Commercial Law OutlineBackground/Basic Points Secured credit, by enabling lenders to take security interests in debtors property, reduces their risk of not being paid and thereby increases the volume of credit available.

Various levels of lending: Unsecured credit given based on borrowers projected cash flow and general creditworthiness

unsecured creditors face risk that borrowers might take-on addtl debt, even secured debt, or borrowers financial position might deteriorate.

can protect against this, at least partially, by having covenants in loan agreement

covenants can achieve the same effects as a security interest by requiring borrower to not encumber or transfer certain assets

Secured-credit asset based loans. Assets can include inventory, accounts-receiveable (A/R), equipment, intellectual property, etc. Purchase money secured credit prime example, car loan, most often seen in consumer lending?

Perhaps most important difference is tx of lenders when borrowers become insolvent

Rights of Unsecured Creditors (p3) Gen rule: before judgment or its equivalent, an unsecured creditor has no rights at law or in equity in the property of his debtor.

Seller vs Debtor: Seller must first sue Debtor, obtain money judgment, then take steps necessary to authorize sheriff to seize Debtors assets Seller vs. Other unsecured Creditors and Trustee: whoever wins race to courthouse gets assets before bankruptcy. After bankruptcy, proceeds (if any) distributed pro rata among unsecured creditors, assuming no unsecured creditor has transformed himself into secured creditor by obtaining lien at least 90 days before bankruptcy filing.Rights of Secured Creditors (p5)

Lien a property right in debtors property. Most often consensual, it becomes a security interest. Creating security interest under Article 9 is quite easy. Agreement must be written (but electronic copies fine) and authenticated by debtor. It has then attached, that is, the security interest has become enforceable against debtor w/ respect to collateral, 9-203(a). Seller vs Debtor: Seller can seize collateral upon default w/ no need for court intervention

Seller vs. Other unsecured Creditors and Trustee: under 9-201(a), a secured creditors has rights to collateral that trump purchasers of collateral, or other creditors.

Secured claims trump unsecured claims unless specific Art 9 provisions provide otherwise. 9-317(a)(2)(A) says security interest must be perfected before it trumps other claims. If unsecured debtor acquires lien creditor status before security interest is perfected, security interest becomes subordinate to lien creditor. Equitable Remedies Against Secured Creditors (p9) Knox v Phoenix Leasing Inc. (Cal Ct of App 1994)

Majority Rule: Can secured creditor who seized defaulted debtors property be subject to restitution for value of goods furnished to debtor by third party? No, absent exceptional circumstances.

Outlier cases, Producer Cotton Oil v Amstar (Cal) and Duggan (CO), only allowed restitution when creditor was entitled to proceeds of crops or livestock and third-party provided harvesting services or feed, respectively, to debtor w/ understanding of creditor. B/c feed or harvest preserved (or increased the value of) the perishable collateral, third-party allowed to recover under unjust enrichment claim against secured creditor Exception restricted to cases where:

secured creditor would provide service 3rd party provided anyway as part of its duty to provide reasonable care in the custody and preservation of collateral in his possession, 9-207(1), or where creditors fraud was used to obtain 3rd party services, 1-103, principles of law and equity... shall supplement [UCC] provisions. Policy reasons behind majority rule:

secured creditors should not have to monitor debtors business so closely

plus, secured creditor would have affirmative duty of warning potential unsecured creditors

unsecured creditors put on notice by system of public filings that they are at risk

Policy Issues Is Secured Credit Efficient or Fair? (p6)

Art 9 makes it simple for secured creditors to take security interest in all debtors assets, present or future, to exclusion of all other creditors.

Pro Secured Credit

Since unsecured creditors know ahead of time their claim might be eclipsed by secured creditors, they will demand more for their increased risk. Therefore no arguments for one rule over another can be made on fairness grounds.

Secured credit can be obtained more cheaply b/c it involves less risk

But increases risk for unsecured creditors

Three types of efficiency arguments:

Cost - Secured credit can be obtained more cheaply b/c it involves less risk

But increases risk for unsecured creditors

total cost to debtor probably unchanged

Bonding by giving security interest in certain assets to creditor, debtor can ensure creditors and debtors interests are aligned.

Signaling allows borrowers to signal that they plan to pay back since it will be costly to borrower if default occurs.

Or inefficient just redistributes risk from secured party to unsecured creditors; especially if done post-hoc or w/o consent of unsecured, involuntary creditor, LoPucki calls this redistribution theft.

Anti Secured Credit

But not all unsecured creditors agree to subordinate status voluntarily (e.g. tort victims). Debtor can make himself judgment proof by granting security interests in all property.

Assumes all unsecured creditors are sophisticated parties acting w/o coercion. Not always true.

One possible reform: subordinate security interests to involuntary creditors. Secured creditors can take out insurance against such an event to prevent losses. Debtors costs would be increased.

Definitions - 9-102 (p20)

debtor, 9-102(a)(28), and obligor, 9-102(a)(59) usually the same person, but the obligor is the person owing the debt while the debtor is the person whose property is subject to the creditors security interest secured party, 9-102(a)(72) creditor in whose favor the security interest is created security agreement, 9-102(a)(73) agreement that creates the security interest. Medium can be tangible or electronic.

security interest, 9-201(b)(35) interest in property that secures payment of debt. Also applies to security interests created by specific transactions, e.g., consignments and sales of accounts, covered by UCC 9. collateral, 9-102(a)(12) property subject to the security interest. Can be tangible goods, 9-102(a)(44), like inventory, (a)(48), farm products, (a)(34), equipment, (a)(33), or intangible like accounts. financing statement, 9-102(a)(39) record, tangible or electronic, that secured party files in public records, usually states filing office.

attachment, 9-203(a) security interest attaches to collateral when it becomes enforceable against debtor. Usually occurs when debtor & secured party have entered into security agreement and secured party has given value to debtor, either by making loan or selling property on credit to debtor. perfection, 9-308(b) security interest is usually perfected when it has attached and secured party has filed financing statement or taken possession of collateral. Sometimes security interest is perfected automatically. Perfection establishes secured partys priority w/ respect to 3rd parties.

proceeds, 9-102(a)(64) property acquired by debtor upon sale, lease, licenseor other disposition of collateral. If retail debtor sells inventory collateral in exchange for cash or check, these are cash proceeds, 9-102(a)(9). Or retail debtor may sell in exchange for obligation to pay which may be an account, 9-102(a)(2), a promissory note, 9-102(a)(65), etc. Security interest in inventory carries over to the proceeds, 9-315(a)(2). record, 9-102(a)(69) information stored in tangible or intangible form so long as it is retrievable in perceivable form.Attachment (p22)

Security Interest SI attaches to collateral when it becomes enforceable against the debtor - 203(a) SI is enforceable against debtor and 3rd parties w/ respect to collateral only if: -- 203(b) value has been given debtor has rights in collateral or power to transfer rights

one of the following conditions is met:

debtor has authenticated a security agreement that provides a description of the collateral - 203(b)(3)(A) (most common) security agreement becomes authenticated when debtor signs it 9-102(a)(7) writing not needed, only a record 102(a)(69)

in electronic form, debtor authenticates by identifying itself and manifesting acceptance of terms of agreement (p23)

collateral description is sufficient if it reasonably identifies what is described and does not need to be specific. 9-108.

can describe specifically, by category, quantity, etc.

but all the debtors assets or all the debtors personal property not sufficient. 9-108(c)

for security agreement, but this generic/broad descrip is ok for fin stmt. 9-504(2). sufficient defined in Comment 2 collateral is in possession of secured party - 203(b)(3)(B)

collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, etc., and secured party has control - 203(b)(3)(D)

Composite Document Rule In re Bollinger (3rd Cir 1980) (p24) rejects formal rule requiring grant or other such language before finding presence of security agreement, and instead allows financing stmt signed by both parties, a written promissory note, and letters between both sides evidencing an intent to create a security interest in the collateral to suffice as a security agreement. IOW, a security agreement can be found through the use of multiple documents, hence the composite document rule. Pro-secured creditor argument: lets just be realistic Pro-bankrupcty trustee argument: Sec Cred are in incredibly strong positions; insisting on minimal formal reqts doesnt seem to be too much to req in exchange for such benefits.

After-Acquired Collateral (p37) Security agreements may create or provide for a security interest in after-acquired collateral. 9-204(a)

but not in consumer goods or commercial tort claims. 9-204(b)

When security agreement is silent on after-acquired collateral, court may read such a clause into agreement. UCC rules are silent on issue. 9-108, Comment 3 Majority Rule: After-acquired clauses are presumed when inventory and/or accounts-receivable are collateral, subject to rebuttal evidence that parties intended otherwise. In re Filtercorp (9th Cir 1998) (p39). Rationale: both inventory and A/Rs are cyclical by nature.

Rebuttal evidence can include specific list of inventory evidencing intent to limit reach of inventory as collateral. In re Filtercorp (p41)

Minority Rule: express language reqd. Rationale: bright line rule. Better notice to 3rd parties. Proceeds & Supporting Obligations (p42)

Gen Rule: security interest in collateral automatically attaches to identifiable proceeds. 9-203(f), 9-315(a)(2). Proceeds defined expansively. 9-102(a)(64). Includes dividends of collateral, insurance proceeds.

Proceeds of proceeds (i.e. 2nd generation proceeds and inventory) also included since def of collateral, 9-102(a)(12)(A), makes final generation proceeds & transforms all prev proceeds into collateral. Supporting obligations, 9-102(a)(77), tx in same way as proceeds since Sec interest attaches automatically. Rights in Collateral (p45)

no need for debtor to have full ownership; even if debtor only has some of the rights in the bundle of ownership rights, those rights can be collateral. 9-203, Comment 6. Even the power to transfer rights is sufficient enough for collateral. Id. Swets Motor Sales v. Pruisner (p46) holding that financing co, Chrysler Fin, took security interest in vehicles purchased by D from Swets even though Ds check to Swets later bounced. Issue was whether D had given value as reqd by 9-203(b). UCC provides that purchaser of goods acquires all title that transferor had or had power to transfer... even if delivery was in exchange for check later dishonored. 2-403.Perfection (p51)

Attachment elevates secured creditors over unsecured creditors so long as the debtor is not in bankruptcy. Once in bankruptcy, however, secured and unsecured creditors are in the same boat unless the secured creditor has perfected their interest. Perfection can be achieved in a variety of ways:

Automatic perfection upon attachment. 9-309

Possession of collateral. 9-313(a)

Perfection by Control (most often of deposits). 9-312(b)(1) & 8-106, Comment 1-7. (p100) can apply to:

deposit accounts (9-104) control of deposit accounts can be achieved in 3 ways: 9-104(a)(1)-(3)

when SP is depository bank at which acct is held

when debtor, SP, and depository bank agree in authenticated record that bank will comply with SPs instructions

when SP becomes banks customer w/ regard to deposit acct.

electronic chattel paper (9-105)

investment property (9-106), and

letter of credit rights (9-107).

in case of 1) deposit accounts as original collateral or 2) letter of credit rights other than as supporting obligations, control is the only possible means of perfection. 9-312(b)

reqts for control differ for each type of collateral.

control of ltr of credit right reqs issuer of ltr of credit to consent to assignment of proceeds of ltr of credit. 9-107.

control of a certificated security, a subset of investment property, reqs control as provided in 8-106 (i.e. delivery and indorsement of security). 9-106(a).

Compliance with other law (e.g. security interests in automobiles)

Perfection by Filing 9-310.

Security interests in accounts and payment intangibles can only be perfected by filing Notice filing and central filing were two central goals in Art 9 system. Allows filing party to establish priority in debtors collateral, and provides info to searching party about pre-existing security interests in such property. Sufficiency of Filing Statements, 9-502 Filing stmt is sufficient only if it provides, 9-502(a) name of debtor

name or name of rep of secured party

indicates collateral covered by fin stmt

However, filing stmts are effectively reqd to include address of debtor and secured party, and type and state of formation if debtor is an org, since sample form, 521(a), has space for this info and state filing offices allowed to reject fin stmts w/o this info, 9-516(b)(5). Stmts rejected for his reason are considered not filed. 9-520(a). However, if a filing ofc accepts the fin stmt that lacks such info, the filing stmt is considered valid. 9-516(a).

Filing of Financing Stmt has to be Authorized by Debtor Fin Stmt has to be authorized by debtor in authenticated record. 9-509(a).

signed/authenticated security agreement (SA) suffices to authorize fin stmt covering collateral in SA. 9-509(b) Fin stmt w/o authorization is not effective. 9-510(a).

Debtor damaged by unauthorized fin stmt can sue for damages and $500 penalty. 9-625(b), (e)(3). Debtor has right to demand termination stmt from secured party (filer) that must be sent w/i 20 days of receipt of demand letter. 9-513(c)(4).

Indication of Collateral in Filed Fin Stmt (p64)

Original Collateral

Indication of collateral in fin stmt sufficient if it provides either a description of collateral pursuant to 9-108 or indication that fin stmt covers all assets or personal property. 9-504(a) and (b), respectively. Descriptions by category, type, computation, etc. all suffice. 9-108(b)(3). Descriptions of collateral covered allowed to be much broader in fin stmt vs SA b/c fin stmt puts 3rd parties on notice (and has no effect on debtor if collateral not covered by SA) while SA actually gives creditor security interest in collateral mentioned Addtlly broad descriptions in fin stmts allow creditors to have easy to extend floating liens

Proceeds Perfected security interest in collateral automatically continues in proceeds, whether or not proceeds are mentioned in fin stmt. 9-315(c). Security interest covers proceeds until fin stmt lapses or is terminated, 9-315(e), only if:

1) proceeds are collateral in which sec interest may be perfected by filing in ofc in which fin stmt is filed, and proceeds are not acquired w/ cash proceeds. 9-315(d)(1). Sec interest in cash proceeds continues indefinitely as long as they can be identified. 9-315(d)(2)

If debtor uses cash proceeds to buy new collateral, sec interest continues for 21 days unless fin stmt indicates type of collateral covered. 9-315(d)(3), and Comment 5. Name of Debtor (p67) Name on fin stmt sufficient for individual debtor if name is given. 9-503(a)(4)(A). If debtor is general partnership, by giving name of partnership, not partners. Id. and 1-201(b)(25) (defining organization broadly).

But, if partnership has no formal name, by giving names of partners. 9-503(a)(4)(B).

If debtor is registered org, by giving name of organization indicated in the public records of the debtors organizing jurisdiction. 9-503(a)(1). Registered org, def in 9-102(a)(70), includes corps, LLC, LPs, but not gen partnerships.

Minor Errors Rule (p68) Fin stmt w/ minor errors ok, unless errors make fin stmt seriously misleading. 9-506(a). But, if correct name isnt given, fin stmt is per se misleading. 9-506(b).

But, if searcher using correct name and filing ofcs std search logic would have turned up fin stmt in question, then erroneous name provided does not make fin stmt seriously misleading. 9-506(c). Post-Filing Changes (p83) SPs generally protected; AB2I, burden falls on innocent searchers Fin stmt still effective if debtor sells, exchanges, etc., collateral, and even if SP knows of or consents to the disposition. 9-507(a). Sec Parties (SP) security interest in collateral continues even if debtor sells, exchanges, etc., collateral, and even if SP knows of or consents to the disposition. 9-315(a). But, security interest in collateral may become unperfected (i.e. fin stmt becomes ineffective) if new debtor is located in another jurisdiction. 9-316.

If orig debtor moves to new jurisdiction, SP has four months to file new fin stmt. 9-316(a)(2).

If collateral is transferred to diff debtor in another jurisdiction, SP has one year. 9-316(a)(3).

If debtor just changes name, SPs fin stmt remains effective for four months, and if extended/amended before the end of 4 mos, for however long afterwards. But if 4 mos go by w/ no amendment, fin stmt loses effectiveness w/ regard to newly acquired collateral. 9-507(c), and Comment 4.

If new holder of collateral qualifies as new debtor, 9-102(a)(56), by becoming bound to a sec agreement prev entered into by another person, 9-203(d), then fin stmt remains effective against all collateral covered by the sec agreement, not just collateral prev held by original debtor. 9-508(a). But, if fin stmt becomes seriously misleading b/c of name change, then fin stmt not effective against newly acquired collateral of new debtor acquired after 4 mos. grace period. 9-508(b). When two debtors merge, both of which had pre-existing SAs w/ diff creditors, see 9-326 to resolve conflict.

When two debtors merge, and original debtor has pre-existing SA, but new debtor has creditor that perfected by means other than filing, see 9-326. Most often creditor of original debtor is subordinated.

Filing System (p88)

Central place of filing adopted by states Secy of State. 9-501(a)(2). Initial filing stmt effective for five years, 9-515(a), unless continued, 9-515(c).

Model form at 9-521. Person entitled to file only w/ debtors authorization, 9-509(a), but debtors authentication of security agmt is presumed authorization to file fin stmt. 9-509(a). Amendments/continuation model form at 9-521(b).

If amendment adds collateral or addtl debtor, authorization is needed.

Continuation effective for addtl five years past earlier fin stmts expiration (i.e. no penalty for filing continuation early). 9-515(e).

But, continuation can only be filed w/i 6 mos of expiration date. 9-515(d). Other amendments dont continue. 9-512(b).

Termination stmts when debt is paid in full, debtor can demand that w/i 20 days SP either send debtor a termination stmt that debtor may file, or SP has to file a term stmt himself. 9-513(c). But, consumers have right to have termination stmt filed w/o their request w/i 1 month of full payment of debt. 9-513(a), (b).

Assignments of security interest -- If SP1 assigns interest to another SP2, fin stmt amendment can be filed pursuant to 9-514. But even if new/amend fin stmt isnt filed, sec interest persists b/c all other parties still have notice. 9-310(c).

Filing becomes effective when fin stmt is presented to filing office along w/ approp. fee or filing office accepts the record. 9-516(a). If filing office makes indexing mistake (making it impossible for searcher to find), SP is not held responsible. Filing is still effective. 9-517

If and only if fin stmts violate conditions imposed in 9-516(b) can they be rejected by state filing offices. 9-520(a). If filing office wrongly rejects the fin stmt, it is still effective except against a purchaser of the collateral that gives value in reasonable reliance upon absence of record from files. 9-516(d).

If filing office wrongly accepts fin stmt, it is effective unless it also violates 9-502(a). 9-520(c).

If state filing office makes error, state tort law determines whether, and to what extent (if any), they can be held liable. (p94-95).

Security Interests in Consumer Goods (p102)

Most consumer transactions governed by state consumer protection laws. See 9-201(b). Purchase money security interests in consumer goods automatically perfected at attachment, w/ no filing req. 9-309(1).

exception justified on grounds that 1) transactions are freq small, and cost of filing is prob prohibitive, 2) consumer transactions are so numerous they would unduly burden filing system & 3) parties to consumer transactions are less likely to search records. But, this doesnt apply to vehicles, boats, etc. Perfection in these items most often accomplished by listing security interest on title. 9-311.

Plus, credit cards are most often used and result in unsecured purchases.

Filing is necessary, however, to perfect nonpurchase money security interest in consumer goods, and

filing reqd for priority in consumer-to-consumer sales under 9-320(b).

Priority Chap 3 (p117) Art 9, Part 3, Subpart 3 (i.e. 9-317 thru 9-339) deal w/ establishing various creditors rights to property vis a vis the debtor and other debtors and lien holders First to File Rule Gen Rule: when parties have conflicting claims to the same collateral, whoever filed or perfected first has the superior claim. 9-317(a), 9-322(a).

Difference between filing submitting an effective fin stmt to filing office and having it accepted and perfection having an attached security interest in property attach and either having an effective fin stmt filed, or having perfection occur by some other method (automatic in case of purchase money interest, by possession of collateral, etc.) B/c most security interests are perfected by filing, rule is most often referred to as first to file. Future Advances (p119) Sec agreements frequently have both after-acquired property clauses and future advances clauses. After-acquired property clauses establish security interests in property acquired by debtor in the future, while future advances clauses use existing collateral of debtor to secure future advances made by creditor. Security agreements can have both. Future advance clause that applies sec agmt to all future loans is referred to as a dragnet clause. Gen Rule: If SP1 has filed fin stmt earlier than SP2s fin stmt, SP1 has priority even if SP2 ends up advancing money earlier than SP1, so long as both parties advanced money after they filed fin stmts. In addition, if SP1 files fin stmt and lends $ to Debtor on April 1, SP2 does the same on April 2, and SP1 lends addtl $$ on May 1, SP1 has priority over SP2 in the amt of the sum of April 1 and May 1 loans so long as security agreement had future advances clause. See 9-322(a), Comment 4. When future advances are made are generally irrelevant for purposes of priority since most often a fin stmt has been filed. 9-322(a) & 9-323, Comment 3. Leads to Financing Stmt as an Umbrella (p122)

B/c fin stmts are good for five years, and can be contd so long as debt exists, and fin stmts can cover all personal property of the debtor, the first-to-file creditor can effectively lock up the rights to all of the debtors property in the event of bankruptcy, preventing anyone else from recovering anything. Simultaneously, no other creditors may appear since the first locked up rights to all the debtors collateral. Three possible ways for junior creditors to get out from under senior creditor(s): Purchase money security interests (PMSIs) Senior creditor agrees to subordinate its security interest, at least in part, to junior creditor

Law is very accommodating to subordination agreements. 9-339. Subordination agreements are also effective in bankruptcy. BC 510.

Junior creditor buys out senior creditor

Prob better for junior creditor to take assignment of Sr creditors security interest, rather than having Sr creditor file termination stmt, and junior creditor filing new fin stmt of his own. 9-310(c) and Comment 4.

Purchase Money Priority (p129) an exception to First to File general rule Purchase money security interest (PMSI) has priority over conflicting security interests in same collateral (other than inventory or livestock) if PMSI is perfected when debtor receives possession of collateral or w/i 20 days thereafter. 9-324(a). PMSI allowed in inventory only under some circumstances. 9-324(b).

Even though debtor might have possession of property for more than 20 days, if property doesnt become collateral until some later point, 20-day safe harbor period to file fin stmt starts at the point where possessor of property becomes debtor and property becomes collateral. See Brodie Hotel Supply v U.S. (p130), 9-324, Comment 3. Purchase money obligation def as one incurred (i) as all or part of the price of collateral (seller sells goods to buyers and takes sec interest to secure the unpaid price) or (ii) for value given to enable debtor to acquire rights in or use of collateral if the value is in fact so used (lender lends money used to purchase goods). 9-103(a)(2).

Purchase money obligation includes all costs of acquisition, not just purchase price. 9-103, Comment 3.

But, PMSI limited to goods and software. 9-103(a)(1).

If property has already been acquired, creditor cannot obtain PMSI after the fact. See Prob #1, p134. Creditors money has to enable the purchase under 103(a)(2). Diff. tracing rules, FIFO or LIFO, might be used. Banks can avoid this situation by making out checks to debtor/seller jointly.

In cases of conflicting PMSIs, the sellers PMSI is normally given priority over the lenders. See 9-324(g).

Transformation Rule Rejected in Favor of Dual Status Rule (p136)

Gen Rule: Dual status rule; Just b/c loan secured by purchase money collateral is consolidated w/ another loan, 9-103(f)(3), or if collateral secures more than purchase money obligation, 9-103(f)(2), or conversely, because PMSI is secured by more than purchase money collateral, 9-103(f)(1), PMSI does not lose its status as PMSI. 9-103(f) Old rule holding that PMSI disappeared when loan was consolidated w/ others, or when collateral secured more than just amt of purchase money obligation is rejected by 9-103(f). But, Gen rule does not apply to consumer transactions. 9-103(h).

PMSIs in Inventory Req Purchase Money S/P to Notify (p138) PM secured party req to send authenticated notification to holder of conflicting security interest in order to secure higher priority. 9-324(b)(2). Notice is good for five years. 9-324(b)(3). Conflicting security interest holder must receive notice before debtor receives possession of inventory. 9-324(b)(3).

PMSI must be perfected when debtor receives inventory. 9-324, Comment 4.

PMSIs in inventory do not normally continue to proceeds. 9-324(b). PMSIs limited to cash proceeds received on or before delivery of the inventory to the buyer (i.e. cash down payments). Effectively deprives purchase money creditors of usual proceeds from credit sales of inventory, accounts, etc. In bankruptcy, inventory-PMSI holders can get down payments made on inventory, and whatever is left of inventory, but general inventory SIer gets priority to the rest. PSMIers get priority in identifiable cash proceeds (so long as they are received on or before delivery of inventory to a buyer), chattel paper or instruments constituting proceeds, and in proceeds of chattel paper. 9-324(b). 9-103(e) outlines how payments are to be allocated.

Contemporary practice is for original lender to have a negative covenant declaring the existence or creation of any other security interests in the Borrowers current or future-acquired property to be a condition of default, causing immediate acceleration of total amt due. (p145).

Not all PMSI rules are followed in consumer goods context. 9-103(h). (p145) Lien Creditors (p146) Gen Rule: Unperfected security interest is subordinate to lien holders. 9-317(a)(2). Bankruptcy trustees are lien holders from the date the petition was filed. 9-102(a)(52)(C). Gen Rule means that S/P who perfects by filing after bankruptcy filing is normally out of luck. However, if value wasnt advanced by the date the bankruptcy petition was filed, the security interest hasnt attached, and S/P is fine. See 9-317, Comment 4.

Exception to gen rule to create parity between first and subsequent advances according to prior existing sec agrmts Future Advances so long as advances are made w/i 45 days of the lien arising, S/P is okay. 9-323(b). If S/P didnt have knowledge of the lien, S/P is covered even after 45 days has lapsed since lien was filed. 9-323(b)(1), (2).

Buyers & Lessees (p148)

Buyers and lessees of non-inventory goods take subject to perfected security interests. 9-317(b). Buyers of non-inventory goods determined by looking at whether you are a buyer in the ordinary course of business. See Art 1. This, in turn, is accomplished by determining whether selling these goods is in the normal course of business by seller. If seller normally sells this stuff, the buyer is in ordinary course of business.

Interest continues in goods sold or leased and in any identifiable proceeds. 9-315(a).

Buyers and lessees of inventory take free of security interests Gen Rule: Buyers in ordinary course of business takes free of a security interest created by buyers seller. 9-320(a). Similar rule for lessees. 9-321(b). BUT, pre-existing secured interest can persist so long as they were created prior in the ownership chain to buyers seller, screwing over the unwitting, ultimate consumers

Buyer in ordinary course of business is def in such a way that a person only becomes a buyer when they take possession of goods or has a right to recover the goods from seller under Art 2. See 1-201(9). Dual-Debtor problem (p153)

Descrip of problem: D1 grants SP1 a security interest in bus equip and SP1 files fin stmt. D1 subsequently sells equip to D2, not a buyer in ordinary course of business, and D2 takes equip subject to SP1s security interest. But prior to initial SP1 fin stmt, SP2 had filed fin stmt asserting rights in all equip owned by D2, then and in the future. Chronologically SP2s fin stmt was filed earlier, but common sense says SP1s rights shouldnt just be obliterated. 9-325(a) resolves conflict in SP1s favor. Debtors grant of security interest is subordinate to security interest in same collateral if:

debtor takes subject to prior security interest by other debtor

that prior security interest was perfected at time Debtor acquired collateral, and

no period where security interest was unperfected.

Comment 3 and 6 to 9-325 suggest that the reasoning behind 9-325 could be extended to fit situations that dont meet the exact, formal reqts of 9-325(a)(1)-(3).

Rights to Payment (p160)

Rights to payment: accounts receivable, payment intangibles, chattel paper and instruments. Often referred to as receivables. Chattel paper, 9-102, Comment 5b, a monetary obligation w/ a security interest in or a lease of specific goods if obligation and security interest or lease are evidenced by a record(s). Installment sales contracts and leases of goods are prime examples. Chattel paper can be tangible or electronic, 9-102(a)(78) and 9-102(a)(31), respectively. General intangible, 9-102(a)(42), a residual category meaning personal property other than accounts, chattel paper, etc., including payment intangibles and software, rights in software, copyrights, trademarks, patents, etc. Payment intangible, 9-102(a)(61), subset of general intangibles under which account debtors principal obligation is a monetary obligation. Prime example is bank loan.

Promissory note, 9-102(a)(65), an instrument that evidences a promise to pay money. Def excludes checks and CDs.

Accounts & General Intangibles (p181) Priority in Proceeds Gen Rules:

Accounts and gen intangibles can be perfected only by filing, 9-310(a).

Priority between conflicting sec interests in accounts and gen intangibles is determined by first-to-file rule of 9-322(a).

Purchase money security interests can be created only in goods and software, and not in accounts. 9-103 and 9-324, Comment 2. Gen Rule: If debtor sells collateral (covered by perfected SA) and proceeds are accounts (not covered by SA), debtor has perfected security interest in accounts dating back to original fin stmt. 9-315(c),(d)(1). BUT, if direct proceeds from sale of collateral are cash proceeds, debtor generally has only 20 days to file new fin stmt to continue perfected sec interest in new collateral purchased w/ cash proceeds, unless new collateral is also covered by orig fil stmt. 9-315(d)(1)(C) and Comment 5. For ex., filed fin stmt covers only inventory. Debtor sells inventory for cash and then purchases equip. Sec interest in equip not perfected automatically. Diff result if orig fin stmt covered both inventory and equip. One exception to need to file fin stmt for accounts is when they are truly isolated instances or parties would never think of filing. 9-309. 9-309(2) lays out significant percentage test, to which case law adds a casual or isolated instance prong. See In re Tri-County Materials, Inc. (p183). 9-309, Comment 4 backs this dual prong test. Chattel Paper & Instruments (p186)

Chattel paper is basically a record of both a monetary obligation and security interest in specific goods or lease of goods. Traditionally, accounts were not seen as pledgeable, but chattel paper was seen as pledgeable b/c possession of that record was seen as evidence of the right to collect payment. In effect, the record of the obligation to pay is merged into that instrument the holder of the record is the one and only obligor. chattel paper, def in 9-102(a)(11), can include leases, but excludes charters of vessels or rights to payment of credit or charge cards. Another exception to first-to-file rule: Disputes over chattel paper generally involve a Creditor floor planning a dealers inventory with a filed fin stmt covering inventory. Dealer subsequently sells/leases inventory in exchange for chattel paper, and sells chattel paper to Fin Co.

Creditor claims sec interest in chattel paper merely as proceeds of inventory, while Fin Co holds possession. Fin Co wins if Fin Co purchased chattel paper, 9-330(a): in good faith and in the ordinary course of purchasers business

purchaser gives new value, and

takes possession of chattel paper (or obtains control), and chattel paper itself doesnt indicate that it has been assigned to someone else. If creditor claims sec interest in chattel paper other than merely as proceeds, purchaser still wins if, 9-330(b): purchaser gives new value,

takes possession (or control) in good faith,

in the ordinary course of purchasers business, and w/o knowledge that purchase violates rights of SP

Creditor better off if they impose controls on Dealers handling of cash proceeds in Dealers possession. Merely as proceeds only qualifies for other than merely as proceeds if original SP has stamped/legended actual chattel paper so that Fin would have to know upon seeing it. 9-330, Comment 5.

Instruments, def in 9-102(a)(47) as basically rights to payment, including negotiable instruments, 3-104(a), (b).

Treated similar to chattel paper per 3-330(d). Main difference is: purchaser of instrument only has to give value, not new value as in case of chattel paper.

Req of good faith, 9-330(d), does not necessitate inquiry. 9-331, Comment 5.

Some conflict between 9-330(d) and 9-331(a) for negotiable instrument??? (see bot p194)

Deposit Accounts (p196) Deposit Accounts includes everything from checking & saving accts to trust accts; excludes CDs. 9-102(a)(29). Art 9 excludes consumers from pledging deposit accts as original collateral. 9-109(d)(13).

to get around, just transfer money into money mkt acct or CD

Attachment, 9-203(b)(3)(D), perfection, 9-312(b)(1), and priority, 9-327, over deposit accounts all depend on control (9-104) Control over deposit accounts, 9-104. SP has control, 9-104(a), if:

(1) SP is bank w/ which dep acct is maintained

(2) debtor, SP, and bank have agreed in authenticated record that bank will comply w/ SPs instructions re: disposition of acct w/o further consent by debtor

(3) SP becomes banks customer w/ respect to dep acct (acct put in SPs name)

Control is sole method of perfection for sec interests in deposit accts as original collateral. See 9-312(b) and 9-104, Comment 2. Priority: Sec interests in Dep Accts as Proceeds of Other Collateral (p200) When two SPs w/ dueling security interests assert claims in debtors deposit acct and one has control (i.e. the bank), then the one w/ control wins. 9-327. Even if bank does not have sec interest in acct, bank can still prob exercise right to set-off or recoupment against secured creditor w/ regards to $$ in deposit account. 9-340.

Even if SP obtains 104(a)(2) control, bank still wins under 327(a)(3). Only 104(a)(3) control (where SP gets account put into its name) suffices to defeat Banks priority. Even a later arising sec interest by Bank triumphs. See Comment 4e to 9-101.

In addition, Bank can refuse to enter into agreement described by 104(a)(2).

Only way for SP to protect itself vis a vis Bank is 104(a)(3) control, or subordination agrmt w/ Bank, 9-339.

In bankruptcy, unless SP has control over deposit acct, SP loses b/c control is only way to perfect sec interests in deposit accts. So subordination agrmt w/ Bank only protects in non-bankruptcy situations.

Cash Proceeds (p205)

Priority: A person who receives money or funds from a deposit account takes free of a security interest unless the transferee acts in collusion w/ the debtor in violating the rights of the SP. 9-332(a), (b). Collusion std described in Restatement of Torts 876, per 9-332, Comment 4. Collusion occurs when person either: commits tort in concert w/ another, or

knows that anothers act is a breach of duty and gives substantial assistance to the violator and in doing so breaches his own duty to the victim.

Lowest Intermediate Balance Rule: to the extent cash proceeds are mingled w/ other non-proceeds, cash proceeds remain identifiable to the extent that the SP identifies the proceeds by a method of tracing, including app of equitable principles, that is permitted under law other than this article... 9-315(b)(2) most pre-Revision cases used Lowest Intermediate Balance (LIB) rule. 9-315, Comment 3 approves.

LIB rule leaves SP with rights only to extent of the lowest acct balance over the period in question. If acct goes to zero or negative bal, the SP is shit out of luck. Creditor should use a lockbox account, see p222 (bot), to avoid the possibility of co-mingled proceeds.DEFAULT & ENFORCEMENT Chap 4 (p247) Default

Upon default, a secured creditor is entitled to take possession of tangible collateral and sell them in order to satisfy the secured debt. Similarly, the SP is allowed to collect directly from account debtors where chattel paper or accounts were the collateral. Once a person/entity has declared bankruptcy, all creditor action is automatically stayed.

Default is not def w/i Art 9, leaving most to agree that default is whatever the security agreement says it is. See Gilmore (p248).

Most often, total debt due is accelerated once any default has occurred. But if Sec Agmt is silent on the issue, creditor can only dispose of collateral up to amt of overdue installments. 9-610(a).

Excess amts must be returned to debtor. 9-615(a)(2), (d)(1).

Insecurity clauses if SA gives creditor right to accelerate at will or when it deems itself insecure, creditor is only allowed to do so if the creditor believes in good faith that prospect of payment or performance is impaired. 1-309.

Good faith honesty in fact and observance of reasonable commercial stds of fair dealing. 1-201(b)(20). Burden of proving lack of good faith is on debtor. Waiver & Estoppel (p260) If SP hasnt insisted on debtors compliance w/ deal terms, SPs behavior can be interpreted in two ways. 1) Debtors behavior could be part of a course of dealing, understood as an element of parties agreement. 1-303(a), (d).

2) SPs conduct could constitute a waiver of debtors default. Moe v John Deere Co. (p260) Ct holds that John Deeres repeated willingness to accept late payments constituted a waiver which could only have been cured by sending a letter insisting on strict compliance w/ terms in future.

Ct held that even though non-waiver clause was in K

Enforcement (p266) SPs can sue debtors in court, obtain a judgment and therefore attack all of the debtors property, not just the collateral. Repossession: Extra-Judicial actions

Sale or other disposition of collateral. 9-610.

Repossession: SP has right to repossess collateral upon debtors default w/o judicial assistance. 9-609.

But, SP can only do so if done w/o breach of the peace. 9-609(b)(2).

What constitutes breach of peace? Traditionally, risk of violence is key factor, but sometimes even that interpreted favorably to SP. See Williams v Ford Motor Credit Co. (p272) If breach of peaces does happen, SP is liable to debtor for any loss suffered as a result. 9-625(b).

Commercially reasonable sale at either public or private sale, 9-610, and apply proceeds to satisfaction of debt w/ surplus going to debtor.

Collection of rights to payment.

proceed in commercially reasonable manner under 9-607 to collect amt owed by notifying account debtor to make payment to SP. If debtor consents in manner prescribed under 9-620, SP can accept collateral as partial or full consideration of amt owed to SP. Repossession: Judicial Action SP can respossess by judicial action. 9-609(b)(1). SP can also reduce its claim to judgment, levy on the collateral, and execute on its judgment by a judicial sale pursuant to 9-601(a).

Sale conducted by judicial officials in accordance w/ state law.

Reqts of a commercially reasonable disposition dont apply, and whether a SP may bid is governed by state law. 9-601, Comment 8.

Judicial sales may be costly, and no guarantee that those costs can be recovered.

Also, if property damaged while being seized by marshalls, SP is immunized from those damage claims. 9-604(d). Disposition of Collateral (p280) Art 9, Part 6 allows sale of collateral at private sales (held to ex post commercial reasonableness std) in effort to avoid limiting sales to colluding bidders on courthouse steps. 9-610(b), 9-609(b), 9-627(b). Notification before Disposition If SP decides to foreclose by extra-judicial sale, SP shall send... a reasonable authenticated notification of disposition to debtor, any secondary obligor (e.g. guarantor). 9-611(b), (c). Though notice must be sent, no proof of receipt necessary

oral notice does not suffice (see authenticated)

9-613 prescribes contents of notification in non-consumer cases. 9-614 for consumer cases.

date and time and place of sale must be listed.

method of disposition (public, private)

if public, SP may bid. 9-610(c).

Public described in 9-610, Comment 7.

If private, SP may only bid if collateral is customarily sold on recognized mkt. 9-610(c). Stocks on NYSE okay, cars per Blue Book not. 9-610, Comment 9.

9-613 gives commercial creditors more leeway if they omit any info listed in 9-613(1). In addition, minor errors ok. 9-613(3)(B). Commercial SPs are given safe harbor if they send notice at least 10 days before earliest disposition. 9-612(b). Doesnt apply to consumer cases.

Notification of disposition can be waived by agreement authenticated after default. 9-624.

Equitable Doctrine of Marshalling, 1-103(b). (p287) If two creditors have security interest in one piece of collateral, and one creditor also has security interest in another piece of collateral, court can req creditor w/ two security interests to proceed against piece of collateral with only one security interest first. See Meyer v. US. Only allowed when one SP wouldnt be inconvenienced or harmed by this reqt. Commercially Reasonable Disposition (p288) SP may sell, lease, license, or otherwise dispose of collateral in present condition or following any commercially reasonable prep or processing. 9-610(a). But, collateral must be prepped if selling in present condition would be commercially unreasonable. 9-610, Comment 4.

Every aspect of disposition must be commercially reasonable. Public or private proceedings, more than 1 K, as a unit or in parcels all okay if commercially reasonable. 9-610(b).

But, public sales not always commercially reasonable. See Farmers Bank v Hubbard (p299), 9-610(b).

Commercially reasonable def in 9-627. Safe harbor, 9-627(b)(3), if disposition is made in conformity w/ reasonable commercial practices among dealers in the type of property subject to disposition. Correct procedure in sale more important that final price achieved. If price low, still ok so long as commercially reasonable procedures were followed. 9-627(a). General Electric Capital Corp. v Stelmach Construction Co. (p289) excellent example of many steps savvy creditor took to protect itself against later claims of commercial unreasonableness. Advertised sale, listed each item of collateral individually, contacted potential buyers directly, allowed pre-auction inspection, etc.

Some duties/rights not waivable. 9-602.

But, parties can agree on stds to measure compliance w/ those rights/duties. 9-603. If SA sets out stds/def of commercial reasonableness, then compliance w/ SA is strong evidence of commercial reasonableness. See Ford Motor Credit Co. v. Solway (p302).

Liability for Deficiency (p296) If SP doesnt recover full amt owed after sale of collateral, SP may elect to sue for deficiency judgment, though doing so might be expensive and debtors assets might already be encumbered. Obligor is liable for any deficiency, and debtor is entitled to any surplus. 9-615(d).

But, if underlying transaction is sale of accounts, chattel paper, promissory notes, etc., debtor is not entitled to surplus and obligor is not liable for any deficiency. 9-615(e).

If SP doesnt comply w/ disposition reqts, what is debtors remedy? Rebuttable presumption rule says baseline assumption is the correct procedures wouldve resulted in sale equal to debt, and SP has burden (and ability) to prove otherwise. 9-623(a)(3), (4), Comment 3. Consumer Transactions Cts free to adopt their own rules re: SPs non-compliance w/ disposition remedies in cases where debtor is consumer. 9-626(a). Acceptance of Collateral in Satisfaction of Debt (p305) SP must get debtors authenticated consent. 9-620(a)(1), (c). but, if SP sends an unconditional proposal accepting collateral in full satisfaction of debt, and SP does not receive notification of objection authenticated by debtor w/i 20 days after proposal is sent, consent is presumed. 9-620(c)(2)(A-C). Good faith still reqd; if SP tries to obtain consent via silence by accepting collateral worth $1mil in exchange for $100K debt, Ct will probably intervene. 9-620, Comment 11; Gilmore, p306. Acceptance of collateral in partial satisfaction of debt must be expressly agreed to by debtor. Silence not acceptable. 9-620(c)(1). Acceptance of collateral in partial satisfaction of consumer debt not allowed. 9-620(g).

Acceptance of chattel paper, accounts, etc., for full satisfaction considered a sale of such instruments to SP where formalities reqd by 9-309 are considered automatically fulfilled. 9-620, Comment 10. 9-628 immunizes SP from liability to unknown persons. See also 9-605. Constructive possession - whereby SP holds onto collateral for several months - does not suffice to remove need for explicit acceptance by both SP and debtor. 9-620(b). Effect of Disposition or Acceptance on 3rd Parties (p309)

If 3rd party (good-faith transferee) takes collateral after auction, transferee takes all debtors rights in property, and free and clear of any debtors claims. 9-617(a), (b). Junior Security Interests/Liens

Buyers at foreclosure auctions also buy free and clear of any security interests or liens junior to that being foreclosed. 9-617(a)(3). Any junior creditor w/ fin stmt on file covering collateral seized, or who has notified SP1 before sale of a claim on that collateral must be notified by SP1. 9-611(c)(3). SP1 given notification safe harbor if 9-611(e)s notice provisions complied with.

Surplus only reqd to be shared w/ junior secured party if junior SP sends authenticated demand for proceeds to ranking SP. 9-615(a)(3)(A).

Junior creditors entitled to recover from SP1 for their errors in accordance w/ 9-625(b), (c). Senior SPs acceptance of collateral wipes out all rights of junior lienors and other subordinate interests. 9-622(a).

Junior parties can object to proposal to accept w/i timelines laid out in 9-620(d). Senior SPs must send notification of proposal to junior parties. 9-621(a). Collection of Rights to Payment (p311) If collateral is chattel paper, accounts, etc., security agreement and Art 9 both will allow SP to collect from account obligor directly. 9-607(a)(1).

If collateral is chattel paper, accounts, etc., no reqt that SP notify debtor before SP collects directly from account obligors. If SP doesnt want to collect directly, SP may sell accounts. 9-610. Again, debtor is not entitled to surplus and SP is not entitled to deficiency when accounts, chattel paper, etc., are sold. 9-608(b). When are accounts, chattel paper, etc., sold outright compared to sale of accounts that secure an obligation? 9-109, Comment 4 leaves test to Cts.

See Majors Furniture Mart v Castle Credit Corp. (p313), holding that despite Sec Agmts explicit reference to sales of accounts, nature of transaction and nature of recourse was more akin to financing transaction vs. outright sale. Big point of analysis was risk allocation. B/c Majors retained almost all risk, transaction was seen more as fin than sale.

In addition, SPs returns on accounts, fixed or related to assets performance, can be determinative. Question is important b/c if debtor sold accounts outright to SP, then debtor is not due any surplus collected from account debtors. Conversely, if SP retained a security interest in accounts in exchange for giving loan/money, then relationship is more a secured loan, and debtor is due any surplus collected from accounts by SP.Leases & Consignments Chap 5 (p323) Leases Difference between leases and purchase money secured transactions are tough to discern. But, Art 9 does not cover leases. See Art 2A instead. Difference: in a lease situation, the lessor has a residual interest in property and is entitled to get property back when term of lease is over. In secured transaction, when debtor pays its debt, security interest ends and former debtor owns property outright. Even though lessee can appear to own property, no need to notify 3rd parties (filing), and creditors are prior to lessors interest in property. See 2A-307(1); 2A-301, Comment 2. Why do people lease v. retain security interest? Tax and accounting treatments vary significantly. Lease w/ Option to Purchase or Renew (p325)

Key factors to differentiate between lease/security interest: 1-203. If lessee cannot terminate lease, and 1 of 4 factors in 1-203(b) is present = automatically becomes security interest. Otherwise, consider facts of the case.

In re: Zaleha (p325) for thorough discussion of pertinent factors.

In deciding whether option to purchase is for nominal amount, important to consider that fact when the contract was signed, not at the time the option can be exercised. In re: Zaleha (p329)

Open-End Lease (p344) Open-end leases: relationship between lessor/lessee does not end, instead includes sale of [vehicle] and adjustment between two parties based on sales price.

Key point in equip and consumer leasing business is terminal rent adjustment clauses (TRAC) In re Tulsa Port Warehouse Co. (p344) Lessor regains possession of car at end of lease, sells it at wholesale auction, and lessee is entitled to surplus/responsible for deficit depending on price obtained at auction.

B/c lessee seems to be bearing both upside & downside risks of equity, Ct leans towards security interest

Addtl factors: lessee was reqd to obtain ins, pay sales tax, licenses, registration, etc., pay for maintenance & repairs Ct concludes arrangement in sale w/ GMAC retaining security interest, not a lease. Therefore GMAC becomes unsecured creditor in bankruptcy b/c no fin stmt was filed.

Cts still divided on question of whether open-end lease is really just a security interest since lessees bear the upside/downside risk. Consignments (p349)

Consignments where a wholesaler/mfg retains all title and interest in goods, but gives store possession of them to sell. When/if sold, title passes from wholesaler/mfg to buyer directly. If not sold, goods returned to wholesaler/mfg. Allowed/incentivized stores to stock new and/or risky merchandise w/o having to outlay any of their own precious capital. Art 9 covers consignments meeting def in 9-102(a)(20). Must meet all conditions of following test: person/dealer delivers goods to merchant for purpose of sale, and for purpose of sale does not exclude goods that need to be processed, milled, etc., further or incorporated w/ other materials in order to constitute final product. 9-102, Comment 14. But if processor is simply processing goods and delivering them to someone pre-selected by owner, then not consignment. Id. merchant deals in goods of that kind under a name other than that of person/dealer,

in goods of that kind so long as components are regular parts of consignees business, no problem. For ex., seller of window frames held to be dealer of wood preservative since it was regular component. In re Georgetown Steel Co. (p357). is not an auctioneer, and

is not generally known by its creditors to be substantially engaged in selling the goods of others. aggregate value of goods must be > $1000 at time of delivery

goods are not consumer goods immediately before delivery, and transaction does not create security interest that secures obligation.

If transaction falls w/i 9-102(a)(20) def, its covered by Art 9. 9-109(a)(4). If transaction does create a security interest, then its merely inventory financing. 9-109, Comment 6.

Traditionally, if consignee (store) had to pay dealer/mfg regardless of whether item was sold or not, then arrangement was considered to have created security interest, thus violating 102(a)(20)(D)s condition making it just plain old inventory fin and not a consignment

TAKE-AWAY: File fin stmt even if its consignment.

Other pertinent diff:

Consignment that meets def of 9-102(a)(20) isnt restricted to recovery rules of Part 6. Consignments that create security interest that secures obligation, 9-102(a)(2)(D), are.Security Interests in Bankruptcy Chap 9 (p461)

INTRO/BACKGROUND

Chapter 7 bankruptcy most simple method, referred to as liquidation. Chap 13 bankruptcy reorganization

avail to individuals who owe:

less than $300K + in unsecured debt and less than $900K + in secured debt. BC 109(e).

debtor can be discharged from bankruptcy w/o losing nonexempt property debtor reqd to create plan where debtor pays, in whole or part, some or all debt over a period of time (most often 5 yrs). creditors paid from earnings, although some assets may be liquidated.

Plan doesnt need to be approved by creditors, only bankruptcy court. If approved, creditors are bound. BC 1327(a).

creditor can object, however.

if plan doesnt provide for full payment of debts, all projected disposable income must be accounted for. BC 1325(b)(1).

Chap 11 bankruptcy mostly business reorg (though can be used by individuals)

debtor normally allowed to retain assets & continue to operate business normally debtor discharged only after plan approved the various classes of creditors and stockholders

acceptance by class accomplished by vote of members in class in specified majorities. sometimes plan can be approved w/o every classes approval

plan normally provides that creditors be paid (maybe not full amt) from debtors assets and post-discharge earnings. if plan is accepted, pre-bankruptcy debts discharged

Petition in Bankruptcy & the Automatic Stay (p464) voluntary bankruptcy started w/ debtor filing a petition in bankruptcy court. BC 301. This filing acts as automatic stay against most acts against debtors property. BC 362(a). Filing stays: start or continuation of judicial proceedings against debtor to recover pre-bankruptcy claims

enforcement of pre-bankruptcy judgment

any act to obtain possession of property any act to create, perfect or enforce any lien against property of estate

But creditor can get some relief under BC 362(d) in some cases.

Trustee in Bankruptcy (p465)

Chap 7 bankrutpcy estate administered by trustee (either an individual or corp). BC 321 Duties of trustee listed in BC 704.

principal duties include: collecting property of estate, reducing it to money (i.e. selling it), and applying proceeds to payment of expenses of bankruptcy and claims of creditors collecting property can include recovering property transferred in pre-bankruptcy transaction deals. These avoidance powers are most important aspects of bankruptcy.

trustee may also investigate and oppose improper claims

Trustee is fiduciary, but is primarily tasked w/ securing biggest payout for unsecured creditors Chap 12 or 13 trustee different from Chap 7 mostly collect earnings from debtor that are source of payments under re-org plan

Chap 11 normally doesnt involve trustee, instead debtor continues as debtor in possession. BC 1107(a), 1108.

Claims in Bankruptcy (p466)

Chap 7 Secured Claims Proof of claim normally filed by creditor written stmt setting out creditors claim. BC 501. Creditor def in BC 101(10). Claim only paid if allowed, which simply means that its recog by Ct as valid in amt claimed. BC 502 governs allowance and disallowance

To the extent a debtor has a secured claim not covered by value of collateral, part of claim not covered becomes unsecured. BC 506(a)(1). Value determined by bankruptcy court. Chap 7 Unsecured Claims (p466)

After disposing of property in satisfaction of secured claims, remainder get distrib to unsecured creditors.

Priority among remaining claims outlined in BC 726. First priority is domestic support obligations, BC 101(14A), second is admin expenses, BC 503, and then come addtl categories in BC 507(a)(3)-(10).

Finally, distrib to remaining unsecured creditors according to pro rata share.

BC 507 also applies to Chap 11-13 cases.

Chap 7 Discharge

Individuals normally receive discharge from pre-bankruptcy debts. BC 727(b).

Some claims may not be discharged. BC 727(a).

Non-dischargable debts listed in BC 523(a).

SECURED CLAIMS IN BANKRUPTCY (p467)

Upon debtors bankruptcy filing, secured party becomes holder of secured claim. BC 506(a)(1). Secured claims take off the top (i.e. first). BC 725.

AVOIDANCE POWERS OF TRUSTEE (p492) Trustee not only succeeds to the assets of the debtor, BC 541(a)(1), but also has power to reach back and nullify pre-petition transfers subject to some infirmity. BC 541(a)(3). Strong arm clause allows trustee to set aside unperfected security interests in their entirety. BC 544(a).

BC 546(b) allows perfection after bankruptcy to defeat rights of trustee when Art 9 gives retroactive effect to perfection. If purchase money security interest attaches before bankruptcy, and Art 9 allows retroactive fin stmt to be filed, e.g. 9-317(e), then creditor also protected. (??? Really??? See problems, p493)

Where creditor files fin stmt before bankruptcy, but security interest doesnt actually attach until after bankruptcy filing, creditor ok. 9-317(a)(2)(B), BC 544(a).

Preferences: If insolvent debtor pays unsecured creditor in preference to other creditors w/i 90 days of bankruptcy, payment may be recovered by trustee. BC 547.

Five elements of a voidable preference BC 547(b). Trustee may avoid any transfer of an interest of debtor in property transfers include creation of a lien. BC 101(54). So long as w/i 90 days of bankruptcy declaration, lien can be nullified by trustee. If transfer was cash, equiv amt can be recovered. BC 541(a)(3). 1) to or for benefit of a creditor

if guarantor of debt is forced to pay debtors debt, creditor receiving guarantors payment cannot be attacked since debtors property was not involved (estate isnt any smaller as a result of guarantors payment). if debtor pays creditor on debt guaranteed by Guarantor, then trustee can attack either creditor or guarantor if w/i 90 day window. (p500).

2) for or on acct of antecedent debt owed by debtor before such transfer was made. But BC 547(c) lists exceptions: if bank advances funds to debtor and w/i short period debtor grants security interest to bank to secure debt, then transfer is substantially contemporaneous w/ advance, and immune from attack. BC 547(c)(1). except if creditors intent to obtain security interest is not contemporaneous (i.e. it only arises later). See Natl City Bank v Hotchkiss (p502)

Money advanced by creditor to purchase new property exempt from avoidance. BC 547(c)(3). Creditor allowed 30 days to perfect; transfer then took place when property transferred, not perfection. BC 547(e)(2).

payments in ordinary course of business or according to ordinary business terms, BC 547(c)(2), are exempt from avoidance. if payment method changes, may no longer be in ordinary course

late payments not ordinary, unless late payments were normally accepted in prior history.

floating liens: transfers involving account receivables, inventory, or proceeds of either, not avoidable. BC 547(c)(5). If this provision didnt exist, some question as to when perfection happened w/ these goods would arise. creditor (s/p) is in as good a position as hell ever be 90 days before bankruptcy; s/p can be worse off, but cant be better off

if commodity prices increase, and that makes s/p better off, fine, but even if more oil, gold, etc., is accumulated as collateral, it cant put s/p in better position than he was 90 days before filing. (?? Check this against class notes and answers to problems on p509). Delayed perfection (diff from delayed attachment, see above) okay so long as w/i 30 days. BC 547(e)(2) 3) made while debtor was insolvent

presumption is that debtor was insolvent 90 days before filing. BC 547(f).

4) made on or w/i 90 days before filing of petition, or between 90 days and 1yr before filing of petition if creditor was insider, and insider def in BC 101(31), but not limited to those listed (p499).

5) that enables such creditor to receive more than such creditor would receive if: case was under Chap 7, transfer had not been made, and creditor received payment of debt to the extent provided by Chp 7 law.

KEY POINT: So if creditor has perfected correctly, transfer is only avoidable if secured party is under, or not, collateralized. If SP has security interest in collateral worth more than payment made, then its not avoidable b/c under bankruptcy, SP wouldve had rights to that amt anyway. If debtors property had two liens on it and otherwise superior lien is avoidable in bankruptcy, second lienholder does not benefit. Instead, avoidance always operates to benefit estate. BC 551. If insolvent debtor transfers property to another w/o receiving reasonably equivalent value in exchange w/i 2 years of bankruptcy, trustee can recover property even if no fraud was involved. BC 548. Subrogation of Trustee - BC 544(b).

If trustee can find one actual unsecured creditor at time of bankruptcy against whom the debtors transfer is voidable, the trustee can set aside the entire transfer for the benefit of the whole estate. BC 541(a)(3), 550(a).

Principle, known as void against one, void against all, codified in BC 544(a) and BC 550(a).

If one unsecured creditor relied upon lack of fin stmt in making loan to Debtor, and thereafter secured party files fin stmt (late), then normally perfected security interest trumps. But, if debtor has filed for bankruptcy, then b/c perfected security interest is void against creditor who relied upon lack of fin stmt, perfected security interest if void against all unsecured creditors. See problems p.494.Negotiability and Holders in Due Course Chap 11 (p600)

Two fundamental idea behind negotiable instruments: Good faith purchase -- if a stranger purchased the bill for value, in good faith, and in the ordinary course of business, he held it free both of underlying K defenses and of outstanding equities of ownership.

Merger doctrine -- the piece of paper on which the bill was written should be treated as if it, the paper, was itself the claim or debt which it evidenced.

Definitions: Note, or promissory note promise to pay another person, the payee. 3-104(e). A note is a negotiable instrument if it complies w/ reqts of 3-104(a), unconditional promise to pay $$ to a bearer or order. TWO PARTY TRANSACTION.

Draft an order by a drawer, 3-103(a)(5), to a drawee, 3-103(a)(4), to pay a payee, 3-104(e). A check is the most common form of a draft. 3-104(f). Person signing the check is the drawer and bank on which check is drawn in drawee. THREE PARTY TRANSACTION.

Holder in most cases, holder is possessor of an instrument that is either payable to that person or indorsed to that person. But possessor of bearer instrument is holder. Person must be holder before they can be holder in due course. 1-201(b)(21). Merger Doctrine (p604) Negotiation Basic rule on enforcement: Person entitled to enforce (PETE) an instrument means 1) the holder of the instrument, 2) a nonholder in possession of the instrument who has rights of a holder, or 3) person not in possession of the instrument who is entitled to enforce instrument pursuant to 3-309 (lost instrument) or 3-418(d) (dishonored instrument). A person may be a PETE even though the person is not the owner of the instrument or is in wrongful possession of the instrument. Note payable to bearer: A note is issued by a maker when it is first delivered. 3-105(a), 3-103(a)(5).

When person receives delivery from maker, she becomes bearer of note as well as its holder. 1-201(5), (21). Right of possessor to receive payment is based on fact that person is holder, not on her ownership. 3-301. If original payee loses bearer note, and Finder takes possession, Finder becomes holder (but not owner) and thereby has right to enforce bearer note. 3-301. Transfer of possession alone, voluntary or not, is described as negotiation of bearer note. 3-201(a). Note payable to order: note payable, for ex., to order of Rachel. 3-109(b). Upon delivery, Rachel becomes holder b/c shes in possession and she is person identified in note as payee. 1-201(21).

Negotiation of note payable to order requires not only possession, but also indorsement by holder. 3-201(b).

Indorsement, described in 3-204(a), can be made for several purposes:

negotiation,

restricting payment of instrument

incurring indorsers liability on the instrument

Signature is indorsement unless it is clear by placement, accompanying words, etc., that signature is on instrument for alternate purpose. 3-204(a).

Special indorsement, 3-205(a), makes instrument payable only to specific person, and normally consists of Pay to Johnson before holders signature.

blank indorsement, 3-205(b) & 3-109(c), transforms note from payable to order to bearer note.

Transfer (p605) Right to enforce instrument normally obtained via negotiation, but right to enforce can be obtained w/o negotiation sometimes. If payee of note transfers note to another w/ intent to serve as payment, a transfer of the note has taken place. 3-203(a). Reqs delivery, a voluntary transfer of possession, 1-201(b)(15), and intent to give transferee right to enforce.

With transfer, possessor of note can then become PETE under 3-301(ii), b/c possessor gains rights of a holder. 3-203(b) Plus PETE has specifically enforceable right to have prev holder indorse the note so that PETE also becomes holder. 3-203(c). Discharge (p607) Tradtl rule held that only payments to holder of the note discharged the obligation to pay the note Corrollary was that if discharge was only obtained if correct person was paid.

MODERN RULE: 3-602.

Payment to person formerly entitled to payment suffices only if party obliged to pay has not received adequate notification that note has been transferred and that payment is to be made to most recent transferee. 3-602(b). Adequate notification) signed by transferor or transferee, 2) reasonably identifies transferred note, and 3) provides address at which future payments should be made.

Upon request, transferee of note shall provide reasonable proof that note was transferred. Until that time, person can continue paying old holder of note.

Holder in Due Course: Freedom from Claims & Defenses (p610)

A holder in due course (3-302) takes free of some defenses of the obligor (3-305(b)) as well as claims of ownership (3-306). Claims of Ownership (p611) Holders in due course take free of ownership claims. 3-306. In comments, claims is construed extremely broadly, basically immunizing holder-in-due-course from claims by previous or original owners of instrument.

Ordinary defenses (p612) per 3-305(b), rights of holders in due course to enforce instrument limited only by real defenses listed in 3-305(a)(1). holders in due course cannot be limited by ordinary defenses, 3-305(a)(2), or claims in recoupment, 3-305(a)(3).

Ordinary defenses, 3-305(a)(2), listed in first paragraph of Comment 2.

mostly: fraud, misrepresentation, and mistake in issuance

Real defenses (p612) See 3-305, Comment 1, most real defenses involve some kind of public policy concern of state (illegality, infancy, duress, etc.) Claims in Recoupment, 305(a)(3) only available against non-holders in due course Formal Reqts of Negotiable Instruments (p613) Most important elements of negotiable instrument, 3-104(a), establish a bright line test, and include: only an order, a written instruction to pay money signed by the person giving the instruction, 3-103(a)(6) or promise, a written undertaking to pay money signed by person undertaking to pay, 3-103(a)(9), qualify as negotiable instrument negotiable instrument is always a signed writing that promises or orders payment of money negotiable instruments can be notes or drafts

draft = order, 3-104(e)

checks are most common forms of draft, 3-104(f)

note = promise, 3-104(e)

CDs are considered notes, 3-104(j).

order or promise must be payable to order or bearer, 3-109

order or promise to pay must be unconditional, def in 3-106

order or promise to pay must be payable on demand or at a definite time, 3-108. order or promise to pay must be fixed amt of money, w/ or w/o interest, 3-112, or other charges, 3-104(a).

Reqts for Holder in Due Course (p622) two reqd elements per 3-302 instrument when issued or negotiated to holder isnt obviously forged or fake, and holder took instrument

1) for value (p661) only a holder who takes an instrument for value can be holder in due course. 3-302(a)(2)(i) value def in 3-303(a).

If only partial, ratable value given, sometimes only partial, ratable amt is recoverable. 3-302, Comment 6, Case #5.

Banks are a special case. To determine whether they have given value to a customer who deposited a check w/ them, see 4-210 and 4-211 which complement (and DO NOT replace) 3-303.

Whether bank has given value for the check is determined under 4-211, which state that bank has given value to the extent it has a security interest in the check

Bowling Green v. State Street Bank & Trust (p668) -- security interest is any security interest, not just those mentioned in 4-210. So bank w/ floating lien on all depositors property acquired security interest in depositors check (and therefore value, and therefore became holder in due course) as soon as it took possession of check. See also 4-205. 4-210 states rules for determining when a banks security interest arises.

if check is deposited and resulting credit is withdrawn or applied. 4-210(a)(1).

applied = if bank reduces some other debt or applies it to prev overdraft

if check is deposited and customer is given right to make withdrawal. 4-210(a)(2).

if bank makes a loan or cash payment based on check. 4-210(a)(3). Determine whether bank has given credit using FIFO rule. 4-210(b).

This security interest is in addition to banks common law bankers lien. 4-210, Comment 1.

2) in good faith,

good faith = honesty in fact and observance of reasonable commercial standards of fair dealing. 1-201(b)(20) 3) w/o notice that instrument is overdue or has been dishonored or that there is an uncured default w/ respect to payment of another instrument issued as part of same series,

person has notice if person, 1-202(a):

has actual knowledge,

has received a notice or notification of it, or

from all facts and circumstances known to person at time in question, has reason to know that it exists. 4) w/o notice that instrument contains unauthorized signature or has been altered,

5) w/o notice of any claim to instrument per 3-306, and 6) w/o notice that any party has defense or claim in recoupment per 3-305(a).Liability of Parties to Negotiable Instruments Chap 12 (p675)

Obligations of parties are set out in four sections: Makers obligation, 3-412 (applies to notes which are 2-party transactions) Maker is person primarily obliged to pay promissory note.

maker is person who signs or is identified in a note as person undertaking to pay. 3-103(a)(5)

issuer of a note... is obliged to pay instrument (i) according to its terms at time it was issued. 3-412.

issue is the first delivery of an instrument by the maker or drawer, whether to a holder or non-holder, for purpose of giving rights on the instrument to any person. 3-105(a)

If multiple parties sign the note, they can be jointly and severally liable. 3-116(a). If one person pays the entire note, that person can go after other signatory-issuers. 3-116(b). Acceptors obligation, 3-413 (applies to drafts, i.e., 3-party transactions) Drawee is not liable on instrument until drawee accepts it. 3-408. Acceptance is the drawees signed agreement, on the draft, to pay a draft as presented. 3-409(a).

A drawee that accepts a draft becomes known as an acceptor, and is obliged to holder to pay the draft. 3-413. Gen rule: drafts that doesnt specify time of payment are payable on demand. 3-108(a). Most common example of demand draft is check. Time draft doesnt contemplate immediate payment but instead says something like Pay to the order of Jane sixty days after presentment. If time draft is accepted by drawee, drawee becomes liable to pay, but only after stated time period has passed. Normally, date of acceptance of time draft is included along w/ signature of drawee indicating acceptance, 3-409(a), (c), but not reqd.

Another example of accepted draft is certified check. Basically, drawer obtains drawees assurance of payment before delivering to payee. Banks signature is called certification, but is identical to acceptance. 3-409(d).

Payee can also obtain banks (drawee) consent to pay check, but not immediately, by asking that check be certified. Bank can do this as courtesy, but is not reqd to do so. 3-409(d). And refusal to certify is not dishonor. Id. Once check has been accepted, drawers obligation to pay is discharged. 3-414(c). Obligation to pay rests solely on acceptor. Drawers obligation, 3-414, (applies to drafts, i.e., 3-party transactions) Drawer is obligated to pay draft until it is accepted by drawee, 3-414(a), even if draft was never issued. Drawers obligation ends upon drawees acceptance, 3-414(c), regardless of when or by whom acceptance is obtained.

Presentment is when PETE demands payment, or acceptance, from drawee. 3-501. 3-501(b) governs place, time and manner of presentment. Drawee does not have obligation on draft to payee, so payee cannot force payment and payee has no cause of action against drawee. 3-408.

Drawer might have action against drawee for wrongful dishonor, see 4-402, but holder of draft has no cause of action against drawee.

Dishonor has occurred if payee presents check to drawee, but drawee refuses to pay in timely manner. 3-502.

Dishonor of ordinary checks and drafts is governed by 3-502(b), (e). Drawer of draft other than check can disclaim liability by writing without recourse after signature. 3-414(e).

Indorsers obligation, 3-415

Indorser of instrument has obligation to pay instrument if dishonored. 3-415(a). Indorser can escape liability by printing without recourse after signature. 3-415(b).

Indorser who has paid instrument can go after prior indorsers. 3-145(a).

Conversely, if draft is accepted by bank after indorsement, indorsers liability is discharged. 3-415(d).

If acceptor is non-bank, or indorsement made after acceptance, indorser still potentially liable.

Drafts (i.e. checks) Dishonor of instrument triggers indorsers liability. 3-415(a). Dishonor normally requires presentment by payee and failure to pay by drawee. 3-502(b). Obligation of indorser to pay unaccepted instrument is discharged in two situations:

First, if draft is check and check is not presented w/i 30 days of indorsement, indorser is discharged. 3-415(e).

Second, discharge can occur as result of failure to give timely notice of dishonor to indorser. 3-415(c), 3-503(a). Timely notice of dishonor normally 30 days for non-banks. 3-503(c). Delay excused in some cases. 3-504(c).

Normally w/ checks, liability of indorser is of limited importance since depository bank can just revoke provisional credit or otherwise get refund from depositor. 4-214(a). Accomodation partys obligation (i.e. Guarantor) 3-419 accommodation party (i.e. guarantor) can sue the real maker for the whole amount

if you want to make sure youre an accommodation party, make sure to write that under your signature. Otherwise, you might be deemed a co-maker, and you can only recover a pro-rata share of what youve paid.

If accomodation party is an individual, accomodator (i.e. guarantor) succeeds to all rights that payee had against maker of note, if maker has forced accomodator to pay. 3-419(f).

Once maker of note has paid it, maker cannot demand contribution by accomodator if accomodator did not benefit. 3-419(f). If accomodation party is an organization, accomodator has same rights even if accomodator is related party (i.e. sole stockholder, or corps president). person asserting accomodator status has burden of proof and whether person is accomodator is question of fact. 3-419, Comment 3. Liability of Transferor (p681) Just like a law finds that a seller of goods has provided certain implied warranties, a seller of an instrument provides warranties outlined in 3-416. Warranties regarding authenticity of instrument (a)(2),(3) and instruments enforceability (a)(1),(4),(5): all signatures are authentic and authorized. 3-146(a)(2)

instrument has not been altered. 3-416(a)(3).

transferor is PETE, 3-416(a)(1) right to enforce is not subject to defenses that can be asserted against transferor, 3-416(a)(4) no knowledge of payors bankruptcy or insolvency proceedings, 3-416(a)(5).

Most of time, warranties are of limited use since transferor is often indorser (and therefore personally liable). If indorsement made w/o recourse, however, transferor warranties can be important. Transfer warranties, however, can also be disclaimed by without warranties legend. 3-416, Comment 5.

Cashiers and Tellers Checks (p682) Cashiers check always issued by a bank and in form of ordinary check except that drawer and drawee are same bank (i.e. Bank A orders itself to pay $xx.) in this case liability of drawer is same as liability of maker, 3-412.

Tellers check difference is that tellers check is typically drawn on another bank (i.e. a small bank maintains acct at large, national bank.) Issuer is obliged to pay check as drawer of check, 3-414(b). Drawee bank still has no obligation to payee. 3-408.

If uncertified check is taken for underlying obligation, obligation is suspended until dishonor of check or check is paid or certified. 3-310(b)(1).

If certified check is taken, action can only be taken against bank, 3-310(a), and if bank has failed, holder is insured by FDIC to $100K.

Certification of check is considered same as payment, so no stopping payment on certified checks. 4-303(a)(1). Same result for tellers checks, but analysis a little diff under 4-403 and Comment 4.

Cashiers check is different still b/c no instruction by another person can be made since bank is issuer/maker and drawee.

Wrongful refusal or delay by bank in paying either tellers or cashiers check puts them in very bad position. 3-411. But obligated bank can succeed in some limited situations. 3-411(c).

Lost cashiers, tellers or certified checks under 3-312. See 3-312 and especially Comment 4.

Payment Systems: Checks and Credit Cards - Chap 13 (p718)

Definitions:

depository bank first bank to take an item, even if its also payor bank, unless item is presented for immediate payment over the counter. 4-105(2)

payor bank bank that is drawee of draft. 4-105(3).

only payor bank can pay the check. Every other bank is buying the check, but not paying it.

even for payor bank there is difference between settling check and paying check.

BUT, under 4-107, each branch of a bank, or even separate office of a bank, can (not must) be treated as a different bank for purposes of computing midnight deadline.

intermediary bank bank to which item is tranferred in course of collection, except depository or payor bank. 4-105(4).

collecting bank bank handling an item for collection, except payor bank 4-105(5)

presenting bank bank presenting an item, except payor bank. 4-105(6)

only payor Check Collection Collection process consists of moving check from depository bank to its presentation to payor bank.

Returning process operates in reverse going from payor bank to depository bank.

Midnight Rule: To avoid liability for check, payor bank must return dishonored check to depository bank by midnight deadline which is midnight of next day after check is received. 4-104(a)(10). When has bank on which check is drawn (i.e. the payor bank) paid the check under Art 4?

if payee takes check to drawee bank and asks for cash over the counter, drawee can pay full amt in cash, and check is paid. 4-215(a)(1).

If depository bank = payor bank.

If payees depository bank is same as drafts issuer bank, when depository bank credits payees account, it is normally a provisional settlement. 4-104(a)(11), 4-213(a)(2)(iii). bank has time-limited right to revoke payees credit. 4-301(a). bank can revoke credit by returning check to payee and to debit payees account (revoke provisional settlement) in amt of check.

If bank fails to do this, it has paid the check, b/c right to revoke settlement no longer exists. 4-215(a)(3), 4-301(a).

payee has right to withdraw money/provisional credit at opening of banks second banking day following receipt of item. 4-215(e)(2).

If depository bank is not same as payor bank. depository bank = collecting bank. 4-105(5).

if depository bank doesnt go directly to payor bank, it will negotiate check to intermediary bank, which in turn is collecting bank. 4-105(4).

Payor bank may refuse payment of check by returning it to presenting bank, and revoking provisional settlement (i.e. credit) to presenting bank. 4-301(a).

In turn, presenting bank and each collecting bank returns the check to bank from which it received check, and recovers provisional payment. 4-214(a). Same authority allows depository bank to collect provisional credit from payee/holder. If payor bank misses midnight deadline, 4-104(a)(10), by not returning, settling, or paying check, or sending notice of dishonor, payor bank becomes liable for it. 4-302(a). By missing the midnight deadline, payor bank has made final payment on check. 4-215(a)(3). Delay by collecting or payor bank is excused if caused by interruption of communication facilities, suspension of payment by another bank, war, emergency conditions, etc. 4-109(b).

Blake v Woodford Bank & Trust (p722) lays out exacting standard when examining banks excuses for missing deadline.

In addition, liability of payor bank is subject to defenses based on breach of presentment warranty, 4-208, or proof that person seeking enforcement of liability intended to defraud payor bank. 4-302(b). Branches of banks can be considered separate banks for purposes of midnight deadline. 4-107.

Payee who has deposited money in depository bank has right to withdraw money originally provisionally credited when settlement has become final and depository bank has had reasonable amt of time to receive returned check, but has not. 4-215(e)(1).

Right of Collecting Bank to Revoke Settlement on Dishonored Check (p749) Depository bank is reqd to either send customer the returned check or give notice of checks dishonor to customer by its midnight deadline. 4-214(a). Even if bank misses deadline, it can still revoke settlement, but depository bank becomes liable to customer for any loss resulting from delay. 4-214(a).

At moment of final payment, all previously provisional settlements that occurred along the way become instantaneously finalized. The payor bank becomes liable for amt of check, 4-302(a), and collecting/depository banks lose ability to revoke provisional settlement, 4-215(d), 4-214(a). Check Encoding (p752)

Bank who electronically encodes check erroneously is liable for mistake, 4-209, in the amt of loss suffered as breach of this warranty, plus expenses and