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Secure Transactions 1

Secure TransactionsCourse Outline- Fall 2012McJohn

I. Pre-Code Security Devices-Basic Terminology

(1) Lien= Interest in the debtor’s property given by law to protect the creditor.(2) Consensual Lien= Voluntarily Granted, in real property termed a mortgage, in

personal property termed a security interest(3) Statutory Lien=A lien imposed by statute or common law in favor of certain creditors

the law deems worthy of protection (i.e. artisan’s liens (mechanics liens for garage mechanics).-Article 9 helps to organize priorities in bankruptcy cases

C: Benedict v. Ratner- Designed to illustrate the evils associated with secret liens where no notice present -Other pre-code security devices- (A) Pledge- Where the debtor gives physical possession of the collateral to the creditor until the debt is paid (B) Chattel Morgtage- Mortgage in goods (C) Conditional Sale- UCC 2-702- (D.) Trust Receipts- I.e. car dealership financing(E.) Field Warehousing-Bills of landing where you want a traditional pledge but goods are too large/vast to do that, here creditor holds on to bill of landing

II. The Scope of Article 9-UCC 9-109- “This article applies to any transaction (regardless of its form) which is intended to create a security interest in personal property -List of traditional security devices as spelled out in subsection (2) is illustrative only, other old devices, as well as any new ones which the ingenuity of lawyers may invent, are included, so long as the requisite intent is found. The controlling definition is that it is a transaction intended to create a security interest in personal property.

-If real property (i.e. land) then it is a mortgage, NOT a Security Interest (personal property). +Security Interest=An interest in personal property or fixtures which secures payment or performance of an obligation. -Debtor may want to use some of his/her present wealth as collateral to to secure obligation to perform… “Debtor creates an Article 9 Security Interest in (whatever piece of property) in favor of the creditor. -If debtor does not meet obligation, then specific property can be made directly available to the creditor. -ID (1) Secured Party (2) Debtor (3) Collateral (4) Obligation Collateral is meant to secure**Whether a security interest is created is a question of intent, do parties intend to create an SI?+Mechanics Liens (i.e forced statutory liens) are not governed as Article 9 Security Interests+Title Retention/Conditional Sale is just a sale with the seller maintaining a security interest in the goods+Notes are personal property, despite the fact that real estate transactions are not.


**UCC 9-109- General Scope of Article 9- Does not include a lien, other than an agricultural lien given by statute or other rule of law for services or materials. Article 9 does include all transactions, regardless of form, that create a security interest in personal property or fixtures by contract.

~Problem 2-Assume that a state statute gives someone doing repairs a possessory artisan’s lien on the property repaired. Mr. Baker took his car into Mack’s garage for repair but, being strapped for funds, couldn’t pay the full bill, and Mack wouldn’t let him have the car back. Is Mack’s artisan’s lien an Article 9 Security interest? NO, not covered. What if, prior to the repair work, Mr. Baker signed a statement giving Mack’s garage a right to repossess the car if the bill wasn’t paid, security interest now? Yes, regardless of form, intended to create an SI.

**UCC 9-109-General Scope of Article 9 - A sale of accounts, chattel paper, payment intangibles or promissory notes is covered by Article 9.~Problem 3To raise money, Farmer Brown’s Vegetables Roadside Stand sold all of its accounts receivable to Nightflyer Finance Company, which notified the customers that henceforth all payments should be made directly to Nightflyer (outright sale, not a lease with Accounts receivable as collateral). Is this sale nonetheless an Article 9 Security Interest? YES, Nightflyer must therefore file an Article 9 Financing Statement and conform to the reqs of Article 9 if it wishes to be perfected as against later creditors. ~Problem 4Suppose Dickens Publishing agrees “Dickens agrees to repay Lender the entire principal of $18,000 on or before April 1, 2015. If Dickens cannot refinance its current debt to cover this amount or if another source of funds is unavailable, Dickens agrees to sell its inventory and equipment in order to repay lender.” Is this transaction governed by Article 9? NO, promising to sell something is not the same thing as granting a security interest in the asset

II. Consignments-A true consignment is neither a sale nor a security device; just a marketing device whereby consignor (owner of goods) sends (cosigns) goods to a consignee (retailer) for sale to the public.

+If retailer cannot sell them, they are returned to the consignor. Consignor typically controls the terms of sale.

+Some consignments are not consignments at all bur rather sales on credit (i.e. secure transactions) designed to escape Article 9 filing requirements (i.e. if the retailer is required to pay whether or not he sells the goods or not).-Some consignments are covered by Article 9, others are not. +UCC 9-102 Consignments- Consignment means a transaction , regardless of its form, in which a person delivers goods to the merchant for the purpose of sale and:

(A)The merchant:(i.) Deals in goods of that kind under a name other than the name of the person

making the delivery.(ii.) Is not an auctioneer; and(iii.) Is not generally known by its creditors to be substantially engaged in selling the

goods of others.


(B) With respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of the delivery.

(C) The goods are not consumer goods immediately before delivery and;(D)The transaction does not create a security interest that secures an obligation.

~Problem 5Antiques R US was the largest antiques store in the city, well known as a place where antique dealers could hire out space and exhibit their wares, with the store handling the sales and taking a commission on each one and returning to the dealer’s items that remain unsold. When the store takes out a loan from Octopus National Bank and uses as collateral “all its property” will the bank’s security interest reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under Article 9? NO, this is not an Article 9 consignment because this merchant is not “not generally known by its creditors to be substantially engaged in selling the goods of others.”C: In re Fabers, Inc.- Oriental rug shipment is found not to be a true consignment but rather was an agreement intended to form a security interest, covered under Article 9. This is an Article 9 consignment because Oriental Rug Co. was not well known to be involved in the selling of goods of others. ~Problem 6When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large, jeweled sword, he took it down to Weapons of the World (WOW) a large gun and weapon dealer, which mostly sold items that it either manufactured itself or bought from other dealers around the globe. The sword was appraised at being worth over $25,000. Luke asked WOW to sell the sword for him. Is this an Article 9 consignment so that Luke needs to take Article 9 steps to protect himself from WOW’s other creditors who have an interest in the store’s inventory? Yes, this is an Article 9 consignment because this merchant is “not generally known by its creditors to be substantially engaged in selling the goods of others”

III. Leases--Tough to distinguish between lease and a secured sale +Sale= Seller parts with goods forever vs. Lease=Seller Parts with goods for some designated period of time. -Is there an expectation that the seller will get the goods back? -Installed Payment Arrangement Sale + Retained Security Interest is NOT a lease, is a secured sale -“An economically meaningful reversionary interest in the property”-Distinguishing leases vs. sales +A transaction is a secured sale if the lessee’s obligation is for a term “not subject to termination by” that lessee and if ONE of the following (a)- (d) factors is met

(a) Original term of the lease is equal to or greater than the remaining economic life of the goods

(b) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods.

(c) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration upon compliance with the lease agreement


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

**Always look to the facts of the case to determine whether or not there is a lease.~Problem 7- BIG Machines, Inc. leased a duplicating machine to Connie’s Print Shop. The lease was for five years, and the rental payments over this period exactly equaled the current market price of the machine. The lease contract further provided that at the end of the five years Connie’s print shop borrowed money from the Octopus National Bank and signed a security agreement with the bank granting it an interest in all of the print shop’s equipment. Octopus National seized all the sop’s equipment, including the duplicating machine. In the lawsuit Octopus National Bank v. Big Machines, who gets the machine? Octopus National gets the machine, this is a secured sale between BIG and Connie’s print shop because it is (i) not subject to termination by Connie’s Print shop and (ii) The lessee has an option to become the owner of the goods for no additional consideration or for nominal (just 5 dollars additional) additional consideration upon compliance with the lease agreement. Thus, it is an FS race and Octopus would clearly prevail. ~ Problem 8 Business Corporation leased a massive copier from Copies, Inc. for a five year period. At the outset of the lease the copier had a fair market value of $300,000 and a predicted ten-year useful life. Over the course of the five-year lease the rental payments would total to $330,000. The lease provides that Business Corporation has the option to become the owner of the copier at the end of the five year period by paying Copies, Inc. the amount of $10,000. Is this a true lease or a secured sale? This is a true lease because, at the end of the day, the amount of consideration available for ownership is not “nominal” since Business Corporation has already paid more than the value of the thing itself. Would we reach a different result if the copier’s useful life were only five years? If the copier’s useful life were only five years, then a disguised sale has occurred (secured sale) because the lease is for the entire economic life of the leased goods, with or without renewal (aka “junk pile test”)

C: In re Architectural Millwork of Virginia, Inc. - Once you determine Part (i), then you go to Part (ii) to see if you can get one of the four a-d factors (original term of lease equals economic life of goods, lessee bound to renew lease on goods for remaining economic life of goods or just become the owner of goods, lessee has option to renew the lease for the remaining economic life of the goods with no additional consideration upon compliance with terms of lease, lessee has the option to purchase the goods with little or only “nominal consideration” upon compliance w/ terms of lease). None of four can be found in this case so it is considered a true lease and not a secured sale.~Problem 9- When Mercy Hospital’s administrators decided to build a new addition, they hired a general contractor named Crash Construction Co., and required it to get a surety to guaranty the performance of the construction job and the payment of all workers and material suppliers (to avoid a mechanic’s lien on the hospital). Standard Surety issued such a performance and payment bond covering Crash’s obligation to Mercy Hospital. To finance the construction, Crash borrowed money from Octopus National Bank (ONB) and have as collateral the right to collect progress payments from Mercy Hospital as they became due. ONB duly filed an Article 9


financing statement. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, by virtue of common law right to subrogation (the equitable right given to sureties to step into the legal shoes of persons they have paid) Standard Surety claimed a superior right to unpaid monies retained by Mercy Hospital, which were to be paid to Crash. ONB also claimed this fund, pointed to its filed security interest, and stated that standard Surety’s subrogation right was only an unfiled article 9 security interest. Who should win? Standard Surety should win, because subrogation, or the surety which pays of the debt taking the place of the creditor and thus being entitled to funds owed, is not an Article 9 Security Interest. Article 9 security interests apply only to security interests created by contract, NOT as a matter of law like subrogation. Surety has claim to disputed funds even absent the adequate financing statement.

IV. Exclusions from Article 9-UCC 9-109(A) Federal Statutes- Do not always trump UCC (state provisions), sometimes the two supplement each other. ***Intellectual Property as Collateral~ Sort of unclear as to whether federal filing is necessary to perfect an IP Security Interest (i.e. trademark, patent, etc.).

+This is consequential because if only UCC is required one filing in name of debtor will suffice for all intangible rights he/she owns. If federal filing is necessary, it will have to be done for each patent, copyright, and trademark, a much more expensive undertaking.~Problem 10Pollution Solutions borrows one googol dollars from Octopus National Bank (ONB), putting up as collateral its copyright, patents, and trademarks. Where should ONB file, to be sure it has a perfected security interest? No one knows where ONB must file to perfect the security interest, but the question here is slightly different. To be safe, ONB should file at the federal level, for each of its copyrights, patents, and trademarks. Although a UCC filing as a one-time deal may be all that is required, it is much more sensible to file at the federal level so as to secure ONB’s interest.C: Philko Aviation, Inc. v. Shacket- This case really embodies the way federal law can control, Federal Aviation Act- all airplane transactions must be registered with the FAA in order to have validity over subsequent purchasers for value. Here federal law is in direct conflict with state law and thus federal law governs.

(B) Landlord’s Liens and Other Statutory Liens- UCC 9-109 excludes statutory liens from Article 9, but this might not include landlord’s liens where they are mutually agreed upon/consensual and a contract is formed.~Problem 11-When Christopher Morley opened his bookshop, the landlord wanted security for the rent. They signed a lease agreement providing that all of the inventory (the books) would be subject to a lien in the landlord’s favor and could be seized and sold if Christopher defaulted on the rent payment. Is the landlord’s lien required to be perfected under Article 9? Yes, this is a consensual landlord’s lien brought about by contract, and thus Article 9 is triggered and the landlord’s lien is required to be perfected under Article 9.

(C) Wage Assignments


-Generally, Article 9 does not apply to an assignment of a claim for wages, salary, or other compensation of an employee. +There do remain some statutory exceptions which survive this~Problem 12Carl Jugular was an independent insurance agent who sold policies for many companies, though his primary sales were the life and automobile policies of the Montana Insurance Association (MIA), In order to float a loan to buy a car, Carl gave the lending bank a security interest in “all present and future commissions earned or to be earned” from the MIA. Does Article 9 cover this assignment? No, Article 9 likely does not exclude this assignment since these are commissions, NOT really considered wages.

(D) Non-Financing Assignments- UCC 9-109(d)(4)-(7) excludes Sales of accounts, chattel paper, payment intangibles, or promissory notes as part of the sale of a business out of which they arose or for the purposes of collection only, an assignment of a right to payment under a contract to an assignee that is obligated to perform under the contract, and an assignment of a single account, payment or intangible, or promissory note to an assignee in full or partial satisfaction of pre-existing debts.~Problem 13-When Dean Malone sold his lucrative art business to John Pivarski, he sold not only all the tangible assets but his outstanding accounts receivables as well. Must the buyer take the steps required by Article 9 of a secured party? No, the sale of accounts, chattel paper, payment intangibles or promissory notes as part of the sale of a business out of which they arose are excluded from Article 9 by UCC 9-109 (d)(4). If Malone received a commission to paint a portrait of the city’s mayor but decided he was too busy to perform the task and (with the mayor’s permission) transferred the job (and the right to the payment for it) to another artist, must the new artist take Article 9 steps? No, an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract is excluded from Article 9 by UCC 9-109(d)(6).When one of Malone’s clients refused to pay for a delivered painting, Malone sold the account to Trash Collection Agency. Must Trash Collection Agency comply with Article 9? No, an assignment of accounts, chattel paper, payment intangibles or promissory notes which is for the purposes of collection only is excluded from Article 9 by UCC 9-109(d)(5). Finally, pressed by his art supplies store for payment of his outstanding tab, Malone transferred to the store the money due him from a client whose portrait he had painted the month before. Must the art supplies store take Article 9 steps? No, an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of preexisting indebtedness is excluded from Article 9 by UCC 9-109(d)(7).(E) Real Estate- According to Official Comment 7 of UCC 9-109, security interest in something (i.e. a promissory note) which is covered by Article 9 even if that something (here, the note) is secured by something not in/excluded from Article 9 (here, real-property mortgage).~Problem 14-Local Loan Company (LLC) needed to borrow money, and Octopus National Bank (ONB) agreed to loan it the requisite amount, taking into ONB’s possession as collateral the real property mortgages and accompanying promissory notes given to LLC by its borrowers. Need ONB do anything either in the real property recording office or under the UCC’s Article 9 to protect its interest in this collateral? Yes, they should conform with Article 9 as to the promissory notes in order to secure them as collateral, because even though they are secured by real mortgages (which do not fall under Article 9), they should protect their security interest in this collateral (the notes).(F) Other Exclusions~Problem 15-Octopus National Bank issued Connie Consumer a credit card. As collateral for the credit card debts, ONB took a security interest in all the items she purchased using the card, as well as in her personal checking account with the bank. Does Article 9 apply to the bank’s rights in this account? No, Article 9 does not apply here because an assignment of a deposit account in a consumer transaction is excluded from Article 9 by UCC 9-109 (d)(13).~Problem 16-Debtors assign to Octopus National Bank “all sums recovered by debtors, directly or indirectly” from their lawsuit against Meep Corporation for breach of a sales contract. Meep Corporation settles the lawsuit, and agrees to pay


Debtors the claimed amount. Is the assignment subject to Article 9? Yes. An assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral, is excluded from Article 9 by UCC 9-109(d)(9).However, here what is being assigned is the specific settlement amount itself, not the judgment itself.

V. Classifying the Collateral-In order to protect interests to the greatest extent Article 9 will allow, it is important not only to have the security interest attach but also to have that interest perfected. +Perfection depends a great deal on the proper classification of the collateral-First step is to identify in real terms what you are dealing with (i.e. widgets, raw materials, etc). +UCC Comment 5 to 9-102: “While most sections of this Article apply to a security interest without regard to the nature of the collateral or its use, some sections state special rules with reference to particular types of collateral.” -Article 9 establishes a “unique classification scheme.” +10 Principal Parts of the Classification of Collateral:

A.) Goods 1. Consumer Goods/UCC 9-102(a)(23 )-Consumer goods means goods that

are used or bought for use primarily for personal, family, or household purchases.

2. Farm Products/UCC 9-102(a)(34)- Farm Products means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are crops grown, growing, or to be grown, livestock, supplies used in a farming operation, products of crops and livestock in their unmanufactured states.

3. Inventory/UCC 9-102(a)(48)- Inventory means goods, other than farm products, which are leased by a person as lessor, are held by a person for sale or lease or under a contract, are furnished by a person under a contract of service, consist of raw materials, work in process, or materials used or consumed in business.

4. Equipment/UCC 9-102(a)(33)- Equipment means goods other than inventory, farm products, or consumer goods.

B.) The “Quasi Tangibles” 5. Document/UCC 9-102(a)(30)- Document means a document of title or a

receipt of the type described in UCC 7-201(b).6. Instrument/ UCC 9-102(a)(47)- An instrument means a negotiable

instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary couse of business is transferred by delivery with any necessary indorsement or assignment. This 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.

7. Chattel Paper/UCC 9-102(a)(11)- Chattel paper means a record or records that evidence both a monetary obligation and a security interest in specific goods.


8. Letters of Credit Rights/UCC 9-102(a)(51)- Letter of credit right means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The trm does not include the right of a beneficiary to demand payment or performance under a letter of credit.

9. Investment Property/UCC 9-102(a)(49)- Investment Property means a security, whether certificated or certificated, security entitlement, securities account, commodity contract, or commodity account.

C.) The“Intangibles” 10. Accounts/UCC 9-102(a)(2)- Except as used in “account for”, means a

right to payment of a monetary obligation, whether or not earned by performance.

11. Health Care Insurance Receivables/UCC 9-102(a)(46)- Health care insurance receivables means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health care goods or services provided or to be provided.

12. Deposit Accounts/UCC 9-102(a)(29)- Deposit account means a demand, time, savings, passbook, or similar account maintained with the bank.

13. General Intangible/UCC 9-102(a)(42)- General intangibles means any personal property, including things in action, other than accounts, chattel paper, instruments, etc. This term includes software.

14. Payment Intangibles/UCC 9-102(a)(61)- Payment intangible means a general intangible under which the account debtor’s principal obligation is a monetary obligation.

~Problem 17-**Classify the following goods**A. Pianist’s Piano- Equipment (Go to goods, obviously not farm, not inventory, not consumer because used for professional reasons, so equipment).B. Cattle fattened by a farmer for sale- Farm Products (Go to goods, not consumer goods, not equipment and not inventory-classic farm goods). The farmer’s tractor- Equipment (Go to goods, not inventory, farm products, or consumer goods, so equipment).The farmer’s chickens-Farm products (debtor engaged in business of farming, and is livestock). C. A mobile home- Classified as a “manufactured home” under UCC 9-102(54).D. A right to sue someone for breach of contract-This is the assignment of a general intangible A right to sue someone for negligence arising out of an automobile accident-This is an assignment for a claim arising in tort, which is specifically excluded from Article 9 by UCC 9-109(d)(12)., A right to sue a corporation for wooing away a trusted employee-This is a commercial tort claim pursuant to UCC 9-102(a)(13), and thus it is not excluded from Article 9., a security interest in a lawsuit plaintiff has already won and has been reduced to a settlement agreement.- This is a payment intangible because it is a general intangible under which the account debtor’s principal obligation is a monetary obligation.E. Pencils and other stationary supplies used by Sears or a similar large retailer in its credit offices- This is inventory, while it would normally be considered consumer goods it is in the hands of the business here and is thus inventory.F. A liquor license- General intangible G. Curtains bought by a lawyer for the law office- Just like the pianist’s piano, equipment (not used for personal use, used for business purposes).H. Patents, trademarks, and copyrights- General Intangibles (Trademarks, patents, and copyrights are considered general intangibles under Article 9).I. Lottery Winnings- Lottery Winnings are considered accounts under UCC Article 9.J. Aunt’s agreement to loan $5,000 to nephew- Payment Intangible.


C: In re Troupe- Whether a tractor is to be classified as consumer goods or not- if it is consumer goods, then defendant’s interest is perfected even without an FS. If it is not consumer goods, then a FS is needed. ***Focus must be on the intended use of the collateral when the security interest was granted.***

~Problem 18-Mercy Hospital needs financing and calls you, its attorney, with this question. Many of its patients are members of various health plans, and when they come in for treatment, they sign paperwork authorizing the hospital to seek payment for their health insurance coverage provider. The hospital always has a large number of such receivables in the process of collection. When the hospital borrows money, can it use the monies due it from the various health plans as collateral? **UCC 9-109(d)(8)Excluded from Article 9 is a transfer of interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health care insurance receivable and any subsequent assignment of the right to payment. **UCC 9-102(a)(46)-“Health care-insurance receivable” means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided or to be provided. -Yes, the hospital can use the monies due it from the various health plans as collateral pursuant to UCC 9-109(d)(8). These are health care insurance receivables.

~Problem 19-Passport Credit Card Company issued millions of credit cards internationally, sending them to cardholders, who then used them in millions of transactions with merchants. The merchants would then send in the resulting paperwork to Passport for reimbursement (minus Passport’s fee). You are the attorney for Passport. When it needs to borrow money, can it use these credit card transactions as collateral? **UCC 9-102(a)(2)-These are accounts, or rights to payment of a monetary obligation. Yes, the sale of accounts or chattel paper, payment intangibles, or promissory notes does fall under Article 9.

~Problem 20-**Classify the following goods:

A. Milk in the hands of the farmer- This is a farm product.B. Milk in the hands of the grocery store- This is inventory.C. Milk in the hands of the grocery store’s customer who is buying for consumption-These are consumer

goods.D. Milk in the hands of a restaurant-This is an inventoryE. A certificate of deposit issued by a bank-This is an instrument.F. An airbill issued by an airline as a receipt for frozen shrimp shipped by air- This is a document.G. The receipt given to a farmer by a silo operator when the farmer’s stored grain there-This is a document.H. Rare coins bought by a hobbyist for addition to his collection- These are consumer goods.I. A tax refund-This is a general intangible.J. A debenture bond issued by a corporation- This is investment property.K. The checking account you have at your bank-This is a deposit accountL. A computer program-This is a general intangible.


M. The monthly rental obligations owed to a landlord, who wants to sue these obligations as collateral for a loan-These are accounts.

N. The promissory notes signed by the tenants to pay their rent- These are instruments.

C:Morgan County Feeders, Inc. v. McCormick- Question whether a farmer’s recreational cattle used in cattle drives should be classified as inventory or equipment. Court rules equipment because they are fixed assets or have, as identifiable units, a relatively long period of use and are not immediately for sale. In cases like this key factors to be considered include whether goods are for sale, whether they will be used up, etc.

~Problem 21-Sam Ambulance was a lawyer who loved speculative investments. When Elvis Presley died, Ambulance managed to to acquire one of the singer’s guitars. He decided to keep it for years and let it appreciate in value (he did not himself play the guitar). If Ambulance uses the guitar as collateral for a loan needed to run his law practice, how is the guitar classified? Sam Ambulance’s guitar is a good, so start in that section, it is not farm product, is not inventory, either consumer goods or equipment, seems more likely to be equipment since he is not using them for personal use.

~Problem 22-How would you categorize the car lease contracts that Dime-A-Minute Rental Cars uses as collateral when it borrows money from a bank? These lease contracts would be defined as chattel paper.If Dime-A-Minute so moves into the computer age that it stops using paper entirely, can the electronic version of this paperwork be used as collateral? Yes, this is known as electronic chattel paper.Article 9 provides that a secured party will be protected as to such electronic chattel paper if it has “control” over the paper, but, given that there is no actual writing, how could this possibly be done? So long as there is some reliable system which designates the secured party is assigned to the chattel paper, then it has control.**UCC 9-102(a)(5) Agricultural Liens-Agricultural lien can be an interest in farm products which secures payment or performance, and it CAN be created by statute if it is in favor of a person who in the ordinary course of business furnished goods or services to a debtor in connection with a debtor’s farming operation. **UCC 9-109(a)(2)-States that Article 9 does apply to an agricultural lien.~Problem 23-The state of Montana has enacted a statute giving unpaid crop dusters a lien on the crops of the farmer. This is, of course, a statutory lien (since it arises by statute and is not created by the consent of the debtor- the farmer. Is this nonetheless an Article 9 transaction requiring compliance with the usual Article 9 rules? Yes, this is an agricultural lien given the arrangement of the crop duster as a person who in ordinary course of business furnished services to the debtor in connection to the debtor’s farming operation.

VI. Technical Validity of the Forms- The creation of a security interest usually involves two documents, the security agreement (which creates property rights between the creditor and the debtor) and the financing statement (which creates property rights in the creditor against the rest of the world).

+Various technical requirements in order to have valid security agreements and financing statements.


-UCC 9-203(a)-A security interest attached to collateral when it becomes enforceable against the debtor with respect to the collateral (i.e. S.A., rights in collateral, creditor gives value).

-UCC 9-502(a)-Financing statement must include (1) Name of debtor (2) Name of secured party or representative of secured party (3) indicates/identifies the collateral

-UCC 9-509(a)- Unless an agricultural lien, debtor must authenticate filing of financing statement before it can be filed

+When creditor has possession of the collateral, no written security agreement is required. When they do not, written security agreement (UCC 9-203) required with BOTH (i) authentication by debtor and (ii) description of the collateral.

*No mention of “agreement” is required, but in reality you should try and be as specific as possible (parties, collateral, mutual understandings of agreement, point of default, etc.).

~Problem 24-When Frederick Bean bought a new computer on credit from Centerboro Office Supply, before

he could take it home the store made him sign a “conditional sales contract” by which he agreed that title to the computer would remain in the store until he had fully paid for his purchase. The contract described the computer, but nowhere did it mention a security interest. Does the contract qualify as a security agreement under UCC 9-203?

Yes, the seller of the computers reserves a security interest and since he does not have the computer, an SA is formed with a writing, regardless of whether it mentions security agreement, so long as it is authenticated (signed) by the debtor.

-Financing Statement-+FS need not be signed, per UCC 9-502 it must identify parties and the collateral.***”the financing statement has as its function the giving of notice to later creditors as to what

property of the debtor is encumbered by prior liens.”***-FS is filed under the debtor’s name, so it is particularly important that it be accurate.+UCC 9-503 says that debtor can be the registered organization’s name if the debtor is an

organization.**UCC 9-503 - “A financing statement that provides only the debtor’s trade name does not

sufficiently provide the name of the debtor.If the debtor has a name, it must provide the individual or organizational name.

~Problem 25Harry Felini ran a movie theatre called “Fellini’s art theatre” but, because he was the sole proprietor, that was a trade name. He gavce a security interest in the business’ equipment toSharkteeth financial company. The financing statement calls for a listing of “the debtor’s name”.

A.) Should the parties use the individual name or the business name? Individual Name. Since that is a trade name, an FS that provides only a debtor’s trade name is not sufficient.

B.) If the theatre were run as a partnership, would the partnership’s name be used as the debtor’s name? Debtor’s name. Since the debtor has a name, it must provide the individual or organizational name (Only if it does not have a name may a partnership be used.

+UCC 9-506 “Search Engine Test: “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 sufficiently provide the name of the debtor in accordance with Section 9-503, then the name provided does not make the financing statement seriously misleading.”

~Problem 26-The debtor’s correct name was “Michael A. Erwin” but the financing statement listed him as “Mike Erwin.” The rules of Article 9 excuse “minor errors…unless…seriously misleading”;

A.) Financing statement reads Michael A. Erwin, real name Mike Erwin. Is the secured party okay here? Yes, because a search of the debtor’s correct last name, or even last name and first initial, would yield this financing statement (reasonable degree of diligence required).

B.) What if it states Michael Atwood Irwin but debtor’s real name is Michael Edward Erwin? Yes, once again, because a search of the debtor’s correct last name, or even last name and first initial, would yield this financing statement.

C: In re John’s Bean Farm of Homestead, Inc.- Creditor files FS under the name “John Bean farms, Inc.” instead of the Debtor’s actual name of incorporation, “John’s Bean Farm of Homestead, Inc.). **”The financing statement is effective if a computer search run under the debtor’s correct name turns up the financing statement with thte incorrect name. If it does not, then the financing statement is ineffective as a mtterof law.”**Here the incorrect name would not appear following a search of the correct incorporation name without scrolling for nearly 60 pages, so this is seriously misleading. **UCC 9-507c- You are fine(Comment 4 says “Subsection (b) provides that, as a general matter, post-filing changes that render a financing statement inaccurate and seriously misleading have no effect on a financing statement.) The financing statement remains effective for anything acquired before or within four months after the change, after 4 months for other collateral acquired you must file an amendment to the FS.~Problem 27-Barbara Song borrowed $50,000 from Octopus National Bank in order to start a business called “Barb’s interiors.”, interior design being her specialty. ONB and Ms. Song signed a security agreement showing her as the debtr and giving ONB an interest in the inventory and equipment. ONB duly filed for a Financing Statement. Subsequently, Ms. Song married Fred Dancer, and she changed her name to Barbara Dancer. She then borrowed another $50,000 from Nightflyer Finance Company, which loaned her the money after searching the record under “Dancer” and finding no prior encumbrances. Did ONB lose its security interest because it failed to file when Barbara Song changed her name to Barbara Dancer? No.~Problem 28-The Last National Bank filed a financing statement in the proper place to secure its interest in the accounts receivable of The American Electronics Store. When the latter ran into financial difficulty, its assets were sold to a new electronics concern, Voice of Japan, which moved into the same retail location. Must Last National refile to keep its security interests perfected (1) in the accounts actually transferred by American Electronics to Voice of Japan Per UCC 9-507, a field financing statement remains effective to collateral that is sold, leased, liscensed, or otherwise disposed of, so it need not refiule.or (2) Accounts thereafter acquired by Voice of Japan? No, still must not refile unless some time constraint. Do we get the same result if the two companies merge to form “Voice of Electronic”? Also fine. What if Last National reassigns


its interest to Octopus National Bank? Is ONB’s interest superior to that of Last National’s interest? Also fine, Last National Rules, do not need to re-file, ***per UCC 9-310©, where a secured party assigns rights to someone else another filing statement is not necessary.~Problem 29-When Robin Oakapple found out he could not get a loan unless he had collateral, he permission from his foster brother’s yacht as collateral. Should the lender make both sign thesecurity agreement (only Robin signed the promissory note?) Richard is the debtor here sinceit is his boat and thus he must sign. Which of these parties is the debtorand which party is the obligor? Richard is the debtor and Robin is the obligor. Under whosename should the FS be filed? Should be filed under Richard’s name because he is the debtor and FS must be filed under debtor’s name.~Problem 30-Peter Poor signed a security agreement and financing statement in favor of the Total FinanceCompany, giving the company a security interest in “all personal property debtor now owns orever will own to ever hopes to own between now and the end of the world or his death, whichever occurs first. Does this perfect an interest in his guitar? Yes, as to the FS it does, which has a much broader description. As to the S.A. it does not, you need to specifically describe the collateral for a written security agreement.

C: In re Grabowski:Bank of America files first financing statement describing collateral, including a tractor, only in very broad terms. South Pointe Bank subsequently files an FS with a far more specificdescription of the tractor itself. *Bank of America still rules b/c FS need not be ultra-specific, can describe collateral as “all assets” or something of the like, should just cause investigator to notice that further inquiry into the status of the property is required (i.e. any potential liens).

**Security Ag(9-108) is generally harsher than Financing St(9-504) in terms of describing the collateral sufficiently**

~Problem 31-Polly Travis owned a clothing store that was doing quite well, so she decided to open branches all over the state. She borrowed money to do so from Longhorn State Bank, which took a security interest (according to the filed financing statement) in “all inventory, accounts receivable, equipment, instruments, general intangibles, and personal property.” The bank also made her pledge her extensive collection of jewelry to the bank, making her bring it from her home and putting it in the vault. A year later she asked to have the jewelry back so that she could wear it to a special occasion, and the bank gave it back to her. Before she could give it back, another creditor seized it by judicial process. Whose interest wins out?You are the lawyer for Longhorn State Bank. Is their interest in the jewelry perfected by the filed financing statement? The other creditors would prevail because an FS needs slightly more detail than this (at least item, type) description of “personal property”. ***The test is whether the description can lead you to reasonably identify the goods”~Problem 32-The security agreement and the financing statement both described the collateral as “inventory.” Does this limit the security interest to existing inventory only, or does the security interest extend to replacement for original collateral? The SA would be limited to original collateral, because


the SA must be more detailed and there is no intent to include after acquired. If the security agreement had said “inventory now owned or after-acquired” but the financing statement had simply mentioned “inventory”, does this perfect a security interest in after-acquired inventory? Yes, this is fine, because the SA is as specific as it needs to be and the FS, while more general, satisfies the inquiry notice requirement. “Description need only inform, it is not required to educate”~Problem 33-The financing statement’s description said “Various Equipment, see attached list.” No list was attached. Is the statement sufficient to perfect a security interest in the debtor’s equipment? No, this financing statement is not sufficient. It is not uncommon for an FS to list “All equipment”, to provide for required FS inquiry notice, but here it is simply too confusing/speculative because it says some equipment, but then doesn’t specify which equipment! **There are limits/constraints to the generality of financing statements**

~Problem 34-The security agreement stated that the collateral was “machinery, equipment, furniture and fixtures.” To this list the financing statement added “inventory and accounts receivable.” The parties are all willing to testify that the loan was intended to be secured by inventory and accounts receivable as well as by the items listed in the security agreement. Other creditors object. Does the secured party’s interest reach inventory and accounts receivable? No, the only property covered in the security interest would be that which is described in the security agreement. It cannot be supplemented by reference to other loan documents.~Problem 35-The loan officer at Octopus National Bank has sent you, the bank’s attorney, an email with the following question. The bank is planning to make a loan to Luddite Technology, Inc. and wants to take a security interest in all of the equipment of the debtor. However, Luddite’s most important piece of equipment is the very expensive Abacus-12, which makes computer hardware. Should the security agreement be drafted to say that the debtor grants a security interest in “the-Abacus 12 plus all other equipment,” “all equipment, particularly the Abacus-12 or simply “all equipment”. Or do you have better phraseology. It should explicitly mention the Abacus-12, it is in the hands of the debtor so you must identify it in a security agreement. Perhaps “Abacus 12 plus other equipment”

~Problem 36-The security agreement stated that the tractor buyer granted a security interest to “_____”, but he seller forgot to fill in his name. The seller later filed a financing statement showing he had a secured interest in the buyer’s tractor. Is the purported document with the blank 9-203 security agreement? What about the financing statement? What about both? You can infer intent for an SA, so while the document lacking a name is not a SA, taken together you could have a perfected interest.VIII. Attachment of the Security Interest-Once a security interest has been created and becomes enforceable as between two parties, the debtor and the secured party, it has attached to that piece of property.

+3 Essential Criteria for Attachment (UCC 9-203(1))1.) There is a security agreement of some kind


-Per UCC 1-201(3), a security agreement is not always a physical thing, i.e. a writing, it is an agreement “in fact” (i.e. it could be an oral agreement). +UCC 9-203- “Security Agreement” can be met if: (1) the collateral is actually in possession of the secured party pursuant to the agreement or (2) The debtor has an authenticated security agreement which contains a description (the description need not be specific but must only reasonably identify what is described) of the collateral (and, when the security interest covers crops growing or to be grown or timber to be cut, a description of the land concerned). **There must be a security agreement under the facts. Crucial to everything is the need for consent of both parties to a security agreement in fact; nothing may substitute for that.

2.) Value must have been given- Some value must have been given by the secured party to the debtor in some form or another. You do not receive a security interest simply because you are a nice guy.

3.) The debtor must have some rights in the collateral- Debtor must have rights in the collateral; you cannot give an interest in something that is not yours to begin with.

**Critical to each of these three facets (security agreement, value, rights in collateral) is TIMING, unless some explicit postponement, then attachment occurs at the time all 3 facets have been fully met**

***Debtor need not own the collateral to have rights in the collateral***

~Problem 37-Roy Gabriel decided to go into the music business and borrowed $35,000 from octopus National Bank (ONB) in order to open his shop, named Gabriel’s trumpets. On January 6 his inventory consisted of four guitars and a pitch pipe. Gabriel did have a contract with Triumphant Trumpet Manufacturing Company (TTMC) to sell him 40 trumpets, which he paid for in advance of the delivery date. On March 15, TTMC packaged the 40 trumpets and marked them “For shipment to Gabriel’s Trumpet store. On March 30, TTMC shipped them to Gabriel, who received them that day and displayed them in the store.

A.) On what day or days did the bank’s security interest attach (that is become effective) as to the guitars, pitch pipe, and trumpets? March 30th, since the debtor got rights that day and bank (creditor) had already given value, and SA already presumably signed.

B.) Does your answer change if we add the fact that the bank filed a proper financing statement covering Gabriel’s inventory on January 7? Can a financing statement be filed before the security agreement is signed? Attached? Why would the creditor wish to file a financing statement before the security interest had attached? No, but because of first to file priority he may want to file FS earlier rather than later.

C.) If the bank did not advance any money until March 31 (the date the bank actually saw the trumpets in the store), and if the bank did not make any commitment to advance any money until that date, when did the security interest attach? March 31st, because the bank (creditor) did not give any value until then.

~Problem 38-Daniel lends Jennifer money to buy a car. They agree over the phone that the car will be collateral for the debt. After Daniel sends a form to the Registry of Motor Vehicles, he is listed


as a creditor on the car’s certificate of title. Does he have a security interest in the car? No, there must be a written security agreement describing the collateral. ~Problem 39-ACRO owes considerable funds to its bank. The bank happens to get possession of valuable promissory notes belonging to ARCO, because the transactions were closed in the bank’s offices and the notes put in the vault. Do the notes become collateral for ARCO’s debt to the bank? NO, look to true intent and from contact perspective, they do not. No consent of both parties.

IX. Perfection of the Security Interest+UCC 9-303: A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken. If such steps are taken before the security interest attaches, it is perfected at the time it attaches.

-3 Basic Ways a Security Interest can be perfected:+++(1) By filing a UCC-1 Financing Statement+++

Filing technically doesn’t matter, because it’s not required.

FS must identify (i) Name of the debtor (ii) Name of the secured party or representative of the secured party (iii.) Indicates the collateral (iv.) is signed by the debtor covered by the financing statement (not necessary because of e-filing, more liberal standard than description of collateral in SA which mentions either specific or category based description OR just “all assets” or “all personal property”)

* “A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading”

* All FS filed in the name of debtor. *Sometimes perfection depends not on filing an FS, but on notating the security interest on the certificate of title (i.e. automobiles).

*Filing before it attaches is good practice to perfecting the interest* Good practice is to File, then search, until filing comes through pipeline – then close

*It is not illegal for a debtor to put up the same piece of property as collateral +UCC 9-503- “A financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor .If the debtor has a name, it must provide the individual or organizational name. (You cannot file as an unincorporated corporation, you can file as an incorporated corporation.)

~Problem 48-Hamlet Corporation borrowed $100,000 from the Elisnore Finance Company and gave it a security interest in the corporation’s equipment. The parties properly filled out a financing statement; W Shakespere was mentioned on the financing statement as the President of Hamlet Corporation. Elisnore agve the FS and the fee to the clerk at the Secretary of State’s Office. The clerk has just announced her intention to quit to her fellow office workers and was not paying attention to her job as she indexed the filing statement under “Shakespere” instead of “Hamlet”. One year later, another finance company loaned Hamlet Corporation more money, taking a security interest in the same equipment (the second finance company had checked the records and discovered nothing under “Hamlet Corp.” Since priority of creditors depends on order of


filing, did Elinore “file” first or did it bear the risk of clerical error? Elisnore filed first, the risk of clerical error is on those who search the file (In this case the other finance company). UCC 9-516: Communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing.

+ A financing statement is active/valid for 5 years unless a continuation statement is filed. Filing office must keep records of lapsed FS’s for at least another one (1) year period. It is done in order to clear out the files so that there are no ghost creditors

~Problem 49-Octopus National Bank (ONB) had a security interest in the equipment of the Weekend Construction Company for which it filed a financing statement in the proper place on May 1, 2012. Antitrust National Bank (ANB) took a security interest in the same collateral and filed a financing statement on May 2, 2012, in the same place.

A.) How long is the FS effective? It is effective for 5 years.B.) If ONB files a continuation statement on May 1, 2016, is its perfected position

continued? No, a continuation statement may be filed *only* during a 6 month window prior to the expiration of the 5 year term of the FS.

C.) If ONB never files a continuation statement at all, after May 1, 2017, does it nonetheless retain its priority over ANB (who, after all, always thought of itself as junior to ONB’s prior filing and would get a windfall if it suddenly prevails). No, the perfection/effectiveness of the FS FULLY EXPIRES upon lapse.

D.) If ONB fails to file a continuation statement in time, so that its perfection lapses, but a week later it files a financing statement, is it still senior to ANB? No, it is as if it never filed, so it has expired and ANB’s interest is superior. It may be perfected if done properly but it does not get priority as to ANB.

~Problem 50-When Portia Moot paid off her debt to Last National Bank, which had loaned her $3,000 to buy a computer for her law office (and taken a PMSI , for which it had duly filed a FS), she wanted the bank to clear up the record down at the filing office. Does she have this right? Yes, she can have the secured party file a termination statement within one month of there being no further obligation per UCC 9-513.

~Problem 51-When attorney Sam Ambulance handled a divorce for a client, he incurred the wrath of her ex-husband, Andrew Anarchist, president of the Freeman Common Law movement, a group that did not recognize the authority of the state or federal government. The irate ex-spouse filed 42 phony filing statements in the public records to show that all of Sam’s assets were security for various non-existing loans in favor of Anarchist, the secured party of record. What can Sam do to clear up these clouds on his title to his property (which the common law would regard as defamation)? He can send Anarchist a demand to Anarchist for a termination statement to whatever address for Anarchist is provided on the FS, regardless if Anarachist actually receives it or not.

+++(2) Perfection by Possession+++


“As at common law, there is no requirement of filing when the secured party has possession of the collateral in a pledge transaction” -In this case, the world at large is alerted to the creditor’s possible interest in the property. -Only collateral having “physical form” may be possessed.

+If the property is simply too large for the secured party to perfect by possession, it may be possible to store the goods in a warehouse and get a negotiable warehouse receipt representing the goods

+UCC 9-312(c)- While goods are in the possession of a bailee that has issued a negotiable document covering the goods: (1) A security interest in the goods may be perfected by perfecting a security interest in the document; and (2) A security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time. -A security interest in goods, instruments, money, negotiable documents, or chattel paper may be perfected by the secured party’s taking possession of the collateral.

~Problem 40-Your client, Archibald Gracie, owns The White Star of England, a famous large diamond currently on display at the Astor Museum in New York. Molly Brown, a wealthy Colorado investor, has agreed to buy the diamond from Gracie, and she has made a substantial down payment, with an agreement that she will make three more payments before she gets possession. Gracie and Brown have signed the purchase agreement, which contains a clause granting him a security interest in his own diamond until she has made all the required payments. Can he perfect a security interest in the diamond by simply notifying the Astor Museum of the sale and telling the museum to hold it for his benefit until she makes payment in full, thus creating an escrow arrangement in which possession is held by the escrow agent? No, the museum, in order to take possession for the benefit of the secured party, must authenticate a record. (UCC 9-313c.

~Problem 41-Kiddie Delight, Inc., a manufacturer of toys, wanted to borrow money and use its inventory of toys as collateral. It called up Fred’s Field Warehouse Company, and Fred’s came to the plant, put the inventory in a locked room, and posted a sign on the door saying “Contents of Room under control of Fred’s Field Warehouse.” Fred then issued a negotiable warehouse recipet deliverable to the order of Kiddie Delight. Fred’s hired Mort Menial, the Kiddie Delight janitor, as a local warehouse custodian (he was paid $1 a week). Kiddie Delight pledged the warehouse receipt (a document) to Mammon State Bank in return for a loan. Kiddie Delight went bankrupt shortly thereafter.

(A.) By having possession of this document, did the bank have a perfected security interest in the inventory? Yes, when the goods are in the hands of a bailee, a security interest in the goods may be perfected by perfecting a security interest in the negotiable document covering the goods (which, as here, can be done by possession).

(B.) Assume the warehouse receipt is validly issued and effective. If the bank and Kiddie Delight signed a written security agreement covering the warehouse receipt and the inventory it represented and if the bank gave Kiddie Delight the money, does the bank have a perfected security interest in the warehouse receipt even before the bank gets possession of it? Yes, the bank has a perfected security interest for a period of 20 days


before it gets possession of the document. UCC 312(e)- “A security interest in certified securities, negotiable documents, or instruments is perfected without filing or the taking of possession or control for a period of 20 days from the time it attaches to the extent that it arises for new value given udner an authenticated security agreement.

(C.) If Kiddie Delight (prior to bankruptcy) wanted to get the warehouse receipt from the bank in order to present it to the warehouseman (Mort), get the goods, clean them, return them to the field warehouse, and get back the receipt for rehypothecation to the bank, will the bank lose its perfection if it turns the document over to the debtor? Yes, the bank will retain perfection of the goods for 20 days after it makes them available to the debtor.

(D.) If the bank loses its perfection, who would you advise to sue? It would make the most sense to sue the warehouseman, as he is liable for the goods being lost.

~Problem 42-Octopus National Bank (ONB) makes a loan to PI Solutions, secured by Pi’s patent on a solar powered night light. ONB learns that it is unsettled whether a security interest is perfected by filing in the state UCC office or the federal patent and trademark office. ONB has a brainwave. Rather than filing, can ONB perfect a pledge-taking possession of PI’s patent certificate? NO, a patent is a general intangible, not goods, isntruments, chattel paper or negotiable documents. ONB cannot perfect a pledge by taking possession, it must have filed a UCC-1 FS.~Problem 43-Karate, Inc. was a self-defense training school. It pledged 36 of the promissory notes given by its customers to Nightflyer Finance Company in return for a loan. The parties sign a security agreement, and the finance company takes possession of the notes. A month later Karate Inc’s president asks Nightflyer to let him have back one of the notes so that he can present it to a customer for payment. The finance company gives him the note on April 6. Sun put it in his desk at the school and forgot about it. On October 12 the karate school went bankrupt. Does the bank have a perfected security interest in any or all of the promissory notes? It has it in the 35 notes, but not in the other one, as once the 20 day period expired they needed to file. Could the finance company have protected itself by filing a financing statement as to the promissory notes? Yes, they could have perfected by FS as well and then it would not have mattered.

+++(3) Automatic Perfection (PMSI in Consumer Goods) +++Where a third party loans money to the debtor to enable the debtor to acquire rights in or the use of some specific collateral, if the loan proceeds are in fact used for the purchase intended, the lender will be able to claim a PMSI in goods acquired from the money it loaned. PMSIs in consumer goods other than automobiles (where a notation on the certificate of title is usually needed for perfection).are automatically perfected at the time of attachment (SA, creditor gives value, debtor has rights). *PMSI given a lot of weight, often considered superior to other creditors’ interests.

~Problem 44-Bilko Siding, Inc. put aluminum siding on Mr. and Mrs. Brown’s home. They signed a contract on August 4th, giving the company a security interest in all their currently owned consumer goods plus those acquired in the future. On September 25th the Browns went to First Finance Company and borrowed $80 for the stated purpose of buying a sweing machine. They signed a security


agreement with the finance company, granting it a security interest in the machine. First Finance did not file a financing statement. The Browns bought the machine on October 11. The filed for bankruptcy on October 12. Bilko, first Finance, and their trustee all claimed the machine.

A.) Did Bilko’s interest attach to the sewing machine? No. Per UCC 9-204(b), security interests do not attach to after-acquired property unless the property is gained within 10 days of the secured party providing value. Here, well outside 10 days of company doing aluminum siding (creditor giving value).

B.) Was the loan agreement a PMSI even though First Finance was a lender and not the seller of the machine? Yes, for sure, 3rd party (lender) gave Mr. and Mrs. Brown loan to acquire specific good (sewing machine) and sewing machine is what they “IN FACT” bought.

C.) Would it have been a PMSI if the Browns had used the $80 to pay a liquor bill and had used the $80 from their savings account to buy the sewing machine? NO, UCC 9-103(a)(2) “Purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acuire rights in or use of the collateral ***IF THE VALUE IS “IN FACT SO USED”

D.) Assuming the $80 was used for the announced purpose, who gets the sewing machine? First Finance, PMSI is automatically perfected as of October 11th and thus they beat out other creditors.

C: In re Short- American General Finance, Inc. loans money to debtors, who use some of the money to buy furniture. They then consolidate this loan with other loans, ***but court rules that PMSI still retains its character, albeit in slightly different form***

~Problem 45-Façade Motors decided to buy an expensive Oriental Rug for its main office. It selected one from the Stock of Treasures of Persia, Inc., which let Façade Motors take the rug back to the office to try it out and see if it wanted to buy the rug. All of the equipment of Façade Motors was covered by a perfected floating lien in favor of Octopus National Bank. As soon as Façade gets possession of the rug (and before it makes up its corporate mind whether it wants to buy it), does the bank’s lien attach? No. A “sale on approval” per UCC 2-326, where delivered goods can be returned even if they fully conform to the contract and the goods are really delivered primarily just for use. Not subject to the claims of creditors. Façade Motors decided to purchase the rug, so it signed a contract to do so with treasures of Persia, Inc., making a down payment at the time it did so. To finance the rest of the installment payments, façade Motors borrowed the necessary amount from Nightflyer Savings and Loan, giving it a security interest in the rug. Does Nightflyer’s security interest qualify as the purchase money kind? Yes. Official Comment 3 to UCC 9-103 states that PMSIs include obligations incurred by or connected with the purchase of/acquiring rights in the collateral.

C: General Electric Capital Commercial Automotive Finance Inc. v. Spartan Motors, Ltd.General Motors Acceptance Corporation loaned Spartan Car Dealership money shortly after the purchase of two Mercedes Benz vehicles. Another financing company, GECC, already had a security interest in all of the dealership’s inventory. Question is whether post-purchase reimbursement counts as a PMSI, court finds it does, must consider (1) course of dealing (so long as it is reasonable). (2) whether purchase was “closely allied with loan” (here it is). PMSI


controls over toehr creditors’ interests. GMAC’s reimbursement enabled Spartan to buy those two vehicles.

+Certain Accounts and Other Intangibles are ALSO automatically perfected. While it is always wise to file, there is an exception

+UCC 9-309(2)- This security interest is automatically perfected upon attachment “An assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the asignor’s outstanding accounts or payment intangibles”

C: In re Wood: Larkin was a lawyer who loaned his friend Wood money. As collateral, Wood gives to Larkin some of his legal accounts recievable (two accounts) for litigation he is working on. Question is whether Larkin is exempted from filing and gets automatic perfection because the accounts represent a small % of Wood’s accounts recievable, or whether because he was a sophisticated lawyer he should have known better. He is exempted because sophistication does not matter.

+Where the assignee is regularly engaged in commercial financing and routinely accepts assignments of accounts, perfection by way of filing is required under the UCC REGARDLESS of % of accounts assigned (this applies to above case b/c Larkin was not regularly engaged in commercial financing).

-Usually “percentage test” (% of debtor’s accounts) or “causal and isolated transaction test” (debtor rarely transfers accounts/intangibles like this- also case w/Larkin and Wood who were just friends).

~Problem 46-Octopus National Bank sold all the promissory notes it was holding in its vault to Last National Bank. Remember that the sale of promissory notes is an Article 9 transaction (with the seller being the “debtor” and the buyer the “secured party” Must Last national file a financing statement or make sure it has possession in order to perfect its interest in the notes? No, per UCC 9-309(4) the sale of promissory notes count as intangibles which have security interests that automatically attach.

+Sale of Debt-2 different classifications for the sale of debt, which one decides whether the sale automatically perfects or not per UCC 9-309(3) and UCC 9-309(4). (1) With Recourse- Risk of non-collectivity of debt still rests on the original seller of the debt, not the party that bought the debt. NO AUTOMATIC PERFECTION W/ ATTACHMENT HERE, MUST FILE (2) Without Recourse- Risk of non-collectivity rests on party that bought the debt, AUTOMATIC PERFECTION HERE WITH ATTACHMENT PER UCC -309(3) AND 9-309(4) +UCC 9-309(3)- Perfection with attachment if a sale of a payment intangible.

+UCC 9-309(4)- Perfection with attachment if a sale of a promissory note.

~Problem 47-When Nightflyer Finance Company (NFC) loaned $20,000 to Portia Moot to enable her to expand her law practice, she gave the finance company a security interest in her accounts


recievable (the monies her client owed her) which NFC promptly perfected by filing a Financing Statement in the appropriate place. One of these accounts had a surety, the mother of a client, who promised Portia that she would pay the debt if the client did not. What must NFC do to perfect its interest in the surety obligation of the mother? Nothing, so long as it has perfected its security interest in the accounts receivable, “Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral.

X. Multi-State Transactions- What happens when facts involved involve more than just one of the fifty states- governed largely by UCC 9-301 as to which laws/laws of which jurisdictions control transactions.

+UCC 9-301- Except as otherwise provided, the following rules determine the law governing perfection, the effect of perfection, and the priority of a security interest in collateral:

(1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or non-perfection, and the priority of a security interest in the collateral.

(2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral.

(3) Except as otherwise provided in paragraph (4), while tangible negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs

a. Perfection of a security interest in the goods by filing a fixture filing.b. Perfection of a security interest in timber to be cutc. The effect of perfection or nonperfection and the priority of a nonpossesory

security interest in collateral.~Problem 52-Mary Bush lived in a home she owned in Cheyenne, Wyoming, but she also wanted to buy a large sailboat in Cleveland, Ohio, and planned to keep the boat there after the purchase, for use in her fishing charter business. Ohio law provides that whenever a buyer has paid more than 75 percent of a debt secured by a boat, the creditor’s security interest is automatically stripped from the boat. Wyoming has no such rule. If a creditor loans Mary money to buy the sailboat and takes a security interest in it, where should the creditor file the financing statement? When Mary had paid 75 percent of the debt, will the creditor’s security interest still be attached to the boat? The debtor should file in WY because that is where she lives. However, OH law will govern the collateral b/c that is where the collateral is located, so the creditor’s SI is gone once 75% is paid off pursuant to OH law.

***Place of Business= An agency or office by a person, his clerks, those in his employment which is devoted to carrying on some sort of trade or commerce.

UCC 9-307- (b) Debtor’s location=if individual, individual’s place of residence, if organization, place of business of organization, if organization has more than one place of business, its chief executive office.(c) These location standards only apply if relevant jurisdiction whose law generally requires information about non-possessory security interests being made public, if not, File in Washington D.C.


(e) A registered organization that is organized under a law of a state is considered as located in that state.~Problem 53-Peripatetic Corporation was organized under the laws of the State of Delaware but has its large retail store outlet in New Jersey. Further, the corporation was really a husband and wife type of business, and they did all the corporate paperwork at their home in Baltimore, Maryland (where they also keep the corporate records). Their corporate stationary used their home address. When the corporation borrows money against its accounts receivable, in what state should the financing statement be filed? The FS should be filed in the state the corporation is incorporated in (“organized under” per UCC 9-307 (e) so Delaware. If the corporation was registered and had its only place of business in the Republic of Jahala, a Pacific Island Nation, where should the financing statement be filed? The FS should be filed in DC, if the relevant jurisdiction, Republic of Jahala, does not have an equivalent Article 9 system for filing non-possessory SI’s. If it does you are good to file there. File in both places if uncertain.

~Problem 54-Factory, Factory, & Money is a legal partnership that has its only place of business in Chicago, Illinois, where Octopus National Bank, which has a security interest in the accounts receivable of the firm, has filed its financing statement. If the law firm makes a permanent move to Washington, D.C., on January 1, 2013, does the bank lose its perfection or does it have a grace period in which to re-file in the new jurisdiction? Pursuant to UCC 9-316, it has a 4 month grace period following the debtor’s change in location to another jurisdiction. If the law firm merges with a law firm in D.C., with the new D.C. firm assuming all the debts of the former one, is the time period the same? Following a transfer of collateral to a person who becomes a debtor and is located in another jurisdiction, there is a one year grace period to re-file.~Problem 55-Suppose that Factory, Factory, & Money, the Chicago firm in the las problem, had two creditors before its permanent move to DC, both of which had a perfected security interest in the firm’s accounts receivable-Octopus National Bank, which had filed its financing statement first, and Last National Bank, which had filed second, both creditors filing in Chicago early in the year 2012. When the move occurred on January 1, 2013, Last National promptly refilled in DC before the end of March of that year, but Octopus National was careless and didn’t realize that the firm had moved until that September. If it files in DC in September, will it retain its priority over Las National? No, if it does not meet re-filing grace period/reqs under UCC 9-316, then the SI becomes unperfected and is deemed never to have existed. ~Problem 56-Lyle Saylor was a trucker who lived and worked in the State of Michigan. When his old rig wore out and he decided to buy a completely new truck, he went to Pennsylvania and purchased a truck on credit from Ringer Truck City. Because the state of Indiana charged a great deal less for licenses and other registration fees, Saylor told the dealership that he lived in Indiana and that the truck would be domiciled there. He gave Ringer Truck City the address of his sister, who did live in Indiana. Indiana Law requires that lien interests be noted on the certificate of title, a step that Ringer Truck City duly took when it procured the Indiana Certificate. When Saylor went bankrupt a year later, the trustee in bankruptcy argued that Ringer Truck City was unperfected


because it had not gotten a Michigan certificate of title and had its lien interest noted thereon, as Michigan law required. Ringer Truck City argued that it was entitled to believe the debtor when he told the company he lived in Indiana. How should this come out? Ringer Truck was safe when they noted lien interest on Indiana certificate of title, perfection through non-resident state title law is fine.C: Metzger v. Americredit Financial Services, Inc. +A grand application of UCC 9-337, which protects good faith buyers in automobile cases:

+UCC 9-337: If, while a security interest in goods is perfected by any other method udner the law of another jurisdiction, this state issues a certificate of title that does not show that the goods are subject to the security interest or contain a statement that they may be subject to security interests not shown on the certificate

(1) A buyer of goods, other than a person in the business of selling goods of that kind, takes free of the security interest if the buyer gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest.

~Problem 57-On May 10, Holly Tourist, a resident of Dallas, Texas, bought a new car on credit while on vacation in Norman, Oklahoma, from Norman Car Sales, Inc. Oklahoma law required lien interests to be noted on the certificate of title as a condition of perfection, which NCS did on May 12. On May 14, Holly drove the car to Dallas, and that same day she re-registered the car there and received a Texas Certificate. Somehow she was able to do this without surrendering the Oklahoma Certificate (though Texas Law apparently required her to turn in the old certificate before a new one should have been issued). Texas required lien interests to be noted on the certificate of title as a condition of perfection, but the Texas certificate showed no liens of any kind thereon. On May 26, holly sold the car to her neighbor, William Innocent, who paid full value therefor without knowledge of NCS’s interest. On May 28, learning of the sale to William, NCS arranged for the car to be repossessed from in front of his house. Assuming that her resale of the car was a “default” so as to entitle NCS to repossess, decide which of them is entitled to the car? The new certificate of Texas governs the collateral and the good-faith buyer, Sam Innocent, is protected pursuant to UCC 9-337.

~Problem 58-Joseph Armstrong bought a yacht in a state that did not use certificates of title for boats and that required filing for perfection in such collateral, a step that the financing bank, Octopus National Bank, duly took. Armstrong then moved to a state that required all security interests on boats to be noted on certificates of title issued by that state, but he never took the time to get such a certificate. Does ONB’s perfection in the second state last as long as its filed financing statement is still effective or for only four months? It is only valid for 4 months following the debtor’s move to a new jurisdiction before it must be re-filed according to new jurisdiction’s law (presumably needs certificate).

XI. Priority- When debtor’s financial situation collapses, creditors all scramble to seize debtors assets, thus big element of ST Law=Priority Disputes -For priority in unperfected (just attached) priority disputes, UCC 9-317 governs

(**Lien creditor means (A) a creditor that has acquired a lien on the property involved by attachment, levy, or the like (B) AN assignee for benefit of creditors from the time of assignment


(C) A trustee in bankruptcy from the date of the filing of the petition (D) A receiver in equity from the time of appointment.**)+UCC 9-317 gives priority to lien creditors, perfected interests.~Problem 59-Epstein’s Bookstore borrowed $10,000 from octopus National Bank (ONB), signing a security agreement giving the bank a floating lien over the store’s inventory. ONB, due to negligence, never got around to filing the financing statement. Martin’s Travel Service was an unpaid creditor of the bookstore that sued on the debt and recovered a judgment against the store. It had the sheriff levy the inventory. Does ONB or Martin’s Travel Service get paid when the inventory is sold? Martin’s Travel Service gets paid, because UCC 9-317 prioritizes lien creditors among unperfected security interests. If, instead of a judgment creditor’s seizing the goods, Epstein’s Bookstore had filed a bankruptcy petition while ONB’s lien was still unperfected, what result? Lien creditor can also be a bankruptcy trustee, so Epstein’s bankruptcy trustee would get priority over the unsecured creditor. What result if, instead, Epstein’s Bookstore had sold all the inventory to a good faith buyer? Receiver in equity without knowledge of the security interest (in this case this good faith buyer) would get priority over other creditors.~Problem 60-Coke Travel Agency used its accounts receivable as collateral for a loan from the Mansfield State Bank, but the bank failed to file the financing statement that Coke Travel Agency had signed because the bank’s attorney lost the statement in the maze of papers on his desk. Six months later, Coke Travel Agency needed another loan and applied for one from Bethlehem National Bank, which searches the files, discovered no financing statements recorded for Coke Travel Agency as debtor, and took a security interest in the agency’s accounts recievable. Bentham National Bank did file a financing statement in the proper place. Which bank has the superior interest in the collateral? Very simple here, perfected wins out over unperfected per UCC 9-322. Bentham wins dispute because it is perfected.

+UCC 9-322(a)(1)- Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to:

(1) Priority in Time of Filing or Perfection.~Problem 61-Jay Eastriver ran a clothing store and needed money. He went to two banks, the First national Bank and the Second State Bank, and asked each to loan him money using his inventory as collateral. They each made him sign a security agreement. First National Bank filed its financing statement first, on September 25, but did not loan East River any money (nor did it make any commitment to do so) until November 10. On October 2, Second State both loaned EastRiver the money and filed its financing statement. Eastriver paid neither bank.

(a) Did both banks have a perfected security interest, assuming they filed in the proper place? Is it possible for two creditors to have perfected security interests in the same collateral? Yes, they both have a perfected security interest in his inventory, both took all proper steps.

(b) Remembering that attachment is a prerequisite for perfection, 9-308 and that attachment cannot occur until the creditor gives value, decide which bank has the superior right to the inventory. Second State has right to the inventory. Even though both were perfected, First National pre-filed but creditor did not


assign value (SA, value, rights) until November 10, so Second State perfected first and wins.

(c) If Second Bank had knowledge of the transaction between EastRiver and First National at the time it perfected, does that affect its priority? Yes, if First national can prove that Second State knew about the financing statement but went ahead anyways, it impacts “good faith” and they can still hang on.

~Problem 62-When First National Bank took a perfected security interest in the inventory of Jay Eastriver’s clothing store, the security agreement provided that the inventory would secure not only the current loan “but all future advances of whatever kind.” Six months later, First National loaned Eastriver an additional $10,000 and had him sign a new promissory note for that amount. Do the existing filed FS and security agreement need to be altered in any way, or are they sufficient as to protect the bank?

+UCC 9-204 (c)- A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to the commitment. SA can provide that collateral also secures future advances, NO alternation needed.~Problem 63-Assume in the last problem that after First National made Eastriver the first loan and filed its FS, he then borrowed more money from Second State Bank, using the same inventory as collateral, and this lender also filed an FS in the correct place. Eastriver then paid off the loan to First National completely, but the bank never filed a termination statement. A month later, First National loaned Eastriver more money. The parties signed a new security agreement, but no new FS was filed. First national’s attorney reasoned that the earlier FS would protect the later loan’s priority, even though his loan was not contemplated when the first financing statement was filed. Is this right? YES, First National’s priority is protected because of the future advances language. ~Problem 64-Phillip Philately pledged his valuable stamp collection to the Collectors National Bank (CNB) in return for a loan (he gave CNB an oral security interest in the collateral; no FS was signed). The bank put the stamp collection in its vault. Philately later borrowed money from his father and gave him a signed Security Agreement in the same stamp collection. The father files an FS in the proper place.

A.) Who has priority between CNB and the father? The CNB bank has priority.B.) If Phillip goes to the bank and takes the collection home so that he can add new

stamps but does then return it, does the answer change? Yes, if perfection depends on possession and secured party lacks possession in a pledge agreement then perfection stops. CNB would lose its priority date.

C.) If CNB makes Phillip sign an SA and then turns the collection over to him but never files an FS, who wins? The father, if he filed FS first he would have priority you need either possession or an FS to perfect here.

***The Dragnet Clause***+UCC 9-204(c)- A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment.


~Problem 65-Howard “red” Poll decided to go into the cattle business and borrowed $65,000 from the Bargus National Bank to finance part of the purchase of the initial heard. Poll signed a security agreement using the cattle as collateral for this and “all other obligations now or hereafter owed to the bank.” A financing statement covering this transaction was filed in the appropriate place. Two years later, Poll received a charge card from the same bank and used it to finance a trip to Australia to look over cattle ranching there. When he failed to pay the credit card bill, the bank repossessed the cattle (even though his payments on the cattle purchase loans were current). Did the bank’s security interest in the cattle encompass the credit card obligation? If it were to observe cattle there, then loans are likely of “same class” and would pass new restrictions on the dragnet clause. Would it make a difference if he had gone to Australia in search of the perfect wave for searching? If he went for purely consumer based reason, then loans are of different class and it would seem more likely it was not parties’ intent to include loan of this sort in dragnet clause.

C: In re Wollin:-Adopts strict constraints on the dragnet clause-No matter how it is drafted, the future advance to be covered must be of the same class as the primary obligation…and so related to it that the consent of the debtor to it is to be inferred.-Wollin Standard=(1) Must “specifically reference” antecedent debt to be covered by a later loan w/collateral (2) Future advances must be so related as to lead to clear inference of assent.~Problem 66-Aware of the difficulties with cross-collaterization clauses, rancher Howard Poll was always careful to keep his consumer obligations (from his Visa Card, using the objects purchased as collateral) with a different bank than the one he financed his ranching operations (with a traditional loan, using his cattle as collateral). Both banks had him sign security agreements that provided that the collateral nominated for each debt would also protect “any and all debts, now existing or after acquired” owed the same creditor. Howard was therefore distressed to learn that when the two banks merged, the new bank’s loan officer now insisted that his cattle also protect the debts that he owed on his Visa Card. Is that right? This depends on interpretation of the dragnet clause, likely would not pass the “same class” test under In re Wollin, but dependent on interpretation of dragnet clause.

Purchase Money Security Interests

+PMSIs are given special priority over other security interests-vary by type of PMSI “super-priority”. Seller need only (1) file a financing statement and (2) notify the prior secured party of its interest before delivery of the new inventory. Seller must perfect/ file within 20 days to get priority.

PMSI in non-inventory has priority in same collateral/proceeds if perfected within 20 days after debtor got collateral


-Consumer Goods-UCC 9-309(1)- A purchase-money security interest in consumer goods, except as otherwise provided, with respect to consumer goods, is perfected upon attachment (automatic). -All other PMSis-UCC 9-317(e)-Except as otherwise provided, if a person files a FS with respect to a PMSI before or within 20 days after the debtor receives delivery of the collateral, the Security Interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing. (Must be perfected during the 20-day “grace period” following the buyer’s possession of the goods in order to take advantage of a relation-back of priority to that date.)

-UCC 9-324(a)-Except as otherwise provided, a PMSI in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided, a perfected security interest in its identifiable proceeds also has priority, if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days after.~Problem 67-When Paramount Homes finished building “Utopia, Ltd.”, its newest fancy apartment complex, it had to furnish the clubhouse, so it sent construction manager, Bill Gilbert, to Sophy’s interiors, a furniture store, where he made $2,000 worth of credit purchases and signed a security agreement on Paramount Homes in favor of the seller. The agreement was signed on June 8, the goods were delivered on that same day. Bill failed to mention that all his employer’s equipment was designated as collateral on an existing security agreement and FS in favor of Sullivan National Bank. This agreement contained an “after acquire property clause”, which stated that later collateral coming into the buyer’s estate would automatically fall under the bank’s security interest. The policy of Sophy’s interiors was not to file FS for its credit furniture sales

A.) Why might it have such a policy? For consumer goods you normally do not need to file a FS (automatic), but here it is equipment for business use, so they should at least ask how the goods are intended to be used.

B.) On June 10, which creditor will have priority in the furniture? On June 30? On June 10, Sophy’s Interiors is still under the 20 day grace period so they have priority. On June 30th if they still have not filed, Sullivan National Bank has priority b/c the 20 day grace period will have expired.

C:In re Wild West World, L.L.C., Debtor- Larson sells Wild West amusements a ride on credit, claiming to withhold title until payment is complete (In actuality, this is nothing more than a security interest. Wild West acquired the ride on March 5th, but Larson did not perfect until far beyond March 25th (20 day window for PMSI perfection of non-consumer goods). First National had a prior in time perfected security interest which therefore trumps Larson because Larson failed to take advantage of the special “super priority” afforded PMSIs.

+”A special exception to the general priority rules//creates a special priority for PMSIs. It elevates the holder of a PMSI security interest over a perfected non-PMSI in the same collateral, provided the PMSI within 20 days of delivery of collateral to the debtor. This special priority rule for PMSI for purchase money security interest applies even if the non-puchase money security interest was perfected by filing prior to the purchase money security interest. ~Problem 68-Video Wonder, an electronics store, had granted a floating lien over its inventory and equipment to Last National Bank, which perfected its security interest by filing its FS in the appropriate


place. Needing a guard dog for the store, Video Wonder’s manager responded to an ad in the newspaper placed by Agatha Shaw, who was selling her beloved German Shepard, Fang. She had bought him for protection when he was but a pup, but he had proven too much for her, having seriously injured a meter reader and two mail carriers. She checked out the store carefully before agreeing to sell Video Wonder the dog, saying she wanted a god home for Fang. He cost the store $1,200. The manager agreed to send her $100 a month until the dog was paid for, at which time she agreed in writing to sign over Fang’s papers. Mr. Shaw and the manager agreed that the store would not get any title to Fang until all the payments have been made. Fang proved to be a fine watchdog for the store, but when Video Wonder stopped making payments to all creditors two months later, Last National Bank seized all of the store’s assets, including Fang. Agatha Shaw is upset. She calls you, her attorney. Is there any hope for her? Can she argue that the bank’s security interest only attached to Video Wonder’s equity in the dog, or that until Video Wonder paid the entire debt, it had no property interest to which the bank’s floating lien could attach? This hinges on classification of the goods. Fang is not consumer goods b/c he is being used for business purposes as a guard dog for the store, so he is equipment. Automatic perfection and super priority for consumer goods PMSI, not for equipment. She should have perfected within 20 days but she did not, so she loses super priority of PMSI and then loses to Last National Bank b/c they filed earlier in time.

+UCC 2-326- Sale on Approval (impress with appearance)/ Sale or Return (in merchant’s possession until merchant can sell)- Sale on approval= Not subject to claims of buyer’s creditors, because seller owns them (2) Sale or Return= Is Subject to claims of buyer’s creditors~Problem 69-Hart Farm Equipment leased a construction backhoe to Farmer Bean for a six-month period with the understanding that Farmer Bean would be given the option to purchase the backhoe at any time during that period, and, in fact, the lease at one point called this a “sale on approval.” Farmer Bean’s equipment was already subject to a perfected floating lien in favor of Octopus National Bank. Three months after the delivery of the backhoe, Farmer Bean agreed to buy the backhoe, and Hart Farm Equipment filed its FS the next day, claiming its PMSI. Who wins the priority battle between Hart Farm Equipment and Octopus National Bank? Hart Farm Equipment wins the priority battle. Sales on Approval are not subject to claims of buyer’s creditors, but here sale on approval turns to actual sale. Hart farm had 20 day grace period for equipment to file FS and it DID, so its PMSI gets super-priority over Octopus National Bank’s interest. Hart Farm Equipment did not receive collateral until time of sale, sales on approval do not count as receiving collateral.~Problem 70-Danica trades in her SUV for a hybrid Maxwell Demon at Cash for Clunkers. Danica still owes Cash for Clunkers $15,000 on the SUV, which is now worth $10,000. Danica borrows $25,000, secured by the Maxwell Demon, from Octopus National Bank: A hybrid loan of $20,000 to pay the price of the Maxwell Demon and $5,000 to pay off her “negative equity” in the SUV. Does Octopus National Bank have a PMSI? Yes. Negative Equity, here the $5,000 used to pay the difference between what Danica owes on the SUV and what it is currently worth, is considered to be a PMSI.

-Inventory-UCC 9-324(b)- A perfected PMSI in inventory has priority over a conflicting security interest in the same inventory, has priority over a conflicting security interest in chattel


paper or an instrument constituting proceeds of the inventory and in proceeds of the chattel paper, also has priority as to cash proceeds of inventory if: (1) PMSI perfected when debtor receives inventory (2) PMSI secured party sends notice to holders of conflicting interest (3) Holder gets notification within 5 years before debtor receives possession of inventory (4) Notification states intention to acquire PMSI in inventory.

+In order to protect inventory financiers, or those who loan money for the acquisition of inventory and expect they have a floating lien on moving and changeable inventory, UCC 9-324(b) requires that, to protect them, the second creditor of later inventory must follow a notification procedure to inform the first creditor (inventory financier) of the interest.~Problem 71-The Merchants Credit Association held a perfected security interest in the inventory of Harold’s clothing store. Harold went to a fashion showing in New York and contracted to buy $4,000 worth of new clothes for resale; the seller was to be Madame Belinda’s Fashions, Inc., which took a PMSI in the clothes on December 10., the date of the sale. Madame Belinda herself wrote the Merchants Credit Association on December 11 and informed the credit manager of the sale. He protested but did nothing. Madame Belinda filed on December 11; the goods were delivered to the store on December 12.

A.) Who has priority? Madame Belinda has priority, she filed F/S within 20 days, followed proper notification procedure for PMSI in inventory (notification received within 5 years prior to delivery).

B.) Would your answer change if Madame Belinda’s notice wasn’t received until December 13? Yes, now Merchants Credit Association has priority, because the notice was not received within 5 years of the delivery (received after the delivery).

C.) If the notice was received on December 11, as above, is it sufficient to permit Madame Belinda to keep selling goods to Harold for an indefinite period thereafter or only for this one transaction? For up to 5 years according to the rules of notice for inventory based PMSIs under UCC 9-324(b).

C:Kunkel v. Sprague National Bank- Previous creditor and PMSI creditor in dispute. Inventory received in form of cash proceeds, but notice not received until later. That does not matter, debtor never had the cattle so they never had possession, thus notice was timely.

- Practical effect is must give notice prior to debtor receiving inventory. Once they are given notice, it is good for 5 years. Don’t have to give separate notice for each shipment of inventory.+UCC 9-324(g)-“Vendor Beats Lender”-For conflicting PMSIs, one which secures an obligation incurred as all or part of the price of the collateral has priority over one incurred for value given to enable the debtor to acquire rights in the collateral.~Problem 72-Hans Racing Equipment bought much of its inventory from Standard Auto Wholesales, Inc., which always took a PMSI in the goods sold to Hans and which filed a FS on the same day. Hans also borrowed money from the Matching Dishes National Bank (MDNB) to finance the purchase of inventory from wholesalers, part of which was used to pay off Standard Auto. MDNB filed a FS, claiming a security interest in Hans’s inventory. On March 28, Hans contracted to buy $3,000 in goods from Standard, making a down payment of $1,500 and giving Standard a PMSI


in the goods for the rest. On that same day, he borrowed the $1,500 down payment from MDNB and also gave the bank a PMSI in the same goods. Both creditors knew of the other, so they both sent written notice to each other. The goods were delivered to Hans on April 2. Which creditor has priority? Standard Auto Wholesales (the vendor) beats MDNB (the lender). When 2 parties have a PMSI, and one is a vendor and the other a lender, vendor beats lender.

+UCC 9-103(d)-Consignor’s interest in PMSI- The security interest of a consignor in goods that are the subject of a consignment is a PMSI in inventory.~Problem 73-Barbara Shipek was please and flattered when Tim Isle, owner of Isle’s fine Art Works, asked her if he could exhibit and sell some of her pottery. She gave him five of her favorite pieces. The next day she took a party of friends down to the store to see the display and was astrounded to learn that Octopus National Bank(ONB), which had a perfected floating lien on the store’s inventory, had foreclosed and seized everything in the store, including Barbara’s pottery. Can ONB do this to her? It depends on whether she had given proper notice to ONB and perfected her interest with FS before pottery delivered, b/c she was entitled to a PMSI in inventory. If she did, she has priority. If she did not, ONB has priority.

+Buyers— +Question of what happens when someone buys something which is already subject to a security interest.

“Generally speaking, a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors”

Exceptions to this rule:(1) UCC 9-320(a) Buyers in Good Faith - A buyer in the ordinary course

of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

(2) UCC 9-315(a)(1) Secured Party Authorization -A security interest or agricultural lien continues in collateral not-withstanding sale, lease, license, exchange or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien…

~Problem 77-Betty Consumer bought a television set from Distortion Tv, Inc., a retail store. A month later, Distortion went bankrupt, and a minor functionary from the Octopus National Bank(ONB) showed up on her stoop and asked her to turn over the set. He explained that ONB held a perfected security interest all of Distortion’s inventory and that since Distortion had not paid off qsits debts to ONB, the bank was repossessing.

A.) What should Mrs. Consumer tell the bank’s flunky? She is protected and takes the TV free of any existing security interest pursuant to UCC 9-320(a).

B.) Would it matter if she had known that ONB had a perfected security interest in Distortion’s inventory? No. Buyer’s in the ordinary course of business take free of any existing security interest even if they know about the existing security interest.


C.) Would it matter if she bought at a “Liquidation Sale” and was informed by the store’s owner that the store planned to file a bankruptcy petition the following week?” Per relevant case law, NO.

9-320 Protection of Buyers of Goods- Requirements -Buyer in the Ordinary Course of Business-Applies to a Person who, -In good faith-Without knowledge that sale violates security agreement (can still know that’s its collateral but not know it violates security agreement)-Buys in Ordinary Course-Gives new value (i.e not for old debt)-From merchant of such goods (but not farmer)-Takes possession-Security Interest created by Seller.C:International Harvester Co. v. Glendenning: Man buys 3 tractors, gets them at bargain price. Is aware of numerous improprieties, lies, and cheats in the transaction and that the transaction involves a scam of another party (International Harvester) holding Security Interest in the goods. Not in good faith so he does not receive the protections of UCC 9-320(a).+UCC 9-320(e)- 9-320(a) as to good faith and consumer buyers does not apply to security interests which have been automatically perfected by possession without an FS. ~Problem 78-Deering Milliken was a textile manufacturer. It routinely sold textiles on credit to Mill Fabrics, a firm that finished the textiles into dyed and patterned fabrics. It was Mill Fabrics’ practice to resell the fabrics to Tanbro Fabrics, a wholesaler. While the textiles were still in Deering’s warehouse, Mill Fabrics contracted to buy them from Deering, signing a SA to that effect and giving Deering a FS, which it duly filed. In turn, Mill Fabrics sold the textiles to Tanbro, which paid Mill Fabrics for them, but delayed taking delivery for a few weeks, so that the fabrics remained in Deering’s possession. Deals of this kind were common in the textile industry, and all parties knew of the others’ interest. Unfortunately, Mill Fabrics became insolvent and never paid Deering for the textiles and Deering therefore refused to deliver them to Tanbro. Tanbro sues. Who prevails? Tanbro does not receive the protections of good faith buyer because Deering’s Security interest in the goods was perfected by possession, not FS. Deering still has possession.

*Good faith is an underlying requirement of buyer in ordinary course of business UCC 9-320(a)

C:In re Western Iowa Limestone, Inc.- WIL Limestone quarry has all its limestone subject to bank’s security interest. Subsequent purchaser buys some of this limestone, takes constructive possession of it (WIL holds on to it at their quarry until buyer is ready to pick it up). WIL goes bankrupt and both bank that has security interest and buyer claim right to limestone. Iowa law says that only a buyer who takes possession of the goods from the seller can be a buyer in the ordinary course of business. Here court finds constructive possession is enough, subsequent purchaser is buyer in ordinary course of business, limestone not in possession of secured creditor (bank) like 9-320€, so 9-320(a) buyer in ordinary course of business applies.


+There are requirements buyer must meet to purchase free of a prior security interest as buyers in ordinary course of business:

(1) He/she must be a buyer in the ordinary course of the seller’s business.(2) Buyer does not buy in bulk, or take the goods to pay off an existing debt the seller

had to him anyways (buyer must really be giving “new value”(3) Buyer must buy from one in the business of selling goods of that kind.(4) Buyer must buy in good faith and without knowledge that this purchase is in violation

of others’ ownership rights or security interests.(5) Who does not buy farm products from a person engaged in farming operations.(6) The seller’s creditor must part with possession (UCC 9-320(a)).(7) The competing security interest must be one “created by the buyer’s seller.”

~Problem 79-Octopus National Bank (ONB) had a perfected security interest in all cars on Smiles Motors’ lot. Smiles owed $5,000 in past due insurance premiums to its insurance agent, Howard Teeth, who showed up one morning to buy a new car from Smiles. The president of Smiles first gave Howard a check for $5,000, but Howard endorsed it back over to Smiles when he saw a new car he wanted to buy. Is Howard a buyer in the ordinary course of business? No, no new value given. This buyer is taking the goods to pay off an existing debt the seller (Smiles) had to him anyways, and therefore he is not a buyer in the ordinary course of business.

~Problem 80-Arthur Greenbaum bought a new car on credit from Lorri’s Car City, which took a PMSI in the vehicle, perfection same by notation of its lien interest on the certificate of title, as required by state law. Arthur was a used car dealer by profession, but he had purchased the car for his own private use. Nonetheless, he frequently parked the car on his lot, and one day sold it for cash to Ann Matheson, a customer in search of a good used car. Arthur did not emotion to her that it was his personal car. When everyone learned what had happened, Ann sued Lorri’s Car City, demanding that is release the title. What result? Ann meets all the requirements of a buyer in the ordinary course, so it she gets title to the car.

UCC 9-320(b)-Buyer of Consumer Goods- Says that buyer of consumer goods (goods used primarily for personal, family, or household purposes) takes free of any security interest if the buyer buys without knowledge, for value, and primarily for buyer’s household or family use.~Problem 82-Andy Audio bought a stereo receiver on credit from Voice of Japan, Inc., an electronics store, giving it a PMSI in the receiver. Voice of Japan did not file a FS. Six months later, when Andy still owed Voice of Japan $300, he held a garage sale and sold the receiver to Nancy neighbor for $200 cash. If Andy stops making payments to Voice of Japan, can Voice of Japan repossess from Nancy? No, UCC 9-320(b) says that buyer of consumer goods (goods used primarily for personal, family, or household purposes) takes free of any security interest if the buyer buys without knowledge, for value, and primarily for buyer’s household or family use. *If, however, stereo was very expensive, she would be required to search the UCC records.~Problem 83-The Repossession Finance Company had a perfected (filed) security interest in the equipment of White Truck Ice Cream (WTIC), Inc. (the company sold ice cream to children from trucks that traveled through the city’s neighborhoods. Though technically still a corporation, WTIC was in


actuality a family business, and Bill White-Truck himself frequently drove one of the trucks. One day while making his rounds, Bill met Frank Family, a consumer who asked about buying an ice-cream-making machine for his family. Bill promptly sold him one of the machines the company owned, for which Frank paid cash. When WTIC failed to make its payments, the finance company lived up to its name and repossessed all equipment. When Frank refused to turn over the ice cream machine, Repossession sued him for conversion.

A.) Does buyer Frank Family or Repossession Finance Co. prevail? Repossession Finance Co. (Creditor) would prevail. Buyer Frank Family not buying in the ordinary course of business (9-320a) or buying consumer goods (9-320b) so he takes these goods subject to security interest.

B.) Would we get a different result if the bank’s interest were unperfected at the time of sale? Yes.

C.) Would we get a different result if the bank knew and approved of the sale? Yes, per 9-315, creditor can authorize the transfer of goods free of a security interest.

~Problem 84-Paul Pop was a rock singer to whom Octopus National Bank (ONB) loaned $8,000 so he could buy stereo equipment for his road show. On April 2, Paul purchased the equipment, and on April 10, ONB filed its FS in the proper place. However, in the interim, on April 8, Paul sold the equipment to Used Stereo Heaven, which bought with no knowledge of the bank’s PMSI. Does ONB or Used Stereo Heaven have the superior claim to the equipment? ONB does, they get a PMSI in the equipment with a 20 day grace period to file FS. Buyer does not get Ordinary Course 9-320 protection because they bought from a rock star, not a music business.~Problem 85-When farmer Bean borrowed a large amount of money from Famers’ Financing Company (FFFC), he was required to sign a SA by which he promised not to sell the crop that was collateral for the loan without the written consent of the FFFC. Nonetheless, every year he sold the crop to the same buyer and remitted the proceeds to FFFC without getting his written consent. Does the buyer take free of the security interest of the secured party under UCC 9-320(a)? Yes, buyer in ordinary course. If FFFC never protested what was going on year after year as the SA was violated, can it be said to have waived the security interest? Yes, per 9-315(a) it consented to the taking of the crops free of security interest.C:Clovis National Bank v. Thomas- Clovis National Bank loans money to Mr. WD Bunch to purchase cattle. At various points Bunch sells the cattle and remits the proceeds to Clovis National Bank. When, later, Bunch sells some cattle and does not remit payment to Clovis, Clovis sues. ***Consent may be established (to sale with buyer taking free of security interest) by implication arising from a course of conduct as well as by express words, and that consent to a sale operates as a waiver of the lien or security interest***C:Farm Credit Bank of St. Paul v. F & A Dairy- Bank loans money to Dairy famer to sell its milk. Court finds that the Dairy farmer cannot just start selling to another dealer when there is already an assignment account between the bank and an initial buyer.~Problem 87-Mr. and Mrs. Halyard purchased a large sailboat with money borrowed from the Boilerplate National Bank (BNB), which took a security interest therein and promptly filed a FS in the proper place. The Halyards sold the boat to Oil Sick Boat Sales, Inc., a used boat concern, telling Oil Slick of the bank’s interest and of the necessity of making monthly payments to the bank. Oil Slick turned around and resold the boat to Mr. and Mrs. Blink, innocent people who paid full


value for the boat believing Oil Slick had clear title. When BNB did not receive its usual monthly payment, it investigated, found the boat, and repossessed it. Has the Blink’s property been converted, or don’t they fit into UCC 9-320(a)? No, the security interest here was not created by the security interest was created by the Halyards with BNB, NOT Oil Slick, so protections of buyer in ordinary course of business does not apply.

+Article 2 vs. Article 9: The Interplay+UCC 9-110. SECURITY INTERESTS ARISING UNDER ARTICLE 2 OR 2AA security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5) is subject to this article. However, until the debtor obtains possession of the goods:(1) the security interest is enforceable, even if Section 9-203(b)(3) has not been satisfied; (2) filing is not required to perfect the security interest; (3) the rights of the secured party after default by the debtor are governed by Article 2 or 2A; and (4) the security interest has priority over a conflicting security interest created by the debtor.

~Problem 90- (Know to test understanding for Exam)Jack Gladhand was a traveling salesman. He needed new luggage to carry his samples and bought a new set from Alligator Fashions, which reserved a security interest therein and filed a FS. A month later, in the middle of a hot sales deal, Jack sold all of his samples and the luggage to Mark Impulse, a compulsive buyer. Jack told Mark (who paid cash for the goods) that the luggage was genuine alligator (a lie-he knew it was lizard). When Mark discovered the truth, he revoked his acceptance of the goods pursuant to 2-608 and claimed a security interest in the goods. On learning of Jack’s resale to Mark and the latter’s revocation of acceptance, Alligator Fashions decided to call the loan and repossess the luggage. Who is entitled to the luggage? Per UCC 9-110 and UCC 2-711(3), Mark Impulse has possession (not the debtor) and therefore his security interest has priority over the conflicting security interest created by the debtor (Gladhand with Alligator Fashions).

+UCC 2-702- Where the seller discovers that the buyer has received goods on credit while insolvent, he may reclaim the goods upon demand made within 10 days after the receipt (unless misrepresentation of solvency is made in writing in which case 10 day constraint does not apply).~Problem 91-Guy Baldwin was a successful author who decided to self-publish his latest book and market it directly to retailers. He received an order for 200 copies from Cowskin Book Chain, and he shipped off the books immediately, along with an invoice for their price. Two days later, he learned that Cowskin was hopelessly insolvent and unable to pay any creditors. What can he do? He may reclaim the goods upon demand if he does so within 10 days of receipt. Suppose that two weeks before he shipped the books, Cowskin had sent him a letter lying about its financial condition, now how long does he have to make his reclamation demand? Here the 10 day constraint does not apply and he basically has as much time as he would like so long as he got that notice within 3 months prior to delivery. C: In re Arlco, Inc.- A sellers reclamation claim to goods it has sold a debtor in bankruptcy is subject to the claim of a holder of a perfected security interest in the debtors assets and is


rendered valueless upon sale of the goods where the secured claim exceeds the value of the reclamation claim. *Secured Party can be labeled a “Good faith purchaser” under Article 9.* ***Most courts treat a holder of a prior perfected, floating lien on inventory as a good faith purchaser with rights superior to those of a reclaiming seller***~Problem 92-Octopus National Bank (ONB) held a perfected security interest in all the cattle owned by Family Farms of Iowa, Inc. (a mom and pop operation). When it became obvious that the farm was failing financially, ONB decided to pull the plug. Before it did so, it wanted to make sure that the cattle were well fed. So the ONB officer in charge of loan management called Cow Chow, Inc. and encouraged it to make another delivery of cattle feed to Family Farms, even though it had not been paid for its last two deliveries. ONB did not mention that it was about to foreclose on the fattened cattle, which it did as soon as they had consumed most of the new delivery (for which Cow Chow billed Family Farms in the amount of $10,000). Cow Chow was an unsecured creditor, which ONB knew well. Is ONB required to give Cow Chow any of the money it realizes from the foreclosure sale? Yes, he is required to give Cow Chow some of the money on a theory of unjust enrichment. Courts have held that where a secured creditor encourages a transaction and is benefitted by the transaction between its debtor and an unsecured creditor that enhances the value of the secured collateral, the secured creditor may be held liable to the unsecured creditor on the theory of unjust enrichment. *This is a very rare case, equitable subordination, used typically only in cases of clear fraud*

XII. Statutory Lien Holders+Just as the buyer in the ordinary course of business is a favorite of the law, the

repairperson in the ordinary course of business is frequently given priority over previously perfected consensual security interests.

+UCC 9-333-Priority of Certain Liens Arising by Operation of Law-A possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise

**Possessory Liens, as name implies, DEPEND ON POSSESION.~Problem 93-The repossession Finance Company (RFC) had a perfected security interest in Hattie’s Mobile Car (RFC’s lien was noted on the certificate of title as required by state law). The car broke down on the interstate one day, and Hattie had it towed to Mike’s Greasepit Garage, where it was repaired. State Law gave a possessory artisan’s lien TO REPAIRPERSONS. The garage told Hattie it was claiming such a lien, but when she pleaded with the manager, he let her drive the car to work after she assured him that she would return the car to the garage for storage every night (fortunately, she lived across the street). Repossession found out about this practice and, deeming itself insecure, accelerated the amount due and repossessed the car from the parking lot in front of Hattie’s place of business.

A.) Which creditor has the superior interest in the car under UCC 9-333? RFC does, because Mike’s possessory lien was not effective while he did not have possession of the car.

XIII. Fixtures


+Fixtures-UCC 9-313-Goods are fixtures which become so related to particular real estate that an interest in them arises under real estate law.

+Fixture Filing UCC 9-313(1)(b)=Filing of FS covering goods which are or are to become fixtures

+A security interest in fixtures is subordinate to the conflicting interest of an encumberancer or owner of real estate who is not the debtor.

Generally, mortgager/real owner of property/encumbrance’s interest trumps any security interest in fixtures, but there are some exceptions.

-perfected SI in fixture SI has priority over mortgage if-

(1) PMSI- PMSI in fixtures, and fixture filing no later than 20 days after goods become fixtures (n/a to construction mortgage), or

(2)Certain Types of Fixtures-fixtures are readily removable factory or office machines, or readily removable replacements of domestic appliance consumer goods, and perfected before became fixtures

(3) Fixture SI Filed First-SI in fixtures filed before mortgage was filed or real property Owner took control

**Construction Mortgages Usually get priority over PMSI in fixtures perfected later.***

C:George v. Commercial Credit Corp.: When personal property (i.e. the mobile trailer) becomes attached to the realty/land, it can then take on the role of a fixture.~Problem 94-As stated above, in differentiating among goods (subject to the UCC filing), fixtures(subject to UCC and ordinary realty filing) and ordinary building materials (subject only to realty filing) courts look to 3 TESTS: (1) Actual physical annexation to the realty

(2)Application or adaption to the use or purpose to which the realty is devoted(3.) Intention of the person making annexation to make a permanent accession to the freehold.

How would these be decided?-Furnace that heats the building and water-Fixture-The pipes that carry hot water through the walls-Not a fixture, building materials-A couch that has been sitting in the living room for 20 years-Not a fixture-A lavish designer bathtub, handcrafted and carefully set in the corner- Not a fixture.

+UCC 9-334(e)-Priority of Security Interest in Fixtures Over Interests in Real Property-PMSI exception (20 days after goods become fixtures grace period)-Domestic Appliances/Factory or office machines


~Problem 96-Simon Mustache decided to erect an apartment building on a vacant lot he owned, so he borrowed $4 million from Construction State Bank (CSB), to which he mortgaged the real estate “and all appurtenances or things affixed thereto, now present or after-acquired.” Simon and CSB signed the mortgage, which contained a legal description of the realty, and the mortgage was file in the real property recorder’s office. Is the mortgage effective as a Financing Statement? Yes, should be filed in the local office where mortgages are filed. Should include the name of record owner if debtor does not have interest in real property. If he buys a furnace and the seller takes PMSI in fixture, only if PMSI is perfected by fixture filing before goods become fixture or within 20 days after (20 day grace period). However, Construction Mortgages usually take priority.~Problem 97-Would your answer to the last Problem’s priority disputes change if the object in question were a refrigerator? Domestic appliances are exceptions where perfected security interest in fixtures has priority. What if it were a computer that Simon purchased for use in his office (which is located in the apartment building). Same here.C:Lewiston Bottled Gas Co. v Key Bank of Maine- Heating and A/C units as fixtures? Sought to be joined to the real estate/made a part of the real estate? *Intent of the parties does not depend on hidden subjective intent but rather is deduced from such external factors as structure and mode of attachment”

+Perfected security interest in fixtures has priority over the conflicting interest of an encumberancer or owner of the real estate where:

(a) The security interest is a PMSI, the interest of the encumberancer or owner arises before the goods become fixtures, the security interest is perfected by a fixture filing before the goods become fixtures or within 10 days thereafter, and the debtor has an interest of record in the real estate or is in possession of the real estate.

~Problem 98-Simon Mustache failed to pay his attorney, Susan Mean, so she sued him, recovered judgment, and levied on the apartment building and its contents. Will Simon’s creditors holding security interests in the fixtures prevail if they have perfected fixture filings? Yes, perfected security interests in fixtures are supreme to encumberancer or owner of real property where the conflicting interest is a lien on the real property from an equitable proceeding obtained after the fixture security interest have already been perfected. What if those creditors filed FS in all the correct places except the real estate records? Does not make a difference method of perfection does not matter when it comes to legal/equitable proceedings. ~Problem 99-After the building was complete, Tuesday Tenant moved in. Not liking the refrigerator Simon had installed, she had him remove it, and she bought another refrigerator on time from Easy Credit Department Store, which reserved a security interest therein but never filed a financing statement. Assume state real property laws permit Construction Bank’s after-acquired property mortgage to reach fixtures installed by lessees. Will Easy Credit be entitled to priority if it is forced to repossess? They would if their SI was perfected under the replacement of domestic goods (i.e. refrigerators) exception to the general real property owner over fixture SI rule. They did not file a fixture filing statement and thus they probably will lose.


~Problem 100-Assume Tuesday (last Problem) bought a trash compactor on credit from Easy Credit Department Store and had her kitchen area remodeled to accommodate it. It was installed on May 5. Easy Credit comes to you on May 7. Is it entitled to automatic perfection of its security interest in consumer goods here? No, filing is required pursuant to UCC 9-309 cmt. 3. Suppose it has a FS indicating the debtor is Tuesday. Should the statement contain Simon Mustache’s name too? Yes, Simon is the record owner.Will Easy Credit prevail over CSB if it files on May 10? Yes, within 20 days (PMSI exception)~Problem 101-Assume that Blast Home Supplies held a perfected security interest in Simon’s furnance and that this interest was entitled to priority over CSB, the real estate mortgagee. If Simon defaults on his payments, what liability does Blast have to CSB if removal (repossession) of the furnace will do $1,000 damage to the building’s structure and if to replace it Simon (or CSB) will have to spend $8,000? Secured party will need to pay for damage it caused in removing the collateral.

XIII. Bankruptcy and Article 9+Filing of a bankruptcy petition creates an automatic stay of any further creditor collection activity Trustee in bankruptcy gets a number of rights in resisting or attacking creditor’s claims.

o Strong Arm Clause -Elevated to the position of a UCC 9-317 judicial lien creditor upon the filing of bankruptcy, which gives avoidance rights over other unperfected security interests.

Strong-arm power to void unperfected security interests PMSIs that haven’t been perfected yet will not lose their interest if they file

within 20 days Recover preferential transfers sec. 547 (90 days before the debtor filed for BK

and where he paid off one creditor, another creditor who didn’t get paid off can force those assets to be returned by way of involuntary BK)

Fraudulent Conveyance sec. 548 (1yr. pre-BK)(1) S544: Trustee as Lien Creditor and Successor to Certain

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any other creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-

1. A creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such a credit, a judicial lien on all property on which the creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists.

2. A creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not a creditor exists; or

3. A bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at


the time of the commencement of the case, whether or not such a purchaser exists

(b.) Avoidances- The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable or not allowable under s502.

~Problem 108-Lew Sun, a Korean, moved to Chicago and opened a Korean restaurant called “Seoul Food.” He had many unsecured creditors (food sellers, linen providers, etc.). On April 17, he applied to the International State Bank for a loan of $10,000, and signed a security agreement in favor of the bank, secured by an interest in Sun’s equipment. On April 18, one hour before the bank filed its FS, Sun files for bankruptcy.

A.) If no new general creditors came into existence between the loan on April 17 and the petition filing on April 18, can the trustee avoid the bank’s security interest per 544a? Yes, the security interest was not perfected at the time of bankruptcy, so the Bank is still an unsecured creditor and the trustee avoids banks interest.

B.) What result if the bank had filed its financing statement two seconds before the bankruptcy petition was filed? Then the bank is a secured creditor and thus he cannot avoid the bank’s interest, the bank wins. However the trustee can still try and find something wrong with the perfection (filing in the wrong state).

C.) If the bank’s interest had been a PMSI, would the filing of bankruptcy have cut off the normal 20-day grace period? No, PMSI 20 day grace period still applies. Why? Because we want people to sell goods on credit, and we don’t want everyone sellers to delay transactions by having to file first then going through with the sale.

(b) Preferences +A “preference” is a transfer” (including the creation of a security interest in the debtor’s property) used by the bankrupt to pay off a pre-existing debt in the days leading up to bankruptcy

-Allows unsecured creditors to get more $$$ than they would in a traditional bankruptcy proceeding. This would be unfair to secured creditors because the unsecured would be racing to get their money out before BK filing.

-SOLUTION: Trustee may recover transfer of debtor’s property of preferences

-Criteria: (1) To or benefit of Creditor (Did you transfer money to a creditor because they were a creditor?)

(2) For an account of an antecedent/pre-existing debt owed by the debtor before such a transfer was made,

(3) Made when the debtor is insolvent (4) Made on or within 90 days before the filing of the bankruptcy

petition,-Exceptions Exchange for new value Ordinary course payment (routine, non-preferential) PMSI 30 day grace period (don’t worry about this one) Followed by unsecured new value


Inventory: Looks at improvement between status of 90 days out compared to day of bankruptcy. No improvement in status preBK then not a preferential transfer.

+Preferences dealt with in s547 of Bankruptcy Code.~Problem 109-On June 8, Business Corporation borrowed $80,000 from Octopus National Bank (ONB) and gave the bank a security interest in its equipment (worth $100,000). On July 18, ONB filed a valid FS in the proper place. The next day, Business Corporation filed its bankruptcy petition. Can the trustee destroy ONB’s secured position and turn it into a general creditor under the theory that the delayed perfection is a preference? No, because at no point during 90 day period was amount of indebtedness greater than worth of collateral. If ONB had perfected on June 8 but the debtor made some extraordinary payments to ONB in the 90 day period before the filing the petition, could the trustee use s547 to make ONB pay the money back into the estate? No, because amount of debt still not greater than amount of collateral. Finally, again assume that ONB had perfected on June 8 but that the collateral was only worth $60,000 (the debt was $80,000 so the bank is undersecured). Would routine payment s made to service this debt be preferential? Yes, up to the extra $20,000 ~Problem 110-On November 1, the Piggy National Bank loaned Kermit $1,000 to buy a banjo he wanted for his nightclub act, making him sign a SA and a financing statement. He bought the banjo on November 15, and the bank filed its FS on December 5. Kermit filed his bankruptcy petition the next day. Is the transfer of the security in his banjo a preference? If the bank’s security interest was not of the PMSI variety but rather was simply a floating lien covering all after-acquired equipment, what result using the same dates?

~Problem 111-In early 2013, John carter borrowed $1,000 from the Barsoom World Bank; it was a signature loan (i.e. no collateral). On September 25, 2013, John made a $500 payment to the bank (assume that this payment is not in the ordinary course), but on October 4 he borrowed $300 more from the bank, giving it a security interest in his sword collection. The bank never filed a financing statement , and John filed a bankruptcy petition on November 8, 2013. How much, if anything, can the bankruptcy trustee recover from the bank? He can collect $200 (200 in preference).

+The Floating Lien in Bankruptcy-s547c basically says that for floating liens/after acquired property clauses, you compare the collateral/debt ration 90 days before the filing and then at the filing. If debt worth more than collateral at some point, then there is a preference.~Problem 112-The Last National Bank had a perfected security interest in the inventory of the Epstein bookstore, which owed the bank $20,000. On March 1, the inventory was worth $8,000. On May 28, when Epstein filed for bankruptcy, the inventory was worth $20,000 because the store had purchased several new shipments for cash in the interim. What can the trustee do about the bank’s claim? He can get $12,000 back because that is preference. What if the bank first loaned Epstein $20,000 on May 1, when the inventory was worth $12,000? He can get $8,000 back.

In re Smith’s Home Furnishings, Inc.


In order for the trustee to be able to lay a claim for a preference, ***the trustee must show that the amount of indebtedness was greater than the amount of the collateral at some point during the 90 day preference period***

+ Fraudulent Transfers Trustee may always avoid transfers which are fraudulent. 2 basic types (1.) where no reasonably equivalent value in exchange given and (2.) where there is actual intent to defraud the debtor’s creditors.

Problem 113When Arnold Austin retired as international diplomat, he was famous but much in debt . He decided to make money by writing his memoirs, which were certainly best-seller material. He gave a security interest in the right to receive royalty payments from his publisher to his wife as collateral “for the many debts I owe her,” and she filed a financing statement in the proper place five months before Arnold filed his bankruptcy petition. Can the trustee avoid the security interest? At common law, one of the badges of fraud was a voluntary transfer made to the debtor by a family member). No, there is likely intent to defraud debtors here because, since John’s wife is perfected and outside the 90 day window, she would likely receive all the royalty payments and Arnold’s creditors would have access to none of them.

C:Aptix Corporation v. QuickTurn Design Systems, Inc.-Use litmus test for fraudulent transfer, “badges of fraud” with 3 main badges (1) Whether the transfer or obligation was to an insider (2) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suite (3) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

XIV. Proceeds

Proceeds includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. 9-102 Insurance payable by reason of loss or damage to the collateral is proceeds. Money, checks, deposit accounts, and the like are “cash proceeds”, All other proceeds are

“non-cash proceeds”. 9-315a Subject to other provisions, a security interest continues in collateral notwithstanding a sale,

exchange or other disposition thereof unless the secured party authorized the disposition free of the security interest, and attaches to any identifiable proceeds

Priority rules are the same.

Problem 114When Rosetta Stone bought a new car made from Champollion Motors, Inc., she traded in her five year old car, made a $200 down payment by giving the dealer her check, and signed a promissory note for the balance payable to the dealership. Rameses National Bank had a perfected security interest in Campollion Motors’ inventory.


A.) Does the security interest continue in the car once it is delivered to Ms. Stone? No, she is a buyer in the ordinary course of business as in UCC 9-320(a) so she takes it free of any security interest.

B.) Under 9-315(a) the bank’s security interest will continue in proceeds. What are the proceeds of the car sale? The proceeds of the car include the check, the promissory note, and the trade in car (whatever is acquired from the sale)

C.) Is the attachment of the creditor’s security interest in the proceeds automatic, or must they be claimed in the original security agreement? The security interest in the proceeds is automatic so long as there was an SI in the collateral to begin with.

C: Farmer’s Cooperative Elevator Co. v. Union City BankLivestock are not proceeds as to security interest on grain sold, they are not “products of or co-mingled with the collateral to extend far enough to count them as proceeds.Problem 115Octopus National Bank (ONB) makes a loan to Dairy, secured by Dairy’s equipment. The equipment is then sold to Cheeseworks, which later sells the equipment to ButterCups. Is the money that Cheeseworks receives as proceeds of the sale subject to ONB’s security interest?Yes, the money that Cheeseworks receives as proceeds is subject to ONB’s Security Interest. Collateral was still subject to ONB’s Security Interest when Cheeseworks bought it from Dairy, and “a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien.

+Insurance Claims for the Diminution in Value of Collateral Considered ProceedsC: Brenda P. Helms v. Certified Packaging CorporationCollateral is destroyed by fire, and an insurance claim arises for the replacement of the collateral. ***If a suit against someone who steals or damages collateral eventuates in an award measured by the diminution in the value of the collateral, the award, like an insurance payment for damaged collateral, constitutes “proceeds” of the collateral and is therefore covered by the lender’s security interest. ***The claim of a secured creditor to the proceeds of collateral cannot exceed the value of the collateral.Problem 116Farmers’ Friend Credit Association loaned Farmer Bean money secured by his crops. In 2011 the federal government paid Farmer Bean not to grow any crop that year. Is the government payment the “proceeds” of the crop? Yes or No, the Credit Association’s loan may/may not count as proceeds of the crop.Problem 118Shadrach Heating and Air Conditioning, Inc. borrowed $15,000 from the Meshach Museum Financing Association (MMFA) in order to purchase a new furnace for its own home office. When one of its important clients needed an identical furnace in a hurry, Shradach Heating sold its own new furnace, which it installed in the client’s place of business. The $17,000 check it received in payment was put into Shradach’s checking account (balance prior to this deposit:$81) with the Abednego State Bank. Thereafter, Shadrach made one further deposit of $5,000, followed a week later by a withdrawal of $5,040.

A.) Are its proceeds from the furnace sale still in the bank accounts? Yes, it really does not matter that these funds were co mingled. Proceeds are still identifiable. *A


security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof by the debtor thereof unless his action was authorized by the secure party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received from the debtor.*

B.) If Shadrach Heating defaults on its loan repayment to MMFA and also on an unsecured promissory note currently held by the Abednego State Bank, can the bank exercise its common law right of setoff and pay itself out of the checking account, or is the setoff right junior to MMFA’S security interest in the proceeds? The bank can pay itself directly out of the checking account, it is allowed to exercise the right of setoff against the other secured creditor (here, MMFA).

C.) What can a creditor claiming an interest in proceeds do to protect itself from setoff by the debtor’s bank? It could take control by becoming the bank’s customer.

C: HCC Credit Corp. v. Springs Valley Bank and Trust Co:A receipt of payment made “in the ordinary course “by the debtor takes that payment free and clear of any claim that a secured party may have in the payment as proceeds.” Ordinary course determined by (1) the extent to which the payment was made in the routine operation of the debtor’s business and (2) the extent to which the recipient was aware that it was acting in prejudice of the secured party.(Did the recipient payee know that the payment was in violation of a third party’s security interest/was it reckless?)

+UCC 9-332Transferee of money or funds from deposit account takes free of security interest, unless colluding with the debtor. Creditor has a big risk if the debtor keeps money in a bank account. They can lose security from an unsecured creditor for a payment. In practice they put the money in a lockbox.

Problem 119Octopus National Bank (ONB), with a perfected security interest in Waterloo’s checking account, smugly enjoys its priority over competing unsecured creditors. Waterloo loses a court case to Agincourt and pays the judgment from the checking account. Can ONB recover its collateral from Agincourt? No, so long as Agincourt was not in collusion with Waterloo (which it was obviously not), it is protected as transferee of funds and takes free of creditor’s security interest in the account. ONB loses and Agincourt wins.

+UCC 9-315(d)-When automatically perfected security interest in proceeds becomes unperfected

-A perfected security interest in proceeds becomes unperfected on the twenty first day after the security interest attaches to the proceeds unless:

a.) a filed financing statement covers the original collateralb.) The proceeds are collateral in which a security interest may be perfected by

filing in the office in which the FS has been filed, ANDc.) The proceeds are not acquired with cash proceeds

Same thing as above but in his slides• SI in proceeds becomes unperfected 20 days after receipt by debtor, unless• 1. filed for collateral and could have filed for proceeds category (and not acquired for

cash proceeds),


• 2. identifiable cash proceeds, or• 3. security interest is perfected < 20days,

Problem 121On August 2, when the filed financing in favor of the Last National Bank covered “all business machines” the debtor engaged in the transactions listed below. Decide for each transaction if the bank should take action before August 22 or if the FS is sufficient as filed:

A.) The debtor traded a computer for another computer. You are fine beyond 21 days ((1)original FS (2)proceeds (computer) can be filed by FS (3)not cash

B.) The debtor traded another computer for a painting that hung in the office.You are fine beyond 21 days (1) Original FS (2) Proceeds (painting) can be fled by FS (3) Not cash

C.) The debtor traded a duplicating machine for a used car (and state law requires a lien interest in a vehicle to be noted on the certificate of title as the sole means of perfection).You are not fine, must re-file (1) Original FS (2) Proceeds (used car) CANNOT be filed by FS (3) Not cash

D.) The debtor sold a calculator to a friend for cash and used the cash to buy a painting that same day. Not fine, proceeds acquired with cash proceeds

E.) The debtor sold an adding machine for $500 and put the cash in a bank account at a different bank, on August 2, that bank exercised its right of setoff on the account. No, cash proceeds.

F.) The debtor sold a coffee maker for $200 and gave the money to a Salvation Army Volunteer that same day. No, cash proceeds, cannot be filed.

XV. Default

Problem 123Andy Doria was the owner of 100 shares of Titanic Telephone, which he pledged to the Morro Castle National Bank as collateral for a $10,000 loan. At the time of the pledge, the stock was selling for $100 a share. The security agreement was oral, and the bank filed no FS.

A.) If the stock began to fall in value and if on November 4, when it was selling at $80 a share, Andy called the bank and told the bank to sell, is the bank responsible if it does not and the stock bottoms out at $1.50 a share? The bank possessing the collateral should use reasonable care in preserving the collateral UCC 9-207, so it could be responsible.

B.) Would it help the bank’s position if the pledge agreement contained a clause saying that the bank was not responsible for its own negligence in dealing with the stock? No, this standard of reasonable care CANNOT be disclaimed (UCC 1-302).

C.) Andy’s dealings with the bank became more complicated, and eventually the bank held, as pledgee, Andy’s stocks in five different companies. One of these, Lusitania Foundry, offered a stock split option that had to be exercised by December 31, so Andy wrote the Morro Castle National Bank and, explaining that his records had become confused, asked the bank how many shares of Lusitania Foundry it held. The bank replied that it possessed 50 shares (this was an error, it actually held 150). Andy tendered 50 shares of equivalent stock to the bank in exchange for a return of 50


shares of Lusitania Foundry, on which he then exercised the stock option, which proved very profitable. On January 3, Andy learned he owned 100 more shares that the bank held, it was too late to take the stock option on these shares. Does Andy have a cause of action against the bank under 9-207? Under 9-210? What damages can he recover? Under 9-210 the secured party must comply with a list of collateral and authenticate it, so they would ostensibly be liable.

D.) May a creditor in possession sell the collateral, in the absence of default or authorization in the security agreement? No, to sell it like this would be a violation of the creditor’s duty to keep and secure the collateral.

+ UCC 9-207 Collateral damaged while in possession of Secured Party -The risk of accidental loss or damage to the collateral while in the possession of the secured party falls on the debtor (UCC 9-207).Problem 124Mazzie Minkus borrowed $2,000 from the Mount Brown State Bank and, as collateral, pledged to the bank her stamp collection (valued at $2,000). She used the money for a South American vacation. While she was away, the bank, which was located in an unstable geological area, was destroyed in an earthquake. The stamp collection went with it. Fortunetley, the bank was fully insured by a policy with the Gibbons Insurance Company, which, inter alia, paid the bank $2,000 for the loss of the stamp collection. Gibbons then notified Mazie that she should pay the $2,000 debt to the insurance company, which was using the doctrine of subrogation to step into the shoes of the bank. Need she pay? She should pay, because the risk of accidental loss or damage to the collateral while in the possession of the secured party falls on the debtor (UCC 9-207).

+ Default- No specified definition of default, it usually must be specified by the parties in the actual security agreement.

+ UCC 1-309 Acceleration of Payment -When a secured party has any reason in good faith to feel unsecure or to feel like its ability to get paid is at risk, it may accelerate payment due. *Usually, while you do not need NOTICE for acceleration of payment, you might need it for repossession-if there is a clause like “upon demand”, might give rise to inference notice is necessary before repossession.Problem 125When Mr. and Mrs. Bankruptcy bought a mobile home from nervous Motors, Inc., they signed a PMSI in favor of the seller that contained an acceleration clause identical to the one above. Which of the following events, in your opinion, is sufficient to trigger proper use of the clause?

A.) A very bad financial quarter for Nervous Motors, Inc. NOB.) A serious drop in the state of the economy NOC.) Knowledge that the Bankruptcys have been talking to a lawyer.NOD.) A report (which is false) that the Bankruptcys have failed to pay their grocery bills for

the past two months.NOE.) An anonymous phone call that states the Bankruptcys are getting ready to move the

mobile home to Mexico NO, good faith belief.F.) The confiscation of the Mobile home and the arrest of the Bankruptcys for possessing

marijuana. Yes, Collateral no longer even in their possession


G.) If signed a demand promissory note allowing creditor to call on loan anytime he wants, does this run up against good faith for acceleration of payments? Agreements for creditors to call upon loans anytime are fine, acceleration/good faith clause applies only to debts which become due at a later date.

C:Klingbiel v. Commercial Credit CorpCar was respossed without any notice. Court says usually, while you do not need NOTICE for acceleration of payment, you might need it for repossession-if there is a clause like “upon demand”, might give rise to inference notice is necessary before repossessionProblem 126Natty Birdwhistle bought a car with money borrowed from Carpe Diem Finance Company (which perfected its interest in the car). The security agreement provided that “time was of the essence” and that the acceptance by the finance company of late payments was not a waiver of its right to repossess. Natty always paid 10 to 15 days late. One month, Carpe Diem Finance had enough, and it sent a man out who took the car (using a duplicate set of keys) from the parking factory where Natty worked. Has a default occurred? No, a default has not occurred. The acceptance of late payments means that the creditor has no reason to suddenly feel insecure in good faith, and acceptance of late payments serves as waiver in spite of that disclaimer.

+Repossession and Resale- UCC 2-609 authorized the secured party to skip going through judicial process and repossess the collateral on debtor’s default if this can be done without “breach of the peace.”C:Williamson v. Fowler Toyota, Inc.

***This case holds that the duty not to breach the peace is non-delegable to a 3rd party, i.e. you cannot have someone else re-possess for you and then say it is their responsibility, not yours, to not breach the peace******Court also says that the increased breaking of gates/fences ratchets up the extent/degree that the peace is breached.Problem 127Don Jose was in charge of repossession for Carmen Motors. One Monday morning the dealership told him that cars owned by four debtors (Escamilio, Micaela, Zungia, and Morales) were to be picked up because the buyers had missed payments.

A.) Is Carmen Motors required to give the debtors notice that they are in default before possessing? Notice is not required for repossession under UCC 9-609.

B.) Don Jose breaks Escamilio’s car window to get in, breach of peace? No, not technically, no reaction of debtor/likelihood of inciting violence. No clear lack of consent. Can go both ways.

C.) Don Jose shows up with an off duty police officer, tells Michaela he is repossessing the car, and she says nothing. Can go both ways. This is constructive force, which also constitutes breach of the peace, but moreover you cannot use a police officer for repossession in a non-judicial context.

D.) Don Jose goes into Zungia’s garage with the help of a locksmith; contract says he can enter property to get property. Professor believes breaking in tends to be a breach of peace. Yes, waivers can be effective to allow for repossession (without breach of peace).

E.) Morales takes the car in for repairs after being lied to that it is being recalled, repair shop led by Don Jose then just refuses to give the car back. Yes, DECEIT a big factor in breach of peace, clear deceit here.


C:Hillman v. CobadoMan repossessing cattle ignored express please and non-consent of cattle owners NOT to repossess and encouraged violence/acts of violence with his words, gestures, and actions, and thus BREACH OF PEACE DID OCURR.Problem 128Octopus National Bank (ONB) financed Mary Melody’s purchase of a new car, in which it perfected its security interest. The loan agreement provided that, on default, the bank had all rights listed in Part 6 of Article 9of the UCC and that the parties agreed that the bank would not be liable for conversion or otherwise if there were other items in the car at the time it was repossessed. Mary missed a payment, and ONB’s agent took the car in the dead of night from the parking place at her home. She protested the next day, claiming that her golf clubs were in the trunk. ONB looked but couldn’t find the clubs. When she sued, ONB defended on the basis of the security agreement’s exculpatory clause. Is it valid? No, the exculpatory clause is not valid. To allow the creditor to convert the property of the debtor which is not part of the security agreement would be unfair and inequitable regardless of what the language of the contract says. If ONB finds the clubs and then returns them promptly on her demand, is the bank still guilty of conversion? No, it can hold them subject to her written demand without liability.Problem 129Chambers quietly repossesses a Ford Expedition, which was sitting with its motor running on the street. Less than a minute later, he realizes there are two children in the backseat, so he rapidly and safely returns them and the vehicle to their parents. Is Chambers in violation of Article 9? No, no breach of peace because Chambers did nothing to incite violence, cause a scene, quickly returned children. Not in violation.Problem 130Octopus National Bank declares default on Napoleon’s car loan and Napoleon Shows up at ONB to surrender the vehicle. May ONB decline to take it and instead sue Napoleon for the debt? Yes, ONB may, but is not forced to, take repossession of the vehicle and/or sell it. It does not have to. +Once bankruptcy petition has been filed, AUTOMATIC STAY immediately in effect and bars creditors from trying to repossess. +After creditor gets collateral, may do nothing (strict foreclosure) or choose to resell. If he chooses to resell, must give (1) NOTICE per 9-611 and (2) sale must be COMMERCIALY REASONABLE per UCC 9-610.Commercially Reasonable: Sell it in a way someone in that business would sell it in conformity with reasonable commercial practices. Recognized marketplace.+ Creditor must account for proceeds and give surplus to debtor or other creditors, and may get deficiency from debtor.+Good faith etc. buyer of sale by creditor takes free of interests of debtor and junior creditor. This is unlike real estate foreclosure where buyers don’t take free of interests until court confirms sale.+Repossesion: Unless otherwise agreed, creditor may take possession of, or disable, collateral (no notice required, cannot breach the peace, but can use court) 9-609 or notify account debtors to pay creditor 9-607.

Problem 131


Wonder Spa gave Antitrust National Bank (ANB) a security interest in its accounts receivable and chattel paper in return for a loan. When Wonder Spa missed two payments in a row, ANB notified the spa’s customers that future payments should be made directly to the bank. Does the bank have this right? Yes, may liquidate what becomes due on the collateral or notify person obligated on collateral to make payment for benefit of secured party. If the spa stops opening its doors, need its former customers keep paying ANB? No, consumer is protected here.Problem 132After Nightflyer Loan Company had possessed Lynn Brown’s car, it decided to advertise it for bids in a local newspaper. Is this a private or public sale? Public sale, public has a meaningful opportunity at bidding. How much in advance of the resale must she be given notice? A reasonable time before the actual disposition is scheduled to take place. What should the notice say? Must describe debtor, creditor, method of intended disposition, time and place of disposition, etc. After the resale, Nightflyer simply sent out a message saying the amount she now owed was $3,200. She is unsure about how Nightflyer came up with this figure. What are her rights here? She deserves to have it adequately explained to her. The price obtained at the resale seems suspiciously low to her. How relevant is that? Just because the creditor could have gotten more at the disposition does not make it commercially unreasonable. She suspects that the reason the sale brought so little is that the only buyer was Nightflyer Loan Company itself. Can they do that? Yes, they can if it is commercially reasonable. If she succeeds in reducing the amount she owes, can she also get actual damages for the harm they have caused her? No, she may only recover damages to the extent of her surplus, not Nightflyer’s noncompliance with Article 9. If the car were to be sold in an internet auction, would it be sufficient to give notice of the Web address of the auction and the physical address of the auction company? Yes, this is sufficient.Problem 133Mr. and Mrs. Miller decide to open a restaurant, for which purpose they need $80,000. They went to Apocalypse National bank, which agreed to loan them the money if (1) they got a surety (2) signed an agreement giving the bank a security interest in the restaurant’s equipment and inventory and (3) pledged to the bank additional collateral having a value of $20,000 or more. The Millers got Mrs. Miller’s father (Mr. Stuhldreher) to sign as a surety, they signed the SA, and they borrowed $20,000 worth of stock from Mr. Miller’s cousin, Mr. Layden. The stock was registered in Layden’s name at the time it was pledged to the bank, but the bank had it registered in the bank’s name so that it could be sold easily in the event of default. The bank did, however, file its FS in the appropriate office. Subsequently, the Millers borrowed another $5,000 from Northbend Credit Union, which also took a security interest in the restaurant’s equipment, and filed a FS. The restaurant then became involved in an unfortunate food poisoning accident, and business fell off dramatically. The Millers missed two payments on the loan. The bank sent its collection agent, Mr. Crowley, out to the restaurant, and he repossessed the assets he found there. Mr. Crowley sent a written notice to Mr. Miller (who he knew was actually now moved into a hotel), telling him that the stock would be sold on the open market (no specific date given) and that the restaurant equipment would be sold at public auction on December 1 at the offices of the Crowley Collection Agency. Crowley phoned Mr. Stuhldherer (the surety) and told him the same thing. He sent a written notice to Mr. Layden (the stock owner” but the letter came back as “MOVED- No Forwarding Address”. If asked, either Mr. or Mrs. Miller would have supplied Crowley with Layden’s new address. Crowley sold the stock for $10,000 on the open market


(that was the current selling price) and auctioned off the restaurant equipment on December 1st for $500(only one bid was received-Crowley himself was the bidder, he later resold the equipment to other restaurants for $10,000. Crowley turned over the proceeds from the two sales ($10,500 total) to Apocalypse National Bank, which then brought suit against the Millers and Mr. Stuhldrer for the deficiency.

A.) Is a surety entitled to notice under? That is, is he a debtor? Yes, a surety is entitled to notice. Was Mr. Layden a debtor too? No, he is a secondary obligor.. Does the oral notice to Mr. Stuhlderer satisfy 9-611? It must be authenticated.

B.) Were any parties entitled to notice of the stock sale? Debtor, secondary obligor, AND other party w/ security interest in the collateral.. How about the sale of the equipment? SAME (SO long as non-consumer goods). If no notice was sent to Northbend Credit Union before the equipment was sold, did Mr. Crowley himself take free of security interest when he bought the equipment at the foreclosure sale? Yes, any subordinate SI gets wiped out following the foreclosure

C.) Does 9-611 require the creditor to whom a notice is returned by the post office to take further steps to notify the debtor? No, this is a matter of “judicial resolution”

D.) If the restaurant equipment is also named as collateral in a junior filed FS, must the bank notify that’s secured party of the resale? Yes, since it is not consumer goods it must inform other security interest holders.

E.) Who has the burden of proof as to the “commercial reasonableness” of the sale? The secured party has the burden of proof as to commercial reasonableness of the sale.

F.) If Crowley had given the equipment sale no publicity, has a public sale occurred and, if so, was it commercially reasonable? A private sale has occurred b/c the public had no “meaningful opportunity” to purchase the goods, but a private sale can still be commercially reasonable.

G.) When a secured party repossesses goods and sells them at a foreclosure sale, will this give rise to article 2 sales warranties being made to the purchaser at the sale? Yes, these warranties are all included.

C:R & J of Tennessee, Inc. v. Blankenship-Melton Real Estate(1) Notice- A person notifies or gives notice by taking any steps reasonably required to

inform the other in ordinary course whether or not such other actually comes to know of it. A person receives notice when it either comes to his attention or his delivered to his place of business or where the contact was done up.

(2) Commercially Reasonable-Disposition must be made in keeping with prevailing trade practices among reputable and responsible businesses and commercial enterprises engaged in the same or similar business.

Problem 134The Bunyan State Bank held a perfected security interest in the logging equipment of the Blue Ox Timber Company. When Blue Ox defaulted on its loan repayment, Bunyan repossessed the equipment. The sale was held the next day in the middle of a snowstorm. The equipment sold for very little (there was only one bidder, and he complained that it was hard to know the condition of the equipment because it was so dirty, being covered in mud from the backwoods. Bunyan sued Blue Ox for the amount still due. Answer these questions:

A.) Was the notice period too short? Not reasonable notice.


B.) Is the secured party required to wash the collateral prior to sale? Yes, it may have to to prepare the goods in advance of the sale.

C.) Did it violate 9-610b to hold the sale in a snowstorm? It is not commercially reasonable to hold the sale in a snowstorm.

Problem 135When you explained to your client, Repossession Finance Company, all the rights debtors have when the creditor seizes the collateral and resells it, the president of the company asked you to draft a clause in the security agreement waiving these rights. How should you do this? List all applicable aspects. Can guarantors (as opposed to the primary debtor) wave these rights? They cannot wave these rights.Problem 136Façade Motors granted a security interest in its inventory to Octopus National Bank (ONB) which duly perfected it by filing a financing statement in the proper place. Subsequently, Façade Motors granted an identical security interest to Nightflyer Finance Company to get short-term credit. When façade failed to repay the second debt, Nighflyer repossessed the inventory and sold it. Must it somehow account to ONB for the proceeds of the resale? Does the buyer at the resale take free of the security interest of the senior creditor? If it does not know of the senior SI, it is clear. If it does that is an issue.Problem 137Façade Motors repossessed the car that Portia Moot used in her law practice but failed to send her any notice of the foreclosure sale, which brought only half the amount she still owed on the car. May it still sue her for the deficiency? It may, but it is limited to anything beyond what it would have gotten if it did it properly. What are Portia’s rights(9625). She could get damages. If Portia had purchased the car for personal use what is the rule? Court must apply established approaches as to consumer transactions.C: Coxall v. Clover Commercial Corp.-11 days not considered enough notice for disposition of collateral, “lower price than you could have gotten” not in and of itself commercially unreasonable, but makes you highly suspect/alert

+Redemption is a key right in equity for defaulting debtor to recover the collateral by curing the default until the creditor has sold the collateral as a binding contract. Because it’s just stuff (not a house).

-Must pay all obligations secured-Must act before collateral sold, under contract-Pay all debts that are due, including what has been accelerated.-Unmatured debt (no right to accelerate debt upon missing payment): collateral still secures and don’t have to pay full amount.

Problem 138When Paul Morphy borrowed $2,000 from the Lasker State Bank in order to finance a trip to Iceland, the bank made him sign an agreement giving the bank a security interest in Paul’s private yacht. He agreed to repay the loan at a rate of $200 a month; He took the trip and on his return made the first payment on time. He failed to make the second payment on the due date, and the next day the bank repossessed the yacht. Paul raced to the bank with the late payment. He had $200 in cash, which he tendered. The bank refused to take the money. The bank’s loan officer, a Mr. Andersen, pointed to an acceleration clause in the security agreement that made the entire amount due if a payment was missed. Anderson demanded the total unpaid balance. Need


Paul pay off everything? Yes, for redemption, especially where there was an acceleration clause, everything must be paid off at once/entire balance must be tendered.

+Strict Foreclosure is when the creditor repossesses the collateral (personal property) and simply keeps it in satisfaction of the debt. No deficiency is sought. Not a right creditor has but can propose to do, if debtor refuses cannot keep.-Creditor may offer to keep the collateral in satisfaction of the debt.-If debtor or others with interest in collateral do not object within 20 days of when offer sent, it is effective.

+If debtor has paid 60% of price/debt where collateral is consumer goods will not allow strict foreclosure. This is to prevent creditor from realizing a windfall gain by foreclosing on property that is substantially more valuable than the remaining debt. Creditor must sell within 90 days, or liable in conversion or 9-626 (unless debtor waives after default), creditor will recoup its debt from the proceeds of that sale, returning all excess to debtor.

Problem 139Art Auctions, Inc. sold Dudley Collector a $5,000 painting by Smock Pallet, a famous artist. Dudley paid $1,000 down and agreed to pay over $1,000 a month thereafter. The finance charge was $151.20; the annual percentage rate was 18%. The contract contained a clause saying that in the event of default, AAI could repossess the painting and keep it without reselling it, or, at its option, could resell it and sue for the deficiency. Dudley made three more payments, and then missed the last one, being temporarily short of funds. AAI, without notice, sent one of its agents to Dudley’s home. Dudley’s teenage son let the agent in, and he simply removed the painting from the wall and walked out saying “Thank You.” Dudley immediately tendered $1,000 to AAI and demanded the painting. AAI refused (the painting is now worth $7,000). Four months later, Dudley filed suit. What is the basis of his cause of action, and to what relief is he entitled?9620e. He could demand Art Auctions dispose of the painting because where 60% of price is paid in consumer goods the creditor must dispose of the goods and then he would be entitled to surplus. If Dudley had made only one payment and then defaulted, causing AAI to repossess, could AAI have sent him a proposal that it would keep the painting and forgive half the remaining debt only? 9620g No, partial satisfaction is not allowed.

Problem 140When repossession Finance Company declared a default and repossessed all the office equipment of attorney Portia Moot, as allowed by the security agreement, the company did nothing with the collateral except let it sit in a storage room for 17 months. Finally, it conducted a resale with appropriate notices and sued Portia for the deficiency. She defended by arguing that actions speak louder than words and that, in effect, by doing nothing for such a long period, the finance company had constructively elected strict foreclosure and had forfeited any right to a deficiency. Is this correct? No, this is not correct, the secured party does not accept the collateral without an authenticated agreement, and there is no such thing as an implied strict foreclosure following a delay with no authenticated agreement. C:Reeves v. Foutz & Tanner, Inc.


Some courts find that where a notice of retention as to strict foreclosure is sent, creditor cannot then just go ahead and sell the goods in the ordinary course.

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