PRIMER ON FINANCING GOODS: BACK TO THE BASICS

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1 COMMERCIAL FINANCE COMMITTEE AND UNIFORM COMMERCIAL CODE COMMITTEE FALL MEETING PRIMER ON FINANCING GOODS: BACK TO THE BASICS Presented by:, McGlinchey Stafford, Baton Rouge, Louisiana Elizabeth Davidson, Jenner & Block, Chicago, Illinois

2 PRIMER ON FINANCING GOODS: BACK TO THE BASICS By: * INTRODUCTION Goods are a broad and often overlooked category of collateral under Article 9 of the Uniform Commercial Code. This type of collateral encompasses all things that are movable when a security interest attaches, including equipment, inventory, consumer goods and farm products. 1 The sale or lease of goods on credit also gives rise to other collateral as proceeds, such as chattel paper and instruments. This article is an overview of the financing of commercial goods and their proceeds. It is a reminder of what you learned (or should have learned) in law school, but which with the passage of time and non-use has become a little hazy. I. EQUIPMENT AND INVENTORY Any good primer starts at the beginning as with the old saying for football, this is a football. In the case of financing goods, the beginning is this is inventory and this is equipment Under Article 9, inventory is goods that are not farm products and that are (a) held for sale or lease; (b) leased by a lessor; (c) furnished in connection with a service contract, or (d) raw materials, work in process, or used or consumed in a business. 2 Equipment, on the other hand, is a residual category. This type of collateral is goods that are not inventory, farm products or consumer goods. 3 A. GENERAL SCENARIO A typical financing transaction dealing with goods takes shape in the following scenario. Manufacturer ( Manufacturer ) manufacturers a widget and sells the widget on credit to a Dealer ( Dealer ). Dealer sells the widget on credit to his customer. The credit owed from the customer is a receivable of the Dealer. A credit company ( Credit Co. ) (often an affiliate of Manufacturer) purchases the receivable from the Dealer and pays off the credit extended by the Manufacturer on behalf of the Dealer. It is important to note that in this scenario, generally, the * is a member of McGlinchey Stafford, PLLC resident in its Baton Rouge office. He is a fellow and regent in the American College of Commercial Finance Lawyers, a fellow in the American College of Real Estate Lawyers, a member of the board of directors of the Association of Commercial Finance Attorneys and a co-chair of the Planning and Programming Subcommittee of the Commercial Finance Committee of the Business Section of the American Bar Association. Marshall has authored many articles and presented many programs on many issues in commercial finance, secured transactions, commercial real estate, and ethics and professionalism in the transaction context. If you would like to contact Marshall, feel free to him at mgrodner@mcglinchey.com. 1 UCC 9-102(a)(44). Reference or citations to the Uniform Commercial Code and its comments in this article are as published in Chomsky, Kunz, Rusch and Schiltz, ed., Selected Commercial Statutes: 2010 Edition, (West 2009). 2 UCC 9-102(a)(48). 3 UCC 9-102(a)(33).

3 widget in the hands of the Dealer will constitute inventory, and the widget in the hands of Dealer s customer will constitute equipment. 4 B. PURCHASE MONEY SECURITY INTEREST In this typical scenario, both Manufacturer and Credit Co. want to make sure that each has a first priority security interest in the widget. The easiest way under Article 9 of the Uniform Commercial Code to obtain priority over the security interest of another in the same collateral is to obtain a purchase-money security interest ( PMSI ) DEFINITIONS In order to obtain a PMSI, the Manufacturer and Credit Co. need to know what a PMSI is. Under Article 9 a PMSI is a security interest in goods that are purchase-money collateral. 6 Purchase-money collateral are goods that secure a purchase-money obligation. 7 A purchasemoney obligation is an obligation that is for all or part of the purchase price or value given and used to enable the debtor to acquire or use the collateral. 8 Simply, but inexactly, put, a PMSI is a security interest in goods securing the credit extended to enable the debtor to acquire or use the goods. The method of assuring that the PMSI takes priority over other security interests in the goods, however, differs in accordance with whether the good is inventory or equipment. 2. PMSI IN EQUIPMENT Turning first to equipment, the method of perfecting is relatively simple. Typically, when the Dealer sells the widget to its customer on credit, the widget will be equipment in the hands of the customer. 9 In this case, if the Dealer perfects his security interest (i.e. files a financing statement) before the customer receives possession of the equipment or within 20 after the customer receives possession, the Dealer will have a PMSI. 10 An important reminder, if the filing takes place after the 20 day period, the Dealer will not have PMSI priority and will be subject to prior perfected security interests. 3. PMSI IN INVENTORY Although obtaining a PMSI in equipment is relatively simple, getting one in inventory is a little more problematic. When the Manufacturer sells the widget to the Dealer, the goods become inventory in the hands of the Dealer since the Dealer typically is holding the item for 4 The collateral could also constitute consumer goods or farm products. This article deals with commercial transactions so consumer goods generally are outside its scope. PMSIs in farm products are discussed later in this article. See Section III infra. 5 UCC UCC 9-103(b)(1). UCC 9-103(b)(2) and (3) deal with cross-collateralization and software and are outside the scope of this article. 7 UCC 9-103(a)(1). 8 UCC 9-103(a)(2). 9 In some cases, however, the good in the hands of the customer will be either a consumer good or a farm product. The following rule also applies to consumer goods and farm products other than livestock. Note filing is not necessary to perfect a security interest in consumer goods. UCC 9-301(1). 10 UCC 9-324(a).

4 sale or lease. The Manufacturer must then obtain a PMSI in inventory. In order to have a PMSI in inventory, the Manufacturer has to (a) file a financing statement prior to delivering the collateral to the Dealer, (b) send a notice to holders of other security interests in the collateral (a PMSI Notice ), and (c) re-send the notice when the PMSI is continued. 11 The PMSI Notice to be sent must state that Manufacturer has or will acquire a PMSI in inventory and must describe the inventory. 12 C. FLOOR-PLANNING THE BASICS Now that Manufacturer knows the basics of PMSIs, what does the Manufacturer need to do. The first step is to determine where to file a financing statement to perfect its security interest. Under Article 9 basically you file with the secretary of state (or its equivalent) in the state where the debtor is located. 13 For a debtor who is an individual, she is located in her principal residence. 14 For a debtor that is an entity, it is located in its state of formation. 15 Once the location of the Dealer is determined, the Manufacturer should run a UCC search in the name of the Dealer. 16 If the UCC Search shows conflicting security interests (including financing statements that cover all assets or all inventory ), Manufacturer needs to send a PMSI notice to the conflicting security interest holders. Manufacturer also needs to obtain a security agreement executed by the Dealer and to file a financing statement with the appropriate office in the state where Dealer is located. 17 After these steps, then Manufacturer can begin delivery of the collateral. Remember if there is delivery prior to filing the financing statement or sending the PMSI Notices, then the security interest of Manufacturer will not be a PMSI. Assuming Manufacturer has a PMSI, what should the Manufacturer do going forward? A financing statement needs to be continued within the six months of the five year anniversary of the date of its original filing (or last continuation). 18 At this time, Manufacturer should do another UCC search to determine if the financing statements of the conflicting security interest holders are still effective or whether they have been assigned to someone else. Then, 11 UCC 9-324(b)(1) (3) 12 UCC 9-324(b)(4). 13 UCC and 501. Although practically the filing takes place where the debtor is located Article 9 gets to this answer circuitously. Technically the law of the location of the debtor governs perfection and priority. The law of the location of the debtor then tells you where to file in most states with the Secretary of State or its equivalent. 14 UCC 9-307(b)(1). 15 UCC 9-307(f). Technically, this provision is limited to registered organizations. The term registered organization includes the typical type of entities, such as corporations, limited liability companies and limited partnerships. 16 The name of an individual debtor may be problematic. Is it the first, middle and last name, first and last, nicknames etc.? For entities, Manufacturer should obtain a certified copy of the organization documents from the secretary of state of the Customer s state of formation, and use the name listed in the organizational documents to do the UCC search. 17 Although the financing statement can include the terms all assets, all inventory or list a specific piece of inventory as collateral, it is probably better practice to do something like all inventory of debtor manufactured by [name of manufacturer] or something similar for two important reasons. Making it less general than all assets or all inventory will prevent other persons financing different inventory coming to Manufacturer all the time for subordination/intercredtior agreements. Making it more general than the specific piece will eliminate having to file new financing statements every time a new item of inventory is delivered. 18 UCC

5 Manufacturer needs to send new PMSI Notices to the still effective security interest holders, including assignees to keep its PMSI status. 19 On the other hand, what should the Manufacturer do if it does something so that its security interest is not a PMSI, like delivery of the item before filing a financing statement or sending a PMSI Notice? The good news where an item is delivered before the filing of a financing statement or before the sending of a PMSI notice is that other items delivered after the financing statement is filed and the sending of the PMSI Notice (assuming the other steps were appropriately taken), then Manufacturer will still have a PMSI in the later delivered items. For the items delivered previously, Manufacturer has only one option in order to take priority over conflicting security interest holders. Manufacturer must obtain an agreement from the conflicting security interest holder in which the conflicting security interest holder subordinates its security interest to the security interest of Manufacturer. 20 The next step in the process is the transaction between the Dealer and the customer. This transaction can be a sale or a lease. To the extent it is a sale on credit or a lease, usually the customer will execute a Retail Installment Contract ( RIC ) in favor of the Dealer. In the RIC, the customer grants a security interest in the collateral sold or leased in favor of the Dealer. In most cases, the collateral described in the RIC will constitute equipment in the hands of the customer. 21 Dealer should then file a financing statement in the name of the Dealer in the appropriate filing office. 22 To determine the appropriate filing office, Dealer should do the same due diligence regarding the customer as Manufacturer does for Dealer, including determining the customer s principal residence if the customer is an individual or determining the correct name and state of formation if the customer is an entity. In order for the security interest to be a PMSI in equipment, Dealer needs to file the financing statement before or within 20 days of the delivery of the collateral to the customer. 23 Unlike Manufacturer s transaction with Dealer, in the case of Dealer s transaction with the customer, no UCC searches and no PMSI notices are necessary since the collateral is most likely equipment not inventory. D. CHATTEL PAPER FINANCING THE BASICS The next step in the financing chain is the assignment of the RIC to the Credit Co. as security for Credit Co. extending credit to Dealer to pay off Dealer s debt to Manufacturer for the collateral pursuant to Dealer s floor-planning arrangement with Manufacturer. 24 In order to determine how Credit Co. needs to perfect its security interest in the RIC, Credit Co. must determine what type of collateral the RIC is under Article 9. In most cases, it will constitute 19 UCC 9-324(b)(4). 20 UCC It could also be consumer goods or farm products. Although outside the scope of this article, if the collateral is consumer goods not subject to a certificate of title law, the security interest is perfected upon execution of the RIC, so no filing is necessary. UCC 9-309(1). For a discussion of farm products see Section III(C) infra. 22 Even if no filing to perfect is necessary because the RIC is a true lease since it is not a security interest under UCC 1-201(35), a cautious Dealer should make a protective filing out of an abundance of caution in case a court determines it is in fact a security interest. 23 UCC 9-324(a). 24 Most often Credit Co. is an affiliate of Manufacturer, but Credit Co. can be either an independent third party or Manufacturer, itself.

6 tangible chattel paper under Article Chattel paper generally is a record (for purposes of this article a writing) that includes both a promise to pay and a security interest or a lease in specific goods. 26 There are two ways to perfect a security interest in tangible chattel paper. 27 One is physical possession of the chattel paper. 28 The second method is by filing a financing statement. 29 Turning first to perfection by possession, there are two ways for Credit Co. to take possession. The first is to require Dealer to deliver physically the chattel paper to Credit Co. and Credit Co., itself holds possession. 30 A second way to accomplish possession is to have a third party take possession ( Bailee ). In order for Credit Co. to be perfected where the chattel paper is in the hands of Bailee, Bailee must acknowledge in an authenticated record (mostly a writing) that Bailee holds the chattel paper for Credit Co. s benefit. 31 An interesting, but somewhat unresolved issue in this context, is whether perfection occurs if Bailee is an employee or other agent of the Dealer. The second method of perfection in chattel paper is by filing a financing statement. 32 The drawback to this means of perfection is the general rule that perfection by possession of chattel paper takes priority over perfection by filing regardless of the timing of perfection. 33 Therefore, there is the possibility that the unscrupulous Dealer may double finance the chattel paper by granting a security interest to Credit Co. that is perfected by filing and then granting another security interest (or outright selling it) to a third party and delivering possession to the third party. In this case, Credit Co. may be outranked by the third party. If Credit Co., however, cannot take possession by itself or through Bailee for whatever reasons, it may have one alternative. A security interest in chattel perfected by possession takes priority over a prior conflicting security interest perfected by filing only if the holder of the security interest perfected by possession is in good faith, gives value and has no knowledge that its security interest violates the rights of the secured party perfected by filing. 34 Because of this exception, Credit Co. could insist that the chattel paper itself contain a statement that the chattel paper is subject to a security interest of Credit Co. or has been assigned to Credit Co. Therefore, it would be hard for the third party to argue that it did not have actual knowledge that its security interest violated the rights of 25 To the extent that the RIC is in electronic form, it will constitute electronic chattel paper. UCC 9-102(a)(31). Perfection in electronic chattel paper takes place through control. UCC Electronic chattel paper is outside the scope of this article, and this article deals only with tangible chattel paper. 26 UCC 9-102(a)(11). 27 For the rest of this article, the term chattel paper will mean tangible chattel paper as defined in UCC 9-102(a)(78). Furthermore, in this context, however, there may be some interesting issues. If the agreement contains more than a security interest in specific goods, like a blanket lien or a security interest in accounts, it would not be chattel paper. At first blush, one might think it would be an instrument, that also can be perfected by possession. However, an instrument cannot contain a security agreement. UCC 9-102(a)(47). Most likely the collateral then would be a payment intangible. UCC 9-102(a)(61). A security interest in a payment intangible can only be perfected by filing. 28 UCC 9-313(a). 29 UCC 9-312(a). 30 UCC 9-313(a). 31 UCC 9-313(c). 32 UCC 9-312(a). 33 UCC 9-330(c) 34 Id. It should be noted that the knowledge required is not constructive knowledge because the notice in the UCC records of the conflicting security interest perfected by filing, the knowledge must be actual. [find cites].

7 Credit Co. This actual knowledge could also be imparted by requiring the Dealer to stamp each chattel paper with words of similar import. E. CERTIFICATE OF TITLES Turning back to the more general scenario, one interesting category of these types of financing transactions are those dealing with motor vehicles. Generally, each state has a certificate of title law that applies to motor vehicles (and sometimes manufactured homes) as defined in each state s certificate of title law. The certificate of title laws vary from state to state. 35 Under Article 9, the UCC defers to these certificate of title laws for perfection purposes. 36 Generally, under certificate of title laws, perfection is accomplished by noting the security interest on the certificate of title itself. There is one exception to this rule, however. Article 9 provides certificate of title laws do not apply to inventory held for sale or lease by a person in the business of selling goods of this kind. 37 This collateral constitutes inventory governed by Article 9 not by certificate of title law. Applying the certificate of title rules to the general scenario, it is important to point out that the transaction between the Manufacturer and Dealer typically is perfected by filing a financing statement since the Dealer is in the business of selling the goods, and therefore the goods are inventory in the hands of Dealer. The transaction between the Dealer and the customer, however, generally is perfected under the certificate of title law, which in most cases requires the notation on the certificate of title. 38 One issue has recently arisen in the context of assignment of the security interest perfected by notation on a certificate of title. In the general scenario, this occurs when the customer s RIC is assigned to Credit Co. by Dealer. In many states, it is not cost effective to have each motor vehicle retitled upon each assignment, and this retitling is hardly ever done. Some customers, however, have raised the argument that Credit Co. cannot enforce the RIC or seize the collateral because the assignment is not noted or Credit Co. is not noted as lienholder on the certificate of title. 39 The better position, however, is that unless the certificate of title law specifically provides otherwise, the general rule under the UCC that assignments need not be filed should apply. 40 Therefore, it should not be necessary for Credit Co. to be noted on the certificate of title either as assignee or lienholder. F. LEASING COMPANY SCENARIO Moving to a variation of the general paradigm discussed in this article, there is another scenario relatively common in these types of financings. In this case, Dealer will want to convert items held for sale to items held for lease. Manufacturer only finances items held for sale. 35 For a good discussion of each state s certificate of title laws, see Harrell, ed. Compendium of State Certificate of Title Laws, (ABA 2009). 36 UCC 9-311(a)(2). 37 UCC 9-311(d). 38 One issue here may arise where Dealer s customer is in the business of selling goods of that kind, i.e. the customer is another dealer. In that case, UCC 9-311(d) would apply and perfection would take place through filing a financing statement. 39 [Find TX and AR cases] 40 UCC 9-310(c).

8 Credit Co. finances items held for lease. Also, from Dealer s side, there are two different types of scenarios. The first is where Dealer is both the sales entity and the leasing entity. The second is where the leasing entity is a separate entity (Leasing Co.) that is often a subsidiary or sister of the Dealer. 1. DEALER AND LEASING COMPANY ARE THE SAME ENTITY In the situation where Dealer is both the selling entity and the leasing entity, what Credit Co. should do is enter into a direct lending agreement with the Dealer. This agreement would obligate the Dealer for debts owed to Credit Co. and grant Credit Co. a security interest in the inventory to be leased. This agreement can be accomplished in at least two ways. First, Credit Co. can enter into a separate commercial credit accommodation with Dealer which provides Dealer with a line of credit for Dealer to use to refinance debt owed to Manufacturer for sales inventory to be converted into leased inventory. In this first situation, the agreement between the Manufacturer and Dealer Agreement should be amended to include cross-collaterization and cross-default language for the new Credit Co. direct lending agreement particularly where Manufacturer and Credit Co. are related entities. Second, there can be an addendum to Dealer s agreement with Manufacturer adding Credit Co. as an additional potential lender/secured party and providing for the credit accommodation. The latter may be more preferable, because it would be easier to add cross-collateralization and cross-default language in the addendum, rather than having an amendment to the Dealer s agreement with Manufacturer and a separate credit agreement. a. THE REFINANCE ISSUE The major legal issue presented in this factual scenario is whether Credit Co. will maintain Manufacturer s priority under Manufacturer s PMSI after making a loan to Dealer to repay the original debt owed by Dealer to Manufacturer. The applicable provision of Article 9 is UCC 9-103(f)(1). This provision provides that a PMSI does not lose its character as a PMSI even if: [T]he purchase-money obligation 41 has been renewed, refinanced, consolidated, or restructured. [Footnote added]. In this case, the specific legal issue is whether what would appear on its face to be a refinancing by Credit Co. of the original debt owed by Dealer to Manufacturer constitutes a refinance under the UCC since it does not appear to be a renewal, consolidation or restructuring. The comments to this provision do not clearly define refinance (and it is not otherwise defined in the UCC), except to indicate that a refinancing with the original lender is a refinancing for purposes of UCC 9-103(f). 42 The comments, moreover, do not indicate whether, as in the present case, a payoff by another lender to the original lender constitutes a 41 Purchase-money obligation is defined in UCC 9-103(a)(2) as an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is so used. See discussion in Section I(B). 42 Please note that even if the loan to the dealer to Credit Co. constitutes a refinance, if Credit Co. advances new money over and above the amount necessary to payoff Manufacturer, this new money will not be secured by a PMSI. Comment 7(a) to UCC

9 refinancing. A good argument can be made that such a payoff is a refinancing. Most dictionaries do not limit the term refinance to the original lender. 43 Colloquial usage of the term refinance includes taking a out a new loan, regardless of whether it is with the same or a new lender, as long as the proceeds of the new loan are used to payoff the old loan. Therefore, it is reasonable for Credit Co. to take the position that to the extent Credit Co. advances funds to payoff the Manufacturer loan and Manufacturer assigns its security interest in the subject inventory, the transaction constitutes a refinance under UCC 9-103(f)(3), and Credit Co. should maintain Manufacturer s PMSI status, although the resolution is not entirely clear. 44 b. ASSIGNMENT OF SECURITY INTEREST There are other issues in this scenario, however. Since Credit Co. is not a secured party on the original financing statement for the items originally offered for sale by the Dealer, Credit Co. may want to file an assignment of Manufacturer s financing statement. 45 Further, since under the current version of Article 9 it is not clear that this transaction constitutes a refinance and under the prior version of Article 9 the prevailing interpretation was that a refinance of a PMSI does not qualify for PMSI status, Credit Co. may want to file a new financing statement. Moreover, since Credit Co. may not have the super-priority in the equipment held for lease over other conflicting security interest holders that Manufacturer has, 46 Credit Co. out of an abundance of caution should run a UCC search in the name of Dealer, and get intercreditor/subordination agreements from the conflicting security interest-holders in the leased inventory prior to lending money or delivering collateral under either type of agreement. 43 For example Dictionary.com defines refinance as: 1. to finance again. 2. to satisfy (a debt) by making another loan on new terms: She just refinanced her mortgage. 3. to increase or change the financing of, as by selling stock or obtaining additional credit. Merriam Webster s online defines refinance as: transitive verb : to renew or reorganize the financing of intransitive verb : to finance something anew 44 Note the burden is on Credit Co. to prove it has a PMSI. UCC-9-103(g). Further, as stated in Fn. 4, assuming the payoff by Credit Co. constitutes a refinance, Comment 7(a) to makes clear that even if Credit Co. advances additional funds the security interest will remain a PMSI to the extent of the payoff, but security interest securing the additional funds will not constitute a PMSI. In the master agreement described in Section II(B) of this memorandum, however, Credit Co. should consider a provision that to the extent there are non-pmsi secured obligations that payments are first to be applied to the non-pmsi secured obligations and then to the PMSI secured obligations so that the PMSI priority remains as to the most secured obligations as possible. See 9-103(e). 45 Although filing a UCC-3 assigning Manufacturer s financing statement to Credit Co. is not necessary under UCC 9-310(c), Credit Co. may wish to do so in order to become the secured party of record. 46 See discussion in Section I(F)(1)(a) infra.

10 2. DEALER AND LEASING COMPANY ARE SEPARATE ENTITIES Sometimes Dealer has or will want to operate the leasing program under a separate entity that is most likely an affiliate of the entity. 47 In these situations, Dealer enters into a RIC with Leasing Co. that is assigned to Credit Co. Credit Co. pays off the debt owed to Manufacturer with respect to the sold items, and Dealer delivers the chattel paper to Credit Co. 48 Dealer or Credit Co. on Dealer s behalf also files a financing statement that lists the Leasing Co. as debtor, the Dealer as secured party, and Credit Co. as an assignee of the secured party. 49 This method would work to protect Credit Co. s interests in the leased equipment, except there are additional steps that the Dealer (or Credit Co. on the Dealer s behalf) needs to take to create a super-priority PMSI in the Leasing Co. s inventory held for lease. These steps are substantially the same as Manufacturer should be taking as set forth in Section I(C) with regard to Dealer. To again recap, before any sale by Dealer to Leasing Co. and before the delivery of the goods subject to the sale, Credit Co. needs to (with important differences from Manufacturer s obligations under Section I(A) highlighted in bold and italics): 1. Get a certificate of good standing for the Leasing Co./debtor together with a certified copy of its articles/certificate of formation; 2. Run a UCC search in the name listed in the articles/certificate of formation; and 3. Send a PMSI Notice in the name of Dealer to any conflicting creditors listed on the UCC Search (if any). For inventory to be held for lease already delivered to Leasing Co. prior to sending the PMSI Notice or filing a financing statement, if there are any conflicting creditors shown on the UCC search, Credit Co. (in the name of the Dealer and its assigns) will need to get an intercreditor/subordination agreement from those creditors in order to have priority in Credit Co. s collateral over the conflicting creditors. If the creditors refuse, Credit Co., as assignee of the sale s company security interest, most likely will lose to the conflicting creditors in a priority battle. a. RECEIVING POSSESSION One issue that arises where the Dealer and Leasing Co. are the separate entities is the issue of when the Leasing Co. receives possession of the item or items. Remember in order to have a PMSI in inventory, the security interest must be perfected and the PMSI Notice must be sent prior to the Debtor receiving possession. 50 When the debtor receives possession may become problematic where Dealer and Leasing Co. are related entities and share show-room or 47 For the analysis below, it is not necessary for the leasing entity to be an affiliate of the Dealer. 48 It is important that Credit Co. take possession of the original tangible chattel paper to take priority over other creditors perfected by filing a financing statement that is prior in time to Credit Co. s financing statement. There are other steps that Credit Co. can use to protect itself from non-delivery of chattel paper. For further discussion see Section I(D) infra. 49 It is important to list the sales entity as secured party, the leasing entity as debtor and Credit Co. as assignee on the financing statement to avoid any future argument with regard to the PMSI status. 50 See discussion in Section I(B)(3) infra.

11 warehouse space. Out of an abundance of caution, Credit Co. should make sure that it is perfected prior to the execution of the RIC between Dealer and Leasing Co. b. CERTIFICATE OF TITLE One last issue arising where the Dealer and Leasing Co. are separate entities is the impact of the certificate of title law. Remember, if a debtor (like Dealer) is in the business of selling goods of that kind and the collateral is of the type covered by a certificate of title law, collateral held for sale or lease remains inventory in the hands of such debtor and is perfected by filing a financing statement. On the other hand, although the collateral in the hands of Leasing Co. are items held for sale or lease, Leasing Co. most likely is only in the business of leasing goods, not of selling goods of that type. Therefore, in the hands of the Leasing Co., the inventory exception does not apply, and Dealer must perfect under the certificate of title law, by, in most cases, being noted as lienholder on the certificate of title. 51 II. CONSIGNMENTS Turning away from the general scenario and its variations, there is another type of transaction that comes under the rubric of financing goods the consignment transaction. In typical circumstances, a consignment is a transaction where a person places an item with another in order for the other to sell it for the owner. Usually, the seller keeps part of the sales price as compensation. The seller never becomes owner of the item. A. DEFINITIONS Article 9 is more restrictive in its definition of a consignment transaction than the typical transaction. Under Article 9, a consignment is a transaction where a person delivers goods to a merchant for the purposes of sale. In addition, the merchant must be (a) a person who deals in goods under a name other than the name of the person delivering the goods, (b) is not an auctioneer, and (c) is not generally known by its creditors to be engaged in the sale of the goods of others. Further, (a) the goods to be sold by the merchant (i) must each have a value of over $ and (ii) must not be consumer goods in the hands of the person making delivery, and (b) the transaction must not create a security interest. 52 A consignee is the merchant, 53 and the consignor is the person delivering goods to the consignee. 54 B. GENERAL If a transaction meets the definition of consignment, the transaction is covered by Article Further, the interest of the consignor in the goods subject to a consignment is a purchasemoney interest in inventory. 56 As a purchase-money interest in inventory, the consignor must 51 For more in depth discussion of certificate of title laws and citations to the UCC see Section I(E), infra. This problem should not be an issue where the Dealer and Leasing Co. are the same entity, because in that case Dealer/Leasing Co. is in the business of selling goods of that type. 52 UCC 9-102(a)(20). 53 UCC 9-102(a)(19). 54 UCC 9-102(a)(21). 55 UCC 9-109(a)(4). 56 UCC 9-103(d).

12 perfect (generally file a financing statement) and send a PMSI Notice prior to delivery of the goods to the consignee. 57 C. ISSUES One of the most litigated issues in the consignment context is whether the consignee is or is not generally know by its creditors as a person who sells the goods of others. 58 These cases arise where the consignor did not either file or give the PMSI Notice so if the transaction is a consignment under Article 9, the consignee loses to the properly perfected creditors of the consignee, but if it is not a consignment under Article 9, the consignor wins because the conflicting security interest only attaches to the property of the consignee and the goods of the consignor are the consignor s property. Generally, the burden of proof is on the consignor to show that the majority of the creditors of the consignee knew that the consignee was generally in the business of selling the goods of others. Some courts, however, possibly erroneously, have held that if the complaining conflicting creditor has actual notice of this fact, the complaining creditor loses. There is another similar unresolved issue in the consignment context. This issue arises where a consignee delivers a good that is to be processed into something completely different by the consignee. The agreement between the consignor and consignee provides that the goods remain the property of the consignor until the goods are used and payment is due when the goods are used. The consignee then sells the finished/processed goods. Some courts hold that this is an Article 9 consignment, 59 but good arguments can be made that the transaction is not an Article 9 consignment. III. AGRICULTURAL FINANCE Leaving consignments, we move to the last commercial financing transaction in goods covered by Article 9. This transaction is financing farm products. A. FARM PRODUCTS; FARMING OPERATIONS Farm products are crops (including those produced on vines and trees, and in aquaculture), livestock, supplies used in farming operations and unmanufactured products of livestock or crops. To be a farm product, the good must be produced by a debtor engaged in a farming operation. 60 A farming operation is one which is engaged in raising, cultivation, propagating, fattening, grazing or any other farming, livestock or aquacultural operation. 61 B. AGRICULTURAL LIENS 57 See discussion in Section I(B)(3). 58 See, e.g., In re Downey Creations, LLC, 414 B.R. 463 (Bankr. S. D. Ind. 2009); Fariba v. Dealer Services Corp., 178 Cal.App.4th 156, 100 Cal. Rptr. 3d219 (Cal. Ct. App. 2009) 59 In re Georgetown Steel Company, LLC, 55 UCC Rep Serv 2d 475, 318 B.R. 352, 2004 WL (Bankr. D.S.C. 2004) 60 UCC 9-102(a)(34). 61 UCC 9-102(a)(35).

13 Article 9 applies not only to consensual security interests in farm products, but also to certain non-consensual interests called agricultural liens. 62 An agricultural lien is an interest in farm products which (a) secures payment or performance of an obligation for goods or services rendered or for rent of real property all in connection with the farming operation, and (b) is created by statute in favor of a person who supplies goods and services or leases real property all in connection with the farming operation. Further, the interest created by the statute must not depend on the interest holder s possession of the farm product. 63 C. ATTACHMENT AND PERFECTION In order to create a consensual security interest in a farm products, the standard procedures are followed. The debtor authenticates a security agreement describing the farm products. 64 In most circumstances the secured party will then file a financing statement in the location of the debtor to perfect the security interest. 65 An agricultural lien is perfected when the statute creating it makes it effective against the debtor and the required steps for perfection have occurred. 66 Generally, filing of a financing statement in the location of the debtor is required to perfect an agricultural lien. 67 D. PRIORITY Turning next to priority, there are some similar and differing rules applying to farm products and agricultural liens. There are not only the general rules, but also purchase-money security interest rules for farm products as with other goods. 1. GENERAL The general priority rules for security interests under Article 9 apply to both agricultural liens and consensual security interests meaning typically first to file wins. 68 There is one exception. If the statute creating the agricultural lien provides for priority, the priority provided for in the statute controls PMSI There are also specific purchase-money security interest rules that apply to farm products as well. One rule applies to farm products other than livestock, and the other applies to livestock (a)(2). 63 UCC 9-102(a)(5). 64 UCC 9-203(b). 65 See discussion of the location of the debtor in Section I(C). 66 UCC 9-308(b). 67 UCC 9-310(a). Note, however, when a farm product is located in a jurisdiction, the local law of that jurisdiction governs perfection and priority of an agricultural lien. UCC UCC UCC 9-322(g). Therefore, one must consult to individual state statutes in cases of agricultural liens to determine a priority dispute.

14 a. FARM PRODUCTS OTHER THAN LIVESTOCK Farm products other than livestock are governed by the general residual rule for PMSIs. As with equipment, a PMSI in farm products, other than livestock, takes priority over other security interests if it is perfected at the time of delivery or within twenty days thereafter. 70 b. LIVESTOCK Turning next to livestock, the secured party can get a PMSI if it follows certain rules which are very similar to obtaining a PMSI in inventory. 71 To get a PMSI in livestock, the security interest must be perfected before the debtor receives possession, the secured party must send a PMSI Notice and the PMSI notice must be received during the six month period prior to the debtor receiving possession. 72 The main difference between a PMSI in inventory and a PMSI in livestock is that unlike the renewal of the PMSI Notice every five years as in the case with inventory, the PMSI Notice for livestock must be renewed every six months. 73 c. OTHER STATUTES Further, with regard to priority, a secured party needs to be aware that there are certain federal statutes, and in many states, similar state statutes, that effect priority of security interests in farm products by protecting unpaid sellers of farm products. The main federal statute that affects farm products, other than livestock, is called the Perishable Agricultural Commodities Act. 74 Generally, these statutes provide that the receivables of a buyer of an unpaid seller of farm products are in a constructive trust the beneficiary of which is the unpaid seller, and such receivables are not therefore the property of the buyer. Not being the property of the buyer, then the security interest of the creditor of the buyer (as proceeds of farm products or as original collateral) does not attach to these receivables. There is a similar statute for livestock. 75 CONCLUSION This article was intended as a general overview of the legal basics of financing goods in a commercial context. It covered the basics of floor-planning, inventory and equipment financing, consignments and financing of farm products. Remember this article is merely an exposition of the basics, and that there are many specific and complex scenarios not covered. 70 UCC 9-324(a). For a more detailed discussion of PMSI in context, see Section I(B)(1) and (2), infra. 71 See Section 1(B)(3) infra. The steps the secured party should take such as finding out the name of a registered organization, doing a UCC search are set forth in that section, and are not repeated in this section. 72 UCC 9-324(d). 73 UCC 9-324(d)(3) U.S.C. 499a et. seq. 75 The Packers and Stockyards Act, 7 U.S.C. 181 et seq.

15 is a member in the firm's Baton Rouge office. His practice focuses primarily in commercial transactions, secured transactions, commercial finance, opinion letters, commercial real estate and gaming law. Marshall serves as chair of the firm's legal opinion committee. Marshall has served as an adjunct professor at the Louisiana State University Law Center. He has authored or co-authored several articles in law reviews and other publications dealing with secured transactions, commercial real estate and other business law issues. Marshall has also delivered lectures and papers throughout the country dealing with loan documentation, secured transactions, ethics and professionalism in the transactional context and real estate law. COMMERCIAL FINANCE Known for his experience in secured lending, Marshall has an extensive practice representing both Louisiana and out-of-state lenders in numerous large commercial transactions, locally, regionally and nationally. He is the co-chair of the Joint Task Force for Deposit Account Control Agreements, of the Business Law Section of the ABA. Marshall also is past chairman of the Loan Documentation Subcommittee of the Commercial Finance Committee of the Business Law Section of the ABA. As recognition of his expertise in commercial finance, he also is a Fellow and Regent in the American College of Commercial Finance Lawyers. REAL ESTATE In addition to his experience in secured lending, Marshall has also been in the forefront of intercity redevelopment, having done pioneering work with both non-profit and for-profit developers in putting properties adjudicated to municipalities or sold at tax sale back into commerce. Marshall also served as the Reporter for the Adjudicated Property Committee of the Louisiana State Law Institute. His work resulted in Act 819 of 2008 which completely revised the laws of Louisiana governing tax sales and adjudicated property. As an acknowledgement of his expertise in real estate law, Marshall is a Fellow in the American College of Real Estate Lawyers. As part of his real estate practice, Marshall is a licensed Louisiana title insurance agent for most of the major title insurance companies, including First American Title Insurance Company, Fidelity National Title Insurance Company, Chicago Title Insurance Company, Commonwealth Title Insurance Company and Lawyers Title Insurance Company, and regularly issues title insurance policies to lenders, purchasers and lessees of property in Louisiana. ADMITTED TO PRACTICE * Louisiana * United States District Court for the Eastern District of Louisiana * United States District Court for the Middle District of Louisiana

16 * United States District Court for the Western District of Louisiana * United States Court of Appeals for the Fifth Circuit EDUCATION * Louisiana State University Paul M. Hebert Law Center, J.D., 1990 (Order of the Coif, Phi Kappa Phi, Law Review) * Louisiana State University, B.A., 1983 PROFESSIONAL AFFILIATIONS * American Bar Association, Business Law Section, Co-Chair, Joint Task Force on Deposit Account Control Agreements, Vice Chair, Publications and Communications Subcommittee of the Commercial Finance Committee; Chair, Website Management Subcommittee of the Commercial Finance Committee; Past Chair, Load Documentation Subcommittee of the Commercial Finance Committee * American College of Commercial Finance Lawyers, Inc., Fellow (2005-present); Regent (2006-present) * Association of Commercial Finance Attorneys, Inc., Education Chair (2006); Member, Board of Directors (2006-present) * American College of Real Estate Lawyers, Fellow (2007-present) * Baton Rouge Bar Association * Equipment Leasing Association * The International Association of Gaming Attorneys * Louisiana Bankers Association * Louisiana State Bar Association * Louisiana State Law Institute, Reporter, Adjudicated Property Committee * American Bar Association, Real Property and Probate Section PRESENTATIONS * What is Right and What is Wrong: What Role Does Morality Play in the Practice of Law and the Problem of Client Fraud Association of Commercial Finance Attorneys, CLEW * Primer on Financing Goods: Back to the Basics Association of Commercial Finance Attorneys, CLEW * "Ethics in a World of Change: Consolidating Clients, Disappearing Firms and Other Ethical Issues in the Transactional Context," American Bar Association, Annual Meeting, August 2009 * "Ruminations on Ethics and Professionalism," Louisiana Land Title Association, Spring Meeting, 2009 * "Tax Sales and Adjudicated Property: Act 819 of 2008," Louisiana City Attorneys Association, Spring Meeting, April 2009 * "Tax Sales and Adjudicated Property: Act 819 of 2008," Louisiana Land Title Association Annual Meeting, December 2008 * "Tax Sales and Adjudicated Property: Act 819 of 2008," Louisiana Bankers Association, Bank Counsel Conference, November

17 * "Tax Sales and Adjudicated Property: Act 819 of 2008," Louisiana City Attorneys Association, Fall Meeting, November 2008 * "Topsy Turvy Markets: When Lenders and Credit Providers are in Financial Trouble," ABA Annual Meeting, Sponsors: Commercial Finance Committee, Committee on Securitization and Structured Finance and UCC Committee of the Business Law Section, ABA, Real Property and Probate Section, ABA and American College of Commercial Finance Lawyers, August 2008 * "It s a Wrap!: The Model Deposit Account Control Agreement Final Report," ABA Annual Meeting, Sponsors: Commercial Finance Committee, Committee on Securitization and Structured Finance and UCC Committee of the Business Law Section, ABA, Real Property and Probate Section, ABA and American College of Commercial Finance Lawyers, August 2008 * "Adjudicated Property and Tax Sales: The Proposed Revision," Louisiana Land Title Association Annual Meeting, December 5, 2007 * "Security Interest in Deposit Accounts and Investment Property," Louisiana Banker s Association, Louisiana Bank Counsel Conference, November 15, 2007 * "The American Bar Association Task Force And Model Deposit Account Control Agreement: A Model For Acceptance And A Touchstone For Negotiation By Borrowers, Secured Creditors And Depository Financial Institutions," Joint Meeting Commercial Finance Committee Commercial Law And Bankruptcy Section Financial Institutions Section, Connecticut Bar Association, October 18, 2007 * "Using the New Inserts to the Model Deposit Account Control Agreement, Task Force on Deposit Account Control Agreements," Business Law Section, ABA, August 10, 2007 * "Adjudicated Property and Tax Sales," Louisiana Land Title Association Spring Meeting, April 2007 * "Deposit Account Control Agreements," American Banker's Association, Webinar, January 2007 * "Save Your Deal: Using the Model Deposit Account Control Agreement," New York State Bar Association, Annual Meeting, January 2006 * "Deposit Account Control Agreements," American Bar Association Webinar, November 2006 * "Report of the Joint Task Force on Deposit Account Control Agreements," Commercial Financial Services Committee, Business Law Section, ABA, October 2006 * "Save Your Deal: Using the Model Deposit Account Control Agreement," Commercial Finance Association, Annual Meeting 2006, October 2006 * "Commercial Finance Legal Opinions: What You Want and What Should You Get," Joint Presentation of the Commercial Financial Services and Legal Opinion Committees, ABA Annual Meeting, August 2004 * "Woulda, Coulda, Shoulda: How to Draft Loan Documents under Revised Article 9 to Survive Challenges in Bankruptcy," Joint Presentation of UCC Committee and the Task Force on Forms under Revised Article 9, ABA Business Section Spring Meeting and Satellite Presentation, April and May 2004 * "Revised Article 9: Questions for the Perplexed - Common Drafting Issues," Joint Presentation of the UCC Committee, Commercial Financial Services Committee and the Task Force on Forums under Revised Article 9, of the American Bar Association, Business Law Section, April 2003 PUBLICATIONS

18 * "Additional Report," 64 The Business Lawyer, 801, May 2009 * "Louisiana Chapter in Commercial Lending Law: A State By State Guide," ABA, 2009 * "Initial Report of the Joint Task Force on Deposit Account Control Agreements," The Business Lawyer, February, 2006 * "Form Borrower s Counsel Perfection Opinion Letter chapter in Forms Under Revised Article 9, Business Law Section," Forms Under Revised Article 9, Business Law Section, 2005 * "Recent Developments in the Law: Security Devices," LSU Law Review, 53 La. Law Rev. 969,

19 Elizabeth A. Davidson Partner Chicago Office Tel: (312) Fax: (312) Elizabeth A. Davidson is a partner in Jenner & Block s Chicago office. She is a member of the Firm s Corporate, Corporate Finance, and Private Equity/Investment Management Practices. Ms. Davidson is also Co-Chair of the Firm's Opinion Letter Committee. Ms. Davidson primarily counsels corporations and other business organizations with respect to financing transactions including unsecured and secured senior, subordinated and mezzanine credit facilities ranging from $10 million to $2 billion. She has significant experience in representing private equity funds in a broad range of acquisition financing transactions, many with complex international, tax and security interest issues. Ms. Davidson also spends a substantial amount of time working with distressed business organizations, representing such entities in the work-out and restructure of their indebtedness and has represented both debtors and lenders in DIP credit facilities. Ms. Davidson provides counsel to both private and public corporations in connection with treasury and other corporate finance matters. Ms. Davidson also represents financial institutions with the structuring and documentation of senior and subordinated credit facilities. Prior to attending law school, Ms. Davidson spent six years as a commercial loan and work-out lender with Boulevard Bank, N.A. in Chicago and then Bank One in Lexington, Kentucky. Prior to joining Jenner & Block, Ms. Davidson was an associate at Kirkland & Ellis. Ms. Davidson received her J.D. from the University of Kentucky in 1997, cum laude and Order of the Coif, and was a member of the Kentucky Law Journal. She received her B.S. in finance from the University of Illinois in 1988 with High Honors.