Commercial Law Terms & Definitions Study Set - Ramirez

Honest John sold Nancy Debts a used car for $900, to be paid off in three payments of $300 each. The contract was oral. Nancy missed the second payment, and one of Honest John's employees repossessed the car and returned it to the seller. Nancy sued Honest John for conversion. Who should win?

Nancy should win. UCC § 2-702 says that “except as provided in this subsection, the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.”

Thus, John doesn’t have the ability to reclaim the goods as a remedy since Nancy innocently misrepresented solvency/intent to pay, unless he reclaimed the goods upon demand within 10 days after receipt.

The fact that it is an oral contract is okay.

John can repossess under THREE circumstances:

a. (1) Under § 2-702;

b. (2) Buyer granted seller security interest in car; or

c. (3) If seller sues, gets judgment, & sheriff executes by seizing (levying) property (making the creditor a judicial lien creditor)

Assume that a state statute gives someone doing repairs a possessory artisan's lien on the property repaired. Mr. Baker took his car into Mack's Garage for repair but, being strapped for funds, couldn't pay the full bill, and Mack wouldn't let him have the car back. Is Mack's artisan's lien an Article 9 security interest?

This would not be a security interest under Article 9 because liens given by statute for services or materials are not within the scope of the section. It’s a nonconsensual lien. §9-109(d)(2).

However, if they signed a statement giving Mack’s Garage a right to repossess the car (as collateral) if the bill wasn’t paid, this would create a security interest under 9-109(a)(1). This is because it would be voluntary/consensual.

Excluded from scope of Article 9: liens given by statute for services not covered; “but §9-333 applies with respect to priority of lien.”

So even though Mack doesn’t have a SI that falls under Article 9, it will still fall under the articles of priority to protect it against other creditors

In need of cash, Livingstone signed an agreement with Stanley, selling his Land Rover to Stanley for $20,000, with the right to repurchase the vehicle in six months for $23,000. The Land Rover had a market value of $25,000. The agreement allowed Livingstone to continue using the vehicle during those six months. Does Article 9 apply so that steps are needed to protect these rights from later creditors wanting to seize the Land Rover?

Yes. Article 9 applies because title to the vehicle acts as security for the loan, and it is personal property

To protect the rights from later creditors, Stanley needs to perfect the security interest to provide notice.

Two steps: must ATTACH and PERFECT.

Stanley is the one here who needs his rights to be protected, since Livingstone has possession of the vehicle.

Remember, a transaction in the form of a sale that creates a security interest will still fall under the scope of Article 9. This is an example of a secured transaction in substance but not in form. Alas, the secret lien problem comes up here.

Floyd Mutrux, one author of the musical "Million Dollar Quartet," owed money to his attorney, Gilbert Kelly. Mutrux made an agreement assigning to Kelly a percentage of Mutrux's future royalty distributions from the musical, effective until the debt was paid. Does Article 9 apply so that the attorney should take appropriate steps to protect these rights from other creditors?

Yes. Article 9 applies because security interests include payment intangibles. 1-201(b)(35) and 9-109(a)(1). Therefore, the attorney should take appropriate steps to protect these rights from other creditors.

In a sense, future royalties are an accounts receivable.

9-109(d)(7) might mislead you to think that it doesn’t fall in the scope. However, this doesn’t apply because the assignment here is temporary, not complete

A payment intangible is some kind of debt payable in currency. Again, secret lien problem of Benedict v. Ratner.

There wouldn’t be this problem if it fell under 9-109(d)(7), because the entire account would be under the control of the attorney.

To raise money, Farmer Brown's Fresh Vegetables Roadside Stand sold all of its accounts receivable to Nightflyer Finance Company, which notified the customers that henceforth all payments should be made directly to Nightflyer. (Note that this is not a loan from the finance company to the farmer with the accounts put up as collateral; it is an outright sale. If it were a loan, and if the collectible accounts exceeded the amount of the loan, the excess would be returned to Farmer Brown; in an actual ale, Nightflyer can keep the surplus. Is this sale nonetheless an Article 9 "security interest"? Why would the Code drafter have brought an outright sale of accounts (and chattel paper, payment intangibles, and promissory notes, all defined below) under the coverage of Article 9?

A sale of accounts is listed under the Scope of Article 9. § 9-109(a)(3).

See Comment 4

Why? Avoids the secret lien problem. Plus, the distinction between a security interest and an outright sale can be blurry.

The exception under (d)(4) wouldn’t apply here because Farmer Brown is not selling his business—he is just selling a single account in the business.

Note that the sale of accounts WITH the sale of business does not get included in the scope of 9-109.

Thus, Farmer Brown is a DEBTOR under 9-102(a)(28)(B)!

o Antiques R Us was the largest antiques store in the city, well known as a place where antique dealers could hire out space and exhibit their wares, with the store handling the sales and taking a commission on each one and returning to the dealers’ items that remained unsold. When the store takes out a loan from Octopus National Bank and uses as collateral “all its property,” will the bank’s security interest reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under Article 9?

Under Article 9, a “consignment” means a transaction in which a person delivers goods to a merchant with the purpose of sale and the merchant is not generally known by its creditors to be substantially engaged in selling the goods of others.

Here, Antiques R Us is well known as a place where the store handles the sales of others.

So this type of consignment would not be the type covered by Article 9, and the security interest will not reach the items in the store that belong to the other dealers.

NOTE: If it only ails one part of the tests, you don’t have to look at the other tests. It doesn’t apply.

Creditors already have notice (because they’re well known); you don’t have to give notice here.

When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large, jeweled sword, he took it down to Weapons of the World (WOW), a large gun and weapon dealer which mostly sold items that it either manufactured itself for bought from other dealers around the globe. The sword was appraised as being worth over $25,000. Luke asked WOW to sell the sword for him.

QUESTION 1: Is this an Article 9 consignment so that Luke needs to take Article 9 steps to protect himself from WOW's other creditors who have an interest in the store's inventory?

Yes, it would fall under Article 9. 9-102(a)(20)(A)(iii).

The analysis is you simply go through the steps provided in 9-102(a)(20)

Ramirez said that they are not known by others to be “substantially engaged in the selling of goods of others”

The SI in the jeweled sword is subject to Article 9 perfection

§ This SI is a PMSI (remember—special perfection rules)

When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large, jeweled sword, he took it down to Weapons of the World (WOW), a large gun and weapon dealer which mostly sold items that it either manufactured itself for bought from other dealers around the globe. The sword was appraised as being worth over $25,000. Luke asked WOW to sell the sword for him.

QUESTION 2: Would it make a difference if one particular creditor knew the sword was on consignment? The court have split as to this.

The courts are split. The first case says that there is nothing in Article 9 that says that, so we can’t just “insert our own ideas” as to whether the creditor knew or not. However, if the new creditor had somehow acted in bad faith, the outcome could be different

When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large, jeweled sword, he took it down to Weapons of the World (WOW), a large gun and weapon dealer which mostly sold items that it either manufactured itself for bought from other dealers around the globe. The sword was appraised as being worth over $25,000. Luke asked WOW to sell the sword for him.

QUESTION 3: What if Luke had agreed that WOW could show the sword but did not have the authority to sell it?

If Luke had agreed that WOW should show the sword but did not have the authority to sell it, this would NOT be a consignment. It is well settled that there is no consignment under 9-102(a)(20). Where a merchant is “merely entrusted with” the item. Mellen v. Biltmore.

9-109(a)(20) says “for the purpose of sale,” so mere entrustment wouldn’t apply—this is not a sale!

BIG Machines leased a duplicating machine to Connie's Print Shop. The lease was for 5 years, and the rental payments over this period exactly equaled the current market price of the machine. The lease contract further provided that at the end of the five years Connie's could purchase the machine outright by paying $5. BIG Machines filed a did not file a financing statement. Thereafter Connie's borrowed money from ONB and signed a security agreement with the bank granting it an interest in all of the print shop's "equipment." ONB duly perfected its security interest by filing a financing statement. When Connie's failed to repay the loan, ONB seized all the shop's equipment, including the duplicating machine. In the lawsuit against ONB, who gets the machine?

This is probably a disguised secured transaction, because at the end of the lease period, Connie's Print Shop can become the owner of the property for little to no consideration—a nominal $5. Thus, BIG Machines should have file an Article 9 financing statement to protect the secured interest from creditors, which they did not.

This is a secured interest. $5 is nominal. You'd be stupid to not pay the $5.

This is just disguised as a lease.

It is likely a secured sale, not a true lease, where "only a fool would fail to exercise the purchase option".

So ONB wins.

Mercy Hospital's administrators hired a general contractor named Crash Construction Co. and required it to get a surety to guaranty for the performance of a new construction job and the payment of all the workers and material suppliers Standard Surety issued payment bond covering Crash's obligation to Mercy Hospital. To finance the construction, Crash borrowed money from ONB and gave as collateral the right to collect the progress payments from Mercy Hospital as they came due. ONB filed. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, Standard Surety claimed a superior right to unpaid moneys retained by Mercy Hospital, which were paid to Crash. ONB also claimed this fund, pointed to its filed security interest, and stated that Standard Surety's subrogation right was only an unfiled Article 9 security interest. Who should win

The “federal view” is that sureties have priority!

The surety’s subrogation rights are superior to secured creditors whose interests are properly perfected.

Subrogation rights look like secured transactions, but they are not prototypical.

Subrogation rights are rights to property that are given under common law.

Thus, do not fall under Article 9. This counts as “other rule of law” under 9-102(d)(2), so Article 9 doesn’t apply.

Essentially, subrogation rights arise as a matter of law [i.e., involuntary lien] not contract.

Pollution Solutions took out a loan from ONB putting up as collateral its copyrights, patents, and trademarks. Where should ONB file to make sure it has a perfected security interest? NO one knows where ONB MUST file to perfect its security interest, but the question here is slightly different. As a lawyer, what would you have your client do?

File in both federal and state offices.

When Christopher Morley opened his bookshop, the landlord wanted security for the rent. They signed a lease agreement providing that all of the inventory (the books) would be subject to a lien in the landlord's favor and could be seized and sold if Christopher defaulted on the rent payments. Is the landlord's lien required to be perfected under Article 9?

Non-consensual liens are excluded from Article 9 under 9-109(d)(3), but if you were to change the facts to where Morley signed a lease saying inventory of books subject to lien in landlord's favor if default on rent, THIS IS COVERED UNDER ARTICLE 9, because the landlord decided not to rely on the landlord’s lien—he wants a secured interest and wants the renter to sign a contract to give him a consensual interest in the inventory.

Carl Jugular (independent insurance agent) primarily sells life and auto policies of. Montana Insurance Association. Borrows from bank to buy car and gives bank security interest "in all present and future commissions earned or to be earned" from MIA. Does Article 9 cover this assignment?

This is not a 9-109(d)(3) question, because it does not deal with WAGES, but COMMISSIONS.

The key here is to define “wages."

The cited case defined “commissions” as a contractual right and NOT as wages.

Wages are exempt from Article 9, but NOT contract rights (“payment intangible” §9-102(a)(61)

Pemulis Auto borrowed money from Wolters Bank, with the parties agreeing that Pemulis Auto's inventory, equipment, and accounts receivable would be collateral for the loan. Does Article 9 apply?

Classic secured transaction covered by 9-109(a). Party agrees to use personal property as collateral for a debt.

Von Richthofan provided aerial photography services for Konstantin Farms, to guide irrigation and planting decisions. A state statute gave Von Richthofen a lien on Konstantin "Farms'" crops, to secure payment for those services. Would Article 9 apply here?

Agricultural lien, so covered under 9-109(b).

Williams Bank purchases the accounts receivable of Fitzherbert Spa, which are the debts owed by customers for spa services. Would Article 9 apply here?

This is a sale of accounts so covered under 9-109(a).

Turing, unable to sell his Enigma supercomputer on eBay, delivers it to a local electronics retailer. The parties agree that if the retailer sells the Enigma, they will split the proceeds, and if not, Turing will take the Enigma back. Would Article 9 apply here?

This is a consignment, but secret lien problem comes up because the retailer's creditors might not realize that the Enigma does not belong to the retailer. Bringing such consignments within Article 9 means that Turing will (as later chapters will discuss) need to file a UCC financing statement to maintain priority in the Enigma, should other creditors go after it or should the retailer file bankruptcy.

Baldwin put up his house on Strivers Row as collateral for a loan from Empire Bank. Does Article 9 apply?

No. Excluded because it's real estate.

Stewart used her life insurance policy as a security for a debt to Fateful Finance. Does Article 9 apply?

No. Insurance as collateral is specifically excluded.

Darrow, a lawyer assigned a long-unpaid account receivable, for collection to Persistent Servicing. Does article 9 apply?

An assignment of an account for collection only is excluded. 9-109(d)(5).

Although assignments of accounts generally are made subject to Article 9, some assignments of accounts generally are made subject to Article 9, some assignments are excluded because the protections of Article 9 are not necessary.

Cannon leased a car for a day.

A one-day car rental is a true lease, not a disguised secured transaction.

Sasha had a samovar, which had been in the family for several generations. He took it to Karl's Konsignments, who agreed to attempt to sell it on Sasha's behalf, for a percentage. Not long after, Karl's Konsignments went into bankruptcy. If Article 9 applied, that means Sasha would lose the samovar to the bankruptcy trustee. Did Article 9 apply?

No. While Article 9 generally applies to consignments, the definition excludes various consignments to which the policy of giving notice to creditors is weaker. 9-102(20). It excludes consignments where the consignor and consignee have the same name, where the consignee is an auctioneer, or where the creditors know the consignee generally takes goods on consignments.

Pemulis Auto offers to sell Lloyd, an Uber driver, a Somme Sedan for a down payment of $1,000, along with 36 monthly payments of $400. Lev likes those terms, but would prefer a lease, on the theory that he could deduct the lease payments as a business expense. So Pemulis Auto offers a Lease Agreement, under which Lloyd ("Lessee") pays down $1,000 and is obliged to make 36 monthly lease payments of $400 to Pemulis Auto ("Lessor"), and then will have an option to purchase the car for $1. The Lease Agreement further provides that if Lev fails to make the payments, Pemulis Auto may repossess the car. Lev signs and hands over $1,000. Pemulis Auto signs the papers to have the car registered in Lloyd's name and reminds him to get insurance on the car. Is the transaction subject to Article 9?

Yes. In substance, the transaction is a sale of the car on credit, with the car serving as collateral.

The business deal was that Lev was obligated to pay for the car and was entitled to keep it, subject to Pemulis Auto's right of repossession in the event of default. In substance, that is a sale of a car on credit, with the car serving as collateral.

Chang Equipment was negotiating a one-year loan of $50,000 at 10 percent interest from Nightflyer Finance, putting up equipment worth $120,000 as collateral. Nightflyer wished to avoid the complexities of debtor-creditor law. Creatively, the parties crafted the following transaction. Chang Equipment agreed to sell the equipment to Nightflyer for $50,000, although Chang Equipment retained use of the equipment. In one year, Chang has the option to buy the equipment back for $55,000. If it does not buy the equipment back, Nightflyer gets the equipment. Does Article 9 apply to the transaction?

Yes. The transaction, in substance if not form, is a secured loan.

The transaction is just the secured loan under another name. The terms are the same: Nightflyer hands over $50,000 and in one year Chang Equipment pays $55,000 or loses its equipment.

How would a professional pianist's piano be classified?

Equipment

How would cattle fattened by a farmer for sale be classified?

Farm products.

How would a farmer's tractor be classified?

Equipment.

How would a farmer's chickens be classified? Manure from the dairy herd?

Farm products, farm products.

How would a person's mobile home be classified?

Consumer goods

How would a right to sue someone for breach of contract be classified?

General Intangible (thing in action)

How would a right to sue someone for negligence arising out of an automobile accident be classified?

trick question. It would be excluded under 9-109(d)(12).

How would a right to sue a corporation from wooing away a trusted employee be classified?

Commercial tort claim (intangible property)

How would a security interest in a lawsuit the plaintiff has already won and that has been reduced to a settlement agreement be classified?

Payment intangible

How would pencils and other stationery supplies used by Sears or a similar large retailer in its credit offices be classified?

Inventory

How would a liquor license be classified?

General intangible

How would the right to the return of a security deposit held by a landlord be classified?

General intangible

How would a newspaper carrier's right to payments for papers to be delivered in the future be classified?

Intangible accounts

How would curtains bought by a lawyer for the law office be classified? What if, after purchasing the curtains, the lawyer decides to use them at home?

Equipment. They would remain equipment even after the use changes.

Aunt Augusta loaned her nephew $5,000 with an oral agreement that he would repay the money the following year. If she wants to use this agreement as collateral, how would it be classified?

Payment intangible.

How would patents, trademarks, and copyrights be classified?

General intangibles

How would lottery winnings be classified?

Accounts.

How would bitcoin be classified?

General intangible.

How would hay grown, raised, harvested, and packed in bales by the farmer be classified?

Farm products

Wheeler made a loan to Montreal, Maine & Atlantic Railway (MMA). The security agreement and financing statement described the collateral as, among other things, “payment and accounts.” An MMA freight train laden with oil derailed, causing havoc. MMA filed a claim under its business interruption insurance policy for lost business income. Is the insurance claim collateral of Wheeler?

This would not be a part of “accounts” for purposes of article 9. “Accounts” says that accounts includes a right to payment of a monetary obligation for a policy of insurance issued or to be issued.

Rather, this language refers to the insurer’s right to be paid in connection with the sale of an insurance policy. Had drafters intended “account” to include insurance payouts, the definition would have referred to payment UNDER an insurance policy instead of FOR issuance of a policy. But don’t be fooled by this.

9-109(d)(8) comes in and says that CLAIMS (PAYOUTS) OF INSURANCE ARE NOT COVERED UNDER ARTICLE 9 (except healthcare receivables).

Mercy Hospital needs financing and calls you, its attorney, with this question. Many of its patients are members of various health plans, and when they come in for treatment, they sign paperwork authorizing the hospital to seek payment from their health insurance coverage provider. The hospital always has a large number of such receivables in the process of collection. When the hospital borrows money, can it use the monies due it from the various health plans as collateral?

Yes, this would fall under Article 9. Health care receivables are included in the scope. 9-109(d)(8) only excludes insurance policy claims that are NOT an assignment by or to a healthcare provider of a health care insurance receivable and any subsequent assignment of the right to payment.

Passport Credit Card Company issued millions of credit cards internationally, sending them to cardholders, who then used them in millions of transactions with merchants. The merchants would then send the resulting paperwork to Passport for reimbursement (minus Passport's fee). You are the attorney for Passport. When Passport needs to borrow money, can it use these credit card transactions as collateral?

(1) The right of a credit card issuer to payment arising out of the use of a credit card is an “account.”

(2) Remember that the outright sale of such property by Passport is also an Article 9 transaction: 9-109(a)(3)).

A hotel puts up "accounts" as collateral for loan from the creditor. Many hotel guests pay with credit cards. Does the Creditor have a security interest in the hotel's right to collect from the credit card company?

No—it doesn't include it because it's a payment intangible and not an account (See Comment 5.d for distinction). The security agreement didn't put up as collateral payment intangibles—it put up accounts. The bank's attorney screwed up.

How would milk in the hands of the farmer be classified?

Farm product

How would milk in the hands of the grocery store be classified? Would your answer change if "restaurant" were used instead of "grocery store?"

Inventory; no

How would milk int he hands of the grocery store's customer who is buying for consumption be classified?

Consumer goods

How would a CoD issued by a bank be classified? Would it make a difference if it was transferable?

Quasi-tangible; no

How would an airbill issued by an airline as a receipt for frozen shrimp shipped by air be classified?

Quasi-tangible (bill of lading)

How would the receipt given to a farmer by a silo operator when the farmer stored grain there be classified?

Quasi-tangible documents (warehouse receipt/document of title)

How would you classify rare coins bought by a hobbyist for addition to his collection? What if he was in the trade or business of collecting coins?

Consumer good; inventory

How would you classify a tax refund?

General intangible (NOT an account)

How would you classify a debenture bond issued by a corporation?

Quasi-tangible (Investment property)

How would you classify a right to 100 shares of stock recorded on the books of the debtor's stockbrocker?

Quasi-tangible (investment property)

How would you classify the checking account you have with your bank?

Intangible (deposit account)

How would you classify a computer program that is embedded? How would you classify a computer program that isn't embedded?

Consumer good; general intangible

(1)How would you classify the monthly rental obligations owed to a landlord, who wants to use these obligations as collateral for a loan? (2) What about the promissory notes signed for the tenants to pay their rent?

(1) EXCLUDED as real property.

(2) Quasi-tangible (instrument)

How would you categorize the car lease contracts that Dime-A-Minute Rental Cars uses as collateral when it borrows money from a bank? If Dime-A-Minute moves into the computer age and stops using paper entirely, can the electronic version of this paperwork be used as collateral?

Electronic chattel paper. See 9-102(a)(31) and its Official Comment 5(b).

Article 9 provides that a secured party will be protected as to such electronic chattel paper if it has “control” over the paper, but, given that there is no actual writing, how could this possibly be done?

The electronic version of this paperwork can be used as collateral if the system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned. 9-102(a)(31).

The State of Montana has enacted a statute giving unpaid crop dusters a lien on the crops of the farmer. This, of course, is a statutory lien (since it arises by statute and is not created by the consent of the debtor—the farmer). Is this nonetheless an Article 9 transaction requiring compliance with the usual Article 9 rules?

This would be an agricultural lien, so yes, it requires compliance with usual Article 9 rules.

When Frederick Bean bought a new computer on credit from Centerboro Office Supply, before he could take it home, the store made him sign a "Conditional Sale Contract," by which he agreed that title to the computer would remain with the store until he had fully paid for his purchase. The contract described the computer, but nowhere did it mention a security interest. Does the contract qualify as a security agreement under §9-203?

A contract for conditional sale creates a security interest! Remember pre-code security devices? This included conditional sale. So this still creates a SA contract, even though it is not labeled as that. So you just need to ask: is RAVE met?

Here, debtor has rights because he possesses the computer (rights doesn’t have to be total 100% ownership)

Here, there is an agreement also with the conditional sale contract

There is value to the debtor by the creditor giving him the computer.

The agreement is evidenced because it is a written agreement—the evidence is through the authenticated (signed) written agreement.

Henry Fellini ran a movie theater called "Fellini's Art Theater," but, because he was the sole proprietor, that was a trade name. He gave a security interest in the business's equipment to Sharkteeth Finance Company. The financing statement calls for a listing of the "debtor's name."

(a) Should the parties use the business name or individual name?

(b) If the theater were run as a partnership, would the partnership's name be used as the debtor's name?

(a) They should use the individual name as under their valid driver's license that is issued in THIS state—that would be sufficient here.

(b) In this case, a partnership is considered a registered organization, so you would be able to use the registered organization's name on the public organic record.

Bob Wolton had always used "Bob" as his first name even though his birth certificate lists him as "Robert Edward Wolton." All of Bob's public records used "Bob Wolton," and that is the name on his driver's license.

(a) When Bob applied for a loan from a credit union, using his valuable comic book collection as collateral, will the credit union be perfected in an Alternative A state if its financing statement identifies him as "Bob Wolton?" In an Alternative B state?

(b) What if his driver's license lapses and he fails to get another one? Is the credit union now perfected in either state?

(c) If a debtor signed a security agreement with the debtor's nickname rather than the name of the debtor's driver's license, would the security agreement be effective?

(a) Yes in an Alternative A state, because it matches his driver's license. Same with an Alternative B state.

(b) It would not work in an Alternative A state because the drivers' license is expired, but it would still work in an Alternative B state because it is still the individual name of the debtor. Understand this distinction here.

Also note that any after-acquired collateral received within 4 months will still be perfected, but after four months, it will not be perfected. 9-507(c)(1).

(c) Not in an alternative A state, but maybe in an alternative B state.

EDM Corporation routinely did business as "EDM Equipment," and was commonly known by that name, so when the. Lender filed its financing statement it listed the debtor as "EDM CORPORATION D/B/A EDM EQUIPMENT." Does this correctly identify the debtor's name, and, to answer this question, is there something else you need to know?

You can't use the trade name with or in place of the public organic record. It HAS to be the name in the public organic record. This would make it seriously misleading because YOU CAN'T INCLUDE IT IN THE SPACE THAT IS RESERVED FOR THE DEBTOR. You can put it somewhere else, just not in that space.

To answer this question, you might need to know the administrative search logic rules of the state the FS is being filed in.

When World Wide Widgets was formed, it filed a corporate name document with the State Corporate Registration Office as required by law. That document identified the company as "World Wide Wigets, Inc." (a typographical error), but the State's database correctly listed the company as "World Wide Widgets, Inc." and that was the name in the State's Index of Registered Corporations. What is the corporation's name for Article 9 filing purposes?

The document here is a public organic record. So when they filed this document, it is critical to proving the name of the corporation that must be included in the financing statement. The public organic record itself had a typographical error. Even though it has an error, they must still put the erroneous title in the financing statement because it is nonetheless the one in the organic record.

Barbara Song borrowed $50,000 from ONB in order to start a business called "Barb's Interior," interior design being her specialty. ONB an Ms. Song signed a security agreement showing her as the debtor and giving ONB an interest in the inventory and equipment. ONB duly filed a financing statement. Subsequently, Ms. Song married Fred Dancer, and she changed her name to Barbara Dancer. She borrowed another $50,000 from the Nightflyer Finance Company, which loaned her the money after searching the records under "Dancer" and finding no prior encumbrances on the business's inventory and equipment. Did ONB lose its security interest because it failed to refile when her name changed?

They have 4 months to fix the misleading error. 9-507. After that it becomes unperfected.

LNB filed a financing statement in the proper place to perfect its security interest in the accounts receivable of the American Electronics Store. When the latter ran into financial difficulty, its assets were sold to a new electronics concern, Voice of Japan, which moved into the same retail location.

(1) Must LNB refile to keep its security interest perfected in (a) the accounts actually transferred by American Electronics to Voice of Japan or (b) accounts thereafter acquired by Voice of Japan?

They don't have to refile with regards to stuff filed beforehand, because it remains effective even if the collateral is sold—buyer purchases subject to the existing security interest.

However, a new contract with a new entity would be necessary (has to sign a new security interest) after the four months. This is because Voice of Japan is not a "new debtor" that automatically becomes bound to the security interest made by the original debtor with LNB.

The comments tell us if a future creditor wants to know whether or not they have already collateralized that accounts receivable, they can do a search in the SOS office to find a financing statement that lists the name of the debtor.

Creditor needs to be aware that they may not find all of the collateralized assets, because some of them may have originated with another debtor.

When you're in that situation, you want to ask the debtor what the source is of their collateral.

LNB filed a financing statement in the proper place to perfect its security interest in the accounts receivable of the American Electronics Store. When the latter ran into financial difficulty, its assets were sold to a new electronics concern, Voice of Japan, which moved into the same retail location.

(2) What result do we get if American Electronics Store merged with Voice of Japan and the new entity is called "Voice of Electronics, Inc."?

In this case, we would not need to sign a new security agreement. Laws say that the merger automatically makes the new debtor subject to the original agreement signed by the old debtor. 9-203(d) and (e).

LNB filed a financing statement in the proper place to perfect its security interest in the accounts receivable of the American Electronics Store. When the latter ran into financial difficulty, its assets were sold to a new electronics concern, Voice of Japan, which moved into the same retail location.

(3) What happens if the debtor remains the same, but LNB assigns its interest in the debtor's accounts to ONB? Need the records be changed? Is ONB's interest superior to that of LNB's creditors?

Yes—the name of the CREDITOR is what has to be changed.

However, 9-310 (assignment of a perfected Si) and 9-511 (secured party of record) says that the original collateral continues to be protected. So they don’t have to go back and change the ACTUAL financing statement because that part is still good.

Also recall that the actual assignment to LNB’s interest to ONB is in itself a secured transaction (recall Benedict v. Ratner outright sale of accounts). So ONB needs to protect its secured interest in that assignment, so they still have to perfect it in and of itself.

When Robin Oakapple found he could not get a loan unless he had collateral, he got permission from his foster brother, Richard Dauntless, to use Richard's yacht as collateral. Should the lender make both sign the security agreement (only Robin signed the promissory note)? Which of these parties is the "debtor' and which is the "obligor"? Under whose name should the financing statement be filed?

The answer is that the banks should make both of them sign.

Richard has to sign because he is the one whose collateral is being put up for the bank (he has to give the bank authority to possess the boat if there is default by the brother)

You definitely need Robin’s signature, because he is the one who ultimately must pay the money back.

Here, Richard is the debtor, and Robin is the obligor. I know it doesn’t make sense, but under the definition in 102(a)(28)(A), Richard is clearly the debtor. The obligor is the party who is ultimately responsible for paying the money back. 102(a)(59).

So Richard’s name must be on the financing statement so future creditors can find the information on the yacht if they plan to use it as collateral.

Peter Poor signed a security agreement and financing statement in favor of the Total Finance Company, giving the company a security interest in “all personal property debtor now owns or ever owns or even hopes to own between now and the end of the world or his death, whichever occurs first.” Does this perfect an interest in his guitar? Compare 9-108 and 9-503. Why would the drafters have drawn this distinction between the description in the security agreement and that in the financing statement?

No, it’s no good. 9-108(c) says that a description in the security agreement as “all debtor’s personal property” does not reasonably identify the collateral.

However, in the financing statements, it’s okay to say “all personal property.” 9-504. But remember, attachment has to occur first to make it enforceable against the debtor, and we don’t have this since the SA is ineffective.

A financing statement states: "This Financing Statement also relates to an obligation secured by a security interest in collateral and is evidenced by the mortgage referred to above and the All-Assets Security Agreement executed on September 28, 2015." Does the financing statement perfect a security interest in collateral listed in the All-Assets Security Agreement?

No, this is no good. It is unreasonable to expect a searcher to make further inquiry when the collateral is completely omitted from the financing statement.

This is not a sufficient description to perfect an interest in any of the collateral covered by the SA. The reference to a document does not describe WHAT IS ON THE DOCUMENT.

Collateral is defined as “property subject to a SI,” [9-102(a)(12)] not the document that creates the SI. The statute requires more than notice of an existing security interest—the collateral must be described. 9-502(a)(3).

Jeanne Angell sold 20 cows to Richard Baker, a dairy farmer, on credit. With each cow, Angell delivered a Certificate of Registration issued by Holstein Association USA, Inc. Each certificate stated the name of the cow and included a sketch of the cow with its distinctive markings. Some of the certificates included handwritten ear tag identification numbers. Baker granted Angell a security interest in the cows for the unpaid price. Angell filed a financing statement, stating a name and ear tag identification number for each cow. Sometime later, it turned out that only four of the cows had ear tags with numbers that matched the financing statement. Ten cows had no tag and six cows had tags with numbers not matching those listed in the financing statement. Missing and inaccurate tags are common in the dairy industry. Did the financing statement sufficiently describe the 20 cows?

Yeah it's fine. Ear tags fall off all the time.

Not unusual, so not unusual to have to rely on some other method of identifying the cows (such as names or tattoos).

When you sign up for a credit card, the agreement will often have this clause: “Cardholder hereby grants the Issuer a security interest in all goods purchased on your Account.” Does this sufficiently describe the law books you subsequently buy with the card?

No. According to 9-108(c), a description of collateral as "all the debtor's personal property" or using words of similar import does not reasonably identify the collateral.

The financing statement described the collateral as: "All assets of the Debtor including, but not limited to, any and all equipment, fixtures, inventory, accounts...now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises at 100 River Rock Drive, Suite 304, Buffalo, New York, together with any products and proceeds thereof including, but not limited to, a certain Komori 628 P+L Ten Color Press and Heidelberg B20 Folder and Prism Print Management System." After the financing statement was filed and payment commenced, the debtor moved everything in the business to a new location in Buffalo. No one thought to amend the financing statement. Will this description be sufficient to give the creditor a valid interest in the same assets at the new Buffalo location?

The description was sufficient because it unambiguously referred to "all assets of the Debtor" irrespective of their location. The phrase "including, but not limited to" introduced a subset of, and did not function as a limitation on, "all" of debtor's assets, and the Trustee offered no reason for departing from this general principle of interpretation

In sum, because the geographic reference in the initial collateral indication was merely illustrative and because the indication clearly reached all assets of the debtor, the FS description was all good.

Debtor gets a personal loan of $6,000 from creditor ($3,000 designated for purchase of personal computer for family use. How many security agreements should the creditor draft and why? BONUS QUESTION: When does the clock start for the consumer goods acquired after 10 days?

They should draft two.

One of the security agreements is for the PMSI on the computer ($3,000). The other is for the security agreement for the other secured interest (the other $3,000 which is not a PMSI for the debtor to use as he pleases).

Because they are consumer goods, only those consumer goods acquired within 10 days after value has been delivered by the creditor are acquired are perfected as after-acquired collateral.

So this is kind of a dangerous clause for the creditor to use as a secured interest (if we know it's consumer goods).

Bonus: The clock starts the day the Creditor delivers the $6,000 to the debtor.

Polly Travis owned a clothing store that was doing quite well, so she decided to open branches all over the state. She borrowed money to do so from Longhorn State Bank, which took a security interest (according to the filed financing statement) in “all inventory, accounts receivable, equipment, instrument, general intangibles, and personal property.” The bank also made her pledge her extensive collection of jewelry to the bank, making her bring it from her home and putting it in the vault. A year later, she asked to have the jewelry back so that she could wear it to a social occasion, and the bank gave it to her. Before she could return it to the bank, another creditor seized it by judicial process. You are the lawyer for Longhorn State Bank. Is their interest in the jewelry perfected by the filed financing statement?

They would lose perfection since they don't still have it. 9-313(d).

The security agreement and the financing statement both described the collateral as "inventory." Does this limit the security interest to existing inventory only, or does the security interest extend to replacement for the original collateral? If the security agreement had said "inventory now owned or after acquired" but the financing statement had simply mentioned "inventory," does this perfect a security interest in after-acquired inventory?

The court held that security interest in inventory and accounts receivable presumptively included after-acquired property, subject to rebuttal by evidence that the parties intended otherwise.

Likewise, majority of jurisdictions (including TX) hold that a floating lien is presumed, subject to rebuttal. Make sure to just go ahead and include "after-acquired" language in the security agreement.

Mark Escoto, a dentist, gets a loan from a patient to fund litigation arising out of defective construction of Escoto's home. Escoto signs a promissory note providing that the loan will be due in three years or upon settlement of the litigation. The note further states: "Escoto further pledges any and all personal possessions holdings and items of value as security and collateral for payment of this note and by this note grants Lender-Hillsman the right to remove any and all possessions of Escoto to be sold as necessary to recover debt in full and to effect garnishment of any paycheck, settlement monies, or other assets without the need of a court order regarding the same." Escoto comes into funds as a result of settling the lawsuit. Do the settlement funds become collateral of the patient creditor?

NO. As to the pledge of any and all personal possessions holdings and items of value, the bankruptcy court in this case concluded that this pledge encompassed only tangible items and not intangible interests such as legal claims and proceeds thereof (i.e., settlement proceeds).

The financing statement's description said "Various Equipment, see attached list." No list was attached. Is the statement sufficient to perfect a security interest in the debtor's equipment.

No. The absence of the list amounts to an insufficient description of collateral. "The description...certainly demands further search or inquiry. However, where does such search and inquiry begin and end?"

The security agreement stated that the collateral was "machinery, equipment, furniture and fixtures." To this list the financing statement added "inventory and accounts receivable." The parties are all willing to testify that the loan was intended to be secured by inventory and accounts receivable as well as by the items listed in the security agreement. Other creditors object. Does the secured party's interest reach inventory and accounts receivable?

No, it doesn't. A security interest cannot exist in the absence of a security agreement, and it follows that a security interest is limited to property described in the security agreement. Neither the financing statement nor the other loan documents can expand the bank's security interest beyond the security agreement.

Parol evidence cannot enlarge a security interest beyond that stated by an unambiguous security agreement.

The loan officer at ONB has sent you, the bank's attorney, an email with the following question. The bank is planning to make a loan to Luddite Technology, Inc., and wants to take a security interest in all of the equipment of the debtor. However, Luddite's most important piece of equipment is the very expensive Abacus-12, which designs computer hardware. Should the security agreement be drafted to say that the debtor grants a security interest in "the Abacus-12 plus all other equipment," "all agreement, particularly the Abacus-12," or simply "all equipment"? Do you have better phraseology?

To be super clear, you should include all that in your description. You don't HAVE to, but if you want to make it really really clear you should to play it safe.

But in theory, "all equipment" should give notice of the Abacus-12.

You could say: "all equipment, including but not limited to the Abacus-12."

The security agreement stated that the tractor buyer granted a security interest to "_____" but the seller forgot to fill in his name. The seller later filed a financing statement showing that he had a secured interest in the buyer's tractor. Is the purported document with the blank a §9-203 security agreement? What about the financing statement? What about both?

Some courts will be willing to tack the security agreement and financing statement together to save the situation, particularly where documents obviously refer to the same transaction and refer to one another.

Doesn't violate the parol evidence rule.

"Agreements can be explained or supplemented by evidence of consistent additional terms."

If the creditor agrees to provide value to a third party on the debtor's request, will the security interest still attach to the debtor's property?

This case held that the value provided to a third party (i.e., providing legal services to a client of the debtor) would meet the value requirement.

Under the relevant sections of UCC 9-203, "value may consist in any consideration sufficient to support a simple contract."

"Benefit to a third party is clearly sufficient to support a simple contract."

Daniel Huron loaned Jennifer Ontario money to buy a car. They agreed over the phone (oral agreement) that the car would be collateral for the debt. After Huron sent a form to the Registry of Motor Vehicles, he was listed as a creditor on the car's certificate of title. Does he have a security interest in the car?

There is no evidence of an oral agreement here because he does not have possession of the car.

Remember that an oral agreement can only be evidenced with possession.

The only other way to evidence this is through an agreement that is authenticated.

We might want to know if the debtor signed the application—some courts have held that an application may reflect an existing SA, but is not itself such an agreement.

Acro, Inc., owed considerable funds to its bank. The bank subsequently obtained possession of valuable promissory notes belonging to ACRO, and because the transactions were closed in the bank's offices, the notes were put in the bank's vault. Did the notes become collateral for ACRO's debt to the bank?

No. It fails RAVE because there is no agreement nor evidence. The bank cannot force a security interest just because they have possession.

To get a loan from Mutsy, Mason signed a security agreement putting up his partnership interest in MMC partners. The partnership agreement has a clause providing that partnership interests may not be assigned. Does the partnership interest become Mutsy's collateral?

This problem addresses the effectiveness or not of "anti-assignment clauses."

Such clauses (found in some partnership agreements and corporate bylaws) prohibit persons with interest/rights in the partnership/corporation from entering into later agreements (i.e., SAs) that might transfer interests/rights in partnership or corporation.

If such clauses are effective, then D has no rights to give (i.e., no "R" in RAVE)

Antos got a loan from Magnolia Financial Group, signing a security agreement putting up as collateral Antos's interest in a settlement agreement of certain litigation. The settlement agreement, however, has a clause stating that the rights under the agreement may not be assigned. Does Magnolia have a security interest in the funds received under the settlement?

A security interest will generally not attach if applicable law or a contract clause prohibits transfer of property.

But, there is a large exception: “no-transfer” clauses not effective for accounts or payment intangibles (§9-406). But, here, the SI DOES attach because of the exception for accounts or payment intangibles applies.

The settlement agreement is a payment intangible under the terms of Article 9 because it is a general intangible in which the primary obligation of the account debtor is to pay money.

Bruce Banner gets a loan for his biotech business, putting up as collateral his precision scientific instruments. What category of collateral are the instruments?

Equipment. Instruments are not necessarily instruments!

Banner (owner of a biotech company) gets his loan from Hector (with a SI in his precision scientific instruments). The parties make an oral agreement, sealed with a handshake. Hector delivers the money. Banner promises that the instruments are collateral for the debt, although Banner will retain them and use them in the lab's work. If called on to testify, Banner would freely testify to the agreement. Is the security agreement effective to create a security interest? Meaning, will it stand up if Banner goes into bankruptcy or another creditor gets a judgment against Banner?

No, because there was no agreement signed by Banner and Hector was not in possession of the collateral.

Pemulis Auto delivered a car to Lloyd under a Lease Agreement, which provided that Lloyd would own the car after making the required payments. Because such a transaction is in substance a secured sale on credit, Article 9 applies. Does that mean that Pemulis Auto would have no effective security. interest, because the parties signed a Lease Agreement, not a security agreement?

No--Pemulis Auto still has an effective security agreement, because the Lease Agreement will qualify as a security agreement.

Maximilian Miltzlaf signed a security agreement to put up his art collection as collateral and got a loan from Slippup Bank. Slippup Bank filed a UCC financing statement, but misspelled the debtor's name as "Maximilian Milztlaf." A search of the state's UCC records using its standard search logic under the debtor's correct name does not disclose the financing statement. Is the financing statement effective?

No. The error is deemed seriously misleading under the "Search Engine Test" because a search using the correct name does not disclose the statement filed with the incorrect name.

Maximilian Miltzlaf signed a security agreement to put up his art collection as collateral and got a loan from Slippup Bank. Slippup Bank filed a UCC financing statement, but misspelled the debtor's name as "Maximilian Milztlaf." Assume the financing statement is not effective because a search of the state's UCC records using standard search logic under the debtor's correct name does not disclose the financing statement. Does Slippup Bank have an enforceable security interest?

Yes. Slippup Bank has a security interest that is enforceable against Maximilian Miltzlaf, but would probably lose its security interest if Miltzlaf went into bankruptcy or another of Miltzlaf's creditors got a judgment lien on the art collection.

Your client, Archibald Gracie, owns The White Star of England, a famous large diamond currently on display at the Astor Museum in New York. Molly Brown, a wealthy Colorado investor, has agreed to buy the diamond from Gracie, and she has made a substantial down payment, with an agreement to make three more payments before she gets possession. Gracie and Brown have signed the purchase agreement, which contains a clause granting him a security interest in his own diamond until she has made all the required payments. His question to you is this: Can he perfect a security interest in the diamond by simply notifying the Astor Museum of the sale and telling the museum to hold it for his benefit until she makes a payment in full, thus creating an escrow arrangement in which possession is held by the escrow agent?

I believe so since escrow arrangements are fine according to 9-313 C.3. But I don’t have Ramirez notes on this.

Kiddie Delight, Inc., a manufacturer of toys, wanted to borrow money and use its inventory of toys as collateral. It called up Fred’s Field Warehouse Company, and Fred’s came to the plant, put the inventory in a locked room, and posted a sign on the door saying “Contents of Room Under Control of Fred’s Field Warehouse.” Fred’s then issued a negotiable warehouse receipt deliverable to the order of Kiddie Delight. Fred’s hired Mort Menial, the Kiddie Delight janitor, as its local warehouse custodian (Mort was paid $1 a week by Fred’s to mind the goods; he continued to receive his normal paycheck from Kiddie Delight). Kiddie Delight pledged the warehouse receipt (a document) to Mammon State Bank in return for a loan. Kiddie Delight went bankrupt shortly thereafter.

(a) By having possession of this document, did the bank have a perfected security interest in the inventory?

9-312(c) and 9-313 C.3

Assuming Fred’s Field Warehouse Company is not an agent of Kiddie Delight, this should be good to perfect their security interest. (my answer)

Kiddie Delight wanted to borrow money and use its inventory of toys as collateral. It called up Fred's Field Warehouse Company, and Fred's came to the plant, put the inventory in a locked room, and posted a sign on the door saying "Contents of Room Under Control of Fred's Field Warehouse." Fred's hired Mort Menial as its local warehouse custodian. Kiddie Delight pledged a warehouse receipt to Mammon State Bank in return for a loan. Kiddie Delight went bankrupt shortly thereafter.

(b) Assume the warehouse receipt is validly issued and effective. If the bank and Kiddie Delight signed a written security agreement covering the warehouse receipt and the inventory it represented and if the bank gave Kiddie Delight the money, does the bank have a perfected security interest in the warehouse receipt even BEFORE the bank gets possession of it?

See 9-312(e) (temporary perfection—C.9)

The answer is yes, even before it gets possession of the warehouse receipt itself. See C.8.

Kiddie Delight wanted to borrow money and use its inventory of toys as collateral. It called up Fred's Field Warehouse Company, and Fred's came to the plant, put the inventory in a locked room, and posted a sign on the door saying "Contents of Room Under Control of Fred's Field Warehouse." Fred's hired Mort Menial as its local warehouse custodian. Kiddie Delight pledged a warehouse receipt to Mammon State Bank in return for a loan. Kiddie Delight went bankrupt shortly thereafter.

(c) If Kiddie Delight, prior to bankruptcy, wanted to get the warehouse receipt back from the bank in order to present it to the warehouseman (Mort), get the goods, clean them, return them to the field warehouse, and get back the receipt for rehypothecation to the bank, will the bank lose its perfection if it turns the document over to the debtor?

9-312(f)

No—9-312 allows the debtor to have some access to the goods or deal with them in some manner preliminary to their sale or exchange. Grace periods for possession; perfection remains during those times.