Secured Transactions Questions From Various Sources

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6. Debtor executed a valid security agreement with Bank covering Debtor's machinery and equipment. However, Bank failed to perfect its security interest by filing or in any other manner. If Debtor defaults, can Bank enforce the interest?

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CREATION OF SECURITY INTEREST

6. YES Failure to perfect a security interest does not affect the validity of the interest
as against the debtor.

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7. Jeweler pledges a bag of diamonds worth $50,000 as security for repayment of a
loan from Lender. Assume no authenticated security agreement is ever executed and no financing statement is ever filed. Does Lender have an enforceable security interest in the diamonds?

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CREATION OF SECURITY INTEREST

7. YES If collateral is in the possession of the secured party, no formal security agreement is required for the interest to attach, and the interest is perfected upon possession.

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8. If a security agreement describes the collateral as "all machinery and equipment located at ... [debtor's address]," is the description sufficient to create a security interest in machinery and/or equipment having license or serial numbers for identification?

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CREATION OF SECURITY INTEREST

8. YES. A reasonable identification is all that is required; description by category and location is generally enough.

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9. As security for a loan, Merchant conveys to Lender a security interest in his "inventory and stock on hand" at a designated location.

a. Does such description confer upon Lender a security interest in the cash and accounts that Merchant will obtain when he sells the inventory?

b. Is the description sufficient to confer upon Lender a security interest in items that become part of Merchant's inventory after the date of the security agreement, in the absence of any "after-acquired property" clause?

c. Assume Merchant has signed the security agreement. Must it also sign the financing statement?

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CREATION OF SECURITY INTEREST

9. (a). YES. Unless otherwise agreed, proceeds of described collateral are covered as a matter of law.

b. YES Although there is some conflicting authority, the word "inventory" is usually sufficient to create an interest in after-acquired items.

c. NO The financing statement does not need to be signed, but it does need to be authorized. When the debtor authenticates the record of the security agreement, this automatically authorizes the secured party to file a financing statement.

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10. Debtor executes a security interest on certain collateral in reliance on Lender's promise to loan $10,000. Can Lender claim an enforceable interest in the collateral before paying over the $10,000?

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CREATION OF SECURITY INTEREST

10. YES The interest attaches when "value" is given, and the commitment to make the
loan is "value" under the U.C.C.

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11. Printer borrows $50,000 from Bank to purchase a printing press to be manufactured to his specifications by Pressco. The security agreement describes the press as being in the process of manufacture. Does Bank have any security interest in the press during the several months that it takes to complete manufacture and prior to its delivery to Printer?

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CREATION OF SECURITY INTEREST

11. PROBABLY. A security interest attaches as soon as the debtor acquires rights in the collateral.Printer's right to possession (enforceable through replevin or specific performance) would arise as soon as goods had been identified to the contract. Bank's interest would attach at this time (subject to Pressco's right to withhold to complete production and to obtain payment, etc.).

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1. Dexter Moneybucks, in need of some ready cash, asks his friend Susan if she can lend him $12,000. He promises to repay that amount with interest within a year and further offers to let Susan keep a valuable ruby ring of his "as collateral for the loan." Susan agrees. She gives Dexter a check for $12,000, and in exchange he hands over the ring. Nothing is in writing.

a. Have Dexter and Susan created a security interest that attaches to the ring under Article 9?

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Attachment E & E

1 a. Yes. Susan's security interest has attached under Article 9. She has no record of the security agreement authenticated by Dexter, but under the circumstances and in light of the language of §9-203 (b) (3) (B) that isn't a problem. The ring is collateral and is in her possession "pursuant to the debtor's security agreement." As we've already noted, the Code defines agreement clearly in Article 1 as the agreement "in fact," not as any particular piece of paper or other physical manifestation of the agree¬ment. Dexter and Susan may not have explicitly invoked any specific section or language from Article 9 (indeed, neither of them may have even the foggiest notion that an Article 9 exists and rides herd over their actions), but it's clear that they've agreed to something regarding the ring and that Dexter has by agreement given Susan some kind of interest in it. What they've agreed to is what we would know (since we at least have a deep and abiding belief in not just the existence but the efficacy and indeed the majesty of Article 9) to be a U.C.C. security interest as defmed in Article 1. And a security interest in personal property created intentionally by the parties thereto is governed by Article 9, whether the parties are aware of this simple fact or not. Recall §9-109 (a) (1) and all we saw in Chapter 1. All of this is just a long-winded way of saying that the condition imposed by §9-203(b) (3) has been met here because "the collateral is in the possession of the secured party pursuant to the debtor's security agreement," satisfying paragraph (3) (b). We will deal with the subtleties of the other two conditions imposed by paragraphs (1) and (2) in more detail in the next chapter, but there seems to be no
question that they're met here. Susan has given value, the $12,000, to Dexter. Dexter, we've assumed from the start, has "rights in" the ring. It's his. He owns it. Take my word for it. It's been in the Moneybucks family for ages. So a security interest in the ring has attached—has been created — in favor of Susan. Susan can be congratulated. But, let us not forget, congratulations go to Dexter as well. He's gotten his loan and the ready cash he so desperately needed.

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b. Suppose that in fact Susan had refused to take the ring when Dexter tried to hand it over to her, saying, "I see no reason you shouldn't keep wearing it, as long as it's agreed I can get it if you don't make repayment." How does this affect your analysis?

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Attachment E & E

1 b. If Susan allows Dexter to retain possession of the ring, then her failure to get a signed copy or other authenticated record of his security agreement does most definitely make a difference. No security interest ever attaches in her favor. Look at §9-203(b) (3) (A). If the collateral is neither in the possession of the secured party nor of a special type dealt with in either paragraph (3) (C) or (3) (D), it is essential that the debtor has authenticated a security agreement that provides a descrip¬tion of the collateral and, if the security interest covers timber to be cut, a description of the land concerned.
Putting aside, as we can here, any concern about timber, what is crucial is that the debtor must generally have authenticated a security agreement meeting some (very minimal) standards. As to the purpose underlying the general requirement of §9-203(b) (3) (A) that attachment can occur only when the debtor has authenticated in some fashion a security agreement (other than in those exceptional cases covered by paragraphs (B),(C), and (D)), see the first two sentences of Comment 3 to this section:

Under subsection (b) (3), enforceability requires the debtor's security agreement and compliance with an evidentiary requirement in the nature of a Statute of Frauds. Paragraph (3) (A) represents the most basic of the evidentiary alternatives, under which the debtor must authenticate a security agreement that provides a description of the collateral.

Note also the possibility of attachment without an authenticated record in the case where the collateral is in the possession of the secured party "pursuant to the debtor's [wholly oral] security agreement" under paragraph (3)(B) —which is what saved Susan in the first part of this example — is explained at the beginning of Comment 4 as being appropriate since "the secured party's possession substitutes [as a means of providing evidence supporting the secured party's claim of an interest] for the debtor's authentication under paragraph (3) (A)."

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2. Meanwhile, in another part of town, Dexter's sister, Deborah Moneybucks, is also short of cash. She borrows $4,000 from one Stella, who asks for no interest or any collateral in making the loan. It is agreed that Deborah will repay Stella within two weeks. As she is handing over the check to Deborah, Stella notices and comments on a small but obviously valuable cameo that Deborah is wearing. Deborah, in recognition of the help her friend is giving her, agrees to let Stella borrow the piece so that she, Stella, might wear it to a fancy party she is to attend the following week. A month later Deborah's fortunes are not going as well as she had anticipated. She calls Stella to assure her that one way or the other she will be repaid although she cannot say exactly when. Deborah also says that she will be coming over to pick up the cameo Stella declares, however, that she intends to hang onto the bauble until her friend is no longer in default on the loan. Would Stella be within her rights to do so?

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Attachment E & E

2. No. Stella was lent the cameo on certain terms, and, like any other borrower of a precious trinket, has to return it as agreed. It should be clear that even though Deborah handed it to her at the same time as the loan was being made, Stella has no security interest in the cameo
as she seems to be trying to assert. The problem is not that there is no authenticated security agreement; it's much more basic than that. There is no security agreement at all under the facts. Deborah gave Stella temporary possession but never agreed that she, Stella, had any interest in the piece as collateral or in any way connected to the loan obligation. I put this example in to highlight once again an important point: The security interest can only be created by contract of the parties. The fact of possession by the secured party may obviate the need for an authenticated security agreement under §9-203 (b) (3) (B), but crucial to everything is the need for the consent of both parties to a security agreement in fact, and nothing can substitute for that.

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3. A third member of the Moneybucks clan, David, arranges to borrow money from a business acquaintance named Sandy. Before Sandy releases any funds to David, she insists that he sign two documents that she has prepared. The first is a note calling for payment by David, as the two had agreed. The second reads in its entirety: I, David Money Bucks, hereby grant Sandy a security interest in my 1994 Honda civic in connection with a loan being made by her to me. David Money Bucks David signs on the dotted line and gets his loan. Has a security interest in the automobile been created? In particular, if David were to fail to make proper payment on the note and Sandy then tried to enforce what she claims to be a valid interest by repossessing the Pontiac, could David argue against the repossession on the grounds that

a. the document was not headed "Security Agreement" or anything of the sort;

b. David did not sign the document in front of any witnesses, nor was his signature notarized;

c. it is nowhere signed by Sandy;

d. it gives neither David's nor Sandy's address;

e. it gives David's name incorrectly (as I'm sure you immediately noticed);

f. it carries no information about the loan terms?

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Attachment E & E

3. Yes. There is a valid security agreement here. The agreement David signed may have been short, but it was to the point and meets the requisites for an authenticated security agreement under §9-203(b) (3) (A). As you can see, these requirements are not terribly elaborate. David must have authenticated the document, which he did. The document must also "provide [] a description of the collateral." If we assume that he has only one 1994 Honda Civic, then this description seems all that we could ask for. (Later examples deal with situations where the description as given is more of a problem.) I see no reason why any of the factors (a) through (f) would prevent Sandy from enforcing the agreement. Remember once again that for these purposes Article 9 law is just ordinary contract law. Contract law does not require that any document setting forth the contract be headed in a particular way or that it take a particular form. There certainly is no general requirement, unlike what may be true in the law of wills, for example, that any signature be made in front of witnesses or notarized. So that takes care of (a) and (b). The very nature of the security agreement and basic contract principles presumably require that Sandy agree to the creation of this security interest in her favor (Why would she not?), but there would not be any general requirement that she evidence assent by her signature. And, of course, §9-203 (b) (3) (A) itself requires only the debtor's having to authenticate the agreement. So much for (c).

What of (d)? As a matter of how contracts are written up, depending on who is doing the drafting and what the circumstances are, the parties' addresses may or may not be included in the text. There certainly is no absolute requirement that these addresses be included in order to bind anybody. What is important is merely that the parties have sufficient information to know one another and for each to assent to the relationship with the other. Addresses could help in this regard, but they could just as easily get in the way, because people may move around without any thought that their contractual relationships will be affected. You will, of course, often see language in contract documents to the effect that notice to a party "shall be deemed given" if sent to such-and-such an address unless and until a change of address is effectively given to the other party. Such a provision makes a good deal of sense for obvious reasons, but it just as obviously has nothing to do with any requirement that the parties be identified in the writing in any one particular way for the contract to be enforceable. So neither David's nor Sandy's address need necessarily be included for the security agreement to be effective under §9¬203 (b) (3) (A). But remember, here we're concerned only with the security agreement. For the moment, simply note that when we get to considering the criteria for a second important document crucial to the Article 9 scheme of things, what we will call the financing statement, the lack of an address can be significant. Similarly, consider the mistake regarding how David's name is rendered. As we will see in Chapter 6, and consider there in no small detail, a mistake or misspelling of the debtor's name on a financing statement will turn out to be a major problem for the secured party. Even a misspelling that may seem to us terribly trivial can render the entire financing statement in effect null and void, as if it had never been filed at all. But again, that will turn out to be because of the distinct nature of the document in question, the fmancing statement. For the purposes of the security agreement, I would argue that a mistake in the rendering of one party's name in the documentation, as long as no one can claim he or she was actually misled or mistaken as to who was who, has no legal effect under any general principle of contract and hence is not likely to be of any real consequence here.

Finally, as to part (f), there is no requirement that any details of the obligation secured by the arrangement be spelled out in the security agreement. It is sufficient if there is the kind of generalized reference to the obligation as was made here ("the loan being made by her to me") that makes the character of the agreement unmistakable as a security agreement, which after all must by its nature be related to some underlying obligation of the debtor to the secured party. The impression that, should David fail to make timely payments on the note, Sandy has the right to take action involving the Honda — as sanctioned by Article 9 and as we will explore more fully in the last chapters of this book — seems clear enough from even the single sentence agreement that Sandy has come up with. To be sure, we can imagine problems that could arise and that would have been eliminated by a more detailed and lengthier document. What if, for example, over the course of time Sandy makes several loans to David? To which loan does this simple piece of paper refer? Sandy could assert that, one loan being overdue, she has the right to repossess the Honda, while David insists that the Honda was collateral for another loan entirely, one on which he has made regular payments. Still, the point here is that this is the kind of controversy that can arise in any contractual setting where the language used is open to more than one possible interpretation and the parties disagree on how the document is to be understood. A court called upon to settle the matter would presumably deal with this as just your run-of-the-mill (albeit terribly unfortunate) contract interpretation problem that would never have come up had the parties been a little more careful in their drafting. Parol evidence might be allowed in to assist the court in determin¬ing which of David's manifold obligations to Sandy was being se¬cured by the Honda. Or the court could conclude that the document was fatally ambiguous and hence unenforceable. It's all simple and straightforward contract law. (By which I certainly don't mean to imply that contract law is all that easy, only that its complexities and perplexities are for another book in the Examples and Explanations series.)

Aside from the very limited requirements as actually spelled out in §9-203(b) (3)(A) —and in distinct contrast to what we'll see later when we turn our attention to the financing statement—the law of the security agreement is just our old friend contract law. At least in theory, and by and large in practice as well, no special rules need apply.

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4. Dewey buys a new refrigerator from Selma's Appliance City, agreeing to pay for it over a period of two years under what Selma advertises as her "EZ Credit" plan. Dewey gives Selma a check for a portion of the price as a down payment. He also signs a document prepared by her headed "Retail Sales Installment Agreement." This paper makes no reference to a security interest, collateral, Article 9, or anything of the sort. It states only that Dewey is to finish paying for the refrigerator in specified monthly install¬ments over the two years and further that "title in any appliance or appliances sold hereunder remains in Selma until full and final payment" by Dewey. One year later, when Dewey is behind in his payments, Selma threatens to repossess. Can Dewey defend on the absence of an authenticated security agreement as called for in §9-203(b)(3)(A) ?

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Attachment E & E

4. No. Whatever else Dewey may do to keep his refrigerator from being repossessed—paying Selma what's due her would be nice he has no defense based on the lack of a written security agreement. The arrangement he entered into with Selma, while phrased in terms of retention of title by the seller, is deemed under the Code immediately to transfer the property to the buyer at the same time it reserves a security interest in the seller. See the directly applicable language in the Article 1 definition of "security interest," or for that matter the second sentence of §2-401(1). The arrangement between Dewey and Selma's Appliance City is, therefore, a security agreement under Article 9. That being so, the paper he signed is the authenticated record, here a conventional written agreement, and all Selma will need to establish her rights under §9-203.

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5. Dan runs a small delivery service ("Dan's Vans") using two Ford vans that he has had for some time and that he now owns outright. He decides that the volume of his business justifies his buying a third van and arranges to borrow the money he needs to purchase this vehicle, a 2008 Chevy van, from a lender, Trucker's Credit Service. The security agreement he signs gives the Credit Service an interest in "one delivery van owned by Dan and used in his business."

a. Is this agreement sufficient to create a security interest under Article 9?

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Attachment E & E

5a. It's hard to believe the description of "one delivery van" will do, at least not when Dan is the proud owner of a fleet (albeit a fairly modest fleet) of vans. Section 9-108(a) says that for the purposes of Article 9, "a description of personal . . . property . . . is sufficient, whether or not it is specific, if it reasonably identifies what is described." This doesn't seem to do much for us, but it may help to appreciate the background against which the drafters were working when they included this provision. Read the second paragraph of Official Comment 2 to this section. Prior statutes and practice often set a very high standard for the necessary description of the property, something much more like what you'd expect to see in land transactions perhaps. Article 9 calls for a more functional approach. "The test of sufficiency of a description... is that the description do the job assigned to it: make possible the identification of the collateral described." Fair enough, but how does that work out in our particular situation?

We have to consider what precisely is the "job assigned" to the description of the collateral in the security agreement under §9-203(b) (3) (A). Recall that a comment to that section refers to the requirement as "in the nature of a Statute of Frauds." I take it from this, and from the very essence of the security agreement itself as a contract written up to establish rights as between the two parties, that the purpose of the description in the security agreement is rather elemental. It is to make clear, in light of the possibility of later dispute between the parties, exactly what property is the subject of the agreement. Imagine the kind of dispute that could arise between Dan and the Credit Service. The most obvious problem is that Dan may fail to make payment on the loan. As we will see, this can give the Trucker's Credit Service, as the secured party, the right to take action, to repossess the collateral and in this it will need no distinct official mandate such as a court order or the participation of a sheriff. In most cases all Trucker's Credit Service need do is fmd the collateral in which it has an interest and take it away.

So we are contemplating the possibility that Dan has fallen behind in his payments and the Credit Service comes around to repossess the collateral. Suppose further that they get their hands on and are able to drive off with one of Dan's Ford vans, perhaps because it's the only one parked outside and the most easily accessible. Dan complains to the local constabulary that as far as he is concerned, one of his vans has been stolen by someone with no rights in it. The Credit Service, he will explain to anyone who will listen, may have had every right to repossess the Chevy van, in which it had a legitimate security interest, but not one of his other vehicles. If, as we are now positing, the description in the written security agreement were only "one delivery van owned by Dan and used in his business," the writing is of no help in resolving this dispute. The sheriff who is called in to try to calm things down as the Credit Service's tow truck stands all hooked up and poised to tow away the Ford and as Dan's face gets redder and redder would get no help from looking at the paper produced by the creditor, nor would the judge who may have to be called upon to make a final determination of who did what to whom somewhere down the road.

So I conclude that this description, "one delivery van owned by Dan and used in his business," simply won't pass muster. It doesn't do the job assigned to it. Remember that the consequence of this conclusion is to hold that Trucker's Credit Service never gets an enforceable security interest of any type or in any collateral at the time it makes the loan. Even if no repossession dispute of the type I have hypothesized ever arises, indeed even if no one ever takes a look over the written security agreement after it is once signed and thrown in the files, the Credit Service may find itself out in the cold as only a general creditor should Dan's Vans descend into bankruptcy. On the other hand, the requirements that Trucker's Credit has to fulfill to get a very special privileged place in any potential bankruptcy proceeding, the attachment of a valid Article 9 security interest and its perfection, are, as we continue to see, not terribly onerous. If it fails to make the right moves, as for example by failing to adequately describe the collateral, we can argue that it has no one to blame but itself.

Other commentators and some courts would perhaps be somewhat more generous (but, we have to ponder, generous to whom and at whose expense?) than I in what they would allow as a description sufficient to satisfy §9-203(b) (3) (A), at least when there is no third party who claims that he or she actually consulted the description and was misled. I, as you can tell, can't see why the position of third parties has anything to do with it, other than that of my hypothesized third-party adjudicators, who could be brought in to settle disputes between the two parties to the security agreement—the debtor and the creditor. In any event, I doubt any court or commentator would find favor with the description here, "one delivery van owned by Dan and used in his business." Perhaps some would allow in parol evidence of which van exactly the parties intended to cover in their agreement, but this seems to me to defeat the whole requirement of a description doing the "job assigned" to it in the instrument itself.

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Continued from Last Card
#5.

b. Would your answer be any different if the description had read "one 2008 Chevrolet cargo van?"

c. What if, because of a mistake by someone at the Credit Service, the description had read "one 2008 Chevrolet cargo van serial number 56Z789Q?" This serial number is incorrect; it should read "56Z798Q." Does this defeat the Credit Service's security interest?

d. Finally, consider what the result would be if the description of the collateral in the security agreement had read only "One motor vehicle as more fully described in Schedule A attached hereto," but that, again because of a mistake, no Schedule A was to be found attached to the agreement?

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Attachment E & E

5b. Under the circumstances I would think this description passable. True, there may be any number of "2008 Chevrolet cargo vans" out on the road, but it seems that Dan has only one (the subject of all this discus¬sion), and if there could be no possible misunderstanding or dispute between the two parties as to which vehicle was meant, I see no reason for anyone else — even me — to make a fuss. I fmd support, of course, in the §9-108(a) instruction that any description "is sufficient, whether or not it is specific, if it reasonably identifies what is described." This reasonably identifies Dan's one 2008 Chevy van, and that is good enough for me.

5c. Perhaps I'm getting just too easygoing in my middle age, but I'm inclined to think that even this description — or to be more fastidious, this misdescription —will be acceptable and not defeat the creation of Truck¬er's Credit Service's security interest under Article 9. It's important to this argument, of course, that there really is only one Chevy van of this vintage in the picture. Were we talking about a whole fleet of vans, then keeping them straight might really depend on keeping track of each and every serial number, and getting even one digit incorrect might well cost the Credit Service dearly. In the circumstances here, however, it's hard to see how the minor error would even be uncovered, except perhaps by an eagle-eyed lawyer type trying to find some "technicality" with which to undermine a legitimate claim of the honest and altogether noble Credit Service. Section 9-108(a) and its Official Comment 2 again suggest, if they don't necessarily dictate, a response to this kind of minor foul-up. Perhaps a misdescription of this sort will defeat a party's interest under the highly technical and formalistic regimen of the system of land titles and mortgages; there's no reason for the same attitude to be carried over into the supposed "reasonable" Article 9 system.

5d. This mistake pretty clearly renders the security agreement insufficient for the purposes of §9-203(b) (1). And yes, it is the kind of mistake the fallout from which turns up all too often in the case reports. See, for example, In re Southern Illinois Rail Car Co., 301 Bankr 305, 2002 Bankr LEXIS 1433 (Bankr S D Ill. 2002).

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6. Isabelle Inkster runs a small printing business out of a shop attached to her home. Over the years she has accumulated various pieces of equip¬ment, a press, a binding machine, and so forth, all of which are fully paid for. She also owns outright a truck with which she makes deliveries. She finds, however, that she is sometimes not able to take on large projects from which she could profit because she doesn't have the ready cash to buy the large quantities of paper and ink that she would need. Isabelle negotiates with her local bank, Downtown Federal, for a small business line of credit on which she can draw up to a specified amount. As part of the documentation required by the bank, she signs a security agreement that describes the collateral simply as "all Inkster's equipment."

a. Does this agreement sufficiently describe the collateral in order to be effective? See §9-108 (b) (3).

b. Suppose instead that the agreement's description read "all of Inkster's assets." Can the bank's interest attach to any of Inkster's property? See §9-108(c).

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Attachment E & E

6a. Yes. Subsection 9-108(b) is intended to give examples of how the parties may "reasonably identify," for the purposes of subsection (a), collateral subject to a security agreement. One way that a description may be given, according to (b) (3) is, with some exceptions not relevant here, by "a type of collateral defined in" the Uniform Commercial Code itself. In Chapter 5 we will deal in detail with the various "types" of collateral that Article 9 contemplates and to each of which it or another article of the Code gives precise definition. For the moment it is suffi¬cient that the term "equipment" is indeed one of the types of collateral, as you will find it defined in §9-102 (a) (33). Don't worry now what exactly is or is not part of Inkster's equipment. The point here is simply that the description of the collateral required by §9-203(b) (3) (A) that the authenticated security agreement is required to provide is met by the language in the writing Inkster signed, that is, "all Inkster's equipment."

6b. No. The cited subsection specifically states that what is referred to as a "supergeneric description" such as we have here is not a reasonable, and hence not a sufficient, description of the collateral for the purposes of creating a valid and enforceable authenticated security agreement for the purposes of §9-203(b). That being so, Downtown Federal will never be able to gain a security interest that attaches to any of Inkster's property.

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7. Samantha, a retired university professor, is in need of some money to meet her mounting medical bills. She approaches a firm, Local Lending Associates, and arranges for a loan. Local Lending asks her to sign a written security agreement that describes the collateral that Samantha is putting up to secure the loan as "all consumer goods held" by Samantha. Is this a valid description of the collateral, sufficient to make the security agreement Samantha signs enforceable against her should she not repay the loan? See §9-108(e) (2) and §9-102 (a) (23) and (26).

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Attachment E & E

7. No. As you can see in §9-102(a) (23), consumer goods are a type of collateral defined in Article 9. Under the general rule of §9-108 (b) (3), this would appear to make the description in the doc¬ument Samantha signed one that reasonably identifies the collateral and hence a proper description for §9-203(b) (3) (A) purposes, similar to the satisfactory description we saw ("all Inkster's equipment") in Example 6a. Section 9-108 (b) (3), however, is explicitly made subject to the exceptions contained in subsection (e) of the same section. Here we are looking at the effect of (e) (2). Samantha's arrangement with Local Lending is, as you can check for yourself, a consumer transaction under §9-102 (a) (26). In such a transaction, a description of the collateral as "all consumer goods" is deemed insufficient (as would be a description by type of certain kinds of what we will later learn to identify as forms of investment properties that the consumer might be asked to put up as collateral by a lender).

The rationale behind this exception to the general notion that identification by defined type of collateral is a proper way to describe collateral in a security agreement is, as the drafters tell us in Comment 5 to §9-108, "to prevent debtors from inadvertently encumbering certain property." Would Samantha, even if she is a very smart woman, understand that in granting the lender a security interest in all of her "consumer goods" she had given it the right, should she fail to repay the loan when due, to take possession of any and all of the furniture in her home, the clothing in her closets, and indeed the food in her cupboards? All of this perfectly well qualifies as consumer goods held by her under the Article 9 definition of that type of collateral. It may be that Local Lending would not actually be that interested in repossessing such stuff as this, but just the threat that it could happen gives that firm a way of putting pressure on Samantha which, the drafters concluded, was not one that she as a consumer could be expected to have been aware of when she signed a document as seemingly innocuous as the one the lender had put before her.

By and large, and not without criticism, the process leading to the formulation of the original version of Article 9 left it relatively free of what we may think of generally as "consumer protection" provisions. The arguments of the drafters at the time were that this was best left to separate legislation outside of the grand, overarching Uniform Commercial Code that had other things to worry about and was not to be cluttered with special provisions for any one particular group (and certainly not individual consumer debtors). By the time of the drafting of the Revised Article 9, the thinking had changed, not least because consumer advocates were brought in and had their voices heard as part of the drafting process in a way that had not been true when the original Article 9 had been created. The consumer advocates argued strenuously on behalf of the interests they represent for various aspects of consumer protection to be made part of the revised article. These advocates did not get all that they wanted out of the revision process (no single interest group did in what necessarily was a process of drafting by compromise), but the concerns they expressed could not be ignored. The result is that Revised Article 9 pays much more attention to how individual consumer, nonbusiness debtors are affected by its workings and includes many provisions not in the original article intended to protect consumers from overreaching or unscrupulous lenders — and also from the individual consumer's understandable potential ignorance of all of the fine points of secured lending. The rule of §9-108(e) (2) is just one of the additions made to the Revised Article 9 to reflect this newfound concern for incorporating protection of consumers into the article itself and not leaving it to other law or to slip through the cracks.

Notice that if, in fact, Local Lending had made the decision to loan to Samantha on a secured basis because she did have some particular property, say a large collection of rare and valuable books built up over her years as a professor, which it saw as truly valuable collateral worthy of backing up a loan (unlike the shoes in her closet and the boxes of cereal in her kitchen), it would be able to do so. The security agreement could then have been written to describe the collateral "by category" as provided for in §9-108(b) (2) as, for example, "all books held by Samantha." This should pass muster under §9-108(b) as reasonably identifying the collateral and allow for an enforceable security agreement under §9-203(b) (3) (A). It would also more properly put Samantha on notice of exactly what property of hers she has put at risk by using it as collateral to obtain the loan.

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1. On April 21, Dexter Moneybucks, always in need of some ready cash, gets his friend Sarah to loan him $2,000, which he promises to repay within a year. He further agrees that one of the more valuable pieces of modern art hanging on his library walls ("Composition Looking Like Hell"), which he had purchased from the artist when still an unknown (the artist that is), will stand as collateral for the loan. Dexter and Sarah shake hands on the agreement, and Sarah delivers over to Dexter a check for $2,000. A few weeks later Sarah, having related this story to a friend who is in law school, becomes concerned that she has nothing in writing signed by Dexter. She visits him on May 15 and asks that he sign a simple form security agreement, which her friend has helped her prepare. Dexter (only sightly put out that his friend would think such a formality at all necessary) whips out his expensive Mont Blanc pen and signs the agreement. Has an Article 9 security interest in favor of Sarah ever attached to the work of art? If so, when?

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Attachment E & E

1. Yes. A security interest attached on May 15. You should satisfy yourself that each of the criteria of §9-203(b) has been met and on what date. Because the collateral was neither in the possession of Sarah, the secured party, nor of a type dealt with in §9-203(b) (3) (C) or (D), it was necessary that there be an authenticated security agreement describing the collateral. There eventually was such an agreement, but only on May 15. Value was given — that is given by the secured party to the debtor—when Sarah gave Dexter the check on April 21. I doubt you'd have much difficulty accepting the idea that the check is value, but just to be sure look at the Article 1 definition of "value." A person gives value for rights if the person "acquires them . . . in return for any consideration sufficient to support a simple contract." A check for $2,000 will do. Lastly, Dexter had rights in the artwork from some time prior to April 21. So the mighty triumvirate has been established. The last event to occur was the preparation and signing of the written security agreement on May 15, and so that is the moment that attachment occurred.
There is, of course, no reason why the requirement of §9-203(b) (3) will necessarily be the last to fall into place and to mark the moment of attachment. The three pieces of the puzzle — the giving of value, the debtor's rights in the collateral, and the agreement—can occur in any order. There's nothing for it but to check out each one under the facts of the particular situation. If ever an issue in law called for a checklist approach, albeit a pretty modest one, it is the question of attachment of an Article 9 security interest. As an exercise you might want to try your hand at rearranging the facts of this example so that the giving of value is the last event and hence determines the moment of attachment, then rearranging things once again so that it is the time at which Dexter actually attains "rights in" (and not just bragging rights about) the painting hanging on his wall.

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2. Isabelle Inkster runs a small printing business. She started small, making use of a modest amount she had saved before going into business on her own. Over the years she has done well and the business has grown. She has accumulated various pieces of printing equipment, all of which are fully paid for. She now finds, however, that she doesn't have the capital to take advantage of her success. She is sometimes not able to take on bigger projects from which she could profit because she doesn't have the ready cash to buy large supplies of paper and ink that she would have to have on hand Furthermore, when buying supplies she is often not able to take advantage of quantity discounts because of the cash outlay it would entail, nor is she able to advertise in ways that she feels would be of benefit to her. In November she speaks to a loan officer at her local bank, Downtown Federal, about getting a small business loan. The officer has her complete a Loan Application. He also has her sign a security agree-ment, which he fills in with a description of the collateral as "all Inkster's equipment, now owned or hereafter acquired." This officer tells Inkster that he is "confident" that the loan committee will look favorably on her application but that the decision will take some time. A couple of weeks later he calls her to ask for a few more details about her business. He says that "everything looks in order " Inkster then hears nothing for several weeks.

a. Has a security interest in favor of the bank covering her equipment yet attached?

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Attachment E & E

2a. No security interest has attached as of this moment. Inkster, the hopeful borrower, has signed a security agreement, and she presumably has rights in her equipment, but no value has been given. There's nothing inherently unusual about this situation, and certainly nothing for Inkster to be embarrassed about. A lender will understandably often need some time to investigate the borrower's credit history, get some independent evaluation of the worth of the collateral, and so on. The period between making the loan application and eventually getting a response from the lender can be a very frustrating one for the potential borrower, but there is not much she can do but wait — and cooperate with any reasonable request from the lender that will help move the application process along towards a successful conclusion.

Front 18

b. Finally, on January 14, Inkster hears from the bank officer, who tells her to come to his office as soon as possible. There he hands her a letter from the bank stating that her loan application has been approved and that she now has a "Small Business InstaLoan" line of
credit for $80,000 with the bank. The terms of the credit line are set forth in the letter. "All you have to do," he explains, "to have the money available to you is sign this note." Inkster signs the bank's standard form note for such a loan, and the officer hands her a packet of materials explaining how she can "call on" the money now at her disposal, how she'll be billed for payments and so on. The beginning of the year is a slow time in the printing business, so Inkster does not draw a check from this credit line until some time in March. Has a security interest ever attached, and if so when?

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Attachment E & E

2b. Yes. Attachment occurs on January 14. The bank, by approving her loan application and making a line of credit available, has given value as of that date. This is so even though Inkster may not actually draw on the credit for some time. Look now at either §1-201 (44) (a) or §1R¬204(1). It says it all.

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3. Thad's a thief. While casually browsing over the merchandise at Xavier's, a fashionable jewelry store, he skillfully pockets a small emerald pin. He takes the pin to Happy Harry's, a respected neighborhood pawnshop, where he uses it to borrow $500 from Harry. The pin is in Harry's possession, and he has Thad's agreement that it will stand as collateral for the loan.

a. Has a security interest in the pin with Harry as secured party ever attached?

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Attachment E & E

3a. No security interest in Harry's favor ever attaches since Thad, as a thief, can never have any type of "rights in" the property he has stolen nor does he have any power to transfer rights in it. That term "rights in," as it occurs in §9-203(b) (2), is nowhere defined, and might in some instances leave some room for argument, but not here. Even if you won't find it anywhere in the Uniform Commercial Code, it's just your most basic common law of property as it relates to goods. A thief of personal property gets possession of the goods, but that's about it; he or she can never gain title, or an interest, or any kind of rights in the goods no matter how you were to define any of those terms. The thief gets nothing even approaching "right in" or power over what he or she has stolen.

Front 20

Continued from #3

b. What if Thad, instead of pawning the pin, had sold it to one Emily, a complete innocent who had no knowledge of the theft and who paid a fair market value for it? Later Emily is the one to leave it with Harry as security for a loan. Would Harry's security interest —now granted by Emily — attach under this scenario?

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Attachment E & E

3b. Emily, even if she may be a complete innocent in the situation (and I assure you there's no reason to doubt it), can never gain any rights to the pin if she bought it from a thief. Under the common law, and under the Article 2 law of sales, the thief can transfer even to the so-called "good faith purchaser for value" only what interest he or she (the thief that is) has to begin within. We see this in the introductory language to §2-403 (1) : "A purchaser of goods acquires all title which his transferor had or had power to transfer . . . ." In this case what Thad legitimately had to transfer was nothing, so Emily ends up with nothing beyond mere possession of something to which she has no right. Should Xavier's, the true owner of the pin, be able to track it down and find it in her hands, she'd have no rights against that firm and no choice but to give it back. So Emily, being like Thad in having no "rights in" the item, or any power to transfer any such rights, is never able to grant a security interest in the pin to another, no matter how much she wants to, how innocent she is, or how hard she tries.

Front 21

Continued from #3

c. Would your answer to either (a) or (b) of this question be different if it turned out Thad was not a thief but just a nogoodnik' To be more specific, suppose he did not steal the pin from Xavier's but instead paid for it with a personal check that later bounced, leaving Xavier's unpaid. Can attachment in Harry's favor ever occur here? Look at §2-403(1).

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Attachment E & E

3c. Whatever we may think about Thad's behavior as the example has now been transmogrified, at least he's no thief. And he gets different treat¬ment under Article 2 — or at least someone who qualifies as a "good faith purchaser for value" from him does. Read on in §2-403(1). A person with what the section terms "voidable title" does have the power to transfer "good title" to the good faith purchaser for value. Without getting into all the hairy details of this distinction between truly void and merely voidable title, which §2-403(1) sets forth, it is clear from (b) of this subsection that Thad got such voidable title, and hence the power to pass on true title to the right kind of person, when he purchased the pin from Xavier's in exchange for a check that was later dishonored.
There's no single definition of "good faith purchaser for value" in the Code, but you can piece it together from the definitions of "good faith," "purchaser," and "value," the citations for which are given at the end of §2-403. Emily, being naive, and having given value for the trinket (as opposed to having gotten it as a gift from Thad the nogoodnik), clearly must qualify as one who gets "good title" to the pin when she buys it from Thad. And having what Article 2 calls "good title" to the item must mean she has "rights in" it for Article 9 purposes. So if Emily does buy it from Thad, who's obtained it in this way, and then later tries to use it as collateral at Happy Harry's, there's no reason a security interest in favor of Harry couldn't or wouldn't attach under §9-203.
What's more interesting is the result if Thad himself, having bought the pin with a bum check and still in possession of it, tries to use it at Harry's to obtain some ready cash by way of loan. Is it possible that Harry can get a valid attached security interest from a fellow such as Thad? The answer seems to be yes. Remember that under the circumstances Thad was able to transfer "a good title" to any good faith purchaser for value. And the terms "purchase" and, through it, "purchaser" have a decidedly broad range under the Code. Look at §1-201(32) or §1R-201 (b) (29) . "Purchase" includes by sale, lease, discount, negotiation, mortgage, pledge, lien, secu¬rity interest, issue or reissue, gift, or any other voluntary transaction cre¬ating an interest in property.
This certainly includes Harry, who has taken, by way of what has historically been referred to as a pledge, a type of security interest. Certainly what he has gotten is an interest in the property — not a full ownership interest, I grant you, but to him a not insignificant security interest — and it was an interest coming out of a voluntary transaction between him and Thad. Harry, assuming he has given value (And if he hasn't, how's he possibly claiming attachment?) and that he acted in good faith (on which see the standard of §1-201 (19) or §1R-201(b) (20)) qualifies as a good faith purchaser for value. Thad, whether or not he acquired for himself any "rights in" the pin when he got it under the circumstances here, did pick up the power if not the right to transfer rights of the pin to Harry. And this is enough to meet the requirement of §9-203(b) (2). The debtor need have either rights in the collateral "or the power to transfer rights in the collateral to a secured party." This phrase concluding §9-203(b) (2) was added to Article 9 in the recent revision and makes this situation easier to deal with than it was under the prerevision version, which required that the debtor have "rights in" the collateral and did not offer the alternative way of meeting the criterion now found in (b) (2). For a case that came to the conclusion that a pawnbroker such as Harry could obtain a security interest in goods obtained in such a fashion as Thad has obtained the pin here, decided under the old Article 9 but that only gains support from the "power to transfer rights" language now in §9-203(b) (2), see National Pawn Brokers Unlimited v. Osterman, 176 Wisc. 2d 418, 500 N.W.2d 407, 21 U.C.C.2d 1176 (1993).

Front 22

Continued from #3

d. Here's one more way that Thad may show his true colors: Suppose he asks a friend, Bill, if he can borrow Bill's saxophone so that he, Thad, can have a try at playing the thing Bill agrees to lend the sax to Thad for a few months. Thad quickly discovers that he has no aptitude for the instrument, but also discovers he is in need of some cash to pursue other lines of endeavor. He takes the saxophone to Happy Harry's, pawning it and walking out with a loan of $325. Does a security interest in favor of Harry ever attach to the sax?

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Attachment E & E

3d. Thad here is not a thief; he's a bailee. Bill gave him the right to possession of the instrument, but not the right to sell it, to give it away, or anything like that. There's no reason to think that he has the right to use it as collateral. Cases refer to Thad as a "bailee for a limited purpose," and at least if the purpose is as it seems to be here, he would not have any "rights in" the sax that would allow him to grant a security interest in favor of Harry. Nor would he have ever acquired any power to transfer any rights in the instrument to a secured party. The Osterman case, cited above, has a good discussion of this situation if you care to pursue it any further.
All of Happy Harry's potential dealings with the likes of Thad should teach him a valuable lesson. Indeed, it's a lesson important to all lenders who make decisions on whether and how much to lend influenced by the value of particular collateral in which they intend to take a security interest. It's usually not that hard (or at least it shouldn't be) for the lender to determine whether it has a valid and sufficient security agreement to satisfy criterion (b) (3). Likewise, a lender should know when it gives value to meet the requirement of (b) (2). But how do you know — really know for sure — that the debtor has the requisite "rights in" the collateral or the power to deal in such rights? One thing's for certain, you can't just ask the debtor. In any of these situations Thad (or the innocent Emily in part (b) for that matter) will say, "Yeah, no doubt about it. It's mine all right." Would it help any to ask the potential borrower to sign a statement, attested to every which way and under oath, to the effect that the property he or she is about to use as collateral is truly his or hers to do with exactly as he or she wishes? When you get right down to it, such contractual covenants, promises, or what have you are about as valuable as the paper they are written on.
This is not to suggest that most people are crooks or out to pull a fast one. It's just that some people are, and the careful lender has to be looking out for himself or herself. Even beyond that, many totally honest and forthright people will end up for one reason or another being confused as to exactly what stuff they own and what strings might already be attached to their property. The lender, if he or she is truly interested in having an attached security interest that will be of help should push come to shove, has to do what is possible under the circumstances to determine independent of what the borrower is willing to attest to that the collateral and the borrower's interest in it are really what the borrower says is so.
In the instant case Harry will at the very least have to satisfy himself, either through his own expertise or by getting an outside appraisal, that the emerald in the pin is really an emerald and not just a bit of green glass. What should Harry do to content himself that the person pawning it has rights to the thing? He could ask for proof of ownership, something that has at least some chance of not being fake. Notice that if Thad really was a thief, as we started out postulating, he would not be able (unless he wanted to spend some time, forging papers as well) to come up with a bill of sale showing that he had ever purchased and paid for such a bauble. Compare this to the situation in part (c), where Harry bought the pin with a bum check. If Xavier was willing to part with a valuable piece of jewelry in exchange for a personal check and to give a bill of sale marked "Paid in Full" as well, then Harry will have something to rely on and, as we saw, will triumph over Xavier. This does go some way toward explaining why the situations in parts (a) and (c), while they may look so similar from
the jeweler's point of view, come out differently under Articles 2 and 9 of the Code, as we saw.
The point more generally — and in truth and for obvious reasons pawnbrokers are probably among the most casual about this — is that any lender taking an Article 9 interest has to do what it can to satisfy itself not just of the true value but of what I sometimes refer to as the provenance of the collateral in question. How did it come to be in this potential borrower's hands and does he or she have the right to encumber it with this kind of interest? When it comes to questions like this, it's very much the lender's duty to itself to ask the right questions and make an appropriate investigation. Article 9 will not be very forgiving towards the casual, the sloppy, or the too readily trusting lender.

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4. Christopher Heath is the major investor in two separate corporations, First Vertica Corporation and Second Vertica Corporation. Other than having Heath as president, the two corporations have distinct directors and officers and keep their business affairs carefully segragated. The two corporations are run out of a single suite of offices with the name and logo of "Vertica Solutions" displayed prominently on the door and share a Web site Heath has specially created for "Vertica Solutions."
In July 2000 First Vertica Corporation purchased a large amount of computer products from Comark for $2.8 million. In July of the same year, Tyrone Owens, the treasurer of Second Vertica Corporation, arranged to borrow $25,000 from Fifth Third Bank and signed a security agreement granting that bank a security interest in all of the Comark computer equipment located in the Vertica Solutions offices. Owens never had any official position with First Vertica. No one with any authority concerning the affairs of First Vertica had authorized, or was even aware of, this loan from Fifth Third. Did that bank's security interest ever attach to the computer equipment?

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Attachment E & E

4. Obviously it isn't only pawnbrokers who have to be concerned about the provenance and ownership of what is being offered up as collateral. This example is inspired, if that is the word, by Fifth Third Bank v. Comark, Inc., 794 N.E.2d 433, 51 U.C.C.2d 533 (Ind. App. 2003), with the names of the parties only slightly altered for convenience. Fifth Third Bank (that is its real name) was held not to have any security interest in the computers as its debtor, Second Vertica, had no rights in the com¬puters owned by another distinct entity, First Vertica. The court took note of the age-old general principle that "one cannot encumber another man's property in the absence of consent, estoppel or some other special rule." No consent, no estoppel, and certainly no special rule was found under the circumstances to help out Fifth Third, which could have protected itself by doing a careful investigation of who actually owned all that computer equipment. There's a rule of thumb in the secured lending business: Know Who Your Debtor Is. For two other recent cases leading to the same moral, see Preferred Funding, Inc. v. Jackson, 185 Ore. App. 693,61 P.3d 939, 49 U.C.C.2d 620 (Ore. App. 2003), and In re Ace Sports Management, LLC, 271 Bankr. 134, 47 U.C.C.2d 790 (Bankr. E.D. Ark. 2001).

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5. Selma's Appliance City is a retail store. In February Selma negotiates a loan from Credit Associates. On March 1 she signs a security agreement granting Credit Associates a security interest in all of her inventory, "now held or hereafter acquired." On March 3 she picks up a check from Credit Associates for the amount of the loan.

a. Does a security interest in favor of Credit Associates ever attach to the inventory on Selma's showroom floor and in her warehouse as of the beginning of March? If so, when?

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Attachment E & E

5a. Yes. A security interest covering all of Selma's presently held inventory attaches as of March 3. It's just a matter of going through the three criteria of §9-203(b) one more time. She signed a security interest on March 1. She got value in the form of a check on March 3, and as of that date she had rights in all the stuff in her possession. So as of March 3 all parts are in place and the interest attaches to all of that present inventory.

Front 25

Continued from #4

b. In April Selma receives an order of toasters from one of her principal suppliers, Bakewell America. She immediately puts some of the toast¬ers out on her store shelves; others she puts in her warehouse. Does the Credit Associates security interest ever attach to these toasters? See §9-204(a). Does it make any difference that Credit Associates extends no additional funds to Selma in April? What about the fact that Selma has purchased the toasters from Bakewell on open trade credit — that is, she has agreed to pay Bakewell the price charged her within 90 days of their delivery to her store and has given Bakewell no security for this payment, only her contractual promise that she will pay?

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Attachment E & E

5b. Yes. The Credit Associates' security interest attaches to the toasters as soon as she gets "rights in" them. We can argue about the exact moment when that happens — as we will in the next part — but no doubt she has rights in these particular appliances by the time she receives delivery and has them in her possession. As I suggested, we first note §9-204(a). Putting aside for a moment the one exception which need not detain us here, a security agreement may create or provide for a security interest in after-acquired collateral.
So the provision in the security agreement Selma signed is perfectly permissible and has just the effect we're seeing here. As of the date of their delivery a security interest in the toasters arises, it attaches, in favor of Credit Associates. Going back one more time to §9-203(b) we can see that Selma already signed an agreement covering this collateral and has already received value. So as soon as she gains "rights in" some more collateral of the type covered, the interest attaches to that collateral as well. There is no requirement that additional value be given to allow for the attachment to these new bits of collateral. And even if Selma bought the toasters on credit and still owes Bakewell for them, that doesn't prevent her having rights in them for the purposes of §9-203 and attachment.
Take note of the very first sentence of Comment 2 to §9-204: "Subsection (a) makes clear that a security interest arising by virtue of an after-acquired property clause is no less valid than a security interest in collateral in which the debtor has rights at the time value is given." The security interest that Credit Associates can now claim in the new toasters that have more recently shown up is, apart from a later moment of attachment, otherwise no different, no less in favor, or no lower in status, than the security interest that earlier attached in the older inventory. There's no second class citizenship here, just a different date of birth. The rest of Comment 2 might be hard for you to fully appreciate (if that's the word with respect to Uniform Commercial Code commentary) before you've gotten further into this material, but you should read it now.
Do notice how valuable, practical, and efficient this so-called "after-acquired property" provision and from it the working concept of the "continuing general lien" or "floating lien" turn out to be. Selma is able to work out a comprehensive long-term lending relationship with Credit Associates putting all of her inventory on the line. As new pieces come into that inventory, there is no need for any new paperwork on her part or on the lender's. There will be no need for additional or amended public filings when we get to talk about those, much less anything like a closing or any formal and hard to arrange meeting of the parties. Nor is there any need for Credit Associates to hand over in dribs and drabs the money it's lending as each shipment of toasters, microwave ovens, pasta makers, and the like come to her delivery dock and into her possession.

Front 26

Continued From #5

c. Assuming that the security interest does attach to this particular shipment of toasters, when is the exact moment of attachment? To be more precise: What is the earliest date that Credit Associates can claim for attachment? Assume that she placed the order on April 1, that Bakewell packaged the toasters in a crate marked for delivery to her store on April 6, and that this crate was put in the hands of a shipping company on April 7. The crate is delivered to Selma's store on April 15. Consult §2-501.

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Attachment E & E

5c. You may wonder why the day in April on which the moment of attach¬ment occurred could be that important, but as we will see in much of what is to come if Selma's business position starts to sour and the going gets rough, it all of a sudden becomes every man, woman, and lending institution for himself, herself, or itself, respectively, and a matter of a day here or there can make all the difference in the world. We've seen that the moment of attachment will occur when the last of the three prerequisites to attachment has fallen into place, and in this situation it's clearly the lime when Selma first could claim "rights in" those toasters. By the time they're in her possession under the contract for sale, on April 15, this criterion is surely met. But can Credit Associates argue successfully for any earlier moment? One possibility, as suggested by my referring you to §2-501, is to try to drag in the Article 2 concept of "identification" of goods to a contract for sale. Notice that §2-501(1) says that the buyer, here Selma, obtains "a special property interest" in the goods by identification. Nobody knows for sure exactly what this term is supposed to mean, but it certainly can be argued that whatever it is having "a special [!] property interest" in a particular identifiable conglomeration of toasters is sufficient to give the person involved "rights in" those very toasters.
This is neither the time nor the place to go into all the nitty-gritty about identification under Article 2. Suffice it to say that here identification would seemingly occur, by virtue of part (b) of §2-501 (1), when the toasters were "shipped, marked, or otherwise designated by the seller as goods to which the contract refers," on April 6. For a case that does use this Article 2 identification analysis to set the moment of attachment for Article 9 purposes, see Trust Company Bank v. Gloucester Corp., 419 Mass. 48, 643 N.E.2d 16, 25 U.C.C.2d 62 (1994). But then, for a case that finds identification under Article 2 not enough in and of itself to establish "rights in" the collateral for Article 9 purposes, see First Tennessee Bank, N.A. v. Graphic Arts Centre, Inc., 859 S.W.2d 858, 23 U.C.C.2d 269 (Mo. App. 1993). Perhaps the two cases can be reconciled; perhaps they cannot. It is a fairly minor point in any event, and given the vagueness of the "rights in" language of §9-203(b) (2), it's probably too much to ask for or to expect some bright-line definitive test. On the edges of the concept, at least, you would not be surprised to learn that the courts appear to engage in a kind of case-by-case, you-know-it-when-you-see-it, approach.

Front 27

Continued From #5

d. Finally, assume that sometime in May Selma puts in a call to Bakewell with the intent of ordering more of Bakewell's products for imme¬diate delivery. Someone at that company informs her that (for whatever reason) they have become concerned about selling to her on open credit with no security to ensure their eventually being paid. Selma works out an agreement under which they will send her more of their wares to be paid for within 90 days of delivery, but only after she has signed a security agreement prepared by Bakewell under which she grants that company a security interest in "all Bakewell products that have been or are to be supplied by that company to Selma and held by her as inventory." Selma receives such a form. She signs it on May 20 and returns it to Bakewell. Does a security interest in favor of Bakewell ever attach to those toasters delivered in April that haven't yet been sold and are still in Selma's possession? If so, when?

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Attachment E & E

5d. Yes. Bakewell does acquire a security interest in the toasters still on hand, and that interest attaches as of May 20 when Selma signs the Security Agreement granting such an interest. No doubt that as of that date she has rights in those toasters. What about the value require¬ment? Look back to the Article 1 definition of "value." Value is given for
rights — here Bakewell's security interest — if Bakewell acquired those rights "as security for . . . a pre-existing claim." Bakewell had from the very outset a claim to be paid for the merchandise it delivered. Orig¬inally this claim was unsecured. In May, Selma agrees to give Bakewell this security interest in these toasters as "security for" this pre-existing right on Bakewell's part that it be paid. So Bakewell has an Article 9 security interest, which attaches just like any other.
A couple of points need to be made in wrapping up this tale of the toasters. First of all, as the last part of the example should have made clear, it is perfectly possible for two, or even more than two, distinct parties to have Article 9 security interests in — that is attached to — the same piece of collateral. By the end of part (d) each one of these simple appliances was subject to one security interest held by Credit Associates and another held by Bakewell America. I would not say the more the merrier — not by a long shot — but the Article 9 scheme as a general matter creates no impediment to this kind of multiple interests and in fact spends a lot of time and energy (as we ourselves will in Part III of this book not coincidentally labeled "Priorities") sorting out the players and their relative positions should things get dicey.
A second general point, or rather a question, may have occurred to you: If Article 9 security interests keep attaching to collateral, attaching often to more collateral as time goes on, and sometimes attaching to items to which other interests have already attached — well, doesn't the whole process threaten eventually to overwhelm if not the collateral itself then at the very least our meager powers of comprehension? A toaster is, after all, just a toaster. How much of a burden as a piece of collateral in this exciting, ever-changing world of Article 9 interests can it be expected to take on? From what we've seen so far, security interests keep attaching and attaching, clasping onto the collateral for dear life, but seemingly never letting go. Have no fear, at least on this score. In material to follow we will learn how interests may and do fall away either at the happening of a specific event or by the passage of time. While the drafters of Article 9 (mercifully) have spared us from having to speak of an interest "detaching" or "unattaching," we will learn in chapters to follow of how an interest may "terminate" or become "no longer effective" against particular parties. There stands the simple toaster, apparently unaffected by all the activity swirling around it. Article 9 security interests come and go like, well, so many slices of bread.

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6. Samantha, a retired university professor faced with some large medical bills, gets a loan from Local Lending Associates. The lender is willing to give her the loan based on her putting up as collateral the impressive collection of books in her field of study that she has accumulated over the years, including a number of rare and valuable volumes. She grants to Local Lending a security interest in "all books now held or hereafter acquired" by her. Six months after obtaining the loan, Samantha inherits from a distant relative a Bible which has been in her family for genera¬tions. She feels honored now to be the custodian of this important record of her family's long history and, while she recognizes that it would have a significant market value due to the age and rarity of the edition, would never think of parting with it for any amount of money. She has every intention of passing it on to a member of the next generation in her will. A question remains: Did Local Lending's security interest attach to this Bible at the time it came into Samantha's possession? See §9-204(b) (1).

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Attachment E&E

6. No. All of Samantha's books, the family Bible included, constitute con¬sumer goods. There's no reason to worry about "accessions" here (if ever), so it is clear from §9-204(b) (1) that Local Lending's security interest will not attach to the Bible, no matter how valuable, in spite of the after-acquired property clause that firm wrote into the security agreement that Samantha was asked to and did sign. She acquired rights in the Bible more than ten days after the lender gave value. Comment 3 to §9-204, which deals with this exception to the general enforceability of after-acquired property clauses, doesn't do much more than restate the conclusion as we found it in the Code text, but the reason for the exception should be obvious. It is another example (like the rule of §9¬108 (e) (2), which we looked at in the last example of the previous chapter), of a bit of consumer protection finding its way into Article 9. When Samantha originally took out the loan she had to know that she was putting at risk — should she not be able to repay Local Lending —her collection of scholarly books. She may not have been happy to do so, but we have to assume that had she not been willing to put that collection up as collateral she could not have obtained the loan. At the same time, Local Lending would have been making its decision to lend on this basis based on what it estimated to be the worth of the scholarly book collection at the time she applied for the loan. It could not have been relying on the possibility that her collection of books would grow, especially not in the way that it has here by her unforeseen inheritance of a family treasure. There is no valid reason for allowing Local Lend¬ing's interest to extend to this later-acquired piece of Samantha's personal property, and Samantha is protected by §9-204(b) (1) from inadvertently encumbering it with a security interest just because there was some language, which she might well not have fully understood, about "now held or hereafter acquired" in the document she signed. The Bible stays free of Local Lending's security interest.