1 00:00:00,040 --> 00:00:03,040 Welcome back to the deep dive. Today we are well. 2 00:00:03,040 --> 00:00:04,720 We're not just wading into the pool. 3 00:00:04,720 --> 00:00:07,480 I think we're swimming out to the deepest, darkest part of the 4 00:00:07,480 --> 00:00:09,960 ocean. We are tackling Chapter 5 of 5 00:00:09,960 --> 00:00:11,840 Secured Transactions. This is it. 6 00:00:11,840 --> 00:00:15,840 This is the chapter that really separates the passing grades 7 00:00:15,840 --> 00:00:18,080 from the top of the curve. It's where we leave the 8 00:00:18,520 --> 00:00:21,680 comfortable, you know, the predictable world of inventory 9 00:00:21,680 --> 00:00:24,440 and equipment behind. Right up until now, everything 10 00:00:24,440 --> 00:00:27,160 is felt somewhat logical. You have a widget, you file a 11 00:00:27,160 --> 00:00:30,600 paper, you're safe. But chapter 5 introduces what 12 00:00:30,600 --> 00:00:33,400 the outline calls special collateral types. 13 00:00:34,160 --> 00:00:36,360 I prefer to call it the danger zone. 14 00:00:36,480 --> 00:00:38,360 That's a good name for. It because if you walk into an 15 00:00:38,360 --> 00:00:41,320 exam question or you know a client meeting, assuming the 16 00:00:41,320 --> 00:00:44,200 general rules apply here, you are going to get crushed. 17 00:00:44,280 --> 00:00:47,280 You will absolutely get crushed. The fundamental shift we have to 18 00:00:47,280 --> 00:00:50,800 make today is moving from what we know, the notice filing 19 00:00:50,800 --> 00:00:54,120 system, to a completely different world, a system of 20 00:00:54,120 --> 00:00:57,800 control and possession. You see the standard Article 9 21 00:00:57,800 --> 00:00:59,520 rules. They're designed for things you 22 00:00:59,520 --> 00:01:02,480 can touch and count, like tractors or boxes of shoes. 23 00:01:03,320 --> 00:01:08,720 But Chapter 5 this deals with intangible assets, liquid assets 24 00:01:09,040 --> 00:01:12,280 and well, assets that are physically bolted to the earth. 25 00:01:12,280 --> 00:01:15,600 So the mission for this deep dive is to build an Is it 26 00:01:15,600 --> 00:01:18,640 special checklist. The strategy is simple. 27 00:01:18,640 --> 00:01:21,760 Before you apply a general rule like first in time, you have to 28 00:01:21,760 --> 00:01:23,240 pause. You have to ask is this 29 00:01:23,240 --> 00:01:26,080 collateral special? That is the primary analytical 30 00:01:26,080 --> 00:01:28,280 framework exactly. If the answer is yes, you just 31 00:01:28,440 --> 00:01:30,000 you have to discard the general rule. 32 00:01:30,000 --> 00:01:33,080 You find a specific exception and we are going to cover a lot 33 00:01:33,080 --> 00:01:35,200 of ground today. Deposit accounts, proceeds, 34 00:01:35,400 --> 00:01:39,840 fixtures, sessions, commingled goods, electronic chattel paper, 35 00:01:39,920 --> 00:01:41,800 and commercial tort claims. All right. 36 00:01:41,800 --> 00:01:44,520 Let's start with the asset that every business cares about the 37 00:01:44,520 --> 00:01:48,880 most cash or in our world in legal terms, deposit accounts. 38 00:01:48,880 --> 00:01:51,520 Deposit accounts are the absolute domain of control. 39 00:01:51,640 --> 00:01:54,560 Now to set the stage, a deposit account is you know your 40 00:01:54,560 --> 00:01:57,640 standard demand savings passbook or similar account maintained 41 00:01:57,640 --> 00:01:59,520 with the bank. But wait, I want to stop you 42 00:01:59,520 --> 00:02:02,080 right there because there is a trap immediately at the front 43 00:02:02,080 --> 00:02:03,920 door. We aren't talking about every 44 00:02:03,920 --> 00:02:05,080 bank account in the world, are we? 45 00:02:05,120 --> 00:02:07,920 No. And this is where students lose 46 00:02:07,920 --> 00:02:10,120 points on the very first sentence of an essay. 47 00:02:10,960 --> 00:02:15,560 We have to look at UCC section 91-O9OD13. 48 00:02:16,200 --> 00:02:19,000 Article 9 generally does not apply to an assignment of a 49 00:02:19,000 --> 00:02:21,040 deposit account in the consumer transaction. 50 00:02:21,240 --> 00:02:24,440 So if I'm a law student and I go to the bank to buy a Honda 51 00:02:24,440 --> 00:02:27,560 Civic, and the bank wants to take a security interest in my 52 00:02:27,560 --> 00:02:29,880 personal saving account, that's not this. 53 00:02:29,880 --> 00:02:32,440 That's not this. Article 9 is not the governing 54 00:02:32,440 --> 00:02:34,560 body for that transaction. It's excluded. 55 00:02:34,960 --> 00:02:38,480 We are talking strictly and only about commercial deposit 56 00:02:38,480 --> 00:02:41,760 accounts, business accounts. OK, so we are in the commercial 57 00:02:41,760 --> 00:02:43,160 world. I am a business. 58 00:02:43,160 --> 00:02:45,120 I have a bank account with $100,000 in it. 59 00:02:45,120 --> 00:02:46,880 I want to use that as collateral for a loan. 60 00:02:47,160 --> 00:02:49,720 My instinct based on everything else we've learned is to file a 61 00:02:49,720 --> 00:02:51,640 UCC 1 financing statement, right? 62 00:02:51,720 --> 00:02:53,360 I file it with the Secretary of State. 63 00:02:53,760 --> 00:02:56,280 I describe the collateral as all deposit accounts. 64 00:02:56,360 --> 00:02:58,280 I pay my fee. Am I perfected? 65 00:02:58,280 --> 00:03:01,560 You are wholly unperfected. You have done absolutely nothing 66 00:03:01,560 --> 00:03:03,640 of legal value. That seems harsh. 67 00:03:03,640 --> 00:03:04,880 I mean, I put the world on notice. 68 00:03:04,880 --> 00:03:06,160 Why doesn't that count for anything? 69 00:03:06,280 --> 00:03:09,320 Because the statute says so, plain and simple. 70 00:03:09,520 --> 00:03:14,360 Section 931-B1 is what I call the control or nothing Roll for 71 00:03:14,360 --> 00:03:18,160 a deposit account is original collateral filing is just it's 72 00:03:18,160 --> 00:03:19,200 ineffective. OK. 73 00:03:19,200 --> 00:03:21,000 Why though? What's the policy? 74 00:03:21,360 --> 00:03:23,200 Well, think about the policy reason here. 75 00:03:23,520 --> 00:03:27,000 If we allowed filing every time a bank teller cashed a check, 76 00:03:27,680 --> 00:03:30,200 they would effectively have to search the Secretary of State's 77 00:03:30,200 --> 00:03:33,440 database to see if a lender had a claim on those funds. 78 00:03:34,080 --> 00:03:35,960 The banking system would grind to a halt. 79 00:03:36,480 --> 00:03:38,240 It's unworkable. That makes sense. 80 00:03:38,240 --> 00:03:42,040 Speed is currency, so if filing is garbage, I need control. 81 00:03:42,200 --> 00:03:45,920 The source material outlines 3 methods under section 91-O four. 82 00:03:46,200 --> 00:03:48,360 Let's walk through them, because this is where the exam 83 00:03:48,360 --> 00:03:50,760 hypotheticals live. For sure method one is the 84 00:03:50,760 --> 00:03:52,320 easiest. It's the homecourt advantage. 85 00:03:52,440 --> 00:03:54,760 The secured party is the bank where the account is maintained. 86 00:03:54,760 --> 00:03:58,440 So if I borrow money from Wells Fargo and my operating account 87 00:03:58,440 --> 00:04:00,200 is at Wells Fargo and they just win? 88 00:04:00,320 --> 00:04:02,280 Wells Fargo is automatically perfected. 89 00:04:02,360 --> 00:04:04,840 They have control by virtue of being the bank. 90 00:04:04,920 --> 00:04:06,680 They don't need to sign a new agreement. 91 00:04:06,680 --> 00:04:07,920 They don't need to file anything. 92 00:04:07,920 --> 00:04:09,560 They win. Done. 93 00:04:09,720 --> 00:04:11,160 OK. But that's too easy. 94 00:04:11,520 --> 00:04:14,880 In the real world, businesses often borrow from, I don't know, 95 00:04:15,080 --> 00:04:18,440 private equity groups or alternative lenders, but they 96 00:04:18,440 --> 00:04:20,680 keep their money at a big National Bank. 97 00:04:20,880 --> 00:04:23,720 So the lender is not the bank. What now? 98 00:04:23,720 --> 00:04:26,720 Now you enter the world of the DACA, the Deposit Account 99 00:04:26,720 --> 00:04:29,680 Control Agreement. This is method 2 and requires an 100 00:04:29,680 --> 00:04:32,840 authenticated record and a piece of paper basically signed by 101 00:04:32,840 --> 00:04:37,160 three parties, the debtor, the secured party and the bank. 102 00:04:37,240 --> 00:04:39,160 And what does that piece of paper actually say? 103 00:04:39,160 --> 00:04:41,800 What's the magic language? The core provision is that the 104 00:04:41,800 --> 00:04:44,880 bank agrees to comply with the secured party's instructions 105 00:04:44,880 --> 00:04:48,360 regarding the funds and here's the kicker, without requiring 106 00:04:48,360 --> 00:04:51,120 further consent from the debtor. That sounds dangerous for the 107 00:04:51,120 --> 00:04:52,880 debtor. Does that mean the lender can 108 00:04:52,880 --> 00:04:54,840 just drain the account whenever they want? 109 00:04:54,920 --> 00:04:57,760 Legally, yes. That's what control means. 110 00:04:58,000 --> 00:05:01,800 Now, in practice, the agreement usually says I, the lender, 111 00:05:01,960 --> 00:05:05,080 promise not to touch the money unless the debtor defaults. 112 00:05:06,640 --> 00:05:09,640 But for the purpose of perfection, the power to direct 113 00:05:09,640 --> 00:05:13,280 the funds must be absolute. The bank has to agree that if 114 00:05:13,280 --> 00:05:16,240 the lender calls and says freeze the account, the bank will 115 00:05:16,240 --> 00:05:19,880 freeze it even if the debtor is on the other line screaming no. 116 00:05:20,000 --> 00:05:23,160 Wow, I can imagine banks hate signing these. 117 00:05:23,160 --> 00:05:24,600 It puts them right in the middle of a fight. 118 00:05:24,720 --> 00:05:27,440 Oh, they despise them. It creates liability, but it's 119 00:05:27,440 --> 00:05:30,000 the standard way to perfect. If you're not the bank, it's 120 00:05:30,000 --> 00:05:33,040 just the cost of doing business. Now there's a third method. 121 00:05:33,080 --> 00:05:35,000 The outline calls it the name change. 122 00:05:35,280 --> 00:05:37,400 This is the nuclear option. I like that term. 123 00:05:37,560 --> 00:05:40,480 The secured party actually becomes the bank's customer on 124 00:05:40,480 --> 00:05:42,680 the account. You literally the name on the 125 00:05:42,680 --> 00:05:45,640 account from Debtor Inc to Lender LLC. 126 00:05:45,640 --> 00:05:47,320 Why would anyone go to that extreme? 127 00:05:47,320 --> 00:05:49,160 It seems like an administrative nightmare. 128 00:05:49,160 --> 00:05:50,760 You're messing with their operations. 129 00:05:50,760 --> 00:05:54,280 You do it because of priority. This leads us right to the fight 130 00:05:54,280 --> 00:05:58,120 scenario. Section 9327 lays out who wins 131 00:05:58,120 --> 00:05:59,880 when multiple people claim the cash. 132 00:06:00,120 --> 00:06:03,040 OK, let's play that out. We have a lender with a control 133 00:06:03,040 --> 00:06:07,280 agreement that's method 2, and we have the bank where the 134 00:06:07,280 --> 00:06:11,160 account is held method one. The bank lends the debtor money 135 00:06:11,160 --> 00:06:12,640 later. Who wins? 136 00:06:12,840 --> 00:06:14,640 The bank wins. Even though they were second in 137 00:06:14,640 --> 00:06:15,880 time. Even though they were. 138 00:06:15,880 --> 00:06:19,080 Second, the rule is that the bank where the deposit account 139 00:06:19,080 --> 00:06:23,240 is maintained generally has priority over a conflicting 140 00:06:23,240 --> 00:06:26,600 security interest held by another party, even if that 141 00:06:26,600 --> 00:06:28,040 other party has a control agreement. 142 00:06:28,080 --> 00:06:30,520 Wait, hold on, that sounds incredibly unfair. 143 00:06:30,520 --> 00:06:32,800 You're telling me I can get a control agreement on January 144 00:06:32,800 --> 00:06:35,520 1st, Lend $1,000,000 and feel? Totally safe. 145 00:06:35,920 --> 00:06:38,360 Then on June 1st the bank lends them money and they 146 00:06:38,400 --> 00:06:40,800 automatically jump ahead of me just because they hold the 147 00:06:40,800 --> 00:06:43,560 account. Yes, that is the bank priority 148 00:06:43,560 --> 00:06:46,200 rule. The banks right of set off and 149 00:06:46,200 --> 00:06:48,560 their inherent priority. Trump's the third party. 150 00:06:49,080 --> 00:06:51,880 The policy is that the bank sees the flow of funds. 151 00:06:52,080 --> 00:06:53,760 They rely on that account balance. 152 00:06:53,760 --> 00:06:56,240 They're the custodian. The law gives them the upper 153 00:06:56,240 --> 00:06:58,200 hand. So how does a third party lender 154 00:06:58,200 --> 00:07:00,560 protect themselves? Do they just have to accept 155 00:07:00,560 --> 00:07:03,560 being second in line? No, and that is exactly why 156 00:07:03,560 --> 00:07:06,360 method 3 exists. If the third party lender 157 00:07:06,360 --> 00:07:09,240 actually puts the account in their own name, becomes the 158 00:07:09,240 --> 00:07:12,760 customer of record, they defeat even the depository bank. 159 00:07:12,960 --> 00:07:15,560 So the nuclear option is the only way to beat the house. 160 00:07:15,800 --> 00:07:18,680 Precisely if you want to prime the bank, you have to take 161 00:07:18,680 --> 00:07:20,360 ownership of the account. It's the only way to be 162 00:07:20,360 --> 00:07:23,720 absolutely certain you're first. That is a brutal ecosystem. 163 00:07:24,160 --> 00:07:26,680 OK, let's shift gears. We've been talking about cash in 164 00:07:26,680 --> 00:07:30,840 the bank as original collateral, but often cash appears in a bank 165 00:07:30,840 --> 00:07:32,560 account because you sold something else. 166 00:07:32,560 --> 00:07:34,520 You sold inventory and you got a check. 167 00:07:35,240 --> 00:07:37,120 Now we're talking about proceeds. 168 00:07:37,480 --> 00:07:40,880 Proceeds one of the most intellectually interesting 169 00:07:40,880 --> 00:07:45,560 concepts in commercial law, Section 91-O2 A 64 defines them 170 00:07:45,560 --> 00:07:48,080 really broadly. Whatever is required up on the 171 00:07:48,080 --> 00:07:51,080 sale, lease, license or disposition of collateral. 172 00:07:51,120 --> 00:07:53,880 And the general rule is lender friendly Section 9. 173 00:07:53,880 --> 00:07:56,960 Creative Teen says the security interest attaches automatically 174 00:07:56,960 --> 00:08:00,560 to identifiable proceeds. The keyword there, as you said, 175 00:08:00,800 --> 00:08:04,160 is identifiable. If I trade a car for a specific 176 00:08:04,160 --> 00:08:07,560 check and I hold that check in my hand, it is clearly 177 00:08:07,560 --> 00:08:09,400 identifiable proceeds of the car. 178 00:08:09,880 --> 00:08:12,320 But in the real world, businesses don't hold checks, 179 00:08:12,320 --> 00:08:13,640 they deposit them. Right. 180 00:08:13,640 --> 00:08:16,280 They deposit the check into a general operating account. 181 00:08:16,520 --> 00:08:19,600 That account also contains payroll money, a loan from an 182 00:08:19,600 --> 00:08:22,480 uncle, revenue from services that aren't collateral. 183 00:08:22,880 --> 00:08:25,160 It's a soup. The money is commingled. 184 00:08:25,400 --> 00:08:28,720 This is the commingling problem and the question is does the 185 00:08:28,720 --> 00:08:32,679 lenders security interest die because the specific dollar 186 00:08:32,679 --> 00:08:34,559 bills got mixed up with other dollar bills? 187 00:08:34,600 --> 00:08:37,919 Common sense might say yes, once you mix water you can't unmix 188 00:08:37,919 --> 00:08:39,720 it. But the law says no. 189 00:08:40,360 --> 00:08:43,440 And to solve this, the courts use an equitable tracing 190 00:08:43,440 --> 00:08:45,080 principle. It's called the lowest 191 00:08:45,080 --> 00:08:47,480 intermediate balance rule, or labia. 192 00:08:47,680 --> 00:08:50,840 I love the labia because it forces us to imagine a narrative 193 00:08:50,840 --> 00:08:52,560 about how the debtor spends money. 194 00:08:52,600 --> 00:08:56,800 It's almost a cynical narrative. It is entirely cynical, but it's 195 00:08:56,800 --> 00:09:00,280 also a legal fiction. The rule assumes that the debtor 196 00:09:00,280 --> 00:09:03,560 acts in the best possible faith towards the creditor, even if 197 00:09:03,560 --> 00:09:06,000 they aren't trying to. Here's the analogy I use. 198 00:09:06,560 --> 00:09:08,640 Imagine the bank account is a water tank. 199 00:09:09,120 --> 00:09:11,560 The secured creditors proceeds are blue water. 200 00:09:12,120 --> 00:09:15,440 The debtors own unrestricted cash is Clearwater. 201 00:09:15,680 --> 00:09:17,840 They get poured into the tank and they mix together. 202 00:09:18,080 --> 00:09:21,720 OK, so we have light blue water. Now the debtor pulls the plug at 203 00:09:21,720 --> 00:09:23,240 the bottom to pay the electric bill. 204 00:09:23,880 --> 00:09:26,600 The lowest intermediate balance rule presumes that the debtor 205 00:09:26,600 --> 00:09:29,880 drains the Clearwater first. They spend their own money 206 00:09:29,880 --> 00:09:32,160 before they ever touch the secured creditors money. 207 00:09:32,640 --> 00:09:35,320 The blue water stays in the tank as long as possible. 208 00:09:35,360 --> 00:09:38,200 But what happens if the tank gets drained, almost empty, if 209 00:09:38,200 --> 00:09:40,800 they spend a lot of money? That is the lowest intermediate 210 00:09:40,800 --> 00:09:42,360 balance. Let's put numbers on it makes 211 00:09:42,360 --> 00:09:45,200 more sense. Day one you have $5000 of your 212 00:09:45,200 --> 00:09:47,040 own money in the account Clearwater. 213 00:09:47,360 --> 00:09:50,600 Day 2 you deposit $10,000 of proceeds. 214 00:09:51,200 --> 00:09:55,920 Blue water total is 15,000. Day three you spend $12,000. 215 00:09:56,160 --> 00:10:00,000 The rule says you spent your 5000 first plus 7000 of the 216 00:10:00,000 --> 00:10:03,120 proceeds. The balance is now $3000. 217 00:10:03,600 --> 00:10:07,120 That $3000 is all that is left of the secured. 218 00:10:07,120 --> 00:10:10,120 Creditors claim the blue water level dropped. 219 00:10:10,840 --> 00:10:13,520 Here is the trick though. Here's the exam question. 220 00:10:14,440 --> 00:10:18,200 What if on day 4, the debtor wins the lottery and deposits 221 00:10:18,200 --> 00:10:22,240 $50,000 into the account? Does the blue water level rise 222 00:10:22,240 --> 00:10:23,880 back up to 10,000? No. 223 00:10:24,200 --> 00:10:25,800 Absolutely not, and that's the key. 224 00:10:26,000 --> 00:10:28,520 Once the blue water drains out, it is gone forever. 225 00:10:29,080 --> 00:10:31,840 You cannot replenish the collateral with new unrelated 226 00:10:31,840 --> 00:10:33,880 money. The secured claim is capped at 227 00:10:33,880 --> 00:10:36,800 the lowest balance the account hit during that interim period. 228 00:10:36,920 --> 00:10:41,600 We have a case in the materials in re Qualia Clinical Services 229 00:10:41,600 --> 00:10:43,360 from the 8th Circuit. What happened there? 230 00:10:43,400 --> 00:10:45,280 Quali is the textbook application of this. 231 00:10:45,600 --> 00:10:48,160 The bank claimed a security interest in the debtors deposit 232 00:10:48,160 --> 00:10:50,240 accounts as proceeds of accounts receivable. 233 00:10:50,720 --> 00:10:53,360 The debtor went bankrupt. The trustee argued that because 234 00:10:53,360 --> 00:10:55,440 the money had been churned, money in, money out, the 235 00:10:55,920 --> 00:10:59,400 identifiable proceeds were lost. It was all just one big soup. 236 00:10:59,640 --> 00:11:02,160 And the court said. The court applied Labyr. 237 00:11:02,440 --> 00:11:03,840 They looked at the daily balances. 238 00:11:03,840 --> 00:11:07,120 They said no, the interest isn't lost, but it is limited to the 239 00:11:07,120 --> 00:11:09,720 lowest point. It saved the lender from getting 240 00:11:09,720 --> 00:11:13,200 0, which was a big win, but it prevented them from claiming all 241 00:11:13,200 --> 00:11:16,800 the new cash that came in later. So for exam purposes, if you see 242 00:11:16,800 --> 00:11:19,840 a fact pattern with a list of deposits and withdrawals, you 243 00:11:19,840 --> 00:11:23,880 literally need to go line by line, find the lowest number in 244 00:11:23,880 --> 00:11:26,080 the column, and that's your cap. Exactly. 245 00:11:26,080 --> 00:11:28,520 It's a math problem masquerading as a law problem. 246 00:11:28,600 --> 00:11:31,800 Now, sticking with proceeds, we have to talk about perfection. 247 00:11:32,280 --> 00:11:34,800 Just because the interest attaches to the proceeds doesn't 248 00:11:34,800 --> 00:11:38,720 mean you are perfected forever. Correct, there is a 20 day rule. 249 00:11:39,200 --> 00:11:42,120 If you have a perfected interest in the original collateral, you 250 00:11:42,120 --> 00:11:44,760 are automatically perfected in the proceeds for 20 days. 251 00:11:45,240 --> 00:11:47,360 It is a grace period, a little breathing room. 252 00:11:47,360 --> 00:11:50,120 What happens on day 21? Do you just fall off a Cliff? 253 00:11:50,400 --> 00:11:53,720 You become unperfected unless you meet an exception, and the 254 00:11:53,720 --> 00:11:57,160 most important one, the one tested all the time, is the same 255 00:11:57,160 --> 00:11:59,200 office rule. OK, walk us through that. 256 00:11:59,440 --> 00:12:03,600 The rule is this perfection continues indefinitely if the 257 00:12:03,600 --> 00:12:06,800 financing statement covering the original collateral was filed in 258 00:12:06,800 --> 00:12:10,280 the same office where you would file to perfect the proceeds. 259 00:12:10,920 --> 00:12:14,080 So an example, you have a security interest in inventory, 260 00:12:14,080 --> 00:12:15,520 you file with the Secretary of State. 261 00:12:15,520 --> 00:12:17,880 Standard stuff. The debtor sells the inventory 262 00:12:17,880 --> 00:12:20,080 on credit, creating accounts receivable. 263 00:12:20,440 --> 00:12:23,440 Those are the proceeds. How do you perfect an interest 264 00:12:23,440 --> 00:12:25,840 in accounts receivable? You file with the Secretary of 265 00:12:25,840 --> 00:12:28,000 State. Since it's the same office, you 266 00:12:28,000 --> 00:12:30,280 don't need to do anything. Your original filing on 267 00:12:30,280 --> 00:12:32,560 inventory is good enough to cover the accounts. 268 00:12:32,560 --> 00:12:34,960 Proceeds forever. But let's break it. 269 00:12:34,960 --> 00:12:38,120 What if I trade my inventory for a piece of equipment? 270 00:12:38,120 --> 00:12:40,240 Still the same office. Secretary of State for 271 00:12:40,240 --> 00:12:41,800 inventory, Secretary of State for equipment. 272 00:12:41,800 --> 00:12:43,920 You're good. OK, what if I trade my inventory 273 00:12:43,920 --> 00:12:47,000 for a warehouse Real property? Now you're in trouble. 274 00:12:47,520 --> 00:12:50,200 Now you have a problem. Real property mortgages are 275 00:12:50,200 --> 00:12:53,440 recorded in the county. Land records inventory is filed 276 00:12:53,440 --> 00:12:55,440 with the Secretary of State. Different offices. 277 00:12:55,640 --> 00:12:58,360 Different offices. The same office rule fails. 278 00:12:58,880 --> 00:13:01,760 You have 20 days to rundown to the county recorder and file a 279 00:13:01,760 --> 00:13:04,880 mortgage, or your security interest in that warehouse 280 00:13:04,880 --> 00:13:08,160 becomes unperfected on day 21. That is a classic exam trap. 281 00:13:08,320 --> 00:13:10,720 Wash the office. OK. 282 00:13:10,920 --> 00:13:13,520 I want to pivot to a fascinating case study in the materials 283 00:13:13,520 --> 00:13:18,120 regarding proceeds and federal law, the FCC license cases. 284 00:13:18,680 --> 00:13:20,200 This feels like a clash of Titans. 285 00:13:20,520 --> 00:13:22,600 It is. It's the unstoppable force of 286 00:13:22,600 --> 00:13:25,920 commercial finance versus the immovable object of federal 287 00:13:25,920 --> 00:13:28,080 policy. The immovable object is the 288 00:13:28,080 --> 00:13:30,800 Federal Communications Act. It says basically that the 289 00:13:30,800 --> 00:13:34,040 Airways belong to the public. A private company like a radio 290 00:13:34,040 --> 00:13:36,680 station gets a license to use them, but they don't own the 291 00:13:36,680 --> 00:13:39,240 frequency. Therefore, the statute says you 292 00:13:39,240 --> 00:13:41,640 cannot place a lien on an FCC license. 293 00:13:41,640 --> 00:13:43,640 Which creates a huge problem for lenders. 294 00:13:43,640 --> 00:13:46,280 I mean, if I'm lending $50,000,000 to a broadcaster, 295 00:13:46,280 --> 00:13:48,160 their only real asset is that license. 296 00:13:48,160 --> 00:13:50,400 If I can't take it as collateral, I'm not lending the 297 00:13:50,400 --> 00:13:51,240 money. Correct. 298 00:13:51,440 --> 00:13:53,800 So lawyers got creative. They said, OK, we won't put a 299 00:13:53,800 --> 00:13:56,160 lien on the license itself, we'll put a lien on the proceeds 300 00:13:56,160 --> 00:13:58,800 of the license, the money you would get if you ever sold it. 301 00:13:59,000 --> 00:14:02,560 And the courts have been, let's just say, split on whether this 302 00:14:02,560 --> 00:14:04,280 clever workaround actually works. 303 00:14:04,280 --> 00:14:07,640 We have Henry Tracy Broadcasting and Henry Terrace Star Networks. 304 00:14:07,640 --> 00:14:09,840 Let's contrast them. In Tracy Broadcasting, we had a 305 00:14:09,840 --> 00:14:13,240 radio station in bankruptcy. The lender had a security 306 00:14:13,240 --> 00:14:16,400 agreement covering general intangibles and proceeds. 307 00:14:16,920 --> 00:14:20,520 They claimed this covered the SEC license proceeds, but the 308 00:14:20,520 --> 00:14:23,080 court looked at the timing. At the moment of bankruptcy, 309 00:14:23,080 --> 00:14:25,520 there was no buyer. There's no sale pending. 310 00:14:25,920 --> 00:14:27,720 It was just a hypothetical future sale. 311 00:14:27,720 --> 00:14:30,480 Exactly. And the court said essentially 312 00:14:30,640 --> 00:14:33,640 you can't have proceeds of a sale that hasn't happened yet 313 00:14:34,040 --> 00:14:36,600 since the license itself is a public right and can't be 314 00:14:36,600 --> 00:14:39,320 collateral, and no private proceeds existed yet. 315 00:14:39,560 --> 00:14:42,240 The lender got nothing. The Lynn was invalid. 316 00:14:42,560 --> 00:14:46,000 That is terrifying for a lender. It suggests the collateral value 317 00:14:46,000 --> 00:14:48,880 is 0 until the very moment a sale closes. 318 00:14:49,240 --> 00:14:51,400 But then Tarastar came along and offered a lifeline. 319 00:14:51,680 --> 00:14:53,760 Tarastar involved a massive satellite network. 320 00:14:54,000 --> 00:14:57,080 The stakes were much higher and the lawyers there, while they 321 00:14:57,080 --> 00:15:00,080 were smarter with their drafting the court in terrorist, are 322 00:15:00,080 --> 00:15:01,240 distinguished. Tracy. 323 00:15:01,680 --> 00:15:04,600 They held that a lien can attach to the economic value of the 324 00:15:04,600 --> 00:15:07,680 license as proceeds even without a current sale. 325 00:15:08,240 --> 00:15:11,400 They reasoned that the right to monetize the license is a 326 00:15:11,440 --> 00:15:14,920 private right separate from the public right to broadcast. 327 00:15:14,920 --> 00:15:17,160 So it comes down to drafting. It's about the words on the 328 00:15:17,160 --> 00:15:18,640 page. It absolutely does. 329 00:15:18,920 --> 00:15:20,560 The take away for our listeners is this. 330 00:15:21,080 --> 00:15:24,160 Don't just list FCC license in your collateral description. 331 00:15:24,400 --> 00:15:26,440 That is void. It's a mistake. 332 00:15:26,840 --> 00:15:30,480 You have to explicitly describe all economic rights, proceeds 333 00:15:30,480 --> 00:15:33,280 and attributes associated with the license while arguably 334 00:15:33,280 --> 00:15:35,000 excluding the public license itself. 335 00:15:35,560 --> 00:15:38,320 You have to thread the needle to survive the Tracy versus Terror 336 00:15:38,320 --> 00:15:40,680 star split. Let's move from radio waves to 337 00:15:40,680 --> 00:15:43,160 digital waves. Electronic chattel paper. 338 00:15:43,400 --> 00:15:45,480 First, we need to define chattel paper. 339 00:15:45,680 --> 00:15:47,560 It's a weird hybrid, right? It is. 340 00:15:47,920 --> 00:15:52,480 Chattel paper is a record or a set of records that evidences 2 341 00:15:52,480 --> 00:15:55,640 things simultaneously. 1A monetary obligation you owe me 342 00:15:55,640 --> 00:15:59,440 money and two a security interest in specific goods. 343 00:15:59,920 --> 00:16:01,680 If you don't pay, I take the car. 344 00:16:02,120 --> 00:16:05,320 The classic example is a car loan or an equipment lease. 345 00:16:05,680 --> 00:16:07,800 In the old days, this was physical paper. 346 00:16:08,160 --> 00:16:10,880 If a finance company bought a stack of car loans from a 347 00:16:10,880 --> 00:16:13,520 dealer, they would physically take the papers. 348 00:16:13,520 --> 00:16:15,960 They would put them in a vault. That is possession. 349 00:16:16,520 --> 00:16:18,120 Possession perfected the interest. 350 00:16:18,480 --> 00:16:21,240 But now I signed my car lease on an iPad. 351 00:16:21,400 --> 00:16:23,320 There is no original paper. It's a PDF. 352 00:16:23,480 --> 00:16:25,240 You can't put a PDF in a physical vault. 353 00:16:25,360 --> 00:16:28,160 So Article 9 had to invent a digital equivalent of 354 00:16:28,160 --> 00:16:30,320 possession. They call it control, but the 355 00:16:30,320 --> 00:16:33,920 question is how do you control a digital file that can be copied 356 00:16:33,920 --> 00:16:37,280 infinitely with a keystroke? Section 9 One O 5 sets out a 357 00:16:37,280 --> 00:16:40,040 really strict 6 point test to determine if a computer system 358 00:16:40,040 --> 00:16:42,720 creates what's called a single authoritative copy. 359 00:16:42,760 --> 00:16:44,880 I want to actually go through these points, or at least the 360 00:16:45,000 --> 00:16:47,560 essence of them, because this is where the tech meets the law. 361 00:16:47,840 --> 00:16:50,000 It sounds like they were describing blockchain before 362 00:16:50,000 --> 00:16:52,160 blockchain was even a thing. They essentially are. 363 00:16:52,560 --> 00:16:55,920 It's about digital integrity. To have control, your system 364 00:16:55,920 --> 00:17:00,480 must prove that this specific digital file is the 1 So 1 a 365 00:17:00,480 --> 00:17:03,720 single authoritative copy must exist which is unique, 366 00:17:03,880 --> 00:17:08,599 identifiable, and importantly, unalterable. 2 the authoritative 367 00:17:08,599 --> 00:17:11,839 copy must identify the secured party as the assignee, and 368 00:17:11,839 --> 00:17:14,720 three, the authoritative copy must be communicated to and 369 00:17:14,720 --> 00:17:17,599 maintained by the secured party or its custodian. 370 00:17:17,960 --> 00:17:21,000 OK, so points 1-2 and three create the digital vault. 371 00:17:21,319 --> 00:17:22,760 What about copies? How do you handle? 372 00:17:22,760 --> 00:17:25,880 That that is the rest of the test. 4 copies are amendments 373 00:17:25,880 --> 00:17:28,520 that change the assignee can only be made with the consent of 374 00:17:28,520 --> 00:17:31,640 the secured party. The lender holds the keys. 5 375 00:17:31,960 --> 00:17:34,680 each coy of the authoritative copy, like a backup or just a 376 00:17:34,680 --> 00:17:37,080 rintout, must be clearly marked as a copy. 377 00:17:37,360 --> 00:17:40,640 It can't be mistaken for the original and six, Any amendment 378 00:17:40,640 --> 00:17:43,360 has to be readily identifiable as either authorized or 379 00:17:43,360 --> 00:17:45,360 unauthorized. There has to be an audit trail. 380 00:17:45,480 --> 00:17:47,880 It's rigorous. I mean, you can't just save APDF 381 00:17:47,880 --> 00:17:49,560 to a hard drive and claim you have control. 382 00:17:49,560 --> 00:17:51,640 You need specialized vaulting software. 383 00:17:51,880 --> 00:17:54,080 But why does this matter? Why go through this IT 384 00:17:54,120 --> 00:17:56,480 nightmare? Why not just file a UCC 1 385 00:17:56,480 --> 00:17:59,880 covering chattel paper? You can file a UCC, one that 386 00:17:59,880 --> 00:18:04,040 works for perfection, but filing is weak, control is strong, and 387 00:18:04,040 --> 00:18:07,480 the reason is there is a super priority rule for purchasers of 388 00:18:07,480 --> 00:18:09,440 chattel paper. A super priority, OK. 389 00:18:09,440 --> 00:18:13,120 If I buy chattel paper from a dealer and I take possession if 390 00:18:13,120 --> 00:18:16,600 it's paper or control if it's electronic for new value and I 391 00:18:16,600 --> 00:18:19,880 act in good faith, I win. Wait, let's unpack that Win Win 392 00:18:19,880 --> 00:18:21,920 against 2. I beat a secured party who 393 00:18:21,920 --> 00:18:24,880 merely filed. Let's say Bank A lends money to 394 00:18:24,920 --> 00:18:28,360 a car dealer and files a UCC one on all chattel paper. 395 00:18:28,800 --> 00:18:30,600 Bank A is perfected. Being safe. 396 00:18:31,320 --> 00:18:34,320 The dealer then sells a car contract to finance Company B 397 00:18:34,800 --> 00:18:37,920 Finance Company B pays cash and takes control of the electronic 398 00:18:37,920 --> 00:18:39,600 file. The authoritative copy. 399 00:18:39,600 --> 00:18:42,120 The dealer goes bust. Who owns the car contract? 400 00:18:42,120 --> 00:18:44,600 Well, my gut says Bank A. They filed first. 401 00:18:44,600 --> 00:18:46,040 First in time. It doesn't matter. 402 00:18:46,200 --> 00:18:49,360 Finance Company B has control Control Trump's filing in 403 00:18:49,360 --> 00:18:52,360 chattel paper disputes. Finance Company B takes the 404 00:18:52,360 --> 00:18:54,280 asset free and clear of Bank A's land. 405 00:18:54,440 --> 00:18:56,920 That is a massive trap. So if you're a lender and you're 406 00:18:56,920 --> 00:19:00,040 relying on filing for chattel paper, you are vulnerable to a 407 00:19:00,040 --> 00:19:04,360 purchaser who takes control. The law wants these assets to be 408 00:19:04,360 --> 00:19:06,320 liquid. It wants a dealers to be able to 409 00:19:06,320 --> 00:19:10,280 sell these contracts easily. Correct. the Super Priority Rule 410 00:19:10,280 --> 00:19:13,120 facilitates commerce. If purchasers had to check the 411 00:19:13,120 --> 00:19:16,600 UCC filings every time they bought a car loan, the secondary 412 00:19:16,600 --> 00:19:19,440 market would just freeze. Let's shift from cars to 413 00:19:19,440 --> 00:19:22,840 buildings fixtures. This is where Article 9 crashes 414 00:19:22,840 --> 00:19:26,080 head first into real estate law. Fixtures are goods that have 415 00:19:26,080 --> 00:19:30,040 become so related to particular real property that an interest 416 00:19:30,040 --> 00:19:32,120 in them arises under real property law. 417 00:19:32,760 --> 00:19:35,640 Think of a central air conditioning unit, A built in 418 00:19:35,640 --> 00:19:38,480 furnace or industrial machinery that's bolted to the factory 419 00:19:38,480 --> 00:19:40,600 floor. The confusing part is that it is 420 00:19:40,600 --> 00:19:43,720 still a good It's a furnace, but it's attached to the land. 421 00:19:43,800 --> 00:19:47,040 So do we file with the Secretary of State for goods or the county 422 00:19:47,040 --> 00:19:49,400 recorder for land? If you want to be safe against 423 00:19:49,400 --> 00:19:51,360 everyone, you need a fixture filing. 424 00:19:52,040 --> 00:19:55,360 This is a special kind of UCC One, it has three extra 425 00:19:55,360 --> 00:19:57,760 requirements. One it must be filed in the real 426 00:19:57,760 --> 00:20:00,480 property records, the county office where deeds and mortgages 427 00:20:00,480 --> 00:20:02,800 are filed. Two, it must provide a 428 00:20:02,800 --> 00:20:06,080 description of the real property, and three, it must 429 00:20:06,080 --> 00:20:08,440 name the record owner of the real estate if the debtor 430 00:20:08,440 --> 00:20:10,320 doesn't own the land like a tenant. 431 00:20:10,680 --> 00:20:14,280 We have a case in Remay that shows what happens when you get 432 00:20:14,280 --> 00:20:16,760 lazy with point #2, the property description. 433 00:20:17,080 --> 00:20:20,560 In remay is a great warning. The creditor filed a fixture 434 00:20:20,560 --> 00:20:24,080 filing, but for the description of the real estate they didn't 435 00:20:24,080 --> 00:20:26,840 use the full legal meets and bounce description. 436 00:20:27,120 --> 00:20:30,440 They use something vague like a street address or partial lot 437 00:20:30,440 --> 00:20:31,680 number. Not good enough. 438 00:20:31,840 --> 00:20:34,200 Not nearly good enough. The bankruptcy court asked the 439 00:20:34,200 --> 00:20:37,160 key question, would a title searcher looking at the land 440 00:20:37,160 --> 00:20:41,480 records find this UCC filing? The answer was no. 441 00:20:42,080 --> 00:20:44,760 The description was insufficient to index it properly against the 442 00:20:44,760 --> 00:20:47,320 land result. The filing was worthless. 443 00:20:47,360 --> 00:20:49,000 The lien was avoided by the trustee. 444 00:20:49,000 --> 00:20:52,920 So 123 Main St. is not enough. You can't just put that in the 445 00:20:52,920 --> 00:20:55,640 box. Never rely on a street address 446 00:20:55,640 --> 00:20:59,160 in a fixture filing. You get the deed, you copy the 447 00:20:59,160 --> 00:21:01,920 legal description word for word. No shortcuts. 448 00:21:02,280 --> 00:21:03,960 Now let's talk about the priority battle. 449 00:21:04,160 --> 00:21:05,920 This is the main event for fixtures. 450 00:21:06,240 --> 00:21:09,120 We have a bank with a mortgage on the building recorded years 451 00:21:09,120 --> 00:21:11,640 ago. We have a supplier who sells a 452 00:21:11,640 --> 00:21:14,040 new furnace to the building owner on credit. 453 00:21:14,360 --> 00:21:18,160 The furnace gets installed, the owner defaults who gets the 454 00:21:18,160 --> 00:21:20,720 furnace. The general rule is first in 455 00:21:20,720 --> 00:21:22,800 time. The mortgage was recorded years 456 00:21:22,800 --> 00:21:24,760 ago. The furnace is installed today. 457 00:21:25,200 --> 00:21:27,320 The mortgage, in a sense, eats the fixture. 458 00:21:27,600 --> 00:21:29,920 The bank wins. That seems unfair to the 459 00:21:29,920 --> 00:21:31,840 supplier. The bank is getting a windfall, 460 00:21:31,880 --> 00:21:34,200 a free furnace. It is unfair, which is why we 461 00:21:34,200 --> 00:21:37,560 have the PMSI exception. If the supplier holds a purchase 462 00:21:37,560 --> 00:21:40,760 money security interest, meaning they lent the money specifically 463 00:21:40,760 --> 00:21:43,880 to buy that furnace, and they make a proper fixture filing 464 00:21:43,880 --> 00:21:47,040 within 20 days of the goods becoming fixtures, they went. 465 00:21:47,040 --> 00:21:49,440 So the supplier can jump ahead of the existing mortgage. 466 00:21:49,440 --> 00:21:51,920 They can prime a mortgage recorded 10 years earlier. 467 00:21:52,000 --> 00:21:56,360 Yes, they get super priority. The rationale is that we want to 468 00:21:56,360 --> 00:22:00,240 encourage modernization. We don't want an old mortgage 469 00:22:00,240 --> 00:22:03,360 lender to block the debtor from upgrading their property with 470 00:22:03,360 --> 00:22:05,120 new efficient equipment. But. 471 00:22:05,680 --> 00:22:08,720 And there is always a But in Chapter 5 there is one lender 472 00:22:08,720 --> 00:22:12,840 who beats even the PMSI supplier, the construction 473 00:22:12,840 --> 00:22:14,960 lender. The construction mortgage is the 474 00:22:14,960 --> 00:22:18,840 God Mode of real estate lenders. As we said, if the goods are 475 00:22:18,840 --> 00:22:21,320 brought onto the site during the construction phase and the 476 00:22:21,320 --> 00:22:23,720 construction mortgage is recorded, the construction 477 00:22:23,720 --> 00:22:25,880 mortgage beats the PMSI fixture lender. 478 00:22:25,960 --> 00:22:28,040 Why? Why do we screw the supplier of 479 00:22:28,040 --> 00:22:30,040 the windows and the elevators in the furnace? 480 00:22:30,160 --> 00:22:32,680 Because the construction lender is taking a massive risk, 481 00:22:32,760 --> 00:22:34,920 They're funding a hole in the ground hoping it becomes a 482 00:22:34,920 --> 00:22:37,800 building. If we allowed every supplier, 483 00:22:37,800 --> 00:22:40,720 the toilet guy, the window guy, the elevator guy, to come in and 484 00:22:40,720 --> 00:22:44,120 file superior lenses on their specific parts, the building 485 00:22:44,120 --> 00:22:46,200 would be picked apart if things went wrong. 486 00:22:46,920 --> 00:22:49,240 The construction lender needs a first liens on the entire 487 00:22:49,240 --> 00:22:50,840 project to make the financing work. 488 00:22:51,040 --> 00:22:53,840 So if you are selling elevators to a skyscraper under 489 00:22:53,840 --> 00:22:56,640 construction, what do you do? You realize you are second in 490 00:22:56,640 --> 00:23:00,840 line or you get the construction lender to sign a subordination 491 00:23:00,840 --> 00:23:03,240 agreement, but good luck with that. 492 00:23:04,320 --> 00:23:07,320 Moving on, we have two concepts that sound similar but are 493 00:23:07,320 --> 00:23:10,480 legally distinct accessions and commingled goods. 494 00:23:11,040 --> 00:23:14,560 What is the difference between Agps installed in a truck and 495 00:23:14,560 --> 00:23:17,480 flour baked into a cake? Great example. 496 00:23:17,680 --> 00:23:21,080 The GPS is in a session that's section 9335. 497 00:23:21,680 --> 00:23:24,360 It is physically united with the truck but it retains its 498 00:23:24,360 --> 00:23:26,280 identity. You can unscrew it. 499 00:23:26,280 --> 00:23:29,400 It is still AGPS. The flower is commingled goods 500 00:23:29,400 --> 00:23:32,920 section 933D6. It's identity is lost in the 501 00:23:32,920 --> 00:23:35,080 product. You cannot extract the flower 502 00:23:35,080 --> 00:23:36,720 from the cake. Let's start with the accession 503 00:23:36,720 --> 00:23:38,480 the GPS. Who wins between the truck 504 00:23:38,480 --> 00:23:41,240 lender and the GPS lender? Generally the priority follows 505 00:23:41,240 --> 00:23:44,400 the normal Article 9 rules, first to file, PMSI rules, 506 00:23:44,400 --> 00:23:46,480 etcetera. However, there is a massive trap 507 00:23:46,480 --> 00:23:48,280 called the Certificate of Title exception. 508 00:23:48,840 --> 00:23:50,920 Cars and trucks are covered by certificates of title. 509 00:23:50,920 --> 00:23:54,200 The pink slip if the security interest in a hole the truck is 510 00:23:54,200 --> 00:23:56,920 perfected by notation on the certificate of title that 511 00:23:56,920 --> 00:23:59,040 interest Trump's the security interest in the accession. 512 00:23:59,160 --> 00:24:02,520 So if Ford Motor Credit is on the title of the truck and I 513 00:24:02,520 --> 00:24:08,880 sell you a $5000 stereo system on credit and file a UCC. 1 If 514 00:24:08,880 --> 00:24:10,760 they repossess the truck, they take the stereo. 515 00:24:11,160 --> 00:24:14,320 Your security interest in the stereo is subordinate to their 516 00:24:14,320 --> 00:24:16,960 interest in the whole truck. That seems to kill the market 517 00:24:16,960 --> 00:24:19,000 for aftermarket part sales on credit. 518 00:24:19,120 --> 00:24:21,080 It certainly makes it very, very risky. 519 00:24:21,120 --> 00:24:23,560 Now what about the cake, the commingled goods? 520 00:24:23,640 --> 00:24:25,560 I supply flour, you supply sugar. 521 00:24:25,640 --> 00:24:28,080 We bake a cake. The cake is the product. 522 00:24:30,320 --> 00:24:32,880 Does my lean on the flour just disappear into the ether? 523 00:24:32,880 --> 00:24:36,840 No, your lean shifts. It attaches to the product cake. 524 00:24:37,080 --> 00:24:39,920 But now we have a problem. We have two lenders, Flower 525 00:24:39,920 --> 00:24:42,400 Lender and Sugar Lender, claiming the same cake. 526 00:24:42,600 --> 00:24:43,840 Who wins? Who's first? 527 00:24:44,000 --> 00:24:45,680 Right, first in time doesn't make sense here. 528 00:24:45,680 --> 00:24:48,920 It doesn't, so this is one of the few times the law uses pure 529 00:24:48,920 --> 00:24:51,000 math. They rank equally in proportion 530 00:24:51,000 --> 00:24:52,560 to the value of their contributions. 531 00:24:52,880 --> 00:24:56,720 If the flower cost $10 and the sugar cost $5, the total cost of 532 00:24:56,720 --> 00:25:00,160 inputs is $15.00. The flower lender gets 100 and 533 00:25:00,160 --> 00:25:02,840 fifteenths or 2/3 of the cake proceeds. 534 00:25:03,440 --> 00:25:06,160 The sugar lender gets a 500 and fifteenths or 1/3. 535 00:25:06,440 --> 00:25:09,200 Pro rata sharing. No first in time, just math. 536 00:25:09,440 --> 00:25:11,280 Correct. Since the goods are lost, we 537 00:25:11,280 --> 00:25:14,320 can't say mine is on top. We just share the value. 538 00:25:14,360 --> 00:25:16,120 It's the only equitable solution. 539 00:25:16,400 --> 00:25:17,960 We are entering the final stretch. 540 00:25:17,960 --> 00:25:20,880 Let's do a quick fire round for a few other special traps in 541 00:25:20,880 --> 00:25:23,960 Chapter 5. First up, commercial tort 542 00:25:23,960 --> 00:25:25,720 claims. I am a business. 543 00:25:25,880 --> 00:25:28,160 I sue a competitor for patent infringement. 544 00:25:28,520 --> 00:25:31,960 I expect to win $10 million. Can I use that lawsuit as 545 00:25:31,960 --> 00:25:35,720 collateral for a loan? Yes, but with two huge caveats. 546 00:25:35,800 --> 00:25:40,920 1 Specificity You cannot write all commercial tort claims in 547 00:25:40,920 --> 00:25:42,800 your security agreement. That is invalid. 548 00:25:43,000 --> 00:25:44,920 You have to describe the specific claim. 549 00:25:45,160 --> 00:25:48,200 The lawsuit against X Corp, case number 12345. 550 00:25:48,400 --> 00:25:51,280 And the second one. Two, no after acquired property. 551 00:25:51,600 --> 00:25:53,720 The after acquired property clause does not work for these 552 00:25:54,000 --> 00:25:57,320 If you sign the deal today and a new tort claim arises next year, 553 00:25:57,320 --> 00:26:00,240 when someone else infringes your patent, your security interest 554 00:26:00,240 --> 00:26:02,480 is not attached to it. You have to sign a new amendment 555 00:26:02,480 --> 00:26:03,880 to add it. Why does the law make it so 556 00:26:03,880 --> 00:26:05,080 hard? What's the policy? 557 00:26:05,360 --> 00:26:08,440 It goes back to an old common law doctrine called champerty. 558 00:26:09,120 --> 00:26:12,040 The law hates the idea of lenders stirring up litigation 559 00:26:12,040 --> 00:26:15,560 just to make money. By requiring specificity, we 560 00:26:15,560 --> 00:26:19,360 ensure the lender is financing a specific existing asset, not 561 00:26:19,360 --> 00:26:21,520 just betting on the debtors general litigiousness. 562 00:26:21,840 --> 00:26:23,840 Next trap Letter of credit rights. 563 00:26:24,480 --> 00:26:28,200 The rule is simple control. That's the only way. 564 00:26:28,520 --> 00:26:30,160 Unless it's a supporting obligation. 565 00:26:30,400 --> 00:26:33,160 You need the issuer, the bank that wrote the letter, to 566 00:26:33,160 --> 00:26:35,080 consent to the assignment of the proceeds. 567 00:26:35,200 --> 00:26:37,480 Filing a UCC 1 is generally ineffective. 568 00:26:37,720 --> 00:26:39,480 You need the bank's permission period. 569 00:26:39,600 --> 00:26:42,800 And finally, a concept that confuses everyone, sales of 570 00:26:42,800 --> 00:26:45,280 accounts. We usually think of Article 9 as 571 00:26:45,280 --> 00:26:47,640 covering loans. If I borrow money and pledge my 572 00:26:47,640 --> 00:26:50,040 accounts receivable, that's clearly Article 9. 573 00:26:50,600 --> 00:26:53,440 But what if I sell my accounts receivable to a factor true 574 00:26:53,440 --> 00:26:54,920 sale? I don't own them anymore. 575 00:26:55,160 --> 00:26:57,120 Does Article 9 apply? Yes, it does. 576 00:26:57,360 --> 00:27:01,200 This is a big one. Under section 91-O9A3, the seal 577 00:27:01,200 --> 00:27:03,720 of accounts, chattel paper, payment, intangibles, and 578 00:27:03,720 --> 00:27:06,280 promissory notes is treated as a secured transaction. 579 00:27:06,280 --> 00:27:09,000 For perfection purposes. The buyer is treated as the 580 00:27:09,000 --> 00:27:11,360 secured party. The seller is treated as the 581 00:27:11,360 --> 00:27:12,600 debtor. But why? 582 00:27:12,600 --> 00:27:14,680 If I bought it, I own it, it's mine. 583 00:27:14,880 --> 00:27:17,160 Why do I have to file a financing statement against the 584 00:27:17,160 --> 00:27:18,920 person I bought it from? It seems totally 585 00:27:18,920 --> 00:27:21,720 counterintuitive. Think about the secret land 586 00:27:21,720 --> 00:27:24,080 problem. If I sell my accounts to you, 587 00:27:24,320 --> 00:27:27,200 but I stay in business, I still send the invoices to my 588 00:27:27,200 --> 00:27:29,840 customers. To the outside world, it looks 589 00:27:29,840 --> 00:27:32,920 like I still own those accounts. If another lender comes along, 590 00:27:33,080 --> 00:27:35,240 they might lend me money thinking I have all these great 591 00:27:35,240 --> 00:27:37,400 assets. They have no idea they've been 592 00:27:37,400 --> 00:27:39,600 sold. To prevent that kind of fraud, 593 00:27:39,800 --> 00:27:42,920 the law forces the buyer to file a UCC one. 594 00:27:43,280 --> 00:27:45,920 This puts the world on notice. Hey, these accounts have been 595 00:27:45,920 --> 00:27:47,200 sold. Don't rely on them. 596 00:27:47,440 --> 00:27:51,280 We have a case in re Commercial Money Center that confirms this. 597 00:27:51,280 --> 00:27:55,320 Yes, in that case, the buyer of the assets failed to perfect. 598 00:27:55,360 --> 00:27:58,160 They failed to file, the seller went bankrupt, and because the 599 00:27:58,160 --> 00:28:00,960 buyer hadn't filed, the bankruptcy trustee was able to 600 00:28:00,960 --> 00:28:04,200 use their strong arm powers, treat the sales unperfected, and 601 00:28:04,200 --> 00:28:06,760 effectively claw the assets back into the bankruptcy estate. 602 00:28:07,480 --> 00:28:09,920 The buyer lost everything. The lesson is brutal. 603 00:28:10,200 --> 00:28:12,800 Even if you buy the asset outright, if it's an account or 604 00:28:12,800 --> 00:28:16,360 chattel paper, file the UCC one or risk losing at all. 605 00:28:16,520 --> 00:28:18,760 We have covered a massive amount of ground today. 606 00:28:18,800 --> 00:28:24,040 We've gone from bank accounts to radio towers to cake batter. 607 00:28:24,440 --> 00:28:27,200 If you had to summarize the exceptions, mindset for our 608 00:28:27,200 --> 00:28:31,440 listeners, the strategy for the exam, what is the mental map? 609 00:28:31,640 --> 00:28:34,280 The mental map is this. Stop the autopilot. 610 00:28:34,640 --> 00:28:37,880 When you read a fact pattern, identify the collateral first. 611 00:28:38,040 --> 00:28:41,080 Don't do anything else. If it is inventory or equipment, 612 00:28:41,080 --> 00:28:43,560 you can relax into the standard rules first to file. 613 00:28:43,920 --> 00:28:46,240 But if it is a deposit account you have to ask do I have 614 00:28:46,240 --> 00:28:49,520 control? If it is chattel paper, ask who 615 00:28:49,520 --> 00:28:53,000 holds the authoritative copy. If it is a fixture ask did we 616 00:28:53,000 --> 00:28:57,040 file in the real estate records? If it is proceeds ask, can we 617 00:28:57,040 --> 00:28:59,200 trace it via the lowest intermediate balance rule? 618 00:28:59,440 --> 00:29:02,440 It really is about recognizing that the special categories are 619 00:29:02,440 --> 00:29:05,760 where the money is won and lost. The default setting of file with 620 00:29:05,760 --> 00:29:08,240 Secretary of State is the wrong answer for the most valuable 621 00:29:08,240 --> 00:29:10,760 assets a company might have, its cash and its contract. 622 00:29:10,760 --> 00:29:14,400 Precisely the strategist, The top student, knows that the 623 00:29:14,400 --> 00:29:16,760 exceptions are not just footnotes, they are the ball 624 00:29:16,760 --> 00:29:18,920 game. And that is a perfect place to 625 00:29:18,920 --> 00:29:21,200 wrap up. We hope this deep dive helps you 626 00:29:21,200 --> 00:29:23,440 navigate the minefield that is Chapter 5. 627 00:29:24,080 --> 00:29:26,520 For our listeners, here's a final provocative thought to 628 00:29:26,520 --> 00:29:29,000 chew on. We talked about control for 629 00:29:29,000 --> 00:29:32,240 electronic channel paper. As cryptocurrency and blockchain 630 00:29:32,240 --> 00:29:35,080 assets become standard on corporate balance sheets, how 631 00:29:35,080 --> 00:29:38,400 does Article 9 adapt? Is a crypto wallet a deposit 632 00:29:38,400 --> 00:29:41,160 account? Is it a general intangible or is 633 00:29:41,160 --> 00:29:44,600 it electronic money? The UCC is currently being 634 00:29:44,600 --> 00:29:47,040 mended in many states. To answer that, look up Article 635 00:29:47,040 --> 00:29:48,280 12. But until it's settled 636 00:29:48,280 --> 00:29:51,520 everywhere, it is the ultimate special collateral trap waiting 637 00:29:51,520 --> 00:29:53,480 to happen. That is a whole other deep dive 638 00:29:53,480 --> 00:29:54,080 for another. Day. 639 00:29:54,080 --> 00:29:55,920 Indeed it is. Thanks for listening and good 640 00:29:55,920 --> 00:29:57,680 luck with the code. All right, everyone, welcome 641 00:29:57,680 --> 00:29:59,520 back. We're diving into Article 9 of 642 00:29:59,520 --> 00:30:02,800 the UCC, which you know, is a huge topic on the bar exam. 643 00:30:03,000 --> 00:30:05,760 But what really separates the top scores is mastering the 644 00:30:05,760 --> 00:30:07,920 exceptions. So today we're going to tackle 645 00:30:07,920 --> 00:30:10,320 some of the trickiest parts of Article 9, the special 646 00:30:10,320 --> 00:30:12,400 collateral types. You know, these are the spots 647 00:30:12,400 --> 00:30:15,240 where the normal rules just don't apply, and frankly, where 648 00:30:15,240 --> 00:30:17,760 the examiner's love to see if you really know your stuff. 649 00:30:18,400 --> 00:30:20,760 So here's our game plan. We're going to start with a 650 00:30:20,760 --> 00:30:23,480 quick look at why these exceptions even exist. 651 00:30:23,880 --> 00:30:26,520 Then we'll get into the nitty gritty of each special 652 00:30:26,520 --> 00:30:28,920 collateral type. We're talking proceeds, 653 00:30:29,040 --> 00:30:32,040 fixtures, deposit accounts, the whole shebang. 654 00:30:32,520 --> 00:30:35,840 And at the end, we'll tie it all together so you can see the big 655 00:30:35,840 --> 00:30:38,400 picture and be ready for whatever curve balls the exam 656 00:30:38,400 --> 00:30:41,880 decides to throw your way. You see, most of Article 9 is 657 00:30:41,880 --> 00:30:45,120 built on this really simple, kind of beautiful notice filing 658 00:30:45,120 --> 00:30:47,720 system. You file a UCC 1 financing 659 00:30:47,720 --> 00:30:50,080 statement and boom, the whole world is on notice of your 660 00:30:50,080 --> 00:30:52,920 security interest. But for certain kinds of 661 00:30:52,920 --> 00:30:55,440 collateral, the rules completely change. 662 00:30:55,920 --> 00:30:58,720 These exceptions are there for some very specific policy 663 00:30:58,720 --> 00:31:01,960 reasons, and spotting them is absolutely the key to acing 664 00:31:01,960 --> 00:31:05,040 these questions. OK, this slide right here. 665 00:31:05,280 --> 00:31:07,880 This is your new best friend. Seriously. 666 00:31:08,160 --> 00:31:10,800 Think of it as the CHEAT SHEET for this whole topic. 667 00:31:11,040 --> 00:31:14,200 It lays out the key exceptions and shows how they just totally 668 00:31:14,200 --> 00:31:17,040 flip the script on attachment, perfection and priority. 669 00:31:17,440 --> 00:31:19,560 We're going to walk through each one of these, so don't stress 670 00:31:19,560 --> 00:31:21,000 about memorizing it right this second. 671 00:31:21,240 --> 00:31:23,040 Just get a feel for the landscape we're about to 672 00:31:23,040 --> 00:31:25,760 explore. So what is it that makes this 673 00:31:25,760 --> 00:31:29,520 collateral so special? Well, it's because these assets 674 00:31:29,520 --> 00:31:32,640 just don't fit nicely into that standard filing system. 675 00:31:33,000 --> 00:31:35,400 Sometimes they bump up against a completely different area of 676 00:31:35,400 --> 00:31:38,080 law, like real estate law when we talk about fixtures. 677 00:31:38,520 --> 00:31:41,680 Other times they're super liquid financial assets, like a bank 678 00:31:41,680 --> 00:31:44,640 account, where a public filing in some state office just isn't 679 00:31:44,640 --> 00:31:47,000 the best way to let people know what's going on. 680 00:31:47,520 --> 00:31:50,720 OK, let's jump into our first category, proceeds. 681 00:31:51,080 --> 00:31:53,680 The core idea here is really simple, but powerful. 682 00:31:53,800 --> 00:31:56,080 A security interest shouldn't just disappear when the 683 00:31:56,080 --> 00:31:58,720 collateral changes form. The whole point is that the 684 00:31:58,720 --> 00:32:02,240 security interest is supposed to follow the value even if the 685 00:32:02,240 --> 00:32:05,520 original item gets sold, traded, or whatever else happens to it. 686 00:32:06,080 --> 00:32:09,360 And you'll notice the definition here is incredibly broad, and 687 00:32:09,360 --> 00:32:12,160 that's on purpose. So if your debtor sells a 688 00:32:12,160 --> 00:32:15,640 secured piece of inventory, the cash they get, those are cash 689 00:32:15,640 --> 00:32:18,000 proceeds. If they trade in a secured 690 00:32:18,000 --> 00:32:21,160 company truck for a new one, that new truck is non cash 691 00:32:21,160 --> 00:32:23,720 proceeds. The key rule is that your 692 00:32:23,720 --> 00:32:25,680 security interest in the original collateral 693 00:32:25,680 --> 00:32:29,760 automatically continues in any identifiable proceeds. 694 00:32:30,680 --> 00:32:34,280 Ah, and here it is. This is the classic 100% going 695 00:32:34,280 --> 00:32:37,240 to be on the exam problem. Your debtor sells some 696 00:32:37,240 --> 00:32:39,640 collateral for say 10 grand in cash. 697 00:32:39,960 --> 00:32:42,600 They deposit that 10 grand into their business account which 698 00:32:42,600 --> 00:32:46,080 already had five grand in it. Now the funds are commingled. 699 00:32:46,440 --> 00:32:48,960 How in the world does the secured party prove which part 700 00:32:48,960 --> 00:32:51,440 of that $15,000 is their collateral? 701 00:32:52,080 --> 00:32:55,120 So to solve this puzzle, the law uses this really clever 702 00:32:55,120 --> 00:32:57,080 accounting trick. It's called the Lowest 703 00:32:57,080 --> 00:32:59,640 Intermediate Balance rule, or LIBR. 704 00:33:00,000 --> 00:33:01,680 It basically works on a presumption. 705 00:33:01,840 --> 00:33:04,680 We assume the debtor spends their own money first before 706 00:33:04,680 --> 00:33:06,640 they spend the secured party's proceeds. 707 00:33:06,960 --> 00:33:09,600 But here's the catch. If the total account balance 708 00:33:09,680 --> 00:33:12,600 ever dips below the amount of proceeds you put in, that dip 709 00:33:12,680 --> 00:33:14,360 permanently cuts down your claim. 710 00:33:14,680 --> 00:33:18,680 So if that $15,000 account drops to $8000, your identifiable 711 00:33:18,680 --> 00:33:21,440 proceeds are now capped at 8 grand, even if the debtor 712 00:33:21,440 --> 00:33:23,240 deposits $1,000,000 the next day. 713 00:33:23,960 --> 00:33:26,840 All right, so we've seen how a security interest can follow the 714 00:33:26,840 --> 00:33:28,880 value as collateral changes form. 715 00:33:29,280 --> 00:33:30,840 Now let's look at a totally different kind of 716 00:33:30,840 --> 00:33:33,120 transformation. What happens when personal 717 00:33:33,120 --> 00:33:36,680 property, like a furnace, gets so attached to a building that 718 00:33:36,680 --> 00:33:39,000 it basically becomes part of the real estate? 719 00:33:39,360 --> 00:33:41,600 This is where Article 9 has to figure out how to work with a 720 00:33:41,600 --> 00:33:44,640 completely different legal universe, real property law. 721 00:33:45,400 --> 00:33:48,560 The big question here is whether a piece of personal property, 722 00:33:48,560 --> 00:33:52,200 what Article 9 calls a good, has become so connected to the real 723 00:33:52,200 --> 00:33:54,920 estate that it's now considered a permanent part of it. 724 00:33:55,560 --> 00:33:57,200 This is always a question of fact. 725 00:33:57,200 --> 00:34:00,440 But the textbook example is that giant commercial furnace that's 726 00:34:00,440 --> 00:34:02,760 been bolted into the basement of an office building. 727 00:34:03,600 --> 00:34:06,640 And this right here brilliantly illustrates the exam trap. 728 00:34:07,040 --> 00:34:09,840 A standard UCC, one that you file with the Secretary of 729 00:34:09,840 --> 00:34:13,080 State, does absolutely nothing to give you priority over a real 730 00:34:13,080 --> 00:34:15,600 estate mortgage. To win that battle, you need 731 00:34:15,600 --> 00:34:17,440 something special. Called it, Fixed your filing. 732 00:34:17,920 --> 00:34:20,840 Now, this is still a UCC one form, but it has extra 733 00:34:20,840 --> 00:34:23,320 requirements like a description of the real property. 734 00:34:23,320 --> 00:34:26,239 And this is the crucial part. You file it in the local land 735 00:34:26,239 --> 00:34:29,040 records office, the exact same place where you'd go to record a 736 00:34:29,040 --> 00:34:32,239 mortgage. So how do you actually figure 737 00:34:32,239 --> 00:34:35,520 out if something's a fixture? Well, courts use A5 part test 738 00:34:35,520 --> 00:34:38,400 that you can remember with the acronym Maria M is for the 739 00:34:38,400 --> 00:34:40,480 method of attachment. You know, how hard is it to 740 00:34:40,480 --> 00:34:44,199 remove a is for adaptability? Was this thing custom built for 741 00:34:44,199 --> 00:34:46,960 this specific building? R is the relationship of the 742 00:34:46,960 --> 00:34:48,480 parties. We expect different things from 743 00:34:48,480 --> 00:34:50,320 a tenant than from someone selling the property. 744 00:34:50,679 --> 00:34:53,480 I is for the objective intent of the person who installed it. 745 00:34:53,760 --> 00:34:57,000 And finally, A is for any agreement the parties made on an 746 00:34:57,000 --> 00:34:58,400 exam. You'll want to run through these 747 00:34:58,400 --> 00:35:01,640 factors to build your argument. All right, let's switch gears 748 00:35:01,640 --> 00:35:04,280 completely. We're moving to another type of 749 00:35:04,280 --> 00:35:07,520 collateral that is a huge favorite on exams, deposit 750 00:35:07,520 --> 00:35:10,320 accounts. And listen, here is the absolute 751 00:35:10,320 --> 00:35:11,800 number one thing you need to know. 752 00:35:11,800 --> 00:35:14,120 Forget everything you've learned about filing a financing 753 00:35:14,120 --> 00:35:17,520 statement when a deposit account is the original collateral. 754 00:35:17,600 --> 00:35:21,520 Filing is useless. It is all about 1 concept and 755 00:35:21,520 --> 00:35:25,680 one concept only control. This is the black letter rule. 756 00:35:25,800 --> 00:35:27,400 You have to write this on your exam. 757 00:35:27,920 --> 00:35:30,560 If the fact pattern gives you a commercial bank account as the 758 00:35:30,560 --> 00:35:34,160 original collateral and it says the lender filed to UCC one, 759 00:35:34,400 --> 00:35:37,760 that filing does nothing 0 zilch. 760 00:35:38,200 --> 00:35:40,840 The only way to perfect that security interest is to get 761 00:35:40,840 --> 00:35:43,360 control. So how do you get control? 762 00:35:43,600 --> 00:35:46,320 Well, there are three ways. The first one's the easiest. 763 00:35:46,520 --> 00:35:49,200 If the lender is the same bank that holds the account, they 764 00:35:49,200 --> 00:35:51,920 have control automatically. The third way is pretty rare. 765 00:35:52,240 --> 00:35:54,560 It's the second option that's the real workhorse in commercial 766 00:35:54,560 --> 00:35:57,520 lending, the deposit Account Control agreement or DACA. 767 00:35:58,000 --> 00:36:00,520 This is just a three party contract between the lender, the 768 00:36:00,520 --> 00:36:03,520 debtor and the bank where the bank says, Yep, if the lender 769 00:36:03,520 --> 00:36:06,320 tells us to send them the money, we'll do it no questions asked. 770 00:36:07,120 --> 00:36:10,040 OK, now here is where it gets really interesting. 771 00:36:10,360 --> 00:36:13,280 This slide shows you the priority waterfall for deposit 772 00:36:13,280 --> 00:36:16,840 accounts and it totally throws the normal first to file or 773 00:36:16,840 --> 00:36:20,160 perfect rule out the window. Look who's at the very top, the 774 00:36:20,160 --> 00:36:22,040 bank that actually holds the account. 775 00:36:22,280 --> 00:36:24,200 They have what we call super priority. 776 00:36:24,400 --> 00:36:26,760 They win. They win even if another lender 777 00:36:26,760 --> 00:36:28,600 got a DAC assigned a year earlier. 778 00:36:28,840 --> 00:36:31,200 And if you think about it, this makes perfect sense from a 779 00:36:31,200 --> 00:36:33,640 policy standpoint. The bank holding the cash is in 780 00:36:33,640 --> 00:36:35,640 the absolute best position to control it. 781 00:36:36,640 --> 00:36:39,760 So we've seen how control is king for liquid assets like bank 782 00:36:39,760 --> 00:36:42,600 accounts. Now let's see how that idea and 783 00:36:42,600 --> 00:36:46,240 a few others apply to some other unique intangible assets. 784 00:36:46,720 --> 00:36:49,360 Let's start with a really specific one, commercial tort 785 00:36:49,360 --> 00:36:52,600 claims. The UCC is incredibly strict 786 00:36:52,600 --> 00:36:55,200 about this, and the policy reason is pretty clear. 787 00:36:55,440 --> 00:36:58,720 We don't want lenders making these huge blanket grabs of any 788 00:36:58,720 --> 00:37:00,680 and all future lawsuits A debtor might have. 789 00:37:01,120 --> 00:37:04,800 So the security agreement has to describe the specific tort 790 00:37:04,800 --> 00:37:07,040 claim. A generic description, like all 791 00:37:07,040 --> 00:37:09,160 commercial tort claims is totally invalid. 792 00:37:09,480 --> 00:37:13,440 And this is a critical point. And after acquired property 793 00:37:13,440 --> 00:37:16,840 clause does not work for these, the interest can only attach to 794 00:37:16,840 --> 00:37:19,280 a claim that already exists when the agreement is signed. 795 00:37:19,960 --> 00:37:24,040 Just like with deposit accounts, that word control pops up again 796 00:37:24,040 --> 00:37:27,040 for electronic chattel paper. But here it means something a 797 00:37:27,040 --> 00:37:29,080 bit different, a bit more high tech. 798 00:37:29,720 --> 00:37:31,600 To have control, you need a system that can create the 799 00:37:31,600 --> 00:37:35,320 electronic equivalent of a single unique original document. 800 00:37:35,720 --> 00:37:38,720 Think of it like a digital master copy, a special file that 801 00:37:38,720 --> 00:37:41,200 can't be changed without the secured party say so. 802 00:37:41,480 --> 00:37:44,920 And it clearly marks all other copies as just that, copies. 803 00:37:45,440 --> 00:37:47,720 It's all about preventing multiple people from claiming 804 00:37:47,720 --> 00:37:51,200 they hold the original. And here is another huge exam 805 00:37:51,200 --> 00:37:53,840 trap. So many students assume that if 806 00:37:53,840 --> 00:37:56,680 something is a sale, it can't possibly be a secured 807 00:37:56,680 --> 00:37:59,560 transaction. But for accounts receivable and 808 00:37:59,560 --> 00:38:02,520 for chattel paper, Article 9 actually treats an outright 809 00:38:02,520 --> 00:38:04,720 buyer as if they were a secure party. 810 00:38:05,080 --> 00:38:06,960 Why? Well, because to the rest of the 811 00:38:06,960 --> 00:38:09,760 world, it's impossible to tell if a company sold its 812 00:38:09,760 --> 00:38:12,160 receivables or just borrowed money against them. 813 00:38:12,640 --> 00:38:16,440 So the law steps in and says to the buyer, you have to file a U 814 00:38:16,440 --> 00:38:20,000 CC-1 to perfect your ownership or you risk losing out to the 815 00:38:20,000 --> 00:38:23,840 seller's other creditors. OK, let's pull all this 816 00:38:23,840 --> 00:38:25,760 together. We've just marched through a 817 00:38:25,760 --> 00:38:29,400 whole bunch of very specific rules, but what are the big 818 00:38:29,400 --> 00:38:32,120 ideas, the themes that connect all of them? 819 00:38:32,680 --> 00:38:35,960 Understanding the why behind the rules is what's going to help 820 00:38:35,960 --> 00:38:38,960 you reason through a new fact pattern on the exam. 821 00:38:39,760 --> 00:38:42,600 When you boil it all down, it really comes down to these two 822 00:38:42,600 --> 00:38:45,200 core principles. For financial assets, things 823 00:38:45,200 --> 00:38:48,040 that are basically cash, like a bank account, your brain should 824 00:38:48,040 --> 00:38:50,520 immediately scream control of giving notice. 825 00:38:50,960 --> 00:38:53,800 For physical assets that change form or get bolted onto a 826 00:38:53,800 --> 00:38:56,640 building, you should be thinking coordination and following the 827 00:38:56,640 --> 00:38:58,600 value. This is the mental framework 828 00:38:58,600 --> 00:39:01,040 that will help you slice through the facts and spot the right 829 00:39:01,040 --> 00:39:04,040 issues. And that brings us right back to 830 00:39:04,040 --> 00:39:08,120 the central conflict that makes this area so tough, but also so 831 00:39:08,120 --> 00:39:10,200 testable. So what's the answer? 832 00:39:10,400 --> 00:39:12,920 Which law governs? Well, the answer, of course, is 833 00:39:12,920 --> 00:39:15,240 that both of them do. And to get all the points on 834 00:39:15,240 --> 00:39:18,480 your exam, you have to analyze the problem under both the Ucc's 835 00:39:18,480 --> 00:39:21,440 fixture rules for priority against other lenders and under 836 00:39:21,440 --> 00:39:24,320 real property law for priority against mortgagees, showing you 837 00:39:24,320 --> 00:39:27,240 can synthesize those two worlds. That is what demonstrates true 838 00:39:27,240 --> 00:39:28,280 mastery of the subject.