Commercial Law Knippenberg Summer 2001
I. Scope –transaction must be sufficient and necessary to comply with Article 9
- Subject Matter Whether Article 9 applies?
§ 9-102(1)(a) - “applies to any transaction, regardless of form..”
“Intent to create a security interest In personal property or fixtures”
“regardless of form” – doesn’t matter what SP or D call it.
Intent – as defined outside UCC (§1-103) Unless Act prohibited by provisions.
Create – Under Article 9, Under article 2, or by assignment [“SALE”]
`Security Interest – as defined under § 1-201(37) “interest in
personal property or fixtures which secures payment or performance of an obligation.” Reservation or some string left on property.
“Personal Property” - Is it not Real Property? §1-103 “kick out provision”
“Fixtures” are governed by both Article and State law – see §9-313 cmt 1
§9-104 - Exclusions – (a) fed Statute(b) Landlord’s lien
(c) mechanics/artisans lien(d) wage/salary claims
(g) insurance policy (l) deposit accts
(j) real estate
§9-102(3) allows a SI in turned secured by a transaction out of Article 9 Alfredo’s construction and the bank
- Geographic Scope - which state’s Article 9 applies especially for Perfection?
AFTER you know what state’s law applies, you will be able to know where to file….
§ 1-105(1) - General Rule - “parties can agree, so long as the juris (of the chosen state)
bears some reasonable relation to the transaction.”
§1-105 (2) - Trump provision - consult a more specific code provision
ex: §9-103 Conflicts Rule which requires CLASSIFY GOODS
DO a TIME LINE!
§9-103(1) Docs, instruments, LOC, and Ordinary goods SITUS of COLLATERAL
§9-103(1)(b) Situs of Collateral when LAST EVENT (sign, rights,value+steps)
§9-103(1)(d) When collateral changes states (Only 1 state involved in formation)4month
§9-103(1)(c) PMSI understood that goods to be held in another jurisdiction 30day
if not in new state by 30 days, then 9-103(1)(b) applies until collateral goes then 9-103(1)(d) would apply
9-312(4) a pmsi would have priority over a conflicting SI even if PMSI is the later SI
§9-103(3) Accounts, general intangibles, & Mobile goods(normally used in more than 1 jurisdiction)
§9-103(3)(b) SITUS OF DEBTOR RULE
§9-103(3)(c) when debtor not located in jurisdiction in US
§9-103(3)(d) Place of Business or Exec office if more then one PoB, otherwise
at his residence.
§9-103(3)(e) 4 MONTH rule: SI remains perfected under old jurisdiction
unless reperfected in new jurisdiction before expiration.
After Unperfection, then will be DEEMED unperfected against
one who became a purchaser after the change.
II. Creation and Validity Steps necessary to Attach security interest to collateral
Once ATTACHED, the SP has maximum rights over Debtor’s collateral.
- Parties must create a Security Agreement – SA is a contract between the SP and Debtor that
spells out the duties and obligations.
“Creation”- §9-105(1)(1);voluntary “S.A. means an ‘agreement’ which creates or provides for
Sec Interest”
“Agreement” §1-201(3) “means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of performance as provided in this Act….”
Security Agreement
- Voluntary – Under §9-105(1)(l) either a) or b)
a.)Written – §9-203(1)(a) Signed by debtor and Reasonably describes the Collateral. §9-110 (Descriptionis sufficient so long as it Reasonably identifies the collateral..)
b.)Oral [can be agent of D]“pledge” with Possession of the collateral §9-203(1)(a)
c.)
2. Assignment (see 9-102(2) AND 9-302(2) and 9-318(xx,xx))
3. Involuntary creation - Article 2 “Sales” - see §9-113 “by operation of law SI”
- When seller attempts to reserve title §2-403 “express reservation of title”
- § 1-201(37) also includes reservation of title
- §9-102 attempt by seller to reserve title “keep a string on it - call it what you will”
Proceeds from Collateral from a Valid S.A. are automatically attached unless specifically stated otherwise. Definition§9-105(2), §9-203(3), §9-306
- Validity – Is the Created S.A. attached and therefore enforceable? 9-203 is the SOF.
§9-201 “Unless otherwise provided, Security Agreement is effective
according to its terms against the world...
§9-203(l)(a) “Attachment” Requires each of following 3 steps co-exist - §9-203(2)
(valid if attached - analogous to sheriff s lien attachment)
- Agreement: (cautionary & evidentiary) (signed describing collateral)9-203(1)(a)
S.A. must meet all requirements of CREATION.
- Value – 203(1)(b)
a.) § 1-201(44) = “consideration” – sufficient to support A simple contract.
b) A security for a pre-existing claim
c) accepting delivery under a pre-existing Kx for purchase
d) in return for a binding commitment to extend credit
- Rights in the Collateral - “stuff belongs to the debtor” 203(1)(c)
§9-202 – Title to Collateral Immaterial
With an after acquired clause §9-204(2),the debtor has already agreed and rcvd value
And Gets new rights every time new collateral is received.
Must be careful w/ 9-204 clauses that they are not Williams v Walker Unconscionable
use PMSI’s and FIFO.
CREATION and VALIDITY
Collateral: 1) Consumer Goods2) Equipment3 ways to classify 3) Farm products
4)Inventory (floating liens) 5) fixtures (fixture filings 9-313 &9-402(5)) 6) accounts
7)Chattel Paper8)Documents 9) instruments10) General intangibles
11) Deposit accounts
We don’t care what the parties Meant – we use NOTICE system to inform 3d parties and can’t contract
away someone else’s rights. This is why defining collateral can be costly for a SP.
- Perfection - gives notice & stakes your claim for priority
§9-303 - Perfection = Attachment §9-203 + Steps §9-302
§9-302 – is Filing required (generally yes, see 9-305, 9-304, back to 9-302)
§9-402 WHAT and §9-401 WHERE (Oklahoma Alternative 2)
Define the Collateral then look at the 3 ways to perfect. A)FileB)PossessC)automatic
A) File
- Classify collateral if “goods” §9-105(l)(h) “is it moveable at the time the security
attaches?” See also §9-102 comment 5
§9-109 Four kinds of “goods” based on debtor’s use
2. §9-305 - “may take possession” permissive
§9-304 - “must take possession” mandatory
3. Method = File
a. What to file? UCC form I “financing statement” or Fixture Filing??
§9-402 (reasonably identifies collateral, names of parties, addressees, debtor signs
May be filed before SA is made or before SI attaches. (ref 402(7) name change)
An error is seriously misleading if a REASONABLE search would not turn up
the Financing Statement……22 June
Corporate name is ALWAYS sufficient, a trade name may not be sufficient
PERFECTION
b. Where to file?§9-401 (alternatives) OK = method 2
Classify collateral, use of debtor’s stuff determines place to file, central or
local See §9-109
In §9-401(1)(c) 3d alt: if business, look to Place of Business (21 june)
§9-403 What constitutes a Filing, Effect of lapsed filing, Duties of filing officer.
B) Possession
§9-305 - “may take possession” permissive
§9-305 Cmt 2: a third party can be possess for the SP as “bailee” allowing
SP to be classified as possessing himself.
§9-304 - “must take possession” mandatory
C) Automatic do nothing:time limits…
§9-304(4) and §9-304(5) 21 day from attachment under §9-203and from release of possession.
Works in conjunction with Article 5 Letters of Credit and Article 7Warehouse Receipts
§9-306 applies for proceeds 10 day after disposition unless ….
§9-302(1)(e) an assignment of accounts so long as not a significant part of outstanding accts
§9-302(1)(d) a PMSI in Consumer goods
§9-302(1)(a) a SI in collateral in possession of SP under 9-305 (b is temp perfection for 9-304 and 306)
§9-302(2) if a SP assigns a P.S.I., no filing required.
§9-302 General Rule = File
Exceptions = §9-302(l)(a) take Possession (go to §9-305)
- ex: goods - take possession or file.
§9-302(l)(d) do nothing further - PMSI
What Steps? How to determine which method?
IV. Priority - One party always an Article 9 Secured Creditor (SP)
Priority is a purely race statute under §9-312(5)
§9-312(5)(a) – Priority dates from filing or perfection, whichever is earlier.
- Identify the competing parties
- Which provision governs priority dispute (§ 9-301)
§9-301(1) Unperfected SI is subordinate to
(a) persons entitled to priority under §9-312 (determining priority in SAME collateral)
(b) a lien creditor before perfection of SI
(c) re: goods,Instruments,documents,chattel paper
(d) re accounts, general intangibles, investment property
§9-301(3) a TRUSTEE in bankruptcy is a “hypothetical lien creditor”
ex: §9-307 “buyer in the ordinary course of business” other than farming takes FREE of a SI created by HIS seller even though SI is perfected and even if buyer knows of it- buy from someone’s inventory
PERFECTED SI in SAME collateral §9-312
Code Provisions
§1-103 “Kick Out Provision” Consult local law (eg: whether something is realty, instrument)
§1-105 “Juris Scope”
§1-105(1) General Rule - “parties can agree, so long as the juris (of the chosen state) bears some reasonable relation to the transaction.”
§1-105(2) “Trump provision - consult a more specific code provision (eg: 9-103)”
§1-201 “General Definitions”
§1-201(3) “Agreement means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of performance as provided in this Act….”
§1-201(9) “Buyer in the Ordinary Course” buys [out of inventory] from a person in the business of selling goods of the like kind.
§1-201(11)Contract means the total legal obligation which results from the parties agreement as affected by Act
§1-201(15) “Document of Title” = includes BOL’s, Dock Warrants, dock receipts, warehouse receipts, and any other
doc which in regular course of business or financing is treated as adequately evidencing possession
DOC must purport to be issued to a bailee and purport to cover goods in bailee’s possession…..
§1-201(32)(33) Purchaser is one who takes by sale, discount, mortgage, lien, or “any voluntary transaction creating an interest in property” - (eg: Security Interest) allows for purchaser of goods to have enough rights for a security interest to attach, In Re Samuels, (See §2-403, and §2-507), but might not allow a lessor to have enough rights to create a SI.)
§1-201(37) “Security Interest” “interest in personal property or fixtures which secures payment or performance of an obligation. Also includes rights of a purchaser of chattel paper (eg: floor plan arrangement)”
§1-201(44) “Value” “basically consideration” “includes forgiveness of debt, extension of credit”
§1-203 “Every contract or duty within this Act imposes an obligation in good faith in its performance or enforcement. Good faith is NECESSARY but often is NOT sufficient.
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SALES
§2-403(l) “Power of GF Purchasee, In Re Samuels
§2-507(2)”Rights of Buyee, “right to keep, conditioned on payment” In Re Samuels
§2-511 “Payment by Check”
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§2-702(2) “Seller’s Reclamation Rights” Elements: goods on credit, demand 10 days after receipt (note §2-702(3) “subject to rights of GF purchaser under §2-403)
§2-703 “Seller’s Rights in General”
§2A-306 Statutory trump provision: a lien taken in ordinary Course of business (mechanics lien) takes
priority over lessee/lessee’s interests Unless competing lien is statutory/operation of law.
§2A-307 Except for 2A-306, a creditor of lessee takes subject to the Lease. a SA is subject to lease
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Negotiable Instruments
§3-103 Definitions including “drawee” (drafts), Drawer (drafts), maker (notes), Order
Drafts are ORDERS to pay, NOTES are promises to pay. different risk factors
§3-104 “Negotiable Instruments” checks .... orders to pay”(see also §9-105(l)(1) “any other writing”) because these are “reified” (rights bound to paper) one must possess to perfect (see §9-304)
§3-114 Contradictory typewritten terms prevail over printed, handwritten over both, and words over numbers
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Letters of CreditStrongly tied to Article 7, and the financing to Article 9
§5-102 DEFINITIONS (see floor planning example 15 june, 2001) Works in conjunction w/ 9-304(4,5)
(a)(2) “Applicant” = person at whose request or for whose account a LOC is issued
(a)(3) “Beneficiary”=person under terms of LOC who is entitled to have complying presentation Honored
(a)(8) “Honor” of LOC = performance of issuer’s undertaking to pay value
(i) upon payment or(ii) if LOC provides for acceptance…or(iii) if LOC provides incurring deferred obligation..
(a)(9) “issuer” = bank… that issues LOC but not individual…
(a)(10) “Letter of Credit” = definite undertaking satisfying §5-104 to honor to beneficiary at request
of applicant upon documentary presentation BY payment/delivery of Value
LOC essentially a third party beneficiary contract.
(a)(12) “presentation” = delivery of Document(s) to issuer for honor or giving value
Warehouse receiptsStrongly connected with Article 5, and article 9 for financing.
§7-102(1)(a) “Bailee” = person who by Wreceipt or BOL or other doc of title acknowledges possession and deliver to them
§7-102(1)(e) “Document” = document as defined §1-201
§7-102(1)(g) “Issuer” = bailee who issues a doc except …. BUT including agent or employee having real
or apparent authority to issue documents….
§7-102(1)(h) “Warehouseman” is person engaged in the business of storing goods for hire.
§7-104(1)(a) a Document is negotiableif by its terms the goods are to be delivered to bearer or
“to the order of…” a named person….
THE GOODS ARE TIED UP IN THE DOCUMENT! “to have the document is to have the goods”
Secured Transactions
§9-102 “Subject Matter Juris”
§ 9-102(1)(a) - Art. 9 “applies to any transaction, regardless of form..” 1) intent to create a SI (see § 1-201(37)) 2) in personal property (if not sure consult local law § l- 103) or fixtures (§9- 313(l)(a) “one man, one wrench, one hour”)
§9-102(l)(b) “Sale of Chattel Paper”
§9-102(2) “K including assignments, liens, except to the extent liens are statutory, and provide otherwise
(see §9-310 “priorities”)
§9-102(3) “Art 9 application not affected by obligation which is itself secured by transaction to which Art. 9 may not apply” (eg: Realty Paper - promise to pay secured by mortgage)
§9-102 “Comments” - good overview and cross-reference of types of “stuff’
§9-103 “Perfection of Security Interest in Multistate Transactions” “Conflicts Law”
§9-103(1)(b) Law that governs is the law of SITUS of collateral is when LAST EVENT occurs
§9-103(1)(c) 30 Day rule for when PMSI created with knowledge collateral going to be in different
jurisdiction running from when Debtor gets Possession in the NEW jurisdiction
§9-103(1)(d) Perfected SI from ANOTHER jurisdiction remains perfected UNTIL
§9-103(1)(d)(i) 4 month in new jurisdiction or expiration of perfection whichever is FIRST
ref 9-403 PurchaserWHEN unperfected, SI DEEMED unperfected against any PURHCASER after removal
or LC intrastate§9-103(1)(d)(ii) REPERFECTED in new jurisdiction.
§9-104 “Exclusions” “includes landlord’s lien §9-104(b), insurance §9-104(g), real estate §9- 1040),
Deposit account (except proceeds)(§9-104(1))
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§9-105 “Definitions”
§9-105(1)(a) “Account Debtor” person obligated on account, Chattel Paper, or General Intangible.
CMT#2 Where collateral is an account…. Then you have an “Account Debtor.”
§9-105(1)(b) “Chattel Paper” means a writing evidencing an obligation AND a Sec. Interest
§9-105(1)(c) “Collateral”
§9-105(1)(d) “Debtor” (see comment §9-105 - Debtor may include person to whom collateral has been xferred subject to a SI, depending on the context San Juan Packers [Nat. Can and farmers bank])
i.e. you can make someone else’s debtor your debtor too
§9-105(1)(e) “Deposit Account”
§9-105(1)(f) “Documents” defined as meaning “document of title”
§1-201(15) Doc of Title = BOL, Dock warrant/receipt or order for delivery of goods which in regular
course of business is treated as evidencing that the person in possession is entitled to receive…goods.
§9-105(1)(h) “Goods” “moveable at time SI attaches” (see §9-109)
§9-105(1)(i) “Instrument” “Art. 3 instruments, AND “any other writing which evidences right to payment which itself is not a SI and is which transferred in the ordinary course of business by delivery with indorsement (signature on back).... (consult local law § 1- 103)
See §3-114 for priority of contradictory terms.
§9-105(1)(1) “Security Agreement” (see §9-1 10 “description is sufficient if it reasonably describes (collateral)”)
§9-105(1)(m) “Secured Party”
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§9-106 “Account”(right to payment for goods sold or leased not evidenced by instrument or chattel paper) “General Intangibles” (eg: realty paper, one must file to perfect, b/c there is no exception for
“Gls”)(also note, GI cannot be chattel paper b/c chattel paper is the product of a transaction to which
Art. 9 applies, like “Floor Plan!’)
§9-107 “Purchase Money Security Interest”(PMSI)
§9-107(1) “Type One” - “taken or retained by the seller or collateral to secure all or part of price”
§9-107(2) “Type Two” - “taken by a person who by making advances gives value to debtor “enabling” him
to acquire rights in collateral if such value is in fact used.” (key = debtor did not have collateral
before transaction; debtor used credit or $ to secure purchase of collateral) Note- to perfect, one must
“do nothing” (§9-302(l)(d)) and have “consumer goods”
§9-109 “Classification of Goods” - (Key: As Used by the Debtor)
§9-109(1) “Consumer Goods” “used or bought primarily for personal, family, household purposes”
§9-109(2) “Equipment” - bought for use in business
3 ways courts classify by use: Normal , intended , or Actual use. Actual use most protective of new SP
§9-109(3) “Farm Products” -1) Crops or Livestock or Supplies or products of crops/livestock 2) Used or Produced in
Farming Operations or if they are Products of crops or livestock in theirUnmanufactured States, comment leaves open
for debate how much will consider a Manufactured state but candling, oiling and packaging eggs is not manufacture 3) and they are in the
Possession of a Debtor engaged inthe raising, fattening, grazing or other Farming Operations.” If goods are
farm products they cannot be inventory or equipment (mutually exclusive - see In Re K.L. Smith)
§9-109(4) “Equipment” held by a person who holds them for sale or lease
§9-110 “Sufficiency of Description” “description is sufficient if it reasonably describes (collateral)”
§9-113 “Security Interest Arising Under Art. 2 - Sales” excuses Si from the formal requirements of Art. 9 for
perfection, etc... Provided Debtor does Not have possession (SP must have possession - see In Re Samuels)
§9-201 “Validity” “Unless otherwise provided Security Agreement is effective according to its terms, against the world...”
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§9-203 “Attachment, Enforceability”
§9-203(1)(a) “Agreement: (cautionary & evidentiary)”
a. Security agreement in writing signed by the debtor describing the collateral (§9-1 10) or
b. Collateral in possession of the secured party (oral agreement) See Idaho Bank sufficiency of
description
§9-203(1)(b) “Value Given” see § 1-201(44)
§9-203(1)(c) “Debtor has Rights in Collateral” In Re Samuels
§9-203(2) “Attachment occurs when all three events above occur
§9-203(3) SI attaches to proceeds automatically (See 9-306)
§9-203(4) “conflicts”
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§9-204(1) “All obligations clauses” (can cover prior unsecured debt) Must EXPLICITLY Express 9204
§9-204(2) “after acquired property clauses” (note exception for consumer goods)(description of
collateral as “accounts receivable” covers this b/c everyone knows that it is by nature revolving
goods); cloud over the water concept (floating lien)
§9-204(3) “future advances” (this collateral now will cover the $ one gives next week
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§9-301 “Persons who take Priority over Unperfected Security Interest”
§9-301(1)(a) persons who take priority under §9-312 (eg: PMSI)
§9-301(1)(b) person who becomes a Lien Creditor before the SI is perfected (§9-301(3) Def.of Lien
Creditor includes Trustee in Bankruptcy) takes priority
§9-301(1)(c) buyer, Not a BOC, or other person who is not a SP who receives Goods, Instruments,
Documents, or Chattel Paper, by transfer to the extent he gives value and has no knowledge of other
SI BEFORE it becomes perfected.
§9-301(1)(d) person who is not a SP who receives Accounts, General Intangibles, by transfer to the
extent he gives value and has no knowledge of other SI.
§9-301(3) “LIEN CREDITOR” obtains involuntarily (levy or the like) and Includes as HypoLC a Trustee.
§9-301(4) a LC takes subject to a previously perfected SI ONLY as for securing advances and subject to SI
arising up to 45 days after LC became a LC
OR commitment made WITHOUT KNOWLEDGE of the lien or where. SEE ALSO 9-312(7)
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§9-302 “Perfection” “Requirements = Attachment + Steps” §9-302(l) general rule, financing statement
(§9-402) must be filed except:
§9-302(1)(a) a SI in Possession of Secured Party(SP) pursuant to §9-305 (b is temp perfection for 9-304 and 306)
§9-302(1)(d) PMSI in consumer goods (“do nothing”) no one would lend money on OLD consumer goods.
§9-302(1)(e) an assignment of accounts so long as not a significant part of outstanding accts
§9-302(2) “if SP assigns perfected SI, SI remains perfected” In Re Bollinger NO filing required
§9-302 Cmt 5
§9-302(3)(b) certificate of title for automobiles - no filing is necessary (subject to state statutes)
§9-303(1) SI is perfected when it is attached and steps taken (§9-302)
§9-304(1) “Must Possess” = money or instruments or written letter of credit
§9-304(4) A S.I. in instruments…Negotiable documents is perfected w/o filing or taking possession for
21 Days from attachment 9-203 to the extent is arises for new value given under a written SA
§9-304(5) A SI as above continues for 21 days (when debtor receives actual goods)