INTRODUCTION....................................................................................................................................................................

4
OTHER SECURITY TRANSACTIONS..........................................................................................................................................5
Lease-Purchase................................................................................................................................................................. 5
Installment Sales Contract.................................................................................................................................................5
Consignment...................................................................................................................................................................... 5
Heath-Care Receivables....................................................................................................................................................6
Investment Property...........................................................................................................................................................6
TRANSACTIONS EXCLUDED FROM UCC ARTICLE 9.................................................................................................6
COLLATERAL.......................................................................................................................................................................... 6
Tangible Collateral............................................................................................................................................................6
Semi-Intangible Collateral & Intangible Collateral..........................................................................................................7
Proceeds Subject to a Security Interest..............................................................................................................................7
Insurance Proceeds on Secured Collateral........................................................................................................................7
ATTACHMENT OF THE SECURITY INTEREST..............................................................................................................8
REQUIREMENTS FOR ATTACHMENT........................................................................................................................................8
AFTER-ACQUIRED PROPERTY.................................................................................................................................................8
PURCHASE MONEY SECURITY INTEREST................................................................................................................................9
FUTURE ADVANCES................................................................................................................................................................ 9
PERFECTION OF THE SECURITY INTEREST..............................................................................................................10
PERFECTION BY FILING A FINANCING STATEMENT...............................................................................................................10
Financing Statement........................................................................................................................................................10
Generally............................................................................................................................................................................................................. 10
Debtors Name on Financing Statement................................................................................................................................................................10
Individual as Debtor....................................................................................................................................................................................... 10
Business as a Debtor....................................................................................................................................................................................... 11
Change of Name.................................................................................................................................................................................................. 12
Five Year Statute of Limitations........................................................................................................................................................................... 12
Improper Filing.................................................................................................................................................................................................... 13
PERFECTION BY POSSESSION................................................................................................................................................13
AUTOMATIC PERFECTION......................................................................................................................................................13

Purchase Money Security Interest in Consumer Goods...................................................................................................13

Assignments of Accounts.................................................................................................................................................13
Benefit of Creditors and Trust Interests...........................................................................................................................14
PRIORITY CONFLICTS......................................................................................................................................................14
UNPERFECTED SECURITY INTERESTS....................................................................................................................................14
Secured Creditor v. Unsecured Creditor..........................................................................................................................14
Secured Creditor v. Buyer................................................................................................................................................14
Secured Creditor v. Lien Creditor....................................................................................................................................14
Secured Creditor v. Secured Creditor..............................................................................................................................14
PERFECTED SECURITY INTERESTS........................................................................................................................................15
Perfected Security Interest v. Buyer.................................................................................................................................15
Buyer in the Ordinary Course of Business........................................................................................................................................................... 15
Entrusting Rule.................................................................................................................................................................................................... 15
PMSI in Consumer Goods................................................................................................................................................................................... 16

Perfected Security Interest v. Lien Creditor.....................................................................................................................16

Future Advance Clause........................................................................................................................................................................................ 16
Liens Arising by Operation of Law......................................................................................................................................................................16

Perfected Security Interest v. Unperfected Security Interest............................................................................................17

Perfected Security Interest v. Perfected Security Interest.................................................................................................17
First in Time, First in Right.................................................................................................................................................................................. 17
Pre-Filing Rule............................................................................................................................................................................................... 17
Second in Time, First in Right PMSI................................................................................................................................................................17
PMSI in Inventory and Livestock................................................................................................................................................................... 17
PMSI in non-inventory collateral, (e.g. equipment)........................................................................................................................................18
PRIORITIES IN FIXTURES.......................................................................................................................................................18

Fixture Filing.................................................................................................................................................................. 19
General Rule................................................................................................................................................................... 19
PMSI in Fixtures.................................................................................................................................................................................................. 20

Construction Mortgages....................................................................................................................................................................................... 20
Readily Removable Machines.............................................................................................................................................................................. 20
Fixtures Owned by Tenants.................................................................................................................................................................................. 20
Default by Debtor................................................................................................................................................................................................ 20

Priorities in Accession UCC9-335.................................................................................................................................20

DEFAULT............................................................................................................................................................................... 21
GENERAL RULE....................................................................................................................................................................21
Taking Possession Upon Default without Judicial Process..............................................................................................21
Repossession Breach of the Peace................................................................................................................................22
Resale of Collateral.........................................................................................................................................................22
Retaining Collateral in Satisfaction of the Debt Strict Foreclosure..............................................................................24
Consumer Goods................................................................................................................................................................................................. 24
Non-Consumer Goods......................................................................................................................................................................................... 24

Right to Redeem.............................................................................................................................................................. 25
Secured Creditor Liability for Violations.........................................................................................................................25
UCC ARTICLE 9 CHECK LIST..........................................................................................................................................26

Introduction
UCC Article 9 governs any transaction intended to create a security interest in
i.
personal property or fixtures including:
a. tangible goods,
b. software, documents,
c. instruments,
d. general intangibles,
e. commercial tort claims,
f. chattel paper, or
g. deposit accounts, as well as
h. accounts receivable or chattel paper. UCC9109.
A security interest is an interest in personal property or fixtures, which secures payment or performance of an obligation.
In order for a security interest to arise, there must be a creditor who lends money or extends credit and receives security to protect that credit, and a debtor
who is the person owing payment or other performance of the secured obligation.
The security the creditor holds or secures is called collateral. There must be a payment obligation plus a security interest in the collateral.
Most frequently, the following two parties play roles in security interests:
1. The secured party (the creditor in whose favor a security interest is created) (UCC9102(a)(73)); and
2. The debtor (the person who owes the debt and who has rights in the collateral in which the security interest is created) (UCC9102(a)(28)).
The obligor is the entity or entities, debtor or sometimes a third party, who has assumed the debt and owes payment or a performance on it. UCC9102(a)(59).
EXAMPLE:
Printer buys a printing press on credit and signs a note and a security agreement with Seller. Several years later, Printer sells the printing
business to Buyer who expressly assumes Printers debt to Seller. Printer remains liable to Seller, but because of Buyers contractual assumption
of the debt, Buyer has also become the obligor of the debt and is liable to Seller for payment.
A secured creditor has rights to specific assets pledged as collateral superior to those of an unsecured creditor. To the extent there is sufficient value in the
collateral to satisfy the debt owed to the secured creditor, the secured creditor will be fully satisfied before any unsecured creditor receives any value from the
collateral. An unsecured creditor must bring a civil suit, and will find itself subordinate to secured creditors and on the same unenviable footing with the entire pool
of general creditors. Secured creditors, while they have priority over general creditors, must look to UCC Article 9 to determine their priority among the debtors
other secured creditors when the time comes to distribute the debtors collateral.
UCC Article 9 was revised in all 50 states effective July 1, 2001 and again effective July 1, 2013. The revisions expanded the scope of collateral that can
be used to secure a loan or a sale on credit, potentially leaving less for unsecured creditors to claim. The revised UCC Article 9 also provides that UCC filings are
no longer properly made in the state where the chattel is located. Filing is to be made in the state where the debtor is located.
In determining where to file the financing statement, it is important to identify the debtor. UCC9-307 directs where the filings shall be made based upon whether
the debtor is a registered entity, an unregistered business (e.g., a partnership), or an individual debtor.

An exception to the rule that states where filings must be made applies to fixtures, farm crops, mined minerals, timber to be cut, gas or oil to be extracted; security
interests in these properties are referred to as real estate related collateral and are filed in the real estate recording system in the county where the realty is
located. UCC9501. Just about all other filings are made in one centralized filing system in each state (e.g., in New York, with the Secretary of State in Albany).
Other Security Transactions
UCC Article 9 governs transactions that create security interests even where those transactions are given some other name. When a security interest is
created, this Article applies regardless of the form of the transaction or the name that parties have given to it. UCC 9-109, cmt. 2. This is most often
seen in lease-purchase agreements and consignment agreements which are actually intended to create a security interest as opposed to operate as true
leases or consignment.
A bill of sale, a lease of goods, or a long term installment sales contract to buy goods, although absolute in form, may be shown to have been given as
security. Under UCC Article 9, a debtor may show by parol evidence that a transfer purporting to be an absolute lease or a contract of sale was in fact
given for security. UCC 9-203 cmt. 3. This is very similar in concept to a real property equitable mortgage, where the agreement purports to be a deed to
real property or a real property installment sales contract, but in equity it is treated as a real property mortgage in order to preserve the debtors equity of
redemption.
Lease-Purchase
In lease-purchase situations, the contract has a payment obligation, but the lessor actually takes or acquires an interest in the lessees property. In
true lease situations, at the end of the lease, the property in question is returned to the lessor.
To determine if an agreement is a true lease or whether the lease is intended as a security agreement, look for provisions stating that the lessee
shall become or has the option to become the owner of the property (buy out) at the end of the lease period for no additional consideration or for
nominal consideration (e.g., $1). In such cases, since the item is not being returned to the lessor, the lease is really intended for security purposes,
and UCC Article 9 should govern, thus requiring the creditor to perfect security agreements. UCC 1-203.
EXAMPLE:
A truck dealer enters an agreement boldly captioned LEASE. The five-year lease terms are for $1,000 per month for five years at which
time the lessee can purchase the truck for $500. Two years later, the lessee declares bankruptcy. If this were a true lease, then the trustee
in bankruptcy would have to either affirm the lease and continue paying the monthly rent or return the truck to the lessor. Here, however,
this arrangement likely will be deemed an unperfected security agreement thereby rendering the truck dealer an unsecured general
creditor.
Installment Sales Contract
If the transaction is not a lease, but an installment sales contract where the seller in effect retains title in order to secure the buyers obligation to
fully pay for the goods, then UCC Article 9 controls. UCC 9-109(a)(6). UCC Article 9 treats such arrangements as security agreements that the
seller must perfect by filing a financing statement that covers the items sold.
EXAMPLE:
Printer purchased a $500,000 printing press. The installment contract provided that (1) Printer would pay off the purchase price at
$100,000 per year for five years; and (2) only when the purchase price is fully paid (in five years) is the seller required to give title to the
press to Printer. UCC Article 9 controls this transaction.
Consignment
In general, a consignment situation arises when a consignor retains title to consigned goods, which, if not sold by the consignee, are to be returned
to the consignor. Consignment is the delivery of non- consumer goods having a value of $1,000 or more to a merchant who deals in goods of that
kind for the purpose of resale, and the consignee has a business name other than name of the consignor; the consignee is not an auctioneer and is
5

not generally known by its creditors to be selling goods of others. UCC 9-102(2). The Code treats such transactions as security interests that
must be perfected in order to protect the seller from the buyers creditors. UCC 9-319 If the creditor (consignor) does not perfect its security
interest in the consigned goods, then the purchaser (paying value) of the consigned goods and creditors of the purchaser take free of the
consignors interest. By way of example, sellers of diamonds and art frequently enter consignment contracts.
Note that UCC section 2-326(1) covers similar consignment contracts of consumer goods to a merchant generally known by its creditors to sell
goods for others. Even though the goods are conforming, under a sale or return contract, title and risk of loss vests in the buyer, even though the
goods can be returned. To protect itself, the seller should execute a security agreement and file a financing statement as a purchase money
perfected security interest in inventory. UCC 9-319. Under UCC Article 9, a consignor must file a financing statement for a security interest in
consigned goods, the value of which must exceed $1,000 in order to protect its interest against the consignees creditors. UCC 9-109(a)(4); 9319.
EXAMPLE:
Consignor consigns goods to Debtor without perfecting a security interest in the goods. Thereafter, Debtor grants a perfected security
interest to new creditors in the same goods, e.g., inventory or equipment. The new creditors prevail over Consignor. UCC 9-319, cmt. 2,
Example 1.
Heath-Care Receivables
Revised UCC Article 9 covers health-care insurance receivables (e.g., of a doctor, dentist, or hospital) which are the funds patients are entitled to
receive from health insurance companies assigned by the patients to their health-care provider. These health-care insurance receivables are
frequently used as collateral by the healthcare provider to secure a loan until the insurance benefits are paid by the health-care insurance company.
UCC 9-102(a)(46).
Investment Property
Investment property such as corporate securities (stock) and securities accounts are governed by UCC Article 9. UCC 9-102(a)(49). Again, these
assets are used as collateral to secure a loan or a line of credit. The creditor should take possession of such documents indorsed to the creditor or
indorsed in blank which gives the secured creditor not just possession, but also full control over that asset. UCC 9-328.
Transactions Excluded From UCC Article 9
Rules other than those provided in UCC Article 9 apply to certain secured transactions. In that regard, UCC Article 9 does not apply to:
1. Transactions preempted by a federal statute (e.g., the Ship Mortgage Act, federal government contracts) or security interests to secure repayment
of a loan to finance an airplane or airplane parts, which is governed by federal law;
2. Landlord liens;
3. Leases and other interests in real estate (mortgages), though a note secured by a realty mortgage may fall under UCC Article 9 if the mortgagee
uses the note as collateral to secure a loan (UCC 9-109, cmt. 7); and
4. An individuals personal injury tort claim. UCC 9-109(d), 9-102(a)(13).
Collateral
Collateral is the property that is subject to a security interest. The debtor must have rights in the collateral in order for the security interest to attach to the
collateral. UCC 9-102(a)(12). Such property can be tangible or intangible.
Tangible Collateral
Tangible collateral or goods may be items that are movable at the time the security interest attaches or immovable fixtures attached to realty.
6

UCC 9-102(a)(44). The following constitutes tangible collateral:

1. Consumer goods (goods used for personal, family, or household purposes) (UCC 9- 102(a)(23));
2. Equipment (goods used or bought primarily for business purposes) (UCC 9-102(a)(33));
3. Farm products (crops, livestock, or supplies used or produced in farming) (UCC 9- 102(a)(34)).
1 Such products must be used by the farmer (debtor) in farming operations e.g., insecticide or fertilizer used in raising, cultivating, etc.;
products include growing or harvested crops, livestock raised on the farm, supplies and feed; however, be advised that a farmers tractor
is a good, but it falls under equipment and not farm products;
4. Inventory (goods other than farm products held for sale or lease) (UCC 9-102(a)(48)); and
5. Fixtures (personal property that so relates to the realty that an interest arises in the property under real property law) (UCC 9-102(a)
(41)). Fixtures can either be business equipment attached to a building or consumer goods attached to a home. See Section IV(C)
Priority in Fixtures, infra.
To determine within which category the collateral falls, look at its principal use from the debtors point of view. Collateral can switch categories
through a change in its use. For example, a refrigerator on the floor of an appliance store is inventory; a refrigerator in a home is a consumer good;
a refrigerator in a doctors office to keep drugs cold is equipment.
Semi-Intangible Collateral & Intangible Collateral
Semi-intangible collateral is evidenced by a document calling for a payment. Intangible collateral, however, consists of collateral in which there is
no indispensable writing or other tangible substance that may be
1.
Instruments (must be negotiable instruments satisfying the requirements found in UCC physically possessed. For example:Article
3, plus any necessary endorsements) (UCC 9-102(a)(47));
2. Documents of title (including warehouse receipts and bills of lading) (UCC 9- 102(a)(30));
3. Accounts receivable (rights to payment for goods sold or leased, e.g., payments to a merchant due from credit card companies)
(UCC 9-102(2));
4. Chattel paper (UCC 9-102(a)(11)) and electronic chattel paper (UCC 9-102 (a)(31));
5. General intangibles (patents, trademarks, licenses, software, franchises, and other intangibles) (UCC 9-102(42));
6. Commercial tort claims (arising in the course of the claimants business or profession but not including damages arising out of a
personal injury or death of an individual) (UCC 9-102(a)(13); City Sanitation, LLC v. Allied Waste Services of Massachusetts,
LLC, 656 F.3d 82 (1st Cir. 2011); Helms v. Certified Packaging Corp., 551 F.3d 675 (7th Cir. 2008));
7. Investment property including shares of stock, commodity accounts and executory contracts to buy or sell commodities; and
Deposit accounts maintained by a bank (UCC 9-102(a)(29)).
Proceeds Subject to a Security Interest
When a secured item is sold, the security interest of the creditor attaches to the proceeds generated from the disposition of such
collateral, usually for at least 20 days. UCC 9-315; 9-509(b)(2) and cmt. 4. Proceeds include anything received upon the sale,
exchange, collection, or other disposition of collateral, including insurance payable on the collaterals destruction. UCC 9102(a)(64).
EXAMPLE:
Debtor authenticates a security agreement in Debtors inventory. Creditor files a financing statement covering the
inventory. When Debtor sells the inventory and takes back cash and/or an I.O.U., then the perfected security interest
attaches to that cash and the account receivable as proceeds of the inventory.
Note that if the inventory was sold for cash that Debtor deposited into a bank account and subsequently used to purchase
equipment, then Creditor has the right to either amend the financing statement within 20 days to add the equipment or to
file a new financing statement covering that equipment. UCC 9-509.
7

Insurance Proceeds on Secured Collateral

If the debtors inventory is damaged or destroyed and the debtors insurance company pays the insurance proceeds to the
debtor (rather than to the secured creditor), is the insurance company liable to the secured creditor? No.
Constructive notice (the recorded financing statement) is insufficient notice to an insurance company. Insurance companies are not
required to search the public records, because such a requirement would cause undue delay in the payment of insurance claims.
The secured creditors remedy is to see to it that the creditor is named in the insurance policy as an irrevocable third-party
beneficiary.
If, however, the debtors attorney settles with the insurance company, receives the insurance check, and then, knowing of
the secured creditors security interest in the insured goods, pays the insurance proceeds to the debtor, the attorney is liable to the
secured creditor for the tort of conversion (and possibly for punitive damages).
Attachment of the Security Interest
When a UCC Article 9 security interest attaches, the lender becomes a secured party, and a security interest attaches to the property. In general, once attachment
has occurred, the security interest becomes enforceable against the debtors property. The security interest is enforceable against third parties (e.g., the debtors
judgment creditor, the debtors trustee in bankruptcy, or a creditor who was aware of the security interest), but perfection is required to determine priority over
other creditors.
Requirements for Attachment
To create a UCC Article 9 security interest, the following requirements must be met:
1. A written security agreement must be authenticated (UCC 9-102(a)(7)) by the debtor to satisfy the Statute of Frauds
a. (e.g., by e-mail or written signature). It must contain a sufficient description reasonably identifying the collateral (e.g., by category
such as equipment, inventory, etc., or by precise description of a particular item or items) (UCC 9-108, cmt 2 and UCC 9203, cmt. 3)).
Alternatively, the secured party may obtain possession of the collateral pursuant to an oral or written agreement with the debtor which is
called a possessor security interest (UCC 9-203(b)(3); 9-313);
2. The debtor must have rights in the collateral to give to the secured party;
3. The debtor must have intended to create a security interest and that intent must be manifested in some way (look to the language in the
security agreement); and
4. The secured party must give value (consideration) for the security interest. UCC 9- 203(b)(1).
Attachment of a security interest to specific collateral requires an enforceable contractual agreement contained in a security agreement setting forth in
detail the aforementioned four requirements. Once a security interest attaches it is enforceable against the debtor, a lien creditor, and other creditors who
were aware of the security interest.
One purpose of a security agreement is to ensure that the debtor and creditor agree as to the nature of the collateral. In addition, the agreement
must contain language sufficient to evidence the creation of a security interest. This can be accomplished by a written security agreement or,
alternatively, by the secured party actually taking physical possession of the collateral (as a pledge). A written security agreement must include a
description of the collateral to enable reasonable identification of what is described, and the debtors signature is required. UCC 9-108, 9-203(b)(3)(A).
An example of an insufficient description is all of the debtors assets. The security agreement must be more specific, though such a general
description in the financing statement is sufficient for purposes of perfection. UCC 9-504.
The debtor, for UCC Article 9 purposes, must have rights in the collateral, which means the right to obtain possession or an ownership interest.
To determine possessory rights, look for evidence of dominion and control by the debtor. Lastly, value must be given by the secured party to the debtor
before the security agreement will create a security interest. Value is anything that would support a contract.
These requirements may be met at any time and in any order. Once all are met, attachment occurs and the security agreement becomes enforceable
8

between the contracting parties.

After-Acquired Property
A creditor with a security interest in a debtors collateral may include in the security agreement an after-acquired property clause, creating what is often
called a floating lien. Such a provision, if sufficiently descriptive, gives a creditor rights to future items once the debtor acquires an interest in them, e.g.,
equipment, inventory, etc. Once the debtor obtains rights to the new collateral, the creditors security interest attaches to that after-acquired property. UCC
9-204(a).
A security interest in after-acquired property does not attach to:
1. Future commercial tort claims (these claims are not deemed to have been relied upon by the creditor in deciding to extend credit
or make the loan) (UCC 9-204(b)(2)); or
2. Consumer goods, unless the debtor acquires rights within 10 days after the creditor gave value. UCC 9-204(b)(1).
EXAMPLE:
Debtor owns a retail clothing store. To obtain the funds to pay rent and wages, Debtor enters into a security agreement with Creditor. The security
agreement states that in exchange for the loan, Debtor pledges all her current and future inventory as collateral until the loan is repaid. The future
inventory pledged by Debtor is after-acquired property and is deemed additional collateral that secures creditors interest in Debtors satisfaction
of the loan.
Purchase Money Security Interest
A purchase-money security interest (hereinafter, PMSI) arises in two situations:
1. Where a loan is made to enable the debtor to purchase specific goods, e.g., a lender making a car loan or a financing company loaning an airline
money for the specific purpose of buying an airplane; or
2. Where a seller sells goods to a buyer on credit and secures repayment of the purchase price by retaining a security interest in the goods, e.g., a
truck manufacturer selling a truck to a delivery company under an arrangement that permits the truck manufacturer to use the truck while making
payments, perhaps with interest, toward ultimately paying off the truck. In the event the delivery company defaults, the truck manufacturer would
be able to replevin the truck.
As mentioned in the first situation above, a PMSI may arise even when the creditor did not sell the goods directly to the debtor. In order for there to be a
PMSI, the creditor must be able to show that the money was used to buy the collateral, e.g., the bank/lender made the check payable to the seller and not to
the debtor. A PMSI arises only when the loaned funds are used to purchase the collateral. A PMSI does not arise when other collateral (e.g., collateral
already owned by the debtor) is pledged by the debtor to secure financing or to obtain credit for an unspecified purpose. See Example above. In
transactions not involving consumer goods, a secured party claiming a PMSI has the burden of proving the security interest is a PMSI. UCC 9-103(g).
Future Advances
A security agreement may cover the possibility of future loans being made to the debtor based on the existing collateral. Future advance language in a
security agreement allows but does not necessarily commit (look to the agreement) the secured creditor to future loans or extensions of credit to the debtor
which would continue to be secured through the collateral described in the present agreement. UCC 9-323; UCC 9-204(c).
EXAMPLE:
Bank lent Debtor $50,000 and obtained a security interest in Debtors collateral (inventory) which interest was properly perfected. The
security agreement specifically provided for future advances. A year later, Finance Company lent Debtor $40,000 and perfected a security interest
in the same collateral by filing a financing statement. The following month, Bank advanced another $25,000 to Debtor. Debtor subsequently
defaulted on both loans. Who prevails?
Bank perfected its security interest first in time by being the first to file its financing statement. UCC 9-322(a). This also gives Bank
9

priority for its subsequent advance (the $25,000), even though it was made after Finance Company filed its financing statement. UCC 9-323.
The future advance is given the same priority as Banks first to file a perfected security interest.
The best way for a potential creditor (for example, Finance Company above) to protect against a prior creditors future advances is to demand a
copy of the security agreement and not make a loan without reviewing it. If the agreement contains a future advance clause, the second creditor should
either refuse to make the loan, pay off the prior loan and obtain a statement from the prior creditor releasing the collateral used to secure the prior creditors
or demand a subordination agreement from the prior creditor.
A future advance also has priority over an intervening lien creditor. A lien creditor is a creditor who has created a lien by attachment, levy, or the
like, e.g., a judgment creditor who has engaged the sheriff to levy or attach the collateral, a trustee in bankruptcy, or an assignee for the benefit of creditors.
UCC 9-102(52). Bankruptcy 544
The future advance lender must show that:
1. The advance was made to the debtor without knowledge of the lien (UCC 9-323(b));
2. The lender made the advance with knowledge of the lien, but did so within 45 days after the lien attached. UCC 9-323(b).
Future advances from a secured creditor take priority over an intervening lien creditor when the secured creditor does not have knowledge of the
lien. This rule enables a secured creditor to make future advances to a debtor without fear of unknown lien creditors.
Additionally, many types of commercial transactions require extension of credit at different stages of the creditor/debtor relationship (e.g., building
construction). Where it would be impractical for a creditor to extend funds in one lump sum for such a project, custom dictates that future advances from
the secured creditor are released over time to cover the costs of the venture as needed. By giving priority to a secured creditor over a lien creditor, the
interests of a secured creditor are protected with regards to the total amount of funds advanced to the debtor.
Perfection of the Security Interest
The date of perfection determines a secured partys priority over subsequent lien creditors. If a creditor has only attached the collateral, then he has an unperfected
security interest.
There are three ways to perfect a security interest:
1. File a financing statement;
2. Take possession of the collateral; or
3. Qualify for automatic perfection under the Code.
Perfection by Filing a Financing Statement
Financing Statement
Generally
For most types of collateral, by filing a financing statement the creditor puts all other creditors on notice of the creditors security interest
in the collateral. Under UCC section 9-502(a), the financing statement must contain the following information:
1.
2.
3.
4.
5.

The debtors correct name;

Whether the debtor is an individual or an organization;
The debtors mailing address;
The name and address of the secured party from which information concerning the security interest may be obtained; and
A statement indicating the type(s) of collateral or generally describing the collateral that is subject to the security agreement.

The financing statement, unlike the security agreement, may simply indicate all assets or all personal property of the debtor.
UCC 9-504, 9-516. However, if the collateral consists of crops or fixtures, then the financing statement must also contain a description
10

of the real estate where the crops

or fixtures are located sufficient to identify the property. Note that the financing statement does not have to describe the debtors afteracquired property as being covered; a security agreement must indicate covered after-acquired property.
Under UCC Article 9, while a financing statement is all that must be filed, an executed security agreement authorizing the filing must exist
or the filing is a nullity. UCC 9-509, cmt. 3; In re Romero, No. 07-CV-0862 (ARR), 2007 WL 1213231, at *1 (E.D.N.Y. 2007). A security
agreement may serve and be filed as a financing statement, provided it contains all the information listed above. The same holds true for a
recorded real estate mortgage that lists the fixtures and contains all the necessary information. Such a document would be effective in
perfecting a security interest in the fixtures. Where the descriptions in the financing statement and the security agreement are inconsistent,
the more narrow description of the collateral prevails.
EXAMPLE:
Where a financing statement listed equipment and inventory but the executed security agreement listed only equipment, under the
Double Filter Rule, the creditors rights are to be measured by the narrower of the two documents. In this case, since inventory was
not listed in the security agreement, it will not be considered collateral subject to the security interest.
Debtors Name on Financing Statement
Individual as Debtor
Under UCC sections 9-503(a)(4) and (5) (2010 amendment to Revised Article 9), filing a financing statement of a debtor who is a
natural person can be a trap for the creditor. The name used to file the financing statement must be precisely correct. The name to
be used is the debtors name as it appears on the debtors unexpired drivers license or on the debtors government issued
identification card, which name is referred to the license name. The simplicity and reliability of this filing procedure benefits
and protects creditors by providing more certainty.
This filing procedure is referred to as Alternative A of UCC section 9-503. It is also referred to as the only if approach, i.e., a
financing statement filed against a debtor possessing an unexpired drivers license or government issued identification card in lieu
of a drivers license is effective only if it is filed under the name as it appears on the individual debtors unexpired drivers license
or a government identification card. If the individual does not have an unexpired license or a government issued identification
card, then the filing is properly made under the debtors surname and first personal name.
Another method for financing statement filing for individual debtors (which individual states may choose to adopt) is Alternative
B, which provides three filing choices:
6. The individual name of the debtor;
7. The surname and first personal name of the debtor; or
8. The name on the debtors unexpired license or government issued identification card.
Under Alternative B, if the creditor uses any of the three alternatives, then a valid security interest is properly filed and gives
priority to that creditor. Thus, to be safe, subsequent creditors should search under all three possible name choices available under
Alternative B. Clearly, the more limited Alternative A provides greater ease and certainty for creditors.
The financing statement is deemed to be filed when presented to an officer and the fee is paid. Note that minor errors that are not
seriously misleading do not invalidate the financing statement. What a court considers to be seriously misleading frequently
depends upon the search logic of the filing clerks database. That is, if one searching the database by using the debtors correct
name would discover the financing statement, then the error is not seriously misleading.
EXAMPLE:
A financing statement using a debtors nickname was misleading and not effectively filed. In re Miller, 2012 WL 32664 (Bankr.
C.D. Ill. 2012).
EXAMPLE:
A financing statement transposing the debtors surname with the debtors first name, (e.g., Pieper Damian) was deemed seriously
misleading and not effective notice.
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Business as a Debtor
Where the debtor is a business organization, such as a limited liability company, a corporation, a business trust, or a limited
partnership, then the proper name for filing is the name indicated on the organic public record, which is the public record on file
in the state where the entity was first formed.
Public organic record translates to a record initially filed with or issued by a State or the United States, available for public
inspection, to form or organize. UCC 9-102(a)(68). The filing of the financing statement is to be made in the state where that
business entity was first formed. Thus, if a debtor is a corporation or a limited liability company formed in Delaware, then the
financing statement must be filed in Delaware.
If the debtor is an unregistered business, e.g., a partnership, or an individual, then the financing statement is to be filed in the state
where the unregistered business conducts its affairs. UCC 9-307(a). If it is conducting business in more than one state, then
filing is proper in the state where its executive office is located. UCC 9-307(b).
As with filings against individual debtors, the financing statement must not be seriously misleading.
EXAMPLE:
A court found that a filing statement identifying the debtors name as Roger House rather than Rodgers House was
seriously misleading. Pankratz Implement Co. v. Citizens Natl Bank, 281 Kan. 209 (2006).
EXAMPLE:
Where the lender omitted the debtors corporate name and filed the financing statement under a name similar to its
assumed name under which the debtor conducted business, the filing was deemed seriously misleading and ineffective to protect
the lender. The lender was required to use the borrowers name indicated in public records in the jurisdiction where it was
incorporated. Misnaming the business entity is not considered seriously misleading if a reasonable search of the UCC filing office
would have discovered the filed financing statement, but here the bankruptcy trustees search did not disclose the financing
statement. Harvey Goldman & Co., 2011 WL 4056900 (Bankr. E.D. Mich. 2011).
EXAMPLE:
A financing statement identifying the debtors name as KWM Electronics Corporation rather than K.W.M. Electronics
Corporation (the difference being the missing periods) was found seriously misleading such that the security interest was
held to be not perfected. The court found it was seriously misleading because a search in the filing clerks office would not
have uncovered the filed interest. Host Am. Corp. v. Coastline Fin., Inc., 60 U.C.C. Rep. Serv. 2d 120 (D. Utah 2006)
(showing Utahs search logic to be extremely narrow).
Change of Name
If a debtors name is subsequently changed (e.g., an individual debtor gets married and assumes the other spouses name, or a business
organization debtor merges into another corporation) so that the debtors new name is seriously misleading, then, under UCC section 9507(c):
8. Collateral acquired and secured prior to the name change is still perfected. Thus, creditors should always inquire about a debtors
prior name because a prior security interest perfected in any collateral before the name change remains perfected;
9. Collateral acquired up to four months after the name change is still perfected; and
10. Collateral acquired by the debtor after four months is not perfected, unless an amended financing statement is filed within four
months of the name change. This allows a creditor four months to learn of a debtors name change and file the amended statement.
Note that if an existing financing statement was filed before June 2013 when the UCC was amended, the financing statement remains
effective after a name change until the expiration of the filings five year statute of limitations. When a continuation statement is filed, the
12

secured party must then comply with the rules as amended. UCC 9-805(b).
What if the filing statement is proper, but a filing clerk indexes it improperly? Unlike former UCC section 9-401 which placed the burden
on the party filing the instrument, the revised code imposes the risk of filing-office error on those who subsequently search the files. The
failure of the filing office to properly index a record correctly does not affect the effectiveness of the filed record. (UCC 9-517).
Five Year Statute of Limitations
The filed financing statement is good for five years from the date of filing. UCC 9-515(a). To continue the perfection of the security
interest and its priority beyond five years, a continuation statement must be filed by the secured party. The continuation statement must be
filed within the six months leading up to expiration of the five year period. The continuation statement will extend the validity of the
original statement for another five years from the expiration of the first five-year period. UCC 9-513, 9-515(d). There is no limitation
on the number of continuation statements that can be filed. UCC 9-515(e). If the statement is not continued, then at the end of five years
the financing statement becomes a nullity as if it was never filed. UCC 9-510(c).
EXAMPLE:
As the fifth year of the financing arrangement approached, the debtor went into bankruptcy. The debtors bank neglected to file the
continuation document within the final six months and lost its priority on the debtors equipment. The bank argued that the automatic
bankruptcy stay maintained the banks priority. That argument had validity under the old section 9-403(2), but not under revised section 9515(c). In re Miller Bros. Lumber Co., 2012 WL 1601316 (Bankr. M.D.N.C. 2012); UCC 9-515, cmt. 4.
EXAMPLE:
A lender had a perfected security interest in a debtors equipment and inventory. A judgment creditor of the debtor subsequently acquired a
judgment lien on the same goods. Two weeks thereafter, the five year statute of limitations expired on the lenders security interest and the
effectiveness of the financing statement lapsed. Between the lender and the judgment creditor, who prevails? Since the judgment creditor
gave no new consideration, i.e., a judgment creditor is not considered a purchaser of the collateral for value, and the judgment lien was
obtained while the security interest was still perfected, the lender will prevail. UCC 9-317(a)(2) and UCC 9-515, cmt. 2 and 3,
Example 2.
An exception to the five year statute of limitations is a financing statement securing a manufactured home, which is good for 30 years
from the date of filing. A manufactured home (UCC 9-102(53)) is transported in one or more sections, is eight feet or more in width,
and 40 feet or more feed in length designed to be used as a dwelling when connected to utilities which includes the electrical system,
heating, plumbing and air conditioning with the structure.
Improper Filing
Identifying the character of the collateral is important when determining where a financing statement should be filed. If a filing is made in
good faith but in an improper place, or not in all the places required by the Code, the filing will nevertheless be effective with regard to
any collateral which the filing complied with the Code requirements. Even though misfiled, it also will be effective as to collateral covered
by the financing statement against any person who has knowledge of the contents of the statement. UCC 9-501.
A security interest in letters of credit and advances of credit, goods, instruments, money, negotiable documents, or tangible or electronic
chattel paper may be perfected by the secured partys taking physical possession of the collateral. UCC 9-313, 9-105 and 9-330. Thus,
a secured party may perfect by possession and dispense with the filing requirements. Note that general intangibles and accounts are not
included here since by their nature there is nothing to possess.
EXAMPLE:
Neighbor borrowed money for business and personal reasons from Friend. Friend knows that Neighbor owns a Rolex watch and a
valuable vase. To secure the loan, Friend takes possession of both. Friend has a perfected security interest in the Rolex and vase.
A security interest is perfected by possession from the time the collateral is taken (it does not relate back to the date of the original
security agreement) and it lasts only as long as possession is retained. Although possession is preferred, filing is appropriate for all
collateral except deposit accounts and negotiable instruments, which security interests must be perfected by possession. For
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example, possession of a note (a form of negotiable instrument) secured by a mortgage on real property is necessary to perfect a
security interest in the note, and will control regardless of whether the underlying mortgage has been recorded. Provident Bank v.
Cmty Home Mortg. Corp., 498 F. Supp. 2d 558, 569 (E.D.N.Y. 2007). Although UCC Article 9 does not govern the creation of a
lien or mortgage on real property (real property law does), it does govern any security interest in a secured obligation like a
mortgage on real property.
If collateral is held by a bailee, then the secured party is deemed to have possession from the moment the bailee receives notice of the
secured partys interest. UCC 9-306. While possession may be acquired and held by an agent for the secured party, it is clear that the
debtor or a person controlled by him cannot qualify as such an agent for the secured party. UCC 9-315. Possession by the secured party
or someone acting on his behalf gives notice to the world that the debtor does not have full use of the collateral, whereas possession by the
debtor sends quite a different message.
A security interest in money (UCC 9-312(b)(3)) or a deposit account (UCC 9-312(b)(1)) can only be perfected by possession.
However, a security interest in negotiable instruments and negotiable documents is temporarily perfected without filing or possession for
20 days from the time it attaches to the extent that it arises for new value given under a written security agreement. UCC 9-312(e). After
20 days, perfection depends upon compliance with applicable UCC Article 9 provisions. If the goods are sold, the security interest will
continue in the sale proceeds for a 20-day period unless further perfection occurs with respect to the proceeds. UCC 9-312.
Perfection By Possession
Automatic Perfection
The Code provides for situations where a security interest is perfected merely by attachment of the security interest without any other formalities.
Automatic perfection arises in the following situations:
Purchase Money Security Interest in Consumer Goods
Sellers of consumer goods, as well as those who lend to enable purchase of such goods, receive perfected status without filing when an interest is
retained to secure some or all of the purchase price of consumer goods. The rationale is that consumer goods are relatively inexpensive and
depreciate quickly so that creditors other than purchase money lenders generally do not rely on them in making loans. UCC 9-309(1).
Assignments of Accounts
Perfection is automatic where there is an assignment of accounts receivable which does not alone or in conjunction with other assignments to the
same assignee transfer a significant part of the outstanding accounts of the assignor.
Benefit of Creditors and Trust Interests
Assignments for the benefit of creditors of the transferor and assignments of a beneficial interest in a trust are automatically perfected upon
attachment.
Priority Conflicts
UCC Article 9 addresses the rights and priorities between (1) a secured creditor and a buyer claiming to have taken free of the security interest; (2) a secured
creditor and another secured or unsecured creditor; and (3) a secured creditor and lien creditor, usually a judgment creditor or a trustee in bankruptcy.
In general, the party that is successful in the conflict may fully satisfy its claim out of the collateral before any subordinate party may satisfy its claim. To resolve a
priority conflict, the type of collateral and the type of parties involved must be determined as well as the time of perfection.
Unperfected Security Interests
Secured Creditor v. Unsecured Creditor
UCC section 9-201(a) states: Except as otherwise provided [by this Act], a security agreement is effective according to its terms between the
parties, against purchasers of the collateral, and against creditors. In other words, unless UCC Article 9 states otherwise, the security agreement is
14

a contract effective between two parties and effective against creditors and purchasers. Therefore, the unperfected secured creditor has greater
rights in the collateral than a general or unsecured creditor or purchaser unless the Code changes this result elsewhere.
EXAMPLE:
T lends money to D. T obtains a security interest, but fails to perfect. P also lends money to D. P does not have a security interest, and, therefore,
has no claim without resorting to judicial process. D defaults on both loans. P claims the collateral in which T has an interest. T will prevail
because T has a security interest that is valid between T and D and as against Ds creditors. Ts security interest is good against P even though P is
not a party to it.
Secured Creditor v. Buyer
If a creditor is secured but unperfected, the unperfected security interest usually is subordinate to all buyers who give value and receive delivery of
the collateral without knowledge of the security interest and before that interest is perfected. If the debtor gave the property away or it passed
through the debtors estate, then the unperfected security interest prevails since the transferee did not give value for the collateral, even if it took
without knowledge of the security interest. As to general intangibles and sales of accounts, the buyer will prevail against an unperfected security
interest if the buyer gives value and takes without knowledge of the unperfected security interest; there is no delivery requirement here. UCC 9317(b).
Secured Creditor v. Lien Creditor
A lien creditor (e.g., a bankruptcy trustee or creditor with a judgment) will prevail over an unperfected secured creditor provided the claimant
becomes a lien creditor before the security interest is perfected.
A trustee in bankruptcy will receive all the rights under state law of a perfected hypothetical creditor with a lien on all property of the debtor. The
trustee will prevail over most UCC Article 9 claimants whose interests are unperfected as of the filing of the bankruptcy petition.
The holder of a purchase money security interest has 10 days after the debtor receives the collateral to perfect. As long as the PMSI holder perfects
within this 10-day period, the PMSI holder will take priority over a lien creditor whose rights arose during the 10-day period and before the
unperfected secured creditor perfected.
Secured Creditor v. Secured Creditor
Where there are competing secured parties and both have security agreements which are effective against the other and neither has perfected, then
the one whose interest first attached will have priority.
Perfected Security Interests
Perfected Security Interest v. Buyer
Except as otherwise provided in [the Uniform Commercial Code], a security agreement is effective according to its terms between the parties,
against purchasers of the collateral, and against [the debtors other] creditors. UCC 9-201(a) (emphasis added). Likewise, a security interest ...
continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the
disposition free of the security interest ...; and (2) a security interest attaches to any identifiable proceeds of the collateral. UCC 9-315(a). [A]
security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transference or, in an
appropriate case, may maintain an action for conversion. The secured party may claim both any proceeds and the original collateral.... to the
extent of the debt that is still owed. UCC 9-315, cmt. 2.
Proceeds are whatever is received upon the sale, exchange, collection, or other disposition of the secured collateral. UCC 9-102(a)(64). A
security interest continues in collateral notwithstanding its sale, exchange, collection, or other disposition as to identifiable proceeds unless the
disposition was authorized by the secured party; typically, this authorization will be set forth in the security agreement. If the disposition was
authorized, then the security interest will not continue, and the secured partys only right will be to the proceeds. If the disposition was
unauthorized, then the security interest continues in the original collateral now in the hands of the purchaser or transferee. The secured party can
claim both the proceeds, as well as the collateral, but may have only one satisfaction. UCC 9- 315(a).
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A secured partys interest in proceeds continues as a perfected interest as long as the interest in the original collateral was perfected. UCC 9315(c). However, the interest will become unperfected if a new financing statement covering the proceeds is filed in the same office within 20
days. UCC 9- 315(d).
Buyer in the Ordinary Course of Business
UCC section 9-320(a) protects buyers in the ordinary course of business. A buyer in the ordinary course of business is a person who, in
good faith, buys goods from a person in the business of selling goods of that kind. Such buyers take free of a security interest created by
the seller even though the security interest is perfected and even if the buyer knows of its existence. Note that the seller who created the
security interest must be in the business of selling the type of goods purchased; therefore look to the status of the seller to determine the
buyers status.
EXAMPLE:
X buys a dishwasher from Y Appliance Store. Bank has a perfected security interest in Ys inventory to secure Ys loan. Banks
secured interest will be subordinate to Xs interest because X purchased a good from a seller (Y) who sells such goods in the
ordinary course of the sellers business. Even if X knew of Banks security interest, X may assume that the agreement between
Bank and Y would permit the sale.
Note that if X, the purchaser in the ordinary course of Y Appliance Stores business, bought on credit, the Bank has an interest in
the customers debt (an account receivable or chattel paper) since it is the proceeds from the secured inventory. UCC 9-102(a)
(64); UCC 9-203(f).
Entrusting Rule
Under the entrusting rule, a buyer in the ordinary course of business also has priority over a security interest on goods that are entrusted
to a merchant who regularly deals in goods of that kind. UCC 2-403(2). That merchant may then sell those goods to a buyer in the
ordinary course of the merchants business free from a security interest on the entrustors goods.
EXAMPLE:
Owner has a valuable antique desk in which Bank held a security interest. One day, Owner took the desk to be refinished by Antique
Dealer. After it was beautifully refinished, Antique Dealer mistakenly sold the desk to Buyer in the regular course of Antique Dealers
business. Under the entrusting rule, Buyer takes title to the desk free from Owners claim to ownership, and also takes it free from the
Banks security interest in the desk.
PMSI in Consumer Goods
As stated earlier, purchase money security interests in consumer goods (used for personal, family or household purposes) are automatically
perfected; no filing is necessary. However, if a buyer of consumer goods then resells the goods to another consumer, this subsequent
consumer-purchaser will take free of any security interest provided the subsequent consumer-purchaser purchased for value, without
knowledge of the security interest, for a personal consumer purpose, and before the secured party filed a financing statement. UCC 9309.
EXAMPLE:
L lends money to C to buy a stereo. C is a consumer and uses the stereo for personal purposes. L has an automatic PMSI and does not have
to file a financing statement. C then sells the stereo F. If F bought the stereo for value without knowledge of Ls PMSI interest, and intends
to use it for personal use, F will take free of Ls interest unless L filed a financing statement covering the stereo before F bought it from C.
Perfected Security Interest v. Lien Creditor
When a secured party perfects prior to the creation of a lien creditors interest (a trustee in bankruptcy or a judgment creditors levy or lien), the
secured party will generally have priority over the collateral.
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Future Advance Clause

As previously explained in this chapter, UCC section 9-323 determines the priority between a secured creditor who makes subsequent
advances and a lien creditor who intervenes between the time of the perfected security agreement and the time of the subsequent advance.
No new financing statement need be filed for the creditors advance to the debtor on the same preexisting collateral set forth in the earlier
financing statement.
This priority exists even if the debtor already paid off the original debt by the time the creditor subsequently made the advance.
Even if a secured party has knowledge of the intervening lien, if the advance is made to the debtor within 45 days after the lien attached,
the first-to-file priority carries over from the first advance to the future advance. In other words, the secured creditor has priority for at
least 45 days after the lien is acquired even if the secured creditor had knowledge of the lien. However, if the future advance is made more
than 45 days after the sale, the advance will only have priority if it was made or committed without knowledge of the lien.
A buyer of collateral not in the ordinary course of business takes subject to a future advance, if the advance was made without knowledge
of the buyers purchase of the secured collateral and within 45 days of the sale to the buyer.
Liens Arising by Operation of Law
UCC section 9-333 states that when, in the ordinary course of business, one furnishes services and/or materials with respect to goods
subject to a security interest, one obtains a lien, usually by statute, upon those goods while they are still in ones possession to secure
payment for the services and/or materials. This lien takes priority over a perfected security interest unless the lien is created by a statute
that expressly provides otherwise. The purpose behind this provision is to provide liens to secure mechanics or artisans claims that arise
from work intended to enhance or preserve the value of the collateral. These liens take priority over earlier perfected security interests.
EXAMPLE:
T has a perfected security interest in Ds equipment (e.g., trucks, computers, or factory machines). When one of the pieces of equipment
needed repair, D sent it to R for the repair work. Upon completion of the repairs, R refused to return the equipment until paid by D. D then
defaulted on his loan to T. T claims the equipment held by R as part of the secured collateral. The jurisdiction provided for mechanics
liens of this type. R claims that R has a lien on the collateral and priority over T to the extent of the debt owed to R for the repair work.
Under UCC section 9-333, assuming R does this type of repair work in the ordinary course of Rs business, R has priority in the
equipment over T up to the value of the money owed for the repair.
It is important to look at the statute that creates the lien being claimed. If the statute creating the lien gives priority to the perfected secured
party over the statutory lien holder, then the priority rule stated in the specific lien statute prevails over the general rule stated in UCC
section 9-333.
Perfected Security Interest v. Unperfected Security Interest
A party with a perfected security interest will have priority over a creditor with an unperfected security interest.
Perfected Security Interest v. Perfected Security Interest
First in Time, First in Right
Where two conflicting creditors both have perfected security interests in the same collateral, whichever party was first either to perfect or
to file has priority. UCC 9-322(a). If both parties have perfected by filing, then whichever party filed first has priority, even if the
second-in-time opposing party actually perfected first.
The time of filing competing financing statements can be established through public records. However, if one party perfects through an
alternate means, e.g., possession, that non-filing secured party will have priority if he or she perfected, e.g., took possession, before the
other creditor filed a financing statement.

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Pre-Filing Rule
UCC sections 9-502(d) and 9-504 allow a party to file before signing a security agreement or attaching. Note that the debtor must
authorize the pre- filing of a financing statement in an authenticated record. UCC 9-509(a)(1). Pre-filing has no effect other than
to set priority. If a loan is made months later, priority will date back to the financing statements pre-filing date.
EXAMPLE:
On September 1, Bank agreed to loan T money, and with Ts signed written permission, pre-filed a financing statement. On
September 10, D loaned T money, D and T signed a security agreement, which D filed. On September 17, Bank actually made the
loan to T.
The UCC states that the first to file or perfect has priority. Here, Bank has priority over the collateral because by pre-filing, Banks
priority relates back to September 1. In this case, had D searched the filing system before making the loan, he would have found
the pre-filed financing statement and would have been on notice of Banks security interest.
Second in Time, First in Right PMSI
A secured party may obtain a purchase money security interest only in goods, including software. UCC 9-103(a)(1)(f) and 9-324(a) and
(f). The initial question is to determine whether a PMSI arose, that is: (1) was a security interest taken or retained by the seller of the
collateral to secure all or part of the purchase price, or (2) was the security interest taken by a lender making advances (a loan) or incurring
an obligation to pay value so that the debtor could obtain the specific goods, which in fact were actually obtained. UCC 9-103.
Remember, the creditor may ensure this by making the payment directly to the seller of the goods.
Under UCC section 9-324(a), creditors with properly perfected PMSIs will have priority over pre- existing non-purchase money security
interests in the same collateral and even over an after-acquired property clause in a previously executed and perfected security
agreement. As explained earlier in this chapter, a creditor with an existing security interest in a debtors collateral may include an afteracquired property clause in the security agreement, thereby creating a floating lien on any future similar collateral acquired by the debtor.
In the future, once the debtor obtains rights in new collateral, the creditors prior security interest attaches automatically. UCC 9-204(a).
PMSI in Inventory and Livestock
A perfected PMSI in inventory or livestock has priority over an earlier conflicting perfected security interest in the same inventory
or livestock if:
1. The PMSI is perfected at or before the time the debtor receives possession of the inventory (note that there is no 20-day
grace period for perfecting when securing inventory); and
2. The party holding the PMSI gives notice in writing to the holder of the conflicting prior security interest containing an
after-acquired property clause.
Inventory includes goods held for sale or lease as well as materials and work in progress. UCC 9-102(a)(48). A purchase
money security interest in livestock is treated just like inventory in that it must be perfected before or at the time the debtor
takes possession of the livestock, and the holder of the PMSI must notify any prior perfected security interests with after-acquired
property clauses in the livestock before filing the financing statement. UCC 9 -324(d) and (e).
PMSI in non-inventory collateral, (e.g. equipment)
[A] perfected purchase-money security interest in [collateral] other than inventory . . . has priority over a conflicting security
interest in the same [collateral or its proceeds] . . . if the purchase money security interest is perfected when the debtor receives
possession of the collateral or within 20 days thereafter. UCC 9-324(a). Under this provision, the secured party is not required
to notify other holders of its security interest, and the purchase money lender or creditor perfects its security interest when the
debtor takes possession of the collateral or within 20 days thereafter. UCC 9-324(a).
EXAMPLE:
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Bank loaned Manufacturer money on September 1 and took a security interest in Manufacturers existing and afteracquired equipment. On October 1, Supplier sold Manufacturer additional equipment and retained a security interest to
secure the purchase price. Supplier then files a financing statement within 20 days after Manufacturer took possession of
Suppliers equipment. Supplier will have priority over Banks prior conflicting security interest in the piece of equipment
even without giving Bank notice as would have been required had Suppliers claim been a purchase money security
interest in inventory (as opposed to equipment) under UCC section 9-312(3).
Priorities in Fixtures
UCC section 9-334 discusses the conflict between personal property interests in fixtures and real property interests in fixtures.
Goods become fixtures when they become so related to a particular piece of real estate as to become a part of the real property. A security interest in
fixtures is governed by real estate law rather than the Code. UCC 9-102(a)(41), 9-334(a).
The initial question is whether a party with an interest in the real estate would also have an interest in the goods that are subsequently affixed as part of that
real estate (e.g., a heating or cooling system installed on the realtys structure). However, note that no security interest exists under UCC Article 9 in the
annexation of ordinary building materials incorporated into an improvement on a structure, such as bricks, nails or lumber. Ordinary building materials,
steel beams, shingles, nails, bricks, and lumber are so integrated into the realty that they lose their identity as goods and cannot be a separate basis of
interest to be financed. It is the mortgagee of the realty that has the priority interest in these integrated building materials.
EXAMPLE:
A pipe organ that is built into a ball park is a fixture. A movable bench made especially for and matching the organ is not a fixture. The bench is
an ordinary good. When an interest in realty is conveyed (e.g., by deed, bankruptcy, or sheriffs sale at a foreclosure) fixtures pass with the title.
The financing statement is filed in the county where all realty records (e.g., mortgages, deeds, lis pendens) are filed. Priority between an interest in
the realty (e.g., a banks mortgage or a recorded deed) and an interest in fixtures is based on who was the first to file, except when a PSMI exists
in the fixtures. UCC 9-334(e) and (d).
Under UCC section 9-334(d), a perfected security interest in fixtures prevails over a prior recorded interest in the realty if the debtor has an interest in or
possession of the realty (e.g., a tenant) and;
1. The creditor has a PMSI;
2. The prior interest (e.g., mortgage) arose before the goods became fixtures;
3. The secured interest is perfected by a fixture filing before the goods became fixtures or within 20 days therefrom.
In general, a preexisting mortgage on realty trumps and prevails over a security interest in fixtures.
Whether the goods have become fixtures is determined by local real property law. There is no single definition for fixtures, but courts usually
consider:
1. Whether the good is the type of chattel that generally becomes part of the realty (e.g., storm windows, an awning, shutters, or a hot water heater);
2. Whether the good was installed with the intent that it be subsequently removed or with the intent that it become part of the realty (e.g., did a tenant
install it with the intent to remove it at the expiration of the lease?). While this is usually the case, if the land and the good had a common owner
when the good became a fixture, a presumption arises that it was intended as a fixture.
EXAMPLE:
A law school constructs a large 125 seat classroom and installs rows of desks and chairs attached to the floor as well as light fixtures
attached to the ceiling. These attachments probably are fixtures because they are the type of chattel that generally becomes part of the
realty once affixed to the realty. Since there was a common owner (the law school) between the chairs, desks, lights, and the realty, a
presumption arises that the law school intended those goods to become fixtures.
What about a prefabricated home that is shipped to the realty and then erected on the real property and connected to utilities? UCC section 9-102(a)(53)
and (54) refer to these as manufactured homes, which in their travel mode are at least 8 x 40 in width and length and are treated as fixtures. Depending
19

on state laws, these are fixtures and their financing statement is filed locally where realty records are recorded or a security interest must be noted on its
certificate of title.
Fixture Filing
In order to perfect a security interest in fixtures (or collateral to be extracted from land (e.g., minerals, oil or gas, or timber), a financing statement
covering such goods must be filed locally, i.e., in the government office where a mortgage on the real estate would be filed. UCC 9-102(40), 9502. The financing statement must describe the goods as fixtures, and state it is being filed in the local real property records. The financing
statement must contain a description of the real estate sufficient for its identification and must name the record owner. If the debtor does not have
an interest of record in the real property (e.g., the debtor is a tenant of an unrecorded lease), then the financing statements must provide the name
of the realty owner of record. UCC 9-502(b). By properly filing the financing statement in the real estate records, a secured creditor will be
protected against both personal property creditors and real estate creditors.
What if the creditor having an interest in fixtures just files a financing statement on the fixtures at the state level and not at the local level in the
realty chain of title? Well, the owner of the realty who is not the debtor (e.g., the debtor was a tenant) or a person with subsequent interest in the
realty (e.g., a buyer of the realty) will take priority and prevail over the improper security interest since these latter interests would not have had
constructive notice of the improperly filed financing statements. However, as to other statutory liens, i.e., a trustee in bankruptcy or a judgment
creditor of the realty owner, the improperly filed security interest is given priority.
Note the existence of another fixture filing called a Record of Mortgage. UCC 9-502(c). The Record of Mortgage must describe the goods to
be covered and state whether they are or are to become fixtures. In Alternative A states (only if states) as explained previously in this chapter,
the financing statement must name the individual debtor properly. This filing is made locally, not at the state level, in the real propertys chain of
title.
Besides financing statements for fixtures, there are other instances where the financing statement should be filed locally:
1. A security interest in timber to be cut (UCC 9-501(a)(1)(A));
2. An agricultural lien on growing farm products (UCC 9-302); and
3. A security interest in minerals to be extracted from the earth (UCC 9-301[4]).
General Rule
The first in time, first in right rule is also found in UCC section 9-334(e)(1). A secured party with a proper fixture filing has priority over a
conflicting real estate interest if the fixture creditor perfects before the real estate creditor files a mortgage on the property to which the goods have
become affixed. However, if the mortgage is filed first, the mortgagee has priority, except for the following exceptions to the first-to-file rule.
PMSI in Fixtures
An exception to the above first-to-file rule grants a party with a purchase money security interest (PMSI) who perfects within 20 days after
affixation of a chattel to the realty priority over a prior recorded interest, e.g., a recorded mortgage on the debtors realty. In order to have
priority: (1) the security interest must be a PMSI; (2) the real estate interest must have arisen before the goods became fixtures; (3) the
security interest must be perfected by a fixture filing before the goods became fixtures or within 20 days thereafter; and (4) the debtor
must have an interest of record (e.g., an owner) or be in possession (e.g., a tenant) of the real estate. UCC 9-334(d).
This provision is similar to the UCC section 9-324(a),(g) non-inventory PMSI provision regarding the 20-day rule. However, under UCC
section 9-334(a), the 20-day period begins to run from the time the debtor receives possession of the collateral (e.g., equipment), whereas
here, under UCC section 9- 334(d)(3), the 20 days to file begin to run when the goods are affixed to the realty.
Construction Mortgages
A construction mortgage is an obligation incurred for the construction of an improvement on land, including the acquisition cost of the
land. A construction mortgage has priority over a security interest in goods that become fixtures during construction. UCC 9-334(h). In
other words, the real estate purchase money lender, i.e., a bank or insurance company backing the construction, has, as the general
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purchase money lender, a better claim than does the specific purchase money lender who is relying on the cost of only a few fixtures.
Readily Removable Machines
A fixture filing is not required where collateral is readily removable (not bolted to the ground), such as factory or office machines (e.g.,
typewriters, photocopy and fax machines, or large machines on a factory floor). Regular filing is sufficient. The same holds true for
readily removable replacements of domestic appliances (not original installations), which are considered consumer goods, not fixtures.
UCC 9-334(e)(2). A lender against these goods will take priority over a conflicting real estate interest if it is perfected by any method
before the goods become fixtures. In most instances the secured lender will be a purchase money lender.
Fixtures Owned by Tenants
A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an existing (e.g., a prior mortgage)
encumbrance or the owner of the real estate where: (1) the real estate encumbrancer (usually a bank holding a mortgage on the realty) or
owner of the realty consents in writing to the priority of the tenants fixture security interest, or (2) when the tenant is given the right in the
lease to remove fixtures at the end of the lease period. In the second case, the fixture lender would have the same right as the tenant to
remove the fixture regardless of whether the second creditor has a perfected security interest. UCC 9-334(f).
EXAMPLE:
A tenant has the right under the terms of his lease to remove an air conditioner that he purchased and installed. The fixture lender
has priority over the mortgagees interest and has the same rights as the tenant in removing the fixture.
Default by Debtor
A secured party entitled to priority may remove the fixtures upon default, but is liable to any real estate claimant (other than the debtor) for
the repair of any physical damage caused by the removal. UCC 9-604(c),(d). This liability does not include a reduction in the economic
value of the property due to the loss of the fixtures.
Priorities in Accession UCC9-335
Accessories (accessions) are goods that when attached become part of other goods. They are similar, yet different, from fixtures which are goods
attached to realty.
A security interest in goods that attaches before the goods are installed into and with other goods may take priority over preexisting security
interests in the accessory goods that existed at the time of affixation. UCC 9-335. The purpose of this provision is to establish priority in a
secured party claiming an interest in goods installed in or affixed to other goods over a party with a pre-existing security interest in the good in
which the former was installed or to which it was affixed. This provision does not apply to goods, which are so commingled, that their original
identity is lost. UCC 9-336, 9-102(a)(1).
The security interest in the accession good (e.g., an expensive memory chip installed in a large computer) will not prevail over the first-in-time
perfected security interest in the computer, under the first-to-file rule. UCC 9-322. However, if the interest was a purchase money security
interest, then under UCC 9-324(a), cmt. 8, the memory chips secured lender or seller would prevail.
When a secured party has an interest in an accession, which is entitled to priority over the claims of parties with an interest in the whole, the
secured party may remove the collateral from the whole, but must reimburse the owner (who is not the debtor) for any physical damage caused by
the removal. UCC 9-335(f).
EXAMPLE:
When an engine or generator encumbered by a perfected security interest is installed in a crane or a large piece of equipment in a factory,
that engine or generator may be reclaimed and removed, but any damage to the crane or factory occurring in the reclamation or removal
must be reimbursed.
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The accession rule does not apply when the goods become part of a chattel covered by a certificate of title (e.g., a motor vehicle). UCC 9-335(d).
The secured party in the title will prevail regardless of which security interest was perfected first. That secured party is not required to check to see
if there are security interests on a component part to the vehicle.
Default
What triggers default and what can the secured creditor do when it occurs?
General Rule
UCC Article 9 does not define default. The security agreement should contain a list of events that the parties have agreed constitute default by the
debtor, e.g., the debtors nonpayment of the debt, bankruptcy, a money judgment against the debtor that is not satisfied within a few days, failure to
maintain insurance on the collateral, or where the debtors inventory falls below a stated value. UCC 9-601(a). Upon default, a secured creditor may
exercise the self-help remedy and repossess the goods that are subject to its security interest and keep them in satisfaction of the debt or resell them and
apply the proceeds to the debt. Under the latter scenario, the debtor remains liable for any deficiency on a resale. Remember, where a secured creditor
declares a default and exercises self-help in repossessing and then selling the property or keeping the property in a strict foreclosure, the secured party
must act in good faith. UCC 9-102(a)(4), 1-309 and 1-304 (under Revised Article I).
Alternatively, the secured creditor may sue the debtor by commencing a lawsuit. By court order, the secured creditor may then replevin the goods, and
when the court ultimately grants a money judgment, the creditor may proceed in having the sheriff sell the property. UCC 9-601(a)(1). By obtaining a
money judgment, the secured creditor may also levy against all of the debtors non-exempt property and avoid the two-step process of first selling the
secured collateral and then suing the debtor for a deficiency judgement.
Taking Possession Upon Default without Judicial Process
A secured partys right to possession of the collateral accrues upon default unless stated otherwise in the security agreement. Notice of the
default to the debtor is not required. The secured party can take possession of the secured collateral without judicial process but only when this can
be accomplished without a breach of the peace. If the collateral is heavy equipment, the secured creditor need not remove the equipment from
the debtors place of business, but may render the equipment unusable or even dispose of it from the debtors property. UCC 9-609(a)(2). Selfhelp repossession enables a secured creditor to obtain possession of secured collateral quickly and inexpensively at a time when continued
possession by the debtor could pose serious risks to the secured party.
Challenges have been made as to the constitutionality of this non-judicial self-help repossession. Most courts hold that UCC sections 9609 and 9-610, which grant a secured party the right to retake possession of collateral without breaching the peace and without prior judicial
notice, are constitutional even if the conditional sale agreement between the parties is silent as to repossession on default. Peaceful self-help
remedies by secured creditors do not involve state action, but rather constitute private action not governed by the Fourteenth Amendment.
Repossession Breach of the Peace
UCC section 9-609(b)(2) allows a secured party to repossess collateral upon default without resort to judicial action (replevin) as long as no
breach of the peace will result, i.e., not triggering an assault or battery. To determine whether a breach of the peace has occurred, courts will look
to whether there was entry by the creditor upon the debtors premises and whether the debtor or one acting on the debtors behalf consented to or
opposed the entry and repossession. James J. White & Robert S. Summers, Uniform Commercial Code 267 at 1336 (6th ed. 2010). This creditor
entry and debtor response must take into consideration any third party response, the type of premises entered, and possible creditor deceit in
procuring consent. See generally James J. White & Robert S. Summers, Uniform Commercial Code 26-7 at 1335-38 (6th ed. 2010).
If a debtor voluntarily and contemporaneously consents to the secured partys repossession, then there is no breach of the peace. A breach of the
peace does not require violence; any protest by the debtor or by someone in possession of the debtors property, even in a public place, is a breach
of the peace. When faced with a protest, the person attempting repossession must withdraw. However, a subsequent seizure attempt may be made
provided no breach of the peace occurs.
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If a breach of the peace occurs, then UCC Article 9s self-help authority is revoked, and the creditor is, in effect, stealing the debtors goods and is
liable for the tort of conversion. 35 ALR 3d 1016.
If there is a breach of the peace, the secured creditor may be subject to tort liability (trespass, conversion, assault, or battery), including punitive
damages and criminal penalties, as well as liability under UCC section 9-625. A breach of the peace also may deprive the creditor of his right to a
deficiency judgment. Note that any misconduct in breaching the peace does not destroy the security interest or discharge the debt.
EXAMPLE:
A repossession involving a breach of the peace occurred where a physical altercation took place between the debtor and the towing
company (independent contractor) hired to tow the debtors vehicle away in the repossession process. The injured debtor sued the bank
which moved to dismiss the claim on the grounds that, as the employer of an independent contractor, the bank was not vicariously liable
for the independent contractors torts.
While an employer of an independent contractor generally is not liable for an injury caused to a third party by the acts or omissions of the
independent contractor or its employees, UCC section 9-609 imposes a non-delegable duty on a secured creditor to keep the peace in the
course of a repossession. The secured party is responsible for the actions of others, including independent contractors engaged by the
secured party to take possession of collateral, taken on the secured partys behalf. UCC 9-609, cmt. 3.
The purpose behind the breach of the peace doctrine is to deter violence. In that regard, creditors are prohibited from entering a debtors home
without permission. Entry by fraud or deceit, depending on the magnitude, may constitute a breach of the peace, e.g., unauthorized entry by a
creditor through use of police officers badge. Likewise, if a creditor breaks a lock to enter a debtors residence or place of business, it is likely that
the creditor will be guilty of a breach of the peace, the rationale being that the security of the premises will be breached, coupled with a general
aversion to trespass.
The Code does not authorize a secured party who repossesses without judicial process to utilize the assistance of a law enforcement officer. A
number of cases have held that a repossessing by a secured partys use of a law enforcement officer without benefit of judicial process constitutes
a failure to comply with the self-help rules. UCC 9-609, cmt. 3.
Resale of Collateral
After default and repossession of the debtors collateral, a secured party may sell, lease, or otherwise dispose of the collateral in its current
condition or after reasonable preparation or processing by the creditor. The collateral may be disposed of by public or private sale, via one or more
separate contracts.
The requirements for resale are: (1) the creditor must send notice to the debtor (UCC 9- 611(c)(1)) and any secondary obligor (UCC 9-611(c)
(2)) such as a surety on the debt (UCC 9- 102(a)(72)), or a subordinate secured party (the creditor must search the UCC records for subsequent
financing statements); and (2) all aspects of the sale must be commercially reasonable with respect to the time, manner, method, place, and the
terms of the sale. UCC 9-601(b).
To determine reasonableness, the court will look to local standards among similar dealers. UCC 9-627(b). A secured partys failure to act in a
commercially reasonable manner may subject the creditor to liability for damages under UCC section 9-625 and bar any attempt by the creditor to
obtain a deficiency judgment, which is simply the difference between the amount of the debt and the sale price of the repossessed goods. The
parties may by agreement set reasonable standards against which rights and duties pertaining to disposition of collateral may be measured. UCC
9-601.
A creditors disposition of the debtors collateral will be considered commercially reasonable if it was disposed:
1. In the usual manner on any recognized market;
2. At a current price in a recognized market, e.g., the wholesale market; or
3. In conformity with commercial practices among dealers in the type of property that was the subject of the disposition.
If the goods are sold at a private sale for a reduced price to the secured creditor, a person related to the secured party, or a secondary obligor (e.g., a
surety on the debt), then any deficiency or surplus is calculated by the court as if the goods had been sold to an independent willing buyer, i.e., at
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fair market value. Thus, the court will disregard the reduced sale price. UCC 9-615(f).
QUERY:
Can the secured party purchase the collateral?
ANSWER:
Yes, if it sold at a public auction (not at a private sale without risking a claim for damages due resulting from an improper sale).
UCC 9-610(c)(1).
The proceeds of the sale are first applied to reasonable repossession and resale expenses; second, to satisfy the security interest; third, to satisfy the
subordinate security interests of other creditors if written notice of demand is received before distribution; and last, if any proceeds remain
(surplus), they are paid to the debtor. If the proceeds are insufficient to cover the creditors security interest, the creditor may seek a deficiency
from the debtor. Note that a waiver by the creditor of the right to any surplus in the original security agreement is not enforceable.
Under UCC section 9-624, the secured party is required to give the debtor notice of the time and place of a public sale or the deadline after which
a private sale may occur. Reno Fin., Ltd. v. Valleroy, 229 S.W.3d 622 (Mo. App. E.D. 2007). The notification requirement protects the debtor from
unscrupulous creditors by allowing the debtor the opportunity either to participate in the sale or to redeem the collateral. Erika L. Weinberg, An
Equitable Approach to Creditor Noncompliance with Section 9-504(3): Siemens Credit Corp. v. Marvik Colour, Inc., 70 St. Johns L. Rev. 373, 382
(1996).
Reasonable notice for disposing of the collateral also means timely notice which is a question of fact. In nonconsumer transactions, the Code
states that notice sent ten or more days before the disposition is reasonable. UCC 9-612(b).
The notice requirement affords the debtor an opportunity to attend the sale, as well as to spread the word to those who would be interested in
buying the collateral. By failing to give the requisite notice of sale, the creditor becomes liable for those damages proximately caused to the debtor,
but this amount is often difficult for a debtor to prove. Here, the debtor, if a consumer, would urge the court to adopt the absolute bar rule,
prohibiting the creditor from seeking any deficiency since the creditor did not properly follow Article 9s rules. The consumer would also seek
statutory damages in UCC 9- 625(c)(2).
A creditor is required to give proper authenticated notice to those parties having an interest in the collateral, i.e., the debtor or another secured
creditor who has filed a financing statement at least ten days before the notifications date. UCC 9-610-613.
The Code excuses a notice of sale when the collateral is of a type customarily sold on a recognized market, e.g., publicly traded shares of stock
held as collateral when sold on a stock exchange. UCC 9-610(c)(1).
If the secured party in non-consumer debt does not give the necessary notice, UCC section 9-615 creates a rebuttable presumption that the value
of the collateral equaled the outstanding debt, shifting the burden to the secured party to prove any deficiency. Individual states are free to adopt up
the rule for sale mistakes for consumer goods. The most popular rule followed in a majority of states raises a rebuttable presumption that the value
of the collateral equaled the amount of the debt, thus there is no deficiency. The burden of proof shifts to the creditor to burst this presumption
bubble.
Another theory adopted by some states to address failure to comply with the rule of sale is to absolutely bar any claim for deficiency. Other states
(only a few) place the burden on the debtor to prove the amount of damages it suffered (not an easy task) as a result of the noncompliant sale.
The sale of the debtors collateral can be at public auction or it can be by private sale as a single unit or in separate parts in a commercially
reasonable manner. UCC 9-615(f). UCC section 9-627(a) seeks to prevent second-guessing by a debtor claiming that the sale by the creditor did
not obtain the highest possible price. The fact that a greater amount could have been obtained by a sale at a different time or in a different method
from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the sale was made in a
commercially reasonable manner. Id.
The foreclosure sale will not be set aside for mere inadequacy of the price obtained unless it is so inadequate as to shock the conscience of the
court. Courts take judicial notice that foreclosure sales result in prices substantially less than market values.
When reclaimed goods are sold at a foreclosure sale, the sale impliedly includes the warranties of title, quiet enjoyment, etc. UCC 9-610(d).
These warranties, however, may be expressly disclaimed by the seller. UCC 9-610(e)-(f).
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Similar to a mortgage foreclosure on realty, the buyer at a sale of a debtors UCC Article 9 collateral or as a result of a total or partial strict
foreclosure of the debtors debt, buys without subordinate security interests or judgment liens filed on that property, which are wiped out by the
sale. UCC 9-622; 9-617.
Retaining Collateral in Satisfaction of the Debt Strict Foreclosure
UCC section 9-620 governs strict foreclosure, which permits a creditor to retain the debtors collateral in full or partial satisfaction of the debt.
This remedy is only available if the debtor consents to strict foreclosure after a default. The debtor cannot consent to strict foreclosure in
anticipation of a future default or at the time it entered into the transaction that created the security interest. In re CBGB Holdings, LLC, NYLJ
1202473638412 at *1 (S.D.N.Y., Oct. 13, 2010).
Consumer Goods
In the case of consumer goods, if the debtor has paid off at least 60% of the price of a PMSI in consumer goods or 60% of a loan for
consumer goods, strict foreclosure is prohibited, and the secured party must sell the collateral within 90 days after taking possession .
Here, the creditor may not request to keep the goods in full satisfaction of the debt. UCC 9-620(e)-(f), 9-624. The rationale is that the
debtor who may have built up equity in the goods has the right to a subsequent resale that may result in a surplus. If the consumer goods
are not sold within 90 days from repossession and the debtor has not renounced the right to have the collateral sold, the debtor may sue the
creditor for the tort conversion. UCC 9-620(f), 9-624(b).
In any other non-60% repayment case involving consumer goods, the secured party must retake possession after default and send written
notice to the debtor and other secured creditors of its intention to keep the collateral in full satisfaction of the consumers debt (unless the
debtor waived right to notice after default). UCC 9-620, 9-621, 9-624. With consumer goods, there can be no strict foreclosure for only
partial satisfaction of the debt. The creditor must agree to fully extinguish the debt. If the consumer concents to a strict foreclosure and
renounces the right to have the goods sold, the secured creditor may keep the goods without giving notice to other creditors.
Non-Consumer Goods
The creditor who has reclaimed goods from a nonconsumer may retain the goods (this is referred to as a strict foreclosure) either in full
or partial satisfaction of the debt, but this requires the debtors consent. If the creditor gives the debtor notice of its intent to retain the
reclaimed goods in full satisfaction of the debt (full strict foreclosure), the debtors consent can be either express (an affirmative written
response from the debtor), or it can be implied by the debtors failure to make an objection within 20 days from notice of the intended
strict foreclosure. UCC 9-620(c)(2).
The secured party must also (except for consumer goods) give notice to any other secured party that has given written notice of an interest
in the collateral.
If the secured creditor does not receive any objection from the debtor or any other party entitled to notice within 20 days after the
proposal is sent, then the secured creditor may keep the collateral in full satisfaction of the debt. UCC 9-620(c)(1)(C). If there is any
objection, then the secured party must dispose of the collateral at a public or private sale. When a creditor elects to accept collateral in full
satisfaction of a debt, he surrenders any right to a deficiency. UCC 9-623, 9-624; Harris v. Key Bank Natl Assn, 51 Fed. Appx. 346
(2d Cir. 2002).
On a partial strict foreclosure, i.e., where the creditor retains the goods to only partially satisfy the debt, there can be no implied consent
by the debtor. This requires a written authorization executed by the debtor after default. UCC 9-620(c)(1). Remember, partial satisfaction
is not available in consumer transactions.
Note that a full strict foreclosure for the entire debt can be implied if there is no objection within 20 days after the proposal is sent,
whereas a partial strict foreclosure for only part of the debt requires the debtors express written consent. UCC 9-620(c).
Right to Redeem
As long as the secured party has not sold the collateral, entered into a contract with a third party to dispose of the debtors property, or discharged
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the debt by retention of the collateral in a strict foreclosure, the debtor or another secured party may redeem the seized property. The debtor must
pay, in full, all obligations secured by the collateral plus any reasonable expenses incurred by the secured party. UCC 9-623.
This right to redeem cannot be waived in a consumer contract. The waiver in a non-consumer contract must be authenticated (Statute of Frauds),
and can only be done after the debtor defaults.
Secured Creditor Liability for Violations
Except in circumstances involving a judicial sale conducted with judicial oversight, a self-help secured party is required to dispose of collateral in
good faith and in a commercially reasonable manner with notice to all having an interest in the collateral. If the creditor fails to comply with this
Code requirement, then control over the disposition of the collateral may be obtained judicially, e.g., by the debtor seeking a preliminary
injunction. If the disposition has already occurred, the secured party will be held liable for any loss that was caused by the failure to comply. If the
sale extinguished any deficiencies, only loss of surplus damages are available.
If the collateral is consumer goods, the debtor can recover as statutory punitive damages the credit service charge plus 10% of the principal
amount of the debt or the time-price differential plus 10% of the cash price. UCC 9-625(c), cmt. 2. Note that UCC section 2-625, cmt. 4 states
that this Article does not include a definition or explanation of the terms credit service charge, principal amount, time-price differential, or
cash price .... It leaves there construction and application to the court, taking into account the subsections purpose of providing a minimum
recovery in consumer goods transactions. Some argue that the credit service charge is the interest actually paid to the creditor by the consumer.
Others cogently argue that it is the total finance charge originally imposed for the full amount of the loan. The latter rule is favored by your
authors, and is used in the example that follows.
EXAMPLE:
Consumer purchased a car for $13,000 from Auto, a car dealer. Consumer was to pay $300 per month for 50 months (total $15,000). After
24 months, Consumer defaulted and Auto peacefully reclaimed the car and without notice to Consumer (mistake #1 under UCC 9- 613(1)
(e)) sold the car at a private sale where Auto was the purchaser (mistake #2). Although the secured party may purchase at a public sale, it
may not at a private sale unless the collateral is customarily sold on a recognized market or the subject of widely distributed standard
price quotations, e.g., publicly traded stock or other securities. UCC 9-610(c).
Auto is liable for damages that Consumer can prove. However, because we are dealing with a consumer good, UCC section 9-625(c)(2)
provides a formula for recovering not less than the difference between the original price ($13,000) of the consumer good and the financed
price ($2,000, which is $15,000 minus $13,000) (alternatively, depending on the court, it could be only $40 per month in interest for the
24 months ($960)), plus 10 percent of the purchase price for a total damage claim of $3,300 ($2,000 plus $1,300) against the secured
creditor who did not follow the rules set forth in UCC Article 9.
Note that, not only does the debtor have standing to sue the secured party for damages because the creditor did not conduct the sale properly, but
also any subordinate interest such as lien holders or subordinate security interests that were extinguished by the improper sale.
602 SAYS YOU CANT WAIVE 607 COMMERCIALLY REASONABLE LOOK AT 603(a) allows you to modify the commercially reasonable
standard but you cant just waive it.
UCC ARTICLE 9 CHECK LIST
Does Article 9 apply?
o What type of collateral is at issue property (tangible-intangible) or proceeds?
o Was there attachment of the security interest?
Signed security agreement;
Value given by the secured party; and
Debtor had rights in the collateral.
o Was the security interest a purchase money or non-purchase money security interest?

26

o
o

27

Was the security interest perfected?

Filed financing statement;
Possession taken of the collateral; or
Automatic perfection for consumer goods.
Who has def conflicting creditor claims arise?
Rights upon default:
Repossession;
Obtain and execute on a money judgment.