Secured Transactions

SCOPE ART 9: consensual security interests in Attachment: steps required to give C a SI in collateral that is effective against D. C
 Personalty & fixtures is not a secured creditor until attachment.
 Stat. non-poss. Agro liens Perfection: steps required to give C SI in collateral effective against the world.
 Sale of accts, CP, payment intangibles, prom. Notes Generally, perfection = giving public notice of SI.
 Disguised consignments [actually SI] FS: Financing statement doc used to provide public notice of SI. Filing is primary
 Secured sales disguised as lease means of perfecting.
* Only to consensual/voluntary collateralizations not stat or mechanics liens. BIOC: Buyer in the ordinary course. Purchaser/lessee of goods from merchant [i.e.
inventory], in good faith, without knowledge that sale violates another’s SI, from
DEFINITIONS & KEY ABBREVIATIONS: someone in the business of selling such goods.
SI: Security Interest in personal prop/fixtures secures payment for performance of HIDC: holder in due course of an indorsed negotiable instrument.
obligation NOCB: Non-ordinary course buyer. Purchases collateral outside ordinary course of a
C/SP: Creditor/secured party that has SI through SA. business e.g. stereo from flower shop
SA: Security Agreement between D and C that creates SI. PAC: Perfected & Attached Creditor
D: Debtor who owes payment or performance obligation. LC: Lien Creditor w/ attached interest. Gets judicial lien on collateral [non-
Collateral: fix/Personalty subject to SI. C can look to it for satisfaction of debt. consensual]. Attached on date of lien’s creation, usually filing judgment. Citation to
PMSI: Purchase Money Security Interest. Gets super-priority discover assets to enforce judgment against D is served then lien attaches.
 Seller PMSI: C sells D collateral on credit & retains SI in the item sold. Bankruptcy petition filed by trustee in bankruptcy [TIB] then lien attaches.
AUPC: Attached, unperfected creditor
 Lender PMSI: C gives D loan enabling D to buy specific coll & C takes SI in
GUC: General Unsecured Creditors. Lender that does not take right in to secure loan
specific coll.
After acquired prop clause: allows C to obtain SI in D’s future prop. collateral/SI e.g. visa/mastercard. Claims of GUC are not against property; only
against the D personally. GUC can get judgment against D & turn that into a judicial
Future advance clause: allows C to K to make future advances secured by present
lien = LC. Represented by TIB if D declares bankruptcy giving GUCs higher priority
SA.
than before [LC]

STEP 1: ID COLLATERAL
STEP 2: DID IT ATTACH
Collateral ID is determined by the D’s principal use of the prop at the time of attachment.
 To attach you need (1) Agreement (2) Value to D (3) D’s rights in prop
o Value = anything really. Can even be past consideration [even though wont work under K law]
o Rights = Ownership interest or right to obtain possession. Title doesn’t matter except for consignment.
 Agreement = must be consensual & evidence by (1) Authenticated SA record (2) Possession or (3) Control
o Authenticated SA record providing adequate description of collateral [all can be attached by authenticated SA]
o Possession = C possesses collateral. Must be tangible or quasi tangible.
 By C actual possession
 C’s agent has possession & its followed by preceded by authenticated record.
o Control = intangibles can be “controlled” by C since can’t be possessed. only intangible commercial deposit accounts, electronic CP, or uncert investment prop.
Collateral Defined Includes Attachment
1. Tangibles Goods that are movable when interest attaches. Equipment is default catch-all
Fixtures become so incorporated into - affixed - immovable property becomes part of the Consumer goods if D consumer Possession
realty.
Equipment if D business
Standing timber to be cut Possession
As-extracted collateral Rights in oil, gas, and other minerals reserved before extraction, so that the Possession
security interest will attach to the mineral as soon as it is extracted.
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Manufactured homes Secured transaction that (1) creates a PMSI interest in a manufactured home that Mobile homes Possession
is not inventory or (2) manufactured home that is not held as inventory is the
collateral.
Embedded computer if program is (1) customarily considered part of the computer program or (2) by Possession
programs purchasing computer, B gains the right to use the program in connection w the
computer.
Consumer goods Tangible goods used or bought for primarily personal, family, or household use. Possession
& Fixtures owned by an individual.
Inventory Goods, other than farm products, that are held by a business for sale/lease to Possession
others in the ordinary course of business and raw/consumable materials used by
the business.
Farm Products Crops, livestock, unmanufactured products of livestock, and supplies that are used Operations: Raise, cultivate, Possession
or produced in farming operations and, which a farmer possesses or uses. fattening on farm

Supplies: Seed, fertilizer, not

fixed assets
Unmanufactured products: what
comes out of crops/livestock in
natural state. When product goes
under transformation = inventory
e.g. Cheese is man.
Equipment Any tangible thing held by a business that is not within another category of Possession
tangibles. & Fixtures owned by a business.
2. Quasi-Tangibles Legal rights represented by a tangible writing. Where the promise to pay becomes merged so completely into a piece of paper that the
paper embodies the promise. Transferring the paper is necessary to transfer the promise to pay.
Instruments A negotiable instrument or writing evidencing a promise to pay memorialized in a Promissory notes - IOU Possession
note or certificate of deposit [ordinary course of business is transferred by Checks
delivery with an Indorsement or assignment] Drafts
Cert of deposit
Negotiable CDs
Documents of title Pieces of paper representing the right to receive goods. Warehouse receipt- in business of
storing goods for hire
Bills of lading – commercial
shipping
Chattel Paper A record that evidences both a promise to pay and a property right in a chattel - Promise to pay = monetary Control [electronic]
both evidenced in the same record/s. Tangible chattel paper is a quasi-good; obligation related to the
electronic CP is intangible personalty [secured by the goods Possession
or owed under a lease of the [tangible]
goods]
Property right = security interest
in specific goods or lease of
specific goods [Security interest in
software used in goods; License
of software in goods]
 Secured Transactions
Investment Property Stocks/bonds, certificated/uncertificated, securities accounts, mutual funds, Paper share certificated = Control
brokerage accounts certificated securities
3. Intangibles No physical form.
Account [receivable] Right to collect on a promise to pay the debtor later on a monetary obligation after
the sale or lease of Personalty- not represented by a writing.
Deposit Account A commercial bank account [technically the bank’s promise to give you back $ Uncertificated CD [if certificated Control
that you put on deposit] it would be an instrument]
Commercial tort claim Filed by an organization/entity or filed by individuals that arose out of his
business and that do not involve personal injury.
General Intangibles Catch-all for intangible rights. Includes rights in intellectual property, business It is the “right” which is intangible
goodwill, non-monetary K rights. e.g. right to explore land for
minerals, right to buy the minerals
on certain terms.
4. Proceeds Whatever is (1) acquired upon disposition (2) collected on (3) rights arising out of (4) claims from or (5) insurance from — collateral
 Attaches automatically despite terms of SI, as long as proceeds are identifiable as linked to original collateral. After acquired prop also
attaches automatically as soon as D acquires an interest in property that is after acquired.
Cash Money, checks, deposit accounts coming from Collateral Money Includes: Damages/Claims Trace $ into deposit
& Insurance payments for loss, account and the SI
If proceeds are cash, lowest intermediate balance rule applies. Presumption that D destruction, interference etc. with will attach to the
spends non-proceeds first. The value of the SI in proceeds is the lesser of collateral deposit account.
proceeds deposited or lowest balance of account.
Non-Cash Everything else – i.e. another form of collateral. e.g. Proceeds of inventory are
equipment

STEP 3: PERFECTION
Perfection puts world on record or constructive notice of C’s existence & interest in collateral.
Possession: SI perfected as soon as C takes possession of tangible coll.
Control: intangibles can be “controlled” by C since can’t be possessed.
Notation of lien on cert of title: where coll. Is auto or boat must file w/dept of motor vehicles. Not when D is seller of cars/boats bc would be inventory.
FS: filed with SOS where D resides or coll located [fix/as extracted deed recorder office]. Valid for 5 years. Continuance 6 mos before exp = relates back.
 D’s exact name on DL or arts of incorp w state. Not seriously misleading.
 Enough description of coll to put others on notice and to make inquiries. [less than SA, but don’t make too broad otherwise wont cover whats in SA]
 D moves/org changes name = 4 mo grace period to file in new state.
Change in use: doesn’t change effectiveness of FS filing.
Fixture filing: in office of deed recorder [mortgage filing] same req’s as FS + reasonable ID of real estate and name of real estate owner.
Collateral Filing Possession Control Auto-Perfect Auto-Temp
Farm products      where in temp possession of bailee - 20 days
Consumer goods     PMSI  where in temp possession of bailee - 20 days
Equipment      where in temp possession of bailee - 20 days
Inventory      where in temp possession of bailee - 20 days
Fixtures      where in temp possession of bailee - 20 days
Document of title   Negotiable    negotiable, where C gives new value under
SA- 20 days
 where C Makes negotiable doc avail - 20 days
 Secured Transactions
Certificated Security      where C gives new value under SA- 20 days
 where C Makes available - 20 days
Investment Property     Some 
Deposit Account     
Comm. Tort claim     
Accounts     Small scale assign. 
 Assign. Lotto winnings
Chattel paper   Tangible  Elec.  
General Intangibles     
Payment Intangibles     Actual sales 
Agricultural Liens     
Money     
Instrument     Actual sales of promissory notes  where C gives new value under SA- 20 days
 where C Makes available - 20 days
Beneficial interest decedent’s estate/ trust     
Proceeds     original FS describes proceeds by  20 days [beyond this look to left for auto
category perfection]
 Identifiable cash proceeds [$,
checks, deposit accounts]
 non-cash if (1) original SI perfected
by filing (2) Proc. are coll that can be
perfected by filing in same office as
original filing (3) not acquired with
cash proceeds
Accession  if SI perfected when Coll becomes
accession, remains perfected in coll.

STEP 3: WHO WINS IN PRIORITY HEIRARCHY

Highest priority gets first rights to payment in full. If any collateral or proceeds are left, it goes to the next in line.
General Default Rules: As between claimants in the same level of the hierarchy, First in time, first in right.
 Perfected v Perfected – First in Time: As between multiple secured parties the first to file or perfect has priority.
 Perfected v Unperfected – Perfected wins
 Unperfected v Unperfected – first to attach
 Perfected v Buyer: Generally, Perfected wins; SI follows into hands of buyer of goods [exceptions]
 Proceeds: first to file or perfect. Same priority as perfected SI in original collateral as long as beyond 20-day temp
Key
 Blue background is non-hierarchy its These are usually requirements for the These are added factors to consider that
just specific situations within that claimant to win priority over the person do not necessarily have an effect on the
hierarchy. in the “priority over” box priority battle. Usually something to do
 The claimant here beats the claimants with advances or priority over proceeds.
in the “Priority over” box
 In #8 PAC & LC the same rules
essentially apply to both parties PAC
 Secured Transactions
perfects and LC attaches or files for
the judicial or statutory lien
CLAIMANT HEIRARCHY CONTEXT PRIORITY OVER NOTES
1. BIOC Inventory purchase vs PAC unless knowledge
2. HIDC
3. Transferee Deposit Account vs PAC unless acted with collusion with
D
4. Purchasers of:
Chattel Paper Purchaser in ordinary course gives new vs Note: Purchaser of CP has priority in
value + Good faith with:  PAC’s interest in CP that arises as proceeds if either:
 Possession – Tangible CP proceeds of inventory unless  Would have had priority under
 Control – Electronic CP indication of assignment general rules
 Anyone unless knowledge  Proceeds are specific goods covered
in CP or cash proceeds of specific
goods.
Instruments Purchaser + Good faith + value + vs PAC unless knowledge Note: Difference CP requires ordinary
Possession course & new value. Instruments do not.
5. Possessory Lienholder Ordinary Course + Possession vs PAC This is still under UCC law; Non-
possessory [LC in this chart] is not under
UCC law
6. Art. 2 Claimant Retains possession vs PAC Sale of goods
7. PMSI Super-priority NOTE:
a. Garage Sale Consumer purchaser from consumer vs PAC  Proceeds of PMSI included
vs Auto-PMSI in consumer goods  PMSI Inventory both Perfected +
unless knows of SI or FS filed. Written notice to all SIs prior to
b. Seller PMSI delivery to D
c. Lender PMSI  PMSI Consumer = Auto
 PMSI Equip = Perfect any time w/I
20 days of D’s possession.
8. PAC & LC PAC vs LC = First to perfect/attach lien
a. LC Context: Future Advances LC wins vs PAC over PAC’s future
advance that was perfected before lien
PAC Perfected prior to LC attachment arose, but advance made 45+ days after
lien arose except:
 PAC made advance w/o knowledge
of lien
b. PAC v PAC contests method of perfection vs who & how perfected result
Perfected by filing vs PAC perfected by filing = first to file even if perfection was never
complete i.e. attached after filing
Perfected by filing vs PAC perfecting in other way = First to file or perfect

Perfected by other way vs PAC perfecting by other way = 1st to perfect

c. PAC Proceeds Proceeds of cash, CP, DA, Neg. Doc. PAC Has priority if
Instruments, Investment prop  Priority in original coll
 Secured Transactions
 SI in proceeds are perfected
 Proceeds are either
o Cash proceeds
o Proceeds of same type as original
coll
o If proceeds of proceeds all
intervening proceeds are
 Cash proceeds
 Proceeds of same type as
original coll
 Accounts related to original
coll.
d. Investment property Perfected by control vs PAC perfecting in any other way
e. Chattel Paper Perfected by Possession vs PAC perfecting in any other way
f. Promissory Note Perfected by possession vs PAC perfecting in any other way
g. Lien on real prop Fixtures Vs SI in fixtures = First to file fixture
filing or first to record interest in real
prop.
 Exception: PMSI fixture filing w/I
20 days after affixation wins over
real prop recorded before affixation.
Unless construction mortgage if
goods affixed before completing
construction
h. PAC SI in the whole Accession cases – where there is an SI in vs SI in an accession, general priority Car & Boat cases. When non-inventory of
collateral a part of the whole… rules apply except if the SI in the whole a dealer, need to perfect by filing with
was part of a certificate of title the SI in dept of vehicles etc.
the whol always wins over SI in
accession.
i. PAC SI in crops Agro context vs SI in real prop always loses to PAC in
crops no matter time of filing or
perfection.
9. NOCB No knowledge + Gives value + Receives Wins vs PAC only if C consents to No delivery required for intangibles
delivery of collateral disposition of collateral without SI [accounts, CP, general intangible,
investment prop other than certificated
Wins vs AUPC except security]
 C attaches PMSI before NOCB pays
or receives delivery
o Attach= C files PMSI w/I
20 days of D’s receipt.

Wins vs AUPC’s future advances if either

 Advances made after C learns of
purchase
 Secured Transactions
Advances made 45+ days after
purchase.
10. AUPC Wins vs LC if attaches PMSI before LC
Within this level, AUPC v AUPC first to acquires interest + AUPC files within 20
attach wins days after D receives collateral.

vs GC= always wins

11. GUC Upon bankruptcy will be represented by
General unsecured Creditor TIB, and move up in priority.
12. Debtor

1. DEFAULT: When D breaches SA, C has a right to proceed against D through (1) self-help repo (2) repo by judicial action (3) Strict foreclosure or (4) sale. Whatever is still
owed to C, other C’s, others lienholders etc., can proceed w/ deficiency judgment. If sold/foreclosed D has a right to redeem, but K can include acceleration clause requiring
payment of full amount owed.
a. Self-Help Repossession: C allowed to repossess collateral w/o judicial 1. Consumer goods  notice to D & secondary obligors
process as long as he doesn’t breach the peace [C’s/lienholders etc]
i. Breach peace: Conduct likely to cause violence. Physical 2. Non-consumer goods Notice to D, other C’s,
presence of D + verbal objection generally enough to breach perfected creditors, & secondary obligors.
peace. iii. Content of notice must include
ii. If collateral in Ds home, C cannot enter without voluntary and 1. Non-consumer goods
contemporaneous consent a. Description of D & C
iii. If collateral outside home, C can take if no objection by D. b. Description of collateral
b. Replevin: C can go to court and get a judicial writ ordering sheriff to c. Method of sale = public/private
obtain possession and deliver to C. d. Statement that D is entitled to accounting for
c. Strict foreclosure: Upon default or repo, C retains collateral in full unpaid debt
satisfaction of debt. C must send written proposal to retain collateral: e. Time & place of public sale or when private
i. Consumer goods: notice to (1) D and (2) any secondary sale will take place
obligors [co-signors] 2. Consumer goods Same as above + how D can
1. 60% rule: No strict foreclosure of consumer goods if calculate D’s deficiency and redeem collateral.
D paid at least 60% of cash price in PMSI; or 60% of iv. Limitation- Code Violations: If C fails to comply with
loan in other cases. C must sell collateral within 90 requirements for sale, the debtor is entitled to actual damages
days after repo. or, at a minimum, 10% of the price of goods plus interest to be
ii. Not consumer goods: notice to (1) D (2) any other C’s from paid over the life of the loan.
whom foreclosing C has received notice of a claim in coll and 1. Also raises a rebuttable presumption that the sale
(3) any other PAC that filed a financing statement or made would have generated enough to satisfy the
notation on cert of title. obligation in full.
1. If anyone objects [for any or no reason] within 20 v. Proceed disbursement
days after notice sent  NO strict foreclosure. 1. Expenses – includes retaking, holding, preparing and
Collateral must be disposed of by sale. disposing of collateral and attorney’s fees.
d. Sale: Upon default, C may sell, lease, or license collateral, and apply 2. Satisfaction of obligation secured by C.
profit to debt owed. Requirements: 3. Satisfaction of obligation secured by subordinate SPs
i. Sale must be commercially reasonable as to method, time, if C received demand.
manner, place and terms. 4. Debtor or trustee.
ii. Reasonably authenticated notice must be sent w/i a reasonable e. Action for deficiency judgment: If proceeds from collateral are less
time period before sale 10 days: than amount owed, C can proceed against D. BUT if collateral sold for
 Secured Transactions
cheap to an inside buyer deficiency is calculated based on price an i. D must tender amount owed + reasonable expenses
independent 3P would have paid [FMV]. ii. Acceleration clause may require D to tender entire balance in
f. D’s right to redeem: D has right to redeem before collateral is sold or order for him to redeem.
strict foreclosure.