effective because after 4/1. What do you have to do to protect OMB in this case — file a new f/s with the new debtor’s name. What’s the latest date you can file under §9-508 — 3 months and 29 days, it means you can if by 7/31.

(D) Problem 8D — Would the result be different in 8b w/ respect to validity of original ONB f/s if Song bough the forklift before 1/1?

(1) Analysis — the f/s is effective.(2) Advice : Make sure you check your debtor’s name every 4 month.

Its worse for ONB under new Art. 9 — you want effect f/s for priority battle — and you don’t know how much resources to put in to monitor f/s because don’t know if they’ll be a priority battle. The difficulty under new Art. 9 is that a f/s rescued under §9-508 works for some priority battles and not for others. Under §9-326 priority rule tells you which ones work.

(3) Priority Battle — Scenarios on Handout 8A —whether 9-508 rescues work for priority under §9-326 ; (A) Scenario 1 (B) Scenario 2 (C)Scenario 3 (D)Scenario 4

(4) Given this uncertainty what do you tell your client — ONB will get stuck if post name file change w/ sometimes a 4 month grace period. How do you monitor subsequent name changes by your debtor? Suggestions —

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(A) Tell the debtor to inform creditor if she changes her name — if read s/a in Handout #3 included is a clause stating debtor must inform creditor of either (1) structural or (2) name change immediately and if fails to do it’s a default event. So when you get information, immediately file a new f/s in the new name.

(B) If debtor fails to report, ONB gets stuck because the agreement only between ONB and debtor; FFC not a party to it and doesn’t effect §9-326.

(C) Who is likely to pick up a name change? The accounting department? Since the name on check. So have accounting inform counsel of name change. Stationary may give you a clue to a name change.

(D) You could set up a billing stub you send to debtors and require the debtor to write here name on paper —make it a part of payment routine so you are notified every month if subsequent name change.

(E) Business Reason — for ONB to closely monitor the debtor and you may not need to take extra steps like the ones described in A —D. (1) Example — Floating Lien [see diagram

After acquiredFuture adv. ($100K) inventoryFuture adv. ($50K)

Debtor $ or P to P

P to P; floating lien(creditor) [inv.], f/s

Inventory proceeds

(A) Analysis — A floating lien — where the debtor is receiving inventory financing — this is a case where you’d have close monitoring. Say B owns a hardware store and there is a constant stream of goods moving in and out of store. She gets proceeds (§9-315). ONB wants to give B all money at once — it’s a way of controlling the debtors spending (it controls risk). So ONB will make advancements every span period. If B’s collateral is inventory — you can get a floating lien.

(B) Three Blocks of Floating Lien — (1) After acquired property — §9-204(a) — security interest in

present and after acquired inventory (“after” the act which authenticates the s/a). How does that work? (A) Example — assume ONB made the loan on 1/1 and got s/a on

1/1. And on 2/1 B gets new inventory. When does ONB get an attached security interest to the new inventory. On 1/1 who owns the inventory? The wholesaler, so security interest can’t attach on 1/1. See §9-203(b)(3) requirements for Art. 9 attachment: (a) Value — 1/1; (b) s/a — 1/1; (c) debtors rights in collateral in new inventory 2/1 (under 2-401 title passes when goods are delivered). So security interest does not attach until 2/1 and can’t perfect until 2/1. ONB

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ONBSong

Customers

Wholesalers of Inventory

does not have to create a new s/a. What ONB has to do @ instant B gets rights in the new inventory its s/a expands to treat collateral — ONB security interest attaches.

(2) Proceeds —§9-203(f), 9-102(a)(64), 9-315(a)(2) — (A) Example — Assume B sells new inventory and on 3/1 she gets a check from customer (its proceeds under §9-315(a)(2) it’s identifiable proceeds). Security interest doesn’t attach until 3/1. The benefit is that one s/a doesn’t need to be renegotiated at any time; she sells and gets proceeds. The security interest expands. So w/ one s/a you create a charge that floats on present and after acquired inventory and proceeds with one document.

(3) Future Advances — §9-204(c) — the effect — when does security interest attach?(A) Example — Assume on 4/1 ONB makes a future advance,

when does security interest attach. On 4/1 because under §9-203(b)91) you need value. The benefit is not renegotiating on 4/1.

(C) Business Reason for Monitoring: With a floating lien the debt collateral ratio fluctuates. So ONB will monitor the debtor. So because they have to monitor the ration, they can simultaneously monitor the name change. This event usually occurs with large loans. Don’t have post name problems when have post deals like this one.

(15) Problem 9 (handout #8) — This problem deal with land. The Easterbrooks

need help. They are farmers in MD who raise tobacco. 4 years ago (1997) they borrowed $200,000 from MNB, and granted a security interest in “crops growing on debtor’s farm in St. Mary’s County, and all farm equipment located on the farm.” For the purpose of this problem , you should assume that MNB took all necessary steps to perfect its security interest and that its consensual lien will be senior to the lien of subsequent Art. 9 secured creditors with non-purchase money security interests. The Easterbrooks have paid down the MNB loan to $25,000. The Es are short on funds this year, they’d don’t have enough money to bring in this year’s crop of tobacco, to make necessary repairs on their farm equipment, and to repair the roof on their farm house. They also need funds to prepare the fields for next year’s planting. They would like to borrow against their current, unharvested, year 2001 crop, but MNB has severely curtailed its lending to tobacco farmers. Given the increasingly burdensome taxation of tobacco products, MNB believes that tobacco farms can no longer operate profitably. MNB, accordingly, refuses to give Es any additional financing. The Es have approached a second lender, FF which continues to finance tobacco growers. But FF refuses to give the Es a loan b/c FF will not make a crop loan when its lawyers advise that FF would be junior to another creditor in the event of default. The Es explain that they always assumed that MNB security interest encumbered only the 1997 crop, that crop was harvested and sold years ago. (A) Analysis — Is MNB or FF right? What should Es do? —

FF won’t loan against 2001 crop because don’t want to be second creditor because under §9-322(a)(1) conflict Art. 9 security interest. FFC would be second in time if MNB s/a covers the 2001 crop. Assume E says the s/a was only for the 1997 crop. Could you put E on the stand to testify to that? No, it’s a parol evidence issue. You can only submit oral evidence if the K clause is ambiguous. MNB will argue “crops growing” is not ambiguous — thus parol evidence rule applies. If arguing

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for E, its ambiguous because of doctrine because you construe the document in four corners. Assume E can testify? What’s the problem? Who will MNB bring to the stand — the loan officer — he’ll rebut testimony — we never make loans with 5 payment reschedule with one year of crops. This a long shot — so how do we deal with construing language — “crops growing.” E could argue ambiguity is construed against the drafter. What about construing the K with custom (§1-205) — should have used the term “hereinafter.” None of these arguments are a slam dunk and unlikely will put E on the stand. This is a problem because E can’t get credit.

(1) Suggestions : Say you talk to creditors on behalf of E — who would you talk to first — FF or NMB? Need to look at the benefits and negatives:(A) NMB — if talk to NMB, what is the upside? What would you

get out of the talk? You’ll be asking them to redraft the s/a to re-describe the collateral — highly unlikely. What’s the downside? “insecurity clause (or acceleration clause — look at default clause on Handout #3) If creditor is unsecure of the good faith repayment of loan, they can recall the debt early. So instead of helping your client to get more financing, you get the creditor to call the loan.

(B) FFC — If talk to FF, lay out the argument above and throw a sweetner (we’ll pay a higher interest rate or higher condensed repayment period). Downside — they say No. But that doesn’t affect the current debt. Upshot— talk to FF first.

(2) Other advice : What else can E do to persuade a later creditor to loan them the money? They have to pay off the first loan. You might persuade FF to refinance the loan (only a $25K balance) or maybe can borrow against or put on credit card. Once pay debt, there’s no security interest under §1-201(37). They can then under §9-513 they can get a termination statement. Effect: If you create a s/a with a vague, overbroad collateral s/a — other creditors will construe it unfavorably to debtor.

(3) Prevention — How would you prevent this problem: Collateral covers only the year (e.g., 1997) of the crop. Be very careful how you describe the collateral.

(B) Problem 9B — The Es also raise llamas on their farm. They sell the wool as well as baby llamas. They would like you to give them a written opinion letter stating that neither the llamas nor their wool are covered by the MNB security interest. W/ the letter, perhaps FF will make a loan against the llamas. Should you provide the opinion?

(1) Analysis — Clearly the llamas and baby llamas are out of Art 9 because not a crop or equipment. But what about the wool? Is it a farm product under §9-102(a). Webster Dictionary includes wool in crops. But under UCC crops does not include wool.

(2) Prevention — Correct the s/a and state “1997 tobacco crop” and then no-one could argue wool was covered by original s/a.

(16) Problem 10 (handout #8) — Your client, National Cell (NC), which manufactures various components for cell phones, recently won a judgment (w/ your able assistance) for trademark infringement against NC, also a manufacturer of cell phone components. The judgment, after four years of litigation, is for $2 million dollars. Immediately after the judgment was rendered in your client’s favor, the lawyer for the D (NC) told you, in the hall outside the courtroom, “Your client might as well forget about collecting anything on the judgment, my client has no valuable encumbered assets.”

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During the post judgment discovery, you learn that the D, NC, owns no real estate; its manufacturing operations have been conducted in rented space. Plus, VA Bk, which provided financing for the D’s operating expenses, has an Art. 9 security interest against all the D’s present, and future inventory, fixtures and equipment and proceeds. You conduct an independent search of the UCC files and discover 3 f/s, each showing VA Bk as the secured party. Each of the F/s describe the collateral as “all past, present, and future inventory, equipment, fixtures, and proceeds thereof located at” and then gives one of three addresses where NC has been manufacturing office supplies. Further investigation reveals that NC also is manufacturing cell phone components at one additional rented site, namely at 100 N. King street, Ruckersville, VA. That address does not appear on any of the f/s and there are not other public records revealing any lien against the inventory, fixtures and equipment at N. King St. site. Later you speak w/ LL at N. King St.; she tells you NC installed only new fixtures and equipment at the N. King St. plant.

(A) In order for f/s to be effective, is it necessary for VA Bank f/s to show all addresses where debtor is conducting business? Must the f/s at least provide a mailing address for the debtor? [See §9-338, 9-502(a), 9-516, and 9-520] — First thing to do, is to hire an investigator to see what assets are available. Assume no insurance against trademark liability. No real estate owned (they rent). You check Art. 9 files — 3 f/s all filed by VA Bk — cover all past, present, and future… you discover its an order of levy jurisdiction (judicial lien arises when sheriff seizes property) You discover §9-317 governs battles between judicial lienors and Art. 9 secured creditors. What do you do? Is it necessary for VA Bk. To contain the addresses where debtor doing business? No, not necessary. See §9-502, 9-504, 9-516 nothing says to include where debtor does business.

Chart Describing 3 Types of F/S in Terms of Complying W/ Technical Requirements

Perfect F/SSatisfies all requirements in §9-502(A) and §9-516(B)

Slightly Defective F/SSatisfies all requirements in §9-502(A) but is defective

under §9-516(B)

Seriously Defective F/S

Does not satisfy requirements in §9-502(A)

Should filing officer reject the F/S

No, can infer from §9-528

Maybe No

If Filing Officer Accepts the F/S, is F/S effective

Yes, It works in any priority battle where it works

Sometimes No

Good F/S — Do everything right on §9-502, 9-516(b). You need to include mailing address of debtor, but not places of business.

Little Mistake — Do everything right under §9-502 , but make a mistake with §9-516(b) — the officer is suppose to reject so you can fix. (so you lose time and time is everything for priority battles). What if officer accepts, but fails to include mailing address — according to §9-

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520(C) — f/s its effective for most priority battles except where other creditor is hurt by defect.

Seriously Defective —Reject and Not effective

How do you use the information in F/S? Start with you as lawyer for NC – do you know if VA Bk made a loan to debtor — No; do you know if there’s an authenticated s/a — no. Why would there be a f/s if no s/a? You can under §9-502(d) make an early bird filing and never reach a deal. So all we know is that there are 3 papers in file; §9-513 NC should gotten a termination statement, but didn’t. We don’t know if there’s a loan outstanding (or the amount)?

What should NC do? What are the options? (1) Tell the sheriff to levy all property off debtor [if VA bk senior, they’ll

get it}(2) Get more information — who has the information — need to know if

loan, amount, collateral, etc…) Can ask the debtor or bank?(3) go ahead and levy at the one location, King St., which was not

described in F/S (this is the middle approach)

(B) Question : Should NC ask the sheriff to levy on the inventory of office supplies, fixtures, and equipment at the N. King St. plant? Is there any othe rinfo you should obtain before you advise your client to take this step? NC will be unhappy if it has to pay for more litigation before it recovers anything on the trademark judgment you have just won. For the purpose of answering this question, assume that these events take place in an “order of levy” jurisdiction. Further assume that if VA Bk holds a perfected article 9 security interest in the inventory, fixtures, and equipment at 100 N. King St., VA Bk has priority over your client NC. [See §9-108, 9-317(a)(2), 9-502, 9-504.

(1) Analysis —(A) Hypo : Assume worst case scenario to debtor — say

debtor owes more money than the collateral is worth and s/a is very broad (so that includes all collateral but no geographic description — under §9-108 don’t have to be adequate description). This is the converse of problem 7 — s/a is broader than f/s (in Problem 7 it’s the opposite where the f/s is broader than s/a). Assume 1/15 VA Bk loans money to NC and s/a authenticated but no geographic modifier, and 3 f/s filed. On 2/15 you tell sheriff to levy at King Street. Who wins priority and why? Need to look at status of both creditors?

(1) NC (creditor for $2 mil) when did it get its lien (order of levy jurisdiction) — 2/15 when sheriff grabs property that’s when judicial lien arises.

(2) VA Bank — when does it have an attached security interest — 1/15. Perfected when? Not on the property dispute because it doesn’t describe King location because of geographic modifiers. When VA bank filed the description of collateral which was comprehensible was limited by inclusion of words “located at.” So the 3 f/s don’t cover this case. So VA bank has an unperfected security interest. This f/s is under inclusive and creates a secrecy problem. VA bank will argue

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that’s not what we intend the words to mean — its helpful information but not required. If I were judge, you should rule for NC because words matter.

(3) Outcome : If NC is correct, who should win the priority battle? Under §9-317(a)(2) a security interest (held by VA Bank) is subordinate (loses) to rights of a person who becomes a lien creditor (NC) before earlier time. Security interest is perfected or one of conditions of §9-203(b) was satisfied and f/s covering the collateral in dispute — that’s NC’s argument ) — so send sheriff.

(B) Hypo Option #2 : Say instead of sending sheriff yet, you get more information. You call VA bank and ask them to send you a copy of the s/a for NC. What will VA bank do? Check the file and find a broad s/a (that looks good, and copies of F/s and find a mistake — 4th location not covered). So VA will attempt to amend the f/s — do you need debtor to sign to amend? No, §9-509(b)(1) —ipso facto authorization. So, don’t do that because you are not a lienor yet. Don’t tip off your adversary.

(C) Hypo Option #3 : Assume the s/a had geographic modifiers _ this time description of collateral in s/a matches w/ f/s. Should you send sheriff to King St.? Bigger mistake this time. Now VA bank doesn’t even have an attached security interest to King St. — they’re a general creditor. This isn’t even in Art. 9 — its general creditor v. judicial lienor. So send the sheriff. If we tipped off the VA bank the time they need debtor to amend because can’t amend s/a to include more property without debtor. Why would debtor encumber additional collateral? There’s 2 creditors who want the property. Debtor would most prefer to keep property free and clear. But that won’t happen. So, if you know the 2 creditors after it, VA Bank is your buddy it provides financing whereas NC won a $2 mil judgment against debtor. So debtor more likely to help VA Bank.

(D) How can VA bank get an attached security interest if Value has been given already in 1/15. Could the earlier debt serve as value for expanded s/a? YES, § 1-201(44) value — a person (VA Bank) gives value for new — if Va Bank acquires security interest as security for a pre-existing claim; so, VA bank doesn’t have to give more value. But you should give more value because there is a statute under uniform Fraudulent Act — be careful it doesn’t look like fraud, but under Art. 9 no problem with value.

(C) Recommendations :(1) Don’t include superfluous language in s/a(2) Don’t believe adversary if debtor says all property encumbered(3) If judicial lienor, use Art. 9 files and priority rules to shake

collection efforts(4) When doing pre-trial discovery think about collection and copies

of s/a early. But problem with tip off — after judgment given — then looked for s/a — May get in discovery without tipping off.

(17) Problem 11 (handout #8)

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C. Attachment of the Security Interest

(1) Read text pgs. 66-75(2) Problem 2 —consider when the bank’s security interest will attach to

Gabriel’s accounts receivables in the following cases:(A) 2A — 1/10, FVB agrees to loan G $500,000 and the money is deposited

the same day in his business account at FVB. G signs a loan agreement and a security agreement on 1/10; the collateral is G’s “present accounts receivables.” The G-FVB s/a includes the following language:

in the event G shall be in default in payment of principal or interest under the loan agreement and s/a…and if said default shall not be cured w/in 5 days after receipt by G of notice thereof from FVB, then at the end of the five day period, FVB’s rights and obligations with respect to the collateral shall be those of a secured party holding collateral under the provisions of Art. 9 of the UCC as in effect in VA.

On 1/11, FVB files a properly completed f/s. On 9/1 G, whose business has expanded too rapidly, defaults on the FVB loan. On 9/2, FVB sends G a notice of default which he receives on the same day. G does not make any further payments to FVB. When does FVB first obtain a perfected security interest in G’s accounts receivable? [§9-203, 9-308(a), 9-310(a)]

(1) Analysis — Does VA bank get a perfected article 9 security interest? Remember secured creditors want to perfect as soon as possible to win priority battles. When is there attachment? (a) Value — 1/10; (b) debtor’s rights in collateral — 1/10 (says present accounts —what he has now); (c) s/a w/ adequate description 1/10. When is there perfection? §9-310(a), 9-312 financing statement. §9-308 need attachment and perfection to have perfected security interest. (A) Words Matter — Look at indent quotation — what does it

mean? Sounds like parties postponed attachment of security interest. §9-203(a) — enforceable and §9-203(b) unless agreement expressly postpones time of attachment. It postpones attachment (don’t do this because it will make your client — VA bank — a general creditor. It puts FVB in position of judicial lienor. The clause tried to remind debtor that if defaulted they had Art. 9 remedies. So perfection is on 9/7 not 4/11.

(B) 2B — On 1/10, FVB agrees to loan G $500,000 so that he can buy the inventory of PMS. The FVB —G loan agreement provides, in pertinent part:

FVB is under no obligation to loan the $500,000 to G unless he first submits to FVB a binding, written sales agreement executed by PMS. If such an agreement is submitted, G has the option of receiving the loan proceeds but is not committed to take the $500,000.

A valid s/a is signed on 1/10, providing that the FVB loan will be secured by G’s “present accounts receivables.” On 2/1, G and P execute an agreement of sale which is submitted to FVB by Go on the same day. On 3/1, FVB credits G’s business account at FVB w/ $200,000, the amount requested by G. When does FVB’s security interest attach to G’s

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accounts receivable? [See §9-203, 1-201(44); see generally 9-102(a)(68).(1) Analysis —Attachment: there is no question §9-203(b)(3) s/a satisfied

on 1/10. Debt collateral on 1/10. The issue is whether value was given — when did Va Bank give value — it would say 3/1. But VA bank wants it earlier. Can you argue VA Bank gave value earlier? Is 2/1 agreement a condition precedent? Well there’s 2 condition precedents for bank giving value (1) he has to ask for it; and (2) has to perform. Teacher says value is given on 1/10? Why? Remember illusory promises (1-201(44)(d) — value — bank gives value if it gives any consideration to support a K.(A) Hypo #1 — I promise to pay you $100K if moa my lawn. Is this

consideration? Yes because the person that controls the condition is the promisee.

(B) Hypo #2 — I promise to pay $100K if I feel like it; that is an illusory promise not consideration. Who controls this condition, the promisor.

Outcome — Here, both conditions on bank to pay are in control of G. Because of that fact, there’s consideration to support a K and that’s when security attaches (1/10). Why didn’t we use §1-201(44)(1)? Not used because we have to figure out if binding (who controls condition precedent — §1-201(a)(44)(d).

(C) 2C — 1/10 FVB explains to G that it is willing to loan him up to $500,000 on the terms set forth in problem 2b. But the FVB officer suggest that neither the loan agreement nor the security agreement be signed until a later closing date (after G submits the executed sales agreement.) On 2/1, G and P execute an agreement of sale which is submitted to FVB by G on the same day. On 2/2, G and FVB execute the loan agreement and the security agreement. On 3/1, FVB credits G’s business account at FVB w/ $500,000, the amount requested by G. When does FVB’s security interest attach to G’s account receivable?(1) Analysis — The bank’s security interest attaches on 2/2.

(D) 2D — When does FVB give value if it gives G an unauthenticated record which states in pertinent part:

FVB will give you $100K by 1/30, if our loan committee concludes that you satisfy our standards for credit worthiness.

If the bank’s standards are “sufficiently objective,” at the time G receives the letter; otherwise, on 1/30.

(E) 2E — Does FVB give value if it sends G a letter (whichhe receives) stating in pertinent part: You owe FVB $100K on a signature loan we extended to you last year and which was due yesterday. FVB will refrain from calling that loan and exercising its rights as a general creditor if, and only if, you execute a security agreement by 2/12 granting FVB a security interest in your present accounts receivable to secure repayment of the balance owed on last year’s loan?

Yes. See UCC §1-201(44).

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(F) 2F — Does FVB give value if it sends G a letter which states in pertinent part: You have informed FVFB that you have an overdue loan with state Bank and you have asked for FVB’s help. FVB cannot make you a loan but FVB will serve as a third party guarantor of your obligation to pay state bank. In exchange, you must pay FVB $ as a fee and must sign the attached s/a giving FVB a consensual lien on your sail boat and automobile to secure your obligation to repay FVB should FVB need to pay State Bank on the FVB guaranty.

Yes, aguarantee is consideration sufficient to support a simple K. See UCC §1-201(44).

(3) Problem3 — Boeing leases a jet to GA. The lease is a true lease; at the end of the 5 year lease term, the parties intend that the jet will be returned to the lessor, Boeing. Texaco, your client, is the principal supplier of fuel to GA. Texaco does not want to make future deliveries of fuel to GA on credit unless GA grants a security interest in personal property of value (Texaco is concerned about the long term financial viability of GA).

Jet p to p rent

oilp to p; s/a

(A) 3A Question — If GA agrees to sign a s/a for Texaco that describes the collateral as Boeing jet, leased by GA from Boeing on 9/1/2000, will Texaco have an enforceable lien against the jet to secure GA’s obligation to pay for the Texaco fuel. Will §9-203 be satisfied?(1) Analysis —There is a true lease which means Boeing has a stake in

the jet because it’ll get it back at end of lease. Texaco does NOT have an Art. 9 security interest on the jet because GA doesn’t have rights in the jet (GA has no ownership interest). Look at definition to see what rights GA has under a lease. §2A-103(J) the right to use the jet — no property interest. So what happens it Texaco assumes it has a security interest in the jet. Say GA defaults and Texaco grabs the jet and Boeing sues Texaco for conversion. Who wins? Boeing. Look at §2A-301, 2A-307(1) — clearly Boeing wins.

(B) 3B Question — If Texaco s/a prepared for GA’s signature describes the collateral as “G’s interest under the B-G lease agreement of 9/1/2000 — for 5 year lease of Boeing jet, will Texaco have an enforceable lien? If so, against what collateral? How ould the collateral be classified under Art. 9? IF GA defaults on its fuel bill can Texaco seize and sell the jet? §9-609, 9-610. If GA defaults on its fuel bill, can Texaco use the jet for the remainder ot the term of the lease? Would it make a difference if the lease agreement b/w G and B requires G to take out insurance for the jet and to certify that any pilot flying the jet has a minimum of 500 hours flying time on a jet during the last year? Is the analysis different if B-G

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Boeing

GATexaco

lease agreement prohibits G from assigning its interest under the lease? If the lease agreement makes such an assignment an event of default? Does it make a difference if GA defaults on the Texaco obligation? See UCC §2A-303, 9-407.(1) Analysis — How do we classify the collateral? It isn’t chattel paper?

§9-102(a)(11) — there’s no monetary obligation — GA is not the lessor (remember: that DA was lessor and owed the right to payment) Here, the debtor is the lessee and doesn’t have a right to payment. The collateral here is a general intangible. Does Texaco have an Art. 9 security interest? (A) Assume I : the lease is silent on question whether GA can grant

an Art. 9 security interest?(1) Under this scenario, GA can create an Art. 9 security interest

because there is nothing in Art. 9 or 2A from prohibiting this. But Texaco can seize the jet but not sell it. It can foreclose on collateral, but the collateral is not the jet, the collateral is the use of the jet — the rights of the lessee. Assume Texaco seizes, does Texaco have to pay rent to Boeing? Yes. Texaco will have to also follow all conditions of the lease. Its as if Texaco stepped in GA’s shoes as lessee. Assume at time GA defaults they owe $200K to Texaco. Why would Texaco want the collateral? How would it help Texaco by using the jet? Will rights under the lease pay off the debt of GA? Need to know what the FMV rent of jet is versus the rent paid for jet. Assume debt equals $200K, and FM rent (the cost it would to rent another jet or sublease is $75,000/year) Rent of lease $50K/year. So at end of lease, Texaco would take the $25K and deduct it from debt. Sometimes, the rights of a lease will help offset debt but not always depends on FM rent. Boeing not happy about this arrangement because GA made Texaco a successor lessee — in effect GA chose the lessee not Boeing. Boeing would much rather the excess benefit of $25K by kicking out GA and re-leasing capturing the difference.

FMV Rent > Rent of Lease = when the rights help offset debt

Don’t feel sorry for B on these facts because they should have included a clause in lease saying you can’t assign the lease.

(B) Assume II : leases says its an event of default if GA tries to grant a security interest;(1) Analysis — B anticipates the problem above an puts in lease

saying a security assignment of rights is an event of default. Assume GA breaches Lease K by signing a S/A with Texaco, but GA continues paying Texaco. GA hasn’t defaulted on Texaco. B says GA defaulted and can kick lessee out. What’s the consequence of this language — what’s the consequence of signig the s/a? you would think if GA breached the lease, B could grab the plane under §2A-525, but that’s not the case. See §9-407(a). Why are we in §9-407 — restrictions in creating a s/a. A term in lease agreement is ineffective if creating security interest

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clauses default _ thus this case makes no difference as long as GA is paying — the words mean nothing — B can’t grab the plane. But §9-407(b) says if GA does not pay Texaco and then texaco repossesses the jet (uses the jet and captures the difference b/w FMV rent and rent of lease) the language of default is EFFECTIVE — this is bad for Texaco. See § 2A-303 what’s the consequence of this language being effective — this § has been amended. See page 1272 subsection (2) — a provision is lease agreement makes default effective — taking you to (4) — takes you to remedies §2A-501(2) and 2A-525 and 523.

Except as provided in subsection (3) and §9-407, a provision in a lease agreement which (i) prohibits the voluntary or involuntary transfer, including a transfer by sale, sublease, creation or enforcement of a security interest, or attachment, levy, or other judicial process, of an interest of a party under the lease K or of the lessor’s residual interest in the goods, or (ii) makes such a transfer an event of default, gives rise to the rights and remedies provided in (4), but a transfer that is prohibited or is an event of default under the lease agreement is otherwise effective. §2A-303(2)

§2A-303(4) — Subject to subsection (3) and §9-407:(a) if a transfer is made which is made an event of default under a lease agreement, the party to the lease K not making the transfer, unless that party waives the default or otherwise agrees, has the rights and remedies described in §2A-501(2).

(b) if para. (a) is not applicable and if a transfer is made that (i) is prohibited under a lease agreement or (ii) materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract, unless the party not making the transfer agrees at any time to the transfer in the lease K or otherwise, then , except as limited by K, (i) the transferor is liable to the party not making the transfer for damages caused by the transfer to the extent that the dmages could not reasonably be prevented by the party not making the transfer and (ii) a court having jurisdiction may grant other appropriate relief, including cancellation of the lease K or an injunction against the transfer.

What’s consequence of the language in §2A-303(2)? Boeing can cancel the lease and repossess, but “transfer is otherwise effective.”

Policy: Why is the default language effective? The idea is there is no real harm to Boeing just because GA signed a s/a. Boeing would argue otherwise — sure I am hurt _ I amore uncertain about my future rights — countervailing policy

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argument is free alienability of rights — and the real danger won’t occur until real transfer.

Assumption: this is the Hard case — Texaco lawyer says its an event of a default if GA signs s/a and there is a huge difference between FM rent and lease rent and Boeing fussy about who it leases its jets too. We know that if GA defaults and Texaco seizes, B will cancel lease. Is there any benefit to Texaco taking this collateral? Difference between ex ante and post ante benefits discussing priority rule _ so who ends up with the jet? From GA’s eyes, it doesn’t care who wins it cares about keeping the jet and when GA gives s/a to Texaco can inflict immediate harm on GA if it defaults. So Texaco has pre-default leverage. If you were Texaco and you had a choice between collateral — Texaco may never want to foreclose and may never view this pre-default leverage as useful; but it doesn’t. § 2A-303 the last sentence makes it clear that Boeing has to act immediately if not then s/a is effective.

(C) Assume III : GA prohibited from giving an Art. 9 security interest. (1) Analysis — Start with §9-407 are we in (a)(1) or (a)(2) [Case II

was in (a)(2)). Here we are in (a)(1). §9-407(b) cross references only to (a)(2) that tells us that we are in (a)(1) — the language is ineffective and its thus the lease was silent and Texaco can repossess without worrying about Boeing will cancel lease.

(D) Advice: (1) If lessor’s lawyer: (a) have to determine whether you want

lessee to assign rights; (b) to prevent security interest — have to say its an event of default.

(3) If Texaco’s lawyer, (a) read lease; (b) think about whether its worth to take collateral — that’s the determination between FM rent and Rent of lease.

(4) Problem 4A — G, the sole proprietor of G’s music store, needs money to finance the addition of a wine bar to his shop. G asks FVB for a $300,000 loan. The loan officer wants an attached security interest on a variety of personal property owned by G, including G’s collection of antique mandolins, worth $150K. What steps must FVB take to obtain an Art.9 consensual lien covering this valuable collection of musical instruments? What are the options? Is a security agreement necessary if G enters into a pledge transaction w/ FVB, delivering the collection of antique mandolins to the bank officer. See §9-203.(A) Analysis — Its goods — what type? Not sure? Does the bank have an

attached security interest? Bank can either use an authenticated s/a or take a possessory security interest. See §9-203(b)(3)

(5) Problem 4B — G, the sole proprietor of G’s music store, needs money to finance the addition of a wine bar to his business. G asks FVB for a $300,000 loan. The loan officer wants to obtain an attached security interest on a variety of collateral, including G’s business checking account at FVB (with a current balance of $100K) and his business savings account at Musician’s

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Credit Union (MCU) (with a current balance of $200,000). What steps should FVB take to obtain art. 9 security interest in each of these two accounts? See §9-102, 9-203.(A) Analysis — the collateral is both deposit accounts. Is a credit union a

bank? Generally no, but art. 9 uses the definition of bank to include credit union. See §9-109(d)(13) not a consumer transaction; §9-203(b)(1) value given; debtor has rights; what’s the bank’s options of setting — (1) to use §9-203(b)(3)(A) — authenticated s/a describing the collateral; and (2) better choice is under §9-203(b)(3)(d) — how does a secured party get control of a deposit account. §9-104 gives 3 ways to get control:(1) FVB has to do nothing —§9-104(a)- because deposit account

maintained there. Does that mean every time GA gets a loan from FVB he’ll create an security interest Art. 9 automatically in his deposit account w/ bank that maintains account? §9-203(b)(3)(d) — “pursuant to debtor s/a — don’t need to be in writing or signed but G must manifest consent.”

(2) Credit Union — control of deposit account: §9-104(a)(1) doesn’t work because account not maintained there. §9-104(a)(2) —who’s

instructions? FVB — what does that mean? S/a b/w FVB, G, and CU — depository bank will comply. See Handout 11 (pg. 1) control agreement for deposit account. Para. 1 agreement for control. Assuming tripart s/a signed — FVB can call CU and tell them to wire funds to FVB? Control means a lot of power. Does FVB have a legal right to demand CU transfer money to its deposit account? If G hasn’t defaulted. No legal right to empty account unless debtor defaults but they have power to dispose debtor’s property serving as collateral (emptying the account). §9-104(a)93) — new agreement — saying FVB is the customer. In all three cases — think about the power of the secured party — FVB has the power to dispose account without consent of debtor. However, control does not = possession.

(B) Notice: The code specified way to dispose intangible property — its similar to possessory security interest. Core idea — control is surrendered over the asset.

(6) Problem 4C — For this subpart, assume that G wants the $300,000 FVB loan to pay for college expenses for his son (who is a junior in college) and his twin daughters (both of whom are freshmen). FVB wants an Art. 9 security interest on G’s personal checking account at Crestar Bank. What steps must FVB take to obtain an Art. 9 security interest on this personal account? §9-102, 9-109, 9-203.(A) Analysis — Can’t do it under Art. 9 — it’s a consumer transaction; see

§9-102(a)(26) and 9-109(d)(13).

(7) Problem 5 — This problem concerns the attachment of security interests to stocks and bonds.(A) Refer to the following §§:

(1) §8-102(a)(2)(2) §8-102(a)(4)(3) §8-102(a)(7)(4) §8-102(a)(9)(5) §8-102(a)(14)(6) §8-102(a)(15)(7) §8-102(a)(17)

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(8) §8-102(a)(18)(9) §8-301(10) §8-501(a)(11) §9-102(a)(49)(12) §9-102(b)(13) §9-203

(B) Problem 5a — 1/10, FVB agrees to loan G $500,000 to purchase new inventory for his business; the loan proceeds are deposited the same day in his business account at FVB. G signs a loan agreement and a security agreement, also on 1/10; the collateral is described, in pertinent part, as G’s 100 shares of Ceridian stock. “ The stock is represented by stock certificates. The stock certificates indicate on their face that they are owned by G as sole proprietor of the music store. The certificates are kept in G’s business safe. How is this collateral classified under Arts. 8 and 9? When does FVB first obtain an attached security interest in this collateral? What other options are available to FVB if it wants an attached security interest in this collateral?(1) Analysis —The collateral is registered certificated securities (registered

because G’s name is on it rather than saying “bearer”). What are the options for satisfying §9-203(b)— (1) sign a s/a under §9-109 so you know how to describe collateral; (2) §9-203(b)(3)(c) — see §8-301 — purchase broad enough to include secured creditor under §1-201; (3) §9-203(b)(3)(d) — collateral —investment property and secured party has control — what’s control —§9-106 — takes us to §8-106 (pg. 1280) because stock had G’s name whereas §8-106(b) deals with registered form. What is required in addition to delivery has to be endorsed. (A) Notice — difference is that certificates have to be

endorsed in §9-203(b)(3)(d) and delivered under §9-203(b)(3)(c).

But have to comply with §8-106. This difference will make a big difference for priority battles.

(2) Class Notes — we classified the stock as registered certificate securities. You can have a signed s/a; the secured party can

take possession under §9-203(b)(3)(c) (does not require endorsement of stock under §8-106); or the secured party could get control of stock by getting possession or delivery (8-301; 8-106) plus endorsement. Which of the three options is the best for debtor — signing a s/a because you want to keep and control your collateral. Why don’t you want to surrender control (the most extreme option) — the secured party has the power to dispose of stock. Why not trust the secured creditor? We are not always talking about a bank (creditor could be a friend, or family member). Also there can be disputes about whether default has occurred (so the secured party can be disposed based on his view of default). Thos of the concerns of the debtor. What is the best option for the secured party — you want control. Why? Exactly the same right power dichotomy. If the debtor is left with the stock (the classic non-possessory security interest), the debtor does not have the legal right to sell the stock without secured party’s consent; but debtor can (because he has possession).

(C) Problem 5b — 1/10, FBV agrees to loan G $500,000 to purchase new inventory for his business; the loan proceeds are deposited the same

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day in G’s business account at FVB. G signs a loan agreement a security agreement, also on 1/10; the collateral is described, in pertinent part, as G’s 100 shares of Intel stock in First Union Securities. G’s investment account at First Union Securities is a business account. How is this collateral classified under Art. 8 and 9? When does FVB first obtain an attached security interest in this collateral? What other options are available to FVB if it wants an attached security interest in this collateral?(1) How do you classify collateral? It’s a securities entitlement

(subcategory of what Art. 9 calls investment property — stock held in the indirect holding system — diagram pg. 8) The creditor will get an attached security interest on 1/10. The only issue as to adequacy is the description of the collateral in the s/a — check under [9-108(d)]. What are the debtors other alternatives for attachment — the only possible alternative is 9-203(b)(3)(d) – collateral is investment property and secured party has control. How does secured party get control of a security entitlement (start with Art. 9-106(a) — tells us that a person has control of a security entitlement as provided in §8-106 (need to look at revised §8-106 on page. 1280] —what has to be done to get control of a security entitlement — [put aside subsection (3)]:

§8-106(d)(1) [because we are talking about security entitlement] if purchaser [ the bank] becomes the entitlement holder. [purchaser defined in Art. 1 — how would the purchaser become the entitlement holder — the core idea of security entitlement is its just an electronic credit in G’s account — so what they’ll do is that they will have an investment account also at that bank and the debit G’s account and credit the bank’s account OR the bank may have an account at another brokerage house and just conduct an electronic credit and debit.

The second alternative is §8-106(d)(2) — securities intermediaries (first union) has agreed to comply … originated by purchaser (the bank) without further consent of entitlement holder. [same with respect to deposit account]. Get a tripartite agreement. [Look at last page of Handout 11] Also make sure you read §8-106(f) [like 9-104(b)] allows the debtor to have some access to the collateral

§8-106(f) a purchaser satisfying (d) has control even if the entitlement holder retains the right to make substitutions for uncertificated securities or entitlements or …otherwise to deal with the security entitlement [“deal” includes voting the stock]. [example in handout 11 showing an agreement between debtor and creditor where debtor gets some access to the collateral]. It all depends on the bargaining power.

(D) Problem 5c — 1/10, FVB agrees to loan G $500,000 to purchase new inventory for his business; the loan proceeds are deposited the same day in his business account at FVB. G signs a loan agreement and a security agreement, also on 1/10; the collateral is described, in pertinent

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part, as G’s First Union Securities investment account #3333. The investment account at First Union Securities is a business account. How is this collateral classified under Articles 8 and 9? When does FVB first obtain an attached security itnerst in this collateral? What other options are available to FVB if it wants an attached security interest in this collateral?(1) Analysis: How do we classify the collateral? Its Not an uncertificated

security (however there may be uncertificated security in the account — this type of collateral means a direct holding system — if uncertificated, there is no paper but its all in the direct holding system]. What is being offered is the entire account that G has First Union. Again under Art. 9 its an investment property and then under §8-106 it’s a securities account. [8-501(a) defines what a security account is] FVB will have an attached security interest assumed there is an adequate description in s/a [9-108]. What are the other options? 9-203(b)(3)(b), (c), doesn’t apply; but, 9-203(b)(3)(d) does apply – you can get control of a securities account. How do you get control? [(b)(3)(b) doesn’t apply because it is hard to get possession or delivery of a securities account] —

Look at §9-106(c) — a secured party having control of all …has control over the security account sending us back to §8-106(d) — so everything in security account has to be transferred to an account owned by First union or a tripart agreement.

(E) Problem 5d — Everything is the same as in 5(c) except FVB describes the collateral, in pertinent part, as all securities accounts. How is this collateral classified under Arts. 8 and 9? When does FVB first obtain an attached security interest in the stocks and bonds in G’s sole business investment account which is maintained at First Union Securities?

(1) Analysis —What is an adequate description of collateral to satisfy §9-203(b)(3)(a) — is it good enough? See §9-108 — if have a consumer transaction where the description is inadequate, you need specificity. General classification used in this example is OK in a business context.

(F) Problem 5e — Everything is the same as in 5(d) except G, a young “dot.com” millionaire, borrows the money from FVB to build and furnish a new beach house in the Hamptons. The security agreement describes the collateral, in pertinent part, as all personal securities accounts. G’s investment account at First Union Securities is a personal account. Does FVB hold an attached security interest in the stocks and bonds in G’s investment account at First Union Securities?(1) Analysis — language not good enough because it’s a consumer

transaction and needs to be more specific.

(8) Review on Formal Requirements for Getting an Attached Security Interest:(A) §9-203(b)(3) provides the evidentiary tests to see whether debtor

actually consents to the lien: We have studied the following modes for attachment:(1) Authenticated security agreement §9-203(b)(3)(a)(2) Delivery / possession of collateral to secured party §9-203(b)(3)(b), (c)

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[where the evidentiary act is simply the delivery of possession of collateral to secured party]

(3) Debtor surrenders control §9-203(b)(3)(d) [secured party put in a position where it can dispose collateral w/out getting further consent from debtor.]

(B) NOTICE : §9-203(b)(3)(b), (c), and (d) — also work for perfection purposes. So even if you get a security agreement you may need to satisfy (b), (c) or (d) to get a perfected security interest. See §9-313 (which deals with possession) and §9-314 (which deals with control).

IV. Perfection of the Security Interest

A. Perfection by Possession(1) Read text pg. 78-80(2) Class Notes

A. Modes of Perfection:

1. File f/s §9-310, 312(a) — how does it given notice

2. Possession of collateral 9-313(a), 9-312 – tells us when that will work (when it’s a permissible mode) How does it give notice: subsequent searcher does a visual inspection of collateral — where is it?

3. Secured party can take control — §9-314, 9-104-107 (which spell out what you do for control under art. 9) — How does this mode give notice? W/ control the secured party in position to sell the asset without debtor giving prior consent. How does it help subsequent searcher [control will only work for deposit account and investment property]. How do you give notice: if you know control works for collateral need to ask more questions — assume collateral is a deposit account in a bank — who do you ask if control — the depository bank — check to see who’s name is in the deposit account; is there a tripartite agreement.

4. Automatic perfection §9-309, 9-312 (e)(f)(g)(h) — how does it give notice? It

doesn’t (there is always a countervailing policy argument raised.)

5. Notation of the lien on the certificate of title (for cars) §9-311; how does it

give notice — you ask the debtor to show the certificate of title and check.

B. Notice: with respect to deposit account you can only perfect with control (see §9-312(b)). But with all other types of collateral can be perfected with one or more modes. It depends on factors of the case because some modes win priority battles. Trust is also a factor.

Perfection by possession (problem 32 and problem 1, 2) — §9-313(a) [in hard cases the secured party does not have physical possession, an agent of secured party does] All three problems deal with the issue — whether a person other than the secured party can satisfy the requirement of possession in order for the secured party to get attachment (and perfection).

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(3) Problem 32 (text pg. 78)—A museum (not secured creditor) has possession of

collateral (diamond). MB promises to pay G the balance of purchase price and signs a s/a covering the diamond. Assume there is an adequate description of collateral, and MB wants the diamond for investment purposes. Also assume under s/a its an event of default if MB were to sell the diamond and parties agree MB gets title before possession (parties can bargain for title to pass after identification of diamond but before delivery §2-401). Can G perfect a security interest in diamond but simply calling the museum tell them to hold the diamond for his benefit until MB pays in full; thus creating an escrow arrangement.

Before we can answer this question we must look at the easier cases:

A. Case 1 — 11 A.M. MB-G sign sales and s/a and makes down payment. At12 P.M. G calls museum and tells them he is going to pick up diamond at 1:00 P.M. G arrives and gets the diamond. When does G have a perfected security interest? When he is actually handed the diamond — look at 9-313(a) — classify the diamond as equipment and goods — a secured party may perfect security interest in goods if gets possession. If G has got it in his hands, that’s possession.

B. Case 2 — G has a personal secretary, James. 11 A.M. closing on the sale and at noon G phones the museum and tells them his secretary James going to pick up diamond at 1:00. Say James gets diamond and doesn’t get back till 3:00 P.M. When does G have a perfected security interest? Under §9-313(a) if James is an “actual agent” of G, then perfection is when James received the diamond. [an agent is someone that has the power to bind their principal by their acts in deed]. Clearly, here James is an agent. The comments of new Art. 9 suggest that possession by an agent is the same as possession of secured party.

C. Case 3 — No museum, instead diamond imported by a jewelry shop. G bought diamond and paid cash and got title. But he didn’t take the diamond. Now MB comes along and wants to buy G’s diamond that is still in the store. At 11 AM, closing of sale. At 11 AM, does G have a perfected security interest in diamond that never left the store. Is the jewelry store’s continued possession of diamond enough so that we can say G, the original owner (and also the credit seller) has a perfected security interest in the diamond that is still in the store? We are not in §9-313(a). G is not in actual possession of diamond nor is the store an agent. The store is a non-agent bailee, someone to whom the bailor delivers the property for a very specific limited purposes. So the store is not G’s agent, but it is a bailee. SO the question is what has to be done to perfect an Art. 9 security interest when diamond in hands of a bailee? Look at §9-313(c) (this is the clear case of subsection (c)) secured party (G) takes possession of diamond when diamond in possession of a person (the store) other than the debtor (MB) other than the secured party (G) when subsection (1) the person (store) in possession authenticates a record acknowledging it holds collateral of secured party. So G can do this but needs to take an additional step by getting an authenticated record by jeweler saying he is holding the diamond on behalf of G.

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D. Compare Case 2 and Case 3 — Why does agent have possession, but the

bailee does not under §9-313(a). What is the policy reason? Here, the store could have the diamond for one reason only — to fix it for G. There is no necessary explanation of the store’s possession as a collateral agent as someone who is holding it on behalf of G for purpose of giving notice and maintaining perfection. Idea is we don’t want litigation why the store is holding the diamond. This why we require a signed record to prevent litigation — the signed record is also likely to give notice to others.

E. Museum Case (Problem 32) — Is this case more like Case 2 or Case 3. Its

closer to Case 3 (the jewelry store case). What a museum might be willing to do, its unlikely they are willingly to become an agent — much more likely to become a bailee. If they are a bailee (and documents are consistent) then again under §9-313(C) its not enough for G to call, you need an authenticated record showing museum is holding the diamond on behalf of G.

F. What is an escrow agent: its an agent who owes a fiduciary obligation to 2

principals. Here, its G and MB. Again the agent can bind both its principals by its acts and words within its scope of its authority. Assuming Museum is an escrow agent, does G need an authenticated record that says the museum is holding the diamond on G’s behalf. In an escrow arrangement, you are still in §9-313(a) — don’t need an authenticated record acknowledging the possession (but you will always have a writing — saying the escrow agent holds the collateral). Since we don’t know how these provisions will be applied. A good idea is to get this kind of writing whether you are talking about museum, store, or James if inexpensive. Also a way out, G could just file a f/s for perfection.

G. Recap of §9-313 — possession by agent works for purposes of §9-313(a); but if have a non-agent bailee you go to §9-313(c) and need an authenticated record. See Handout 9A which provides samples of clauses you would put in this record by the bailee.

(4) Problem 1 (handout #10)— When you work problem 32 (p. 78) make the following assumptions: [this is a typical escrow arrangement involving stock]

1(a)(i) the G-B sale and security agreement contains an adequatedescription of collateral;

1(a)(ii) B does not intend to wear the diamond but wants to keep it in her safe

for investment purposes, hoping to later sell it at an appreciated price;

1(a)(iii) the default clause in the G-B sale and security agreement states that

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it is an event of a default if the debtor sells or otherwise disposes of the collateral during the credit repayment period w/out G’s prior consent; and

1(a)(iv) the G-B sale and security agreement states that B receives title to the

diamond (subject to G’s security interest) at time that she makes the down payment on the price. (To understand the importance of this assumption review §2-401 and 9-203(b)(2)).

Problem 1(b)(i) — Assume for this problem that your Client Archibald G wants to sell 100 shares of C stock, in the form of stock certificates, to MB (who does not invest in or like diamonds). The sale is on credit. G is worried that may default. To persuade G to sell the stock on credit, B agrees to grant G a purchase money security interest (in the stock) and to set up an escrow arrangement. AA, a local lawyer in town who has not done work for either G or B, is to serve as the escrow agent. In preparation for the sale, G exchanges his C sock (showing G’s name as owner) for new certificates (issued by C) indicating that MB is the owner of the 100 shares. On 2/1/01 G and B signa a sales ands/a that grants to AC a si in 100 shares of C stock to ensure payment of the full purchase price for said stock. Under this agreement, B also promises to pay for the stock in full and to make the 1st pmt. Of 25% of the purchase price at the time of the execution of the sales agreement. When G receives 25% down pmt. On 2/1 he delivers stock certificates to B. Later the same day, pursuant to the sales and s/a, B indorses the stock in blank and delivers the the stock certificates to escrow agent. The escrow agent is instructed to return stock if B pays in full and on time and if B fails to pay, the “bearer” stock is to be delivered to AG. By 7/30/01 B is in default on her pmts to G and other creditors. She files for bankruptcy on 7/31/01. The escrow agent is still in possession of the stock certificates. In a battle b/w the trustee in bankruptcy (asserting strong arm under §544(a)(1)) and G who wins? Why?

(1) Analysis Here G wants to sell stock in the form of stock certificates. This stock is a certificated security and at the outset what G does is G gets the corp. issuer to issue the stock in the buyer’s name (MB) so we would say its registered certificated securities (because it has MB’s name not “bearer”). G gets MB to sign a s/a, but that is not enough. SO he sets up an escrow agent ( a lawyer not on retainer to either party). So on Feb. 1, G and MB sign a sales agreement; MB signs s/a; MB makes a down payment; and then all three sign the escrow agreement which is always in writing. G is suppose to indorse the stock and give to the escrow agent. Escrow is to hold the stock during the loan repayment period — if pays full give to MB; if default give to G.

Assume Feb. 2, G files a f/s; July 30 MB defaults and July 31 MB files for bankruptcy. The question is who wins? — (we could have thrown the trustee of bankruptcy into problem 32).

What is the status of the trustee in bankruptcy? At time MB files bankruptcy, he has a judicial lien (§541(a)(1) — this the strong arm power).

What is the status of G? Does he have an attached security and if so when? Under §9-203(b) Yes, on Feb. 1.; What about perfection? §9-

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308(a) — there are two modes: (1) possession (§9-313(a) — second sentence describes this collateral — by taking delivery under §8-301) don’t need to worry about §9-313(c) because doesn’t apply to certificated securities or goods secured… Look §8-301 (pg. 1285) — defines delivery [what delivery are we looking at? Be careful with the word “purchaser” — here we are looking to see if G through the escrow agent has possession (the purchaser here is G). Again we have the problem of deciding whether we are in §8-301(a)(1) or (a)(2) — here the escrow agent is closer to an agent than a bailee so we are in (a)(1). But pay attention to (a)(2) — it does not say the acknowledgment has to be in writing or authenticated (so it is different from §9-313(c). So what do you do if you represent G — get a signed writing (most likely the escrow agreement will work).

A. Assume the escrow agent happens to be MB’s son in law, and the agent does all legal work for MB. Does G have a perfected security interest by possession? Does it matter that agent is related to MB? What will trustee in bankruptcy say the relationship is too close and not an agent, which means who is in possession, the debtor and that is not perfection (the core idea is to deal with the secrecy problem). But if agent is related and MB’s lawyer that connection is too close to resolve the secrecy problem, that means G if relied solely on perfection, G would only have an attached security interest and would lose to the trustee becoming a general creditor.

B. Does the F/S help the possession problem so as to perfect the security interest. How do you know filing a F/S will work to perfect security interest in certificated securities. See §9-312(a). Yes.

C. Under these facts, G will have control too. We would start with §9-314(a) (p.1112). Go to §9-106(a) sends you to §8-106 (the revised version on pg. ) §8-106(a) says a purchaser (G) has control over a certificated security if the security is delivered to purchaser. §8-106(b)(1) would also apply. Note the word delivery, which sends us back to §8-301 (must satisfy delivery whether relying on possession or control to beat the trustee in bankruptcy).

(2) What would be the result if G had filed a properly completed f/s on 2/2/01? [in resolving this priority battle, consider all 3 permissive modes of perfecting a s/a in this collateral, namely possession, control and filing)? See §9-312(a) — Yes she would have a perfected security interest.

(3) See the following Sections:(A) §544(a)(1)(B) §8-102(C) §8-106(D) §8-301(E) §9-106

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(F) §9-203(G) §9-312(H) §9-313(I) §9-314(J) §9-317(A)(K) §9-328

Problem 1(b)(ii) — Assume that AG does not set up an escrow arrangment nor does he sell the C stock to MB. Instead, B has owned the C stock for years. The stock certificates, on their face, show MB as owner; the certificates are in her possession. G is a venture capatilist. He agrees to loan B $100K for the opera co. she owns and operates. On 2/1/01 G and B sign a loan agreement and a security agreement and agree on the lang. In the form financing statement; all 3 docs contain an adequate description of the C stock as collateral. G gives B the $100K loan proceeds on the same day. G files the f/s on 2/2/01. On 3/28/01, B , who cannot meet her current business expenses persuades ONB to make her a short term, $50,000 secured loan, to enable her to meet opera payroll. On 3/28, ONB gives B $50,000 loan proceeds; at the same time, B signs an ONB s/a describing collateral as 100 shares of C stock and delivers the C stock certificates to ONB to serve as collateral for loan. By 7/31/01 B is in default on her obligations to both G and ONB. Which creditor has a senior claim to the C stock? Why ? Does the answer to this question depend on whether B indorses the stock “to bearer” before delivering the certificates to ONB? See §9-322(a), 9-328.

(A) Which Creditor has a senior claim to the C stock? Why? — Here we have registered certificated securities held in the direct holding system.

What is the status of G? — When does she get an attached security interest? Feb. 1 (value, s/a w/ adequate description under §9-108, rights in collateral). When if any is there perfection? G got a perfected security interest in 2/1 even though filed on 2/2/01. Look at §9-312(e) temporary automatic perfection — a security interest in certificated securities is perfected without filing or the taking of possession for a period of 20 days from the time it attaches to the extent it arises for new value given and an authenticated security agreement. So from 2/1 to 2/20 without doing anything G is automatically perfected — is there a secrecy problem; yes, what is the countervailing policy — read the comments — for the convenience of the secured creditor because getting possession takes time. Look at §9-312(h) after 20 day period expires perfection depends on Art. 9 — G filed a f/s so he is perfected under §9-308(c).

What is the status of OMB? They get an attached security interest 3/28. It also has the benefit of automatic perfection, but does it do enough to get permanent perfection? — They took possession — under §9-318(a) taking physical delivery of certificated securities will work whether or not you indorse. So if they wanted control, what would OMB have to do on 3/28? Possession doesn’t require indorsement, but for control on these facts, they would need MB indorsement (§8-106(b)(1)). Both modes serve to perfect the security interest on 3/28.

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What is the Priority Rule? Start with residual rule of §9-322(a)(1) (this is the rule you go to when have 2 conflicting security interests) — when applying this section, start with second sentence and generate a priority date — Start w/ G – Feb. 1 because of automatic perfection; OMB –3/28 — do you feel sorry for OMB? Couldn’t they find out. They should have checked the files and adjusted this behavior. If this were the right priority rule, but under §9-322(f)(1) — subsection (a) is subject to the other provisions of Part 3 of Article 9 — is there a specific priority rule that governs this battle that might give a different result. Look at §9-328 —(priority of security interests in investment property which covers certificated securities) — under subsection (5) if OMB relies on possession, it wins. But what if OMB got control as its mode of perfection, under 8-106(b)(1) OMB also wins. What if OMB had filed a f/s, who would win? G would win under §9-322(a)(1) because its who filed first. Remember, some modes of perfection win other priority battles even though all 3 modes are permissible and will beat the trustee under §9-317. But if G relies on f/s, it is the least preferred mode of perfection when talking about priority battles with investment property.

Policy: What’s the reason for the result above. The drafter suggest 2 reasons: (1) first, they say this is a transition rule — we’ve been transitioning from 1994 — before 1994 people who dealt with securities were not use to checking the art. 9 files, so filing a f/s and checking for a f/s is irrelevant because most people will take control; (2) second, (slightly more persuasive) they say it gives the system more flexibility. The idea is if you have a credit worthy debtor you may perfect only with a f/s. Debtor doesn’t mind because debtor gets to keep control and possession of property. Alternatively, if worried about the status of debtor, you would insist on taking control or possssion, which might mean you might have to charge a slightly lower interest rate to give the debtor an economic interest to agree to surrender control and possession. The idea is you have different levels of perfection, which provides more flexibility. The cost is that if you have 3 modes of perfection, the subsequent creditor has to search all 3 modes.

(B) Does the answer to this question depend on whether B indorses the stock “to bearer” before delivering the certificates to ONB? [See §9-322(a), 9-328]

Analysis — Endorsement of the stock may in this case because if the stock is not indorsed, but delivered ONB has possession and beats the other creditor under §9-328(5). If ONB gets the stock indorsed and meets the other requirements of control §8-106(b)(1), and still under §9-328 ONB will win. Therefore endorsement is not a factor.

More Facts 1(b)iii — Assume everything is the same as above in 1(b)(ii) immediately above except that B does not deliver the C stock to ONB on 3/28/01. Instead, B keeps the stock in her safe and ONB files a f/s on 3/28. Does G or ONB hold the senior claim to the stock? Why?

(A) Analysis — Since there is no possession or control in this hypothetical, the mode of perfection used here is filing a finance statement. §9-322

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governs battles between two secured creditors (it’s the first in time rule). Under §9-322(a)(1), G wins because it perfected its security interest on 2/1 whereas ONB perfected on 3/28/01. Therefore, G was first.

Problem 1(c) — Please read §9-312(b)(1) which describes the only effective way

to perfect a security interest in deposit account collateral, namely by control under §9-104. Review your analysis and class notes on how to obtain control of a deposit account in connection with Handout #9, problem 4 (refer to page 76 of outline).

(A) Analysis —Basically §9-104 tells us how a secured creditor can get control of a deposit account; there are basically three ways: (a) where the account resides in the bank of the secured creditor; tripartite agreement between debtor, secured party, and institution holding the account (e.g., credit union); and (c) see §9-104(c).

(5) Problem 33 (text pg. 78)—

33A — How you perfect a negotiable document of title? Is §9-203(b) satisfied? There was no signed s/a, how was attachment satisfied (value — bank gave $; debtor owns the collateral (the receipt); but what about §9-203(b)(3) was it satisfied? If don’t have attachment don’t have perfection. Look at §9-203(b)(3)(b) collateral in possession of secured party if negotiable document is described in §9-313(a), which it does. So, the bank has an attached security interest in the receipt before bankruptcy. Is there perfection in the receipt, yes under §9-313(a). Does the bank have a security interest in the toys? (we know it does in the receipt) — this is the important question. — Look at §9-312(c) contains a perfection rule in (c)(1) — a security interest in goods may be perfected by getting perfection in the documents. It looks like the answer is yes, but what will the trustee in bankruptcy argue to say the bank did not have a perfected security interest in the toys — why isn’t there carry over perfection? Who’s minding the store — someone who is an EE of the debtor; so if the connection is close you won’t get carry over perfection under §9-312(c)(2) and then the trustee can strong arm you under §544(a)(1) and the bank becomes a general creditor.

(6) Problem 2 (handout #10) —In addition to problem 33 (p.78) work the following

problems, making the assumption that Fred is in charge of the day to day operation of the field warehouse. Consider §§9-312, 9-313, 9-322.

(A) Problem 2(a) —1/10, MSB and KD sign a s/a covering KD’s inventory of toys. On the same day, MSB gives KD loan proceeds of $50,000 and files a f/s covering the inventory. On 1/20, KD, w/out MSB’s knowledge, stores some of the encumbered inventory in a field warehouse run by Fred. Fred issues a negotiable warehouse receipt to the order of KD. On

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1/21, KD needs more money and borrows $80,000 from SF. As part of this transaction, KD gives SF a signed s/a covering both the 1/20 negotiable warehouse receipt and the underlying inventory. On 1/22, SF takes possession of the warehouse receipt. Later KD defaults on both MSB loan and SF loan. MSB and SF are fighting over who has the senior right to the inventory in Fred’s field warehouse. What result?

(1) Analysis —The bank wants collateral, but inventory is difficult to loan against because the debtor needs it to sell to then pay back the

loan. Debtor will not want to surrender the toys. The bank could have created a floating lien (refer to Barb problem). But the bank doesn’t want to do a floating lien because requires a lot of monitoring. Instead, the bank creates a “field warehouse” (this mode is use a lot in agriculture and small businesses).

A. We are looking at the receipt of warehouse as collateral. Fred sets up a field warehouse (e.g., a fenced in area, a locked room — some physical space in which Fred has control of goods). So KD gives the toys to Fred and Fred locks them in a room. Fred gives Kd a “negotiable warehouse receipt” (this is a subset of a “document of title” — so its quasi tangible property — we are only studying negotiable warehouse receipt — see e.g., attached to Handout 10) Negotiable means easily transferable and complying with Art. 7 standards. Now Fred gives KD this receipt which shows she has delivered the toys. KD gives the bank a promise to pay, a s/a encumbering the receipt, and usually actual physical possession of the receipt. The bank loves this — because it’s a lot better storing the paper rather than toys. The receipt represents ownership, so when MSB has the receipt, essentially the value is locked up in the paper and no-one (not KD) can get access from Fred unless MSB gives consent. So, bank in effect has what looks like a possessory security interest but doesn’t have the costs of this transaction. So, the bank may say to Fred the debt collateral ratio is 60%, once a week you take inventory and KD in meantime is paying debt, if debt collateral ratio drops then KD can take some more toys out. The receipt provides for a very fluid situation and easy to monitor and the bank does not have the difficulty of possession.

B. What if KD defaults — See §9-601 — they can get the goods and sell them.

C. If KD pays the debt in full the warehouse is dismantled and KD gets the toys.

D. Recap on Field Warehouse : Remember some modes of perfection work better for priority battles than others.

E. Recap Analysis for 2A — In all of problem 2 the fight is about inventory (the toys), which are goods.

Status of MSB — §9-203(b) attachment occurs on 1/10. When did perfection in the toys occur — 1/10 (they filed a f/s, which

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is an appropriate permissible mode of perfecting a security interest in goods).

Status of SF— §9-203(b) attachment 1/21 of the receipt. When was the security interest in the receipt perfected (clearly on 1/22 it took possession, but 9-313(a) first sentence says a secured party may perfect a security interest in negotiable documents by possession (could have made the problem harder by including an escrow agent). But SF perfected on 1/21 (how is that possible — didn’t file or take possession on that day) because there is temporary perfection §9-312(e) — (a receipt is a negotiable document) an this type of collateral is automatically perfected temporarily for 20 days. But it got permanent perfection on 1/22.

Priority Rules — conflicting security interests — go to the residual rule of §9-322 first (under §9-322(a)(1) second sentence we are to look at the contestants separately — MSB filed and perfection on 1/10 and SF perfected 1/21 and filed on 1/22 (§9-322 does not distinguish between temporary or permanent perfection). The creditor who files or perfects first wins — Here, MSB wins. Don’t feel sorry for SF because they could have checked the Art. 9 files.

But under §9-322(f)(1) if there is any other provision of this part (that part being PART 3) that produces a different result and applies to this collateral, we have to go to that rule — the only realistic possibility is §9-312(c) —this provision contains both a rule about how to perfect (that’s (c)(1) and a priority rule (which tells us who wins). Look at the priority rule §9-312(c)(2) — “by another method” (a method other than what? — when they say another method they must be referring to something they just described in this provisions — what does (c)(2) says “perfected in the document” they must mean other than perfecting in the document and then say “during that time” (what time? — have they described a time period in this section earlier than the words we just quoted? Now we know “while goods in possession of bailee”…) In this problem, was there a creditor who perfected in the goods by another method? Did either of these creditors perfect in the toys by another method? (another method means perfecting other in the document) — what did MSB f/s say? — how did it describe the collateral and what did the s/a say? MSB did not mention the document, there was no document at time of perfection (the toys didn’t go into the warehouse on 1/10) So, clearly MSB perfected the goods by another method (but was it during that time? 1/10 was before that time) SO this priority rule does not apply. So, §9-322(a) applies and MSB wins.

Policy — Think about Doctrine of Derivative Title; at time toys went into warehouse they were encumbered by a publicized security interest because MSB did everything right on 1/10. SO when the value of the toys get locked up in this receipt.

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Nothing more can be locked up than what debtor has, and it already had a perfected security interest in the toys.

(B) Problem 2b — On 1/10, KD stores its inventory of toys w/ Fred. Fred issues a negotiable warehouse receipt to the order of KD. On 1/15, in anticipation of extending credit to KD, MSB files a f/s w/ respect to the inventory of toys. On 2/1, SF takes possession of warehouse receipt from KD and extends credit to KD in the amount of $80,000. A s/a is signed in favor of SF describing the negotiable warehouse receipt. On 2/5, MSB loan of $50,000 is made and a s/a creating the MSB security interest in the toys is signed. KD defaults on both loans. Which lender has superior rights in the inventory of toys? What if everything is the same except that the toys went into the warehouse on 1/16 (instead of 1/10)?

(1) Analysis — Look at the status of each creditor:

(A) MSB Status — attachment not till 2/5 under §9-203(b). Perfection in the toys occurred on 2/5. (look at §9-308(a) — second sentence says a security interest is perfected when it attaches and …).

(B) SF Status — attachment 2/1; perfection in the receipt on 2/1. (see §9-313(a), 9-312(e))

(C) Priority — If §9-322 (the residual rule were the correct rule who would win) applies, who wins — MSB priority dates 1/15 (because that is when they filed their f/s — See §9-502(d) — a case where filing is different from the date of perfection) and SF priority date is 2/1. MSB wins.

a. Policy : Do you feel sorry for SF? Remember all that happened was that MSB filed a f/s (the deal may not have closed), but at least SF knows there is a potential relationship between MSB and KD, which covers the toys. This information is enough so that SF can respond, and it didn’t and this why they get screwed under §9-322(a)(1).

§9-312(c) if it applies it trumps §9-322. Did either of these creditors perfect by another method. Yes, MSB perfected directly in the toys, it didn’t say anything about the document. The toys went into the warehouse on 1/10, and MSB perfected on 2/5. So who wins, SF. This time even though SF is second in time in terms of giving notice, it beats MSB.

(D) Hypo : Assume MSB f/s says receipt and s/a says receipt. Would MSB still have a perfected security interest in the receipt on 2/5? Yes, filing is an appropriate mode of perfecting a security interest in a negotiable document. Look at §9-312(a) (you can do it either way). SO, you have a choice, possession, filing, or temporary perfection in appropriate cases. Does §9-312(c)(2) apply — did either of these creditors perfect in the goods by another method? NO, both of them perfected in the documents (one by taking possession the other by filing a f/s that describes

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the document). Does §9-312(c)(2) apply? One person who perfects in the document and another who perfects in the goods by another method? No, because they both perfected in the documents and we go back to priority rule §9-322(a)(1) and MSB wins.

(E) POLICY — Why are the drafters favoring perfection in the documents when goods are in the warehouse - whenever there is both a receipt and goods outstanding there is a potential for confusion because there is two physical embodiments in the goods. So they want to encourage dealing in the documents. In problem 2(a) they couldn’t deal with the goods because there was no warehouse. In problem 2(b) SF wins under §-312(c)(2) — what advice would you give MSB so it doesn’t get trumped by a later creditor? What should they do before they file a f/s on 1/15? [the problem is they don’t know the goods have or will be put in the warehouse] — go look. In other words, on 1/15 MSB should check the Art. 9 files, and make a visual inspection of the inventory (the collateral) and if went to look they would see Fred’s warehouse set up; so they have notice.

(F) Hypo — Assume the toys went into the warehouse on 1/31 everything else in 2(b) is the same. If MSB does everything we said should be done (check art. 9 files and visual inspection of no warehouse receipt). Who wins? MSB loses because they perfected on 2/5 by another method during the period the goods were in the warehouse because went in 1/31. So MSB still loses. So when should MSB do visual inspection of inventory — the instant before they perfect — so that would be the instant before you give the debtor money (because earlier won’t protect MSB from being trumped). Remember — there are two modes of perfection (there is a preference for perfecting in the document when goods are in the warehouse.

(G) § 9-312(c)(1) — if perfected in the receipt, then perfected in the toys.

(C) Problem 2c — MSB and KD sign a s/a on 1/10 describing the negotiable warehouse receipt. KD tells MSB that it will take 7 days to get the receipt from KD’s safe deposit box. MSB agrees to the delay and gives KD the loan proceeds. 1/18 passes but no receipt is delivered. ON 2/1 KD borrows money from SF; a s/a is signed describing the toys (which are now in Fred’s warehouse). SF files a f/s describing the toys the same day. On 2/3, MSB realizes that it never received the receipt. KD explains to MSB that KD could not locate the receipt. MSB asks KD to sign a f/s which descries the negotiable warehouse receipt. MSB files that f/s the same day.

(1) If KD defaults on both loans, who will get the toys? — In this case, the

collateral is described as a receipt. You don’t need the debtor’s signature to file f/s (because of ipso facto because the debtor signed the s/a).

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(A) Status of MSB — attachment on 1/10; perfection on (remember temporary perfection §9-312(e) — it applies) 1/30. So, perfection lapses, and §9-312(h) perfection depends on compliance with the article. And on 2/3 MSB re-perfects. (Notice the gap between 1/31 and 2/2).

(B) Status of SF — attachment and perfection both on 2/1

(C) Priority Rule — start with the residual rule of §9-322(a)(1) — MSB’s priority dates (there is a period when there is neither filing nor perfection — there’s a gap — had they acted with in the 20 day period their priority date would be 1/10; so there date is 2/3.) and SF priority date is 2/1. If this is the right priority rule, SF wins.

Is §9-322(a)(1) the right priority rule or should we apply §9-312(c)(2) — did either of these creditors perfect by another method? Yes, SF perfected in the toys not in the document. Did SF perfect by another method during that time? Yes, because during that time means when the toys were in the warehouse (and they’ve been in the warehouse the whole time). So, §9-312(c)(2) applies and MSB wins. Both creditors made mistakes:

(1) MSB lets its period of temporary perfection lapse. Didn’t catch the problem during the 20 period day; and that cost them losing the priority battle. Because what happened during the gap — along came another creditor (SF).

(2) SF’s mistake was that it perfected in the toys (the less preferred mode of perfection while the toys were in the warehouse) They should have done the visual inspection before perfection).

(3) Which mistake is worse — the drafters think the worst mistake is to file against the toys because §9-312(c) does not take into account the temporal sequence of events. It matters who does it correctly. That is why MSB wins under §9-312(C)

HYPO: Assume instead of SF perfected in toys it f/s and s/a said receipt. Where is our priority rule now? GO to §9-322(a)(1). Here both creditors perfected in the documents. §9-312(c) only applies when one perfects right and the other doesn’t. So back to §9-322(a)(1) and because MSB let the perfection period lapse, MSB loses and SF wins.

(2) If KD had returned the receipt as promised on 1/18, what priority date could MSB claim under §9-322(a)(1)?

(7) Problem 4 (handout #10) —Sally Student owns a $5000 car. She needs $9000

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for tuition. SF makes the loan but requires Sally to surrender the car as collateral. Sally signs a standard form s/a which contains no provision concerning insurance for the car. SF’s insurance policy covers all collateral in its possession against destruction by fire up to $2500. There is a fire and Sally’s car is destroyed (her insurance does not cover the loss.) Sally has not repaid any of the loan and is in default. SF sues Sally for the $9000 balance outstanding and wins. What will Sally have to pay? See UCC §9-207.

(A) Analysis — Sally will argue that she should pay no more than $4000. Why? Spurwink Finance will argue that Sally should pay $9000; it does not want to file a claim under its insurance policy because it fears a rate increase. See §9-207() indicates Spurwink can collect only $6500. Why? If you represent a debtor in a pledge transaction, remember to bargain about who is to provide insurance for the collateral.

(8) Problem 34 — Assume that the s/a was signed by Karate on 3/1 and that NF took possession of the notes on 3/10. In this problem, consider whether the trustee in bankruptcy can “strong arm aside” NF’s security interest under §544(a)(1). — Here NF makes a loan to Karate (debtor); the collateral is 36 notes ( Karate provides lessons to its customers and they give him notes for promises to pay for the lessons). On 3/1 NF gets s/a and 3/10 Karate delivers the notes to 3/10; and 4/6 Karate requests NF to give them one note back and on 10/12 Karate folds and files for bankruptcy; and the bankruptcy trustee comes into the problem and they want to try to strong arm aside NF’s security interest.

(A) Analysis ——Does NF have a good enough position to beat the bankruptcy in trustee. Separate the 35 notes from the other note.

a. Analysis for 35 Notes — the promissory notes is under quasi tangible property and its part of instruments. When does attachment occur in the 35 notes? Under §9-203(b) [Value — 3/1; rights in collateral 3/1 (Karate owned the notes); 3/1 s/a) attachment occurred on 3/1. What about perfection? 3/10 (how do you know taking possession is a permissible mode of perfection in taking notes — see §9-313(a) — notes fall under instruments). But NF really perfected on 3/1 because of temporary perfection §9-312(e) a security interest in “instruments” is automatically perfected for 20 days. So as to the 35 notes, NF was perfected from 3/1 to 3/20 and it took possession within that 20 day period, which is permanent perfection under §9-313(a); So it was permanently perfected until 10/12 when K filed for bankruptcy. The status of bankruptcy of trustee got a judicial lien on 10/12. Who wins the priority battle (§9-308(c) NF was continuously perfected up until the bankruptcy filing). Which priority rule applies? (§9-322 applies only conflicting security interests — here it doesn’t apply because one of the creditors has a judicial lien). §9-317(a)(2) applies —a security interest (NF) is subordinate to a lien creditor (bankruptcy trustee) before the security interest is perfected. Here not true, so by negative

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implication NF wins because it perfected before the trustee became a judicial lienor.

b. Analysis for 1 Note — Everything the same, but on 4/6 NF released the note; so it no longer has possession and under §9-313(d) it says if perfection depends on possession, perfection continues only while the secured party retains possession (and NF released it). If look at §9-312(g) — there is another 20 day period of temporary perfection that snaps in, but that only takes us to the middle of May, so the period lapses under §9-312(c) and so when Karate files for bankruptcy NF has an attached security interest but unperfected and is strong armed by the trustee becoming a general creditor.

c. Counting Days — Do not carry the first day of the period, but count the second day. Don’t count holidays. For instance, when attachment on 3/1, the twenty day period lasts until 3/21 (not 3/20 because we don’t count the first day).

B. Automatic Perfection

(1) Read text pages 80-105

(2) Class Notes —§9-309 most important provision for automatic perfection (focus on §9-309(1) ) Whenever there is automatic perfection, there is a secrecy problem; therefore there is a countervailing policy argument for §9-309(1) it would be too expensive to file a f/s for consumer goods every time; also it is thought there weren’t be that many subsequent searchers because used consumer goods aren’t very useful collateral because their aren’t effective resale markets, depreciation great. If you think about this rationale, it is not necessarily true. What about ebay and all those auction sites which create effective resale markets for used consumer goods. Some states have taken this into account and have modified §9-309(1) and have put a monetary cap on it [e.g., in Maryland they put a cap on certain consumer goods).

(3) Problem 35 (p.81) — 8/4 Bilko enters into an agreement with Browns. S/a covers the currently owened consumer goods plus those acquired in the future, and 9/1 the siding put up. Browns go to FF on 9/25 to get money to purchase a sewing machine and they sign a s/a that signs the sewing machine. On 10/11 Brown’s get sewing machine, and 10/12 Browns file for bankruptcy.

(A) Analysis — The fight is about the sewing machine [classified as goods and consumer goods]. The trustee has a judicial lien under §544(a)(1) on the day of filing for bankruptcy. What is Bilko’s status? Is he a general creditor or secured creditor? Does he have an attached security interest in the sewing machine? Start with 9-203(b) [Value given on 8/4 promise to put up siding under 1-201(44); s/a 8/4; debtor has rights incollateral on 10/11 (§2-401]; So it looks like there is an attached security interest; but look at §9-204(a), but there are limitations in 9-204(b) — clearly since the Brown’s did not own the machine on 8/4, Bilko has to rely on

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the after acquired property clause to consumer goods when given as additional security unless the debtor acquires rights in 10 days after secured party gives value — here, secured party gave value on 8/4 that is when the 10 day period begins to run, since rights not given until 10/11; there is no attachment. This is one of the few consumer protection clauses. The drafters are limiting the bargaining of the parties, even though Brown’s agreed that agreement is ineffective under 9-204(b)(1). Thus, Bilko is a general creditor.

What about FF? Do they have a security interest in the machine? §9-203(b) [Value on 9/25; rights in collateral 10/11; s/a 9/25] Now, 10/11 is more than 10 days after 9/25, do we need to worry about 9-204(b)(1) as to FF’s security interest? Is FF also a general creditor. No, §9-204(b)(1) does not apply because the sewing machine was not given as “additional security” — the sewing machine is the “only” security. We are not talking about attachment about an after acquired property clause; it’s the only collateral; So, §9-204(b) doesn’t apply. Does FF have a perfected security interest? Yes, we have a purchase money security interest and under §9-301(1) its automatically perfected because its consumer goods. So, who wins FF (10/11 attachment) and Trustee (10/12)? FF wins under §9-317(a) that’s the priority rule that tells us that a perfected secured creditor beats a judicial leinor. As to Bilko, he loses because he is a general creditor.

(B) Policy — What is the policy reason for §9-204? The author tells us that the reason that the clauses are not enforced because they have “inter rorum effects”. What’s the interrorum effect on an after acquired property clause on consumer goods? If the repossess the debtor’s goods and the debtor still owes money, and the debtor goes out and gets more goods to replace those taken, the secured party can keep coming back and repossess those goods because there was a s/a signed on after acquired goods. That is the interrorum effect.

Hypo: Assume we are talking about X, who is a carpenter, who does work for a wealthy couple and they consumer luxury consumer goods (e.g., cases of wine, paintings), and X does work on credit. Shouldn’t X be able to get a security interest in this couples’ after acquired luxury consumer goods. Debtors and creditors come in all sizes and shapes and if you have a friend like X, there is a lot of rich debtors who don’t pay their bills while they are consuming. So the issue is do we like §9-204(b)(1) — its too broad and too narrow: To narrow because it doesn’t protect Ms. Brown’s present consumer goods (she should have more protection); its too broad because it doesn’t cover luxury consumer goods. This provision is a subcategory of consumer protection provisions.

What are the Arguments On the Issue of Whether we Should Have Consumer Credit Protection:

(1) Best Argument for Creditors as to why debtors ought to grant s/I in their consumer goods: Creditors would start out by reminding us that debtors have a legal obligation to pay their debts; and that the obligations don’t mean anything unless there are effective remedy. They’ll say let us take s/I in consumer goods because if not it will lower (or limit) their bad-debt losses. How? We talked about ex-anti

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effects [e.g., Texaco and Global – talking about leverage to get them to pay their debts] or interrorum effect which lower bad debt losses. The ex-poste benefits can offset bad debt losses. Taking security helps them judge credit worthiness of the debtor because the debtor wouldn’t pledge it unless they have a serious intention to pay because they know the secured party can foreclose. So by these 3 methods, bad-debt losses can be lowered; who will get the benefit? They would say this benefit is passed forward in the form of lower interest rates and more available credit. You pay lower interest rates because there is lower risk; not only will interest rates be lower; more credit will be available to those who can’t get it because there is lower risk. This is the economic argument. They will also argue freedom of K — offer debtors two different deals: (1) low price deal (where you get security); (2) high price deal (borrow on general credit); The creditors say let the debtor choose; debtor’s know better than the credit to know what deals will maximize their utility; don’t block us because then we can’t offer the cheap deal. Finally, creditors will argue that the debtors’ should not be left with nothing; Make these transfers directly to people who don’t income, but don’t distort the credit markets in attempt to protect low income individuals. Give us free reign to take s/I where debtors want them, but provide income assistance to the Brown’s. Don’t tell them how to use it by rejecting the availability of credit. [these are the arguments against §9-204(b)(1)).

(2) Debtor’s Argument: Sure there is a legal obligation, but sometimes default comes about outside the control of the debtors. In those

circumstances, the consequence of default should be proportionate to the moral turpitude of the act involved. That defines a just society. It is out of proportion for Ms. Brown (in the case of consumer goods) to face losing a lot of their HH goods because they default. The counsumer advocate would argue in humaine society we don’t want the Brown put to this choice — namely paying off their creditors (using their food money) or alternatively losing present/ and after acquired goods (its mal proportioned). Second, they will argue that we understand it makes credit more expensive, but that’s allright that’s the price we pay for consumer credit protection. They will also argue creditors bear some responsibility for default and therefore their remedies should be slightly limited. The basic idea is creditors don’t check carefully enough about their debtors credit worthiness. The consumer response is look creditors you can lower your bad debt losses in another way by doing more careful checking before extending credit. They will also argue in the context of a consumer debtor it is illusory to talk about freedom of K. The Brown’s don’t shop for credit and they don’t understand the agreement; therefore the freedom of K argument is bogus.

(3) Problem 5 (Handout #10)—Consider whether FF would have a purchase money security interest in the following variations on problem 35 —

A. Problem 5A —The Browns borrow $80 from FF for the state purpose of buying a sewing machine w/ a purchase price of $80. When the Browns arrive at the sewing machine store, the salesman persuades them to buy a $300 model. The Browns use the FF loan proceeds to make the

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down payment. Does FF need to file a financing statement to perfect its security interest in the $300 sewing machine.

(1) Analysis — No, if the sewing machine is goods

B. Problem 5B —The Browns borrow $80 from FF for the stated purpose of buying a loan mower to cut the grass around their home. The Browns sign a s/a describing the mower. After the Browns purchase the mower, they discover that they can make “substantial money” by renting the mower to neighbors six out of seven days per week. Does FF hold a perfected security interest in the mower?

(1) Analysis —Yes

(4) Regulation ZA. § 226.2(25)B. § 226.17C. § 226.18

(5) FTC Credit Practices RuleA. 16 C.F.R. §444.2(4)

(6) Problem 36 (p. 91) — This is a direct take out loan. 3/1/98 ONB gets a floating lien over motors on present and after acquired equipment and f/s. 4/1 TOP provides a rug to Façade for a trial period. 5/1/01 assume Façade wants the rug (it’s a sale on credit). 5/3/01 NF loans money to Façade and gets a s/a and f/s. There is a default.

A. As soon as Facade Gets Possession (here 4/1) and before it makes its mind up does OMB earlier floating lien attach to the rug? The

attachment question requires us to go to §9-203(b) [Value 3/1/98; s/a 3/1/98; debtors rights?]; the rug is equipment which is ok: the question is when the debtor gets the rights in the collateral? Does Façade have enough rights to transfer the run — see §2-326 (revised on pg. 1269); this § describes two types of sales (sale on approval or sale on return] We have a sale on approval because goods delivered to façade for use; goods on approval not subject until acceptance under §2-326(2); When did façade accept the rug? Not until 5/1/01 [§2-606 defines acceptance]. So from 2-326(2) we can conclude Façade doesn’t have rights in the run to which OMB s/I can attach until 5/1/01.

B. Does NF have a purchase money security interest in the rug? NF loaned the exact amount of money to make the installment

payments on the price. Read the Case assigned. [you got inverted purchase money events]. Look at 9-103 — there are two issues here: (1) did NF make the loan to enable the debtor (look a NF’s purpose] to buy the rug; (2) was the money so in fact used? In the comments to 9-103, there is a flat statement that says “this can never be [if you have an inverted purchase money chronology] the idea is that this loan enables Façade to pay off any debts it wants to pay off. There are two separate transactions — there is a sale on general credit and then a later loan to the buyer of the loan. But there is a lot of case law under old Art. 9 which suggests it can be a purchase money security interest if you have certain info. That

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suggests that there was reliance on the money to help Façade to make the payments [the closer in time the loan the more it looks like a loan; did TOP know that debtor would turn around and get a loan; had NF made a commitment to Façade that said if they buy the rug they’ll advance the loan]

C. Assuming it is a purchase money security interest does NF get automatic perfection if it doesn’t file a financing statement? Yes,

under §9-309 — a purchase money security interest in “consumer goods.” Façade is a car dealer and is going to use it in his dealer. Here, the rug is classified as equipment. So there is no automatic perfection. So why do we care if NF has a purchase money security interest. Under 9-322(a), who would win the priority battle between OMB and NF (assuming NF files a f/s on 5/3). Both are art. 9 secured creditors — they can use the earlier of the time of a filing is first made or s/I is first perfected. So OMB priority date is 3/1/98 [that’s importance of anticipatory filing] and NF priority date is 5/3/01. So, NF will lose unless it has a purchase money security interest. [we will learn under 9-324(a) which would apply because we have equipment NF will win if it has a purchase money security interest, but will lose if it doesn’t] That is why its important to know if the direct loan is a purchase money security interest.

(7) Problem 7 (Handout #10)—In connection with problem 36 and GECC v. Spartan Motors (p.91) consider how ONB could distinguish the facts in problem 36 from the facts in Spartan Motors. Also contrast UCC §9-322(a)(1) with UCC §9-324(a).

(A) Analysis —

C. Perfection by Filing

(1) Review UCC Sections: These sections deal with filing a financing statement and perfection.

A. §9-201B. §9-501C. §9-502D. §9-503D. §9-504E. §9-516E. §9-521F. §9-210G. §9-501 [tells us where you file a f/s] — filing will take place in a single

central location in the state [probably in the secretary of state’s office][the idea is that when combined with electronic filing and searching, it will reduce transaction costs]

(2) Read text pages 106-109

(3) Problem 39—HC borrows $100K from EFC and gives it a security interest in the corporation’s equipment. The parties properly filled out a f/s; The clerk in the Secretary of State’s office files the statement under Shakespeare instead of Hamlet. One year later, another finance company loans HC more money, taking a security interst in the same equipment [thy checked the

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statement under Hamlet and found nothing) Since priority of creditors in this situation depends on order of filing [See §9-322(a)(1) first in time rule] did EFC file first, or did it bear the risk of the clerical error? See §9-516(a), 9-517 [and the official comment 2]. Whichever creditor loses should sue the state for negligence. Some states have set aside a fund from the filing fees with which to pay judgments against the filing officer.

(A) Analysis — Elsinore Finance Co. is not responsible for clerk Ophelia Nunnery’s mistake in indexing the financing statement.

(4) Problem 40 — ONB has a security interest in the equipment of the WCC for which it filed a f/s on 5/1/02. ANB took a security interest in the same collateral and filed a f/s on 5/2/01, in the same place.

(A) Problem 40A — How long is the financing statement effective?

(1) Analysis —§9-515(a) — it is effective for 5 years. If you have a loan with a repayment period of more than 5 years, you need to worry about the f/s lapsing. See §9-515(c).

(B) Problem 40B — If ONB files a continuation statement on 5/1/06 is its perfected position continued. No, See §9-515(d) and 9-510(c). This problem illustrates the problem of “premature renewal”.

(1) Analysis — The filing of a continuous statement 5/1/06 does not sustain its perfection position because it must be done 6 months prior to the lapse. This is a premature renewal. It has to be renewed 6 months before lapse. See §9-515(c). Also 9-510(c) confirms f/s won’t work. But if OMB filed its continuation statement on 3/1/07 it would work because within 6 month of the 5 year period proscribed in 9-515(c).

(5) Problem 41 — Portia Moot pays her debt of $3000K to LNB for a computer she

bought for her law office [and taken a purchase money security interest therein, for which a proper f/s was filed]. Does PM have the right to demand LNB correct the records at the filing office. See §9-513. What if they ignore her written demands for a termination statement? See §9-615(b) and (e)(4).

A. Analysis — Portia has the right to get the financing statement “out of the

file” by demanding the bank file a termination statement. UCC §9-513(c), 9-5133(d). If the bank fails to comply with her legitimate request, Portia can also file a termination statement herself under §9-509(d)(2). Moreover, she can recover actual damages and $500 in statutory damages from the recalcitrant secured creditor. Se UCC §9-625(b), 9-625(e)(4).

B. Note: Open Drawer Concept of file searches — this means that later searches are given absolutely everything related to the original f/s (amendments, assignments, deletions, continuation, and terminations statements, etc…) when they do a search, so that they have complete info as to the current status of the filed transaction. Note the definition of a f/s includes an original filing and all related amendments; §9-102(a)

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(39). §9-519(c) 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. Thus, when a later searcher request the f/s per §9-523(c), the entire file will be forthcoming. §9-522(a) requires the filing office to maintain all filings until at least one year after the filing has lapsed w/ respect to all secured parties of record; §9-519(g) prohibits the removal of a debtor name from the index until one year after lapse. When you put all this together, you have the open drawer system where a drawer is created for each new f/s into which all related filings are deposited.

(6) Problem 42 — When lawyer SA handled a divorce for a client, he incurred the

wrath of her ex-husband, AA, president of FCLM, a group that does not recognize the authority of the state or federal govt. The irate ex-spouse filed 42 phony financing statements in the public records showing that all of Sam’s assets were security for various non-existent loan in favor of AA, the secured party of record. What can Sam do to clear up these clouds on his title to his property? See §9-513, its Official Comment 3, §9-518, and 9-615(b) and (e)(4).

A. Analysis — Using the same sections as cited above in the answer to problem 41, Sam can remove the cloud on his title and get these bogus filings “terminated.”

(7) Problem 8 (Handout #10) — The transactions involved in this problem are similar to those described and diagramed in problem 5, Handout 8. Specifically, on July 1, 01 GMAC, the originating institution, makes 500 car loans to individuals to enable the customers to buy GM cars from various car dealerships. 80% of these car loans (400), those to higher risk borrowers, are secured. Each of these 400 GMAC — car buyers sign written agreements including the buyer’s promises to repay GMAC (the balance outstanding with interest over time) and language conveying (to GMAC) Art. 9 purchase money security interests in the new cars purchased with GMAC credit. Plus, these 400 borrowers execute negotiable promissory notes payable “to the order of bearer” which are delivered to GMAC. GMAC and these 400 “high risk” car buyers follow all required formalities under Art. 9 for attachment and perfection. The other 20% of the GMAC car loans (100) are made to “blue chip borrower/ buyers.” In these transactions, GMA makes purchase money loans on general credit. The buyers sign sales contracts but do not sign promissory notes or security agreements. On Aug. 1, 2001, GMA borrows two million dollars from First Bank. GMAC signs a s/a conveying a security interest to First Bank in GMAC’s rights arising from the 500 transactions with both “high risk” and “blue chip” car buyers.

(A) Problem 8A —What steps should First Bank take to ensure that it has a perfected Art. 9 security interest in this collateral?

(1) Analysis —The collateral is chattel paper; There are two modes of perfection for the high risk borrowers: (1) possession; and (2) filing a financing statement. For the low risk borrowers, the collateral is payment intangible and the only mode of perfection is to file a financing statement.

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(B) Problem 8B — Would your advice for First Bank be different if the First Bank agreement with GMAC contained the following language:

“First Bank does hereby deposit to GMAC’s bank account #3333 2 million dollars. In consideration, GMAC does hereby assign and transfer to said bank all of GMAC’s rights arising from the 500 car loans described in attachment A, including GMAC’s rights to receive all payments on said loans.”

(1) Analysis — Here, the sale in the top tier transaction is not a loan. If it’s a sale, nothing has changed with respect to the high risk

borrowers. But for low risk borrowers you may be able to rely on automatic perfection under 9-309.

(C) Problem 8C — Would your advice for First Bank be different if the First Bank agreement with GMAC contained, in addition to the language in problem 8(b) the following language:

Should any of the 500 obligors (the car buyers) on the 500 car loans default w/in 6 months from the execution of this agreement, GMAC agrees, in further consideration for the 2 million dollars, to buy back any such car loan at the same price paid earlier by First Bank to GMAC.

(1) Analysis — These facts suggest that maybe there isn’t really a sale; if not a sale, the answers to problem 8a governs.

(8) Problem 11 (Handout #10) — You are an associate in a law firm and a partner,

who specializes in real estate financing but not asset based financing, asks for your help in setting up the following transaction for First Bank. First Bank wants to make a $500,000 loan to LEZ so she can expand her health food store to include both a pharmacy and a juice bar/restaurant. Part of the collateral for the loan will be LEZ’s equipment and inventory. Because of the vacation schedule of the principals, it will take several weeks for the parties to negotiate the final terms of the security agreement and the loan agreement. First Bank is concerned that while negotiations are on-going, LEZ might encumber some of her property. The partner wants to know whether it is possible for First Bank to file the f/s before the s/a is authenticated. If the anser is yes, she also wants to know whether the UCC record search should be done before or after the filing of the f/s. What do you think and why? See §§9-502, 9-519(a), 9-519(h), 9-523(c), 9-523(e).

(A) Analysis —The financing statement can and should be filed in advance

of the signing of the s/a, thereby giving the bank an earlier priority date (based on the time of filing) in some priority battles. See UCC §9-322(a). It is usually a good idea to file the Bank’s financing statement before the Bank orders the search of the index of filings. The only way for the Bank to be sure that the search will reveal all filings before the Bank’s filing is if the search reveals the Bank’s own filing. This problem arises because the code gives the filing office several days to enter an effective filing into the index. The Bank does not want its search to miss earlier filings still “in the

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basket” awaiting indexing. To be exact, the Bank’s search should not be ordered until the third business day after the Bank’s own financing statement is accepted for filing.

D. Perfection by Control(1) Read text page 109(2) Read Handout #11(3) Review Problems in Handout #10

V. Priority Problems Outside of Bankruptcy

A. Simple Disputes

(1) Read text pg. 117-119

(2) Review of Priority Battles —

Priority Sections Battles Between§9-201 Golden rule that says Art.9 secured creditors beat out other creditors§9-317(a)(2) Deals with Art.9 secured creditor and a judicial lienor§9-333(b) Deals with Art.9 secured creditor and a statutory lienor with a

possessory lien§9-322(a) or (g) Deals with Art.9 secured creditor and agricultural lienor§9-322(a)(1) The residual rule dealing with 2 Art.9 secured creditors§9-328 Deals with two Art.9 secured creditors where collateral is investment

property§9-312(c)(2) Deals with 2 Art. 9 secured creditors and the collateral is a negotiable

document [the KD problem where one creditor perfects in the document and the other in underlying goods)

§9-326; 9-508 Deals with 2 Art.9 secured creditors where one relies on a financing statement that is seriously misleading but rescued under §9-508

§2-326(2) Deals with sale on approval or sale on return§2A-301 Golden rule that says the lessor wins [counterpart to §9-201]§2A-301(7) Governs battle between true lessor and creditors of lessee§2A-306 Deals with lessor and statutory lienor [remember the Mac hypothetical

in Handout #6]

A. Today’s Focus is on §9-317: §9-317(a) deals with an Art. 9 secured creditor and someone else §9-317(b) deals with an Art. 9 secured creditor and someone who

buys the collateral of the debtor §9-317(c) deals with secured creditor and someone who leases the

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§9-317(d) deals with secured creditor and someone who is a licensee or buyers of certain collateral

§9-317(e) deals with purchase money secured creditors and buyers, lessors, or judicial lienors.

(2) Problem 50 (p. 117) — Epstein borrows $10K from ONB signing a s/a giving the bank a floating lien over inventory. ONB never files a f/s. MT was an unpaid creditor of Epstein, and it sued on the debt and recovered a judgment against the store. It then had the sheriff levy on the inventory. ONB learns of this, call their attorney. Does ONB or MT get paid first when the inventory is sold? If, instead, of a judgment creditor’s seizing the goods, Epstein files a bankruptcy petition while ONB was still unperfected, what result?(A) Anlaysis : Under §9-102(a)(52) a “lien creditor is a creditor that has

acquired a lien on the property involved by levy. Therefore, MT is a lien creditor. ONB is has a secured attached, but unperfected security interest. Under §203(b): a) value was given ($10K), b) s/a; and c) debtor had rights in the collateral (inventory). It is not perfected under §9-308 b/c ONB fails to file a f/s. Based on the priority rules, MT wins under §9-317(a)(2) because — a security interest is subordinate to the rights of a person that becomes a lien creditor before the earlier of the time the security interest or agricultural lien is perfected. Here, ONB loses because it did not perfect.

(B) Alternative Hypo: If there is a bankruptcy proceeding, then another creditor enters into the equation, and that is the trustee in bankruptcy and under §544 of the bankruptcy code, the trustee can strong arm an art. 9 creditor if un-perfected and make them into a general creditor. Therefore, ONB would be subordinate to MT. As between MT and the trustee in bankruptcy, it looks like we have to lien creditors — MT acquired its lien upon the levy (if order of levy jurisdiction) and the Trustee acquired its lien upon commencement of the bankruptcy proceeding.

(3) Problem 1 (Handout #12) — Make the following assumptions: MT provides services to Epstein on 12/15/2000; On 1/3/2001 Epstein borrows the $75,000 from ONB. On 1/15/2001, MT sues Epstein on the debt. On 2/1, the state court issues a writ of execution which MT’s lawyer delivers to the sheriff on same day. On 2/15/2001, ONB files a f/s. On 3/1/2001, the sheriff levies on Epstein’s inventory on behalf of MT and later sells the books. All books seized were in bookstore on 12/15/2000.

(A) Problem 1(a) — Does ONB or MT get paid first out of proceeds from sale of inventory. Assume events take place in an order of levy jurisdiction (judicial lien acquired when levy is accomplished).

(1) Analysis — Octopus National Bank wins under §9-317. §9-317(a)(2) says a security interest is subordinate to the rights of a person that becomes a lien creditor before the earlier of the time: (A) the security interest is perfected or (B) one of the conditions specified in §9-203(b)(3) is met and f/s covering the collateral is filed. Here, MT gets a judicial on 3/1/2001. Whereas, ONB gets an attached security interest under §9-203(b) on 2/15/2001 [value and s/a on 1/3/2001; rights in collateral 12/15/2000;], OR ONB satisfied §9-203(b)(3) condition by getting s/a and f/s covering collateral filed on 2/15. So

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under (A) or (B) the priority date is 2/15/2001 which beats out MT’s judicial lien. Therefore, ONB wins.

(B) Problem 1(b) — MT provides services to Epstein on 12/15/2000. Assume on 1/3/2001 ONB gives Epstein $75K but no security agreement is signed. On 2/1/2001, MT obtains a judgment based on 12/15/2000 obligation. On 2/2/2001 clerk of the court issues a writ of execution and it is delivered to sheriff. On 2/15/2001, ONB files a f/s. On 3/1, the sheriff levies for MT. All books seized where in bookstore on 12/15/2000. On 3/2/2001, Epstein signs ONB’s s/a, covering present and after acquired inventory. The events take place in order of levy jurisdiction. Does ONB or MT get paid first after the judicial sale of Epstein’s inventory seized by sheriff?

(1) Analysis — The fight is over E’s books, and books are goods, and classified as inventory. It looks like we have 2 creditors: Martin Travel (MT) and OMB. What is MT’s status — they became a lien creditor on 3/1. It doesn’t have an Art. 9 security interest, does not have a statutory lien, but it has a judicial lien (order of levy jurisdiction — so it arises on 3/1). What is OMB’s status – consensual lienor with an art. 9 security interest which attaches under §9-203(b) on 3/2 (b/c s/a not signed till 3/2]. When did OMB perfect? On 3/2 because under §9-308 you need attachment to perfect and attachment did not occur until 3/2 (signed s/a) even though filing was done on 2/15/2001.

Priority Rule — §9-317(a)(2)(A), (B) — Apply both subsections even if they produce the same result; What was the time when OMB satisfied (a)(2)(A) on 3/2; what about (a)(2)(B) also 3/2. Here, both of the dates are the same. So OMB’s priority date is 3/2, therefore MT wins because its date is 3/1.

Hypo: Assume same facts, but MT did get a security agreement in the books on 12/15 and it didn’t rely on sheriff to levy on 3/1, but instead on 3/1 it filed a financing statement [these are big changes because now it’s a battle between 2 art. 9 secured creditors]. ONB analysis stays the same, but MT’s status has; it gets an attached security interest on 12/15 (value, s/a, debtor = 12/15]. Perfection occurred on 3/1. The priority rule that governs is §9-322(a) — under second sentence of this section what is the priority date for OMB — 2/15 [the earlier of the date of perfection; here, filing]; For MT, its 3/1; Here, OMB wins. Upshot: OMB has to do less when MT is a secured creditor — just get a financing statement and that’s enough for OMB to stake out a priority battle. This is not true to beat a judicial lienor. What is the minimum OMB needs to do to beat a judicial lienor if it hasn’t perfected? It needs do more than filing, but less than perfection. See §9-203.

Policy — Both creditors have the opportunity to file. But MT as a judicial leinor certainly doesn’t have that opportunity. So the rules make it a fairer fight if you don’t allow the bear financing statement to suffice for OMB to beat a later judicial lienor.

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(C) Problem 1(c) —Assume on 1/3 ONB gives Epstein money and Epstein signs s/a covering present and after acquired inventory. On 1/10, MT performs services on credit; 2 days later on 1/12, Epstein defaults. ON 1/15, MT files a complain. On 2/1 MT obtains judgment. The next day a writ of execution is issued, and on 2/15 ONB files a f/s. On 3/1, the sheriff levies on Epstein’s books and sells them. All of the books seized were in the store since 12/15/2000. These events take place in an “order of issue jurisdiction.” Assume that MT knew about ONB’s security interest in the books on 1/10. Does ONB or MT get paid first after judicial sale?

(1) Analysis — Martin wins; his knowledge is irrelevant in this “pure race” statute. The statute was designed to avoid litigation on the issue of “knowledge”. MT is still a judicial lienor and ONB is a art.9 creditor. MT becomes a judicial lienor on the date the writ was issued — 2/2. Under §9-317(a)(2)(A), ONB gets an attached security interest on 1/3, but doesn’t perfect until 2/15; and under §9-317(a)(2)(B), ONB meets the §9-203(b)(3) condition (s/a) on 1/3 but files on 2/15. Either way, ONB loses.

(D) Problem 1(d) — This is a more realistic case than in problem 1(b). Everything is the same as in problem 1(b) except that on 1/3/2001, Epstein signs a s/a, but ONB does not give Epstein the loan proceeds or even make a commitment to extend money; instead, the loan proposal and docs are sent to ONB’s Loan Approval Committee for further review. On 32/2001, the loan is approved (ONB does not know about MT’s levy) and Epstein receives the money. Does NOB or MT have the senior claim to inventory in the hands of sheriff?

(1) Analysis — The collateral is still E’s inventory. When does MT get its judicial lien — on 3/1 (upon the levy). No art. 9 security interest. What about OMB — [notice a s/a is signed before the loan is extended] it gets an attached security interest on 3/2 [Rights in collateral 12/15; s/a 1/3; value 3/2]. When did they perfect? For perfection, you need not just the notice giving act but also attachment, so not until 3/2. Who wins? §9-317(a)(2) what is the earlier of the two dates? (a)(2)(A) perfection 3/2 or (a)(2)(B) §9-203(b)(3) one of those conditions met and filing done — [9-203(b)(3) satisfied 1/3 b/c s/a signed and filing done on 2/15] so the earlier of two dates is 2/15. Therefore, OMB wins. Notice opposite result from problem 1(b).

(2) New Addition : §9-317(a)(2)(B) is the new provision. And it makes it easier for the Art. 9 secured creditor to win. It is a very Art. 9 pro secured creditor rule. Do you think the new Art. 9 priority rule is better or worse than the old one. Certainly it is more favorable to secured creditors. Explore this question by looking at how far each of these creditors have gone to collect the debt.

i. MT committed its resources on 12/15, and when the debtor didn’t pay, MT did everything right [it went to court and got a judicial lien to enforce its collection]. Even though it did everything right, it lost. Look at OMB, it started to negotiate on 1/3 but didn’t even promise to give money [it did all the necessary steps to get an art. 9 security interest] without

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giving money yet. The unfairness is that OMB had the last opportunity to correct the priority battle [they should have made a visual inspection of the goods and they would have discovered that the goods were gone because the sheriff levied them]. Why? The Drafters made this change because there was an inconsistency with the rules governing future advances and first advances. [Not studying rules of future advances]. 2 ways to cure inconsistency — make the rules of future advance more friendly to judicial lienors OR make the rules of first advances more friendly to secured parties. They chose the latter.

(E) Problem 1(e) — On 1/3 Harriet, an EE of Epstein, falls in the store and is seriously injured. Epstein is at fault, and Harriet’s lawyer files a complaint against E. On 3/1, ONB loans E $75K and obtains a s/a covering “present and after acquired inventory.” ONB files a f/s on same day. In Nov., E defaults on his payments to ONB. On Nov. 28, H obtains judgment against E. On Nov. 29, the court issues a writ of execution. H’s lawyer delivers the writ to the sheriff on the same day. On Nov. 30, E receives a delivery of antique books (rare books) worth as much as his entire existing inventory of modern books (ordinary books). On 12/1 the sheriff levies on all books, ordinary and rare, to satisfy H’s judgment. Should H or ONB get paid first out of the proceeds of the judicial sale? Assume first these events occur in an order of levy jurisdiction. Next consider an order of delivery jurisdiction. Consider the rare books and the ordinary books separately. Are the Art. 9 rules fair to tort victims and other involuntary creditors? Would you feel differently about the outcome if H were suing to collect back pay b/c she had been wrongfully discharged by E b/c of discrimination? Would the outcome be different?

(1) Analysis —Make sure you can apply §9-312(a)(2). If its an order of levy jurisdiction over the regular books, order of levy and rare books, order of delivery and regular books; order of delivery and rare books. ONB wins all four battles. Make sure you analyze all four battles separately, because the time the lien arises and attachment changes.

(A) Order of Levy and Ordinary Books : H’s judicial lien arises on 12/1 the day of levy. ONB gets an attached security under §9-203(b) [value, s/a , 3/1; rights in collateral ? assume 3/1] on 3/1; its perfected on 3/1 because that was date of filing. Under §9-317(a)(2)(A) ONB has a perfected security interest on 3/1 and (a)(2)(B) it meets one of the §9-203(b)(3) conditions [s/a] on 3/1 and files on 3/1. Either way, 3/1 beats out 12/1 and therefore ONB wins.

(B) Order of Levy and Rare Books : Same assessment for H. But for ONB, its date of attachment changes to 11/30 because that is when it acquires rights in the collateral [title passes on delivery under 2-401], and perfection occurs not until attachment is satisfied under §9-308; so perfection is on 11/30. Under §9-317(a)(2)(A) ONB has a perfected security interest on 11/30 and (a)(2)(B) ONB satisfies a condition of §9-203(b) [s/a on 3/1] and files and f/s on 3/1. Either date is before 12/1, and therefore ONB wins again.

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(C) Order of Issue and Ordinary Books : H’s judicial lien arises on Nov. 29. ONB gets an attached security under §9-203(b) on 3/1 and its perfected on 3/1. Under §9-317(a)(2)(A) or (B), ONB’s perfection date (3/1) and §9-203(b) [s/a] and filing (3/1) are before Nov. 29, and therefore ONB wins again.

(D) Order of Issue and Rare Books : H’s judicial lien arises on Nov. 29. ONB gets an attached security interest under §9-203(b) on 11/30; and it perfects on 11/30. Under §9-317(a)(2)(A) its perfection date is on 11/30 [under this section it looks like MT would win] BUT, under (a)(2)(B) ONB satisfies a condition under §9-203(b) [s/a on 3/1] and files [3/1]. Therefore, §9-317(a)(2)(B) is satisfied and ONB beats out MT again.

(2) Policy — Is it fair to Harriet (the tort victim). She is not a voluntary creditor like MT. She is an involuntary creditor (we should have more empathy for Harriet than MT since she is an involuntary creditor and has no choice in getting the security agreement]. Look what happens to Harriet, she first becomes an involuntary creditor, and then the debtor Epstein enters into two voluntary transactions which diminishes her opportunity of recovering on her claim. Here is Epstein giving ONB a floating lien on all present and after acquired inventory; moreover, he takes money from his account and converts it into rare books and these rare books are covered under ONB’s security interest. Harriet doesn’t get a say in those transactions, and Epstein has every motive to favor OMB. Is this rule really favor? How can we make a better rule?

(3) What about super priority for tort victims with judicial liens will beat out Art. 9 secured creditors. So what will you as a creditor do before you loan money to Epstein — ensure there are safe working conditions. This is “Calebreisi Resource Allocation Law — it shifts the cost of the behavior on the person who causes the problem. Assume tort victims win regardless earlier or later — before OMB loans money it checks the workplace to ensure safety, if OMB concludes its not a safe place, how will it affect its lending to Epstein? It won’t offer the cheap deal (low interest limited collateral deal); they will charge a high interest rate close to general credit because can’t rely on collateral because you know you may be trumped. The theory is that if the market is competitive, which it is, Epstien will be driven out and this is good because they had an unsafe work environment. Basically, the rule will only discourage lending to bad actors.

i. American Bankers Opinion — They will have a lot of complaints about this hypothetical super priority rule for tort victims. Another answer to this problem, we have worker’s comp (EE insurance) and insurance companies, and direct govt. regulation (OSHA). The creditors will argue don’t make us responsible for taking care of all these problems. Shift the burden to those who are capable. [this argument is similar to the one made above in problem 36].

ii. Any time you sue and you get a judgment you face Harriet’s problem under §9-317(A)(2). Not only does this rule not help

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judicial lienors, it makes their situation worse under §9-317(A)(2)(B).

(F) Problem 1(f) — this is a battle between an article 9 secured creditor and judicial lienor. HS is a designer of clothes. UE is a retail shop. On 1/3/2001, UE asks HS to sell it $200K of clothes on credit. HS agrees and UE signs a sale agreement and s/a describing the collateral as “HS spring fashions sold in Jan. 2001”. The HS clothes are delivered to UE on 1/5. UE’s business is struggling. In Dec. 2000, it lost a battle w/ UO over the UE trademark; UO obtained a judgment of $500K against UE. After unsatisfactory attempts to get UE to pay, UO asks the sheriff to levy. The sheriff seizes HS clothes out of UE store on 1/23/2001. UE calls HS on 1/24 to inform them about the levy. HS discovers that it has not yet filed a f/s for the 1/3/2001 credit sale; she makes a filing that day. Will UO or HS get paid first out of the proceeds from the judicial sale? Assume you are in an order of levy jurisdiction. Is the outcome of this problem fair? Efficient?

(1) Analysis — The fight is over the clothes in the retailer (therefore inventory). What is Urban Outfitters’ status (UO) they have a judicial lien and it arises on the levy (order of levy jurisdiction) 1/23. What is High Spirit (HS) status — it has an attached security interest under §9-203(b) [value — gave them clothes in advance of giving credit 1/3/01 —consideration to support a simple K; s/a 1/3/01; rights in the collateral 1/5 [when delivered under §2-401] so attachment is 1/5/01 and perfection occurred when they filed in 1/24/01.

(2) Outcome of Battle — If we were to apply §9-317(a)(2) [NOT the correct rule], what would the result be? If we were to apply 9-317(a)(2), UO would win because it became a creditor before HS under (a)(2)(A) and (a)(2)(B). The correct rule 9-317(e) — If a person (HS) files a f/s with respect to a purchase money security interest (§9-103 — there is a purchase money security interest b/c under §9-103(b)(1) the goods are purchase money collateral with respect to the security interest and (a)(1) purchase money collateral is something that secures a purchase money obligation and (a)(2) obligation of an obligor (here, its UE) incurred as price of collateral — this means HS wears 2 hats] within 20 days [1/5 to 1/26] and etc…There’s a 20 day grace period for HS, and HS wins b/c she filed on 1/24 [with 2 days left in the 20 day period].

(3) Is there a Secrecy Problem for UO ? On 1/23 will UO be able to learn UE’s property is encumbered? If you check the files, there’s no file; therefore, no notice. There’s a secrecy problem. The reason for this is part of the preference for purchase money security interests. Why might UE call HS on 1/24 [this is what triggered HS to file, and win the priority battle]. If HS doesn’t know about the levy, they can’t go to the sheriff and ask him to pay them first according to the priority rules. If you represent UE, why might you not call? If you call HS knows you are in default of the agreement [there’s a clause in the s/a that if someone levies the collateral, this is a default event]. UE might think if the levy is not too devastating, they won’t tell HS and just keep paying HS and get back on track. S

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(G) Problem 1(g) —Everything is the same in 1(f) except that HS and UE sign a consignment agreement on 1/3/2001,under which HS reserves title to the clothes. UE is to receive a 20% commission on any sale of HS to the public but must remit 80% balance w/in 2 weeks of the sale. UE has the right to return any unsold clothes by 9/1/2001. HS does not file its f/s until 1/24, after UE phones HS about the levy. Does UO or HS have the senior claim to HS fashions?

(1) Analysis —The only difference is that the relationship between HS

and UE is different. There is a consignment agreement [9-102(a)(2) there is a true consignment under Art. 9 b/c there is enough value involved]. If it’s a true consignment its in art. 9 under 9-109(a)(4) and if look at the definition of secured party and debtor it includes true consignor and consignee. What priority rule do you go to — §9-317(e). This is what we mean when true consignments are in Art. 9, they are swept in. How do you know if the there is a purchase money security interest [if there is no purchase money security interest they lose under §9-317(a)(2)]. But, under §9-103(d) it tells us that it is a purchase money security interest. Therefore, under §9-317(e), HS wins because there is a 20 day grace period for filing for purchase money security interests.

(4) Problem 51 (p. 118) —CTA used its accounts receivables as collateral for a loan from the MSB, but the bank failed to file a f/s. 6 months later, CTA needed another loan and applied for one from BNB, which searched the files, discovered there was no f/s recorded for CTA as debtor, and took a security interest in their accounts receivable. BNB did not file a f/s in the proper place. Which Bank has the superior interest in the collateral?

(A) Analysis — Bentham National Bank wins. The author refers you to an §9-317 official comment 3 to answer this question. Where is the statutory support for this conclusion?

§9-322 states general rules for determining priority among conflicting security interests and refers to other sections that state special rules of priority in a variety of situations. The security interests given priority under §9-322 and other §§ to which it refers take priority in general even over a perfected security interest. A fortiori they take priority over an unperfected security interest. Paragraph of (a)(1) of §9-317 so states.

Under §9-317(a)(1) a security interest is subordinate to the rights of a person [here BNB] entitled to priority under §9-322. §9-322(a)(2) A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest.

(5) Problem 2 (Handout #12) — Security interest in promissory notes [quasi intangible property, which is part of subcategory of “instruments”]. Various large commercial customers of CTA give them promissory notes in payment for services; the notes are negotiable. See §3-104. On 1/3, CTA gives MSB a security interest in the notes in exchange for a loan. As part of the loan

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deal, CTA promises to deliver the notes to MSB w/in one week after the CTA’s receipt of the MSB loan proceeds on 1/3; CTA explains it needs time to collect the notes from the safe deposit boxes at a number of branches of FUB. CTA never delivers the notes to MSB. On 1/8,CTA engages in double financing and gives BNB a security interest in the same notes in exchange for a loan. BNB also insists on delivery of the notes and CTA promises to deliver the notes w/in 1 week of receipt after receipt of BNB loan proceeds. CTA also does not satisfy this delivery development. On 2/1, CTA defaults on both loans. Which creditor has the senior lien on the notes, which remain in CTA’s safe deposit boxes on at various branches of FUB at time of default?

(A) Analysis — The collateral is classified according to the status of the creditors. What is MSB’s status between 1/3 and time of default (2/1). When does MS get attachment — 1/3? When is there perfection in the notes? See §9-312(e) [in the exam take up all 5 modes of perfection to ensure you don’t miss something] there is automatic perfection, but at time of default the automatic perfection lapses. What is BNB status? Attaches on 1/8; perfection lapses by time of default and under 9-312(h) neither creditor took steps to re-perfect. We have two art. 9 secured, but unperfected creditors. Go to §9-322(a)(3) — the first security interest to attach if conflicting security interests are unperfected. Therefore, MBS wins.

(B) What if default is 1/26 ? MSB is unperfected; but BNB is still perfected; and under §9-322(a)(2) BNB wins.

(C) What if Default is 1/10? Both are still perfected. So, MSB wins under §9-322(a)(1) [first in time rule] MSB perfected first.

(D) What if on 1/6 MSB files a f/s and default is on 1/26 ? MSB wins because it has temporary perfection and during that time it gets continuous perfection (no lapse). BNB has temporary perfection, but under §9-322(a)(1), MSB wins because it has the earlier date of perfection (1/3 when temporary perfection started).

(E) Lesson : Always file a financing statement because of the concern that the notes don’t arrive. The other important point from this problem is the importance of figuring out at what time do look at the status of the various contestants, because their status keeps changing. And depending on the priority rule, you may look at a different time. Some rules tell you what time to look (9-317(a) tells us to look at the secured party’s status when at the time the other contestant becomes a lien creditor — if it’s a battle between the trustee we look at 544(a)(1) — at time of commencement of bankruptcy; under 9-312(c)(2) we saw the critical time period was when the goods were in the warehouse; 9-322 does NOT tell us explicitly when to look, but we see in this problem that the time is when you look at the mutual default.

(6) Problem 52 (p. 118)— JE ran a clothing shop and needs money. JE goes to 2 banks, FNB and SSB, and asks each for a loan using his inventory as collateral. They each make him sign a s/a and f/s. FNB files first on 9/25, but did not loan EJ any money (nor any commitment to do so) until Nov. 10. On 10/2, SSB loans JE the money and files f/s. JE pays neither bank.

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(A) Analysis : Did both banks have a perfected security interest, assuming they filed in the proper place? In other words, is it possible for 2 creditors to have perfected security interests in the same collateral? YES, under comment 1 of §9-322, two or more people may claim a security interest in the same collateral. §9-322(a)(1) governs the priority of competing perfected security interests.

(B) Analysis : Remembering that attachment is a pre-requisite to perfection, §9-308, and that attachment cannot occur until the creditor gives value, decide which bank has the superior right to the inventory. See Example 1 in official Comment 4 to §9-322.

When there is more than one perfected security interest, the security interests rank according to priority in time of filing or perfection. Filing refers to filing an effective f/s; whereas, perfection refers to acquisition of a perfected security interest, one that has attached and as to which any required perfection step has been taken. §§9-308, 309.

Example of 1 of Comment 4: On 2/1, A files a f/s covering a certain item of debtor’s equipment. On 3/1 B files a f/s covering the same equipment. On 4/1 B makes a loan to Debtor and obtains a security interest in the equipment. On 5/1 A makes a loan to Debtor and obtains a security interest in the same collateral. A has priority even though B’s loan was made earlier and was perfected when made. It makes no difference whether A knew of B’s security interest when A made its advance.

This example illustrates anticipatory filing under §9-502. The justification for determining priority by order of filing lies in the necessity of protecting the filing system — that is, of allowing the first secured party who has filed to make subsequent advances w/out each time having to check for subsequent filings as a condition of protection. Note, however, that this first to file protection is not absolute. For example,§9-324 affords priority to certain purchase money security interests, even if a competing secure party was the first to file or perfect.

(7) Problem 3 (Handout #12) —

(A) Problem 3(a) — Assume JE signs both s/a and f/s on 9/1JE does not receive $ from either that day. Neither bank gives him a firm loan commitment. On 9/25, FNB files; On 10/2, SSB gives Jay $ and files. On 11/10, FNB gives JE its proceeds. Which bank has the senior lien on JE’s inventory? When did each perfect its security interests?

(1) Analysis —The s/a is in the debtor’s inventory. There is no commitment to extend credit by either bank on 9/1. When does FNB get attached security interest — on 11/10 because under 9-203(b) you need value. When did FNB perfect on 11/10 because under §9-308 need attachment to perfect. For SSB, attachment and perfection occur on 10/2. SSB perfects before FNB, but they lose. Go to 9-322(a)(1) because we have 2 art. 9 conflicting secured creditors. The filing for FNB is 9/25 so they beat out SSB. This is a case where anticipatory filing works.

(2) Policy — Do you like this priority rule (is there secrecy)? From SSB standpoint, is there notice? It will find the f/s. If you represent SSB, what more would you like to know whether to extend the

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credit [what can you find out on 10/2]? You call FNB and want to know how much they are going to loan the debtor; all you know is there is a potential relationship that may occur that may involve the collateral you are looking. Because you are unsure about this other relationship, SSB will charge a high interest rate close to general creditor rate because of the possibility that there may be an earlier lien on the collateral? Some think this is a bad result because in effect it gives FNB a situational monopoly on the opportunity to extend credit in the future; no one can compete with FNB because no one has the information; thus they will have to charge a higher rate. There are a lot of reasons why the debtor may want to have an exclusive relationship with one bank; but should the law require no choice. Assume the exclusive bank starts putting more honerous provisions on the debtor, at that point SSB may be able to compete; but SSB will require the debtor to pay off the debt; Thus, the result, is the debtor now has an exclusive relationship with another problem. These are the problems with anticipatory filing — it gives a bank situational monopoly. It makes no sense because it gives no notice.

(B) Problem 3(b) — Everything is the same as above except that on 9/25, FNB takes possession of JE’s encumbered inventory. Which bank has the senior lien? Why?

(1) Analysis — Second State Bank wins. Early bird taking of possession has NO impact on the application of the second sentence of UCC §9-322(a)(1).

(C) Variation of Problem 3(b) —Everything is the same as in 3(a) except before Nov. 10, FNB receives a copy of SSB’s s/a and f/s. Which bank has the senior lien?(1) Analysis — Although First National Bank has the “last clear chance”

to avoid the priority battle, actual knowledge is not taken into account under §9-322(a)(1) and, accordingly, First National Bank wins. Why is knowledge ignored?

(D) Problem 3(d) — Everything the same in problem 3(A) except there is a third creditor and some of the dates are different. JE signs only the SSB s/a on 9/1; JE signs the FNB s/a on Nov. 10, immediately before he receives the loan proceeds; and on 10/15, Walmart, which has won a judgment against JE for failure to pay for a $15K credit purchases, has the sheriff levy on JE’s inventory. These events occur in an order of levy jurisdiction. The inventory is not worth enough to pay all three creditors in full. The sheriff sells the inventory. In what order should the sheriff distribute the sale proceeds?

(1) Analysis : a. SSB v. Walmart: Walmart has a judicial lien on 10/15; SSB

has an art. 9 security interest that attaches under §9-203(b) [s/a 9/1; value 10/2; rights in collateral ?] assume 10/2 and perfection occurs on 10/2. Under §9-317(a)(2), SSB wins because it perfected before OR met §9-203(b)(3) condition and filed before Walmart.

b. FNB v. Walmart: Same goes for walmart; FNB has an art. 9 114

security interest that attaches under §9-203(b) [s/a, value 11/10; collateral?] Assume 11/10 date of attachment; and perfection occurs on 11/10 also [even though filing on 9/25] because need attachment to perfect under §9-308. Under §9-317(a)(2)(A) FNB perfects on 11/10 or satisfies (a)(2)(B) [s/a on 11/10] and files [9/25]. Either way FNB’s priority date is 11/10, and that means Walmart wins.

c. SSB v. FNB: Both banks are art. 9 secured creditors, and therefore the correct priority rule is §9-322. Under §9-322(a)(1), SSB perfects on 10/2 and filed on 10/2. As for FNB, they perfected on 11/10, but filed on 9/25. Therefore under the first in time rule in §9-322(a)(1), FNB beats SSB.

(2) Anticipatory filing Problem — There is a circular outcome and the judge will have to figure out which policy is more important to break the outcome. If favor anticipatory filing he’ll pick FSB first, SSB, then Walmart. If you are more worried about judicial lienors (the policy surrounding Harriet), the judge might pay SSB, Walmart, and FNB. You have to break the priority rule in order to figure out who gets paid first.

(8) Problem 4 — The following problem involves priority battles but the collateral

in dispute is over shares of stock held in the indirect holding system in AGE. Review Diagram on pg. 8 of Handout 9 concerning the indirect ownership of stock. Also study §§ 8-102(a)(7), 8-102(a)(8), 8-102(a)(14), 8-102(a)(17), 8-106 [revised section], 8-501(a), 8-501(b), 8-507, 9-106, 9-312, 9-314, 9-324, 9-322, and 9-328.

(A) Problem 4(a) — Everything is the same as in problem (3)(a) except that when JE goes to the banks he offers as collateral the 100 shares of stock that he keeps in his account at AGE. Both banks describe the collateral in their s/a and filing statements “as 100 shares of Intel stock in the Debtor’s account at AGE”; JE defaults on both loans in Dec. DO both banks have perfected security interests, assuming that they filed in the proper place? Which bank has the senior lien on JE”s stock at AGE?

(1) Analysis — The collateral is (not a security b/c not a direct holding system, not a security account) a security entitlement, which is part of a security account, and which is investment property. FNB attaches on 11/10. When does perfection occur for FNB? [Is filing a f/s a proper mode for perfecting a security entitlement? — if its inappropriate, then FNB will have an attached, but unperfected security interest; but under §9-312(a) filing a financing statement will work and its perfected on 11/10; For SSB they have perfection and attachment on 10/2.

(2) Priority Battle — Under §9-322(f) special provisions trump the residual

rule of §9-322(a). Go to §9-328 — (1) and (2) does not apply because no control; (3) doesn’t apply because neither is a security intermediary; not a commodity intermediary, not a certificated security; wrong debtor; but (7) applies and it sends us back to §9-

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322 FNB wins again because under §9-322(a) first in time rule makes FNB the winner.

(B) Problem 4(b)(i) — everything the same except on 10/2 instead of filing SSB wants it to be transferred to security account. Is SSB still perfected on 10/2. Yes, under §8-106(d)(1) there is control; so its perfected. The priority rule under §9-328(1) governs which says the one that has control wins. So, SSB wins.

a. Policy — How does FNB get notice. What would you advise FNB to do before handing over the money — the issue raised how do you the equivalent of a visual inspection of goods when talking about investment property? Ask the debtor to provide a current statement of its security account (the stock won’t show up because in SSB’s account].

(C) Problem 4(b)(2)(ii) — Assume JE is uncomfortable with transferring the stock into SSB’s brokerage account, but does know and trust the firm Astor an York which is on retainer to SSB. JE and SSB agree that Mr. Astor will act as a “collateral agent” for SSB in this transaction. JE instructs his broker at AGE to transfer the 100 shares in his account to Astor’s account at FUS. The shares are to remain I that account during the loan repayment period unless JE is in default. JE’s broker effectuates this transfer electronically on 10/2/ Which bank has the senior lien? Why?

a. Analysis — This is like the diamond case. If Mr. Astor is in effect closely related to SSB (so closely related so that he is like an alter ego) then control by Astor is equivalent to control by SSB. And go to 8-106(d)(1) — (pg. 1280) the purchaser (SSB) has become the entitlement holder; but MR. Astor’s lawyer may seem more neutral (like a bailee) if that is the case, then under 8-106(d)(3) to see if there is control — another person has control of the security entitlement on behalf of SSB and acknowledges that it has control [need to know if the lawyer acknowledges control]. So there will be control either under 8-106(d)(1) or (3). The outcome of priority is

(D) Problem 4(c) — Everything is the same as in (4)(a) above except that SSB does not file a f/s. JE does not like the idea of transferring the stock into SSB’s brokerage account at AGE. Instead, JE proposes that SSB send a letter to AGE, consigned by JE, notifying AGE that SSB holds a security interest covering the 100 shares of the Intel stock out of JE’s brokerage account during the loan repayment period w/out the written consent of SSB. IF his procedure is followed, who wins after JE’s default?

a. Analysis — Does SSB have a perfected security interest? No, under 8-

106(d)(2) is the only possibility, but they have not become the entitlement holder, and no other person with in the meaning of (d)(3), so the only possibility is a tripartite agreement, but what is missing —[who has to agree? The securities intermediary has to agree —here the debtor, SSB agreed but not AGE and that is a fatal mistake for SSB, which means they have an unperfected attached security interest, which means they will lose against FNB and the

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trustee in bankruptcy. Why does the intermediary have to agree? They handle a lot of buy/sell orders and they need time to enter the system to punch in instructions to obey SSB orders not FNB.

(E) Problem 4(d) — Everything is the same as in (4)(a) above except that SSB does not file a f/s. JE does not like the idea of transferring the stock into SSB’s brokerage account at AGE. Instead, on 10/2, a 3 party agreement is executed by JE and representatives of AGE and SSB which provides, in pertinent part: (1) that the stock will not at this time be transferred out of JE’s brokerage account; (2) that AGE will comply with all entitlement orders originated by SSB w/out further consent by JE; (3) that so long as the Stock remains in JE’s brokerage account, JE (as well as SSB) will receive monthly statements from AGE and AGE will send all dividends and proxy statements to JE; and (4) that during the loan repayment period, JE, with the consent of AGE but w/out consulting SSB, may substitute a security entitlement of IBM stock (of equal market value at time of substitution) for the 100 shares of Intel stock. Which bank wins the priority battle when JE defaults on both obligations in December?

(1) Analysis: The collateral is classified as investment property under Art.9, more specifically [100 shares of stock in AGE] and under

Art. 8 it’s a security entitlement. FNB gets an attached security interest under Art. 9-203(b) [value 11/10, rights collateral 9/1; s/a 9/1] on 11/0. Did FNB perfect — the right mode of perfecting a security entitlement — filing will work under §9-312; so its perfected on 10/12. SSB gets an attached securities interest on 10/2. One way to perfect is to get control under §9-313, takes us to 9-106, to 8-106(d)(2) a tripartite agreement will work for control. So SSB gets perfection on 10/2.

Priority Rule: If the residual rule of §9-322(a) applied, FNB would win because it filed earlier 9/25. But, §9-328 applies. Under §9-328(a) a secured party that has control will beat the other secured creditor. So, SSB wins.

Problem: Debtor has rights in the collateral [e.g., to get the dividends, proxies] under 8-106 that’s ok, it doesn’t destroy control on the part of SSB. What about voting rights? Need to ask whether the objectives would be the same in terms of the issues they would be likely to vote on. At first blush, you think they have the same interests [the both want the stock to maintain value], but their time frames might be different [assume it’s a 1 year loan, and JE wants to hold the stock for 30 years — that will affect how one may vote on the stock; Also the bank may have tax considerations which also would affect how they might vote]; So their objectives may not be the same; The parties could agree not to vote during the loan repayment period. The broader point: is the CODE does NOT tell you what to do — control does not have to be exclusive for it to work to give a perfected security interest.

(F) Problem 4(e) — Everything is the same as in (4)(a) except that this time, FNB does not file a f/s. Instead, on 11/10, when FNB makes its loan, FNB enters into a tripartite agreement w/ JE and AGE. The agreement provides that AGE, during the loan repayment period, will follow FNB’s

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orders, respecting the 100 shares of Intel stock in JE’s account, as though those orders were issued by JE. On 10/2, slightly more than 1 month earlier, SSB executed a comparable tripartite agreement w/ JE and AGE covering the same 100 shares of Intel stock in JE’s account. SSB also did not file a f/s. Which bank has the senior lien? Why? Why would AGE enter into both of these tripartite agreements? What should each of these banks do to avoid this difficulty in the future? To protect against this problem?

(1) Analysis: The collateral is still security entitlement. FNB gets an attached and perfected security interest on 11/10. [same analysis as above §9-203(b) and control under 9-313] and SSB gets attached and perfection on 10/2. Is there a collateral specific priority rule that governs? §9-328(1) doesn’t apply because both parties have control and this subsection only assumes one party has control. But, under §9-328(2) says conflicting security interests where each has control ranked in priority of time of subsection (B)(ii) — whoever obtains control first under §8-106(d)(2) (see page 1280 its revised). Therefore, SSB wins because they get control first.

(2) Policy: It seems contradictory to have two parties have control of the security interest. Clearly FNB is first on the fault of AGE not

carefully checking. FNB will not only sue J, but also AGE on the theory that they should check. But the court suggests that this isn’t AGE’s problem — its not per se negligence. So if you represent SSB or FNB and want to protect against this result — when get the tripartite agreement you bargain for protections against this result (e.g., AGE has searched his files and doesn’t know of any earlier third party claim to this security entitlement; AGE has not signed an earlier tripartite agreement; and AGE will not sign any future control agreement to this account]. W/ this language, then FNB could sue AGE.

(9) Handout 12A: Why Allow Secured Transactions?

(a) Why do we allow secured transactions?

(1) Hypo: Assume J is the debtor, and in effect, by entering a secured transaction, has entered into a K with Creditor #1. That K is

embodied in the s/a and f/s. It’s a private deal and the effect of J entering into this secured transaction w/ Creditor #1, is that J and Creditor #1 demote the claims of Creditor 2, 3 , and so on — all these future contestants. They are not parties to the deal, but the effect of the transaction is to demote the claim of strangers to the deal. Why do we let people do this? Or is this the wrong question — Should we disallow secured transactions? Is there a principal basis for saying we don’t want J and creditor #1 by private agreement to demote claims of strangers to the deal?

a. Freedom of K View:Utility argument: won’t enter the K unless it will maximize his utility. Since he knows his utility, we don’t

let the govt. decide, that’s why we allow freedom to enter into deals. Also the freedom to enter into a deal, is part of our liberties.

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b. 3 Rationales:1. Secured transactions are unfair — this deals with the

question of whether you feel sorry for the other creditor. Its not

unfair if you have an adequate notice system. Don’t feel sorry if there is an opportunity of notice. But there are deficiencies in notice in Art. 9. We saw when there is a change in the name of the debtor, there’s a problem with notice; Anticipatory filing — little notice given; true lessors don’t give good notice; §9-309 (automatic perfection) don’t provide notice. But all these problems could be fixed if we had the will. Do you feel sorry if there is notice? NO, there are lots of strangers to Ks who are hurt by the fact that 2 parties make a deal. Example — I want to sell my horse, and you offer $10K and sister offers $15K. You sell it to me, my sister is hurt because she offered a better price; but this not unfair in a system of freedom of Ks. There are a few cases where secured transactions can be unfair — Example — involuntary creditors (Harriet the judicial lienor, she has no choice whether there is notice or not); unfairness if J is a consumer and doesn’t know what he is doing when [§9-204(b) there is some protection of consumer debtors so that they don’t become extended.] There is no problem to the unfairness question IF there is NOTICE.

2. Secured transactions are inefficient [losses exceed gains] —Is

this system a good system — will there be more cheap credit available? Any priority rule reduces transaction costs [think how expensive it would be for the debtor to enter into separate bilateral agreements, so you don’t have to bargain the problems of conflicting creditors]. Under §9-339 you can create a subordination agreement.

Ex Anti Benefits and Post Benefits to Creditor

We have learned that taking security leads to ex anti benefits for the Art. 9 secured creditor [e.g., taking security is a sorting mechanism helps evaluate the debtor’s credit worthiness; there is the pre-default leverage effect (interrorum effect) of taking security (debtor knows if it defaults, creditor has the power to inflict immediate harm); if f/s filed it may scare away other potential creditors preventing the debtor from over-extending [fewer creditors more likely creditor one will be paid]; fewer creditors means the debtor may have to put more money in the venture, which means less likely to take a risky chance.

Ex Post Benefits to Creditor — Talking about post default, don’t need to go to court, get a judgment, you have something to collect out of.

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Some argue these benefits should be passed on to lower interest rates on extending credit. So does that mean J is better off. One would expect if the cost of secured credit is less than general credit, J would want to secured his debts. The problem is that debtors can’t meet all their credit needs by using secured transactions. Debtors don’t have enough collateral to put forth. So most businesses and individuals use a combination of secured debt and general credit. As the debtor increases the amount of secured credit he uses, you’d expect the amount of general credit to increase, because all the assets which are encumbered are removed from the pool of assets available to general creditors, [see §9-201(a)]. Is this just a zero sum game for creditors.

Refer to the formula at the bottom of Handout 12A.

3. Secured transactions have unacceptable distributional consequences. — In general secured creditors are

institutional and sophisticated; and general creditors are unsophisticated; so they don’t know when the debtor increases secured debt thereby reducing the property subject to general credit pool. If they don’t know then they can’t raise the rates, and then they will be charging too little, which will eventually drive those creditors out.

c. Conclusion: If we assume the 3 rationales are correct, what does

the new Art. 9 do. It encourages the use of secured credit. It makes the use of secured credit as easily possible. How, in the face of this uncertainty? (1) it reduces formalities — look at §9-203(b), this procedure is simple and cheap to get a security interest in property. (2) Art. 9 allows the floating lien — §9-204, very few formality; (3) the scope of Art. 9 keeps expanding — it covers securitization, new forms of collateral; (4) priority rules saves cost; (5) anticipatory filing — making it easy for creditor #1 to beat out judicial lienors under §9-317; (6) powerful remedies under §9-609. All these components reduce the cost of entering into a secured transaction.

B. Priority Battles Involving Purchase Money Security Interests(1) Read text pg. 129 to 147

(2) Relevant Sections: §9-324 this is the main priority rule for purchase money secured creditors, which beats out earlier Art. 9 secured creditors with floating liens. It reverses the first in time priority rule in §9-322, and it ignores the notice issues because we don’t go in first in time. There are two traditional reasons for the super priority of purchase money security interests: (1) it is said that the earlier creditor who loses is NOT hurt and may in fact be helped by the fact that there was later infusion of purchase money credit [e.g., in problem 2a where Abe beats out FB, FB is not hurt and is helped as consequence of the purchase money transaction]. Why is the earlier creditor helped? The empirical assumption is that the value of the purchase money collateral at time of default will be greater than owed by the purchase money security + later investment. (2) Purchase money credit is an important source of secondary credit, and it would dry up if all we had was the residual rule of §9-322(a)(1). Why? Anticipatory filing

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creates the situational monopoly on the opportunity to extend credit in future making it harder for subsequent creditors to compete. By giving super priority, it allows subsequent creditors to compete. Why be skeptical of these two rationales? Why don’t we just fixed the problems, then we wouldn’t need the super priority rule.

(2) Problem 2: (Handout #14) —

(A) Problem 2A: On 6/1 Lucio, a consumer, borrows $ from FB. L authenticates a written s/a describing the collateral as “present and after acquired paintings.” FB files a f/s the same day. On 6/8, L buys 5 paintings from Abe’s Interiors (a sole proprietorship) on credit. Lucio picks up the paintings on the same day (she has told Abe that she intends to hang the paintings in her apt.). Abe takes a security interest in the paintings, but does not file a f/s — he never does. If L defaults on her obligation to FB and to Abe’s Interiors, which creditor has the senior right to the paintings?

(1) Analysis — FB gets an attached, perfect non-purchase money security interest on 6/8 [b/c debtor needs rights in collateral which doesn’t occur until 6/8 based on §2-401]. Abe gets an attached, perfected purchase money security interest on 6/8. If we apply §9-322(a)(1), FB wins because it can use the earlier of date of filing or perfection. Here, FB filed on 6/1. And Abe gets automatic perfection under §9-309(1). The anticipatory filing would give FB a victory under §9-322(a)(1). But the correct priority rule is §9-324(a) which covers purchase money security interests, here Abe wins because the purchase money security interest was perfected when the debtor received possession of the collateral [automatic perfection on date of attachment, here 6/8] or within 20 days thereafter.

(2) Alternative Question: The paintings are still goods, but its equipment if she hangs them in her office. [We also know Abe files on 6/25, which he has to because automatic perfection under §9-309(1) it has to be consumer goods]. Under §9-322(a)(1), FB wins. When does the 20 day period begin to run in §9-324(a) — it runs after possession (he has until 6/29). Abe would win again because Abe was perfected within 20 days thereafter the debtor received possession of collateral. [But if Abe doesn’t file until 7/25, we are out of the 20 day priority, no super priority, we go back to §9-322(a)(1), and FB wins because its date is the earlier date of perfection or filing.]

(B) Problem 2B: 6/1 — L gets money from FNB; S/S describes collateral as “present and

after acquired shares of Walmart and Intel Stock”; F/S filed6/8 — Abe sells L 100 shares of Walmart registered certificated stock;

Stocks delivered to L and endorsed: F/S filed.Who wins the battle over the 100 shares of Walmart stock if Lucio defaults on her obligations to both FB and Abe?

(2) Analysis: Status of FNB: The collateral is investment property; more

specifically “registered certificated security” because it is in the direct holding system. FNB gets an attached security interest under §9-203(b) on 6/8, and perfection on 6/8 because need attachment to

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perfect under §9-309. And filing is a proper mode of perfection under §9-312(a). Status of Abe: Abe has a purchase money security interest because under §9-103, Abe is enabling the debtor, L, to purchase the stock via credit. Abe gets an attached purchase money security interest on 6/8. There is no automatic perfection under §9-309(1) because consumer goods are not involved. But there is temporary perfection under §9-3312(e) for a 20 day period from time it attaches (6/29) and another 20 day from time of delivery under §9-312(g)(1) for 20 days from delivery [So Abe is perfected till 6/29] and Abe also gets permanent perfection (filing which is a permissible mode under §9-312(a)) by filing on 6/8.

Priority Battle: At instance, L gets rights in the stock (§8-302(a) thru endorsement); in terms of perfection, we have a tie. Under §9-322(a)(1), FNB wins because it filed first (6/1). Notice §9-324 does not apply since Abe enabled the debtor money to purchase the stock. It doesn’t apply because its not goods. Look §9-324(a) deals with goods other than inventory and livestock; (b) deals with inventory; (f) software. And under §9-103 purchase money only applies to goods and software. Under §9-324(5) perfected by taking deliver — did either creditor take physical possession of the stock? Abe had physical delivery, but when he sold it to L, he gave it to L. L never gave it back to L or FB. Nothing in §9-328 applies. So you go to the residual rule of §9-322(a)(1), which means FNB wins because it filed first.

Policy: Look at comments on page 1143 that explains why there is no purchase money priority — the control rule of paragraph 1 provides for the ordinary cases in which persons purchase securities on credit. What the drafters are saying is that this scenario does not happen usually.

How Could Abe Prevent This Situation: Perfect by getting into §9-328(5) [in other words Abe would re-insist L re-deliver the stock] or get control under §9-328(1) [which requires Abe to get control of the stock, which means Abe would need L to endorse the stock].

(C) Problem 2C : Assume Lucio does not hold any of her stock directly. Instead, she holds her stocks and bonds in a securities account at AGE. On 6!, Lucio signs a s/a for FB describing the collateral as “Debtor’s present and after acquired investment property held in her business investment account at AGE. She receives the FB loan on the same description of collateral on 6/1. On 6/8 Lucio asks AGE to purchase 100 shares of Walmart stock for her account. Lucio does not have sufficient funds to pay for stock. AGE agrees to finance the purchase, retaining a security interest in the Walmart stock, as well as other investment property in Lucio’s business account at the brokerage. AGE also handles the mechanics of purchasing the stock for Lucio. By the end of the day, AGE indicates, by an enry in its books, that Lucio’s business investment account now includes 100 shares of walmart stock. Lucio later defaults on both the FB loan and the loan made by AGE. Which creditor has the senior claim to the 100 shares of walmart stock? Who wins as to the other investment property in Lucio’s AGE investment account, for ex. Her security entitlement to 200 shares of Cisco stock purchased last year w/ money she saved form her pay check? What prophylactic steps

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would you recommend that FB take if it wants to protect itself against potential competing claims to Lucio’s financial assets in her business investment account at AGE — whether the later contestant in AGE or outside creditor?

(1) Analysis : Problem 2C demonstrates the “ordinary case” when buying stock on secured credit. Review 14A Handout, which gives a detail example of how this case would work [“margin loans”].Analysis Pertaining to W Stock:

The collateral is classified as a “security entitlement” under Art. 8 since we are in the indirect holding system. [It could be a security account?] Status of FB: FB obtains an attached security interest on 6/8, and it is not perfected until 6/8 since §9-308 requires attachment for perfection. Status of AGE: AGE obtains an attached security interest on 6/8. There is automatic perfection under §9-309(10) when a security interest in investment property is created by a broker or securities intermediary. §8-102(14)(ii) AGE is a “securities intermediary”. So, AGE gets perfection upon attachment, which occurs on 6/8. [Purchase money security interest involves goods not investment property].

How Does Control work under §8-106? In this problem (a) and (b) don’t apply because there is no certificated security; (c) doesn’t apply because we don’t have a security; (d) also doesn’t apply; but (e) does apply because the entitlement holder (the debtor L) gives the purchaser (AGE) rights in the security entitlement. Thus, AGE has control.

Priority Battle: Under the residual rule of §9-322(a)(1), FB would win again because first in time to file. But, the correct priority rule is §9-328(3), which says that a security interest held by a securities intermediary in a security entitlement or security account maintained w/ the securities intermediary has priority over a conflicting security interest held by another secured party. This means AGE wins with respect to the W stock. Also under §9-328(1) AGE wins because it has control. There is automatic perfection as to control under §9-328(1) applies and AGE wins as to the walmart.

Analysis Pertaining to the Other Stock: The collateral is still security entitlement in the account. FB Status: FB obtains an attached security interest on 6/1 and perfection also occurs on 6/1. AGE Status: AGE obtains an attached security interest on 6/8 and there is automatic perfection under §9-309(10) on date of attachment — here 6/8. [Perfection §9-314, 9-106, 8-106(e)] by control [BUT there is NO control]. Priority Battle: Under §9-322(a)(1) FB wins, but under §9-328(3) AGE wins because Art. 9 favors security interests created by securities intermediaries.

Assume: FB wants to make the loan but wants to beat AGE at least as to the Cisco stock (and possibly the future stock). FB tries to get control. With respect to the Cisco stock, on 6/1 in

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addition to making loan, f/s/ s/a — it gets a tripartite agreement signed by them, AGE, and L. Remember 8-106(d) — talking about someone other than a securities intermediary; (d)(2) purchaser (FB)….(p. 1280). So now FB has an attached and perfected by control security interest in cisco stock. AGE doesn’t get automatic control until 6/8. So, §9-328(1) doesn’t apply, but §9-328(3) applies, and AGE wins. §9-328(3) is an exception to subsection (2) — the difference is that one of the secured parties is a secured intermediaries.

Policy: What else can FB do to win? AGE’s non-purchase money security interest will beat out a purchase money security interest under §9-328(3). FB could bargain for a subordination agreement or bargain with AGE so they don’t take a security interest in the stock. That is what the drafters intended. The explanation given is that AGE has to handle all kinds of stocks (transactions) everyday in which lending is only one, and FB and other banks that loan against stock know that most keep their stock in brokerage houses; So FB has can find out about AGE (by asking the debtor). And, then knowing about these very favorable rules, you are suppose to bargain with AGE before you make the loan. Will AGE give up some of this priority? Why would they do? Maybe they have no intention to ever loan L, maybe L has stock valued well over the debt (grossly over collateralized), or L is a very important customer and AGE doesn’t want to lose L (b/c make a lot of commissions). SO they will bargain, and give up priority as to or both forms of stock.

(3) Problem 57 — Paramount homes finished building U, its newest apt. complex. The clubhouse had to be furnished, so Bill went to Sophy’s, furniture store, where he made $2000 worth of credit purchases and signed a s/a on behalf of Paramount Homes in favor of the seller. The agreement was signed on 6/8; the goods were delivered that same day. Bill failed to mention that all his ER’s assets (equipment and inventory) were designated as collateral on an existing s/a and f/s in favor of SNB. The agreement contained an “after acquired property” clause, stating that later a similar collateral coming into the buyer’s estate would automatically fall under the bank’s security interest. (See §9-204(a)). The policy of Sophy’s was not to file f/s for its credit furniture sales.

(A) Analysis : Why might it have such policy? Is it wise here? (B) Analysis : On 6/10, which creditor will have priority in the furniture?(C) Analysis ? On 6/30, which creditor will have priority in the furniture?

(4) Problem 3 (Handout #14) — Make the following additional assumptions Paramount obtains its loan from SNB on 6/1. SNB files its f/s on the same day. Bill is a part owner of Paramount. Does SNB or Sophy have the senior interest in the furnishings in each of the following 3 cases: [Refer to §§ 9-102(a), 9-324]

(A) Problem 3A : Bill buys 1 $2,000 sofa and puts it into the apt. he will live in as manager.

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(1) Analysis: The sofa is consumer goods and if the contest is joined on 6/30, Sophy wins.

(B) Problem 3B: Bill buys 10 identical $200 sofas and tells Sophy’s sales clerk

he intends to place them in furnished rental units.

(1) Analysis: The sofas are inventory and if the contest is joined on 6/30, Sophy loses.

(C) Problem 3C: Bill buys 1 $2,000 sofa and places it in the clubhouse for the

apt. complex.

(1) Analysis: The sofa is equipment and if the contest is joined on 6/30, Sophy loses.

(4) Problem 4 (handout #14): On 9/1 MI borrows $100K from VSB to expand its dining facilities. MI gives VSB a perfected security interest in all of its “present and after acquired” equipment on 9/1. On 9/30, MI’s agent, C, locates a computer (to keep track of accounts) at Track. She explains to the salesperson that although MI wants to purchase a computer, it first wants to use the computer for a trial period before making a final purchase decision. Track agrees. On 9/30, an agreement is executed giving MI temporary possession of the computer selected by C, but reserving title in Track. MI is given an option to purchase the computer at the end of a 30 day trial period. During the trial period, MI is to pay a reasonable rental per day for the use of the computer. The computer is delivered to MI on 10/1. ON 10/30, MI decides to purchase the computer, on credit, and signs a s/a (describing the computer as collateral) and f/s prepared by Track. Track files the f/s on 10/1 in proper place.

(A) Problem 4A : If MI fails to pay both VSB and Track, which creditor gets the computer?

(1) Analysis: The interpretative difficulty under §9-324(a), faced by Track, is that MI first “received” the computer on 10/1; accordingly, more than 20 days elapsed b/w receipt and perfection. See §2-103(1)(3) [definition of “receipt of goods”]. Track’s most persuasive arguments are: (1) that MI is not a “debtor” until 10/30 under §9-102(a)(28)(A); (2) that the computer is not “collateral” until 10/30 under §9-102(a)(12); an (3) that §2-326(2) provides that MI cannot subject the computer to the claims of its creditors until 10/30 and therefore there is no need for earlier notice. The argument for VSB is that the secrecy problem arises on 10/1. If the drafters were sympathetic to the Bank’s concern, how would they change the code? In particular, how could they amend §2-326? Tack wins here. See Brodie Hotel Supply v. US.

(B) Problem 4B : Assume that on 9/30, MI rents the computer under a true lease. On 10/30, MI decides to exercise an option to purchase the computer under the lease. The purchase price is to be paid in installments. On 19/30, C, executes a s/a (describing the computer as collateral) and f/s prepared by Track computer. If Track wants to be senior to competing creditors including VSB, how much time does it have, if any, to file its f/s?

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(1) Analysis: Tack wins if it files w/in 20 days after 10/30. See §§2A-307(1), 9-324(a).

(C) Problem 4C : Assume on 9/30, MI signs a lease for the computer but the transaction is in fact a disguised installment sale. On 10/30 MI decides to exercise its option to purchase the computer. On 10/30, C executes s/a (describing the computer as collateral) and a f/s prepared by Track. If Track wants to be senior to competing creditors including VSB, how much time does it have, if any , to file a f/s?

(1) Analysis: Tack wins if it files w/in 20 days after 9/30. §§1-201(37), 9-324(a).

(5) Handout 14A: Margin Loans — talking about the events on 6/8 when L goes to AGE and requests a margin loan. How does a margin loan work? The first thing you need to know is that AGE cannot loan more than ½ of the purchase price because (federal law says so) of the stock crash where stock lost its value very quickly [L is trying to use her stock to buy more stock]. So, L will have to put forth half the purchase price. Under the Margin Loan Agreement (see Handout 11 for e.g.) there is a “margin maintenance requirement” (a.k.a. debt collateral ratio). The debt collateral ratio required is 65%. When she gets the 100 shares her debt collateral ration is 20%, but that changes quickly when the market drops and the interest accrues daily. Now, L’s Debt collateral ratio is 98.2%. And under the agreement, AGE can make a margin call, which means that L has to contribute cash or stock to bring the account back in the margin. Realistically, AGE would make a margin call way before this happened. But, what does L have to do? Get back into the margin, she has to come up with $1825 to get into the maximum. But that doesn’t solve her problem because the interest is accruing everyday. So its highly unlikely that she will be able to meet the margin call. This is what happens when you borrow against stock and the stock falls. If L can’t meet the margin call, there is a default event and she has to repay the loan. AGE is a secured creditor and thus under §9-609, 610 foreclose and sell the stock at a bargain basement price that created the problem; So L would have to liquidate virtually her entire portfolio locking in her losses because of the drop to pay back the loan.

Critics of Margin Lending: This result floods the market with supply, forcing the price of stock even lower [the same thing happens on the way up — if collateral becomes more valuable and prices are inflated, she can borrow more on the margin and buy more stock at a higher price, driving prices higher]. This is how margin lending exacerbates market fluctuation.

Why Does AGE Make Money on Purchases of Stock on the Margin: Profit from the interest rate, commissions on the purchase of stock (when L buys it), if L sells it, they get a commission on sale; also, under Art. 9 AGE can buy the stock themselves in the foreclosure sale under (§9-609(c)). So, AGE can hold it until the market improves. This is why AGE makes the

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margin loans and this is why it is the most common form of secured purchases of common stock. This is high risk purchasing for borrowers.

(6) Problem 5 (Handout #14)

(A) Problem 5A : This example involves inventory financing12/1/00 — MCA obtains a perfected security interest in H’s present and

after acquired inventory [floating lien]; MCA files a F/S

12/10/00 — H contracts to purchase $4,000 worth of B’s clothes B has a purchase money security interest in the clothes Clothes identified in the contract, but not delivered [§2-401]

12/11/00 —B files a F/S B notifies via e-mail MCA about the credit sale and her Art. 9

security interest MCA replies to B’s email and objects

12/12/00 —Delivery [H receives clothes]

Analysis: The collateral is classified as inventory. Status of MCA: MCA obtains an attached art. 9 security interest on the after acquired clothes on 12/12. Perfected on 12/12 because need attachment.

Rights in collateral [title may pass on 12/10, but for sure 12/12]; under §2-501 title may pass if goods identified. But we didn’t study this rule (minority view); rights in collateral will be when debtor gets physical possession.

Status of B: B obtains an attached purchase money security interest on 12/12; perfected on 12/11. If the parties did not agree on title passing when goods identified, attachment would be on 12/11, which means perfection would be 12/12 because of §9-308

Priority Battle: Under §9-324(c)(1) MCA filed a F/S covering the same types of inventory before (12/1) B filed on 12/11. This means that subsections (b)(2) through (4) in §9-324(b) apply.

Subject to (c), a perfected purchase money security interest in inventory has priority over a conflicting security interest in the same inventory if…

(1) the purchase $ security interest is perfected when debtor receives possession of the inventory [Yes, §2-401 title passes on delivery, filed 12/11]

§9-324(a) gives a 20 day grace period for perfection, notice (b) is more stringent no grace period.

(2) the purchase $ secured party sends an authenticated notification to the holder of the conflicting security interest [Yes, if email is considered to be a method of

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providing authenticated notification; see §9-102(a)(74); authentication (signature or symbol) §9-102(a)(7)(B).

Email raises 3 questions: (1) will email work (is it the same as “sends an authenticated notification”; (2) who needs to authenticate the email; and (3) how do you authenticate email?

Sending email will work under §9-102(a)(74) [send, record, and notification in Art. 1]

Who authenticates (§9-102(a)(7)(B) — the purchase money secured creditor [the code is unclear, should have both B and debtor authenticate] but, new Art. 9 doesn’t require debtor to sign F/S, which is a notice paper; by analogy, the debtor may not have to sign the email. Why should B authenticate? The idea is to notify MCA to not make a future advance.

How do you authenticate email? Under §9-102(a)(7), authenticate means to sign, or to execute or adopt a symbol, or encrypt or similarly process the record…. So, you should check the state where transaction takes place and see if it adopted the Uniform electronic transaction Act or the Electronic Signature Act (E-Sign) and any other state law, to figure out how to authenticate. Assume, if B types her name at end of email, it is good enough to authenticate the email for purpose of §9-324(b)(2).

(3) the holder of the conflicting security interest receives the notification w/in 5 years before the debtor receives possession in the inventory [Yes, 12/11]

(4) the notification states that the person sending the notification has or expects to acquire a purchase money security interest in inventory of the debtor and describes the inventory [Yes]

Result: Under §9-324(b), It looks like B wins even though MCA filed first. Under §9-322(a)(1), MCA would win because filed first in time.

(B) Problem 5B Analysis : Without notification, the priority rule governing this transaction will be §9-322(a)(1), which means that MCA wins because it was first in time to file on 12/1. See Comments 4 of §9-324(b). Under §9-102(a)(74), notification is not sent.

Notes: No matter the state of e-commerce law is, under UCC §9-324(b)(2), this email has not been sent; and under §9-324(b)(3) the notice has not been received. [These terms are defined in the code] As a consequence, B is in real trouble unless she can establish that MCA was not entitled to get the notification. See §9-324(c) defines who the set of creditors are who are entitled to get this special notice. Is MCA entitled to get the notification.

Under §9-324(c), MCA is entitled to the notice because since B perfected through filing, (b)(2) through (4) applies since MCA filed before the

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purchase money secured creditor (B). MCA was entitled to the notice, and did not get the notice. And accordingly, B does no t have a qualified purchase money security interest. So we go to §9-322(a)(1), MCA wins because they filed before B.

Policy: What is the purpose of requiring B to file a f/s to get super priority. The purpose is to give notice to later creditors, purchasers. And the purpose of the notification is to let earlier creditors know about the purchase money security credit. What’s the purpose of notification — isn’t it too late for MCA to adjust their behavior (they gave the debtor the money)? So, MCA won’t give the debtor any more money. The reason why the requirements under §9-324(b) are more stringent than §9-324(a), you are more likely to have a floating lien on inventory, and that means that the earlier creditor is more likely to rely on the after acquired property and give more future advances.

(6) Problem 6 (Handout #14)12/11/00 —B notifies in writing

MCA receives the writingThe writing specifies future sales and deliveries to H B’s S/A contains “No future advance” clause]

12/31/01 — B obtains a second valid S/A and F/SFiles F/S

1/1/02 — Clothes delivered to H

12/31/05 —B obtains a third valid S/A and F/SFiles F/S

1/1/06 — Clothes delivered to H

Analysis: §9-324(b)(3) requires that notification be within 5 years before the debtor receives possession of the inventory. As for the second delivery, the notice conforms to the 5 year period, but the third transaction is outside the 5 year parameter. Therefore, I would suggest, B send another authenticated notification to MCA before deliver of the third shipment of clothing. She must provide notice by 12/31/05 (that day).

Notes: The real question does B need to take additional steps to ensure she keeps her super priority as to the later sales of credit. No notification required as to the second delivery, but the third delivery is beyond the deadline. So §9-324(b)(3) was not satisfied as to the last delivery of the clothes. The idea is that this special notice lasts for 5 years, just like a F/S lasts for five years.

Policy: The secrecy problem arises when the debtor gets the new clothes, that is why we require perfection at that moment under §9-324(b)(1).

(7) Problem 7 (Handout #14)VB — HO owes $500K

Holds a perfected floating lien covering all past, present, after acquired inventory and accounts of HOValue of collateral is 400K

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SLFG — Provide HO short term financing for HO’s acquisition of spring/summer inventory Collateral in Spring/Summer Inventory and accounts generated by this inventory.

(A) Analysis :Recommendations:

Purchase money security interest in the inventory S/A should say “inventory and proceeds.” To get priority in inventory, satisfy the requirements under §9-324(b) With regard to the accounts see the explanation below Party financing the inventory on a purchase money basis makes a

contractual arrangement that that the proceeds of receivables financing by another be devoted to paying off the inventory security interest. [Comment 8 of §9-324]

Notes: Notice the security interest is under collateralized (the debt is worth more than the value of the collateral). Assume these dates:3/00 VB f/s; s/a; value3/10/01 paperwork3/15/01 HO purchase4/1 HO

Notes: To get into §9-324(b), SLFG needs a “purchase money security interest”. So start with §9-301 — how can you be sure you have a purchase money security interest. Look at §9-103(g), SLFG will have the burden of showing it is a purchase money security interest. Also need to look at §9-103(a)(2) looking at the purpose of the lender in making the loan (if value so in fact used). Need to worry about two issues with respect to making it clear that you have a purchase money security interest (1) spell purpose out in the S/A and Loan agreement (that the $ is for purchasing these goods) and (2) [how do you ensure the $ is used for that purpose] — you could do a joint proceeds check (with the debtor and seller’s names).

Now you go to §9-324(b). How do you satisfy this with respect to the clothes? Look at (b)(1) the term “when” means before or when (advice: file before attachment at an earlier time; before debtor receives possession; of course notification has to be received before same moment under §9-324(b)(2)). You want to have all the requirements done in §9-324 before HO purchases the clothes. How will you know when HO will purchase the clothes and get possession. How do you control timing? Don’t give HO the money until all the paper work is done (the filing, the notices, etc…). This will prevent SLFG messing up on the timing. Say you do all this, is there still a problem created by the acts just suggested above? What about VB when they get the notice? If there is an acceleration or default clause in the S/A, VB will declare default and this is a real problem for SFLG because they have to deal with the debtor’s collateral in bankruptcy proceeding.

Look: (1) SLFG can follow the code and end up w/ the situation above; (2) It can say to HO, VB needs to be at the table (maybe no loan made); OR (3) don’t send the notice to VA bank. If you really think HO is Ok for

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the short term, you don’t need priority over VA Bank (you are taking a risk that you will be second in time (problem 5(B)), but if you think they can repay, VA bank will never know). The cost of getting priority (notification to earlier creditor) may be too great. That is exactly the result the drafters wanted because they wanted to break up the mini monopoly the earlier creditor had, but imposing minimal protections.

(8) Problem 8 (Handout #14) 3/28 - H borrows $15,000 from MDNB

S/A describes inventory to be purchasedF/S filed

MDNB sends an adequate authenticated notification under §9-324(b)(2)

H purchases $30K of inventory from Std. AutoH makes a down paymentStd. Auto finances the rest taking a security interest in inventoryStd. Auto files F/S

Std. Sends MDNB an adequate authenticated notification [received same day]

4/2 - Inventory delivered to H

Problem 8A: MDNB gets attached and perfect on 4/2; Std. Auto gets attached and perfected on 4/2. They both have attached perfected pmsi, under §9-324(g)(1), the vendor is favored over the outside lender. Std. Auto wins.

Notes for 8A: Does it matter who wins, because the collateral is worth $30,000, and the 2 creditors should be able to get their money in default; but what about the issue of bargain sales at foreclosure, expenses, interest, depreciation. So, priority does matter. §9-324(b) does not govern this battle because it deals with cases you have a purchase money security interest v. another type of creditor. §9-324(g) deals where you have 2 purchase money secured creditors that have super-priority under (a), (b), etc… Std. Auto wins under (g)(1). This section is referred to as the “vendor preference rule”; The seller gets preference over the outside lender.

Problem 8B3/28 — MDNB loans $15,000 (11:00)

No notification sent F/S filed (11:30)

H borrows $15,000 from CF (2:00 PM) S/A and F/s (2:30) CF sends notification to MDNB, which is received that day

H signs sales agreement with Std. Auto purchasing $30K of inventor (4:00 PM)

No security interest, because H paid in full

4/2 Inventory delivered

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Problem 8B Analysis: Under §9-324(c), subsections (b)(2) through (4) do NOT apply to MDNB because they perfected by filing before CF. This means to satisfy §9-324(b), MDNB only has have a perfected purchase money security interest when H receives the collateral, which is true. As for CF they also meet §9-324(b) requirements for priority. So we go to §9-324(g) — §9-324(g)(1) does not apply because both security interests secure enabling loans [No vendor in this problem] But §9-324(g)(2) applies, which brings us back to the residual rule of §9-322(a)(1); therefore MDNB wins because the filed before CF.

Problem 8C: MDNB wins because there is no conflicting purchase money security interest that qualifies for super priority under §9-324(b)(1). Only MDNB satisfies (b), so they win. Under §9-322(a)(1), MDNB would also win. But the better priority rule is §9-324(b).

Std Auto: Attaches on 4/2, but perfects 4/3. Under §9-324(C)(1), (b)(2) through (4) applies because MDNB filed before Std. Auto. But Std. Auto does not meet (1), which means they don’t qualify for super priority, which means §9-324(g) doesn’t apply.

MDNB: Attached and perfected on 4/2. Under §9-324(c)(1), (b)(2) through (4) does NOT apply because MDNB filed before Std. Auto. This means that they only have to satisfy (b)(1), which is met.

Policy Reason for the Chart: Notice that these three rules were employed under old Art. 9 depending on the jurisdiction you were in. Notice the vendor approach rule is the rule adopted by the new Art. 9. Look, the most neutral rule is the equitable rule; the residual rule favors the outside lender whereas the vendor preference rule favors the seller. Which approach do you like the best in terms of policy?

Equitable Rule: It’s the best rule. If you agree there ought to be super priority for purchase money secured creditors, the equitable rule is the fairest. It doesn’t matter whether the creditor is an outside lender or seller. They are both critical players for H being able to buy auto parts. If you don’t like its pro rata formula, since each creditor will know of their existence, they can bargain for another rule. So this is a good starting point.

Vendor Rule: Look at page 1138. The quote the Restatement of Real Property. So the vendor’s hazard of losing real estate previously owned is greater than the lenders hazard of being unable to collect from its property interest in real estate. In other words, the hazard faced by Std. Auto (its risk) — they risk losing property (e.g., auto parts) if the debtor defaults, and that loss is different from MDNB’s loss — their loss is money (it risks not getting the money back). The Drafters distinguish it, but common sense makes it hard to distinguish. Maybe it works well in the real estate world — loses real property (b/c of the uniqueness of the property) v. money. But when you are talking about auto parts, the rationale doesn’t translate. Under this rule, you need two priority rules. Because there may be a situation where both creditors are outside lenders, which sends them back to the residual rule. If you

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are serious about encouraging purchase money security interest, there is a problem with §9-324(g)(1) and (2).

3 Possible Approaches to Resolving the Priority Battle Involving 2 Purchase Money Secured Creditors In Compliance w/ §9-324(b)

[The Table Explores the Policy Reason for §9-324(b)]

Case I Case IILiquidity Value of the Collateral

$20,000 $10,000

M Bank: Loan Balance Outstanding $15,000 $16,000Standard Auto: Credit Balance Outstanding

$15,000 $4,000

Residual Rule: §9-322(a)(1)(a) Recovery of M Bank $15,000 $10,000(b) Recovery of Standard Auto $5,000 $0Equitable Rule:(a) Recovery of M Bank $10,000 $8,000(b) Recovery of Standard Auto $10,000 $2,000Vendor Preference Rule: §9-324(g)(1)(a) Recovery of M Bank $5,000 $6,000(b) Recovery of Standard Auto $15,000 $4,000

I. Residual Rule: §9-322(a)(1) governs, and MDNB because first in time to file 3/28 (11:30).

Status of MDNB: MDNB obtains an attached purchase money security interest on 4/2 because debtor does not have rights in collateral until 4/2. MDNB perfects not until 4/2 because under §9-308 you need attachment to perfect.

Value on 3/28 [11 A.M] Debtor’s Rights in Collateral on 4/2 [could be earlier if goods identified in K] S/A on 3/28 [11:30 AM] Perfection [Filing] on 3/28 [11:30 AM]

Under §9-322(a)(1) MDNB relevant dates are 3/28 (11:30) filing and 4/2 (perfection)

Status of Std. Auto: Std. Auto obtains an attached purchase money security interest on 4/2; And perfects on 4/2

Value is given on 3/28 [K right] (2:00 P.M) Debtor’s Rights in Collateral on 3/28 (2:00) [if goods identifiable in sales K] S/A on 3/28 (2:00 PM) Perfection [Filing] on 3/28 (2:30)

Under §9-322(a)(1) Std. Auto relevant dates are 3/28 [filing] (2:30) and [perfection] (2:00)

II. Equitable Rule: Formula

C1 = $15,000133

$30,000 (15 +15) = ½ ($20,000) = $10,000

C1 = $16,000 $20,000 (16 +4) = 4/5 ($10,000) = $8,000

C2 = $15,000 $30,000 (15 +15) = ½ ($20,000) = $10,000

C2 = $4,000 $20,000 (16 +4) = 1/5 ($10,000) = $2,000

III. Vendor Preference Rule: Purchase $ Vendor should beat purchase $ outside lender. Since Std. Auto is the purchase money vendor, it beats out the outside lender, which is MDNB.

Recap on Policy: In most of the cases where you have 2 purchase money secured creditors, they will know about each other and bargain. So the priority rules will

rarely come up. The vendor rule makes sense because the vendor is not in the business of loaning money; it means that it is less likely to gage the risk in the transaction,

protect themselves, and spread the risk if it suffers the loss as contrasted to the OUTSIDE lender, which tends to be an institutional creditor. SO it makes sense to put the loss, the default rule, on the one who can better protect themselves — the institutional lender. But the teacher says the equitable rule is the better rule.

(9) Problem 62 (p. 147)

C. Priority Battles Involving Perfection by Control

1. Read Text page 147-1492. Problem 64 (p. 149) —— This is modified in Handout 14(b). Out debtor is PR

and wants to borrow money for IB. It offers as collateral its bank account from LNB. IB asks you how to perfect its security interest. How do you perfect a security interest that involves deposit accounts. Focus on two factors: (1) minimizing the danger that the debtor (PR) will empty the bank account; and (2) maximizing the opportunity for your client, IB to win future priority battles to other creditors. Obviously what we suggest to IB, the debtor may not agree upon, but IB is our client.

A. Analysis: We have studied 5 modes of perfection, which will work for deposit accounts? Control is one possibility, and the ONLY mode of perfection that will work for deposit accounts. See §9-312(b) says except as provided for proceeds, a security interest in deposit account may only be perfected by control. Classify the collateral first — as a deposit account, and now we know there is only one mode of perfection. Start with §9-314, which sends us back to §9-104. Review the options under §9-104:

1. Secured party has control if the secured party is the bank where the account is maintained (§9-104(a)(1)). The account is now at LNB, so debtor would have to move the account to IB.

2. Secured party would have to get a tripartite agreement under §9-104(a)(2).

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3. §9-104(a)(3) —The account would stay at LNB, but instead of PR being the customer, IB would be the customer, and would require LNB to execute a new deposit account agreement, which would substitute IB for PR as the customer and all of LNB responsibilities would run not to PR any more, but to our client IB. §9-104(a)(3).

Which option under §9-104 is best for IB and worst for IB. Option 1 and 3 would be the best because [debtor could not dissipate the fund because IB’s name is on the account; so debtor can’t write checks]. Clearly, option 2 is the least safe option because money stays at LNB because LNB agrees to the instructions, but they can make mistakes. Option 1 is in the middle because you trust your tellers better than LNB.

Future Priority Battles: Handout 14B provides hypothetical.

D. Priority Battles Involving Deposit Accounts As Original Collateral

1. Case I — 2/1 — IB credit; s/a; control [method of control not specified]; perfection

3/1 — sheriff serves writ of garnishment (works just like writ of execution) but you use that when you go after a third person to pay a promise to pay a monetary obligation. Serving is the just like levying, when we get a judicial lien.

Look at §9-327 [smart place to start because says priority for deposit accounts]. Do we have “conflicting” security interests. Does the judicial lienor hold a security interest in the deposit account. No it’s a judicial lien. So §9-327 doesn’t apply. Where do we go where there is a perfected secured creditor v. a judicial lienor — §9-317(a)(2)(A) [default rule], IB wins. It had a perfected security interest by negative inference. It does not matter which of the three modes of perfection IB uses within the definition of control for this battle. Same would be true if IB were fighting the trustee in bankruptcy (because 544 takes us to §9-317].

2. Case II — Here there is a tripartite agreement — control under §9-104(a)(2). 2/1 — IB credit; s/a; control by triparti3/1

This time we have a “conflicting” security interests. Are both creditors perfected? Yes, under §9-104(a)(2) IB has control; As to LNB they have control under §9-104(a)(1) because they hold the account. So we have two art. 9 creditors both of which who are perfected by control. If §9-322(a)(1) were the priority rule, IB would win because it perfected first. But the priority rule that governs in this case is §9-327. §9-327 trumps §9-322 because it is the collateral specific rule. §9-327(3) tells us that LNB would win because they hold the account. So, the later creditor beats the earlier creditor because of the choice of the mode of control under §9-104(a). That is the lesson of §9-327(3).

Policy: Why does the later creditor win? IB had the opportunity to get control under §9-104(a)(1), but it chose not to. IB knows LNB’s identity because that is where the account is. So IB could negotiate a subordination agreement with LNB. This should remind you of §9-328(3), where we saw the securities intermediary had a leg up in priority battles and beat outside creditors. But now we are seeing the bank where deposit maintained has a leg up against

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outside creditors. The idea is that we want to encourage lending by banks to their customers just like securities intermediaries to their customers. So, the outcome suggests the tripartite method is the worst option because will lose in priority battles.

3. Case III — IB becomes the customer on the LNB bank account — method of control. §9-104(a)(3).

We have 2 conflicting security interests where both creditors have control. Under §9-322, IB would win. But under §9-327(4) (the correct rule), IB would win. §9-327(4) says control under §9-104(a)(3) trumps the bank that holds the account.

Policy: Does LNB have notice? Yes, because IB cannot become a customer without LNB not knowing — we are switching the names on the account — which requires the signing of a new agreement. Clearly, LNB knows and when it made the loan it should have checked. Don’t feel sorry for LNB.

4. Case IV — IB perfects by §9-104(a)(3) and LNB by 9-104(a)(1)

Both creditors have perfected security interests by control. Under §9-322(a), LNB would win because it perfected first. But under §9-327(4), a security interest perfected by §9-104(a)(3) beats a security interest held by the bank. So, IB wins, the one that became the customer.

Policy: Do we feel sorry for LNB, because they became the creditor first. No, because you needed their approval to switch the customer. LNB has to sign off on the switch, and it won’t if it already has an outstanding loan. So these rules take into account notice.

D. Priority Battles Where One Claimant Purchased the Collateral From the Debtor — This is an entire new subject [these our battles between Art. 9 secured creditors and buyers of collateral on the other side]. Previously we focused on 2 secured creditors.

1. Read Text pages 151 to 1812. Problem 66 — In all these problems the debtor is the bad actor. Look, by

selling the collateral in a way inconsistent with the s/a the debtor has increased ONB’s risk after ONB has committed the money to the deal and now suddenly the collateral is being sold in a way contrary to the agreement. W/ respect to Betty, she thought she was buying the TV free in clear. The TV is subject to ONB’s security interest. Both ONB and Betty can sue the debtor; ONB can sue for breach of contract; conversion [no right to sell the TV]; Betty can sue for breach of contract; breach of warranty of title [§2-312 — you warranted I was getting a good title to the TV, but in fact it is encumbered in a prior security interest].

Methodology for Battles between Buyers and Creditors:1. Classify the collateral2. Status of both contestants

a. Secured Creditor: attachment and perfection136

b. Buyer: make sure the person is a “buyer” [sometimes not clear — she

may be a general creditor “a financing purchaser”]3. Priority Rules — Start with §9-315(a)(1)

a. §9-315(a)(1) — a security interest (here’ ONB) continues in the collateral (the “TV”) notwithstanding sale [so the security interest continues in the original collateral as it goes from the debtor to the buyer] unless the secured party authorizes the disposition free of the security interest. If ONB authorized the sale free of the security interest, end of story. Betty owns the TV free and clear. There is no priority battle and Betty has no personal liability to ONB [she doesn’t become bound like under §9-203(e). ONB cannot go after purchasers of collateral or individuals getting it as a gift if they authorize the sale or transfer. The security interest is extinguished when the secured creditor authorizes the sale or transfer.

b. When you have a “sale out of trust” [the collateral is encumbered by a security interest], the starting point is §9-201(a). Except as otherwise provided, a security agreement is effective against purchasers of the collateral. That is bad news for Betty. That means ONB’s security interest in the TV is effective against Betty unless otherwise provided.

c. Exceptions: Art. 3, 8, and 9 apply for buyer protection priority rules. All of these rules override §9-201(a). But you don’t get to them unless you have a “sale out of trust”. Break the exceptions in 2 categories:

1. There are buyer protection priority rules that are triggered if the secured party did not perfect the security interest [NO notice given]. §9-317(B) is a good example of this type of buyer protection priority rule [but it must be a sale out of trust].

2. There are buyer protection priority rules that are triggered even though the secured party did everything right. For example, focus on the nature of the collateral [different rules for stock, instruments, consumer goods]. We look at expectation of buyers; the ability of the secured party to prevent the unauthorized sale. These factors are relevant in the analysis.

a. §9-320 — buyer of goods

b. §9-330 — buyer of instruments (plus Art. 3)

c. §9-331 — buyers of stock [plus Art. 8-302, 8-303, 8-502]

d. §9-332 — transferees who get money out of a bank account

e. Federal Food Security Act — where farm products are involved.

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a. Case 1 [Handout 15a] — A “sale out of trust” [violates the security agreement — the sale is inconsistent with the clause in the security agreement].Here the fight is between a secured creditor and the buyer.

Analysis: Focus on §9-315. Say Secured creditor authorized the debtor to sell the TVs in any way. So we have an authorized sale [this is always a question of fact — customs w/ this particular debtor; always a good idea to have an express clause in the s/a]. §9-315(a)(1) tells us that Betty takes the original collateral completely free of the security interest. So how does ONB collect? It can foreclose on other TVs that the Debtor hasn’t sold yet, other collateral still in the debtors hands. Look at §9-315(a)(2) — a security interest attaches to any identifiable proceeds of the collateral. So presumably when Betty got the TV, she paid money and if the Debtor has the money, ONB can go after the proceeds. Isn’t that good enough? Why would ONB want to go after the TV — proceeds tend to dissipate quickly b/c very liquid. Even in the case of the authorized sale, ONB can get proceeds in the hand of the debtor. §9-315(a)(1) — priority battle — Betty wins because the sale was authorized and thus she hasn’t assumed the personal liability of the seller.

1. Hypo: No credit sales on TVs less than $1000. Betty buys on credit. This is an unauthorized sale [a “sale out of trust”]. This means ONB’s security interest continues in the hands of betty according to §9-315(a) — essentially ONB and Betty have shared ownership of the TV. So now we have to look at another priority rule. Under §9-201(a) ONB would win, but there may be a “buyer protection rule” for Betty. Look at §9-320(a) — perfection makes no difference, Betty wins as long as she is a “buyer in ordinary course of business” under §1-201(9) [has been revised].

POLICY: Do you like this result? Why did we go to §9-320(a) instead of (b)? We went to (a) because it has to be a consumer good both in the hands of the buyer and seller. We are not in §9-320(b). If Betty were buying “real estate” (e.g. house), would you require her to check the records? YES, you know we expect consumers to check the records when they buy real estate; So, why don’t we require Betty the consumer here to check? The transaction costs seem very hard to check for low price items. But what about an item that really expensive — there is no cut off amount on consumer goods. Whenever it’s a consumer buying irrespective of the amount of the money you would like the consumer not to have a burden of inquiry because of the consumer’s expectation of getting the goods free and clear.

b. Case II [Handout 15a] — this is a case about a “sale out of trust”. ONB might be nervous about the debtor’s business practice — you can sell TVs on credit only if the customers pay 50% down. It is a way of monitoring risk — improving the debtor’s business practice. [This explains how a retailer can sell out of trust]. Say Debtor sells the TV to Betty with only 5% down — this is a sale out of trust. ONB can also establish a debt-collateral ratio. This time how does ONB collect. Under §9-315(a)(1) ONB has a security interest in Betty’s TV and the proceeds, the money in debtor’s hand. So it can collect from two sources. This is assuming there is no special buyer protection priority rule.

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1. Hypo: Betty hangs out at a bar and there is a TV in the Bar. Betty asks what happen to the old TV? The bar asks Betty if she wants to buy it. She buys it and brings it home. Later she gets a letter from ONB and it states that they have an attached and perfected security interest on the TV and the Bar defaulted on its loan; and we want the TV. Assume this is a “sale out of trust”. Also assume under §9-201(a) ONB will win UNLESS otherwise provided. So the issue remaining is whether Betty can get protection under §9-320? Betty’s expectation is the same as the hypo above. To qualify under §9-320(a) Betty must be a “buyer in ordinary in the course of business” — [§1-201(9) on page 1267 — which defines this term as “the buyer in good faith and doesn’t check the Art. 9 files and in the ordinary course, not a pawn broker, and in the business of selling that good. Here, the bar is not in the business of selling TVs, rather they sell beer and food. Here the seller is not in the business of selling these goods. [Controversial Cases — Rent-a-Cars who sell some of their cars rather than rent — courts split on whether they qualify as a person in the business of selling the cars rather than only leasing. Bottom-line: Should Betty win in this case? If Betty loses, she is left with a law suit against the bad actor, the bar.

c. Case III [Handout 15a] — You can have an authorized sale, but where ONB says the collateral passes to the third party subject to their security interest. This comes up where the debtor is a wholesaler and Betty is a retailer (2 businesses involved.) SO you have a tripartite agreement where everyone agrees that the security interest continues with the sale. So ONB can go against both under §9-315(a)(1) collateral and (a)(2) proceeds of collateral.

1. Hypo: ONB providing inventory financing to debtor. Here the buyer is a multi-million dollar corporation that runs assisted living communities. They just bought 1500 TVs for the price of $600,000. If the buyer were loaning money to the debtor they would check the art. 9 files, BUT here the buyer is not loaning money, rather they are buying the TVs. Would the buyer win against ONB? If they got a really low ball price, you may argue they were acting in bad faith, but here it sounds like they are paying a FMV amount. The first question is (1) is it a sale out of trust? Yes, because there may be a s/a clause that says if you sell over a certain amount to one buyer you need the secured party’s consent (Why? It may be a signal of “going out of business”) — so we go to §9-315(a) which tells us that the corp. gets the TVs encumbered with ONB security interest. Then §9-201 tells us ONB would win unless there is some other buyer protection rule — so we go to §9-320 — the issue is whether the corp. is a “buyer in the ordinary course of business”? Is this term limited to “consumers”? NO. — §1-201(9) [page 1267] — it seems that you may be able to make an argument for ONB on the second sentence — if it is typical that the debtor doesn’t usually sell to large. Corps. In a high volume (or its just extraordinary) you may be able to argue they are not a buyer in

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the ordinary courts. But the mere volume does not disqualify the corp. as a buyer. So under §9-320, the corp. will win.

Policy: This seems unfair because the least cost avoider is the corp. ONB did everything right by filing a notice and its difficult for them to control the debtor’s selling behavior. All the corp. had to do was check the art. 9 files.

d. Case IV: (Handout 15a) — Here Bart saves his money and wants to buy a vending cart. The debtor is offering to sell a vendor’s cart. Bart calls the debtor and offers $12,000 to the debtor. The debtor agrees to sell the cart to Bart. Suddenly, Bart gets a letter from ONB telling him about the security interest in the cart and that the seller has defaulted on the loan. What advice do you give Bart?

1. Analysis: First thing you do is read the s/a to see if the sale was authorized. IF you can find a way to construe the agreement as authorizing the sale, then Bart is OK. But assuming it is out of trust, then the security interest continues in the vendor’s cart into Bart’s hand under §9-315(a). There may be another attack — check the state law on certificate of title; but lets assume there is proper perfection. So go to §9-320 — can Bart win? §9-320(b) doesn’t work because not consumer goods rather its equipment in the buyer and debtor’s hands. Here, Bart loses.

Policy: Should Bart lose?

e. How do we Rationalize the Results From Case I to Case IV: In case I and III, the corp. and consumer win irrespective of the amount and whether they are a consumer or corp. In case II and IV, the consumer and proprietor lose. It is a VERY big deal if you lose the collateral because then the person is out of money and the good. What were the drafters doing? The drafters are trying to protect retailers and wholesalers who sell these types of goods in the ordinary course. The notion is [encouraging commerce} you want whether individuals or corps. When they go to buy from people in the business to not have to endure the transaction cost of checking to see if there are earlier liens and that promotes commerce. This raises 2 questions: (1) do we need consumer protection in addition to this; and (2) do you think in the case of corporate buyers (who have lawyers) ought to have the same protections as consumers (if they are the least cost avoider when the secured party has done everything right).

If the creditor is an institutional creditor, institutional creditors may be better gauging risk, but what if the creditor is a wholesaler, who is not in the business of loaning money. Another problem with §9-320 — should we analyze on a case by case the buyer’s reasonable expectation — this approach may result in more just outcomes but there is a shortcoming and that is it is not a very certain rule and makes it difficult for creditors to gauge the risk of unauthorized sales and increase litigation. Another approach may be to separate buyers — the Code approach: “if buy from someone in the business” then you are protected or another approach “monetary cap” or you can separate “types of goods”. Unfairness can arise from each of these approaches.

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f. Problem 66(B): Would make a difference if Betty knew about the security clause. Here are 2 different scenarios:

1. Case I: Betty walks into the TV store and the owner tells Betty that there is a lien on the store and backed by his mortgage. Under §9-320(a), would Betty win? Look at §9-320(a) it says takes free of a security interest even if security interest is perfected and the “buyer” (betty) knows of its existence. So even though the owner notifies Betty that everything is encumbered, Betty wins.

2. Case II: Betty walks into the TV store and the owner says he just got a loan from ONB and they have a lien on the entire store. Betty asks the owner she would like to see the s/a? Betty discovers that if she buys the TV at the discounted price that would violate an express term of the s/a. But, Betty buys the TV and the debtor defaults. ONB asks Betty for the TV. In this case Betty loses because she learned that the sale violated the terms of the s/a and Betty is no longer considered a “buyer in the ordinary course” when she knows the sale violates the agreement. See the lang. “without knowledge that the sale violates another person’s interest in the goods”. [See the COMMENTS].

3. Case III: What about the corp.? You want to be willfully blind — you don’t want to inquire [totally contrary to the way we treat creditors in priority battles]. Here the best advise you can give a buyer in the ordinary course is “Don’t Ask”.

POLICY: Is that the rule you want — “don’t ask”? §1-203 and 1-201(9) you need to act in “good faith”. But the very intention of §9-320(a) says “even if you know of the existence, you win”. Personally, should be trouble with the case II and IV that they lose and in III the corp. wins. [think about these four scenarios and the policy — possible exam question].If you are buying from a person in the business, then there is no burden inquiry.

4. Hypo: Assume the loan goes to the debtor and then debtor sells the cart to a broker for money and then the broker sells the cart to broker. Assume the broker is in the business of selling carts. Go to §9-320(a) says — now Bart is arguably a “buyer in the ordinary course of business — “the buyer’s seller” — here the security interest was not created by the buyer’s seller, it was created by the debtor. So, §9-320(a) won’t help Bart. In fact there is nothing in Art. 9 that will protect Bart on these facts and if it is a sale out of trust Bart will lose. §9-320(a) is limited to the protections of the seller’s financier.

3. Problem 1 (Handout #15) — Chart [stems off case II of Handout 15a] — this is the case where there is equipment financing and there is a sale out of trust and there is no question that Betty will lose because the bar is not in the business of selling Tvs, and thus she is not a “buyer in the ordinary course of business”. This problems explores in “real numbers the consequence of these rules” to Betty.

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Priority Battles Where One Claiminat Purchase the Collateral From the DebtorCase IOvercollateralized

Case IIUndercollateralized

Balance Owned by ONB by Bar $5,000 $12,000Value of System Sold to Betty (What Betty paid)

$10,000 $10,000

ONB’s Recovery At Foreclosure Sale[After Expenses]

$7,000 $7,000

Proceeds From That Sale To ONB $5000 [§9-615(a)(1) and (2)] $7,000 [all of it goes to ONB]Proceeds From That Sale To Betty $2000 [§9-615(d)] $0 [Betty gets nothing]Recovery if Betty sues Bar (and Bar is Non-Judgment Proof)

$8000 + Expenses $10,000 + expenses

Recovery if ONB sues Bar (and Bar is non-judgment proof)

$0 [b/c paid in full from the foreclosure of sale]

$5,000 [See §9-615(d)(2)]

Recovery if ONB sues Betty (and Betty is not judgment proof)

$0 [Betty has no personal liability — §9-615(d)(2) b/c Betty is not the obligor

$0 [even if there is an outstanding deficiency, Betty is not an outstanding obligor]

Betty’s loss if Bar is judgment proof $8000 $10,000

a. In a case where there is over-collateralization, the efforts must be commercially reasonable under §9-610 (that’s a broad term); the creditor may not have expertise in marketing; bidders come to these sales looking for bargains; the good may not be in season when the sale.

1. §9-615(d) (pg. 1237) — talking about a “surplus” (the extra $2000); secured party shall pay the debtor for any surplus. Remember under the New Art. 9, debtor means the person who owns the collateral; and obligor means the person who owes the obligation. In almost all cases we’ve seen, we’ve used the term debtor for both. This is not true here. The debtor (owner) is Betty and the obligor (owes the money to the creditor) is still the bar. So there are two different people. And you would rely on §9-615(d) for support for giving the $2000 to Betty.

b. Second Chart, the only question is what should Betty do as the losing party. There are 3 options: (1) Betty can turn over the collateral; (2) Betty can refuse to turn over the collateral and force ONB to sue her; or (3) negotiate with ONB for a compromise.

1. Column 1 and 2 involved the case where ONB is over collateralized. In

column 1, Betty says “NO” to ONB and in column 2 Betty “surrenders the collateral to ONB.”

a. Result of Column 1: Betty loses nothing in the initial transaction ($0). There is no loss in the initial transaction. But now she will get sued. What will the damages be in a conversion action? Betty is engaging in an unlawful exercise of dominion over in effect ONB’s property. The courts have said “FMV of the property (at time of conversion) + interest up until the time of trial. But there is a cap for the secured party — the cap is the

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“debt outstanding” (if talking about a secured party). So, here it would be $5,000; So Betty’s total loss (damages) would be $5000 if she keeps the TV and forces ONB to sue. This is not a good outcome because she has expended $15,000 for a TV only worth 10,000.

b. Result Column II: Betty loses $8,000 [$10,000 –2,000]. She does better here when she surrenders the TV. There is a $3,000 difference [8,000 –5,000]. What happened to the $3,000 of value — it’s the loss in the foreclosure sale [the FMV of the TV was $10,000 but it only brought in $7,000 in a liquidation sale]. Who got the $3,000 windfall — whoever bought the TV at the foreclosure; who pays for the windfall (when there is an overcollateralized creditor) — Betty — it comes right out of her recovery and increases her loss by $3,000]. If Betty can settle with the bank any where in close to $5,000 it makes sense.

c. Result Column III: Debt is under-collateralized. Betty loses $0 in the initial transaction (she keeps the TV). What are her damages in the suit? $10,000 [FMV at time of conversion + interest, capped by the debt outstanding]]. $10,000 is Betty’s loss.

d. Result Column IV : Betty’s loss is also $10,000.

1. Policy: In an under-collateralized debt, who eats the loss? Its not Betty. The Bar unless they are judgment proof. That $3,000 is part of the deficiency that the “obligor” (bar) owes to ONB.

Summary of Column Results Above

ONB Over-collateralized ONB Under-Collateralized

Case I Case II Case III Case IVBetty keeps the TV and is sued for conversion by ONB

Betty voluntarily surrenders the TV at ONB’s request (same as case I on chart above)

Betty keeps the TV and is sued for conversion by ONB

Betty voluntarily surrenders the TV at ONB’s request (same as case II on chart above)

Betty’s loss, if any, in the initial transaction with Bar:

$0———————She pays $10,000 for a TV that she keeps despite ONB’s request

Betty’s loss, if any, in the initial transaction with the Bar:

$0———————She pays $10,000 for a TV that she surrenders to ONB to avoid action for conversion

Betty’s loss, if any, in the initial transaction with the Bar:

$0——————She pays $10,000 for a TV that she keeps despite ONB’s request.

Betty’s loss, if any, in the initial transaction with the Bar:

$0———————She pays $10,000 for TV that she surrenders to ONB to avoid action for conversion

Damages that Betty must pay to ONB after

Proceeds received from ONB following the

Damages that Betty must pay to ONB after

Proceeds received from ONB following the

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ONB wins its action for conversion against Betty:

$5,000——————

foreclosure sale of the TV:

————————

ONB wins its action for conversion against Betty:

$10,000

____________

foreclosure sale of the TV:

$10,000

__________________

Betty’s Total Loss:

$5,000

Betty’s Total Loss Betty’s Total Loss

$10,000

Betty’s Total Loss

$10,000

4. Problem 2 (Handout #15)a. Problem 2(c)(i) — ONB has a floating lien covering the jeeps

(inventory and equipment) Did everything right. The debtor enters a sale agreement with Betty. This case is a little different because the car (the jeep) has not been manufactured yet (its not in existence yet); since it is “made to order” the debtor requires a pre-payment (75% of the purchase price). On 11/15, jeep delivered to debtor; on 11/16 debtor defaults; and on 11/17 ONB repossess the cars including the made to order jeep.

1. How is this case different from the cases above? Betty hasn’t taken possession or paid the full price yet. What has she done by 11/16 (when debtor defaults on the ONB loan — that’s the critical time when the contest begins)? She signed the contract — arguably under §2-501 the car is identified in the contract — does Betty have title to the car by 11/16? Where would you look for title? NO, if there is a certificate of title in existence, she doesn’t have it and under §2-401, Betty doesn’t have physical possession of the car — the car is in the possession of the dealer to the bank. So the question is if you are a buyer [this is same problem in 66(d)] and signed the contract and car identified and don’t have title or possession, can you be a buyer in the ordinary course in that car and cut off the rights of the earlier secured creditor under §9-320(a)?

If Betty is NOT a buyer (b/c she didn’t close the sale), what is she? She is a general creditor — for the 75% she paid down + any damages she suffered for getting a substitute. She is NOT a “secured” creditor because she doesn’t have a s/a whereby specifying the dealer as the debtor. Here, betty is a “financing purchaser” — how far do you have to go to be a buyer — is she a buyer or a general creditor. If she is a buyer, she wins; if she is a general creditor, she loses.

2. Analysis: [Review the timeline at top of Handout 6] Important events: (1) sales agreement; (2) identification in K; (3) Title passes; (4) delivery and possession; and (5) full payment. At time of 11/15 we have partial payment, sales agreement, identification in K, BUT NO title and physical possession. The

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issue is if you have not completed the sale [All these events] can you qualify as a “buyer in the ordinary course of business”? This makes a huge difference because if you are a “buyer” don’t have to worry about earlier secured creditors and if you are not you have “constructive notice.”

A. How Does New Art. 9 Deal With this Issue? Basically, imagine that this fight is just between Betty and her “seller” (the dealer), ignore ONB. In that battle, did Betty get far enough in the sale so that if the dealer repudiated the K (did not give her the jeep) she would have a right to go to court and recover that jeep [“a right like “specific performance” against her seller]. The drafters say that if she has that “RIGHT” then Betty also has the right to “qualify as a buyer in ordinary course” and beat the seller’s creditor. On the other hand, if Betty does not have the RIGHT to beat the “seller” [if her only remedy is to bring a breach of K for damages but not recover the jeep itself] then in her fight against ONB she is treated like a creditor for damages —“a disappointed creditor”.

Procedure for Analyzing: Start with the following §§:

1. §2-105(2) — distinction b/w “existing goods” and “future goods” — existence means in “physical existence” (assembled) and “future” suggests not assembled (to be manufactured). See Definitions in (2) — “goods must be both existing (as a matter of fact — good has to be in physical existence) and identified (as a matter of fact) before any interest can pass.” “Goods which are not both existing and identified are FUTURE goods.” If you want to be an existing good (to satisfy definition) — a good MUST be BOTH (1) in physical existence and (2) identified (specify in K). A property interest can NOT pass in a Future good ONLY in an existing good.

2. §2-501 — tells us when the legal event of identification occurs. §2-501(1) must be construed with §2-105(2) — its major purpose is to tell us what a “buyer” gets when the legal event of identification occurs. (2) says the “buyer obtains a special property and insurable interest in goods by identification as a matter of law of existing good.” This means a “property interest” (consistent with §2-105(2) first sentence) — it tells us this what a buyer gets. In the absence of an explicit agreement, identification occurs when (1) when the K is made if for the sale of goods already existing as a matter of fact and identified as a matter of fact.

a. Problem 2(c): On 11/1 the jeep is “future good” because its not in physical existence. Does Betty get a “property interest” under §2-501(1) on 11/1? NO, because it only happens w/ respect to “existing goods”. Does §2-501(1)(a) apply on 11/1? NO. The parties never said anything about the events of identification, but can’t be here when sales agreement signed. [A case where it would be — assume on 11/1 Betty wants a standard car but not present at the dealer but they locate one in a dealer in another state; so Betty makes a pre-payment and buys the car. Nobody says

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anything about when goods are identified in the K? When is the car identified? Under §2-501(1)(a) — “when the K is made” — the goods are identified (Betty agreed to buy the car in the other dealer) and its in existence (not manufactured in the future). That would be a case in §2-501(1)(1), but that is not our case here.

b. Does §2-501(1)(b) apply here? “when who receives the jeep” —[we don’t have enough facts] — its says when goods are shipped by “seller, marked, or otherwise designated by seller” — so it may be way back when the jeep was at the plant (but unlikely), it may be when the dealer received the jeep (at that point its no longer a future good) — for §2-501(1)(b) the good is no longer future because it is “marked”. So either on 11/15 when jeep arrived that the dealer wrote the ID number on the K or may have put a sign “sold” — all they have to do is designated, but the dealer may have done it later. So we don’t know when identification occurred.

(1) Assume identified on 11/15. Is Betty a buyer in ordinary course of business to beat ONB? Start w/ §1-201(9) [pg. 1267] — look at 4th sentence — “only a buyer that takes possession of the goods OR a “right to recover the goods from the seller under Art. 2” may be a buyer in the ordinary course of business. If Betty didn’t get possession (go all the way through the legal events), Betty needs a right to recover specific performance (get jeep from seller). Where do we go in Art .2 to find out whether Betty has the RIGHT to recover specific performance from the dealer? §2-502 — the comments suggest 2 sections to tell us when the Buyer has this RIGHT — §2-502 [revised on pg. 1271] subsection (1) even if goods NOT shipped to Betty, a “buyer” who has paid in part in which Betty has a “special property” under the provisions of the immediate proceeding § [which means “as a matter of law the goods are identified to the K under §2-501], Betty may recover the jeep from the seller if the car was bought for personal use and the seller repudiates or breaches the K [here ONB reposseses the car]. Look at §2-502(2) — this means at time of ID. If on 11/15, under §2-502 and 501 Betty got a “special property interest” and jeep identified in K, Betty can be a “buyer in ordinary course of business”; then under §9-320(a) betty wins and has no burden of inquiry.

(2) Assume the Dealer NEVER Identifies the jeep? Can Betty still be a “buyer in the ordinary course of business” under §1-201(9)? She can go to §2-716 [revised on page 1271] subsection (1) goods are “unique” — not easy to satisfy the burden that goods are sufficiently unique to justify specific performance by a seller. In this problem we are talking about a somewhat unique jeep, and Betty may be able to persuade the good and if it is

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held to be unique she can be a buyer in the ordinary course and thus she can win under §9-320(a).

Policy: (1) There is a certain logic to the approach above – the idea is that Betty has gone far enough to insist that the seller hand over the jeep to be a buyer in ordinary course; (2) its limited under §2-502 to buyers of consumer goods [If betty is a consumer buyer, it is highly unlikely you think of yourself as a creditor]; (3) §2-502 will provide no protection to a “business buyer” [so in case III of handout 15a — the corp. would not be a buyer in ordinary course; same result under IV]; Problems: This rule creates a secrecy problem — this is explore in problem 2(c)(ii).

Notes: See §2, 716, 2-501, 2-502 for right of reclamation. If the buyer has a “special property interest”, then under 2-502, she has a right to recover of the seller and that is enough to be a “buyer in the ordinary course”.

b. Problem 2(c)(ii) — This is the secured creditor’s problem. They should send inspectors to the dealers to see what number and value of cars on the lots. These should be unannounced visual inspections. With the new definition of “buyer in the ordinary course of business” the creditors are worry that the will “over count” and subject to claims of buyers that are not in visible protections.

1. Should the creditor be worried? Yes, they will lose against buyers who could get possession under 2-716 or right of reclamation under 2-501/502.

2. How could the creditor gauge the risk better? How do they deal with this problem?

a. Obviously, include a provision in the s/a that it’s a “sale out of trust” if sell to a pre-pay buyer” or “report to the secured lender the number of sales to pre-paid buyers and which cars”. We know provisions in the s/a don’t help that much (influence good debtors), but it doesn’t improve ONB’s rights to the buyer if the debtor breaches the s/a.

b. Can the inspectors count in a different way to reflect the change in the new law? You could require the inspectors to search the books and see if they can tell which ones are pre-paid buyers. That is an expensive method. Do you have to locate all pre-paid buyers (e.g., a pre-paid buyer of a car for a business)? Yes, you need to look at whether a business pre-paid buyer is protected? 2-716 doesn’t work; and only 2-501/502 protects the business in a Narrow case. Look at revised §2-502 — even though the goods are not shipped…may recover from the seller if: (b) in all cases where the seller becomes insolvent [this should remind you of 2-702]. All you need to worry about is consumer buyers. If you are going to inspect the books only look for consumer buyers.

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c. With respect to customized vehicles, what do you tell the instructors to do? Don’t count customized vehicles. But there is no complete answer.

d. Creditors will need to develop some data — get statistics on what percentage of the cars are consumer or business sales; and what percentage in standard cars goes to pre-paid consumer buyers. If you could develop that data, you may develop a discount factor to figure out the risk. But there is no solution to the creditor because pre-paid buyers have right to possession.

3. HYPO: Say you pre-pay a car that is located in Denver. As a pre-paid buyer what should you do to protect yourself, so that you don’t end up losing the car to the secured creditor. How do you make sure (protect) yourself to make sure you have 2-501/502 rights in the standard car, which will make you a buyer in the ordinary course of business to beat the seller’s creditors? (Notice 2-716 doesn’t work for standard cars.]. What does the buyer want in the contract? She wants it to be clear it’s a consumer car and the K to show she has a “special property interest”? How do you make sure you satisfy 2-501 (special property interest)?

a. §2-501 — since we are talking about standard goods already in physical existence, 2-501(1)(a) says you have a special property interest if the goods are “existing” and “identified” at time of K. So the buyer would want the VIN # to be specified in the K. So from the moment you hand over the deposit, you have a special property interest and thus you are a buyer in the ordinary course.

4. HYPO: Assume Debtor is a mfg. Of expensive equipment used by hospitals. And assume Betty is a hospital. Betty wants to buy a $1 million dollar piece of equipment. Debtor doesn’t assemble and build the equipment automatically, they only build on order. Also, the debtor needs the money to manufacture the equipment. So Betty is a “true financing purchaser”. Also, the machine is standard. a. How does Betty protect herself? If its standard equipment,

§2-716 and 2-502 don’t help. You cannot win under 9-320(a) b/c can’t qualify as a buyer in ordinary business until you get the equipment and that will be too late because the debtor could have defaulted. Under 2-502 it has to be consumer goods to have a right to recover, and here this equipment is not consumer goods. IF you can’t be a buyer in ordinary course of business, how do you protect yourself?

1. What do you do before you buy? Check the art. 9 files. It’s the opposite advice we gave in the corp. hypo above. You ask for the s/a; you see it’s a sale out of trust. If you want to buy the machine, you go to ONB and get a subordination agreement b/c you understand the priority rules.

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5. Problem 69— Art is a “sales person” at a dealership and he bough t his own personal car from the dealer and signed a s/a. The dealer noted its lien on the certificate of title. Look at §9-301, there is an exception for cars covered by certificate of title, so the dealer did everything right. But there is a sale out of trust. The only question is who wins (no problem with buyer in ordinary course). We know the car is a “consumer good”; the dealer has a perfected and attached security interest; it’s a sale out of trust (§9-315(a)(1)) and 9-201(a) tells us that the dealer wins unless there is a buyer protection priority rule.

A. Analysis: Is there a buyer protection rule that overrides §9-201(a)? Start with §9-320 because we are talking about “goods”. There are 2 possibilities under §9-320 — either (a) or (b). If you were Anne’s lawyer, (a) is much more promising than (b). Start with §9-320(b) — What are the difficulties Anne faces under this provision: (1) one question is whether she has knowledge of the security interest — how does she have actual knowledge — notice of the lien on the certificate of title (Art. Handed her the certificate of title, and had she read it she would be notified and be out of §9-320(b)). Assume, Anne’ didn’t read the title. What is the effect of a notation on the certificate of title? Go to §9-311(b) — noting the lien on the certificate of title is equivalent to filing a financing statement. So she loses under 9-320(b)(4). What is Anne’s problem under §9-320(a) — Anne is arguably not a buyer in the ordinary course because its Art’s car. Go to §9-201(9) [page. 1267] — assume Anne in good faith, no knowledge, and in the ordinary course of the seller in the business of selling these goods. Here, Art is not in the ordinary business. On these facts, however, Anne wins.

Policy under 9-320(a). The idea is to make it easier for retailers or wholesalers to people who walk in; and when you go to a store you ought to be able to rely on the store that you are getting the goods free and clear. So when you interpret the requirements you ought to look at the reasonable facts. Here, it looked like Anne was going to a used car dealer and buying a used car. So it looks like she was a buyer in the ordinary course.

Compare: Under 9-320(a) Anne wins. Under 9-320(b) if Anne is a pre-paid buyer she loses because she has to take delivery; in addition she loses under (b) if the secured creditor noted its lien on the certificate title or filed a financing; in other words she loses on constructive knowledge. Why the difference? Drafters care about promoting sales in ordinary course by business sellers, not the sale b/w consumer seller and consumer buyer.

6. Problem 707. Problem 3 (Handout #15)

A. Problem 3(a): Instead of goods we have notes as the collateral. This is a sale out of trust. The creditor claims conversion.

1. Analysis: We know notes are instruments; they are quasi-tangible property. S is a secured creditor and ONB is a buyer in notes.

Under §9-313(a) possession works for instruments. When ONB

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released the notes to W, there is temporary perfection; but we don’t know when the sale took place.

A. Sale took place while S temporary perfected. S’ security interest continues in the collateral under §9-315(a)(1) if sale out of trust [9-315 applies to all personal property]. Then we go to §9-201, which says its against purchasers of the collateral. So if ONB is to win it needs a “buyer protection priority rule”. There are 2 possibilities: (1) §9-330 [Priority of Purchaser of an Instrument] and (2) §9-331 [Priority of Rights of Purchasers of Instruments, Docs, and Securities]. So §9-331 is the broadest provision.

1. §9-331 — this article does NOT limit the rights of a holder in due course of an instrument OR a protected purchaser of a security. The Drafters want to make it clear that in these other articles where there are protected buyers, that Art. 9 does NOT undercut those buyers rights created under other articles of the code. But, Art. 9 may increase the rights of such buyers, but not limit their rights.

a. §3-302 defines a Holder in Due Course — the first issue

is whether ONB is a holder in due course? Holder in due course is similar to a “buyer in ordinary course” or a “protected purchaser of stocks.” We are talking about “burden of inquiry” on part of the buyer — you are responsible for looking at the note. Is there value [under Art. 3 there is a narrow definition of value]? There is value with respect to cashier check (but not with respect to the promise to pay); we have good faith; etc… Assume ONB is a holder in due course.

b. Art. 3 has its own priority rule. [the author is wrong] You go to §3-306 — a person having rights of a holder in due course takes free of the claim to the instrument. So ONB wins.

B. Assume S filed a f/s before releasing the notes: See §9-302(b) and 9-331(c) — Filing itself is NOT enough to give notice. What would disqualify you from being a “holder in due course”? What if they saw the financing statement? The best view is that ONB would be a holder in due course unless they saw the f/s, saw the s/a, and saw the clause that said this was a sale out of trust OR S told them this sale violated the s/a. A few courts have said that if ONB knows of the existence of a financing statement, then they are not a holder in due course. But the professor thinks this is the wrong position.

If ONB is not a holder in due course under Art. 3, it loses, but it could win under Art. 9. See §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: …. POLICY: Even if you assume ONB is not a holder in due course, ONB will win

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unless they know its an authorized sale. This is consistent with §9-320(a) and 1-201(9) for buyer in the ordinary course.

What advice would you give S? Its very important to identify the secured party. Look at §9-330(f). ONB already has the burden of inquiry to check the notes. Don’t rely on the markings of the note to protect yourself from another creditor. You better put another f/s because if not you will lose to another creditor/or trustee.

Review of Buyer’s of Instruments: Purchasers of instruments are protected under 3-302 and 306 if holder in due course. This protection is under Art. 3. and 9-330(d) if good faith purchaser for value if don’t qualify as holder in due course under 3-302. There only burden of inquiry was to look at the face of the instrument

Art. 3 Policy: Art. 3 of free circulation is more important than art. 9 concern that notes serve as collateral.

C. Problem 3(b): collateral is registered certificated security. (stock held

in direct holding system). Under §9-315(a)(1) if sale is unauthorized (here it is it violates the anti-alienation clause) then the security interest continues in the stock certificates to ONB. We know under 9-201(a) ONB will lose unless there is a buyer protection rule.a. Analysis: §9-331(a) this Art. Does not limit (it can increase) the

rights of a protected purchaser of a security. Now we go to Art. 8 — Transfer of Certificated Securities (part 3) —8-302 and 8-303.

1. Start with §8-302 (revised on pg. 1285) subsection (a) says a purchaser of a certificated security acquires all rights in the security that the transferor had (that’s the doctrine of derivative title). Does subsection (a) help ONB in its fight against the secured creditor (CSB)? Who would win a battle b/w CSB and the transferor? CSB because they have an attached and perfected security interest in the stock. So if we say that ONB gets what the transferor gets, that’s not enough for ONB to win.

2. Go to §8-303 (not revised) — subsection (B) in addition to acquiring rights of a purchaser, a protected purchaser also acquires the So if ONB is a protected purchaser and the claim is adverse, then ONB wins. Is there an “adverse claim” (8-102(a)(1) —for it to be an adverse claim it must be a sale out of trust (just like 9-328). So clearly there is an adverse claim. Is ONB a protected purchaser? Yes because it has given value (remember art. 3 has its own definition of value), no notice of adverse claim (art. 8 has its own definition of notice, and finally obtains control (since we have a certificated security and ONB has physical possession and the stock was endorsed, ONB has control — had it not been endorsed and only delivered, ONB would not be a protected purchaser — See §8-106 to determine if control exists, which it does).

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3. §8-105 — Defines Notice. Under subsection (b) (similar to 3-302(b)), if ONB saw the financing statement that’s not enough, but had it seen the s/a and realized it’s a sale out of trust, it would be enough notice under (a)(1) or (a)(2) (willful blindness). Assuming that ONB is a “protected purchaser” it would win under 8-303(b). But if it had actual notice under 8-105, it would just be a purchaser and it would lose under 8-302.

4. Policy: The statute tells us that CSB will lose if ONB is a protected purchaser. So , how do you prevent ONB from becoming protected purchaser? Under 8-105(d)(2) you would advise CSB to mark the stock. What else could CSB do? You want to make it impossible for ONB to become a protected purchaser? One alternative is to mark the stock; You could also make the secured party a protected purchaser; You could make the debtor endorse the stock to CSB (making CSB have control; and thus ONB couldn’t have control); how do you keep ONB from not getting physical possession — require CSB to keep the stock —CSB could say to the debtor that during the loan repayment period it wants to keep possession of the stock. If the debtor is concerned about the right-power dichotomy. You could set up an escrow account. Reason backwards from 8-303(a) — there would be no delivery. The preferable approach is to keep possession rather than marking the notes. Why? There is a transaction cost with marking the notes, you will have to find ONB if they have the notes — transaction costs involved with the battle. If keep the notes, there would be no protected purchaser and there would be no battle.

D. Problem 3(b)(ii): The collateral was a security entitlement. Start with 9-315(a) it’s a sale out of trust so security interest continues in the security entitlement into the hands of ONB (read 8-501 — essentially, there will be a debt in debtor’s account and a credit in ONB’s security account). So we know under 9-201(a) CSB wins unless otherwise provided. Under 9-331(a) only place to go for a buyer protection rule is Art. 8. So we go to §8-502 (part 5 because we are talking about indirect holding of stock). [notice Art. 8 left out good faith on the buyer but they beefed up the notice requirement). A. Analysis: How do you protect CSB this time? There is nothing to

mark? CSB could set up an escrow arrangement (in other words they could take control — it’s a way to perfect a security interest in investment property). The safest mode of control is possession because tripartite agreement the debtor could still sell the stock and under 8-502 you lose.

B. HYPO: Say CSB perfects by filing a f/s and later on the debtor is in financial difficulty. So CSB sends a letter to AGE letting them

know that the debtor is experiencing financial difficulty and they have a security interest in the stock (send a copy of s/a highlighting the sale out of trust clause); then debtor sells stock to ONB and AGE obeys debtor’s order.1. CSB won’t sue debtor because he has nothing; won’t sue ONB

b/c

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they’ll lose under 8-502. So CSB wants to sue AGE because they gave him notice. Who wins? AGE — look at 8-115 —AGE is an innocent converter of property. 8-115 is very protective of securities intermediaries.

2. Policy: They are not a signatory to the s/a or f/s. They don’t want to have to find out if the agreement is valid, they handle

thousands of exchanges. The code creates a way for CSB to communicate with AGE. There is only one way — that is only through an effective tripartite agreement; anything else won’t work.

8. Problem 719. Problem 7211. Problem 73 12. Problem 4 (Handout #15) [spin off of problem 73] This problem refers to

goods. There is a sale out of trust in violation of an anti-alienation clause in the agreement. The goods is “stereo” (no problem of pre-paid buyer). Now ONB goes after Used Stereo Haven.

Problem 4(a)(i)

A. Analysis : ONB has an attached, but unperfected security interest. The collateral is equipment (stereo). There is a sale out of trust under 9-315. The security interest continues; and under 9-201 ONB will win unless there is a buyer protection priority rule. Since talking about goods start with §9-320. Does subsection (a) provide any protection to Used Stereo Haven? A buyer in ordinary course of business takes free of a security interest created by the seller even though security interest is perfected. Is Used Heavan a “buyer in the ordinary course”? No because Pop doesn’t sell used stereo he is in the business of performing. So under 1-201(9) no buyer in ordinary course; Under §9-320(b) won’t work because goods not consumer goods (not in personal use of either party). What about §9-317(b) another buyer protection rule — takes free of security interest if buyer gives value and receives delivery without knowledge and before it is perfected. So the answer to problem 4(a)(ii) will depend on whether ONB perfected before 2 events occurred: (1) delivery to the buyer and (2) the buyer gave value. ONB perfected on 4/10 (that’s when they filed). Used received the equipment on 4/8 and gave value on 4/8; Therefore, Used would beat ONB assuming ONB had not yet filed a f/s. Assuming a non-purchase money security interest, had they filed before the sale, Used would lose because no protection under 9-320(a) or (b) and no protection under 9-317(b). So, ONB would win.

1. Policy: Used loses if ONB files first before the sale (more precisely

before they give value and receive delivery) and Used wins if ONB doesn’t perfect. Do you like the result (its very different from 9-320(a)). A buyer in ordinary course does have a burden of inquiry, but you won’t lose if not a buyer in ordinary course and check the files and there is nothing to see (its just like 9-322 — there is a burden on the later creditor). Any business that sells used goods from people not in the business selling will have to check the art. 9 files to avoid the result of losing.

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2. Would the result be different if the stereos were consumer goods?

No, don’t fit in §9-320(b). What if ONB argued it had automatic perfection under art. 9-309. The problem for ONB is that it waited to long to file its f/s. Does automatic perfection help ONB? Is there automatic perfection if this is a consumer good in case of 4(a)(i). Only if there is a purchase money security interest. Which it is not. So it makes no difference. The result is the same.

Problem 4(a)(ii)

B. Analysis : Assume there is a purchase money security interest. Now we go to §9-317(e). There is a 20 day grace period (start with 4/2). ONB would win. Again we see the preference for purchase money secured creditors.

C. HYPO : Everything is the same except Pop is not a rock star; he is a wholesaler who sells in the ordinary course of business stereo equip. to retailers, like Used Heaven. Assume the dates are the same. Under §9-317(e) it looks like ONB wins. But under 9-320(a) it looks like Used wins because they are buyer in ordinary course. Which one applies?

1. How did we know to go §9-317(e) in problem 4(a)(ii)? Why didn’t we apply §9-317(b)? Except as otherwise provided in (e)…

(there’s a cross reference). Does that help you in figuring out which rule to apply here? It makes you check §9-320 which suggest that is the rule that trumps the §9-317(e) rule. 9-320 itself has no special favortism showed to purchase money secured creditors. Also in addition 9-320(a) is saying that Used wins even if ONB is perfected at time of sale; and all 9-317(e) tells us is that ONB has a 20 day period to perfect, but that makes no difference under 9-320(a). 9-317(e) adds more buyers to wins but it doesn’t subtract. That is what comment 1 under 9-317(e) is trying to explain.

13. Problem 75 14. Problem 5 (Handout #15)

A. Working Problem 5 Under the UCC : the collateral is food products. The buyer is a buyer in ordinary course under 1-201(9). This is a sale out of trust, and under 9-315 the security interest continues. Is there a buyer protection rule?

1. §9-320 specifically excludes food products. So ONB wins because

there is no special buyer protection rule. The entire loss is on the buyer in ordinary course of business.

2. History: In the past, agricultural financiers tended to be small local banks that would loan to all farmers w/in the

community. They took big risks and relied on farm products for collateral. If it were a bad crop year, there is no collateral. There was a real problem. On the other hand, who buys farm products? The large food processors, and they are represented

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by agents or brokers and have much more bargaining power than the local banks. They thought if anyone needed protection were the small banks not the large buyers. So, the way it worked in practice was that before they would buy the crops they’d go to the bank and make sure it wasn’t a sale out of trust and usually they would write a joint proceeds check to both the bank and the debtor and let the bank and debtor decide how they would divide the proceeds. So it worked really well. The buyer didn’t end up paying twice. Then things changed. Large national banks began doing agricultural financing and so did the govt. through FHA. Everyone began to think this version of 9-320(a) (exclusion of farm products) made no sense. So the states began to drop the exclusion clause of 9-320(a). In 1985 Congress stepped in and enacted the Food Securities Act.

B. Working Problem 5 Under the Food Security Act (pg. 1409) How does the Food Security Act work? (very complex solution to an easy problem). §1631(a) gives the purposes for the rule. Look at §1631(d) the only thing we needed if we thought the fed. Govt. could intervene at all (at least according to the professor) — takes free of a security interest even though its perfected (it’s the lang. Of §9-320(a) just including the farm products as collateral).Basically it removes the exclusion of farm product from §9-320(a). That would have been fine, but instead they decided there would be 3 cases notwithstanding 1631(e) the purchaser should lose even though the purchaser might satisfy definition of a buyer of a farm product.

3 Exceptions Where Buyer Will Lose Under the Food Security Act: §1631(e)

(1) 1631(e)(3) (pg. 1412) — a state that has a “central filing system”

(Created an entire separately filing system for f/s dealing with farm products – 1631(c)(2)). Basically, 20 states have central filing systems that have been approved by the Dept. of Agriculture. It doesn’t have to be approved, and we will see the consequence of not having certification.

—1631(c)(2)(a) assume a state has a certified filing system and ONB wants to file a f/s; the secretary of state is suppose to create a master list of all the f/s that come each month and organize them by farm products (e.g., Idaho — donkeys and burrows, fox and pelts). Go to §1631(c)(2)(d)(1)(e)— if you buy farm product, you are suppose to register with the secretary of state and there is a master list organized by product. Under §1631(c)(2)(E), the secretary of state is suppose to distribute the pages of the master list that relate to farm products you are buyer of farm products.

Start with §1631(e)(3), these are cases where the secured creditor wins. The buyer receives a written notice (the pages of the master list) and does not secure a waiver from the secured party by performing any payment obligation. So the idea is if you are a buyer of corn products from Farmer and you have registered and ONB has filed a f/s and the secretary state sends the pages to you [the list will identify the creditor] and you don’t

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contact ONB and either pay off the farmer’s obligation to ONB or somehow get a waiver, the buyer loses. [this is a bigger burden on the buyer then under 9-320(a)]

(2) §1631(e)(2) also where there is a central filing system — the buyer

has failed to register and the secure party has filed an effective f/s.

Policy: Why would you fail to register? Maybe a consumer buyer or small buyer who is unaware or economically worth it won’t register. If you don’t register and are in a central filing statement, you lose because don’t work something out with the secured creditor.

(3) §1631(e)(1) the only exception that applies if NOT in a state that has a central filing system (one of the 30 states that has not

got the Dept. of Agriculture certification — they don’t create master lists etc…). A buyer of farm products loses if w/in one year before the sale the buyer has received from secured party written notice of the security interest organized to the farm product. So the idea is that for ONB to win in these states notwithstanding §6321(d) it has to send a notice to the buyer within one year before the sale.

How Do You Know Who All the Potential Buyers will be in the next year? One thing you will do is ask the farmer (debtor) and compile a list of past buyers; trying to identify who the largest buyers of such farm products are in this locale, and then you do what the lenders call the “blizzard approach” — send notices to all potential buyers of the debtor. If you are lucky and the notice gets to the buyer, who wins? §1631(e)(1)(B) — must meet the requirements — as in the other exceptions, the buyer has not performed the farmer’s payment obligation to the extent ONB insists that those obligations be paid. The idea is that you have to work it out and if the debtor is late on payment, you have to take subject to the security interest.

15. Problem 75 : Illustrates the problem where a state doesn’t not have a central filing system. Farmer gives ONB a list of potential buyers. Farmer sold to World, a grain merchant, that was not on the list and Farmer didn’t tell ONB of this off list sale and ONB asks the buyer to pay in cash. We are also told that the buyer did know that Farmer had borrowed money from ONB. Who wins when farmer later defaults and ONB goes after the collateral in World’s hands?

A. Analysis : Not in any of the exceptions because §1631(e)(1) doesn’t apply because no notice. The only issue is whether ONB can satisfy §1631(d). We must determine whether there is a buyer in the ordinary course of business. No mention of good faith, of notice (although we have some help in 1631(d) itself. 1631(d) tells us it doesn’t matter that the buyer knows of the existence of the security interest. Here, World is probably a buyer in the ordinary course — unless you can say buying in cash is so unusual to make it not a buyer in ordinary course. So §1631(d) doesn’t work. What about §1631(h) [creditors don’t think this is a great benefit] — a person (farmer) violating paragraph 2 shall

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be fined $5000 or 15% of the value of the benefit received for such farm product (which ever is greater). There is one other hooker — apart from the problem that the buyer may not have the money — who gets the fine? (h)(1) tells us the s/a can require the debtor to furnish the list; (h)(2) says nothing that helps here; (h)(3) selling off list have to pay the fine, but it doesn’t say whom. The Dept. of Agriculture takes the position that they collect the fine.

B. Large Buyers : When you advise your client you need to first check if the state has a central filing system and you have to act accordingly. With states w/out filing system, the BUYER will win; in most cases its like 9-320 because it is very hard for the creditor to hit the off list seller. If in the filing system chance, the creditor has a good chance of winning under one of the exceptions. What we’ve seen is the difficulty of allocating the risk of bad behavior by debtors b/w creditor and buyers.

E. Priority Problems Involving Leases

1. Read Text Page 181-182

Methodology: (1) classify collateral; (2) analyze status of contestants (a) creditor analysis of §9-203(b) and (b) party to a lease — make sure if it’s the lessor or lessee (b/c priority rules are different; (3) then go to §9-315 to see if whether the lease is authorized; if the lease is authorized, the security interest is extinguished; if NOT authorized (a “lease out of trust”), then we go to the priority rules —§9-201(a) does NOT apply because a lessor/lessee are NOT purchasers (check definitions of 1-201(a)) or creditors. We go to 2A-301 (that’s the equivalent of 9-201(a)) — it’s a default rule — there the party to the lease wins. So if can’t find another protection rule, it’s the party to the lease who wins against the creditor.

2. Problem 1 (Handout 16) — Problem 1(a) is the combination of problem 77.

Problem 1(b): You have delayed delivery of physical possession under a lease.

Here Hybid and Newcomer lease on 2/1/01 with this agreement for delayed delivered. On 10/1/00 ONB loans $ to Hybid. On 1/2/01 it delivers the equipment. And on 2/1/01 Hybid defaults. Assume this is a lease out of trust and go to §2A-301 that tells Newcomer wins. SO then we go to 2A-307(3) (revised pg. 1276) — we know (1) and (2) doesn’t apply, but (3) says a lessee takes a leasehold interest subject to a secrutiy interest held by a creditor of the lessor. When does the lessee take its leasehold interest? When you take a lease hold interest.

A. 2A-103(1)(m): leasehold interest — when does a lessee get an interest under lease K? It depends what we mean by the word “interest”. It can’t mean a property interest, because don’t get a property interest under a true lease. It means the K right (that’s the interest of a leasehold right). So, Newcomer gets its K right on 2/1/00. So does §2A-307(3) apply? A lesee takes the interest held by a creditor of the lessor. When does ONB security interest arises? Not until 10/1/00 — so 2A-307(3) does NOT

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apply. So we have to go to the default rule under 2A-301 and Newcomer, the lessee wins.

Policy: From Newcomer’s perspective, do you like the result? (there is a big

secrecy problem for ONB) but Newcomer would never find anything about the deal? When does their reliance on their rights begin? They start relying when they sign the lease (b/c stop looking for alternatives), and may sign a K with some else relying that they will have the equipment on such a date. But there is huge problem for ONB? Their problem on 10/1/00 is that they are NOT aware of the lease, and who has possession of the equipment? Hybid. (they see it after a visual inspection). Also you don’t file a f/s for a true lease and even if it did it would be filed under Newscomer’s name (permissive filing under 9-505). So the only way for ONB to know is to ask Hybid — and ask if there are outstanding lease agreements with respect to the equipment (and we know that is not a good safety net for ONB to rely on).

3. Problem 77 (See Diagram on Handout 16A) It illustrates the real business risks to the transaction of a lease. Assume from the outset, the type of equipment is not covered by a certificate of title statue (otherwise we would have to worry about §9-311). Hybid is in a jam with labor and it brings in a new construction company to do the job. The new construction doesn’t have enough equipment, but Hybid says it will lease them their equipment.

A. If You were Representing Hybid: You would want at least 3 agreements: (1)

make sure that there is an agreement b/w Hybid and University that releases Hybid from any obligation to complete the construction (don’t want Hybid guaranteeing Newcomers work); (2) the second agreement b/w Newcomer and the University (Newcomer promises to work; University promises to pay; (3) the lease agreement b/w Hybid and Newcomer — Hybid is likely to give Newcomber a good deal (make below market price because Hybid is getting out of the K with the University and Newcomer doesn’t have any use for the equipment).

B. Risks: The risk for Newcomer is that after signing the agreements, Hybid defaults on the ONB loan. What happens? ONB goes to Newcomer and grabs the equipment. Who is stuck? Newcomer b/c liable to the K with the university, doesn’t have equipment, and will have to pay premium to rent new equipment on a emergency basis. This is the risk to Newcomer, the lessee in this type of arrangement.

C. Analysis:

1. What is ONB’s status? They have an attached but unperfected security interest in equipment.

2. Newcomer is an Art. 2A lessee.

3. Start with analysis of §9-315(a)(1) — this lease is a lease out of trust and therefore the security interest continues into Newcomer’s

hands.

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4. Priority Rules — Start with §2A-301 (pg. 181) A lease contract (the agreement b/w Hybid and Newcomer) is effective against

creditors of Hybid; this means Hybid wins UNLESS otherwise provided — there is some secured protection priority rule. We’ve looked at §2A-306, which doesn’t apply — it deals with liens arising by operation of law; but §2A –307 (revised on pg. 1276) — Start with 2A-307(1) — a creditor of a lessee takes subject to a lease K — doesn’t apply; 307(2) — doesn’t apply because liens are not art. 9 security interests; 307(3) — subject to a security interest held by the creditor of the lessor — that tells us that ONB wins; so it overturns the default rule. But we need to worry about the exceptions in 9-317, 321, 322. Starting with 9-317? Is it relevant to our dispute —Newcomer would win under 9-317(c) — it says that except as otherwise provided in subsection (e) [ONB doesn’t have a purchase money security interest, if it did you would have to worry about (e)] , a lessee takes free of clear if gives value, delivery without actual knowledge, and before perfection. Need to test knowledge at two times: (1) when it gives value and (2) delivery — §1-201 gives a definition of delivery and receipt in Art. 2 — if read two together — receipt occurs at point of physical possession; assuming Newcomer doesn’t know anything, Newcomer wins. But if ONB files at outset of transaction, ONB would win because there is actual knowledge — b/c go back to §2A-307(3) which says that ONB wins.

Outcome: (1) if ONB doesn’t file and Newcomer doesn’t have knowledge, Newcomer wins; (2) if ONB files at outset, they win.

4. Hypo: Say Dawn leased the car when she got to Maine. She is driving the rental car. You stop at a light, ONB wants to repossess the car b/c this lease violated Hybid Budget car’s s/a and they defaulted.

A. Analysis: Dawn will win. Assume ONB filed a f/s, so you can’t rely on §9-317(c). So you would argue §9-321(c) — it says Dawn — a lessee in ordinary course of business takes a lease hold interest (see definition under art. 2A) free of a security interest created in goods by lessor, even if perfected and Dawn knows of its existence. So most consumer lessees will be protected under 9-321(c). This should make us feel better in the outcome above. Why doesn’t 9-321(c) protect Newcomer — b/c they are not a lessee in the ordinary course of business b/c they are leasing from Hybid who is not in the business of leasing equipment. Read the definition, since Hybid is in the business of construction and not leasing, Newcomer cannot take advantage of §9-321(c).

Problem 78

5. Problem 2 (Handout 16)

Last class: (missed ) the losing party under the UCC priority rules, they seek to change the result to change the outcome by arguing fraud. Under the Uniform fraudulent transfer act (a state statute) — the problem is the UCC drafters don’t want fraud challenges to ordinary business transactions. So we learned the UCC has “gate-keeping” rules, which limit your access to fraud rules. We saw these rules in three cases:

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Its very difficult to get fraud in a lease because you have to produce facts that show that ONB (buyer/lessee) was in bad faith and showing any value will eliminate the bad faith argument.

3 Step Approach: UCC Analysis, Gate Keeping Provision, FTA (See Below)

Handout Problem 16 Problem 2 (See Diagram At end of Handout 16a)

1. 1994 AMB makes it loan to Hybid and gets a floating lien covering present and after acquired equipment; also files a financing statement.

2. June 5, 01 Hybid promises to pay the 300,000 for a crane from Catfield.

3. Jan. 2002 Hybid is in financial distress. (this is the point where potential fraud increases).

4. Feb. 1 2002 — we have a work out agreement (lease back of the crane). Essentially Hybid has bought the crane and is now leasing it back to Catfield. The lease transaction is unusual b/c Cat is not paying any rent; instead the dealer is canceling 50% of Hybid’s obligation to pay the purchase of the crane. This the way Cat is paying for the lease. This is a sweet deal for Cat b/c it knows that NewComer wants to lease the crane and they are willing to pay $20,000.

5. Feb. 10, 2002 — Subleases the crane to NewComer. It’s a sweet deal b/c Cat is getting $15,000 from Hybid and $20,000 from NC (extra $5,000).

6. AMB finds out what’s going on 3/1/02 — both leases are out of trust and they want to get the crane from NC (the sublessee) [Notice that financing statements only last for 5 years and ONB did not file a continuation within 6 months of the gap]. This is why it files again on 3/1/02.

AMB is the plaintiff and NC is the defendant. Will the work out arrangement hold up or can AMB pull it apart.

UCC Analysis: (1) classify the collateral in the hands of the debtor — equipment, and not covered by certificate of title statute (b/c if did you would have to worry about 9-311). What is AMB’s status? When do they get an attached security interest in the crane that is the subject of the dispute? Attachment means 9-203(b) must be satisfied: (a) Value — 1994 (b) Rights in Collateral — 6/5 (c) S/A — 1994. But attachment on 6/5/01. Was there perfection on 6/5/01? N0, because the f/s lapsed. So AMB is secured but unperfected.

NC is a sublessee (so its rights are derivative to Cat). So its really a battle between AMB and Cat. Is Cat a lessee or a lessor? Cat is a lessee b/c the owner of the crane is now Hybid. So Hybid is the lessor and both Cat and NC are the lessees. The next step is we go to 9-315 — to see if a it’s a lease out of trust? Yes, both of them were so AMB’s security interest continues in the 2 leases.

Who Wins Under the UCC? Start with §2A-301 — it tells us a lease K is effective according to its terms against creditors. This suggests Cat (the lessee) wins. Then you need to look in Art. 2A to see if otherwise provided (a special priority rule). Go to §2A-307 (revised on). We are in 2A-307(3) — that’s what takes us to 9-317 — because we are talking about a lessee a lessee takes a lease subject

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to a security interest held by a creditor of the lessor. So now we go to 9-317(c), which tells us — on what day do we test the lessee’s knowledge? When they get delivery and give value? Both times would 2/1/02. Assume no knowledge? Was AMB perfected? No, because it lapsed (the critical time is when Cat gave value and when they received delivery — 2/1/02). AMB did not re-perfect until later (result would be different if perfected in january), therefore NC wins because NC’s rights are derivative to Cat.

Policy: Yes, AMB made a mistake, but had there not have been this work out (the leaseback) AMB could beat Hybid and Cat. Explain Why? Why could AMB beat Cat if there was no lease back? How would you characterize Cat — a general creditor for the balance of the purchase price (they sold a machine on general credit). The priority rule that would apply if no leaseback would be 9-201(A) — secured party beats a creditor. Also, had the leaseback not had happened, AMB would beat Hybid. Why? Because you don’t need a perfected security interest to beat a debtor, just need attachment (9-203(b). AMB is very upset, so they want to argue fraud. Is there a gatekeeping rule to argue fraud.

Gate Keeping Rules For Fraud:§ 2A-308 — subsection (1) doesn’t apply because the lessor is not in possession (NC is). What about subsection (3) — no (in problem 78 Hybid was a seller/lessee), here they are a buyer/lessor. What about subsection (2) — pre-existing claim for money (YES) — Cat’s claim for the balance of the purchase price. So AMB can claim fraud.

Policy: Never an ordinary course transaction when working out a preexisting claim. When doing lease backs, the UCC does not limit AMB’s resort to the fraud laws.

Fraudulent Transfer Act:What case can AMB make under FTA?§5(deals with constructive fraud) — what 2 elements must AMB satisfy to show fraud: (1) AMB’s claim arose before the transfer (the transfer is the leaseback); so AMB has standing and needs to show (a) reasonable equivalent value; and (b) insolvency.

Assume Hybid by January 2002 is insolvent within in the meaning of FTA’s §5 definition. Only question is whether there was reasonably equivalent value? The value was 50% discount of 15,000 dollars a month. Is this reasonable equivalent value for the transfer (giving Cat the right to use the crane)? Cat turned around and subleased this lease (the crane) for $20,000 a month, but it only took $15,000 of of Hybid’s bill — that’s not reasonably equivalent. (You could argue there are transaction costs, but you are talking close to 25% — 5,000 on 20,000). So, this can be challenged as fraud. If fraud is found, the court may require Cat to discount the purchase even further or they may rescind the lease.

So you can challenge on the basis of fraud — this is the analysis you use for lease backs.

HYPOS:

1. Say AMB did everything right (f/s is good) and Cat’s lawyer knowing FTA isn’t too greedy and just gives Hybid a $20,000 discount on its purchase price. This helps AMB if Hybid gets a $20,000 cancellation because Hybid will have more money to pay back the loan from AMB. On these facts there is no constructive fraud challenge. Under the UCC, who wins? Under §2A-301 — then go to 2A-307(3) — and we wouldn’t get to 9-317(c) and AMB would win. So if there was a f/s at time of the lease back was done AMB would win.

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2. Say Cat knows by 1/2002 of AMB assuming no fraud. Will 9-317(c) protect Cat? Start with 2A-301 — 2A-307(3) says except as provided the lesee takes the leasehold subject to a security interest held by a creditor of the lessor. Then go to 9-317(c) won’t help in either of the 2 hypos b/c the lessee doesn’t take free if at time lessee gives value and delivery it either has knowledge or there is a financing statement. And 9-321 won’t help either because there is no lessee in the ordinary course of business. So, AMB wins.

What Should You do If You Are the Lawyer for CAT working out a LeaseBack:1. It can be challenged under the FTA — so don’t bee too greedy.2. Before you do the deal, check the files. If find nothing, go ahead. If no nothing about AMB

go ahead but don’t be greedy. But if find a f/s then under the UCC rules you have to deal with AMB, so you bring them into the bargaining and work something out between all three parties. That is the interplay b/w the fraud and UCC rules would shape a leaseback agreement.

F. Priority Battles Where One Claimant Has Rights Under Article 2

1. Read Text page 182 to 184

2. Problem 79: (refer to Handout 16(b)) Good review of rejection and revocation of

acceptance. Marc is being deceived: (1) sale out of trust; and (2) he got lizard luggage instead of alligator. Classifying the collateral in Jack’s hands is equipment (b/c uses it in his business) and ALF has an earlier security interest and under 9-315 it continues because it is sale out of trust. Marc is a different type of buyer, he is a “revoking buyer”.

Art. 9 Secured Creditor v. Revoking Buyer

A. Variation A (Business Example) Jack is a wholesaler and Marc is a blacksmith. Marc orders a drill press to stamp designs. It costs $30,000 and has to order and put a down payment of 10,000 and has to wait 4 weeks.

1. Case I: Asks for a drill press in gray. 4 weeks later it arrives and its bright

orange. Jack says they don’t make the press any more in gray. Jack says he’ll give him a 15% discount if he takes it in orange. Assume Marc says Ok. Under Art. 2 lang., Marc has accepted a non-conforming good with the defect. See 2-601 and 602.

Analysis: He can’t revoke. If you accept with notice of a defect, then under 2-607 he has no right to revoke. He could have rejected, but he didn’t. The standard is higher for revocation of acceptance. See §2-607(2).

2. Case II. He orders a fancy attachment with the drill press. It comes and there is no attachment. Jack says take it the way it is and I will order the attachment and because of the disruption, I will give you a 1 year free maintenance. Marc says Ok. 3 weeks later Jack calls and says there is a problem — they don’t sell the attachment separately. Instead Jack will give you another 20% discount. Marc says I don’t want it, I need the

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attachment. I want my deposit back — I want to revoke my acceptance. This is acceptance with notice of a defect.

Analysis: Here, 2-608(1)(a) applies. Because he thought the defect would be cured, he could reject. For revocation of acceptance, only the cases specified in 2-608 can you reject. Revocation of acceptance — the seller has to take back used goods. What are Marc’s remedies if he has properly revoked? Start with §2-608(3) — then go to 2-711 — he has all of the remedies he would have had if had rejected in the beginning. Under 2-711(1), Marc would be able to cancel the K (out of this deal) and recover his deposit, recover cost of substitution and other damages. Assume Marc does all this and Jack says give me the machine back? Why would Marc not want to hand over the machine back to Jack? Because he wants to get repaid. How would you describe Marc’s status after he has revoked acceptance — he ends up being a creditor and 2-711(3) he is a secured creditor. Look at 2-711(3) a buyer has a security interest in goods in his possession (has to keep them) for any expenses incurred; he can sell it and use the drill press as collateral for the money owed by his seller. However, Marc is not alone. There is another earlier Art. Secured perfected creditor. Assuming the buyer keeps physical possession, you get an Art. 2 security interest. Make sure you know why its an Article 2 security (its not a consensual lien — the parties didn’t agree to it, its created by operation of law — its part of the remedy of section of the buyer). Under Article — 9-109(a)(5) article 2 security interests are swept into Art.9.

1. Does Marc have an Art. 9 security interest? Not under 9-203 because subsection (b) isn’t satisfied (Jack didn’t sign a S/A for his buyer). Under 9-109(a)(5) says we are in art. 9 and sends us to 9-110(1) — the Art. 2 security interest is enforceable even if 9-203(b) hasn’t been satisfied, and filing is not required to perfect the security interest. If we were to stop at 9-110(2) (old Art. 9) who would win? ALF because they perfected first under 9-322(a)(1). Under new article 9, Marc wins because under 9-110(4) whether earlier or later Marc wins.

2. Article 9-110 gives the art. 2 favorable status — don’t need to file a f/s (no secrecy problem b/c buyer has to keep possession); also favorable priority rule in 9-110(4)

3. Case III. Marc gets everything. But after 2 weeks, Marc realizes that the good has faulty wiring. Marc doesn’t want it. He wants his cost of cover. This would be acceptance without notice with a latent defect (this is the case where most controversy arises).

Analysis: Same as above.

B. Variation B: It gives a more realistic example where everything is ordinary course except there is a problem in the machine (assume there is a latent defect). Al Bank is providing inventory financing on 4/1 to Jack a wholesaler; and Jack in the ordinary course of business sells a drill press to Marc on 4/10. Marc pays the full price of $30,000 (b/c it looks like the drill press is fine — latent defect not discovered until 4/15 — 5 days later when he revokes and he does everything right — “I don’t want this machine”).

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See Handout 16B and the Chart attached.

1. Assume Jack is judgment proof; so if Marc keeps the machine and goes after Jack for damages, he won’t get anything b/c Jack is broke. Jack’s debt to the financier is $150,000 (much more than the value of the machine). So when you focus on the machine, Aligator Bank is under-collateralized. But its expensive enough that they may go after Marc, and it may be in Jack’s interest to tell the bank who owns the various drill presses. Under 2-711(1) March can get the purchase price + damages. See rest of assumptions on the handout.

Table on the Chart: There are two columns: column I is designed to show the outcome of priority battles under the old art. 9; column II shows the outcome under the new art. 9. This explains what §9-110(4) does. This is the only new thing that we will talk that is new to new article 9 is the addition of 9-110(4). In other words, under the old art.9 once you have concluded that Marc had an art. 2 security interest included in art.9 you went to art. 9 default priority rules to determine who wins, because no special rules.

There are 4 different cases:

Case A and B: Marc is a buyer in ordinary course of business. See §1-201(9).Case C and D: Marc is not a buyer in ordinary course of business.We will explore the losses to Marc under these facts: Its too late to reject because he accepted; he has two options: (1) keep the machine with the

defect; or (2) revoke his acceptance.

Case A: He is a buyer in ordinary course of business. It is a straight forward seller from a wholesaler to a business person. Marc paid $30,000.

1. Old Art. 9: He is out $30,000. Marc is in a battle with AL bank against the

machine. The $20,500 is described because the professor thinks he will win the battle. If Marc keeps the drill press, he is a “buyer in the ordinary course”. Start with 9-315 — 9-201 — 9-320(a) — as a buyer in ordinary course even if AL bank is perfected and knows of the security interest, he wins. So if he keeps it, he gets $20,500. He gets nothing from Jack, because judgment proof. So he totally loses (30 – 20, 500) = 9,500 if he keeps the press.

2. New Article 9 — same result as old.

Case B: Justifiably revokes his acceptance and is a buyer in ordinary course of business.

1. Old Article 9: He has paid out $30K. The value of press to Marc is 0. Why 0? You must think Aligator Bank can beat Marc in a fight over the drill press. Why? (remember under old art. 9 there is no 9-110(4)). What is the status of Marc if he justifiably revokes acceptance? Marc is a secured perfected creditor under under art. 2-711 and 9-109(a)(5). So who wins? Aligator banks under 9-322(a)(1) b/c they were perfected first (4/1) and Marc was perfected on (4/10). Once Marc revokes he is no longer a buyer, rather he becomes the equivalent of art. 9 secured

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creditor because of art. 9-110. Jack is judgment proof; so no damages. Marc’s total loss is $30,000.

Policy: If Marc keeps the machine he only loses 9,500; but if he justifiably revokes, he loses the full $30K and we haven’t even talked about damages for cover. This should strike you as very Odd! We say to Marc, as a buyer of ordinary course, don’t check the files you can rely on Jack that he sells goods of this kind; he loses an important remedy, namely the remedy to revoke acceptance if there happens to be an earlier art. 9 secured creditor. He loses his remedy; it has no meaning because he can’t collect in the face of this early secured creditor; who he shouldn’t know is there since he doesn’t have to check the files because he is a buyer in the ordinary course of business and we want to encourage people like Marc to buy goods from sellers in the ordinary course (b/c it promotes commerce). Although Marc has a security interest it is worth nothing b/c there was earlier perfected security interest.

2. Under NEW Art. 9 (we have 9-110(4) this is a new addition). Again there is

a $30,000 loss. The value of the press to Marc is $20,000. Why? Because under 9-110(4) Marc will win against the bank. Again he is a later secured creditor, but look what 9-110(4) says. It is very generous to the revoking buyer. Look: the art. 2 security interest has priority over a conflicting security interest created by the debtor, Jack. Its’ 20,000 because — Marc doesn’t want the machine — he’s kept the machine as collateral to cover his loss — so he will sell the press at a foreclosure sale (like any secured creditor would). Its only 20,000 because the foreclosure sale discounts the price. So, Marc’s total loss is $10,000.

Policy: If March keeps the machine and revokes under New Article 9, the result is very similar. The advantage of new Art. 9, Marc can make the decision b/w those 2 remedies: keep it or sell it without worrying about an earlier secured creditor. His choice is not driven by an earlier secured creditor, which he didn’t have to worry about when he bought the machine.

Case C: Marc is NOT a buyer in ordinary course of business.

1. Old Article 9: Marc keeps the drill press. Purchase price paid out is $30,000 (loss). Value of the press with latent defect to Marc who is in a battle with the bank is $0. Why? Because the bank will beat Marc. If Marc decides to keep the machine, then he remains a buyer. He bought it and he is keeping it; so his status stays buyer. But he is a buyer not in ordinary course. Under 9-315 the banks’ security interest continues and under 9-201(a), bank wins and there is no other special provision for buyers not in ordinary course. So, Marc’s total loss is $30,000.

Policy: (remember the example where the hospital bought a medical machine) What’s the danger if they keep the machine with the defect? You lose.

2. New Article 9: Same Result.

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Case D: Not a buyer in ordinary course, but revokes acceptance.

1. Old Article 9: $30,000 paid out. The value to Marc is $0? Why? Who wins? Aligator bank wins because the same rationale. Now Marc’s status if he revokes is a creditor with an art. 2 security interest (in art. 9). It doesn’t help b/c he is second in time to debtor’s earlier creditor. Under 9-322(a)(1) Marc loses the full $30,000.

Policy: This result shouldn’t bother you. Because they should have known they were not a buyer in the ordinary course. Knowing that you should have check the art. 9 files and you would know about the bank. You should have got a subordination agreement from Bank.

2. New Article 9: $30,000 paid out. If Marc justifiably revokes, the value of the drill press to Marc is $20,000. Why? Because Marc will beat the bank. Now Marc is a perfected secured creditor and under 9-110(4), Marc beats Aligator Bank. It protects Marc whether he is a buyer in ordinary course OR NOT a buyer in ordinary course.

Policy: The addition of 9-110(4) cured the anomaly we saw b/w the $9,500 and the $30,000 when Marc was a buyer in ordinary course. But it went so far that they created an anomaly the other way that benefits buyers NOT in ordinary course of business.

Advice If Representing Buyer: Check art. 9 files and discover the f/s. Tell them to revoke because if you revoke you beat the bank, but if you keep the machine you lose. And that seems crazy to the professor. What’s the rationale? We are going to protect you if you buy in ordinary course b/c we want to promote commerce, but if you buy outside ordinary course and a defect arises, we will rescue you. Art. 9-110(4) provides an opening for buyers to take advantage of this scheme when making a decision to keep or revoke the machine.

How Long Can You Marc Hold On to the Machine Before He Goes to the Foreclosure sale without risk being turned on Characterizing Him as Keeping the Machine: The standard is “commercially reasonable.”

If up to the professor, she would limit recourse of 9-110(4) to only buyers in ordinary course.

G. Fixtures: The main challenge is again harmonizing two bodies of law. Here the bodies of law, both of which are state law, are art. 9 financing law and state real estate law dealing with real estate financing. Both apply to fixtures.

1. Notes:

a. 9-102(a)(4) Fixture means goods that it becomes so related to real property

that an interest arising in them under real property law. Essentially, the classification issue whether it’s a fixture or not is punted from art. 9 to real estate law. Its real estate law that determines whether you have a fixture. There are 3 general categories of property:

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(1) At one extreme you have goods that are so thoroughly merged into

real property that they lose their independent physical identity as separate goods (§9-333(4)(a) — building materials — a security interest does not exist in ordinary material buildings — these are not fixtures they are real estate (e.g., the window incorporated in a building, a steal beam, bricks in the façade).

(2) The middle approach: Examples, the black board, wall to wall carpeting, chair lift at a skii area — integrated into the land (affixed) yet maintains its identity as goods (not totally merged) We treat both as personal property and real estate. If you want a consensual lien you can either get a mortgage and record it or get an art. 9 security interest.

(3) Goods attached to real estate but there attenuous that no one would think they are part of the real estate (e.g., a painting hanging on a wall, curtains). Again it’s a affixed to a building, but its attenous and the goods maintain their identity. These goods are regulated by art. 9. If you want a consensual lien, you comply with 9-203(b) and perfection rules. Real estate law doesn’t apply at all. These are non-fixtures.

Classification of Fixture: (1) degree of physical (how difficult is it to remove the good for real property — the more difficult it is the more it looks like a fixture) (2) intent of the debtor who owns the property; (3) reasonable expectation of the third party; (4) the extent to which the presence of the goods is critical to the use of the real estate (ex. The chair lift — is it attached affixed to the real estate? Yes; the intention of parties — to leave it till its full ecn. Life; The lift is critical to the real estate. Most courts would say a chair lift is a fixture.

2 Approaches to Getting a Consensual lien in fixtures:

1. Article 9 Approach: Nothing special as to attachment (§9-203 and 9-108); Perfection: (1) act as if its not a fixture and file f/s, take possession...; or (2) do a fixture filing (9-502(b) tells us what to include in the filing), its filed in a different place (its filed under 9-501 — in the local real estate records — county-wide basis whereas standard f/s are filed centrally often in the Sec. State’s office). Which Method do you choose? What we will learn in problem 5 is that you will win more if you do a fixture filing than if you rely on standard art. 9 perfection modes.

Art. 9 Approach: Begin with 9-334(a) — a security interest may attach to fixtures. Go to 9-203 and 9-108 for attachment. You just have to identify it just like any other collateral. How do you perfect? 2 choices: (1) you do the standard UCC filing of a f/s that complies with 9-502(a) and 9-516(b) and file it centrally as you do for all other art. 9 property (9-501(a)(2)); (2) the other alternative is you do is what is called a “fixture filing” — it requires more go to 9-102(a)(4) — look at 9-502(b) it tells you what more you have include in the paper that goes to the records: you have to indicate it covers fixtures, indicate it has to file with real estate records; provide a description of the

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related real property; and if the debtor doesn’t have an interest you have to give???. You file it locally, county-wide in the land records (in same place a mortgage would be filed) 9-501(a)(1)(b) —

2. Real Estate Approach: Ignore Art. 9 and just go to state real estate law and find out what formalities you need to follow to create a mortgage on real estate (make sure description on mortgage is broad enough to include fixtures) and record it just like dealing with traditional real estate. There will be secrecy problems (this should remind you of negotiable documents — if one party views it as personality and perfects under Art.9 and the other views it as real estate, there is a huge problem).

1. Read test 185 to 200, and narrative in problem 3 on Handout 16

2. Problem 83: This question raises the issue — what approach you should takefor securing a fixture?

Facts: ONB wants a consensual lien on the RR tracks (it’s a fixture b/c they are attached to real property but have a separate identity). Assume ONB wants to use the article 9 approach (this makes sense here for reasons that will become apparent below — so it follows §9-203(b)). The only question is what it should do to perfect the fixture?

a. Analysis: Transmittal utility under §9-102? Yes. Since they can get a fixture filing by filing centrally, they will file one per 12 states. This is an exception for transmitting utilities under §9-502(b). The idea is that a subsequent searcher (even if they view the RR tracks as real estate would know that there are special rules for transmitting utilities and so they will go to this central statewide office to check filings).

3. Problem 4 (Handout 16) — This extends the analysis in problem 83.

a. Problem 4(a): ONB wants to rely on the land and easements as well as the

pipeline for collateral. What should they do? Assume the pipe line is a fixture. The pipeline also falls under the definition of transmitting utilities; so as to the pipeline itself, your client would have the option to file in the office, whichever designated, for transmitting utilities under 9-502(b). What about the land and the easements?

1. Will these fixture filings in the 12 states perfect ONB’s consensual lien on the land? No —Put aside the easements — where Monopoly owns the land — will the filing of the 12 fixture filings give your creditor a perfected lien in the land? See 9-501(b) — does it say anything about perfection in real estate? No, in fact article 9 doesn’t even talk about real property. Article 9 doesn’t tell us how you create a lien on straight real property. It only tells us about this narrow case of fixtures, where the law overlaps. So if you represent ONB and you want a perfected lien on the land and pipeline, ONB will have to record their mortgage to get a perfected interest in the land (it will be filed in the county office). SO ONB has to file 2 separate recordings.

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2. The book problem only illustrated the fixture. Problem 4 illustrates a problem where the creditor wants land. So, here, ONB would use the real estate approach — making it broad enough to cover fixtures and the underlying related real estate. So you can see article 9 only helps to fixtures not to real property. It would be easier to use real estate approach and only file one f/s.

b. Problem 4(b): This time BFX owns the land and Monopoly (debtor) owns the tower and leases it and ONB is interest in getting a consensual lien just on the tower. This may be a case where you may not want to use real estate law at all b/c the debtor doesn’t own it.

1. Classify the Tower: A fixture. If a fixture, it could be a transmitting utility. If it weren’t a fixture, it would probably be equipment.

But there is an argument that it could be inventory (items held for lease and that’s what Monopoly does with it). So, we have three possible classifications.

2. 3 Modes of Perfection : If it’s a fixture, but not a transmitting utility? — file under §9-501 in the local records office. If its transmitting

utility, then you go back to the special central office for transmitting utility. If its equipment or inventory, file a f/s under art. 9-501. Result: File all 3 f/s and your client is safe.

a. Argument Why its Not a Transmitting Utility : Debtor is NOT primarily in the business of transmitting communications; rather it is in the business of leasing towers. Rather BFX is in the business of transmitting. But you could argue it does.

c. Problem 4(c):1. Classification: Looks like fixtures and equipment.2. Perfection: For equipment file one in each state (so 12); for the

fixtures, you have to file in every county real estate record. In this case you have to do both, OR take a chance (that the debtor won’t default and won’t need a perfected security interest).

5. Problem 5: This problem deals with priority battles with fixtures.

(a) Problem 5a1. Analysis: Always start with what the fight is about? The fight isn’t

about the real estate (b/c both creditors don’t have an interest in the land); the only fixtures that are subject to dispute are those that are in the apartment building.

a. Status : They both are creditors with perfected liens.b. Priority Battle : Start with 9-201 a s/a is effective against other

creditors; So FCC wins. Then we go to 9-334(c) — (default rule) — clearly FCC is the party with a security interest in the fixture and ONB under this § is the “encumberancer” (when talking about real estate, the mortgagor is the debtor; whereas encumbrancer is the creditor). So 9-334(c) default rule says FCC loses unless otherwise provided.

1. Can FCC use 9-334(d)? No, because FCC doesn’t have a 169

purchase money security interest.2. Can FCC use 9-334(e)? Does FCC have a perfected security

interest in fixtures (yes, by 12/3)? Does the debtor have a real interest in the recorded property? The debtor is Simon (the owner of the building) and he has a deed in the record (that’s critical so he has an “interest of record”). Who wins turns on the mode of perfection. Assume there was a fixture filing on 12/3 (before the interest of the encumbrancer is of record — here ONB its interest of record occurred on 12/15]. So under 9-334(e)(1) assuming we have a fixture filing FCC wins and overturns the default rule. If it weren’t a fixture filing, then 9-334(e)(1) would not have applied.

3. Not readily removable so 9-334(e)(2) doesn’t apply4. It involves a judicial lien so 9-334(e)(3) doesn’t apply.5. (f) and (g) doesn’t apply because ONB didn’t consent6. (h) doesn’t apply b/c no constructive mortgage.7. So then we go back to default rule under (c) and ONB wins.

Policy: If you are a real estate lender (a mortgagee) you don’t need to check the art. 9 files except with transmitting utilities.

(b) Problem 5b — Everything the same except this is a sale of notes with backed up mortgage (realty paper). But that’s not our problem b/c the fight is not over realty paper, its over fixtures.

1. Analysis: Assume it’s a fixture filing and under 9-334(c) ONB will win under the default rule unless FCC can take advantage of one of

the exceptions above. 9-334(d) doesn’t apply b/c no purchase money security interest; 9-334(e)(1) doesn’t work b/c in (e)(1)(b)— essentially, analyze the battle b/w FU and FCC and figure out who wins — that’s what (e)(1)(b) says you have to do. Start with default rule — FU beats FCC. None of the exceptions apply — (e)(1)(a) won’t help b/c FU filed before FCC. B/c FCC would lose to FU, it also loses to ONB.

2. Policy: Don’t worry about FCC b/c they could have found out about FU’s interest by looking the land records. So we learned that the

Fixture financier (FCC) has a burden of inquiry — they have to look in the land records and if they had they wouldn’t have realized the sale took place but they would have found out about FU and then would have found out about the sale to ONB.

(c) Problem 5c — What’s different is that FCC doesn’t get a signed s/a until 12/18. So, the question is who wins?

1. Analysis: ONB wins. Start with 9-334(c), it tells us ONB wins. Now you

could check the exceptions — why doesn’t (e)(1) work? Isn’t filing first in time enough? No, FCC loses because (e) is not satisfied b/c under (e)(1)(a) says the security interest is perfected by a fixture filing (when is perfection for FCC — need attachment for perfection, here its 12/18 — its perfection under 9-334(e) which tells us that there is no anticipatory filing for a fixture financier when its in a battle with a mortgagee like ONB; it would

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work for another creditor under art. 9 under 9-322(a) or other lienors like judicial lienors under 9-317). Why did they eliminate anticipatory filing?

2. Policy: Why did they eliminate anticipatory filing? Can the mortgagee

anticipatorily file — you would have to check real estate law (but the professor hasn’t seen one that allows it for mortgages). We are trying to mesh two systems – it wouldn’t make sense to impose anticipatorily filing on 50 different versions of real estate law. Lesson: Need to perfect early (don’t rely on anticipatory filing).

(d) Problem 5d — This is a sale out of trust as to FCC, it violates its S/A. Should M Developer pay the debtor’s bill to FCC? Who wins?

1. Analysis: M Developer would win. Start with 9-315 b/c we know with respect to any collateral if its an authorized sale FCC would lose

its security interest; but b/c it’s a sale out of trust the security interest continues. Then we go to 9-334(c), M Dev. Wins under the default rule — (“conflicting interest of whom”? Is M Dev an encumberancer? No they are the owner). What about 9-334(d)? No; 9-334(e)(1)? Depends. A perfected security interest in fixtures has priority if the debtor has an interest of record in real property (as of Dec. 15, it is M Dev that has the interest of record — but we are talking about the period when FCC was dealing with Simon); and the s/I is perfected by a fixture filing before … If FCC filed a fixture filing on 12/3 and 12/15 M Dev. Records? FCC wins. But if it’s a normal f/s M Dev. Wins.

Recap: We learned fixture filings provide better protection for fixture financiers than regular art. 9 filings.

(e) Problem 5e — This example deals with a purchase money loan; and a fixture filing statement was filed. Who wins? Good Real Estate Law Case

1. Analysis: If started with residual rule of 9-334(c) ONB would wins. Do any of the exceptions in 9-334 apply? (e) doesn’t help because

FCC is second in time with respect to perfection.

9-334(d) says a perfected security interest in fixtures (clearly FCC has perfected before default) has priority over a conflicting interest of an encumerancer and Simon has a deed and security interest is purchase money (yes under 9-103 definition — value given to enable the debtor to purchase the pumps and furnaces that serve as collateral). (d)(2) says the interest of the encumberancer arises before the goods become fixtures — on what does it arise here? Why Oct. 5 and not Oct.1? It’s Oct. 5 on these facts but only b/c of N.C. Real estate law — when the statute says “interest arises” — that’s the attachment question (when this consensual lien on real estate is created); when the UCC (the statute) and 9-334 says the “interest is recorded” that means notice is given on a interest that has already arisen, but under NC real estate law the mortgagor (the debtor Simon) but from the time of registration — so in this state no interest arises (is even created) until Recordation. (in

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other states you may have two separate time — a time of attachment and time of giving notice.). When it says the “interest of the encumberancer arises” — you assume it meant the interest of the encumererancer in the underlying or related real estate. Its impossible for the encumberancer to have an interest in the goods before they become fixtures — why is it impossible? The mortgage covers fixtures — while there still goods they’re not fixtures — so it would be impossible to satisfy 9-334(d)(2) unless you read it as an interst in the underlying real estate — that’s correct reading and under 9-334(d)(3) — that’s satisfied — when does the 20 day period run? They became fixtures on the 12/4 so it would go till 12/24. FCC WINS.

Policy: Secrecy problem arises when the goods are installed, and that is why we allow the 20 day period. Its in ONB’s interest to have FCC to provide the financing because ONB in for the long term (better heat more likely to have more occupancy and thus likely to pay his mortgage more quickly)… In addition, public interest in the proper maintenance of real estate. This super priority rule is NOT unfair to ONB.

(f) Problem 5f — Another example of purchase money. This example demonstrates the problem of a 3rd creditor. How do we rank the

creditors?

When you have 3 creditors — a way to analyze the problem is to separate the contests.

1. Analysis: Start with FCC v. ONB — Under 9-334(c), ONB will win; again under 9-334(e)(1) won’t help FCC b/c its second in time in terms of perfection of its interest in fixtures. Is there another provision that helps FCC? §9-334(d)

(1) purchase money security interest(2) satisfied(3) perfection Ok

Under 9-334(d) FCC beats ONB.

ONB v. State Bank — this is a battle b/w 2 mortgagees. Does 9-334(c) apply? Because we have 2 encumberancers and no art. 9 creditors. So where do we go? A mortgagee has a consensual lien on real estate — art. 9 won’t help — we go to real estate law. From the general principles and the NC statute it should be clear who wins? ONB wins b/c they recorded first. Record in first in time.

FCC and State Bank — now we are bank in article 9. Under 9-334(c), State Bank wins. Will 9-334(e)(1) (first in time rule help FCC)? No because FCC perfected after State bank recorded. What about 9-334(d) because FCC is a purchase money lender (1) pmsi — yes; (2) interest of encumberancer arises before the goods become fixtures? No (when did interest of state bank arise under NC law? 12/11/01 — goods became fixtures before that date). So, 9-334(d) doesn’t work. State bank wins.

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Look what happens we have a circular outcome. You can see what causes this circular outcome — look, FCC beats ONB, but FCC loses to State Bank. FCC beats the earlier mortgagee but loses to the later.

Policy: What’s the policy behind that result (the requirement in (d)(2))? Why does FCC lose to State Bank? Think about notice — neither state bank or ONB has notice if they check land records b/c FCC filed after both them committed their resources to the deal. FCC acted within the grace period (12/4-12/24) and that enables him to beat the earlier creditor but not the later creditor. Had State Bank grilled the debtor do you have any fixture financers — at least State bank could have found out about FCC — whereas its impossible for ONB. Why did the drafters do that? Why should there be a different outcome when both mortgages gave money and couldn’t find out about the previous security interest.

(1) If in the shoes of State bank — check records don’t find the f/s. Make a visual inspection of the building — when you saw the building you would see the fixtures. (For ONB, on the other hand, they would not have seen the fixtures). You could argue State Bank’s reliance interest is greater. In other words, State bank saw new fixtures in the building and no fixture filing; therefore, unless the debtor tells State bank about FCC state bank might loan more than it would otherwise. ONB however didn’t rely on the fixtures as collateral because they didn’t exist; therefore for that reason the 2 are treated differently. That tells us something about the grace period — don’t count on it b/c you don’t know when a second mortgagee will come around if you depend on the grace period. There is an alternative for FCC — just have to file a fixture filing on 12/2 and FCC would beat both mortgages — this time under 9-334(e)(1).

(2) 3 ways to break the circle:

1. Pay ONB first, State bank, FCC [under this scenario — FCC can’t use the grace period]

2. State bank, ONB, FCC (this option won’t be upheld b/c it would upset the real estate recordation system).

3. FCC, ONB, State Bank [under this scenario — the distinction drawn above b/w the 2 mortgagees is unimportant — the

reliance interest argument and we will treat State bank the later mortgagee just like ONB and the purchase money secured creditor gets super priority).

Courts usually invoke 1 or 3.

(g) Problem 5g — Priority Battle involving fixtures (art. 9 creditor v. encumbrancer) Here, ONB makes a construction loan. It records on Oct. 5; Dec.2 FCC provides purchase money to the debtor; Debtor receives delivery on 12/3; Installed 12/4; on 12/10 FC files a fixture financing statement. Debtor defaults. Who wins?

1. Anlysis: One factual issue is when was the construction completed; another issue is what the construction mortgage recording

actually said. Look at 9-334(h) it says a mortgage is a construction mortgage to the extent it…if a recorded record of the mortgage

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indicates. So first inquiry is whether the Oct. 5 record said constructive mortgage. Assume it did.

a. Say construction mortgage completed 11/15/01 — this would mean it was completed before goods became fixtures and

FCC wins by having a purchase money security interest under 9-334(d). Policy for this conclusion is see in problem 5(e).

b. If construction was ongoing till Dec. 31/01 —ONB would win under 9-334(h).

c. Policy: If ONB is a construction mortgage and its on going at time

the fixtures are installed ONB wins. Why? Is ONB a purchase money creditor here in a sense? Yes, for the whole project — its big purchase money creditor — they are providing all the money to create the building; so really what you have with a construction mortgage is 2 purchase money secured creditors (1) in land and most of the building and (2) in just the fixtures. For those reasons, if the construction is on going at time fixtures installed ONB wins. ONB will be an active participant if they are a constructive mortgagee.

d. What Advice Would You Give to FCC Given ONB’s Active Involvement: Assume Debtor comes to FCC and you advises

FCC to check the land records and discover ONB’s recording; it says construction mortgage. What do you do? Before you try to get ONB’s consent under 9-334(f), you should first see if the construction is on going because if its completed you just go ahead with the loan. SO you do a visual inspection. When you see the construction is on going, the you go to ONB and under 9-334(f) you get a subordination agreement, which makes sense because ONB is managing all the suppliers. This priority rule makes it difficult for the debtor to bypass the major purchase money creditor in the deal. It forces later purchase money creditors to talk to ONB. Why would ONB agree? They want the construction to finish — they made the big loan and there are cost-over runs (too much money already given out).

(h) Problem 5g(2): Everything is the same except ONB made the Oct. 1 loan to

refinance a 1990 construction loan by Second State Bank. Who wins?

1. Analysis: Need to know what the mortgage recorded says and whether

the construction is ongoing. Does the ONB mortgage need to say construction mortgage or just State Bank’s mortgage? [We saw in 9-334(h) to be a construction mortgage it must so indicate in the records] Its not totally clear from the statute, but you could argue that 9-334(h) doesn’t say a construction mortgage has this priority, it just says “a mortgage” which seems to suggest that the ONB mortgage does not need to say construction, but clearly State Bank’s record must. Does the construction have to be ongoing on 12/4/01? Yes (its not totally clear but if think of the rationale behind

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the rule it makes sense — once ONB is a regular mortgage the other rules would apply and can’t take advantage of (h)). Its unlikely here that the construction is ongoing because it started 1990 to 2001. But we don’t know?

(i) Problem 5g(3): Instead of 12/4/01, ONB records on 12/15/01. Who wins? 9-334(e) trumps 9-334(h) (while 9-334(h) trumps 9-334(d) see in 5g(1)). Here FCC perfects by fixture financing before ONB records; thus FCC wins. This makes sense because even if the project is ongoing at time fixtures installed, if ONB doesn’t give notice here in any way FCC can’t adjust its behavior to respond to the risk (like ask for a subordination agreement). SO FCC wins in a just straight in time rule.

(j) Problem 5h — ONB records on 10/5; 12/2 FCC advances purchase money; etc.. This time in (h) we are told that what’s purchase is some fancy replacements of dishwater to be put in the penthouses. The construction is ongoing through the end of 12/31/01. So again ONB is our construction financier and the construction is ongoing. FCC deals with the debtor. The fight is over the dishwashers.

1. Analysis: Start with 9-334(c) (the residual rule) that tells us ONB wins. What about 9-334(d)? Because after all FCC has a purchase money security interest, it would win. But ONB wins under 9-334(h). 9-334(e)(1) won’t work because FCC is second in time. What about 9-334(e)(2) purchase money has priority if before the goods become fixtures the security interest is perfected and the fixtures are readily removable replacements of appliances that are consumer goods. There’s 2 problems with (e)(2) — (1) if the security interest is perfected before goods became fixtures (12/4) and perfection wasn’t till (12/10) — not satisfied; (2) consumer goods requirement — it’s a replacement of a domestic appliance, but is it a consumer good? Is the dishwasher a consumer good as to Debtor? No, its equipment (used in operation of his business – leasing apartments.) SO ONB will win under 9-334(h).

6. Problem 86: CSB makes a construction loan and getting a mortgage on the building. Construction is over; BI files a fixture financing statement in the furnace; the furnace is installed. An attorney who did work for debtor sues him for owed judgments. There are levies on the fixtures. There are three creditors (1) CSB; (2) BI; (3) Lawyer.

a. Analysis: CSB v. BI — Who wins? BI will win under 9-334(d) because it is a purchase money security interest. CSB v. Attorney (under fight of building) — these are both encumbrancers — so have to go to real estate law (mortgagee v. judicial lienor) — CSB would win because they got their lien first and recorded first; Finally BI v. the Lawyer (fight over the furnace — that’s the only property BI has a claim to) — BI wins because under 9-334(e)(3). Once we are in (e), we can ignore (h) because (e) trumps (h). It doesn’t matter that BI filed a fixture f/s; it would win if it just filed a standard f/s too. Why? To win in (e)(1) and (e)

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(2) it was required to file in the real estate records. Why is it different for (e)(3)? Where will the attorney look? She’ll look in all the records. So whether BI filed in the land records or in the Art. 9 files, if the lawyer is looking she’ll find it. That’s why we don’t require a fixture financing statement under 9-334(e)(3)

b. Policy:

7. Problem 87 — CSB construction mortgage and records; the building is completed. TT moves into the building and says to Simon to take the refrigerator out and she’ll buy the replacement. The debtor agrees and TT buys a replacement refrigerator and buys on credit (gives a purchase money security interest and no filing). The refrigerator is installed and then Simon (debtor) defaults. There is a battle b/w CSB and the Store that sold the refrigerator. Assume state real property laws permit CSB’s mortgage to reach fixtures installed by lessee (that’s a big assumption because who is the debtor who signs the mortgage document Simon; but who owns the refrigerator TT). The question is can a document signed by Simon convey an interest (a property interest) in property owned by someone else (TT)? Here Real Estate Law assumes that Simon can convey an interest in TT’s refrigerator (that’ is odd — they must have something in mind? Simon’s interest in the refrigerator is more than mere possession — its TT’s refrigerator in his building, but he probably has a greater interest b/c allowing her to install it is the idea that she will leave it there if she terminates the lease. The baseline assumption is that when a TT puts improvements in leased property they leave them — then this makes sense b/c Simon does have a property interest and can convey an interest to CSB under the mortgage document).

a. Analysis: Now that we understand Simon has a property interest in the replacement refrigerator, who wins? The first question is whether Easy Credit perfected before installation (run through 9-203(b) there is attachment and automatic perfection under 9-309(1) because it’s a purchase money security interest in consumer goods). Then you go to 9-334(e)(2)(C) and rest is satisfied assuming this is a consumer good. Easy Credit wins.

b. Policy: why should you classify the refrigerator as a consumer good (why view it through TT’s perspective and not Simon — how do we know by looking at 9-334(e)(2) — what time period are we suppose to focus on? Before the goods become fixtures b/c after they are fixtures they are no longer consumer goods they are fixtures. The time period before the goods became fixtures there was only one debtor and one creditor — here TT and Easy Credit. This why Easy Credit wins. Why does Easy Credit win? This is a trickle down benefit to consumers make it easier for Easy credit to sell to tenants and then making it easier for tenants to buy. Easy Credit gets 4 breaks under art. 9 (1) doesn’t have to check land records; (2) automatic perfection; (2) doesn’t have to file a fixture statement; and (4) doesn’t have to bargain with ONB. All of these benefits is designed to help TT.

8. Problem 5(a) Problem 5i — like 87, but the refrigerator is not a replacement, it’s a

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second refrigerator. The question is assuming you have a default and the fight is b/w Easy Credit and CSB who wins. TT is worried b/c of the real estate law that she may not want to stay in the apartment and so she gets in writing from Simon and CSB an agreement that says she has a right to remove the refrigerator if she leaves. Who wins?

1. Analysis: She has a right to remove the goods against the encumbrancer or owner. Thus Easy Credit wins under 9-334(f)

(2). If there was no agreement, CSB would win because can’t get in 9-344(e)(2)(C) because not a replacement. What about 9-334(e)(2)(B)? it doesn’t help.

(b) Problem 5j : 10/1/99 ONB makes a loan to debtor; record 10/5/99; On 1//15/01 debtor enters into a K with K&D to install heating equipment. 12/2/01 K&D purchases the equipment from Loews. K&D buys on credit. [K&D gives Loews a purchase money security interest; next day the furnace is delivered on 12/3; installed on 12/4; on 12/10 Loews files a fixture filing]. On 2/1/01 debtor defaults. There are three creditors: (1) Debtor to K&D; (2) K&D to Loews; and (3) Loews to ONB.

(1) Analysis: We start with 9-334(c)(residual rule), we know ONB will win

(security interest in fixtures overpowers an encumbrancer). Is there an argument that Loews doesn’t have a security interest in the heat pumps (this would say we don’t need 9-334(c)? Separate the transactions — Loews extending credit to K&D and K&D selling the equipment to debtor. In a battle between Debtor and Loews, is there an argument that Loews doesn’t even have an interest in the equipment (putting aside fixture law)? We don’t know if there is a sale out of trust (in other words, if Loews is selling to a contractor, you know they won’t keep it they’ll sell it and it may very well be an authorized sale, and with an authorized sale on 9-315 the security interest may not continue]. Let’s assume, however, there is a sale out of trust. Then under 9-334(c), we know ONB will win. §9-334(e)(1) won’t help b/c Loews is in second in time; (e)(2) won’t help b/c fixtures not readily movable; (e)(3) no judicial liens; (f) won’t work because NO consent, (h) no constructive mortgage. So only hope to Loews is 9-334(d) — at beginning of (d) if the debtor has an interest of record in OR is in possession of the real property — but Loew’s debtor is K&D and K&D doesn’t have an interest in the real estate and doesn’t have physical possession. [But what about T&T problem? T&T was in possession of her apt. so in that sense she was different; Also in problem 7 we will see the debtor is in possession]. So 9-334(d) won’t work here because K&D doesn’t have possession. What can Loew’s do to protect themselves? They could ask K&D whose building are these fixtures going into and check out the files and then work out a deal with ONB. But this doesn’t sound practical if the equipment is low price. They could take other property as collateral; not extend credit; OR they may have under state real estate law a statutory lien (“mechanics Lien”) — basically this type of lien is a lien on real estate created by statute which is to protect individuals or companies which either provide materials that goes to improving real estate

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or services (e.g., those who do the labor). If Loew’s had such a statutory lien, 9-334© wouldn’t work — we would have a battle between 2 encumbrancers and real estate law governs. The point is that art. 9 won’t tell us a lot about this type of battle.

9. Problem 6: Instead of the situation where we are considering who wins the priority battle, we are focusing on remedies available to the winner. We are to assume Blast, who has a perfected security interest in irrigation pumps. Blast wants to know whether it has to pay to compensate the farmer or the jr. mortgagee (CSB) or damages which are caused when it forecloses on the pumps. That’s the issue. We are told there is 15K damage to the loan and it will cost 20K to farmer to replace the irrigation pumps that have been removed. What does Blast have to pay, if anything?

a. Analysis: Under 9-604(d), Blast would have to pay 15K to CSB to compensate harm to the real estate and wouldn’t have to pay anything to the farm (no payment of 20,000). 9-601(a) after a default, so you could have the remedies provided by statute as well as supplemental. Then you go to 9-604(c) which gives Blast it’s right to removal (they have priority over all owners, farmer, and encumbrancers, CSB subject to other provisions — 9-609 it has to be done without breach of peace. 9-604(b) says the secured party has to reimburse the encumbrancer for any damages caused by removal. Don’t compensate for replacement costs of the pumps, however. Only for damages to the area.

Under 9-609, if can’t move the pumps without a breach of peace, the secured party can go to court because can’t move with breaking peace.

b. Policy: Why doesn’t Blast have to pay 15K to farmer? Farmer granted a security interest in the pumps to Blast; but Blast has caused damages to farmers’ land. Why shouldn’t farmer be compensated? It’s an assumption of risk —if grant a security, too bad — if don’t want a risk don’t grant a security interest in a fixture difficult to remove. The farmer assumed the risk. Why then does Blast, who is senior to CSB, have to pay $15,000 to the mortgagee? This is the first case where a senior creditor has to compensate a junior creditor? CSB has a consensual lien on the real estate and after acquired equipment. In exercising its remedy against the pumps, its caused damage to land. So as to CSB who is senior in the land OR as to a non-debtor (owner of the land, we don’t have one) you are entitled to compensation b/c Blast’s interest doesn’t extend to the land.

c. 9-604(c) — Policy — what’s wrong with this remedy. Imagine you have a security interest in an elevator and you can pull it out if there is a default. It’s not very practical, it creates a lot of inefficiency — have to reimburse the non-debtor owner, costs of removal, re-affix the replacement (often there are cross default clauses — a default on fixtures is a default for mortgagee — so you two people seeking remedies.). What do people really do when the debtor defaults? The mortgaee (CSB) and secured party (Blast) are likely together, preferably before default, and they usually agree that there will be a single foreclosure sale of the real estate with the fixture attached; this makes better sense then removing the fixture. In the agreement, they will try to figure out the value added to the real estate by the

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fixture (e.g., an elevator adds 10% of value to the apt. building). They also agree how the foreclosure proceeds will be divided. This creates another problem which is illustrated in the MapleWood Case(comments of 9-604) — sometimes you have the mortgagee selling the real estate before an agreement is reached — the question is whether the secured party has a legal right to demand part of the proceeds. Under old Art. 9, they couldn’t demand. But as a matter of practice, they usually agreed, but NO legal right; Now under NEW art. 9 (tried to solve this) — see 9-604(b)(2) — solve the Maplewood problem — if the s/a covers goods that are fixtures, the secured party (blast) may proceed in accordance with the “rights” with respect to real property — [the difficulty is that the fixture financier has no rights to the real property: it raises two issues: (1) does it mean that if CSB doesn’t want to sell the land, Blast can? In other words, does it mean that Blast can sell the fixtures with land attached? Isn’t that absurd? Can’t mean that? The courts will read the language to mean that if they don’t enter into an agreement in advance of the foreclosure sale where you have the mortgagee initiating the foreclosure sale if the creditor has a senior claim under 9-334(c) will have a right to the proceeds from the foreclosure sale. This is what it must mean — if real estate foreclosure, Blast gets a share of the proceeds and this would result in the sensible outcome of courts ordering the mortgagee if its junior to pay a share of foreclosure to the senior fixture financier. But we haven’t seen any cases on this point yet.

11. Problem 7 : City is our client and wants to sell a sound system to debtor for his business. City wants to be sure that they can get the system back if debtor defaults. That’s there major concern. You should know you can’t assure City that they will be able to do that. There is NO way you can’t make that guarantee — b/c of the breach of peach provision (it is very easy for the debtor to precipitate a breach of peace — e.g., stand in the door and not let the REPO man in) under 9-609. Also, City would want to know the obligation to reimburse — the obligation to reimburse non-debtor owners (here, Universal realty who owns the building) and should there be other mortgages they may have to be reimbursed if exercise right to remove. Assuming City wants to go ahead with those 2 caveats, you want City to assert a purchase money security interest with a fixture filing made in advance before the installation of the system (assuming the system is a fixture — since there is wiring and bolted speakers, it’s highly likely it’s a fixture). You also want to do a visual inspection b/c we know 9-334(h) trumps 9-334(d) if construction on-going. Also, do you need to know the name of the landlord? You need to do a fixture filing to win under 9-334(d) — does a fixture filing require the name of the LL? We would look under 9-502(b)(4) — you need to know the LL if going to make a fixture filing, which you need to do. You also want to know the name of the owner of Real estate b/c of the right of reimbursement and if something goes wrong you want an agreement on how to divide the proceeds because 9-604(b)(2) gives no instruction to courts about how to divide the proceeds from foreclosure sale. You want to have it worked out in advance and in an agreement. Do you want to know the names of the mortgages? Yes, particularly b/c if anything goes wrong you want to know who you are dealing with.

12. Problem 8

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I. Accounting and Commingling (Liens) —see Handout 17(a)

1. All private contestants in the course will be subject to a battle with IRS2. Federal government has a tax lien for collection of taxes 3. A failure to pay federal taxes leads to a delinquency assessment which

automatically leads to the creation of a federal tax lien. Federal tax law tells us how its create (attachment) and who wins the priority battles (IRS v. purchasers, Art. 9 secured creditors, and others…).

How does federal tax lien arise: 3 steps: (1) assessment; (2) demand and (3)failure to pay.o Assessment: They file and in it they say they owe x, but they are

only paying 7 (they admit in their filing that they are not paying full tax). Assessment can also occur when taxpayer underestimates his liability on return (maybe the IRS discovers it through an audit and then you contest it — if lose then it becomes an assessmnt).

o Formal Demand that you pay is the next step.o Third step is you don’t pay.

Federal Tax Lien Statutes (Pg. 2088) 1. Failure to pay §63212. §6322 (attachment) it arises when assessment made and continues

until payment made. [what’s important in priority battles is when IRS

gives Notice — tax lien filing — see 6323(f) there is a form for a notice of tax lien and its filed —its not the same place where you file real estate records or Art. 9 security records; so when worrying about tax liens, have to do a separate search for tax liens).

3. Pay roll taxes — (see handout 17(a)) — You get your check and you see withholding and ER w/holds supposedly to pay fed., state, and social

security. The ER is accruing a liability to the fed. Govt, they are going into debt and they pay it usually quarterly. So what happens during the 3 months — the taxpayer or govt. doesn’t get the money, but in effect your ER gets the opportunity cost of using the money b/c not being paid to anyone yet. When an ER is in financial distress (tax liens arise from pay roll usually), they have to figure out which creditor to pay first b/c don’t have enough cash? Who do they pay first? Lots of times they choose not to pay the federal govt. first. They do that for a very good, practical reason — because, they think it is less likely the fed. Govt. will discovery quickly that they haven’t paid and the govt. is less likely to be tough on them if don’t pay, and govt. will work with them then the other creditors who will either cut them off or leave their job. So they will either underestimate their liability or admit their liability. At some point the fed. Govt. discovers the non-payment. Usually, the govt. will file a notice of tax lien and that’s the major endorsement tool used to collect these back taxes and collect penalties. This is a major concern for other creditors. Who has priority once a notice of tax lien is filed?

Priority Battles of Federal Tax Liens: Generally, what the federal govt. has done is to play by the same rules (of course with exceptions); basically if the fed. Govt wants to win, it has to give notice first. This is surprising because the govt. could

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have created a super-priority rule, but it didn’t. Incidentally, some state govts. Take the position that state tax liens take priority but not federal tax liens. Why? The answer in legislative history that there was a concern that if the govt. didn’t play by the same rules there would be impediment of private lending (it would reduce the amount of lending by private lenders).

Problem 1A: On 3/1/01 ONB lends money and s/a; On 4/15 IRS makes and assessment and a formal demand. On 5/15/01 IRS files a tax lien and comes after the equipment to pay the tax liability. The question is who wins?

a. Analysis: We know under article 9 ONB has an attached security interest in equipment but NOT perfection (there’s no

automatic perfection) on 3/1. The IRS on the other hand we know that under §6321 and 6322 at time of assessment which is earlier than 4/15 attachment occurred and notice was given on 5/15.

b. Priority Rules §6323: The default rule is that the IRS wins (but

statute doesn’t say it). Then you go to 6323 to see if there is an exception where the IRS loses. §6323(a) is the most general exception and based on notion of notice; under subsection (b) through (d) refine and expand subsection (a). SO the order with which we go is that (1) IRS wins then you go (2) to 6323(a) and then to the next exceptions.

§6323(a) the lien shall NOT be valid as against any holder of security interest until NOTICE has been filed. What does this mean? It means you look at the time the private contestant becomes a holder of a security interest — by that time had the IRS filed a notice of tax lien. If it has NOT, then its notice of tax lien is NOT Valid — its subordinate to the holder of security interest. Here, when did ONB get its security interest and was it before the NOTICE of tax lien was filed? If we applied art. 9 security interest, ONB wins. But you have to look at the definitions in the Federal Tax Lien (it defines a “security interest” broader (b/c it covers real estate) and narrow (b/c it doesn’t cover all things in art. 9). The Federal Tax Lien security interest is defined as: (6323(h)(1) — any “interest in property” ( it includes real property) acquired by “contract” for purposes of securing payment of an obligation (talking about consensual liens created by contract on property). When does ONB get a property interest acquired by K? ON 3/1/01 (that’s what s/a does). A security interest exists at any time (a) if such time the property is in existence (distinction b/w present and future goods) — here the goods are present — and the interest has been protected in local law against the subsequent judgment lien (what does judgment lien mean — it’s a judicial lien that covers both liens on real property and personal property (execution lien). Local law means Article 9 law. So the question we are asked to answer is what is the earliest date when ONB would beat a subsequent judicial lienor in a fight over this equipment under article 9? The answer is that ONB would not beat a judical lienor (say they came on 5/14/01) because

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according to §9-317(a) and (b). ONB would lose to any subsequent judicial lienor on these facts because to win it would have to satisfy 9-317(a) or (b) and it can’t because it didn’t perfect or file a financing statement. So, ONB does NOT have a security interest according to Federal Tax Lien §6323(h)(1). [Also Federal Tax Lien has a definition of value — last sentence in 6323(h)(1)]. In any case, ONB does not have a security interest under the Federal definition of the term security interest. So you go back to 6323 is NOT satisfied and bounce back to the default rule and ONB loses.

Problem 1(a) Alternative: Same facts except ONB files a f/s on 5/14/01.

a. Analysis: Under 6323(h)(1) when does ONB get a interest in property? As soon as you have attachment, which is on 3/1/01. A security I interest exists if the interest has been protected under art. 9 against a subsequent judicial lien. What is the earliest date that ONB could beat a later judicial lienor? Here it would 5/14 because under 9-317(a)(2)(a) perfection is enough to beat a judicial lienor. Now we have to go to value — was there money worth? Yes, because they gave money back on 3/1. So what day does ONB have a federal tax lien security interest — when all three requirements are satisfied — 5/14/01. We Know there is an exception under 6323(a) — lien shall not be valid against holder of security interest until tax lien notice has been filed (5/15/01). Thus, ONB wins — this is a first in time rule.

Problem 1(b): 3/1/01 ONB gives s/a; f/s/ but no commitment of $; 4/15 IRS sends demand; 5/15 IRS files notice; and 5/20 ONB gives value.

a. Analysis: Status of ONB — no attachment until 5/20 (9-203(b) because value not given until 5/20) and perfection is also on 5/20 (9-308(a) can’t have perfection without attachment). IRS lien arises before the demand — but it doesn’t give notice until 5/15 of its tax lien.

§6323(h)(1) On what day did ONB get an interest in property in this equipment. Not till 5/20 because value wasn’t given until 5/20. The interest has become protected under article 9 against a subsequent judicial lienor — what is the earliest time ONB could beat a later judicial lienor under art. 9-317? There is a weak form of early bird filing in 9-317. ONB could win under 9-317(a) if it perfects — so as to any judicial lien comes after 5/20 ONB wins; can ONB argue it has an earlier date — 9-317(a)(2)(b)(3) — one of the conditions satisfied (s/a on 3/1) and files f/s (3/1) — so under new article 9 ONB could beat a subsequent judicial lienor under 9-317(a)(2)(b) from 3/1. But, we need to finish the rest of the security interest definition of Federal Tax Lien Law — look at 6323(h)(1)(b) and to “the extent at such time the holder has parted with money or money’s worth” — so on 3/1 had ONB parted with money? NO. There was no commitment to extend credit on 3/1. [Money means cash or a “binding commitment to extend credit” according to Federal Regulations]. So what is the date when ONB becomes a holder of security interest — 5/20 because need to satisfy all three sentences in 6323(h)(1); therefore, under the default rule IRS wins.

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Problem 1(c): This question requires us to construe two federal laws: (1) federal tax lien law and (2) federal bankruptcy code. Focus on 544(a) of the bankruptcy code. On 4/15 IRS makes a demand; 9/14 debtor goes into bankruptcy.

a. Analysis: What is the trustee’s status under 544(a)(1)? How do we describe their status? The trustee is a judicial lienor (as of the commencement of the case which is 9/14). Under this implicit default rule we would say IRS wins unless there is an exception under 6323. Is there an exception that protects the trustee in bankruptcy? Start with 6323(a) — as trustee’s lawyer you would argue that the IRS never filed — the lien shall NOT be valid as against a judgment lien creditor until NOTICE thereof has been filed. So, the trustee at the commencement of the case no notice was filed. So IRS loses and trustee can strong arm aside this tax lien. Does this make sense? Yes, the federal govt. is playing by the same rule. The reason that the trustee has strong arm power is to encourage creditors in pre-bankruptcy period to give notice so that debtors won’t become over-extended. This policy works for the IRS also. If want a tax lien that is good in bankruptcy, you need to give notice promptly or else you will lose because everyone needs to know about the lien.

Problem 1(d): 4/15 IRS makes a demand; 4/17 ONB gives $/s/a and f/s; 5/15 IRS files notice and 5/30 the debtor gets new tools and that is what the fight is about.

a. Analysis: ONB doesn’t have an attached security interest under 9-203(b) until

5/30 because debtor doesn’t have rights in the collateral until 5/30. Notice the goods weren’t bought until after IRS filed its tax lien. Perfection isn’t until 5/30 again because under 9-308 you need attachment. IRS lien arose at time of assessment before 4/15 and notice given 5/15.

When does ONB get a security interest under 6323(h)(1)? When did ONB get an interest in the new tools created by K to secure payment of debt? On 5/30 because that when the debtor had rights in the collateral. At such time, the interest has become protected under local law (art. 9) against a subsequent judicial lien? What is the earliest time on these facts under 9-317 of the new art. 9 when ONB could win this battle? 4/17 because you don’t need perfection under 9-317(a)(2)(b) — all you need is a signed s/a and a f/s before the other party becomes a judicial lienor (this is a weak form of anticipatory filing). How about VALUE? Money is given on 4/17 as well. If look at all three requirements above, then when does ONB have a federal tax lien law security interest? On 5/30 because that is the first moment that ONB had an interest in property under art. 9. Federal Govt wins.

When does IRS get a tax lien on the new tools? At the same instant as ONB. Look at 6321 — all property belonging to such person — you don’t get a tax lien on someone else’s property. So we have a tie here. This is the situation in McDermott case (see Handout 17).

McDermott: Basically, there bank had a judicial lien on real estate. IRS filed its notice and then taxpayer purchased a new real estate. The court said it

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was a tie. The supreme court held that the IRS wins in the event of a tie. There were three reasons: (1) statutory argument; (2) structural argument; and (3) policy argument.

Policy: If you agree we have a tie, and we’ve seen other situations where we have had ties — what do you do? You either give victory to the first creditor who gave notice or a pro-rata distribution of the debt outstanding. The funny thing about McDermot — if just look at notice, ONB gave notice first. ONB in effect made an anticipatory filing.

Supreme Court Analysis:(1) Statutory Argument: According to 6323(a) — it says the “lien shall

NOT be valid as against a holder of security interest until notice is filed. Court says it does not say a lien shall not be valid until notice of an attached federal tax lien is given. It just says notice is given. (the professor thinks this argument is weak). This is a weak argument because look at the words following the “lien” — the lien imposed by §6321 — and that says its only imposed on the taxpayer’s property.

(2) Structural Argument: (Good Argument) — Basically, court says 6323(c) and (d) deal with exactly this problem — the problem of after acquired property (after the filing of the tax notice) and if you give victory to ONB based on anticipatory filing you will in effect make those special exceptions redundant. You wouldn’t need them — the general rule would swallow the exceptions.

(3) Policy Argument: (See page 4284 on Handout 17 — at end of opinion) A strong first to record presumption may be appropriate under ordinary statutes creating private liens. But the govt. cannot indulge in the luxury of this requirement. Notice doesn’t enable govt. to protect itself. [Remember Harriet — the tort victim — and 9-317(a)(2)(b) and its form of anticipatory filing — letting an earlier creditor who is a consensual lienor and filing a f/s and beat a jucial lienor like Harriet (who is an involuntary creditor).] This is the court’s argument — the fed. Govt. is a creditor for taxes — it can’t change its behavior based on anticipatory filing. The govt. is like Harriet.

Problem 1(e): There is a demand on 4/15/01; A notice of tax lien is filed on 5/15/01. And on 5/20 there are various terms and ectc…

1(e)(1): Car sold and Ricardo pays in full and doesn’t know about the tax lien and certificate of title endorsed to him and assume Ricardo takes physical possession. The problem is that the IRS wants the car. The question does Ricardo have to surrender the car to the federal govt.

a. Analysis: Start with general rule that IRS wins. 6323(a) doesn’t help Ricardo because he bought the car after the notice. But is there a buyer protection priority rule Ricardo can rely on? 6323(b)(2) — it says even though notice of a lien has been filed such lien shall not be valid with respect to a motor vehicle as a against a purchaser of a motor vehicle if at time of purchase there was notice and before he obtained notice he had possession and he has not relinquished possession of the car. Why does Ricardo have possess this car? We are worried about laundering cars through tax liens through innocent third parties.

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b. Policy: Federal Tax liens are not noted on certificate titles of car. So there is problem of notice for buyers if they didn’t have this protection.

1(e)(2): What if Smiles was a lessee?

a. Analysis: 6323(a) or (b) do NOT mention lessees of cars. Under the language of

Article 9 Ricardo would be a lesse in the ordinary course of business. Under art. 9 there would be protection under 9-321(c). But how about under the federal tax lien law? Is there any protection for a lessee? If go to definition of purchaser — the term lessee is included. 6323(h)(6) — a lease of property shall be treated as an interest in property. We are to pretend that a lessee is a purchaser for the purpose of subsection (a) NOT (b). In subsection (a) a lessee is treated as a purchaser; that means a lessee will beat the govt. if the govt. has NOT yet filed a notice. But if you are late like you are in the case (where notice has been filed) you need to get into subsection (b)(2) to win and the cross reference doesn’t get us there. We saw under article 9 most business lessees have a burden of inquiry to check files; the only person who will do worse in a fight against the tax lien is a lessee in ordinary course of business. Thus, lessees have a burden of inquiry to check files.

1(e)(3): Smiles sold family car to Ricardo and paid in full; he had no notice of tax problem.

a. Analysis: 6323(a) doesn’t apply because he bought the car after the tax lien. First, thing to notice is that if he did get the certificate of title Ricardo wins (that’s more generous to the buyer than article 9 is). Here, Ricardo is NOT a buyer in ordinary course under article 9 and under 9-320(b) he would lose. Under federal tax lein, it protects a buyer NOT in ordinary course even if come after the filing — Why? Because tax liens don’t appear on the certificate of title; thus, problem with notice. If Ricardo does NOT get the certificate of title, he has a serious problem under federal tax lien law. To win under (b)(2), Ricardo has to be a purchaser. To be a purchaser, (h)(6), among other things, a person who gets an interest in property which is valid under local law against subsequent purchasers without actual notice. Assume Smiles first sold the car to Ricardo, he takes possession and pays, but doesn’t get the certificate of title. Say Smiles sells the same car to another person and gives that person the certificate of title. The question is who would win under non-federal law (certificate title law) against Smiles and the other person. The other person wins because he has the title.

1(e)(4): Ricardo buys the car from Smiles Motors (so the purchase is from a dealer); but, Ricardo only pays 60% of the list price.

a. Analysis: The issue is whether its “money’s worth.” §6323(h)(6) — the term purchaser means a person who for adequate and full consideration acquires an interest. So the factual issue is whether 60% is adequate and full consideration. Is it reasonably equivalent

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value? It is an issue of fact that one must litigate. If Ricardo is not a purchaser, Ricardo will lose.

b. Policy: Why is there a greater emphasis of value in tax lien law than under article 9. There is a greater fear of sham transactions. We are more worried about Smiles not getting enough money b/c the hope is that the IRS can get the proceeds. If Ricardo gets a windfall, who pays? All the taxpayers because if Smiles doesn’t get reasonable equivalent value the IRS has no proceeds to go after.

1(e)(5): What happens when Mia takes her car to the repair garage. Mac refuses to release the car until she pays her bill. Along comes the IRS and finds the car in Mac’s garage and demands him to relinquish the car.

a. Analysis: Mac is NOT a purchaser, a holder of a security interest, not a mechnics lienor, not a judgment lienor, but there is still an exception that applies under 6323(b)(5) — even though notice is filed such lien not valid with respect to tangible personal property subject to lien under local law securing reasonable amount of repairs. The Federal govt. says Mac will only win as to reasonable charges irrespective of state law. As long as there are reasonable charges and Mac has continuous possession, he will win.

1(e)(6): Fed. Govt. going after a buyer. Tumor bought a 1000 share of IBM stock from Smiles Motor. Under art. 8, these 1000 shares would be a security entitlement — its held indirectly. What does the federal tax lien law call this security entitlement to 1000 shares? It calls it a “security”. [Under art. 8 a security means stock in direct holding system — see the difference]. §6323(h)(4) — security means “share of stock”. Who wins? Tumor wins 6323(b)(1) — people who owns stock not expected to search the files.

Would it be different if the stock was given as a charitable donation. Yes. It has to pay tax bills before it gives money away as a donation.

1(e)(7): New car radio sold and no knowledge of tax problems. Is there a buyer protection rule? 6323(b)(3) — personal property purchased at retail. The tax lien law allocates the risk — the question who gets stuck suing the debtor. With respect to tangible personal property purchased at retail (retail means buying for your own ultimate use and usually in a relatively small quantity).

1(e)(7): cell phone hypo. Ricardo wins under 6323(b)(4). 6323(b)(4) provides for a monetary cap. With respect to HH goods and personal effects or property (e.g., tools of trade of small businesses), purchase in a “causal sale” (a sale by someone not in business of selling those goods) but only if there is no actual notice and sale must be less than 1000. [we saw in 9-320(b), you loses if secured party files].

Policy: “not one of a series of sales” — what does that mean? There is a concern that people will sell al their valuable property by trying to avoid paying taxes.

ONB wins — they would have a si on 5/20 which is after the notice of tax lien, but ONB wins b/c of 6323(b)(1)(b). Why are we in (b)(1) dealing with

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securites because securities includes NOTICE. Remember (b)(9) applies to NOTes

ONB has a security interest in deposit account on 5/20. ONB has automatic perfection under 9-104. Is that security interest beats tax lien. Under 6323(b)(10). Remember (b)(10) applies to deposit accounts.

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