Perfection: Other Methods. Assignment 19 Perfection: Exceptions to the Article 9 Filing Requirement. Problem 19.1(a): Cash

Assignment 19

Perfection: Exceptions to the

Article 9 Filing Requirement

Reference: Understanding Secured

Transactions §§ 1.04, 6.01, 6.02,

6.03, 6.04, 7.01, 7.02

Perfection: Other Methods

required) in certain circumstances include:

– Automatic perfection (PMSI in consumer goods) – Compliance with certificate of title statute (titled goods) – Possession (money, tangible goods, indispensable paper) – Perfection by “control” (deposit accounts, investment

property)

Problem 19.1(a). How could Secured Party

perfect as to cash in the cash registers of a

debtor that operates stadium concessions?

A. Only by filing a UCC-1

covering the cash

B. Only by taking possession of

the cash

C. Either A or B is sufficient

D. Both A and B are required

Only  by filin g a UC C‐1 cov ... On ly by ta king posses

sion... Either A or

 B is suffi cien

t Both

 A and  B are require

d

0% 0% 0% 0%

Problem 19.1(a): Cash

• Except where money is cash proceeds of other collateral, a security interest in money can be perfected only by possession (not by filing)

– § 9-312(b)(3) requires SI in money to be perfected by possession (filing ineffective)

Problem 19.1(c). How could Secured Party

perfect as to money the debtor is keeping in

a bank account?

A. Only by filing a UCC-1

covering the bank account

B. Only by taking control of the

bank account

C. Either A or B is sufficient

D. Both A and B are required

By  filing a UC C‐1 covering... By ta king co ntrol of th e ... Both A an

d B are sufficient Both

 A and  B are required

0% 0% 0% 0%

Problem 19.1: SI in Deposit Account

UCC-1 filing is not effective [§ 9-312(b)(1)] • Secured party has “control” if [§ 9-104(a)]:

– (1) Secured party is the bank at which the deposit account in question is maintained, or

– (2) Debtor, secured party, and bank enter agreement that bank will comply with secured party’s instructions regarding payment of funds from the account, or – (3) Secured party is the bank’s customer on the deposit

account in question

• Secured party can have “control” even if debtor still has the right to withdraw funds [§ 9-104(b)]

Control: Priority Concern

• Perfection by “control” is sufficient to perfect SI in the deposit account (and the funds in it at any point in time), but

• A transferee of funds from a deposit account takes the funds free of a perfected SI in the deposit account, unless the transferee acts in collusion with the debtor in violating the rights of the secured party [§ 9-332(b)]

Payment Rights as Collateral: Hypo

• For customers who can’t pay cash, retail and wholesale sellers typically sell goods 3 ways

– To some, Seller sells on “account” (buyer’s unsecured promise to pay within a certain time)

– To some, Seller has Buyer sign an “instrument” (buyer promises to pay, as evidenced by promissory note signed by Buyer)

§ 9-102(a)(47). “Instrument” means a negotiable

instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.

§ 9-102(a)(11). “Chattel paper” means a record or records

that evidence both a monetary obligation and a security interest in specific goods [or] … a lease of specific goods ….”

§ 9-102(a)(2). “Account” … means a right to payment of

a monetary obligation … for property that has been or is to be sold … [or] for services rendered or to be rendered.”

Payment Rights as Collateral: Hypo

• If Seller sells all of its goods in exchange for future payment rights, it can create “cash flow” difficulty

– Seller needs $$ now to pay its employees, utilities, buy new inventory, etc.

• Seller can obtain necessary financing by:

– Selling its rights to payment from its customers (in exchange for cash), or

– Borrowing money, using its rights to payment from its customers as collateral

• Suppose Bank loans Uphoff’s Used Cars $500,000, and takes a SI in all of Uphoff’s chattel paper (i.e., installment contracts signed by car buyers)

• Uphoff’s later defaults. How does the Bank go about enforcing its security interest?

– Bank could sell all of the contracts in a commercially reasonable foreclosure sale [§ 9-610]

– Instead, Bank could start collecting the payments due under the installment contracts from the customers, who are “account debtors” [“account debtor” is a “person obligated on an account, chattel paper, or a general intangible,” § 9-102(a)(3)]

• Bank would enforce by “collection” by giving notice to Uphoff’s customers (account debtors) to make their payments directly to Bank [§ 9-607(a)] • After getting notice, a customer could satisfy its

obligation under the contract only by paying Bank [§ 9-406(a)]

– “Double payment” risk if a customer gets notice and nevertheless makes its payment to Uphoff’s

• Could Bank repossess the cars?

Problem 19.1(e). How could Secured Party

perfect its SI in the payment obligations of

car buyers, evidenced by chattel paper?

A. Only by filing a UCC-1

covering “chattel paper”

B. Only by taking possession of

the contract (chattel paper)

C. Either A or B is sufficient

0% 0% 0%

• SI in “chattel paper” can be perfected either by a filing covering the chattel paper [§ 9-312(a)] or by taking possession of the chattel paper (i.e., taking possession of each contract) [§ 9-313(a)] • But Secured Party should take possession,

because chattel paper is “quasi-negotiable”

– If it leaves Debtor in possession of chattel paper, Debtor could assign it to a 3rd_{party, for value, who}

could take possession of it and then take free of Secured Party’s conflicting SI that was perfected only by a UCC-1 filing [§§ 9-330(a), 9-330(b)]

Problem 19.2(a)

• Casa Grande loans $300K to Ruth/Gene Canard • Collateral: the right of the Canards to be paid a

total of $500,000 in annual installments by Watson Family Restaurants, Inc. (Watson), under a contract entitled “Contract for

Payment,” entered by Watson when it purchased the Canards’ “Turkey Burger” franchise

– “Contract” didn’t grant Canards a SI in the franchise or any other assets sold to Watson

Problem 19.2. How would you

correctly classify the collateral (i.e., the

right to be paid under the “Contract for

Payment”)?

A. It is an “account”

B. It is “chattel paper”

C. It is an “instrument”

D. Need more information

l paper ” It is an “instrumen

t” Need mo re informat

ion

• Contract is not “chattel paper” [§ 9-102(a)(11)]; a franchise is not “goods,” and the contract did not create a SI in specific goods

• Contract is an “instrument” [§ 9-102(a)(47)] if it:

– Evidences right to payment of a monetary obligation, – Is not itself a security agreement or a lease, and – Is of a type ordinarily “transferred by delivery with any

necessary indorsement or assignment”

• If not an instrument, it is an “account” (“right to payment of a monetary obligation ... for property that has been or is to be sold”) [§ 9-102(a)(2)]

Account v. Instrument

• Instrument (e.g., promissory note or a check) is said to “embody” the obligation it reflects

– Possession of instrument is customarily viewed as being sufficient to give the possessor the ability to enforce the obligation

– Instrument is thus transferred by “endorsement” and delivery of possession

• “Account” is purely intangible, and is not “embodied” in any specific document(s)

– Mere possession of an invoice would not customarily give possessor the ability to collect the account

• If the “Contract” is an “account,” Casa Grande can perfect its SI only by filing [§ 9-310(a)]

• If the “Contract” is an “instrument,” Casa Grande can perfect by filing [§ 9-312(a)] or possession [§ 9-313(a)]

– But, if it perfects only by filing, Casa Grande risks losing its priority to a purchaser of the instrument – A “good faith purchaser” of an instrument will take

priority over SI in that same instrument that is perfected other than by possession [§ 9-330(d)] – Rationale: “instrument” is “negotiable” collateral

(possession = ability to deliver good title)

§ 9-330. Priority of Purchaser of Chattel Paper

or Instrument.

(a) [Omitted]

(b) [Omitted]

(c) [Omitted]

Problem 19.2

• If it isn’t clear whether the “Contract” is an “instrument” or an “account,” Casa Grande should

– File a UCC-1 (in case a court later says it is an “account”), and

– Take possession of it (to prevent its later

negotiation to a 3d party)

Problem 19.3

• Casa Grande plans to loan $300K to the Canards, to be secured by their right to payment under a $500,000 promissory note, payable by Watson

– Problem: the promissory note is currently in the possession of Garp, who has a prior SI in the note (the Canards owe $60,000 to Garp)

– Casa Grande is willing to be 2d in priority, but it doesn’t want to be unsecured. How should it act?

• Casa Grande can perfect by filing?

– Yes [§ 9-312(a)], but this is risky

– If the Canards later repaid Garp, and Garp returned the note to Canards, then the Canards would have possession of the note and could transfer the note to a BFP who would take free of Casa Grande’s SI [§ 9-330(d)]

• Garp probably won’t agree to turn over the note to Casa Grande, because it would then face the same possible risk

• Solution: have Garp be as “bailee” holding the note on behalf of Casa Grande, too [§ 9-313(a), 9-313(c)]

§ 9-313(c). [Collateral in possession of persons other than debtor.] With respect to collateral other than

certificated securities and goods covered by a document, a secured party takes possession of collateral in the

possession of a person other than the debtor, the secured party, or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business, when:

(1) the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit; or

Problem 19.3

• Problem: Garp has no legal obligation to agree to serve as Casa Grande’s bailee [§ 9-313(f)]

• So what should Casa Grande do if Garp refuses?

– Pay Garp an acceptable price to serve as its agent – Agree to hold the note for Garp’s benefit

– 3d party escrow agent could hold it for benefit of both – Loan Canards $60K more, have Canards pay off debt to

Garp, which then must return the note, then take possession of the note)

Problem 19.4

• Kettering needs to borrow money from Silverado • As collateral, Kettering plans to use the following

property:

– A mobile home (not covered by a title certificate) – Rare books (on display at Library of Congress) – A Mercedes auto

– A gold ingot and loose diamonds

– Computer equipment (in Kettering’s office)

If a search shows no UCC-1 filings

covering these assets under the name

“Kettering,” can Silverado be assured

of having first priority?

A. Yes; any conflicting SI in

these items would be

unperfected

B. No

y conf licting SI in

 ... No

0% 0%

PMSIs in Consumer Goods

• PMSI in consumer goods is automatically

perfected upon attachment (no filing necessary) [§ 9-309(1)]. Rationale:

– High volume of filings regarding consumer goods collateral would clutter the filing system

Purchase Money Security Interests

• SI in goods is purchase money SI if goods are “purchase money collateral” [§ 9-103(b)(1)] • Goods are “purchase money collateral” if they

secure a “purchase money obligation” with respect to the collateral [§ 9-103(a)(1)] • “Purchase money obligation” is one:

– Incurred to seller as all/part of the price of the collateral, or

– Incurred to lender in exchange for value given to enable the debtor to acquire the collateral (and debtor actually so uses it) [§ 9-103(a)(2)]

Problem 19.4

• Automatically perfected PMSI could exist vs. (a) mobile home, (b) books, and (d) gold/diamonds

– Silverado must investigate whether debtor acquired these assets for personal, household, or family purposes

– Silverado must also ascertain whether debtor incurred a “purchase money obligation” to acquire these assets

• Automatically perfected PMSI could exist in (e) computer, but only if it was “consumer goods” at the time Kettering bought it

Problem 19.4

• Automatically perfected PMSI would not exist vs. the Mercedes auto

– Can perfect SI in a titled vehicle only by compliance with title certificate statute [§§ 9-309(1), 9-311(a)] – Silverado would have

to look to the title certificate for evidence of prior liens

Problem 19.6

• Janet plans to borrow $100K from Will

– As collateral, she wants to grant Will a SI in her rights as plaintiff in Dakin v. Hershey (a lawsuit against her financial adviser for negligence in managing her investment portfolio)

Lawsuits as Collateral

• Lawsuit based on breach of contract claim is a “general intangible” [§ 9-102(a)(42)]

– Perfection by filing is required [§ 9-310(a)]

• Article 9 allows a “commercial tort claim” [§ 9-102(a)(13)] to serve as collateral

– SI perfected by filing [§ 9-310(a)]

– Problem: “commercial tort claim” must arise in course of claimant’s business or profession, and Janet’s claim appears to be personal

Liens on Personal Tort Claims

• Article 9 does not apply to assignment of noncommercial tort claims [§ 9-109(d)(12)] • Janet could assign a noncommercial tort claim

under other state law (other than Article 9), if

applicable state law permits her to do so (e.g.,

Bluxome Street Associates, p. 339)

– Note, however: Missouri law does not permit