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Secured Transactions Outline May 4, 2011

Goal of Secured Credit: To facilitate lending and encourage desirable economic activity Methods: Provides creditors with coercive remedy that does not destroy too much of the value of the collateral in the process; Lets lenders know before they lend what priority in the collateral they will have against third parties in the event of default

Debtor-Creditor Relationship
Lien: an interest in the specific property of the debtor used to satisfy the debt Judicial Lien: Lien obtained with judicial process

Creditors Remedies Under State Law

Unsecured Creditor: Method when not getting paid (1) File suit and get a judgment for amount owed (2) Draft a writ of execution (3) Tell sheriff what to do seize property, etc. (if you dont know what debtor has, get a deposition and examine under oath; levy on property. (4) Once sheriff takes possession of the debtors property pursuant to writ of execution, you have a judicial lien Defined: anyone owed a legal obligation that can be reduced to a $ judgment is a creditor of the owing party Debtor-Creditor Relationship: May be entered into voluntarily (loans) or involuntarily (tortfeasors judgments)

Who is an unsecured creditor?

Unsecured Creditor: Creditor whose debt is not backed up by security or collateral Judgment Creditor: Creditor who obtained court judgment to establish liability Limits on Power of Creditor: Self help seizures of property are prohibited Recovery of Debt via fraud or other illegal methods: Usually produces counterclaim for debtor, may cause them to face larceny charges or may cause debtor to incur liability for wrongful collection practices Conversion: Prohibited seizures of debts property will constitute tort of conversion and creditor can be sued for damages then can only counterclaim for amount of unpaid debt File Lawsuit: obtain judgment Discovery: do discovery to ascertain assets held sheriff cannot act without proper info If Win: obtain writ of execution from court certifies ability to collect judgment Take writ to sheriff w/ instructions of what to seize and sheriff seizes it and conducts sale/auction. Creditor pays costs of seizure, sale and auction, then distribution (auctioneer, lawyers, etc. paid first) Debtor can challenge auction method or claim exemptions under state

How do unsecured creditors compel payment?


Vitale v. Hotel California Rule: Sheriff must follow creditors reasonable instructions regarding the time and manner of making the levy Holdings: Successive Levis Under One Write: Levies can be made under same. It is universal rule that further levies under one write are allowed under same write before the return day if the initial levy doesnt satisfy the judgment Reasonableness of Requested Levies: has duty not to request inordinately frequent and numerous levies Amercement: By proceeding in amercement, a judgment creditor may hold a sheriff liable for failing to properly excuse against a judgment debtor Other Remedies: Small claims courts; Garnishment (can compel employer to pay directly)

Procedural and Practical

Creditors can sue until debtor defaults: no legal remedy until breach JCs have obligation: to use discovery to locate assets sheriff will only act on clear info JC Can Ask Questions: about assets under threat of contempt/perjury but debtor with $10,000 in may still lie If Property Seized: Turns to be that of a third party, JC may be liable for any damages caused to the third party wrongful exercise of dominion/conversion

Even if JC discovers location of assets they may be moved Assets are Mobile: Even if discovered, can be moved before sheriff gets there Debtor May: Sell and disperse cash in deals; move out of state ($ judgment only enforcement in state where rendered); may continue to do business, losing and converting assets; may repay other creditors first Attachment: if the debtor is fraudulently disposing of its property during the lawsuit, creditor may have right to attach immediately what the debtor still has Exemption Statutes: Prevent sheriff from seizing certain assets under writ of execution Only for Individuals: Not corporations, usually for vital goods, homes, cars, % of GI, etc. Only protects: against unsecured creditors Both Federal and State: Protects debtors wages federal statute provide that a minimum of 75% of the earnings from personal services will generally be exempt in all states; TX and PA exempt al earnings Defined: Limits on what debtor can do in resisting collection All 50 states: Have laws that allow creditors to set aside their debtors fraudulent transfer and recover the property transferred Two Types: (1) Any transfer made with actual intent to hinder, delay or defraud any creditor -UFTA 4(a) Intent is key. (2) Any transfer made without receiving a reasonably equivalent value in exchange for the transfer if the debtor was insolvent at the time of the transfer - UFTA 2(a) Practically: Fraudulent transfer law is useless Enforcement: of civil judgments for money damages is often ineffective Strict enforcement methods for some things like child support but not money judgments, wages or most contract breaches Criminal Remedies: Reserved for violations of rights we hold more dear than mere money obligations

Fraudulent Transfers

Effectiveness: Law for Unsecured Debts

Problem Set 1 Problem 1.1 Jeff loans neighbor $1000 to buy furniture. Neighbor Lisa signs an IOU. Jeff wants to take furniture. Can Jeffrey get his stuff back?. Jeff may not simply enter Lisas backyard and repossess the furniture. Self-help seizures of property are prohibited and may constitute the tort of conversion. Larceny - prosecuted Conversion tort an exercise of dominion over Lisas property inconsistent with the right of ownership Process: Jeff must first get a judgment against Lisa. To do so, he has to prove that he loaned Lisa the money (needs to have an IOU). If he is successful in getting a judgment against Lisa, he must then get a writ of

execution and take this writ to the sheriff so that the Sheriff, and not Jeff, may levy on Lisas furniture. This is likely not worthwhile for Jeff because law firm costs are more than value of furniture. But because Jeff has union agreement for consultation, the lawyer can tell Jeff how to handle the issue in small claims court (less than small amounts like 2,500). Small claims court is an option in a jurisdiction with a streamlined process. The threat of a treble damage lawsuit is often enough to end matter. If small claims court is not an option, Jeffs options are really poor. To be an unsecured creditor is bad situation if debtor is unable to pay. Lots of people end up being unsecured creditors. If you go into bank to buy car, the bank is going to take security interest in car. But if business asks for 10 million, the bank will give it for unsecured credit (maybe to get business and working relationship).

Problem 1.2 This is a story about some unsecured creditor who tricks the debtor into giving unsecured creditor valuable property. The creditor tricks the debtor to giving up lobster (under pretense it was going to Stephen King), but the lobster value is $11,000 short of full debt. How do you advise creditor/ Try to repurchase the lobsters and return them to their owner; he could be in trouble for conversion or larceny if he does not return them and perhaps some form of criminal liability He should identify assets of his debtor and then get a writ against him for the amount to be executed by a sheriff, not self-help. The judges remedy was a civil remedy along with a criminal remedy. We want to avoid the criminal charges. How to avoid prosecution? You should bring prosecution for criminal charges first. There is a colorable case of fraud. So when debtor responds and brings criminal charges back at you, the prosecutor would probably not go forward with either charge. For public interests, prosecute both or none. Other alternatives? AK: might have to think deviously. Remember: you want to keep your client out of jail. Can go to prosecutor and say that this person is guilty of criminal fraud go investigate. .. But debtor could always say larceny go investigate. Problem 1.3 This involves a loan in business situation. Benning gives $$ to day care center. Payment has been made and discovers that all kinds of things happen at day care center that makes loan precarious. They are not behind on payment to Benning. Look to loan agreement to see her options. She may try to negotiate for some security but she has no leverage to do it. If she is on better relations, she could exchange some credit for better security. The point of the problem is to show that unsecured creditors go down if debtor goes down. The debtor really runs the show once the money has been paid over. What can she do? She could help give some business advice, but she has no leverage to do that Might be a lot better to have security than a few extra dollars of interest

Problem 1.4 The daycare folds, and you have default judgment against owner. How does Benning get paid? Benning is a judgment creditor. She is going get a writ of execution and go to the Sheriff. She needs to know what assets she can levy on. These assets cannot be covered by state exemption statute and cannot be secured by another creditor. She needs to find out some unencumbered nonexempt assets! Records: state records, personal property records. Sit visit see all kinds of stuff lying around Credit reporting service could get a lot of this information for you Problem: Credit reporting service is not open to private people. Its a service for repeat players. Deposition? Like Hotel California, the lawyer took deposition to discover assets. Problem: depositions require hiring court reporter (very pricy). There is no incentive at all to come into depositions and show what is owned. He has every incentive to prolong deposition. As lawyer for Benning, tell her that its expensive. You may find that assets are not owned by daycare center. Motor vehicle records Could get records to see if he owns the car Automobile records are titled/public records and will list secured creditors in the record. The real record is at the DMV Problem 1.5 Assume you took deposition and Knopf (debtor who borrowed 10K) moved to WI and you took his deposition. He testifies that he owns the following property, free of any liens and security interests: (Read statute - WI exemption statute may apply to certain assets to allow debtor livelihood.) A. A four-year-old Toyota worth $6,000 a. Wisconsin S 815.18 (g) says Motor Vehicles exempt up to $1200 BUT can add the consumer goods exemption, too, if you dont use it up on all consumer goods so you have $6200 to play with there . B. House from his mother worth $35K a. Exempt under S 815.20 up to 40K as long as he lives there! b. Principle residence: exempt if less than 40 acres. C. Equipment from day car center worth $10K a. Statute exempts equipment used in the business not to exceed $7,500 but daycare center is shut down i. Could argue that as a policy matter, whats the difference if its currently running or not? ii.Equipment defined as goods used or bought for use primarily in a business iii.Could argue that under (b), only professional books used in the business implying that other stuff doesnt need to be used in the business! 1. AK: As a matter of policy, natural instinct would be to say that used in the business applies to all the mentioned categories iv.AK: could say the other categories have a definition in the definition section, except for professional books, so we could

say thats the only one that needs to be used for business but what he really thinks is that as a matter of policy, it makes more sense not to make the exemption turn on whether its currently used in the business, but whether it was used in the business at all. D. Bank account worth $2,265.92 a. S815.18 (k) exempts depository accounts up to $1,000 b. You need to get a writ of execution from the court to order bank to pay you as creditor. If debtor withdraws money before Sheriff serves writ, creditor is SOL. You can take a bathroom break during deposition and serve writ right away. Problem 1.6 Its very difficult to prosecute anyone for perjury, but if you ask the question quite specifically, then it may become a lot easier to nail them. You can try to collect a lot of assets. Dont just look for cash assets. Examples: Does any person or entity owe you anything of value? Account receivables from the daycare? Is there anyone from daycare center who owes you any money for your services? Have you made a prepayment for anything? Have you brought a legal action against anybody? Do you have any legal rights against anyone? Security deposit? Last month rent? Refund for taxes? Insurance income? Any pre-payments in connection with insure? Have you paid any bills for which you might be reimbursed by insurance? Have you been paid for all the day care equipment which you sold off? Check from car insurance company for overpaying?

Security and Foreclosure

Parties who wish to do so can easily construct the security relationship using the everyday conventions of sale and option to purchase: Could still enter into STs but it doesnt protect against forfeiture Clever Parties: Can use existing legal forms in ways unanticipated by lawmakers In determining which transactions are in the nature of security and must be foreclosed: one cannot rely on documents Lien: Charge against or an interest in property to secure payment of a debt or performance of an obligation Security Interest: any lien created by contract between creditor and debtor; a right in property contingent on the non-payment of debt Intended as Security Doctrine: 9-109(a)(1) Art. 9 applies to any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract A deed conveying real property, though absolute on face, will be considered to be a mortgage when the instrument is executed as security for a debt

Security Provides More Protection than Unsecured Loans

Can create security interest if you do not mean to Right of Redemption: the debtors right to pay the debt and own the property free of interest

Basil v. Erhai Holdings: Intended as Security Doctrine Facts: contends that a deed in lieu of foreclosure was intended to be a security and thus constitutes a mortgage Rule: An equity of redemption cannot be waived or abandoned by any stipulated of the parties at the time, even if embodied in a mortgage Analysis: Same doctrine also applies to personal property. 9-102: Article 9 provisions apply to any transaction intended to create a security interest in personal property; a security interest may be found to be intended despite the name by which the parties give it Held: A deed conveying real property, although absolute on its face, will be considered to be a mortgage when the instrument is executed as security for a debt. Reasoning: Court looks beyond term of instrument to real transaction and when that is shown to be one of a security, it will give effect to the actual contract of the parties.

Four Types of Transactions Intended as Security

(1) Conditional Sales: Title remains in seller until buyer finishes paying off goods 2-401(1): Any retention or reservation by the seller of the title in goods shipping or delivered to the buyer is limited in effect to a reservation of the security interest. Buyer becomes the owner of the goods and the seller becomes a secured creditor for the price of the goods (2) Leases Intended as SI: A sale, combined with an SI securing payment of the purchase price, has precisely the same economic impact on parties as a lease for the entire economic life of the property (3) Sales of Accounts: Art. 9 applies to Sale of Accounts and security interest in accounts; Referring to accounts receivables True Lease v. Security Interest: If you lease a car that is expected to work for 7 years, lease is an SI. Same is true if the parties agree to lease car for 4 yers and lessee has an option to buy it at the end of the lease for $100. If Parties lease car for only 3 years, or lease it for 7 and give it the option to terminate at 3 years, the lease is a true lease NOT a security interest. (4) Asset Securitization: to securitize an asset is to divide ownership of its value into large numbers of identical shares (can be done with anything but usually mortgages and accounts arising out of credit cards) Foreclosure: process that transfers ownership from debtor to the purchaser at the foreclosure sale and sets off the debtors right to redeem the collateral Foreclose v. Possession of Collateral: Foreclosure is ownership transfer; change of possession may occur before, during or after foreclosure Judicial Foreclosure: Above accomplished by the entry of a court order (1) Creditor holding SI or mortgage files civil action against debtor

Foreclosure Procedure

(2) Complaint is serves on debtor and any subordinate lien holders who usually have around 20 days to raise defenses (3) Typically as part of judgment the court will set a date for FC sale (4) On that date, the sheriff of clerk will conduct an auction (5) Generally the FC sale must be confirmed by the court the purchaser is then entitled to possession (6) After confirmation has been entered, sheriff disburses the sale proceeds Writ of Assistance: Court order allowing sheriff to remove debtors who refuse to leave from foreclosed property and put the purchaser in possession Deed in Lieu of Foreclosure: Voluntary transfer of the debtors ownership/right to redeem to the creditor (the right to redeem is transferable property); no need to FC or go through judicial proceedings If there are no other liens or interest in the collateral, the debtor can simply transfer the property to the creditor by these means Simply ends the mortgage and underlying mortgage debt Security Agreement Gives: creditor right to sell property in event of default Each state has own procedure including cure period and ad requirements In deed of trust states, property is in hands of 3rd party agent who effects the sale Avoids: messy litigation unless debtor refuses to vacate but this would be a separate legal issue Art. 9 governs disposition of collateral after default: 9-610(a) Upon default, secured party may sell, lease, license the collateral, etc. Sale of disposition itself forecloses debtors right to redeem the property 9-623(a) A secured partys disposition of collateral must be commercially reasonable 9-610(b) 9-617(a): Governs effect of the disposition of collateral After default a secured partys disposition transfers to the transferee for value all debtors rights in collateral; discharges the SI under which disposition can be made; discharges any subordinate SI or liens 601(a): In the alternative, the SC may foreclose by any available procedure

Real Property Power of Sale Foreclosure

UCC Foreclosure by Sale

Problem Set 2 Problem 2.1 Page 35 Wisconsin statute exempts certain property (see page 16). Statute says, No property otherwise exempt may be claimed as exemptionagainst the claim or interest of a holder of a security interest. You have a security agreement taking a car, house, equipment, etc as security. What items can Benning reach through foreclosure of her security interest? State foreclosure exemptions dont apply to secured creditors who foreclose.

Here the WI exemption statute does not apply because it applies only to liens that result from judicial procedure. There, the lien is created only once the property is actually seized. The minute Knoff enters into a security agreement, then a lien in the property exists and need not be established by judicial procedure. Therefore, because he has a security interest, he can reach all those items. The entry of judgment does constitute a lien against most real property in almost all states, but not in respect to personal property, the sheriff has to seize it for there to be a lien. The WI statute specifically preserves the mortgage from the homestead exemption. You cant use the exemption to defeat the banks claim from the mortgage or no one would ever give our mortgages to buy houses. Policy: The WI statute specifically preserves the mortgage from the homestead exemption. You cant use the exemption to defeat the banks claim from the mortgage or no one would ever give out mortgages to buy houses.

Problem 2.2 Here Bonnie runs a used car lot and ends up repossessing a lot of cars. To ease her administrative burden, Bonnie plans to begin leasing the cars rather than selling them. She wants to lease the cars for a per month figure giving the lessor the option to purchase at the end for $10. She would provide that on default, she has the right to terminate the lease and the right to buy. She thinks this way she can just repossess without having to foreclose under article 9. Is this correct? NO! This lease is actually a sale with a right of repossession in the event of default as the equivalent of a security interest. UCC 1-201(37): whether a transaction is a lease of security interest depends on the facts of the case. There are a number of transactions in which the form of a lease is actually a security interest. In the second paragraph of the definition of security interest, a transaction that is a lease in form is treated as a security interest if the lessee cannot terminate the agreement. See if lessee has right of termination; if so, that takes us out of this paragraph. The second factor is that the lessee has an option of ownership for nominal consideration. This would mean that the rent payment is not really rent but rather an installment plan. The courts are concerned with the economics of the transaction. Maybe the substance of the transaction is actually a sale with a security interest. One of the most litigated issues is whether the transaction constituted a lease or sale. The problem is supposed to be simple; however, the lease terms are exactly the same as security agreement. You cannot get out of the foreclosure requirements by doing this. Typically, you will not have such an easy fact situation. You cannot get around giving public notice by calling your document a lease when it is really a security interest.

Note: when you look at a contractual waiver of exemption rights, the debtor does not have any exemption rights when a security interest is concerned BY DEFINITION of the word exempt. Policy reason is clear! You never have a transaction involving the security interest of the individual where all these things are exempt (then it wouldnt be secure!)

Problem 2.3: The statues of the state in which you are practicing authorizes foreclosure against real property only by judicial process. You work for Enterprise State Bank who performs dozens of foreclosures at a time. You are now told to begin foreclosure proceedings on Linda OHurley, notifying her of her default. A) Linda says she realizes they cannot afford the house, but states that the house is worth more than the balance owed, but that the housing market is slow now and attempts to sell the house havent gone well. She wants to know if she can just turn the house over to the bank because they dont want to be sued or have a foreclosure on their record. If they go through the foreclosure procedure, OHurleys would get the amount over their defaulted loan. If the bank avoids foreclosure, the bank saves money, so maybe they can negotiate. The banks best option is to take the deed and maybe give up some money. What about the explanation issue? Any explanation may be construed as violating ABA Model Rules of Professional Conduct (see caption). There might be a legal problem with the fact that the bank doesnt represent OHurley. The bank could tell her that they do not represent her or her interests. They get her to sign a paper saying she understands they do not represent her. That seems to be okay. Suppose the OHurleys have their own lawyer, what would a good lawyer tell them? Giving the bank a deed in lieu of foreclosure is giving the bank the excess money in the house and it is saving the bank the costs of going through the foreclosure process including the cost of delay. So youd advise them to negotiate with the bank for some money for the OHurleys to make it worthwhile for them. You, as the banks lawyer, know this and they dont actually have a lawyer, so what do you tell Mrs. OHurley? So youve told her youre not disinterested, you represent the bank, not her and that shes free to get her own lawyer. During representation, the lawyer should not give advice to an unrepresented person other than the advice to attain counsel. Can you negotiate with her if she is unrepresented if you do all these things? Yes, you cant force her to get counsel. What if she asks you to explain the drawn up deed to her, then you are giving her advice perhaps, and you arent allowed to do that. What is the obligation of a lawyer for a secured creditor with respect to dealing with a debtor not represented by counsel? You have no legal or fiduciary obligation, but you want to be careful in dealings as to not expose your own client. Sometimes, that will mean not taking maximum advantage of people like the OHurleys.

A) What if the OHurleys execute the deed today, with an understanding that you will give it back to them if they make up the bank payments within 60 days, but otherwise you will record it? This is really the equivalent of a security interest. See UCC 1-201(37) and Basile. The banks interest is contingent on nonpayment of the OHurleys. If deed is effective immediately, that would not be a security interest. The difference is between giving you a book now (effective now as a gift), and I will give you my book tomorrow where there is no consideration. Problem 2.4: Mr. Mashimoto has an idea for a deed of trust, in event of default the creditor forecloses. If you include a power of sale within the transaction you can avoid a judicial foreclosure, which is expensive and time consuming procedure. Problem 2.5: There is another way to deal with collateral. Take a security interest in both real property and personal property. Judicial foreclosure takes a long time, but if you acquire enough company stock to control its actions you can expedite the foreclosure process by making the company consent to the transfer. The foreclosure of stock, unlike real property, occurs under Article 9 so this is done much more quickly. Two months, maybe, instead of six. You dont have to worry about statutory rights of redemption. The creditor gains stock of corporation and gets company to deed real estate. The creditor takes control of debtors corporation, but the debtor corporation is probably in default to others, and the secured creditor assumes the corporations other debt. If debtors corporation spill toxic stuff on land, the secured creditor is liable for the cleanup. But in some situations its worth thinking about. A secured creditor can deal with default situations in ways that are not most time consuming. Problem 2.6: How would you change the high cost and excessive litigation involved in judicial foreclosure? The issues in foreclosure cases usually involve efforts by debtors to prolong everything. Usually debtors think tomorrow will be better. Some issues of foreclosure involve overreaching by creditors too. The form most seriously considered involves trying to get state foreclosure procedures to mimic federal bankruptcy procedures, changing the debtors right to redeem, the statutory period, the actual sale of collateral. During the whole period, the debtor can stand by and do nothing. The efforts of reform try to make the redemption period run smaller. That is, the time the debtor should raise defenses, creating less uncertainty.

Repossession of Collateral
Reasons to Possession Collateral Pending FC: Debtor may have little incentive to preserve and maintain property Economic value enjoyed during period Potential buyers may have limited access while debtor has control Security Agreement May: provide that creditor has the right of possession immediately on default

Whether enforced or not depends on circumstances even if SC obtains the right to possession from a provision, jurisdiction may require that the SC follow particular procedures to obtain that possession

Repossession of Personal Property

Secured Partys Right after Default: 9-609 If the SC can get possession without breaching peace, he can take it immediately after default; if debtor resists the SC must get court order and have sheriff take possession. May either: (1) Take possession or (2) Render collateral unusable With Resistance Writ of Replevin: orders sheriff to take possession of property and give it to the (1) SC Files a civil action and show that he is likely to prevail in it at hearing (2) Contingent upon creditor posting a bond in case debtor ultimately prevails

Dels Big Saver v. Carpenter: Notice Facts: Store is repossessed Dels owners had no notice until repossession; owners alleged that repo procedures violated their due process rights Rule: The due process clause guarantees the right to an opportunity to be heard and thus no hearing need be held unless debtor having received notice of his opportunity, takes advantage of it Due Process Clause in Repo or Garnishments: (1) Debtor must have hearing before property is taken OR (2) Debtor is provided with certain pre-repo procedural safeguards, coupled with a prompt post-deprivation hearing before final judgment Breach of Peace: In taking possession an SC may proceed without judicial process if it can be done without breach of peace or may proceed by action

Art. 9 Right to Self-Help Repo

9-609: Provides that after a default a secured party may take possession of the collateral Generally: Courts hold the duty to refrain from breach of peace during repo a non-delegable duty making the SCs liable for the consequences of illegal repos by their contractors 9-609(a): Creditor has option to leave equipment temporarily in the possession of the debtor but render it unusable 9-609(b): Permits self-help without breach of peace cannot be waived before default 9-607 See 9-624 Waiver for Post-Default Cases with Holding of Breach: Debtor consented w/ no confrontation b/c creditor brought police officer. Court stated that fact that deputy did not say anything was insignificant Creditor returned to recalcitrant debtor with two intimidating men Creditor cut chained fence and left property unprotected to repo

Limits to Self-Help: Breach of Peace

Cases Holding NO Breach Creditor stealthily took back truck at 2 a.m., frightening debtor Repo agents stood b/w debtor & car while they retrieved personal items Repo despite threat of violence from debtor. 30 days later, repossessor took car. Debtor did not know car was being taken until repo safely departed with it Locksmith changes locks on door to repo collateral Repo of rigs due to fraudulent misrepresentation but no threat of violence Creditor allowed access to debtor facilities by friend and peacefully repod

Salisbury Livestock v. CO Creditor Union: Trespass Facts: Creditors repo cars by trespass on secluded area belonging to third party; the entry was onto a secluded ranch yard of an isolated ranch where the vehicles sought were not even visible from a public place. Privacy expectations of rural residents are sufficiently different from those of urban dwellers to warrant a jury trial. Also, entry onto 3rd-party residential premises could trigger a breach of the peace Rule: A trespass breaches the peace only if certain types of premises are invaded or immediate violence is likely Held: Jury should decide whether this is a breach or not Reasoning: Breach depends on (1) Potential for imminent violence and (2) Nature of premises intruded on Trespass is not auto breach depends on circumstances Violence or potential for is not necessarily required for breach

Self-Help Against Accounts (Receivables)

Generally: Debtors often borrow against AR as collateral; creditors allow debtor to collect account but must apply portion to loans Account debtors directly pay creditor Sometimes account debtors must deposit payments in PO box of creditor 9-607: Creditor who knows identity of ARs can send them written notices to pay the SC directly 9-406(a): Account debtor who received such a notice can discharge its obligation ONLY by paying a secured party forces the account debtors to pay creditors once they receive notice that they are no longer supposed to pay his debtor as they had ben

Marine Nat. Bank v. Airco: Account Debtors Facts: Creditor sued Acct. Debtor who received noticed to pay creditor but paid debtor instead an account debtor was required to pay SC sum that debtor owed creditor. Account debtor should have had relief from the debtor but here the debtor was out of business and account debtor was forced to pay debt twice. Rule: 9-404(a) gives the debtor the same defenses it had against the debtor against the creditor after it received notice of assignment

Reasoning: AR may be hard to collect if AR debtor realizes that debtor is headed out of business May be hard to manufacturer to sue them on an unpaid account Bank financing the manufacturer may not have the info necessary to prove account obligation Result accounts can be expenses or may become completely uncollectible General Rule: Debtor remains owner of the property and is right to repossession of it until the court forecloses it and the sale is held; mortgagees never become entitled to possession of mortgaged real property in their capacity as mortgagees purchaser at sale is entitled to dispossess debtor but may have to sue for eviction Receiver: Officer of court with FD to all with an interest in the property can be requested by either party rarely appointed, called in for original mortgage docs (used to preserve value) Acceleration: Right of mortgagor to accelerate payments if debtor defaults Assignment of Rents: Like receiver, functional equivalent of taking possession; entitles mortgagee to rent from property as additional security in case of default Because collecting rents from mortgaged property that has been rented to third parties, it is like appointing a receiver, and some courts are reluctant to give effect to it

Right to Possession Pending FC: Real Property

Problem Set 3
Problem 3.1: J lends money to N. When N does not pay, J cannot just go take the lawn furniture (if unsecured creditor). He may find himself in front of criminal trial. The picture changes if J is secured creditor. He can self-help repossess if he does not breach the peace. Looking at cases, J probably wants to sneak onto the property and take furniture. The danger of confrontation is less at night. The debtor has less possibility of doing things that would increase chance of violations. In long run, maybe interest will not be served by taking furniture. The N may play load music at night. There are often good business reasons for not pushing ahead. But its also true that lenders lose more by trying to help debtor through period of financial troubles.

Problem 3.2: Collection department and repossession policy. What are general guidelines for repo people. No matter what the circumstances say avoid confrontation, do not use force while attempting to repossess, leave the minute there is any sign of confrontation. Can you come back later once a confrontation has occurred? Wade v. Ford Motor Credit Co. says you can go back even if there was threat of breaking the peace the first time. Suppose the debtor comes out and says what are you doing and the debtor says dont do that. Unless they order you to leave, you dont have to leave so long as they dont attempt to interfere or order you off the property you dont need to leave, see Williams and Rain-water. Sometimes if you put a provision in the security agreement that says you have the right to enter the debtors premises, it makes it easier.

A) Assume no guard and no fence. If no one will start conflict or confront repo,
then do it peacefully. If there is potential for immediate violence, then dont repo. If all the people are doing is objecting, the repo people can still do it. But the threshold is objection +. You can always come back later. The case law seems to favor when the people do it at night. There is a greater possibility for violence when you are mistaken for a thief.

B) Suppose there is a fence but no guard. Its probably ok. C) There is a guard. The site is a little more secure. What if you say you have
a court order but you are lying? Cases differ. What about the ethics rules about professional misconduct? A lawyer may discuss the legal consequences of proposed course of conduct. Suppose you say that the debtor says it is okay to enter to the guard. You could discuss this with the client, you just cant encourage him or conduct in it yourself. See rule 1.2 of the ABA Model Rules of Professional Conduct.

D) A right granting Maretka the right to trespass when making repossessions.

This would help make it easier to repossess without Problem 3.3: What advice can we give the debtor to prevent repossession? Article 9-609, a secured creditor may proceed without judicial process if it proceeds without a breach of the peace, taking possession, rendering equipment unusable. The debtor is always going to win if both sides play it smart. Repo usually wins only against stupid debtors. Question really is if the secured creditor and the debtor could give the best advice possible on resisting repossession, who could give the best argument possible? Debtor -- even with the provision authorizing consent, you still cannot consent to the breacher of the peace; too many people would get hurt. But people could get hurt the other way, too --- showing up in a secluded ranch in the middle of the night might well lead to someone getting hurt. People who will not confront repossessor are those who: a) are dumb and dont know whats going on b) dont know their rights (poor/uneducated/etc.) The idea of forcing people through the judicial system like that puts a burden on the judicial system. At the same time, it creates a business for people looking for ways to take the property of poor people without getting caught. Problem 3.4: If both the debtor and creditor have the best legal advice regarding self-help repossession follow it carefully, who wins? The debtor is always going to win if both sides play it smart. Repo usually wins only against stupid debtors. If both get good legal advice the debtor will likely prevail because self-help just isnt going to work against a wellinformed debtor. Repossession people have their biggest clientele, consumers mostly. Commercial property repossession is much rarer.

Basic Transaction: Dealer sells property computers to a big business and the business owes the dealer $100K. The Dealer borrows money from the bank, giving the bank a security interest in the account. The bank takes a security interest in the accounts owned by the dealer. The business in this transaction is called the account debtor. The bank will be either the secured party, or the buyer. This is the basic transaction. Businesses raise money this way all the time! Dealer always needs money so has to borrow money from the bank 1980 s Dealer, OPM (Other Peoples Money), committed enormous fraud. OPM needed a lot of money to buy computers, since was in the computer leasing business. Had to raise capital and didnt have enough flowing in to raise it. So, they forged a whole bunch of pieces to a 3rd party and got the money to finance their business. Ponzi scheme (Bernie Madoff - when you have all these people invest, but you dont really have a business, youre just spending their money and paying out dividends from other people's money)

Problem 3.5: Deare has a bunch of A/R from its customers. It needs financing and uses its A/R to receive a loan from First Bank. Deare has requested that Firstbanks interest in the accounts not be made known to the account debtors because it might make them nervous. What are the risks of this arrangement? How might Deare cheat you? Is there any way you could discover this cheating without contacting Deares customers? Youre taking a security interest in what could be liquidated assets! This isnt money that gets paid over by dealer every month. You have a security interest in A/R, which is pretty good. But one of things that could happen when the dealer goes bust is that suddenly the businesses dont deal with someone they know theyre dealing with a bank who they dont do regular business with. One factor is that you really want to make some assessment of what type of person youre dealing with and the only way to do that is if youre in contact with them. What you can do: As payments are made by the business from the dealer, the dealer is supposed to apply those payments immediately to his bank obligations. You can require the dealer to establish an account with the bank in which it deposits the proceeds of the payments to you. Then, it requires the dealer to submit copies of all invoices. THEN you can compare the checks received, deposited into the accounts, to invoices that are sent BUT that is still not perfect because the dealer could be pulling an OPM (Other Peoples Money haha ) on you by submitting forged checks. Only way to check that is to have copies of the sales invoices and check with the buyers. 2 ways of policing: 1 Making sure that the transaction against which bank is making the loan genuine 2 Making sure that the money that flows from the business to the dealer is applied to the indebtedness of the dealer to the bank Risks of this arrangement: First Bank not being able to talk to customer limits its ability to find out if customer will pay them or if the equipment is a good product (defenses, etc).


Deare may cheat, so have customers send checks directly and compare against Deares deposits. Doing an audit is expensive, and each level involves an extra layer of defense. You want to make sure that if Deare defaults, the money will be in there. It is not useful to have security interest in the collateral and when you need it, the collateral has already been spent. You want a security interest to back the A/Rs. Deare would assign to bank an A/R + a security interest in the farm machinery (stock in trade of retail consumers). That is more typical. There are situations that bank finance transactions backed only by A/R, but not with farm equipment and cars. This is a much more complex transaction.

We want to think about this 3 party transaction to realize that typically we have 2 loans- Bank to Dear to Customers.

What is Banks security? There are two kinds: it has the stream of payments made by customer to Deare. That is the A/R. It is highly liquid and available form of return. This stream of payments accounts for the figures heavily. This is why Bank needs to know something about customers of Deare, how creditworthy they are. It is a lot easier to talk about customers if we know who they are. The stream of payments is one thing. But secondly, it wants a security interest in the underlying collateral. It is thinking about the farm equipment. Is it accurate to say that Bank has security interest in farm equipment when in the hands of the customers. If Deare is in default, but the customers of Deare are not in default of Deare, what can Bank foreclose? You cannot get at the farm equipment because the Banks interest is subject to non-payment by customers. But Deare has something of value, a security interest in the farm machinery. If Deare is in default, Bank can go against Deare, foreclose on Deare, and steps into Deares shoes, and it is the secured creditor. Between Deare and Bank, they own all the sticks making up the property interest.

Problem 3.6: A year after the proceeding problem, Firstbank is back, Deare ultimately defaulted on the loan, and four months ago Firstbank notified the account debtors to pay it directly. There has to be notification to the business. Only way a business can discharge its obligation is by paying the bank. If it pays the dealer instead, then it may have to pay twice because the bank can collect. The business can go back against the dealer and get his money back, but typically what happens in that situation, is that the dealer is bust and the business has to pay twice.

A) Hornes Feed and Seed, one of Deares account debtors, claims that it paid
Deare in full last month and refuses to pay Firstbank. Does the person who owes the debtor money have to pay twice? They were told four months ago to pay the creditor, the paid the debtor one month ago. The person who owes the creditor must then pay twice.

a. 9-406(a) says that once notified, the debtor cannot continue paying the other
debtor, but must pay the creditor. The account creditor may discharge its obligation by paying the assignee and may not discharge its obligation by paying the assignor. The secured party simply by telling the client you have to pay us, imposes an obligation on the client to pay a party with whom it has never dealt. One solution would be to have a interpleader to cut this off. 9-607(a) gives the creditor the debtors enforcement rights as against his debtors.

B) Another account debtor, Wilsons Farming Goods, has refused to pay

claiming that they received $42,000 in equipment, they have warranty claims amounting to $19,000. What can Firstbank collect from Wilsons? 9404(a) gives the debtor the same defenses it had prior to receiving notification. Problem 3.7: a) Bank has mortgage on business premises. You want to know whether they have to go through judicial foreclosure or not. If you have power of sale or transfer, those go quickly. Depends on what kind of foreclosure process weve got judicial foreclosures take a long time. If we do not have a sale, then it wont be immediate, but it will probably just take a few months. Different foreclosure rules mean different leverage for debtors/creditors. b) Loan is secured by trade fixtures and equipment. Citizens repossess the trade fixtures and equipment. c) The utility people have lots of leverage, and they can turn off the lights. d) With any unsecured creditors, you may need them in the future --- if he really needs the inventory, then they both have the same leverage. BUT bear in mind that unsecured creditors cant do any self-help repossession so dont have much leverage. Its expensive to foreclose; it cuts off future business. If the secured creditor has security in the collateral, they would probably hold off. You probably want to deal with the utility people first. You are trying to advise your client who to pay first when he is having cash flow problems. This is not illegal, looking at the rule of professional conduct, the delay isnt just for delay itself, it is to keep the work going and keep paying the employees, you can always find some reason for delay that sounds more in tune with public good. On the other hand it is very hard to tell where to draw the line. Problem 3.8: What do you do by way of going ahead trying to get possession when debtor claims a defense? Dont go ahead. If you repossess and there is a defense, there is the risk of conversion. You could instead go through a judicial foreclosure proceeding where the debtor must go through defenses and litigate them if they have any (you dont have to go through the sheriff and get a writ of

replevin). The debtor will have some problems with suing for conversion because if its a lemon, it isnt worth much as she claims, if it is valuable, then she has no defense. Dont do it If Evans turns out to have a good defense, there will be liability. Sensible solution is to go through a foreclosure to litigate whatever defenses. Could levy the car, but there are some risks to doing that Problem 3.9: Give weekly code to start car. If not up to date, no code, and cannot drive the car. It is unclear whether this is ok. An article turned up in the newspaper and circulated among commercial law teachers. People are split. The disabling rules allow a creditor in event of default to disable equipment, a classification that does not relate to consumer goods. There is no provision that allows disabling of consumer goods. Its a question of how we will interpret the default provisions. If there is a mistake and the person has paid then there is a conversion for sure. You could also be in trouble if there is a malfunction and someone is hurt. See UCC 9-102(a)(33), 9-201, 9-602, 9-609a2 Problem 3.10: As you were cleaning the sludge from your spam filter, you see an instruction to pay your MasterCard bill to American Financial Corp. You see the last 4 digits of your MasterCard account number in the e-mail. a) What do you do next? UCC 9-406a and c, 1-202e (formerly 1-201(26). Request statements from American Financial Corporation but you could get a bogus pdf attachment. Then what? You probably want to get to MasterCard and ask them if they assigned it but theyre in big financial trouble and probably wont get back to you.

Real Estate Judicial Sale and Deficiency

Basics: When there is a FC by a secured creditor, there may be prior liens and there may be subsequent liens on the property. The sale is subject to all prior liens, meaning the purchaser buys the property with all the prior liens still attached to the property. However, subsequent liens are gone Generally: Even if mortgage specifically provides for the SC to become the owner of the collateral in the event of default and FC, the public sale must still be held in many states Auctions: If the auction fetches higher value than debt the debt is repaid and excess equity remitted to debtor If the auction fetches lower value than debt debtor can still be liable for deficiency if the creditor petitions for a Judgment of Deficiency Defined: Assets are not sold, property held in satisfaction of debt Contract for Deed or Installment Land Contract: Most strict FCs A contract for the sale of real property that provides for the payment purchase price in installments over many years, with the deed to be delivered only after installment has been made

Typically Sale Must be Held

Strict Foreclosure

If the purchaser doesnt make timely payments, seller must FC through courts Policy: Strict FC forfeits a substantial equity that a buyer has built up over several years; not often year and usually only for sales of real estate with relatively small values Defined: Usually via auctions on certain days of the month; nearly always sales are conducted by public official (sheriff or clerk) Court That Orders FC Sale: may have discretion to determine some aspects of the manner in which the sale is held (ads, how bidder ID themselves, etc.) Creditor Typically Highest Bidder: Balance of purchase price must be paid within few hours or days and if high bidder doesnt make good on bid property may be sold to 2nd highest or may be a new sale; high bidder who doesnt perform may forfeit deposit and be liable for damages Dictated by State Statute: Auction time and place Post auction review and confirmation Distribution Right to Redeem: Debtor has right to redeem pre-sale by paying full mortgage amount plus interest and attorneys fees; cut off at time of sale Title and Condition: Caveat Emptor rule applies buyers take subject to any defects in title that they could have discovered through a search of the public records or an inspection of the property Marino v. US Bank of IL: Superior lien existed on property; lawyer denied such lien and purchaser bought property no detrimental reliance complaint was allowed because of caveat emptor (did not check the title) unless there is fraud, misrepresentation or mistake of fact Horicon v. Kant: environmental liabilities also do not nullify sale Rights to Redeem: majority of states the debtor has a right to redeem collateral from buyer after the sale (6 months to 3 years after) by paying the purchaser the amount the purchaser paid at the sale Freely transferable debtor with right can sell this to others to exercise it Debtor remains in possession until right expires Inadequate Sale Price: Debtor can bring suit to set aside for price, but will likely fail; generally bad prices are due to: Poor advertising Difficulty or impossibility of inspection Title and Condition (Caveat Emptor) Hostile Situation Buyers Statutory Right to Redeem

Foreclosure Sale Procedure

Problems with Foreclosure Sales

Armstrong v. Csurrilla: Sales Prices Facts: A sells C gas station for $230K. C defaults; A buys it for $90K and court recognized that the debtors property was sold for less than its FMV but also recognized that this is what generally happens in FC sales Rule: When an inadequate prices does not fall into the shock the conscience range (25% plus or minus 15%) it may still be so inadequate (if less than 2/3 of the appraisal value) as to call for judicial invalidation of the sale if the circumstances leading to unfairness are present Two Circumstances to Invalidate Low Repurchase: (1) Price shocks the conscience (2) Circumstances are unconscionable Burden: Debtor faces heavy burden in convincing a court that an FC sale price is inadequate

Anti-Deficiency Statutes
Three Types: (1) Prevent court from granting deficiency judgments in certain circumstances (to react to fact FC sales rarely yield FMV) (2) Grant court discretion to grant deficiency judgments (3) Limit amount of the deficiency to be granted Most Common: Credits the debtor for the FMV of the property even if the property brings a lower price at the FC sale Credit Bid: When the creditor bids on the property at an FC sale for up to the amount of the debt Incentives for Creditors to Bid Highly: (1) minimizes chances sale will be set aside for price; (2) minimizes likelihood debtor will exercise right to redeem; (3) if outbid, it will collect the whole of its secured debt otherwise it has the property to resell for profit; (4) lack disadvantages that 3rd parties have like right to inspect, etc.
Problem 4.1: Bank has a judicial foreclosure sale. The balance owing on the mortgage is $53,231. The bank estimates that the house is worth $40-45,000. Under the law of the state, the bank will not be able to obtain a judgment for any deficiency remaining after the sale. The bank wants to know how much it should bid at the sale.

Problem Set 4

A) The bank is the only bidder present at the sale, for what amount should they buy
the property? They should bid the full amount of their debt, $53,232. Bid either way just in case the junior creditor gets the fall? If the value of the property ends up being more than what is owed by the debtor, then he could end up getting the windfall (more than what he is owed). AK says bid 530 because theres no reason not to if they cant get a deficiency theres no reason not bid the full amount. If they can get a deficiency, then theres a reason to bid the 400. Redemption is another issue. B) A third party bids $531,232, should the bank go higher? You should bid nothing and let them win. C) A third party bids $44,000 get the place appraised. Is it worth more than that? Maybe bid up to have the other match you. Think about who the third party bidder is. Is it a bona fide bid? It may indicate that the market value is more than you thought it was. If that bid is not bona fide, you may have to do it all over

again. It is not a slam-dunk answer. Commercial is going to have to response by figuring it out. Problem 4.2: Give advice to a defaulting debtor who owes $53,000 on mortgage. The creditor can ask for a deficiency. A) FMV between $40-45,000: Her danger is that she cannot count on the bank to bid that amount. She should look out for potential bidders. She can stir things up a bit. Maybe the bidding price would put her in bankruptcy, so it does not matter. - She should sell the house. She probably wont want to mention the foreclosure sale because the prospective buyer will think he can get the house at a cheaper price. However, any responsible buyer would do a title search, which would reveal the judgment of foreclosure. Especially true if someone like Sallie has an equity in the house. Foreclosing mortgagee would be able to scoop up that equity as a windfall for itself. Sallie wouldnt get a deficiency judgment against her, so thats a positive thing. Brother could exercise Sallies right of redemption, which Sallie would be happy to do. Depending on the jurisdiction would either be 530 (the amount of debt), or the FMV What if First Savings bought at 400K and gets s deficiency of 90K? Bank can still get a deficiency if Sallie redeems, so Sallie should file bankruptcy and if the brother owns the house, then Sallie gets to stay in it. B) FMV $700,000: She has equity of 17 grand. Maybe it would be better to look for a bidder to give closer to $70,000; she cannot count on the bank to bid this amount. Maybe the bank would split the equity. Maybe she can raise money on a second mortgage. If she wants the full equity, she can try to sell the house herself. When you go to the realtor, you dont want to explain the desperate situation. If the potential buyer knows this is a distress sale, then that buyer may offer less than FMV. What happens if he pays off the mortgage? If there are any junior liens, they survive. Suppose there are no junior liens who owns the house if he pays off the mortgage? Sallie owns it and if she has any other creditors, then they take it off the house. If he is the owner of the house, Sallie can live in it and her creditors cannot go after the house.

C) Sallies brother deals in real estate and has the ability to buy the house. He is
willing to do so and allow Sallie to keep living in it. How does that change your answer. What if First City Bids its debt of 53,000 when the house has a market value of 40,000 to 45,000? I think you would not bid because youd be paying in excess of the houses FMV. In many cases she can redeem at the FMV and get the house back. So that is what Sally would want to do. So suppose first savings bids 20,000, what should Sally do then. She should let them buy and then redeem at 44,000, maybe she could redeem at 20,000. If first savings bids 20,000, my sale should be confirmed at 20,000 because that is FMV, then you are in a problem of interpretation on FMV that gets credited. The court would then have to decide what that was. What about the deficiency, she still has that problem so long as first savings goes in and gets a deficiency judgment. She can go into bankruptcy and get rid of the deficiency and gets to live in the house because of the homestead exemption. She could assign her right of redemption to her brother in law who can buy the house and she can continue to live in it. Why

doesnt the brother in law pay of the mortgage before the sale and let Sally repay, what is the downside of doing that. Assume the house is worth 70,000. If first savings stops at 53,000 what do we do? Wed bid higher than that because bank just wants its money paid back they dont really want to try to resell the house and the like. Theyll be happy to have their judgment paid off. At that point, before the foreclosure sale takes place, they figure first savings is going to bid 53,000 and know first savings knows it is worth 70,000 and at that point suppose the brother says why dont I just pay them off. As Sallys lawyer what do you say? What will be the difference in the title to the house situation in the two scenarios. If brother buys at auction brother gets title, if brother pays off mortgage sally keeps title to house. Why might Sally be better off without title? She could have other creditors. If you want to buy and pay off mortgage you buy subject to any other liens because it never got to foreclosure. Problem 4.3: You are the buyer and see a house in foreclosure. What do you want to know about the house? Is it worth my time to get interested in this house? AK: If house value is less than mortgage debt, its a waste of time to get into this because First Bank will bid up to its debt in a foreclosure sale. If house value is greater than mortgage debt, then you would be able to buy. Youll need a lot of information, so also depends on whether Sallie will be willing to cooperate. If she thinks the bank got it too cheaply, she may be able to purchase a right of redemption. You want the value of the house to be more than mortgage, because bank will credit bid full amount. If house is worth 70, there is a possibility here. You dont assume anything about the condition of the house. The house may have serious problems. The more the sheriff talks, the more he is exposed to liability. Youd want to know about the redemption statutes or if there were other liens on the house because if you buy and there are other liens on the house youre stuck with them. You can go to the various lien recording places and find everything (title search). Youd want to know the condition of the house. A secured lender buying at sale may get a court order that allows it to get the house tested, but you wont. Very chancy to buy at a foreclosure sale. But unless the home owner is cooperative there are lots of things you wont find out. The foreclosure sale discharges all liens subordinate to the foreclosing secured creditor. All junior liens end at foreclosure, all senior liens survive. See 9-617(a). Problem 4.4: American Insurance Company is creditor and debtor defaulted on loan. Four wealthy people guarantee the loan. The mortgage is 20 million and FMV is 18. What to bid? - In theory bid low and go after guarantors for deficiency. But this strategy invites litigation. But why arent the wealthy guarantors at the sale. The Ins Co was going to bid 500,000 in FL where there is no statutory right of redemption. What happens turns up in b and c. The mystery bidder turns up and bids 20 million. Maybe he is in there to make sure that the guarantors are off the hook. Maybe the mystery bidder is a shell corporation with no assets. Its really hard to know what to do. You can let them get it. But if there is no cash, then you have to start all over again with another sale process. The Ins company has to make a judgment about the mystery bidder in a hurry. What if there are three bidders, .5, 12, and 25 million. A statute designed to protect creditors- giving property to second highest bidder if highest bidder unable to

complete sale- might be used to creditors disadvantage. If cannot recover 8 million from guarantors you can always claim conspiracy. a) American is the only bidder at the sale. For what amount should they buy the property? AK: The danger is that youre just fighting an attack on the foreclosure sale for inadequate consideration. Discuss in text re: Mexico case, which tells you various percentages court finds too low. If you just bid a nominal bid, youre asking for trouble and delay. Also, building may depreciate while litigation continues. You end up at Square One --- so a nominal consideration is a big risk. AK: Q to ask is why didnt guarantors show up and bid at the sale? If they showed up, wouldnt have been stuck with a price could guarantee. Maybe they saw in our foreclosure proceedings that we had set ourselves up for subsequent litigation that they could use as a way of settling their guaranteed obligations at a smaller amount. Big game of chicken with regard to how high the guarantor and guarantee should go. b) Raises a really difficult problem for a mortgagee what happens if a mystery bidder bids $20 million? Mortgagee says great mystery bidder pays up and we get our full mortgage BUT what if there were some kind of ploy going on? Our client is afraid of mystery bidder because if mystery bidder doesnt pay, then there is a big delay and the mortgagee will lose a lot of money. If it is a ploy to get the mortgagee to bid a little bit more, then our bid fixes the value and the guarantors are off the hook. Maybe the mystery bidders are somehow the alter-ego of the guarantor. It is hard to figure out what to do if they dont pay up, then house could depreciate. In the real case, the mortgagee was spooked and it did bid higher. c) Under the law of your state, if high bidder at public sale fails to purchase property, must sell to 2nd highest bidder. Does this change your initial bidding strategy? What if the 2 are strangers at your sale, and one bids $12 million and the 2nd immediately bids $25 million. What should you do? AK: At the point when you have to bid, you dont know if youll be able to collect from the guarantors or not. You hope that youll be able to collect 6 million (the difference). If you bid higher, then you have definitely lost the 6 million, so maybe you should err on the side of not bidding higher. Alternative: How about trying to upset the sale for inadequate consideration on the facts of this case? Or, if you could prove collusion, then its a possibility. The point is that a benign statute that had aimed to help creditors by withholding the sale has the potential to be used to hurt the creditor. Problem 4.5: The bank is approached by a shopping center developer, Marshak, who would like a $2.5 million standby commitment to enable her to bid on a shopping center that is to be sold at a judicial foreclosure sale. The developer thinks the value of the shopping center is $5.1 million. What do you want to know? What is the outstanding balance on the loan being foreclosed? If it is more than 2.5 million, the mortgagee will bid up to the loan so that you wont get it. If the outstanding balance of the loan is less than 2.5 million, then you might have a chance. AK: The problem from the banks perspective is that it has to ask how does Marsha know what to bid? Suppose he wins the property and it worth less than 2.5 million.

Maybe Marshak wont be able to pay. He has to know what the outstanding balance is on the loan if it is more than 2.5 million, then why wont the mortgagee of the shopping center put a bid in the property and then arrange to sell it. If the loan balance is less than 2.5 million and it is still in default, then you start to wonder why it is in default why is the shopping center owner unable to make enough money to pay off a smaller mortgage than Marshak is contemplating? The message of this problem is that if Marshak is an insider, then Marshak will know more about the condition of the shopping center and its income potential, then it will be able to get the information needed to make a judgment. Concerned with lack of information. Marshak might have information if she is an insider, This is a situation where you are more likely to make a loan to an insider than an outsider. The big question is, weve assumed that the mortgage balance is below the value of the shopping center so why is the debtor unable to turn enough of the profit to pay the mortgagee, that is a warning signal. Reason the debt is not being serviced. Suppose you go ahead and lend her the money. What can she go wrong if she wins the bid? There could be a statutory right of redemption, if in fact the property is worth more the current owner might scare up enough cash with a partner to make it worthwhile to redeem. This is highly unusual in commercial sales. Make the mortgagor say that if the property is redeemed the debt will be paid out of the redemption price.

Article 9 Sale and Deficiency

Sales: Under Art. 9 serve essentially same purpose as judicial sales determine value of collateral and convert value into cash Like Real Property FCs: Requirement that collateral be offered for sale as part of the personal property FC process cannot be waived or varied in the initial lending contract 9-602(7) 9-602(10); 9-620 The debtor has the right to a sale of the collateral after default regardless of the original contractual language (sale is essential part of the FC process) Strict FC- 9-620: Debtor can consent to a secured party retaining the collateral in full or partial satisfaction of the debt Consent: the absence of objection within 20 days of notification of intent to retain the collateral (oral is not sufficient) 9-620(c)(2) Conditions for Rights to Consent: 9-620(c) No objections from other lien holders; if collateral is consumer goods, can consent only after repo; for consumer goods only less than 60% has been paid (if 60% or more has been paid, waiver to sale is valid only in writing) 9620(e)(1) and (2) 9-610 Sale of Collateral: SC conducts the sale, not public official; Must be commercially reasonable get a good price 9-611 Notice: the SC must send debtor notice of the sale 9-623 Right of Redemption: Debtor must pay entirety of debt as well as creditors reasonably expenses and attorneys fees NO right of redemption after sale Debtors Defenses:

Art. 9 Sale and Deficiency Basics

9-610(a) Failure to Sell Collateral SC may sell collateral after default with narrow consumer goods 9-620(f) exception 9-626(a) No fixed time within which sale must occur while in creditors possession the collateral may decline in value; if delay is unreasonable, deficiency judgment will be limited to what it would have been had the sale been reasonable 9-610(b) Improper Notice: Every aspect must be commercially reasonable a method that reasonable owners of that particular type of property would use when their own money is at stake

Acceptance of Collateral: Strict FC 9-620

Acceptance: similar to acceptance of deed in lieu of FC under real estate law Strict FC Can Occur: When debtor consent to the creditor retaining collateral in full or partial satisfaction of the debt after default Consent: Debtor must give consent to creditor to accept collateral and in most cases it is not real only implied 9620(c)(2) implies consent if the secured party sends the debtor a proposal for retention of the collateral in full satisfaction of the debt and does not receive a notification of objection to the proposal within 20 days. An oral objection is insufficient Right to Consent Subject to 4 Conditions: 9-620(a)(2) No objection from lien holders (g) Partial satisfaction not permitted in consumer transaction (a) Consumer goods debtor can consent in writing or silence to strict FC only after repo (a)(4) and (e); 924(b) Strict FC is not allowed if paid over 60% of cash price of CG on credit or 60% of loan against other consumer goods 9-610 governs the procedure for sale Different with Real Estate: SC (not public official) conducts sale/distribution with broad latitude to determine method and timing of sale Limits: Must be commercial reasonably 9-610(b) 9-627(a) What is reasonable: (1) usual manner; (2) at usual price or (3) usual practice 9-611(c)(1) Notice 9-623: Common law right to redeem: debtor must pay full amount of debt including SCs attorney fees and expenses of sale; no additional statutory right to redeem after disposition Debtors Right to Set Aside a Defective Sale: More constricted than most judicial sale procedures (may only sue for loss of equity rare; or larger-than-appropriate deficiency judgment) Good Faith Purchaser: can buy with confidence that it will not lose bargain because sale is set aside 9-617

Sale Procedure Under Art. 9

In re Dowling: Requirement of Notice of Sale Facts: objects to unsecured deficiency claim of creditor BMW in his bankruptcy case, says that BMVs notice was inadequate to preserve the right to such a claim Rule: A notice that fails to inform the debtor that the intended method of disposition is a private sale, that that the debtor has a right to accounting and that the debtor will be liable for any deficiency the sale is not sufficient to preserve the creditors right to a deficiency claim Notice 9-611: Secured party must send notice to debtor, guarantors and some lien holders May have to conduct a search of public records to identify the lien holders Chavers v. Frazier: Requirement of Commercially Reasonable Sale Facts: alleged the sale of repod jet was not commercially reasonable Rule: To make a determination of commercial reasonableness, the total circumstances should show that the seller took all steps considered reasonable by prevailing practices to insure that the sale would bring a fair price 9-610: Every aspect of a disposition (method, time, place, etc.) of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable Leaves to discretion of creditor reasonable is case-by case Problem Set 5
Problem 5.1: The bank repossessed Maxs Hummer and notified him that it would sell it in a private sale after 10 days from the notice. The balance owed on the loan, including, principal, interest, attorneys fees, and expenses of sale is $100K. a) If the FMV is 80K and it sells for 70K in a commercially reasonable sale, what is the proper amount for the court to award as a deficiency? UCC 9-615(d) and 9-626(a)(3) and (b). UCC 9-610 sets the standard for commercially reasonable. The standard is commercially reasonable. If the sale was commercially reasonable, then the debtor is responsible for any deficiency. UCC 9-615(d) deficiency is the difference between the sale price and the obligation owed. Deficiency here is $30K. b) How much should Maxwell have to pay to redeem the car? $30K. UCC 9-623 to redeem a person must pay for all obligations secured by the collateral and any reasonable expenses and attorneys fees. 9-623(b)(2) says reasonable expenses and attorneys fees in addition to the redemption price. c) If Maxwell has enough money to redeem the car, would you recommend that he do so or that he purchase another car just like it for 80K? If he redeems, he pays 100K (70K for car and 30K for deficiency), but if he buys another car for 80K, he still has a 30K deficiency so it costs him more. d) Maxs friend offers $80K for the car. The bank refuses the offer because of their policy of selling all repossessed cars through auto auctions. The friend cant go to the auction

because it is only open to dealers. At the auction, the car sells for $70K. How much is the deficiency? 9-626, 9-627(a) & (b) UCC 9-627(b)(3) says you can sell at a dealers auction; it just depends if this meets one of the statutory requirements for commercially reasonable under 9-627(b) or if not, then under 9-626 it might be commercially unreasonable and therefore entitle him to only the difference between Debt and FMV, or 10 grand. Problem 5.2: You are a creditor owed a debt of $57,345, plus interest to date of the sale for $3,541. The security agreement provides that the debtor will cover the creditors reasonable attorneys fees on default. Your attorneys fees are $3,650. Youve spent $1,500 preserving the collateral and $750 advertising the sale. Auto Parts sends you a letter saying they are owed 4,200 to be paid out of the proceeds of the sale. a) Assume the highest Bid is 47,316. That money is now in your possession. Who should you pay with it? How much is the deficiency? Autoparts is an unsecured creditor, they dont get anything. You didnt get a judgment so too bad. First, we are entitled to get repaid because we are the only secured creditor. The total debt is 57,345 plus 3,541 for a total of 60,886. Attorneys fees get included in the expenses, only if it is included in the security agreement and here it was. All other expenses of the sale are always included. There are is a total sale expense of 6,250. So they are owed a grand total of 67,136. The highest bid is 47,136 so the deficiency is 20,000. b) If the highest bid is 75,000? Wed have 7,864 left over after paying off secured creditor. You have to give this to the debtor as opposed to the unsecured creditor because under the statute the surplus goes back to the debtor and if you send it to Autoparts it is conversion. 9-615(a) They do not have a lien or a secured interest against the inventory or equipment sold. How it works: If there is a surplus, the debtor gets the remaining amount before the unsecured creditor. If there is not enough money to pay for sale expenses and secured creditor, the secured creditor will get a deficiency judgment and the debtor will bear the sale expenses. But if the debtor does not pay the deficiency judgment, the creditor bears the cost of sale. If there is a surplus, the sale takes care of it. Problem 5.3: Does East Bank have to send notice to defaulting debtors of auction, where the debtor cannot participate anyways since only dealers are invited? If security agreement has a waiver, then maybe no notice required. Under UCC 9611(a)(2): the debtor can waive notification, if sale is under recognized market (under 9-611(d)). Dealer auction is not a recognized market under comments. But comments have not been enacted by legislature. Problem 5.4: Bank repossessed hull of helicopters, finding out that debtor has taken out engine and stuff. The debt is $345,000, leaving a hull with no resale value. The debt is personally guaranteed.

A) Can the creditor throw away the hull? 9-610(a) seems to give secured
creditor a choice. A secured creditor can sell collateral in present condition or following any commercially reasonable preparation. What is commercially reasonable? We would have to decide whether its commercially reasonable to reinstall old equipment or buy new stuff. But the comment is designed to make it clear that you DONT have a right to sell it in the present condition if you can make more on it by fixing it up.

B) What if Grizzly could have spent 245,000 to get 345,000? 9-626(a)(3): LOOK at
this provision. It is probably a drafting error. There is no deficiency judgment if the creditor could have spent 245,000 to get 345,000 (commercially reasonable). 9-626(a)(3), seems to reach an absurd result for determining deficiency amount. The secured party is entitled to 0 even though it would have had to spend 245 to realize 345. This is because expenses does not include the 245 under 9-623(a)(3) (B) if it is not actually spent on rebuilding helicopter. But if in reality, the creditor actually spent the 245, then that amount is real and counts as an expense under 9-623(a)(3)(A) and is added to the deficiency limit. Note: proceeds means gross sales.

Problem 5.5: The owner of a business wants to retire and sell store to a new party. The new party put down 50 grand and signed a promissory note for 277,000. The new party cannot run store. The old owner takes the store back and sent defaulting buyer a bill for 131 grand, which was the excess it owed after crediting him for the value of the store. Can the old owner sue for the deficiency without selling the store first? Under 9-626: if the secured party fails to prove that the collection disposition was conducted in accordance to the provisions of this part, the creditors deficiency is limited (reasonable sale provisions). Secured creditor says he is entitled to full amount of debt less value of what it was when he took it back. The debtor may argue that 9-626 does not apply because there was no defective sale. The creditor just kept the property. Look to 9-617(b): good faith transfers A transferee takes free of the rights and interests described in (a), even if the secured party fails to comply with this article or the requirements of any judicial proceeding.

Creditors Remedies in Bankruptcy

Bankruptcy: Changes relationship; secured and unsecured creditors must think about what happen if debtor goes bankrupt Bankruptcy Act: filing of the petition of bankruptcy is that it keeps creditors both secured and unsecured from taking any action against the debtors Freezes creditors remedies emphasizes collective nature of proceedings Compared to State: Can take a while for efficient resolution Discharge: Forgiveness of Debt Extension or Debt Adjustment: Rescheduling Payment Always Possible: to go with Federal Bankruptcy and not state

Federal Bankruptcy System

Filing a Bankruptcy Case

Initiation: Filing can be from either a debtor or its creditors most are voluntary from debtor To File: Fills out forms of disclosures of assets, history, liabilities, income, etc. Creates Bankruptcy Estate: consisting of all property of debtor 541(a) (1)

Stay Created: against any collection activities automatically imposed 362(a)

Chapter 7: Liquidation
Trustee: Debtor surrenders all property to a trustee (except exempt under state law) and trustee sell property and distributes proceeds, court discharges all debt (Except non-dischargeable and reaffirmed debt) 552(b): Debtor keeps property exempt under state law ( 552(d)) and lists federal bankruptcy exemptions that are an option for debtor instead of exemptions under state law 704: Debtors assets are liquidated and distributed pro rate to general creditors; if debtor is individual all remaining debts are discharged 727(a)(1): if corporation, after discharge, corporate shell remains with not assets but still owing all debts Key: Debtor will remain in possession of assets during case, debtor proposes a plan to repay the debt, creditors vote (each class has a veto) but the court can confirm despite veto (cramdown), plan binds all of the creditors Idea: We want some of these businesses to continue to run Creditors: must get at least what they would get under Chapter 7 1104(a); 1129(a)(7) Strict Eligibility: Individuals with unsecured debt less than $300K and secured debt less than $1M (no corps) Key: Debtor will retain all debtors property, debtor proposes plan to pay all disposal income to creditors for three years (five years for debtors with above median incomes), no voting by creditors because you are paying everything possible, court confirms plan if it meets requirements and if debtor performs plan, remaining debt is discharged 1325(b); 1302; 1328 Unsecured Creditors: File proof of claim statement of debt owed and get pro rate distribution of same percentage of debt to each creditor in class The Stay for Secured Creditors: Usually in place until end of case 362(c) and will hold deliberate violators in contempt and court or sue for damages for breach of stay 362(h) Secured Creditors: lifting the stay Promised eventual access to its collateral or property or money of equivalent value Right to participate individually in the case 362(d) Stay must be lifted when: Lack of Adequate Protection: protection against decline in value of SCs collateral no protection for time value of its money, interest, etc.; only protection from decline in the value of the collateral; adequate protections can be extra payments, liens against other property and is decided by court

Chapter 11: Business Reorganizations

Chapter 13: Individual Reorganizations

Unsecured v. Secured Creditors in Bankruptcy

No Bankruptcy Purposes: No equity in the collateral that might be realized for unsecured creditors; collateral is not necessary to an effective reorganization; to retain SC collateral, trustee or debtor must show that retention serves a bankruptcy purpose Cushion of Equity: excess of collateral value over loan amount Automatically Ends: unless within 30 days after an SC moves to lift, the court enters an order continuing its effect 362(e)

In re Craddock-Terry Shoe Corp: Lifting Stay Facts: was SC contesting a debtors ability to reorganize and sought protect from the decline in value of their property; Two SCs LW and both have SIs in mailing interests and catalogues argue that no reorganizations will be effective and that no adequate protection exists for thee value of the collateral which is declined (mailing lists become more stale as time goes on and bankruptcy has reputational tolls Held: Lists vital to reorganization so stay is not lifted but that doesnt mean the debtor need not provide them with adequate protection nevertheless Adequate Protection Rule: For an SC, this means that they must receive the same measure of protection in bankruptcy that he could have had outside of bankruptcy, though the type of protection may differ from the bargain initially struck between the parties Depends on valuation of collateral debtor says it is worth much less than SCs BUT we use FMV Adequate protection is the opportunity cost for not having the asset in the outside world if this is less than the going concern surplus then it is a socially optimal thing to do creditors get alternate liens in other collateral Problem Set 6
Problem 6.1: CEO says a bunch of their clients are in bankruptcy. She wants to do serious collection efforts. What do you say? The automatic stay is the paradigm of the collective nature of bankruptcy against the individual orientation of state remedy law. Under state law, the remedy goes against the swiftest creditor. Whatever unsecured creditor gets to the court first has the best chance of collecting his debts. The whole idea of bankruptcy is that the whole pool of unsecured creditors who sink or swim together. There is really nothing you can do here. You should just submit claim in bankruptcy court. The automatic stay prevents you from any effort to collect and probably even sending a statement would be a violation of an automatic stay, because the purpose of sending a statement is to induce payment. Under 362(a)(6): when under stay, cannot act to collect, assess, or recover. If do it, then may get fined or be held in contempt. Problem 6.2: You represent a bank that is trying to collect collateral that is the security for one of its loans through self-help repossession. You have a judgment and the sheriff is ready to levy on the goods, however, at that moment you learn the debtor has filed for bankruptcy. Can you go through with the repossession? Can the sheriff levy on the property of a bankrupt debtor after judgment has been entered? NO neither you NOR the sheriff can go after the debtor once it is in bankruptcy. it freezes ALL collection action.

Any action to obtain possession of the property of the estate is stayed. There is nothing n the language of 362(b) that provides an exception. Note: In 362(b)(4), there is a provision that is excepted from the automatic stay. At the end, it says in the enforcement of a judgment, other than a money judgment, in the enforcement of police or regulatory power (basically for government entities)

Problem 6.3: Restaurant chain owes $250k, and the secured property is worth no more than that. Debtor filed bankruptcy. You represent the bank and bank is trying to collect collateral that is the security for one of its loans through self-help possession. Bank wants to know how quick you can foreclose on it and take a quick but minimal loss. You cannot foreclose under state law! Cannot foreclose under 362(a)(3) because you cannot take possession. T you can try to lift the automatic stay and then foreclose get stay lifted, have to assert that there is: No adequate protection ( 362(d) The following conditions are met ( 362(d)(2): (A) debtor does not have equity in property AND (B) property is not necessary to effective reorganization - You can probably get stay lifted through 362(d) since there is no equity here and the collateral property restaurant is already closed and needed for the chain to reorganize Even as a secured creditor, you cannot foreclose because there is an automatic stay. Automatic stays apply to both secured and unsecured creditors. You can move to have the say lifted. This will likely be granted because the debtor has no equity in the property and because they had already closed the business it was necessary for reorganization. Once the stay is lifted you can foreclose under state law. Problem 6.4: The bank wants to foreclose on a Chapter 11 restaurant owing $210K. But the restaurant is worth about 600 grand. There is still adequate protection because there is a 390 grand cushion. Also, the property is necessary for effective reorganization, so the court probably wont lift the stay. If you start to lose your adequate protection you can go back into court. The longer the debtor stays in reorganization, the more likely it is that the property value will decline. Bank will not get paid according to its contract even if it really needs the money that is not a ground for lifting the stay. Problem 6.5: You have a security interest in a yacht worth 350,000 on a loan of 175,000. The boat has no insurance and the owner goes into bankruptcy. What do you do? If the boat is destroyed by a storm, there would be total loss for the bank. So the equity cushion may not be meaningful. 362(d) There is a lot of equity here, so they might say there is a lack of necessity here. There is no adequate protection of its interest because the insurance is critical and if the hurricane comes along to destroy the boat the collateral is gone. A nice equity cushion here but most courts would say that without insurance, the bank does lack adequate protection because if the boat is destroyed, there will be a complete loss for the secured creditor. Problem 6.6: Your firm does some debtors work. You are helping out a debtor food processor. The company files for chapter 11. a) The first irate creditor calls and says he wants his loan amount of 126 grand.

Problem unsecured creditor. So he is SOL, and has to wait along with the rest of the unsecured creditors. If the unsecured creditor gets any money at all, it will not be until: 1) A plan is confirmed or 2) The debtor is liquidated. By and large, if there IS liquidation, but NO plan, unsecured creditors dont get anything.

b) The next creditor has a security interest in the sterilization equipment to secure a $50K debt. However, the defaulting amount of 50 grand is less than the value of the equipment (40 grand). They are not going to win under 363(d)(2) because property is crucial to reorganization. But under 363(d)(1), there is lack of adequate protection (because the collateral is appraised at less than what the secured creditor is owed.) The debt is 50 but the secured collateral is worth only 40 grand. Most courts say you dont get additional adequate protection from the date the debtor filed bankruptcy protection. You only get adequate protection from the time you took efforts to protect yourself, such as filing relief from stay. The secured creditor is going to move to lift the stay. If they win that will doom the reorganization plan if you lose that equipment, it is probably essential to the business however, there isnt adequate protection because the collateral is appraised at less than what the secured creditor is owed. Issue - when do you measure adequate protection from. Retroactivity rule, - apply only when the motion for adequate protection is filed, it hasnt been filed yet, so no additional jurisdiction needs to be granted yet. However, that isnt the rule in all jurisdictions. Craddock Terry(sp), is a case with the minority rule. Under a jurisdiction with this case, wed have to provide as of this moment another 10,000 of additional collateral in order for them to be adequately protected. But even in a majority rules jurisdiction, if the motion is filed instantly, and we arent adequately protected, so measured form now you have no claim, it is valued at 40,000 and that is what your collateral is worth. The secured creditor is going to say what, adequate protection is what? Suppose there is a likelihood of decline in the collateral, can you demonstrate that now, are you entitled to additional protection. Yes! The real question for the court is which way does the 10,000 drop in the value of the collateral drop point Does it point to the value of the collateral really heading south or has it hit rock bottom and it is going to go up. The parties are going to introduce evidence and fight over what happens to this kind of collateral in this kind of market. The declining of the collateral took place before the filing of the motion. It may raise the that that pertains to the past, but in the future, the collateral will drop in value and the question will be what is the $10K drop in the value of the collateral show? Is it temporary? Will there be a rebound? Protection against any future value in decline that will be likely to occur. c) In a typical case, (calculating the amount of an unsecured claim) it is usually just done by the debtor but it doesnt mean very much because of the text under subsection b on page 117, saying that unsecured claims are generally nonexistent. Calculating the amount of secured claims is pretty important in this course and debts on 119. Pretty straightforward.

Treatment of Secured Creditors in Bankruptcy

Debt: sum of money owing, determined under nonbankruptcy law, typically tort, contract and antitrust fluctuates as interest accrues, attorneys fees and other expenses are incurred Discharge: a discharged debt still exists but creditor is permanently enjoined from collection but if a lien of SI hasnt been removed during bankruptcy, creditor can foreclose on it after Nonrecourse Debt: 524(a)(2) - Discharged debt that cannot be enforced against debtor; if there is a non-recourse debt and the lien not removed during bankruptcy, it continues to encumber the collateral afterwards and the creditor can force an FC after bankruptcy but he cannot then get any deficiency if the sale doesnt cover debt Nonrecourse Unsecured Debt: Not connected to anything and has no consequence Nonrecourse Secured Debt: Non-repayment may still have consequences Security Interest: under Art. 9 the special collection of rights of a persona property secured creditor Bankruptcy Code groups Art. 9 SIs together with real estate mortgages and deeds of trust under the term 101(51) Lien: Rights of a previously unsecured creditor who has levied against property of the debtor 9-102(a)(55) Mortgage: Rights of a creditor consensually secured by an interest in real estate 9-102(a)(55) Some states these rights may be in form of deed of trust Claim: Creditors claim in bankruptcy is the amount of the debt owed to the creditor under nonbankruptcy law at the time the bankruptcy case is filed 101(5) and (12) Allowed: Only claims that are allowed are eligible to share in the distributions 502(b) List of claims that are not allowed so slight How much creditors are paid depends on: (1) How much the various creditors are owed (2) Creditors relative priority in the estate (3) Value available with which to pay them System for Creditors to Establish 502: amounts debtor owed each creditor under state law at time of filing 501: proof of claim describes debt and states that it is outstanding and if no one objects, then it is allowed under 502. Under chapter 11, debtor files list of creditors and what is owed creditor doesnt have to file anything unless something is incorrect. 502(b)(1): claims against estate are accelerated. 502(c): disputed claims can be estimated if they threaten to delay process 558: bankr estate has defenses available to debtor had outside bankr.

Claims Process

507(a): some groups (e.g. tax authorities and employees) get priority over other unsecureds

System for Creditors to Establish Claims The creditor must file a one-page form called a proof of claim describing the debt and stating that it remains , outstanding, Bankr. Code5 01(a) If one objects to the claim, then it is allowed, Bankr. Code5 (a) 02 Under chapter 11, debtor files list of creditors and what is owedcreditor doesnt have to file anything unless something is incorrect, Bankr. Code1111 (a) Claims are accelerated due to bankruptcy if claim is disputed, quicker resolution than under state law, 50 2(b)(1 Most claims are resolved in a single evidentiary hearing (as opposed to a full-scale trial). ). Under nonbankruptcy procedures, debtors often have substantial incentive to dispute collection claims (even on the flimsiest claims). Absent a dispute, a creditor can obtain a quick judgment and enforce it by seizing the debtors assets. If the debtor disputes all or part of the debt, the creditor typically has no remedy until the dispute is resolved. Meanwhile, the debtor can remain in bustiness and continue to use its assets. If the ultimate resolution of a claim threatens to delay the bankruptcy case or distribution, the bankruptcy court can estimate the amount of a claim, allow in the estimated amount, and proceed. Bankr Code5 8. 5 If the debtor outside bankruptcy had a legal defense to payment, the bankruptcy estate will have the same defense, Bankr. Code558 . Bankruptcy law gives some groups of unsecured creditors priority over others, see 5 07(a): (e.g. tax authorities and employees)

Calculating the Amount of an Unsecured Claim

Amount Owed: Is amount owed on debt at moment bankruptcy is filed 502(b) No Accrual: of interest or fees after that moment are owed 502(b)(2) Fees and Costs: Only added if contractually mandates and if before declaration of bankruptcy 502(b)(1) Once value of all appraised: distributed to creditors pro rata Most UC: get nothing in bankruptcy Step 1: Amount of the SC claim begins with determining the amount owing under non bankruptcy law at the time bankruptcy forms filed 502(b) Step 2: Bifurcate the claim claim of a secured creditor can be a secured claim only to the extent of the value of the collateral the remainder is an unsecured claim 506(a) Example of Bifurcation: 40K loan but collateral only worth 35K Value of Collateral: is a secured claim 35K secured Additional Value of Loan: an unsecured claim 5K unsecured SS 506(b): On secured claims, creditor is entitled to post-petition interest, fees and costs IF 3 conditions are met: (1) fees and costs are reasonable, and (2) payment is contractually mandated by agreement and (3) Interest, fees, etc. are only accruable to the extent that value of collateral exceeds value of the claim secured by it (over secured claims) Example: 40K loan, 50K collateral fees can be accrued up to 10K 40K loan, 35K collateral fees cannot be accrued on either secured or unsecured portion. Interest Entitlement:

Calculating the Amount of a Secured Claim

Unsecured Undersecured Oversecured

Prepetition Yes 502(b) Yes 502(b) Yes 502(b)

Pendency No, 502(b) No, Timbers Yes, 506(b)

Post-confirmation Yes, 1129(b)(2) (B) Yes, 1129(b)(2) (A) Yes, 1129(b)(2) (A)

Selling the Collateral

Trustee 541(a): Trustee usually sells property subject to SI this is because usually sells only the debtors equity in the property subject to an SI because that is the estate is entitled to Subject to Lien: Sold for value of debtors equity, lien goes with the property, buyer is not liable for any deficiency unless buyer assumes and agrees to pay Free and Clear of Liens 363(f): Sale would then transfer lien from collateral to proceeds of the sale Abandon Property of Estate that is Burden or of Inconsequential Value 554: Creditor moves to lift the stay and foreclose Example: Boat worth 50K and debt is 40K trustee sells boat for 10K, subject to lien of 40K Terminates automatic stay and bank now free to foreclose 362(c)(1) But forclosure is probably unnecessary because buyer of attached lien and is prepared to pay it Example 554(a): If boat is worth 35K with 40K lien, trustee is allowed to abandon property burden to estate - debtors equity in the collateral is so inconsequential not worth bothering with If debt has not been paid and property abandoned, stay is lifted and creditor can repossess Example 363(f): Trustee can potentially sell collateral free and clear of liens Whatever amount it fetches becomes security claim of bank, if less than value of claim If more than value of claim, full lien is paid off and excess remains with estate for general distribution 506(c): Trustee who has incurred reasonable disposition costs can recover them for SCs property Only if SC has benefited from the sale if SC would have had to pay those fees Undersecured SC fees will be deducted, because would have had to pay fees out of collateral value Oversecured SC fees wont because fees wouldve been taken out of extra equity above loan price

Expenses of Trustee

Chapter 11 and 13 Reorganizations

Debtor typically seeks: to keep property subject to an SI and continue using it, reduce the amount of the secured debt and lien and reschedule payment over a longer period Confirmation of Chapter 11 Plan: discharges old secured debts and payment schedules and substitutes new one 1141(d)(1)(A) Chapter 13: discharge only after debtor completes all the payments under the plan 1328(a) Cramdown: authorization of a plan to which the creditors object 11129(b)(2)(A), 1325(a)(5): Unless the creditor agrees to the plan the debtor must (1) Surrender the collateral or (2) distribute the creditor property with a value as of the effective date of the plan that is not less than the amount of allowed secured claim Time Value of Money: amount of money that must be paid at some later time to have a value of $X as of the effective date of the plan is $X plus interest at the market rate from the effective date of the plan to the date of the payment Example if borrow $100 with promise to pay back plus 10% in one year - $100 now is equal to $110 a year from now. Market Rate of Interest: Number of factors to consider: Inflation, risk that borrower will not repay the loan or repay in full interest rates are added so the promise of future payments will have present value Greater the inflation and risk the higher the charge for the loan the higher the interest rate In re EI Parks: Creditor objects to debtors amended plan b/c plan didnt propose to pay market rate of interest Held: appropriate discount rate must be determined in light of risks involved

Valuing Future Payments

Till v. SCS Credit Corp.: Market Rate of Interest Facts: filed an objected to s proposed bankruptcy repayment plan for truck SCS had financed for them. Rule: The formula approach is the appropriate method for determining the interest rate for installment payments made in bankruptcy pursuant to 1325(a)(5)(B) cramdown Problem Set 7
Problem 7.1: From now on, put it in the contract!!! 450 per month (x 6 months) = 2700 The creditor claim would be limited to 30 grand plus interest until the debtor filed bankruptcy. They get six months interests so 2,700 (30,000 x 18% x 6/12). The total before petition is 32,700. After the petition is filed, under 502(b)(2), it says you cannot get unmatured interest. Attorney fees can only be claimed if agreed upon before hand. Dataeserve could sue its prior counsel for failing to include an attorneys fees provision in the contract. There is almost always an agreement for pre-petition attorneys fees for both secured and unsecured creditors. Neither of them can collect these fees if they are not in the original contract. Interest for unsecured creditors stops being collectable at the minute the party files for bankruptcy.

Problem 7.2: Every unsecured creditor gets 5%, (59,575/1,191,500) x 32,700 so our client get 1,635 and writes off the excess of 31,365, more than their original loan. That is what happens to unsecured creditors. Our client was probably lucky to get anything with 59,000 kicking around there. There is lots of temptation to jack up the attorney fees. Nobody will have a big enough stake to make a claim. Problem 7.3: Our client CI is a secured creditor, owed 340,000 plus 6 months of interest at 12%, secured by equipment worth 400,000. The debtor filed Chapter 11.

A) Interest is 20,400 (340,00 x 12% x 6/12), for a total of 360,400. Can you get
post-petition interest on a secured claim if is provided for in the plan and if the collateral is sufficient. B) If plan was confirmed today, you can add an additional 12%. You have 1% interest per month, 360,400 x 3% = 10,212. You would have to propose payments that have a discounted value of 371,212. The plan would have to promise payment on the effective date of plan with interest at a market rate. With this kind of collateral were talking about something in the neighborhood of a 5-10 month payout plan. The plan has got to propose a payment schedule that when discounted amounts to a present value of 371,212 dollars and add a market interest rate on top of that. You do post filing interest on the 360,400 (the claim at the filing date).

C) If the reorganization plan is not confirmed for another year, then what? You
can keep piling on the interest of the year, but only up to the amount of the secured collateral, of 400,000. If the contract provided for collection expenses, and had prefiling collection expenses, that lowers your cushion even more. After your secured claim is capped at 400,000, you may end up with an unsecured claim as well. But the interest does not go past the 400,000 mark. After that, the debt goes up, but the claim is not allowed. As a secured creditor you want to push for approval of the plan. Another 28,788 in interest for 12 months so that brings you up to 400,000. The calculation of the payments that gets discounted Problem 7.4: The secured claim is capped at 325,000. The debt owed is 360,400. A) The claim is bifurcated under 506(a). The secured claim is 325,000, the remaining amount, 35,400, is unsecured.

B) You dont get post petition interest on any claim because the
collateral cannot handle it. The creditor becomes an unsecured creditor after that amount and cannot charge unmatured interest. The creditor could only get post petition interest if the collateral exceeded the debt. Since it does not, the creditor cannot charge post petition interest because it acts as an unsecured creditor. So they get the 325,000 + 10% of 35,400 for a total of 328,540. C) The claim will stay the same this year or next. You are going to close this up youll get the same, but youd rather have it this year than next year. Problem 7.5: Now assume same problem as above but the party is not secured. A) Her company is an unsecured creditor for 340,000 + 20,400 interest = 360,240. The scheme of payment under the bankruptcy code has some unsecured creditors getting payment before others.

B) They get 10% of this so 36,024. Problem 7.6: You are appointed to act as TIB in chapter 7. Perez summer house is in estate. This is a summer house so it wont qualify for an exemption so they can go after it. You are appointed to act as TIB in chapter 7. Perez summer house is in estate. The house is encumbered by mortgage to first capital. The mortgage is 85,000, which includes interest accrued to date at the contract rate of 10% per annum. If sold after 6 months, the house will produce 100,000 6,000 (Real Estate Commission) 85,000 (Mortgage) 1,000 (interest for 6 months on mortgage i.e. 4,250) = 3,750. If the house is sold a year later, another 4,250 of mortgage interest is added because the bank has a secured interest in that collateral. Sometime between 6 months and one year, the trustee may want to look out for unsecured creditors, and abandon it. This way, the bank could get the mortgage on the house. It allows the bank to go ahead with its foreclosure procedure. 6000 com, 1000 costs, 85000 mtg, 4350 add int. = 96,250, might want to sell. If sell for 100,000, 3750 is left in trust for unsecured creditors. If it takes a year then the interest goes up by 4250 and your total is above 100000. Problem 7.7: the secured creditor gets its money and the unsecured get the rest pro rata. For the coin collection, the secured creditor gets the 26,000, but the rest is unsecured and they all get it pro rata.

Creation of Security Interests

Formalities for Attachment: creditors taking an SI either under Art. 9 or under real estate law have one key feature in common they obtain their status by contract with debtor Art. 9 SCs or real estate mortgagees are consensual creditors they have enhanced collection rights because their debtors consented to them

Formalities for Art. 9 Security Interest

9-203(b): Lists 3 formalities that are required to create an enforceable SI against the debtor (attachment) (1) Either SC must possess the collateral OR the debtor must authenticate a Security Agreement which contains a description of the collateral (2) Value must have been given AND (3) Debtor must have rights in the collateral Only when all three requirements met: does the SI attach to the collateral and become enforceable against the debtor 9-203(a) and (b) Security agreement: description of collateral, obligations secured, provisions defining default, rights of creditor on default, obligations on debtor (care for collateral and insurance) Authenticate: to sign, or to execute or adopt a symbol...with the present identify the person and adopt...a record Record: information inscribed on a tangible medium that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form 9-102(a)(69) Intent of the parties to create a security interest only becomes relevant if there is language in the agreement that can be construed as granting a security interest In re Thompson (Wieberg v. Thompson) (p.134) Art. 9 Allows 2 Different Kinds of Security Agreements (1) Authenticated Records: A signed writing 9-102(a)(69) - most agreements are this type and terms allows all possibilities of signed documents (email, etc.) (2) Taking Possession of Goods by Oral Agreement to Create Security Interest: 9-203(b)(3)(B) pawns are most common example of this possessor secured lending is relatively rare Field Warehousing: Ways to take possession without depriving debtor of use of collateral but these methods add unwarranted expenses and complexity Authenticated a Security Agreement Means: (1) Oral contract when creditor is in possession of collateral

Possession or Authenticated Security Agreement

(2) Written, signed agreement when collateral is in possession of debtor (3) Tangible medium record such as email or electronic agreement

In re Shwalb: Security Agreements Facts: The security agreement was at hand and said, You are giving a security interest in the following property Court has to determine whether the words you are giving adequately created or provided for an SI in the cars. Held: Yes, no magic words necessary to create a SI, agreement itself neednt even contain the term security Note: Courts founds all of the elements of a security agreement in a single sentence In re Ace Lumber Supply: Security Interest Claims Facts: claimed a SI in debtor, evidenced only by financing statement and telephone notes Two Part Test: (1) Does language of writing objectively indicate that parties intended to create interest? (2) Did parties actually intend to create that interest? Composite Document Rule: Signature + Clear Intent + Description of Collateral = SI Must be (1) cross-referenced and (2) apparent and actual intent Jurisdictions are split Majority Rule: So long as documents have internal connection, they may be read to together to include collateral of second agreement under signature of first agreement

Value has been given

1-201(44): Value defined so broadly that requirement is virtually always met. Assumed that creditor has to be the one to give value. Value under Art. 9 includes all contractual notions of consideration and, in addition, past consideration (allows change from unsecured to secured) Person Cannot Grant SI in Someone Elses Property: 9-203(b)(2) (1) Lease: If debtor owns limited interest in property (lease), and grants an SI in the property, the SI will generally attach only the limited interest 9-203 (2) Fraud: Some owners who got property rights by fraud have the power to transfer to bona fide purchasers ownership rights they themselves do not have 2-403 (3) Obtaining Collateral: SI only becomes enforceable at time that debtor obtains collateral

Debtor has Rights in the Collateral

Problem Set 8
Problem 8.1: Do the following meet the authenticated security agreement requirement of 9-203(b)(3)(A)? Promissory note for 50K that was signed by debtor, reciting that secured by collateral described in security agreement bearing same date. NO There is no description of the collateral.

Letter from the debtors attorney to the creditor that states, Enclosed are the promissory note and FS which give you a security interest my clients inventory & equipment. No other writings were introduced. NO a lawyer cannot sign for debtor. What about composite document rule? Why does the financing statement not serve? It has a description of the collateral and although not signed it was executed by debtor. Do the documents stand alone or do you need to read the testimony? See 9102(a)(7) for definition of authentication seeming to require signature or mark of some sort on the document. There may be something in there that will take you out of the composite document agreement. The rule says that debtor must authenticate the agreement (who cares if security did not sign).

Problem 8.2: You are asked at what point in time First National Banks security interest attached to the Fishermans Pier restaurant. See UCC 1-204, 9-203(b)(3)(A), and 2501(1). -Was there a security agreement when the financing statement was filed in the Fishermans Pier example? One of the great advances for secured creditors was that they were allowed to file a financial statement before security agreement was filed. But the date of the financial statement is the date when notice was given to third parties. Also, there were some famous cases where there was a closing and the debtor rushed in to file, and in between that time, another person rushed in and got priority. The value is given with the first check or 38,000 not the promissory note. The bill of sale is the time in which the debtor had rights in collateral. You need to have value given for attachment to occur, see 9-203(b). Problem 8.3: Security agreement with collateral description that read: The restaurant equipment described on the attached list. No list was attached and parties signed without realizing this. Closing was completed and loans disbursed. Did the bank have an enforceable security agreement? You cannot have a security interest without a description of the collateral. 9-203(a). The description is later mailed and stapled to security agreement. Is this sufficient? 2 cases say yes and 2 cases say no (page 148). If Pablo is in bankruptcy then what? The bankruptcy court says you cannot create security agreement while in stay. 363(a)(4). Problem 8.4: After debtor goes into bankruptcy, you forgot to attach the description to the blank spot. The client sent it to you and you stuck it in your desk but forgot to staple it together. You cannot prove it after stay. What about the composite document doctrine? Its not signed by debtor but in some of these composite document doctrine the debtor does not sign everything. The composite document doctrine makes reference to each document internally. If we read the documents, they should refer to each other. If you know that the client will commit perjury, can you still withdraw without telling trustee? Client is willing to fix mistake and then lawyer will turn you in? If the lawyer creates a security interest now, this will be a violation of ethics. Lawyer knows that this would be a violation because it is a lie to say that these documents were together at the closing. Cannot create a security interest after the fact! What about if the client fires me and wants all the documents back? Should I give him the documents?

See rule 3.3(a)(3) p. 149 lawyer shall take remedial measures At this juncture, I would also have to call my malpractice insurer because I have clearly committed malpractice. Most lawyers wouldnt go through all this ethical trouble. They would just staple the documents together and send the security interest this would be both client and selfpreservation, but it is still UNETHICAL. Kaufman advises against taking this action even though situations like this are common in practice.

Problem 8.5: Do you turn your ex client into the court? This is confidential information. Mr. Meastre is not a present client; he is a former client. You need to keep confidences of former clients. What about 3.3? Maybe it wont be assisting fraud to keep silent, especially considering that there is an argument that the composite document rule covers this whole thing and it meets 9. MRPR: a lawyer is required to keep confidences of a former client. Does 3.3a2 require you to turn in a prior client (it clearly requires you to turn in a present client). Assisting does not mean aiding and abetting in the criminal law sense. Would I then turn in the client after it was my mistake that has harmed clients financial interests? Kaufman notes that there is no easy way out of this situation and that this is why extra care must be taken to properly create a security interest at the time of closing.

What Collateral and Obligations and Covered?

Security Interest: The right to apply the value of the collateral to the holders debt The value of the security interest cannot be more than the value of the collateral covered by it Most Secured Transaction: There will be at least two descriptions of collateral (1) In the security agreement that is the contract between the parties (2) In the financing statement that will be filed in the public records Debtor Against Creditor: Court discern intent of parties as objectively expressed in written K; a security interest is a K between debtor/creditor 9102(a)(73) and rules that govern K interpretation generally apply to SAs as well 9-201(a) Ambiguities: Parol evidence may be used Mutual Mistake: Where writing results from it, the SA can be reformed Creditor Against 3rd Party: SAs also bind 3rd parties other creditors and purchasers of collateral Effect: is that the secured party often takes collateral that the other creditors were counting on for collection Interpretation: courts have to construe the meaning of security agreements that involve a 3rd party, they are likely to interpret them more literally that in accord with the intention of the debtor and secured party. That includes provisions that state the collateral Interpreting Descriptions of Collateral: Afforded Art. 9 definition means, not everyday definition (e.g. accounts, equipment) Accounts 9-102(a)(33)

Interpreting Security Agreements

Inventory 9-102(a)(48) Instruments 9-102(a)(47) Consumer goods 9-102(a)(23) General intangibles 9-102(a)(42)

Sufficiency of Description: Art. 9 Security Agreement

Description: Primarily to enable interested parties to identify collateral Need to Enable Interested Parties: Debtor, creditor, other creditors disadvantaged by grant of security, trustees in bankruptcy, courts

In re Shirel: Interpretation Facts: K of adhesion purported to create security interest in all merchandise bought with credit card; bought fridge from using a credit card; application stated that retained a SI in all merchandise purchased. When filed for bankruptcy, asserted a lien. moved for an exemption, arguing that failure to identify the fridge resulted in not having an SI in the item. Rule: Phrase all merchandise does not sufficiently describe collateral to create a security interest under the UCC. Held: Court invalidates the K, read in most unfavorable light to the creditor 9-108(c): All debtors assets or personal property not specific enough to identify collateral All Merchandise: doesnt do work that 9-203 expected (notice and ID); too broad and imprecise

Describing After-Acquired Property

After-Acquired Property: property a debtor acquires after the SA is authenticated or the SI is otherwise created Floating Lien: Collateral that debtor obtains on a rolling basis (AR, inventory) Authorization 9-204(a): Extends valid collateral in SAs to after-acquired property Ineffective with two types of Collateral: (1) Consumer Goods that debtor acquires more than 10 days after the secured party gives value (2) Commercial tort claims

Stoumbos v. Kilimnik: After-Acquisition Facts: sold business to AAM, retaining an SI in it, when AAM defaulted, seized all inventory and equipment in AAMs possession, including inventory and equipment acquired after sale. Rule: The majority rule, which enables an interest in after-acquired inventory, where the description is not specific as to time, does not apply to equipment. Held: s description of equipment does not imply after-acquired property, though inventory does. Use of After-Acquired Property: is to allow SI to float on collateral that constantly changes often the category rather than individual items in it; becomes ineffective after filing bankruptcy 552(a)

552(a): after acquired property clauses become ineffective upon filing of bankruptcy General Rule: Almost any obligation can be secured if the parties make their intentions clear 9-204(c): allows for SAs in future advances Dragnet Clauses: where every obligation of any kind that comes into existence in the future is secured, although some states do not allow them unless it can be shown that existence of the duty was thought of while making the contract (pre-securitize any further money advanced by creditor) Valid for Art. 9 SAs make sure it is in the SA Can be included in real estate mortgages with limitations in some states Non-Advance Provisions: Attorneys fees and collection expenses are included in total debt Description: Must describe land sufficiently to identify it Acceptable: to refer to separate documents such as maps or plats for that purpose Ambiguity: Refer to parol evidence Vagueness: If it is too vague, the mortgage may be rendered void Broadness: E.g. all grantors property in the county, are generally good

What Obligations are Secured?

Real Estate Mortgages: Descriptions

Problem Set 9
Problem 9.1: The farmer gives security interest in crops growing on farm in Osprey, County, about 14 miles from Tilanook and most of their farm equipment. Is that sufficient? With crops growing on land, you have to describe the land too. The land description seems ok. The farmers want to borrow more money from another lender but that lender wont go because the crops are already encumbered by First National. The security description is ambiguous. Suppose repayment is one year, then current crops may be the only crops encumbered. But if at the time the loan is taken out, and there is no current crop, maybe the security interest is for the future crops growing on the land, meaning that whatever grows on land becomes a security interest. This would apply to future crops. You want to know more details. What should the farmers do? Litigation takes time. They want a security interest in crops because crops means cash. Equipment sits in fields. What about the land itself? The land is probably encumbered already. They could always sue their lawyer. The lawyer that left them in this fix is a perfect target. With malpractice insurance, if there is a plausible claim, the lawyers will settle and not fight it. The current crop might qualify as after acquired property under 9-204. Bottom line is that a lawyer must take extreme care before representing a debtor. You have to spot the issue about whether the language covers this years crop or crops in the future. Problem 9.2: What about the sheep the farmers raise on the property? Are the sheep equipment? Are they crops? They are valuable for their wool, meat, and milk. The wool is a crop in Websters dictionary. The security agreement says crops growing on farm. Maybe the sheep are on land and not on farm. What is the difference?

An opinion letter leaves great potential for malpractice. You cannot give an opinion letter in absolute affirmation that the sheeps wool is not covered. There is a small risk but the odds are in their favor.

Problem 9.3: The security agreement says all of debtors equipment, including replacement parts, additions, repairs, and accessories incorporated therein or affixed thereto. Without limitation the term equipment includes all items used in recording, etc. Does this include new equipment? Does the word additions sufficiently describe after acquired property? It might, but its not clear? This description comes out of a case, in which the court granted summary judgment against the secured creditor. It is an example of the court. You can define it at one level of generality such as equipment, etc (but cannot use all consumer goods under 9108c), as long as it is not super generic under 9-108c, such as all assets or all property (to protect the mom and pop stores). If you want to include everything, you need to list the types of property, such as inventory, equipment, A/Rs, farm products, etc, and state after acquired property too (look at 9-108). You could create a standardized form and check off what does not apply. The purpose of this section was to protect the consumer. Problem 9.4: Walter takes an interest in everything the debtor purchases on their credit card. They cannot just describe interest in everything bought on credit card anymore. What should they do? Walter should outfit their cash register with a documentation database that will give a computerized security agreement at the point of sale. Problem 9.5: Someone wants to create a form taking an interest in everything of debtors, except for the few boxes that are checked off of items not covered. Is this possible? -- Likely not, would violate 9-108(c) One can say that you dont want to prevent the secured creditor from locking up all the debtors property that easily.. Not sure that the consumer protective explanation works. Doesnt really know the answer to the Q. As a matter of policy, why should a description saying all the debtors property be invalid? Because the drafters were worried debtors would not understand the exactly how much there were agreeing to. Problem 9.6: Bank lends against the fixtures & equipment of a bar. 6 years later, owner absconds, taking all of the fixtures & equipment in the bar with him. Bank takes possession of bar and finds no personal property. Debtor admits to taking all of the fixtures & equipment, but says he has taken no collateral. How could this be so? When the security interest was created, the fixtures and equipment that existed at the time were collateral. However, if they were consequently replaced, then the fixtures that existed at the time of foreclosure were not the collateral as the original fixtures. Problem 9.7: This is a common problem when lawyers are repeat lawyers and are repeatedly doing business with bank official who may not know what theyre doing and make a mistake, like failing to check a few boxes on the security agreement because theyre in a hurry. So what do you do? Set up a program that makes it impossible for the loan officer to make a mistake in failing to check a necessary box because the program wont let you continue. Officer could still make a mistake in judgment, but not as far as checking boxes goes. Problem 9.8? Skipped this problem in class! Client executed a security agreement in 1997 in accounts. The creditor is now claiming that accounts include the proceeds owing from the sale of real estate. Accounts did not include real estate proceeds in 97,

but became accounts upon adoption of revised Article 9. Did the expansion in article 9 definitions of accounts expand the scope of First Banks security interest? If you use an Article 9 definition, you are stuck with an Article 9 category over time. You have to tell your client that he cannot ignore First Bank. There is no way to handle this problem without dealing with First Bank. According to 9-102(a)(2) account is a right to payment of a monetary obligation for property that has or is to be sold

Proceeds, Products and Other Value-Tracing Concepts

Collateral Changes Form: Oil to plastic, inventory to AR, goods to cash Art. 9 Makes it Harder to Trace Value: because proceeds of proceeds are no longer defined as proceeds Comment 13(d) 9-102 By giving its SC an interest that floats from one item to another as value is transferred, transformations in value become less threatening to SCs 9-102(64): Whatever is acquired upon sale of collateral Whatever is collected on or distributed on account of collateral Rights arising out of collateral (expands what may be proceeds) Claims arising out of damage to collateral Insurance claims arising out of damage to collateral 9-203(f): Attachment of an SI in collateral gives the SP the rights to proceeds Even when an agreement is silent on the issue, proceeds are automatically covered Proceeds are not type of collateral per se instead they are what happens to collateral after debtor has sold the collateral Cannot have proceeds without original collateral derivative 9-315: an SI attaches to any identifiable proceeds of collateral 9-102(a)(12): Proceeds are within general definition of collateral Example: if I have an interest in your snow blower, and you trade it to your neighbor and your neighbor gives you a cow, I have a security interest in the cows proceed, but also have a security interest in the snow blower. I cant collect more than I am owed, but my security interest has ballooned Will SC be better of than you when you give your watch the watchmaker to repair it? Gives watchmaker all power to transfer all rights of the entrusted to a buyer in ordinary course of business Thief cannot pass good title but the watchmaker is not thief so when 915 says except as otherwise provided in 2-403(2) thats what theyre talking about Every time you take your watch to get repair, you are at risk

Definition of Proceeds

2-403(2): Watchmaker

McLemore v. Mid-South Agri Corp Facts: Held that a cash payment for not planting crops under a federal subsidy program was proceeds acquired from the disposition of crops

Key: Gives rights into the entire value of the exchange despite value that might be added from wholesale to retail SCs Sometimes Allow: debtors to dispose of the collateral free of the SI Authorization: may be (1) Contained in the SA (when the inventory lender to a department store agrees that the store can sell inventory to customers free of the security interest) (2) May be expressed by the SC later on (bank financed car allows to sell it) or (3) May be implied by circumstances or conduct (as when the SA between an inventory lender and a department store is silent on the matter of sale of collateral or where the bank that financed a herd of cattle knows that the debtor has been selling cattle from the herd to buyers who do not think they are taking subject to a security interest and the bank has not objected to the sales) 9-315: Gives effect to all three types of authorization buyer takes free and clear of the security interest and the SI can look only to the debtor and the proceeds After Unauthorized Disposition: Debtor has power to transfer ownership of the collateral to the buyer SI continued in collateral and the proceeds notwithstanding sale Limitations on SCs Ability to Trace 9-315(a)(2): SC will still encumber proceeds only as long as they remain identifiable tracing rules are limit on the extent Particular problem collateral is converted into money and that money is placed in an account that is commingled with other money (must apply tracing rules) Lowest Intermediate Balance Method: Debtor is assumed to have withdraw unencumbered funds first and then encumbered funds last result is that amount of proceeds in the account will be equal to the lowest account balance in the relevant period (majority) In re Oriental Rug: Creditor repod rugs that were bought with proceeds from rugs that were collateral burden is on creditor to track the proceeds when claiming interest in results them results of commingled funds Proceeds from the sale of collateral (oriental rugs) went into a bank account. Funds from account were used to buy new inventory. Held that if the creditor wanted new inventory to secure the old debt he should have required a separate bank account. [or presumably put in an after acquired clause] Rule: Where a creditor wishes to claim an SI in proceeds received in exchange for collateral, the burden is on the party claiming the SI to ID the proceeds Non-Value Tracing: distinction between after acquired property and proceeds can a fine one. So include both

Termination of SI in Collateral after Authorized Disposition

Continuation and Limitation of Security Interest

Problem Set 10 Problem 10.1: First Bank has secured interest in equipment, inventory, and accounts without mention proceeds, products, offspring, substitutions, additions, or replacements. 9-203(f) the attachment of a security interest in collateral gives the secured party the rights to proceeds provided by 9-315, and is also attachment of a security interest in a supporting obligation for the collateral. 9-315a2, a security interest attaches to any identifiable proceeds of collateral. Any manufacturer selling to retailer does not expect that security interest will follow into car itself. Of course, it wants security interest in proceeds. Problem 10.2: What of the following are collateral of FB under secured interest in equipment, inventory, and accounts? a) $ is now in Pollys bank account. Accounts is defined in 102(a)(2). The term means a right to payment of a monetary obligation, whether or not entered by performance. Account does not mean deposit account. The money in deposit account could, however, be proceeds from inventory sold or equipment sold. The most likely scenario is that they got paid on their A/R. b) The parrot that Polly took in payment of an overdue account. The text suggest that after acquired property is inferred when you take a security interest in inventory and accounts (since they are constantly changing). You should include the magic words of after acquired accounts. But in this case, the courts would probably infer intent. The parrot falls under the definition of proceeds. 9-102a64: proceeds whatever is acquired upon sale, lease, license, exchange, or other disposition of collateral, etc. c) New computer to replace the old one? She would have to use the proceeds to buy it. Replacements are not mentioned in security agreement. What about equipment? Does after acquired property work for equipment too (its seems like it is inferred to A/R and inventory but not equipment). The secured creditor is the enemy in the bankruptcy proceeding. The whole system is geared towards producing money for unsecured creditors. d) Myna Bird: is it not an account because a Myna Bird is not a monetary obligation. The bird is not part of the business because its kept as a pet its not equipment or inventory. Problem 10.3: What about security interest in race horse and proceeds, products, and profits. The horse wins 50 grand purse. Maybe the purse is a profit. You cannot get the purse in 102(a)(64) because you did not get the purse in disposition of the collateral. What about 102(a)(64)(c)? It could be rights arising out of collateral. Problem 10.4: J contracted to buy Toy Shop. Can inventory become A/R? Inventory could transform into an A/R, and then that money could come in and become furniture, equipment, fixtures, etc. The description in the security agreement is a starting point but that description does not limit the coverage. It gives the creditor an interest in lots of other property. If the debtor has already given a security interest, it makes the job of a lawyer very difficult. We want to get rid of the inventory loan that B took out. Once this loan is paid off, the security interest will be gone. It goes with the debt.

Problem 10.5: ELP loaned Golan money to buy copier (35 grand), Golan gets loan, and signs a security agreement. The security agreement list copier with serial number. The copier gets destroyed. Under 9-102(a)(64)(e), proceeds includes insurance proceeds of collateral. a) the insurance company paid proceeds to debtor. It would be a mistake for ELP to be named loss payee. There are two ways for ELP to get protected: 1) have itself named loss payee, as their interest may appear. But if ELP is named as loss payee, and the debtor in applying for insurance has misstated certain facts, the insurance company can assert that defense to the creditor. 2) The secured creditor can make sure that it is named in standard mortgagee clause, and if named, you get first dibs, and you are not subject to insurance companys defenses. It has not cost anymore to get a standard mortgagee clause. The lawyer who lets the debtor get insurance but does not get the creditor a standard mortgagee clause is an idiot. Lawyers dont do it for some reason. The debtor deposits the check in bank account. The proceeds are commingled with debtors funds. We can trace it by using lowest intermediate balance rule: up to extent of collateral value, but the lowest intermediate balance rule says you get the lowest amount in the account. The collateral is 35 grand. When Golan rights a check for 2,000, there is 38 grand left, so its enough to cover the 35,000 grand. The lowest intermediate balance says that the 2,000 that was paid out was paid from the extra 5 grand and not your 35,000 value. Those funds are paid from debtors funds first. Then G writes a check to the IRS for 32000, with 6 grand left in the account. Once the check is written, the creditor is screwed and has only 6,000 claim on that account. The 38 grand was 3 grand debtor cash and 35 grand of secured creditor collateral left. Can you get money back from the 2,000 creditor or the IRS? 9-332b, you cannot trace funds out of bank accounts to the transferee, unless the transferee acts in collusion with the debtor, violating the rights of a secured creditor. A transferee take free and clear. Problem 10.6: What if the debtor wrote a check to buy another copier? What is the collateral now? Is the new machine covered by the security agreement? The security agreement says copier but gives a serial number. You trace the old machine, to insurance, to deposit in account, to new machine. There is 6 grand in account that is still proceeds of old collateral. This is still proceeds. This new machine cost 32 grand. Is this new machine collateral? There are several possibilities. 1) Following Gilmore theory, you could say that the secured creditor security interest is lost. The new copier is not entirely related to secured creditors old collateral interest. Since it is not entirely proceeds, its not proceeds at all. 2) Since if you can trace most of the proceeds, say 29 grand worth, you can trace all the proceeds to the new copier. The collateral grew. But that happens in many types of situations. This is not unheard of in article 9. OR 3) You can identify the bank account. 29/32 of the copier is yours. The authors think that the last suggestion is bizarre. That there is no such proceed interest left in article 9.

Tracing Collateral Value During Bankruptcy

Differences in Bankruptcy under 552: Interest proceeds, products, profits, rents and offspring will continue

But interest in after-acquired property will not since it cannot be traded to original collateral allowed the SI to attach would take value that could be distributed amount the USCs at benefits of the SP Tracing Value in Reorganization: Courts use equity discretion under Bankruptcy 552(b) to apportion only part of the value of products to the creditor to allow for reorganization Value tracing limited to five concepts: (1) Proceeds, (2) Products (3) Offspring (4) Rents (5) Profits Result: secured creditor can keep collateral value it had as of BR filing but cant acquire additional collateral value during bankruptcy; cant claim additional assets. In effect, 552 permits a secured creditor to trace collateral value from one form to another, but does not permit the secured creditor to enhance its position by claiming assets that would have been available equally to all creditors (reflects idea that trustee is prohibited from favoring one creditor over another Four interpretations of proceeds under Art. 9 are possible: New Art. 9 1978 Art. 9 Delbridge Approach Hotel Approach

In re Cafeteria Operators: Bankruptcy Tracing Held: Equity of the case exception provided a sound rationale for splitting proceeds Post-Petition Operations: Even assuming that revenues generated from post-petition operation of business could be regarded as proceeds, creditors SI should not extend to post-petition revenue to the extent that such revenues had been enhanced due to post-petition toil and effort of debtors employees In re Delbridge: Cow Facts: cow is collateralized; creditor seeks access to (post-petition) milk as product of cow after debtor files for BR. Farmer argues that milk is not product of cow, but of farmers expenses and labor Rule: Lender is entitled to the same percentage of the proceeds that his capital contribution represents to total inputs of production Jointly: Once debtor is in bankruptcy, a creditor secured by proceeds must share jointly with those who contribute to production of proceeds during Chapter 11 Held: Product belongs to the SC in proportion of input to product farmer retains % of value of his own work Formula: tries to give us a mathematical solution to milk produced by a cow in bankruptcy. The formula is set forth on page 190. CC = (D/D+E+L) x P

Net Proceeds Solution to Proceeds Dilemma

Method: Accounting for debtors and SCs respective contributions to postpetition revenues First: debtor is reimbursed for expenditure made to generate the postpetition revenue Second: whatever remains is collateral In re Gunnison Center Apartments: (In the case of apartments and hotels, as well) lender is entitled to the portion of the room rates that are attributable as rents from room occupancy, but not those attributable to services such as check-in, check-out, room cleaning, bell-hop, telephone, ice making, etc. Court says that although the SC has perfected interest, the debtor was entitled to use, with supervision, certain of the income generate by the property to pay the same expenses as would a received, if one were there Key: Court interpreted rents and proceeds to mean net rents and net proceeds
Are all proceeds under the definition in Article 9 proceeds in bankruptcy? th th 5 and 9 circuits have said yes th 11 Circuit says no because that would give state law makers the ability to define terms in the federal bankruptcy statute o If this rule prevails, the definition is probably that under article 9 at the time the bankruptcy code was adopted (the 1978 UCC definition of proceeds): Proceeds includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Thus, four views of what proceeds means: o As defined in UCC 9-1 (a) 02 o As defined under 1978 official text of article 9 o Only that portion of proceeds attributable to the collateral under Delbridge test o Only the net proceeds derived from use of collateral under Hotel Sierra Vista test

Cash Collateral in Bankruptcy

Debtors in Bankruptcy: Can used collateral to keep business running 363(c)(1) and (b)(1) Same for Cash: 363(a) defines cash as highly liquid collateral like cash, negotiable instruments Restraint: only restraint is that debtor must provide adequate protection to SC against loss/diminution Adequate Protection: When business files for Chapter 11 reorganization bankruptcy protection, its leaders hope to modify their operations and finances to correct the problems causing the necessity for bankruptcy. They are not asking to be liquidated (all assets sold) and receive a total discharge of existing debts. However, the debtor usually needs to control major company assets (real estate, equipment, computers, autos, and other assets) to manage the business. Therefore, the business becomes a debtor in possession of assets for which one or more creditors have a legal claim to recapture. These creditors must be given adequate protection that these assets will not be misused or destroyed

Cash: Protection usually comes in form of a lien against some of the inventory produced by the workers not really proceeds but mirrors structure and logic Difference that is doesnt need to be a lien on proceeds, it can be a lien on anything Notice: required notice and a hearing to SC before trustee can use cash collateral 363(c)(2)

Problem Set 11
Problem 11.1: What about the racehorse example, winning a 50 grand purse, where the security agreement said proceeds and profits? The debtor filed bankruptcy now and the money is in a trust account. Is your claim stronger, weaker or unchanged? The horse won the purse. Its either proceeds or its not. If that security interest is good, and gets resolved in favor of secured creditor, one looks at bankruptcy code 552, and the dollar bills are proceeds of track promise, then the situation is unchanged, and the proceeds serve as collateral to secured creditor. So the claim would be unchanged in this case, since it really doesnt matter what the definition of proceeds is since the creditor had an interest in the winnings before the bankruptcy proceedings began. There is an interest in cash and the amount doesnt increase, grow or change during the proceedings. There is no change then. In problem 10.3 we had said that maybe it could be rights arising out of the collateral. If it is this category we could not get it now since bankruptcy limits the value tracing concepts to 5. Problem 11.2: Polly, from problem 10.2, filed bankruptcy but continued to run her business. A few days later, she worked for 28 straight hours repairing a dangerous leak at Golan Industries power plant and billed Golan at $65 an hour for a total of $1,820. When Polly receives the money, will it be subject to Firstbanks security interest? The security interest includes all equipment, accounts, and inventory. Does the later work, creating a new account, create a security interest for First Bank? Thats an after acquired property clause and in bankruptcy this cannot be taken by the creditor. The automatic stay interrupted this The other argument is that this is just proceeds. The account arises out of her services and if it were services then this wouldnt be part of the Banks collateral. So if its services it cannot go to the bank. Suppose she uses inventory and equipment to produce this account receivable. i.e. she uses O rings and other materials. 9-102 (a) whatever is acquired on the disposition of collateral. You could also argue that the account is a right arising out of the collateral. Proceeds include accounts received upon the disposition of the inventory. There is nothing in there that says proceeds have to come entirely from the disposition. The court probably wont buy this argument. The court is likely to say that the equipment and value of inventory used up was negligible. Somewhere half way in between where some inventory was used would probably go half way. It is not at all clear that a court would say it was not proceeds. The proceeds cases have been pretty generous. Most of the time the court will say that it is services and will refuse to address the issue, besides in this case the amount is so little. Maybe the court will apply some equitable remedy here as in the Delbridge case where the creditor is entitled to the same percentage of proceeds as its capital contribution. Among the categories of collateral: Account Monetary obligation for service

This didnt come from pre-bankruptcy collateral; came from prebankruptcy services. Even Article 9 probably wouldnt say that is proceeds. In bankruptcy, the case is that maybe she owed $2.

Problem 11.3: The copy machine caught on fire problem. After fire but before insurance, Golan filed for bankruptcy. Golan got the check for 35 grand, deposited it, and then started to write checks without prior consent or hearing. There is only 6k left in the account instead of 40k. What is the collateral in the bankruptcy case? The thing that is different is that under automatic stay provision, there is a Chapter 11 reorganization, operating under bankruptcy rules, the debtor in possession was acting in possession, and the secured creditor had as proceeds 35 grand in bank account. The debtor violated the stay provision. You could ask for adequate protection and look around for anything that has value. Under 363, the debtor should have obtained the courts permission before using the money; the debtor did not do so here. The debtor used the money wrongfully because of a lack of permission. The trustee could probably void the transaction. There is an argument under 549, that the trustee could upset that transaction, forcing the third party transferee to give the money back on tendering the new copier. Assuming they received the new copier, one of the questions is is there adequate protection? Before we get there, though, what is ELPs argument that it is entitled to proceeds? It is an insurance claim arising out of the destruction of the previous copier and proceeds are allowed. Does it have a proceeds claim to the copier? Do we have proceeds to deal with here? We dont like windfalls under the bankruptcy code so we wont give you security interest in the whole copier. You dont have any security interest in the copier, but you can trace the full 32K in the copier. OR might say that the equities of the case call for selling the copier and you may get 29K out of it hard to know what theyll say in bankruptcy because its hard to know what Article 9 will be interpreted to say on it What about adequate protection? Under bankruptcy code, if you want to use cash collateral, the debtor has to offer adequate protection in the form of a lien of other property What is the authority for claiming $35K for adequate protection?: Retroactive adequate protection from the date of the filing of the petition owed after the petition, even though it came in afterwards

NOTE the transfer of something in which the debtor has no interest is not property of the estate Problem 11.4: Security interest in Hotel Sierra Vista. What does the secured creditor get under Sierra Vista? You have to distinguish the revenues generated by room rental from services. If you do it that way, there is a loss. The cash collateral would be 0. Under Delbridge, there is no depreciation, so the cash collateral would be 0. Under 552, it applies to revenues and not net revenues, so all $510,000 from room revenues goes to cash collateral and proceeds. All authors of article 9 are trying to expand definition of proceeds. If you think reorganization should be carried out, then read net into revenues, but if read literally then read just revenues.

A) If the court follows Hotel Sierra Vista, what is the collateral? The collateral would be 0
since 520k-510k= -10k, so there is a loss since here we distinguish the room revenues or rents from the services. The Court in Hotel Sierra Vista takes the net room revenues as what goes to debtor to be used to continue the life of the business. The Hotel could use the other 21k of profit made on the food and drinks.

B) If we follow Delbridge, then what? In Delbridge the Court applies a complicated

formula to give something to the creditor for the depreciation of the collateral by the use of it by the debtor and over time. In this case over the 17 day period the depreciation was 0 and hence if we apply the formula just as it was is Delbridge then the result is 0, (0/0 = 0). In Delbridge since we were dealing with a cow there was always a positive outlook since it was producing milk.The Prof thinks that the formula could be modified. In the numerator we could place the rental value of the collateral and that way we can more faithfully represent the contribution of the secured creditors capital to the amount of money coming in.

C) If the Court applies BC 552(b)(2) literally without applying equity? The cash
collateral would be the entire revenue 510k, and the debtor would have no cash with which to operate the business and hence it folds. leaves it to the discretion of the BR judge to avoid the windfall If there is no equity adjustment then the debtor cannot continue to operate the business. In a way it is like the Art 9 definition of proceeds. Some courts are not reading this article literally b/c they dont want to believe that Congress wants to foreclose the businesses, but the Prof thinks that the lobbyists that wrote this article may have pretended just that. They produce 30% of the effort to produce 121K of revenue, and therefore, under that theory, they should get 36,200 of the revenue AK thinks thats what the court means when it says its so easy to figure out but its not so easy Problem 11.5: You represent a client, Globus who is a secured creditor for 900k on an apartment building worth 700k. There is a managing company that wants to use cash proceeds of 10k monthly to pay off expenses and run the business. What can you do?

A) What is the secured claim at the time the petition is filed? The secured
claim is for 700,000, the value of the collateral.

B) Can Globus accrue interest on that amount? No, they are in bankruptcy
and the creditor is under secured and hence interest doesnt operate since if they were to get interest it would be going to their unsecured claim. They would only get interest if they were over secured up to the amount of their collateral. Here, the creditor cannot accrue the interest not even in their unsecured portion, they just lose it for the purposes of the bankruptcy proceeding. Unless they come out of bankruptcy without a discharge then maybe you have something but this almost never happens.

C) The 10,000 rent is received after filing. Is that collateral? Yes, it is under
552b of BC. IT would be yes for the Courts that read the article literally and no or perhaps for those courts who read it differently as discussed above. The statute does not say anything about net rents. So it probably means gross rents.

D) What about adequate protection? 363 of BC says that adequate

protection needs to be given for the creditors interest. In this case the adequate protection may have to be for the 200k (900-700= 200 unsecured). Pine Manor has no other assets so I dont know how they could provide protection. You would argue that you need adequate protection against apartment house and decline in value of rest of collateral, which is 10 grand a month. You should win on this argument because Pine Manor has no other property. Globus should lift the stay instantly. You go to 7 oclock hearing and oppose the motion. Every secured creditor who winds up to be under secured is in a bad situation but it happens for a number of reasons; the collateral changes etc. So here Globus has to go the hearing and try to get the automatic stay lifted. If the Court allows the cash to be used then Globus is going to be losing daily. You dont know what debtor is or isnt doing to adequately maintain the property. Might be able to lift the stay.

Default: Gateway to Remedies

Default: Both SC and debtors are interest in precise definitions of default If creditors exercise remedies: before the debtor is in default, they will be liable Debtors want: defined as narrowly as possible to avoid them Consequences: often that the SC sends the debtor a notice, saying that because you are in default, you owe the entire balance, etc.

When is Payment Due?

Installment Loan: Payment due in series of scheduled payments Single Payment Loans: entire value of loan is due on a specific day Loan on particular AR Rollovers: loans made payable with no expectation that the loan will be continued if the account remains in good standing Loans on Demands: lender can call the loan in at any time Line of Credit: Generally Bank Ks to lend up to certain amount of money Lender borrows on line as they need it with check on bank account Bank covers any overdrafts up to line of credit As debtor gets revenues from operations, pays down obligations Due: Sometimes K specifies date during off seasons, many times expectation is that certain balance will rollover
J .R. Hale Contracting Co. v Unite Ne Me . d w xico Ban atAlbuque k rque o Debtors failed to pay interest on revolver bank calls loan based on default and insecurity Company must prove bank lacked good faith belief that its prospect for repayment was impaired Ruleof law: A creditor has a right to accelerate a loan only if it in good faith believes that the prospect of payment or performance is impaired. UCC 1-309

Acceleration and Cure

Acceleration: By K, the creditor specific that if the debtor fails to pay and goes into default in any way, the entire outstanding balance of the loan will be due

Old Re public Ins urance Co. v Le Pg 227as a general rule of law, a mortgagor, prior to the election of a . e right to accelerate by the mortgage holder upon the occurrence of default, may tender the arrears due and thereby prevent the mortgage holder from exercising his option to accelerate. However, once the mortgage holder has exercised his option to accelerate, the right of the mortgagor to tender only the arrears is terminated. o Basically, once the mortgage holder has exercised his option to accelerate, the right of the mortgagor to tender only the arrears is termination.

Cure: Debtor pays the amount of the loan on which he is in arrears acceleration generally has the effect of eliminating the debtors ability to cure its default Limits to Enforcing Acceleration Clauses: (1) Creditor can accelerate for any default no matter how small, even if debtor is current on payments (2) If creditors accelerates because he feels prospect of payment is impaired, he must show good faith belief that repayment is impaired Debtors Right to Cure: Generally, once acceleration occurs, the debtor may only redeem by paying the entire outstanding balance on the debt Some States: provide for reinstatement by statute Allows debtor to cure and reinstate by payment of only the arrearages Generally only to mortgages and the like

Enforcement of Payment Terms

Courts Split: on if creditors have duties to debtors when they loan on demand Lender Liability (6th Circuit): obligation to act in good faith requires a period of notice to allow reasonable opportunity to seek alternative funding Easterbook (7th Circuit): Knowledge that literal enforcement means some mismatch between parties expectations and the outcome doesnt imply a general duty of kindness Some changes to Art. 9 and Rev. Art. 1 reflect these concepts of good faith but the yare unclear and yet to be adopted most often Secured Creditors Options: Depends on what he knows about debtor will determine which one (1) Self Help Remedy: repo on notification to account debtors (debtors of the debtors) Creditor risks a lender liability action if debtor is not in default (2) Foreclosure: safer but is slow and the debtor may be selling off assets (3) Replevin: Middle ground Heard much faster and though the debtor doesnt have to respond, often will to try and keep control of assets Allows creditor time to evaluate defenses

Procedures after Default

Problem Set 13
Problem 13.1: Pat missed two payments of $434. She noticed her omission before bank gave notice of acceleration. She sent a check for overdue payments. The bank says that its a default and the secured creditor can accelerate the loan. The bank mailed the check back to her saying that they called the whole loan, requesting the balance. Does the bank have to give notice of acceleration? Look to the contract? Can the Bank get away with accelerating the loan? The agreement says at the parties option so when she missed the payment, the Bank had to accelerate.

What about notice? The authors do not say anything, so assume there is no notice provision. Would seem to depend on whether notice is required by the contract. If we treat this as you dont have to give notice, then the bank is right and they can accelerate the loan under the circumstance that she is in default Compare acceleration v. debtor tendering payment. So did she cure her default before the notice or before acceleration? So when was the debt accelerated and when was the tender made? Its a question of timing. If the bank had decided to accelerate before receiving the check then she may have not cured her default. The Prof. thinks that if the bank received the checks before the accelerated then this would be a good tender. . Postbox rule maybe a check counts as mailed once it was placed in the mail. Options for debtor: Debtor can perhaps redeem by paying whole balance which she might be able to do Better plan for debtor: DONT ACCIDENTALLY MISS PAYMENTS, or ENSURE THERE IS A NOTICE REQUIREMENT When does the bank accelerate, when they put the notice in the mail? When the board records the decision in the minutes of the meeting? When is the tender made? When put into the mail box? Maybe just by raising these questions the Bank will want to negotiate to avoid a negative decision on the books of the bank. If they accelerate the books by making the entry that is pretty good evidence that accelerated before debtor tendered payment. She may have an estoppel claim.

a) Pat asks you if the Bank get away with accelerating the loan 9-623 (c) tells us redemption can operate any time before the debtor (1) Has collected the collateral under 9-607, (2) Has disposed of the collateral or entered into a contract for its disposition under 9-610, or (3) Has accepted collateral in full or partial satisfaction of the obligation it secures under 9-622, in which the creditor takes back the collateral. The comment to this article says that if the entire balance is due, if acceleration has occurred then the entire balance would have to be tendered. But when they get the check, why should bank send it back?. Apply it to payment of principal. Is it a waiver of default to deposit the check? Its an intentional relinquishment of rights. The debtor must show some kind of reasonable reliance to his detriment. Many banks return the checks in situations like this to avoid any possible claim that they waived default by the debtor! Bank wants to avoid any possible estoppel claim that debtor may have (although no detrimental reliance here)! Better safe than sorry! Bank may end up with a bleeding-heart judge that wants to stick it to them! Note: This is NOT a waiver of banks right to accelerate

b) What would have been the effect if the Bank had accelerated the loan on their books before receiving the check? Many banks would not accept the check just to avoid the estoppel argument. Problem 13.2: You are asked advice by friend with temporary cash flow problem who cannot pay mortgage (monthly payment of $860). He missed the October 1 payment. He is worried about what happens next. The default provision is set out in the example: default means an outstanding amount EXCEEDING one full payment which has remained unpaid for more than 10 days after the due date. Now, on Oct 1 we are one full payment late but not exceeding one full payment late.

A) When does the debtor absolutely have to make the payment? Nov. 12 (10 days over
due), after Nov. 12 we would be late exceeding one full payment. We have to be more than 10 days late. If he doesnt pay then the creditor can accelerate payment and foreclose on the mortgage. If interest was accruing on unpaid portion, then he is in default when interest accrues on October 12. The interest plus the unpaid amount would add up quickly and we would be overdue much sooner. Some states dont allow the accrual of interest by overdue payment by statute. If you are representing someone who is trying to hold off as long as possible you have to read these clauses carefully. The Prof. wonders that with a clause like this one if this more like a drafting error that the creditor has made since he is giving the debtor 2 months leeway.

B) If under the Illinois Reinstatement act (p228) then the debtor would have 90 days
after being served with a summons or publication in the foreclosure case during which he could try and reinstate the mortgage by paying all costs and expenses required by the mortgage. This is a big deal since it gives the debtor a big power, but its not costless, the debtor would have to come through will all the attorneys fees and others, which sometimes can run very high (10k for instance). Can the bank argue that the whole is due even though foreclosure did not go through. It is costly for the bank. Every state has a rule of responsibility that fees must be reasonable. A lawyer who enters that fee arrangement must be very careful. Until the sale is actually confirmed by the court, you could redeem, but you have to pay the entire balance due because of the associated finances. According to the IL statute, one could reinstate within 90 after the summons has been served but that is not costless. You have to cure the default and then you have to have additional payments of the secured creditors attorneys fees and other expenses that have been incurred because of the foreclosure sale expenses are usually large. Problem 13.3: There is a provision in the loan agreement requiring that insurance be effective and notice be given annually to secured creditor and failure to give notice is an event of default. The Creditor knows that the debtor is a good debtor but the creditor needs money on the spot and he can recall this loan based on the fact that he has not provided insurance info. The contract has gone on for 2 years without providing insurance info. Can you recall the loan if the debtor has not provided the certificate of insurance? There is a general requirement of good faith. 9-201(?) defines good faith as honesty in fact and the observance of reasonable commercial standards of fair dealing. 9-102 definitions only apply to article 9 issues. As of this moment revised article 1 has only been passed in VA and TX. The present article 1 definition in every state except VA and TX only talks about honesty and fact. This is an easier standard to meet. There is a disconnect between article 1 and revised article 9. A court sympathetic to a debtor would have to follow the comment. Easterbrook (Case on p. 230) would say that the contract declares default and the secured creditor can take advantage of it. How about the secured creditor waiver by not asking proof of insurance (waiver by estoppel since it did not ask in the past)? Its hard to find a waiver by not acting within 23 days in Hale case (where the bank met with the debtor and remained silent). (c) If Macklin calls the loan in bad faith, can Lance sue for damages? Sword/shield distinction re: good faith we just dont know (d) Are you willing to continue representing Harvey? If you continue to represent him, might be in bad faith Problem 13.4: A debtor gets a line of credit with a bank and signed a note for 150k although she is only drawing 75k. The banks security agreement says payable on

demand. The debtor is in no position if the demand note is called. What if the bank decides to execute the demand provision and calls the loan? If she cannot meet it instantly, the bank will follow it up with a writ of replevin and shut her down. What about oral assurances? They are not worth anything. Oral assurances are certain to be followed up by a written agreement. If not written, the parole evidence rule will keep them out. You can call it an assurance or a prediction. What if she signs a note for 100k? When push came to shove she signed a demand note. Maybe she got a lower interest rate for signing a demand note. She could make the loan come due once a year instead of on demand. What about relying on her relationship with her loan officer? There is always turnover. She is only liable up to the amount that she took out. If she wants the money, she should sign the note. That is the way business is done. If she makes too much noise about it, she will go down as a trouble maker. Problem 13.5: The loan officer wants to give the debtor in financial trouble 30 days notice to find additional money to deal with financial problems instead of pulling the plug. Do you approve the proposal to give notice? How much notice? If not, how should bank proceed? If we promise 30 days notice, will there be a substantial risk that the collateral will decline in value? They buy their inventory on credit, and as the loan officer looks at collateral they have, it looks like they will lose 50 grand. This is a long time customer, who has been a good debtor, so loan office proposes giving him another 30 days. The debtor may deplete the inventory. Giving 30 days notice puts the bank at risk. When it looks bad enough, your initial instinct is that the bank would be better off if you pull the plug now. But watch out for Lender Liability. Do you have to give notice? REMEMBER: Were not in the acceleration problem at all. Good faith comes in the acceleration problem not the demand problem. Youre concerned about reputation in the community, but why wouldnt you give notice? Theyre going to sell the collateral at the fraction of its value! At a substantial discount! So what are you going to do? You pull the plug! What are the steps for the creditor?? 1st make your demand, pull them out. 2nd declare a default. 3rd show up with the sheriff. Then take the keys? Step for the debtor declare bankruptcy! Problem 13.6: It looks like lender liability to tell another lender the financial problems that caused initial lender to call loan. It blocks attempt to refinance. It destroys business. If complaint looks good enough, then maybe initial bank would work with you. If you really think the threats are empty, but you still want to be careful. You should still call the loan, but hold off on getting a writ of replevin. You probably will face liability for destroying the debtors business by proceeding without notice. Advising the client is pointing out all the risk. If you proceed by thinking you are in a 13.5 situation, but you are not really in a 13.6 situation. Recite the whole history of what happened. File a lawsuit, saying that the bank misled the creditor re: line of creditor. Arbitrarily increasing line of credit, etc. Claim whole value of the business. If youre the bank, you want a release from any liability extending backwards, as a condition of getting a loan.

You can also go through judicial foreclosure go to court and only show up the sheriff after youve obtained a court order.

Default under Bankruptcy Law

Stage One: Protection of the Defaulting Debtor Pending Reorganization Stay is automatically imposed and remains in effect until a plan is confirmed Debtor must still give adequate protection only protection against decline in value of the interest in the collateral Chapter 13 will have to resume making payments no later than 45 days after petition for bankruptcy Chapter 11 need not resume payments until plan has been confirms Modification v. Reinstatement and Cure Modification: allows the rewriting of a loan if: (1) Minimum due under moficiation present value of the amount allowed under the secured claim using a market rate of interest (2) Chapter 11 allows payments to extent over period that is fair and reasonable (3) Chapter 13 allows payments over period of the plan (usually 3 years) Reinstatement and Cure Under Chapter 11: allow for resuming obligation of current loan if: (1) Debtor Cures any default occurring before or after beginning of bankruptcy (2) Future payments due as specific in original K (3) Creditor compensated for damages incurred through reasonable reliance (4) Plan doesnt otherwise alter legal or equitable or K rights of the SC If conditions met plan met be imposed on the creditor Why choose reinstatement over modification: Modification is prohibited on mortgages against the principle residence of the debtor in both Chapter 11 and Chapter 13 Debtor may want to preserve some favorable term in the original K (interest rate, etc.) Reinstatement and Cure under Chapter 13: Allows for resuming obligations of current loan if: (1) Cure all defaults as in 11 but only within reasonable time not lump sum (not beyond period of plan) (2) Future payments must remain due at the times scheduled originally (3) Compensation for damages will be required only if required under state law (4) Plan doesnt alter the rights to which SC is entitled Chapter 13 Debtors: more likely to use reinstatement than modification because modification can only last over period of plan 3 or so year which is too short for long-term obligations

Stage Two: Reinstatement and Cure

Too Late to File Bankruptcy to Reinstate and Cure?

DeSeno: Modification but not reinstatement is available to debtor in possession (after foreclosure) Bankruptcy Reform Act (1994): Reinstatement available until the residence is sold at a foreclosure sale and modification has since been disallowed under 11 and 13 for primary residences Result: Debtor in possession can reinstate but not modify mortgage on primary residence Debtors Choose 13 because Less Expensive, despite better treatment in Chapter 11: Fees: Chapter 11 ($800, $2,500 total); Chapter 13 ($130; $600 total) Binding Lenders in Absence of Fixed Schedule for Repayment (Credit Lines): No right to cure under bankruptcy
MODIFICATION VS. CURE & REINSTATEMENT Modification (rewrite Cure & Reinstatement loan) Debtor proposes new payment schedule Arrearage is included in payments Interest at a market-based rate set by the court Debtor pays the unsecured potion to the same extent that debtor pays other unsecured claims Debtor returns to original payment schedule Arrearage is paid separately Interest at the contrite rate on the reinstated payments Debtor pays the unsecured portion in full

In re Moffett: Payments Facts: debtor sues to give back car they repod - defaulted on 2 monthly payments after a year of timely paying and promptly repod; same day car was repod, filed for Chapter 12 reorganization and demands return. Rule: Once a debtor files for Chap. 13 Bankruptcy 362(a)(3)-(5) automatically stays any act to exercise control over, or to enforce a prepetition or post-petition lien against any property of the BR estate. Held: Court affirms the Bankruptcy Court order for to turn over car to . Reasoning: Car is part of Bankruptcy Estate which includes all the legal or equitable interests of the debtor in property 541(a)(1) 9-623 grants the right to redeem the car any time before disposes of it; 9-611, 612, 614 says that creditor must give debtor 10 days notice before disposing of it Problem Set 14
Problem 14.1: What can the debtor do in bankruptcy to change position from 13.5? The debtor could stop bank in its tracks by filing chapter 11. If indeed Rebel is viable, and can give the bank adequate protection, it can keep operating. Sometimes the bank will just tell Rebel what it proposes to do and that he will file chapter 11. The bank will give same advice as Rebels lawyer.

Problem 14.2: The bank will lend Teresa $150,000 according to two options. 1) lend at prime plus 2% on demand note; or 2) lend at prime plus 3.5 with a 30 days notice provision if not in default. What can Teresa do? She can either refinance or file chapter 11. Under bankruptcy, the automatic stay will keep her in position, and if she is viable, she can cram down a plan even if the bank does not like it. If she is viable, she can find another bank and refinance. And if thats realistic, the bank really should give her time. Chapter 11 is for two kinds of businesses, cash flow problem or capital problem, so they can find new sources of capital or deal with cash flow issues. Suppose she is not really viable, the 30 days is not going to do her much good. If she is really not viable, she will not be able to find substitute financing. That interest is a lot to pay, given the alternatives from chapter 11. You are better off taking prime + 2%. Does the loan look any different from a line of credit of 150,000? You should pull full line of credit, and then file in chapter 11. However, there is a big upside in bargaining for an advanced notice with an agreement in the loan agreement that you can borrow full amount. You should pull it all out and file chapter 11. A) If you chose option 1 and the bank calls the loan the sheriff can show up with a writ of replevin right away, but chapter 11 eliminates the worry that youll go out of business the second the sheriff shows up. You can rewrite the loan over a longer period of time and you can stay in possession. 11-29(b) you can cram down the plan over the banks objection. There could be an advantage to option 2, the bank might call the loan instantly, here she has try to get new financing, but if shes in bad shape she wont be able to get refinancing. B) IF notice when fully drawn then no difference from the answer in A. If we are thinking about January then think what teresa could do if the bank calls the loan. Why would a bank ever allow that to happen, look at Easterbrook case, that is exactly what happened, the debtor increased its loan substantially after the loan had been called. Once it has given notice, the bank must be open to draws or can be subject to a tremendous lender liability suit in that situation. If Teresa hasnt solved its finaces in 30 days and the sheriff comes she can file chapter 11 and use the 50,000 to keep going, so may be worth the extra interest you would pay to have an advance notice of a call of a loan. Problem 14.3: homeowner financing mortgage at 8%, and then goes into default, with a stream of letters from the lender, and then the lenders lawyer with increasing demands. Under chapter 11, if he cures, he has to pay lump sum from arrearage at effective day of plan. He would also have to make up post petition results, and the big chapter 11 filing fee. Suppose you advise him to go into chapter 13. He does not have to cure the default in a lump sum. He has to pay it over a period of the plan. The chapter 13 fees are not as big either. Under chapter 13, you have to file a plan within 15 days and pay 30 days after that initial 15 days. Also, they may be able to charge interest on the arrearage depending on non-bankruptcy state law. For this client, make sure he makes payments soon. banks dont like to declare a default, it is expensive for them so they try to keep the debtor making payments. He has a choice now that he has a choice between chapter 11 and 13. If you are in chapter 11 the homeowner doesnt have to make any payments until the plan is confirmed, but once the plan is confirmed he must pay the sum in areas at confirmation and post petition defaults and some attorneys fees.

You cannot modify this mortgage. The one kind of mortgage you cant modify are the home mortgages for some crazy reason for some peoples belief that that will bring in more lenders. (you can t modify a mortgage unless the last payment is due on the date on which the final payment of the plan is due, that is only the case in less than one percent or one percent, like less than three years to go on the mortgage, see 1322(c)(2) ). If he files under chapter 13 he has to resume regular mortgage payments and payments to cure default within 30 days of filing bankruptcy, yes you have to get started paying sooner, but you avoid the big fees of chapter 11 and most lawyers would push for chapter 13 instead of a chapter 11.

b) What about a balloon payment after five years? She could reinstatement and cure. But she would have the balloon payment due in two years anyways. Reinstatement under chapter 13 works well with long-term mortgages. But you cannot get a plan confirmed under 13 unless she proves that she can make the payments. Her only possibility is to find another source of financing and with her difficulties that is highly unlikely. Whether there is interest on the arrearages will depend on the state law of the jurisdiction where he lives. You have to file a plan within 15 days and start making payments in 30 days, you have to start making payments soon. d), what if she moves out, and rents it out, using the rental payments to rent another house? If she moves out, its not her principle residence, and she can modify under chapter 11 and stretch the payments out over 20 to 30 years, paying a higher market interest rate. But she keeps the house. e) If Willard did not file but instead re-negotiated terms, paying a higher interest rate and 6 months to pay fixed arrearage, what is his best move? Dont file chapter 13 until the 6 grand is past due so that its not maintained under the plan but rather as arrears Problem 14.4 a) They cannot modify their mortgage under chapter 13 so maybe they should not enter into bankruptcy and try to work something out with the bank beforehand. If they moved out they might be able to file a chapter 11 and have the payments extend over a longer-term. b) The only way they can keep it is to pay 71,000. They can file under chapter 7 give the condominium to the bank and discharge the 71,000 debt and buy the condo when the bank sells it for 23,000 or forget about it another condo for 23.500 and then they could, the noblemans could discuss with the bank options 2 and 3 and then work out a deal with the bank. Use the ability to walk away and stick the bank with a condo worth only 23,500 as some leverage to work a deal with the bank, the bank might decide to deal with the devil they know rather than the devil they dont know and taking a big hit. Theyve got some big leverage right now.

The Prototypical Secured Transaction: Example

BB borrows Money from ITT: to fund its inventory. Security Agreement: typical Names of parties Description of collateral

Promises by debtor and creditor Acceleration clause List of what is default Parties signatures Financing Statement: For filing in UCC filing system of state gives public notice of SI Personal Guaranty from Bonnie: Proprietor of business signs personal guarantee of repayment Gives incentive to owner to minimize deficiency without it there is less incentive to keep business going Incentive to pay the debt Floorplan Agreement: K with inventory supplier and lending bank If bank must seize collateral, supplier will buy it back at full invoice price With this K in place, supplier can offer 100% financing to qualified deals because bank put up money and if inventory supplier had to do financing itself it would still have to it anyways Bank can supply debtor more credit than it otherwise would do Guarantor is BB: A creditor can get the money from the guarantor who then has the rights to recover from the debtor; guarantor has rights of reimbursement, contribution and subrogation (can assert rights of the bank) BB doesnt borrow directly: all of the K complexities would be avoided it so but all of BBs assets could still be seized by company Bank could only go after Bonnie personally. While this would include her shares in the company, the banks security interest would be subordinate to other creditors who have a security agreement with Bonnies Boat World directly Unfair to Bonnie: Banks have strict K terms rather than offering a complete menu with different prices Banks wouldnt want to lend to anyone who would agree to a huge interest rate sign that no intention to repay it; usury laws also prevent banks from charging ridiculous rates Field Warehousing: Debtor is usually willing to offer a collateral items debtor needs for its business (inventory, equipment) If creditor is worried about leaving the debtor in possession, creditor will let the debtor continue to use the collateral to produce the funds to repay but the SC will establish tights control (more than inspection checks) The SC establishes a physical warehouse on the debtors premises, under lock and key SC requires that the inventory be deposited in the locked portion of the premises, which is under the control of an employee of the field warehouse company; it was a way of preventing the debtor from disposing of the collateral without paying the loan of the proceeds of the sale (expensive)

Problem Set 15
Problem 15.1 (a) The problem was identical to a real case. Allied Crude Vegetable leased the oil tanks of a refinery. They persuaded the creditor to operate a field warehouse on the premises, which was a wholly owned sub of American Express. They induced the major

producers of salad oil to store their oil in those tanks. Allied acted as either (1) broker (agent for sale) or (2) purchaser for resale on its own account. The major figure in Allied had been prosecuted for fraud in an earlier point in his career. A number of his employees were hired by the creditor to operate the field warehouse. He stole blank receipts, presented them to the banks, and got huge loans from the banks. He managed to sell most of the vegetable oil supplied by the major companies and pocket the proceeds. The field warehouse employees, the suppliers and the banks secured creditors would check the collateral. How were they deceived? 1) The tanks only had a small amount of oil on the tops. 2) There was a glass cylinder that was pure vegetable and the rest was water. 3) The tanks were interconnected, so they would change the contents of the tanks as the checkers moved around. Allied had loans for more vegetable oil than could actually be produced through out the country. American Express was not a corporation (at the time). The individual stockholders were individually liable for the debts of American Express. It was formed under an ancient statute. They settled and could not take the risk that the corporate veil would be pierced. The major figure in Allied went to jail. Not interested in B because you go in and see that there are no boats. Means he used the same card as collateral on TWO loans. That means if he goes to a bank that he has worked with before and asks for a loan, how do they check to see if the card is free and clear? Go to the financing statement see if it lists inventory or a car Why wont checking titles work? Dealer of inventory of cars wont have a certificate of title, but will have a Manufacturers Statement of Origin, which describes the car and has the manufacturers plate on it Problem 15.2 (a): What if Bonnie sells as many boats as possible and wires proceeds to Bahamas? How can you stop her? Requirement that the buyers bank send the money directly to the creditor. More checks by the inspector. Look for advertising of sales. Surprise inspections or requirement that the debtor keep the bank account at the creditors bank. Some creditors have too many debtors to monitor all of them. They rely on the initial credit check and do not perform random checks. (b) Debtor sells the boat and does not report the sale to the secured creditor. Look at the registration numbers on the boat. Look to see if the buyer has painted a name on the side of the boat. Check the sales ledger, but the debtor might keep two sets of books. Can demand all statements of origin, you have to surrender to get a certificate of title, so the seller would have to give it up to get the owners certificate of title for the buyer Problem 15.3 Personal guarantee of the debtor (p. 265). 9 out of 10 cases, you cannot collect on them, so how are they useful? Induces the owners to cooperate. The debtor will have an incentive to avoid or minimize the judgments that might be taken against them. The debtor will want to avoid the stigma of bankruptcy. Trade-off: May lose business to banks who are less risk-averse and dont require personal guaranties.

He is more likely to favor the creditor with personal guarantees over other creditors. A debt is not dischargeable in bankruptcy when there is fraud!!! Whats the advantage of having her on a guarantee? If the business is worthless, she has an incentive to cooperate with the lender because she is liable herself. Problem 15.4 Duetsche has a right to the boat, she has it by contract and by statute (9609) when she is default. Deutsche will immediately try to repo (a): The bank declared BBW in default and demands surrender boats. The agreement for wholesale financing and the floorplan agreement give the secured creditor the power to repossess the boats at its discretion; notice is not required. 9-601(a) after default, a secured party may reduce a claim of judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure 9-609(a) a secured party has the right to possession of collateral after default. 9-609(b) The secured party may proceed without judicial process (i.e, self-help) if it proceeds without breaching the peace. (b): The debtor gives up the collateral without a fight: 9-608(a)(4) a secured party shall account to and pay debtor for any surplus, and the obligor is liable for any deficiency. The debtor might have to file for bankruptcy. She could be prosecuted under the Illinois statute: Ill Statute (p173) it is unlawful for a debtor to dispose of the collateral and willfully and wrongfully fail to pay the secured party the amount of proceeds due under the security agreement. Failure to pay within 10 day is prima facie evidence of a willful and wanton failure to pay. The bank could prosecute the debtor to send a message to its other customers. (c). Does the debtor have the power to keep the boats? How long? If the bank tries to repossess the boats, the debtor could create a breach of the peace. The secured creditor will be required to use judicial process. File a petition in chapter 11 automatic stay stops the replevin. The bank will have to get the stay lifted, which will take time and money. What is the point of doing all this? Can the debtor use the threat to delay in chapter 11 to get them to agree not to prosecute her? Danger that Deutsche could try to get her put in jail (fraud), you dont want to make them that mad. Deutche can come in reassess the boats and then sue for deficiency. (d). Model Rules of Professional Conduct A lawyer shall not threaten criminal prosecution solely to gain advantage in a civil matter. In this problem, it is the other way around. The debtor wants the secured creditor to give up an advantage in the civil matter. Does it turn on whether in the first instance, the secured creditors lawyer has mentioned the violation of the criminal statute? Designed to prevent lawyer conduct that looks like extortion.

If the lawyer does not go to the prosecutor, it looks suspicious. This has been a requirement of determining whether solely was met. If the secured creditor agrees not to prosecute it supports an inference that the purpose of threatening the criminal prosecution was to return the stolen money. The client can make the deal not to prosecute, but the clients lawyer cannot. Can the lawyer tell the client to threaten criminal prosecution? 1. A lawyer cannot violate the rules through the actions of another. You are not supposed to unjustly delay, but has the lawyer delayed them, he has given them their boats in the deal. The initial refusal to turn over the boats doesnt violate article 9 because article 9 says self-help possession only if they can do so without breaching the peace. The ability to hold up a secured creditor, through chapter 11 and breach of peace, gives the debtor considerable leverage.

PG 170 Make example out of her. Keep debtors honest this is what we do when we lend collateral out of trust. Problem 15.5 There is no consideration. Once it has given consideration it is done and the argument is gone. Thinks it is a waste of money to make that argument if the loan has been made and if it hasnt been made you wont be in court because the bank wont be a creditor. AK: This is an exercise in using a magnifying glass, but this is typically what a statement in transaction will look like. Its not easy to figure out what the finance charges are. First 30 days, no interest charge AKs best guess is that Shoreline is picking up the tab. Is Bonnie liable for a deficiency if she gives back the boat and its not enough? Shoreline definitely has a deficiency but its not a secured party Shoreline is secondarily obligated to DFS on Bonnies debt Look 9618-d If we look at (d), an assignment, transfer, or segregation, described under Section 9(a), is not a disposition of the collateral under Section 9(a) Last piece of the puzzle is the agreement between Bonnie & DFS Paragraph 10 of the agreement Bonnie and DFS have agreed about what happens when there is a default page 259 And private sale of such collateral under the UCC But using 9618 this is not a disposition of the collateral Parties seem to have agreed that segregation rights do not apply what we have here is a private sale of the collateral in which case, Shoreline is a buyer and buyers are not entitled to a deficiency judgment The agreement makes Shoreline a buyer and so Shoreline does not get any deficiency from Bonnie and it cant claim segregation rights OR is Shoreline more like a party that has taken over the rights and duties of DFS? Our authors say Shoreline looks more like a purchaser at a private sale, BUT AK thinks the whole transaction is transfigured in a way that requires Shoreline to take over DFSs position if Bonnie defaults Problem 15.6 Bonnie consults you before signing each of the following deals, what is your advice?

a) Thinks it means that the next 60 days the interest days is prime 1, over ninety probably means prime + 2.1, if it is late it is prime +5.5, some kind of add on

b) 9-109 (d)(11) could take priority over the interest in contract rights, lots of
litigation over transfer of interest, if article 9 were to apply wouldnt be contract right but general intangible. Doesnt think they could get lease as general intangible, because the exclusion ought to control. No security interest in the rents, the rents arent proceeds of your collateral. It can become a separate item of collateral, it just doesnt follow from your interest in the lease. You can give someone a security interest in a deposit account, yes, but you cant give a creditor a security interest in lease and then by virtue of that have it extend to rents (???). What about the deposit account? Is a deposit account an account? Def. of accounts, right to payment of a monetary obligation, doesnt include deposit accounts, 9-102(a)(2). How might deposit accounts be included, if proceeds from collateral go into the deposit accounts, proceeds from things that are undeniably collateral go into account. Contract rights used to be an article 9 term, some has gone into definition of accounts and some into general intangible. Turns up in some peoples security agreements. Do general intangibles cover a bank account, dont think that it is sufficiently ambiguous to allowing officer to testify as to what it meant. c) Can they give a demonstration ride? Paragraph 5(b) of prototype agreement says you cant demonstrate without the written permission. Why is that? The value of the demonstrating boats goes down. Demonstration models get sold at a cheaper price. Under our agreement use as a demonstrator is an event of default giving Deutsche a right to call the loan.

d) When there is a reposed boat, Shoreline says they will pay Deutsche the value
of the boat, but whatever happens there is no deficiency for Deutsche because it gets paid in full by shoreline. Can it get a deficiency under 9-618? A secondary obligor, shoreline, acquires the rights and has the obligations after. The sale to shoreline by contract is a disposition and thus shoreline is in the position of a buyer and not a secured creditor. By contract shoreline has been done out of the ability to get a deficiency judgment. Comment 3, transfer to a recourse party, shoreline, can sometimes constitute a disposition that discharges a security interest. Prof. thinks that is wrong, because of 9-618 proposition of subrogation, there is a case called The French Lumber Case, said someone subrogated to position of former debtor, he thinks that once shoreline pays Deutsche finance, it is subrogated to Deutsches position by obligation of law and you dont have to worry about 9618. Whatever is in paragraph 10 of Deutsche Bonnie agreement shouldnt bind shoreline. Shoreline more like a purchaser at auction or one who takes over debt. Takes over debt then should be on hook.

Creditor-Third Party Relationship

Priority - Competition for SCs Collateral: Law treats many of the contests over rights to collateral as questions of Priority

Perfection: Personal Property Filing Systems

Priority: Contests to rights to collateral Liens: Relationship between debt and property that serves as collateral Remedy: Attribute of a lien where if debtor fails to pay debt, SC can foreclose the lien, force a sale of the collateral, and have the proceeds of the sale applied to payment of the debt Priority: Relationship between liens and other liens against the same collateral Senior lien priority gets paid over junior liens Each lien is relationship between an obligation and an item of collateral; priority is the relationship between these relationships

Peerless Packing Co v. Malone Facts: USCs claim that SC of bankruptcy debtor was unjustly enriched. sued because knowing it was going to foreclose on store allowed to continue delivery on goods for a week before took over; 13 USCs of grocer, one took SI and got everything Rule: A theory of unjust enrichment is not applicable in a case governed by the UCC Purpose and Effective of UCC: would be substantially impaired if interests created in compliance with procedure could be defeated by applicable of this doctrine Only truly egregious circumstances verging on fraud would warrant setting aside from UCC procedures

How do creditors get priority?

General Rule: Liens rank in CHRONOLOGICAL order in which they are perfected Perfecting a Lien: (1) Filing (2) Possession (3) Control (4) Posting notice on the property Theory of Filing: Allows those with SI in property to leave a message giving notice to other creditors Problems sophisticated lenders will know about it while the others will not; must know rules too; searching is hard and expensive and adverse consequences arise only if the debtor lies on the loan application (disincentive to lie)

Filing Systems

Multiplicity of Filing Systems: Each county can have variety of recording systems UCC, Real estate, property tax, local tax lien, money judgment, etc. Federal systems copyright office, office of patent and trademarks Method of Costs and Searching: Methods: many times, only employees may access records, although some allow members of public to search; lawyers generally choose service company Costs: searching is generally $50 per name; may have to search many names or variations; tack on cost of service company and printing; Filing is generally $15 with a service company Reduce Costs: by dealing with office and knowing procedures or get access through remote connection Best Method: best to just file everywhere if you are uncertain what type of property you are dealing with but the decision where to file requires an understanding of the law

In re Peregrime Entertainment Facts: SI in copyrights held by and not registered with the Copyright Office were challenged by the debtor in possession. Issue: is SI in copyright perfected by filing with the US Copyright Office or Sec. of State? Held: Comprehensive scope of federal copyright law clearly meant to preempt state filings. Rule: An SI in a copyright is perfected by filing with the USCO rather than filing a UCC-1 FS with the appropriate Sec. of State In re Pasteurized Eggs Corp. Facts: sought determination that certain patents and trademarks were property of the bankruptcy estate. Rule: an SI in a patent is perfected when the assignor files a proper UCC-1 FS in accordance with state law. Art. 9: governs the method for perfecting a SI in patents as it applies to general intangibles, which includes IP Problem Set 16
Problem 16.1: Felicia (judgment creditor) wants to have sheriff levy on car (Honey), and you discover that there is a security interest on car given to Bernie. Felicias lien is not perfected since Sheriff does not have possession. Bernie is perfected, and Felicia is not. The debt is greater than the amount of the car. There is nothing left for Felicia. Between these two creditors, its the debtor who has decided who is going to give priority. If this occurred before 90 days of filing before bankruptcy, the TIB can upset security interest as voidable preference. Its up to Bernie to see if he can stay off bankruptcy for 90 days. The sheriff can still go ahead and levy. All Bernie has to do is notify the sheriff and say he has priority over Felicia, and the active sale is a conversion of Bernies rights. 9-317(a)(2) is the disposition that refers to the competition b/w a lien creditor and a secured creditor. The secured creditor is not subordinate to the lien creditor if it perfects first. Bernie by going out and filing the financing statement and entering into a SA has perfected first. Felicias lien is not perfected since

Sheriff does not have possession. Bernie is perfected, and Felicia is not. The debt is greater than the amount of the car. There is nothing left for Felicia. In most States an unsecured creditor obtains an execution lien by reducing its claim to judgment obtaining a writ of executing and having the sheriff levy on the assets. Under the law of most states the levy both creates the lien and perfects it by the Sheriffs possession. (p280). In this case the SI comes before and has priority. Bernie became a secured creditor long before after being a creditor. Did Bernie give value to get this SI? Are the past loans considered as value? 1-202 (44) defines value: the taking of property in satisfaction of or as a security for a preexisting claim. The debtor decided who would be the secured creditor. Both of these guys have a right to money from the debtor. The debtor decided who was going to win basically. Can he do this? Is there anything that cuts down on the debtors ability to do this? Bankruptcy Law prevents the debtor on the eve of bankruptcy from preferring one debtor over another. Bankruptcy law prevents the debtor to prefer one debtor, the law is in favor of equality of debtors, to share the assets of goods of the debtor on a pro rata basis. The preference period is of 90 days (this is why in the facts of the case it says just over 3 months ago), so in this case the preference laws dont work. If this occurred before 90 days of filing before bankruptcy, Felicia can upset security interest as voidable preference. Its up to Bernie to see if he can stay off bankruptcy for 90 days. The idea is that if you have a SI you are going to prevail over unsecured creditors is one of the great certainties of commercial law.

If debtor is going to go under, whole notion of bankruptcy distribution? The sheriff can still go ahead and levy. All Bernie has to do is notify the sheriff and say he has priority over Felicia, and the active sale is a conversion of Bernies rights. Could Felicia sell the car subject to Bernies priority? The junior creditor can sell the item subject to the senior creditors rights. 9-401 it can be transferred involuntarily. As a buyer of course you arent going to pay very much for the car or anything. In this case you have a 10k car with someone else who has a 12k priority in it. So the car isnt worth anything to anyone else, she couldnt sell. In some cases a Court wont let the junior creditor sell if the senior creditor objects. If in this case Bernie comes in and says he wants to conduct the sale and not let the junior sale conduct the sale, then the junior creditor should seize in his sale. The senior creditor has the right to exercise the first sale. Selling subject to the senior creditors priorities isnt per say a prejudicial circumstance to the senior creditor. The real problem for Bernie would come if the debtor was in default to the junior creditor alone and not to the senior creditor. This would be a problem since the junior creditor would have a right to foreclose. In this case Bernie could declare a default even though the payments are not in default to him. This is the reason behind a provision in the SA by which a default in subordinate liens is to be considered a default in the loan you are making! When there is an original disposition the proceeds are multiplied since

the creditor has access to the collateral and the proceeds received form the sale. Problem 16.2: This is a small claims problem. There is Sergio the street vendor, paying some money to a seller for a vender cart. Seller goes into business, but street vender finds out that seller previously gave a security interest in cart to financer. The financer is fully protected. Street vender is not a BOC of business. Sergio cannot sue seller because of bankruptcy stay. Under UCC, there is nothing you can do for Sergio. You could look to the footnote in Peerless Packing, talking about fraudulent conduct by secured creditor (GFC). Its not general finance companys fraud. Its sellers fraud. The GFC of this world are tuff guys in a tuff business. You can find something to give leverage. Problem 16.3: You are order UCC searches for collateral below in anticipation for lending against it. In what systems will you make the filings and conduct searches? a) Tools: look to state UCC system. The tools are equipment. b) Patent: file in both places- Patent and UCC system, Kazinsky is unclear in National Peregrine whether we have to file in Patent Office. c) Royalty on Copyright: probably in copyright office. You would want to double file because there is uncertainty. What about the proceeds from the copyright? You have to order 119 searches. Thats a lot of money. One of the purposes of the copyright office is to set up a filing system for searches. That makes it harder for searchers not easier, since it adds a multiplicity of places to look. d) Rare Automobiles Dealer: If not inventory then its equipment. There is lots of fraud with respect to motor vehicles. Trade Mark (American Originals): You might have to search/file in both UCC and Trademark Office for trademarks. Youll probably end up filing and searching in the patent office, in the trademark office, and in the UCC system If you want to buy something, you can know that there is a security interest in the goods when you cant know that the sale to you would be a violation of the security interest. Will come up in 9-320. Problem 16.4: Should you search or file first? File first because you may lose priority in the mean time. Plus, there may be someone ahead of you and it has not yet shown up in the records (the filing office has 2 days). What if there is a delay? There is no penalty against the filing officer.

Art. 9 Financing Statements: Debtors Name

Key: Even if a filer and search go to the same filing system, it still may not be enough to ensure that the message is received. Filer must not only go to the right system but they must leave in the right place in that system, in such form that the searcher who finds it can realize its relevance Financing Statements: Paper records which are filing at FO Methods: of storage whether paper, microfilm, etc. do not allow for searching the content of the financing statement To Find Specific: FS you must have the file number assigned to it by the clerk upon filing Index: What the typical searcher knows isnt the file number but the name of the debtor so the FO maintains an index of the FSs by the debtors name

Components of a Filing System

Also includes the file number and address of the debtor May include description of collateral, the name and address of the creditor and date of filing Search Systems: In a system of millions of alphabetized name it is easy for some to get lost due to misspelling by filer or data entry error by clerk Search logic can be programmed to pick up some but not all of the errors May or may not be disclosed and no two logics are the same The Basket: Not all financing statements may have made it in to the index yet, if not 9-506: A financing statement substantially complying with the requirements is effective even if it includes minor errors or omissions unless the errors or omissions make the FS seriously misleading Individual Names Rule: Correct name is the name by which the individual is generally known, for non-fraud purposes, in the community Problems With regards to individual names, the indexing system is built on sand Courts favoring longer more formal names over short more colloquial versions Filers Rule: File in full, formal name of the debtor Searchers Rule: a searcher may still be required to make multiple search to protect himself Corporate Names: Because corps can only be formed through a charter or COI with Sec. of State in the state of Inc., a corporation has only ONE correct name at any given time Generally required to designate as such through suffix Exception CA States will refuse to incorporate a second corp. with the same or a confusingly similar name but two corps. Can have the same name if Inc. in different states Partnership Names Rule: Name of the partnership is that by which it is generally known in the community Trade Names: Name other than legal name by which a person or entity does business Rule: Neither necessary nor sufficient to identify a debtor on an FS 9503(b) Entity Problem: If looking to see if Harvard Law property was encumbered, what name would you look under? 1-201(28) ends the definition of organization with the words or any other legal or commercial entity Implication: an entity may be a debtor for the purposes of Art. 9 even though it is not a legal entity for any other purpose Errors in Debtors Names on FS: A lender who lends pursuant to a search under an incorrect name will nevertheless be subordinate to a lender who filed prior to them 9-503(a) A FS filed under an incorrect name is ineffective

Correct Names for Use of Financing Statements

9-517 An FS that was misfiled by the filing officer is nevertheless effective search may have cause of action against the filing officer if the state has waived sovereign immunity 9-502(a): any future SC or lien holder may gain priority by demonstrating that a prior filing was insufficient because it didnt provide the name of the debtor 9-506(c) Test for sufficiency of name: not whether the FS was actually found but whether it would have been found in a search by a trustee, lien creditor or future SC Test for Misleading Names 506: if the FS was not found in a search under the debtors correct name, using the filing offices standard search logic, the name is seriously misleading

In re Kinderknect Facts: appealed from a decision of the bankruptcy court preventing him from avoiding alleged SIs held by . Rule: an individual debtors legal name MUTS be used in the FS to be sufficient under 9-502(a)(1) Held: By using the debtors nickname, failed to provide the name of the debtor within the meaning of the UCC and failure to provide the correct name is seriously misleading as a matter of law under 9-506(b) Reasoning: When a UCC search of a debtors legal name provides no matches, parties in interest should be to assume that the debtors property is unencumbered. failed to perfect the SI and Bankruptcy reversed. In re Spearing Tool and Manufacturing Facts: files a complaint with the Bankruptcy Court alleging its lien against Spearing Tool and had a higher priority than the IRS lien. Rule: An IRS tax lien doesnt need to perfectly identify the taxpayer. Reasoning: Federal form preempts any state law on lien notices including the UCC The Standard: Only questions is if IRS sufficiently identifies Spearing in its notices; standard is whether an abbreviated or erroneous name sufficient identifies a taxpayer where a reasonable and diligent search would have revealed the existed of the notices of the federal tax liens under these names US as involuntary creditor of delinquent taxpayers is entitled to a special priority over voluntary creditors Problem Set 17
Problem 17.1: Your client wants to lend against equipment, inventory, and A/Rs owned by McErny Leasing and Bob McErny. What will you ask for from Bob to conduct a UCC search under McErny Leasing and Bob McErny. Bob is the owner of the company. You want to know what kind of entity McErny Leasing is? Verify with Secretary of State. You are looking for something that looks like McErny Leasing Co. at a familiar address. How do you know that company owns collateral? You have to trace title from inventory and equipment to sources of sale. Suppose its not a corporation. Ask the filing officer to do a search in all variations of the name he is known in the community. McErny Leasing could be a trade name and that is no good to file. Ask Bob what his full name is? Its Robert Joseph McErny. If you file under the most formal name, and if that name is not used, its probably an ineffective filing. It all depends on the systems search logic. If you are in a system that does not show up variations, the question is how are you going to search all

variations. The lender has to come up with a policy. Because if you start searching for all the variations, you start to run into big bucks; the bigger the loan, the more thorough the searching. Correct name: Heartland Corporation of Iowa. Does Heartland Corporation work? AK thinks of Iowa is part of the corporate name and the name will be ineffective Correct name: Heartland Corporation of Iowa. Does Heartland of Iowa, Inc. work? Yes says Corporation Correct name: Heartland Corporation of Iowa. Does Heartland Corporation, an Iowa corporation work? Yes Correct name: The Heartland Corporation. Does Heartland Corporation work? No it ignores the Correct name: K.W.M. Electronics Corporation. Does K W M Electronics Corporation work? No it ignores the punctuation Correct name: Heartland Inc. Does Harland Inc. work? No it is misspelled Correct name: John Phillip Smith IV. Does Smith, John work? Standard search logic treats no middle name as the equivalent of all middle names , but we dont know how to work ith the suffix. AK knows some systems ignore the suffix, but doesnt know about all systems. AK thinks that it could come out either way, but would be effective in most systems Correct name: John Phillip Smith IV. Does Smith IV, John Philip work? Middle name is misspelled, so ineffective Correct name: John Phillip Smith IV. Does Smith IV, J. work? No middle is equivalent to all middle names J is first letter of first name so its OK Correct name: Robert Don McErny. Does Don R. Mc Erny work? System ignores spaces, so its OK. Correct name: Robert Don McErny. Does Mr. Don Robert McErny work? If system ignores suffixes, then it is OK Correct name: Eduardo Sanchez-Garcia. Does Eduardo Sanchez-Garcia work? OK Correct name: Eduardo Sanchez-Garcia. Does Eduardo Sanchez Garcia work? System ignores cultural differences, so it is OK that there is no hyphen. Correct name: Eduardo Sanchez Garcia. Does Eduardo Sanchez work, with Sanchez listed as the last name? Standard search logic says Sanchez is the middle name, so it is OK (?)

Correct name: Eduardo Sanchez-Garcia. Does Eduardo Sanchez Garcia work? With Sanchez Garcia listed as the last name? No not OK AK says youre asking for trouble if you put two unhyphenated names as the middle name. System doesnt allow for cultural differences, so treats unhyphenated names the same as hyphenated names. Problem 17.2: Susan Alexander? John Phillip (Jack) Smith? Tessies Tire City? You want to know what entities these are before you go down to the filing office. Whats the transaction about? Is it a developer? Is it a consumer? You first want to know the address before you go to the filing office. There is a hard copy but its probably old, so you will probably request a computer search. You ask for Susan Alexander, and order all the financial statements, and see which ones match the address of your person. The problem is learning the search logic and dealing with it. States differ in procedure. Tessies Tire City is not a corporate name because it does not have an inc., co. corp., etc. Once you find that out the business name, search it, but also search with trade name to make sure (even though its probably ineffective). b) If you want to lend to Lee Leasing against a whole bunch of collateral, what do you want to know about Lee Leasing and its collateral? Find out what kind of entity Lee Leasing is. What are you looking for when you check with the Secretary of State? If they say they have Lee Leasing on file, find out: - You want to know if they own it! They might just be leasing it! Problem 17.3: Name John Phillip Smith. Filed names: John P. Smith, John Smith, John Philip Smith, Jr., and others with same name, but different middle initial. UCC 9-506(c) All those filings are effective against John Phillip Smith because the search logic employed by the Secretary of States office allowed it to turn up in the search. Which ones do you order? If there is a mistake in the middle name, its probably not a seriously misleading mistake, since it came up under our search. Because it turns up in the searching logic, it aint serious if the name that its under is ineffective. The Secretary of State office did us no favor by giving us all those names. Curse the Secretary of State. Problem 17.4 If name s John Phillip Smith, which should you search? John Phillip Smith, John Phillip Smith, Je., John Philip Smith, Jack Smith. (a) If a search returns a name, the searcher has a duty to check it out. Might want to devise a system where Smyth shows up as a result if you search for Smith, BUT not the other way around, otherwise youd get too many search results. Youd probably want to ignore the suffix in the search because theres a high probability that the filer ignored the suffix. AK doesnt know what standard search logic is doesnt know if the system will show the results that spell Philip with 1 L Problem 17.5: If filing office receives an original financing statement on Wednesday, when does it have to index it under 9-519(a) and (h) and 9-523? It has to index it by Friday, end of the second business day, 9-519(h). What day would the last search go out that did not include reference to this financing statement? UNDER 9-523(C)(1), THE FILING OFFICE HAS TO REPORT/COMMUNICATE ON THE RECORD BY THE 3 BUSINESS DAY AFTER RECEIVED ORIGINAL. The information has to be current as of 3 business days. So on Friday, they dont have to report on information except from Tuesday. Overall, its 2 days to be recorded and 3 days to show

up in a request. Because the filing office can do it at the end of the day on the second business day. This means that the request may not be current until 3 days after filing, and here that day is Monday. a) If the filing office receives an original financing statement on Wed., by what day must the filing office index it and thereby render it searchable? 9-519(a) & (h) - Must enter it by the end of Friday the latest date a filing officer can respond to a search request is the 2nd business day after it receipt, so if you receive it on Monday, you have to respond by Wednesday. - When you ask for a filing, you want to search for something that will pick up your financing statement want to pick up all the preceding financing statements ahead for you. So if you ask on Monday, you want to ask on Tuesday also, in case anyone filed financing statements ahead of you. This system depends on the filing office complying with the requirements indexing, searching, etc. There is NO sanction if they do not comply with the requirements. Secretary of States Office in CT was 144 days behind, but didnt stop business in state of CT!!! Problem 17.6: You are going to search for security interest on Tang and on Argon. Who knows if you can be ready by end of closing day? They may follow state procedure. a. File your own financing statement. Do a search now, but we wont find anything that comes between now and 16 days from now. We probably wont be ready in 16 days because the filing office has to index it. Whether the filing office indexes it immediately or holds it for 2 days and then indexes it, the search will pick up our statement and anything before ours. b. Running out of time, so schedule closing for 7pm on the 16th day. What can we do, what is a practical solution? Run your search now, schedule closing for 16 days from now, do everything, hold the papers in escrow until you do a second search that comes up clean. The only thing that will show up is if the debtor has given someone else an interest. Second search should come up the same as the first search, have to get a search that shows my financing statement on it. - Political difficulty of eliminating filing office. Problem 17.7 Options 1-3: not good alternatives Option 4: A combined 50-state filing system would be too enormous. Kaufman thinks we should go with what weve already got multiple filing systems.

Art. 9 Financing Statements: Other Information

Generally: Most file in hard copy on an official form in 9-521 but the form is not required; Some file the SA itself

Required Information on Financing Statements and the Result of Erroneous Information

UCC Required Information 1. Debtors Name 2. Secured Creditors Name 9-502 3. Description of Collateral 4. Debtors Address 9-516(b)(5)(A) 9-516(b)(4) 9-516(b0(5)(B) 6. Type of Debtor (Individual or Corp.) 7. Type of Organization If the debtor is an organization 8. Jurisdiction of Origin 9. Organization ID # 5. Secured Creditors Address If left blank? Clerk should reject the filing. If it is accepted it is nevertheless ineffective If it is erroneous? Minor errors are only fatal if they are seriously misleading Secured Creditors trade name is only fatal if seriously misleading Errors are only fatal if they are seriously misleading

Clerk should reject the filing If Accepted it will be effective against all but a purchaser who reasonably relies 520(c) Clerk should reject the filing If accepted, it will be effective against all but a purchaser who reasonably relies

Errors are only fatal if they are seriously misleading

Additional Rules

Filing clerk should not consider the accuracy of any piece of info, but should reject it only if it is left blank If Filing Office Wrongfully Rejects: filing is still effective against lien creditors Unlike SA: all assets is a sufficient description of collateral Description with Wrong Address: Statement may still be effective Must have Permission in Authenticated Document: 9-509(a)(1): (1) Signing a SA automatically the creditor permission to file an FS (2) If the FS is not authorized, it is ineffective Unauthorized Filing: Victim of bogus FS may file a correct statement Filing Correction Statement: helps gives notice to potential lenders but title to the collateral is still clouded

Authorization to File a Financing Statement

Real Estate: attempts to remedy this problem by requiring that the mortgage by witnesses and acknowledged

Grabowski v. Deere Facts: BOA files FS listing collateral as all equipment; SPB files FS listing collateral as three specific machines and SPB claims that prior FS is ineffective failure to describe collateral Rule 9-505: Huge leeway in description of collateral for FS Either by type or category or by saying all assets Under this standard BOA wins; reasonable search had necessary info to make further inquiry Even more generous standard in Teel Construction SI granted in collateral at certain address, the address didnt exists but the FS was valid because the sarched had enough info to inquire In re Pickle Logging Facts: sought reconsideration of Bankruptcy Courts decision that it failed to perfect an SI in piece of logging equipment. Rule: Description of collateral in an SA and FS is sufficient if it reasonably identify what is described Reasoning: misidentified both the model and serial numbers compounded by the fact that the incorrect numbers matched each other There was no inconsistency that could alert a person of ordinary business prudence that further investigation of this alleged SI was required

UCC Insurance
Coverage: The rusk of most kinds of errors in the filing and search process and some aspects of attachment, perfect and priority Does not Cover: Against possibility that the debtor does not own the collateral

Problem Set 18
Problem 18.1: You have a filing statement that has to be filed today. The debtor authorizes it but you dont know its organization number. Its not required to be effective, but the secretary of state by statute is required to reject it if it does not have the number. The filing office does not reject it if it is a wrong number. The effectiveness only goes to the debtor, creditor, and collateral description. There is no difference from leaving it blank or telling you to fill in a false number. From a substantive reason there is none. What happens if a busy body in the secretary of state office sends it back to you? The danger of doing nothing, and later some creditor is deceived, and you prove that you are perfected under the statute, that creditor is going to say that you should have done something. You are perfected, but you are perfected because you put false information. There could be an estoppel argument. The secretary of state office did something wrong. But they have sovereign immunity. What did the first creditor do wrong? You can claim a lack of good faith argument. You should not rely on fault of secretary of state mishap. A lawyer shall not make a material misrepresentation of fact to a third party. So are you violating that? The lawyer should later file an amended statement on Monday with the correct number. Therefore while you are lien perfected with the wrong number, you will lose to a secured creditor that relies on the misrepresentation and

the fact that filing with an incorrect number got you by. The other author says 9-516 comment 3 doesnt say it is okay to do it all it does it not provide a penalty for filing with the wrong organizational number. What you are really saying is that you get to do the morally correct thing by violating a rule of professional ethics. How do you have your cake and eat it too?

A) In the context of the particular facts, giving the wrong organizational number
is not a material misrepresentation if taken to mean what they do in 441. Doesnt article 9 set you up to do it? Maybe you could include in parenthesis that this is not the right number to save you from disciplinary action. If you dont file with a false number and someone gets in before you then you could be on the hook for medical malpractice.

B) 9-516(d) a record communicating to the filing office with the fee which the
filling officer refuses to accept is effective except with respect to a person who gives reasonable value (a purchaser) with reliance on the absence. A secured creditor is a purchaser according to 1-201(32) and (33), but it is generally effective against the person you are probably most worried about, the trustee in bankruptcy.

C) 9-338 again talks about the purchaser who gives value in reasonable reliance
on incorrect information. What kind of reliance are you going to have on a false organization number. In the usual situation it is going to be perfectly obvious that the organizational number is wrong, especially if there were addresses, jurisdiction, and organization was there. Hard to see how someone is going to rely on organization number then. Problem 18.2: Being perfected at debtors bankruptcy is critical.

A) 9-516(b)(4) (requires the mailing address for the secured party) the filing officer
should have rejected, but he didnt, so is it still effective? Yes under 9-520. Is this a problem for a hypothetical searcher, is a searcher who wishes to find a secured party even without an address, sure. This is a federally chartered bank, a searcher wont have any difficulty at all in finding that bank, so the failure to put an address wouldnt make any difference to the searcher.

B) It has the correct name so it is effective, because they are required to accept the
financing statement even though it had the incorrect debtor address. The filing clerk is required to accept it anyways. Can the trustee avoid it? When it is lien perfected it applies to trustees in bankruptcy as well. Although, this one really does interfere with the operation of the system. How does article 9 deal with it? 9-338 it is effective, but it does have consequences, 9-338 limits the priority of the secured party in favor of a purchaser who gives value in reliance on the wrong information.

C) Assume that the filing officer has accepted it, 9-506(a) it is effective even if
there are some minor errors unless it is seriously misleading and here the trade name is so different from the actual name that, as much as searches are not conducted under the partys name an error in the name of the secured party will not be seriously misleading. That is what the comments say. (Using the debtors trade name is the a problem, but here using the secured creditors trade name so we dont have that kind of situation). If it made the secured creditor hard to find then perhaps it could be considered misleading. After all the name is required to be there for a purpose.

D) You can inquire of the stated secured party, but once she says it isnt her, the
searcher cannot rely on the name so there isnt going to be any estoppel relied there. But they you look at 9-506 comment 2 that says an error in the name of the secured party will not be misleading. If that is effective and it turns out that both Elizabeth Warren and Lynn LoPucki says I will pay you a little money and Ill be protected by your filing. Kaufman thinks it is seriously misleading and it is true that you dont search in the name of the secured party and at times you are entitled to rely on what you find there. Kaufman doesnt see why you cant rely on that at least to the extent of saying that it is seriously misleading. The financing statement must have the following correct information: Debtors name, secured partys name and description of the collateral. Unless they are minor errors that are not misleading. 9-502 are the three items that have to be right except for minor stuff. - Kaufman thinks that Comment 2 is wrong. - Searcher cant make an inquiry because the secured party isnt identified at all. - You cant get an estoppel claim unless there is REASONABLE reliance! E) The description of the collateral is just wrong and aside from the problem with the financing statement, is there another problem? They listed what was at A and meant to cover what was at B and by the particularity of the description they have missed the collateral that they wanted to include. F) The filing officer should have rejected, but even though he took it, as a matter of article 9 it is defective. As a matter of policy how should this turn out, the searcher should have been put on notice that there was some kind of security interest in something the debtor owns and of what value is the description of the collateral in the financing statement? Suppose you find equipment and you want to know if you can levy on inventory or accounts receivable. Are you safe to levy on the inventory, the accounts receivable by looking at the financing statement that says equipment and finding no other financing statements and no other liens. A security interest that starts in equipment can drift off into other items as proceeds. The authors suggest that there is a pretty good argument that that requirement ought to be offended. The people who defend it say that it ought to be a starting point. Financing statement is facially defective Problem 18.3: The other creditor has 5 financial statements stated at a particular addresses other than Trimble Ave. The landlord knows that the other location is new and not listed. Could Trimble Ave collateral be perfected? Maybe. What you going to do? You should levy on Trimble Ave. You are entitled to rely on apparent state of the record. You have not sold anything yet, so go ahead and levy. A) It doesnt seem that likely that Glacier is perfected. B) Reasonable chance you should go ahead and levy because it is reasonable to assume that Glacier is going to be unperfected. Problem 18.4: Glacier is supposed to have a security interest in Trimble Ave collateral but financial statement got screwed up. A lien creditor calls and asks you about it because he wants to levy. Do you lie? Some jurisdictions take lying seriously. The law may sanction it. You should say, let me find out, and Ill get back to you. Then go get one at that point before Smith levies. What about if you got a call from another bank, whose debtor SCI wants a loan

and gives an application? Is there a difference is confidentiality arrangements between Glacier and debtor, when another bank calls and wants to know debtor status? Creditors by and large do not have confidentiality with debtors. Here a loan officer from another bank calls you, and you who are the first lender, and you have a negative pledge clause preventing giving a junior lien to yours, to finance new inventory, want to find out whats going on. On the other hand, you want to have a look at state law in jurisdiction, which has expanded privacy rights over the years.

A) You might try to get off the phone as soon as possible. You dont have a duty to
do the other persons work for them. You can then go get the debtor to approve of anything you need and get the security interest filed. It is the other parties mistake for calling you and putting you on notice that I am about to levy. You dont, however, want to be put in a position of making a flat out lie. The more I talk, the more suspicious the person will get.

B) Is there something there for you if youre honest. This is your debtor going to
another bank for a loan. You want to find out Problem 18.5: typically department stores who take security agreements dont file financing statements, and with respect to consumer goods, they dont have to and there is automatic perfections. But you file a financing statement, and you may want to file one with high ticket items. If the consumer sales to another consumer, that second consumer will take free and clear of security interest, as long as there is no financing statement filed, as a consumer to consumer transaction under 9-320(b). You dont need explicit permission to file against a customer who has already executed a security agreement. That execution constitutes authorization. The debtor normally has to authorize an execution of a financial statement in writing. So if the financing agreement goes first, you need a writing. Also, use same description as that in security agreement because authorization in security agreement only covers property in the security agreement. A) The execution of a security agreement is the necessary authorization for the secured creditor to file a financing statement. B) What does the authorization consist of? You are authorized to file a financing statement based on security agreement so the collateral description ought to be the same or you might find that you didnt have permission. Problem 18.6: The issue here is that you had an early financing statement with only an oral authorization, and some later creditor files one, and the first filer subsequently executes a security agreement, that then constitutes the authorization. The authors think the first filer loses since there is no written authorization. Kaufman is doubtful that is the correct result because priority section states priority from date of filing. And here second bank is the first filer. Maybe filing means authorized filing. But it was authorized orally, and they were on record first, and the second filer should have seen that filing. A) If he hasnt signed anything authorizing the filing then the first filer loses. Normally we have our second national bank on March 1, and Nations Bank on March 10. Normally the first filer wins, but here there was no authorization of filing, 9-322 the basic priority rule. Second Bank Filed first, why doesnt our client win, our authors say our client doesnt. The authors say that the only way to read filing is authorized cause you cant just go out and file against everyone and youd have priority if you later made a loan.

Nations Bank should have searched the file, willing to read authorized but they got subsequent written authorization so the first in time Kaufman thinks should be prevail. Authors dont agree. Written authorization is there to protect the debtor At every turn of Article 9, we are trying to limit the powers of the trustee When we looked at what should be in the financing statement yesterday, and we looked at what was not there, the trustee loses because the lien creditor loses on the theory that lien creditors never trust the file --- it is the same theory here! Lien creditors dont check the file just as the trustees never check the file ---- same kind of policy argument Drafters of Article 9 did everything they could to protect secured creditors against junior secured creditors and trustees and lien creditors Eliminates requirement of signature of debtor on the financing statement because thought it would screw up electronic filing Financing statement is not effective at all, until the security agreement gets signed, authorizing the filing of the financing statement It unsettles the date of priority from the date that is stamped on for the filing of the financing statement priority date was supposed to be carved in stone in Article 9, but isnt the priority date in this kind of situation If you dont remember anything else from this course, remember this*** Huh?

Exceptions to Art. 9 Filing Requirement

When Creditor Takes Possession: Generally, it is pretty clear what is going on in SC world Substitute Notion of Control: When you cannot take over certain things like bank account SC still has control, even if it leaves the debtor with a check book and doesnt have any say as to what checks debtor writes Protecting collateral in the way that Deutche Bank checks collateral with Reznick (1) Possession: Money, many forms of collateral (2) Automatic Perfection by Operation of Law: PMSIs in Consumer goods (purchase money security interest) (3) Notice to or through some person or organization that control the collateral: example of deposit accounts

Three Ways to Perfect a Security Interest Outside of Filing


Authors give us the superseded definition of purchase money security interest o 2 situations in which we have PMSI Seller who sells good on credit and keeps a security interest in the goods sold to the debtor Deutche Bank is putting up the money/financing the purchase and gets the security interest in the boats that Shoreline sells to Bonnie If you buy a car from Cambridge Honda, you go to the Bank of America, who puts up the money for the car and gets a security interest in the car you bought. SO LONG as they make sure that the exact money they give you is the money that winds up in the hands of Cambridge Honda. Bank of America might make its check out to Cambridge Honda, or YOU AND Cambridge Honda, so that you dont use the check for something else. o PMSI is a really good thing to have Very good for debtor because it is a way for the debtor to be able to buy something on credit when it has already borrowed money Gives the PMSI to the seller, who is willing to sell because it will have priority over the secured creditor who has the filing statement

Possession: Perfection

Both Art. 9 and Real Estate: Recognize possession of some types of collateral as a substitute for public notice filing 9-310 and 9-313 permits perfection by possession if the collateral is negotiable documents, goods, instruments, money or tangible chattel paper Agents and 3rd Party: a SP may possess collateral through an agent, This is the case of a gas station with one employee on the premises. The employee is the agent, but the owner oil company retains possession even though its name might not appear anywhere on the premises Possession as Means of Perfection: May take any of three roles in perfections (1) Sole means of perfection: as with money as collateral 9-312(b)(3) (2) Alternative means of perfection to filing: as with goods, instruments, chattel paper, negotiable documents and certified securities 9-313(a) (3) Notice that Under 9-330(d) and 331(a): a perfection by possession of the above (except goods) trumps prior perfections by filing (4) Ineffective for Perfection: SIs in accounts and general intangibles may be perfected ONLY by filing or some other form of automatic perfect not possession Deposit Accounts: Generally bank account in 9-102(a)(29); 9-104 Indicates three ways a SP may take control of a deposit account (1) SP may be bank where account is (2) Debtor, SP and Bank can authenticate a record instructing the bank to comply with the SPs instructions (3) account may be put in the name of the SC thereby making the creditor the customer of bank Control: is potential not actual the SP may choose to control the account but until then the debtor can use it freely PMSIs: Automatic Perfection 9-309(1): Creates exception to filing for most purchase money security interests in consumer goods Definition: An SI is a PMSI to the extent that it is (a) Taken or retained by the seller of collateral to secure all or part of its purchase price (b) Taken by a person who by making advances incurring an obligation gives value to enable the debtor to acquire the rights in or the sue of collateral if such value is in fact so used Created in Two Situations: (1) Consumer buys a good on creditor from a vendor, the vendor takes a security interest in the good (2) Consumer gets loan from 3rd party to buy goods from a vendor, the 3rd party takes an SI in the good ONLY for Consumer Goods: Automatic perfection in other situation they must be perfected through system 9-102(a)(23) consumer goods) Gallatin Bank v. Lockvich: S $32,500 Boat counts as a consumer good for which a PMSI can automatically be created

Security Interests Not Governed by Art. 9 or Another Filing Statute: Collateral excluded from Art. 9 Coverage 9-104 Wage claims Insurance policies and claims Real estate interests Tort claims Most kinds of bank accounts

Bluxome St. Associates v. Firemans Fund Facts: Deals with settlement for legal malpractice suit for payment of $600K; F and S Firm claim that they were first in line because they filing an FS. Held: Under 9-109 such interest in non-commercial tort suit is not governed by Art. 9 and Contractual lien was valid and enforceable without notice required Problem Set 19
Problem 19.1: Permissible ways to perfect question? A) Cash in the Register: the only way to perfect a security interest in actual physical money is by taking possession of it. 9-312(b)(3). Have an employee of yours run the machine. You can make the teller your employee. Is that enough if debtor still pays that person? The creditor has to pay the teller as an employee? B) Negotiable promissory notes: falls under instruments, in which perfect by filing or possession. Possession is better because if you have only perfected by filing, a purchaser (which includes another creditor) who takes possession will take priority over the prior filer. Filing is a weak protection because you can lose to another creditor. The concept of negotiable promissory notes is to make them as much like dollar bills as possible. C) Money debtor keeps in Deposit Account: 9-104: bank holding an account, second, an authenticated report signed by debtor and bank saying bank will comply with secured party instructions, and thirdly, the secured party becomes banks customer with respect to account which means secured party named account holder. D) Stock: perfect by either filing or by taking possession of certificate, or having shares registered by GM in name of secured party. E) Obligations of customer to pay for merchandise evidenced by a promissory note and a security interest. Chattel paper, 9-102(11) it is something in writing that evidences a monetary obligation, a debt of the buyer of goods, and a security interest in the goods. Another example is just a plain old lease that is used as collateral (contains monetary obligation and an interest in goods themselves, the interest of the owner). You can perfect by possession or filing, 9-330(b) and (c) possession is favored over filing unless you work the number of filings by stamping each piece of chattel paper. Problem 19.2: K for Payment, promising certain installments plus interest? Instrument or Account. Account definition excludes instrument. Does it transfer? Kanards are filing using money for a contract for payment that theyve gotten from someone else for payment. In UCC terms, a contract for payment is what: is it an account, is it an instrument, or is it a general intangible. Youd have to see the document itself to try to figure out if it is an instrument. General intangible is any personal property other than an instrument. Suppose it isnt an instrument because it doesnt fit the article 3 definition of an instrument. Then what would it be? Then it could be an account. It cannot be both an account or an intangible. It has to be one or the other. If it is an account, you have to file to perfect. If it is an instrument, then you should probably possess. So what do you do? You want to do both because it isnt crystal clear which you should do.

Problem 19.3: Instrument with another party holding possession. There are two creditors, one with both possession and a 60 grand first security interest. What does the second creditor do to perfect as a second secured interest. Maybe have a 4th party hold it in escrow. You should refinance that loan and add it to your 300 grand, and take possession of note. Problem 19.4: How to protect yourself against automatically perfected security interest. A) Mobile Home: may have a PMSI automatically perfected. Trace source of title. Find out where the money came from, relying some on the debtor at that point. You also worry about whether salesperson had it free and clear when sold it. Could this mobile home be a fixture on the land, permanently on the land? There may be a mortgage on the land, which gives the mortgagee an interest in that mobile home. B) Rare Book Collection: it could be PMSI. The library of congress could be holding the books for the secured creditor and does not have to tell you under 9-313(g)(2). C) Mercedes Benz Automobile: if in certificate of title state, almost certainly you can only comply with filing according to certificate of title rules. D) Diamonds: could be PMSI. E) Computer Equipment: located at office, which would tend to look like business not consumer, but the stock stuff makes it look like personal use. You may have an automatic security interest. Before you spend a lot of money, you should take a good look at the equipment. F) Checking account at Bank of West and in Ketterings name: You perfect by control. A secured creditor under 9-104 (private agreement between bank creditor and debtor) or a bank under 9-104. G) Almost anything can be consumer goods. The provision that makes things easy for takers of security interests in consumer goods makes it difficult for searchers. Problem 19.5: Borrow 100,000 using potential lawsuit winnings as collateral. Tort claim? How to perfect? What is this lawsuit about? Is it a breach of contract? If its a breach of contract, its not a tort claim, but rather its a general intangible (this a catch all category). How to perfect a general intangible? You have to file. But what if this is a tort claim? Then look to see if it is a commercial tort (where claimant is with an organization, or the claimant is an individual and the claim is in the course of persons business)? 9-109d12commercial tort claims but not tort claims are in article 9. There is nothing talking about commercial tort claim specifically, so we file, because 9-310 says that unless otherwise provided, a financing statement must be filed to perfect all security interests. 9-108e says you cannot say just file by identifying commercial tort claim. You dont have to go into great detail, but you have to identify the nature of the claim. Problem 19.7: Sabine sells musical equipment to Jersey on credit with a security interest in equipment, but Sabine is going to be using equipment in business. They put it in separate room, sublease it to Sabine, and agree the its in Sabines possession. Bill (President of Jersey), as Sabines agent will control access to room, with this information printed on door. You can use an employee of the debtor to take possession under comment 3 of 9313. But the comment explains that debtor cannot qualify as agent for the secured party for purposes of the secured party taking possession. Although the separate room is to give notice and warn a creditor who levies on it not to waste their time, and they got a lien, but the problem is that the agent is the president. This is not like the field warehouse where the agent is an employee of the creditor. So this is a dual agency situation, and you picked somebody that is subordinate, or in fact, is the debtor.

Land and Fixtures Recordings Systems

Personal Property: anything capable of being owned except real property

A. Re Prope Re al rty cordingSys ms (p344 te ) Each state is divided into counties, and each county maintains a real estate recording system. Typically it is located in the county seat. Resemble personal property filing systems in that: v If you took a mortgage to the recording office a clerk would take a small fee for recording and would immediately stamp the date and time of the recording on the face of the mortgage. v The clerk would place your now-recorded mortgage in a basket for photocopying and indexing and later someone would add it to the appropriate place in the index and mail the original back to you Differ from personal property filing systems in that: v Real estate system contains not only documents evidencing liens against real estate, but also deeds that show transfers of ownership. Enables users to determine who owns property as well as who has liens against it Bills of sale, the personal property equivalent of deeds, are not recorded in the personal property system v It is more expensive to file in the real estate system. This system has both recording and transfer fees. The real estate recording system is not self-purging. Filings in the real estate system are permanent and do not have expiration times like UCC filings. The debtors name is relatively unimportant in the real estate system because the filing system records tracts of land and chains of title. o A search with the wrong name would present no documents at all, including deeds. o In most counties, real estate searches can be conducted not only by the names of the parties, but also by tract, the description of the property. o Real estate records are duplicated by private firms across the United States. There is no uncertainty as to which filing system is correct for the real estate system. o Land in one county must be filed in the real estate recording system for that county. o Land touching multiple counties must be recorded in the recording system for all of the counties. B. What is Re corde (p346 d? ) Formalities for the creation of a mortgage A mortgage document Signed by the debtor and Perhaps Containing a description of the debt secured and the collateral securing it. o Split authority as to whether a mortgage that omits entirely the amount of the debt or expresses it in general terms is valid o General rule is that a description of the collateral is not too vague so long as it is possible to identify the property by a rule of construction or through evidence extrinsic to the mortgage The actual mortgage document is filed in the real estate system not just notice of the existence of a document. The advantage is that searchers can see the actual debt. The disadvantage is that additions or changes may require a new filing. Recording usually requires that the mortgage be signed in front of a witness and be acknowledged before a notary public or some official, who authenticates the debtors signature by affixing the officials own signature and seal.

Real Property: Includes land, certain interests in land such as easements and permanent structures on land Overlap: Fixtures

Defined: Permanent buildings are part of the land on which they stand unless they are specifically excluded, proper place to record a mortgage on these building is real estate filing State Law: UCC states that goods are fixtures when they have become so related to particular real property that an interest in them arises under real property law. What may be a fixture in one state might not in another

2. HowDoe a Se s cure Cre or Pe ct in Fixture d dit rfe s? In many situations it will be impossible to predict whether the courts would consider particular property to be fixtures. Often this will lead to filings in both the real estate and personal property filing system s. Goods that are fixtures or may become fixtures may be used for a security interest under article 9 if allowed under the state real estate law, 9-334(b). In reCliffs Rid eSkiing Corp (Bankr. W Mich. 1 1 p3 g . .D. 99 48) o A ski chairlift was classified as a fixture under a three-part test. Is the property annexed or attached to the realty Is the attached property adapted or applied to the use of the realty Is it intended that the property will be permanently attached to the realty o Fixture filings are permissible in Michigan in both the real estate and UCC systems. o Real estate mortgages, when filed, can also perfect security interests in future fixtures. o In the case, three different entities were found to hold security interests in the chair lift. Se curity inte sts in fixture m bepe cte thre ways re s ay rfe d e o 1) Mortgage filing in the county real estate office Under most if not all state law a mortgage creates an interest in fixtures and this interest is perfected when the mortgage is filed o 2) Fixture filing under the UCC Must file a financing statement that meets the standard requirements of 9-31 0(a) and under 950 2(a)(3). Thefinancing state e m m nt ust: State that it covers collateral that are fixtures or are to become fixtures State it is to be recorded in the real estate filing system Contain a description of the real estate where the fixtures are located or are to be located, which is sufficient to give constructive notice If the debtor doesnt have an interest of record in the real estate, the owner of the record must be disclosed, 9-5 (b)(4) 02 o 3) Filing an ordinary financing statement under the UCC Allows perfection of a security interest in goods that are fixtures, yet such a filing does not qualify as a fixture filing, UCC 9 1(a), but there is nothing in article 9 that says one must make a fixture -50 filing to perfect in fixtures. UCC 9-501 doesnt require filing in the real estate records to prefect in fixtures, it merely requires filing in the real estate records by means of a fixture filing. However as shown in 33, this is of limited effect In re Re naud (Ricev Sim ons First Bank of Se . m arcy p 54 Issue re: perfecting a SI in a mobile home and ) g3 how to maintain that perfection. Fact that a mobile home is without wheels and designed as permanent living quarters does not exempt owners of mobile homes from having to obtain a certificate of title under Arkansass certificate of title laws. 3. Pe ctingin t Fixture of a Transm ingUt y Pg 3 rfe he s itt ilit 55 9-50 1(b) allows for the filing of security interests in the fixtures of transmitting utilities to take place in the office of the secretary of state. 9-10 2(a)(8 defines transmitting utility to include businesses such as radio and television stations that do not 0) have lines or tracks running through numerous counties. This simplifies filings against railroads and power companies who have fixtures strewn across the country, and would have required filings in hundreds of counties.

Personal Property Interest in Real Property

If a person owns land in fee simple, their interest is in real property and a security interest in that interest must be recorded in the real estate system. If they form a corporation or a partnership, her interest, the stock or interest in the partnership, is personal property and is governed by article 9. Similarly, the debtors interest in a partnership or trust is personal property, even though the partnership or trusts owns nothing but real estate. A SC perfects its interest in the debtors interest in the partnership or trust by filing in the Article 9 system. Article 9 considers a mortgage to be a security interest in a note, personal property, and therefore covered by article 9. Creation of a lease of real property is governed by real estate law. 9-109(b) provides that the application of article 9 to a security interest in a secured obligation (the mortgage note) is not affected by the fact that the note is secured by an interest (the mortgage) to which the article doesnt apply. The drafters extended coverage to mortgages by saying that attachment of a security interest to a right of payment secured by a security interest in real property (the note) is also attachment of a security interest in the mortgage, 9-302(g).

Problem Set 20
Problem 20.1: This has to do with the Cliff Case. There are 3 creditors: FoA, Cliff Dev, and First National. There was not one unified priority scheme, and thus, equity answers the subordination question. FoA v. FN: FN wins; FoA v. CRD: FoA wins; CRD v. FN: CRD wins. If title of property is held in Pacific Interest partnership, the partnerships interest is personal property, and if you take interest in partnership interest, you file in UCC. a) How should SLP (lender) perfect in PIs (debtor) 1/3 interest in 160 tract of land known as Devils Valley? Trees all over the tract of land are realty. PI could be a tenant in common, or PI might have a beneficial interest. If PI owns the property, SI would have to go to the real estate system. If you have a beneficial interest it would be more like a general intangible and you would have to go to the U.C.C. system. Couldnt be a fixture. b) Pine trees growing on land. The authors try to show that the trees are crops grown for harvesting, so they dont seem to be part of the land. However, under 9-501(a)(1)(a) timber to be cut is filed in U.C.C., but this does not meet the definition because it does not have a contract for sale on it. 9-102(a)(44). Before trees are cut, they are goods. After cut, they are something different. If its not goods, it cannot be fixtures, and then maybe its not covered by article 9. Does it mean that it might not be covered by article 9? (d) If SLP perfects by recording mortgage against the second parcel, does it have to mention the trees? The problem with mentioning the trees is inclusio est exclusio est. If you describe one and you dont describe the others there is an argument that you didnt get the others. e) PI has a mortgage and note from another party. PI recorded in real estate office and original is now in PIs possession. SLP wants security interest in that mortgage and note. If SLP perfects by recording a mortgage, does the mortgage have to mention trees? No, the mortgage covers everything on land. You can put in the mortgage, including trees but not excluding other things. The note that evidences the promise to pay is physically incorporated into the purchase money mortgage. The mortgage follows the debt. Old adage: With a note representing an obligation to pay, a transfer in an interest in the note automatically transfers the underlying security. Under 9-203g, the secured creditor by perfecting the security in the promissory note perfects a security interest in the underlying mortgage. You perfect a security interest in the underlying mortgage by taking possession of the note. Theoretically, you dont have to file in the real estate records.

But if you are really counting on real estate security, most careful lawyers will file in the real estate records, because someone searching the title in the real estate records and does not find it will be pissed off and their may be litigation. h) The fact that they call them store fixtures does not make them store fixtures. Ask whether there is an interest so related to realty that they are part of the property arising in real estate law. You should file in Secretary of States office if they turn out to be equipment; also, file in the real estate office in case they turn out to be fixtures. Problem 20.2: The eccentric debtor gets a million by signing security agreement in manufacturing facility on a food stained napkin. The question is whether the security agreement sufficiently describes the collateral. If sufficient, the secured creditor can write up a filing statement and file it because the security agreement implies debtor authorization. If land is involved, is there sufficient description to record a mortgage on the land? In many jurisdictions, that would be so vague as to be barred. In some jurisdictions, they allow extrinsic evidence. In some jurisdictions you need a witness. You need a notary at the time the debtor signed, in her presence. If you dont have the proper witness and notary you cannot file it as a mortgage. But maybe you can start a foreclosure suit, which files a les depends, a notice of pending lawsuit, which gives notice of the mortgage, and there is at least an argument that this gives the equivalent of notice. Problem 20.3: Folds sells mobile homes; he has buyer execute a promissory note, security interest, and a standard UCC financing statement, describing the brand mobile home, serial number, and files it in the Secretary of State office. But here a buyer takes it home and the PSF (mortgagee of buyer) forecloses on mobile home. Is the mobile home a fixture? Maybe. Folds may have a PMSI. If this is not a fixture, then our client is home free. But if its a fixture, the client is perfected under article 9 because it did file under the UCC. But to take priority over mortgagee, it had to file as a fixture filing before mortgage under 9-334(e). But it will beat the trustee in bankruptcy under 9-334e3, which says that if client perfects by any method under article 9, it is to prevail over any interest obtained by legal or equitable proceeding. The TIB stands in the shoes of a lien creditor. This enables priority over estate. Folds should file in real estate records, as a fixture filing. What do they have to do in order to file in real estate records? Problem 20.4: There is a mortgage clause saying that borrower has to give lender any requested financing statements, including to successors. This is in here in case the bank forgets to do something in closing. A new buyer from FLEET may want additional documentation. They may want additional stuff that did not turn up in search. The costs are heavy. Last sentence of paragraph If the mortgagee sells the mortgage to X and X sells it to Y and Y passes it on to Z, each one of those (X,Y,Z) may want additional documentation and the borrower has agreed to pay for it, including additional financing statements that have to be filed, etc.

Characterizing Collateral and Transactions

Keys: Chattel Paper, instruments and accounts all involve a debt owed by a third party to the debt. The debtor is using its right to that money as collateral to secure its own debt to the creditor Defined: When documentation evidences both a monetary obligation and an SI in specific goods, an SI in specific goods and software used in the goods or a lease of a specific goods Perfection: Two ways (1) By filing (2) By possession: Purchasing chattel paper with no knowledge of a prior SA is superior to filing 9-330(b) purchaser is broad enough to encompass both buers and takers of SI including bank lenders Example: Purchasing a boart for $20,000 with no money down financing and a SI in the boat the $20K promissory note along the with SI constitutes chattel paper Defined: When docs show a right to the payment of a monetary obligation, is not itself an SA or lease, and is of a type that ordinary course of business is transferred by delivery with any necessary endorsement or assignment Perfection: Two ways (1) Filing 9-313(a) (2) Possession 9-313(a) Defined: A right to payment of monetary obligation, not chattel paper, instrument, tort of deposit account or general intangible General Intangibles: A right to personal property other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, etc. Perfection: By Filing

Chattel Paper



Omega Environmental Inc. v. Valley Bank: Instrument v. General Intangibles Instrument: means a negotiable instrument as defined under 3-104 or any other writing which evidences a right to payment of money and is not itself a security agreement or lease and is of the type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment General Intangible: intended to cover types of personal property such as goodwill, copyrights and trademarks that are not usually represented by a particular document CDs: instruments under UCC, because although say nonnegotiable and nonassignable, is still a right to payment of money which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment

In re Commercial Money Center Facts: Court says that transaction as SI in a payment intangible, not the sale of a payment intangible, if payment streams were payment intangibles, then automatically perfected upon attachment, if transactions were sales rather than loans Held: Transactions were loans, not sales, and therefore didnt satisfy criteria of 9-309 thus Banks interest was not automatically perfected Reasoning: Strong indicia of loans rather than sale because bank (1) Has none of the potential ownership benefits (2) Contractually allocated none of the risks

2. TrueLe e v . Le e Inte das Se as s s as s nde curity Pg 3 62 Art 9 applies to security interest in personal property but not to leases of personal property unless they are intended as security. v A lease intended as security is a sort of security interest in disguise v A lease not intended as security is referred to as truele e . as s If the length of a lease and the payment schedule under a security agreement happen to be for exactly the useful life of the property, there may be no functional difference between the two. *Tax Rules: o If it is a true lease then under special tax rules there can be a deduction equal to the monthly payments of the lease. o If it is a security interest then the deduction is for the annual depreciation and the interest instead. 9-50 allows the true lessor to file a financing statement when he is not sure it has achieved that status. It can file 5 without the admission by the lessor that the transaction is a SI. 1-20 1(37) ssets forth the distinction between true lease and leases intended as security interests In reW Com Inc. Pg363 in asking whether the lessee has an equity interest, the Court is essentially orld , examining whether the contractual option price was set lower than the predicted FMV of the goods in order to reflect the equity interest in goods that the lessee had previously accumulated, presumably by paying more in rent than the parties would ave agreed to in the absence of an intent to allow the lessee to accumulate such equity v B/c the FMV of the equipment was not established, the Court was unable to determine whether WorldCom had acquired an equity interest on that basis v Court concluded that WorldCom had adduced sufficient evidence to create an issue of material fact as to whether GE possess a meaningful reversionary interest in the equipment v *here, it mattered whether transaction was a lease or SI b/c the 2 are treated differently in BR (if transaction = lease, lessor is entitled to its property with no need to prove filing) *Courts have held that the practical inability of the lessee to return the leased goods due to the cost and difficulty of removal is evidence that a SI was created 3. Re y Pape Pg3 alt r 67 Realty paper is a promissory note secured by a mortgage or deed of trust. Under 9-3 08(e the proper method to perfect in realty paper is to perfect in the right to payment ), In most cases this note is considered an instrument and hence perfection can be accomplished by taking possession of the note (9 3 -31 (a)) or by filing a financing statement (9-3 (a)). 12 v Catch: only perfection via possession will achieve priority over a later purchaser 9-3 (d) 30 4. Chat l Pap r, Ins rum nt , Account VS. Pay e Int ib s Pg367 te e t e s s m nt ang le Chattel paper, instruments, and accounts- all involve a debt owed by a third party to the debtor. The debtor is using its right to that money as collateral to secure its own debt to the creditor. v If collateral qualifies as: (PRIORITY LIST chattel paper seems to trump other categories) Chattel paper it is chattel paper 9-102(a)(11 ) Instrument it is an instrument UNLESS it qualifies as chattel paper (by containing a security agreement or lease) 9-10 2(a)(47) Account it is an account UNLESS it qualifies as chattel paper OR an instrument 9-1 (a)(2) 02 Payment intangible payment intangible UNLESS account, instrument, OR chattel paper 9 10 2(a)(6 and (42 1) )

Problem Set 21
Article 9 does not apply to original lease of the property, but it does apply to taking a security interest in that property But most courts have not read it that way Most courts have said that it does not apply to any interest in 306, including the interest in a lease Problem 21.1: How should the secured party perfect the following security interests?

a) Lessees interest under a lease in real property: a lease embodies a

right to payment to lessor, also embodies a right of reversion like chattel paper. For lease to be chattel paper, the lease has to be a lease of goods. This is not a lease of goods, but rather real property, so it is not chattel paper. 9-109(d)(11): article 9 does not apply to creation or transfer of real property including a lease. This is not an article 9 transaction, so record it in real estate office. So the answer here is to record the assignment in the real property record. The lease taken is chattel paper, any lease can be made into chattel paper, but in this case were dealing with real-estate and hence it escapes the scope of applicability of Art 9 and the filing need be done in the real property system.

b) Wheat growing in farmer debtors field: Crops are goods under 9104(a)(44). In some states, crops may be fixtures, but in either case, article 9 applies, and you should file a financing statement. You have to file in both places. The landowner shouldnt allow or give a mortgage if the only thing being financed is the fixture b/c they put a cloud on title. Can you perfect by a fixture filing in the real estate record? There is one court that has held wheat planted annually cannot be a fixture, because there is no intent of permanent connection to land.

c) Franchise to operate a BK franchise: this is a general intangible 9-102

(42) and can only be perfected by filing in the secretary of states office. you would think it was an instrument 9-102(47), but this section tells us that it has to be in writing. 1-201 has a definition of writing printing and any reduction to a tangible form, what does that mean though? So the issue here is if an electronic records a tangible form. Additionally an instrument also requires that it be transferred in ordinary course of business and in this case we dont really know if the transfer of these types of entries are transferred as an ordinary course of business. It is probably a deposit account, that is an account maintained with a bank. This is a critical distinction. If it is an instrument, then you need to file or take possession, but if is a deposit account, you need to take control, by one of the three methods in 9104, that is taking control. The problem with these cases is always to be thinking about the what ifs, the concept of control by itself is a vague concept. The Bank may issue a written certificate to replace the electronic certificate at the request of the debtor, the debtor then can give someone else a SI in the written certificate. Another creditor could even take possession in the written certificate and the collateral now is in the hands of someone else

d) An electronic book entry certificate of deposit:

and there is a creditor with priority under 9-330(d). In most cases as a creditor you can ask the debtor to give you a written or paper version of your electronic entry. 9-105 allows the creation of electronic chattel paper as long as the creditor can maintain control over it and can create it and store it in a unique and identifiable manner. This section tells the creditor what he must fulfill to create it but one cannot be 100% sure how to create an electronic file that cannot be confused with copies. The best solution is simply to get the debtor to print out the certificate of deposit or whatever and then youre back with the regular paper filing.

a) Software on a consumers debtors personal computer, including

software written by the debtor. The issue is over whether it is goods. If the program is so embedded with goods that it goes with goods (anti-lock brake example), then it is goods (9-102(44)). So if it is not embedded in goods then its goods, but if it is not embedded then it is going to fall in the category of general intangibles, under 9102(a)(42). So what is embedded then; is the operating system software embedded? You can take it off and replace it etc, so probably its not embedded. So the software on a PC is not embedded most likely so it is not a good. The anti-lock braking system in the car is a computer program is probably embedded in the car, you cant take it out with the transfer of the car. If we can take it off and transfer it, then its a general intangible. If its a general intangible, you have to file to perfect it. But goods could be perfected in a whole variety of ways: filing, possession, Cert of Title on car, etc. *With debtors own software, software written by the debtor? In that case were talking about IP and copy write issues. Kazinsky has to register by filing in copyright office. One has to look at what the collateral really is before filing.

b) With respect to the manuals to software: 9-102(75) defining software

includes supporting stuff so this would also be a general intangible and hence perfection would be by filing. Problem 21.2: Why have separate systems? If you keep the real property and personal property divisions could you unite and make a single filing system for all personal property SI? Could you require a UCC filing for everything under one office? Prof thinks it would probably be a good idea. May place a greater burden on the debtor since the creditor could file against more of the debtors collateral more easily. The debtor would then find it hard to get extra or additional financing to try and re-finance the debt and pay up. No other bank would make loans. There could be issues trying to get the collateral from another creditor who has already perfected by taking possession. You would have to take it from another creditor. Farm products: filing is where crops are located but inventory is where the debtor is located. Instruments v. general intangibles and accounts: instruments by possession. Chattel paper v. accounts also makes things complicated. The ability to perfect by taking possession seems to be more certain today than dealing with the filing system. You could theoretically get rid of problems by having everyone file in the same manner. Problem 21.3: Is there someway to structure a transaction to create a lease out of what is really a sales transaction? If you run the same payment schedule for

the whole life of the equipment you are going to end up having a secured transaction and not a lease. This is the problem of true leases v lease intended for security. The seller needs to assume some risk to take advantage of the full econ value of the property and to make sure that a Court will find that the deal was a lease and not a SI. The longer the lease and the closer the terms that the so called lease has similar to those of a sales contract the higher the risk of a Court finding that the lease was really a SI . Their solution is to require filing for all true leases. They want to say that you can turn a lease really intended as security into something that looks like a lease transaction by shortening the term and saying that you have to pay the reversionary interest.

21.5 About how someone can protect themselves in the commercial money sense. Somebody comes in with a pile of leases as collateral and your client asks if it is OK to go forward with this. You say, after what the providers of Article 9 did in 2001, we have a real problem here because there may be a secret lien. The would-be debtor who wants to borrow this money for chattel papers may have a stream of income represented by the lease payments to a 3rd party that they arent telling you about. If we cant trace the security interest, maybe we can trace the money if the debtor gives us a list of lessees and then we can find out who they have been paying.
Crucial word in 9-310-c is assigns. Assign just means transfer transaction can be either a sale or a loan in order to have the security agreement serve as collateral.

Maintaining Perfection
General Example: A financing is good for 5 years then at end of 5 years, SCs must do something else if they want financing statement to continue to be good at the end of the 5 years; File a continuation statement within 6 months of the end of the 5 year period Filing new statement will not continue the effectiveness of the original FS unless you file continuation statement

Maintaining Perfection Through Lapse and Bankruptcy

Art. 9 Termination and Release: A debtor may demand the SP file a termination statement within 30 days of satisfaction, provided that the K doesnt provide for further loans; when the TS is filed, the FS to which it relates becomes ineffective Termination Statement: Must ID the FS to which it related by its file #. Also must state the FS is not longer effective, becomes part of the FS Penalties for Not Filing: Becomes liable for actual damages and a civil penalty of $500 Release: SP may choose to release some collateral from the coverage of the FS by filing an amended FS in 9-512 Financing Statements Lapse after 5 Years: unless a continuation statement is filed during the last 6 months of the 5 year period and upon lapse the SI becomes unperfected and is deemed never to have been perfected as against a purchaser of collateral for value Loss of priority doesnt apply in favor of a lien creditor or trustee in a bankruptcy who filed while the FS was valid A continuation doesnt violate the automatic stay of bankruptcy Self-Clearing: Old FSs automatically lapse the filing office may remove the records from the office and destroy them over 1 year of lapse 9-519(h): filing should be indexed within two days of receipt

Art. 9 Self-Clearing and Continuation

Worthen Bank and Trust v. Hilyard Drilling Facts: NBC fails to continue SI in Hilyard AR, instead files new FS. Worthen files FS on same asset and because NBA didnt continue it, W has priority Held: The effective of an FS lapses 5 yearss from date of filing unless a continuation statement is filed prior to lapse Continuation statements filed too early inadequate While those filed too late ineffective

In re Schwinn Cycling: Effect of Bankruptcy on Lapse and Continuation Facts: files complaint with bankruptcy court against seeking determination on their alleged SI in money made from sale of goods dispute if interest remained perfected because it didnt filed an FD with respect to the goods within 20 days after it relinquished custody of goods Rule: A temporarily perfected SI in goods is not automatically continued indefinitely once the debtor initiates bankruptcy proceedings Held: would have had to perfect the interest by filing or by taking possession again Even if debtor is bankruptcy SC must file continuation statements Problem Set 22
Problem 22.1: Financing statement filed on Dec 30, 2001, a continuation on July 7, 2006 - was that continuation filed properly?

a) It was filed on time. You have to file it within 6 months of 5 years, and if
you file it later or earlier, its ineffective. Lawyers sometimes neglect to have the conversation with the client on who is going to accept responsibility. File it between June 30 (or July 1) and December 30, 2006. Bank filed on time because it filed within 6 months. Time in between is measured as 5 years from the day the original financing statement was perfected. June 30, 2011 Dec. 30, 2011

b) The next window if the statement filed on July 7, 2006. Does it run from July 7th or
December 30th. It runs from the 30th because the old statement is effective until Dec. 30th and the second is filed but doesnt run until the old statement expires, so it lasts until Dec. 30th 2011. c) There is no stay under 362(b)(3) to perfect on interest. Section 362(b)(3) refers you to 9-546(b)(1) which says you are protected as against the lien creditor in the intervening period. You can file the continuation after debtor files for bankruptcy. The bankruptcy dates do not change the dates. The continuation statement is an important document in any transaction that is ongoing. Problem 22.2: The lawyer makes a mistake. The layer discovers that a client sold a restaurant and took back a PMSI, which payments are suppose to go over 6 years, and the lawyer discovers that he did not file a continuation within the 5 years 6 month period. He will have to file a new financing statement. Will that be effective? Youll have to see if somebody else has also filed or see if there has been a judgment and levy. Suppose you find another financing statement. Under 9-509, a security agreement gives a debtor authorization in filing an initial financing statement and amendment (a continuation is not an amendment). There may be an agreement in the security agreement that says you can file a continuation or another financing statement. You are worried about any intervening interest in the last two months. The debtor now has the ability to lend money on the security because there is no longer a perfected security agreement. The second financing statement has no authorization because the security agreement only applies to the initial one. Whatever is

decided should be memorialized in writing because the lawyer can always claim that Gomez was supposed to file a continuation. Before you call your malpractice insurer, what do you want to know? You want to know if you are able to file another financing statement. Do you have the authorization. What do you want to know, suppose you file and you think it is alright, what is it that you want to know. You are going to do a search to see who has intervening filings. Why not get authorization from the debtor? The debtor now has the ability to lend money on the security because there is no longer a perfected security agreement. There is another question regarding if you have to notify your client of this. Suppose you find out that there is someone who has a priority over you now, do you have to call your client? Can you say, why didnt you file a continuation statement Gomez? The continuation statement is supposed to occur in five years so then you didnt even know that he will be your client. You ought to clearly and in writing tell your client that perhaps it was the clients responsibility to file the continuation statement or secure council to do so. You have to know the situation with respect to the collateral. Who has the collateral now? Is that enough? No because 9 years from now, dont know what will happen. Problem 22.3: This involves a fight between two secured creditors, one with possession of the collateral when both filed, while the second filed first and the one with possession filed second. First in time under 9-322(a)(1), and under 9-308(c) if you perfect in different ways then both of them are continuous and you can tack them (if by another method). Possession method one and filing method two. The possession works to beat out the first filing creditor. You should always look to see if there is automatic perfection and possession, not just that no one else has yet to file. You ask the debtor where he got the goods from and ask the seller if he has a security interest, he doesnt have to tell you but this will signal red flags, how you check for automatic perfection. You can get an affidavit sworn to before a notary and dated as of the relevant date or pictures to prove you had possession of the assets at the date you claimed you perfected your interest. Want to reach the agreement with that other bank right away. 3rd creditor in the picture would not lend money to buy the ski lift unless the 1st secured creditor would subordinate. Problem 22.4: Real estate development. The developer is financed on entire holdings and then sales one lot, and the buyer does not want to buy the lot with anothers mortgage stuck to it. Courts will enforce mortgage as written. You are going to look at the terms of the mortgage, if there is a release term hurrah, if not, then you tell your client he is going to have to beg because the court is going to enforce the mortgage as written. The court is going to say to get a lot released you have to pay the entire 160,000 to get the lot released. You cant clear the title by merely paying 30,000. You could beg or try to get refinancing.

Problem 22.5: There is a lender secured by forklifts and additions/replacements. The financing statement says all collateral. Now the debtor wants to borrow against a drill press, which is not covered by lenders SA. Debtor wants lender to file a release but lender wants it as leverage. There is nothing in article 9 requiring a release. If the financing statement is authorized, its completely effective. The debtor has to authorize the financing statement. So at that time, put releases in the statement. You can try to refinance. You can get the secured creditor to give a statement of current collateral, but the financing statement still allocates priority between secured creditors. There is a very broad financing statement that has been filed that covers equipment. Secured creditor hasnt made a loan against all the equipment of the debtor, it has only made a loan against some of the debtors equipment. The financing statement is much broader than the actual equipment the creditor has a claim against. The debtor wants to get a release to so that it can take the portion of the financing statements coverage off. They cant do anything, they authorized the financing statement so it is just too bad. The new lender will not give a loan against the property that isnt in the other secured creditors security agreement because (in bankruptcy no problem because security agreement doesnt cover the equipment) if subsequently the original secured party lends some more money against the drill presses even though its security agreement will be second to us, its financing statement is prior to ours and it will have priority. Suppose the debtor promises us he wont give the original secured creditor an interest in the drill presses, if they break that agreement were stuck. Suppose the new lender goes to the old lender and gets an agreement from the old lender that it wont take a security interest in the drill presses. The moral is that representing a debtor this is the sort of problem that the debtor runs into that the debtor authorizes the filing of a too broad financing statement, when the statement describes assets by type rather than the particular assets covered. Nothing in Article 9 that says that if a debtor authorizes the filing of a financing statement that says equipment in favor of a secured creditor that is only financing one piece of equipment --- nothing says that the secured creditor has a release to enable the debtor to finance the rest of its equipment to someone else. If the debtor has authorized the filing of a financing statement that lists the equipment by type, then it will be stuck.

Problem 22.6: what happens if mortgagee tries to screw debtor? There are not a lot of options when closing is set. You can pay the ransom and sue for a refund after get satisfaction. You need the cooperation of the buyer. Under FL statute, you can get attorney fees. In some jurisdictions, you can ask for an emergency order. AZ. holds secured party liable for actual damages. What happens when your mortgagee holds you up and says you owe more money than you really do and you need to close. You could pay what they ask for and hope that theyll give you a satisfaction of mortgage by closing date and then sue for a refund. You will be met with a defense, but will you really sue for such a small amount. You could refuse to pay the money, let the sail fall through and sue Global. Is the loss of the deal avoidable damages under contract law because you could have sold and sued for a refund. Maybe the buyer would help out. Under FL statute, you

can get attorney fees. In some jurisdictions, you can ask for an emergency order. AZ. holds secured party liable for actual damages. Complicate suit for a small recovery. NC allows money to be deposited with court and order execution of release once money with court. This does happen in the real world there are sleazy people in the mortgage business. This situation is not easy for a mortgager especially if youre under pressure to have a closing. Problem 22.7: Under 9-513(c) the Suarezes would be entitled to a termination statement within 20 days of the payment of their debt, instead of the 30 or 60 provided for in the AZ and FL statute. If there is a shorter time period maybe you could get the buyers cooperation. Thinks that in a situation like this faced with the sellers problems will just want to wash their hands of it.

Maintaining Perfection Through Changes of Name, Identity and Use

Key: Debtor who comes to searcher for a loan may have changed its name and address since filer put its FS on file. If debtor doesnt reveal its old name and address to the search, search may have difficult time find the FS that is on file. Collateral: Collateral described accurately on FS may have so much that even the search finding the old FS it will be unable to link the collateral to the FS (exchange for proceeds) Example FS may describe collateral as beans but by the time the debtor seeks a loan from the searcher, debtor may have traded beans for circus elephant Methods to Deal with Problem: Hold FS ineffective if it wouldnt have been effective as a new FS in the changed circumstance holds filer responsible in monitoring changes and making updates Hold that initially effective FS remains effective even though changes places responsibility on search to discover prior circumstances of debtor and collateral Three Most Important Changes in Circumstances: (1) Change of Debtors Name (2) Changes affecting collateral description (3) Conversion of collateral into proceeds Corporation and Other Entities Change Names: Notice that corporate name changes are matter of public record and can be discovered by (1) Insisting that debtor prove its incorporation under the law of some state or country (2) Searching records of that state or country for changes in debtors name and (3) Having discovered debtor with previous name, running a search in the old name as well as the new name

Changes in Debtors Name

Lenders: Should be aware of changes by their debtors to things like names on checks and letterhead Individuals: A change in the debtors name renders a filed FS seriously misleading but the statement remains effective with regard to: (1) Collateral Owned by the debtor at the time of the name change and (2) Collateral Acquired by the debtor in the first four months after the change Rule: The FS is ineffective for collateral acquired more than four months after a name change, as a result (1) An SP that financed the purchase of a specific boat need not be concerned about name changes, but an inventory financer for a boat store would need to be very watchful for name changes (2) Burden on the SP to monitor debtor name changes and other than K provisions there is nothing in the system that penalizes a debtor for failing to report a name change Differentiating Transfer of Collateral: Transfer of collateral under 9507(a) are different than debtor name changes Example If T borrows money against the equipment of her business and later incorporates the business under T, Inc. It is not a name change. It is a new entity with the equipment that will be transfer to it from T. FS filed against T would be effective against the collateral in the hands of T, Inc. BT Lazarus v. Christofides: creditor took SI in assets of BTL, Inc. Creditor delayed filing its FS for nearly 4 months after signing SA. In period between signing & filing, BTL changed its name to Alma Marketing, Inc. Court held the filing ineffective Two Types of Changes: (1) A change in circumstances that didnt control the place of filing but that does make the collateral difficult for search to identify as covered by the filing Example Collateral is pulled out of inventory for use as equipment Even though the change may make the FS seriously misleading, the FS remains effective (2) A change in circumstances that is sufficient to affect the method of perfection that would have been appropriate for the initial filing Example an SI in lumber that is inventory, and the lumber is used to build a building that becomes a fixture 9-507(b) excuses the now-seriously-misleading description but doesnt excuse the failure to make a fixture filing Type 1 Barter: Proceeds received by the debtor fall within the description of collateral in the already-filed FS Result: The SI attached to the new item as proceeds even with a statement to the effect in the SA

Changes Affecting the Description Collateral

Barter Transactions: Exchanging Collateral

Example swapping a Coyote Loader for a Caterpillar Loader with a FS that just says Loader in description Type 2 Barter: An exchange of collateral for non-cash proceeds where those proceeds are property not covered by the description in the FS but are property in which a SI could be perfected by filing in the office where the SC FS is already on file Result: SP remains perfected without a new filing under 9-315(d)(1) Example: an exchange of inventory for a circus elephant that will not be inventory the elephant rule Any time a debtor has swapped collateral, the financing statement may encumber property not described in it. Unless the searcher knows that the debtor did not acquire the collateral in question in a swap transaction, the searcher cannot rely on the description of collateral in any financing statement Type 3 Barter: An exchange of collateral for non-cash proceeds of a type in which filing is required in a different office than the one in which the original collateral was perfected by filing Result: SP becomes unperfected doesnt get the exception and must refile in the appropriate system to remain perfected. TO be continuously perfected from the original date the SP must make the new filing within 20 days from the time debtor received the proceeds Example trading inventory for real property in order to remain perfected the secured party must refile in the real estate system

National Bank of AL v. Erickson Facts: Secured loan on AR, AR is paid by grant of loan. Not perfected because separate filing not make. Bank argued that its perfect SI in a debtors AR should extend to parcel of real property the debtor exchange for the account Rule: To perfect an interest in real property, must record deed signed by the grantor UCC doesnt apply to real property, so the banks perfected SI in the account didnt extend to the real property.

Collateral to Cash Proceeds to Noncash Proceeds

Defined: Exchanging something for money and then buying something else Provided it can trade proceed: creditors SI will reach the new property 9-102(a)(12) Type 1: Original filing remains effective to cover goods of the same description Type 2: Exchange results in collateral that is not longer covered by the original description in the filing statement the secured party has 20 days to file a new FS to remain continuously perfected Type 3: Treated like type 2 changes, except that the new filing is required in a new office within 20 days Defined: Secured parties are granted continuous, perpetual perfection in identifiable cash proceeds 9-315(d)(2); Collateral to cash no new property

Collateral to Cash Proceeds

Example: An elephant subject t to SI, sold for cash. Cash is placed in bank account. Bank account is cash proceeds and there is an SI on the account under 9-102(a)(9) SP may wish to take control under 9-314 to avoid reliance on cash proceeds Control may be established in three ways: (1) Secured party is the bank with which the deposit account is maintained (2) Debtor, secured party, and the bank have agreed in an authenticated record that the bank will honor instructions from the secured party (3) Account is in the name of the secured party

Problem Set 23
Problem 23.1: HM is a compliance officer at Gbank. She is working with Bonnie, owner of Bonnie Boat World. GB finances BBW inventory under a financial statement that describes collateral as inventory, accounts, and chattel paper: a) Changes affecting description of SAME collateral: On routine inspection, HM found that B violated security agreement prohibiting use of inventory by keeping it at her house (using it personally). Did the interlude have any effect on GBs security interest? Under 9-507(b), even if change in circumstance makes financial statement seriously misleading after initial filing, it is still effective if would file in the same office. Under 507(a), security interest follows to Bonnie (from BBW). But if personal equipment, GB now has to file under COT office for boats. Excuses seriously misleading description but not non-filing. But if its owned by the business, the business cannot use it as consumer goods. This is careless drafting under 9-102a23-26, defining consumer stuff as used by individuals. How do you sort it all out? A careful lawyer would initially file it as equipment. It is probably equipment since the debtor is a business, but maybe its consumer goods, since the drafting is not clear. If consumer goods, dont worry about it. Change of use makes it misleading but the financial statement is effective under 9-507b. b) What happens when ownership of boat transferred from company to Bonnie? GB is still perfected. This is not a change of name (507c) but rather a transfer (507a) and the security interest follows. A transaction of this size would have paperwork. This is an unauthorized transaction, and financing statement is still good. c) BBW traded boat for forklift. Went from inventory to equipment. Barter transaction type 1, where same office, and under 315(d)(1) the secured party remains perfected without a new filing. This is the elephant rule.

d) What if BBW bought the forklift with cash from the proceeds of a boat
sale? No longer effective under 9-315(d)(3), which requires filing within 20 days for collateral to cash proceeds to noncash proceeds transasction.

e) Bank should have, but was not listed as loss payee of former insurance
policy does bank have a perfected interest in claim against former insurer? Insurance loss is proceeds under 9-102(a)(64), so 9-109(d)(8) allows 9-315 to apply. Was security interest in original collateral perfected? If so, under 9-315c the proceeds are perfected. Assume yes, then perfect cash proceeds within 21 days by taking control. Under 9315d, proceeds become unperfected unless comply with provisions. Before the insurance company pays out, is it identifiable cash proceeds? If the insurance company owes you money, its a general intangible. You perfect that in the same financing office. So you can comply with 9315d1. Boats to Insurance is a 9-315d1 situation (barter in same office) and then its goes into identifiable cash proceeds (under 9-315d2 you are perfected), and finally, trace it to the deposit account where it is still identifiable cash proceeds and 9-315d2 protects you. What if another bank takes a second security interest in the boat for extra collateral? If the second bank becomes loss payee, then the first bank loses security interest in insurance proceeds. The insurance payable to the second bank would say that its payable to second bank and Bonnie consistent with their respective interests. So GB says that it is payable to debtor, so it has proceeds interest in it. The answer is that you have a proceeds interest but only to the extent of debtors interest in insurance. If second banks interest is greater than amount of collateral, then debtors interest is zero and so is GBs. Do secured parties as common practice always see if name is on insurance policy? No, there is lots of malpractice out there. The peculiar wording of proceeds interest was insufficiently appreciated. Many secured parties make sure their names on insurance policies. The reason insurance is handled differently in Article 9 comes out of pressure in insurance industry. There can be a proceeds interest unless someone other than debtor or secured party is named loss payee. That opens up possibility that someone else on insurance policy gets money. Problem 23.2: GB inventory loan to SW Appliance. 6 months ago debtor changed name to SW General. How to remain perfected. Under 9-507(c), with a debtor name change, the financing statement is effective to collateral already owned by debtor before change, and collateral acquired in first 4 months since name change. Also, a 9-507c Amendment to change name to keep continuous perfection has to be filed within that 4-month period. But the debtor has to authorize the amendment. Amendments are for adding new debtor or new collateral. Problem 23.3: What procedures to keep up with name changes? A) Check every 4 months minus a couple of days. You may want to make it a shorter time in a jurisdiction that is behind. B) What about continuation statements and new names? There is nothing in article 9 that says new name has to be on continuation statement. C) In the investigation of a loan applicant, how old a name change could be relevant? 5 years.

Problem 23.4: Lender wants to loan secured by substantially all debtors assets. There is only one financing statement filed by Suti, describing the collateral as lawn dogs manufactured by Suti. There are only $25,000 of lawn dogs on inspection. Is there anyway Sutis filing could cover more than the lawn dogs? Yes under 9-315d1, via collateral barter with collateral in same financing office. Type 1 exchange! Also, lawn dogs may cover other collateral fitting under lawn dogs (type 0 unlikely). Also, cash proceeds ok and cash proceeds to bank account, control of bank account sufficient. But cash proceeds to other collateral needs financing statement under 9-315d3, if new collateral does not fit lawn dog description. You want to know if there is outstanding debt and that if there is lots of debt of unsecured creditors. Problem 23.5: A bank lends 1 million taking security interest in equipment , inventory, and accounts, chattel paper, and bank accounts. The lender files a financing statement. One of the debtors assets is a bank account. Does lender have security interest in the bank account? Maybe. Control is exclusive if original collateral. But security interest follows/perfected to cash proceeds under 9-315d2. So, only if control if original or cash proceeds. Are they identifiable cash proceeds under 9-315d2? It does not matter how long the cash proceeds have been in the bank account. The time factor is not important.

Maintaining Perfection Through Relocation of Debtor or Collateral

State-Based Filing in National Economy: Rule that specify where to file and search are found in 9-301-9-307 Initial Perfection: 9-301(1) when a debtor is located in a state, the local law of that state governs perfection of a nonpossessory SI 9-301(2) For a possessory SI, the law is that of the jurisdiction where the collateral is located 9-307 Debtors Location: Individual debtor is located at principle residence (where living) Organization registered organization is under law of state of incorporation is the state of perfected filing Non-Incorporated Organization: Located in its place of business or nerve center test Intent Test: An individual debtor may own multiple homes or changes places of residence so the debtors principle residence is determine by the intent of the debtor to domicile With Change: When a debtor changes principle residence, an SC has FOUR months (one year for corporations) in which to file the destination state if the SC doesnt the SI becomes unperfected 9-316(b) Agreements usually require the debtor to inform the creditor of a change in the principle residence often fail to do it When Collateral Moves States, Not Debtor: For filing operation, this transfer creates same problem and the filing against the former debtor remains effective

Relocation of Debtor

Transfer of the Collateral

Art. 9: Affords the earlier filer a grace period in which to discover the transfer and perfect by filing in the destination state If earlier filer does, the earlier filer remains continuously perfected and defeats even a competitor who was first to file against the collateral in the destination state Both Same for Countries

Problem Set 24
Problem 24.1: William Shatner is the debtor. The collateral of the business is located in Tucson, AZ. Shatner lives in Kansas but will probably move to Missouri. He plans to move to Hawaii in a few years. His wife also works in the business. Who is the debtor? It is dependent on who owns the collateral, and it is not clearly specified in the problem. If William Shatner owns the collateral, he is an individual debtor under 9-307. An individual debtor is deemed to be located at the individuals principal residence. Where should the creditor file for Shatners principal residence? It is uncertain, so the creditor should file in all three places: Kansas he is currently living there, but you already know he is looking for a new place. Arizona his summer home. Missouri where he is looking of a house, and the creditor would want to be on file as soon as the debtor moves. Who is the debtor? Debtor is a defined term, a person having an interest, not a security interest, in the collateral whether or not the person is the obligor, 9-102. The collateral appears to be owned by Shatner Engineering, located in Tucson, AZ. So where do you file? 9-307(b) William Shatner, is he an individual or an organization. Lets assume he is an individual, where are we going to file? 9-307 tells you to file at the individuals principle residence. But where is Shatners principle residence? In the short term he intends to move to MO, why dont we file in MO? He does not have a residence in MO at the moment. In the long-term wants to move to HI, but he currently doesnt own anything there? He currently lives in KA, but he has no intention of staying there. AZ is where hes been the longest with a residence there. You file in KA because residence doesnt necessarily mean domicile so the intention not to remain may not stop KA from being the principal residence. File in AZ as well because he has a long-term attachment to there. You might also file in MO because he has an intent to live there, it probably isnt good now, but it might be in three months.

A) So what is Shatner Engineering? What would you call it? This is likely a sole
proprietorship. A debtor that is an organization and has only one place of business, does that apply. Is a sole proprietorship an organization. 9-307 comment 2: personal and business assets, it contemplates that an individual can be someone who owns business assets. 1-201(28) is the definition of the an organization found in the UCC. This tells us that it is two or more persons who have a joint account interest. So is Shatner an organization? So is he not a corporation because he isnt two or more people? Under the current notion if you keep reading it doesnt define an individual so Shatner Engineering could be something other than an individual. Subsection 28 suggests we have an organization here. What state does the debtor conduct the business from, AZ. But where is the chief executive officer or does it have more than one place of business. The real question is, is there more than one place of business. The nerve center is in MO during the academic year and AZ during the summer. His ex-wife receives a percentage of profits, sounds kinda like a partnership doesnt it. Youd have to dig into that. What is the relevance of deciding shes a partners, then you know you have an organization.

Debtor is not the person who owns the debt, but the DEBTOR IS THE PERSON WHO HAS THE COLLATERAL. He would file at his principal residence --- his Kansas home. Might also file in Missouri or Hawaii. What name should he file under? What kind of legal entity is Shatner Engineering? Is it an organization? What is an organization? Look at 1-201 (An organization is a person other than an individual) 1-201(27) --- or any other legal or commercial entity Is William Shatner an individual, or is Shatner Engineering an organization? A sole proprietorship in business could be thought to be something different than just a plain old individual. If this is an organization, then you have to file at Chief Executives Office, unless there is only one place in business Is his office where he teaches in Missouri his place of business? Or is the officer where he works from home a place of business? The nerve center is wherever he manages most of the operations of business 9-307 Comment 2 tells us that the residence of the individual debtor is the residence of both the individual and his business assets

A) What names should we put on there? We are going to put William Shatner,
Shatner Engineering, and Louise Godfrey (put them all on just to be sure). What name is he going to file under? William Shatner, Shatner Engineering, or both 9-503(4)(A)(b) you have to file under all these different names. It wont be one file its going to be many Will you need specific authorization from the ex-wife to file under her name? If there is a partnership, then AK assumes that he filing on his half of the partnership and so he doesnt need specific authorization from her if he has authority to execute security What if you just pick one name and file under that name? The court decides who gets it right youd have a malpractice lawsuit against you

A) Nevada Corporation, why would you file in NV, all we know is that
Shatner formed a NV corporation under Shatner Engineering Products Inc. You would want to know if the equipment, accounts and inventory belong to the corporation. How do you find that out? Youll have to ask the debtor all the stuff about how the accts arose and if there was a Merger there will be a public record of it. In the end if you cant assure yourself if this business youll file in another place. Could just file in NV instead of saving money. If there is a corporation in the picture, all these other things that youre worried about, youll start worrying about with respect to Shatner Engineering. What if Shatner Engineering Products, Inc. is a Nevada corporation? Before filing, make sure that the corporation owns the collateral that the creditor is taking a security interest in. How do you find out if the corporation owns the collateral? Look at invoices for the relevant equipment and inventory. Look at the invoices from the corporations debtors to see if they are in the name of Shatner Engineering Products, Inc. to determine if the accounts are owned by the corporation. If Shatner Engineering owns the collateral, file in Nevada, the place of incorporation.

How do you know that the debtor owns the collateral in which hes giving you a security interest? Hard Q to answer Could be a fraudulent conveyance that upsets the transfer If youre giving an opinion, you should ask the client what kind of checks he wants you to do to see where the current title is Insurance policy that lists equipment If the jurisdiction has a local property tax that might list the items of value on which the personal property tax is calculated Stock certificate (can take possession of it) Equipment do the best you can Vehicles certificate of title Harder with ordinary stuff that is lying around You need to show your client that youve done everything possible to ensure that the debtor is 100% the owner of this property without anyone else having a claim to it! D. What if the business is unincorporated and Louise owns 1/3 interest as a tenant in common. In what state do you file? Which names should be listed? An organization is two or more persons having a joint or common interest. Thus, Louise and William Shatner, who share ownership in the business as tenants in common, are an organization. If the organization has more than one place of business, the proper place to perfect in the collateral is at the chief executive office. 9-307(b)(3). The creditor should file at both places of business (where Shatner and Louise are both located).

1st- is there more than one place of business? Might have to file in each city Problem 24.2 How should Firstbank monitor the location of the debtors? Would the answer change if the loan were for $25 million instead of $225,000?

Should monitor the location every 4 months or so to ensure that their principal residence hasnt moved Principal residence is both where he lives AND his intentions so you should monitor both Individual Debtors: Check the principal residence of the individual debtor in a time period that is less than every four months. When an individual debtor changes his or her state of principal residence, the secured creditor who filed in the original state has four months in which to file in the destination state. 9-316(a)(2). If the secured creditor does not file, the security interest becomes unperfected. 9-316(b). Registered Organization look at municipal records, tax records. Merger: Check the public records for merger documents in a time period that is less than every year. 9316(a)(3) gives the secured creditor a year to discover the merger and perfect in a destination state. Sale of assets: Close monitoring b/c it may not show up in the public records. Unregistered Organization: Keep an eye on the office of the chief executive officer. Monitor Shatners involvement with the business, and if he cuts backs, retires, or withdraws, you might want to check on where the business is being run from. Who do you check who owns the collateral? Look at invoice documents from time to time. Problem 24.3: Global bank, the client, is lending $1.9 million to Tang Aluminum Products, Inc. to purchase the inventory, equipment, accounts and general intangibles of

Argon, Inc. How should the lawyer conduct the UCC search? What inquiries should the lawyer make? Names to search? Filing systems? Search for Tang AND Argon Want to find out if theyre corporations, etc. If you find that theyre both DE Corporations See if they just moved to DE recently Why are you worried about a merger? Filing in a different state Filing under a different name You want to know what other liens Argon had because Tang takes them subject to those liens. If Tang is not a registered organization youll have to worry about its place of business or its chief executive officers. Where is the first place youd go to verify what Tang has told you. The corporation division of the state to verify the names and the registration. Youd like to know if there has been a name change, because valid claims can exist in previous valid names that exist. Youd also like to know a change of identity through a merger. Youd also like to know if Argons in possession of its intangibles, youd like to know whether they own or lease them and if they own them, you want to know how they got them. You want to know how they got them because if they just bought them they just bought them from some CA company, not a manufacturer, they might encumbered, they might have bought them subject to a security interest perfected by filing somewhere else. If you are really counting on these assets youre going to do some checking by asking for invoices and the like just to make sure they didnt buy them from some other company. Problem 24.4: Afghan law gives priority to the first security interest created and that country has no filing system. Firstbank loans $1 million to Afghan, Inc., an Afghanistan corporation whose headquarters and operations are in New York. Where if Firstbank required to file? Answer: File in New York. 9-307(c) 9-307(b) only applies if the debtor is located in a jurisdiction whose law generally requires information in a filing system. (9-307(b) applies b/c New York has a filing system). Under 9-307(b), the debtor has only one place of business (New York). Since its an Afghanistan corporation, 9-307(b) would still apply. Afghan corporation is located in NY & NY is the place to file 9-307(e) does not apply What tells us that you file in the place of incorporation? E says a registered corporation that is created under the law of a state, Afghanistan is not a state. So e does not apply and were left with b. When you look at c, NY complies to Suppose Afganistan did have a filing system and the company had a place of business in Kabul where its chief executive officer was as well as in NY. C SAYS THAT B APPLIES ONLY IF A DEBTOR RESIDENCE, PLACE OF BUSINESS, OR CHIEF EXECUTIVE OFFICER HAS ONE OF THESE SYSTEMS. If Afganistan didnt have a registry system youd file in DC. Note in the prior problem it had only one place of business which is why you could file in NY. Problem 24.5 What would happen if: Delaware adopted a non-uniform amendment that excuses filing altogether, and all security interests are perfected without filing. Cherokee, Inc. a Delaware corporation whose assets and operations are located in NY grants a NY bank a security interest. The NY bank does not file a financing statement. A

year later, Cherokee, Inc. files for Ch 11 bankruptcy in New York and wants to avoid the banks security interest as unperfected.

(B) says we should file in Delaware, but (E) says (B) only applies if the states has Article 9. If (B) does not apply then (C) tells us what to do But NY does have Article 9 If B doesnt apply, then E controls, and none of the specific rules of E controls You CANT read the last sentence of C to make DC apply if you dont use 1, 2, & 3. *This hypo was put before the drafters when they drafted this section What if you have a jurisdiction that doesnt have a public notice filing system? They put that in to say that it wont apply Did an awful job drafting it because the result is that if DE does do it, then AK thinks that the section should read the DE law applies. To say that DE doesnt apply, you have to interpret 9-307 to mean that you never get to E even if DE has Article 9. You get to the District of Columbia. E is supposed to be the one sure thing about the location of the debtor should be able to go straight to E! Solution: If litigation occurs in New York, New York has adopted the official text of Article 9, which provides that perfection is determined by the local law of the jurisdiction in which the debtor is located. 9-301(1). Since the debtor is located in Delaware, Delaware law governs. And Delawares substantive law provides that security interests are perfected without filing. 9-307(c) was drafted to take care of this problem. E is controlling and he thinks the drafters blew it, all these except as otherwise provided really come home to roost. They shouldnt have done it there. If we got rid of filing a private market would grow up that would serve the interests of the major creditors many of whom rely on the private information market in addition to the public market already. The kind of credit information they get is very important to them, it is the financial situation of their debtors. That is what they are really relying on most. They might find it less expensive to rely solely on the private market system. It certainly wouldnt serve the interests of smaller creditors that a public filing system applies.

Maintain Perfection in Certificate of Title Systems

Compliance: Equivalent of Filing usually consists of getting certificate of title Key: In COT systems, SIs are called liens and filing is called notation of the lien on the certificate of title To Perfect: an SC must deliver to the Department (DMV) its application for notation of its lien on COT SI Need Not be Noted: on the title to be valid perfection is not accomplished by notation on eithers owners or DMB copy of certification, but by applicable for such a notation Advantages to COT Systems: Contains title as well as lien info Art. 9 must determine from other sources the owner of collateral All collateral identified by two numbers Plate and VIN

Certificate of Title Systems

B. Acce ions (p423) ss Just as personal property can be affixed to real property, creating a fixtures problem, one item of personal property can be affixed to another item of personal property creating an accessions problem. Accession problems present the most difficulty with regard to property covered by a certificate of title system v The certificate issued in a certificate of title system implicitly assumes that the collateral is a whole and is mortgaged as such; the certificate of title is not designed to deal with the possibility of mortgages against particular parts of that whole. v To give the accession-secured creditor priority would be to enable debtors to routinely defeat SI just by affixing the collateral to a whole financed at some earlier time. Thre Ty e of Acce ion Prob m e ps ss le s v 1) That which is not sufficiently related to the whole to be considered part of it and therefore not an accession (spare tire); v 2) That which is so integrated into the whole that it is part of the whole for financing purposes (mixer on the back of a cement truck); v 3) Accessions, the property in b/w that is sufficiently integrated that is sufficiently affixed to be reached by a security interest in the whole, but not sufficiently integrated that it can no longer be subject of separate financing (tires on car). The accession-secured party can perfect its interest in the accession by filing in the Art 9 system but must do so before the property becomes affixed. v 9-3 11(a)(2) provides that the filingof a financing st m nt is not e ct e t p rfe a se ate e ffe iv o e ct curit int re in y e st p e y s je t a ce ificateof titlest ut . rop rt ub ct o rt at e v 9-3 35(d) giv s a se e curit int re in thew y e st holepriorit ov r a se y e curit inte s in an acce ion to t y re t ss he w hole re ardle of t ord r in w , g ss he e hich thetw se o curit int re s w repe cte and even though the y e st e rfe d security interest in the accession is attached and perfected before the accession was affixed and before the security interest in the whole was created. v 9-3 35(e bars the holder of a subordinate accessions interest from enforcing it, rendering it virtually ) worthless. 9-335 facilitates the financing of automobiles, aircraft, boats and other certificate of title property as wholes and makes accessions filing impossible. The biggest losers with this system are those who finance items not intended to be used as accessions, but that are. Unde 9-3 any se r 35 cure cre d ditor whosenon-ce rtificateof titlecollate is affixe to s ral d ome othe s cure cre r e d ditors ce rtificate of titlecollate e ctive los s its inte st. ral ffe ly e re

Problem Set 25
Problem 25.1: a) First Bank lends 65 grand to Kahled to purchase a Jaguar. First Bank perfects by notation on WI title, putting it in safe deposit box. Kahled moves to AL. It borrows from Second Bank, perfecting on AL clean title (Kahled gets a new one in AL) and then Third Bank also perfects on the title in AL. Is First Bank still perfected? Here Kahled told the Dept of the second state that he lost his original certificate of title in order to get more loans on his car. Start at 9-316(d) and (e). Under d, the WI security interest remains perfected until it would have been perfected under that jurisdiction (forever, COT doesnt expire), that is four months later. But under e, d does not apply to purchasers for value, if not perfected on second COT within 4 months after second certificate issued. Remember a purchaser is a Secured creditor and here the second and third banks have become perfected. But 9-316 is a priority statute that allows First Bank security interest to remain perfected against lien creditor and trustee in bankruptcy, so First Bank remains perfected in bankruptcy. The bankruptcy code calls on state notions of perfection. By phrasing what happens in terms of perfection, the drafters have succeeded in allocating priority in bankruptcy. See page 428 of TB. The rule isnt a rule about perfection, its a rule about priority but the drafters have no choice but to phrase it as a rule of perfection since that is an area in which State Law can regulate while bankruptcy law and priority is a matter of Federal law.

Is First Bank perfected? It is perfected against the trustee in bankruptcy because we look at: The certificate of title of Wisconsin to see if it is still effective What is the effect of the issuance of the AL certificate if the debtor moves to AL on Wisconsins certificate? If you look at Wisconsins 9-303(b), it tells us that goods cease to be covered by a certificate of title at the earlier of the time that the certificate of title ceases to be effective or the time when the goods covered subsequently by the certificate of title issued by another securitization which would be AL in this case AL asks if the goods would still be perfected in Wisconsin if AL had not issued its certificate. If AL had not issued a certificate, then Wisconsins certificate would still be good to perfect the security interest in the car

Second and Third Banks perfection is ahead of First Banks because the 4 months have expired, so their certificate of title in AL trumps the one in Wisconsin If you dont perfect in 4 months, then youre unperfected and youre unperfected retroactively against the purchaser of value. Remember, by definition, a secured creditor is a purchaser. Suppose First Bank realized within 3 months and got it noted on AL certificate? First Bank fulfills 9-311(b). Under 9-316(d) the lien was noted on AL COT, First Bank has never become perfected, and d applies, and First Bank remains continuously perfected. There are situations where you can make a demand to get COT, but the subordinate lien holder needs to require mailing from lien holder in possession. UMVCTA 21c. This is a very common situation. People move all the time to new jurisdictions. All kinds of things happen when people move from one jurisdiction to another. It is common.

Which prevails? The UMVCTA or the General Article 9? The UMVCTA is much narrower and it inundates Article 9. Sometimes they say Article 9 supersedes it and sometimes it is the other way around. First Bank prevails under UMCTA (Certificate of Title Act) and Second Bank prevails under Article 9 the court has to decide which one wins Even though First Bank is continuously perfected, Second Bank has priority What can First Bank do to protect itself? First Bank, as a secured creditor, has a continuing relationship with AL COT, since it paid every month, so First bank has some incentives to monitor his whereabouts. The minute they discover that hes moving to AL, the minute the envelope with the payment check comes in. The technology is making it harder for First Bank, since they need to rely on the monthly receipt. Still, they can monitor and check his monthly address. How can First Bank persuade Second Bank to registering of their prior lien? First Bank can threaten to bring and action for fraud under 26 of UMVCTA and apply for a new certificate of title to be issues only showing First Banks lien. If First Bank does bring an action of this kind Second and Third Bank will most

likely be subordinate lien holders, the AL Court will order the Dept to issue a new certificate showing the three liens in order of preference. Problem 25.2: Babs has a Nissan in MI where she lives. She titled it in MI and got financing from MI bank, has possession of COT with lien, and she moves to NY without telling the bank. She thinks shell be in NY for only a while so she thinks she doesnt have to register in NY or apply for a new certificate. a) Is MI bank still perfected after 4 months and for how long? Under 9-303(b) the car in NY is covered by MI COT, indefinitely, until earlier of new COT in another jurisdiction or MI law leaves unperfected. Registration is not a COT. Since she had not applied for a new COT the law of the old jurisdiction applies. There is nothing in MI law that is going to render the COT ineffective because of the move. Under UMVCTA 20 the same result will be reached. - 9-303 says the MI certificate of title continues to cover until NY issues a certificate of title. b) Suppose Babs registers the car in NY but NY Dept doesnt issue a new certificate of title just the plates? The MI COT is still valid and the Bank perfected. - Registration has no effect just means getting NY plates. c) Suppose Babe has possession of MI COT and not the Bank. She gets a new COT from NY, turning into NY old certificate, falsely telling them that lien was satisfied? She resorts to fraudulent methods of getting a clean title. Is the Bank still perfected? UMVCTA 20(c)(2)(A)- There may be a strong argument that the old certificate is still existing in any meaningful sense since then creditors looking at the MI title will be mislead. An NY Court interpreting UMVCTA law should say that the MI certificate ceases to be effective when the NY application is turned into the Dept. Were back in the same area as 25.1 20(c)(2)(A)- existing pretty hard for MI Bank to argue that the certificate of title doesnt exist. MI Bank can go to NY and have the certificate of title revoked for fraud. MI certificate still remains in existence if the Bank is still holding onto it Assuming that there is nothing in MI law that says surrendering in another state makes the lien unperfected, there is still an argument that the lien remains perfected if possessed by NY. A COT is like a bill of sale given to owner. So it is still perfected under subsection d, but you still have subsection e, protecting purchaser for value. But MI Bank still has argument against other lien holders and TIB. But under UMVCTA, if name of lien holder is shown on existing COT issued by that jurisdiction (MI), his security interest remains perfected in NY. This means that searcher cannot rely on COT.

The thing is that here the UMVCTA and the UCC conflict on this particular point. Which controls? There is no clear answer, they are both state law so one has to try and put them together as best you can.

a) Suppose Babs lies and says there is no liens on MI COT, which she lost a
while ago and NY issues a new COT. Is the Bank perfected? The MI certificate is still perfected against lien holders and TIB but not against purchaser for value (secured creditor). 9-316e However, under section 26 of UMVCTA there is a way for MI to revoke COT due to fraud. This section does not say that if you get it revoked you perfect a security interest noted on it. The lien does not say anything about priority of second secured creditor against somebody in the position of MI bank. Maybe that will be dealt with under article 9-316. The ability to get the clean certificate revoked means what? If MI bank gets NY COT revoked, what happens to its security interest? Problem 25.3: What should MI bank do to perfect lien on COT of MI residents for automobiles? What if they move from MI to another state? The Bank plans to lend only to residents on cars that initially titled and were registered in MI, will make sure the Certificate carries a notation of the Banks lien and it will retain possession. They are vulnerable to second clean certificate and will loose out to buyers for value on the automobiles. You can monitor debtors but that probably would not work out. So know your debtor. There is a section in the UCC that says that except as otherwise provided in the UCC a SA remains effective b/w the parties if there is something else that is missing. The agreement itself is going to have some value. The plan of the Bank is a good plan and will hold up against trustees and lien holders. 1-201(32),(33) = defines purchasers as anyone who takes for sale, lease, lien, security interest, mortgage etc. So a secured creditor, a second creditor that comes a long is a purchaser and can be a purchaser for value. The Bank that puts up the money and takes a SI in the car is a purchaser. Problem 25.4: Shoreline Boats, with own credit corporation, wants to finance boats sold by its dealers in 23 states

A) They want to know how to perfect PMSI. If in COT statute state, then you have to file
COT. 9-309 says a PMSI interest for consumer goods is perfected upon attachment but 9-311b says that the property that is perfected by certificate or title system must be complied with and only perfection will occur if compliance is carried out (compliance with the certificate of title act). Under 9-303a, you can go to another state and get a COT in another state, allowing you to beat out a TIB or a lien holder under 9-303c but not a purchaser for value. If Shoreline isnt in a state where certificate of title operates then to perfect a PMSI you file if a boat is considered a consumer good. You will tell Shoreline that they should file b/c there may be boats that are not bought for the purposes of consumer goods. Normally you dont have to file a SI in consumer goods if you are dealing with high ticket items as collateral it is worthwhile to file a FS. If there is a filing then there will always be perfection in these goods.

If there is no COT, cant be sure how the goods will be used If youre in a COT jurisdiction, there is no automatic perfection for consumer goods

B) How should Shoreline Boats protect itself against later movement or

retitling of the boats? Suppose we go from one pure Art 9 state to another pure Art 9 state = You have to file within the 4 month grace period (9-316a2) during which to discover the move from one jurisdiction to another. Suppose you move from a Art 9 state to a certificate of title state= The Bank would have a 4 month grace period to apply for a certificate of title Suppose you move from a Certificate of Title state to a Art 9 state= as long as that certificate of title is still good, it remains good, then Shoreline will remain perfected on the collateral. If a second lender wants to check the item to serve as collateral, he would have to check to see if the debtor has moved recently from one jurisdiction to another to see if there is a certificate of title outstanding. Certificates of title on trucks for example can be obtained in Maine no matter where you live. This is why you need to be careful, the boat in this case can be titled anywhere in the US and it will be effective. If the debtor moves from one certificate of title state to another certificate state and the debtor doesnt ask for a new certificate in the new state the creditor will remain perfected on their certificate. If they go out and get a new one then the 4 month time frame operates. When Shoreline finances in a filing state what should Shoreline do? They perfect by filing in the state and then go to a state that allows titling of certificates of title and filing on the certificate of title to get additional protection. If you move from a COT of title state to an Article 9 perfection state, then as long as the COT is outstanding, the secured creditor will remain perfected.

Problem 25.5: How to perfect on bulldozer, owned by IL corp. and used in MI? Coldwell offices are in IL but bulldozer is in MI? We need to look at the two statues that conflict with one anther: 1. Under UMVCTA 5 tells us that a COT is optional and if you exercise the option and get a COT the perfection is not effective until the lien holder has complied with applicable law, that is with Art 9. The notation perfects although it is not going to be effective until the secured party complies with Art 9.2. Under article 9-311(a)(2), the filing of a FS is not necessary or effective when you must file on a COT. If you are perfected under a COT, filing isnt effective under Art 9. Hopefully Courts would find that the drafters of the UMVCTA meant to say that special mobile equipment is to be perfected under Art 9 and a gratuitous COT filing will help searchers. If Art 9 controls in this case then youd file where this organization is registered and file there. If its some other type of unregistered organization the you file in IL since thats where its main place of business is. In the end file in both places. Get a COT in case this isnt special mobile equipment and to prevent the debtor from getting a COT later at some point. 6 of UMVCTA could be used to find out if there has already been a certificate of title issues, you cant rely on the debtor telling you. The problem is that a COT could be outstanding in any jurisdiction in the US.

Key: To say that one creditor has priority over another is to say that if the value of the collateral is sufficient to pay only one of them, the law requires that the value be used to pay the one who has priority

Priority under State Law: Foreclosure Sales

Two Basic Principles (1) Any lien holder may foreclose while the debtor is in default to that lien holder Prior lien doesnt block exercise of rights under subordinate one any creditor may act under default (2) No lien holder is compelled to foreclose: matter of discretion Sale: Discharges from the collateral the lien under which the sale is held and ALL subordinate lien BUT NOT prior lien 9-617(a) Transfers: Sale transfers the debtors interest in the collateral to the purchase SUBJECT to all PRIOR liens Proceeds of Sale: Applied first to the expense of the sale THEN To payment of the lien under which sale was held THEN To payment of subordinate liens in order of priority 9-615 Debt Underlying Each Lien: Reduced by amount paid to the lien holder from the sale but the balance remains owing the lien holder is entitled to a judgment against the debtor for the deficiency unless there is a statute providing otherwise After Foreclosing and Subordinate Lien holders have been paid: if there is money leftover it is returned to the debtor (ignored the claims of any unsecured creditors) If Purchased Doesnt Pay a Prior Lien: The purchaser doesnt become liable on the debt to the lien holder the debtor remains liable. Debtor is unlikely to pay a debt owed on someone elses property the prior lien holder will have to foreclose on the property now owned by the purchase Typically the purchasers pay the prior liens Rules Above: Only for typical priorities and some states have different rules (e.g. foreclosure sale discharges all liens with payment to the first lien holder and on down the line even if the first lien holder wasnt the foreclosing lien holder) All Jurisdictions: have in common that those creditors who liens are discharged by the sale share in the proceeds of the sale in order in which their liens have priority

Basic Principles of Judicial and Foreclosure Sales

Reconciling Inconsistent Priorities

Mortgages typically have priority over subsequent judgment liens because when a debtor has a judgment lien against their property they cant get a mortgage anyway Bank Leumi Trust v. Liggett: which made mortgage loans on real property after judgment liens had been perfected against the property sought to share in the distribution of the proceeds from the sale of the property Rule: Court may otherwise direct the distribution of the proceeds of the sale when it appears to the court that someone other than those specified in the statute has an interest superior to the specific persons

Grocers Supply v. Intercity Investment: Right of Possession Between Lien Holders Facts: perfected an SI of over $600K to secure its inventory financing of the Grocer and CW. Intercity obtained a judgment in the county court against Grocer for 26K and later in year the attorney for levied writ of execution. Sheriff took possession of the inventory of that store. Rule: A prior perfected creditor has a right to take possession of its collateral from an officer who has levied on the property at the direction of a judgment creditor. When senior and junior creditors clash, the senior creditor has right of way. Held: Court found that Grocers Supply as a prior secured creditor has the right to take possession of the collateral with a superior right to that of Intercity a mere judgment creditor and that Grocers Supply could regain possession of the collateral from the constable who had levied on the property. Intercity is also condemned to pay for the damage and pay expenses of holding the property in warehouse. So the senior creditor here has the right of way Frierson v. United Farm Facts: Senior creditor cannot ignore a default by the debtor to the detriment of the junior creditors. Senior cannot just sit on the SI and wait letting time go by although the debtor has clearly defaulted to the detriment of the junior lien holders. Rule: An SC cannot refuse to exercise its rights under an SA while it impairs the status of other creditors by preventing them from exercising valid lien rights Reconciled with Grocers: Right of the senior to possession is not the right to possession for purpose of leaving the debtor in business and frustrating collection by junior lien holders. Senior lien holder must foreclose or stand aside so juniors can do so JLH must surrender possession but may continue with the sale under some states sale procedures, property can be sold even though it is not physically present Negative Pledge Clause: debtor agrees that it wont give a junior SI to anyone else and it agrees that no one else will obtain any sort of lien on the collateral sometimes senior cannot avoid attaching another to the property Junior LH must surrender possession but may continue with the sale dont let it happen if you are senior

UCC Notice of Sale

Lien Holder Other than One Forced Sale: Must know the sale is occurring Senior LHs whose debts are in default may wish to demand possession and conduct their own sales Junior LHs may wish to protect interest by bidding at the Senior LH sales

Liens may be perfected in various ways that make them difficult/impossible to discover. If the foreclosing creditor cannot discover them, the foreclosing creditor cannot give them notice UCC 9-6 forces foreclosing secured parties to give notice of sale only to other lienholders who are easy to find 11 those who have properly indexed FS on file or who have perfected by compliance with a federal statute or state certificate of title statute. o To take advantage of this safe harbor, the foreclosing secured party request a search of the UCC filing system 20-30 days before the notification date (date on which the foreclosing secured party will send notice of sale). If the search results arrive before the notification date, secured party sends notice to the lienholders name in the search result and to any lienholder who furnished the foreclosing secured party with an authenticated notice of its claim. 9-6 (c) does not require notice to the holder of properly perfected valid lien, the lien is discharged 11 without notice

Problem Set 26
Problem 26.1: Junior mortgagee creditor has a debt of 10,000 on a property being sold at auction. The client is willing to pay up to 25,000. There is a senior mortgage of 17,000 that has not been disclosed. The costs of the sale are 200. Up to how much should she bid? She should not bid more than $8,000. She would have the property, but have a remainder of the senior mortgage of $17,000. Notice that a sale clears the mortgage or lien that is foreclosing, and any subordinate liens or mortgages. Senior mortgages, however, remain. In this the $8,000 bid would go to pay first the $200 cost of sale and goes to the sheriff. Then the $7,800 would go to the cover the $10,000 debt. There would be a deficiency judgment in the amount of $2,200 that would remain, but that is for the debtor to deal with and not the purchaser. See 9-617a. The foreclosing mortgagee is going to get the money out of the sale, the person that conducts the sale is going to get the money. So in this case Gotlieb who is foreclosing (we presume the junior mortgagee for 10k) will get 7,800. In this case if the property is worth 25k, you would only want to pay 8k since you have to pay off the 17k later to the senior creditor. The senior creditor has the right to foreclose to recuperate his loan. If the senior creditor knows the buyer in the auction then maybe he would be willing to let Gotlieb as a junior creditor sell off the property and reinstate the terms of the deal with the purchaser of the collateral replacing the debtor. If this were the case, most likely a deal would have been worked out earlier to avoid the foreclosure in the first place. The person who ends up bearing the expenses of the sale is the most junior lien holder, the one at the bottom of the collection ring is going to end up paying for the expenses. Problem 26.2: What about a 75k Rolls subject to two SI, one worth 60k first creditor and 30k second creditor. The sheriff seized the Rolls for a judgment creditor with a lien worth $8,000. The expenses of sale are $200. Neither creditor objects the sale. What do you expect the sale price to be offered? Here there is a car worth 75k with 90k worth of liens. This car isnt really worth

anything. What you buy at a sale is the debtors equity in the collateral. In this case the car isnt worth anything. The foreclosing creditors are going to have to pay the sale expenses even if there is no bid, the sheriff doesnt work for free. So the foreclosing creditor has a credit bid has a bid for at least a couple hundred dollars. The execution creditor has to bid at least $200. What if you bid $0 or only the $200 to cover the expenses of a sale? If you take an outside bidder, whatever you purchase will be subject to security interests of $60,000 first, and $30,000 later. There is no equity there to an outside bidder. What if you bid $10? If no one else bids you get title and the car (subject to security interests). Then you just wait for one of the other secured creditors to come and foreclose. You still have the car until they foreclose. When they come to repossess you threaten violence, and you get the car for some more time. What about $200? This is the cost of sale. The executor is going to pay this out no matter what to pay the sheriff, so they might as well bid this much just in case so they get the car for a joy ride. You are going to have the use of this car for a while, at least for a couple of weeks or a month. There isnt a case for a conversion lawsuit in a case like this, yes you are forcing the creditors to spend money on lawyers but there is no way that this is conversion. They can take the car away from you, but they dont have a debt against you. They cannot come after you for any deficiency. There is a difference between buying property and assuming the mortgage, and buying subject to the mortgage. In the latter, you dont assume the debt. When you assume the mortgage you are agreeing to pay, but if you buy property subject to a SI then you are simply recognizing that the creditor can come after the car. As a bidder you would only buy the property if there were equity in it, if there were excess value in the property. When an unsecured creditor has gotten a judgment and is forcing the sale the thing for the secured creditors is to not allow the execution creditor to conduct the sale. If the execution creditor conducts the sale subject to the 2 SC, they should stop the execution creditors sale. The Senior secured creditor should jump in and ask the court to let him conduct the sale. Suppose the senior creditor in this case brings the sale. He is going to be willing to bid 60k credit bid. If you were the junior creditor you could bid 61k, pay off the senior creditor and then sell the car and get back 14k of your debt and then sue the debtor for the deficiency. If the senior creditor bids over his debt then the surplus goes to the second mortgage holder. If the senior creditor bids 65k then 5k (minus the sale costs) go to the junior lien holder. This car is pretty much worthless - $90k of liability on a car worth $75k. Whats going to happen if youre the winning bidder? Foreclosing creditor is liable for expenses of the sale. What do you get besides possession and a bill of sale? The keys. Lets see the creditor come and take it. Itll take them a couple months to get a writ of replevin, and you get to drive around a Rolls for two months for a dollar. Not well set-up to protect secured creditors in Article 9. The thought is that no one can buy this except subject to the security interest, so how can they be harmed? This example is how some guy could be careening around in this car he bought for a dollar and seriously depreciating it. Suppose the senior secured finds out. Theyre going to bid up to the amount of their debt (credit bid). The execution creditor can credit bid if the seniors arent the foreclosing creditors, theyre not going to be able to do that. Better tell the firsts to hold the sale themselves. The negative pledge clause event of default for debtor to let someone else get a lien on the collateral

Problem 26.3: The debtor is current on his loan. You represent DHB, which has a first secured interest on mobile equipment for $27,000. The collateral is worth $40,000 at least, even is sold a judicial sale. DHB feels safe because at an auction, the equipment will bring at least 40 grand. It becomes clear as you read through Art 9 that the secured creditor doesnt have to give notice. The creditor knows who his debtor and where the collateral is. If its consumer goods then the creditors arent entitled to notice. If its something thats not consumer goods then they are entitled to notice if its something that would come up on the FS on a search. (See 9-611). The issue is when the secured creditor gets notice only in certain circumstances. o 3. You need to be concerned about who has control of your collateral could be taken out of the jurisdiction, improperly maintained, etc. a)You have heard rumors what a junior lien creditor may be forcing a sale of the equipment? DHB should be concerned because the new buyer may not maintain the equipment. The new buyer does not keep up the insurance. This is why there are negative pledge clauses in agreement. If a subordinate creditor forces the sale, you dont know your debtor. Dont let someone else retain a lien on it. A negative pledge clause is an event of default. So the secured creditor can foreclose at that moment. Its not DHBs sale, so any money goes to subordinate creditor, DHB will get a SI in the collateral still even when it changes hands, the purchaser takes the property subject to SI. Most courts will let them step in and stop sale and conduct the sale themselves. DHB lien cannot be displaced, but remember it can be hurt if someone gets the property and tears it up. DHB also runs the additional risk that it wont be able to find the equipment because it is mobile. DHB might not even know about the sale. No notice is required under the U.C.C. It is set up that way because it hypothetically doesnt matter. b) What if DHB purchases to protect its position? If DHB knows there is a sale, it could bid at the sale. Remember the fact that DHB is in first position; they are buying into second position. You are paying in full dollars. You are just making that much of a bigger investment in the collateral. c) Can DHB prevent the sale? It cannot prevent the sale, but can take possession of the collateral. 9-401 is the relevant section if the junior lien holder is a judgment creditor and wed have to look at the state statute in this regard to see if the judgment creditor would have priority. If we assume that he is an article 9 secured creditor instead and forces sale then it cannot be prevented. D) Is DHB entitled to receive notice assuming the creditor is an Art 9 creditor? A judgment lien creditor does not have to give notice (unless it has received written notice from the other secured creditor that is has an interest in the collateral). A secured creditor has a limited obligation to search and make a limited effort to notify record holders who show up in the search. This is a courtesy of banks to banks. 9-611 and Comment 4. *So what could DHB do? The way to get ahead is for Diamond Head to foreclose before the lower creditor. You can demand possession. You could do a replevin, and you might get posted ahead (because replevin is faster). You could also self-help. If you foreclose, you are okay because the second interest

will be discharged. There is a problem that you cant foreclose if the debtor is not in default. What you need to do is put in a couple of other clauses. The first is a cross default clause that says if you go into default on a loan with someone else you also go into default with me. The second says that no judgment liens will ever be placed against the collateral. But, if you dont have these in the contract you are in trouble. Problem 26.4: A Friend needs to borrow $10,000 from you. She will give a second against a house she bought for 120,000 subject to a first in amount of 80,000. The house is worth at least 90,000. 4. Should you lend a friend $10k to meet financial need when theres already an 80K first mortgage on the house? The house is worth considerably more than $90K. Youll have to bid $90 to protect your $10K whats a better scenario? Pay on their behalf and add it to your mortgage? a) Say the friend defaults on the 10k and you have to look to the house for repayment. What can you do? You can try to foreclose on the house. At an auction, in the worst case, if no one shows up to bid you should bid $10,000. To make a credit bid you dont have to be the senior party, you just have to be the foreclosing bidder. I am credit bidding, you arent bidding into the first position as in the above case. I am the legal owner of the house subject to an $80,000 mortgage worth at least 90,000 so in theory youd have the good to sell it and then pay the secured creditor. Would you really be willing to foreclose on your friends house? There is also risk in taking over the house and then trying to sell it again. You also run the risk that my buddy will tear up the house. If someone else bids more than 10k then you should let them take it since you will get your 10k and they will take the hose subject to the 80k senior creditors lien. b) Will that assure 10 grand recovery? Nope. c) What happens if your friend makes payment on your mortgage but defaults in payments under the first mortgage? Now you run the risk that the first creditor will foreclose. You also run the risk that they will bid $80,000 (or below). Because I have a second security interest I will end up with an unsecured deficiency of $10,000 and no money. If you think that the property is worth 100k and the senior creditor has bid 80k maybe you could bid 90k, (80 for the senior and the other 10 as a credit bid) you are going to have to put up 80k in cash and pay the expenses. It doesnt look like a good deal. This is why second mortgage lending is for professionals with capital, here you, a friend are unlikely to have 80k in cash to get your 10k out. If your friend is about to default, what can you do? You can make a payment yourself and add it onto your mortgage (This is what is termed a wrap around mortgage). The second mortgagee is really extending a line of credit under a wrap around mortgage. d) Can you protect yourself against default in the first mortgage by a provision in your loan agreement? Maybe you could put in a clause that reads that when any term of the first mortgaged is breached you can foreclose. Problem 26.5: What exactly happened in Grocers Supply? A junior creditor took possession. It was decided the senior had a right to the inventory, so the sheriff made the junior return the stuff. The senior gets access to the property if he

wants it. In Grocers Supply the senior wanted to foreclose. The junior then could have bid at the sale, or its also possible that a third party would have come in and bid high enough to pay them both off. Now we have a senior who is not foreclosing. He is just saying no and letting the Grocery Store continue running the business. The Junior creditor wants to foreclose and pressure the debtor but there is a senior credit and on the property and is in possession of the collateral. What can you do? We would argue to the court that a senior creditor also has a superior right of possession because he has priority. Junior would argue that if the senior doesnt choose to foreclose, he passes that right to the subordinates. The response is that as the senior should be able to control its own destiny. They are choosing to liquidate the inventory through normal sales in order to preserve value for everyone. The point is that then any debtor with a compliant senior secured creditor could frustrate all creditors. We have to solve who has the right of possession. Rather than doing the sale first do a lawsuit first. Go into court, explain the situation, and get a writ from the court saying you have a right to possess the property. That will put it on the table quickly and you will be able to make the determination. If you lose, you only lose court costs. In Court you would bring up the Frierson decision where the senior creditor was found to not be able to hold off from foreclosing for no reason. In Frierson says that the senior creditor has priority but the debtor cannot use the senior creditor to shield himself from foreclosure this way. -The problem is that Grocers and Frierson are from two different courts and are contradicting opinions. The ideal would be to get declaratory judgment in this case asking the Court whether the secured creditor can shield himself by letting the secured creditor remain in possession. The circumstances in Grocers are a little different, here the senior creditor has notice, etc. There are some people that still think that being a senior creditor means that you have control over the collateral and as such can let the debtor continue using the collateral. The senior can foreclose whenever it wants and doesnt have to do what the junior wants. Another possibility from page 443 is we might be able to have a sheriffs sale without taking possession of the property. Someone will buy at that sale, subject to the senior, and probably with an impending lawsuit. The advantage is the lawsuit occurs after, so you dont get dinged with the costs of possession. The problem is no one is really going to bid. When the collateral is something that can be divided up, such as inventory, the seizure of the collateral will only cover the amount of the debt. The order given to the sheriff in the writ says that he is to seize enough to satisfy the debt and not all the debtors inventory. Problem 26.6: Your client, Fidelity Mortgage, is a creditor in Alaska who lends money and takes SI in real property. You take a look at the agreements used by your client and notice that they say nothing regarding property taxes. In Alaska there is a provision that read: Property taxes, together with penalty and interest are a lien upon the property assessed and the lien is prior and paramount to all other liens or encumbrances against the property. If these taxes arent paid in 2 years the state forecloses the property tax lien and the property is sold to the highest bidder at auction. The proceeds are applied first to the tax authority and then to the liens. The clause in Alaska gives the State a super priority and is constitutional and exists in many states.

A) If one of Fidelitys debtors fails to pay property taxes and the state forecloses what is the effect on your clients mortgage? The proceeds are paid after the tax authorities are paid and youd have a deficiency against the debtor for the remaining amount. B) If such a foreclosure is under way against one of your clients mortgages what can you do to protect the client? If the creditor pays the property taxes it ends the foreclosure, so you can do that and get the bank out of the way. Property taxes tend to be small so it shouldnt be too bad. C) What suggestions do you have for reforming your clients standard form contract? Since the tax authorities give the debtor 2 years to pay you can place some clause that says that any failure to pay property taxes gives the creditor the right to foreclose on the property, it is an event of default. The creditor would have to come in and make the payments to the tax authority before theirs can foreclose. This way you can get the property sold before the state. The bank could create an escrow account to have the debtor pay the taxes and insurance on the house. The bank will require that these payments be made to an account in control of the mortgagee on a monthly basis. 6. Under state law, generally property taxes, even though they arise after a mortgage, become prior to the mortgagee. Junior liens are discharged at the foreclosure sale, senior liens survive. If you see property taxes going into default you pay them off and add them into your mortgage. Make a failure to pay an event of default. What happens in most situations is that a mortgagee will require mortgagor to deposit on a monthly basis in advance both the property tax payments and insurance payments in escrow accounts.

Priority in Bankruptcy Law

Key: SIs and Liens survive the filing of a bankruptcy case except to the extent Bankruptcy Plans (1) can reduce the amount of the lien to an amount equal to the value of the collateral as determined by the court and (2) Extend the time for payment During bankruptcy some kinds of lien can be avoided because they are unperfected or are preferences Non-Bankruptcy: Any lien holder may foreclose while the debtor is in default to that lien holder Bankruptcy: Automatic stay contradicts this principle the SC cannot foreclose until the stay is terminated Key Principle: No lien holder is compelled to foreclose Bankruptcy: The trustee or debtor in possession can sell the SCs collateral free and clear of liens effectively foreclosing the SCs lien on the trustees or debtors own time table Bankruptcy Focused: less on priority and more on creating value for all creditors. The bankruptcy system hold secured creditors in place for the benefit of junior secured creditors, general USCs and the debtor

Contrasting Bankruptcy with Non-Bankruptcy

Three Areas Where Priority Rights of Secured Creditors are Diminished

The trustee or debtor in possessions ability to sell collateral: Sale options during bankruptcy (1) Subject to Liens: Collateral may be sold subject to liens of senior creditors. In this case automatic stay expires SC becomes free to foreclose Abandonment: If the lien > value of the collateral, no one may be willing to buy it here the collateral is burdensome to the state and trustee may abandon the collateral; when this occurs Property is given back to the debtor, automatic stay terminated and lien holders may foreclose Free and Clear Sale: May chose this option 363(f) sold much the same way as if senior creditor had foreclosed on the property and sold it free of all subordinate liens. Typically full value of the collateral is received and the proceeds are distributed amount the lien holders based on priority. Difference is that SCs are at mercy of trustee or DIP for timing

In re Oneida Lake Development Facts: Debtor moved to have court allow sale of all real estate for 750k, creditor WPV was judgment creditor and objected. As the date of filing, the real estate being sold was subject to $1.3M in lien, WPV contended that debtor doesnt comply with 363(f)(4) because the sale wouldnt produce a full money satisfaction of its judgment and 363(f)(5) because there arent adverse proceedings against the preference it holds Held: Court can allow the sale when the debtor is getting the best possible price for the collateral WPV is judgment holder whose judgment is subject to attack and the collateral is subject to quick depreciation which makes this a special circumstances Allows sale and debtor has right to sell collateral free and clear despite the SC objection 363(f)(3) In order to Sell, sale must be able to satisfy all liens on property: Here that would mean collateral would have to sell for $1.9M, but in this case the liens are valued by the value of the collateral and in this case, Citi is secured for $1M since the collateral is now worth $1M. Under OL the secured status of SSB is $) and there isnt much you can do about it

Implications of Oneida
Key: Any appreciation in the collateral will go to the purchaser and not the SC had he sat on the collateral and not foreclosed Ability to Sell: In Bankruptcy protects the value in depreciating collateral for junior creditors Weakness of a FC Sale Free and Clear of Liens: SCs who are unsure of amount and priority of their liens may face hard task in determining how much to bid may bid under 363(k) Misinterpretation of 363(f)(3): because this interpretation any sale price would be sufficient for lien interests because they are defining the value of lien interests to be what the collateral can currently sell for

Power to Grant Senior Liens

Under State Law: Liens generally rank in priority in which they are perfected usually procedure is: (1) Inspect collateral (2) Search public records to determine what liens currently encumber it (3) SO before making loan, lender can know what priority its SI will have and that its initial priority will not change (exceptions are rare) Once Debtor in Bankruptcy: tenet that lien first created/perfected has 1st priority no longer holds! Trustee or Debtor in Possession May Grant Liens Senior to Existing Liens In limited cases the DIP or trustee can borrow additional money from a post-petition lender secured by a lien prior to existing liens 364(d) For this to happen, the existing lien holders must be notified and if object, must be shown: (1) Estate is unable to borrow the money without granting a prior lien AND (2) There is adequate protection of the interest of the secured creditor whose lien is being usurped

In re 495 Central Park Facts: Hancock Mutual took an SI in a building which later the debtor bought subject to the SI. Debtor defaults and Hancock accelerates trying to foreclose but is stayed. Then during bankruptcy proceedings debtor needed money to renovate building in order to enter a lease with LC. Held: The goal of adequate protection is to safeguard the SC from diminution in the value of its interest during the Chapter 11 Reorg. Property would be improved by the proposed renovations and that increase in value will result so the value is sufficient protected court allowed debtor to get senior priority and get another loan on the building Aletha Dewsnup v. Louis Timm Facts: Debtor Dewnsup trying to strip down value of SI to say that claim is only worth 200k though house that served as collateral and loan were worth 1M. Debtor wants to only be burdened with a 200K debt when he comes off bankruptcy. If the value of the house or collateral rises again the person who gains the value is going to be the debtor. Rule: Debtor claims that the creditor loses the value of his SI above the value of collateral when he enters into bankruptcy; 506 says that that a claim is a secured claim to the extent of the value of such creditors interest in the estates interest in such property Held: 1M is secured and is a claim of the creditor it is allowed for the full 1M although its only really secured for 200K. None of the lien is voided. Timing: Time that is critical for the creditor is the moment of foreclose because any increase in value between the time of institution of bankruptcy proceedings and the time of FC has to go to the SC not the debtor

Shift in Focus in Bankruptcy to Protect Junior Lien Holders

Occurs when:

Senior Lien Holders: Thought by court to be adequately protected against loss and Stay: is likely to facilitate the collection efforts of subordinate creditors Focus: on creditors whose priority is sufficiently high that they may be able to be paid through an efficient liquidation or reorg but not so high that they will be paid in any event

Problem Set 27
Problem 27.1: Junior mortgagee creditor has a debt of 10,000 on a property being sold at auction. The client is willing to pay up to 25,000. There is a senior mortgage of 17,000 that has not been disclosed. The costs of the sale are 200. Up to how much should she bid at a sale free and clear of liens in bankruptcy? Bid up to $25,000 to win. The sale is free and clear of liens so it wont be subject to a senior lien after the bankruptcy sale. The costs of sale will be paid for first. Then the rest will be distributed in order of priority on down to the general unsecured creditors. The buyer does not have to worry about costs of sale, they will be paid by the trustee. The bidding will probably begin by having each mortgagee credit bid on the property. In bankruptcy the person can simply bid on the property paying what the property is worth. Some would argue that under bankruptcy 363(f)(3) you can only sell if the aggregate value is greater than the value of the liens. The estate gets to determine the sale. One consequence is that if the estate can boost up the price, it lowers the residual claims that will persist against it. Given the estates interest, you can bet the estate will bring more money than at a sheriffs sale because they can advertise, they can fix stuff up, and the stuff will be sold free and clear. Furthermore, it doesnt have to sell on a particular day. The incentive is to maximize the price for the estate. What it takes away in value from the secured creditors is that they can no longer control the timing of the sale, and their interests cannot persist. Problem 27.2: You represent SSB that holds an 800k second security interest in railroad cars. In the depressed market the cart are worth about $1 million. The first SI is for about $1.1mill held by Citibank. SSB made the loan two years ago when the market was high and the collateral was worth $3mill. SSB thinks the market will come back around. The debtor who has the cars files for Ch 11 and proposes to sell free and clear of liens for current value. If sold for $1mill who will get what? Citibank will get $1mill and be unsecured for 100k. SSB will be unsecured for 800k. Citibank would argue that the true value of the collateral is worth more than 1mill, since it was purchased for 3mill. 363(f)3 tells us that in order to sell, the sale must be able to satisfy all liens on the property. In this case that would mean the collateral has to sell for 1.9mill. Oneida Lake, however tells us that liens are valued by the value of the collateral and in this case Citibank is secured for 1mill since the collateral is now worth 1mill. Under Oneida Lake the secured status of SSB is $0 and there isnt much you can do about it under this holding. In this case the Citibank is secured for 1mill and SSB is unsecured for 800k and thats it. *What the debtor in the Aletha Dewsnup case is analogous to what the debtor is trying to do here in this case. What is different here is that in Dewsnup is that the trustee is going to abandon the property at some point. Here the debtor is trying to sell the collateral right now at this price. The question is whether these assets should be sold in bankruptcy proceedings and if it is sold then that will be the end for SSB. The debtor doesnt have any equity in the railroad cars. There is an argument made partly in Dewsnup that in these cases where the debtor is in deep then the property should be abandoned and the debtor barred from doing anything with it.

Why is the debtor proposing to sell the property here? If the sale goes on then the person likely to bid will be Citibank and SSB. Citibank would credit bid. People associated with the debtor though are the ones that know most about the value of these cars and will be in there bidding (others or the same industry and profession as the debtor). Can SSB do anything about it? SSB could bid more, but they will have to bid more than their credit bid. They will have to end up paying cash to Citibank which isnt a very good idea. There also may be some banking regulation regarding how long one of these two banks can hold onto. Maybe they cant keep them for 3 years waiting for the cars to increase in value. If the debtor could get away with stripping down the value of the debt to the value of the collateral then the debtor would be in great shape since he would only have about 1mill of debts to deal with. *The Court however should say that the trustee is going to abandon the property since there is no equity in the property and clearly the property is not needed for an effective reorganization. The car should be turned over to the secured creditors with their SI in the car attached. To abandon in this scenario would be the equivalent of having the collateral going out of the estate and then going straight into the hands of the creditors. Then the two banks could negotiate and reach an agreement to hold onto the car and wait for the market to go back up. Citibank has serious leverage here though since Citibank may ask SSB to buy them out if they are so sure the market is going to go back up. All of this depends of course on extending the theory of the Dewsnup decision. Some bankruptcy people think that this decision is terrible but its 13 years old and little attention has been given to it, the bankruptcy courts have discussed it little. *If the court however decides that Dewsnup doesnt apply and that Oneida Lake controls what do you do as SSB? You appeal the decision and at least you can delay the judgment and hopefully the market for the cars will go up while you get another decision. You may have to put up a bond when appealing but this would be to protect the estate from a downturn, but what sort of downturn can occur if the market of cars has hit rock bottom. Problem 27.3: Client owns an office complex under construction and the loans under the property total 5mill. It wants more money but the asset cannot support it, there are too many liens against the property. If we werent in bankruptcy: Asset is worth $2 million; American has first in amount $4 million; and Lien Creditors have mechanic lien in amount of $1 million. The asset would all go to American, they would only get half of what they wanted secured, and everyone else would be general unsecured In bankruptcy, asset is worth $2 million. If we spend another $1.5 million, then the asset will be worth $4 million. Outside of bankruptcy no one would come in and lend because they would be subject to American. In bankruptcy, under 364, a new lender can come in and lend and take first position, as follows. So the debtor would have to grant a new lender priority over American Bank and get the loan for 1.5mill. American bank will argue that adding 1.5mill will not increase the value of the offices to 2mill more. The argument on the other side is that the 500k cushion of equity is sufficient as decided in the Central Park Avenue Case. American may not want to lend more since the debtor has proven that he has failed once and why give him a second chance. Dev. Asset $4 million New Lender $1.5 million American $4 million Lien Creditors $1 million Distribution: New Lender $1.5 million

American $2 million secured ($2 million unsecured) General Uns. $0.5 million If we look at the judgment in 495 Central Park Avenue Corp then its possible to think the judge may allow a senior loan on this shopping mall. The idea here is that under bankruptcy the debtor may be able to pursuade the judge to grant an extra loan while granting a new and more senior SI. Problem 27.4: Refer to problem 26.4 where you loan friend 10 grand on house, where there is already a first mortgage. He defaults on the loan and now he owes another first secured creditor 80k and you 10k. The house is worth 120k but the housing market is slow. If a foreclosure sale is held, that is in nonbankruptcy law you are going to get hosed b/c your debt will get whipped out by the senior creditor. Because it is subject to the senior lien your debt will be wiped out. The senior creditor will probably credit bid on the house and you will have a unsecured credit against your friend. In bankruptcy, he first mortgagee cant proceed to a sale b/c there is an automatic stay. Our client is a junior secured creditor but is secured b/c there is equity in the property. If someone wants to sell you are entitled to adequate protection under these circumstances. The bankruptcy proceeding may allow a restructuring so the both creditors get paid at some point down the line. The junior secured creditor is in a better situation in bankruptcy than under nonbankruptcy law.

Competition for Collateral

How and When

Lien Creditors v. Secured Creditors: The Basics

How Creditors become lien creditors: Generally the prototypical lien creditor is an unsecured creditor who: (1) Won a judgment against the debtor (2) Obtain a writ of execution, and then (3) Obtain a lien by levying on specific property of the debtor Most Jurisdiction: Attachment is legal process where obtain writ and gets it to sheriff who then levies on property. Distinction between attachment and execution is that attachment occurs before judgment is entered, which execution is after. Property seized pursuant to attachment is not immediately sold, it is held by sheriff pending litigation outcome. Garnishment: Process by which a judgment creditor in most states reaches debt owing from a third party to the debtor or property of the debtor that is in the hands of a third party Trustee or DIP in Bankruptcy: Has the rights of a hypothetical ideal lien creditor 554(a) Found: Usually in state statutes and is on first come and first served basis Priority: Usually as of one of four dates (most common to least) (1) Date of levy (2) Date of delivery of write (3) Date of service of writ of garnishment (4) Date of recordation of judgment Writs of Execution: in competition between writs of execution, general rule gives priority to the first to levy on that particular property Minority gives priority based on dates the writs of execution were delivered to the sheriff Key: Priority between lien creditor and non-PMSI Art. 9 SC depends on whether the lien creditor becomes a lien creditor 9-317(a)(2) before the SP does one of two things: (1) Perfects its security interest OR (2) Files a FS and complies with ONE of the conditions of 9-203(b)(3) (security agreement, possession, or control) Fight is About: If the secured creditor ever perfected lien creditor will try to find some sort of deficiency in the SC filing Meaning: An SC that has filed an FS and gotten an authenticated SA but hasnt given value yet, can get priority over a lien creditor

Priority Among Lien Creditors

Priority Between Lien Creditors and Secured Creditors

People v. Green Facts: tries to enforce an SI filed on property seized by state for payment of restitution to the victims of s alleged grand theft, burglary and forgery. Rule: State seizures and demands are not adequate to create rights in unsecured creditors Held: State failed to file a proper petition seeking a TRO or a preliminary injunction or appointment of receiver or any other appropriate protective relief necessary to preserve the property or assets. If unsecured, no injunction there can be no levy. None of the victims individually perfected an SI or filed a judgment lien but the attorney, perfected an SI in all of the property and will get paid first.

Purchase Money Priority (PMSIs)

Priming: PMSIs may prime prior secured lenders they are exception to the first in time principle PMSIs v. Lien Creditors: Can prime an LCs interest only if the PMSI comes into being and attached to the collateral before the LC obtains its lien against the collateral; if the PMSI attaches first, the holder of the PMSI has a 20-day grace period in which it can perfect and thereby defeat a lien that come into existence between the dates of attachment and perfection of the PMSI 9-317(e) Example: Debtor buys boat on credit, LC then levies on boat. Lien creditor will win unless the SC perfects within 20 days of sale.

Problem Set 28
Problem 28.1: The local credit bureau reported the entry of a judgment of $125,000 in favor of Sheng Electronics, an unsecured creditor. The debtor also owes $50,000 (unsecured) to RFT. How can RFT get priority over Sheng? RFT can gain priority by perfecting a security interest before Sheng levies. Under 9-317(a) perfect a security interest prior to the levy for Shengs judgment, which will give RFT priority since it is complying with 9-203(b)(3)(A). You would have to get RFT to obtain and file a FS (with authorization), and a SA. Why would the debtor give RFT a security interest? RFT has been patient with the debtor and Sheng has already executed a judgment. Negotiate -- The debtor has leverage (the ability to give a secured interest to RFT and put RFT in a much better position). The debtor could use this leverage to obtain more credit, etc. from RFT. Well see later that under bankruptcy a trustee could upset the granting a SI in collateral within 90 days of the filing of bankruptcy. Grocer Supply -- RFT does not have to levy. RFT can say the debtor is in default and has a right to possession. Therefore if the sheriff levies in favor of Sheng, it must give the property to RFT. The secured creditor will hold off the lien creditor and assert its position to get the property back if there is a levy. Grocers Supply is not a long-term solution. The subsequent case (Friersan) says the secured creditor cant keep holding off lien creditors forever. The solution for the unsecured creditor who wants to levy is to get a declaratory judgment and not risk attorneys fees the second time around. -Under the Ohio statute, if RFT delivers a writ of execution to the sheriff on the same day as Sheng, the amount will be distributed pro rata (see statute on p466). The creditor

needs a judgment in order to get a writ of execution. This is not likely to happen in one day even if the debtor cooperates. Problem 28.2: Phyllis loans Melinda $20,000, which is secured by a scaffolding and construction equipment. On March 7, Melinda signs a financing statement, security agreement, and promissory note, but Phyllis does not distribute the money, because she has ordered a search. Phyllis files the financing statement the same day and orders a search. On March 10, the sheriff levies on equipment pursuant to a writ of execution in favor of Star Plastering. On March 11, Phyllis receives the report. (a) As matters now stand, is Phyllis perfected? No, under 9-308(a) she has not met all the requirements of 9-310 through 9-316 since she has not given value. UNDER 9-203(B) (1) A SECURITY INTEREST ATTACHES AGAINST A DEBTOR AND THIRD PARTIES WITH RESPECT TO THE COLLATERAL IF VALUE HAS BEEN GIVEN. A SI hasnt even attached. If Phyllis has made a promise or commitment that she will disburse, then this would be considered as having been given value for purposes of attachment of a security interest. (b) If Phyllis makes the $20,000 loan despite the levy, will she have priority over Star in the equipment? Yes, if Phyllis gives value she will be perfected, under 9-317(a)(2)(B) it will also have a priority if it has filed a financing statement and the debtor has authenticated a security agreement describing the collateral under 9-203b3. You can file and get a security agreement before the levy, and give money after the levy and win. If you file according to a security agreement that is enough to get a toe hold. When you actually give value the security agreement goes back to the date of the filing even if the levy has already occurred. The filing pursuant to a security agreement locks your date, these two things the filing of a FS and the signing of a SA allow you to have priority when you later give value. The policy for this is a way to make sure you are in first in line. You dont want to have to put dollars on the line to find out if you are first in line. Problem 28.3: National specializes in asset-based lending to small businesses that are in financial distress. All of Nationals loans are non-PMSI loans secured by personal tangible property. All are made in a state in which a creditor becomes a lien creditor only when the sheriff takes actual possession of the property. Nationals loan procedure: First, they file a financing statement, then search to make sure collateral is in hands of debtor, then disburse loan amount within two weeks. Can an execution creditor come ahead of National? Once they see the collateral in the debtors possession (a judgment creditor has not already levied), National is ok under 9-317(a)(2)(B) if debtor also authenticated a security agreement. It seems they dont have any problem, it looks like a good plan. Possible problem: Maybe there are loans over these goods are PMSI although their loans are not PMSI. Hence, goods purchased with a PMSI that have a 20-day grace period under 9-317(e) if a person files a financing statement with respect to a PMSI before or within 20 days after the debtor receives delivery of the collateral the SI takes priority over the rights of a buyer. Problem 28.4: What if National is in a state that adopts a statute like CAL, which creates a judgment creditor (and applies as a lien) by filing notice of the judgment with the Secretary of State? The situation does not change from Problem 28.3. The judgment should show up in the creditors search since the CAL statute says that the judgment becomes a lien on personal property when the JLC files a FS with the secretary of state. So in a search then it will show up before the loan is made. Problem 28.5: What if Nationals state adopts a statute like Ohio 2329.10 (in which no preference is given to writs delivered on the same day if amount is not sufficient, prorata distribution).

*Hypo: On Nov. 1, the judgment creditor gives a writ. On Nov. 5, National files a financing statement. On Nov. 15, the sheriff levies. When did the judgment creditor become a lien creditor? -The statute says in all other cases the writ of execution first delivered to the officer shall be the first satisfied it does not say when the judgment creditor becomes a lien creditor with respect to Article 9. It only discusses priority between two levying creditors. Its uncertain, but the statute suggests that the judgment creditor becomes a lien creditor on Nov. 1 before the Sheriff takes possession. It takes the date on which the writ is taken to the Sheriff to grant the status of lien creditor. 9-313(3)(a) tells us that a lien creditor is going to have priority if he becomes one before the SC perfects. Another problem with these state statutes is how extensive is this lien going to be. Does it cover all the personal property of the debtor? So this is a problem in states like Ohio. If you are Nationals lawyer, you would suggest that National change its procedures to protect them from this possible upset of priority. Most sheriffs offices keep records with respect to delivery of documents, so National should add a search of the records of the county sheriff to be sure that nothing has been delivered. Kaufman: Not likely, but it is possible that under the law of Ohio, delivery of the writ to the sheriff in county 1 might establish priority with respect to county 2. The attorney would need to research case law, etc. In Ohio there are something like 70 counties so this evidently is a huge problem. So you would have to tell National that its uncertain and there is some minor risk involved here. Problem 28.5: Bonnie sold a boat to Edith for $35,000 -- $3,500 down and a promissory note for the rest. Bonnie ran an instant creditor check and missed the judgment against Edith for $22,000 unpaid alimony and child support, there was an unregistered Judgment against Edith from her husband. Edith signed a security agreement and financing statement. All these documents are sitting on Bonnies desk. Immediately after Edith takes possession of the boat she is followed to the marina and the sheriff levied on the boat in favor of Ediths ex-husband. Bonnies contract states that any levy on the boat constitutes a default. What can Bonnie do? IF PURCHASE MONEY SECURITY INTEREST WITH A SPECIAL SET OF 9-317(E). There is automatic attachment and perfection when we are dealing with consumer goods. It was perfected when she signed the security agreement. If we have consumer goods, then we can ask for the boat back because we have a fully perfected security interest. She has to have a right to immediate possession and this will be if Edith is in default and the SA contains a provision that any levy constitutes default. So if she is in default then she can demand possession from the sheriff. 9-102(26) Consumer transactions are those where an individual buys something for personal or household purposes 9-309(1)- SI perfects when it attaches when dealing with a PMSI in consumer goods. Citing Grocers Supply we would be asking for it back based on the prior security interest. The judgment is interfering with the senior creditors ability to repossess. As between our right to repo and the judgment creditors right to foreclose, we have the stronger right (Remember that Grocers Supply isnt everywhere). 9-609 gives creditor right to possession, but this has to be keeping the seniors rights intact.

*If they are not consumer goods, you are no longer automatically perfected. You need to file a FS. Once you have the sale go through, under 9-317(e), you have 20 days to file because it is a purchase money security interest. If you file within the 20 days then you are priming.

Problem 28.6: Same facts as above EXCEPT Edith forgot to sign the security agreement, the space on the SA for the signature is blank. Edith (the buyer) is sitting in your clients office in BBW and is willing to sign the SA at this very moment. Id rather BBW get the boat than my ex. (The sheriff has already levied). What do you tell them? It wont do any good to sign now. Now the date that you would go back to is still after the judgment levy and 9-317e would not be applicable. 9-317e tells us that it goes back to the time of attachment. It attaches when she signs the security agreement. We still tell her to sign and file now. But, we are still in big trouble because of the judgment levy. Ethical Issues: Bonnies lawyer cannot advise Edith. Bonnie can get Edith to sign as long as she does not represent the advice as coming from the lawyer. You are not tricking Edith into doing anything she is not supposed to do (i.e., signing the security agreement). Bonnie would be doing something perfectly lawful. Possible argument: There is a provision in the model code that says the lawyer cannot advise someone to do something the lawyer could not do themselves. In this case Bonnie would not be allowed to pass along her lawyers advice to Edith. But, The Model Rules are in effect, which contains a sentence that says it is not a violation to give legal advice to your client. The lawyer is required to explain the legal situation to Bonnie, the client that the security agreement is second in time. -Lopuckis advice: Bonnie has supplied value here, the ex husband has not, the fact that Bonnie get the boat back would be the equitable solution. Edith was supposed to sign it anyway. Bonnie should have Edith sign it and waive it around in the sheriffs face. See if the sheriff asks the right questions or not. Warren: There are witnesses. This is kind of shady since in reality you are backdating the SA, and as a SC she didnt do what she was supposed to do. You may even be exposing Bonnie to criminal prosecution for fraud. -Now suppose you were present when all this happened and Bonnie asks you what she can do? Bonnie can sue for malpractice and come out of this whole; you would have the obligation to advise Bonnie about her cause of action for malpractice. Problem 28.9 The debtor grants a real estate mortgage to M, who does not record. C levies on the real estate. As between M and C, who has priority? Generally, the unrecorded real estate mortgage prevails over the lien creditor since most states give priority to the first lien created. Justification for two different results: there is usually more of a reliance interest in the case of real estate, and they dont want to do anything to mess up a chain of title. The lending of the money was not given with getting a reliance of the collateral when we talk about a judgment creditor.

Lien Creditors v. Secured Creditors: Future Advances

Priority of Future Advances: Time an advance in made plays no role in determining the priority of a SI 9-323 Comment 3 Two Situation When Question is One of Competition against Lien Creditor or Purchaser of Collateral When Security Advances are NOT measured by priority of the FS Usually it is the date of the filing of the FS that determines priority of SI Future Advances: Secured inventory lenders, construction financiers, etc. often make additional loan advances to their borrows

Priority of Future Advances: Personal Property

Exception (1) 9-323(b): gives future advances priority over lien creditors provided the creditor making the advance doesnt have the knowledge of the lien Exception (2) Every Secured Advance Made within 45 Days after a levy: entitled to priority over the lien, even if the SC making the advance knows of the liens existence (even IRS tax liens) Every Advance Without Knowledge: Similarly protected Even if the SC knew about the levy at the time of the advance, if there was no knowledge of the lien at the time of the commitment to make a future advance, then the advance is secured Secured lenders argue this provision is necessary to provide businesses with the money they need to remain in business Non-Advances: Akin to attorneys fees and collection costs that are arranged for in an SI. Debtor agrees to pay these non-advances. Most SAs Provide: In event of default, the debtor will compensate SCs reasonable expenses of collection, including attorneys fees

Priority of Non-Advances: Personal Property

Uni-Imports v. Exchange Bank Facts: ENB SC continued to make advances to debtor after a judgment creditor sought to enforce its lien Issue: Do these non-advances (reasonable costs and fees) qualify for priority over lien creditors under 9-323(b)? Rule: SIs relating to advances created after the intervention of a 3rd party as lien creditor or purchaser should be subordinated to the interest of the 3rd party. Non-Advances dod not constitute new SAs under 9-323(b) and they relate back to the first date of perfection and share that status against judgment creditors Security Advance: each advance gives rise to a new SI, which arises when creditor extends value perfection when a debtor signs an SA containing a description of the collateral Held: Non-advances relating to advances made before the levy have priority of the first advance, while non-advances relating to advances made after the levy have only the priority of the future advances Note: Many security agreements contain provisions that the debtor will pay the secured creditors reasonable costs of collection, including attorneys fees, in case of default. According to this case, these expenditures are not really advances. UCC 9-301(4) therefore does not apply to such expenditures Relate Back: decisions though confirm that nonadvances do not constitute new security agreements under 9-323(b). Rather, they relate back to the first date of perfection and share that status against judgment creditors. Although protecting nonadvances benefits revolving credit lenders and this presumably improves debtors chances of obtaining such loans it does so at the cost of squeezing out lien creditors. It would be unfair to permit after enlargement of the SI after the lien creditor has successfully levied on the property

Problem Set 29
Problem 29.1:Real property and future advances. The mortgagor borrows $50,000 from the Mortgagee, and executes a note and mortgage that states that future advances can be made by the Mortgagee for $25,000 in the future. Mortgagee has no obligation to make the future advance. The mortgage states it secures interest at 10% and attorneys fees in a collection action. J obtains a judgment for $100,000 against mortgagor and records a lien on the real estate. Then Mortgagee loans an additional $25,000 with knowledge of the lien. Mortgagor defaults owing $10,000 interest and $5,000 attorneys fees. As between Mortgagee and J, who has priority in the real property? The mortgagee will get priority. The mortgagee will also get all nonadvance costs, since knowledge is not a factor in the first 45 days! In real property according to the Shutze case the mortgagee will get $75,000 pursuant to the mortgage agreement. (The Restatement 3rd of property also says this is what is going on this isnt to say there arent minority jurisdictions, but this is the majority view). The mortgagee gets nonadvance costs as well. Notice that for a mortgagee, knowledge doesnt matter. Involuntary third parties really cant wiggle their way in with judgment liens. *What if we were in a jurisdiction that distinguishes b/w optional and obligatory advances? *Pro-rating is the most likely way to handle it. We talked about a similar concept when we were dealing with comingled funds the proceeds of the secured collateral are the ones that stay in there as long as possible, but AK thinks that this would be apportionable pro rata. If states start to recognize this distinction for personal property, where the statute doesnt speak to that, it would seem that it would be natural to introduce the same kind of distinction into real estate law. The states that do it in the personal property context will probably do it in the real estate. In this case the advance was optional the JLC would have priority over the second 25k and would have priority over a portion of the attorneys fees and interests related to the 25k. Problem 29.2: Personal Property and future advances. Debtor borrows $50,000 from Secured Party and executes a note and a security agreement that state that future advances up to an additional $25,000 may be made by the Secured Party in the future. However, Secured Party has no obligation to make such advances. The security agreement also states that it secures interest at 10%. Secured Party perfects. Thereafter, J obtains a judgment of $100,000 against Debtor and becomes a lien creditor by levying on the collateral. Secured Party has actual knowledge of the lien. Sixty days after the levy, Secured Party lends and Debtor accepts an additional $25,000 advance. Debtor defaults on the loan owing the full balance and $10,000 in interest. Secured Party incurs $5,000 of attorneys fees that are recoverable against Debtor under the terms of the security agreement. As between Secured Party and J, who has priority in the personal property? Secured creditor will have priority on the 50K. The secured creditor gets protection BEYOND the 45 days if the secured creditor DOES NOT HAVE KNOWLEDGE. Also get attorneys fees and probably get funds allocated pro rata. First $50,000 goes to the secured party (both real estate and personal property). As for the $25,000 (optional advance made 60 days after with knowledge of the existence of a JLC), the secured lender wins if this were real estate, but when dealing with personal property and the UCC, the Judgment Lien Creditor wins according to 9-323(b). This

additional advance made by the secured party was made after 45 days of the JLC perfection and the secured party did not make a commitment prior to the JLC perfection, the secured party had no obligation to make advances. So there are three circumstances here; the SC had actual knowledge, had no commitment to make advances and the 45 days have passed now. Concerning the expenses (nonadvances, the interest and attorneys fees) when dealing with personal property they are split. All interest and fees attributed to the $50K get the same priority as the $50,000. Whatever is associated with the second advance gets that same position behind the judgment lien creditor. If this were real estate, the mortgagee would get them all. What about the nonadvances then? How do you distribute them? Maybe you can pro-rate them, etc. There is nothing in the statute that tells us. Problem 29.3: A year ago, Carol lent $1,000 to her friend, Bob. Bob gave her a security interest in his new boat, and saw that the financing statement was duly filed. BCA recently recovered a judgment against Bob in the amount of $45,000. On March 1, they levied on the boat. It now sits in the Sheriffs compound. Now, Bob is back to ask Carol another favor. Bob wants an advance of $31,000. Bobs lawyer says the advance will protect the boat from judicial sale. He says even if they go through with the sale they wont get anything. Carol asks if this will work? What would happen if Carol did not make the additional loan? The sale will happen, but Carols 1,000 interest will continue. If the boat is worth $32,000, the sale will go as high as $31,000. What happens to the JL and Carols liens? What happens if the bidder only bids 10k? Then the lien will be paid off and the lien will be discharged. The JLC will get proceeds but they dont attach to the boat. We also have to worry about the costs of the sale. There is no credit bid on cost of sale. So here the JLC could bid $31,500. Once the bidder purchases the boat, advise them to GIVE NOTICE because you dont want Carol to lend more money because if she does, then shell have priority over the future advance!!!!!!!!!!!!!!! If someone comes along and purchases the boat at auction, there is a danger here that the SA contains a future advance clause b/c Carol could have made a future advance at some point b/w the bidding process. The purchaser of the boat would need to tell Carol about the purchase instantly, give her knowledge, so that would trump Carols ability to make future advances on the boat. This is the way that 9-323(d) reads, the earlier of 45 days OR the time that the SC receives notice of the purchase. - A buyer of goods takes free of SI to the extent that it secures advances made after the earlier of: 1. the time the SC acquires knowledge of the buyers purchase or 2. 45 days after the purchase. The SC should not be protected any further once they know that someone else has bought the collateral. *Under 9-317(a)(2) if the security agreement included a future advance clause, and Carol loaned additional money within 45 days Carol has priority over the lien creditor, under 9-323. Note: We dont know if the original agreement had a provision for future advances. If it was limited to the $1,000 loan without a dragnet clause or anything of the sort, then Carol would need a NEW security agreement since SI arise as a matter of contract. Here although there is a new SA Carol could use the same old FS but there would need to be a new SA. In order to get priority over the JLC it

would have to be done after a SA contemplated advances. The new security agreement would be perfected too late and the Carol would not have priority over the judgment creditor. Whats a future advance? Carols second advance could be considered a future advance but we and the UCC is referring to a future advance clause contained in a SA. The drafters of the UCC recognized the notion of the split SI after future advances are made, but only in certain circumstances in which the JLC could come before the SC. The drafters do this simply by giving us rules that tell us who wins certain contests. Problem 29.4: BCA is attempting to collect the $45,000 judgment against Bob. The value of the boat is assessed at $45,000. The sheriffs sale is set for March 29, just a few days from now. In preparation for the bidding and sale, you discover Carols financing statement. You dont want to bid higher than the value of Bobs equity in the boat. But to know how much that is you need to know the amount secured by Carols interest AND how much Bob owes Carol. When you call Carol, she said she would have to consult her attorney before giving you the information. Carol has not called you back. a) How do you plan to get the information? UCC 9-203(b)(3)(A) The levying creditor wants to know how much to bid and what to tell others how much to bid. The levying creditor needs to know how much the loan is at the instance of sale, its not good enough to know that there is a 1k lien on the boat. Can you force Carol to give you the amount of the loan? Maybe if you are the execution creditor you can get her in Court to give the amount of the loan and immediately paying her off and having the court order her to remove the FS on the boat. The amount is not found on the financing statement. According to 9-210, the inquiry must be made by the DEBTOR. The response to an inquiry has to arrive within 2 weeks not enough time. I would also ask Bob. I assume they come into court with a paper saying $1,000 and future advances. We are still not safe because they can still make future advances. A judgment creditor could put Bob under oath and ask how much he owes, but this will not be at sometime before the foreclosure. But this does not help the bidder, b/c the financing statement and security agreement is outstanding and Carol could lend additional money right before the sale. Another option: You could string the sale out for 45 days, and then do the discovery. b) If you cant get the information, what will be your bidding strategy at the sale?

Should bid zero -- The bidder does not know how much the secured creditor is owed, and it should bid zero b/c it would buy subject to the security interest. Look to 9-323(d) the buyer of goods acquires free of the security interest to the extent it secures advances at the earlier of 1) the secured party has knowledge of the purchase; or 2) 45 days after the purchase. The secured party must have knowledge of the purchase. Typically, if the secured party gets knowledge that the boat will be sold on March 29. It will prevent the secured party from making an advance. Buying subject to the $1,000 security interest. So, you should bid $31,000. (Value of $32,000 - $1,000). a) Can a court help you with this problem?

What if Carol doesnt make the loan, and goes to the sheriff to demand possession under Grocers Supply? - The lien creditor would use Freierson especially if Carol lets Bob use the boat. Problem for the lien creditor: provision in Article 9 that says the debtor can require Carol to supply the 3rd party with the details of the security agreement. The lien creditor cant get it on its own. The lien creditor would have to take Carol to court. Then, the lien creditor would pay off Carols 1,000 judgment

Problem 29.5: A creditor, Sheng, runs a search in preparation for a levy. The search turns up three financings statements, each covering all the assets of the debtor Conda Copper, a company that is in financial difficulty. The financing statements have been filed a little over 3 months ago. Each names a different secured party and describes the collateral as all of the assets of Conda Copper. From your discovery earlier, you know that at the time of those filings, CC was in such bad financial condition that you doubt that anyone would have been stupid enough to lend them money unsecured. (a) What do you think is going on? Copper is wrapping herself in security agreements in order to ward off judgment creditors. Looks like Grocers Supply the debtor is friendly with a creditor in order to block a judgment creditor. It is better to be second in priority instead of an unsecured general creditor. (b) What should you do? UCC 9-317(a) and 9-323(b) Uniform Fraudulent Transfer Act 3(a), 4(a), 5(a) Put the last two questions together with Grocers Supply. I have one debtor and one creditor who are in cahoots. You can say you are harming my stuff. Frierson limits Grocers Supply when they are both trying to repossess. The best thing to do is to put a future advance agreement in the original contract with your buddy. It allows the first secured lender to protect its position up front, and then come in at any point. Uniform Fraudulent Conveyance (and Transfer: two different Acts) Act: is aimed at transactions with the intent to hinder, delay or damage creditors. These are transfers normally given without fair consideration. Some of the law under these Acts is very obvious and other not so much, very subtle complex transactions. At the moment though there probably isnt much that our client can do. The facts say that 3 months have passed and the reach back of the trustee in bankruptcy to upset transfers like this is normally 90 days.

Trustees in Bankruptcy v. Secured Creditors: Strong Arm Clause

Purposes of 544(a): Lets TIBs demote unperfected SCs to status of USCs in bankruptcy two reasons: a. Polices compliance with the filing requirements of Article 9 b. Serves distributive function by insuring that secured creditors don't get benefits against unsecureds in bankruptcy that secureds couldn't get outside of bankruptcy 544(a) Power: Gives the Trustee the Power toe Avoid any Transfer that could be avoided by one of the three hypothetical people 1) TheTe of Bankruptcy Code 54 xt 4(a): a) The text of the provision says that the TIB has the same rights as: i) A J LC w e nds cre and le s at thetimeof bankruptcy ho xte dit vie ii) A cre ditor with e cution re xe turne uns fie Ignore it. d atis d: iii) A Bona fidepurchas r of re prope who could perfect against the debtor e al rty (1) This is trying to get a state recording statutes where you might have a race/notice, pure notice, or pure race statutes.

Midlantic National Bank v. Bridge Facts: MB refinances a mortgage for 260K. Old mortgage is discharged but bank fails to record a new one until after bankruptcy initiated. MB argues that it retained an equitable lien on the property because under equitable subrogation doctrine they would be able to replace the new mortgage and replace the first a. Hypothetical Bone Fide Purchase: this trustee is deemed to have paid value for the property and is deemed to have perfected his interest as a legal title holder in the subject property as of the date of the bankruptcy petitions filing Held: Bank did not have a good mortgage against anyone at time of bankruptcy. Reasoning: Had an equitable lien but that such a lien would not be good against a bona fide purchaser. 544(a)(3) gives trustee the powers of a hypothetical bona fide purchaser and entitled to trustee to avoid the equitable lien of the unrecorded mortgage. TIB wins.

Implementing the Strong Arm Provision

Non-Self-Executing: TIB or DIP must file lawsuit in bankruptcy to demote the unperfected SCs Chapter 7 TIB: Lawyers who are not paid if there is nothing in the estate but fully encumbered property a. Get paid ahead of all unsecured but behind the SCs DIP in Chapter 11: Tend to be management of the corp. and often do not want to avoid SIs a. Have granted this SI in the first place in order to screw unsecured creditors Key: Unperfected creditors at time of bankruptcy can take advantage of relate back provisions that allow them to take action post-filing that would make them secured from some pre-filing event; PMSI filing How Possible: a. 363(b)(3) Exception from auto-stay for perfection allowed under 546(b) b. 546(b) post-filing perfection is fine if it is perfection that would be good against any entity prior to filing

Grace Periods

Problem Set 30
Problem 30.1: You are employed as attorney for the trustee in the Ch 7 bankruptcy of GI Inc. Filed chapter 11 on April 15, and the case was converted to Ch 7 on October 15. Which security interests can the trustee avoid under 544(a)? (a) Secured creditor cant save itself here because hasnt perfected. A lien creditor would defeat the secured creditor. When the bank attorney files the FS on April 22, he will be in big trouble because he violated the automatic stay. It is a violation of the automatic stay to perfect AFTER bankruptcy unless there is something in the bankruptcy code that allows you to perfect afterwards. Look at 546 pg 323 - 546 (b)(1) the trustee powers under 544 are subject to state law that permits them to be perfected before the date of bankruptcy basically, if there is a grace period, the person who levies can be defeated by the person who subsequently files --- because its a grace period! This would NOT be a violation of the automatic stay

The secured party filed its financing statement on April 22. It can be avoided b/c the effective date of bankruptcy filing is April 15, and as of this date the secured party had not perfected. A lien creditor would have priority over an unperfected security interest. 348(a) the conversion of a bankruptcy case does not effect a change in the date of filing of the petition or commencement of the case. Bankruptcy Code 544(a) says that trustee can avoid it because he takes on the role of a lien creditor as of the date of the bankruptcy file on April 15, and as such it can avoid the unperfected security interest because he has priority over the un-perfected security interest at this point. ******* 9-317(a)(2), if you become a lien creditor before it is perfected. 546(b)(1) the rights and powers of a trustee under 544 are subject to any general applicable law that permits perfection of an interest in property against any entity that acquires such rights as of the date of perfection. The facts here suggest we might have a PMSI with respect to collateral, they have 20 days to perfect. The attorney filed a financing statement on April 22nd, with respect to collateral acquired after 2 or after then the person might be okay. It doesnt violate an automatic stay in that case. Would filing a financing statement violate an automatic stay if the collateral were acquired prior to April 2nd? 362(a)(4) any act to create, perfect, or enforce any lien violates the automatic stay. 363(b)(3) filing of a petition does not operate as a stay of an act to perfect to the extent that such rights and powers are subject to such perfection under 546(b). So if you are within 20 days youre alright, but with respect to property acquired 22 days before you might not be okay? The rest of 362(a)(3) unless the act is accomplished under the period set forth in 547(e)(2)(a) used to provide a 10 day grace period, but in the most recent change of the bankruptcy act they changed the 10 day period to 30 days. Go back 30 days from April 22, we might be okay on 30 day things. It is possible that you cant beat the purchase money under article 9 and that you havent violated the stay. (b) Same facts as (a), except the bank properly filed its financing statement on April 14, one day before the debtor filed under Ch 11. If FS is PROPERLY filed and SA perfected before debtor files for BR, it cannot be avoided under 544(a). It is a properly filed and perfected security agreement. NOTE: It may be a voidable preference under 547. Once youve gotten it on file, the trustee cant use 544(a) that is the meaning of 544(a). (c) The creditor listed the debtor as Gargantuan Industries and left off Inc. and it omitted all the information required by 9-516(b)(5). The security agreement still showed up in the search, but it is impossible to tell if the filing is against the debtor or a business using a trade name. The filing officer should have rejected the financing statement, but it was accepted. The trustee loses. Under 9-520(c), if the filing office accepts a financing statement that does not give the information required, the filing is fully effective. 9-520(c), comment 3. The trustee, therefore, cannot avoid it. Does the exception in 9-338 apply? 9-338 (Priority of Security Interest Perfected by Filing Financing Statement with Incorrect Information) the creditor is subordinated to a purchaser who buys in reasonable reliance on the incorrect info. No. Under 9-338, you have to make a negative inference. We dont have someone who is a purchaser or gave value. A trustee cannot fit into this description.

(d) The creditor filed a financing statement 5 years prior to July 15, but failed to file a continuation statement. The financing statement lapsed on July 15, so it was effective on the date bankruptcy was filed on April 15. A lien creditor would not have prevailed if it levied on April 15. What happens when the financing statement ceases to be effective? 9-515(c) a security interest is unperfected upon lapse. If a security interest becomes unperfected upon lapse, it is deemed to never have been perfected ONLY against a purchaser of the collateral for value. See 9-515(c), Comment 3, example 2. If you are thinking about filing for bankruptcy, you should wait until the financing statement lapses. It is all about reliance. The lien creditor did not rely on the filing system, so the lien creditor does not get an advantage. Even after the perfected secured creditor becomes unperfected it still has priority over someone who becomes a lien creditor when it was perfected. (e) Florida National Bank was unperfected at the time that Gargantuan filed for bankruptcy. Model Rules of Professional Conduct - attorney probably shouldnt have revealed that the client was unperfected The lawyer forgets to fill in the description of the collateral on the security agreement. Two years later, the lawyer wants a subordinate lawyer, Grace to fill in the blank. Grace refuses, resigns from the firm, and tells the trustee. Another lawyer in the firm, Bennie fills in the blank. The lawyer and the client agree in writing that this expressed their original intention. What have Bennie and Grace done wrong? Bennie has violated the automatic stay of 362(a) criminal contempt of court, and he can go to jail. Bennie has also falsified documents to court and could be disbarred. Under the old version of the Model Rule 1.6, Grace is not allowed to breach confidence. Under the new version of Rule 1.6, Grace can breach confidentiality in order to prevent the financial harm to a 3rd party. Grace is an associate, so she wont have responsibility for what her colleague did unless she supervised him. In NY it is the intention to commit a crime, CA has a very restrictive notion to the exceptions of confidentiality and they dont encompass what Grace did here. (f) Grace period is 10 days. On April 6, nine days before the company filed for Ch 11, a bank financed the purchase of a company vehicle. The bank filed the certificate of title on April 25 after it learned of the bankruptcy. Did the bank violate the automatic stay? The bankruptcy code allows you to file within a window under 362(b)(3). Here, we are outside 10 days, but under 20 days. The DMV only gives you 10 days, as does 547(e)(2)(A). But, 546(b) gives you a bigger window subject to generally applicable law. Under 9-311(a) you dont need a financing statement because cars are done by certificate of title. Under 9-317 it is a PMSI (purchase money security interest) so you get 20 days. What about the fact that the DMV only gives you 10 days? Note that the DMV gives you 10 days to maintain your status not 10 days to file. You can file whenever you want. The question is whether you get the 20 days in PMSI or the 10 days from the DMV? You have to look at the comments. Look at comment 8 to 9-317. If it is filed within the 20 days you are okay. This comment is a wraparound. When article 9 was revised they wanted more time for PMSI and rather than asking all of the DMVs to change the amount of time, they put in this workaround. So the trustee loses. For purposes of bankruptcy, you still have 20 days to file. Section 20(b) of the motor vehicle title act gives you a ten day grace period. Article 9311(b) compliance with that is the equivalent of filing a financing statement, does that

gives us an argument that 9-317(e) applies, that if someone files a PMSI within 20 days. He might make this argument. (g) One week before Gargantuan filed its bankruptcy petition, the Yarn Shop delivered a writ of execution to an Ohio sheriff along with instructions to levy on an automobile owed by Gargantuan. Two days after the petition is filed, the sheriff (who was unaware of the filing) levies on the car and takes possession of it. Can the TIB avoid the levy under 544(a)? The trustee will prevail if a hypothetical lien creditor that levied on the date of bankruptcy would prevail over the yarn shop. Under Ohio law, the yarn shop having delivered the writ of execution first would prevail over a hypothetical lien creditor who delivered a writ of execution and levied on the same day. So how do we regard the trustee, the trustee effectively delivers its writ to the sheriff on the day of the filing. The yarn shop has already delivered its writ. Is the reference in the bankruptcy code to noncode law to determine the rights of the hypothetical lien creditor, yes. The existence of a lien and priority are two different things according to Kaufman. Unless you have a security interest that priority doesnt do you any good. The argument for 546(b)(2) is that there is an inchoate lien here. The OH statute is a moderately common statute, and you can imagine that when a bankruptcy is occurring there are unsecured creditors outside scrambling to get liens. What else should we look at to solve the problem? Violated 362(a)(3) Automatic stay the sheriff levied after the filing of the petition in bankruptcy. 362(b)(3) is not applicable in this problem allows you to perfect a lien that you already have. This section does not apply b/c under Ohio law, you dont have a lien until the sheriff seizes the property. The priority dates from the writ of execution. There are two viewpoints authors and Kaufman. Authors: Based on state law: Ohio lien law (p466) priority between liens does not depend on day of levy BUT delivery of the writ to the sheriff. The bankruptcy petition comes between delivery of the writ and execution. The sheriff is permitted to finish the execution, and it relates back to the delivery of the writ. Kaufman: what about the provision of the Ohio lien law that says you have to levy to get a lien? The sheriff had not levied by the date of bankruptcy in this problem, regardless of when their priority relates. Problem 30.2: if you disperse the profits early, if you are dealing with PMSI, weve got 20 days after the debtor receives possession of the collateral and if we do that our client will have priority over trustees in bankruptcy and even with respect to certificates of title with 10 day provisions. 360(2)(b)(2)? gives us a 30 day window for file to beat the trustee in bankruptcy if it isnt a PMSI. Could be problem if doesnt get it on file within 30 days or if someone files ahead of us or that we wont always fill out the financing statements perfectly right and the filing office properly rejects them. The answer to the question is that there are enough risk one ought to change the procedure and not disburse the proceeds early, borrowers need the money and put on a lot of pressure to disburse the proceedings once the closing has taken place and sometimes it is hard to resist them. Can argue either way if legislature doesnt do it, then courts will do it the best they can Problem 30.3: Debtor has $10 million in assets. $8 million of secured debt to Oriental bank. The debtor also has $20 million in unsecured debt. The financing statement does not show up in a search under the debtors name. The DIP may avoid. 9-506(b) a financing statement is seriously misleading if it fails sufficiently to provide the name of the debtor

544(a) only says that the trustee in bankruptcy may avoid. So, Oriental is vulnerable but within limits it is up to the DIP to decide what it wants to do. How much can Oriental get under chapter 11? It is entitled to what it would get in a chapter 7 liquidation. If the DIP does not avoid its security interest, it is entitled to the full $8 million. $8 million but since it is now unsecured debt, the creditor will probably not get the entire $8 million, but rather a pro-rata portion of the debt. (8/28 * $10 million = .29 cents on the dollar)

How much money are unsecured creditors entitled to receive? It turns on what the DIP does with Orientals security interest. Not avoided - $2 million is left. Avoided 20/28 * $10 million = $.71 cents on the dollar, other unsecured creditors, 7.1 million d. 8/28 of the 20 million, .29 on the dollar, 2.9 million a. b. c. How much money are shareholders entitled to? None, there is $28 million in unsecured debt, and $10 million in assets. Absolute priority rule under bankruptcy. Proposal by the DIP -- $5 million for Oriental, $4 million for the unsecured creditors, and $1 million for the shareholders. Oriental: accept the $5 million if they think the DIP will avoid their security interest. Unsecured creditor: If they think Oriental is a friendly creditor to the DIP and the DIP will not avoid Orientals security interest, they should accept the proposal. If they think Orientals security interest will be avoided, they should not accept the plan. The unsecured creditors might be able to bring a lawsuit against Oriental to avoid its security interest. If the case against Oriental is open and shut, they dont have much of a defense. The position of the unsecured crediors is strong for getting permission to avoid it. But this does not happen very often. What has the DIP in possession accomplished if the proposal is accepted? The shareholders have equity left in the company.

Problem 30.4: If the property in Midlantic v. Bridge had been personal property rather than real estate, would that have changed the outcome? The trustee would only have the rights of a lien creditor under 544(a) with regards to personal property. Kaplan -- Lien creditor vs. lien creditor principles of equitable subrogation might edge out the trustee in bankruptcy. Should real estate and personal property be the same. An unrecorded mortgage is effective in most instances. You could do something like reduce the rights of real estate mortgages. Kaufman isnt so sure about repealing 544(a): we could have a rule that just protected creditors who actually relied on the situation as it was. Who actually looked at the files and were misled by either a mistake that was made by the filing officer or the filing party. The minute you have rules that turn on reliance, those rules do encourage lying. Filing is easy and it is easily proved in most cases, so Kaufman thinks there is a lot to be said for just leaving things as they are.

Trustees in Bankruptcy v. Secured Creditors: Preferences

Priority Among Unsecured Creditors: Under State Law: Basically the USCs jockey with one another and debtor can prefer one creditor over another by promoting them to the status of SC Under Bankruptcy: USCs are one big family If Promote to SCs Prior to Bankruptcy: Bankruptcy looks back in the 90 days prior to filing and knocks out any attempts to promote creditors from USC to SC What SIs can Be Avoided as Preferential? 547 Transfers Must: (b)(1) Be a transfer of property for the benefit of a creditor OR (b)(2) On account of antecedent debt (excludes new loans secured by new SIs) (b)(3) Must be made when debtor is insolvent (debtor is presumed insolvent in the 90 days prior to filing) (b)(4) Be made in the preference period usually for most creditors it is 90 days For insiders period of preference is 1 year; for insiders outside the 90 days presumption the avoider must actually prove insolvency (b)(5) That improve the position of the creditor Improvement Test: Imagine two otherwise identical Chap. 7 Liquidations, one where the creditor had benefit of preference and one in which creditor didnt . If creditor gets more in such a liquidation because of the preference, it is voidable

When does transfer of Security Interest Occur?

Basic Rule: Transfer occurs at the moment of perfect Perfection: Defined under state law by imagining a hypothetical challenger to the SI, thus perfected when (1) A bona fide purchaser couldnt beat interest (real property) (2) When a JLC couldnt beat interest (personal property) Example under an after acquired property clause, the interest in after acquired property is not created until it is actually acquired, rather than when the initial statement was filed void anyway. (a)Exceptions for Accounts Receivable and Inventory Since AR and Inventory Constantly Turn Over: Voidable preferences could mean that these creditors would always be unsecured in bankruptcy Under (c)(5): Treat AR and inventory as a single pool basically you are secured up to the value of your inventory or accounts as of 90 days before filing regardless of if they are actually different products in place during the 90 day period Relation Back Rules: Problem of creating Secured Loans during 90 days period - timing; if you sign a note and then give minutes later, you file the FS, is the SI voidable as given on account of an antecedent debt?

No you have ten-day relation back period 547(e)(2) 20 day relation back period for PMSIs

In re Ebbler: Two Point Test First Determine: Amount of the loan outstanding 90 days prior to filing and value of the collateral on that day Second Step: make the same determination as of the date of filing the petition If there is reduction: during the 90 days period of the amount by which the initially existing debt exceeded the security there is a preference 547 Makes only the Extent of the Preference Voidable If the creditor is fully secured 90 days before filing the petition, then the creditor will never be subject to a preference attack If Existing Debt-Security at 90 Days<Existing Debt-Security at Filing= Preference Fidelity Financial v. Fink Facts: Broad statutory history of the preferences provisions persuasively suggest the Congress intended 547(c)(3)(B) to establish a uniform federal perfection period immune to alternation by state laws permitted relation back Implications: No longer matters for purposes of preferences avoidance what grace period a state gives the holders of PMSIs in which to perfect When Transfer Takes Effect v. When Transfer Occurs: Takes Effect: when the SI attaches Occurs: at the time of perfection or the earlier authentication of an SA and filing of the FS or if the interest if perfected within 30 days of attachment, the transfer is deemed to have occurred at the time of attachment under the relate-back provision

Strategy of Preference Avoidance

Debtors Wanting to Give Preference to Some Creditors: Will wait for 90 days in order to be outside the limits Unsecured Creditors: will monitor filing to see if debtors are promoting some USCs to SCs indicates financial struggle; USCs may file for involuntary bankruptcy to insure that there is something in the estate left Savvy USCs: will go to creditor and threaten involuntary petition and demand they be upgraded

Problem Set 31
Problem 31.1: Company filed Ch 11 bankruptcy on September 1. On December 30, the case was converted to Ch 7. A partner in the law firm was appointed trustee. Which transactions can be avoided as preferences? (a) On Aug. 15, Company borrowed $300,000 from Firstbank. They executed loan documents that day. They included security agreement and financing statements, both covering equipment owed by the Company. Firstbank filed the financing statement the following morning. Is Firstbanks security interest preferential? Not avoided. When did the transfer take effect? That is to say when did attachment occur. Aug. 15 b/c a security agreement was signed. When was the transfer made? Aug. 15 b/c the security agreement was filed within 30 days and wasnt for antecedent debt. Therefore, it is not for antecedent debt even though it was in

the preference period. No antecedent debt the debt was created on the day the transfer was made (day of attachment). 547(b)(2) requires there be an antecedent debt. 547(e)(2) relation back for security interests perfected within 30 days after the interest takes effect between debtor and creditor. b) On February 7, Company borrowed $300,000 from Secondbank on an unsecured oneyear note. On July 11, Company signed a security agreement that granted a Secondbank a security interest, and Secondbank immediately perfected. Avoided transfer for benefit of creditor on antecedent debt within 90 days of filing bankruptcy. The security interest will put the creditor in a better position. When does the transfer take effect? July 11. When was the transfer made? July 11. When was the debt created? Feb. 7. (antecedent debt). TIB is going to be able to avoid this one. (c) On Feb 7, Company borrowed $300,000 from Thirdbank on a secured one-year note. The financing statement was lost in the mail. Five months later, it was found by a postal employee. On July 11, the UCC filing office accepted the filing. Avoided not within the 30 day window. When is the transfer made? July 11 for antecedent debt. (d) On July 21, Company purchased a network and hardware from EMS. Company financed the purchase with a $30,000 note from Fourthbank. Company signed a promissory note, security agreement, and financing statement. Fourthbank issued the loan check on July 21. EMS delivered the network the following day. Fourthbank mailed the financing statement to the Secretary of State, and it was accepted for filing on July 30. Not avoided there is no preference b/c of 30 day window. What if this was filed on Aug. 2? PMSI 9-103(a)(1) purchase money collateral means goods or software that secures a purchase-money obligation incurred with respect to the collateral. 9-103(b) purchase money security interest in goods. 30 day window after debtor gets possession of the collateral under 547(c)(3). 547(e)(3) a transfer is not made until the debtor acquires rights in the property. The transfer is perfected within 30 days and so is not avoidable. (e) Would the result be different in (d) if Company had issued the check to the Company and the Company used other funds to purchase the network? Not a different result. It would no longer meet the definition of a PMSI, but it is still within the 30 day window of 547(e)(2). There is no preference here. When is the transfer made? July 21st after 30 days from when it took effect. Even if it isnt a purchase on a security interest, you still have 30 days for preference purposes. (For priority purposes, August 4th would be the date) (f) On March 9, Company did not have the money to make its payroll. It borrowed $300,000 from the wife of the CEO. The financing statement was not filed until April 9 which would make it voidable. 101(31) defines insider and if the debtor is a corporation, it includes the relative of a GP, director, officer, or person in control of the debtor.101(45) defines relative and it means an individual related by affinity or consanguinity within the 3rd degree. 547(b)(4) gives a preference period for insiders of one year. Remember that the trustee loses the presumption of insolvency under 547(f). It was not contemporaneous under 547(c)(1) and does not meet the 30-day window exception under 547(e)(2). So here it would be voidable since here we would consider this to be a deal with an insider so the one year term applies and this would be a transfer.

Problem 31.2: Over a year ago, you filed suit against Company on behalf of your client. The suit is on an unsecured promissory note. The case was tried more than two months ago, and you won a verdict of $547,000. On the day after the verdict, four other creditors of the Company filed financing statements and recorded real estate mortgages against Company. Eleven days ago, the court entered judgment on your verdict. Yesterday, the judgment became final and you entered writs of execution and garnishment on Companys property. The Company is still selling motorcycles on its showroom. What is your next move? How do you use the preference call to your advantage in this situation when youre behind on a bunch of other creditors? - Put the debtor in bankruptcy. All other unsecured creditors have their security interests voided as preferences. The result will be that youre not going to get much money out of it. - So then you think that you havent gotten your judgment yet for execution. The other creditors can - If you say to the other creditors, If I push the debtor into bankruptcy, that will cost you your security and loss, even if it doesnt get me a lot f money. So what are you going to do for me? ---- Save your security! - The other formerly unsecured creditors and the debtor are close thats how the creditor gave the loan unsecured. - What if the debtor says I dont want to go into bankruptcy. Ill give you your security and maybe a little money.? What will You need to ask, by how much did the unsecured creditor improve its position by that date and the commencement of bankruptcy? In this case, its 500K. (1) Involuntary bankruptcy303(a) -- Threaten with involuntary bankruptcy. If the debtor has 12 or more creditors, it takes 3 creditors to file an involuntary petition. Watchdogs get no special reward only pro rata distribution, so this is not a good option. With all the other creditors hanging around you probably arent going get much money. 547(b) - avoid the other creditors security agreements filed the day after the judgment. (2) Threaten involuntary bankruptcy unless the Company gives you a security interest or money. But, if you get a security interest, and later they go into bankruptcy your security interest may be avoided while the others will be outside the preference period. It isnt a good idea to get the debtor to give you a SI since at anytime bankruptcy can be entered and then youll be in the preference period. (3) Best option: Go to the other creditors and bargain with them. Unless they cut you in on their preferential position, you will push the Company into bankruptcy and then theyll all be in the same boat. Problem 31.4 Security interest in inventory 547(c)(5). On June 1 balance of loan was $250,000 and value of inventory was $120,000. On Aug. 29, date of bankruptcy filing, the loan balance was $150,000 and the value of inventory was $70,000. Kaufman thinks that one could cram a conditional sales contract and chattel paper into the exception of 547(c)(5). Solution: This section creates what is called two point test under 547(c)(5) Within 90 days of filing (June 1) $130,000 difference between loan and value of inventory. (250-120=130) Date of filing -- $80,000 difference between value of loan and value of inventory. (150-70=80) Preference of $50,000. So 50k will be voidable by the TIB. Here the SC has improved its position and so that 50k improvement represents a preference. The formula doesnt deal

with the situation in which the SC is fully secured, it only comes into play when the debtor is under secured. HYPO: If you are oversecured on day one, there is no preference! Within 90 days of bankruptcy: (100 debt and 125 collateral) AND Date of bankruptcy: (100 debt and 200 collateral), there is NO preference! What do you tell the trustee in bankruptcy about its ability in handling the equipment under 544(a)? Transfer took effect on 1st thats when the security interest attached When was the transfer made? Kaufmans problem to illustrate 544(b) The Bank loan and creditors judgment are each in excess of the value of the equipment. Should the trustee abandon the equipment? 544(b) gives the trustee the power to avoid transfers that can be avoided by an actual unsecured creditor. This removes from the trustee the power to avoid security interests voidable under Article 9 b/c the creditor who can defeat an unperfected security interest is not an unsecured creditor. Only a lien creditor can defeat an unperfected security interest. In bankruptcy, a lien creditor is a secured creditor b/c the judgment is secured by the lien. 544 is useless with respect to secured creditors, except in this situation: What c With this Assignment, consider the following scenario: 7/1/05 Bank makes loan and takes a security interest in debtors equipment 7/2/05 Judgment creditor of debtor levies on its equipment 7/10/05 Bank files its financing statement 9/15/05 Debtor files in bankruptcy Lien creditor steps into the shoes of the judgment creditor and will prevail to the extent of the value of the bank. We cant use 544(b) but there is another way to do it It is like Moore v. Bay achieves the same result by using the rights of an actual judgment lien creditor, but the banks security interest (unlike in Moore) is only avoided to the extent of the lien. The whole value of the lien is not avoided! The question the trustee should ask itself is: this lien I avoided, does it have any bankruptcy priority that I can take advantage of? Because 544-1(?)/551 (?) says that I step into the shoes of the lien creditor I am able to avoid that I can use to attack someones security interest that I cant attack directly? Purpose of problem is to see that debtor cant attack bank directly either via 544-1 or the preference because they perfected their security interest. Lein creditor can beat bank, but lien creditor didnt foreclose for a while so antecedent debt strong arm statute, so then bankruptcy trustee can step into their shoes and avoid the bank. (NOTE JUDGMENT LIEN CREDITORS ARE ALWAYS PERFECTING ON ANTECEDENT DEBT, THEREFORE THEY CAN ALWAYS BE AVOIDED IF OCCUR DURING 90 DAY PERIOD AS A PREFERENCE.) Avoided Under Strong Arm Statute? Trustee in bankruptcy cant attack the bank under 544(a) b/c the bank has perfected before bankruptcy. Under 544(a) the Bank wins over the trustee in bankruptcy. The trustee cant attack the banks security interest under 544(b), which only gives unsecured position. The

trustee cant step into the shoes of the lien creditor here because under bankruptcy law, lien creditors are considered to be secured creditors. The minute the judicial lien creditor gets its rights by levying it looses its status under the bankruptcy code as an unsecured lien. So for purposes of the bankruptcy code the judicial lien creditor is safe. The trustee cant go against the judicial lien creditor. If he hasnt levied then 9-317 doesnt give the creditor any rights. Avoided as Preference? The perfection is on account of an antecedent debt in literal terms but we have the 30-day window provided in 547(e)(2)(b), 30 days after the SI is perfected. The transfer is made at the time the transfer takes effect which means the giving of a SI. Transfer taking effect means when it attaches. The SI doesnt have to be perfected, all it has to do to transfer is attach. Here the SI attaches on 7/1 and is filed in the window of 30 days and hence IS NOT considered antecedent debt. Perfection depends on beating out the lien creditor. In order to get the relation back and the retroactive effect, it has to be perfected within 30 days of attachment. 547(e)(2)(A) is important. 547(e)(2)(A) gets you around the notion that the transfer is made for antecedent debt. This is why the trustee cant avoid the transfer under the true transfer avoidance. The SC can relate back to 7/1 since he has filed within the 30 days. The loan and the transfer are considered simultaneous. The Bank hasnt beat out the JLC until he files on the 7/10. If the bank had filed after 30 days then the FS may be considered for antecedent debt. The relation back only operates when you file within the 30 days. What about the judicial lien creditor? Can the trustee avoid the judicial lien creditor? There is a case of classic preference. The indebtedness of the judicial lien creditor must date to way back before the Banks since by the 7/2 he already has gotten a judgment and levied (his original loan must be much older). The JLC gets its interest in the property when it levies. Therefore, the judicial lien creditors interest can be avoided as a preference under 547(b). 551 any transfer voided or lien voided is preserved for the benefit of the estate. The trustee in effect steps into the shoes of the unperfected SC and enforces the SI for the benefit of the estate and indirectly the unsecured creditors. The trustee steps into the shoes of the lien creditor. The TIB has avoided the lien of the lien creditor, the trustee preserves that lien and by preserving it for the benefit of the estate it preserves the priority it enjoys over the bank. To the extent of the amount represented by the JLC the trustee is going to be able to exercise the right over the equipment and reduce the right of the bank to that of an unsecured creditor completely. The TIB thus achieves the result that was formally achieved by Moore v Bay using the rights of an actual creditor to defeat the secured creditor but measures by the amount of the priority of the avoided lien. The lien creditor can prime the bank for the amount of the judgment. The delay in filing allowed the lien creditor to get priority over the bank to the extent of the lien. Remember 9-317(a) judgment creditor has priority over the bank. The judgment creditor primes the bank b/c the bank is not perfected before or did not file before judgment creditor levied. Although 544 does not allow the TIB to use rights of lien creditor directly, through this end run, by using 9-317 and 551, the TIB can use the rights of an actual lien creditor against the security interest. The estate gets the amount the lien creditor can get.

Secured Creditors v. Secured Creditors: Basics

Basic Rule: First to file or perfect

Basic Rule and Exceptions for Transfers

Rule 9-322(a)(1): Under this rule, first filer win even if they dont perfect until after the second filer. Example bank files at TI and bank 2 lends and files at T2 (perfects) and then Bank 1 lends (and thus perfects) at T3 Bank 1 wins. Exception for Transfers 9-325: Example of Bank1 perfects against Debtor1 widget at T1. Bank2 perfects an after acquired property clause against Debtor2 at T0. At T2, Debtor1 transfers widget to Debtor2 without any release of Bank1s SI. Between Bank1 and Bank2 who wins? Answer: Bank 1 wins. Under 9-322 Bank 2 perfected first and so should win but 9-325 says that Bank 1 wins before it was perfected in the widget prior to the transfer

9-325: exception to pure race for asset transfers v Subordinates security interests perfected against a transferee to those perfected against a transferor. v Example SC1 securitizes debtor 1 for equipment. SC2 securitizes debtor 2 for after-acquired property. SC2 files. Then, SC1 files and perfects. Debtor 1 sells asset to debtor 2 Even though SC2 filed first, SC1 (transferor SC) wins as long as it pe cte before the sale rfe d This is because SC1 had a security interest perfected against the transferor prior to the sale which trumps the security interest SC2 has perfected against the transferee regardless of who perfected first.

Priority for Future Advances

Hypothetical: At T1, bank1 files FS against W1, at T2, B2 perfects against W1. At T3 Bank1 perfects by taking SI and making advance against W1, with a future advance clause in its SA. As between B2 and B1 loan who win in priority? Answer: B1 wins. It was first to file or perfect and later advances secured by the same collateral relate back to original perfection in the collateral and beat out Bank2. Hypothetical: At T1, Bank1 files against Ds W, though D has none now. At T2 bank2 files against the W. At T3, bank2 loans money. At T4, bank1 loans money. At T4, debtor actually buys widget. Who wins? Answer: Bank1. Art. 9 Innovation makes inventory financing practical otherwise bank would have to constantly filing FS to stay perfected Basic Rule: Under 9-324(a): a PMSI wins if it is perfected within 20 days of when the debtor gets possession Hypo: B1 perfects against Ds equipment at T1. At T2, D buys and takes possession of new equipment financined by a PMSI by Dealer. At T2 + 20 days, dealer files against Ds equipment. Who wins between Bank1 and Dealer? Dealer Wins. PMSIs in Inventory: 9-324 doesnt apply to PMSI in goods that become inventory in the bands of the purchaser Will generally be financed by inventory lenders not by PMSI

Priority in After Acquired Property

Priority of PMSIs

Still possible if: (1) Seller files before goods are in possession of debtor and (2) seller notifies the inventory lender Bottom Line: Inventory lenders do not need to continually search inventory and wait 20 days before disbursing money, facilitated quick lending

Purchase Money Proceeds

Basic Rule: Priority of PMSI creditor continues even if the original collateral is converted into something else subject to an SA Flow through only applies to: Cash, instruments and chattel paper (not accounts). Purposes to facilitate account financing Basic Rule: When something is comingled, perfection continues in the new item Hypo: A has perfected SI in Nitrate. Nitrate is combined with something to make Fertizilizer. B perfects in the Fert. A has priority to B. Accession: Perfection in objects that are incorporated into other objects remains but an SC in the new object can keep the first SC from removing the original object Hypo: At T1, I perfect in a machine part. At T2, you incorporate the machine part into a machine. At T3, your cousin perfects against the machine. I have priority over your cousin as to my part, but your cousin can keep me from yanking it out of the machine

Priority in Comingled Collateral

Problem Set 32
Problem 32.1: There is a debtor who gives several security interests in the same collateral, some lawn dogs, to different creditors on different dates. The security interests are the following: 8/1 Bank 1 filed a financing statement (but there is no commitment yet). 8/5 Bank 2 filed a financing statement and advanced funds to debtor 8/7 C-Dogs became a lien creditor by levying on the equipment and taking possession 8/10 Bank 1 approved the loan and disbursed the funds Who has priority in the equipment? Easy bank 1 first to file, so it has priority When did bank 2 perfect? August 5 C Dogs perfected August 7th, so Bank 2 has priority Need a financing statement AND security agreement

Bank 1 vs. Bank 2 Bank 1 wins. 9-322(a)(1) -- Between the holders of two security interests in collateral, the first to FILE OR PERFECT has priority and here Bank 1 first filed the FS on Aug 1. Bank 2 vs. Lien Creditor Bank 2 wins. 9-317 -- Bank 2 perfected before the lien creditor filed as they had a SA and a FS. Bank 1 vs. Lien Creditor Lien Creditor wins. Bank 1 would need a security agreement and financing statement to beat Bank 1 under 9-317(a)(2)(b) since Bank 1 didnt have a SA by the time the lien creditor takes possession of the law dogs and UCC tells us that a FS and a SA has to exist. Lien creditor is superior to Bank 1. How do you divide up the collateral? Circular priority problem (Similar to Ski Ridge in assignment #20 where the court broke the circular priority where there was a subordination agreement. The Court allowed the junior creditor to take the property.).

There is no logical way to break out b/c there is inconsistency in the priority rules. The court faced with the problem must decide which party does public policy favor in the situation? The court will have to invent some solution here and favor one of the creditor. The problem is that there are Art 9 rules and common law rules regarding the priority of the lien creditor that clash here. It depends on if you are pro-secured creditor or not. Maybe the court will divide the payment after liquidation. If one were to follow the Art 9 rules then Bank1 would come first, Bank 2 second and lien creditor last. Problem 32.2: Double debtor problem. Centurion loaned money to Flight Analysis against flight simulation equipment, but it did not realize that First National Bank had previously filed a financing statement covering the same collateral. Centurion had a security interest in another company and a first FS (in Pilots Unlimited) describing the same collateral and after acquired property (last year sometime). Will Centurion be ahead of First National if Flight Analysis sold its equipment to Pilots Unlimited?

You relied on 9-325 we have the earliest financing statement on file, but 9-325 subordinates the security interest because Centurion wasnt even in the picture when the security interest was taken by First National This is the double debtor problem what happens when you have 2 debtors that give security interest with respect to their property? Debtor 1 gives A a piece of equipment, Debtor 2 gives the same kind of collateral as security interest to B, then Debtor 1 sells its property to Debtor 2 and suddenly the secured creditor of Debtor 2 says, Well we have the earliest financing statement on file. --- which may be true, but they have it against Debtor 2 and Debtor 1 had already given a security interest to its debtor, A, so B cannot take advantage of the transfer of the security interest to Debtor 2 to claim priority. Debtor 2 takes the equipment subject to the security interest of Debtor 1/A AND subject to its own priority. HOWEVER, look at 9-325 (b) When there is a sale, who has a priority to the 750K? First National has first rights to its collateral, which is perfected indefinitely, BUT Centurion has priority to the ___, which is perfected by control If you look at 9-325(1): A security interest created by a debtor is subordinate to a security interest in the sale collateral created by another person if: (1) the debtor acquired the collateral subject to the security interest created by another person. (a) bank should not have to worry every time someone else has access to that account

Solution: No, Centurions security interest in the equipment sold to Pilots Unlimited will be subordinate to First Nationals security interest, even if Centurion filed against Pilots Unlimited before First National filed against Flight Analysis. Under 9-325 (a), a security interest created by a debtor (Pilots Unlimited) is subordinate to a security interest in the same collateral created by another person (Flight Analysis) if: debtor acquired the collateral subject to the security interest created by the other person; (Yes, First Nationals security interest clings to the equipment); the security interest created by the other person was perfected when the debtor acquired the collateral; and (Yes) there is no time when the security interest was unperfected. (Yes). 9-325 is deliberately designed to prevent pulling off the scheme to take advantage of an earlier filed financing statement and allege that the collateral would be covered under an after-acquired property clause. Additionally 9-507 tells us that even when disposed of the FS remains effective against the collateral being sold. Under the old Article 9 this problem would come up, and people in the position of Centurion would look around and find an earlier financing statement even though the other deal was in the records. See

Comment 3, 9-325. The idea is that the buyer that in this case is a fraudulent buyer would have the possibility of looking and searching before making the purchase to see if what they are buying is subject to a SI. HYPO: A Holding Corp owns Bank A and Bank B. A part of Bank As collateral goes to Bank B (inventory, accounts). According to 9-325 were still in the same situation. What happens though, if this inventory and the account receivables these now create after acquired inventory and account value. As a matter of law, the contracts that are inherent to the assets of one part of the business become binding on the other parts when the collateral moves. 9-203d and e tell us that the SA entered into by a corp is binding on the taker. In the case above the conditions of the SA b/w Bank A and the collateral is binding on the Bank B. 9-508 tells us that the FS naming an original debtor is effective to perfect the SI in collateral in which new the new debtor has or acquires rights in the FS that would have been effective. If the FS becomes seriously misleading theyll have 4 months to file a new one. So here there will be control on the after-acquired accounts and inventory. Bank A will have a SI over the after acquired inventory and accounts. Bank A will have these rights without tracing mechanism. Problem 32.3: ONB made a $7,500 loan to George and filed a financing statement that contained no provision regarding future advances. It indicated that the collateral was equipment. ONB has approved a $40,000 line of credit for George secured by the dry cleaning equipment in his shop. ONB knows it must prepare a new security agreement, but does it have to file a new financing statement? ONB does not need to file a new financing statement. The financing statement does not have anything to do with the amount outstanding. The security agreement defines the terms between the parties and a new SA needs to be made. This would be so even if it were another advance on the same thing the first loan was made. So, there has to be a second SA. It may even be dangerous to file a second FS since you open yourself to the argument that the 2 nd FS refers to the second loan. A financing statement is good for any number of security agreements as long as they relate to the same description, the original FS serves the notice giving function. Since ONBs financing statement covers equipment all advances made by ONB have priority as of the filing of the first financing statement. 9-322(a)(1). Under 9-502(d) a financing statement may be filed before a security agreement is made or attaches The authors tell us this is so. This will of course be limited to the description of the collateral. Advances made under new agreement will have priority, so long as the original financing statement gives notice of the possibility that there will be future advances made that will have no priority Can file a financing statement before any advances are made at all and befre a new security agreement is signed

Problem 32.4: (a) Carol lent Bob $1,000 secured by his boat. A month later, BCA loans Bob $45,000 secured by his boat and other items. Bob fell behind on payments to BCA, and BCA repossessed the boat. Bob wants Carol to advance him $31,000 so BCA cant sell the boat or collect. Will this work? Yes. Under 9-322, the 31,000 advance has the same priority as the original $1,000 advance since both creditors are under Art 9 law and BCA has filed first. Hes taking advantage of the power to transfer. Possible problems: Fraudulent transfer hinder, delay, defraud creditors. There is a protection in the UFTA for recipients of transfers if they are in good faith and have given

reasonably equivalent value. There is reasonably equivalent value b/c Carol advanced $31,000. But, is there a good reason for the advance? She made it to defeat a creditor who levied on the boat. What happens if the transfer is avoided? Carol has a lien for money that she gave, but the lien may be worthless in the face of the earlier seizure by the lien creditor. As Carols lawyer, you should discuss the reason for making the loan. Remember Grocers Supply, Carol can lend $31,000 and foreclose and that will knock out the subordinate security interest. See 4a2 and 8 of UFTA: a transfer made with actual intent to defraud or hinder any creditor of the debtor. (b) Assume that Carol had filed a financing statement against Bob before BCA repossessed, but Bob had not authorized a security agreement and Carol had not sent any money. Would the scheme work under these circumstances? Yes, the scheme would work even if Bob had not authorized a security agreement and Carol had not lent any money. See, Comment 4 to 9-322. When you have a secured creditor, all you need to do is get a subsequent security agreement. You dont even need a future advance clause. Comment 4 of 9-322 tells us jus this, the filing without a SA is going to act as a marker for your first position. Problem 32.5: How does a second creditor protect themselves from advances made by the prior secured creditor? Subordination agreement --9-339 - a person entitled to priority may effectively agree to subordinate its claim. Only the person entitled to priority may make such an agreement: a persons rights cannot be adversely affected by an agreement to which the person is not a party. The first secured creditor isnt likely to give a subordination agreement across the board. The first secured creditor may desist from making an advance in exchange for money from the second secured creditor. The first secured creditor may benefit from a fresh infusion of cash from the second secured creditor and this way may be able to have the debtor continue with the life of the corp and maybe pay back the loans. Problem 32.6: Harley is under pressure from Centurion to stop messing up. He had Centurion lend to Grumman 150 grand unsecured. However, he found out that FN has a security interest of 1.5 million in all Grummans assets (liquidation value less than 1.5 million). Harley ran a search. It does not turn up anything under the name of the debtor. Is the creditor safe can First National have an effective filing even though the search came back blank? 1) Is there any way that FN could have an effective financing statement that doesnt show up in the official search in the state in which Grumans business is located? a) (1) If the filing officer wrongfully rejects the financing statement, it is still effective. If the officer wrongfully rejected it then the original FS would have gone back to the filing office b) (2) They have moved within the last four months. 9-316(a) continuing perfection of security interest following change in governing law. A security interest perfected under the law of one jurisdiction remains perfected for a fixed period of time (four months or one year) even though the jurisdiction whose law governs perfection changes. If a secured party properly reperfects its security interest before it becomes unperfected under (a) it is continuously perfected. c) (3) The debtors principal residence is in another jurisdiction then the FS somewhere else will be effective. 506b d) (4) The filing officer made a mistake by misindexing it, the FS is effective, leaving the searcher at risk. e) (5) It could be a partnership with the financing statement under the name of one of the partners.

2) How can you find out if a financing statement exists without shooting yourself in the foot? Warrens answer: Search alternative names. If you can find the wrong filing, you 5know they made a mistake, and it is not enforceable against me. 3) What should you do? Harley offers to loan an additional $100,000, if Grumman secures all $250,000 (giving Centurion a possible first). The old $150,000 advance will remain vulnerable as a preference in bankruptcy for 90 days, but the new $100,000 will not. What should Harley do? First, Harley could file a financing statement, and then call First National to see if they have a security interest in the debtors property. Harley cant file a financing statement unless they have authorization from the debtor. The debtor is unlikely to authorize unless the creditor agrees to lend money. Harley should carefully word the requirement for giving the debtor additional money. Second, wait four months for name and venue change windows to pass. Third, call FNB. Now you can tip your hand because you already have a security interest filed. Fourth, cut a deal between the two if FNB has a possible security agreement. Rather than litigate, have FNB and Harley sign a subordination agreement. Harley will not lend anything more than the $250,000 and that Harley wont be sued. -Here if Harley enters into a SA and has filed a FS it doesnt mean that Harleys Bank will give any money. The SA lays down the conditions that will apply when the Bank decides to give the money. The wording in the SA would have to say that this new loan will only be given if this loan is going to have priority. If FN has an effective FS it can withdraw the loan and if not the Centurion will have priority for 250k. -If there is a dispute b/w Centurion and FN then you can always agree on a subordination agreement and Centurion will be willing to forgo its priority for something in exchange. 4) What happens if you look under an incorrect spelling and find First Nationals filing? Ethical issue? 9-506 ineffective if seriously misleading. Finding it by accident doesnt cure the flaw. It didnt show up under the logic of the filing system. It is not effective. Ethical issue/Business judgment: The lawyer would not have an ethical issue. But, can Centurion take advantage of First Nationals mistake? It might adversely affect Centurions reputation and business ethics look at standard practices in the business community. Only $150,000 is at stake. Harley Davidson wants to file to protect his job, but the client is Centurion. The attorney should look out for the best interest of Centurion and not Harley whos an employee. Problem 32.7: Sara sells speakers to customers (who have inventory lenders). How can Sara get a first security interest in the speakers she sells to customers? 9-324(a) a PMSI has priority in goods OTHER than inventory. But this is inventory. 9-324(b) steps an inventory purchase money security interest must do to have priority: (a) A)The purchase money financier must perfect no later than the time the debtor receives possession of the collateral. This would be done by perfecting a SA and filing a FS (although if this is consumer goods it would be automatically perfected, but we are selling to dealers). And; (b) B)The purchase money financier must give advance notice to the inventory lender that it expects to acquire a PMSI in inventory. a. It must search the system for all secured parties with a filing in inventory of the type if plans to sell. The lender should send notice by certified mail. Like a financing statement, the notice expires at the end of five years. The inventory lender must learn of the financing before disbursing against the collateral. The notification is going to say that Sally is taking a SI in the speakers. What is the inventory lenders position? They probably will not let the debtor give a PMSI in inventory. The debtor is double-financing and the creditor will probably have a provision in the SA that says that its an event of default if someone else gets priority on

the collateral. The debtor is using the money from the inventory lender for some other purpose. What do you tell Sara, who sells the inventory? What is better than taking a purchase money security interest? Get paid out of the inventory financing cash on delivery or an arrangement that the inventory lender sends money straight to Sara.

Competitions Involving CrossCollateralized and Asset Marshaling

Marshaling: C1=$100, C2 = $60 C1 C2 A B $80 $80

C2 $60 (c) Overview: More than 1 Unsecured Surplus: $0 piece of collateral can But, what happens when C1 goes after B first? satisfy a single debt. C1=$100 C2=no $, but unsecured claim for $60 (d) Debtors: Do not like Unsecured Surplus = $60 cross-collateralization How do you decide which asset(s) to go after? Relative liquidity. If C1 and C2 are direct competitors, because all can be take B so that C2 now has no SI. confiscated if default on What about PMSIs? PMSIs: when Creditor holds PMSIs in a variety of collateral, the burden is on the holder to establish how much of each item is secured on a PMSI. If not clearly stated in K, then creditor one (although most loans LOSES PMSI STATUS. An after-acquired property clause will generally operate to void a PMSI. have clauses e.g. default on one means all are automatically in default)

If C1 seizes A first

C1 $100

(e) 504(2)(a)(2): If SI secures indebtedness, then unless otherwise agreed, SP is entitled to deficiency from debtor a. Occurs almost any time after an after-acquired property clause reaches an additional item of collateral (f) Secured Creditors Right to Choose Remedy: Generally SC secured with more than 1 piece of collateral have right to choose when it will FC against each can strategically force a debtor into bankruptcy a. Single Action Rules: Limits to items of real property, e.g. can only seize one item of real property (minority) b. 501(4): IF Sec. Ag. covers both real and personal property, SP may either: proceed for ONLY personal property under Article IX; or real property and personal property under state real property law (g) Release: all collateral is encumbered until debt is paid in full a. 9-307(1) default rule: Sale of inventory automatically releases the property sold from any SI created by the seller. (Can K around though with items expensive items like aircrafts, etc.)

Marshaling Assets
(h) Defined: Creditors election to proceed against one item of collateral rather than another can determine fate of other unpaid creditors 9-504(4) and (1) (i) Marshaling as Limit on Choice: Equitable doctrine developed to limit the senior secured creditors choice of which collateral to pursue. When it applies, it requires the creditor to look for its recovery in that/those asset(s) not encumbered by junior liens (this enabling junior lienholders the ability to recover the only assets available to them) a. (1) Cannot be used to compel FC against home property b. (2) Cannot be applied if senior creditor is prejudiced

In re Derecktors Ship of RI (j) Facts: Derecktors Ship building/ repair facility is in bankruptcy; borrowed $6.5MM from Port Authority to set up business in 1979, gave SI in current and after-acquired fixtures, furnishings, equipment, machinery, inventory and other tangible personal property. 2/92 D still owed $5MM. In 1987/88 Bank of New England (eventually FDIC) loans D $9MM to buy a dry-dock and gets a PMSI. Unsecured creditors claim that allowing marshaling here would be prejudicial (k)Three Required Elements: a. (1) Existence of 2 creditors of D (FDIC and PA) b. (2) 2 funds owned by debtor (here sale of proceeds from Dry Dock III and the assignment, the INA settlement, etc.) c. (3) Ability of one creditor to satisfy claim from either or both funds: while the other can look only to one of the funds - FDIC can satisfy its claim from all debtors funds, while PA can only look to Dry Dock III and equipment, machinery, and inventory for payment (l) PA Rights as SC: legally superior to USCs so no equal footing thus prejudice argument doesnt fly

Effect of Cross-Collateralization on Purchase Money Status

(m)Key: PMSI status can be easily lost as a result of cross-collateralization 9107 Southtrust Bank of AL v. Borg-Warner
(1) Court places on secured creditor the obligation to trace its $ into particular items of collateral and keep the account. (2) BWACs exercise of future advances and after-acquired property clauses in its Sec. Ag. w/ debtors destroyed its PMSI status. (BWAC does maintain a secured interest in goods, just loses its priority status as a PMSI lender). (3) W/o some guidelines, legislative or contractual, the courts should not be required to distill from a mass of transactions the extent to which a security interest is purchase money. (4) How do you allocate against the assets? Whats the relationship between Warner Acceptance Co and the Ds here? Warner was financing all inventory purchases over time. Provision: Prior, present, and future indebtedness. (5) Why is it important for Warner to get a PMSI? Genl first-in-time rule, PMSI exception. (a) Every month D pays certain % of each invoice. (b) PMSI is valuable to break up bank; ensures maximum value.

Problem Set 34
Problem 34.1: The creditor holds a second mortgage on a house. There is an outstanding first mortgage of $220,000. The house is worth not more than $200,000. If no additional relevant facts come to light, how much do you expect to recover? Zero. The first secured creditor is entitled to the whole amount, and can sue for deficiency under 9-615(d)(2). What additional facts might allow the creditor to recover by virtue of the second mortgage? Marshalling Has the first secured creditor cross-collateralized? If the secured creditor had two funds to satisfy the debt, he could resort to the fund that did not have a junior lienholder. *Elements for marshalling: (1) two creditors of the debtor (2) two funds owned by the debtor (3) ability of one creditor to satisfy claims with either or both of the funds, while the other creditor can look to only one fund. Limitations of marshalling: Cant force the creditor to foreclose on a homestead if the other alternative is a non-homestead. Cant be less equitable to the senior lien holder.

If the senior SC feels over secured in two loans made, he would have no incentive to C-c? since he may be forced to marshal. Problem 34.2: When the debtor filed for bankruptcy, he owned only two non-exempt assets, an apartment building and a yacht. The apartment building had a first mortgage held by UCB for $450,000. The first security interest in the yacht was held by CE for $400,000. The $400,000 note was also secured by a second mortgage against the apartment building. The debtors lawyer, Hurst, held a second security interest in the yacht securing $25,000 in legal work done more than a year before the filing of bankruptcy. By consent of all the parties, the Chapter 7 trustee sold the two assets free and clear of liens and the liens transferred to the proceeds of the sale. Apt Building- 660k UCB-450 Yatch-250k (200k) Carp Eq- 400k Hurst 25k

(a) If Hurst requests that CE marshall assets: Apartment proceeds $660,000: $450,000 to UCB (remaining $210,000 to CE). Yacht proceeds $250,000: $190,000 to CE; $25,000 to Hurst; $35,000 to the estate (TIB). The TIB cant force marshalling b/c he is a representative of the unsecured creditors. The estate is left with a surviving amount. Under the rule, Hurste can compel that CE look to the Apt first. If you are in a jurisdiction that recognizes the TIB as a junior lien holder (the minority) then youre not going to be able to marshall. The TIB could theoretically go into court and ask for instructions (b) If the yacht sold for only $200,000. Apartment building sold for $660,000. Apartment proceeds: $450,000 to UCB; ($210,000 to CE). Yacht: $190,000 to CE and $10,000 to Hurst. Hurst is out $15,000 and is unsecured for that amount. There is nothing for the TIB. If you took the minority view that the TIB was a lien creditor. It does not help the trustee b/c all the other people have good junior liens. One junior lien creditor cant use marshalling in a situation where it would hurt another junior lien creditor who has a good lien. That is this problem. The theory of marshalling is that the person who has taken the time and gone out and gotten security should be able to get some money and disfavor the unsecured creditors. Problem 34.3: See the debtors secured property below: A judgment creditor obtained a $10,000 judgment 6 months ago and recorded, but the D has all property encumbered. Is it collectible?

Farm -- $60,000 First mortgage National City Bank ($35,000 Balance) Second mortgage PCA ($44,000 Balance) Third (judgment) Millers lien against property ($10,000)

Machinery -- $55,000 First security interest PCA $44,000 Second interest SBA ($54,000 Balance) Home (exempt homestead property) -- $63,000 (a) First Security interest -- SBA ($54,000 Balance)

How can Miller get his money? Under normal circumstances: The house is worth $60,000. NCB would foreclose on the house to obtain its $35,000. The remaining $25,000 would go to PCA. Miller would be left with nothing. Issue: Double marshalling argument -- Can a junior lien creditor (Miller) use marshalling to force a senior creditor (PCA) to go after other collateral in such a way to force SBA to look to its collateral (homestead) in which it is senior? You cant use marshalling to force someone to go against a homestead, which is a protection of the homestead. The effect is that Miller is forcing SBA to go against the homestead. There is no rule that says SBA on its own cant decide to go against the homestead. If SBA wants to, they can go after the homestead. Issue: How do we persuade SBA to go against the homestead? Threaten litigation if SBA makes a move against the machinery, when it can get money out of the homestead. Threatening in pro of litigation, you will scare SBA into thinking that theyll waste a lot of time and money on a litigation instead of just going after the home. Or buy out SBA and foreclose against the homestead and pick up the excess of the machinery. This is a home free. Or buy out PCA (cheaper option), you get the excess $25,000 on the foreclosure of the farm which will pay off the difference between $25,000 and $44,000, which is $19,000. It will also pay off the judgment of $10,000. By buying out ether one of them then youll be in control of the mortgage and you can do whatever you want to foreclose. In this case there is enough money for everyone, but there is a problem with the homestead b/c perhaps the senior doesnt want to close on someones home first. Kaufman: This is an unrealistic problem. All the efforts have been directed at getting SBA to foreclose on the homestead. On the facts, SBA will foreclose against the homestead on its own b/c the most PCA can get out of the farm is $25,000. PCA will have to get $19,000 from the machinery. It will leave SBA $36,000 from the machinery, and it will not swallow an $18,000 loss. SBA will levy on the home. HYPO: PCA is only owed $25,000. You might convince the judge that PCA is getting fully paid on the farm. SBA is getting fully paid from the machinery. An equitable assignment of $1,000 of PCAs interest in the machinery to Miller. It will allow Miller to collect something without hurting SBA and PCA. Problem 34.6: On October 1, Becky sells a robot to MW for $70,000. MW pays $20,000 in cash and signs a promissory note for the remaining $50,000. MW also signs a security agreement granting Becky a security interest in all equipment to secure all obligations owing from MW to Becky. The security agreement makes no mention of purchase money status and provides no rules for applying payments. The robot will be equipment in the hands of MW. This problem addresses the difference between equipment and then inventory. (a) Is Beckys security interest purchase money? If so, to what extent? 9-103(b) -- A security interest is purchase money only to the extent that the collateral secures an obligation that is the purchase price of the collateral. Yes, the goods are purchase money with respect to the security interest. If the goods are purchase money collateral, they are purchase money to the extent of $50,000. PM collateral are goods that secure the partial payment of an obligation. (b) On November 1, Becky sells a miniature submarine to MW for $60,000. MW pays $20,000 in cash and signs a promissory note for the remaining $40,000. The submarine will be equipment in the hands of MW. In what amount is the submarine encumbered? What is the amount of the debt that encumbers the sub? The submarine is equipment and is encumbered with $90,000 of debt. 40k of this debt is PM. This is the intro to the notion that with respect to a single item of collateral, there can be part of it that secures PMSI and another that doesnt.

(c) The definition of PMSI, the debt secures a purchase money obligation with respect to that collateral. Since it is equipment, the second submarine is PMSI only to the extent of $40,000. (d) MW pays down $1,000. What is the $1,000 attributed to? 9-103(e) -- $1,000 is credited against the oldest obligation, the robot. Comment 7 tells us that is has to go to the oldest PMSI, so the PMSI goes to 39k. (e) What if the collateral were inventory? You add it all up and dont differentiate with PMSI. If it is inventory, the $90,000 purchase money security interest is against both items. In other words youd have a 90k SI in the submarine. 9-103(b)(2) -- To the extent that the security interest in the robot secures the price of the submarine, the security interest in the robot would be a purchase money security interest. Rationale: it is too difficult to try to match each loan with respect to each item when inventory is flowing in and out. The authors of the book tell us that its too complicated to try and differentiate. So it all gets added up with a total of 90 grand PMSI against both the sub and robot. This is a big advantage to the SC. Problem 34.7: On May 31, Bonnies Boat World purchases two Coyote Loaders for $90,000. Coyote takes a security interest for $50,000 for the purchase price. Bonnie borrows another $40,000 from Firstbank against the loaders, without mentioning Coyotes lien. Firstbank takes a security interest in the loaders, disburses the loan proceeds directly to Coyote, and perfects by filing a financing statement on June 1. Coyote perfects by filing a financing statement on June 2 and, and delivers the loaders to Bonnies on June 3. Bonnie uses the loaders as equipment. (a) Who has priority? Two parties have contributed to the purchase of the equipment the seller and the lender. Coyote Loaders b/c they are the seller under 9-324. Under 9324(a) -- A perfected PMSI in goods other than inventory have priority over a conflicting security interest if perfected when the debtor receives possession of the collateral or within 20 days thereafter. 9-324(g) conflicting PMSI priority is granted to the PMSI created in favor of the seller over PMSI that secures enabling loans (lenders). Coyote is preferred as it handed over actual collateral, the loaders while the Bank only gave cash to buy the loaders. The UCC gives priority to the provider and not the long term financer. b)What should the losing party have done to avoid this unexpected setback? There is nothing the lender can do it might be able to get a subordination agreement from the seller. The manufacturer may be willing to do this so it can make a sale. It is unlikely that the seller would give it, but in the right circumstances it may be possible. The Bank is more likely to rely on the financial condition of the debtor than on the SI it is getting. Problem 34.8: Deutsche Financial Services finances inventory, and then conducted a search, finding a financing statement filed by Firstbank covering inventory. Debtor tells DFS that FB only financing Bayliner brand. Does DFS need a subordination agreement even though DFS plans on only financing Shoreline boats? Suppose that Firstbank gives debtor $100 to help make down payment on a Shoreline boat. And the description in FBs security agreement is broad enough to cover a Shoreline boat. Firstbank will have a PMSI in the boat. The collateral is inventory, so the Firstbank security interest in Shoreline is PMSI to the extent that it secures any inventory. Firstbank is cross-collateralized, so it secures the entire Firstbank indebtedness. a)Who would have priority in the Shoreline boat? Firstbank has priority b/c it has lent money to make the payment and the debtor has used it to buy the boat so it has a PMSI. b) For how much is it PM? The collateral is inventory so firstbanks debt, the whole thing (not just the $100) is PM. c) These are both lender, who has priority over the other? 9324bc and g. First bank did not give notice to Duestche Bank under 9-324, but it did not have to b/c it was the first filer. Duetsche needs a financing statement with respect to financing the Shoreline boats.

Otherwise, Firstbank could lend money and it will come first. If Duetsche Bank filed first, it would have priority. So here, First Bank filed first and has priority. If Duetsche bank have priority if they filed first? Yes. They would have priority if they had filed first.

Buyers v. Secured Creditors

General Principles: Security doesnt effect alienability you can sell a car with a lien on it it will probably sell for less but you can alienate it 9-401 SCs expect to be secured in value 9-401 Some purchasers expect to get good title without searching e.g. buying an appliance at the mall Real Personal Buyers: Generally purchase subject to SI 9-315(a) Authorized Disposition: SCs can allow owners to sell property free of SI Regardless of Whether Buyer Searched and Found SI, court will sometimes imply consent, as when a SC knows that an owner is making a sale in violation of the SA and does nothing Split; Rev. 9 left the split in place Buyers in the Ordinary Course of Business 9-320: BOC take free of SIs Ordinary course of Sellers biz Regardless of buyers knowledge of SI Only free interests created by the seller if it is encumbered by interest created by someone else the sellers seller then buyer takes subject to those interests Does not apply to farm equipment

Daniel v. Bank of Hayward: When is a Buyer a Buyer? Facts: Car dealer has loan secured by inventory, sells a car to a customer who makes a down payment but title is not delivered. Issue: Is car free and clear of secured lenders SI? Held: Buyer becomes buyer when the car is identified to the K even if payment is not complete and title has not passed, he is buyer. Buyers outside ordinary course of business: Do not get an exception.

Consumer to Consumer Sales

Buyer in Consumer to Consumer Sales: Takes free of SI even if perfected if the buyer buys: Without knowledge of the SI For value For personal use and Before the filing of a FS covering the goods

Problem Set 36
Problem 36.1:Davis Store sold a TV-VCR to Beavis on credit. Beavis paid no money down, but signed a security agreement, promissory note, and financing statement. Davis Store filed in the statewide UCC records. The security agreement provides that Beavis agrees not to sell the collateral. Beavis sold the TV-VCR to Butthead at a garage sale.

Butthead did not know about the security agreement. Butthead paid by check. Can Davis repossess the TV-VCR from Butthead? The transfer can take effect under 9-401(b). The security interest continues under 9-315(a). The security continues in the collateral and Beavis is not a ordinary seller in this type of collateral. The conditions of consumer to consumer exception of 9-320(b) are not met (because a financing statement has already been filed) so the property is still encumbered. Davis has filed a financing statement and the later consumer who buys will not have priority over the second consumer. But how you expect a consumer to know about the filing system and check? If its a high ticket item then maybe you would be willing to check it out. The bank doesnt have to pay. Butthead can go after Beavis for the $960 he paid. Problem 36.2: UCB has a security interest in inventory of Sound City. The security agreement authorized sales in the ordinary course of business, prohibited sales on credit, and required Sound City to deposit the proceeds in a designated account. Sound City filed for bankruptcy. The trustee abandoned the inventory. A deficiency remains owing on the loan. The following transactions took place before the filing of the petition: (a) A buyer purchases as stereo from Sound City. The buyer bought the stereo by paying a negotiable promissory note. Under 1-201(9) -- A buyer in the ordinary course may buy for cash, in exchange of other property, or on secured or unsecured credit. Here the buyer can buy on credit. In this case the buyer is buying in the ordinary course although he is buying on a credit sale. UCB cant get this stereo. (b) The lawyer takes the sound system in payment for services. Under 1-201(9) a buyer in the ordinary course does not include a person that acquires goods for total or partial satisfaction of a money debt. An antecedent debt is value for Art9 purposes. At the end of this section though it says that partial satisfaction of a money debt is not going to be a buyer in the ordinary course of business. Problem 36.3: All Seasons RV sold to Eddy a motor home (Eddy owes 17 grand). Eddy sells to another dealer, Sun Rise (subject to All Seasons security interest created by Eddy). All seasons security interest survives b/c Eddy is a consumer. When Alicia buys from Sun Rise, Alicia is a buyer in the ordinary course but she only takes free of security interests created by Sun Rise. The security interest was created by Eddie here (the sellers seller). a) Alicia wants to sue to remove All Seasons lien from the car? Is her case any good? The consumer gets stuck by the created by its seller in 9-320. It is hard to make an authorized disposition b/c All Seasons is selling to a consumer. The SI is created by Eddy here (the sellers seller) and not by Alicia and hence the SI survives. Eddy is not a dealer in the ordinary course of business, Sun Rise took the RV under the condition that the SI would continue. If Sun Rise were a consumer what would happen? The buyer has knowledge and the certificate of title is the equivalent of filing a FS. b) What if the consumer buyer wants to see the certificate of title? Sun Rise will show the certificate of title it will show All Seasons lien. On the bank of the certificate there will be Eddys signature. It is signed by Eddie in blank, and the dealer is likely to say it will take care of it. If there had been a release of the lien by All Seasons when Eddy sold the RV to Sunrise, it would be in a separate document (theres no place on it on the certificate). Alicia, the ordinary consumer, does not know to ask for this separate document. The dealer would most likely say Im getting it for you. Asking to see the certificate wont solve Alicias problem. If this were a genuine transaction, and if she knew to ask, she would know that there would have to be some document from All Seasons releasing Eddy from the SI. But someone in the position of Alicia (a regular consumer) isnt going to know this. Dealers in situations like this dont get certificates of title in their

own name. They will hold on to Eddys with the transfer of title on the certificate. Once Alicia buys the car, the dealer will send the certificate to the RMV to get them to issue a new certificate with Alicias name on it. Problem 36.4: A consumer wants to buy a reconditioned piano at the mall. The buyer wants representation at the closing. Does she have anything to fear? 9-320(a).This is just like the RV case, but you dont get certificates of title on pianos. If the person who originally owned the piano has a security interest, Alicia will take the piano subject to the security interest. Difficult to check the records ask for the bill of sale to find the name of the former owner. You would look at the filing system of the prior owners residence and every place the prior owner lived while he/she owned the piano (Comment 3 9-507). AND, there may have been a previous owner before that. Theres a risk of there existing an ongoing chain of past ownership. What do you tell Alicia? You cant eliminate all risks, you can only narrow the risk. Can the problem occur with new good as well? Yes, but it is pretty unusual. Ex: if American bought the inventory of another piano company going out of business American could take subject to the interests of the other piano company since it is not a BOC, it would have been a buyer in bulk and not in OC. Alicia would not take free of the other piano companys security interest. So there is no guarantee about anything, you can narrow the risk as much as possible but there is no real way to be 100% safe. Problem 36.6: After the Daniel v. Hayward Bank Case, the Bank comes to you for advice. They send someone form the bank to inspect the vehicles physically every once in a while. Now though the bank could have sold the cars way before. a) The lot could be full of vehicles but all paid to prepaying customers. Do you agree? If there is a vehicle on the lot, and a buyer has already bought the car, a bank cannot know anything by the presence of a vehicle on the lot. The bank can be fearful about the cars on the lots being bought previous to delivery. But buyers of cars like to take their cars right away, but the dealer may be servicing and getting the cars ready for delivery or something. Theoretically, there is a danger for the bank, but its no usual for this sort of thing to endanger a large part of the collateral. It will not be the case with respect to the hundreds of cars on the lot. b)Under Chrysler the Bank says that we controlled delivery of the MSO, now the buyer can just sue us for it. Is the Bank right? Under Daniel, the buyer did not title in the sence of having the certificate of titile. But this was true under Chrysler too, all you needed was an agreement. If the dealer agreed that the title passed even before getting the certificate of title, the SC was going to be in bad shape. If the agreement said something about the passage of title occurring when the consumer bought the car, then there was trouble, title had passed. Title can pass from a seller to buyer as a matter of contract law without the certificate of title being in the hands of the buyer. (When you buy a car and drive away, it takes a couple of weeks for the certificate of title to get to you from the registry of motor vehicles but title has passed under any version of 9-320.) Even before the RMV gets around issuing the certificate of title, title in the legal sense has already passed over to the buyer. So holding on to the MSO wont do that much, although it may help prove that the dealer has been selling cars out of trust without the knowledge of the Bank. c)In the Daniels case the Court said that the Bank is in the business of lending money and has access to information on how to protect itself. What can you suggest? There are a couple of things the bank can do. (1) keep possession of the car (under 9-320(e), part a, BOC, and part b, consumer to consumer sales, dont work when secured party has possession). The Bank would have to establish their possession of the collateral (and use

9-320(e) to defeat 9-320(a)). Is this a good idea? Yes, they can defeat the buyers this way. Secured party can prevail even when vehicles were actually delivered to the lot. -Can the dealer be an agent of possession for the creditor? This is hard to do. What the Bank can do is set up a field warehousing operation. The bank can still maintain possession under a field warehouse arrangement and put up a sign that constitutes notice, there is going to have to be an employee on your payroll to control access to the field warehouse. Cars in the field warehouse are in possession of the bank, the secured creditor of the dealer. Problem 36.7: The Bank asks you what you think about a new plan. The bills of lading for new vehicles will provide that from the moment of identification of a new vehicle to a dealers contract for sale until the vehicle actually arrives on the dealers lot, the manufacturer and the carriers will hold possession of the vehicles agents for the bank that finances the dealers inventory. That way the Bank says buyers like Daniel wont be entitled to vehicles on which they have made down payments before the vehicles show up on the lot. a) Is the Bank right? b) Is there anyway the Bank can use 9-320(e) to prevail even as to vehicles actually delivered to the dealers lot? c) What advice would you give to people like the Daniels who want a car custommade for them, but are faced with the inevitable demand from the dealer for a substantial down payment? The Daniels could try and contract around this issue. You want to defeat the secured creditor of the dealer. The contract would have to say that the Daniels become a buyer when the car is identified in the contract, and hence the SI of the secured creditor didnt attach on the car b/c it belongs to you. You want to make the Daniels the buyers as soon as possible. The dealer is simply the agent for the Daniels and not acting as a buyer themselves. Another possibility here would be to do a search and find the dealers inventory lender and send the lender a notice that says that the Daniels are taking a PMSI in their own car. Then, you give the dealer money for value and then the Daniels would have to file to perfect. This is a weird way to get priority but theoretically it would work. The need to do things like this suggests that the addition of 9-320(e) to get rid of certain cases wasnt such a good idea. It causes a lot of trouble. Problem 36.8: Two Sherrock brothers, partners in Sherrock Toyota Dealerships, buy two cars from Dover motors and made an arrangement to pay for them by transfer of funds later this afternoon. They leave the cars at Dover motors. Dover is in financial difficulty. Is there a problem with leaving the vehicles on the lot? a) What happens if Dover sells the cars in the ordinary course of business? Article 2403(2) Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. The innocent purchaser will not think they are buying someone elses car, and the purchaser under 2-403(2) will divest entruster of title. So this is dangerous since someone could come along and purchase the cars free of the SI. b)What happens if Dover files for bankruptcy and the brothers cars are entrusted to Dover, and the inventory lender claims the cars? A purchaser is a person who takes by purchase, which includes a lender. Does inventory lender fit the definition of buyer in the ordinary course? No, 1-201(9) -- A buyer in the ordinary course buys goods, the inventory lender only has a security interest. 2-403(2) doesnt protect the inventory lender.

Overview: What is the brothers claim? The brothers will claim to be BOC who takes free of the security interest. A buyer in the ordinary course of business must take in good faith. In article 9, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. Article 2 (sale of goods) good faith means honesty in fact and the observance of reasonable commercial standards in the trade. In the automobile trade, the standard is not for the dealer to have possession of the cars, after someone has purchased. Note: UFTA makes it a rebuttable presumption that leaving the goods in the possession of the dealer is not in good faith. Authorized Disposition? There is no restriction in the inventory lending agreement about selling to dealers. So, we may not have to reach 9-320. Also, what about acquiescence? Often a debtor restricted from selling will sell in a situation where at least there is an argument about whether the security interest does not attach b/c acquiescing is equivalent to entrusting under 2403(2). When the secured creditor finds out that X has bought the collateral, and the secured creditor does nothing about it, maybe its acquiescence. If the person buying (X) is a merchant (rather than a ordinary purchaser), some courts will say 2-403 applies because acquiescence is entrusting within the meaning of 2-403(2). The buyer in the ordinary course from X is protected. It is a funny use of entrusting b/c the secured creditor did not entrust the goods to merchant X. This is a way of protecting the consumer that buys from the merchant. There is a body of common law doctrine that says when a buyer leaves the seller in possession of goods, this is fraud. In some jurisdictions this used to be conclusive proof of fraud in others it was just indicative. A lot of this has disappeared but a lot of this turns up on particular cases to make it a problem to cause a sufficient amount of worry. So the best thing here would be to drive the cars immediately, or at least take them off the lot and park them on the street. HYPO: Taking your watch to the Swiss watchmaker for repair. The Swiss watchmaker sells watches, so the watch maker could sell in the ordinary course of business. The owner of the watch would loose to the bona fide purchaser. POLICY: Maybe not good policy -- two equally innocent parties. HYPO: A neighbor entrusts his snow blower with another neighbor. Can the neighbor sell the snow blower and have the power to transfer the rights to an owner in the ordinary course of business? No, the neighbor-owner will be able to get the snow blower back. The neighbor entrusted with the snow blower does not deal in goods of that kind, so he does not have the power to transfer title.

The Basics of Federal Tax Liens

US Government: One of the principle competitors for debtors assets

Creation and Perfection of US Federal Tax Liens

Federal Tax Lien: All encompassing, when the tax is assessed, the lien comes into being; 6231(2) and (3) doesnt become valid against 3rd parties (SCs and purchasers) until a notice of the lien has been filed under 6323.

Maintaining a Perfection in Tax Lien: 6323 required refilling period for a Notice of Tax lien is the one-year period ending 30 days after expiration of ten years after the date of assessment of the tax
a) LMS Hold Com any (IRS knew that debtor sold property subject to the tax lien, and the IRS ing p did not file a new notice) i) Held: the IRS has an affirmative duty to refile Notices of Tax Lien that could not be discovered upon a search and the IRS knew of the change. ii) The court decides what instances trigger refilling and how long the IRS should have to refile. 2) What happens if the debtor moves? (In re Eschenback) a) A federal tax lien attaches to any property owned by the delinquent at any time during the life of the lien. b) Once properly filed, it attaches to property no matter where it is located. The lien remains valid even if the debtor leaves the residence. 26 USC 6323(f)(2)(B).

Name Changes or Property is Sold: Competing Interests: What must a competing interest do to be valid and prevail over tax lien? 6323(h) security interests exists only when (a) the property is in existence and the interest has become protected against a judgment lien under local law and (b) the holder has parted with the money or other value, the repayment of which is secured (1) There is no security interest until the property is in existence. (similar to bankruptcy law (2) Must be protected against a hypothetical subsequent judgment lien and levy. So, you a) Purchas r v. Tax Lie must acquire its status as a purchaser BEFORE the government files a e n tax lien. 6323(a). must be i) Purchaser is defined as a person who for adequate and full consideration in money or moneys worth acquires an interest valid under local law (state law) against a subsequent perfected purchaser without actual notice of the interest. (3) Must have (1) If local law requires the filing or recording of transfers of particular personal property, the filing or recording is likely to protect the transferee against a tax lien filed later parted with against the transferor. ii) Ex: in some states, a real estate purchaser would have to file a deed money or iii) Mayer Dupree person purchased an automobile before the government recorded a notice of moneys worth tax lien. The person did not file a certificate of title. The IRS can seize the car b/c the person
who bought the car is not purchaser since she did not record).

Problem Set 38 b) J udg nt Lie Cre me n ditor v. Tax Lie n c) Exceptions in 6323(b),(c),(d) an interest that arises subsequent may prevail over the tax lien. Problem 38.1: Priority i) Personal property retailer ex: file a tax lien against Best Buy. If you buy TV from Best Buy between a lien creditor (law as a purchaser, under 6323(b)(3) the purchaser will prevail over the tax lien (unless the purchaser knows of the lien). firm) and a filed tax lien ii) If you buy at a yard sale, 6323(b)(4) says that if you dont know about the tax lien and what you buy in the yard sale is less than $1,000, you prevail against the tax lien. when there are two real estate iii) 6323(b)(8) attorneys lobby parcels that the debtor owned before the notice of tax lien was filed. May 5, 1994 judgment recorded for $250,000 August 23 IRS filed a tax lien for $953,000 December 24 IRS levied on 3 parcels of real property owned by the debtor December 27 debtor files for bankruptcy The three parcels are the only property of value in the debtors estate. Each is worth between $50,000 and $30,000: 1993 Debtor bought the Adams parcel June 1994 Debtor bought the Baker parcel Nov 1994 Inherited the Charlie parcel

Who is entitled to that value? A judgment creditor does not have to levy against real property. 1993 Adams parcel and June 1994 Baker parcel go to the judgment creditor, first in time first in right. 6323(a) the federal tax lien had been recorded. Who prevails in the after-acquired property? When property is inherited, both the lien of the lien creditor and the lien of the tax lien attach at the same moment. After-acquired property (property acquired in Nov 1994): federal tax lien is given priority (if it has been recorded McDermott). Problem 38.2: Sally owes $14,923 in payroll taxes. She has received two notices of assessment, but has not yet received a notice of the filing of a tax lien. She has a message on the answering machine from the IRS office, before calling the IRS back she comes to her lawyer with the following questions: Does the IRS have a lien against her business, house (which is exempt from execution under state law), or birds? Yes, it has a lien against all her property upon notification of assessment! When the IRS notifies the taxpayer of its assessment, that notice constitutes demand in 6321 and the tax lien comes into existence and relates back to the date and time of assessment.There is an exemption section, but it is not included in the statute book. 6334 is much like the homestead exemptions on p16 of the textbook. The principal residence of the taxpayer is exempt unless if the district director or assistant district direct of the IRS personally approves the levy in writing OR the secretary finds that the collection of tax is in jeopardy. (very discretionary). The lien attaches to all property and rights to property, whether real or personal, belonging to the taxpayer. 6321. What can the IRS do? What are they likely to do? Sally has converted trust funds. She has committed a crime, but the IRS is not likely to go after her. The IRS just wants to get the taxes collected. The non-payment must stop. They will set up a schedule for the payment of taxes. If they file a notice of tax lien, they will put Sally out of business. And, then the chances for getting the taxes paid will be small. The IRS will probably not file a notice of tax lien. If the taxpayer does not pay within 10 days after notice and demand, the IRS can levy on the taxpayers property. (Notice is notice that a levy is forthcoming, not simply notice of a tax lien). The IRS can levy in two ways: IRS employees can levy and sell assets, or serve a notice of levy on a 3rd party (easier and less complicated). Sally wants to sell one of her birds to her friend George for $2,500 to raise money to keep the business going. If George pays her the $2,500 and she gives him possession of the bird, can the IRS take it back? Does it matter whether George knows about the unpaid payroll taxes? In order to prevail, George must acquire status as a purchaser before the government files notice of its tax lien 6323(a), 6323(h)(6). This is true even if George know of the troubles with the IRS and knows there is a lien outstanding, but no notice has been filed. George does not have to do anything to prevail over a subsequent purchaser in this case he cant file for title, security interest, etc. Sallys mom loans her money and takes a security interest in the birds. What does her mother have to do to prevail over a tax lien? A security interest exists only when (a) the property is in existence and the interest has

become protected against a judgment lien under local law AND (b) the holder has parted with money or value. If they get a written security interest and financing statement on file BEFORE the notice of tax lien is filed, the secured creditor will be protected against the subsequent lien creditor. There is nothing in the definition that requires that the value be given at the time the security interest is given (contemporaneously). Here there is antecedent debt. The secured creditor must do as follows: (A) security interest must attach under 9-203(a), and security interest must be perfected by filing (9-310) or possession (9-313) AND (B) give the money to the debtor. Under 9-317, a secured creditor that is properly perfected will prevail over a lien creditor. Note: perfect by possession (non written security agreement). Problem 38.3: Sally lives in Wyoming County, NY and her business is in neighboring Niagara County, NY. The only real estate she owns is a home in Wyoming County. Where should the IRS file a notice of a tax lien against Sally? (using NY lien law). Under 6321 the IRS tax lien reaches all property and rights to property, whether real or personal, belonging to the taxpayer. For Individual file in the individuals county of residence (Wyoming County). Sallys business is an individual proprietorship when searching the records, there is nothing on file in the Secretary of States office and nothing on file in the county of residence. Filing in the individuals county of residence will cover the sole proprietorship. Compare to article 9: filing in secretary of state. Moral: Tax liens are filed in county of residence. What if Sally did not run her business as a sole proprietorship, but her business was incorporated and the corporation owned the pretzel shop in Niagara County and Erie, PA, but owned no real property at either location. Sally ran her business from her office in the back of the Niagara County store. Under these circumstances, where should the IRS file Notice of Tax Lien? Assume NY and PA have identical statutes to the NY statute 240 reproduced in text. For Corporation in two states: Personal property file in the county where the property is situated. Personal property is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed. The residence of a corporation is deemed to be the place where the principal executive office is located. Where the corporation has personal property in NY and PA, the principal executive office is probably in NY (Sally ran the business in back of Niagara county store). The notice of tax lien is filed in NY. A searcher in PA will not find anything. If you are lending to a corporation on the strength of the corporations PA assets, you must find out more about the corporation b/c they might have assets in other states.

Problem 38.4: Transfer of property by debtors -- Dans only asset is a lunch wagon worth about $18,000. Dan grants a security interest in the wagon to Firstbank to secure a loan in the amount of $10,000. The IRS files a tax lien against Dan. Dan sells the wagon to a buyer who does not check the records and does not have actual knowledge of either encumbrance. Eighteen months later, the buyer files under chapter 7 and you are appointed as trustee. What do you do? LMS

case requires the IRS (if they know of the property has been transferred by the debtor to a 3rd party) to re-file in a reasonable time. The courts read into the tax lien act a requirement on the IRS to
re-file when it knows of a transfer of property. They imply that it must be done in a reasonable time. LMS might be good law but the circuit courts and SC have not ruled on the issue.

Assignment 39: Federal Tax Liens: Advanced Problems 1) Class Note Summary: a) Under 6323(d), a secured creditor can make additional loans under future advance clause for a period of 45 days, and come ahead of the IRS tax lien. i) 6323(d) with respect to any kind of collateral, in which a secured party has a security interest at the filing of the tax lien, for a period of 45 days after that the secured creditor can make additional loans (1) If they dont know about the existence of the tax lien. The secured creditor will come ahead of the tax lien with respect to the debt incurred in the 45 day period. (2) Rationale: When you have a future advance lender who is disbursing to the debtor on a regular basis, the business would be killed if they had to check the tax lien filing every time they disbursed. b) Also, the secured creditor would have to win with respect to advances over an article 9 lien creditor. There is a 45-day period where the secured lender wins over lien creditor even though it knows of the existence of the lien of the lien creditor. It has absolute priority for advances within 45 days. The purpose was not to defeat lien creditor but rather to defeat the IRS under the tax lien act. c) 6323(c) protects after-acquired property within 45 days. Refers to commercial lending in situations where there is a constant flow of money to the debtor and changing collateral. i) This defines collateral as commercial financing security for chattel paper, accounts receivable, mortgages on real property, and inventory. d) Part c is different from part d because the secured lenders take priority even if know of tax lien on after acquired property. The secured creditor has no choice, the inventory is sold and new inventory comes in. Unlike above, the secured creditor has no choice to cut off. e) Note: How different from Article 9? i) Under Article 9, a security interest may be attached and perfected if the secured creditor has given consideration sufficient to support a simple contract. ii) Under FTLA, a security interest exists only to the extent that the secured creditor has parted with money (made the loan). 2) Protection of Those Who Lend After the Tax Lien is Filed: a) Commercial Transaction Financing Agreements

i) Floating Liens -- 6323(c) protects Article 9 floating liens that occur within 45 days of filing the tax lien. ii) Applies only with respect to commercial financing security: accounts, inventory, chattel paper, and mortgage paper. iii) Extends to collateral acquired 45 days after tax lien filing. b) Real Property Construction or Improvement Financing i) 6323(c) protects construction lenders against a tax lien filed during construction. ii) The construction lender must have entered into a contract to finance the construction prior to the filing of the tax lien. iii) Protection only extends to the real property improved. iv) If a construction lenders priority is protected under local law against a judgment lien arising as of the time of tax lien filing, out of an unsecured obligation the protection extends to advances made after the construction lender knows about the tax lien. c) Obligatory Disbursement Agreement - 6323(c)(4) d) Statutory Liens - 6323(b) some statutory liens have priority over federal tax liens, even when those statutory liens arise after the federal tax lien is filed. i) Artisans liens in favor of those of make improvements to personal property and retain possession of the property as security for claims 6323(b)(5) ii) Real property and special assessment-- 6323(b)(6) iii) Mechanics liens for improvements made to real property - 6323(b)(7) limited to debtors personal residence and contracts not in excess of $1,000. iv) Attorneys lien - 6323(b)(8) for fees against a judgment or settlement amount obtained by the attorney on behalf of the client. e) Purchase Money Security Interests i) PMSI has protection against an earlier-filed tax lien. ii) No provision in 6323(b), but the courts interpreted one and the IRS acquiesced. iii) First Interstate Bank v. IRS

f) Nonadvances - 6323(e)
i) What are nonadvances? Interest, attorneys fees, and other expenses incurred by the secured creditor in protecting and recovering its collateral and collecting the amount of debt owing from the debtor. ii) If the nonadvances are provided for in the security agreement and are reasonable, nonadvances under a security agreement are equal in priority to the first advance. Problem Set 39

Problem 39.1 Aug 1- Bank 1 filed a financing statement (no commitment to make the loan). Aug 5 Bank 2 approved the loan, filed a financing statement, security agreement, advanced funds to debtor. Aug 7 IRS files notice of tax lien. Aug 10 Bank 1 signs security agreement.

What is the priority between Bank 1 and the IRS? Does Bank 1 have a security interest as defined by the FTLA in 6323(h)? 6232(h) a security interest comes into existence when it is protected by local law against a subsequent judgment lien and parted with moneys worth. Bank 1 does not have a FLTA-defined security interest until it parts with
money on Aug. 10, which is after the tax lien was filed (Aug 7). IRS has priority over Bank 1. The outcome would not change even if Bank 1 signed the security agreement on August 1 (unless it made a commitment to make the loan).

What is the priority between Bank 2 and the IRS? Does Bank 2 have a security interest as defined by the FTLA in 6323(h)? 6323(h) a security interest comes into existence when it is protected by local law against a subsequent judgment lien and parted with moneys worth. Bank 2 has a signed security agreement, filed the financing statement, and
made the loan. Bank 2 has a FLTA-defined security interest on Aug. 5, which is before the tax lien was filed (Aug 7). Bank 2 has priority over the IRS.

What is the priority between Bank 1 and Bank 2? Priority between two secured creditors:9-323(a)(1) -- first to file or perfect.
Bank 1 has priority b/c it filed on Aug 1 before Bank 2 filed or perfected (Aug 5). Who wins when there is circular priority? A court will do equity in the situation and decide looking at Article 9 and the tax lien act and determine which principles are strongest in this situation. Tempted to say Bank One is at the top of the heap, and the federal tax lien will be paid out of Bank ones priority. If anything is left over, Bank One can take. Then, Bank Two. Policy of 6323 the federal tax lien is effective against Bank 1 the minute the tax lien is filed. What could Bank 1 have done? Give a nominal amount ($100) on August 1. Wait for search to come back, and then advance the remaining amount (which will be within 45 days of the tax lien). Problem 39.2: The debtor operates a pet store. The IRS notifies the debtor that it will file a tax lien in the next few days. The debtor is concerned about the following situations: (a)Will the customers who buy pets from the stores inventory after the Notice is filed take free and clear of the IRS lien? 6323(b)(3) -- Personal property purchased at retail take free of filed tax lien: with respect to tangible personal property purchased at retail, as against a purchaser in the ordinary course of the seller's trade or business, unless at the time of such purchase such purchaser intends such

purchase to (or knows such purchase will) hinder, evade, or defeat the collection of any tax under this title. **Ordinary consumer is protected against the tax lien. (b) The debtor needs to install a new fish tank that will cost $5,000. The seller will provide 100% of the financing, and the debtor will make payments over the next five years. They will not be able to get the deal done before the lien is filed. The seller will file a financing statement, but probably wont search the public records. Purchase money security interest exception: There is no provision in 6323(b) for purchase money security interests. But, the courts have read one into the provision. (First Interstate Bank). The PMSI lender should prevail over the tax lien filed earlier in time. (c) The debtor is worried about his employees. If he pays them with money which the IRS has a lien, can the IRS take the money back? If the IRS levies the day before payday, where do the employees stand? Everyone assumes that the employees take free and clear, but it is hard to actually see this in the FTLA Politically, the IRS should not try to take the employees money. Once there is a levy, the employees would be stuck b/c the debtor cannot pay out of a deposit account that has been levied. (d) The business is financed with an inventory and accounts receivable loan from the Bank. The bank lends 65% of the cost of inventory as the Debtor (pet store) receives it. The security interest contains the usual provisions regarding future advances and after-acquired property. The debtor believes the bank will work with him. There is an outstanding $175,000 balance on the loan. If the business continues, the collateral will be worth that amount. If the business closes, the bank will only get $50,000 out of the collateral. Can the Bank work with the debtor without losing its priority over the tax lien? They can work something out with the bank, but only for 45 days. 6323(c) inventory and a/r within 45 day period. The bank is not going to be interested in working with the debtor beyond the 45day period. If inventory is sold after 45 days, it diminishes the banks collateral. The inventory lender could become a purchase money lender with respect to specific shipments of inventory (even after 45 days it would be protected). But, the lender has a problem b/c they cant let the debtor make sales on credit b/c the Interstate case says you cant have a PMSI in an account receivable (for purposes of the a/r). What about using segregated accounts? The bank has priority in all inventory and a/r as of today. If they are sold, you put the proceeds in a segregated bank account. Use the segregated bank account to buy new inventory, even acquired after the 45 day limit. Then put those proceeds in a segregated bank account. Kaufman does not know the answer to this situation, but it is risky but might work. The FLTA does not say anything about proceeds. The notion of protecting the revolving collateral and loans in 6323(c) implicitly carries a notion of protecting proceeds in the same way secured creditors are protected in bankruptcy and retain an interest in proceeds.

Problem 39.3: The client does a substantial amount of inventory and accounts receivable financing. The client was recently burned in a situation where a tax lien was filed ,and 45 days went by without the client learning of it. The client continued to fund the loan and eventually lost nearly all remaining collateral to the tax lien. What can the client do to avoid recurrence of the problem in the future? Texas Oil and Gas case refers to the problem of searching every 45 days. It is very expensive and it takes a while for tax liens to show up in the records. Practical solution: People in this lending business, use credit bulletins that put out weekly newsletters. The newsletter lists all the tax liens that have been filed. The newsletter does the searching every week. Problem 39.4: Should a debtor worry about leaving items purchased at a store? She is a purchaser, and under IRC 6323(b)(3) purchasers are protected against even earlier-filed tax liens. If she walks out with the item, she does not have a problem. Is she right about leaving the piano at the piano dealer entrusted with dealer? She will not be protected against the earlier-filed taxed lien b/c she is not protected against the subsequent purchaser w/o knowledge. If another buyer purchases the piano when Alecia leaves, she loses. Alecia has entrusted the piano with a dealer in those goods. 9-403(b); 2-403(2). Problem 39.5: If Alecia buys a used sailboat. How will she know if there is a tax lien against the boat? 6323(b)(4) casual sales (household goods, personal effects, and other tangible personal property) the tax lien is not valid in casual sale for less than $1,000. The sailboat is bought for $3,000, so it is not a casual sale. The buyer should check the records (and not only for tax liens but also security agreements of the bank that filed a financing statement).