Fall 2001: Professor Zinnecker



UCC (Uniform Commercial Codes) “CODE”

·         Since 1940s

·         11 Articles at present

·         State law and is interpreted by state courts

·         Drafters of UCC (comprised of judges, lawyers from all states)


Article 1: General Provisions

·         §1-102(1): This Act shall be liberally construed and applied to promote its underlying purposes and policies.

·         §1-103: Supplementary General Principles of Law Applicable

·         Applies to ALL articles of the UCC (§1-101, §1-102, §1-103)

·         §1-201 Definitions apply throughout the Code

·         §1-203 Obligation of Good Faith (§1-201-19) Non-Waivable (§1-102)


Article 2 --- Sales of goods

Article 2A --- Lease of goods

Article 3 --- Negotiable Instruments

Article 4 --- Bank Deposits and Collections

Article 4A --- Funds Transfers

Article 5 --- Letters of Credit

Article 6 --- Bulk Transfers and Bulk Sales

Article 7 --- Documents of title

Article 8 --- Investment Securities

Article 9 --- Secured Transactions *

Article 10 --- Effective Date and Repealer

Article 11 --- Effective Date and Transition Provisions



·         What we are primarily concerned with in this class.

·         Promulgated the Revised Article 9 (effective July 1, 2001):

-ALI-American Law Institute

-NCCUSL-National Conference of Commissioners on Uniform State Laws

·         Primary source of state law regarding obligations secured by interest in personal property and fixtures,

so-called “Asset-Base Financing”

·         Focus is on “secured financing”

·         Applies to secured transactions involving deposit accounts, commercial tort claims and interests in certain insurance policies

·         In a secured credit transaction, the creditor’s right to payment and ability to collect are safeguarded by an interest in property called collaterals (cannot be realty assets); §9-102(12) and §9-105(1)9c)

·         Modern law of ST distinguishes between obligations secured by interest in real estate and obligations secured by interest in personalty and fixtures.

·         §9-109(a)(1) General Scope of Article 9; a transaction, regardless of its form, that creates a security interest in personal property or fixture by contract


Bankruptcy Code, 11 U.S.C. §101 is the principal source of federal law governing the debtor-creditor relationship







Making Loan Securities

·         §9-102(12)                    Collaterals: property subject to a security interest or agricultural lien.

·         §9-102(28)(A)               Debtor: a person having an interest, other than a security interest or other lien, in the

 collateral, whether or not the person is an obligor or a cosignee.

·         §1-201(37)                    Security Interests: an interest in personal property or fixtures which secures payment

performance of an obligation

·         §9-102(72)(A)               Secured Party: a person in whose favor a security interest is created or provided for

under a security agreement, whether or not any obligation to be secured is outstanding.

·         §9-102(73)                    Security Agreement: an agreement that creates or provides for a security interest.

·         §9-102(a)(7)                 Authenticate: to sign; or (b) to execute or otherwise adopt a symbol, or encrypt or

similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.

·         §9-102(a)(59)                Obligor: a person that, with respect to an obligation secured by a security interest in or

an agricultural lien on the collateral,

(i)                  owes payment or other performance of the obligation,

(ii)                has provided property other than the collateral to secure payment or other performance of the obligation, or

(iii)               is otherwise accountable in whole or in part for payment or other performance of the obligation.  Term does not include issuers or nominated persons under a letter of credit.

·         §9-102(a)(69)                Record: except as used in “for record”, “of record”, “record or legal title”, and “record

owner” , means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form


Process by which we create the enforceable security interest:

·         §9-203(a)                      Attachment: a security interest attaches to collateral when it becomes enforceable

against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

·         §9-203(b)                     Enforceability: a security interest is enforceable against the debtor and third parties with

respect to the collateral only if:

(1)    Value has been given by secured party;

(2)    Debtor has rights in the collateral to a secured party; and

(3)    Debtor has authenticated a security agreement with description of the collateral


RAV=E (mnemonic used to remember) for attachment requirements.  Must satisfy all three in order to have an enforceable security interest.

R = Rights in collateral (debtor’s perspective)

A = Agreement between the parties

V = Value

E = Enforceability


Example:  Macy’s makes a loan with Chase Bank

M –debtor        

CB-secured party

All of the assets: collaterals       

Encumbered lien: security interests        


Does it have to be written or can it be oral?  Can be oral.


Problem 1.1, Page 23

A is a retail seller of IBM-compatible computer systems, which it assembles from component parts.  A operates five stores in the San Francisco area.  It leases the premises for these five stores.  Its total inventory of computer systems has a wholesale value of $300,000, which A sells at 50% mark-up.  A also owns $150,000 in display cases, cash registers, tools, computers, and the like.


A currently owes its various unsecured creditors approximately $500,000.  After deducting its monthly payments to these creditors and overhead costs, A nets $2,000 per month.  A regularly sells computer systems to the City of San Francisco and Stanford University.  A invoices both purchasers with payments due 30 days after delivery.  Presently, each customer owes $8,000. 


a)      A has asked C for a $150,000 loan to expand its work force.  C is inclined to make the loan but requests advice as to whether it should demand security.  What do you advise?  From a numerical perspective, it’s better to take collateral ($650,000 debt by Ace).  If we stay out of bankruptcy, the unsecured creditor can get collateral but it would be a long court process.  From the debtor’s perspective, do they care whether the loan is secured or not?  Maybe. They would probably want an unsecured loan; it improves their chances of being able to borrow in the future; no risk.  However, they may prefer a secured loan for interest reasons and for long term loans. 


b)      If C wants a SI, what collateral would you recommend?  What risks and benefits do you see with each kind of collateral?  Inventory worth $300,000.  You would want to take the existing and future inventory. Disadvantage? It may diminish in value for a variety of purposes. Other inventory include the business equipments.  Downside would be the depreciation of such equipments; value could go down.; including those property in the future.  Also, can take their accounts receivable ($8,000); may not be payable though; including taking the future receivables. What other property? Ground lease, good will, intellectual property, stocks and bonds


Problem 1.2 Page 24

Assume C makes the requested $150,000 loan above and takes a valid SI in A’s inventory of computer systems.  After A makes the 5 month payments, C learns A has suffered a sharp decline in monthly sales and is currently losing $5,000 a month.  The terms of A’s loan agreement with C require A to make monthly payments of $10,000. 


a)      C is very concerned and comes to you.  It wants to know its rights.  What do you tell the client?  Cannot get collateral until statement of default—creditor could be sued for conversion.  Assume there is a default—do you seize collateral yet? You can do it.


b)      Assume the loan documents permit C to proceed against the collateral, thereby closing A down.  Should it repossess A’s inventory?  What further information might be useful in making this decision?  If C does not foreclose immediately, should it take any other action?  Would your answer change if C were a supplier of component parts to A?  Yes. The computers could then be sold and the proceeds would go towards satisfying the debt. Other useful info before repossessing Ace’s inventory is, does Ace have any other real or personal property and whether they are non-exempt assets.  If  C was a supplier of component parts to A, then C may want to not repossess the computers b/c A would no longer be able to run its business and have money to pay its debts.


c)      Based on your discussions with C, what provisions might you, as creditor’s counsel, add to the loan agreement?  What protections or limitations might you seek as debtor’s counsel?  An upfront provision that sets out the consequences in the event that Ace could not make its payments.  Warn C of the risks of A not being able to pay and provide and recommend strategies for avoidance.



§ 1-201(36): “Rights” include remedies

§2-105(1) & (2): Definitions; Transferability; Goods; Future Goods; Lot; Commercial Unit.

§2-501(1): Insurable Interests In Goods; Manner of Identification of Goods

§2-509(1): Risk of Loss In the Absence of Breach

§2-401(2): Passing of Title; Reservation for Security; Limited Application of This Section



Problem 2.14, page 23

B2 has a SI in L’s current and after-acquired inventory.  L operates a furniture store.  If customers cannot find appropriate merchandise on the showroom floor, they can choose items from catalogues L keeps on the premises.  Customers place catalogue orders through L.  L then purchases the item from a supplier. 


On 4/1, L orders a custom-made sofa from A.  As always, L forwards the purchase price with the order.  On 4/15, A begins construction of the sofa. 


a.       On 4/4, after A has received L’s purchase order and check, does B2 have a SI in the sofa?  What about on 4/15?

b.       On 5.10, A completes construction of the sofa, designates it as the custom-made sofa ordered by L and places it in its warehouse pending shipment to L.  Does B2 have a SI in the sofa at this point?

c.       On 5/12, A delivers the sofa to a carrier and makes appropriate arrangements for shipment instructions.  Does B2 have a SI in the sofa now? 


4/1 mails order with check

4/4 seller receives order and payment check

4/15 seller begins work on sofa

5/10 finished sofa

5/12 seller delivers sofa to trucking company

? delivery to buyer


Earliest date debtor has rights 5/10

5/12 is also possible; seller has finished all its duties

Under §2-501 --- Yes, as of 5/10, we could argue that we have rights.

Perhaps also on the date of 4/14 b/c K was made then, but not sure

Delivery date to buyer might be ok also.

4/15 is probably not

4/1 definitely No


Problem 2.15, page 23

Draft language for B2’s SA which would give B2 an enforceable SI as of 4/5 so as to resolve or avoid the problems identified above. 


Unless otherwise explicitly agreed, SB shall have security interest in L’s current and after-acquired inventory, regardless of whether the inventory is in stock, on order, or in the process of being delivered by a third party supplier.    


Problem #2-1 Handout

B contractually agrees to loan $250,000 to A in one or more advances.  J, the majority shareholder of A, agrees to grant to B a SI in some of her assets to secure repayment of the loan.  The loan agreement and the SA are executed on 9/1.  At A’s request, B advances $100,000 on 9/15. 


1.       Is the “value” requirement satisfied?  Yes When?  The parties agreed 9/1.

2.       Who is a “debtor” under 9-102(a)(28) and/or an “obligor” under 9-102(a)(59)?  J.  Which party (parties) should authenticate the SA?  A.


Value is given on the earliest date of agreement –Sept. 1; the earlier we can find the security interest, the better for our creditor.

Debtor: Jill

Obligor: Ace – she has to sign it b/c she has interest in the property

Value doesn’t necessarily have to flow to debtor.

Problem #2-2 Handout

Your neighbor borrows $250 from you and promises to repay you at the end of the week.  He doesn’t.  To make sure he repays the loan, you secretly remove his lawn mower from his garage and lock it up in your tool shed, intending to replace it (with stealth and cunning) after you get your $250.  Do you have an enforceable SI in the lawn mower?  No, b/c no agreement.  There must be possession by agreement.


Same scenario, but your neighbor feels so bad about being unable to repay you, he offers his lawn mower as collateral.  You have no room for it at your place, so you both mutually agree that the lawn mower will stay either with the neighbor or the neighbor’s daughter who lives two blocks away.  Do you have an enforceable SI in the lawn mower?  See 9-313, Official comment 3.  No, debtor can’t have agency connected to debtor.  Here, it’s the daughter of debtor.           


Rights in Collateral

·         Advice: place in public record; mark the collateral; provide exclusion clause to who has interest


Litwiller Machine & Manufacturing, Inc. v. NBD Alpena Bank, page 110

Issue: Whether the components were part of Koss’ after-acquired inventory described in its security agreement with D, and if so, whether Koss had sufficient rights in the boom assembly components to have “rights in the collateral”.

Holding: A debtor has rights in the collateral when it has “any interest” other than naked possession; where a debtor gains possession of collateral pursuant to an agreement endowing him with any interest other than naked possession, the debtor has acquired such rights as would allow a security interest to attach.

Conclusion: D’s security interest in Koss’ after-acquired inventory attached to plaintiff’s components.


Ways to satisfy the requirements for ATTACHMENT: §9-203(b)(3)

1.       Authenticated by the debtor; in writing and signed (old way); today as of July 1, 2001, it must be a record

2.       Description of the collateral

3.       Possession by SP; mere possession of the collateral

4.       Control and limited to 4 types of assets:

·         deposit accounts,

·         electronic chattel paper,

·         investment property, or

·         letter-of-credit rights


In most instances, #1 is most popular.

Must satisfy all elements of attachment in order to be enforceable; doesn’t matter what order.



Usually won’t be an issue.

In certain forms:

1.       money



When a buyer buys something on credit, they do not intend to leave it with the seller.



Ways to satisfy attachment requirements (RAV=E)

·         Must be satisfied before a security interest can attach (legal existence/enforceable against the debtor

·         §9-203(b)3(A): AUTHENTICATION of security agreement

·         For nonposessory security interests in collateral other than investment property, a security interest will not attach unless “the debtor has signed a security agreement which contains a DESCRIPTION OF THE COLLATERAL (writing on an electronic record)

·         §9-203(a)(1) condones oral agreements creating a security interest if the creditor POSSESSES the collateral pursuant to agreement §9-203(3)(B); or the collateral is investment property and the creditor has CONTROL pursuant to agreement §9-203(b)(3)(D)


Example: “I, Debtor, grant you, Creditor, a security interest in my 1999 silver Mercedes coupe.”

Security Agreement vs. Financing Statement, page 85

Both typically accompany an Article 9 secured transaction

1.      Security Agreement

·         §9-102(a)(73) à represents the contract between the debtor and the creditor

·         Evidences the debtor’s agreement and intention to create the security interest


2.      Financing Statement

·         It is the document intended to give public notice of the creditor’s interest.

·         §9-501 establishes where a creditor must file the financing statement to give proper notice of its claim.


*The writing requirement serves as an evidentiary function; in the nature of the SOF

*Description of the collateral achieves two important goals:

1.       it provides objective proof of the parties’ agreement to create a security interest; and

2.       it is objective evidence of the parties’ agreement to create a security interest


A SI is perfected when it has attached and “all the applicable steps required for perfection have been taken à §9-308(a); often involves the filing of a financing statement (doing so makes a creditor’s claim effective against third parties b/c it gives third parties notice of the claim.


Attachment v. Perfection, page 85


·         Relates to a creditor’s ability to enforce its security interest’s effectiveness against a debtor

·         Security agreement is associated with the process of attachment


·         Relates to the security interest’s effectiveness against third parties

·         Financing statement is associated with the process of perfection and public notice of the creditor’s claim


§9-502(d)    Filing before security agreement or attachment; a financing statement may be filed before a security agreement is made or a security interest otherwise attaches


§9-502(d)    Official Comment 2: “Notice Filing”

·         Does not require the SA itself, but only a simple record providing a limited amount of information (financing statement)

·         A FS may be filed before a SI attaches or thereafter

·         Merely indicates that a person may have a SI in the collateral indicated.

·         Proved to be of great use in financing transactions involving inventory, accounts, and chattel paper b/c it obviates the necessity of refiling on each of a series of transactions in a continuing arrangement under which the collateral changes from day to day

·         Effective also for SI not yet in existence and after-acquired property


In re Bollinger Corp., page 91

Facts: Debtor B executed a promissory note and signed a SA with ICC to borrow 150K and perfected the SA by a financing statement; B paid off ICC 65K and still owed 85K; B then executed only a PN and FS with Z&J to borrow 150K; Z&J was assigned the 85K that B still owed CC; no formal SA was ever executed between B and Z&J; B goes bankrupt and Z&J claims they have SI in the 150K.

Issue: Can a creditor assert a secured claim against the debtor when no formal security agreement was ever signed, but where various documents executed in connection with a loan evince an intent to create a security interest?

-Court here says YES.  There was an enforceable security interest between the two parties.

-Z&J want to prove they have a total claim for both the 65K of CC assigned to them and their 85K even in the absence of a SA for the 85K.

-§9-203(1)(a): generally, 2 documents are needed to create a perfected SA: SA and FS

-However, the commercial world has often neglected this requirement

-§9-402: a SA may serve as a FS if it is signed by both parties; but here, can it be the reversed? Can a FS satisfy a SA?

Rule: Although a standard from of FS by itself cannot be considered a security agreement, an adequate agreement can be found when a FS is considered together with other documents (e.g. PN)

Holding: The PN read in conjunction with the FS was sufficient to establish a valid SA.


General rule should be that you don’t give the value until the agreement is in place.


Problem 2.9, page 96

B borrows $500,00 from C.  B executes a PN containing the following clause: “This PN is given in exchange for the purchase price of certain equipment described in a bill of sale to be delivered by B to C with this PN.”  Two days later, C files a FS that specifically describes the equipment B bought.  The president of B signs both the PN and the FS. 


We don’t see any facts that mention a security agreement.  Financing statement alone does not satisfy the SA to show intent between the parties.

a.       Assuming no other writings are involved, does C have an enforceable SI in the described equipment?  Probably not b/c the facts don’t show anything else evidencing a SA

b.       Would the result above change if B had delivered the bill of sale to C?  No. It only shows an intent to buy and not necessarily an agreement; we need to see some language in the bill of sales that evidence intent to secure an interest

c.       What if B;s Board of Directors had passed a resolution authorizing the president of B to grant a SI in the equipment the corporation would buy with C’s$500,000 loan?  Yes. The resolution shows intent.


It’s so easy to draft a collateral description and just have the debtor sign it to make things easier.


In a corporate context (corporate entity), make sure that the officer’s signature binds the corporate entity and the signer is signing on behalf of them.


Make sure all parties involved in signing the SI signs it.


Master CODE terms in order to know which specific rules apply.



§9-203(b)(3)(A):           Enforceability of Security Interest; the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned

§9-108:                         Sufficiency of the description

(a)    Except as otherwise provided in subsections (c), (d), and (e), a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

§9-102(a)                      Definitions:

Account (2)     

Chattel Paper (11)        

Commercial Tort Claim (13)      

Consumer Goods (23)

Deposit Accounts (29)

Document (30)

Electronic Chattel Paper (31)

Equipment (33)

Farm Products (34)

Farming Operation (35)

Fixtures (41)

General Intangible (42)

Goods (44)

Health-care-insurance Receivable (46)

Instrument (47)

Inventory (48)

Investment Property (49)

Letter-of-credit right (51)

Payment Intangible (61)

Promissory Note (65)

Software (75)

Tangible Chattel Paper (78)


You could use your own term as long as it reasonably identifies the property.  You can’t use all of the debtor’s property §9-108(c): Supergeneric description not sufficient.  You must be specific.  We want the debtor to know what he’s securing an interest in. 


Types of Article 9 Collaterals:

Tangibles “Goods”

·         Inventory

·         Farm products

·         Consumer goods

·         Equipment


To know what a good actually is will depend on what it is used for by the debtor à e.g. refrigerator

What if something has a 50/50 use? A car used for business and personal?   Here, it’s either a consumer good or an equipment.  Depends on the residual.  Its primary use is what dictates.



·         Documents (eg. documents of title, bill of laden, receipts)

·         Instruments (eg. checks, Article 3-type promissory note)

·         Chattel paper



·         Account

·         General intangibles

·         If it doesn’t fit anywhere else, then it’s a general intangible



·         Investment property (eg. stocks and bonds)

·         Letter-of-credit rights (will not be discussed this semester)

·         Deposit accounts

·         Commercial tort claims (does not include all tort claims)


Again, keep in mind that we don’t have to use any of these. 


Matter of Ripley Oil Company, page 67

Facts: The debtor is a retailer of petroleum products who sells oil to customers and as part of the sale, lends them oil tanks to use for storing the oil. Customers were to sign an “Equipment Agreement” which stated that the tanks remained the personal property of the debtor.  CN loaned debtor 60K and obtained as SI ‘all accounts receivable and inventory’ of debtor.  CN claims the tanks are inventory while debtor claims they are equipment and thus not subject to CN’ SI.

Issue: Are the tanks equipment or inventory? Were the tanks furnished under contracts of service?

Holding: Court concludes the oil tanks are equipment and were not furnished under contract of service.

Debtor never held the goods for sale, either in the ordinary course of business or otherwise, since no title was passed from a seller to a buyer for a price; customer and debtor had intended that the title to the tanks would remain in the debtor.


Debtor should have listed the equipment in the description of collateral.  We could have described the storage tanks.


Knotsman v. West Loop Savings Association, page 68

Facts: Debtor N is bankrupt. Creditor W had loaned N over 166K.  As SI for the loan, W had received an assignment of an annuity contract issued by MLIC.  W had failed to file a FS with the TX Secretary of State.

Issue: Whether W had perfected its SI in the annuity contract it received from N.

-W argued the annuity contract was an instrument, which is automatically perfected upon delivery.

-Lower court held it was a “general intangible” and not an instrument, therefore W did not perfect its SI.

-Instrument: (1) Evidence a right to the payment of money and (2) be of the type which is in the ordinary course of business transferred by delivery with an endorsement or assignment…

Holding: This court finds that the annuity contract was a general intangible and thus W had to file a financing statement with the secretary of state in order to perfect its SI. By not doing so, they now held an unsecured interest in the annuity.

-Possession of the annuity contract alone does not convey the right to receive payments.

-Notice and delivery is required to transfer rights conferred by the annuity certificate.

-Professionals do not attach significance to the possession of the annuity certificate itself.


Only way to perfect a general intangible is by filing a FS.  If you can’t choose with certainty what term to use, describe it so that all parties can understand.


The UCC defines a “general intangible” merely by stating what is not a general intangible.  A general intangible is essentially a bundle of rights such as those inherent in a franchise, a chose in action, a copyright, or an annuity…


Problem 2.1, page 73

M purchases a laptop computer from S for $3,000.  M executes an installment K for the purchase.  S wants to use M’s installment K as collateral for a loan from Lender. 


a.       Classify M’s installment K when S offers it to Lender as collateral.  Possible answers: instrument, account, chattel paper; appreciate the terms are mutually exclusive.  Won’t be account if it’s one of the other two.  It has to be one of three.  That’s why it won’t be a general intangible.  Instrument is very hard to satisfy.  Could be chattel paper b/c it meets the monetary obligation component.

b.       In addition to the installment K, assume M also executes a PN payable to S.  Classify M’s note and installment K when S offers them as collateral to Lender.  Same thing: Instrument, chattel paper, or an account.  We don’t know all of the terminology of the agreement.  Until we do, we can still narrow it down to one of the three.

c.       Would your answer change in (a) or (b) if the installment K M executed reserved title to the laptop in S?  Chattel paper

d.       What if M put the purchase on her MasterCard?  Account

e.       Assume Lender makes the loan to M so she can purchase the lap-top.  Lender takes a SI in the computer.  Classify the collateral.  It would depend on its use; if it’s for personal use, then it’s a consumer good.  If used for business, then it’s an equipment.


Problem 2.2, page 73

H enters into a K with O to construct an office building.  The K provides for periodic payments to H at various stages of the project.  H has not yet performed any work. 


a.       If H assigns its rights to payment under the K to Bank as security for a loan, what type of collateral is involved?  Account; does not matter if work has not been performed yet.  Maybe also be chattel paper or instrument.  It’s easier to be classified as account.  The only way it’s not an account is writing out there that says it’s not one of the other.  Chattel paper says it has to be a specific good, not real estate.  So any mention of real estate would exclude it as chattel paper.

b.       What about H’s right to a tax refund from the prior year? Would your answer change depending on whether H was entitled to a tax refund?  Assuming it was entitled to a tax refund, would you classify the tax refund right differently depending on whether H had filed its return?  On whether H had received a check from the IRS?  General intangible; probably can’t be an instrument.  The tax return would be a general intangible; a check from IRS would be an instrument under the category of semi-intangible.  Tax refund would not be an account b/c it’s not a right receivable or monetary obligation. 


Problem 2.3, page 73

Classify the following when offered as collateral:

a.       Coca-Cola’s patent infringement claim against Pepsi.  commercial tort claim

b.       The charcoal that H uses to char-broil its burgers.  inventory; it’s raw materials used up in the process

c.       Buffy’s lottey ticket.  account; could be argued to be general intangible and further subcategorize it as payment intangible

d.       Buffy’s lottery winnings consisting of the right to receive $1 million a year for the next 10 years.  account

e.       A certificate of deposit issued by Bank that says at the top: “NON-NEGOTIABLE.”  What if it also says “NON-TRANSFERABLE?” deposit account unless it was an instrument (non-negotiable)  Official Comment 12



We have mentioned that the most popular way to attach is by authentication and that there is a description of the collateral. 


Description of collateral: Two main words the CODE actually just wants à “reasonably identifies”

You do not have to use the terms set out in the CODE.  You can use any description you like as long as it reasonably identifies the collateral.  It’s good to know the terms b/c it helps us read the CODE better.


Problem 2.5, Page 74

DD wants to borrow money from B.  Classify the following when DD offers them as collateral to B:

a.       Flour, sugar and chocolate used to make donuts: Inventory

b.       Cloth aprons, DD T-shirts and hats that all employees must wear: Equipment or inventory

c.       Napkins, paper cups and bags: Equipment or inventory; probably more an equipment

d.       DD’s secret recipe for chocolate butter crunch donuts: General intangible or equipment? It’s more a GI b/c it’s the recipe information that is of value.

e.       Cash register, oven, pans, and trays: Equipment, but may be fixtures too; you could use both terms also b/c they’re not mutually exclusive; anytime you have an equipment, it could be a fixture.


Problem 2.6, page 74

AI is a genetic laboratory that grows various life forms that it sells for use in medical research.  Classify the life forms if AI offers them as collateral for a loan.  How would you classify its patent for life form C-256H?  What about a computer program AI developed to test the performance of its products?  Data reports produced by the program? 


Life forms grown is inventory.  It may be a farm product too when we sell it. 

The patent would be a general intangible.

Computer program would be a general intangible.

Data reports would be a general intangible.  If not, it’ll have to be equipment as the residual.


Scope of Interest Taken

Citizens Bank  & Trust v. Gibson Lumber Co., page 97

Facts: G granted a SI in its property to C. A SA was perfected between them.  The SA described the collateral in which C took a SI as “all inventory of lumber and logs, accounts receivable, all sawmill equipment and all rolling stock, including, but not limited to…”  Items not specifically listed as collateral were G’s gang saw, Delta feeder mechanism and a Detroit Allison diesel generator.  These items were sold at auction.  C claimed that it was entitled to the proceeds.  Bankruptcy court found the omnibus clause describing the collateral were not sufficient to include the latter items. 

Issue 1: Whether or not omnibus clauses are effective in Kentucky when used to describe general types of collateral in security agreements.

Issue 2: Whether it remains effective against certain specific collateral that is not listed on a schedule of specific items of collateral which is also part of the security agreement.

Holding: Court here did find the omnibus clause “all equipment” to be effective as to cover the latter items.

As for the second issue, intent of the parties was ambiguous.  Here, the use of both a schedule listing specific items of collateral and an omnibus clause describing a general type of collateral creates ambiguity when a specific item fails to appear on the schedule but is ostensibly covered by the omnibus clause.

Rule:  If a SA contains an omnibus clause and a schedule of specific collateral which does not list all that the omnibus clause ostensibly describes, then the initial creditor has failed to provide adequate notice to subsequent creditors and the ambiguity shall be construed against the initial creditor.


The drafter should have decided whether he wanted to be general or specific in describing the collateral.  Rely either on a specific least or the omnibus clause. 


Let’s assume that Zinnecker borrows 3K from you.  He wants to secure a SI in his TV. 

Could Z say “all assets”?  Too broad

“TV” or “television”?  We don’t know which one; he may have more than one.

RCA XL-100 19 SN #456AZ?  Yes.  Specific


Can you get too particular?  Yes.  It depends on how court sees it. 

Standard to follow: It has to reasonably identify the collateral


Let’s assume on Friday, X goes out and buys another TV?

Would I get it? Debtor would say “all” means all as of “now”, not in the future.

Generally, if you want to grant a SI in assets not yet acquired, you must include language describing so.


Creditors, however, can include after-acquired assets à §9-204

Account receivable and inventory are usually what creditors would want to include in after-acquired SI.

Not only assets of today, but also in the future.


Exceptions: §9-204(b)

Other than that, creditor can obtain after-acquired property in anything else.

*If you wanted to circumvent the after-acquired clause, you could always execute another security agreement.  Do this to avoid worrying about the creditor every time you acquire new property.


§9-204 After-acquired Property; Future Advances

(a)   After-acquired collateral:

(b)    When after-acquired clause is not effective: A SI does not attach under a term constituting an after-acquired property clause to:

1.       consumer goods, other than an accession when given as additional security, unless the debtor acquires rights in them within 10 days after the secured party gives value; or

2.       a commercial tort claim

(c)    Future advances and other value:

Problem #2-3 in handout: After-acquired property clause; consumer protection: §9-204(b)

On 9/1, TRZ borrows $6,000 from WFB.  TRZ executes a SA that creates a SI in “(i) Steinway piano w/bench and (ii) all electronic entertainment equipment (including, w/o limitation, stereo equipment, TVs, and VCRs), whether now owned or hereafter acquired.”  TRZ makes the following acquisitions during the month of September:


            9/5        Borrows $6,000

            9/5        Compact disk player ($150)

            9/8        Personal computer ($3,000 – using WFB’s money)

            9/12      TV ($400)

Which of the three purchases are part of the collateral?  All of them (it’s within 10 days).


Has WFB committed “an unfair act or practice” under the Federal Trade Commission Act?  See FTC Credit Practices Rules §444.2(a)(4) and §444.1(i) [pp. 1907-1909 0f 2001 statutes book.]  Yes, see §444.2(4)


Ask who or what is the debtor? 

Ask what are the goods used for?

Assume here that they are consumer goods.

No timing problem (it’s within 10 days)

We have a description problem.  It’s possible that the PC is not part of the collateral. 

“Without limitation” is the tricky language here.

Unless we specifically mention PC, there’s a danger it may not be included.


What about FTC issue?

When the statute refers to a nonpossessory, we ask is the secured party in possession.  If not, it’s a nonpossessory interest.  Next, ask if it is household goods?  If it is a household good, there will be a FTC violation.  Piano is furniture.  Compact disk player?  Probably not b/c it’s under exclusion clause.  TV? Yes, especially if it’s the only one you own.  CP?  We don’t care b/c facts tells you whose money you used to buy it (Wells Fargo).  This makes it a purchase money security interest and therefore will not violate FTC rules.  Anytime that a creditor lends you money to buy something and turns around and takes a secured interest in the very collateral that you’re obtaining, it is a purchase money security interest (PMSI §9-103).  We’ll discuss this more later on in the semester b/c it is important.


 §9-204(c) means basically that you don’t have to promise to make the loan; just acknowledge that there is future debt.


2 components of SI:





Paulman v.Gateway Venture Partners III, L.P., page 101

Facts: F was a corporation which developed and distributed carbonated pads used in the food industry.  In November 1991 F took out a series of loans from P. The loans were short term and executed by promissory notes.  The note in dispute was the final 3-months note executed in June 1992 and due September 1992.  The note secured 75,000 shares of Filter Corp., stocks, and the accounts receivable and inventory of Filter Corp with a “see UCC-1 filing and attached inventory listing”.  The parties never executed a separate security agreement.  P perfected his SI by filing a UCC-1 financing statement on October 1992.  The FS identified the collaterals as 1) accounts receivable and 2) materials inventory.  Despite the note’s reference to an inventory listing, none was ever attached to the note or the financing statement.  There was no evidence whether the parties intended to secure after-acquired inventory or accounts receivable for the June 1992 note.  F defaulted on the note and P brought suit to enforce it. 

Issue: Whether a security agreement that grants an interest in inventory or accounts receivable, w/o more, presumptively includes after-acquired inventory or accounts receivable.

Holding: P had a SI in after-acquired accounts receivable, but not in after-acquired inventory b/c the SA demonstrated an intent to limit the inventory collateral by referencing an attached inventory listing. 

Rule: There is a presumption that security interests in inventory and accounts receivable includes after-acquired property, absent evidence of intent to the contrary.



1.       It is better to be simple than sorry and less can be more.  If your client wants a security interest in after-acquired property, use clear, unambiguous words to express that intention. à ex. “all debtor’s current and after-acquired trucks”

2.       Judicial inquiry regarding the existence and scope of a creditor’s security interest focuses on two legally distinct issues: a) the legal sufficiency of the description; and b) the parties’ intentions to encumber the property


Problem 2.11, page 108

S processes peanuts which it markets in the form of peanut oil, peanut butter and unsalted peanuts.  It also processes other food commodities for the wholesale market.  B1 lends $900,000 to S.  S signs an agreement which grants B1 a SI in:


Peanut processors, and packers, and all equipment used or useful in the conduct of its business; all accounts, contract rights, instruments and inventory; all general intangibles including Debtor’s trademarks, goodwill and patents, current and after-acquired.


a.       Is the language in the SA sufficient to cover processed peanuts held for sale by S on the date of the agreement?  Would the language cover peanuts obtained after the SA is executed?  If you were drafting the agreement, would you elaborate on the description to make sure processed peanuts are covered?  On the date of the agreement: Yes. You can assume processed peanuts are included in inventory.  After SA was executed: Not sure.  Is inventory presumed to be an after-acquired property?  Argument that it does not modify after-acquired property.  I would not elaborate on the description.

b.       Does the agreement cover a delivery truck which S acquires after it signs the SA?  Does something in the description pick up the delivery truck?  It would have to be under equipment.  But here again, it says the equipment is before the after-acquired clause.  So, no.

c.       Is the language sufficient to describe a conditional sales K and PN which S receives from G in connection with G’s credit purchase of peanut oil from S?  It mentions contract rights.  Do we know when the K was executed?  We’re not sure.  We then have an issue of whether after-acquired language modifies it.  Therefore, no.  It might fit in as chattel paper.

d.       Does the agreement cover S’s rights to a tax refund?  No.  We see a general intangible in the description.  What’s another concern? We don’t see a “but not limited to” clause.  What does the phrase “after-acquired” modify?


Place the “after-acquired” clause somewhere where it’ll includes all of what you want; not at the end. 

You get everything up to and on the day the agreement is signed.


Problem 2.12, page 109

S filled out a “SearsCharge Credit Account Application.”  In a blocked out portion containing a line for the applicant’s signature, the form stated: 


I agree to pay Sears in accordance with the credit terms disclosed to me and to comply with all the terms of the SearsCharge Agreement.  A copy of the SearsCharge Agreement will be given to me when my application is approved.  Sears will retain a SI where permitted by law on all merchanise charged to the account…


S filled out the other requested information and then signed and returned it.  Four weeks later, she received a SearCharge card and a copy of the agreement.  The back of the card stated:


By signing this card I acknowledge that I have read and agreed to the terms and conditions of my credit agreement with Sears.


S signed the card and one week later, used it to purchase a television set, lawnmower and some jewelry.  She signed a sales slip which stated:






Does Sears have a SI in any of the items S purchased on credit?


We could probably look at this stuff and figure it out what they are, therefore description is reasonable.  Are we worried about the 10-day rule?  No, the agreements were contemporaneously executed.  Are we worried about the FTC violation? No, b/c it’s all PMSI.


Problem #2-4 Handout: After-acquired property clause; future advance clause: 9-204

CB agrees to make periodic loans to a construction company.  Repayment will be secured by collateral consisting of the debtor’s heavy-duty construction equipment.  The debtor executes the SA on 3/1, when CB makes a $250,000 loan.  On 3/1, the debtor owns one piece of construction equipment, a bulldozer.  Through the year, the following transactions occur:


4/1        CB loans another $300,000

5/1        Debtor acquires a road grader

6/1        Debtor acquires another bulldozer

7/1        CB loans another $200,000


What constitutes “secured debt” and “collateral” if the only SA executed by the parties has:

1.       no after-acquired property clause; no future advance clause

2.       after-acquired property clause; no future advance clause

3.       no after-acquired property clause; future advance clause

4.       after-acquired property clause; future advance clause


Assuming that the SA includes an after-acquired property clause; on what date does CB first have an enforceable SI in any collateral?  In the road grader?


Transaction                   3/1                    4/1                    5/1                    6/1                    7/1


Collateral                      BDZR              -                       RGDR              2nd BDZR


Secured Debt                250K                300K                -                       -                       200k


What constitutes “secured debt” and “collateral” if the only security agreement executed by the parties has:


                                                            Secured Debt                Collateral


1.       No AAPC; No FAC                        250K                            BDZR

2.       AAPC; No FAC                             250K                            RGDR, 2nd BDZR                    

3.       No AAPC; FAC                             250K, 300K, 200K         BDZR                         

4.       AAPC; FAC                                   250K, 300K, 200K         BDZR, RGDR, 2nd BDZR


BDZR covers all debt.

Assuming SA includes AAPC:

On March 1, Chase Bank will have SI in any collateral.

On May 1, Chase Bank will have SI for the road grader.


Note: Must still satisfy RAV=E; We’re not worried about the 10-day limitation b/c these are not consumer goods.  #4 is the best position for the creditor to be in; creditor has a choice to liquidate any one first.  Total debt of $750K.            



Problem 2.13, page 109

MB issued commitment letter at 9% interest for 6 years secured by                           3/11

B’s “equipment, general intangibles and accounts whenever acquired.”                         


MB loans B $2 million at 9% interest and B signs a promissory note secured by          7/1

B’s“equipment, general intangibles and inventory.”                                                        


B also signs security agreement which covered “all B’s equipment,                  7/1

 including three tape editors in the FL office and all accounts,

chattel paper and inventory.”                   


B also signed a financing statement which covered                                                    7/1

“equipment, inventory, chattel paper, accounts and general intangibles.”                                  


B has fallen on hard times and desires to sell some property that are not subject to MB’s security interest.  Advise as to B’s ability to sell the following:


B/c there are a wide range of description mentioned and discrepancies in them for each document, we would probably concern ourselves mostly with the SA b/c it’s binding.  We would not worry about the FS.  FS is for perfection.

Now, we need to determine what is considered part of the collateral package.


a)      A camera acquired on 6/15 and a similar camera on 7/19 used in FL.  Probably not b/c we don’t know where the camera is being used or is located.  What does the geographical limitation mean to modify? But maybe so b/c no after-acquired clause.  Or argue for  creditor  that B can’t sell it b/c the SA says “all” means all times when it’s acquired.


b)      K’s with several Michigan companies allowing them to use B’s logo which is a registered trademark.  B’s logo would probably be classified as an account and therefore he can’t sell it b/c it is subject to MB’s SI.  Also, what if this is a type of account that does not change on a daily basis, in which an after-acquired clause is not needed, would the court infer it?  Probably though.  Timing  might be an issue.  Then again, it might not even be an account.  It might be an instrument or inventory.


c)      Obligations ranging from 1K to 50K which various merchants owe for ads aired on FL or NJ stations during the past several months.  Such obligations may be classified as an account, assuming it’s not evidenced by instrument or chattel paper, and therefor B can’t sell them.


d)      B licenses for its FL and NJ stations.  Note: FCC regulations prohibits the transfer of licenses w/o FCC approval.  The licenses are classified as general intangibles and can be sold.  If the SA did include general intangibles, we may run into FCC issues.  FCC would probably like to know who’s in control of the air waives.


We’ve discussed the four forms of agreement in attachment; keep in mind that they are not mutually exclusive.

Control will trump anything else from an attachment perspective; although the other forms may work.


Handout Problem #2-5: Creating an Enforceable SI in Investment Property

§9-203(b)                      Enforceability

§9-102(a)(49)                Investment property

§9-106(a)                      Control of Investment property: Control under §8-106

§9-106(c)                      Control of Investment property: Effect of control of securities account or commodity account

§9-108                          Sufficiency of description; reasonably identification

§9-308(f)                      When security interest or agricultural lien is perfected; continuity of perfection: Security entitlement carried in securities account.

§8-102(a)                      Definitions:

 (4)                Certificated security                 

 (7)                Entitlement holder

                (14)              Securities Intermediary

                (15)              Security

                (17)              Security Entitlement

                (18)              Uncertificated security

§8-106                          Control

§8-301                          Delivery

§8-501(a)                      Securities account; acquisition of security entitlement from securities intermediary

§1-201                          General definitions

             (32)                 Purchase

             (33)                 Purchaser

Article 8                       Evolution of the indirect holding system, page 533

                                    Indirect Holding System, page 537

                                    Security Interests, page 538


BU intends to loan $1 million to MG.  Repayment of loan will be secured by a SI in the following investments owned by MG:

·         100 shares of Shell Oil stock (MG holds the actual certificates registered in her name)

·         100 shares of Intel stock (no certificates have been issued but MG’s ownership is reflected in book-entry form on the corporate books of Intel)

·         100 shares in the Fidelity Magellan Fund (a stock mutual fund that does not issue certificates but provides MG with periodic performance statements)

·         $250K U.S. Treasury Bill (purchases by MG’s investment broker, Prudential Securities, for her account; MG holds other investments in her PS account, but these will not serve as collateral for the loan)


All investments in MG’s account are managed by her investment broker, Goldman Sachs.  How would you label the above investments?

·         Certificated security:            100 shares of Shell Oil stock

·         Uncertificated security:        100 shares of Intel stock; 100 shares of Fidelity Magellan Fund

·         Security entitlement:            $250K U.S. Treasury Bill by PS

·         Securities account:               Goldman Sachs portfolio (has everything)


If you have a broker (security intermediary) involved, you will always have either a security entitlement or a security account.  It’s important to figure out how to label these stuff b/c of the “control” issue.


How can BU create an enforceable SI in these various investments?

§8-106 Control

We use §8-106(b): registered form; means it’s issued to a particular person.


Is a secured party a purchaser?  Yes.  A purchase can be taken by a security interests

Must also satisfy §8-301 Delivery.  But appreciate that we also need more than delivery.

8-106(b)(1) certificated security must be indorsed or registered in the name of purchaser.


Most securities today are uncertificated securities or part of a security attachment.

8-106(c) for uncertificated security; concept of purchaser control

We don’t have to have exclusive control by the creditor; but you want to be in a position to liquidate the debt w/o debtor’s consent.

8-106(d) for security entitlement; agreement

Where does it mention about the creditor obtaining the debtor’s account?  Look at §9-106(c).  Automatic control if a secured party has control of all security entitlements or commodity contracts.


Only worry about description concern if it’s not in writing.


If executing a SA is an option, how would you describe the collateral? (don’t concern with this question)

·         $250K U.S. Treasury Bill by PS; document

·         100 shares of Shell Oil stock; general intangibles

·         100 shares of Intel stock; general intangibles

·         100 shares of Fidelity Magellan Fund; general intangible



You cannot take a SI in a deposit or primary savings account under the old code.  Article 9 Rev. says you can now.

Under old article 9, such accounts were still used as collateral.


Handout problem #2-6: Creating an enforceable security interest in a deposit account

§9-203(b)(A), (D)         Enforceability: description of the collateral; control

§9-104                          Control of deposit account

§9-102(a)(29),(8)           Definitions: deposit account; bank

§9-109(a)(1)                 Scope of Article 9

§9-109(d)(13)                Inapplicability of article 9; an assignment of a deposit account in a consumer transaction

§9-102(a)(26)                Definition: consumer transaction



Bill Smith buys a piano on credit from Bank One so his 3 children can take piano lessons.  Bill has offered as collateral not only the piano, but also a non-negotiable, non-transferable certificate of deposit issued by Bank One.


a)      Can Bank One take a UCC Article 9 SI in the CD? First you might want to define what the CD is --- could be a deposit account b/c it says non-transferable or non-negotiable.  Assumption that the CD is a promise to pay at a later date.  Now, we ask is it a form of proper collateral?   Look at §9-109(13).  Next, is this a consumer transaction?  If so, we can’t take an article 9 interests.  We now go to §9-102(a)(26) to define consumer transaction.  We satisfy (i) for the piano but not for CD under (ii).  Therefore, we cannot take an interest in the CD under article 9.  Courts say people need to be able to make deposits and write checks to pay their bills.


There is a way around this for the creditor.  What could the debtor tell the bank to do to make a SI in the CD?

We could take the money out of the bank’s deposit account and into another account that is outside article 9 restriction.  B/c as long as it remains in the bank, then you would have to worry b/c it’s a consumer transaction.


b)      Would your analysis change if BS is a professional musician and buys the piano for his studio where he gives lessons?  Yes, we can take an interest in it b/c no longer for consumer transaction.  We can now satisfy RAVE.  One way is by controlà§9-203(b)(3)(D).  Or we can secure it by control of deposit account à §9-104.  For our case, (a)(1) does not apply.  We can under (a)(2) as long as the secured party can liquidate the property w/o debtor’s permission.  Under (a)(3) probably won’t be used since it’s a bit scary from the debtor’s perspective.  Or all together, we could authenticate a written agreement.  Does it matter for attachment?  Not much.  But once we talk about perfection, we must get control.


BizCorp maintains its checking/savings account with Bank One.  It also has a non-negotiable, non-transferable CD issued by Bank Two.


a)      BizCorp desires to borrow 50K from Bank One and offers his checking/savings account and CD as collateral. 

How will BizCorp and Bank One create an enforceable interest in the collateral? Under §9-104, Bank One will have control of the checking/savings account since it maintains the account for Bill.  Bank One will not have control of the CD /c it’s non-negotiable and non-transferable.


Is the secured party the bank where the deposit was made?  No.  We would have to try and satisfy the (a)(2) or (a)(3) test of     §9-104.



So far we have only focused on two parties involved in the secured transactions à the creditor and debtor.

There are other parties out there:

·         Other creditors (eg. statutory, unsecured, lien, relatives, trustees in situations of bankruptcy)


What about from collateral perspective?  They might liquidate, buy, sale, or lease the collateral.

Article 9 came up with perfection to solve such issues.  Let’s start by creating a chart of the collaterals we’ve mention:






Federal Law

Method of Perfection















Consumer Goods







Farm Products

























X (new law)



Tangible Chattel Paper






Electronic Chattel Paper













General Intangibles






Deposit Accounts


X (only way)





Commercial Tort Claims








X (only way)





Investment Property (C)


X (delivery)




Investment Property






Possession: if it’s tangible, grab it; if not, then it doesn’t apply.

Money: Only by possession (rare)

Automatic perfection only applies to 2 prong test:

1.       purchase money in consumer goods (PMSI)

2.       but still have to comply with COT law §9-103


A.     Requirement of Notice, page 135


§-308(a) attempts to define perfection.  Says you must first have attachment in order to even have perfection.


  1. The giving of notice: the acts the creditor must take to satisfy the formal notice requirements; focuses on the actions of the actor and whether they are adequate
  2. The having notice: determining what a third party in fact knows or reasonably should know from those acts or otherwise; focuses on what the recipient has, or has not, discovered.


As a general rule, when notice is relevant at all, Article 9 focuses on the “giving aspect” – what steps are adequate to give notice.


Secret Liens and Ostensible Ownership:

·         Body of law dealing with “fraudulent conveyances”

·         Focus is on the transferor’s creditors and the transfers made with actual or constructive intent to defraud them

·         Law seeks to recapture assets that should have been available to satisfy creditor claims against the transferor

·         Remedy lies in “setting aside” the transfer (no punitive or criminal sanctions involved)

·         Common law initially responded to the problem  by recognizing only possessory security interests; a secured transaction in which the creditor took possession of the collateral

·         Such possession gave third parties notice of the creditor’s claim

·         Such a “possession only” rule had enormous indirect costs


Article 9 authorized an alternative form of public notice:

Public Filing

·         A secured creditor need not take possession of the collateral, but if he does not, he must make a public filing in a designated place before he can shift the risk of competing claims to other property claimants

·         A filing system places fewer restrictions on the use of collateral than does a possession-based solution to the ostensible ownership problem, yet it stills provides information that allows a creditor to avoid the uncertainty caused by the possibility of debtor misbehavior

·         A secured creditor can determine if there are competing claims to his collateral by examining both the property that the debtor possesses and the public filings.

·         However, it has been suggested that modern techniques for the collection of communication of credit have made filing systems unnecessary and obsolete; such information could be obtained just as well through financial statements.


§9-309(1)                      Security interests that are perfected upon attachment

§9-310                          When filing required to perfect SI or agricultural lien; SI and agricultural liens to which filing provisions do not apply

(a)    General rule: Perfection by filing

(b)    Exceptions: Filing not necessary

§3-111                          Perfection of security interests in property subject to certain statutes, regulations, and treaties

      (a)  (1) and (2) Security interest subject to other law

(d)  Inapplicability to certain inventory

§9-312                          Perfection of SI in chattel paper, deposit accounts, documents, instruments, investment property, letter-of-credit rights, and money; perfection by permissive filing; temporary perfection w/o filing or transfer of possession

(a)    Perfection by filing permitted

(b)    Control or possession of certain collateral

§9-313                          When possession by or delivery to secured party perfects security interest w/o filing

(a)    Perfection by possession or delivery

(b)    Goods covered by certificate of title

(c)    Collateral in possession of person other than debtor

1. person in possession must authenticate a record acknowledging that it holds possession of the collateral for the secured party’s benefit. ---NEW LAW

(f)     Acknowledgment not required

§9-314                          Perfection by Control

(a)    A SI in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control of the collateral



B. Methods of Perfection, page 147

An Article 9 SI is enforceable against the debtor when it attaches.  Perfection gives the SI optimal effect against third parties.  Applicable steps for perfection differ depending on the types of collateral.


Possible methods of perfection:

a)      Filing a financing statement(s) in a designated place(s) – it includes everything except for deposit accounts and letter-of-credits; generally dealing with a financing statement; mostly for automobiles and other vehicles

b)      Notice by possession (the “pledge transaction”)

c)      Control

·         an all-purpose device b/c it creates as well as perfects the creditor’s interest

·         the first creditor to obtain control has priority over other conflicting claimants (investment property, deposit accounts, letter-of-credit rights)

d)      Automatic perfection

·         Must be both a PMSI and a consumer goods; exception in COT – cannot use automatic perfection

·         The SI perfects automatically upon attachment; no act of public notice is required


When Article 9 perfection rules will NOT apply:

a)      Federal statute will sometimes state its own rules regarding public notice (e.g. Federal Aviation Act)

b)      If a separate state statute establishes its own public notice scheme (eg. State Certificate of Title for automobiles–COT)


In re Pipes, page 154

Facts:  MI had a dual-filing system for financing statements pertaining to business property.  It requires the filing both with the Secretary of State and the Recorder of Deeds of the obligor’s county of business location if business property is the claimed collateral.  However, if the claimed collateral is consumer goods, farm products, or farm equipment, filing is required in the county of the obligor’s residence only.  Trustee asserts mechanic’s tool should be classified as business equipment.  ITT says it’s consumer goods and therefor it only had to be filed its collateral claim in the county of obligor’s residence only.

Issue:  How is the collateral defined or characterized?

Rule: The nature of a collateral depends on its use by the owner.

Holding:  Such tools were expensive and extensive hand tools used in the debtor’s business of repairing motor vehicles at the debtor’s place of business for financial reward; therefor it is labeled as a business equipment.  ITT secured claim is denied since ITT did not file UCC-1’s with the Secretary of State to perfect a SI in the business equipment


Fitzgerald v. American General Finance, Inc., page 156

Facts:  Debtor MP, who lives in Idaho, purchased a snowmobile in Wyoming.  No COT was ever issued for it.  Subsequently, Debtor MP borrowed money from D and granted it a SI in the snowmobile to secure a loan.  D attempted to perfect its SI by filing a UCC-1 financing statement with the Idaho Secretary of State.  MP later filed a bankruptcy petition.  P is the trustee in the bankruptcy case.  Debtor MP surrendered the snowmobile to P.  P bought this action to avoid defendant’s SI in the snowmobile.

Issues:  P claims that D’s lien is not properly perfected under Idaho law, and is therefor avoidable under a trustee’s hypothetical lien creditor status bestowed by the “strong-arm provisions of the Bankruptcy Code”.

Rule:  Exception to the general rule is made for the Idaho motor vehicle title statutes.  Issuance of a COT and the notation of the creditor’s lien on that certificate is the exclusive method of perfection.

Holding:  P is correct.  D failed to insure that a proper certificate of title to the snowmobile was issued and that its lien was noted on the certificate.  D’s SI is therefor avoidable by P.  It doesn’t matter that the vehicle was purchased in another state that does not require COT; it is D’s burden to follow Idaho law to properly perfect its SI. 


“Belt-suspenders approach” to protect yourself in the situation of bankruptcy.


Problem 3.2, page 157

You represent Unitex Corporation.  U desires to engage in secured financing relying on the following types of collateral:

1.       Installment contracts GM stores generates from its sale of office equipment to various law firms.  U is making its loan to GM.

2.       The office equipment described in (a) above assuming U is lending to GM.  Would your advice change if U were lending to the various law firms purchasing the office equipment from GM?

3.       Promissory note GM’s customers execute which GM wishes to sell to U at a discount.

4.       Credit card receivables GM generates from sales.

5.       Television sets and stereos various private individuals will purchase with loans from U.  Would your advice to U change if its loans to these individuals were not in any way connected to their purchase of the televisions and stereos?

6.       A delivery truck GM purchases to make furniture deliveries.

7.       GM’s stock in GM Jr., a wholly owned subsidiary.

8.       Software which GM uses in its accounting system and which it holds under license from Micro-SW.


Set up chart:



Type of Collateral


Method of Perfection

Installment contracts


Accounts, Instrument, Chattel Paper


Filing, for CP and I, you would prefer to have Possession under §9-330

Office Equipment


Inventory, Equipment, PMSI


Filing by FS (more practical), possession, no Automatic Perfection for PMSI b/c not a consumer good in the hands of the buyer

Promissory note


Instrument, Tangible Chattel Paper, Accounts

§9-109(a)(3), §309(4), §9-312, §9-313, §9-309(4)*

Filing (may be better), Possession, Automatic perfection when we’re dealing with promissory notes

Credit card receivables



§9-309(2), §9-102(2)(vii), §9-310(2)

Filing a FS

Television sets and stereos

Consumer Goods (depends on debtor’s use), may be Equipment

§9-309 PMSI

Possession (not practical), Filing (may actually be better than automatic perfection under

§9-320(b), Automatic (only if it’s a consumer goods)

Delivery truck



§9-310(b)(3), §9-311 for vehicle -COT

Possession (not so sure it’ll work b/c you need a first lien on COT, therefore, you mind as well file a COT), Filing a COT

GM’s stock


Instrument, Investment Property -- Certificated Security or Uncertificated Security


Control (will trump filing and everything else under §9-328), Filing

Software (holds it under a license)


General Intangible

§9-312, §9-314, §9-310(8)

Filing only


The president of U wants answers to the following questions:

1.       What are the perfection requirements regarding each type of listed collateral?

2.       If options are available, which method of perfection do you recommend and why?

3.       If filing is an available option, where must U file assuming the jurisdiction in question has enacted Revised Article 9?

4.       If U desires to determine the ownership and existence of any claims against the foregoing collateral, how can it do so?

Through financing statement or check file in secretary of state’s office.


In filing, you might ask yourself:

Where do we file?  Two choices for state filing – within a central location or at a county level.

How do you even know which state law controls?







Problem 3.3, page 158

U increases your retainer and requests a similar memo with respect to the following:



Type of Collaterals


Method of Perfection

10 non-transferable, non-negotiable certificates of deposit for 10K each issued to SF and redeemable 90 days from date of issue.      U will lend to SF, Inc.

Deposit accounts; perhaps also an instrument but b/c they’re marked non-transferable and non-negotiable, they wouldn’t be


Control (only way)

Supplies of machine replacement parts stored by SF for use in repairing its machines

Equipment; could be inventory


Possession, Filing (more practicable)

Cash which SF originally places in its register but ultimately deposits in its account at Bank of Boston


While in the register, it’s money; when it’s in the bank, it’s a deposit account (the better choice)


Possession (when it’s money), Filing, for DA, it would have to be control

SF’s Patent infringement claim against Trigger Happy Company


Commercial tort claim


Filing (only way)

SF’s Child-proof trigger patent


General intangibles


Filing (only way); with respect to patent, you don’t have to comply with federal law; you can go by UCC guidelines.

In re Cybernetic Services: 252 F3rd. 1039, 9th Circuit 2001


Problem 3.6, page 159

G sells new and used cars.  It also provides repair and body shop service and leases a fleet of taxi cabs to the city.  G has asked Bank of Harrington for a loan.  B wants to know how to perfect its interest in the following, assuming the state in which G is located, has enacted alternative 2 of §9-401(1) or has enacted Revised Article 9.   It also wants to know how it can determine (confirm) title in the following property and the existence of any prior claims against it.



Type of Collaterals


Method of Perfection

G’s new cars



Possession, Filing a FS (more practicable than filing with the DMV)

Used cars G receives on trade-in



Possession, Filing a FS is more practicable if it’s in the dealer’s hand; but if it’s in the consumer’s hands, file COT

G’s rights to payment for body shop and repairs services

Chattel paper (probably not though), Accounts (the better choice if you don’t want to commit malpractice)


Possession (the better choice), Filing (for accounts only)

G’s tow truck



Possession (don’t think so), Filing with DMV (better choice,)

G’s fleet of leased taxi cabs



Possession (might work since it’s just inventory), Filing a FS is the better choice though

The large computer system and network that G uses in its various business locations



Possession (not likely), Filing (better choice)

Software developed by G and used in maintaining inventory control

General intangible (if it’s an article 9 software); may be an equipment but most likely not


Filing (only)


Note:  When you think of accounts, you better be thinking about chattel paper or instrument as well.


Handout Problem #3-1 “A Walk Through the Filing System”

Why would you worry about a lien search?  You want to know where you are in line as the creditor in relation to other creditors.  What did TRZ leave out in the FS?  Here, there’s no way to determine control or possession.


How do you order a UCC lien search?


How do we get a copy if this report?  Secretary of State office at the state level or sometimes, at the county level (for consumer goods or fixtures).  What information do you have to give them? Name of the debtor. Today, some of these request are online or on paper.  What would you have received 10 years ago from the filing office: name of debtor, secured party, collateral description, termination statement.  You also would want to get a copy of the FS in issue.

§9-523              Information from filing office; Sale or license of Records

(c) Communication of requested information

(d) Medium for communicating information

(e) Timeliness of filing office performance         

§9-102(a)(18)    Definition of “communication”


What will you receive from the Texas Secretary of State? Refer to TRZ handout.


Assume that the search reveals a “bogus filing” against S?  What should S do? TRZ will discuss.

§9-518              Claim Concerning Inaccurate or wrongfully filed record

(a) Correction statement

(b) [Alt. A], Sufficiency of correction statement

(c). Record not affected by correction statement


You may be able to get actual DAS if you can prove it up.  Otherwise, you may get 5K at minimum.  This has been a problem in TX.  Don’t worry about this for exam.


TNB wants to perfect its SI.  For most of the collateral, TNB can perfect its SI by filing a FS.  The Bank ask you to prepare a FS.  What information do you need to prepare the FS?


§9-502              Contents of FS; Record of Mortgage as FS; Time of filing FS

(a)    Sufficiency of financing statement

(b)    Real property-related financing statement


In reading this section, keep in mind §9-516.

§9-503              Name of Debtor and Secured Party


§9-102              Definitions

(a)(50) Jurisdiction of organization         

(a)(70) Registered organization

§1-201              Definitions


§9-504              Indication of Collateral

§9-509              Persons entitled to file a record

(a)(1) Persons entitled to file record; the debtor authorizes the filing in an authenticated record

(b) Security agreement as authorization

§9-510              Effectiveness of filed record

                        (a) Filed record effective if authorized by person that may file it under §9-509

§9-516              What constitutes filing; effectiveness of filing

(b) Refusal  to accept record; filing does not occur b/c:

(4) record does not provide name and mailing address of secured party of record

(5) record does not provide mailing address of debtor, indicate whether D is an organization or individual, and if organization, the type of organization, a jurisdiction of organization, and organizational identification number for the debtor or indicate that debtor has none.

§9-520              Acceptance and Refusal to Accept Record

(a)    Mandatory refusal to accept record

(c)  Communication concerning refusal

§9-521              Uniform form of written financing statement and amendment                  

(a)    Initial financing statement form


Basic component of FS: name of debtor, secured party, description of collateral.  Are you surprised there’s no requirement of signature?  The former Article 9 version required it.


A fixture is something so tangible that it could be subject to real estate laws.  Anytime you take a security interest in an equipment, make sure to check if it could be a fixture and therefor you must file a fixture filing.  How is it different from a generic filing?  There are some specific that you must file.


Can TNB file its FS before TNB and S execute the SA? Yes, code says so.  What if we file a FS w/o signature?  Urge

debtor to sign the FS as a form of authorization. The elimination of this signature requirement was to foster the electronic filing method.  Does not require location. 


§9-502              Contents of FS; Record of Mortgage as FS; Time of filing FS

(d) Filing before security agreement or attachment


What can you do in a FS that you can’t do in a SA?  Use supergeneric term in describing the collateral à “includes all…”


If TNB does so, does perfection occur upon filing?

§9-308              When security interest or agricultural lien is perfected; continuity of perfection

(a) Perfection of Security Interest: When it attaches and all applicable requirements for perfection      

(§9-310 to §9-316) are satisfied. 



Assume TNB has filed a FS.  Two weeks later, TNB decides that it wants to make specific reference to several valuable pieces of equipment.  Can TNB unilaterally file an amendment to accomplish its desired purpose? Yes


Aren’t they really no different than the original filing.  Only requires authorization and place of filing.

§9-509              Persons entitled to file a record

§9-512              Amendment of financing statement

(a)    [Alt. A] Amendment of information in financing statement

(c)  Effectiveness of amendment adding collateral

§9-521              Uniform form of written financing statement form

(b)    Amendment form


Two weeks after the FS is filed, you note that your paralegal who prepared the FS transposed two digits in the ZIP Code of the debtor’s address.  Is this a problem?  What if the collateral box on the FS says “See description of collateral on Attachment A” -- and the paralegal forgot to attach the attachment?  What if the paralegal described the debtor as “Star Furniture Company” instead of “Star Furniture Corp.”? 


The standard we use is whether it is “seriously misleading”.  We must also determine if the error is major.  Here, it is a major error b/c collateral description is an essential element of FS. 


Whether a mistake in the debtor’s name is seriously misleading depends if the search system picks up the name.  May be or may not be.


§9-506              Effects if error or omissions

(a)    Minor errors and omissions: A FS substantially satisfying the requirements of this part is effective,even if it has minor errors or omissions, unless the errors or omissions are make the FS seriously misleading.


S has just signed a standard form FS, also known as UCC-1 (see §9-521).  Assume that all of the collateral is located in TX.  Where does TNB file its FS? Any authorized office unless local laws state otherwise.


In TX, you file the FS centrally in the secretary of state’s office with the person who’s the UCC officer.  You may file in other places when the SI concerns fixtures à fixture office in the county level.


§9-501              Filing Office

(a) Filing Offices          


Does your answer suggest that you should have ordered UCC lien searches from anyone other than the TX Secretary of State? Yes, but also should have searched at the county clerk’s office where the fixtures are located.                             


You submit the FS to the TXSOS.  Does filing occur when the secretary indexes the filing, or at an earlier point in time?

When you pay the proper fee after sending in your information.  Express filing is permissible in TX.


§9-516              What constitutes filing; effectiveness of filing

(a)    what constitutes filing: communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office


By what piece of information does the filing officer index the FS?  Does the filing officer do anything other than index the FS? Name of the debtor.  Filing officer also provides a unique number and records it.


§9-519              Numbering, Maintaining, and Indexing records; Communicating information provided in records

(a)    Filing Office Duties

(c)  Indexing: General


What if the filing officer erroneously switches the names of the debtor and secured party and the FS is erroneously indexed against TNB?  The searcher bears the risk b/c it’s still effective. 


§9-517              Effect of Indexing Errors: The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.


Two years into the loan, S decides that it can get better pricing terms from AB.  AB agrees to make a 50K loan to S.  Some of the loan proceeds will be used to pay off TNB.  The loan will be secured by the same assets.  The AB loan officer thinks he has two options: either ask TNB to terminate its liens and file new FS’s or ask TNB to assign its liens to AB as part of the payoff.  Do you favor one option over the other?  As a lawyer, you sure do.  You care about the older date and you want to take an assignment.  Also, go back and check over the FS to make sure it’s correct.  Why?


§9-310              When filing required to perfect SI or Agricultural lien; SI’s and Agricultural liens to which filing provisions do not apply

(c) Assignment of perfected SI:  If a secured party assigns a perfected SI or agricultural lien, a filing under this article  is not required to continue the perfected status of the SI against creditors of and transferees from the original debtor.


AB decides to take an assignment of TNB’s liens and wants to file something in the UCC records to indicate that AB is now the secured party of record. What are the elements of an effective assignment?  You need to cross-reference back to the original filer.


§9-514              Assignment of Powers of Secured Party of Record

(b)    Assignment of filed financing statement:

1.       identifies, by its file number, the initial FS to which it relates;

2.       provides the name of the assignor; and

3.       provides the name and mailing address of the assignee.

§9-521              Uniform form of written FAS and Amendment

(b) Amendment form: A filing office that accepts written records may not refuse to accept a written record in the following form and format except for a reason set forth in §9-516(b)


The loan officer at AB calls you up and ask how frequently, if at all, it has to refile to continue the effectiveness of its FS.  What do you tell the loan officer? Most loans on average last about five years that’s why the code chose the number.


§9-515              Duration and effectiveness of FS; Effect of lapsed FS

(a)    Five-Year effectiveness after the date of filing.


Does the effective period run from the filing date of TNB’s original FS, or from the date when AB filed its assignment? 

§9-512              Amendment of financing statement

(b)    Period of effectiveness not affected


What information is required on a continuation statement?  Make the continuation statement reference back to the original FS.  Make sure to include file number and date so that you can later trace back by using such information.

When can you file the continuation statement?  Within 6 months.  Does the additional period of effectiveness run from when (i) the original FS would lapse or (ii) the continuation statement is filed? If lapsed, the FS is not perfected and then you would have to worry about the next creditor behind you.  Lien creditors (involuntary) are not protected by retroactive perfection.  You want continuous and uninterrupted perfection.  If you file the continuation statement late, you go to the back of the line behind the people you were ahead of.


§9-515              Duration and effectiveness of FS; effect of lapsed FS

(d) When continuation statement may be filed: only within 6 months before the expiration of the 5-year period specified in subsection (a) or the 30-year period specified in subsection (b), whichever is applicable.

§9-512(a) [Alt. A]         Amendment of information in FS:

1.       identifies, by its file number, the initial FS to which the amendment relates; and

2.       if the amendment relates to an initial FS filed [or recorded] in a filing office described in §9-501(a)(1), provides the information specified in § 9-502(b).

§9-521              Uniform form of written FAS and Amendment

(c)    Amendment form: A filing office that accepts written records may not refuse to accept a written record in the following form and format except for a reason set forth in §9-516


Assume you’re eager  to please the loan officer at AB so you file a continuation statement 6 months and two days before the 5-year effectiveness period.  What result?

§9-510              Effectiveness of filed record

(c)    Continuation statement not timely filed:  A continuation statement not filed within the 6-month period prescribed by §9-515(d) is ineffective


You discover your error after the 6-month period has expired.  The original filing by the TNB has lapsed.  What is the effect on AB’s SI?

§9-515              Duration and effectiveness of FS; effect of lapsed FS

(d)    Lapse and continuation of FS:  on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed pursuant to subsection (d).


Now you need to file a new FS.  Can AB unilaterally file a new FS covering the same collateral described in the SA?

§9-509              Persons entitled to file a record.

(a)    Person entitle to file record:  a person may file an initial FS, amendment that adds collateral covered by a FS, or amendment that adds a debtor to a FS only if:

1.       Debtor authorizes the filing in an authenticated record or

2.       The person hold an agricultural lien that has become effective at the time of filing and the FS covers only collateral in which the person holds an agricultural lien.

(b)    Security Agreement as authorization:  By authenticating or becoming bound as debtor by a SA, a debtor or new debtor authorizes the filing of an initial FS, and an amendment covering:

1.       the collateral described in the SA; and

2.       property that becomes collateral under §9-315(a)(2), whether or not the SA expressly covers proceeds


S informs AB that S wants to borrow 500K from CB, but CB demands a perfected SI in unencumbered collateral worth at least 750K.  AB, in a cooperative mood, agrees to permit S to borrow the 500K and agrees to release its SI in two specific pieces of equipment worth approximately 750K.  Does Article 9 require AB to file a release document in the UCC records to reflect that the two specific pieces of equipment are no longer part of its collateral package?  No. You could , but don’t have to. 

§9-512(a) [Alt. A]         Amendment of information in FS:

3.       identifies, by its file number, the initial FS to which the amendment relates; and

4.       if the amendment relates to an initial FS filed [or recorded] in a filing office described in §9-501(a)(1), provides the information specified in § 9-502(b).


Assume that AB is willing to cooperate but is unwilling to release its SI on any of the collateral.  What alternative action might AB take that will accommodate CB? Subordinate the SI.  “I was first in line but now I’ll let you be in line, but I still want to be in line”.  A and B just switched position in the line.  We will be in line with a chance to claim the SI.


If AB elects to file a release, which CB will urge AB to do, what information is required to be on the release?  Same concept.  Just determine what it is (e.g. assignment, amendment, release, termination) and reference it by the filing number.


§9-512(a) [Alt. A]         Amendment of information in FS:

5.       identifies, by its file number, the initial FS to which the amendment relates; and

6.       if the amendment relates to an initial FS filed [or recorded] in a filing office described in §9-501(a)(1), provides the information specified in § 9-502(b).

§9-521              Uniform form of written FAS and Amendment

(e)    Amendment form: A filing office that accepts written records may not refuse to accept a written record in the following form and format except for a reason set forth in §9-516


S repays the 50K loan.  Is AB required to file any document in the UCC records indicating that the loan has been paid and the SI is terminated?  Yes.  If so, what information must be on the termination statement?  What if the termination was never filed?  Can we claim DAS caused by it?  Yes.  At minimum, we would get $500 for the violation. Can AB force S to file the statement (and thus save itself from paying the filing fee)?  Would your answers differ if the collateral was consumer goods and the debtor was an individual?


§9-513              Termination Statement

(a)    Consumer Goods: A secured party shall cause the secured party of record for a FS to file a termination for the FS if the FS covers consumer goods and;

1.       There is no obligation secured by the collateral covered by the FS and no commitment to make an advance, incur an obligation, or otherwise give value; or

2.       The debtor did not authorize  the filing of the initial FS

(b)    Time for compliance with subsection (a)

1.       Within one month after there is no obligation secured by the collateral covered by the FS and no commitment to make an advance, incur an obligation, or otherwise give value; or

2.       If earlier, within 20 days after the secured party receives an authenticated demand from a debtor

(c)    Other collateral.

§9-512(a) [Alt. A]         Amendment of information in FS:

7.       identifies, by its file number, the initial FS to which the amendment relates; and

8.       if the amendment relates to an initial FS filed [or recorded] in a filing office described in §9-501(a)(1), provides the information specified in § 9-502(b).


Can S unilaterally file a termination statement if AB fails to honor its obligation under §9-513? Yes

§9-509              Persons entitle to file certain amendments

(d)    Person entitled to file certain amendments:

1.       the security party of record authorizes the filing; or

2.       the amendment is a termination statement for a FS as to which the secured party of record has  failed to file or send a termination statement as required by §9-513(a) or (c), the debtor authorizes the filing, and the termination statement indicates that the debtor authorized it to be filed.



B.     Adequacy of Financing Statement, page 160

If filing is an available option, the creditor must know what to file as well as where to file it.   Pre-Code, a secured creditor could lose important rights as a result of minor errors in the recorded document.  Thus, Article 9 adopted a simple “notice” filing system: what is required to be filed is not, as under chattel mortgage and conditional sales acts, the security agreement itself, but only a simple notice which may be filed before the security interest attaches or thereafter.  Revised Article 9 simplifies even further the requirements for a valid FS.  §9-502(a) says a FS is sufficient if it gives the debtor’s name, the name of the creditor or creditor’s representative and “indicates the collateral covered by the FS. 


All states issue standardized, pre-printed FS forms so-called “UCC-1”.


1.      Description of Collateral

§9-402(1) says that a FS is sufficient if it “contains a statement indicating the types, or describing the items, of collateral.” Although such a rule seems simple and easy to do, it has caused significant confusion.


Gill v. United States, page 161

Facts:  SBA is a creditor of B under a loan agreement that gives SBA a SI in B’s assets.  In 1984, B filed bankruptcy.  Thereafter, the trustee for B filed suit against one of B’s former customer’s.  After settlement, the trustee sought a declaration in the bankruptcy court that SBA did not have an interest in the proceeds of the settlement.  SBA argued that a FS filed in 1983 gave them a perfected SI in the settlement proceeds.

Issue: Whether a FS describing the collateral for a loan as “personal property” was sufficient to perfect the SBA’s SI in the proceeds of a lawsuit settlement.

Holding:  No.  A FS under the UCC must describe collateral with greater precision that that furnished by the term “personal property”.  §9-402 requires that FS’s describe collateral by “type” or “item”.  Such description is understood to require a certain degree of specificity.  It is insufficient for the notice to claim all of the debtor’s property.  The use of the term “personal property” cannot satisfy §9-402’s required identification of “types” or “items” of collateral w/o effectively nullifying the rule since “personal property” refers to no more and no less than every kind of collateral perfectible under the statute.  If such terms were sufficient to perfect a SI, creditors would never need to use other language to designate collateral.  This would be at odds with §9-402’s policy of requiring disclosure to potential creditors of the nature of the encumbered collateral.  It also makes no difference if the FS uses the term “personal property” in conjunction with specific types of property such as equipment and accounts receivable.  The term would be redundant with all other terms in the FS and adds no new “items” or “types”.



Revised Article §9-504 says: A FS sufficiently indicates the collateral that it covers if the FS provides:

1)      a description of the collateral pursuant to §9-108; or

2)      an indication that the FS covers all assets or all personal property.


Thus, you can ONLY do it in a FS.  The same does not hold true for a SA (§9-504).  A SA describing the collateral as “all the debtor’s assets” or “all the debtor’s personal property” will NOT create a valid SI in all the debtor’s assets.


Problem 3.8, page 168

BLI asks B for a $1 million loan.  B agrees.  President of BLI signs a SA granting B a SI in “all its chemicals, now or after-acquired, and all products thereof; all its cell cultures, current and after-acquired; all test animals; used equipment as indicated on the attached appraiser’s report; chattel paper; and all existing and future rights to receive payment under K orders.”  The appraiser’s report includes “one centrifuge, serial #258305; one Dell server; 10 Dell Pentium II computers; and fifty siphon tubes” identified by serial number.  B files a FS covering “inventory; one centrifuge, serial #258805; one Dell server; assorted siphon tubes; Pentium II computers; and payment rights.”


In each of these, we have to look beyond the FS.  You can’t perfect something unless you have an interest in it.  We have to look at the description through the FS and the SA.  We can’t look at anything else until we satisfy the description in the SA.  Only then can we look to the FS for perfection. 


a.       Assuming FS is valid, does B have a perfected SI in BLI’s existing stock of polio vaccine?  Okay. The description in the SA doesn’t have to be the same as in the FS, but to be safe, you should have them as mirror images. 


What about hepatitis vaccine it only manufactures after execution of the SA?  We’re probably okay.


Lab animals born a year later? SA test is not satisfied b/c no after-acquired clause included.  “All” only really means “as of today”.  These could be equipment or farm product or even inventory.  The point here is that we must be able to determine with certainty.  We could avoid it by just saying test animals.  We never have to use an after-acquired clause in a FS, but we MUST in a SA.  Otherwise, we will have a problem regarding these lab animals.


b.       Does B hold a perfected SI in the centrifuge?  Okay in the SA, but the filing # is not the same in the FS.  It would be more fatal if the file # was wrong in the FS.  If you can’t get the serial # right, don’t use it at all in the description. 


The Dell server?  It’s in the FS and in the appraiser’s report.  If we only have one, it’s okay, but more than one will pose a problem.  Here, which one do they mean?


The computers?  We’re going to have the same problem b/c they used the #10. 


The siphon tubes?  We know exactly which fifty, so it’s okay.


The revenues BLI receives from the sale of its products?  Okay.  In FS, we can rely on the payment rights.


c.       If you were representing B, would you have drafted the SA and/or FS language differently?

Yes, use the same description in each document to avoid problems.


Problem 3.9, page 169

L sells most of its inventory on credit with customers executing conditional sales Ks and promissory notes payable to L.  L obtains a $1 million line of credit from B.  It executes a SA granting B a SI in “all current and after-acquired accounts”.  Both parties understand the language to refer to the conditional sales Ks and notes L receives from its credit sales of furniture.


a.       Does B have a SI in L’s conditional sales Ks and promissory notes?  First ask, how might we describe the conditional sales K?  The sales K would be chattel paper – evidence a monetary obligation to pay and assumption of retention of title by the seller.  PN could be instrument (don’t have to though).

b.       Assume B’s FS list “accounts”.  Would that perfect a SI in L’s conditional sales Ks and PNs if the parties understood the term “accounts” to mean “conditional sales Ks and PNs?


But what if we use the word “account” again in the FS?  Will they have an understanding of the meaning of the word “account”? Probably not.  They’re probably relying on the Article definition of it.  FRZ would probably not use the word “account” at all to avoid confusion.


2. The Debtor’s Name

The debtor name requirement is the linchpin of the Article 9 notice filing system.  Filing officers index FSs according to the debtor’s name.  Searchers search under a debtor’s name [§9-519(c)].  If you can get only one thing right, maker sure it’s the debtor’s name.  But what is the debtor’s name.  For example, if it’s “The Gap”?


TRZ hates this case!!!

In re Mines Tire Co. Inc., page 169

Facts: Involves a FS which contains an error in its recitation of the borrower’s name.  In June 1993, BEAC sold the assets of its auto and tire service business to MTC.  As part of the consideration for the sale, MTC executed 3 PNs.  These were to have been secured by a lien covering all of the obligor’s “appurtenances, appliance, fixtures, equipment, accounts receivables, chattel paper, and the proceeds therefrom.”  Unfortunately, both the FS and the chattel mortgage were executed in the name of “Mines Company, Inc.”, title lacking the word, “Tire”.  MTC later defaulted on its obligations to BEAC and file for bankruptcy. 

Issue: Whether computer technology can effect a change of standards, so as to render defective a lien that reasonably diligent searcher would have discovered through the use of manual techniques.  Whether deletion of the word “Tire” from the obligor’s name is seriously misleading.

Rule: §9-408(1) provides that a FS substantially complying with the requirements of this section is effective even though it contains minor errors which are “not seriously misleading”.  When determining whether an inaccuracy in the name of the debtor in the FS was a “minor error” which was “not seriously misleading”, a court must ask whether a reasonably diligent searcher would be likely to discover a FS indexed under the correct name.  The inquiry must question the extent of the discrepancy between the debtor’s true name and that indicated on the FS so as to determine whether the filing gave the minimum information necessary to put any searcher on inquiry.

Holding: Deletion of the word “tire” is not such an error as would be seriously misleading.  Computer users must learn to recognized its shortcomings and thereby act to circumvent any resulting problems.



Revised Article §9-503(c) says a FS is not seriously misleading if a search of the records under the debtor’s correct name, using the filing office’s standard search logic, would disclose it.


§9-503 also requires filing in the debtor’s legal name, NOT a trade name: view is that the actual individual or organizational name of the debtor on a FS is both necessary and sufficient, whether or not the FS is both necessary and sufficient.


TRZ says it’s really just subject to the adequacy of the search software the secretary of each state uses.  But at least we now have a statutory standard by which to measure.


Problem 3.10, page 182

H and F are brothers.  Together, they operate a business called, “Goat’s Milk Dairy Farm.” They ask B for a 100K loan.  B agrees.  Both brothers sign a SA granting B a SI in “all dairy goats, now or after-acquired, and all products thereof; all existing and after-acquired equipment and accounts.”  B files a FS giving the debtor’s name as “Goat’s Milk Dairy Farm.”  It lists the collateral as “farm products, equipment, accounts.”


In filling out the FS, we’re not only worried about the description of the collateral, but also the legal name of the debtor.


a.       Is the FS sufficient to perfect B’s interest in the debtor’s goats?  Yes, could be farm products and equipment.  They’re probably farm products. 


b.       What if the FS gave the debtor’s name as “Goat’s Milk Deiry Farm?” When the debtor’s legal name was “Goat Milk Dairy Farm”?  What about “Gote’s Milk Dairy Farm”?   We don’t know what the search would look like.  It would probably be a greater error for the “Gotes” search.  Space and comma could be a problem.  Would your answer depend on whether the files were computerized? On whether all searches were conducted by a state filing officer by means of a computerized search?


c.       Would a filing under “Goat’s Milk Dairy Farm” be sufficient if the debtor’s legal name were “Goat’s Milk Dairy Farm, Inc.”? If the state maintained a separate filing index for business entities?


d.       Assume the FS gave the debtor’s correct legal name.  However, it misstated the debtor’s address, did not give any address for B and did not contain B’s signature.  The filing officer accepts the FS as tendered. Would B hold a perfected SI in the goats?  What if the FS gave no address at all for the debtor?  Let’s assume we don’t have the debtor’s address.  It would be fatal.  What if we gave it wrong?  Could be fatal if seriously misleading.  Missing signature of creditor?  Not fatal b/c not required.  Debtor’s signature missing? Not fatal b/c also not required under Rev. Article 9.  A FS will get file even if it’s wrong.  The concern is, is the error seriously misleading?  Ex. Houston verses Dallas?  This would be fatal.  Depends on where the problem is.


e.       Could the filing officer rightfully refuse to accept the FS described in (d)?


f.        Would your answer to any of the above change if the debtor had not signed the FS?


g.       What if the FS was otherwise valid but listed B’s agent, JJM & Co., rather than B as the secured party and did not indicate JJM’s representative capacity?




Problem 3.11, page 183

M approaches FWT for a 100K loan.  M has relatively little in assets.  FWT will not loan M on an unsecured basis.  His mother, N, offers her Ming Dynasty horse statute as collateral.  The statute is extremely valuable. M is an artist and works at a frame shop and art supply store in York County.  M is an attorney with an office on Berkshire County.  He resides in Shropshire County.


a.       You are the attorney for FWT.  It wants to know who should sign what document and why (PN, SA and FS).

For PN, the son b/c he the direct beneficiary of the loan.  For the SA, the mother b/c it reflects a person’s willingness to put out there own interest.  For the FS, nobody.  The mother would be the debtor.  The son would be a primary obligor.  Mother could also possibly the obligor, but she will be the only debtor.   Should the bank sign?  Perhaps for custodial purposes, but not required.


b.       Draft language to describe the collateral for purposes of the SA.  Not an article 9 term.  Use more specific terms –“ Ming Dynasty Statute” under revised code.


c.       Draft the appropriate language regarding the collateral for the FS.


d.       Assume everyone resides in the same jurisdiction and the bank is a locally chartered bank in that jurisdiction.  Where would you file the FS(s)? 



Side note: If a FS filed even though it doesn’t contain the required elements, it is still effective. 


Continuation Statements

A filed FS is effective for five years from the date of the filing [§9-515(a)].  Some parties contemplate or desire a longer credit relationship.  Naturally, the creditor who wants to continue its perfection would like to maintain the priority date fixed by its original filing.  A creditor can do so and only do so by filing a CS. 


The effectiveness of the FS lapses on the expiration of the five year period unless a CS is filed prior to lapse.  Upon lapse the SI becomes unperfected, unless it is perfected without filing.  It is the concept of retroactive “unperfection”. The creditor’s lack of perfection “relates back”.


NBD Bank, N.A. v. Timberjack, Inc., page 195   

Facts: Involves a priority battle between two secured creditors’s interest in the same collateral.  Trial court determined that T lost its status as a perfected secured creditor when it filed a premature CS concerning the subject collateral.  Court affirms.  CSP manufactures logging and forestry equipment.  It became a dealer of T products.  Pursuant to the agreement, T was granted a SI in the products and its proceeds.  T had perfected its SI by filing a FS.  T filed its first CS 6 months and 5 days before the expiration of the term of the FS and subsequent CS referencing the original FS through 1986.  C later entered into a loan agreement with NBD.  The FS granted NBD a blanket SI in all of C’s assets. NBD recorded its FS on June 1984.  T claims that it had substantially complied with the requisites of the statute by putting NBD on notice b/c the word “may” in the statute is meant to be permissive.  Therefore it was entitled to file the CS before the 6 month period.

Holding:  The word “may” provides a secured creditor with the option to continue its interest in collateral covered by a FS, not its option to file a CS within 6 months.  Trial court was correct in concluding that T’s premature filing of the CS invalidated its status as a perfected secured creditor.

Rule: If a creditor wants to continue the effectiveness of its filed FS and the priority date it establishes, it must file a CS and it must file it within the 6-month period preceding expiration of the filed FS. 



Only the secured party may file a CS or other UCC-3.  A CS signed by someone other than the secured party of record must be accompanied by a separate written statement of assignment signed by the secured party of record and setting forth the name of the secured party of record and the debtor, the file number, and date of filing of the FS, the name and address of the assignee and a description of the collateral assigned.  This is a condition precedent to preserving perfected status. 


However , only the secured party of record can effectively file a CS, release, termination, or amendment.  By filing a written statement of assignment with any of these filings, an assignee in effect becomes the secured party of record.  W/o filing such a statement establishing that he is the secured party of record, however, an assignee cannot file an effective CS. 


Problem 3.17, page 199

MB extends credit to P&P.  MB obtains a valid SI in P&P’s inventory, current and after-acquired.  On 8/30/95, it properly files a valid FS listing “inventory”.  On 2/2/99, P&P grants SMF a SI in its current and after-acquired inventory in exchange for a 100K line of credit.  SMF properly files a valid FS listing “inventory” on 2/3/99.  At the time of its credit transaction with P&P, SMF has actual knowledge of MB’s prior interest b/c it checked the files and found MB’s filed FS.


a.       Assume P&P defaults on 4/10/00.  Who has priority to P&P’s inventory, MB or SMF, assuming the first secured creditor to file or perfect has priority so long as there is no subsequent interruption in perfection or filing.  Bank – within 5 years.  General rule is first to file or perfect wins.  See §9-322(a)(1): conflicting perfected SIs and agricultural liens rank according to priority in time of filing or perfection. 


b.       Would your answer in (a) change if P&P did not default until 9/03/00, and MB had forgotten to file a continuation statement?  Yes b/c of the 5-year period.  The only party still perfected today is SMF.  See §9-515(c): Effectiveness of FS lapses on expiration period of its effectiveness unless before the lapse a CS is filed.  If SI  becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.  Secured parties are purchasers for “value” purposes.


c.       Assume SMF does not exist.  Instead, J, a judgment creditor of the partnership, obtains a lien on P&P’s assets to satisfy an unpaid debt.  Further assume MB will have priority over J if MB’s SI is perfected, but J will have priority if MB’s SI is unperfected.  Assume J obtains its lien on 4/10/00.  Who has priority to the proceeds if the sheriff conducts a foreclosure sale on 5/1/00?  Between a lien creditor and the article 9 creditor, perfection beats a lien and a lien beats an unperfected lien  §9-317(a)(1).  Here, MB would still wins.


2nd question: Probably the lien creditor would win when the lien arrives. Then again, maybe it won’t matter b/c a lien creditor is not a purchaser for value.  A judgment creditor is not a voluntary creditor b/c its interest arises as a matter of law and not by contractual agreement.  Do we reshuffle our battle if it’s a judgment creditor?  See –515(c) – says we only suffer retroactive priority if it’s a purchaser creditor for value.  Here, the judgment creditor is not.  Therefore, we don’t have to worry.  See also §9-403(2) of the old version of Article 9.  Notice a significant difference from the Revised Article 9?  The lien creditor is not mentioned.  Look at definition of “lien creditor” in Rev. Article 9.  A “lien creditor” includes the bankruptcy trustee.


d.       Would your answer in (c) change if the sheriff’s foreclosure sale only occurred on 9/15/00, and MB forgot to file a CS?


Overall point:  Make sure you have the necessary information for filing so that you can make reference to the original FS.


Termination Statement, page 200

What happens when a creditor pre-files but subsequently decides not to make the loan or the creditor makes the loan and the debtor pays it?  In both cases, the debtor would want to remove the filed FS.  It casts a black cloud on the assets covered and will hinder the debtor’s ability to borrow from someone else.  The Code gives debtors the right to a TS     (§9-513).


A TS is a unique filing created by a different code section than the one governing FS and amendments.  Its effect on SI is dramatic and final.


 §9-510             Effectiveness of filed record

                        (c) CS not timely filed within the 6 month period prescribed by §9-515(d) is ineffective.

§9-513              Termination Statement

(a)    Consumer Goods: A secured party shall cause the secured party of record for a FS to file a termination for the FS if the FS covers consumer goods and;

3.       There is no obligation secured by the collateral covered by the FS and no commitment to make an advance, incur an obligation, or otherwise give value; or

4.       The debtor did not authorize  the filing of the initial FS

(b)    Time for compliance with subsection (a)

3.       Within one month after there is no obligation secured by the collateral covered by the FS and no commitment to make an advance, incur an obligation, or otherwise give value; or

4.       If earlier, within 20 days after the secured party receives an authenticated demand from a debtor

(c)    Other collateral.


§9-515              Duration and effectiveness of FS; Effect of lapsed FS

(a)    Five-Year effectiveness after the date of filing.

(c)  Lapse and continuation of financing statement

(d)    When continuation statement may be filed

(e)    Effect of filing a continuation statement


§9-102(a)(52) “Lien Creditor” means:

(A)  a creditor that has acquired a lien on the property involved by attachment, levy, or the like.


PEB Commentary #3, page 919 of the CODE.

Conflicts between §9-306(2) and §9-402(7)


§9-306(2) Provides: “Except where this Article otherwise provides, a SI continues in collateral notwithstanding sale, exchanges or other disposition thereof unless the disposition was authorized by the secured party in the SA or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.”


This section only treats the issue of whether a SI continues in the collateral following disposition of the collateral.


§9-402(7) Provides that: “a filed FS remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer”.  This clause was intended to resolve an ambiguity as to whether a secured party is required to file an amended or new FS when the collateral is transferred. 


Handout problem #3-2 “Post Filing Mischief”

§9-503              Name of Debtor and Secured Party

                        (a) Sufficiency of debtor’s name

§9-507              Effect of Certain Events on Effectiveness of FS

(a)    Disposition: A FS remains effective with respect to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a SI or agricultural lien continues, even if the secured party knows of or consents to the disposition.

(c)  Change in debtor’s name

§9-315              Secured Party’s Rights on Disposition of Collateral and in Proceeds

(a)    Disposition of Collateral: Continuation of SI or agricultural lien; proceeds

1.       a SI 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 SI or agricultural lien; and

2.       a SI attaches to any identification proceeds of collateral.


B makes 10K loan to “A Co.” which executes SA that gives B a SI in “all of debtor’s equipment, whether now owned or hereafter acquired.  “B timely files a proper FS with the appropriate recording office.  Thereafter…


SCENARIO #1:  “A Co.” changes its name to “B Co.” on February 1st.  “B Co.” acquires a piece of equipment in April,

and another piece of equipment in July.  Does B have an enforceable SI in the piece of equipment acquired in April?  Yes.   If so, is it perfected?  Yes. Does B have an enforceable SI in the piece of equipment acquired in July?  Yes.   If so, is it perfect?  No.   You get perfection up through the fourth month.  Name change has no affect on the enforceability of FS; just that it may be misleading. 


SCENARIO #2:  “A Co.” sells equipment to “B Co.” w/o B’s knowledge.  Does B retain an enforceable SI in the

equipment after it is sold to “B Co.”?  Is it perfected?


First, will the disposition terminate our interest?  Is it an interest that only survives if the debtor has it? 

The SI continues but not perfected.


SCENARIO #3: Same as #2, except B knew of and consented to the sale, free and clear of its SI.  Does B retain an

enforceable SI in the equipment after it is sold to “B Co.”? No.  Is it perfected under §9-507(a)? No.  It’s actually not a relevant question.  We don’t satisfy the FS on the sale.  Once it’s terminated, perfection is irrelevant. 



Maintaining Perfection, page 184

Post Filing Changes in Name, Form or Ownership

§9-507              Effect of Certain Events on Effectiveness of Financing Statement

§9-203              Attachment and Enforceability of SI; Proceeds; Supporting Obligations; Formal Requisites

(d) When person becomes bound by another person’s SA

(e) Effect of new debtor becoming bound

§9-102              (a)(56)  “New Debtor”: person that becomes bound as debtor by a SA previously entered into by another


§9-508              Effectiveness of FS if new debtor becomes bound by SA

§9-509              Persons entitled to file a record

(b) SA as authorization


§9-507 condones hidden liens.  It recognizes that a filed FS that has become seriously misleading due to a debtor name change will nevertheless continue to perfect a SI in collateral the debtor has or acquires within four months of the name change.  But doesn’t this seem inconsistent with Article 9’s fundamental tenet of notice?


What should the creditor file?  Most creditor choose to file an amendment, AKA as “UCC-3”.  Although a UCC-3 amendment statement did not describe the collateral, it did refer to the original filed FS by file number and that FS adequately described collateral:  therefore, “new appropriate FS requirement satisfied b/c amendment and the original FS together gave searchers reasonable notice.  §9-507(c)(2) also specifically mentions filing “an amendment to the FS which renders the FS not seriously misleading”.  Rev. Article 9 does not require the debtor’s signature on the FS or an amendment.  Under Rev. Article 9, creditors should file amendments to reflect the debtor’s name changes.  


Problem 3.13, page 185

B extends credit to M&P, a partnership doing business in Austin.  B obtains a valid SI in all of M&P’s current and after-acquired inventory.  On 8/30, B files a FS listing “inventory” in the appropriate office.  Both partners signed the FS in a representative capacity for the partnership.  The FS identifies the debtor as “Merrill & Pierce” and gives the partnership’s Austin’s street address.  On Jan. 2nd of the following year, the debtor adds a new partner and renames itself “Fenner, Merill & Pierce.”  B learns of the changes but does nothing.

            J, a creditor, delivers a writ of execution to the sheriff based on a judgment it obtained against the partnership.  The sheriff levies on the partnership’s inventory on May 10.  At the time, the partnership’s inventory consisted of two items acquired in December of the previous year and the three items required on May 1, ten days before the sheriff’s levy.  If B’s SI is perfected, B will prevail over J.  If B’s SI is not perfected, J’s lien will have priority. 


a.       In June, J sues B.  J argues it searched the files under the name Fenner, Merril and Pierce and found no FS.  Therefore, B is unperfected and J’s claim to the partnership’s assets should prevail.  As between J and B, who has priority to what and why?  This is really no different than scenario A in handout.  Name change but FS is ok.  All the stuff acquired was before the 4 month period.  Therefore, Bank would get it.


b.       Would your answer change if shortly before J acquired its lien, the partnership converted one item to use as equipment and J’s lien attached to all the partnership’s assets?  Instead of selling it, we’re keeping it in house.  See §9-507(b).  It suggests that we don’t have a problem if it’s not the change in the debtor’s name. 


c.       Would your answer change if debtor, on Jan. 2nd, in addition to changing its name, relocated its business to Houston?  Seems to be okay à §9-507(b).  From searcher’s perspective, filers love it b/c they only have to do a minimum.


Problem 3.15, page 193.

Daniel  Jost is a MA resident and an underground hip-hop producer who goes by the handle “Mr. Diligence.”  He gets a loan from Bank.  Bank takes a valid SI in his current and after-acquired inventory; current and after-acquired equipment; and current and after-acquired accounts.  On August 30, Bank files a FS in the appropriate office listing “inventory, equipment, accounts.”  The FS states the debtor’s name as Daniel Jost.


On Jan. 2nd of the following year, Jost incorporates his business according to the laws of MA under the name “Mr. Diligence & Co., Inc.” Jost transfers all his business assets – inventory, equipment and unpaid accounts –to his newly formed corporation.


a.       Does Bank have a perfected SI in the transferred inventory and equipment?  Yes.  The name change is seriously misleading.  Prior to transfer, everything is okay.  All this is an asset disposition.  The affect of the asset transfer on the attachment: this transaction has not terminated our interest.  Now, is our FS unperfected?  Go to 9-507, we are okay (as long as we have an enforceable SI, we don’t have to re-file).  We’re worried only about the asset at the time of attachment.  Concept of new debtor.  Is this corporate entity a “new debtor”?  See 9-203(d): talks about new debtor being bound by SA.  Let’s assume the corporate entity is a new debtor for this problem.  As long as the person is a new debtor, the SA is okay.  What about a new FS? Does Bank have to file a new FS?  No.  See 9-508. Only re-file if the name change is seriously misleading within 4 months.  Also, see 9-509(b) for other secured creditors who unilaterally discovers it. 


b.       Does Bank have a SI in any inventory Mr. Diligence & Co., Inc. acquires?  If so, is it perfected?


c.       What, if anything, must Bank do to have a SI in inventory the corporation acquires more than 4 months after Jan. 2nd?


Problem 3.16, page 194

JC operates a consulting firm in Sacramento called JC Consultants Ltd.  She has 35 employees and has consulting contracts with 15 major corporations.  The typical K calls for monthly payments to JC in return for performance by J and her staff of a minimum number of hours consulting on oil and gas exploration issues.  In addition to various office equipment, J has a number of confidential reports involving geologic information of great use and significance to oil companies.  From time to time, J signs consulting Ks with other companies which bring in large revenues for short periods of time. 


What name do we put in the debtor box?  We could put JC Consultant Ltd or Julie Caesar.  What about the organization box?  We have a debtor description problem.

a.       Bank One makes a loan to JC Consultants taking a SI in its Ks, equipments and other assets.  Bank wants to know how the FS should describe the collateral and list the debtor.

The K’s is probably an account.  Office equipment is equipment.  Confidential geological reports could be a general intangible or an equipment (default selection).



Handout problem #3-3: Purchase Money Security Interest in Consumer Goods


Article 9’s multi-state provision:

§9-103  Purchase-Money Security Interest; Application of Payments; Burden of Establishing

(a)    Definitions

(1)    “purchase money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

(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 acquire rights in or use of the collateral if the value is in fact so used.

(b)    PMSI in goods.  A SI in goods is a PMSI:

(1)    to the extent that the goods are purchase-money collateral with respect to that SI; it has to be in goods (no tangible paper); equipment and inventory qualifies b/c they can also be a good; they will not qualify for automatic perfection; only consumer goods can be automatically perfected.


SPC sells a 20K baby grand piano to TRZ, retaining a SI in the piano to secure repayment of the purchase price.  Does SPC have a PMSI in the piano?  Yes.  SPC would hope so b/c it’s a consumer good and they would be able to automatically perfected.  The piano is a consumer good here.


SPC won’t sell the piano to TRZ on credit, so TRZ borrows 20K from SB, who retains a SI in the piano to secure repayment of the loan.  TRZ uses the 20K to purchase the piano from SPC.  Does SB have a PMSI in the piano? Yes.

Same analysis but also focus on the obligation.  Look at third party financing.  It’s a PMSI.  If a consumer good, SB would have automatic perfection.


On August 1, TRZ borrows 20K from his parents and buys a Steinway grand piano.  The piano dealer delivers the piano that same day.  On August 10, TRZ borrows 20K from SB and uses the money to repay the unsecured loan to his parents.  SB secures repayment of its loan by taking a SI in the piano.  Does SB have a PMSI in the piano?  No b/c no purchase-money obligation and no seller obligation.  The money his parents gave him allowed him to acquire rights in the piano.  The bank does not have a PMSI.  SB needs to take some other affirmative step to file the SI. 


TRZ requests a 20K loan from SB to buy a grand piano from SPC.  TRZ agrees to grant a SI in the piano to SB.  SB issues a 20K check payable to the order of TRZ on August 1.  That day he deposits the check into his checking account, which has a 32K balance immediately after the deposit.  The next day he issues a 20K check payable to SPC, which delivers the piano to TRZ’s residence that afternoon.  Does SB have a PMSI in the piano?  Yes.  Here, third party financing. Doesn’t matter if you use all of the loan or a portion of it according to the code.  If you want to argue PMSI, burden of proof is on the creditor.  Look at the check to see if TRZ used it or not.  Make check payable to TRZ and seller.  It would be easier to just make the check payable to the seller.  In the worst case scenario, the CODE does allow you to argue PMSI. 


Ex.       Small Bank       à                    TRZ à Bill

            automatic          CG PMSI         sells      buys

Look at:

§9-320  Buyer of Goods

(b)  Buyer (Bill) in ordinary course of business.


Thus, if you use the FS, creditor will never be hurt in the business transaction.  We’ll discuss this statute more later in the course. 


For Wednesday:

Example:  Assume we have state of DE, TX, CA, FL.  The debtor is incorporated in DE.  Debtor has warehouse in TX, CA, and FL.   Debtor’s chief executive office is located in TX.  Secured party comes to you and asks where it should file the FS?  Our choices are DE (state of incorporation), TX (chief executive office), CA or FL (place of collateral -- warehouse).  Prior to July 1, 2001, the  state of incorporation was irrelevant.  The new law says state of incorporation will have importance.



Perfection and Maintaining Perfection in Multi-State Transactions, page 203


§9-301  Law Governing Perfection and Priority of SI

(1)    local law governs while a debtor is located in that jurisdiction

(2)    local law governs while collateral is located in that jurisdiction

(3)    local law governs while negotiable documents, goods, instruments, money, or tangible chattel paper is located in that jurisdiction


§9-307  Location of Debtor

(a)    [“Place of Business”] means a place where debtor conducts its affairs

(b)    [Debtor’s location: general rules] the following determines a debtor’s location:

1.       Individual – the individual’s principal residence

2.       Organization with only one place of business – its place of business

3.       Organization with more than one place of business – its chief executive office

(e) [Location of registered organization organized under state law] Location is in that state.


§9-316  Continued Perfection of SI Following Change in Governing Law

(a)    [General rule: effect on perfection of change in governing law.]  A SI perfected remains perfected until the earliest of:

1.       the time perfection would have ceased under the law of that jurisdiction;

2.       the expiration of 4 months after a change of the debtor’s location to another jurisdiction; or

3.       the expiration of 1 year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction

(b)    [SI perfected or unperfected under law of new jurisdiction]  If a SI becomes perfected under the law of the

other jurisdiction before the earliest time or event described in that section, it remains perfected thereafter.  If it does not, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.


§9-102(a)(70) “Registered Organization” means an organization organized solely under the law of a single State or the

U.S. and as to which the State or U.S. must maintain a public record showing the organization to have been organized.


Because Article 9 is state law, choice-of-law issues concerning secured transactions arise frequently.  §9-301 to §9-307 is Article 9’s multi-state provision.  It governs the effect of perfection or non-perfection of a SI.  They cover perfection, the effects of perfection or non-perfection, and the priority of SI.  It does not, however, address other choice-of-law issues.  For example, it does not cover which law governs attachment of a SI, its validity, the characterization of the parties’ transaction – is it a true lease or a SA? – or what law governs enforcement and default issues. 


Revises Article 9 states particularized rules for certain types of collateral. Overall, its approach reflects distinctions based on three factors:

1.       the nature of the SI (i.e. is it possessory or non-possessory);

2.       the nature of the collateral (i.e. is it intangible, tangible or semi-tangible); and

3.       the method of perfection.


The choice-of-law rules further distinguish between which state’s law governs perfection and which state’s law governs the effect of perfection, non-perfection and priority.


Problem 3.18, page 212

Zenith, a DE corporation, is a multi-state company that manufactures, distributes and sells televisions throughout the country.  Its principal place of business and manufacturing facilities are in KY.  It has a financing arrangement with Chase Bank who holds a valid SI in all its inventory.


a.       If Chase desires to perfect its interest in Z’s inventory located in KY, where must it file? This question just raises perfection concerns.  In DE under §9-307(e) à §9-102 (“registered organization; three types).  Z can be a corporation, or limited partnership, or limited liability.  Proprietership for individuals.  What about Z’s inventory located in TN? 


b.       Where should Chase file if it desires to perfect a SI in accounts generated from Z’s sales of inventory from a retail store located in FL?  The type of collateral is different here – cash.  Probably in DE still.   Under former Article 9, it would be a location test à chief executive office.  Would your answer change if Z was a general partnership?  Yes b/c it’s not a registered organization.  We would go to 9-307(b)(3) à chief executive office à KY.  An individual who resided in OH?  In OH; doesn’t matter where individual is doing business; it’s by their residence.


c.       Whose law governs perfection of Chase’s interest in conditional sales Ks  that Z generates from the sale of home entertainment systems from its KY stores? Does it matter whether Chase wants to perfect by possession or by filing? Still determined by DE if we file à9-307(1) applies.  But if Z wants to take possession, then it’s wherever the chattel paper is kept. 


d.       Assume Chase has a perfected SI in all Z’s current and after-acquired inventory and accounts.  Must Chase do something to maintain its perfected status in Z’s inventory and accounts if Z relocated its corporate headquarters to Mobile, Alabama, but maintains its principal manufacturing plant and stock warehouses in KY?


 Here, we’re moving corporate headquarters.  This is of no importance to us under Revised Article 9.  Would your answer change if Zenith was a partnership, not a corporation?  Depends what kind of a partnership.  If limited partnership, no concern.  If general partnership, it will be affected.  §9-307(b)(3) à says chief executive office à §9-316 tells us if a debtor has relocated.  Refile should be within 4 months.  Our concern also if we would be running out of our five year perfection period.  Much more simple than under old CODE.  Just know what kind of debtor you’re dealing with.  Secured party just needs to monitor the debtor’s location changes.  But it’s rare that a debtor would reincorporate.


Handout problems:

#3-4: SI in deposit account; 9-301; 9-304; 9-316

Deposit account SI can only be perfected by control.  §9-304 tells us which state to pick.  Then we go to the bank’s jurisdiction.  Which bank?  9-304(b) tells us.


Ameribank – deposit account à New York law governs.  It’s the facility where the deposit accounts is maintained. 

Central National Bank – certificate of deposit à Missouri law governs.

Oklahoma National Bank – deposit account agreement à 9-304(b)(3) à Oklahoma law governs.


Now we would worry about which law controls.  Rev. Article 9.

Good illustration of how choice of law is difficult if it isn’t under Article 9 Revised.


Last question:  Would you be nervous if you were Ameribank?  Go to §9-316.  (a)(2) does not apply.  (b) does not apply.  (f) does apply.  4 month test.   


#3-5: SI in investment property: 9-301; 9-305(a), (c); 9-316(f), (g)

§9-301 à §9-305(a) and (c).  Never have to worry about (b) with TRZ.  We would file in TX b/c Maria is located there.  If in LA, 4 month test.  If SI left TX, no worry.


Perhaps it’s better if we perfect it by control.

For the certificate, we just need to know where it’s located. 

For the shares, (a)(2) applies b/c it’s a uncertificated SI

For the investment, we’re dealing with a security account à (a)(3) applies.  It would be Prudential for intermediary à 801-10(e)



Errors and Liability for Errors


People’s National Bank v. Weiner, page 227

Facts: Plaintiff loaned  S 60K and in return, received a SI in S’s inventory and equipment.  Plaintiff was represented in transaction by defendant attorney who in turn retained M to conduct the title searches on the collateral and to file a UCC FS with the proper authorities.  M delivered and mailed the FS to the Secretary of State.  M received no return receipt.  S later filed for bankruptcy.  It was discovered that plaintiff’s FS had never been filed and as a result, plaintiff lost its status as a secured creditor.  Plaintiff claimed defendant M breached their duty to ensure that the FS was properly filed.

Issue: Does mailing constitute filing under the UCC?

Holding: A FS must be received by the filing officer before it is presented and evidence of receipt is required.  Presentation for filing of a FS and tender of the filing fee or acceptance of the statement by the filing officer constitutes filing under UCC-9.



Chemical Bank v. Title Services, page 229

Facts:  Chemical loaned money to Central in which a portion of the loan proceeds would go to F.  F executed a SA granting Chemical a SI in certain collateral. C engaged TSI (defendant) to conduct lien searches.   B, one of the debtor, was not searched out b/c of misspelling problems.  A then brought suit on B to foreclose on a lien.  The lien included Chemical’s filing listing F as debtor.  None of TSI’s search revealed B’s FS by Chemical.  Chemical sued TSI alleging that TSI failed to conduct the searches properly.  

Issue:  Is TSI liable to Chemical for failure to conduct a proper lien search?

Holding:  A searcher does not have a duty to hypothesize possible misspellings b/c the secured party is required to file an accurate FS.  The burden is on the creditor to make a proper filing and the creditor bears the risk of misfiling.  The filing clerk is required to index the statement under the name found in it and is not required to engage in some second-guessing. 


Deb-Jo Construction, Inc. v. Westphal, handout

Facts: Defendant attorney failed to file FS with Department of State.

Rule: §9-302, 9-401[1][c]: the failure of an attorney to file a financing statement in the manner required by law to perfect his client’s SI constitutes negligence or malpractice as a matter of law.


Janos Marias v. Eugene A. Marano, handout

Facts: Defendant attorney admits that he breached the applicable standard of care by failing to file the FS to perfect the plaintiff’s SI in the partnership property.  Although, he admits negligence, he maintains that his negligence was not the proximate cause of the plaintiff’s damages.

Holding: There does exist substantial evidence upon which a jury could find that the defendant’s negligence was not the proximate cause of the plaintiff’s damages.

Rule: It is not proximate cause if the injury likely would have occurred anyway.


Side note: §547 of the BC Coded


Advanced Scope Issues, page 214-215

Real estate can serve as collateral. 

We will not worry about consignment in here.


Problem 3.22, page 226

Dr. S is a radiologist who practices as Dr. S, P.C.  In addition to her own practice, she wants to start a radiology clinic.  She approaches B for a $1 million loan to purchase equipment.  Medical equipment can depreciate rapidly in value due to rapid advances in medical technology.  B wants additional protection if it is to make the loan. 


Bank would have a PMSI in the equipment no automatic perfection b/c it’s not a consumer goods.  Bank would have to file FS.

a.       This is an Article 9 sales transaction §9-109(a)(3).  The debtor would be the seller (Dr. Suzanne Hubbard).  Account would serve as collateral.  Perfection concerns here also.  Secured party is lender.  Only way to perfect is by filing.  On the note, it’s also y filing. However, the sale of notes are automatically perfected. 

b.       Any concerns?  Not from an Article 9 perspective.  Maybe from a seller’s perspective.

c.       Can we take an article 9 SI in her accounts?  Look at debt.  No effect.  It would be if lender and bank are separate entities, you have control perfection concerns. 

d.       To label them as article 9, they would be cash.

e.       Depends if it’s a government agency.  You might have to comply with government policies.  So it could be included.  On the other hand, does federal government even allow this to be perfected? TRZ says probably not.

f.        Probably not.  Such licenses are unique to you. 

g.       Let’s assume clinic wants to use judgment as collateral.  Can we take an Article 9 SI in this judgment? 9-109(d)(9) says timing is relevant.  The answer would then be no.  The judgment has to be before the SI was taken.

h.       What if we reduced the judgment to a settlement agreement?  Might have a general intangible here.

i.         She wants to put up her retirement account.  Article 9 collateral?  The IRS might have an interest in knowing what you do with your money.  There is no prohibition to granting it as collateral.  However, debtor may  not what to b/c of tax penalties imposed by granting such interest.

j.         What about her life insurance policy? Article 9?  No.  Outside of Article 9, then yes.

Trimarchi v. Together Development Corp., handout

Trademark as collateral. Secured party file FS with patent office.  Court said this is not an assignment.  Article 9 transaction is not an assignment.  Therefore, no perfection here.  There is no preemption issue here.


Federal preemptions:

Broadcast licenses: generally it’s not an asset that can be transferred nor can it be an interest taken as security.

Example of 1-109(c)(1) concerns.


§9-109: Examination of



We’ve covered attachment, and then perfection.  Today, we start to talk about priority claims.

Who may argue that they will have SI and therefore priority?

·         Bankruptcy trustee

·         A lien creditor

·         Another Article 9 creditor

·         Real estate encumbrance

·         Statutory creditor (e.g. IRS)

·         Buyers of the collateral and anyone who has a claim to the property


Priority Issues, page 253

·         Whose claim will be satisfied first?

·         Designed to resolve conflicts between parties laying claim to the same property

·         Article 9 perfection and priority rules are intended to enable parties to obtain the information they need to act intelligently in assessing risk and extending credit – allows for effective planning.

·         Question arises when two (or more) parties assert claims to a single asset or pool of assets.

·         Many of the rules are organized according to the type of claimant in competition with the Article 9 party

·         Other rules are organized according to the type of collateral involved (e.g. instruments, chattel paper, and fixtures, investment property, deposit accounts, letter-of-credit rights)

·         Understanding what underlies a rule will allow you to understand the rule and its application to a particular fact-setting, which will then enable you to predict risks and devise strategies to reduce or minimize them.


Lien Creditors, page 225

Lien creditors v. Article 9 Secured Creditors

·         9-102(a)(52) defines a lien creditor; one who acquires property by attachment, levy or the like

·         Lien creditors acquires lien by statute, agreement or common law; does not arise through judicial process

·         §9-317(a)(2): tells us how to resolve priority dispute only between Article 9 creditor and a lien creditor.  It says a perfected SI is subordinate to the rights of…a person who becomes a lien creditor before the SI is perfected.

·         A lien creditor begins its life as an unsecured creditor.

·         If the lien creditor does everything it’s supposed to do first, it will win.

·         Conversely, if the Article 9 creditor does everything it is supposed to do first, it wins.


Keep Fresh Filters, Inc. Reguli, page 256

Facts: KFF claims its execution lien was superior to a SI claimed by the judgment debtor’s daughter

Holding: Court determined that the daughter’s rights were subordinate to those of the judgment creditor.

Rule: Once a lien is noted on an automobile’s certificate of title, it relates back to the date of the filing of the application requesting the notation of the lien.  The application, however, must be complete. 



§9-317(a)(2) subordinates the lien creditor to the secured creditor who files a FS covering the collateral before the lien creditor acquire its lien. 




Problem 4.1, page 272

Consider whether any of the following creditors would qualify as an Article 9 lien creditor:

a.       A’s Food Mart, which holds H’s check for grocery dated May 1 which H’s banks dishonored on May 5.  Amy is not a lien creditor.  She is a creditor but unsecured. 

b.       C, who, on December 1, obtained a trial court judgment against GM on a products liability claim.  C is a lien creditor b/c of his court judgment.

c.       Josh, whose judgment against M on a K claim has resulted in issuance of a writ of execution dated February 3 commanding the sheriff to seize M’s assets.  Josh is not a lien creditor b/c the legal judgment has been levied yet. Compare to also to C: it doesn’t matter if your K arises out of tort claim or K claim. 

d.       HB, who rendered beekeeping services to P, and according to state statute, has a nonpossessory lien in P’s bees to secure its payment.  HB is not a lien creditor b/c it’s by state statute and is not for purposes of Article 9.  Liens can be created statutorily, contractually or by judicial process.


Problem 4.3, page 273

A approaches B on May 1 for a loan to be secured by her inventory.  Bank accepts her loan application, pre-files a FS covering “inventory”, and begins its investigation into her creditworthiness.  On May 10, T, a tort victim, judgment in hand, sends the sheriff out to levy on A’s inventory.  On May 15, Bank gives A a 10K loan in exchange for a SI in her inventory.  A defaults on May 20.  Who has priority to her inventory, Bank or T?


T would since there’s no protection of the SI until after A executes it, which would be May 10.  No value was given until 5/15.  Debtor may have right on the day of agreement.  Here, it wouldn’t be earlier than May 15.  Now, under new code, we also have to have the date when agreement is in place and the date of filing of the FS.  The lien creditor wins the priority dispute here.  It’s a two -prong test.  Pick the later of the two dates (of the subject: FS test) and use that to compare priority.  The other date is lien creditor.  Also, you have a date under the first test (date of perfection).  Three dates total.


Any advice for the secured party? Ask debtor if he been sued and loss?  Is there another place to go to verify what debtor tells you?  Credit reports might be helpful.  County clerk’s office; you can look for pending suits or whether writs against the property has been issued. 


Handout Problem #4-1: Secured Creditor v. Lien Creditor

§9-323(b)          Future Advances

Concern here is not only the basic rule but does our protection run forever?


9/1        Debtor grants Bank a SI in certain equipment worth 100K to secure a 30K loan.  The SA has a future advance clause and an after-acquired property clause.  Bank is not obligated to make any future advances.  Bank files its FS.

9/10      Unsecured creditor obtains a 60K judgment against debtor.

9/15      To satisfy the judgment, the sheriff seizes debtor’s equipment presumably according to a writ.  This equipment is part of Bank’s collateral.

10/1      Bank advances another 20K

10/25    Bank learns that the sheriff has seized the equipment

10/28    Bank advances another 30K

11/4      Bank advances another 20K

11/7      Sheriff sells equipment for 100K


How should the sheriff distribute the 100K?


Secured creditor is claiming 100K.  Lien creditor is claiming 160K.  But the value in collateral is only 100K. 

See §9-323 Future Advances.  We have to ask when did the lien creditor became a lien creditor?  In 9/15 b/c that’s when

the property was seized.  When did the bank make the advance? 9/1-30K, 10/1-20K, 11/4-20K.  Bank will have priority

for the 30K on 9/1 and 20K on 10/1.  No protection for 10/28-30K and 11/4-20K.   Notice dispute arise somewhere

around 10/1.  Is notice or knowledge relevant under statute?  Yes, but not always – irrelevant if it’s within 45 days.  Here,

we’re beyond the 45 day period.  What if Bank never had notice or knowledge of the lien?  We could say 10/28 is okay. 

For practical matters, what happens if a bank has knowledge?  Bank probably won’t advance any more money to debtor. 

Thus, bank ought to monitor its debtor occasionally. 


??? A commitment would have been entered into without knowledge of the lien.  B/c you entered into a commitment w/o

knowledge, it won’t matter.  It’s what you know at the time of entering into commitment.


Assume SA includes: “Secured party agrees to loan 150K to debtor in one or more advances; provided that no Event of

Default exists when the requested advance is funded.”  Assume that “Event of Default” is defined to include judgments

against debtor in excess of 5K.  Does this change your answer above?



Bankruptcy trustee is a lien creditor upon filing of a FS. 


Handout problem #4-2: Secured creditor v. lien creditor

§9-317  Interest that takes priority over or take free of SI or Agricultural lien


9/1        Dealer sells large piece of equipment to Debtor.  To secure repayment of the purchase price, Dealer retains a SI in the item pursuant to agreement.


9/5        Dealer delivers equipment to Debtor.


9/10      Unpaid unsecured creditor of D acquires status of “lien creditor” under applicable law.  The lien encumbers the



Whose interest in the equipment enjoys priority on 9/30 if Dealer filed a FS on 9/18? It would be the dealer.  On 9/28?  Lien creditor would win.  As of 9/10 lien creditor is perfected, but not the Art. 9 creditor.  On Monday, we would say no, but under 9-317(e) it allows for a PMSI.  Dealer can claim a PMSI (9-103).  We did file a FS on 9/18 or 9/28.  We have to keep in mind that there’s a time limitation – 20 day period after debtor receives delivery.  9/28 would not be timely.  Start the running from the date of delivery 9objectively determined).  Under old version of code, it was just a 10-day period.  While it’s a change to 20-day, it is not a change in many states still (no change in TX).


Let’s assume this interest was something subject to COT (e.g. automobile), therefore has to comply with DMV.  9-317(e) contemplates perfection by filing a FS.  Would this provision help a creditor trying to sell a PMSI?  Look at comment 8.  It does embody motor-vehicles. 


Now we switch gears:

§9-322(a) Priorities among conflicting SI in and agricultural liens on same collateral.  It’s a general priority rule.  (a)(1) applies when you have two perfected parties.  (a)(2) has perfected v. unperfected.  (a)(3) has two unperfected parties. 


The first to file, the first to perfect – basic rule

The two SI now are contractual. 


Notes, page 227-281 text

Majority of courts holds that a party’s knowledge of other claims is irrelevant to application of priority rights.

Also, according to most courts, a party has knowledge of the contents of the FS if it knows what it would have known had it seen the misfiled FS. 


Revised Article 9 carries on the old codes’ basic “first-to-file-or-perfect” rule, but adds many new collateral-specific or fact-specific priority rules (e.g. priority regarding: deposit accounts; investment property; letter-of-credit rights; goods covered by by COTs; transferred collateral; and security interests created by a new debtor).  This priority expansion reflects two goals: 1) modernization to address new financing transactions; and 2) clarification. 





Problem 4.5, page 280

On 6/10, D, a manufacturing concern, executes a SA granting a SI in its current and after-acquired equipment to AB in exchange for a 100K loan.  The same day, D signs a valid FS covering “equipment”, but AB does not file it until 7/1.  On 6/15, BB files a FS signed by D covering D’s “equipment”.  At the time, BB and D are engaged in loan negotiations.  Those negotiations conclude on 7/30, culminating in an enforceable SI in D’s “equipment”.


Thereafter, D defaults on both loans.  At the time of default, D possesses two items of equipment: one acquired on 6/1 and another on 8/15.  D acquired both pieces of equipment with its own funds.





AB       7/1

BB       6/15


ATTACHMENT (therefore perfection):

AB       7/1

BB       7/30


Whichever is earlier (file or perfect)




AB       7/1

BB       6/15


ATTACHMENT (therefore perfection):

AB       8/15 [7/1]

BB       X


R          8/15 for both AB and BB





BB does not have SI in item #2.  There is no after-acquired property clause.  AB does.  And it’s not a FS concern that AB did not include it in the FS.  It would only be a problem for SA. We really don’t use the (a)(1),(2), or (3) rule here. 


Change facts: Let’s assume BB discover it did not include an after-acquired clause and decides to include it by creating a new SA on 8/20.  Who wins now?  9/2 is when dispute is resolved.  In this case, BB would win.  Go back to earlier of file or perfection so BB still wins.  As long as collateral description matches up.


a.       Assuming both bank filings were proper, who has priority to the items of equipment? For item #1, BB would win b/c it filed first.  AB waited too long. 

b.       Would the result in (a) change if, during negotiations, D informed BB that it had granted AB a SI in its equipment?  In other words, does not knowledge or relevancy have affects on how we apply these rules?  No.  In doing so, it allows the party to conduct their affairs w/o discretion.  Makes it more flexible for you conduct your affairs in response to the rules.

c.       Would the result in (a) change if, on 6/10, AB had misfiled the FS?  Would the result in (b) change?  What if BB had actually found AB’s misfiled FS? Raises an issue no longer in existence. Under old article 9, there was a good faith aspect.  Don’t have to worry about this per TRZ.  Today, file in the wrong place and it’s just no good. 


General rule on priority to remember: first to file or first to perfect, whichever is earlier.

§9-204              After-acquired property; Future Advances

§9-322(a)          Priorities Among Conflicting SIs in and Agricultural Liens on Same Collateral

§9-323(a)          Future Advances: When priority based on time of advance


Priority Under After-Acquired Property and Future Advance Clauses, page 282

After-Acquired Property:

·         Approach from a planning perspective

·         By validating after-acquired property clauses, Article 9 allows debtor to encumber property they do not yet own [§9-204(a)]

·         Although the phraseology may vary, the effect is the same: when the debtor acquires the described property, the creditor’s SI will automatically attach to it.

·         Are enforceable in most transactions

Future Advance Clauses:

·         Are also validated by Article 9 [§9-204]

·         Provides that the creditor’s subsequent extensions of credit are secured by the collateral described in the SA.

·         It allows the creditor, at the outset of a transaction, to secure future loans it might make to a debtor.

·         It is conceptually similar to an after-acquired property clause.

·         Typically they work in tandem


Both are now an established part of modern personal property finance law.  Such clauses obviate the need for a new SA every time a new item of collateral is acquired or a new advance is made.  They are the cornerstones of the floating lien. They permit commercially feasible lending against inventory at reduced cost.


Future advance clauses have caused more litigation in recent years than after-acquired clauses. Thus, case laws address two issues:

1.       the parties’ intentions to secure an obligation; and

2.       the priority accorded to a creditor’s future advance(s)


“Dragnet or Anaconda” clause is the term used to describe the clause that attempts to secure the largest amount of (all possible) indebtedness owed.   Refers to the future-advance clause in the SA.


“Floating lien” extends the creditor’s lien to cover property acquired by the debtor after the loan is made.


§9-323 determines what priority a future advance will enjoy.


In re Kazmierczak, page 283

Facts: In 1990 and 1991, Debtor’s bought fertilizer and chemicals for their farm from TI on credit secured by their crops.  Debtor’s executed a new SA each year and each year a new FS was duly filed to perfect TI’s SI and each year the debtors paid off their debt in full.  In 1992, TI again advanced credit to debtors to purchase the supplies.  But before the debtor’s got around to executing their SA, they declared bankruptcy.  TI thus never filed a secured claim for it.  TI argues that that the dragnet clause secured its interest.

Issue: Was the dragnet clause clear enough to secure TI’s interest?

Holding: Yes.  The original agreement must make clear its applicability to future debts.  The 1991 agreement signed b debtor was clear.  The “future debt” clause was a hedge against the debtors’ failure to execute a SA.


Under WI law though, in order to prevent abuse of the dragnet clause, it requires that there be a “relatedness”.  Here, the issue is whether the future debt, which arose from the 1992 purchase of chemical and fertilizers, was related to their original debt, which arose from the 1991 purchase of chemicals and fertilizers (for it is the 1991 SA on which TI relies).  It is clear that they are related. 





The “Relatedness Doctrine” is a judge-made doctrine designed to determine the parties’ intentions regarding the scope of their future advance clause:


“in the absence of clear, supportive evidence of a contrary intention a [SA] containing a dragnet type clause will not be extended to cover future advances unless the advances are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation secured or unless the document evidencing the subsequent advance refers to the [SA] as providing security therefor.”


It tries to limit every situation that will encompass the dragnet clause.  Judge Posner hates this doctrine.  The doctrine is still recognized in some states.  See §9-204: Comment 5.  The doctrine is somewhat important but TRZ rarely sees it come up in litigation.


Note however:

·         The CODE’s first-to-file priority rule does not apply to future advances. 

·         The priority date for the advance is the date the advance was made.

·         A single FS in connection with a SA when no provision is made for future advances is “not an umbrella for future advances based upon new SAs, notwithstanding the fact that what is involved is the same collateral.”

·         Thus, the original creditor cannot rely on its prior filing to secure its position.  It has to check the files each time it contemplates a new advance.  See §9-323 Official Comment 2.

·         An after-acquired property clause is not effective to create a SI in consumer goods unless the debtor acquires rights in the goods within 10 days after the secured party gives value.  See §9-204(b)(1)

·         Also, an after-acquired property clause is not effective to create a SI in future commercial tort claims.  See §9-204(b)(2). 

·         A SI cannot attach in a commercial tort claim unless the claim exists when the SA is signed.  The SA must also describe the tort claim with greater specificity than simply “all tort claims”.   See §9-204 Official Comment 5

·         Revised Article 9 validates future advance clauses in agreements involving the sale of accounts, chattel paper, payment intangibles, or promissory notes.  See §9-204(c)


In answering the problems, try to ask:

1.       What property (collateral) secures the indebtedness?

2.       How much of the indebtedness owing is secured?


Problem 4.7, page 288

On 9/1, C1 files a FS listing D’s “equipment”.  On 9/3, C2 files a FS listing D’s “equipment”.  On 9/6, D executes a SA granting C2 a SI in its current and after-acquired equipment in exchange for a 100K loan from C2.  On 10/1, D executes a SA granting C1 a SI in D’s equipment” in exchange for a 100K loan.  Assume D defaults on both loans on 12/1.


a.       Who has priority to D’s equipment acquired before 9/1?  C1 would since it filed first à §9-322(a)(1)

b.       Who has priority regarding an item of equipment D acquired on 11/1?  C2 would since it did have an after-acquire property clause in its SA while C1 did not.

c.       Would the result in (b) change if, on 11/15, D executed a second SA granting C1 a SI in the equipment D had acquired on 11/1?  Yes, b/c now C1 would have priority b/c it filed a FS on 9/1.  By doing so, C1 easily remedies the lack of including the after-acquire property clause.  C2 thus still needs to keep in mind that C1’s earlier filing will still trump his after-acquired clause.

d.       In light of your conclusion in (c), should you revise your understanding of the significance of a SA?  Of a FS?  Yes, recognize that it’s the FS that sets priority whether the collateral is acquired before or after so as long as the priority sets the scope of equipment.








Problem 4.8, page 288

A grants F a SI in the following property and all additions, accessions, and substitutions to it: all equipment and machinery, including drill presses, conveyors, and delivery trucks (the “collateral”) to secure payment of 100K as provided in D’s note dated 2/22 as well as all other liabilities of D to Secured Party, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising (all of which are called “Obligations”).


On 2/22, F lends A 100K and files a FS covering “equipment”.  On 5/1, 2nd Bank obtains a perfected SI in A’s “equipment” to secure a 100K loan it makes to cover A’s legal costs regarding a lawsuit.


Per TRZ: On 9/1, A wants to obtain a 50K melting pot for its operations.  It borrows 30K from First.  Thereafter, A owes First a total of 130K.  The fair market value of all A’s equipment including the 50K melting pot is 200K.


200K    Creditor 1 has debt of 130K                               Creditor 2 has debt of 100K

Filed 2/22                                                          Filed 5/1

70K      2/22      C1 gets 70K/ leaving 60K as unsecured credit                

50K      5/1                                                                                C2 gets 50K/leaving 50K as unsecured credit

30K      8/31

50K      ….


C1 would not get the 50K b/c no after-acquired property clause. 

Assume the 200K of equipment was acquired by A as follows: on or before 2/22 (70K); from 2/23 through 5/1 (50K); from 5/2 through 8/31 (30K); 9/1 (50K melting pot).


a.       Assume A does not execute a new SA to secure First’s 30K loan to A.  How will the value of the equipment be distributed if, on 9/15, A defaults on both loans?


b.       Would the result in (a) change if the original SA between A and First defined “Obligations” to mean “loans made for drill presses”?  It would change the C1’s debt amount 9130K) and maybe C2’s also (100K).  It raises the relatedness concern since debtor raised it in his drafting.


c.       Would the result in (b) change if A, in connection with the 30K loan, executed a second SA to secure it?  It would pick up the 30K collateral.   Be concern how we draft the debt and collateral side of the SI.  It’s a matter of K interpretation.


Problem 4.10, page 290

On 6/1, D executes a valid SA in favor of B1.  The same day, B1 files a FS but does not advance any money.  On 6/2, B2 obtains a valid SA from D, files a FS and advances 50K.  On 6/5, B1 advances 10K to D.


Per TRZ:  Assume each creditor claims an interest in “investment property, whether now owned or hereafter acquired”; in (b), assume B1 has not filed a FS.


We just have a straight-up priority dispute. 


                        File                   Perfect

B1                    6/1                    6/5

B2                    6/2                    6/2


§9-323  Applies only in limited situations; probably not applicable to this problem.  Look more at 9-322.

a.       Assuming all advances were clearly in connection with the credit transaction contemplated at the time the SAs were executed, who has priority on 6/10? B1 b/c it filed first.

b.       Assume that on 6/1, D transfers physical possession of 100 shares of IBM stock to B1 as security for a loan D contemplates from B1.  If all other facts remain unchanged, who has priority on 6/10?  B1 has possession on 6/1.  B1 would probably want to be perfected on 6/1.  First to file rule protects filers and not by other methods.  A little tricky here.  Thus, it suggests we like filing the most as determining priority.



§32(a) General rule: the first to file or perfect, whichever is earlier.

Who likes this rule? 


Secured Party


Why might debtor not like this rule?  Concern between debtor and SP #2. 

So far, all we’ve just talked about is priority.  Now, we can talk about super-priority.


§9-324              Priority of Purchase-Money Security Interests

(a)    General rule: Purchase-money priority: Except as otherwise provided in subsection (g), a perfected PMSI in goods other than inventory or livestock has priority over a conflicting SI in the same goods, and, except as otherwise provided in 9-327, a perfected SI in its identifiable proceeds also has priority if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

(g) Conflicting PMSIs: If more than one SI qualifies for priority in the same collateral: 

1.       a SI securing an obligation incurred as all or part of the price of the collateral has priority over a SI securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of collateral; and

2.       in all other cases, 9-322(a) applies to the qualifying SIs.


Make sure to satisfy 9-103 definition of PMSI first before applying 9-324 priority.


In other words, 9-324 grants priority to the PMSI seller.  Often arises when two parties provide purchase-money financing for the same item where one is a PMSI seller and the other a PMSI lender.  The PMSI has to be other than inventory, perfection by the debtor within 20 days after delivery.


Such reasoning is based on real estate law.  The equities favor the vendor.  Not only does the vendor part with specific real estate rather than money, but the vendor would never relinquish it at all except on the understanding that the vendor will be able to use it to satisfy the obligation to pay the price.  The law is more sympathetic to the vendor’s hazard of losing real estate previously owned than to the third party lender’s risk of being unable to collect from an interest in real estate that never previously belonged to it.  The first-to-file-or-perfect rule of 9-322 applies to multiple PMSIs securing enabling loans.


§9-322              Priorities Among Conflicting SIs in and Agricultural Liens on Same Collateral

(a)    General priority rules

(f)(1) Limitations


§9-103              PMSI; Applications of payments; burden of establishing

(a)    Definitions:

1.       “Purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

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 acquire rights in or use of the collateral if the value is in fact uses

(b)    PMSI in goods: A SI in goods is a PMSI:

1.       to the extent that the goods are purchase-money collateral with respect to that SI;

2.       if the SI is in inventory that is or was purchase-money collateral, also to the extent that the SI secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a PMSI; and

3.       also to the extent that the SI secures a purchase-money obligation  incurred with respect to software in which the secured party holds or held a PMSI




Subsequent Financing and Purchase Money Security Interests, page 290-296

·         §9-322(a)(1) gives the first creditor to file or perfect priority over subsequent secured creditors.

·         §9-323 states that the creditor’s priority extends to after-acquired property and most future advances. 

·         Thus, this means that Creditor #1 occupies an extremely powerful position.

·         However, Creditor #2 does have the opportunity to structure a transaction with the debtor that gives it a limited priority.  If the Creditor #2 wants to increase its options or maximize its position, it MUST take affirmative steps to do so.


Brodie Hotel Supply, Inc. v. United States, page 290

General Rule of Priority: If both interests are perfected by filing, the secured party who first files a FS prevails, regardless of when his SI attached. 


However, there is an exception for PMSIs in collateral other than inventory:

The PMSI prevails over conflicting interests in non-inventory collateral if “the PMSI is perfected”.

The purchase-money creditor has to file within 20 days [§9-324(e)] after the debtor receives possession of the property.


Reason for this exception:

A creditor with a SI in after-acquired property enjoys a special competitive advantage over other lenders in all his subsequent dealings with the debtor.  In our view, the purchase money priority is best thought of as a device for alleviating the situational monopoly created by an after-acquired property clause. 


Problem 4.11, page 295

On 5/10, BB takes a valid SI in J’s “current and after-acquired equipment” and properly files a valid FS listing “equipment”.  On 4/10, CB properly files a valid FS covering J’s “equipment”.  On 3/20, J executes a SA granting CB a SI in all its equipment to secure CB’s loan to J to purchase item #1 of equipment.  CB makes a loan to J that day.  J purchases and installs item #1 of equipment on 3/22.


On 6/10, Seller sells a new drill press to J who takes delivery that day.  Seller takes a SI in “J’s drill press and all J’s other equipment, current and after-acquired.”  Seller properly files a valid FS covering “equipment” on 6/15.  On 7/9, J acquires item #3 of equipment using its own funds.  Thereafter, J defaults on all three loans.


Unlike other problems, we have three creditors here: BB, CB, a seller

                        File                   Perfect

BB                   5/10                  7/9

CB                   4/10                  NO

Seller                6/15                  7/9

Debtor acquired rights in item #3 on 7/9


CB’s problem is it has no perfection date.  There’s only a two-party dispute (between BB and Seller).


a.       Seller makes the following argument regarding equipment item #3.  A SI cannot be perfected until it attaches. B/c everyone’s interest in item #3 attached and perfected at the same time, all claimants share priority.  Consider Seller’s argument and determine who has priority to item #3.


For item #3, BB would have priority b/c it file first (they both perfected the same time).

Advice for CB: put an after-acquire property clause.  They would then have won b/c they filed first. 

J used his own money to buy item #3; therefore, no PMSI. 


b.       Who has priority to the drill press?


6/10 Perfection date for BB and Seller.  No perfection for CB.   Change seller’s date of perfection to 6/15.  Now, it seems that BB wins.  However, 9-103 applies to seller which means he has a PMSI.  Seller can claim super-priority as a purchase-money creditor. 


      Who has priority to item #1?

Perfection dates are 4/10 for CB; 5/10 for BB; and 6/15 for Seller.  CB would have priority b/c they filed first.  C executed a SA on 3/20.  Debtor acquired rights on 3/22.  Did CB include after-acquired clause? No.  While it doesn’t have it, it’s hoped that CB’s SA description suggests that’ll be funded.  Notice; we didn’t even need 9-324(a) b/c CB also did file first (9-322).  Only need it if the other two filed first.  It all goes back to the description. 


c.       Would the result in (a) change if J, on 7/10, executed a SA granting CB a SU in its equipment?


Problem 4.12, page 296

FB holds a valid, perfected SI in D’s current and after-acquired equipment.  It properly files a valid FS covering equipment on 8/30.  In September of the following year, D wants to acquire a new piece of equipment that costs 100K.  It requests FB’s permission to use its existing item of equipment (“E #1”) as a trade-in for the new item, E #2.  FB agrees and releases its SI in E #1.  On 9/15, Dealer gives D a 20% trade-in credit for E #1 (20K) and finances the remainder of the purchase price (80K) for E #2.  D executes a conditional sales K under which Dealer reserves title to the new equipment until D completes its purchase obligations.  D installs the new equipment on 9/16.  On 9/20, Dealer properly files a valid FS covering E #2.

The parties here both have PMSIs.  See 9-324(g).  You have to know what kind of PMSI you’re dealing with: seller and financing.


a.       1 year later, D defaults on its loan to FB and Dealer.  At the time of default, it owes Dealer 70K and FB 15K attributable to E #2.  If E #2 is sold for 40K, how will the 40K of value be distributed between FB and Dealer?


FB would win. ???


b.       Would your answer change if:

1)      D paid Dealer 80K in cash for E #2;

2)      the cash came from a loan Bank Two made to D expressly to purchase E #2; and

3)      Bank Two took and perfected a SI in E #2 on 9/16, the date D purchased it?


B1 would get the first 5K for problem 1; go back to first-to-file o perfect rule.  Neither bank is a vendor.  In second problem they only get first 15%.  Bank Two gets 40K.  You can only get up to what your PMSI is.



Recap of 324(a)

Now we go down to 324(b)



§9-203(d), (e)







Problem 4.14, page 297

Lizzie is a gourmet caterer in MA.  IAM takes and perfects a SI in all her current and after-acquired accounts on 1/10.  A year later in April, Lizzie incorporates her business according to the laws of DE.  The corporation’s name is Bon Appetit, Inc.  On 6/1, K lends Bon Appetit 100K, taking a SI in its current and after-acquired accounts.  K properly perfects its interest on 6/10.


This problem raises the dual debtor rule. 

Lizzie                à à à           Bon Appetit

IAM Bank                                   K Bank

    (b)                                              (a)

old assets                                  old assets


Let’s look at question (b) first.  Here, we do not have a name change problem, but rather a location problem. 

Look to 9-316(a).


a.       In September, IAM finds out about the incorporation, declares a default and seeks to collect on accounts Bon Appetit generated from catered parties.  K claims priority to those accounts.  Who wins and why?  See 9-325(a).  Look at the language and replace the names àour new debtor is Bon Appetit.  The other person is Lizzie.  IAM Bank has priority in the transferred assets.  IAM has no duty to search against transferee.   See 9-203(a) for new debtor.  What about the FS?  See 9-508: says old FS is still good with new debtor.  IAM Bank can argue that its old FS is still good to perfect.  For priority dispute, look at 9-508 (4-month concern).  Here, we’re dealing with the April assets.  So we are beyond the 4-months and therefore, IAM’s FS is no longer perfected.   Neither debtor has changed its location.   We see a different result when we look at the transferred assets verses when looking at the new assets.  If Bon Appetit is not a new debtor, then there is no agreement between the banks and there would be no.  Here, it’s with respect to new assets.  IAM Bank loses b/c they rely solely on 9-508.  They should have relied on the re-filing against Bon Appetit.  The moral is that IAM needs to go out and re-file its FS. 


b.       What if the priority dispute related to 25K in uncollected accounts Lizzie had generated as a sole proprietor? We’re only curious if the SI continues?  If yes, is it perfected?  Seer 9-203(d) and the whole concept of new debtor.  See more 9-315(a).  SI had survived the transfer.  We can get continued attachment/enforcement despite the transfer.  Does SI remain effective?  See 9-507(a).  Yes, it is still perfected. 


c.       Would it make a difference in result if the dispute in (b) arose more than one year after Lizzie’s incorporation and IAM had not refiled its FS in DE?  Yes.   Concern now is the change in location.  Does it mean we lose our perfection retroactively?  Yes.  See 9-508(b).  IAM Bank has to file in DE or else it’s useless; must have continuous perfection.



§9-324(b), (c)

§9-102(a)(9), (64)



Secondary Financing of Inventory, page 576 à 9-324(b)

·         In a floating lien arrangement, a debtor commits a substantial portion of its assets to, and has an ongoing relationship with, one creditor. 

·         In practice, both parties benefit from it.

·         Despite this and on-going funding from the primary lender, a debtor frequently wants or needs other credit arrangements for various reasons:

1.       Primary creditor may be unwilling to extend funds at an interest rate available from other sources.

2.       Primary creditor may be unwilling to provide funds for certain purposes (e.g. to meet payroll expenses or to finance capital expansion or improvement.

3.       The debtor may have exhausted its agreed upon credit line

·         In such cases, the debtor will look to other sources of credit.

·         §9-324(a)-(b) establishes its requirements for superpriority for purchase-money interests in inventory are considerably more complicated than those regarding equipment (a non-inventory collateral)

·         The CODE imposes more rigorous requirements for superpriority regarding PMSIs in inventory than it does for other collateral (e.g. equipment)


9-324(b): Priority of PMSI in Inventory

1.       when debtor receives possession of inventory

2.       PM secured party sends notification to holder of the conflicting SI

3.       notice must be received within 5 years before receipt of possession of inventory

4.       notification states that sender has or expects to acquire PMSI in inventory of debtor with description


Never worry about 9-324(c)(2) in this class. 




Problem 7.14, page 599

WJ’s requires a substantial sum of money to finance construction of a new “Magnificent Pong” section in each of its stores.  It borrows 100K from CRT.  CRT obtains an enforceable (notice no perfection yet) SI in WJ’s current and after-acquired inventory 9doesn’t have to).  CRT files a FS on 7/1 listing “inventory”. 


On 9/1, LB lends 50K to WJ’s to enable it to purchase new items of inventory.  LB takes and perfects a SI in the new inventory on the same day.  It sends CRT written notification of its interest which CRT receives on 9/10. 


a.       As between CRT and LB, who has priority to the new inventory if it is delivered to WJ on 9/9?  LB is going to claim priority.  However, CRT will have priority b/c possession of inventory was on 9/9.  The purchase-money creditor did not provide timely notice.  Advice is to control delivery of the assets. 


b.       Will the result change if the inventory is delivered on 9/30?  Yes. Big difference.  You could change the date here to 9/10 or 9/11.  We solved the problem in (a). 



§9-322(a)                      Priorities among conflicting SIs

§9-324(b), (c)                Priority of PMSIs

§9-102(a)(9), (64)          “Cash Proceeds” and “Proceeds”

§9-103(a), (b)                PMSIs


Only thing you need to do to satisfy super-priority under 9-324(a) is timely perfection with post-delivery grace period of 20 days.  With inventory, there’s a lot more hoops for the super-priority creditor to jump through. 


Under 9-324(b), you have to be perfected before possession but no later than possession.  Also, there must be notification to the holder of the conflicting SI.  It has to be no later than possession.  Thus, 9-324(b) requires the notice concept.


Problem 7.14, page 600 (continued)

c.       Assume the inventory is delivered on 9/30 and thereafter, WJ’s sells ten items to buyers who pay cash.  Who has priority to the 2.5K in cash generated by these sales?  The bank has priority in the inventory before sale.  The superpriority will carry on to the proceeds of the sale in cash.  Can we just say all cash or is there further limitations?  No, the language of code says it’s not all cash proceeds à it has to be identifiable (burden of proof on the purchase-money creditor) and it must be received on or before the delivery of the inventory to a buyer.   Account is being excluded here.  Timing is everything.  Thus, you should dictate how the debtor should sale the collateral à cash only.

Compare it to a 9-324(a) proceeds à it wouldn’t matter.


d.       Would your answer in (c) change if the buyers bought the items by charging the purchase on their Mastercards?  Look at 9-324(a) b/c credit cards are considered accounts under 9-102(2) definition.  Credit cards are not cash proceeds.  Therefore, we’re back into the regular priority rule. 


e.       Would your answer in (c) change if the buyers charged their purchases on their WJ’s Department Store charge cards? Same thing as in (d).


f.        Would your answer in (c) change if the buyers “paid” by executing promissory notes and SAs granting a SI in the items purchased?  What if they “paid” by executing promissory notes for the purchase price?  This would be chattel paper if it was PN with collateralization in the SA.  Here, these are non-cash proceeds, so do we get priority?  See 9-330.  We will look much more at this provision later.  At minimum here, it has to take possession.  But we’re not sure from the facts.  Also, must satisfy new value requirement, which is also unclear here.  If 9-330 doesn’t apply, then we’re left with straight up 9-322 rule and thus, CRT would win. 







Problem 7.15, page 600 (perfect exam question per TRZ!)

H provides commercial financing to retail appliance stores throughout the country, typically for the acquisition of new inventory.  Frequently, H lends to stores that have pre-existing inventory financing from local lenders.


H agrees to provide 150K to M in Boise, Idaho, to enable M to purchase a new line of high-end Sony microwave ovens and other hard goods such as TVs.  The 150K will cover M’s initial purchase of 100 ovens (at a total cost of 20K) as well as fund future purchasers from the Sony plant in Cheyenne, Wyoming.  M will repay the loan at quarterly intervals, with each payment to be the greater of 15K, or 20% of the outstanding principal and interest.


H will issue 20K check to Sony on 6/1 prior to shipment of the goods.  Their packaging and transfer from Cheyenne to Boise will take three days.  S holds a prior perfected SI in M’s inventory to secure a $2 mill debt. 


Why doesn’t H (the creditor) not make a check to debtor? Debtor might use the money for something else.  Thus, it’s smarter for creditor to make check to the seller of the collateral.


a.       H asks you to draft documents and specify procedures to implement this transaction.  Please give H advice on all relevant questions including (1) when and where to file; (2) how the SA should describe the collateral; (3) when and what notices H should provide to other parties; (4) the content of the notices and FS(s); and (5) when and where M should take possession of the property.  Also, how should M handle any cash or other receipts? 


b.       Assume H is not willing to rely on the Code’s priority rules to protect its interest.  It will propose a subordination agreement to S.  Draft appropriate substantive terms for such an agreement.  How will your proposal handle credit card receipts, cash receipts and conditional sales Ks that buyers execute when they purchase on secured credit?


We’re at least going to write the check to the supplier.  Normally, you would perfect your interest by filing a FS and describe your collateral specifically.  Or you could just describe it as “inventory” (it’s okay for FS; not too broad).  File the FS in the right place.  You must find out what kind of entity you’re dealing with (corporation, general proprietorship, solo).  Also, how fast do you want to file under 9-324 à before the debtor takes possession.  Here, we don’t know.  Difference between FOB destination (it is not until the goods get here that the debtor takes possession) and FOB shipping point (debtor takes possession; thus we would need to know when K close).  We also have to have notice under 9-324(b).  Certainly the Sony invoice may suffice.  But if this is a deal that stretches over a period of time, this could be a lot of policing.  Creditor might want to tell debtor how to sell such items à cash over. 


*New topic:

Particularly for inventory, question may be whether you can destroy your PMSI.  In the real world, you’ve got a continued relationship between the creditor and debtor and they’re not executing a SA for each new item, but rather one master SA.  Concern becomes what has happened to our PMSI?  If they’re left with just SI, creditor may lose priority under 9-322.  Under old code, it was unclear.  Now we have two rules: transformation and dual status.


§9-103  (a), (b), (e)-(h)  PMSIs


The Transformation Rule

Southtrust Bank v. Borg-Warner Acceptance Corp., page 299

Facts: BWAC appeals from judgment for SB.  SB filed a declaratory judgment to ascertain which of the parties has priority in the inventory of 4 debtors who defaulted on obligations to one or the other party. Both SB and BWAC have perfected SIs in the inventory of the debtors.  In each case, SB filed its FS first.  BWAC contends that as a purchase money lender, it falls within the PMSI exception to the first to file rule and therefore is entitled to possession of the inventory.  BWAC engages in purchase money financing.  District Court held that inclusion of after-acquired property and future advance clauses in the SA converted BWAC’s PMSI into an ordinary SI.

Issue: Whether inclusion of an after-acquired property clause and a future advance clause in BWAC’s SAs converted its PMSI into an ordinary SI. 

Holding:  BWAC’s exercise of the future advances and after-acquired property clauses in its SAs with the debtors destroyed its PMSI.  Unless a lender contractually provides some method for determining the extent to which each item of collateral secures its purchase money, it effectively gives up its purchase money status.


The Transformation Rule: (transforms PMSI into regular SI)

·         You’re left only with 9-322

·         It’s a judge-made rule that originated in the consumer bankruptcy context. 

·         It allows a debtor to avoid nonpossessory, nonpurchase-money SI to the extent they impair a debtor’s exemption rights. 

·         This debtor avoidance power is limited to nonpurchase-money SIs. 

·         A creditor’s PMSI trumps a debtor’s exemption rights.  The transformation rule began as a benighted judicial attempt to protect a debtor’s exemption rights. 

·         If the creditor’s PMSI was somehow transformed into a nonpurchase-money interest, the debtor could avoid it to the extent it impaired the debtor’s exemption rights. 

·         The “somehow” occurred  if the one-to-one correspondence between purchase-money debt and purchase-money collateral was lost. 

·         The 11th circuit court extended it to a commercial setting in Borg-Warner. 

·         Not all courts follow the transformation rule.


The Dual Status Rule:

·         Other courts believe a creditor can have two SIs in the same item of collateral: one purchase-money, one nonpurchase-money. 

·         Argue it is more in harmony with the CODE b/c of its pro-tanto preservation of PMSIs.

·         Tolerance of the add-on debt and collateral provisions properly applied carries out the approbation for purchase-money security arrangements and simplifies repeat transactions between the same buyer and seller.

·         They argue that the transformation rule is inconsistent with the CODE, which gives favored treatment to those financing arrangements on the theory they are beneficial both to buyers and sellers.  

·         They also argue that the TR would jumble priorities among creditors…defeat the very reasons for having a priority system, and undermine the very purpose behind the purchase-money super-priority which was designed to encourage new infusions of credit to a debtor. 


Two kinds of consumer credit clauses typically trigger application of the transformation rule:

(1)    Collateral Add-On Clauses (Cross-Collateralization): provides that collateral bought in the future will secure the earlier purchase-money debt.  Nonpurchase-money collateral is securing purchase-money debt. 

(2)    Debt Add-On Clauses: provides that future advances as well as the original purchase-money advance will be secured by the original purchase-money collateral.  Purchase-money collateral is securing nonpurchase-money debt. 


B/c of the one-to-one relationship between purchase-money collateral and purchase-money debt is lost, courts receptive to the TR will hold the creditor’s purchase-money SI is “transformed” into a nonpurchase-money interest.  In a commercial context, this means the creditor is not entitled superpriority. 


Handout problem #4-3 -- PMSIs: Dual Status Rule v. Transformation Rule

6/1        SP-1 loans 100K to D (a retail furniture seller).  To secure repayment of the loan, D grants s SI in its equipment,

inventory, and receivables (in each case, whether then owned or thereafter acquired or created).  SP-1 files a proper FS with the appropriate filing officer.


7/1        SP-2 and D execute a master purchase agreement.  D will buy various pieces of equipment on credit.  SP-2 will

retain a SI in the equipment.  The agreement includes a cross-collateralization clause (i.e. all equipment bought

from SP-2 secures all unpaid purchase prices, and all unpaid purchase prices are secured by all equipment bought from SP-2).  The agreement states that all payments will be applied to the oldest purchase price first.  SP-2 files a proper FS with the appropriate filing officer.


8/1        D acquires 60K lathe from SP-2.

8/15      D makes 20K payment to SP-2.

9/1        S acquires 80K stitching machine from SP-2.

9/15      D makes 50K payment to SP-2.

10/1      D acquires 10K photocopier from SP-2.

10/15    D makes 30K payment to SP-2.

2/15      D defaults on loans to SP-1 and SP-2 and seeks bankruptcy protection.


Debtor owes SP-2 50K (take purchase price and apply to incoming items à 0+40+10=50K); lathe debt is 0; stitching machine debt is 50K of which 40K is PMSI debt; photocopier debt of 50K and 10K of which is PMSI debt à it is to the extend that the items secures its own unpaid debt, it is a PMSI) à hence, the dual status rule.


If the bankruptcy trustee first sells the lathe for 50K, how should the proceeds be distributed…

a.       If the transformation rule is applicable? SP-1 will win b/c SP-2’s PMSI becomes regular SIs.  And thus, whoever files first.  And here, it’s SP-1.  This is the same for the next two answers. 

b.       If the dual status rule is applicable?  SP-1 wins b/c no debt unpaid.


If the bankruptcy trustee first sells the stitching machine for 45K, how should the proceeds be distributed…

a.       If the transformation rule is applicable?

b.       If the dual status rule is applicable?  SP-1 gets 5K; SP-2 gets 40K


If the bankruptcy trustee first sells the photocopier for 4K, how should the proceeds be distributed…

a.       If the transformation rule is applicable?

b.       If the dual status rule is applicable?  SP-2 would get 4K.


All we’ve done was take the original purchase price and figured out what was paid off.



There are significant differences between what the purchase-money has to prove under 9-324 (a) and (b).



§9-102(a)(9), (58), (64)              “Cash proceeds”, “Noncash proceeds”, “Proceeds”


§9-203(f)                                  Proceeds and supporting obligations

(f)     the attachment of a SI in collateral gives the SP the rights to proceeds provided by §9-315 and is also attachment of a SI in a supporting obligation for the collateral.


§9-315(a), (c), (d), (e)                Secured party’s rights on disposition of collateral and in proceeds

(a)                Disposition of collateral: continuation of SI; proceeds

(c)        Perfection of SI in proceeds

(d)        Continuation of perfection

(e)        When perfected SI in proceeds becomes unperfected


§9-322(a)(1), (b)(1)                   Priorities among conflicting SIs in and agricultural Liens on same collateral

                                                (a)(1) General priority rules

                                                (b)(1) Time of perfection proceeds and supporting obligations.


§9-311(b) (first sentence)          Perfection of SI in property subject to certain statutes, regulations, and treaties

(b)                Compliance with other law: compliance with the requirements of a statute, regulation, or treaty described in subsection (a) for obtaining priority over the rights of a lien creditor is equivalent to the filing of a FS under this article


§9-327                                      Priority of SIs in Deposit Account

(1)    SI held by a SP having control  has priority over a conflicting SI held by a SP that

does not have control

(2)    SI perfected by control rank according to priority in time of obtaining control

(3)    SI held by bank with which the deposit account is maintained has priority over the conflicting SI held by another SP

(4)    SI perfected by control has priority over a SI held by the bank with which the deposit account is maintained.




·         Usually, the inventory lender has a SI in an item of inventory only until it is sold b/c the party who buys it is a buyer in ordinary course or the creditor authorized the sale free of its SI.  §9-315(a)(1).  As a result, the property a debtor receives in exchange is important to the inventory lender.  

·         Property received on the sale or other disposition of collateral is broadly defined as “proceeds”.  §9-102(64)

·         Thus, SAs regarding inventory often seek to protect a creditor’s interest in the proceeds.  Indeed, a creditor might engage in some types of inventory financing primarily to ensure access to a debtor’s chattel paper proceeds.

·         A creditor, by operation of law, has a SI in all identifiabe proceeds unless the parties’ agreement expressly establishes otherwise.  §9-315

·         Problems of proceeds issues are most pronounced in the realm of inventory and receivables

·         In the inventory arena, one lender’s proceeds might be another lender’s primary collateral (e.g. a sale of inventory might generate accounts, chattel paper or cash). A single debtor may have an inventory creditor, an accounts receivable financer and a party committed to purchasing its chattel paper.  Potential for conflict is obvious.  Peaceful co-existence occurs if a debtor pays or the parties agree about how to distribute the “remains”.

·         Although Article 9 recognizes a creditor’s SI in virtually all proceeds, it does not necessarily accord a proceeds claim the same treatment or priority as the creditor’s claim to the original collateral. 

·         In resolving priority disputes regarding proceeds, three questions arise:

1.       Do the conflicting claimants have a claim to the proceeds?

2.       If so, are those claims perfected? (A creditor’s interest in proceeds is not necessarily perfected just b/c its SI in the original collateral was perfected.  Article 9 states a special set of perfection rules for proceeds (9-315).

3.       If all claimants hold perfected interests in the proceeds, who has priority?  9-322(b)(1) states the general rule regarding conflicting claims to proceeds.

·         Much of article 9 case law involving proceeds arise in the bankruptcy context.  Bankruptcy renders after-acquired property clauses ineffective. Thus, the secured creditor’s SI will not attach to property the debtor acquires postpetition.


Problem 7.5, page 556

A holds a SI in D’s inventory.  On 6/21, A files a valid FS covering “inventory”.  C has a SI in D’s inventory and equipment.  On 9/1, C files a valid FS covering “inventory and equipment”.  E has a SI in D’s accounts, which it perfects by filing on 6/19.  D is a retail dealer of horse saddles.  On 12/1, D sells a saddle to P for $500 in cash.


We have three creditors:

A         INV                 6/21

C          INV/EQUIP     9/1

E          A/R                  6/19


a.       As of 12/5, do any of the creditors have an interest in the $500 in D’s hands?  A and C.  You get it if you can get it under 9-315.  You have to be identifiable proceeds.  Burden is on the SP claiming an interest.   The $500 is proceeds.  Both parties can claim an enforceable interest in the cash.  E cannot claim interest.   If so, is their interest perfected?  They are b/c 9-315(c).  If the secured interest in the original inventory is perfected.  It has.  Now we move to 9-315(d).  Use to be 10 days under old code.  Multi-part test.  These creditors would argue  (d)(2): it is cash proceed.  Who has priority?  Go to 9-322(b)(1).  A would get priority b/c it filed first.  A wins.  What is their situation as of 12/23?  They’re still perfected b/c we’re dealing with identifiable proceeds.  Would your answer change if D received a check upon sale of the saddle?  It’s still cash proceeds so same analysis.  A promissory note?  It is noncash proceeds then would need to argue 9-322(d)(1).  We can argue that we remain perfected even if we’re beyond the 20 days.  Under article 9, you could label the PN as instrument or as an account.  This would make a difference.  Dilemma is whether the PN satisfies the definition of instrument.  If so, it can’t be an account and we would have only a two-party dispute.  If it’s an account, we have a three-party dispute.   What is there situation as of 12/23?


b.       Assume D uses the $500 cash to purchase a desk chair for her office.  Further assume A and C can prove D used the $500 cash proceeds to acquire the desk chair.  This is important for identifiability concerns.  Do A, C, or E have an interest in the desk chair? Here, we have none.  A and C are still in dispute here.  Let’s assume we satisfy the 20 day concern.  Are both parties perfected beyond the 20 days here?  C really doesn’t have to worry too much about the proceeds theory, but A does b/c its proceeds is limited to the inventory.  It’s locked in the 9-315.   A cannot invoke 9-315(d)(2) b/c we’re not dealing with cash proceeds anymore.  9-315(d)(1)(C): were these proceeds acquired with cash proceeds?  Yes, so we can’t use this either.   We have intervening cash proceeds.  If you want an interest in equipment, you better mention it in your collateral agreement.  For the first 20 days though, A will still be okay.  A may not be perfected if it’s outside the 20 days.  A would try to argue 9-315(d)(1) and would lose.  Advice for A is to  add “equipment” to the SA description and FS.  If so, who has priority?  C would.


c.       Assume that P, rather than paying cash, purchases the saddle on unsecured credit, with payment due three months after delivery.  Three parties are now on the scene.  E doesn’t have to worry about the proceeds theory.  It’s just now involved b/c we now have accounts.  All three will be perfected outside the 20 days.  We are not dealing with intervening cash proceeds here.  We knew that this was going to be labeled as an account b/c it represents a right to payment.  It could only be this absent more facts.  The word “unsecure credit” clues you in that it can’t be chattel paper.   Who has priority to P’s promise and to the cash D receives when payment is made three months later? E would win b/c it filed first.  Accounts are the type of collateral you want an interest in b/c liquidation could trigger any filing that pre-dates yours.


d.       Assume D owns a delivery truck.  C has properly noted its lien on the truck’s certificate of title.  D sells the truck on 6/1 and receives 15K.  Does C have a perfected SI in the 15K on 6/30?  Pretty specific question.  We eliminated any priority disputes.  C would have interest in the 15K.  Rely on 9-315(d)(2) b/c it’s cash proceeds.  If you’re dealing with cash proceeds and you’re perfected beyond the 20 days, then you’re perfected.  C was here.


Problem 7.8, page 558

On 7/7, A grants MB a SI in its deposit account at MB.  On 8/1, OF files a FS covering “equipment”.  On 8/10, OF lends A 100K secured by its current and after-acquired equipment.  On 11/13, A writes a 10K check from its MB account to buy a new genom-converter.  A installs the new equipment in its manufacturing plant on 11/15.  MB learns about A’s 100K withdrawal and purchase on 11/16 and files a FS listing equipment that same day.  On 12/10, A defaults all-round.  Who has priority to the genom-converter?


Collateral we’re dealing with between A and MB is a deposit account.  How do you perfect a SI in deposit accounts?  Control.  9-104: automatic perfection.  Only two parties here.


We don’t have a problem with saying OF has interest in the equipment.  The problem is that the money of which MB had an interest was used to buy the equipment of which OF has an interest. 


Who gets priority in the genom-converter?  We could argue that MB should have priority in the machine b/c it was proceeds from the deposit account; it had control first which trumps the filing date. 


There is a special statute to look at to resolve such dispute à 9-322 (not the first-to-file or perfection rule).  Look at the special priority rules.  9-322(c),(d), and (e) addresses proceeds.  Let’s see which one applies.  9-322(c) does not apply b/c we’re not dealing with cash proceeds.  We’re dealing with hard collateral here.  Let’s see 9-322(d).  MB did perfect by control.  However, OF would win b/c 9-322(d) ranks according to priority in time of filing and thus OF filed first. 



Quick review:

You get automatic perfection in proceeds but temporary (20 days).

Then you’re limited by 9-315(d).  Must satisfy three conditions:

1.       FS covers the original collateral; filed in same place; proceeds not acquired with cash proceeds

2.       Identifiable cash proceeds

3.       SI attaches to proceeds or is within 20 days thereafter; uninterrupted continuation


§9-205              Use or disposition of collateral permissible.

(a)    When SI not valid or fraudulent

1.       the debtor has the right or ability to:

(A)  use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;

(B)   collect, compromise, enforce, or other wise deal with collateral;

(C)   accept the return of collateral or make repossessions; or

(D)  use, commingle, or dispose of proceeds; or

       2. the SP fails to require the debtor to account for proceeds or replace collateral

(b)    Requirements of possession not relaxed.  This section does not relax the requirement of possession if attachment, perfection, or enforcement of a SI depends upon possession of the collateral by the SP.

§9-315(b)(2)     When commingled proceeds identifiable:

                              (2) if the proceeds are not goods, to the extent that the SP identifies the proceeds by a method of tracing,

            including application of equitable principles, that is permitted under law other than this article with respect to commingled property of the type involved.



·         Most significant and serious proceeds problems involve chattel paper and cash receipts from inventory and receivables

·         The handling of cash proceeds in a way which meets the debtor’s needs but at the same time protects the lender’s interest creates significant legal, contractual and practical problems.

·         Two debtor actions especially threaten a lender’s continuing interest:

1.       The commingling of cash proceeds with other funds and

2.       The use of cash proceeds to pay someone other than the lender

·         The creditor’s claim to proceeds therefore depends upon its ability to trace the property in question back to the original collateral.  Tracing is not so easy when it involves cash.

·         That is why SAs often require a debtor to establish a separate “proceeds only” deposit account.  Debtor may violate the SA and commingle the funds anyway.

·         Article 9 creditor does not lose its SI simply b/c it allows the debtor freedom to use or dispose of proceeds.  See 9-205.

·         Article 9 does impose a requirement of identifiability on a creditor’s claim to proceeds.  Thus, in theory, a court could deny a secured creditor’s claim to commingled funds.  In practice, courts have not done so.


ITT Commercial Finance Corp. v. Tech Power, Inc., page 560

·         Commingled funds may be traced if the portion which represents proceeds from the sale of collateral can be sufficiently identified.

·         Party claiming a right in the proceeds has the burden of proving that the funds in the deposit account derived from the sale of it collateral.

·         Lowest Intermediate Balance Rule: involves several assumptions:

1.       Funds withdrawn from a commingled account will first deplete nonproceeds;

2.       Proceeds are deemed to be withdrawn only if no nonproceeds remains in the account; and

3.       Subsequent deposits of nonproceeds do not replenish proceeds.


Problem 7.10, page 565

Assume D’s checking account contains 1K in nonproceeds.  On Day 1, D deposits 3K of proceeds.  The account now has a balance of 4K.  On Day 4, D withdraws 1K.  The account now contains 3K.  On Day 5, D withdraws 1K, leaving a balance of 2K.  On Day 7, D deposits 3K of nonproceeds, bringing the account balance to 5K.


a.       Determine the amount of the secured creditor’s claim to proceeds in the commingled account.  2K.

b.       Assume on Day 8, D deposits 2K in proceeds.  On Day 10, D withdraws 3K.  Determine the creditor’s claim. 4K is creditor’s claim.  If it’s a nonproceeds, creditor has no interest in claiming it.  What if the source of the Day 8 deposit cannot be identified? Who has the burden of proof?  Creditor.


What do you tell your creditor?  Tell debtor don’t commingle the cash.  Or have debtor set up separate accounts. 

What if the deposit account is not maintained with the lender?  Get control.  You can obtain control and still get the debtor to get what comes in and goes out. 


Problem 7.11, page 565

a.       $900

b.       $400

c.       $2400

Draw a column to separate proceeds from nonproceeds. 

End of day one, balance for proceeds is zero. 



PEB Commentary #7: The Relative Priorities of SIs In The Cash Proceeds of Accounts, Chattel Paper, And General Intangibles


Issue: SP-A and SP-B each has a perfected SI in the same account, chattel paper, or general intangible, with A having priority over SP-B.  If the account debtor makes payment to SP-B, directly or through the debtor, may SP-A recover the payment from SP-B?


A. Payment by Check

When the account debtor pays B by check, or when the debtor indorses and delivers to B a check drawn by the account debtor to the order of the debtor, B will be a holder of the check.  If B takes the check under the circumstance described in 3-302(1), B will be a holder in due course.  A’s FS does not constitute notice to B of A’s claim to the check and does not preclude B from being a holder in due course.   Specifically, B takes priority over A’s earlier, perfected SI in the check and is entitled to keep the funds received when the check is paid.  Even if B is not a holder in due course, 9-308 may give priority to B’s SI in the check.  But if B takes the check under circumstances that preclude B from being a holder in due course (e.g if a notation on check gives B reason to know that the check constitutes A’s proceeds) and from taking priority under 9-308, then B would take the check subject to A’s SI.  See 3-306(a)


B. Payment In Cash

Code does not specifically address the right of B to retain cash payment from the account debtor.  Resort is had to the principle of law and equity.  See 1-103.  Thus, when a person assigns the same claim to two persons and the assignee w/o priority (B) receives payment from the obligor, the assignee receiving payment owes a duty of restitution to the assigneee having priority (A).  But if B gave value for the assignment (as B must have, see 9-203(1)(b) and obtained the payment in good faith and w/o knowledge or reason to know of the prior assignment, then B may retain the payment.


§9-331(a), (c)                Priority of rights of purchasers of instruments, documents, and securities under other articles;

priority of interests in financial assets and security entitlements under article 8.

(a)    Rights under article 3,7 and 8 not limited

(b)    Filing not notice

§9-332                          Transfer of money; transfer of funds from deposit account.

§9-315(a), (c)-(e)          SP’s rights on disposition of collateral and in proceeds.


PRIORITY ISSUES, page 652 text

Allstate Financial Corp. v. Financorp, Inc., page 653


Problem 8.8, page 664

X has a two-tiered financing structure.  It has a $4 mill revolving line of credit from B secured by its inventory.  B perfected its interest by filing on 3/1.  B’s SA contains no provisions regarding X’s use of cash or other proceeds.  The “second tier” involves E, which has extended X a $2.5 mill line of credit which it will advance as X generates “eligible accounts” from its sales of antenna products to various cable television companies.  E takes a valid SI in X’s account which it perfects on 5/12.  Approximately 70% of X’s sales generate accounts.  E’s agreement requires X to deposit all cash and checks received from these accounts into a segregated “proceeds only account” to be maintained by debtor at JNB.  Once a month, E “sweeps” this account, taking the balance in payment of its debt.  Although both creditors are aware of the other’s interest, they have not contracted between themselves.


B has collateral in inventory.  E has collateral in the accounts.  They’re all proceeds.  


a.       Three weeks ago, just after E swept $1 mill from the JNB account, X’s major supplier, C, threatened to stop delivery b/c it had not been paid for four months.  X took 50% of all its cash receipts and deposited them into its operating account.  It then wrote a $900,000 check from this account to pay C.  Can either B or E recover this $900,000 payment from C?  C would get the full $900,000; it could argue it’s a holder in due course under 9-331 and article 3.  9-332(a) can be argued by C as well.


b.       X also wrote a $70,000 check from the E account to pay an overdue installment to B.   May E recover this payment from B?  B would argue it should keep it b/c it filed first.  Since E does know of the interest, it could be collusion under 9-332.  However, probably not.  However, B might argue E knew of the competing interest and it didn’t sweep on a daily basis, therefore B should get it.  B could also argue it’s a holder in due course.  Maybe, but not sure.  TRZ thinks BE may be able to keep the money.  This type of problem should not be going on.  This should be addressed through an intermediary participant who clarifies this.  You would think B and E contractually settled it among themselves. 


c.       $100,000 remains in the E account and $70,000 in X’s operating account.  As between the creditors, who has priority to these amounts?  As far as the money in E’s account, it’s a straight-up priority rule and E would win.  For the other account, we now have a commingling problem.  It is now an identifiable proceeds issue.  Both parties now have burden of tracing the proceeds.  If satisfied, E could still win as well.  Here, we don’t know yet.  Where’s the other 30K?  We would have to look at the bank statements. 


d.       Design a revision of its SAs for B to cope with the problems indicated in this hypothetical.  Set up control of the debtor that satisfies 9-332.



We’re still talking about priority disputes.  For chattel paper, look for a writing and it must evidence a monetary obligation and SI in or lease of specific goods.  This is the modified definition for our purposes in class.  In the real world, it is much more extensive.  


Ex. TRZ leases a car for 3 years at $300 a month.  Executive leasing may wish to use this lease and convert it into cash equipment.  Finance company will pay cash for it.  Over a 3-year period, executive will expect to get $10,800.  Executive may however want it quicker.  Thus, executive leasing may sell it.  Could this lease be chattel paper? Is it a writing?  Yes.  Does it evidence a monetary obligation?  Yes.  Does the writing evidence a SI or a lease of specific goods?  Yes.  Thus, it seems that a lease will always satisfy our definition of chattel paper.   It’s very possible that a SP has a SI in some or all of the asset of executive leasing.  Perhaps in the vehicle or proceeds.  And it may predate Executive’s interested and thus perfected.  So when E sells the lease or chattel paper, it is likely there is a priority dispute in the chattel paper. 


We need to look at the relationship between E and financing company.  First, is this an Article 9 transaction?  Yes à 9-109(a)(3).  Then we have to identify the parties.  One of the parties is a secured creditor.  9-102(28) à defines debtor.  9-102(a)(72) picks up the seller.  E is our seller and debtor.  Financing Co. is our buyer and SP.  Debtor and secured party do fall into Article 9 transaction.   Did the debtor have right in the chattel paper?  Yes.  Did the seller give value?  Most likely.  If there’s no written agreement, can we look to something else to satisfy the “A” prong of RAVE?  Yes, see if SP has possession.  What if Financing Co. never files the FS?  It’s OK b/c possession also satisfies perfection.  Thus, Financing Co. is perfected by possession and SP is perfected by filing.  If we have two secured party, who wins then?  E (SP) wins over Financing Co.  Are we sure?  No.  Financing Co. would win and D would want it to.  D has an interest in it too. 


9-330 trumps 9-322.  9-330 awards priority to a general purchaser.  How can we legitimately jump from 9-322 to 9-330?  Go to 9-322(f) for limitations.  This would lead us to 9-330.  Primarily look at 9-330(a) and (b).  Who has the SI here?  SP does.  To make 9-330 never applicable, advise SP to take possession.  If it has possession, then Financing Co. could not.  As a SP, pursuade your debtor to indicate which one will be deemed the original possession.  Instead of just saying chattel paper on your FS, also specify that anyone who takes it is violating your rights to it; some language that is self-serve.  But this is only in 9-330(b).  The statute is written as a pro-purchaser statute to generate business dealings.


9-109(a)(3)                   Article 9 applies to a sale of accounts, chattel paper, payment intangibles, or promissory notes

9-102(a)(11), (28)(B), (72)(D)    Chattel paper; Debtor; Secured Party

9-315(a), (c)-(e)                        Secured Party’s Rights on Disposition of collateral and in proceeds.

9-330                            Priority of purchaser of chattel paper or instrument

9-322(c)                        Special priority rules and supporting obligations

9-102(a)(43), (57)          Good faith ; New value


PEB Commentary #8, page 933

Issue I

If a financer loans or extends credit for the cost of specific items or inventory and expects to be paid upon the sale of the items, the financer’s in chattel paper generated when the items are sold is a mere proceeds interest unless the financer in a new transaction gives value against the specific paper.  On the other hand, a lender who agrees to lend up to a specified percentage of the cost of inventory and of receivables has more than a mere proceeds interest in chattel paper which a part of the receivables covered by the SA.  In inventory financing transactions which do not fall within the above two categories, whether the financer has more than a mere proceeds interest in chattel paper generated when inventory subject to its secured interest is sold must be determined from an examination of all the facts of the case. 


Issue II

A chattel paper financer who gives new value and takes possession of chattel paper in the ordinary course of his business and is w/o knowledge of prior SIs in the chattel paper has no duty to search for Article 9 filings against the chattel paper or to make other inquiries which might reveal perfected prior interests in the specific chattel paper, even if the chattel paper financer is aware of the possibility that a prior SI exists.  Knowledge of a UCC form 1 filing covering chattel paper does not impose any obligation upon the chattel paper financer to make inquiries.



Blazer Financial Services, Inc. v. Harbor Federal Savings & Loan Ass’n, page 619

Issue is whether the trial court erred when it limited the protection of 9-308 to the amount paid by B for the chattel paper.  Court says yes.  One who purchases chattel paper in accord with the statutory requirements of 9-308 has a priority interest in the chattel paper to the full extent of its face value.


Problem 7.20, page 622

D obtains inventory financing from G.  G takes a SI in all D’s current and after-acquired inventory and chattel paper which it perfects on 6/1.  G’s agreement with D requires D to sell and deliver to G all chattel paper generated by D’s sales.

On 6/15, B buys a large screen television from D by executing a conditional sales K.  D does not file a FS.  B uses the television in its business.  F is B’s equipment financer.  As of 6/10, F held a perfected SI in all B’s current and after-acquired equipment.  D sells B’s conditional sales K to S rather than to G as provided in D’s SA with G.  S, which does not know of G’s agreement with D, pays D cash and takes possession of the paper on 6/20.  S routinely buys chattel paper from various merchants.



We have five people involved.

G à SP with interest in D’s inventory and chattel; perfect on 6/1

D then sells TV to B; executes a conditional sales K on 6/15

F is B’s financer; holds a perfected SI as of 6/10

D sells B’s K to S rather than to G

S pays cash and takes possession of the chattel paper on 6/20


Does G even have an interest in the sales K?  No.  When D (seller) sales the TV, it retains a SI in it until B pays in full.  Thus we have a writing that evidences a monetary obligation and the interest is in the TV.  Thus, we have chattel paper.  9-315 says our SI continues.  Is it continued perfected?  9-507 says it is.  S is a SP that is attached and is perfected.  So is G.  Buyer is the consumer debtor for purposes of priority dispute here. 


a.       If both B and D default on all their loans, who has priority to the television?  Resolve two priority disputes: G v. S (concerning conditional sales K) and D v. F (concerning TV).  In G v. S, S would have priority b/c it satisfied 9-330.  S has no duty to search. F has perfected interest in TV. D has an interest in PMSI.  But it is unperfected.  Between D v. F, F would have priority under 9-322(a) b/c it perfected its SI whereas D did not file a FS. 


b.       What result in (a) if D filed a valid FS covering the television on 6/19? Has nothing to do with possession.  Can’t use first to file or perfection rule.  D will thus invoke 9-324(a), which deals with non-inventory (equipment here).  9-324(b) covers inventory only.   D thus wins as long as it perfects filing within 20 days and here it was.  We are well within the post-delivery grace period for filing.  Thus D claims super-priority under 9-324(a).


c.       SKIP


d.       Assume D leases the television to B and B is NOT in default.  As between G and S, who has priority to B’s monthly lease payments?  S would win under 9-330(c).   Doesn’t bother us on the chattel paper definition.  It’s still chattel paper.  Ask ourselves what about proceeds?  9-330(c) deals with proceeds.  We then flip back to 9-322 to look for special rules for proceeds à takes us to 9-322(c).  Security in proceeds by S is perfected here b/c it’s cash proceeds à 9-315(d)(2).  Now we must satisfy 9-315(2)(b).  We have b/c cash proceeds.  Test in (c)(2) is a 3-part test.  Must satisfy all of it.  Bottom line is if we’re dealing with proceeds, priority extends to cash proceeds.



9-201(a)            General Effectiveness of SA

(a) Except as otherwise provided in the UCC, a SA is effective according to its terms between the parties, against purchasers of collateral, and against creditors.

9-315(a)            SP’s rights on disposition of collateral and in proceeds.

                        (a) Disposition of collateral: continuation of SI; proceeds

9-320(a),(b)       Buyer of Goods

(a)    Buyer in ordinary course of business: takes free of a SI created by the buyer’s seller, even if the SI is perfected and the buyer knows of its existence.

(b)    Buyer of consumer goods: takes free of a SI, even if perfected, if the buyer buys:

1.       w/o knowledge of the SI;

2.       for value;

3.       primarily for the buyer’s personal, family, or household purposes; and

4.       before the filing of a FS covering the goods

1-201(9)  [page 880]      “Buyer in ordinary course of business” means a person that buys goods in good faith, w/o knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind.  The buyer must take possession of the goods or has a right to recover the goods from the seller under Article 2.

9-317(b)            Interests that take priority over or take free of SI

                        (b) Buyers that receive delivery 

9-507(a)            Effect of certain events on effectiveness of FS

(a)    Disposition: A filed FS remains effective with respect to collateral that is sold, exchanged, leased, license, or otherwise disposed of and in which a SI continues, even if the secured party knows of or consents to the disposition.



·         Another general claimant in potential conflict with a secured creditor is a buyer of the collateral.  Here, we focus on the buyers of goods. See 9-315(a)(1)

·         For example, assume your client wants to purchase an expensive piece of machinery and does not want to purchase a lawsuit with someone who says the machinery as its collateral.  What steps would you take to protect your client?

·         First question to ask is, is your FS still good?  They’re going to look under the name of the debtor first. Do you have to refile your FS? 9-508 says FS remains effective even if after transfer. 

·         Question really then is will the new buyer take free of that SI?  


Daniel v. Bank of Hayward, page 310

Issue: When does a retail purchaser who makes a down payment on a motor vehicle but does not take title to the vehicle become a “buyer in the ordinary course of business” under 1-201(9) and 9-307(1), to prevail over the SI of the motor vehicle dealer’s floor plan financer?

Holding: If the purchasers in this case became buyers in ordinary course of business prior to the Bank’s seizing the van, their interest in the van takes priority over the Bank’s perfected SI.  Court concludes that the purchasers in this case became buyers in ordinary course of business when the vehicle was identified to the contract.  Thus courts have overwhelmingly rejected a definition of buyer in ordinary course that focuses on whether title has passed.  They reasoned that the inventory financer is better able to guard against the risks inherent in this type of financing than is the average retailer.


Notes, page 316

·         According to 9-320(a), the SI in question must be “created by the buyer’s seller”.


Problem, 4.21, page 324

W sells clothing.  W grants B a SI in all its current and after-acquired inventory.  On 7/1, B files a FS covering W’s inventory.  W grants C a SI in “all its equipment, current and after-acquired.”  On 7/10, C files a FS covering W’s equipment.  W’s agreement with B does not mention W’s right to sell the collateral.  W’s agreement with C includes a debtor warranty that W will not sell the collateral w/o C’s prior written consent.  The SA makes breach of any warranty a default. 


a.       W sells a $500 dress to J for personal use.  J is aware of B’s SI.  Does B have any continuing interest in the dress? Of course B will still have a continuing interest unless a provision cuts it off.  The basic provision is 9-102(a).  Thus, there are plenty of cuts off B’s interest in Article 9.  Start with 9-315(a)(1).  Says SI still continues into the hand who bought it.  Then look has there been any kind of authorization?  If so, you’re done.  You then don’t need to look further.  But here, the agreement was silent on way or the other.  Thus, it’s fair to say there’s been no affirmative authorization of whether the debtor can do that.  But on the other hand, what’s the expectations though?  A business that has inventory is obviously going to sell and acquire it continually.  So how can you not authorize the transfer of inventory since the whole point of having inventory is to sell it.  Thus if a SA is silent or has provision saying debtor can’t sell the inventory or that debtor must get permission of SP first before selling it, then you have a conditional sell.  If it’s silent, courts will just imply there was authorization based on conduct of the parties.  9-315(a) gives SP rights to proceeds even if debtor cuts off the SI.  Thus, as SP you’ve got to have something in place so that you don’t have to run after the debtor. 


What if the court finds that your interest in the inventory has been cut off by the debtor even though there’s been no authorization for sale? 9-320(a) gives you another option as a buyer.  The SI has to be created by the buyer/seller and the buyer has to be somebody in the ordinary course of business.  It also has to be in good faith.  Secondly, you have to be buying w/o knowing that it violates the SI that someone else has in the property.  9-320(a) says buyer takes free of SI created by seller.  No, even though J was aware of B’s SI 9-320(a).  Third, the sale has to be in the ordinary course of business; means the sale has to be the ordinary way that they sell there inventory,  Fourth, you have to be in the business of selling such goods.  Here, SI has to be created by J’ seller (which is W).  The seller has to be the debtor in the transaction that creates the SI in the first place. 


If the SI is cut off, it’s cut off forever.  Basic shelter doctrine.  Anyone buying under J is protected from someone taking their interest. 


b.       On 8/9, and w/o C’s knowledge or consent, W decides to liquidate some of its equipment.  It moves 10 used personal computers onto its showroom floor for sale.  J, a satisfied customer, returns and purchases one of them.  He pays full value and is not aware of C’s SI.  Does C have a continuing interest in the computer?  Start with 9-315(a)(1).  Go through the same analysis as above.  Here, there was no authorization for debtor to sell the equipment.  How about 9-320(a)?  This doesn’t work either.  J is not in the business of selling computers.  Thus, there’s no way J qualifies as a seller in the ordinary course of business.  Does 9-320(b) apply so that buyer can take the interest free?  Does not work here.  One more place to look.  9-317(b) is the last stop on the buyer priority road map that would let a buyer take free of SI.  J, however, does not meet element 4 of 9-507.  There was a perfected SI.  Thus J took the computer subject ot the interest.  C could take it if there is an issue of default later down the line.  Does B have an interest?  Ask, is it inventory?  Probably not since W is not in the business of selling computers.  We don’t have enough facts but probably it’ll be considered still inventory and B would then not have an interest in it.  C would still though.


***Side note: Discussion about 9-320(a).  It has two requirements.  Take a look at notes on page 316.  See hypo.  Debtor would probably not take SI b/c no authorization and it’s not in ordinary course of business.  9-317 would not work to cut off SI of dealer either.  Customer cannot take free of SI b/c the SI was not created by the buyer’s seller.  It was created by the debtor.  Reasonable expectation of equipment and inventory is different.  9-320(a) cuts your SI in inventory.  With equipment, once sold you expect to have a continuing interest in it.  If it’s sold, you’d expect your interest to go with it.  Here, you took a SI in equipment and you expect debtor to keep it, but he went and sold it to a dealer.  Dealer shouldn’t be able to take a SI in it.  That’s why we have 9-320(a) provision that the SI has to be created by the buyer/seller and not the debtor.  Debtor has to be the one in original transaction.  If you bought it from dealer and used it as consumer goods, it wouldn’t be cut off.  Here, dealer is not using it for consumer goods.  9-320(b) doesn’t usually work anyway.  It’s rare b/c if you take a SI in somebody’s goods, you would file FS.  If you sell goods and take and interest in it, it’s automatic perfection b/c PMSI, thus you don’t need to file.  


c.       Assume J purchases the computer for personal use and on credit.  W retains a SI in the computer to secure the purchase price.  W does not file a FS covering the transaction.  One month later, J sells the computer to A who also purchases for personal use.  A is unaware of any of the SIs.  Does W, C or B have a continuing interest in the computer? No under 9-320.  We sort of already answered it.  Automatic perfection here b/c it’s PMSI so need to file FS.   C would have b/c 9-320(b) does not apply to C b/c C has filed a FS to perfect its equipment.  It will cut off W’s interest b/c of 9-320(b) restrictions. 


d.       Would it make any difference in (c) if A purchases the computer for use in her business?  Sure it would.  9-320(b) does not apply.  W’s interest would continue.  9-320(a) does not apply b/c A is not buyer in ordinary course of business.  9-317 does not apply either. 


Note on page 316: A buyer in the ordinary course of business must have possession in the goods.  Thus, courts have overruled prior cases.  A right to recover may still be possible.  Go through article 2.



9-201(a)            General Effectiveness of SA

(a) Except as otherwise provided in the UCC, a SA is effective according to its terms between the parties, against purchasers of collateral, and against creditors.

9-315(a)            SP’s rights on disposition of collateral and in proceeds.

                        (a) Disposition of collateral: continuation of SI; proceeds

9-320(a),(b)       Buyer of Goods

(c)    Buyer in ordinary course of business: takes free of a SI created by the buyer’s seller, even if the SI is perfected and the buyer knows of its existence.

(d)    Buyer of consumer goods: takes free of a SI, even if perfected, if the buyer buys:

5.       w/o knowledge of the SI;

6.       for value;

7.       primarily for the buyer’s personal, family, or household purposes; and

8.       before the filing of a FS covering the goods

1-201(9)  [page 880]      “Buyer in ordinary course of business” means a person that buys goods in good faith, w/o knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind.  The buyer must take possession of the goods or has a right to recover the goods from the seller under Article 2.

9-317(b)            Interests that take priority over or take free of SI

(b)    Buyers that receive delivery

9-325             Priority of SIs in transferred collateral

9-507(a)            Effect of certain events on effectiveness of FS

(c)    Disposition: A filed FS remains effective with respect to collateral that is sold, exchanged, leased, license, or otherwise disposed of and in which a SI continues, even if the secured party knows of or consents to the disposition.


A SP would start with 9-201 in determining its relationship with the buyer.  Then the SP would go to 9-315.  Then SP would go to 9-320 for buyer rule.  9-320(a) and (b).  9-317 might also help a buyer.  Only time buyer can invoke 9-317 is if the SP is unperfected.  Is there a provision that says a SI continues perfected and thus no need to refile?  Yes, under 9-507.  All this is review.  For a buyer to win, buyer has to be buying from the seller. Dispute is between SP and some buyer out there.  SP always has the avenue of proceeds to the buyer.  The seller has to be the debtor under 9-320. 



Problem  4.23, page 325

Z took a SI in all BJ’s current and after-acquired equipment on 6/1 and filed that same day.  M was a subsidiary of BJ.  On 8/10, BJ made an inter-corporate transfer of one of its multimillion dollar, three color printing presses to M.  T held a SI in all M’s current and after-acquired equipment.  It had filed a FS covering “equipment” on 3/2.  Both banks’ SAs defined default to include the “suffering of another encumbrance” on their collateral.


Z (SP)à BJ (debtor)

T (SP)à M (debtor)


We have two debtors and two secured parties and we have a sale between the debtors.  The buyer’s creditor filed FS first (T).  Under basic priority rule, T would win.  9-325, however, would give Z victory.  When M bought asset from BJ, the asset was subject to SI under 9-315 and 9-507.  Z was continually perfected.  Thus, Z wins.  If Z beats M, then Z also beats M’s creditor.  You can’t get any greater right than your creditor has.  Both buyer and seller are the debtors here.  For purposes of reference to debtor, it will be the buyer.  For other, it would be transferor. 


a.       Who has priority to the printing press and why?

b.       Would it make a difference in result if T had loaned M $2 million to enable it to purchase the printing press from BJ? No.  It’s irrelevant.  It does suggest to you that when financing buyer’s situation, make sure there’s FS.  But doesn’t happen too often.


Problem 4.25, page 326

D, a local jewelry and antique dealer, is in desperate need of money.  It announces a “distress sale” auction of last year’s jewelry and watches.  It schedules this auction on a Monday, cancelling its regular antique auction scheduled for that day.  It hires F to conduct the auction.  D’s inventory is subject to a perfected SI held by E.  The SA authorizes D to sell its inventory in the ordinary course of business w/o E’s prior written consent.  D does not inform E of the upcoming “distress sale”.


It holds the auction at its main showroom and attracts a large audience.  Posted behind the auctioneer’s podium is a sign stating “This auction is authorized by E.”  Among the forty items auctioned was a Rolex watch purchased by P, a first year law student at the local law school.  As required by the auction, she paid cash, which she borrowed from her mother.  G, a retail seller of jewelry, purchased another watch which it placed in its store for resale.  It sold the watch to C, who gave it to her daughter, Erika, as a birthday present.


Several months pass.  Although D pays nothing to E, E never contacts D.  Then E discovers what happened.


The SP is E.  Our debtor is D. 

Dispute is between E v. G.  Then E v. Erika 


E v. G: Under 9-201, E would win.  Under 9-315, there is a concern whether this is an ordinary course of business sale.  If we hold it is, the buyer would win.  If we assume it’s not, then neither 9-320(a) or (b) applies.  Buyer had to be a buyer in ordinary course of business which is our problem here. Also, buyer has to take free of interest, of which is okay here.  9-320(b) can’t be invoked b/c it’s not a consumer good in hands of buyer and seller.  Another problem for P is that FS is not on file.  E is perfected.  Bottom line is, E wins.  Does G have an action against anybody? Yes, maybe against D for fraud or breach of K. 


E v. Erika: Under 9-201, E would win.  9-315, same debate.  Now let’s assume we do not have a sale in ordinary course of business.  This would be a problem for Erika.  Can she invoke 9-320(a)?  Maybe b/c it’s a gift.  She may be sheltered by Mom’s rights.   It’s not likely G would be a buyer in ordinary course.  If so, W and Erika would be able to take free of the SI.  Shelter doctrine would work if you could get G to take the property free of the SI.  In the real world, E would put pressure on D in the proceeds.  From E’s perspective then, the cause of action would be conversion.  Could Erika invoke 9-320(b) consumer to consumer transaction?  It’s a consumer goods from W’s hand to Erika’s hands.  Erika still couldn’t take it b/c E filed the FS.  Therefore, Erika still loses.  We made Erika the buyer for this purpose.  See if the first buyer took the property free and clear of SI when dealing with Shelter doctrine. 


a.       In E’s lawsuit against W and her daughter to recover the watch purchased from G, what result? 

b.       In E’s lawsuit against G to recover the Rolex, what result?  Would the result change if G sold the watch to A, a third year law student, and E sued A?


Handout problem #4-4: Priority Disputes in Investment Property

9-328                                Priority of SIs in investment property

(1) (2), (5), (7)

8-106                Control

8-301                Delivery


B1 loans $1 million to D, who executes a written SA that creates an enforceable SI in various assets, including the following:


            100 shares of IBM stock (D holds the actual certificates, which are registered in its name)  certificates


            200 shares in the Fidelity Magellan Fund (a stock mutual fund which does not issue certificates but provides D

with quarterly performance statement.  Uncertificated entitlements


All investments in D’s account managed by its investment broker, Morgan Stanley Dean Witter.  Series of

security entitlements


B1 perfects its SI by filing a FS.


Later, B2 loans $2 million to D, who executes a written SA that creates an enforceable SI in various assets, including the same investment property described above.  B2 then perfects its SI by filing a FS.


1.       Whose interest enjoys priority in the investment property?  9-323(7) default rule.

2.       Whose interest enjoys priority in the IBM stock if B2 files after B1 but B2 also takes possession of the IBM stock certificate properly endorsed by D to B2?  9-328(1) control

3.       Whose interest enjoys priority in the Fidelity Magellan Fund if B2 files after B1 but Fidelity revises its records to reflect B2 as the “registered owner”?

4.       Whose interest enjoys priority in the Morgan Stanley Dean Witter portfolio if B2 files after B1 but D, B2, and Morgan Stanley Dean Witter execute a three-party agreement that gives B2 the non-exclusive power to order Morgan Stanley Dean Witter to sell all or part of the portfolio at any time w/o D’s consent?

5.       Same as #4, except D and Morgan Stanley Dean Witter also execute a three-party agreement with B1 that gives B1 the non-exclusive power to order Morgan Stanley Dean Witter to sell all or part of the portfolio at any time w/o D’s consent.  Whose interest enjoys priority in the Morgan Stanley Dean Witter portfolio?  Does it matter which three-party agreement is executed first? 9-327(2) whomever has control first. 



Finish up on priority dispute material.  Today we talk about fixtures.

It borders on real estate issues.  Thus, a lot of professors don’t touch on it and it doesn’t show on the bar exams very often, BUT may.  You may have to look to property law for a clearer definition of what a fixture is.  For article 9, we would worry about what fixtures are when we’re dealing with equipment and consumer goods (in most instance, probably not an issue).  If it’s just pure article 9 litigant, you don’t have to worry about the real estate property law.  Just use Article 9 rules.  You would only worry when you’re dealing with a real estate litigant.  But either way, make sure to file a fixture filing statement.  It would perfect you against a real estate litigant. 


9-109                                (a) General scope of article 9

(1)      a transaction, regardless of its form, that creates a SI in personal property or fixtures by contract

(d)    In applicability of article: this article does not apply to:

     (11) the creation or transfer of an interest in or lien on real property, including a lease or rents 

thereunder, except to the extent that provision is made for:

9-102                                (a) (40) Fixture Filing: means the filing of a FS covering goods that are or are to become fixtures and

satisfying 9-502(a) and (b).  The term includes the filing of FS covering goods of a transmitting

utility which are or are to become fixtures;

(41)    Fixtures: means goods that have become so related to particular real property that an interest in

them arises under real property law.

9-334                Priority of SIs in fixtures and crops.

(a)    [SI in fixtures under this article] A SI under this article may be created in goods that are fixtures or may continue in goods that become fixtures.  A SI does not exist under this article in ordinary building materials incorporated into an improvement on land.

(b)    [SI in fixtures under real-property law]  This article does not prevent creation of an encumbrance upon fixtures under real property law.

(c)    [General rule: subordination of SI in fixtures]  In cases not governed by subsections (d) through (h), a SI in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.

(d)    [Fixtures purchase-money priority]  Except as otherwise provided in subsection (h), a perfected SI in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and:

(1)    the SI is a purchase-money SI;

(2)    the interest of the encumbrancer or owner arises before the goods become fixtures; and

(3)    the SI is perfected by a fixtures filing before the goods become fixtures or within 20 days thereafter.

(e)    [Priority of SI in fixtures over interests in real property] A perfected SI in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if:

(1)    the debtor has an interest of record in the real property or is in possession of the real property and the SI:

(A)  is perfected by a fixture filing before the interest of the encumbrancer or owner is of record; and

(B)   has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner;

(2)    before the goods become fixtures, the SI is perfected by any method permitted by this article and the fixtures are readily removable:

(A)  factory or office machines;

(B)   equipment that is not primarily used or leased for use in the operation of the real property; or

(C)   replacements of domestic appliances that are consumer goods.

(3)    the conflicting interests is a lien on the real property obtained by legal or equitable proceedings after the SI was perfected by any method permitted by this article; or

(4)    the SI is:

(A)  created in a manufactured home in a manufactured-home transaction; and

(B)   perfected pursuant to a statute described in 9-311(a)(2).

(f)     [Priority based on consent, disclaimer, or right to remove] A SI in fixtures, whether or not perfected,

has priority over a conflicting interest of an encumbrancer or owner of the real property if:

(1)    the encumbrancer or owner has, in an authenticated record, consented to the SI or disclaimed an interest in the goods as fixtures; or

(2)    the debtor has a right to remove the goods as against the encumbrancer or owner.

(g)    [Continuation of paragraph (f)(2) priority.]  The priority of the SI under paragraph (f)(2) continues for a reasonable time if the debtor’s right to remove the goods as against the encumbrances or owner terminates.

9-501                                Filing Office

(a)[Filing Offices]

(1)    the office designated for the filing or recording of a record of a mortgage on the related real property, if:

(B) the FS is filed as a fixture filing and the collateral is goods that are or are to become fixtures

9-502                                Contents of FS; Record of mortgages as FS; time of filing FS

(b) [Real-property-related FS] Except as otherwise provided in subsection 9-501(b), to be sufficient, a FS

      that covers as-extracted collateral or timber to be cut, or which is filed as a fixture filing and covers     

      goods that are or are to become fixtures, must satisfy subsection (a) and also;

(1)    indicate that it covers this type of collateral;

(2)    indicate that it is to be filed [for record] in the real property records;

(3)    provide a description of the real property to which the collateral is related [sufficient to give constructive notice of a mortgage under the law of this state of the description were contained in a record of the mortgage of the real property]; and

(4)    if the debtor does not have an interest of record in the real property, provide the name of a record owner.

9-604                                Procedure if SA covers real property or fixtures.

(a)    [Enforcement: personal and real property.]  If a SA covers both personal and real property, a SP may proceed:

(1)    under this part as to the personal property w/o prejudicing any rights with respect to the real property; or

(2)    as to both the personal property and the real property in accordance with the rights with respect to the real property, in which case the other provisions of this part do not apply.

(b)    [Enforcement: fixtures.] Subject to subsection (c), if a SA covers goods that are or become fixtures, a SP may proceed:

(1)    under this part; or

(2)    in accordance with the rights with respect to real property, in which case the other provisions of this part do not apply.

(c)    Removal of fixtures.]  Subject to the other provisions of this part, if a SP holding a SI in fixtures has priority over all owners and encumbrancers of the real property, the SP, after default, may remove the collateral from the real property.

(d)    [Injury causes by the removal.]  A SP that removes collateral shall promptly reimburse any encumbrancer or owner of the real property, other than the debtor, for the cost of repair of any physical injury caused by the removal.  The SP need not reimburse the encumbrancer or owner for any diminution in value of the real property caused by the absence of the goods removed or by any necessity of replacing them.  A person entitled to reimbursement may refuse permission to remove until the SP gives adequate assurance for the performance of the obligation to reimburse.


FIXTURES, page 710

·         If collateral in question is personalty only, only Article 9 applies.  If the collateral is real estate only, only real estate law governs.  If the collateral qualifies as a “fixture,” both real estate law AND Article 9 apply. 9-109(a)(1)

·         It’s property having characteristics of personalty and realty.

·         “Half-inch” test: Anything that can be moved more than one-half inch by one blow of a hammer weighing not more than 5 pounds, swung by a man [or woman] weighing not more than 250 pounds, would not qualify as a fixture.

·         “Screwdriver-crescent wrench-one hour” test: Anything affixed to real estate would qualify as a fixture unless one man [one woman], armed with a screwdriver and a crescent wrench, could loosen it from the floor or wall within one hour.

·         9-334 states priority rules to resolve the conflict between the real estate claimant and Article 9 creditor regarding fixtures.

·         Fixture filing under 9-502(b) is a filing of a FS covering goods that are or to become fixtures and satisfying the requirements of 9-502(a) and (b). It is simply a specially tailored FS.

·         Generally, to determine “Is it a fixture?”, courts generally apply an “intentions of the parties” test.  Did the parties intend to affix the property permanently to the freehold?  Issue is treated as a question of fact.


Problem 9.2, page 727-728

Three years ago, W obtained a $6 million loan from H to finance construction of a new factory.  H secured its loan by a valid construction mortgage which it properly filed in the real estate records.  Once construction was completed, W borrowed money from B1 to pay off H.  H released its mortgage.  B1 properly recorded its mortgage.  Recently, W obtained a loan from B2 to purchase the following items:


1.       a conveyer system to replace its current, outmoded conveyor (the conveyor system was to be installed into the floors and ceilings of the plant);

2.       a large bottle-capping machine which would be bolted to the floor of the plant; and

3.       several electric bottle-hauling carts for use within the plant.


B2 took a SI in all these finances items and made a fixture filing prior to their installation at W’s plant.  Shortly after the new equipment was installed and in operation, C1, an unsecured creditor of W, obtained a judgment and had the sheriff levy on all W’s property.  W’s SA with B2 defined “default” to include the rendering of any judgment against W.  A similar clause existed in W’s mortgage agreements with B1.


We have three creditors here.  B1, B2 and a judgment lien creditor, C1.  Here, #1 and #2 are classified as fixtures.  #3 is non-fixture.


a.       Who has what priority in the various items of equipment as among B1, B2 and C1? B2 would have priority in the fixture b/c it filed a proper fixture filing statement.  For fixture, we have a three-party dispute.  If non-fixture, we have a two party dispute.  If it’s a  dispute between a non-fixture creditor and a lien creditor, we look at 9-317.  Lien creditor wins over B1 b/c B1 filed in the wrong place.  For fixtures, we have 3-party dispute here.  9-334(d) for PMSIs.  B2 has PMSI.  The encumbrancer here is B1 b/c it’s holding the mortgage.  This rule will favor B2 (at least between B1).  Now we look to dispute between B2 and lien creditor.  B2 wins again based on 9-334(d)(2).  Ultimately, priority goes to B2, then B1, and then lien creditor; this is only regards to the fixtures.


b.       Would the result in (a) change if B2 had only made an Article 9 filing instead of a fixture filing?  We have a problem arguing that 9-334(d) applies so B2 loses to B1 in the absent of fixture filing.  Look to (e)(2) as alternative remedy.  B2  can look to (e)(2(A) to possibly win.  But there is another rule that may apply –9-334(c).  Thus, B2 will lose to B1 under 9-334(c) but can still win against the lien creditor.  (c) would not save the secured creditor.  It only resolves the B1 and B2 dispute.  Bottom line is that if we had filed centrally instead of locally, B1 would beat B2. 


c.       Reconsider your conclusions in (a) and (b) assuming the sheriff’s levy on behalf of C1 occurred before the items were installed in W’s factory.  If they’re never fixed to the real estate, then they’re never a fixture.  Does it make it worthless then?  Look at 9-501: “or are to become a fixture…” Thus, even though they do not become fixtures b/c ceased prematurely, fixture filing rule  may still help.  It does not change our analysis in question (b).


d.       Would your answers to any of the above questions change if H had assigned its loan and mortgage to B1? B1 would win on all the items b/c it had the original SI in the mortgage.


New topic: Example per TRZ:

Financing options:

1.       may pay cash

2.       finance it and I will take a PMSI in it w/ 3-year note plus interest = $6,000

3.       Lease – 36 month – 160/month po = 3,860 total


What advice would you have for a lease transaction party?  File a precautionary UCC FS.  The mere filing alone will not come back to haunt you.  And put self-serving language also to avoid the shifting from Article 2A to Article 9.


For remedies, look to 9-604 in the event of default à removal of fixtures.  In many circumstances, removal is not so attractive.  Also look at (d) that may make the SP removing the collateral liable for certain injuries.   However, the DAS is limited.  SP does not have to pay for the economic damage of the fixture. 



·         A company can acquire equipment for use in its business one of two ways:

(1)    Purchase: Often the company will do so on credit obtained from the vendor or another party

(2)    Lease: It’s an increasingly common commercial phenomenon

·         Which transaction a company chooses will depend on many factors: financial considerations, federal tax considerations and assessments regarding the risks that the equipment will be unsuitable, faulty or become obsolete.

·         Lease law differs in material respects from sales and secured financing law.

·         Under a lease, an owner transfers possession of property to a lessee for a period of time.  The owner (lessor) retains  title to the property and, therefore, holds a reversionary interest in it.  The owner also receives payment, but the payments are rental payments rather than the repayments of debt.

·         The lessor’s remedies in the event of lessee default are also very different from a SP’s rights in the event of debtor default.

·         The lessor’s and SP’s rights to the property post-default are fundamentally different. 

·         Generally, a SP must sell the property.  No such requirement exists for lessors.

·         Special equipment lease: so-called “finance” or “three-party lease”. Occurs in situations where X only wants to sell, not lease, its property.  Y, on the other hand, wants to lease, not purchase the computer.  Enter Z (third party), typically a company set up specifically to accommodate such situations.  Z purchases X’s property and leases it to Y.  The lease rental payments will cover Z’s purchase cost and some profit, factoring in the property’s value at the end of the lease term.


1-201(37)          “Security Interest”: It also makes clear that, with certain exceptions, in rem rights of sellers and lessors

under article 2 and 2A are not “security interests.”  The retention or creation of a SI is not a lease.

9-505                                Filing and compliance with other statutes and treaties for consignments, leases, other bailments, and other transactions.

(a)    Use of terms other than “debtor” and “secured party”

(b)    Effect of FS under subsection (a):  Affords the option of filing of a FS with appropriate changes of terminology but w/o affecting the substantive question of classification of the transaction.


[Default and Enforcement of SI]

Article 9 does not define what is default.  The contracting parties define it.


9-601        Rights after default; judicial enforcement; consignor or buyer of accounts, chattel paper, payment intangibles, or promissory notes

(a)    [Rights of secured party after default].  After default, a SP has the rights provided in this part and, except as otherwise provided in 9-602, those provided by agreement of the parties.  A SP:

(1)    may reduce a claim judgment, foreclose, or otherwise enforce the claim, SI, or agricultural lien by any available judicial procedure; and

(2)    if the collateral is documents, may proceed either as to the documents or as to the goods they cover.

(c) [Rights cumulative; simultaneous exercise] The rights under subsections (a) and (b) are cumulative and may

                         be exercised simultaneously.

(d) [Rights of debtor and obligor.] Except as otherwise provided in subsection (g) and 9-605, after default, a 

                        debtor and an obligor have the rights provided in this part and by agreements of the parties.



·         The rights of the SP in the collateral after the debtor’s defaults are the essence of a secured transaction.

·         These are the rights which distinguish the secured from the unsecured lender.

·         After default, the secured creditor has a right to repossess and dispose of the collateral to satisfy the outstanding indebtedness.

·         The post-default process is commonly described as “repossession and foreclosure”.


Default Issues, page 423

Waiver and Material Breach

·         Rights and remedies only arise after default; if a creditor repossesses collateral when the debtor is not in default, it has converted the debtor’s property

·         If the parties’ agreement does not define default, the common law controls (limits default to a debtor’s failure to pay when an obligation is due).  Of course, few loan agreements are silent on the issue. 

·         Drafters of loan documents (unsecured and secured) approach default issues on one of two ways:

(1)    Some recite a host of representations, covenants and warranties, followed by a clause defining “default” as any material misrepresentation or breach of warranty or covenant.

(2)    Others draft a HUGE default clause that describe all the circumstances that will constitute a default.

·         Default provisions protects the creditor and define the relationship







Moe v. John Deer Co., page 425

·         First issue here is did the oral statements and conduct of the parties modify the written agreement so that pre-possession notice was required?  Court has held that a modification of a written K may be effected through subsequent conduct or oral agreements.  Whether a modification has occurred is a question of fact.  Here, the record reveals that it has been modified. 

·         Second issue is whether the “non-waiver clause” is enforceable in this K.  General rule is that a SP who has not insisted upon strict compliance in the past, who has accepted late payments as a matter of course, must, before he may validly rely upon such a clause to declare a default and effect repossession, give notice to the debtor that strict compliance with the terms of the K will be demanded henceforth if repossession is to be avoided.

·         Such a rule that a creditor must give pre-possession notice upon modification of a K results in both the debtor and the creditor being protected.

·         Court held that the repeated acceptance of late payments by a creditor who has the contractual right to repossess the property imposes a duty on the creditor to notify the debtor that strict compliance with the K will be required before the creditor can lawfully repossess the collateral.


Notes, page 436-439

·         Both old and new Article 9 does not require notice of intent to repossess or foreclose.


Problem 6.1, page 439

W executed a SA giving B a SI in W’s inventory.   The agreement required W to make monthly payments of $10,000 and on its $300,000 loan.  The agreement provided all payments were due on the first of the month.  After three months if timely payments, W made its fourth payment on 4/9/.  Thereafter, W’s monthly payments became progressively later and later.  On 8/16, B received W’s August payment.  On that same day, it sent a letter to W stating:


During the past months, your payments have been increasingly late.  We would appreciate your attention to this matter and your efforts to conform to the terms of our loan agreement.


Thereafter, W paid on 9/20, 10/17 and 11/18.  On 12/10, no December payment in hand, B seeks your advice.  It wants to repossess W’s inventory as soon as possible but realizes it cannot do so unless a default has occurred.


Clause 6: No waiver by the SP of any default shall operate as a waiver of any other default or of the same default on a

   future occasion.


a.       What would you advise if the loan agreement did not define “default”? Adhere to basic common law rule that limits default to failure to pay an obligation. 

b.       What would you advise if the agreement contained clause 6 mentioned above? It may or may not help you depending on how the court interprets it. 

c.       Would you advise if the agreement contained clause 6 and a provision stating: “Time is of the essence?”  We gotta look at our actions though. 

d.       What would you advise if the agreement contained all of the clauses mentioned above and also stated: “Late payments are subject to a penalty of ¼% interest per day?  This is standard language.  We might want to be more firm and direct in our language. 


We get anything within reason if there is a default.  We can always sue on the note through the courts.  Under article 9, remedies include:

1.       For collateral with interest: you can demand that payor pay you directly.

2.       You can repossess collateral w/o judicial process as long as you don’t breach the lease

3.       You can sell the collateral and whatever $ you get you can apply it against the debt; give difference back

4.       You can elect to keep the collateral and forgive the debt: strict foreclosure.








[Default and Foreclosure] (continued)



·         Many credit transactions involve installment notes in which the debtor agrees to repay the debt over time in installments.

·         At CL, a creditor has no right to sue until installment becomes due.  Unless the K contains additional provisions, e.g an acceleration clause, each installment only becomes due and collectible on the date specified in the note.

·         The K doctrine of anticipatory repudiation does not apply to installment credit Ks.  Therefore, a creditor does not have an immediate right to sue for the entire unpaid balance when a debtor defaults with respect to an installment payment.

·         Thus, the creditor only has two unattractive choices:

(1)    the creditor can sue a debtor as each installment becomes due; or

(2)    it can wait until the last installment is due and sue then for the entire obligation.

·         To overcome the CL, creditors add acceleration clauses to their loan agreements.

·         Acceleration clauses are of two basic types:

(1)    Automatic Clause: Will typically provide, “Upon default, all sum shall become immediately due and payable.”

(2)    Optional Clause:


1-208Option to Accelerate at Will:

A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or “when he deems himself insecure” or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired.  The burden of establishing lack of good faith is on the party against whom the power has been exercised.


Shumway v. Horizon Credit Corp., page 444

A waiver of presentment, notice of intent to accelerate, and notice of acceleration is effective if and only if it is clear and unequivocal.  A waiver provision must state specifically and separately the rights surrendered.  However, waiver of notice or notice acceleration does not waive notice of intent to accelerate.

Concurring opinion: Holds that the contractual waiver of the maker’s right to demand for payment, notice of intent to accelerate and notice of acceleration is void as against public policy and therefore unenforceable.  Equity demands that the maker always have a meaningful opportunity to cure any default before a holder is permitted to accelerate the note, repossess the collateral, sell it at a foreclosure sale and bring suit against the maker for deficiency judgment.  This is so b/c borrowers do not stand in an equal bargaining position with their lenders. 


Notes, page 449

·         Acceleration is likely to pose hardship on a debtor.

·         Also, few creditors immediately invoke acceleration and its consequences b/c workout returns are usually superior to the return on collection.

·         Thus, many Ks have grace periods and rights to cure or to reinstate written in them.  Even when the Ks do not contain these provisions, the fact pattern of consistently accepting late payments is common, and in many transactions workouts will be arranged.

·         Finally, debtors often default due to circumstances beyond their control and, if given leeway, may be ale to cure the default or abide by a restructured agreement.

·         SAs and PNs will often include a so-called “insecurity” or “at will” clause.  Such clauses serve as a backstop for events or situations not anticipated and hence not mentioned in the default clause.  They allow a creditor to declare a default and to accelerate “at will” when the creditor deems itself insecure. 1-208 says such clause shall be construed to give a creditor the power to accelerate “only if it in good faith believes that the prospect of payment or performance is impaired”.  Good faith is often an objective test à by evaluating reasonableness of the creditor’s feelings of insecurity

·         Many commercial notes provide for periodic payments, but indicates that the full amount of the debt is due “on demand”. A demand note is an instrument which does not state a time for payment.  Thus, a holder of a demand note may properly demand payment in full at any time.  Good faith is not required. 

·         In contrast, a term note states the terms under which payments are due and what constitutes a default permitting the lender to demand immediate payment in full.  Under a term note, absent a default, a lender cannot demand full payment.


Problem 6.4, page 453

On December 2, Acme lends $100,000 to MGH.  The SA and PN provided in part:


            MGH promises to pay $130,000 in forty equal monthly installment payments of $3,250, due on or before the

second of each month.  The first payment is due on January 2.  It is understood by the parties that upon any

default in the SA or this note, all sums owing under this note shall become immediately due and owing.


The agreement also contains all the clauses mentioned supra.


MGH promptly pays the first six installments.  In July, it uses its available cash to pay unanticipated personnel expenses.  On July 10, without contacting MGH, Acme instructs its agents to repossess the collateral consisting of ten trucks.  They do so peaceably on July 18.  Thereafter, Acme conducts a proper foreclosure sale and receives $40,000 in proceeds


a.       Acme sues MGH seeking to recover the difference between $40,000 and $110,500 plus repossession, storage, and insurance costs.  What results in this lawsuit?  First make sure we have a default here.  Yes, debtor missed a payment.  Acceleration costs is automatic.  Maybe we also need to know what the law is in terms of was notice required?

b.       Would the result in (a) change if the agreement provided: “Upon default, Acme may declare all amounts hereunder immediately due and owing”?  Here, we have an optional acceleration clause.  Creditor would get a lot less b/c no trigger of acceleration clause.  Redemption price would be less too.  We still have a default. 

c.       What if the acceleration clause were “at will”?  1-208 says you can exercise it as long as there’s good faith on part of creditor.  Debtor has burden of proof though à difficult to do for him.  Again, TRZ’s advice is not to put the such a clause in there. 

d.       Would you redraft the acceleration clause for this agreement?  Just keep in mind that do you want option to accelerate or not and what waiver that you want debtor to sign.



·         Upon default, a creditor has the right to repossess the collateral; can exercise this right by “self-help” à 9-609(b)(2) or 9-601(a)(1), 9-609(b)(1).  Most creditors take this route if at all possible and can only do so w/o breach of the peace.


9-609                                SP’s right to take possession after default.

(a)    [Possession; rendering equipment un-usable; disposition on debtor’s premises.] After default, a SP:

(1)    may take possession of the collateral; and

(2)    w/o removal, may render equipment unusable and dispose of collateral on debtor’s premises under 9-610.