LAW 634 Outline

(Includes text and statutes; my handwritten notes may come later)

(“PR 9-xxx” = pre-revision article 9; “9-xxx” (no “UCC” = revised article 9)

I. Attachment and perfection of security interests (Art. 9 covers personal, not real property)

  1. “Security interest” = lien created by agreement (i.e., a voluntary lien), or “an interest in personal property . . . [that] secures payment or performance of an obligation . . . .” (1-207(37))

B.  We have secured credit transaction to encourage transactions, by reducing risk exposure

C.  Secured creditors take priority over unsecured creditors

  1. PR 9-201: “Except as otherwise provided by this Act a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors”

D.  Lory v. Parsoff, 296 A.D.2d 535 (2d Dep’t 2002)

  1. “An attorney’s failure to file a Uniform Commercial Code financing statement in the manner necessary to perfect his client’s security interest constitutes malpractice as a matter of law.”

E.  Knox v. Phoenix Leasing Inc. 29 Cal. App. 4th 1357 (1994)

  1. Per PR 9-203 and 9-402, a SP’s claim to collateral whose purchase it helped finance takes priority over the unsecured claim of he who sold the collateral to the debtor
  2. SP owes restitution to the seller iff it induces seller to transact with debtor, to its benefit

F.  Different types of liens exist

  1. Statutory lien: favored by law without a bargain; excluded from Article 9 by PR 9-104(c) except as PR 9-310 applies to set their priority over security interests
  2. Judicial lien: seizure of property pursuant to a money judgment
  3. Consensual liens: typical credit transaction covered by Article 9; requires attachment and perfection to take effect

a.  Attachment: creation of SI via security agreement; attachment = enforceable against debtor

b.  Perfection: a completion of a security interest that results from either possession of the property, or a filing in a public office of notice of the secured transaction

1.  Requirements for perfection (per 9-203(b))

  1. Security agreement containing info about collateral, and authenticated with signatures
  2. Value delivered from creditor to debtor
  3. Debtor has rights to the collateral
  4. Public notice: filing; automatic (PMSI, per 9-309); secured party takes possession; control (for deposit and investment accounts)

2.  The above steps don’t have to happen in any order; perfection occurs when the last step occurs

  1. With floating liens, the last step will be when the after-acquired goods arrive and come into possession of the debtor

G.  Perfection matters a lot in bankruptcy proceedings

  1. PR 9-301(1) / 9-317: “[A]n unperfected security interest is subordinate to the rights of . . . a person who becomes a lien creditor [someone who obtains a judicial lien] before the security interest is perfected . . . .”
  2. One type of lien creditor is the bankruptcy trustee, who under 11 USC 544(a) obtains the rights and powers of a “super-creditor,” a representative of all unsecured creditors collectively who tries to keep as many assets as possible available for distribution
  3. 9-317 + 11 USC 544(a) = unperfected SI’s unenforceable in bankruptcy

H.  In re Bollinger, 614 F.2d 924 (1980)

  1. Composite document rule: per PR 9-402, a security agreement can serve as a financing statement if signed by both parties; a financing statement can serve as a security agreement if it (maybe with help from other documents) has enough detail to show that a valid SI exists

I.  Swets Motor Sales, Inc. v. Pruisner, 236 N.W.2d 299 (1975) (Voidable Titles)

  1. Per PR 2-403, SP who buys something that seller doesn’t own (i.e., no title) still has priority over holder of title, as long as SP bought in good faith; title changes hands when seller completes performance; seller cannot reclaim goods past an initial 10-day (longer if buyer misrepresents himself in writing) period, based on fraud allegations

J.  In re Filtercorp, Inc., 163 F.3d 570 (9th Cir. 1998) (Floating Liens)

  1. One creditor lost out to subsequent creditors because his SI did not mention after-acquired inventory, and he did not stay sale of assets per 11 USC 363(m), while debtor was in bankruptcy court
  2. PR 9-204 (minority view): SI must mention after-acquired accounts or inventory explicitly
  3. PR 9-204 (majority view): SI has rebuttable presumption of covering after-acquired inventory, because no creditor would agree to collateral that expired so quickly; rebut presumption with evidence that parties intended to limit the SI
  4. PR 9-110: security agreement need not describe covered collateral specifically as long as it reasonably identifies what is described
  5. 9-315(a)(2): security interest in collateral automatically passes to identifiable proceeds of the disposition of that collateral
  6. 9-203(f): SI in a supporting obligation (e.g., letter of credit rights or secondary obligations such as guarantees) automatically follows from SI in the underlying, supported collateral

M.  Problems page 33-34

  1. An omnibus clause in a security agreement that describes general classes of assets (e.g., “equipment”) per PR 9-109 would include company cars that fall under the PR 9-109(2) definition of equipment
  2. A collateral clause that lists “molds, tools, dies, component parts,” but then says “including specifically” 4 particular molds, covers only those molds à if you plan to mention specific items, then cover all items specifically or else only the items listed specifically will count

II.  The filing system

A.  PR 9-302 and PR 9-304 deal with financing statements, the common method of perfection

B.  C2:PR9-402 and C5:PR9-204(d): only “notice filing required”

  1. PR 9-402(1): the financing statement (the only public document) need only include “a statement indicating the types, or describing the items, of collateral” à specific items of collateral not necessary, but don’t trust legal presumptions in a jurisdiction: mention specifically in the security agreement that after-acquired assets count as collateral
  2. 9-210: at debtor’s request, SP may have to disclose the complete state of affairs

a.  9-210 gives debtor the right to an accounting of the aggregate secured obligation balance owed; 9-625(f) gives debtor right to $500 penalty if secured party doesn’t comply with 9-210 without reasonable cause

  1. 9-516(a): Electronic filing without debtor signature OK if debtor authenticates by signing the security agreement (per 9-509(a), 9-510(a))
  2. 9-502(c): debtor’s signature no longer has to appear on the financing statement; debtor’s name is enough (debtor still has to authorize by signing the security agreement)
  3. If secured party files without debtor’s authentication, then 9-513(c)(4) allows debtor to demand a termination statement from secured party within 20 days after secured party receives the demand
  4. 9-625(b): if secured party files unauthorized filing, then debtor can collect damages in the loss caused by the secured party’s act
  5. 9-625(e)(3): if secured party files unauthorized filing, then debtor can collect a $500 penalty
  6. 9-521(a),(b): forms for financing statement amendment/addendum, respectively; make sure that debtor’s name appears correctly!
  7. In re Mines Tire Co., 194 B.R. 23 (Bankr. W.D.N.Y. 1996)

a.  Minor Error Rule of PR 9-402: financing statements must list the debtor’s name, but minor errors that are not seriously misleading will not cause problems

1.  Not seriously misleading = a reasonably diligent searcher would likely discover the financing statement indexed under the correct name; if human searchers would examine all corporate names with certain basic components, then computer searchers need to do the same and can’t excuse themselves because a search of the exact name turned up empty

  1. Problem p. 57: “Voyager” instead of “Voyageur” in a filing statement

a.  9-506(a) clears up the problem in Mines: a financing statement that does not comply with 9-503 is presumed to be misleading unless, per 9-506(c), a searcher using the correct name of the debtor would find the flawed financing statement “using the filing office’s standard search logic” à importance of local practice

1.  If the filing office searches alternative spellings routinely, then a spelling error would not be misleading

  1. Pearson v. Salina Coffee House, Inc., 831 F.2d 1531 (10th Cir. 1987)

a.  SP must list debtor’s legal name – searching by trade name creates too much of a burden for potential creditors (debtor can have many trade names, or trade name could differ from legal name so much that creditor would have no idea who the real debtor is; also, creditors expected to sue using debtor’s legal name)

  1. Cabool State Bank v. Radio Shack, Inc., 65 S.W.3d 613 (Mo. Ct. App. 2002)

a.  Change of debtor trade name does not invalidate a financing statement (i.e., require updating), where the creditor listed the individual debtors and not the entity’s old trade name

  1. In re Scott, 113 B.R. 516 (Bankr. W.D. Ark. 1990)

a.  In contrast to above case, financing statement does lose validity where individual debtors who signed create a corporation, and transfer the assets in the SI to the corporation

b.  PR 9-402(7) / 9-508 gives a SP 4 months to amend financing statement after a corporate debtor changes name or corporate structure à here, the new corporation had no agreement with the creditor, allowing seizure of collateral by a different creditor who had SI with the corporate entity

  1. What if debtor sells collateral, and SP executes new security agreement but doesn’t file a new financing statement?

a.  SP still should have its secured interest intact à it consented to transfer, but a transfer subject to the security interest, not free and clear of it

1.  9-507(a): “A filed financing statement remains effective with respect to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a security interest . . . continues, even if the secured party knows of or consents to the disposition.”

2.  9-315(a): “Except as otherwise provided in this article . . . (1) a security interest . . . continues in collateral notwithstanding sale . . . or other disposition thereof unless the secured party authorized the disposition free of the security interest . . .; and (2) a security interest attaches to any identifiable proceeds of collateral.

  1. Estate of Harris v. Harris, 218 F.3d 1140 (10th Cir. 2000)

a.  A trust obtains a judgment against P

b.  D lets some of its cattle graze on P’s land à P puts his brand on the cattle too

c.  Trust tries to satisfy its judgment by seizing any cattle with P’s brand on them à presumption that P owns the cattle

d.  D wins: its brand plus ownership papers refute P’s presumption of ownership à Trust can’t seize cattle that P does not own

E.  Mechanics of filing

  1. UCC-1 (central filing with secretary of state) or UCC-2 (local filing) required for perfection
  2. 9-403(4): filing officer must give each statement a filing number, mark it with the date and hour of filing, and index the form in the name of the debtor in a file open to public inspection
  3. 9-302(2): a secured party can assign his perfected interest to someone else, and that other person need not file a new form
  4. 9-403(2): a filed financing statement lasts 5 years; UCC-3 continuation statement then required
  5. In re Flagstaff Foodservice Corp., 16 B.R. 132 (Bankr. S.D.N.Y. 1981)

a.  Committee of unsecured creditors challenges another party’s security agreement, on grounds that the secured party had no proof that the town clerk received the documents

b.  Secured party wins: PR 9-403(1) [9-501, 519] says that presentation to the filing officer constitutes filing à perfection; secured party does not suffer if filing officer doesn’t do his job

F.  Perfection by possession

  1. In re Rolain, 823 F.2d 198 (8th Cir. 1987)

a.  PR 9-305 allows collateral to enter possession of an escrow agent designated by both sides, who is detached from each side; here; the attorney for one side is too close to the transaction à invalid transfer that does not create possession à trustee in bankruptcy can ignore this unperfected SI

  1. 9-313(c): A secured party takes possession “when the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit”
  2. 9-313(f): “A person in possession of collateral is not required to acknowledge that it holds possession for the secured party’s benefit.”
  3. 9-313(g): Acknowledgement effective under section C even if the acknowledgement violates some other debtor’s rights; someone in possession who gives acknowledgement owes nothing to the secured party and does not have to confirm the acknowledgement to another person à person in possession has duties only to the extent that the security agreement says so

a.  This helps out people who hold other people’s property for reasons unrelated to secured transactions (e.g., holding for storage, repair, or use)

G.  Ordinary Goods

  1. 9-309(1): Purchase money security interest in consumer goods perfected automatically at time of attachment, with no filing requirement
  2. BUT watch whether an item = consumer good or equipment (personal or business use)
  3. Filing still necessary for nonpurchase money security interest in consumer goods, and for priority over buyers of consumer goods per 9-320(b) (e.g., consumer goods transaction at a garage sale destroys unperfected SI à store should file for big ticket items)
  4. “Purchase-money” defined in 9-103

a.  PM = money given to debtor to buy the collateral

b.  PMSI = SI in collateral bought with PM

c.  From Black’s Law Dictionary: “If a buyer's purchase of a boat, for example, is financed by a bank that loans the amount of the purchase price, the bank's security interest in the boat that secures the loan is a purchase-money security interest”

d.  9-103(a)(1): Purchase-money collateral = “goods or software that secures a purchase-money obligation incurred with respect to that collateral”

H.  Multiple state transactions

  1. The basic problem: where do you file a financing statement when collateral, debtor, and secured party all lie in different jurisdictions?
  2. 9-301(1): “Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral”
  3. 9-301(2): For possessory security interests, law of the state where collateral is determines perfection and priority
  4. 9-301(3): For goods, documents, and instruments, the law of the debtor’s location determines the place of perfection, but the law of the collateral’s location governs the effect of perfection or nonperfection and the priority of a nonpossessory security interest
  5. An example

a.  Creditor 1 takes a possessory security interest in inventory located in State A