LECTURE HANDOUT

SECURED TRANSACTIONS

PROFESSOR DOUGLAS K. MOLL

Copyright © 2019 by BARBRI, Inc.

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SECURED TRANSACTIONS
BY PROFESSOR DOUGLAS K. MOLL

I. INTRODUCTION

A. DEFINITION OF SECURED TRANSACTION

A secured transaction is a transaction intended to create a security

interest in personal property or fixtures. It generally involves a sale on
credit or a loan in which the seller or the lender obtains a lien on some or
all of the debtor’s property as security for payment.

Look for: (1) a credit transaction (sale on credit or a loan) and (2) an
agreement that creates a lien in favor of the creditor in the debtor’s
personal property to secure the debt.

B. TYPICAL SECURED TRANSACTION: TERMINOLOGY

Hilda borrows $20,000 from First Bank to buy some additional inventory
for her retail hat shop. First Bank and Hilda execute a document that grants
to First Bank a lien on the hats being purchased, and in addition on all other
inventory now owned or hereafter acquired by Hilda to secure this loan and
any future indebtedness of Hilda to First Bank. First Bank also files a form in
the public records that indicates that First Bank has a lien on Hilda’s
inventory.

1. Debtor: The person who owes payment or performance of the

obligation secured (here, Hilda).

2. Secured party: A lender, seller or other person in whose favor there

is a security interest (here, First Bank).

3. Security agreement: The agreement between the debtor (Hilda) and

the secured party (First Bank) that creates the security interest.

4. Security interest: An interest in personal property or fixtures which

secures payment or performance of an obligation. It is a contingent
property interest in the debtor’s collateral that the debtor grants to
the creditor. When the contingency, which is _________________,
occurs, the property interest springs to life and the creditor has rights
in the debtor’s collateral.
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5. Collateral: The property subject to a security interest (here,

inventory). Collateral is property that the secured party can
repossess upon default to insure that the debt is paid.

6. Purchase money security interest [2 kinds]

a. Secured party sells debtor collateral on credit and retains a

security interest in the item sold.

b. An enabling loan; a loan to a debtor for the purpose of

enabling the debtor to buy specific collateral, and the creditor
takes a security interest in the specific collateral.

Example: Creditor loans debtor $1,000 for the purpose of buying a

television and takes a security interest in the television. Debtor
actually uses the $1,000 from creditor to buy the television. Is there
a purchase money security interest? ____________. What if debtor
had used the $1,000 from creditor to go to Las Vegas, and the debtor
had instead purchased the television with $1,000 from the debtor’s
savings account? Does the creditor have a security interest in the
television? ____________________. Is it a purchase money
security interest? ____________________.

7. After-acquired property clause: A secured party often will want to

obtain a security interest not only in debtor’s present property, but
also in property that the debtor will obtain in the future. This is
permissible. Security agreements typically contain an after-acquired
property clause (as in the hypo).

8. Future advance clause: A secured party often contemplates making

future loans to the debtor and wants to secure these future
advances in the present security agreement. This is permissible.
Security agreements typically contain a future advance clause (as in
the hypo), in which case a new security agreement is not needed when
a future advance is made.

9. Attachment: Deals with those steps legally required to give the

secured party a security interest in the collateral that is effective as
against the debtor. Once a security interest attaches, it is effective
against the debtor and the creditor has all of the rights of a secured
creditor under Article 9. A creditor is not a secured creditor until
attachment.

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10. Perfection: Deals with those steps legally required to give the
secured party an interest in the collateral that is effective as against
the world. In general, perfection is the process of giving public
notice of the security interest to the world.

11. Financing statement: Document generally used to provide public

notice of the security interest, and so to perfect the security interest.

C. TYPES OF COLLATERAL

Classification of the collateral is important because many provisions of Article

9 (particularly those dealing with perfection and priorities) make legal
distinctions based on the type of collateral.

1. Goods

a. Definition: “Goods” include all things which are movable at

the time the security interest attaches, and include the
unborn young of animals and growing crops. Goods also
include fixtures (which we will discuss later).

b. Classification: Goods are further classified as either (1)

consumer goods, or (2) equipment, or (3) farm products, or (4)
inventory. In classifying the collateral, look to see how the
debtor is using the collateral. What is the collateral in the
hands of the debtor?

(1) Consumer goods: Used or bought for use primarily for

personal, family or household purposes.

(2) Equipment: Used or bought for use in business.

(3) Farm products: Crops or livestock or supplies used or

produced in farming operations or products of crops
or livestock in their unmanufactured states (such as
ginned cotton, wool-clip, maple syrup, milk and eggs) if
they are in the possession of a debtor engaged in
farming operations.

(4) Inventory: Held by a person who holds them for sale

or lease or to be furnished under service contracts;

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materials used or consumed in a business in a short

period of time.

c. How would you classify the following items of collateral?

(1) A guitar purchased by Harry Homebody as a present

for his son Marvin

(2) The same guitar purchased by Sterling Studly, a

professional rock musician, to be used on tour

(3) Milk in the hands of a farmer (who got it from his cows)

(4) Milk in the hands of a grocery store (or a restaurant)

(5) Milk in the hands of the grocery store’s customer who

is buying for his family’s consumption

(6) Automobiles held by a local car rental agency

(7) Pencils and other stationery supplies used by Sears or

some other large retailer in its credit offices

2. Semi-intangible and intangible property (8 types)

a. Definitions

(1) Instruments: Negotiable instruments and any other

writing which evidences a right to the payment of a
monetary obligation, and which are in the ordinary
course of business transferred by delivery with any
necessary indorsement or assignment (does not
include investment property).

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(2) Documents: A document which in the regular course

of business is treated as evidencing that the person in
possession of it is entitled to receive, hold, and
dispose of the document and the goods it covers (e.g.,
bill of lading, warehouse receipt).

(3) Chattel paper: A record or records which evidence

both a monetary obligation and a security interest in or
a lease of specific goods. A “record” is information that
is stored in either a tangible medium (e.g., written on
paper), or an intangible medium (e.g., electronically
stored). Chattel paper that is stored in an electronic
medium also is called “electronic chattel paper.”

(4) Investment property: Includes items such as stocks,

bonds, mutual funds, and brokerage accounts
containing such items.

(5) Accounts: A right to payment [not evidenced by an

instrument or chattel paper] (1) for property, (2) for
services, (3) for a policy of insurance issued or to be
issued, (4) for a secondary obligation incurred or to be
incurred, (5) for energy provided or to be provided, (6)
for the use or hire of a vessel, (7) arising out of the use
of a credit card, or (8) as lottery winnings. Health care
insurance receivables are included. A contractual
obligation arising from a loan of money is not an
account—it is a general intangible (see below).

(6) Deposit accounts: An account maintained with a bank.

Note: Article 9 only applies to nonconsumer deposit
accounts and deposit accounts that are claimed as
proceeds of other collateral.

(7) Commercial tort claims: A claim arising in tort with

respect to which (1) the claimant is an organization
(e.g., partnership or corporation), or (2) the claimant is
an individual and the claim arose in the claimant’s
business or profession and does not include damages
for personal injury or the death of an individual.

(8) General intangibles: Any personal property not

coming within the scope of the other definitions (e.g.,
software, patent and trademark rights, copyrights,
goodwill). A general intangible under which the
account debtor’s principal obligation is a monetary
obligation is a payment intangible.

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b. How would you classify the following items of collateral?

(1) A promissory note.

(2) A stock certificate.

(3) A receipt given to a farmer by a silo operator when the

farmer stored her grain there.

(4) A written contract in which a car buyer purchasing on

credit promises to pay the car dealership for the car
and grants the dealership a security interest in the car.

(5) Big T sells tires on credit. What are its customers’

obligations?

(6) A hospital has patients who come in for treatment.

They sign paperwork authorizing the hospital to seek
payment from their health insurance coverage provider.
Can the hospital use the monies due from the various
health plans as collateral?

(7) Credit Card Company issues millions of credit cards to

cardholders, who use them in transactions with
merchants. Merchants send the resulting paperwork to
Credit Card Company for reimbursement (minus
certain fees). Can Credit Card Company use these
credit card transactions as collateral?

(8) The checking account that you have at your bank.

(9) Patent and trademark rights, copyrights, goodwill, a tax

refund claim, a liquor license, a commercial clamming
license, a right to the return of a security deposit held
by a landlord.

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(10) A right to sue a corporation for wooing away a trusted

employee.

(11) A claim arising in tort that has been settled and

reduced to a contractual obligation to pay.

(12) A computer program.

D. SCOPE OF ARTICLE 9

Article 9 applies to:

(1) any transaction, regardless of its form, that creates a security interest
in personal property or fixtures by contract;

(2) an agricultural lien;

(3) a sale of accounts, chattel paper, payment intangibles, or promissory

notes (unless the sale is for the purposes of collection only, or the sale
is part of the sale of a business);

(4) certain consignments;

(5) a secured sale disguised as a lease.

1. Illustrations

a. D rents a stall at Ark Self Storage and stores his goods there.
The rental agreement provides that Ark has “a contractual
lien” on the contents of the stall, and that if D defaults in his
rental payments, Ark has the right to enter the stall, seize the
contents and sell them to satisfy the rental obligation. No
mention is made of the creation of any security interest.
Nevertheless, a security interest has been created that is
governed by Article 9.

Retention of title is another good example: if a seller

and buyer of goods agree that the seller will retain title
to the goods after they are delivered until the buyer
has paid for them, the agreement will be treated as the
seller’s retention of a security interest.
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b. The state has enacted a statute giving unpaid farmers who

have delivered their crops to a middleman a lien on the
inventory of the middleman. While Article 9 does not create
such liens (they must be created separately by the
legislature), when such a lien exists, Article 9 does regulate
some of the legal issues that arise (e.g., where to perfect,
some priority issues).

c. To raise money, Acme Manufacturing sold all of its accounts

to Friendly Finance, which notified the customers that
payments should be made directly to Friendly. (Note: This is
not a loan from Friendly to Acme with the accounts put up as
collateral; it is an outright sale.) This sale is governed by
Article 9, and the buyer must comply with Article 9 to protect
its interest against competing third parties.

d. Elvis, a music promoter, delivers compact discs worth $1,500

by the band No Tolerance to CD Barn to be sold on
consignment. If the compact discs are not sold, CD Barn (the
consignee) may return them to Elvis (the consignor). Unless
CD Barn is generally known by its creditors to be substantially
engaged in selling the goods of others, Elvis must comply
with the provisions of Article 9 to protect his interest in the
compact discs against the creditors of CD Barn. (Note: Elvis
does not need to comply with Article 9 if the goods are worth
less than $1,000 or the consignor used the goods for
personal, family, or household use).

(Note: In a typical consignment, the consignor (i.e., the owner

of the goods, such as a manufacturer or wholesaler) retains
title to the goods and delivers them to the consignee (e.g., a
retailer) for sale to the public. If the goods are not sold, the
consignee may return them to the consignor. In cases where
a creditor of the consignee would have difficulty distinguishing
inventory that a consignee is selling on consignment from
inventory that the consignee actually owns, Article 9
considers the consignment to be a security interest and
requires the consignor to comply with the provisions of Article
9 to give notice to the consignee’s creditors.)

e. For tax and other reasons (including the desire to avoid the
requirements of Article 9), parties may try to disguise what
really is a sale with a security interest as a lease. A “true
lease” is not covered by Article 9, but a lease that is really a
sale with a security interest is covered by Article 9. To
distinguish the “true lease” from the “disguised sale,” ask
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whether the transaction is, in substance, a lease or a sale. In a

lease (e.g., a car rental), the lessor is going to receive the item
back at the end of the lease term when the item still has
meaningful economic value. In a sale, the buyer is the owner
and is generally going to drain all of the economic value from
the item. The relevant question is: at the time the parties
entered into the transaction, was it reasonably likely that
the “lessor” would get the item back when it still had
meaningful economic value? If yes, it is a “true lease.” If no, it
is a sale with a security interest in substance, and it is
governed by Article 9.

Machines, Inc. leases a duplicating machine to Print Shop.

The parties execute a five-year lease. Whether this is a “true
lease” outside the scope of Article 9, or it is a “disguised
secured sale” governed by Article 9, must be determined on
a case-by-case basis. Article 9 will apply if: (1) at the end of the
lease period, the lessee (Print Shop) becomes the owner of
the machine for little or no consideration (e.g., option to
purchase for $1 when the machine is worth $1,000); or (2) the
lessee is bound to purchase the goods at the end of the lease
or to renew the lease for the remaining economic life of the
goods; or (3) the lease is for the entire economic life of the
leased goods, with or without renewal.

II. CREATION OF AN ARTICLE 9 SECURITY INTEREST

(ATTACHMENT)
A. A SECURITY AGREEMENT

Unless the collateral is in the possession or control of the secured party

pursuant to an agreement, a written (or electronically stored) security
agreement is required. Most often, the debtor wants possession of the
collateral, so a writing is necessary.

Possession: If the collateral is in the possession of the secured party

pursuant to an oral security agreement (e.g., I’ll loan you $50 but we agree
that I will keep your watch until you pay me back; if you don’t pay me back,
we agree that I can sell your watch), this meets the “security agreement”
requirement. Such an arrangement is called a _____________________.

Control: With respect to control, if the collateral is a nonconsumer

deposit account, electronic chattel paper, or investment property, the

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security agreement may be evidenced by control. The method by which

control may be obtained depends on the type of collateral involved.

1. Form of the security agreement (when written)

a. The agreement must be evidenced by a record (written or

electronically stored information) and must show an intent to
create a security interest.

b. The agreement must be “authenticated” by the debtor. This

usually means “signed” by the debtor. Any symbol, including
an electronic symbol, that is made with the present intent to
authenticate the record will work (e.g., an “X,” a smiley face).

c. The agreement must contain a description of the collateral

(and if the security interest covers timber to be cut, a
description of the land concerned).

The Code says that the security agreement must “reasonably

identify” the collateral.

B. THE SECURED PARTY MUST HAVE GIVEN VALUE

The value definition is very liberal. Any consideration sufficient to support a

simple ____________ is enough. Even ____________ consideration is
enough. The debtor always gives value because the debtor, at a minimum,
promises to pay. So the question is whether the secured party gave value.

C. THE DEBTOR MUST HAVE RIGHTS IN THE COLLATERAL

The debtor must have rights in the collateral because the debtor cannot
grant a contingent property interest in property that it does not own.

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III. SCOPE OF THE SECURITY INTEREST

A. DEBT SECURED MAY INCLUDE FUTURE ADVANCES
1. In the Hilda hypothetical on page 1, First Bank loans Hilda $20,000
on the date of the transaction, March 5. On May 10, First Bank lends
Hilda an additional $5,000. No new security agreement is signed.
What is the amount of debt secured?

B. PROPERTY SECURED MAY INCLUDE AFTER-ACQUIRED PROPERTY

1. Assume that Hilda buys new inventory six months after her
agreement with First Bank, using money supplied by Second Bank.
Is the new inventory subject to First Bank’s security interest?

General rule: Without an explicit after-acquired property clause in the

security agreement, the secured party’s security interest only reaches
collateral that the debtor had rights in at the time the debtor signed the
security agreement.

Exception: Even when there is not an explicit after-acquired property clause,

the courts will often imply an after-acquired property clause when the
collateral is of a type that is rapidly depleted and replenished (e.g., inventory
or accounts). The courts assume that the parties must have meant to cover
after-acquired property, or the security interest will reach nothing.

Another exception: A security interest does not attach under an after-

acquired property clause to consumer goods unless the debtor acquires
rights in them within 10 days after the secured party gives value.

Yet another exception: An after-acquired property clause is ineffective as

to commercial tort claims.

C. PROPERTY SECURED GENERALLY INCLUDES PROCEEDS

“Proceeds” includes whatever is received upon the sale, exchange,

collection, or other disposition of collateral or proceeds. If collateral is
insured and money is received from the insurance company on account of
loss or damage to the collateral, the money is a proceed of the collateral (up
to the value of the collateral) unless it is payable to someone other than the
debtor or the secured party claiming it. In addition, any claims arising out of
the loss of, defects in, or damage to collateral are proceeds of the collateral
(up to the value of the collateral). Unless otherwise agreed, a security
interest automatically gives the secured party a right to identifiable

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proceeds. (“Identifiable” means that the secured creditor can prove that
the proceeds can be traced back to the creditor’s original collateral.)

1. First Bank has a security interest in Hilda’s inventory. Hilda sells some
inventory on credit. Does First Bank’s security interest reach the
accounts resulting from such sales?

2. Hilda sells some inventory for $3,000, which cash is deposited in

Hilda’s bank account. Does First Bank’s security interest reach this
money?

Yes, if the proceeds are still ________________ (meaning that the

secured party can prove that all of the monies in Hilda’s bank
account are proceeds).

The problem is that cash proceeds are frequently _________ with

cash non-proceeds such that it becomes impossible to determine
which part of the cash is proceeds.

To determine which part of a commingled mass of cash is identifiable

(such that the secured party has a security interest in it), apply the
_______________________ test. Look at the balance in a
commingled bank account starting at the time the proceeds are
deposited and ending at the time you are applying the test. The law
deems that the lowest balance during that time period is the secured
party’s identifiable proceeds (but it cannot exceed the value of the
cash proceeds originally deposited).

3. What if Hilda’s bank account had a $1,000 balance (all non-proceeds)

just before the $3,000 from the inventory sale was deposited? The
account balance never dropped below $4,000. How much of the
bank account is the secured party’s identifiable proceeds?

4. What if Hilda’s bank account had a $1,000 balance (all non-proceeds)

just before the $3,000 from the inventory sale was deposited? The
account balance then dipped to $1,000, increased to $7,000, dropped
to $50, increased to $2,000, and dipped again to $750. How much of
the bank account is the secured party’s identifiable proceeds?

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D. THE ATTACHMENT OF A SECURITY INTEREST IN COLLATERAL ALSO IS

AN ATTACHMENT OF A SECURITY INTEREST IN A SUPPORTING
OBLIGATION FOR THAT COLLATERAL.

1. Sarah grants Finance Company a security interest in her accounts

receivable. One of these accounts has a surety, who promised Sarah
that she would pay the account if the account debtor did not.
Finance Company’s security interest automatically attaches to this
supporting obligation.

IV. PERFECTION OF THE SECURITY INTEREST

Perfection deals primarily with rights as between the secured party and third
parties. Perfection is not necessary to create a valid, enforceable security interest
as between the debtor and the secured party.

A. METHODS OF PERFECTION

Usually, a security interest is “perfected” when it has attached and when

some additional step (e.g., possession or filing) is taken.

1. Automatic perfection: In certain situations, a security interest is

automatically perfected upon attachment. The most common such
situation is:

a. Purchase money security interest in consumer goods: D

borrows money from S Loan Company for the purpose of
buying a new dining room set for her home (the money from S
Loan Company is used to buy the dining room set). S obtains a
security interest in the dining room set. The security interest is
automatically perfected upon attachment.

2. Possession of collateral by secured party: A secured party may

perfect a security interest in most types of collateral simply by taking
possession of the collateral. The security interest is perfected from
the moment of possession without relation back to the time of
attachment. Perfection continues only so long as possession is
retained.

a. When impossible?

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Note: Most often, possession by the secured party is not very

practical. The debtor usually wants possession of the collateral.

3. Perfection by “control”: Security interests in investment property

and electronic chattel paper may be perfected by control. Security
interests in nonconsumer deposit accounts can only be perfected by
control.

a. Investment property: Basically, a secured party has control of

an item of investment property when the secured party has
taken whatever steps are necessary to be able to have the
investment property sold without further action from the
owner.

b. Electronic chattel paper: A party has control over electronic

chattel paper when a system showing the transfer of interests
in chattel paper reliably establishes the secured party as the
assignee. An example of a system that meets this standard is
one in which the secured party has the authoritative copy of
the records constituting the electronic chattel paper (e.g., a
computer file), that copy identifies the secured party as the
assignee of record, and any other copy of or amendments to
the records are marked as such.

c. Nonconsumer deposit accounts

(1) The bank in which a nonconsumer deposit account is

maintained automatically has control over the deposit
account.

(2) If the secured party is not such a bank, it can obtain

control over the deposit account by either: (1) putting
the deposit account in the secured party’s name, or (2)
agreeing in an authenticated record with the debtor
and the bank in which the deposit account is
maintained that the bank will follow the secured
party’s orders without further consent by the debtor.

4. Notation of lien on certificate of title

The only way to perfect a security interest in an item covered by a

certificate of title statute (e.g., cars and trucks) is for the secured party
to get the relevant governmental authority to note the secured party’s
lien on the certificate of title.

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Exception: If the debtor is holding the car or truck as ___________

(i.e., if the debtor is a dealer), then a secured party must perfect by
filing a financing statement against inventory. Noting its lien on the
certificate of title will not work.

5. Filing a financing statement

a. Notice filing

The financing statement is premised on the concept of

“notice filing.” The notice must indicate merely that a person
________________ have a security interest in the collateral
indicated. Further inquiry from the parties concerned will be
necessary to disclose the complete state of affairs.

b. Contents of financing statement

(1) Debtor’s name: Financing statements are indexed by

the debtor’s name. If the debtor is an individual, the
individual’s name should be given. If the debtor is a
corporation, the corporate name should be given. If
the debtor is a partnership, the partnership name
should be given.

(a) What name should be used on the financing

statement if the debtor is Mike Sabbath
operating under the trade name The Sabbath
Commeth?

For individual names, the rule in the majority of

jurisdictions is the following: if the debtor has
an unexpired driver’s license issued by the
state where the financing statement is to be
filed, the financing statement must include the
name as indicated on the license. If the debtor
does not have such a license, then the financing
statement may include the debtor’s individual
name, which Article 9 does not define, or the
debtor’s personal name and surname. NOTE: A
financing statement that provides only the
debtor’s trade name does not sufficiently
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provide the name of the debtor. (A trade name is

simply a non-legal name used by a business.)

(b) Suppose a secured loan is made to Michael

Sabbath. The financing statement mistakenly
shows the name as Michael Sadbath. Is the
financing statement effective?

Yes, as long as the error is not ____________.

To determine if a name error is seriously
misleading, check whether a search under the
debtor’s ____________ name, using the filing
office’s standard search logic, would retrieve the
erroneous financing statement. If it does, the
name error is not seriously misleading. If it does
not return the erroneous financing statement,
then the error is seriously misleading.

(c) Suppose that the filing officer mistakenly files

the financing statement so that the index shows
the secured party as the debtor. Is the filing
effective?

Debtor’s name change: If the debtor so changes its name that a filed
financing statement becomes seriously misleading (i.e., a search under the
debtor’s correct name, using the filing office’s standard search logic, would
not retrieve the financing statement with the debtor’s former name), the
financing statement is effective to perfect a security interest in collateral
acquired by the debtor before or within four months after the change. It is
not effective to perfect a security interest in collateral acquired by the
debtor more than four months after the change (unless an amended
financing statement is filed within the four months that renders the
financing statement not seriously misleading).

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(2) Description of collateral

This is the same test that we saw with the security
agreement—i.e., the description must “reasonably
identify” the collateral. Normal vocabulary (e.g.,
television) works to reasonably identify the collateral,
and Article 9 categories (e.g., inventory, equipment)
work as well.
(a) Will a security interest in Hilda’s hats be
perfected by a properly filed financing
statement that describes the collateral as
“inventory”?

(b) Will a security interest in Hilda’s hats be

perfected by a properly filed financing
statement that describes the collateral as “all
assets” or “all personal property”?

(3) Secured party’s name: Because searches are not

conducted under the secured party’s name, an error
in the name of the secured party will not be seriously
misleading (though, in an appropriate case, this type
of error may give rise to an estoppel in favor of a
particular holder of a conflicting claim to the
collateral).

(4) Real-property-related financing statements: If the

financing statement covers real-property-related
collateral (i.e., minerals, timber to be cut, or fixtures),
the financing statement must also indicate that it is to
be filed in the real property records (so that the filing
officer sees that it gets to the right place), provide a
description of the real property to which the
collateral is related (must “reasonably identify” the
real estate—a metes and bounds description is not
necessary), and name the record owner if the
property belongs to someone other than the debtor.

(5) No signature required, though debtor must

authorize the filing: The authorization may be in any
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signed writing. In addition, the debtor automatically

authorizes the financing statement if she
authenticates a security agreement covering the
same collateral.

(6) Authenticated security agreement itself may be

filed: If it is filed, it must contain all of the elements
discussed above.

c. Where to File a Financing Statement

(1) General Rule: Except as otherwise specifically

provided in a state’s Article 9, the financing statement
is ordinarily filed with the Secretary of State.

(2) Filing must be made in the office where a mortgage

on the real estate would be filed or recorded where
the collateral is timber to be cut or as-extracted
collateral, or where the financing statement is filed as
a fixture filing and the collateral is goods which are or
are to become fixtures.

These real-estate-related filings are usually filed in

the _______________ records of the county where
the real property is located.

(3) Multiple state transactions

(a) Your client takes a security interest in D’s

equipment which is located in North Carolina. D
is a Delaware corporation with its chief
executive office in Ohio. In which state should
you file a financing statement? The general rule
is that you file in the state where the debtor is
___________. If the debtor is an individual, she
is located at her ________________________.

If the debtor is a registered organization (a business

organization that is only created by filing a specified
document with the state, such as a corporation, a
limited partnership, or a limited liability company), the
debtor is located in the state where the registered
organization is _____________________________.

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If the debtor is an unregistered organization (e.g., a

general partnership, including a limited liability
partnership), the debtor is located at its place of
___________________, if only one. If more than
one place of business, the debtor is located at its
________________________________.

(b) What if a financing statement is properly filed in

Delaware where the debtor is located (assume
the debtor is an individual)? The debtor then
moves to North Carolina. Is it necessary to file a
financing statement in North Carolina?

The secured party will become unperfected

_______________after the debtor’s move
unless it files a financing statement in the new
jurisdiction before that ______________period
is up.

(c) What if a financing statement is properly filed in

Delaware where the debtor is located? The
collateral is then transferred to a new debtor
who is located in North Carolina. Is it necessary
to file a financing statement in North Carolina?

The secured party will become unperfected

_______________after the collateral moves
unless it files a financing statement in the new
jurisdiction before that ______________period
is up.

When farm products are located in a state, an agricultural lien on those

farm products should be perfected in that state.

A financing statement is effective for five years from the date of filing. It can
be extended by filing a continuation statement. To be effective, the
continuation statement must be filed in the last six months of the five-year
“life” of the financing statement (i.e., between 4.5 and 5 years).
When there is no outstanding obligation of the debtor and no commitment
on the part of the secured party to make further advances, the secured
party, upon receiving an authenticated demand by the debtor, must
within 20 days provide the debtor with a termination statement to the effect
that the secured party no longer claims a security interest under the
financing statement. If a financing statement covers consumer goods, then
within one month after there is no outstanding obligation, or within 20 days
of receiving an authenticated demand from the debtor, a termination
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statement must be filed by the secured party. The secured party is liable to
the debtor for $500 and for any loss caused to the debtor for failure to
comply with the above.

Note: A financing statement can be filed even before a security agreement

is entered into. When we discuss priorities we will see why you might want
to do so.

B. PERFECTION AS TO PROCEEDS:

If a secured party has a perfected security interest in collateral, a secured

party automatically has a perfected security interest in whatever proceeds
the debtor receives in exchange for that collateral for 20 days. To remain
perfected in those proceeds beyond 20 days, the secured party must take
new action to perfect its interest unless:

1. the proceeds are identifiable cash proceeds; or

2. the security interest in the original collateral was perfected by filing

a financing statement, a security interest in the type of collateral
constituting proceeds would be perfected by filing in the same place
as the financing statement for the original collateral, and the
proceeds were not purchased with cash proceeds of the collateral
(sometimes called the “same office” rule).

Illustration: S loans money to D and takes a security interest in D’s

inventory. S perfects its security interest by filing a financing statement with
the secretary of state. D trades some of its inventory to X for some
equipment. S remains perfected as to the equipment.

Illustration: S loans money to D and takes a security interest in D’s inventory.

S perfects its security interest by filing a financing statement with the
secretary of state. D sells some inventory for cash, and uses the cash to
purchase some equipment. Unless the financing statement’s description
was already broad enough to encompass the equipment, S would need to
amend its financing statement (by amending the description to cover the
equipment) within 20 days to be perfected as to the equipment.

C. CHANGE IN USE OF COLLATERAL:

If the debtor changes its use of the collateral (e.g., equipment to inventory),
the filed financing statement (with the description of “equipment”) remains
effective to perfect the security interest. The secured creditor has no duty

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to monitor the collateral or to amend the financing statement even if it

knows that the description is seriously misleading.

V. PRIORITY
We are now dealing with a situation where the secured party and some third
party are claiming the same collateral. The third party may be another secured
party, a purchaser of the collateral, or a creditor who has obtained a judgment
against the debtor. There are rules that specify which party is entitled to first satisfy
its claim out of the collateral.

A. SECURED PARTY V. SECURED PARTY

1. General rule: As between two perfected secured creditors, the first

to file or perfect, whichever occurs first, has priority.

a. Debtor needed money for his clothing business. He went to

First Bank and Second Bank, asking each to loan him money
and offering his inventory as collateral. They each made him
sign a security agreement and a financing statement. First
Bank filed first, on March 10, but did not loan Debtor any
money (nor make any commitment to do so) until June 15. On
April 20, Second Bank loaned Debtor the money and filed a
financing statement. Debtor paid neither bank.

(1) Did both banks have a perfected security interest,

assuming they both filed in the proper place?

(2) Which Bank has a superior right to the inventory?

First Bank filed on __________. First Bank

perfected on _________. Second Bank filed on
________. Second Bank perfected on _________.

(3) Is priority in any way affected by the knowledge that

one may have of the other’s interest?

b. On March 1, A loans D $2,000 and takes a purchase money

security interest in consumer goods. No financing statement
is filed. On April 1, B obtains a non-purchase money security
interest in the same consumer goods. B files a financing

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statement on April 2. D is unable to pay A or B. Who has

priority?

2. As between two unperfected secured creditors, the first to

__________________ has priority.

As between a perfected secured creditor and an unperfected

secured creditor, the __________ secured creditor has priority.

3. Special rules

a. Purchase money security interests in goods other than

inventory or livestock: A purchase money security interest in
such goods has priority over a conflicting security interest in
the same goods or its identifiable proceeds if the purchase
money security interest is perfected at the time the debtor
received possession of the collateral or within 20 days
thereafter.

(1) On May 1, D buys equipment from A on credit, and A

retains a security interest in the equipment. A
delivers the equipment to D on May 5, but does not
file a financing statement until May 12. In the interim,
D borrows money from B, who obtains a security
interest in the same equipment and files a financing
statement on May 10. D defaults, and the value of the
equipment is less than the amount owed to both A
and B. Who has priority?

(a) What if A had filed its financing statement on May

30 instead of May 12?

b. Purchase money security interests in inventory or livestock:

A purchase money security interest in inventory or livestock
has priority over a conflicting security interest in the same
inventory or livestock (as well as proceeds that are chattel
paper, instruments, and identifiable cash proceeds) if, before

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the debtor receives possession of the inventory or livestock,

the secured party (1) perfects, and (2) sends an authenticated
notification to holders of previously filed conflicting security
interests in the collateral. The holder of the conflicting
security interest must receive this notice within five years
before the debtor receives possession of the inventory (i.e.,
the notification is effective for deliveries of the same type of
collateral for five years).

(1) On June 5, A obtains and perfects a security interest

in all of D’s inventory “now owned or hereafter
acquired.” On July 2, D buys inventory from B on
credit and B retains a security interest in the
inventory. On July 3, B files a financing statement
and sends notification of the transaction to A. B
delivers the inventory to D on July 6. D subsequently
defaults on its obligations to A and B, and the value of
the inventory is less than both these obligations.
Who has priority?

(a) What if B had failed to send a notification to A?

(2) Under Article 9, a consignor’s interest in the

consigned goods is considered to be a PMSI in
inventory. Therefore, a consignor can acquire PMSI
superpriority in consigned goods if she complies with
the above requirements for gaining PMSI
superpriority in inventory.

c. Conflicting purchase money security interests

(1) B wishes to purchase a $10,000 piece of equipment

from S. B borrows the $500 down payment from
Finance Company and S extends credit to B for the
remainder of the purchase price. Both Finance
Company and S take a security interest in the
equipment, and both file financing statements to
perfect their interests within 20 days of B receiving
possession of the equipment. Does S or Finance
Company have priority to the equipment?

The Code says that a ________________ purchase money

security interest has priority over a ____________ purchase
money security interest.
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d. Special priority rules for investment property

(1) A security interest perfected by control has priority

over a security interest perfected by any other
method (filing or automatic).

(2) If conflicting security interests each were perfected

by control, they rank according to the time of
obtaining control.

(3) A security interest granted to a debtor’s intermediary

has priority over a security interest granted by the
debtor to another secured party (unless the
intermediary agrees otherwise).

(4) Except as provided in (1), (2), or (3) above, the first to

file or perfect rule governs priority questions.

e. Special priority rules for deposit accounts

(1) A security interest perfected by control has priority

over a security interest perfected via proceeds.

(2) If conflicting interests each were perfected by

control, they rank according to the time of obtaining
control.

(3) A secured party who has obtained control by putting

the deposit account in its own name has priority over
all other secured parties with control.

(4) A bank that has control because it maintains the

deposit account has priority over all other secured
parties with control except a secured party who has
obtained control by putting the deposit account in his
name.

Note: If a debtor transfers money or deposit account funds (e.g., by

writing a check or making an electronic funds transfer), the transferee
of the funds takes free of a security interest in the funds unless the
transferee acts in collusion with the debtor in violating the rights of
the secured party.

f. Purchaser of chattel paper: If a purchaser of chattel paper in

good faith gives new value and takes possession in the

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ordinary course of business (or takes control of electronic

chattel paper), the purchaser will have priority over:

(1) a security interest in chattel paper that arises merely

as proceeds of inventory (as long as the chattel
paper does not indicate that it has been assigned to
anyone other than the purchaser), and

(2) any other security interest in the chattel paper, as

long as the chattel paper purchaser acquired its
interest without knowledge that its purchase violated
the rights of the secured party.

g. Purchaser of instruments: A purchaser of an instrument has priority

over a perfected security interest in the instrument if the purchaser
gives value and takes possession of the instrument in good faith and
without knowledge that the purchase violates the rights of the
secured party.

B. SECURED PARTY V. BUYER OF THE COLLATERAL

General rule: If you buy something with a security interest on it, the
security interest stays on it. There are a few exceptions, discussed
below.

1. Authorized sales: If the sale is authorized by the secured party free

of the security interest, the buyer takes free of the security interest.
This authorization may be express, or it may be implied from the
type of sale or from the seller’s conduct.

a. Bank extends credit to an appliance store and obtains a

security interest in the store’s inventory. The security
agreement is silent on the issue of selling the collateral. The
appliance store sells a washer and dryer to Harry Homebody.
Is this sale authorized?

(1) Assume that the appliance store had sold its entire
inventory to L, a liquidation sales company. Would
this be authorized?

b. Bank extends credit to D, a hog farmer, and obtains a security

interest in D’s hogs. The security agreement provides that D
would not sell his hogs without written consent of the bank.
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Despite this provision, the bank acquiesced in over 100 sales

of these hogs over a five-year period. Were these sales
authorized?

2. Unauthorized sales

a. General rule: A buyer in the ordinary course of business

(other than a person buying farm products from a person
engaged in farming operations) takes free of a security
interest created by his seller even though the security
interest is perfected and even though the buyer knows of its
existence.

(1) What is a buyer in the ordinary course?

A buyer in the ordinary course means a person who

buys goods in _______________, without knowledge
that the sale violates the rights of another person
(usually the secured party) in the goods, and in the
ordinary course from a person in the business of
______________________ goods of that kind.

(2) Carla Consumer buys a new refrigerator from

Appliance World, a retail store. Several months later,
a representative of State Bank came to Carla’s home
demanding that she turn over the refrigerator. The
representative explains that State Bank has a
perfected security interest in all of Appliance World’s
inventory, and that because Appliance World has
defaulted on its loan, the bank was repossessing.
What should Carla tell the bank’s representative?

(a) Would it matter if Carla had known of the bank’s

perfected security interest when she purchased
the refrigerator?

(3) The Bogarts (ordinary consumers) purchased a

sailboat with money borrowed from State Bank,
which took a security interest in the sailboat and
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promptly perfected. The security agreement

prohibited sale of the collateral without State Bank’s
consent. Three months later, in violation of the
security agreement, the Bogarts sold the sailboat to
Mabel’s Marina, which sells new and used boats. A
month later, the sailboat was sold to Nudnik. State
Bank has tracked down the sailboat, and seeks to
enforce its security interest in the sailboat which is in
Nudnik’s hands. Can it enforce its security interest in
the sailboat? [Note: The security interest was created
by the Bogarts and not by Nudnik’s seller.]

b. Buyers not in the ordinary course of business take subject

to perfected security interests. They take free from
unperfected security interests (and unperfected agricultural
liens) unless they know of the security interest.

(1) Finance Company had a perfected security interest

in Acme Manufacturing Company’s equipment.
Without the knowledge of Finance Company, Acme
sold a piece of its equipment to Baker Manufacturing
Company. Acme defaulted on its loan to Finance
Company, and Finance Company seeks to repossess
all equipment. Can Finance Company recover the
equipment that Acme sold to Baker?

Yes. Baker is __________________ a buyer in the

ordinary course because Acme is not in the business
of selling its equipment. Baker takes subject to the
perfected security interest of Finance.

(a) Would your answer be the same if Finance

Company’s interest were unperfected at the
time of the sale?

c. Special rule: consumer-to-consumer sales: In the case of

consumer goods, a buyer takes free of a security interest
even though it is perfected if he buys without knowledge of
the security interest, for value, and for his own personal,
family, or household purposes, unless prior to the purchase

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the secured party has filed a financing statement covering

such goods.

Note: The goods must be consumer goods in the hands of

both the buyer and the seller.

(1) Consumer buys a new television set on credit from S.

S retains a security interest but does not file a
financing statement. Consumer holds a garage sale
and sells the television to Irma (who will use the
television in her home). Does Irma take free of S’s
security interest?

(2) What if Irma knows of S’s security interest?

(3) What if S had perfected by filing before the sale to

Irma?

What if, instead of selling the television to Irma,

Consumer had traded the set in to Distortion TV (a
retailer) for some credit towards a new television?

This is not a consumer-to-consumer sale, so the

special rule does not apply. Consumer is not in the
business of selling televisions, so Distortion is
_______________________ a buyer in the ordinary
course. Distortion takes subject to the automatically
perfected security interest of S.

C. SECURED PARTY V. JUDGMENT LIEN HOLDERS

An unperfected security interest is subordinate to the rights of a person

who becomes a lien creditor before the security interest is perfected. If the
security interest is perfected before the person becomes a lien creditor, the
security interest has priority.

Article 9 defines a “lien creditor” as “a creditor who has acquired a lien on

the property involved by attachment, levy or the like.” While Article 9 does
not clearly define the moment when the status of “lien creditor” arises, the
lien obtained by judicial proceedings must attach to the collateral. An
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unsecured creditor who has obtained a judgment and has levied on that
judgment is a “lien creditor.”

KEY: Look at the time of perfection of the security interest and the time of
the levy by the sheriff.

If the security interest is perfected before the sheriff levies, the security
interest has priority.

If levy precedes perfection of the security interest, the judicial lien has
priority.

1. On April 5, S loans $5,000 to D and obtains a non-purchase money

security interest in D’s equipment. On April 10, L tries to collect her
$20,000 judgment against D by having the sheriff levy on D’s
equipment. S perfects its security interest by filing on April 13. The
equipment is worth only $20,000. Who has priority?

a. What if S’s security interest had been perfected by filing on

April 8?

NOTE: Technically, the priority rule for secured party v. judgment lien
holder is that the secured party has priority (1) if the secured party perfected
before the judgment lien holder got its lien; OR (2) if the secured party
obtained a security agreement and filed a financing statement before the
judgment lien holder got its lien.

2. Special Rule: PMSI v. Lien Creditor

a. If the secured party files with respect to a purchase money

security interest within 20 days after the debtor receives
possession of the collateral, he takes priority over the rights
of a lien creditor which arises between the time the security
interest attaches and the time of filing.

3. Priority for Future Advances

a. A security agreement can secure present and future

advances if the security agreement contains a future advance
clause. A future advance by a secured creditor has priority
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over a lien creditor if the future advance is made (1) without

knowledge of the lien, OR (2) within 45 days of the lien arising,
OR (3) pursuant to a commitment entered into without
knowledge of the lien.

D. SECURED PARTY V. STATUTORY LIEN CLAIMANTS

1. Bank has a perfected security interest in a car owned by D. D takes

the car to Bubba’s garage for repairs. Bubba makes the repairs, but D
fails to pay Bubba. By statute (and common law) Bubba has a lien on
the car. D also defaults on his loan to Bank. Who has priority to the
car?

VI. DEFAULT
A. DEFINITION OF DEFAULT

The right of the secured party to proceed against collateral is normally

triggered by default. But Article 9 does not define the term “default.”
Typically, grounds of default are specified in the security agreement (e.g.,
failure to make payment when due, selling collateral without the secured
party’s permission, failing to keep the collateral insured). In the absence of
such a specification, default has been restricted to failure to perform or pay
the obligation when it is due.

1. Look for late or missed payments

2. Also look for a possible waiver by the secured party of late or missed
payments

B. SELF-HELP REPOSSESSION

After default the secured party is entitled to take possession of the collateral
without judicial process if this can be done without “breach of the peace.”

When a secured party breaches the peace, he loses the authorization to

repossess, may be sued for conversion (and possibly assault, battery,
trespass, etc.), and is liable for actual (and frequently punitive) damages.

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1. What constitutes a “breach of the peace?”

Any conduct by the secured party that has the _____________ to

lead to _________________ is a breach of the peace. Generally,
physical presence by the debtor (or a representative of the debtor)
plus verbal objection is enough to create a breach of the peace.

a. Several burly men come to Wanda’s house and inform her

that they have come to repossess her dinette set. Wanda tells
them to go away, but one of the men tells her: “get your butt
out of the way if you don’t want to get hurt.” Wanda takes his
advice, and the dinette set is repossessed. Has a breach of
the peace occurred?

b. While D is off at work, S enters an open window of D’s home

to repossess a stereo. S leaves through the same window,
doing no damage to the premises. Has a breach of the peace
occurred?

(1) Would your answer be the same if the security

agreement signed by D contained a provision
granting S the right to enter onto the premises at any
time to repossess the stereo?

c. While D is asleep in his home, S hotwires D’s car and drives it

from D’s driveway. Has there been a breach of the peace?

(1) Would your answer be the same if the car was taken
from a closed garage?

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d. While D’s restaurant is closed, S picks a lock to gain entry,

and repossesses several pieces of equipment. Has there
been a breach of the peace?

Note: If self-help is unavailable, the secured party can use judicial process
(e.g., replevin) to get the goods.

Note: Without removal, the secured party may also make equipment
unusable and dispose of it on the debtor’s property if she can do so
without a breach of the peace. This latter right is directed toward the
problem of taking possession of heavy, bulky equipment that is not
easily movable.

Self-help in accounts: If the debtor defaults and the collateral is

accounts, the secured creditor can notify (in a signed writing) the
persons owing money to the debtor (i.e., the account debtors) to
make payment to the secured party rather than to the debtor. Upon
notification, the account debtor must pay the secured creditor rather
than the debtor. Payment to the debtor will not discharge the
obligation.

C. RETENTION OF COLLATERAL (STRICT FORECLOSURE)

After default and repossession, the secured party may propose retaining the
collateral in full or partial satisfaction of the debt.

1. A secured party wishing to do so must send its proposal to any other

secured party from whom the foreclosing party has received notice
of a claim to the collateral, and any other secured party who has
perfected a security interest in the collateral by filing a financing
statement or noting its security interest on a certificate of title. If a
notified party objects within 20 days after the secured party sent
notice, the collateral must be disposed of by sale.

2. A secured party wishing to retain the collateral also must obtain the
debtor’s consent. The debtor consents by either: (1) agreeing in an
authenticated record after default, or (2) in the case of a full strict
foreclosure, failing to make an authenticated objection within 20
days after the secured party sent notice (a debtor cannot consent to
a partial disclosure in this manner).

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D. RESALE OF COLLATERAL

After default, the secured party may sell, lease, license, or otherwise
dispose of the collateral in its condition when repossessed or after
reasonable preparation. The sale may be either public (auction) or private,
and may be by one or more contracts.

The sale discharges the security interest under which the sale is being
made and all subordinate security interests. The purchaser, however, is still
subject to superior security interests.

1. Reasonable notification: Reasonable notice that is authenticated by the

secured party (the notice cannot be oral) must be given to the debtor
and any sureties on the debt, and (except in the case of consumer
goods) to any other secured parties who have notified the secured party
of their interests, and any secured parties who have perfected by filing a
financing statement or making a notation on a certificate of title. This
notice is not necessary when the collateral is perishable or threatens to
decline rapidly in value or is of a kind ordinarily sold in a recognized
market (e.g., stock). The debtor or the surety may, after default, in an
authenticated agreement waive the right to notice.

a. Timeliness: Notice must be sent within a reasonable time

before the sale (a question of fact). In nonconsumer
transactions, notice is deemed to be sent within a reasonable
time if it is sent 10 days or more before the time of sale.

b. Content: The content of the notice depends on the type of

sale and type of collateral.

(1) The statute provides “safe harbor” notice forms.

(2) For a public sale, notice of the ______________

and ___________________ of sale is required.

(3) For a private sale, notice of the time _____________

which the sale will occur must be given (e.g., the car
will be sold at a private sale after January 1, 2017).

(4) Extra information is required for consumer goods.

2. Commercially reasonable sale: Every aspect of the sale (including

the method, manner, time, place and terms) must be commercially
reasonable.

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3. Secured party buying collateral: The secured party may buy at any
public sale, but may buy at a private sale only if the collateral is of a
type customarily sold in a recognized market or is of a type which is
the subject of widely distributed standard price quotations.

4. Compliance with resale requirements

a. Secured party’s right to deficiency

(1) D owes S $20,000, and S has a security interest in

D’s inventory. D defaults and S properly repossesses
and resells the collateral. The sale yields only
$15,000. What are S’s rights?

S receives a $5,000 ________________________

judgment. This is just like any other judgment that a
plaintiff wins in court. It is an unsecured judgment
that S can use to try and collect against D’s non-
exempt assets.

(a) What if the sale had yielded $22,000?

More on the proceeds of sale: Technically, the money from a foreclosure sale goes
first to repay the costs of the repossession and sale, then to pay off the debt of the
foreclosing creditor, and then to pay off the debt of creditors with lower priority
than the foreclosing creditor. If any money is left over, the debtor gets this surplus.
(Note: Creditors with higher priority than the foreclosing creditor receive no money
from the sale because they do not lose their liens as a result of the foreclosure
sale.)

Explanation of deficiency or surplus: If the debtor is a consumer, after the sale, the
secured creditor must send the debtor an explanation of the calculation of any
debt still owed (the deficiency) or money the debtor will receive (the surplus).

5. Failure to comply with resale requirements

a. A secured party is liable for the actual damages caused by

failure to follow ANY of the Code’s rules.

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b. Minimum recovery for consumer goods: If the collateral is

consumer goods and the secured creditor violates Code rules,
the debtor is entitled to a minimum of 10% of the cash price of
the goods plus an amount equal to all the interest charges to
be paid over the life of the loan.

c. Right to deficiency judgment?

(1) D owes S $20,000, and S has a security interest in

D’s inventory. D defaults and S properly repossesses
the collateral. S holds a resale, but fails to give proper
notice (or fails to otherwise conduct the sale in a
commercially reasonable manner). The sale nets
$15,000. Can S recover the deficiency?

General rule: If the secured party fails to conduct a

commercially reasonable sale, there is a rebuttable
presumption that the sale proceeds _____________
the amount of the debt. In other words, the secured
party presumptively loses any deficiency.

E. DEBTOR’S RIGHT TO REDEEM

Any time before the secured party has resold the collateral or has entered
into a contract for its disposition, or the obligation has been discharged by
the secured party’s retention of the collateral, the debtor may redeem the
collateral. To do so, the debtor must tender fulfillment of all obligations
secured by the collateral. Because most security agreements contain an
acceleration clause, the debtor typically must tender the entire balance in
order to redeem. (An acceleration clause gives the creditor the option to
declare the entire loan balance due when there is any default.)

1. D buys a car from S on credit, with S retaining a security interest in

the car. D is to make 60 monthly payments of $200 (a total of
$12,000). After making five monthly payments (a total of $1,000), D
defaults and S repossesses. How much will D have to pay to redeem,
assuming S accelerates?

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VII. FIXTURES
A. WHAT IS A FIXTURE?

1. The Code defines “fixtures” as goods that have become so related

to particular real property that an interest in them arises under real
property law. In general, personal property attached to real estate
with the intent that it become a permanent part of the real estate is a
fixture (e.g., central air conditioning, built-in appliances, elevators,
etc.). The distinctive aspect of a fixture is that interests in it may arise
under both the Code and under the law of real estate.

2. Note: No security interest can exist in ordinary building materials

(e.g., bricks, lumber, shingles, etc.) incorporated into an
improvement on land.

B. PERFECTION

1. To perfect a security interest in fixtures, a “fixture filing” must be

made in the office where a mortgage on the real estate would be
filed. In addition to the usual requirements for a financing statement,
a fixture filing financing statement must reasonably identify the real
estate, and must show the name of the owner (if the debtor does not
have an interest of record in the real estate).

C. RIGHTS ON DEFAULT

1. S sells and installs central heating in a home. S sells on credit, and

retains a security interest. If the homeowner defaults, can S
repossess even if it is February and the home will be uninhabitable?

D. PRIORITY

1. Secured party v. subsequent real estate interest

a. General rule: A security interest in fixtures has priority over

any real estate interest that arises subsequent to the
perfection of the security interest by fixture filing.

(1) S loans D $10,000, taking a security interest in D’s

escalator and perfecting by a proper fixture filing. L
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then makes a loan to D, taking a mortgage on D’s

building. Whose claim to the escalator has priority?

2. Secured party v. prior real estate interest

a. General rule: A prior real estate interest that is properly

recorded has priority over a security interest that
subsequently arises.

b. Exception: A purchase money security interest takes priority

over an earlier in time realty interest if it is perfected by a fixture
filing before the goods become fixtures or within 20 days
thereafter.

(1) On March 1, D borrows $40,000 from Bank, giving

bank a mortgage on D’s real property. On June 1, S
sells D on credit a new furnace for his building,
retaining a security interest in the furnace. S makes a
fixture filing on June 5. Who has priority to the
furnace?

c. Note: A construction mortgage takes priority over a

subsequent purchase money security interest in fixtures even
if the security interest is perfected by a fixture filing within 20
days of affixation.

(1) On May 1, L agrees to provide construction money for

D’s new building. L records its mortgage on May 3.
On June 6, S sells D on credit a boiler for his
building, retaining a security interest in the boiler. S
installs the boiler on June 9 and makes a fixture filing
on June 10. Who has priority to the boiler?

3. When fixture filing unnecessary

A secured party need not fixture file as to readily removable (1)

factory or office machines, or (2) equipment that is not primarily used
or leased for use in the operation of the real estate, or (3)
replacements of domestic appliances which are consumer goods.
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SECURED LAW
TRANSACTIONS

Any method of perfection before such goods become fixtures

entitles the secured party to priority.

A secured party need not perfect at all to have priority if the

encumbrancer or owner of the real estate has in an authenticated
record consented to the security interest or has disclaimed an
interest in the goods as fixtures, or if the debtor has a right to
remove the goods as against the real estate claimant.

VIII. ACCESSIONS
A. DEFINITION OF ACCESSIONS

Accessions are goods that are physically united with other goods in such a
manner that the identity of the original goods is not lost (e.g., tires on a car).
B. PERFECTION

If a security interest is perfected when the collateral becomes an

accession, the security interest remains perfected in the collateral.

C. GENERAL RULE AS TO PRIORITY

As a general rule, the rules for priority previously discussed (e.g., first to file
or perfect, special PMSI rules) apply to accessions.

1. Illustration: Bank has a perfected security interest in debtor’s piece

of equipment. Subsequently, Finance Company finances a new
motor for this equipment and takes a security interest in the motor.
Finance Company files a financing statement perfecting its security
interest within 20 days of debtor receiving the motor. Finance
Company would have priority over Bank with respect to the motor
because of the special PMSI rule (had Finance Company not filed
within 20 days, Bank would have had priority as the first to file or
perfect).

2. Special priority rule: A security interest in an accession is

subordinate to a security interest in the whole which is perfected by
compliance with the requirements of a certificate-of-title statute.

Illustration: Debtor owns an automobile subject to a security

interest in favor of Bank. This security interest is perfected by
notation on the certificate of title. Finance Company finances a new
motor for the automobile, taking a security interest in the motor, and
perfects by filing a financing statement within 20 days of debtor
receiving the motor. Bank would have priority as to the motor.
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D. REMOVAL AND REIMBURSEMENT FOR PHYSICAL INJURY TO

THE WHOLE

A secured party may remove an accession from other goods if the security
interest in the accession has priority over the claims of every person having
an interest in the whole. The secured party removing the accession is
responsible for the cost of repair of any physical injury to the whole or the
other goods. A person entitled to reimbursement may refuse permission to
remove until the secured party gives adequate assurance for the
performance of the obligation to reimburse.

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