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Sales and Sales Financing outline [Maryland Law]
DIR By: Penny22
Date: February 17, 2011, 10:16 pm
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Sales and Sales Financing
Article 9 – Secured Transactions
Deals w/the creation of security interests in personal property.
A. UNSECURED CREDITOR
1. Does not have a right to self-help. He must
a. file a lawsuit
b. Obtain a judgment (by default or trial)
c. if you get the judgment, doesn’t mean you can collect, so
d. You have to go to Sherrif’s office and have them seize
property, sell it @ auction, and out of that $ you pay the
Sherriff’s fees and then the debt is paid off.
BUT:
2. Exemption Laws. Every state has them. Certain property
can’t be seized to satisfy a debt. (i.e. tools of trade,
homestead)
3. You can’t follow the property. If debtor sold property
before a levy was done and the debtor spent the $, you can’t go
after the subsequent BFP to get the value or property (unless
the sale was done in a fraudulent manner in order to avoid
seizure). This means you get an in personam right (you can go
after the person), not an in rem right (following the property).
4. If insolvent/bankrupt, there’s no particular priority.
B. SECURED CREDITOR/SECURED PARTY (SP)
B/C of this, many creditors will only take a security interest
(SI). Might do so via
1. As mortgagee (not governed by UCC) holding security
interest in real property
2. As an Article 9 security interest in personal property
1. SECURED CREDITOR ADVANTAGES
1. Right to self-help. It applies if it can be asserted w/o
‘breaking the peace’. They can repossess the car from the
street in front of your house, but can’t get into a locked
garage to take it.
2. Not subject to exemption laws. Exemption laws specifically
state they’re for unsecure creditors.
3. In rem right. Creditor can go after subsequent BFP, even if
they were innocent of the lien.
4. Priority in event of bankruptcy. Get paid in full before
rest of $ is distributed.
I. Mechanics of Attachment
3 steps for an Article 9 SI to attach (can be in any order)…
STEP 1. must be a written security agreement, signed by debtor
which has a description of the collateral.
STEP 2. secured party must give value to debtor. There must be
$/consideration…can’t be a gift.
STEP 3. Debtor must have rights in the collateral. (Doesn’t
have to have it @ time – maybe I get the ownership later).
When these 3 steps area met, there’s attachment. However,
there’s still no public record/notice yet. So, Article 9 also
requires….
II. Perfection. To get perfection you need
Financial statement/UCC – 1:
filing of public notice in a public office. Contains:
a) Name and address of secured party
b) Name and address of debtor
c) Brief description of collateral
d) Signed by debtor
e) Filed under debtor’s name in public office, usually the
office of the Secretary of that State. (MD – it’s the state
department of taxation and assessment)
Effective for 5 years. Can be renewed by refilling w/in 6
months of expiration. To release it after debt is paid off,
must file a termination notice.
NOTE: car loans are noted as liens on the automobile’s title,
rather than as a filing of a financing statement.
III. Steps in getting a SI:
1. sign a promissory note: I agree to pay $ to the bank.
Obligation to pay $. It’s unsecured interest. Represents your
in personam indebtedness.
2. sign a security interest (this is where the process of
attachment will be done). Giving the bank a SI in the car.
3. Then the bank will complete the perfection stage by having
their name listed on the title as a lien holder (called
notation).
Different Types of Property that can be Art. 9 collateral
I. TANGIBLE/GOODS
1. Types of tangible goods:
a) inventory goods: held for sale or lease.
i) materials intended to be consumed immediately in a biz, such
as pencils, paper, etc.
b) consumer goods: things bought for personal, family,
household use.
c) equipment: property used in a biz, but not for sale – for
the biz’s use.
d) farm products: aggie collateral. Ex. Grain, livestock,
tractor is farm product
statutorily, not equipment.
2. 2 types of SI for goods:
a) Purchase Money Security Interest (PMSI): a SI taken by the
person lending you the $ to buy a specific thing. These have
superior rights to non-PMSIs.
2 types of PMSIs:
i. SI retained by the Seller of the thing
ii. SI retained by a 3rd party lender who’s $ is used to buy
the thing
b) Non PMSI: all else. EX. Lends you $ and takes interest
in something you already own, like a 2nd mortgage.
IV. WHAT IF YOU DEFAULT?
Alternative 1. Sell it. SP repossesses, there’s a statutory
obligation to sell it. If there’s a surplus, (they get more $
for it than you owe), you get that remaining money. If they get
less than you owe, you still are liable for a deficiency (lender
becomes Unsecured (USP)).
Alternative 2. Strict foreclosure. Requires debtor’s consent.
They take collateral and it wipes the slate clean. If there’s a
surplus you don’t get it, if there’s a deficiency, they can’t
come after you for it. If debtor demands a sale however, they
must sell it.
Alternative 3. Partial strict foreclosure. Agreement to allow
car to be a trade-in for a reduction in the debt. Bank says if
you let us keep the car, we’ll knock $5k off your debt.
Alternative 4. Right of redemption. At any time between repo
and sale, D (debtor) can pay off the remaining/entire debt and
get the good back. Usually an acceleration clause requires
payment of the entire debt once repoed for redemption to be
effected.
II. GENERAL INTANGIBLE PROPERTY
A. Deposit Accounts: (They get access to your bank account)
B. Accounts: (Payments outstanding)
EX: customers bought things w/Sears credit card; $ owed are
Sears’ accounts receivable.
C. Problems w/using accounts as a SI:
1. Dribs and Drabs. $ comes in little bits over long period of
time
2. Can’t collect b/c of valid s. If Sears couldn’t
collect bank can’t collect either.
3. It’s an SI in an UNsecured interest. Accounts US by
definition.
4. Could never be able to collect b/c it never comes into being
5. Self-destructing collateral. Accounts get paid off. Get
after acquired property clause
B/c of these problems, usually a bank will only lend on a
certain % of accounts, & a loan officer will also exclude from
the computation delinquent or disputed accounts (so only the
good ones).
C. Other General Intangible Property
This not for goods sold or services rendered; Rights to payment
for intellectual property
III. GENERAL INTANGIBLE PROPERTY
A. Chattel Paper
SI in a secured obligation, but like an account.
EX: A car. Dealer finances, has a SI (PMSI) in the car. Assume
it’s payable over 3 years, so it’s still outstanding. Like
credit cards (an account but unsecured), but the dealer’s
interest is a Secured Interest. Gets a SI loan from a bank
using these SI in the car as collateral. Chattel papers= double
level SI.
Stage 1: SI in goods – Secured party=dealer. Consumer=buyer.
Stage 2: Secured party in stage 1 becomes debtor in stage 2,
and uses his SI as collateral to another secured party.
Stage 3: Bank gets a SI in the dealer’s SI – called a SI in
chattel paper.
SO IMPORTANT (if you as an attorney don’t put this in, it’s
malpractice!) get the after acquired property clause!!!
Ex. Dealer sells car. Buyer (B) puts down payment and
finances rest w/Dealer (D). D has PMSI in the car thru
attachment (1. written security agreement; 2. value given; and
3. debtor gets rights); then D perfects by notation on
certificate of title. Here it’s just the PMSI. Then, D needs
cash (say wants to expand dealership). Doesn’t want to wait to
receive the payments owed b/c they come in dribs and drabs…needs
$ now. D goes to bank & offers:
1. To sell his chattel paper (say the face value of the
installment ks are $10mil over 4 yrs.; D will sell it to a
factor for $5mil now). This is a pure sale. If he paid $5mil
and gets the $10mil, he keeps it. If he only gets $2mil, D is
not liable for the deficiencies and he’s not entitled to the
surpluses.
2. Other thing D can do is borrow $ from the bank and give them
a SI in the chattel paper.
3 characteristics of a sale transaction:
1. A sale of a discreet package already in existence
2. Immediate notification/default not relevant
3. No seller responsibility for deficiency nor entitlement to a
surplus
(sometimes certain clauses are added, like $ back guarantee)
Characteristics of the SI in the chattel paper:
1. Here, by definition, after acquired property clause would be
required.
2. Bank can’t do anything unless/until D defaults to bank
3. Bank would owe D any surplus and D would remain liable for
deficiencies if liquidated b/c of D’s default
4. Bank can’t repossess cars unless/until customer defaults
Art. 9 governs BOTH sales of chattel paper AND SI in chattel
paper
When Art. 9 talks about debtor  aka seller of chattel
paper
Secured Party aka buyer of chattel paper
Security Agreement sale of chattel paper
(remember though that Art. 9 sales have to be commercially
reasonable)
How do you create a SI (including sales) in chattel paper?
1st, the same 3 steps of attachment;
1. Security Agreement
2. Value given
3. Debtor (seller) must have rights in chattel paper
Then, how do you perfect SI?
1. Take physical possession of the chattel paper; Docs car
buyers signed (the originals). Delivery of those papers to
bank/factor perfects.
2. Filing of financing statement indexed under name of debtor
(the D who’s selling the chattel paper/borrowing $).
Alternative: Stage 1 SI in goods (art. 9)
Personal Property Lease. D leases cars also. In a lease
there’s a stream of payments. So, D can do same thing w/leases
(sell the rights in the lease (assignment) or grant a SI in the
leases). However, this alternative to stage 1 is NOT governed
by Art. 9 (though Art. 9 does apply at stage 2).
4 types of chattel paper:
1. Personal Property LeaseSale of Lease (NOT Art. 9)
2. Personal Property LeaseSI in lease (NOT Art. 9)
3. Art. 9 SI in goodsSale of SI (Governed by Art. 9)
4. Art. 9 SI in goodsSI in the SI (Governed by Art. 9)
B. Consignment
Take goods to a consignment shop. You create a bailment. They
act as your agent (they don’t own the property). Some assets
are store’s own goods, some are other people’s (consigned).
Should we require consignors to file Art. 9 financing statements
so lenders are on notice b/c lenders give $ not knowing not all
the assets they see are not the property of the consignee.
Art 9-§109(a): What must consignors do under Art. 9?
Every time you create a consignment, you’re treated as if you’re
a SP lending $ and taking a SI in the property; (It’s as if
you’re a SP taking a SI in the property that belongs to the
consignee (even though technically it’s your property, this is
how it’s treated so it can be covered by Art. 9))
For consignment, it’s as if the thing you have a SI in, is the
consignee’s goods and you (consignor) only has a SI in the
goods, and  you must perfect by filing an Art. 9
financing statement (indexed under consignee’s name).
C. Leases
Art. 9 doesn’t generally govern leases. What’re the advantages
of one over the other? Some are taxation issues. Lease
payments are 100% deductible as biz payments if used for the
company’s biz. Advantage for sale is you get a depreciation
allowance; lease you get maintenance taken care of, etc.
Conceptually, the diff is do you accrue equity/ownership as you
make payments? (Some leases are actually sales, such as if the
lease is for the life of the item, or you can purchase at end
for a nominal fee)
1. Both involve stream of payments, and
2. If a default, there can be repossession
BUT
1. During sale, you build equity as you go along
2. Lease you get no ownership
3. Art. 9 applies to the sale but not the lease.
disguised leaseIf it’s really a sale, you’d better
perfect for a SI, just to make sure.
§1-201 (37): SI in a lease must comply w/art 9 if:
1. Lease is for the item’s expected economic life; (treated as
an Art. 9 sale).
OR
2. Mandatory renewal: for the remaining economic life of the
good (must renew) or lease requires item to be bought upon
completion of the lease
OR
3. & 4. If at the end of the lease, I have option to get the
goods for 0 or nominal consideration, it’s a disguised sale, not
a lease.
NOTE: Art. 9 says if a lessor isn’t certain if it’s a sale or a
lease, he may be safe and file; but it’s NOT an admission that
it’s a sale.
-if it’s a lease, and there’s a default, you pull out remainder
of lease, but keep the surplus. If it’s a sale, you pull out
remainder owed but it there’s a surplus, you’d owe it back to
the lessee.
D. Mortgages
§9-109 (d)(11). Art. 9 doesn’t cover creation of a mortgage.
E. Instruments
§9-109(b) and comment 7.
You can grant a SI in an instrument (art. 9 collateral). A
promissory note/instrument is valid art 9 collateral whether I
sell my notes, or give a SI in the notes, (creation or sale of
instrument/note and creation of SI in note). Perfect by taking
possession or filing a financing statement.
§9-109(b) - fact that the note is secured by something not
covered by art 9 doesn’t matter/prevent an art 9 SI from
existing in the note.
Changes:
1. Art 9 covers note transactions even if sold
2. Art 9 gives 2 options in perfection
3. Perfection in either way carries over to a mortgage w/o
having to comply w/real estate law. The mortgage is a
supporting obligation.
CREATING A VALID SECURITY INTEREST:
Stage 1 – Attachment; when SI enforceable
Agreement; debtor has rights; value given
For maximum protection against 3rd parties, you need to go
through
Stage 2 – Perfection
Ways to Perfect
The 6 modalities of Perfection
1. Small category of SIs that are automatically perfected,
nothing else beyond attachment is needed – PMSIs in consumer
goods; patent royalties.
2. Temporary - §9-312f: A perfected SI in goods in possession
of a bailee remains perfected for 20 days w/o filing if the SP
makes available the goods for sale, exchange, loading,
unloading, etc. (specific purposes). If SP releases for
periods of < 20 days (and only for specific purposes) and then
takes possession again, they’re the beneficiaries of continuity
of perfection (they never lost their perfection).
3. Perfection by possession - Collateral by physical possession
called a pledge. Physical delivery of collateral into the hands
of the SP is always a means of perfection. Always valid
perfection of notes (called instruments) – KIM sales of notes
are automatically perfected, but a SI in notes is not
automatically perfected) and possession is effective for chattel
paper (it’s the best way).
4. Perfection by control - give bank SI in your bank account; SI
in things like stock certificates/security entitlements (give
authority to liquate your portfolio if you default)
5. Perfection by filing - For accounts and intangibles, it’s the
only way.
6. Perfection by notation - Notation of lien is on the title
itself; used for cars
KIM: Priority is preserved via date of filing/perfection. If
new things are added, they are only perfected as of that new
date, while the older items are still perfected from the old
date. EX: You take my stamp collection as collateral (perfect
by possession). I take back for 2 days to add more stamps, and
returned it to you yesterday. You perfect for the old stamps
from the 1st date, but for the new stamps, only as of yesterday.
Details of the Filing System
4 things you can file:
1. Financing Statement
2. Continuation Statement
3. Amendment
4. Termination Statement
1st Question:
Where do you file a financing statement?
Sub-Question (a): What state do you file in?
New Code = perfection is governed by the state of the debtor’s
location. Ex. SI in Sears’ inventory. Inventory is kept in 25
different states.
So you have to determine where Sears is located...
1st if that store only has one place of biz, that’s where you’d
file. If not, then
2nd you’d look to where the corp has its chief executive office
(this is for an unincorporated biz w/more than 1 place of biz)
3rd If it is incorporated, then it’s the state of incorporation.
4th if the chief executive office is in a foreign country, and
it’s incorporated in a foreign land, you file in D.C.
Sub-Question (b): Where within that state do you file?
Ex Debtor’s location is in MD. So, where in MD do you file?
1. Usually it’s in the Office of the Secretary of State
2. In MD, it’s in the State Department of Assessment and
Taxation (SDAT) (What you do is check the state’s UCC to find
out where in that state you’d actually file)
There are some exceptions:
1. Fixture filings: SI in goods that are physically attached to
real property you file in the Office of Recorder of Deeds (in
the property records) in the county where the real estate is
located.
Contents of the Filing Statement
Name and address of debtor and SP, and a brief description of
the collateral (even “all assets” if it’s in everything would be
fine)
In many bizs, its trade name isn’t often it’s legal name.
’99 Code says you must use the legal name (get it from the
articles of incorporation). Errors not seriously misleading in
the name (like spelling mistakes, etc) don’t invalidate. ’99
Code goes on saying if the standard search logic would unearth
the wrong name, it’s not seriously misleading.
Fees
(in MD) the filing fee = $20 if 8 or less pages. >8= $75.
Electronic filing=straight $20.
Other states levy a % of the indebtedness.
Effectiveness
For 5 years from the date of filing. After 5 years the filing
lapses (the SI would become unperfected). If $ is still owing,
you can file a continuation statement w/in 6 months. If you do
so, you get another 5 years (You can keep doing it). If don’t
do this, you have to refile anew and you’ll have a gap in your
perfection.
Amendment
Can add/delete a debtor, SP, collateral; statement of
assignment.
Termination Statement
For this, there has to be (1) No outstanding debt, and (2) No
further obligation by SP to make a future loan. If these are
met, you have a duty to file the termination statement.
1. for consumer goods: it is incumbent upon the SP to file w/in
1 month (irrespective of demand).
2. for SI other than consumer goods: no duty until debtor
requests it. Even then, SP just has to sign it and debtor has
to file it.
3. KIM: you only have to file a termination statement if
there’s been a financing statement
4. A SP who refuses to cooperate w/a termination statement is
liable to debtor for damages resulting
Changes
Doctrine of Continuity. Code gives a 4 month grace period. If
you take corrective action w/in that 4 months, you’re deemed to
be continuous in your perfection. If you don’t, you have to
refile (and it’ll only be valid from the date of the new
filing).
The Q of PRIORITY
If there are multiple claims against the same object, and the
value of the collateral is not sufficient to satisfy all of
those claims in full, who gets paid 1st ?
Part 3 of § 9 Perfection and Priority
§9-322, and §9-324  special PMSI rules
EX: Unperfected SP v UnSP w/Judicial Lien: §9-317(2): one who
holds a judicial lien = a lien creditor. Anyone who becomes a
lien creditor before filing or other perfection wins over an
unperfected SI.
A. THE BIG PRIORITY RULE (THE FIRST TO FILE RULE): When there
are multiple §9 SP, both of whom have perfected by filing a
financing statement, priority is awarded NOT to the 1st to
attach, and NOT 1st to perfect, but rather the 1st to give
notice/1st to file.
1st qualification to the 1st to file rule: If D moves states,
and you have to refile (continuity), you must do it w/in 4
months, or else you become UnSP, or have to file anew and lose
the perfection from the original date. Think about that in
addressing problems.
2nd qualification: Doesn’t work very well when one creditor is
not required to file a financing statement (PMSI in consumer
goods). In a case where one of the SP was able to perfect w/o
filing (where he’s not required to file), he will win if his
perfection was before the other person’s filing.
3rd: If there’s a financing statement on file against you, but
you don’t actually owe them any $, can I lend you $, and
actually get 1st place? NOT ENOUGH. Since priority is based on
1st to file, as long as there is a financing statement on file,
a new lender’s priority will be based (date wise) upon others.
The 1st to file rule is designed to operate when BOTH parties
are perfecting via the filing system. MAIN JIST: If both sides
are in the filing system look at the filing date. If
one side didn’t have to file to perfectlook at the
perfection date
B. Priorities involving PMSIs:
Basic priority rule that works is the 1st to file rule. But 1st
to file can be changed if the 2nd person is the holder of a
PMSI. There are in turn exceptions:
PMSI in inventory
PMSI in every other property than inventory
Even if I know I’m 1st to file, there’s no guarantee that I’ll
automatically beat out someone else who comes along later if
they’re a PMSI meeting §9-324.
THE §9-324 exception:
I lend you $; take SI in your accounts receivable (I’m filer
#1). If another lender comes along, he would lose…1st the file
rule.
SP2 gets SI and files on inventory; SP2 advanced the $ that
purchased the inventory, so SP2 has a PMSI in the inventory.
That inventory is sold and generates accounts receivable. SP1
filed directly on the accounts receivable (and before SP2 came
along); SP2 filed on the inventory, which was later sold and
generated accounts receivable.
§9-324 inventory PMSI won’t work, b/c that protects only the
inventory itself or if it’s sold for cash. But if the sale
generates accounts, the exception doesn’t apply. If SP1 files
on accounts receivable he can’t be undercut by anybody who comes
along later.
One of the policies behind these rules is the facilitation and
encouragement for the creation of accounts receivable.
If more than 1 SI qualifies for priority in the same collateral
as under a,b,c,d,or f (if you have more than 1 PMSI) priority of
PMSI seller overrides the priority of PMSI lender…even if
lender filed 1st .
The §9-322 exception:
§9-322 has so many exceptions…check them. One rule deals w/bank
accounts. Way to perfect SI in the account is by getting
control over the account (put in your name, or bank follows
lenders instructions). Priority rules are subject to the rule
of deposit accounts.
§9-320  Buyer of goods. Buyer takes free of a SI even
if the SI is perfected and the buyer knows of its existence. The
Buyer In Ordinary Course Rule (BIOC) (a buyer who purchases in
the ordinary course of the seller’s business).
§1-201 to be a BIOC, you must purchase in good faith and
w/o knowledge that the sale is wrongful (Just b/c you know
there’s a SA, there’s no reason for you to assume that it’s
passing to you is wrongful).
§9-320(a) you take free of a SI created by the Buyer’s
seller. You take free of a SI the dealer gave to the bank…you
never take free of a SI you yourself created.
§9-320(b)  for Consumer buyer. B Buys from D NOT in the
ordinary course of biz (say D isn’t a retailer, and this is sold
at yard-sale), but B still unaware/without notice, B will take
clear (and SP must not have filed a financing statement).
General rule about NON-BIOC is they lose to a perfected SI, but
win vis a vis an unperfected SI except for the consumer buyer
exception:
a/k/a: The Garage sale exception, (§9-320b), B’s from S’s not in
ordinary course of biz who:
1. buy for personal use,
2. take possession,
3. give value, and
4. don’t have knowledge of outstanding SI
will win over perfected SP unless perfected SP filed a financing
statement.
When looking at priority questions, identify your fighters so
you can plug in the right rule.
Double Debtor Problem  Use the Buyer Rules, not the 1st
to file. D2 in biz of selling equipment (SP2 has a SI in his
stuff). D2 sells to D1 (SP1 has a SI in his inventory w/after
acquired property clause). Both default. SP2 can’t get D2’s
equipment back from D1 b/c D1 was a BIOC. Forget the 1st to
file rule, and use the Buyer rules.
In the SP v Buyer issue, if Buyer wins, B keeps everything and
SP gets nothing. If SP wins, SP pulls out his debt, and B gets
surplus.
In SP v SP the first one pulls out his debt and the rest goes to
the other SP.
Proceeds Issue
1st concept: Basic Rule §9-315. What do we mean by
proceeds? Whatever is received upon sale, exchange, lease,
destruction, replacement stuff of collateral. Replacement stuff
can be stuff, or monies, barter items (non-cash proceeds), or
they can be intangibles like goods sold that generate chattel
paper. Whatever debtor has that’s traceable to the collateral
no matter how many generations removed.
Includes proceeds of collaterals, and proceeds of proceeds, and
so on. Bank has SI in dealership. Dealer sells a car (check,
trade-in, and credit agreement). Bank doesn’t have a SI in the
car anymore b/c the buyer was a BIOC. If dealership defaults,
bank can’t repo the car. Bank has a SI in the proceeds of the
car. What are they? The check received, the trade-in, and the
chattel paper generated. Dealership defaults, bank has right to
get check, repo the trade-in, and take over the chattel paper by
notifying the customer. Proceeds include tangible and
intangible. If dealership gets payments, the status of the
checks are the proceeds of chattel paper that are the proceeds
of the inventory in which the bank had a SI. Danger is that
once the checks get into the bank account and someone else gets
control, it could destroy priority.
I have a perfected SI in your equipment. You sell equipment to
a buyer, but the buyer doesn’t qualify as a BIOC b/c you’re not
in the ordinary biz of selling things. When you default, I can
still repossess the item of equipment. I can go after the
collateral, or I can choose instead to go after the proceeds, or
go after both but I can only get a single satisfaction.
Proceeds doesn’t automatically mean you lose the right to the
collateral. So if sold to BIOC (9-320) lender loses right to go
after the collateral. Proceeds rule gives SP an extra place to
go after, it doesn’t deprive access to collateral…that would
depend on priorities.
When SP claims proceeds, SP has burden of showing that proceeds
can be identified to his collateral. If you sold collateral,
got $ for it, put it in an account, I have to show that my
proceeds $ is still in the account. UCC says method of ID used
to show your collateral is in the account is based on C/L
principles. The most common formula used is lowest intermediate
balance rule (LIBR). When collateral is sold and generates $
and the $ is co-mingled into a bank account where there’s
proceeds and non-proceeds, he gets whatever he can establish via
the LIBR.
LIBRProceeds $ and general $ in a bank account. Assume
account has $10,000, all of which is non-proceed. Day 2 $5,000
proceeds $ deposited. Day 3 $7,000 withdrawl, leaving account
now to $8,000. LIBR says we treat non-proceeds as water and
proceeds as oil, so any withdrawl less than the $10,000 (the
non-proceeds $) is coming out of the non-proceeds. Proceeds $
of $5,000 is still there. It gives SP the benefit of depletion
by saying until the account dips below $5,000 you’re covered.
If it dips below $5,000, but more non-proceeds $ delivered,
you’ll be entitled to get the lowest point it reached unless
more proceeds $ came in. §9 requires identification and then it
goes into C/L.
2nd basic concept:
Generally, a SI that attaches to collateral will automatically
attach to the proceeds. You don’t need a specific clause in the
SA.
Perfection Requirements?
Perfected SI on collateral. It’s then converted into proceeds.
DO you have to re-perfect?
Basic rule is NO…a perfected SI on original collateral will
continue to be on proceeds.
BUT there are specific rules:
Initially, your automatic rollover is only for 20 days unless a
# of conditions are met (3):
1. Same place of filing rule: If you perfected your SI in the
original collateral by filing a financing statement, and the
proceeds are collateral for which if you were to file on that
proceeds would be in the same office as you did file for the
collateral, you don’t have to do anything.
a. Same place of filing rule wouldn’t work if you perfected
original in a manner other than filing. Ex. PMSI in consumer
goods (bought a computer from CC). Automatically perfected. B
exchanges that computer for a boat. Does CC have perfected SI
in the boat? Yes for 20 days, but unless they file a new one
that covers the boat, they’ll become unperfected.
b. Also doesn’t apply to 3rd generation proceeds where 2nd was
cash. Let’s say I sold you a computer system (you buy as
equipment). I take perfected SI in that. You then sell the
computer for $ and you use the $ to buy some other thing, the
cash intermediary breaks the chain to the 3rd thing, so I only
have 20 days. SLA I perfect w/in the 20 days I’ve got
continuity of perfection.
c. When you perfect by filing a financing statement, you should
have as broad a description as possible, so that you get the
benefit of the doubt for the same place of filing rule.
2. With respect to cash proceeds. Cash, checks, bank accounts,
you never have to reperfect. If I have a perfected SI however,
I automatically have a perfected SI in cash proceeds. Where you
get in trouble is when the cash buys item 3.
3. If you’re not in a position to use the other means, you have
to do it by day 21.
KIM: §9 separates perfection from priority. Your perfection
may carry over but it doesn’t mean that your priority carries
over as well. EX, collateral sold, proceeds go into account;
your perfection carries, but say another party had control over
that account…they get priority.
EXAMPLE: Bank lends you $10k to buy a car. They perfect by
noting lien on the Certificate of Title. (Not by filing). You
sell the car. (You’re not a dealer, so Buyer not a BIOC). You
default, bank wants to go after proceeds. If $ was simply put
into your bank account, it qualifies as cash proceeds, and bank
has a perfected SI in that $ up to the LIBR. What if you
deposited it, then you cleaned out the account and bought a lot
of stuff. Do they have a SI in those other things? NO b/c
(1st) same place of filing rule can’t cover generation 3 b/c it
wasn’t done via filing and (2nd) intervening cash proceeds.
When a car is sold in a barter example (car for boat), the same
place of filing rule won’t be appropriate. Bank would have to
file w/in 20 days of debtor getting boat.
Basic priority rule is §9-322…1st to file rule. Sub-rule says
when you’re 1st to file on collateral, you’re considered to be
1st to file on proceeds too. Under §9-315 there’s also
continuity of perfection (you have to have this).
Another rule is §9-330- A purchaser is NOT same as a Buyer.
Purchaser is broader than Buyer. Can mean a B of chattel paper,
or a lender of chattel paper who takes a SI in chattel paper.
Purchaser of chattel paper has priority over a SI in that
chattel paper which is claimed merely as proceeds of inventory
if:
(1) In good faith (you’re not aware there’s a transfer
restriction) and
(2) In the OC of PURCHASER’s Biz (part of purchaser’s biz to
make loans on chattel paper),
(3) Gives new value (not if D were to transfer its chattel paper
b/c of a past debt owed)
Ultimate lesson…if you’re a lender against chattel paper, don’t
rely on filing as a means of perfection. Take possession.
Basic rule is if you win b/c of chattel paper rule, that gives
you superior right not only to chattel paper, but also to
proceeds of chattel paper and to the goods (this is implicit).
§9 perfected SI vs a right of set-off (this is where you have $
in an account, and you owe the bank $ for a loan. If you don’t
pay them on time, they have right to take it out of your
account.)  §9 provides that right of set-off has
priority over even a perfected §9 SI. This is analogous to how
it deals w/multiple SP…remember whoever gets control of the bank
account 1st trumps 1st to file rule; technically the bank
already has control of the account unless SP gets control of the
account before the bank.
Fixtures
§9-334. Basically, all tangible property will be real estate,
personal property. Essentially personal property physically
attached to real estate.
Generally, when you sell a house, unless you otherwise indicate,
the fixtures are sold w/the house. A/C unit, hot water
heater…these are removable things, but they are fixtures to the
house.
The issue is HOW connected is it? KIM that it can vary from
state to state, but it’s really about a degree of affixation.
UCC says an §9 SI can’t be created in real estate, but CAN be
created in a fixture, or a personal property that becomes a
fixture. IF I buy a heating system, and BG&E takes a SI in it,
it can be subject to §9.
1st qualification it doesn’t apply to building materials
used to build the house.
2nd qualification  there’s a special type of financing
statement required to be filed. It’s called a fixture filing.
2 things that distinguish a fixture filing from a regular filing
1. Where you file-these are local filings and have to be filed
in the land records office where you’d file a mortgage statement
2. Certain requirements for content – must contain a legal
description of the land where the fixture is.
Fixture filings are NOT mandatory. Theoretically I could
perfect by a non-fixture filing, or by not filing at all if it’s
a PMSI in a consumer good. Perfection can occur by a regular §9
filing, or where there’s a PMSI in consumer goods, or by
automatic perfection. BUT it will tend to be very vulnerable
w/o a fixture filing. Will my SI survive a bankruptcy if I
don’t file, the answer is YES, but you probably won’t beat real
estate filings.
§9-334: What are rights of §9 SP, that has a SI in a fixture vs
the holder of a real estate mortgage on the entire house? I own
a house. I’ve installed a # of appliances and systems which I
bought on credit, and I granted PMSIs to various lenders. I
also have a SA w/the bank who helped me buy the house. Clearly,
if the mortgagee is foreclosing on its mortgage, the mortgagee
wants all the stuff to stay w/the house. If fixture person has
priority, he could remove heating and A/C units, sell them
separately. Or he could demand an allocation – sell the house
but figure out how much goes towards the heating system.
If mortgagee has priority fixtures can’t be removed.
If fixture guy has priority, he can remove items, or allow
foreclosure sale and take out what’s owed to him.
§9-334e3: a perfected SI in fixtures has priorities over a
conflicting interest if the conflicting interest is a lien on
the real property obtained by legal/equitable means after it was
perfected by any means permitted by this article. “Perfection
by any method permitted by this article” includes a fixture
filing, automatic if PMSI in consumer goods, or a filing in the
land office. As long as fixture filing was perfected before the
judgment lien arose the fixture filing prevails.
Ways a §9 will win over a pre existing real estate mortgage:
Rule 1: If you perfect by a fixture filing before real estate
mortgage has been properly recorded, the fixture filing will
always win.
Rule 2: A PMSI in a fixture will prevail over a real estate
mortgage if the holder of the PMSI makes a fixture filing before
affixation or w/in 20 days thereafter. NOTE: this requires
there be a FIXTURE filing (automatic perfection won’t help).
There are 2 exceptions to this rule:
1. Depends on type of mortgage. When it’s a non-construction
mortgage (I borrow $ to buy a pre-existing house) apply the PMSI
rule as above. Special favortism granted to a construction
mortgage ($ was lent for purpose of new construction) that says
the construction mortgage wins vis a vis goods that become
fixtures before the completion of construction .
EX: You install fixture on Day 1. Day 2 mortgage recorded.
Day 3 you file your fixture filing. Even though you filed your
fixture filing w/in 20 days, you’ll still lose b/c mortgage was
filed after, not before. Mortgagee filing after affixation is
relying on those fixtures being there for the valuation of his
risk as a source of collateral. If fixture filing done before
mortgage filing, fixture filing always wins. However, where
mortgage filed 1st, the PMSI undercutting won’t happen if (1)
construction mortgage and installed before completion, and (2)
even if non-construction but mortgage filed after affixation.
Next Group of Exceptions:
1. Dealing w/fake fixtures. Fake fixtures go to §9 person;
fixture filing must have been made before affixation; In many
states, the very fact that it’s readily removable means it’s NOT
a fixture at all and  not subject to a real estate
mortgage.
2. Replacements. If the jurisdiction would say something was a
fixture, but then you replace it, §9 protects the 2nd
replacement fixture, but not the 1st, original fixture. The
initial installation of fixtures during construction will always
go to the construction mortgagee unless see above. EX: I’m a
construction lender. No fixture filing on file. I’m
essentially guaranteed that I’ll have a priority in fixtures,
even if they’re sold on a PMSI basis and even if they’re readily
removable as to the initial installation.
SUMMARY:
1. §9 SI in a fixture has priority over a real estate mortgage
when
a. PMSI priority even where mortgage filed 1st, §9 SI
may still have priority if
i. it’s a PMSI
ii. A fixture filing was made
iii. 20 day rule
iv. BUT that exception doesn’t apply where the competing
mortgage is a construction mortgage, and the fixtures are
installed during that construction.
v. Also doesn’t apply after fixtures were installed.
vi. You NEED a fixture filing.
b. First to file priority absolute. If a fixture filing
was made before mortgage recorded, no ifs ands or buts, the
fixture will always have priority. You NEED a fixture filing.
c. Fake fixtures priority where they’re fundamentally
fake (they more or less resemble pure personal property) then
we’ll allow the §9 SI to have priority. For this exception, the
§9 doesn’t have to perfect by a fixture filing, it can be
perfected by any means (including automatic PMSI perfection).
Any method of perfection/filing will suffice. There are 3
categories of fake fixtures (e), and all must be readily
removable.
i. Factory or office machines;
ii. Readily removable equipment not connected to the operation
of the real estate
iii. Replacements of domestic appliances that are consumer goods
Main point about §9-334 on Fixtures….
1st one in should win.
Special favoritism we give to PMSIs.
If it’s not a fixture anyway, why should the §9 person win? If
they really would not be fixtures, but are personal property,
you really wouldn’t need this category. You just need the fake
fixture section for those jurisdictions that do consider it a
fixture.
Default rule in §9-334 is mortgage wins, unless (one of the 3
exceptions above).
Construction lender will usually beat out the PMSI lender. Vast
majority of these cases, the mortgages file first, and we give
the construction lender the benefit.
However, say the mortgage wasn’t a construction mortgage. I
borrow $ and give bank mortgage on the house, and I put in a
refrigerator, the PMSI lender will be able to get back the
fridge. Construction lending is a very great risk, and so we
want to give them lots of protection to encourage construction
lending.
PART 6 OF §9 – PRACTICAL MECHANISMS OF REPOSSESSION AND SALE
(How do you enforce a SI)
§9 SI in physical goods (including inventory, consumer, farm
products, equipment)
Rule 1  SP can’t do ANYTHING until there’s a default
(what SA defines it as being)
Usually SA have acceleration clauses, saying if I miss a
payment, they can demand the entire debt. SP has to have honest
faith belief of insecurity in debt.
Section called “events of default” (a/k/a representations,
warranties, covenants) list additional things:
Cross-Default if you’re in default to anybody, you’re
also in default to me.
Bankruptcy Default Clause if you go into bankruptcy, you
are in default to me.
Impairment of Net worth You say that your net worth will
always be 125% of my liability. If I dip below that, lender may
want to say then you’re in default
Debtor moving collateral, etc. if you move it, etc.
that’s an event of default
STEP 1 IS DEFAULT
STEP 2 AFTER DEFAULT:
Repossession of collateral. Can be done by SP or his agent.
Doesn’t require prior notice (SP self-help not
unconstitutional).
No requirement that one goes to court to repossess (self-help
repossession). Major exception to this is where repossession
would involve a breach of the peace.
STEP 3 – TO SELL COLLATERAL OR TO KEEP THE COLLATERAL
Selling the collateral.
Must give notice to debtor. Collateral can be sold at a public
sale (auction), or it can be sold in a private sell (S by
himself or thru a broker finds a B willing to pay a good price).
Providing the amount was commercially reasonable. A SP can’t
be the B at his own private sale, but he can be at a public
sale.
1. Distribution of proceeds of the sale:
1st – the cost of the sale; the cost of the repossession; cost
of the auctioneer; administrative costs of the sale
2nd – to the principle and interest of the secured debt
3rd – if there’s a surplus, and if there’s a Jr SP giving the Sr
SP notice (and ONLY IF giving notice), it goes to Jr SP.
4th – Anything left over after this, would go back to debtor.
2. This presupposes that there’s a surplus. What if there’s a
shortfall?
Sr SP pulls out the $ he gets from sale and applies towards debt
owed. The remainder of the debt becomes an UnSecured claim (no
more collateral left to cover it). Jr would have to under-file
(send Sr note saying “if there’s any more $, it’s owed to me).
3. What if Jr repossessed?
If D defaulted to Sr also, Sr can repo from Jr. Maybe D
defaulted to Jr, but not Sr…Sr can’t collect unless a
cross-default clause or something. Jr keeps what he gets from
sale, and Sr’s SI is NOT extinguished (b/c UCC says sale
extinguishes SI for seller and all juniors). Sr perceives Jr’s
sale as a non-event b/c it doesn’t effect him. A B at a UCC
sale is definitionally not a BIOC.
4. Sales must be commercially reasonable.
Who’d say it wasn’t? D may use sale as a total/partial 
in an action for a deficiency; Jr who under-files; surety or
guarantor. (2ndary obligors – people who have to pay off the SP
if the debtor didn’t). If SP brings action against D for
deficiency, and D raises  sale commercially
unreasonable, SP has burden of proof. If D brings action saying
should’ve been a surplus (or Jr does), they have POE burden.
Article 2 - Sales of Goods (tangible personal property)
Many §9 transactions would also be §2 sales. I sell a car, and
I retain a PMSI, my PMSI rights are determined by §9, but the
sale is governed by §2. Seller is a SP (under §9), and he’s a
Seller (under §2). Buyer is a Debtor (§9), and a Buyer (under
§2)
Part 1 is general construction.
Part 2 is form, formation and readjustment (how do you
create/modify a contract of sale?)
Part 3 is what are the obligations of a contract once formed?
(what are you required to do)
Part 5 is how does one perform those obligations?
Part 6 is about breach.
Part 7 details specific remedies when a breach occurs
Part 2 of §2 – formation of a contract.
Section on Statute of Frauds §2-201 and the
Parole Evidence Rule §2-202
Both involve a writing being more important than something not
in writing
SOF= k not enforceable unless it’s in writing
Parole Evidence Rule - once a k is in writing, to what extent
can it be interpreted, varied, changed, supplemented, by some
oral agreement that doesn’t appear in the writing itself (oral
supplements)
Both are de facto “disfavored” today.
§2-201 UCC Statute of Frauds
Normally, a contract for sale of goods for more than $500 won’t
be enforceable if not in writing, with of course many
exceptions…
Trigger is the price of goods. SOF activated if price of goods
is $500 or more.
When SOF is activated, how must it be satisfied? The contract
need not be in writing; you just need a writing that indicates a
contract was made signed by party against whom enforcement is
sought (I’m looking forward to getting what we talked about on
Monday).
Potential for asymmetrical enforcement. B followed up w/a
signed writing. S will be able to enforce contract against B
b/c B signed. B can’t enforce against S b/c S DIDN’T sign; can
only be enforced against one who signed a writing indicating
contract was made
Writing doesn’t have to have entire contract. You could use PE
to show writing is inaccurate, or other things. The one thing
which must be accurate in the writing is the quantity. If the
writing says 500 pounds, and one party says agreement was for
600 pounds, you can’t second guess the 500 pounds.
If no signed writing, contract is unenforceable against the
non-signer.
Subsection 2:
Sometimes a writing signed by one party may be sufficient to
satisfy SOF even against other party. Requires a signed writing,
but allows it to be used against non-signer. Between Merchants
(professional sellers) such as a whole-seller to a retailer.
B and S have oral agreement to purchase $1,000 of goods. After
meeting S sends B letter saying thank you for your order of
$1,000 of goods. S is bound by this. If B is a merchant and is
aware of what this is about, and he does nothing for 10 days, he
becomes bound and can’t raise SOF as a . Say memo says
Thanks for order for $1,000, and B doesn’t respond. 2 weeks
later, B realizes that deal was for $800. Can B bring in E to
contest accuracy of that writing? Some courts have said no, b/c
it must have been in 10 days. That’s incorrect b/c only issue
subsection 2 is concerned w/ is whether a party can raise
 of SOF. If I receive a memo and don’t contest it, I
can’t raise my failure to sign a writing as a …that’s
what I lose. But I still have my right to bring in PE. I can
still show it doesn’t accurately represent what was agreed to.
Similarly, general C/L rule is you can’t be forced into
acceptance by silence. Assume as a merchant I send PO to S. He
fails to respond to my PO w/in 10 days. B tries to argue I sent
you a memo, we’re merchants, you failed to respond,  we
have a contract. INCORRECT. It has to be a writing in
confirmation…meaning it follows up an offer and acceptance. A
PO is an offer you haven’t accepted. This doesn’t change the
C/L rule.
2 court mistakes therefore are (1) use to prevent a recipient to
challenge accuracy and he should have that right, and (2)
misapply to offer and acceptance and it really should only be
applied to confirmation of previously agreed to offer and
acceptances.
Let’s say I send written notice of rejection. I’m not bound to
yours, I’m bound to mine. You’d have to say I hereby decline to
consider this writing evidence of a contract; I don’t
acknowledge a contract b/w us.
#Post#: 87--------------------------------------------------
Re: Sales and Sales Financing outline [Maryland Law]
DIR By: snowbopeep
Date: May 6, 2015, 11:21 pm
---------------------------------------------------------
A lot of useful information. I learn a lot I JUST read that it
is very simple.
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