Secured Transactions Under the Uniform Commercial Code and International Commerce

Preface xxi

Table of Cases xxiii

Table of Authorities xxvii

Table of UCC Citations xxxv
CHAPTER 1 INTRODUCTION 1

  A. The Common Law World Without a System for Recording Personal Property
EncumbrancesLimitations on Capital Formation  2

1. Cash, Unsecured and Secured Credit 2

2. Possessory Security Interest RequirementLimitations on Capital
FormationPro of Ostensible Ownership 

Clow v. Woods 4

Notes & Questions 6

3. Evolution of Security DevicesFrom Common Law Pledge to Non-Possessory
Security Interests; From Tangibles to Intangibles 7

Walter D. Malcolm, The Uniform Commercial Code as Enacted in Massachusetts, 13 Bus. 490 (1958) 7

Note 9

Problem 1-1: Pledge 9

Problem 1-2: Chattel Mortgage 9

Problem 1-3: Conditional Sale; Purchase Money Security Interest 10

4. More on Distinguishing Chattel Mortgages and Conditional Sales 10

Pacific Metal Company v. Joslin 10

Notes & Questions 12

Problem 1-4: Floating Lien in Inventory 12

Problem 1-5: Floating Lien in Accounts


B. Introduction to Article 9 of the Uniform Commercial Code 12

Note on Other Forms of "Credit Enhancement: 15

C. Generating Working Capital By Creation of an Attached and
Enforceable Security InterestIntroducing Samuel Clemens 16

1. Alternative Sources of Financing 16

Problem 1-6: Options When Raising Working Capital 16

P. Hunt, C. Williams & G. Donaldson, Basic Business Finance: A Text 112 (1974) 16

Table 1: Major Sources of Funds for American Business 17

2. Remedies of the Unsecured Creditor 18

Problem 1-7: Remedies of the Unsecured Creditor 18

Problem 1-8: Why a Security Interest? 19

3. Why Creditors Prefer a Secured Transaction 19

Heywood Fleising,  Secured Transactions: The Power of Collateral, 33 Fin. & Dev. 44 (1996) 19

P. Hunt, C. Williams & G. Donaldson, Basic Business Finance: A Text (1974) 24




CHAPTER 2 ATTACHED AND ENFORCEABLE SECURITY INTERESTS 27
A. Setting up a Secured Loan Transaction 29
 

 
1. Documenting a Secured Transaction 29
 

 Document AModel Demand Note 30

 Document BModel Loan Security Agreement 31

 Document CModel Financing Statement 34 
 
 
2. Demand Promissory Notes 35
 
 
 

B. General Scope of Article 9 37

 

 
Problem 2-1 37
 
1. Inclusion 37
 

 
In re Marhoefer Packing Company, Inc. 38

 Notes and Questions 44

 The National Shawmut Bank of Boston v. New Amsterdam Casualty Co., Inc. 45

 Notes and Questions 49

 General Insurance Company of America v. Lowry 49

 Notes and Questions 49

 In re Zwagerman  52

 Notes and Questions 61

 Note on Types of Article 9 Personal Property 61

 (1) Tangible collateral 62

 (2) Semi-intangible collateral 62

 (1) Intangible collateral 62
 
 
 
2. Exclusion 63
 
 

C. Expansion of Scope of Article 9New and Modified Types of Collateral 65


1. Commercial Tort Claims 65
 

 
Problem 2-2: Tort Claims as Collateral 65
 
 
2. Deposit Accounts 66
 

 
Problem 2-3: Deposit Account as Collateral 66
 
 
3. More on New and Modified Types of Collateral 66
 

 
a. Electronic Chattel Paper 67

 b. Health-Care-Insurance Receivable 67

 c. Letter-of-Credit Rights 67

 d. Account 68

 e. General Intangibles 68

 f. Instruments 69

 g. Investment Property 69
 
 
4. Security Interests in Software and Other Intellectual Property Rights 69

 

D. Requirements for Attachment and Enforcement of Security
Transactions 72

 

 
Problem 2-4(a): Oral Security Agreement"NonPossessory" Security Interest 72

 Problem 2-4(b): Signed Security Agreement 73

 Problem 2-4(c): Real Estate Mortgage 73

 Problem 2-4(d): Fixture 73

 Problem 2-5: Oral Pledge Agreement"Possessory" Security Interest 73

 Problem 2-6: Control Over a Security Entitlement 74

 Problem 2-7: Value 74

 Note on "Rights in the Collateral" 74

 Problem 2-8: Rights in Collateral, Equipment Collateral 75
 

E. Is a Separate Security Agreement Required?Conflicting Case Law 76

 

 
1. Separate Security Agreement Required 76
 

 
American Card Company v. H.M.H. Co. 76

 Notes and Questions 78
 

 
1. Holding of American Card

 2. Should Drafters Have the Last Word? 79

 2. (Composite Document)
 
 
In re Amex-Protein Development Corporation 79

 Notes and Questions 86
 
 

 
1. Holding of Amex-Protein 86

 2. Proceeds 86

 3. Summing Up 86
 
 
 
 


F. Drafting ExerciseSecurity Agreement 88

 

 
Problem 2-9: Sample Security Agreement 88

 Problem 2-10: Use of Forms 88
 

 
1. Ethical Concerns 88

 2. Adapting Forms to the Client's Needs 90
 
 
In re Product Design and Fabrication, Inc. 90

 Notes & Questions 94

 

 1. Bankruptcy Aspects of this Case in a Nutshell 94

 2. Financing StatementForm UCC-"Perfection" 95

 3. Statute of Frauds Function 95

 4. Proceeds 95
 
 
G. More on Attached and Enforceable Security Interests 96

 

 
1. After-Acquired property 96
 

 
Problem 2-11:After-Acquired Property 96
 
 
 2. Future Advances 96
 

 
Problem 2-12: Future Advances 96
 
 3. Multiple State Transactions 97

 4. Different Requirements for Descriptions of Collateral in Security Agreements and Financing Statements 98

 5. Security Agreement: Description of Collateral 101
 

 
Problem 2-13: Description of Collateral 101
 
 6. Time of Attachment and Enforceability
 

 
Problem 2-14: Time of Attachment and Enforceability 101
 
 7. Personal Property Lease 101

 8. Fixtures 102

 

 Problem 2-15: Fixtures 102

 
 9. "Accounts receivable"; Proceeds 102
 

 
Problem 2-16; Accounts Receivable; Proceeds 102
 
 10. Motor Vehicle103
 

 
Problem 2-17: Motor Vehicles 103
 
 
 

CHAPTER 3 DEFAULT, REPOSSESSION, AND DISPOSITION 105

A. DefaultCumulative and Simultaneous Remedies 109
 

 
Spillers v. First National Bank of Arenzville 109

 Notes & Questions 111
 

 
1. Definition of DefaultDrafting Default Provisions 111

 2. Legal Alternatives on Default: More on Cumulative and Simultaneous Remedies 112

 3. Practical Considerations: The Business Workout 112

 4. Judgment or Cognovit Notes 113
 
 
Prototype Transaction: A Diversion

 Problem 3-1: Other Security Interests 115

 Problem 3-2: Insurance 115

 Problem 3-3: Change of Location of Collateral 116

 Problem 3-4: Disposition of Collateral 116

 Problem 3-5: Change in Debtor 116

 Problem 3-6: Options Upon Default 116
 

B. RepossessionBreach of the Peace and Other Limitations on Self-Help Repossession 117

 

 
Stone Machinery v. Kessler

 Notes & Questions
 

 
1. Repossession of Court Action 121

 2. Breach of the Peace 122

 3. Debtor's Criminal Liability 122

 4. Constitutionality of Self-Help Repossession 122
 
 
Problem 3-7: Repossession Procedure 123

 Problem 3-8: Enforcing Accounts Following Default 124

 Note: Collection Rights Upon Default 124

 Problem 3-9: Good Faith 126
 
 
 
C. Disposition Following Repossession 127

 

 
Problem 3-10: Compulsory Disposition of Collateral 127

 Problem 3-11: Redemption of the Collateral 127

 1. Notice of Disposition
 

 
Problem 3-12: Notice of Disposition 128

 Problem 3-13: Notice of Disposition 128
 
 2. Notice of DispositionDamages for Negligence 129
 

 
Spillers v. First National Bank of Arenzville 129

 Notes and Questions

 Policy vs. Strict Construction 132

 Hall v. Owen County State Bank 132

 Notes & Questions 132
 

 
1. Sending or Receiving Notices 138

 2. To Whom Must Notice Be Given?
 
 
 
 
D. Commercially Reasonable Disposition 139

 

 
Problem 3-14: Commercially Reasonable Disposition 139

 Hall v. Owen County State Bank 139

 1. Rules for Recovery of Deficiency or Surplus(Absolute Bar) and (Rebuttable Presumption) 145
 

 
Problem 3-15: Applicable Law 145
 
 2. Disposition of Proceeds and Priorities Following Foreclosure 146
 
 
CHAPTER 4 PERFECTION AND PRIORITY 149

A. PerfectionOverview 152

B. Methods of Perfections 155
 

 
1. Perfection by Filing 155

 2. Perfection by Possession of the Collateral
 

 
Problem 4-1: Perfection by PossessionPriority Over Unperfected Security Interest 156

 Problem 4-2: Perfection by Possession; Priority in Bankruptcy; Perfected v. Unperfected Security Interest 156
 
 
3. Automatic Perfection
 

 
Problem 4-3: Priority by Automatic Perfection 157
 
 
4. Perfection by (Control) of the Collateral 157
 

 
Problem 4-4: Perfection by ControlDeposit Account as Collateral 158
 
 

C. Required Filings and Exceptions 159
 

 
General Outline of Perfection Requirements and Procedures 161
 

D. Priorities  162
 

 
1. Overview 162
 
2. Types of Third Party Claimants 164
 

 
a. An Unsecured Creditor v. Debtor 164

 b. Judgment Creditor v. Debtor 164 

 c. Lien Creditor v. Unperfected Security Interest 164
 

 
Problem 4-5: Lien Creditor vs. Unperfected Security Interest 164
 
 d. Debtor's Trustee in BankruptcyPriority v. Unperfected Security Interest 165
 

 
Problem 4-6: Trustee in Bankruptcy v. Unperfected Security Interest 165
 
 e. Creditor with a Lien that Arises by Operation of Law 166
 

 
Problem 4-7: Repairman's Lien v. Perfected Security Interest 166

 In re N-REN Corporation v. Oklahoma Natural Gas Company 166

 Notes and Questions
 
 f. First to File or Perfect Rule 170
 

 
In re Smith 170

 Problem 4-8: Filing of financing Statement Preceding Perfection 174
 
 
 g. Buyer of Collateral Out of Inventory 174
 

 
Problem 4-9: Priority of a Buyer in Ordinary Course with Knowledge 75
 
 h. "Consumer Buyer of Ordinary Goods" 175
 

 
Problem 4-10: Seller and Buyer of "Consumer Goods"Priority Requirements 176
 
 
 
 
E. Where to File 177

 

 
1. Conflicts of Law 177
 

 
a. Introduction to Multistate Transactions 177

 b. Multistate Secured Transactions under Revised Article 9 178
 
 
Schematic Outline
 

 
General Rule 178

 Possessory Security InterestsLocation of Collateral 178

 Fixture FilingsLocation of Goods 178

 Timber to be CutLocation of Timber 178

 Collateral to be ExtractedLocation of the Wellhead or Minehead 178

 Other Exceptions to the "Location of Debtor" General Rule 178

 Note on Priority of Non-Possessory Tangible and Semi-Tangible Security Interests 179

 Problem 4-ll(a): Non-Possessory Security Interests Which State Do I File In?Conflicts of Law Issues 179

 Problem 4-11(b): Possessory Security InterestConflicts of Law Issues 179
 
 
2. Which Registry to File In 179
 

 
Problem 4-12: Place of Filing a Financing Statement 180

 Problem 4-13: Movement Within the State 180
 
 

F. What to File 181

 

 
1. Contents of Financing Statement 181
 

 
Problem 4-14: Contents of Financing Statement 181

 Problem 4-15: Effectiveness of a Financing Statement 181

 Problem 4-16: Minor Errors in Financing Statement 181

 Problem 4-17: Trade Name in Financing Statement 181

 Problem 4-18: Change in Form of Debtor: Partnership 182

 Problem 4-19: Change in Form of Debtor: Corporation 182

 Problem 4-20: Further Information 182
 
 
 
2. Procedure for Continuing Perfected Status in Proceeds 182
 

 
Problem 4-21: Perfected Security Interest in Proceeds 182

 Note on Security Interest in Proceeds 183

 Notes and Questions 183

 

 
1. Perfecting Security Interests in Motor Vehicles: Certificates of Title 183

 2. Analyzing Priority Between Competing Claims to Collateral 184

 3. Assets Subject to a Certificate-of-Title Law 185
 
 
Problem 4-22: Secured Party v. Lien Creditor 187

 Problem 4-23: Secured Party v. Trustee in Bankruptcy 187

 Problem 4-24: Secured Party v. Buyer 188

 Problem 4-25: Secured Party v. Secured Party 188

 Problem 4-26: Chattel Paper PracticesConditional Sales Contracts 188

 Problem 4-27: Chattel PaperLease of Specific Goods 188

 Problem 4-28: PMSI in Inventory Goods 189

 Problem 4-29: PMSI in Non-Inventory Goods 189
 
 
 
G. Fixtures, Accessions, and Commingled Goods 190
 
 

 
1. Fixtures 190
 

 
a. Holders of Security Interests in Fixtures Versus Owners or Mortgagees of Real
 Estate Whose Interest Extends to Fixtures 190

 b. Attachment to the Property 190
 

 
In re Flores De New Mexico, Inc. 191

 Notes and Questions 193
 
 
c. Perfection of a Security Interest in Fixtures"Fixtures
 Filing" 194
 

 
Fixture Filing Concept 194
 
 
d. Priority Issues 195
 

 
i. General Priority of Real Estate Interest 195

 Problem 4-30: General Priority of Real Estate Interest 195

 ii. Purchase of Money Security Interest in Fixtures20 Day Grace Period 195

 Problem 4-31: Purchase Money Security Interest Rule 195

 iii. Readily Removable Factory or Office Machines or Readily Removable Replacements of
 Domestic Appliances"Perfection by Any Method"
 196

 Problem 4-32: Readily Removable Factory and Office Machines 196

 iv. Liens on Real Estate Obtained by Legal or Equitable
 Proceedings 196

 Problem 4-33: Liens Creditors, Including Bankruptcy Trustees 197

 v. Consent of the Owner or Encumbrancer to an Interest in
 Fixtures; Debtor's Right to Remove Fixtures 197

 Problem 4-34: Debtor's Right to Remove Fixtures 97

 vi. Construction Mortgagee's Priority Over Purchase Money
 Security Interest 197

 Problem 4-35: Priority of Construction Mortgage over Purchase
 Money Security Interest 198

 vii. Liability for Damage to Real Estate 198
 
 
 
2. Accessions 198
 

 
Paccar Financial Corp. v. Les Schwab Tire
 Centers of Montana, Inc. 199
 
 
3. Commingled Goods 203
 

 Problem 4-36: Priorities in Commingled or Processed Goods 203
 
 

CHAPTER 5 THE EFFECTS OF BANKRUPTCY 205

A. Bankruptcy Generally 206
B. The Automatic Stay 208
 

 
Problem 5-1 208
 
C. Avoidance PowersThe Trustee as Hypothetical Lien
Creditor (The "Strong-Arm" Clause) 111
 

 
Problem 5-2 211
 

D. Avoidance PowersPreferential Transfers 212

 

 
1. Preferential Transfers Generally 212
 

 
a. The Transfer Must be Made to for for the Benefit of a Creditor 212

 b. The Transfer Must Be Made for or on Account of an Antecedent Debt 213

 c. The Debtor Must Have Been Insolvent at the Time of the Transfer 213

 d. The Transfer Must Take Place Within 90 Days Prior to the Filing of
 the Bankruptcy Petition (or Within One Year Prior to Filing if the
 Creditor is an "Insider") 213

 e. The Transfer Must Not Place the Creditor in a Better Position Than It
 Would Have Occupid Had the Transfer Not Occurred and Had the Creditor
 Asserted Its Claim in a Chapter 7 Liquidation Proceeding 214

 Problem 5-3 214
 
 
2. Time of the Transfer 215
 

 
Problem 5-4 215
 
 
3. Exceptions to the Trustee's Power to Avoid PreferencesFloating
 Liens on Inventory and Receivables 218
 

 
Problem 5-6 220
 
 
4. Exceptions to the Trustee's Power to Avoid PreferencesFloating
 Liens on Inventory and Receivables 218
 

 
Problem 5-6 220
 
 

E. Other Effects of Bankruptcy 222






CHAPTER 6 INTRODUCTION TO INTERNATIONAL SECURED TRANSACTIONS 223

A. Harmonization Through Treaties an Domestic Laws 224
 

 
Ronald C.C. Cuming, Overview of the Convention on International Interests in Mobile Equipment, 2001 228
 

B. Comparison of the Scope of the Convention on International Interests in Mobile Equipment
(Hereafter CIIME) and UCC
Article 9 238

 

 
Problem 6-1: Applicability to "Functional"
 Security Interests 238

 Problem 6-2: Applicability to Conditional Sales Contracts 239

 Problem 6-3: Applicability to True Leases and "Leases" Which
 Actually Create a Security Interest 239

 Problem 6-4: Applicability to Sales 239

 Problem 6-5: Types of Personal Property Covered 240

 Problem 6-6: Differences in Coverage 240
 
 

C. Territorial Applicability, Filing and Priority Under the
CIIME and the Aircraft Equipment Protocol 241

 

 
Problem 6-7: Territorial Applicability of CIIMEFiling
 RequirementPriority Issues 241

 Problem 6-8: Territorial ApplicabilityDebtor and Creditor in the Same
 State 241

 Problem 6-9: Applicability Limited to Mobile Equipment 241
 
 
D. Compliance With the Federal Aviation Act or the CIIME Aircraft Protocol System?
242

 

 
Sanders v. M.D. Aircraft Sales, Inc. 242
 
 
 
 
Appendix 1 Detailed Model Security Agreement 245



Appendix 2 Convention on International Interests in Mobile Equipment 253



Appendix 3 Protocol to the UNIDROIT Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 285