1 00:00:00,040 --> 00:00:03,800 Welcome back to the Deep Dive. Today, we're really plunging 2 00:00:03,800 --> 00:00:06,000 into something fundamental in commercial law. 3 00:00:06,520 --> 00:00:10,240 We're talking secured transactions under UCC Article 4 00:00:10,240 --> 00:00:11,560 9. That's right. 5 00:00:11,800 --> 00:00:15,080 And you've given us some great lecture notes focusing squarely 6 00:00:15,400 --> 00:00:19,800 on 2 huge concepts, perfection and priority. 7 00:00:20,160 --> 00:00:22,960 Absolutely huge. They're they're really the core 8 00:00:22,960 --> 00:00:26,000 of making a security interest stick against the rest of the 9 00:00:26,000 --> 00:00:29,000 world. So our mission here is to unpack 10 00:00:29,000 --> 00:00:32,159 those notes, pull out the absolute essentials, you know, 11 00:00:32,159 --> 00:00:34,920 help you get a handle on what you need for law school for 12 00:00:34,920 --> 00:00:36,280 exam. Even for the bar. 13 00:00:36,280 --> 00:00:37,960 Honestly, these concepts are everywhere. 14 00:00:38,000 --> 00:00:40,480 Right, we want to cut through the complexity, explain the what 15 00:00:40,480 --> 00:00:41,600 and the why. Exactly. 16 00:00:41,880 --> 00:00:44,640 Perfection and priority are like you said, where the rubber meets 17 00:00:44,640 --> 00:00:46,600 the road. A security interest might be 18 00:00:46,600 --> 00:00:49,080 totally fine between the debtor and the creditor. 19 00:00:49,080 --> 00:00:52,600 That's attachment under Article 9, but without nailing 20 00:00:52,600 --> 00:00:56,560 perfection and priority, that interest could be well worthless 21 00:00:56,560 --> 00:00:57,720 against everybody else. OK. 22 00:00:57,960 --> 00:01:00,360 So we're going to break down what perfection actually means, 23 00:01:00,360 --> 00:01:03,360 how you do it, the different methods like filing, possession 24 00:01:03,360 --> 00:01:05,280 control. And automatic perfection. 25 00:01:05,280 --> 00:01:06,760 Can't forget that one. Right. 26 00:01:06,960 --> 00:01:08,640 And then we'll tackle the priority rules. 27 00:01:08,760 --> 00:01:11,280 Who wins when multiple people claim the same thing? 28 00:01:12,120 --> 00:01:14,640 That can get pretty interesting, sometimes counterintuitive. 29 00:01:14,720 --> 00:01:16,800 Definitely. We'll use the examples and cases 30 00:01:16,800 --> 00:01:18,520 from your notes to make it really concrete. 31 00:01:18,560 --> 00:01:21,040 OK, let's get started on this deep dive. 32 00:01:21,560 --> 00:01:24,560 First things first, that distinction your notes make 33 00:01:24,560 --> 00:01:26,760 between attachment and perfection. 34 00:01:27,000 --> 00:01:28,760 It seems critical. It is. 35 00:01:28,760 --> 00:01:31,280 You absolutely have to separate them in your mind. 36 00:01:31,280 --> 00:01:35,600 Attachment comes first. That's under UCC section 9-2O3. 37 00:01:36,160 --> 00:01:39,120 It's when the security interest actually becomes enforceable 38 00:01:39,120 --> 00:01:41,080 between the debtor and the secured party. 39 00:01:41,760 --> 00:01:44,520 And that happens when three things line up. 40 00:01:44,560 --> 00:01:48,080 Typically, yes. One, the secured party has to 41 00:01:48,080 --> 00:01:50,680 give value, you know, lend the money, sell the goods on credit. 42 00:01:50,800 --> 00:01:53,880 2, the debtor needs to have rights in the collateral, they 43 00:01:53,880 --> 00:01:56,200 have to own it or have the power to grant an interest in it. 44 00:01:56,520 --> 00:01:59,840 And three, there generally needs to be an authenticated security 45 00:01:59,840 --> 00:02:01,960 agreement, usually assigned writing that reasonably 46 00:02:01,960 --> 00:02:04,280 describes the collateral. Those ducks in a row. 47 00:02:04,280 --> 00:02:07,720 And boom, you have attachment, you have a valid claim against 48 00:02:07,720 --> 00:02:10,080 that specific debtor regarding that collateral. 49 00:02:10,680 --> 00:02:14,120 O attachment is like making that private deal the contract hase. 50 00:02:14,120 --> 00:02:15,880 Exactly. Spot on. 51 00:02:15,880 --> 00:02:18,520 It's the necessary first step. You've got the agreement, the 52 00:02:18,520 --> 00:02:20,560 value's been given, the debtor has rights. 53 00:02:21,080 --> 00:02:25,360 Your claim exists on paper between the two of you. 54 00:02:25,560 --> 00:02:28,840 But, and this is the big but, your notes emphasize, attachment 55 00:02:28,840 --> 00:02:31,400 alone isn't enough protection against the rest of the world 56 00:02:31,640 --> 00:02:34,320 third parties. Not even close. 57 00:02:34,560 --> 00:02:36,880 It leaves you incredibly vulnerable. 58 00:02:36,880 --> 00:02:39,320 Think about it. If your deal is just between you 59 00:02:39,320 --> 00:02:42,440 and the debtor, who else knows what stops the debtor from 60 00:02:42,440 --> 00:02:45,200 pledging the exact same collateral to another lender 61 00:02:45,200 --> 00:02:46,360 tomorrow? Nothing I guess. 62 00:02:46,360 --> 00:02:48,400 Right. Or what if the debtor doesn't 63 00:02:48,400 --> 00:02:50,920 pay their taxes and the government tries to seize the 64 00:02:50,920 --> 00:02:55,040 asset? Or a supplier wins a lawsuit and 65 00:02:55,040 --> 00:02:57,160 gets a judgement Lin against the debtor's property. 66 00:02:57,160 --> 00:03:00,080 If your interest isn't public, somehow those other parties have 67 00:03:00,080 --> 00:03:01,640 no way of knowing you have a claim. 68 00:03:01,720 --> 00:03:04,880 Exactly, and they could potentially take the collateral 69 00:03:04,880 --> 00:03:07,440 right out from under you even though you have a perfectly 70 00:03:07,440 --> 00:03:10,600 valid attached security interest against the debtor. 71 00:03:10,800 --> 00:03:13,240 And that is the problem perfection solves. 72 00:03:13,720 --> 00:03:16,880 It's the process to establish your rights against those third 73 00:03:16,880 --> 00:03:18,080 parties. Precisely. 74 00:03:18,240 --> 00:03:20,800 Perfection is the step that broadcast your claim. 75 00:03:21,120 --> 00:03:23,600 It takes it from a private agreement to a publicly 76 00:03:23,600 --> 00:03:27,200 recognized interest. It's what gives your claim teeth 77 00:03:27,200 --> 00:03:30,560 against other secured creditors, judgment creditors, lien 78 00:03:30,560 --> 00:03:34,440 creditors, and, critically, the bankruptcy trustee. 79 00:03:34,440 --> 00:03:36,000 AH. Yes, the bankruptcy trustee, 80 00:03:36,000 --> 00:03:37,400 your notes really highlighted that one. 81 00:03:38,240 --> 00:03:40,400 Why is the trustee such a major threat here? 82 00:03:40,840 --> 00:03:43,720 Because under the Bankruptcy Code the trustee is given 83 00:03:43,720 --> 00:03:46,280 special powers. One of the most important is the 84 00:03:46,280 --> 00:03:49,720 strong arm power which basically lets the trustee step into the 85 00:03:49,720 --> 00:03:52,880 shoes of a hypothetical lien creditor who got a lien on all 86 00:03:52,880 --> 00:03:55,720 the debtors property the very instant the bankruptcy petition 87 00:03:55,720 --> 00:03:58,280 was filed. So if your security interest 88 00:03:58,280 --> 00:04:01,360 wasn't perfected at that exact moment, the moment of bankruptcy 89 00:04:01,360 --> 00:04:03,840 filing, the trustees hypothetical lien beats your 90 00:04:03,840 --> 00:04:07,840 unperfected interest. Section 9317 tells us an 91 00:04:07,840 --> 00:04:10,520 unperfected security interest is subordinate to a lien. 92 00:04:11,120 --> 00:04:13,120 Who gets their lien before? Perfection. 93 00:04:13,120 --> 00:04:15,680 And the trustee is that lien creditor, hypothetically 94 00:04:15,680 --> 00:04:17,959 speaking? Right, so you get knocked down 95 00:04:17,959 --> 00:04:21,560 from being a secured creditor to just a general unsecured 96 00:04:21,560 --> 00:04:23,680 creditor. And in most bankruptcies, 97 00:04:23,680 --> 00:04:26,520 unseared creditors get pennies on the dollar in anything. 98 00:04:26,760 --> 00:04:29,800 It's often a total wipeout for the unperfected secured party. 99 00:04:30,040 --> 00:04:31,280 Wow. OK. 100 00:04:31,280 --> 00:04:33,440 So perfection is absolutely vital. 101 00:04:33,960 --> 00:04:37,840 It's the shield against other lenders, judgement creditors and 102 00:04:37,840 --> 00:04:39,720 the bankruptcy trustee. It's your armor in the 103 00:04:39,720 --> 00:04:42,400 commercial world. But just to reiterate the point 104 00:04:42,400 --> 00:04:45,960 from the notes, perfection isn't needed for the interest to be 105 00:04:45,960 --> 00:04:49,240 valid, just between the debtor and the secured party, right? 106 00:04:49,520 --> 00:04:51,800 That's attachments job. Correct attachment makes it 107 00:04:51,800 --> 00:04:53,160 enforceable between the two of them. 108 00:04:53,200 --> 00:04:55,960 Perfection makes it enforceable against almost everyone else. 109 00:04:56,320 --> 00:04:59,040 You could have a perfectly attached interest, $1,000,000 110 00:04:59,040 --> 00:05:03,360 loan, solid paperwork, but if you don't perfect and someone 111 00:05:03,360 --> 00:05:06,760 else does perfect or a judgement creditor levies before you do, 112 00:05:07,200 --> 00:05:09,320 you're likely out of luck regarding that collateral. 113 00:05:09,320 --> 00:05:11,720 It's like having the deed to a house but never recording it. 114 00:05:11,960 --> 00:05:14,760 That's a great analogy. Someone else could buy the house 115 00:05:14,760 --> 00:05:17,840 from the same seller, record their deed first, and they'd 116 00:05:17,840 --> 00:05:20,600 likely win. Perfection under Article 9 117 00:05:20,600 --> 00:05:23,680 serves that public notice function similar to recording a 118 00:05:23,680 --> 00:05:26,200 deed in real estate. OK, so attachment is the 119 00:05:26,200 --> 00:05:28,640 handshake. Perfection is shouting it from 120 00:05:28,640 --> 00:05:30,480 the rooftops. Or at least, you know, putting 121 00:05:30,480 --> 00:05:33,640 it on the public bulletin board. Exactly, and Article 9 provides 122 00:05:33,640 --> 00:05:36,840 specific ways to do that, shouting specific methods of 123 00:05:36,840 --> 00:05:39,680 perfection. Your notes list the four main 124 00:05:39,680 --> 00:05:42,240 ones. Knowing which method to use for 125 00:05:42,240 --> 00:05:45,240 which type of collateral is, well, it's essential. 126 00:05:45,480 --> 00:05:48,640 Let's dig into those methods, then the how of perfection 127 00:05:48,920 --> 00:05:52,880 filing, possession control, and automatic perfection, right? 128 00:05:52,960 --> 00:05:55,000 These are the tools in the Perfection Toolkit. 129 00:05:55,160 --> 00:05:57,840 Let's start with the most common one, perfection by filing. 130 00:05:57,840 --> 00:06:01,360 OK, Section 9310. That's the one for most types of 131 00:06:01,360 --> 00:06:03,600 collateral. Think equipment, inventory, 132 00:06:03,600 --> 00:06:05,920 general intangibles, accounts receivable. 133 00:06:06,080 --> 00:06:09,160 The standard way to perfect is by filing a document called the 134 00:06:09,160 --> 00:06:12,440 UCC 1 Financing Statement. And you file this where the 135 00:06:12,440 --> 00:06:15,520 notes seem really specific about this debtors location, not 136 00:06:15,520 --> 00:06:19,920 collateral location. Yes, very specific and crucial. 137 00:06:20,160 --> 00:06:23,040 This is a major difference from real estate law where you record 138 00:06:23,040 --> 00:06:25,640 where the land is. For most Article 9 collateral, 139 00:06:25,640 --> 00:06:28,640 you filed A financing statement in the central filing office, 140 00:06:28,960 --> 00:06:31,960 usually the Secretary of State's Office of the State where the 141 00:06:31,960 --> 00:06:34,200 debtor is located. And how do you know where the 142 00:06:34,200 --> 00:06:36,640 debtor is located? Article 9 defines it. 143 00:06:36,960 --> 00:06:39,720 For an individual debtor, it's their principal residence. 144 00:06:40,040 --> 00:06:44,320 For a registered organization, that's your corporations LLC's 145 00:06:44,400 --> 00:06:47,360 limited partnerships created by a state filing. 146 00:06:47,360 --> 00:06:49,680 Their location is the state where they are organized or 147 00:06:49,680 --> 00:06:51,560 incorporated. So if you're lending to a 148 00:06:51,560 --> 00:06:55,080 Delaware corporation, you file in Delaware, even if all their 149 00:06:55,080 --> 00:06:56,960 equipment and operations are in California. 150 00:06:57,000 --> 00:06:59,080 Exactly. File in the wrong state and your 151 00:06:59,080 --> 00:07:02,160 filing is generally ineffective. A searcher looking in Delaware 152 00:07:02,160 --> 00:07:03,600 won't find your California filing. 153 00:07:03,920 --> 00:07:07,360 OK, debtors location is key. What about what goes in the 154 00:07:07,360 --> 00:07:10,720 financing statement? The notes mention three basics, 155 00:07:11,200 --> 00:07:14,520 daughter's name, secured party's name and indication of 156 00:07:14,520 --> 00:07:15,680 collateral. Correct. 157 00:07:15,880 --> 00:07:17,840 And let's really pause on the debtor's name. 158 00:07:17,840 --> 00:07:20,600 This is probably the single biggest area where mistakes 159 00:07:20,600 --> 00:07:22,760 happen with catastrophic consequences. 160 00:07:23,000 --> 00:07:26,760 Why is the name so critical? Because the entire UCC filing 161 00:07:26,760 --> 00:07:29,920 system is indexed by the debtor's name, if you get the 162 00:07:29,920 --> 00:07:33,560 name wrong even slightly, searches run under the debtor's 163 00:07:33,560 --> 00:07:36,600 correct legal name might not find your filing. 164 00:07:36,640 --> 00:07:39,560 And if it can't be found, it doesn't provide notice. 165 00:07:39,560 --> 00:07:41,720 Exactly. Which brings us to that case 166 00:07:41,720 --> 00:07:44,440 your notes flagged in re Leonard. 167 00:07:44,560 --> 00:07:46,800 It's the classic example. Tell us about Leonard. 168 00:07:47,160 --> 00:07:49,440 OK. The debtors actual legal name 169 00:07:49,440 --> 00:07:53,360 was Edwin Charles Leonard. The secured party filed the 170 00:07:53,360 --> 00:07:56,000 financing statement under Edwin C Leonard. 171 00:07:56,520 --> 00:07:59,040 Just use the middle initial instead of the full middle name. 172 00:07:59,040 --> 00:08:01,720 Seems like a minor typo. You'd think so, but the court 173 00:08:01,720 --> 00:08:05,200 looked at Section 9-5O6, which asks if an error makes the 174 00:08:05,200 --> 00:08:07,440 financing statement seriously misleading. 175 00:08:07,920 --> 00:08:11,160 The test is objective. Would a search using the filing 176 00:08:11,160 --> 00:08:14,560 offices standard search logic under the debtors correct legal 177 00:08:14,560 --> 00:08:17,240 name find the financing statement despite the error? 178 00:08:17,240 --> 00:08:20,000 And in Leonard. Using the search logic of that 179 00:08:20,000 --> 00:08:23,120 particular office at that time, searching for Edwin Charles 180 00:08:23,120 --> 00:08:26,600 Leonard did not retrieve the filing made under Edwin C 181 00:08:26,600 --> 00:08:28,760 Leonard. Therefore, the court held the 182 00:08:28,760 --> 00:08:32,360 filing was seriously misleading, ineffective, and the secured 183 00:08:32,360 --> 00:08:34,200 party's interest was unperfected. 184 00:08:34,240 --> 00:08:36,159 They lost out to the bankruptcy trustee. 185 00:08:36,320 --> 00:08:39,000 Wow, just for using C instead of Charles? 186 00:08:39,000 --> 00:08:41,000 That's brutal. It underscores the need for 187 00:08:41,080 --> 00:08:44,640 absolute precision. For an individual, you generally 188 00:08:44,640 --> 00:08:47,720 need the name on their unexpired driver's license if they have 189 00:08:47,720 --> 00:08:49,840 one. For a registered organization, 190 00:08:49,840 --> 00:08:53,000 you need the exact name shown on its public organic record, the 191 00:08:53,040 --> 00:08:56,040 articles of incorporation or certificate of formation filed 192 00:08:56,040 --> 00:08:58,680 with the state. No trade names, no shortcuts. 193 00:08:58,680 --> 00:09:01,840 OK, message received. Get the debtor's name exactly 194 00:09:01,840 --> 00:09:03,360 right. What about the collateral 195 00:09:03,360 --> 00:09:05,000 description on the financing statement? 196 00:09:05,120 --> 00:09:07,960 The notes contrast this with the security agreement. 197 00:09:08,520 --> 00:09:10,080 Right. Another important distinction. 198 00:09:10,320 --> 00:09:13,840 The security agreement, the actual contract creating the 199 00:09:13,840 --> 00:09:18,000 interest needs a description that reasonably identifies the 200 00:09:18,000 --> 00:09:19,680 collateral. It often requires more 201 00:09:19,680 --> 00:09:21,920 specificity. You're defining the scope of the 202 00:09:21,920 --> 00:09:24,320 deal. The financing statement though, 203 00:09:24,320 --> 00:09:28,400 its purpose is just notice, so Article 9 allows for a more 204 00:09:28,400 --> 00:09:30,400 general indication of the collateral. 205 00:09:30,440 --> 00:09:34,160 So things like all assets or all personal property are actually 206 00:09:34,160 --> 00:09:36,920 OK on a UCC 1. Yes, absolutely. 207 00:09:36,920 --> 00:09:39,720 That's perfectly acceptable, even encouraged sometimes for 208 00:09:39,720 --> 00:09:42,680 broad coverage. Your notes have that Acme 209 00:09:42,680 --> 00:09:45,800 manufacturing example. First Bank takes an interest in 210 00:09:45,800 --> 00:09:48,680 specific equipment and inventory spelled out in the security 211 00:09:48,680 --> 00:09:51,680 agreement, but the financing statement they file can just say 212 00:09:51,680 --> 00:09:54,360 all assets of debtor or all personal property. 213 00:09:54,520 --> 00:09:56,160 And that works. It works for notice. 214 00:09:56,160 --> 00:09:59,400 It tells the world, hey, First Bank might have a claim on some 215 00:09:59,400 --> 00:10:02,480 or all of Acme's stuff. If you're thinking of dealing 216 00:10:02,480 --> 00:10:05,240 with Acme's assets, you should probably ask First Bank for more 217 00:10:05,240 --> 00:10:07,760 details. It puts other parties on inquiry 218 00:10:07,760 --> 00:10:10,080 notice. Inquiry notice, meaning they 219 00:10:10,080 --> 00:10:11,640 have a duty to investigate further. 220 00:10:11,760 --> 00:10:13,920 Precisely. They see the broad filing. 221 00:10:14,120 --> 00:10:16,840 They should then contact the secured party whose name and 222 00:10:16,840 --> 00:10:19,800 address are on the filing and ask about the specifics. 223 00:10:19,800 --> 00:10:21,720 Maybe request the security agreement? 224 00:10:21,720 --> 00:10:24,960 Got it. So for filing right state 225 00:10:25,360 --> 00:10:29,360 debtors location exact legal name Leonard Barrett and the 226 00:10:29,360 --> 00:10:32,120 collateral indication can be broad for notice that covers 227 00:10:32,120 --> 00:10:35,560 filing what's method #2. Method 2 is perfection by 228 00:10:35,560 --> 00:10:38,680 possession. Section 9313 covers this. 229 00:10:38,960 --> 00:10:41,880 It's simpler in concept, but applies to fewer types of 230 00:10:41,880 --> 00:10:44,120 collateral. This is where the secured party 231 00:10:44,240 --> 00:10:46,240 physically holds a collateral. Exactly. 232 00:10:46,480 --> 00:10:48,880 If the secured party has physical possession of the 233 00:10:48,880 --> 00:10:51,960 asset, that itself serves as notice to the world that the 234 00:10:51,960 --> 00:10:54,040 debtor doesn't have unfettered control. 235 00:10:54,240 --> 00:10:56,800 Like the pawnbroker example in the notes, they hold your 236 00:10:56,800 --> 00:10:58,480 necklace, their interest is perfected. 237 00:10:58,480 --> 00:11:01,360 Perfect example, Possession works to perfect interest in 238 00:11:01,360 --> 00:11:04,400 things like negotiable instruments, promissory notes, 239 00:11:04,400 --> 00:11:07,640 checks, tangible chattel paper money, and certificated 240 00:11:07,640 --> 00:11:10,200 securities, actual paper stock certificates. 241 00:11:10,760 --> 00:11:13,280 If you can hold it and you are holding it as collateral, you're 242 00:11:13,280 --> 00:11:15,760 perfected without needing to file a UCC 1. 243 00:11:16,000 --> 00:11:18,440 Makes sense, if the debtor doesn't have it, someone else 244 00:11:18,440 --> 00:11:21,040 probably has a claim on it. That's the underlying logic 245 00:11:21,240 --> 00:11:24,120 position provides very clear, tangible notice. 246 00:11:24,520 --> 00:11:26,280 OK, moving on. Method 3. 247 00:11:26,920 --> 00:11:30,480 Perfection by control. This sounds like it's for things 248 00:11:30,480 --> 00:11:33,240 you can't physically possess. That's exactly right. 249 00:11:33,560 --> 00:11:37,600 Section 9314 introduces perfection by control. 250 00:11:37,920 --> 00:11:41,320 This is the primary method for perfecting security interests in 251 00:11:41,320 --> 00:11:44,240 certain types of intangible or electronic assets. 252 00:11:44,480 --> 00:11:48,680 Likewise, the big ones are deposit accounts, bank accounts, 253 00:11:48,800 --> 00:11:52,240 investment property like stocks and bonds held through a broker 254 00:11:52,240 --> 00:11:55,280 in electronic form and electronic chattel paper. 255 00:11:55,600 --> 00:11:58,920 So how do you get control over, say, my checking account? 256 00:11:59,080 --> 00:12:01,760 It's just electronic entries. Good question. 257 00:12:02,040 --> 00:12:05,280 Article 9 spells out specific ways to achieve control, and it 258 00:12:05,280 --> 00:12:08,840 varies slightly by asset type. For deposit accounts, your notes 259 00:12:08,840 --> 00:12:12,520 outline the three main ways. 1 The secured party is the bank 260 00:12:12,520 --> 00:12:15,320 where the account is held. If Bank A lends you money and 261 00:12:15,320 --> 00:12:17,600 takes a security interest in your checking account at Bank A, 262 00:12:17,600 --> 00:12:21,200 they automatically have control. They're already the institution 263 00:12:21,200 --> 00:12:23,040 managing the account. OK, that's easy. 264 00:12:23,200 --> 00:12:25,720 What if the lender is different from the bank holding the 265 00:12:25,720 --> 00:12:27,800 account? Then you need option two or 266 00:12:27,800 --> 00:12:30,160 three. Option 2 is the most common, a 267 00:12:30,160 --> 00:12:32,760 three-way agreement called a control agreement. 268 00:12:33,200 --> 00:12:35,920 The debtor, the secured party and the bank where the account 269 00:12:35,920 --> 00:12:38,720 is held, the depositary bank, all sign it. 270 00:12:39,000 --> 00:12:41,960 In that agreement, the depositary bank agrees that it 271 00:12:41,960 --> 00:12:44,840 will follow instructions from the secured party regarding the 272 00:12:44,840 --> 00:12:48,040 funds in the account without needing further consent from the 273 00:12:48,040 --> 00:12:50,240 debtor. That gives the secured party 274 00:12:50,240 --> 00:12:52,800 control. So the bank essentially agrees 275 00:12:52,800 --> 00:12:55,560 to listen to the lender instead of the account holder if push 276 00:12:55,560 --> 00:12:58,640 comes to shove. Precisely the third way, less 277 00:12:58,640 --> 00:13:01,760 common, is for the secured party to actually become the bank's 278 00:13:01,760 --> 00:13:04,960 customer with respect to that specific deposit account. 279 00:13:05,480 --> 00:13:07,480 The account gets put in the secured party's name 280 00:13:07,640 --> 00:13:09,360 effectively. So control is like the 281 00:13:09,360 --> 00:13:11,200 intangible version of possession. 282 00:13:11,720 --> 00:13:14,960 It gives the secured party the ultimate power to direct what 283 00:13:14,960 --> 00:13:16,960 happens with the asset. That's a great way to think 284 00:13:16,960 --> 00:13:18,600 about it. It establishes the secured 285 00:13:18,600 --> 00:13:21,360 party's dominance over that intangible asset. 286 00:13:21,880 --> 00:13:25,240 For investment property held via a broker, control usually 287 00:13:25,240 --> 00:13:28,320 involves similar mechanisms, either the secured party being 288 00:13:28,320 --> 00:13:31,840 the broker or agreements where the broker agrees to follow the 289 00:13:31,840 --> 00:13:33,400 secured party's instruction. OK. 290 00:13:33,440 --> 00:13:35,680 Control for key financial intangibles. 291 00:13:36,240 --> 00:13:39,000 Now the 4th method. Automatic perfection. 292 00:13:39,440 --> 00:13:41,000 This one sounds too good to be true. 293 00:13:42,320 --> 00:13:45,440 It is easy when it applies, but its scope is very narrow. 294 00:13:45,920 --> 00:13:48,920 Section 9 and three O 9 lists several types of security 295 00:13:48,920 --> 00:13:51,680 interests that are perfected automatically the instant they 296 00:13:51,680 --> 00:13:54,600 attach. No filing, no possession, no 297 00:13:54,600 --> 00:13:56,280 control needed. And then example. 298 00:13:56,520 --> 00:13:59,680 By far the most important one for you to know for exams is the 299 00:13:59,680 --> 00:14:02,480 purchase money, security interest, the PMSI and consumer 300 00:14:02,480 --> 00:14:04,240 goods. Right, the furniture stores 301 00:14:04,240 --> 00:14:06,560 selling a couch on credit to someone buying it for their 302 00:14:06,560 --> 00:14:07,680 home. Exactly. 303 00:14:07,760 --> 00:14:10,400 The store retains a security interest to secure the purchase 304 00:14:10,400 --> 00:14:12,080 price. That makes it a PMSI. 305 00:14:12,320 --> 00:14:14,520 And because the couch is a consumer good bought for 306 00:14:14,520 --> 00:14:17,880 personal, family or household use, that security interest is 307 00:14:17,880 --> 00:14:20,400 automatically perfected the moment the sale happens and the 308 00:14:20,400 --> 00:14:22,680 interest attaches. Why the special treatment for 309 00:14:22,680 --> 00:14:24,320 consumer goods? PMS Eyes. 310 00:14:24,640 --> 00:14:29,320 Purely practicality, imagine the burden if every store selling 311 00:14:29,320 --> 00:14:33,000 appliances or furniture on credit had to file a UCC one for 312 00:14:33,120 --> 00:14:36,320 every single transaction. The system would collapse. 313 00:14:36,880 --> 00:14:39,960 These are typically lower value, high volume transactions. 314 00:14:39,960 --> 00:14:42,160 So Article 9 give sellers this shortcut. 315 00:14:42,440 --> 00:14:44,840 But you said it's narrow, so this doesn't apply if the goods 316 00:14:44,840 --> 00:14:47,120 aren't consumer goods. Critically important 317 00:14:47,120 --> 00:14:50,560 distinction, Yes, Automatic perfection for Pmsis generally 318 00:14:50,560 --> 00:14:54,560 applies only to consumer goods. If that same furniture store 319 00:14:54,560 --> 00:14:57,600 sells couches on credit to a hotel to furnish its lobby, 320 00:14:57,600 --> 00:15:00,920 that's equipment for the hotel, or to another retailer to sell 321 00:15:00,920 --> 00:15:03,480 in their store, that's inventory for the retailer. 322 00:15:03,720 --> 00:15:06,200 The sellers. PMSI is not automatically 323 00:15:06,200 --> 00:15:08,480 perfected. So for Pmsis and equipment or 324 00:15:08,480 --> 00:15:12,160 inventory, the seller must take other steps to perfect like 325 00:15:12,160 --> 00:15:14,800 filing. Yes, if they want their PMSI to 326 00:15:14,800 --> 00:15:17,400 be perfected and potentially gain priority over other 327 00:15:17,400 --> 00:15:20,720 creditors of the hotel or retailer, they absolutely must 328 00:15:20,720 --> 00:15:23,160 file a financing statement or sometimes take possession. 329 00:15:23,160 --> 00:15:25,200 But filing is typical for these goods. 330 00:15:25,480 --> 00:15:28,360 Relying on automatic perfection outside the consumer goods 331 00:15:28,360 --> 00:15:30,560 context is a recipe for disaster. 332 00:15:30,800 --> 00:15:33,920 OK, that's a huge take away. Automatic perfection. 333 00:15:34,080 --> 00:15:38,280 Primarily PMS is in consumer goods for business assets you 334 00:15:38,280 --> 00:15:40,640 need to file or possess control. You got it. 335 00:15:40,720 --> 00:15:42,920 Those are the four main doors to perfection. 336 00:15:43,120 --> 00:15:46,720 Filing the workhorse possession for tangibles, you can hold 337 00:15:46,840 --> 00:15:50,520 control for key intangibles and automatic mostly for consumer 338 00:15:50,520 --> 00:15:51,640 goods. PMS is. 339 00:15:52,200 --> 00:15:53,720 So now we know how to get perfected. 340 00:15:54,480 --> 00:15:56,800 The next big question your notes tackle is priority. 341 00:15:57,280 --> 00:16:00,240 What happens when multiple parties have claims, maybe even 342 00:16:00,240 --> 00:16:02,520 perfected claims, on the same collateral? 343 00:16:02,600 --> 00:16:04,080 Who gets paid first? Right. 344 00:16:04,120 --> 00:16:06,680 This is The Who gets what part. You could have two banks with 345 00:16:06,680 --> 00:16:09,440 perfected security interests, or a perfected party versus an 346 00:16:09,440 --> 00:16:12,480 unperfected one, or versus a buyer or a lien creditor. 347 00:16:12,960 --> 00:16:15,360 Article 9 provides a set of rules to sort this out. 348 00:16:15,480 --> 00:16:18,680 And the main rule, the starting point is the first to file or 349 00:16:18,680 --> 00:16:22,640 perfect rule section 9322. That's the bedrock principle. 350 00:16:22,920 --> 00:16:26,280 It governs priority battles between competing perfected 351 00:16:26,280 --> 00:16:28,560 secured parties. The rule is simple. 352 00:16:29,120 --> 00:16:32,240 Priority goes to whichever party was the first to either file a 353 00:16:32,240 --> 00:16:35,800 financing statement covering the collateral or perfect their 354 00:16:35,800 --> 00:16:39,160 security interest by some other means like possession or 355 00:16:39,160 --> 00:16:43,360 control, which ever occurred earlier. 1st in time wins. 1st 356 00:16:43,360 --> 00:16:45,600 in time of filing or perfection wins. 357 00:16:45,880 --> 00:16:49,640 And here's the kicker, your nose highlight filing can establish 358 00:16:49,640 --> 00:16:52,760 your priority date even before you've actually made the loan or 359 00:16:52,760 --> 00:16:54,520 the security interest has attached. 360 00:16:54,600 --> 00:16:57,440 That seems odd. How can filing before the deal 361 00:16:57,440 --> 00:17:00,040 is done give you priority? Let's use that hypothetical from 362 00:17:00,040 --> 00:17:02,000 the notes again. Widget Co needs money. 363 00:17:02,240 --> 00:17:04,960 First Bank is thinking about lending against Widget Co's 364 00:17:04,960 --> 00:17:07,319 equipment. On January 1st, First Bank files 365 00:17:07,359 --> 00:17:10,599 a UCC 1 covering equipment. At this point, there's no loan 366 00:17:10,599 --> 00:17:12,760 yet. No security agreement, nothing 367 00:17:12,760 --> 00:17:15,240 attached, nothing perfected. They just filed. 368 00:17:15,400 --> 00:17:18,760 On January 15th, Second Bank actually makes a loan loan to 369 00:17:18,760 --> 00:17:21,640 Widget Co, takes a security interest in the same equipment 370 00:17:21,640 --> 00:17:23,839 via a signed agreement and gives value. 371 00:17:24,319 --> 00:17:27,160 Let's say they file their UCC one on January 20th. 372 00:17:27,640 --> 00:17:31,040 So Second Bank attached and perfected on Jan 20th so. 373 00:17:31,040 --> 00:17:34,560 Second bank is perfected first. They perfected first, yes, But 374 00:17:34,560 --> 00:17:36,840 watch what happens on February 1st. 375 00:17:36,840 --> 00:17:39,320 First Bank finally makes its loan to Widget Co, gets its 376 00:17:39,320 --> 00:17:42,240 security agreement signed. Now First Bank's interest 377 00:17:42,240 --> 00:17:44,880 attaches and because they already filed back on January 378 00:17:44,880 --> 00:17:47,680 1st, their interest becomes perfected at the moment of 379 00:17:47,680 --> 00:17:49,200 attachment on February. OK. 380 00:17:49,200 --> 00:17:51,520 So now both are perfected. Who has priority in the 381 00:17:51,520 --> 00:17:53,160 equipment? First Bank wins. 382 00:17:53,320 --> 00:17:55,360 Why? Because the rule is first to 383 00:17:55,360 --> 00:17:58,480 file or perfect. First Bank filed on January 1st. 384 00:17:58,640 --> 00:18:00,400 Second Bank filed on January 20th. 385 00:18:00,560 --> 00:18:03,400 First Bank's filing date was earlier, so they get priority 386 00:18:03,680 --> 00:18:06,040 even though Second Bank's interest attached and became 387 00:18:06,040 --> 00:18:08,040 perfected weeks before First Banks did. 388 00:18:08,160 --> 00:18:11,120 Wow, so filing really does act like reserving your spot in 389 00:18:11,120 --> 00:18:12,440 line. Exactly. 390 00:18:12,720 --> 00:18:15,200 It encourages early filing and provides certainty. 391 00:18:15,200 --> 00:18:18,400 A potential lender like Second Bank could search the records on 392 00:18:18,520 --> 00:18:22,760 Jan 18th, see First Bank's Jan 1st filing, and know that any 393 00:18:22,760 --> 00:18:26,080 interest First Bank eventually perfects relating to that filing 394 00:18:26,080 --> 00:18:29,360 will beat theirs. It allows lenders to assess risk 395 00:18:29,360 --> 00:18:32,680 based on the public record. File early, file correctly. 396 00:18:32,680 --> 00:18:35,560 OK, so first a file are perfect is the general rule. 397 00:18:35,760 --> 00:18:39,440 Powerful stuff, but like always with the UCC, there are 398 00:18:39,440 --> 00:18:42,000 exceptions, big ones that can flip the outcome. 399 00:18:42,120 --> 00:18:45,440 Absolutely critical exceptions and prime territory for exams. 400 00:18:45,560 --> 00:18:48,240 The first huge one we need to unpack is the purchase money, 401 00:18:48,240 --> 00:18:51,520 security interest, the PMSI. We talked about it for automatic 402 00:18:51,520 --> 00:18:54,360 perfection, but it also has special priority rules. 403 00:18:54,360 --> 00:18:56,000 Your notes call it super priority. 404 00:18:56,160 --> 00:18:59,200 It does. Section 9324 grants PMS eyes 405 00:18:59,200 --> 00:19:01,760 priority over conflicting security interests in the same 406 00:19:01,760 --> 00:19:04,400 collateral, even if those other interests were filed or 407 00:19:04,400 --> 00:19:07,800 perfected first, provided the PMSI holder follows specific 408 00:19:07,800 --> 00:19:09,640 rules. Why does Article 9 give this 409 00:19:09,640 --> 00:19:12,920 special boost to PMS MSIS? The policy is to encourage 410 00:19:12,920 --> 00:19:17,040 enabling loans financing that allows the debtor to acquire new 411 00:19:17,040 --> 00:19:19,760 assets. The thinking is that specific 412 00:19:19,760 --> 00:19:23,280 new collateral wouldn't even be available to any creditor if the 413 00:19:23,280 --> 00:19:26,280 PMSI lender hadn't provided the funds or credit for its 414 00:19:26,280 --> 00:19:28,840 purchase. So that lender deserves first 415 00:19:28,840 --> 00:19:32,400 dibs on that specific new asset they enabled the debtor to get. 416 00:19:32,480 --> 00:19:35,120 OK, makes sense. But the rules for getting the 417 00:19:35,120 --> 00:19:38,240 Super priority are different depending on the type of 418 00:19:38,240 --> 00:19:40,960 collateral, right? Your notes really stress this. 419 00:19:40,960 --> 00:19:42,960 Dramatically different. You absolutely must know the 420 00:19:42,960 --> 00:19:45,280 distinction. Let's start with Pmsis and goods 421 00:19:45,280 --> 00:19:47,080 other than inventory or livestock. 422 00:19:47,440 --> 00:19:50,640 This mainly covers equipment and also consumer goods, though for 423 00:19:50,640 --> 00:19:53,000 consumer goods, remember, perfection is often automatic. 424 00:19:53,000 --> 00:19:56,040 This priority rule helps beat other perfected interests even 425 00:19:56,040 --> 00:19:58,880 earlier filed ones. So PMSI and equipment, how does 426 00:19:58,880 --> 00:20:02,040 it get super priority? The PMSI holder gets priority 427 00:20:02,040 --> 00:20:04,960 over a conflicting security interest, like an earlier 428 00:20:04,960 --> 00:20:08,760 blanket lien, if they perfect their PMSI no later than 20 days 429 00:20:08,760 --> 00:20:10,920 after the debtor receives possession of the goods. 430 00:20:11,160 --> 00:20:13,520 A 20 day grace period. Exactly. 431 00:20:13,680 --> 00:20:15,000 Let's go back to our hypothetical. 432 00:20:15,280 --> 00:20:17,920 First Bank filed its blanket line on equipment Jan. 433 00:20:17,920 --> 00:20:20,360 First. Second Bank provides financing 434 00:20:20,360 --> 00:20:23,400 for Widget Co to buy a specific new machine, a PMSI. 435 00:20:23,720 --> 00:20:27,280 Widget Co receives the machine on February 1st if Second Bank 436 00:20:27,280 --> 00:20:29,680 files its financing statement specifically covering that new 437 00:20:29,680 --> 00:20:33,560 machine on, say, February 15th. That's within the 20 days. 438 00:20:33,640 --> 00:20:36,120 Right. So Second Bank's PMSI in that 439 00:20:36,120 --> 00:20:39,120 new machine gets priority over First Bank's earlier filed 440 00:20:39,120 --> 00:20:41,560 blanket Lin, but only as to that machine. 441 00:20:41,560 --> 00:20:44,320 First Bank still has priority on all the other equipment Widget 442 00:20:44,320 --> 00:20:45,840 Co already owned. OK. 443 00:20:45,840 --> 00:20:49,360 So for equipment, PMS is perfect within 20 days of delivery to 444 00:20:49,360 --> 00:20:51,400 get super priority on that specific item. 445 00:20:51,640 --> 00:20:55,080 What about PMSI as in inventory Notes say it's much stricter. 446 00:20:55,080 --> 00:20:57,680 Much much stricter and a very common place for mistakes or 447 00:20:57,680 --> 00:21:01,440 exam questions for a PMSI in inventory to get super priority 448 00:21:01,440 --> 00:21:03,840 over an earlier filed conflicting interest like that 449 00:21:03,840 --> 00:21:07,160 bank with the blanket inventory limb, the PMSI lender must do 450 00:21:07,160 --> 00:21:09,640 two things and do them before the debtor receives possession 451 00:21:09,640 --> 00:21:12,840 of the inventory. One, they must perfect the PMSI 452 00:21:12,840 --> 00:21:14,360 before the debtor receives possession. 453 00:21:14,600 --> 00:21:17,720 There is no 20 day grace period for inventory file first. 454 00:21:17,920 --> 00:21:19,560 OK, no grades period. What's the second thing? 455 00:21:19,560 --> 00:21:22,480 2 They must send an authenticated notification to 456 00:21:22,600 --> 00:21:25,480 any other secured party who has already filed A financing 457 00:21:25,480 --> 00:21:27,680 statement covering the same type of inventory. 458 00:21:28,320 --> 00:21:33,280 This notice basically says, hey, I have or expect to get a PMSI 459 00:21:33,280 --> 00:21:35,320 in inventory the debtor is receiving. 460 00:21:35,520 --> 00:21:38,560 The notice has to describe the inventory and must be received 461 00:21:38,560 --> 00:21:41,880 by those prior filers within five years before the debtor 462 00:21:41,880 --> 00:21:44,640 gets the inventory. Wow, so for inventory you have 463 00:21:44,640 --> 00:21:48,360 to perfect and notify existing lenders before the goods even 464 00:21:48,360 --> 00:21:50,760 show up. Why the extra hoops? 465 00:21:50,960 --> 00:21:52,960 It's because inventory financing is different. 466 00:21:53,040 --> 00:21:56,560 Inventory turns over constantly. An existing lender with a 467 00:21:56,560 --> 00:21:59,680 blanket Lin is relying on that floating pool of collateral. 468 00:22:00,200 --> 00:22:02,640 If new inventory could constantly come in subject to a 469 00:22:02,640 --> 00:22:05,640 senior PMS island without them knowing, it would undermine 470 00:22:05,640 --> 00:22:08,120 their security. The notice requirement gives the 471 00:22:08,120 --> 00:22:10,720 existing lender a heads up, allowing them to adjust their 472 00:22:10,720 --> 00:22:12,680 own lending or monitor the situation. 473 00:22:12,840 --> 00:22:16,320 In that case, Farmer State Bank V Production Credit Association. 474 00:22:16,480 --> 00:22:20,400 Classic example, the PMSI lender in that case apparently didn't 475 00:22:20,400 --> 00:22:23,600 perfectly follow the timing and notice rules for their PMSI and 476 00:22:23,600 --> 00:22:26,640 livestock, which is treated like inventory for these rules. 477 00:22:26,960 --> 00:22:29,840 Because they slipped up on the strict requirements, they lost 478 00:22:29,840 --> 00:22:32,600 the Super priority. Their interest fell back under 479 00:22:32,600 --> 00:22:35,400 the general first to file rule and the earlier blanket filer 480 00:22:35,400 --> 00:22:37,920 one. It shows courts mean business 481 00:22:37,920 --> 00:22:40,600 when they say strict compliance is needed for inventory. 482 00:22:40,600 --> 00:22:43,440 PMSI super priority. Definitely hammers on the point. 483 00:22:43,680 --> 00:22:46,520 Know the collateral. Know the exact PMSI rule for 484 00:22:46,520 --> 00:22:49,320 that collateral. OK, what's the next major 485 00:22:49,320 --> 00:22:52,320 exception to 1st to file? Buyers in the ordinary course of 486 00:22:52,320 --> 00:22:56,280 business or biocybes section 9320. 487 00:22:56,400 --> 00:22:59,000 This is fundamental for commerce to function smoothly. 488 00:22:59,040 --> 00:23:00,360 How so? What does it do? 489 00:23:00,480 --> 00:23:03,160 It says that a person who buys goods in good faith without 490 00:23:03,160 --> 00:23:05,640 knowledge that the sale violates the rights of another person, 491 00:23:05,640 --> 00:23:08,320 like a secured party in the ordinary course of business, 492 00:23:08,640 --> 00:23:11,280 from a seller who is in the business of selling goods of 493 00:23:11,280 --> 00:23:14,440 that kind, takes the goods free of a security interest created 494 00:23:14,440 --> 00:23:17,120 by their seller, even if that security interest is perfected 495 00:23:17,120 --> 00:23:20,680 and the buyer knows it exists. OK, unpack that a bit. 496 00:23:21,000 --> 00:23:23,680 The example was the customer buying a widget from Acme. 497 00:23:23,800 --> 00:23:25,920 Exactly. Acme sells widgets. 498 00:23:26,040 --> 00:23:28,960 That's their business. First Bank has a perfected 499 00:23:28,960 --> 00:23:32,280 security interest in Acme's inventory of widgets created by 500 00:23:32,280 --> 00:23:35,680 Acme the seller. You, a regular customer, walk 501 00:23:35,680 --> 00:23:37,520 into Acme's store and buy a widget. 502 00:23:37,760 --> 00:23:40,960 You're a bio cop. Even if I somehow knew First 503 00:23:40,960 --> 00:23:42,760 Bank had financed Acme's inventory. 504 00:23:43,240 --> 00:23:45,760 Generally, yes, as long as you don't know that the specific 505 00:23:45,760 --> 00:23:48,400 sale to you is actually prohibited by First Bank's 506 00:23:48,400 --> 00:23:51,640 agreement with Acme, which is rare for inventory sales. 507 00:23:52,280 --> 00:23:55,400 As a bio cob, you take that widget free and clear of First 508 00:23:55,400 --> 00:23:57,960 Bank security interest. First Bank can't come to your 509 00:23:57,960 --> 00:24:00,240 house and repossess it. That makes sense, otherwise 510 00:24:00,240 --> 00:24:02,240 shopping would be terrifying. Precisely. 511 00:24:02,360 --> 00:24:05,080 Commerce would grind to a halt if buyers had to worry about 512 00:24:05,080 --> 00:24:07,280 liens created by the retailers they buy from. 513 00:24:07,800 --> 00:24:09,880 The security interest doesn't disappear entirely. 514 00:24:09,880 --> 00:24:12,800 It continues in the proceeds that Acme received from the sale 515 00:24:12,880 --> 00:24:16,560 the cash or account receivable. The lender follows the money, 516 00:24:16,560 --> 00:24:18,640 not the goods sold to ordinary buyers. 517 00:24:18,640 --> 00:24:20,480 Protects the flow of goods. Got it. 518 00:24:20,600 --> 00:24:23,120 And the last big priority contest mentioned is against 519 00:24:23,120 --> 00:24:24,600 lien creditors. Right. 520 00:24:24,600 --> 00:24:28,560 Section 9317 again once we touched on with bankruptcy, this 521 00:24:28,560 --> 00:24:32,280 deals with priority between a secured party and someone who 522 00:24:32,280 --> 00:24:35,480 gets the lien through the judicial process like a judgment 523 00:24:35,480 --> 00:24:37,720 creditor who levies on the debtors property. 524 00:24:37,840 --> 00:24:40,280 And the rule is basically perfection wins. 525 00:24:40,440 --> 00:24:43,960 Pretty much a perfected security interest has priority over a 526 00:24:43,960 --> 00:24:46,720 judicial lien if the perfection occurred before the lien 527 00:24:46,720 --> 00:24:48,480 attached. But if the security interest is 528 00:24:48,520 --> 00:24:50,880 unperfected when the sheriff shows up to levy. 529 00:24:51,040 --> 00:24:54,600 Then the lien creditor wins. The unperfected security 530 00:24:54,600 --> 00:24:57,680 interest is subordinate to the lien creditor who acquires their 531 00:24:57,680 --> 00:25:01,360 lien before perfection happens. It's another race perfect before 532 00:25:01,360 --> 00:25:04,800 the lien attaches or before bankruptcy is filed, triggering 533 00:25:04,800 --> 00:25:08,040 the trustees hypothetical lien. It really highlights the cost of 534 00:25:08,040 --> 00:25:09,240 delaying perfection. OK. 535 00:25:09,240 --> 00:25:12,200 So those are the big priority rules, first a file or perfect 536 00:25:12,200 --> 00:25:15,800 as a baseline, then PMSI super priority with different rules 537 00:25:15,800 --> 00:25:19,400 for goods versus inventory, Biocybes taking free and 538 00:25:19,400 --> 00:25:22,080 perfected interest beating later lien creditors. 539 00:25:22,640 --> 00:25:24,920 What about that special topic of proceeds? 540 00:25:25,000 --> 00:25:28,360 Proceeds are super important because collateral rarely stays 541 00:25:28,360 --> 00:25:31,640 in one form forever. Inventory gets sold, accounts 542 00:25:31,640 --> 00:25:33,760 get collected, equipment gets traded. 543 00:25:33,760 --> 00:25:38,640 In Section 9315 says a security interest automatically attaches 544 00:25:38,640 --> 00:25:41,760 to any identifiable proceeds of the original collateral. 545 00:25:41,760 --> 00:25:43,680 So the security interest follows the value. 546 00:25:43,680 --> 00:25:46,400 Exactly. If First Bank had an interest in 547 00:25:46,400 --> 00:25:50,720 Acme's inventory, and Acme sells some inventory for cash, First 548 00:25:50,720 --> 00:25:53,120 Bank's interest now attaches to that cash. 549 00:25:53,480 --> 00:25:56,240 If they sell it on credit, creating an account receivable, 550 00:25:56,440 --> 00:25:58,000 the interest attaches to the account. 551 00:25:58,280 --> 00:26:00,760 If the account is later paid, the interest attaches to the 552 00:26:00,760 --> 00:26:03,200 payment received. Seems straightforward as long as 553 00:26:03,200 --> 00:26:05,840 you can trace it. The notes mentioned challenges 554 00:26:05,840 --> 00:26:08,560 with cash proceeds, especially in commingled accounts. 555 00:26:08,560 --> 00:26:10,320 Yes, that's where it gets tricky. 556 00:26:10,440 --> 00:26:13,160 If the debtor takes cash proceeds and deposits them into 557 00:26:13,160 --> 00:26:15,760 their general operating bank account mixed with funds from 558 00:26:15,760 --> 00:26:18,800 other sources, how do you prove which dollars in the account are 559 00:26:18,800 --> 00:26:21,040 your proceeds? Right, money is fungible. 560 00:26:21,360 --> 00:26:24,320 Exactly. So courts often use tracing 561 00:26:24,320 --> 00:26:25,840 rules. The most common one mentioned in 562 00:26:25,840 --> 00:26:29,080 your notes is the lowest intermediate balance rule, or Li 563 00:26:29,120 --> 00:26:30,840 BR. How does Li BR work? 564 00:26:31,040 --> 00:26:34,120 It's an equitable tracing principle generally favorable to 565 00:26:34,120 --> 00:26:37,760 the secured party. It presumes that as funds are 566 00:26:37,760 --> 00:26:40,920 withdrawn from the commingled account, the debtor spends their 567 00:26:40,920 --> 00:26:44,800 own money or non proceeds money first before spending the 568 00:26:44,800 --> 00:26:46,960 secured parties identifiable proceeds. 569 00:26:46,960 --> 00:26:49,000 OK. So the secured parties claim to 570 00:26:49,000 --> 00:26:51,520 the funds remaining in the account is limited to the amount 571 00:26:51,520 --> 00:26:54,480 of their proceeds that were deposited, but no more than the 572 00:26:54,480 --> 00:26:57,280 lowest balance the account reached after the proceeds went 573 00:26:57,280 --> 00:26:59,400 in and before they try to claim the funds? 574 00:26:59,480 --> 00:27:00,760 Can you give a quick example? Sure. 575 00:27:00,960 --> 00:27:04,720 Account has $1000. Debtor deposits 5000 dollars of 576 00:27:04,720 --> 00:27:08,320 your identifiable cash proceeds. Balance is $6000. 577 00:27:08,640 --> 00:27:11,720 Debtor then pay some bills, balance drops to $2000. 578 00:27:12,000 --> 00:27:13,680 Then debtor gets paid by someone else. 579 00:27:13,680 --> 00:27:16,880 Deposits $4000. Balance is now $6000. 580 00:27:16,880 --> 00:27:19,800 Again under Libya. Your claim against that final 581 00:27:19,800 --> 00:27:23,400 $6000 is limited to the lowest intermediate balance the account 582 00:27:23,400 --> 00:27:26,160 hit after your $5000 went in, which was $2000. 583 00:27:26,600 --> 00:27:30,200 Even though $5000 money went in, the presumption is that $3000 of 584 00:27:30,200 --> 00:27:33,160 it was spent when the balance dropped, leaving only $2000 585 00:27:33,160 --> 00:27:36,080 continuously traceable. So the lowest dip in the balance 586 00:27:36,080 --> 00:27:39,240 after your proceeds go in effectively caps your traceable 587 00:27:39,240 --> 00:27:40,880 claim. That's the essence of it. 588 00:27:40,920 --> 00:27:44,120 It provides a way to trace, but it can limit recovery if the 589 00:27:44,120 --> 00:27:46,440 account balance fluctuates significantly. 590 00:27:47,120 --> 00:27:50,400 This complexity is one reason why taking control over deposit 591 00:27:50,400 --> 00:27:52,920 accounts is often preferred by lenders when feasible. 592 00:27:53,160 --> 00:27:54,240 Makes sense. OK. 593 00:27:54,240 --> 00:27:57,160 We've hit the major perfection methods, priority rules and 594 00:27:57,160 --> 00:27:59,360 proceeds. We talked Leonard for debtor 595 00:27:59,360 --> 00:28:02,160 names and Farmer State Bank for PMSI strictness. 596 00:28:02,640 --> 00:28:04,440 Any other key cases from the notes? 597 00:28:04,680 --> 00:28:07,760 The notes mentioned in Repair Grant Entertainment Ltd quickly. 598 00:28:08,000 --> 00:28:11,040 It's useful because it applied the standard Article 9 first 599 00:28:11,040 --> 00:28:14,560 file rule to a less common type of collateral, copyrights and 600 00:28:14,560 --> 00:28:16,280 films, which are general intangibles. 601 00:28:16,920 --> 00:28:19,880 There was a fight between a lender who perfected by filing a 602 00:28:19,920 --> 00:28:23,240 UCC 1 and another party who had recorded something with the US 603 00:28:23,240 --> 00:28:25,720 Copyright Office. The court basically said for 604 00:28:25,720 --> 00:28:28,760 Article 9 priority purposes regarding the general intangible 605 00:28:28,760 --> 00:28:32,520 itself, the UCC filing system governs and the first to file 606 00:28:32,520 --> 00:28:35,880 the UCC 11. It reinforces that the Article 9 607 00:28:35,880 --> 00:28:38,520 framework is broad and usually applies unless there's a 608 00:28:38,520 --> 00:28:41,280 specific federal law that completely preempts it for 609 00:28:41,280 --> 00:28:44,200 perfection and priority. So even for fancy collateral 610 00:28:44,200 --> 00:28:47,440 like film rights, the basic UCC rules often control. 611 00:28:48,040 --> 00:28:51,440 Follow the Article 9 steps. Generally yes, always check for 612 00:28:51,440 --> 00:28:54,080 specific federal rules like for aircraft or ships. 613 00:28:54,480 --> 00:28:57,880 But for many intangibles, Article 9 and UCC filing is the 614 00:28:57,880 --> 00:29:00,360 way. These cases really do drive home 615 00:29:00,360 --> 00:29:02,760 how technical this area is. Precision matters. 616 00:29:02,760 --> 00:29:06,360 Immensely secured transactions is statutory law. 617 00:29:06,680 --> 00:29:09,560 You follow the statutes requirements or you risk losing 618 00:29:09,560 --> 00:29:12,280 your secured status. OK, let's quickly run through 619 00:29:12,280 --> 00:29:14,960 that main hypothetical again to solidify the interaction between 620 00:29:14,960 --> 00:29:17,040 the rules. Widget Co gives first Bank 621 00:29:17,040 --> 00:29:18,480 interest in inventory, equipment. 622 00:29:18,760 --> 00:29:21,840 First bank files Jan 1. Widget Co gives second Bank 623 00:29:21,840 --> 00:29:24,360 interest in equipment. Second bank loans Feb one files 624 00:29:24,360 --> 00:29:26,680 Feb 5. Right priority on the equipment. 625 00:29:26,720 --> 00:29:29,800 First bank wins they filed 1st Jan one versus second Bank of 626 00:29:29,800 --> 00:29:31,360 Feb first to file rule. Perfect. 627 00:29:31,360 --> 00:29:34,520 Now the PMSI twist. What if Second Bank's loan was a 628 00:29:34,520 --> 00:29:38,400 PMSI for a specific new machine Widget Co received on say, 629 00:29:38,720 --> 00:29:42,080 January 25th? OK Second Bank has a PMSI in 630 00:29:42,080 --> 00:29:46,240 equipment they need perfect within 20 days of Wichico 631 00:29:46,240 --> 00:29:50,680 getting possession Jan 25th. They're filing on Feb 5th. 632 00:29:51,320 --> 00:29:54,920 Jan 25 to Feb 5 is 11 days. That's within 20 days. 633 00:29:55,120 --> 00:30:00,080 So, so Second Bank's PMSI get super priority over first Bank's 634 00:30:00,080 --> 00:30:02,480 earlier filing, but only for that new machine. 635 00:30:02,480 --> 00:30:05,480 Exactly. And if Second Bank had filed on 636 00:30:05,480 --> 00:30:08,240 Feb 20th instead. That's more than 20 days after 637 00:30:08,240 --> 00:30:10,480 Jan 25th. They'd missed the grace period, 638 00:30:10,480 --> 00:30:12,480 meaning meaning they lose the Super priority. 639 00:30:12,800 --> 00:30:15,560 Their interest is just a regularly perfected interest and 640 00:30:15,560 --> 00:30:18,880 priority reverts to 1st to file. First Bank filed Jan 1st. 641 00:30:18,880 --> 00:30:21,120 So First Bank would win even on the new machine. 642 00:30:21,400 --> 00:30:23,920 You nailed it. That hypothetical perfectly 643 00:30:23,920 --> 00:30:26,840 shows the interplay between the general rule and the PMSI 644 00:30:26,840 --> 00:30:29,000 exception for equipment. Classic exam pattern. 645 00:30:29,200 --> 00:30:31,360 Definitely need to watch those dates and collateral types. 646 00:30:31,440 --> 00:30:33,480 Yeah, OK. One last mechanical piece from 647 00:30:33,480 --> 00:30:35,720 the notes maintaining perfection. 648 00:30:36,000 --> 00:30:38,480 Once you file that UCC one, you're not done forever. 649 00:30:38,600 --> 00:30:41,240 Not usually, no. A filed financing statement has 650 00:30:41,240 --> 00:30:44,360 a limited lifespan under Section 9515. 651 00:30:44,360 --> 00:30:47,200 It's generally effective for five years from the data filing. 652 00:30:47,480 --> 00:30:50,280 And if you do nothing before the five years are. 653 00:30:50,280 --> 00:30:52,760 Up it lapses. The financing statement ceases 654 00:30:52,760 --> 00:30:55,360 to be effective. Perfection is lost. 655 00:30:55,720 --> 00:30:57,880 And the consequence of lapsing. It's bad, right? 656 00:30:58,200 --> 00:31:00,560 It can be very bad if perfection lapses. 657 00:31:00,560 --> 00:31:02,920 The security interest is treated as if it had never been 658 00:31:02,920 --> 00:31:06,040 perfected against purchasers of the collateral or holders of 659 00:31:06,040 --> 00:31:07,840 liens that arose before the lapse. 660 00:31:08,480 --> 00:31:11,120 So someone who is junior to you while you're filing was 661 00:31:11,120 --> 00:31:14,800 effective can suddenly jump ahead in priority if you let it 662 00:31:14,800 --> 00:31:15,880 lapse. Ouch. 663 00:31:16,400 --> 00:31:19,720 So you could do everything right initially, be first in line, but 664 00:31:19,720 --> 00:31:22,160 forget to renew and suddenly be behind someone else. 665 00:31:22,320 --> 00:31:24,320 Absolutely, it's a crucial maintenance step. 666 00:31:24,760 --> 00:31:28,160 To prevent lapse you have to file a continuation statement. 667 00:31:28,320 --> 00:31:30,120 And there's a specific window for that. 668 00:31:30,200 --> 00:31:32,240 Yes. A continuation statement is only 669 00:31:32,240 --> 00:31:35,520 effective if it's filed within the six month period immediately 670 00:31:35,520 --> 00:31:38,960 before the five year expiration date of the financing statement. 671 00:31:39,320 --> 00:31:40,960 File it too early, it doesn't count. 672 00:31:41,160 --> 00:31:43,720 File it too late. After lapse it doesn't count. 673 00:31:43,720 --> 00:31:45,480 Get it right in that six month window. 674 00:31:45,640 --> 00:31:48,320 And it continues the effectiveness of the original 675 00:31:48,320 --> 00:31:51,200 filing for another five years, measured from the original 676 00:31:51,200 --> 00:31:54,080 expiration date. You can keep filing continuation 677 00:31:54,080 --> 00:31:55,840 statements every five years as needed. 678 00:31:55,920 --> 00:31:58,200 OK, so continue to stay perfected. 679 00:31:58,360 --> 00:32:00,520 What about when the debt is finally paid off? 680 00:32:00,560 --> 00:32:03,640 Then you generally need to file a termination statement under 681 00:32:03,640 --> 00:32:07,240 section 9513. This officially terminates the 682 00:32:07,240 --> 00:32:10,440 effectiveness of the financing statement and clears the public 683 00:32:10,440 --> 00:32:12,720 record. Does the secured party have to 684 00:32:12,720 --> 00:32:16,360 do this automatically? For consumer goods collateral, 685 00:32:16,600 --> 00:32:20,000 yes, the secured party usually has an affirmative obligation to 686 00:32:20,000 --> 00:32:22,600 file it within a certain time after the debt is paid and 687 00:32:22,600 --> 00:32:24,240 there's no further commitment to lend. 688 00:32:24,600 --> 00:32:27,720 For other types of collateral, the secured party generally only 689 00:32:27,720 --> 00:32:30,400 has to file it if the debtor makes an authenticated demand 690 00:32:30,400 --> 00:32:32,880 for them to do so. Once demanded, they have to 691 00:32:32,880 --> 00:32:36,680 comply promptly. So file to perfect, continue to 692 00:32:36,680 --> 00:32:39,080 maintain, terminate when the gets done. 693 00:32:39,240 --> 00:32:41,520 That's the life cycle. That's the administrative life 694 00:32:41,520 --> 00:32:44,040 cycle for perfection by filing. Exactly. 695 00:32:44,320 --> 00:32:46,200 Wow. OK, that was incredibly 696 00:32:46,200 --> 00:32:48,720 thorough. We've really dug into perfection 697 00:32:48,720 --> 00:32:52,480 why you need it, the methods like filing possession control 698 00:32:52,480 --> 00:32:55,600 automatic and then the whole priority puzzle first to file 699 00:32:55,760 --> 00:33:00,240 the huge PMSI exception with its different flavors bio salmons 700 00:33:00,240 --> 00:33:02,920 lien creditors. Plus how the interest follows 701 00:33:02,920 --> 00:33:05,680 proceeds, the tracing issues, and the importance of just 702 00:33:05,680 --> 00:33:08,400 managing the filings through continuation and termination 703 00:33:08,480 --> 00:33:10,920 statements. It's a lot, but it all fits 704 00:33:10,920 --> 00:33:12,760 together. It definitely feels like the 705 00:33:12,760 --> 00:33:15,600 kind of material where understanding the structure and 706 00:33:15,600 --> 00:33:18,280 the key rules is crucial for exams. 707 00:33:19,000 --> 00:33:21,280 Hopefully breaking down the lecture notes this way gives 708 00:33:21,280 --> 00:33:23,400 everyone a solid framework. Absolutely. 709 00:33:23,400 --> 00:33:27,320 And remember the details in any secured transactions, Hypodates, 710 00:33:27,320 --> 00:33:29,360 collateral descriptions, party types. 711 00:33:29,640 --> 00:33:32,560 They are almost always there for a reason, usually to test one of 712 00:33:32,560 --> 00:33:34,160 these specific rules or exceptions. 713 00:33:34,280 --> 00:33:35,720 Precision is key. Right. 714 00:33:36,080 --> 00:33:38,560 And Speaking of what's next, your note suggests the next 715 00:33:38,560 --> 00:33:41,880 topic is default and remedies what happens when the debtor 716 00:33:41,880 --> 00:33:43,480 can't pay. Exactly. 717 00:33:43,480 --> 00:33:46,560 That's the enforcement side. How does the secured party 718 00:33:46,560 --> 00:33:49,080 actually exercise its rights against the collateral 719 00:33:49,360 --> 00:33:52,600 repossession sale, dealing with deficiencies or surpluses? 720 00:33:52,920 --> 00:33:54,760 Another area full of important rules. 721 00:33:54,960 --> 00:33:56,840 Sounds like another essential deep dive. 722 00:33:56,840 --> 00:33:59,720 Indeed, it's where the security interest shows its practical 723 00:33:59,720 --> 00:34:01,800 value. So as you're reviewing all this 724 00:34:01,800 --> 00:34:04,320 perfection and priority material, here's something to 725 00:34:04,360 --> 00:34:06,800 Mull over kind of pulling together the threads. 726 00:34:07,000 --> 00:34:10,360 Article 9 clearly puts a huge premium on being the first to 727 00:34:10,360 --> 00:34:13,440 file creating certainty. Yeah, but it also creates this 728 00:34:13,440 --> 00:34:17,800 powerful PMSI exception that lets later lenders jump the line 729 00:34:17,800 --> 00:34:19,679 if they finance specific new assets. 730 00:34:20,320 --> 00:34:22,199 So what's the bigger policy goal here? 731 00:34:22,520 --> 00:34:25,239 Is the system ultimately tilted more towards protecting the 732 00:34:25,239 --> 00:34:28,239 certainty of the first filer with a blanket limb, or is it 733 00:34:28,239 --> 00:34:32,199 more focused on facilitating new acquisitions by debtors, even if 734 00:34:32,199 --> 00:34:35,320 it disrupts the first sellers position on those new assets? 735 00:34:35,920 --> 00:34:37,400 Where does the balance really lie? 736 00:34:37,520 --> 00:34:39,400 Something to think about as you connect these dots. 737 00:34:39,520 --> 00:34:42,199 An excellent question. It really gets to the heart of 738 00:34:42,199 --> 00:34:45,120 the compromises inherent and Article 9 structure. 739 00:34:45,320 --> 00:34:47,920 Well, thanks for joining us for this deep dive into perfection 740 00:34:47,920 --> 00:34:50,320 and priority. We really hope breaking it down 741 00:34:50,320 --> 00:34:54,080 helps clarify these complex but absolutely vital concepts.