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

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1 Assignment 19 Perfection: Exceptions to the Article 9 Filing Requirement Reference: Understanding Secured Transactions 1.04, 6.01, 6.02, 6.03, 6.04, 7.01, 7.02 Perfection: Other Methods Filing is the default method of perfection [ 9-310(a)] Other methods of perfection that are used (or are required) in certain circumstances include: Automatic perfection (PMSI in consumer goods) Compliance with certificate of title statute (titled goods) Possession (money, tangible goods, indispensable paper) Perfection by control (deposit accounts, investment property) Problem 19.1(a). How could Secured Party perfect as to cash in the cash registers of a debtor that operates stadium concessions? Problem 19.1(a): Cash A. Only by filing a UCC-1 covering the cash B. Only by taking possession of the cash C. Either A or B is sufficient D. Both A and B are required Only by filing a UCC 1 cov... 0% 0% 0% 0% Only by taking possession... Either A or B is sufficient Both A and B are required Except where money is cash proceeds of other collateral, a security interest in money can be perfected only by possession (not by filing) 9-312(b)(3) requires SI in money to be perfected by possession (filing ineffective) Rationale: cash is negotiable (possession = sufficient evidence of title); 3rd party not expected to search UCC records before accepting cash 1

2 Problem 19.1(c). How could Secured Party perfect as to money the debtor is keeping in a bank account? A. Only by filing a UCC-1 covering the bank account B. Only by taking control of the bank account C. Either A or B is sufficient D. Both A and B are required By filing a UCC 1 covering... 0% 0% 0% 0% By taking control of the... Both A and B are sufficient Both A and B are required Problem 19.1: SI in Deposit Account Can be perfected only by control [ 9-314(a), (b)]; UCC-1 filing is not effective [ 9-312(b)(1)] Secured party has control if [ 9-104(a)]: (1) Secured party is the bank at which the deposit account in question is maintained, or (2) Debtor, secured party, and bank enter agreement that bank will comply with secured party s instructions regarding payment of funds from the account, or (3) Secured party is the bank s customer on the deposit account in question Secured party can have control even if debtor still has the right to withdraw funds [ 9-104(b)] Control: Priority Concern Perfection by control is sufficient to perfect SI in the deposit account (and the funds in it at any point in time), but A transferee of funds from a deposit account takes the funds free of a perfected SI in the deposit account, unless the transferee acts in collusion with the debtor in violating the rights of the secured party [ 9-332(b)] Payment Rights as Collateral: Hypo For customers who can t pay cash, retail and wholesale sellers typically sell goods 3 ways To some, Seller sells on account (buyer s unsecured promise to pay within a certain time) To some, Seller has Buyer sign an instrument (buyer promises to pay, as evidenced by promissory note signed by Buyer) To some, Sellers has Buyer sign chattel paper (buyer signs an installment contract that reflects buyer s promise to pay and grants Seller a security interest in the goods) 2

3 9-102(a)(47). Instrument means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment (a)(11). Chattel paper means a record or records that evidence both a monetary obligation and a security interest in specific goods [or] a lease of specific goods (a)(2). Account means a right to payment of a monetary obligation for property that has been or is to be sold [or] for services rendered or to be rendered. Payment Rights as Collateral: Hypo If Seller sells all of its goods in exchange for future payment rights, it can create cash flow difficulty Seller needs $$ now to pay its employees, utilities, buy new inventory, etc. Seller can obtain necessary financing by: Selling its rights to payment from its customers (in exchange for cash), or Borrowing money, using its rights to payment from its customers as collateral Suppose Bank loans Uphoff s Used Cars $500,000, and takes a SI in all of Uphoff s chattel paper (i.e., installment contracts signed by car buyers) Uphoff s later defaults. How does the Bank go about enforcing its security interest? Bank could sell all of the contracts in a commercially reasonable foreclosure sale [ 9-610] Instead, Bank could start collecting the payments due under the installment contracts from the customers, who are account debtors [ account debtor is a person obligated on an account, chattel paper, or a general intangible, 9-102(a)(3)] Bank would enforce by collection by giving notice to Uphoff s customers (account debtors) to make their payments directly to Bank [ 9-607(a)] After getting notice, a customer could satisfy its obligation under the contract only by paying Bank [ 9-406(a)] Double payment risk if a customer gets notice and nevertheless makes its payment to Uphoff s Could Bank repossess the cars? Only if the customer defaulted under the customer s contract [Bank is an assignee of Uphoff s SI in the car] 3

4 Problem 19.1(e). How could Secured Party perfect its SI in the payment obligations of car buyers, evidenced by chattel paper? A. Only by filing a UCC-1 covering chattel paper B. Only by taking possession of the contract (chattel paper) C. Either A or B is sufficient Only by filing a UCC 1 cov... 0% 0% 0% Only by taking possession.. Either A or B is sufficient SI in chattel paper can be perfected either by a filing covering the chattel paper [ 9-312(a)] or by taking possession of the chattel paper (i.e., taking possession of each contract) [ 9-313(a)] But Secured Party should take possession, because chattel paper is quasi-negotiable If it leaves Debtor in possession of chattel paper, Debtor could assign it to a 3 rd party, for value, who could take possession of it and then take free of Secured Party s conflicting SI that was perfected only by a UCC-1 filing [ 9-330(a), 9-330(b)] Problem 19.2(a) Casa Grande loans $300K to Ruth/Gene Canard Collateral: the right of the Canards to be paid a total of $500,000 in annual installments by Watson Family Restaurants, Inc. (Watson), under a contract entitled Contract for Payment, entered by Watson when it purchased the Canards Turkey Burger franchise Contract didn t grant Canards a SI in the franchise or any other assets sold to Watson Problem How would you correctly classify the collateral (i.e., the right to be paid under the Contract for Payment )? A. It is an account B. It is chattel paper C. It is an instrument D. Need more information It is an account 0% 0% 0% 0% It is chattel paper It is an instrument Need more information 4

5 Account v. Instrument Contract is not chattel paper [ 9-102(a)(11)]; a franchise is not goods, and the contract did not create a SI in specific goods Contract is an instrument [ 9-102(a)(47)] if it: Evidences right to payment of a monetary obligation, Is not itself a security agreement or a lease, and Is of a type ordinarily transferred by delivery with any necessary indorsement or assignment If not an instrument, it is an account ( right to payment of a monetary obligation... for property that has been or is to be sold ) [ 9-102(a)(2)] Instrument (e.g., promissory note or a check) is said to embody the obligation it reflects Possession of instrument is customarily viewed as being sufficient to give the possessor the ability to enforce the obligation Instrument is thus transferred by endorsement and delivery of possession Account is purely intangible, and is not embodied in any specific document(s) Mere possession of an invoice would not customarily give possessor the ability to collect the account If the Contract is an account, Casa Grande can perfect its SI only by filing [ 9-310(a)] If the Contract is an instrument, Casa Grande can perfect by filing [ 9-312(a)] or possession [ 9-313(a)] But, if it perfects only by filing, Casa Grande risks losing its priority to a purchaser of the instrument A good faith purchaser of an instrument will take priority over SI in that same instrument that is perfected other than by possession [ 9-330(d)] Rationale: instrument is negotiable collateral (possession = ability to deliver good title) Priority of Purchaser of Chattel Paper or Instrument. (a) [Omitted] (b) [Omitted] (c) [Omitted] (d) [Instrument Purchaser s Priority.] Except as otherwise provided in Section 9-331(a), a purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party. 5

6 If it isn t clear whether the Contract is an instrument or an account, Casa Grande should File a UCC-1 (in case a court later says it is an account ), and Take possession of it (to prevent its later negotiation to a 3d party) Problem 19.2 Problem 19.3 Casa Grande plans to loan $300K to the Canards, to be secured by their right to payment under a $500,000 promissory note, payable by Watson Problem: the promissory note is currently in the possession of Garp, who has a prior SI in the note (the Canards owe $60,000 to Garp) Casa Grande is willing to be 2d in priority, but it doesn t want to be unsecured. How should it act? Casa Grande can perfect by filing? Yes [ 9-312(a)], but this is risky If the Canards later repaid Garp, and Garp returned the note to Canards, then the Canards would have possession of the note and could transfer the note to a BFP who would take free of Casa Grande s SI [ 9-330(d)] Garp probably won t agree to turn over the note to Casa Grande, because it would then face the same possible risk Solution: have Garp be as bailee holding the note on behalf of Casa Grande, too [ 9-313(a), 9-313(c)] 9-313(c). [Collateral in possession of persons other than debtor.] With respect to collateral other than certificated securities and goods covered by a document, a secured party takes possession of collateral in the possession of a person other than the debtor, the secured party, or a lessee of the collateral from the debtor in the ordinary course of the debtor s business, when: (1) the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party s benefit; or (2) the person takes possession of the collateral after having authenticated a record acknowledging that it will hold possession of collateral for the secured party s benefit. 6

7 Problem 19.3 Problem: Garp has no legal obligation to agree to serve as Casa Grande s bailee [ 9-313(f)] So what should Casa Grande do if Garp refuses? Pay Garp an acceptable price to serve as its agent Agree to hold the note for Garp s benefit 3d party escrow agent could hold it for benefit of both Loan Canards $60K more, have Canards pay off debt to Garp, which then must return the note, then take possession of the note) Problem 19.4 Kettering needs to borrow money from Silverado As collateral, Kettering plans to use the following property: A mobile home (not covered by a title certificate) Rare books (on display at Library of Congress) A Mercedes auto A gold ingot and loose diamonds Computer equipment (in Kettering s office) If a search shows no UCC-1 filings covering these assets under the name Kettering, can Silverado be assured of having first priority? A. Yes; any conflicting SI in these items would be unperfected B. No Yes; any conflicting SI in... 0% 0% No PMSIs in Consumer Goods PMSI in consumer goods is automatically perfected upon attachment (no filing necessary) [ 9-309(1)]. Rationale: High volume of filings regarding consumer goods collateral would clutter the filing system Most lenders are naturally aware that something that was consumer goods might already be subject to an automatically perfected PMSI 7

8 Purchase Money Security Interests SI in goods is purchase money SI if goods are purchase money collateral [ 9-103(b)(1)] Goods are purchase money collateral if they secure a purchase money obligation with respect to the collateral [ 9-103(a)(1)] Purchase money obligation is one: Incurred to seller as all/part of the price of the collateral, or Incurred to lender in exchange for value given to enable the debtor to acquire the collateral (and debtor actually so uses it) [ 9-103(a)(2)] Problem 19.4 Automatically perfected PMSI could exist vs. (a) mobile home, (b) books, and (d) gold/diamonds Silverado must investigate whether debtor acquired these assets for personal, household, or family purposes Silverado must also ascertain whether debtor incurred a purchase money obligation to acquire these assets Automatically perfected PMSI could exist in (e) computer, but only if it was consumer goods at the time Kettering bought it Automatically perfected PMSI would not exist vs. the Mercedes auto Can perfect SI in a titled vehicle only by compliance with title certificate statute [ 9-309(1), 9-311(a)] Silverado would have to look to the title certificate for evidence of prior liens Problem 19.4 Problem 19.6 Janet plans to borrow $100K from Will As collateral, she wants to grant Will a SI in her rights as plaintiff in Dakin v. Hershey (a lawsuit against her financial adviser for negligence in managing her investment portfolio) Will wants to know: (1) Can Janet s rights under the lawsuit can be collateral? (2) If so, how can that SI be perfected? 8

9 Lawsuits as Collateral Lawsuit based on breach of contract claim is a general intangible [ 9-102(a)(42)] Perfection by filing is required [ 9-310(a)] Article 9 allows a commercial tort claim [ 9-102(a)(13)] to serve as collateral SI perfected by filing [ 9-310(a)] Problem: commercial tort claim must arise in course of claimant s business or profession, and Janet s claim appears to be personal Liens on Personal Tort Claims Article 9 does not apply to assignment of noncommercial tort claims [ 9-109(d)(12)] Janet could assign a noncommercial tort claim under other state law (other than Article 9), if applicable state law permits her to do so (e.g., Bluxome Street Associates, p. 339) Note, however: Missouri law does not permit assignment of tort claims for personal injuries (contrary to public policy) 9