Secured Transactions

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Overview of Statutory Scheme

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Involve credit transactions. Typically one party (the debtor) buys something on credit from another party (the creditor or secured party) but doesn't pay immediately. To ensure payment, creditor takes a security interest on specific personal property (collateral) of debtor, which allows creditor to take property if debtor fails to fulfill the credit obligation. For security interest to be effective b/w parties, certain steps known as attachment must be taken. After attachment, if debtor defaults, creditor has right to take property to satisfy the obligation. However, attachment generally doesn't provide creditor w/ rights against other parties who might also have an interest in same collateral. To maximize its rights against such parties, creditor must take additional steps to perfect the security interest. When more than 1 creditor has interest in same collateral, rules of priority determine whose interest is superior.

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Scope of Article 9

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Applies to the following transactions:

-K security interests (interests in personal property or fixtures that secure payment or performance of an obligation;

-Sales of accounts, chattel paper, payment intangibles, and promissory notes

-Commercial consignments of goods worth a total of $1k or more to persons who (i) deal in goods of that kind under name other than consignor's, (ii) are not auctioneers, and (iii) are not generally known by their creditors to be substantially engaged in selling goods of others

-Agricultural liens, i.e., nonpossessory liens on farm products that are created by state statute in favor of persons providing goods, service, or rental land to farmers (only perfection and priority of agricultural liens are governed by Art 9; creation and enforcement of liens are governed by state statutes)- In TN, Art 9 does NOT apply to agricultural liens in TN b/c state defines term "agricultural lien" to exclude statuary liens on farm products;

-Leases that are interred to serve as security arrangements (but not true leases); and

-A seller's retention of title to delivered goods (treated as security interest for price).

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Article 9-Exceptions

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Most notable to Art 9 coverage is that it doesn't apply to most transfers of interests in land (except for interests in fixtures).

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Security Interests-PMSIs

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A purchase money security interest (PMSI) is special type of security interest in goods. Person who holds PMSI has priority over other security interests in same goods if certain requirements are met. A PMSI can arise in 2 ways: (i) creditor sells the goods to debtor on credit, retaining a security interest in the goods for purchase price (e.g., debtor buys a stereo from a store on credit and store retains a security interest in stereo); OR (ii) creditor advances debtor the funds used to buy goods, and creditor takes security interest in goods (e.g., a debtor borrows money from bank to buy stereo and bank takes a security interest in stereo for purchase price).

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Security Interests-PMSIs-Dual Status Rule

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Security interest in nonconsumer goods (i.e., goods that were not bought or used for personal, family, or household purposes) does not lose its status as PMSI if: (i) security interest also is secured by property that wasn't purchased w/ loan money or credit (e.g., if security interest also is secured by after-acquired property), (ii) collateral also secures advances that weren't made for purchase of collateral (e.g., if collateral also secures future advances), or (iii) PMSI has been refinanced, consolidated, etc. If goods are consumer goods (i.e., goods bought or used for personal, family, or household purposes), courts must determine appropriate rules for such PMSIs.

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Collateral

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While almost any type of personal prop may serve as collateral, certain Art 9 rules (e.g., how to perfect) vary depending on type of collateral. There are various types of collateral that may be divided into 3 broad classifications: tangible collateral goods; intangible or semi-intangible collateral; and proceeds.

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Collateral-Tangible Collateral or Goods

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4 types. Category into which tangible collateral is placed depends on primary use to which debtor puts property:

a) Consumer goods-goods bought or used for personal, family, or household purposes (e.g., home stereo system)

b) Inventory-goods held for sale or lease and goods consumed by a business (e.g., fuel used to run a factory)

c) Farm Products-goods (including crops and animals) used or produced in farming that are in possession of or used by farmer; and

d) Equipment-goods that aren't consumer goods, inventory, or farm products (e.g., durable goods used by biz, such as machinery used in factory)

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Collateral-Intangible or Semi-Intangible Collateral

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8 types of intangible or semi-intangible collateral. Category into which they are placed depends on nature of collateral (rather than its use):

a. Instruments-notes, drafts, and certificates of deposit

b. Documents-bills of lading and warehouse receipts

c. Chattel paper-records (i.e., written or electronically store information) evidencing both monetary obligation and security interest in or lease of goods, such as promissory note and written security agreement

d. Accounts-rights to payments for goods, services, etc., such as accounts receivable

e. Deposit accounts-savings accounts, passbook accounts, etc. (not that Art. 9 only applies to non consumer deposit accounts and consumer deposit accounts that are claimed as proceeds of other collateral)

f. Investment property-stocks, bonds, mutual funds, brokerage accounts, etc.

g. Commercial tort claims-torts claims filed by organizations and tort claims filed by individuals that arose out of individuals' biz and don't involve personal injury (not that Art 9 only applies to commercial tort claims and noncommercial tort claims that are claimed as proceeds of other collateral); and

h. General intangibles-intangibles not fitting def of other types of intangibles, such as copyrights and goodwill (not that general intangible in which principal obligation of one of parties is payment of money is payment intangible).

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Collateral-Proceeds

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Include whatever is received upon sale, exchange, collection, or other disposition of collateral or proceeds. Include 2nd generation proceeds. Insurance payable by reason of loss or damage to collateral is proceed, unless it's payable to someone other than debtor or secured party. Claims arising out of loss of, defects in, or damage to collateral are also proceeds.

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Creation (Attachment) of Security Interest

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Art 9 concerns secured party's rights against both debtor and 3rd parties. Rights against debtor are established by attachment; rights against 3rd parties are established by perfection.

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Creation (Attachment) of Security Interest-Requisites for Attachment

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Security interest isn't enforceable unless it has attached. 3 requirements for attachment, which must coexist:

(i) parties must agree to create security interest, as evidenced by 1) creditor taking possession of collateral; 2) debtor's authentication of (i.e., singing or electronically marking) a security agreement describing the collateral (and land concerned if collateral is timber to be cut), or 3) creditor taking control of certain types of collateral

(ii) value must be given by secured party (a preexisting debt is deemed value if security interest is intended as security for preexisting debt); and

(iii) debtor must have rights (e.g., ownership) in collateral.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Description of Collateral in Authenticated Security Agreement

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In authenticated security agreement, collateral can be described broadly by category or type (e.g., equipment) or specifically (e.g., by serial number). However, super generic description of collateral such as "all of debtor's assets" isn't sufficient description.

Exception: Consumer goods, consumer securities accounts, and commercial tort claims can't be described by type alone; a more specific description is needed.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Methods of Obtaining Control

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Creditor can obtain control over following types of collateral: non consumer deposit accounts, electronic chattel paper, and investment property.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Methods of Obtaining Control-Nonconsumer Deposit Accounts

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Bank in which non consumer deposit account is maintained automatically has control over deposit account. If secured party isn't such a bank, it may obtain control over non consumer deposit account by either: (i) putting deposit account in secured party's name, or (ii) agreeing in authenticated record w/ debtor and bank in which deposit account is maintained that bank will comply w/ secured party's orders regarding deposit account w/o requiring debtor's consent.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Methods of Obtaining Control-Electronic Chattel Paper

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Chattel paper that is stored in an electronic medium (e.g., stored on computer) is called "electronic chattel paper" and chattel paper that is stored in tangible medium (e.g., written on paper) is called tangible chattel paper. Control of electronic chattel paper is functional equivalent of possession of tangible chattel paper. Party has control over electronic chattel paper when system put in place to show transfer of interests in chattel paper reliably establishes secured party as assignee.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Methods of Obtaining Control-Investment Property-Certified Securities

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A secured party obtains control over certified security (i.e., stock or bond represented by certificate) by taking possession of certificate if it's in bearer form. If certificate is in registered form, secured party must take possession AND certificate must be either endorsed to secured party or registered by issue in name of secured party.

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Creation (Attachment) of Security Interest-Requisites for Attachment-Methods of Obtaining Control-Investment Property-Securities Accounts

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Secured party obtains control over securities account if owner of account instructs securities intermediary that:

a) Secured party has same right in account also owner; OR

b) Intermediary may comply w/ secured party's orders w/o owner's further consent.

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Creation (Attachment) of Security Interest-Requisites for Attachments-Rights and Duties of Secured Party in Possession or Control

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Secured party in possession must use reasonable care in storing and preserving collateral, but is entitled to reimbursement for reasonable expenses in caring for collateral. Risk of loss of property in secured party's possession is on debtor to extent of any insurance deficiency. Secured party in possession or control may hold any increase in value of, or profits from, collateral (except money) as additional security, but money so received must be given to debtor or applied against secured obligation. Secured party in possession or control may also pledge collateral.

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Creation (Attachment) of Security Interest-Property that Debtor Acquires in Future-After-Acquired Property

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Security agreement may create security interest in property to be acquired in future. Security interest will attach to property as soon as debtor acquires an interest in collateral. Generally, such an interest may be created only by including an after-acquired property clause in security agreement.

Exception: Security interest will attach automatically to proceeds from disposition of collateral and to accounts and new items of inventory collateral, even w/o an after-acquired property clause.

Note: An after-acquired property clause doesn't apply to consumer goods unless debtor acquires rights in goods w/i 10 days after creditor gives value. In addition, an after-acquired property clause doesn't apply to any commercial tort claims.

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Creation (Attachment) of Security Interest-Property that Debtor Acquires in Future-Future Advances

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Security agreement may provide that collateral will serve as security not only for present obligation, but also for advances creditor makes to debtor in future.

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Perfection of Security Interest-In General

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Attachment establishes secured party's rights to collateral as against the debtor. However, other parties may also have rights in collateral (e.g., subsequent purchasers, unsecured creditors, other priority creditors). To acquire maximum priority in collateral over most such third parties, secured party must "perfect." There are 5 methods of perfection: (i) filing; (ii) taking possession of collateral; (iii) control; (iv) automatic perfection; and (v) temporary certification.

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Perfection of Security Interest-Time of Perfection

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Security interest isn't enforceable against anyone until it has attached to collateral. If all of steps for perfection are taken before security interest has attached, perfection will occur upon attachment.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed

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Secured party may obtain perfection by filing (either in writing or electronically) a financing statement. Financing statement must contain: (i) debtor's name and mailing address; (ii) secured party's name and mailing address; (iii) indication of collateral covered by financing statement; (iv) if financing statement covers real property-related collateral (i.e., minerals, timber to be cut, and fixtures), a description of related real property, name of record owner (if not debtor), and an indication that is to be filed in real property records.

Note that security interest may be perfected by filing as to all kinds of collateral except deposit accounts and money.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Debtor's Name

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Financing statements are indexed under debtor's name. In most states, if debtor is an individual w/ unexpired driver's license issued by state where financing statement is to be filed, debtor's name on financing statement must match its most recent public organic record (i.e., publicly available record that forms or organizes the organization).

In TN, under 2010 amendments to Art 9, which became effective in TN on July 1, 2013. TN adopted majority approach for naming an individual's debtor. Thus, if debtor has an unexpired TN driver's license or photo ID license, a financing statement filed in state must include debtor's name as it appears on license.

In TN, fee for filing financing statement is $15 plus 50 cents per page after first 10 pages. In addition, a recordation tax of 11.5 cents per $100 of debt after first $2k must be paid. Tax is assessed according to amount of debt actually outstanding.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Debtor's Name-Effect of Error in Debtor's Name

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Minor errors in debtor's name won't invalidate financing statement, but seriously misleading errors (i.e., such that financing statement couldn't be discovered using debtor's correct name w/ filing office's standard search logic) will.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Debtor's Name-Debtor Name Change

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If debtor's name as indicated on filing financing statement becomes insufficient and thus seriously misleading (e.g., b/c debtor changed her name), financing statement is effective only against collateral acquired by debtor before name became insufficient and w/i four months after. For collateral acquired after 4 month period, secured party must refile using debtor's correct name.

Remember financing statement becomes invalid only if name is seriously misleading. If filing easily could be found despite the error, financing statement will stand.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Effect of Missing Address

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If financing statement that doesn't contain debtor's and/or secured party's mailing address is accepted by filing office, financing statement is effective despite lack of addresses.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Indication of Collateral

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As is case w/ authenticated security agreement, an indication of collateral in a financing statement is sufficient if it indicates collateral broadly by category or type (e.g., equipment) or specifically (e.g., by serial number). However, unlike requirements for an authenticated security agreement, a financing statement may contain a super generic indication of collateral, such as all assets.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-Debtor Must "Authorize" Filing of Financing Statement

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For financing statement to be effective, debtor must authorize it in an authenticated record (i.e., authorization can't be oral) either before or after it's filed. Debtor authorizes financing statement if she authenticates the financing statement or security agreement covering same collateral as financing statement.

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Perfection of Security Interest-Perfection by Filing-Records to Be Filed-After-Acquired Property

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Financing statement need not mention after-acquired property to perfect a security interest in such property if description in financing statement is broad enough to cover after-acquired property (e.g., financing statement, a description of equipment is sufficient to perfect an interest in new pieces of equipment if security agreement includes an after-acquired property clause).

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Perfection of Security Interest-Perfection by Filing-Place of Filing-General Rule-File Centrally

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Generally, filing must be done centrally in office of secretary of state.

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Perfection of Security Interest-Perfection by Filing-Exception-Timber to be Cut, Minerals, and Fixtures

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Filing for security interests in timber to be cut, minerals, and fixtures is local, in county where mortgage on real estate is filed. In case of fixture filing, it is safest to fill both in real estate records and at place that would be proper if goods were't fixtures.

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Perfection of Security Interest-Perfection by Filing-Period for Which Filing is Effective

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Filing is valid for 5 years. Continuation statement may be filed, good for an additional 5 years. Continuation statement can only be filed w/i 6 months before lapse of filed statement. Authorization of debtor isn't required for continuation statement; secured party may authorize it.

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Perfection of Security Interest-Perfection by Filing-Certificate of Title Law

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Security interests in motor vehicles required to be title (except those created by dealers) are perfected by notation on certificate of title (no Art 9 filing). Security interests created by dealers in vehicles held for sale or lease are perfected by ordinary filing under UCC, even if certificate of title covering vehicle is outstanding.

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Perfection of Security Interest-Perfection by Taking Possession (Pledge)-Collateral that Cannot be Pledged

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Security interests in most types of collateral can be perfected by possession, but security interests in general intangibles, non consumer deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts cannot be perfected by possession.

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Perfection of Security Interest-Perfection by Taking Possession (Pledge)-Time of Perfection

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Where secured party takes actual possession of collateral, security interest is perfected from moment of possession and continues as long as possession is retained. Where collateral (other than certified securities and goods covered by a doc) is in hands of bailee, secured party is deemed to be in possession from moment the bailee authenticates record acknowledging that it's holding collateral for secured party's benefit.

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Perfection of Security Interest-Perfection by Control

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Security interests in investment property, non consumer deposit accounts, and electronic chattel paper may be perfected by control

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Perfection of Security Interest-Automatic Perfection-PMSI in Consumer Goods

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PMSI in consumer goods is perfected as soon as it attaches; neither filing nor possession by creditor is necessary. Recall that seller has PMSI when security interest was retained to secure at least part of purchase price.

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Perfection of Security Interest-Automatic Perfection-PMSI in Consumer Goods-Limitations

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Security interest in motor vehicles can be perfect only by notation on vehicle's certificate of title, and PMSI in fixtures will have priority over an encumbrancer of real estate only if PMSI holder files.

Remember that the only type of PMSI that is automatically perfected is a PMSI in consumer goods. A PMSI in inventory or equipment must be filed to be valid.

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Perfection of Security Interest-Temporary Perfection-Twenty Day Period for Proceeds

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Security interest in proceeds from original collateral is continuously perfected for 20 days from debtor's receipt of proceeds. This security interest becomes unperfected after 20 days unless statutory requirements are complied with; however, in many cases the requirements are automatically met.

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Perfection of Security Interest-Temporary Perfection-Twenty-Day Period for Instruments, Negotiable Documents, and Certificated Securities-New Value

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Where new value is given under an authenticated security agreement for instruments, negotiable documents, or certificated securities, perfection is valid for 20 days after attachment; neither filing nor possession is necessary.

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Perfection of Security Interest-Temporary Perfection-Twenty-Day Period for Instruments, Negotiable Documents, and Certificated Securities-Delivery of Collateral to Debtor for Disposition

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Where creditor who has perfected her security interest by possession delivers instruments, negotiable documents, certificated securities, or goods in possession of bailee to debtor for disposition (e.g., where creditor gives debtor a promissory note, which is serving as collateral, so that debtor can present note to its maker for payment), perfection is valid for 20 days, after which creditor must reperfect (by filing or taking possession) or lose his perfection.

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Perfection of Security Interest-Temporary Perfection-Interstate Shipments

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When debtor moves from one state to another, and location of debtor determines which state's law governs perfection security interest in collateral that was perfected in original state will remain temporarily perfected in new state.

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Perfection of Security Interest-Continuation of Perfection of Interest in Proceeds

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Secured party has temporarily (20-day) perfected security interest in proceeds of collateral. Security interest in proceeds will continue to be perfected beyond 20 days if:

1. Security interest in original collateral was perfected by filing a financing statement, a security interest in type of collateral constituting the proceeds would be filed in same place as financing statement for original collateral, and proceeds weren't purchased w/ cash proceeds of collateral (sometimes called, "same office" rule).

2. Proceeds are identifiable cash proceeds (this is sometimes called "cash proceeds" rule).

3. Security interest in proceeds is perfected w/i 20 day period.

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Priorities

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Heart of Art 9 is its allocation of priority among conflicting interests in same collateral. E.g., one creditor has PMSI in collateral and another creditor has prior perfected security interest in same collateral by virtue of an after acquired property clause; if debtor defaults on obligations owed to both creditors, which creditor has priority in collateral?

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Priorities-Secured Party v. Secured Party-Priority b/w Unperfected Secured Parties

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The first to attach has priority.

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Priorities-Secured Party v. Secured Party-Priority b/w Unperfected and Perfected Security Parties

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Perfected security interest generally prevails over unperfected security interest.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties

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Conflicting perfected security interests rank in priority according to time of filing or perfection. Priority dates from time a filing is first made covering collateral, or time security interest is first perfected--whichever is earlier--provided there is no period thereafter when there is neither filing nor perfection. Remember filing/perfection is what matters, not date of attachment!

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Special Priority Rules for Conflicting Security Interests in Investment Property

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The "first to file or perfect" rule generally governs priority questions regarding investment property. However, security interest perfected by control has priority over security interest perfected by any other method (i.e., by filing or automatic perfection).

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Purchase Money Security Interests

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PMSIs enjoy a super priority-they are superior to prior perfected security interests in same collateral if certain conditions are met. PMSI arises only where seller sells collateral to debtor on credit and reserves security interest in the collateral, or where creditor advances funds to allow debtor to purchase collateral and takes security interest in collateral.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Purchase Money Security Interests-PMSI in Inventory

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PMSI in inventory collateral has priority over conflicting security interest in same inventory or proceeds of inventory that are chattel paper, instruments, or cash if:

(i) It's perfected at time debtor gets possession of inventory (filing must take place before inventory is delivered to debtor); and any secured party who has perfected his security interest in same inventory receives written notification of PMSI before debtor receives possession of inventory, and notification states that purchase money party has or expects to take PMSI in inventory of debtor described by kind or type.

Similar test for livestock.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Purchase Money Security Interests-PMSI in Inventory-Consingor Has PMSI in Inventory

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Under Art 9, consigner's interest in consigned goods in considered to be PMSI in inventory. Therefore, consignor can acquire PMSI super priority in consigned goods if she complies w/ requirements for gaining PMSI super priority in inventory.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Purchase Money Security Interests-PMSI in Goods Other than Inventory or Livestock

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PMSI in goods other than inventory and livestock (e.g., equipment) has priority over conflicting security interests in same goods or their proceeds if interest is perfected before or w/i 20 days after debtor receives possession of goods.

In TN, interest must be perfected before or w/i 30 days after debtor receives possession of goods.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Purchase Money Security Interests-Conflicting PMSIs

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If more than 1 party has PMSI super priority in collateral, following rules apply:

a) Secured party who has PMSI in collateral as seller has priority over secured party who has PMSI in same collateral as lender.

b) Otherwise, first secured party to file or perfect prevails.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-"Purchasers" of Chattel Paper Instruments

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Art 9 contains special rules for "purchasers" of (who include parties taking a security interest in) chattel paper and instruments.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-"Purchasers" of Chattel Paper Instruments-Chattel Paper Purchasers

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If purchaser of chattel paper in gf gives new value and takes possession of chattel paper in ordinary course of biz (or takes control of electronic chattel paper), purchaser will have priority over:

(i) a security interest in chattel paper that arises merely as proceeds of inventory, as long as chattel paper doesn't indicate that it has been assigned to anyone other than purchaser; AND

(ii) any other security interest in chattel paper, as long as chattel paper purchaser acquired its interest w/o knowledge that its purchase violated rights of secured party.

Note: Chattel paper purchaser also has priority in proceeds of chattel paper if either: (i) she would have had priority under general priority rules (i.e., purchaser was first party to file or perfect), OR (ii) proceeds are specific goods covered by chattel paper or cash proceeds of specific goods.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-"Purchasers" of Chattel Paper Instruments-Instrument Purchasers

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Purchaser of an instrument has priority over perfected security interest in instrument if purchaser gives value and takes possession of instrument in gf and w/o knowledge that purchaser violates rights of secured party.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Priority in Proceeds

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For purposes of determining priority of security interests in proceeds, Code divides collateral into "filing collated" and "non-filing collateral." Filing collateral is collateral in which secured party would normally achieve priority by filing a financing statement (i.e., goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents). non-filing collateral is collateral in which secured party would normally achieve priority by possession or control, rather than filing (e.g., cash, chattel paper, non consumer deposit accounts, negotiable documents, instruments, and investment property).

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Priority in Proceeds-General Rule

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Generally, perfected security interest in proceeds will have same date of priority as perfected security interest in original collateral (e.g., under "first to file or perfect" rule), as long as the perfection of security interest in proceeds extends beyond 20-day temporary perfection period. There are also special super priority rules for certain proceeds of collateral subject to PMSIs.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Priority in Proceeds-Special Rule for Certain Proceeds of Non-Filing Collateral

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B/c rules governing priority in non-filing collateral contain many exceptions to "first to file or perfect" rule, Code contains special priority rule for certain proceeds of that collateral. A secured party has priority in proceeds of non-filing collateral if: (i) she has priority in original collateral, (ii) her security interest in proceeds is perfected, and (iii) proceeds are cash proceeds or proceeds of same type as original collateral. If proceeds are proceeds of proceeds, all intervening proceeds must be cash proceeds, proceeds of the same type as original collateral, or accounts relating to the collateral.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Priority in Proceeds-Special Rule for Certain Proceeds of Non-Filing Collateral-Exception-Filing Collateral as Proceeds of Non-Filing Collateral

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If security interest in original collateral that is non-filing collateral is perfected by method other than filing, and proceeds of original collateral are filing collateral, first secured party to file a financing statement covering proceeds has priority in proceeds.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Security Interests in Fixtures, Accessions, and Crops

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Fixtures are goods that become so attached to real prop that an interest int hem arises under real prop law (e.g., build-in oven). Accessions are goods that are physically united w/ other goods in such a manner that identity of original goods isn't lost (e.g., new pedals on a bike).

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Security Interests in Fixtures, Accessions, and Crops-Fixtures

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Generally, in contest b/w holder of security interest in fixture and holder of interest in real prop to which fixture is attached, first party to file fixture filing (i.e., filing in local real estate records describing real property to which fixture is attached) or record its real property interest prevails.

Exception: PMSI secured party who makes fixture filing w/i 20 days after affixation will prevail over any real prop interest in same fixture that was recorded prior to affixation (except construction mortgage if goods became fixtures before completion of construction.

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Security Interests in Fixtures, Accessions, and Crops-Accessions

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Usually, general rules for priority (e.g., first to file or perfect, PMSI super priority) apply to accessions.

Exception: If accession (e.g., new motor) becomes part of whole that is subject to security interest perfected by notation on certificate of title (e.g., a car) security interest in whole (car) has priority over security interest in accession (new motor).

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Security Interests in Fixtures, Accessions, and Crops-effect of Fixture or Accession Interest w/ Priority

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When security interest in fixture/accession has priority over all interests in real prop or goods, holder of security interest in fixture/accession may, upon default, remove fixture/accession from real prop or goods. However, she must reimburse any owner of real prop or goods who isn't the debtor for cost of any repairs of physical injury to real prop or goods caused by removal (but not for any other diminution in value).

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Priorities-Secured Party v. Secured Party-Priority b/w Perfected Secured Parties-Security Interests in Fixtures, Accessions, and Crops-Crops

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Perfect security interest in crops has priority over conflicting interest in real prop on which crops are growing, regardless of time of filing or perfection.

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Priorities-Secured Party v. Buyer or Other Transferee

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Although purchaser of goods generally acquires his transferor's right to extend of interest purchased, in certain situations, buyer can take collateral free of its attached security interest.

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Priorities-Secured Party v. Buyer or Other Transferee-Unperfected Secured Party v. Buyer or Lessee

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Person who buys or leases collateral from debtor generally has interest in collateral superior to person who has unperfected security interest in collateral if buyer or lessee, w/o knowledge of security interest, gives value and receives deliver of collateral. Note: If collateral is an account, electronic chattel paper, a general intangible, or investment prop other than certificated security, there is no delivery requirement b/c there is nothing tangible to deliver.

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Priorities-Secured Party v. Buyer or Other Transferee-Unperfected Secured Party v. Buyer or Lessee-PMSI Grace Period Exception

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If secured party attaches PMSI in debtor's collateral before buyer or lessee w/o knowledge pays value and receives delivery (if required), secured party will have priority over buyer or lessee if she files w/i 20 days after debtor receives the collateral.

Under TN law, a secured party will have priority over buyer or lessee if she files w/i 30 days after debtor receives the collateral.

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Priorities-Secured Party v. Buyer or Other Transferee-Perfected Secured Party v. Buyer or Lessee

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Generally, holder of perfected security interest in goods has rights in goods superior to those of subsequent buyer or lessee.

Exceptions:

a. If secured party consents to disposition of collateral free of security interest, transferee takes free of perfected security interest.

b. A buyer or lessee in ordinary course of biz take free of nonpossessory perfected security interest in goods unless buyer or lessee knows that sale or lease is involution of security interest.

c. Consumer purchaser from consumer has priority over PMSIs in consumer goods unless purchaser knows of security interest or financing statement has been filed.

d. Buyer or lessee not in ordinary course of biz has priority over future advances or commitments to make future advances made by secured party either after secured party learns of purchase or lease or more than 45 days after purchase or lease.

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Priorities-Secured Party v. Buyer or Other Transferee-Secured Party v. Holder in Due Course or Like

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Holder in due course of negotiable instrument (and similar holders of negotiable docs of title or securities) has priority over security interest in negotiable instrument.

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Priorities-Secured Party v. Buyer or Other Transferee-Secured Party v. Transferee of Money or Deposit Account Funds

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If debtor transfers money or deposit account funds (e.g., by writing check or making electronic funds transfer) to person that takes free of any security interest in money or funds, unless transferee acts in collusion w/ debtor in violating rights of secured party.

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Priorities-Secured Party v. Judicial Lien Creditor or Holder of Possessory Lien-Unperfected Secured Party v. Judicial Lien Creditor

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Judicial lien creditor (i.e., person who has acquired lien on collateral through judicial attachment, levy, or the like, or bankruptcy trustee) prevails over holder o security interest in collateral if lien creditor comes such before security interest is perfected.

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Priorities-Secured Party v. Judicial Lien Creditor or Holder of Possessory Lien-Unperfected Secured Party v. Judicial Lien Creditor-PMSI Grace Period Exception

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Secured party who attaches a PMSI in debtor's collateral before judicial lien creditor acquires an interest in collateral will have priority over judicial lien creditor if she files w/i 20 days after debtor receives the collateral.

In TN, a secured party who attaches PMSI in debtor's collateral before a judicial lien creditor acquires an interest in collateral will have priority over judicial lien creditor if it files w/i 30 days after debtor receives collateral.

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Priorities-Secured Party v. Judicial Lien Creditor or Holder of Possessory Lien-Perfected Secured Party v. Judicial Lien Creditor

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Generally, prior perfected security interest has priority over lien.

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Priorities-Secured Party v. Judicial Lien Creditor or Holder of Possessory Lien-Perfected Secured Party v. Judicial Lien Creditor-Exception: Future Advances

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Judicial lien will have priority over future advance (i.e., advance of value under an earlier security agreement) that was perfected before lien arose but made more than 45 days after lien arose, unless future advance was made (i) w/o knowledge of lien, or (ii) pursuant to commitment made w/o knowledge of lien.

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Priorities-Secured Party v. Judicial Lien Creditor or Holder of Possessory Lien-Secured Party v. Possessory Lien Holder

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Possessory lien imposed by other (i.e., non-UCC) stat law in favor of those who supply goods or services (e.g., an artisan's lien or material man's lien) has priority over security interest as long as goods or services were provided in ordinary course of biz and collateral remains in lien holder's possession.

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Priorities-Secured Party v. Article 2 Claimant

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If Art 2 grants a buyer or sells possessory security interest in goods (e.g., if buyer rightfully revokes acceptance of goods), Art 2 claimant has priority over an Art 9 secured party as long as Art 2 claimant retains possession of goods.

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Priorities-In a Nutshell

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When debtor defaults and number of persons have interest in same item of collateral, the person with highest priority has first rights in collateral; if any part of collateral or its proceeds is left, next person can recover, etc. Excluding investment property and non consumer deposit accounts, in which party w/ control generally has priority ranking is as follows:

1. Buyer in ordinary course of biz who doesn't know sale is in violation of security interest.

2. Holder in due course and like of negotiable instrument.

3. Transferee of money or funds from deposit accounts.

4. Certain purchasers of chattel paper or instruments who have possession or control.

5. Possessory lienholder.

6. Art 2 claimant w/ possession of goods.

7. PMSI (Except that consumer purchaser from consumer-such as neighbor buying from neighbor- has priority over automatically perfected PMSI in consumer goods).

8. Perfected security interests and judicial liens that have attached to collateral (including trustees in bankruptcy as of date bankruptcy petition is filed)--a. as b/w perfected security interests in same collateral, first to file or perfect has priority; b. as b/w perfected security interest and attached lien, attached lien generally has priority if it attached before security interest was perfected. Otherwise, security interest has priority.

9. Purchaser of collateral who buys for value and receives delivery w/o notice of any unperfected security interest.

10. Unperfected security interests (rank in priority according to order of attachment).

11. Debtor

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Rights on Default-Determining When Default Has Occurred

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Art 9 doesn't define events that twill trigger a default, but security agreement usually will define fault to include events such as failure to pay or maintain insurance. Default on agricultural lien is determined by lien statute.

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Rights on Default-Right to take Possession and Sell Collateral-Taking Possession and Sale

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Secured party has right either: (i) to sue on debt itself; or (ii) to take possession of collateral (even w/o judicial process, if this can be done w/o breach of peace), sell it by public or private sale, and then sue to collect deficiency. All aspects of sale must be commercial reasonable. Debtor, any sureties on debt, and, in non consumer goods cases, other secured parties generally are entitled to notice. Notice must be sent w/i reasonable time before sale (notice sent 10 days before sale is deemed reasonable in non consumer transactions, and it must contain details a/b parties, the collateral, the time and method of sale, etc. Sale gives buyer whatever rights debtor had in collateral and discharges security interest under which sale was made and all subordinate security interests.

Under TN Law, 10-day notice rule applies to both consumer and non consumer transactions.

Explanation of Deficiency or Surplus: In TN, explanation must be sent w/i 30 days after receipt of request for explanation.

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Rights on Default-Right to take Possession and Sell Collateral-Reasonbleness of Sale

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If exam question raises issue of reasonableness of sale, keep in mind that secured party must show that he made an effort to obtain best price for collateral. Courts will consider, and your answer should discuss, factors such as the following:

1) Sufficiency of advertising

2) If collateral had limited market, whether people in the market were contacted

3) Whether collateral needed cleaning or repair and

4) If sale was by public auction, convenience of time and place

Remember, low price alone isn't enough to make sale not commercially reasonable, but if price is very low, courts will give extra scrutiny to other circumstances of sale.

Front 83

Rights on Default-Right to take Possession and Sell Collateral-Retention of Collateral in Satisfaction of Debt

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If debt has paid 60% of cash price on PMSI in consumer goods, or 60% of loan on non-PMSI in consumer goods, secured party MUST dispose of collateral w/i 90 days after repossession, or debtor may recover it is in conversion. W/ respect to any other collateral, secured party may propose to retain collateral in full satisfaction of the obligation, but (i) debtor must consent to retention in an authenticated record after default or, in cases where debt is being fully satisfied, no object to retention w/i 20 days after notice is sent by secured party, and (ii) secured party must send written notice of such proposal to debtor (and to other secured parties,) and if a person entitled to notice objects in writing w/i 20 days of sending such notification, secured party MUST dispose of collateral and properly disburse proceeds.

Note: If collateral is non consumer goods, secured party may retain goods in partial satisfaction of obligation and seek deficiency judgment for reminder of debt if above requirements are met.

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Rights on Default-Right to take Possession and Sell Collateral-Debtor's Right of Redemption

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Until secured party has sold collateral or has discharged debt by retention of collateral, debtor, surety, or any other secured party or lien holder may redeem collateral by paying all obligations secured by collateral plus additional reasonable expenses.

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Rights on Default-Right to take Possession and Sell Collateral-Failure to Comply w/ Code Requirements

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Secured party is liable for actual damages caused by his failure to follow rules of Art 9. iF secured party violates Code default requirement and collateral is consumer goods, debtor may recover, at a minimum, 10% of cash price of goods plus amount equal to all interest charges to be paid over life of loan. In addition, secured party who violates default rules may lose her right to deficiency judgment. In non consumer transactions, rebuttable presumption rule applies--i.e., unless secured party proves otherwise, value of collateral is presumed to equal amount of debt, and proper sale would have generated enough money to pay off debt entirely. Code doesn't provide rule for consumer transactions, and leave determination of rule to courts. Courts have generally taken 3 approaches. They either:

a. Follow rebuttable presumption rule

b. Deny secured party deficiency regardless of whether secured party can prove that collateral is worth less than debt (absolute bar rule) OR

c. Allow secured party to recover deficiency minus any actual damages that debtor can prove (setoff rule)

In TN, rebuttable presumption rule applies to both consumer and non consumer transactions.

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Rights on Default-Other Rights of Secured Party on Default

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Instead of taking possession and selling collateral under Art. 9, secured party on default may bring ordinary judicial action for amount due and levy on collateral after judgment.

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Rights on Default-Remedies are Cumulative

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Secured party's remedies under Art 9 (i.e., sale, strict foreclosure, and judgment) are cumulative. However, secured party is entitled to only one satisfaction.

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Jurisdictional Rules-Which State's Laws Govern Perfection?

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Question of which state's law governs perfection of security interest is especially important when security interest is perfected by filing, b/c filing must occur in proper state.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-General Rule

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Law of state where debtor located generally governs perfection of security interest. If debtor is an individual, she is located in state of her principal residence. If debtor is registered organization (e.g., corporation, LLC, or limited partnership) the debtor is located in state under whose laws it is organized (i.e., where articles of incorporation are filed). If debtor is unregistered organization (e.g., general partnership), it is located at its PPB if only has one place of business or its chief executive office if it has more than one place of business.

UCC Art 9 doesn't apply to agricultural liens in TN.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-Exceptions-Possessory Security Interests and security Interests in Fixtures and Timber to be Cut

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Governed by law of state in which collateral is located.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-Goods Covered by Certificate of Title

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Lw of state issuing most recent certificate of title governs perfection.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-Deposit Accounts

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If collateral is deposit account, unless debtor's agreements provide otherwise, law of state in which banks has its chief executive office governs perfection.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-Investment Property

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If collateral is certificated security, law of state where certificated security is located governs perfection. If collateral is uncertificated security, unless debtor's agreement w/ issuer provides otherwise, law of state where issuer was organized governs perfection. If collateral is securities account, unless debtor's agreement w/ securities intermediary provide otherwise, law of state where securities intermediary's chief executive office is located governs perfection.

Exception: If security interest in investment property is perfected by filing, or it it's automatically perfected by securities intermediary, law of state where debtor is located governs perfection.

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Jurisdictional Rules-Which State's Laws Govern Perfection?-Agricultural Liens

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Perfection of agricultural lien is governed by law of state in which farm product covered by lien is located.

Front 95

Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Collateral in Which Perfection is Governed by Debtor's Location-Relocation of Debtor

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If perfection of security interest is governed by law of state in which debtor is located, and debtor moves from one state to another, security interest generally will remain perfected w/o any further action until 4 months after debtor moves or until perfection in first state lapses, whichever occurs earlier. This grace period also applies to collateral that debtor acquired w/i 4 months after location change.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Collateral in Which Perfection is Governed by Debtor's Location-New Debtor in Different State

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If collateral is transferred to new debtor (i.e., someone who becomes bound by original security agreement) who is located in a diff state, security interest will remain perfected w/o any further action until l1 year after sale of collateral or until perfection in first state lapses, whichever occurs earlier. A security interest in collateral a new debtor acquired before or w/i 4 months after become bound by original debtor's security agreement is temporarily perfected for 4 months by corresponding financing statement filed in original debtor's jurisdiction.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Other Collateral-Collateral in Which Security Interest is Perfected by Possession

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If perfected security interest in collateral is possessory security interest (which is governed by law of state in which collateral is located), and collateral is moved from one state to another, security interest will remain perfected w/o any further action as long as security interest is also perfected by possession under laws of new state.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Other Collateral-Certificate of Title Property (Automobiles and Other Vehicles)

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If vehicle is moved from one state to another and is covered by certificate of title issued by new state, security interest in vehicle that was properly perfected in original state lasts as long as it would have if vehicle hadn't been covered by new certificate of title.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Other Collateral-Certificate of Title Property (Automobiles and Other Vehicles)-Exception: Purchasers for Value

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If vehicle subject to perfected security interest in one state is moved to new state and is covered by certificate of title issued by new state, security interest in original state is perfected as against purchaser for value of vehicle only until earlier of:

a) Time when security interest would have become unperfected in original state if vehicle hadn't been covered by new certificate of title (same rule as general rule) OR

b) 4 months after vehicle is covered by new certificate of title.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Other Collateral-Certificate of Title Property (Automobiles and Other Vehicles)-Exception: Clear Certificate of Title Issued in New State

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If certificate of title issued in new state doesn't note secured party's interest in vehicle, following parties have priority over secured party:

a) Buyer of vehicle who isn't biz of selling vehicles who purchases for value and receives delivery of vehicle w/o knowledge of security interest; AND

b) Secured party who perfects security interest in vehicle w/o knowledge of other security interest after clear certificate of title is issued in new state.

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Jurisdictional Rules-Movement of Debtor or Collateral from One State to Another-Other Collateral-Deposit Accounts, Uncertified Securities, and Securities Accounts

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If bank, issuer, or securities intermediary moves to new state, perfection of an interest in deposit account, uncertified security, or securities account continues until earlier of:

1) Time when security interest would have become unperfected in original state if bank, issuer, or securities intermediary hadn't moved to new state; OR

2) 4 months after bank, issuer, or securities intermediary moves to new state.