1. Class 16 Secured Transactions, Fall, 2018 Choice of Law
11/7/2018
Class 16 Secured Transactions, Fall, Choice of Law
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. Choice of Law by the Parties
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Choice of Law by the Parties
Generally Respected
See UCC and 1-302
Called Off for Perfection in Article 9
See UCC 1-301(c)[7 or 8]
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3. Why Do We Care about Choice of Law?
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Why Do We Care about Choice of Law?
Two Critical Issues for Article 9
Where to file financing statements
Non-uniformities
One result in one state, a second result in another state
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4. 11/7/2018
9-301
Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law governing perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral:
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5. Specific Collateral Types, Specific Rules
9-303: Goods covered by Certificate of Title
9-304: Deposit Accounts
9-305: Investment Property
9-306: Letter-of-Credit Rights
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6. 9-301(4): As-Extracted Collateral
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9-301(4): As-Extracted Collateral
(4) The local law of the jurisdiction in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral.
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7. 9-301(2): Possessory Security Interest
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9-301(2): Possessory Security Interest
(2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral.
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8. 9-301(3)(A), (B): Fixture Filings, Timber to Be Cut
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9-301(3)(A), (B): Fixture Filings, Timber to Be Cut
(3) Except as otherwise provided in paragraph (4), while negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs:
(A) perfection of a security interest in the goods by filing a fixture filing;
(B) perfection of a security interest in timber to be cut; and
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9. 11/7/2018
9-301
Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law governing perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral:
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10. 11/7/2018
9-301(1): Baseline Rule
(1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral.
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11. 11/7/2018
9-301(3)
(3) Except as otherwise provided in paragraph (4), while negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs:
(C) the effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral.
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12. Three Questions Magenta Issues Questions
Are you “a debtor located in a jurisdiction”?
Are these “goods … located in a jurisdiction”?
Determined under choice of law rules of forum jurisdiction
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13. Three Questions Are You Perfected? Green: “Governs perfection”
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Three Questions
Are You Perfected?
Green: “Governs perfection”
The local law of the location of the debtor determines this under 9-301(1)
This matters for figuring out where to file a financing statement
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14. Three Questions If You Are Perfected, With What Consequences?
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Three Questions
If You Are Perfected, With What Consequences?
Purple: “Governs the effect of perfection or nonperfection, and the priority of a security interest in collateral”
Call this EPNP&P
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15. 11/7/2018
Three Questions
Which local law governs EPNP&P this depends on the type of collateral in issue
For nonpossessory SIs, the local law of the location of the collateral governs EPNP&P for goods and the other collateral types in 9-301(3)
For the rest—think SIs in accounts and general intangibles—the local law of the location of the debtor governs EPNP&P
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16. 11/7/2018
9-501
(a) [Filing offices.]
Except as otherwise provided in subsection (b), if the local law of this State governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is:
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17. 11/7/2018
9-501
(2) the office of [ ] [or any office duly authorized by [ ]], in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.
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18. 9-307: Location of Debtor (a) [“Place of business.”]
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9-307: Location of Debtor
(a) [“Place of business.”]
In this section, “place of business” means a place where a debtor conducts its affairs.
(b) [Debtor’s location: general rules.]
Except as otherwise provided in this section, the following rules determine a debtor’s location:
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19. 11/7/2018
9-307: Location of Debtor
(1) An debtor who is an individual is located at the individual’s principal residence.
(2) A debtor that is an organization and has only one place of business is located at its place of business.
(3) A debtor that is an organization and has more than one place of business is located at its chief executive office.
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20. 11/7/2018
9-307: Location of Debtor
(e) [Location of registered organization organized under State law.]
A registered organization that is organized under the law of a State is located in that State.
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21. Which Location and When?
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Which Location and When?
Location of the Debtor
Always matters for questions of perfection
Matters for EPNP&P for collateral that doesn’t have a natural location (AR and GI)
Location of the Collateral
Matters for EPNP&P certain types of collateral (including goods)
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22. Oil, Gas and Minerals as Collateral
Two Key Situations
Owner of OGM borrows money
Wants to use the OGM as collateral
Owner of OGM lends money in a sale of OGM
Wants to sell OGM, finance the sale and take interest in it as collateral (PMSI) (SemCrude)
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23. Two Key Situations in Mind
Owner Borrows Money
Wants to grant an SI in oil and gas
Enters into that transaction before oil and gas are extracted
Article 9 as-extracted collateral rules (see 9-102(a)(6)) might apply to this situation
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24. Two Key Situations in Mind
Owner Lends Money in Sale of OGM
Owner is financing purchase of oil and gas by buyer and wants to take an SI in oil and gas as collateral for sales price
This is, simplified, the situation in SemCrude
As-extracted collateral rules should not apply to this situation
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25. OGM as Collateral for Owner Lending
As-Extracted Collateral Generally Inapplicable
Debtor is going to be the purchaser of the OGM with sale financed by Owner
As-extracted collateral regime applies to situations where owner is debtor, not where owner is secured creditor
Ordinary Article 9 rules apply where owner is lender
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26. Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Bank
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Sale of OGM
Sem1 OKLP
Sem2 DELP
Sem3 OKLP
KS Producers
Sell O&G
No FS
SA: All Assets
FS: OK/DE
Bank
Who has priority?
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27. Creating an Ordinary PMSI
Usual Process
Execute SA
File FS (in which state?)
Give appropriate notices required under 9-324(b)
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28. Where to File FS? Assuming uniform version of 9-301
9-301(4) covers as-extracted collateral, but that isn’t SemCrude
9-301(1) says governs perfection question governed by local law of the debtor’s location
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29. Where to File FS? Assuming uniform version of 9-307(e)
A registered organization that is organized under the law of a State is located in that State.
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30. Where to File FS? 9-102(a)(71) “Registered organization”
means an organization formed or organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States.
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31. Where to File FS? 9-102 Official Comment 11
“Not every organization that may provide information about itself in the public records is a ‘registered organization’. For example, a general partnership is not a "registered organization", even if it files a statement of partnership authority under section 303 of the Uniform Partnership Act (1994) or an assumed name (‘dba’) certificate.”
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32. Where to File FS? 9-102 Official Comment 11
“This is because such a partnership is not formed or organized by the filing of a record with, or the issuance of a record by, a state or the United States. In contrast, corporations, limited liability companies, and limited partnerships ordinarily are ‘registered organizations’.”
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33. Meaning Here For Ordinary PMSI File in location of debtor
Under 9-307(e), file where debtor is registered, meaning Oklahoma and Delaware
Under 9-301(1), location of debtor will govern perfection
Under 9-301(3), for goods, location of collateral will govern EPNP&P

34. Kansas 9-339a Non-Uniform SI in Favor of Certain Oil and Gas Producers
Purchase agreement itself operates as security agreement (9-339a(a))
SI perfected on recording of affidavit of production (9-339a(b))
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35. Kansas 9-339a
Given PMSI status without having to give standard notices (9-339a(f))
SI covers oil and gas itself and certain proceeds (9-339a(c))
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36. Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Bank
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Sale of OGM
Sem1 OKLP
Sem2 DELP
Sem3 OKLP
KS Producers
Sell O&G
No FS
SA: All Assets
FS: OK/DE
Do the KS Producers have a SI? Who has priority in a bankruptcy case filed in DE?
Bank
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37. Choosing Applicable Law Outside of 9-301 to 9-307
Debtor and SP Can Choose Some Law (But Not all Law)
1-301(c)[7 or 8] bars choice of law only as to issues covered by to 9-307
Debtor and SP should be able to choose Kansas law for, for example, attachment of the security interest
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38. Meaning Here? Do through Sale Contract
Kansas producers should provide in sales contract that they get the benefits of Kansas 9-339a
That would give them a security interest without doing a security agreement
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39. Perfection: Applying All of this Here
Uniform 9-301’s (and KS is uniform too)
Bankruptcy filed in DE
Federal court under Klaxon applies state choice of law regime
Applies DE 9-301
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40. Applying All of this Here
Under DE 9-301
Debtor’s location controls governs perfection question under 9-301(1)
Under 9-307(e), that is where LP is registered, here OK and DE
For goods, EPNP&P question governed by KS law
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41. Applying All of this Here
Meaning?
As to O&G, KS producers needed to file FSs in OK/DE to perfect
Didn’t do so, so unperfected (with SI created by sale contract and allowed choice of Kansas law)
Under KS version of and 9-317, unperfected creditor loses to perfected secured creditors
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42. Is this Surprising? Designing Non-Uniform Statutes
What did Kansas hope to accomplish with KS 9-339a?
Did it work?
How should it re-design the statute to accomplish its desired end?
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43. Does the Purchaser take free and clear of KS Producer SI?
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Second Sale of OGM
Sem1 OKLP
Sem2 DELP
Sem3 OKLP
KS Producers
Sell O&G
No FS
SA: All Assets
FS: OK/DE
Does the Purchaser take free and clear of KS Producer SI?
Bank
Sell O&G
Purchaser
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44. Two Relevant Sections 9-317(b): Buyer for Value
9-320: Buyer in the Ordinary Course of Business
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45. 9-317(b): Buyer For Value (b)
Except as otherwise provided in subsection (e), a buyer, other than a secured party, of tangible chattel paper, tangible documents, goods, instruments, or a certificated security takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.
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46. Two Key Issues
Value
Bought oil on credit but 8th Circuit says promise to pay suffices for value
Other related transactions didn’t change that
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47. Two Key Issues Knowledge: 1-202
(a) Subject to subsection (f), a person has “notice” of a fact if the person:
(1) has actual knowledge of it;
(2) has received a notice or notification of it; or
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48. Two Key Issues Knowledge: 1-202
(3) from all the facts and circumstances known to the person at the time in question, has reason to know that it exists.
(b) “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
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