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Welcome back to our second 
lecture on secured transactions.

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Now that we have thoroughly 
examined the nature and creation

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of security interests, we are 
ready to turn our attention to 

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the critical concepts of 
perfection and priority under 

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Article 9 of the Uniform 
Commercial Code, which we will 

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refer to as the UCC. 
These two concepts, perfection 

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and priority, are essential for 
understanding the rights of 

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secured parties, especially in 
relation to third parties such 

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as other creditors, buyers, and 
lion holders. 

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Even if a security interest is 
valid between the debtor and the

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secured party, meaning it has 
attached under UCC Section 

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9-203, that interest is not 
fully protected against third 

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parties until it is perfected. 
Perfection serves as a public 

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notice function alerting the 
world to the secured parties 

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claim to the collateral. 
Let us begin by defining 

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perfection more formally. 
Perfection is the process by 

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which a secured party 
establishes its rights in the 

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collateral against the claims of
third parties. 

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In most cases, this means that 
the secured party must take some

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additional step beyond 
attachment, most often filing a 

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public notice to give the rest 
of the world fair warning that 

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the collateral is encumbered. 
It is important to stress here 

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that perfection is not required 
to make the security interest 

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valid between the debtor and the
secured party. 

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Attachment suffices for that. 
However, perfection is necessary

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to protect the secured party's 
rights against others, including

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other secured creditors, 
judgment creditors, and 

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bankruptcy trustees. 
Now, let's take a closer look at

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the primary methods of 
perfection under Article 9. 

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Broadly speaking, there are 4 
main avenues for perfection. 

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Filing a financing statement. 
Possession of the collateral. 

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Control over the collateral. 
Automatic perfection by 

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operation of law. 
Let's explore each in detail. 

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First, the most common method is
perfection by filing a financing

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statement under UCC section 
9-310-A secured party perfects 

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its interest by filing a UCC -1 
financing statement in the 

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appropriate public office, 
typically the office of the 

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Secretary of State in the state 
where the debtor is located. 

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For individuals, this is 
generally their principal 

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residence. 
For registered organizations, it

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is the state of incorporation. 
The financing statement serves a

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critical public notice function.
It must contain three basic 

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elements, the debtor's name, the
secured party's name, and an 

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indication of the collateral 
covered. 

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Importantly, the financing 
statement need only provide a 

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general indication of the 
collateral. 

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It does not need the same level 
of specificity as the security 

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agreement. 
For example, all assets or all 

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personal property is generally 
sufficient in the financing 

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statement, even though such 
language would likely be 

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inadequate in the underlying 
security agreement. 

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Let me give you an example here.
Suppose Acme Manufacturing 

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grants First Bank a security 
interest in all its equipment in

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inventory. 
To perfect the interest, First 

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Bank files a financing statement
that lists Acme's legal name as 

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the debtor, identifies First 
Bank as the secured party, and 

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describes the collateral as all 
assets. 

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Even though the security 
agreement itself must 

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specifically describe the 
collateral, the financing 

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statements broad language is 
permissible because its purpose 

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is merely to provide notice that
a secured interest might exist, 

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not to provide the detailed 
terms of the arrangement. 

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Next, let's explore perfection 
by possession. 

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Certain types of collateral, 
such as negotiable instruments, 

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tangible chattel paper, or 
certificated securities, can be 

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perfected simply by the secured 
party taking physical 

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possession. 
This method eliminates the need 

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for filing, and it can offer 
greater protection in some 

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cases, particularly when the 
collateral is transferable by 

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delivery under UCC Section 
9-313. 

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Possession serves both as a 
method of perfection and as a 

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signal to the world that the 
secured party has a claim to the

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property. 
For example, imagine a 

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pawnbroker who lends money 
against a customer's gold 

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necklace. 
By taking physical possession of

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the necklace, the pawnbroker 
perfects its security interest 

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without filing anything. 
The pawnbrokers possession 

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serves as a visible sign of its 
rights in the collateral. 

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Moving on, perfection by control
applies to certain intangible 

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assets such as deposit accounts,
investment property, and 

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electronic chattel paper. 
Under UCC Section 9-314, control

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occurs when the secured party 
has the ability to direct the 

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disposition of the asset, 
typically through contractual 

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arrangements or account 
agreements. 

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For deposit accounts, control is
usually achieved by becoming the

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bank itself, entering into a 
control agreement with the bank 

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and the debtor, or otherwise 
gaining exclusive authority over

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the account. 
For example, if First Bank holds

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a security interest in Acme's 
deposit account at Big Bank, 

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First Bank can perfect by 
entering into a control 

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agreement with Big Bank and 
Acme, giving First Bank the 

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right to direct transfers from 
the account. 

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Finally, there is automatic 
perfection where no filing, 

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possession or control is 
required. 

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Under UCC Section 9-309, certain
security interests are 

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automatically perfected upon 
attachment. 

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The most common example is a 
purchase money security interest

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PMSI in consumer goods. 
If a seller provides financing 

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to a buyer for the purchase of 
consumer goods, for example, a 

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furniture store that sells a 
couch on credit, the seller's 

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security interest is 
automatically perfected without 

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filing. 
However, it is crucial to 

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understand the limitations. 
Automatic perfection applies 

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primarily to consumer goods for 
inventory and equipment. 

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Even a PMSI requires filing to 
gain priority over conflicting 

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interests. 
Now that we have examined the 

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methods of perfection, let's 
turn to the rules of priority, 

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which determine whose rights 
take precedence when multiple 

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parties claim an interest in the
same collateral. 

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Under the general rule set forth
in UCC Section 9-322, priority 

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is determined by the 1st to file
or perfect principle. 

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This means that between two 
perfected secured parties, the 

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party who first filed A 
financing statement or otherwise

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perfected its security interest 
as priority, even if the 

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security interest attached 
later. 

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To illustrate, suppose First 
Bank files a financing statement

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against Acne's equipment on 
January 1st, but the loan is not

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extended until February First. 
Second Bank files a financing 

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statement against the same 
equipment on January 15th and 

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extends a loan on January 20th. 
Even though Second Banks loan 

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and attachment occurred first, 
First Bank has priority because 

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it filed first. 
This rule encourages early 

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filing and creates certainty in 
commercial transactions. 

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However, there are important 
exceptions to the general rule. 

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One key exception involves 
purchase money security 

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interests. 
Under UCC Section 9-324-A, 

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perfected PMSI in goods other 
than inventory or livestock has 

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super priority over conflicting 
security interests if perfected 

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within 20 days after the debtor 
receives possession of the 

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goods. 
For PMS eyes and inventory, the 

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secured party must perfect 
before the debtor receives 

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possession and must notify 
existing secured parties with 

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conflicting interests. 
These rules reflect a policy 

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judgement that sellers or 
lenders who enable the debtor to

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acquire new assets should be 
given special protection. 

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For example, suppose Acme buys 
new manufacturing equipment 

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using financing from equipment 
lender who files APMSI within 

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the required 20 days. 
Even though First Bank has an 

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earlier filed blanket lien on 
all equipment, equipment 

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lenders, PMSI takes priority 
with respect to the new 

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equipment. 
Another critical exception 

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involves buyers in the ordinary 
course of business. 

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Under UCC Section 9-320, such 
buyers take goods free of a 

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security interest created by 
their seller. 

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Even if the security interest is
perfected. 

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This rule protects the 
expectations of buyers and 

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facilitates commerce. 
For example, if Acme sells 

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widgets subject to First bank 
security interest, a retail 

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customer who buys a widget in 
the ordinary course takes it 

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free of the bank's claim. 
Let's also address the status of

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lien creditors under UCC section
9-317-A. 

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Perfected security interest has 
priority over the rights of a 

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lien creditor. 
However, if the security 

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interest is unperfected, the 
lien creditor prevails. 

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This underscores the importance 
of timely perfection as a 

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secured party who delays filing 
risks losing priority to 

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judgment creditors or bankruptcy
trustees. 

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We must also examine the special
rules for proceeds under UCC 

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section 9-315-A Perfected 
security. 

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Interest generally continues in 
identifiable proceeds of the 

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collateral. 
This means that if the debtor 

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sells or disposes of the 
collateral, the secured parties 

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interest attaches to whatever 
replaces it, so long as the 

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proceeds can be traced. 
However, if the proceeds are 

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cash or funds deposited into a 
bank account, additional rules 

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may apply, particularly if the 
secured party lacks control over

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the account. 
Let me illustrate this with an 

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example. 
Suppose Acme sells inventory 

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subject to First Bank security 
interest and deposits the 

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proceeds into its general 
operating account. 

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First Bank security interest 
continues in the proceeds, but 

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if the funds are commingled with
other money, the bank may face 

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tracing challenges. 
Courts typically apply equitable

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principles, such as the lowest 
intermediate balance rule, to 

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determine the extent of the 
secured parties claim. 

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Now let's bring in some key 
cases that have shaped the 

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understanding of perfection and 
priority. 

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In Enri Leonard, the court 
examined whether a financing 

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statement that misnamed the 
debtor was effective. 

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The court held that even minor 
errors could render a filing 

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ineffective if they made the 
statement seriously misleading 

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as determined by a search under 
the debtors correct name. 

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This case underscores the 
importance of strict compliance 

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with filing requirements, 
particularly the accurate 

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identification of the debtor. 
Another important case is 

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Farmers State Bank versus 
Production Credit Association, 

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where the court addressed the 
priority of a PMSI over an 

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earlier perfected security 
interest. 

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The court emphasized that PMSI 
claimants must strictly comply 

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with the filing and notice 
requirements to gain super 

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priority. 
Failure to meet these procedural

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steps results in subordination 
to prior secured claims. 

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We should also mention and re 
Peregrine Entertainment Limited,

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where the court analyzed the 
priority between competing 

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security interests in film 
rights, a form of general 

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intangible. 
The court applied the first to 

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file or perfect rule, 
demonstrating that even complex 

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or unusual collateral types fall
within the established priority 

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framework. 
Let's walk through a detailed 

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hypothetical to solidify these 
concepts. 

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Suppose that Widget Co grants 
First Bank a security interest 

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in all its inventory and 
equipment. 

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First Bank files a financing 
statement on January 1st. 

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On February first, Second Bank 
extends a loan secured by which 

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it codes equipment and files a 
financing statement on February 

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5th. 
Under the general rule, First 

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Bank has priority because it 
filed first even though Second 

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Bank security interest attached 
earlier. 

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However, if Second Bank has a 
properly perfected PMSI in the 

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equipment, it can gain priority 
over First Banks earlier 

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interest, but only if it files 
within 20 days of which it Co 

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receiving the equipment. 
If Second Bank misses this 

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window, its interest is 
subordinate. 

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Before we conclude, let's 
briefly touch on continuation 

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and termination. 
A financing statement is 

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effective for five years, after 
which it lapses, unless a 

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continuation statement is filed 
within six months before the 

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expiration date. 
If the financing statement 

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lapses, the security interest 
becomes unperfected and may lose

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priority. 
Additionally, once the 

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obligation is satisfied, the 
secured party is generally 

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required to file a termination 
statement to clear the public 

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record. 
To summarize today's expanded 

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lecture, we have taken an in 
depth look at the methods of 

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perfection, the rules governing 
priority among competing 

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claimants, the critical 
exceptions to the general 

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priority framework, and the 
doctrinal issues that shape 

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these rules. 
We have explored key statutory 

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provisions, examined 
illustrative hypotheticals, and 

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analyzed landmark cases to 
deepen our understanding of 

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these complex but vital 
concepts. 

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In our next lecture, we will 
shift our attention to the 

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issues of default, the remedies 
available to secured parties, 

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and the enforcement mechanisms 
under Article 9. 

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We will explore how secured 
parties exercise their rights 

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when the debtor breaches the 
statutory framework governing 

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repossession and foreclosure and
the protections afforded to 

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debtors and third parties. 
Thank you for joining me today 

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and I look forward to continuing
this exploration with you in our

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next session.