Chapter 28: Security Interests in Personal Property

CHAPTER 29 SECURITY INTERESTS IN PERSONAL PROPERTY

I. OBJECTIVES: This chapter is intended to give the students an understanding of the Code rules that govern secured transactions in personal property. After reading the chapter and attending class, a student should: A. Know how a security interest is created under Article 9 of the Code, and what collateral can be covered by a security interest. B. Understand the role of perfection in a creditor's obtaining priority, and realize that perfection does not always give a creditor priority. C. Know the priority rules that determine who among creditors and others with claims to the collateral has priority to the collateral and understand the basic priority rules. D. Know the rights and responsibilities of the debtor and the creditor upon default. E. Understand the special rights and responsibilities of creditors and debtors when a bulk transfer occurs.

II. ANSWER TO INTRODUCTORY PROBLEM A. The first question following the hypothetical that appears at the beginning of the chapter asks how creditors of a new business can obtain security for the credit they have extended to the owner of the business. The creditors can protect themselves by obtaining a security interest in collateral of the debtor—such as the inventory, fixtures and/or equipment as well in after- acquired property the debtor may obtain—and then perfecting the security interest. B. The second question asks what steps the creditors must take in order to get maximum protection against the debtor and against her other creditors in the event she defaults on her obligations. The critical elements are: (1) a security agreement in which the debtor grants the creditor a security interest in defined property in which the debtor has rights; (2) attachment of the security interest to the collateral; and (3) perfecting the security interest, most commonly through a public filing.. C. The third question asks what relative rights the creditors will have against each other in the event the debtor defaults on her obligations to them. The rights are determined through application of a set of decision rules that determine the relative priorities between competing claims or security interests. D. The fourth question asks how the small business owner can protect herself when she extends credit to her customers. She would generally follow the steps outlined in A and B above. To the extent she operated a layaway plan, she would be retaining possession of the goods and an oral security agreement would be sufficient to protect here interest. For goods the customers purchase on credit and have possession of, she would have a secured interest if she had a security agreement with the customer, and the security interest had attached to the goods. It would receive (limited) perfection just from the attachment of the security interest to consumer goods.

III. SUGGESTIONS FOR LECTURE PREPARATION: A. Introduction

Chapter 29: Security Interests in Personal Property36 1. Review the history of security devices contained in Chapter 28. It should be emphasized that Article 9 of the Code is designed to reconcile the competing interests of debtors, creditors, and third-party claimants to the collateral, especially by eliminating secret liens on property. Note what is at stake for the creditor if he does not comply with the statutory requirements. 2. You may wish to review the nature of the lien or security interest, perhaps by using the string and the toy car illustration suggested in Chapter 28 of this teacher's manual. List and discuss the various classifications of collateral covered by Article 9. Explain that these classifications affect how a creditor goes about obtaining an enforceable security interest in that type of collateral. Note that an item can fall into different classifications, depending on its owner. Ask the students what type of collateral are the following: a. Stan buys a stereo at Store and grants Store a security interest in the stereo. (Consumer goods) b. General Motors Corp. buys a machine for its assembly line from Assembly Co. and grants Assembly Co. a security interest in the machine. (Equipment) c. Joe borrows $500 from Mary and gives her 10 shares of General Motors stock as collateral. (Investment property) d. Same as #c, except Joe gives Mary his rights to a copyrighted song. (General intangible) e. Retail Co. borrows $5,000 from Bank and gives Bank a security interest in its accounts receivable. (Accounts) f. Joan buys roofing shingles from Lumber Co. and grants Lumber Co. a security interest in the shingles. Joan installs the shingles on the roof of her house. (Fixtures). g. Retail Co. buys TVs for resale from Sharp TV Manufacturing Co. Retail gives Sharp a security interest in the TVs. (Inventory) Additional Example: Problem Case #1. As a lead in to the material that follows in the text, briefly note the three main concepts of Article 9: attachment, perfection, and priority. Attachment permits the creditor to enforce his security interest against the debtor. Perfection may permit the creditor to obtain a priority over other creditors and claimants to the property. Perfection is a way to obtain priority, but priority may not always be obtained although perfection is accomplished in timely fashion. B. Attachment of the Security Interest 1. Attachment. Note that attachment is a technical legal term not having the same meaning as it is given in common English usage. A security interest attaches to the collateral when it is enforceable against the debtor. Point out that attachment does not ensure that the creditor has a priority over other creditors. It merely means that he can enforce the security interest against the debtor; that is, he has rights in the collateral superior to the debtor upon default. List the requirements for attachment. (1) There must be an agreement to create a security interest. (2) The creditor must give value, and (3) the debtor must have rights in the collateral. 2. Security Agreement. Note that the security agreement generally must be in writing and “authenticated” by the debtor. Refer the students to the security agreement reproduced in

37 Chapter 29: Security Interests in Personal Property the text and point out the parts of the security agreement that create a valid security interest. Note the importance of including a clear description of the collateral. In Re Shirel (page 650). The court concluded that the credit card application which included—in small type in the middle of a seven page document--a statement granting Sight’N Sound a security interest in all merchandise purchased with the credit was not sufficient to grant the creditor a security interest in a refrigerator subsequently purchased by the debtor using the credit card. Points for Discussion: Note the court’s focus on the sufficiency of the description of the collateral and whether it reasonably identified the collateral in which the debtor was granting a security interest to the creditor. Ask the student what steps Sight’N Sound should take to make sure that it would obtain an enforceable security interest in subsequent sales of merchandise by buyers using its credit card. Example: Problem Case #2. Cyber Law in Action: Revised Article 9 is e-Commerce Friendly (page 651): Note that Revised Article 9 no longer requires that a security agreement creating a security interest be “signed” by the debtor—instead it allows an “authenticated record—one produced by a consumer online—to substitute for the signed writing. 3. Future Advances. Define future advances. Note that they can be covered by a security agreement and that the creditor has advanced value when the advance is actually made. 4. After-Acquired Property. Note that a security agreement may be drafted to give a creditor a security interest in after-acquired property of the debtor. Explain when the security interest attaches to such property and note the potential for conflict with other creditors who may already claim an interest in that same property. 5. Proceeds. Note that proceeds from the disposal of the collateral covered by a security agreement are automatically covered as well. This is important where the debtor sells the property or it is damaged or destroyed but is covered by insurance. C. Perfecting the Security Interest 1. Perfection. Indicate how perfection occurs and what advantage perfection confers upon a creditor. Note that perfection is a means of obtaining priority, but that timely perfection does not ensure priority, especially when purchase money security interests are involved. 2. Perfection by Public Filing. List the requirements a financing statement must meet and the potential place of filing. Note the purpose of a public filing: to place others on notice of the secured party's claim against the collateral. Hence, the filing requirement helps eliminate secret liens. Note that the financing statement is valid for up to five years and that a continuation statement may be filed to extend the time. Note also that the debtor is entitled to have a termination statement filed when the obligation being secured is fulfilled. Note, also, the new version of the Financing Statement contained in Revised Article 9 is reproduced in the text as Figure 1 (pages 653-654). 3. Possession by Secured Party as Public Notice. Discuss the rationale for achieving perfection by possession at the collateral by the creditor. Note that when a debtor does not have possession of the collateral a person should be cautious about taking a security interest in it. A creditor's possession of the collateral puts other creditors on notice of the first creditor's security interest. Take some care in explaining field warehousing as that subject has appeared frequently on the CPA Exam. In Re 4-R Management (page 656). Where the bank took possession of a coin collection that had been pledged as security for a loan, the bank’s security interest in the coin collection was perfected by virtue of its possession of the collateral.

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 38 Points for discussion: Note the requirement for a security agreement, which in the case where the collateral is in the possession of the creditor, can be oral. In this case there was a written agreement granting the bank the security interest in the coin collection. 4. Perfection by Attachment. Perfection by attachment alone is a difficult and important concept, and deserves special attention. You should note that a secret lien is created by this rule. However, the burden on the few persons over whom the secured creditor who perfects by attachment has priority is deemed outweighed by the benefit to the secured creditor and commerce by not requiring a public filing. Most security interests that are perfected by attachment alone are ones accompanying sales transactions that commonly are secured. The most significant security interest perfected by attachment is the purchase money security interest in consumer goods. Note that the creditor with a security interest perfected by attachment alone has incomplete priority. Some persons will take priority over the security interest despite the existence of the perfection by attachment. At this point you should define clearly the purchase money security interest. Which of the following are purchase money security interests (PMSI) and, as such, may be perfected by attachment: a. Hal buys a camera on credit from Camera Store and gives Camera Store a security interest in the camera. ( PMSI) b. Same as #1 except Bank loans Hal the money to buy the camera and Hal gives Bank a security interest in the camera. ( PMSI) c. Hal gets a loan from Bank to pay for his camera, which he bought on credit from Camera Store two months earlier. Hal gives Bank a security interest in the camera. (Not a PMSI) In Re Ranier: Horowitz v. Green Tree Financial Corp. (page 657). Where a creditor financed the purchase of a personal watercraft (PWC) and took a security interest in the vehicle (a purchase money security interest) but did not file a financing statement to perfect the interest, the creditor had a perfected security interest merely by attachment of its security interest in consumer goods. A critical issue in the case was whether the PWC was a motor vehicle for purposes of UCC section 9-302(1). If it was considered to a motor vehicle required to have a state certificate of title, then the lien would have to be noted on the certificate of title in order to be enforceable against another creditor claiming an interest in the vehicle. Points for Discussion: This case provides a good opportunity to discuss not only the principle (and limits) of perfection by attachment of security interests to consumer goods but also to introduce the special rules that apply to motor vehicles for which the state issues certificates of title. Examples: Problem Cases #3 and #4. 5. Motor Vehicles. Note the rules that apply when state law requires a certificate of title, i.e., that the security interest be noted on the title. 6. Fixtures. Note the special rules that apply to fixtures, particularly the requirement that the notice of the security interest be filed with the real estate records. Briefly review the material on fixtures in Chapter 24. D. Priority Rules 1. Importance of determining priority. Discuss the importance to a creditor of obtaining a priority position over other creditors relative to the collateral of a debtor and the problems a creditor may face if he does not have priority.

39 Chapter 29: Security Interests in Personal Property 2. General Priority Rules. List on the chalkboard (or distribute to students) the priority rules. a. General rule as between creditors (1) the first to file or to perfect wins (2) if none are perfected, the first to attach wins. b. PMSI (purchase money security interest) in equipment has priority over conflicting security interest if filed within twenty days after the equipment is delivered. Example: Problem Case #6. c. PMSI in fixtures has priority over conflicting security interest if filed within twenty days after affixed to real estate. d. PMSI in inventory has priority over a conflicting security interest if filed and notice in writing is given to creditor holding the conflicting security interest before the inventory is delivered. Example: Problem Case #5. General Electric Commercial Automotive Finance, Inc. v. Spartan Motors, Inc. (page 659). Where a creditor (GMAC) agreed to “floor plan” the inventory of a dealer, recorded its security interest in the inventory, provided notice to a prior secured creditor (General Electric), and subsequently reimbursed the dealer for the cost of acquiring two automobiles, GMAC’s security interest in the two automobiles as held to take priority over General Electric’s security interest. Points for Discussion: Note the issue the court had to struggle with—i.e. whether it should make a difference that the subsequent creditor that provided after-advanced funding through reimbursement of the debtor could qualify for purchase money security status. e. Artisan's lien created in ordinary course of business has priority over conflicting security interest. Example: Problem Case #7. f. BITOCOB (buyer in the ordinary course of business) takes free of security interest (usually PMSI in inventory) created by his seller even if filed and BITOCOB knows of the security interest. Example: Problem Case #8. g. Bona fide consumer purchaser for value takes free of unknown, unfiled PMSI in consumer goods. Since these rules are difficult to understand in the abstract, you should illustrate each rule with an example, such as those used in the text. With each example explain when perfection occurs, state who has priority, and give the purpose of the applicable priority rule. Using examples like those in the textbook will help students understand that perfection does not ensure priority. h. Fixtures. In certain situations, the holder over a security interest in a fixture has priority over an encumbrancer or the owner of the real estate. Additional Example: Problem Case #7. E. Default and Foreclosure 1. Default. Note the events that constitute default are not defined in the Code but rather are left to the parties to decide by agreement in good faith. 2. Right to Possession. Remind the students that repossession is the "pulling of the string" attached to the collateral. An important issue concerning repossession is whether the

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 40 creditor has breached the peace. Ask the students whether the following repossessions are breaches of the peace: a. The debtor is intimidated by the size of a 6 foot, 5 inch, 275 pound repossession agent. (Not a breach of the peace.) b. A repossessor enters a locked door of a home. (Breach of the peace.) c. A creditor repossesses a locked car parked on the street. (Not a breach of the peace). d. A creditor repossesses a car in the debtor's driveway. (Not a breach of the peace.) e. A creditor repossesses a car in the debtor's garage. (Not a breach of the peace if the garage door is open; a breach of the peace if the garage door is locked.) Ivy v. General Motors Acceptance Corp. (page 667): The court held that the agent for General Motors Acceptance Corp. had breached the peace in the course of repossessing the automobile and upheld the award of actual damages; at the same time, the denied the award of punitive damages. The dissenting judge would find the conduct of GMAC's agent in this case to be so egregious that he would allow the award of punitive damages. Points for Discussion: Ask the students whether they agree with the majority or the dissenting judge? What kinds of situations is the rule re breach of the peace trying to avoid? Additional Example: Problem Case #9. 3. Sale of the Collateral/Consumer Goods. Note that the debtor always has the power to force the creditor to sell the collateral. The procedure that must be followed to exercise this power depends upon the type of collateral and the extent to which the debtor has paid his debt. The seller may propose to keep the collateral upon proper notice to the debtor, but if the debtor disagrees, the collateral must be sold at a public sale. The Code makes it difficult for the seller to retain the collateral in satisfaction of the debt. (To prevent the creditor from getting a windfall profit.) Example: Problem #10. 4. Distribution of Proceeds. List the order which the proceeds are distributed on the sale of the collateral. Note when the debtor may be liable for a deficiency judgment. 5. Liability of Creditor. Note that a creditor must be careful to comply with the provisions of Article 9 or he may become liable to any person injured as a result. 6. Ethics in Actio: What is the Ethical Thing To Do? (page 669): Here the students must consider whether their interest stops at protecting their own financial interest--or whether they should put themselves into the shoes of the other party to the transaction and ask how they would like to be treated

IV. SUGGESTED REFERENCES: A. James Brook, Secured Transactions: Examples and Explanations (2nd edition), Aspen Law and Business, 2002. B. William Lawrence, William Henning & R. Wilson Freyermuth, Understanding Secured Transactions (2nd edition), Matthew Bender, 1999. C. Bradford Stone, Uniform Commercial Code in a Nutshell, West, 2002. D. Uniform Commercial Code Reporting Service, Chicago, Callaghan & Co. A complete Code service including the Code and variations made by adopting states. This service publishes many of the Code cases, which are easily accessed through the service's indexing system.

41 Chapter 29: Security Interests in Personal Property E. James J. White & Robert S. Summers, Handbook of the Law Under the Uniform Commercial Code (3 rd edition), West Publishing Co. The standard hornbook for the Code, this book presents the history of the law concerning secured transactions, explains why the law is what it is, and studies ambiguities in the Code. F. Eldon Reiley, Security Interests in Personal Property, Deerfield, IL, West Group, 3d ed. 1999. G. Barkley Clark, The Law of Secured Transactions Under the Uniform Commercial Code, Boston, Warren, Gorham & Lamont, Inc., 1993 (Rev ed.). Another in the excellent WG&L series on commercial law, it contains explanation of code sections, examples, case references, and an analysis of litigation trends. H. Steven O. Weise, “A Comparison of the Current Article 9 and the New Article 9” and “A Comparison of Security Agreements Under the Current Article 9 and the New Article 9”, Uniform Commercial Code Law Journal (Winter 2000). A very useful comparison of the former and revised versions of Article 9.

V. ANSWERS TO PROBLEMS AND PROBLEM CASES: 1. Grinnel Brothers can argue that the drums were "consumer goods" and therefore exempted from the filing requirements of 9-401 by 9-302. While this argument might have merit in many situations, here the purchaser of the goods was a professional musician. He earned a considerable amount in this manner, had done so before and he played several instruments to earn money. Therefore this drum set was not consumer goods but rather business equipment, and a security interest must be perfected under the Code to be enforceable. In re Symons, 5 UCC Rep. 262 (E.D. Mich., 1967). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. The provisions of former section 9-302 relevant to this problem are now contained in revised section 9-309 and the counterpart to former section 9-401 is revised section 9-501. 2. Yes. The sales ticket constitutes a valid security agreement which result in Sears having an enforceable security interest in the camcorder. Section 9-203 provides in pertinent part: (1) a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless . . . (a) the debtor has signed a security agreement which contains a description of the collateral (b) value has been given; and © the debtor has rights to the collateral. Here, the sales ticket contained the language expressly conveying a security interest. There is no issue about the signature of Silch on the sales ticket or the sufficiency of the description of the collateral; accordingly it complied with the requirements of a security agreement. Sears Roebuck & Co. v. Silch, 28 UCC Rep.2d 1195(Ct. App. Mo. 1995). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-203 (b) which contains the requirement for an authenticated security agreement that contains a “description of the collateral.” 3. No. The court found that the computer items were purchased primarily for use in business rather than for personal, family, or household purposes. Accordingly, the creditor was required to file a financing statement in order to perfect its security interest. The limited perfection by attachment is available only for purchase money security interests in consumer goods. In Re Phillips, Creditway of America v. Phillips, 42 UCC rep. 679 (Bankr. W.D. Va. 1985). While this case was decided under the earlier version of Article 9, the same result

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 42 would be expected under Revised Article 9. See revised section 9-309(1) (the exception for PMSIs in consumer goods). 4. No. Rike-Kumber had a perfected security interest in the ring. The ring was “consumer goods” even though it had been bought to be a gift. This was a purchase for “personal, family or household use.” As the diamond was a consumer good, Rike-Kumber obtained a perfected security interest in the ring when it attached its interest to the ring. This happened when Rike-Kumber and Nicolosi signed the security agreement and Rike-Kumber extended credit to Nicolosi. In re Nicolosi, 4 UCC Rep. 111 (S.D. Ohio 1966). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-309 (1) which provides for perfection by attachment of security interests in consumer goods. 5. Yes. ITT had a purchase money security interest in the motorcycles that attached and was perfected before Union Bank gained a security interest in them. ITT had a purchase money security interest in the motorcycles because its money was used to acquire the motorcycles. Union Bank did not have a purchase money security interest because the money it loaned to Gresham was not used to acquire the motorcycles. Gresham already had title to them because the ITT money had been used to buy them. Union Bank's money was simply going to pay off the loan to ITT. ITT Commercial Finance Corp. v. Union Bank & Trust Company of North Vernon, 528 N.E.2d 1149 (Ind. Ct. App. 1988). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-324(b). 6. Firestone had the best right to the cash register. Firestone had a perfected security interest in Carroll's equipment and fixtures , including any after-acquired property. The cash register was after-acquired equipment and was covered by Firestone's security agreement and financing statement. National Cash Register failed to protect its interest in the cash register. To do so, it should have filed its security interest within 10 days of the time it delivered the cash register to Carroll. Then, as the holder of a perfected purchase money security interest, it would have prevailed over Firestone. National Cash Register Company v. Firestone & Company, Inc., 191 N.E.2d 471 (Mass. Sup. Jud. Ct. 1963). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-324(a) which provides that the creditor has 20 days after the collateral is delivered to file the security interest. 7. No. The court held that Grimes was a buyer in the ordinary course of business. As such, Grimes bought the car free of Sterling Acceptance’s security interest. The court said that a creditor with a security interest in the debtor’s inventory expected the debtor to make sales from the inventory. The creditor looked to the merchant to turn the inventory into cash to repay the loan. Thus, the creditor must look to the merchant for repayment and not to the car in the hands of Grimes. Sterling Acceptance Co. v. Grimes, 168 A.2d 600 (Pa. Super. Ct. 1961). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-320(a). 8. ACM’s lien has first priority under section 9-310 because it was a person who is in the ordinary course of business furnished services and materials for goods subject to a security interest—and had a possessory common law lien—which is given priority. Magnavox Fort Worth Employees Credit Union v. Benson, 331 NE2d 46, 17UCC 876 (Ind. Ct. App. 1975). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-333. 9. No. Despite the prior threat of violence, the repossession took place without any contact of confrontation between the repossessor and the debtor at the time of repossession. A month had passed since the earlier attempt and it was carried out in a way that the likelihood of

43 Chapter 29: Security Interests in Personal Property violence was reduced. In fact, the car was taken before Wade realized it was gone. Wade v. Ford Motor Credit Co., 668 P.2d 183 (Ct. App. Kan. 1983). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised section 9-609(b). 10. Gibson can recover a total of $883. This is the difference between the total reasonable value of the articles and the amount he owed on the loans. Hagberg violated the provisions of 9- 507 by failing to provide notice to Gibson as required by 9-504(3). This type of jewelry was not of the type usually sold by the pawn shop, therefore the sale was not commercially reasonable. Mr. Hagberg is liable for his conversion. Gibson v. Hagberg, 11 UCC Rep. 655 (N. Mex. 1972). While this case was decided under the earlier version of Article 9, the same result would be expected under Revised Article 9. See revised sections 9-625 and 9-627.

VI. ONLINE RESEARCH: USING THE INTERNET TO SEARCH FOR PRE-EXISTING SECURITY INTERESTS Steps taken by a student performing this exercise: 1) Arizona Government website 2) Search “article 9 filings” on homepage 3) Select database at “www.sos.state.az.us/scripts/UCC_Search_PreRA9.cgi” 4) Enter name to be researched 5) No entries for John Joseph Smith

VII. ADDENDUM—REVISED ARTICLE 9

In 1998 the American Law Institute and the National Conference of Commissioners on Uniform State Laws approved a revision to Article 9. Revised Article 9 now has been adopted by all the states. The proposed effective date for Revised Article 9 is July 1, 2001. For a very detailed comparison of the previous Article and Revised Article 9, we recommend an excellent article by one of the members of the Permanent Editorial Board for the Uniform Commercial Code, Steven O. Weise, entitled ”A Comparison of the Current Article 9 and the New Article 9,” 32 Uniform Commercial Code Law Journal 270 (Winter 2000), West Group. The major changes in Article Nine are noted under the corresponding section heads in Chapter 29. Preliminarily, two general definitional additions to Article 9 should be noted. o “Good faith” is defined to mean “honesty in fact” and “observance of commercial standards of fair dealing. See revised 9-102(a)(43). The term “authenticate” replaces the term “sign” in many provisions to among other things permit the use of signatures that are not handwritten on paper and facilitates electronic agreements such as “electronic chattel paper.” See revised 9-102(a)(7). Revised Article 9 also provides the following transitional rule: A security interest that is perfected under the current Article 9 will remain perfected under Revised Article 9. A financing statement filed in the correct state under the current Article 9 will remain effective even though the filing would occur in a different state under Revised Article 9 until the later of (i) the time the financing statement would lapse or (ii) five years after the effective date of Revised Article9. A security interest perfected by other means will remain perfected for only one year after the effective date of Revised Article 9. See revised 9-702 et seq.

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 44 SECURITY INTERESTS UNDER THE CODE  Many of the changes in the revision involve the definitions of the types of property and the transactions that are covered by Article 9. These changes were desirable to reflect changes in the types of property and transactions in which security interests are obtained.  The definition of “Accounts” has been expanded to include a wide variety of rights to payment arising out of the transfer of rights in tangible and intangible property, including credit card receivables. Compare former section 9-106 with revised sections 9-102(a)(2) and 9-109(a)(3).  The definition of “Chattel Paper” is expanded to include obligations secured by software to the extent sold or leased in an integrated transaction with specific goods. See revised 9-102(a)(11).  “Goods” include software that is imbedded in goods and becomes part of the goods. See revised 9-102(a)(44), 9-102(a)(75), and 9-103.  Article 9 now governs security interests in “investment property.” This change follows Revised Article 8. See revised 9-102(a)(49), 9-106, 9-312(a), and 9-314.  Article 9 applies to all consignment transactions and treats all consignments subject to Article 9 as purchase money security interests (PMSIs). However, small consignments and consignments of consumer goods are excluded. See revised 9-102(a)(20), 9-102(a)(21), and 9-109(a)(4).

ATTACHMENT OF THE SECURITY INTEREST

Attachment The Security Agreement  A security agreement must “reasonably describe” collateral and very broad generic descriptions —such as “all personal property”--normally are not sufficient for security agreements even though they are for financing statements. However, it is acceptable to use the Article 9 categories such as “inventory” and “accounts.” See revised 9-108.  In a consumer secured transaction, a description by “type” alone is not sufficient. See revised 9- 108(e)(2). Assignment/Waiver of Defenses  Revised Article 9 applies the effect of the FTC rule denying holder in due course treatment in all circumstances where it should apply even though the note does not contain the required legend. See revised 9-403(d). PERFECTING THE SECURITY AGREEMENT Perfection  Revised Article 9 adds a new method of perfection to filing, possession and attachment—namely “control.” For some forms of collateral (e.g., for investment property or electronic chattel paper) it is an alternative means of perfection and for other collateral (e.g., deposit accounts) it is the only means for perfecting a security interest.

Perfection by Public Filing  All filings are now at the “location” of the debtor. See revised 9-301(1).  All filings, other than fixture filings, are central. See revised 9-501(a)(2).  A financing statement may describe collateral as “all assets” or “all personal property.” See revised 9-504(2).  The debtor’s signature is not required on the financing statement but the debtor must authorize the filing of a financing statement. If the debtor has authenticated a security agreement, that act

45 Chapter 29: Security Interests in Personal Property automatically authorizes the filing of a conforming financing statement. See revised 9-502 and 9- 509. PRIORITY RULES General Priority Rules  A secured party that perfects a security interest in a promissory note by possession (even if not a holder in due course under Article 3) has priority over a secured party that perfects only by filing if the secured party in possession took possession in good faith an without knowledge that the transaction violates the rights of the other secured party. A holder in due course defeats a secured party that perfects only by filing. See revised 9-330(d) and 9-330(a).  A secured party that perfects a security interest in investment property by control has priority over a secured party that perfects only by filing. Secured parties that perfect by control rank temporally. See revised 9-328.  The PMSI for the price (that is granted in favor of the seller) has priority over enabling loan PMSIs (that is, those granted in favor of non-seller lenders). Multiple enabling PMSIs rank in order of filing. See revised 9-324(g) and 9-322(a).  A depository institution’s security interest in an account maintained by the debtor at the depository will generally have priority over another security interest. See revised 4-104, 9-104 and 9-327(3).  The holder of a security interest in an instrument perfected by possession generally has priority over one perfected only by another method such as filing. See revised 9-330(d). Buyers in the Ordinary Course of Business  A transferee takes free of a security interest if the secured party authorizes the disposition “free of the security interest.” See 9-315(a)(1).  A buyer in ordinary course of business of goods does not defeat the rights of a secured party that has perfected by possession. 9-320(e).  Transferees of money take free of a security interest unless the transferee acted in “collusion” with the debtor. See revised 9-332)(a).

DEFAULT AND FORECLOSURE Sale of the Collateral  A secured party may “dispose” of collateral in its then condition or following any commercially reasonable preparation or processing. See revised 9-610(a).  The calculation of a deficiency following a commercially reasonable sale of collateral to the secured party, a party related to the secured party, or a guarantor at a price “significantly” below the range of prices that a commercially reasonable foreclosure disposition to a third party would have brought is based on the amount that would have been obtained had a third person obtained the collateral. See revised 9-615(f).  The secured party must give notice of sale to other secured parties of record. See revised 9- 611[c].

Consumer Goods  The secured party may accept collateral in partial satisfaction of the debt with the authenticated consent of the debtor. However this does not apply in many consumer transactions. Revised 9- 620(e) will require disposition if 60 percent of the cash price in a PMSI transaction or 60 percent of the principal amount in a non-PMSI has been paid. See revised 9-620.  The debtor in a consumer goods secured transaction is entitled to additional information in the notice of the foreclosure sale. See revised 9-614.

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 46  The secured party in a consumer goods secured transaction has to provide an “explanation” of the calculation of any deficiency if the secured party seeks to collect a deficiency from a consumer if requested by the consumer. See revised 9-616.  Where a “low price” is realized, a court should give special scrutiny to the commercial reasonableness of the sale. See Official Comment 2 to revised 9-627 and 9-615(f).

47 Chapter 29: Security Interests in Personal Property