Post-Transaction Changes. Temporary Perfection. Possible Approaches

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1 Assignment 9: Temporary Perfection and Perfection of Security Interests in Proceeds Reference: Understanding Secured Transactions Ch. 6 Post-Transaction Changes Post-transaction changes can trigger a new ostensible ownership problem E.g., Bank takes SI in the jewelry of Chad Ochocinco, files UCC-1 covering jewelry Later, Ochocinco changes his name back to Chad Johnson Third parties dealing with Chad Johnson may not locate Bank s filed UCC-1 Possible Approaches (1) Post-transaction change that renders a UCC-1 misleading results in an immediate loss of perfection (rejected by UCC drafters) (2) Temporary perfection period, with secured party required to cure problem during grace period to maintain continuous perfection (3) Secured party remains continuously perfected despite change (searcher bears risk) Temporary Perfection In some situations, Article 9 provides the secured party with a grace period of temporary perfection in the event of a posttransaction change After grace period expires, perfection would lapse, unless secured party has taken steps during the grace period to maintain continuous perfection One such situation involves sale of collateral that produces a security interest in proceeds 1

2 Uphoff bought TV from Best Buy on installment credit (Best Buy retained SI in TV) Best Buy assigned contract to Neighborly Finance (NF) Uphoff is now in default NF learns that Uphoff exchanged the TV for 20 cases of French wine Does NF have a SI in the wine? Is it perfected? Problem 1 Assuming NF can prove Uphoff made the TVfor-wine exchange, the wine is identifiable proceeds of the TV, so NF has a SI in the wine [ 9-315(a)(2)] Problem: 3rd parties dealing w/uphoff may not realize NF has a SI in the wine, b/c: If SI was an auto-perfected PMSI in consumer goods, Best Buy may not have filed a UCC-1, or If it did file a UCC-1, the UCC-1 may have described only the TV (not wine ) Secured Party s Rights on Disposition of Collateral and in Proceeds. (a) Except as otherwise provided in this article and in Section 2-403(2)... (2) a security interest attaches to any identifiable proceeds of collateral... (c) [Perfection of security interest in proceeds.] A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. (d) [Continuation of perfection.] A perfected security interest in proceeds becomes unperfected on the 21 st day after the security interest attaches to the proceeds unless: proceeds; 2

3 Perfection as to Proceeds If SI in original collateral was perfected, SI in proceeds remains temporarily perfected for 20 days [ 9-315(c), (d)] For SI in proceeds to remain continuously perfected after day 20, either: (1) Secured party s original UCC-1 must qualify for the same office rule [ 9-315(d)(1)] (2) Proceeds must be identifiable cash proceeds [ 9-315(d)(2)], or (3) Original UCC-1 must cover the proceeds, or secured party must perfect as to the proceeds before 20 day period expires [ 9-315(d)(3)] Problem 1 (Automatic Perfection) If SI in Uphoff s TV was auto-perfected PMSI in consumer goods and NF didn t file UCC-1, then: SI in wine (as proceeds of the TV) is temporarily perfected for 20 days after exchange [ 9-315(c), (d)] After 20 days, SI becomes unperfected unless NF perfects by filing a UCC-1 covering the wine (by filing) or repossesses the wine (by possession) [ 9-315(d)(3)] Note: if exchange occurred >> 20 days ago, NF s perfection as to the wine has already lapsed! What if NF had filed a UCC-1 the time of the original loan, and that UCC-1 had described the collateral as Debtor s consumer goods? What if the original UCC-1 described the collateral as Debtor s TV? Problem 1 proceeds; [THE SAME OFFICE RULE] 3

4 UCC-1 Filing vs. Consumer Goods? Assuming that Uphoff is not a wine merchant holding the wine for resale, then the wine would be consumer goods [ 9-102(a)(23)] If so, the original UCC-1 filing ( consumer goods ) would be sufficient to cover the wine Thus, NF would remain continuously perfected as to the wine, even after the 20-day grace period of temporary perfection expires [ 9-315(d)(3)] UCC-1 Filing vs. Debtor s TV SI in the wine (as proceeds) temporarily perfected for 20 days after exchange [ 9-315(c), (d)] After that, NF s SI remains continuously perfected under the same office rule [ 9-315(d)(1)] Original UCC-1 vs. the TV would be filed in the Secretary of State s office UCC-1 covering wine would be filed in same office Thus, no new filing is necessary (even though the original UCC-1 didn t cover wine explicitly) proceeds; [THE SAME OFFICE RULE] Same Office Rule: Rationale [Understanding, p ] The basic idea is that in certain common financing transactions, a searcher should recognize that a particular type of described collateral will yield a particular type or types of undescribed proceeds... E.g., Debtor s credit sales of inventory often produce accounts, instruments, or chattel paper Thus, a UCC-1 filing vs. inventory should alert a searcher that the secured party might claim SI in accounts, instruments, or chattel paper as proceeds Does this make sense as applied to Problem 1? 4

5 Problem 1: Same Office Rule It is easy to infer that inventory might be sold to produce accounts, instruments, or chattel paper It is less intuitive for a searcher to appreciate or infer that a TV set might have been swapped for French wine Nevertheless, the same office rule applies equally to both situations Problem 2: The Cash Phase Scenario Instead, Uphoff sells the TV for $2,000 at a neighbor s garage sale, then used the $2,000 cash to buy 10 cases of South African wine Does this change your analysis and your advice to Neighborly Finance? The Cash Phase Rule: Rationale? NF s SI attaches to the $2,000 cash proceeds of TV, and then (in turn) to the wine as proceeds of the $2,000 in cash [ 9-315(a)(2)] NF s SI in wine is temporarily perfected for 20 days [ 9-315(c), (d)], but the same office rule doesn t apply (b/c wine was acquired with cash proceeds) Q: Was SI in TV perfected by filing? If so, is the description in the original UCC-1 sufficient to cover wine? If yes, NF is continuously perfected If not, NF must file a new UCC-1 covering the wine during 20-day grace period, or its perfection lapses If a 3 rd party searcher asks Uphoff where did you get the wine?, an honest Uphoff should respond, I paid cash for it. Practically, it is too difficult for a 3 rd party to trace (a) what cash Uphoff used to buy the wine, and (b) whether that specific cash was proceeds of the other collateral covered by a prior filed UCC-1 Thus, NF should have to amend its prior filing (or make a new one) to remain perfected after 20 days Note: NF wouldn t need to amend its initial UCC- 1 (or make new one) if original UCC-1 description had used a broader collateral description (e.g., consumer goods or all of Debtor s assets ) 5