professor colin marks st. mary's university school of...

SECURED TRANSACTIONS PROFESSOR COLIN MARKS

ST. MARY'S UNIVERSITY SCHOOL OF LAW

CHAPTER 1: DEFINITIONS AND CLASSIFIYING COLLATERAL

A. Terms

• What does it mean to be “secured”?

o A secured transaction involves a relationship between two parties, typically a debtor and a creditor, where the debtor has given certain assurances in the form of a security interest in specific property to assure that the obligation will be performed.

• Security interest: An interest in __________________________________________________ or _______________________________ that secures payment or performance of an obligation.

• Security agreement: ______________________________________________________ that creates a ____________________________________________________.

• Debtor: A person who has an interest, other than a ____________________________________ _____________________________________________, in the collateral, such as the sole owner of the collateral.

• Obligor: A person who __________________________ with respect to the obligation that is secured by a security interest in the collateral.

• Collateral: _____________________________________________________________________ – may be tangible or intangible.

Example 1: Stewie loans Peter $1,000 and takes a security interest in Peter’s guitar. In this example, the guitar is the collateral and Peter is both the obligor and the debtor.

Example 2: Peter subsequently sells his guitar to Brian without Stewie’s authorization. Peter is still the obligor but now Brian is the debtor (not the obligor).

Example 3: If Lois had guaranteed the loan, then she would be an _______________________, but not the debtor.

B. Classifying Collateral Generally

• Classification of goods is important because it can affect the validity of a security interest, the way in which a security interest can be perfected, and the rights of a third party in the collateral, such as a buyer of collateral.

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• Classification is based on the debtor’s ___________________________________ at the time when the security interest attaches.

C. Goods

• Anything that is “moveable at the time that a security interest attaches” • Includes _______________________________, standing timber that is to be cut,

_____________________________________________, growing or unharvested crops, and manufactured homes

• Four classes of goods (mutually exclusive): Mnemonic - Cats Get Furry Paws Into Everything

o CG: Consumer Goods: Those acquired primarily for ______________________________________________________________________

Example 4: Television, clothes, etc.

o FP: Farm Products: Goods that are ___________________________________________ and include supplies that are used or produced in farming

Example 5: Eggs that chickens lay, hay for the horses, etc.

o I: Inventory: Goods, other than farm products, that are ________________________ ______________________________________, are furnished under a service contract, or consist of raw materials, works in process, or materials used or consumed in a business

Example 6: Furniture at the furniture store, apples at the grocery store, etc.

o E: Equipment: The catch-all class, consists of goods that are not _________________________________________, ____________________________________, or ____________________________

Example 7: Delivery trucks

Example 8: Brian is a dairy farmer. He milks his cows and delivers the milk to Family Milk, Inc. which pasteurizes the milk, cartons it and sells it to the local grocery store. Stewie buys a carton to pour on his cereal.

Example 9: The milk that Brian has is a ______________________________.

Example 10: Once the milk is processed by Family Milk and is at the grocery store, it is _____________________________.

Example 11: In Stewie’s hands, the milk is a ___________________________.

D. Intangibles

• Includes nine classes of personal property. Unlike the classification of tangible collateral, classification of intangible collateral does not turn on the manner in which the debtor uses the property.

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• Some goods are tangible enough to be possessed even if it does not constitute a good – these are “____________________________________________” property, usually defined by a writing.

1. Quasi-intangible Property:

o Documents: A document of title, which confers on the holder ____________________________________________________________.

Example 12: Warehouse receipt, bill of lading

o Instruments:

Negotiable instruments, such as _______________________________________________________, and

____________________________________________________ that evidence a right to the payment of a monetary obligation and are transferred in the ordinary course of business by delivery, such as a certificate of deposit from a bank.

Example 13: An IOU

o Investment property: Includes both _________________________________ and ___________________________________________ securities, such as stocks and bonds

Example 14: Stock certificates

o Chattel paper: Consists of one or more records that evidences both

A __________________________________________________ and A security interest in _______________________________________ or a lease of

specific goods.

Example 15: A security agreement that also shows the amount due

2. True Intangible Property

o Accounts: Includes the right to payment of a monetary obligation for goods or services

Example 16: Account receivable

NOT A CHECKING ACCOUNT

o Deposit account: Includes a __________________________, passbook, time, or demand account maintained with a bank.

Example 17: A checking account

o Commercial tort claim: Tort claims possessed by an organization, or by an individual that arose in the course of the ________________________________________________

Example 18: Malpractice suits


Personal tort claims are not covered

o General intangibles: Residual category of personal property that is not included in other types of collateral

Example 19: Copyrights, trademarks

CHAPTER 2: TRANSACTIONS UNDER ARTICLE 9

A. Generally:

• Article 9 governs: A transaction that creates, ____________________________________, a security interest in personal property or a fixture.

B. Types of Transactions:

1. Leases:

o “True lease” – Article 2A is given priority o However, there are transactions called leases that are actually a “disguised sale” with a

security interest.

Test for a “disguised sale”: Lessee must pay consideration to the lessor and this payment obligation cannot be terminated by the lessee, PLUS one of the following four conditions is also met:

• The original term of the lease is __________________________________________ the remaining economic life of the goods; or

• The lessee is bound to renew the lease for the _________________________________________________________ of the goods or is bound to become owner of the goods; or

• The lessee has an option to renew the lease for the remaining economic life of the goods for no ______________________________________________________ or nominal additional consideration upon completion of the lease; or

• The lessee has an option to ____________________________________________ of the goods for no additional consideration or nominal additional consideration upon completion of the lease.

Example 20: Stewie sells used cars on credit. Lois comes to Stewie to buy a car. Stewie decides, instead of selling a car, to lease a car to Lois for $180.77 per month for 3 years (the same terms as he would normally sell the car) with an option to buy at end of lease for another $10. Lois can exit the lease only by making all remaining lease payments. Is this transaction a lease or a disguised sale?


Example 21: This would be a ___________________________ sale. The lease is not _____________________________ and going through the 4 other factors, ________________________ is met.

2. Consignments:

o Some consignments may fall within the scope of Article 9 as a purchase-money security interest in consigned inventory.

o In order to be subject to Article 9, the following must be met:

A person (i.e., consignor) must deliver goods to a merchant, ___________________________________________________________, for the merchant to sell (and who does not operate under the same name as the consignor);

The merchant is not generally known by its creditors to be substantially engaged in selling goods for others or is not an auctioneer;

The value of the goods delivered in each delivery must be at least _________________; and

The goods must not be _______________________________________ immediately before the delivery.

o NOTE: To protect their interests, consignors must perfect their interests like any other security interest.

Example 22: Lois gives piano lessons for a living. Recently, she decided to purchase a new piano and went to Stewie’s Piano Emporium to sell her old piano, which she used exclusively at work. Stewie offers Lois $2,000 for the piano, but Lois refuses as she believes the true value to be closer to $5,000. Unsatisfied with the price Stewie offers, she instead convinces Stewie to sell the piano on consignment, a practice Stewie has never before engaged in. Lois’s transaction with Stewie is subject to Article 9.

3. Liens

o Statutory liens in services and materials (mechanic’s liens) are __________________________________ to Article 9.

Exception: Priority provision in Article. 9

o Agricultural liens _________________________________ to Article 9.

Includes an interest in farm products that secures payment for either (i) ______________________________________________ furnished with respect to the debtor’s farming operation (e.g., livestock feed sold to a cattle rancher) or (ii) rent on real property leased by a debtor in connection with a farming operation

4. Sales of Receivables

o Mnemonic: Charlie Parker’s Prolific Notes Are Played Intensely


CP: _______________________________________________ PN: _______________________________________________ A: ________________________________________________ PI: ________________________________________________

o The buyer of these receivables is the secured party; the seller is the debtor. o However, Article 9 is inapplicable to some sales and assignments that by their nature do not

concern commercial financing transactions.

Two notable examples that ARE NOT governed by Article 9: Sale of business and assignment of a single receivable in satisfaction of a preexisting debt.

5. Real Property Transactions

o Not subject to Article 9 o However, if an Article 9 receivable is secured by real property, then it will still be subject to

Article 9

Example 23: Brian lends Peter $300,000 to buy a house secured by a mortgage. Brian then gets a loan from Stewie for $100,000 and signs a promissory note for that amount and secures the note with the mortgage from Peter.

Example 24: The mortgage between Brian and Peter is _______________________________________ by Article 9.

Example 25: However, the transaction between Brian and Stewie is _______________________________ by Article 9 despite the use of the mortgage as collateral.

6. Texas Assignment of Rents Act

o Under Texas law, an assignment of rents arising from real property creates a presently effective security interest in the accrued and unaccrued rents.

CHAPTER 3: ATTACHMENT

A. Attachment:

• A security interest that is enforceable against the debtor with respect to the collateral is said to have ________________________________ to the collateral.

• Three conditions must exist for attachment:

o ___________________________ has been given, o Debtor has ____________________________ in the collateral, AND o Debtor has __________________________________________________________________

with a description of the collateral OR the secured party has __________________________


or _______________________________________ of the collateral pursuant to the security agreement.

1. Value:

o The same consideration needed for contract to be valid BUT ________________________________________________________.

Example 26: Stewie loans Brian $1,000. He later realizes he should have secured the loan and so has Brian sign a security agreement taking an interest in Brian’s collection of rare books. Stewie ________________________________________________ to have given value.

2. Debtor’s Rights in the Collateral

o Attaches only to the rights the debtor has.

3. Security Agreement

o To be enforceable, the security agreement must have three things:

Mnemonic - Restful Days Ahead

• R: ____________________________ – can be any tangible medium or in electronic form;

• D: ________________________________________________________ – must reasonably describe collateral, such as by class but CANNOT be ______________________________________; and

Example 27: A security agreement describing the collateral as “all Brian’s equipment” would be acceptable but “all Brian’s assets” would not.

o Note: Consumer goods cannot be described by class – so “all Brian’s consumer goods” would not be an acceptable description.

• A: _________________________________________________________ – normally a signature but can be any symbol adopted by the debtor (such as an email moniker).

4. Alternatives to a Written Security Agreement

o Possession (for tangible collateral) or Control (for certain intangible collateral) but both must still be pursuant to a _______________________________________________.

o A secured party that opts for possession or control owes a duty of ________________________________________ with respect to the collateral as well as a duty to keep the collateral identifiable and to relinquish the collateral once the underlying obligation has been satisfied.


CHAPTER 4: PURCHASE MONEY SECURED INTERESTS (PMSI), ACCESSIONS AND COMMINGLED GOODS, AFTER-ACQUIRED PROPERTY VERSUS PROCEEDS

A. PMSI

• Only applies to goods and software • Receives special priority status • How does a PMSI arise?

o Lender’s PMSI: Secured party gives value to the debtor in order to enable the debtor to acquire rights in or use of the goods, and the value given was so used.

Example 28: Brian loans Peter $2,000 to buy a new piano (and secured by the piano) and Peter does in fact use money to purchase the piano. Brian has a _____________________ in the piano.

Example 29: NOTE: If Peter uses the money for something else, Brian ________________________________________.

o Seller’s PMSI: A secured party sold goods to the debtor, and the debtor incurs an obligation to pay the secured party all or part of the purchase price.

Example 30: Stewie sells a piano to Peter for $2,000 on credit, pursuant to a security agreement under which Stewie retains a security interest in the piano. Stewie has a ___________________ in the piano.

o NOTE: In both of the above situations, the security interest must still attach before a PMSI is created.

• Consignment of goods = PMSI in inventory

Example 31: Stewie supplies rugs to Peter with an agreement that Peter only has to pay for the rugs he sells and has to return the rest. Under this arrangement, Stewie has a PMSI in the inventory of rugs he supplied to Peter.

• PMSI in software: Exists only where the debtor acquired its interest in software in an ___________________________________________________ in which the debtor also acquired an interest in goods (e.g., computer), and the debtor acquired that interest in the software for the principal purpose of using the software in the goods.

• Dual status PMSIs

o In a non-consumer goods transaction, collateral does not lose its PMSI status merely because it:

Also secures _________________________________________________; or The underlying obligation is also secured by

_________________________________________________________; or The underlying obligation has been renewed, refinanced or restructured.


B. Accessions versus Commingled Goods

• Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is _____________________________.

• Commingled goods are goods that are physically united with other goods in such a manner that their identity _________________________ in a product or mass.

• The fact that collateral is or becomes _____________________________________ does not destroy the security interest in the particular collateral.

• However, ___________________________________________________ do lose their identity BUT the security interest will now attach to the product or mass.

Example 32: Stewie sells a car stereo to Brian on credit and takes a PMSI in the stereo. Brian then installs the stereo into his car. The car stereo is ________________________________and Stewie’s security interest continues in the stereo.

Example 33: Quagmire’s Egg Company sells eggs to Cleveland’s Cookies, Inc. on credit and retains a PMSI security interest in the eggs. Cleveland’s Cookies uses the eggs to make cookies. The eggs are ________________________________________ and have lost their identity. However, Quagmire’s Egg Company will now have a security interest in the __________________________________________.

C. After-Acquired Property versus Proceeds

1. After-Acquired Property

o A security interest attaches only to the collateral described in the agreement. Thus, if a creditor wishes to also have an interest attach to collateral acquired subsequent to attachment, the creditor must include an ___________________________________________________________.

Example 34: Stewie wishes to take a security interest in all of Lois’ business equipment, which at the time of drafting the security agreement consists of only a piano. Stewie thus executes a security agreement describing the collateral as “all of Lois’ equipment.” Two months later, Lois buys a computer which she uses exclusively for work. Though the computer would qualify as equipment, Stewie’s security agreement would not reach the after-acquired property. To extend to this equipment, Stewie should have phrased the description as “all of Lois’ currently owned and subsequently acquired equipment.”

Exception: A majority of courts find that the simple description of “inventory” implies that it includes after-acquired inventory due to the high turnover inherent in inventory.


2. Proceeds

o No additional clause in the security agreement is necessary to reach proceeds as attachment of collateral gives the secured party the rights to proceeds automatically.

o Proceeds are defined broadly by the code as:

1) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;

2) Whatever is collected on, or distributed on account of, collateral;

3) _______________________ arising out of collateral;

4) Legal claims arising out of the collateral or

5) Insurance claims arising out of the collateral.

Example 35: In the above example, had Lois not bought the computer but instead traded her piano for the computer, Stewie’s security interest would have ______________________________ in the computer despite the lack of an after-acquired property clause as the computer would be a proceed from the piano. It was acquired upon exchange of the collateral (the piano) and thus fits the definition of proceeds.

Example 36: Assume in the above example that the piano was destroyed in a fire. Lois had an insurance policy covering the piano. Stewie now has a security interest in the insurance proceeds from the destroyed piano.

o NOTE: Further action may still be required to perfect in the proceeds as will be discussed in chapter 6.

CHAPTER 5: PERFECTION, PERFECTION BY FILING

A. Attachment v. Perfection

• Attachment: Describes the process by which a security interest becomes enforceable against the debtor with respect to collateral.

• Perfection: Generally gives the secured party _________________________________________ in the collateral to an unperfected secured party (and possibly priority over other secured parties).

• ATTACHMENT DOES NOT ALWAYS EQUAL PERFECTION OR VICE VERSA • In order for a secured interest to be perfected it must be attached.

o Ask:

1) Was the interest attached?

2) Was the interest perfected?


• Perfection requires one of the following:

o __________________________ a financing statement; o ____________________________________ of the collateral; o ___________________________ over the collateral; or o ____________________________________ (either temporary or permanent)

• Mnemonic – Fussy People Cry Aloud

B. Filing

• What is filed is called a financing statement • Filing is sufficient for any collateral EXCEPT:

o Deposit accounts o Money o Letter-of-credit

1. Financing Statement – Basic information:

o MUST have the following three pieces of information:

_______________________________________________, _______________________________________________, AND _____________________________________________________________________.

o The purpose of a financing statement is to put other potential creditors on notice that there may be a security interest. This is called _________________________________________.

o Additional information is required for real property-related collateral such as ______________________________, extracted collateral such as oil, and timber to be cut. For such collateral, the following additional pieces of information must be on the financing statement:

An indication that it covers this type of collateral, An indication that it is to be filed in the real property records, _____________________________________________________________ to which the

collateral relates, and Name of a _________________________________________ of the real property if the

debtor does not have an interest of record in the real property.

a. Debtor’s name

The debtor’s name must be its correct legal name and cannot be __________________________________________________.

If the debtor’s name is not correct, it could void the financing statement filing.


Safe harbor:

• However, there is a safe harbor rule that makes a financing statement with an incorrect debtor’s name nonetheless valid if a search for the correct legal name in the filing office would uncover the misleading financing statement.

Example 37: Brian files a financing statement with the debtor listed as “Stewie Griffin.” Stewie’s correct legal name is Stewart Griffin. Despite this error, Brian’s financing statement will be saved if a search of the Secretary of State’s records under the name ____________________________________________ would show the name Stewie Griffin.

Texas individual debtors

• If the individual has a state-issued driver's license or identification card, the financing statement is correct only if it provides the name of the individual on the driver's license or identification card (most recent if multiple have been issued).

• If there is no such license or identification card, the financing statement must contain the surname and first personal name of the debtor.

Corporation name: If the debtor is a ______________________________________ organization, the debtor’s name for purposes of the financing statement is the name shown on the public registration records (e.g. the articles of incorporation).

• NOTE: Filing only under the corporation’s __________________________________ is insufficient. Also, a filing will not be ineffective for failure to list a trade name.

Changed legal name

• If the debtor changes its name causing the financing statement to become seriously misleading, the secured party has ____________________________ in which to file an amendment to the financing statement reflecting the new name. If the secured party does not amend in this time frame, collateral acquired by the debtor ____________________ the four-month period is not covered by the financing statement.

Example 38: On March 1, Stewie takes a security interest in all Lois’s present and after-acquired equipment and files under the name “Lois Pewter”, Lois’s legal name. At the time of the agreement, Lois’s equipment includes a computer and a bulldozer. On April 1, Lois marries Peter and changes her legal name to “Lois Griffin.” On May 1, Lois acquires another piece of equipment, a backhoe. On August 1, Lois acquires a second bulldozer which is also equipment. Stewie never amends the financing statement.

Example 39: Nevertheless, Stewie will be perfected in the computer, the first bulldozer and the _______________________ as it was acquired ________________________________________. He will not be perfected in


the ______________________________________, however, as that was acquired after the 4 month window.

b. Secured party’s name

While the debtor’s name cannot be seriously misleading, an error in the name of the secured party on a financing statement ______________________________________ the perfection of the security interest, but the secured party who files a financing statement with such an error may be subject to estoppel in favor of a holder of a conflicting claim in the collateral.

c. Collateral must be indicated

The financing statement must contain a description of the collateral that sufficiently indicates the collateral. This requirement can be satisfied by a description that meets the requirements for the security agreement, OR can be ______________________________________, such as by listing “all debtor’s assets.”

• NOTE: The financing statement description CAN BE much broader than a security agreement.

After-acquired property and proceeds: While a financing statement does not have to mention that it covers after-acquired property, the description must still be broad enough to cover such collateral.

The financing statement also need not make specific reference to proceeds in order for a security interest in proceeds to be perfected, however, further action may be required (as described below).

2. Authorization

o The debtor is not required to sign the financing statement but they must authorize filing in an authenticated record.

o An authenticated ___________________________________________________ automatically authorizes a filing with respect to the collateral covered in the agreement.

3. Where to File

o Generally: With the Secretary of State of the state where the debtor is ___________________________

For individuals, this is their principal residence. For registered organizations, such as corporations, this is the state in which the

organization is _________________________________________. For unregistered organizations, such as partnerships, this is the state in which the

organization maintains its place of business. If there is more than one place of business, then the organization is located where it has its ________________________________ _____________________________________.


o EXCEPTION: _______________________________________________________________ (e.g. fixtures) are filed in the real property records in the county where the property is located. Additionally, under the Texas Assignments of Rents Act, a security interest in rents arising from real property is perfected when the document creating the assignment is recorded in the county in which any part of the property is located.

4. Additional Information Required

o The following pieces of information are also required, however, errors will not necessarily destroy the effectiveness of the financing statement:

___________________________ of both the debtor and the secured party; and Identify whether the debtor is an

_________________________________________________________.

o Though required, if the filing office accepts a financing statement with one of the above left blank, the financing statement is nevertheless fully effective.

5. Effect of Filing Office Errors

o If the financing statement is missing any of the required information, then the filing office may ______________________ the financing statement and it is treated has having not been filed.

o However, if the filing office’s refusal to accept a financing statement for filing is unjustified, the financing statement is treated has having been filed, except with respect to a purchaser of the collateral who gives value in ______________________________________________ upon the absence of the record from the files.

The term “purchaser” covers subsequent _______________________________________________.

o The filing office’s incorrect indexing of a financing statement ___________________________________ the effectiveness of the filed financing statement.

6. Duration of Financing Statement

o Effective for: ______________________________ from date of filing. o Continued: To continue a financing statement beyond 5 years, a

___________________________________ statement must be filed within ________________________________ prior to the expiration of the financing statement. The debtor’s authorization is not needed to file a continuation statement.

o Termination: The effectiveness of a financing statement may be terminated prior to the 5 year time-frame by the filing of a ____________________________________ statement.


CHAPTER 6: PERFECTION BY POSSESSION & CONTROL, AUTOMATIC PERFECTION

A. Perfection by Possession

• A secured party may perfect a security interest in most tangible collateral by taking possession of the collateral. The following collateral may be perfected by possession:

o Goods, instruments, negotiable documents, and tangible chattel paper

• Mnemonic: Good Investors Never Dare Tip Chatty People • NOTE: Possession is the EXCLUSIVE method for perfecting in __________________________.

B. Perfection by Control

• A secured party may perfect a security interest in specific collateral by taking control of the collateral.

• The following collateral can be perfected by control:

o Deposit accounts, investment property, electronic documents or electronic chattel paper, and letter-of-credit rights.

o Mnemonic: DA’s In Philadelphia Encounter Danger Establishing Criminal Procedure, Lots Of Cases

• NOTE: For letter-of-credit rights and deposit accounts (such as checking accounts), control is the exclusive method of perfection. A secured party can gain control over a __________________________________________ in one of three ways:

1) The secured party is the bank maintaining the account;

2) The debtor, secured party and bank have authenticated a record agreeing that the secured party has control; or

3) The secured party’s name is added to the debtor’s account.

C. Automatic Perfection

• Regardless of the above methods of perfection, some types of perfection can occur upon attachment.

• These can be divided into two types of automatic perfection: ____________________________ and ___________________________________ periods of perfection.

1. Indefinite

o The major type of indefinite period of perfection is a PMSI in __________________________________________.

A purchase-money security interest (PMSI) in consumer goods is automatically perfected ____________________________________________________.

• A secured party does not need to file a statement or have possession to have a perfected PMSI in consumer goods.


A PMSI in other types of goods (e.g., inventory, equipment) or in automobiles is _______________________________________________________.

2. Temporary

o Three major ways in which temporary perfection arise:

1) When the secured party perfects by possession and subsequently gives the collateral over to the debtor for resale;

2) When either the debtor or collateral moves from one state to another; or

3) When the collateral is exchanged for or gives rise to proceeds.

o Delivery of collateral to debtor

When the secured party is perfected, and makes collateral available to the debtor for the purpose of selling or exchanging the collateral, the security interest in the collateral remains perfected for 20 days.

Example 40: Stewie is perfected via possession in Brian’s inventory of bicycles but has not filed a financing statement. Brian requests the bicycles so that he can sell them at his store. Stewie delivers the bicycles on March 1. Stewie will remain perfected in the bicycles for ________________________. If Stewie wishes to remain perfected beyond this time period he must _________________________________________________ or repossess the inventory.

o Interstate movement of debtor or collateral

Movement of debtor

• When a debtor moves states, a perfected security interest remains perfected for _______________________________ after the debtor’s change in location.

Example 41: Stewie perfects a security interest against Lois by filing a financing statement in Texas (Lois’s state of residence). Lois subsequently moves to Missouri. Stewie will remain perfected for ______________________. If Stewie wishes to remain perfected beyond this time frame, he must ________________________________________ within the 4-month window.

o NOTE: This also applies to collateral that that is acquired subject to a security interest, such as by operation of an after-acquired property clause, within the 4-month window.

Movement of collateral

• When collateral is transferred to a person located in another state who becomes a debtor, a perfected security interest generally remains perfected for one year after the transfer.


Example 42: Stewie perfects a security interest in Lois’s antique sewing machine by filing a financing statement in Texas (Lois’s state of residence). Lois subsequently forms Lois, Inc. and incorporates in Missouri and transfers all of her assets, including the sewing machine, to Lois, Inc. in Missouri. Stewie will remain perfected for __________________________ after the transfer. If Stewie wishes to remain perfected beyond this time frame, he must ________________________________________________________. within the 1 year window.

Effect of lapse of perfection

• In either of the above two situations, where a security interest is not perfected in the second state before the expiration of the applicable temporary perfection period, the security interest generally ceases to be perfected ___________________________________________ and with respect to purchasers for value, such as a subsequent secured party, such a security interest is deemed never to have been ________________________________.

Example 43: Stewie perfects a security interest in Lois’s antique sewing machine by filing a financing statement in Texas (Lois’s state of residence). Lois subsequently makes an unauthorized sale of the sewing machine to Brian, who lives in Missouri. Within a month of receiving the sewing machine, Brian enters into a security agreement with Peter who properly files against Brian in Missouri. A year passes and Stewie fails to re-file in Missouri. With respect to Peter, it is as if Stewie _____________________________________________________________in the first place (despite the period of temporary perfection).

3. Proceeds

o A security interest in proceeds enjoys temporary perfection and may also be entitled to indefinite automatic perfection.

o Temporary perfection: When the security interest in the original collateral is perfected, a security interest in proceeds is perfected for ____________________________ from the time it attaches.

o Indefinite automatic perfection: Regardless of the above, a security interest in proceeds may continue to be automatically perfected beyond the 20-day period in the following two circumstances:

a. Cash proceeds

Where the proceeds are _____________________________________ cash proceeds and the security interest in the original collateral is perfected, the perfected security interest in the proceeds continues indefinitely.


Example 44: Stewie takes a security interest in Lois’s antique sewing machine and properly perfects by filing. Lois subsequently sells the sewing machine to Brian for $500. Assuming he can identify the $500 dollars, Stewie will be ______________________________________________________ in the $500.

b. Same office

A perfected security interest in proceeds may also continue indefinitely when:

• A filed financing statement covers the ________________________________________________;

• The proceeds are collateral in which a security interest may be perfected by filing _______________________________________________ in which the original financing statement has been filed; AND

• The proceeds are not acquired with _______________________________________.

Example 45: Stewie takes a security interest in Lois’s antique sewing machine and properly perfects by filing a financing statement describing the collateral as “sewing machine.” Lois subsequently trades the sewing machine to Brian for a piano. As both a sewing machine and piano would be filed in the _____________________________________, Stewie will be perfected in the piano without re-filing or amending.

Example 46: BUT – what if Lois had sold the sewing machine to Brian for $500 and then used the cash proceeds to buy the piano?

Example 47: In this instance, the same office rule would not apply due to the introduction of cash proceeds. Stewie would have __________________________ to file an amendment.

o NOTE: If the original financing statement describes the collateral broadly enough, there is no need to invoke the same office rule.

Example 48: Assume in the above example that instead of describing the collateral as a “sewing machine,” Stewie described the collateral as “all Lois’s assets” (which is permitted on a financing statement but NOT a security agreement). Stewie’s original financing statement is broad enough to cover both the sewing machine and piano so there is no need to invoke the same office rule or worry about the use of cash proceeds.

o NOTE: State Certificate of Title: When property is subject to a special statute in lieu of Article 9’s rules on perfection, such as the certificate of title statute for automobiles, the statute dictates the manner of perfection.

Example 49: Stewie takes a security interest in Lois’s antique sewing machine and properly perfects by filing a financing statement describing the collateral as “sewing machine.” Lois subsequently trades the sewing machine to Brian for a


car. As cars are subject to the certificate of title statute, Stewie must record his interest on the certificate of title. Note the same office rule would not apply here as, the collateral are to be perfected in __________________________________________.

CHAPTER 7: PRIORITIES RULES

A. Types of creditors

• Conflicts between three major types of creditors:

o General creditors (Unsecured) – A general creditor is one who has a claim, including a judgment, but who has no lien or security interest with respect to the property in question.

o Judicial lien creditor – A judicial lien creditor is a creditor who acquires a lien on the collateral by a judicial process, rather than by operation of law.

o Secured creditor – For priority purposes, there are three major types of secured creditors: those that have perfected, those that have not (unperfected), and those that have perfected a PMSI.

B. Secured Interest v. Judicial Liens and Unsecured Interest

• Unperfected secured v. general creditors

o A secured party will ____________________________________________ over a general creditor with respect to the debtor’s collateral.

• Unperfected v. judicial lien

o A judicial lien creditor ______________________________ has priority over an unperfected security interest. However, if a judgment lien is acquired after attachment of a security interest, the judicial lien creditor ________________________________________________ of the security interest at the time the lien attaches.

• Perfected v. judicial lien

o A judicial lien creditor ______________________________________ to a perfected security interest.

• PMSI v. judicial lien

o If the secured party has a PMSI that perfects before or within _________________________ after the debtor receives possession of the collateral, the perfection will revert back to the date the debtor receives possession for priority purposes.

Example 50: On March 1, Stewie sells Lois a piano on credit for use in her business subject to a security agreement. On March 6, five days after Lois receives the piano, Brian, pursuant to a court order, has the sheriff levy on the piano, thus becoming a judicial lien creditor. Stewie properly files a financing


statement on March 16. Despite Brian’s intervening interest, Stewie’s priority will ___________________________________ to March 1.

• Advances:

o An amount of money lent after the security agreement attaches o Advances made __________________________________________ of the lien creditor

becoming such will have priority. o Advances made more than 45 days after the person becomes a lien creditor, are

________________________________ to the lien creditor UNLESS:

The advance is made without knowledge of the lien, or Is made pursuant to a commitment entered into without knowledge of the lien.

o Basically this gives the secured party a 45 day window to advance money regardless of knowledge.

C. Secured Interest v. Secured Interest

• The general rule for all of the below conflicts is: The first to _____________________ OR _____________________________ wins.

o Perfected v. unperfected

The _________________________________________________ takes over the unperfected interest regardless of the date the security agreement was signed or the interest attached.

o Unperfected v. unperfected

The “first in time, first in right” rule applies with the critical time being the time of ___________________________________.

o Perfected v. perfected

The first to file or perfect has priority. When both security interests are perfected, priority dates from the time of filing or perfection, ______________________________________________________.

Example 51: Stewie enters into a security agreement on March 1 with Lois, taking an interest in her piano and the interest attaches that same day. On March 5, Brian gets authorization from Lois to file a financing statement listing her piano as collateral and files that same day. On March 10, Stewie gets around to filing a financing statement covering the piano. On March 15, Brian enters into a security agreement with Lois taking an interest in her piano and the interest attaches the same day.

Example 52: Who has priority in the piano? ______________________________________.


CHAPTER 8: EXCEPTIONS TO FIRST IN TIME PRINCIPLE

A. PMSI

• Four kinds of PMSIs: PMSIs in consumer goods, PMSIs in equipment, PMSIs in fixtures, and PMSIs in inventory.

o Consumer goods – perfection is ____________________________________. o Equipment and fixtures – perfection requires a filing within ________________________ of

either the debtor receiving the goods or the goods becoming fixtures. o Inventory – perfection requires that a filing must be made prior to the debtor

__________________________________________________________ and the secured party must notify all conflicting security interest holders of the PMSI prior to the debtor receiving possession.

• As long as the PMSI is properly perfected, it will generally have priority over __________________________________________________________ subject to exceptions listed below.

1. PMSI v. PMSI

o As to competing PMSIs, the first to file or perfect rule applies EXCEPT: _____________________________________ takes priority over a Lender’s PMSI.

Example 53: Brian loans Lois $500 to buy a new piano for her business pursuant to a security agreement and properly files the PMSI loan with a financing statement on March 1. On March 5, Lois buys a $1000 piano from Stewie putting the $500 from Brian down and opting to pay the rest on credit pursuant to a security agreement. Stewie files on March 8. Who has priority in the piano? _____________________________________________________

2. PMSI in fixtures v. other interests in real property

o A PMSI in fixtures has priority over a prior interest in the real property with which the fixtures are associated if:

The debtor has an interest of record in the real property (e.g., owner) or is in possession of the real property (e.g., Lessee); and

The security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

o Exception: A construction mortgage (e.g. a mortgage securing the construction of building, including the cost of the acquiring the land, and that indicates it is a construction mortgage in the real property records) has priority over a subsequent PMSI in a fixture IF:

The construction mortgage is recorded _____________________ the goods become fixtures, and

It only covers goods that become fixtures before the completion of the construction.


• The below chart is meant to help you keep the different PMSI interests straight. It does not include the rules governing competing PMSIs listed above.

Type of PMSI How perfected Priority over

In consumer goods. Automatically. Everyone but BIOCB and consumer-to-consumer transactions.

In non-consumer; non-inventory, non-fixture goods.

Filing w/in 20 days of debtor receiving collateral.

Everyone but BIOCB.

In fixtures. Filing a fixture filing prior to or w/in 20 days of goods becoming fixtures.

Everyone but a construction mortgage.

In inventory. Filing prior to debtor receiving possession AND sending proper notice to conflicting SI.

Everyone but BIOCB.

B. Purchasers

• Certain types of purchasers take collateral free and clear of a security interest.

1. Buyer v. Unperfected

o A buyer takes free of any ______________________________________________ interest provided:

The buyer __________________________________; Receives delivery of the of the collateral; and Buys _____________________________________________________ of the preexisting

security interest.

2. Buyer v. Perfected

o Generally, a buyer of goods takes subject to a perfected security interest unless the security interest holder authorizes the sale. However, this rule is subject to some exceptions.

o A buyer in the ordinary course of business (BIOCB) takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence if the following conditions are met:


__________________________________________ (not including farm products); From a __________________________________ who is in the business of

____________________________________________________; and In ____________________________________ and without actual knowledge that the

sale violates the rights of another in the same goods.

o NOTE: The buyer does __________________ have to buy in the ordinary course of their own business. The focus is on the _______________________________.

Example 54: Stewie sells a piano to Lois on credit pursuant to a security agreement. She uses the piano as a consumer good and the interest perfects automatically as a PMSI. Six months later, Lois sells the piano to Brian, who owns a used piano store. He intends to resell the piano as part of his business. Brian has no knowledge of Stewie’s security interest.

Example 55: Who has priority in the piano? _________________________ because Brian is not buying from a merchant who is in the ________________________________________________________.

3. Consumer Buyer v. Secured

o “Garage sale rule” - A buyer of consumer goods takes free of a security interest, even if perfected, unless prior to the purchase, the secured party has ___________________________________________________________covering the goods. To qualify under this rule, however, the consumer must:

Buy consumer goods for value; For his own personal, family, or household use; From a _____________________________________________; and ___________________________________________________ of the security interest.

o NOTE: A PMSI with automatic protection would not be protected under the garage sale rule.

Example 56: Stewie sells a piano to Lois on credit pursuant to a security agreement. Lois intends to use the piano as a consumer good and Stewie does not file or take any further steps to perfect (he simply relies on his automatic perfection). Three months later, Lois sells the piano to Brian for $500. Brian also intends to use the piano as a consumer good and has no actual knowledge of Stewie’s security agreement.

Example 57: Who has priority in the piano? ______________________ because Stewie failed to ____________________________________________.

4. Purchaser v. Future Advances

o A purchaser who does not qualify as a BIOCB may still take free of a security interest to the extent that it secures an advance made after the earlier of:


The time the secured party acquires knowledge of the buyer’s purchase; or 45 days after purchase.

CHAPTER 9: DEFAULT

A. Consequences of Default

• Default is not defined by Article 9. To determine if there is a default, refer to the security agreement and rules of contract interpretation.

• Non-payment is not the only means of defaulting on a security agreement. • Once there has been a default, the secured party may choose to seek to possess the collateral

either through:

o Judgment – secured party goes to court, proves up default, gets judgment, OR o Non-judicial re-possession - after default, a secured party is entitled to take possession of

the collateral through self-help repossession.

Self help repossession is limited in that the repossession cannot ___________________________________________.

• While the term “breach the peace” is not defined, typically any criminal act will constitute a breach of peace, such as pulling out a gun or threatening physical harm.

• NOTE: If the secured party brings a police officer to the repossession, and the officer is not there pursuant to a writ of execution, the officer’s presence is a per se breach of peace.

• To constitute a breach of peace, there typically must be some potential for violence.

Alternative to self-help repossession: After a default, a secured party may render equipment (e.g., heavy machinery) unusable.

• By agreement, this may also apply to consumer goods.

o In the case of accounts, the secured party has the option to step into the debtor’s shoes for 3rd parties that owe the debtor; secured party can collect directly.

o In the case of fixtures, the secured party is entitled to repossess, i.e., remove, the fixture. However, if the real property owner to which the fixture is attached is someone other than the debtor, the secured party must reimburse the owner for any damages caused by the removal but not for any diminution in value caused by the absence of the goods.

B. Disposition of Collateral

• A secured party may sell, lease, license, or otherwise dispose of all or any collateral so long as the disposition is in all ways _____________________________________________________. A secured party may dispose of the collateral publicly or privately.


1. Commercially Reasonable Standard for Disposition

o A disposition IS commercially reasonable if the collateral:

Is sold in the usual manner on a ____________________________________________ (e.g. stock exchange);

At the _________________________________________ in any recognized market at the time of the disposition; or

Otherwise in conformity with ______________________________________________ among dealers in the type of property that was the subject of the disposition.

2. Commercially Reasonable Price

o Price alone does not establish that the disposition was not commercially reasonable. However, a low price can trigger carefully scrutiny by the court of all aspects of the disposition and its reasonableness.

3. Commercially Reasonable Time

o Article 9 does not mandate a specific time in which a disposition must occur. Instead, ____________________________________________________________________ may dictate what is a commercially reasonable time for disposition.

4. Notice – the secured party must give notice of the disposition.

a. To:

The debtor; Any other secured party or lienholder that was perfected by filing or pursuant to a

statute; and Any other party from whom the secured party has received authenticated notice of a

claim or interest in the collateral.

b. Timely

The notice must be given in a __________________________________ time period. Article 9 provides a safe harbor that _________________________________ prior to disposition is reasonable.

c. Content

Must contain:

• The debtor and the secured party’s name; • A description of the collateral; • _____________________________________________ the collateral will be

disposed; and • A statement that the debtor is entitled to an accounting of the unpaid indebtedness

and the charge, if any, for providing that accounting.


In addition to the above, in the case of consumer goods, the notice must include:

• A description of any liability for a deficiency of the person to whom the notification is sent;

• The telephone number from which the redemption amount is available; and • The telephone number or mailing address from which additional information

concerning the disposition and secured obligation is available.

C. Proceeds of Disposition

• A secured party must apply, or pay over for application, cash proceeds of a disposition in the following order:

o Reasonable expenses for collection and enforcement, including reasonable attorney’s fees (if provided for in the security agreement); then

o To satisfy the debt owed to the foreclosing secured party; then o To satisfy any subordinate security interests (provided that the junior secured party makes a

demand prior to distribution of proceeds; then o The remainder of the proceeds to the debtor.

• Short hand – Reasonable expenses, secured party, subordinate liens, debtor. • Mnemonic – Rusty Elders Shouldn’t Play Soccer Late Dear • If the proceeds are insufficient to pay the underlying obligation, then the secured party can seek

a _________________________________________________ for the remaining amount (but may be an unsecured creditor for that amount).

• NOTE: Senior liens do not get any of the proceeds. Instead, they continue to have a security interest in the collateral. Junior liens are extinguished by the sale.

Example 58: Brian, Peter, and Stewie all have a perfected security interest in Lois’s piano. Brian has the senior most lien, followed by Peter, and Stewie is last. Lois defaults on her payments to Peter and Stewie (but not Brian). Peter forecloses and sells the piano for $1000. These cash proceeds would go first to pay Peter’s _________________________________________________, and then would go toward satisfying ________________________________________________. If there is any money left over, it will go to ______________________ and the remainder will ______________________________. Brian gets nothing but continues to have a security interest in the piano (now in the hands of a 3rd party).

D. Acceptance of Collateral

• In lieu of disposing of the collateral, a secured party may opt to keep the collateral in _____________________________________________________ of the debt if certain conditions are met.


o Full Satisfaction: A secured party may accept collateral in full satisfaction of an obligation secured by the collateral when:

The debtor consents, _____________________________________, to the acceptance in an authenticated record; or

The debtor does not object to the secured party’s proposal to accept the collateral within __________________________ after the proposal is sent.

o Partial satisfaction: A secured party may accept collateral in partial satisfaction of an obligation secured by the collateral when the _____________________________________, after default, to the acceptance in an authenticated record.

• NOTE: For either of the two methods above, the secured party must send notice to other secured parties who have an interest in the same collateral and cannot accept the collateral in full or partial satisfaction if it receives objection to the proposed acceptance within 20 days after such notice was sent.

• EXCEPTION: Consumer debtors:

o A secured party can accept the collateral only in ______________________________________________ of the obligation.

• EXCEPTION TO THE EXCEPTION: The 60 percent rule:

o If the goods are consumer goods AND the debtor has paid 60 percent of the cash price in the case of a PMSI, or 60 percent of the obligation secured in a non-PMSI case, then the goods must be sold UNLESS the debtor waives this right to force a sale of the collateral, provided it is done _______________________________________ in an authenticated agreement.

E. Redemption

• Up to any point before the Secured Party has disposed of (or entered into a contract to dispose of) the collateral, the debtor can fulfill all obligations and redeem the collateral. This fulfillment of obligations includes reasonable expenses for repossession.

F. Secured Party’s Failure to Comply

• A secured party’s failure to comply with Article 9, such as by breaching the peace during a repossession, failing to give proper notice of disposition, failing to dispose in a commercially reasonable manner, etc., can lead to injunctive relief, damages and the reduction of any deficiency judgment sought by the secured creditor.

o Actual Damages – The debtor (or other secured party) may seek damages for any loss cause by the secured party’s failure to comply. This loss may include loss resulting from the debtor’s inability to obtain alternative financing, or the increased cost of obtaining such financing.


o Statutory Minimum for Consumer Goods – If the collateral is consumer goods, a debtor may recover an amount not less than the credit service charge, plus ____________________________________________________ of the obligation or the time-price differential, plus 10% of the cash price, even if the actual damages are less.

o Reduction of deficiency in non-consumer transaction – There is a rebuttable presumption that the secured party is _____________________________________________ to collect a deficiency which can be overcome by showing that the deficiency would have existed even had the secured party complied with Article 9.

o Reduction of deficiency in consumer transactions – In Texas, if the transaction is a consumer transaction and a secured party’s collection, enforcement, disposition, or acceptance is not in accord with Article 9, courts apply __________________________________________________________, under which the non-complying secured party cannot recover a deficiency.

NOTE: This is a Texas rule – Texas is a minority jurisdiction in this regard.

o Conversion action for improper repossession - When a secured party improperly repossesses collateral, the debtor may be able to pursue a _______________________________________________ under non-UCC law.

Exam tip: Focus on elements of attachment, how to perfect, the difference between attachment & perfection, and priority rules. Good luck!

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