1. Class 5 Secured Transactions, Fall, 2017 Perfection: Introduction
9/17/2018
Class 5 Secured Transactions, Fall, Perfection: Introduction
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. 9-308: When SI is Perfected (a) [Perfection of security interest.]
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9-308: When SI is Perfected
(a) [Perfection of security interest.]
Except as otherwise provided in this section and Section 9‑309, a security interest is perfected if it has attached and all of the applicable requirements for perfection in Sections 9‑310 through 9‑316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.
September 17, 2018

3. Standard Perfection Tools
Key Tools
Filing a financing statement
Taking possession
Taking control
Automatic perfection
Under what circumstances?
September 17, 2018

4. 3-1: Categorizing the Collateral
What is a glomph?
You don’t know and need to act accordingly
Need to recognize what you know and don’t know
Need to recognize what a judge in a lawsuit might see
Design the deal structure to manage the uncertainty
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5. Figuring out UCC Collateral Types
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Figuring out UCC Collateral Types
Debtor
Bank
1/1
FS: Equipment?
Inventory? $
SA: “Debtor hereby grants to Bank a security interest in Debtor’s copiers to secure all debts of Debtor to Bank.”
What category should Bank list in the FS?
September 17, 2018

6. 9-102(a)(44): Goods “Goods” means
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9-102(a)(44): Goods
“Goods” means
all things that are movable when a security interest attaches. … The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction.
September 17, 2018

7. Answer Drafting Approach What kind of good?
Conceptual definition of goods—movable things—with exclusions by other categories
Have to know those definitions to understand goods
But if this scheme is working copier will be good
What kind of good?
September 17, 2018

8. Classes of Goods Official Comment 4.a to 9-102
The classes of goods are mutually exclusive. For example, the same property cannot simultaneously be both equipment and inventory. In borderline cases–a physician’s car or a farmer’s truck that might be either consumer goods or equipment–the principal use to which the property is put is determinative.
September 17, 2018

9. Classes of Goods Official Comment 4.a to 9-102
Goods can fall into different classes at different times. For example, a radio may be inventory in the hands of a dealer and consumer goods in the hands of a consumer. As under former Article 9, goods are “equipment” if they do not fall into another category.
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10. 9-102(a)(33): Equipment “Equipment” means
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9-102(a)(33): Equipment
“Equipment” means
goods other than inventory, farm products, or consumer goods.
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11. 9-102(a)(23): Consumer Goods
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9-102(a)(23): Consumer Goods
“Consumer goods” means
goods that are used or bought for use primarily for personal, family, or household purposes.
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12. 9/17/2018
9-102(a)(34): Farm Products
“Farm products” means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:
(A) crops grown, growing, or to be grown, including:
(i) crops produced on trees, vines, and bushes; and
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13. 9/17/2018
9-102(a)(34): Farm Products
(ii) aquatic goods produced in aquacultural operations;
(B) livestock, born or unborn, including aquatic goods produced in aquacultural operations;
(C) supplies used or produced in a farming operation; or
(D) products of crops or livestock in their unmanufactured states.
September 17, 2018

14. 9/17/2018
9-102(a)(48): Inventory
(48) “Inventory” means goods, other than farm products, which:
(A) are leased by a person as lessor;
(B) are held by a person for sale or lease or to be furnished under a contract of service;
(C) are furnished by a person under a contract of service; or
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15. 9/17/2018
9-102(a)(48): Inventory
(D) consist of raw materials, work in process, or materials used or consumed in a business.
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16. Figuring out UCC Collateral Types
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Figuring out UCC Collateral Types
Debtor
Bank
1/1
FS: Equipment?
Inventory? $
SA: “Debtor hereby grants to Bank a security interest in Debtor’s copiers to secure all debts of Debtor to Bank.”
What category should Bank list in the FS?
September 17, 2018

17. Answer Depends on Facts What use is Debtor making of the copier?
If using it to run its business—like the Law School—it is equipment but if the copier is the thing that Debtor sells, then inventory
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18. Bean Timberland Bean Bank Potlach Idaho
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Bean Timberland
Bean
Bank
SA: Timber
FS: Timber
Sale of cut timber
Sale of cut timber
Is the timber inventory such that P and I are BIOCOB for 9-320?
Potlach
Idaho
September 17, 2018

19. Section 9-320: Buyer of Goods
(a) [Buyer in ordinary course of business.]
Except as otherwise provided in subsection (e), a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
September 17, 2018

20. Section 9-320: Buyer of Goods
Farm Security Act
Recall that FSA (7 USC 1631) creates parallel regime at federal level for farm products
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21. 1-201(b)(9): Definition of Buyer in Ordinary Course of Business
Buyer in ordinary course of business means
a person that buys goods in good faith without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind.
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22. 9-102(a)(44): Goods “Goods” means
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9-102(a)(44): Goods
“Goods” means
all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes.
September 17, 2018

23. The Status of Cut Timber
Official Comment 3 to 9-501
Unlike as-extracted collateral, standing timber may be goods before it is cut. See Section (defining “goods”). Once cut, however, it is no longer timber to be cut, and the filing in the real-property-mortgage office ceases to be effective. The timber then becomes ordinary goods, and filing in the office specified in subsection (a)(2) is necessary for perfection.
September 17, 2018

24. Why is the Court Wrong in Bean Timberland?
The Court’s Analysis
Equipment means “goods other than inventory, farm products, or consumer goods.” 9‑102(a)(33). The Commentary notes that, generally speaking, “goods used in a business are equipment if they are fixed assets or have, as identifiable units, a relatively long period of use.” See 9‑102. This obviously does not describe cut timber.
September 17, 2018

25. Why is the Court Right in Bean Timberland?
Categorize the cut timber
Farm products under 9-102(a)(34)?
Inventory under 9-102(a)(48)?
Equipment under 9-102(a)(33)?
September 17, 2018

26. Bean Timberland: Right Outcome, Wrong Reasons
Court gets outcome right because
Cut timber doesn’t seem to qualify as farm products and should qualify as inventory and therefore is not equipment
Not that cut timber isn’t farm products and isn’t equipment and therefore must be inventory
September 17, 2018

27. 11 East 36th LLC: Step 1 East 36th M. Lofts 15 Condos 13 Condos
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11 East 36th LLC: Step 1
East 36th
LLC
Sole Member
M. Lofts
LLC
15 Condos
13 Condos
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28. Borrows $, Grants Mortgage on Condo
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11 East 36th LLC: Step 2
Guthrie
M. Fund
LLC
Lends $
Borrows $, Grants Mortgage on Condo
Bank
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29. 11 East 36th LLC: Step 3 Guthrie East 36th M. Lofts 15 Condos
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11 East 36th LLC: Step 3
SA and FS: ???
Guthrie
East 36th
LLC
Sole Member
M. Lofts
Guthrie gets UCC9 SI. How should she do SA? FS?
LLC
15 Condos
13 Condos
September 17, 2018

30. 11 East 36th LLC: Step 3 Questions
How should we classify the collateral?
How should we describe it in the SA? The FS?
September 17, 2018

31. 11 East 36th LLC: Step 3 SA Language
“In relevant part, the 11 East 36th Pledge grants Guthrie a security interest in all of 11 East 36th’s ‘right, title, and interest in and to its membership interest in Morgan Lofts, LLC.’”
September 17, 2018

32. 11 East 36th LLC: Step 3 FS Language
“The collateral secured shall include 11 East 36th LLC’s interest in the following units owned by Morgan Lofts LLC located at 11 East 36th St., NY, NY: 701, 801, 803, 804, 903, 904, 1003, 1004, 1103, and The collateral shall not include units 1001, 1203, and 1204 located at 11 East 36th St., NY, NY …”
September 17, 2018

33. Security Interest in LLC Membership Interests
9-312(a): Perfection by filing permitted.
A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing.
Is the interest in the LLC interest “investment property”?
September 17, 2018

34. Security Interest in LLC Membership Interests
9-313(a): Perfection by possession or delivery.
Except as otherwise provided in subsection (b), a secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral.
Can’t perfect via possession for accounts, GI
September 17, 2018

35. Security Interest in LLC Membership Interests
9-313(a): Perfection by possession or delivery.
A secured party may perfect a security interest in certificated securities by taking delivery of the certificated securities under Section
Is the interest in the LLC interest a certificated security under 8-301?
September 17, 2018

36. Definition of Investment Property
9-102(a)(49): Definition of “Investment Property”
“a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account.”
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37. Analysis in 11 East 33th Street
Don’t know for sure, but …
Not trying to claim perfection based on possession
Filing works for investment property or for general intangibles and those are the competing characterizations here
September 17, 2018

38. Analysis in 11 East 33th Street
Actual FS wrong either way
But:
If FS about notice, what should we make of this FS?
September 17, 2018

39. Figuring out UCC Collateral Types
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Figuring out UCC Collateral Types
Copiers-R-Us™
Bank
Debtor is a copying firm. Provides copying services and sells and leases copiers. Also sells toner and paper.
How should Bank describe collateral in the SA? The FS?
September 17, 2018

40. Mapping Transactions and Collateral
Possible CRU transactions
Purchase new copiers
Buy more paper, toner
Sell toner/paper for cash/credit
Provide copying services on credit
Sell copiers for cash/credit
Lease copiers
September 17, 2018

41. Purchase New Copiers Collateral Issues
Should be inventory under 9-102(a)(48) but firm could use some of them internally in its business and those would likely be treated as equipment under 9-102(a)(33)
Potential lender would probably want both categories in SA/FS
September 17, 2018

42. Cash/Check Transaction
Collateral Issues
Actual cash or check will likely flow through deposit account
9-102(2)(29): “Deposit account” means a demand, time, savings, passbook, nonnegotiable certificates of deposit, uncertificated certificates of deposit, nontransferrable certificates of deposit, or similar account maintained with a bank.
September 17, 2018

43. Cash/Check Transaction
Collateral Issues
Deposit account as original collateral:
Must perfect via control (9-312(b)(1) and 9-314)
Deposit account as proceeds (derivative of prior collateral)
Need not take control (see 9-315(c, d))
September 17, 2018

44. Credit Transaction for Services, Paper/Toner
Collateral Issues
Do this as store credit (credit card or invoice payable in 30 days), not as Amex, Visa etc.
This will give rise to an “account” under 9-102(a)(2)
September 17, 2018

45. Own Credit Transaction for Services, Paper/Toner
“Account”, except as used in “account for”, means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, …
September 17, 2018

46. Own Credit Transaction for Services, Paper/Toner
(vii) arising out of the use of a credit or charge card or information contained on or for use with the card … . The term does not include (i) rights to payment evidenced by chattel paper or an instrument, … or
September 17, 2018

47. Own Credit Transaction for Services, Paper/Toner
(vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card.
Have to file FS for accounts; can’t possess or control (9-312, 9-313)
September 17, 2018

48. General Intangible Definition
9-102(a)(44): “General intangible” means
any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.
September 17, 2018

49. Third-Party Credit Case (Amex et al)
Collateral Types
Rights to store under contracts with Amex et al will give rise to general intangibles under 9-102(a)(44) and probably payment intangibles under 9-102(a)(61) (Payment intangible “means a general intangible under which the account debtor’s principal obligation is a monetary obligation.”)
September 17, 2018

50. Third-Party Credit Case (Amex et al)
See also comment 5.d to 9-102:
“A debtor’s right to payment from another person of amounts received by the other person on the debtor’s behalf, including the right of a merchant credit-card, debit-card, prepaid-card, or other payment-card transaction to payment of amounts received by its bank from the card
September 17, 2018

51. Third-Party Credit Case (Amex et al)
system in settlement of the transaction, is a ‘payment intangible.’ (In contrast, the right of a credit-card issuer payment arising out of the use of a credit card is an ‘account.’)”
New Comment
That comment was added in the 2010 amendments.
September 17, 2018

52. Lease of Copier Collateral Types 9-102(a)(11): “Chattel paper” means
a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of
September 17, 2018

53. Lease of Copier
software used in the goods, a lease of specific goods, or a lease of specified goods and a license of software used in the goods. In this paragraph, “monetary obligation” means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods.
September 17, 2018

54. One More Time Copiers-R-Us™ Bank Lessee
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One More Time
Copiers-R-Us™
Bank ?
One year lease of copier with 5 year life; 12 monthly payments followed by return of copier
How should Bank describe collateral in the SA? The FS?
Lessee
September 17, 2018

55. Answer Should be straightforward
When CRU looks to borrow money from Bank, it offers as collateral the lease rights and that will be classified as chattel paper under 9-102(a)(11)
Tangible CP vs. Electronic CP will matter (see 9-105) but not today
September 17, 2018

56. Unbundling Chattel Paper
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Unbundling Chattel Paper
Copiers-R-Us™
Bank1
Payment Stream under CP
One year lease of copier with 5 year life; 12 monthly payments followed by return of copier
How should Banks describe collateral in the SA? The FS?
Non-Payment Rights under CP
Lessee
Bank2
September 17, 2018

57. Is this Commercial Money Center?
And
Is this just glomphs again?
September 17, 2018

58. Ex Post Argument Drivers
As to perfection:
No financing statements filed
Questions re possession (next week)
Auto perfection for sales of payment intangibles under 9-309(3)
Trustee wants to avoid sale characterization and payment intangible classification
September 17, 2018

59. Court’s Analysis Payment Intangibles?
“Payment streams stripped from the underlying leases are not records that evidence monetary obligations—they are monetary obligations. Therefore, we agree with NetBank that the payment streams are not chattel paper.”
September 17, 2018

60. Court’s Analysis
“If they are not chattel paper, what are they? Most monetary obligations are ‘accounts’ but the definition of account excludes ‘rights to payment evidenced by chattel paper.’ Therefore the monetary obligations in this case fall within the payment intangible subset of the catch-all definition of general intangibles. See 9-102(a)(2) … .”
September 17, 2018

61. 2010 Comment Changes Revised Comment 5.d to 9-102 Rejects CMC I
“Thus, an assignment of the lessor’s right to payment under a lease also transfers the lessor’s rights with respect to the leased goods under Section 2A-523.”
September 17, 2018

62. 2010 Comment Changes Revised Comment 5.d to 9-102 Rejects CMC I
“If, taken together, the lessor’s rights to payment and with respect to the leased goods are evidenced by chattel paper, then, contrary to In re Commercial Money Center, Inc., 350 B.R. 465 (Bankr. App. 9th Cir. 2006), an assignment of the lessor’s right to payment constitutes an assignment of the chattel paper.”
September 17, 2018

63. 2010 Comment Changes Revised Comment 5.d to 9-102 Rejects CMC I
“Although an agreement excluding the lessor’s rights with respect to the leased goods from an assignment of the lessor’s right to payment may be effective between the parties, the agreement does not affect the characterization of the collateral to the prejudice of creditors of, and purchasers from, the assignor.”
September 17, 2018