Wednesday, June 21, 2017 Commercial and Bankruptcy Law Rooms: An Article 9 Primer for Iowa Attorneys 10:30 a.m. 11:15 a.m.

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1 Wednesday, June 21, 2017 Commercial and Bankruptcy Law Rooms: An Article 9 Primer for Iowa Attorneys 10:30 a.m. 11:15 a.m. Presented by Prof. Matthew Doré Drake University Law School 2507 University Ave Des Moines, IA Phone:

2 An Article 9 Primer for Iowa Attorneys Matthew G. Doré Richard and Anita Calkins Distinguished Professor Drake University Law School Iowa s UCC Article 9 Codified in Chapter 554 of the Iowa Code. UCC = Iowa Code NOTE: Due to the Iowa Code style and numbering conventions, numbers and letters in Iowa s version of Article 9 will generally be transposed from the Uniform version of Article 9. E.g.: UCC 9-102(a)(2) = Iowa Code (1)(b) (defining the term account ) (defining the term account ) NOTE: The Iowa Legislature does not enact the Comments to the UCC, but the Iowa Code Annotated does include them. The Comments to the UCC are also available on line and in the Uniform Law Annotated volumes. Courts generally treat the Comments as very important interpretative authority. These slides cite to UCC Article 9 rather than the Iowa Code version. Overview of UCC Article 9 Main Concepts Attachment of Security Interests and Scope of Article 9 Perfection of Security Interests Priority of Security Interests Enforcement of Security Interests 1

3 Attachment per Section 9-203(a) What is required for a security interest to attach under Section 9-203(a)? -- Per 9-203(a): A security interest attaches to collateral when it becomes enforceable against the debtor with respect to collateral Attachment per Section 9-203(b) (b) a security interest is enforceable against the debtor with respect to collateral only if: (1) value has been given; (2) the debtor has rights in the collateral ; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral.; Requirements for a Valid Security Agreement An agreement that creates or provides for a security interest (a)(74). Description of the collateral 9-203(b)(3)(A) and Debtor s authentication (signature) 9-203(b)(3)(A) Description of the obligation secured 1-201(b)(35) The Iowa case law test: The basics of a security agreement are (1) a writing manifesting an intent to create or provide for a security interest; (2) signed by the debtor; and (3) which contains a description of collateral. F.S. Credit Corp. v. Shear Elevator, Inc., 377 N.W.2d 227, 231 (Iowa 1985). 2

4 Attachment per Section 9-203(b) What can go wrong? What if Debtor has not signed (authenticated) a document that purports to be a security agreement? Example: In re Bossingham, 49 BR 794 (S.D. Iowa 1985) Attachment per Section 9-203(b) 1984 Agreement Between Joanne B. and David Bossingham Joanne B. is providing cash inputs as well as credit inputs due to her credit worthiness and I, David Bossingham, agree to reimburse and pay to Joanne B. all expenses incurred by her on my be-half in the 1984 crop year. * * * /s/ David L. Bossingham A week before this agreement was signed, Joanne filed a UCC-1 Financing Statement signed by David that described the collateral as all of Debtor s crops now growing for The Financing Statement listed the names and addresses of David and Joanne as Debtor and Secured Party. Attachment per Section 9-203(b) Could the Financing Statement alone suffice as a security agreement? The Court held NO, presumably because the Financing Statement makes no reference to what obligation was secured. Note: Under current Article 9, the Debtor does not sign the Financing Statement, making it more difficult to argue that the Financing Statement operates as a Security Agreement. Could the 1984 Agreement, together with the Financing Statement suffice as a security agreement? The Court held YES, concluding that at the time this agreement was entered, the parties actually intended to create a security interest in favor of Joanne Bossingham. 3

5 Other Attachment Issues: Does the Security Agreement sufficiently describe the Collateral under the standards of Section Section 9-108(a) s test: Any description that reasonably identifies the collateral. This includes, per Section 9-108(b)(3): a type of collateral defined in the UCC. Using Article 9 Collateral Classifications for Descriptions of Collateral (Section 9-108(b)(3)) Classifications of Collateral per Goods Intangibles Quasi-Intangibles Consumer Goods Accounts Chattel Paper Equipment Deposit Accounts Instruments Farm Products General Intangibles Documents (of Title) Inventory Some Investment Some Investment Property Property Commercial Tort Claims Example of Using Article 9 Collateral Classifications as Description Wells Fargo Bank v. Robex, 711 N.W.2d 732 (Iowa Ct. App. 2006): The security agreement granted Wells Fargo a security interest in the following as collateral for the loan: a. All equipment and machinery, including power-driven machinery and equipment, furniture and fixtures now owned or hereafter acquired, together with all replacements thereof, all attachments, accessories, parts and tools belonging thereto or for use in connection therewith. b. All passenger and commercial motor vehicles registered for use upon public highways or streets, now owned or hereinafter acquired, together with all replacements thereof, all attachments, accessories, parts, equipment and tools belonging thereto or for use in connection therewith. The Court rejected Debtor s challenge to the collateral description. 4

6 Caution: Section requires a more specific description for commercial tort claims and, in a consumer transaction, for investment property. Example: Shirley Medical Clinic, P.C. v. U.S., 446 F.Supp.2d 1028 (S.D. Iowa 2006) (description any lawsuit due or pending was not sufficient to attach security interest in a judgment for breach of fiduciary duty against former employees of corporation a commercial tort claim). Other Attachment Issues: If there is a security agreement describing the collateral, what else can go wrong with attachment? Debtor must also have rights in the collateral for the security interest to attach to the collateral. Example: In re Banke, 275 BR 317 (N.D. Iowa 2002): Debtor-wife purported to grant security interest in boat to secure a bank loan. The boat was titled solely in her husband s name. Held: Security interest never attached and was unenforceable! Nemo dat quod non habet! Other Attachment Issues: Does the Security Interest Attach to After-Acquired Property? Section 9-204(a) provides: After-acquired collateral.... a security agreement may create or provide for a security interest in after-acquired collateral. 5

7 Other Attachment Issues: Does the Security Interest Attach to After-Acquired Property? Example Day 1: Bank loans money to Debtor (a construction company). Debtor signs a Security Agreement to secure the loan, granting Bank a security interest in All of Debtor s equipment. Day 5: Debtor acquires a new bulldozer. Is the new bulldozer part of Bank s collateral? NO the security agreement speaks as of the day of attachment and makes no provision for after-acquired collateral. Note: Some courts might interpret a Security Agreement to have after-acquired intent where the collateral turns over frequently e.g., inventory or accounts. Proceeds 9-102(a)(64) Proceeds... means the following property: (A)whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; (B) whatever is collected on, or distributed on account of, collateral; (C)rights arising out of collateral; (D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or (E) to the extent of the value of collateral..., insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral (a) Except as otherwise provided in this article...: (1) a security interest... continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest...; and (2) a security interest attaches to any identifiable proceeds of collateral. Proceeds The collateral is a truck. Classic examples of Proceeds would be... : Debtor trades the truck for a car. The car is proceeds. Debtor sells the truck in exchange for cash and a promissory note. The cash and promissory note are proceeds. Debtor leases the truck and receives rent in exchange. The rent received is proceeds. The truck is damaged in a casualty event, which is covered by insurance. The insurance claim and payment are proceeds. The truck is damaged in an accident for which another driver is responsible. The claim against the other driver is proceeds. The truck is defective and owner has a warranty claim against the manufacturer. The warranty claim is proceeds. 6

8 More Difficult Proceeds Questions The collateral is a car. Debtor uses the car as an Uber driver. Are the Uber payments proceeds? The collateral is a horse. Debtor enters the horse in a race and the horse wins. Is the prize proceeds? What if Debtor entered the horse in a horse show and the horse won a prize? The collateral is a cow. The cow gives milk. Is the milk proceeds? What if the cow has a calf. Is the calf proceeds? Would we worry about this issue if the collateral description was Debtor s cows now owned and hereafter acquired and all products thereof. More Difficult Proceeds Questions Feed Store sells feed on credit to Farmer and takes a security interest in the feed to secure the purchase price. Farmer uses the feed to fatten hogs. Are the hogs proceeds of the feed? Held no: Farmers Co-op Elevator v. Union State Bank, 409 N.W.2d 178 (Iowa 1987). Proceeds Do proceeds include proceeds of proceeds? Example: SP has a SI in D s Bulldozer. D sells the Bulldozer to X in exchange for cash. D uses the cash to buy a Truck. The cash D received is proceeds of the Bulldozer. So SP had a SI in the cash. Is the Truck also proceeds? See the definition of collateral in Section 9-102(a)(12), which includes proceeds. So the answer is YES -- the Truck is proceeds of the cash as collateral (assuming SP can trace the Truck back to the cash and the Bulldozer). 7

9 What effect does Debtor s bankruptcy have on an attached security interest? If a SI is perfected, then the Secured Party will normally receive up to the value of its collateral despite D s bankruptcy. But there are limitations: No new SI after BR case is filed (unless court approves). An AAP clause is not valid after BR case is filed. A Future Advances clause is not valid after BR case is filed. However, a SP CAN get SI in proceeds after BR case is filed. Attention Creditors and Other Third Parties! : Five Methods of Perfection Financing Statements Other Law Provides Method of Perfection Certificates of Title Federal Systems Possession Automatic (Perfection occurs upon attachment without further action by SP) Control

10 : Five Methods of Perfection Financing Statements Used for most collateral : Five Methods of Perfection Automatic (Perfection occurs upon attachment without further action by SP) Often used for PMSIs in consumer goods : Five Methods of Perfection Other Law Provides Method of Perfection Certificates of Title Federal Systems Used for property covered by state law title systems and some federal property (e.g., trademarks, airplanes) 9

11 : Five Methods of Perfection Used (rarely) for tangible collateral Used for deposit accounts as original collateral and for some Investment Property Possession Control Three Cautionary Statements The five perfection methods are collateral-specific. Enforceability does not require perfection. Perfection does not assure priority. What is Filed to Perfect a SI? A Financing Statement

12 A Sample Completed Financing Statement Jordan Hal 219 Maple Street Coast City CA USA First Bank 201 W. Main Street Coast City CA USA Jewelry and lamp. The Essential Contents of a Financial Statement: 9-502(a) (1) The Debtor s name (see 9-503); (2) The Secured Party s name; and (3) An indication of the Collateral (see 9-504, and cmt. 2 to 9-502). Note: the 9-506(a)-(c) rules on errors and omissions are also important. Where is the Financing Statement Filed? Assume Debtor is an individual sole proprietor who lives in Council Bluffs and conducts her business (a hair salon) in Omaha. If an Iowa lender takes a security interest in Debtor s salon equipment, in which state s Secretary of State s office should the financing statement be filed Nebraska or Iowa? Answer: Iowa. The general rule is that perfection is governed by the law of the Debtor s location (see 9-301(1)). See also (an individual debtor is located in the state of the debtor s principal residence ). 11

13 Where is the Financing Statement Filed? Assume Debtor is a Delaware corporation that conducts its business (a hair salon) in Nebraska. If an Iowa lender takes a security interest in Debtor s salon equipment, in which state s Secretary of State s office should the financing statement be filed Nebraska or Iowa or Delaware? Answer: Delaware. The general rule is that perfection is governed by the law of the Debtor s location (see 9-301(1)). See also ( a registered organization that is organized under the law of a state is located in that state. ) Where is the Financing Statement Filed? Assume Debtor is a partnership with two locations: a chief executive office in Iowa and a manufacturing/sales office in Nebraska. If an Iowa lender takes a security interest in Debtor s salon equipment, in which state s Secretary of State s office should the financing statement be filed Nebraska or Iowa? Answer: Iowa. The general rule is that perfection is governed by the law of the Debtor s location (see 9-301(1)). See also ( a debtor that is an organization and has more than one place of business is located at its chief executive office. ) The NAME GAME and Section Error Standard Under Section 9-502, the Financing Statement must contain the Debtor s Name, along with the Secured Party s Name and a Description of the Collateral. Section 9-506(a) (General Error Standard): Subject to Section 9-506(b), the financing statement is effective even if there is a minor error in the Financing Statement that is not seriously misleading. Section 9-506(b): Subject to Section 9-506(c), an Error in the Debtor s Name IS ALWAYS seriously misleading! Section 9-506(c): Name Error IS NOT seriously misleading if a search under Debtor s correct name would find filing with incorrect name! 12

14 Search and Responses Jennifer Lowell Douglas # Name on Filing Effective if Disclosed 3 Jennifer Douglas 1 Jennifer L. Douglas 2 Jenny Douglas 4 Jennifer Douglass 87 Jennifer [x] Douglas Should Be Included in Search Response? The NAME GAME and Types of Debtors Covered by Section vs. Registered Organizational Debtors (see 9-503(a)1), 9-102(a)(71) and the definition of public organic record in 9-102(a)(68)) Corporations, LLCs, Limited Partnerships, Coops vs. Organizational Debtors (see 1-201(b)(25) and 9-503(a)(6)) Partnerships and LLPs Individual Debtors (see 9-503(a)(4) & (5)) vs. Other types of Debtors (see 9-503(a)(2) & (3) for estates and trusts) What about trade names? See Sec (b) not required. The NAME GAME and Recent Article 9 Changes for Individual Debtors Individual Name Problem Old Article 9 standard: Section 9-503(a)(3) if the debtor is an individual, only if the financing statement provides the individual name of the debtor. 13

15 Example Birth Certificate Name: Anastasia Beata Ceauşescu Also goes by: Anna Married Surname: Davenport Passport: Anastasia Ceauşescu Davenport Driver s License: Anna C. Davenport Individual Debtor s Name All Possibilities Considered Anastasia Ceauşescu Anastasia B. Ceauşescu Anastasia Beata Ceauşescu Anna Ceauşescu Anna B. Ceauşescu Anna Beata Ceauşescu Anastasia C. Davenport Anastasia Ceauşescu Davenport Anna C. Davenport Anna Ceauşescu Davenport Anastasia Davenport Anastasia B. Davenport Anastasia Beata Davenport Anna Davenport Anna B. Davenport Anna Beata Davenport Anastasia B. C. Davenport Anastasia B. Ceauşescu Davenport Anastasia Beata C. Davenport Anastasia Beata Ceauşescu Davenport Anna B. C. Davenport Anna B. Ceauşescu Davenport Anna Beata C. Davenport Anna Beata Ceauşescu Davenport The NAME GAME and Recent Article 9 Changes for Individual Debtors Individual Name Problem --New Article 9 standard: States can choose Alternative A (Iowa chose this option): Sec (a)(4): Must use [driver s license] name if D has one; Sec (a)(5): otherwise can use debtor s individual name or debtor s surname and first personal name. or Alternative B: Sec (a)(4)): (A) Individual name or (B) surname and first personal name or (C) [driver s license] name. ALL ARE ACCEPTABLE! 14

16 Individual Debtor s Name License Issued by State of Residence Alternative A Filing & Searching First Personal Name Anna Add. Personal Name(s) C. Surname Davenport Individual Debtor s Name License Issued by State of Residence Alternative B Filing First Personal Name Add. Personal Name(s) Surname Anna C. Davenport or Anna or Anastasia surname plus first personal name Davenport or Ceauşescu or the Debtor s individual name Alternative B Filing First personal name (two possibilities) Surname (two possibilities) But if you use Debtor s individual name, which one of the possibilities is the correct individual name? First Personal Name Anastasia Anna Add. Personal Name(s) [none] B. Beata C. Ceauşescu B.C. Beata C. Beata Ceauşescu B. Ceauşescu Surname Ceauşescu Davenport Same goes for Alternative B searching 15

17 Individual Debtor s Name All Possibilities Considered Anastasia Ceauşescu Anastasia B. Ceauşescu Anastasia Beata Ceauşescu Anna Ceauşescu Anna B. Ceauşescu Anna Beata Ceauşescu Anastasia C. Davenport Anastasia Ceauşescu Davenport Anna C. Davenport Anna Ceauşescu Davenport Anastasia Davenport Anastasia B. Davenport Anastasia Beata Davenport Anna Davenport Anna B. Davenport Anna Beata Davenport Anastasia B. C. Davenport Anastasia B. Ceauşescu Davenport Anastasia Beata C. Davenport Anastasia Beata Ceauşescu Davenport Anna B. C. Davenport Anna B. Ceauşescu Davenport Anna Beata C. Davenport Anna Beata Ceauşescu Davenport Secured Transactions Chapter 4 Other Essential Information in a Financing Statement per Sec (a)? (2) secured party s name and (3) indication of collateral covered. Note: the standards of Sec do NOT apply to the Secured Party s name. Assume SP s security agreement covers all equipment and inventory, now owned or hereafter acquired, but SP s financing statement covers All Assets. OK? YES! Per Sec financing statement can use all assets or similar description, Even though not permitted in the Security Agreement. Financing Statement All Assets Security Agreement Existing and after-acquired inventory and equipment 16

18 Assume SP s security agreement covers all equipment and inventory, now owned or hereafter acquired, but SP s financing statement covers inventory and accounts. The security interest in inventory is attached and perfected; the security interest in equipment is unperfected. Security Agreement Financing Statement Equipment Inventory Accounts SI attached SI attached FS only but not PF d & Pf d What about the absence of after acquired language in the Financing Statement? Not required: See cmt. to 2 to Section 9-502, end of 2 nd paragraph. Financing Statement Equipment Security Agreement Office Furnishings SI attached and Pf d Authority to File a Financing Statement Does Debtor have to authorize the filing of a financing statement? --YES per 9-509(a)(1). --NO per 9-509(a)(2) (but only for Ag Liens). Purpose of Debtor consent to the filing of a financing statement? Consequences for SP if files FS without authority? --See 9-510(a): An unauthorized filing has no effect! --See also 9-625(b): damages COA vs. a party who does not comply with this article and 9-625(f): minimum $500 damages award. 17

19 Authority to File a Financing Statement How can a Debtor give authorization? Article 9 no longer includes a debtor signature space on the form UCC-1 Financing Statement! --Section 9-509(a)(1) debtor authorizes the filing in an authenticated record... Example? --Signed loan application or other writing signed by D authorizes SP to file the FS. Authority to File a Financing Statement How else can a Debtor give authorization? See Section 9-509(b): By authenticating or becoming bound as debtor by the security agreement, a debtor... authorizes the filing of an initial financing statement... covering: (1) the collateral described in the security agreement.... AKA Ipso Facto authorization. Authority to File a Financing Statement What if SP files a FS without authorization, then D executes a Security Agreement covering the collateral described in the FS? Is the FS authorized under 9-509(b)? --Yes. Although not initially authorized, the Security Agreement provides ipso facto authorization retroactively. Comments to (see last 2 paras. of cmt. 3) and 9-509(b) (see last two sentences of cmt. 3) indicate drafters intention that the authorization is retroactive to the date of filing, regardless of impact on intervening third parties. 18

20 Authority to File a Financing Statement What if SP files a FS without authorization, then D executes a Security Agreement covering the collateral that is not as broad as the collateral described in the FS? E.g., FS says Inventory and Accounts but Security Agreement says Inventory? Is the FS authorized to any extent under 9-509(b)? --Yes, ipso facto FS authorization as to Inventory (the collateral described in the Security Agreement) but not as to Accounts. Financing Statement all assets unauthorized as to this Security Agreement existing and after-acquired inventory and equipment authorized to this extent Methods of Perfection Filing a Financing Statement Possession (directly or through an agent or bailee) Recordation on a Certificate of Title an alternate State filing s system Compliance with a Federal Filing System Control Automatic 19

21 The Exception to Filing a Financing Statement to Perfect General rule is that SP must perfect by filing a financing stmt. Exceptions? --Don t file financing stmt. for property subject to a statute, regulation or treaty described in 9-311(a) (a)(1) refers to property for which there is a federal filing system for liens and security interests. Examples: SI in aircraft regulated by federal statutes that establish a system for ownership interests in aircraft, as well as security interests on aircraft, to be recorded with the FAA [at its offices in Oklahoma City, Oklahoma]. SI in ocean-going vessels (federal admiralty law), SI in Railroad Rolling Stock (also federal law). SI in SOME (but not all) intellectual property: Registered Copyrights (Y) Why does Article 9 require use of the federal filing system, rather than the state UCC filing system, to perfect SIs in this property? Trademarks (N) Patents (N) 9-311(a)(2)&(3) reference: (2) THIS STATE s certificate of title laws, if the title law provides for the SI to be listed on the title as a condition of perfection. (3) Another state s certificate of title law so long as that law provides requirements for a SI in property to have priority over lien creditors. Why does Article 9 require use of the applicable state law Certificate of Title system, rather than the state UCC filing system, to perfect SIs in this property?. Note: 9-311(d) excepts INVENTORY from the general rule of 9-311(a)(2). Does this exception make sense? 20

22 Methods of Perfection Filing a Financing Statement Compliance with a Federal Filing System Recordation on a Certificate of Title Possession (directly or through an agent or bailee) Control Automatic Perfection Without a Filed Financing Statement: Automatic Perfection Section 9-310(a): General rule that PF Step = Filed FS. Section 9-310(b)(2) exception: Security Interest perfected upon attachment per Section Section 9-309: Lists 14 situations where there is automatic perfection upon attachment. The 9-309(1) situation (PMSI in consumer goods) is particularly important. Perfection Without a Filed Financing Statement: Automatic Perfection A PMSI in Consumer Goods is automatically perfected. But what is a PMSI? A SI is a PMSI under Section 9-103(a) and (b) if: 1) Seller financed purchase (... an obligation of an obligor incurred as all or part of the price of the collateral... ) or 2) if TP financing allowed D to purchase the collateral (for value given to enable the debtor to acquire rights in or use of the collateral if the value is in fact so used. ) 21

23 Rules on Maintaining Perfection Change Result Provision Classification Change Ownership Change Location Change No need to amend filing; cf if perfection method changes. No need to amend filing because of new name (b) 9-507(b) 1 year after property transferred to new owner in different state (a)(3) 4 months after debtor s location changes (a)(2) Name Change Proceeds 4 months to re-file; 9-507(c) applies only to property acquired after that. Automatic for 20 days; various rules for beyond that (c), (d) Secured Transactions Priority Base Priority Rules Considerations that are relevant in Article 9 s priority rules: --Whether, when and how SP perfected the SI, --What the collateral classification is, --Whether the SI is a PMSI, --What kind of interest the competitor has in the collateral e.g., -a judgment lien? -a security interest? -is the competitor a buyer of the collateral? Secured Transactions Priority Base Priority Rules First set of priority rules to study: 9-317(a) and (e) Article 9 SI vs. Judicial Lien Creditor A VERY important set of rules because if D files BR, the Trustee in BR has the same rights as a creditor with a judicial lien on all of D s property! 22

24 Secured Transactions Priority Base Priority Rules INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF SECURITY INTEREST OR AGRICULTURAL LIEN. (a) [Conflicting security interests and rights of lien creditors.] A security interest or agricultural lien is subordinate to the rights of: (1) a person entitled to priority under Section 9-322; and (2) except as otherwise provided in subsection (e), a person that becomes a lien creditor before the earlier of the time: (A) the security interest or agricultural lien is perfected; or (B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed. Secured Transactions Priority Lien Creditors vs. PMSIs perfected by filing: The Special Priority Rule of 9-317(e) 9-317(e):... if a person files a financing statement with respect to a PMSI before or within 20 days after debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer... or lien creditor which arise between the time the security interest attaches and the time of filing. Secured Transactions Priority Basic SP v. SP priority Unperfected v. Unperfected 9-322(a)(3) First to attach wins Perfected v. Unperfected 9-322(a)(2) Perfected wins Perfected v. Perfected 9-322(a)(1) First to file or perfect, if no period when there is neither 23

25 Secured Transactions Priority General PMSI Priority Rule of Section 9-324(a) a perfected PMSI in goods other than inventory or livestock has priority over a conflicting security interest in the same goods if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter. Secured Transactions Priority Priority Rules for SI in Deposit Accounts as Original Collateral Priority Rules for Security Interests in Deposit Accounts vs. Others: SI in Deposit Account vs. Depositary Bank s setoff / recoupment rt. Depositary Bank wins UNLESS SI in Deposit Acct. was pf d under 9-104(a)(3) (SP has control by being customer on dep. acct.) SI in Deposit Account vs. SI in Deposit Account (1) SP that has control beats SP that does not have control. (2) If both SPs have control, first in time of control has priority. (3) If both SPs have control, but one SP is depositary bank, that SP wins. (4) If a SP has control by being a customer on the account, that SP wins. (A Priority Ladder : 4 beats 3 beats 2 beats 1. See 9-327) Secured Transactions Priority SP v. Buyer in General Exceptions to Basic Rule 9-201(a) Except as otherwise provided in UCC.... Exception 1: 9-317(b) Buyers that Receive Delivery of Collateral w/out Knowledge of SI and SI is Unperfected Careful: Remember that a perfected SI may become unperfected and deemed retroactively unperfected vs. purchasers! Exception 2: 9-320(a) (buyer in ordinary course) Exception 3: 9-320(b) (garage sales) Exception 4: 9-323(d), (e) (buyers of goods vs. future advances) Exception 5: (purchasers of instruments & chattel paper) Exception 6: 9-331(a) (holders in due course) 24

26 Secured Transactions Enforcement Overview of Enforcement Extracting Value from the Collateral 1. Disposition (e.g., Sale, Lease or License of Collateral) Notification (what, when, to whom) How to conduct disposition What to do with disposition proceeds Effect of disposition (on liens) Liability for error 2. Acceptance (a/k/a Strict Foreclosure keeping collateral) Consent Needed (how manifested) Effect of Disposition (on liens) 3. Collection Notification (to debtor; to account debtors) Defenses to payment by account debtors How to collect What to do with collection proceeds Secured Transactions Enforcement Repossession & Breach of the Peace Holding: Breach of Peace is objective standard based on: Whether the creditor s actions incite violence or are likely to incite violence. Relevant Factors 1. Where and when the repossession took place 2. The debtor s response 3. The reaction of and affect on third parties 4. The creditor s use of deception Secured Transactions Enforcement Dispositions If Secured Party has repossessed the collateral, what purpose does a disposition (a foreclosure sale) of collateral serve? Can t the Secured Party simply keep the collateral? If the Secured Party doesn t want to go to court (file a lawsuit) to enforce the security interest, can the Secured Party conduct its own disposition of the collateral under Article 9? YES: See Section 9-610! Why does Article 9 permit self help dispositions when most states require judicial foreclosure proceedings for real estate? 25

27 Secured Transactions Chapter 3 Dispositions Under Section What are the main limits imposed on a Secured Party who conducts a self-help disposition under Section 9-610? See subpart (b). The commercial reasonableness requirement. Comments are very helpful. Other requirements for a Disposition? Notice per Section through Secured Transactions Enforcement Article 9 Dispositions Main Issues 1. Notification through (a) To whom must it be sent? ( 9-611) (b) How far in advance? ( 9-612) (c) What must it say? ( & 9-614) Secured Transactions Enforcement Extracting Value from Collateral 1. Disposition Essentially, a foreclosure sale May be public or private Issues: Commercial reasonableness; notification; application of proceeds 2. Acceptance ( Strict Foreclosure ) Retaining collateral in full or partial satisfaction of the secured obligation Typically used with goods, but not so limited Requires active or constructive consent 3. Collection & Enforcement Applies to obligations owed to the debtor (e.g., accounts, chattel paper, instruments & payment intangibles) Thus, necessarily involved two debts: One owed by the debtor: the secured obligation One owed to the debtor: the collateral 26

28 Secured Transactions Enforcement Dispositions Commercial Reasonableness 9-610(b) Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable (b) A disposition of collateral is made in a commercially reasonable manner if... See also cmts. to both sections! Secured Transactions Enforcement Requirements for Full Strict Foreclosure Debtor must consent; 2. Secured party must receive no objection from any other person with an interest in the collateral; 3. If the collateral is consumer goods, the debtor does not have possession; and 4. If the collateral is consumer goods, less than 60% of the debt has been paid. Secured Transactions Enforcement Remedies for Violating Article 9 s Enforcement Rules Actual Damages 9-625(b) Who can sue under 9-625(b)? See 9-625(c) Denial of a Deficiency / Presumption Against a Deficiency? & case law $500 Penalty 9-625(e) Statutory Damages 9-625(c) Tort Law Recovery outside of Article 9?? 27