Yea thru the valley of the debts meyer has led us

Tho I fear no evil

Because the debtor pays filing fees
And file I must when cause is almost just.

1. INTRODUCTORY TERMS

A. Voluntary Credit Transactions

1. Credit Sales – purchase but no payment (pay on time)
2. Loans – borrow money to do something
• All definitions are found in either 9-102 or 1-201 and 9-102
trumps in the case that there are any discrepancies between
definitions in the two sections.
• Start w/ Art. 9. Then go to other UCC provisions. If not in
UCC, 1-103 says that common law controls.
• Remember that Unsecured Parties can include those obligated
through involuntary credit transactions. Such as Tortfeasor (D) and
injured party (CR).
• A defendant in a patent infringement suit. If someone gets a
judgment, they are a creditor, they owe someone.
• If person has a positive balance in their bank account, the Bank is
the D (b/c they’re borrowing your money) and you are the CR.
• 3d parties include:
(a) Buyer #2 who buys from Buyer #1
(b) Trustee in bankruptcy
(c) Bank #2 who loans you money after Bank #1.

Credit Sale--

Bank #2 (can use good as collateral)

Bank Borrower-D TIB (trustee in bankruptcy)
Buyer #2 (sells good to buyer)

3d parties to a loan –
Bank #2
Bank Borrower-D TIB
Buyer #2

If there is a D-creditor relationship created, what are the rights of that creditor as against
third parties. That is where almost all of the litigation is. The very same issues apply to
both above.
 B. Difference B/W Unsecured and Secured CRs

Types of Credit –

UNSECURED
CREDIT REAL PROPERTY
SECURED
PERSONAL PROPERTY *****(this course)
D has given a specific interest
in specific property by K to CR
to ensure performance

1. Kinds of Unsecured Credit –

• Seller credit cards are for dealings only w/ that seller that
allow D to buy on time
• Bank Credit Cards
• Employment
• Services (medical, legal, dental, plumber, mechanic, etc . . .)
• Utilities (phone, electric, gas, water, cable, etc . . .)
• Student Loans are Signatory loans where we sign a
promissory note promising to pay but no interest in D’s property
is established.

Hypo #1: Enforcement of Judicial Lien –

Car
1/2/00 – CR D
$10K Prom. Note promising to pay in 8 mos.

8/2/00 – D defaults

 CR is a “unsecured creditor”.
 Since the PN gave CR no interest in the car, the car is no longer CR’s and CR
cannot get it back upon D’s default.
 CR must sue D for unpaid debt, get a judgment (normally a default judgment), get a
writ of execution directing the sheriff to seize the non-exempt property of D, sell the
property, and satisfy the amount of debt outstanding.
 If CR would have had a security agreement, CR would have had the right to
repossess the car.

• Without a Security Interest, the CR has no right to get the property back on his own.
• K.S.A. § 60-2304(c) – Exempt property from seizure and sale. Includes
transportation regularly used and costing less than $20K. The car above is exempt
from seizure and sale (not all states have exact, but all states have these exempting

2
 statutes). Attachment reference in statute is not to Article 9, but rather a pre-
judgment creditor’s remedy.

Same facts as hypo except for there was a security agreement signed. Does the
exemption, like the Kansas one above, apply? NO, the exemption statute does not
apply because the security agreement is created by contract.

Simply put, a perfected secured creditor is going to win against anyone in a claim in the
property.

C. Difference B/W Security Interest, Judicial Lien, and Statutory Lien

1. Lien Creditor (Judicial Lien) – 9-102(a)(52)(A) – CR has acquired a
lien on property involved by attachment, levy, or the like.
• CR in above example was a lien CR when the sheriff took
control of the car, but not before control over the property
existed.
• Non-consensual
2. Trustee in Bankruptcy – 9-102(a)(52)(C) – tib is automatically a lien
CR upon the date that the petition for bankr. is filed. Exemptions
don’t apply to tib
3. Statutory Lien – Status liens created by operation of law. Example:
Mechanics have a labor lien in services provided for your car. The
law says you pay for the work done, or the mechanic has the legal
right to keep the car until payment is made. Non-consensual.
4. Consensual Lien – Creation of SI by K pursuant to a SA.

D. Secured Creditors
1. 9-201(a) – EFFECTIVENESS – Except as provided for elsewhere
in Art. 9, Security Agreement (SA) is good b/w the parties, agst
purchasers of the collateral, and agst other CRs.
2. Not subject to exemption rules like Unsec. CRs are
3. Sec. CR are usually protected in Bankruptcy
4. Sec. CR are protected against 3d parties
5. Sec. CR can obtain reimbursement easier and quicker.

Hypo. #2(a) –
1/2/00 – S sells barrels on Unsecured Credit to D
2/1/00 – D borrows $ from Bank → PSI in all D’s assets
6/1/00 – D files Bkcy petition

 Bk’s PSI → paid off in whole if D’s assets equal or are greater than the unpaid debt.
 S will receive little or nothing at all (b/c Unsec. CR)
 The absolute “safest” thing this seller could have done was make the sell a “cash
sell”
 The secured part of SC is the value of the collateral.

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Hypo. #2(b) –
1/2/00 – Bank loans money to D; D gives SI in all EQ and Inv.
1/2/00 – Bank files proper FS in proper place
2/1/00 – S sells to D on unsecured credit
7/1/00 – D files Bkcy petition

 Bk’s wins to extent the secured collateral covers the unpaid debt. Bk’s filing of the
FS put the world on notice of its PSI and S could have found out that the D was
being financed
 Perfection puts the world on “notice”. S could have looked and called Bk to find out
about financing and security agreement.

Hypo. #3 –
Bank financing D’s production of implants; Bk has PSI
D was sued in tort by thousands of woman
D files Bkcy petition

 Bk. will be paid off first from D’s liquidated assets. The tort claimants will receive
very little, they are classified as unsecured creditors.
 There are no “choices” here in terms of credit decisions. There is no way to plan
around the secured creditors. Employees would also fall into the realm of unsecured
creditors in such a situation.
 Article 9 does not make any judgments on priority of unsecured creditors.
 How should Article 9 respond this type of situation?

E. Consumer D (9-102(a)(22)) vs. Commercial D

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II. ATTACHMENT – § 9-203, § 9-204

A. Generally – When does CR get a SI that is enforceable against D’s

property? Essential for SI to be enforceable b/w CR and D.
1. Definitions
• Debtor– 9-102(a)(28)(A) = Buyer
• Secured Party – 9-102(a)(72)(A) = Seller
• Security Agreement – 9-102(a)(73) = K creating SI
• Security Interest – 1-201(37)(first paragraph) = granting
interest to CR in property possessed by D
• Collateral – 9-102(a)(12) = D’s property that the interest is
created in

B. Three Requirements of Attachment under 9-203(b)

1. CR must give value (1-201(44)); includes giving the D money or
allowing D to have access to a line of credit, and
2. D must have rights to collateral or power to transfer rights in
collateral, and
3. A SA must exist. (1-201(3); 9-102(a)(73)) (WHAT SATISFIES AS
WRITING)
(a) D must authenticate the SA’s description of the collateral,
(Authenticate = to “sign” or signature by electronic device/e-
mail 9-102(a)(7)) Has to be an appropriate authentication
and have a sufficient description of the collateral.

EXCEPTIONS to non-authenticated security agreement which still

fall under the statute in subsections (B)-(D)
(b) CR must have possession of collateral (authentication not
required);
(c) Collateral is a certificated (8-301) security and has been
delivered to CR, or
(d) CR has control of the collateral that is a deposit acct,
electronic chattel paper, etc . . .

♦ 2 types of credit transactions –

Credit Sales – 9-203(1), (2), (3)(B) occur at time of sale
Loan – Bk won’t agree to extend credit until know whether other CR
have interest in the collateral.
♦ All 3 requirements may not happen at the same time, but they must
all happen for Attachment to occur.

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Hypo. #1 –
1/1/00 FS filed – Coll. = “all widgets owned by D”

2/1/00 D’s manager sends letter to CR saying” I, debtor’s manager, enclose FS giving
you a SI in all widgets owned by D.” Singed by D’s manager.

3/1/00 D signed PN and delivered to CR. PN stated that CR’s interest was secured by
coll. described in 3/1/00’s SA which was never filed.

D has always had possession of widgets.

 Assume 9-203(b)(1) is satisfied and value is given

 9-203(b)(2) is satisfied b/c D was always in possession of the widgets
 9-203(b)(3) → Composite Document Theory
• FS filed (9-502 says that D need not authenticate, only authorize the filing)
• PN signed referring to SA that never existed. PN’s strength is weak.
• LETTER is a much stronger argument for intent if the manager had the
authority to bind the D.

Hypo. #2 –
SA covered Mach, EQ, Furn. and Fixtures; Unintentionally omitted inventory (Inv.) and
accounts receivable (A/C).

Parties intended all to be covered.

FS covered everything

D filed bkcy petition.

Bk claimed SI in inv. And A/R

SA and FS must be considered together
Parties intended inv and A/R

Can the composite document theory be used to bring in Inv. and A/R?

 Composite document theory does not bring Inv. and A/R into the PSI. Need more
than just the FS to bring it in. (If another CR saw a FS covering everything, they
would ask to see the SA and would ultimately rely on what it said was covered.) The
Ct. is unlikely to let other coll. in b/c the SA was unambiguous on its face. But, if
both parties admit mutual mistake, the Ct. may reform the K to what the parties
swear is the correct description.
(Look to see if Sec. CR has possession. If not, then is there some
record in any medium that the terms of the SA could be found in.
Then look to composite document theory)

6
Ironically, compare this Illinois case to Bollinger where there was no security agreement
at all and the creditor won. In this case, the creditor lost, even though a security
agreement existed, but was insufficient in covering two entities.

C. Security Agreement
1. Description
(a) Sufficient if it reasonably identifies what is described. 9-108(a)
(b) Examples of reas. identification. 9-108(b)
• Category = all furniture
• Types of Collateral = Accounts, Chattel Paper,
Documents, Instruments, General Intangibles, Goods
(Consumer Goods, Equipment, Farm Products, Inventory)
(See Old 9-102 for the list)
(c) “All D’s assets/personal property” does NOT reas. identify for
SA purposes (although it is acceptable for FS purposes (9-504)
because a financing statement gives notice and priority, not a
contract like the SA) 9-108(c)
(d) Can’t describe coll. by type when it’s a commercial tort claim or
consumer transaction, consumer goods, etc .. . 9-108(e) BUT
description is sufficient if it satisfies 9-108(a) and contains
descriptive component beyond the “type” alone. ALL
equipment, or ALL farm products is sufficient. ALL crops is
NOT specific enough, it is rather a category.
(e) 9-108 is not intended to be an exclusive list. The use of the
word “example” in 9-108(b) shows that the test really is: “is it a
reasonable identification of the collateral”.

Hypo #3 –
SA makes specific reference to Internat’l Truck and has an omnibus clause. Does that
clause encompass the 2 Oldsmobile cars?

 In re Laminated Veneers Co., Inc., 471 F.2d 1124 (2d Cir. 1973).
 The cars are not “here at the plant” (limited to property) or are going to be
“brought in or installed” later. And the SA specifically lists the truck but not
specifically the cars. Cars aren’t covered. A reas. CR would see the SA and
assume that the cars aren’t covered.
 Strong dissent saying the majority was ludicrous because of the omnibus
clause read “all equipment.
 A way to redraft this correctly is including the wording “all vehicles”. They
also could have said “all equipment, wherever located”. .
 All equipment is not, in and of itself, a fatal error. Just because you use
the buzz words does not mean you will be covered.

7
Hypo #4 –
SA covers Mach, EQ, and Fixtures. Includes specified molds. Does this cover only
specified molds or also other Mach and EQ?

 In re Sarex Corp., 509 F.2d 689 (2d Cir. 1975).

 Same judge that ruled in previous hypo.
 The use of “including” allows reasonable CRs to understand that the coll.
in this SA isn’t limited to only those specified molds. Adequately covers all Mach
and EQ even though the word “all” was not used.
 The sure fire way to not miss anything: “All equipment of every kind
including… but not limited to”

2. After-Acquired Property
(a) It is a rebuttable presumption, based on the nature of
overturning assets, that a SI in inventory and accounts
receivable includes AA Inv. and A/R. (Filtercorp and 9-
204(a))
• CR wouldn’t enter into SA for inv. and A/R when
these coll. don’t continue to exist. They assume that
there’s a “floating lien” on the collateral, reasonably
allowing them to assume that “all Inv. and A/R” includes
present and AA goods.
• The real issue is the construction and the
interpretation of the contract.
(b) 9-108, Cmt. 3 says that SAs failure to explicitly include AA
goods is not covered by UCC because it is a matter the
Drafters punted and left to the courts. (K interpretation
matter)
(c) The EXCEPTION is 9-204(b) → AA Consumer Goods must
be acquired by D w/in 10 days after secured party gives
value. Otherwise, SA is unenforceable as to AA consumer
goods. UCCC and federal rules that regulate lending also
regulate after-acquired consumer goods. If you see after-
acquired consumer goods, a red flag goes up. Federal law
will trump UCC if applicable.
(d) There is no need for financing statements to include
references to after-acquired property. 9-204, Cmt. 7; 9-
502(a)(3); 9-504. FS is treated completely different than SA.

3. Proceeds
(a) The security agreement does not need to specifically refer to
the proceeds of the collateral and is covered as long as it is
(1) proceeds (9-203(f)); and (2) identifiable (9-315(a(2)).

8
 (b) 9-102(a)(12)(A) – Collateral includes Proceeds
(c) 9-102(a)(64) – “Proceeds” includes anything exchanged for
the collateral. Very broad and simply put means “anything
replaced for collateral”.
(d) 9-315(a)(2) – SI attaches to any identifiable proceeds of
collateral
(e) Difference b/w Cash Proceeds (9-102(a)(9)) and Non-Cash
Proceeds (9-102(a)(58))
• Car dealer example handout:
• PN and SA = Non-cash proceeds/chattel
paper;
• Cash payment = Cash proceeds;
• Trade-in & Cash = Non-cash proceeds and
Cash proceeds
(f) 9-203(f) – Attachment of SI in collateral gives Sec. CR rights
to proceeds provided by 9-315(a)(2) (any identifiable
proceeds)
• “Identifiable” is not defined by the code. The closest
definition is that of 9-315(b)’s commingled proceeds
identifiable.
• Cash is hard to identify b/c it’s deposited into accts w/
other cash. Chattel Paper and Trade-in are identifiable.

C. Rights in the Collateral

THIEF------------------------------------------------OWNER

**The questionable rights facts fall within the above extremes

Swets Motor Sales

Cars & Clear Title

S Pruisner P defaulted on obl. to Chy.
Bad Checks PSI in P & S sought cars from P
AA Inv. But Chy. intervened
Chy. Credit

The cars: 9-102(a)(48) – “Inventory” = Any good held by business for sale

In order to prevail, Chrysler must establish the three elements under 9-203.

Chy. must est. a SI in the cars

• 9-203(b)(3)(A) – Written SA
• 9-203(b)(1) – Value given?
“New Value” 9-102(a)(57) isn’t required

9
 “Value” 1-201(44)(b) → Value given for pre-existing debt is
enough.
• 9-203(b)(2) – P has rights in the collateral or the power to
transfer rights in the collateral to a secured party. (the
bolded was added in the 1999 revision and probably codified
Swets).
• Where does the power come from?
2-507(2), Cmt. 3: between two parties, voidable title is
recoverable by seller. However, when third parties are
involved, 2-403(1) protects good faith purchasers.
2-403(1)– Chy. is good faith purchaser with good title. P
bought the cars and obtained voidable, transferable title. P
could create good title to good faith purchaser even though
he paid with a bad check (2-403(1)(b)).
Good Faith def under 9-102(a)(43): “Good faith”
means honesty in fact AND the observance of
reasonable commercial standards of fair dealing.
(This is broader than the good faith standard applied
at the time of Swets)
1-201(32) & (33) – Purchaser includes CR → “any other
voluntary transaction creating an interest in property.
Purchaser includes a “security interest”.
Chy. has SI under 9-203. S is an Unsec. CR.

Moral: S should have required certified funds. The overall reasoning of the harsh result
to S is that S runs the risk of commerce as between S and Chrysler.

First Nat’l Bank v. Pleasant Hollow Farm (p.48 cb)

Production K ‘91
C PH
‘92K Assigned ’91 K

$
Bk Min-Go
SI – ’92 Crop

The Ct found for the Bank and not for C who was the superior Sec. CR.
1-103 Common Law provision allowed the court to estop C from defeating
Bk’s claim b/c C allowed Min-Go to hold itself out as if it owned the
crop. C failed to act in good faith as a reas. business person.

 Can’t go after Collateral until D defaults!!!!! 9-601(a) and 9-609

10
Hypo #1 –
P gives S a check and defaults on the check.

 B/c it was a check given, this is a cash transaction and not a credit transaction
 3-408 – Bank only has to pay S if the check is a properly payable check
 2-507(2) – When ck is dishonored, S has right to get goods back so long as there’s
no 3d party. He doesn’t need a SI b/c he can reclaim the goods within a reas. time.
 2-702(2) – Applies to credit transactions where Buyer says pay in 5 days (for ex.)
Can reclaim goods if within 10 days w/o suing Buyer.
 S has a right to the specific property of P if either of these two statutes apply.
Otherwise, he must get a judgment.

Owner  watch  Jeweler

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III. PERFECTION – 9-308

A. Generally – Puts world on notice that there may be a SI in the particular

property. (9-502 Cmt 2) Essential for CR to be protected agst 3d parties.
1. 9-308(a) → SI is Perfected if Attached and Steps for Perfection are
completed.

B. Five Ways to Perfect

1. Filing – works for almost all goods except those that require cert. of
title. It is usually an alternative way to perfect.
• Filing is only way to perfect for Accts and Gen. Intangibles
• Filing is permissible for goods, chattel paper, documents,
and instruments
• Filing not permissible for money 9-312(b)(3), Deposit Accts
9-312(b)(1), goods subject to certificate of title 9-311(a)(1) & (d)
2. Possession by the secured party
3. Automatic upon attachment (limited)
4. Notation of security interest on certificate of title
5. Control

BASIC PERFECTION RULES

Start with 9-310
(a) says that must file unless (b) exceptions apply.
(b) exceptions include
(b)(2) → perfected upon attachment (includes PMSI in consumer
goods)
(b)(3) → property subject to other statutes such as cars subject to cert.
of title
(b)(5) → certificated securities (stock certificates), securities,
documents, goods or documents that can be perfected w/o filing or
possession
(b)(6) → collateral in the possession of the secured party
(b)(8) → personal property such as deposit accts, and investment
property which is perfected by control
(b)(10) → proceeds
(c) doesn’t require filing when a PSI is assigned to another CR.
Go to 9-501 to determine where to file
Go to 9-502 to determine what FS must include

C. Filing
1. D need only Authorize, NOT Sign (requirement Dropped from 9-
502; 9-509(a)(1) requires D Authorization.)
• Now there is no argument about whether a FS can stand
alone without a SA since D need not sign FS.
• A CR can file a FS and a SA may never be reached. No SA
may ever attach. And this is perfectly acceptable.

12
2. What to File – 9-310 When filing is required and when it’s not
3. Where to File – 9-501 Where to file financing Statement
4. Contents of Financing Statement
(a) Need to look at two places: 9-502(a)(1-3) – Minimum
Identification Requirements. Also see 9-516(b) for additional
requirements including the “right to reject” without the
mailing address of the secured party (4) or mailing address
of the debtor (5)(a).
(b) The filing officer cannot practice discretion if the
requirements (see below) are met. 9-520(a). If the filing
officer wrongfully rejects, 9-516(d) provides that the filing is
effective as a filed record EXCEPT as against a purchaser
(includes a secured party under 1-201(32)-(33) (does not
include TIB because lien creditors do not get an interest in
property voluntarily) of the collateral which gives value (1-
201(44)) in reasonable reliance (must show that they
reasonably searched) upon the absence of the record from
the files. There has been a bill introduced in Congress to
change the rule in effect to a trustee in bankruptcy.

Filing Office’s Rejection of FS

(a) 9-520(a) → Shall refuse for reasons set forth in 9-516(b) and
only for those reasons.
(b) Proper Refusal Reasons 9-516(b)
• Incorrect communication or incorrect medium (b)(1);
• Incorrect filing amount (b)(2);
• Inability to file the record b/c of improper or missing
descriptions (b)(3);
• Failure to include name and address of Sec. CR (b)
(4);
• Failure to include D’s address, identity as ind. or org.,
or type of org (includes debtors name). (b)(5);
• If Incorrect, Go to 9-338 →
• (1) Incorrect FS subordinate to
conflicting PSI where CR gave value in reas.
reliance upon incorrect information;
• (2) Purchaser takes clear of PSI when
he gives value in reas. reliance upon incorrect
information, and in the case of some types of
coll. takes delivery of the collateral.
• Failure to include name assignee if assignment (b)(6);
• Failure to file a continuation statement w/in the final 6
mos (b)(7).
(c) If Improperly Refused, FS is effective except agst purchaser
of coll. who gives value in reas. reliance upon absence of
record from the files. 9-516(c)

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 5. Description of Collateral 9-502(a)(3), 9-504
(a) 9-504 – Sufficient to describe collateral according to 9-108
rules, or to simply state “all assets or personal property of
the D”
• Personal Property = Goods (Consumer Goods, Inv.,
EQ, Farm Products), Accts, Chattel Paper, Documents,
General Intangibles, Letters of Credit, Money 9-102
• Whether “consumer goods” are covered under 9-
504(2)’s blanket provision is unclear. To be safe, if trying
to cover consumer goods in FS, one should follow the
specific type provision of 9-108(e).
(b) There is no need to refer to AA prop or Future Advances in FS.
Only in SA does a need ever present itself. 9-204, Cmt. 7;
9-502, Cmt. 2
(c) D has some control over how the collateral is described. Under
9-509(a)(1), the D must authorize the FS filing. Under 9-
509(b)(1), the CR must describe the collateral in the SA.

Hypo #1 –
SA gives SI in “100 cows w/ @ brand”
FS says “1000 cows w/ @ brand”

 CR has PSI in 100 cows. The SA control whether you have attachment and must
have attachment to achieve perfection. FS desc. cannot expand the amt designated
in the SA. The FS’s language of “1000 cows” is no different than the broad
language allowed under 9-504(2).

Hypo #2 –
SA “1000 cows”
FS “100 cows”

 CR has PSI in 100 cows. Unperf. SI in 900 cows. FS controls the amt of the SA
that is perfected.

Hypo #3(a) –
SA gives SI in all new/used Buicks now or hereafter acquired.
FS describes coll. as inventory.

 “Inventory” satisfies FS description requirement. Indicates collateral included.

Hypo #3(b) –
SA gives SI in all new/used Buicks now owned or AA.
FS describes Coll. as “All Personal Property of D”

14
 9-502(a)(3) requires the FS to indicate the collateral covered. 9-504(2) states that
the FS may sufficiently indicate the coll. covered if it indicates all assets or all pers.
prop. of the D.

Hypo #3(c) –
If this were a consumer transaction at issue.

 9-108(e)(2) says that consumer transactions cannot describe collateral only by type.
A more specific description is needed. “All Personal Property” would fail in the SA,
but not in the FS. (9-504(2))
 9-108(e)(2) → Specificity; created mostly for SA
 9-504(2) → broad; serving notice purpose; reference to 9-108 is only for possible
types of descriptions, not for bringing in the (e)(2) restriction. It doesn’t matter is it’s
a commercial or consumer transaction.

6. Assignment of PSI – 9-310(c) says that when PSI is assigned,

another filing isn’t needed to continue PSI status agst other CRs
and 3d parties. (See In Re Bollinger where Z & J pay of ICC’s
$65K PSI – No new filing needed to give Z & J a PSI)

D. Minor Error Rule

1. Name of D
• FS are filed and indexed by D name 9-519(c)
• D’s name may depend on what kind of entity it is (Ask D for
name and documents supporting that name; What name do
they file 1040 under)
• 9-503(a)(1) → “Registered Organization”; 9-102(a)
(70)
• Ways to find out? Ask, look at incorporation
documents, tax-returns, etc.
• 9-503(a)(4) → “Sole Proprietorship” – D is the
individual
• Ways to find out? Ask, tax-returns, etc.
• Trade Name NOT Legal Name. Trade Name is insufficient.
9-503(c).
• But you could file a “trade name” FS and a correct
one to cover your ass on a Kansas like search logic.
2. Primary function of FS → To give Notice & To establish Priority
3. Minor Error Rule 9-506
(a) Effective unless seriously misleading
(b) Failure to sufficiently provide D’s name is seriously
misleading, except as provided for in (c)
(c) Look at the system used by the filing office to see if seriously
misleading. If the office searches under the D’s correct
name and finds FS → Not seriously misleading. If doesn’t
find FS → Seriously misleading.

15
 • “Standard Search Logic” is not defined. Assume that
most offices have a methodology to find D’s FS. If this
methodology is used, it’s supposed to be a bright line
test.

Don’t Find → Seriously

Misleading
D’s Correct Name Use standard search logic
Find → Not Seriously
Misleading

E. D Changes His Name

1. Comment 2, 9-508 – A name change is not considered a “transfer”
2. 9-507(a) → Filed FS effective w/ respect to coll. that’s sold,
exchanged, leased, etc. if SI continues, despite Sec. CR’s
knowledge or consent to the disposition.
3. 9-507(b) → Except as otherwise provided for in (c) & 9-508, FS not
ineffective if, after FS is filed, the info in FS become seriously
misleading under 9-506.
4. 9-507(c) → Change in D’s Name that becomes seriously misleading
under 9-506
(a) FS is effective to perfect a SI in coll. acquired by D before or
w/in 4 mos after the change and
(b) FS not effective to perfect a SI in coll. acquired by D more
than 4 mos after the change, unless CR files an amendment
to orig. FS that renders the name change not seriously
misleading w/in the 4 mos. after the name change.
5. Editors of Rev. 9 probably “assume” that attachment is present
based on the rules of 9-507.

Hypo #4 –
“A Co.” gives SI in P and AA EQ (Computers) to Sec. CR
Proper FS filed in proper place

(a) –
1/2/00 A Co. changes name to B Co.
A Co. had 10 computers used in Business
4/1/00 B Co. buys 5 new computers
Q → What computers are covered by Old FS?

 Old FS still covers All Computers. 9-507(c) B Co. name would be seriously
misleading under 9-506. But, the new 5 computers were bought w/in 4 mos after the
name change. If CR files amendment to Old FS by 5/1/00, would remain PSI for B
Co.

16
(b) –
1/2/00 A Co. sells 10 computers to C Co.

 FS still covers 10 Computers. 9-315(a)(1) says that PSI follows coll. unless Sec. CR
authorizes the disposition of the coll. free of PSI. 9-507(a) says that FS remains
effective despite sale . . . so long as SI continues.

6. 9-508 → New D Rules

(a) 9-508(a) → New D is bound by FS naming Original D that
created a PSI in coll. that New D now has an interest in to
the extent that FS would have been effective agst the Orig.
D.
(b) 9-102(a)(56) → “New D” is bound by SA previously entered
into by another person
(c) 9-102(a)(60) → “Original D” defined
(d) 9-203(d)(2) → Person becomes bound by SA entered into by
another person if, by law or K (not under UCC), the person
becomes generally obligated for the obligations of the other
person and acquires or succeeds to all or substantially all of
the other person’s assets. (Typically what happens w/
mergers, etc.)
(e) 9-302 -- A transfer of collateral can include a sale, a merger,
and an incorporation.
(f) 9-203(e) → If New D becomes bound, Attachment Exists.
• 9-203(b)(3) is satisfied with respect to P & AA prop. of
New D to the extent the prop. is described in SA.
• No other SA is needed to make SI enforceable.
• See 9-508 Cmt. 3 for Drafters interpretation as
to how to handle these 9-203 provisions.
(g) 9-508(c) says that New D rules don’t apply if 9-507(a)
Disposition rules apply. The transfer of property would have
to be considered a disposition.
(h) 9-508(b) → If New D’s name is seriously misleading as to
Orig. D’s FS (under 9-506 test):
• FS effective as to New D’s coll. acquired before and
w/in 4 mos. after New D becomes bound under 9-203(d)
• FS not effective as to coll. acquired by New D after 4
mos. unless an initial FS providing New D’s name is filed
w/in those 4 mos.
• Summary: Once you have a new debtor, as long as the
original debtor had an “after acquired property” provision, the
new debtor is bound pursuant to 9-203(e). This clearly changes
the outcome of In Re Scott [4]. Is the financing statement still
good? 9-508 leads us to 9-506’s “minor error rule” to determine

17
 if the name is seriously misleading. If the name is seriously
misleading, the old finance statement is effective to assets prior
to the change of entity, AND assets acquired 4 months after the
change. You need to look at “pre-change” assets and “post
change” assets. Assuming there was no specific authorization,
under 9-315(a)(1), the bank security interest follows the
collateral transferred to the new corporation. The only issue is
whether incorporation is a transfer (no specific language but
comments and courts indicate incorporation is so). Transfer of
assets, security interest follows it.

Hypo #5 –
1/2/00 A Co. gives PSI in P & AA EQ to CR 1
1/5/00 A Co. merges w/ D Co.
Under state law, D Co. is required to assume A Co.’s obligations
2/1/00 D Co. PSI in P & AA EQ to CR 2. (Filed FS covering all equipment under D Co.)
3/5/00 D buys EQ #3
8/4/00 D buys EQ #4

Question → CR 1 and CR 2 have PSI in all of D Co’s EQ?

 D Co. is a New D. 9-102(a)(56) defines New D.

 Attachment Exists. 9-203(d)(2) says that a New D, D Co., is bound by Original D’s,
A Co., obligations. 9-203(e) says that Attachment exists here regarding the New D’s
existing and AA property to the extent that the property is covered by the Original SA
and that no other agreements need to be made.
 Perfection exists? 9-308(a) says that to perfect there must be a SA and the
perfection plus steps must occur. Since this is EQ in the possession of the D, the
plus step is filing. 9-310(a). 9-508(a) says that FS remains effective unless it is
seriously misleading, 9-508(b), or this is a disposition of the property and not a new
D situation, 9-508(c).
 Since the name of the New D vs. name of Original D is seriously misleading under 9-
508(b), FS perfects the SI of CR 1 for 4 mos after New D becomes bound, unless
during those 4 mos. CR 1 were to file a new FS w/ D Co.’s name.
 CR 1 has PSI in Original EQ and EQ #3. CR 2 has PSI in EQ #4. The Priority Rules
in 9-322(a) support this b/c CR 1 was filed first.

Hypo #6 –
D SA to CR in P & AA Inv. and Proceeds of Inv.
CR perfected SI by filing in D’s name and describing Coll in same way.
1/2/00 D sold assets (10 apple computers) to Buyer, subject to PSI of CR.
Buyer gave SA to CR describing Coll in same way
CR did NOT file a new FS with Buyer.
2/1/00 Buyer buys 10 IBM computers
Q → Does CR have PSI in Inv. now possessed by Buyer? In coll acquired after the
transfer?

18
 Apples: Attachment → 9-315(a)(1) SI continues after disposition of coll to Buyer.
Perfection → 9-507(a) If SI continues, then so does FS. (even if the public
record is not corrected 9-507, Cmt. 3)
 IBMs: Attachment → Assume 2d SA meets the requirements set forth in 9-203(b)
Perfection → No PSI b/c CR didn’t file. Only attachment =
Unperf. SI

F. Place of Filing and Mechanics

1. Correct classification of property
2. Type of perfection required or allowed
(a) Only file for Accts and Gen. Intangibles
(b) Filing permissible for Chattel Paper, Goods, Instruments,
and Documents
(c) Filing is not permissible for Money 9-312(b)(3), Deposit
Accounts 9-312(b)(1), letter of credit rights, and goods
subject to cert. of title statutes 9-311(a)(1) & (d).
3. If Filing, then where to file
(a) Central filing is typically required. 9-501(a)(2)
(b) Local filing may be required for certain types of collateral
• 9-501(a)(1) → real property such as as-extracted coll.
or timber to be cut, fixtures filings for goods that are or
are to become fixtures

If Inventory, perfect by:

Question 1 –
Sells TV
TV Manuf. ABC (TV Retailer)
SI in TV

Q → How does TV Manuf. perfect?

 Classify TV → Inventory (9-102(a)(48))

 How to Perfect → 9-310(a) File unless an exception in (b) applies. No Exceptions
Apply.
 Where to File → 9-501(a)(2) Central Filing
 What to File → 9-502(a)(1-3) FS Required Information

If Equipment, perfect by:

Question 2 –
Sells TV
ABC (TV Retailer) Doctor’s Office
SA, PN
Q → How does ABC perfect?

 Classify TV → Equipment 9-102(a)(33)

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 How to Perfect → 9-310(a) File b/c no (b) exceptions apply
 Where to File → 9-501(a)(2) Centrally
 What to File → 9-502(a)(1-3) FS Required Information

If Consumer Goods, perfect by:

Question 3 –
Sells TV
ABC Consumer (for home use)
SA, PN

Q → Perfect?

 Classify → TV is a Consumer Good 9-102(a)(23). Also do not forget to look at 9-

102, Comment 4(a) to verify.
 How to Perfect → 9-310(b)(2) Purchase Money Security Interest (PMSI) [defined in
9-103(b)]. 9-309(1) says that PMSI’s perfect upon Attachment. No need for filing.
Referred to as a “secret lien”.
 If you wanted to file anyway, you would file centrally for the “consumer good”.
 Remember, you must have a security interest (attachment) for the PMSI to apply.
Test to see if PMSI applies. Does the credit enable the debtor to require the
collateral?

If Agricultural Crops, perfect by

Question 4–
$
Bank Farmer
Coll = crops

Q → Perfect?

 Classify → Crops are Farm Product 9-102(a)(34)(A) & (a)(35). Not inventory under
9-102(a)(48) because inventory excludes farm products.
 How to Perfect → 9-310(a) File
 Where to File → 9-501(a)(2) Central and/or 9-501(a)(1) Local
 What to File → 9-502 – 9-504
 Under the old rule, there had to be a real estate description in the SA and FS for
growing crops. This has been deleted from Revised 9. If you still put one in, don’t
screw up.

If Accounts Receivable, perfect by:
Question 5 –
Bank perfect SI in A/R?

 Classify → Account 9-102(a)(2) (i.e. Doctors, Lawyers, Dentists, etc.)

20
 How to Perfect → 9-310(a) Filing (9-313, Cmt. 2 – Accts generally require filing)
 Where to file →
 What to file →

If Certificate of Deposit, perfect by:

Question 6 –
Bank perfect SI in Certificate of Deposit?

 Classify → Instrument 9-102(a)(47) (A CD is a negotiable instrument, not a deposit

account) See also 9-312, Cmt. 2.
 How to Perfect → 9-310(b)(5) & (6) – Can perfect by taking possession under 9-
313(a) or by filing under 9-312(a). Taking possession is the “safest” avenue.

If Automobile, perfect by:

Question 7 –
Bank perfect SI in vehicles?

 Classify → Consumer Good: Good subject to certificate of title 9-102(a)(10). Note: If

a vehicle is being used in a business, it is classified as equipment under 9-102(a)
(33) but the same rules below apply.
 How to Perfect → 9-310(b)(3) send us to 9-311(a)(2) and K.S.A. 8-135(c), 8-127,
and 8-128. Only way to perfect: Mark the SI on the cert. of title (notation on
certificate of title is equated with “filing” 9-320, Cmt. 5) No need to file, just register.
Note: The PMSI statute under 9-309 does not apply.
 Exception: 9-311(d) if goods are held by D as inventory, then file.
 THERE WILL BE A QUESTION ON MIDTERM ABOUT A “VEHICLE”
 If Mobile Homes 9-102(a)(53)-(54): most states, like Kansas, treat subject to the
certificate of title statutes. You must follow the same rules as above for vehicles.

G. When Filing Occurs

1. 9-516(a) Filing occurs when
(a) The record is communicated to the filing office and
(b) Tender of the filing fee is made; or
(c) When the record is accepted by the filing office
2. 9-520(a) Shall refuse for reasons set forth in 9-516(b) and only for
those reasons.
3. 9-520(b) If rejected for any reason, must inform CR why and when
4. 9-520(c) If FS meets requirements in 9-502(a) & (b) yet could have
been rejected for failing to meet a 9-516(b) requirement, still
effective if filed
• EXCEPTION: Failure to meet 9-516(b)(5) is governed by 9-
338 (when incorrect info given at filing)
5. Incorrect refusal by filing office under 9-516(d) → PSI effective agst
all but (a) a purchaser of coll. which (b) gives value (c) in reas.
reliance upon absence of record from file.

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 (a) “Purchaser” 1-201(32) → Sec. CR is a Purchaser b/c it’s a
voluntary transaction creating an interest in D’s property
• Lien CR and TIB is NOT a purchaser b/c NOT a
voluntary creation of an interest in D’s property.
6. Failure to properly index FS does not affect effectiveness of filed
record. 9-517. (Based on the idea that the CR should know if FS
improperly rejected, but may not know if FS improperly filed)
7. Some states shield filing officer immune to liability. Kansas 9-
523(f).
8. A financing statement, incorrectly filed, is not perfected if not
meeting the requirements of 9-502.
9. Bogus Filing 9-518 → FS filed w/o D’s authorization
(a) File Correction Statement 9-518(a) following either
Alternative A or B as to what the Correction Statement must
say. Even though Correction Statement is filed, the
effectiveness of the Bogus Filing is unaffected. 9-518(c)
(b) In order to eliminate the effectiveness of the bogus
statement, 9-513(c)(4) requires CR to file a termination
statement w/in 20 days from D’s request if D didn’t authorize
the filing.
(c) 9-625 – CR is liable for $500 damages for such bogus filings
10. FS effective for 5 years 9-515(a). It can be amended under 9-512.
Continuation statement can be filed and must be filed w/in the last 6
mos. before expiration 9-515(c)-(d).
11. Termination of finance statements. 9-513.
12. 9-625(b), 9-625(e)(4): very specific remedies for not complying with
the termination rules.

H. Perfection by Possession
1. 9-310(b)(6) allows for perfection by CR’s possession of the
collateral under 9-313. Perfection by possession is referred to in
the industry as a “pledge”.

Problems (pp. 93-94) –

1/1/00 Bank loaned D $10K.
D pledged 100K note. Indorsed and delivered to Bank
Upon payment, the note is to be returned to D.
Upon default, the Bank is to sell the note and return the surplus to D
5/1/00 L loans D $15K.
D gives L a SI in the $100K note.
L and D send letter to Bank requesting Bank to send note to L if Bk is paid. If BK
is not paid, Bank is to send enough surplus to L to pay L off and rest of
surplus back to D.

(a) Bk doesn’t reply to Letter. Does L have PSI in note Bk possesses?

22
 Since the Note is a Negotiable Instrument, it can be perfected by either filing, 9-
312(a), or by possession, 9-313(a).
 There is nothing to indicate that the Bank is L’s agent. This could be established
through 9-313 Cmt. 3. This is not present here so we go to 9-313(c).
 For L to have PSI, Bank must authenticate a record stating that it holds possession
for L, 9-313(c).
 9-313(f) – The bank is not required to acknowledge that it holds possession for L’s
benefit. See also Cmt. 8.
 9-313(g)(1) – If Bank does acknowledge possession for L, acknowledgment is
effective even if it violates the rights of the D. 9-313(g)(2)-- UCC does not make the
Bank L’s agent. The terms of bank’s obligations and duties to L are to be left up to
the two parties to K into.
 L has an unperf. SI. Should file under 9-312(a).

(b) Bk replies that it won’t represent L. When paid off, returns note to D. When does
L have a PSI?

 Unperf. SI before returned

 Unperf. SI after returned b/c neither filed nor possessed.

(c) Bk replies and agrees to hold note for L and to comply with the terms set forth in
the letter. But, when Bk paid off, the note is returned to the D and not to L.
What’s L’s interest?

 PSI while Bk held the note. 9-313(c)

 Unperf. SI once Bank returns the note to D. 9-313(d) provides that the PSI
continues only while Sec. CR retains possession either personally or through an
authenticated 3d party.

I. Perfection in Consumer Goods

1. AA consumer goods treated differently. 9-204(b) gives the CR
rights to only those AA cons. goods acquired w/in the 10 days after
the Sec. CR gives value.
Hypo #15 –
1/2/00 Bk gives Consumer a loan.
Consumer gives Bk a SA in P & AA cons. goods
1/8/00 Consumer buys new TV → Covered
2/1/00 Consumer buys new TV → Not Covered
2. “Secret liens” → No need to file if PMSI in consumer goods 9-
309(1). The SI is perfected upon Attachment.

Hypo #16 (Holder in Due Course) –

TV
Dealer Consumer
PN

23
PN $ TV breaks and C stops paying Bk. Bk says pay and
C
replies that he’s not subject to personal defenses C
has agst
Bank Dealer. Bk claims he’s a holder in due course

3-302 → Who is a holder in due course

3-305 → What defenses are not good agst a holder in due course

 This concept has essentially been destroyed in the context of consumer goods.
 Still exists in the commercial context.

Hypo #17 –
Dealer sells instruments on credit to Amateurs as 75% of his business
Dealer sells instruments on credit to Professionals as 25% of his business

Q → What kinds of risk does D have?

 Unsec. CR has no remedies other than going to court to become a judicial lien CR.
9-317(a)(2) places Dealer’s SI as subordinate to PSI and to person who becomes a
lien creditor before Dealer’s SI is perfected. Dealer would therefore lose to a tib.
 Consumer may sell the instrument to another Buyer. 9-317(b) says that Buyer takes
free of SI if he gives value and receives delivery of coll w/o knowledge of the SI
before the SI is perfected.
 Consumer could use instrument as coll. for another loan

Q → What are D’s cost factors if he’s to begin creating PSI in sales?
 Forms, People to fill out forms and file them properly, Filing fees

• Remember that Dealer must look to the purpose for which the good was bought
when deciding whether the instrument is a consumer good (amateur) or equipment
(professional).

 With Consumer Goods, Attachment is enough to perfect if it’s a PMSI (9-103 & 9-
309) so long as Dealer has a valid SA in record form.

 With Equipment, (9-102(a)(33)) Perfection requires attachment and filing here

Hypo #18 –
Q → What if Amateur turns Professional and use of the instrument changes from
consumer goods to equipment?

 Rev. Art. 9 not clear on who wins.

 Looking at the old code, 9-401(3): the use can change.
 Meyer: the dealer is unperfected. The court would carry through the old notion that
the “secret lien” cannot be extended when the use changes.

24
Hypo #19 –
Dealer has PSI in instrument and Amateur sells it.

 9-315(a)(1) says that the SI follows the Coll., except as provided for in 9-320
 9-320 → Buyer of Consumer Goods takes free of PSI if buys (a) w/o knowledge of
SI, (b) for value, (c) primarily for personal, family, or household purposes, and (d)
before the filing of a FS covering the goods.
 Perf. Dealer who didn’t file and relied on PMSI automatic perfection will lose to
the Buyer. (A PMSI IS NOT GOOD AGAINST THE WORLD)

Hypo #20 –
Furn.
Manuf. Dealer
SI, no FS
SI, no FS Furn.
Consumer

 9-310 – Furn to Dealer = Inventory. Manuf. has to file to Perfect. Manuf = Unperf
SI CR
 If Dealer sell furn, they get back something (cash, trade-in, A/R, chattel paper). 9-
203(f) says that Proceeds are automatically covered as the replacement for the
Inventory. Manuf. = Unperf for Orig. Coll and also Unperf for Proceeds
 Dealer has PSI → PMSI (9-103) under 9-309.

J. Multi-State Perfection Issues

1. 9-301(1) – Location of D controls Perfection and Priority of
Nonpossessory (cmt. 5a.) SI (Secured party does not have
possession of collateral)
2. 9-301(2) – Location of Collateral controls Perfection and Priority of
Possessory (cmt. 5a.) SI (Secured party has possession of
collateral)
3. 9-301(3)(C) – When Nonpossessory interest is in a Negotiable
Doc., Good, Instrument, Money, or Tangible Chattel Paper, location
of the collateral controls Priority

25
Hypo #21 –
State A State B
CR 1, SI Inv. D located
Poss. Of Inv.

CR 2, SI Inv. CR 2 files FS

Two prongs of inquiry

(1) What state law governs? 9-301(1) or (2); (2) Is the collateral perfected? 9-310

 PERFECTION → CR 1 – Look to law of state A b/c loc. of coll. controls possessory

SI – Perfected under 9-310(b)(6) and 9-313 by controlling the good; CR 2 – Look
to law of state B b/c loc. of D controls nonpossessory SI. Both CRs PSI
 PRIORITY → Since it’s a good, State A law applies under 9-301(3)(C) – location of
coll. CR 1 has priority – First to file 9-322(a)(1)

Hypo #22 –
Kansas Iowa
Corp. registered Plant w/ EQ
Plant
Exec. Office
1/1 BK PSI in EQ
Filed centrally
3/1 EQ moved to Iowa plant
4/1 D bkcy petition

Q → Bk perfected as to all EQ?

 9-301(1) says perfected because nonpossessory SI perfection is governed by law of
state in which D is located. 9-307(b)(3) says that D who is an organization w/ more
than one place of business is located in the state where it’s chief executive office is
located. 9-307(e) says registered org are located in the state registered in. D
location = Kansas. Perfected b/c under 9-310(a), CR must file and he did so
centrally as 9-501(a)(2) states he must. The key is if the debtor’s location changed.
In this case, only collateral changed. If the debtor’s location had changed, 9-316(a)
would have become relevant. It makes no difference in equipment or offices move
if the organization is registered. It is the birth state of the organization pursuant to 9-
307(e).

 9-301(3)(c) Priority is governed by Iowa law since that’s where coll is located. This
is an exception to 9-301(1)’s “except as otherwise provided” language.

4. 9-307 → D Location Rules

5. 9-316 → PSI perfected until earliest of (1) when perfection would
have expired under state law, (2) 4 mos. after D changes location

26
 to another jurisdiction, and (3) 1 yr after transfer of collater to
another person who becomes a D and is located in another
jurisdiction (NEW D)

6. Multi-State Perfection regarding Automobiles

(a) Applies only to goods covered by a certificate of title and
there is no requirement that the debtor or collateral be in the
state in which certified. 9-303(a).
(b) 9-303(c) → State who issued the cert. of title governs until 9-
303(b) another state issues a new title or the title ceases to
be effective under the law of the issuing jurisdiction. The law
of the issuing jurisdiction still has to be dealt with. 9-316(d)
(c) 9-303, Cmt. 4: The fact that the law of one State ceases to
apply under 9-303(b) does not mean that a security interest
perfected under that law becomes unperfected
automatically. In most cases, the security interest will
remain perfected. See 9-316(d), (e).
Hypo #23 –
Kansas Iowa
Bk PSI
C of T
Car Car moved to Iowas
C of T issued
No KS SI noted

 Now Iowa law governs Perfection and Priority

 9-316(d) KS PSI remains perfected until SI would have become Unperf. under
KS law had the C of T not been reissued in Iowa.
 9-316(e) Iowa Buyer purchases car for value and KS Bk has not had its PSI
noted on new C of T or has not taken possession (9-313), then SI is unperfected. 9-
316(e)(2) Has either 4 mos or until PSI would have been unperf in KS originally to
reperf this SI.
 9-337 If KS fails to have its PSI noted, whether w/in 4 mos. grace period or not –
Buyer of goods takes free of SI if he gives value and receives delivery of goods after
issuance of the C of T and w/o knowledge of the SI. And SI is subordinate to
conflicting SI. And is perfected by 9-311(b), after issuance of C of T and w/o
conflicting Sec CR’s knowledge of SI. (Even Buyer purchased w/in and violates the
4 mos grace period)

27
Hypo #24 –
1/2/00 CR loans to D, SI in Ill. C of T
2/1/00 D moves car to Tenn.
4/1/00 Clean title showing no CR lien issued by Tenn.
5/2/00 D sells car to Buyer who paid value, didn’t know of SI and relied upon the clean
title

 9-303(b)-(c) – Until Tenn. Issued a clean title, Ill. Law applied

 9-316(d) – Still perfected until 9-316(e) says it’s not.
 9-316(e)(2) – Gives CR four months grace period to have SI perfected and renoted
on cert.
 9-337(1) – Buyer of goods here takes free of SI b/c he gave value, and received
delivery after clean title issued by Tenn. And w/o knowledge of SI.

Hypo #25 –
1/2/00 CR loans to D, PSI in Ill. C of T
2/1/00 D moves to Tenn (9-316(e) 4 month time starts to accrue)
4/1/00 Clean title issued by Tenn. w/ no mention of CR’s SI
5/2/00 D files bkcy petition (w/in 4 mos grace period of 9-316(e))

 tib does not = a purchaser. Look at 9-102 def. of purchaser. Tib isn’t holder of
voluntarily granted interest. The 9-337 exception does not apply.
 It would make no difference if the bkcy was filed on 8/1/00. The Tib is not a
purchaser (9-102) under the language of 9-316(e) and even if the four month period
passes, it cannot get good title.

7. Multi-State Perfection and Intangibles

Hypo #26 –
Kansas Iowa
ABC, Inc. Reg. BK ABC
Plant
Exec. Office
1/1/00 KS Bk loans to ABC, gets SI in all EQ and Files centrally. RP
2/1/00 KS EQ sold to R to pay in 90 days

 Is this a transfer under 9-316(a)(3)? What is a transfer of collateral? Physically

moving equipment is not a transfer. 9-316, Cmt. 2, Ex. 4. The transfer rule
essentially only applies when you have a new debtor.
 Now coll. = RP’s acct (9-102(a)(2)) that replaced the EQ RP just bought. RP is an
account debtor under 9-102(a)(3). RP is an account debtor because he is obligated
under an account. Account debtor is not included under the 9-316(a)(3) one-year
rule.

28
 What law governs perfection and priority with regard to an account?

 PERFECTION → 9-301(1) D location for nonpossessory SI. Here we have a

nonpossessory security interest in a proceed. KS law governs for both EQ and Acct.
 PRIORITY → An account is an intangible (can’t see, feel, taste, touch, hear).
General intangibles governed by D location in 9-301(1). Tangibles governed by coll.
location in 9-301(3)(C)

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IV. PRIORITY – 9-317 – 9-339

A. Generally – Determines whose claim is superior and whose is

subordinate.
1. Perfected Secured Creditor [9-322 to 9-324]
2. Lien Creditor ($ judgment from the court) [9-317(a)(1)]
3. Tib [9-317(a)(1) and 11 U.S.C. § 544-551]
4. Unperfected Secured Creditor [9-317]
5. Unsecured Creditor [9-201, 9-317(a)(1)]
6. Buyers of collateral subject to a SI [9-315(a)(1) buyer of goods 9-
320, buyer of farm products 7 U.S.C. 1631, purchaser of chattel
paper and instruments 9-330, purchaser of instruments, documents
and securities under other Articles 9-331]

The first issue of any priority conflict is to identify the status of the parties (see handout).

B. Lien Crs vs any conflicting SI – 9-317(a)

1. Lien Cr (including tib) trumps any conflicting SI so long as become
Lien Cr before
a. SI is perfected OR
b. SI is almost perfected: one of the conditions in 9-203(b)(3) is
met (such as SA exists but there’s no attachment yet) AND
FS covering the collateral is filed.

Hypo →
2/1/00 – Bk filed FS covering all EQ
2/2/00 – L loaned $ to D, SA all EQ
2/5/00 – L files FS covering all EQ
2/9/00 – Bk $ to D, SA all EQ
5/1/00 -- Default

Who has priority? The Bk (9-322(a)(1))

Would it make any difference if Bk knew about L’s advance when it loaned? No, Cmt. 4
to 9-322.
What if L filed locally? The Bk (9-322(a)(2))

Hypo 
See Example 4, 3-222, Cmt. 5.

10/1 Bk loaned $35k to D

SA (EQ #1) (P loan and FA’s)
Proper FS filed correctly (no FA clause)

11/1 L $25k to D, SA (EQ #1)

12/1 Bk $35k to D, New SA (EQ #1) new FS

30
12/30 D defaulted on both loans
EQ #1 = $60k

How should the $60k be divided?

Two Issues: (1)When the original SP does not have a security agreement, the general
rule is that future advances are not secured. What happens when you
make a new advance and you make a new SA? Triggers the application
of the first-to-file rule. As long as you have attachment, it makes no
difference when it occurs. See also All-Chalmers [13]

(2) What impact does the filing of a new financing statement have? Bank does
not terminate original financing statement. They simply filed a new one.
There was no need for the bank to have filed a new financing statement.
Remember, in FS you do not need a future advance clause, and FS are
good for 5 years and will cover ANY SA created during that period of time
so long as the description in the FS covers the description. In summary: if
the FS is effective as to EQ #1, you do not need the another filing. The
court’s that have looked at this have just ignored the re-filing and do not
apply the first-to-file rule again.

Status of the parties at default: Lender is clearly perfected; Bank’s value (9-203(b)(1))
attached on 12/1 when the future advance was given. Bank did not
become perfected until 12/1.

9-323 is labeled “future advances” but does not help us at all with this problem (drafters
fucked up). This section applies to limited circumstances.

9-322 has no references to subsequent advances.

9-323, cmt. 3 “under a proper reading of 9-222(a)(1) it is “abundantly clear” that the
time when an advance is made plays no rule except when the financing
statement is not filed.

No doubt whether the first to file rule applies to future advances. Therefore, under
these facts, the bank gets it all.

When L sees that the Bank has a filed FS for the collateral, they simply need to deal
with the Bk.

Hypo  (problem 1, p.141)

2/1 Secured Party A gives 30,000 Loan, SA in proceeds and equipment

No future advances clause, FS filed centrally

6/15 Secured Party B gives 40,000 loan, SA Existing equipment

31
 Filed FS centrally
Debtor files 9-210 statement
Secured party A said only 30,000
Loaned
Secured Party B saw SA and No Future Advances clause

7/15 Secured Party A loaned 60,000, SA, P EQ

No new FS filed

9/1 Default
Eq= 100,000
SP A has 90,000 secured debt
SP B has 40,000 secured debt

Both parties are perfected. Does 9-322(a)(1) apply? The loan made on 7/15 is a future
advance, but 9-323 does not apply. 9-323, cmt.3 ex. 1 is exactly
applicable. The winner: Secured Party A gets all the money.

Secured party B had debtor request 9-210 statement. This has NO impact on the
priority rules, it is merely informational. The only way this would have had
any impact is if B would have asked an agreement with A not to make any
more loans (than you would have had a K issue). 9-210 is informational in
nature and has not impact.

Pure Race to the Courthouse: unless you are dealing with a PMSI, 9-322 is a pure race
statute. This is a “damn simple” rule.

Hypo →
1/1/00 – Nat’l Bk loans $10K used to buy EQ 1, SI to Bk, Proper FS
2/1/00 – Fin. Co. loan, SI in EQ 1, Proper FS
3/1/00 – D defaults on Nat’l loan
3/2/00 – D goes to State Bk to pay Nat’l $10K ($ directly to Nat’l), State SI, Proper FS
5/1/00 – Default. State Bk possession of EQ – sold for $9K
Owed State Bk $11K; Fin. Co. $6K. [2 competing PSCrs]

Does Fin. Co. have priority as to the $6K?

9-322(a)(1) → First-to-file has priority

State Bank could have taken an assignment of Nat’l’s interest under 9-310(c) and would
not have had to file anything new. Priority would have then dated from Nat’l Bk’s 1/1/00
filing. Zero doubt: if an assignment would have been executed, State would have won.

State Bk could also have argued subrogation (common law assignment theory under 9-
103).

32
 → Fin. Co. knew another CR was out there when it loaned D the $ so it’s not
unfair to place them 2d. State Bk was merely trying to keep D in business, not taking
advantage of the situation.

C. First-to-File-or-Perfect-Rule
1. If there are two PSCr, first ask if the 2d PSCr has a PMSI.
a. If he does  9-324 below. Different Rules
b. If he doesn’t, go to 9-322.
2. 9-322
a. (a)(1) → 2 PSI; Winner= earlier of 1st to file OR 1st to perfect
b. (a)(2) → 1 PSI vs. UnPSI; Winner = PSI
c. (a)(3) → 2 UnPSI; Winner = 1st to Attach
3. Future Advances
a. 9-204(c) → allows FA clauses to be included in SA
b. 9-323(a) → Perfection of a FA occurs upon advance. BUT,
time of advance does not determine priority. Priority is
determined by first filing (unless one of the limited
exceptions apply). (Cmt 3)
c. A PSCr can claim priority as to a FA so long as
(i) FA Clause is in 1st SA (see above Hypo), OR
(ii) New SA (with FA) with 2d loan
→ Don’t have to file new FS, only new SA
→ L would have searched and found FS for Bk and D.
Should have understood that the FS applied to both P
and FA. The only exception to this is a PMSI
d. If the collateral changes (1st loan: EQ 1; 2d loan: EQ 2), then
would have had to describe new collateral in the original SA.
Not likely to happen.
e. A 2nd in time lender can protect itself.
(i) 9-210(c) request for accounting → CR 1 must provide
a list of coll. claimed to the D upon D’s request.
→ 9-602 D cannot waive rules in 9-210
→ 9-625(f) imposes a $500 penalty if the SCr fails to
comply with 9-210 w/o reasonable cause.
(ii) 9-310(c) CR 2 can arrange for an assignment of the
SI and pay CR 1 off.
→ 9-514 Assignment from BK, don’t have to re-file
→ 9-513 Make sure that CR 1’s FS is terminated
(iii) 9-512(a) CR 2 could get release on part of collateral
(iv) 9-339 CR 2 and CR 1 could execute a subordination
agreement, allowing them to contract around the
priority rules.

33
 4. After-Acquired Collateral
a. 9-322, Cmt 5 – Follow the first-to-file rule if 2 CRs are
perfected at same time as to the AA Coll. and neither has
PMSI.
b. Follow FA rules → don’t need to mention AA clause so long
as new SA when AA coll. exists. FS doesn’t need to refer to
AA
Hypo →
2/1/00 – Bk filed FS in all of D’s EQ [No attachment]
2/2/00 – L loans $ to D, SA in all EQ
2/5/00 – L files FS in all EQ [PSI (9-308(a) attachment and filing)]
2/9/00 – Bk loans $ to D, SA in all EQ [PSI]
5/1/00 – Default as to both loans

9-322(a)(1) – Bk wins – filed first

1-201(25) – “Notice” – when actual knowledge exists
Here, actual knowledge is irrelevant (Cmt 4). Dafters wanted to avoid
factual inquires. Wanted efficiency, predictability, and workability. Therefore it makes
no difference if BK knew of L on 2/9/00.

• Both parties must file correct FS in the correct location to be perfected. (If Bk filed
locally, then L would win because Bk would be UnPSCr)

Hypo →
10/1/00 – Bk loans $35K to D, gets SA in EQ 1 to secure the Present loan and Future
Advances (to be made after original SA and FS are executed), Proper FS in proper
place
• 9-204(c) – allows FA clauses in SA
11/1/00 – L loans $25K to D, SA in EQ 1, Proper FS
12/1/00 – Bk loans $35K to D, no new SA (Bk now has an interest in $70K, Perfection
occurred on 12/1/00 when the 2d $35K value was given)
• Perfection in 2d $35K occurred after L loaned $25K
12/30/00 – D defaults. EQ 1 = $60K

Bk can get the full $60 to offset its $70 loan to D.

• When collateral is gone, a PSCr turns into UnPSCr, must sue D to get a $ judgment
and seize unsecured collateral to get any $ back.

Variation on above Hypo →

10/1/00 – Same except Bk does not include a FA clause
11/1/00 – L makes loan
12/1/00 – Bk loans $35K to D, New SA in EQ 1 to secure 2d $35K loan, New FS
12/30/00 – Default

9-322(a)(1) → First to file – Bk wins as to its first $35K loan

34
Bk can claim priority as to 2d $35K loan (see FA rules above)

[2d loan is PSI → 9-203 requirements met, 9-308 requires the 9-310 and 9-501(a)(2)
filing plus steps]

Hypo →
1/1/00 – Bk 1, $ to Car Dealer, SA (all cars, P and AA), FS (all Inv) filed centrally
2/1/00 – Bk 2, $ to Car Dealer, Same SA, Same FS
2/5/00 – 10 New Cars. No PMSI (AA Collateral)

Attachment is on 2/5/00 when D got right in the collateral. Both Bks are perfected as to
the 10 cars at the same time on 2/5/00
Priority goes to First-to-File Cmt 5, 9-322

D. PMSI in Non-Inventory (exception to First-to-File Rule) 9-324

1. Comes into play when one or more CRs have a PMSI in the
collateral
2. Ask:
a. Have PMSI? (established under 9-103)
b. What kind of collateral is involved?
3. 9-324(a)
a. Super priority as to any SCrs (perfected or not) if Perfected
PMSI is held
b. Carries over to Identifiable Proceeds also if Perfected within
20 days of when D receives possession.
4. Don’t get to the 9-103 enabling PMSI language unless you first
establish 9-203 attachment. If you have a SI, this is a special kind
of SI.
5. May also run into problems establishing a PMSI when a check is
written out to the D, properly enabling him to purchase the good
sought. However, the D deposits it into his bank account that
already has a positive balance. The First in, First out Rule may
make it impossible to trace the money to prove that the BK actually
enabled the D to purchase the EQ. Can ensure your PMSI if the
check is made directly payable to the Seller.
6. 9-324(g) – Conflicting PMSIs → A SI securing an obligation
incurred as all or part of the price of the collateral has priority over
SI securing obligation incurred for value given to enable the D to
acquire rights in the collateral. [Seller will probably always trump
the Bank]

35
Brodie Hotel Supply →
6/64 – L possession of B’s EQ, B’s Restaurant
L and B negotiated about L buying EQ in restaurant
11/2/64 – Bk $ to L; SA EQ
11/4/64 – BK FS EQ
11/12/64 – B Bill of Sale for EQ to L (=SA)
11/23/64 – B filed FS
Default on both transactions

Status of parties at default?

B → PSI on 11/23
Bk → PSI on 11/10

How do you get to the PMSI supermajority language? (remember this)

9-322(a)’s “except” language  9-322(f)(1)’s “other provisions of this part(300s) lang.

9-324(a) → B has a super priority over PSCrs if he has a PMSI, and super priority as to
the collateral’s identifiable proceeds if file within 20 days after D receives possession.

The code does not define possession nor does it use the word “physical possession”.
9-313 Cmt. 3 speaks about possession. Reflecting on 9-324 Cmt. 3 “the twenty days do
not commence until the collateral is subject to a security interest.” Looking at the
comment, it appears the drafters definition of possession is that you have to have a
security interest created. At what point in time did B have a SI in equipment? 11/12/64.
At what time did B file? 11/23/64. Thus B filed eleven days later within 9-324(a)’s
twenty day requirement for priority.

This problem is kind of “screwy” in that in 6/64 Lyon in effect had a lease on Brodie’s
EQ and the time could have started running at that time. Just something to think about.

Hypo →
1/1/00 – Bk SA (P and AA EQ), $, FS
3/1/00 – Seller sold EQ 2 for $100K, financing $80K
Bk gave $20K for down payment
Ck payable to Seller and D → PMSI
Seller sold on Credit for $80K, SA EQ 2, FS → PMSI
5/1/00 – Default on both loans; EQ 2 = $50K

9-324(g) – Conflicting PMSIs → Winner = Seller. Bk gets nothing

36
Problem 1, p. 147 Hypo 
7/1 S sold goods on unsecured cr
7/7 D borrowed $50K from Bk
Ck payable to D and S

Does Bk have a PMSI?

9-103(a)(2): (1) the loan has to enable the debtor (the question in this case); and (2)
was the money in fact so used. Did this money enable the D? The Bank has the
burden to show this. If someone has the good, how can a loan made after the good
enable the good.
The money was sent directly back to the seller, but they already had the goods. 9-103,
Cmt. 3 “thus a security interest does not qualify as a PMSI if a D acquires property on
unsecured credit and subsequently creates the SI to secure the purchase price. From a
planning standpoint, you want to loan the money before. It is a “tough job” for a Bk to
establish 9-103(a)(2) when the debtor already has the collateral when the loan is made.
To avoid this, the Bk could make it a policy that no loan money is available if the
collateral is already in possession of the Debtor.

Problem 2, p. 147 Hypo 

7/1 Bk $10k to D to buy machine, SA
Bk deposits $10K in D’s checking Acc’t
Balance before deposit: $15K
Balance after deposit: $25K

7/3 D buys and pays for machine with $10k check on checking account balance
when check paid $22k.

Does Bk have a PMSI?

9-103(a)(2): (1) the loan has to enable the debtor; and (2) was the money in fact so
used (the question in this case). Many states have a “first in, first out” (FIFO).
All $15K has to go out before the $10K can be used (because the $15K was
there before the loan).

Problem 3, p. 147 Hypo  Two PMSI’s

1/1 Bk SA (P & AA EQ), $, FS

3/1 S sold D EQ #2 $ 100k

Bk advanced $20k to enable down payment
Ck payable to D and endorsed to S

S sold on credit for $80k, SA EQ#2, FS

37
5/1 Default on loan and S’s contract
EQ#2 = $50k

Who is entitled to priority to $ and EQ#2?

Two issues:
(1) First Issue: Who wins between two PMSIs?
a. 9-324(g)(1)
i. gives priority to the seller. If you have two PMSI’s that is lenders,
then it is the first to file rule under (g)(2). But if it is between a seller
and a lender, the seller wins.
1. The significance of this: the seller is out $30k ($80k - $50k),
but the lender is out entire $80k. Also, remember that the
value of the collateral is the amount of the SI, not the amount
of the original value of the collateral.
a. Under this rule, why then would a bank ever loan any
money?
i. The bank says to the seller that “you finance it”
unless we can get a subordination agreement
under 9-339.
b. 9-324, Cmt. 13:
(2) Second Issue: Whether the bank’s use of a SI, including a AA Prop clause,
prevents the bank from having a PMSI?
a. 9-103(b)(1) “to the extent that goods are purchase money collateral”, and
then to go 9-103(f): a PMSI is good the extent of the PMSI is good. You
simply have to establish that you have a PMSI, it makes no difference if it
is clouded by AA Prop. and FA.

9-324(a) on its face looks pretty simple. If you look at 9-324(b), there are two major
differences from (a): (1) you have to search the records; (2) there is no requirement to
give to notice to anybody; and (3) the finance company does not have to be filed
“before” the debtor gives possession. Not as simple as it seems: (1) the finance
company has to establish the PMSI; (2) you have to file within 20 days the Debtor gains
possession of the collateral. Simply, no seller should release a good before you have
filed, and as far as a lender, never make a loan until you have filed and until you know
the debtor has bought the good.

Hypo 
1/1/00 BK SA (All EQ, P & AA, FA), $, FS
D owns EQ #1
2/1/00 Fin. Co. $ used to buy EQ #2
SA, FS covered EQ #2
5/1/00 Default on both loans

Who has priority as to EQ #2?

38
Start at general priority:

Go to 9-322(a) which states “except as otherwise provided in this section” which then
sends us to 9-322(f)(1) which states that (a) is subject to (g) and the “other provisions of
this part (300s) which then sends us to 9-324(a).

9-324(a) tells us that other than (g) conflicting pmsi’s; inventory or livestock; or in
deposit accounts under 9-327, that a PMSI takes priority over a conflicting security
interest and the same goods and identifiable proceeds if the PMSI is perfected when the
debtor receives possession of the collateral or within 20 days thereafter.

Finance Co. must establish that it has a PMSI in non-inventory or livestock; they were
perfected at the time the D got possession or within 20 days of possession. If these
requirements are satisfied, they take first (even though they are not the first in time to
file).

E. PMSI in Inventory and Livestock (exception to First-to-File Rule)

1. If collateral is Inventory → 9-324(b)
a. Perfected PMSI in Inventory has priority over conflicting SI in
same inventory, over conflicting SI in Chattel Paper or an
Instrument constituting proceeds of the inventory, in
Proceeds of the Chattel Paper, and in identifiable cash
proceeds of the inventory that are received on or before
delivery of the inventory to the buyer.
b. PMSI must be perfected when D receives possession
c. PMSCr must send authenticated notification to the holder of
the conflicting SI, within 5 years before D receives
possession, stating that the PMSCr has or expects to
acquire a PMSI in the D’s Inventory, and a description of the
Inventory is included.
2. Cross-Collaterization
a. 9-103(f) and Cmt 4 [Item 1 can secure Item 2’s (now sold
off) unpaid price. Had a PMSI in 1 and 2 was subject to
PMSI.]
3. Transformation Rules (addressing two situations in ways PMSI can
be altered)
a. 9-103(f)(3) → Refinancing – No transformation here (so long
as it’s not a consumer good; if it’s consumer goods, it’s up
to the courts to determine whether still a PMSI or not) (this
rule applies to “all” transactions, including consumer goods,
in Kansas).
b. 9-103(f)(1) → Seller sells additional goods – “Dual Status”
Rule. Presence of a non-PMSI does not destroy the
purchase money aspect so long as PMSI secures the price
of the goods even though it secures the price of other items

39
 as well. Burden of Proof is on the party claiming PMSI (9-
103(g)).
4. Inclusion of FA and AA clause does not necessarily destroy the
PMSI. Under 9-103(b)(2), it looks like an argument can be made
either way. But you’re best off not risking it.
5. The security interest of a consignor in goods that are the subject of
a consignment is a purchase-money security interest in inventory.
9-103(d).

Zoro hypo →
1/1/00 – Bk PSI (Inv P and AA, FA), $, FS
D in computer business
Owns 10 IBM Computers
2/1/00 – Comp. Manf. Sells D 5 Zoro Computers on credit transaction
SA, FS and gives Bk good proper notice
2/5/00 – Zoros delivered
2/10/00 – 1 Zoro sold and paid for by Visa
2/11/00 – 1 Zoro sold and B given 90 days to pay
2/12/00 – Default on both debts; 10 IBMs and 3 Zoros, visa slip, and account

Classify Collateral → Account – 9-102(a)(2) includes both the 90 days to pay

arrangement and the credit card transaction. The IBM’s and Zoros are inventory (9-
102(a)(48)(B))

Classify Parties →
Bk – PSI in P and AA Inv. (IBMs and Zoros)
Includes PSI in the Account and visa slip as Identifiable Proceeds
9-203(f) → Automatically Covered
9-315(c) → Perf. of SI in Proceeds if Orig. Coll. Perfected
9-315(d) → Automatic 21 days to perfect in proceeds. Perfected if
Orig. FS in same place as Proceeds would require a FS
Accounts require filing centrally as does Inventory! 9-313, cmt. 2
Manuf – PSI in the 5 Zoros. Look to 9-203(b) and Manuf. Had all three which
constitute a valid SA. (SA description refers to Zoros, no attachment to IBMs).
The Zoros are inventory 9-102(a)(48) and to be able to have priority, you must
perfect by filing centrally under 9-501(a)(2).
Includes PSI in the Account and visa slip as Identifiable Proceeds (same
analysis)
Has PMSI as to the Zoros (9-103)

9-103(b) … to the extent that goods are purchase money collateral. Falls under 9-
103(a)(2) seller provision.

Therefore, manuf. clearly has a PMSI which sends us to the general priority rules found
in 9-322(a)(1) which send us to 9-322(f)(1) which sends us to 9-324’s priority rules
when dealing with PMSI’s. The key in knowing where to go in 9-324 is classifying the

40
collateral of the PMSI. In this case, the collateral under the PMSI is inventory (9-102(a)
(48)(B)). Because the PMSI is inventory, this sends us to 9-324(b) which specifies the
general requirements of a PMSI having priority when the collateral is classified as
inventory. Note the inventory collateral section of 9-324(b) contains greater
requirements to attain priority then PMSI’s which collateral fall under 9-324(a)’s general
PMSI priority rules in which the PMSI collateral is classified as anything but livestock or
inventory.

Clearly Bk wins as to the 10 IBMs

9-324(b) → Requirements met by Manuf. who wins as to Zoros
9-322(b)(1): the first-to-file rule applies to proceeds.
Superpriority (very limited) for PMSI does not carry over to the visa slip and account
because they’re not identifiable cash proceeds (9-102(a)(9): “money (1-201(24)),
checks, deposit account (9-102(a)(29)) or the like”.) See also, 9-324 comments 8-9
which states: an account is not an identifiable cash proceed. An account is not
considered cash and does not fit under the “or the like” language.
Therefore, only Money and Checks would fit here, not the visa slip or an account.

Cross-Collateralization and Transformation

Southtrust Bank →
1/1/00 – Bk PSI Inv. (P and AA, FA), FS, $
2/1/00 – inventory Buyer 1
Seller invoices D
Buyer 2
$ to pay off
invoices SA (FA, AA) Inv., FA. Only Inv. that
BWAC BWAC provided money for.

Agreement → D pays off a percentage of invoice each month whether the item in the
invoice is sold or not. If an unpaid item is sold, other inv. coll. secures the remaining
debt for the sold item.

Example:
2/1 Seller sells 3 computers to D
Comp. #1: $2000
Comp. #2: $3000
Comp. #3: $5000

BWAC provided all the $ to buy

3/1 Comp. #1 sold and D received $2,000.

Paid BWAC $200
Computers #2 and #3 became collateral for $1800 unpaid on #1.

5/1/00 – Default on both loans

41
Revised Art. 9 would find that the FA and AA clause did not destroy BWAC’s PMSI.

9-103(b)(2): If the security interest is in inventory that is or was purchase-money

collateral, also to the extent that the security interest secures a purchase-money
obligation, incurred with respect to other inventory in which the secured party holds or
held a purchase-money security interest
See also 9-103(b)(2) Cmt. 4

What the effect is: so longu u as this was originally a purchase money loan, and the
collateral that is not substituted it purchase money collateral, the lender is considered to
have a PMSI to the extent of the unpaid balance (including the $3K and the $5K.).

All items in example (all computers) had to have been subject to a PMSI and are. That
is the key. They had to be in one time in time subject to a PMSI.

This is Cross-Collaterization and Transformation

F. Buyer of Goods subject to Perfected Security Interest

1. Is buyer “a buyer in the ordinary course” (BIOC) under 1-201(9)
[amended def. on p. ----]
a. If buyer is “a buyer in the ordinary course”  9-320(a). (See
also 9-315(a)(1), 9-317(b))

2. 4 common situations

Goods are inventory

a. Bk Appliance Dealer Inv. Buyer
PSI Inv. $
Day after sale, A.D. defaults w/ Bk

• 9-315(a)(1) – SI follows Coll. unless CR authorizes

sale free of SI.
→ If the Bk says to sell free of SI, we’re just interested in
proceeds, never get to BIOC in 9-320(a) because if CR
authorizes sale free of SI, then SI attaches to identifiable
proceeds
• EXCEPTION to 9-315(a)(1): 9-320(a) – (1) BIOC and
(2) SI was created by Buyer’s Seller.
→ Takes free even if Buyer knows of SI and SI is
perfected. The mere knowledge that the good is subject
to a SI is not enough to prevent BIOC. Must know that
there’s an SI and that Seller can’t sell that good
• Amend. 1-201(9) (p. ----) – BIOC (typically this
applies if individual buys and it’s not an extraordinary
event, like buying the entire inventory)
(a) Buys a good

42
 (b) in good faith
(c) w/o knowledge that sale violates rights of a 3d
person in the goods
(d) from person in business of selling goods of that
kind
• 9-102(a)(43) Good Faith –
(a) Honesty in fact (good heart, w/o knowledge)
(b) Observation of reasonably commercial standards
(the seller is a seller who sells such goods)

Goods are equipment

EQ
b. Bk PSI EQ Appliance Dealer Buyer
$
• 9-315(a)(1) – SI follows because not BIOC
• 9-320(a) – requires seller to be seller in goods of the
kind.
• 9-320(b) – Requires the seller to have used or bought
the good as a consumer good
• Bk can go after Buyer b/c not BIOC and not a
consumer good in the hands of the seller

Goods are Farm Products

c. Bk PSI Farm Prod Farmer Farm Prod Buyer

$
• 9-320(a), Cmt 4 – This provision does not apply to
Farm Products. Look instead to Food Securities Act of
1985:
7 U.S.C. §1631

Goods are Consumer Goods

Cons. Good
d. Bk Consumer Buyer
PSI Cons Goods
• 9-315(a)(1) – SI follows unless CR authorizes it free
• 9-320(b) –
(a) Consumer good in hands of the Seller and Buyer
(b) Bought without knowledge of SI
(c) For value
(d) For consumer good purpose, and
(e) Before filing of FS covering the goods

43
Gordon v. Hamm →
Sold Coach PSI Coach (noted on C of T)
Seller Hamms J.D. Credit[kept title, copy to
Hamms]
$ $
entrusted Coach Hamms
entrusted the Coach
Sunset Motors to SM to try to sell it, but
Coach Sold $ trade was not complete
→ SM didn’t pay off
J.D. w/
Gordons Gentra $ from Gentra. SM
bkcy pet.
No title, PN, SI
Have Coach (buying Coach on time)

The lawyers for the Gordons attempted to find exceptions to 9-315(a)’s

general language that SI follows the collateral. They first tried to argue 9-
320(a) and then entrustment under 2-403(2).
• 9-320(a) argument fails for the Gordons because the SI was not
created by SM (the seller) even though they were a buyer in the
ordinary course; it was created by J.D. Credit. Therefore 9-315(a)(1)
applies.
• An argument could be made that the Hamm’s were using
SM as an agent to sell. This would probably still fail because this
would probably not be in the ordinary course.
• The Gordon can still sue SM under 2-312 breach of
warranty. SM is in bankruptcy and this would probably get
Gordons anywhere.
• Entrusting Coach to SM not a sale.
2-403(2) – Entrusting to a merchant in goods of the kind gives him
power to transfer ALL rights of the entruster (Owner/Hamms) to the
Buyer (Gordons) in the Ordinary Course of Business.
• Transferring all rights means that since Hamms interest was
subject to J.D.’s SI, Gordons bought an interest subject to J.D.’s SI.
• Entrustment generally not a disposition under 9-315. (If CR knew
of entrustment and did nothing to prevent it, may be able to estop CR
from enforcing their SI based on the 9-315(a) language “unless the
secured party authorized.” 9-315, Cmt. 2 makes a reference to PEB
commentaries (pg. 913-) which help in defining and arguing meanings
of 9-315.

Look at 9-320, Cmt. 3, Example 2 for an interesting example of how the drafters were
trying to provide a little bit of protection for the buyers in a Gordon v. Hamm type
situation.

44
Garage Sale Hypo →
chair
Dealer Consumer
PN, SA, no FS Sells chair for cash at garage sale

Neighbor
Dealer is PSCr – 9-309(1) – Automatic perfection with consumer goods in PMSI (9-
103), except as otherwise provided in 9-311(b): C of T.

9-320(b) – Exception to 9-315(a)(1). Seller must be using good as a consumer good. If

he is, then sells free of SI, even if perfected, so long as all 4 requirements exist.

Hypo →
$ TV
Bk Dealer Consumer 1
PN, PSI Inv. PN, SA, FA $ TV
Consumer 2
Dealer defaults and C2 has the T.V.

1-201(9) – C1 was BIOC (meets all requirements)

→ 9-320(a) – C1 takes free of Bk’s SI

Dealer and C1 default.

Dealer has a PSI. C2 has no Special Buyer Protection under 9-320(b) because Dealer
filed FS.
Because Dealer defaulted, Bk can step into his shoes and since Dealer has right to
recover the T.V., so does the Bk.

G. Buyer of Inventory subject to C of T

BIOC and the New Car (**Read 168, #1) →

Manuf.
$ MSO Car
Fin. Co. Dealer
$ Car, no C of T, Dealer will apply for C of T
Buyer

If Dealer doesn’t apply before default, Fin. Co. will claim it has the Manufacturer’s
Statement of Origin (MSO) and Buyer can’t get Certificate of Title.
• Art. 9 trumps C of T → Buyer in Ordinary Course wins
• Some states say can’t get rights in vehicle with Certificate of Title

45
BIOC and the Used Car (**Read 169, Case #2) →
$
Bk Dealer Owner
PSI Inv, FS car, C of T
Get C of T’s and Car, Promise to get new title issued
give back if $ paid Buyer

H. Double D

1. 9-325(a) – SI created by a D is subordinate to SI in same coll.

created by another person if:
a. D acquired Coll. subj. to SI created by the other person,
b. SI was Perfected when D acquired the Collateral, and
c. There’s no period when the SI is unperfected
2. 9-325(b) – You reach this section only if the interest being
subordinated would have priority under 9-322 (First-to-File) or 9-
324 (PMSI).

Bank of West →
$
1982 Bk (CR1) Allied (D1)
PSI Inv. & A/R, P & AA w/o consent of CCFS,
$ BCI sold Inv. & A/R to Allied
1984 CCFS (CR2) BCI (D2)
PSI Inv. & A/R

9-315(a)(1) → CCFS did not authorize disposition so SI continues to attach

9-315(a)(2) → Not only does this cover the Inv., but also covers the Identifiable
Proceeds of the Collateral (A/R)

2-403(1) → Allied gets the same rights as BCI had (remaining subject to a SI)

The Court rejects the Bk’s First-to-File argument. Allowing that argument to stand
would defeat the Notice Function of 9-310

Allied is not a Special Buyer, not in ordinary course when buying all of another’s
inventory.

Apply 9-325(a) and CCFS wins.

46
9-507(a) – Effectiveness of FS for assets that are sold will continue as to the assets
transferred.

A. Purchaser of Farm Products

1. Food Securities Act of 1985, 7 U.S.C. § 1631 – sale of farm prod

are subject to SI
a. UCC governs Attach, and Perf.
b. Fed. Stat. governs priority only
• Opposite of 9-320(a), §1631(d) (pg 1383) presumes that you
buy free of SI
(i) BIOC buys FP from Seller engaged in Farm Operations,
takes free of SI “created by the seller,” even though SI
is perfected and BIOC knows of it.
(ii) (e)(1) – Buyer takes subj. to SI if written notice
received by Buyer from SP within 1 year before sale
of FP. “written notice received” should be taken
seriously, and a bank should send receipt requested
or certified as a simple matter of proof.
(iii) (c)(1): BIOC does not have a good faith requirement.
The other major difference is “without knowledge”
requirement is not present. The significance is
illustrated by the hypothetical below where the bank
had actually given the elevator notice by phone.
Under the UCC definition, the elevator could never be
a buyer in the ordinary course because they had
knowledge. Under this definition, knowledge is
irrelevant.
(iv) The definition of “farm products” is not the same in
this federal statute.
(v) Upshot: If you have a sale of a farm product that is
subject to a SI, look to the federal rule because Art. 9 has
been preempted (under 9 it would survive). Under 7 U.S.C.
§ 1631(d), the presumption is that the SI is cut off. The only
exception is if the buyer has received “within one year of the
sale” an appropriate notice ((e)(1) “appropriate written
notice”. Who has to give the notice? The SP has to give an
appropriate written notice. If the bank does not give a
notice, the SP’s interest is cut off when sold. The
significance is that if the buyer’s proceeds cannot be found
(bank has right in them) (99% of time, the proceeds will be
gone), the bank’s only real possibility is to sue the elevator in
conversion.

47
Bk Farmer
PN, PSI in all 8/1 – sells wheat
7/15 – crops
phone call to elev. Elevator – despite agreement to write jt. ck., elevator writes single
to request jt. ck. for party ck to Farmer
Farmer’s wheat when sold

9/1 – F defaults on PN to Bk. Bk sues elevator in conversion.

In the real world, the result is that the elevator ends up having to pay twice: the farmer,
and the bank. This is called “double jeopardy.”

That concludes are discussion of priority in relation to buyers.

We are now going to talk about accounts, general intangibles including payment
intangibles, and deposit accounts.

I. Rights to Payment on Accounts and General Intangibles

1. 9-102(a)(2) – Account → right to payment of a monetary obligation

(i) property that has been or will be sold (includes both personal
and real property); (ii) for services rendered
a. If a Plumber has three acc’ts and needs the money now, she
can either sell the acc’ts or put them up as collateral to
secure a loan for the needed money.
(i) Sale the accounts→ Bk acquires all rights and
immediate access to the acc’ts
(ii) SI in accounts→ Bk gives $ for SI in Acc’ts and gains
access and rights to those acc’ts upon the Plumber’s
default to Bk.
b. 9-109 → covers both creation of SI in personal property (a)
(1) and sales of accounts (a)(3), etc . . . This means that all
of the article applies to both of these transactions. (d)(4)
restricts, but only applies to the sale of a business.
c. 9-309(2) Automatic perfection in limited circumstances.
2. 9-102(a)(3) – Account D → Person who owes = account D
a. Account Ds are 3d parties whose rights are protected under
the 9-400s (See Artoc/Apex Hypo below) If someone is
asserting a defense to the original SP and the SP has
assigned, the 9-400s assert rights. (not on exam)
3. 9-102(a)(42) – General Intangibles → Includes Software and
Payment Intangibles. Cannot be an account. If you satisfy the
definition of an account, it cannot be a general intangible. 9-102(a).
Comment 5(b) includes examples of general intangibles.

48
 Additional ones are a partnership interest, tax refund (payment
intangible as a subset). Sale of general intangibles is not covered
by Article 9, BUT the sale of payment intangibles (below) is covered
by Article 9.
4. 9-102(a)(61) – Payment Intangibles → general intangible under
which Acc’t D’s principal obligation is a monetary obligation. Are a
subset of general intangibles, but are covered by Article 9, whereas
general intangible sales are not.
5. 9-102(a)(72)(D) – Secured Party → includes someone who buys
accounts, payment intangibles, etc.
6. 1-201(37) (amend. p. 1267) – SI includes Buyer of Acc’ts
7. 9-322 – First-to-File rule governs priority → no special protections
for Buyers of Acc’ts

Hypo → (pg. 184)

2/1 – $ to buy new Inv. 2/15 – Goods sold

Bk D Retailer
PSI P & AA A/R 90 days to pay (A/R) 9-102(a)(2)(i)
4/1 – sells A/R
Factor – Files FS
5/1- Default

Classify the Parties 

Bk: PSI in D’s accounts as of 2/1. Proceeds of inventory were automatically covered
notwithstanding the accounts language in FS.
Factor: PSI in D’s accounts as of 4/1 because accounts can be sold.
Factor’s interests →
9-109 → applies to sale of A/R.
Factor is a Secured Party under 9-102(a)(72)(D)
To perfect, Factor must file(9-310(a)) centrally (9-510(a)(2))

Conflict between two perfected secured parties.

Priority governed by 9-322 – First-to-File; Winner = Bk (Factor should’ve searched FS).

There are no special priority protections for buyers of accounts. The first to file rule
governs priority. 9-322(b)(1): priority, as to proceeds, dates from first filing.

49
Hypo → (pg. 184)
1/2 – Bk loaned D $, SA in P & AA Inv.; FS centrally, same descrip; No reference to
proceeds in SA or FS (Don’t need to refer to proceeds, automatic coverage and
protection under 9-203(f) and satisfaction of 9-315(c)-(d).)
2/1 – Lender $ to D; SI in all P & AA Acc’ts; FS centrally; No reference to proceeds in
SA/FS

Bk = PSCr in both Inv. and Acc’ts that are proceeds from sale of Inv. (9-203(f), 9-315(a)
(2), (c), (d)).
Lender = PSCr in Acc’ts, including those that are proceeds from sale of Inv.

9-322(b) – Since 2 PSCr, first-to-file rule controls, covering not only original collateral,
but also proceeds. Winner = Bk

Hypo → (pg. 185)

1/2 – Bk loaned $, SA in P & AA Inv.; FS centrally in St. A, no reference to proceeds
2/1 – L loaned $, SI in Accounts; FS centrally in St. B, no reference to proceeds

State A State B
Inventory located Executive Office
Bank FS Lender FS

9-301(1) – D location governs perf. and priority

9-307(b)(3) – D located where Exec. Office is located = State B determines perf. and
priority

Bk = UnPSCr as to inv. and proceeds

Lender = PSCr because he filed appropriately
9-322(a)(2) → PSCr wins over UnPSCr

Accounts as original collateral, you have to file. There is a different priority rule between
301(1) and (3) depending on whether you have tangible or intangible collateral.

Hypo → (pg. 185)

Customers allowed to pay in 25 days or in monthly installments with a finance charge –
Retailer retains these sales slips with customer agreeing to pay. What kind of collateral
is the promise to pay sales slips?

The kicker is that you have something signed. It is arguably an instrument. The
problem is, it has to satisfy 3-104.

How do you perfect a SI in an account? Filing

How do you perfect a SI in a instrument? Filing (new under Rev. 9) or Possession

50
Therefore, in this situation, don’t take possession, and file a FS with a broad description.
This saves warehouse space.

9-102(a)(2)(vii) – Account from use or credit or charge card (Doesn’t fit cleanly but it’s
where the Drafters intended it to fit).
Since it’s an account, a Bk must perfect by filing a FS centrally.

Artoc/Apex Hypo → SI in all A/R

Uni (D) (Assignor) Artoc (Bk) (Assignee)
Sold Gas ($10K)
EQ Invoice subj. to Artoc SI Apex to pay to Artoc, Not Uni
($5K) Pay to Lockbox 9-404(a)(2) – If Apex got Notice of
Artoc’s
Apex Oil (Account D) interest, can’t set off the $5K of debt

Lockbox security arrangement (pg. 1173) SP controls PO Box. This is a way that the
bank controls the proceeds. A very common way in situations where there is a troubled
financial debtor, and banks do this to make sure that the proceeds are not commingled.
So the check is made payable to the debtor at a certain PO Box which is in the
possession of the Bank and then the bank has instant and ensured access to proceeds.

B. Buyers of Chattel Paper (exception to First-to-File Rule)

1. 9-330 (See also, PEB Comm. pg. 933 explaining special rule)
(a) CP purchaser has priority over CP SI claimed merely as
proceeds of inventory subj. to SI if:
(1) in good faith AND in ordinary course of purchaser’s
business, the purchaser gives new value AND takes
possession of CP; AND
(2) CP doesn’t indicate that it’s been assigned (no
legend)
(b) CP purchaser has priority over CP SI claimed other than
merely as proceeds of inventory subj. to SI if:
(1) Purchaser gives new value AND takes possession of
CP OR obtains control of CP in good faith AND
(2) without knowledge that purchase violates the rights of
the secured party Cmt 6, 7
(c) Have priority in CP as a purchaser, also have priority in its
proceeds
(d) Instrument purchaser has priority over instrument SI
perfected by filing if
(1) purchaser gives value and takes possession in good faith
AND
(2) without knowledge that purchase violates rights of the
secured party. Cmt 6, 7

51
 (e) Separate and distinct definition of “new value” if dealing with
PMSI. Go to 9-324(b) bracketed language. Does the super
priority carry over to proceeds? If the chattel paper replaces
inventory subject to a PMSI, the bracketed language says
that the super priority carries over to the chattel paper.
Summary: The super-priority in inventory can carry over to
chattel paper if the PMSI holder can satisfy the requirements
of 9-330. What this section does is it takes care of the new
value requirement in the context of a PMSI.
(f) If CP or Instrument indicate that it’s been assigned to an
identified secured party other then purchaser (legend),
purchaser of CP or Instrument has knowledge that purchase
violates the rights of the secured party. Cmt 6, 7

Rex Financial → [20]

$ RVs for CP Buyer (SA, PN=chat. pap)
R Fin RV Dealer Buyer (SA, PN=chat. pap)
PSI in all Inv. Buyer (SA, PN=chat. pap)
CP $
D sold CP to GW
D defaulted to R Fin
R Fin and GW both want CP GW

Buyers are Acc’t Ds 9-102(a)(3)

R Fin → PSI in Inv.

If CP are Proceeds (9-102(a)(64)) then 9-203(f) says SI attaches to CP.
9-312 says that filing is permitted for perfecting CP. 9-313 allows CR to perfect
with possession. 9-315(c), (d) allow R Fin to have PSI in CP as Proceeds because filed
in same place

GW → PSI in Proceeds b/c 9-203 value, rights and SP possession; 9-313 possession
perfects
GW has priority (exception to first-to-file) under special rule: 9-330(a).
R Fin could have protected itself by
(a) Taking possession of CP (GW can’t win if no possession)
(b) Stamping R Fin has an interest on the CP in the CP’s legend

Hypo → (problem 1, pg. 199)

1/1 – Bk gave $ to Dealer
Dealer gave Bk PSI in P & AA Inv. and CP
2/1 – D sold Fridge to B for CP (installment sales K and PN)
2/4 – D assigns B’s CP to Bk, Bk gave new value (no possession)

52
3/1 – D sold B’s CP to Fin. Co. who took possession, gave new value and had actual
knowledge of Bk’s FS but did not know D had assigned B’s CP to Bk

Bk = PSI in Inv. and CP

Fin. Co. = PSI in CP

9-330(b) → Bk not claiming CP as mere proceeds (Bk gave new value)

(c) → requires “actual” knowledge that purchase violates the rights of the SP.

Hypo → (problem 2, 199)

$
Bk App. Dealer A
PSI in Inv. & Proceeds Acc’t
B
Sells all PN, SA → CP (9-102(a)(11))
and poss. C
except Negotiable PN → Instrument
Acc’t & D
Cash Lease (chattel paper)

Fin. Co. → PSI AD’s Acc’ts, CP, Instrument

App. Dealer defaults and conflict between Bank and Finance Company.

Bk = PSI as to all proceeds from sale of inventory (Includes Neg. PN which can now file
to perfect).
How? Attachment: 9-203(f), 9-315(a)(2))
Perfection: 9-315(c)-(d), automatic perfection for 21 days and will continue
forever if you can show that requirements of (d) are satisfied.
All the proceeds (accounts: got to file centrally) (chattel paper: can
take possession or file centrally) (promissory note (negotiable
instrument): 9-312(a) tells us that a SI in instrument may be
perfected by filing centrally) (lease: chattel paper (9-102(a)(11))
treated the same way).
Fin. Co. = Acc’ts → PSI
CP and Instrument → PSI
9-330 First-to-File Rule applies to Acc’ts, 9-330 does not.
Winner = Bk
9-330 CP and Instrument special priority protections
(a) Bk is claiming CP merely as proceeds. Bk’s interest/name not stamped on
CP legend. Winner = Fin. Co. (same analysis for the lease)
(d) Bk perfected interest in Instrument by filing for proceeds (not by possession).
Winner = Fin. Co.

53
Hypo →
$ TV
Bk App Dealer Buyer → Defaults to AD OR
PSI all Inv. CP Buys TV and returns it
9-330(c) – Good that comes back is treated as a proceed of CP → Bk still has an
interest in it.

J. Deposit Accounts

1. 9-109(a)(1) – Deposit Accounts covered so long as they are

commercial accounts. Personal property.
a. 9-109(d)(13) – Art. 9 does not cover consumer transaction
deposit accounts.
2. 9-102(a)(29) – Deposit Account → accounts maintained with a
bank. (Both savings and checking accounts fit in here)
3. A deposit account is not a general intangible, and it must be
referenced as “deposit accounts” in a FS to be able to perfect as
original collateral.
4. 9-314(a), 9-312(b)(1) – Perfection of a Deposit Account → only by
Control (do not need a written agreement under 9-203(3)(D) and
filing has nothing to do with the perfection of deposit accounts.
Control is the method needed to perfect).
5. 9-104 – How to Control Deposit Accounts
(a)(1): SP is the Bank where the Deposit Account is maintained
(a)(2): D, SP, and Bk have authenticated record of agreement that
Bank will comply with SP’s orders
(a)(3): SP becomes the customer of the account
(b): D can maintain the right to direct disposition of the funds from
the deposit account without destroying SP’s control.
6. 9-327 → Priority of SI in Deposit Accounts go to the SP having
control of the deposit account under 9-104
7. 9-340 – Set-offs →
a. Bank can set-off against SP that holds a SI in Deposit
Account
b. Bank cannot set-off against SP that has perfected their SI in
the Deposit Account by Control under 9-104(a)(3)
c. Major exception to first-to-file rule. Get here by 9-322(f)(1).

54
Hypo →
SI – Inv. and Sav. Acc’t in Bk

Cap Fed Lander Nursery

CF files FS covering all dep. acc’ts and Inv., sends written notice to Bk of its SI

Cap Fed did none of the requirements for control of a Dep. Acc’t in 9-104, so UnPSCr
as to the Savings Acc’t

The Checking Acc’t wasn’t included in the SA, so it’s inclusion in the FS does not create
an interest in it, as a Dep. Acc’t on behalf of Cap Fed.
However, since only proceeds went into that Checking Acc’t, Under the proceeds
attachment and perfection provisions, Cap Fed has a PSI in the Checking Account as
Proceeds

Hypo →
Cap Fed Landers
SI in Inv. and savings account at Bank
1/2 – Cap Fed files FS (All Dep. Acc’ts and Inv)
2/1 – Landers opens in Bank a Checking Account w/ $ from Sale of Inventory
Bk loans $ to L on unsecured basis
3/1 – Default on both loans

Assume there are only proceeds in the bank account.

Cap Fed clearly has a SI in the proceeds under 9-203(f) and 9-315(a)(2). The question
is then: Is Cap Fed perfected? Go to 9-315(d)(2) which sends us to identifiable cash
proceeds (9-102(a)(64)(a)). Are they cash proceeds? 9-102(a)(9) defines cash
proceeds and one of the possibilities is a cash account. The question that remains then
is: are these cash proceeds identifiable? We have no direct definition of identifiable.
Cmt. 3, 9-315 talks about the concept and subsection (b)(2) is relevant when you are
dealing with commingling. The negative inference is that under (b)(2), if you do not
have anything commingled, you have identifiable cash proceeds if this account is set up
only to take proceeds from the sale of inventory. Cap Fed has the burden of showing
this, and once they show it, they have identifiable cash proceeds and they are therefore
perfected.

The Bank has a SI, so they have attachment. The Bank perfected by control (9-312(b)
(1). If you look at 9-104(a)(1), the deposit account is maintained in the bank that has
the SI, therefore they are perfected.

55
We now have a conflict between two perfected secured creditors. Cap Fed (based on
proceeds), and the Bank (SI in deposit account as “original collateral”)

What rules do we look to decide who wins? 9-322(a)(1) is normally where we start: “the
first to file, whichever occurs first, controls.” Under (b)(1), the time of filing covers
proceeds as well. If we look just at this, Cap Fed wins. But, we cannot stop. Under 9-
327 (priority of SI in deposit accounts). How do we know if 9-327 controls 9-322? 9-
322(f)(1) tells us that you have to look to other provisions “of this part” (300s). This gets
us to 9-327. 9-327(3) says that the bank wins: “except as otherwise, a SI held by Bank
in which the deposit account is maintained, has priority over a SI held by another
secured party.” Under this, Bank defeats Cap Fed, even though Cap Fed filed first, the
rules were different in the past. The Bank is going to win. 9-327 TRUMPS 9-322. This
is the garden variety case that 9-327 deals with, and Bank wins.
It means that Cap Fed needs to police it’s collateral pretty darn closely.

Bank reduces amount in bank account to offset the unpaid debt owed to the bank (Set-
Off)

HYPO
$
Bk D

PN, no SA
Ck
Ck

Cking Buyer
Acc’t

D defaults on unsecured loan

Cking account has positive balance

Bk=debtor, D=debtor.

K. Cash Proceeds 9-322(b)

1. 9-332 – Transferee of $ takes free of SI unless in collusion with D in

violating the rights of the SP. The same is true of transfers of funds
from a deposit acc’t.
a. Collusion today requires more than awareness. Cmt 4. The
CR has more of a duty to control the proceeds (lockbox,
require a separate acc’t, etc.)
b. 9-332 deals with $ and dep. acc’t funds. Cks are covered
under “holder in due course” rules in 9-331

56
For a CR to have a PSI in a bank acc’t, must have:
(1) Control (9-104) OR
(2) Identifiable Cash Proceeds

Hypo → Cash Proceeds and Bank Accounts

PSI Inv. and Proceeds TV for CP-ck Buyer

Bk AD
Fridge for ck Buyer
All cks
Cks for repairs
Ckg Acc’t

AD Repair Shop
ck

Supplier of goods to AD

You know have two commingled proceeds going into checking account under
9-315(b)(2).

Lowest Intermediary Balance Rule

Upon AD’s default, Bk wants to claim ckg acc’t.
Bk = PSI in Inv. and Proceeds
9-315(a)(2) – the proceeds must be identifiable to continue. Common law and
equitable tracing principles. (lowest intermediate balance, first-in first-out,
constructive trust theory).
Salad Dressing Rule for Tracing Proceeds (majority rule)
(non-proceeds go out first)
**Look at what exactly goes in and what exactly goes out and apply this rule:
So long as the lowest intermediate balance of the commingled account > the
amount of the proceeds, those proceeds are deemed to remain in the account.
The presumption is that non-proceeds go out first.

Proceeds

Non-proceeds

57
Transfer of Funds From Deposit Account
The drafters added 9-332 to answer many of these questions. There are two subparts
and (b) deals with a transfer of funds from a deposit account (check), while (a) deals
with you actually going to the bank and getting the money. (b): “a transferee from a
deposit account takes the funds free of a SI in the deposit account unless the transferee
acts in collusion with debtor in violating the rights of the secured party.” “Collusion” is
not defined in the code. It is clear that this rule is not very effective to PSP.

HCC Credit →
Bk
$212K Ck $ - on unsecured basis
(Balance $22K PSI in Tractors and proceeds
Before $199K)Dealer HCC
Dealer is paying off a junior
creditor
$199K ck before PSI with Priority. So long
as
Buyer no collusion is apparent, there
should be no problem with the jr.
CR taking the money

Chrylser Credit → [227cb]

Cks went into the general acc’t and then to cash coll. acc’t
Problem arose because the general acc’t had a negative balance that D kept drawing
on. That resulted in comingling proceeds and the bank’s money. The PSI in identifiable
proceeds isn’t destroyed so long as you can trace and lay claim to any proceeds at all
that might be left in an acc’t. (lowest intermediate balance tracing is the norm)

Chrysler should have had debtor deposit proceeds directly into cash collateral account.

On pg. 230, the second paragraph contains the general wording of the “lowest
intermediate balance” rule.
Must trace, and then look at what has gone out of that account. This tracing rule
is probably the most favorable for a secured party. This rule essentially is this:

So long as the lowest intermediate balance of the commingled account > the
amount of the proceeds, those proceeds are deemed to remain in the account.
The presumption is that non-proceeds go out first.

58
These issues can come up in bankruptcy, the battle between creditors, and transfers
from a bank account that contains proceeds.

V. DEFAULT

A. Enforcement of a Security Agreement

1. Upon default, a SP (no requirement that SP be Perfected, only

need attachment) may enforce his SI in the collateral
a. D voluntarily turns collateral over
b. No consent but peaceable repossession (9-609)
c. Judicial replevin action to enforce SI (need to give notice)
d. Judgment, writ of execution, seizure and execution sale (9-
601) (need to give notice)
2. “Default” → Not defined in UCC (9-601) left to the parties to K
a. U.C.C.C. § 5.109 defines default as
(i) failure to make a payment
(ii) anticipatory missed payment (even though D is still
current)
3. Default occurs when
a. There’s a missed payment
b. There’s an acceleration clause
(i) Acceleration → Default occurs, CR demands payment
of the entire debt.
c. There’s an Insecurity clause 1-208
(i) Insecurity clause → CR anticipates that D will default
and demands payment of entire debt.
(ii) Insecurity clauses have a good faith requirement 1-
201(19), 9-102(a)(43) (this good faith definition has a
subjective and objective requirement).
4. Cumulative Remedies → 9-601(c) – May proceed simultaneously
with 2 different remedies (But you’ll only get one satisfaction)
a. Cmt 5 – can do this if acting in good faith
b. 1-203 – implied duty of good faith

When and how

5. 9-601 → General rights of secured party after default
6. 9-602 → Certain rights cannot be waived
7. 9-604  If security interest covers real property or fixtures
8. 9-607 → Account D
9. 9-609 → Self-Help Repossession.
a. 2 aspects:
(i) Obtaining Collateral
(ii) Disposing of Collateral
→ Surplus or Deficiency Issues

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 → D response 9-625
→ Commercially Unreasonable Sale remedies
OR
→ CR did not seek commercially reasonable
resolution
b. Penney Rule: Unless SA says otherwise, SP can seize
property without notice to D, when default occurs (There’s
no such thing as a bad seizure of collateral)
c. No notice needs to be given. Not required in 9-609, not
required in Art. 9 anywhere. Parties can put a notice
requirement into the K.
d. U.C.C.C. 5.110, 5.111 → Notice required 30 days prior for
commercially reasonable standard in consumer cases
(i) Have to wait 10 days b/t default and Notice to Cure
(ii) Have to wait 20 days between Notice to Cure and
Repossession
e. Breach of Peace – 9-609(b) → SP may proceed without
judicial process if not in breach of peace. (U.C.C.C. 5.112).
An agent or independent contractor of the SP is also held
under breach of peace. Cmt. 3. Failure to comply with Art. 9
remedies: 9-625(b), (c) damages for D and also common
law remedies.

Waiver
f. 9-602 – D may not waive any of the rules in the sections
listed
9-624: permissible waivers: a limited exception to 9-
602’s prohibition of waivers by debtors and obligors.
Permits some post-default waivers in limited cases.
g. Cmt 3, 9-601 – K terms and Common law determines
whether default has occurred or has been waived
→ If CR has waived default, he must make it explicitly clear
to D that he intends to find D in default the next time (Ex. SP
has accepted late payments. At this time, the SP is
considered to have waived enforcement, and must
specifically tell debtor that this late shit is over and the next
late payment is their ass).

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10. Disposition of the Collateral
a. 9-610 →
(i) (a) After default, a SP can dispose of the collateral in
its present condition or following any commercially
reasonable preparation or processing.
**The proceeds are then required to be applied
in the order set forth in 9-615(a).
(ii) (b) Every aspect of disposition must be commercially
reasonable, and can be sold as a unit or in parcels.
“Commercially reasonable” is not defined in the
code.
Look to factors of 9-627 to help determine if
“commercially reasonable”
(iii) (c) The sale of the collateral can be by public sale
(auction) or private sale. Cmt. 2: Private sells are
encouraged. Cmt. 7: There are two distinctions
between private and public: (1) the secured party can
normally buy at public, but usually not at private (only
if collateral is of a type customarily sold in recognized
market or is of a type which is the subject of widely
distributed standard price quotations ((c)(2)); (2) the
debtor is entitled to notice of time and place in a
public sale, but only time at a private sale. Also,
some form of advertisement must precede a public
sale.
(iv) (d) (e) warranties are included in the sale price and
may be disclaimed
b. 9-611, 9-612 → Notification before Disposition of Collateral
(i) Who is to be notified and by what date. The
reasoning is to let the debtor/guarantor have sufficient
time in attempting to secure parties to bring price up
to help stop or limit potential deficiency.
(ii) 9-611(a)(2) D’s waiver right to notice post-default is
allowed
(iii) 9-611(b) CR shall send reasonable authenticated
notification
→ Requires a writing (oral is not enough) under 9-
102(a)(74) “Send” and also “Authenticate” and
“Record”.
(iv) 9-611(c) Who is to be notified including the debtor (9-
102(a)(28)) and the secondary obligor (encompasses
a guarantor) (9-102(a)(71)).

61
 The notice to the debtor and secondary obligor
can be waived under 9-624(a).

9-611(c)(3)(B):
(v) 9-611(e) Safe Harbor – If between 20 and 30 days
before notification date, SP requests a search of
records under D’s name and gets no response or
sends notice to all those who appear, CR has
complied with (c)(3)(B)’s ten day rule. There is no
safe harbor for searching the records.
(vi) 9-612: Timeliness of notice
(a) the notification must be sent within a
reasonable time which is a question of fact.
(b) In a non-consumer transaction, notice sent
after default and at least 10 days before
disposition is considered reasonable. (10 days
is the norm)
If creditor deposits in mail, courts
indicate that this may toll the ten days
until received.
c. 9-613, 9-614 → What must be contained in the Notification.
9-613(1): general requirements.
9-613(3)(A): minor errors are tolerated
9-613(5): model form
9-614: special revisions for consumer goods
d. 9-615, 9-616 → Proceeds, Deficiencies and Surpluses
9-615(a): governs proceed distribution.
9-615(d): If the SI secures indebtedness, the secured
party must account to the debtor for any surplus and,
unless otherwise agreed, the debtor is liable for any
deficiency.
9-316: In a consumer goods transaction, the secured
party must provide the debtor or obligor with an
explanation of how the deficiency or surplus was
calculated.
e. 9-627(a) → Just because a greater amount could have been
obtained doesn’t preclude SP from establishing that the
disposition was done in a commercially reasonable manner
f. Value of the Collateral → 9-610, Cmt 10 (low price is
questionable), 9-627, Cmt 2, 9-615(f) (how to calculate a
deficiency when the purchaser at disposition is a relative of
SP)
g. Rebuttable Presumption Rule → 9-626(a)(4)
(i) Presume that it’s commercially reasonable

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 (ii) If D puts this in question, SP has burden of proving
commercially reasonable
(iii) Depending on what SP proves or fails to prove is a
commercially reas. price, the deficiency will be
adjusted accordingly.
(iv) U.C.C.C. § 5.103: rebuttable presumption not
applicable for consumer transactions.
11. Strict Foreclosure – keep the collateral in satisfaction of the debt

Account Debtor
Skim 9-615(d)-(e)
9-607- 9-608

9-109(a): if it is a loan secured by accounts, it is a secured transaction covered by

Article 9.
9-109(a)(3): sale of accounts is also covered by Article 9.

This means that all the rules apply: attachment; perfection; priority.

What difference does it make whether transaction is sale or transaction?

The key difference deals with deficiencies in surpluses.

9-607(a): we have here an exception to the general rule that you have to
have default before the secured creditor can enforce the security interest.
(a) “if so agreed, and in any event after default (you can have an
agreement that provides that a secured party can move against collateral
before technical default.) Situations, (a)(1): “may identify an account
debtor” (the customer: the person who is obligated on the account). What
this provides is that even before default, can notify customer. “Lock-box
agreements are very common (payments go to a PO box). In effect, that
avoids giving specific notice.
9-608(b): this is the significant difference between a secured transaction
(i.e. loan) and the sale of an account. Under (b), it says that if the
underlying transaction is a sale of accounts, the debtor is not entitled to
any surplus and the obligor is not liable for any deficiency.
9-615(d) – (e): (d) general rule with regard to non-sales: the
secured creditor has to account for any surplus, and the debtor is
liable for any deficiency.
Under (e)(1): the debtor is not entitled to any surplus and the
obligor is not liable for any deficiency.
***The important distinction between this and what we have learned
so far, secured creditor does not have to account for a surplus and
has no right to go back after the debtor for a deficiency.

63
 Example:

Plumber $5000 worth of accounts Customers

Sell accounts
For $4000

Bank

Suppose Bank notifies customers to pay and the customers only pay $3000. The
question is, can the Bank go back against the plumber? The answer is NO, they have
no right to seek any deficiency. On the other hand, suppose that all the customers pay
and they get $5000. That is a surplus and they do not have to account for it back to
Plumber. If you take the same transaction and make it a loan instead of a sale, the
plumber is liable for deficiency and is also due surplus under 9-615(d).

That is the significant difference between surplus and deficiency in secured transactions
in sales or loans.

VI. MISCELLANEOUS

A. Leases (read pg. 348-350 of text)

1. If a Sale/SI is created and not a Lease – 9-109(a)(1) says that Art.

9 governs “regardless of form”:
a. 1-201(37)(2 ¶) → How to determine if it’s a real lease or a SI.
Based on facts of each case; however a transaction creates
a SI: if requirement; and requirement (one of (a)-(d)).
b. 9-505(a) → Consignor/Lessor may file FS
2. If it’s a lease, B.C. § 365, 544 say tib can assume or reject it if it
wants. (C of T, no FS, tib can avoid)

B. Consignment

1. Art. 9 covers all of the consignment issues except for the 9-600s
enforcement provisions
2. Treated as a PMSI in Inv. 9-103(d)
3. Definition of Consignment: 9-102(a)(20) →
Delivers (1-201(14)) goods to a merchant (2-104)
(A) Who deals in goods of that kind

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 (i) different names; (ii) not an auctioneer; and (iii) not
generally known by its creditors to be substantially
engaged in selling goods of others
(B) Goods greater than $1000
(C) Not Consumer goods immediately before delivery
(D) Transaction not create SI that secures an obligation
See also the following relevant sections:
4. 9-109(a)(4)
5. 9-102(a)(20)
6. 9-103(d): says a consignor is treated as having a PMSI in
inventory.
7. 9-319
8. 9-322(a)(1)

Statutory Liens
How to deal with statutory lien/bank conflicts: start at 9-109(a) which applies to the
bank’s SI. The garage’s claim is a “statutory lien” (status lien: involuntary creation,
there was never an agreement; K.S.A. 58-201). 9-109(d) suggests that involuntary liens
not created by an agreement that Article 9 does not cover. Comment 10 to 9-109 (very
important to read) …with few exceptions, they are not covered. General proposition,
general involuntary liens are not covered. EXCEPTIONS (9-109(d)) (1): does not apply
to an agricultural lien (non-possessary) (the state of KS is the only state that did not
adopt this 9-109(d)(1); (2) it is possible to have a common law lien and it is not covered
except for priority rules under 9-333; for personal property, it is not a mechanic’s lien
even though the garage is a mechanic (you must find a state statute that gives the
garage a right in this car.

K.S.A. 58-201: the key is that after the comma, …”the first and prior lien on such
property is hereby created”: covers the reasonable cost of labor and parts and material.
It goes on, 2nd paragraph goes on…classic mechanic lien.

9-333: Priority of Certain Liens Arising by Operation of Law

trumps the bank unless the statute provides otherwise.

In short, statutory liens are involuntary liens. We start with the proposition that
they are not covered by Art. 9. We have some exceptions including ag. Liens,
and have 9-333 with deals with priority.

C. Investment Property 9-102(a)(49)

→ Classify Collateral

1. Security 8-102(a)(15)
a. Certificated 8-102(a)(4)
(i) Bearer Form 8-102(a)(2)

65
 (ii) Registered Form 8-102(a)(13)
2. Securities Entitlement 8-102(a)(17), (7), (9)
3. Securities Account 8-501→ Account in which a financial asset is or
may be credited. Get a securities entitlement if a securities
intermediary receives a financial asset from the person or acquires
one on their behalf, and accepts it for credit to their securities
account

→ Attachment 9-203(b)

1. Value
2. Rights
3. Authenticated Agreement with appropriate description under 9-
108(d), (e)
OR
4. Registered Certificated Security and delivered to SP under 8-301
and pursuant to D’s SA
a. 8-301 → “Delivery”
OR
5. Investment Property and SP has control pursuant to SA.
a. 9-106, 8-106 → “Control”

→ Perfection

1. 9-314 → Perfection by Control under 9-106, 8-106

a. 8-106(a) → Purchaser has control of certificated security in
bearer form upon delivery (possession) 8-301
b. 8-106(b) → Purchaser with possession of registered
certificated security and it’s indorsed or registered in
purchaser’s name
c. 8-106(d) → Purchaser of security entitlement who is an
entitlement holder or a securities intermediary who has
agreed to act at direction of the purchaser
2. 9-313(a) → Possession of certificated security – Automatic upon
attachment
3. 9-328 → Control trumps Filing

Hypo →
• E owns 1000 shares of A Inc. = $200K; has cert. registered on A’s books.
• Bk loans $100K pursuant to oral K granting BK a SI in stk and Bk takes possession
of cert. that E indorses in blank on back of cert.
• Bk not registered with A Inc.; Bk has possession of cert.

Attachment met under 9-203(b)(3)(C)

Perfection established through control under 8-106(b)

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D. Real Estate related collateral

Fixtures
9-109(a)(1): applies to personal property and fixtures. The question then
becomes, “what is a fixture?”
Fixture (9-102(a)(41)): we have a definition that is not very helpful.
What you have to think about is that it is a former chattel that has
been affixed to the real estate in such a way that a reasonable
person would think they are part of the real estate, but they
maintain a separate identity. There are other definitions to look at:
9-102(a)(44)(i); and
9-334(a): in effect a definition: building materials incorporated into
improvements into the land are not fixtures (lumber, glass, bricks,
etc.) A classic example of a fixture is a furnace.
By in large, you must to look to state law to determine if you have a
fixture or not (do not need to know for exam);
Other sections needed to be aware of: there is a special fixture
filing defined at 9-102(a)(40) and is a special kind of FS that is
referred to as a fixture filing. There is a direct reference to
9-502(b)-(c) and there are some very “specific” requirements to a
fixture filing (legal description and who owner is). Where do you file
it? 9-501(a)-(b). You file it locally where the real estate is located
(one of the few exceptions to the central filing rule).

The classic conflict is between a real estate mortgage and a holder

of a SI in the fixture. Fixtures are included in the sale price of real
estate unless excluded in the sales contract. Carpets, light fixtures,
dishwashers are probably fixtures. Washer/dryer, stove, fridge are
not fixtures.
Other illustrations of fixtures: built-in range, curtain rods (not
drapes); window air-conditioning units.

Fixture Priority
Kind of like the first-to-file rule. The first to record is going to win
unless you can find an exception. A major exception is 9-334(d)
which is very similar to PMSI in 9-324.
9-334(d): a perfected interest in fixtures has priority over if
the debtor has possession if: (1) PMSI; (2) the interest of the
encumbrancer or owner arises before the goods become
fixtures; AND (3) the security interest if perfected by a fixture

67
 filing before the goods become fixtures or within 20 days
thereafter.

9-109(a)(1) tells us that Article 9 applies to personal property and fixtures. We

know that collateral is defined under 9-109(a)(12) and is extremely broad. How
do we classify (payments to debtor on loan) under Article 9: 9-102(a)(11): you
have to have a monetary interest and a security interest in specific goods. The
payments for Green Acre is not a security interest in specific goods. The
payments for Green Acres is an account. What happens if we have a default on
both A and B?

***********
Issue arises in the real world whether accounts on real property are general
intangibles or accounts. They are accounts, plain and simple.

9-102(a)(2) … for property that has been or will be sold.

The definition of account is much broader than it was before the revision of the
code.

9-109(d)(11)…does not apply to the creation or transfer of an interest in or lien

on real property, including a lease or rents thereunder. Cmt 7.: talks about
promissory notes (obligation to pay for is secured by real estate).

The payments are person property thus the bank must comply with Article 9.

Pure real estate interests are not covered by Article 9. 9-109(d)(11)

E. Bankruptcy

Two of the “so-called” avoidance powers, and a little bit of background

§547(b) (507 text): Bankruptcy is a federal statute 11 U.S.C. § 101. You file in a federal
court system. By in large, in regards to priorities, Congress has in effect said that
Article 9 will determine priority for most things. There will be a new bankruptcy code
introduced in Congress next year and there is good chance it will pass.
Bankruptcy is about financial failures. We are giving people and opportunity to have a
“fresh start.” The second rationale is creditor equality, puts everyone on the same field.
There are also costs to bankruptcy, social and economic. The prize is a discharge from
debts, and someone has to pay (lose money) from this. Taxpayers pay for it.
You “do not” walk away from security interests and valid liens. That is the importance of
being a secured creditor.

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In the material, there is a discussion of secured claims (pg. 512cb). Secured claims can
be secured either by personal property or real estate. We are looking at personal
property. Obviously, unsecured creditors fair badly.

Two types of Bankruptcy:

1. liquidation (Chapter 7): debtor says “I quit”
2. reorganization (Chapter 11)

Unsecured creditors share in property that is not subject to liens. Therefore, it is of

prime importance that these liens be attacked by a trustee. (read pg. 11)
In all liquidation bankruptcies, a trustee will be created. A trustee will marshal assets
together and if you are going to claim a PSI, you have to submit it to the trustee. The
trustee will attack those b/c they are trying to get as much money for the unsecured
creditors as he can.

Extremely important concept: Stay (pg. 511-512)

Incredibly important power of bankruptcy court. Once it is filed, all things stop.
NO one can do anything without approval. The stay effects all the debtors
property, any action, or anything without court approval.

Discharge (pg. 513)

A valid lien survives bankruptcy.

What is the value of a SI?

Controlled by two things: 1. amount of unpaid debt; and 2. value of collateral.
The value of the collateral controls the value of the lien. You can be oversecured
or undersecured. If the value of the property exceeds the value of the unpaid
debt, you have an oversecured creditor and they can only give the value of the
debt (no windfalls). If undersecured, they have a secured claim for value of
collateral and an unsecured claim for the remaining. In liquidation, unsecured
creditors get from least (nothing) to most 10 cents on the dollar.

Avoidance Powers of the TIB

§ 544(a)(1); Lien creditor (9-317(a)(2))
Strong-arm clause: the TIB becomes a lien creditor on all property immediately
when bankruptcy petition is filed. The importance of the avoidance power as a
lien creditor is that it always defeats unsecured creditor.

Certain statutory liens are avoidable. § 548(a) is an “amazing power” that Congress
gave the TIB. Two things about it: 1. one-year statute of limitations (TIB can go back
one year and look at any transfer debtor has made and essentially any gift made for not
“reasonable equivalent value” the TIB can come get it back. Don’t have to show any
fraudulent intent;

69
§ 547(b) Preferential transfers by debtor (pg. 2055)
gives TIB, under certain circumstances, to set aside. First thing is we are not covering
sub(c) which is the exceptions to the TIB claims. That is there, we are not covering.

Basic Requirements
Five Elements (+ two other requirements)

§ 547 Threshold Requirements

Before you get to the elements: the trustee may avoid any transfer of an interest in the
debtor in property (must be a transfer and that transfer must involve interest in property)
A “transfer” is defined at 11 U.S.C. § 101(54): incredibly broad definition
Can be voluntary/involuntary; gift, sale.

Of the interest in any property of the debtor.

Property can be cash, specific goods, personal property, real estate

§ 547(b) Requirements

1. the transfer has to be to or for the benefit of the creditor;

a. unlike § 548, the transfer does not have to be to a creditor.
2. The transfer must be for or on the account of an antecedent debt owned by the
debtor before such transfer was made;
3. the transfer must be made when the debtor was insolvent;
a. §547(f) says for purposes of this section, that if the transfer occurs within
90 days there is a presumption of insolvency (very important presumption)
i. definition of insolvency is found 7 U.S.C. § 101(31) and it is not
always easy to determine.
ii. Importance is that under (g), the TIB has the burden of establishing
each requirement, and establishing insolvency would be hard for
TIB without (f)
4. transfer is made on or within 90 days before the debt of the filing petition; or
between ninety days and one year before the date of the filing of the petition , if
such creditor at the time of such transfer was an insider (7 U.S.C. § 101(31))
a. first part before “or”: look at the day petition was filed and count back 90
days and see if the transfer occurred within that period
b. second part: under 7 U.S.C. § 31(a) insider language, if debtor is
individual, it talks about who this “insider” language is applied to: relative
7 U.S.C. § 101(45)
c. Essentially, the transfer can go back one year if an “insider” but only 90
days if by someone else
5. the transfer enables such creditor to receive;
a. more than such creditor would receive under Chapter 7; and
b. the transfer had not been made; and

70
 c. such creditor received payment of such debtor to the extend provided by
the provisions of this title
** simply put, what would this creditor have gotten in the liquidation if the
transfer had never been made. If the creditor gets more than they would
have gotten without transfer, it is satisfied.

Problem 1, p. 583

5/1 D owed Cr $20, $20,000 unsecured

D paid Cr in cash $20K
Not paid other creditors

7/15 Bkcy pet filed

1a. Can TIB avoid the payment?

What we are looking at is 547(b). Has there been a transfer? Yes, the
money, under 101(54), we have a voluntary transfer of money. Payment
of cash is a transfer. Then we look at the five enumerated requirements.
#1: yes; #2: the debt pre-existed the payment; #3: 547(f): there is a
presumption if 90 days before bkcy, this is less than 90 (76 days); #4: yes;
#5: key question: did this transfer enable the CR to get more than this CR
would have gotten if the transfer never would have been made? YES,
chapter 7 no one ever gets 100% on the dollar. If they would have gotten
10%, preferential would have been 90%.

Does it matter if Cr knew about D’s financial condition?

NO, under 547(b), knowledge is irrelevant.

Who has the burden of proving insolvency? §547(f & g)

1b. Would your answer be different if petition was filed 8/15? (insider)
look at § 547(f): says that for purposes of § 547, the debtor is presumed to
be insolvent during the 90 days before. (g) says that TIB has presumption
of proving elements. BUT, the presumption does not result if you have
insolvency outside the 90 days.

1c. p.583

5/1 D owed Cr $20,000 unsecured

Cr obtained judicial lien and sheriff seized prop. = $20K
Not paying other creditors

7/15 Bkcy pet filed

Can TIB avoid the seizure under § 547(b). Is this a transfer?

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Transfer is defined at 101(54). Here the debtor is getting an interest “involuntarily”.
This is covered as well. The seizure of the property gives the creditor a specific interest
in the debtors property. We then go through the rest of the five requirements under
547(b). 1? Yes; 2? Yes; 3? Yes; 4? Yes; 5? Did this transfer enable creditor more than
it would have gotten had the seizure never occurred. They would have been an
unsecured creditor and %99.99 time, less. Element are required. TIB can avoid it.
Problem 2, p. 584
Looks at whether the creditor is “preferentially treated”

9/1/90 Bk 1 year $10K loan

Dr gave PSI to Ks in EQ = $15K

11/1/91 Dr pd BK $10K + Interest

Dr was insolvent

12/1/91 Dr filed Bcky pet

12/1/91 Dr filed Bkcy pet

Can TIB avoid the payment under § 547(b)?

There was a transfer ( a payment). Requirements 1-4 are met. The 5th requirement: did
this transfer (payment) enable the creditor to get more than it would have gotten had the
transfer not been made? What would the bank have received in a chapter 7 liquidation?
Look at the value of the collateral and the amount of the unpaid debt. They would have
received $11K had the transfer never occurred. Therefore element #5 is not satisfied
because it did not prefer this creditor (this creditor did not get more if the transfer would
have never occurred.) If the collateral was only worth $9 and the unpaid debt was
$11K, we would now have $2K which is a preferential transfer. So if the collateral is
worth less than the unpaid debt, and the bank received 100% of the payment, they
would have a $2K preferential treatment.

§ 550(a)
“to the extent that a transfer is avoidable, the trustee may recover for the benefit
of the estate, the property transferred by the initial transferee to the transferor.”

A couple more transfer issues:

§ 547(b) transfer

1/2 Bk loand $ to D on unsecured CR

5/1 Bk learns D in financial difficulty

D grants Bk PSI in EQ#1

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6/1 D files Bkcy pet

Can TIB avoid Bk’s PSI?

544(a)(1): the answer is no. The TIB can defeat a PSCr. A lien creditor loses to a PSI.
look at 9-317(a)(1).

What about 547(b)?

What is the issue? The transfer occurred on 5/1 because that is when the SI
(voluntary interest of property of debtor). Then you go through the rest of the
requirements: 1-5: are fulfilled. All 7 requirements are satisfied, thus avoid. This is an
example of where perfection does not help. Ethical question: will the bank try to keep
the operation afloat for 90 days at least to get out of 5?

547(b) Transfer

1/2 Bk loans $ to D
D grants Bk PSI in EQ#1

1/3 D files Bkcy pet

Can TIB avoid this transfer?

Under 544(a)(1) (lien creditor 9-317(a)(2)) cannot use.

What about § 547(b)?

Was their a transfer? Yes, when the SI was created. What about the second
requirement? Yes, because it is for the benefit of the creditor. What does not happen is
this is not a transfer on an account of an anacedent debt. When the debt and transfer
occur at the time, there is no transfer. The debt had to pre-exist the transfer in property,
therefore this transfer cannot be avoided and you cannot satisfy 547(b)(2).

AFTER-ACQUIRED PROPERTY

2/1 Bk PSI in D’s P and AA EQ

3/1 D buys new EQ without $ from BK

5/1 Bankruptcy

Can TIB avoid Bk’s PSI in new EQ?

Under 9-203(b), there are three requirements for attachment. Under Article 9, the
priority date occurs on 2/1 because filing or perfection whichever occurs first. Under
Article 9, priority dates at 2/1

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**CONGRESS changed this rule in respect to Bkcy. This represents a major difference
between Article 9 and the bankruptcy code.

When did the transfer occur under § 547? (e)(3) (pg. 2059). 1-2 relate to where a
transfer occurs, do not need to know them. We are looking at (e)(3) which says “a
transfer is not made until a debtor obtains rights in the collateral” Not until 3/1 for
purposes of ). 1-2 relate to where a transfer occurs, do not need to know them. We are
looking at (e)(3) which says “a transfer is not made until a debtor obtains rights in the
collateral” Not until 3/1 for purposes of §547(b). You can then acquire all the
requirements of § 547(b).

In short, § 541(a)(1) will not work for TIB because you have a perfected secured CR at
the date of BKCY.

§ 547(b) will work because of (e)(3), therefore a TIB beats a PSCR. The key to
remember in addition is that you have to have the transfer within the 90 days. If the
equipment is purchased before, will not work.

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