SECURED TRANSACTION

ARTICLE 9

INTRODUCTION: 5 INQUIRIES

1. Scope: consensual SI (security interest) in personalty &

fixtures.
2. Attachment: VCR: value, contract, rights in the collateral.
3. Perfection: publicity.
4. Priority: first in time, first in right.
5. Defaults: creditor has statutory & judicial remedies.

I. THE SCOPE OF ART. 9 OF THE UCC

A. Art 9 applies to consensual SI (not statutory/mechanic liens)
in personalty (goods) and fixtures (not land:
mortgages).
B. Vocabulary:
i. Debtor
ii. Security party/creditor (secured party)
iii. Security agreement: K or record
iv. Security Interest: right that creditor has in debtor’s
personalty or fixtures.
v. Collateral: personalty or fixture creditor can look to for
satisfaction of the debt.
1. Tangible collateral or goods:
a. Test: Subjective: primary use in debtor’s
hands.
b.
Classes:
i.
Consumer goods: items used for personal/family purposes.
ii.
Equipment: items used in business.
iii.
Inventory: goods held for sale/lease.
iv.
Farm products
v.
Fixtures: items annexed to realty.
2.
Intangible o semi-intangibles: (representation of the value of the
collateral):
a.
Tangible intangible: what is necessary to collect the money: promissory
notes & drafts, bill of lading, chattel paper.

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 b.
Intangible intangible: any physical representation to proof the
existence of the thing of value: contract for endorsements, PT
agreement: patents & trademarks, copyrights, stock bonds & mutual
funds, proceeds received from the sale of collaterals, accounts (any right
to payment for goods or services.)
3.
Example of collateral:
a.
A bank has a PMSI in Company’s inventory (including after acquired
inventory). Company is in the business of leasing cranes.
b.
Company leased some cranes to ABC renter, who pays rental payments to
Company.
c.
If Company sells his lease rights to Equity in exchange for valued
consideration, Equity is buyer in ordinary course of business since the
chattel paper that Equity receives is a representation of the rental
payments. {I believe Equity is a buyer not in the ordinary course of
business, since Company’s business deals with leasing cranes, not selling
financial instruments about lease of cranes.}
d.
Bank has no priority over Equity’s right to rental payments from ABC
renter, but Bank has priority over the price paid by Equity to Company,
b/c that price is proceeds from inventory.
II.
CREATION OF AN ENFORCEABLE SI: ATTACHMENT:
A.
Attachment = enforceability of SI.
B.
Requirements: VCR = value, contract, rights.
i.
Value given by creditor.
ii.
Contract (security agreement/record) that evidences the secured
transaction (unless creditor takes possession of the collateral).
1.
Pledge: No need of record: if security party- creditor takes possession
of collateral (pledge=something given as security.)
2.
Security Agreement: The security agreement contains a “granting
clause” where the debtor grants a security interest in favor of security
party.
a.
Need of record: if collateral remains w/debtor.
b.
The record must:

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 i.
Be authenticated (signature or electronic mark).
ii.
Reasonably identify the collateral.
iii.
Rights: debtor must have rights in the collateral.
C.
“After acquired collateral” clauses are enforceable.
III.
PERFECTION OF SI
A.
Perfection = publicity device. Put the world on notice or constructive
notice.
B.
Methods to attain perfection?
i.
Pledge: security party takes possession of collateral.
ii.
Automatic perfection upon attachment: PMSI (purchase money
security interests) in consumer gods.
1.
Rationale: encourage lending to customers. Favorite child of art 9’s
family.
2.
PMSI: security interest that enables debtor to purchase goods.
iii.
Filing: Common route to perfection: filing in public records puts the
world on notice or constructive notice.
1.
What is filed:
a.
The security instrument (agreement) is not filed.
b.
Instead, a financing statement is filed: very simple document that
provides interested parties with info to make follow-up inquiries.
i.
Content of a financing statement:
1.
Debtor’s name and address
2.
Secured creditor’s name and address
3.
Collateral (super-generic descriptions are permissible, i.e.: “all of
Debtor’s assets”.)
c.
Where to file the Financing Statement?
i.
Central Filing: Secretary of State, where debtor is located.

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 ii.
If debtor is
1.
An individual: State of principal residence.
2.
Registered Org. (Corp., LLC, PT): St under which laws is organized.
iii.
Exception to central filing: file locally where land is located if collateral is
timber, minerals or land fixtures.
IV.
PRIORITY
A.
Basic context: First in time, first in right.
B.
Characters:

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 CHARACTER DESCRIPTION
1. Buyer in Ordinary Course (BOC) X buys a guitar from
Guitar Store, Inc.
(rationale: promote
commerce)
 PMSI-holders (vs. after-acquired collateral financers AACF) If If If
collate collate collat
ral is ral is eral is
consu equip invent
mer ment ory
goods
Perfecti After Before
on is debtor debtor
automa takes takes
tic posses posses
upon sion: sion
possess PMSI PMSI-
ion, holder holder
without files 1. Files
filing w/in 20 properl
the days. y, AND
financin 2.
g Notifie
statem s
ent. AACF.
(Ex.:
Rose
buys a
$500
TV from
Sears
on an
installm
ent
payme
nt
plan.)
If it’s a
car,
then
PMSI
holder
files
w/in 20
days of
purcha
se.
2. Perfected Attached Creditor (PAC), including after-acquired Creditor who perfects
collateral financers (AACF)
3. Lien Creditor Creditor gets judicial lien
on the collateral. It can be
a motor vehicle lien (i.e.
mechanic performs work
in the car and has a
5 statutory lien on car.)
4. Non-ordinary course buyer X buys a guitar from his
mechanic.
5. Unperfected Attached Creditor (UAC) Security interest attaches
 C.
Filing and then attachment: if filing the financing statement first
(recording) and then an attaching happens afterwards (VCR), priority is
preserved.

V.
DEFAULT: upon debtor’s failure to pay:
A.
SELF-HELP REPOSSESSION: w/no breach of peace (no violence).
i.
Issue: whether creditor did something provocative or likely to cause
violence.
ii.
Breach of peace:
1.
Any mild protest by debtor.
2.
No constructive force (no wearing cop custom).
3.
Civil/criminal penalties for creditor’s misconduct.
iii.
Procedure:
1.
if the collateral is at home:
a.
SP (secured party) enters debtor’s home w/voluntary and
contemporaneous consent.
2.
If the collateral is outside:
a.
SP takes collateral as long as there’s no debtor objection.
iv.
After repo
1.
SP can keep the collateral if no debtor objection w/in 20 days, or

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 2.
SP sells collateral and get deficiency judgment for balance (+ cost of
replevin and sale.)
B.
REPO BY JUDICIAL ACTION: By a writ of replevin.
i.
Effect: after repossession either by self help or action of replevin, the
secured party may keep the goods if the debtor makes no objection
w/in 20 days, or resell the goods and obtain a deficiency judgment
if the amount recovered in the sale is insufficient to cover the
amount owed plus the costs of replevin and sale.

C.
STRICT F/C:
i.
Concept: SP retains collateral upon default and debt is discharged. Ex:
PMSI-holder retains yacht.
ii.
Method

If collateral is
Consumer good Non-consumer good
Notice sent to debtor and Notice sent to debtor,
secondary obligor secondary obligors,
(guarantor) perfected SP and other
SP who advised the
foreclosing creditor of
its SI.
Strict F/C if nobody objects w/in 20 days after
notice; otherwise sale is available.

iii.
60% rule in consumer goods: if debtor paid 60% of the loan (non PMSI)
or 60% of the cash price (PMSI), the creditor cannot automatically
foreclose under penalty of conversion. Instead, creditors have to sell
w/in 60 days.
1.
Rationale: avoid rewarding creditors w/windfalls.
D.
SALE:
i.
Every aspect of the sale must be commercially reasonable.
ii.
Notice: advance notice must be given:

If collateral is
Consumer good

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Notice sent to debtor and secondary obligor (guarantor) Notice
advise
Additional consumer-protective provisions are mandatory, including: - Noti
- Ho
w any deficiency will be calculated.
- Rig
ht of redemption.
iii.
Other considerations

Public sale Private sale

Content of Time and place Time after which
Notice sale will be made
Buying at sale Allowed Allowed if
external market
checks are
available.
E.
THE ACTION FOR A DEFICIENCY JUDGMENT:
i.
If there’s an outstanding balance after sale.
ii.
If inside buyer bought, then the calculation is based on what a 3P might
have paid (“to avoid fraud”).
F.
DEBTOR’S RIGHT OF REDEMPTION
i.
No right after creditor’s successful sale or strict f/c.
ii.
Redeem: debtor has to pay:
1.
Amount owed (it might include entire amount owed if an acceleration
clause is provided in the agreement)
2.
Accrued interest
3.
SP’s reasonable expenses (cost)
4.
Atty’s fees

COMMERCIAL PAPER: ARTICLE 3

The holder in due course of a negotiable instrument duly negotiated, is

free from all claims to it and from personal defenses, but subject only
to real defenses.

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 Introduction: we must determine:
1. Negotiable instrument vs. mere K
2. D is sued under
a. Contract or signature liability
b. Warranty or transfer liability
3. Duly negotiated negotiable instrument (what makes the transfer proper)
4. HDC
5. Personal vs. Real defenses

I. TYPES OF NEGOTIABLE INSTRUMENT

a. The promissory note (promise maker)
i. Promisor (maker) makes an affirmative
promise to pay (payee).
b. The draft (checks) [the commander]
i. The drawer orders/commands the
drawee (bank) to pay to payee (beneficiary).
ii. If drawer A indorses the check to B
(indorsee), B will be the indorser with respect to Bank that is the payor
(with respect to B), and also a drawee (with respect to A.)
c. The indorser: signs on the back in favor
of the indorsee (transferee.)
d. Negotiable instrument vs. Ks.:
i. Requirements for a Neg. inst.:
WOSSUPP
1. Writing
2. Payable to the Order (“pay to the
order/assigns of”) or bearer (“pay to bearer/order of bearer/cash/order of
cash”)
a. “Pay to Andy Garcia” (not negotiable:
lack “to the order of”)
b. Check is payable on demand.
3. Signed by maker (promissory
note)/drawer (checks)
4. For a sum certained (calculated from
what the writing says or reference to outside source; interest references
to outside sources are ok)
5. Unconditional promise (promissory
note)/order (checks)
a. Ks are conditioned
b. The negotiable instrument is still
negotiable if it refers to outside documents or contracts regarding
collateral, another contract, prepayment, acceleration or consideration.

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 6. Payable on demand/at
sight/presentation or at definite time (acceleration clauses are permissible
and don’t compromise negotiability)
7. Payable in currency (not goods)
II. Theories On How The Defendant
Gets Sued?
a. Contract Or Signature Liability
i. Who signs promises to pay, and
potentially gets sued.
1. Maker of promissory note.
2. The indorser (secondary liable)
3. The drawer of the check is liable upon
notice (indorsee made presentment to the Bank, dishonor and notice of
dishonor to drawer.)
a. In the event where a drawer pays to
payee through 2 checks (one to the order and another “cash”), and
thereafter thief steals them and indorses those checks to ABC store,
drawer won’t have to honor the check “to the order of payee” b/c of the
thief’s forged signature (provided that drawer requested bank to stop
payment of the draft, b/c this is forgery = “illegality” defense); but
drawer will have to honor the check payable to “cash” since it is
the equivalent of money.
b. Then drawer has to re-issue a check to
payee, but the check cashed by thief is lost b/c it is like money (payee
loses that money.) Thief and the store who paid the check are better off
(the store is HDC: holder in good faith, for value and without notice.)
4. Issuer
5. Acceptor (when the bank certifies and
accepts the check) b/c bank is promising to pay
6. Accommodation party: co-signor, co-
drawer or co-indorser. Ex.: A and B go to the bank to cash A’s check but A
has no account on the bank. B does, so B signs as an accommodation
party and indorser (two liabilities.)
7. The drawee (the bank) is NOT liable,
since the bank doesn’t sign [tested]
a. However, NYT q. 1 says that the Bank
is liable if it pays a 3P b/c of a forged indorsement and negligence of
bank.
8. “Without recourse” next to
indorser/drawer represents a disclaimer of liability (it passes title w/no
liability on signature)
b. Warranty Or Transfer Liability
i. Similar to seller’s liability for selling a
defective instrument.
ii. D = Any transferor (not a donor) who
sells the negotiable instrument may be sued for breach of warranty.
iii. P = any person in possession may
sue, provided the D indorsed the instrument.

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 1. When D indorses, warranties run w/the
instrument. (memorize)
2. If drawer doesn’t indorse the instrument,
then the person in possession cannot sue drawer.
3. If the payee gives the check to a 3P
without signing the check, he has no obligation under the instrument
since he didn’t sign; but he (the payee) may still be liable b/c of breach of
the underlying contract.
iv. The 5 warranties: D promises that
1. P has good title to the instrument
2. All signatures are genuine and
authorized (thus forgery is a breach of warranty)
3. The instrument hasn’t been materially
altered
4. The instrument is enforceable (no
defense or claim against D)
5. There’s no bankruptcy or insolvency
proceeding against the maker/drawer.
c. Final payment rule (not tested)
d. Conversion liability (the bank takes the
draft and doesn’t pay.)

III. NEGOTIATION OF NEGOTIABLE

INSTRUMENTS
a. “Duly negotiated” = proper transfer =
HDC.

b. Payable to the order of specific payee =

delivery of instrument to payee.
i. Any further negotiation requires that the
payee indorse the instrument and delivers it to the transferee.
c. If payable to bearer = indorsement is
not required.
d. Types of indorsement:
i. Special indorsement: names an
indorsee, who signs also to further negotiate the instrument.
ii. Blank indorsement: doesn’t name a
particular person and may be negotiated by delivery.
iii. Restrictive indorsement: w/a
condition: “for deposit only + signature”.
IV. THE HOLDER IN DUE COURSE: HDC
a. HDC takes the instrument:
i. For value
1. Value is consideration (a promise is not
enough)
2. Old value is good
ii. In good faith (subjective test: honesty
in fact/good heart and empty head), and

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iii. W/out notice that is
overdue/dishonored/subject to claim or defenses:
1. Objective test: did the holder know or
have reason to know the problem?
2. Notice that the instrument is overdue: It
should have already been paid.
a. Payable at definite time.
b. Principal in arrears
i. But if interest is in arrears, that’s ok.
3. Notice that the instrument is
subject to defenses/claims.
a. The appearance of the instrument
gives notice: “void/paid”
b. Notice that obligation of any party
is voidable (the holder is HDC if he ignores a voidable transaction.)
c. Notice of competing claims to the
instrument: if the HDC didn’t know or didn’t have reason to know that the
instrument was lost/stolen.
d. Notice that the fiduciary negotiated the
instrument in breach of his fiduciary duties.
i. Standard: actual notice.
4. The HDC and the Shelter Rule
a. The transferee steps into the shoes
of the transferor (HDC) and takes shelter, even though the
transferee is
i. Donee, or
ii. Might fail to quality as HDC.
V. Personal Defenses Vs. Real
Defenses

a. A HDC and subsequent transferees (who

take shelter) take the note free from claims or personal defenses but
subject to real defenses.

A HDC TAKES the instrument

FREE FROM SUBJECT TO REAL
DEFENSES
(MAD FIFI4)
CLAIMS PERSONAL - Material Alteration (but if
DEFENSES the maker is negligent –
A duly negotiated Defenses available in such as leaving blank
instrument is free Ks: spaces- he is stopped from
from claims of - Lack of asserting this defense).
superior consideration. - Duress
ownership - Fraud in the - Fraud in the factum
(someone trying inducement.12 - Incapacity
to assert a - Unconscionability. - Infancy
superior interest - Waiver. - Insolvency
in the instrument - Estoppel. - Illegality
itself.)
b. The HDC analysis is for the Plaintiff
(who is trying to get paid), not for the Defendant. The Plaintiff takes the
note free from defendant’s personal defenses and claims (but subject to
real defenses.)

c. Personal Fraud Vs. Real Fraud

PERSONAL DEFENSE
Personal fraud (fraud in the
inducement)
- A sells a fake ring to B and B
signs a note to A.
- B has personal defenses for
fraud against A, but B knew
that he was signing a note.
REAL DEFENSE
Real fraud (fraud in factum)
- Lawyer has X sign a note
misrepresenting it as a
credit application.
- The fraud is on the instrument.

HDC takes free from this HDC is subject to this real

personal defense defense

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 - Bankruptcy and Secured Instruments: A trustee in a bankruptcy
proceeding can avoid a preference if the transfer was:
i. To, or for, the benefit of a creditor, and
ii. It was made for or on account of an antecedent debt, and
iii. While the debtor was insolvent, and
iv. The transfer was made within 90 days prior to the date of the
filing of the bankruptcy petition, and
v. The transfer will increase the amount that the creditor
would receive if the preference was not made.

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