The University of Chicago 11/21/2018 Class 8 Secured Transactions, Fall, 2018 Perfection: Description Requirement & Possession Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-18 Randal C. Picker. All Rights Reserved.

9-502 (a) [Sufficiency of financing statement.] 11/21/2018 9-502 (a) [Sufficiency of financing statement.] Subject to subsection (b), a financing statement is sufficient only if it: (1) provides the name of the debtor; (2) provides the name of the secured party or a representative of the secured party; and (3) indicates the collateral covered by the financing statement. November 21, 2018

9-504: Indication of Collateral 11/21/2018 9-504: Indication of Collateral A financing statement sufficiently indicates the collateral that it covers if the financing statement provides: (1) a description of the collateral pursuant to Section 9‑108; or (2) an indication that the financing statement covers all assets or all personal property. November 21, 2018

“Assignment AR” and Proceeds 11/21/2018 Thorp 5/13/71: $6500 Bank Northgate SA: AR & Proceeds FS: 5/21/71, Minn SS “Assignment AR” and Proceeds SA: AR FS: AR 4/2/72 $ Who has priority in AR? Thorp November 21, 2018

Two Views of the Description Requirement 11/21/2018 Two Views of the Description Requirement Notice Independent Sufficiency November 21, 2018

Two Views of the Description Requirement 11/21/2018 Two Views of the Description Requirement Notice “Under one view a financing statement adequately covers collateral if it reasonably puts a subsequent creditor on notice of a need for further inquiry about the possibility that the collateral is subject to a prior security interest. November 21, 2018

Two Views of the Description Requirement 11/21/2018 Two Views of the Description Requirement The reasonableness of the notice would depend on balancing such factors as the difficulty of making further inquiry against factors such as the likelihood the type of collateral described in the financing statement might include the collateral which interests the subsequent creditor.” November 21, 2018

Two Views of the Description Requirement 11/21/2018 Two Views of the Description Requirement Independent Sufficiency “Under the second view of Article 9, a financing statement suffices to perfect a security interest in collateral if the financing statement itself contains a reasonable description of the collateral. November 21, 2018

Two Views of the Description Requirement 11/21/2018 Two Views of the Description Requirement The determination of reasonableness involves balancing such factors as the ease with which the prior creditor could make the description of the collateral more precise or clearer against factors like the danger that a subsequent creditor might fail to recognize that the collateral is covered.” November 21, 2018

FS Need Not Describe Collateral? Per the Court “The [view that] requires that the financing statement by its own terms describe the collateral cannot be supported under Article 9. Article 9 simply does not require that the financing statement describe anything more than the type of collateral and leaves to interested parties the burden of seeking more information.” November 21, 2018

With the Result Per the Court “A subsequent creditor, faced with notice that a security interest may exist or be created in any or all of the debtor’s accounts, would certainly have reasonable grounds for inquiring further before relying on any of the debtor’s accounts for collateral.” November 21, 2018

With the Result Per the Court “We conclude that under Minnesota law applying the UCC the financing statement covering ‘assignment accounts receivable’ was adequate to perfect the Bank’s security interest in accounts acquired subsequent to the filing of the financing statement, whether or not there was a specific assignment of particular accounts.” November 21, 2018

Key Point: FS Description Defines Extent of Priority 11/21/2018 Key Point: FS Description Defines Extent of Priority Description and Scope of Priority The scope of possible priority held by the secured creditor is defined by the description in the financing statement Inquiry might tell a subsequent party the scope of the security agreement today It cannot tell what will happen in the future November 21, 2018

Key Point: FS Description Defines Extent of Priority 11/21/2018 Key Point: FS Description Defines Extent of Priority A subsequent secured creditor must control prior FS through contract or risk loss of position through interpretation November 21, 2018

ProGrowth Wells Fargo Hanson ProGrowth 11/21/2018 ProGrowth 9/8/05: $ Wells Fargo Hanson SA: Two Annuity Contracts by Fidelity & Guaranty Life L9E00015 and L9E00016 FS: xxx SA: Ann FS: Ann 2/9-14/06: $ 9/16/05: FS: yyy ProGrowth Who has priority in Annuity Contracts? November 21, 2018

November 21, 2018 Wells Fargo FS

November 21, 2018 Wells Fargo FS

November 21, 2018 Wells Fargo FS

November 21, 2018 Wells Fargo FS

November 21, 2018 Pro Growth FS

November 21, 2018 Pro Growth FS

November 21, 2018 Pro Growth FS

9-313: Perfection through Possession 11/21/2018 9-313: Perfection through Possession No definition of possession (see comment 3) Possession is effective for certain collateral categories (9-313(a)) New statute offers greater specificity regarding rules in third-party situations (subs f, g, h and i) November 21, 2018

Definition of Possession 9-313 Comment 3 “This section does not define ‘possession.’ It adopts the general concept as it developed under former Article 9. As under former Article 9, in determining whether a particular person has possession, the principles of agency apply.” November 21, 2018

9-313(c) (c) [Collateral in possession of person other than debtor.] 11/21/2018 9-313(c) (c) [Collateral in possession of person 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: November 21, 2018

11/21/2018 9-313(c) (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. November 21, 2018

9-313(h) (h) [Secured party’s delivery to person other than debtor.] 11/21/2018 9-313(h) (h) [Secured party’s delivery to person other than debtor.] A secured party having possession of collateral does not relinquish possession by delivering the collateral to a person other than the debtor or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business if the person was instructed before the delivery or is instructed contemporaneously with the delivery: November 21, 2018

11/21/2018 9-313(h) (1) to hold possession of the collateral for the secured party’s benefit; or (2) to redeliver the collateral to the secured party. November 21, 2018

Has a perfected security interest been created? 11/21/2018 3‑12: Simple Possession Debtor Bank 1/1 Watch and Receipt $50 loan Has a perfected security interest been created? November 21, 2018

3‑12: Answers Answer The watch is a good under 9-102(a)(44) 11/21/2018 3‑12: Answers Answer The watch is a good under 9-102(a)(44) Goods are possession-eligible under 9-313(a) The watch is in the possession of the secured party under 9-313 for the purposes of 9-203(b)(3)(B) November 21, 2018

3‑13: Possession and Bailees 11/21/2018 3‑13: Possession and Bailees Debtor Bank 1/1 Watch and Receipt $50 loan 2/1 Watch Is Bank still perfected? Bailee November 21, 2018

3‑13: Answer Bank will need to satisfy mechanics of 9-313(h) 11/21/2018 3‑13: Answer Bank will need to satisfy mechanics of 9-313(h) November 21, 2018

3‑13: Possession and Bailees 11/21/2018 3‑13: Possession and Bailees 1/1 Swap Watch and Receipt For $50 loan Debtor Bank 2/1 Watch Is Bank still perfected? November 21, 2018

3‑13: Answer Undercuts ostensible ownership concern 11/21/2018 3‑13: Answer Undercuts ostensible ownership concern Both 9-313(c) and 9-313(h) bar debtor from being eligible to act on behalf of secured party And see again 9-313 Comment 3 “The debtor cannot qualify as an agent for the secured party for purposes of the secured party’s taking possession.” November 21, 2018

Mixed Perfection and Priority 11/21/2018 TTYN Mixed Perfection and Priority Corp Finco 1/1 SA: Computer Perfect: Via Possession $10K 2/1 SA: Computer FS: Computer $10K 2/1: Who has priority to computer? Bank November 21, 2018

Answer 9-322(a)(1): Earlier of First to File or Perfect Finco wins Finco perfected 1/1 Bank filed and perfected on 2/1 Finco wins November 21, 2018

Mixed Perfection and Priority 11/21/2018 TTYN Mixed Perfection and Priority Corp Finco 1/1 SA: Computer Perfect: Via Possession $10K 1/1 SA: Computer Perfect: Via Possession $10K 2/1 SA: Computer FS: Computer $10K 3/1 FS: Computer Gives up Poss. Computer Bank 3/1 Who has priority? November 21, 2018

11/21/2018 4-5: Answer 9-322(a)(1): Earlier of the time a filing covering the collateral is first made or the security interest is first perfected Finco perfected on 1/1, filed on 3/1 Bank filed and perfected on 2/1 Finco wins November 21, 2018

Secured Creditors and Bankruptcy Avoiding Powers Unperfected Secured Creditor Loses SI Trustee in bankruptcy has status of hypothetical lien creditor under BC 544(a)(1) Under 9-317(a)(1), lien creditor has priority over unperfected secured creditor Trustee can avoid security interest and then preserve it for bankruptcy estate for benefit of unsecured creditors under BC 551 November 21, 2018

Secured Creditors and Bankruptcy Avoiding Powers Late Perfected SI May be Avoidable as Preference Transfers to creditors within 90 days prior to bankruptcy are suspect Grant of SI on account of prior debt counts BC 547(e) sets forth timing rules for transfers November 21, 2018

Secured Creditors and Bankruptcy Avoiding Powers If SI is perfected late—beyond 30 days after the transfer actually took place between the parties—then the transfer is deemed to take place at the time of perfection. Late perfection will create the antecedence required for a preference November 21, 2018

Secured Creditors and Bankruptcy Avoiding Powers Bottom Line Unperfected SI will be lost in bankruptcy under BC 544(a)(1) Late perfected SI may be avoided as preference under BC 547 Mental note for later: BC 547(e)(3) and after-acquired property clauses November 21, 2018

CMC II CMC Royal NetBank Lease Pool Assignments: CMC I payment intangibles transaction; SI in leases, EQ + More (No FSs and not a true sale) Surety Bonds on Lease Pools; 3-party SSA with Royal as servicer and CMC as sub-servicer NetBank November 21, 2018

Default Transactions Key Events 2/1/2002: Royal court action against CMC 2/11/2002 – 3/26/2002: Royal and CMC stipulate to TROs 3/4/2002: CMC provides CDs of lease accounting data and copies of electronic files to Royal November 21, 2018

Default Transactions Key Events 3/12/2002: Royal gets possession of lease files 5/30/2002: CMC files Chapter 11 case 90 days prior to that is 3/1/2002 November 21, 2018

Possession? Limits in TRO per the Court “The amendments to the TRO further prohibited CMC from: (1) withdrawing any lease payments from certain accounts related to the Royal bonded lease pools; (2) removing any leases from Royal bonded lease pools without Royal’s consent; November 21, 2018

Possession? “(3) depositing any Royal bonded lease payments into accounts other than those related to the Royal bonded lease pools; (4) instructing lessees in the Royal bonded lease pools to deposit or transfer lease payments into bank accounts other than those related to Royal; (5) depositing any proceeds from any collection activities related to any Royal bonded leases into bank accounts other than those related to Royal;” November 21, 2018

Possession? Are these equivalent to possession? “(6) transferring any payments from leases that had been removed from the Royal bonded lease pools (‘removed leases’) and placed into non-Royal accounts; and (7) selling or transferring any of the removed leases or any payments derived from the removed leases without Royal’s consent.” Are these equivalent to possession? November 21, 2018