6 Step Analysis

1. Determine if the transaction is within the scope of Article 9
2. Classify the collateral
3. Determine if a security interest has been created, that is, has attachment occurred
4. Determine if the security interest has been properly perfected
5. Determine the persons who are making claims to the collateral
6. Apply proper priority rules and rules regarding repossession

Types of Transactions under Article 9

There are 5 types of transactions w/in the scope of Article 9:

• Collateralized Transactions
• Sales of Receivables
• Consignments
• Agricultural Liens created by statute
• Lease-Purchase Agreements

Art 9 - (1) Collateralized Transactions

Def - any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures

The property used as collateral may be:

• Already owned by the owner
• To be acquired with loan (PMSI)
• After-acquired

Art 9 - (2) Sales of Receivables

This includes the outright sale of:

• Accounts
• Chattel paper
• Payment intangibles, and
• Promissory notes

Art 9 - (3) Consignments

Def - a bailment by the owner/bailor/consignor under which the bailee/consignee has authority to sell

The consignor may be required to comply with Article 9 to gain protection over consignee's other creditors

Consignments which MUST comply with Article 9:

• Consigned goods are worth a total of $1,000 or more, and
• The consignor did NOT use the goods for personal, family or HH purposes, and
• Potentially deceptive consignee:
• Consignee deals with goods of that kind under a name other than the consignor's name,
• Consignee is NOT an auctioneer, and
• Consignee is NOT generally known by consignee's creditors to be substantially engaged in selling consigned goods

Art 9 - (4) Agricultural Liens Created by Statute

Def - nonpossessory liens on farm products such as crops and livestock created by state law in favor of a person who provides goods or services to a farmer

Art 9 - (5) Lease-Purchase Agreements

Article 9 does NOT cover true leases of personal property, but a lease which is actually an installment sale is covered

A lease is probably an installment sale if:

• Lessee cannot terminate the lease early, and
• Lease term is equal to or greater than remaining economic life of goods, or
• Lessee owns property at end of lease term, or
• Lessee has option to buy for nominal consideration at end of lease term

Collateral - Introduction

• Any particular item can ONLY be one type of collateral
• Classify collateral from debtor's perspective
• The principal use of the good is determinative

Collateral - Goods

Def - movable items and fixtures (at time security interest attaches) - not real property

Specific inclusions:

• Standing timber
• Growing crops
• Unborn young of animals

Specific Exclusions:

• Money
• Minerals before extraction (considered real property)
• Collateral that fits other categories

Collateral - Classification of Goods

Consumer Goods - personal, family or household purposes (clothes, cars, furniture, dishes, etc…)

Equipment - goods used for business purposes 

Includes goods bought for farming or a profession

Includes goods bought by a non-profit organization or a governmental agency

This is the default category

Inventory - includes:

Goods held for sale or lease in the ordinary course of business

Raw materials and work in progress

Consumed materials (pencils and legal pads at law firms)

Farm Products - two requirements must be satisfied:

In the possession of the farmer engaged in farming operations, and

In an unmanufactured condition

Examples:  crops, livestock

Collateral - Semi-Tangible and Intangible Collateral

Instruments - writings that represent money (notes and drafts)

Documents - writings that represent goods (warehouse receipt, bill of lading)

Chattel Paper - single writing or group of writings that represent 2 things:

Monetary obligation (promissory note), plus

Security interest in or lease of goods

Account - any right to the payment of money for goods sold or leased or for services rendered NOT evidences by an instrument or chattel paper

Deposit Accounts - accounts with a financial institution (checking and savings)

Investment Property - (stocks, bonds, mutual funds, brokerage accounts, etc…)

Commercial Tort Claims - business tort claims that do NOT involve personal injury (unfair competition)

General Intangibles - any other type of personal property, except money (copyrights, patents, goodwill, liquor license, etc…)

Collateral - Proceeds

Def - whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds

Note:  may include cash

Attachment - Introduction

Def - process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor does not pay

Attachment - Requirements (VCR)

3 elements of a valid attachment:

• Creditor gave value
• Contract (the security agreement)
• Debtor has rights in collateral

The elements of attachment may occur in any order

No attachment until ALL elements satisfied

Attachment - (1) Creditor Gave Value

Examples - creditor lends money or gives goods on credit

Attachment - (2) Contract

Methods of proving the security agreement (K):

• Oral - only if property in creditor's possession
• Authenticated Record - written/electronic w/ description that reasonably identfies the property
• Control - the right to sell or cash in the collateral w/o further action from the debtor

Attachment - (3) Debtor has Rights in the Collateral

• A debtor CANNOT give a security interest in property w/out having rights in the property such as ownership or identification to a contract

• Debtor cannot use another person's property as collateral w/out that person's permission

Attachment - After-Acquired Property

Using New Property as Collateral for Old Loan

• the debtor can agree that new acquisitions of property will serve as additional collateral for an old loan
• This situation is often referred to as a floating lien and is very common with inventory (need an after-acquired property clause)

Consumer Good Exception

• An after-acquired property clause will work only for consumer goods acquired with 10 days of the creditor giving value

Commercial Tort Claim Exception

• After-acquired property clauses will NOT work with commercial tort claims

Attachement - Future Advances

Debtor can agree that the collateral will serve as collateral for new loans, as well as the current loan (line of credit agreement)

Perfection - Introduction

Def - process by which the creditor protects the security interest from most other claimants to the same collateral

• Attachment
• Act of Perfection

Perfection - Acts That Consitute Perfection 

• Possession of collateral by creditor
• Filing of financing stmt by creditor
• Automatic permanent - attachment alone is sufficient
• Automatic temporary - attachment alone is sufficient for short period of time
• Control
• Notation of security interest on certificate of title

Pefrection - Perfecting by Possession

General rule - almost all collateral may be perfected by possession

Exceptions: (nothing physical to possess)

• Accounts
• Deposit accounts
• Nonnegotiable documents
• Electronic chattel paper
• General intangibles

Perfection - Loss of Possession

General rule - if the creditor no longer has possession of the collateral, perfection is LOST

Exception - 20 day exception for instruments, negotiable documents and certificated securities

Perfection - Perfecting by Filing a Financing Stmt

General rule - almost all collateral may be perfected by filing

• Exceptions: 
• Deposit accounts
• Money

Perfection - Requirements of a financing stmt

• Name of Debtor and Creditor
• Addresses of Debtor and Creditor --> exception - if financing stmt is accepted by filing office you do not need the address
• Debtor's authorization in an authenticated record - this is AUTOMATIC if the debtor authenticated the underlying security agmt
• - May be done after filing
• Description of the collateral - may be broad and after acquired property covered by the security agmt is automatically covered

Perfection - Errors in Financing stmt

Minor errors that are not seriously misleading are excused --> fact question as to whether they are seriously misleading

Perfection - Designation of Debtor in Financing Stmt

Note: This is KEY - this is how you file

• Individual = individual's name (use driver license)
• Registered organization = name under which it is organized
• Trade name is NOT sufficient, unless extremely similar to the debtor's name such that it would be discovered in a search of the SoS records

Perfection - Change in Debtor's Name

• Collateral debtor has at the time of the name change - perfection continues
• Collateral debtor obtains w/in 4 months of name change - perfection continues
• Collateral debtor obtains after 4 months of name change - perfection ends unless refiled under new name w/in the 4 month period

Perfection - Place to File Financing Stmt

• General rule - Secretary of State's office in Austin
• Exception - fixtures, minerals and timber to be cut --> county where mortgage on real estate would be filed

Perfection - Duration of Financing Stmt

• Effective for 5 years from the date of filing
• a recorded real property mortgage covering FIXTURES continues until the mortgage is released or satisfied
• Continuation stmt - to extend the effectiveness of filing, file a continuation stmt within 6 months of the expiration date
• cannot file early

Perfection - Termination Statement

Consumer goods - required to be filed in a timely manner, the earlier of:

• 20 days after the debtor's written demand OR
• 1 month after there is no outstanding secured obligation (no demand necessary)

Non-consumer goods - ONLY upon the debtor's request

• Creditor must provide the debtor with a termination stmt within 20 days of written demand and the debtor then has the responsibility to file the termination stmt

Perfection - Automatic Permanent Perfection

• PMSI in CONSUMER goods which are NOT certificate of title items or fixtures
• Assignment of insignificant amt of debtor's accounts
• Sale of promissory notes

Perfection - Automatic Temporary Perfection

Proceeds - automatically perfected for 20 days from the debtor's receipt of the proceeds

New value for instruments, negotiable documents, and certified securities - perfected for 20 days from the time of attachment if new value was given

Delivery of instrument, negotiable document or certificated securities to debtor for 20 days for sale, exchange or presentation of the collateral

- Get it back or perfection is GONE

Perfection - Perfection by Control

Def - the creditor has the right to sell or cash in the collateral w/o further action from debtor

• Investment property
• Nonconsumer deposit accounts
• Electronic chattel paper

Perfection - Perfection by Notation on Certificate of Title

• Motor vehicles
• Boats
• Manufactured homes

If these items are consumer goods or equipment = notation of security interest on certificate of title

If these items are inventory = file or take possession for perfection 

Perfection - Perfection rules for Proceeds

General rule - perfection continues for 20 days

Perfection will continue beyond 20 days when:

• Same office - original security interest is perfected by filing and a financing stmt covering the proceeds would be filed in the same place as the original collateral
• Identifiable cash proceeds
• Proceeds perfected within the 20 day period 

Perfection - Choice of law - Which state's UCC do we use to determine perfection

General rule - law of the state where the DEBTOR is located

• Individual - principal residence
• Registered organization = law of state where organized
• Unregistered organization - place of business, but if more than one place of business the chief executive office

Exceptions - file in the COLLATERAL's location

• Security interests perfected by possession
• Fixtures
• Timber
• Agricultural liens - law of state where the farm product covered by the lien is located

Other Exceptions

• Certificate of title items - law of state which issued most RECENT certificate of title
• Deposit accounts - law of state in which the bank has its chief executive office

Perfection - Choice of law: Debtor or Collateral change states

• General rule - if debtor moves, perfection continues for 4 months
• Perfection by possession continues as long as you are perfected under the new state's law
• Certificate of title items - perfection continues for as long as it would have under the original certificate of title

Priorities - Introduction

Priorities process: 

• Classify the persons claiming the collateral
• Determine who prevails

Subordination - competing parties may agree to a different priority order

Priorities - Secured v. Unsecured/General

Secured WINS - the perfected status of the secured creditor is irrelevant

Priorities - Unperfected secured v. unperfected secured

First to ATTACH wins

Priorities - Perfected secured v. Unperfected secured

Perfected WINS - even if the 2nd in time had knowledge of being second

Priorities - Perfected secured v. Perfected secured

General rule - first to either FILE OR PERFECT

We do NOT care about attachment, who had the first security interest, knowledge 

Priorities - 5 Exceptions

Exception if one creditor has PMSI in GOODS (not inventory or livestock)

PMSI prevails (even though 2nd) if it is perfected:

• At the time the debtor receives possession of the collateral OR
• Within 20 days of when the debtor received possession of the collateral

Exception if one creditor has PMSI in Inventory

PMSI prevails if:

• PMSI creditor perfected at time debtor receives possession of the inventory AND
• Authenticated notice to all creditors who have already filed with respect to the collateral.  Must contain:
• Explanation that the creditor is obtaining a PMSI in inventory
• Describe the collateral
• Be given BEFORE the debtor receives possession of inventory
• Notice is effective for 5 years for deliveries of the same type of collateral

Exception if one creditor has a PMSI in livestock - apply same rules as with inventory

Exception for deposit accounts - secured party with CONTROL wins

Exception for investment property - secured party with CONTROL wins

Prioritioes - Secured v. Donee

Collateral remains subject to the security interest in the donee's hands

Priorities - Secured Party v. Purchaser (Gen)

General rule - secured party wins

If debtor has permission to sell --> purchaser prevails

Priorities - Secured Party v. Purchaser (1)

If the secured party is Unperfected at the time of purchase

• General rule - Purchaser wins IF 
• (1) buyer gives value; 
• (2) buyer receives delivery of the item; and 
• (3) buyer has no knowledge of security interest at time of delivery
• PMSI exception - If PMSI creditor perfects within 20 days after debtor receives the collateral but after debtor sells collateral to purchaser - creditor will prevail over the "gap" purchaser.

Priorities - Secured Party v. Purchaser (2)

Buyer in the Ordinary Course of Business - BIOC can prevail even over a perfected creditor IF:

• Good faith (honesty in fact and observance of rzbl commercial standards)
• Without knowledge of security interest violation
• Purchase of goods that are NOT farm products
• Ordinary purchase (from a person in the business of selling goods of the kind)
• Security interest created by the seller
• Creditor not perfected by possession

Priorities - Secured Party v. Purchaser (3)

Garage Sale Rule (Consumer Purchase of Consumer Goods) Buyer Prevails If:

• Consumer goods in hands of seller
• Consumer goods in hands of buyer
• Buyer has NO knowledge of security interest
• Buyer pays value
• Creditor not perfected by possession
• Creditor's interest is UNFILED prior to purchase

Priorities - Secured Party v. Purchaser (4) 

Buyer NOT in ordinary course - Future Advances - the creditor gives more money to the debtor based on collateral that the debtor has already sold to a purchaser who does not qualify as a BIOC.  A non-BIOC can prevail over a secured creditor for future advances made AFTER the FIRST of these events occurs:

• Secured creditor obtains KNOWLEDGE of the purchase or
• 45 days have elapsed from the date of the purchase

Priorities - Secured Party v. Purchaser (5)

Holder in Due Course - will prevail over earlier perfected interest in a negotiable instrument

Priorities - Secured Creditor v. Lien Creditor

Def: General creditor who acquired judicial lien by a levy on the debtor's ppty (includes BK trustee)

• If secured creditor is UNPERFECTED at time lien attached - LIEN creditor prevails
• If secured creditor is PERFECTED at time lien attached - SECURED creditor prevails

PMSI exception - If PMSI creditor perfects by filing within 20 days after debtor receives the collateral but after debtor sells collateral to purchaser - creditor will defeat lien creditor who obtained their lien in the gap period

Future advances - The secured creditor will lose priority to a lien creditor for future advances after both of the following 2 things occur:

(1) The secured creditor obtains KNOWLEDGE of the lien; and

(2) 45 days elapsed from the date of the lien

Priorities - Secured Creditor v. Statutory Mechanic's Lien

Statutory lien PREVAILS if:

• Person furnished services or materials with respect to the goods covered by the sec interest
• Furnishing was done in the ord course of business
• Collateral is in the possession of the statutory lien holder

Priorities - Proceeds

Priority is the SAME as the priority in the original collateral AS LONG AS the sec interest in the proceeds is perfected

Priorities - Fixtures - Sec Party v. Holder of Real Ppty Mortgage

Secured party may win if:

• Perfected BEFORE real estate interest recorded AND
• Perfected with a FIXTURE filing - 
• (1) describes the real ppty and 
• (2) filed in the office where a mortgage on the real ppty would be recorded

PMSI exception - PMSI creditor, even though perfected after real ppty interest is of record, can prevail if: 

• PMSI creditor perfected by fixture filing
• Perfected within 20 days of good becoming a fixture
• Competing real estate interest is NOT a construction mortgage (the loan which enabled the whole building process to begin and thus is NOT defeated by a later PMSI)

Readily removable collateral - will be treated as a regular good and may be perfected WITHOUT a fixture filing

Judicial lien - a SI in fixtures that is perfected in ANY manner prevails over a later-acquired judicial lien EVEN IF the perfection was not done via a fixture filing

Priorities - Crops 

A perfected SI in crops has priority over a conflicting interest in the land on which the crops are growing.  It does not matter who filed or perfected first.

Remedies - Repossession

Can repossess without judicial process but CANNOT breach the peace (can't break into someone's ppty, can't be violent or threaten violence, can't dress up like a police man and carry a gun)

Creditor can't delegate duty not to breach the peace 

After Foreclosure: Creditor can

(1) sell collateral or

(2) strict foreclosure

Remedies - Sell Collateral (1)

Notice of Sale

General rule - must have notice 

Exceptions - when you DON'T need notice

• Perishable collateral
• Collateral threatening to decline speedily in value
• Collateral is customarily sold on a recognized market

Remedies - Sell Collateral (2)

Content of notice

• Describe debtor and secured party
• Describe collateral
• Method of sale (public or private)
• Stmt that debtor is entitled to an accounting and the charge, if any
• Time and place of public sale; time after which a private sale will be made
• If the collateral is consumer goods, notice must also:
• Explain that debtor liable for deficiency
• Telephone no. of person from whom debtor can obtain amount needed to redeem the collateral
• Telephone no. or address from which debtor can get additional info about the sale

Timeliness - notice must be sent a rzbl amount of time before the sale (in a nonconsumer transaction - 10 days or more is considered rzbl)

Remedies - Sell Collateral (3)

Who Receives Notice

• Debtor - unless debtor has waived notice in an authenticated agmt AFTER default (thus, waiver in a SA won't work)
• Sureties
• If collateral not consumer goods - notice to creditors who have perfected by filing, notation on COT, or who have given notice to reselling creditor

Debtor's Right to Redeem

Debtor has the right to cure the default and regain the collateral if

(1) creditor has not yet sold or entered into a K to sell;

(2) strict foreclosure has not yet occurred;

(3) debtor has not waived the right to redeem after default;

(4) debtor must tender fulfillment of ALL obligations;

(5) debtor must tender creditor's rzbl expenses

Remedies - Standard of care

Commercially rzbl - this is a fact question with the BOP on the creditor to show commercial rzblness of the sale

Remedies - Ability of creditor to purchase at resale

Public sale (auction) - yes

Private sale - only if:

(1) collateral is customarily sold in a recognized mkt OR

(2) collateral is subject to widely distributed std price quotes

Remedies - Title of Purchaser at Resale

Remedies - Application of resale proceeds

• Rzbl expenses of reselling creditor
• Satisfaction of debt
• Satisfaction of subordinate creditors
• Surplus, if any, to debtor

Remedies - Penalty for not complying with Resale Requirements

• Creditor liable for ACTUAL damages
• Consumer goods - the creditor is automatically liable for amt = to finance charge + 10% of the principal
• In CONSUMER transactions - it is an absolute bar to recovery of deficiency
• In NONCONSUMER transactions - there is a rebuttable presumption that value of collateral was = to amt of debt

Remedies - If collateral accounts or instruments

The creditor directs the obligor to make pmts directly to the creditor, rather than to the debtor

Strict FC - Creditor retains collateral

The creditor may retain the collateral in TOTAL satisfaction of the debt (in non-consumer transactions - the creditor may retain the collateral in total or partial satisfaction of the debt)

Strict FC - Requirements

Debtor consents

• Express - debtor agrees in an authenticated record made after default OR
• Implied - debtor fails to object to the creditor's proposal to strict foreclosure within 20 days of when creditor sent notice

Creditor sends authenticated notice to retain collateral to

• Debtor - unless the debtor has waived notice in an authenticated agmt made after default
• If collateral not consumer goods - notice to creditors who have perfected by filing, notation on COT, or who have given notice to reselling creditor

No timely objection 

• If the debtor or another creditor objects in writing within 20 days - the creditor may NOT keep the collateral and must conduct a resale

Strict FC - Exception for High Equity

Debtor has paid 60% of the price - Consumer good - resale necessary within 90 days of repossession