Secured Trans (Good Explanations)

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I. Introduction to Secured Transactions

a. Unsecured loan: where the creditor demands nothing more than the (solvent) debtor’s
promise to pay
i. Also called a signature loan
b. Toe lien: term used when you informally try to collect on a debt by stepping on the debtor’s
toes and leaning on him
c. Nulla bona: when there is a judgment, but the debtor has nothing to give as payment
d. Usually the creditor requires more from the debtor- either he:
i. Obtains a surety (also called a co-signer, guarantor, or an accommodation party); or
ii. Secures the debt by nominating some of the debtor’s current or future property as
collateral
1. If the debtor defaults, then the collateral may be seized and sold, or the
surety can be held liable
e. Lien: an interest in the debtor’s property given by the law to protect a creditor
i. If the debtor voluntarily grants such an interest, then it is called a consensual lien
ii. If the lien is taken in the debtor’s real property, it is called a mortgage
iii. If the lien is taken in personal property or fixtures, it is called a SI and is
governed by Article 9
1. § 9-109(a)(1): Article 9 applies to “a transaction, regardless of its form, that
creates a SI in personal property or fixtures by contract”
iv. If the lien arises from a judicial proceeding, then a judicial lien exists
v. If a lien is imposed either by statute or common law, then a statutory lien has been
created
1. A mechanic’s lien is a statutory lien in favor of those that do construction
work
2. Federal tax lien- a statutory lien that reaches all of the taxpayer’s property
3. § 9-109(d)(2): “This article does not apply to a lien, other than agricultural
lien, given by statute or other rule of law for services or materials”
f. Perfection: if a creditor’s claim to the property will survive the attack of a bankruptcy
trustee, then the interest is said to be perfected
i. This is the ultimate goal of any creditor taking an interest in a debtor’s collateral
(unsecured parties typically get nothing in bankruptcy)
ii. Always remember to consider the priority of liens
g. Pre-Code Security Devices:
i. Benedict v. Ratner:
1. To secure a $15,000 loan, the Hub Carpet Company gave Ratner the right to
demand full payment at any time, and provided a monthly list of accounts
receivable (but the company was at liberty to use the proceeds as they saw
fit and the assignment was to remain a secret)
2. Under NY law, it was fraudulent to have a transfer of property as security
where the debtor would still have the right to dispose of the property
3. A mortgage of chattels is good against creditors if the mortgage is recorded,
and if the mortgagor does not have the right to sell and use the proceeds for
his own benefit
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4. To prevent the problem of secret liens, you typically have to take the extra
step of “perfection” whereby the rest of the world can be on notice that this
lien exists (usually through recordation)
ii. Pledge: the debtor gives physical possession of the collateral to the creditor until the
debt is paid (possession then perfects the creditors interest in the collateral- it
wasn’t a secret bc the creditor had physical possession of the collateral)
1. Two drawbacks:
a. Only tangible objects can be pledged, and a debtor might want to
borrow money against an intangible item
i. Ex: accounts receivable
b. For some types of collateral, the debtor needs to keep possession
i. Ex: machines used in manufacturing, or a business’s inventory
2. The UCC does not discuss “pledging” à instead, it discusses “perfection by
possession”
iii. Chattel Mortgage: the debtor mortgages his real property, and this is recorded in a
designated place and indexed under the name of the debtor so that other potential
creditors can check to see whether the collateral (the real property) is encumbered
(this process is the same as the system for filing real estate records)
1. The UCC still uses this system, but you now file a financing statement with
the Secretary of State or in the particular county
iv. Conditional Sale: the buyer gets possession of the property, but the seller reserves
full and complete title until the buyer is paid in full
1. This does NOT escape the secret lien problem in Ratner
a. Most states treat this as nothing more than an unperfected SI
2. The UCC says this is not really a conditional sale, but a sale where the seller
is retaining a SI (PMSI)
3. Problem: something is sold on an open account and no security is taken.
Then, the buyer defaults
a. The seller does not necessarily have the right to proceed against the
property and repossess it
i. Seller is limited to toe lien
b. Can repossess under § 2-702: where you sell something on credit,
but the buyer is insolvent and you act within 10 days
4. If the party responsible for repossession fails to keep the peace, punitive
damages may be awarded
v. Field Warehousing: if goods are too bulky to easily move, a field warehouseman will
go to the goods, stake them out in some way, issue a receipt for them, and then
guard them
1. The receipt is then pledged to the financing agent
2. When the debt is repaid, the warehouse receipt may be returned to the
debtor, who can then present the receipt to the field warehouseman and
receive the goods
II. Scope of Article 9
a. SI defined:
i. § 1-201(37): a SI is an interest in personal property or fixtures that secures payment
or performance of an obligation
ii. If a client’s transaction creates an Article 9 SI, the client needs to take whatever
steps necessary to perfect that interest, otherwise the client could lose that property
to other creditors and will turn his attention towards a malpractice suit
1. § 9-109(a)(1): Article 9 applies to a transaction, regardless of its form, that
creates a SI in personal property or fixtures by a contract
2. § 9-109(a)(2): Article 9 applies to agricultural liens
3. § 9-109(a)(3): Article 9 applies to a sale of accounts, chattel paper, payment
intangibles or promissory notes
a. Even though these are outright sales (not loans) and there is no
collateral, they create a SI that must be perfected
i. Creates a record of the sale, so the seller cannot continue
selling to multiple purchasers
b. EXCEPTION: § 9-109(d)(4): if the sale is a sale of accounts, chattel
paper, etc. as a part of the business out of which they arose
i. This is not a method of financing personal property, which is
what Article 9 applies to
b. Consignments:
i. Consignments are not a sale OR a security device
1. They’re a mkt’ing procedure by which the owner of goods (the consignor)
sends (consigns) the goods to a retailer (the consignee) for sale to the public
2. § 9-109(a)(4): Article 9 applies to consignments
ii. The retailer doesn’t buy the goods à if he can’t sell them, the goods are returned to
the consignor
1. This enables the consigner to retain control over the terms of the sale (and
the consignee makes a commission)
2. At common law, there was no requirement of notice for consignment
a. Today, even with true consignments, you should comply with Article 9
iii. § 9-102(a)(20)(A)(iii): Consignment means a transaction, regardless of form, in
which a person delivers goods to a merchant for the purpose of sale AND the
merchant is not generally known by its creditors to be substantially engaged in
selling the goods of others
1. Merchant’s name must be different from the person making delivery
2. With respect to each delivery, the aggregate value of the goods is $1,000 or
more at the time of delivery;
3. The goods are not consumer goods immediately before delivery; and
4. The transaction does not create a SI that secures an obligation
c. Leases:
i. If the contract is a true lease, Article 9 doesn’t apply, bc the property doesn’t belong
to you
1. However, if the lease is disguised as a sale, Article 9 DOES apply – LOOK
AT CHART
a. An unperfected SI loses out to the trustee in bankruptcy court
b. A lien creditor beats out an unperfected SI
ii. Basic rule of thumb:
1. The lease must come to an end at a time when at least two years or 20% of
the useful life of the leased item remains; and,
2. This residual must be valued at not less than 15% of the purchase price
a. Looks at the equity built in the “leased property” and the value of the
property surrendered
iii. Rules for SIs v. Leases:
1. If at the end of the lease period the lessee becomes the owner of the
property for little or no consideration, a secured transaction and not a lease
has been created
2. If the contract contains a clause that permits the lessee to terminate the
lease at any time and return the leased goods, a true lease has resulted.
Such a right of termination is not an attribute of a sale of goods
a. This is a bit of an overstatement (what if you had a deal where you
paid $1000 for the first two years, and $50 for the last three years, and
the deal allowed you to terminate the deal any time after the first 2
years- you’ve already paid a lot of money, who would really terminate
the lease at that point?!)
3. If the lease is for the entire economic life of the leased goods, w/ or w/out
renewal, a disguised sale has occurred; sometimes called the junk pile test,
bc goods that are worthless at the end of the lease are simply tossed out
iv. It’s still safest to go ahead and file a financing statement, even if it’s a true lease!
1. § 9-505: filing a financing statement is NOT an admission (for tax/accounting
purposes) that only a secured transaction is involved
d. Other Transactions:
i. Under the common law of Subrogation, a surety (or guarantor) can step into the
legal shoes of the persons they have paid
1. Disputes arise between the surety who is claiming priority to the debtor’s
collateral (so the surety can get their money back) and any creditor who has
a claim on the debtor’s collateral
2. The UCC does NOT cover this dispute
a. Common law: bonding companies and sureties have priority
e. Exclusions from Article 9:
i. Federal Statutes: UCC cannot displace federal law
ii. Landlord’s Lien & Other Statutory Liens:
1. Landlord liens does not need to be filed if there are CONSENSUAL SIs
2. Does NOT apply to agricultural liens
iii. Wage Assignments:
1. Article 9 does NOT apply to an assignment of a claim for wages, salary, or
other compensation of an employee
2. Problem: if Sabbath assigns his right to receive money from Mercer, that’s
not governed by Article 9. However, Sabbath also lectures for Barbri- is that
wages, or something else?
a. Cited case: money was not wages- had to file under Article 9
b. “Or other compensation” is tricky- are commissions compensation?
i. Wages, salaries are excluded
ii. Lecturing for Barbri as an independent contractor may be
compensation (litigate whether it needs to be filed)
iv. Non-Financing Assignments:
1. § 9-109(d)(4-(d)(7): excludes the transfers of accounts, chattel paper, etc.

(this is meant to be an exclusion of assignments that are not of a financing
nature)
2. Examples of what may be excluded:
a. Certain sales of accounts that are not being sold to finance a business
i. Ex: when you sell your business, as well as your accounts
b. An assignment of a right to payment under a contract to an assignee
that is also obligated to perform under the contract
c. An assignment of accounts for the sole purpose of collection
d. An assignment of a single account, payment intangible, or promissory
note to an assignee in full or partial satisfaction of a pre-existing
indebtedness
v. Real Estate:
1. The right to receive rents is specifically excluded from Article 9
a. Also, if you give an interest in a lease with a right to receive rent,
Article 9 will not apply
b. Real estate law applies to typical real estate mortgages
2. Real estate SIs pertaining to fixtures, timber, and minerals ARE governed by
Article 9
vi. Bank accounts:
1. Article 9 did not originally apply; however, the most recent version of Article 9
describes a deposit account as a kind of collateral (meaning a SI may be
taken)
III. The Creation of a SI
a. Classifying the Collateral: this is IMPORTANT, bc in the Security Agreement, you have to
describe the collateral. The collateral must be identified correctly, bc different rules may
apply depending on the type of collateral
i. Tangible collateral- Goods: § 9-102(a)(44): includes things that are moveable and
includes unborn young of animals, crops, timber to be cut, fixtures, and computer
software embedded in goods
1. § 9-102(a)(23): Consumer goods: goods that are used or bought for use
primarily for personal, family or household purposes
2. § 9-102(a)(33): Equipment: usually goods used in a person’s business
a. Also provides a catch- all for any goods that do not fit into any of the
other types of goods
3. § 9-102(a)(34): Farm Products:
a. Goods that are used or produced in farming operations and that are in
the possession of a farmer-debtor
b. Article 9 applies to Agricultural Liens, but does not create the lien to
begin with
i. Agricultural liens are created by state law; however, you may
still be bound by Article 9 if a priority dispute arises
4. § 9-102(a)(48): Inventory: goods being held for re-sale
a. Goods that are used up in a short period (ex: pens) of time by a
business are also inventory, while the goods that are fixed assets (ex:
cash register) are equipment
ii. Quasi-Tangible Property (pieces of paper used as collateral):

1. § 9-102(a)(47): Instruments: a writing that evidences a right to the payment
of a monetary obligation, but does not include:
a. Investment property
b. Letters of credit; or
c. Writings that evidence a right to payment arising out of the use of a
credit card
d. § 9-102(a)(65): promissory notes are a sub-category of instruments
2. § 9-102(a)(49): Investment property: stocks and bonds, and rights to
accounts containing the same
3. § 9-102(a)(30): Documents: warehouse receipts and bills of lading
a. Instead of giving the goods as collateral, you use the paper giving
rights to the goods as collateral
4. § 9-102(a)(11): Chattel Paper: when selling on credit, the purchaser will sign
promissory notes in your favor and security agreements giving you a SI so
you can repossess the item sold in the event of default (these papers
collectively are chattel paper)
a. Evidences both a monetary obligation and a SI in or a lease of specific
goods
b. Usually arises in disputes between a person with a lien on inventory
and people who buy chattel paper from the retailer
c. Electronic Chattel Paper: just like regular chattel paper, but evidenced
by a record of information stored electronically
iii. Intangible Property (property having no significant physical form):
1. § 9-102(a)(2): Accounts: a right to payment of a monetary obligation, whether
or not earned by performance for property to be sold, leased, etc.
a. Includes credit card transactions
b. § 9-102(a)(46): Heath care insurance receivables: Article 9 does cover
these transfers or assignments of insurance claims, but all others are
excluded by § 9-109(d)(8)
i. Health care insurance receivables are a sub-category of
accounts
c. Notice that the definition for accounts includes ALL property, but § 9-
109(d)(11) excludes Article 9 from covering the transfer of an interest
in or lien on real property, including a lease or rents under them
i. However, a court reasoned that a hotel could use their
occupancy as collateral, bc people in the hotel do not have an
interest in the property
2. § 9-102(a)(51): Letters of Credit Rights: right to payment or performance
under a letter of credit, whether or not the beneficiary has demanded or is at
the time entitled to demand payment or performance
a. The term does NOT include the right of a beneficiary to demand
payment or performance under a letter of credit
3. § 9-102(a)(29): Deposit Accounts: savings and checking accounts may be
used as collateral
a. Exception: § 9-109(d)(13): consumer transactions
i. Ex: Mike Sabbath goes to Circuit City and says he wants to buy
a big screen television. Bc Sabbath is buying the television for
personal family use, he cannot give a lien on his checking
account
ii. On the other hand, if he just got a Mellow Mushroom franchise
and wanted to use his personal account to pay his rent, Article
9 would technically apply (money is being used for business,
not personal purposes)
1. This does not typically happen
4. § 9-102(a)(13): Commercial Tort Claims: tort claims that are filed by
organizations (ex: partnerships and corporations) and business-related non-
personal injury claims filed by individuals
5. § 9-102(a)(42): General Intangibles: provides a catch-all for intangible
property that does not fall into any other category
a. Ex: putting up a person’s right to receive an income tax refund
b. § 9-102(a)(61): Payment Intangibles: a general intangible under which
the account debtor’s principal obligation is a monetary obligation
i. This is a sub-category of general intangibles
c. Software: computer programs are covered by general intangibles, but
if the software is embedded in the goods, then the software will be a
part of the goods
b. Technical Validity of the Forms:
i. The perfection of an Article 9 SI typically involves 2 documents:
1. The security agreement; and,
2. The financing statement
a. But sometimes there is automatic perfection, statutory perfection,
perfection by possession, or perfection by control
b. Just bc a SI has been created and attached, that does NOT mean the
SI has been perfected
ii. § 9-203: The Security Agreement: the contract between the debtor and the creditor
by which the debtor grants to the creditor (the SP) a SI in the collateral
1. Required for attachment of the SI
2. A SI attaches to collateral when it becomes enforceable against the debtor
with respect to the collateral, unless an agreement expressly postpones the
time of attachment
a. § 9-203(b): a SI is enforceable against the debtor and third parties
with respect to the collateral only if:
i. Value has been given;
ii. The debtor has rights in the collateral; and,
iii. There is an authenticated security agreement; or possession or
control of the collateral
3. Where the collateral is in the possession of the SP, no written security
agreement is required by law, although most people still maintain written
records for evidentiary purposes
4. If the collateral is not in the SP’s possession or control, the security
agreement must:
a. Be authenticated by the debtor; and

i. Sign in writing OR by electronic means
b. Describe the collateral
i. Must also describe the land if timber is involved
5. A good security agreement should:
a. Identify the parties;
b. Describe the collateral;
c. Contain a grant by the debtor to the creditor of a SI in the collateral;
and,
d. Specify the contractual understanding of the parties
i. Particularly, the events constituting a default whereby the
creditor could realize the SI and repossess the collateral
6. Description of the Collateral: there needs to be a description of the collateral
in the security agreement (which needs to be reasonably specific pursuant to
§ 9-108) and in the financing statement (which can be incredibly broad
pursuant to § 9-504)
a. § 9-108: Sufficiency of Description: a description of personal or real
property in the security agreement is sufficient, whether or not it is
specific, if it reasonably identifies what is described
i. Collateral is reasonably described if it identifies the collateral
by:
1. Specific listing;
2. Category;
3. Quantity;
4. Computational or allocational formula or procedure; or,
5. Any other method that is objectively determinable
ii. Super generic descriptions, such as “all the debtor’s assets” or
“all the debtor’s personal property” are NOT reasonable
identifications
1. Generic descriptions are ok in the financing statement,
but NOT the security agreement
iii. Descriptions by type of collateral are insufficient if it is
describing:
1. A commercial tort claim; or
2. Consumer transactions describing consumer goods, a
security entitlement, a securities account, or a
commodity account
b. After-acquired property: a SI may be created in collateral that D does
not own now, but that D may or will acquire in the future (interest will
attach without doing anything further)
i. Exceptions:
1. Consumer goods: no SI attaches to consumer goods
given as additional security under an after-acquired
property clause unless the debtor acquires rights in the
consumer goods within 10 days after the SP gives value
2. Commercial tort claims: an after-acquired property

clause in a SI will not reach commercial tort claims that
were not in existence when the SA was authenticated
ii. Most courts hold the agreement must expressly use the term
“after-acquired property”
1. Exception: a SA covering “inventory” implies both
present and future inventory
c. Floating liens: such liens attach to an aggregation of collateral (ex:
inventory) so that individual items may change (due to sales or
purchase by debtor), but the collateral as a whole remains subject to
the lien
i. The lien “floats” over the collateral, attaching to the item when it
comes into the debtor’s possession and terminating when the
item is sold or the account is paid
ii. Bankruptcy: trustee in bankruptcy may try to attack the
transaction as creating a voidable preference if you use a
floating lien on inventory and accounts and the D goes
bankrupt
iii. The Financing Statement: the notice that is filed in the place specified in § 9-501
and indexed under the debtor’s name, which gives later creditors an awareness that
the collateral is encumbered
1. Purpose: creates property rights in the creditor against most other parties
2. Generally filed in one central state office (secretary of state in most states)
a. Collateral related to realty (timber, minerals, fixtures, but NOT crops):
filed the same place as a real estate mortgage
3. Requirements:
a. Does not need to be signed by anyone, although the debtor must
authenticate
b. Must identify the parties
c. Must indicate what collateral is covered (requires REASONABLE
identification)
i. Less specificity is required than in the security agreement bc
the financing statement’s purpose is to provide mere notice to
others to check further, whereas the security agreement’s
description is the more specific contractual understanding of
the two parties
d. If realty interests are involved (timber, fixtures, extracted minerals), the
realty must be described and the record owner of the realty and
indicate that it be filed in the real property records
4. § 9-516: adds additional requirements for filing a financing statement, such
as filing fees; name and mailing address of the SP; name, mailing address
and type of organization of the debtor
5. “After-acquired” property clause is not required, if the types of collateral
subject to the clause are sufficiently described
iv. The Debtor’s Identity: when the financing statement is filed, it is indexed under the
debtor’s name, so it is important that the name is correct (this enables other
creditors searching the records to find the debtor)
1. § 9-503: Name of Debtor & SP:
a. If the debtor is an individual, use the individual’s name
b. If the debtor is an organization, use the organization’s name
c. If the debtor is a partnership, the financing statement is sufficient if it
states the partnership name
d. If the organization does not have a name, then the financing
statement should name the individuals or other enterprises that
comprise the organization
e. § 9-503(c): a financing statement that only provides a debtor’s trade
name is insufficient
2. § 9-506: Effect of Errors or Omissions: a financing statement that
substantially satisfies the requirements of § 9-503 is effective, unless the
financing statement is seriously misleading
a. § 9-506(b): a financing statement that does not provide the debtor’s
name in accordance with § 9-503 is seriously misleading, unless using
the debtor’s correct name in a standard search logic would disclose
the financing statement
3. § 9-507: Effect of Certain Events on Effectiveness of Financing Statement:
a. If a debtor changes its name and a filed financing statement becomes
seriously misleading under § 9-506:
i. The financing statement is effective to perfect a SI in collateral
acquired by the debtor before, or within four months after the
change; AND,
ii. The financing statement is not effective to perfect a SI in
collateral acquired by the debtor more than four months after
the change, unless an amendment to the financing statement
which renders the financing statement not seriously misleading
is filed within four months after the change
b. If you do not change your name:
i. Any collateral before the name change and the four months
after the name change is still perfected
ii. Any collateral after the four months is un-perfected, unless you
re-file under the debtor’s new name
c. Even if a SP KNOWS about the name change, that party can wait the
four months
i. A potential argument is that good faith requires you to act
quickly (within a reasonable time) to file a new financing
statement; however, there is NO good faith duty in the Code
4. § 9-508: Mergers:
a. Where a new debtor acquires rights under a filed financing statement,
the financing statement remains effective, unless the difference in
name of the original debtor and the new debtor becomes materially
misleading
i. In that case, the financing statement is effective to perfect

security in collateral acquired by the new debtor before, and
within four months after, the new debtor is bound
v. Amendments: amendments that merely change names, amounts or descriptions are
considered part of the original statement and have NO effect on perfection or
priority of the SI
1. If an amendment adds collateral, the SI is effective (as to the added
collateral) from the filing date of the amendment
2. Distinguishing from floating liens: the specific items of inventory covered by a
floating lien are covered from the date of filing, regardless of when they come
into the inventory
vi. Financing statements are effective for five years and will then lapse unless a
continuation statement is filed
1. More than one party can have a lien on collateral
a. This first party to file will have priority
2. Filing office must keep records of lapsed financing statements for one
additional year (statutory requirement)
3. Public finance transactions and manufactured home transactions are
effective for 30 years, while a transmitting utility financing statement is
effective until terminated
4. § 9-515(d): premature renewal: a continuation statement may only be filed
within 6 months before the expiration of the five year period
a. A continuation that is filed before the six month window is ineffective,
and the SP’s interest will become unperfected (the party can re-file,
but it is as if the interest was never perfected and you will lose priority)
5. § 9-513: termination statements
a. For non-consumer goods, the SP has to file a termination statement
within 20 days of the SP receiving an authenticated demand for a
termination statement
b. For consumer goods, the SP needs to file a termination statement
within a month after there is no obligation, or within 20 days after
receiving a demand
c. If the SP fails to file the termination statement, the debtor can file a
termination statement
d. A SP may be held liable for any damages caused by noncompliance
with the Article, and a debtor may recover $500 for each occurrence of
the failure to file a termination statement
6. § 9-517: the failure of the filing office to index a record correctly does not
affect the effectiveness of the filed record
a. If the filing office screws up, the financing statement is still effective
(however, it’s likely the Secretary of State will say the statement was
never filed)
c. Attachment of the SI:
i. Attachment is the process by which the SI in favor of the creditor becomes effective
against the debtor
ii. Perfection is the process by which the creditor’s SI becomes effective against most
of the rest of the world
iii. Steps for attachment: (as soon as these three requirements COEXIST, the SI
attaches- unless the parties have explicitly agreed to postpone the time of
attachment)
1. A security agreement must be signed;
a. Or authenticated, which can be done electronically
2. The creditor must give value; and
a. A person gives “value” for rights if he acquires them:
i. In return for a binding commitment to extend credit or for
extension of immediately available credit, whether or not drawn
upon, or
ii. As security for or in total or partial satisfaction of a pre-existing
claim, or
iii. Generally, in return for any consideration sufficient to support a
contract
b. This requirement is usually not a problem, bc it is easy to satisfy
3. The debtor must have some rights in the collateral
a. “Rights in the collateral” is not defined anywhere in the Code
i. Typically satisfied when the debtor takes possession, but this is
not always the case
1. Ex: in sales contract, when a manufacturer identifies
goods at their warehouse, rights may be created
b. Ex: ownership in a car
i. You don’t need to have actual ownership, but you must have
some RIGHTS (can be broad or limited)
ii. Ex: a thief tries to give you a car as collateral. Can you (the
bona fide purchaser) then use the stolen car as collateral?
1. Probably not- the thief’s ownership transfers and the
thief doesn’t have any ownership!
iii. Ex: what if Sabbath bought a car from Cole, but the check he
used to pay for the car bounced. Would Sabbath have rights for
collateral?
1. A person with voidable title (Sabbath) has power to
transfer good title to a good faith purchaser, even though
Sabbath got the goods by giving a bad check
2. Article 2 gives Sabbath certain powers he doesn’t have if
he steals the property
c. Ex: Sabbath cannot attach the podium from the front of the classroom,
bc he does not have some rights in the collateral
IV. Perfection of the SI
a. Background information:
i. SIs must attach before being perfected
ii. If a SI is perfected, it is senior to most later creditor interests
1. A SI must be effective between the debtor and creditor before it has legal
meaning as to other parties (therefore, a SI must attach before perfection is
possible)
iii. Most common way of perfecting title: the SP (creditor) files a financing statement in
the appropriate place
1. For certain kinds of property (accounts and general intangibles), filing is the
ONLY method of perfection
iv. Other ways to perfect title:
1. Creditor takes physical possession of the collateral (known as a pledge)
2. For some types of collateral, attachment automatically perfects title
3. Perfection for some types of collateral can be accomplished by achieving
control over the collateral
a. Ex: deposit account (have the bank put the account in your name)
v. § 9-308(a): a SI is perfected if:
1. It has attached; and,
2. All the applicable requirements for perfection in § 9-310- § 9-316 have been
satisfied
vi. § 9-310: except as otherwise provided, a financing statement must be filed to
perfect a SI
1. This assumes that the standard form of perfection is by filing a financing
statement, which makes sense bc in most instances the debtor will need to
keep possession of his collateral
vii. A SI may be perfected more than once: if this occurs, the later perfection by another
means is deemed to relate back to the date of the original perfection, provided there
has been no intervening unperfected period
b. § 9-313: Perfection by Possession:
i. If the collateral is in the physical possession of the creditor, the world at large is
alerted to that creditor’s possible interest in the property, and no other notice is
required
1. Authentication of the security agreement is required (may be oral)
2. Perfection in this manner will only occur if the collateral has a physical form
3. This is not very common: if Sabbath has inventory, he’s not going to want to
give me physical possession of his inventory, he will want to sell the
inventory
a. Possession of GOODS is rare
4. More common for promissory notes, negotiable title, etc.
ii. The Code does not define “possession” à definition is left to common law
iii. Possession can be made through an agent
1. What if it’s an escrow account?
a. Under the terms of the escrow agreement, the debtor can’t get the
good back
b. Comments indicate that if the good is out of the hands of the debtor,
possession perfects
i. However, the Code itself does not say this- the comment just
backs up the argument that escrow accounts are ok
c. § 9-313(c): an escrow arrangement can indirectly establish perfection

by possession if the person in possession (the third party in
possession or taking possession in the future) authenticates a record
acknowledging that it holds possession of the collateral for the SP’s
benefit
d. § 9-313(f): the third party in an escrow arrangement is not required to
do this acknowledgement, but the owner needs to get the record
before the diamond is indirectly secured by possession
i. By contacting the third party, the third party knows not to
dispose of the item
iv. Perfection by Possession works for SIs in: Tangible negotiable documents; Goods;
Instruments; Money; or, Tangible chattel paper
v. Pro’s for Perfection by Possession:
1. Perfection is assured
2. Solves any Statute of Frauds issue and prevents 3rd parties from being
misled
3. Sometimes a person who perfects by possession will have priority over
someone that merely filed a financing statement
vi. Con’s for Perfection by Possession:
1. Problems of storage, care, and maintenance
vii. If the goods are in possession of a third party (ex: bailment situation), the SP does
not have to settle for perfecting by a financing statement, but may be able to work
with the bailee to indirectly perfect by possession
1. Goods covered by negotiable document of title: since a negotiable title
represents the goods being held by the bailee, possession of the document
perfects a SI in both the document and the goods covered thereby
2. Goods covered by non-negotiable document of title: possession does not
result in perfection
a. SP can perfect a SI in the goods by having the document issued
directly to the SP; or sending the bailee notice of the SP’s interest in
the goods
3. Bailment with no document of title: if the goods are in the hands of a bailee
who has not issued any kind of a document of title covering the gods, the SP
can perfect by getting the bailee to authenticate a record
a. The bailee is not required to do so- if he refuses, the only recourse for
the SP would be to file a financing statement to perfect an interest in
the goods
viii. Stocks (certified securities) or goods covered by a document may not be indirectly
perfected by possession
ix. Rights and duties of SP in possession: must take reasonable care to store and
protect the collateral (failure to exercise reasonable care will make the SP liable for
any loss resulting from such breach of duty, but does not forfeit the interest)
1. Exculpatory clauses totally absolving the SP from liability are void
2. The SP is entitled to reimbursement for expenses incurred in storing and
protecting the collateral (including the cost of insurance)
3. Rents, issues, profits (i.e., money received from the collateral) must be
returned to the D or applies against the obligation
4. Risk of loss is on the D, but only to the extent of any deficiency in the
creditor’s insurance coverage
a. The SP has a duty to insure collateral in her possession
5. The SP cannot re-pledge the collateral to a third party if this action doesn’t
impair the debtor’s ability to redeem
6. The SP cannot use the collateral unless:
a. The use is necessary to preserve the collateral
b. The use is pursuant to a court order; or
c. (If the collateral is not consumer goods) their use is agreed to by the
debtor
x. § 9-313(d): perfection by possession does not take place any earlier than the time
that the SP takes possession, and the perfection continues only while the SP is in
possession
1. However, temporary possession can exist
a. § 9-313(e) and (f): primarily used in letter of credit transactions, where
the issuing bank receives a bill of lading (a document) covering the
goods and turns it over to the buyer (debtor) so the buyer can get the
goods from the carrier, sell them and reimburse the bank (during this
20 days period, the bank’s interest in the document remains perfected,
even though the document is out of its possession
i. § 9-308(c): Continuous Perfection: a SI is perfected
continuously if it is:
1. Originally perfected by one method under this article and
2. Is later perfected by another method under this article
3. Without an intermediate period when it is unperfected
ii. § 9-312(g): once the 20 day period expires, the SI becomes
unperfected (and if the debtor becomes bankrupt, you will likely
lose out to the bankruptcy trustee)
c. Automatic Perfection:
i. Purchase Money SI in Consumer Goods (PMSI):
1. Consumer goods are unlikely to be used as collateral twice (generally, they
aren’t worth that much), so there are rarely any creditors to protect, and bc
filing costs money it is not worth it for merchants to file after every sale
a. The creditor must have an authenticated SA with the debtor to have a
valid SI
b. But notice that PMSIs in other types of collateral are not automatically
perfected (but there are often special rules for PMSIs)
i. Non-consumer good PMSIs: these do not automatically perfect,
but if the SP does certain things, they can gain priority over
parties that have already filed
1. A PMSI in non-consumer goods does not lose its status
as a PMSI if it is refinanced or consolidated with other
loans (this is the “dual status” rule). The effectiveness of
PMSIs in consumer goods is left for the courts to decide
ii. Garage sale exception: automatic perfection for consumer

goods PMSIs does not protect against a consumer selling a
consumer good to another consumer
1. Therefore, creditors do not rely on automatic perfection
for big-ticket consumer goods
iii. Exception: motor vehicles: NO automatic perfection
1. In every state, certificates of title are issued evidencing
the ownership of certain motor vehicles, and SIs in the
vehicle must be perfected by notation of the interest on
the face of the certificate
2. This exception does not apply to cars in a dealership’s
inventory
iv. Exception: fixtures: NO automatic perfection
1. Consumer goods that are to become fixtures (ex:
furnaces) require special steps for perfection
2. Consumer goods: look at primary purpose of goods to determine whether it’s
a consumer good
a. Actual use of the goods may not be determinative if it differs from what
the consumer told the creditor at the time of attachment (ex: if Dan
says the goods are for personal use and is lying, I am still protected
without filing if I believed him)
3. Who holds a PMSI: a purchase money SP may be either the seller who has
advanced credit for all of part of the price or any other person (ex: finance
company, lender) who gives value or incurs an obligation to enable the
debtor to acquire the collateral or rights in it, but only if the value is actually
used in the transaction by the debtor
4. If you have a PMSI in consumer goods, it is AUTOMATICALLY perfected
a. The first to file rule does NOT apply to PMSIs; however, the creditor
must still have an authenticated security agreement with the
debtor to obtain a valid SI in the first place
5. § 9-103: two types of PSMIs:
a. Where a seller sells something on credit and retains a SI
b. Where a debtor borrows money from a creditor that enables the
debtor to buy a good and the money is in fact used to purchase the
goods and the lender keeps a SI in the goods
6. PMSIs require a close nexus between the acquisition of collateral and the
secured obligation
a. It’s not enough if a debtor acquired property on unsecured credit and
subsequently creates the SI to secure the purchase price
b. Ex: I want to buy a machine and Sabbath loans me $10K- Sabbath
has a PMSI. Three months later, I ask Sabbath for another $2K.
Sabbath wants the second loan to be secured by the first lien on the
machine bought with his loan
i. Sabbath no longer has a PMSI, bc the collateral is securing
stuff other than the initial loan
1. Some courts say that loaning additional money and not

taking out a lien, Sabbath is owed $12K, but there is no
PMSI
2. Other courts say Sabbath has a PMSI for the $10K, but
not on the additional $2K
a. § 9-103 provides a formula for determining how
payments are split between the PMSI and
additional loan
ii. Sabbath loans me money and takes out a lien on the new
machine I buy, as well as three other machines I own
1. Some courts say you have a PMSI for the machine you
are using Sabbath’s money to buy, but not on the other
machines
2. Some courts say you do NOT have a PMSI (Sabbath
loses his PMSI by taking a lien on the other machines)
iii. Three months after the loan, I ask Sabbath to refinance
1. Some courts say Sabbath no longer has a PMSI, bc
Sabbath had already given me money, and refinancing
is almost like Sabbath giving me a new loan
7. Problem: Façade Motors wanted to buy an expensive Oriental rug and
Treasures of Persia loaned them a rug to test. ABC Bank has a floating lien
on Façade Motor’s equipment. Then, Façade Motors goes to Night Flyer to
get financing for the rug
a. Sale on return (common with inventory and other goods for resale):
subject to creditors’ claims on the goods
b. Sale on approval: not subject to claims of creditors until the debtor
accepts and keeps the goods
i. If Façade Motors tested the goods, decided to purchase the rug
and then goes to a lender to get money- it may be questionable
whether this is a PMSI (anybody with a floating lien would have
priority)
ii. Assignment of beneficial interest in decedent’s estate is automatic (such an
assignment is not normally a commercial transaction)
iii. § 9-309: Certain Accounts and Other Intangibles:
1. § 9-309(2): an assignment of accounts or payment intangibles which does
not transfer a significant part of the assignor’s outstanding accounts or
payment intangibles automatically perfects upon attachment
a. Significant portion: what does that mean-
i. Courts tend to focus on the percentage of the debtor’s accounts
being sold to determine significance
ii. Other courts look at the person buying the accounts, and see
whether the person buying accounts is regularly in the business
of taking assignments and should know to file, or whether the
person taking the assignment is an isolated event
iii. This subsection is intended to protect people that do not
ordinarily take assignments or would not think to file them
1. So when courts use this test, the assignee must be both

“insignificant and ignorant”- meaning a small portion of
the outstanding accounts and the assignee does not
normally take assignments
2. § 9-309(4): a sale of a promissory note is automatically perfected when it
attaches
3. Sureties:
a. § 9-203(f): an interest in the account automatically gives an interest in
the payment of the account
i. A surety is a secondary obligation
ii. Ex: Sabbath’s wife joins Gold’s Gym. Gold’s goes out of
business and sells its account to Silver’s Gym. Silver’s interest
in the account from Gold automatically gives them an interest in
payment from Mrs. Sabbath
b. § 9-308(d): a surety does not require a separate filing and perfection
is automatic
c. If you take a lien on an account, you automatically have a lien on the
supporting obligation
i. If you perfect as to the account, you are automatically perfected
as to the supporting obligation
iv. Temporary Automatic Perfection: ONLY LASTS 20 DAYS!
1. A SP as to negotiable documents, certified securities, or instruments who
advances new value obtains a 20-day perfection period from the moment of
attachment, even if the SP does not file and the collateral remains with the
debtor
2. If a SP makes available to the debtor either negotiable documents or goods
in the hands of a bailee that were not covered by a negotiable document, for
the purpose of ultimate sale or exchange, of for loading, shipping, storing, or
like purposes, the UCC grants a 20-day extension of perfection
3. A SP is granted a similar extension when delivering instruments or certified
securities to the debtor for the purpose of sale, exchange, collection,
renewal, or registration of transfer of the instruments or certified securities
d. § 9-310: Perfection by Filing:
i. The revised version of Article 9 requires central filing (typically in the office of the
Secretary of State) for almost all financing statements
1. In Georgia, the central filing is at a Superior Court
2. Exception: file at local county for matters having to do with realty
a. Minerals to be extracted from the earth, timber, or fixtures
3. Note: when filing financing statements, always pay to have duplicate copies
of the financing statement made, stamped and returned to you
a. See § 9-523(a) for procedure
ii. Perfection by filing is effective for all types of collateral except deposit accounts and
letter of credit rights
e. § 9-314(a): Perfection by Control:
i. Perfection for some types of collateral can be accomplished by achieving “control”
over the collateral
ii. § 9-314(a): a SI in investment property, deposit accounts, letter-of-credit rights, or

electronic chattel paper may be perfected by control of the collateral under § 9-104,
§ 9-105, § 9-106 or § 9-107
iii. “Control” generally means that the SP has taken the steps described in these
sections, so it is obvious to anyone investigating the state of the collateral that the
SP has rights in it
V. Multi-State Transactions
a. § 9-310: Conflicts of law: typically, Article 9 looks to the law of the debtor’s location as the
state in which the steps for perfection need to be taken (domicile approach)
i. However, if the collateral has physical form, the law of the jurisdiction in which the
collateral is located will govern issues involving priority and other Article 9 matters
b. § 9-307(b) and (e): provide the general rules for determining where the debtor is located:
i. Individuals: are located at their primary residence
ii. Corporations: are located at their place of incorporation (and it does not matter
where they do business)
iii. Organizations other than corporations:
1. If there is only one place of business, the organization is located at their
place of business (where they conduct their affairs), but
2. If there is more than one place of business, then it is located at its chief
executive office
iv. Registered organizations such as corporations and limited partnerships are located
in the state they are registered
v. Exceptions:
1. Possessory SIs and SIs in fixtures and timber to be cut: location of the
collateral determines issues relating to perfection
2. Minerals: governed by the law of the jurisdiction of the wellhead or minehead
3. Goods covered by certificate of title: governed by the law of the state issuing
the certificate
4. Deposit accounts: law of the depositary bank’s jurisdiction governs
5. Agricultural liens: state law in which the farm product governed by the lien is
located will govern
vi. Problem: a debtor from Wyoming buys a boat from Cleveland, Ohio; under the
current law, you perfect where the debtor is located, but the location of the collateral
determines all the other issues
vii. Problem: an organization is registered in the Republic of Jahala. If there was a
public filing system in Jahala, you would file there, but in the rare situation that there
is no public filing system, then you would file in Washington, D.C. (as a practical
note- when in doubt, file everywhere)
c. § 9-316: changes in governing law: a SI perfected pursuant to the law of the jurisdiction
designated in § 9-310 remains perfected until the earliest of:
i. The time perfection would have ceased under the law of that jurisdiction;
ii. The expiration of four months after a change of the debtor’s location to another
jurisdiction; or
iii. The expiration of one year after a transfer of collateral to a person that thereby
becomes a debtor and is located in another jurisdiction
1. If the collateral is transferred to a new debtor located in another jurisdiction,

then you get one year (this accounts for mergers)
d. § 9-316(b): a SP that re-files prior to the earliest of the options above has continued
perfection, but a party that lets their interest lapse will be deemed to have never been
perfected against other purchasers for value
i. The creditor will have a gap in their perfection when they re-file, and can potentially
lose priority to liens that were previously subordinate but remained perfected
e. § 9-303: Certificates of Title:
i. SIs in goods covered by certificates of title are perfected by placing a notation of the
SI on the certificate, so the law of the state issuing the certificate governs the
perfection
ii. Usually, when somebody moves states, they will notify their lender and the new
certificate of title will show there is a lien on the collateral- the problems arise when
the debtor somehow does not turn in the old certificate or registers in a different
state
iii. § 9-303(a): if a lender notes their interest on a certificate of title that was issued by
an improper state, then the interest is still perfected
iv. § 9-303(b): goods cease to be covered by a certificate of title at the earlier of:
1. The time it ceases to be effective under the law of the jurisdiction, or
2. The goods become covered by a certificate of title issued by another
jurisdiction
v. § 9-316(d): a certificate of title issued under one jurisdiction will remain effective for
four months (so the SP has time to figure out the collateral in another state- and
possibly a new certificate was issued without noting the party’s interest)
1. Exception: § 9-337: a buyer of the goods (other than a person in the
business of selling that type of goods) will take free of the SI if the buyer
gives value and receives the goods after issuance of the title and without
knowledge of the SI
VI. Priority (§ 9-317)
a. Simple Disputes:
i. When the debtor’s financial situation collapses, the creditors all scramble to seize
the debtor’s assets
ii. Problem: a dispute arises between a SP and a judgment lien creditor. Who wins?
(see § 9-317(a)(2) and § 9-102(a)(52))
1. Lien creditors have priority over unperfected secured parties (if you are
unperfected, you lose, even if you have signed a financing statement)
2. Does an unperfected SP defeat a judgment creditor? NO
a. Judgment creditor will defeat unperfected SP
i. A perfected SP that has perfected before the judgment is
reduced to levy will defeat a judgment creditor
b. If judgment is reduced to levy, it becomes a lien creditor and will
defeat an unperfected SP
i. A bankruptcy trustee has the rights of a lien creditor on
the date the debtor files for bankruptcy- so if you are
unprotected at the time of filing for bankruptcy then you will lose
out to the bankruptcy trustee
c. When do you become a lien creditor?

i. A creditor that has acquire a lien on the property involved by
attachment, levy, or the like
1. You don’t become a lien creditor just by getting a
judgment- you only become a LIEN creditor when the
sheriff levies on the property involved
2. Varies state by state- in GA, you don’t need to have a
sheriff levy à instead, judgment needs to be recorded
3. It doesn’t matter if the lien creditor knew of the unperfected SI
4. A trustee in bankruptcy is equivalent to a judicial lien creditor who has placed
a lien on all the debtor’s property
iii. § 9-322(a)(3): If the dispute arises between two unperfected parties, the first interest
to attach has priority
iv. § 9-317(b): Unperfected creditor vs. buyer: a purchaser who pays value and
receives delivery without knowledge of the unperfected interest takes free of such
interest (delivery requirement not necessary when there is nothing tangible- ex:
account, electronic chattel paper)
1. If the collateral is inventory and the buyer purchases in the ordinary course of
business, the buyer takes free of all SI’s (perfected or not), even if the buyer
knows of the SI
v. § 9-322(a)(1): if the dispute arises between two secured parties, the first to file OR
perfect wins
1. Under the new code, this is a pure race statute
a. Doesn’t matter if the second party knew about the first SI
i. § 9-322(a)(2): perfected interests win out against unperfected
interests, regardless of knowledge
2. The justification for allowing the first party to file to have priority lies in the
necessity of protecting the filing system
a. This allows the first SP to make subsequent advances without
checking for subsequent filings each time; and subsequent lenders
are on notice that there is another lender (allowing the subsequent
lender to insist on a termination statement if negotiations fall through)
vi. New debtors: if two different debtors, each of whom have given creditors SI’s in
their collateral, merger into a “new debtor”, the original SI’s continue in the new
debtor without the need for a new SA or financing statement, and the usual rules of
priority apply
vii. § 9-204(c): Future Advances: a security agreement may provide that collateral
secures future advances or other value whether or not the advances or value are
given pursuant to commitment
1. Broadly authorizes future advance clauses in the security agreement
2. The obligations are not required to be the same or related
3. § 9-323, Official Comment 3: even if there is not a future advance clause in
the first security agreement, and the first SP makes the debtor sign another
security agreement, then the first SP will maintain priority bc the financing
statement is still valid
a. This is troubling, bc subsequent creditors would not be on notice that

the primary creditor could step back in to being first in priority
b. However, for practical purposes, there will always be a future advance
clause
viii. Problem: debtor pledges his stamp collection pursuant to an oral security
agreement. The debtor then gets a loan from his dad pursuant to a written
agreement and files a financing statement
1. Who has priority? The bank, bc they were first to perfect
2. If the bank gives the stamps back to the debtor, the bank becomes
unperfected
a. Perfection by possession lapses. The dad steps into priority, unless
the bank files a financing statement and gets a security agreement to
continue their perfection
3. If the bank makes the debtor sign a security agreement but does not file a
financing statement, the bank’s perfection would lapse when they
surrendered the stamps, and the dad would have priority
b. Purchase Money SIs:
i. The general rule of priority (first to file or perfect) is subject to modifications à PMSIs
have “super priority”
ii. The Basic Rule:
1. If the collateral is consumer goods, no further steps need to be taken for a
PMSI to prevail over prior or later interests
a. All other PMSIs in collateral (except inventory & livestock) must be
perfected during a 20-day grace period following the buyer’s
possession of the goods to take advantage of a relation-back of
priority to that date
2. § 9-324(a): generally, a perfected PMSI has priority over a conflicting SI in
the same goods (and a perfected SI in its identifiable proceeds also has
priority) if the PMSI is perfected when the debtor receives the goods or within
20 days of receiving the goods
a. If you do so, you prevail against all conflicting SI’s- even interests that
were filed at the time of sale of which the purchase money SP actually
knew
b. The priority of the PMSI is limited to the extent of the purchase money
(cash or credit) used in acquisition of the collateral
3. Equipment: Sabbath’s interest attaches but has not filed a financing
statement, as long as he files within 20 days (an intervening non-SP will not
win)
4. If there is not full compliance with the special rule for PMSIs, the general rule
of first to file OR perfect applies
iii. § 9-324(b) and (d): Inventory and Livestock:
1. The inventory financier will have a perfected interest in existing and after-
acquired inventory, in effect a floating lien over the mass of changing goods
available for sale by the debtor to others
a. If the debtor buys new inventory and gives the seller a PMSI therein,
the original financier is seriously hurt if:
i. It does not know of the purchase money interest but instead

thinks ALL of the inventory is collateral over which it has
priority; and
ii. The purchase money interest is held to prevail over the already
perfected interest in after-acquired inventory
2. § 9-324(b): a perfected PMSI in inventory has priority over a conflicting SI in
the same inventory if:
a. The PMSI is perfected when the debtor receives possession of the
inventory;
i. Notice the 20 day grace period does not apply to inventory and
livestock (must file BEFORE the debtor receives possession)
b. The purchase money SP must send an authenticated notification to
the holder of the conflicting SI;
i. Must be given prior to the date on which the debtor takes
possession of the collateral
ii. The notifications states the person sending the notice has or
expects to acquire a PMSI in inventory of the debtor and
describes the inventory
iii. Once properly given, the notice lasts for FIVE years
c. PMSI super-priority also extends to certain proceeds of inventory
collateral
i. A creditor with PMSI super-priority in inventory also has
super-priority in identifiable cash proceeds that are
received on or before delivery of the inventory to the
buyer, chattel paper proceeds, and instrument proceeds
3. § 9-324(d): livestock has the same requirements as inventory
iv. § 9-324(g): Two competing PMSIs:
1. If more than one SI qualifies for priority in the same collateral, 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 the rights
a. The seller of the goods has priority over the lender (regardless of
which party perfected first)
2. Problem: an artist lends an art dealer 5 pieces of her work to put on display.
The artist later finds out that the Bank had a lien on the dealer’s inventory
and they repossessed her paintings. Can the Bank do this?
a. Depends on the rules of consignment
i. If the consignee is generally known to take goods on
consignment then the consignor does not need to file a
financing statement
c. Control and Priority: control is a means of perfection for intangibles (much like possession
is a means of perfection for goods)
i. A creditor with control prevails over creditors who do not have control. If more than
one creditor has control, the first creditor to gain control has priority (exception: a
securities intermediary has super-priority over all other creditors with an interest in a
securities account, even those who have control)
ii. Control over Investment Property:

1. There are two ways to take a SI in “investment property”:
a. File a financing statement; and/or
b. Take control of the investment property
i. § 9-328: a SP with control of the investment property has
priority over anyone that has just filed a financing statement
2. Generally, a person has control over investment property by taking delivery
of it along with any necessary endorsements (pursuant to § 8-106)
a. § 8-106(d): a purchaser has control of a security entitlement if:
i. The purchaser becomes the entitlement holder (the account is
put in the creditor’s name);
ii. The securities intermediary has agreed that it will comply with
the entitlement orders originated by the purchaser without
further consent by the entitlement holder
iii. Control over Deposit Accounts:
1. Article 9 allows a perfected SI in bank accounts by a creditor that obtains
control over the account (consumer accounts may not be used as collateral
for consumer debts, but may be used for non-consumer debts)
2. A depositary bank holding a deposit account has a superior right of set-off in
the deposit account for debts owed to it by the depositor, and prevails over
another creditor having control over the deposit account, unless the creditor
obtained control by putting the account in its own name, in which case it
prevails over the bank’s right of setoff
iv. Control over Letters of Credit Rights:
1. If one party does not trust the other to make payment at an agreed-upon
time, that party may require that the payment be made directly by a bank of
good repute
2. If this is done, then the bank will issue a letter-of-credit to the person to
whom payment is made (the beneficiary) specifying the circumstances under
which the bank will honor drafts on it by that person
3. The party that persuades the bank to issue a letter-of-credit is called the
applicant
4. The beneficiary may use its rights to draw on the letter of credit as collateral
for a different loan with a different creditor
d. Buyers:
i. A buyer of collateral covered by a perfected SI generally takes the collateral subject
to the SI
1. Exception: 9-320(a): a buyer in the 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 (as long as the buyer does not know that the sale is in
violation of the terms of the security agreement)
a. The purchase is an “ordinary purchase of the seller’s inventory”
i. Bulk sales do not qualify for § 9-320(a) protection
b. The buyer purchased the goods for value;
c. The buyer purchased the goods in good faith and without knowledge
of a violation of the security agreement; and
d. The SI was created by the buyer’s seller

e. Buyer of farm products: under federal law, such buyers must comply
with notices received from the SP in order to take free of perfected
interests in the farm products
i. Food Security Act of 1985: generally provides the basic
scheme where the bank (creditor) requires the farmer to furnish
the bank with a list of prospective buyers of the farm products,
and the farmer agrees not to sell to anyone else unless the
farmer notifies the bank in writing at least seven days before
the sale. The bank then sends direct notice to the buyer telling
them of any payment instructions, and if the buyer follows the
payment instructions they take free of the bank’s SI.
Additionally, the state may establish a central filing system for
the registration of financing statements covering farm products
f. Ex: Manufacturer, who is in the business of manufacturing appliances,
owns manufacturing equipment subject to a perfected SI in favor of
Lender. Manufacturer sells the equipment to Dealer, who is in the
business of buying and selling used equipment. Buyer buys the
equipment from Dealer. Even if Buyer qualifies as a BOCB, Buyer
does not take free of Lender’s SI, bc Dealer did not create the SI,
Manufacturer did
g. § 9-320(e): if the SP keeps possession of the collateral, SP has
priority over a BOCB
2. Exception: 9-315(a): a SI continues in collateral notwithstanding sale or other
disposition thereof, unless the SP authorized the disposition free of the SI
(this authorization can be express, implied or by acquiescence through
conduct)
3. Exception: § 9-323: buyers not in the ordinary course of business- future
advances
a. A buyer NOT in the ordinary course of business (ex: a purchaser of
non-inventory) takes free of increases in the SI due to future
advances, unless the advances are made by the creditor within 45
days following the sale and are made either without knowledge of the
sale or pursuant to a commitment that was entered into without such
knowledge
4. Exception - 9-320(b): “Garage sale exception”: a consumer buying consumer
goods from another consumer for value takes free of a perfected SI in the
goods unless the buying consumer knows of the SI, or a financing statement
covering the goods has been filed à Requirements of 9-320(b) include:
a. (1) buy from a person who used for personal purposes,
b. (2) without knowledge of the SI,
c. (3) for value,
d. (4) for a primarily personal purpose, and
e. (5) before a filing of a financing statement covering the goods
5. Exception – 9-317(b): Buyers that receive delivery: a buyer, other than a SP,
takes free of a SI if the buyer gives value and receives delivery of collateral
without knowledge of the SI and before it is perfected
ii. International Harvester v. Glendenning: Glendenning purchased three tractors from
Barnes (and those tractors were subject to a SI in favor of International Harvester);
it was alleged that the sales were in bad faith and not in the ordinary course of
business, so the tractors are still subject to the SI;
1. Even where the code is silent about a “good faith” requirement, § 1-203
imposes one
2. Keep in mind that the SI automatically attaches to whatever proceeds
come in from the sale, but the creditor may not have priority on the
proceeds (bc someone may have a lien on their accounts)
a. Typically, what happens is they use the proceeds to purchase more
inventory and there is not a problem
e. Leases:
i. § 2A-307: except as otherwise provided, the lessee takes a leasehold interest
subject to a SI held by a creditor of the lessor
ii. § 9-321(c): a lessee in the ordinary course of business takes its leasehold interest
free of a SI in the goods created by the lessor, even if the SI is perfected and the
lessee knows of its existence;
iii. § 9-317(c): a lessee of goods takes free of a SI if the lessee gives value and
receives delivery of the collateral without knowledge of the SI and before it is
perfected;
iv. § 2A-308(3): a creditor of a seller may treat a sale as void if as against the creditor
retention of possession by the seller is fraudulent, but retention of possession of the
goods pursuant to a lease contract entered into
v. § 2A-307(1): a creditor of a lessee takes subject to the lease contract
f. Article 2 Claimants: Article 2 creates rights in sellers and buyers of goods that can cause
priority problems when those goods are also subject to Article 9 SIs;
i. Automatic Article 2 SIs:
1. Interests of buyers: under Article 2, a buyer has the right to reject defective
goods tendered by the seller; or, if a substantial defect is discovered only
after “acceptance” of the goods, the buyer may revoke acceptance and
demand a refund
a. Upon exercise of either of these rights, the buyer obtains a
possessory SI in the goods to secure the return of the price paid for
them and other incidental damages
2. Interests of sellers: a seller’s Article 2 SI arises upon exercise of the seller’s
right to order a carrier of goods sold to stop delivery of the goods, or the right
of an unpaid seller to resell goods the buyer will not accept and sue the
buyer for the difference between the contract price and the resale price (plus
incidental damages, such as the cost of resale)
ii. Priorities between Article 2 claimants and Article 9 creditors: Article 9 gives priority
to the Article 2 claimant as long as the Article 2 claimant has possession of the
goods
1. Special priority rule when the buyer is insolvent:
a. Seller’s interest: an insolvent buyer who orders goods on credit

commits an act regarded as common law fraud (if a seller discovers
that the buyer is insolvent, the seller has 10 days following delivery of
the goods to make a demand for their return; however, if the buyer
has sent the seller a written misrepresentation of solvency within the
three months before delivery, the 10-day limitation does not apply)
b. A creditor’s perfected SI attaching to goods in the hands of the
insolvent buyer is superior to the rights of an unpaid seller trying to
reclaim the goods
c. Buyer’s bankruptcy: the buyer’s trustee in bankruptcy is subject to the
seller’s written demand for return of the goods made within 20 days
after their delivery
g. Statutory Lien Holders: the repairperson in the ordinary course of business is frequently
given priority over previously perfected consensual SIs
i. § 9-333(b): a possessory lien on goods has priority over a SI in the goods unless
the lien is created by a statute that expressly provides otherwise
1. § 9-333(a): Possessory Lien: an interest that secures payment or
performance for services or materials furnished with respect to goods by a
person in the ordinary course of the person’s business, which is created by
statute, whose effectiveness depends on the person’s possession of the
goods
h. Fixtures: i.e., personal property attached to real property
i. The UCC does not provide a definition of “fixtures” à ordinary building materials that
are incorporated into an improvement on land (ex: bricks, lumber, cement) are
specifically excluded, but all other goods become “fixtures” as provided by local,
non-UCC law
1. Most states define a fixture as a permanent attachment of the goods to real
property
a. Annexation test: measured by the difficulty of removal
b. Intention of parties test: did the parties intend permanence?
c. Some courts have developed different categories of fixtures:
i. Trade fixtures: items of personal property necessary to the
conduct of the tenant’s business, but not permanent (generally
treated as equipment and not fixtures)
ii. Assembled Industrial Plant Doctrine: all items connected with
the operation of a going business are fixtures
2. Mobile homes on leased land: the debtor has the right to remove, not
permanent
3. Pre-fabricated buildings brought onto land may be classified as fixtures if the
owner intended a permanent attachment to the land
4. “Readily removable” factory or office machines are rarely classified as
fixtures
a. If they are, a special rule provides that a SI therein can be perfected
by any method permitted under Article 9 (i.e., special fixture rules do
NOT apply)
i. This is also true for readily removable replacements of

domestic appliances that are consumer goods (ex: window unit
AC)
ii. Priority Among Fixtures: the general rule is that the first to file (either the mortgage
or the fixture filing) will have priority;
1. A fixture filing needs to filed in the real estate records, bc the people you
will have disputes with have mortgages or are taking mortgages—and will be
looking in the real estate records
2. § 9-334(c): a non-PMSI in fixtures (or a PMSI perfected more than 20 days
after the goods become a fixture) loses to prior recorded interests in the
realty even if the fixture financer perfects by a fixture filing
a. Conversely, unrecorded prior interests in the realty are subordinate to
the fixture financer’s perfected SI
3. § 9-334(e): the non-purchase money fixture financer can prevail over
subsequent parties (i.e., later real property mortgagees and buyers) by
making a fixture filing before the subsequent parties obtain rights in the realty
a. If the subsequent claimant to the property is a judicial lien creditor, the
fixture financer can achieve priority by perfecting the SI using ANY
method before the judicial lien attaches to the realty
iii. Special PMSI rule: most SIs in particular fixtures are PMSI’s, and under § 9-334(d)
the PMSI will prevail against existing or future interests in the real estate if:
1. (1) the interest is a PMSI;
2. (2) the PMSI is perfected by a “fixture filing” at the time the goods are affixed
or within 20 days thereafter, and
3. (3) the debtor is the owner or in possession of the real estate;
4. Rationale: this encourages people to allow others to improve their property,
and the mortgagee is okay with it bc it improves their collateral;
5. Fixture Filing (under § 9-102(a)(40) and § 9-501(a)(1)(b)):
a. A perfection of the fixture financer’s SI in the goods
b. Accomplished by filing a financing statement in the place where real
property records are filed;
c. A fixture filing financing statement must recite that it is to be filed in the
real estate records;
d. Must describe the goods;
e. Must contain a description of the related real estate
iv. EXCEPTION TO PMSI FIXTURE RULE: § 9-334(h): Priority of Construction
Mortgage: a construction mortgagee has priority if (1) a record of the mortgage is
recorded before the goods become fixtures, and (2) the goods become fixtures
before the completion of the construction
1. Construction Mortgage: a mortgage is a construction mortgage to the extent
that it secures an obligation incurred for the construction of an improvement
on land (including the acquisition costs for the land), if a recorded record of
the mortgage so indicates
a. A mortgage has priority to the same extent as a construction mortgage
to the extent it is given to refinance a construction mortgage.
2. Maplewood Bank v. Sears: Maplewood was the mortgagee, and

subsequently Sears granted a PMSI on various items used to re-do the
mortgagor’s kitchen. The mortgagor defaulted. The mortgagee foreclosed,
and Sears claimed priority on proceeds from the foreclosure sale.
a. The court held Sears was not entitled to proceeds but limited to the
remedy provided in § 9-604 à either repossess the goods and pay for
any damages to the property or choose not to repossess;
b. The Current Code expressly disregards this holding, and 9-604(b)
allows for the SP to pursue remedies pursuant to 9-604(c)(d) or in
accordance with rights with respect to real property;
i. Accessions and Commingling:
i. Accession: goods attached to other goods (ex: telephone installed in a car)
1. There are no special rules for perfecting SIs in an accession. If the SI in the
accession is perfected when the accession is installed in other goods, its
perfection continues in the accession;
2. Priority: there are not special rules for priorities in accessions use the general
rule of first to file or perfect, with the same exceptions);
a. EXCEPTION: goods installed in automobiles: if a vehicle is covered by
certificate of title on which the SI must be noted to achieve perfection,
then the SP listed on the certificate of title has priority in all accessions
added to the vehicle, no matter whether the accessions are prior or
subsequent to the certificate of title perfection;
ii. Commingling: goods that are physically united with other goods so their identity is
lost in a product
1. Ex: a party takes a SI in baled cotton that the debtor later spins into thread
and then weaves into cloth. The collateral has changed but is still
identifiable, so the SI is not affected à but, if the cotton was spun with rayon,
it is commingled
2. Interest Continues in the Final Product: a perfected SI in goods that have
become part of a product or mass extends to the product or mass if they
have been manufactured, assembled or commingled so that they are no
longer identifiable
3. Competing Interests: if there are several secured parties with an interest in
commingled goods (ex: several types of raw materials combined into one
product), the code ranks the interests of these secured parties equally—so
that each has an interest in the mass or total product in proportion to the
value of the collateral at the time of the commingling
a. It makes no difference when the original interests in the commingled
goods attached and were perfected, they are still treated equally
b. Perfected SI’s have priority over unperfected ones with commingled
goods
j. Federal Priorities for Debts and Taxes: for the most part, federal statutes regarding
secured transactions are registration acts, and say nothing about priority, with the two
exceptions of (1) the general federal priority statute and (2) the federal tax lien act;
i. General Federal Priority Statute: 31 USC 3713
1. A claim of the US Government shall be paid first when:
a. (A) a person indebted to the Government is insolvent and:

i. (i) the debtor without enough property to pay all debt makes a
voluntary assignment of property;
ii. (ii) property of the debtor, if absent, is attached; or
iii. (iii) the act of bankruptcy is committed; or
b. (B) the estate of a deceased debtor, in the custody of an executor or
administrator, is not enough to pay all the debts of the debtor
2. A representative of a person or an estate paying any part of a debt of the
person or estate before paying a claim of the Government is liable to the
extent of the payment for unpaid claims of the Government;
3. EXCEPT: the statute does not provide an exception, but courts have
subordinated federal claims to an earlier lien (judicial, statutory or
consensual) if the lien is choate:
a. Choate: this is hard to predict, but generally a lien is choate if it is
definite as to (1) the identity of the lienor, (2) the amount of the lien,
and (3) the property to which it attaches;
ii. Tax Liens: a federal tax lien arises upon assessment and covers all of the tax
payer’s real and personal property, whether presently owned or after-acquired—and
this prevails over all parties claiming interest except those listed in 6323(a) of the
tax code: “any purchaser, holder of a SI, mechanic’s lienor, or judgment creditor”;
To prevail over these persons, the federal tax lien must be filed in the place
designated under state law
1. Practical Matter: this comes up a lot bc the typical business man that cannot
pay his creditors will not pay his taxes either, and the government is usually
the first person that he does not pay (bc he still has to pay his employees, or
suppliers, etc…)
2. General Rule: The Tax Lien has priority over all other unperfected interests in
real or personal property—so if you are perfected then you can beat out a
subsequent tax lien
3. Tax Liens and After-Acquired Property: after-acquired property of the debtor
(inventory, chattel paper, instruments and accounts) that come into existence
within 45 days of the federal tax lien being filed are senior to the federal tax
lien
a. But inventory or other after acquired property that comes in 45 days
after the filing of the tax lien will not have priority over the tax lien
4. Tax Liens and Future Advances: so long as the SP does not know about an
existing tax lien, future advances made within 45 days of the filing of the tax
lien still have priority
a. If the SP knows of the tax lien, or the advance was made over 45 days
following the filing of the tax lien, then the SP will be subordinate to
the tax lien
VII. Bankruptcy and Article 9:
a. Key thing: determine whether the creditor perfected a SI
i. If the creditor has done all the UCC requires to perfect a SI, the collateral can be
reclaimed from the bankruptcy estate and used to satisfy the debt
1. Perfected SI cannot be a fraudulent conveyance
2. Perfected SI cannot be a preference

ii. Even if the SP’s interest withstands attack, there is no assurance the debt will be
paid in full
1. Debtor may have disposed of part of the collateral
2. Resale may not repay the debt (a discharge in bankruptcy frees the debtor
from further personal liability for the deficiency)
3. A secured creditor must seek permission of the court or trustee to enforce his
rights
b. Filing a bankruptcy petition creates an automatic stay to any credit collection activity, and
creditors may only pursue their rights through the bankruptcy proceeding
i. Bankruptcy is a federal procedure initiated by filing a petition in bankruptcy and tried
before a bankruptcy judge
ii. A trustee takes title to all of the debtor’s property and investigates the claims to the
property
1. The trustee in bankruptcy has the following powers:
a. All rights and powers of the debtor
b. Power to aside any transfer (including the creation of a SI) that is
fraudulent as to any existing unsecured creditor
iii. The Strong Arm Clause – gives the trustee the state law status of a judicial lien
creditor with a lien on all of the debtor’s property as of the moment of filing for
bankruptcy;
1. § 9-317(a)(2): allows a judicial lien creditor to avoid unperfected SIs
2. The trustee may use whatever defenses the debtor may have had against
the creditor’s claim (ex: personal defenses like the statute of frauds)
3. The trustee is given the rights and position of any unsecured creditor who
has a claim against the estate
iv. Distribution of debtor’s assets:
1. Property exempt under state law is released
2. Property subject to liens and perfected SIs is generally released to the lien
creditors
3. The remaining property is sold and the proceeds are applied to pa the
Code’s designated creditors and finally the unsecured creditors
c. Preferences: a SI that is neither fraudulent nor attackable by the trustee asserting the
powers of real or hypothetical creditors may still be vulnerable if the perfection of the SI
constitutes a preference
i. A preference is a transfer of any property of the debtor (including the perfection of
an unperfected SI) made to or for the benefit of a credit, on account of an
antecedent (old) debt, made by the debtor while insolvent and within 90 days before
the filing of the bankruptcy petition, the effect of which transfer is to allow the
creditor to obtain a greater percentage of the debt than the creditor could otherwise
have received in the bankruptcy proceeding, and, in a consumer case only, the
aggregate value of all affected property is greater than $600
1. Look at when the loan was made and when perfection occurred: if perfection
occurred within 30 days of the loan being made, you can avoid voidable
preference
a. If Dan loans me $2,000 (taking a SI) on Nov. 1 but does not perfect
his interest until Dec. 15, there is voidable preference
ii. If a challenged transaction meets ALL of the above qualifications, it is voidable by
the trustee in bankruptcy, meaning the “preferred” creditor must repay the money to
the trustee; or, where perfection of an SI is held “preferential”, that the SI is simply
invalid and the creditor becomes a “general” (unsecured) creditor
iii. Non-preferential payments: payments for value and payments made to a fully
secured creditor (i.e., with collateral worth as much or more than the debt owed) are
not voidable as preferences, even if made on the eve of bankruptcy
iv. A transfer is preferential only if it was made while the debtor was insolvent
1. Presumption of insolvency: the trustee must demonstrate that the debtor was
insolvent (meaning the debtor had more debts than assets) at the time of the
transfer, but this task is made easier by the Code’s presumption that the
debtor was insolvent during the 90 days preceding the filing of the petition
v. Ever if a transfer qualifies as a preference, the trustee may not avoid it if:
1. The parties intended a contemporaneous exchange or the transfer was in
fact substantially contemporaneous
a. Ex: bank loaned debtor money and two hours later, the debtor signed
the SA giving the bank a SI in the debtor’s inventory à no preference
2. Payments made in the ordinary course of the debtor’s business or financial
affairs (if made according to ordinary business terms) are not preferential
a. This would exempt routine payments (ex: monthly phone bill) to all
secured or unsecured creditors
vi. When the preferred creditor was an “insider” who received a preferential transfer in
the period between 90 days and one year before the filing of the petition, the trustee
can recover the property transferred if the insider had reasonable cause to believe
the D was insolvent at the time of transfer
1. An “insider” is someone having a close connection with the debtor (family,
friends, etc.)
vii. In determining whether a voidable preference has been created, focus on the time
of “transfer”
1. Personal property: transfer is complete when a general creditor of the debtor
could not longer have secured a superior lien to the property by suing the
debtor on the debt and levying an attachment on the collateral
2. Real property: whether a bona fide purchaser of the property could have
obtained right superior to those of the SP
3. There is no requirement that such a general creditor or bona fide purchaser
actually exists, only that a hypothetical one could have achieved a higher
priority within 90 days of bankruptcy
4. Grace periods: if a purchase money secured creditor perfects within 30 days
after the debtor receives possession of the property, no preference occurs
(even if the creditor gave value prior to the debtor’s possession, so that the
attachment of the SI now protects an antecedent debt)
a. The Bankruptcy Code gives other creditors a 30-day grace period
(running from when the transfer takes effect between the parties,
rather than filing) in which to perfect
d. After-Acquired Property: the Floating Lien in Bankruptcy: the trustee often argues that
collateral first falling under the floating lien during the preference period is recoverable as a
preferential transfer
i. § 547(c)(5): the trustee may not avoid a transfer that creates a perfected SI in
inventory or a receivable, or the proceeds of either (even if first acquired in the 90
days, or 1 year for insiders, prior to the petition)
1. Exception: if in the 90-day period (or 1 year for insiders), the SP has the
debtor “build up” (i.e., acquire more inventory or accounts receivable than
were present at the start), a preference occurs if unsecured creditors are
harmed due to the build up
2. Ex: Dan has inventory that was subject to a prior perfected floating lien in
favor of ABC Bank. On Feb. 1, the inventory was worth $50K and Dan owed
ABC $100K. By May 1, additional inventory had been purchased so that it
was then worth $75K. Dan still owed ABC $100K
a. To the extent Dan has “built up” ($25K), there is a voidable preference
e. Fraudulent Transfers: under § 548 or § 544(b) of the Bankruptcy Code, the trustee can
avoid any transfer (which includes creating Article 9 SIs) that is a fraudulent transfer.
Generally, there are two types of fraudulent transfers:
i. (1) where the transferee from an insolvent debtor does not give the reasonably
equivalent value in exchange (this does not mean the fair market value, but
something less than that)
1. When people are in financial trouble, they will sell off their property for less
than its value, but this does not necessarily mean that it is a fraudulent
transfer
ii. (2) where the transferor and the transferee have the actual intent to defraud the
debtor’s creditors
f. Non-consensual liens and the Trustee:
i. Judicial Liens: § 547 (b) of the bankruptcy code deems all judicial liens acquired by
a creditor within 90 days preceding the bankruptcy filing as preferential
ii. Statutory Liens: they are effective under section 545 against the trustee if (a) they
would be good against a BFP and (b) they do not arise only on insolvency
VIII. Proceeds
a. § 9-102(64): anything received by the debtor on the sale, lease, exchange or other
disposition of the collateral, whether or not authorized by the creditor
b. Problems in proceeds arise when the debtor exchanges collateral covered by a security
agreement for other goods that are not adequately described in the financing statement, or
when the debtor receives cash for the collateral and uses that cash to buy new goods
c. § 9-315(a): no express reference to “proceeds” is required in the security agreement or the
financing statement. The SP’s rights in the proceeds are deemed to automatically arise by
operation of law
d. § 9-315(c): a SI in proceeds is a perfected SI if the SI in the original collateral was
perfected
i. The date of priority in the proceeds will be the same as that of the original collateral
e. Same filing office- no new perfection required: if a financing statement is already on file in
the office where the proceeds should be filed, the creditor does not need to do anything to
continue its perfection, even if the filed financing statement is misleading when applied to
the proceeds
f. Proceeds of cash proceeds- 20 day rule: the SP is given temporary perfection in the
second generation proceeds for only 20 days and must file a new financing statement
describing the second generation proceeds in the appropriate office within that period or
lose its perfection
g. Cash proceeds: perfection of a SI in the original collateral continues in cash proceeds of
the collateral as long as the cash proceeds are still identifiable
i. Whether cash proceeds are “identifiable” is left to common law
h. If a creditor has a perfected SI in the original collateral and neither the same office or cash
proceeds rule applies to proceeds of the collateral, the creditor must obtain a perfected SI
in the proceeds within 20 days after the debtor receives the proceeds to retain its perfected
SI
i. Rules of Priority:
i. Usual priority rules (first to file or perfect) govern most of the time
ii. Accounts as “proceeds” of inventory:
1. Wherever a SI exists in the debtor’s inventory and another SI exists in the
debtor’s accounts receivable, a conflict will exist if the debtor sells the
inventory on credit, since the “proceeds” of inventory will be an account
receivable
2. Chattel paper, instrument, and cash proceeds of PMSIs in inventory: the
super-priority given to a PMSI in new inventory continues in the chattel
paper, instrument and cash proceeds of the sale of such collateral
iii. Chattel paper as proceeds:
1. If the purchaser of chattel paper gives new value for it and takes possession
in the ordinary course of business, the purchaser has a priority over another
SI in the chattel paper that is claimed merely as proceeds of inventory
subject to a SI
a. This is true even though the purchaser of the chattel paper knows that
the paper being sought is subject to the SI
b. This allows chattel paper purchasers to prevail of the PMSI creditor
2. If the chattel paper is subject to a SI perfected other than as proceeds of
inventory, the purchaser of chattel paper must not only give new value and
take possession, but must also take without knowledge that that purchase
violated the rights of the SP
a. A SP claiming an interest in chattel paper other than as a mere claim
to proceeds can get protection and still allow the debtor to retain
possession of the paper by stamping or marking the paper with a
notice of the assignment
j. Returned goods: the original SI in the goods continues (re-attaches) in returned goods
i. This is true regardless of the reason for their return as long as they go back into the
inventory
ii. If the original SI was perfected by a filing that is still effective, nothing further is
required to continue the perfection
1. Otherwise, the SP must take possession of the returned goods or file to

perfect
iii. If the debtor repossesses goods that it sold, the rights of the various creditors of the
debtor do not attach to the repossessed item until it becomes the property of the
debtor again
iv. If the sale of the goods has created chattel paper or an account receivable, a
purchaser of the chattel paper or account has a SI in the returned goods, which is
good against the debtor (retailer) who sold the chattel paper or account
v. The SI in returned goods must be perfected for protection against creditors of the
transferor, as well as purchasers of the returned or repossessed goods
1. Perfection of the original SI does not carry over automatically to the returned
goods, as it does where the SP originally financed the inventory
a. The chattel paper or account financer must take steps within 20 days
to get perfection as to the returned goods by filing or by taking
possession of them
vi. If a dealer has financing arrangements with two separate parties: the SI of a
purchaser in chattel paper has priority over that of an inventory financer if the
purchaser of the chattel paper gave value for the paper and took it in the ordinary
course of business
k. Farmers Co-op v. Union State Bank: the debtor owned a hog farm that was primarily
financed by Union State, where he granted an interest in his equipment, fixtures, livestock,
supplies, etc… The debtor also entered into several purchase money security agreements
to enable him to buy feed for his hogs, where he granted a PMSI in the feed and his feeder
hogs. The debtor went bankrupt, and a dispute arose as to who had priority in the hogs.
i. Farmers Co-op argued that their PMSI in the feed continued to the hogs as
proceeds of the feed—bc they consumed the feed and were the product of fattened
livestock
ii. The court held that ingestion and biological transformation of feed was not the type
of “other disposition” within the contemplation of the code—and the hogs were not
proceeds of the feed
l. Insurance Money as Proceeds: the code does not usually regulate insurance policies as
collateral—but where insurance payments qualify as proceeds, they will be governed by
Article 9
i. Ex: If a car is collateral, but the car is destroyed in a traffic mishap. When the car
owner receives compensation from an insurance company, the insurance money is
proceeds and the SI in the car will attach to the money
ii. This applies to tort claims as well
m. Accounts as Proceeds:
i. Ex: If the car owner sells the car and deposits the buyer’s money in a bank account,
the account is now proceeds, and the car money can be traced into the bank
account and tapped by the unpaid secured creditor
IX. Default
a. Article 9 does not say what conditions constitute a default à this is determined by the
provisions of the SA
i. The UCC does specify certain remedies for the creditor, although the parties can
choose others
b. Occurrence of Default: the following clauses are frequently included in security

agreements
i. Acceleration clauses: gives the SP the option of declaring the entire unpaid balance
of the obligation immediately due upon the occurrence of some default
1. The SP’s right to accelerate is limited to cases where he in good faith
believes that the prospect or payment of performance is impaired
2. The burden is on the debtor to show that the SP was not acting in good faith
ii. Insecurity clauses: SP can have the right to declare the entire obligation due “at will”
or in the event the SP deems himself insecure
1. Standards of good faith apply (courts are split as to whether good faith is a
subjective or objective test)
iii. Waiver of defenses against assignees: to facilitate financing and negotiability, SA’s
frequently contain provisions by which the borrower or buyer agrees to “waive” (as
against any assignee of the seller or lender) whatever defenses the borrower might
have if the seller or lender sued directly
1. This assures the assignee will be able to invoke default remedies if the
debtor fails to make payments due
2. Waivers are valid if the assignee purchased the agreement in good faith and
without notice of any defenses that the buyer or borrower might have against
the assignor-seller
a. Good faith is construed narrowly to disqualify assignees who are in
collusion with the assignor
b. Exception: consumer goods: the validity of waiver must be determined
by other statutes or decisional laws
iv. Time is of the essence clauses: failure to make any payment on time is so serious
that the SP may declare a default and repossess the collateral
1. May be waived if the creditor routinely accepts late payments (to combat this,
the SA may specifically state that the acceptance of late payments does not
result in waiver; however, most courts hold that routinely accepting late
payments waives the anti-waiver clause, which can only then be reinstated
by a warning that the waiver has ceased and payments must be made on
time)
c. If the debtor moves states without telling the SP, changes names without telling the SP, or
does not maintain insurance, etc… the court will not automatically interpret default
d. Remedies:
i. Under the UCC, the SP’s rights and remedies are cumulative
ii. Three basic remedies:
1. Retention of the collateral
2. Sale of disposition of the collateral
3. An action for the debt
iii. The UCC does not allow the SP to make a profit at the expense of the debtor by
compounding remedies, but the pursuit of one remedy does not bar pursuit of a
subsequent remedy until the party is made whole
iv. If the collateral consists of a document of title (ex: warehouse receipt, bill of lading),
the SP may proceed against either the documents or the underlying goods
v. When a SI applies to collateral that involves both real and personal property (ex: a
SI in a factory (real) and its inventory (personal)), the SP may proceed against the
entire collateral under the procedures governing real property (UCC does not
apply!)
1. Alternatively, the SP may exercise UCC remedies with respect to the
collateral consisting of personal property
e. Right of Possession upon Default:
i. The UCC grants the SP the right to take possession of the collateral upon default,
provided the parties have not agreed otherwise
1. Repossession sets the stage for other remedies, such as sale of the
collateral to satisfy debt
ii. As long as possession of the collateral can be obtained without a breach of the
peace, the SP may proceed to seize it without judicial process
1. Otherwise, legal proceeding are required
2. A repossession made over any protest by the debtor or anyone present
constitutes a breach of the peace, even though no violence or significant
disturbance occurs
a. However, when a protest stops an attempted repossession, nothing
stops the creditor from trying again
3. A peaceful repossession by a creditor with a weapon constitutes a breach of
the peace, as does a phony show of legal authority
a. Such acts contain implied threats and are not “peaceful”
4. Many courts hold that breaking and entering is a breach of the peace, even if
the SA authorizes the same
a. Mere trespass is not usually considered a breach of the peace
5. Repossession under false pretenses (ex: calling debtor to “bring in your car,
bc it’s been recalled and we want to fix it”) are unfair, but usually held valid
by courts
6. A creditor who breaches the peace loses the authorization to repossess
without court aid
a. If the creditor continues to repossess, the debtor may sue for
conversion and recover actual (and frequently punitive) damages
7. In considering whether a breach of the peace occurred, courts should hold
the SP responsible for actions of others taken on behalf of the SP
iii. Requirement of notice: absent a provision in the SA, a creditor is not required to
give the debtor notice of repossession
1. Exception: if the language of the SA expressly or impliedly requires the SP to
give a pre-repossession notice, a creditor who seizes the property without
first complying is subject to an action for conversion and possibly punitive
damages
2. After repossession, the creditor may wish to resell the collateral and sue the
debtor for the amount still due à UCC requires notice of the time and place of
resale
iv. Unconscionability: where a SA provision involves an unreasonable forfeiture of the
debtor’s equity, the debtor may attack the provisions of the SA authorizing
repossession and claim unconscionability
v. The SA may require the debtor, upon default, to assemble the collateral at a
specified place, reasonably convenient to both parties
vi. When the collateral is equipment, the SP may render the equipment unusable (ex:
removing a necessary part) on the debtor’s premises and then may dispose of the
collateral (ex: sell it) on the same premises
1. Limitation: the SP is still bound by standards of commercial reasonableness
vii. After taking possession, the SP assumes the same duties as a party who perfects
by possession
1. Possessor must take reasonable care of the collateral (maintain, insure
upkeep, etc.)
2. When repossessing the collateral, if the creditor comes into possession of
other personal property (ex: golf clubs in the trunk of a repossessed car), the
debtor may be able to sue for conversion
a. Most SA’s have a clause authorizing the SP to repossess “the
collateral and all property contained therein, the property not covered
by the SI to be returned promptly”
f. Realizing on the Collateral:
i. Strict foreclosure: after repossession, the creditor may elect to keep the goods in full
or partial satisfaction of the debt
1. SP may try to do this when he is over secured by the collateral
a. Ex: debt of $18K, secured by a car worth $26K
2. Exception: consumer goods: where the collateral is consumer goods and the
debtor has repaid at least 60% of the principal debt, the credit must resell the
collateral within 90 days of repossession (or within a longer period if the
debtor agrees) and turn over any excess to the debtor
a. Debtor’s right to resale may be waived only after default
3. A creditor electing strict foreclosure must send an authenticated notice to the
debtor and other creditors with interests in the collateral who have sent an
authenticated notice of their interests to the repossessing creditor or who
have filed a financing statement
a. Those notified have 20 days in which to object and force the creditor
to sell the collateral
4. A creditor wishing to retain collateral in partial satisfaction of the debt must
also acquire the debtor’s consent in an authenticated record
a. This remedy is only available for collateral that is NOT consumer
goods
ii. Disposition of the Collateral by Sale:
1. The SP is not restricted to sale, but is permitted to sell, lease, license or
otherwise dispose of the collateral
a. Code permits either private or public sale
b. SP may pursue debtor for any unpaid amount (deficiency)
2. In order to sell, the SP must act in good faith and in a commercially
reasonable manner
a. Every aspect of the disposition, including the method, manner, time,
place and terms of sale must be completely reasonable
b. In any ensuing litigation, the SP has the burden of proving that the
sale was commercially reasonable
c. Failure to advertise or solicit purchasers for the sale evidences a lack
of commercial reasonableness
3. Authenticated notice of the sale of the collateral must be given to the debtor
and certain other persons, except where the collateral is perishable (i.e.,
likely to decline speedily in value) or is of a type sold in a recognized market
(ex: stocks and bonds)
a. The authenticated notice is sufficient if it contains:
i. A description of the debtor and the SP
ii. A description of the collateral
iii. The method of sale (private or public)
iv. The time and place of a public sale, or the time at which a
private sale will be made (in case D wants to redeem); and
v. A statement that the D is entitled to an accounting for the
unpaid indebtedness and the charge for performing the
accounting
b. Additional notice requirements for consumer goods:
i. Describe the liability for a deficiency (the amount still due after
the resale)
ii. Contain a telephone number to find out the amount that must
be paid to the SP to redeem the collateral; and
iii. Contain a telephone number or mailing address from which
additional information concerning the disposition and the
obligation secured is available
c. The C must take reasonable steps to make sure notice is received by
the D
d. Persons to be notified include:
i. Debtor: waiving notice of sale in the SA is void as a matter of
law (however, after default, the debtor may sign a statement
renouncing or modifying the debtor’s right to notice of sale
ii. Sureties: co-signers, sureties, and guarantors of the debtor’s
obligation
iii. Other creditors of record: if the collateral is non-consumer
goods, the SP must also send a notification to all creditors who
have filed a financing statement as to this collateral in the 10
days before notice is required to be send, and also to any other
person from which the SP has received, before the notification
date, an authenticated notification of a claim of an interest in
the collateral
e. “Recognized market”: notice not required
i. Limited to auction markets (ex: grain markets, stock market)
where goods are fungible
ii. Cars are NOT sold on a recognized market
f. Notice must be send after default and a reasonable time before the
date of disposition of the collateral
i. In non-consumer transactions, if the SP sends the notice at

least 10 days before the earliest possible disposition of the
collateral, the notice is timely sent and cannot later be attacked
(creating a “safe harbor” for the creditor to rely on)
ii. The safe harbor rule does not apply to consumer goods à
reasonableness of notice is decided case-by-case
4. SP’s right to bid for collateral:
a. Public sale: SP has the right to purchase
b. Private sale: SP is entitled to bid for the goods only if they are of a
type customarily sold in a recognized market or are of a type subject
to standard price quotations
5. Application of proceeds: applied in turn to:
a. The expenses of the SP in connection with the default
i. Entitled to expenses incurred in sale (including legal expenses
and reasonable attorneys’ fees if provided for in the SA), any
costs in taking or holding the collateral, and reimbursement for
any improvement or processing of the collateral undertaken to
make it more marketable
b. The debt owed the SP
i. After initial expenses, proceeds are applied to the obligation
upon which the debtor has defaulted and under which the
disposition of the collateral is made
c. The indebtedness owed to junior creditors having interests in the
collateral
i. Junior creditor must send an authenticated demand for
payment
ii. Paid in order of their priority
6. Surplus and deficiency:
a. The SP must give the debtor any surplus proceeds that are left after
the above disbursements
i. The debtor is liable for any deficiency
b. Computing amount of surplus or deficiency: the amount received on
the sale of the collateral is usually the basis for determining whether
there is a surplus or deficiency
i. Receiving a low price is not enough to make a sale
commercially unreasonable
ii. Collusive sales: if the buyer at resale is the creditor, a person
related to the creditor, or a party owing a supporting obligation,
and the amount of the proceeds of the resale is significantly
below what an independent person would have paid, there is a
presumption that the surplus should be determined based on
what the independent person would have paid, rather than what
was actually paid
iii. Accounting to consumers: in a consumer transaction, a creditor
must send a debtor an explanation of how a deficiency or
surplus was calculated before the creditor pays a surplus or
makes a demand for a deficiency (and in any event within 14

days after a debtor’s demand)
1. If a consumer owes a deficiency but the creditor decides
not to collect it, the creditor must send the consumer a
statement waiving its right to a deficiency within 14 days
of the debtor’s request
2. If the creditor does not these requirements, it will be
liable for actual damages plus $500 in punitive damages
c. Possible loss of deficiency in non-complying resale:
i. In a non-consumer transaction, if a resale is not commercially
reasonable, there is a rebuttable presumption that a foreclosure
sale following the Code default rules would have brought the
amount still due (i.e., it is rebuttably presumed that the debtor
does not owe a deficiency)
d. No statutory rule in consumer cases:
i. A consumer may recover punitive damages for creditor non-
compliance
7. Rights of purchaser of collateral:
a. The purchaser of the collateral takes all of the debtor’s rights
i. Free of secured interests of all junior creditors
ii. Subject to secured interests of senior creditors
b. A sale by a repossessing creditor gives rise to all the usual warranties
iii. Allowing Debtor to Retain Collateral and Suing on Debt:
1. The SP may allow the debtor to keep the collateral and sue on the debt
2. The SP’s judgment lien dates back to the perfection of the original SI
g. Debtor’s Right to Redemption:
i. Prior to resale, the debtor may redeem the collateral by tendering the debt owed at
the time of redemption plus expenses of repossession
ii. A debtor CANNOT waive the right of redemption prior to default
h. Effect of Failure to Comply with Default Provisions:
i. If the SP does not comply with the default provisions of the Code, the debtor may
seek judicial direction as to disposition of the collateral, or may wait until the goods
have been disposed of and proceed against the SP for damages
ii. Penalty for SP’s Noncompliance:
1. If the creditor fails to comply with the default rules of Article 9, the creditor will
be liable for actual damages (and, in certain cases, $500 in punitive)
2. In consumer goods cases, minimum damages are 10% of the finance charge
or the time-price differential plus 10% of the cash price
i. Non-Waivable Rights under the Security Agreement:
i. Debtors may not waive the following rights in advance of default, although the
parties ma agree on standards for performance of these rights:
1. Accounting for surplus
2. Notice requirements
a. Exception: after default, the debtor may waive notice of sale of the
collateral
3. Discharge upon retention
a. The debtor is entitled to a discharge of the obligation to the extent it is

satisfied if the creditor retains the collateral in full or partial satisfaction
of the debt
4. Right of redemption
a. This right may be waived only after default
5. Liability for failure to comply
6. Waiver of rights by guarantor
a. Sureties, guarantors, and co-signers have the same non-waivable
rights as the debtor
j. Special Default Rules for Intangibles and Fixtures:
i. Intangibles:
1. If the collateral is accounts or chattel paper, the creditor may give notice to
and collect directly from the account or chattel paper obligors
ii. Fixtures and Related Interests:
1. A creditor with priority may remove the fixture or accession but must pay the
parties other than the debtor for any damage caused to their interests by the
removal

Secured Trans (Good Explanations)

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I. Introduction to Secured Transactions

1. § 9-109(d)(4-(d)(7): excludes the transfers of accounts, chattel paper, etc.

ii. Quasi-Tangible Property (pieces of paper used as collateral):

a. Be authenticated by the debtor; and

2. Commercial tort claims: an after-acquired property

i. In that case, the financing statement is effective to perfect

c. § 9-313(c): an escrow arrangement can indirectly establish perfection

ii. Garage sale exception: automatic perfection for consumer

1. Some courts say that loaning additional money and not

1. So when courts use this test, the assignee must be both

ii. § 9-314(a): a SI in investment property, deposit accounts, letter-of-credit rights, or

1. If the collateral is transferred to a new debtor located in another jurisdiction,

c. When do you become a lien creditor?

a. This is troubling, bc subsequent creditors would not be on notice that

i. It does not know of the purchase money interest but instead

ii. Control over Investment Property:

d. The SI was created by the buyer’s seller

a. Seller’s interest: an insolvent buyer who orders goods on credit

i. This is also true for readily removable replacements of

2. Maplewood Bank v. Sears: Maplewood was the mortgagee, and

a. (A) a person indebted to the Government is insolvent and:

2. Perfected SI cannot be a preference

1. Otherwise, the SP must take possession of the returned goods or file to

b. Occurrence of Default: the following clauses are frequently included in security

i. In non-consumer transactions, if the SP sends the notice at

makes a demand for a deficiency (and in any event within 14

a. The debtor is entitled to a discharge of the obligation to the extent it is

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