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Secured Transactions Under the Uniform Commercial Code and International Commerce, Second Edition (2011)

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Secured Transactions Under the Uniform Commercial Code and International Commerce presents a clear and concise guide through the law of security interests included in Article 9 and Article 1. Students benefit from the user-friendly problems exploring each issue, illustrating in a concise way how the Code applies to transactions, both as to legal result and as a guide to drafting agreements and financial statements.

A significant body of case law from around the country is included in this Second Edition. This new edition is even more user-friendly than the prior edition. Some highlights of the Second Edition are:

• Notes on "The Role of Codes, Statutes and Case Law" and "Simplifying Complicated Statutory Language" to introduce students to statutory interpretation and help them develop skills to better understand the sometimes complicated text of Article 9.

• Hypothetical Problems are used on a continuing basis to help students navigate through secured transactions from creation (Chapter 2), to enforcement (Chapter 3), to perfection and priority of the security interest (Chapter 4). With this model, students work with more interesting and more easily understood problems rather than a series of unrelated hypotheticals.

• Difficult problems created by errors in financing statements, in particular with reference to names of individual debtors, are addressed with new cases interpreting Revised Article 9.

• Early exposure to In Re QDS which forces them to work with difficult and complicated statutory language to distinguish the so-called "true lease" from the "dirty lease".

• New materials illustrating breach of the peace, notification, and commercially reasonable foreclosure requirements.

• Chapter 5 on bankruptcy has been updated to include more comprehensive analysis of the 2005 amendments to the Bankruptcy Code and expanded to include discussion of state and federal rules on fraudulent transfers.

The introduction to cross-border secured transactions (Chapter 6), a topic of more and more relevance-and one typically not covered in other casebooks.

This book also is available in a heavily discounted, three-hole punched, alternative loose-leaf version printed on 8 ½ x 11 inch paper with wider margins and with the same pagination as the hardbound book.

Authors / Contributors

Table of Contents

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