1. Class 15 Secured Transactions, Fall, 2018 Transfers
6/9/2019
Class 15 Secured Transactions, Fall, Transfers
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. Diamond Walnut Bella Farms Bank Diamond Customers
6/9/2019
Diamond Walnut
Bella Farms
1981: $ USC
Bank
SA: 1983 Crop $ PR
FS: Same
Who has priority as to the crop?
Who has priority as to the proceeds?
Delivers
Crop
SA: Member Proceeds
1983 Walnut Crop
FS: Calif SS $
Diamond
Pay $
Sell Crop
Customers
June 9, 2019

3. 5‑4: Control v. Proceeds Interest
6/9/2019
TTYN
5‑4: Control v. Proceeds Interest
Finco
Debtor
3/1
SA,FS: INV, AR, PR $
2/1
Control of deposit account $
4/1
Debtor Sells Inventory
$10K AR
Bank
4/1 Who has priority?
June 9, 2019

4. Attachment of Original SI in Deposit Account
9-203(b)(3)(D)
Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if: …
June 9, 2019

5. Attachment of Original SI in Deposit Account
(D) the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents, and the secured party has control under Section 7-106, 9-104, 9-105, 9-106, or pursuant to the debtor’s security agreement.
June 9, 2019

6. Perfection of SI in Deposit Account
9-312(b)(1)
Except as otherwise provided in Section 9-315(c) and (d) for proceeds:
(1) a security interest in a deposit account may be perfected only by control under Section 9-314;
June 9, 2019

7. 5‑4: Answer Bank has no right to AR on 4/1
6/9/2019
5‑4: Answer
Bank has no right to AR on 4/1
Finco is fully perfected in the AR
Finco has priority in AR
June 9, 2019

8. 5‑4: Control v. Proceeds Interest
6/9/2019
TTYN
5‑4: Control v. Proceeds Interest
Finco
Debtor
3/1
SA, FS: INV, AR, PR $
2/1
Control of deposit account $
4/1
Debtor Sells Inventory
$10K AR
5/1
Customer pays Debtor
via check and Debtor
deposits in deposit account
5/1 Who has priority?
Bank
June 9, 2019

9. 9-327: Deposit Account Priority
6/9/2019
9-327: Deposit Account Priority
The following rules govern priority among conflicting security interests in the same deposit account:
(1) A security interest held by a secured party having control of the deposit account under Section 9‑104 has priority over a conflicting security interest held by a secured party that does not have control.
June 9, 2019

10. 9-327: Deposit Account Priority
6/9/2019
9-327: Deposit Account Priority
(2) Except as otherwise provided in paragraphs (3) and (4), security interests perfected by control under Section 9‑314 rank according to priority in time of obtaining control.
June 9, 2019

11. 9-327: Deposit Account Priority
6/9/2019
9-327: Deposit Account Priority
(3) Except as otherwise provided in paragraph (4), a security interest held by the bank with which the deposit account is maintained has priority over a conflicting security interest held by another secured party.
June 9, 2019

12. 9-327: Deposit Account Priority
6/9/2019
9-327: Deposit Account Priority
(4) A security interest perfected by control under Section 9‑104(a)(3) has priority over a security interest held by the bank with which the deposit account is maintained.
June 9, 2019

13. Summing Up 9-327 on Deposit Account Priorities
6/9/2019
Summing Up on Deposit Account Priorities
Control v. Non-Control
Control wins (9-327(1))
SP Control v. SP Control
First in time wins (9-327(2))
June 9, 2019

14. Summing Up 9-327 on Deposit Account Priorities
6/9/2019
Summing Up on Deposit Account Priorities
SP Otherwise v. Bank in Control
Bank wins (9-327(3))
SP as Customer v. Bank in Control
SP wins (9-327(4))
June 9, 2019

15. 6/9/2019
5‑4: Answer
Answer
Finco has perfected security interest in deposit account as proceeds under 9-315
Depending on tracing rules, DA may be identifiable cash proceeds, and if so covered under 9-315(d)(2)
Bank wins under 9-327(1)
June 9, 2019

16. 5‑4: Control v. Proceeds Interest
6/9/2019
5‑4: Control v. Proceeds Interest
Finco
Debtor
2/1
SA, FS: INV, AR, PR $
3/1
Control of deposit account $
4/1
Debtor Sells Inventory $
5/1
Customer pays Debtor
via check and Debtor
Deposits in DA
Would that change the outcome?
Bank
June 9, 2019

17. 5‑4: Answer No. Priority under 9-327(1) is not temporal
6/9/2019
5‑4: Answer
No. Priority under 9-327(1) is not temporal
Method of perfection, not timing, controls
June 9, 2019

18. 5‑5: Proceeds v. Proceeds Finco Debtor Bank
6/9/2019
TTYN
5‑5: Proceeds v. Proceeds
Finco
Debtor
3/1
SA, FS: INV, AR, PR $
2/1
Control of deposit account $
4/1
Debtor Sells Inventory $
5/2
Debtor withdraws $
Buys new inventory
5/1
Customer pays Debtor
via check and Debtor
Deposits in DA
Bank
5/2 What are the relative priorities of Bank and Finco?
June 9, 2019

19. 6/9/2019
5‑5: Answer
Answer
9-322(c), (d) and (e) address proceeds of controlled collateral
9-322(c) covers mainly proceeds of controlled collateral where the proceeds is cash proceeds or a controlled collateral type
June 9, 2019

20. 6/9/2019
5‑5: Answer
Answer
9-322(d) and 9-322(e) address proceeds of controlled collateral where the proceeds are not one of those types
Inventory is one of those types
June 9, 2019

21. 6/9/2019
5‑5: Answer
Answer
This is example 12 in the comment 9 to 9-322, with inventory swapped for equipment
Finco wins as to new inventory
June 9, 2019

22. Answer 9-322 (e) [Applicability of subsection (d).]
Subsection (d) applies only if the proceeds of the collateral are not cash proceeds,chattel paper, negotiable documents, instruments, investment property, or letter-of-credit rights.
June 9, 2019

23. Answer 9-322(d) [First-to-file priority rule for certain collateral.]
Subject to subsection (e) and except as otherwise provided in subsection (f), if a security interest in … deposit accounts … is perfected by a method other than filing, conflicting perfected security interests in proceeds of the collateral rank according to priority in time of filing.
June 9, 2019

24. Answer Applying this Here
The proceeds are inventory (goods), so 9-322(e) makes clear that 9-322(d) does apply
Bank hasn’t filed at all, so Finco holds priority in inventory as rule ties priority in proceeds of DA to timing of filing
June 9, 2019

25. Answer Applying this Here
Even if Bank did file in the 20-day perfection window of 9-315(d), that filing would be second to Finco’s filing and therefore Finco would have priority under 9-322(d)
See comment 9, example 12
June 9, 2019

26. Question
What about the $ that came out of the deposit account to the buy the inventory?
This is Tusa and
June 9, 2019

27. Two Deposit Accounts? Bank2 Debtor Finco Bank1 Creditco
6/9/2019
TTYN
Two Deposit Accounts?
Bank2
3/10: D sets up new DA
2/1: $
SA, FS: INV, AR, PR
Debtor
Finco
1/10: D sets up deposit account
3/1: Takes control of DA with Bank1
What priority on 3/5? 3/10?
Creditco
Bank1
3/5: Inv proceeds enter DA
June 9, 2019

28. Answer
3/5
This is the case from earlier. Creditco has priority over Finco, as under 9-327(1), control beats non-control
June 9, 2019

29. Answer
3/10
This is 9-322(c)(2)
The new deposit account will qualify as cash proceeds under 9-102(a)(9); assuming identifiability, attach under 9-315(a)(2) and perfect under 9-315(d)(2)
Creditco wins under 9-322(c)(2)
June 9, 2019

30. Two Deposit Accounts, Three SPs
6/9/2019
TTYN
Two Deposit Accounts, Three SPs
Bank2
3/10: D sets up new DA
2/1: $
SA, FS: INV, ACC, PR
Debtor
Finco
3/20: Takes control of DA with Bank2
1/10: D sets up deposit account
3/1: Takes control of DA with Bank1
Lendco
Creditco
Bank1
What priority on 3/20?
3/5: Inv proceeds enter DA
June 9, 2019

31. Answer 3/20 Lendco beats Creditco who beats Finco
Lendco wins under 9-327(1) given control of DA at Bank2
9-322(c) isn’t applicable as Lendco never had rights as to DA at Bank1
June 9, 2019

32. Tusa-Expo Holdings Tusa Office Kroll Textron Customer Bank
6/9/2019
Did Kroll receive proceeds?
Tusa-Expo Holdings
4/30/2002: $
SA, FS: All Assets
Kroll
Tusa Office
7/2009: Lockbox deposit account
7/2009: $
SA, FS: All Assets
7/2009: Subordination agreement
Textron
Customer
Bank
Make payment into lockbox and funds flow
June 9, 2019

33. Why Do We Care about Proceeds Here?
Bankruptcy Code Preferences
Mechanics of Preferences under Section 547(b)(5) of the Bankruptcy Code
June 9, 2019

34. Money and Tusa-Expo 1-201(a)(24)
(24) “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.
June 9, 2019

35. Money and Tusa-Expo No Money Here in Purple Value Flow Probably not
Customer probably not paying cash
Certainly no cash from Bank to Textron to Tusa to Kroll
June 9, 2019

36. Money and 9-332(a) (a) Transferee of money.
A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
June 9, 2019

37. Funds and Tusa-Expo Purple Value Flow Should be Funds Flow
9-332(b). Transferee of funds from deposit account.
A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
June 9, 2019

38. Tusa-Expo Answer (Not What the Court Says)
Piece by piece
Customer makes payment via check into lockbox
That lockbox (deposit account) will be proceed of Kroll SI in AR
At that point, Kroll will have a SI in deposit account (and nothing more vis-à-vis Customer payment)
June 9, 2019

39. Tusa-Expo Answer (Not What the Court Says)
Piece by piece
When value flows from Bank to Textron, Textron should take free of all SIs in deposit account per 9-332(b)
When value eventually flows to Kroll, it isn’t getting proceeds
June 9, 2019

40. Protecting Funds Flows
See Comments to 9-332
Comment 2
“This section affords broad protection to transferees who take funds from a deposit account and to those who take money.”
June 9, 2019

41. Protecting Funds Flows
See Comments to 9-332
Comment 3
“Broad protection for transferees helps to ensure that security interests in deposit accounts do not impair the free flow of funds. It also minimizes the likelihood that a secured party will enjoy a claim to whatever the transferee purchases with the funds.”
June 9, 2019

42. Protecting Funds Flows
See Comments to 9-332
Comment 3
“Rules concerning recovery of payments traditionally have placed a high value on finality. The opportunity to upset a completed transaction, or even to place a completed transaction in jeopardy by bringing suit against the transferee of funds, should be severely limited.”
June 9, 2019

43. 9-315: Continuation of the SI After Transfer
6/9/2019
9-315: Continuation of the SI After Transfer
(a) [Disposition of collateral: continuation of security interest or agricultural lien; proceeds.]
Except as otherwise provided in this article and in Section 2‑403(2):
June 9, 2019

44. 9-315: Continuation of the SI After Transfer
6/9/2019
9-315: Continuation of the SI After Transfer
(1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien;
June 9, 2019

45. 9-320: Buyer of Goods (a) [Buyer in ordinary course of business.]
6/9/2019
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.
June 9, 2019

46. 1-201(b)(9): Buyer in ordinary course of business
6/9/2019
1-201(b)(9): 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.
June 9, 2019

47. 1-201(b)(9): Buyer in ordinary course of business
6/9/2019
1-201(b)(9): Buyer in ordinary course of business
Means
A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices.
June 9, 2019

48. 5‑7: Sales from Inventory
6/9/2019
5‑7: Sales from Inventory
Bank
Debtor
1/1
SA: PP, TO & TA
FS: PP, TO & TA
2/1: Sale of
Washing Machine $
Does Bank’s security interest in the washing machine survive the sale?
Customer
Is it perfected, and, if so, for how long?
June 9, 2019

49. 5‑7: Answer Under 9-320(a), Customer takes free and clear of Bank’s SI
6/9/2019
5‑7: Answer
Under 9-320(a), Customer takes free and clear of Bank’s SI
June 9, 2019

50. Bean Timberland Bean Bank Potlach Idaho
6/9/2019
Bean Timberland
Bean
Bank
SA: Timber
FS: Timber
Sale of cut timber
Is the timber inventory such that P and I are BIOCOB for 9-320?
Sale of cut timber
Potlach
Idaho
June 9, 2019

51. Answer Key issue is whether sale is in ordinary course of business
Court finds not standard practice to run UCC search before buying, so buyers didn’t have to do so here
Note BIOCOB definition seems to focus really on seller’s practices, not those of buyer
June 9, 2019