Assignment 16 Perfection: Personal Property Filing Systems. Perfection. Financing Statements. Problem 16.2

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1 Assignment 16 Perfection: Personal Property Filing Systems Reference: Understanding Secured Transactions, Chapter 4 (pages ), 5.01, 5.02, 5.04, 5.05, Introduction to Part IV (pages ) Perfection Perfection makes an attached security interest enforceable against third parties Secured party can enforce SI vs. debtor even if that SI is not perfected [ 9-203(a)] An act of perfection thus establishes a secured party s priority relative to other creditors and/or other 3 rd parties Financing Statements General rule: a financing statement must be filed to perfect a security interest [ 9-310(a)] Form (UCC-1) prescribed in 9-521(a) Filing customarily occurs in state s central filing office (in MO, the Secretary of State s office) Once a SI has attached and a UCC-1 is filed, SI is perfected [ 9-308(a)] Recall: UCC-1 may be pre-filed [ 9-502(d)] Problem 16.2 You want to buy a set of Missouri statutes from a retiring lawyer (for sale for $8,000 on ebay) What do you do? 1

2 Seller may have granted a SI in the books E.g., If Bank has a SI in the books, that SI may follow the books into your hands, unless Bank authorized the sale free and clear of its SI [ 9-315(a)(1), codifying derivative title ] You must search records to see if 3d party has filed a UCC-1 vs. Seller, covering the books E.g., if Bank filed UCC-1 covering Seller s equipment, there could be a SI in the books If so, you shouldn t buy without getting agreement with Bank that you ll get title free of its interest Problem 16.1 Leonard owes (a) $30,000 judgment to ex-wife Felicia for child support; (b) $36,000 debt to business partner Bernie Felicia wants to levy upon Leonard s Camaro (which is worth $30,000) Title certificate shows a lien in favor of Bernie (but Bernie never filed a UCC-1) Leonard in fact granted Bernie a SI in the car 3 months ago (after Felicia had her judgment) If Felicia levies on the car now, what are the respective priorities of Bernie and Felicia with respect to Leonard s car? A. Bernie s SI is perfected and has priority over Felicia s judgment lien B. Bernie s SI is perfected, but Felicia s prior judgment lien has priority C. Bernie s SI is unperfected (no UCC-1 filing), and Felicia s judgment lien would have priority Bernie s SI is perfected a.. 0% 0% 0% Bernie s SI is perfected,... Bernie s SI is unperfected... For titled vehicles like cars, secured party perfects its SI by complying with the state s title certificate statute, not by filing a UCC-1 [ 9-311(b)] Usually, this is done by applying to have SI noted on the vehicle s title certificate A UCC-1 filing is generally not effective to perfect a SI in a titled vehicle [ 9-311(a)(2)] A security interest is subordinate to the rights of a person who became a lien creditor before the SI was perfected [ 9-317(a)(2)] Perfected SI has priority over a later lien creditor 2

3 Problem 16.1(a) Bernie s SI has priority over Felicia s lien Felicia only became a lien creditor when sheriff levied upon the car [ 9-102(a)(52)], not when she got the judgment At time of levy, Bernie already has a perfected SI in the car Bernie s perfected SI would thus take priority over Felicia s judgment lien (if and when she gets one) [ 9-317(a)(2)] Problem 16.1(b): Felicia goes ahead with the levy. If the sheriff sells the car, and Lambert buys it at the sheriff s sale. A. Lambert will get nothing (sale is void; Felicia doesn t have priority) B. Lambert will get title free and clear of all liens C. Lambert will get title subject to Bernie s SI Lambert will get nothing... 0% 0% 0% Lambert will get title fre... Lambert will get title sub... Problem 16.1(b) Felicia can enforce her judgment lien, but b/c the lien is subordinate to Bernie s perfected SI, the sheriff s sale will have no effect on Bernie s SI Derivative title: buyer at sheriff s sale will take car subject to Bernie s SI [ 9-315(a)(1)] Lambert would not be personally liable for Leonard s debt to Bernie, but he must pay off that debt to redeem the car from Bernie s SI If the car s FMV = $30,000, how much should Lambert be willing to pay to buy the car at the sale? If car is unlikely to bring a buyer, why should Felicia bother to seize the car and sell it? Problem 16.1(b) 3

4 Going ahead and having the sheriff levy on the car and conducting an execution sale may not be entirely pointless for Felicia (even if there s no equity in the car) Sale would extinguish Leonard s interest Thus, if he wants to keep the car, Felicia s threat to conduct execution sale may prompt him to settle with her and pay support arrearages Or, maybe she d get some psychic joy from seeing her ex-husband lose his car to her (she d likely be the only bidder) Stevie buys a food cart from Winchell Unknown to Stevie, Winchell had granted a SI in the cart to GFC, to secure a debt of $5,000 GFC had filed UCC-1 covering the cart GFC has now demanded that Stevie (a) turn over the cart or (b) pay off Winchell s $5,000 debt Problem 16.3 Suppose Stevie says: Winchell lied to me and he said I would get full ownership of the cart. I didn t know about GFC. A. Stevie can use Winchell s fraud as a defense if GFC tries to repossess the cart B. Stevie cannot use Winchell s fraud as a defense to repossession Stevie can use Winchell s... 0% 0% Stevie cannot use Winche... Stevie must turn over the cart (unless he pays off the debt to GFC to redeem it) GFC s SI was perfected by filing of UCC-1 [ 9-308(a), 9-310(a)] prior to sale to Stevie GFC didn t defraud Stevie; Stevie can t use Winchell s fraud as a defense to repossession by GFC; no unjust enrichment (Peerless Packing) GFC s SI is still enforceable despite sale of cart to Stevie, b/c GFC did not authorize sale of the cart free and clear of GFC s interest [ 9-315(a)(1)] 4

5 Problem 16.3 Filing system based on constructive notice; it s irrelevant that Stevie didn t know that the cart was subject to SI (buyer takes subject to perfected SI) [ 9-317(b)] Stevie may have been defrauded, but he wasn t defrauded by GFC (it cured the ostensible ownership problem by filing its UCC-1) Problem 16.4(a): What System? Pipes has applied to ITT Services for a loan to be secured by Pipes s service station tools In what filing systems should ITT (a) search for prior SIs, and (b) give effective notice? Problem 16.4(a): What Office? Tools are equipment that Pipes uses in his business [ 9-102(a)(33), cmt. 4a] Use of the collateral is key to classification, not the use of the loan proceeds (tools are equipment, even if this is a consumer loan) SI in equipment is perfected by filing a UCC-1 in the central filing office in the state [ 9-501(a)(2)] In MO, this would be w/secretary of State Problem 16.4: What State? There is not one Article 9 filing system; there are 50 Article 9 filing systems Each state maintains its own Article 9 filing system Which state is the relevant state for a particular debtor/transaction? 5

6 ITT must search for filings, and file its UCC- 1, in the state where Pipes has his primary residence Perfection of a SI in Pipes s tools is governed by the law of the state where Pipes is located [ 9-301(1)] B/c Pipes is an individual, he is located in state of his principal residence [ 9-307(b)(1)] Thus, if Pipes has his principal residence in MO, ITT would search/file in Missouri Problem 16.4(b): Wolfson, a St. Louis inventor, applied to Bank for $400K loan, to be secured by a patent. Where should Bank file/search? A. In the US Patent & Trademark Office B. In the MO Secretary of State s office C. Both A and B In the US Patent & Trad... 33% 33% 33% In the MO Secretary of S... Both A and B Patent Statute: Recording An assignment, grant or conveyance [of an interest in a patent] shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage. [35 USC 261] Question: does this statute pre-empt Article 9? Problem 16.4(b) If Patent Act pre-empts Article 9, UCC-1 filing would be ineffective [ 9-311(a)(1)] Under this view, grant of SI would have to be recorded in Patent Office to perfect SI [Cf. Peregrine Entertainment, dealing with SI in a copyright] But, some courts have held Patent Act does not preempt Article 9 [Pasteurized Eggs, p. 291] Under this view, UCC-1 filing would perfect SI 6

7 Should Patent Law Pre-empt Art. 9? Kozinski s view for pre-emption (expressed in Peregrine) is based on efficiency A recordation scheme best serves its purpose where interested parties can obtain notice of all encumbrances by referring to a single, precisely defined recordation system If a creditor could perfect by filing in either patent office or state UCC office, later creditors must search in both (increasing search costs) Given statutory and case uncertainty, Bank should go the belt and suspenders approach Search for prior filings in both PTO and MO Secretary of State File in both places, too Bank is better safe than sorry! Whichever law applies, Bank protected Problem 16.4(b) Summary: Intellectual Property For attachment, Article 9 is not pre-empted; Art. 9 governs whether SI attaches to IP For perfection: Copyright statute pre-empts Art. 9; to perfect vs. copyright, must file in US Copyright Office (Peregrine) Patents and Trademarks: weight of authority is that patent and trademark statutes do not pre-empt Article 9; thus, creditors taking SI in a patent or trademark will perfect by belt and suspenders (UCC-1 filing and filing in PTO) Other Pre-emptive Filing Systems Aircraft: Federal Aviation Act (perfection of SI in aircraft must occur by filing with FAA) Ships: Ship Mortgage Act (perfection of ship mortgage must occur by filing with Secretary of Dept. of Homeland Security) Trains: perfection as to railroad rolling stock must occur by filing with Surface Transportation Board 7

8 Problem 16.4(d) Bank to lend $600K to dealer of rare autos Collateral includes all of the rare autos owned by dealer Some of the rare autos are held for sale to customers; others are not held for sale, but for display in a museum run by the dealer and used by dealer to drive in area parades Problem 16.4(d): For which of the cars must Bank have its lien noted on the car s title certificates? A. Only the ones being held for sale B. Only the ones not being held for sale C. All of them Only the ones being held... 0% 0% 0% Only the ones not being... All of them For autos not held for sale, Bank must perfect its SI by complying with certificate of title statute [ 9-311(a)(2)] Usually, this is done by applying to DMV to have lien noted title certificate Secured party will often take physical possession of the title certificate, and hold it until loan is repaid Problem 16.4(d) Autos held for sale are inventory [ 9-102(a)(48)] While held for sale, 9-311(a)(2) exclusion doesn t apply [ 9-311(d)] Thus, SI in cars held for sale is perfected by UCC-1 filing! [ 9-501(a)(2)] Problem 16.4(d): Autos for Sale? 8

9 Problem 16.5 In closing the loan to Debtor, your supervisor gives you the following steps : (1) Search the records to confirm there are no prior filings against the Debtor covering the collateral (2) If the search comes up clean, then file (so Bank will be perfected once the transaction is complete) (3) Have the Debtor sign the security agreement (if it hasn t done so already) (4) Now you can disburse the loan proceeds and be assured of expected first priority Is this advice correct? There can be a gap from time when a UCC-1 (1) is filed by a secured party and (2) is actually indexed by the filing officer Filing = tender of financing statement + filing fee [ 9-516(a)] An authorized UCC-1 is effective upon filing [ 9-510(a)] But, filing officer must index the filing to make it discoverable by searcher [ 9-519(a)] Indexing Delays and The Basket During this gap, a filed UCC-1 is effective, but anyone searching wouldn t be able to find it! During this time, filed UCC- 1 is in the basket Note: filing officer has up to 2 business days to index a filed financing statement! [ 9-519(h)] (and some are behind on their duties!) Indexing Delays and The Basket Creditor Y s Nightmare Scenario Creditor X files financing statement Tuesday 10am Creditor Y gets clean search report Wednesday 1pm Creditor Y files financing statement Wednesday 2pm Thursday 8am Filing officer indexes Creditor X s financing statement 9

10 Correct sequence: (1) file your UCC-1 first; (2) wait until filing officer has indexed it; (3) THEN search for other filings Your filing will stake out your priority vs. other creditors as of time of filing [ 9-322(a)(1)] If your search then reveals that another creditor had made a prior filing before your filing was accepted, you can decide not to make the loan If your search reveals only your own filed UCC-1 (but no others), you can reasonably expect to have first priority against the collateral 10