Secured Transactions PDF

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MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... Quick jump menu Search  MARK AS COMPLETE  BACK TO TOP I. IN GENERAL A secured transaction under Uniform Commercial Code (UCC) Article 9 typically involves a relationship between two parties, a debtor and a creditor, that arises when the debtor makes a purchase on credit and gives the creditor a security interest in speci c property (i.e., collateral) to assure the creditor that the debtor will repay the obligation. These assurances involve special rights enjoyed by the creditor as a secured party in the collateral, such as the right to seize and sell the property to satisfy the outstanding debt. To enjoy this protection, the creditor must adhere to speci c requirements (e.g., attachment, perfection) and is subject to special restrictions in the timing and exercise of those rights. A. Security Interest A security interest is generally an interest in personal property or xtures that secures payment or performance of an obligation. UCC § 1-201(35). The purpose of a security interest is to: i) Make the debt more easily collectible if the debtor cannot or refuses to pay the obligation; ii) Provide the secured party with a position superior to other creditors who might attempt to obtain the same collateral to secure or collect their debts; and iii) Provide the secured party with rights to obtain the collateral if it is sold or otherwise transferred to a third party. B. Agreement Typically, Article 9 applies to a consensual agreement that provides for a security interest. If the substance of the transaction is the creation of a security interest, then Article 9 applies regardless of the form of the transaction or the name given to it by the parties. It is, therefore, the substance of the transaction, not its form, that determines whether Article 9 is applicable. UCC § 9-109(a), cmt. 2. An agreement is the bargain-in-fact between the parties. By contrast, a contract is the legal obligation that results from the agreement. UCC § 1-201(3), (12). C. Parties There are three types of parties with respect to a secured transaction: a secured party, an obligor, and a debtor. 1. Secured Party A secured party is the person in whose favor a security interest is created under the security agreement. Usually, the secured party is the person who has loaned money or extended credit to the obligor. A secured party may also include a consignor; the buyer of accounts, chattel paper, payment intangibles, or promissory notes; or the holder of an agricultural lien. UCC § 9-102(a)(72). 2. Obligor An obligor is a person who must pay (or otherwise perform) with respect to the obligation that is secured by a security interest in the collateral. UCC § 9-102(a)(59). 3. Debtor 1 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... A debtor is a person who has an interest, other than a security interest or other lien, in the collateral, such as the sole owner of the collateral. Although the debtor is usually also the obligor, the debtor need not be. UCC § 9-102(a)(28). Example 1: A loans money to B. B grants A a security interest in his car. A is a secured party. B is both an obligor and a debtor. UCC § 9-102, cmt. 2.a. Example 2: A loans money to B without seeking security from her. B’s sister, C, cosigns the note and grants A a security interest in her car to secure the loan to B. A is a secured party. B is an obligor but not a debtor. C is both an obligor and a debtor. UCC § 9-102, cmt. 2.a. D. Collateral Property subject to a security interest is called “collateral.” The characterization of collateral as, for example, inventory or a deposit account can a ect the validity of a security interest, the way in which a security interest can be perfected, and the rights of a third party in the collateral, such as a buyer of collateral. UCC § 9-102(a)(12). 1. Tangible Collateral—Goods “Goods” encompasses anything that is “moveable at the time that a security interest attaches.” Also included within the de nition of goods—even though they are not moveable at the time the security interest attaches—are (i) xtures, (ii) standing timber that is to be cut and removed pursuant to a contract, (iii) unborn animals, (iv) growing or unharvested grown crops, including crops produced on trees (e.g., apples), vines (e.g., grapes), or bushes (e.g., blueberries), and (v) manufactured homes. UCC § 9-102(a)(44). a. Classi cation of goods There are four classes of goods, each of which is mutually exclusive at any particular moment in time; however, the classi cation may change during the life of the goods. 1) Consumer goods “Consumer goods” are those goods acquired primarily for personal, family, or household purposes. UCC § 9-102(a)(23). 2) Farm products “Farm products” are goods that are crops grown, growing, or to be grown, livestock born or unborn, supplies that are used or produced in farming, and products of crops or livestock in their unmanufactured state. Excluded from farm products is standing timber for which there is not a contract to cut and remove. It is important to remember that for goods to be considered farm products, the debtor must be engaged in a farming operation. UCC § 9-102(a)(34). 3) Inventory “Inventory” includes goods, other than farm products, that are held for sale or lease; are furnished under a service contract; or consist of raw materials, works in process, or materials used or consumed in a business in short period of time (e.g., fuel used in operations). UCC § 9-102(a)(48), inc. cmt. 4.a. 4) Equipment “Equipment,” a catchall class, consists of goods that are not consumer goods, farm products, or inventory. It usually refers to goods that are used or bought for use primarily in a business, such as employees’ desks or machinery used in manufacturing. UCC § 9-102(a)(33). b. Classi cation issues 1) Multiple uses by a single debtor When the debtor uses the property for multiple purposes, the principal use to which the debtor puts the property determines the class of the goods. UCC § 9-102, cmt. 4.a. 2) Various uses by two or more debtors The same property may fall into di erent classes with respect to di erent debtors. UCC § 9-102, cmt. 4.a. 2 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... 3) Time for testing use Generally, goods are classi ed when the security interest attaches. See UCC § 9-102(a)(44). Example: A retailer of pianos uses the pianos as collateral to obtain a loan. The pianos are inventory for purposes of the security interest created by the retailer. A symphony orchestra buys one of the retailer’s piano to use during concerts and uses it as collateral to guarantee that it will pay the retailer for the piano. The piano is equipment for purposes of the security interest created by the orchestra. c. Software Software embedded in goods, such as a diagnostic computer program contained in an automobile, is treated as part of the goods in which it is embedded. Software that is not embedded in goods, such as software sold in a separate box at a retail store, is treated as a “general intangible.” See § I.D.2.i. General intangibles, infra. UCC § 9-102(a)(44), (75), incl. cmts. 4.a., 25. 2. Other Collateral There are nine other classes of personal property. The rst four classes listed below are sometimes referred to as “quasi-intangible” property because a writing usually exists that de nes the property right. Unlike the classi cation of goods, classi cation of these nine types of collateral does not turn on the manner in which the debtor uses the property. UCC § 9-102(a)(42). a. Chattel paper “Chattel paper” consists of one or more records that evidence both (i) a monetary obligation (e.g., a negotiable note) and (ii) a security interest in speci c goods (e.g., a security agreement) or a lease of speci c goods. UCC § 9-102(a)(11). If the record is stored electronically, then the chattel paper is known as “electronic chattel paper.” If the record is maintained on paper or another tangible medium, then the chattel paper is referred to as “tangible chattel paper.” UCC § 9-102(a)(31), (78). b. Document A “document” refers to a document of title, which confers on the holder ownership rights in goods held by a bailee, such as a bill of lading, transport document, a dock warrant, a dock receipt, a warehouse receipt, and an order for the delivery of goods. UCC §§ 1-201(16), 9-102(a)(30). c. Instruments “Instruments” encompass negotiable instruments, such as promissory notes and checks, as described in Article 3, and nonnegotiable instruments that evidence a right to the payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certi cate of deposit from a bank. When coupled with evidence of a security interest, the two combined constitute chattel paper. UCC § 9-102(a)(47), (65). d. Investment property “Investment property” includes both certi cated and uncerti cated securities, such as stock and bonds, as well as securities accounts, security entitlements, commodity accounts, and commodity contracts. UCC § 9-102(a)(49). e. Accounts “Accounts” include the right to payment for property sold, leased, licensed, or otherwise disposed of, or services rendered or to be rendered. Also included is a right to payment for the issuance of an insurance policy, the use of a credit or charge card, or winning a lottery. Excluded are rights to payments that are evidenced by another type of collateral, such as an instrument or chattel paper and those that arise out of a transaction that is not contained within the de nition of an account. For example, a right to payment arising out of a loan transaction would, if not evidenced by an instrument or chattel paper, be a payment intangible, not an account. UCC § 9-102(a)(2). f. Commercial tort claims “Commercial tort claims” include tort claims possessed by an organization, or by an individual that arose in the course of the individual’s business. Excluded are tort claims by an individual for personal injury or death. UCC § 9-102(a)(13). 3 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... g. Deposit account A “deposit account” includes a savings, passbook, time, or demand account maintained with a bank. Excluded are investment property and accounts evidenced by instruments, such as certi cates of deposit. UCC § 9-102(a)(29). Article 9 does not apply to a deposit account that is pledged as collateral in a consumer transaction, but such an account that is received as proceeds is subject to the rules regarding proceeds. UCC § 9-109(d)(13). h. Letter-of-credit right A “letter-of-credit right” is a right to payment or performance under a letter of credit, even though the bene ciary has not demanded—nor is the time ripe for —payment or performance. UCC § 9-102(a)(51). i. General intangibles “General intangibles” is the residual category of personal property that is not included in other types of collateral. Included among items that are general intangibles are copyrights, things in action (e.g., legal claims), payment intangibles (i.e., a general intangible under which the account debtor’s principal obligation is a monetary obligation), and software-not-part-of-goods. UCC § 9-102(a)(42), (61), incl. cmt. 5d. E. Eligible Transactions 1. General Rule Article 9 governs a transaction that creates, by agreement, a security interest in personal property or a xture. In addition, a lease, consignment, agricultural lien, and even a purchase of personal property may be subject to Article 9. Also, a real-property transaction can produce an obligation, such as the promissory note secured by a mortgage, that can be the subject of an Article 9 security interest. UCC § 9-109(a)(1). 2. Leases A true lease of goods is governed by Article 2A. Leases are covered under Article 9 only when the transaction, although in the form of a lease, is in economic reality or substance a secured transaction. It is generally determined on a case-by-case basis not by the parties’ characterization of the transaction but by the economic reality of the transaction. UCC § 1-201(35). a. Transaction creating a security interest A transaction in the form of a lease is treated as creating a security interest if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and one of the following four conditions is also met: i) The original term of the lease is equal to or greater than the remaining economic life of the goods; ii) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods; iii) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or iv) The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement. UCC § 1-203. Example: The so-called lease provides for payments of $5,000 per year for a period of ve years without a right of early termination by the lessee. At the end of the ve-year term, the lessee has the option to purchase the goods for the nominal price of $1. Notwithstanding the parties’ characterization of the transaction, the economic reality is that it is a sale to the lessee with a security interest retained by the lessor. Thus, the transaction is governed by Article 9. b. Protective ling Even though a lease of goods is arguably subject to Article 2A, the lessor may nevertheless take steps to comply with Article 9’s ling rules. The lessor 4 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... may wish to do so when there is doubt as to whether the transaction constitutes a true lease or a sale with a retained security interest. By making such a protective ling, the lessor is not prevented from asserting that the transaction constitutes a lease, but he will be accorded perfected status in the event that a court later determines that it is not. UCC § 9-505. 3. Consignments Consignments may fall within the scope of Article 9. If so, the consignor’s security interest in the consigned goods is treated as a purchase-money security interest (PMSI) in inventory. UCC §§ 9-109(a)(4), 9-103(d). In order for a consignment to be subject to Article 9, the following requirements must be met: i) A person (i.e., the consignor) must deliver goods to a merchant for the merchant to sell; ii) The merchant (i.e., the consignee) must: a) Deal in goods of that kind, b) Not operate under the name of the consignor, c) Not be generally known by its creditors to be substantially engaged in selling the goods of others, and d) Not be an auctioneer; iii) With respect to each delivery, the value of the goods delivered must be at least $1,000 at the time of the delivery; and iv) The goods must not be consumer goods immediately before the delivery. UCC § 9-102(19)–(21). 4. Liens A statutory or common-law lien for services or materials (e.g., a mechanics lien) is not subject to Article 9, except for the rule regarding the priority of such a lien. See § IV.B.3. Statutory or Common-Law Lien Creditor, infra. Similarly, a landlord’s lien, which arises from an interest in real estate rather than personal property, is not subject to Article 9. UCC § 9-109(d)(1), (2). 5. Agricultural Liens An agricultural lien is an interest, other than a security interest, typically in farm products (e.g., crops, livestock) that secures payment or performance of an obligation for either (i) goods or services furnished with respect to the debtor’s farming operation (e.g., livestock feed sold to a cattle rancher) or (ii) rent on real property leased by a debtor in connection with a farming operation. An agricultural lien is created by statute in favor of a person that (i) in the ordinary course of business furnished goods or services to a debtor in connection with her farming operation, or (ii) leased real property to a debtor in connection with her farming operation. The e ectiveness of this lien does not depend on the person's possession of the personal property. Unlike other statutory and common-law liens, an agricultural lien is generally subject to Article 9, and must comply with the rules regarding perfection of the lien in order to enjoy priority over other claimants. UCC §§ 9-102(a)(5), 9-109(a)(2). 6. Purchases Generally, the sale of personal property is not subject to Article 9. a. Sale of accounts, chattel paper, payment intangibles, promissory notes Subject to several exceptions, the sale of accounts, chattel paper, payment intangibles, and promissory notes is subject to Article 9. UCC § 9-109(a)(3). Such transactions, however, are not subject to Article 9 if the sale is part of a sale of the business out of which they arose. In addition, the following assignments are not subject to Article 9: i) The assignment of accounts, chattel paper, payment intangibles, or promissory notes for the purposes of collection only; ii) The assignment of a single account, payment intangible, or promissory note in full or partial satisfaction of a preexisting indebtedness; and 5 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... iii) The assignment of a right to payment under a contract to an assignee who is also obligated to perform under the contract. UCC § 9-109(d)(4)–(7). b. Seller and buyer of goods The rights of a seller pursuant to Article 2 to retain or acquire possession of goods, as well as the property interest of a buyer of goods upon the identi cation of such goods, are usually not treated as security interests. The seller or buyer may acquire a security interest in the goods by complying with Article 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer is limited in e ect to a reservation of a security interest. UCC § 1-201(35). 7. Real Property Transactions Although Article 9 is generally limited to personal-property transactions, it does apply to a security interest in a secured obligation (e.g., a promissory note), even though the obligation is itself secured by a transaction or interest to which Article 9 does not apply (e.g., a real property mortgage). UCC § 9-109(b). F. Value Value may be given: i) By providing consideration su cient to support a simple contract; ii) By extending credit, either immediately or under a binding commitment to do so (the debtor need not draw upon the credit); iii) By, as a buyer, accepting delivery under a preexisting contract, thereby converting a contingent obligation into a xed obligation; or iv) In satisfaction of, or as security for, part or all of a preexisting claim. UCC § 1-204. II. ATTACHMENT OF SECURITY INTEREST A. In General Generally, a security interest that is enforceable against the debtor with respect to the collateral is said to have “attached” to the collateral. For the security interest to be enforceable against the debtor, three conditions must coexist: i) Value has been given by the secured party; ii) The debtor has rights in the collateral; and iii) The debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement. When these conditions coexist, the security interest has attached, unless there is an agreement to postpone the time of attachment. UCC §§ 9-201, 9-203(b). B. Value Given The secured party, or a person acting on behalf of the secured party, must give value (e.g., consideration su cient to support a contract) for the security interest (see I.F. Value, supra). UCC § 9-203(b). 1. Future Advances and Other Value 6 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... In addition to value given at the time that a security agreement is entered into, the security agreement may provide that the collateral secures future value (e.g., future advances) given by the secured party. Note that with regard to perfection of a security interest, however, the nancing statement is not required to refer speci cally to future value. UCC § 9-204(c). Example: A debtor grants a secured party a security interest “in all inventory now owned or hereafter acquired by the debtor for a current loan of $50,000 and all future loans made by the secured party to the debtor.” 2. New Value For creating a security interest that is enforceable against the debtor, a creditor may receive a security interest in exchange for a preexisting debt. In a few instances, a creditor must give new value in order for the security interest to be perfected or have priority (see III.E.2.a. Temporary perfection (security interest in certi cated securities, negotiable documents, or instruments), IV.C.2. Buyers in the Ordinary Course of Business (BOCB), and IV.C.4. Purchasers of Chattel Paper, all infra). In these circumstances, new value consists of (i) money, (ii) money’s worth in property, services, or new credit, or (iii) release by a transferee of an interest in property previously transferred to the transferee. The term does not include an obligation substituted for another obligation. UCC § 9-102(a)(57). C. Debtor's Rights in Collateral 1. Generally For the security interest to attach to the collateral, the debtor generally must have rights in the collateral. The basic rule is that a security interest attaches only to the rights that the debtor has. A debtor’s limited rights in collateral are su cient for a security interest to attach. In a few instances, the debtor may have the power to transfer rights in the collateral to a secured party even though the debtor does not possess such rights. For example, a person with voidable title to goods may have the power to create an enforceable security interest. UCC §§ 9-203(b)(2), incl. cmt. 6; 2-403(1). Similarly, if a debtor has sold an account, the debtor still retains “rights” in the account for attachment purposes until the purchaser perfects its security interest. UCC § 9-318. 2. Consignments Generally, if the consignor retains title to the consigned goods, the consignee does not have rights in the consigned goods. Consequently, a security interest in the consignee’s inventory, for example, would not extend to the consigned goods. However, when the consignment is covered by Article 9, the consignee is treated as having the consignor’s rights in the consigned goods. See § I.E.3. Consignments, supra. UCC § 9-319(a). 3. Prohibition on Transfer An agreement between the debtor and secured party that prohibits a transfer of the debtor's rights in collateral does not prevent the transfer from taking e ect, but may give the secured party rights against the debtor for doing so. (In other words, an agreement between a debtor and a secured party that would void a subsequently created security interest in the same collateral with another secured party is not e ective. In fact, the later secured party may even achieve priority over the earlier security interest.) Similarly, an agreement between the debtor and secured party that makes the transfer a default does not prevent the transfer from taking e ect, but may nevertheless make the transfer a default. UCC § 9-401(b). D. Security Agreement For a security interest to attach to collateral, there must be a security agreement. In addition, the secured party must satisfy the Article 9 Statute of Frauds. This means that the security agreement must be established by the debtor’s authentication of the agreement, or the secured party’s possession or control of the collateral. UCC §§ 9-201(a); 9-203(b)(3), incl. cmt 3. 1. Authenticated Record The most common means by which to evidence the debtor’s assent to the security agreement is by an authenticated record. To satisfy this requirement, the security agreement must: i) Be in a record; 7 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... ii) Contain a description of the collateral; and iii) Be authenticated by the debtor. UCC §§ 9-102(a)(7), (70), (74); 9-203(b)(3). a. Record The agreement must be in a tangible medium (e.g., a writing on paper) or in another medium, such as electronic, that can be retrieved in a perceivable form. UCC §§ 9-102(a)(69); 9-203(b)(3). b. Description or identi cation of collateral The agreement must describe the collateral in su cient detail to make it possible to identify the collateral. The description of the collateral need only reasonably identify the collateral. It may speci cally list the collateral, such as by identifying the object and its manufacturer, model and serial number, but such an exact and detailed description is not mandated. A description of the Article 9 type of collateral (e.g., “all of debtor’s equipment” or “debtor’s entire inventory”) is usually su cient unless the collateral is consumer goods or a commercial tort claim, but a super-generic description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” is not su cient. UCC § 9-108, inc. cmt. 2. c. Authentication of a security agreement A security agreement must be authenticated by the party against whom it may be enforced (i.e., the debtor). The most common method of authentication is for the debtor to sign or execute the record that evidences the security agreement. A complete signature is not necessary. The question always is whether the symbol was executed or adopted by the debtor with the present intention to adopt or accept the record. UCC §§ 9-102(a)(7); 9-203(b)(3)(A). 1) New debtor The original authenticated security agreement between a debtor and secured party can serve as the authenticated security agreement of a person who becomes bound as a debtor to the security agreement entered into by the original debtor (i.e., a new debtor). A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than Article 9 or by contract: i) The security agreement becomes e ective to create a security interest in the person's property; or ii) The person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person. The original authenticated security agreement can serve as the new debtor’s authenticated security agreement with respect to existing and after- acquired property described in the original agreement. The new debtor need not execute another agreement. UCC § 9-203(d, e). As a consequence, the secured party can le a new or amended nancing statement without the need to secure the new debtor’s authorization (see III.B.2. Debtor’s Authorization, infra). 2. Possession of Collateral A secured party’s possession of tangible (e.g., goods) or quasi-intangible (e.g., chattel paper) collateral satis es the Article 9 Statute of Frauds if the secured party’s possession is pursuant to a security agreement, which may be an oral or a written security agreement. UCC § 9-203(b)(3)(B), (C). Example: A lends money to B. To ensure repayment, A accepts B’s stereo as collateral. A takes possession of the stereo pursuant to an oral agreement that the stereo will be returned to B when A has been repaid. The agreement and A’s possession of the stereo create an enforceable security interest in A’s favor. 3. Control of Collateral 8 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... Similarly, for types of collateral that typically have no physical existence (i.e., deposit accounts, electronic chattel paper, electronic documents, investment property, and letter of credit rights), a secured party’s control of the collateral satis es the evidentiary requirement that the debtor assent to the security agreement, provided the control is pursuant to the security agreement. UCC § 9-203(b)(3)(D). Example: A lends money to B. To ensure repayment, pursuant to an agreement, B pledges the money in his savings account as collateral. Instead of taking actual possession of the money, A takes control of the deposit account by getting the debtor and the bank to agree that the bank will follow A’s orders without the further consent of B. Their agreement and A’s control of the account create a security interest in favor of A. E. After-Acquired Collateral 1. General Rule A security interest may apply not only to the collateral that the debtor owns at the time the security is granted, but also to collateral that the debtor acquires in the future. No new security agreement is necessary when the collateral is acquired later if the original security agreement provides that it applies to after-acquired collateral. If, for example, the collateral is inventory, then the description of the collateral will be something like “all inventory now owned or hereafter acquired.” UCC § 9-204(a). When the parties have left out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is of a type that rapidly changes, such as inventory or accounts), the courts are split on whether to imply it, but the majority of courts have adopted a rebuttable presumption that after-acquired property is included. 2. Exception An after-acquired clause is not e ective if the collateral is consumer goods, unless the debtor acquires them within 10 days after the secured party gives value, or a commercial tort claim. UCC § 9-204(b). F. Proceeds A security interest in collateral automatically attaches to identi able proceeds. UCC §§ 9-203(f); 9-315(a)(2). The term “proceeds” means: i) Whatever is acquired upon the sale, lease license, exchange, or other disposition of collateral; ii) Whatever is collected on, or distributed on account of, collateral; iii) Rights arising out of collateral; iv) To the extent of the value of collateral, claims arising out of the loss, nonconformity or interference with the use of, defects or infringement of rights in, or damage to, the collateral; and v) To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. UCC § 9-102(a)(64). Example 1: A secured party acquires a security interest in a debtor’s inventory. The debtor sells items of inventory in exchange for checks. The secured party’s security interest will attach to the checks if they are identi able as proceeds. Example 2: Same facts as Example 1, except now the debtor sells items of inventory and receives from buyers a promise to pay in full within 90 days. The secured party’s security interest will attach to the accounts. Example 3: Same facts as Example 1, except the inventory was damaged by a re started by an arsonist. The secured party’s security interest will attach to whatever insurance payments are due the debtor and to the debtor’s commercial tort claim against the arsonist. G. Rights and Duties of Secured Party 9 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... 1. Duties Arising From the Secured Party's Possession or Control of Collateral a. Duty of care The secured party in possession of collateral has the duty of reasonable care with respect to custody and preservation of the collateral. The duty of care cannot be circumvented by an agreement between the debtor and the secured party, but the parties can determine the standards for judging such care; such standards must be reasonable. UCC §§ 9-207(a); 9-603(a). b. Duty to keep collateral identi able The secured party in possession of collateral must keep the collateral identi able but may commingle fungible collateral. UCC § 9-207(b)(3). c. Duty to relinquish possession or control of collateral 1) Duty to relinquish possession of collateral The secured party has a duty to relinquish possession of the collateral upon satisfaction of the secured obligation and the secured party is not committed to make advances or otherwise give value. Failure to do so constitutes conversion. UCC § 9-208. 2) Duty to relinquish control of collateral Similarly, a secured party in control of collateral has a duty to relinquish control when there is not an outstanding secured obligation and the secured party is not committed to make advances or otherwise give value. Generally, the secured party has 10 days from receiving an authenticated demand by the debtor to relinquish control; this time period may be varied by the parties’ agreement. Upon the secured party’s failure to relinquish control, the debtor has the same remedy as if the secured party failed to le a termination statement. UCC § 9-208. 2. Rights and Risks Arising From the Secured Party's Possession or Control of Collateral a. Right to charge for reasonable expenses The secured party in possession of collateral has the right to charge the debtor for reasonable expenses (e.g., storage, insurance, and taxes) incurred in the custody, preservation, use, or operation of the collateral; such expenses are also secured by the collateral. UCC § 9-207(b)(1). b. Risk of loss or damage is on the debtor The debtor bears the risk of accidental loss of, or damage to, the collateral; consequently, the debtor is liable to the secured party for any de ciency in e ective insurance coverage. UCC § 9-207(b)(2). c. Right to use or operate collateral The secured party may use or operate collateral for the purpose of preserving the collateral or its value. In addition, use or operation with respect to collateral that is not consumer goods may be in the manner and to the extent agreed to by the debtor. UCC § 9-207(b)(4). d. Right to hold proceeds As additional security, the secured party in possession or control of collateral may hold any proceeds, except money or funds, received from the collateral. Any money or funds received must be applied to reduce the secured obligation or remitted to the debtor. UCC § 9-207(c). 3. Assignment of Account Rights a. Generally If the debtor assigns his right to receive payment on an account, chattel paper, or a payment intangible, then the secured party, after default or earlier if the debtor so agrees, may notify an account debtor (i.e., a person obligated on an account, chattel paper, or general intangible, but not a person obligated on a negotiable instrument) to make payment to the secured party. The noti cation must be authenticated by the debtor (i.e., assignor) or secured party (i.e., assignee) and must reasonably identify the rights assigned. Generally, a term in the agreement between the account debtor and the assignor that prohibits or otherwise restricts assignment is ine ective. UCC § 9-406. b. E ect on an account debtor 10 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... Upon receipt of noti cation, the account debtor may discharge her obligation only by paying the assignee; a payment made to the assignor does not discharge the account debtor’s obligation. Against the assignee, the account debtor may raise, unless waived, claims and defenses that arise from the transaction with the assignor who created the account, even those that accrue after the account debtor is noti ed of the assignment. The rights of an assignee are subject to all terms of the agreement between the account debtor and the assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract. Other defenses and claims that the account debtor has against the assignor may be raised only if they have accrued prior to the account debtor’s receipt of noti cation of the assignment. Unless the account debtor incurred the debt as a consumer, account debtor’s claims and defenses may only serve to o set the amount that the account debtor owes. UCC §§ 9-404; 9-406. H. Rights of Debtor 1. Accounting and Other Information From the Secured Party A debtor may obtain information from a secured party about the secured obligation and the collateral in which a secured party may claim a security interest. The debtor may request an accounting from the secured party. In addition, the debtor may submit a list of collateral and a statement of the aggregate amount of unpaid secured obligations, which the secured party may approve or correct. Generally, the secured party has 14 days to respond after receiving the debtor’s request. UCC § 9-210. 2. Noti cation of Account Debtors by the Secured Party When there is not an outstanding secured obligation and the secured party is not committed to make advances or otherwise give value, the debtor can demand that the secured party notify account debtors (i.e., persons obligated to the debtor on an account, chattel paper, or general intangible) that they are no longer required to make payments to the secured party. The secured party must send the noti cation within 10 days after receiving an authenticated demand by the debtor. UCC §§ 9-102(a)(3), 9-209. I. Purchase-Money Security Interest (PMSI) A PMSI is a special type of security interest that may be accorded special rules with respect to perfection and priority. A PMSI may exist only with respect to two types of collateral—goods (including xtures) and software. UCC § 9-103. As the name implies, a PMSI must be an attached security interest; it must meet the three requirements of value, rights, and agreement (see II.A. In General, above). 1. PMSI in Goods A PMSI in goods exists when: i) A secured party gave value (e.g., made a loan) to the debtor to enable the debtor to acquire rights in or use of the goods, and the value given was so used; or ii) A secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit). UCC § 9-103(a), (b). Example 1: A, an automobile dealer, sells B, the debtor, an automobile and agrees to nance the automobile because B does not have the full purchase price. B, pursuant to the agreement, is to make payments on a monthly basis until the automobile has been paid in full and gives A a security interest in the automobile. A has a PMSI in the automobile. Example 2: A, an automobile dealer, sells B, the debtor, an automobile. B does not have the full purchase price of the automobile. B goes to C, a bank, and borrows money to purchase the automobile. In exchange for the loan, B gives C a security interest in the automobile that she is purchasing from A. Pursuant to the agreement with C, B is to make payments to C until the loan for the automobile has been paid in full. C has a PMSI in the automobile. The amount of the obligation can include expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, nance charges, interest, freight charges, administrative charges, expenses of collection and enforcement, attorney’s fees, and similar obligations. UCC § 9-103, cmt. 3. 11 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... a. Consignment of goods The security interest of a consignor in the consigned goods is a PMSI in inventory. UCC § 9-103(d). b. Cross-collateralization of PMSIs in inventory If inventory subject to a PMSI secures not only its own price or enabling loan but also the price or enabling loan of other purchase-money inventory, then the security interest in the inventory is a PMSI not only to the extent that the inventory secures its own price but also the price of the other inventory. UCC § 9-103(b)(2), incl. cmts. 3, 4. Example: A seller who retains a security interest in an inventory item (Item X) to secure not only the price of X, but also all other future and existing obligations of the buyer to the seller, has a PMSI in Item X, not only with respect to the current obligation to pay for Item X, but also with respect to any existing or future obligations that arise from a PMSI in additional inventory items sold to the buyer by the seller. In other words, by cross-collateralizing PMSIs in inventory, the parties create a PMSI in each item of inventory that secures the aggregate of the PMSI obligations. c. “Dual status” rule for non-consumer goods transaction In a transaction other than a consumer-goods transaction, a PMSI does not lose its status as a PMSI merely because: i) The collateral also secures an obligation that is not a purchase-money obligation (e.g., equipment that secures a bank loan to the buyer for the purchase of the equipment is subsequently used as collateral for a second bank loan to the buyer); ii) The collateral that is not purchase-money collateral also secures the purchase-money obligation (e.g., equipment owned by the debtor prior to the time that the debtor borrows money to buy additional equipment when the previously owned equipment also serves as collateral for the purchase- money obligation); or iii) The obligation has been renewed, re nanced, consolidated, or restructured. Under the “dual status” rule, a security interest may be a PMSI to some extent and a non-PMSI to some extent. In such a transaction, the secured party claiming a PMSI has the burden of establishing the extent to which the security interest is a PMSI. Note that for consumer-goods transactions, the treatment of a PMSI as having a “dual status” is left to the courts. UCC § 9-103(f)–(h). d. Application of payments When the extent to which a security interest is a PMSI depends on the application of a payment of a particular obligation, the payment must be applied: i) In accordance with the parties’ reasonable agreement; ii) If there is no reasonable agreement, in accordance with the manifestation of the obligor before or at the time the payment is made; or iii) If neither (i) nor (ii) apply, then rst to unsecured obligations and then to obligations secured by a PMSI in the order in which the obligations were incurred. UCC § 9-103(e). 2. PMSI in Software A PMSI in software exists only when the debtor acquired his interest in software in an integrated transaction in which the debtor also acquired an interest in goods (e.g., a computer), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods. The security interest in the software must also secure an obligation with respect to the goods, and the secured party must hold a PMSI in the goods. UCC § 9-103(b), (c). J. Accessions Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost, such as memory installed in a computer, or tires installed on a car. A security interest that is created in collateral that becomes an accession is not lost due to the 12 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... collateral becoming an accession. Moreover, a security interest can be created in collateral that is an accession. Generally, the description of the collateral in the security agreement will determine whether a secured party acquires a security interest in the whole in the event its collateral becomes an accession. UCC §§ 9-102; 9-335(a), cmt. 5. K. Commingled Goods Commingled goods are goods that are physically united with other goods in such a manner that their identity is lost in a product or mass. UCC § 9-336(a). Example: Chicken eggs may be commingled goods when stored together with other chicken eggs so that the separate identity of each group cannot be ascertained. Similarly, such eggs may be commingled goods when used as an ingredient in making cakes. Once goods have been commingled, a security interest in the speci c goods that have been commingled cannot be obtained. However, a security interest may attach to the product or mass that results when the goods are commingled, such as a security interest in inventory of a manufacturer who makes brass by combining copper and zinc. UCC § 9-336(b). An existing security interest in collateral that subsequently becomes commingled goods is transferred to the resulting product or mass. UCC § 9-336(c). In addition, if the security interest in collateral that subsequently becomes commingled goods is perfected before the collateral becomes commingled, the security interest in the resulting product or mass is also perfected. UCC § 9-336(d). If more than one security interest attaches to the product or mass, a security interest that is perfected has priority over a security interest that is unperfected at the time the collateral becomes commingled goods. If more than one security interest is perfected, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods. UCC § 9-336(f). Otherwise, the general rules regarding priority apply. UCC § 9-336(e). III. PERFECTION OF SECURITY INTEREST Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties. Perfection has no relevance to the secured party’s rights against the debtor. A security interest is perfected upon attachment of that interest and compliance with one of the methods of perfection. UCC § 9-308(a). EXAM NOTE: Very frequently tested is whether a security interest has attached and is perfected. A. Methods of Perfection Under Article 9, there are four ways by which a secured party can perfect a security interest: i) Filing of a nancing statement; ii) Possession of the collateral; iii) Control over the collateral; and iv) Automatic perfection (either temporary or permanent). If there is another statute that governs perfection of a security interest, that statute may provide another method of perfection. For an example, see § III.F. Non-Article 9 Rules: Notation for Vehicles, infra. B. Filing 13 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... A security interest in any collateral, except a deposit account, money, or letter-of-credit rights that are not a supporting obligation, may be perfected by ling a nancing statement. Filing is the most common method of perfection. The primary objective of ling is to give interested parties notice of the existence of the security interest. UCC §§ 9-310(a); 9-312(b). A security interest in money may be perfected only by possession. A deposit account or letter-of-credit rights that are not a supporting obligation may be perfected only by control. A security interest in accounts may be perfected only by ling. 1. Financing Statement A nancing statement (sometimes referred to as a “UCC1”) must contain the following information: i) The debtor’s name; ii) The name of the secured party or a representative of the secured party; and iii) The collateral covered by the nancing statement. This “bare bones” information is intended to provide a person, such as a potential creditor of the debtor, with enough information to make further inquiries of the debtor or secured party as to the existence and terms of a security interest. The limited-information method of recording a security interest for public access is frequently referred to as notice ling. UCC § 9-502(a), incl. cmt. 2. a. Collateral related to real property When the collateral is related to real property, the nancing statement must, in addition to the information required for all nancing statements, contain: i) An indication that it covers this type of collateral; ii) An indication that it is to be led in the real-property records; iii) A description of the real property to which the collateral relates; and iv) The name of a record owner, if the debtor does not have an interest of record in the real property. This additional information is required for (i) as-extracted collateral (i.e., oil, gas or other minerals subject to a security interest that is created by a debtor having an interest in the minerals before extracted and that attaches to the minerals as extracted), (ii) timber to be cut, and (iii) goods that are or are to become xtures if the ling is a xture ling. UCC §§ 9-102(a)(6); 9-502(b). b. Additional information The nancing statement should also: i) Contain the addresses of both the debtor and the secured party; and ii) Identify whether the debtor is an individual or organization. UCC § 9-521(a). Should the ling o ce accept for ling a nancing statement that lacks such information the nancing statement is nevertheless e ective. UCC §§ 9-338; 9-520(a), (c). Under the 2010 amendments to Article 9, a nancing statement cannot be rejected by a ling o cer for failure to include the debtor’s type of organization, jurisdiction of organization, or the organization’s identi cation number. c. Alternatives to a nancing statement 1) Security agreement as nancing statement A security agreement usually contains more information than is required of a nancing statement. Consequently, a security agreement that contains the 14 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... information necessary for a nancing statement may be led as a nancing statement to perfect a security interest. 2) Mortgage as a nancing statement With respect to collateral related to real property, a mortgage may serve as a nancing statement, provided it contains the necessary information. A mortgage is e ective as of the date of its recording. UCC § 9-502(c). d. Name of the debtor 1) Individual debtor The 2010 amendments to Article 9 provide states with two alternatives for how an individual debtor’s name must appear on a nancing statement. UCC § 9-503. a) “Only-if” rule (Alternative A) The nancing statement must re ect the name on the debtor’s current (i.e., unexpired) driver’s license or state-issued identi cation card (issued by the state in which the nancing agreement will be led). If the debtor does not have a driver’s license, the ler must use either the individual name of the debtor (i.e., the debtor’s current legal name) or the debtor’s surname and rst personal name. A majority of jurisdictions have adopted this approach. b) “Safe harbor” rule (Alternative B) Under the “safe harbor” rule, adopted by only a few jurisdictions, the nancing statement may include the debtor’s “individual name” (which the UCC does not de ne), the name on the debtor’s driver’s license, or the debtor’s surname and rst personal name. 2) Debtor’s trade name Identi cation of the debtor solely by the debtor’s trade name is insu cient. By contrast, failure to include the debtor’s trade name does not a ect the e ectiveness of the nancing statement when the debtor’s name is correctly provided. UCC § 9-503(b), (c). 3) Registered organization When the debtor is a registered organization, the debtor’s name for purposes of the nancing statement must be the name shown on public organic records. A public organic record includes the articles of incorporation or equivalent formation records led to create a business entity, the record initially led by a business trust, legislation that creates an organization, or a government-issued charter that forms an organization. UCC §§ 9-102(a)(68), 9-503(a)(1). 4) Name change by the debtor If the debtor changes its name and the led nancing statement consequently becomes seriously misleading (i.e., the name on the nancing statement does not meet the requirement of 9-503), then the secured party has four months in which to le an amendment to the nancing statement re ecting the new name. Should the secured party fail to act within this four-month window, collateral acquired by the debtor after the four-month period is not covered by the nancing statement. UCC § 9-507(c). If a new debtor becomes bound by a security agreement, and the di erence between the name of the original debtor and the name of the new debtor causes the nancing statement to be seriously misleading, then the secured party has a similar four-month window in which to act. UCC §§ 9-508, 9-507(c). 5) Error in the debtor’s name Because nancing statements are indexed under the name of the debtor, a nancing statement that fails to accurately contain the debtor’s name is seriously misleading and therefore not e ective to perfect the security interest. However, when a standard search of the ling o ce records under the debtor’s correct name would disclose such a nancing statement, the erroneous name does not make the nancing statement seriously misleading. UCC § 9-506(b), (c). 6) Error in the secured party’s name 15 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... An error in the name of the secured party on a nancing statement is usually not seriously misleading and does not a ect the perfection of the security interest because the ling system is not geared to a search based on the secured party’s name. However, the secured party who les a nancing statement with such an error may be subject to estoppel in favor of a holder of a con icting claim in the collateral. UCC § 9-506, cmt. 2. e. Description of the collateral The nancing statement must contain a description of the collateral that su ciently indicates the collateral. This requirement can be satis ed by a description that meets the requirements for the creation of an enforceable security agreement. See § II.D. Security Agreement, supra. Alternatively, when the security interest covers all of the debtor’s assets or personal property, the nancing statement, unlike the security agreement, can contain a broad statement to that e ect (e.g., “this nancing statement covers all of the debtor’s assets” or “this nancing statement covers all of the debtor’s personal property”) without identifying each of the types of collateral covered. UCC § 9-504. 1) After-acquired property and future advances A nancing statement may be e ective to cover after-acquired property if such property falls within the collateral described, whether after-acquired property is mentioned as such in the nancing statement or even contemplated by the parties at the time that the nancing statement was authorized. Similar treatment is accorded to future advances. UCC § 9-502, cmt. 2. 2) Proceeds A nancing statement need not make speci c reference to proceeds in order for a security interest in proceeds to be perfected. UCC §§ 9-315(c); 9-502, cmt. 2. 3) Error in the description of collateral If there is an error with respect to the collateral covered by a nancing statement, then the debtor may demand that the secured party prepare a termination statement with respect to the erroneous collateral and provide the debtor with the termination statement for the debtor to le; in the case of consumer goods, the secured party is the one who must le the termination statement. UCC § 9-513. 2. Debtor’s Authorization The debtor’s signature is not required on the nancing statement. The debtor must authorize the ling of a nancing statement for the statement to be e ective. If the debtor has authenticated the security agreement, then this authentication constitutes an authorization to le the nancing statement with respect to the collateral covered by the agreement (i.e., an “ipso facto authorization”). Alternatively, the debtor may speci cally authorize the ling of the nancing statement in an authenticated record. (Note: A debtor is presumed to consent to the ling of a nancing statement when the secured party seeks to perfect, by ling, a security interest in any identi able proceeds of collateral, whether or not the security agreement expressly covers proceeds.) UCC § 9-509(a,b). A person who les a nancing statement without the debtor’s authorization is liable for actual and statutory damages. UCC § 9-625(b). 3. Person Entitled to File a Financing Statement Although the secured party or a representative of the secured party usually les the nancing statement, any person may do so. The signature of the ling party is not required. UCC § 9-509(a). 4. Filing Location Generally, for collateral that may be perfected by ling, the nancing statement must be led with the secretary of state (“central ling”) of the state of the debtor’s location. UCC § 9-501(a)(2). a. Exception Local ling (i.e., ling in the o ce for recording a mortgage on the related real property) is required for a security interest in (i) as-extracted collateral (i.e., oil, gas or other minerals subject to a security interest that is created by a debtor having an interest in the minerals before extracted and that attaches to the minerals as extracted), and (ii) timber to be cut. A security interest in goods that are or are to become xtures may be perfected through either local ling or central ling but, to qualify as a xture ling (see IV.D.3. Fixtures, infra), the nancing statement must be led locally. UCC § 9-501(a) 16 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... (1). b. Debtor’s location For all collateral not related to real property, the nancing statement is led with the secretary of state (“central ling”) of the state of the debtor’s location. UCC § 9-501(a)(2). 1) Individual debtor An individual is located in the state in which he maintains his principal residence. UCC § 9-307(b)(1). 2) An organization An organization that is not a registered organization (e.g., a partnership) is located in the state in which it maintains its place of business and, if it has more than one place of business, at its chief executive o ce. UCC § 9-307(b)(2)(3). 3) A registered organization A registered organization that is organized under the law of a state is located in that state (e.g., a corporation is located in the state in which it is incorporated). UCC § 9-307(e). 5. Length of Perfection A nancing statement is generally e ective for ve years after the date of ling. The nancing statement is e ective during this period, even though there is no obligation secured by the collateral and no commitment to make an advance, unless a termination statement has been led. UCC § 9-515(a). 6. E ective Date of Filing A nancing statement is generally e ective upon its delivery to the ling o ce and tender of the ling fee if it contains the basic required information. UCC § 9-516(a). a. E ect of the ling o ce’s refusal to accept a nancing statement The e ect of the ling o ce’s refusal to accept a nancing statement for ling depends on whether the refusal is justi ed. UCC § 9-516(b). 1) Justi ed refusal When the ling o ce’s refusal to accept a nancing statement for ling is justi ed, the nancing statement is treated as having not been led. Grounds upon which the ling o ce may justi ably refuse to accept a nancing statement include the failure to tender the required fee, the failure to submit the nancing statement by an authorized method or medium of communication, and the failure of the record to identify a debtor. UCC § 9-516(b). 2) Unjusti ed refusal If the ling o ce’s refusal to accept a nancing statement for ling is unjusti ed, then the nancing statement is treated as having been led. Such a nancing statement is e ective except with respect to a purchaser of the collateral who gives value in reasonable reliance upon the absence of the record from the les. UCC § 9-516(a), (d). b. E ect of the ling o ce’s incorrect indexing of a nancing statement The e ect of the ling o ce’s incorrect indexing of a nancing statement does not a ect the e ectiveness of the led nancing statement. UCC § 9-517, incl. cmt. 2. The risk of a ling-o ce error rests on those who search the les rather than on those who le a nancing statement. 7. Continuation Statement 17 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... The e ect of a nancing statement may be extended by ling a continuation statement, which extends the e ect of the nancing statement for another ve-year period. The continuation statement must be led within six months prior to the expiration of the nancing statement and requires only the authorization of the secured party, not the debtor. If a continuation statement is not led, a nancing statement ceases to be e ective and any security interest or agricultural lien that was perfected by the nancing statement becomes unperfected, unless the security interest is perfected otherwise. In addition, the security interest (unless otherwise perfected) is treated as never having been perfected as against a purchaser of the collateral for value. UCC §§ 9-515(c)–(e); 9-509(d). 8. Amendment of a Financing Statement A person may amend a nancing statement, such as by adding or deleting collateral covered by the statement. The amendment is generally e ective as to the added item only from the date of the amendment. An amendment does not extend the period of e ectiveness of the nancing statement. UCC § 9-512. 9. Termination Statement The e ectiveness of a nancing statement may be terminated by the ling of a termination statement. UCC § 9-513(d). In the case of consumer goods, the secured party must le a termination statement within the earlier of (i) one month after there is no obligation secured by the collateral covered by the nancing statement and no commitment to make an advance, incur an obligation, or otherwise give value, or (ii) 20 days after the secured party receives an authenticated demand from a debtor. In the case of other collateral, the secured party must generally le a termination statement or send one to a debtor within 20 days after the secured party receives an authenticated demand from a debtor. UCC § 9-513(c). C. Possession A secured party may perfect a security interest in most collateral by taking possession of the collateral. As a rule, this security interest remains perfected only while the secured party retains possession. UCC § 9-313(a). Except for money, collateral that may be perfected by possession may also be perfected by ling. Perfection by ling does not require the secured party to be also in possession of the collateral. A secured party may perfect a security interest in most collateral by taking possession of the collateral. As a rule, this security interest remains perfected only while the secured party retains possession. UCC § 9-313(a). Except for money, collateral that may be perfected by possession may also be perfected by ling. Perfection by ling does not require the secured party to be also in possession of the collateral. Goods, instruments, negotiable documents, money, and tangible chattel paper are the only types of collateral that may be perfected by possession. A security interest in money may be perfected only by possession, unless the money is received as proceeds of a perfected security interest (see E.3.b.2., Cash proceeds, infra). A certi cated security may be perfected by the secured party taking delivery of the security. UCC § 9-313(a) D. Control A secured party may perfect a security interest in speci c collateral by taking control of the collateral. The security interest remains perfected only while the secured party retains control. UCC § 9-314(a). 1. Collateral Perfected by Control Perfection by control of the collateral may only be achieved with respect to a security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents. Gaining control for purposes of attachment also su ces for purposes of perfection. UCC §§ 9-312(a), 9-314(a). 2. Letter-of-Credit Rights 18 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... A security interest in letter-of-credit rights, if such rights are a supporting obligation for other collateral (e.g., chattel paper) is perfected by the perfection of the security interest in the other collateral. Otherwise, perfection of a security interest in letter-of-credit rights may be perfected only by control. UCC § 9-312(b)(2). 3. Deposit Account A security interest in a deposit account can be perfected only by control. UCC § 9-312(b)(1). A secured party has control of a deposit account if: i) The secured party is the bank with which the deposit account is maintained; ii) The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or iii) The secured party becomes the bank’s customer with respect to the deposit account. UCC § 9-104(a). E. Automatic Perfection Under some circumstances, a security interest is automatically perfected upon attachment. Such perfection may extend inde nitely or may be subject to a time limitation, in which case it is referred to as “temporary perfection.” UCC § 9-309. A security interest that is entitled to automatic perfection may, of course, be perfected through another permitted method (e.g., ling, possession, or control). 1. Inde nite Period of Perfection a. PMSI in consumer goods A PMSI in consumer goods is automatically perfected upon attachment. A secured party does not need to le a nancing statement or have possession to have a perfected PMSI in consumer goods. A PMSI in other types of goods (e.g., inventory, equipment) or in automobiles is not automatically perfected. UCC § 9-309(1). b. Other automatic permanent perfection Automatic permanent perfection also occurs in other situations, the most important of which for bar exam purposes are: i) The casual or isolated assignment of accounts or payment intangibles that does not transfer a signi cant part of the assignor’s outstanding accounts or payment intangibles; and ii) Sale of a payment intangible or promissory note. UCC § 9-309. 2. Temporary Perfection a. New value If new value is given under an authenticated security agreement, a security interest in certi cated securities, negotiable documents, or instruments is automatically perfected for 20 days from the time it attaches without ling or the taking of possession. UCC § 9-312(e). b. Delivery of collateral to the debtor If the secured party makes the collateral available to the debtor for the purpose of selling or exchanging the collateral, then the security interest in the collateral remains temporarily perfected for 20 days. Collateral subject to this rule includes certi cated securities, negotiable documents, instruments, and goods in the possession of a bailee and for which a negotiable document has not been issued. UCC § 9-312(f), (g). c. Interstate movement 19 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... Temporary perfection may also arise when collateral or a debtor moves from one state to another. 1) Movement of the debtor If a debtor moves to another state, a perfected security interest remains perfected for four months after the debtor’s change in location, unless perfection would have ceased earlier under the law of the debtor’s former state. UCC § 9-316(a), cmt. 2. This four-month grace period also applies to collateral the debtor acquires after the debtor moves, i.e., the ler has perfection for four months in collateral acquired post-move. UCC § 9-316(h). For a security interest that is automatically perfected upon attachment (e.g., a PMSI in consumer goods), the security interest remains perfected inde nitely. The secured party is not required to take further action within the four-month grace period to maintain the perfection of its security interest. 2) Movement of collateral If collateral is transferred to a person located in another state who becomes a debtor (i.e., takes the collateral subject to the security interest), then a perfected security interest generally remains perfected for one year after the transfer, unless perfection would have ceased earlier under the law of the former debtor’s state. UCC § 9-316(a), cmt. 2. 3) Possessory security interest—continuous perfection A perfected possessory security interest in collateral generally remains continuously perfected, despite the movement of the collateral to another state, when the security interest is perfected under the laws of the state to which the collateral is moved. UCC § 9-316(c). 4) E ect of a lapse of perfection If a security interest is not perfected in the second state before the expiration of the applicable temporary perfection period, then the security interest generally ceases to be perfected prospectively (i.e., upon the expiration of the temporary perfection period). However, with respect to a purchaser for value of the collateral after the removal, such a security interest is deemed never to have been perfected. UCC § 9-316(b). A “purchaser” includes a person who takes a security interest in the collateral as well as anyone who acquires an interest in the collateral in a voluntary transaction. UCC § 1-102(29), (30). 3. Proceeds A security interest in proceeds enjoys temporary perfection and may also be entitled to inde nite automatic perfection. This perfection occurs even though the nancing statement does not speci cally mention proceeds. UCC § 9-315(c), (d). a. Temporary perfection If the security interest in the original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from the time it attaches. UCC § 9-315(c), (d). b. Inde nite automatic perfection In the following circumstances, a security interest in proceeds may continue to be perfected beyond the 20-day period: 1) Perfection pursuant to nancing statement If the original nancing statement is broad enough to encompass the proceeds or the secured party takes the necessary steps to amend the nancing statement to cover the proceeds within the 20-day period, the security interest in the proceeds continues to be perfected. UCC § 9-315(d)(1), incl. cmt. 5. 2) Cash proceeds If the proceeds are identi able cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues inde nitely, even though the security interest in the original collateral subsequently ceases to be perfected. The identi cation of cash proceeds is left to common law. UCC § 9-315(d)(2), incl. cmt. 3. Note that cash proceeds include more than just money. They also include checks and deposit accounts. UCC § 9-102(a)(9). 20 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... 3) Same o ce A perfected security interest in proceeds may also continue inde nitely when: i) A led nancing statement covers the original collateral; ii) The proceeds are collateral in which a security interest may be perfected by ling in the o ce in which the nancing statement has been led; and iii) The proceeds are not acquired with cash proceeds. However, under this option, if the original ling ceases to be e ective after the 20-day period, then the security interest in proceeds also ceases to be automatically perfected. UCC § 9-315(d)(1),(e)(1). Note that when the original ling ceases to be e ective during the 20-day period after the security interest in the proceeds attaches, the security interest in the proceeds continues to be automatically perfected until the expiration of that period. UCC § 9-315(e)(2). F. Non-Article 9 Rules: Notation for Vehicles When property is subject to a special statute in lieu of Article 9’s rules on perfection, the statute dictates the manner of perfection. The most prominent of such property subject to separate legislation is a motor vehicle that is subject to a certi cate-of-title statute. This type of statute requires that the security interest in a vehicle be noted on the certi cate of title or a registry maintained by a state agency (e.g., Department of Motor Vehicles) in order to perfect the security interest. Neither the ling of a nancing statement nor possession of the vehicle or the certi cate of title is generally su cient to perfect the security interest, and the rule granting automatic perfection to a purchase money security interest in consumer goods does not apply. There is a limited exception for dealers under which the Article 9 rules for perfection do apply. When motor vehicles are held as inventory for sale or lease by a person, or leased by that person as lessor, and that person is in the business of selling goods of that kind, such as a car dealership, perfection can be done by ling under ordinary Article 9 rules. Other property, such as civil aircraft, is subject to federal statutory rules for perfection. UCC §§ 9-309(1), 311, 313(b). G. Timing of Perfection A security interest is perfected upon (i) attachment of that interest and (ii) compliance with one of the methods of perfection. Although typically the security interest attaches and is then perfected, if the necessary steps for perfection are taken prior to attachment (e.g., the secured party les a nancing statement that covers after-acquired property), then the security interest is perfected upon attachment. In addition, a security interest that is perfected by one method and later perfected by another method without a lapse in perfection is continuously perfected despite the change in method. The date of perfection is the date on which the security interest rst became perfected. UCC §§ 9-308(a); 9-502(d). IV. PRIORITIES Article 9 sets out rules governing the priorities of con icting interests in collateral. Unlike in bankruptcy, which provides a pro rata share to all creditors, Article 9 prioritizes the claims and pays them in order. The holder of a priority can agree to subordinate his interest to another’s interest. UCC § 9-339. EXAM NOTE: Priority problems are commonly tested and generally occur when two or more parties claim a right to the same collateral. One of the parties will always be claiming a security interest under Article 9. The determination of priority involves two steps: i) Identify the status of each claimant; and ii) Apply the appropriate priority rule. A common error is the failure to properly characterize the status of the competing parties. A. Claimants 21 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... Other persons with interests that may con ict with a secured party’s interest traditionally fall into one of three groups: i) Creditors; ii) Transferees/buyers; and iii) Other secured parties. B. Creditors 1. General Creditor (Unsecured) A general creditor is one who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question (i.e., the collateral). A general creditor has no interest to assert under Article 9; this type of creditor does not have a claim to particular property owned by the debtor. A secured party will always prevail over a general creditor with respect to the debtor’s collateral. UCC § 9-201. 2. Judicial Lien Creditor A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law. A judicial lien creditor takes the collateral subject to an existing perfected security interest but generally has priority over an unperfected security interest. However, even if the security interest is unperfected at the time the judicial lien comes into existence (i.e., the value necessary for attachment and perfection of the security interest has not yet been given), the secured party will have priority if the debtor has authenticated a security agreement listing the collateral and a nancing statement has been led (assuming eventual attachment and perfection takes place). Otherwise, if at the time that the judicial lien is created a security interest does not exist, the judicial lien generally has priority over a subsequently created security interest. UCC §§ 9-102(52)(a), 9-317(a)(2). Example: On Day One, the debtor authenticates a security agreement, which describes the collateral. On Day Two, the secured party les a nancing statement. On Day Three, the creditor acquires a judicial lien on the collateral. On Day Four, the secured party gives value. The secured party will have priority even though the security interest was unperfected on Day Three because the secured party authenticated a security agreement and led a nancing statement before the creditor’s lien attached, and the secured party eventually attached and perfected its security interest. a. Exception—PMSI If the secured party has a PMSI that is perfected before or within 20 days after the debtor receives possession of the collateral, then the security interest takes priority over the rights of a creditor that arose between the time the security interest attached and the time of ling. A secured party with a PMSI will prevail over any creditor that obtains a lien within that 20-day period. UCC § 9-317(e). b. Advances A security interest that secures an advance is subordinate to the rights of a person who becomes a lien creditor when the advance is made more than 45 days after the person becomes a lien creditor, unless the advance is made without knowledge of the lien or made pursuant to a commitment entered into without knowledge of the lien. Note that when the advance is made within the 45-day time period, knowledge of the lien does not prevent the holder of a security interest from having priority over the lien creditor. UCC § 9-323(a), (b). 3. Statutory or Common-Law Lien Creditor A statutory or common-law lien creditor is a creditor who obtains a possessory lien on the property of another by operation of a statute or common-law rule. Unlike an Article 9 security interest, these are nonconsensual liens. A statutory or common-law lien has priority over a security interest, including a perfected security interest, in goods, provided: i) The e ectiveness of the lien depends on the lien holder’s possession of the goods; and ii) The lien secures payment or performance of an obligation for services or materials furnished with respect to goods by the lien holder in the ordinary course of that person’s business (e.g., supplier’s lien, mechanic’s lien). When the lien is statutory and the statute creating the lien expressly provides a di erent priority rule, such as subordination of the possessory lien to security interests, that rule governs. UCC §§ 9-317(a)(2), 9-333(b). 22 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... C. Transferees Transferees of the collateral are persons who obtain full title to the goods as a result of a transfer of the collateral from the debtor. EXAM NOTE: A typical inquiry in a priority problem is whether the buyer takes the collateral free from the security interest or subject to it. 1. General Rules a. Transferee versus secured party with a security interest If the collateral is transferred and transferee of the collateral is not a buyer, the security interest generally continues in the collateral unless the secured party authorized the transfer free of the security interest. UCC § 9-315(a)(1). b. Buyer versus secured party with an unperfected security interest A buyer, other than a secured party, of collateral that is goods, tangible chattel paper, tangible documents or a security certi cate takes free of an unperfected security interest in the same collateral if the buyer: i) Gives value; and ii) Receives delivery of the collateral; iii) Without knowledge of the existing security interest. UCC § 9-317(b). If the collateral is intangible collateral, such as accounts, or a general intangible, such as a copyright, then there is no requirement that the buyer receive delivery of the item. UCC § 9-317(b), (d). c. Buyer versus secured party with a perfected security interest A buyer of collateral subject to a perfected security interest generally takes the collateral subject to that interest, unless the secured party has authorized its sale free of the security interest. UCC §§ 9-315(a); 9-317(b), (d); 9-320, cmt. 6. 2. Buyers in the Ordinary Course of Business (BOCB) A buyer in the ordinary course of business (BOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. A BOCB is a person who: i) Buys goods (other than farm products); ii) In the ordinary course; iii) From a seller who is in the business of selling goods of that kind; iv) In good faith; and v) Without knowledge that the sale violates the rights of another in the same goods. UCC §§ 1-201(9), 9-320. A buyer does not receive BOCB status if the merchant is a pawnbroker. UCC § 1-209, incl. cmt. 9. Example: Retailer owns a department store. Bank provides Retailer with a loan to purchase inventory, and, in exchange, Retailer gives Bank a security interest in its entire inventory. Customer purchases a television from Retailer’s inventory. Customer takes free and clear of Bank’s security interest in the inventory, even though it has been led and perfected. a. Knowledge requirement 23 of 37 6/20/2024, 13:17 MyThemis Learners https://www.themisbar.com/learners/index.php?service=subjectoutline&... The requirement that a BOCB take without knowledge means actual knowledge that the sale is in violation of another party’s rights. Mere notice or reason to know is insu cient. UCC §§ 1-201(25), 9-320(a), incl. cmt. 3. Example: The security interest given by a bank to a used car dealer provides that the dealer must obtain the bank’s permission before selling a car. A consumer buys a car from the dealer. The consumer sees a notice posted in the dealer’s o ce that the inventory is subject to the bank’s security interest. While the consumer has knowledge that the car is subject to the bank’s security interest, the consumer, without more, does not have knowledge that the sale violates the security agreement. Consequently, the consumer is a BOCB who takes the car free of the bank’s security interest. b. New value The buyer can purchase goods for cash, on credit, or in exchange for other goods, but does not achieve BOCB status if he acquires the goods in total or partial satisfaction of a money debt. UCC § 1-201(b)(9). c. Seller of goods This exception does not apply if the seller is a person engaged in farming operations and the buyer purchases farm products from the seller. UCC §